SCHEDULE
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INFORMATION
REQUIRED IN PROXY STATEMENT
SCHEDULE
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Proxy
Statement Pursuant to Section 14(a)
of
the Securities Exchange Act of 1934
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the Registrant x
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computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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(1)
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Title
of each class of securities to which transaction applies:
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(2)
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Aggregate
number of securities to which transaction applies:
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(3)
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Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11:
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(4)
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maximum aggregate value of transaction:
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Date
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SBE,
Inc.
June
24, 2005
Dear
Stockholder:
You
are
cordially invited to attend the Special Meeting of Stockholders of SBE, Inc.
to
be held on July 26, 2005 at SBE’s offices located at 2305 Camino Ramon, Suite
200, San Ramon, California 94583. The meeting will begin promptly at
9:00 a.m., Pacific Daylight Time.
The
items
of business to be considered at the meeting are listed in the following Notice
of Special Meeting and are more fully addressed in the proxy statement included
with this letter. The items you will be asked to approve at the meeting relate
to our proposed acquisition of PyX Technologies, Inc. and a proposed private
placement of shares of our common stock and warrants to purchase shares of
our
common stock.
SBE
is
making several moves to maximize opportunities in two dynamic markets, Internet
Protocol, or IP, storage and Voice over IP, or VoIP. Technology is changing,
and
companies that grow in the future are those who are able to accept and adapt
to
change. Multiple factors in today’s business landscape are driving technology
demands for storage and VoIP, and the proposed PyX acquisition gives SBE the
opportunity to make a difference.
Industry
experts in storage and VoIP project market growth that justifies our efforts
in
these markets. Internet Small Computer System Interface, or iSCSI, enables
remote
access to secure multi-terabyte storage via desktops, laptops, PDAs, or other
mobile devices, and offers significant cost savings over existing storage
alternatives. Recent
reports from International Data Corporation (IDC) indicate that the iSCSI market
grew from $18 million in 2003 to $113 million in 2004. Furthermore, IDC
forecasts the IP storage area network, or SAN, market to reach $296 million
in
2005 and $2.7 billion by 2008.
In
my 20
years of sales and marketing experience in this industry, I’ve learned that
there is a direct correlation between product uniqueness, customer demands
relative to timing, and revenue success. Through months of research, testing,
and customer evaluations, we have concluded that PyX’s technology has unique
fault-tolerant features essential for the success of iSCSI that are not found
in
competitive solutions today. We believe our acquisition of PyX will enable
SBE
to approach IP storage in a three-tier manner: to sell the iSCSI software
separately; to sell storage hardware separately; and lastly, to combine the
software with our TCP/IP Offload Engines, or TOE, hardware for integrated,
“best-of breed” original equipment manufacturer, or OEM, solutions.
Timing
and execution are our focus henceforth. Our goal is to become a leading provider
of IP storage solutions to the OEM market. Concurrently, we continue to nurture
the business with our current customers in the communications markets, and
target those customers who have been key to SBE’s past success.
Our
board
of directors carefully considered the proposed merger and private placement
and
recommends that you vote in favor of these transactions. SBE’s strong management
staff and team of employees are ready to execute on these corporate initiatives.
We are excited about the opportunities for the combined company and believe
that
the combined company will be able to create substantially more stockholder
value
than could be achieved by the companies individually.
UWhether
or not you plan to attend the special meeting in person, it is important that
your shares be represented and voted at the meeting.U
Please
date, sign, and return your proxy card promptly in the enclosed envelope to
ensure that your shares will be represented and voted at the special meeting,
even if you cannot attend. If you attend the special meeting, you may vote
your
shares in person even though you have previously signed and returned your
proxy.
On
behalf
of your board of directors, thank you for your investment in and continued
support of SBE, Inc.
Sincerely,
/s/
Dan
Grey
Dan
Grey
President
and Chief Executive Officer
SBE,
INC.
NOTICE
OF SPECIAL
MEETING
OF STOCKHOLDERS
To
Be Held On July 26, 2005
To
the
Stockholders of SBE, Inc.:
You
are
cordially invited to attend the Special TMeeting
of Stockholders of SBE, Inc.T,
a
Delaware corporation
(“SBE”). The meeting will be held Ton
July
26, 2005 at 9:00 a.m., local time, at our offices located at 2305 Camino
Ramon, Suite 200, San Ramon, California 94583, for the following
purposes:TT
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(1) To
approve a merger agreement between us and PyX Technologies, Inc.,
the
merger of PyX with and into our newly-formed, wholly-owned subsidiary,
PyX
Acquisition Sub, LLC, and the issuance of 2,561,050 shares of our
common
stock to the PyX shareholders and the assumption of options to purchase
up
to an additional 2,038,950 shares of our common stock in the proposed
merger;
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(2) To
approve the form of unit subscription agreement and the issuance
of units
consisting of one share of our common stock and a warrant to purchase
an
additional one-half share of our common stock for aggregate gross
proceeds
to us of $5,150,000 in a private placement; and
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(3) To
transact such other business as may properly come before the meeting
or
any adjournment thereof.
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These
items of business are more fully described in the Proxy Statement accompanying
this Notice.
The
record date for the Special Meeting of the stockholders is June 9, 2005. Only
stockholders of record at the close of business on that date may vote at the
meeting or any adjournment thereof.
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By
Order of the Board of Directors,
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/s/
David W. Brunton
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David
W. Brunton
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Secretary
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San
Ramon, California
June
24,
2005
YOU
ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
WHETHER
OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND
DATE
THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH DOES
NOT REQUIRE ANY POSTAGE IF MAILED IN THE UNITED STATES,
IN ORDER TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING. EVEN IF YOU
HAVE
VOTED BY PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR
OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN A PROXY ISSUED
IN
YOUR NAME FROM THAT RECORD HOLDER IN ORDER TO VOTE IN
PERSON.
TABLE
OF CONTENTS
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PAGE |
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1
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WHERE
YOU CAN FIND MORE INFORMATION
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1
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SUMMARY
TERM SHEET FOR THE MERGER AND PRIVATE PLACEMENT
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6
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RISK
FACTORS
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13
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Risk
Relating to the Transactions
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13
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Risk
Relating to SBE after the Transactions
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14
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Risks
Related to PyX’s Business
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15
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THE
COMPANIES
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17
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SBE
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17
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PyX
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17
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THE
MERGER AND THE PRIVATE PLACEMENT
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18
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Background
of the Merger and the Private Placement
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18
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Reasons
for the Merger and the Private Placement
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20
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Opinion
of Our Financial Advisor
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22
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Regulatory
Approvals Relating to the Transactions
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29
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Dissenters’
Rights Relating to the Transactions
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29
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Interests
of Certain Persons in the Transactions
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29
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PROPOSAL
1 - APPROVAL OF THE MERGER, THE MERGER AGREEMENT AND THE ISSUANCE
OF
SHARES OF OUR COMMON STOCK AND ASSUMPTION OF OPTIONS TO PURCHASE
SHARES OF
OUR COMMON STOCK IN THE MERGER
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30
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General
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30
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Effective
Time of the Merger
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30
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Treatment
of Stock Options
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30
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Surrender
and Exchange of Share Certificates
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31
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Escrow
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31
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Representations
and Warranties
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31
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Certain
Covenants
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33
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Indemnification
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36
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Conditions
Precedent
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36
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Termination
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37
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Waivers
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37
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Amendments
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37
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Fees
and Expenses
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37
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Accounting
Treatment of the Merger
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38
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Shareholder
Agreement
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38
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TABLE
OF CONTENTS
(CONTINUED)
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PAGE |
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Voting
Agreement
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38
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Past
Contacts, Transactions or Negotiations
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39
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Recommendation
of our Board of Directors
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39
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COMPARATIVE
PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
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40
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Unaudited
Pro forma Consolidated Financial Statements of SBE
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42
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SELECTED
FINANCIAL DATA OF PYX
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48
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DESCRIPTION
OF PYX’S BUSINESS
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48
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS
OF OPERATIONS OF PYX
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50
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PROPOSAL
2 - APPROVAL OF THE UNIT SUBSCRIPTION AGREEMENT AND THE ISSUANCE
OF SHARES
OF SERIES A PREFERRED STOCK IN THE PRIVATE PLACEMENT
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64
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General
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64
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Per
Unit Purchase Price
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65
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Closing
of the Private Placement
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65
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Representations
and Warranties
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65
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Certain
Covenants
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67
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Indemnification
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67
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Conditions
Precedent
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67
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Warrants
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67
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Investor
Rights Agreement
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67
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Registration
Rights
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68
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The
Voting Agreement
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68
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OTHER
MATTERS
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69
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Except
as
otherwise specifically noted, “SBE,”“we,”“our,”“us” and similar words in this
proxy statement refer to SBE, Inc. and its subsidiaries. References to “PyX”
shall mean PyX Technologies, Inc.
FORWARD-LOOKING
STATEMENTS
The
information in this proxy statement contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended,
and
Section 21E of the Securities Exchange Act of 1934, as amended. Statements
that are not historical in nature, including statements about beliefs and
expectations, are forward-looking statements. Words such as
“may,”“will,”“should,”“estimates,”“predicts,”“believes,”“anticipates,”“plans,”“expects,”“intends”
and similar expressions are intended to identify these forward-looking
statements, but are not the exclusive means of identifying such statements.
Such
statements are based on currently available operating, financial and competitive
information and are subject to various risks and uncertainties. You are
cautioned that these forward-looking statements reflect management's estimates
only as of the date hereof, and we assume no obligation to update these
statements, even if new information becomes available or other events occur
in
the future. Actual future results, events and trends may differ materially
from
those expressed in or implied by such statements depending on a variety of
factors, including, but not limited to those set forth under “Risk Factors” and
elsewhere in this proxy statement. Important factors that might cause or
contribute to such a discrepancy include, but are not limited to:
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the
extent of our ability to integrate the operations of PyX with our
own
operations;
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our
ability to develop and market the Internet Small computer System
Interface, or iSCSI, software;
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the
effect of any unknown liabilities of PyX that materialize after the
transactions;
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the
effect of the transactions on our market
price;
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the
factors discussed under “Risk Factors,” beginning on page 13;
and
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other
risks referenced from time to time in our filings with the Securities
and
Exchange Commission, or SEC, including our annual report on Form 10-K
for our fiscal year ended October 31, 2004 and our quarterly
report
on Form 10-Q for the quarter ended April 30, 2005, copies of which
accompany this proxy statement.
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WHERE
YOU CAN FIND MORE INFORMATION
We
are a
reporting company and file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, proxy statements or other information that we file at the SEC’s public
reference room at 450 Fifth Street N.W., Room 1024, Washington, D.C.,
20549. You can also request copies of these documents by writing to the SEC
and
paying a fee for the copying costs. Please call the SEC at 1-800-SEC-0330 for
more information about the operation of the public reference room. Our public
filings with the SEC are also available on the web site maintained by the SEC
at
http://www.sec.gov.
We
have
supplied all information in this proxy statement relating to SBE. PyX has
supplied all information in this proxy statement relating to PyX. Houlihan
Lokey
Howard & Zukin Financial Advisors, Inc. has supplied the information
regarding its fairness opinion.
SBE,
INC.
2305
Camino Ramon, Suite 200
San
Ramon, California 94583
PROXY
STATEMENT
FOR
THE SPECIAL
MEETING
OF STOCKHOLDERS
To
Be Held On July 26, 2005
The
Special Meeting of Stockholders of SBE, Inc. will be held on July 26,
2005,
at 2305 Camino Ramon, Suite 200, San Ramon, California 94583, beginning promptly
at 9:00 a.m., local time. The enclosed proxy is solicited by our board
of
directors. It is anticipated that this proxy statement and the accompanying
proxy card will be first mailed to holders of our common stock on or about
June
24, 2005.
QUESTIONS
ABOUT THE MERGER AND THE PRIVATE PLACEMENT
Why
am I receiving this proxy statement and proxy card?
You
are
receiving a proxy statement and proxy card because you own shares of our common
stock. This proxy statement describes the issues on which we would like you,
as
a stockholder, to vote. It also gives you information on these issues so that
you can make an informed decision.
Who
can vote at the special meeting?
Only
stockholders of record at the close of business on June 9, 2005 will be entitled
to vote at the special meeting. On this record date, there were 5,243,483
shares
of common stock outstanding and entitled to vote.
Stockholder
of Record: Shares Registered in Your Name
If
on
June 9,
2005
your
shares were registered directly in your name with our transfer agent, American
Stock Transfer & Trust, then you are a stockholder of record. As a
stockholder of record, you may vote in person at the meeting or vote by proxy.
Whether or not you plan to attend the meeting, we urge you to fill out and
return the enclosed proxy card to ensure your vote is counted.
Beneficial
Owner: Shares Registered in the Name of a Broker or Bank
If
on
June 9,
2005
your
shares were held, not in your name, but rather in an account at a brokerage
firm, bank, dealer, or other similar organization, then you are the beneficial
owner of shares held in “street name” and these proxy materials are being
forwarded to you by that organization. The organization holding your account
is
considered to be the stockholder of record for purposes of voting at the special
meeting. As a beneficial owner, you have the right to direct your broker or
other agent on how to vote the shares in your account. You are also invited
to
attend the special meeting. However, since you are not the stockholder of
record, you may not vote your shares in person at the meeting unless you request
and obtain a valid proxy from your broker or other agent.
What
am I voting on?
You
are
being asked to vote on the following matters relating to our proposed merger
with PyX and the proposed private placement of shares of our common
stock:
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Proposal
1 —
To approve a merger agreement between PyX, PyX Acquisition Sub, LLC,
our
newly-formed, wholly owned subsidiary (referred to in the proxy statement
as “Merger Sub”) and us and the transactions contemplated by the merger
agreement, including the merger of PyX with and into Merger Sub,
the
issuance of 2,561,050 shares of our common stock to the PyX shareholders,
and the assumption of options to purchase up to an additional 2,038,950
shares of our common stock; and
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Proposal
2 —
To approve the issuance of units consisting of one share of our common
stock and a warrant to purchase an additional one-half share of our
common
stock, for aggregate gross proceeds to us of $5,150,000, in a private
placement pursuant to the terms of a unit subscription agreement
between
AIGH Investment Partners, LLC and certain other unaffiliated purchasers
and us.
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Each
of
the merger and the private placement is conditioned upon our receipt of
stockholder approval of each of Proposals 1 and 2. If we do not obtain
stockholder approval of each of these proposals, we will not be able to
consummate the merger or the private placement. We refer to the merger and
the
private placement collectively in this proxy statement as the
transactions.
How
do I vote?
For
each
of the matters to be voted on, you may vote “For” or “Against” or abstain from
voting. The procedures for voting are fairly simple:
Stockholder
of Record: Shares Registered in Your Name
If
you
are a stockholder of record, you may vote in person at the special meeting
or
vote by proxy using the enclosed proxy card. Whether or not you plan to attend
the meeting, we urge you to vote by proxy to ensure your vote is counted. You
may still attend the meeting and vote in person if you have already voted by
proxy.
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To
vote in person, come to the special meeting and we will give you
a ballot
when you arrive.
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To
vote using the proxy card, simply complete, sign and date the enclosed
proxy card and return it promptly in the envelope provided. If you
return
your signed proxy card to us before the special meeting, we will
vote your
shares as you direct.
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Beneficial
Owner: Shares Registered in the Name of Broker or Bank
If
you
are a beneficial owner of shares registered in the name of your broker, bank,
or
other agent, you should have received a proxy card and voting instructions
with
these proxy materials from that organization rather than from us. Simply
complete and mail the proxy card to ensure that your vote is counted. To vote
in
person at the special meeting, you must obtain a valid proxy from your broker,
bank, or other agent. Follow the instructions from your broker or bank included
with these proxy materials, or contact your broker or bank to request a proxy
form.
How
many votes do I have?
On
each
matter to be voted upon, you have one vote for each share of common stock you
own as of June 9, 2005.
How
are votes counted?
Votes
will be counted by the inspector of election appointed for the meeting, who
will
separately count “For” and “Against” votes, abstentions and broker non-votes.
Abstentions and broker non-votes will be counted towards the vote total for
each
proposal and will have the same effect as “Against” votes.
If
your
shares are held by your broker as your nominee (that is, in “street name”), you
will need to obtain a proxy form from the institution that holds your shares
and
follow the instructions included on that form regarding how to instruct your
broker to vote your shares. If you do not give instructions to your broker,
the
shares will be treated as broker non-votes.
What
if I return a proxy card but do not make specific
choices?
If
you
return a signed and dated proxy card without marking any voting selections,
your
shares will be treated as broker non-votes and will have the same effect as
“Against” votes.
Who
is paying for this proxy solicitation?
We
will
pay for the entire cost of soliciting proxies. In addition to these mailed
proxy
materials, our directors and employees may also solicit proxies in person,
by
telephone or by other means of communication. Directors and employees will
not
be paid any additional compensation for soliciting proxies. We may also
reimburse brokerage firms, banks and other agents for the cost of forwarding
proxy materials to beneficial owners.
What
does it mean if I receive more than one proxy card?
If
you
receive more than one proxy card, your shares are registered in more than one
name or are registered in different accounts. Please complete, sign and return
UeachU
proxy
card to ensure that all of your shares are voted.
Can
I change my vote after submitting my proxy?
Yes.
You
can revoke your proxy at any time before the final vote at the meeting. If
you
are the record holder of your shares, you may revoke your proxy in any one
of
three ways:
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You
may submit another properly completed proxy card with a later
date;
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You
may send a written notice that you are revoking your proxy to our
Secretary at 2305 Camino Ramon, Suite 200, San Ramon, California
94583;
or
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You
may attend the special meeting and vote in person. However, simply
attending the special meeting will not, by itself, revoke your
proxy.
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If
your
shares are held by your broker or bank as a nominee or agent, you should follow
the instructions provided by your broker or bank.
What
will happen in the merger?
In
the
merger, PyX will be merged with and into Merger Sub. Merger Sub will then be
the
surviving entity. PyX will cease to exist as a separate entity and we will
continue as the sole member of Merger Sub. As consideration for the merger,
we
will issue 0.46 of a share of our common stock to the PyX shareholders for
each
share of PyX common stock outstanding as of the effective time of the merger.
In
addition, we will assume each stock option that is then outstanding under PyX’s
2005 Stock Plan, whether vested or unvested, in accordance with the existing
terms of that plan and the applicable stock option agreement. We will issue
a
total of 2,561,050 shares of our common stock in consideration of the shares
of
PyX common stock outstanding as of the effective time of the merger. In
addition, we will assume options to purchase an additional 2,038,950 shares
of
our common stock.
What
will happen in the private placement?
In
the
private placement, we will issue units consisting of one share of our common
stock and a warrant to purchase an additional one-half share of our common
stock, for aggregate gross proceeds to us of $5,150,000, pursuant to a unit
subscription agreement between us, AIGH Investment Partners LLC and certain
other unaffiliated investors.
When
do you expect the merger and private placement to be
completed?
We
plan
to complete the transactions as soon as possible after the special meeting,
subject to the satisfaction or waiver of certain conditions to the transactions,
which are described in this proxy statement. We cannot predict when, or if,
these conditions will be satisfied or waived.
What
risks should I consider in evaluating the merger and private
placement?
You
should consider the risks described under the heading “Risk Factors” beginning
on page 13.
How
many votes are needed to approve each proposal?
To
be
approved, each of Proposal 1 (to consider and vote on the merger, the related
merger agreement, the issuance of shares of our common stock and the assumption
of options to purchase shares of our common stock in the merger) and Proposal
2
(to approve the unit subscription agreement and the issuance of shares of our
common stock and warrants to purchase shares of our common stock in the private
placement) must receive a “For” vote from the majority of the outstanding shares
present and voting at the special meeting, either in person or by proxy. If
those present do not vote, or abstain from voting, it will have the same effect
as an “Against” vote. In addition, Broker non-votes will have the same effect as
“Against” votes.
What
is the quorum requirement?
A
quorum
is necessary to hold a valid meeting. A quorum will be present if a majority
of
the outstanding shares are represented either by stockholders present
at the meeting or by proxy. On the record date, there were 5,243,483 shares
of
SBE common stock outstanding and entitled to vote. Thus, at least 2,621,742
shares must be represented either by stockholders present at the meeting or
by
proxy in order to have a quorum.
Your
shares will be counted towards the quorum only if you submit a valid proxy
(or
one is submitted on your behalf by your broker, bank or other nominee) or if
you
vote in person at the meeting. Abstentions and broker non-votes will be counted
towards the quorum requirement. If there is no quorum, a majority of the votes
present at the meeting may adjourn the meeting to another date.
Does
the board of directors recommend approval of the proposals at the special
meeting?
Yes.
After careful consideration, our board of directors recommends that our
stockholders vote FOR each of the proposals.
Who
can help answer my questions about the proposals?
If
you
have additional questions about these proposals, you should contact David
Brunton, our chief financial officer, at (925) 355-2000.
How
can I find out the results of the voting at the special
meeting?
Preliminary
voting results may be announced at the special meeting. Final voting results
will be published in our quarterly report on Form 10-Q for the quarter in which
the special meeting occurs.
SUMMARY
TERM SHEET
FOR
THE MERGER AND PRIVATE PLACEMENT
(Proposals
1 and 2)
The
following summary, together with the previous question and answer section,
provides an overview of the proposed merger and private placement discussed
in
this proxy statement and presented in the attached annexes. The summary also
contains cross-references to the more detailed discussions elsewhere in the
proxy statement. This summary may not contain all of the information that is
important to you. To understand the proposed merger and private placement fully,
and for a more complete description of the terms of the proposed merger and
private placement, you should carefully read this entire proxy statement and
the
attached annexes in their entirety.
TThe
Companies (see page 17)
SBE
We
develop and provide network communications and storage solutions for original
equipment manufacturers, or OEMs, in the embedded systems marketplace. Embedded
networking technology is hardware or software that serves as a component within
a larger networking or storage device or system, such as a Gigabit Ethernet
or a
T-1/T-3 input/output network interface card, that plugs into an expansion slot
in a high-end computer or storage system. Embedded networking solutions enable
the functionality of many commonly used devices or equipment, such as products
and solutions for basic telephone and internet services, mobile phones, medical
equipment and storage networks.
PyX
PyX
Technologies, Inc. is a development-stage technology company focused on the
development, implementation and sale of Internet Small Computer System
Interface, or iSCSI, software as an economical and efficient data storage
alternative for enterprises and organizations. PyX currently has two Linux-based
products that have been completed - the iSCSI Initiator and the iSCSI Target.
All PyX products conform to the iSCSI standard as ratified by the Internet
Engineering Task Force, or IETF. PyX believes that it is the first and only
company in the world to complete development of a iSCSI protocol that meets
and
exceeds certain IETF standards.
Overview
of the Transactions (see page 18)
We
have
entered into a definitive agreement and plan of merger and reorganization with
PyX. Under the merger agreement, PyX will merge with and into our newly-formed,
wholly-owned subsidiary, PyX Acquisition Sub, LLC (referred to in this proxy
statement as Merger Sub), which will remain as the surviving legal entity and
our wholly-owned subsidiary. At the time of the merger, PyX will cease to exist
as a separate entity and Merger Sub will succeed to all of PyX’s assets,
liabilities, rights and obligations.
We
also
have entered into unit subscription agreements pursuant to which we agreed
to
issue units consisting of one share of our common stock and a warrant to
purchase an additional one-half share of our common stock, for aggregate gross
proceeds to us of $5,150,000, in a private placement. The completion of the
merger is contingent on us being able to raise at least $5.0 million in gross
proceeds in an equity financing. We expect to raise a total of $5,150,000 in
connection with the private placement. In addition, the private placement is
contingent on the completion of the merger. It is anticipated that the
transactions will be completed concurrently.
Recommendation
of the Board of Directors (see page 22)
Our
board
of directors has determined that the merger, the private placement and the
issuance of shares of our common stock as consideration in the transaction,
are
fair to, and in the best interests of, us and our stockholders and recommends
that our stockholders vote FOR each of the transactions and the issuance of
shares of our common stock in connection with these transactions.
To
review
the background and reasons for the transactions in detail, see “The Merger and
the Private Placement — Reasons for the Merger and the Private Placement”
beginning on page 20.
Opinion
of Our Financial Advisor (see page 22)
In
connection with the merger, our board of directors received a written opinion
from Houlihan Lokey Howard & Zukin Financial Advisors, Inc. as to the
fairness of the merger consideration to be paid by us, from a financial point
of
view and as of the date of the opinion. The full text of Houlihan Lokey’s
written opinion is attached to this proxy statement as Annex A. You are
encouraged to read this opinion carefully in its entirety for a description
of
the assumptions made, matters considered and limitations on the review
undertaken. We did not obtain a fairness opinion with respect to the private
placement.
The
Merger (see page 30)
General
Following
the merger, PyX will cease to exist as a separate entity and Merger Sub will
continue as the surviving limited liability company and our wholly-owned
subsidiary. When the merger occurs:
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the
issued and outstanding shares of PyX common stock will be converted
into
the right to receive an aggregate of 2,561,050 shares of our common
stock,
or approximately 49% of the outstanding shares of our common stock
based
on the number of shares outstanding on April 29, 2005 and 24.6% of
the
outstanding shares of our common stock after the closing of the private
placement, assuming no further issuances of shares of our common
stock and
no exercise of outstanding stock options or warrants;
and
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the
issued and outstanding options to purchase shares of PyX common stock
will
be assumed by us and converted into the right to receive an aggregate
of
2,038,950 shares of our common stock upon exercise of the underlying
options, or approximately 38.8% of the outstanding shares of our
common
stock based on the number of shares outstanding on April 29, 2005
and
19.6% of the outstanding shares of our common stock after the closing
of
the private placement, assuming no further issuances of shares of
our
common stock and no exercise of outstanding stock options or warrants.
The
exercise price of the assumed options will be $2.17 per share of
our
common stock issuable upon exercise of the underlying option. The
options
will be subject to the same terms and conditions as were in place
prior to
the merger.
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The
exchange rate for each share of PyX common stock is 0.46 of a share of our
common stock and is fixed and not subject to change.
We
will
not issue any fractional shares. Instead, PyX shareholders will receive a check
equal to the fractional share amount multiplied by the average closing sale
price of a share of our common stock for the ten consecutive trading days
immediately preceding the closing date of the merger, as reported on the Nasdaq
SmallCap Market.
Terms
of the Merger Agreement
The
merger agreement is attached to this proxy statement as Annex B. We
encourage you to read the merger agreement carefully. Our board of directors
has
approved the merger agreement, and it is the binding legal agreement that
governs the terms of the merger.
Agreement
Not to Solicit Other Offers
PyX
and
certain holders of PyX’s outstanding capital stock, referred to in this proxy
statement as the signing shareholders, have agreed that neither PyX nor the
signing shareholders will do any of the following during the period between
the
signing of the merger agreement and the effective time of the merger, or until
the merger agreement is terminated in the event the merger is never
consummated:
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solicit
or encourage the initiation of any inquiry, proposal or offer relating
to
an alternative business combination proposal;
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participate
in any discussions or negotiations or enter into any agreement with,
or
furnish any non-public information to, any person relating to or
in
connection with any alternative business combination proposal;
or
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consider,
entertain or accept any proposal or offer from any person relating
to any
alternative business combination
proposal.
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Conditions
Precedent
The
completion of the merger depends on the satisfaction or waiver of a number
of
conditions, including conditions relating to:
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accuracy
of the other party’s representations and warranties and compliance by the
other party with their covenants;
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approval
by our stockholders of the issuance of shares of our common stock
in
connection with the merger;
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execution
and delivery of certain ancillary documents attached to the merger
agreement as exhibits;
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receipt
of an officer’s certificate certifying the accuracy of each party’s
representations and warranties and satisfaction of certain conditions;
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our
entering into a definitive agreement with respect to the private
placement;
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absence
of legal prohibitions to the completion of the
merger;
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absence
of legal proceedings challenging the merger, seeking recovery of
a
material amount in damages or seeking to prohibit or limit the exercise
of
any material right with respect to our ownership of stock in Merger
Sub or
the PyX shareholders’ ownership of our common stock;
and
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no
material adverse effect will have occurred and no circumstance exists
that
could reasonably be expected to have or result in a material adverse
effect with respect to us or PyX.
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In
addition, our obligation to complete the merger is subject to satisfaction
or
waiver of certain additional conditions, including conditions relating
to:
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holders
of no more than 5% of the outstanding PyX common stock will have
elected
to exercise their dissenters’ rights in connection with the
merger;
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receipt
of required third-party consents;
and
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amendment
of PyX’s current customer agreement with Pelco in a manner acceptable to
us.
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Termination
In
addition to terminating upon mutual consent, either party may terminate the
merger agreement under the following circumstances:
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if
it is reasonably determined by that party that timely satisfaction
of any
of the conditions precedent to the obligations of that party to effect
the
merger and consummate the transactions contemplated by the merger
agreement has become impossible;
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if
any of the conditions precedent to the obligations of that party
to effect
the merger and consummate the transactions contemplated by the merger
agreement has not been satisfied as of the agreed closing date;
or
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the
merger has not been completed on or before July 31,
2005.
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Survival
of Representations and Warranties
The
merger agreement contains customary representations and warranties made by
PyX
and the signing shareholders to SBE and Merger Sub and by SBE and Merger Sub
to
PyX and the signing shareholders for purposes of allocating the risks associated
with the merger. The assertions embodied in the representations and warranties
made by PyX and the signing shareholders are qualified by information set forth
in a confidential disclosure schedule that was delivered in connection with
the
execution of the merger agreement. All of the representations and warranties
made by the parties to the merger agreement survive for a period of one year
following the closing of the merger, except for PyX and the signing
shareholders’ representation and warranty relating to PyX’s capitalization,
which survives for a period of five years following the closing of the merger,
and the representation and warranty relating to PyX’s legal proceedings, which
survives for a period of three years following the closing of the merger.
Indemnification
With
certain exceptions, satisfaction of PyX and the signing shareholders’
indemnification obligations is limited to the shares of our common stock placed
in escrow, as described below under “Escrow,” and is further limited to claims
asserted on or prior to the end of the one year period following the closing
of
the merger. However, the signing shareholders are personally liable for any
breach of the representations and warranties relating to PyX’s capitalization
and legal proceedings. With respect to breaches of the representation and
warranty relating to PyX’s legal proceedings, the signing shareholders’
liability is capped at their pro rata portion of the shares received from the
escrow. All of the shares received by the signing shareholders in connection
with the merger are subject to their indemnification obligations with respect
to
breaches of the representation and warranty relating to PyX’s capitalization and
breaches of certain covenants related to securities law compliance and the
information statement provided to the PyX shareholders in connection with the
solicitation of PyX shareholders’ votes with respect to the merger agreement and
merger. There is no limitation on the liability of the signing shareholders
with
respect to breaches involving fraud or intentional misrepresentations.
We
are
not entitled to recover any damages with respect to an indemnification claim
until the total damages incurred under the merger agreement exceed $25,000,
after which we are entitled to recover such number of shares of our common
stock
equal to the amount of the liability divided by the average closing sale price
of a share of our common stock for each of the 10 consecutive trading days
immediately preceding the closing date of the merger, if the claim was made
on
or prior to the end of the one year period following the closing of the merger,
otherwise, for the 10 consecutive trading days immediately preceding the date
notice of the claim was delivered.
Escrow
The
merger agreement provides that, at the effective time of the merger, 460,000
shares, or 17.96% of the aggregate number of shares of our common stock to
be
issued to the PyX shareholders at the effective time of the merger, will be
placed into an escrow account to satisfy the shareholders’ indemnification
obligations relating to representations and warranties made in the merger
agreement, as described above under “Indemnification.”
As of
May 11, 2005, the value of the escrow shares was $1,154,600 based on the closing
price of our common stock on that date. If no claims for indemnity are made
within one year following the closing of the merger, the shares of our common
stock held in escrow will be distributed on a pro rata basis to the PyX
shareholders.
Interest
of Certain Persons in the Merger
Mr.
Ignacio C. Munio, our Vice President, Engineering, beneficially owns 25,000
shares of PyX common stock and as a result will be entitled to receive 11,500
shares of our common stock in connection with the merger. In addition to the
shares of our common stock that Mr. Munio will receive in connection in with
the
merger, he currently beneficially owns 299,825 shares of our common stock,
or
approximately 5.7% of the outstanding shares of our common stock based on the
number of shares outstanding on June 9, 2005. After consummation of the
transactions, Mr. Munio will beneficially own 2.9% of the outstanding shares
of
our common stock, assuming no further issuances of shares of our common stock
and not exercise of outstanding stock options or warrants.
Mr.
Greg
Yamamoto, currently the Chief Executive Officer of PyX, beneficially owns
200,000 shares of PyX common stock and options to purchase up to an additional
750,000 shares of PyX common stock. As a result of the merger, Mr. Yamamoto
will
be entitled to receive 92,000 shares of our common stock and options to purchase
up to an additional 345,000 shares of our common stock, representing
approximately 8.3% of the outstanding shares of our common stock, assuming
the
exercise in full of all of the options, based on the number of shares
outstanding on June 9, 2005. In addition, Mr. Yamamoto is investing $200,000
in
the private placement and, assuming a purchase price per share of $2.00, will
receive 100,000 shares of our common stock and a warrant to purchase up to
an
additional 50,000 shares of our common stock. After consummation of the merger
and the private placement, Mr. Yamamoto will beneficially own 5.6% of the
outstanding shares of our common stock, assuming exercise of all options and
warrants to purchase shares of our common stock, assuming no further issuances
of shares of our common stock and no exercise of outstanding stock options
or
warrants, other than the exercise of the stock options and warrants issued
to
Mr. Yamamoto. In addition, Mr. Yamamoto is investing an additional $100,000
in
the private placement on behalf of his two minor children, Melanie Yamamoto
and
Nicholas Yamamoto, and, assuming an purchase price per share of $2.00, each
child will receive 25,000 shares of our common stock and a warrant to purchase
up to an additional 12,500 shares of our common stock.
Accounting
Treatment
The
merger will be accounted for by us under the purchase method of accounting
in
accordance with generally accepted accounting principles. Therefore, the
aggregate consideration paid by us in connection with the merger, together
with
the direct costs of the merger, will be allocated to PyX’s tangible and
intangible assets and liabilities based on their fair market values. The assets
and liabilities of PyX will be consolidated into our assets and liabilities
as
of the effective date of the merger. The stock options issued to the former
holders of options to purchase shares of PyX common stock will be assumed by
us
and accounted for in accordance with Accounting Principles Board Opinion No.
25,
Accounting
for Stock Issued to Employees,
or APB
25.
Under APB 25, compensation expense is based on the difference, if any, on the
date of the grant between the fair value of the stock and the exercise price
of
the option.
The
Private Placement (see page 64)
General
The
unit
subscription agreement provides that, assuming a purchase price of $2.00 per
share, we will issue 2,575,000 shares of our common stock, or approximately
49%
of the outstanding shares of our common stock based on the number of shares
outstanding on June 9, 2005, and warrants to purchase up to an additional
1,287,500 shares of our common stock, or approximately 24.5% of the outstanding
shares of our common stock based on the number of shares outstanding on June
9,
2005, to the purchasers.
Terms
of the Unit Subscription Agreement
The
unit
subscription agreement is attached to this proxy statement as Annex C. You
should read the unit subscription agreement carefully. Our board of directors
has approved the unit subscription agreement, and it is the binding legal
agreement that governs the private placement.
Calculation
of Unit Price
The
unit
subscription agreements provide that the purchasers will invest $5,150,000
for
units consisting of one share of our common stock and a warrant to purchase
one-half of a share of our common stock. The price per unit is to be the lowest
of:
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92%
of the average closing sale price per share of our common stock,
as quoted
on the Nasdaq SmallCap Market, for each of the five consecutive trading
days on which our common stock trades ending on the date immediately
prior
to the closing date of the private placement;
and
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95%
of the closing sale price per share of our common stock, as quoted
on the
Nasdaq SmallCap Market, on the trading day on which our common stock
trades that immediately precedes the closing date of the private
placement.
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The
private placement will be significantly dilutive to current stockholders and
the
PyX stockholders. We have the right to terminate the unit subscription agreement
and not close the transaction if the price per unit is less than
$2.00.
Conditions
Precedent
The
completion of the private placement depends on the satisfaction or waiver of
a
number of conditions, including, among others, conditions relating
to:
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execution
and delivery of the investor rights
agreement;
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accuracy
of the representations and warranties of the parties and compliance
by the
parties with their respective
covenants;
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approval
by our stockholders of Proposals 1 and
2;
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our
listing status on the Nasdaq SmallCap
Market;
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completion
of the merger; and
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entry
by PyX into a reseller agreement with LSI
Logic.
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Representations
and Warranties
The
unit
subscription agreements contain customary representations and warranties made
by
us to the purchasers and by the purchasers to us for purposes of allocating
the
risks associated with the private placement. The assertions embodied in the
representations and warranties made by us are qualified by information set
forth
in a confidential disclosure letter that was delivered in connection with the
execution of the unit subscription agreements. All of the representations and
warranties made by the parties to the unit subscription agreements survive
for a
period of one year following the closing of the private placement.
Rights
of Participations
The
purchasers in the private placement will have the right to participate in any
future private placements of our equity for a period of two years following
the
closing of the private placement. These rights are subject to certain customary
exceptions, including, among other things, issuances of common stock to
employees, officers and directors under our equity compensation
plans.
Warrants
The
warrants issued in connection with the private placement have a term of five
years and are exercisable at a per share price equal to 133% of the unit price,
subject to proportional adjustments for stock splits, stock dividends,
recapitalizations and the like. In addition, the shares of our common stock
issuable upon exercise of the warrants are subject to adjustment in the event
we
issue shares of our common stock at a price less than the then applicable
purchase price of the warrants, subject to certain customary exceptions,
including, among other things, issuances to employees, officers and directors
under our equity compensation plans. If not exercised after five years, the
right to purchase shares of our common stock pursuant to the warrants will
terminate. The warrants contain a cashless exercise feature. The common stock
underlying the warrants are entitled to the benefits and subject to the terms
of
the Registration Rights described below.
Regulatory
Approvals (see page 29)
We
are
not aware of any federal or state regulatory requirements that must be complied
with or approvals that must be obtained to consummate the merger and private
placement, other than the filing of (1) a certificate of merger with
the
Secretary of State of the State of California, (2) this proxy statement
with the SEC and (3) compliance with all applicable state securities laws
regarding the offering and issuance of the shares in connection with the
transactions. If any additional approvals or filings are required, we will
use
our commercially reasonable efforts to obtain those approvals and make any
required filings before completing the transactions.
Dissenters’
Rights (see page 29)
Our
stockholders are not entitled to exercise dissenters’ rights in connection with
the merger or the private placement.
Registration
Rights (see page 68)
We
have
agreed to file a registration statement within 90 days after the completion
of the merger and within 60 days after completion of the private placement
registering for resale the shares of our common stock issued to (1) the PyX
shareholders in the merger and (2) the purchasers in the private
placement. The merger agreement requires that, prior to completion
of the
merger, each PyX shareholder who will receive shares of our common stock in
the
merger enter into an agreement providing that, with respect to 95% of the shares
of our common stock that such shareholder receives in connection with the
merger, the shareholder will not sell those shares until one year after the
closing date of the merger. We expect all PyX shareholders to enter into this
agreement. In addition, we have agreed to register the shares of our common
stock issuable upon exercise of the PyX options we assume in connection with
the
merger on a registration statement on Form S-8 shortly after the closing of
the
merger.
Voting
Agreement (see pages 38 and 68)
Our
executive officers and members of our board of directors are party to a voting
agreement pursuant to which they have agreed, subject to the terms and
conditions of the voting agreement, to vote all of their shares of common stock
in favor of proposals 1 and 2 and any other matter necessary to effect the
transactions. The shares subject to the voting agreement represent approximately
3.2% of the outstanding shares of our common stock, based on the number of
shares outstanding on June 9, 2005.
RISK
FACTORS
You
should consider carefully the following risk factors as well as other
information in this proxy statement and the documents incorporated by reference
herein or therein, including our annual report on Form 10-K for the year ended
October 31, 2004 and our quarterly report on Form 10-Q for the quarter ended
January 31, 2005, in voting on Proposals 1 and 2 relating to the merger and
the
private placement, respectively. If any of the following risks actually occur,
our business, operating results and financial condition could be adversely
affected. This could cause the market price of our common stock to decline,
and
you may lose all or part of your investment.
Risk
Relating to the Transactions
If
we are unable to complete the merger and the private placement, our business
may
be adversely affected.
If
the
merger and the private placement are not completed, our business and the market
price of our stock price may be adversely affected. We currently anticipate
that
our available cash balances, available borrowings and cash generated from
operations will be sufficient to fund our operations only through July 2005.
If
we are unable to complete the transactions, we may be unable to find another
way
to grow our business. Costs related to the transactions, such as legal,
accounting and financial advisor fees, must be paid even if the transactions
are
not completed. In addition, even if we have sufficient funds to continue to
operate our business but the transactions are not completed, the current market
price of our common stock may decline.
The
transactions will result in substantial dilution to our current
stockholders.
The
issuance of shares of our common stock in the merger and the private placement
will significantly dilute the voting power, book value and ownership percentage
of our existing stockholders. In addition, the private placement will
significantly dilute the interests of the PyX shareholders in our common stock.
We will issue a total of 4,600,000 shares of our common stock in the merger,
including shares of our common stock issuable upon exercise of the PyX stock
options that we are assuming in connection with the merger. We expect to issue
up to 3,787,500 shares of our common stock in the private placement, including
shares issuable upon exercise of the warrants to purchase our common stock
that
we are issuing in connection with the private placement. Immediately following
completion of the transactions, the shares held by our existing stockholders
are
expected to represent approximately 32.8% of our outstanding capital stock
assuming the exercise in full of all outstanding options and warrants. If the
PyX shareholders and the purchasers in the private placement were to act in
concert, they would be able to direct our actions after the transaction,
including actions that could be opposed by our management, our board of
directors and/or our minority stockholders and may make it more difficult for
us
to enter into other transactions, including mergers, acquisitions or change
of
control transactions.
We
may not realize any anticipated benefits from the
merger.
While
we
believe that the opportunities for the combined company are greater than our
current opportunities and that the combined company will be able to create
substantially more stockholder value than could be achieved by the companies
individually, there is substantial risk that the synergies and benefits sought
in the transactions might not be fully achieved. There is no assurance that
PyX’s technology can be successfully integrated into our existing product
platforms or that the financial results of combined company will meet or exceed
the financial results that would have been achieved by the companies
individually. As a result, our operations and financial results may suffer
and
the market price of our common stock may decline.
The
exchange rate in the merger will not be adjusted, even if there is an increase
in the price of our common stock.
The
price
of our common stock at the time the merger may vary from its price at the date
of this proxy statement and at the date of the special meeting. Therefore,
the
shares that we issue in connection with the merger may have a greater value
than
the value of the same number of shares on the date of this proxy statement
or
the date of the special meeting. Variations in the price of our common stock
before the completion of the merger may result from a number of factors that
are
beyond our control, including actual or anticipated changes in our business,
operations or prospects, market assessments of the likelihood that the
transactions will be consummated and the timing thereof, regulatory
considerations, general market and economic conditions and other factors. At
the
time of the special meeting, you will not know the exact value of the shares
that we will issue in the merger.
In
addition, the stock market generally has experienced significant price and
volume fluctuations. These market fluctuations could have a material effect
on
the market price of our common stock before the merger is completed, and
therefore could materially increase the value that we will transfer to the
stockholders of PyX in the merger.
The
purchase price for the shares issued in the private placement reflects a
discount from the market price of our stock and will not be increased, even
if
there is an increase in the price of our common
stock.
The
purchasers in the private placement will have acquired shares of our common
stock at a discount from than the per share market value of a share of our
common stock as reported on the Nasdaq Smallcap Market. Therefore, the shares
that we issue in the private placement will have a greater value than the value
of the same number of shares on the date the unit subscription agreement
relating to the private placement is executed or on the date the private
placement is closed. Further, the purchase price may further decrease if the
market price of our stock decreases between the date we executed the unit
subscription agreement and the date the private placement is closed. Variations
in the price of our common stock before the closing of the private placement
may
result from a number of factors that are beyond our control, including actual
or
anticipated changes in our business, operations or prospects, market assessments
of the likelihood that the transactions will be consummated and the timing
thereof, regulatory considerations, general market and economic conditions
and
other factors. At the time of the special meeting, you will not know the exact
price at which the shares will be issued in the private placement. In addition,
although we have the ability to terminate the private placement if the purchase
price per share is less than $2.00, we may be unable to complete the merger
if
we do so. Further, the costs related to the transactions, such as legal,
accounting and financial advisor fees, must be paid even if the transactions
are
not completed. Even if we have sufficient funds to continue to operate our
business but the transactions are not completed, the current market price of
our
common stock may decline.
Most
of the indemnification obligations under the merger agreement are secured only
by shares of our common stock.
PyX
and
the PyX shareholders have agreed to indemnify us for certain breaches of
representations, warranties and covenants set forth in the merger agreement.
In
the event of such breach, our right to recover for any damages we suffer as
a
result of such breaches is largely limited to the shares of our common stock
issued to the PyX shareholders in connection with the merger. Subject to certain
limitations, we are entitled to recover such number of shares of our common
stock equal to the amount of the liability divided by the average closing sale
price of a share of our common stock for each of the 10 consecutive trading
days
immediately preceding the closing date of the merger, if the claim was made
on
or prior to the end of the one year period following the closing of the merger,
otherwise, for the 10 consecutive trading days immediately preceding the date
notice of the claim was delivered, in each case as reported on the Nasdaq
SmallCap Market. Such shares may be inadequate to fully address any damages
we
may incur and our operations and financial results may suffer and the market
price of our common stock may decline.
Risk
Relating to SBE after the Transactions
If
we are unable to successfully integrate the business operations of PyX after
the
merger, we will not realize the anticipated potential benefits from the merger
and our business could be adversely affected.
The
merger involves the integration of companies that have previously operated
independently. Successful integration of PyX’s operations with ours will depend
on our ability to consolidate operations, systems and procedures, eliminate
redundancies and to reduce costs. If we are unable to do so, we will not realize
the anticipated potential benefits of the merger with PyX, and our business
and
results of operations could be adversely affected. Difficulties could include
the loss of key employees and customers, the disruption of our and PyX’s ongoing
businesses and possible inconsistencies in standards, controls, procedures
and
policies. Our integration of PyX may be complex and time-consuming.
Additionally, the realization of expected efficiencies and cost savings could
be
adversely affected by a number of factors beyond our control, and may not
materialize after the merger.
If
the combined company experiences losses after the transactions are completed,
we
could experience difficulty meeting our business plan, and our stock price
could
be negatively affected.
After
the
transactions, the combined company may experience operating losses and negative
cash flow from operations as it develops PyX’s iSCSI software solution. Any
failure to achieve or maintain profitability could negatively impact the market
price of our common stock. Historically, PyX has not been profitable on a
quarterly or annual basis, and we expect that the combined company will incur
net losses for the foreseeable future. We anticipate that the combined company
will incur significant product development, sales and marketing and
administrative expenses. As a result, the combined company will need to generate
significant quarterly revenues if it is to achieve and maintain profitability.
A
substantial failure to achieve profitability could make it difficult or
impossible for us to grow our business. The combined company’s business strategy
may not be successful, and the combined company may not generate significant
revenues or achieve profitability. Any failure to significantly increase
revenues would also harm our ability to achieve and maintain profitability.
If
we do achieve profitability in the future, we may not be able to sustain or
increase profitability on a quarterly or annual basis.
Future
sales of our common stock issued in the transactions could cause the market
price for our common stock to significantly decline.
After
the
transactions, sales of substantial amounts of our common stock in the public
market could cause the market price of our common stock to fall, and could
make
it more difficult for us to raise capital through public offerings or other
sales of our capital stock. In addition, the public perception that these sales
might occur could have the same undesirable effects. The PyX shareholders who
receive shares of our common stock in the merger will, prior to the completion
of the transactions, enter into an agreement that provides, in part, that,
with
respect to 95% of the shares of our common stock that the shareholder receives
in connection with the merger, the shareholder will not sell these shares until
one year after the merger is completed. However, we are required to file a
registration statement for the resale of all shares that we issue in the merger
no later than 90 days after the merger is completed. In addition, we
are
required to register for sale all of the shares issued in the private placement
no later than 60 days after the private placement is completed. The purchasers
in the private placement are not subject to any lockup with respect to the
shares they purchase in the private placement. Once the registration statement
relating to such shares becomes effective, the shares issued in the private
placement will generally be freely tradeable without restriction. Such free
transferability could materially and adversely affect the market price of our
common stock. We intend to register the shares issued in connection with the
merger at the same time we register the shares issued in connection with the
private placement. As a result, sales under the registration statement will
include a very substantial number of shares and percentage of our common stock.
Immediately after the transactions, holders of approximately 44.3% of the
outstanding shares of our common stock will have the right to sell their shares
pursuant to these registration rights and holders of an additional approximately
5.7% of the outstanding shares of our common stock, assuming no further
issuances of shares of our common stock, will have the right to sell their
shares after the one year period has passed.
Risks
Related to PyX’s Business
PyX’s
products will require a substantial product development investment by us and
we
may not realize any return on our investment.
The
development of new or enhanced products is a complex and uncertain process.
As
we integrate the PyX products into our product line, our customers may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products
and
enhancements, both to our existing product line as well as to the PyX products.
Development costs and expenses are incurred before we generate any net revenue
from sales of the products resulting from these efforts. We expect to incur
substantial research and development expenses relating to the PyX product line,
which could have a negative impact on our earnings in future
periods.
If
PyX’s products contain undetected errors, we could incur significant unexpected
expenses, experience product returns and lost sales.
The
products developed by PyX are highly technical and complex. While PyX’s products
have been tested, because of their nature, we can not be certain of their
performance either as stand-alone products or when integrated with our existing
product line. Because of PyX’s short operating history, we have little
information on the performance of its products. There can be no assurance that
defects or errors may not arise or be discovered in the future. Any defects
or
errors in PyX's products discovered in the future could result in a loss of
customers or decrease in net revenue and market share.
THE
COMPANIES
SBE
We
develop and provide network communications and storage solutions for original
equipment manufacturers in the embedded systems marketplace. Embedded networking
technology is hardware or software that serves as a component within a larger
networking or storage device or system, such as a Gigabit Ethernet or a T-1/T-3
input/output network interface card, that plugs into an expansion slot in a
high-end computer or storage system. Embedded networking solutions enable the
functionality of many commonly used devices or equipment, such as products
and
solutions for basic telephone and internet services, mobile phones, medical
equipment and storage networks.
We
deliver a product portfolio comprised of standards-based wide area networking,
or WAN, local area networking and storage area network, network interface and
intelligent communications controller cards. All of our products are coupled
with enabling Linux or Solaris software drivers. Our products are designed
to be
functionally compatible with each other and, since we use industry standard
form
factors and technologies, our products are also compatible with third party
standards-based products. This standard scalability and modularity offers our
customers greater flexibility to develop solutions for unique product
configurations and applications.
We
were
incorporated in 1961 as Linear Systems, Inc. In 1976, we completed our initial
public offering. In July 2000, we acquired LAN Media Corporation, a privately
held company, to complement and grow our WAN adapter product line from both
a
hardware and software perspective. In August 2003, we acquired the products
and
technologies of Antares Microsystems to increase the functionality of our PCI
product line. We continue to operate under a single business unit.
PyX
PyX
Technologies, Inc., or PyX, is a technology company that was incorporated under
the laws of the State of California on November 26, 2002. Since inception,
PyX's
efforts have been devoted to the development of software products for the
Internet Small Computer System Interface, or iSCSI, enterprise storage market
and raising capital. PyX has not received any significant revenues from the
sale
of its products or services. Accordingly, through the date of this proxy
statement, PyX is considered to be in the development stage and the accompanying
financial statements on page 55 represent those of a development stage
enterprise.
PyX
has
developed a complete software-based, scalable storage solution via an iSCSI
Initiator and Target driver set for the NetBSD or LINUX OS. PyX believes that
its iSCSI software provides an efficient alternative for all environments
seeking interoperability in a software-based enterprise storage solution. A
Storage Area Network, or SAN, infrastructure with iSCSI capabilities can
continue to operate during the constant network changes and updates facing
network operators today.
Managing
storage is universally regarded as one of the most burdensome of IT
responsibilities. In direct-attached storage environments that most small to
mid-sized companies deploy, the process of managing storage is multiplied by
the
number of physical connection points and the number of storage systems in an
organization. Imagine an environment with ten computers, each with its own
storage system. Not only does that create ten point-for-management for the
storage systems themselves, it also requires ten times the effort to handle
storage expansion, reallocation and repairs. With SANs storage management is
consolidated to a single point from which an IT manager can partition, allocate,
expand, reassign, backup and repair storage. By moving to a SAN, small to
mid-sized organizations can scale their storage infrastructure much more easily.
When additional capacity is needed, simply add additional storage to the SAN.
IP
SANs such as iSCSI provide higher-speed storage access than internal disks
while
also enabling load balancing across multiple connections. Remote storage powered
by iSCSI also enables on-line data back up, disaster recover and high-speed
access to data by remote users.
THE
MERGER AND THE PRIVATE PLACEMENT
Background
of the Merger and the Private Placement
Our
acquisition of Antares Microsystems on August 7, 2003 provided us with products
that addressed technical functionality that we desired. Our greatest interest
was in the TCP/IP Offload Engine, or TOE, which accelerates TCP/IP protocol
processing by the computer system by running the protocol on the TOE itself
-
offloading the work from the computer’s motherboard. Antares also had storage
products, such as Small Computer Storage Interface, or SCSI, and Fibre Channel
adapters, used for both attached disk drives and high performance storage area
networked installations.
The
TOE
is particularly valuable in connection with two applications: connecting
computers together for fast file transfers, such as with databases running
database management software or cluster computing when the host CPU is fully
utilized; and IP storage, supporting the iSCSI protocol, ultimately providing
a
lower cost and fault-tolerant replacement for Fibre Channel storage
architectures.
We
immediately recognized the need to support iSCSI and opened discussions with
several software companies to provide that functionality. On August 7, 2003,
Andre Hedrick, a founder and then chief executive officer of PyX, approached
us
at the LinuxWorld trade show in San Francisco expressing an interest in
combining his iSCSI products with our TOE. We passed the PyX contact and product
information on to our engineering group.
During
the fourth quarter of 2003, PyX was given several of our TOE products in order
to write software drivers that would interface with Linux
workstations.
In
the
first quarter of 2004, Mr. Hedrick gave us a demonstration of the iSCSI target
and initiator software products. PyX was excited about our TOE product because
it was the only multi-port product available, and highlighted the benefits
of
PyX’s port aggregation feature, which allows the user to combine both Gigabit
Ethernet ports for combined functionality, and failover and error recovery
features that detect fatal errors on one port and quickly re-route to the other
port.
On
April
23, 2004, Mr. Hedrick met with our engineering, sales and marketing groups
for a
training session and we had preliminary discussions regarding a joint marketing
effort. We discussed and agreed to move forward with a joint marketing effort
based on several factors, including the low cost of initial research and
development, the anticipated quick time to market a joint product, and the
benefits associated with joint sales materials and demonstrations.
On
April
30, 2004, Chris Short joined PyX as vice president of sales and marketing.
Mr.
Short met with Dan Grey, our then Senior Vice President of Sales & Marketing
and currently our President and Chief Executive Officer, to negotiate terms
of a
reseller agreement.
On
May 5,
2004, Mr. Short met with Yee-Ling Chin, our Vice President, Marketing, and
together they developed data sheets and other marketing materials in preparation
for the Network World InterOp trade show in Las Vegas, Nevada.
On
May
11, 2004, PyX demonstrated a complete fault tolerant target/initiator system
in
our booth at the Network World InterOp trade show. In addition, we also issued
a
joint press release highlighting the results of the Las Vegas demonstration
and
the availability of iSCSI products.
On
June
22, 2004, PyX demonstrated a complete fault tolerant target/initiator system
in
our booth at the SUPERCOMM trade show in Chicago. Approximately 40% of our
new
sales leads came from the combined TOE-iSCSI product.
On
July
8, 2004, Bill Heye, our then President and Chief Executive Officer and David
Brunton, our Chief Financial Officer, initiated preliminary discussions with
Mr.
Hedrick regarding the possible acquisition of PyX by us, our valuation, and
the
potential strengths of the combined company. After several meetings during
July,
PyX chose to continue to grow independently and without outside
funding.
On
August
5, 2004, PyX demonstrated a complete fault tolerant target/initiator system
in
our booth at the LinuxWorld trade show in San Francisco.
On
September 1, 2004, we and PyX signed an OEM agreement allowing us to resell
the
full PyX product-line in combination with our TOE adapter.
In
December 2004, we started our first joint TOE-iSCSI advertising campaign in
InfoStor, a leading storage magazine, entitled “Have You Been Chasing the Wrong
Target?”
On
December 14, 2004, we issued a press release announcing the first shipment
of
the combined TOE-iSCSI product.
Also
in
December 2004, Messrs. Brunton and Hedrick met on several occasions to again
discuss a potential merger of us and PyX. Mr. Hedrick was receptive to the
idea,
but PyX was in the process of hiring a new Chief Executive Officer and Chief
Operating Officer. We were told at that time that the new management team was
set to begin working in January 2005 and would make the decision on the future
of PyX.
Between
January 24 and January 28, 2005, Messrs. Grey and Brunton held advanced
discussions with various parties regarding a potential equity financing. These
discussions included the topic of a potential acquisition of PyX by us, the
need
to raise up to $10 million in a private placement of either equity or
convertible debt, and our desire to continue as a reseller of PyX’s iSCSI
software, which would require us to raise up to $3 million through a private
placement of either equity or convertible debt. All of the parties were
supportive of the PyX acquisition and expressed an interest in providing all
or
part of the capital necessary to complete the acquisition.
On
January 31, 2005, Mr. Grey met with Greg Yamamoto, PyX’s current Chief Executive
Officer, to discuss PyX’s growth plans and a possible merger with us.
Messrs. Grey and Yamamoto also met with other members of our management
to
discuss the potential merger between the companies.
During
the first week of February 2005, a term sheet for the proposed merger was
delivered to PyX. After negotiation, both parties mutually agreed to the terms
of the merger.
In
February 2005, we continued our discussions with PyX on the details of the
proposed merger between us and PyX, including potential synergies, revenue
growth potential, marketing position, potential product offerings and the
management structure of the combined company. In light of the liquidity issues
facing both companies at the time, we also discussed the necessity for an
additional equity investment in the combined company. Messrs. Grey and
Yamamoto decided at that time that it would be in the best interests of both
companies to move forward with the merger.
On
February 8, 2005, our board of directors met to approve the term sheet and
instructed our management to move forward with the merger. Messrs. Grey and
Brunton were tasked with responsibility of overseeing the negotiation and
execution of definitive agreements relating to the merger.
On
February 15, 2005, the PyX iSCSI solution was demonstrated in our booth at
the
LinuxWorld trade show in Boston.
In
mid-February 2005, Mr. Brunton contacted certain investors and investment banks
who had previously expressed an interest in providing financing to us regarding
a $5 - $7 million private placement of equity to fund the proposed merger and
the combined company after the merger. AIGH Investment Partners was selected
as
the lead investor in the proposed private placement.
In
late
February 2005, we delivered the first draft of the merger agreement to PyX
and
its counsel. During February and March 2005, additional meetings and conference
calls were held to discuss open issues and to conduct further legal, business,
accounting and financial due diligence. During this time, our management team
and legal and financial advisors continued to analyze the business, legal and
regulatory issues arising from a potential merger of us and PyX. In addition,
our management team and advisors met with PyX’s management team and advisors to
analyze in detail the potential synergies and the near- and long-term value
creation that would result from a strategic merger of the two
companies.
In
February 2005, Mr. Brunton arranged for PyX to move into office space adjacent
to our offices, rent-free until the merger was completed.
On
March
8, 2005, the PyX iSCSI solution was demonstrated in our booth at the Embedded
Systems Conference in San Francisco.
In
early
March 2005, Mr. Brunton selected Houlihan Lokey to render a fairness opinion
as
to the purchase price that we proposed to pay for PyX. During the next three
weeks, the team from Houlihan Lokey met with the management teams from both
companies and performed due diligence on the companies and the transaction
in
connection with their valuation services.
On
March
22, 2005, we held a telephonic meeting of our board of directors to review
the
results of the Houlihan Lokey investigation. Houlihan Lokey presented the
results of their investigation and answered the questions of our board of
directors. Houlihan Lokey also determined that the price to be paid by us for
PyX was reasonable and fair. Our legal counsel reviewed with
our
board of directors the terms of the proposed final drafts of the merger
agreement and related documents and the corporate actions required to approve
the merger. Our board of directors then unanimously approved and adopted the
merger agreement and the transactions contemplated by the merger agreement
and
agreed to recommend to our stockholders the adoption of the merger agreement
and
approval of the transactions contemplated by the merger agreement.
On
March
28, 2005, we and PyX signed the merger agreement. On the same day, a press
release announcing the merger was released and filed on a Form 8-K with the
Securities and Exchange Commission.
In
the
March issue of Embedded Computing Design magazine, an article co-authored by
us
and PyX was published entitled “Storage Data Transfers Across the Internet with
iSCSI and Dual-Port TOE.”
On
April
5, 2005, AIGH’s legal counsel delivered the initial private placement term sheet
to us and our legal counsel. After negotiation, the revised private placement
term sheet was signed on April 11, 2005.
On
April
11, 2005, we and our counsel received the initial drafts of the private
placement documents from AIGH’s counsel.
On
April
12, 2005, we and PyX jointly exhibited at our first storage-only trade show,
Storage Network World, in Phoenix, Arizona. PyX distributed a joint white paper
with Neterion and Force 10 highlighting the world’s record for iSCSI performance
on a 10 Gigabit network.
On
April
15, 2005, we held a telephonic meeting of our board of directors to review
and
approve the term sheet relating to the private placement regarding raising
$5 -
$7 million through the sale of shares of our common stock and the issuance
of
warrants to purchase shares of our common stock. Our board of directors then
unanimously approved and adopted the agreement and agreed to recommend to our
stockholders the adoption of the unit subscription agreement and the approval
of
the issuance of shares of our common stock and warrants to purchase shares
of
our common stock to the purchasers in the private placement.
On
May 4,
2005 after negotiations, the agreed upon private placement documents were
executed by our officers and the purchasers.
Reasons
for the Merger and the Private Placement
In
reaching its decision to approve the merger and the private placement and to
recommend approval of the merger agreement and issuance of shares of our common
stock in connection with the merger and the private placement by our
stockholders, our board of directors consulted with our management team and
advisors and independently considered the proposed merger agreement, the unit
subscription agreement, and the transactions contemplated by such
agreements.
Our
board
of directors considered the following factors as reasons that the merger and
the
private placement will be beneficial to us and our stockholders.
The
Merger
Prior
to
approving the merger, our board of directors considered various alternative
ways
to grow our business. After such consideration, our board of directors concluded
that the merger presented the best course of action for us at this
time.
The
material factors considered by our board of directors in making its
determination to pursue the merger included the following:
|
1.
|
whether
the combination of our existing solutions with PyX’s Internet Small
Computer System Interface, or iSCSI, software meets a significant
customer
need;
|
|
2.
|
whether
the combined company will be in the best position to capture market
share
as iSCSI technology is adopted in the marketplace;
and
|
|
3. |
whether
our products with PyX’s products will increase their respective
functionality.
|
The
Private Placement
Prior
to
approving the private placement, our board of directors considered various
alternatives to the private placement. After such consideration, our board
of
directors concluded that the private placement, in connection with the merger,
presented the best course of action for us at this time.
The
material factors considered by our board of directors in making its
determination to pursue the private placement included the
following:
|
1.
|
the
price to be paid for the common stock by the purchasers in the private
placement;
|
|
2.
|
limited
sources of capital for companies in SBE’s financial position;
and
|
|
3.
|
our
immediate need for additional capital to develop PyX’s iSCSI software
solutions in order to enhance SBE’s future
revenues.
|
Factors
Relevant to the Merger and the Private Placement
In
the
course of its deliberations, our board of directors reviewed a number of other
factors relevant to the transactions with our management. In particular, our
board of directors considered, among other things:
|
1.
|
information
relating to the business, assets, management, competitive position
and
operating performance of PyX, including the prospects of SBE if it
were to
continue without acquiring PyX;
|
|
2.
|
the
financial presentation of Houlihan Lokey, including its opinion described
under “Opinion of Our Financial Advisor” on page 22, to the effect
that, as of the date of the opinion, the merger consideration is
fair to
our stockholders from a financial point of view;
and
|
|
3.
|
our
need following the transactions for capital to develop the iSCSI
software
solutions, fund the costs associated with merger and provide sufficient
operating capital to support our operations for the near
term.
|
Recommendation
of Our Board of Directors
At
its
meetings held on March 22, 2005 and April 14, 2005, our board of directors
(1) determined that the merger, the private placement, the merger agreement
and the unit subscription agreement are fair to and in the best interests of
us
and our stockholders and (2) determined to recommend that our stockholders
approve the proposals related to the transactions. Accordingly, our board of
directors recommends that our stockholders vote FOR the merger, the merger
agreement, the unit subscription agreement and the issuance of shares of our
common stock to the PyX shareholders in connection with the merger and to the
purchasers in connection with the private placement.
In
connection with the foregoing actions, our board of directors consulted with
our
management team, as well as our financial advisor and legal counsel, and
considered the following material factors:
|
1.
|
all
the reasons described above under “Reasons for the Merger and the Private
Placement”;
|
|
2.
|
the
judgment, advice and analyses of our senior management, including
their
favorable recommendation of the merger and the private
placement;
|
|
3.
|
alternatives
to the merger and the private
placement;
|
|
4.
|
the
presentations by and discussions with our senior management and
representatives of our counsel and Houlihan Lokey regarding the terms
and
conditions of the unit subscription agreement and the private
placement;
|
|
5.
|
the
presentations by and discussions with our senior management and
representatives of our counsel regarding the terms and conditions
of the
merger agreement and the merger;
|
|
6.
|
that
while the merger and the private placement are likely to be completed,
there are risks associated with completing the transactions and,
as a
result of conditions to the completion of the transactions, it is
possible
that the transactions may not be completed even if approved by our
stockholders and PyX’s shareholders;
and
|
|
7.
|
the
risk that the synergies and benefits sought in the merger might not
be
fully achieved or achieved at all.
|
Our
board
of directors did not find it useful to, and did not attempt to, quantify, rank
or otherwise assign relative weights to these factors. Our board of directors
relied on the analysis, experience, expertise and recommendation of our
management team with respect to each of the transactions and relied on Houlihan
Lokey, our financial advisor, for analyses of the financial terms of the merger.
See “Opinion of Our Financial Advisor” on page 22.
In
addition, our board of directors did not undertake to make any specific
determination as to whether any particular factor, or any aspect of any
particular factor, was favorable or unfavorable to its ultimate determination,
but rather our board of directors conducted an overall analysis of the factors
described above, including discussions with our management team and legal,
financial and accounting advisors. In considering the factors described above,
individual members of our board of directors may have given different weight
to
different factors.
Our
board
of directors considered all these factors as a whole, and overall considered
the
factors to be favorable and to support its determination. However, the general
view of our board of directors was that factors 6 and 7 described above were
uncertainties, risks or drawbacks relating to the transactions, but that the
other reasons and factors described above were generally considered
favorable.
Opinion
of Our Financial Advisor
The
full
text of the written opinion, which sets forth, among other things, the
assumptions made, general procedures followed, matters considered, limitations
on and qualifications made by Houlihan Lokey in its review, is set forth as
Annex A to this proxy statement and is incorporated herein by reference. The
summary of Houlihan Lokey’s opinion in this proxy statement is qualified in its
entirety by reference to the full text of the written opinion. You are urged
to
read carefully Houlihan Lokey’s written opinion in its entirety.
Overview
Our
board
of directors retained Houlihan Lokey to render a written opinion as to the
fairness to us, from a financial point of view, of the consideration to be
paid
by us in connection with the merger. Houlihan Lokey is a nationally recognized
investment banking firm that is frequently engaged to provide financial advisory
services and rendering fairness opinions in connection with mergers and
acquisitions, leveraged buyouts and business and securities valuations for
a
variety of regulatory and planning purposes, recapitalizations, financial
restructurings and private placements of debt and equity securities. Our board
of directors chose to retain Houlihan Lokey based upon their experience in
the
valuation of businesses and their securities in connection with mergers and
acquisitions, recapitalizations and similar transactions. Houlihan Lokey has
no
material prior relationship with us or our affiliates.
Houlihan
Lokey's opinion to our board of directors addresses only the fairness of the
merger to our stockholders from a financial point of view. Their opinion does
not address the underlying business decision to effect the merger or our board
of director’s decision to recommend the merger or the merger agreement to our
stockholders; nor does it constitute a recommendation to our stockholders as
to
how to vote with respect to the merger. Houlihan Lokey has no obligation to
update or reaffirm its opinion. However, Houlihan Lokey may render updates
or
bringdowns of its opinion if reasonably requested by us prior to the completion
of the merger. Houlihan Lokey did not, and was not requested by our board of
directors, us or any other person to make any recommendations as to the form
or
amount of consideration to be paid by us in connection with the merger.
Furthermore, Houlihan Lokey did not negotiate any portion of the merger
agreement or the merger, initiate any discussions with third parties with
respect to the merger or advise our board of directors with respect to
alternatives to the merger.
As
compensation for its services in connection with the merger, we agreed to pay
Houlihan Lokey a fee of $135,000, in addition to reimbursement of their
reasonable out-of-pocket expenses. To the extent that we request Houlihan Lokey
to render updates or bringdowns of its opinion beyond May 31, 2005, we agreed
to
pay Houlihan Lokey a fee of $25,000 per month until the merger is completed.
No
portion of Houlihan Lokey’s fee is contingent upon the successful completion of
the merger, the private placement or the conclusions reached in Houlihan Lokey’s
opinion. We have also agreed to indemnify and hold harmless Houlihan Lokey
and
its affiliates, and their respective past, present and future directors,
officers, shareholders, employees, agents, representatives, advisors and
controlling persons within the meaning of either Section 15 of the Securities
Act of 1933, as amended, or Section 20 of the Securities Exchange Act of 1934,
as amended, which we refer to in this proxy statement as the Indemnified
Parties, to the fullest extent lawful, from and against any and all losses,
claims, damages or liabilities (or actions in respect thereof), joint or
several, arising out of or related to Houlihan Lokey’s engagement by our board
of directors, any actions taken or omitted to be taken by an Indemnified Party
(including acts or omissions constituting ordinary negligence) in connection
with the engagement, the opinion, or any transaction or proposed
transaction.
In
arriving at its fairness opinion, Houlihan Lokey performed, among other things,
the following:
|
1.
|
reviewed
our Annual Report on Form 10-K for the fiscal year ended October
31, 2004,
and our quarterly report on Form 10-Q for the first quarter ended
January
31, 2005, which our management has identified as being the most current
financial statements available;
|
|
2.
|
reviewed
PyX’s unaudited financial statements for the fiscal years ended December
31, 2003 and 2004 and interim financial statements for the two-month
period ended February 28, 2005;
|
|
3.
|
reviewed
copies of the following agreements:
|
|
• |
the
Term Sheet between us and PyX, dated February 7,
2005;
|
|
• |
the
Agreement and Plan of Merger and Reorganization between us and PyX,
dated
March 28, 2005;
|
|
• |
the
Form of Shareholder Agreement between us and the shareholders of
PyX;
|
|
• |
the
Form of Noncompetition Agreement;
|
|
• |
the
Form of General Release;
|
|
• |
the
Form of Affiliate Agreement;
|
|
• |
the
Form of Escrow Agreement;
|
|
• |
the
Disclosure Schedule of PyX, dated March 28,
2005.
|
|
4.
|
reviewed
the form of legal opinion of Orrick, Herrington & Sutcliffe LLP, dated
March 28, 2005;
|
|
5.
|
met
with certain members of the senior management of PyX and us to discuss
the
operations, financial condition, future prospects and projected operations
and performance of PyX and us, and met with representatives of our
legal
counsel to discuss certain matters;
|
|
6.
|
visited
our facilities and business
offices;
|
|
7.
|
reviewed
forecasts and projections prepared by our management with respect
to us on
a stand-alone basis and in combination with PyX for the fiscal years
ended
October 31, 2005 and 2006;
|
|
8.
|
reviewed
the historical market prices and trading volume for our publicly-traded
securities;
|
|
9.
|
reviewed
certain other publicly-available financial data for certain companies
that
Houlihan Lokey deemed comparable to us and PyX, and publicly-available
prices and premiums paid in other transactions that they considered
similar to the merger; and
|
|
10.
|
conducted
such other studies, analyses and inquiries as Houlihan Lokey deemed
appropriate.
|
Analyses
Houlihan
Lokey used several methodologies to assess the fairness of the consideration
to
be paid by us in connection with the merger, from a financial point of view.
The
following is a summary of the material financial analyses used by Houlihan
Lokey
in connection with providing its opinion. This summary is qualified in its
entirety by reference to the full text of their opinion, which is attached
as
Annex A to this proxy statement and incorporated herein by reference.
Houlihan
Lokey performed each of the following analyses based upon its view that each
is
appropriate and reflective of generally accepted valuation methodologies, the
accessibility of comparable privately-held companies, data from recent
financings, the accessibility of comparable publicly-traded companies and the
availability of forecasts from our management. Further, no one methodology
was
considered to be more appropriate than any other methodology, and therefore
Houlihan Lokey utilized all of the aforementioned methodologies in arriving
at
its conclusions.
Valuation
of PyX
Houlihan
Lokey performed the following analyses in order to determine the value of the
equity of PyX:
Private
Financing Methodology
The
private financing methodology considered pre-money valuations of
publicly-disclosed private financings of comparable private companies to derive
a value for PyX. The private financings selected included first and second
rounds of funding. Houlihan Lokey considers PyX to be a company that, if venture
backed, would be at a stage between a first and second round.
The
pre-money valuations of the private financings selected exhibited a range of
$7.0 million to $17.4 million with a median and mean of $8.8 million and $10.4
million, respectively. Furthermore, median pre-money valuations for first-
and
second-round financings for all disclosed venture-financed deals in 2004 were
approximately $5.1 million and $12.1 million, respectively.
Based
on
the private financing methodology, Houlihan Lokey selected a range of value
for
the PyX business of $7.0 million to $12.0 million, on a controlling interest
basis.
Previous
PyX Financing
PyX
completed a round of financing in January 2005 in which they raised money from
investors, including two incoming key members of their senior management, at
a
post-money valuation of $10.0 million, which equates to $1.00 per share on
a
fully-diluted basis. Since the time of the financing, the two members of senior
management that participated in the financing have begun employment with PyX,
and PyX has further developed its products, customer pipeline and sales
process.
Determination
of Equity Value
As
set
forth above, Houlihan Lokey determined the value of the PyX business using
the
private financing methodology and the previous PyX financing. These valuation
indications are summarized as follows:
Enterprise
Value Indication from Operations
|
|
|
|
|
|
|
|
|
|
UMarket
ApproachU
|
|
Low
|
|
|
|
High
|
|
|
|
|
|
(figures
in thousands)
|
|
|
|
Private
Financing Methodology
|
|
$
|
7,000
|
|
|
--
|
|
$
|
12,000
|
|
Previous
PyX Financing
|
|
$
|
10,000
|
|
|
--
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Concluded
Enterprise Value
|
|
$
|
7,000
|
|
|
--
|
|
$
|
12,000
|
|
Concluded
Equity Value
|
|
$
|
7,000
|
|
|
--
|
|
$
|
12,000
|
|
Based
upon the aforementioned analyses, Houlihan Lokey selected a range of value
for
the PyX business of approximately $7.0 million to $12.0 million.
Houlihan
Lokey considered the aforementioned analyses as a whole and did not weight
any
one analyses more or less than any other of its analyses. Accordingly, Houlihan
Lokey arrived at its range of equity value based upon all of the aforementioned
analyses.
Valuation
of SBE
Houlihan
Lokey performed the following analyses in order to determine our fundamental
value per share:
Multiple
of Income and Cash Flow Measures - Market Multiple
Methodology.
Houlihan
Lokey reviewed certain financial information of comparable publicly-traded
companies engaged in the sale of solutions for the embedded systems marketplace.
These publicly-traded comparable companies were selected solely by Houlihan
Lokey, and Houlihan Lokey deemed the selected companies to be reasonably
comparable to us. The comparable companies included: Adaptec, Inc., Interphase
Corporation, Performance
Technologies, Inc., RadiSys Corporation and SBS Technologies, Inc. Houlihan
Lokey calculated and considered certain financial ratios of the comparable
companies based on the most recent publicly-available information, including
the
multiples of:
|
•
|
enterprise
value, or EV, which is the market value of equity, or MVE, of the
comparable company, plus all interest-bearing debt, less cash and
cash
equivalents, to our latest 12 months, or LTM, of
revenues;
|
|
•
|
EV
to estimated calendar year 2005
revenues;
|
|
•
|
EV
to estimated calendar year 2006
revenues;
|
The
analysis showed that the multiples exhibited by the comparable public companies,
as of March 9, 2005, were as follows:
|
|
EV
/ Revenues
|
|
|
|
LTM
|
|
CY05
|
|
CY06
|
|
Selected
Comparables
|
|
|
|
|
|
|
|
Performance
Technologies, Inc.
|
|
|
1.75x
|
|
|
1.59x
|
|
|
1.39x
|
|
Radisys
Corporation
|
|
|
0.99x
|
|
|
0.92x
|
|
|
0.79x
|
|
Adaptec,
Inc.
|
|
|
0.94x
|
|
|
0.85x
|
|
|
0.76x
|
|
SBS
Technologies, Inc.
|
|
|
0.93x
|
|
|
0.83x
|
|
|
0.72x
|
|
Interphase
Corporation
|
|
|
0.71x
|
|
|
NA
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
Houlihan
Lokey determined that LTM, calendar year 2005 and calendar year 2006 revenues
should be considered given the growth prospects and profitability levels of
our
business.
The
EV/LTM revenue multiples had a range of 0.71 to 1.75 with a median and mean
of
0.94 and 1.06, respectively. The EV/calendar year 2005 revenue multiples had
a
range of 0.83 to 1.59 with a median and mean of 0.89 and 1.05, respectively.
The
EV/calendar year 2006 revenue multiples had a range of 0.72 to 1.39 with a
median and mean of 0.78 and 0.92, respectively.
Houlihan
Lokey derived indications of the value of our business by applying selected
revenue multiples to our LTM, calendar year 2005, calendar year 2006, low case
scenario, and calendar year 2006, high case scenario, revenues.
The
indications of the value of our business based on selected multiples from
comparable public companies ranged from approximately $11.1 million to
approximately $15.6 million.
Houlihan
Lokey also analyzed the market multiples as of March 24, 2005 and observed
that
the comparable companies had generally traded down. Performance Technologies,
Inc., in particular, traded down 22.0%, but had a company-specific negative
announcement on March 8, 2005.
Determinations
of Equity Value and Resulting Per Share Value
As
set
forth above, Houlihan Lokey determined the value of our business using the
multiple of income and cash flow measures methodology. These valuation
indications are summarized as follows:
|
|
(figures
in thousands,
except
per share values)
|
|
Enterprise
Value Indication from Operations
|
|
|
|
|
|
|
|
|
|
|
|
UFundamental
Valuation of SBE
|
|
ULow
|
|
UHigh
|
|
|
|
|
|
|
|
Market
Multiple Methodology
|
|
$
|
11,100
|
|
$
|
15,600
|
|
|
|
|
|
|
|
|
|
Enterprise
Value from Operations using Market Approach
|
|
$
|
11,100
|
|
$
|
15,600
|
|
Add:
Excess Cash (1)
|
|
|
--
|
|
|
--
|
|
Less:
Total Debt
|
|
$
|
172
|
|
$
|
172
|
|
Aggregate
Equity Value of Minority Interests
|
|
$
|
10,928
|
|
$
|
15,428
|
|
|
|
|
|
|
|
|
|
Primary
Shares Outstanding
|
|
|
5,200
|
|
|
5,200
|
|
Dilutive
Effect of Options
|
|
|
359
|
|
|
495
|
|
Diluted
Shares Outstanding
|
|
|
5,559
|
|
|
5,694
|
|
|
|
|
|
|
|
|
|
Per
Share Value - Indication from Fundamental Valuation of
SBE
|
|
$
|
1.97
|
|
$
|
2.71
|
|
|
|
|
|
|
|
|
|
(1) |
Cash
of $1.56 million as of January 31, 2005, is expected to be used
to fund
operating losses and therefore was not included in the equity
value of
SBE.
|
Based
upon the aforementioned analysis, Houlihan Lokey selected a range of value
for
our business of approximately $11.1 million to approximately $15.6 million.
Houlihan Lokey then made certain adjustments to the range of the selected
enterprise values to determine our equity value. Such adjustments included
subtracting our debt of approximately $0.172 million. This resulted in an equity
value with a range of $10.9 million to $15.4 million or approximately $1.97
to
$2.71 per share, on a minority interest basis.
Public
Market Pricing
Houlihan
Lokey reviewed the historical market prices and trading volume for our common
stock and reviewed news articles and press releases relating to us and the
industry in which we operate. Houlihan Lokey analyzed the closing price of
our
common stock as of March 9, 2005, which was $3.29 per share, and the 20-day
average price of our common stock as of March 9, 2005, which was $3.03. Houlihan
Lokey also analyzed the closing price of our common stock as of March 24, 2005,
which was $3.15 per share, and the 20-day average price of our common stock
as
of March 24, 2005, which was $3.20. Finally, Houlihan Lokey analyzed the closing
price of our common stock for other historical periods.
Houlihan
Lokey considered the aforementioned analyses as a whole and did not weight
any
one analyses more or less than any other of its analyses. Accordingly, Houlihan
Lokey arrived at its range of equity values based upon all of the aforementioned
analyses.
Determination
of Fairness
|
|
(in
thousands)
|
|
|
|
Low
|
|
|
|
High
|
|
Concluded
Equity Value of PyX
|
|
$
|
7,000
|
|
|
|
|
$
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration
Paid for PyX - Based on SBE Public Share Price
(1)
|
|
|
|
|
$
|
10,500
|
|
|
|
|
Consideration
Paid for PyX - Based on SBE Public Share Price
(2)
|
|
|
|
|
$
|
11,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration
Paid for PyX - Based on Fundamental SBE Valuation
|
|
$
|
6,500
|
|
|
--
|
|
$
|
9,000
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Using the 20-Day Average Stock Price of $3.03 as of March 9,
2005.
|
(2)
Using the 20-Day Average Stock Price of $3.20 as of March 24,
2005.
|
After
determining our equity value and price per share, Houlihan Lokey noted that
the
consideration to be paid by us in connection with the merger is fair to us
from
a financial point of view.
Conclusion
Houlihan
Lokey delivered a written opinion, dated March 28, 2005, to our board of
directors stating that, as of that date, based on and subject to the assumptions
made, matters considered, limitations on and qualifications made by Houlihan
Lokey in its review, the consideration of 2,561,050
shares of our common stock and the assumption of options to purchase 2,038,950
shares of our common stock issued to employees of PyX,
was
fair to us from a financial point of view. In connection with its review,
Houlihan Lokey considered financial projections prepared by our management.
The
financial projections did not take into account any circumstances or events
occurring after the date they were prepared. In addition, factors such as
industry performance, general business, economic, regulatory, market and
financial conditions, as well as changes to our business, financial condition
or
results of operation, may cause the financial projections or the underlying
assumptions to be inaccurate. As a result, the financial projections provided
to
Houlihan Lokey are not necessarily indicative of our future
results.
Houlihan
Lokey’s opinion is based on the business, economic, market and other conditions,
including, but not limited to, growth in the U.S. Gross Domestic Product,
inflation rates, interest rates, consumer spending levels, manufacturing
productivity levels, unemployment rates and general stock market performance
as
they existed as of March 28, 2005, and on our financial projections provided
to
Houlihan Lokey. Subsequent events that could affect the conclusions set forth
in
the opinion include adverse changes in industry performance or market conditions
and changes to the business, financial condition and results of operations
of
PyX or us. In rendering its opinion, Houlihan Lokey relied upon and assumed,
without independent verification, that the financial and other information
provided to them, including the financial projections, was reasonably prepared
and reflected the best currently available estimates of our financial results
and condition; that no material change had occurred in the information reviewed
between the date the information was provided and the date of the Houlihan
Lokey
opinion; and that there were no facts or information regarding us that would
cause the information supplied to Houlihan Lokey to be incomplete or misleading
in any material respect. Houlihan Lokey did not independently verify the
accuracy or completeness of the information supplied to it with respect to
us
and does not assume responsibility for it. Houlihan Lokey did not make any
independent appraisal of the specific properties, assets or liabilities of
us or
PyX.
Houlihan
Lokey was not asked to opine and does not express any opinion as
to:
|
• |
the
tax or legal consequences of the merger;
|
|
• |
the
net realizable value of our common stock or the prices at which our
common
stock may trade;
|
|
• |
the
private placement; and
|
|
• |
the
fairness of any aspect of the merger not expressly addressed in its
fairness opinion.
|
No
limitations were imposed by our board of directors upon Houlihan Lokey with
respect to the investigations made or procedures followed by it in rendering
its
opinion.
The
summary set forth above describes the material points of more detailed analyses
performed by Houlihan Lokey in arriving at its fairness opinion. The preparation
of the fairness opinion is a complex analytical process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and application of those methods to the particular circumstances and
is
therefore not readily susceptible to summary description. In arriving at its
opinion, Houlihan Lokey made qualitative judgments as to the significance and
relevance of each analysis and factor. Accordingly, the analyses and summary
set
forth in this proxy statement must be considered as a whole and that selecting
portions of the analyses, without considering all analyses and factors, or
portions of this summary, could create an incomplete and/or inaccurate view
of
the processes underlying the analyses set forth in Houlihan Lokey’s fairness
opinion. In its analyses, Houlihan Lokey made numerous assumptions with respect
to us, the merger, industry performance, general business, economic, market
and
financial conditions and other matters, many of which are beyond the control
of
the respective entities. The estimates contained in the analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be more or less favorable than suggested by the analyses.
Additionally, analyses relating to the value of our businesses or securities
are
not appraisals. Accordingly, such analyses and estimates are inherently subject
to substantial uncertainty.
Regulatory
Approvals Relating to the Transactions
We
are
not aware of any federal or state regulatory requirements that must be complied
with or approvals that must be obtained to consummate the merger and private
placement, other than the filing of (1) a certificate of merger with
the
Secretary of State of the State of California, (2) this proxy statement
with the SEC and (3) compliance with all applicable state securities laws
regarding the offering and issuance of the shares in connection with the
transactions. If any additional approvals or filings are required, we will
use
our commercially reasonable efforts to obtain those approvals and make any
required filings before completing the transactions.
Dissenters’
Rights Relating to the Transactions
Our
stockholders are not entitled to exercise dissenters’ rights in connection with
the merger or the private placement.
Interests
of Certain Persons in the Transactions
Mr.
Ignacio C. Munio, our Vice President, Engineering, beneficially owns 25,000
shares of PyX common stock and as a result will be entitled to receive 11,500
shares of our common stock in connection with the merger. In addition to the
shares of our common stock that Mr. Munio will receive in connection in with
the
merger, he currently beneficially owns 299,825 shares of our common stock,
or
approximately 5.7% of the outstanding shares of our common stock based on the
number of shares outstanding on June 9, 2005. After consummation of the
transactions, Mr. Munio will beneficially own 2.9% of the outstanding shares
of
our common stock, assuming no further issuances of shares of our common stock
and not exercise of outstanding stock options or warrants.
Mr.
Greg
Yamamoto, currently the Chief Executive Officer of PyX, beneficially owns
200,000 shares of PyX common stock and options to purchase up to an additional
750,000 shares of PyX common stock. As a result of the merger, Mr. Yamamoto
will
be entitled to receive 92,000 shares of our common stock and options to purchase
up to an additional 345,000 shares of our common stock, representing
approximately 8.3% of the outstanding shares of our common stock, assuming
the
exercise in full of all of the options, based on the number of shares
outstanding on June 9, 2005. In addition, Mr. Yamamoto is investing $200,000
in
the private placement and, assuming a purchase price per share of $2.00, will
receive 100,000 shares of our common stock and a warrant to purchase up to
an
additional 50,000 shares of our common stock. After consummation of the merger
and the private placement, Mr. Yamamoto will beneficially own 5.6% of the
outstanding shares of our common stock, assuming exercise of all options and
warrants to purchase shares of our common stock, assuming no further issuances
of shares of our common stock and no exercise of outstanding stock options
or
warrants, other than the exercise of the stock options and warrants issued
to
Mr. Yamamoto. In addition, Mr. Yamamoto is investing an additional $100,000
in
the private placement on behalf of his two minor children, Melanie Yamamoto
and
Nicholas Yamamoto, and, assuming an purchase price per share of $2.00, each
child will receive 25,000 shares of our common stock and a warrant to purchase
up to an additional 12,500 shares of our common stock.
PROPOSAL
1
APPROVAL
OF THE MERGER, THE MERGER AGREEMENT AND
THE
ISSUANCE OF SHARES OF OUR COMMON STOCK AND ASSUMPTION OF OPTIONS
TO
PURCHASE
SHARES OF OUR COMMON STOCK IN THE MERGER
General
The
merger agreement provides that, subject to satisfaction of certain conditions,
PyX will be merged with and into our newly-formed, wholly-owned subsidiary,
PyX
Acquisition Sub, LLC, referred to in this proxy statement as Merger Sub, and
that following the merger, PyX will cease to exist as a separate entity and
we
will continue as sole member of Merger Sub, the surviving entity in the merger.
When the merger occurs:
|
•
|
the
issued and outstanding shares of PyX common stock will be converted
into
the right to receive an aggregate of 2,561,050 shares of our common
stock,
or approximately 49% of the outstanding shares of our common stock
based
on the number of shares outstanding on June 9, 2005 and 24.6% of
the
outstanding shares of our common stock after the closing of the private
placement, assuming no further issuances of shares of our common
stock and
not exercise of outstanding stock options or warrants;
and
|
|
•
|
the
issued and outstanding options to purchase shares of PyX common stock
will
be assumed by us and converted into the right to receive an aggregate
of
2,038,950 shares of our common stock upon exercise of the underlying
options, or approximately 38.8% of the outstanding shares of our
common
stock based on the number of shares outstanding on June 9, 2005 and
19.6%
of the outstanding shares of our common stock after the closing of
the
private placement, assuming no further issuances of shares of our
common
stock and no exercise of outstanding stock options or warrants. The
options will be subject to the same terms and conditions as were
in place
prior to the merger.
|
We
entered into the merger agreement with PyX on March 28, 2005. The merger
agreement is attached to this proxy statement as Annex B. You should
read
the merger agreement carefully. It is the agreement that governs the terms
of
the merger. The following information summarizes the terms of the merger
agreement.
Effective
Time of the Merger
The
merger agreement provides that the closing of the merger will take place as
soon
as practicable and no later than two business days after the last condition
precedent to closing has been satisfied or waived. Concurrently with the
closing, we will file a certificate of merger and all other necessary documents
with the Secretary of State of the State of California to complete the merger.
The merger will become effective at the time the certificate of merger has
been
accepted by the Secretary of State, or at another time as the parties may agree,
which will be specified in the certificate.
Completion
of the merger could be delayed if there is a delay in satisfying the closing
conditions to the merger. There can be no assurances as to whether, and on
what
date, the conditions will be satisfied or that the parties will complete the
merger at all. If the merger is not completed on or before July 31,
2005,
either we or PyX may terminate the merger agreement, except that a party may
not
terminate the merger agreement if that party’s failure to fulfill any of its
obligations under the merger agreement was the cause of the merger not being
completed by that date.
Treatment
of Stock Options
At
the
effective time of the merger, each outstanding option granted by PyX to purchase
shares of PyX common stock will be converted into an option to acquire shares
of
our common stock and will be subject to the same terms and conditions as the
PyX
stock option had before the effective time of the merger. The number of shares
of our common stock that will be subject to the new stock option exercise price
per share of our common stock issuable upon exercise of the new option will
reflect the exchange ratio in the merger. We expect the exercise price of the
assumed options will be approximately $2.17 per share of our common stock
issuable upon exercise of the assumed options.
The
stock
options granted to the PyX employees are subject to change of control provisions
that provide for full acceleration of the vesting on their options in the event
that either their employment is terminated without cause or they resign for
good
reason after the change in control takes place. Because the merger constitutes
a
change of control under the agreements governing these options, and because
we
are assuming these options upon the same terms and conditions as were in place
immediately prior to the merger, if any of these employees are terminated
without cause or resign for good reason following the merger, these options
will
become fully vested and immediately exercisable by the affected
employee.
Surrender
and Exchange of Share Certificates
As
soon
as reasonably practicable after the effective time of the merger, but in any
event no more than two business days thereafter, we or our agent will send
to
the PyX shareholders, other than the shareholders who are party to the merger
agreement (referred to in this proxy statement as the signing shareholders),
transmittal materials containing instructions on how to exchange of their stock
certificates representing shares of PyX common stock for certificates
representing shares of our common stock that are payable to them in connection
with the merger. Upon surrender to us or our agent of their stock certificate
or
certificates representing the shares of PyX common stock held immediately prior
to the merger, and the acceptance of such certificate or certificates by us
or
our agent in accordance with the instructions to be provided by us or our agent,
the PyX shareholders will receive that number of shares of our common stock
equal to the number of shares of PyX common stock held immediately prior to
the
merger multiplied by the exchange rate of 0.46, less that shareholder’s pro rata
portion of the escrow which, as stated below, consists of 460,000 shares of
our
common stock. PyX shareholders that fail to exchange their stock certificates
will not be entitled to receive any dividends or other distributions payable
by
us after the closing until their certificates are surrendered.
We
will
not issue any fractional shares in the merger. In lieu of fractional shares,
PyX
shareholders will receive a cash payment equal to the fractional share amount
multiplied by the average closing sale price of a share of our common stock,
as
reported on the Nasdaq SmallCap market, for each of the 10 consecutive trading
days immediately preceding the closing date of the merger.
Escrow
At
the
effective time of the merger, 460,000 shares, or 17.96% of the aggregate number
of our shares of common stock to be issued to the PyX shareholders at the
effective time, will be placed into an escrow account to satisfy the PyX
shareholders’ indemnification obligations relating to breaches of
representations, warranties and covenants made in the merger agreement, as
described below under “Representations
and Warranties.”
However, our ability to make a claim against the shares placed in escrow for
any
damages we incur as a result of such breach will be limited to claims made
within the first year after the closing of the merger. If no claims are made
within that one-year period, the shares of common stock held in escrow will
be
distributed on a pro rata basis to the PyX shareholders.
Representations
and Warranties
The
merger agreement contains customary representations and warranties made by
PyX
and the signing shareholders to SBE and Merger Sub and by SBE and Merger Sub
to
PyX and the signing shareholders for purposes of allocating the risks associated
with the merger. The assertions embodied in the representations and warranties
made by PyX and the signing shareholders are qualified by information set forth
in a confidential disclosure schedule that was delivered in connection with
the
execution of the merger agreement. While we do not believe that the disclosure
schedule contains information that securities laws require us to publicly
disclose, other than information that is being disclosed in this proxy
statement, the disclosure schedule may contain information that modifies,
qualifies and creates exceptions to the representations and warranties set
forth
in the merger agreement. Accordingly, you should not rely on any of these
representations and warranties as characterizations of the actual state of
facts, since they may be modified in important respects by the underlying
disclosure schedule. Moreover, information concerning the subject matter of
the
representations and warranties may have changed since the date of the merger
agreement, which subsequent information may or may not be fully reflected in
the
disclosure schedule PyX delivered to us at signing and which may not be
delivered to us until the closing date of the merger.
The
representations and warranties in the merger agreement include, among other
things:
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the
organization, qualification and good standing of each of us, Merger
Sub
and PyX;
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•
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the
accuracy of each of our and PyX’s financial
statements;
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PyX
and our authority to enter into, and carry out the obligations under,
the
merger agreement and the enforceability of the merger
agreement;
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the
vote required to approve the merger by our stockholders and PyX’s
shareholders;
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the
absence of conflicts, violations or defaults under each party’s
organizational documents, applicable laws and material
agreements;
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the
absence of litigation matters involving the assets of the parties
or that
may have the effect of interfering with the merger;
and
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finders’
or advisors’ fees.
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In
addition, the merger agreement contains additional representations and
warranties by PyX and the signing shareholders to us and Merger Sub as to
certain other matters, including:
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the
accuracy of PyX’s books and
records;
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the
absence of certain changes since February 28,
2005;
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title
to, and absence of liens and encumbrances on, PyX’s
assets;
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the
accuracy of information regarding accounts with financial institutions
and
the collectibility of PyX’s accounts
receivable;
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the
condition and adequacy of PyX’s
assets;
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PyX’s
intellectual property;
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PyX’s
material contracts;
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the
absence of undisclosed material liabilities of
PyX;
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compliance
by PyX with applicable legal
requirements;
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governmental
authorizations required in connection with the operation of PyX’s
business;
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employee
benefit and labor matters;
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the
absence of certain agreements, conflicts and/or other relationships
with
PyX’s officers, directors and other related
parties.
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All
of
the representations, warranties and indemnities set forth in the merger
agreement survive for a period of one year following the closing of the merger,
except for PyX’s representation and warranty relating to its capitalization,
which survives for a period of five years following the closing of the merger,
and PyX’s representation and warranty relating to legal proceedings, which
survives for a period of three years following the closing of the
merger.
Certain
Covenants
Access
to Information and Confidentiality
The
merger agreement provides that PyX will, and will cause its respective officers,
directors, employees, representatives and advisors to:
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provide
us with reasonable access to PyX’s representatives, personnel, assets and
to all existing books, records, tax returns, work papers and other
documents and information relating to
PyX;
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provide
us with copies of any existing books, records, tax returns, work
papers
and other documents and information relating to PyX;
and
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provide
us with such additional financial, operating, and other data and
information regarding PyX as we may reasonably
request.
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Conduct
of Business Prior to the Merger
PyX
and
the signing shareholders have agreed that during the period from the date of
the
merger agreement through the effective time of the merger, PyX
shall:
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conduct
its business and operations in the ordinary course and in substantially
the same manner as conducted prior to the date of the merger
agreement;
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use
reasonable efforts to preserve intact its current business organization,
keep available the services of its current officers and employees
and
maintain its relations and goodwill with persons having business
relationships with PyX;
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keep
in full force all identified insurance
policies;
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report
to us on at least a weekly basis concerning the status of PyX’s
business;
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not
take certain actions with respect to PyX’s capital stock and option plans
and agreements relating to PyX’s capital
stock;
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not
take any action with respect to PyX’s articles of incorporation or bylaws
or become a party to an alternative business combination
proposal;
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not
form any subsidiary or acquire any interest in any other
entity;
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not
make capital expenditures in excess of $5,000 per
month;
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not
enter into or permit PyX’s assets to become bound by, any material
contract or amend, prematurely terminate or waive any material right
or
remedy under any material contract;
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not
acquire, lease or license any right or other
asset;
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not
sell, lease or license any right or other
asset;
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waive
or relinquish any right other than assets acquired, leased, licensed
or
disposed of pursuant to immaterial
contracts;
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not
lend money or incur or guarantee any indebtedness for borrowed
money;
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not
establish, adopt or amend any employee benefit
plan;
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not
pay any bonus or make any profit-sharing payment, cash incentive
payment
or similar payment to, or increase the amount of any compensation
payable
to any of its directors, officers or
employees;
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not
hire any new employee;
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not
change any of its methods of accounting or accounting practices in
any
material respect;
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not
make any tax election;
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not
commence or settle any material legal
proceeding;
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not
make any payment to any third party without our consent in the event
we
make an extension of funds to PyX as provided below under “Extension
of Funds,”
on page 35; and
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not
agree or commit to take any of the above
actions.
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PyX
Shareholder Vote
The
holders of a majority of the outstanding shares of PyX common stock have already
approved the merger and the merger agreement. Because one of the conditions
precedent to our obligation to effect the merger is that holders of no more
than
5% of the outstanding shares of PyX common stock elect to exercise their
dissenters’ rights in connection with the merger, PyX and we are continuing to
solicit consent from the remaining PyX shareholders. In addition, pursuant
to
the terms of the merger agreement, PyX has prepared and distributed a notice
regarding the merger to its shareholders, including an information statement
setting forth the material terms of the merger agreement and the merger. We
took
no part in drafting the PyX information statement, although we were given the
opportunity to review and comment on the information statement prior to its
distribution to the PyX shareholders.
Agreement
Not to Solicit Other Offers
PyX
and
the signing shareholders have agreed that neither PyX nor the signing
shareholders will do any of the following during the period between the signing
of the merger agreement and the effective time of the merger, or until the
merger agreement is terminated in the event the merger is never
consummated:
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solicit
or encourage the initiation of any inquiry, proposal or offer relating
to
an alternative business combination proposal;
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participate
in any discussions or negotiations or enter into any agreement with,
or
furnish any non-public information to, any person relating to or
in
connection with any alternative business combination proposal;
or
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consider,
entertain or accept any proposal or offer from any person relating
to any
alternative business combination
proposal.
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Public
Announcements
The
merger agreement provides that neither PyX nor any signing shareholder will
issue any press release or make any public statement regarding the merger or
the
merger agreement, or the other transactions contemplated by the merger
agreement, without our prior written consent. We agreed to use reasonable
efforts to consult with PyX before issuing any press release or making any
public statement with respect to merger.
Notification
The
merger agreement provides that, prior to the effective time of the merger,
the
parties to the merger agreement shall promptly advise each other
of:
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the
discovery of any event, condition, fact or circumstance that occurred
or
existed on or prior to the date of the merger agreement that could
cause
or constitute an inaccuracy in or breach of any representation or
warranty
made by such party in the merger
agreement;
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any
material breach of any covenant or obligation;
and
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any
event, condition, fact or circumstance that would make the timely
satisfaction of any of the conditions set forth in the merger agreement
impossible or unlikely.
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Employee
Matters
We
agreed
that, on or before the effective time of the merger, we will make employment
offers to certain employees of PyX on terms no less favorable than that provided
to existing employees of ours who are similarly situated. Following the
effective time of the merger, the time each of these employees spent employed
by
PyX will be treated as time spent employed by us for purposes of determining
certain employee benefits, including any tax-qualified pension plan and welfare
benefit plans. No employment offers have been made or determined as of the
date
of this proxy statement, however, one of the conditions precedent to our
obligation to effect the merger is that Nick Bellinger and Andre Hedrick accept
their employment offers. At the time of this proxy statement, it is our
expectation that one or more of the PyX employees to whom employment offers
are
made will become executive officers of SBE. However, we expect that our existing
management team will remain in place and will otherwise be unaffected by the
merger.
Indemnification
of Directors and Officers
We
and
PyX have agreed that the indemnification obligations existing in favor of the
directors and officers of PyX, as in effect immediately prior to the effective
time of the merger, shall continue in full force and effect for a period of
six
years after the effective time of the merger. In addition, for a period of
six
years after the effective time of the merger, Merger Sub will, to the fullest
extent permitted under applicable law, indemnify and hold harmless those persons
currently covered by the indemnification provisions currently set forth in
PyX’s
articles of incorporation and bylaws against all costs and expenses, judgments,
fines, losses, claims, damages, liabilities and settlement amounts paid in
connection with any claim, action, suit, proceeding or investigation, whether
arising before or after the effective time of the merger, arising out of or
pertaining to any action or omission in their capacity as an officer, director,
employee, fiduciary or agent, to the same extent currently set forth in PyX’s
articles of incorporation and bylaws. In the event that Merger Sub is
consolidated with or merged into another entity and is not the surviving entity
of such consolidation or merger, or if Merger Sub transfers all or substantially
all of its properties and assets to another person, then proper provisions
will
be made so that the successors and assigns, or we, will assume these
indemnification obligations.
Extension
of Funds
The
merger agreement provides that, if the closing of the merger does not occur
on
or before May 15, 2005, we will extend a loan to PyX, in the amount of $50,000,
on the 15PthP
day of
each month, commencing on May 15, 2005, and continuing until the earlier of
the
closing of the merger or the termination of the merger agreement. We have agreed
that any loan made to PyX pursuant to this provision of the merger agreement
will not, under any circumstances, be secured by the PyX source code. Such
loans, if made, are expected to become due and payable six months after they
are
made.
Dilution
Prior
to
the effective time of the merger, we have agreed to refrain from granting any
option, subscription right, call, warrant or other right to acquire shares
of
our capital stock or other securities to any new or existing employee, officer
or director without first notifying PyX’s chief executive officer and giving him
reasonable opportunity to consult with us regarding any such grant.
Indemnification
With
certain exceptions, satisfaction of the PyX and signing shareholders’
indemnification obligation with respect to breaches of representations,
warranties and covenants is limited to the shares of our common stock placed
in
escrow, as described above under “Escrow”
on page
31 and “Representations
and Warranties”
on page
31, and is further limited to claims asserted on or prior to the end of the
one-year period following the closing of the merger. However, the signing
shareholders are personally liable for any breach of the representations and
warranties relating to PyX’s capitalization and legal proceedings. The signing
shareholders will receive a total of approximately 1,817,000 shares of our
common stock in connection with the merger, or approximately 71% of the total
number of shares paid to all of the PyX shareholders in connection with the
merger. With respect to breaches of the representation and warranty relating
to
PyX’s legal proceedings, the signing shareholders’ liability is capped at their
pro rata portion of the shares received from the escrow, or a total of
approximately 326,358 shares of our common stock. All of the shares received
by
the signing shareholders in connection with the merger, or a total of
approximately 1,817,000 shares of our common stock, are subject to their
indemnification obligations with respect to breaches of the representation
and
warranty relating to PyX’s capitalization and breaches of certain covenants
related to securities law compliance and the information statement provided
to
the PyX shareholders in connection with the solicitation of the PyX shareholder
vote with respect to the merger agreement and merger. There is no limitation
on
the liability of the signing shareholders with respect to breaches involving
fraud or intentional misrepresentations.
We
are
not entitled to recover any damages with respect to an indemnification claim
until the total damages incurred under the merger agreement exceed $25,000,
after which, and subject to the limitations described above, we are entitled
to
recover such number of shares of our common stock equal to the amount of the
liability divided by the average closing sale price of a share of our common
stock for each of the 10 consecutive trading days immediately preceding the
closing date of the merger, if the claim was made on or prior to the end of
the
one year period following the closing of the merger, otherwise, for the 10
consecutive trading days immediately preceding the date notice of the claim
was
delivered, in each case as reported on the Nasdaq SmallCap Market.
Conditions
Precedent
Conditions
to the Obligations of Each Party
Our
obligation and the obligation of PyX to effect the merger are subject to the
satisfaction or waiver of the following conditions:
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accuracy
of the other party’s representations and warranties and compliance by the
other party with their covenants;
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approval
by our stockholders of the issuance of shares of our common stock
in
connection with the merger;
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execution
and delivery of certain ancillary documents attached to the merger
agreement as exhibits;
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receipt
of an officer’s certificate certifying the accuracy of each party’s
representations and warranties and satisfaction of certain conditions;
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our
entering into a definitive agreement with respect to the private
placement;
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absence
of legal prohibitions to the completion of the
merger;
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absence
of legal proceedings challenging the merger, seeking recovery of
a
material amount in damages or seeking to prohibit or limit the exercise
of
any material right with respect to our ownership of stock in Merger
Sub or
the PyX shareholders’ ownership of our common stock;
and
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no
material adverse effect will have occurred and no circumstance exists
that
could reasonably be expected to have or result in a material adverse
effect with respect to us or PyX.
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Additional
Conditions to Our Obligations
Our
obligation to effect the merger is also subject to the following
conditions:
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holders
of no more than 5% of the outstanding PyX common stock will have
elected
to exercise their dissenters’ rights in connection with the
merger;
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receipt
of required consents; and
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amendment
of PyX’s current customer agreement with Pelco in a manner acceptable to
us.
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Material
Adverse Effect
As
set
forth in the merger agreement, a violation or other matter will be deemed to
have a “material adverse effect” on a person if the violation or other matter
would have a material adverse effect on the person’s business, condition,
assets, liabilities, operations, financial performance or
prospects.
Termination
In
addition to terminating upon mutual consent, either party may terminate the
merger agreement under the following circumstances:
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if
it is reasonably determined by that party that timely satisfaction
of any
of the conditions precedent to the obligations of that party to effect
the
merger and consummate the transactions contemplated by the merger
agreement has become impossible;
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if
any of the conditions precedent to the obligations of that party
to effect
the merger and consummate the transactions contemplated by the merger
agreement has not been satisfied as of the agreed closing date;
or
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the
merger has not been completed on or before July 31,
2005.
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Waivers
Any
provision of the merger agreement may be waived if the waiver is duly executed
and delivered by the party against whom the waiver is to be effective and will
only be applicable in the specific instance in which it is given.
Amendments
Any
provision of the merger agreement may be amended if the amendment is duly
executed and delivered by all of the parties to the merger
agreement.
Fees
and Expenses
We
and
PyX will each pay our own respective fees, costs and expenses incurred in
connection with the transactions contemplated by the merger agreement, including
all fees and expenses incurred in connection with:
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our
investigation and review conducted with respect to PyX’s
business;
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the
negotiation, preparation and review of the merger agreement and ancillary
agreements delivered or to be delivered in connection with the
transactions contemplated by the merger
agreement;
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the
preparation and submission of any filing or notice required to be
made or
given in connection with, and the obtaining of any consent required
by,
any of the transactions contemplated by the merger
agreement;
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our
preparation and audit of the PyX’s financial statements;
and
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the
consummation of the merger.
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Accounting
Treatment of the Merger
The
merger will be accounted for by us under the purchase method of accounting
in
accordance with generally accepted accounting principles. Therefore, the
aggregate consideration paid by us in connection with the merger, together
with
the direct costs of the merger, will be allocated to PyX’s tangible and
intangible assets and liabilities based on their fair market values. The assets
and liabilities of PyX will be consolidated into our assets and liabilities
as
of the effective date of the merger. The stock options issued to the former
holders of options to purchase shares of PyX common stock will be assumed by
us
and accounted for in accordance with Accounting Principles Board Opinion No.
25,
Accounting
for Stock Issued to Employees,
or APB
25.
Under APB 25, compensation expense is based on the difference, if any, on the
date of the grant between the fair value of the stock and the exercise price
of
the option.
Shareholder
Agreement
At
or
prior to the closing of the merger, we will enter into the shareholders
agreement with the PyX shareholders who will receive shares of our common stock
in the merger. The shareholder agreement is the agreement that governs the
terms
under which we have agreed to register for resale the shares of our common
stock
to be issued to these shareholders with the SEC.
Registration
Rights
We
have
agreed to use our best efforts file a registration statement with the SEC within
90 days after the closing date of the merger registering the resale
of such
shares of our common stock from time to time by these shareholders, and to
cause
the registration statement to become effective within 120 days following the
closing date. Once effective, the registration statement will permit these
shareholders to sell the shares of our common stock issued to them in connection
with the merger from time to time using the methods of distribution to be
described in the registration statement. However, the shareholder agreement
also
provides that, with respect to 95% of the shares of our common stock to be
received by such shareholders in connection with the merger, no sales will
be
made until one year after the effective time of the merger. We have also agreed
not to have any other registration statements filed with the SEC with respect
to
the issuance or resale of shares of our capital stock (other than a registration
statement on Form S-8 registering for resale shares of our common stock issued
pursuant to an equity compensation plan or arrangement) declared effective
unless the registration statement with respect to the shares to be issued in
connection with the merger has also been declared effective. We expect to
register these shares for resale concurrently with those issued in connection
with the private placement. The shareholder agreement also contains customary
obligations and indemnity provisions on the part of us and the PyX shareholders
relating to the registration process, and provides that we will pay the expenses
incurred by us in any registration pursuant to the shareholders
agreement.
Voting
Agreement
Certain
members of our management are party to a voting agreement, dated May 4, 2005,
pursuant to which they have agreed, subject to the terms and conditions of
the
voting agreement, to vote all of their shares of common stock in favor of
proposals 1 and 2 and any other matter necessary to effect the transactions.
The
form of voting agreement is attached to this proxy statement as Annex D. You
should read the voting agreement carefully. It is the agreement that governs
the
terms under which our management team has agreed to vote in favor of the
transactions. The shares subject to the voting agreement represent approximately
3.2% of the outstanding shares of our common stock, based on the number of
shares outstanding on April 29, 2005.
Past
Contacts, Transactions or Negotiations
Other
than as described in the “Background of the Merger and the Private Placement,”
we and PyX have not had any past material contacts, transactions or
negotiations.
Recommendation
of our Board of Directors
Our
board
of directors recommends that our stockholders vote FOR the merger, the merger
agreement, the issuance of shares of our common stock to the PyX shareholders
and the assumption of options to purchase shares of our common stock in the
merger.
COMPARATIVE
PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
The
following table sets forth the historical per share information of us and PyX
and the combined per share data on an unaudited pro forma basis after giving
effect to the merger, as well as the issuance of the common stock in the private
placement. Also presented is PyX’s equivalent pro forma per share data for one
share of PyX common stock. The pro forma information is presented for
illustrative purposes only. You should not rely on the pro forma financial
information as an indication of the combined financial position or results
of
operations of future periods or the results that actually would have been
realized had the entities been a single entity during the periods
presented.
The
unaudited pro forma combined per share information combines the financial
information of us for the six-month period ended April 30, 2005 with the
financial information of PyX for the six-month period ended March 31, 2005
and
for our fiscal year ended October 31, 2004 and the PyX fiscal year ended
December 31, 2004, assuming the merger and the private placement had occurred
on
the first day of the respective periods.
Historical
book value per common share for us is computed by dividing stockholders’ equity
(deficit) attributable to common stockholders by the number of shares of common
stock outstanding at April 30, 2005 and for PyX by dividing stockholders’ equity
(deficit) attributable to common stockholders by the number of shares of common
stock outstanding at March 31, 2005. Our unaudited pro forma combined per share
data is derived from the unaudited pro forma combined financial statements
that
are included elsewhere in this proxy statement. The PyX equivalent pro forma
per
share data is calculated by applying the exchange ratio of PyX common shares
to
our common shares received.
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Six-Month
Period Ended April 30, 2005 (SBE) of
March
31, 2005 (PyX)
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Year
Ended October 31, 2004 (SBE) or December
31, 2004(PyX)
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(Unaudited)
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SBE
Historical Per Share Data:
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Basic
and diluted net loss per common share
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$
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(0.15
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)
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$
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(0.33
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)
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Book
value per common share
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$
|
0.75
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$
|
0.83
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PyX
Historical Per Share Data:
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|
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|
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Basic
and diluted net loss per share
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|
$
|
(0.03
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)
|
$
|
(0.05
|
)
|
Book
value (deficiency) per common share
|
|
$
|
(0.00
|
)
|
$
|
(0.04
|
)
|
SBE
Pro Forma Combined:
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|
|
|
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Basic
and diluted net loss per common share
|
|
$
|
(0.25
|
)
|
$
|
(0.53
|
)
|
Book
value per share
|
|
$
|
1.11
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|
$
|
1.11
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|
PyX
Equivalent Pro Forma Combined:
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|
|
|
|
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|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.07
|
)
|
$
|
(0.11
|
)
|
Book
value per share
|
|
$
|
(0.00
|
)
|
$
|
0.00
|
|
Our
common stock is listed on the Nasdaq SmallCap Market, under the symbol “SBEI.”
For the periods indicated, the following table sets forth the high and low
per
share closing prices for our common stock as reported by The Nasdaq SmallCap
Market through the close of business on April 30, 2005.
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Fiscal
2004
|
|
|
|
|
|
First
Quarter
|
|
$
|
$8.50
|
|
$
|
$5.52
|
|
(ended
January 31, 2004)
|
|
|
|
|
|
|
|
Second
Quarter
|
|
|
7.38
|
|
|
3.63
|
|
(ended
April 30, 2004)
|
|
|
|
|
|
|
|
Third
Quarter
|
|
|
4.40
|
|
|
2.81
|
|
(ended
July 31, 2004)
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
|
4.10
|
|
|
2.54
|
|
(ended
October 31, 2004)
|
|
|
|
|
|
|
|
Fiscal
2005
|
|
|
5.09
|
|
|
2.89
|
|
First
Quarter
|
|
|
|
|
|
|
|
(ended
January 31, 2005)
|
|
|
3.79
|
|
|
2.57
|
|
Second
Quarter
|
|
|
|
|
|
|
|
(ended
April 30, 2005)
|
|
|
3.55
|
|
|
2.30
|
|
The
closing sale price for our common stock on the Nasdaq SmallCap Market on March
24, 2005, the last full trading day prior to the public announcement of the
merger, was $3.15, and on May 11, 2005, was
2.51.
There are no restrictions on our ability to pay dividends; however, it is
currently the intention of our Board of Directors to retain all earnings, if
any, for use in our business and we do not anticipate paying cash dividends
in
the foreseeable future. Any future determination as to the payment of dividends
will depend, among other factors, upon our earnings, capital requirements,
operating results and financial condition.
No
active
trading or public market exists for PyX common stock. The shares of PyX common
stock are not listed on any exchange and are not traded in the over-the-counter
market. As of June 9, 2005, the record date, there were 14 stockholders
of
record who held shares of PyX common stock. PyX has never paid any cash
dividends on its common stock.
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF SBE
|
|
SBE,
Inc.
Unaudited
Pro Forma Consolidated Balance Sheet)
|
|
|
|
April
30, 2005
|
|
March
31, 2005
|
|
|
|
|
|
|
|
Historical
|
|
Historical
|
|
|
|
Combined
|
|
|
|
SBE
|
|
PyX
|
|
Adjustments
|
|
As
Adjusted
|
|
|
|
(in
thousands
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,221
|
|
$
|
79
|
|
$
|
4,800
|
a |
$
|
6,100
|
|
Trade
accounts receivable, net
|
|
|
1,599
|
|
|
15
|
|
|
|
|
|
1,614
|
|
Inventories
|
|
|
1,474
|
|
|
--
|
|
|
|
|
|
1,474
|
|
Other
|
|
|
262
|
|
|
--
|
|
|
|
|
|
262
|
|
Total
current assets
|
|
|
4,556
|
|
|
94
|
|
|
4,800
|
|
|
9,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
392
|
|
|
20
|
|
|
|
|
|
412
|
|
Capitalized
software, net
|
|
|
149
|
|
|
--
|
|
|
|
|
|
149
|
|
Intellectual
property, net
|
|
|
--
|
|
|
--
|
|
|
9,987
|
b |
|
9,987
|
|
Other
|
|
|
288
|
|
|
85
|
|
|
|
|
|
373
|
|
Total
assets
|
|
$
|
5,385
|
|
$
|
199
|
|
$
|
14,787
|
|
$
|
20,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
$
|
--
|
|
$
|
10
|
|
|
|
|
$
|
10
|
|
Trade
accounts payable
|
|
|
854
|
|
|
69
|
|
|
|
|
|
923
|
|
Accrued
payroll and employee benefits
|
|
|
329
|
|
|
26
|
|
|
|
|
|
355
|
|
Other
accrued expenses
|
|
|
164
|
|
|
--
|
|
|
|
|
|
164
|
|
Deferred
revenue
|
|
|
--
|
|
|
103
|
|
|
|
|
|
103
|
|
Capital
lease obligations
|
|
|
27
|
|
|
--
|
|
|
|
|
|
27
|
|
Total
liabilities
|
|
|
1,374
|
|
|
208
|
|
|
|
|
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
term liabilities
|
|
|
135
|
|
|
--
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,509
|
|
|
208
|
|
|
|
|
|
1,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock and additional paid in capital
|
|
|
16,175
|
|
|
365
|
|
|
11,862
|
b |
|
29,253
|
|
|
|
|
|
|
|
|
|
|
4,800
|
a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
compensation
|
|
|
(88
|
)
|
|
--
|
|
|
(1,876)
|
b |
|
(1,964
|
)
|
Retained
deficit
|
|
|
(12,211
|
)
|
|
(374
|
)
|
|
|
|
|
(12,585
|
)
|
Total
stockholders' equity
|
|
|
3,876
|
|
|
(9
|
)
|
|
14,787
|
|
|
18,585
|
|
Total
liabilities and stockholders' equity
|
|
$
|
5,385
|
|
$
|
199
|
|
$
|
14,787
|
|
$
|
20,371
|
|
Footnotes
to the Unaudited Pro Forma Condensed Consolidated Balance Sheet as of April
30,
2005 for the Company and March 31, 2005 for PyX:
The
Unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as if
the
transaction had occurred on April 30, 2005.
(a) |
Net
cash received from selling 2,575,000 shares of the Company’s common stock,
assuming a price per share of $2.00, and warrants to purchase 1,287,500
shares of the Company’s common stock, assuming an exercise price per share
of $2.66, in the private placement, net of $350,000 of estimated
offering
expenses and of expenses related to the PyX acquisition. The assumed
price
per share is based on the lowest unit price at which the Company
is
obligated to complete the private
placement.
|
b) |
In
the PyX acquisition, the Company will issue 2,561,050 shares of
the
Company’s common stock with an assumed value of $3.09 per share for
payment to the selling shareholders of PyX for the acquisition
of PyX. The
assumed price per share is based on the average closing price for
the
Company’s common stock over the period beginning five trading days prior
to and ending five trading days after the date the merger agreement
was
signed, March 28, 2005. In addition, the Company will assume the
PyX stock
option plan with the outstanding PyX stock options converted into
options
to purchase 2,038,950 shares of the Company’s common stock. These
replacement options vest over 4 years and the PyX employees must
continue
to be an employee of the Company during the vesting period. The
fair value
of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2005: Dividend yield of 0%: expected
volatility of 70.0%, risk-free interest rate of 3.0%, and expected
life of
four years. The assumed price per share is based on the average
closing
price for the Company’s common stock over the period beginning five
trading days prior to and ending five trading days after the date
the
merger agreement was signed, March 28,
2005.
|
The
purchase price of $11,862,000 related to the shares of the Company’s common
stock issued to selling shareholders of PyX and the issuance of options to
purchase the Company’s common stock is allocated to as follows: $9,987,000 to
Intellectual Property, which is the estimated fair value of the PyX intellectual
property, associated with current and future products acquired in the
acquisition of PyX and $1,876,000 to deferred compensation. The deferred
compensation is calculated as the difference between the stock option strike
price of $2.17 per share and the assumed value of $3.09 per share. The assumed
price per share is based on the average closing price for the Company’s common
stock over the period beginning five trading days prior to and ending five
trading days after the date the merger agreement was signed, March 28, 2005.
The
Company amortizes deferred compensation to expense on a straight-line basis
over
the vesting period of the underlying options to purchase the Company’s common
stock, in this case 4 years. Deferred compensation expense totaling $281,000
per
year will be included in the Company’s product research and development expense
and deferred compensation expense totaling $188,000 per year will be included
in
the Company’s sales and marketing expense for a total of $469,000 of annual
deferred compensation amortization expense.
|
|
SBE,
Inc.
Unaudited
Pro Forma Condensed Combined Statement of
Operations
|
|
|
|
for
the six months ended
|
|
|
|
|
|
|
|
April
30, 2005
|
|
March
31, 2005
|
|
|
|
|
|
|
|
Historical
|
|
Historical
|
|
|
|
Combined
|
|
|
|
SBE
|
|
PyX
|
|
Adjustments
|
|
Companies
|
|
|
|
(in
thousands, except for per share amounts)
|
|
Net
Sales
|
|
$
|
4,520
|
|
$
|
--
|
|
|
|
|
$
|
$4,520
|
|
Cost
of Sales
|
|
|
2,305
|
|
|
--
|
|
|
1,664
a
|
|
|
3,969
|
|
Gross
Profit
|
|
|
2,215
|
|
|
--
|
|
|
(1,664
|
)
|
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
research and development
|
|
|
1,048
|
|
|
91
|
|
|
367
b
|
|
|
1,506
|
|
Sales
and marketing
|
|
|
1,053
|
|
|
48
|
|
|
263
c
|
|
|
1,364
|
|
General
and administrative
|
|
|
795
|
|
|
34
|
|
|
--
|
|
|
829
|
|
Total
operating expense
|
|
|
2,967
|
|
|
173
|
|
|
630
|
|
|
3,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income loss
|
|
|
(752
|
)
|
|
(173
|
)
|
|
(2,294
|
)
|
|
(3,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense)
|
|
|
(3
|
)
|
|
--
|
|
|
--
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
|
(755
|
)
|
|
(173
|
)
|
|
(2,294
|
)
|
|
(3,151
|
)
|
Provision
for income taxes
|
|
|
5
|
|
|
--
|
|
|
--
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(760
|
)
|
$
|
(173
|
)
|
$
|
(2,294
|
)
|
$
|
(3,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per share
|
|
$
|
(0.15
|
)
|
|
|
|
$
|
$
|
|
$
|
(0.31
|
)
|
Diluted
loss per share
|
|
$
|
(0.15
|
)
|
|
|
|
$
|
$
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- shares used in per share computations
|
|
|
5,175
|
|
|
|
|
|
5,136
|
d |
|
10,311
|
|
Diluted
- shares used in per share computations
|
|
|
5,175
|
|
|
|
|
|
5,136
|
d |
|
10,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footnotes
to the Unaudited Pro Forma Condensed Combined Statement of Operations for the
six months ended April 30, 2005 for the Company and March 31, 2005 for
PyX:
(a) |
The
intellectual property acquired in the PyX acquisition is amortized
to
expense over 36 months. This $1,664,000 adjustment reflects six months
of
amortization of intellectual property originally valued at $9,987,000
acquired in the PyX acquisition.
|
(b) |
Adjustment
to reflect the difference between the current salaries plus benefits
of
the PyX engineering employees and the expected salaries plus benefits
of
the PyX engineering employees when they are hired by the Company.
Included
in this adjustment is $141,000 of amortization expense related to
six-months of amortization of deferred compensation related to the
issuance of options to purchase the Company’s common stock awarded to the
engineering employees of PyX as part of the purchase price of PyX.
The
deferred compensation related to the purchase price of PyX totals
$1,876,000 and will be amortized to product research and development
and
sales and marketing expense over the 4-year vesting period of the
options.
This adjustment is for the six-month period from November 1, 2004
through
April 30, 2005.
|
(c) |
Adjustment
to reflect the difference between the current salaries plus benefits
of
the PyX sales employees and the expected salaries plus benefits of
the PyX
sales employees when they are hired by the Company. Included in this
adjustment is $94,000 of amortization expense related to six-months
of
amortization of deferred compensation related to the issuance of
options
to purchase the Company’s common stock awarded to the sales and marketing
employees of PyX as part of the purchase price of PyX. The deferred
compensation related to the purchase price of PyX totals $1,876,000
and
will be amortized to product research and development and sales and
marketing expense over the 4-year vesting period of the options.
This
adjustment is for the six-month period from November 1, 2004 through
April
30, 2005.
|
(d) |
Combined
pro forma shares include 2,561,050 shares of the Company’s common stock
that the Company will be issuing to the shareholders of PyX, at an
assumed
price of $3.09 per share based on the average closing price for the
Company’s common stock over the period beginning five trading days prior
to and ending five trading days after the date the merger agreement
was
signed, March 28, 2005, plus 2,575,000 shares of the Company’s common
stock in the private placement equity transaction at an assumed price
of
$2.00 per share, which is based on the lowest unit price at which
the
Company is obligated to complete the private placement. The following
securities were not included in the computation of pro forma number
of
shares because to do so would have been anti-dilutive for the periods
presented:
|
SBE
outstanding employee stock options
|
|
|
2,307,627
|
|
Warrants
to purchase SBE common stock
|
|
|
140,000
|
|
PyX
outstanding employee stock options to be assumed by SBE
|
|
|
2,038,950
|
|
Warrants
to purchase SBE common stock issued in conjunction with the private
placement transaction
|
|
|
1,287,500
|
|
Total
securities not included in pro forma number of shares
|
|
|
5,774,077
|
|
|
|
|
|
|
SBE,
Inc.
Unaudited
Pro Forma Condensed Combined State of Operations
|
|
|
|
|
for
the year ended
|
|
|
|
|
|
|
|
|
|
|
October
31, 2004
|
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Historical
|
|
|
|
|
|
Combined
|
|
|
|
|
SBE
|
|
|
PyX
|
|
|
Adjustments
|
|
|
Companies
|
|
|
|
|
(in
thousands, except for per share amounts)
|
|
Net
Sales
|
|
$
|
11,066
|
|
$
|
--
|
|
$
|
0
|
|
$
|
11,066
|
|
Cost
of Sales
|
|
|
6,646
|
|
|
--
|
|
|
3,329
a
|
|
|
9,975
|
|
Gross
Profit
|
|
|
4,420
|
|
|
--
|
|
|
3,329
|
|
|
1,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
research and development
|
|
|
2,411
|
|
|
143
|
|
|
735
b
|
|
|
3,289
|
|
Sales
and marketing
|
|
|
2,177
|
|
|
125
|
|
|
525
c
|
|
|
2,827
|
|
General
and administrative
|
|
|
1,755
|
|
|
--
|
|
|
|
|
|
1,755
|
|
Loan
reserve
|
|
|
(239
|
)
|
|
--
|
|
|
|
|
|
(239
|
)
|
Total
operating expense
|
|
|
6,104
|
|
|
268
|
|
|
1,260
|
|
|
7,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,684
|
)
|
|
(268
|
)
|
|
(4,589
|
)
|
|
(6,541
|
)
|
Interest
income (expense)
|
|
|
5
|
|
|
--
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
|
(1,679
|
)
|
|
(268
|
)
|
|
(4,589
|
)
|
|
(6,536
|
)
|
Benefit
for income taxes
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,679
|
)
|
$
|
(268
|
)
|
$
|
(4,589
|
)
|
$
|
(6,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per share
|
|
$
|
(0.33
|
)
|
$
|
0
|
|
$
|
0
|
|
$
|
(0.64
|
)
|
Diluted
loss per share
|
|
$
|
(0.33
|
)
|
$
|
0
|
|
$
|
0
|
|
$
|
(0.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- shares used in per share computations
|
|
|
5,022
|
|
|
|
|
|
5,136
d
|
|
|
10,158
|
|
Diluted
- shares used in per share computations
|
|
|
5,022
|
|
|
|
|
|
5,136
d
|
|
|
10,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footnotes
to the Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended October 31, 2004 for the Company and December 31, 2004 for
PyX:
(a) |
The
intellectual property acquired in the PyX acquisition is amortized
to
expense over 36 months. This $3,329,000 adjustment reflects twelve-months
amortization of intellectual property originally valued at $9,987,000
acquired in the PyX acquisition.
|
(b) |
Adjustment
to reflect the difference between the current salaries plus benefits
of
the PyX engineering employees and the expected salaries plus benefits
of
the PyX engineering employees when they are hired by the Company.
Included
in this adjustment is $281,000 of amortization expense related to
twelve-months of amortization of deferred compensation related to
the
issuance of options to purchase the Company’s common stock awarded to the
engineering employees of PyX as part of the purchase price of PyX.
The
deferred compensation related to the purchase price of PyX totals
$1,876,000 and will be amortized to product research and development
and
sales and marketing expense over the 4-year vesting period of the
options.
This adjustment is for the twelve-month period from November 1, 2003
through October 31, 2004.
|
(c) |
Adjustment
to reflect the difference between the current salaries plus benefits
of
the PyX sales employees and the expected salaries plus benefits of
the PyX
sales employees when they are hired by the Company. Included in this
adjustment is $188,000 of amortization expense related to twelve-months
of
amortization of deferred compensation related to the issuance of
options
to purchase the Company’s common stock awarded to the sales and marketing
employees of PyX as part of the purchase price of PyX. The deferred
compensation related to the purchase price of PyX totals $1,876,000
and
will be amortized to product research and development and sales and
marketing expense over the 4-year vesting period of the options.
This
adjustment is for the twelve-month period from November 1, 2003 through
October 31, 2004.
|
(d) |
Combined
pro forma shares include 2,561,050 shares of the Company’s common stock
that the Company will be issuing to the shareholders of PyX, at an
assumed
price of $3.09 per share is based on the average closing price for
the
Company’s common stock over the period beginning five trading days prior
to and ending five trading days after the date the merger agreement
was
signed, March 28, 2005, plus 2,575,000 shares of the Company’s common
stock that the Company will be selling to the purchasers in the private
placement equity transaction at an assumed price of $2.00 per share,
which
is based on the lowest unit price at which the Company is obligated
to
complete the private placement. The following securities were not
included
in the computation of pro forma number of shares because to do so
would
have been anti-dilutive for the periods
presented:
|
SBE
outstanding employee stock options
|
|
|
2,307,627
|
|
Warrants
to purchase SBE common stock
|
|
|
140,000
|
|
PyX
outstanding employee stock options to be assumed by SBE
|
|
|
2,038,950
|
|
Warrants
to purchase SBE common stock issued in conjunction with the private
placement transaction
|
|
|
1,287,500
|
|
Total
securities not included in pro forma number of shares
|
|
|
5,774,077
|
|
SELECTED
FINANCIAL DATA OF PYX
The
following selected consolidated financial data should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations of PyX” and the financial statements and the notes thereto included
elsewhere in this proxy statement. PyX was incorporated on November 26, 2002.
The selected statements of operations data for the quarters ended March 31,
2005
and 2004 and the fiscal years ended December 31, 2002, 2003 and 2004
and
the selected balance sheet data as of March 31, 2005 and December 31,
2003
and 2004 are derived from the audited financial statements that are included
elsewhere in this proxy statement and represent the financial data of PyX since
its inception
|
|
January
1, 2005 to
|
|
January
1, 2004 to
|
|
January
1, 2004 to
|
|
Period
from Inception
|
|
|
|
March
31, 2005
|
|
March
31, 2004
|
|
December
31, 2004
|
|
to
December 31, 2003
|
|
U
Statements of Operations Data: U
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
--
|
|
|
--
|
|
|
--
|
|
$
|
5,000
|
|
Total
operating expenses
|
|
$
|
466,255
|
|
$
|
6,579
|
|
$
|
267,432
|
|
$
|
26,696
|
|
Operating
loss
|
|
$
|
(466,255
|
)
|
$
|
(6,579
|
)
|
$
|
(267,432
|
)
|
$
|
(21,696
|
)
|
Net
loss
|
|
$
|
(467,255
|
)
|
$
|
(6,579
|
)
|
$
|
(268,463
|
)
|
$
|
(22,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
U
Balance Sheet Data: U
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
$
|
93,897
|
|
$
|
4,869
|
|
$
|
392
|
|
Total
assets
|
|
$
|
198,864
|
|
$
|
41,449
|
|
$
|
11,982
|
|
Total
current liabilities
|
|
$
|
207,187
|
|
$
|
219,922
|
|
$
|
1,992
|
|
Total
liabilities
|
|
$
|
207,187
|
|
$
|
219,922
|
|
$
|
1,992
|
|
Total
shareholders' equity (deficit)
|
|
$
|
(8,323
|
)
|
$
|
(178,473
|
)
|
$
|
9,990
|
|
|
|
|
|
|
|
|
|
|
|
|
DESCRIPTION
OF PYX’S BUSINESS
The
following description of PyX’s business contains forward-looking statements that
involve risks and uncertainties. Words such as
“believes,”“anticipates,”“expects,”“intends” and similar expressions are
intended to identify forward-looking statements, but are not the exclusive
means
of identifying such statements. Readers are cautioned that the forward-looking
statements reflect PyX’s analysis only as of the date hereof, and PyX assumes no
obligation to update these statements. Actual events or results may differ
materially from the results discussed in or implied by the forward-looking
statements. The following description should be read in conjunction with PyX’s
consolidated financial statements for the years ended December 31, 2003
and
2004 the quarter ended March 31, 2005 and the related notes included in this
proxy statement.
Overview
PyX
Technologies, Inc., or PyX, is a technology company that was incorporated under
the laws of the State of California on November 26, 2002. Since inception,
PyX's
efforts have been devoted to the development of software products for the
Internet Small Computer System Interface, or iSCSI, enterprise storage market
and raising capital. PyX has not received any significant revenues from the
sale
of its products or services. Accordingly, through the date of this proxy
statement, PyX is considered to be in the development stage and the accompanying
financial statements on page 55 represent those of a development stage
enterprise.
PyX’s
goal is to develop a complete software-based, scalable storage solution via
an
iSCSI Initiator and Target driver set for the NetBSD or LINUX OS. PyX believes
that its iSCSI software provides an efficient alternative for all environments
seeking interoperability in a software-based enterprise storage solution. A
Storage Area Network, or SAN, infrastructure with iSCSI capabilities can
continue to operate during the constant network changes and updates facing
network operators today.
PyX
currently has two products that have been completed, an iSCSI Initiator and
an
iSCSI Target running on Linux. All PyX products conform to the iSCSI standard
as
ratified by the Internet Engineering Task Force (“IETF”). PyX believes that it
is the first and only company in the world to complete development of a
universal iSCSI protocol that meets and exceeds the IETF standard for Error
Recovery Level Two (ERL2) with full Sync and Steering.
Strategy
PyX
expects its principal markets to be with the manufacturers, developers and
systems integrators of small- and medium-sized companies for whom the costs
of
other high-performance storage transport technology, and in particular fibre
channel architectures, may be prohibitively expensive. As companies see the
number of servers and databases grow on their networks, they are experiencing
increasing storage-management complexity that can result in inefficient storage
utilization and increased cost of ownership. When the expense and scarcity
of
qualified IT support staff are factored in, these issues can be compounded
significantly.
For
small- and medium-sized companies, iSCSI may be their best solution as it
utilizes the same IP infrastructure as network attached storage, but features
the block input/output protocol inherent in storage area networks, or SANs.
PyX
believes that the adaptability of iSCSI to varied storage approaches likewise
increases the market potential for iSCSI software solutions. The bulk of PyX’s
iSCSI revenues for 2005 and 2006 are expected to come from sales in the SAN
market as described above. PyX also anticipates being able to market to the
developing consumer and military/government markets. Specifically, iSCSI
applications are expected to include Secure Mobile Computing, in the
military/government market, and the Global Personal SAN, in the consumer market.
While these markets will take longer to develop, they are expected to be a
part
of PyX’s long-term strategy for growth and expansion beyond the traditional SAN
market.
Products
PyX’s
product development initiative for 2005 is expected to include several iSCSI
software products, two of which have been completed, the iSCSI Initiator and
the
iSCSI Target software running on Linux. The iSCSI Initiator, the Linux version
of which is currently being shipped, is a product that resides on a client’s
computer, server or device that is connected to a network. PyX’s technology
allows the iSCSI Initiator to regard the target storage device as another local
disk, whether it is in a server in a nearby location or in another country.
The
iSCSI Target is a product that resides on a storage server and is the
destination of the iSCSI Initiator. Recently, a graphical user interface was
added to the management features of this stack to enhance the ease-of-use
experience and broaden the appeal to a larger market.
All
of
PyX’s current and planned products conform to the iSCSI standard as ratified by
the Internet Engineering Task Force, IETF. PyX believes that it is the first
and
only company in the world to complete development of a universal iSCSI protocol
that meets, and exceeds, the IETF standard for Error Recovery Level Two, or
ERL2, with full Sync and Steering. At present, PyX is not aware of any other
iSCSI vendors that are offering both Initiator and Target solutions that provide
full error-recovery features.
This
advance in PyX’s technology offers enterprise level, multi-path migration with
error recovery previously available only in more expensive fibre channel
architectures. PyX believes that its software will enable original equipment
manufacturers, value-added resellers and independent software vendors to deliver
on iSCSI’s promise of providing multi-path linked enterprise data storage with
error recovery and failover at significantly less than the cost of fibre
channel.
PyX’s
roadmap for the further development of its iSCSI software products is expected
to include a number of initiatives in 2005 and 2006. The chart below presents
the current plan and an estimated timeline for projects that have been approved
or are being considered by PyX.
Intellectual
Property
PyX
does
not hold and has not applied for or registered any patents or
trademarks.
Customers
As
of the
date hereof, PyX is dependent on one customer, a leading video surveillance
company, for 100% of its revenue. PyX expects to execute agreements with
additional customers in 2005.
Employees
PyX
currently has five employees: Greg Yamamoto, its Chief Executive Officer; Andre
Hedrick, its President and Chief Technical Officer; Leo Fang, its Chief
Operating Officer); Nicholas Bellinger its Chief Software Architect; and Chris
Short its Vice President of North American Sales.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS OF PYX
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and
uncertainties. Words such as “believes,”“anticipates,”“expects,”“intends” and
similar expressions are intended to identify forward-looking statements, but
are
not the exclusive means of identifying such statements. Readers are cautioned
that the forward-looking statements reflect our analysis only as of the date
hereof, and neither we nor PyX assume any obligation to update these statements.
Actual events or results may differ materially from the results discussed in
or
implied by the forward-looking statements. The following discussion should
be
read in conjunction with PyX’s consolidated financial statements for the
quarters ended March 31, 2005 and 2004 and the years ended December 31,
2003 and 2004 and the related notes included in this proxy statement.
Overview
PyX
Technologies, Inc., or PyX, is a technology company that was incorporated under
the laws of the State of California on November 26, 2002. Since inception,
PyX's
efforts have been devoted to the development of software products for the
Internet Small Computer System Interface, or iSCSI, enterprise storage market
and raising capital. PyX has not received any significant revenues from the
sale
of its products or services. Accordingly, through the date of this proxy
statement, PyX is considered to be in the development stage and the accompanying
financial statements on page 55 represent those of a development stage
enterprise.
PyX’s
revenues are derived primarily from the sale of iSCSI software licenses and
related consulting services associated with customer product development.
Currently, PyX has licensed its iSCSI Initiator and Target software to a single
customer. Revenues are recognized upon satisfying all generally accepted
accounting principles related to software revenue recognition. Cash received
in
advance of revenue recognition is included in deferred revenue.
PyX’s
operating expenses consist primarily of research and development costs and
selling and marketing expenses. PyX’s research and development expenses consist
primarily of salaries of personnel, consulting expenses associated with new
technology development and testing costs. PyX’s selling and marketing expenses
consist primarily of sales personnel and public relations expenses.
PyX’s
general and administrative expenses consist primarily of salaries of personnel
engaged in corporate administration, finance and accounting, human resources,
and operations. General and administrative expenses also include professional
fees and other general corporate expenses.
Critical
Accounting Policies and Use of Estimates
Use
of Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires PyX to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Results
of Operations
The
following table sets forth our results of operations:
|
|
Quarter
Ended
|
|
Quarter
Ended
|
|
January
1, 2004 to
|
|
Period
from Inception
|
|
|
|
March
31,
2005
|
|
March
31,
2005
|
|
December
31, 2004
|
|
to
December 31, 2003
|
|
Total
revenue
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
5,000
|
|
Total
operating expenses
|
|
|
466,255
|
|
|
6,579
|
|
|
267,442
|
|
|
26,696
|
|
Operating
loss
|
|
|
(466,255
|
)
|
|
(6,579
|
)
|
|
(267,442
|
)
|
|
(21,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
200
|
|
|
|
|
|
200
|
|
|
-
|
|
Income
(loss) before income taxes
|
|
|
(466,455
|
)
|
|
(6,579
|
)
|
|
(267,642
|
)
|
|
(21,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
800
|
|
|
--
|
|
|
831
|
|
|
814
|
|
Net
loss
|
|
$
|
(467,255
|
)
|
$
|
(6,579
|
)
|
$
|
(268,473
|
)
|
$
|
(22,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Quarters Ended March 31, 2005 and 2004
Revenues
There
was
no revenue for either period. PyX defers all revenue in accordance with
generally accepted accounting principles related to software revenue
recognition. PyX had $19,500 in deferred revenue for the quarter ended March
31,
2005 compared to none in the same period in 2004.
Operating
Expenses
Operating
expenses for the quarter ended March 31, 2005 increased to $466,255 from $6,579
for the period in 2004. The increase in operating expenses was primarily due
to
an increase in salary payments during the later part of 2004 along with
increased travel, accounting and advertising expenses. Included in the March
31,
2005 operating expense is $303,150 of non-cash salary expense related to
warrants to purchase common stock granted to three employees of the Company
in
lieu of a cash salary and $82,105 in non -cash compensation expense related
to
vested stock options granted to employees of the Company.
Interest
Expense
Interest
expense for the quarter ended March 31, 2005 increased to $200 from no interest
expense for the same period in 2004. The increase was due to the interest
related to a $10,000 loan financed in the fourth quarter of 2004.
Net
Loss
Net
loss
for the quarter ended March 31, 2005 increased to $467,255 from $6,579 for
the
same period in 2004. The increased loss in 2005 primarily resulted from
increased research and development spending on the iSCSI software products
and
an increase in cash and non-cash salary expense during the quarter ended March
31, 2005. In the quarter ended March 31, 2004, none of the Company’s employees
were paid a salary.
Stock-based
Compensation
On
February 28, 2005, the Company granted three employees warrants to purchase
a
total of 215,000 shares of the Company’s common stock for $0.01 per share in
lieu of cash salary. The difference between the $0.01 exercise price per share
and the estimated fair market value on the grant date of $1.42 is included
in
the general and administrative expense as compensation expense. The Company
also
adopted an employee stock option plan on February 28, 2005 and granted 4,432,500
stock options on February 28, 2005 to its employees. The stock options vest
over
four years and have an exercise price of $1.00 per share.
Comparison
of Years Ended December 31, 2004 and 2003
Revenues
Total
revenues for the year ended December 31, 2004 decreased to $0 from
$5,000 for the period from inception to December 31, 2003. The decrease
in
revenues in 2004 resulted primarily from deferral to 2005 of all of PyX’s
revenue for 2004 in accordance with generally accepted accounting principles
related to software revenue recognition. PyX had $82,500 in deferred revenue
for
2004.
Operating
Expenses
Operating
expenses for the year ended December 31, 2004 increased to $267,442 from $26,696
for the period from inception to December 31, 2003. The increase in operating
expenses was primarily due to an increase in salary payments during
2004.
Interest
Expense
Interest
expense for the year ended December 31, 2004 increased to US $200 from no
interest expense for the period from inception to December 31, 2003. The
increase was primarily due to the interest related to a $10,000 loan financed
in
the fourth quarter of 2004.
Net
Loss
Net
loss
for the year ended December 31, 2004 increased to $268,000 from $23,000 for
the
period from inception to December 31, 2003. The increased loss in 2004 primarily
resulted from increased research and development spending on the iSCSI software
products and an increase in salary payments during 2004.
Stock-based
Compensation
From
its
inception to December 31, 2004, PyX did not have any stock based compensation.
Liquidity
and Capital Resources
Since
its
inception, PyX has financed its operations through sales of stock and a small
loan and, more recently, minimal amounts of internally generated cash flow
from
operations. PyX’s cash and cash equivalents increased to $78,846 at March 31,
2005. The increase was primarily a result of an investment round of $250,000
in
January 2005, offset by $65,900 for retaining legal counsel, pre-paying future
commission expenses and fixed asset costs. PyX’s net cash and cash equivalents
provided by financing activities during the first quarter of 2005 totaled
$250,000.
At
December 31, 2004, PyX had cash of $4,869. This represented a $4,477 increase
in
cash from $392 at December 31, 2003. The increase in cash resulted primarily
from $90,000 in cash received from financing activities, most notably $80,000
from the sale of stock and $10,000 from a related party loan. The cash received
from financing activities was partially offset by losses from operations and
purchases of computer equipment.
In
January of 2003, PyX sold 5,000,000 shares of PyX common stock for a per share
price of $0.002 with aggregate proceeds to PyX of $10,000. In June and August
of
2003, PyX sold 22,500 shares of PyX common stock for a per share price of $1.00.
In March and April of 2004, PyX sold 80,000 shares of PyX common stock for
a per
share price of $1.00. In January 2005, PyX sold 250,000 shares of PyX common
stock for a per share price of $1.00.
PyX’s
cash expenditures have been primarily related to operating expense, such as
payroll, marketing and travel, in addition to purchases of computer and
development equipment.
If
the
proposed acquisition of the Company by SBE does not materialize the Company
will
need to raise additional capital through the issuance of debt or equity
securities. In addition, the Company’s projected revenue growth will provide
sufficient capital to continue operations. If additional funds are raised
through the issuance of preferred stock or debt, these securities could have
rights, privileges or preferences senior to those of our common stock, and
debt
covenants could impose restrictions on our operations. The sale of equity or
debt could result in additional dilution to current stockholders, and such
financing may not be available to us on acceptable terms, if at all.
Recent
Accounting Pronouncements
PyX
derives revenues from the following sources: (1) software, which includes new
iSCSI Target and Initiator software licenses and (2) services, which includes
consulting.
New
software license revenues represent all fees earned from granting customers
licenses to use PyX’s iSCSI software. While the basis for software license
revenue recognition is substantially governed by the provisions of Statement
of
Position No. 97-2, Software Revenue Recognition, or SOP 97-2, issued by the
American Institute of Certified Public Accountants, PyX exercises judgment
and
uses estimates in connection with the determination of the amount of software
and services revenues to be recognized in each accounting period.
For
software license arrangements that do not require significant modification
or
customization of the underlying software, PyX recognizes new software license
revenue when: (1) it enters into a legally binding arrangement with a customer
for the license of software; (2) it delivers the products; (3) customer payment
is deemed fixed or determinable and free of contingencies or significant
uncertainties; and (4) collection is reasonably assured. Substantially all
of
PyX’s new software license revenue is recognized in this manner. No software
license revenue has been recognized to date.
Certain
of PyX’s software arrangements include consulting implementation services sold
separately under consulting engagement contracts. Consulting revenues from
these
arrangements are generally accounted for separately from new software license
revenues because the arrangements qualify as service transactions as defined
in
SOP 97-2. The more significant factors considered in determining whether the
revenue should be accounted for separately include the nature of services (i.e.,
consideration of whether the services are essential to the functionality of
the
licensed product), degree of risk, availability of services from other vendors,
timing of payments and impact of milestones or acceptance criteria on the
realizability of the software license fee. Revenues for consulting services
are
generally recognized as the services are performed. If there is a significant
uncertainty about the project completion or receipt of payment for the
consulting services, revenue is deferred until the uncertainty is sufficiently
resolved. Service revenues of $0 and $5,000 were recognized in the year ended
December 31, 2004 and the period from inception (November 26, 2002) to December
31, 2003, respectively.
INDEX
TO PYX TECHNOLOGIES, INC.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
56
|
Balance
Sheets
|
57
|
Statements
of Operations
|
58
|
Statements
of Shareholders’ Equity
|
59
|
Statements
of Cash Flows
|
60
|
Summary
of Accounting Policies
|
61
|
Notes
to Financial Statements
|
61
|
TReport
of Independent Registered Public Accounting Firm
Board
of
Directors
PyX
Technologies, Inc.
San
Ramon, California
We
have
audited the accompanying balance sheets of PyX Technologies, Inc. (the
“Company”) as of December 31, 2004 and 2003 and the related statements of
operations, stockholders’ equity (deficit), and cash flows for the year ended
December 31, 2004, the period from inception (November 26, 2002) through
December 31, 2003, and the period from inception (November 26, 2002) through
December 31, 2004. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board. Those standards require that we plan and perform
the
audit to obtain reasonable assurance about whether the financial statements
are
free of material misstatement. The Company is not required to have, nor were
we
engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting
as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of PyX Technologies, Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash
flows
for the year ended December 31, 2004, the period from inception (November 26,
2002) through December 31, 2003, and the period from inception (November 26,
2002) through December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
/s/
BDO
Seidman, LLP
March
3,
2005, except for Note 5, which is as of March 28, 2005
San
Francisco, California
PYX
TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
BALANCE
SHEETS
|
|
(unaudited)
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
78,847
|
|
$
|
4,869
|
|
$
|
392
|
|
Accounts
receivable
|
|
|
15,050
|
|
|
---
|
|
|
---
|
|
Total
current assets
|
|
|
93,897
|
|
|
4,869
|
|
|
392
|
|
Property
and equipment, net
|
|
|
20,467
|
|
|
12,580
|
|
|
11,982
|
|
Other
assets
|
|
|
84,500
|
|
|
24,000
|
|
|
---
|
|
Total
Assets
|
|
$
|
198,864
|
|
$
|
41,449
|
|
$
|
11,982
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
10,400
|
|
$
|
10,200
|
|
$
|
--
|
|
Accounts
payable
|
|
|
68,608
|
|
|
82,870
|
|
|
1,992
|
|
Accrued
payroll and employee benefits
|
|
|
26,179
|
|
|
44,352
|
|
|
---
|
|
Deferred
revenues
|
|
|
102,000
|
|
|
82,500
|
|
|
---
|
|
Total
current liabilities
|
|
|
207,187
|
|
|
219,922
|
|
|
1,992
|
|
Total
liabilities
|
|
|
207,187
|
|
|
219,922
|
|
|
1,992
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
|
|
|
|
|
|
|
|
($0.001
par value); authorized 10,000,000, 10,000,000 and 200,000 shares;
issued
and outstanding 5,567,500, 5,102,500 and 100,450
|
|
|
1,549
|
|
|
1,084
|
|
|
1,004
|
|
Additional
paid-in capital
|
|
|
4,607,271
|
|
|
111,416
|
|
|
31,496
|
|
Deferred
compensation
|
|
|
(3,858,915
|
)
|
|
---
|
|
|
---
|
|
Deficit
accumulated during the development stage
|
|
|
(758,228
|
)
|
|
(290,973
|
)
|
|
(22,510
|
)
|
Total
shareholders’ equity (deficit)
|
|
|
(8,323
|
)
|
|
(178,473
|
)
|
|
9,990
|
|
Total
liabilities and shareholders’ equity (deficit)
|
|
$
|
198,864
|
|
$
|
41,449
|
|
$
|
11,982
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
PYX
TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF OPERATIONS
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
January
1, 2005 to March 31, 2005
|
|
January
1, 2004 to March 31, 2004
|
|
January
1, 2004 to December 31, 2004
|
|
Period
from Inception to December 31, 2003
|
|
Cumulative
from Inception to March, 31 2005
|
|
Service
contract revenues
|
|
$
|
--
|
|
$
|
--
|
|
$ |
-- |
|
$ |
5,000 |
|
$ |
5,000 |
|
Total
revenues
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
5,000
|
|
|
5,000
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
research and development
|
|
|
46,732
|
|
|
3,379
|
|
|
142,625
|
|
|
13,808
|
|
|
203,165
|
|
Selling,
general and administrative
|
|
|
419,523
|
|
|
3,200
|
|
|
124,807
|
|
|
12,888
|
|
|
557,218
|
|
Total
operating expenses
|
|
|
466,255
|
|
|
6,579
|
|
|
267,432
|
|
|
26,696
|
|
|
760,383
|
|
Operating
loss
|
|
|
(466,255
|
)
|
|
(6,579
|
)
|
|
(267,432
|
)
|
|
(21,696
|
)
|
|
(755,383
|
)
|
Interest
expense
|
|
|
200
|
|
|
--
|
|
|
200
|
|
|
-
|
|
|
400
|
|
Loss
before income taxes
|
|
|
(466,455
|
)
|
|
(6,579
|
)
|
|
(267,632
|
)
|
|
(21,696
|
)
|
|
(755,783
|
)
|
Income
tax expense
|
|
|
800
|
|
|
--
|
|
|
831
|
|
|
814
|
|
|
2,445
|
|
Net
loss
|
|
$
|
(467,255
|
)
|
$ |
(6,579 |
) |
$ |
(268,463 |
) |
$ |
(22,510 |
) |
$ |
(758,228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
PYX
TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF SHAREHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
Common
Stock and Additional
Paid-in
Capital
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Par
Value
|
|
Additional
Paid-in
Capital
|
|
Deferred
Compensation
|
|
Accumulated
Deficit
|
|
Total
|
|
Balance,
November 26, 2002
|
|
$
|
---
|
|
$
|
---
|
|
$
|
---
|
|
$
|
---
|
|
$
|
---
|
|
$
|
---
|
|
Stock
issued to founders
|
|
|
5,000,000
|
|
|
1,000
|
|
|
9,000
|
|
|
---
|
|
|
---
|
|
|
10,000
|
|
Stock
issued in connection with private placement
|
|
|
22,500
|
|
|
4
|
|
|
22,496
|
|
|
---
|
|
|
---
|
|
|
22,500
|
|
Net
loss
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(22,510
|
)
|
|
(22,510
|
)
|
Balance,
December 31, 2003
|
|
|
5,022,500
|
|
|
1,004
|
|
|
31,496
|
|
|
---
|
|
|
(22,510
|
)
|
|
9,990
|
|
Stock
issued in connection with private placement
|
|
|
80,000
|
|
|
80
|
|
|
79,920
|
|
|
---
|
|
|
---
|
|
|
80,000
|
|
Net
loss
|
|
|
--
|
|
|
---
|
|
|
--
|
|
|
---
|
|
|
(268,463
|
)
|
|
(268,463
|
)
|
Balance,
December 31, 2004
|
|
|
5,102,500
|
|
|
1,084
|
|
|
111,416
|
|
|
---
|
|
|
(290,973
|
)
|
|
(178,473
|
)
|
Stock
issued in connection with private placement
|
|
|
250,000
|
|
|
250
|
|
|
249,750
|
|
|
---
|
|
|
---
|
|
|
250,000
|
|
Warrants
to purchase stock issued in connection with employment
|
|
|
215,000
|
|
|
215
|
|
|
305,085
|
|
|
---
|
|
|
---
|
|
|
305,300
|
|
Deferred
compensation included in common stock
|
|
|
|
|
|
|
|
|
3,941,020
|
|
|
---
|
|
|
|
|
|
3,941,020
|
|
Deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
(3,858,915
|
)
|
|
|
|
|
(3,858,915
|
)
|
Net
loss
|
|
|
--
|
|
|
---
|
|
|
--
|
|
|
---
|
|
|
(467,255
|
)
|
|
(467,255
|
)
|
Balance,
March 31, 2005 (unaudited)
|
|
|
5,567,500
|
|
$
|
1,549
|
|
$
|
4,607,271
|
|
$
|
(3,858,915
|
)
|
$
|
(758,228
|
)
|
$
|
(8,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
PYX
TECHNOLOGIES, INC.
|
|
|
|
|
|
|
(A
DEVELOPMENT STAGE COMPANY)
|
|
|
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Quarter
Ended March 31, 2005
|
|
Quarter
Ended March 31, 2004
|
|
Year
Ended December 31, 2004
|
|
Period
from Inception (November 26, 2002) through December 31, 2003
|
|
Period
from Inception (November 26, 2002) through March 31, 2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(467,255
|
)
|
|
(6,579
|
)
|
|
(268,463
|
)
|
|
(22,510
|
)
|
|
(758,228
|
)
|
Adjustments
to reconcile net loss to net cash used
in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,125
|
|
|
1,116
|
|
|
5,447
|
|
|
1,812
|
|
|
9,384
|
|
Stock
based compensation expense
|
|
|
385,255
|
|
|
---
|
|
|
---
|
|
|
|
|
|
385,255
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account
receivable
|
|
|
(15,050
|
)
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(15,050
|
)
|
Other
assets
|
|
|
(60,500
|
)
|
|
---
|
|
|
(24,000
|
)
|
|
---
|
|
|
(84,500
|
)
|
Accounts
payable
|
|
|
(14,062
|
)
|
|
---
|
|
|
80,879
|
|
|
1,992
|
|
|
68,608
|
|
Accrued
payroll and commissions
|
|
|
(18,173
|
)
|
|
---
|
|
|
44,351
|
|
|
---
|
|
|
26,179
|
|
Deferred
revenues
|
|
|
19,500
|
|
|
5,000
|
|
|
82,500
|
|
|
---
|
|
|
102,000
|
|
Net
cash used in operating activities
|
|
|
(168,160
|
)
|
|
(463
|
)
|
|
(79,286
|
)
|
|
(18,706
|
)
|
|
(266,352
|
)
|
Cash
flows from
investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(10,012
|
)
|
|
(734
|
)
|
|
(6,437
|
)
|
|
(13,402
|
)
|
|
(29,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(10,012
|
)
|
|
(734
|
)
|
|
(6,437
|
)
|
|
(13,402
|
)
|
|
(29,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
|
---
|
|
|
---
|
|
|
10,200
|
|
|
---
|
|
|
10,400
|
|
Proceeds
from issuance of common stock
|
|
|
252,150
|
|
|
30,000
|
|
|
80,000
|
|
|
32,500
|
|
|
364,650
|
|
Net
cash provided by financing activities
|
|
|
252,150
|
|
|
30,000
|
|
|
90,200
|
|
|
32,500
|
|
|
375,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
and cash
equivalents
|
|
|
73,978
|
|
|
28,803
|
|
|
4,477
|
|
|
392
|
|
|
79,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of year
|
|
|
4,869
|
|
|
392
|
|
|
392
|
|
|
---
|
|
|
---
|
|
Cash
at end of year
|
|
|
78,847
|
|
|
29,195
|
|
|
4,869
|
|
|
392
|
|
|
78,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Income
tax paid
|
|
|
---
|
|
|
---
|
|
|
800
|
|
|
---
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company and Basis of Presentation:
PyX
Technologies, Inc. (the Company) is a technology company incorporated under
the
laws of the State of California on November 26, 2002 (inception). The Company
is
in the research and development stage of software products for the Internet
Small Computer System Interface (“iSCSI”) Enterprise Storage
market.
Since
inception, the Company's efforts have been devoted to the development of iSCSI
software and raising capital. The Company has not received any significant
revenues from the sale of its products or services since inception. Accordingly,
through the date of these financial statements, the Company is considered to
be
in the development stage and the accompanying financial statements represent
those of a development stage enterprise.
The
financial statements present the results of operations for the period from
inception to March 31, 2005. While the Company was incorporated on November
26,
2002, it had no operations during the period November 26, 2002 to December
31,
2002.
Use
of Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires the Company
to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash:
Substantially
all of the Company’s cash is held with one large financial institution and may
at times be above insured limits.
Property
and Equipment:
Property
and equipment are carried at cost. The Company records depreciation charges
on a
straight-line basis over the assets' estimated useful lives of three years
for
computers and related equipment used to develop its software products.
When
assets are sold or otherwise disposed of, the cost and accumulated depreciation
are removed from the accounts and any gain or loss on sale or disposal is
recognized in operations. Maintenance, repairs and minor renewals are charged
to
expense as incurred.
The
Company reviews property and equipment for impairment whenever events or changes
in circumstances indicate the carrying value of an asset may not be recoverable.
In performing the review for recoverability, The Company estimates the future
gross cash flows expected to result from the use of the asset and its eventual
disposition. If such gross cash flows are less than the carrying amount of
the
asset, the asset is considered impaired. The amount of the impairment loss,
if
any, would then be calculated based on the excess of the carrying amount of
the
asset over its fair value.
Revenue
Recognition:
The
Company will derive revenues from the following sources: (1) software, which
includes new iSCSI Target and Initiator software licenses and (2) services,
which include consulting.
When
the
Company exits the development stage, new software license revenues will
represent all fees earned from granting customers licenses to use the Company’s
iSCSI software. While the basis for software license revenue recognition is
substantially governed by the provisions of Statement of Position No. 97-2,
Software Revenue Recognition, issued by the American Institute of Certified
Public Accountants, the Company exercises judgment and uses estimates in
connection with the determination of the amount of software and services
revenues to be recognized in each accounting period.
For
software license arrangements that do not require significant modification
or
customization of the underlying software, the Company will recognize new
software license revenue when: (1) it enters into a legally binding arrangement
with a customer for the license of software; (2) it delivers the products;
(3)
customer payment is deemed fixed or determinable and free of contingencies
or
significant uncertainties; and (4) collection is reasonably assured.
Substantially all of the Company’s new software license revenue is recognized in
this manner. No software license revenue has been recognized to
date.
Certain
of the Company’s software arrangements include consulting implementation
services sold separately under consulting engagement contracts. Consulting
revenues from these arrangements are generally accounted for separately from
new
software license revenues because the arrangements qualify as service
transactions as defined in SOP 97-2. The more significant factors considered
in
determining whether the revenue should be accounted for separately include
the
nature of services (i.e., consideration of whether the services are essential
to
the functionality of the licensed product), degree of risk, availability of
services from other vendors, timing of payments and impact of milestones or
acceptance criteria on the realizability of the software license fee. Revenues
for consulting services are generally recognized as the services are performed.
If there is a significant uncertainty about the project completion or receipt
of
payment for the consulting services, revenue is deferred until the uncertainty
is sufficiently resolved. Service revenues of $0 and $5,000 were recognized
in
the year ended December 31, 2004 and the period from inception (November 26,
2002) to December 31, 2003, respectively.
Product
Research and Development Expenditures:
Research
and development costs are expensed as incurred.
Stock-based
Compensation
On
February 28, 2005, the Company granted three employees warrants to purchase
a
total of 215,000 shares of the Company’s common stock for $0.01 per share in
lieu of cash salary. The difference between the $0.01 exercise price and the
estimated fair market value on the grant date of $1.00 is included in the
general and administrative expense as compensation expense.
Income
Taxes:
The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes.
SFAS No.
109 requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of items that have been included in the financial
statements or tax returns. Deferred income taxes represent the future net tax
effects resulting from temporary differences between the financial statement
and
tax bases of assets and liabilities, using enacted tax rates in effect for
the
year in which the differences are expected to reverse. Valuation allowances
are
recorded against net deferred tax assets where, in our opinion, realization
is
uncertain. The provision for income taxes represents the net change in deferred
tax amounts, plus income taxes payable for the current period.
As
of
December 31, 2004 the Company had net operating loss (NOL) carryforwards of
approximately $99,000 and $2,000 for federal and state income tax purposes
expiring in varying amounts from 2023 through 2024. Because management could
not
determine it was more likely than not that deferred tax assets, primarily
relating to the NOLs, would be realized, a valuation allowance has been provided
to eliminate all of the deferred tax assets of approximately $40,000 at December
31, 2004. The Company did pay the required California state minimum income
taxes
in 2003 and 2004.
Pursuant
to the provision of the Tax Reform Act of 1986, utilization of the NOL
carryforwards may also be subject to an annual limitation if a greater than
50%
change in the ownership of the Company occurs within a three-year
period.
2. PROPERTY
AND EQUIPMENT
Property
and equipment are comprised of the following:
|
|
March
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Computer
hardware
|
|
$
|
29,851
|
|
$
|
19,839
|
|
$
|
13,402
|
|
Less
accumulated depreciation and amortization
|
|
|
(9,384
|
)
|
|
(7,259
|
)
|
|
(1,812
|
)
|
|
|
$
|
20,467
|
|
$
|
12,580
|
|
$
|
11,590
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense totaled $2,125, $5,447 and $1,812 for the three months ended March
31,
2005 and years ended December 31, 2004 and 2003, respectively.
3. SHAREHOLDERS'
EQUITY
In
January 1, 2003, the Company sold 100,000 shares to the Company’s founders in
exchange for the assignment to the Company of certain technology and related
rights owned by the purchasers valued at $10,000. In July 2003, 450 shares
of
common stock were sold to investors for $50.00 per share. On November 30, 2003,
the Company increased its authorized number of shares of common stock from
200,000 to 10,000,000 and simultaneously declared a 50 to 1 stock split of
its
common stock. In March 2004, 80,000 shares of the Company’s Common Stock have
been sold to investors for $1.00 per share. On January 20, 2005, the Company
issued $250,000 of preferred stock for $250,000 cash. The preferred stock has
a
liquidation preference to the Company’s common stock holders. The preferred
stock is convertible into common stock simultaneously with the sale of the
Company to SBE. The Company also entered into an employment agreement with
two
of the holders of the preferred stock. The employees will receive 175,000 shares
of the Company’s preferred stock vested monthly over the period January 2005
though July 2005 in lieu of cash compensation. For financial statement
reporting, all shares and par value amounts have been adjusted to reflect such
stock split.
4. LOANS
On
September 27, 2004, the Company entered into a loan agreement with a relative
of
one of the founders for $10,000 at an annual interest rate of 8% due October
31,
2005. As of March 31, 2005, the outstanding principal and interest totaled
$10,400.
5. SUBSEQUENT
EVENTS
On
March
28, 2005, the Company entered into a definite agreement to be acquired by SBE,
Inc (“SBE”), a Delaware corporation listed on the Nasdaq SmallCap Market under
symbol SBEI. In the acquisition, the Company will be merged with and into a
wholly-owned subsidiary of SBE and each outstanding share of the Company’s
Common Stock will be automatically converted into 0.46 shares of SBE Common
Stock . The closing of the merger is subject to certain closing conditions
including approval by SBE’s stockholders, SBE entering into a definitive
agreement for raising at least $5 million in cash from investors (with the
closing being subject only to the closing of the merger), amendment of the
Company’s agreement with Pelco and customary closing conditions. The merger is
expected to close in SBE’s third fiscal quarter, ending July 31, 2005. An
officer of SBE, Inc. is also a shareholder of the Company.
PROPOSAL
2
APPROVAL
OF THE UNIT SUBSCRIPTION AGREEMENT
AND
THE ISSUANCE OF SHARES OF SERIES A
PREFERRED
STOCK IN THE PRIVATE PLACEMENT
General
The
unit
subscription agreement provides that, subject to satisfaction of certain
conditions, and assuming a price per share of $2.00, we will issue to the
purchasers:
|
• |
2,575,000
shares of our common stock, or approximately 24.8% of the outstanding
shares of our common stock after the closing of the merger and the
private
placement, assuming no further issuances of shares of our common
stock and
no exercise of outstanding stock options or warrants, based on the
number
of shares outstanding on April 29, 2005; and
|
|
• |
warrants
to purchase up to an additional 1,287,500 shares of our common stock,
or
approximately 12.4% of the outstanding shares of our common stock
after
the closing of the merger and the private placement, assuming no
further
issuances of shares of our common stock and not exercise of outstanding
stock options or warrants, based on the number of shares outstanding
on
April 29, 2005.
|
We
refer
to the shares of our common stock and the warrants to purchase shares of our
common stock in this proxy statement as units. Each unit consists of one share
of our common stock and a warrant to purchase one-half of a share of our common
stock.
The
aggregate proceeds we will receive from the issuance of the units to the
purchasers in the private placement is $5,150,000.
We
entered into unit subscription agreements, each dated as of May 4, 2005, with
each of the purchasers set forth below. Together, these investors are referred
to as the purchasers. The purchasers have agreed to purchase units representing
aggregate gross proceeds to us of $5.0 million in the following amounts:
Name
|
|
Investment
|
|
Herschel
Berkowitz
|
|
$
|
150,000.00
|
|
Paul
Packer
|
|
|
50,000.00
|
|
Globis
Capital Partners
|
|
|
500,000.00
|
|
Globis
Overseas Fund Ltd.
|
|
|
200,000.00
|
|
Richard
Grossman
|
|
|
50,000.00
|
|
Joshua
Hirsch
|
|
|
50,000.00
|
|
James
Kardon
|
|
|
17,000.00
|
|
AIGH
Investment Partners LLC
|
|
|
825,000.00
|
|
Ellis
International LLC
|
|
|
100,000.00
|
|
Jack
Dodick
|
|
|
200,000.00
|
|
Stephen
Spira
|
|
|
100,000.00
|
|
Fame
Associates
|
|
|
100,000.00
|
|
Cam
Co
|
|
|
350,000.00
|
|
Anfel
Trading Limited
|
|
|
650,000.00
|
|
Ganot
Corporation
|
|
|
350,000.00
|
|
LaPlace
Group, LLC
|
|
|
300,000.00
|
|
F.
Lyon Polk
|
|
|
60,000.00
|
|
Paul
Tramontano
|
|
|
50,000.00
|
|
Hilary
Edson
|
|
|
60,000.00
|
|
Kevin
McCaffrey
|
|
|
100,000.00
|
|
William
Heinzerling
|
|
|
100,000.00
|
|
John
A. Moore
|
|
|
100,000.00
|
|
Mark
Giordano
|
|
|
30,000.00
|
|
Jeffrey
Schwartz
|
|
|
8,000.00
|
|
Norman
Pessin
|
|
|
250,000.00
|
|
Greg
Yamamoto
|
|
|
200,000.00
|
|
Tzu-Wang
Pan
|
|
|
50,000.00
|
|
Kurt
Miyatake
|
|
|
50,000.00
|
|
Greg
Yamamoto, as UTMA custodian for
Melanie
Yamamoto
|
|
|
50,000.00
|
|
Greg
Yamamoto, as UTMA custodian for
Nicholas
Yamamoto
|
|
|
50,000.00
|
|
Total
|
|
$
|
5,150,000.00
|
|
The
form
of unit subscription agreement is attached to this proxy statement as Annex
C.
You should read the unit subscription agreement carefully. It is the agreement
that governs the terms of the private placement. The following information
summarizes the terms related to the private placement and the unit subscription
agreements.
Per
Unit Purchase Price
Each
unit
will be issued at a price equal to the lowest of:
|
•
|
92%
of the average closing sale price per share of our common stock,
as
reported on the Nasdaq SmallCap Market, for each of the five consecutive
trading days on which our common stock trades ending on the date
immediately prior to the closing date of the private placement; and
|
|
•
|
95%
of the closing sale price per share of our common stock, as reported
on
the Nasdaq SmallCap Market, on the trading day on which our common
stock
trades that immediately precedes the closing date of the private
placement.
|
The
private placement will be significantly dilutive to current stockholders and
the
PyX stockholders. We have the right to terminate the unit subscription agreement
and not close the transaction if the price per unit is less than
$2.00.
Closing
of the Private Placement
The
unit
subscription agreements provide that the closing of the private placement will
take place as soon as practicable after the last condition precedent to closing
has been satisfied or waived and no later than 60 days after the date the unit
subscription agreements were entered into. However, if the SEC determines to
review this proxy statement, then the closing of the private placement must
take
place no later than July 31, 2005, or such later date as the purchasers of
a
majority of the units determine.
Closing
of the private placement could be delayed if there is a delay in satisfying
the
closing conditions to the private placement. There can be no assurances as
to
whether, and on what date, the conditions will be satisfied or that the parties
will complete the private placement at all. If the private placement is not
completed on or before 60 days after the unit subscription units were entered
into or July 31, 2005, as applicable, and the purchasers of a majority
of
the units are unwilling to extend the closing date, the unit subscription
agreements will terminate.
Representations
and Warranties
The
unit
subscription agreements contain customary representations and warranties made
by
us to the purchasers and by the purchasers to us for purposes of allocating
the
risks associated with the private placement. The assertions embodied in the
representations and warranties made by us are qualified by information set
forth
in a confidential disclosure letter that was delivered in connection with the
execution of the unit subscription agreements. While we do not believe that
the
disclosure letter contains information that securities laws require us to
publicly disclose, other than information that is being disclosed in this proxy
statement, the disclosure schedule may contain information that modifies,
qualifies and creates exceptions to the representations and warranties set
forth
in the unit subscription agreements. Accordingly, you should not rely on any
of
these representations and warranties as characterizations of the actual state
of
facts, since they may be modified in important respects by the underlying
disclosure letter. Our disclosure letter contains information that in some
cases
has been included in our general prior public disclosures, and also may contain
additional non-public information. Moreover,
information concerning the subject matter of the representations and warranties
may have changed since the date of the unit subscription agreements, which
subsequent information may or may not be fully reflected in the disclosure
letter we delivered to the purchasers at signing and which may not be delivered
by us until the closing date of the private placement.
The
representations and warranties in the unit subscription agreements include,
among other things:
|
•
|
the
purchasers and our authority to enter into, and carry out the obligations
under, the unit subscription agreements and the enforceability of
the unit
subscription agreements; and
|
|
•
|
retention
of brokers or finders in connection with the private
placement.
|
In
addition, the unit subscription agreements contain additional representations
and warranties by us as to certain other matters, including:
|
•
|
our
organization, qualification, corporate power and good
standing;
|
|
•
|
the
organization, qualification and good standing of each of our subsidiaries,
including, for purposes of the unit subscription agreements, of
PyX;
|
|
•
|
this
proxy statement and the special
meeting;
|
|
•
|
the
authorization of shares of common stock and the warrants to purchase
shares of common stock to be issued pursuant to the unit subscription
agreements;
|
|
•
|
the
exemption of the units from the registration requirements of the
Securities Act of 1933, as amended;
|
|
•
|
the
absence of certain conflicts;
|
|
•
|
receipt
of all necessary governmental authorizations required in connection
with
the private placement;
|
|
•
|
compliance
with applicable legal requirements and material
agreements;
|
|
•
|
the
accuracy of certain of our SEC filings and our financial
statements;
|
|
•
|
the
absence of certain changes since January 31,
2005;
|
|
•
|
our
intellectual property;
|
|
•
|
adverse
business developments;
|
|
•
|
outstanding
registration rights;
|
|
•
|
the
accuracy of our charter documents as provided to the purchasers;
and
|
|
•
|
our
use of the proceeds from the private
placement.
|
All
of
the representations and warranties set forth in the unit subscription agreements
survive for a period of one year following the closing of the private
placement.
Certain
Covenants
We
have
agreed to cooperate with the purchasers in connection with their filings with
the SEC with respect to the units. Additionally, we have agreed to deliver
to
the purchasers any reports that we deliver to our stockholders generally and
to
reserve for issuance that number shares of our common stock issuable upon
exercise of the warrants issued to the purchasers in connection with the private
placement.
Indemnification
We
have
agreed to indemnify the purchasers with respect to breaches of representations,
warranties and covenants contained in the unit purchase agreements. However,
our
liability for such breaches is limited to the aggregate purchase price paid
by
the purchasers in connection with the private placement. Further, the purchasers
are not entitled to recover any damages with respect to an indemnification
claim
until the total damages incurred under the unit subscription agreements exceed
$25,000, after which they are entitled to be indemnified for the full amount
of
the damages, subject to the cap mentioned above.
Conditions
Precedent
The
completion of the private placement depends on the satisfaction of a number
of
conditions, including, among others, conditions relating to:
|
•
|
execution
and delivery of the investor rights
agreement;
|
|
•
|
accuracy
of the representations and warranties of the parties and compliance
by the
parties with their respective
covenants;
|
|
•
|
the
approval of Proposals 1 and 2;
|
|
•
|
our
listing status on the Nasdaq SmallCap
Market;
|
|
•
|
completion
of the merger; and
|
|
•
|
entry
by PyX into a reseller agreement with LSI
Logic.
|
Warrants
The
warrants issued in connection with the private placement have a term of five
years and are exercisable at a per share price equal to 133% of the unit price
described above under “Per Unit Purchase Price” subject to proportional
adjustments for stock splits, stock dividends, recapitalizations and the like.
In
addition, the shares of our common stock issuable upon exercise of the warrants
are subject to adjustment in the event we issue shares of our common stock
at a
price less than the then applicable purchase price of the warrants, subject
to
certain customary exceptions, including, among other things, issuances to
employees, officers and directors under our equity compensation plans. If not
exercised after five years, the right to purchase shares of our common stock
pursuant to the warrants will terminate. The warrants contain a cashless
exercise feature. The common stock underlying the warrants are entitled to
the
benefits and subject to the terms of the Registration Rights described
below.
The
form
of warrant is attached to this proxy statement as Annex E. You should read
the
warrant carefully. It is the agreement that governs the terms of the warrant.
The following information summarizes the terms related to the private placement
and the unit subscription agreements.
Investor
Rights Agreement
We entered an investor rights agreement, dated as of May 5, 2005, with the
purchasers in the private placement. The investor rights agreement is attached
to this proxy statement as Annex F. You should read the investor rights
agreement carefully. It is the agreement that governs the terms under which
we
have agreed to register for resale the sale of the shares of common stock and
the shares of common stock to be issued upon exercise of the warrants that
will
be issued to the purchasers in the private placement. The following summarizes
the terms of the registration rights agreement.
Registration
Rights
We
have
agreed to file a registration statement with the SEC within 60 days
after
the closing date of the private placement registering the resale of such shares
of common stock, including the shares underlying the warrants, from time to
time
by these purchasers, and to use our best efforts to cause the registration
statement to become effective as within 90 days after filing the registration
statement. Once effective, the registration statement will permit the purchasers
to sell their shares of common stock in the open market from time to time using
the methods of distribution to be described in the registration statement.
Our
obligation to maintain the effectiveness of the registration statement
terminates on the earlier of (i) two years after closing and (ii) the date
that
all of the shares of our common stock issued to the purchasers, including any
shares purchased by the purchasers upon exercise of the preemptive rights
described below under “Preemptive Rights,” (a) have been sold or (iii) can be
sold under Rule 144(k) of the Securities Act of 1933, as amended. We have also
agreed not to grant any other registration rights senior to the rights granted
to the purchasers. We expect to register such shares for resale concurrently
with those issued in the merger. We have also agreed to certain customary
obligations and indemnity provisions relating to the registration process and
to
pay the expenses incurred in connection with the registration of these
shares.
Rights
of Participation
Each
purchaser in the private placement will have the right to participate in any
future private placements of our equity for a period of two years following
the
closing of the private placement. These rights are subject to certain customary
exceptions, including, among other things, issuances to employees, officers
and
directors under our equity compensation plans. These rights are intended to
enable the purchasers to maintain their pro rata interest in us according to
their then-current ownership interest at the time of the applicable
issuances.
The
Voting Agreement
Certain
members of our management are party to a voting agreement, dated May 4, 2005,
pursuant to which they have agreed, subject to the terms and conditions of
the
voting agreement, to vote all of their shares of common stock in favor of
proposals 1 and 2 and any other matter necessary to effect the transactions.
The
form of voting agreement is attached to this proxy statement as Annex D. You
should read the voting agreement carefully. It is the agreement that governs
the
terms under which our management team has agreed to vote in favor of the
transactions. The shares subject to the voting agreement represent approximately
3.2% of the outstanding shares of our common stock, based on the number of
shares outstanding on June 9, 2005.
Recommendation
of our Board of Directors
Our
board
of directors recommends that our stockholders vote FOR the unit subscription
agreement and the issuance of units consisting of one share of our common stock
and a warrant to purchase an additional one-half share of our common stock,
for
aggregate gross proceeds to us of $5,150,000, to the purchasers in the private
placement.
OTHER
MATTERS
Incorporation
By Reference Of Annual Report On Form 10-K
Concurrently
with this proxy statement, we are sending you a copy of our annual report on
Form 10-K for the year ended October 31, 2004 and our quarterly report
on
Form 10-Q for the quarter ended April 30, 2005. This proxy statement
incorporates by reference Items 7, 7A, 8 and 9 of the Form 10-K, which
contains important information about us and our financial condition that is
not
included in this proxy statement. A copy of the Form 10-K has also been
filed with the SEC and may be accessed from the SEC's homepage (www.sec.gov).
Accountants
Representatives
of BDO Seidman, LLP are expected to be present at the Special Meeting will
have
an opportunity to make a statement if they so desire and will not be available
to respond to appropriate questions.
|
|
|
By
Order of the Board of Directors,
|
|
|
|
|
|
/s/
David W. Brunton
|
|
|
|
David
W. Brunton
|
|
Secretary
|
San
Ramon, California
June
24,
2005
ANNEX
A
HOULIHAN
LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC. OPINION
March
28,
2005
The
Board
of Directors of
SBE,
Inc.
2305
Camino Ramon, Suite 200
San
Ramon, CA 94583
Gentlemen:
We
understand that SBE, Inc. (“SBE” or the “Company”) expects to enter into a
definitive agreement to acquire all of the outstanding shares of PyX
Technologies, Inc. (“PyX”) for approximately 2.6 million shares of SBE common
stock. Additionally, SBE expects to assume approximately 2.0 million options
issued to employees of PyX. Such transaction is referred to herein as the
“Transaction.” In conjunction with the Transaction, it is our understanding that
the Company will be entering into a financing agreement (the “Financing”) in
which the Company will receive at least $5 million in gross proceeds.
You
have
requested our written opinion (the “Opinion”) as to the matters set forth below.
The Opinion does not address the Company’s underlying business decision to
effect the Transaction. The Opinion is not intended to be, nor does it
constitute, a recommendation to any security holder as to how to vote on the
Transaction. The Opinion also does not address the Financing in conjunction
with
the Transaction. At your request, we have not negotiated the Transaction or
advised you with respect to alternatives to it.
In
connection with the Opinion, we have made such reviews, analyses and inquiries
as we have deemed necessary and appropriate under the circumstances. Among
other
things, we have:
1. |
reviewed
the Company’s annual reports to stockholders and on Form 10-K for the
fiscal year ended October 31, 2004, and the quarterly report on Form
10-Q
for the first quarter ended January 31, 2005, which the Company’s
management has identified as being the most current financial statements
available;
|
2. |
reviewed
PyX’s unaudited financial statements for the fiscal years ended December
31, 2003 and 2004 and interim financial statements for the two-month
period ended February 28, 2005;
|
3. |
reviewed
copies of the following agreements:
|
- |
Term
Sheet between SBE and PyX, dated February 7,
2005
|
- |
Agreement
and Plan of Merger and Reorganization between SBE and PyX, dated
March 28,
2005
|
- |
Shareholder
Agreement between SBE and the shareholders of PyX, dated March 28,
2005
|
- |
Noncompetition
Agreement, dated March 28, 2005
|
- |
General
Release, dated March 28, 2005
|
- |
Affiliate
Agreement, dated March 28, 2005
|
- |
Escrow
Agreement, dated March 28, 2005
|
- |
Disclosure
Schedule, dated March 28, 2005
|
4. |
reviewed
Form of Legal Opinion of Orrick, Herrington & Sutcliffe LLP, dated
March 28, 2005
|
5. |
met
with certain members of the senior management of the Company and
PyX to
discuss the operations, financial condition, future prospects and
projected operations and performance of the Company and PyX, and
met with
representatives of the Company’s outside counsel to discuss certain
matters;
|
6. |
visited
the facilities and business offices of the
Company;
|
7. |
reviewed
forecasts and projections prepared by the Company’s management with
respect to the Company on a stand-alone basis and in combination
with PyX
for the fiscal years ended October 31, 2005 through 2006;
|
8. |
reviewed
the historical market prices and trading volume for the Company’s publicly
traded securities;
|
9. |
reviewed
certain other publicly available financial data for certain companies
that
we deem comparable to the Company and PyX, and publicly available
prices
and premiums paid in other transactions that we considered similar
to the
Transaction; and
|
10. |
conducted
such other studies, analyses and inquiries as we have deemed
appropriate.
|
We
have
relied upon and assumed, without independent verification, that:
· |
the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the
future
financial results and condition of the Company and PyX, and that
there has
been no material change in the assets, liabilities, financial condition,
business or prospects of the Company or PyX since the date of the
most
recent financial statements made available to
us;
|
· |
the
data, material and other information with respect to the Company,
PyX,
their respective subsidiaries or any of their respective assets,
liabilities or business operations furnished to Houlihan Lokey by
or on
behalf of the Company or PyX and each of their respective agents,
counsel,
employees and representatives (the “Information”) is true, correct and
complete; and
|
· |
the
representations and warranties of the Company made in our engagement
letter dated March 3, 2005 (the “Engagement Letter”) and the
representations and warranties of the Company and PyX in the Agreement
and
Plan of Merger and Reorganization are true, correct and complete,
except
as set forth in the Disclosure Schedule dated March 28,
2005.
|
We
have
not independently verified the accuracy and completeness of the Information
and
do not assume any responsibility with respect to it. We have not made any
independent appraisal of any of the properties, assets or liabilities
(contingent or otherwise) of the Company or PyX.
Based
upon the foregoing, and in reliance thereon, it is our opinion as of the date
of
this letter, that the consideration to be paid by the Company in connection
with
the Transaction is fair to the Company, from a financial point of
view.
The
Opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of the Opinion. Subsequent
events that could affect the conclusions set forth in the Opinion include
adverse changes in industry performance or market conditions and changes to
the
business, financial condition and results of operations of the Company or PyX.
In addition, if certain of our assumptions listed herein prove to be inaccurate,
the conclusions reached in the Opinion could be materially affected. We are
under no obligation, and have not been requested, to update, revise or reaffirm
the Opinion.
The
Opinion is furnished solely for your benefit and may not be relied upon by
any
other person without our express, prior written consent. Any summary of,
reference to or disclosure of the Opinion is subject to the terms and conditions
set forth in the Engagement Letter. The Opinion is delivered to you subject
to
the conditions, scope of engagement, limitations and understandings set forth
in
the Opinion and the Engagement Letter, and subject to the understanding that
the
obligations of Houlihan Lokey in the Transaction are solely corporate
obligations, and no officer, director, employee, agent, stockholder or
controlling person of Houlihan Lokey shall be subjected to any personal
liability whatsoever to any person, nor will any such claim be asserted by
or on
behalf of you or your affiliates.
HOULIHAN
LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
ANNEX
B
AGREEMENT
AND PLAN
OF
MERGER AND REORGANIZATION
This
Agreement and Plan of Merger and Reorganization
(“Agreement”)
is
made and entered into as of March 28, 2005, by and among: SBE,
Inc.,
a
Delaware corporation (“Parent”);
PyX
Acquisition Sub, LLC,
a
California limited liability company, the sole member of which is Parent
(“Merger
Sub”);
PyX
Technologies, Inc.,
a
California corporation (the “Company”);
and
the parties identified on Exhibit
A
(the
“Signing
Shareholders”).
Certain other capitalized terms used in this Agreement are defined in
Exhibit
B.
Recitals
TA.T Parent,
Merger Sub and the Company intend to effect a merger of the Company into Merger
Sub (the “Merger”)
in
accordance with this Agreement and the California Corporations Code (the
“CCC”).
Upon
consummation of the Merger, the Company will cease to exist, and Parent will
continue as the sole member of Merger Sub.
TB.T It
is
intended that the Merger qualify as a tax-free reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
“Code”).
TC.T This
Agreement has been approved by the respective boards of directors of Parent,
Merger Sub and the Company.
TD.T The
Signing Shareholders own a total of 3,950,000 shares of the Common Stock (par
value $0.001 per share) of the Company (“Company
Common Stock”),
constituting a majority of the outstanding Company Common Stock.
E. Contemporaneously
with the execution and delivery of this Agreement, Andre Hedrick and Greg
Yamamoto are executing a shareholder consent with respect to the
Merger.
Agreement
The
parties to this Agreement, intending to be legally bound, agree as
follows:
Description
of Transaction
1.1 Merger
of the Company into Merger Sub.
Upon the
terms and subject to the conditions set forth in this Agreement, at the
Effective Time (as defined in Section 1.3), the Company shall be merged
with and into Merger Sub, and the separate existence of the Company shall cease,
and Parent will continue as the sole member of Merger Sub (the “Surviving
Entity”).
1.2 Effect
of the Merger.
The
Merger shall have the effects set forth in this Agreement and in the applicable
provisions of the CCC.
1.3 Closing;
Effective Time.
The
consummation of the transactions contemplated by this Agreement (the
“Closing”)
shall
take place at the offices of Cooley Godward llp,
One
Maritime Plaza, 20PthP
Floor,
San Francisco, California at 10:00 a.m. on a date to be designated by Parent
(the “Scheduled
Closing Time”),
which
shall be no later than two business days after the last condition set forth
in
Sections 6 and 7 has been satisfied or waived (other than those conditions
that
by their nature are to be satisfied at the Closing, but subject to the
satisfaction or waiver of such conditions). The date on which the Closing
actually takes place is referred to in this Agreement as the “Closing
Date.”
Contemporaneously with or as promptly as practicable after the Closing, a
properly executed agreement of merger conforming to the requirements of Chapter
11 of the CCC shall be filed with the Secretary of State of the State of
California. The Merger shall become effective at the time such agreement of
merger is filed with the Secretary of State of the State of California (the
“Effective
Time”).
1.4 Articles
of Incorporation and Bylaws; Directors and Officers.
Unless
otherwise determined by Parent and the Company prior to the Effective Time,
immediately upon the Closing:
(a) |
the
articles of organization of the Surviving Entity shall be the articles
of
organization of Merger Sub, except that the name of the Surviving
Entity
shall be PyX Technologies, LLC;
|
(b) |
the
operating agreement of the Surviving Entity shall be the operating
agreement of Merger Sub; and
|
(c) |
the
directors of the Surviving Entity immediately after the Effective
Time
shall be the directors of Parent as of such time, and the officers
of the
Surviving Entity immediately after the Effective Time shall be the
Chief
Executive Officer and the Chief Financial Officer of Parent as of
such
time.
|
1.5 Conversion
of Shares.
(a) |
Subject
to Sections 1.8(c) and 1.9, at the Effective Time, by virtue of the
Merger
and without any further action on the part of Parent, Merger Sub,
the
Company or any shareholder of the
Company:
|
(i) |
each
share of Company Common Stock outstanding immediately prior to the
Effective Time shall be converted into the right to receive the Applicable
Fraction (as defined in Section 1.5(b)) of a share of the common
stock
(par value $0.001 per share) of Parent (“Parent
Common Stock”);
and
|
(ii) |
each
share of the common stock (par value $0.001 per share) of Merger
Sub
outstanding immediately prior to the Effective Time shall be converted
into one share of common stock of the Surviving
Entity.
|
(b) |
For
purposes of this Agreement, the “Applicable
Fraction”
shall be the fraction: (i) having a numerator equal to 4,600,000
shares of
Parent Common Stock (the “Share
Consideration”),
subject to adjustment as provided in Section 10.2; and (ii) having
a
denominator equal to the sum of (A) the aggregate number of shares
of
Company Common Stock outstanding immediately prior to the Effective
Time
(including any such shares that are subject to a repurchase option
or risk
of forfeiture under any restricted stock purchase agreement or other
agreement), and (B) the aggregate number of shares of Company Common
Stock
purchasable under or otherwise subject to all Company Options (as
defined
in Section 1.6(a)) outstanding immediately prior to the Effective
Time
(including all shares of Company Common Stock that may ultimately
be
purchased under Company Options that are unvested or are otherwise
not
then exercisable).
|
(c) |
If
any shares of Company Common Stock outstanding immediately prior
to the
Effective Time are unvested or are subject to a repurchase option,
risk of
forfeiture or other condition under any applicable restricted stock
purchase agreement or other agreement with the Company, then the
shares of
Parent Common Stock issued in exchange for such shares of Company
Common
Stock will also be unvested and subject to the same repurchase option,
risk of forfeiture or other condition, and the certificates representing
such shares of Parent Common Stock may accordingly be marked with
appropriate legends.
|
1.6 Employee
Stock Options.
(a) |
At
the Effective Time, each stock option that is then outstanding under
the
Company’s 2005 Stock Plan, whether vested or unvested (a “Company
Option”),
shall be assumed by Parent in accordance with the terms (as in effect
as
of the date of this Agreement) of the Company’s 2005 Stock Plan and the
stock option agreement by which such Company Option is evidenced.
All
rights with respect to Company Common Stock under outstanding Company
Options shall thereupon be converted into rights with respect to
Parent
Common Stock. Accordingly, from and after the Effective Time, (i)
each
Company Option assumed by Parent may be exercised solely for shares
of
Parent Common Stock, (ii) the number of shares of Parent Common Stock
subject to each such assumed Company Option shall be equal to the
number
of shares of Company Common Stock that were subject to such Company
Option
immediately prior to the Effective Time multiplied by the Applicable
Fraction, rounded down to the nearest whole number of shares of Parent
Common Stock, (iii) the per share exercise price for the Parent Common
Stock issuable upon exercise of each such assumed Company Option
shall be
determined by dividing the exercise price per share of Company Common
Stock subject to such Company Option, as in effect immediately prior
to
the Effective Time, by the Applicable Fraction, and rounding the
resulting
exercise price up to the nearest whole cent, and (iv) all restrictions
on
the exercise of each such assumed Company Option shall continue in
full
force and effect, and the term, exercisability, vesting schedule
and other
provisions of such Company Option shall otherwise remain unchanged;
provided,
however,
that each such assumed Company Option shall, in accordance with its
terms,
be subject to further adjustment as appropriate to reflect any stock
split, reverse stock split, stock dividend, recapitalization or other
similar transaction effected by Parent after the Effective Time;
provided
further,
that in no event shall any assumed Company Option have a term in
excess of
ten years.
|
(b) |
The
Company and Parent shall take all action that may be necessary (under
the
Company’s 2005 Stock Plan and otherwise) to effectuate the provisions of
this Section 1.6.
|
(c) |
At
the Closing, Parent will deliver to each holder of an assumed Company
Option a written notice setting forth (i) the number of shares of
Parent
Common Stock subject to such assumed Company Option, and (ii) the
exercise
price per share of Parent Common Stock issuable upon exercise of
such
assumed Company Option.
|
1.7 Closing
of the Company’s Transfer Books.
At the
Effective Time, holders of certificates representing shares of the Company’s
capital stock that were outstanding immediately prior to the Effective Time
shall cease to have any rights as shareholders of the Company, and the stock
transfer books of the Company shall be closed with respect to all shares of
such
capital stock outstanding immediately prior to the Effective Time. No further
transfer of any such shares of the Company’s capital stock shall be made on such
stock transfer books after the Effective Time. If, after the Effective Time,
a
valid certificate previously representing any of such shares of the Company’s
capital stock (a “Company
Stock Certificate”)
is
presented to the Surviving Entity or Parent, such Company Stock Certificate
shall be canceled and shall be exchanged as provided in Section
1.8.
1.8 Exchange
of Certificates.
(a) |
As
soon as practicable after the Effective Time, but in any event no
more
than two business days after the Effective Time, Parent will send
to the
holders of Company Stock Certificates other than the Signing Shareholders
(i) a letter of transmittal in customary form and containing such
provisions as Parent may reasonably specify, and (ii) instructions
for use
in effecting the surrender of Company Stock Certificates in exchange
for
certificates representing Parent Common Stock. Upon surrender of
a Company
Stock Certificate to Parent for exchange, together with a duly executed
letter of transmittal and such other documents as may be reasonably
required by Parent and referenced in the letter of transmittal, the
holder
of such Company Stock Certificate shall be entitled to receive from
Parent, and Parent shall cause such holder to receive, in exchange
therefor a certificate representing the number of whole shares of
Parent
Common Stock that such holder has the right to receive pursuant to
the
provisions of this Section 1 (without giving effect to escrow
arrangements), less such holder’s pro rata share of the Escrow Shares, and
the Company Stock Certificate so surrendered shall be canceled. Until
surrendered as contemplated by this Section 1.8, each Company Stock
Certificate shall be deemed, from and after the Effective Time, to
represent only the right to receive upon such surrender, a certificate
representing shares of Parent Common Stock (and cash in lieu of any
fractional share of Parent Common Stock) as contemplated by this
Section
1. If any Company Stock Certificate shall have been lost, stolen
or
destroyed, Parent may, in its discretion and as a condition precedent
to
the issuance of any certificate representing Parent Common Stock,
require
the owner of such lost, stolen or destroyed Company Stock Certificate
to
provide an appropriate affidavit.
|
(b) |
No
dividends or other distributions declared or made with respect to
Parent
Common Stock with a record date after the Effective Time shall be
paid to
the holder of any unsurrendered Company Stock Certificate with respect
to
the shares of Parent Common Stock represented thereby, and no cash
payment
in lieu of any fractional share shall be paid to any such holder,
until
such holder surrenders such Company Stock Certificate in accordance
with
this Section 1.8 (at which time such holder shall be entitled to
receive
all such dividends and distributions and such cash
payment).
|
(c) |
No
fractional shares of Parent Common Stock shall be issued in connection
with the Merger, and no certificates for any such fractional shares
shall
be issued. In lieu of such fractional shares, any holder of capital
stock
of the Company who would otherwise be entitled to receive a fraction
of a
share of Parent Common Stock (after aggregating all fractional shares
of
Parent Common Stock issuable to such holder) shall, upon surrender
of such
holder’s Company Stock Certificate(s), be paid in cash the dollar amount
(rounded to the nearest whole cent), without interest, determined
by
multiplying such fraction by the average of the closing sale prices
of a
share of Parent Common Stock as reported on the Nasdaq SmallCap Market
for
each of the 10 consecutive trading days immediately preceding the
Closing
Date (the “Designated
Parent Stock Price”).
|
(d) |
Parent
and the Surviving Entity shall be entitled to deduct and withhold
from any
consideration payable or otherwise deliverable to any holder or former
holder of capital stock of the Company pursuant to this Agreement
such
amounts as Parent or the Surviving Entity may be required to deduct
or
withhold therefrom under the Code or under any provision of state,
local
or foreign tax law. To the extent such amounts are so deducted or
withheld, such amounts shall be treated for all purposes under this
Agreement as having been paid to the Person to whom such amounts
would
otherwise have been paid.
|
(e) |
Neither
Parent nor the Surviving Entity shall be liable to any holder or
former
holder of capital stock of the Company for any shares of Parent Common
Stock (or dividends or distributions with respect thereto), or for
any
cash amounts, delivered to any public official pursuant to any applicable
abandoned property, escheat or similar
law.
|
1.9 Dissenting
Shares.
(a) |
Notwithstanding
anything to the contrary contained in this Agreement, any shares
of
capital stock of the Company that, as of the Effective Time, are
or may
become “dissenting shares” within the meaning of Section 1300(b) of the
CCC shall not be converted into or represent the right to receive
Parent
Common Stock in accordance with Section 1.5 (or cash in lieu of fractional
shares in accordance with Section 1.8(c)), and the holder or holders
of
such shares shall be entitled only to such rights as may be granted
to
such holder or holders in Chapter 13 of the CCC; provided, however,
that
if the status of any such shares as “dissenting shares” shall not be
perfected, or if any such shares shall lose their status as “dissenting
shares,” then, as of the later of the Effective Time or the time of the
failure to perfect such status or the loss of such status, such shares
shall automatically be converted into and shall represent only the
right
to receive (upon the surrender of the certificate or certificates
representing such shares) Parent Common Stock in accordance with
Section
1.5 (and cash in lieu of fractional shares in accordance with Section
1.8(c)).
|
(b) |
The
Company shall give Parent (i) prompt notice of any written demand
received
by the Company prior to the Effective Time to require the Company
to
purchase shares of capital stock of the Company pursuant to Chapter
13 of
the CCC and of any other demand, notice or instrument delivered to
the
Company prior to the Effective Time pursuant to the CCC, and (ii)
the
opportunity to participate in all negotiations and proceedings with
respect to any such demand, notice or instrument. The Company shall
not
make any payment or settlement offer prior to the Effective Time
with
respect to any such demand unless Parent shall have consented in
writing
to such payment or settlement
offer.
|
1.10
Escrow.
As soon
as practicable after the Effective Time of the Merger, and subject to and in
accordance with the provisions of Section 9.8, Parent, on behalf of the
shareholders of the Company, shall take, or cause to be taken, the following
actions:
(a) |
Parent
shall withhold from, and not deliver to, the shareholders of the
Company,
certificates representing 460,000 shares of Parent Common Stock out
of the
shares that would otherwise be issued to the Company’s shareholders
pursuant to Section 1.5(a)(i), representing a pro rata reduction
from the
number of shares of Parent Common Stock that each shareholder of
the
Company would have otherwise received (the “Escrow
Shares”);
|
(b) |
Parent
shall issue the Escrow Shares in the names of the applicable shareholders
of the Company that would otherwise have received the Escrow Shares
pursuant to Section 1.5(a)(i); and
|
(c) |
Parent
shall cause the Escrow Shares to be delivered to the Escrow Agent
(as
defined in the Escrow Agreement), which Escrow Shares shall be held
in
escrow and shall be available to satisfy the indemnification obligations
set forth in Section 9. To the extent not used for such purpose,
such
Escrow Shares shall be released as provided in the Escrow Agreement.
|
1.11
Tax Consequences.
For
federal income tax purposes, the Merger is intended to constitute a
reorganization within the meaning of Section 368 of the Code. The parties to
this Agreement hereby adopt this Agreement as a “plan of reorganization” within
the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations. Each party to this Agreement acknowledges that it is responsible
for determining the tax consequences of the Merger for itself and for its
shareholders and that it has not relied on any other party to this Agreement,
or
any Representative of any other such party, in making such
determination.
1.12
Further Action.
If, at
any time after the Effective Time, any further action is determined by Parent
to
be necessary or desirable to carry out the purposes of this Agreement or to
vest
the Surviving Entity or Parent with full right, title and possession of and
to
all rights and property of Merger Sub and the Company, the officers and
directors of the Surviving Entity and Parent shall be fully authorized (in
the
name of Merger Sub, in the name of the Company and otherwise) to take such
action.
Representations
and Warranties of the Signing Shareholders
Except
as
set forth in this Agreement or on the Disclosure Schedule, the Company and
the
Signing Shareholders, jointly and severally, represent and warrant, to and
for
the benefit of the Parent Indemnitees, as set forth below. The Disclosure
Schedule shall be arranged in paragraphs corresponding to the numbered
paragraphs contained in this Section 2, and the disclosure in any paragraph
shall qualify (a) the disclosure in the corresponding paragraph of this Section
2, and (b) the other paragraphs of this Section 2 to the extent it is clear
from
the reading of such disclosure that it also qualifies or applies to such
paragraphs.
1.13
Due Organization; No Subsidiaries; Etc.
(a) |
Except
as set forth in Part 2.1 of the Disclosure Schedule, the Company
is a
corporation duly organized, validly existing and in good standing
under
the laws of the State of California and has all necessary corporate
power
and authority:T
(i)T
to
conduct its business in the manner in which its business is currently
being conducted;T
(ii)T
to
own and use its assets in the manner in which its assets are currently
owned and used; andT
(iii)T
to
perform its obligations under all Company
Contracts.
|
(b) |
The
Company has not conducted any business under or otherwise used, for
any
purpose or in any jurisdiction, any fictitious name, assumed name,
trade
name or other name, other than the name “PyX Technologies,
Inc.”
|
(c) |
The
Company is qualified, authorized, registered or licensed to do business
as
a foreign corporation and is in good standing in each jurisdiction
where
the nature of its activities and of its properties (both owned and
leased)
makes such qualification, authorization, registration or licensing
necessary, except in such jurisdictions where the failure to do so
has not
had and will not have a Material Adverse Effect on the Company or
its
business.
|
(d) |
The
Company does not own any controlling interest in any Entity and has
never
owned, beneficially or otherwise, any shares or other securities
of, or
any direct or indirect equity interest in, any Entity. The Company
has not
agreed and is not obligated to make any future investment in or capital
contribution to any Entity. The Company has not guaranteed and is
not
responsible or liable for any obligation of any of the Entities in
which
it owns or has owned any equity
interest.
|
1.14
Articles of Incorporation and Bylaws; Records. The
Company has delivered to Parent accurate and complete copies of:T
(a)T
the
Company’s articles of incorporation and bylaws, including all amendments
thereto;T
(b)T
the
stock records of the Company; andT
(c)T
the
minutes and other records of the meetings and other proceedings (including
any
actions taken by written consent or otherwise without a meeting) of the
shareholders of the Company, the board of directors of the Company and all
committees of the board of directors of the Company. There have been no formal
meetings or other proceedings of the shareholders of the Company, the board
of
directors of the Company or any committee of the board of directors of the
Company that are not fully reflected in such minutes or other records. There
has
not been any violation of any of the provisions of the Company’s articles of
incorporation or bylaws, and the Company has not taken any action that is
inconsistent in any material respect with any resolution adopted by the
Company’s shareholders, the Company’s board of directors or any committee of the
Company’s board of directors. The books of account, stock records, minute books
and other records of the Company are accurate, up-to-date and complete in all
material respects, and, except as set forth in Part 2.2 of the Disclosure
Schedule, have been maintained in accordance with prudent business
practices.
1.15
Capitalization, etc.
(a) |
The
authorized capital stock of the Company consists of: (i) 10,000,000
shares
of Common Stock (par value $0.001 per share), of which 5,567,500
shares
have been issued and are outstanding. All of the outstanding shares
of
Company Common Stock have been duly authorized and validly issued,
and are
fully paid and non-assessable. Part 2.3 of the Disclosure Schedule
provides an accurate and complete description of the terms of each
repurchase option that is held by the Company and to which any of
such
shares is subject.
|
(b) |
The
Company has reserved 4,647,500 shares of Company Common Stock for
issuance
under its 2005 Stock Plan, of which 4,432,500 shares are reserved
for
issuance upon exercise of outstanding options and 215,000 shares
are
issued and outstanding. Part 2.3 of the Disclosure Schedule accurately
sets forth, with respect to each Company Option that is outstanding
as of
the date of this Agreement: (i) the name of the holder of such Company
Option; (ii) the total number of shares of Company Common Stock that
are
subject to such Company Option and the number of shares of Company
Common
Stock with respect to which such Company Option is immediately
exercisable; (iii) the date on which such Company Option was granted
and
the term of such Company Option; (iv) the vesting schedule for such
Company Option; (v) the exercise price per share of Company Common
Stock
purchasable under such Company Option; and (vi) whether such Company
Option has been designated an “incentive stock option” as defined in
Section 422 of the Code. Except as set forth in this Section 2.3(b),
there
is no:T
(i)T
outstanding subscription, option, call, warrant or right (whether
or not
currently exercisable) to acquire any shares of the capital stock
or other
securities of the Company;T
(ii)T
outstanding security, instrument or obligation that is or may become
convertible into or exchangeable for any shares of the capital stock
or
other securities of the Company;T
(iii)T
Contract under which the Company is or may become obligated to sell
or
otherwise issue any shares of its capital stock or any other securities;
orT
(iv)T
except as set forth in Part 2.3(b) of the Disclosure Schedule,
to the
knowledge of the Company and the Signing Shareholders, condition
or
circumstance that may give rise to or provide a basis for the assertion
of
a claim by any Person to the effect that such Person is entitled
to
acquire or receive any shares of capital stock or other securities
of the
Company.
|
(c) |
All
outstanding shares of Company Common Stock, and all outstanding Company
Options and Company Warrants, have been issued and granted in compliance
with (i) all applicable securities laws and other applicable Legal
Requirements, and (ii) all requirements set forth in applicable
Contracts.
|
(d) |
The
Company has never repurchased, redeemed or otherwise reacquired any
shares
of capital stock or other securities of the
Company.
|
(e) |
As
of the date hereof, the date of the Information Statement (as defined
in
Section 4.3), the date the Information Statement is delivered to
the
Company’s shareholders and the Closing Date, each Person that held shares
of Company Common Stock immediately prior to the Closing is a resident
of
the state set forth opposite such Person’s name on Schedule 2.3(e), as
such Schedule may be updated from time to time prior to the Closing
to
reflect any relocations by Company shareholders that may
occur.
|
1.16
Financial Statements.
(a) |
The
Company has delivered to Parent the following financial statements
and
notes (collectively, the “Company
Financial Statements”):
|
(i) |
The
audited balance sheets of the Company as of December 31, 2003 and
2004,
and the related audited income statements, statements of shareholders’
equity and statements of cash flows of the Company for the years
then
ended; and
|
(ii) |
the
unaudited balance sheet of the Company (the “Unaudited
Interim Balance Sheet”)
as of February 28, 2005 (the “Interim
Statement Date”),
and the related unaudited income statement of the Company for the
two
months then ended.
|
(b) |
Except
as set forth in Part 2.4 of the Disclosure Schedule, the Company
Financial Statements are accurate and complete in all material respects
and present fairly the financial position of the Company as of the
respective dates thereof and the results of operations and (in the
case of
the financial statements referred to in Section 2.4(a)(i)) cash flows
of
the Company for the periods covered thereby. The Company Financial
Statements have been prepared in accordance with United States generally
accepted accounting principles applied on a consistent basis throughout
the periods covered (except as permitted by United States generally
accepted accounting principles and except that the financial statements
referred to in Section 2.4(a)(ii) do not contain footnotes and are
subject
to normal and recurring year-end audit adjustments, which are not
expected, individually or in the aggregate, to be material in
magnitude).
|
1.17
Absence of Changes.
Except
as set forth in Part 2.5 of the Disclosure Schedule, since the Interim
Statement Date:
(a) |
there
has not been any Material Adverse Effect on the Company, and, to
the
knowledge of the Company and the Signing Shareholders, no event has
occurred that will, or could reasonably be expected to, have a Material
Adverse Effect on the Company;
|
(b) |
there
has not been any material loss, damage or destruction to, or any
material
interruption in the use of, any of the Company’s assets (whether or not
covered by insurance);
|
(c) |
the
Company has not declared, accrued, set aside or paid any dividend
or made
any other distribution in respect of any shares of capital stock,
and has
not repurchased, redeemed or otherwise reacquired any shares of capital
stock or other securities;
|
(d) |
the
Company has not sold, issued or authorized the issuance of (i) any
capital
stock or other security (except for Company Common Stock issued upon
the
exercise of outstanding Company Options and Company Warrants), (ii)
any
option or right to acquire any capital stock or any other security
(except
for Company Options and Company Warrants), or (iii) any instrument
convertible into or exchangeable for any capital stock or other
security;
|
(e) |
the
Company has not amended or waived any of its rights under, or permitted
the acceleration of vesting under, (i) any provision of its 2005
Stock
Plan, (ii) any provision of any agreement evidencing any outstanding
Company Option, or (iii) any restricted stock purchase
agreement;
|
(f) |
there
has been no amendment to the Company’s articles of incorporation or
bylaws, and the Company has not effected or been a party to any
Acquisition Transaction, recapitalization, reclassification of shares,
stock split, reverse stock split or similar
transaction;
|
(g) |
the
Company has not formed any subsidiary or acquired any equity interest
or
other interest in any other Entity;
|
(h) |
the
Company has not made any capital expenditure which, when added to
all
other capital expenditures made on behalf of the Company since the
Interim
Statement, exceeds $10,000;
|
(i) |
the
Company has not (i) entered into or permitted any of the assets owned
or
used by it to become bound by any Contract that is or would constitute
a
Material Contract (as defined in Section 2.10(a)), or (ii) amended
or
prematurely terminated, or waived any material right or remedy under,
any
such Contract;
|
(j) |
the
Company has not (i) acquired, leased or licensed any right or other
asset
from any other Person, (ii) sold or otherwise disposed of, or leased
or
licensed, any right or other asset to any other Person, or (iii)
waived or
relinquished any right, except for immaterial rights or other immaterial
assets acquired, leased, licensed or disposed of in the ordinary
course of
business and consistent with the Company’s past
practices;
|
(k) |
the
Company has not written off as uncollectible, or established any
extraordinary reserve with respect to, any account receivable or
other
indebtedness;
|
(l) |
the
Company has not made any pledge of any of its assets or otherwise
permitted any of its assets to become subject to any Encumbrance,
except
for pledges of immaterial assets made in the ordinary course of business
and consistent with the Company’s past
practices;
|
(m) |
the
Company has not (i) lent money to any Person (other than pursuant
to
routine travel advances made to employees in the ordinary course
of
business), or (ii) incurred or guaranteed any indebtedness for borrowed
money;
|
(n) |
the
Company has not (i) established or adopted any Employee Benefit
Plan,
(ii) paid any bonus or made any profit-sharing or similar
payment to,
or increased the amount of the wages, salary, commissions, fringe
benefits
or other compensation or remuneration payable to, any of its directors,
officers or employees, or (iii) hired any new
employee;
|
(o) |
the
Company has not changed any of its methods of accounting or accounting
practices in any respect;
|
(p) |
the
Company has not made any Tax
election;
|
(q) |
the
Company has not commenced or settled any Legal
Proceeding;
|
(r) |
the
Company has not entered into any material transaction or taken any
other
material action outside the ordinary course of business or inconsistent
with its past practices; and
|
(s) |
the
Company has not agreed or committed to take any of the actions referred
to
in clauses “(c)” through “(r)”
above.
|
1.18
Title to Assets.
(a) |
The
Company owns, and has good, valid and marketable title to, all assets
purported to be owned by it, including: (i) all assets reflected
on the
Unaudited Interim Balance Sheet; (ii) all assets referred to in Parts
2.7(b) and 2.9 of the Disclosure Schedule and all of the Company’s rights
under the Contracts identified in Part 2.10 of the Disclosure Schedule;
and (iii) all other assets reflected in the Company’s books and records as
being owned by the Company. Except as set forth in Part 2.6
of the
Disclosure Schedule, all of said assets are owned by the Company
free and
clear of any liens or other Encumbrances, except for (x) any lien
for
current taxes not yet due and payable, and (y) minor liens that have
arisen in the ordinary course of business and that do not (in any
case or
in the aggregate) materially detract from the value of the assets
subject
thereto or materially impair the operations of the
Company.
|
(b) |
Part 2.6
of the Disclosure Schedule identifies all assets that are material
to the
business of the Company and that are being leased or licensed to
the
Company, in each case, having a value, individually, in excess of
$5,000.
|
1.19
Bank Accounts; Receivables.
(a) |
Part
2.7(a) of the Disclosure Schedule provides accurate information with
respect to each account maintained by or for the benefit of the Company
at
any bank or other financial
institution.
|
(b) |
Part
2.7(b) of the Disclosure Schedule provides an accurate and complete
breakdown and aging of all accounts receivable, notes receivable
and other
receivables of the Company as of the Interim Statement Date. Except
as set
forth in Part 2.7(b) of the Disclosure Schedule, all existing accounts
receivable of the Company (including those accounts receivable reflected
on the Unaudited Interim Balance Sheet that have not yet been collected
and those accounts receivable that have arisen since the Interim
Statement
Date and have not yet been collected) (i) represent valid obligations
of
customers of the Company arising from bona fide transactions entered
into
in the ordinary course of business, (ii) are current and will be
collected
in full when due, without any counterclaim or set off (net of an
allowance
for doubtful accounts not to exceed $5,000 in the
aggregate).
|
1.20 Equipment;
Leasehold.
(a) |
All
material items of equipment and other tangible assets owned by or
leased
to the Company are adequate for the uses to which they are being
put, are
in good condition and repair (ordinary wear and tear excepted) and
are
adequate for the conduct of the Company’s business in the manner in which
such business is currently being
conducted.
|
(b) |
The
Company does not own any real property or any interest in real property,
except for the leasehold created under the real property lease identified
in Part 2.10 of the Disclosure
Schedule.
|
1.21 Intellectual
Property.
(a) |
Part
2.9(a) of the Disclosure Schedule accurately identifies and
describes:
|
(i) |
in
Part 2.9(a)(i) of the Disclosure Schedule, each proprietary product
or
service developed, manufactured, marketed, or sold by the Company
at any
time since its inception and any product or service currently under
development by the Company;
|
(ii) |
in
Part 2.9(a)(ii) of the Disclosure Schedule: (A) each item of Registered
IP
in which the Company has or purports to have an ownership interest
of any
nature (whether exclusively, jointly with another Person or otherwise);
(B) the jurisdiction in which such item of Registered IP has been
registered or filed and the applicable registration or serial number;
(C)
any other Person that has an ownership interest in such item of Registered
IP and the nature of such ownership interest; and (D) each product
or
service identified in Part 2.9(a)(i) of the Disclosure Schedule that
embodies, utilizes or is based upon or derived from (or, with respect
to
products and services under development, that is expected to embody,
utilize or be based upon or derived from) such item of Registered
IP;
|
(iii) |
in
Part 2.9(a)(iii) of the Disclosure Schedule: (A) all Intellectual
Property
Rights or Intellectual Property licensed to the Company (other than
any
non-customized software that: (1) is so licensed solely in executable
or
object code form pursuant to a nonexclusive, internal use software
license, (2) is not incorporated into, or used directly in the
development, manufacturing or distribution of, the products or services
of
the Company and (3) is generally available on standard terms for
less than
$5,000); (B) the corresponding Contract or Contracts pursuant to
which
such Intellectual Property Rights or Intellectual Property is licensed
to
the Company; and (C) whether the license or licenses so granted to
the
Company are exclusive or nonexclusive;
and
|
(iv) |
in
Part 2.9(a)(iv) of the Disclosure Schedule, each Contract pursuant
to
which any Person has been granted any license under, or otherwise
has
received or acquired any right (whether or not currently exercisable)
or
interest in, any Company IP.
|
(b) |
The
Company has provided to Parent a complete and accurate copy of each
standard form of Company IP Contract used by the Company at any time,
including each standard form of: (i) end user license agreement;
(ii)
development agreement; (iii) distributor or reseller agreement;
(iv) employee agreement containing any assignment or license
of
Intellectual Property or Intellectual Property Rights or any
confidentiality provision; (v) consulting or independent contractor
agreement containing any assignment or license of Intellectual Property
or
Intellectual Property Rights or any confidentiality provision; or
(vi)
confidentiality or nondisclosure agreement. Except as disclosed in
Part
2.9 of the Disclosure Schedule, no Company IP Contract deviates in
any
material respect from the corresponding standard form agreement provided
to Parent. Except as disclosed in Part 2.9 of the Disclosure Schedule,
the
Company is not bound by, and no Company IP is subject to, any Contract
containing any covenant or other provision that in any way limits
or
restricts the ability of the Company to use, exploit, assert, or
enforce
any Company IP anywhere in the world.
|
(c) |
The
Company exclusively owns all right, title and interest to and in
the
Company IP (other than Intellectual Property Rights or Intellectual
Property exclusively licensed to the Company, as identified in Part
2.9(a)(iii) of the Disclosure Schedule) free and clear of any Encumbrances
(other than nonexclusive licenses granted pursuant to the Contracts
listed
in Part 2.9(a)(iv) of the Disclosure Schedule). Without limiting
the
generality of the foregoing, except as set forth in Part 2.9
of the
Disclosure Schedule:
|
(i) |
all
documents and instruments necessary to perfect the rights of the
Company
in the Company IP have been validly executed, delivered and filed
in a
timely manner with the appropriate Governmental
Body;
|
(ii) |
each
Person who is or was an employee or independent contractor of the
Company
and who is or was involved in the creation or development of any
Company
IP has signed a valid and enforceable agreement containing an irrevocable
assignment of Intellectual Property Rights to the Company and
confidentiality provisions protecting the Company IP;
|
(iii) |
no
Company Employee has any claim, right (whether or not currently
exercisable) or interest to or in any Company
IP;
|
(iv) |
to
the knowledge of the Company and the Signing Shareholders, no employee
or
independent contractor of the Company is: (A) bound by or otherwise
subject to any Contract restricting him or her from performing his
or her
duties for the Company; or (B) in breach of any Contract with any
former
employer or other Person concerning Intellectual Property Rights
or
confidentiality;
|
(v) |
no
funding, facilities or personnel of any Governmental Body were used,
directly or indirectly, to develop or create, in whole or in part,
any
Company IP;
|
(vi) |
the
Company has taken all reasonable steps to maintain the confidentiality
of
and otherwise protect and enforce its rights in all proprietary
information held by the Company, or purported to be held by the Company,
as a trade secret;
|
(vii) |
the
Company has never assigned or otherwise transferred ownership of,
or
agreed to assign or otherwise transfer ownership of, any Intellectual
Property Right to any other Person;
|
(viii) |
the
Company is not now nor has ever been a member or promoter of, or
a
contributor to, any industry standards body or similar organization
that
could require or obligate the Company to grant or offer to any other
Person any license or right to any Company IP;
and
|
(ix) |
to
the knowledge of the Company and the Signing Shareholders, the Company
owns or otherwise has, and after the Closing the Surviving Entity
will
continue to have, all Intellectual Property Rights needed to conduct
the
business of the Company as currently conducted and currently planned
by
the Company to be conducted.
|
(d) |
To
the knowledge of the Company and the Signing Shareholders, all Company
IP
is valid, subsisting and enforceable. Without limiting the generality
of
the foregoing, to the knowledge of the
Company:
|
(i) |
no
trademark (whether registered or unregistered) or trade name owned,
used,
or applied for by the Company conflicts or interferes with any trademark
(whether registered or unregistered) or trade name owned, used or
applied
for by any other Person;
|
(ii) |
none
of the goodwill associated with or inherent in any trademark (whether
registered or unregistered) in which the Company has or purports
to have
an ownership interest has been
impaired;
|
(iii) |
each
item of Company IP that is Registered IP is and at all times has
been in
compliance with all Legal Requirements, and all filings, payments
and
other actions required to be made or taken to maintain such item
of
Company IP in full force and effect have been made by the applicable
deadline;
|
(iv) |
no
application for a patent or for a copyright, mask work or trademark
registration or any other type of Registered IP filed by or on behalf
of
the Company has been abandoned, allowed to lapse or
rejected;
|
(v) |
Part
2.9(d)(v) of the Disclosure Schedule accurately identifies and describes
each filing, payment, and action that must be made or taken on or
before
the date that is 120 days after the date of this Agreement in order
to
maintain each such item of Company IP in full force and
effect;
|
(vi) |
the
Company has provided to Parent complete and accurate copies of all
applications, correspondence and other material documents related
to each
such item of Registered IP;
|
(vii) |
no
interference, opposition, reissue, reexamination or other Proceeding
of
any nature is or has been pending or, to the knowledge of the Company
and
the Signing Shareholders, threatened, in which the scope, validity
or
enforceability of any Company IP is being, has been or could reasonably
be
expected to be contested or challenged;
and
|
(viii) |
to
the knowledge of the Company and the Signing Shareholders, there
is no
basis for a claim that any Company IP is invalid or
unenforceable.
|
(e) |
Neither
the execution, delivery or performance of any of the Transactional
Agreements nor the consummation of any of the Transactions will,
with or
without notice or the lapse of time, result in or give any other
Person
the right or option to cause or declare: (i) a loss of, or material
Encumbrance on, any Company IP; (ii) a breach of any Contract listed
or
required to be listed in Part 2.9(a)(iii) of the Disclosure Schedule;
(iii) the release, disclosure or delivery of any Company IP by or
to any
escrow agent or other Person; or (iv) the grant, assignment or transfer
to
any other Person of any license or other right or interest under,
to or in
any of the Company IP.
|
(f) |
To
the knowledge of the Company and the Signing Shareholders, except
as set
forth in Part 2.9 of the Disclosure Schedule, no Person has
infringed, misappropriated, or otherwise violated, and no Person
is
currently infringing, misappropriating or otherwise violating, any
Company
IP. Part 2.9(f) of the Disclosure Schedule accurately identifies
(and the
Company has provided to Parent a complete and accurate copy of) each
letter or other written or electronic communication or correspondence
that
has been sent or otherwise delivered by or to the Company or any
Representative of the Company regarding any actual, alleged or suspected
infringement or misappropriation of any Company IP and provides a
brief
description of the current status of the matter referred to in such
letter, communication or
correspondence.
|
(g) |
To
the knowledge of the Company and the Signing Shareholders, the Company
has
never infringed (directly, contributorily, by inducement or otherwise),
misappropriated or otherwise materially violated any Intellectual
Property
Right of any other Person. Without limiting the generality of the
foregoing, to the knowledge of the Company and the Signing Shareholders,
except as set forth in Part 2.9 of the Disclosure
Schedule:
|
(i) |
no
product, information or service ever manufactured, produced, distributed,
published, used, provided or sold by or on behalf of the Company,
and no
Intellectual Property ever owned, used or developed by the Company,
has
ever infringed, misappropriated or otherwise violated any Intellectual
Property Right of any other Person;
|
(ii) |
no
Proceeding alleging infringement, misappropriation or similar claim
is
pending or has been threatened in writing, or, to the knowledge of
the
Company and the Signing Shareholders, otherwise against the Company
or
against any other Person who may be entitled to be indemnified, defended,
held harmless or reimbursed by the Company with respect to such Proceeding
or claim;
|
(iii) |
the
Company has never received any notice or other communication (in
writing
or, to the knowledge of the Company and the Signing Shareholders,
otherwise) relating to any actual, alleged or suspected infringement,
misappropriation or violation by the Company of any Intellectual
Property
Right of another Person;
|
(iv) |
the
Company is not bound by any Contract to indemnify, defend, hold harmless
or reimburse any other Person with respect to any intellectual property
infringement, misappropriation or similar claim (other than pursuant
to
the Company IP Contracts described in Section 2.9(a)(iii) and
2.9(b));
|
(v) |
the
Company has never assumed, or agreed to discharge or otherwise take
responsibility for, any existing or potential liability of another
Person
for infringement, misappropriation or violation of any Intellectual
Property Right; and
|
(vi) |
no
claim or Proceeding involving any Intellectual Property or Intellectual
Property Right licensed to the Company is pending or, to the knowledge
of
the Company and the Signing Shareholders, has been threatened in
writing
or, to the knowledge of the Company and the Signing Shareholders,
otherwise, except for any such claim or Proceeding that, if adversely
determined, would not adversely affect: (A) the use or exploitation
of
such Intellectual Property or Intellectual Property Right by the
Company;
or (B) the manufacturing, distribution or sale of any product or
service
being developed, offered, manufactured, distributed or sold by the
Company.
|
(h) |
To
the knowledge of the Company and the Signing Shareholders, none of
the
Company Software: (i) contains any bug, defect or error (including
any
bug, defect or error relating to or resulting from the display,
manipulation, processing, storage, transmission or use of date data)
that
materially and adversely affects the use, functionality or performance
of
such Company Software or any product or system containing or used
in
conjunction with such Company Software; or (ii) fails to comply with
any
applicable warranty or other contractual commitment relating to the
use,
functionality or performance of such software or any product or system
containing or used in conjunction with such Company
Software.
|
(i) |
None
of the Company Software contains any “back door,”“drop dead device,”“time
bomb,”“Trojan horse,”“virus,” or “worm” (as such terms are commonly
understood in the software industry) or any other code designed or
intended to have, or capable of performing, any of the following
functions: (i) disrupting, disabling, harming or otherwise impeding
in any
manner the operation of, or providing unauthorized access to, a computer
system or network or other device on which such code is stored or
installed; or (ii) damaging or destroying any data or file without
the
user’s consent.
|
(j) |
To
the knowledge of the Company and the Signing Shareholders, none of
the
Company Software is subject to any “copyleft” or other obligation or
condition (including any obligation or condition under any “open source”
license such as the GNU Public License, Lesser GNU Public License
or
Mozilla Public License) that: (i) could or does require, or could
or does
condition the use or distribution of such Company Software on, the
disclosure, licensing or distribution of any source code for any
portion
of such Company Software; or (ii) could or does otherwise impose
any
limitation, restriction or condition on the right or ability of the
Company to use or distribute any Company
Software.
|
(k) |
Except
as set forth in Part 2.9(k) of the Disclosure Schedule, no source
code for
any Company Software has been delivered, licensed or made available
to any
escrow agent or other Person who is not, as of the date of this Agreement,
an employee of the Company. The Company does not have any duty or
obligation (whether present, contingent or otherwise) to deliver,
license
or make available the source code for any Company Software to any
escrow
agent or other Person who is not, as of the date of this Agreement,
an
employee of the Company. No event has occurred, and no circumstance
or
condition exists, that (with or without notice or lapse of time)
will, or
could reasonably be expected to, result in the delivery, license
or
disclosure of any source code for any Company Software to any other
Person
who is not, as of the date of this Agreement, an employee of the
Company.
|
1.22 Contracts.
(a) |
Part
2.10 of the Disclosure Schedule
identifies:
|
(i) |
each
Company Contract relating to the employment of, or the performance
of
services by, any employee, consultant or independent
contractor;
|
(ii) |
each
Company Contract relating to the acquisition, transfer, use, development,
sharing or license of any technology or any Intellectual Property
or
Intellectual Property Right;
|
(iii) |
each
Company Contract imposing any restriction on the Company’s right or
ability (A) to compete with any other Person, (B) to acquire any
product
or other asset or any services from any other Person, to sell any
product
or other asset to or perform any services for any other Person or
to
transact business or deal in any other manner with any other Person,
or
(C) develop or distribute any
technology;
|
(iv) |
each
Company Contract creating or involving any agency relationship,
distribution arrangement or franchise
relationship;
|
(v) |
each
Company Contract relating to the acquisition, issuance or transfer
of any
securities;
|
(vi) |
each
Company Contract relating to the creation of any Encumbrance with
respect
to any asset of the Company;
|
(vii) |
each
Company Contract involving or incorporating any guaranty of indebtedness,
any pledge, any performance or completion bond, any indemnity or
any
surety arrangement;
|
(viii) |
each
Company Contract creating or relating to any partnership or joint
venture
or any sharing of revenues, profits, losses, costs or
liabilities;
|
(ix) |
each
Company Contract relating to the purchase or sale of any product
or other
asset by or to, or the performance of any services by or for, any
Related
Party (as defined in Section 2.18);
|
(x) |
each
Company Contract constituting or relating to a Government Contract
or
Government Bid;
|
(xi) |
any
other Company Contract that was entered into outside the ordinary
course
of business or was inconsistent with the Company’s past
practices;
|
(xii) |
any
other Company Contract that has a term of more than 60 days and that
may
not be terminated by the Company (without penalty) within 60 days
after
the delivery of a termination notice by the Company;
and
|
(xiii) |
any
other Company Contract that contemplates or involves (A) the payment
or
delivery of cash or other consideration in an amount or having a
value in
excess of $10,000 in the aggregate, or (B) the performance of services
having a value in excess of $10,000 in the
aggregate.
|
T(ContractsT
in the
respective categories described in clauses “(i)” through “(xiii)” above are
referred to in this Agreement as “Material
Contracts.”)
(b) |
The
Company has delivered to Parent accurate and complete copies of all
written Contracts identified in Part 2.10 of the Disclosure
Schedule,
including all amendments thereto. Part 2.10 of the Disclosure Schedule
provides an accurate description of the terms of each Company Contract
that is not in written form. Each Company Contract is valid and in
full
force and effect, and, to the knowledge of the Company and the Signing
Shareholders, is enforceable by the Company in accordance with its
terms,
subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing
specific performance, injunctive relief and other equitable
remedies.
|
(c) |
Except
as set forth in Part 2.10(c) of the Disclosure
Schedule:
|
(i) |
the
Company has not materially violated or breached, or committed any
material
default under, any Company Contract, and, to the knowledge of the
Company
and the Signing Shareholders, no other Person has materially violated
or
breached, or committed any material default under, any Company
Contract;
|
(ii) |
to
the knowledge of the Company and the Signing Shareholders, no event
has
occurred, and no circumstance or condition exists, that (with or
without
notice or lapse of time) will, or could reasonably be expected to,
(A) result in a violation or breach of any of the material
provisions
of any Company Contract, (B) give any Person the right to
declare a
default or exercise any remedy under any Company Contract, (C) give
any Person the right to accelerate the maturity or performance of
any
Company Contract, or (D) give any Person the right to cancel, terminate
or
modify any Company Contract;
|
(iii) |
the
Company has never received any written notice or, to the knowledge
of the
Company and the Signing Shareholders, other communication regarding
any
actual or possible violation or breach of, or default under, any
Company
Contract; and
|
(iv) |
the
Company has not knowingly waived any of its material rights under
any
Company Contract.
|
(d) |
No
Person is renegotiating, or has a right pursuant to the terms of
any
Company Contract to renegotiate, any amount paid or payable to the
Company
under any Material Contract or any other material term or provision
of any
Material Contract.
|
(e) |
The
Contracts identified in Part 2.10(e) of the Disclosure Schedule
collectively constitute all of the Contracts necessary to enable
the
Company to conduct its business in the manner in which its business
is
currently being conducted,
|
(f) |
Part
2.10(f) of the Disclosure Schedule provides an accurate description
and
breakdown of the Company’s backlog under Company
Contracts.
|
(g) |
Except
as set forth in Part 2.10(g) of the Disclosure Schedule, the Company
does
not, and has never, entered into, bid for, had any interest in or
been
determined to be noncompliant with any Government Contract. The Company
has not made, or participated in any way in, any Government Bid.
Neither
the Company nor any of its employees has been debarred or suspended
from
doing business with any Governmental Body, and, to the knowledge
of the
Company and the Signing Shareholders, no circumstances exist that
would
warrant the institution of debarment or suspension proceedings against
the
Company or any employee of the Company. The Company has not made
any
disclosure to any Governmental Body pursuant to any voluntary disclosure
agreement.
|
(h) |
The
Company has complied with all applicable regulations and other Legal
Requirements and with all applicable contractual requirements relating
to
the placement of legends or restrictive markings on technical data,
computer software and other Intellectual Property.
|
1.23 Liabilities.
The
Company has no accrued, contingent or other liabilities of any nature, either
matured or unmatured (whether or not required to be reflected in financial
statements in accordance with United States generally accepted accounting
principles, and whether due or to become due), except for: (a) liabilities
identified as such in the “liabilities” column of the Unaudited Interim Balance
Sheet; (b) accounts payable or accrued salaries that have been incurred by
the
Company since the Interim Statement Date in the ordinary course of business
and
consistent with the Company’s past practices; (c) liabilities under the Company
Contracts identified in Part 2.10 of the Disclosure Schedule, to the extent
the
nature and magnitude of such liabilities can be specifically ascertained by
reference to the text of such Company Contracts; (d) immaterial liabilities
that
are not required by United States generally accepted accounting principles
to be
disclosed on the Unaudited Interim Balance Sheet and (e) the liabilities
identified in Part 2.11 of the Disclosure Schedule.
1.24 Compliance
with Legal Requirements.
Except
as set forth in Part 2.12 of the Disclosure Schedule, the Company is,
and
has at all times been, in compliance with all applicable Legal Requirements,
except where the failure to comply with such Legal Requirements has not had
and
will not have a Material Adverse Effect on the Company. The Company has not
received any written notice or, to the knowledge of the Company and the Signing
Shareholders, other communication from any Governmental Body regarding any
actual or possible violation of, or failure to comply with, any Legal
Requirement.
1.25 Governmental
Authorizations. Part
2.13
of the Disclosure Schedule identifies each material Governmental Authorization
held by the Company, and the Company has delivered to Parent accurate and
complete copies of all Governmental Authorizations identified in Part 2.13
of
the Disclosure Schedule. The Governmental Authorizations identified in Part
2.13
of the Disclosure Schedule are valid and in full force and effect, and
collectively constitute all Governmental Authorizations necessary to enable
the
Company to conduct its business in the manner in which its business is currently
being conducted. The Company is, and at all times has been, in substantial
compliance with the terms and requirements of the respective Governmental
Authorizations identified in Part 2.13 of the Disclosure Schedule. The Company
has not received any written notice or, to the knowledge of the Company and
the
Signing Shareholders, other communication from any Governmental Body regarding
(a) any actual or possible violation of or failure to comply with any term
or
requirement of any Governmental Authorization, or (b) any actual or possible
revocation, withdrawal, suspension, cancellation, termination or modification
of
any Governmental Authorization.
1.26 Tax
Matters.
Except
as set forth on Part 2.14 of the Disclosure Schedule:
(a) |
All
Tax Returns required to be filed on or before the Closing Date (including
any extensions of such date) by or on behalf of the Company with
any
Governmental Body (the “Company
Returns”)
(i) have been or will be filed on or before such applicable
due date,
and (ii) have been, or will be when filed, accurately and
completely
prepared in all material respects in compliance with all applicable
Legal
Requirements. All amounts shown on the Company Returns to be due
on or
before the Closing Date have been or will be paid on or before the
Closing
Date. The Company has delivered to Parent accurate and complete copies
of
all Company Returns filed since inception that have been requested
by
Parent.
|
(b) |
The
Company Financial Statements fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the dates
thereof in accordance with United States generally accepted accounting
principles. The Company has not incurred a Tax liability from the
date of
the Unaudited Interim Balance Sheet, other than in the ordinary course
of
business, and the Company will establish in its books and records
reserves
adequate for the payment of all such Tax
liabilities.
|
(c) |
No
Company Return relating to income Taxes has ever been examined or
audited
by any Governmental Body. There have been no examinations or audits
of any
Company Return. The Company has delivered to Parent accurate and
complete
copies of all audit reports and similar documents (to which the Company
has access) relating to the Company Returns. No extension or waiver
of the
limitation period applicable to any of the Company Returns has been
granted (by the Company or any other Person), and no such extension
or
waiver has been requested from the
Company.
|
(d) |
No
claim or Proceeding is pending or has been threatened in writing
or, to
the knowledge of the Company and the Signing Shareholders, otherwise
against or with respect to the Company in respect of any Tax. There
are no
unsatisfied liabilities for Taxes (including liabilities for interest,
additions to tax and penalties thereon and related expenses) with
respect
to any notice of deficiency or similar document received by the Company
with respect to any Tax (other than liabilities for Taxes asserted
under
any such notice of deficiency or similar document which are being
contested in good faith by the Company and with respect to which
adequate
reserves for payment have been established). There are no liens for
Taxes
upon any of the assets of the Company except liens for current Taxes
not
yet due and payable. The Company has not entered into or become bound
by
any agreement or consent pursuant to former Section 341(f)
of the
Code. The Company has not been, and the Company will not be, required
to
include any adjustment in taxable income for any tax period (or portion
thereof) pursuant to Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws as a result
of
transactions or events occurring, or accounting methods employed,
prior to
the Closing.
|
(e) |
There
is no agreement, plan, arrangement or other Contract covering any
Company
Employee that, considered individually or considered collectively
with any
other such Contracts, will, or could reasonably be expected to, give
rise
directly or indirectly to the payment of any amount that would not
be
deductible pursuant to Section 280G or Section 162
of the Code.
The Company is not, and has never been, a party to or bound by any
tax
indemnity agreement, tax-sharing agreement, tax allocation agreement
or
similar Contract.
|
1.27 Employee
and Labor Matters; Benefit Plans.
(a) |
Part
2.15(a) of the Disclosure Schedule accurately identifies each former
employee of the Company who is receiving or is scheduled to receive
(or
whose spouse or other dependent is receiving or is scheduled to receive)
any benefits (whether from the Company or otherwise) relating to
such
former employee’s employment with the Company and accurately describes
such benefits.
|
(b) |
The
employment of each of the Company’s employees is terminable by the Company
at will. The Company has delivered to Parent accurate and complete
copies
of all employee manuals and handbooks, disclosure materials, policy
statements and other materials relating to the employment of the
current
and former employees of the Company.
|
(c) |
To
the knowledge of the Company and the Signing
Shareholders:
|
(i) |
no
employee of the Company intends to terminate his employment with
the
Company;
|
(ii) |
no
employee of the Company has received an offer to join a business
that may
be competitive with the Company’s business;
and
|
(iii) |
no
employee of the Company is a party to or is bound by any confidentiality
agreement, noncompetition agreement or other Contract (with any Person)
that may have an adverse effect on: (A) the performance by such employee
of any of his duties or responsibilities as an employee of the Company;
or
(B) the Company’s business or
operations.
|
(d) |
Except
as set forth in Part 2.15(d) of the Disclosure Schedule, the Company
is
not a party to or bound by, and the Company has never been a party
to or
bound by, any employment agreement or any union Contract, collective
bargaining agreement or similar
Contract.
|
(e) |
Except
as set forth in Part 2.15(e) of the Disclosure Schedule, the
Company
is not engaged, and the Company has never been engaged, in any unfair
labor practice of any nature. There has never been any slowdown,
work
stoppage, labor dispute or union organizing activity, or any similar
activity or dispute, affecting the Company, any such slowdown, work
stoppage, labor dispute or union organizing activity or any similar
activity or dispute. No event has occurred, and no condition or
circumstance exists, that might directly or indirectly give rise
to or
provide a basis for the commencement of any such slowdown, work stoppage,
labor dispute or union organizing activity or any similar activity
or
dispute. There are no actions, suits, claims, labor disputes or grievances
pending or, to the knowledge of the Company and the Signing Shareholders,
threatened in writing or, to the knowledge of the Company and the
Signing
Shareholders, otherwise, or reasonably anticipated relating to any
labor,
safety or discrimination matters involving any Company Employee,
including, without limitation, charges of unfair labor practices
or
discrimination complaints.
|
(f) |
None
of the current or former independent contractors of the Company could
be
reclassified as an employee. There are no, and at no time have there
been
any, independent contractors who have provided services to the Company
or
any Company Affiliate for a period of six consecutive months or longer.
The Company has never had any temporary or leased employees. No
independent contractor of the Company is eligible to participate
in any
Company Employee Plan other than the 2005 Stock
Plan.
|
(g) |
Part
2.15(g) of the Disclosure Schedule contains an accurate and complete
list
as of the date hereof of each Company Employee Plan and each Company
Employee Agreement. The Company does not intend nor has it committed
to
establish or enter into any new Company Employee Plan or Company
Employee
Agreement, or to modify any Company Employee Plan or Company Employee
Agreement (except to conform any such Company Employee Plan or Company
Employee Agreement to the requirements of any applicable Legal
Requirements, in each case as previously disclosed to Parent in writing
or
as required by this Agreement).
|
(h) |
The
Company has delivered to Parent: (i) correct and complete copies
of all
documents setting forth the terms of each Company Employee Plan and
each
Company Employee Agreement, including all amendments thereto and
all
related trust documents; (ii) the three most recent annual reports
(Form
Series 5500 and all schedules and financial statements attached thereto),
if any, required under ERISA or the Code in connection with each
Company
Employee Plan; (iii) if the Company Employee Plan is subject to the
minimum funding standards of Section 302 of ERISA, the most recent
annual
and periodic accounting of Company Employee Plan assets; (iv) the
most
recent summary plan description together with the summaries of material
modifications thereto, if any, required under ERISA with respect
to each
Company Employee Plan; (v) all material written Contracts relating
to each
Company Employee Plan, including administrative service agreements
and
group insurance Contracts; (vi) all written materials provided to
any
Company Employee relating to any Company Employee Plan and any proposed
Company Employee Plans, in each case, relating to any amendments,
terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events that
would
result in any liability to the Company or any Company Affiliate;
(vii) all
correspondence to or from any Governmental Body relating to any Company
Employee Plan; (viii) all COBRA forms and related notices; (ix) all
insurance policies in the possession of the Company or any Company
Affiliate pertaining to fiduciary liability insurance covering the
fiduciaries for each Company Employee Plan; (x) all discrimination
tests
required under the Code for each Company Employee Plan intended to
be
qualified under Section 401(a) of the Code for the three most recent
plan
years; and (xi) the most recent IRS determination or opinion letter
issued
with respect to each Company Employee Plan intended to be qualified
under
Section 401(a) of the Code.
|
(i) |
The
Company and each of the Company Affiliates have performed all obligations
required to be performed by them under each Company Employee Plan
and are
not in default or violation of, and neither the Company nor any of
the
Signing Shareholders has knowledge of any default or violation by
any
other party to, the terms of any Company Employee Plan, and each
Company
Employee Plan has been established and maintained substantially in
accordance with its terms and in substantial compliance with all
applicable Legal Requirements, including ERISA and the Code. Any
Company
Employee Plan intended to be qualified under Section 401(a) of the
Code
has obtained a favorable determination letter (or opinion letter,
if
applicable) as to its qualified status under the Code. No “prohibited
transaction,” within the meaning of Section 4975 of the Code or Sections
406 and 407 of ERISA, and not otherwise exempt under Section 408
of ERISA,
has occurred with respect to any Company Employee Plan. There are
no
claims or Proceedings pending, or, to the knowledge of the Company
and the
Signing Shareholders, threatened in writing or, to the knowledge
of the
Company and the Signing Shareholders, otherwise, or reasonably anticipated
(other than routine claims for benefits), against any Company Employee
Plan or against the assets of any Company Employee Plan. Except as
set
forth in Part 2.15(i) of the Disclosure Schedule, each Company Employee
Plan (other than any Company Employee Plan to be terminated prior
to the
Closing in accordance with this Agreement) can be amended, terminated
or
otherwise discontinued after the Closing in accordance with its terms,
without liability to Parent, the Company or any Company Affiliate
(other
than ordinary administration expenses). There are no audits, inquiries
or
Proceedings pending or, to the knowledge of the Company and the Signing
Shareholders, threatened in writing or, to the knowledge of the Company
and the Signing Shareholders, otherwise by the IRS, DOL, or any other
Governmental Body with respect to any Company Employee Plan. Neither
the
Company nor any Company Affiliate has ever incurred any penalty or
tax
with respect to any Company Employee Plan under Section 502(i) of
ERISA or
Sections 4975 through 4980 of the Code. The Company and each Company
Affiliate has made all contributions and other payments required
by and
due under the terms of each Company Employee
Plan.
|
(j) |
Neither
the Company nor any Company Affiliate has ever maintained, established,
sponsored, participated in, or contributed to any: (i) Company Pension
Plan subject to Title IV of ERISA; or (ii) “multiemployer plan” within the
meaning of Section (3)(37) of ERISA. Neither the Company nor any
Company
Affiliate has ever maintained, established, sponsored, participated
in or
contributed to, any Company Pension Plan in which stock of the Company
or
any Company Affiliate is or was held as a plan asset. The fair market
value of the assets of each funded Foreign Plan, the liability of
each
insurer for any Foreign Plan funded through insurance, or the book
reserve
established for any Foreign Plan, together with any accrued contributions,
is sufficient to procure or provide in full for the accrued benefit
obligations, with respect to all current and former participants
in such
Foreign Plan according to the actuarial assumptions and valuations
most
recently used to determine employer contributions to and obligations
under
such Foreign Plan, and no transaction contemplated by this Agreement
shall
cause any such assets or insurance obligations to be less than such
benefit obligations.
|
(k) |
No
Company Employee Plan provides (except at no cost to the Company
or any
Company Affiliate), or reflects or represents any liability of the
Company
or any Company Affiliate to provide, retiree life insurance, retiree
health benefits or other retiree employee welfare benefits to any
Person
for any reason, except as may be required by COBRA or other applicable
Legal Requirements. Other than commitments made that involve no future
costs to the Company or any Company Affiliate, neither the Company
nor any
Company Affiliate has ever represented, promised or contracted (whether
in
oral or written form) to any Company Employee (either individually
or to
Company Employees as a group) or any other Person that such Company
Employee(s) or other person would be provided with retiree life insurance,
retiree health benefit or other retiree employee welfare benefits,
except
to the extent required by applicable Legal
Requirements.
|
(l) |
Except
as set forth in Part 2.15(l) of the Disclosure Schedule, and except
as
expressly required or provided by this Agreement, neither the execution
of
this Agreement nor the consummation of the transactions contemplated
hereby will (either alone or upon the occurrence of any additional
or
subsequent events) constitute an event under any Company Employee
Plan,
Company Employee Agreement, trust or loan that will or may result
(either
alone or in connection with any other circumstance or event) in any
payment (whether of severance pay or otherwise), acceleration, forgiveness
of indebtedness, vesting, distribution, increase in benefits or obligation
to fund benefits with respect to any Company
Employee.
|
(m) |
Except
as set forth in Part 2.15(m) of the Disclosure Schedule, the Company
and
each of the Company Affiliates: (i) are, and at all times have been,
in
substantial compliance with all applicable Legal Requirements respecting
employment, employment practices, terms and conditions of employment
and
wages and hours, in each case, with respect to Company Employees,
including the health care continuation requirements of COBRA, the
requirements of FMLA, the requirements of HIPAA and any similar provisions
of state law; (ii) have withheld and reported all amounts required
by
applicable Legal Requirements or by Contract to be withheld and reported
with respect to wages, salaries and other payments to Company Employees;
(iii) are not liable for any arrears of wages or any taxes or any
penalty
for failure to comply with the Legal Requirements applicable of the
foregoing; and (iv) are not liable for any payment to any trust or
other
fund governed by or maintained by or on behalf of any Governmental
Body
with respect to unemployment compensation benefits, social security
or
other benefits or obligations for Company Employees (other than routine
payments to be made in the normal course of business and consistent
with
past practice). There are no pending or, to the knowledge of the
Company
and the Signing Shareholders, threatened in writing or, to the knowledge
of the Company and the Signing Shareholders, otherwise, or reasonably
anticipated claims or Proceedings against the Company or any Company
Affiliate under any worker’s compensation policy or long-term disability
policy.
|
(n) |
To
the knowledge of the Company and the Signing Shareholders, no shareholder
nor any Company Employee is obligated under any Contract or subject
to any
judgment, decree, or order of any court or other Governmental Body
that
would interfere with such Person’s efforts to promote the interests of the
Company or that would interfere with the business of the Company
or any
Company Affiliate. Neither the execution nor the delivery of this
Agreement, nor the carrying on of the business of the Company or
any
Company Affiliate as presently conducted nor any activity of such
shareholder or Company Employees in connection with the carrying
on of the
business of the Company or any Company Affiliate as presently conducted
will, to the knowledge of the Company and the Signing Shareholders,
conflict with, result in a breach of the terms, conditions or provisions
of, or constitute a default under, any Contract under which any of
such
shareholders or Company Employees is now
bound.
|
1.28 Environmental
Matters.
To the
knowledge of the Company and the Signing Shareholders, the Company is in
compliance in all material respects with all applicable Environmental Laws,
which compliance includes the possession by the Company of all permits and
other
Governmental Authorizations required under applicable Environmental Laws, and
compliance with the terms and conditions thereof. The Company has not received
any written notice or, to the knowledge of the Company and the Signing
Shareholders, other communication, whether from a Governmental Body, citizens
group, employee or otherwise, that alleges that the Company is not in compliance
with any Environmental Law, and, to the knowledge of the Company and the Signing
Shareholders, there are no circumstances that may prevent or interfere with
the
Company’s compliance with any Environmental Law in the future. To the knowledge
of the Company and the Signing Shareholders, no current or prior owner of any
property leased or controlled by the Company has received any notice or other
communication (in writing or otherwise), whether from a Government Body,
citizens group, employee or otherwise, that alleges that such current or prior
owner or the Company is not in compliance with any Environmental Law. There
are
no Governmental Authorizations currently held by the Company pursuant to
Environmental Laws. (For purposes of this Section 2.16: (a) “Environmental
Law”
means
any currently enacted and effective federal, state, local or foreign Legal
Requirement relating to pollution or protection of human health or the
environment (including ambient air, surface water, ground water, land surface
or
subsurface strata), including any law or regulation relating to emissions,
discharges, releases or threatened releases of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern; and (b) “Materials
of Environmental Concern”
include
chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and
petroleum products and any other substance that is now or hereafter regulated
by
any Environmental Law or that is otherwise a danger to health, reproduction
or
the environment.) This Section 2.16 contains the sole and exclusive
representations and warranties of the Company and the Signing Shareholders
with
respect to the Company’s compliance with Environmental Laws.
1.29 Insurance.
Except
as set forth in Part 2.17 of the Disclosure Schedule, each insurance
policy
maintained by, at the expense of or for the benefit of the Company is in full
force and effect. The Company has never received any notice or other
communication regarding any actual or possible (a) cancellation or invalidation
of any insurance policy, (b) refusal of any coverage or rejection of any claim
under any insurance policy, or (c) material adjustment in the amount of the
premiums payable with respect to any insurance policy.
1.30 Related
Party Transactions.
No
Related Party has, and no Related Party has at any time had, any direct or
indirect interest in any material asset used in or otherwise relating to the
business of the Company. No Related Party is, or has at any time been, indebted
to the Company. Except as set forth in Part 2.18 of the Disclosure
Schedule, no Related Party has entered into, or has had any direct or indirect
financial interest in, any material Contract, transaction or business dealing
involving the Company. To the knowledge of the Company and the Signing
Shareholders, no Related Party is competing, or has at any time competed,
directly or indirectly, with the Company. Except as set forth in Part 2.18
of the Disclosure Schedule, no Related Party has any claim or right against
the
Company (other than rights under Company Options and rights to receive
compensation for services performed as an employee of the Company). (For
purposes of the Section 2.18 each of the following shall be deemed to be a
“Related
Party”:
(a)
each of the Signing Shareholders; (b) each individual who is, or who has at
any
time since incorporation of the Company been, an officer of the Company; (c)
each member of the immediate family of each of the individuals referred to
in
clauses “(a)” and “(b)” above; and (d) any trust or other Entity (other than the
Company) in which any one of the individuals referred to in clauses “(a)”, “(b)”
and “(c)” above holds (or in which more than one of such individuals
collectively hold), beneficially or otherwise, a material voting, proprietary
or
equity interest.)
1.31 Legal
Proceedings; Orders.
(a) |
There
is no pending Legal Proceeding, and (to the knowledge of the Company
and
the Signing Shareholders) no Person has threatened to commence any
Legal
Proceeding: (i) that involves the Company or any of the assets owned
or
used by the Company or any Person whose liability the Company has
or may
have retained or assumed, either contractually or by operation of
law; or
(ii) that challenges, or that may have the effect of preventing,
delaying,
making illegal or otherwise interfering with, the Merger or any of
the
other transactions contemplated by this Agreement. To the knowledge
of the
Company and the Signing Shareholders, no event has occurred, and
no claim,
dispute or other condition or circumstance exists, that will, or
that
could reasonably be expected to, give rise to or serve as a basis
for the
commencement of any such Legal
Proceeding.
|
(b) |
Except
as set forth in Part 2.19 of the Disclosure Schedule, no Legal Proceeding
has ever been commenced by or has ever been pending against the
Company.
|
(c) |
There
is no order, writ, injunction, judgment or decree of any Governmental
Body
to which the Company, or any of the assets owned or used by the Company,
is subject. None of the Signing Shareholders is subject to any order,
writ, injunction, judgment or decree that relates to the Company’s
business or to any of the assets owned or used by the Company. To
the
knowledge of the Company and the Signing Shareholders, no officer
or other
employee of the Company is subject to any such order, writ, injunction,
judgment or decree that prohibits such officer or other employee
from
engaging in or continuing any conduct, activity or practice relating
to
the Company’s business.
|
1.32 Authority;
Binding Nature of Agreement. The
Company has the absolute and unrestricted right, power and authority to enter
into and to perform its obligations under this Agreement; and the execution,
delivery and performance by the Company of this Agreement have been duly
authorized by all necessary action on the part of the Company and its board
of
directors, subject to obtaining the shareholder vote referenced in Section
2.22.
This Agreement constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, subject
to (a) laws of general application relating to bankruptcy, insolvency and the
relief of debtors, and (b) rules of law governing specific performance,
injunctive relief and other equitable remedies.
1.33 Non-Contravention;
Consents.
Neither
the execution, delivery or performance of this Agreement or any of the other
agreements referred to in this Agreement, nor the consummation of the Merger
or
any of the other transactions contemplated by this Agreement, will directly
or
indirectly (with or without notice or lapse of time):
(a) |
contravene,
conflict with or result in a violation of (i) any of the provisions
of the Company’s articles of incorporation or bylaws, or (ii) any
resolution adopted by the Company’s shareholders, the Company’s board of
directors or any committee of the Company’s board of
directors;
|
(b) |
subject
to Parent obtaining the approval of its stockholders as described
in
Section 3.6, contravene, conflict with or result in a violation of,
or
give any Governmental Body or other Person the right to challenge
any of
the transactions contemplated by this Agreement or to exercise any
remedy
or obtain any relief under, any Legal Requirement or any order, writ,
injunction, judgment or decree to which the Company, or any of the
assets
owned or used by the Company, is
subject;
|
(c) |
contravene,
conflict with or result in a violation of any of the terms or requirements
of, or give any Governmental Body the right to revoke, withdraw,
suspend,
cancel, terminate or modify, any Governmental Authorization that
is held
by the Company or that otherwise relates to the Company’s business or to
any of the assets owned or used by the
Company;
|
(d) |
except
as set forth in Part 2.21(d) of the Disclosure Schedule, contravene,
conflict with or result in a violation or breach of, or result in
a
default under, any provision of any Company Contract that is or would
constitute a Material Contract, or give any Person the right to
(i) declare a default or exercise any remedy under any such
Company
Contract, (ii) accelerate the maturity or performance of any
such
Company Contract, or (iii) cancel, terminate or modify any
such
Company Contract; or
|
(e) |
result
in the imposition or creation of any lien or other Encumbrance upon
or
with respect to any asset owned or used by the Company (except for
minor
liens that will not, in any case or in the aggregate, materially
detract
from the value of the assets subject thereto or materially impair
the
operations of the Company).
|
Except
as
described in Section 2.22 and Section 4.3, the Company is not and will not
be
required to make any filing with or give any notice to, or to obtain any Consent
from, any Person in connection with (i) the execution, delivery or performance
of this Agreement or any of the other agreements referred to in this Agreement,
or (ii) the consummation of the Merger or any of the other transactions
contemplated by this Agreement.
1.34 Vote
Required.
The
affirmative vote of the holders of a majority of the shares of Company Common
Stock outstanding as of the date hereof is the only vote of the holders of
any
class or series of the Company’s capital stock necessary to adopt this Agreement
and approve the Merger and the other transactions contemplated by this
Agreement.
1.35 Brokers.
No
broker, investment banker, financial advisor or other person is entitled to
any
broker’s, finder’s, financial advisor’s or other similar fee or commission in
connection with the transactions contemplated hereby based upon arrangements
made by or on behalf of the Company or any of its shareholders.
1.36 No
Other Representations.
Notwithstanding anything to the contrary contained in this Agreement, it is
the
explicit intent of each party hereto that none of the Company or its
Representatives or shareholders are making any representation or warranty
whatsoever, express or implied, except those representations and warranties
contained in this Agreement (including any schedule or exhibit attached hereto)
and in any certificate delivered pursuant hereto.
1.37 Full
Disclosure.
This
Agreement (when read together with the Disclosure Schedule) does not, and the
Company Closing Certificate when read together with any disclosure provided
by
or on behalf of the Company under Section 5.10, will not, (i) contain any
representation, warranty or information that is false or misleading with respect
to any material fact, or (ii) omit to state any material fact, in each case
necessary in order to make the representations, warranties and information
contained in this Agreement (including the Disclosure Schedule), in light of
the
circumstances under which such representations, warranties and information
were
provided, not false or misleading.
Representations
and Warranties of Parent and Merger Sub
Parent
and Merger Sub jointly and severally represent and warrant to the Company and
the Signing Shareholders as follows:
1.38 Due
Organization.
Parent
and Merger Sub are each a corporation duly organized, validly existing and
in
good standing under the laws of Delaware and California, respectively, with
corporate power and authority:T
(i)T
to
conduct its business in the manner in which its business is currently being
conducted;T
(ii)T
to own
and use its assets in the manner in which its assets are currently owned and
used; andT
(iii)T
to
perform its material obligations under material Parent or Merger Sub
Contracts.
1.39 Certificate/Articles
of Incorporation and Bylaws. Parent
and Merger Sub have made available to the Company accurate and complete copies
of Parent’s and Merger Sub’s certificate or articles of incorporation or
articles of organization, as applicable, and bylaws or operating agreement,
as
applicable, including all amendments thereto. There has not been any violation
of any of the provisions of such Parent or Merger Sub organizational documents,
and Parent and Merger Sub have not taken any action that is inconsistent in
any
material respect with any resolution adopted by Parent or Merger Sub’s
stockholders or member, as applicable, Parent or Merger Sub’s boards of
directors or managing member, as applicable, or any committee of Parent or
Merger Sub’s boards of directors or managing member, as applicable.
1.40 Capitalization,
Etc.
(a) |
The
authorized capital stock of Parent consists of: (i) 25,000,000 shares
of
Common Stock (par value $0.001 per share), of which 5,214,538 shares
have
been issued and are outstanding as of the date of this Agreement.
All of
the outstanding shares of Parent Common Stock have been duly authorized
and validly issued, and are fully paid and non-assessable.
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(b) |
Parent
has reserved 2,794,215 shares of Parent Common Stock for issuance
(net of
shares issued and outstanding) under its stock option plans and employee
stock purchase plan. Options to purchase 2,086,627 shares of Parent
Common
Stock granted under Parent’s stock option plans are outstanding as of the
date of this Agreement. Except as disclosed in the foregoing sentence
or
the Parent SEC Documents (as defined in Section 3.4), there is
no:T
(i)T
outstanding subscription, option, call, warrant or right (whether
or not
currently exercisable) to acquire any shares of the capital stock
or other
securities of Parent;T
(ii)T
outstanding security, instrument or obligation that is or may become
convertible into or exchangeable for any shares of the capital stock
or
other securities of Parent;T
(iii)T
Contract under which Parent is or may become obligated to sell or
otherwise issue any shares of its capital stock or any other securities;
orT
(iv)T
to
the knowledge of Parent, condition or circumstance that may give
rise to
or provide a basis for the assertion of a claim by any Person to
the
effect that such Person is entitled to acquire or receive any shares
of
capital stock or other securities of
Parent.
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1.41 SEC
Filings; Financial Statements.
(a) |
Parent
has made available to the Company, by directing the Company to the
SEC’s
online EDGAR database, each report, registration statement and definitive
proxy statement filed by Parent with the SEC since January 1, 2002
(the
“Parent
SEC Documents”).
Since January 1, 2002, Parent has timely made all filings with the
SEC
required under the applicable requirements of the Securities Act
or the
Exchange Act. As of the time it was filed with the SEC (or, if amended
or
superseded by a filing prior to the date of this Agreement, then
on the
date of such filing): (i) each of the Parent SEC Documents complied
in all
material respects with the applicable requirements of the Securities
Act
or the Exchange Act (as the case may be); and (ii) none of the Parent
SEC
Documents contained any untrue statement of a material fact or omitted
to
state a material fact required to be stated therein or necessary
in order
to make the statements therein, in the light of the circumstances
under
which they were made, not
misleading.
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(b) |
The
consolidated financial statements contained in the Parent SEC Documents:
(i) complied as to form in all material respects with the published
rules
and regulations of the SEC applicable thereto; (ii) were prepared
in
accordance with United States generally accepted accounting principles
applied on a consistent basis throughout the periods covered, except
as
may be indicated in the notes to such financial statements and (in
the
case of unaudited statements) as permitted by Form 10-Q of the SEC,
and
except that unaudited financial statements may not contain footnotes
as
permitted by Form 10-Q and the Exchange Act, and are subject to year-end
audit adjustments; and (iii) are accurate and complete in all material
respects and present fairly the consolidated financial position of
Parent
and its subsidiaries as of the respective dates thereof and the
consolidated results of operations of Parent and its subsidiaries
for the
periods covered thereby.
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1.42 Authority;
Binding Nature of Agreement.
Parent
and Merger Sub have the absolute and unrestricted right, power and authority
to
perform their obligations under this Agreement; and the execution, delivery
and
performance by Parent and Merger Sub of this Agreement (including the
contemplated issuance of Parent Common Stock in the Merger in accordance with
this Agreement) have been duly authorized by all necessary action on the part
of
Parent and Merger Sub and their respective boards of directors. This Agreement
constitutes the legal, valid and binding obligation of Parent and Merger Sub,
enforceable against them in accordance with its terms, subject to (a) laws
of
general application relating to bankruptcy, insolvency and the relief of
debtors, and (b) rules of law governing specific performance, injunctive relief
and other equitable remedies.
1.43 Vote
Required.
The
only vote of Parent’s stockholders required to approve the issuance of Parent
Common Stock in the Merger (the “Required
Parent Stockholder Vote”)
is the
vote prescribed by Marketplace Rule 4310 of the National Association of
Securities Dealers (the “NASD”).
1.44 Non-Contravention;
Consents.
Neither
the execution and delivery of this Agreement by Parent and Merger Sub nor the
consummation by Merger Sub of the Merger will (a) contravene, conflict with
or
result in any breach of any provision of the certificate of incorporation or
bylaws of Parent or the articles of organization or operating agreement of
Merger Sub or of any resolution adopted by the stockholders, the board of
directors or any committee of the board of directors of Parent or the member
or
managing member of Merger Sub; (b) contravene, conflict with or result in a
violation of, or give any Governmental Body or other Person the right to
challenge the Merger or any of the other transactions contemplated by this
Agreement or to exercise any remedy or obtain any relief under any Legal
Requirement or any order, writ, injunction, judgment or decree to which Parent,
or any of the assets owned or used by Parent, is subject; (c) contravene,
conflict with or result in a violation or breach of, or result in a default
under, any provision of any material Contract to which Parent is a party, or
give any Person the right to declare a default or exercise any remedy under
any
such Contract to which Parent is a party; or (d) result in a violation by Parent
or Merger Sub of any order, writ, injunction, judgment or decree to which Parent
or Merger Sub is subject. Except as may be required by the Securities Act,
the
Exchange Act, state securities or “blue sky” laws, the CCC, the Delaware General
Corporation Law and the NASD Bylaws, Parent is not and will not be required
to
make any filing with or give any notice to, or to obtain any Consent from,
any
Person in connection with the execution, delivery or performance of this
Agreement by Parent or Merger Sub or the consummation by Merger Sub of the
Merger.
1.45 Legal
Proceedings; Orders.
(a) |
There
is no pending Legal Proceeding, and (to the knowledge of Parent)
no Person
has threatened to commence any Legal Proceeding: (i) that involves
Parent
or any of the assets owned or used by Parent; or (ii) that challenges,
or
that may have the effect of preventing, delaying, making illegal
or
otherwise interfering with, the Merger or any of the other transactions
contemplated by this Agreement. To the knowledge of Parent no event
has
occurred, and no claim, dispute or other condition or circumstance
exists,
that will or could reasonably be expected to, give rise to or serve
as a
basis for the commencement of any such Legal Proceeding.
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(b) |
There
is no material order, writ, injunction, judgment or decree to which
Parent, or any of the assets owned or used by Parent, is subject.
To the
knowledge of Parent, no officer or key employee of Parent is subject
to
any order, writ, injunction, judgment or decree that prohibits such
officer or other employee from engaging in or continuing any conduct,
activity or practice relating to the business of
Parent.
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1.46 Valid
Issuance.
Subject
to Section 1.5(c), the Parent Common Stock to be issued in the Merger will,
when
issued in accordance with the provisions of this Agreement, be validly issued,
fully paid and nonassessable.
1.47 Offering
Valid.
Assuming the accuracy of the representations and warranties of the shareholders
set forth in Section 2 of the Shareholder Agreement and the information provided
in the investor questionnaires provided by such shareholders to Parent, and
the
Company’s compliance with its covenants set forth in Sections 4.3 and 5.3, the
offer, sale and issuance of the Parent Common Stock will be exempt from the
registration requirements of the Securities Act, and will have been registered
or qualified (or are exempt from registration and qualification) under the
registration, permit or qualification requirements of all applicable state
securities laws.
1.48 Brokers.
No
broker, investment banker, financial advisor or other person, other than
Houlihan, Lokey, Howard & Zukin, the fees and expenses of which will be paid
by Parent, is entitled to any broker’s, finder’s, financial advisor’s or other
similar fee or commission in connection with the transactions contemplated
hereby based upon arrangements made by or on behalf of Parent or Merger Sub.
Certain
Covenants of the Company and the Signing Shareholders
1.49 Access
and Investigation.
During
the period from the date of this Agreement through the Effective Time (the
“Pre-Closing
Period”),
the
Company shall, and shall cause its Representatives to: (a) provide Parent and
Parent’s Representatives with reasonable access to the Company’s
Representatives, personnel and assets and to all existing books, records, Tax
Returns, work papers and other documents and information relating to the
Company; and (b) provide Parent and Parent’s Representatives with copies of such
existing books, records, Tax Returns, work papers and other documents and
information relating to the Company, and with such additional financial,
operating and other data and information regarding the Company, as Parent may
reasonably request.
1.50 Operation
of the Company’s Business.
During
the Pre-Closing Period:
(a) |
the
Company shall conduct its business and operations in the ordinary
course
and in substantially the same manner as such business and operations
have
been conducted prior to the date of this
Agreement;
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(b) |
the
Company shall use reasonable efforts to preserve intact its current
business organization, keep available the services of its current
officers
and employees and maintain its relations and good will with all suppliers,
customers, landlords, creditors, employees and other Persons having
business relationships with the
Company;
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(c) |
the
Company shall keep in full force all insurance policies identified
in
Part 2.17 of the Disclosure
Schedule;
|
(d) |
the
Company shall cause its officers to report regularly (but in no event
less
frequently than weekly) to Parent concerning the status of the Company’s
business;
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(e) |
the
Company shall not declare, accrue, set aside or pay any dividend
or make
any other distribution in respect of any shares of capital stock,
and
shall not repurchase, redeem or otherwise reacquire any shares of
capital
stock or other securities (except that the Company may repurchase
Company
Common Stock from former employees pursuant to the terms of existing
restricted stock purchase
agreements);
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(f) |
the
Company shall not sell, issue or authorize the issuance of (i) any
capital
stock or other security, (ii) any option or right to acquire any
capital
stock or other security, or (iii) any instrument convertible into
or
exchangeable for any capital stock or other security (except that
the
Company shall be permitted to issue Company Common Stock to employees
upon
the exercise of outstanding Company
Options;
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(g) |
the
Company shall not amend or waive any of its rights under, or permit
the
acceleration of vesting under, (i) any provision of its 2005
Stock
Plan, (ii) any provision of any agreement evidencing any outstanding
Company Option, or (iii) any provision of any restricted stock
purchase agreement;
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(h) |
neither
the Company nor any of the Signing Shareholders shall amend or permit
the
adoption of any amendment to the Company’s articles of incorporation or
bylaws, or effect or permit the Company to become a party to any
Acquisition Transaction, recapitalization, reclassification of shares,
stock split, reverse stock split or similar
transaction;
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(i) |
the
Company shall not form any subsidiary or acquire any equity interest
or
other interest in any other Entity;
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(j) |
the
Company shall not make any capital expenditure, except for capital
expenditures that, when added to all other capital expenditures made
on
behalf of the Company during the Pre-Closing Period, do not exceed
$5,000
per month;
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(k) |
the
Company shall not (i) enter into, or permit any of the assets owned
or
used by it to become bound by, any Contract that is or would constitute
a
Material Contract, or (ii) amend or prematurely terminate, or waive
any
material right or remedy under, any such
Contract;
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(l) |
the
Company shall not (i) acquire, lease or license any right or other
asset
from any other Person, (ii) sell or otherwise dispose of, or lease
or
license, any right or other asset to any other Person, or (iii) waive
or
relinquish any right, except for assets acquired, leased, licensed
or
disposed of by the Company pursuant to Contracts that are not Material
Contracts;
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(m) |
the
Company shall not (i) lend money to any Person (except that the Company
may make routine travel advances to employees in the ordinary course
of
business), or (ii) incur or guarantee any indebtedness for borrowed
money;
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(n) |
the
Company shall not (i) establish, adopt or amend any Employee Benefit
Plan,
(ii) pay any bonus or make any profit-sharing payment, cash incentive
payment or similar payment to, or increase the amount of the wages,
salary, commissions, fringe benefits or other compensation or remuneration
payable to, any of its directors, officers or employees, or (iii)
hire any
new employee;
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(o) |
the
Company shall not change any of its methods of accounting or accounting
practices in any material respect;
|
(p) |
the
Company shall not make any Tax
election;
|
(q) |
the
Company shall not commence or settle any material Legal
Proceeding;
|
(r) |
after
any extension of Funds pursuant to Section 5.14, the Company shall
not
make any payment to any third party without the prior consent of
Parent
(which will not be unreasonably withheld);
and
|
(s) |
the
Company shall not agree or commit to take any of the actions described
in
clauses ”(e)” through “(r)”
above.
|
Notwithstanding
the foregoing, the Company may take any action described in clauses “(e)”
through “(r)” above if Parent gives its prior written consent to the taking of
such action by the Company, which consent will not be unreasonably withheld
(it
being understood that Parent’s withholding of consent to any action will not be
deemed unreasonable if Parent determines in good faith that the taking of such
action would not be in the best interests of Parent or would not be in the
best
interests of the Company).
1.51 Company
Shareholders’ Vote.
(a) |
Within
10 days after the date hereof, the Company shall prepare and distribute
a
notice to its shareholders containing the information required by
Section
1300 et seq. of the CCC. As promptly as practicable after the execution
of
this Agreement, the Company shall prepare and distribute an information
statement that describes the material terms of this Agreement and
the
transactions contemplated hereby (the “Information
Statement”)
to each shareholder of the Company who is entitled to vote (or provide
a
written consent) with respect to the Merger, this Agreement and the
transactions contemplated by this Agreement. The Information Statement
shall meet the requirements of Rule 502(b)(2)(ii) under the Securities
Act
of 1933, and the Company shall provide it to its shareholders in
accordance in accordance with Rule 502(b)(1) under the Securities
Act. The
Company shall provide Parent a reasonable opportunity to review and
comment on the proposed form of Information Statement prior to its
distribution to the Company’s shareholders. The Information Statement
shall contain copies of Parent’s (a) Annual Report on Form 10-K for the
fiscal year ended October 31, 2004 (the “Form
10-K”),
Definitive Proxy Statement on Schedule 14A filed on February 10,
2005,
Current Report on Form 8-K filed on February 23, 2005, and Quarterly
Report on Form 10-Q for the quarter ended January 31, 2005 (the
“Form
10-Q”),
each as filed with the SEC. The information supplied by the Company
for
inclusion in the Information Statement shall not, as of the date
of the
Information Statement, (i) contain any statement that is inaccurate
or
misleading with respect to any material fact, in light of the
circumstances in which made, or (ii) omit to state any material fact
necessary in order to make such information (in the light of the
circumstances under which it is provided) not false or
misleading.
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(b) |
Parent
and Merger Sub shall promptly furnish to the Company all information
concerning Parent and Merger Sub that may be required or reasonably
requested in connection with any action contemplated by this Section
4.3.
The
information supplied by Parent and Merger Sub for inclusion or
incorporation by reference in, or which may be deemed to be incorporated
by reference in, the Information Statement shall not, as of the date
of
the Information Statement, (i) contain any statement that is inaccurate
or
misleading with respect to any material fact, in light of the
circumstances in which made, or (ii) omit to state any material fact
necessary in order to make such information (in light of the circumstances
under which it is provided) not false or misleading. If at any time
subsequent to the date of the Information Statement any event with
respect
to Parent or Merger Sub, or with respect to any information supplied
by
Parent or Merger Sub for inclusion in the Information Statement,
shall
occur which is required to be described in an amendment of, or a
supplement to, such document in order for such document not to be
false or
misleading, Parent or Merger Sub shall so describe the event in writing
to
the Company.
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1.52 No
Negotiation.
During
the Pre-Closing Period, or until the termination of this Agreement if prior
to
the end of the Pre-Closing Period, neither the Company nor any of the Signing
Shareholders shall, directly or indirectly:
(a) |
solicit
or encourage the initiation of any inquiry, proposal or offer from
any
Person (other than Parent) relating to a possible Acquisition
Transaction;
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(b) |
participate
in any discussions or negotiations or enter into any agreement with,
or
provide any non-public information to, any Person (other than Parent)
relating to or in connection with a possible Acquisition Transaction;
or
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(c) |
consider,
entertain or accept any proposal or offer from any Person (other
than
Parent) relating to a possible Acquisition
Transaction.
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The
Company shall promptly notify Parent in writing of any material inquiry,
proposal or offer relating to a possible Acquisition Transaction that is
received by the Company or any of the Signing Shareholders during the
Pre-Closing Period.
Additional
Covenants of the Parties
1.53 Filings
and Consents.
As
promptly as practicable after the execution of this Agreement, each party to
this Agreement (a) shall make all filings (if any) and give all notices (if
any)
required to be made and given by such party in connection with the Merger and
the other transactions contemplated by this Agreement, and (b) shall use all
commercially reasonable efforts to obtain all Consents (if any) required to
be
obtained (pursuant to any applicable Legal Requirement or Contract, or
otherwise) by such party in connection with the Merger and the other
transactions contemplated by this Agreement. Each party shall (upon reasonable
request) promptly deliver to the other party a copy of each such filing made,
each such notice given and each such Consent obtained during the Pre-Closing
Period.
1.54 SEC
Filings.
(a) |
As
promptly as practicable after the date of this Agreement, Parent
shall
prepare and cause to be filed with the SEC a proxy statement with
respect
to the transactions contemplated hereby (the “Proxy
Statement”). Parent
shall use its best efforts to cause the Proxy Statement to comply
with the
rules and regulations promulgated by the SEC and to respond promptly
to
any comments of the SEC or its staff. Parent will use its best efforts
to
cause the Proxy Statement to be mailed to Parent’s stockholders. The
Company shall promptly furnish to Parent all information concerning
the
Company and the Company’s shareholders that may be required or reasonably
requested in connection with any action contemplated by this Section
5.2.
If any event relating to the Company occurs, or if the Company becomes
aware of any information, that should be disclosed in an amendment
to the
Proxy Statement, then the Company shall promptly inform Parent thereof
and
shall cooperate with Parent in filing such amendment or supplement
with
the SEC.
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(b) |
Within
90 days after the Effective Time, Parent shall have prepared and
filed
with the SEC a registration statement on Form S-8 with respect to
the
Company Options assumed by Parent at the Effective Time.
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1.55 Securities
Compliance; Blue Sky.
Parent
and the Company shall take such action as Parent shall reasonably determine
to
be necessary in order for the issuance of the Parent Common Stock in connection
with the Merger under Rule 506 under the Securities Act and applicable state
securities or “Blue Sky” laws; provided,
however,
that
Parent shall not for any such purpose be required to qualify to transact
business as a foreign corporation in any jurisdiction where it is not so
qualified or to consent to general service of process in any such jurisdiction.
To that end, without limitation, (a) the Company shall cause each shareholder
that Parent determines is not an “accredited investor” and is not
“sophisticated” within the meaning of Rule 506 under the Securities Act to
appoint a “purchaser representative” in accordance with Rule 501(h) under the
Securities Act and (b) the Company shall cause such purchaser representative
to
make such disclosures as may be required under Rule 501(h) under the Securities
Act.
1.56 Public
Announcements.
During
the Pre-Closing Period, (a) neither the Company nor any of the Signing
Shareholders shall (and the Company shall not permit any of its Representatives
to) issue any press release or make any public statement regarding this
Agreement or the Merger, or regarding any of the other transactions contemplated
by this Agreement, without Parent’s prior written consent, and (b) Parent
will use reasonable efforts to consult with the Company prior to issuing any
press release or making any public statement regarding the Merger.
1.57 Affiliate
Agreements.
Each
Signing Shareholder shall execute and deliver to Parent, and the Company shall
use all commercially reasonable efforts to cause Andre Hedrick and Greg Yamamoto
(and any other Person that could reasonably be deemed to be an “affiliate” of
the Company for purposes of the Securities Act), to execute and deliver to
Parent, as promptly as practicable after the execution of this Agreement, an
Affiliate Agreement in the form of Exhibit
C.
1.58 Best
Efforts.
During
the Pre-Closing Period, (a) the Company and the Signing Shareholders shall
use
their best efforts to cause the conditions set forth in Section 6 to be
satisfied on a timely basis, and (b) Parent and Merger Sub shall use their
best
efforts to cause the conditions set forth in Section 7 to be satisfied on a
timely basis.
1.59 Noncompetition
Agreements.
At or
prior to the Closing, each of the employee-shareholders of the Company as of
the
Closing Date shall execute and deliver to the Company and Parent a
Noncompetition Agreement in the form of Exhibit
D.
1.60 Tax
Matters.
(a) |
At
the Closing, the Company shall deliver to (a) Parent a statement
in the
form agreed upon by Parent and the Company prior to the execution
hereof
and (b) the IRS the notification required under Section 1.897 - 2(h)(2)
of
the United States Treasury
Regulations.
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(b) |
Parent,
the Company and the Signing Shareholders agree to report the Merger
as a
reorganization within the meaning of Section 368(a) of the Code for
all
tax purposes. Parent shall not take any action, or fail to take any
action, and will cause the Company and the Surviving Entity after
the
Closing, not to take any action or fail to take any action, that
could
cause the Merger to fail to qualify as a reorganization within the
meaning
of Section 368(a) of the Code. Parent is the sole member of Merger
Sub and
after the Merger will remain the sole member of the Surviving Entity,
and
neither the Parent nor the Surviving Entity will make an election
to treat
the Surviving Entity, or take any action that may cause the Surviving
Entity to be treated, as an association or otherwise as an entity
separate
from Parent for federal income tax purposes, if such action could
cause
the Merger to fail to qualify as a reorganization within the meaning
of
Section 368(a) of the Code.
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1.61 Release.
At the
Closing, each of the shareholders and optionholders of the Company shall execute
and deliver to the Company a Release in the form of Exhibit
E.
1.62 Notification;
Updates to Disclosure Schedule.
(a) |
During
the Pre-Closing Period, the Company shall promptly notify Parent
in
writing of:
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(i) |
the
discovery by the Company of any event, condition, fact or circumstance
that occurred or existed on or prior to the date of this Agreement
and
that could cause or constitute an inaccuracy in or breach of any
representation or warranty made by the Company or any of the Signing
Shareholders in this Agreement;
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(ii) |
any
material breach of any covenant or obligation of the Company or any
of the
Signing Shareholders; and
|
(iii) |
any
event, condition, fact or circumstance that would make the timely
satisfaction of any of the conditions set forth in Section 6
or
Section 7 impossible or
unlikely.
|
(b) |
During
the Pre-Closing Period, Parent shall promptly notify the Company
in
writing of:
|
(i) |
the
discovery by Parent of any event, condition, fact or circumstance
that
occurred or existed on or prior to the date of this Agreement and
that
could cause or constitute an inaccuracy in or breach of any representation
or warranty made by Parent or Merger Sub in this
Agreement;
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(ii) |
any
material breach of any covenant or obligation of Parent or Merger
Sub;
and
|
(iii) |
any
event, condition, fact or circumstance that would make the timely
satisfaction of any of the conditions set forth in Section 6
or
Section 7 impossible or
unlikely.
|
(c) |
If
any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 5.10(a) requires any change in the
Disclosure Schedule, or if any such event, condition, fact or circumstance
would require such a change assuming the Disclosure Schedule were
dated as
of the date of the occurrence, existence or discovery of such event,
condition, fact or circumstance, then the Company shall promptly
deliver
to Parent an update to the Disclosure Schedule specifying such change.
No
such update shall be deemed to supplement or amend the Disclosure
Schedule
for the purpose of (i) determining the accuracy of any of
the
representations and warranties made by the Company or the Signing
Shareholders in this Agreement, or (ii) determining whether
any of
the conditions set forth in Section 6 or Section 7 has been
satisfied.
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(d) |
If
any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 5.10(b) requires a Parent Disclosure
Schedule or the filing by Parent of a report on Form 8-K, no such
schedule
or report on Form 8-K filed by Parent after the date hereof shall
be
deemed to supplement or amend the representations and warranties
made by
Parent in this Agreement for the purpose of (i) determining
the
accuracy of any of the representations and warranties made by Parent
in
this Agreement, or (ii) determining whether any of the conditions
set
forth in Section 6 or Section 7 has been
satisfied.
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1.63
Employee Matters.
(a) |
On
or before the Effective Time, Parent shall deliver written offer
letters
(providing for “at will” employment with Parent and salary, benefits and
bonus no less favorable than that provided to similarly situated
employees
of Parent) to Andre Hedrick, Greg Yamamoto, Nick Bellinger, Leo Fang
and
Chris Short to become employees of Parent (the individuals who accept
such
employment shall be referred to as “Affected
Employees”).
The Affected Employees shall be subject to and employed in compliance
with
Parent’s applicable human resources policies and procedures.
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(b) |
Following
the Effective Time, Parent shall, or shall cause its affiliates to,
recognize each Affected Employee’s service with the Company or any of its
subsidiaries prior to the Effective Time (or such later transition
date)
as service with Parent and its affiliates in connection with any
tax-qualified pension plan and welfare benefit plan (including paid
time
off, vacations and holidays) maintained by Parent or any of its affiliates
in which such Affected Employee participates and which is made available
following the Effective Time by Parent or any of its affiliates for
purposes of any waiting period, vesting, eligibility and benefit
entitlement (but excluding benefit accruals under any defined benefit
pension plan). Parent shall, or shall cause its affiliates to, waive
any
pre-existing condition exclusions, evidence of insurability provisions,
waiting period requirements or any similar provision under any of
the
welfare plans (as defined in Section 3(1) of ERISA) maintained by
Parent
or any of its affiliates in which Affected Employees participate
following
the Effective Time.
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1.64
Indemnification.
(a) |
Parent,
the Company, the Signing Stockholders and the Surviving Entity agree
that
all rights to indemnification or exculpation now existing in favor
of the
directors and officers of the Company provided in the Company’s articles
of incorporation and bylaws as in effect immediately prior to the
Effective Time shall continue in full force and effect for a period
of six
years after the Effective Time.
|
(b) |
After
the Effective Time, the Surviving Entity shall, to the fullest extent
permitted under applicable law, indemnify and hold harmless, those
persons
who are currently covered by the indemnification provisions in the
Company’s articles of incorporation and bylaws (such persons,
“Tail
Indemnitees”)
against all costs and expenses (including attorneys’ fees), judgments,
fines, losses, claims, damages, liabilities and settlement amounts
paid in
connection with any claim, action, suit, proceeding or investigation
(whether arising before or after the Effective Time), whether civil,
criminal, administrative or investigative, arising out of or pertaining
to
any action or omission in their capacity as an officer, director,
employee, fiduciary or agent, whether occurring before or after the
Effective Time, for a period of six years after the date hereof to
the
same extent as provided in the articles of incorporation and bylaws
of the
Company. In the event of any such claim, action, suit, proceeding
or
investigation, (i) the Surviving Entity shall pay the reasonable
fees and
expenses of counsel selected by the Tail Indemnitees, which counsel
shall
be reasonably satisfactory to the Surviving Entity, promptly after
statements therefor are received and (ii) the Surviving Entity shall
cooperate in the defense of any such matter; provided, however, that
the
Surviving Entity shall not be liable for any settlement effected
without
its written consent (which consent shall not be unreasonably withheld
or
delayed); and provided, further, that the Surviving Entity shall
not be
obligated pursuant to this Section 5.12 to pay the fees and expenses
of
more than one counsel for all Tail Indemnitees in any single action
except
to the extent that two or more of such Tail Indemnitees shall have
conflicting interests in the outcome of such action; and provided,
further, that, in the event that any claim for indemnification is
asserted
or made within such six year period, all rights to indemnification
in
respect of such claim shall continue until the disposition of such
claim.
|
(c) |
If
the Surviving Entity or any of its successors or assigns (i) consolidates
with or merges into any other person and shall not be the continuing
or
surviving corporation or entity of such consolidation or merger or
(ii)
transfers all or substantially all of its properties and assets to
any
person, then, and in each such case, proper provision shall be made
so
that the successors and assigns of the Surviving Entity, as the case
may
be, or at Parent’s option, Parent, shall assume the obligations set forth
in this Section 5.12.
|
(d) |
Parent
shall cause the Surviving Entity to perform all of the obligations
of the
Surviving Entity under this Section
5.12.
|
1.65 SEC
Filings.
With a
view to making available the benefits of certain rules and regulations of the
SEC which may permit the sale of the Parent Common Stock by the Company
shareholders to the public without registration, Parent will use all
commercially reasonable efforts to:
(a) |
make
and keep public information available, as those terms are understood
and
defined in Rule 144 under the Securities
Act;
|
(b) |
file
with the SEC in a timely manner all reports and other documents required
of the Parent under the Securities Act and the Exchange Act;
and
|
(c) |
furnish
to each Company shareholder promptly upon request a written statement
by
the Parent as to its compliance with the reporting requirements of
such
Rule 144 and of the Securities Act and the Exchange Act and
such
other reports and documents so filed by the Parent as such Company
shareholders may reasonably request in availing themselves of any
rule or
regulation of the SEC allowing such shareholders to sell any Parent
Common
Stock without registration.
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1.66 Extension
of Funds.
If the
Closing shall not have occurred on or prior to May 15, 2005, Parent shall
extend, on the 15th day of each month commencing on May 15, 2005 and continuing
until the earlier of the Closing or the termination of this Agreement, a loan
in
the amount of $50,000. Such loan, notwithstanding anything to the contrary
in
this Agreement or the Disclosure Schedule shall not be the obligation or
responsibility of the Shareholders, and shall in no circumstances be secured
by
any source code of the Company. Merger Sub and Parent on behalf of itself,
the
Surviving Entity and all other Parent Indemnitees, hereby covenants and agrees
that Merger Sub, Parent, the Surviving Entity and all other Parent Indemnitees
shall not make a claim for any such loan amounts against the Shareholders under
the indemnification or other provisions of this Agreement or
otherwise.
1.67 Dilution.
During
the Pre-Closing Period, Parent shall not grant any options, subscription rights,
calls, warrants or other rights to acquire any shares of the capital stock
or
other securities of Parent to any new or existing employee, officer or director
without first notifying the Chief Executive Officer of the Company and giving
him reasonable opportunity to consult with Parent regarding any such
grant.
Conditions
Precedent to Obligations of Parent and Merger Sub
The
obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following
conditions:
1.68 Accuracy
of Representations.
Each of
the representations and warranties made by the Company and the Signing
Shareholders in this Agreement and in each of the other agreements and
instruments delivered to Parent in connection with the transactions contemplated
by this Agreement (without giving effect to any “Material Adverse Effect” or
other materiality qualifications, or any similar qualifications, contained
or
incorporated directly or indirectly in such representations and warranties),
shall be accurate in all respects when made and as of the Scheduled Closing
Time
as if made at the Scheduled Closing Time (except to the extent such
representations and warranties speak as of a specified date other than the
date
made or the Scheduled Closing Time, and without giving effect to any update
to
the Disclosure Schedule), except where the failure of such representations
and
warranties to be true and correct (individually or in the aggregate) would
not
have a Material Adverse Effect on the Company.
1.69 Performance
of Covenants.
All of
the covenants and obligations that the Company and the Signing Shareholders
are
required to comply with or to perform at or prior to the Closing shall have
been
complied with and performed in all material respects.
1.70 Dissenters’
Rights.
At the
Scheduled Closing Date, no more than 5% of the Company Common Stock outstanding
as of the Effective Time shall be eligible to be “dissenting shares” within the
meaning of Section 1300(b) of the CCC and the Company shall have delivered
proper notice to the holders of such “dissenting shares” as required by the
CCC.
1.71 Shareholder
Approval.
The
issuance of Parent Common Stock in the Merger shall have been duly approved
by
the Required Parent Stockholder Vote.
1.72 Consents.
All
Consents required to be obtained in connection with the Merger and the other
transactions contemplated by this Agreement (including the Consents identified
in Part 2.21 of the Disclosure Schedule) shall have been obtained and shall
be
in full force and effect.
1.73 Agreements
and Documents.
Parent
and the Company shall have received the following agreements and documents,
each
of which shall be in full force and effect:
(a) |
Affiliate
Agreements in the form of Exhibit
C,
executed by Andre Hedrick and Greg Yamamoto and by any other Person
who
could reasonably be deemed to be an “affiliate” of the Company for
purposes of the Securities Act;
|
(b) |
Noncompetition
Agreements in the form of Exhibit
D,
executed by each of the employee-shareholders of the Company as of
the
Closing Date;
|
(c) |
The
Escrow Agreement in the form of Exhibit
F,
executed by the Shareholders’ Agent (as defined in Section 2 of the
Shareholder Agreement) and the Escrow
Agent;
|
(d) |
The
Shareholder Agreement in the form of Exhibit
G,
executed by Parent and each shareholder of the Company (the “Shareholder
Agreement”);
|
(e) |
a
Release in the form of Exhibit
E,
executed by the Signing Shareholders and of the other shareholders
of the
Company;
|
(f) |
confidential
invention and assignment agreements, reasonably satisfactory in form
and
content to Parent, executed by each of the current employees of the
Company;
|
(g) |
a
certificate executed on behalf of the Company by its President, certified
as to the President’s title by its Secretary, certifying that each of the
representations and warranties set forth in Section 2 is accurate
in all
respects as of the Closing Date as if made on the Closing Date and
certifying that the conditions set forth in Sections 6.1, 6.2, 6.3,
6.5,
6.8, 6.10, 6.11 and 6.12 have been duly satisfied (the “Company
Closing Certificate”);
|
(h) |
a
legal opinion of Orrick, Herrington & Sutcliffe LLP, dated as of the
Closing Date, containing the opinions delivered to Parent prior to
the
date hereof;
|
(i) |
written
resignations of all directors of the Company, effective as of the
Effective Time; and
|
(j) |
offer
letters for employment with Parent, effective as of the Effective
Time,
executed by each of the Signing
Shareholders.
|
1.74 Questionnaires.
Parent,
or its counsel, shall have received a Selling Stockholder Questionnaire and
an
Investor Questionnaire from each of the shareholders of the
Company.
1.75 FIRPTA
Compliance.
The
Company shall have filed with the IRS the notification referred to in Section
5.8(a).
1.76 Financing.
Parent
shall have entered into a binding financing agreement or agreements pursuant
to
which Parent shall be entitled to receive at least $5,000,000 in aggregate
gross
proceeds (the “Parent
Financing Agreement”)
in
connection with or immediately following the Closing (performance of which
agreement is subject only to the condition that the Closing shall have
occurred).
1.77 No
Restraints.
No
temporary restraining order, preliminary or permanent injunction or other order
preventing the consummation of the Merger shall have been issued by any court
of
competent jurisdiction and remain in effect, and there shall not be any Legal
Requirement enacted or deemed applicable to the Merger that makes consummation
of the Merger illegal.
1.78 No
Legal Proceedings.
No
Person shall have commenced or threatened to commence any Legal Proceeding
challenging or seeking the recovery of a material amount of damages in
connection with the Merger or seeking to prohibit or limit the exercise by
Parent of any material right pertaining to its ownership of stock of the
Surviving Entity.
1.79 No
Material Adverse Effect.
There
shall have been no Material Adverse Effect on the Company, and no event shall
have occurred or circumstances exist that, in combination with any other events
or circumstances, could reasonably be expected to have or result in a Material
Adverse Effect on the Company.
1.80 Amendment
of Pelco Agreement.
The
Company shall have amended its existing agreement with Pelco in form and
substance reasonably acceptable to Parent.
1.81 Audited
Financial Statements.
Parent
shall have received a complete copy of the audited financial statements of
the
Company described in Section 2.4(a)(i) of this Agreement, including the notes
thereto and the unqualified report and opinion of BDO Seidman, LLP relating
thereto.
Conditions
Precedent to Obligations of the Company
The
obligations of the Company to effect the Merger and otherwise consummate the
transactions contemplated by this Agreement are subject to the satisfaction,
at
or prior to the Closing, of the following conditions:
1.82 Accuracy
of Representations.
Each of
the representations and warranties made by Parent and Merger Sub in this
Agreement and in each of the other agreements and instruments delivered to
Parent in connection with the transactions contemplated by this Agreement
(without giving effect to any “Material Adverse Effect” or other materiality
qualifications, or any similar qualifications, contained or incorporated
directly or indirectly in such representations and warranties), shall be
accurate in all respects when made and as of the Scheduled Closing Time as
if
made at the Scheduled Closing Time (except to the extent such representations
and warranties speak as of a specified date other than the date made or the
Scheduled Closing Time, and without giving effect to any update to the
Disclosure Schedule), except where the failure of such representations and
warranties to be true and correct (individually or in the aggregate) would
not
have a Material Adverse Effect on Parent and its subsidiaries taken as a whole.
1.83 Performance
of Covenants.
All of
the covenants and obligations that Parent and Merger Sub are required to comply
with or to perform at or prior to the Closing shall have been complied with
and
performed in all material respects.
1.84 Shareholder
Approval.
The
issuance of Parent Common Stock in the Merger shall have been duly approved
by
the Required Parent Stockholder Vote.
1.85 Agreements
and Documents.
Parent
and the Company shall have received the following agreements and documents,
each
of which shall be in full force and effect:
(a) |
a
certificate executed on behalf of Parent by its President and its
Secretary certifying that each of the representations and warranties
set
forth in Section 3 is accurate in all respects as of the Closing
Date as
if made on the Closing Date and that the conditions set forth in
Sections
7.1, 7.2, 7.3, 7.5, 7.6, 7.7 and 7.8 have been duly satisfied (the
“Parent
Closing Certificate”);
and
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(b) |
a
written notice in the name of each holder of an assumed Company Option
setting forth (i) the number of shares of Parent Common Stock subject
to
such assumed Company Option, and (ii) the exercise price per share
of
Parent Common Stock issuable upon exercise of such assumed Company
Option;
|
(c) |
the
Escrow Agreement, executed by Parent and the Escrow
Agent;
|
(d) |
the
Shareholder Agreement, executed by
Parent;
|
(e) |
certificates
representing the Applicable Fraction of shares of Parent Common Stock
in
the names of each the Signing Shareholders with respect to the shares
to
be delivered to the Signing Shareholders in connection with the Closing
and the shares to be delivered to the Escrow Agent in accordance
with
Section 1.10; and
|
(f) |
offer
letters for employment with Parent to Andre Hedrick, Greg Yamamoto,
Nick
Bellinger, Leo Fang and Chris Short, effective as of the Effective
Time,
executed by Parent and in accordance with the terms and conditions
of
Section 5.11(a).
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1.86 Financing.
Parent
shall have entered into the Parent Financing Agreement, and shall have provided
an executed copy of the Parent Financing Agreement (and all exhibits thereto)
to
the Company.
1.87 No
Legal Proceedings.
No
Person shall have commenced or threatened to commence any Legal Proceeding
challenging or seeking the recovery of a material amount of damages in
connection with the Merger or seeking to prohibit or limit the exercise by
the
Signing Shareholders of any material right pertaining to their ownership of
stock of Parent.
1.88 No
Material Adverse Effect.
There
shall have been no Material Adverse Effect on Parent, and no event shall have
occurred or circumstances exist that, in combination with any other events
or
circumstances, could reasonably be expected to have or result in a Material
Adverse Effect on Parent.
1.89 No
Restraints.
No
temporary restraining order, preliminary or permanent injunction or other order
preventing the consummation of the Merger shall have been issued by any court
of
competent jurisdiction and remain in effect, and there shall not be any Legal
Requirement enacted or deemed applicable to the Merger that makes consummation
of the Merger illegal.
Termination
1.90 Termination
Events.
This
Agreement may be terminated prior to the Closing:
(a) |
by
Parent if Parent reasonably determines that the timely satisfaction
of any
condition set forth in Section 6 has become impossible (other
than as
a result of any failure on the part of Parent or Merger Sub to comply
with
or perform any covenant or obligation of Parent or Merger Sub set
forth in
this Agreement or in any other agreement or instrument delivered
to the
Company);
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(b) |
by
the Company if the Company reasonably determines that the timely
satisfaction of any condition set forth in Section 7 has become
impossible (other than as a result of any failure on the part of
the
Company or any of the Signing Shareholders to comply with or perform
any
covenant or obligation set forth in this Agreement or in any other
agreement or instrument delivered to
Parent);
|
(c) |
by
Parent at or after the Scheduled Closing Time if any condition set
forth
in Section 6 has not been satisfied by the Scheduled Closing
Time;
|
(d) |
by
the Company at or after the Scheduled Closing Time if any condition
set
forth in Section 7 has not been satisfied by the Scheduled Closing
Time;
|
(e) |
by
Parent if the Closing has not taken place on or before July 31, 2005
(other than as a result of any failure on the part of Parent to comply
with or perform any covenant or obligation of Parent set forth in
this
Agreement or in any other agreement or instrument delivered to the
Company);
|
(f) |
by
the Company if the Closing has not taken place on or before July
31, 2005
(other than as a result of the failure on the part of the Company
or any
of the Signing Shareholders to comply with or perform any covenant
or
obligation set forth in this Agreement or in any other agreement
or
instrument delivered to Parent); or
|
(g) |
by
the mutual consent of Parent and the
Company.
|
1.91 Termination
Procedures.
If
Parent wishes to terminate this Agreement pursuant to Section 8.1(a),
Section 8.1(c) or Section 8.1(e), Parent shall deliver to the Company
a
written notice stating that Parent is terminating this Agreement and setting
forth a brief description of the basis on which Parent is terminating this
Agreement. If the Company wishes to terminate this Agreement pursuant to
Section 8.1(b), Section 8.1(d) or Section 8.1(f), the Company
shall
deliver to Parent a written notice stating that the Company is terminating
this
Agreement and setting forth a brief description of the basis on which the
Company is terminating this Agreement.
1.92 Effect
of Termination.
If this
Agreement is terminated pursuant to Section 8.1, all further obligations
of
the parties under this Agreement shall terminate; provided,
however,
that:T
(a)T
neither
the Company nor Parent shall be relieved of any obligation or liability arising
from any prior breach by such party of any provision of this
Agreement;T
(b)T
the
parties shall, in all events, remain bound by and continue to be subject to
the
provisions set forth in Section 10; andT
(c)T
the
Company shall, in all events, remain bound by and continue to be subject to
Section 5.4.
Indemnification,
Etc.
1.93 Survival
of Representations, Etc.
(a) |
The
representations and warranties made by the Company and the Signing
Shareholders in Section 2 (other than Sections 2.3 and 2.19) and
in the
Company Closing Certificate shall survive the Closing and shall expire
on
the first anniversary of the Closing Date, the representations and
warranties made by the Company and the Signing Shareholders in Section
2.3
shall survive the Closing and shall expire on the fifth anniversary
of the
Closing Date and the representations and warranties made by the Company
and the Signing Shareholders in Section 2.19 shall survive the Closing
and
shall expire on the third anniversary of the Closing Date; provided,
however, that
if, at any time prior to the first, third or fifth anniversary of
the
Closing Date, as applicable, any Parent Indemnitee (acting in good
faith)
delivers to the Shareholders’ Agent a written notice alleging the
existence of an inaccuracy in or a breach of any of such representations
and warranties (and setting forth in reasonable detail the basis
for such
Parent Indemnitee’s belief that such an inaccuracy or breach may exist)
and asserting a claim for recovery under Section 9.2 based on such
alleged
inaccuracy or breach, then the claim asserted in such notice shall
survive
such anniversary of the Closing until such time as such claim is
fully and
finally resolved.
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(b) |
All
representations and warranties made by Parent and Merger Sub in Section
3
shall survive the Closing and shall expire on the first anniversary
of the
Closing Date; provided,
however, that
if, at any time prior to the first anniversary of the Closing Date,
any
Shareholder Indemnitee (acting in good faith) delivers to Parent
a written
notice alleging the existence of an inaccuracy in or a breach of
any of
such representations and warranties (and setting forth in reasonable
detail the basis for such Shareholder Indemnitee’s belief that such an
inaccuracy or breach may exist) and asserting a claim for recovery
under
Section 9.2 based on such alleged inaccuracy or breach, then the
claim
asserted in such notice shall survive the first anniversary of the
Closing
until such time as such claim is fully and finally
resolved.
|
(c) |
The
representations, warranties, covenants and obligations of the Company
and
the Signing Shareholders, on the one hand, and Parent and Merger
Sub on
the other, and the rights and remedies that may be exercised by the
applicable Indemnitees, shall not be limited or otherwise affected
by or
as a result of any information furnished to, or any investigation
made by
or knowledge of, any of the applicable Indemnitees or any of their
Representatives.
|
(d) |
For
purposes of this Agreement, each statement or other item of information
set forth in the Disclosure Schedule or in any update to the Disclosure
Schedule shall be deemed to be a representation and warranty made
by the
Company and the Selling Shareholders in this
Agreement.
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1.94 Indemnification
by Signing Shareholders and by Parent.
(a) |
From
and after the Effective Time (but subject to Section 9.1(a)), the
shareholders of the Company immediately prior to the Closing (the
“Company
Shareholders”),
jointly and severally (except with respect to claims under notices
delivered following the first anniversary of the Closing Date, for
which
indemnification shall be several and not joint) but subject to the
limitations set forth in this Section 9, shall hold harmless and
indemnify
each of the Parent Indemnitees from and against, and shall compensate
and
reimburse each of the Parent Indemnitees for, any Damages which are
directly or indirectly suffered or incurred by any of the Parent
Indemnitees or to which any of the Parent Indemnitees may otherwise
become
subject (regardless of whether or not such Damages relate to any
third-party claim) and which arise from or as a result of, or are
directly
or indirectly connected with:T
(i)T
any inaccuracy in or breach of any representation or warranty set
forth in
Section 2 as of the date of this Agreement (without giving effect
to any
“Material Adverse Effect” or other materiality qualification or any
similar qualification contained or incorporated directly or indirectly
in
such representation or warranty, and without giving effect to any
update
to the Disclosure Schedule);T
(ii)T
any inaccuracy in or breach of any representation or warranty set
forth in
Section 2 as if such representation and warranty had been made on
and as
of the Closing Date (without giving effect to any “Material Adverse
Effect” or other materiality qualification or any similar qualification
contained or incorporated directly or indirectly in such representation
or
warranty, and without giving effect to any update to the Disclosure
Schedule);T T(iii)
any breach of or failure to comply with any covenant or obligation
of the
Company or any of the Signing Shareholders (including the covenants
set
forth in Sections 1, 4 and 5); orT
(iv)T
any Legal Proceeding relating to any inaccuracy or breach of the
type
referred to in clause “(i),”“(ii)” or “(iii)” above (including any Legal
Proceeding commenced by any Parent Indemnitee for the purpose of
enforcing
any of its rights under this
Section 9).
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(b) |
From
and after the Effective Time (but subject to Section 9.1(a)), Parent
and
the Surviving Entity, jointly and severally, shall hold harmless
and
indemnify each of the Shareholder Indemnitees from and against, and
shall
compensate and reimburse each of the Shareholder Indemnitees for,
any
Damages which are directly or indirectly suffered or incurred by
any of
the Shareholder Indemnitees or to which any of the Shareholder Indemnitees
may otherwise become subject (regardless of whether or not such Damages
relate to any third-party claim) and which arise from or as a result
of,
or are directly or indirectly connected with:T
(i)T
any inaccuracy in or breach of any representation or warranty set
forth in
Section 3 as of the date of this Agreement (without giving effect
to any
“Material Adverse Effect” or other materiality qualification or any
similar qualification contained or incorporated directly or indirectly
in
such representation or warranty, and without giving effect to any
update
to the Disclosure Schedule);T
(ii)T
any inaccuracy in or breach of any representation or warranty set
forth in
Section 3 as if such representation and warranty had been made on
and as
of the Closing Date (without giving effect to any “Material Adverse
Effect” or other materiality qualification or any similar qualification
contained or incorporated directly or indirectly in such representation
or
warranty, and without giving effect to any update to the Disclosure
Schedule); (iii) any breach of or failure to comply with any covenant
or
obligation of Parent, Merger Sub or the Surviving Entity (including
the
covenants set forth in Sections 1, 4 and 5); or T(iv)T
any Legal Proceeding relating to any inaccuracy or breach of the
type
referred to in clause “(i),”“(ii)” or “(iii)” above (including any Legal
Proceeding commenced by any Shareholder Indemnitee for the purpose
of
enforcing any of its rights under this
Section 9).
|
(c) |
If
the Surviving Entity suffers, incurs or otherwise becomes subject
to any
Damages as a result of or in connection with any inaccuracy in or
breach
of any representation, warranty, covenant or obligation solely with
respect to matters prior to the Effective Time, then (without limiting
any
of the rights of the Surviving Entity as a Parent Indemnitee) Parent
shall
also be deemed, by virtue of its ownership of the stock of the Surviving
Entity, to have incurred Damages as a result of and in connection
with
such inaccuracy or breach prior to the Effective
Time.
|
(d) |
Following
the Effective Time, the indemnification provisions of this Section
9.2
shall be the sole and exclusive remedies of Parent, the Surviving
Entity
and the Company Shareholders for any breach by the other party of
the
representations and warranties in this Agreement, except that the
foregoing limitation shall not apply to any such breach arising directly
or indirectly from any circumstance involving fraud or intentional
misrepresentation.
|
(e) |
The
maximum liability of each Company Shareholder under Section 9.2(a)
(except
as set forth in the following sentence) shall be equal to such Company
Shareholder’s pro rata portion of the Escrow Shares. The maximum liability
of each Signing Shareholder under Section 9.2(a) for breaches by
the
Company or the Signing Shareholders of Sections 2.3, 4.3 and 5.3
shall be
equal to the total number of shares to which such Signing Shareholder
was
entitled based on the conversion of the Company Common Stock listed
on
Exhibit
A
hereto pursuant to Section 1.5(a)(i) of this Agreement (which
consideration is payable as described in Section 9.3) and the maximum
liability of each Signing Shareholder under Section 9.2(a) for breaches
by
the Company and the Signing Shareholders of Section 2.19 shall be
equal to
the shares received by such Signing Shareholder from the escrow pursuant
to the Escrow Agreement; provided,
however, the
limitations on the liability of the Signing Shareholders contained
in this
sentence and the previous sentence shall not apply to any such breach
arising directly or indirectly from any circumstance involving fraud
or an
intentional misrepresentation on the part of the Company or the Signing
Shareholders.
|
(f) |
No
Parent Indemnitee shall be entitled to seek indemnification hereunder
for
Damages until the aggregate of all Damages under this Agreement payable
to
such Parent Indemnitees (in the aggregate) exceeds $25,000 (the
“Threshold”);
after which time the Parent Indemnitees may seek recovery from the
first
dollar and not merely the amounts in excess of the Threshold. No
Shareholder Indemnitee shall be entitled to seek indemnification
hereunder
for Damages until the aggregate of all Damages under this Agreement
payable to all Shareholder Indemnitees exceeds the Threshold; after
which
time the Shareholder Indemnitees may seek recovery from the first
dollar
and not merely the amounts in excess of the Threshold. Notwithstanding
the
foregoing, the Threshold shall not apply to Damages involving fraud
or an
intentional misrepresentation, a breach of covenants in this Agreement
or
a breach of Sections 2.3, 2.19, 4.3 or 5.3 of this Agreement, in
which
case Shareholder Indemnitees or the Parent Indemnitees, as the case
may
be, shall be entitled to seek indemnification hereunder for Damages
from
the first dollar.
|
(g) |
Parent,
the Surviving Entity, the Company and the Signing Shareholders and
their
respective affiliates (including all Indemnitees) shall act in good
faith
and in a commercially reasonable manner to mitigate
any Damages they may suffer.
|
1.95 Satisfaction
of Indemnification Claim.
In the
event any Company Shareholder shall have any liability (for indemnification
or
otherwise) to any Parent Indemnitee under this Section 9, such liability
shall be satisfied by delivering to such Parent Indemnitee the number of shares
of Parent Common Stock determined by dividing (a) the aggregate dollar amount
of
such liability by
(b) the
Designated Parent Stock Price (as adjusted as appropriate to reflect any stock
split, reverse stock split, stock dividend, recapitalization or other similar
transaction effected by Parent between the Effective Time and the date such
liability is satisfied). Notwithstanding
the foregoing, in the event of a breach of Section 2.3, 2.19, 4.3 or 5.3 for
which notice is delivered by Parent following the first anniversary of the
Closing or for which the Escrow Shares are insufficient to satisfy the
indemnification liability, the liability shall be satisfied by delivering to
the
Parent Indemnitee, at the option of each of the Signing Shareholders in his
sole
discretion, either (i) cash in the aggregate dollar amount of such liability
or
(ii) (A) such number of shares of Parent Common Stock held by such Signing
Shareholder at the time of such delivery equal to the amount of such liability
divided by the average of the closing sale prices of a share of Parent Common
Stock as reported on the Nasdaq SmallCap Market for each of the 10 consecutive
trading days immediately preceding the date of such notice plus (B) to the
extent the total number of shares delivered pursuant to clause (A) is
insufficient to satisfy such liability, cash, except that in no event shall
the
payments required by this clause (ii) exceed the value of the shares of Parent
Common Stock held by such Signing Shareholder plus the gross proceeds received
by the Signing Shareholder upon his sale of Parent Common Stock, net of (x)
income taxes paid by the Signing Shareholder in respect of his sale of Parent
Common Stock plus (y) income taxes payable upon the delivery of shares to the
Parent Indemnitee pursuant to (A) above.
1.96 No
Contribution.
Each
Company Shareholder, by virtue of its approval of this Agreement, waives, and
acknowledges and agrees that he shall not have and shall not exercise or assert
(or attempt to exercise or assert), any right of contribution, right of
indemnity or other right or remedy against the Surviving Entity in connection
with any indemnification obligation or any other liability to which he may
become subject under or in connection with this Agreement or the Company Closing
Certificate.
1.97 Interest.
Any
Person who is required to hold harmless, indemnify, compensate or reimburse
any
Indemnitee pursuant to this Section 9 with respect to any Damages shall
also be liable to such Indemnitee for interest, payable as described in the
last
sentence of Section 9.3), on the amount of such Damages (for the period
commencing as of the date on which such Person first received notice of a claim
for recovery by such Indemnitee and ending on the date on which the liability
of
such Person to such Indemnitee is fully satisfied by such Person) at a floating
rate equal to the rate of interest publicly announced by Bank of America, N.T.
& S.A. from time to time as its prime, base or reference rate.
1.98 Defense
of Third Party Claims.
(a) |
In
the event of the assertion or commencement by any Person of any claim
or
Legal Proceeding (whether against the Surviving Entity, against Parent
or
against any other Person) with respect to which any of the Parent
Indemnitees may be entitled to indemnification or any other remedy
pursuant to this Section 9, Parent shall promptly give the
Shareholders’ Agent and the Escrow Agent written notice (a “Claim
Notice”)
of such claim (a “Claim”)
or Legal Proceeding;
provided, however,
that any failure on the part of Parent to so notify the Shareholders’
Agent shall not limit any of the Parent Indemnitees’ rights to
indemnification under this Section 9 (except to the extent
such
failure materially prejudices the defense of such Legal Proceeding).
Parent shall have the right, at its election, to proceed with the
defense
of such Claim or Legal Proceeding on its own. If Parent proceeds
with the
defense of any such Claim or Legal Proceeding, it shall so notify
the
Shareholders’ Agent in the Claim Notice. If Parent makes the foregoing
election, the Shareholders’ Agent will have the right to participate at
its own expense in all proceedings and will provide the Shareholders’
Agent with reasonable access to all relevant information and documentation
relating to the Claim or Legal Proceeding, and the prosecution or
defense
thereof. If the Shareholders’ Agent acknowledges in writing the obligation
of the Shareholders of the Company to indemnify Parent hereunder
against
any Damages arising out of such Claim or Legal Proceeding, all reasonable
and documented third-party expenses relating to the defense of such
Claim
or Legal Proceeding shall be recovered by Parent by having Parent
and the
Shareholders’ Agent instruct the Escrow Agent to release to Parent that
number of Escrow Shares, to the extent available, equal in value
(as
determined in accordance with the terms and conditions of the Escrow
Agreement) to the aggregate amount of such expenses. Such recovery
shall
be made from Escrow Shares on a basis proportional to the Escrow
Shares
contributed under the Escrow Agreement by or on behalf of each Company
Shareholder. Notwithstanding the foregoing, in the event the Claim
or
Legal Proceeding relates to a breach of Section 2.3, 2.19, 4.3 or
5.3 of
this Agreement, if no Escrow Shares are available Parent shall be
entitled
to receive reimbursement from Signing Shareholders as provided in
the last
sentence of Section 9.3.
|
(b) |
Within
ten days of delivery of the Claim Notice, if Parent has not elected
to
proceed with the defense of such Claim or Legal Proceeding on its
own, the
Shareholders’ Agent may elect (by written notice delivered to Parent) to
take all necessary steps properly to contest any Claim or Legal Proceeding
involving third parties or to prosecute such Claim or Legal Proceeding
to
conclusion or settlement. If the Shareholders’ Agent makes the foregoing
election, a Parent Indemnitee will have the right to participate
at its
own expense in all proceedings. If the Shareholders’ Agent does not make
such election within such period or fails to diligently contest such
Claim
or Legal Proceeding after such election, then the Parent Indemnitee
shall
handle the prosecution or defense of any such Claim or Legal Proceeding,
and will take all necessary steps to contest the Claim or Legal Proceeding
involving third parties or to prosecute such Claim or Legal Proceeding
to
conclusion or settlement, and will notify the Shareholders’ Agent of the
progress of any such Claim or Legal Proceeding, will permit the
Shareholders’ Agent, at the sole cost of the Shareholders’ Agent, to
participate in such prosecution or defense and will provide the
Shareholders’ Agent with reasonable access to all relevant information and
documentation relating to the Claim or Legal Proceeding and the
prosecution or defense thereof. If Parent proceeds with the defense
of any
such Claim or Legal Proceeding in these circumstances, all Parent’s
reasonable, documented, third-party expenses relating to the defense
of
such Claim or Legal Proceeding shall be recovered by obtaining that
number
of Escrow Shares, to the extent available, equal in value (as determined
in accordance with the terms and conditions of the Escrow Agreement)
to
the aggregate amount of such expenses. Such recovery shall be made
from
the Escrow Shares on a basis proportional to the Escrow Shares contributed
under the Escrow Agreement by or on behalf of each Company
Shareholder.
|
(c) |
Neither
party will compromise or settle any such Claim or Legal Proceeding
without
the written consent of either Parent (if the Shareholders’ Agent defends
the Claim or Legal Proceeding) or the Shareholders’ Agent (if Parent or
other Parent Indemnitees defend the Claim or Legal Proceeding), such
consent not to be unreasonably withheld, conditioned or delayed.
In any
case, the party not in control of the Claim or Legal Proceeding will
cooperate with the other party in the conduct of the prosecution
or
defense of such Claim or Legal
Proceeding.
|
1.99 Exercise
of Remedies by Indemnitees.
No
Parent Indemnitee (other than Parent or any successor thereto or assign thereof)
shall be permitted to assert any indemnification claim or exercise any other
remedy under this Agreement unless Parent (or any successor thereto or assign
thereof) shall have consented to the assertion of such indemnification claim
or
the exercise of such other remedy. No Shareholder Indemnitee shall be permitted
to assert any indemnification claim or exercise any remedy under this Agreement
unless the Shareholders’ Agent shall have consented to the assertion of such
indemnification claim or the exercise of such other remedy.
1.100 Escrow
Fund.
Each
shareholder of the Company receiving Parent Common Stock in the Merger will
be
deemed to have received and deposited with the Escrow Agent the Escrow Shares
(plus any additional shares as may be issued upon any stock split, stock
dividend or recapitalization effected by Company after the Effective Time of
the
Merger with respect to the Escrow Amount) for purposes of satisfying any
indemnification claims made pursuant to this Section 9. The Escrow Shares will
be deposited with and will be held by an institution mutually acceptable to
Company and the Shareholders’ Agent, such deposit to constitute an escrow fund
to be governed by the terms set forth in the Escrow Agreement. Payment of any
amounts in respect of the Company Shareholders’ indemnity obligations pursuant
to this Section 9 shall first be taken from the Escrow Shares as set forth
in
the Escrow Agreement.
Miscellaneous
Provisions
1.101 Further
Assurances.
Each
party hereto shall execute and cause to be delivered to each other party hereto
such instruments and other documents, and shall take such other actions, as
such
other party may reasonably request (prior to, at or after the Closing) for
the
purpose of carrying out or evidencing any of the transactions contemplated
by
this Agreement.
1.102 Fees
and Expenses.
Each
party to this Agreement shall bear and pay all fees, costs and expenses
(including legal fees and accounting fees) that have been incurred or that
are
incurred by or on behalf of such party in connection with the transactions
contemplated by this Agreement, including all fees, costs and expenses incurred
by such party in connection with or by virtue of (a) the investigation and
review conducted by Parent and its Representatives with respect to the Company’s
business (and the furnishing of information to Parent and its Representatives
in
connection with such investigation and review), (b) the negotiation, preparation
and review of this Agreement (including the Disclosure Schedule) and all
agreements, certificates, opinions and other instruments and documents delivered
or to be delivered in connection with the transactions contemplated by this
Agreement, (c) the preparation and submission of any filing or notice required
to be made or given in connection with any of the transactions contemplated
by
this Agreement, and the obtaining of any Consent required to be obtained in
connection with any of such transactions, (d) the preparation and audit of
the
Company’s financial statements conducted by Parent and Representatives of
Parent, and (e) the consummation of the Merger.
1.103 Attorneys’
Fees.
If any
action or proceeding relating to this Agreement or the enforcement of any
provision of this Agreement is brought against any party hereto, the prevailing
party shall be entitled to recover reasonable attorneys’ fees, costs and
disbursements (in addition to any other relief to which the prevailing party
may
be entitled).
1.104 Notices.
Any
notice or other communication required or permitted to be delivered to any
party
under this Agreement shall be in writing and shall be deemed properly delivered,
given and received when delivered (by hand, by registered mail, by courier
or
express delivery service or by facsimile) to the address or facsimile telephone
number set forth beneath the name of such party below (or to such other address
or facsimile telephone number as such party shall have specified in a written
notice given to the other parties hereto):
if
to Parent:
|
SBE,
Inc.
|
|
Attn:
David Brunton
|
|
2305
Camino Ramon
|
|
Suite
200
|
|
San
Ramon, CA 94583
|
|
Facsimile:
(925) 355-2041
|
|
|
with
copy to:
|
Cooley
Godward LLP
|
|
Attn:
Jodie Bourdet
|
|
One
Maritime Plaza, 20PthP
Floor
|
|
San
Francisco, CA 94111
|
|
Facsimile:
(415) 951-3699
|
|
|
if
to the Company or
the Signing Shareholders:
|
PyX
Technologies, Inc.
|
|
Attn:
Greg Yamamoto
|
|
2305
Camino Ramon, Suite 210
|
|
San
Ramon, CA 94583
|
|
Facsimile:
(408) 354-7335
|
|
|
with
copy to:
|
Orrick,
Herrington & Sutcliffe LLP
|
|
Attn:
Jim Black
|
|
405
Howard Street
|
|
San
Francisco, CA 94105
|
|
Facsimile:
(415) 773-5759
|
1.105 Time
of the Essence.
Time is
of the essence of this Agreement.
1.106 Headings.
The
headings contained in this Agreement are for convenience of reference only,
shall not be deemed to be a part of this Agreement and shall not be referred
to
in connection with the construction or interpretation of this
Agreement.
1.107 Counterparts.
This
Agreement may be executed in several counterparts, each of which shall
constitute an original and all of which, when taken together, shall constitute
one agreement.
1.108 Governing
Law.
This
Agreement shall be construed in accordance with, and governed in all respects
by, the internal laws of the State of California (without giving effect to
principles of conflicts of laws).
1.109 Successors
and Assigns.
This
Agreement shall be binding upon: the Company and its successors and assigns
(if
any); the Signing Shareholders and their respective personal representatives,
executors, administrators, estates, heirs, successors and assigns (if any);
Parent and its successors and assigns (if any); and Merger Sub and its
successors and assigns (if any). This Agreement shall inure to the benefit
of:
the Company; the Company’s shareholders (to the extent set forth in Section
1.5); the holders of assumed Company Options (to the extent set forth in Section
1.6); Parent; Merger Sub; the other Indemnitees (subject to Section 9.7);
and the respective successors and assigns (if any) of the foregoing. Parent
may
freely assign any or all of its rights under this Agreement (including its
indemnification rights under Section 9), in whole or in part, to any
other
Person without obtaining the consent or approval of any other party hereto
or of
any other Person.
1.110 Remedies
Cumulative; Specific Performance.
The
rights and remedies of the parties hereto shall be cumulative (and not
alternative). The parties to this Agreement agree that, in the event of any
breach or threatened breach by any party to this Agreement of any covenant,
obligation or other provision set forth in this Agreement for the benefit of
any
other party to this Agreement, such other party shall be entitled (in addition
to any other remedy that may be available to it) to (a) a decree or
order
of specific performance or mandamus to enforce the observance and performance
of
such covenant, obligation or other provision, and (b) an injunction
restraining such breach or threatened breach.
1.111 Waiver.
(a) |
No
failure on the part of any Person to exercise any power, right, privilege
or remedy under this Agreement, and no delay on the part of any Person
in
exercising any power, right, privilege or remedy under this Agreement,
shall operate as a waiver of such power, right, privilege or remedy;
and
no single or partial exercise of any such power, right, privilege
or
remedy shall preclude any other or further exercise thereof or of
any
other power, right, privilege or
remedy.
|
(b) |
No
Person shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement,
unless the waiver of such claim, power, right, privilege or remedy
is
expressly set forth in a written instrument duly executed and delivered
on
behalf of such Person; and any such waiver shall not be applicable
or have
any effect except in the specific instance in which it is
given.
|
1.112 Amendments.
This
Agreement may not be amended, modified, altered or supplemented other than
by
means of a written instrument duly executed and delivered on behalf of all
of
the parties hereto.
1.113 Severability.
Any term
or provision of this Agreement that is invalid or unenforceable in any situation
in any jurisdiction shall not affect the validity or enforceability of the
remaining terms and provisions hereof or the validity or enforceability of
the
offending term or provision in any other situation or in any other jurisdiction.
If the final judgment of a court of competent jurisdiction declares that any
term or provision hereof is invalid or unenforceable, the parties hereto agree
that the court making such determination shall have the power to limit the
term
or provision, to delete specific words or phrases, or to replace any invalid
or
unenforceable term or provision with a term or provision that is valid and
enforceable and that comes closest to expressing the intention of the invalid
or
unenforceable term or provision, and this Agreement shall be enforceable as
so
modified. In the event such court does not exercise the power granted to it
in
the prior sentence, the parties hereto agree to replace such invalid or
unenforceable term or provision with a valid and enforceable term or provision
that will achieve, to the extent possible, the economic, business and other
purposes of such invalid or unenforceable term.
1.114 Parties
in Interest.
Except
for the provisions of Sections 1.5, 1.6 and 9, none of the provisions of this
Agreement is intended to provide any rights or remedies to any Person other
than
the parties hereto and their respective successors and assigns (if
any).
1.115 Entire
Agreement.
This
Agreement and the other agreements referred to herein set forth the entire
understanding of the parties hereto relating to the subject matter hereof and
thereof and supersede all prior agreements and understandings among or between
any of the parties relating to the subject matter hereof and thereof;
provided,
however, that
(a)
the Confidentiality Agreement executed on behalf of Parent and the Company
on
February 11, 2005 shall not be superseded by this Agreement and shall remain
in
effect until the date on which such Confidentiality Agreement is terminated
in
accordance with its terms and (b) paragraphs 7 through 11 of the Term Sheet,
executed by Parent and the Company on February 7, 2005, shall remain in effect
until such paragraphs are terminated in accordance with the terms of the Term
Sheet. Each of the Signing Shareholders will abide by the obligations of the
Company under the Confidentiality Agreement.
1.116 Construction.
(a) |
For
purposes of this Agreement, whenever the context requires: the singular
number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender
shall
include the masculine and neuter genders; and the neuter gender shall
include the masculine and feminine
genders.
|
(b) |
The
parties hereto agree that any rule of construction to the effect
that
ambiguities are to be resolved against the drafting party shall not
be
applied in the construction or interpretation of this
Agreement.
|
(c) |
As
used in this Agreement, the words “include” and “including,” and
variations thereof, shall not be deemed to be terms of limitation,
but
rather shall be deemed to be followed by the words “without
limitation.”
|
(d) |
Except
as otherwise indicated, all references in this Agreement to “Sections” and
“Exhibits” are intended to refer to Sections of this Agreement and
Exhibits to this Agreement.
|
The
parties hereto have caused this Agreement to be executed and delivered as of
the
date first above written.
SBE,
Inc.,
a
Delaware corporation
By:
PyX
Acquisition Sub, LLC,
a
California limited liability company
By:
PyX
Technologies, Inc.,
a
California corporation
By:
Andre
Hedrick
Nick
Bellinger
Exhibit
A
SIGNING
SHAREHOLDERS
|
|
|
|
Name
|
|
Shares
of Company Common Stock
|
|
Andre
Hedrick
|
|
|
3,200,000
|
|
Nick
Bellinger
|
|
|
750,000
|
|
Total:
|
|
|
3,950,000
|
|
Exhibit
B
CERTAIN
DEFINITIONS
For
purposes of the Agreement (including this Exhibit B):
Acquisition
Transaction.“Acquisition
Transaction”
shall
mean any transaction involving:
(a) |
the
sale, license, disposition or acquisition of all or a material portion
of
the Company’s business or assets;
|
(b) |
the
issuance, disposition or acquisition of (i) any capital stock or
other
equity security of the Company (other than common stock issued to
employees of the Company, upon exercise of Company Options or otherwise,
in routine transactions in accordance with the Company’s past practices),
(ii) any option, call, warrant or right (whether or not immediately
exercisable) to acquire any capital stock or other equity security
of the
Company (other than stock options granted to employees of the Company
in
routine transactions in accordance with the Company’s past practices), or
(iii) any security, instrument or obligation that is or may become
convertible into or exchangeable for any capital stock or other equity
security of the Company; or
|
(c) |
any
merger, consolidation, business combination, reorganization or similar
transaction involving the Company.
|
Agreement.“Agreement”
shall
mean the Agreement and Plan of Merger and Reorganization to which this
Exhibit
B
is
attached (including the Disclosure Schedule), as it may be amended from time
to
time.
COBRA. “COBRA”
shall
mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended.
Company
Affiliate.
“Company
Affiliate”
shall
mean any Person under common control with the Company within the meaning of
Sections 414(b), (c), (m) and (o) of the Code, and the regulations issued
thereunder.
Company
Contract.“Company
Contract”
shall
mean any Contract: (a) to which the Company is a party; (b) by which the Company
or any of its assets is or may become bound or under which the Company has,
or
may become subject to, any obligation; or (c) under which the Company has or
may
acquire any right or interest.
Company Employee.“Company
Employee”
shall
mean any current or former employee, independent contractor or director of
the
Company or any Company Affiliate.
Company Employee
Agreement. “Company
Employee Agreement”
shall
mean each management, employment, severance, consulting, relocation,
repatriation or expatriation agreement or other Contract between the Company
or
any Company Affiliate and any Company Employee, other than any such management,
employment, severance, consulting, relocation, repatriation or expatriation
agreement or other Contract with a Company Employee which is terminable “at
will” without any obligation on the part of the Company or any Company Affiliate
to make any payments or provide any benefits in connection with such
termination.
Company
Employee Plan. “Company
Employee Plan”
shall
mean any plan, program, policy, practice, Contract or other arrangement
providing for compensation, severance, termination pay, deferred compensation,
performance awards, stock or stock-related awards, fringe benefits or other
employee benefits or remuneration of any kind, whether written, unwritten or
otherwise, funded or unfunded, including each “employee benefit plan,” within
the meaning of Section 3(3) of ERISA (whether or not ERISA is applicable to
such
plan), that is or has been maintained, contributed to, or required to be
contributed to, by the Company or any Company Affiliate for the benefit of
any
Company Employee, or with respect to which the Company or any Company Affiliate
has or may have any liability or obligation, except such definition shall not
include any Company Employee Agreement.
Company
IP. “Company
IP”
shall
mean all Intellectual Property Rights and Intellectual Property in which the
Company has (or purports to have) an ownership interest or an exclusive license
or similar exclusive right.
Company
IP Contract. “Company
IP Contract”
shall
mean any Contract to which the Company is or was a party or by which the Company
is or was bound, that contains any assignment or license of, or any covenant
not
to assert or enforce, any Intellectual Property Right or that otherwise relates
to any Company IP or any Intellectual Property developed by, with or for the
Company.
Company
Pension Plan.“Company
Pension Plan”
shall
mean each Company Employee Plan that is an “employee pension benefit plan,”
within the meaning of Section 3(2) of ERISA.
Company
Software. “Company
Software”
shall
mean any software (including firmware and other software embedded in hardware
devices) owned, developed (or currently being developed), used, marketed,
distributed, licensed or sold by the Company at any time (other than
non-customized third-party software licensed to the Company for internal use
on
a non-exclusive basis).
Consent.“Consent”
shall
mean any approval, consent, ratification, permission, waiver or authorization
(including any Governmental Authorization).
Contract.“Contract”
shall
mean any written, oral or other agreement, contract, subcontract, lease,
understanding, instrument, note, warranty, insurance policy, benefit plan or
legally binding commitment or undertaking of any nature.
Damages.“Damages”
shall
include any loss, damage, injury, decline in value, lost opportunity, liability,
claim, demand, settlement, judgment, award, fine, penalty, Tax, fee (including
reasonable attorneys’ fees), charge, cost (including costs of investigation) or
expense of any nature.
Designated
Parent Stock Price.“Designated
Parent Stock Price”
shall
have the meaning given to such term in Section 1.8(c).
Disclosure
Schedule.“Disclosure
Schedule”
shall
mean the schedule (dated as of the date of the Agreement) delivered to Parent
on
behalf of the Company and the Signing Shareholders.
DOL.
“DOL”
means
the United States Department of Labor.
Encumbrance.“Encumbrance”
shall
mean any lien, pledge, hypothecation, charge, mortgage, security interest,
encumbrance, claim, infringement, interference, option, right of first refusal,
preemptive right, community property interest or restriction of any nature
(including any restriction on the voting of any security, any restriction on
the
transfer of any security or other asset, any restriction on the receipt of
any
income derived from any asset, any restriction on the use of any asset and
any
restriction on the possession, exercise or transfer of any other attribute
of
ownership of any asset).
TEntity.T“Entity”
shall
mean any corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint venture,
estate, trust, company (including any limited liability company or joint stock
company), firm or other enterprise, association, organization or
entity.
ERISA.
“ERISA”
shall
mean the Employee Retirement Income Security Act of 1974, as
amended.
Exchange
Act.“Exchange
Act”
shall
mean the Securities Exchange Act of 1934, as amended.
FMLA.
“FMLA”
shall
mean the Family Medical Leave Act of 1993, as amended.
Foreign
Plan. “Foreign
Plan”
shall mean:
(i)
any plan, program, policy, practice, Contract or other arrangement mandated
by a
Governmental Body other than the United States; (ii) any Company Employee Plan
maintained or contributed to by the Company or any Company Affiliate that is
not
subject to United States law; and (iii) any Company Employee Plan that covers
or
has covered Company Employees whose services are performed primarily outside
of
the United States.
Government
Bid. “Government
Bid”
shall
mean any quotation, bid or proposal submitted to any Governmental Body or any
proposed prime contractor or higher-tier subcontractor of any Governmental
Body.
Government
Contract. “Government
Contract”
shall
mean any prime contract, subcontract, letter contract, purchase order or
delivery order executed or submitted to or on behalf of any Governmental Body
or
any prime contractor or higher-tier subcontractor, or under which any
Governmental Body or any such prime contractor or subcontractor otherwise has
or
may acquire any right or interest.
Governmental
Authorization.“Governmental
Authorization”
shall
mean any: (a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant
to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
Governmental
Body.“Governmental
Body”
shall
mean any:T
(a)T nation,
state, commonwealth, province, territory, county, municipality, district or
other jurisdiction of any nature;T
(b)T federal,
state, local, municipal, foreign or other government; orT
(c)T governmental
or quasi-governmental authority of any nature (including any governmental
division, department, agency, commission, instrumentality, official,
organization, unit, body or Entity and any court or other
tribunal).
HIPAA.
“HIPAA”
shall
mean the Health Insurance Portability and Accountability Act of 1996, as
amended.
Indemnitees.“Indemnitees”
shall
mean the Parent Indemnitees and the Shareholder Indemnitees.
Intellectual
Property. “Intellectual
Property”
shall
mean algorithms, APIs, apparatus, circuit designs and assemblies, gate arrays,
IP cores, net lists, photomasks, semiconductor devices, test vectors, databases,
data collections, diagrams, formulae, inventions (whether or not patentable),
know-how, logos, marks (including brand names, product names, logos, and
slogans), methods, network configurations and architectures, processes,
proprietary information, protocols, schematics, specifications, software,
software code (in any form, including source code and executable or object
code), subroutines, techniques, user interfaces, URLs, web sites, works of
authorship and other forms of technology (whether or not embodied in any
tangible form and including all tangible embodiments of the foregoing, such
as
instruction manuals, laboratory notebooks, prototypes, samples, studies and
summaries).
Intellectual
Property Rights.
“Intellectual
Property Rights”
shall
mean all past, present, and future rights of the following types, which may
exist or be created under the laws of any jurisdiction in the world: (A) rights
associated with works of authorship, including exclusive exploitation rights,
copyrights, moral rights and mask works; (B) trademark and trade name rights
and
similar rights; (C) trade secret rights; (D) patent and industrial property
rights; (E) other proprietary rights in Intellectual Property; and (F) rights
in
or relating to registrations, renewals, extensions, combinations, divisions,
and
reissues of, and applications for, any of the rights referred to in clauses
“(A)” through “(E)” above.
IRS.
“IRS”
shall
mean the United States Internal Revenue Service.
Knowledge.“Knowledge”
with
respect to the Company and the Signing Shareholders shall mean the actual
knowledge of Andre Hedrick, Greg Yamamoto, Nick Bellinger, Leo Fang or Chris
Short of a particular fact or other matter.
Legal
Proceeding.“Legal
Proceeding”
shall
mean any action, suit, litigation, arbitration, proceeding (including any civil,
criminal, administrative, investigative or appellate proceeding), hearing,
inquiry, audit, examination or investigation commenced, brought, conducted
or
heard by or before, or otherwise involving, any court or other Governmental
Body
or any arbitrator or arbitration panel.
Legal
Requirement.“Legal
Requirement”
shall
mean any federal, state, local, municipal, foreign or other law, statute,
constitution, principle of common law, resolution, ordinance, code, edict,
decree, rule, regulation, ruling or requirement issued, enacted, adopted,
promulgated, implemented or otherwise put into effect by or under the authority
of any Governmental Body.
Material
Adverse Effect.
A
violation or other matter will be deemed to have a “Material
Adverse Effect”
on a
person if such violation or other matter (considered together with all other
matters that would constitute exceptions to the representations and warranties
set forth in the Agreement or in the person’s Closing Certificate but for the
presence of “Material Adverse Effect” or other materiality qualifications, or
any similar qualifications, in such representations and warranties) would have
a
material adverse effect on the person’s business, condition, assets,
liabilities, operations, financial performance or prospects.
Parent
Indemnitees.“Parent
Indemnitees”
shall
mean T(a)T Parent;T
(b)T Parent’s
current and future affiliates (including the Surviving Entity);T
(c)T the
respective Representatives of the Persons referred to in clauses “(a)” and “(b)”
above; andT
(d)T the
respective successors and assigns of the Persons referred to in clauses “(a)”,
“(b)” and “(c)” above.
TPerson.T“Person”
shall
mean any individual, Entity or Governmental Body.
Registered
IP.“Registered
IP”
shall
mean all Intellectual Property Rights that are registered, filed, or issued
under the authority of, with or by any Governmental Body, including all patents,
registered copyrights, registered mask works and registered trademarks and
all
applications for any of the foregoing.
Representatives.“Representatives”
shall
mean officers, directors, employees, agents, attorneys, accountants, advisors
and representatives.
TSEC.T“SEC”
shall
mean the United States Securities and Exchange Commission.
Securities
Act.“Securities
Act”
shall
mean the Securities Act of 1933, as amended.
Shareholder
Indemnitees.“Shareholder
Indemnitees”
shall
mean T(a)T each
shareholder of the Company immediately prior to the Effective Time;T
(b)T the
respective Representatives of the Persons referred to in clauses “(a)” above;
andT
(c)T the
respective successors and assigns of the Persons referred to in clauses “(a)”
and “(b)” above.
TTax.T“Tax”
shall
mean any tax (including any income tax, franchise tax, capital gains tax, gross
receipts tax, value-added tax, surtax, excise tax, ad valorem tax, transfer
tax,
stamp tax, sales tax, use tax, property tax, business tax, withholding tax
or
payroll tax), levy, assessment, tariff or duty (including any customs duty),
and
any related charge or amount (including any fine, penalty or interest), imposed,
assessed or collected by or under the authority of any Governmental
Body.
Tax
Return.“Tax
Return”
shall
mean any return (including any information return), report, statement,
declaration, estimate, schedule, notice, notification, form, election,
certificate or other document or information filed with or submitted to, or
required to be filed with or submitted to, any Governmental Body in connection
with the determination, assessment, collection or payment of any Tax or in
connection with the administration, implementation or enforcement of or
compliance with any Legal Requirement relating to any Tax.
AGREEMENT
AND PLAN OF MERGER AND REORGANIZATION
among:
SBE,
Inc.,
a
Delaware corporation;
PyX
Acquisition Sub, LLC,
a
California limited liability company;
PyX
Technologies, Inc.,
a
California corporation;
and
Certain
Shareholders of PyX Technologies, Inc.,
___________________________
Dated
as
of March 28, 2005
___________________________
EXHIBITS
Exhibit A |
- |
Signing
Shareholders |
Exhibit B |
- |
Certain Definitions |
Exhibit
C
|
-
|
Form
of Affiliate Agreement
|
Exhibit
D
|
-
|
Form
of Noncompetition Agreement
|
Exhibit E |
- |
Form
of Release |
Exhibit
F
|
-
|
Form
of Escrow Agreement
|
Exhibit
G
|
-
|
Form
of Shareholder Agreement
|
TABLE
OF CONTENTS
|
PAGE
|
SECTION
1. Description of Transaction
|
1
|
1.1
Merger of Merger Sub into the Company
|
1
|
1.2
Effect of the Merger
|
1
|
1.3
Closing; Effective Time
|
1
|
1.4
Articles of Incorporation and Bylaws; Directors and
Officers
|
2
|
1.5
Conversion of Shares
|
2
|
1.6
Employee Stock Options
|
3
|
1.7
Closing of the Company’s Transfer Books
|
3
|
1.8
Exchange of Certificates
|
3
|
1.9
Dissenting Shares
|
4
|
1.10
Escrow
|
5
|
1.11
Tax Consequences
|
5
|
1.12
Further Action
|
5
|
|
|
SECTION
2. Representations and Warranties of the Signing
Shareholders
|
5
|
2.1
Due Organization; No Subsidiaries; Etc.
|
6
|
2.2
Articles of Incorporation and Bylaws; Records
|
6
|
2.3
Capitalization, Etc.
|
6
|
2.4
Financial Statements
|
7
|
2.5
Absence of Changes
|
8
|
2.6
Title to Assets
|
9
|
2.7
Bank Accounts; Receivables
|
9
|
2.8
Equipment; Leasehold
|
10
|
2.9
Intellectual Property
|
10
|
2.10
Contracts
|
14
|
2.11
Liabilities
|
16
|
2.12
Compliance with Legal Requirements
|
16
|
2.13
Governmental Authorizations
|
17
|
2.14
Tax Matters
|
17
|
2.15
Employee and Labor Matters; Benefit Plans
|
18
|
2.16
Environmental Matters
|
21
|
2.17
Insurance
|
21
|
2.18
Related Party Transactions
|
22
|
2.19
Legal Proceedings; Orders
|
22
|
|
PAGE
|
2.20
Authority; Binding Nature of Agreement
|
22
|
2.21
Non-Contravention; Consents
|
23
|
2.22
Vote Required
|
23
|
2.23
Brokers
|
23
|
2.24
No Other Representations
|
23
|
2.25
Full Disclosure
|
24
|
|
|
SECTION
3. Representations and Warranties of Parent and Merger
Sub
|
24
|
3.1
Due Organization
|
24
|
3.2
Certificate/Articles of Incorporation and Bylaws
|
24
|
3.3
Capitalization, Etc.
|
24
|
3.4
SEC Filings; Financial Statements
|
25
|
3.5
Authority; Binding Nature of Agreement
|
25
|
3.6
Vote Required
|
25
|
3.7
Non-Contravention; Consents
|
25
|
3.8
Legal Proceedings; Orders
|
26
|
3.9
Valid Issuance
|
26
|
3.10
Offering Valid
|
26
|
3.11
Brokers
|
26
|
|
|
SECTION
4. Certain Covenants of the Company and the Signing
Shareholders
|
26
|
4.1
Access and Investigation
|
26
|
4.2
Operation of the Company’s Business
|
26
|
4.3
Company Shareholders’ Vote
|
28
|
4.4
No Negotiation
|
29
|
|
|
SECTION
5. Additional Covenants of the Parties
|
29
|
5.1
Filings and Consents
|
29
|
5.2
SEC Filings
|
29
|
5.3
Securities Compliance; Blue Sky
|
30
|
5.4
Public Announcements
|
30
|
5.5
Affiliate Agreements
|
30
|
5.6
Best Efforts
|
30
|
5.7
Employment and Noncompetition Agreements
|
30
|
5.8
Tax Matters
|
30
|
5.9
Release
|
31
|
5.10
Notification; Updates to Disclosure Schedule
|
31
|
|
PAGE
|
5.11
Employee Matters
|
32
|
5.12
Indemnification
|
32
|
5.13
SEC Filings
|
33
|
5.14
Extension of Funds
|
33
|
5.15
Dilution
|
33
|
|
|
SECTION
6. Conditions Precedent to Obligations of Parent and Merger
Sub
|
33
|
6.1
Accuracy of Representations
|
34
|
6.2
Performance of Covenants
|
34
|
6.3
Dissenters’ Rights
|
34
|
6.4
Shareholder Approval
|
34
|
6.5
Consents
|
34
|
6.6
Agreements and Documents
|
34
|
6.7
Questionnaires
|
35
|
6.8
FIRPTA Compliance
|
35
|
6.9
Financing
|
35
|
6.10
No Restraints
|
35
|
6.11
No Legal Proceedings
|
35
|
6.12
No Material Adverse Effect
|
35
|
6.13
Amendment of Pelco Agreement
|
35
|
6.14
Audited Financial Statements
|
35
|
|
|
SECTION
7. Conditions Precedent to Obligations of the
Company
|
35
|
7.1
Accuracy of Representations
|
36
|
7.2
Performance of Covenants
|
36
|
7.3
Shareholder Approval
|
36
|
7.4
Agreements and Documents
|
36
|
7.5
Financing
|
36
|
7.6
No Legal Proceedings
|
36
|
7.7
No Material Adverse Effect
|
37
|
7.8
No Restraints
|
37
|
|
|
SECTION
8. Termination
|
37
|
8.1
Termination Events
|
37
|
8.2
Termination Procedures
|
37
|
8.3
Effect of Termination
|
37
|
|
PAGE
|
SECTION
9. Indemnification, Etc.
|
38
|
9.1
Survival of Representations, Etc.
|
38
|
9.2
Indemnification by Designated Shareholders
|
38
|
9.3
Satisfaction of Indemnification Claim
|
40
|
9.4
No Contribution
|
40
|
9.5
Interest
|
40
|
9.6
Defense of Third Party Claims
|
40
|
9.7
Exercise of Remedies by Indemnitees
|
42
|
9.7
Escrow Fund
|
42
|
|
|
SECTION
10. Miscellaneous Provisions
|
42
|
10.1
Further Assurances
|
42
|
10.2
Fees and Expenses
|
42
|
10.3
Attorneys’ Fees
|
42
|
10.4
Notices
|
42
|
10.5
Time of the Essence
|
43
|
10.6
Headings
|
43
|
10.7
Counterparts
|
43
|
10.8
Governing Law
|
43
|
10.9
Successors and Assigns
|
43
|
10.10
Remedies Cumulative; Specific Performance
|
44
|
10.11
Waiver
|
44
|
10.12
Amendments
|
44
|
10.13
Severability
|
44
|
10.14
Parties in Interest
|
44
|
10.15
Entire Agreement
|
44
|
10.16
Construction
|
45
|
ANNEX
C
SBE,
INC.
UNIT
SUBSCRIPTION AGREEMENT
COMMON
STOCK
AND
WARRANTS
Unit
Subscription Agreement (this “Agreement”)
dated
as of May 4, 2005 among SBE, Inc., a Delaware corporation (the “Company”),
and
the persons who execute this Agreement as investors (the “Investors”).
Background: The
Company desires to sell to the Investors, and the Investors desire to purchase,
an aggregate of shares of Common Stock of the Company (the “Shares”)
in
Units with 5-year warrants, in substantially the form attached hereto as
Exhibit
1,
exercisable to purchase shares of Common Stock of the Company (the “Warrant
Shares”)
at the
Exercise Price (as defined below) (the “Warrants”),
all
for an aggregate price of $5,150,000. The proceeds are necessary for development
and continuance of the business of the Company and each of its Subsidiaries
and
the development and continuance of the business of PyX Technologies, Inc.
(“PyX”),
which
the Company proposes to acquire in the Acquisition (as defined below).
Concurrently with the execution of this Agreement, each of the executive
officers and directors of the Company has entered into a Voting Agreement in
the
form attached as Exhibit
2
providing that he or she will vote his shares of Common Stock of the Company
in
favor of the Proposal at the Stockholders Meeting (the “Voting
Agreement”).
Certain
Definitions:
“Acquisition”
shall
mean the acquisition by the Company of PyX substantially in accordance with
the
terms set forth in the Agreement and Plan of Merger and Reorganization, dated
March 28, 2005, filed by the Company with the SEC on Form 8-K on such date
(the
“Acquisition
Agreement”).
“Action”
has the
meaning set forth in Section 2.10.
“AIGH”
means
AIGH Investment Partners, LLC, a Delaware limited liability
company.
“Agreement”
has the
meaning set forth in the Preamble to the Agreement.
“Blue
Sky Laws”
has the
meaning set forth in Section 2.7(b).
“Certificate
of Incorporation”
has the
meaning set forth in Section 2.2(a).
“Closing”
and
“Closing
Date”
have
the meanings set forth in Section 1.2.
“Closing
Certificate”
has the
meaning set forth in Section 1.3(m).
“Closing
Sale Price”
means
the closing sale price per share of the Company’s Common Stock as quoted on The
Nasdaq SmallCap Market on the trading day on which the Common Stock trades
immediately preceding the Closing Date.
“Common
Stock”
shall
mean stock of the Company of any class (however designated) whether now or
hereafter authorized, which generally has the right to participate in the voting
and in the distribution of earnings and assets of the Company without limit
as
to amount or percentage. As of the date of this Agreement, Common Stock means
the Company’s Common Stock, $0.001 par value per share.
“Company”
includes the Company and any corporation or other entity that shall succeed
to
or assume, directly or indirectly, the obligations of the Company hereunder.
The
term “corporation”
shall
include an association, joint stock company, business trust, limited liability
company or other similar organization.
“Company
Disclosure Letter”
means
the disclosure letter delivered to the Investors prior to the execution of
this
Agreement, which letter is incorporated in this Agreement by reference. The
disclosure schedule delivered by PyX to the Company pursuant to the Acquisition
Agreement shall be attached to, and is hereby incorporated by reference into,
the Company Disclosure Letter.
“Contemplated
Transactions”
has the
meaning set forth in Section 2.1(b).
“Exchange
Act”
has the
meaning set forth in Section 2.7(b).
“Exercise
Price”
means
133% of the Unit Price.
“Financial
Statements”
has the
meaning set forth in Section 2.9(f).
“Form
10-K Financial Statements”
has the
meaning set forth in Section 2.9(d).
“Governmental
Body”
has the
meaning set forth in Section 2.7(b).
“Investor
Rights Agreement”
has the
meaning set forth in Section 1.3(a).
“Investors”
has the
meaning set forth in the Preamble to the Agreement.
“January
31 Form 10-Q Financial Statements”
has the
meaning set forth in Section 2.9(e).
“Legal
Fee”
has the
meaning set forth in Section 6.9.
“Legal
Requirement”
has the
meaning set forth in Section 2.8.
“Loss”
has the
meaning set forth in Section 5.2(b).
“Majority
Investors”
has the
meaning set forth in Section 1.2.
“Market
Price”
means
the average closing sale price per share of the Company’s Common Stock as quoted
on the NASDAQ SmallCap Market for the five preceding consecutive trading days
on
which the Common Stock trades ending on the date immediately before the Closing
Date.
“Material
Adverse Change”
and
“Material
Adverse Effect”
shall
mean a material adverse change in the business, financial condition, results
of
operation, properties or operations of the Company and its Subsidiaries taken
as
a whole; provided, however, that “Material Adverse Change” and “Material Adverse
Effect” shall not include any such changes that result from (a) general
economic, business or industry conditions, (b) the taking of any action
permitted or required by this Agreement, (c) the announcement or pendency of
this Agreement, the Contemplated Transactions, the Acquisition Agreement, the
Acquisition or the other transactions contemplated by the Acquisition Agreement;
and provided, further, that a decline in the Company’s stock price shall not, in
and of itself, constitute a “Material Adverse Change” or “Material Adverse
Effect.”
“Material
Agreement”
means
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Company or
any
of its Subsidiaries is a party or by which the Company or of any of its
Subsidiaries or any property or asset of the Company or of any of its
Subsidiaries is bound or affected that is material to the Company and its
Subsidiaries, taken as a whole.
“NASD”
means
the National Association of Securities Dealers, Inc.
“Ordinary
Course of Business”
has the
meaning set forth in Section 2.11.
“Person”
means
any individual, sole proprietorship, partnership, corporation, limited liability
company, business trust, unincorporated association, joint stock corporation,
trust, joint venture or other entity, any university or similar institution,
or
any government or any agency or instrumentality or political subdivision
thereof.
“Price
Termination”
has the
meaning set forth in Section 1.1.
“Proposal”
has the
meaning set forth in Section 2.2(b)(i).
“Proprietary
Assets”
has the
meaning set forth in Section 2.12.
“Proxy
Statement”
has the
meaning set forth in Section 2.2(b)(i).
“PyX”
has the
meaning set forth in the Background to the Agreement.
“PyX
Financial Statements”
has the
meaning set forth in Section 2.9(f).
“Required
Stockholder Approval”
has the
meaning set forth in Section 2.2(b)(i).
“Review
Date”
has the
meaning set forth in Section 1.2.
“SEC”
means
the Securities and Exchange Commission.
“SEC
Documents”
has the
meaning set forth in Section 2.9(a).
“Securities”
means
the Shares and Warrants.
“Securities
Act”
has the
meaning set forth in Section 2.5.
“Shares”
has the
meaning set forth in the Background to the Agreement.
“Stockholders
Meeting”
has the
meaning set forth in Section 2.2(b)(i).
“Subsidiary”
shall
mean, immediately prior to the Closing, any corporation of which stock or other
interest having ordinary power to elect a majority of the Board of Directors
(or
other governing body) of such entity (regardless of whether or not at the time
stock or interests of any other class or classes of such corporation shall
have
or may have voting power by reason of the happening of any contingency) is,
immediately prior to the Closing, directly or indirectly owned by the Company
or
by one or more Subsidiaries. For purposes of clarity, the definition of
Subsidiary shall include PyX.
“Transaction
Documents”
means
the Agreement, the Voting Agreement, the Warrants and the Investor Rights
Agreement.
“Transfer
Agent”
has the
meaning set forth in Section 1.2(b).
“Unit”
shall
mean (i) one (1) Share and (ii) one Warrant to purchase one half (0.5) of a
Warrant Share.
“Unit
Price”
shall
mean the lowest of (i) $2.50, (ii) 92% of the Market Price and (iii) 95% of
the
Closing Sale Price.
“Warrants”
has the
meaning set forth in the Background to the Agreement.
“Warrant
Share”
has the
meaning set forth in the Background to the Agreement, and includes any shares
of
Common Stock issued or from time to time issuable upon exercise of the Warrants.
“Voting
Agreement”
has the
meaning set forth in the Background to the Agreement.
In
consideration of the mutual covenants contained herein, the parties agree as
follows:
1. Purchase
and Sale of Stock.
1.1. Sale
and Issuance of Securities.
(a) The
Company shall sell to the Investors and the Investors shall purchase from the
Company, that number of Units equal to $5,150,000 divided by the Unit Price,
at
a price per Unit equal to the Unit Price; provided,
however,
that
the Company shall have the right not to sell the Units under this Agreement
and
to terminate this Agreement without penalty (except as provided in Section
6.9)
if the Unit Price as of the Closing Date is less than $2.00 (“Price
Termination”).
(b) The
purchase price of the Units to be purchased by each Investor from the Company
is
set forth on Schedule 1.1(b) hereto, subject to acceptance, in whole or in
part,
by the Company.
1.2. Closing.
The
closing (the “Closing”)
of the
purchase and sale of the Securities hereunder shall take place as soon as
practicable after the conditions for Closing set forth in this Agreement are
met
(other than closing conditions that, by their nature, are satisfied at the
Closing) but no later than (i) a date that is within 60 days of the date of
this
Agreement if the SEC determines not to review the Proxy Statement or (ii) July
31, 2005 (the “Review
Date”)
if the
SEC determines to review the Proxy Statement; provided,
that
the Company, AIGH and other Investors who together with AIGH have subscribed
for
an aggregate of at least 50% of the Units (the “Majority
Investors”)
may
extend such date. The Company shall notify the Investors promptly after the
conditions set forth in Section 1.3 (other than those that, by their nature,
are
satisfied at the Closing) have been met, and the Closing shall take place within
three business days after such notice is given (the “Closing
Date”).
The
Closing shall take place at the offices of Hahn & Hessen LLP, the Investors’
counsel, in New York, New York, or at such other location as is mutually
acceptable to the Majority Investors and the Company, subject to fulfillment
of
the conditions of closing set forth in the Agreement. At the
Closing:
(a) each
Investor purchasing Securities at the Closing shall deliver to the Company
or
its designees by wire transfer or such other method of payment as the Company
shall approve, an amount equal to the purchase price of the Securities purchased
by such Investor hereunder, as set forth opposite such Investor’s name on the
signature pages hereof;
(b) the
Company shall authorize its transfer agent (the “Transfer
Agent”)
to
arrange delivery to each Investor of one or more stock certificates registered
in the name of the Investor, or in such nominee name(s) as designated by the
Investor in writing, representing the number of Shares obtaining by dividing
the
dollar amount set forth opposite such Investor’s name on Schedule 1.1(b) by the
Unit Price; and
(c) the
Company shall issue and deliver to each Investor the number of Warrants obtained
by dividing one-half of the dollar amount set forth opposite such Investor’s
name on Schedule 1.1(b) by the Unit Price.
1.3. Investors’
Conditions of Closing.
The
obligation of the Investors to complete the purchase of the Securities at the
Closing is subject to fulfillment (or waiver by the Majority Investors) of
the
following conditions:
(a) the
Company shall execute and deliver an Investor Rights Agreement, dated the
Closing Date, in the form attached as Exhibit 3,
with
respect to the Shares and the Warrant Shares (the “Investor
Rights Agreement”);
(b) the
Company shall cause to be delivered to the Investors an Opinion of Counsel,
dated the Closing Date and reasonably satisfactory to counsel for the Investors,
with respect to the matters set forth on Exhibit
4;
(c) the
representation and warranties of the Company set forth in this Agreement shall
be true and correct in all respects as of the date of this Agreement and (to
the
extent such representations and warranties speak as of a later date) as of
such
later date as though made on and as of the Closing Date, except for such
inaccuracies as have not resulted and would not reasonably be expected to result
in a Material Adverse Change, and the Company shall have performed in all
material respects all covenants and other obligations required to be performed
by it under this Agreement at or prior to the Closing Date;
(d) the
absence of a Material Adverse Change from the date of this Agreement up to,
and
including, the Closing Date;
(e) the
Company shall pay the Investors’ expenses to the extent set forth in Section 6.9
hereof;
(f) the
Company shall deliver to the Investors a certified copy of its Certificate
of
Incorporation, as amended, and Bylaws and a Certificate of Good Standing from
the Secretary of State of the State of Delaware;
(g) the
Required Stockholder Approval shall have been obtained;
(h) the
Company shall not be subject to delisting with The Nasdaq SmallCap Market,
or
obliged to apply for relisting, under Rule 4330(f) of the NASD or otherwise
as a
consequence of the Acquisition and the Contemplated Transactions;
(i) the
Acquisition shall have been completed;
(j) the
Investors shall have received a certificate signed on behalf of the Company
by
the President and Secretary of the Company, in such capacities, to the effect
that the condition set forth in Section 1.3(c) shall have been satisfied
(the
“Closing
Certificate”);
(k) PyX
shall
have entered into a definitive reseller agreement with LSI Logic; and
(l) All
Securities delivered at the Closing shall have any necessary stock transfer
tax
stamps (purchased at the expense of the Company) affixed.
1.4. Company’s
Conditions of Closing.
The
obligation of the Company to complete the sale of the Securities at the Closing
is subject to fulfillment (or waiver by the Company) of the following
conditions:
(a) the
Investors shall execute and deliver the Investor Rights Agreement;
(b) The
NASDAQ SmallCap Market shall have granted its approval to the Acquisition and
to
the Contemplated Transactions;
(c) the
representation and warranties of the Investors set forth in this Agreement
shall
be true and correct in all respects as of the date of this Agreement and on
the
Closing Date;
(d) the
Required Stockholder Approval shall have been obtained;
(e) the
Company shall not be subject to delisting with The Nasdaq SmallCap Market,
or
obliged to apply for relisting, under Rule 4330(f) of the NASD or otherwise
as a
consequence of the Acquisition and the Contemplated Transactions;
and
(f) the
Acquisition shall have been completed.
2. Representations,
Warranties and Covenants of the Company.
The
Company hereby represents and warrants to, and covenants with, each of the
Investors as follows:
2.1. Corporate
Organization; Authority; Due Authorization.
(a) The
Company (i) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, (ii) has
the
corporate power and authority to own or lease its properties as and in the
places where such business is conducted and to carry on its business as
conducted and (iii) is duly qualified as a foreign corporation authorized to
do
business in every jurisdiction where the failure to so qualify, individually
or
in the aggregate, would result in a Material Adverse Effect. Set forth in the
Company Disclosure Letter is a complete and correct list of all Subsidiaries.
Each Subsidiary is duly incorporated or organized, validly existing and in
good
standing under the laws of its jurisdiction of incorporation or organization
and
is qualified to do business as a foreign corporation or limited liability
company in each jurisdiction in which the failure to so qualify, individually
or
in the aggregate, would result in a Material Adverse Change.
(b) The
Company (i) has the requisite corporate power and authority to execute, deliver
and perform this
Agreement and the other Transaction Documents to
which
it is a party and to incur the obligations herein and therein and (ii) has
been
authorized by all necessary corporate action to execute, deliver and perform
this Agreement and the other Transaction Documents to which it is a party and
to
consummate the transactions contemplated hereby and thereby (the “Contemplated
Transactions”).
Each
of this Agreement and the other Transaction Documents is a valid and binding
obligation of the Company enforceable in accordance with its terms except as
limited by applicable bankruptcy, reorganization, insolvency, moratorium or
similar laws affecting the enforcement of creditors’ rights and the availability
of equitable remedies (regardless of whether such enforceability is considered
in a proceeding at law or equity). To the Company’s knowledge, the Voting
Agreement is a valid and binding obligation of the parties thereto other than
the Company, enforceable in accordance with its terms.
2.2. Capitalization;
Authorization of Additional Shares of Common Stock.
(a) Current
Capitalization.
As of
the date hereof, the authorized capital stock of the Company consists of (i)
25,000,000 shares of Common Stock,
$0.001
par value,
of
which 5,243,483 shares of Common Stock are outstanding and (ii) 2,000,000 shares
of Preferred Stock, $0.001 par value, of which no shares are outstanding. All
outstanding shares were issued in compliance with all applicable Federal and
state securities laws, and the issuance of such shares was duly authorized.
Except as contemplated by this Agreement or as set forth in the Company
Disclosure Letter, there are (i) no outstanding subscriptions, warrants,
options, conversion privileges or other rights or agreements obligating the
Company to purchase or otherwise acquire or issue any shares of capital stock
of
the Company (or shares reserved for such purpose), (ii) no preemptive
rights contained in the Company’s Certificate of Incorporation, as amended (the
“Certificate
of Incorporation”),
Bylaws of the Company or contracts to which the Company is a party or rights
of
first refusal with respect to the issuance of additional shares of capital
stock
of the Company (other than as set forth in the Investor Rights Agreement,
including without limitation the Securities and the Warrant Shares), and
(iii) no commitments or understandings (oral or written) of the Company
to
issue any shares, warrants, options or other rights other than option grants
that may be committed to potential employees of the Company in the Ordinary
Course of Business. Except
as
set forth in the Company Disclosure Letter, to the Company’s knowledge, none of
the shares of Common Stock is subject to any stockholders’ agreement, voting
trust agreement or similar arrangement or understanding. Except as set forth
in
the Company Disclosure Letter, the Company has no outstanding bonds, debentures,
notes or other obligations the holders of which have the right to vote (or
which
are convertible into or exercisable for securities having the right to vote)
with the stockholders of the Company on any matter. With respect to each
Subsidiary other than PyX, and to the Company’s knowledge with respect to PyX,
(x) all the issued and outstanding shares of the Subsidiary’s capital stock
or equity interests have been duly authorized and validly issued, are fully
paid
and nonassessable, have been issued in compliance with applicable federal and
state securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities,
and
(y) except as disclosed in the Company Disclosure Letter, there are
no
outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into,
or
any contracts or commitments to issue or sell, shares of the Subsidiary’s
capital stock or any such options, rights, convertible securities or
obligations. Except as disclosed in the Company Disclosure Letter, the Company
owns 100% of the outstanding equity of each Subsidiary other than PyX. At the
closing of the Acquisition, PyX will be merged with and into another Subsidiary
of the Company and will cease to exist as a separate corporation or
Subsidiary.
(b) Proxy
Statement; Stockholders Meeting.
(i) As
promptly as possible, the Company shall take all action necessary to call a
meeting of its stockholders (together with any adjournments or postponements
thereof, the “Stockholders
Meeting”)
for
the purpose of seeking the requisite stockholder approval (the “Required
Stockholder Approval”)
of (x)
the Acquisition, (y) the Contemplated Transactions to the extent necessary
to
comply with Rule 4350(i) of the NASD, and (z) all matters to be voted upon
incident thereto (collectively, the “Proposal”).
In
connection therewith, the Company will promptly prepare and file with the SEC
proxy materials (including one or more proxy statements (as amended or
supplemented, the “Proxy
Statement”)
and
form of proxy) for use at the Stockholders Meeting and, after receiving and
promptly responding to any comments of the SEC thereon and obtaining SEC
approval of the mailing of the Proxy Statement and proxy to the Company’s
stockholders, shall promptly mail such proxy materials to the stockholders
of
the Company. The Company will comply with Section 14(a) of the Exchange Act
and
the rules promulgated thereunder in relation to the Proxy Statement and form
of
proxy to be sent to the stockholders of the Company in connection with the
Stockholders Meeting, and the Proxy Statement shall not, on the date the Proxy
Statement (or any amendment thereof or supplement thereto) is first mailed
to
stockholders or at the time of the Stockholders Meeting, contain any statement
that, at the time and in the light of the circumstances under which it is made,
is false or misleading with respect to any material fact, or omit to state
any
material fact necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier communication
with respect to the solicitation of a proxy for the Stockholders Meeting or
the
subject matter thereof which has become false or misleading. If the Company
should discover at any time prior to the Closing Date any event relating to
the
Company or any of its Subsidiaries or any of their respective affiliates,
officers or directors that is required to be set forth in a supplement or
amendment to the Proxy Statement, in addition to the Company’s obligations under
the Exchange Act, the Company will promptly inform its stockholders thereof.
The
Company shall give prompt notice to AIGH and the Investors’ counsel of any
determination by the SEC to review or not to review the Proxy
Statement.
(ii) Subject
to its fiduciary obligations under applicable law (as determined in good faith
by the Company’s Board of Directors, after having taken into account the written
advice of the Company’s outside counsel), the Company’s Board of Directors shall
recommend to the Company’s stockholders (and not revoke or amend such
recommendation) that the stockholders vote in favor of the Proposal and shall
cause the Company to take all commercially reasonable action to solicit the
Required Stockholder Approval. Whether or not the Company’s Board of Directors
determines at any time after the date hereof that, due to its fiduciary duties,
it must revoke or amend its recommendation to the Company’s stockholders, the
Company is required to, and will take, in accordance with applicable law and
its
Certificate of Incorporation and Bylaws, all action necessary to convene the
Stockholders Meeting as promptly as practicable to consider and vote upon the
approval of the Proposal.
(iii) In
the
event that (x) the Company does not file the Proxy Statement within 20 business
days following the date of this Agreement, (y) the Company fails to use its
best
efforts to cause the Stockholders Meeting to take place within 90 days following
the date of this Agreement, or (z) the Company’s Board of Directors has
withdrawn or modified its recommendation to its stockholders pursuant to the
provisions of Section 2.2(b)(ii), the Company will pay to each Investor, at
the
earlier to occur of (a) the Closing and (b) the business day after the latest
permitted date for Closing, as set forth in Section 1.2, if the Closing has
not
occurred by such latest permitted date, a cash fee equal to 25% of such
Investor’s investment set forth on Schedule 1.1(b); provided, however, that,
with respect to clause (y) above, no such penalty shall apply in the event
that
a delay beyond the Review Date arises out of review by the SEC as long as the
Company continues to use its best efforts to cause the Stockholders Meeting
to
take place as soon as practicable.
2.3. Validity
of Securities.
The
issuance of the Securities has been duly authorized by all necessary corporate
action on the part of the Company other than the Required Stockholder Approval
and, when issued to, delivered to, and paid for by the Investors in accordance
with this Agreement, the Shares will be validly issued, fully paid and
non-assessable.
2.4. Warrant
Shares.
The
issuance of the Warrant Shares upon exercise of the Warrants has been duly
authorized by the Company’s Board of Directors. At all times between the Closing
Date and prior to such exercise, the Warrant Shares will have been duly reserved
for issuance upon such exercise and, when so issued, will be validly issued,
fully paid and non-assessable.
2.5. Private
Offering.
Neither
the Company nor, to the Company’s knowledge, anyone acting on its behalf has
within the last 12 months issued, sold or offered any security of the Company
(including, without limitation, any Common Stock or warrants of similar tenor
to
the Warrants) to any Person under circumstances that would cause the issuance
and sale of the Securities, as contemplated by this Agreement, to be subject
to
the registration requirements of the Securities Act of 1933, as amended (the
“Securities
Act”).
The
Company agrees that neither the Company nor anyone acting on its behalf will
offer the Securities or any part thereof or any similar securities for issuance
or sale to, or solicit any offer to acquire any of the same from, anyone so
as
to make the issuance and sale of the Securities subject to the registration
requirements of Section 5 of the Securities Act.
2.6. Brokers
and Finders.
Except
as set forth in the Company Disclosure Letter, neither the Company nor any
of
its officers, directors, employees or stockholders, has employed any broker
or
finder with respect to the Contemplated Transactions.
2.7. No
Conflict; Required Filings and Consents.
(a) The
execution, delivery and performance of this Agreement and
the
other Transaction Documents by the Company do not,
and
the
consummation by the Company of the Contemplated Transactions will not, (i)
conflict with or violate the Certificate of Incorporation or Bylaws of the
Company or the charter documents of its Subsidiaries, (ii) conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to
the
Company or its Subsidiaries or by which any property or asset of the Company
or
its Subsidiaries is bound or affected or (iii) result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, result in the loss of a material benefit under,
or give to others any right of purchase or sale, or any right of termination,
amendment, acceleration, increased payments or cancellation of, or result in
the
creation of a lien or other encumbrance on any property or asset of the Company
or of any of its Subsidiaries pursuant to, any Material Agreement; except,
in
the case of clauses (ii) and (iii) above, for any such conflicts, violations,
breaches, defaults or other occurrences that would not prevent or delay
consummation of any of the Contemplated Transactions in any material respect
or
otherwise prevent the Company from performing its obligations under this
Agreement or any of the other Transaction Documents in any material respect,
and
would not, individually or in the aggregate, reasonably be expected to have
a
Material Adverse Effect.
(b) The
execution and delivery of this Agreement and the other Transaction Documents
by
the Company do not, and the performance of this Agreement and the other
Transaction Documents and the consummation by the Company of the Contemplated
Transactions will not, require any consent, approval, authorization or permit
of, or filing with or notification to, any Governmental Body (as hereinafter
defined) except for the filing of a Form D with the Securities and Exchange
Commission and the filing of the Proxy Statement and the filing of a Form 8-K
and other applicable requirements, if any, of the Securities Exchange Act of
1934, as amended (the “Exchange
Act”)
or any
state securities or “blue sky” laws (“Blue
Sky Laws”),
any
approval required by applicable rules of the markets in which the Company’s
securities are traded and any required filing of the Voting Agreement with
the
appropriate Governmental Body. For purposes of this Agreement, “Governmental
Body”
shall
mean any: (a) nation, state, commonwealth, province, territory, county,
municipality, district or other jurisdiction of any nature; (b) federal, state,
local, municipal, foreign or other government; or (c) governmental or
quasi-governmental authority of any nature (including any governmental division,
department, agency, commission, instrumentality, official, organization, unit,
body or entity and any court or other tribunal). Without limitation on the
foregoing, the consummation of the Contemplated Transactions and the Acquisition
do not require the approval of the stockholders of the Company other than the
Required Stockholder Approval and the approval of the Nasdaq SmallCap Market,
both of which will be obtained prior to the Closing.
2.8. Compliance.
Except
as set forth in the Company Disclosure Letter, neither the Company nor any
Subsidiary is in conflict with, or in default or violation of (i) any law,
rule,
regulation, order, judgment or decree applicable to the Company or such
Subsidiary or by which any property or asset of the Company or such Subsidiary
is bound or affected (“Legal
Requirement”)
or
(ii) any Material Agreement, in each case except for any such conflicts,
defaults or violations that would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. Since November 1,
2001, neither the Company nor any Subsidiary has received any written notice
or
communication from any Governmental Body regarding any actual or possible
violation of, or failure to comply with, any Legal Requirement.
2.9. SEC
Documents; Financial Statements.
(a) The
information contained in the following documents did not, as of the date of
the
applicable document, include any untrue statement of a material fact or omit
to
state any material fact required to be stated therein or necessary to make
the
statements therein, in the light of the circumstances in which they were made,
not misleading, as of their respective filing dates or, if amended, as so
amended (the following documents, together with any other filings made by the
Company with the SEC after the date of this Agreement prior to the Closing
Date,
collectively, the “SEC
Documents”),
provided that the representation in this sentence shall not apply to any
misstatement or omission in any SEC Document filed prior to the date of this
Agreement which will have been superseded by a subsequent SEC Document filed
prior to the Closing Date:
(i) the
Company’s Annual Report on Form 10-K for the year ended October 31, 2004;
(ii) the
Company’s definitive Proxy Statement with respect to its 2005 Annual Meeting of
Stockholders, filed with the SEC on February 10, 2005;
(iii) the
Company’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2005;
and
(iv) the
Company’s Current Reports on Form 8-K, filed with the SEC on October 14, 2004,
December 15, 2004, January 4, 2005, February 23, 2005 and March 28, 2005, and
on
Form 8-K/A, filed with the SEC on February 28, 2005.
(b) In
addition, as of the date of this Agreement and as of the Closing Date, the
Company Disclosure Letter, when read together with the representations and
warranties contained in this Agreement, does not include any untrue statement
of
a material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they were made
and the time period about which they were made, not misleading.
(c) The
Company has filed all forms, reports and documents required to be filed by
it
with the SEC since October 31, 2001, including, without limitation, the SEC
Documents. As of their respective dates, the SEC
Documents have
complied, and will have complied, as to form in all material respects with
the
applicable requirements of the Securities Act, the Exchange Act and the rules
and regulations thereunder.
(d) The
Company’s Annual Report on Form 10-K for the year ended October 31, 2004
includes (i) consolidated balance sheets as of October 31, 2003 and 2004 and
(ii) consolidated statements of operations and consolidated statements of cash
flows for the three one-year periods then ended (collectively, the “Form
10-K Financial Statements”).
(e) The
Company’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2005,
includes (i) consolidated balance sheets as of January 31, 2005 and October
31,
2004 and (ii) consolidated statements of operations and consolidated statements
of cash flows for the quarters ended January 31, 2004 and 2005 (the
“January
31 Form 10-Q Financial Statements).
(f) PyX’s
balance sheets as of December 31, 2004 and 2003 and related statements of
operations, stockholders’ equity (deficit), and cash flows for the year ended
December 31, 2004, the period from inception (November 26, 2002) through
December 31, 2003, and the period from inception (November 26, 2002) through
December 31, 2004 are referred to herein as the “PyX
Financial Statements”
and,
together with the Form 10-K Financial Statements and the January 31 Form 10-Q
Financial Statements, are referred to as the “Financial
Statements.”
(g) The
Form
10-K Financial Statements and the January 31 Form 10-Q Financial Statements
(including the related notes and schedules thereto and all other financial
information included in the SEC Documents) fairly present in all material
respects the consolidated financial position, results of operations or cash
flows, as the case may be, of the Company and its Subsidiaries other than PyX
for the periods set forth therein (subject, in the case of unaudited statements,
to normal year-end audit adjustments that would not be material in amount or
effect), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may
be
noted therein. The PyX Financial Statements fairly present in all material
respects the consolidated financial position, results of operations or cash
flows, as the case may be, of PyX for the periods set forth therein, in each
case in accordance with generally accepted accounting principles consistently
applied during the periods involved, except as may be noted therein.
(h) Any
SEC
Documents filed after the date of this Agreement and prior to the Closing Date
will not, as of the date of the applicable document, include any untrue
statement of a material fact or omit to state any material fact required to
be
stated therein or necessary to make the statements therein, in the light of
the
circumstances in which they were made, not misleading, as of their respective
filing dates or, if amended, as so amended.
2.10. Litigation.
Except
as set forth in the SEC Documents or the Company Disclosure Letter, there are
no
claims, actions, suits, investigations, inquiries or proceedings (each, an
“Action”)
pending against the Company or any of its Subsidiaries or, to the knowledge
of
the Company, threatened against the Company or any of its Subsidiaries, at
law
or in equity, or before or by any court, tribunal, arbitrator, mediator or
any
federal or state commission, board, bureau, agency or instrumentality, that,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect. Neither the Company nor any of its Subsidiaries is
a
party to or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality.
2.11. Absence
of Certain Changes.
Except
(i) as specifically contemplated by this Agreement or the Acquisition Agreement
and related agreements and the transactions contemplated thereby, or (ii) as
set
forth in the Company Disclosure Letter, the SEC Documents or the Financial
Statements, since January 31, 2005, there has not been (a)
any
Material Adverse Change; (b)
any
return of any capital or other distribution of assets to stockholders of the
Company (except to the Company); (c)
except
for the Acquisition, any acquisition (by merger, consolidation, acquisition
of
stock and/or assets or otherwise) of any Person; or (d)
any
transactions, other than in the ordinary course of business, consistent with
past practices and reasonable business operations (“Ordinary
Course of Business”),
with
any of its officers, directors, principal stockholders or employees or any
Person affiliated with any of such persons.
2.12. Proprietary
Assets.
(a) For
purposes of this Agreement, “Proprietary
Assets”
shall
mean all right, title and interest of the Company and the Subsidiaries in and
to
the following items or types of property: (i) every patent, patent application,
trademark (whether registered or unregistered), trademark application, trade
name, fictitious business name, service mark (whether registered or
unregistered), service mark application, copyright (whether registered or
unregistered), copyright application, maskwork, maskwork application, trade
secret, know-how, customer list, franchise, system, computer software, computer
program, invention, design, blueprint, engineering drawing, proprietary product,
technology, proprietary right or other intellectual property right or intangible
asset other than goodwill; and (ii) all licenses and other rights to use or
exploit any of the foregoing.
(b) Except
as
set forth in the Company Disclosure Letter, each of the Company or its
Subsidiaries: has good, valid and marketable title to each of the Proprietary
Assets owned by it, free and clear of all liens and other encumbrances; has
a
valid right to use all Proprietary Assets owned by third parties; and is not
obligated to make any payment to any Person for the use of any Proprietary
Asset
except as set forth in the applicable license agreement. Except as set forth
in
the Company Disclosure Letter, neither the Company nor any of its Subsidiaries
has developed jointly with any other Person any material Proprietary Asset
with
respect to which such other Person has any rights.
(c) Each
of
the Company and its Subsidiaries has taken commercially reasonable and customary
measures and precautions to protect and maintain the confidentiality and secrecy
of all Proprietary Assets of the Company and its Subsidiaries (except
Proprietary Assets whose value would be unimpaired by public disclosure) and
otherwise to maintain and protect the value of all Proprietary Assets of the
Company and its Subsidiaries. Except as set forth in the Company Disclosure
Letter, neither the Company nor any of its Subsidiaries has (other than pursuant
to license agreements identified in the Company Disclosure Letter) disclosed
or
delivered to any Person, or permitted the disclosure or delivery to any Person
of, (i) the source code, or any portion or aspect of the source code, of any
Proprietary Asset, (ii) the object code, or any portion or aspect of the object
code, of any Proprietary Asset of the Company and its Subsidiaries, except
in
the ordinary course of its business or (iii) any patent applications (except
as
required by law).
(d) To
the
knowledge of the Company, (i) none of the Proprietary Assets of the Company
and
its Subsidiaries infringes or conflicts with any Proprietary Asset owned or
used
by any other Person; (ii) neither the Company nor any Subsidiary is infringing,
misappropriating or making any unlawful use of any Proprietary Asset owned
or
used by any other Person; and (iii) no other Person is infringing,
misappropriating or making any unlawful use of, and no Proprietary Asset owned
or used by any other Person infringes or conflicts with, any Proprietary Asset
of the Company or any of its Subsidiaries.
(e) Except
as
set forth in the Company Disclosure Letter, excluding
warranty claims received by Company or any of its Subsidiaries in the ordinary
course of business, there has not been any claim by any customer or other Person
alleging that any Proprietary Asset of the Company or any of its Subsidiaries
(including each version thereof that has ever been licensed or otherwise made
available by the Company to any Person) does not conform in all material
respects with any specification, documentation, performance standard,
representation or statement made or provided by or on behalf of the
Company.
(f) To
the
knowledge of the Company, the Proprietary Assets of the Company and its
Subsidiaries constitute all the Proprietary Assets necessary to enable the
Company and its Subsidiaries to conduct their respective businesses in the
manner in which such businesses have been and are being conducted. Except as
set
forth in the Company Disclosure Letter, (i) neither the Company nor any
Subsidiary has licensed any of its Proprietary Assets to any Person on an
exclusive, semi-exclusive or royalty-free basis and (ii) neither the Company
nor
any Subsidiary has entered into any covenant not to compete or contract limiting
such entity’s ability to exploit fully any of such entity’s material Proprietary
Assets or to transact business in any material market or geographical area
or
with any Person.
(g) Except
as
set forth in the Company Disclosure Letter, neither the Company nor any of
its
Subsidiaries has at any time received any notice or other communication (in
writing or otherwise) of any actual, alleged, possible or potential
infringement, misappropriation or unlawful use of, any Proprietary Asset owned
or used by any other Person.
2.13. Adverse
Business Developments.
Except
as set forth in the Company Disclosure Letter, there is no existing, pending
or,
to the knowledge of the Company, threatened termination, cancellation,
limitation, modification or change in the business relationship of the Company
or any of its Subsidiaries, with any supplier, customer or other Person, except
as such as would not reasonably be expected, individually or in the aggregate,
to have a Material Adverse Effect.
2.14. Registration
Rights.
Except
as set forth in the Investor Rights Agreement, the Shareholder Agreement
attached as an exhibit to the Acquisition Agreement, the SEC Documents, or
in
the Company Disclosure Letter, the Company is not under any obligation to
register under the Securities Act any of its currently outstanding securities
or
any securities issuable upon exercise or conversion of its currently outstanding
securities nor is the Company obligated to register or qualify any such
securities under any state securities or Blue Sky Laws.
2.15. Corporate
Documents.
The
Company’s Certificate of Incorporation and Bylaws, each as amended to date and
prior to the Closing Date, which have been requested and previously provided
to
the Investors, are true, correct and complete and contain all amendments
thereto.
2.16. Disclosure.
The
Company shall file a Current Report on Form 8-K, by the time required by the
SEC, describing the material terms of the transactions contemplated by this
Agreement, and disclosing such portions of the Transaction Documents as contain
material nonpublic information with respect to the Company that has not
previously been publicly disclosed by the Company, and attaching as an exhibit
to such Form 8-K a form of this Agreement. Except for information that may
be
provided to the Investors pursuant to this Agreement or pursuant to the request
of any Investor or counsel to the Investors, the Company shall not, and shall
use commercially reasonable efforts to cause each of its officers, directors,
employees and agents not to, provide any Investor with any material nonpublic
information regarding the Company from and after the filing of such Form 8-K
without the express prior consent of such Investor.
2.17. Use
of
Proceeds.
The net
proceeds received by the Company from the sale of the Securities shall be used
by the Company for working capital and general corporate purposes, including
without limitation to support the operations, if any, of each of the
Subsidiaries and PyX.
3. Representations
and Warranties of the Investors.
Each
Investor represents and warrants to the Company as follows:
3.1. Authorization.
Such
Investor (a)
has
full power and authority to execute, deliver and perform this Agreement and
the
other Transaction Documents to which it is a party and to incur the obligations
herein and therein and (b)
if
applicable has been authorized by all necessary corporate or equivalent action
to execute, deliver and perform this Agreement and the other Transaction
Documents and to consummate the Contemplated Transactions. Each of this
Agreement and the other Transaction Documents is a valid and binding obligation
of such Investor enforceable in accordance with its terms, except as limited
by
applicable bankruptcy, reorganization, insolvency, moratorium or similar laws
affecting the enforcement of creditors’ rights and the availability of equitable
remedies (regardless of whether such enforceability is considered in a
proceeding at law or equity).
3.2. Brokers
and Finders.
Such
Investor has not retained any investment banker, broker or finder in connection
with the Contemplated Transactions.
4. Securities
Laws.
4.1. Securities
Laws Representations and Covenants of Investors.
(a) This
Agreement is made with each Investor in reliance upon such Investor’s
representation to the Company, which by such Investor’s execution of this
Agreement such Investor hereby confirms, that the Securities to be received
by
such Investor will be acquired for investment for such Investor’s own account,
not as a nominee or agent, and not with a view to the resale or distribution
of
any part thereof such that such Investors would constitute an “underwriter”
under the Securities Act; provided that this representation and warranty shall
not limit the Investor’s right to sell the Shares or the Warrant Shares pursuant
to the
Investor Rights Agreement or
in
compliance with an exemption from registration under the Securities Act or
the
Investor’s right to indemnification under this Agreement or the Investor Rights
Agreement.
(b) Each
Investor understands and acknowledges that the offering of the Securities
pursuant to this Agreement will not be registered under the Securities Act
or
qualified under any Blue Sky Laws, on the grounds that the offering and sale
of
the Securities are exempt from registration and qualification, respectively,
under the Securities Act and the Blue Sky Laws.
(c) Each
Investor covenants that, unless the Shares, the Warrants, the Warrant Shares
or
any other shares of capital stock of the Company received in respect of the
foregoing have been registered pursuant to the Investor Rights Agreement being
entered into among the Company and the Investors, such Investor will not dispose
of such securities unless and until such Investor shall have notified the
Company of the proposed disposition and shall have furnished the Company with
an
opinion of counsel reasonably satisfactory in form and substance to the Company
to the effect that (i) such disposition will not require registration under
the
Securities Act and (ii) appropriate action necessary for compliance with the
Securities Act and any applicable state, local or foreign law has been taken;
provided, however, that an investor may dispose of such securities without
providing the opinion referred to above if the Company has been provided with
adequate assurance that such disposition has been made in compliance with Rule
144 under the Securities Act (or any similar rule).
(d) Each
Investor represents that: (i) such Investor has such knowledge and
experience in financial and business matters as to be capable of evaluating
the
merits and risks of such Investor’s prospective investment in the Securities;
(ii) such Investor has the ability to bear the economic risks of such
Investor’s prospective investment and can afford the complete loss of such
investment; (iii) such Investor has been furnished with and has had
access
to such information as is in the Company Disclosure Letter together with the
opportunity to obtain such additional information as it requested to verify
the
accuracy of the information supplied; and (iv) such Investor has had
access
to officers of the Company and an opportunity to ask questions of and receive
answers from such officers and has had all questions that have been asked by
such Investor satisfactorily answered by the Company.
(e) Each
Investor further represents by execution of this Agreement that such Investor
qualifies as an “accredited investor” as such term is defined under Rule 501
promulgated under the Securities Act. Any Investor that is a corporation, a
partnership, a limited liability company, a trust or other business entity
further represents by execution of this Agreement that it has not been organized
for the purpose of purchasing the Securities.
(f) By
acceptance hereof, each Investor agrees that the Shares, the Warrants, the
Warrant Shares and any shares of capital stock of the Company received in
respect of the foregoing held by it may not be sold by such Investor without
registration under the Securities Act or an exemption therefrom, and therefore
such Investor may be required to hold such securities for an indeterminate
period.
4.2. Legends.
All
certificates for the Shares, the Warrants and the Warrant Shares, and each
certificate representing any shares of capital stock of the Company received
in
respect of the foregoing, whether by reason of a stock split or share
reclassification thereof, a stock dividend thereon or otherwise and each
certificate for any such securities issued to subsequent transferees of any
such
certificate (unless otherwise permitted herein) shall bear the following
legend:
“THE
SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE BEEN ACQUIRED FOR INVESTMENT
AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES
MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT.”
5. Additional
Covenants of the Company.
5.1. Reports,
Information, Authorization of Sufficient Shares.
(a) The
Company
shall cooperate with each Investor in supplying such information as may be
reasonably requested by such Investor to complete and file any information
reporting forms presently or hereafter required by the SEC as a condition to
the
availability of an exemption, presently existing or hereafter adopted, from
the
Securities Act for the sale of any of the Shares, the Warrants, the Warrant
Shares and shares of capital stock of the Company received in respect of the
foregoing.
(b) For
so long
as an Investor (or the successor or assign of such Investor) holds either
Securities or Warrant Shares, the Company shall deliver to such Investor (or
the
successor or assign of such Investor), contemporaneously with delivery to other
holders of Common Stock, a copy of each report of the Company delivered to
holders of Common Stock.
(c) At
the
Closing and at every time thereafter, the Company shall keep reserved for
issuance a sufficient number of authorized but unissued shares of Common Stock
(or other securities for which the Warrants are then exercisable) so that the
Warrants that remain unexercised at such time may be exercised to purchase
Common Stock (or such other securities).
5.2. Expenses;
Indemnification.
(a) The
Company
agrees to pay on the Closing Date and hold the Investors harmless against
liability for the payment of (1) any stamp or similar taxes (including interest
and penalties, if any) that may be determined to be payable in respect of the
execution and delivery of this Agreement and the issue and sale of any
Securities and Warrant Shares, (2) the expense of preparing and issuing the
Securities and Warrant Shares, and (3) the cost of delivering the Securities
and
Warrant Shares of each Investor to such Investor’s address, insured in
accordance with customary practice. Each Investor shall be responsible for
its
out-of-pocket expenses arising in connection with the Contemplated Transactions,
except that, at the Closing, the Company shall pay fees and disbursements of
counsel to the Investors as set forth in Section 6.9.
(b) The
Company
hereby agrees and acknowledges that the Investors have been induced to enter
into this Agreement and to purchase the Securities hereunder, in part, based
upon the representations, warranties and covenants of the Company contained
herein. The Company hereby agrees to pay, indemnify and hold harmless the
Investors and any director, officer, partner, member, employee or other
affiliate of any Investor against all claims, losses and damages resulting
from
any and all legal or administrative proceedings against one or more Investors,
including without limitation, reasonable attorneys’ fees and expenses incurred
in connection therewith (collectively, “Loss”),
resulting from a breach by the Company of any representation or warranty of
the
Company contained herein or the failure of the Company to perform any covenant
made herein; provided that the Company’s liability under this Section 5.2(b)
shall be limited to the aggregate purchase price actually paid for the
Securities and that the Company shall not be obligated to indemnify the
Investors for Losses until the total amount of Losses accrued aggregates
$25,000, at which point the Company will be obligated to indemnify the Investors
for such amount to the first dollar.
(c) As
soon as
reasonably practicable after receipt by an Investor of notice of any Loss in
respect of which the Company may be liable under this Section 5.2, the Investor
shall give notice thereof to the Company. Each Investor may, at its option,
claim indemnity under this Section 5.2 as soon as a claim has been threatened
by
a third party, regardless of whether an actual Loss has been suffered, so long
as counsel for such Investor shall in good faith determine that such claim
is
not frivolous and that such Investor may be liable or otherwise incur a Loss
as
a result thereof and shall give notice of such determination to the Company.
Each Investor shall permit the Company, at the Company’s option and expense, to
assume the defense of any such claim by counsel mutually and reasonably
satisfactory to the Company and the Investors who are subject to such claim,
and
to settle or otherwise dispose of the same; provided,
however,
that
each Investor may at all times participate in such defense at such Investor’s
expense; and provided,
further,
that
the Company shall not, in defense of any such claim, except with the prior
written consent of a majority in interest of the Investors subject to such
claim, consent to the entry of any judgment or any settlement of such claim
that
does not include as an unconditional term thereof the giving by the claimant
or
plaintiff in question to each Investor and its affiliates of a release of all
liabilities in respect of such claims. If the Company does not promptly assume
the defense of such claim irrespective of whether such inability is due to
the
inability of the afore-described Investors and the Company to mutually agree
as
to the choice of counsel, or if any such counsel is unable to represent one
or
more of the Investors due to a conflict or potential conflict of interest,
then
an Investor may assume such defense and be entitled to indemnification and
prompt reimbursement from the Company for such Investor’s costs and expenses
incurred in connection therewith, including without limitation, reasonable
attorneys’ fees and expenses. Such fees and expenses shall be reimbursed to the
Investors as soon as practicable after submission of invoices to the
Company.
(d) The
Company shall maintain the effectiveness of the Registration Statement (as
defined in the Investor Rights Agreement) under the Securities Act for as long
as is required under the Investor Rights Agreement.
6. Miscellaneous.
6.1. Entire
Agreement; Successors and Assigns.
This
Agreement and the other Transaction Documents constitute the entire contract
between the parties relative to the subject matter hereof and thereof, and
no
party shall be liable or bound to the other in any manner by any warranties,
representations or covenants except as specifically set forth herein or therein.
This Agreement and the other Transaction Documents supersede any previous
agreement among the parties with respect to the Securities. The terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective executors, administrators, heirs, successors and assigns of
the
parties. Except as expressly provided herein, nothing in this Agreement,
expressed or implied, is intended to confer upon any party, other than the
parties hereto, any rights, remedies, obligations or liabilities under or by
reason of this Agreement.
6.2. Survival
of Representations and Warranties.
Notwithstanding any right of the Investors fully to investigate the affairs
of
the Company and notwithstanding any knowledge of facts determined or
determinable by any Investor pursuant to such right of investigation, each
Investor has the right to rely fully upon the representations, warranties,
covenants and agreements of the Company contained in this Agreement or in any
documents delivered pursuant to this Agreement. All such representations and
warranties of the Company shall survive the execution and delivery of this
Agreement and the Closing hereunder and shall continue in full force and effect
for one year after the Closing. The covenants of the Company set forth in
Section 5 shall remain in effect as set forth therein.
6.3. Governing
Law; Jurisdiction.
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of New York without regard to principles of conflicts of law. Each party
hereby irrevocably consents and submits to the jurisdiction of any New York
State or United States Federal Court sitting in the State of New York, County
of
New York, over any action or proceeding arising out of or relating to this
Agreement and irrevocably consents to the service of any and all process in
any
such action or proceeding by registered mail addressed to such party at its
address specified in Section 6.6 (or as otherwise noticed to the other party).
Each party further waives any objection to venue in New York and any objection
to an action or proceeding in such state and county on the basis of forum
non conveniens.
Each
party also waives any right to trial by jury.
6.4. Counterparts.
This
Agreement may be executed in two or more counterparts, each of which shall
be
deemed an original, but all of which together shall constitute one and the
same
instrument.
6.5. Headings.
The
headings of the sections of this Agreement are for convenience and shall not
by
themselves determine the interpretation of this Agreement.
6.6. Notices.
Any
notice required or permitted hereunder shall be given in writing and shall
be
deemed effectively given upon (a) personal delivery, (b) delivery by fax (with
answer back confirmed), or (c) two business days after mailing by recognized
overnight courier (such as Federal Express), addressed to a party at its address
or sent to the fax number shown below or at such other address or fax number
as
such party may designate by three days’ advance notice to the other party.
Any
notice to the Investors shall be sent to the addresses set forth on the
signature pages hereof, with a copy to:
Hahn
& Hessen LLP
488
Madison Avenue
New
York,
New York 10022
Attention:
James Kardon
Fax
Number: (212) 478-7400
Any
notice to the Company shall be sent to:
SBE,
Inc.
2305
Camino Ramon, Suite 200,
San
Ramon, California 94583
Attention:
David Brunton
Fax
Number: (925) 355-2041
with
a
copy to:
Cooley
Godward LLP
One
Maritime Plaza, 20th Floor
San
Francisco, CA 94111-3580
Attention:
Jodie Bourdet
Fax
Number: (415) 951-3699
6.7. Rights
of Transferees.
Except
as may be set forth in the Investor Rights Agreement, any and all rights and
obligations of each of the Investors herein incident to the ownership of
Securities or the Warrant Shares shall pass successively to all subsequent
transferees of such securities until extinguished pursuant to the terms
hereof.
6.8. Severability.
Whenever possible, each provision of this Agreement shall be interpreted in
such
a manner as to be effective and valid under applicable law, but if any provision
of this Agreement shall be deemed prohibited or invalid under such applicable
law, such provision shall be ineffective to the extent of such prohibition
or
invalidity, and such prohibition or invalidity shall not invalidate the
remainder of such provision or any other provision of this
Agreement.
6.9. Expenses.
Irrespective of whether any Closing is effected, the Company shall pay all
costs
and expenses that it incurs with respect to the negotiation, execution, delivery
and performance of this Agreement. Each Investor shall be responsible for all
costs incurred by such Investor in connection with the negotiation, execution,
delivery and performance of this Agreement including, but not limited to, legal
fees and expenses, except that the Company shall pay at the Closing or upon
Price Termination the reasonable legal fees and expenses of Hahn & Hessen
LLP (the “Legal
Fee”),
as
counsel to the Investors, up to a maximum aggregate amount of $50,000. AIGH
may,
at its option, deduct the Legal Fee from the purchase price paid to the Company
for its Securities for payment to Hahn & Hessen LLP. After the Closing, the
Company shall pay Hahn & Hessen LLP’s reasonable legal fees and expenses
associated with the transactions contemplated by the Investor Rights Agreement,
provided that the Company will not be obligated to pay any such amount after
the
total amount paid to Hahn & Hessen LLP by the Company, including the amount
paid at the Closing, equals $50,000.
6.10. Amendments
and Waivers.
Unless
a particular provision or section of this Agreement requires otherwise
explicitly in a particular instance, any provision of this Agreement may be
amended and the observance of any provision of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of (a) the Company and (b) the
holders of 75% of the Shares (not including for this purpose any Shares that
have been sold to the public pursuant to a registration statement under the
Securities Act or an exemption therefrom) (it being understood that any
amendment effected prior to the Closing shall require the consent of Investors
investing 75% of the total amount set forth on Schedule 1.1(b)). Any amendment
or waiver effected in accordance with this Section 6.10 shall be binding upon
each holder of any Securities at the time outstanding (including securities
into
which such Securities are convertible), each future holder of all such
Securities, and the Company.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
SIGNATURE
PAGE
TO
SBE,
INC.
SUBSCRIPTION
AGREEMENT
Dated
May
4, 2005
IF
the
PURCHASER is an INDIVIDUAL, please complete the following:
IN
WITNESS WHEREOF, the undersigned has executed this Agreement this 4PthP
day of
May, 2005.
Amount
of Subscription:
$___________
|
___________________________________
Print
Name
|
|
|
|
___________________________________
Signature
of Investor
|
|
|
|
___________________________________
Social
Security Number
|
|
|
|
___________________________________
Address
and Fax Number
|
|
|
|
___________________________________
E-mail
Address
|
|
|
ACCEPTED
AND AGREED:
SBE,
INC.
By:________________________________________
Name:______________________________________
Title:_______________________________________
Dated:______________________________________
SIGNATURE
PAGE
TO
SBE,
INC.
SUBSCRIPTION
AGREEMENT
Dated
May
4, 2005
IF
the
INTERESTS will be held as JOINT TENANTS, as TENANTS IN COMMON, or as COMMUNITY
PROPERTY, please complete the following:
IN
WITNESS WHEREOF, the undersigned has executed this Agreement this 4PthP
day of
May, 2005.
Amount
of Subscription:
$____________
|
___________________________________
Print
Name of Purchaser
|
|
|
|
___________________________________
Signature
of a Purchaser
|
|
|
|
___________________________________
Social
Security Number
|
|
|
|
___________________________________
Print
Name of Spouse or Other Purchaser
|
|
|
|
___________________________________
Signature
of Spouse or Other Purchaser
|
|
|
|
___________________________________
Social
Security Number
|
|
|
|
___________________________________
Address
|
|
|
|
___________________________________
|
|
Fax
Number
|
|
____________________________________
E-mail
Address
|
ACCEPTED
AND AGREED:
SBE,
INC.
By:________________________________________
Name:______________________________________
Title:_______________________________________
Dated:______________________________________
SIGNATURE
PAGE
TO
SBE,
INC.
SUBSCRIPTION
AGREEMENT
Dated
May
4, 2005
IF
the
PURCHASER is a PARTNERSHIP, CORPORATION, LIMITED LIABILITY COMPANY, TRUST or
OTHER ENTITY, please complete the following:
IN
WITNESS WHEREOF, the undersigned has executed this Agreement this 4PthP
day of
May, 2005.
Amount
of Subscription:
$____________
|
|
|
|
|
|
|
|
|
__________________________________________________
Print
Full Legal Name of Partnership,
Company,
Limited Liability Company, Trust or Other Entity
|
|
|
|
By:
______________________________________
(Authorized
Signatory)
|
|
Name:
___________________________________________
|
|
Title:
____________________________________________
|
|
Address
and Fax Number: ___________________________
_________________________________________________
|
|
|
|
Taxpayer
Identification Number: _______________________
|
|
Date
and State of Organization: ________________________
|
|
Date
on which Taxable Year Ends: ______________________
|
|
E-mail
Address:
______________________________________
|
ACCEPTED
AND AGREED:
SBE,
INC.
By:________________________________________
Name:______________________________________
Title:_______________________________________
Dated:______________________________________
Schedule
1.1(b)
INVESTORS
Name
|
|
Total
Purchase Price
|
|
Herschel
Berkowitz
|
|
$
|
150,000.00
|
|
Paul
Packer
|
|
|
50,000.00
|
|
Globis
Capital Partners
|
|
|
500,000.00
|
|
Globis
Overseas Fund Ltd.
|
|
|
200,000.00
|
|
Richard
Grossman
|
|
|
50,000.00
|
|
Joshua
Hirsch
|
|
|
50,000.00
|
|
James
Kardon
|
|
|
17,000.00
|
|
AIGH
Investment Partners LLC
|
|
|
825,000.00
|
|
Ellis
International LLC
|
|
|
100,000.00
|
|
Jack
Dodick
|
|
|
200,000.00
|
|
Stephen
Spira
|
|
|
100,000.00
|
|
Fame
Associates
|
|
|
100,000.00
|
|
Cam
Co
|
|
|
350,000.00
|
|
Anfel
Trading Limited
|
|
|
650,000.00
|
|
Ganot
Corporation
|
|
|
350,000.00
|
|
LaPlace
Group, LLC
|
|
|
300,000.00
|
|
F.
Lyon Polk
|
|
|
60,000.00
|
|
Paul
Tramontano
|
|
|
50,000.00
|
|
Hilary
Edson
|
|
|
60,000.00
|
|
Kevin
McCaffrey
|
|
|
100,000.00
|
|
William
Heinzerling
|
|
|
100,000.00
|
|
John
A. Moore
|
|
|
100,000.00
|
|
Mark
Giordano
|
|
|
30,000.00
|
|
Jeffrey
Schwartz
|
|
|
8,000.00
|
|
Norman
Pessin
|
|
|
250,000.00
|
|
Greg
Yamamoto
|
|
|
200,000.00
|
|
Tzu-Wang
Pan
|
|
|
50,000.00
|
|
Kurt
Miyatake
|
|
|
50,000.00
|
|
Greg
Yamamoto, as UTMA custodian for Melanie
Yamamoto
|
|
|
50,000.00
|
|
Greg
Yamamoto, as UTMA custodian for Nicholas
Yamamoto
|
|
|
50,000.00
|
|
TOTAL
|
|
$
|
5,150,000.00
|
|
EXHIBITS
AND SCHEDULES TO THE UNIT SUBSCRIPTION AGREEMENT
Schedule 1.1(b) |
Investors |
Exhibit 1: |
Form
of Warrants (see ANNEX E) |
Exhibit
2: |
Voting Agreement (see ANNEX D) |
Exhibit 3: |
Form
of
Investor
Rights Agreement (see ANNEX F) |
Exhibit 4: |
Matters Covered by Legal Opinion (see
ANNEX
G) |
ANNEX
D
VOTING
AGREEMENT
This
Voting Agreement (this “Agreement”)
is
made as of the 4PthP
day of
May, 2005, by and among SBE, Inc., a Delaware corporation (“SBE”
or the
“Company”),
and
certain holders, as set forth in Schedule I hereto (the “Management
Holders”),
of
the Common Stock, $.001 par value per share, (the “Common
Stock”)
of the
Company.
RECITALS
WHEREAS,
it is contemplated that certain investors (collectively the “Investors”)
are
purchasing securities of SBE pursuant to a Unit Subscription Agreement dated
as
of May 4, 2005 (the “Unit
Subscription Agreement”),
which
provides, among other matters, for a Stockholders Meeting and approval of the
Proposal, each as defined in the Unit Subscription Agreement; and
WHEREAS,
the Management Holders have entered into this Agreement regarding the voting
of
the Common Stock acquired or beneficially owned by any Management Holder,
including without limitation any shares of capital stock of the Company that
may
be issued upon exercise of any rights, warrants or options to purchase, or
other
securities convertible into, capital stock of SBE and any rights, warrants
or
options to purchase, or other securities convertible into such capital stock
(collectively, with the Common Stock, the “SBE
Securities”);
NOW,
THEREFORE, in consideration of the Investors’ entering into the Unit
Subscription Agreement and other good and valuable consideration, the adequacy
of which is hereby affirmed, the parties hereby agree as follows:
1. EFFECTIVENESS. This
Agreement shall be effective as of the date hereof (the “Effective
Date”).
2. AGREEMENT
TO VOTE.
(a) In
connection with the Stockholders Meeting, each Management Holder shall vote
all
of such Management Holder’s SBE Securities (or grant or withhold approval or
consent) in favor of the Proposal.
(b) Each
Management Holder shall be present, in person or by proxy, at the Stockholders
Meeting and any adjournments thereof so that all SBE Securities owned of record
or beneficially owned by such Management Holder may be counted for the purpose
of determining the presence of a quorum.
3. AFFILIATES.
In the event any Affiliate of a Management Holder acquires any Common Stock
during the term of this Agreement, such Management Holder agrees to use its
best
efforts to cause such Affiliate to become a party to this Agreement. For
purposes of this Agreement, an “Affiliate”
of a Management Holder shall be a person that controls, is controlled by or
is
under common control with such Management Holder, within the meaning of the
federal securities laws.
4. TERMINATION
OF AGREEMENT. This Agreement shall terminate upon the earlier to occur of
(a)
the
termination of the Unit Subscription Agreement in accordance with its terms,
and
(b) the approval of the Proposal.
5. REPRESENTATIONS
OF THE MANAGEMENT HOLDERS. Each Management Holder hereby represents and warrants
that such Management Holder (a) owns beneficially and has the right to vote
the
Common Stock set forth opposite such Management Holder’s name on Schedule I, (b)
such Management Holder has full power to enter into this Agreement, and (c)
such
Management Holder will not take any action inconsistent with the purposes and
provisions of this Agreement.
6. ENFORCEABILITY;
REMEDIES; EXPENSES. Each Management Holder, in such person’s capacity as a
stockholder, and the Company shall take any and all actions necessary for the
enforceability of this Agreement under Delaware law, including without
limitation making all necessary filings or actions, if any, required by
applicable Delaware corporate law. Each party expressly agrees that this
Agreement shall be specifically enforceable in any court of competent
jurisdiction in accordance with its terms including, without limitation, the
right to entry of restraining orders and injunctions, whether preliminary,
mandatory, temporary, or permanent, against a violation, threatened or actual,
and whether or not continuing, of such obligation, without the necessity of
showing any particular injury or damage, and without the posting of any bond
or
other security, it being acknowledged and agreed that any such breach or
threatened breach would cause immediate and irreparable injury and that money
damages alone would not provide an adequate remedy. The Investors shall be
third
party beneficiaries of this Agreement with the right to enforce it in accordance
with its terms. Without limitation on the other remedies of the Investors and
the Company, the Management Holders shall bear all of the Investors’ and the
Company’s expenses, including reasonable legal fees and expenses, incurred in
connection with the enforcement of this Agreement.
7. GENERAL
PROVISIONS.
(a) All
of
the covenants and agreements contained in this Agreement shall be binding upon,
and inure to the benefit of, the respective parties and their successors,
assigns, heirs, executors, administrators and other legal representatives,
as
the case may be.
(b) This
Agreement, and the rights of the parties hereto, shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
a
contract made and to be performed in Delaware.
(c) This
Agreement may be executed in one or more counterparts, each of which will be
deemed an original but all of which together shall constitute one and the same
instrument.
(d) If
any
provision of this Agreement shall be declared void or unenforceable by any
court
or administrative board of competent jurisdiction, such provision shall be
deemed to have been severed from the remainder of the Agreement, and this
Agreement shall continue in all respects to be valid and
enforceable.
(e) Whenever
the context of this Agreement shall so require, the use of the singular number
shall include the plural and the use of any gender shall include all
genders.
[Signature
page follows]
IN
WITNESS WHEREOF, the parties hereto have executed this Voting Agreement as
of
the date first above written.
SBE,
Inc.
By:
Daniel
Grey
Chief
Executive Officer
Daniel
Grey
David
Brunton
Ignacio Munio
Yee-Ling
Chin
Kirk Anderson
M.M. Stuckey
Ronald Ritchie
John Reardon
William Heye
SCHEDULE
I
Management
Holders
Name
and Address
|
|
Number
of Shares of Common Stock
|
|
Daniel
Grey
c/o
SBE, Inc.
2305
Camino Ramon, Suite 200
San
Ramon, CA 94583
|
|
|
0
|
|
David
Brunton
c/o
SBE, Inc.
2305
Camino Ramon, Suite 200
San
Ramon, CA 94583
|
|
|
69,000
|
|
Ignacio
Munio
c/o
SBE, Inc.
2305
Camino Ramon, Suite 200
San
Ramon, CA 94583
|
|
|
98,495
|
|
Yee-Ling
Chin
c/o
SBE, Inc.
2305
Camino Ramon, Suite 200
San
Ramon, CA 94583
|
|
|
0
|
|
Kirk
Anderson
c/o
SBE, Inc.
2305
Camino Ramon, Suite 200
San
Ramon, CA 94583
|
|
|
0
|
|
M.M.
Stuckey
c/o
SBE, Inc.
2305
Camino Ramon, Suite 200
San
Ramon, CA 94583
|
|
|
0
|
|
Ronald
Ritchie
c/o
SBE, Inc.
2305
Camino Ramon, Suite 200
San
Ramon, CA 94583
|
|
|
15,000
|
|
John
Reardon
c/o
SBE, Inc.
2305
Camino Ramon, Suite 200
San
Ramon, CA 94583
|
|
|
0
|
|
William
Heye
c/o
SBE, Inc.
2305
Camino Ramon, Suite 200
San
Ramon, CA 94583
|
|
|
1,713
|
|
ANNEX
E
FORM
OF WARRANT
Void
after _______, 2010 Warrant No. ________
This
Warrant and any shares acquired upon the exercise of this Warrant have not
been
registered under the Securities Act of 1933. This Warrant and such shares may
not be sold or transferred in the absence of such registration or an exemption
therefrom under said Act. This Warrant and such shares may not be transferred
except upon the conditions specified in this Warrant, and no transfer of this
Warrant or such shares shall be valid or effective unless and until such
conditions shall have been complied with.
SBE,
INC.
COMMON
STOCK PURCHASE WARRANT
SBE,
Inc.
(the “Company”),
having its principal office at 2305 Camino Ramon, Suite 200, San Ramon,
California 94583, hereby certifies that, for value received,
___________________, or assigns, is entitled, subject to the terms set forth
below, to purchase from the Company at any time on or from time to time after
_________ __, 2005 and before 5:00 P.M., New York City time, on ______, 2010,
or
as extended in accordance with the terms hereof (the “Expiration
Date”),
______________ fully paid and non-assessable shares of Common Stock of the
Company, at the initial Purchase Price per share (as defined below) of [$ ].
The
number and character of such shares of Common Stock and the Purchase Price
per
share are subject to adjustment as provided herein.
Background. The
Company agreed to issue warrants to purchase an aggregate of up to __________
shares of Common Stock (subject to adjustment as provided herein) (the
“Warrants”),
in
connection with a private placement of the Company’s Units pursuant to the Unit
Subscription Agreement dated May 4, 2005 between the Company and the investors
party thereto (the “Offering”).
As
used
herein the following terms, unless the context otherwise requires, have the
following respective meanings:
“Additional
Assets”
has the
meaning set forth in Section 7.
“Common
Stock”
shall
mean stock of the Company of any class (however designated) whether now or
hereafter authorized, which generally has the right to participate in the voting
and in the distribution of earnings and assets of the Company without limit
as
to amount or percentage, which as of the date of this Warrant shall mean the
Company’s Common Stock, $0.001 par value per share.
“Company”
includes the Company and any corporation which shall succeed to or assume the
obligations of the Company hereunder. The term “corporation”
shall
include an association, joint stock company, business trust, limited liability
company or other similar organization.
“Convertible
Securities”
means
(i) options to purchase or rights to subscribe for Common Stock, (ii) securities
by their terms convertible into or exchangeable for Common Stock or (iii)
options to purchase or rights to subscribe for such convertible or exchangeable
securities.
“Exchange
Act”
means
the Securities Exchange Act of 1934 as the same shall be in effect at the
time.
“Excluded
Stock”
shall
mean (i) all shares of Common Stock issued or issuable to employees, directors
or consultants pursuant to any equity compensation plan that is in effect on
the
date of this Warrant, (ii) all shares of Common Stock issued or issuable to
employees or directors pursuant to any equity compensation plan approved by
the
stockholders of the Company after the date of this Warrant, (iii) all shares
of
Common Stock issued or issuable to employees, directors or consultants as bona
fide compensation for business services rendered, not compensation for
fundraising activities, (iv) all shares of Common Stock issued or issuable
to
bona fide leasing companies, strategic partners, or major lenders, (v) all
shares of Common Stock issued or issuable as the purchase price in a bona fide
acquisition or merger (including reasonable fees paid in connection therewith)
or (vi) all Warrant Shares (as defined in the Investor Rights Agreement),
Additional Shares (as defined in the Investor Rights Agreement) and shares
issued upon conversion or exercise of other Convertible Securities (as defined
in the Investor Rights Agreement) outstanding on the date hereof.
“Fair
Market Value”
of
assets or securities (other than Common Stock) shall mean the fair market value
as reasonably determined by the Board of Directors of the Company in good faith
in accordance with generally accepted accounting principles.
“Holder”
means
any record owner of Warrants or Underlying Securities.
“Investor
Rights Agreement”
has the
meaning set forth in Section 1.
“Market
Price”
has the
meaning set forth in Section 3.4.
“New
Purchase Price”
has the
meaning set forth in Section 7.
“Offering”
has the
meaning set forth in the Background of this Warrant.
“Options”
means
rights, warrants or options to subscribe for, purchase or otherwise acquire
Common Stock.
“Original
Issue Date”
means
________, 2005.
“Other
Securities”
refers
to any stock (other than Common Stock) and other securities of the Company
or
any other person (corporate or otherwise) which the Holders of the Warrants
at
any time shall be entitled to receive, or shall have received, upon the exercise
of the Warrants, in lieu of or in addition to Common Stock, or which at any
time
shall be issuable or shall have been issued in exchange for or in replacement
of
Common Stock or Other Securities pursuant to Section 6 or
otherwise.
“Purchase
Price per share”
means
[$ ] per share, as adjusted from time to time in accordance with the terms
hereof.
“Ratchet
Issuance”
has the
meaning set forth in Section 7.
“Registered”
and
“registration”
refer
to a registration effected by filing a registration statement in compliance
with
the Securities Act, to permit the disposition of Common Stock (or Other
Securities) issued or issuable upon the exercise of Warrants, and any
post-effective amendments and supplements filed or required to be filed to
permit any such disposition.
“Securities
Act”
means
the Securities Act of 1933 as the same shall be in effect at the
time.
“Underlying
Securities”
means
any Common Stock or Other Securities issued or issuable upon exercise of
Warrants.
“Unit”
means
(i) one (1) share of Common Stock, par value $0.001 per share, of the Company
and (ii) one (1) Warrant, exercisable to purchase one-half (1/2) share of Common
Stock.
“Warrant”
means,
as applicable, this Warrant or each right as set forth in this Warrant to
purchase one-half (1/2) share of Common Stock, as adjusted.
“Weighted
Average Issuance”
has the
meaning set forth in Section 7.
1. Registration,
etc.
The
Holder shall have the rights to registration of Underlying Securities issuable
upon exercise of the Warrants that are set forth in the Investor Rights
Agreement, dated ________, 2005, between the Company and the Holder (the
“Investor
Rights Agreement”).
2. Sale
or Exercise Without Registration.
If, at
the time of any exercise, transfer or surrender for exchange of a Warrant or
of
Underlying Securities previously issued upon the exercise of Warrants, such
Warrant or Underlying Securities shall not be registered under the Securities
Act, the Company may require, as a condition of allowing such exercise, transfer
or exchange, that the Holder or transferee of such Warrant or Underlying
Securities, as the case may be, furnish to the Company an opinion of counsel,
reasonably satisfactory to the Company, to the effect that such exercise,
transfer or exchange may be made without registration under the Securities
Act,
provided that the disposition thereof shall at all times be within the control
of such Holder or transferee, as the case may be, and provided further that
nothing contained in this Section 2 shall relieve the Company from complying
with its obligations concerning registration of Underlying Securities pursuant
to the Investor Rights Agreement.
3. Exercise
of Warrant.
3.1. Exercise
in Full.
Subject
to the provisions hereof, this Warrant may be exercised in full by the Holder
hereof by surrender of this Warrant, with the form of subscription at the end
hereof duly executed by such Holder, to the Company at its principal office
accompanied by payment, in cash or by certified or official bank check payable
to the order of the Company, in the amount obtained by multiplying the number
of
shares of Common Stock issuable upon exercise of this Warrant by the Purchase
Price per share, after giving effect to all adjustments through the date of
exercise.
3.2. Partial
Exercise.
Subject
to the provisions hereof, this Warrant may be exercised in part by surrender
of
this Warrant in the manner and at the place provided in Section 3.1 except
that
the amount payable by the Holder upon any partial exercise shall be the amount
obtained by multiplying (a) the number of shares of Common Stock (without giving
effect to any adjustment therein) designated by the Holder in the subscription
at the end hereof by (b) the Purchase Price per share. Upon any such partial
exercise, the Company at its expense will forthwith issue and deliver to or
upon
the order of the Holder hereof a new Warrant or Warrants of like tenor, in
the
name of the Holder hereof or as such Holder (upon payment by such Holder of
any
applicable transfer taxes) may request, calling in the aggregate on the face
or
faces thereof for the number of shares of Common Stock equal (without giving
effect to any adjustment therein) to the number of such shares called for on
the
face of this Warrant minus the number of such shares designated by the Holder
in
the subscription at the end hereof.
3.3. Exercise
by Surrender of Warrant or Other Securities.
In
addition to the method of payment set forth in Sections 3.1 and 3.2 and in
lieu
of any cash payment required thereunder, the Holder(s) of the Warrants shall
have the right at any time and from time to time to exercise the Warrants in
full or in part by surrendering shares of Common Stock, this Warrant or other
securities issued by the Company in the manner and at the place specified in
Section 3.1 as payment of the aggregate Purchase Price per share for the
Warrants to be exercised. The number of Warrants or other securities issued
by
the Company to be surrendered in payment of the aggregate Purchase Price for
the
Warrants to be exercised shall be determined by multiplying the number of
Warrants to be exercised by the Purchase Price per share, and then dividing
the
product thereof by an amount equal to the Market Price (as defined below) on
the
date that all documents and instruments required to be delivered or surrendered
to the Company for exercise of the Warrant have been so delivered or
surrendered. The number of shares of other securities to be surrendered in
payment of the aggregate Purchase Price for the Warrants to be exercised shall
be determined in accordance with the preceding sentence as if the other
securities had been converted into Common Stock immediately prior to exercise
or, in the case the Company has issued other securities that are not convertible
into Common Stock, at the Market Price thereof.
3.4. Definition
of Market Price.
As used
herein, the phrase “Market
Price”
at any
date shall be deemed to be (i) if the principal trading market for such
securities is The Nasdaq SmallCap Market or another exchange, the average of
the
high reported sale prices per share of Common Stock for the five preceding
consecutive trading days on which the Common Stock trades ending on the date
immediately before the date of determination, (ii) if the principal market
for
the Common Stock is the over-the-counter market, the average of the high
reported sale prices per share on such trading days as set forth by such market
or, (iii) if the Common Stock is not quoted by such over-the-counter market,
the
average of the average of the mean of the bid and asking prices per share on
such trading days as set forth in the National Quotation Bureau sheet listing
such securities for such days. Notwithstanding the foregoing, if there is no
reported high sale price, as the case may be, reported on any of the ten trading
days preceding the event requiring a determination of Market Price hereunder,
then the Market Price shall be the average of the high bid and asked prices
for
such days; and if there is no reported high bid and asked prices, as the case
may be, reported on any of the ten trading days preceding the event requiring
a
determination of Market Price hereunder, then the Market Price shall be
determined in good faith by resolution of the Board of Directors of the Company,
based on the best information available to it or in the event of a dispute
of
the determination of the Board of Directors of the Company provided in clause
(b) above, by arbitration in accordance with the rules then standing of the
American Arbitration Association, before a single arbitrator to be chosen by
the
Company and reasonably acceptable to a majority in interest of the holders
of
Warrants from a panel of persons qualified by education and training to pass
on
the matter to be decided.
3.5. Company
to Reaffirm Obligations.
The
Company will, at the time of any exercise of this Warrant, upon the request
of
the Holder hereof, acknowledge in writing its continuing obligation to afford
to
such Holder any rights (including, without limitation, any right to registration
of the Underlying Securities) to which such Holder shall continue to be entitled
after such exercise in accordance with the provisions of this Warrant,
provided
that if
the Holder of this Warrant shall fail to make any such request, such failure
shall not affect the continuing obligation of the Company to afford such Holder
any such rights.
3.6. Certain
Exercises.
If an
exercise of a Warrant or Warrants is to be made in connection with a registered
public offering or sale of the Company, such exercise may, at the election
of
the Holder, be conditioned on the consummation of the public offering or sale
of
the Company, in which case such exercise shall not be deemed effective until
the
consummation of such transaction.
4. Delivery
of Stock Certificates, etc., on Exercise.
As soon
as practicable after the exercise of this Warrant in full or in part, and in
any
event within three business days after delivery or surrender of all documents
and instruments required to be delivered or surrendered to the Company for
such
exercise, including payment of the exercise price in cash or securities in
accordance with this Warrant, the Company at its own expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the
name
of and delivered to the Holder hereof, or as such Holder (upon payment by such
Holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of fully paid and non-assessable shares of Common
Stock or Other Securities to which such Holder shall be entitled upon such
exercise, plus, in lieu of any fractional share to which such Holder would
otherwise be entitled, cash equal to such fraction multiplied by the then
current Market Price of one full share, together with any other stock or other
securities and property (including cash, where applicable) to which such Holder
is entitled upon such exercise pursuant to Section 5 or otherwise.
5. Adjustment
for Dividends in Other Stock, Property, etc.; Reclassification,
etc.
In case
at any time or from time to time after the Original Issue Date the holders
of
Common Stock (or, if applicable, Other Securities) shall have received, or
(on
or after the record date fixed for the determination of stockholders eligible
to
receive) shall have become entitled to receive, without payment
therefor
(a) other
or
additional stock or other securities or property (other than cash) by way of
dividend, or
(b) any
cash
paid or payable (including, without limitation, by way of dividend),
or
(c) other
or
additional stock or other securities or property (including cash) by way of
spin-off, split-up, reclassification, recapitalization, combination of shares
or
similar corporate rearrangement,
then,
and
in each such case the Holder of this Warrant, upon the exercise hereof as
provided in Section 3, shall be entitled to receive the amount of stock and
other securities and property (including cash in the cases referred to in
subdivisions (b) and (c) of this Section 5 which such Holder would hold on
the
date of such exercise if on the Original Issue Date such Holder had been the
Holder of record of the number of shares of Common Stock called for on the
face
of this Warrant and had thereafter, during the period from the Original Issue
Date to and including the date of such exercise, retained such shares and all
such other or additional stock and other securities and property (including
cash
in the cases referred to in subdivisions (b) and (c) of this Section 5
receivable by such Holder as aforesaid) during such period, giving effect to
all
adjustments called for during such period by Sections 6 and 7 hereof. If the
number of shares of Common Stock outstanding at any time after the date hereof
is decreased by a combination or reverse stock split of the outstanding shares
of Common Stock, the Purchase Price per share shall be increased, and the number
of shares of Common Stock purchasable under this Warrant shall be decreased
in
proportion to such decrease in outstanding shares of Common Stock.
6. Reorganization,
Consolidation, Merger, etc.
In case
the Company after the Original Issue Date shall (a) effect a reorganization,
(b)
consolidate with or merge into any other person or (c) transfer all or
substantially all of its properties or assets to any other person under any
plan
or arrangement contemplating the dissolution of the Company, then, in each
such
case, the Holder of this Warrant, upon the exercise hereof as provided in
Section 3 at any time after the consummation of such reorganization,
consolidation or merger or the effective date of such dissolution, as the case
may be, shall be entitled to receive (and the Company shall be entitled to
deliver), in lieu of the Underlying Securities issuable upon such exercise
prior
to such consummation or such effective date, the stock and other securities
and
property (including cash) to which such Holder would have been entitled upon
such consummation or in connection with such dissolution, as the case may be,
if
such Holder had so exercised this Warrant immediately prior thereto, all subject
to further adjustment thereafter as provided in Sections 5 and 7 hereof. The
Company shall not effect any such reorganization, consolidation, merger or
sale,
unless prior to or simultaneously with the consummation thereof, the successor
corporation resulting from such consolidation or merger or the corporation
purchasing such assets or the appropriate corporation or entity shall assume,
by
written instrument, the obligation to deliver to each Holder the shares of
stock, cash, other securities or assets to which, in accordance with the
foregoing provisions, each Holder may be entitled to and all other obligations
of the Company under this Warrant. In any such case, if necessary, the
provisions set forth in this Section 6 with respect to the rights thereafter
of
the Holders shall be appropriately adjusted so as to be applicable, as nearly
as
may reasonably be, to any Other Securities or assets thereafter deliverable
on
the exercise of the Warrants.
7. Other
Adjustments.
7.1. General.
(a)
Other
than as set forth in Sections 5 and 6, if, on or before the second anniversary
of the Original Issue Date, the Company shall issue any Common Stock other
than
Excluded Stock for a consideration per share (determined as set forth below)
less than the Purchase Price per share in effect immediately prior to the
issuance of such Common Stock (the “Ratchet
Issuance”),
the
Purchase Price per share in effect immediately prior to each issuance shall
forthwith be reduced to a new Purchase Price per share determined by dividing
(x) the sum of (I) the consideration received by the Company in such issue
less
(II) the Fair Market Value of any securities or other assets transferred by
the
Company in units or otherwise together with such Common Stock (“Additional
Assets”),
by
(y) the number of shares of Common Stock (not including shares issuable upon
conversion or exercise of Additional Assets) issued in the Ratchet Issuance
(the
“New
Purchase Price”).
The
number of shares of Common Stock for which this Warrant is exercisable shall
be
increased to a new number of shares determined by multiplying the number of
shares of Common Stock for which this Warrant is exercisable prior to the
Ratchet Issuance by a fraction, the numerator of which is the Purchase Price
per
share in effect prior to the Ratchet Issuance and the denominator of which
is
the New Purchase Price per share.
(b) Other
than as set forth in Sections 5 and 6, if, commencing after the second
anniversary of the Original Issue Date until the expiration of the Warrants,
the
Company shall issue any Common Stock other than Excluded Stock for a
consideration per share (determined as set forth below) less than the Purchase
Price per share in effect immediately prior to such issuance (the “Weighted
Average Issuance”),
the
Purchase
Price
per
share in effect hereunder shall simultaneously with such issuance or sale be
reduced to a New Purchase Price determined by multiplying the Purchase Price
per
share in effect immediately prior to the Weighted Average Issuance by the
quotient of (1) an amount equal to (x) the total number of shares of Common
Stock outstanding immediately prior to such issuance or sale, multiplied by
the
Purchase Price per share in effect hereunder immediately prior to such issuance
or sale, plus (y) the sum of (I) the consideration received by the Company
in
such issuance less (II) the Fair Market Value of any Additional Assets sold
in
units with such issuance, divided by (2) the total number of shares of Common
Stock outstanding immediately after issuance or sale of such additional shares,
multiplied by the Purchase Price per share in effect hereunder immediately
prior
to such issuance or sale. The number of shares of Common Stock for which this
Warrant is exercisable shall be increased to a new number of shares determined
by multiplying the number of shares of Common Stock for which this Warrant
is
exercisable prior to the Weighted Average Issuance by a fraction, the numerator
of which is the Purchase Price per share in effect prior to the Weighted Average
Issuance and the denominator of which is the New Purchase Price per
share.
(c) Adjustments
pursuant to this Section 7 (after reversal of the effect of any adjustments
under Sections 5 or 6) shall at no time reduce the
Purchase
Price per share in effect hereunder to less than fifty percent (50%) of the
initial Purchase Price per share, or increase the number of shares issuable
upon
exercise of the Warrants to greater than two (2) times the number of shares
initially issuable upon exercise of the Warrants.
7.2. Convertible
Securities.
(a)
In case
the Company shall issue or sell any Convertible Securities (including without
limitation Additional Assets), other than Excluded Stock, there shall be
determined the price per share for which Common Stock is issuable upon the
conversion or exchange thereof, such determination to be made by dividing (i)
the total amount received or receivable by the Company as consideration for
the
issue or sale of such Convertible Securities, plus the then current aggregate
amount of additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (ii) the maximum number of shares of Common
Stock of the Company issuable upon the conversion or exchange of all of such
Convertible Securities.
(b) If
the
price per share so determined shall be less than the applicable Purchase Price
per share, then such issue or sale shall be deemed to be an issue or sale for
cash (as of the date of issue or sale of such Convertible Securities) of such
maximum number of shares of Common Stock at the price per share so determined,
provided that, if such Convertible Securities shall by their terms provide
for
an increase or increases or decrease or decreases, with the passage of time,
in
the amount of additional consideration, if any, to the Company, or in the rate
of exchange, upon the conversion or exchange thereof, the adjusted Purchase
Price per share shall, forthwith upon any such increase or decrease becoming
effective, be readjusted to reflect the same, and provided further, that upon
the expiration of such rights of conversion or exchange of such Convertible
Securities, if any thereof shall not have been exercised, the adjusted Purchase
Price per share shall forthwith be readjusted and thereafter be the price which
it would have been had an adjustment been made on the basis that the only shares
of Common Stock so issued or sold were issued or sold upon the conversion or
exchange of such Convertible Securities, and that they were issued or sold
for
the consideration actually received by the Company upon such conversion or
exchange, plus the consideration, if any, actually received by the Company
for
the issue or sale of all of such Convertible Securities which shall have been
converted or exchanged.
7.3. Rights
and Options.
(a)
In case
the Company shall grant any rights or options to subscribe for, purchase or
otherwise acquire Common Stock, other than Excluded Stock, there shall be
determined the price per share for which Common Stock is issuable upon the
exercise of such rights or options, such determination to be made by dividing
(i) the total amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the then current
amount of additional consideration payable to the Company upon the exercise
of
such rights or options, by (ii) the maximum number of shares of Common Stock
of
the Company issuable upon the exercise of such rights or options.
(b) If
the
price per share so determined shall be less than the applicable Purchase Price
per share, then the granting of such rights or options shall be deemed to be
an
issue or sale for cash (as of the date of the granting of such rights or
options) of such maximum number of shares of Common Stock at the price per
share
so determined, provided that, if such rights or options shall by their terms
provide for an increase or increases or decrease or decreases, with the passage
of time, in the amount of additional consideration payable to the Company upon
the exercise thereof, the adjusted Purchase Price per share shall, forthwith
upon any such increase or decrease becoming effective, be readjusted to reflect
the same, and provided, further, that upon the expiration of such rights or
options, if any thereof shall not have been exercised, the adjusted Purchase
Price per share shall forthwith be readjusted and thereafter be the price which
it would have been had an adjustment been made on the basis that the only shares
of Common Stock so issued or sold were those issued or sold upon the exercise
of
such rights or options and that they were issued or sold for the consideration
actually received by the Company upon such exercise, plus the consideration,
if
any, actually received by the Company for the granting of all such rights or
options, whether or not exercised.
7.4. Other
Securities.
If any
event occurs as to which the provisions of this Warrant are strictly applicable
and the application thereof would not fairly protect the rights of the Holders
in accordance with the essential intent and principles of such provisions,
then
the Company shall make such adjustments in the application of such provisions,
in accordance with such essential intent and principles, as the Board of
Directors, in good faith, determines to be reasonably necessary to protect
such
rights as aforesaid. In case at any time or from time to time the Company shall
take any action in respect of its Common Stock, other than any action described
in Sections 5, 6 and 7, then, unless such action will not have a materially
adverse effect upon the rights of the Holders, the number of shares of Common
Stock or other stock for which this Warrant is exercisable and the Purchase
Price per share shall be adjusted in such manner as the Board of Directors,
in
good faith, determines to be equitable in the circumstances. In furtherance
and
not in limitation of the foregoing, if any event occurs of the type contemplated
by Section 7 but not expressly provided for by such Section (including, without
limitation, the granting of stock appreciation rights, phantom stock rights
or
other rights or arrangements with equity features), then the Company’s Board of
Directors shall make an appropriate adjustment in the Purchase Price per share
and the number of shares of Common Stock or Other Securities issuable upon
the
exercise of a Warrant so as to protect the rights of the Holders of such
Warrants. No adjustment made pursuant to this Section 7 shall increase the
Purchase Price per share or decrease the number of shares of Common Stock or
Other Securities issuable upon exercise of the Warrants.
8. Further
Assurances.
The
Company will take all such action as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and non-assessable
shares of stock upon the exercise of all Warrants from time to time
outstanding.
9. Officer’s
Certificate as to Adjustments.
In each
case of any adjustment or readjustment in the shares of Common Stock (or Other
Securities) issuable upon the exercise of the Warrants, the Company at its
expense will promptly cause its Chief Financial Officer to compute such
adjustment or readjustment in accordance with the terms of the Warrants and
prepare a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based, and
the
number of shares of Common Stock outstanding or deemed to be outstanding,
including a statement of: (a) the consideration received or receivable by the
Company for any additional shares of Common Stock (or Other Securities) issued
or sold or deemed to have been issued or sold; (b) the number of shares of
Common Stock (or Other Securities) outstanding or deemed to be outstanding;
and
(c) the Purchase Price and the number of shares of Common Stock to be received
upon exercise of this Warrant, in effect immediately prior to such adjustment
or
readjustment and as adjusted or readjusted as provided in this Warrant. The
Company will forthwith mail a copy of such certificate to each
Holder.
10. Notices
of Record Date, etc.
In the
event of
(a) any
taking by the Company of a record of its stockholders for the purpose of
determining the stockholders thereof who are entitled to receive any dividend
or
other distribution, or any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, or for the purpose of determining stockholders who
are
entitled to vote in connection with any proposed capital reorganization of
the
Company, any reclassification or recapitalization of the capital stock of the
Company or any transfer of all or substantially all the assets of the Company
to
or consolidation or merger of the Company with or into any other person,
or
(b) any
voluntary or involuntary dissolution, liquidation or winding-up of the Company,
or
(c) any
proposed issue or grant by the Company of any Common Stock, Convertible
Securities or any other securities, or any right or option to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities (other than the issue of Common Stock on the exercise of the
Warrants),
then
and
in each such event the Company will mail or cause to be mailed to each Holder
of
a Warrant a notice specifying (i) the date on which any such record is to be
taken for the purpose of such dividend, distribution or right, and stating
the
amount and character of such dividend, distribution or right, (ii) the date
on
which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take place,
and the time, if any, as of which the Holders of record of Underlying Securities
shall be entitled to exchange their shares of Underlying Securities for
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up and (iii) the amount and character of
any
stock or other securities, or rights or options with respect thereto, proposed
to be issued or granted, the date of such proposed issue or grant and the
persons or class of persons to whom such proposed issue or grant and the persons
or class of persons to whom such proposed issue or grant is to be offered or
made. Such notice shall be mailed at least 20 days prior to the date therein
specified.
11. Reservation
of Stock, etc., Issuable on Exercise of Warrants.
The
Company will at all times reserve and keep available, solely for issuance and
delivery upon the exercise of the Warrants, all shares of Common Stock (or
Other
Securities) from time to time issuable upon the exercise of the
Warrants.
12. Listing
on Securities Exchanges; Registration; Issuance of Certain
Securities.
12.1. In
furtherance and not in limitation of any other provision of this Warrant, during
any period of time in which the Company’s Common Stock is listed on The Nasdaq
SmallCap Market or any other national securities exchange, the Company will,
at
its expense, simultaneously list on The Nasdaq SmallCap Market or such exchange,
upon official notice of issuance upon the exercise of the Warrants, and maintain
such listing, all shares of Common Stock from time to time issuable upon the
exercise of the Warrants; and the Company will so list on The Nasdaq SmallCap
Market or any other national securities exchange, will so register and will
maintain such listing of, any Other Securities if and at the time that any
securities of like class or similar type shall be listed on The Nasdaq SmallCap
Market or any other national securities exchange by the Company.
12.2. Until
the
shares issuable upon exercise of this Warrant have been resold publicly pursuant
to a registration statement or under Rule 144, the Company shall not issue
any
(a) Convertible Securities or similar securities that contain a provision that
provides for any change or determination of the applicable conversion price,
conversion rate, or exercise price (or a similar provision which might have
a
similar effect) based on the Market Price or any other determination of the
market price or value of the Company’s securities or any other market based or
contingent standard, such as so-called “toxic” or “death spiral” convertible
securities; provided, however, that this prohibition shall not include
Convertible Securities or similar securities the conversion or exercise price
or
conversion rate of which is fixed on the date of issuance or subject to
adjustment based upon the issuance by the Company of additional securities,
including without limitation, standard anti-dilution adjustment provisions
which
are not based on calculations of the Market Price or other variable valuations;
and provided, further, that in no event shall this provision be deemed to
prohibit the transactions contemplated in the Offering; or (b) any preferred
stock, debt instruments or similar securities or investment instruments
providing for (i) preferences or other payments substantially in excess of
the
original investment by purchasers thereof or (ii) dividends, interest or similar
payments other than dividends, interest or similar payments computed on an
annual basis and not in excess, directly or indirectly, of the lesser of a
rate
equal to (A) twice the interest rate on 10 year US Treasury Notes and (B) 20%.
13. Exchange
of Warrants.
Subject
to the provisions of Section 2 hereof, upon surrender for exchange of any
Warrant, properly endorsed, to the Company, as soon as practicable (and in
any
event within three business days) the Company at its own expense will issue
and
deliver to or upon the order of the Holder thereof a new Warrant or Warrants
of
like tenor, in the name of such Holder or as such Holder (upon payment by such
Holder of any applicable transfer taxes) may direct, calling in the aggregate
on
the face or faces thereof for the number of shares of Common Stock called for
on
the face or faces of the Warrant or Warrants so surrendered.
14. Replacement
of Warrants.
Upon
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of any Warrant and, in the case of any such loss,
theft or destruction, upon delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, upon surrender and cancellation of such Warrant, the Company at
its
expense will execute and deliver, in lieu thereof, a new Warrant of like
tenor.
15. Warrant
Agent.
The
Company may, by written notice to each Holder of a Warrant, appoint an agent
having an office in New York, New York, for the purpose of issuing Common Stock
(or Other Securities) upon the exercise of the Warrants pursuant to Section
3,
exchanging Warrants pursuant to Section 13, and replacing Warrants pursuant
to
Section 14, or any of the foregoing, and thereafter any such issuance, exchange
or replacement, as the case may be, shall be made at such office by such
agent.
16. Remedies.
The
Company stipulates that the remedies at law of the Holder of this Warrant in
the
event of any default or threatened default by the Company in the performance
of
or compliance with any of the terms of this Warrant are not and will not be
adequate, and that such terms may be specifically enforced by a decree for
the
specific performance of any agreement contained herein or by an injunction
against a violation of any of the terms hereof or otherwise.
17. Negotiability,
etc.
Subject
to Section 2 above, this Warrant is issued upon the following terms, to all
of
which each Holder or owner hereof by the taking hereof consents and
agrees:
(a) subject
to the provisions hereof, title to this Warrant may be transferred by
endorsement (by the Holder hereof executing the form of assignment at the end
hereof) and delivery in the same manner as in the case of a negotiable
instrument transferable by endorsement and delivery;
(b) subject
to the foregoing, any person in possession of this Warrant properly endorsed
is
authorized to represent himself as absolute owner hereof and is empowered to
transfer absolute title hereto by endorsement and delivery hereof to a bona
fide
purchaser hereof for value; each prior taker or owner waives and renounces
all
of his equities or rights in this Warrant in favor of each such bona fide
purchaser and each such bona fide purchaser shall acquire absolute title hereto
and to all rights represented hereby; and
(c) until
this Warrant is transferred on the books of the Company, the Company may treat
the registered Holder hereof as the absolute owner hereof for all purposes,
notwithstanding any notice to the contrary.
18. Notices,
etc.
All
notices and other communications from the Company to the Holder of this Warrant
shall be mailed by first class registered or certified mail, postage prepaid,
at
such address as may have been furnished to the Company in writing by such
Holder, or, until an address is so furnished, to and at the address of the
last
Holder of this Warrant who has so furnished an address to the
Company.
19. Miscellaneous.
This
Warrant and any term hereof may be changed, waived, discharged or terminated
only by an instrument in writing signed by the Company and the Holders of
outstanding Warrants to purchase a majority of the shares of Common Stock
underlying all the outstanding Warrants. This Warrant is being delivered in
the
State of New York and shall be construed and enforced in accordance with and
governed by the laws of such State. The headings in this Warrant are for
purposes of reference only, and shall not limit or otherwise affect any of
the
terms hereof.
20. Assignability.
Subject
to Section 2 hereof, this Warrant is fully assignable at any time.
21. Amendments.
This
Warrant may not be amended, modified or terminated, and no rights or provisions
may be waived, except with (a) the written consent of the Holder and the Company
or (b) in the event that all Warrants issued under the Unit Subscription
Agreement are to be amended in like fashion, a majority in interest of the
holders of all such Warrants and the Company.
Dated:
_______, 2005
SBE,
INC
By:________________________________
Name:
_____________________________
Title:
______________________________
Attest:___________________________
FORM
OF
SUBSCRIPTION
(To
be
signed only upon exercise of Warrant)
To:
SBE,
INC.
The
undersigned, the Holder of the within Warrant, hereby irrevocably elects to
exercise the purchase right represented by such Warrant for, and to purchase
thereunder, shares of Common Stock of SBE, Inc., and herewith makes payment
therefor:
(i)
of
$ * or
(ii)
by
surrender of the number of Warrants included in the within Warrant required
for
full
exercise pursuant to Section 3.3 of the Warrant,
and
requests that the certificates for such shares be issued in the name of, and
delivered to, ___________________, whose address is
_______________________.
Dated:
________________________________________
|
(Signature
must conform in all respects to name of Holder as specified on the
face of
the Warrant)
|
________________________________________
(Address)
*
|
Insert
here the number of shares called for on the face of the Warrant (or,
in
the case of a partial exercise, the portion thereof as to which the
Warrant is being exercised), in either case without making any adjustment
for additional Common Stock or any other stock or other securities
or
property or cash which, pursuant to the adjustment provisions of
the
Warrant, may be deliverable upon
exercise.
|
FORM
OF
ASSIGNMENT
(To
be
signed only upon transfer of Warrant)
For
value
received, the undersigned hereby sells, assigns and transfers unto
_________________________ the right represented by the within Warrant to
purchase _________ of Common Stock of SBE, Inc. to which the within Warrant
relates, and appoints ______________________________ Attorney to transfer such
right on the books of SBE, Inc. with full power of substitution in the premises.
The Warrant being transferred hereby is one of the Warrants issued by SBE,
Inc.
as of _________, 2005 to purchase an aggregate of up to _________ shares of
Common Stock.
Dated:_______________
________________________________________
|
(Signature
must conform in all respects to name of Holder as specified on the
face of
the Warrant)
|
________________________________________
(Address)
__________________________________
Signature
guaranteed by a Bank
or
Trust
Company having its
principal
office in New York City
or
by a
Member Firm of the New
York
or
American Stock Exchange
ANNEX
F
SBE,
INC.
INVESTOR
RIGHTS AGREEMENT
INVESTOR
RIGHTS AGREEMENT
(this
“Agreement”)
is
entered into as of _______, 2005 by and among SBE, Inc., a Delaware corporation
(the “Company”)
and
the investors listed on Exhibit
A
hereto
(collectively the “Investors”).
WHEREAS,
the Company desires to sell to the Investors, and the Investors desire to
purchase, _______ shares of Common Stock of the Company (the “Shares”)
and
5-year warrants (the “Warrants”),
exercisable to purchase _________ shares of Common Stock of the Company (the
“Warrant
Shares”),
upon
the terms and conditions set forth in that certain Unit Subscription Agreement,
dated as of May 4, 2005, between the Company and the Investors (the “Unit
Subscription Agreement”);
WHEREAS,
the terms of the Unit Subscription Agreement provide that it shall be a
condition precedent to the closing of the transactions thereunder for the
Company and the Investors to execute and deliver this Agreement;
and
WHEREAS,
capitalized terms used herein and not otherwise defined are defined in the
Unit
Subscription Agreement.
NOW,
THEREFORE, in consideration of the premises and mutual covenants contained
herein, the parties hereto hereby agree as follows:
1. Definitions.
The
following terms shall have the meanings provided below:
“Additional
Shares”
shall
mean any additional shares of Common Stock which may be issued or become
issuable from time to time upon a distribution with respect to, or in exchange
for, or in replacement of, Shares, a Warrant or Warrant Shares, as a result
of
anti-dilution provisions of a Warrant or otherwise.
“Additional
Share Notice”
shall
have the meaning assigned thereto in Section 10 hereof.
“Blue
Sky”
shall
have the meaning assigned thereto in Section 4(c) hereof.
“Board
of Directors”
shall
mean the board of directors of the Company.
“Convertible
Securities”means
(i)
options to purchase or rights to subscribe for Common Stock, (ii) securities
by
their terms convertible into or exchangeable for Common Stock or (iii) options
to purchase or rights to subscribe for such convertible or exchangeable
securities.
“Correspondence”
shall
have the meaning assigned thereto in Section 14(d) hereof.
“Difference”
shall
have the meaning assigned thereto in Section 7(b) hereof.
“Exchange
Act”
shall
mean the Securities Exchange Act of 1934, as amended, and all of the rules
and
regulations promulgated thereunder.
“Excluded
Stock”
shall
mean (i) all shares of Common Stock issued or issuable to employees, directors
or consultants pursuant to any equity compensation plan that is in effect on
the
date of this Agreement, (ii) all shares of Common Stock issued or issuable
to
employees or directors pursuant to any equity compensation plan approved by
the
stockholders of the Company after the date of this Agreement, (iii) all shares
of Common Stock issued or issuable to employees, directors or consultants as
bona fide compensation for business services rendered, not compensation for
fundraising activities, (iv) all shares of Common Stock issued or issuable
to
bona fide leasing companies, strategic partners, or major lenders, (v) all
shares of Common Stock issued or issuable as the purchase price in a bona fide
acquisition or merger (including reasonable fees paid in connection therewith)
or (vi) all Warrant Shares, Additional Shares and shares issued upon conversion
or exercise of other Convertible Securities outstanding on the date hereof.
“Holder”shall
mean the Investors or any transferee of the Warrants or Registrable Shares
that
were held by Investors.
“Majority
Holders”shall
mean, at the relevant time of reference thereto, those
Holders holding more than fifty percent (50%) of the Registrable Shares Owned
by
all of the Holders.
“Mandatory
Registration”
shall
have the meaning assigned thereto in Section 3(a) hereof.
“Mandatory
Registration Termination Date”shall
have the meaning assigned thereto in Section 3(c) hereof.
“Own”shall
mean to own beneficially, as that term is defined in the rules and regulations
of the SEC.
“Proportionate
Percentage”
shall
have the meaning assigned thereto in Section 10 hereof.
“Purchase
Notice”
shall
have the meaning assigned thereto in Section 10 hereof.
“Registrable
Shares”
shall
mean the Shares, the Warrant Shares and any Additional Shares.
“Registration
Statement”shall
have the meaning assigned thereto in Section 3(a) hereof.
“Rule
144”
shall
mean Rule 144 promulgated under the Securities Act and any successor or
substitute rule, law or provision.
“SEC”
shall
mean the Securities and Exchange Commission.
“Securities
Act”
shall
mean the Securities Act of 1933, as amended, and all of the rules and
regulations promulgated thereunder.
“Selling
Expenses”
shall
mean all underwriting discounts, brokerage and selling commissions applicable
to
the sale of Registrable Shares, including standard underwriters’
cutbacks.
“Shares”
shall
have the meaning assigned thereto in the Preamble to this Agreement.
“Suspension”
shall
have the meaning assigned thereto in Section 9(b) hereof.
“Unit
Subscription Agreement”
shall
have the meaning assigned thereto in the Preamble to this
Agreement.
“Warrants”
shall
have the meaning assigned thereto in the Preamble to this Agreement.
“Warrant
Shares”
shall
have the meaning assigned thereto in the Preamble to this Agreement.
2. Effectiveness.
This
Agreement shall become effective upon the Closing.
3. Mandatory
Registration.
(a) No
later
than sixty (60) days after the Closing, the Company will prepare and file with
the SEC a registration statement on Form S-3 for the purpose of registering
(such registration, the “Mandatory
Registration”)
under
the Securities Act all of the Registrable Shares for resale by, and for the
account of, the Investors as selling stockholders thereunder (the “Registration
Statement”).
The
Registration Statement shall permit the Investors to offer and sell, on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
any
or all of the Registrable Shares. Such Registration Statement also shall cover,
to the extent allowable under the Securities Act and the rules promulgated
thereunder (including Rule 416), such indeterminate number of additional shares
of Common Stock resulting from stock splits, stock dividends or similar
transactions with respect to the Registrable Shares.
(b) The
Company agrees to use its best efforts to cause the Registration Statement
to
become effective within ninety (90) days after filing.
(c) The
Company shall be required to keep the Registration Statement, as amended,
effective until such date that is the earlier of (i) two years after the
Closing, (ii) the date when all of the Registrable Shares registered thereunder
shall have been sold or (iii) such time as all the Registrable Shares held
by
the Investors can be sold pursuant to Rule 144(k) and without compliance with
the registration requirements of the Securities Act (such date is referred
to
herein as the “Mandatory
Registration Termination Date”).
Thereafter, the Company shall be entitled to withdraw the Registration Statement
and the Investors shall have no further right to offer or sell any of the
Registrable Shares pursuant to the Registration Statement (or any prospectus
relating thereto).
(d) The
Company shall not grant any registration rights that are senior to the
registration rights of the Investors under this Agreement if such registration
rights would adversely affect the Investors’ ability to sell Registrable Shares
pursuant to the Registration Statement. The Company represents that no
stockholders other than the Investors have the right to sell any Common Stock
or
other securities of the Company pursuant to the Registration Statement other
than rights granted pursuant to the transactions contemplated by the Acquisition
Agreement.
4. Obligations
of the Company.
In
connection with the Company’s obligations under Section 3 hereof to file the
Registration Statement with the SEC and to use its reasonable efforts to cause
the Registration Statement to become effective as soon as practicable after
filing, the Company shall, as expeditiously as reasonably possible, subject
to
Section 9 hereof:
prepare
and file with the SEC such amendments and supplements to the Registration
Statement and the prospectus used in connection therewith as may be necessary
in
order to keep the Registration Statement effective until the Mandatory
Registration Termination Date;
furnish
to the selling Holders such reasonable number of copies of the Registration
Statement and a final prospectus, in conformity with the requirements of the
Securities Act, and such other documents (including, without limitation,
prospectus amendments and supplements as are prepared by the Company in
accordance with Section 4(a) above) as the selling Holders may reasonably
request, in order to facilitate the public or other disposition of such selling
Holders’ Registrable Shares;
use
reasonable efforts to register and qualify the Registrable Shares covered by
the
Registration Statement under such other securities laws or blue sky
(“Blue
Sky”)
laws of
all states requiring such securities or Blue Sky registration or qualification,
provided
that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process
in
any such states or jurisdictions; and
use
reasonable efforts to cause all such Registrable Shares registered hereunder
to
be listed on each securities exchange (including without limitation The Nasdaq
SmallCap Market) on which securities of the same class issued by the Company
are
then listed.
5. Furnish
Information.
(a)
It
shall be a condition precedent to the obligations of the Company to take any
action pursuant to this Agreement that the selling Holders shall furnish to
the
Company such information regarding them and the securities held by them as
the
Company shall reasonably request and as shall be required in order to effect
any
registration by the Company pursuant to this Agreement.
(b) The
Registration Statement will provide for a plan of distribution with respect
to
the Registrable Shares substantially as follows: The Registrable Shares may
be
sold from time to time by the Holders, or by pledgees, donees, transferees
or
other successors in interest. Such sales may be made on one or more exchanges
or
in the over-the-counter market, or otherwise at prices and at terms then
prevailing or at prices related to the then-current market price, or in
negotiated transactions. The Registrable Shares may be sold by one or more
of
the following: (i) a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell a portion of
the
block as principal to facilitate the transaction; (ii) purchases by a broker
or
dealer as principal and resale by such broker or dealer for its account pursuant
to the resale registration statement; (iii) an exchange distribution in
accordance with the rules of such exchange; (iv) one or more underwritten
offerings on a firm commitment or best efforts basis; (v) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; and
(vi)
transactions between sellers and purchasers without a broker/dealer. In
addition, any securities covered by the Registration Statement that qualify
for
sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
the
Registration Statement. From time to time the selling Holders may engage in
short sales, short sales versus the box, puts and calls and other transactions
in securities of the issuer or derivatives thereof, and may sell and deliver
the
shares in connection therewith. For so long as a Holder owns any Registrable
Shares, such Holder shall not maintain a Net Short Position. For purposes of
this Section, a “Net
Short Position”
by a
person means a position whereby such person has executed one or more sales
of
Common Stock that is marked as a short sale and that is executed at a time
when
such Holder has no equivalent offsetting long position in the Common Stock.
For
purposes of determining whether a Holder has an equivalent offsetting long
position in the Common Stock, all Common Stock that is beneficially owned by
such Holder shall be deemed to be held long by such Holder. The Holders may
also
distribute the shares to their partners, members, stockholders or shareholders
to the extent such distributions are effected in full compliance with applicable
securities laws and provided that the distributing Holders and the distributees
provide the Company with such documents and other information as reasonably
requested by the Company. In effecting sales, brokers or dealers engaged by
the
selling Holders may arrange for other brokers or dealers to participate. Brokers
or dealers will receive commissions or discounts from selling Holders in amounts
to be negotiated immediately prior to the sale.
6.
Expenses
of Registration.
All expenses incurred in connection with the registration of the Registrable
Shares pursuant to this Agreement, including without limitation all registration
and qualification and filing fees, printing expenses, fees and disbursements
of
counsel for the Company, and the reasonable fees and disbursements of one
counsel for the selling Holders selected by the selling Holders, shall be borne
by the Company; provided,
however,
that the reasonable fees and disbursements of such counsel shall be subject
to
the limitation on the Legal Fee set forth in Section 6.9 of the Unit
Subscription Agreement. All Selling Expenses shall be borne by the Holders
of
the Registrable Shares so registered and sold, pro rata on the basis of the
number of their Registrable Shares so registered and sold.
7.
Indemnification.
To
the
extent permitted by law, the Company will indemnify and hold harmless each
selling Holder (including the partners or officers, directors and stockholders
of such Holder), and each person, if any, who controls such selling Holder
within the meaning of the Securities Act, against any losses, claims, damages
or
liabilities, joint or several, to which they may become subject under the
Securities Act, the Exchange Act, and other federal or state securities laws,
or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in
respect thereof) (i) arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in the Registration Statement, in
any
preliminary prospectus or final prospectus relating thereto or in any amendments
or supplements to the Registration Statement or any such preliminary prospectus
or final prospectus, (ii) arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading or (iii) arise out
of
any violation or alleged violation by the Company of the Securities Act, the
Exchange Act, any other federal or state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any other
federal or state securities law; and will reimburse such selling Holder, or
such
officer, director or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided,
however,
that
the indemnity agreement contained in this Section 7(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld or delayed), nor shall the Company be liable
in any such case for any such loss, damage, liability or action, to the extent
that it arises out of or is based upon an untrue statement or alleged untrue
statement or omission made in connection with the Registration Statement, any
preliminary prospectus or final prospectus relating thereto or any amendments
or
supplements to the Registration Statement or any such preliminary prospectus
or
final prospectus, in reliance upon and in conformity with written information
furnished expressly for use in connection with the Registration Statement or
any
such preliminary prospectus or final prospectus by the selling Holders, any
broker/dealer acting on their behalf or controlling person with respect to
them.
To
the
extent permitted by law, each selling Holder will severally and not jointly
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement, each person, if any, who
controls the Company within the meaning of the Securities Act, or any selling
Holders, and all other selling Holders against any losses, claims, damages
or
liabilities to which the Company or any such director, officer, controlling
person or such other selling Holder may become subject to, under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any untrue or alleged
untrue statement of any material fact contained in the Registration Statement
or
any preliminary prospectus or final prospectus, relating thereto or in any
amendments or supplements to the Registration Statement or any such preliminary
prospectus or final prospectus, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case
to the extent and only to the extent that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, in any preliminary prospectus or final prospectus relating thereto
or
in any amendments or supplements to the Registration Statement or any such
preliminary prospectus or final prospectus, in reliance upon and in conformity
with written information furnished by the selling Holder expressly for use
in
connection with the Registration Statement, or any preliminary prospectus or
final prospectus; and such selling Holder will reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer,
controlling person, or other selling Holder in connection with investigating
or
defending any such loss, claim, damage, liability or action, provided,
however,
that
the liability of each selling Holder hereunder (when aggregated with amounts
contributed, if any, pursuant to Section 7(d)) shall be limited to the
difference (the “Difference”)
between (a) the amount received by such Holder from the sale of the Registrable
Shares pursuant to the Registration Statement and (b) the amount paid by such
Holder to the Company for such Registrable Shares pursuant to the Unit
Subscription Agreement, and provided further,
however,
that
the indemnity agreement contained in this Section 7(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of those selling Holder(s)
against which the request for indemnity is being made (which consent shall
not
be unreasonably withheld or delayed).
(c) Promptly
after receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 7,
notify the indemnifying party in writing of the commencement thereof and the
indemnifying party shall have the right to participate in and, to the extent
the
indemnifying party desires, jointly with any other indemnifying party similarly
noticed, to assume at its expense the defense thereof with counsel mutually
satisfactory to the indemnifying parties with the consent of the indemnified
party, which consent will not be unreasonably withheld, conditioned or delayed.
In the event that the indemnifying party assumes any such defense, the
indemnified party may participate in such defense with its own counsel and
at
its own expense, provided,
however,
that
the counsel for the indemnifying party shall act as lead counsel in all matters
pertaining to such defense or settlement of such claim and the indemnifying
party shall only pay for such indemnified party’s reasonable legal fees and
expenses for the period prior to the date of its participation in such defense,
and provided further,
however,
that
the indemnified party (together with all indemnified parties which may be
represented without conflict by one counsel) shall have the right to retain
one
separate counsel, with the reasonable fees and expenses of such separate counsel
to be paid by the indemnifying party, if the representation of the indemnified
party by the counsel retained by the indemnifying party would be inappropriate
due to actual or potential differing interests between the indemnified party
and
any other party represented by such counsel in such proceeding. Notwithstanding
the foregoing, the indemnifying party shall not be obligated to pay the fees
of
more than one separate counsel. The failure to notify an indemnifying party
of
the commencement of any such action will not relieve such indemnifying party
of
any liability to the indemnified party under this Section 7 (except to the
extent that such failure materially and adversely affects the indemnifying
party’s ability to defend such action), nor shall the omission so to notify an
indemnifying party relieve such indemnifying party of any liability which it
may
have to any indemnified party otherwise other than under this Section 7. No
indemnifying party shall, without the consent of the indemnified party, consent
to entry of any judgment or enter into any settlement which does not include
as
an unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim
or
litigation and otherwise in form and substance reasonably satisfactory to the
indemnified party.
(d) If
the
indemnification provided in this Section 7 is held by a court of competent
jurisdiction to be unavailable to an indemnified party with respect to any
loss,
liability, claim, damage or expense referred to herein, then the indemnifying
party, in lieu of indemnifying such indemnified party hereunder, shall
contribute to the amount paid or payable by such indemnified party as a result
of such loss, liability, claim, damage or expense in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the
one
hand and of the indemnified party on the other in connection with the statements
or omissions that shall have resulted in such loss, liability, claim, damage
or
expense, as well as any other relevant equitable considerations; provided that
in no event shall any contribution by an Holder under this Section 7(d), when
aggregated with amounts paid, if any, pursuant to Section 7(b), exceed the
Difference. The relative fault of the indemnifying party and of the indemnified
party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state
a
material fact relates to information supplied by the indemnifying party or
by
the indemnified party and the parties’ relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or
omission.
The
obligations of the Company and Holders under this Section 7 shall survive the
completion of any offering of Registrable Shares in a Registration Statement
under Section 3 and otherwise.
8. Reports
Under the
Exchange Act.
With a
view to making available to the Holders the benefits of Rule 144 and any other
rule or regulation of the SEC that may at any time permit the Holders to sell
the Registrable Shares to the public without registration, the Company agrees
to
use reasonable efforts: (a) to make and keep public information available,
as
those terms are understood and defined in Rule 144, (b) to file with the SEC
in
a timely manner all reports and other documents required to be filed by an
issuer of securities registered under the Securities Act or the Exchange Act
and
(c) undertake any additional actions reasonably necessary to maintain the
availability of the Registration Statement or the use of Rule 144.
9. Selling
Procedures.
Any
sale of Registrable Shares pursuant to a registration statement filed in
accordance with Section 3 hereof shall be subject to the following conditions
and procedures:
(a) Updating
the Prospectus.
If the
Company informs the selling Holder that the Registration Statement or final
prospectus then on file with the SEC is not current or otherwise does not comply
with the Securities Act, the Company shall use its commercially reasonable
efforts to provide to the selling Holder a current prospectus that complies
with
the Securities Act as soon as practicable, but in no event later than three
(3)
business days after delivery of such notice.
If
the
Company requires more than three (3) business days to update the prospectus
under Section 9(a)(i) above, the Company shall have the right to delay the
preparation of a current prospectus that complies with the Securities Act
without explanation to such Holder, subject to the limitations set forth in
Section 9(b) below, for a total of not more than two periods of thirty (30)
days
each during any twelve-month period.
(b) General. Notwithstanding
the foregoing, upon receipt of any notice from the Company of (i) any request
by
the SEC or any other federal or state governmental authority during the period
of effectiveness of the Registration Statement for amendments or supplements
to
the Registration Statement or related prospectus or for additional information
relating to the Registration Statement, (ii) the issuance by the SEC or any
other federal or state governmental authority of any stop order suspending
the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose, (iii) the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Registrable Shares for sale in any jurisdiction or the initiation
or threatening of any proceeding for such purpose, (iv) the happening of any
event which makes any statement made in the Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein
by
reference untrue in any material respect or which requires the making of any
changes in the Registration Statement or prospectus so that, in the case of
the
Registration Statement, it will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, and that in the case of the
prospectus, it will not contain an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein,
in
the light of the circumstances under which they were made, not misleading or
(v)
that, in the judgment of the Board of Directors, it is advisable to suspend
use
of the prospectus for a discrete period of time due to pending corporate
developments, public filings with the SEC or that there exists material
nonpublic information about the Company that the Board of Directors, acting
in
good faith, determines not to disclose in a registration statement, then the
Company may suspend use of the prospectus (each a “Suspension”),
in
which case the Company shall promptly so notify each Holder and each Holder
shall not dispose of Registrable Shares covered by the Registration Statement
or
prospectus until copies of a supplemented or amended prospectus are distributed
to the Holders or until the Holders are advised in writing by the Company that
the use of the applicable prospectus may be resumed; provided,
however,
that,
notwithstanding the foregoing, the Company may suspend use of the prospectus
pursuant to Sections 9(a)(ii), 9(b)(iv) and 9(b)(v), and an Holder may be
prohibited from selling or otherwise disposing of the Registrable Shares covered
by the Registration Statement or prospectus, for no
more
than two
periods of thirty (30) days during any such twelve-month period. The Company
shall use its best efforts to ensure the use of the prospectus may be resumed
as
soon as practicable. The Company shall use its best efforts to obtain the
withdrawal of any order suspending the effectiveness of the Registration
Statement, or the lifting of any suspension of the qualification (or exemption
from qualification) of any of the securities for sale in any jurisdiction,
at
the earliest practicable moment. The Company shall, upon the occurrence of
any
event contemplated by clause (iv), prepare a supplement or post-effective
amendment to the Registration Statement or a supplement to the related
prospectus or any document incorporated therein by reference or file any other
required document so that, as thereafter delivered to the purchasers of the
Registrable Shares being sold thereunder, such prospectus will not contain
an
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
10. Preemptive
Rights.
In the
event that at any time after the date hereof until the date that is two (2)
years after the Closing Date, the Company proposes to issue additional shares
of
Common Stock or Convertible Securities, other than Excluded Stock, pursuant
to a
private offering not registered with the SEC, the Company shall send a notice
(an “Additional
Share Notice”)
to the
Holder setting forth the terms of such proposed issuance. The Holder shall
be
entitled to purchase the proposed number of shares of Common Stock or
Convertible Securities, proposed to be issued in proportion to the Holder’s
Proportionate Percentage (as hereafter defined) on substantially the same terms
set forth in the Additional Share Notice by (a) notice to the Company (the
“Purchase
Notice”)
within
10 days of the date of the Additional Share Notice and (b) payment of the price
for such shares of Common Stock or Convertible Securities, by wire transfer
of
immediately available funds or such other method of payment as the Company
may
approve, within 10 days after delivery to the Company of the Purchase Notice.
The “Proportionate
Percentage”
of the
Holder means the percentage obtained by dividing (x) the aggregate number shares
of Common Stock Owned by the Holder by (y) the aggregate number of shares of
Common Stock of the Company issued and outstanding immediately prior to the
proposed new issuance.
11. Issuance
of Certain Securities.
Until
all Registrable Shares have been resold publicly pursuant to a registration
statement or under Rule 144, the Company shall not issue any (a) Convertible
Securities or similar securities that contain a provision that provides for
any
change or determination of the applicable conversion price, conversion rate,
or
exercise price (or a similar provision which might have a similar effect) based
on any determination of the market price or other value of the Company’s
securities or any other market based or contingent standard, such as so-called
“toxic” or “death spiral” convertible securities; provided, however, that this
prohibition shall not include Convertible Securities or similar securities
the
conversion or exercise price or conversion rate of which is (i) fixed on the
date of issuance, (ii) subject to adjustment as a result of or in connection
with a business combination or similar transaction or (iii) subject to
adjustment based upon the issuance by the Company of additional securities,
including without limitation, standard anti-dilution adjustment provisions
which
are not based on calculations of market price or other variable valuations;
and
provided, further, that in no event shall this provision be deemed to prohibit
the transactions contemplated in the Unit Subscription Agreement; (b) any
preferred stock, debt instruments or similar securities or investment
instruments providing for (i) preferences or other payments substantially in
excess of the original investment by purchasers thereof or (ii) dividends,
interest or similar payments other than dividends, interest or similar payments
computed on an annual basis and not in excess, directly or indirectly, of the
lesser of a rate equal to (A) twice the interest rate on 10 year US Treasury
Notes and (B) 20%.
12. Assignment.
This
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the parties hereto and their respective successors and assigns. In addition,
and whether or not any express assignment shall have been made, the provisions
of this Agreement which are for the benefit of the Holders shall also be for
the
benefit of and enforceable by any subsequent holder of any Registrable Shares
who has executed a copy of this Agreement or otherwise indicated its agreement
to be bound hereby. Without limitation on the Holders’ rights to transfer
Registrable Shares, the Company acknowledges that any Holder may, at any time,
transfer any of the Registrable Shares which it may own, beneficially or of
record, to (a) its affiliates or (b) its partner(s), investor(s), security
holder(s) or beneficial holder(s) pursuant to its organization documents or
other agreements, and that, upon the consummation of any such transfer, the
provisions of this Agreement shall be binding upon and inure to the benefit
of
each transferee of such Registrable Shares.
13. Entire
Agreement.
This
Agreement (including the exhibits hereto), the Unit Subscription Agreement
and
the Warrants constitute and contain the entire agreement and understanding
of
the parties with respect to the subject matter hereof, and such agreements
also
supersede any and all prior negotiations, correspondence, agreements or
understandings with respect to the subject matter hereof.
14. Miscellaneous.
(a) Amendments.
This
Agreement may not be amended, modified or terminated, and no rights or
provisions may be waived, except with the written consent of the Majority
Holders and the Company.
(b) Governing
Law.
This
Agreement shall be governed by and construed and enforced in accordance with
the
laws of the State of New York. Each party hereby irrevocably consents and
submits to the jurisdiction of any New York State or United States Federal
Court
sitting in the State of New York, County of New York, over any action or
proceeding arising out of or relating to this Agreement and irrevocably consents
to the service of any and all process in any such action or proceeding by
registered mail addressed to such party at its address specified herein (or
as
otherwise noticed to the other party). Each party further waives any objection
to venue in New York and any objection to an action or proceeding in such state
and county on the basis of forum
non conveniens.
Each
party also waives any right to trial by jury.
(c) Successors
and Assigns.
This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors or assigns.
This Agreement shall also be binding upon and inure to the benefit of any
transferee of any of the Registrable Shares. Notwithstanding anything in this
Agreement to the contrary, if at any time any Holder shall cease to own any
Registrable Shares, all of such Holder’s rights under this Agreement shall
immediately terminate.
(d) Notices.
(i) Any
notices, reports or other correspondence (hereinafter collectively referred
to
as “correspondence”)
required or permitted to be given hereunder shall be given in writing and shall
be deemed effectively given upon (a) personal delivery, (b) delivery by fax
(with answer back confirmed), or (c) two business days after mailing by
recognized overnight courier (such as Federal Express), addressed to a party
at
its address or sent to the fax number provided below or at such other address
or
fax number as such party may designate by three days’ advance notice to the
other party.
(ii) All
correspondence to the Company shall be addressed as follows:
SBE,
Inc.
2305
Camino Ramon, Suite 200,
San
Ramon, California 94583
Attention:
David Brunton
Fax
Number: (925) 355-2041
with
a
copy to:
Cooley
Godward LLP
One
Maritime Plaza, 20th Floor
San
Francisco, CA 94111-3580
Attention:
Jodie Bourdet
Fax
Number: (415) 951-3699
(iii) All
correspondence to any Holder shall be sent to the most recent address furnished
by the Holder to the Company.
(iv) Any
Holder may change the address to which correspondence to it is to be addressed
by notification as provided for herein.
(e) Injunctive
Relief.
The
parties acknowledge and agree that in the event of any breach of this Agreement,
remedies at law may be inadequate, and each of the parties hereto shall be
entitled to seek specific performance of the obligations of the other parties
hereto and such appropriate injunctive relief as may be granted by a court
of
competent jurisdiction.
(f) Attorney’s
Fees.
If any
action at law or in equity is necessary to enforce or interpret any of the
terms
of this Agreement, the prevailing party shall be entitled to reasonable
attorneys’ fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
(g) Severability.
If any
provision of this Agreement is held by a court of competent jurisdiction to
be
unenforceable under applicable law, such provision shall be replaced with a
provision that accomplishes, to the extent possible, the original business
purpose of such provision in a valid and enforceable manner, and the balance
of
the Agreement shall be interpreted as if such provision were so modified and
shall be enforceable in accordance with its terms.
(h) Aggregation
of Shares.
Registrable Shares held or acquired by affiliated entities or persons shall
be
aggregated for the purpose of determining the availability of any rights under
this Agreement.
(i) Counterparts.
This
Agreement may be executed in a number of counterparts, any of which together
shall for all purposes constitute one Agreement, binding on all the parties
hereto notwithstanding that all such parties have not signed the same
counterpart.
SIGNATURE
PAGE TO SBE, INC. INVESTOR RIGHTS AGREEMENT
IN
WITNESS WHEREOF, the parties hereto have executed this Investor Rights Agreement
as of the date and year first above written.
SBE,
INC.
By:
Title:
INVESTORS:
Name:
[
]
Exhibit
A
SCHEDULE
OF INVESTORS
ANNEX
G
SBE,
INC.
FORM
10-K
TABLE
OF CONTENTS
PART
I
|
|
|
|
|
|
Item
1
|
Business
|
4
|
Item
2
|
Properties
|
19
|
Item
3
|
Legal
Proceedings
|
19
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
19
|
|
|
|
PART
II
|
|
|
|
|
|
Item
5
|
Market
for Registrant's Common Equity and Related Stockholder
Matters
|
21
|
Item
6
|
Selected
Financial Data
|
22
|
Item
7
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
Item
7A
|
Quantitative
and Qualitative Disclosures about Market Risk
|
35
|
Item
8
|
Financial
Statements and Supplementary Data
|
36
|
Item
9
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
36
|
Item
9A
|
Controls
and Procedures
|
36
|
|
|
|
PART
III
|
|
|
|
|
|
Item
10
|
Directors
and Executive Officers of the Registrant
|
37
|
Item
11
|
Executive
Compensation
|
37
|
Item
12
|
Security
Ownership of Certain Beneficial Owners and Management
|
37
|
Item
13
|
Certain
Relationships and Related Transactions
|
37
|
Item
15
|
Exhibits,
Financial Statement Schedules and Reports on Form 8-K
|
38
|
|
|
|
SIGNATURES
|
|
42
|
SPECIAL
NOTE ON FORWARD LOOKING STATEMENTS
Certain
statements set forth in or incorporated by reference in this Annual Report
on
Form 10-K constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act
of 1934. These statements include, without limitation, our expectations
regarding our sales to The Hewlett-Packard Company, our expectations regarding
the market for client server networking products, the adequacy of anticipated
sources of cash, planned capital expenditures, the effect of interest rate
increases, and trends or expectations regarding our operations. Words such
as
“may,”“will,”“should,” "believes," "anticipates," "expects," "intends," ”plans,”
"estimates" and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements.
Such
statements are based on currently available operating, financial and competitive
information and are subject to various risks and uncertainties. Readers are
cautioned that the forward-looking statements reflect management's estimates
only as of the date hereof, and we assume no obligation to update these
statements, even if new information becomes available or other events occur
in
the future. Actual future results, events and trends may differ materially
from
those expressed in or implied by such statements depending on a variety of
factors, including, but not limited to those set forth under "Item 1 - Business
-- Risk Factors" on page 15 and elsewhere in this Form 10-K.
PART
I
ITEM
1. BUSINESS
Overview
SBE,
Inc.
develops and provides network communications and storage solutions for original
equipment manufacturers (“OEM”) in the embedded systems marketplace. Embedded
networking technology is hardware or software that serves as a component within
a larger networking or storage device or system such as a Gigabit Ethernet
or a
T-1/T-3 input/output (“I/O”) network interface card (“NIC”) that plugs into an
expansion slot in a high-end computer or storage system. Embedded networking
solutions enable the functionality of many commonly used devices or equipment,
such as products and solutions for basic telephone and internet services, mobile
phones, medical equipment and storage networks.
We
deliver a product portfolio comprised of standards-based wide area networking
(“WAN”), local area networking (“LAN”) and storage area network (“SAN”) network
interface and intelligent communications controller cards. All of our products
are coupled with enabling Linux or Solaris software drivers. Our products are
designed to be functionally compatible with each other and, since we use
industry standard form factors and technologies, our products are also
compatible with third party standards-based products. This standard scalability
and modularity offers our customers greater flexibility to develop solutions
for
unique product configurations and applications.
Our
products are developed based on industry standard form factors including those
known as Peripheral Component Interconnect (“PCI”), CompactPCI, VersaModule
Eurocard (“VME”), PCI Mezzanine Card (“PMC”), and PCI Telecom Mezzanine Card
(“PTMC”). Form factors are the shape and size of interface cards used to expand
the functionality of standard computer bus architectures. For example, a PCI
system includes a 32 or 64-bit local bus architecture used to transfer data
from
a computer’s main microprocessor to peripherals such as hard disks and video
adapter. CompactPCI is an adaptation of the standard PCI on a larger rugged
design and expands the number of available slots for peripheral devices from
four to eight, improves a computer’s ability to withstand adverse conditions
such as extreme vibration and offers “hot swap” capability - allowing the user
to insert and take out the board without turning off the system. A PMC card
plugs on to a standard PCI, CompactPCI, VME or the new AdvancedTCA (“ACTA”) card
enabling it to provide differing input/output or computing functions. A PTMC
is
a PMC card designed specifically for telecommunication applications.
Our
solutions have been integrated into a wide spectrum of applications to enable
network and storage connectivity, including Voice over Internet Protocol
(“VoIP”), Wi-Fi, Enhanced 911, enterprise servers, data storage, data messaging,
process control, media gateways, routers, internet access devices, medical
imaging, CAE/automated test equipment, government/military defense systems
and
telecommunications networks. We distribute our products worldwide through a
direct sales force, distributors, independent manufacturers' representatives
and
value-added resellers.
SBE
was
incorporated in 1961 as Linear Systems, Inc. In 1976, we completed our initial
public offering. In July 2000, we acquired LAN Media Corporation (“LMC”), a
privately held company, to complement and grow our WAN adapter product line
from
both a hardware and software perspective. In August 2003, we acquired the
products and technologies of Antares Microsystems to increase the functionality
of our PCI product line. We continue to operate under a single business
unit.
Business
Strategy
Our
objective is to be a leading provider of high-performance network communications
solutions by delivering reliable, flexible, cost-efficient products in a timely
manner to our customers, thus allowing them to focus on their core competencies.
During
fiscal 2004, we made noteworthy steps in achieving this objective,
including:
· |
Making
our commitment to existing customers our number one
priority
|
As
a
proponent of continuous improvement, we are always identifying new ways to
better serve our customers. Over the past year, to ensure that we fulfill our
commitments to our customers, we strengthened our operations team, including
the
addition of resources in the manufacturing, technical support and quality
departments. In addition, we have implemented a “WebCall” system on our web site
which allows customers to address technical product issues with us at their
convenience, 24 hours a day. Upon implementation of this system in the third
quarter of 2004, the average time to resolution for technical issues has
improved by 50% from one quarter to the next.
· |
New
Product Introductions
|
In
order
to meet the ever-changing requirements of the industry and our customers, we
believe it is important to maintain a strong and flexible portfolio of products
designed for easy and quick deployment into a variety of unique applications.
- |
TCP/IP
Offload Engine (“TOE”).
As Ethernet speeds continue to increase, a progressively higher load
is
placed on the CPU to process the messaging traffic and deal with
the
interface protocol, leaving little computing power left for user
applications. SBE’s TOE board is designed to offload the interface
protocol (“TCP/IP stack”) and manage messaging traffic normally processed
by the Central Processing Unit (“CPU”). This interface protocol offloading
increases user application performance and alleviates networking
bottlenecks. We expect that demand for TOE will continue to increase
as
network bandwidth requirements
escalate.
|
- |
ISCSI
(Internet Small Computer System Interface).
A
new market is emerging using Ethernet infrastructure allowing “virtual
storage” flexibility and lower costs. Our Internet Protocol (“IP”)
management solution bundles our dual port Gigabit Ethernet TOE board
with
PyX’s enterprise level, high availability iSCSI software protocol. Fully
compliant with IETF iSCSI standards, this iSCSI solution delivers
multi-path migration and Error Recovery Level Two (ERL2) functionality.
Our iSCSI product ensures that there is no single point of failure
on the
storage transport layer between any two iSCSI nodes while simultaneously
offloading the network protocol processing from the
CPU.
|
- |
Security
Offload Engine.
In September 2004, we announced the first in a growing series of
board-level encryption solutions designed to accelerate SSL and IPsec
cryptographic operations. These are the two most common encryption
solutions used to provide electronic security in use today. Our
securePMC-L is a PMC-based security offload engine using Cavium Networks’
NITROX Lite security processor, and designed to meet the United States
federal government’s mandated security FIPS 140-2 Level 3 requirements to
be used in all government security related
applications.
|
- |
Channelized
T3 PMC Adapter.
We launched the wanPMC-C1T3 WAN adapter in the first quarter of fiscal
2004. Designed to enable advanced voice and data applications, such
as
VoIP, video-on-demand, voice conferencing, Internet routing, and
SAN
pipes, our wanPMC-C1T3 integrates a fully channelized, single port
T3
interface with an HDLC/transparent controller on a PMC
slot.
|
- |
Channelized
24-port T1/E1:
In August 2004, we introduced the wanPTMC-24TE1, a fully channelized
24-port T1/E1 PCI Telecom Mezzanine Card (PTMC) and Rear Transition
Module
(RTM) board set. This solution is designed for high density applications,
such as VoIP gateways, computer telephony softswitches, TDM switches/PBX,
and voice conferencing systems.
|
- |
Linux
“On Demand”.
Recognizing the value to our customers, we continue developing Linux
software drivers for SBE products using internal resources and those
from
partnering software companies. In addition to standard enterprise
level
drivers, we offer products with “real-time”
enhancements.
|
· |
Strategic
Alliances and Investments
|
We
are
committed to expanding our product offerings by entering into strategic business
agreements where we combine our products with those of our partners to present
a
cost-effective, completely integrated solution to our customers.
· |
PyX
Technologies:
PyX provides enterprise level iSCSI software protocol with Error
Recovery
Level 2 (“ERL2”) functionality, tuned to operate with our TCP/IP Offload
Engine card. ERL2 functionality is required to provide seamless guaranteed
delivery of critical data whenever storage data is transmitted over
the
Internet.
|
· |
TimeSys:
In
a collaborative effort, SBE and TimeSys, a pioneer and leader in
Embedded
Linux and Java development technologies, continue to team to provide
the
high-performance and modularity of SBE’s WAN modules and HighWire
carrier-class core processing platforms bundled with the scalable
computing power of TimeSys Linux GPL and cross-platform development
tools.
|
· |
Cavium
Networks:
SBE teamed with Cavium to provide board-level encryption solutions
designed to accelerate SSLand IPsec cryptographic operations and
significantly improve secure data transmissions for Linux and other
applications.
|
· |
NComm:
SBE and NComm formed an alliance to provide comprehensive WAN solutions
coupling our WAN hardware interfaces with NComm’s intelligent top-level
software drivers and tools. This joint solution results in significant
cost savings for OEMs and speeds up time-to-market by 6-12 months.
|
ATCA
Partner Program. This
is
our program to align
our
PMC and PTMC interface products with AdvancedTCA (“ATCA”) system providers to
provide powerful telecommunications networking solutions. The ACTA products
are
based on a new standard industry form factor that has been developed for use
by
the telecommunications industry. This form factor allows for greater flexibility
and network transmission speeds.
· |
Diversified
Technologies, Inc (“DTI”):
DTI is integrating multiple SBE network interface cards with the
Diversified Technologies ATCA system level platforms to build powerful
ATCA platforms for service providers in the telecommunications and
networking marketplace.
|
· |
GNP:
GNP will complement its product mix by bundling SBE’s portfolio of network
interface cards into its ready-to-deploy ATCA and CompactPCI system
solutions for its customer base of network equipment manufacturers
and
large systems integrators.
|
· |
Concurrent
Technologies, Inc (“Concurrent”):
SBE and Concurrent have entered into an agreement to merge our PMC-based
modules with Concurrent’s ATCA system solutions. This new alliance is
expected to result in expanded market coverage for our
products.
|
In
fiscal
2005, we plan to further build on the momentum that has been generated over
the
past two years by turning
our technology investments into strong, customer-driven product solutions,
continuing to diversify our customer base, and actively seeking out new market
opportunities. Specifically, our key focus areas for the upcoming year
include:
· |
Buiild
and Strengthen Awareness of Expanded Product Portfolio and Capabilities
within Target Markets
|
With
the
recent release of the TOE, Encryption and iSCSI products, we will present our
customers with an enhanced line of board-level I/O choices. We have launched
an
aggressive sales and marketing campaign to develop and enhance awareness of
our
portfolio of products and capabilities to target audiences. Our marketing
initiatives include print/online advertising, direct marketing, joint partner
marketing, public relations, industry tradeshow presence, and web
marketing.
· |
Broaden
Market and Customer
Diversification
|
With
the
expansion of our products, we intend to further penetrate existing territories
and capture opportunities in new markets and applications. In addition, we
evaluate and reinforce our distribution channels to broaden coverage both
domestically and internationally and allow for a wider set of application and
market targets.
· |
Continue
to Invest in New Products and
Technologies
|
Continued
investment in new products and technologies is critical in driving the long-term
growth and success of the business. Areas of technological focus over the next
year include:
|
· |
Voice
over IP (“VoIP”) PTMC Solution. Recognizing
the opportunities in the VoIP marketplace, we are engaged in the
conceptual research and planning for a VoIP media gateway solution.
In the
coming year, we plan to aggressively execute on our VoIP strategy
which
leverages compatibility with current product offerings.
|
|
· |
Expansion
of HighWire Line of Intelligent Communications
Controllers.
We
are in the process of completing development on the next generation
HighWire CompactPCI controller with Intelligent Platform Management
Interface (“IPMI”) to the backplane, Ethernet switch, and dual PTMC
support. As with our currently available platforms, SBE’s future
processors will be designed to provide embedded Linux with the
intent to
offer complete interoperability with a broad selection of WAN,
LAN, and
Storage PMCs.
|
|
· |
ATCA
Mezzanine Card (“AMC”). ATCA
is a new platform that is gaining significant momentum in the marketplace.
It is touted to offer OEMs in the telecommunications space many benefits,
including new levels of scalability and performance. Our wide range
of
PMC/PTMC-based WAN and LAN I/O boards are available for integration
into
today’s ATCA deployments. When the AMC specification has been ratified,
it
will be a natural progression for us to evolve our PMC and PTMC modules
to
AMC.
|
Products
We
design
and provide network interface cards and communication controllers serving the
embedded markets. With the exception of the TOE products, our network interface
adapters are open standards interface adapter cards that generally do not have
a
microprocessor onboard ("state machine products"). They are designed to provide
developers of networking and data communications equipment a simple and cost
effective way to integrate WAN, LAN, SCSI, iSCSI, and/or Fibre Channel
interfaces into their systems. All of our products are supported by
communications software developed by SBE and a select group of third party
partners.
Although
SBE continues to sell and manufacture products such as Multibus, VMEbus, and
ISA, we emphasize six principal lines of products: WAN adapters, LAN/Ethernet
adapters, storage network interface cards (“NICs”), intelligent communications
controllers, iSCSI software and custom and specialty I/O and CPU processing
protocol offload products such as TOE and Encryption cards.
Wide
Area Networking Adapters
A
wide
area network is a computer network that spans a relatively large geographical
area. Computers connected to a WAN are often connected through dedicated
networks, such as the telephone system, leased lines or satellites. Our series
of WAN adapter products is designed to address the need for WAN interfaces
in
data communication products such as those used in internet and other
communications routers, security firewalls, virtual private network ("VPN")
servers and VoIP gateways. We provide a broad range of interfaces, including
synchronous serial, T1/E1, High Speed Serial Interface (“HSSI”) and T3 in PCI,
PMC, and PTMC industry standard form factors.
Local
Area Networking Adapters
A
local
area network is a computer network spanning a relatively small geographical
area. Often confined to a single building or group of buildings, most LANs
connect workstations and personal computers. Each computer in the LAN is able
to
access data and devices, such as printers, located anywhere on the LAN. There
are many different types of LANs but Ethernet is the most common. Ethernet
LAN
connectivity is utilized by virtually every market segment in both the embedded
and enterprise space.
Our
LAN
adapter products are focused on LAN connectivity using high speed Ethernet
technology. We offer single, dual or quad port LAN adapter PCI and PMC modules
that feature connectivity speeds of up to 10 Mb/second, 100 Mb/second or 1000
Mb/second. Our Gigabit Ethernet NICs include trunking and failover. These
features allow our customers’ systems to take advantage of static load balancing
and failure recovery within a user-defined communications trunk. It is designed
to distribute traffic across the aggregated links, detects port failures, and
increases throughput. In the event of a link failure, the software will
automatically redistribute outgoing loads across the remaining links.
Storage
Network Interface Cards
Our
storage NICs are comprised of SCSI and Fibre Channel products. SCSI is a
parallel interface standard used by personal computers and many UNIX systems
for
attaching peripheral devices, such as printers and disk drives, to computers.
SCSI interfaces are designed to allow for faster transmission rates than
standard serial ports, which transfer data one bit at a time, and parallel
ports, which simultaneously transfer data more than one bit at a time. Our
series of SCSI host bus adapters are specifically designed for the enterprise
Sun UNIX market. With transfer rates ranging from 40 Megabyte (“MB”)/sec to 320
MB/sec, our SCSI adapters have been utilized in data centers and enterprise
environments within the financial, government, manufacturing, and healthcare
sectors. These SCSI boards are also utilized in UNIX-based SCSI tape backup
systems.
Fibre
Channel is a serial data transfer architecture developed by a consortium of
computer and mass storage device manufacturers and is now being standardized
by
the American National Standards Institute (“ANSI”). Our Fibre Channel host bus
adapters are available in single or dual port, 1-Gigabit or 2-Gigabit versions
with copper and/or optical Gigabit transceivers.
iSCSI
Storage Management Solutions
iSCSI
is
an Internet Protocol based storage networking standard for linking data storage
facilities which was developed by the Internet Engineering Task Force (IETF).
By
carrying SCSI commands over IP networks, iSCSI is used to facilitate data
transfers over LAN intranets and to manage storage over long distances
(internet). The iSCSI protocol is among the key technologies expected to help
further the rapid development of the SAN market space by dramatically increasing
the capabilities and performance of storage data transmission at a fraction
of
the cost of current SANs. Because of the ubiquity of IP networks, iSCSI can
be
used to transmit data over LANs, WANs, or the Internet and can enable location
independent data storage and retrieval.
Our
iSCSI
storage management solution bundles SBE’s dual port Gigabit Ethernet TOE board
with PyX Technologies’ enterprise level, high availability, uniform iSCSI
software protocol. Fully compliant with IETF iSCSI standards, this iSCSI product
delivers multi-path migration and ERL2 functionality. The SBE/PyX solution
uses
active/active trunking providing seamless connectivity migration which supports
uninterrupted data flow and aggregation of bandwidth. This means that requests
from a failed communication path can be automatically re-assigned to active
communication paths, allowing iSCSI data to continue to flow uninterrupted.
As a
result, the solution ensures that there is no single point of failure on the
storage transport layer between any two iSCSI nodes while simultaneously
offloading the network protocol processing from the CPU.
CPU
Offload Engines
Today’s
modern networks incorporate packet communications for a wide variety of
applications linking WANs, LANs, and SANs. TCP/IP is the common thread
throughout and the de-facto packet standard that was developed for the internet.
Ironically, TCP/IP has also become the major bottleneck in high speed networks.
A
TOE is
a highly specialized TCP/IP protocol accelerator. Typically, in the form of
a
NIC, it is designed to reduce the amount of host CPU cycles required for TCP/IP
processing and maximize Ethernet throughput. This is accomplished by offloading
TCP/IP protocol processing from the host processor to the hardware on the
TOE.
Our
dual
port Gigabit Ethernet controller with full TCP/IP offload capabilities for
maximizing the performance of demanding TCP-based applications is designed
to
reduce the amount of CPU cycles required for TCP/IP processing while optimizing
the Ethernet throughput. Our TOE solution processes TCP/IP at network speeds,
provides full segmentation and reassembly, terminates multiple simultaneous
sessions, and minimizes transaction latency - all without host
intervention.
· |
Security
Offload Engine
|
The
rapid
changes of the information age have put increasing security demands on
enterprise networks, such as VPNs, portals and corporate web sites over the
last
few years. With the expansion of network boundaries come the inevitable need
for
effective solutions to secure these enterprise connections. In September 2004,
we introduced the first in a growing series of security offload solutions for
integration into Linux-based systems. Based on Cavium Networks’ Nitrox
Lite,
our new
encryption board is designed to accelerate SSL, WLAN and IPsec cryptographic
operations and significantly improve security, performance, and availability
of
Linux and other embedded applications.
Intelligent
Communications Controllers
The
HighWire products are "intelligent," containing their own microprocessors and
memory. This architecture allows our communications controllers to offload
many
of the lower-level communications tasks that would typically be performed by
the
host platform.
In
the
telecommunications market, the HighWire series of communications controller
products provide high bandwidth intelligent connectivity to servers designed
to
act as gateways and signaling points within communication networks and network
devices. The HighWire co-processing controllers enable operators of wireline
and
wireless networks to deliver Intelligent Network ("IN") and Advanced Intelligent
Network ("AIN") services such as Caller ID, voice messaging, personal number
calling, Service Provider Local Number Portability, and customized routing
and
billing, as well as digital wireless services such as Personal Communications
Systems ("PCS") and Global System for Mobile Telecommunications ("GSM"). The
HighWire products are designed for integration with standard server platforms
that enable traditional carriers and new telecom entrants to pursue cost-reduced
and performance-enhanced network architectures based on Internet Protocol
("IP"), broadband or other "packet" technologies.
We
offer
embedded Linux operating system software that enables several HighWire products
to be combined with any of our WAN and LAN PMC products or other third party
PMC
form factor products to provide core computing and connectivity solutions to
the
communications, military/government, medical and industrial control markets.
Utilizing our HighWire products in conjunction with other available PMC modules,
such as A-to-D converters or video capture PMC modules, opens up new
opportunities to market the products for factory/process control or video
surveillance applications.
VMEbus
Our
line
of legacy VMEbus products continues to be sold to government, military and
industrial customers. Our VME products are intelligent communications
controllers used to provide connectivity between a system such as a
mini-computer or bridge/router and a local or wide area network. Our VMEbus
communications products target four major protocol communications technologies:
Fiber Distributed Data Interface ("FDDI"), Token Ring, Ethernet and high-speed
serial communications.
The
following table shows sales by major product type as a percentage of net sales
for fiscal 2004, 2003 and 2002:
|
|
Year
Ended October 31,
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(percentage
of net sales)
|
|
|
|
|
|
|
|
|
|
VME
|
|
|
43
|
%
|
|
53
|
%
|
|
56
|
%
|
WAN
Adapter
|
|
|
34
|
|
|
30
|
|
|
31
|
|
LAN
Adapter
|
|
|
8
|
|
|
5
|
|
|
0
|
|
Storage
NIC
|
|
|
4
|
|
|
2
|
|
|
0
|
|
HighWire
|
|
|
11
|
|
|
10
|
|
|
13
|
|
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Distribution,
Sales, and Marketing
We
market
our WAN, LAN, storage, intelligent communication controller, specialty I/O
and
protocol processing offload products to OEMs, distributors and systems
integrators. We sell our products both domestically and internationally, using
a
direct sales force as well as independent manufacturers' representatives,
resellers, and distributors. We believe that our direct sales force is well
suited to communicate and promote our products and how they differentiate from
those of our competitors. Since our products represent a complex and technical
sale, our sales force is supported by application engineers who provide
customers with pre-sale technical assistance.
Our
internal sales and marketing organization supports our channel marketing
partners by providing sales collateral, such as product data sheets,
presentations, and other sales/marketing resource tools. Our sales staff
solicits prospective customers, provides technical advice with respect to our
products, and works closely with marketing partners to train and educate their
staffs on how to sell, install, and support our product lines.
We
have
focused our sales and marketing efforts in North America, Europe and Asia.
All
of our international sales are negotiated in U.S. dollars. International
sales constituted 12%, 12% and 13% of net sales in fiscal 2004, 2003 and 2002,
respectively. International sales are executed in U.S. dollars and are
principally transacted in Europe.
Our
direct sales force is based in three locations in the United States and we
conduct our marketing activities from our principal office in San Ramon,
California.
Research
and Development
We
believe that continued research and development in current and emerging
technologies is critical to maintaining our competitive position in the embedded
and enterprise markets. Many factors are involved in determining the strategic
direction of our product development focus, including trends and developments
in
the marketplace, competitive analyses, and feedback from our customers and
strategic partners. We actively support and contribute to standards development
organizations and trade groups, which define and promote existing and emerging
technologies for both the embedded and enterprise arenas. We belong to several
influential industry associations, including VME International Trade Association
(“VITA”) and PCI Industrial Computers Manufacturers Group (“PICMG”).
Our
product development efforts are focused principally on our strategic product
lines, providing high bandwidth connectivity and computing solutions that serve
a wide range of networking applications. Leveraging our experience in high-speed
data communications and telecommunications enables us to develop integrated
communications solutions for our customers. We believe that the development
of
new internetworking products, high-performance communications controllers and
enabling communications software is essential to expanding our customer base,
penetrating new markets, and retaining existing customers.
During
the past four years, we have developed communications products based on PCI,
CompactPCI, PMC, PTMC, and HyperTransport architectures. We have also redesigned
and upgraded certain communications products to take advantage of new
technologies offering improved product performance and lower costs. In addition,
we have acquired or licensed certain hardware products that have been integrated
principally through the addition of software into our product line.
During
fiscal 2004, we continued to focus on further expansion of our line of
standards-based WAN adapters, upgrading/enhancing software drivers, developing
new products based on emerging technologies, such as TCP/IP Offload, Encryption,
and iSCSI. These hardware and software design efforts have enabled us to more
effectively target existing and emerging markets in areas such as VoIP, VPN,
security routers, telecommunications, military/government, medical and
industrial control
During
fiscal 2004, 2003 and 2002, we incurred $2.4 million, $1.3 million and $3.0
million, respectively, in product research and development
expenses.
Commitment
to Quality
We
have
been an ISO certified supplier of communications products since 1991. In
December 2001, we achieved certification to the internationally recognized
ISO9001: 2000 Standard. As part of our ongoing commitment to quality, we are
regularly inspected by an audit team from Bureau Veritas Quality International
(NA) Inc. (“BVQI”). These audits ensure that our internal quality system meets
internationally recognized quality management systems standards. We believe
that
our customers’ success depends on the delivery of high-quality products and
services. Our adherence to ISO standards and resulting quality practices is
our
way of guaranteeing that customer expectations are met and exceeded.
Manufacturing
We
do not
engage in any manufacturing activities. Instead, we utilize third party
manufacturers to build our products. We currently have non-exclusive
manufacturing agreements with ProWorks, Inc. and Sonic Manufacturing Technology.
We believe that ProWorks and Sonic are equipped to provide more cost-efficient
and timely product delivery than could otherwise be obtained if we manufactured
our product internally. The use of external manufacturing partners allows us
to
better respond to fluctuations in customer demand.
Competition
The
market for networking and communications interface products is highly
competitive. Many of our competitors have greater financial resources and are
well established in the space. Competition within the communications market
is
fragmented principally by application segment. Our HighWire products compete
with offerings from Radisys Corp, Performance Technologies, Interphase Corp,
Artesyn Technologies, and Adax, along with various other platform and controller
product providers. Our VMEbus, WAN adapter and LAN adapter products compete
primarily with products from Performance Technologies, Motorola, Interphase
Corp., Themis Computers, SBS Technologies and various other companies on a
product-by-product basis. Our SCSI products compete with LSI Logic, Adaptec,
Qlogic and Sun Microsystems. Our Fibre Channel products compete with products
from QLogic Corp and Emulex Corp. Our TOE products compete with QLogic and
Adaptec. Our encryption solutions compete with Extreme Engineering, Layer N
Networks, and InterfaceMasters. To compete and differentiate ourselves in our
markets, we emphasize the functionality, engineering support, quality and price
of our product in relation to our competitors, as well as our ability to
customize the product to meet the customer's specific application needs.
Additionally,
we compete with the internal engineering resources of our customers. As our
customers become successful with their products, they examine methods to reduce
costs and integrate functions. To compete with the internal engineering
resources of our customers, we work jointly with their engineering staffs to
understand each customer’s specific system requirements and to anticipate new
product needs versus time-to-market decisions.
Intellectual
Property
We
believe that our ability to innovate in product engineering, sales, marketing,
support, and customer relations, and then to protect this proprietary technology
and knowledge impacts our future success. We rely on a combination of copyright,
trademark, trade secret laws and contractual provisions to establish and protect
our proprietary rights in our products. We currently hold four patents. We
typically enter into confidentiality agreements with our employees, strategic
partners, channel partners and suppliers, and enforce strict limitations and
the
access to our proprietary information.
Backlog
On
October 31, 2004, we had a sales backlog of product orders of approximately
$2.5
million, including $1.0 million in orders from HP, compared to a sales backlog
of product orders of approximately $4.1 million, including $2.0 million in
orders from HP, one year ago. Because customer purchase orders are subject
to
changes in customer delivery schedules, cancellation, or price changes, our
backlog as of any particular date may not be representative of actual sales
for
any succeeding fiscal period. We do not anticipate any problems in filling
our
current backlog.
Employees
On
December 31, 2004, we had 36 employees. None of our employees is represented
by
a labor union. We have experienced no work stoppages. We believe our employee
relations are positive.
We
believe that our future success will depend, in part, on our ability to attract
and retain qualified technical (particularly engineering), marketing and
management personnel. Such experienced personnel are in great demand, and we
must compete for their services with other firms, many of which have greater
financial resources.
Risk
Factors
Our
business is subject to, but not limited to, the risks and uncertainties
described below.
Risks
Related to Our Business
We
depend upon a small number of OEM customers. The loss of any of these customers,
or their failure to sell their products, would limit our ability to generate
revenues.
In
fiscal
2004, most of our sales were derived from a limited number of OEM customers.
In
fiscal 2004, 2003 and 2002, sales of VME products to The Hewlett-Packard Company
(previously Compaq Computer) (“HP”) accounted for 45%, 45% and 30%,
respectively, of our net sales. A
substantial portion of such sales were attributable to sales of VME products
pursuant to a long-term supply agreement with HPT that
is
no longer in effectT. We
will
ship the remaining $1.0 million of the last order for VME products to HP in
the
first fiscal quarter of fiscal 2005. TWe
can
provide no assurance that we will succeedT
inT obtaining
new orders from existing or new customersT
sufficient to
replace Tor
exceed Tthe
Tnet
salesT
previously Tattributable
to HP.T
Orders
by
our OEM customers are affected by factors such as new product introductions,
product life cycles, inventory levels, manufacturing strategies, contract
awards, competitive conditions and general economic conditions. Our sales to
any
single OEM customer are also subject to significant variability from quarter
to
quarter. Such fluctuations may have a material adverse effect on our operating
results. A significant reduction in orders from any of our OEM customers, would
have a material adverse effect on our operating results, financial condition
and
cash flows. In addition, we anticipate a significant portion of future sales
will be dependent on a few new OEM customers, and there can be no assurance
that
we will become a qualified supplier with new OEM customers or that we will
remain a qualified supplier with existing OEM customers.
The
communications and storage products market is intensely competitive, and our
failure to compete effectively could reduce our revenues and
margins.
We
compete directly with traditional vendors of terminal servers, modems, remote
control software, terminal emulation software and application-specific
communications and storage solutions. We also compete with suppliers of routers,
hubs, network interface cards and other data communications and storage
products. In the future, we expect competition from companies offering
client/server
access
solutions based on emerging technologies such as switched digital telephone
services, iSCSI, SCSI, TOE and other technologies. In addition, we may encounter
increased competition from operating system and network operating system vendors
to the extent such vendors include full communications and storage capabilities
in their products. We may also encounter future competition from telephony
service providers (such as AT&T or the regional Bell operating companies)
that may offer communications services through their telephone
networks.
Increased
competition with respect to any of our products could result in price reductions
and loss of market share, which would adversely affect our business, operating
results, financial condition and cash flows. Many of our current and potential
competitors have greater financial, marketing, technical and other resources
than we do. There can be no assurance that we will be able to compete
successfully with our existing competitors or will be able to compete
successfully with new competitors.
We
have incurred operating losses in the past and may not be profitable in the
future.
The
consolidated financial statements contemplate the realization of assets and
the
satisfaction of liabilities in the normal course of business. Although we had
a
net loss of $1.7 million for fiscal 2004, we did have net income of $563,000
for
fiscal 2003 and had eight consecutive profitable quarters prior to the loss
in
our fourth quarter of fiscal 2004. We generated negative cash flows from
operations of $140,000, $84,000 and $2.7 million for fiscal 2004, 2003 and
2002,
respectively We believe our existing cash plus additional cash from our line
of
credit and continuing operations will provide sufficient cash flows to fund
our
operations through October 31, 2005. However, these our cash flows from future
operations is dependent on projected sales are to a limited number of new and
existing OEM customers and are based on internal and customer provided estimates
of future demand, not firm customer orders. In addition, we must successfully
sell and distribute for our new TOE and iSCSI products. If the projected sales
do not materialize, we will need to reduce expenses further and potentially
raise additional capital through customer prepayments or the issuance of debt
or
equity securities. If additional funds are raised through the issuance of
preferred stock or debt, these securities could have rights, privileges or
preferences senior to those of Common Stock, and debt covenants could impose
restrictions on our operations. The sale of equity or debt could result in
additional dilution to current stockholders, and such financing may not be
available to us on acceptable terms, if at all.
Our
operating results in future periods are likely to fluctuate significantly and
may fail to meet the expectations of securities analysts or investors, causing
our stock price to fall.
Our
quarterly operating results have fluctuated significantly in the past and are
likely to fluctuate significantly in the future due to several factors, some
of
which are outside our control, including timing of significant orders from
OEM
customers, fluctuating market demand for, and declines in the average selling
prices of, our products, delays in the introduction of our new products,
competitive product introductions, the mix of products sold, changes in our
distribution network, the failure to anticipate changing customer product
requirements, the cost and availability of components and general economic
conditions. We generally do not operate with a significant order backlog, and
a
substantial portion of our revenue in any quarter is derived from orders booked
in that quarter. Accordingly, our sales expectations are based almost entirely
on our internal estimates of future demand and not on firm customer orders.
Due
to
the adverse economic conditions in the telecommunications industry, our OEM
telecommunications customers may hold excess inventory of our products. A result
of the economic downturn and slowness in recovery of the telecommunications
market is that certain of our customers have cancelled or delayed many of their
new design projects and new product rollouts that included our products. Due
to
the current economic uncertainty, our customers now typically require a
"just-in-time" ordering and delivery cycle where they will place a purchase
order with us after they receive an order from their customer. This
"just-in-time" inventory purchase cycle by our customers has made forecasting
of
our future sales volumes very difficult.
Based
on
the foregoing, we believe that quarterly operating results are likely to vary
significantly in the future and that period-to-period comparisons of our results
of operations are not necessarily meaningful and should not be relied upon
as
indications of future performance. Further, it is likely that in some future
quarter our revenue or operating results will be below the expectations of
public market analysts and investors. In such event, the price of our common
stock is likely to fall.
If
we are unable to keep up with the rapid technological changes that characterize
our industry, our business would suffer.
The
markets for our products are characterized by rapidly changing technologies,
evolving industry standards and frequent new product introductions. Our future
success will depend on our ability to enhance our existing products and to
introduce new products and features to meet and adapt to changing customer
requirements and emerging technologies such as VoIP”), 3G Wireless ("Third
Generation Wireless Services") SATA (“Serial ATA”), SAS (Serial Attached SCSI”)
iSCSI , Gigabit Ethernet, 10 Gigabit Ethernet and TOE. There can be no assurance
that we will be successful in identifying, developing, manufacturing and
marketing new products or enhancing our existing products. In addition, there
can be no assurance that services, products or technologies developed by others
will not render our products noncompetitive or obsolete.
We
have
focused a significant portion of our research and development, marketing and
sales efforts on HighWire, WAN and LAN adapters, Encryption, iSCSI and TOE
products. The success of these products is dependent on several factors,
including timely completion of new product designs, achievement of acceptable
manufacturing quality and yields, introduction of competitive products by other
companies and market acceptance of our products. If the TOE, iSCSI, HighWire
and
adapter products or other new products developed by us do not gain market
acceptance, our business, operating results, financial condition and cash flows
would be materially adversely affected.
We
depend on our key personnel. If we are unable to retain our current personnel
and hire additional qualified personnel as needed, our business would be harmed.
We
are
highly dependent on the technical, management, marketing and sales skills of
a
limited number of key employees. We do not have employment agreements with,
or
life insurance on the lives of, any of our key employees. The loss of the
services of any key employee could adversely affect our business and operating
results. Our future success will depend on our ability to continue to attract
and retain highly talented personnel to the extent our business grows.
Competition for qualified personnel in the networking industry, and in the
San
Francisco Bay Area, is intense. There can be no assurance that we will be
successful in retaining our key employees or that we can attract or retain
additional skilled personnel as required.
Because
of our dependence on single suppliers for some components, we may be unable
to
obtain an adequate supply of such components, or we may be required to pay
higher prices or to purchase components of lesser
quality.
The
chipsets used in most of our products are currently available only from Motorola
or in the case of the TOE products from LeWiz Communications, Inc.. In addition,
certain other components are currently available only from single suppliers.
The
inability to obtain sufficient key components as required, or to develop
alternative sources if and as required in the future, could result in delays
or
reductions in product shipments or margins that, in turn, would have a material
adverse effect on our business, operating results, financial condition and
cash
flows.
Our
future capital needs may exceed our ability to raise capital or use our existing
credit line with a Bank.
The
engineering development and marketing of our products is capital-intensive.
While we believe that our existing cash balances and our anticipated cash flow
from operations will satisfy our working capital needs for the next twelve
months, we cannot assure that this will be the case. Declines in our sales
or a
failure to keep expenses in line with revenues could require us to seek
additional financing or force us to draw down on our existing line of credit
with a Bank in fiscal 2005. Due to the net loss in our fourth quarter of fiscal
2004, we are not in compliance with our Bank line of credit debt covenants
and
may not be able to use that credit line unless the Bank agrees to waive the
covenant violation. In addition, should we experience a significant growth
in
customer orders, we may be required to seek additional capital to meet our
working capital needs. There can be no assurance that additional financing,
if
required, will be available on reasonable terms or at all. To the extent that
additional capital is raised through the sale of additional equity or
convertible debt securities, the issuance of such securities could result in
additional dilution to our stockholders.
We
may be unable to protect our intellectual property, which could reduce any
competitive advantage we have.
Since
we
believe that our future success will depend primarily on continuing innovation,
sales, marketing and technical expertise, the quality of product support and
customer relations, we must also protect the proprietary technology contained
in
our products. We currently hold two patents and two patent applications, and
also rely on a combination of copyright, trademark, trade secret laws and
contractual provisions to establish and protect proprietary rights of our
products. There can be no assurance that steps taken by us in this regard will
be adequate to deter misappropriation or independent third-party development
of
our technology. Although we believe that our products and technology do not
infringe on the proprietary rights of others, there can be no assurance that
third parties will not assert infringement claims against us.
Risks
Associated with Ownership of Our Common Stock
Our
common stock is at risk for delisting from the Nasdaq SmallCap Market. If it
is
delisted, our stock price and your liquidity may be
impacted.
Our
common stock is currently listed on the Nasdaq SmallCap Market. Nasdaq has
requirements that a company must meet in order to remain listed on the Nasdaq
SmallCap Market. These requirements include maintaining a minimum closing bid
price of $1.00 and minimum stockholders’ equity of $2.5 million. Our
stockholders’ equity as of October 31, 2004 was $4.3 million. The closing bid
price for our common stock has been below $1.00 for short periods of time in
the
past. If the closing bid price of our common stock is below $1.00 for a period
of 30 consecutive trading days, our common stock could be subject to delisting
from the Nasdaq SmallCap Market.
If
we
fail to maintain the standards necessary to be quoted on the Nasdaq SmallCap
Market and our common stock is delisted, trading in our common stock would
be
conducted on the OTC Bulletin Board as long as we continue to file reports
required by the Securities and Exchange Commission. The OTC Bulletin Board
is
generally considered to be a less efficient market than the Nasdaq SmallCap
Market, and our stock price, as well as the liquidity of our Common Stock,
may
be adversely impacted as a result.
The
market price of our common stock is likely to continue to be volatile. You
may
not be able to resell your shares at or above the price at which you purchased
such shares.
The
trading price of our common stock is subject to wide fluctuations in response
to
quarter-to-quarter fluctuations in operating results, the failure to meet
analyst estimates, announcements of technological innovations or new products
by
us or our competitors, general conditions in the computer and communications
industries and other events or factors. In addition, stock markets have
experienced extreme price and trading volume volatility in recent years. This
volatility has had a substantial effect on the market prices of securities
of
many high technology companies for reasons frequently unrelated to the operating
perform-ance of the specific companies. These broad market fluctuations may
adversely affect the market price of our common stock.
Our
certificate of incorporation and bylaws and the Delaware General Corporation
Law
contain provisions that could delay or prevent a change in
control.
Our
board
of directors has the authority to issue up to 2,000,000 shares of preferred
stock and to determine the price, rights, preferences and privileges of those
shares without any further vote or action by the stockholders. The rights of
the
holders of common stock will be subject to, and may be materially adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of preferred stock could have the effect of making
it more difficult for a third party to acquire a majority of our outstanding
voting stock. Furthermore, certain other provisions of our certificate of
incorporation and bylaws may have the effect of delaying or preventing changes
in control or management, which could adversely affect the market price of
our
common stock. In addition, we are subject to the provisions of Section 203
of
the Delaware General Corporation Law, an anti-takeover law.
ITEM
2. PROPERTIES
In
December 2001, we relocated our engineering and administrative headquarters
to
15,000 square feet of leased space located in San Ramon, California. The lease
expires in 2006. We expect the facility to satisfy our anticipated needs for
the
foreseeable future. In conjunction with the relocation to the new building,
we
assigned the lease related to our former 63,000 square foot engineering and
administrative headquarters to a third party. The third party has assumed
payment of the remaining lease payments through the termination of the original
lease term in 2006 and we are a secondary guarantor.
ITEM
3. LEGAL
PROCEEDINGS
We
are
not a party to any pending legal proceedings.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of our stockholders in the fourth quarter
of
2004.
IDENTIFICATION
OF EXECUTIVE OFFICERS
Our
executive officers and their respective ages and positions as of October 31,
2004 are set forth in the following table. Our Board of Directors accepted
the
retirement of Mr. William Heye, Jr. as President and Chief Executive Officer
effective December 31, 2004 and appointed Mr. Dan Grey as his replacement
effective January 1, 2005. Mr. Grey will continue to serve as the Senior vice
President, Sales and Marketing. Executive officers serve at the discretion
of
the board of directors. There are no familial relationships between our
directors or our executive officers and any other director or executive
officer.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
William
B. Heye, Jr.
|
|
66
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
David
W. Brunton
|
|
54
|
|
Vice
President, Finance, Chief Financial Officer, Treasurer and
Secretary
|
|
|
|
|
|
Dan
Grey
|
|
49
|
|
Senior
Vice President, Sales and Marketing
|
|
|
|
|
|
Carl
Munio
|
|
54
|
|
Vice
President, Engineering
|
|
|
|
|
|
Kirk
Anderson
|
|
45
|
|
Vice
President, Operations
|
|
|
|
|
|
Yee-Ling
Chin
|
|
29
|
|
Vice
President, Marketing
|
|
|
|
|
|
Mr.
Heye
joined us in November 1991 as President, Chief Executive Officer and member
of
the Board of Directors. Mr. Heye will retire from active management effective
December 31, 2004. From 1989 to November 1991, he served as Executive Vice
President of Ampex Corporation, a manufacturer of high-performance scanning
recording systems, and President of Ampex Video Systems Corporation, a
wholly-owned subsidiary of Ampex Corporation and a manufacturer of professional
video recorders and editing systems for the television industry. From 1986
to
1989, Mr. Heye served as Executive Vice President of Airborn, Inc., a
manufacturer of components for the aerospace and military markets. Prior to
1986, Mr. Heye served in various senior management positions at Texas
Instruments, Inc. in the United States and overseas, including Vice President
and General Manager of Consumer Products and President of Texas Instruments
Asia, Ltd., with headquarters in Tokyo, Japan.
Mr.
Brunton joined us in November 2001 as Vice President, Finance, Chief Financial
Officer, Secretary and Treasurer. From 2000 to 2001 he was the Chief Financial
Officer for NetStream, Inc., a telephony broadband network service provider.
From 1997 to 2000, Mr. Brunton was the Chief Financial Officer and Senior Vice
President - Operations for ReSourcePhoenix.com, a financial services outsource
provider. From 1987 to 1997, Mr. Brunton was the Corporate Controller for the
Phoenix American Companies, an equipment leasing, cable TV, telecommunications
and software development company. Mr. Brunton is a certified public accountant
who prior to 1987 was with Arthur Andersen & Co.
Mr.
Grey
has served as Senior Vice President Sales and Marketing since May 2001. For
the
18 months prior to SBE, he was the Senior Vice President of Sales for SBS
Technologies. From 1999 to 2000, Mr. Grey was Vice President of Sales for LAN
Media Corporation, a company later acquired by SBE. Mr. Grey was the Western
Regional Sales Manager from 1996 to 1999 for Performance Technologies, Inc.
From
1989 to 1996, Mr. Grey served as the Director of Western Sales for SBE. Mr.
Grey
will assume the additional positions of President and Chief Executive Officer
effective January 1, 2005.
Mr.
Munio
joined SBE in August 2003 following SBE’s acquisition of Antares Microsystems.
From 1996 to August 2003, Mr. Munio served as CTO for Antares, where he drove
product developments in emerging and existing technologies. Prior to joining
Antares, he was Director of Operations Product Engineering at Sun Microsystems
for over 11 years, and served in a variety of management positions during a
12-year tenure at Hewlett-Packard.
Mr.
Anderson has served as Vice President, Operations since October 2001. He joined
us as Manager of Operations in 1997 and was promoted to Director, Operations
in
1999. Prior to joining us Mr. Anderson was the Manager, Marketing Logistics
for
Wesley Jessen from 1994 to 1997 where he was responsible for logistical planning
and manufacturing budgeting and control. Prior to 1994 he held various
management positions in operations, finance and marketing for several high-tech
companies in Silicon Valley, including Vitalink Communications, a pioneer in
internetworking products.
Ms.
Chin
joined us in July 2003 as Vice President, Marketing. From 1998 to 2003, she
served as Director of Marketing Communications for SBS
Technologies.
PART
II
ITEM
5. MARKET
FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our
common stock is quoted on the Nasdaq SmallCap Market under the symbol SBEI.
The
following table presents quarterly information on the price range of our common
stock, indicating the high and low bid prices reported by the Nasdaq SmallCap
Market. These prices do not include retail markups, markdowns or commissions.
As
of December 31, 2004, there were approximately 394 holders of record of our
common stock.
There
are
no restrictions on our ability to pay dividends; however, it is currently the
intention of our Board of Directors to retain all earnings, if any, for use
in
our business and we do not anticipate paying cash dividends in the foreseeable
future. Any future determination as to the payment of dividends will depend,
among other factors, upon our earnings, capital requirements, operating results
and financial condition.
|
|
Fiscal
quarter ended
|
|
Fiscal
2004
|
|
January
31
|
|
April
30
|
|
July
31
|
|
October
31
|
|
High
|
|
$
|
8.49
|
|
$
|
7.34
|
|
$
|
4.08
|
|
$
|
3.19
|
|
Low
|
|
|
4.76
|
|
|
3.90
|
|
|
2.81
|
|
|
2.68
|
|
Fiscal
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
1.26
|
|
$
|
0.95
|
|
$
|
2.99
|
|
$
|
6.00
|
|
Low
|
|
|
0.56
|
|
|
0.64
|
|
|
0.77
|
|
|
2.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table includes information regarding our equity incentive plans as
of
the end of fiscal 2004.
Equity
Compensation Plan Information
Plan
category
|
|
Number
of securities to be issued upon exercise of outstanding
options,
warrants
and rights
|
|
Weighted-average
exercise price of outstanding options, warrants
and
rights
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities
reflected
in column (a))
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
1,319,666
|
|
$
|
3.75
|
|
|
1,091,266
|
|
Equity
compensation plans not approved by security holders
|
|
|
617,453
|
|
$
|
2.53
|
|
|
26,250
|
|
Total
|
|
|
1,937,119
|
|
$
|
3.36
|
|
|
1,117,516
|
|
ITEM
6. SELECTED
FINANCIAL DATA
The
following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of
Operations" and the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Form 10-K.
For
years ended October 31,
|
|
|
|
|
|
|
|
|
|
|
|
and
at October 31
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
(in
thousands, except for per share amounts and number of
employees)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
11,066
|
|
$
|
7,456
|
|
$
|
6,898
|
|
$
|
7,726
|
|
$
|
29,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,679
|
)
|
$
|
563
|
|
$
|
(1,731
|
)
|
$
|
(9,896
|
)
|
$
|
3,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - basic
|
|
$
|
(
0.33
|
)
|
$
|
0.13
|
|
$
|
(0.46
|
)
|
$
|
(2.92
|
)
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - diluted
|
|
$
|
(0.33
|
)
|
$
|
0.12
|
|
$
|
(0.46
|
)
|
$
|
(2.92
|
)
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
research and development
Expenses
|
|
$
|
2,411
|
|
$
|
1,330
|
|
$
|
3,027
|
|
$
|
5,652
|
|
$
|
5,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
3,970
|
|
$
|
3,945
|
|
$
|
2,985
|
|
$
|
7,595
|
|
$
|
11,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
6,173
|
|
$
|
6,975
|
|
$
|
5,321
|
|
$
|
10,690
|
|
$
|
17,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
$
|
139
|
|
$
|
217
|
|
$
|
10
|
|
$
|
4,870
|
|
$
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
$
|
4,303
|
|
$
|
5,387
|
|
$
|
3,696
|
|
$
|
4,119
|
|
$
|
13,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of employees
|
|
|
36
|
|
|
32
|
|
|
24
|
|
|
47
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SBE,
Inc.
architects and provides network communications and storage solutions to the
original equipment manufacturers (“OEM”) in the embedded computing and storage
markets. Our solutions enable Tdata
communicationsT,
TtelecommunicationsT
and
storage solution companies in addition to enterprise class high-end server
clients to rapidly deliver advanced networking and storage products and
services. Our products include wide area network (“WAN”), local area network
(“LAN”), Internet Small Computer System Interface (“iSCSI”) software, SCSI,
Fibre Channel, intelligent carrier cards, Encryption and TCP/IP Offload Engine
(“TOE”) cards. These products perform critical computing, processing offload,
Input/Output (“I/O”) and storage tasks across both the enterprise server and
embedded markets such as high-end enterprise level servers, Linux super
computing clusters, workstations, media gateways, routers, internet access
devices, home location registers, data messaging applications, network attached
storage (“NAS”) and remote storage devices and networks. Our products are
distributed worldwide through a direct sales force, distributors, independent
manufacturers' representatives and value-added resellers. Our business falls
primarily within one industry segment.
Our
business is characterized by a concentration of sales to a small number of
OEMs
and distributors who provide products and services to the datacom and
telecommunications markets in addition to OEM’s and system integrators in the
storage and high-end server markets. Consequently, the timing of significant
orders from major customers and their product cycles cause fluctuation in our
operating results. The Hewlett Packard Company (“HP”) is the largest of our
customers and represented 45%, 45% and 30% of net sales in fiscal 2004, 2003
and
2002, respectively. We will ship the remaining $1.0 million of the last order
for VME products to HP in the first fiscal quarter of fiscal 2005. We do not
expect to receive any future purchase orders from HP for our VME products.
If
any of our major customers reduces orders for our products, we could lose
revenues and suffer damage to our business reputation. Orders by our OEM
customers are affected by factors such as new product introductions, product
life cycles, inventory levels, manufacturing strategy, contract awards,
competitive conditions and general economic conditions.
During
fiscal 2004, we introduced new TOE, iSCSI, Encryption, WAN, and LAN products
that are targeted at large growing enterprise markets such as super computing
clusters, network storage clusters, VPN, security and other communications
devices. Our HighWire products have been focused primarily on the
telecommunications market and the communications activities that are driven
by
the convergence of traditional telephony applications with the Internet with
applications like VoIP. While we believe the market for our TOE, iSCSI,
Encryption, HighWire, Adapter and Storage NIC’s and software product families is
large, there can be no assurance that we will be able to succeed in penetrating
these markets and diversifying our sales.
Since
the
fourth quarter of fiscal 2001 we have 24 new design wins, including two in
fiscal 2004, and have added a substantial number of new customers to our growing
base of customers. A design win is defined as a program with an OEM customer
that will generate at least $400,000 in recurring annual Tnet
salesT
typically within 12 to 18 months after the customer accepts and confirms the
use
of our product in their platform. We believe the combination of new customers
and design wins will provide the basis for future TsalesT
growth.
A variety of risks such as schedule delays, cancellations and changes in
customer markets and economic conditions can adversely affect a design win
before or after production is reached. With the current economic climate in
the
communications equipment marketplace, design activity has slowed and reaching
production volumes is proving to be elusive for those products that have been
designed. In these difficult economic times, poor customer visibility is causing
ordering delays. These factors often result in a substantial portion of our
Tnet
salesT
being
derived from orders placed within the quarter and shipped in the final month
of
the quarter.
On
October 31, 2004, we had a sales backlog of product orders of approximately
$2.5
million compared to a sales backlog of product orders of approximately $4.1
million one year ago. Included in these backlogs are orders from HP of $1.0
million and $2.0 million, respectively.
The
market environment for our products is extremely competitive and we have limited
visibility into customer activity. In spite of this uncertain market, we have
been successful in increasing our adapter revenues 53% and revenues from our
HighWire products 77% during fiscal 2004. One of our primary sales goals is
to
diversify our customer base and at the same time provide sources of Tnet
salesT
to fill
the gap that will be left after we process our final shipment of VME products
to
HP in the first quarter of fiscal 2005.
Critical
Accounting Policies and Estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Such estimates include levels of reserves
for doubtful accounts, obsolete inventory, warranty costs and deferred tax
assets. Actual results could differ from those estimates.
Our
critical accounting policies and estimates include the following:
Revenue
Recognition:
Our
policy is to recognize revenue for product sales upon shipment of our products
to our customers provided that no significant obligation remains and collection
of the receivable is considered probable. Shipping terms are generally FOB
shipping point. We defer and recognize service revenue over the contractual
period or as services are rendered. We estimate expected sales returns and
record the amount as a reduction of revenue and cost of goods (“COGS”) at the
time of shipment. Our policy complies with the guidance provided by Staff
Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements,
issued
by the Securities and Exchange Commission. Judgments are required in evaluating
the credit worthiness of our customers. Credit is not extended to customers
and
revenue is not recognized until we have determined that collectibility is
reasonably assured. Our sales transactions are denominated in U.S. dollars.
The
software component of our products is considered incidental to our products.
We,
therefore do not recognize software revenue separately from the product
sale.
Our
agreements with OEMs, such as HP and Nortel Networks Corp, typically incorporate
clauses reflecting the following understandings:
- |
all
prices are fixed and determinable at the time of
sale;
|
- |
title
and risk of loss pass at the time of shipment (FOB shipping
point);
|
- |
collectibility
of the sales price is probable (the OEM is obligated to pay and such
obligation is not contingent on the ultimate sale of the OEM’s integrated
solution);
|
- |
the
OEM’s obligation to us will not be changed in the event of theft or
physical destruction or damage of the
product;
|
- |
we
do not have significant obligations for future performance to directly
assist in the resale of the product by the OEMs;
and
|
- |
there
is no contractual right of return other than for defective
products.
|
Our
agreements with our distributors include certain product rotation and price
protection rights. All distributors have the right to rotate slow moving
products once each fiscal quarter. The maximum dollar value of inventory
eligible for rotation is equal to twenty-five percent of our products purchased
by the distributor during the previous quarter. In order to take advantage
of
their product rotation rights, the distributors must order and take delivery
of
additional SBE products equal to at least the dollar value of the products
that
they want to rotate.
Each
distributor is also allowed certain price protection rights. If and when we
reduce or plan to reduce the price of any of our products and the distributor
is
holding any of the affected products in inventory, we will credit the
distributor the difference in price when it places its next order with us.
We
record an allowance for price protection reducing our net sales and accounts
receivable. The allowance is based on the price difference of the inventory
held
by our stocking distributors at the time we expect to reduce selling prices.
Reserves for the right of return and restocking are established based on the
requirements of SFAS 48, Revenue
Recognition when Right of Return Exists
because
we have visibility into our distributor’s inventory and have sufficient history
to estimate returns.
During
the year ended October 31, 2004 and 2003, $873,000, or 8% of sales and $191,000
or 3% of our sales were sold to distributors, respectively.
Allowance
for Doubtful Accounts:
Our
policy is to maintain allowances for estimated losses resulting from the
inability of our customers to make required payments. Credit limits are
established through a process of reviewing the financial history and stability
of each customer. Where appropriate, we obtain credit rating reports and
financial statements of the customer when determining or modifying their credit
limits. We regularly evaluate the collectibility of our trade receivable
balances based on a combination of factors. When a customer’s account balance
becomes past due, we initiate dialogue with the customer to determine the cause.
If it is determined that the customer will be unable to meet its financial
obligation to us, such as in the case of a bankruptcy filing, deterioration
in
the customer’s operating results or financial position or other material events
impacting its business, we record a specific allowance to reduce the related
receivable to the amount we expect to recover.
We
also
record an allowance for all customers based on certain other factors including
the length of time the receivables are past due and historical collection
experience with customers. We believe our reported allowances are adequate.
If
the financial conditions of those customers were to deteriorate, however,
resulting in their inability to make payments, we may need to record additional
allowances which would result in additional general and administrative expenses
being recorded for the period in which such determination was made.
Warranty
Reserves:
We
accrue
the estimated costs to be incurred in performing warranty services at the time
of revenue recognition and shipment of the products to the OEMs. Because there
is no contractual right of return other than for defective products, we can
reasonably estimate such returns and record a warranty reserve at the point
of
shipment. Our estimate of costs to service our warranty obligations is based
on
historical experience and expectation of future conditions. To the extent we
experience increased warranty claim activity or increased costs associated
with
servicing those claims, the warranty accrual will increase, resulting in
decreased gross margin.
Inventories:
We
are exposed
to a number of economic and industry factors that could result in portions
of
our inventory becoming either obsolete or in excess of anticipated usage, or
subject to lower of cost or market issues. These factors include, but are not
limited to, technological changes in our markets, our ability to meet changing
customer requirements, competitive pressures in products and prices, and the
availability of key components from our suppliers. Our policy is to establish
inventory reserves when conditions exist that suggest that our inventory may
be
in excess of anticipated demand or is obsolete based upon our assumptions about
future demand for our products and market conditions. We regularly evaluate
our
ability to realize the value of our inventory based on a combination of factors
including the following: historical usage rates, forecasted sales or usage,
product end-of-life dates, estimated current and future market values and new
product introductions. Purchasing practices and alternative usage avenues are
explored within these processes to mitigate inventory exposure. When recorded,
our reserves are intended to reduce the carrying value of our inventory to
its
net realizable value. If actual demand for our products deteriorates, or market
conditions are less favorable than those that we project, additional inventory
reserves may be required. In the fourth quarter of 2004, we reviewed our
inventory balances and increased our reserves on specific products by
$547,000.
Inventories
are stated at the lower of cost, using the first-in, first-out method, or market
value.
Acquisitions:
All
business acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the statements of income include the results of
each acquired business since the date of acquisition. The assets acquired and
liabilities assumed are recorded at estimates of fair values as determined
by
management based on information available. Management considers a number of
factors, including third-party valuations or appraisals, when making these
determinations. We finalize the allocation of purchase price to the fair value
of the assets acquired and liabilities assumed when we obtain information
sufficient to complete the allocation, but in any case, within one year after
acquisition. Our acquisition of Antares in fiscal year ended October 31, 2003
resulted in intangible assets of approximately $1.2 million. These assets were
fully written off in the current year.
Intangible
Assets:
We
adopted the Financial Accounting Standards Board (“FASB”) Statements of
Financial Accounting Standards (“SFAS”) No. 141, Business
Combinations
and SFAS
No. 142, Goodwill
and Other Intangible Assets
on
accounting for business combinations and goodwill as of the beginning of fiscal
year 2002. Accordingly, we do not amortize goodwill from acquisitions, but
continue to amortize other acquisition-related intangibles and costs. All of
the
intangible assets that we currently own are intellectual property acquired
in
the Antares acquisition.
For
identifiable intangible assets, we amortize the cost over the estimated useful
life and assess any impairment by estimating the future cash flow from the
associated asset in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
If the
estimated undiscounted cash flow related to these assets decreases in the future
or the useful life is shorter than originally estimated, we may incur charges
for impairment of these assets. The impairment is based on the estimated
discounted cash flow associated with the asset. An impairment could result
if
the underlying technology fails to gain market acceptance, we fail to deliver
new products related to these technology assets, the products fail to gain
expected market acceptance or if market conditions are unfavorable.
Intellectual
property costs consist of the allocation of costs associated with the purchase
of current and the design of future products from Antares Microsystems on August
7, 2003. As required by these rules, we perform an impairment review annually,
or earlier if indicators of potential impairment exist. The impairment analysis
requires significant judgment to identify events or circumstances that would
likely have a significant adverse effect on the fair value of the intangible
asset. Our annual impairment review was completed during the fourth quarter
of
fiscal 2004, and we determined that there was considerable doubt that the
remaining unamortized balance of $713,000 of the intangible asset at October
31,
2004 would be recoverable. The indicators we used to identify those events
and
circumstances included: revenue and earnings trends relative to predefined
milestones and overall business prospects; the technological feasibility of
the
Antares products; and technologies and the general market conditions in the
market for SUN Microsystems compatible products with which Antares products
compete. Our impairment review was based on a discounted cash flow approach
that
uses estimates of future market share and revenues and costs for the Antares
products as well as appropriate discount rates. The estimates used are
consistent with the plans and estimates that we use to manage the underlying
business. We determined that the estimated fair market value of the balance
of
the intangible asset related to the Antares acquisition was nominal and as
a
result, we recorded an impairment charge of $713,000, during the fourth fiscal
quarter ended October 31, 2004, thus writing off the remaining value of the
intellectual property asset.
The
non-cash expense related to the amortization and write-down of the intellectual
property in fiscal 2004 was $1.1 million and consists of $408,000 of regularly
scheduled annual amortization expense plus $713,000 write down related to the
impairment valuation analysis. This write-down plus the regularly scheduled
amortization is included in our cost of goods sold. The amortization expense
for
the one quarter that we owned Antares in fiscal 2003 was approximately
$102,000.
Deferred
Taxes:
We
record
a valuation allowance to reduce our deferred taxes to the amount that is more
likely than not to be realized. Based on the uncertainty of future pre-tax
income, we have fully reserved our deferred tax assets as of October 31, 2004.
In the event we were to determine that we would be able to realize our deferred
tax assets in the future, an adjustment to the deferred tax asset would increase
income in the period such determination was made.
New
Accounting Pronouncements:
In
December 2004, the FASB issued SFAS No. 123R that amends SFAS No. 123
Accounting
for Stock-Based Compensation,
to
require public entities (other than those filing as small business issuers)
to
report stock-based employee compensation in their financial statements. Unless
modified, we will be required to comply with the provisions of SFAS No. 123R
as
of the first interim period that begins after June 15, 2005 (August 1, 2005
for
us). We currently do not record compensation expense related to our stock-based
employee compensation plans in our financial statements.
Results
of Operations
The
following table sets forth, as a percentage of net sales, certain consolidated
statements of operations data for the fiscal years ended October 31, 2004,
2003
and 2002. These operating results are not necessarily indicative of our
operating results for any future period.
|
|
Year
Ended October 31,
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
Net
sales
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Cost
of sales
|
|
|
60
|
|
|
37
|
|
|
46
|
|
Gross
profit
|
|
|
40
|
|
|
63
|
|
|
54
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Product
research and development
|
|
|
22
|
|
|
18
|
|
|
44
|
|
Sales
and marketing
|
|
|
19
|
|
|
20
|
|
|
31
|
|
General
and administrative
|
|
|
16
|
|
|
23
|
|
|
34
|
|
Loan
reserve (benefit)
|
|
|
(2
|
)
|
|
(3
|
)
|
|
7
|
|
Restructuring
costs (benefit)
|
|
|
---
|
|
|
(2
|
)
|
|
6
|
|
Total
operating expenses
|
|
|
55
|
|
|
56
|
|
|
(122
|
)
|
Operating
income (loss)
|
|
|
(15
|
)
|
|
7
|
|
|
(68
|
)
|
Forfeited
deposit, net
|
|
|
---
|
|
|
---
|
|
|
39
|
|
Interest
and other income
|
|
|
---
|
|
|
---
|
|
|
2
|
|
Income
(loss) before income taxes
|
|
|
(15
|
)
|
|
7
|
|
|
(27
|
)
|
Income
tax benefit
|
|
|
---
|
|
|
---
|
|
|
2
|
|
Net
income (loss)
|
|
|
(15)%
|
|
|
7
|
%
|
|
(25)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
Net
sales
for fiscal 2003 were $11.1 million, a 48% increase from $7.5 million for fiscal
2003. Net sales for fiscal 2003 were $7.5 million, an 8% decrease from $6.9
million in fiscal 2002. The increase in fiscal 2004 as compared to fiscal 2003
was primarily attributable to an increase in sales to numerous customers
including our largest, HP. Net sales to HP were $4.9 million in fiscal 2004
as
compared to $3.4 million for fiscal 2003 and $2.1 million in fiscal 2002. Sales
to HP, primarily of VMEBus products, represented 45% of net sales for fiscal
2004, compared to 45% during fiscal 2003 and 30% in fiscal 2002. A
substantial portion of such sales were attributable to sales of VME products
pursuant to a long-term supply agreement with HPT
that is
no longer in effectT.
We have
one remaining order with HP for $1.0 million of VME products that will be
shipped in the first quarter of fiscal 2005.
At this
time, we do not expect to receive any future orders for VME products from HP.
Nortel Networks was the only other customer that represented greater than 10%
of
our sales, accounting for 13% of our sales in fiscal 2004. For fiscal 2003
and
2002, Lockheed Martin was the only other customer representing 10% or more
of
our sales, accounting for 11% of net sales in fiscal 2002. In fiscal 2004 after
one complete year of operations, we derived $1.2 million in sales from products
we acquired from Antares compared to $459,000 in Antares product sales from
acquisition date, August 7, 2003 through October 31, 2003.
Sales
of
our adapter products were $4.9 million for fiscal 2004, as compared to $2.6
million in fiscal 2003 and $2.1 million in fiscal 2002. Sales of our HighWire
products were $1.3 million in fiscal 2004, as compared to $0.8 million in fiscal
2003 and $1.0 million in fiscal 2002. Our adapter products are used primarily
in
edge-of-the-network applications such as VPN and other routers, VoIP gateways
and security devices, whereas our HighWire products are primarily targeted
at
core-of-the-network applications used primarily by telecommunications central
offices. In
the
future, we expect our net sales to be generated TpredominantlyT
by sales
of our adapter and encryption products with Linux and Solaris software, followed
by our recently released TOE products and storage products, primarily iSCSI.
We
expect to see a continued steady increase in the sale of our Highwire products
due to the recent adoption and release of OEM products that have incorporated
our Highwire series of intelligent carrier cards. All of our design wins and
new
customers are for applications using these product families. In addition, we
will continue to sell and support our older VME products, but expect them to
become a declining portion of our future net sales.
We
anticipate that our net sales for fiscal 2005 will increase when compared with
fiscal 2004, as certain of our design wins from the last two year to go into
production and that our customers will increase the rate of product rollout
such
as edge of the network routers, VoIP gateways and WiFi applications. As a result
of these design wins moving to production stage, sales of our Adapter products
increased 53% and sales of our Highwire products increase 77% in fiscal 2004
as
compared to fiscal 2003. One of our major challenges on a long term basis
continues to be replacement of the net sales of VME products previously provided
to HP. HP (including its predecessors, Tandem Computer and Compaq Computer),
has
accounted for a substantial portion of our net sales for the past five years.
We
expect to continue to increase the sales of our Adapter and Highwire products
and that these increases as a percentage of total revenue will replace the
sales
to HP. Even though the market environment for our customers’ activities
continues to be uncertain we have been successful in extending our reach with
new customers. We have been successful in increasing our network of distributors
and value-added resellers in the United States and Europe and have rolled out
some new products such as high density multi-ported adapter cards, Encryption
cards, the TOE product and iSCSI storage software. We
have
also entered into some new strategic partnerships that will expand the reach
of
our products to a new base of customers using AdvanceTCA (“ATCA”) products. We
have continued to add new customers and design wins over the course of fiscal
2004 and we believe the combination of new customers and past design wins
beginning to go into production will provide future growthT
in net
salesT
in the
communications, computing and storage marketplaces.
Our
sales
backlog at October 31, 2004 was $2.5 million, including $1.0 million from HP,
compared to $4.1 million, including $2.0 million from HP, at October 31, 2003.
While we anticipate an increase in our sales volume in our Adapter and Highwire
products over the course of fiscal 2005 as certain
of our design wins from the last two year to go into production
and our
customers gradually return to new product design and product rollout, there
can
be no assurances that such increase will occur. Our customers typically operate
on a "just-in-time" ordering and delivery cycle where they will place a purchase
order with us after they receive an order from their customer. This
"just-in-time" inventory purchase cycle by our customers has made forecasting
of
our future sales volumes very difficult. Because our sales are generally
concentrated with a small group of OEM customers, we could experience
significant fluctuations in our quarterly sales volumes due to fluctuating
demand from any major customer or delay in the rollout of any significant new
product by a major customer.
International
sales constituted 12%, 12% and 13% of net sales in fiscal 2004, 2003 and 2002,
respectively. International sales are executed in U.S. dollars and are
principally transacted in Europe.
Gross
Profit
Gross
profit as a percentage of net sales was 40%, 63% and 54% in fiscal 2004, 2003
and 2002, respectively. Gross profit as a percentage of sales increased in
fiscal 2003 primarily as a result of sales of $409,000 of inventory to HP that
had been fully written down in fiscal 2002 when HP placed its final order for
end-of-life VME products under its then-existing contract. Our gross profit
would have been 58% after excluding the effect of the HP inventory
write-down.
The
decrease in our gross profit margin in fiscal 2004 is due primarily to lower
than expected gross margins from the Antares product, the addition of $547,000
expense related to the valuation adjustment for slow moving and obsolete
inventory and the inclusion of $408,000 of amortization and $713,000 of
impairment charges relating to the August 2003 intellectual property purchased
with Antares. We expect our gross profit to range between 50% and 53% for fiscal
2005 based on our current product sales prices and cost to manufacture those
products. However, if market and economic conditions, particularly in the
telecommunications sector, deteriorate or fail to recover as expected, gross
profit as a percentage of net sales may decline from the current
level.
Product
Research and Development
Product
research and development expenses were $2.4 million in fiscal 2004, $1.3 million
in fiscal 2003, and $3.0 million in fiscal 2002, representing 22%, 18% and
44%
of net sales, respectively. The increase in fiscal 2004 as compared to fiscal
2003 is primarily the result of three factors:
· |
the
inclusion of three personnel hired in conjunction with the Antares
acquisition;
|
· |
the
addition of five additional design engineers hired during the year;
|
· |
a
160% increase in expenditures for new product development.
|
The
decrease in research and development expense as a percentage of revenue from
fiscal 2002 to fiscal 2003 was the direct result of headcount reductions of
fifteen full-time equivalent personnel combined with other project-related
cost
containment measures During fiscal 2004, we began the development of the next
generation of our Highwire products, designed and released several new WAN
and
LAN products including three new encryption products, continued development
and
released our new TOE product and integrated our TOE product with a partners
enterprise based iSCSI software. We also continued to port our products to
new
versions of Linux and Solaris software expanding their market reach. These
hardware and software design efforts have enabled us to more effectively target
enterprise markets such as Internet based storage, TCP offload, VoIP, VPN and
security routers, as well as expand market coverage within the
telecommunications, military/government, medical and industrial control markets.
We
expect
overall spending for our product research and development to range between
15%
and 18% of net sales in fiscal 2005 as we remain committed to the development
and enhancement of new and existing products. We did not capitalize any internal
software development costs in fiscal 2004, 2003 or 2002.
Sales
and Marketing
Sales
and
marketing expenses for fiscal 2004 were $2.2 million, a 47% increase over fiscal
2003. This increase is primarily related to higher headcount in the sales and
marketing departments for the majority of the year increasing by three people
plus an increases in travel and product marketing activities. We increased
our
marketing expenditures by 142% in fiscal 2004 as we attended more industry
trade
shows and increased our advertising in industry relevant magazines. Fiscal
2003
expense was $1.5 million, a 31% decrease over fiscal 2002. The decrease in
fiscal 2003 as compared to 2002 is the direct result of headcount reductions
in
our sales and marketing departments combined with a reduction in our overall
marketing programs. Sales and marketing programs are focused on design wins
with
new customers and, therefore, as new customer sales increase, sales and
marketing expenses will increase. New customers’ product design sales cycles may
span over periods as long as twenty-four months. We
expect
our sales and marketing expenses to range between 15% and 17% of net sales
in
fiscal 2005 as we continue our product marketing efforts, especially for the
TOE
and iSCSI products, and attend an increasing number of industry specific trade
shows.
General
and Administrative
General
and administrative expenses for fiscal 2004 remained constant at $1.8 million
as
compared to fiscal 2003. Fiscal 2004 includes $259,000 in compensation expense
related to the severance package provide to the company’s retiring president and
chief executive officer. Fiscal 2003 expenses decreased to $1.8 million from
$2.4 million in fiscal 2002 or, 26%. The decrease was due to headcount from
eight to five individuals and expense containment measures, primarily rent
and
depreciation, put into place in the fourth quarter of fiscal 2002, with the
cost
savings fully realized in fiscal 2003 and 2004. We
expect
general and administrative expense for fiscal 2005 to increase from fiscal
2004
levels partly due to the increase in insurance and expenses related to
compliance with the Sarbanes-Oxley Act. General
and administrative expenses are expected to range between 12% and 15% of sales
for fiscal 2005.
Loan
Reserve (Benefit)
On
November 6, 1998, we made a loan to our retiring President and CEO which was
used by him to exercise an option to purchase 139,400 shares of our common
stock
and related taxes. The loan, as amended, was collateralized by shares of our
common stock, bore interest at a rate of 2.48% per annum and was due on December
14, 2003.
On
October 31, 2002, we determined that it was probable that we would be unable
to
fully recover the balance of the loan on its due date of December 14, 2003.
Accordingly, a valuation allowance of $474,000 was recorded against the loan
at
October 31, 2002.
During
the fourth quarter of fiscal 2003, the officer repaid $362,800 of the loan
and
as a result, we recognized a benefit of $235,000 related to the reversal of
the
loan impairment charge taken by us in fiscal 2002. During the first quarter
of
fiscal 2004, the officer repaid the remaining loan balance in full and as a
result, we recorded a benefit of $239,000 relating to the reversal of the
remaining loan impairment charge.
Restructuring
Costs (Benefit)
In
response to the economic slowdown, we implemented restructuring plans in fiscal
2002 and recorded restructuring charges of $446,000. Restructuring costs for
fiscal 2002 were comprised of severance costs associated with staff reductions
totaling $115,000, leasehold improvements and equipment write-downs related
to
the abandonment of our Madison, Wisconsin office of $185,000 and estimated
losses related to future rents, net of estimated future recoveries from
potential sublease, of $146,000. We reduced our headcount from 47 employees
to
24 employees during fiscal 2002.
In
the
third quarter of fiscal 2003, we recognized a restructuring benefit of $154,000
after the final settlement of costs associated with prior real estate and
equipment leases.
As
of
October 31, 2004 and 2003, $21,000 and $58,000 of the restructuring costs were
included in other current liabilities, respectively.
Interest
and Other Income
Interest
and other income in fiscal 2004 decreased slightly from 2003 due to lower
average cash balances in fiscal 2004
coupled
with lower average interest rates.
Fiscal
2003 income decreased slightly from fiscal 2002 due to lower average cash
balances in fiscal 2003
coupled
with lower average interest rates.
A
refundable deposit associated with a multi-year supply agreement with HP of
$4.9
million was received in April 2001. This deposit was refundable as we delivered
certain quantities of products to HP over a four year period ending in 2005.
The
supply contact was restructured in fiscal 2002 to include a final purchase
order
for $1.6 million of our products to be shipped to HP in the first two quarters
of fiscal 2003 and the forfeiture by HP of $4.4 million of the $4.9 million
refundable deposit. Under the agreement, we are required to retain for future
production or repair all VCOM finished goods and spare parts inventory through
October 31, 2005 unless notified otherwise by HP. Concurrent with the forfeiture
of the $4.4 million refundable deposit, we recorded a reserve of $1.7 million
related to the potentially obsolete inventory we held at October 31, 2002.
The
$2.7 million of forfeiture of the refundable deposit net of inventory reserve
is
presented under “Forfeited deposit, net” on the fiscal 2002 Consolidated
Statements of Operations.
Income
Taxes
On
March
9, 2002, the Job Creation and Workers Assistance Act of 2002 extended the net
operating loss carryback from two to five years for losses generated in tax
years ending in 2001 and 2002. As a result, we
recorded a benefit for income taxes of $22,000 in the second quarter of fiscal
2003
and a
tax benefit of $91,000 in fiscal 2002 due to refunds of federal income taxes
related to this Act. The net benefit recorded for the 2003 and 2002 periods
were
$17,000 and $177,000, respectively. In fiscal 2002 we also filed amended federal
and state tax returns to claim $86,000 in research and development credits
related to LAN
Media
Corporation (“LMC”),
a
company we acquired in July 2000. Our effective tax rate was 0%, 0% and (8)%
in
fiscal 2004, 2003 and 2002, respectively. We recorded valuation allowances
in
fiscal 2004 and 2003 for deferred tax assets due to the uncertainty of
realization. In the event of future taxable income, our effective income tax
rate in future periods could be lower than the statutory rate as such tax assets
are realized.
Net
Income (Loss)
As
a
result of the factors discussed above, we recorded a net loss of $1.7 million
in
fiscal 2004 compared to net income of $563,000 in fiscal 2003 and a net loss
of
$1.7 million in fiscal 2002.
Contractual
Obligations and Commercial Commitments
The
following table sets forth a summary of our material contractual obligations
and
commercial commitments as of October 31, 2004:
|
|
Payments
due by period (Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Less
than
|
|
1-3
|
|
3-5
|
|
More
than
|
|
Contractual
Obligations
|
|
Total
|
|
1
year
|
|
Years
|
|
Years
|
|
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building
leases
|
|
$
|
1,649
|
|
$
|
963
|
|
$
|
686
|
|
$
|
---
|
|
$
|
—
|
|
Reimbursements
from lease assignment
|
|
|
(902
|
)
|
|
(637
|
)
|
|
(265
|
)
|
|
---
|
|
|
---
|
|
Total
net lease payments
|
|
$
|
747
|
|
$
|
326
|
|
$
|
421
|
|
$
|
---
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
connection with the acquisition of Antares, we committed to issue 98,945 shares
of our Common Stock in 10,000 and 20,000 share increments beginning January
2004
and ending March 2005 to a selling shareholder of Antares. During fiscal 2004,
we issued 30,000 shares of our Common Stock of a committed 98,945 to an employee
who was one of the owners of Antares Microsystems, Inc. pursuant to the original
purchase agreement. We will issue the remaining 68,945 during fiscal 2005.
The
value of the Common Stock issued in fiscal 2004 under this commitment was
$85,600.
In
connection with the retirement of Mr. William Heye, Jr. as the company’s
President and Chief Executive Officer, the Company will pay Mr. Heye $250,000
at
the rate of $20,833 each month for the period January 1, 2005 through December
31, 2005. The commitment to pay $250,000 has been accrued as of October 31,
2004
and is included in General and Administrative expense and Accrued Payroll and
Employee Benefits liability.
Off-Balance
Sheet Arrangements
We
do not
have any transactions, arrangements, or other relationships with unconsolidated
entities that are reasonably likely to affect our liquidity or capital resources
other than the operating leases noted above. We have no special purpose or
limited purpose entities that provide off-balance sheet financing, liquidity,
or
market or credit risk support; or engage in leasing, hedging, research and
development services, or other relationships that expose us to liability that
is
not reflected on the face of the financial statements.
Liquidity
and Capital Resources
Our
liquidity is dependent on many factors, including sales volume, operating profit
and the efficiency of asset use and turnover. Our future liquidity will be
affected by, among other things:
- |
actual
versus anticipated sales of our
products;
|
- |
our
actual versus anticipated operating expenses and results of ongoing
cost
control actions;
|
- |
the
timing of product shipments, which occur primarily during the last
month
of each quarter;
|
- |
our
actual versus anticipated gross profit
margin;
|
- |
our
ability to raise additional capital, if necessary;
and
|
- |
our
ability to secure credit facilities, if
necessary.
|
We
had
cash and cash equivalents of $1.8 million and $1.4 million on October 31, 2004
and October 31, 2003, respectively. In fiscal 2004, $140,000 of cash was used
by
operating activities,
primarily as a result of net losses, the reversal of a valuation allowance
on a
loan from an officer and an increase in inventory. The cash receipt from the
repayment of the loan is included in the financing activities section of the
cash flow statement. Cash was provided by the inclusion of $1.1 million of
amortization expense and the write-down of the intellectual property plus
$420,000 of amortization and depreciation expense related to property and
equipment and capitalized software included in the $1.7 million net loss. Cash
flow was also provided by a $150,000 decrease in our accounts receivable.
Working capital (current assets less current liabilities) at October 31, 2004
was $3.9 million, as compared to $4.0 million at October 31, 2003.
In
fiscal
2004, we purchased $87,000 of fixed assets, consisting primarily of computers
and engineering equipment. Purchased software costs amounting to $136,000 were
capitalized in fiscal 2004. We expect to slightly increase our levels of capital
expenditures in fiscal 2005 in order to purchase test and design equipment
upgrades.
We
received $18,000 in fiscal 2004 from payments related to common stock purchases
made by employees pursuant to the employee stock purchase plan and $233,000
from
proceeds related the exercise of employee stock options, for a total of
$251,000.
On
December 19, 2003 we received cash proceeds of $116,000 from Puglisi & Co.
for the purchase of 70,000 shares of our Common Stock pursuant to a warrant
they
received in conjunction with a private placement of common stock transaction
that was completed in fiscal 2003.
During
the fourth quarter of fiscal 2003, our retiring president and CEO sold 139,400
shares of our common stock and used the proceeds from the stock sale to repay
$362,800 of an outstanding $743,800 loan we made to the officer. In November
2003 the loan was repaid in full when we received an additional loan payment
of
$381,000 from proceeds from the sale of stock.
On
May
13, 2004, we renewed our working capital line of credit for twelve months until
May 14, 2005. The credit line is secured by a first lien on all our assets
and
carries a floating annual interest rate equal to the bank's prime rate of 4.75%,
at October 31, 2004, plus 1.50%. Draw-downs on the credit line are based on
a
formula equal to 80% of our domestic accounts receivable. As of October 31,
2004, due to the net loss for our fourth fiscal quarter of 2004, we are not
in
compliance with all the covenants of our credit line. The Bank agreed to waive
the non-compliance with this covenant. We have not drawn down on this line
of
credit and have no amounts payable at October 31, 2004.
We
believe the projected revenue during fiscal 2005 will generate sufficient cash
flows to fund our operations through October 31, 2005 and beyond. Our projected
future quarterly operational cash flow breakeven point is expected to be $2.7
million to $2.8 million in net sales at an expected 50% to 53% gross margin.
Our
current year’s sales to HP of $4.9 million at a gross margin of 73% are expected
to significantly decline. Our projected sales are based on a combination of
increasing demand for existing products and market acceptance of recently
released products to a limited number of new and existing OEM customers and
are
based on internal and customer provided estimates of future demand, not firm
customer orders. If the projected sales do not materialize, we will need to
reduce expenses further and raise additional capital through customer
prepayments or the issuance of debt or equity securities. If additional funds
are raised through the issuance of preferred stock or debt, these securities
could have rights, privileges or preferences senior to those of our common
stock, and debt covenants could impose restrictions on our operations. The
sale
of equity or debt could result in additional dilution to current stockholders,
and such financing may not be available to us on acceptable terms, if at all.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
cash
and cash equivalents are subject to interest rate risk. We invest primarily
on a
short-term basis. Our financial instrument holdings at October 31, 2004 were
analyzed to determine their sensitivity to interest rate changes. The fair
values of these instruments were determined by net present values. In our
sensitivity analysis, the same change in interest rate was used for all
maturities and all other factors were held constant. If interest rates increased
by 10%, the expected effect on net income (loss) related to our financial
instruments would be immaterial. We hold no assets or liabilities denominated
in
a foreign currency.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements and supplementary data required under Item 8 are provided
under Item 15.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS
AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
An
evaluation as of October 31, 2004 was carried out under the supervision of
and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the
design and operation of the Company's "disclosure controls and procedures,"
which are defined under SEC rules as controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Securities Exchange Act of 1934
(the “Exchange Act”) is recorded, processed, summarized and reported within
required time periods. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective.
(b)
Changes in Internal Controls over Financial Reporting
The
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated any changes in the company's internal control
over financial reporting that occurred during the quarter ended October 31,
2004, and has concluded that there was no change during such quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART
III
ITEM
10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification
of Directors; Audit Committee Financial Expert; Section 16(a) Beneficial
Ownership Reporting Compliance; Code of Ethics
The
information required by Item 10 concerning our executive officers is set forth
in the section entitled "Identification of Executive Officers" appearing in
Part
I of this annual report. The information required by Item 10 concerning our
directors is incorporated by reference from the information in the section
entitled "Election of Directors" appearing in our definitive Proxy Statement
to
be filed with the Securities and Exchange Commission for the Annual Meeting
of
Stockholders scheduled for March 22, 2005 (the "2005 Proxy Statement"). The
information required by Item 10 concerning the compliance of certain persons
with the beneficial ownership reporting requirements of Section 16(a) of the
Act
is incorporated by reference from the information in the section entitled
"Compliance with Section 16(a) of the Securities and Exchange Act of 1934"
appearing in the 2005 Proxy Statement. The information required by Item 10
concerning the disclosure of the existence of an audit committee financial
expert sitting on the Audit Committee is incorporated by reference from the
information in the section entitled "Audit Committee Financial Expert" appearing
in the 2005 Proxy Statement. The information required by Item 10 concerning
the
adoption of a code of ethics is incorporated by reference from the information
in the section entitled "Code of Ethics" appearing in the 2005 Proxy
Statement.
ITEM
11. EXECUTIVE
COMPENSATION
The
information required by Item 11 is incorporated by reference from the
information in the section entitled "Executive Compensation" appearing in the
2005 Proxy Statement.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
information required by Item 12 is found under the heading “Equity Compensation
Plan Information” in Item 5 of this report and otherwise is incorporated by
reference from the information in the section entitled "Security Ownership
of
Certain Beneficial Owners and Management" appearing in the 2005 Proxy Statement.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
information required by Item 13 is incorporated by reference from the
information in the sections entitled "Certain Transactions" and "Executive
Compensation" appearing in the 2005 Proxy Statement.
ITEM
15. EXHIBITS,
FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K
The
following documents are filed as part of this Report:
(a)(1) Financial
Statements
|
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
44
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
45
|
|
|
|
|
Consolidated
Balance Sheets at October 31, 2004 and 2003
|
46
|
|
|
|
|
Consolidated
Statements of Operations for fiscal years 2004, 2003 and
2002
|
47
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity for fiscal years 2004, 2003
and
2002
|
48
|
|
|
|
|
Consolidated
Statements of Cash Flows for fiscal years 2004, 2003 and
2002
|
49
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
50
|
(a)(2) Financial
Statement Schedule
|
Schedule
II — Valuation and Qualifying Accounts
|
70
|
All
other
schedules are omitted as the required information is not applicable or has
been
included in the consolidated financial statements or the notes
thereto.
(a)(3) List
of
Exhibits
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
2.1
(1)
|
|
Asset
Purchase Agreement dated August 8, 2003, by and between D.R. Barthol
&
Company and SBE, Inc.
|
|
3.1(2)
|
|
Certificate
of Incorporation, as amended through December 15, 1997.
|
|
3.2(3)
|
|
Bylaws,
as amended through December 8, 1998.
|
|
10.1(4)*
|
|
1996
Stock Option Plan, as amended.
|
|
10.2(4)*
|
|
1991
Non-Employee Directors' Stock Option Plan, as amended.
|
|
10.3(4)
|
|
1992
Employee Stock Purchase Plan, as amended.
|
|
10.4(4)
|
|
1998
Non-Officer Stock Option Plan as amended.
|
|
10.5(5)
|
|
Lease
for 4550 Norris Canyon Road, San Ramon, California dated November
2, 1992
between the Company and PacTel Properties.
|
|
10.6(6)
|
|
Amendment
dated June 6, 1995 to lease for 4550 Norris Canyon Road, San Ramon,
California, between the Company and CalProp L.P. (assignee of PacTel
Properties).
|
|
10.7(4)*
|
|
Full
Recourse Promissory Note executed by William B. Heye, Jr. in favor
of the
Company dated November 6, 1998, as amended and restated on December
14,
2001.
|
|
10.8(4)+
|
|
Letter
Agreement, dated October 30, 2001, amending (i) Amendment No. S/M018-4
dated April 3, 2001, and (ii) Purchase Agreement dated May 6, 1991,
each
between SBE, Inc. and Compaq Computer Corporation
|
|
10.9(7)
|
|
Stock
subscription agreement and warrant to purchase 111,111 of SBE,
Inc. Common
Stock dated April 30, 2002
between
SBE, Inc. and Stonestreet Limited Partnership.
|
|
10.10(8)
|
|
Amendment
dated August 22, 2002 to stock subscription agreement dated April
20, 2002
between SBE, Inc. and Stonestreet
LP.
|
|
10.11(9)
|
|
TSecurities
Purchase Agreement, dated July 27, 2003, between SBE, Inc. and
purchasers
of SBE’s common stock thereunder, including form of warrant issued
thereunderT
|
|
10.12(9)
|
|
Form
of warrant issued to associates of Puglisi & Co. ($1.50 exercise
price)T
|
|
T10.13(9)
|
|
Form
of warrant issued to associates of Puglisi & Co. ($1.75 and $2.00
exercise price)T
|
|
23.1
|
|
Consent
of BDO Seidman LLP, Independent Registered Public Accounting
Firm
|
|
23.2
|
|
Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm
|
|
31.1
|
|
Certification
of Chief Executive Officer
|
|
31.2
|
|
Certification
of Chief Financial Officer
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
* |
Indicates
management contract or compensation plans or arrangements filed
pursuant
to Item 601(b)(10) of Regulation
SK.
|
+ |
Certain
confidential information has been deleted from this exhibit pursuant
to a
confidential treatment order that has been
granted.
|
(1) |
Filed
as an exhibit to Current Report on Form 8-K, dated April
30, 2002 and incorporated herein by
reference.
|
(2) |
Filed
as an exhibit to Annual Report on Form 10-K for the year ended
October 31,
1997 and incorporated herein by
reference.
|
(3) |
Filed
as an exhibit to Annual Report on Form 10-K for the year ended
October
31, 1998 and incorporated herein by reference.
|
(4)
|
Filed
as an exhibit to Annual Report on Form 10-K for the year ended October
31,
2002 and incorporated herein by
reference.
|
(5) |
Filed
as an exhibit to Annual Report on Form 10-K for the year ended
October
31, 1993 and incorporated herein by
reference.
|
(6) |
Filed
as an exhibit to Annual Report on Form 10-K for the year ended
October
31, 1995 and incorporated herein by
reference.
|
(7)
|
Filed
as an exhibit to Registration Statement on Form S-3 dated May 23,
2002 and
incorporated herein by reference.
|
(8) |
Filed
as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
July
31, 2002 and incorporated herein by
reference.
|
(9)
|
Filed
as an exhibit to Registration Statement on Form S-3 dated July 11,
2003
and incorporated herein by
reference.
|
On
August
25, 2004, we filed a Form 8-K to report our earnings for the three and nine
months ended July 31, 2004.
(c) |
Exhibits
Required by Item 601
|
Please
refer to Part IV, Item 15(a)(3).
Please
refer to Part IV, Item 15(a)(2).
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
|
|
SBE,
INC. |
|
|
|
Date: January
14, 2005 |
By: |
/s/ William
B. Heye, Jr. |
|
|
|
William
B. Heye, Jr.
Chief Executive Officer and President
(Principal Executive
Officer)
|
|
|
|
|
|
|
Date: January
14, 2005 |
By: |
/s/ David
W. Brunton |
|
|
|
David
W. Brunton
Chief Financial Officer, Vice President, Finance
and Secretary
(Principal Financial and Accounting
Officer)
|
|
|
POWER
OF ATTORNEY
KNOW
ALL
PERSONS BY THESE PRESENTS, that each of the undersigned officers and directors
of the registrant constitutes and appoints, jointly and severally, William
B.
Heye, Jr. and David W. Brunton, and each of them, as lawful attorneys-in-fact
and agents for the undersigned and for each of them, each with full power of
substitution and resubstitution, for and in the name, place and stead of each
of
the undersigned officers and directors, in any and all capacities, to sign
any
and all amendments to this report, and to file the same, with all exhibits
thereto and all other documents in connection therewith, with the Securities
and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing
necessary or appropriate to be done in and about the premises, as fully to
all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact or any of them, or any of
their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements for the Securities Exchange Act of 1934, this report has
been signed by the following persons in the capacities indicated, as of January
14, 2005.
Signature
|
|
Title
|
|
|
|
/s/
William B. Heye, Jr.
|
|
|
William
B. Heye Jr.
|
|
Chief
Executive Officer and President
|
|
|
(Principal
Executive Officer)
|
|
|
|
/s/
David W. Brunton
|
|
|
David
W. Brunton
|
|
Chief
Financial Officer, Vice President, Finance and Secretary
|
|
|
(Principal
Financial and Accounting Officer) |
|
|
|
/s/
Ronald J. Ritchie
|
|
|
Ronald
J. Ritchie
|
|
Director,
Chairman of the Board
|
|
|
|
/s/
John Reardon
|
|
|
John
Reardon
|
|
Director
|
|
|
|
/s/
Marion M. Stuckey
|
|
Director
|
Marion
M. Stuckey
|
|
|
Report
of Independent Registered Public Accounting Firm
San
Ramon, California
We
have
audited the accompanying consolidated balance sheets of SBE, Inc. as of October
31, 2004 and 2003 and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the years then ended. We have also
audited the schedule listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well
as evaluating the overall presentation of the financial statements and schedule.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of SBE, Inc. as of October
31,
2004 and 2003, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted
in
the United States of America.
Also,
in
our opinion, the schedule presents fairly, in all material respects, the
information relating to the years ended October 31, 2004 and 2003 as set forth
therein.
/s/
BDO
Seidman, LLP
December
10, 2004
San
Francisco, California
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders of SBE, Inc.:
In
our
opinion, the consolidated statements of operations, of changes in stockholders’
equity and of cash flows for the year ended October 31, 2002 (appearing on
pages
47 through 49 of the SBE, Inc. Annual Report on Form 10-K) present fairly,
in
all material respects, the results of operations and cash flows of SBE, Inc.
and
its subsidiaries for the year ended October 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) on page 38 presents fairly, in all material
respects, the information relating to the year ended October 31, 2002 set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are
the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements and financial statement schedule based
on
our audit. We conducted our audit of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has generated negative cash flows from operations that
raise
substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
/s/
PricewaterhouseCoopers LLP
San
Francisco, California
January
13, 2003
SBE,
INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share amounts)
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,849
|
|
$
|
1,378
|
|
Trade
accounts receivable, net of allowance for doubtful accounts of
$42 and
$90
|
|
|
1,668
|
|
|
1,818
|
|
Inventories
|
|
|
1,926
|
|
|
1,880
|
|
Other
|
|
|
227
|
|
|
240
|
|
Total
current assets
|
|
|
5,670
|
|
|
5,316
|
|
Property
and equipment, net
|
|
|
427
|
|
|
389
|
|
Capitalized
software costs, net
|
|
|
48
|
|
|
120
|
|
Intellectual
property, net
|
|
|
---
|
|
|
1,122
|
|
Other
|
|
|
28
|
|
|
28
|
|
Total
assets
|
|
$
|
6,173
|
|
$
|
6,975
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$
|
856
|
|
$
|
696
|
|
Accrued
payroll and employee benefits
|
|
|
391
|
|
|
184
|
|
Capital
lease obligations - current portion
|
|
|
25
|
|
|
---
|
|
Other
|
|
|
459
|
|
|
491
|
|
Total
current liabilities
|
|
|
1,701
|
|
|
1,371
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations and long term liabilities, net of current portion
|
|
|
139
|
|
|
217
|
|
Total
liabilities
|
|
|
1,870
|
|
|
1,588
|
|
|
|
|
|
|
|
|
|
Commitments
(Notes 7 and 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Convertible
preferred stock:
|
|
|
|
|
|
|
|
($0.001
par value) authorized 2,000,000 shares; none outstanding
|
|
|
---
|
|
|
---
|
|
Common
stock and additional paid-in capital ($0.001 par value); authorized
25,000,000 and 10,000,000 shares; issued and outstanding 5,094,118
and
4,808,650
|
|
|
15,755
|
|
|
15,302
|
|
Note
receivable from stockholder
|
|
|
---
|
|
|
(142
|
)
|
Accumulated
deficit
|
|
|
(11,452
|
)
|
|
(9,773
|
)
|
Total
stockholders' equity
|
|
|
4,303
|
|
|
5,387
|
|
Total
liabilities and stockholders' equity
|
|
$
|
6,173
|
|
$
|
6,975
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SBE,
INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except for per share
amounts)
For
the years ended October 31,
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
11,066
|
|
$
|
7,456
|
|
$
|
6,898
|
|
Cost
of sales
|
|
|
6,646
|
|
|
2,749
|
|
|
3,170
|
|
Gross
profit
|
|
|
4,420
|
|
|
4,707
|
|
|
3,728
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
research and development
|
|
|
2,411
|
|
|
1,330
|
|
|
3,027
|
|
Sales
and marketing
|
|
|
2,177
|
|
|
1,484
|
|
|
2,151
|
|
General
and administrative
|
|
|
1,755
|
|
|
1,752
|
|
|
2,364
|
|
Shareholder
note valuation (benefit)
|
|
|
(239
|
)
|
|
(235
|
)
|
|
474
|
|
Restructuring
costs (benefit)
|
|
|
---
|
|
|
(154
|
)
|
|
446
|
|
Total
operating expenses
|
|
|
6,104
|
|
|
4,177
|
|
|
8,462
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(1,684
|
)
|
|
530
|
|
|
(4,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5
|
|
|
26
|
|
|
51
|
|
Forfeited
deposit, net
|
|
|
---
|
|
|
---
|
|
|
2,712
|
|
Other
income (expense)
|
|
|
---
|
|
|
(10
|
)
|
|
63
|
|
Income
(loss) before income taxes
|
|
|
(1,679
|
)
|
|
546
|
|
|
(1,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
---
|
|
|
17
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,679
|
)
|
$
|
563
|
|
$
|
(1,731
|
)
|
Basic
earnings (loss) per common share
|
|
$
|
(0.33
|
)
|
$
|
0.13
|
|
$
|
(0.46
|
)
|
Diluted
earnings (loss) per common share
|
|
$
|
(0.33
|
)
|
$
|
0.12
|
|
$
|
(0.46
|
)
|
Basic
- Shares used in per share computations
|
|
|
5,022
|
|
|
4,259
|
|
|
3,759
|
|
Diluted
- Shares used in per share computations
|
|
|
5,022
|
|
|
4,709
|
|
|
3,759
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SBE,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(in
thousands, except shares)
|
|
Common
Stock and Additional Paid-in Capital
|
|
Note
Receivable from
|
|
Treasury
Stock
|
|
|
|
Retained
Earnings (Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Stockholder
|
|
Shares
|
|
Amount
|
|
deficit)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 31, 2001
|
|
|
3,521,035
|
|
$
|
13,877
|
|
$
|
(744
|
)
|
|
79,500
|
|
$
|
(409
|
)
|
$
|
(8,605
|
)
|
$
|
4,119
|
|
Stock
issued in connection with stock purchase plan
|
|
|
47,596
|
|
|
31
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
31
|
|
Stock
and warrant issued in connection with private placement
|
|
|
555,556
|
|
|
782
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
782
|
|
Stock
issued to Directors in lieu of cash payments
|
|
|
13,425
|
|
|
21
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
21
|
|
Valuation
allowance on note receivable from officer
|
|
|
--
|
|
|
--
|
|
|
474
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
474
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,731
|
)
|
|
(1,731
|
)
|
Balance,
October 31, 2002
|
|
|
4,137,612
|
|
|
14,711
|
|
|
(270
|
)
|
|
79,500
|
|
|
(409
|
)
|
|
(10,336
|
)
|
|
3,696
|
|
Stock
issued in connection with stock purchase plan
|
|
|
11,012
|
|
|
12
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
12
|
|
Stock
and warrant issued in connection with private placement
|
|
|
500,000
|
|
|
464
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
464
|
|
Stock
issued to Directors in lieu of cash payments
|
|
|
37,787
|
|
|
43
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
43
|
|
Stock
issued in connection with the acquisition of Antares
|
|
|
90,628
|
|
|
259
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
259
|
|
Stock
issued in connection with warrant exercise
|
|
|
111,111
|
|
|
222
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
222
|
|
Retirement
of treasury stock
|
|
|
(79,500
|
)
|
|
(409
|
)
|
|
--
|
|
|
(79,500
|
)
|
|
409
|
|
|
--
|
|
|
--
|
|
Reversal
of valuation allowance on note receivable from officer
|
|
|
--
|
|
|
--
|
|
|
128
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
128
|
|
Net
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
563
|
|
|
563
|
|
Balance,
October 31, 2003
|
|
|
4,808,650
|
|
|
15,302
|
|
|
(142
|
)
|
|
--
|
|
|
--
|
|
|
(9,773
|
)
|
|
5,387
|
|
Stock
issued in connection with stock purchase plan
|
|
|
9,903
|
|
|
18
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
18
|
|
Stock
issued in connection with Stock Option Plans
|
|
|
164,136
|
|
|
233
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
233
|
|
Stock
issued in connection with warrant exercise
|
|
|
81,429
|
|
|
116
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
116
|
|
Stock
issued in connection with the acquisition of Antares
|
|
|
30,000
|
|
|
86
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
86
|
|
Reversal
of valuation allowance on note receivable from officer
|
|
|
--
|
|
|
--
|
|
|
(239
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(239
|
)
|
Collection
of note receivable from officer
|
|
|
|
|
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
381
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,679
|
)
|
|
(1,679
|
)
|
Balance,
October 31, 2004
|
|
|
5,094,118
|
|
$
|
15,755
|
|
$
|
--
|
|
|
--
|
|
$
|
--
|
|
$
|
(11,452
|
)
|
$
|
4,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SBE,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
For
the years ended October 31 |
|
2004
|
|
2003
|
|
2002
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,679
|
)
|
$
|
563
|
|
$
|
(1,731
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
829
|
|
|
443
|
|
|
730
|
|
Impairment
of intellectual property
|
|
|
713
|
|
|
---
|
|
|
---
|
|
Non-cash
restructuring (benefit)
|
|
|
---
|
|
|
(154
|
)
|
|
185
|
|
Stock-based
compensation expense
|
|
|
---
|
|
|
43
|
|
|
21
|
|
Non-cash
valuation allowance (recovery) on loan from officer
|
|
|
(240
|
)
|
|
(142
|
)
|
|
474
|
|
Effect
of re-measured warrant
|
|
|
---
|
|
|
---
|
|
|
(83
|
)
|
Loss
on sale of assets
|
|
|
---
|
|
|
13
|
|
|
19
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
150
|
|
|
(930
|
)
|
|
(128
|
)
|
Inventories
|
|
|
(46
|
)
|
|
30
|
|
|
2,518
|
|
Other
assets
|
|
|
13
|
|
|
30
|
|
|
238
|
|
Trade
accounts payable
|
|
|
160
|
|
|
208
|
|
|
(57
|
)
|
Other
current liabilities
|
|
|
(41
|
)
|
|
(184
|
)
|
|
(29
|
)
|
Non-current
liabilities
|
|
|
---
|
|
|
(4
|
)
|
|
(4,860
|
)
|
Net
cash used in operating activities
|
|
|
(140
|
)
|
|
(84
|
)
|
|
(2,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(87
|
)
|
|
(172
|
)
|
|
(149
|
)
|
Cash
payments related to purchase of Antares assets and related
costs
|
|
|
---
|
|
|
(868
|
)
|
|
---
|
|
Purchased
software
|
|
|
(136
|
)
|
|
(48
|
)
|
|
(105
|
)
|
Net
cash used in investing activities
|
|
|
(223
|
)
|
|
(1,088
|
)
|
|
(254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from stock plans
|
|
|
251
|
|
|
12
|
|
|
31
|
|
Proceeds
from issuance of common stock and warrants
|
|
|
202
|
|
|
686
|
|
|
864
|
|
Proceeds
from repayment of shareholder note
|
|
|
382
|
|
|
270
|
|
|
---
|
|
Net
cash provided by financing activities
|
|
|
834
|
|
|
968
|
|
|
895
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
471
|
|
|
(204
|
)
|
|
(2,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
1,378
|
|
|
1,582
|
|
|
3,644
|
|
Cash
and cash equivalents at end of year
|
|
$
|
1,849
|
|
$
|
1,378
|
|
$
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
---
|
|
$
|
---
|
|
$
|
---
|
|
Income
taxes
|
|
$
|
1
|
|
$
|
1
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
acquired under capital leases
|
|
$
|
164
|
|
$
|
---
|
|
$
|
---
|
|
Non-cash
stock portion of Antares purchase price
|
|
$
|
---
|
|
$
|
542
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company and Basis of Presentation:
SBE,
Inc., headquartered in San Ramon, California, architects and provides network
communications and storage solutions to the original equipment manufacturers
(“OEM”) in the embedded computing and storage markets. Our solutions enable both
Tdata
communicationsT and TtelecommunicationsT
companies in addition to enterprise class high-end server clients to rapidly
deliver advanced networking and storage products and services. Our products
include wide area network (“WAN”), local area network (“LAN”), Internet Small
Computer System Interface (“iSCSI”), SCSI, Fibre Channel, intelligent carrier
cards, Encryption and TCP/IP Offload Engine (“TOE”) cards. These products
perform critical computing, Input/Output (“I/O”) and storage tasks across both
the enterprise server and embedded markets such as high-end enterprise level
servers, Linux super computing clusters, workstations, media gateways, routers,
internet access devices, home location registers, data messaging applications
network attached storage (“NAS”) and remote storage devices. Our products are
distributed worldwide through a direct sales force, distributors, independent
manufacturers' representatives and value-added resellers. Our business falls
within one industry segment and product group.
Liquidity
We
had a
net loss of $1.7 million in fiscal 2004. The net loss includes the following
expenses:
· |
$1.1
million of amortization and impairment charges of the intellectual
property associated with the acquisition of Antares MicroSystems,
Inc. on
August 7, 2003;
|
· |
$259,000
accrual for severance pay for the retirement of the Company’s president
and CEO;
|
· |
$421,000
of depreciation and amortization expense and $547,000 in inventory
valuation charges.
|
We
believe our existing cash plus additional cash from our line of credit and
continuing operations will provide sufficient cash flows to fund our operations.
Principles
of Consolidation:
The
consolidated financial statements include the accounts of SBE, Inc. and its
wholly-owned subsidiaries. All intercompany balances and transactions have
been
eliminated in consolidation.
Use
of Estimates:
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America requires us
to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Such estimates include levels of reserves for
doubtful accounts, obsolete inventory, warranty costs and deferred tax assets.
Actual results could differ from those estimates.
Fair
Value of Financial Instruments:
The
fair
value of our cash and cash equivalents, accounts receivable, accounts payable
and accrued liabilities approximate their carrying value due to the short-term
maturity rate structure of those instruments.
Cash
and Cash Equivalents:
We
consider all highly liquid investments readily convertible into cash with an
original maturity of three months or less to be cash equivalents. Substantially
all of our cash and cash equivalents are held with one large financial
institution and may at times be above insured limits.
Inventories:
We
are exposed
to a number of economic and industry factors that could result in portions
of
our inventory becoming either obsolete or in excess of anticipated usage, or
subject to lower of cost or market issues. These factors include, but are not
limited to, technological changes in our markets, our ability to meet changing
customer requirements, competitive pressures in products and prices, and the
availability of key components from our suppliers. Our policy is to establish
inventory reserves when conditions exist that suggest that our inventory may
be
in excess of anticipated demand or is obsolete based upon our assumptions about
future demand for our products and market conditions. We regularly evaluate
our
ability to realize the value of our inventory based on a combination of factors
including the following: historical usage rates, forecasted sales or usage,
product end-of-life dates, estimated current and future market values and new
product introductions. Purchasing practices and alternative usage avenues are
explored within these processes to mitigate inventory exposure. When recorded,
our reserves are intended to reduce the carrying value of our inventory to
its
net realizable value. If actual demand for our products deteriorates, or market
conditions are less favorable than those that we project, additional inventory
reserves may be required. In the fourth quarter of fiscal 2004, we reviewed
our
inventory balances and increased our reserves on specific products by
$547,000.
Inventories
are stated at the lower of cost, using the first-in, first-out method, or market
value.
Property
and Equipment:
Property
and equipment are carried at cost. We record depreciation charges on a
straight-line basis over the assets' estimated useful lives of three years
for
computers and related equipment to eight years for manufacturing equipment.
Leasehold improvements are amortized over the lesser of their useful lives
or
the remaining term of the related leases.
When
assets are sold or otherwise disposed of, the cost and accumulated depreciation
are removed from the accounts and any gain or loss on sale or disposal is
recognized in operations. Maintenance, repairs and minor renewals are charged
to
expense as incurred. Expenditures which substantially increase an asset's useful
life are capitalized.
We
review
property and equipment for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable.
In
performing the review for recoverability, we would estimate the future gross
cash flows expected to result from the use of the asset and its eventual
disposition. If such gross cash flows are less than the carrying amount of
the
asset, the asset is considered impaired. The amount of the impairment loss,
if
any, would then be calculated based on the excess of the carrying amount of
the
asset over its fair value.
Intangible
Assets:
We
adopted the Financial Accounting Standards Board (“FASB”) Statements of
Financial Accounting Standards (“SFAS”) No. 141, Business
Combinations
and SFAS
No. 142, Goodwill
and Other Intangible Assets
on
accounting for business combinations and goodwill as of the beginning of fiscal
year 2002. Accordingly, we do not amortize goodwill from acquisitions, but
amortize other acquisition-related intangibles and costs. All of the intangible
assets that we currently own are intellectual property acquired in the Antares
acquisition.
For
identifiable intangible assets, we amortize the cost over the estimated useful
life and assess any impairment by estimating the future cash flow from the
associated asset in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
If
the estimated undiscounted cash flow related to these assets decreases in the
future or the useful life is shorter than originally estimated, we may incur
charges for impairment of these assets. The impairment is based on the estimated
discounted cash flow associated with the asset. An impairment could result
if
the underlying technology fails to gain market acceptance, we fail to deliver
new products related to these technology assets, the products fail to gain
expected market acceptance or if market conditions are unfavorable.
Intellectual
property costs consist of the allocation of costs associated with the purchase
of current and the design of future products from Antares Microsystems on August
7, 2003. As required by these rules, we perform an impairment review annually,
or earlier if indicators of potential impairment exist. The impairment analysis
requires significant judgment to identify events or circumstances that would
likely have a significant adverse effect on the fair value of the intangible
asset. Our annual impairment review was completed during the fourth quarter
of
fiscal 2004, and we determined that there was considerable doubt that the
unamortized balance of $713,000 of the intangible asset at October 31, 2004
would be recoverable. The indicators we used to identify those events and
circumstances include revenue and earnings trends relative to predefined
milestones and overall business prospects; the technological feasibility of
the
Antares products and technologies and the general market conditions in the
market for SUN Microsystems compatible products with which Antares product
compete. Our impairment review is based on a discounted cash flow approach
that
uses estimates of future market share and revenues and costs for the Antares
products as well as appropriate discount rates. The estimates used are
consistent with the plans and estimates that we use to manage the underlying
business. We determined that the estimated fair market value of the balance
of
the intangible asset related to the Antares acquisition was nominal and as
a
result, we recorded an impairment charge of $713,000 during the quarter ended
October 31, 2004 thus writing off the remaining value of the intellectual
property asset.
The
non-cash amortization expense related to the intellectual property in fiscal
2004 was $1.1 million and consists of $408,000 of regularly scheduled annual
amortization expense plus $713,000 write down related to impairment valuation
analysis. This write-down plus the regularly scheduled amortization is included
as an expense item in our cost of goods sold. The amortization expense for
the
one quarter that we owned Antares in fiscal 2003 was approximately
$102,000.
Acquisitions:
All
business acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the consolidated statements of operations include
the results of each acquired business since the date of acquisition. The assets
acquired and liabilities assumed are recorded at estimates of fair values as
determined by management based on information available we consider a number
of
factors, including third-party valuations or appraisals, when making these
determinations. We finalize the allocation of purchase price to the fair value
of the assets acquired and liabilities assumed when we obtain information
sufficient to complete the allocation, but in any case, within one year after
acquisition.
Revenue
Recognition:
Our
policy is to recognize revenue for product sales upon shipment of our products
to our customers provided that no significant obligations remain and collection
of the receivable is considered probable. Shipping terms are generally FOB
shipping point. We defer and recognize service revenue over the contractual
period or as services are rendered. Service revenue has not been significant
in
any period. We estimate expected sales returns and record the amount as a
reduction of revenue at the time of shipment. Our policies comply with the
guidance provided by Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements,
issued
by the Securities and Exchange Commission. Judgments are required in evaluating
the credit worthiness of our customers. Credit is not extended to customers
and
revenue is not recognized until we have determined that the collectibility
is
reasonably assured. Our sales transactions are generally denominated in U.S.
dollars.
Our
agreements with our distributors include certain product rotation and price
protection rights. All distributors have the right to rotate slow moving
products once each fiscal quarter. The maximum dollar value of inventory
eligible for rotation is equal to twenty-five percent of our products purchased
by the distributor during the previous quarter. In order to take advantage
of
their product rotation rights, the distributors must order and take delivery
of
additional SBE products equal to at least the dollar value of the products
that
they want to rotate.
Each
distributor is also allowed certain price protection rights. If and when we
reduce the price of any of our products and the distributor is holding any
of
the affected products in inventory, we will credit the distributor the
difference in price when it places its next order with us. We record an
allowance for price protection reducing our net sales and accounts receivable.
The allowance is based on the price difference of the inventory held by our
distributors at the time we expect to reduce selling prices. Reserves for the
right of return and restocking are established based on the requirements of
SFAS
48, Revenue
Recognition when Right of Return Exists
because
we have visibility into our distributor’s inventory and have significant history
to estimate returns.
During
the year ended October 31, 2004, $874,000 or 8% of our sales were to
distributors compared to $191,000 or 3% in fiscal 2003.
Product
Warranty:
Our
products are sold with warranty provisions that require us to remedy
deficiencies in quality or performance of our products over a specified period
of time, generally 12 months, at no cost to our customers. Our policy is to
establish warranty reserves at levels that represent our estimate of the costs
that will be incurred to fulfill those warranty requirements at the time that
revenue is recognized. We believe that our recorded liabilities are adequate
to
cover our future cost of materials, labor and overhead for the servicing of
our
products sold through that date. If actual product failures, or material or
service delivery costs differ from our estimates, our warranty liability would
need to be revised accordingly.
Allowance
for Doubtful Accounts:
Our
policy is to maintain allowances for estimated losses resulting from the
inability of our customers to make required payments. Credit limits are
established through a process of reviewing the financial history and stability
of each customer. Where appropriate, we obtain credit rating reports and
financial statements of the customer when determining or modifying their credit
limits. We regularly evaluate the collectibility of our trade receivable
balances based on a combination of factors. When a customer’s account balance
becomes past due, we initiate dialogue with the customer to determine the cause.
If it is determined that the customer will be unable to meet its financial
obligation to us, such as in the case of a bankruptcy filing, significant
deterioration in the customer’s operating results or financial position or other
material events impacting its business, we record a specific allowance to reduce
the related receivable to the amount we expect to recover.
We
also
record an allowance for all customers based on certain other factors including
the length of time the receivables are past due and historical collection
experience with customers. We believe our reported allowances are adequate.
If
the financial conditions of those customers were to deteriorate, however,
resulting in their inability to make payments, we may need to record additional
allowances which would result in additional general and administrative expenses
being recorded for the period in which such determination is made.
Product
Research and Development Expenditures:
Product
research and development ("R&D") expenditures, other than certain software
development costs, are charged to expense as incurred. Contractual
reimbursements for R&D expenditures under joint R&D contracts with
customers are accounted for as revenue when received.
Capitalized
software costs consist of costs to purchase software and costs to internally
develop software. Capitalization of software costs begins upon the establishment
of technological feasibility. All capitalized software costs are amortized
as
related sales are recorded on a per-unit basis with a minimum amortization
to
cost of goods sold based on a straight-line method over a two-year estimated
useful life. We evaluate the estimated net realizable value of each software
product and record provisions to the asset value
of
each product for which the net book value is in excess of the net realizable
value. No internal software development costs were capitalized in the years
ended October 31, 2004, 2003 and 2002.
Refundable
Deposit:
A
refundable deposit associated with a multi-year supply agreement with HP of
$4.9
million was received in April 2001. This deposit was refundable to HP as we
delivered certain quantities of products to HP over a four year period ending
in
2005. The supply contract was restructured in fiscal 2002 to include a purchase
order for $1.6 million of our products that was shipped to HP in the first
two
quarters of fiscal 2003 and the forfeiture by HP of $4.4 million of the $4.9
million refundable deposit. Under the agreement, we are required to retain
for
future production or repair all VME finished goods and spare parts inventory
through October 31, 2005 unless notified otherwise by HP. Concurrent with the
forfeiture of the $4.4 million refundable deposit, we recorded a reserve of
$1.7
million related to certain HP specific inventory we held at October 31, 2002
but
may not be able to sell. The $2.7 million of forfeiture of refundable deposit
net of inventory reserve is presented under Forfeited
We
account for stock-based employee compensation arrangements in accordance with
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, (“APB
25”) and comply with the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation
and SFAS
No. 148, Accounting
for Stock Based Compensation - Transition and Disclosure.
Under
APB 25, compensation expense is based on the difference, if any, on the date
of
the grant between the fair value of our stock and the exercise price of the
option. We account for equity instruments issued to non-employees in accordance
with SFAS No. 123 and Emerging Issues Task Force ("EITF") 96-18,
Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services,
which
require that such equity instruments be recorded at their fair
value.
deposit,
net on the Consolidated Statements of Operations. The remaining $447,000 of
the
deposit was repaid to HP in the third quarter of fiscal 2003.
Stock-based
Compensation:
Had
compensation cost for these plans been determined pursuant to the provisions
of
SFAS No. 123, our pro forma net income (loss) would have been as follows (in
thousands):
|
|
For
the Year Ended October 31,
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
Net
income (loss) - as reported
|
|
$
|
(1,679
|
)
|
$
|
563
|
|
$
|
(1,731
|
)
|
Stock
based employee compensation (recovery) expense included in reported
net
loss, net of related tax effects
|
|
|
---
|
|
|
---
|
|
|
--- |
|
Less
total stock based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
|
|
(1,177
|
)
|
|
(231
|
)
|
|
(721
|
)
|
Pro
forma net income (loss)
|
|
$
|
(2,856
|
)
|
$
|
332
|
|
$
|
(2,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
(0.33
|
)
|
$
|
0.13
|
|
$
|
(0.46
|
)
|
Basic
- pro forma
|
|
$
|
(0.57
|
)
|
$
|
0.08
|
|
$
|
(0.65
|
)
|
Diluted
- as reported
|
|
$
|
(0.33
|
)
|
$
|
0.12
|
|
$
|
(0.46
|
)
|
Diluted
- pro forma
|
|
$
|
(0.57
|
)
|
$
|
0.07
|
|
$
|
(0.65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
Options
granted in years ended October 31
|
|
2004
|
|
2003
|
|
2002
|
|
Expected
life (in years)
|
|
|
4.00
|
|
|
5.00
|
|
|
5.00
|
|
Risk-free
interest rate
|
|
|
3.29
|
%
|
|
2.00
|
%
|
|
2.00
|
%
|
Volatility
|
|
|
120.20
|
%
|
|
126.00
|
%
|
|
148.00
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted average fair value of options granted during 2004, 2003, and 2002
was
$2.93, $1.79 and $0.92 per option, respectively.
Advertising
Costs:
Advertising
expenditures are expensed as incurred. Advertising costs were $204,000 in fiscal
2004 and $79,000 in fiscal 2003.
Income
Taxes:
We
account for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes.
SFAS No.
109 requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of items that have been included in the consolidated
financial statements or tax returns. Deferred income taxes represent the future
net tax effects resulting from temporary differences between the financial
statement and tax bases of assets and liabilities, using enacted tax rates
in
effect for the year in which the differences are expected to reverse. Valuation
allowances are recorded against net deferred tax assets where, in our opinion,
realization is uncertain. The provision for income taxes represents the net
change in deferred tax amounts, plus income taxes payable for the current
period.
Net
Earnings (Loss) Per Common Share:
Basic
earnings per common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding. Diluted earnings
per common share is computed by dividing net income (loss) by the weighted
average number of shares of common stock and common stock equivalents
outstanding. Common stock equivalents relate to stock options and warrants
include:
· |
397,000
employee options to purchase common stock;
|
· |
23,000
shares of common stock; and
|
· |
30,000
warrants to purchase common stock for the year ended October 31,
2003.
|
Common
stock equivalents of approximately 792,000 and 809,000 options are excluded
from
the diluted earnings per share calculation for fiscal 2004 and 2002,
respectively, due to their anti-dilutive effect.
Comprehensive
Income:
Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. Through October 31, 2004, we have not had any transactions that were
required to be reported in other comprehensive income and, accordingly,
comprehensive income (loss) is the same as net income (loss).
New
Accounting Pronouncements:
In
December 2004, the FASB issued SFAS No. 123R that amends SFAS No. 123
Accounting
for Stock-Based Compensation,
to
require public entities (other than those filing as small business issuers)
to
report stock-based employee compensation in their financial statements. SFAS
No.
123R will require us to expense the fair value of unvested options and future
grants of options over the remaining vesting period. Unless modified, we will
be
required to comply with the provisions of SFAS No. 123R as of the first interim
period that begins after June 15, 2005 (August 1, 2005 for us). We currently
do
not record compensation expense related to our stock-based employee compensation
plans in our financial statements.
Reclassifications:
Certain
reclassifications have been made to the financial statements to conform to
the
prior presentation with no effect on net income (loss) or stockholders' equity
as previously reported.
2. INVENTORIES
Inventories
at October 31, comprise the following (in thousands):
|
|
2004
|
|
2003
|
|
Finished
goods
|
|
$
|
1,343
|
|
$
|
726
|
|
Parts
and materials
|
|
|
583
|
|
|
1,154
|
|
Total
inventory
|
|
$
|
1,926
|
|
$
|
1,880
|
|
3. PROPERTY
AND EQUIPMENT
Property
and equipment at October 31, are comprised of the following (in
thousands):
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$
|
4,708
|
|
$
|
4,482
|
|
Furniture
and fixtures
|
|
|
284
|
|
|
278
|
|
Leasehold
improvements
|
|
|
118
|
|
|
118
|
|
|
|
|
5,110
|
|
|
4,878
|
|
Less
accumulated depreciation and amortization
|
|
|
(4,683
|
)
|
|
(4,489
|
)
|
|
|
$
|
427
|
|
$
|
389
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense totaled $213,000, $303,000 and $649,000 for the years
ended October 31, 2004, 2003 and 2002, respectively. There was no deprecation
expense on capital leases in 2004.
The
following is a schedule by years of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as
of
October 31, 2004: (in thousands)
Year
ending October 31: |
|
|
|
|
2005
|
|
$
|
44
|
|
2006
|
|
|
44
|
|
2007
|
|
|
44
|
|
2008
|
|
|
44
|
|
2009
|
|
|
43
|
|
Total
minimum lease payments
|
|
|
219
|
|
Less:
Amount representing interestP1P
|
|
|
(55
|
)
|
Present
value of net minimum lease paymentsP2P
|
|
$
|
164
|
|
|
|
|
|
|
1
1 |
Amount
necessary to reduce net minimum lease payments to present value
calculated
at the actual lease interest rate at the inception of the
leases.
|
2
|
Reflected
in the balance sheet as other current liabilities and other long-term
liabilities of $25,000 and $139,000,
respectively.
|
4. CAPITALIZED
SOFTWARE COSTS
Capitalized
software costs at October 31, 2004 and 2003 comprise the following (in
thousands):
|
|
2004
|
|
2003
|
|
Purchased
software
|
|
$
|
1,065
|
|
$
|
929
|
|
Less
accumulated amortization
|
|
|
(1,017
|
)
|
|
(809
|
)
|
|
|
$
|
48
|
|
$
|
120
|
|
|
|
|
|
|
|
|
|
We
capitalized $136,000, $48,000 and $105,000 of purchased software costs in 2004,
2003, and 2002 respectively. Amortization of capitalized software costs totaled
$208,000, $38,000, and $81,000 for the years ended October 31, 2004, 2003,
and
2002, respectively. Included in the $208,000 software amortization expense
for
fiscal 2004 is $126,000 related to write-downs of capitalized software during
the fourth quarter of fiscal 2004.
5. STOCKHOLDERS'
EQUITY
In
May
1999, our Board of Directors authorized us to repurchase up to 100,000 shares
of
our issued and outstanding Common Stock. During fiscal 1999 and 2000, we
repurchased 79,500 shares of our Common Stock in the open market for an
aggregate purchase price of approximately $409,000. We retired the 79,500 shares
of our Common Stock that we purchased under this repurchase program on October
16, 2003.
On
April
30, 2002, we completed a private placement of 555,556 shares of Common Stock
at
$1.80 per share plus a warrant to purchase 111,111 shares of common stock,
resulting in net cash proceeds of approximately $0.8 million. The warrant has
a
term of three years and is exercisable at $2.00 per share. The equity investment
was made by Stonestreet L.P., of Ontario, Canada. The shares of Common Stock
and
the shares of Common Stock associated with the warrants were registered with
the
Securities and Exchange Commission and the registration statement was declared
effective on June 14, 2002. Stonestreet L.P. exercised its warrant to purchase
111,111 shares of our Common Stock on October 9, 2003 for cash consideration
of
$222,222.
The
fair
value of the Stonestreet L.P. warrant of $164,000 on its issue date was computed
using the Black-Scholes option pricing model and was recorded as a liability
pursuant to EITF No. 00-19, Determination
of Whether Share Settlement is Within the Control of the Issuer for Purposes
of
Applying Issue 96-3,
as cash
penalties could have been payable to Stonestreet LP in the event a registration
statement related to the private placement was not declared effective and
maintained. The registration statement was declared effective on June 14, 2002.
On August 22, 2002, the private placement subscription agreement was amended
such that no cash penalties are now payable with respect to the warrant.
Accordingly, as of August 22, 2002, the warrant was reclassified from
liabilities to equity at its fair value of $81,000, resulting in $83,000 of
other income.
In
connection with the private placement we paid Vintage Partners a finder's fee
of
$60,000 and warrants to purchase 21,429 shares of Common Stock. The warrants
have a three year term and are exercisable at $3.50 per share. During fiscal
2004, Vintage Partners exercised a portion of their warrants and purchased
11,429 shares of common stock for a total purchase price of
$40,001.
On
June
27, 2003, we completed a private placement of 500,000 shares of common
stock
plus a
warrant to purchase 50,000 shares of common stock, resulting in gross cash
proceeds of $T550,000
and net cash proceeds of approximately $464,000.T
The
warrant has a term of five years and Tbears
an
exercise price ofT $1.50
per
share Tsubject
to certain adjustment provisionsT.
In
connection with the private placement we paid
Puglisi & Co. Tand
its
associates Ta
placement fee of $33,000 and warrants to purchase 150,000 shares of common
stock. The warrants have a five-year term and Tbear
exercise pricesT
between
$1.50 and $2.00 per shareT,
subject
to certain adjustment provisionsT.
The
warrants to purchase a total of 200,000 shares of common stock have a calculated
fair value of approximately $225,000. This value was derived using the
“Black-Scholes” pricing model. We registered for resale all of the shares of
common stock sold in this offering and the shares subject to sale pursuant
to
the exercise of the warrants with the Securities and Exchange Commission on
Form
S-3. During fiscal 2004, Puglisi exercised a portion of their warrants and
purchased 70,000 shares of common stock for a total purchase price of
$116,000.
During
fiscal 2003, we issued 37,787 shares of our Common Stock to the non-employee
members of our Board of Directors in lieu of 50% of their cash compensation.
The
value of the Common Stock of $43,000 was recorded as a general and
administrative expense.
During
fiscal 2003, we issued 90,628 shares of our Common Stock to one of the owners
of
Antares Microsystems, Inc. pursuant to the original purchase agreement. The
value of the Common Stock of $259,000
During
fiscal 2004, we issued 30,000 shares of our Common Stock to an employee who
was
one of the owners of Antares Microsystems, Inc. pursuant to the original
purchase agreement. The value of the Common Stock of $85,600.
In
fiscal
year 2004 and 2003 9,903 and11,012 shares of Common Stock were issued under
the
Employee Stock Purchase Plan, respectively.
6. INCOME
TAXES
The
components of the benefit for income taxes for the years ended October 31,
2004,
2003 and 2002, comprise the following:
|
|
2004
|
|
2003
|
|
2002
|
|
Federal:
|
|
|
|
|
|
|
|
Current
|
|
$
|
---
|
|
$
|
(18
|
)
|
$
|
(161
|
)
|
Deferred
|
|
|
---
|
|
|
---
|
|
|
---
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
---
|
|
|
1
|
|
|
(16
|
)
|
Deferred
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Total
benefit for income taxes
|
|
$
|
---
|
|
$
|
(17
|
)
|
$
|
(177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
We
recorded a tax benefit of $18,000 and $91,000 in fiscal 2003 and 2002,
respectively, due to refunds of federal income taxes related to the Job Creation
and Workers Assistance Act of 2002 which extends the net operating loss
carryback period from two to five years for losses generated in tax years ending
in 2002. We also filed amended federal and state tax returns to claim $86,000
in
research and development credits related to LMC in fiscal 2002. As of October
31, 2003, we received all of these tax refunds.
The
effective income tax rate differs from the statutory federal income tax rate
for
the following reasons:
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
Statutory
federal income tax rate
|
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
Change
in valuation allowance
|
|
|
34.0
|
|
|
34.0
|
|
|
25.0
|
|
Other
|
|
|
---
|
|
|
---
|
|
|
1.0
|
|
|
|
|
(0
|
)%
|
|
(0
|
)%
|
|
(8.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Significant
components of our deferred tax balances as of October 31, 2004 and 2003 are
as
follows:
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
Current
|
|
|
|
|
|
Accrued
employee benefits
|
|
$
|
25
|
|
$
|
36
|
|
Inventory
allowances
|
|
|
924
|
|
|
828
|
|
Allowance
for doubtful accounts
|
|
|
17
|
|
|
39
|
|
Distributor
reserves
|
|
|
8
|
|
|
---
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
|
|
|
|
|
R&D
credit carryforward
|
|
|
2,663
|
|
|
2,871
|
|
Net
operating loss carryforwards
|
|
|
4,569
|
|
|
4,619
|
|
Refundable
deposit
|
|
|
---
|
|
|
191
|
|
Reserve
on shareholder note receivable
|
|
|
313
|
|
|
103
|
|
Depreciation
and amortization, net
|
|
|
416
|
|
|
---
|
|
Restructuring
costs
|
|
|
9
|
|
|
(25
|
)
|
Total
deferred tax assets
|
|
|
8,944
|
|
|
8,662
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax asset valuation allowance
|
|
|
(8,944
|
)
|
|
(8,662
|
)
|
Net
deferred tax assets
|
|
$
|
---
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
Valuation
allowances are recorded to offset certain deferred tax assets due to
management's uncertainty of realizing the benefit of these items. The valuation
allowance increased by $282,000 in fiscal 2004 primarily as a result of
increases in inventory allowances, depreciation and amortization expense and
a
reduction in the reserve on shareholder note receivable. These were have been
partially offset by decreases in net operating loss carryforwards and research
and development credit carryforwards. At October 31, 2004, we have research
and
experimentation tax credit carryforwards of $1.8 million and $1.2 million for
federal and state tax purposes, respectively. These carryforwards expire in
the
periods ending 2011 through 2024. The State R&D tax credits do not expire.
We have net operating loss carryforwards for federal and state income tax
purposes of approximately $12.7 million and $5.7 million, respectively, which
expire in periods ending 2005 through 2024.
Under
the
Tax Reform Act of 1986, the amounts of benefits from net operating loss
carryforwards may be impaired or limited as we have incurred a cumulative
ownership change of more than 50%, as defined, over a three-year
period.
7.
WARRANTY OBLIGATIONS AND OTHER GUARANTEES:
The
following is a summary of our agreements that we
have
determined are within the scope of FIN 45, (“FIN”) No. 45 Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others
-- an
interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34.
We
accrue
the estimated costs to be incurred in performing warranty services at the time
of revenue recognition and shipment of the products to Tour
customersT.
Our
estimate of costs to service our warranty obligations is based on historical
experience and expectation of future conditions. To the extent we experience
increased warranty claim activity or increased costs associated with servicing
those claims, the warranty accrual will increase, resulting in decreased gross
margin.
The
following table sets forth an analysis of our warranty reserve at October 31
(in
thousands):
|
|
2004
|
|
2003
|
|
Warranty
reserve at beginning of period
|
|
$
|
53
|
|
$
|
55
|
|
Less:
Cost to service warranty obligations
|
|
|
(33
|
)
|
|
(13
|
)
|
Plus:
Increases to reserves
|
|
|
---
|
|
|
11
|
|
Total
warranty reserve included in other accrued expenses
|
|
$
|
20
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
TWeT
have
agreed to indemnify Teach
of TourT executiveT
officers
and directors for certain events or occurrences arising as a result of the
officer or director
serving
in such capacity. The term of the indemnification period is for the officer's
or
director's lifetime. The maximum potential amount of future payments we could
be
required to make under these indemnification agreements is unlimited. However,
we have a directorsT’T
and
Tofficers’T liability
insurance policy that Tshould
enableT
us to
recover a portion of future
amounts paid. As a result of our insurance policy coverage, we believe the
estimated fair value of these indemnification agreements is minimal and have
no
liabilities recorded for these agreements as of October 31, 2004 and
T2003,
respectively.T
TWeT
have
agreed to indemnify Teach
of TourT executiveT
officers
and directors for certain events or occurrences arising as a result of the
officer or director
serving
in such capacity. The term of the indemnification period is for the officer's
or
director's lifetime. The maximum potential amount of future payments we could
be
required to make under these indemnification agreements is unlimited. However,
we have a directorsT’T
and
Tofficers’T liability
insurance policy that Tshould
enableT
us to
recover a portion of future
amounts paid. As a result of our insurance policy coverage, we believe the
estimated fair value of these indemnification agreements is minimal and have
no
liabilities recorded for these agreements as of October 31, 2004 and
T2003,
respectively.T
We
enter
into indemnification provisions under our agreements with other companies in
the
ordinary course of business, typically with business partners, contractors,
customers
andTS STlandlords.
Under these provisions we generally indemnify and hold harmless the indemnified
party for losses suffered or incurred by the indemnified party as a result
of
our activities or, in some cases, as a result of the indemnified party's
activities under the agreement. These indemnification provisions often include
indemnifications relating to representations made by us with regard to
intellectual property rights. These indemnification provisions generally survive
termination of the underlying agreement. The maximum potential amount of future
payments we could be required to make under these indemnification provisions
is
unlimited. We have not incurred material costs to defend lawsuits or settle
claims related to these indemnification agreements. As a result, we believe
the
estimated fair value of these agreements is minimal. Accordingly, we have no
liabilities recorded for these agreements as of October 31, 2004
and
T2003,
respectively.
As
discussed below, we are the secondary guarantor on the sublease of our previous
headquarters. We believe we will have no liabilities on this guarantee and
have
not recorded a liability at October 31, 2004.
8.
COMMITMENTS
We
lease
our buildings under noncancelable operating leases which expire at various
dates
through the year 2007. Additionally, we have acquired assets with capital lease
obligations. Future minimum lease payments under noncancelable operating leases
and capital leases, are as follows (in thousands):
|
|
Operating
|
|
Capital
|
|
Year
ending October 31:
|
|
|
|
|
|
2005
|
|
$
|
963
|
|
$
|
44
|
|
2006
|
|
|
626
|
|
|
44
|
|
2007
|
|
|
60
|
|
|
44
|
|
2008
|
|
|
---
|
|
|
44
|
|
2009
and thereafter
|
|
|
---
|
|
|
43
|
|
|
|
|
|
|
|
219
|
|
Less:
total expected reimbursements from sublease or interest
|
|
|
(902
|
)
|
|
(55
|
)
|
Total
minimum lease payments
|
|
$
|
747
|
|
$
|
164
|
|
|
|
|
|
|
|
|
|
In
November 2001, we entered into a facilities lease for our engineering and
administrative headquarters located in San Ramon, California. The lease expires
in 2006. We expect our current facility to satisfy our anticipated needs through
the foreseeable future. Additionally, we assigned the lease related to our
former 63,000 square foot engineering and administrative headquarters facility
to a third-party corporation. The third party has assumed payment of the
remaining lease payments though the termination of the original lease in 2006
and we are a secondary guarantor.
Our
rent
expense under all operating leases, net of reimbursements for subleases, for
the
years ended October 31, 2004, 2003 and 2002 totaled $384,000, $434,000 and
$549,000, respectively. We had reimbursements of sublease proceeds of $637,000,
$713,000 and $158,000 for the years ended October 31, 2004, 2003 and 2002,
respectively.
In
connection with the acquisition of Antares, we committed to issue 98,945 shares
of our Common Stock in 20,000 share increments beginning January 2004 and ending
March 2005 to a selling shareholder of Antares. During fiscal 2004, we issued
30,000 shares of our Common Stock of a committed 98,945 to an employee who
was
one of the owners of Antares Microsystems, Inc. pursuant to the original
purchase agreement. We will issue the remaining 68,945 during fiscal 2005.
The
value of the Common Stock issued in fiscal 2004 under this commitment was
$85,600.
In
connection with the retirement of Mr. William Heye, Jr. as the company’s
President and Chief Executive Officer, the Company will pay Mr. Heye $250,000
at
the rate of $20,833 each month for the period January 1, 2005 through December
31, 2005. The commitment to pay $250,000 has been accrued as of October 31,
2004
and is included in General and Administrative expense and Accrued Payroll and
Employee Benefits liability.
On
May
13, 2004, we renewed our working capital line of credit for twelve months until
May 14, 2005. The credit line is secured by a first lien on all our assets
and
carries a floating annual interest rate equal to the bank's prime rate of 4.75%,
at October 31, 2004, plus 1.50%. Draw-downs on the credit line are based on
a
formula equal to 80% of our domestic accounts receivable. As of October 31,
2004, due to the net loss for our fourth fiscal quarter of 2004, we are not
in
compliance with all the covenants of our credit line. The Bank agreed to waive
the non-compliance with this covenant. We have not drawn down on this line
of
credit and have no amounts payable at October 31, 2004.
At
October 31, 2004, we have two stock-based employee compensation plans, as more
fully described in note 9. We account for these plans under the recognition
and
measurement principles of APB No. 25, Accounting
for Stock Issued to Employees
and
related interpretations. Stock-based employee compensation costs are not
reflected in net income when options granted under the plan had an exercise
price equal to the market value of the underlying common stock on the date
of
grant. During the periods ending October 31, 2004, 2003 and 2002, we recorded
no
compensation expense related to our stock-based employee compensation plans.
As
discussed earlier, should we have determined compensation cost utilizing the
fair value approach, recorded stock compensation expense would have been
approximately $1.2 million, $200,000 and $700,000 in each of the years ended
October 31, 2004, 2003, and 2002, respectively.
9. STOCK
OPTION AND STOCK PURCHASE PLANS
We
sponsor two employee stock option plans, the 1996
Stock Option Plan (the "1996 Plan") and the 1998 Non-Officer Stock Option Plan
(the "1998 Plan").
A total
of 2,730,000 shares of Common Stock were reserved under the 1996 Plan at October
31, 2003.
A total
of 650,000 shares of Common Stock are reserved under the 1998 Plan. Stock
options granted under the 1996 and 1998 Plans are exercisable over a maximum
term of ten years from the date of grant, vest in various installments over
a
one to four-year period and have exercise prices reflecting the market value
of
the shares of Common Stock on the date of grant.
Additionally,
in 1991, stockholders approved a Non-Employee Director Stock Option Plan (the
"Director Plan"). A total of 340,000 shares of Common Stock are reserved for
issuance under the Director Plan. Options granted under the Director Plan vest
over a one to four-year period, expire five to seven years after the date of
grant and have exercise prices reflecting market value at the date of
grant.
At
October 31, 2004 and 2003, 903,516 and 273,964 shares of Common Stock,
respectively, were available for grant under the 1996 Plan. A total of 26,250
and 3,939 shares of Common Stock were available for grant under the 1998 Plan
at
October 31, 2004 and 2003, respectively. A total of 187,750 and 42,750 shares
of
Common Stock were available for grant under the Director Plan at October 31,
2004 and 2003, respectively.
A
summary
of the combined activity under all of the stock option plans is set forth
below:
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Number
of
|
|
Price
Per
|
|
Exercise
|
|
|
|
Shares
|
|
Share
|
|
Price
|
|
|
|
|
|
|
|
|
|
Outstanding
at October 31, 2001
|
|
|
1,419,003
|
|
$
|
0.51
- $23.50
|
|
$
|
6.18
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
809,000
|
|
$
|
0.90--$1.80
|
|
$
|
0.92
|
|
Cancelled
or expired
|
|
|
(458,730
|
)
|
$
|
0.51--$23.50
|
|
$
|
7.94
|
|
Outstanding
at October 31, 2002
|
|
|
1,769,273
|
|
$
|
0.90--$19.81
|
|
$
|
3.32
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
140,500
|
|
$
|
0.70--$2.86
|
|
$
|
1.90
|
|
Cancelled
or expired
|
|
|
(285,238
|
)
|
$
|
0.51--$19.81
|
|
$
|
5.13
|
|
Outstanding
at October 31, 2003
|
|
|
1,624,505
|
|
$
|
0.70--$19.41
|
|
$
|
2.90
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
422,500
|
|
$
|
2.86--$7.13
|
|
$
|
4.99
|
|
Cancelled
or expired
|
|
|
(50,750
|
)
|
$
|
2.86--$7.00
|
|
$
|
3.98
|
|
Exercised
|
|
|
(182,012
|
)
|
$
|
0.90--$5.13
|
|
$
|
1.69
|
|
Outstanding
at October 31, 2004
|
|
|
1,797,119
|
|
$
|
0.70--$19.41
|
|
$
|
3.48
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes information with respect to all options to purchase
shares of Common Stock outstanding under the 1996 Plan, the 1998 Plan, the
Director Plan and the LMC Plan at October 31, 2004:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Number
|
|
Remaining
|
|
Average
|
|
Number
|
|
Average
|
|
Range
of
|
|
Outstanding
|
|
Contractual
Life
|
|
Exercise
|
|
Exercisable
|
|
Exercise
|
|
Exercise
Price
|
|
at
10/31/04
|
|
(years)
|
|
Price
|
|
at
10/31/04
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.00 -$1.00
|
|
|
683,742
|
|
|
4.8
|
|
$
|
0.91
|
|
|
653,666
|
|
$
|
0.91
|
|
$
1.01 -$2.50
|
|
|
144,376
|
|
|
4.5
|
|
$
|
1.61
|
|
|
109,748
|
|
$
|
1.70
|
|
$
2.51 -$ 3.50
|
|
|
222,000
|
|
|
4.0
|
|
$
|
2.73
|
|
|
179,557
|
|
$
|
2.68
|
|
$
3.51 -$ 5.50
|
|
|
479,802
|
|
|
4.8
|
|
$
|
4.80
|
|
|
183,650
|
|
$
|
5.09
|
|
$
5.51 -$ 7.50
|
|
|
88,000
|
|
|
6.0
|
|
$
|
7.01
|
|
|
2,000
|
|
$
|
6.63
|
|
$
7.51 -$ 9.50
|
|
|
107,699
|
|
|
1.5
|
|
$
|
8.23
|
|
|
107,699
|
|
$
|
8.23
|
|
$
9.51 -$14.50
|
|
|
65,000
|
|
|
0.2
|
|
$
|
13.23
|
|
|
65,000
|
|
$
|
13.23
|
|
$14.51
-$19.85
|
|
|
6,500
|
|
|
2.6
|
|
$
|
18.27
|
|
|
6,500
|
|
$
|
18.27
|
|
|
|
|
1,797,119
|
|
|
|
|
|
|
|
|
1,307,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
sponsor an Employee Stock Purchase Plan (the "Purchase Plan") under which
300,000 shares of Common Stock were reserved for issuance at October 31, 2004.
The Purchase Plan allows participating employees to purchase, through payroll
deductions, shares of our Common Stock at 85 percent of the fair market value
of
the shares at specified dates. At October 31, 2004, 32 employees were eligible
to participate in the Purchase Plan and 58,559 shares were available for
issuance. In fiscal year 2004, 2003 and 2002, 9,903, 11,012 and 47,596 shares
of
Common Stock were issued under the Purchase Plan, respectively.
10. NET
INCOME (LOSS) PER SHARE:
Basic
net income
(loss) per common share for the years ended October 31, 2004, 2003 and 2002
was
computed by dividing the net income (loss) for
the
relevant period
by the
weighted average number of shares of common stock outstanding. Common stock
equivalents for the years ended October 31, 2004 and 2002 have been excluded
from shares used in calculating diluted net
loss
per
share because the
effect
would have
been
anti-dilutive.
|
|
Years
ended October 31
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,679
|
)
|
$
|
563
|
|
$
|
(1,731
|
)
|
Number
of shares for computation of earnings
per share
|
|
|
5,022
|
|
|
4,259
|
|
|
3,759
|
|
Basic
earnings (loss) per share
|
|
$
|
(0.33
|
)
|
$
|
0.13
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding during the
year
|
|
|
5,022
|
|
|
4,259
|
|
|
3,759
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
issuance of stock under warrant plus stock issued the employee
and non-employee stock option plans
|
|
|
(a
|
)
|
|
450
|
|
|
(a
|
)
|
Number
of shares for computation of earnings per share
|
|
|
5,022
|
|
|
4,709
|
|
|
3,759
|
|
Diluted
earnings (loss) per share
|
|
$
|
(0.33
|
)
|
$
|
0.12
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
In
loss periods, common share equivalents would have an anti-dilutive
effect
on net loss
per share and therefore have been
excluded.
|
11. EMPLOYEE
SAVINGS AND INVESTMENT PLAN
We
contribute a percentage of income before income taxes into an employee savings
and investment plan. The percentage is determined annually by the Board of
Directors. These contributions are payable annually, vest over five years,
and
cover substantially all employees who have been employed by us at least one
year. Additionally, we make matching payments to the employee savings and
investment plan of 50% of each employee's contribution up to three percent
of
employees' earnings.
For
the
years ended October 31, 2004, 2003 and 2002, total expense under the employee
savings and investment plan was $90,099, $61,730 and $99,471,
respectively.
12. CONCENTRATION
OF CREDIT AND BUSINESS RISKS
Our
trade
accounts receivable are concentrated among a small number of customers,
principally located in the United States. Two customers accounted for 61% of
our
outstanding accounts receivable at October 31, 2004 compared to three customers
who accounted for more than 62% of total accounts receivable at October 31,
2003. Ongoing credit evaluations of customers' financial condition are performed
and, generally, no collateral is required. We maintain an allowance for doubtful
accounts for potential credit losses. Actual bad debt losses have not been
material and have not exceeded our expectations. Trade accounts receivable
are
recorded net of an allowance for doubtful accounts of $42,000 and $90,000 at
October 31, 2004 and 2003, respectively.
Sales
to
individual customers in excess of 10% of net sales for the year ended October
31, 2004 included sales to HP of $4.9 million, or 45% and Nortel of $1.5 million
or 13% of net sales compared to sales to HP in fiscal 2003 of $3.1 million,
or
45%, and sales to HP of $2.1 million, or 30%, and Lockheed Martin of $0.8
million, or 12% of net sales, in fiscal 2002. International sales accounted
for
12%, 12% and 13% of total sales during fiscal 2004, 2003 and 2002,
respectively.
We
depend
on a limited number of customers for substantially all revenue to date. Failure
to anticipate or respond adequately to technological developments in our
industry, changes in customer or supplier requirements or changes in regulatory
requirements or industry standards, or any significant delays in the development
or introduction of products or services, could have a material adverse effect
on
our business, operating results and cash flows.
Substantially
all of our manufacturing process is subcontracted to two independent companies.
The
chipsets used in most of our products are currently available only from
Motorola. In addition, certain other components are currently available only
from single suppliers. The inability to obtain sufficient key components as
required, or to develop alternative sources if and as required in the future,
could result in delays or reductions in product shipments or margins that,
in
turn, could have a material adverse effect on our business, operating results,
financial condition and cash flows.
13.
ACQUISITION
OF ANTARES MICROSYSTEMS, INC.
Effective
as of August 7, 2003, we purchased substantially all of the
assets
of Antares Microsystems, Inc., a California corporation ("Antares"), excluding
cash and accounts receivable, from the Assignee for the Benefit of Creditors
of
Antares (“Assignee”). The acquisition enabled us to obtain intellectual property
such as the TCP/IP Offload Engine (“TOE”) and other intellectual property which
we consider to be complementary to our business. While this product has reached
technological feasibility and is being capitalized as an intangible asset,
we
continue to customize it to meet SBE's specific customer needs. We acquired
Antares for a purchase price of $75,000 in cash plus $582,000 in costs
associated with the payment of certain loan guarantees, legal fees, accounting
fees, broker fees, contract transfer fees and moving expenses and $211,000
in
cash to the selling shareholders of Antares. We also issued 90,628 shares of
our
Common Stock with a market value at the time of issuance of $259,000 to one
of
the selling shareholders and committed to issue 98,945 shares of our Common
Stock valued at $283,000 in 10,000 and 20,000 share increments beginning January
2004 and ending March 2005 to a selling shareholder of Antares.
A
summary
of the assets acquired and consideration paid is as follows:
Tangible
assets acquired
|
|
$
|
187,000
|
|
Intellectual
property
|
|
|
1,223,000
|
|
Total
assets acquired
|
|
|
1,410,000
|
|
Liabilities
assumed
|
|
|
--
|
|
Net
assets acquired
|
|
$
|
1,410,000
|
|
|
|
|
|
|
Cash
consideration or costs paid or to be paid
|
|
$
|
868,000
|
|
Fair
value of stock provided
|
|
|
542,000
|
|
Total
consideration
|
|
$
|
1,410,000
|
|
|
|
|
|
|
We
used
the purchase method of accounting for the acquisition and combined Antares
results of operations beginning August 7, 2003. We allocated the purchase price
to the tangible assets based on fair market value at the time of the acquisition
and to intellectual property based on future expected cash flows to be derived
from the acquired product lines in addition to new products that have reach
technological feasibility, but have not gone into production.
The
unaudited pro forma results are provided for comparative purposes only and
are
not necessarily indicative of what actual results would have been had the
Antares acquisition, and the private equity offering transactions been
consummated on such dates, nor do they give effect to the synergies, cost
savings and other changes expected to result from the acquisitions. Accordingly,
the pro forma financial results do not purport to be indicative of results
of
operations as of the date hereof or for any period ended on the date hereof
or
for any other future date or period. Had we acquired Antares at the beginning
the prior period, our results of operations for would have been as
follows:
For
the Years ended October 31,
|
|
2003
|
|
2002
|
|
Revenues
|
|
$
|
8,845
|
|
$
|
10,702
|
|
Net
loss
|
|
|
(1,173
|
)
|
|
(2,665
|
)
|
Basic
loss per common share
|
|
|
(0.28
|
)
|
|
(0.67
|
)
|
Diluted
earnings per common
|
|
|
(0.25
|
)
|
|
(0.67
|
)
|
|
|
|
|
|
|
|
|
We
did
not assume any of the liabilities associated with Antares. In connection with
the acquisition, we hired certain employees of Antares in order to continue
the
development of the Antares TOE technology, which is not yet to market, and
other
products of Antares. The TOE base technology is being readied for commercial
development. In the event TOE is successfully completed and commercialized,
we
have committed to make certain payments of cash and/or stock as bonuses to
certain of these employees, as sales of the TOE products occur.
The
amount of consideration paid in connection with the asset acquisition was
determined by extensive “arms-length”
negotiation among the parties. We funded the acquisition of the assets in cash
from our working capital plus proceeds from the sale of our common stock as
described in Note 5. There was no material relationship between Assignee or
Antares and us or any of our affiliates, any of our directors or officers,
or
any associate of any such director or officer.
We
planned to amortize the intellectual property acquired in the Antares
acquisition to expense over 36 months which was the estimated useful life at
the
time of acquisition. In the fourth quarter of fiscal 2004, after our annual
asset impairment review (see Intangible Assets in our Significant Accounting
Policies section of this report), we are behind in our roll-out of the new
product and with the change in market competition, we determined that there
exists considerable doubt that we would recover the remaining $713,000 balance
of the intellectual property asset that would have been on our balance sheet
as
of October 31, 2004. As a result of this evaluation and determination we wrote
off the remaining balance. Including the normally scheduled amortization of
the
intellectual property of $408,000 and the $713,00 write-down, the total non-cash
amortization expense included in our cost of goods for fiscal 2004 is $1.1
million. We recorded approximately $102,000 in amortization in fiscal
2003.
14.
RESTRUCTURING COSTS
In
response to the economic slowdown, we implemented restructuring plans in fiscal
2002 and recorded restructuring charges of $446,000. Restructuring costs for
fiscal 2002 are comprised of severance costs associated with staff reductions
totaling $115,000 (we reduced our headcount from 47 employees to 24 employees
during fiscal 2002), leasehold improvements and equipment write-downs related
to
the abandonment of our Madison, Wisconsin office of $185,000 and accrued lease
and brokerage costs totaling $146,000. We reached agreement with the property
owner to terminate the Madison office lease releasing us from further
obligations effective December 31, 2002.
As
of
October 31, 2004 and 2003 $21,000 and $58,000 of the restructuring costs was
included in other current liabilities, respectively.
In
our
third quarter of fiscal 2003, we recognized a restructuring benefit of $154,000
after the final settlement of costs associated with prior real estate and
equipment leases.
The
following table sets forth an analysis of the components of the restructuring
reserve and the payments made against it through October 31, 2004 (in
thousands):
Restructuring
accrual at October 31, 2003
|
|
$
|
58
|
|
Less:
|
|
|
|
|
Cash
paid and adjustment for accrued lease costs
|
|
|
(37
|
)
|
Total
restructuring costs included in liabilities
|
|
$
|
21
|
|
|
|
|
|
|
15.
LOAN TO OFFICER
On
November 6, 1998, we made a loan to our retiring president and CEO which was
used by him to exercise an option to purchase 139,400 shares of our common
stock
and related taxes. The loan, as amended, was collateralized by shares of our
common stock, bore interest at a rate of 2.48% per annum, due on December 14,
2003.
On
October 31, 2002, we determined that it was probable that we would be unable
to
fully recover the balance of the loan on its due date of December 14, 2003.
Accordingly, a valuation allowance of $474,000 was recorded against the loan
at
October 31, 2002.
During
the fourth quarter of fiscal 2003, the officer repaid $362,800 of the loan
and
as a result, we recognized a benefit of $235,000 related to the reversal of
the
loan impairment charge taken by us in fiscal 2002. During the first quarter
of
fiscal 2004, the officer repaid the remaining loan balance in full and as a
result, we recorded a benefit of $239,000 relating to the reversal of the
remaining loan impairment charge.
QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)
(in
thousands except per
share amounts)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
2004:
Net sales
|
|
$
|
2,970
|
|
$
|
2,977
|
|
$
|
2,899
|
|
$
|
2,220
|
|
Gross
profit
|
|
|
1,645
|
|
|
1,560
|
|
|
1,540
|
|
|
(325
|
)
|
Net
income (loss)
|
|
|
527
|
|
|
54
|
|
|
79
|
|
|
(2,339
|
)
|
Basic
income (loss) per common share
|
|
$
|
0.11
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
(0.47
|
)
|
Diluted
income (loss) per common share
|
|
$
|
0.09
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003:
Net sales
|
|
$
|
1,861
|
|
$
|
1,767
|
|
$
|
1,621
|
|
$
|
2,207
|
|
Gross
profit
|
|
|
1,128
|
|
|
1,088
|
|
|
1,062
|
|
|
1,429
|
|
Net
income
|
|
|
91
|
|
|
51
|
|
|
141
|
|
|
280
|
|
Basic
income per common share
|
|
$
|
0.02
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.07
|
|
Diluted
income per common share
|
|
$
|
0.02
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.06
|
|
SBE,
Inc.
Schedule
II - Valuation and Qualifying Accounts
For
the Years Ended October 31, 2004, 2003 and 2002
(amounts
in thousands)
Column
A
|
|
Column
B
|
|
Column
C
|
|
Column
D
|
|
Column
E
|
|
|
|
Balance
at
|
|
Additions
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
charged
to costs
|
|
|
|
End
of
|
|
Description
|
|
of
Period
|
|
and
expenses
|
|
Deductions
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended October 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts and sales programs
|
|
$
|
90
|
|
$
|
---
|
|
$
|
(48
|
)
|
$
|
42
|
|
Allowance
for Warranty Claims
|
|
|
53
|
|
|
---
|
|
|
(33
|
)
|
|
20
|
|
Allowance
for Deferred Tax Assets
|
|
|
8,662
|
|
|
295
|
|
|
---
|
|
|
8,957
|
|
Allowance
for Stockholder Loan
|
|
|
239
|
|
|
---
|
|
|
(239
|
)
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended October 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts and sales programs
|
|
$
|
93
|
|
$
|
11
|
|
$
|
(14
|
)
|
$
|
90
|
|
Allowance
for Warranty Claims
|
|
|
55
|
|
|
11
|
|
|
(13
|
)
|
|
53
|
|
Allowance
for Deferred Tax Assets
|
|
|
8,593
|
|
|
69
|
|
|
---
|
|
|
8,662
|
|
Allowance
for Stockholder Loan
|
|
|
474
|
|
|
---
|
|
|
(235
|
)
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended October 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts and sales programs
|
|
$
|
225
|
|
$
|
---
|
|
$
|
(132
|
)
|
$
|
93
|
|
Allowance
for Warranty Claims
|
|
|
56
|
|
|
---
|
|
|
(1
|
)
|
|
55
|
|
Allowance
for Deferred Tax Assets
|
|
|
8,080
|
|
|
513
|
|
|
---
|
|
|
8,593
|
|
Allowance
for Stockholder Loan
|
|
|
---
|
|
|
474
|
|
|
---
|
|
|
474
|
|
EXHIBIT
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
SBE,
Inc.
San
Ramon, California
We
hereby
consent to the incorporation by reference in the Registration Statement on
Form
S-8 (No. 33-42629) of our report dated December 10, 2004, relating to the
consolidated financial statements and schedules of SBE, Inc. which appears
in
the Company’s Annual Report on Form 10-K for the year ended October 31, 2004.
/s/
BDO
Seidman, LLP
San
Francisco, California
January
12, 2005
EXHIBIT
23.2
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
hereby
consent to the incorporation by reference in the Registration Statements on
Form
S-8 (No. 33-42629) and Form S-3 (No. 333-106951) of SBE, Inc. of our report
dated January 13, 2003, relating to the consolidated financial statements and
financial statement schedule, which appears in this Form 10-K.
/s/
PricewaterhouseCoopers LLP
San
Francisco, California
January
11, 2005
Exhibit
31.1
CERTIFICATIONS
I,
William B. Heye, Jr., certify that:
1. I
have
reviewed this annual report on Form 10-K of SBE, Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) [intentionally
omitted];
c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
January 14, 2005
/s/
William B. Heye, Jr.
William
B. Heye, Jr.
Chief
Executive Officer and President
Exhibit
32.1
CERTIFICATIONS
I,
David
W. Brunton certify that:
1. I
have
reviewed this annual report on Form 10-K of SBE, Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) [intentionally
omitted];
c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
January 14, 2005
/s/
David W. Brunton
David
W.
Brunton
Chief
Financial Officer,
Vice
President, Finance
and
Secretary
Exhibit
32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, William B. Heye, Jr., the Chief Executive Officer
of
SBE, Inc. (the “Company”) hereby certifies that, to the best of his
knowledge:
1. |
The
Company’s Annual Report on Form 10-K for the year ended October 31, 2004,
to which this Certification is attached as Exhibit 32.1 (the “Periodic
Report”), fully complies with the requirements of Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended;
and
|
2. |
The
information contained in the Periodic Report fairly presents, in
all
material respects, the financial condition and results of operation
of the
Company at the end of the period covered by the Periodic
Report.
|
Dated: January
14, 2005
/s/
William B. Heye Jr.
William
B. Heye Jr.
Chief
Executive Officer
EXHIBIT
32.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, David
W. Brunton,
the
Chief Financial Officer of SBE, Inc. (the “Company”) hereby certifies that, to
the best of his knowledge:
|
1.
|
The
Company’s Annual Report on Form 10-K for the year ended October 31, 2004,
to which this Certification is attached as Exhibit 32.1 (the “Periodic
Report”), fully complies with the requirements of Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended;
and
|
|
2.
|
The
information contained in the Periodic Report fairly presents, in
all
material respects, the financial condition and results of operation
of the
Company at the end of the period covered by the Periodic
Report.
|
Dated: January
14, 2005
/s/
David W. Brunton
David
W.
Brunton
Chief
Financial Officer
ANNEX
H
SBE,
INC.
INDEX
TO APRIL 30, 2005 FORM 10-Q
PART
I Financial Information
|
|
|
|
Item
1 Financial
Statements (unaudited)
|
|
|
|
Condensed
Consolidated Balance Sheets as of April 30, 2005 and October 31,
2004
|
3
|
|
|
Condensed
Consolidated Statements of Operations for the three and six months
ended
April 30, 2005 and 2004
|
4
|
|
|
Condensed
Consolidated Statements of Cash Flows for the six months ended
April 30,
2005 and 2004
|
5
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
6
|
|
|
Item
2 Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
12
|
|
|
Item
3
Quantitative and Qualitative Disclosures about Market Risk
|
27
|
|
|
Item
4
Controls and Procedures
|
27
|
|
|
PART
II Other Information
|
|
|
|
Item
4 Submission
of Matters to a Vote of Security Holders
|
28
|
|
|
Item
6 Exhibits
and Reports on Form 8-K
|
.29
|
|
|
SIGNATURES
|
31
|
|
|
EXHIBITS
|
32
|
|
|
PART
I. Financial
Information
Item
1. Financial
Statements
SBE,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
|
|
April
30,
|
|
October
31,
|
|
ASSETS
|
|
2005
|
|
2004
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,221
|
|
$
|
1,849
|
|
Trade
accounts receivable, net
|
|
|
1,599
|
|
|
1,668
|
|
Inventories
|
|
|
1,474
|
|
|
1,926
|
|
Other
|
|
|
262
|
|
|
227
|
|
Total
current assets
|
|
|
4,556
|
|
|
5,670
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
392
|
|
|
427
|
|
Capitalized
software costs, net
|
|
|
149
|
|
|
48
|
|
Other
|
|
|
288
|
|
|
28
|
|
Total
assets
|
|
$
|
5,385
|
|
$
|
6,173
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$
|
854
|
|
$
|
856
|
|
Accrued
payroll and employee benefits
|
|
|
329
|
|
|
391
|
|
Capital
lease obligations - current portion
|
|
|
27
|
|
|
25
|
|
Other
accrued liabilities
|
|
|
164
|
|
|
459
|
|
Total
current liabilities
|
|
|
1,374
|
|
|
1,731
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations and long term liabilities net of current
portion
|
|
|
135
|
|
|
139
|
|
Total
liabilities
|
|
|
1,509
|
|
|
1,870
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock
|
|
|
16,175
|
|
|
15,755
|
|
Deferred
compensation
|
|
|
(88
|
)
|
|
---
|
|
Accumulated
deficit
|
|
|
(12,211
|
)
|
|
(11,452
|
)
|
Total
stockholders' equity
|
|
|
3,876
|
|
|
4,303
|
|
Total
liabilities and stockholders' equity
|
|
$
|
5,385
|
|
$
|
6,173
|
|
|
|
|
|
|
|
|
|
See
notes
to condensed consolidated financial statements.
SBE,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
(Unaudited)
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
April
30,
|
|
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,706
|
|
$
|
2,977
|
|
$
|
4,520
|
|
$
|
5,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,076
|
|
|
1,417
|
|
|
2,305
|
|
|
2,742
|
|
Gross
profit
|
|
|
630
|
|
|
1,560
|
|
|
2,215
|
|
|
3,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
research and development
|
|
|
573
|
|
|
543
|
|
|
1,046
|
|
|
1,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
567
|
|
|
564
|
|
|
1,126
|
|
|
1,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
426
|
|
|
400
|
|
|
795
|
|
|
764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
loss recovery
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(239
|
)
|
Total
operating expenses
|
|
|
1,566
|
|
|
1,507
|
|
|
2,967
|
|
|
2,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(936
|
)
|
|
53
|
|
|
(752
|
)
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense)
|
|
|
--
|
|
|
1
|
|
|
(3
|
)
|
|
2
|
|
Income
(loss) before income taxes
|
|
|
(936
|
)
|
|
54
|
|
|
(755
|
)
|
|
581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
---
|
|
|
---
|
|
|
5
|
|
|
---
|
|
Net
income (loss)
|
|
$
|
(936
|
)
|
$
|
54
|
|
$
|
(760
|
)
|
$
|
581
|
|
Basic
income (loss) per share
|
|
$
|
(0.18
|
)
|
$
|
0.01
|
|
$
|
(0.15
|
)
|
$
|
0.12
|
|
Diluted
income (loss) per share
|
|
$
|
(0.18
|
)
|
$
|
0.01
|
|
$
|
(0.15
|
)
|
$
|
0.09
|
|
Basic
- weighted average shares used in per share computations
|
|
|
5,207
|
|
|
5,003
|
|
|
5,175
|
|
|
4,961
|
|
Diluted
- weighted average shares used in per share computations
|
|
|
5,207
|
|
|
6,030
|
|
|
5,175
|
|
|
6,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to condensed consolidated financial statements.
SBE,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Six
months ended
|
|
|
|
April
30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(760
|
)
|
$
|
581
|
|
Adjustments
to reconcile net income (loss) to net cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
105
|
|
|
106
|
|
Software
|
|
|
20
|
|
|
22
|
|
Deferred
compensation
|
|
|
32
|
|
|
---
|
|
Amortization
of intellectual property
|
|
|
---
|
|
|
204
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
69
|
|
|
185
|
|
Inventories
|
|
|
451
|
|
|
129
|
|
Other
assets
|
|
|
(294
|
)
|
|
(173
|
)
|
Trade
accounts payable
|
|
|
(2
|
)
|
|
(119
|
)
|
Other
accrued liabilities
|
|
|
(163
|
)
|
|
(276
|
)
|
Net
cash provided (used) by operating activities
|
|
|
(542
|
)
|
|
659
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(70
|
)
|
|
(55
|
)
|
Capitalized
software costs
|
|
|
(120
|
)
|
|
(78
|
)
|
Net
cash used in investing activities
|
|
|
(190
|
)
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from exercise of warrants
|
|
|
---
|
|
|
116
|
|
Proceeds
from repayment of stockholder note
|
|
|
---
|
|
|
142
|
|
Proceeds
from exercise of stock options
|
|
|
104
|
|
|
227
|
|
Net
cash provided by financing activities
|
|
|
104
|
|
|
485
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(628
|
)
|
|
1,011
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,849
|
|
|
1,378
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,221
|
|
$
|
2,389
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Non-cash
stock portion of Antares purchase price
|
|
$
|
196
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
See
notes
to condensed consolidated financial statements.
SBE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim
Period Reporting:
These
condensed consolidated financial statements of SBE, Inc. are unaudited and
include all adjustments, consisting of normal recurring adjustments, that are,
in the opinion of management, necessary for a fair presentation of the financial
position and results of operations and cash flows for the interim periods.
The
results of operations for the three and six and months ended April 30, 2005
are
not necessarily indicative of expected results for the full 2005 fiscal
year.
Certain
information and footnote disclosures normally contained in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial statements should
be read in conjunction with the financial statements and notes contained in
our
Annual Report on Form 10-K for the year ended October 31, 2004.
Management
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the U.S. requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, as well as certain
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of net
sales
and
expenses during the reporting period. Actual results could differ from these
estimates. Significant estimates and judgments made by us relate to matters
such
as potential liability for sales allowances, warranty and indemnification
obligations, collectibility of accounts receivable, realizability of inventories
and recoverability of capitalized software and deferred tax assets.
2. Inventories:
Inventories
were comprised of the following (in thousands):
|
|
April
30,
|
|
October
31,
|
|
|
|
2005
|
|
2004
|
|
Finished
goods
|
|
$
|
257
|
|
$
|
1,343
|
|
Parts
and materials
|
|
|
1,217
|
|
|
583
|
|
|
|
$
|
1,474
|
|
$
|
1,926
|
|
|
|
|
|
|
|
|
|
3. Net
Income (Loss) Per Share:
Basic
income (loss) per common share for the three and six months ended April 30,
2005
and 2004 was computed by dividing the net income for such period by the weighted
average number of shares of common stock outstanding for such period. . Common
stock equivalents for the three months and six months ended April 30, 2005
were
510,547 and 583,747, respectively and were anti-dilutive and as such are not
included in the calculation of diluted net income per share. Common stock
equivalents for the three months and six months ended April 30, 2004 were
1,026,890 and 1,173,517, respectively, and have been included in the calculation
of diluted net income per share. The common stock equivalents for the three
and
six months ended April 30, 2004 include the following items: 1) 867,238 and
1,006,914 vested employee stock options, respectively; 2) 90,707 and 97,658
common stock equivalents subject to warrants, respectively 3) 68,945 shares
of
common stock to be issued in connection with the purchase of Antares.
|
|
Three
months ended
|
|
Six
months ended
|
|
($000
omitted)
|
|
April
30,
|
|
April
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
5,207
|
|
|
5,003
|
|
|
5,175
|
|
|
4,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares for computation of net income (loss) per share
|
|
|
5,207
|
|
|
5,003
|
|
|
5,175
|
|
|
4,961
|
|
Net
income (loss)
|
|
$
|
(936
|
)
|
$
|
54
|
|
$
|
(760
|
)
|
$
|
581
|
|
Net
income (loss) per share
|
|
$
|
(0.18
|
)
|
$
|
0.01
|
|
$
|
(0.15
|
)
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
5,207
|
|
|
5,003
|
|
|
5,175
|
|
|
4,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issuable pursuant to options granted under stock option plans and
warrants
granted, less assumed repurchase at the average fair market value
for the
period
|
|
|
---
|
|
|
1,027
|
|
|
---
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares for computation of net income (loss) per share
|
|
|
5,207
|
|
|
6,030
|
|
|
5,175
|
|
|
6,134
|
|
Net
income (loss)
|
|
$
|
(936
|
)
|
$
|
54
|
|
$
|
(760
|
)
|
$
|
581
|
|
Net
income (loss) per share
|
|
$
|
(0.18
|
)
|
$
|
0.01
|
|
$
|
(0.15
|
)
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
Stock Based Compensation:
At
April
30, 2005, we had two stock-based employee compensation plans and one stock-based
director compensation plan. We account for these plans under the recognition
and
measurement principles of Accounting Principle Board Opinion No. 25, "Accounting
for Stock Issued to Employees," (“APB 25”) and related interpretations.
Accordingly, no stock-based employee compensation cost has been recognized
in
net income for the stock option plans. Had compensation cost for our stock
option plans been determined based on the fair value recognition provisions
of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation," (“SFAS 123”) our net income (loss) and income (loss) per share
would have been as follows (in thousands):
|
|
Three
Months
|
|
Six
Months
|
|
|
|
Ended
April 30,
|
|
Ended
April 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss), as reported
|
|
$
|
(936
|
)
|
$
|
54
|
|
$
|
(760
|
)
|
$
|
581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Total stock-based compensation expense (benefit) included in
the net loss determined under the recognition and measurement
principles
of APB 25
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax effects
|
|
|
388
|
|
|
96
|
|
|
1,139
|
|
|
166
|
|
Pro
forma net income (loss)
|
|
$
|
(1,324
|
)
|
$
|
(42
|
)
|
$
|
(1,894
|
)
|
$
|
415
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
(0.18
|
)
|
$
|
0.01
|
|
$
|
(0.15
|
)
|
$
|
0.12
|
|
Basic
- pro forma
|
|
$
|
(0.25
|
)
|
$
|
(0.01
|
)
|
$
|
(0.37
|
)
|
$
|
0.08
|
|
Diluted
- as reported
|
|
$
|
(0.18
|
)
|
$
|
0.01
|
|
$
|
(0.15
|
)
|
$
|
0.09
|
|
Diluted
- pro forma
|
|
$
|
(0.25
|
)
|
$
|
(0.01
|
)
|
$
|
(0.37
|
)
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were 280,000 stock options granted in the quarter ended April 30, 2005. The
assumptions regarding the annual vesting of stock options were 25% per year
for
options granted in 2005. The fair value of each option grant is estimated on
the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2005: Dividend yield of 0%;
expected volatility of 121.5%, risk-free interest rate of 3.1%, and expected
life of four years.
5. Concentration
of Risk:
In
the
three and six months ended April 30, 2005 and 2004, most of our sales were
attributable to sales of communications products and were derived from a limited
number of original equipment manufacturer (“OEM”) customers. In our second
quarter of fiscal 2005, we had sales to two customers that were each greater
than 10% of our net sales for the quarter and collectively accounted for 54%
of
net sales during the second quarter of fiscal 2005. In our second quarter of
fiscal 2004, we had sales to two customers that individually accounted for
greater than 10% of our net sales for the quarter and collectively accounted
for
50% of our net sales for that quarter. In the first six months of fiscal 2005,
we had sales to three customers that were each greater than 10% of our sales
for
that period and collectively accounted for 61% of net sales during the first
two
quarters of fiscal 2005. In the first six months of fiscal 2004, we had sales
to
two customers that individually accounted for greater than 10% of our net sales
for that period and collectively accounted for 56% of our net sales for the
first two quarters of fiscal 2004.
As
of
April 30, 2005, we had two customers that each accounted for more than 10%
of
our accounts receivable compared to three customers as of April 30,
2004.
6.
Warranty Obligations and Other Guarantees:
Warranty
Reserve:
Our
products are sold with warranty provisions that require us to remedy
deficiencies in quality or performance of our products over a specified period
of time, generally 12 months, at no cost to our customers. We accrue the
estimated costs to be incurred in performing warranty services at the time
of
revenue recognition and shipment of our products to our
customers.
Our
estimate of costs to service our warranty obligations is based on historical
experience and expectation of future conditions. To the extent we experience
increased warranty claim activity or increased costs associated with servicing
those claims, the warranty accrual may increase, resulting in decreased gross
margin.
The
following table sets forth an analysis of our warranty reserve at (in
thousands):
|
|
April
30,
|
|
|
|
2005 |
|
2004 |
|
Warranty
reserve at beginning of period
|
|
$
|
20
|
|
$
|
53
|
|
Less:
Cost to service warranty obligations
|
|
|
(4
|
)
|
|
(33
|
)
|
Plus:
Increases to reserves
|
|
|
4
|
|
|
33
|
|
Total
warranty reserve included in other accrued expenses
|
|
$
|
20
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
The
following is a summary of our agreements that we have determined are within
the
scope of the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 45 “Guarantor's Accounting and Disclosure Requirements for
Guarantees” (“FIN 45”).
Indemnification
Agreements:
We
have
agreed to indemnify each
of
our executive
officers
and directors for certain events or occurrences arising as a result of the
officer or director serving in such capacity. The term of the indemnification
period is for the officer's or director's lifetime. The maximum potential amount
of future payments we could be required to make under these indemnification
agreements is unlimited. However, we have a directors’
and
officers’ liability
insurance policy that should
enable
us to
recover a portion of any future amount paid. As a result of our insurance policy
coverage, we believe the estimated fair value of these indemnification
agreements is minimal and have no liabilities recorded for these agreements
as
of April 30, 2005 and October 31, 2004.
We
enter
into agreements with other companies containing indemnification provisions
in
the ordinary course of business, typically with business partners, contractors,
customers and landlords. Under these provisions, we generally agree to indemnify
and hold harmless the indemnified party for losses suffered or incurred by
the
indemnified party as a result of our activities or, in some cases, as a result
of the indemnified party's activities under the agreement. These indemnification
provisions often relate to representations made by us with regard to our
intellectual property rights. These indemnification provisions generally survive
termination of the underlying agreement. The maximum potential amount of future
payments we could be required to make under these indemnification provisions
is
unlimited. To date, we have not incurred material costs to defend lawsuits
or
settle claims related to these indemnification provisions. As a result, we
believe the estimated fair value of these agreements is minimal. Accordingly,
we
have no
liabilities recorded for these agreements as of April 30, 2005 and October
31,
2004.
Other:
We
are
the secondary guarantor on the lease assignment of our previous headquarters
that expires in 2006. We believe we will not have to make any payments as a
result of this guarantee and thus have not recorded a liability at April 30,
2005.
7.
LOAN TO OFFICER
On
November 6, 1998, we made a loan to one of our officers and stockholders, which
was used by the officer/stockholder to exercise an option to purchase 139,400
shares of our common stock and related taxes. The loan, as amended, was
collateralized by shares of our common stock, bore interest at a rate of 2.48%
per annum, with interest due annually and the entire amount of the principal
was
due on December 14, 2003.
On
October 31, 2002, we determined that it was probable that we would be unable
to
fully recover the balance of the loan on its due date of December 14, 2003.
Accordingly, a valuation allowance of $474,000 was recorded based on the fair
value of the common stock collateralizing the note at October 31, 2002 and
the
amount of the officer's personal assets considered likely to be available to
settle the note in December 2003.
During
the fourth quarter of fiscal 2003, the officer sold 139,400 shares of our common
stock and used the proceeds from the stock sale to repay $362,800 of the loan
from us. As a result of the fiscal 2003 loan payment, we recognized a benefit
in
the fourth quarter of 2003 of $235,000 related to the reversal of the loan
impairment charge taken by us in fiscal 2002. In November 2003, the officer
sold
additional shares of our common stock and used the proceeds to repay the
remaining loan balance in full. As a result, in our first quarter of fiscal
2004
we recorded a benefit of $239,000 resulting from the reversal of the remaining
loan impairment charge.
8.
DEFERRED COMPENSATION
On
January 1, 2005, the Company’s retiring President and Chief Executive Officer
was awarded options to purchase 75,000 shares of the Company’s stock at a price
of $4.00 per share (closing price on December 31, 2004). The fair value of
this
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model and is included as deferred compensation on the balance
sheet. The $120,000 deferred compensation is amortized to general and
administrative expense at the rate of $8,000 per month over the 15 month vesting
period ending March 2006 based on his continued service as a director of the
Company. As of April 30, 2005, $32,000 of the deferred compensation has been
amortized to expense and is included in General and Administrative expense.
9.
PENDING ACQUISITION AND PRIVATE PLACEMENT FINANCING
On
March
28, 2005, the Company entered into an Agreement and Plan of Merger and
Reorganization (the “Merger Agreement”) with PyX Technologies, Inc., a
California corporation (“PyX”). The Merger Agreement provides for PyX to merge
with and into a wholly-owned subsidiary of the Company. At the effective time
of
the merger, each share of issued and outstanding PyX Common Stock will be
converted into the right to receive 0.46 shares of the Company’s Common Stock,
and all outstanding options to acquire PyX Common Stock will be assumed. A
total
of 2,561,050 shares of the Company’s Common Stock will be issued in respect of
outstanding PyX Common Stock. An additional 2,038,950 shares of the Company’s
Common Stock will be issuable upon exercise of assumed stock options for
services of selling shareholders who will become employees of the Company.
A
total of 95% of the Company’s shares issued in connection with the merger will
be subject to a one-year market standoff, such that only 128,053 of such shares
will be freely tradable prior to the first anniversary of the closing date.
The
Company has also agreed to register the option shares on a Form S-8 shortly
following the closing. The option shares are issuable upon exercise of options,
subject to vesting restrictions that do not begin to lapse until February 2006,
except that if an optionee’s employment is terminated without cause or the
optionee resigns for certain specified reasons, the vesting will accelerate
and
the options will become fully vested. The Board of Directors of each of the
Company and PyX have approved the Merger Agreement. The transactions
contemplated by the Merger Agreement are subject to the approval of the
Company’s stockholders, the Company obtaining at least $5.0 million in gross
proceeds from a financing to close in connection with the Merger, the receipt
by
the Company of audited financial statements of PyX and other customary closing
conditions.
On
May 4,
2005, the Company entered into a unit subscription agreement with AIGH
Investment Partners, LLC and other accredited investors providing for the
private placement of shares of the Company’s common stock and warrants to
purchase shares of the Company’s common stock, with gross proceeds to the
Company of $5,150,000. The unit subscription agreement provides that the
investors will invest $5,150,000 for units consisting of one share of the
Company’s common stock and a warrant to purchase 0.5 of a share of the Company’s
common stock concurrent with the close of the above merger agreement. The price
per unit is to be the lowest of:
· $2.50;
· 92%
of
the average closing sale price per share of the Company’s common stock as quoted
on the Nasdaq SmallCap Market for the five preceding consecutive trading days
on
which the Company’s common stock trades ending on the date immediately before
the closing date of the private placement; and
· 95%
of
the closing sale price per share of the Company’s common stock as quoted on The
Nasdaq SmallCap Market on the trading day on which the Company’s common stock
trades immediately preceding the closing date of the private
placement.
The
Company has the right to terminate the unit subscription agreement and not
close
the transaction if the price per unit is less than $2.00.
The
warrants issued in connection with the private placement will have a term of
five years and will be exercisable at a per share price equal to 133% of the
unit price, subject to proportional adjustments for stock splits, stock
dividends, recapitalizations and the like. The warrants will also contain a
cashless exercise feature.
The
Company has agreed to file a registration statement within 60 days after
completion of the private placement registering for resale the shares of our
common stock, including shares issuable upon exercise of the warrants, issued
to
the purchasers in the private placement.
The
Company has capitalized in other assets approximately $254,000 in prepaid costs
related to this transaction.
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Forward
Looking Statements
The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and
uncertainties. Words such as "believes," "anticipates," "expects," "intends"
and
similar expressions are intended to identify forward-looking statements, but
are
not the exclusive means of identifying such statements. Readers are cautioned
that the forward-looking statements reflect our analysis only as of the date
hereof, and we assume no obligation to update these statements. Actual events
or
results may differ materially from the results discussed in or implied by the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those risks and uncertainties set forth under the
caption "Risk Factors" below.
The
following discussion should be read in conjunction with the condensed
consolidated financial statements and the notes thereto included in Item 1
of
this Quarterly Report on Form 10-Q and in our Form 10-K for the fiscal year
ended October 31, 2004.
Risk
Factors
In
addition to the other information in this Quarterly Report on Form 10-Q,
stockholders or prospective investors should carefully consider the following
risk factors:
Risks
Related to Our Business
If
we are unable to complete the PyX merger and the proposed private placement,
our
business will be adversely affected.
If
the
merger with PyX and the private placement are not completed, our business and
the market price of our stock price may be adversely affected. We currently
anticipate that our available cash balances, available borrowings and cash
generated from operations will be sufficient to fund our operations only through
July 2005. If we are unable to complete the transactions, we may be unable
to
find another way to grow our business. Costs related to the transactions, such
as legal, accounting and financial advisor fees, must be paid even if the
transactions are not completed. In addition, even if we have sufficient funds
to
continue to operate our business but the transactions are not completed, the
current market price of our common stock may decline.
We
depend upon a small number of Original Equipment Manufacturers (“OEM”)
customers. The loss of any of these customers, or their failure to sell their
products, could limit our ability to generate revenues. In particular, we expect
HP will cease to be a significant customer of ours in fiscal 2005, and our
success depends on being able to replace net sales previously attributable
to HP
with sales to other customers.
In
the
first two quarters of fiscal 2005 and 2004, sales of Versa Module Europa (“VME”)
products to The Hewlett-Packard Company (“HP”) accounted for 23% and 42%,
respectively, of our net sales. We made our final shipment for $1.0 million
of
our VME products to HP in the first fiscal quarter of fiscal 2005. Our future
success depends on being able to replace net sales previously attributable
to HP
with sales to other customers. We
can
provide no assurance that we will succeed
in obtaining
new orders from existing or new customers
sufficient to replace or
exceed the
net
sales
previously attributable
to HP.
Even
after HP ceases to be a customer, we expect to continue to depend on sales
to a
small number of OEM customers, including Data Connection Limited and Nortel
Networks. Sales to Data Connection Limited and Nortel Networks accounted for
34%
and 20% of our net sales for the quarter ended April 30, 2005, respectively.
There can be no assurance that we will become a qualified supplier with new
OEM
customers or that we will remain a qualified supplier with existing OEM
customers.
Orders
by
our OEM customers are affected by factors such as new product introductions,
product life cycles, inventory levels, manufacturing strategies, contract
awards, competitive conditions and general economic conditions. Our sales to
any
single OEM customer are also subject to significant variability from quarter
to
quarter. Such fluctuations may have a material adverse effect on our operating
results. A significant reduction in orders from any of our OEM customers, could
have a material adverse effect on our operating results, financial condition
and
cash flows.
As
of
April 30, 2005, Data Connection Limited and Nortel Networks individually
accounted for 43% and 23% of our accounts receivable, respectively, and
collectively accounted for 66% of our accounts receivable. A failure to collect
outstanding accounts receivable from any of our OEM customers could have a
material adverse effect on our business, operating results, financial condition
and cash flows.
Our
future capital needs may exceed our ability to raise capital or use our existing
credit line with a bank.
The
development and marketing of our products is capital-intensive. We believe
that
our existing cash balances and our anticipated cash flow from operations and
financing alternatives will satisfy our working capital needs only through
July
2005. [Declines in our sales or a failure to keep expenses in line with revenues
could require us to seek additional financing or force us to draw down on our
existing line of credit with a bank in fiscal 2005. In addition, should we
experience a significant growth in customer orders or wish to make strategic
acquisitions of business or assets, we may be required to seek additional
capital to meet our working capital needs. There can be no assurance that
additional financing, if required, will be available on reasonable terms or
at
all. To the extent that additional capital is raised through the sale of
additional equity or convertible debt securities, the issuance of such
securities could result in additional dilution to our stockholders.] Update
for
current cash situation
Because
of our dependence on single suppliers for some components, we may be unable
to
obtain an adequate supply of such components, or we may be required to pay
higher prices or to purchase components of lesser
quality.
The
chip
sets used in most of our products are currently available only from Motorola.
In
addition, certain other components are currently available only from other
single suppliers. If these suppliers discontinue or upgrade some of the
components used in our products, we could be required to redesign a product
to
incorporate newer or alternative technology. The inability to obtain sufficient
key components as required, or to develop alternative sources if and as required
in the future, could result in delays or reductions in product shipments or
margins that, in turn, would have a material adverse effect on our business,
operating results, financial condition and cash flows. If enough components
are
unavailable, we may have to pay a premium in order to meet customer demand.
Paying premiums for parts, building inventories of scarce parts and obsolesce
of
existing inventories could lower or eliminate our profit margin, reduce our
cash
flow and otherwise harm our business. To offset potential component shortages,
we have in the past, and may in the future, carry an inventory of these
components. As a result, our inventory of components parts may become obsolete
and may result in write-downs.
If
we fail to develop and produce new HighWire, WAN
and LAN Adapters, TOE and Storage products, we may lose sales and our reputation
may be harmed.
The
markets for our products are characterized by rapidly changing technologies,
evolving industry standards and frequent new product introductions. Our future
success will depend on our ability to enhance our existing products and to
introduce new products and features to meet and adapt to changing customer
requirements and emerging technologies such as voice over IP (“VoIP”), third
generation wireless services ("3G Wireless "), Serial ATA (“SATA ”), ,
Internet
Small Computer System Interface
(“iSCSI”)Serial Attached SCSI
(“SAS
”), Gigabit Ethernet, 10 Gigabit Ethernet and TCP/IP Offload Engine (“TOE”).
There can be no assurance that we will be successful in identifying, developing,
manufacturing and marketing new products or enhancing our existing products.
In
addition, there can be no assurance that services, products or technologies
developed by others will not render our products noncompetitive or
obsolete.
We
have
focused a significant portion of our research and development, marketing and
sales efforts on HighWire, wide
area
network
(“WAN”)
and local
area network (“LAN”)
adapters, encryption, iSCSI and TOE products. The success of these products
is
dependent on several factors, including timely completion of new product
designs, achievement of acceptable manufacturing quality and yields,
introduction of competitive products by other companies, market acceptance
of
our products and our ability to sell our products. If the TOE, iSCSI, HighWire,
encryption and adapter products or other new products developed by us do not
gain market acceptance, our business, operating results, financial condition
and
cash flows would be materially adversely affected.
The
communications and storage products market is intensely competitive, and our
failure to compete effectively could reduce our revenues and
margins.
We
compete directly with traditional vendors of terminal servers, modems, remote
control software, terminal emulation software and application-specific
communications and storage solutions. We also compete with suppliers of routers,
hubs, network interface cards and other data communications and storage
products. In the future, we expect competition from companies offering
client/server
access
solutions based on emerging technologies such as switched digital telephone
services, iSCSI, SAS, TOE, VoIP and other technologies. In addition, we may
encounter increased competition from operating system and network operating
system vendors to the extent that such vendors include full communications
and
storage capabilities in their products. We may also encounter future competition
from telephony service providers (such as AT&T or the regional Bell
operating companies) that may offer communications services through their
telephone networks.
Increased
competition with respect to any of our products could result in price reductions
and loss of market share, which would adversely affect our business, operating
results, financial condition and cash flows. Many of our current and potential
competitors have greater financial, marketing, technical and other resources
than we do. There can be no assurance that we will be able to compete
successfully with our existing competitors or will be able to compete
successfully with new competitors.
We
depend on our key personnel. If we are unable to retain our current personnel
and hire additional qualified personnel as needed, our business would be harmed.
We
are
highly dependent on the technical, management, marketing and sales skills of
a
limited number of key employees. We do not have employment agreements with,
or
life insurance on the lives of, any of our key employees. The loss of the
services of any key employees could adversely affect our business and operating
results. Our future success will depend on our ability to continue to attract
and retain highly talented personnel to the extent our business grows.
Competition for qualified personnel in the networking industry, and in the
San
Francisco Bay Area, is intense. There can be no assurance that we will be
successful in retaining our key employees or that we can attract or retain
additional skilled personnel as required.
We
may be unable to protect our intellectual property, which could reduce any
competitive advantage we have.
Although
we believe that our future success will depend primarily on continuing
innovation, sales, marketing and technical expertise, the quality of product
support and customer relations, we must also protect the proprietary technology
contained in our products. We do not currently hold any patents and rely on
a
combination of copyright, trademark, trade secret laws and contractual
provisions to establish and protect proprietary rights in our products. There
can be no assurance that steps taken by us in this regard will be adequate
to
deter misappropriation or independent third-party development of our technology.
Although we believe that our products and technology do not infringe on the
proprietary rights of others, there can be no assurance that third parties
will
not assert infringement claims against us.
Risks
Associated with Ownership of Our Common Stock
The
market price of our common stock is likely to continue to be volatile. You
may
not be able to resell your shares at or above the price at which you purchased
such shares.
The
trading price of our common stock is subject to wide fluctuations in response
to
quarter-to-quarter fluctuations in operating results, the failure to meet
analyst estimates, announcements of technological innovations or new products
by
us or our competitors, general conditions in the computer and communications
industries and other events or factors. In addition, stock markets have
experienced extreme price and trading volume volatility in recent years. This
volatility has had a substantial effect on the market price of the securities
of
many high technology companies for reasons frequently unrelated to the operating
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of our common stock.
Our
certificate of incorporation and bylaws, and the Delaware General Corporation
Law, contain provisions that could delay or prevent a change in
control.
Our
board
of directors has the authority to issue up to 2,000,000 shares of preferred
stock and to determine the price, rights, preferences and privileges of those
shares without any further vote or action by our stockholders. The rights of
the
holders of our common stock will be subject to, and may be materially adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of preferred stock could have the effect of making
it more difficult for a third party to acquire a majority of our outstanding
voting stock. Furthermore, certain other provisions of our certificate of
incorporation and bylaws may have the effect of delaying or preventing changes
in control or management, which could adversely affect the market price of
our
common stock. In addition, we are subject to the provisions of Section 203
of
the Delaware General Corporation Law, an anti-takeover law.
Our
sales and operating results have fluctuated, and are likely to continue to
fluctuate significantly in future periods, which may cause our stock price
to
fall as a result of failure to meet the expectations of securities analysts
or
investors.
Our
quarterly operating results have fluctuated significantly in the past and are
likely to fluctuate significantly in the future due to several factors, some
of
which are outside our control and which we may not be able to predict, including
the existence
or absence
of
significant orders from OEM customers, fluctuating market demand for, and
declines in the average selling prices of, our products, success in achieving
design wins, delays in the introduction of our new products, competitive product
introductions, the mix of products sold, changes in our distribution network,
the failure to anticipate changing customer product requirements, the cost
and
availability of components and general economic conditions. We generally do
not
operate with a significant order backlog, and a substantial portion of our
net
sales
in any
quarter is derived from orders booked in that quarter. Accordingly, our sales
expectations are based almost entirely on our internal estimates of future
demand and not on firm customer orders.
Due
to
the adverse economic conditions in the telecommunications industry, many
of ourTS
customers may hold excess inventory of our products. A result of the economic
downturn is that certain of our customers have cancelled or delayed many of
their new design projects and new product rollouts that included our products.
Due to the current economic uncertainty, our customers now typically require
a
"just-in-time" ordering and delivery cycle where they will place a purchase
order with us after they receive an order from their customer. This
"just-in-time" inventory purchase cycle by our customers has made forecasting
of
our future sales volumes very difficult.
Based
on
the foregoing, we believe that quarterly operating results are likely to vary
significantly in the future and that period-to-period comparisons of our results
of operations are not necessarily meaningful and should not be relied upon
as
indications of future performance. Further, it is likely that in some future
quarter our net
sales
or
operating results will be below the expectations of public market analysts
and
investors. In such event, the price of our common stock is likely to
fall.
Management’s
Discussion and Analysis
Overview
SBE,
Inc.
designs, develops and sells network communications and storage solutions to
original equipment manufacturers (“OEM”) in the embedded computing and storage
markets. Our solutions enable data
communications,
telecommunications
and
storage solution companies, in addition to enterprise class high-end server
customers, to rapidly deliver advanced networking and storage products and
services. Our products include wide area network (“WAN”), local area network
(“LAN”), Internet Small Computer System Interface (“iSCSI”) software, SCSI,
Fibre Channel, intelligent carrier cards, Encryption and TCP/IP Offload Engine
(“TOE”) cards. These products perform critical computing, processing offload,
Input/Output (“I/O”) and storage tasks across both the enterprise server and
embedded markets such as high-end enterprise level servers, Linux super
computing clusters, workstations, media gateways, routers, internet access
devices, home location registers, data messaging applications, network attached
storage (“NAS”) and remote storage devices and networks.
In
January 2004, we partnered with NCOMM, a New Hampshire company, to provide
Call
Control Trunk Management Software for our WAN wireline products. NCOMM delivers
the underpinning drop-in software technology necessary to build interoperable,
standards-compliant WAN access devices: framer configuration, alarming &
fault management, PerfMon, line testing, signaling and Automatic Protection
Switching. The combination of our WAN products and the NCOMM software reduces
our telecommunications customers product time-to-market through turnkey
T1/E1/T3/E3 telecommunications source code.
In
April
2005, we contracted with SignaLogic, a Texas company, to develop a family of
VoIP Digital Signal Protocol (“DSP”) products that will interoperate with our
HighWire and WAN products to provide a high-density cost efficient VoIP gateway
with full media gateway functionality. The VoIP gateway is targeted at
telecommunications, cable and Internet Service Providers (‘ISP”) companies that
provide VoIP services. The first product will be completed in our third
quarter.
We
are
currently developing an IP Post Branch Exchange (“PBX”) software stack. The
software stack will convert analog-based telecommunications signals into packet
based signals to enable VoIP services using our WAN products.
In
May
2004, we partnered with PyX Technologies, a California company, to provide
iSCSI
software products that strategically support our TOE development plans.
Thishigh-value iSCSI storage software stack utilizes our TOE hardware to
facilitate Internet based storage solutions to large, small and medium sized
businesses. iSCSI is an end-to-end protocol for transporting storage I/O block
data over an Internet Protocol (“IP”) network. The protocol is used on servers
(initiators), storage devices (targets), and protocol transfer gateway devices.
iSCSI uses standard Ethernet switches and routers to move the data from the
server to storage. The initiator is typically a host (either a PC, server or
laptop) that is running an iSCSI initiator driver (such as the PyX or Microsoft
iSCSI initiator) that will be accessing storage on the IP Storage Area Network
(“SAN”). The target is any storage device, such as disk drives, raid systems,
CDROM’s, DVD’s, or tapes. On March 28, 2005, we entered into a definitive merger
agreement with PyX pursuant to which PyX will merge with and into a wholly-owned
subsidiary of ours. This merger will allow us to own the intellectual property
imbedded in the PyX iSCSI software product. The merger is subject to the
approval of our stockholders.
Managing
storage is universally regarded as one of the most burdensome of IT
responsibilities. In the direct-attached storage environments that most small
to
mid-sized companies deploy, the process of managing storage is multiplied by
the
number of physical connection points and the number of storage systems in an
organization. Imagine an environment with ten computers, each with its own
storage system. Not only does that create ten point-for-management for the
storage systems themselves, it also requires ten times the effort normally
required in order to handle storage expansion, reallocation and repairs. With
SANs, storage management is consolidated into a single point from which an
IT
manager can partition, allocate, expand, reassign, backup and repair storage.
By
moving to a SAN, small to mid-sized organizations can scale their storage
infrastructure much more easily than with a direct attached storage system.
When
additional capacity is needed, IT managers can simply add additional storage
to
the SAN. IP SANs, such as iSCSI, provide higher-speed storage access than
internal disks while also enabling load balancing across multiple connections.
Remote storage powered by iSCSI also enables on-line data back up, disaster
recover and high-speed access to data by remote users.
The
PyX
iSCSI software uses the port aggregation and port failover features of our
TOE
dual port Gigabit Ethernet card to recover from transmission failures. In
addition, the PyX iSCSI software uses our TOE acceleration feature to obtain
wire transmission speeds of up to two Gigabits per second. The SBE/PyX TOE/iSCSI
product has Error Recovery Level 0 (“ERL0”) through Error Recovery Level 2
(“ERL2”) failure recovery functionality. ERL2 functionality is reached when a
TCP/IP and iSCSI transmission can recover from a breakdown in the initiator,
the
target or the transport medium. When using the PyX ERL2 iSCSI software and
our
TOE hardware, the transmission is re-sent from the point of failure and not
from
the beginning of the transmission, as is the case with other ERL0 iSCSI
products, enabling the user to ensure that all data has been transmitted
successfully.
Our
business is characterized by a concentration of sales to a small number of
OEMs
and distributors, consequently, the timing of significant orders from major
customers and their product cycles causes fluctuations in our operating results.
HP has been the largest of our customers. Sales to HP accounted for 0% and
23%
of our net sales in the three and six months ended April 30, 2005, respectively,
and 36% and 42% for the same periods in fiscal 2004, respectively. We made
our
final shipment to HP in the first fiscal quarter of fiscal 2005. In the second
quarter of fiscal 2005 sales to Nortel Networks and Data Connections Limited
accounted for greater than 10% of net sales for the quarter. Nortel was the
only
customer other than HP that accounted for greater than 10% of our net sales
in
the three or six months ended April 30, 2004. As of April 30, 2005, Data
Connection Limited and Nortel Networks individually accounted for 43% and 18%
of
our accounts receivable, respectively, and collectively accounted for 61% of
our
accounts receivable. HP accounted for 17% of our accounts receivable as of
April
30, 2004 and two other customers each accounted for greater that 10% of our
accounts receivable. No other customer individually accounted for more than
10%
of our accounts receivable as of April 30, 2005 or 2004, respectively. Orders
by
our OEM customers are affected by factors such as new product introductions,
product life cycles, inventory levels, manufacturing strategy, contract awards,
competitive conditions and general economic conditions. A significant reduction
in orders from any of our OEM customers, or a failure to collect outstanding
accounts receivable from any of our OEM customers, could have a material adverse
effect on our business, operating results, financial condition and cash
flows.
Our
products are distributed worldwide through a direct sales force, distributors,
independent manufacturers' representatives and value-added resellers. Our
business falls primarily within one industry segment.
Backlog
On
April
30, 2005, we had a sales backlog of product orders of approximately $1.2 million
compared to a sales backlog of product orders of approximately $4.8 million
one
year ago. None of the April 30, 2005 backlog is related to sales of VME products
to HP, as compared to $2.8 million as of April 30, 2004.
Critical
Accounting Policies and Estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the U.S. requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates and judgments made by us include matters
such as indemnifications obligations, accounts receivable, realizability of
inventories and recoverability of capitalized software and deferred tax assets.
Actual results could differ from those estimates.
Our
critical accounting policies and estimates include the following:
Revenue
Recognition:
Our
policy is to recognize revenues for product sales upon shipment of our products
to our customers, provided that no significant obligation on our part remains
outstanding and collection of the receivable is considered probable. Shipping
terms are generally FOB shipping point. We defer and recognize service revenues
over the contractual period or as services are rendered. We estimate expected
sales returns and record the amount as a reduction of revenue and cost of goods
(“COGS”) at the time of shipment. Our policy complies with the guidance provided
by Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements,
issued
by the Securities and Exchange Commission. Judgments are required in evaluating
the credit worthiness of our customers. Credit is not extended to customers
and
revenue is not recognized until we have determined that collectibility is
reasonably assured. Our sales transactions are denominated in U.S. dollars.
The
software component of our hardware products is considered incidental to our
products. We therefore do not recognize software revenues separately from the
product sale.
Our
agreements with OEMs, such as HP and Nortel Networks, typically incorporate
clauses reflecting the following understandings:
- |
all
prices are fixed and determinable at the time of
sale;
|
- |
title
and risk of loss pass at the time of shipment (FOB shipping
point);
|
- |
collectibility
of the sales price is probable (the OEM is obligated to pay and such
obligation is not contingent on the ultimate sale of the OEM’s integrated
solution);
|
- |
the
OEM’s obligation to us will not be changed in the event of theft or
physical destruction or damage of the
product;
|
- |
we
do not have significant obligations for future performance to directly
assist in the resale of the product by the OEMs;
and
|
- |
there
is no contractual right of return other than for defective
products.
|
Our
agreements with our distributors include certain product rotation and price
protection rights. All distributors have the right to rotate slow moving
products once each fiscal quarter. The maximum dollar value of inventory
eligible for rotation is equal to 25% of our products purchased by the
distributor during the previous quarter. In order to take advantage of their
product rotation rights, the distributors must order and take delivery of
additional SBE products equal to at least the dollar value of the products
that
they want to rotate.
Each
distributor is also allowed certain price protection rights. If, and when,
we
reduce or plan to reduce the price of any of our products, and the distributor
is holding any of the affected products in inventory, we will credit the
distributor the difference in price when it places its next order with us.
We
record an allowance for price protection thereby reducing our net sales and
accounts receivable. The allowance is based on the price difference of the
inventory held by our stocking distributors at the time we expect to reduce
selling prices. Reserves for the right of return and restocking are established
based on the requirements of Statement of Financial Accounting Standards 48,
“Revenue Recognition when Right of Return Exists,” because we have visibility
into our distributor’s inventory and have sufficient history to estimate
returns.
During
the quarter ended April 30, 2005, $79,000, or 5%, of our sales were sold to
distributors as compared to $361,000, or 12%, of our sales in the same quarter
of fiscal 2004. During the six months ended April 30, 2005, $253,000, or 6%,
of
our sales were sold to distributors as compared to $590,000, or 10%, of our
sales in the same period of fiscal 2004.
Allowance
for Doubtful Accounts:
Our
policy is to maintain allowances for estimated losses resulting from the
inability of our customers to make required payments. Credit limits are
established through a process of reviewing the financial history and stability
of each customer. Where appropriate, we obtain credit rating reports and
financial statements of the customer when determining or modifying their credit
limits. We regularly evaluate the collectibility of our trade receivable
balances based on a combination of factors. When a customer’s account balance
becomes past due, we initiate dialogue with the customer to determine the cause.
If it is determined that the customer will be unable to meet its financial
obligation to us, such as in the case of a bankruptcy filing, deterioration
in
the customer’s operating results or financial position or other material events
impacting its business, we record a specific allowance to reduce the related
receivable to the amount we expect to recover.
We
also
record an allowance for all customers based on certain other factors, including
the length of time the receivables are past due and historical collection
experience with customers. We believe our reported allowances are adequate.
If
the financial conditions of those customers were to deteriorate, however,
resulting in their inability to make payments, we may need to record additional
allowances which would result in additional general and administrative expenses
being recorded for the period in which such determination was made.
Warranty
Reserves:
We
accrue
the estimated costs to be incurred in performing warranty services at the time
of revenue recognition and shipment of the products to OEMs. Because there
is no
contractual right of return other than for defective products or stock rotation
rights by certain distributors, we can reasonably estimate such returns and
record a warranty reserve at the point of shipment. Our estimate of costs to
service our warranty obligations is based on historical experience and
expectation of future conditions. To the extent that we experience increased
warranty claim activity or increased costs associated with servicing those
claims, the warranty accrual will increase, resulting in increased COGS and
decreased gross profit margin.
Inventories:
We
are exposed
to a number of economic and industry factors that could result in portions
of
our inventory becoming either obsolete or in excess of anticipated usage. These
factors include, but are not limited to, technological changes in our markets,
our ability to meet changing customer requirements, competitive pressures in
products and prices and the availability of key components from our suppliers.
Our policy is to establish inventory reserves when conditions exist that suggest
that our inventory may be in excess of anticipated demand or is obsolete based
upon our assumptions about future demand for our products and market conditions.
We regularly evaluate our ability to realize the value of our inventory based
on
a combination of factors including the following: historical usage rates,
forecasted sales or usage, product end-of-life dates, estimated current and
future market values and new product introductions. Purchasing practices and
alternative usage avenues are explored within these processes to mitigate
inventory exposure. When recorded, our reserves are intended to reduce the
carrying value of our inventory to its net realizable value. If actual demand
for our products deteriorates, or market conditions are less favorable than
those that we project, additional inventory reserves may be
required.
Inventories
are stated at the lower of cost, using the first-in, first-out method, or market
value.
Deferred
Taxes
We
record
a valuation allowance to reduce our deferred taxes to the amount that is more
likely than not to be realized. Based on the uncertainty of future pre-tax
income, we have fully reserved our deferred tax assets as of each of April
30,
2005 and October 31, 2004. In the event that we were to determine that we would
be able to realize our deferred tax assets in the future, an adjustment to
the
deferred tax asset would increase income in the period such determination was
made.
New
Accounting Pronouncements
In
December 2004, the FASB issued Statement of Financial Accounting S No. 123R,
“Share Based Payments” (“SFAS 123R”), which amends Statement of Financial
Accounting Standard No. 123, “Accounting for Stock-Based Compensation,” and
requires public entities (other than those filing as small business issuers)
to
report stock-based employee compensation in their financial statements. As
modified in April 2004, we will be required to comply with the provisions of
SFAS 123R as of the first interim period for the fiscal year beginning on or
after June 15, 2005. Thus, we will be required to comply with SFAS 123R
beginning with our quarter ending January 31, 2006. We currently do not record
compensation expense related to our stock-based employee compensation plans
in
our financial statements.
Results
of Operations
The
following table sets forth, as a percentage of net sales, our consolidated
statements of operations data for the three and six months ended April 30,
2005
and 2004. These operating results are not necessarily indicative of our
operating results for any future period.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
April
30,
|
|
April
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
sales
|
|
100
|
% |
100
|
% |
100
|
% |
100
|
% |
Cost
of sales
|
|
|
63
|
|
|
48
|
|
|
51
|
|
|
46
|
|
Gross
profit
|
|
|
37
|
|
|
52
|
|
|
49
|
|
|
54
|
|
Product
research and development
|
|
|
34
|
|
|
18
|
|
|
23
|
|
|
18
|
|
Sales
and marketing
|
|
|
33
|
|
|
19
|
|
|
25
|
|
|
18
|
|
General
and administrative
|
|
|
25
|
|
|
13
|
|
|
18
|
|
|
12
|
|
Loan
benefit
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(4
|
)
|
Total
operating expenses
|
|
|
92
|
|
|
50
|
|
|
66
|
|
|
44
|
|
Operating
income (loss)
|
|
|
(55
|
)
|
|
1
|
|
|
(17
|
)
|
|
10
|
|
Interest
income
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Income
tax benefit
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Net
income (loss)
|
|
|
(55
|
)%
|
|
2
|
%
|
|
(17
|
)%
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
Net
sales
for the second quarter of fiscal 2005 were $1.7 million, a 43% decrease from
$3.0 million in the second quarter of fiscal 2004. For the first six months
of
fiscal 2005, net sales were $4.5 million, which represented a 24% decrease
over
net sales of $5.9 million for the same period in fiscal 2004. This decrease
was
primarily attributable to a decline in shipments to HP combined with a decrease
in shipments in our adapter products. This decrease in shipments was partially
offset by an increase in our HighWire business. Sales to HP were $0 and $1.0
million in the three and six months ended April 30, 2005, respectively, compared
to $1.1 million and $2.5 million for the same periods of fiscal 2004,
respectively. Sales
to
HP, primarily of VME products, represented 0% and 23% of total sales for the
three
and
six months ended April 30, 2005 as compared
to 36% and 42% of total sales during the comparable periods in fiscal
2004.
We
shipped our final order of VME products to HP in the first fiscal quarter of
2005 and do not expect sales of VME products to HP to be a substantial portion
of our net sales in the future.
We may
not succeed in
obtaining new orders from existing or new customers sufficient
to replace or
exceed
the net
sales attributable
to HP. Data
Connection Limited represented 34% and 22% and Nortel Networks represented
20%
and 16% of our net sales for the three months and six months ended April 30,
2005, respectively. Nortel Networks was our only customer other than HP that
individually accounted
for over 10% of our sales in the three-month period ended April 30,
2004.
Sales
of
our adapter products were $812,000 and $1.7 million for the three and six months
ended April 30, 2005, respectively, as compared to $1.5 million and $2.8 million
for the same periods in fiscal 2004, respectively. Sales of our HighWire
products were $707,000 and $1.3 million for the three and six months ended
April
30, 2005, respectively, as compared to $323,000 and $476,000 for the same
periods in fiscal 2004, respectively. Our adapter products are used primarily
in
edge-of-the-network applications such as Virtual Private Network (“VPN”) and
other routers, VoIP gateways and security devices. Our HighWire products are
primarily targeted at core-of-the-network applications used primarily by
telecommunications central offices and VoIP providers. The Gigabit Ethernet
and
other adapter products we acquired in the Antares acquisition are used primarily
in enterprise applications such as high-end servers and storage arrays using
both Solaris and Linux software. In
the
next few years, if the acquisition of PyX is finalized, we expect our net sales
will be generated primarily
by sales
of our iSCSI storage software products, followed by sales of our VoIP/HighWire
products and our adapter products with Linux software. Although we expect to
see
sales growth in our iSCSI
products as these products gain market acceptance, there can be no assurance
that such an increase or adoption will occur. We
expect
to see continued slowness in the sale of our adapter products, but are
encouraged by the acceptance of our HighWire products and expect to see
continued grow in these high margin products. In addition, we will continue
to
sell and support our older VME products, but expect them to decline
significantly as the OEM products in which they are embedded are phased
out.
The
communications market continues to be slow in recovering economically and,
due
to the continuing economic uncertainty, our customers typically require a
"just-in-time" ordering and delivery cycle where they will place a purchase
order with us after they receive an order from their customer. This
"just-in-time" inventory purchase cycle by our customers has made forecasting
of
our future sales volumes very difficult. Because our sales are generally
concentrated among a small group of OEM customers, we could experience
significant fluctuations in our quarterly sales volumes due to fluctuating
demand from any major customer or delay in the rollout of any significant new
product by a major customer.
Gross
Margin
Gross
margin as a percentage of sales in the second quarter of fiscal 2005 was 37%
as
compared to 52% for the second quarter of fiscal 2004. For the first six months
of fiscal 2005, our gross margin was 49% as compared to 54% for the same period
in fiscal 2004. The decrease in the gross margin is due primarily to the product
mix of our sales. In the quarter ended April 30, 2005, we had no sales to HP
as
compared to net sales of $1.1 million in the same quarter of fiscal 2004 and
in
the six months ended April 30, 2005, we had net sales of $1.0 million to HP
as
compared to $2.5 million in the same period last year. The gross margin on
the
HP sales was approximately 70% as compared to the average gross margin on
HighWire and adapter products of mid-50%. We
expect
our gross margin to range between 47% and 49% for fiscal 2005. However, if
market and economic conditions, particularly in the telecommunications sector,
continue to deteriorate or fail to recover, our gross margin may be lower than
expected.
Product
Research and Development
Product
research and development expenses for the three and six month periods ended
April 30, 2005 were $573,000 and $1.1 million, respectively, a slight increase
from $543,000 for each of the comparable three month period in fiscal 2004
and
no change from the comparable six month period. The increase resulted primarily
from engineering staffing increases to work on PyX software products. We remain
committed to the development and enhancement of new and existing products and
anticipate increasing our spending over the course of fiscal 2005 to capitalize
on new products. We did not capitalize any internal software development costs
in the six month period ended April 30, 2005.
Sales
and Marketing
Sales
and
marketing expenses for the three and six month periods ended April 30, 2005
were
$567,000 and $1.1 million, respectively, virtually unchanged from $564,000
and
$1.1 million for the same periods in fiscal 2004. We expect our sales and
marketing expenses to increase over the remainder of fiscal 2005 as we continue
to accelerate our product marketing efforts and attend an increasing number
of
industry-specific trade shows, especially for the iSCSI and VoIP
products.
General
and Administrative
General
and administrative expenses for the three and six months periods ended April
30,
2005 were $426,000 and $795,000, respectively, an increase from $400,000 and
$764,000 for the same periods in fiscal 2004. The increase in our general and
administrative expense was primarily due to our compliance efforts related
to
Section 404 of the Sarbanes-Oxley Act of 2002. General and administrative
expenses are expected to remain flat for the remainder of fiscal 2005.
Loan
Reserve Benefit
On
November 6, 1998, we made a loan to our former president and chief executive
offer, who retired as of December 31, 2004, which was used by him to exercise
an
option to purchase 139,400 shares of our common stock and pay related taxes.
The
loan, as amended, was collateralized by shares of our common stock, bore
interest at a rate of 2.48% per annum and was due on December 14,
2003.
On
October 31, 2002, we determined that it was probable that we would be unable
to
fully recover the balance of the loan on its due date of December 14, 2003.
Accordingly, a valuation allowance of $474,000 was recorded against the loan
at
October 31, 2002.
During
the fourth quarter of fiscal 2003, the officer repaid $362,800 of the loan
and,
as a result, we recognized a benefit of $235,000 related to the reversal of
the
loan impairment charge taken by us in fiscal 2002. During the first quarter
of
fiscal 2004, the officer repaid the remaining loan balance in full and, as
a
result, we recorded a benefit of $239,000 relating to the reversal of the
remaining loan impairment charge.
Net
Income (Loss)
As
a
result of the factors discussed above, we recorded net losses of $936,000 and
$760,000 in the three and six month periods ended April 30, 2005, as compared
to
net income of $54,000 and $581,000 for the same periods in fiscal
2004.
Off-Balance
Sheet Arrangements
We
do not
have any transactions, arrangements, or other relationships with unconsolidated
entities that are reasonably likely to affect our liquidity or capital
resources. We have no special purpose or limited purpose entities that provide
off-balance sheet financing, liquidity, or market or credit risk support. We
also do not engage in leasing, hedging, research and development services,
or
other relationships that could expose us to liability that is not reflected
on
the face of the financial statements.
Liquidity
and Capital Resources
Our
liquidity is dependent on many factors, including sales volume, operating profit
and the efficiency of asset use and turnover. Our future liquidity will be
affected by, among other things:
- |
actual
versus anticipated increase in sales of our
products;
|
- |
ongoing
cost control actions and expenses, including, for example, research
and
development and capital
expenditures;
|
- |
timing
of product shipments, which occur primarily during the last month
of the
quarter;
|
- |
our
gross profit margin;
|
- |
our
ability to raise additional capital, if necessary;
and
|
- |
our
ability to secure credit facilities, if
necessary.
|
At
April
30, 2005, we had cash and cash equivalents of $1.2 million, as compared to
$1.8
million at October 31, 2004. In the first six months of fiscal 2005, $542,000
of
cash was used in operating activities, primarily as a result of our net loss
and
an
increase in our other assets and a decrease in our accrued liabilities,
partially offset by a decrease in inventory and accounts receivable. The
decrease in accounts payable is related to payments to our contract
manufacturers for finished goods inventory received at the end of October 2004.
The decrease in inventory is due to the shipment of VME products to HP in
January 2005 with an inventory cost of approximately $300,000 that was held
as
inventory at October 31, 2004. Working
capital, comprised of our current assets less our current liabilities, at April
30, 2005 was $3.2 million, as compared to $3.9 million at October 31,
2004.
In
the
first six months of fiscal 2005, we purchased $70,000 of fixed assets,
consisting primarily of computer and engineering equipment, and $120,000 in
software, primarily for engineering and product design activities and payments
related to the contract to design our VoIP products. Capital expenditures for
each of the remaining quarters of fiscal 2005 are expected to range from $25,000
to $100,000 per quarter.
We
received $104,000 in the first six months of fiscal 2005 from payments related
to common stock purchases made by employees pursuant to our employee stock
purchase plan and the exercise of employee stock options.
We
have a
working capital line of credit with a Bank that has an annual renewal date
of
May 14. The credit line is secured by a first lien on all our assets and carries
a floating annual interest rate equal to the bank's prime rate, plus 1.50%.
Draw-downs on the credit line are based on a formula equal to 80% of our
domestic accounts receivable. We have not drawn down on this line of credit
and
have no amounts payable at April 30, 2005.
Our
projected quarterly cash flow break-even point is approximately $3.0 million
to
$3.1 million in net sales if gross margin is 47% to 49%. Our projected sales
are
to a limited number of new and existing OEM customers and are based on internal
and customer-provided estimates of future demand, not firm customer orders.
If
our projected sales do not materialize, we may need to reduce expenses and
raise
additional capital through customer prepayments or the issuance of debt or
equity securities. If additional funds are raised through the issuance of
preferred stock or debt, these securities could have rights, privileges or
preferences senior to those of common stock, and debt covenants could impose
restrictions on our operations. The sale of equity or debt could result in
additional dilution to current stockholders, and such financing may not be
available to us on acceptable terms, if at all.
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
Our
cash
and cash equivalents are subject to interest rate risk. We invest primarily
on a
short-term basis, maturity of less than three months. Our financial instrument
holdings at April 30, 2005 were analyzed to determine their sensitivity to
interest rate changes. The fair values of these instruments were determined
by
net present values. In our sensitivity analysis, the same change in interest
rate was used for all maturities and all other factors were held constant.
If
interest rates increased by 10%, the expected effect on net income related
to
our financial instruments would be immaterial. We hold no assets or liabilities
denominated in a foreign currency. Since October 31, 2004, there has been no
change in our exposure to market risk.
Item
4. Controls
and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
An
evaluation as of April 30, 2005 was carried out under the supervision of and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the
design and operation of the Company's "disclosure controls and procedures,"
which are defined under Securities and Exchange Commission rules as controls
and
other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files under the
Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,
summarized and reported within required time periods. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were
effective.
(b)
Changes in Internal Controls over Financial Reporting
The
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated any changes in the company's internal control
over financial reporting that occurred during the quarter ended April 30, 2005,
and has concluded that there was no change during such quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART
II. Other
Information
Item
4. Submission
of Matters to a Vote of Security Holders
(a) |
The
annual meeting of stockholders was held on Tuesday, March 22, 2005,
at
our corporate offices located at 2305 Camino Ramon, Suite 200, San
Ramon,
California.
|
The
stockholders approved the following two items:
|
(i) |
The
election of two directors to hold office until the 2008 Annual Meeting
of Stockholders:
|
|
|
For
|
|
Withhold
|
|
Ronald
Ritchie
|
|
|
4,995,934
|
|
|
4,843
|
|
|
|
|
|
|
|
|
|
Daniel
Grey
|
|
|
4,995,405
|
|
|
5,372
|
|
|
|
|
|
|
|
|
|
|
(ii) |
The
ratification of the selection of BDO Seidman LLP as our independent
auditors
for the fiscal year ending October 31, 2005.
|
For
|
|
Against
|
|
Abstain
|
|
4,996,990
|
|
|
1,767
|
|
|
2,020
|
|
|
|
|
|
|
|
|
|
Item
6. Exhibits
Exhibit
Number
|
|
Description
|
|
|
|
2.1
(1)
|
|
Asset
Purchase Agreement dated August 8, 2003, by and between D.R. Barthol
&
Company and SBE, Inc.
|
3.1(2)
|
|
Certificate
of Incorporation, as amended through December 15, 1997.
|
3.2(3)
|
|
Bylaws,
as amended through December 8, 1998.
|
10.1(4)*
|
|
1996
Stock Option Plan, as amended.
|
10.2(4)*
|
|
1991
Non-Employee Directors' Stock Option Plan, as amended.
|
10.3(4)
|
|
1992
Employee Stock Purchase Plan, as amended.
|
10.4(4)
|
|
1998
Non-Officer Stock Option Plan as amended.
|
10.5(5)
|
|
Lease
for 4550 Norris Canyon Road, San Ramon, California dated November
2, 1992
between the Company and PacTel Properties.
|
10.6(6)
|
|
Amendment
dated June 6, 1995 to lease for 4550 Norris Canyon Road, San Ramon,
California, between the Company and CalProp L.P. (assignee of PacTel
Properties).
|
10.7(4)*
|
|
Full
Recourse Promissory Note executed by William B. Heye, Jr. in favor
of the
Company dated November 6, 1998, as amended and restated on December
14,
2001.
|
10.8(4)+
|
|
Letter
Agreement, dated October 30, 2001, amending (i) Amendment No. S/M
018-4
dated April 3, 2001, and (ii) Purchase Agreement dated May 6, 1991,
each
between SBE, Inc. and Compaq Computer Corporation
|
10.9(7)
|
|
Stock
subscription
agreement and warrant to purchase111,111 of SBE, Inc. Common Stock
dated
April 30, 2002 between SBE, Inc. and Stonestreet Limited
Partnership.
|
10.10(8)
|
|
Amendment
dated August 22, 2002 to stock subscription agreement dated April
20, 2002
between SBE, Inc. and Stonestreet LP.
|
10.11(9)
|
|
Securities
Purchase Agreement, dated July 27, 2003, between SBE, Inc. and
purchasers
of SBE’s common stock thereunder, including form of warrant issued
thereunder
|
10.12(9)
|
|
Form
of warrant issued to associates of Puglisi & Co. ($1.50 exercise
price)
|
10.13(9)
|
|
Form
of warrant issued to associates of Puglisi & Co. ($1.75 and $2.00
exercise price)
|
31.1
|
|
Certification
of Chief Executive Officer
|
31.2
|
|
Certification
of Chief Financial Officer
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
*
|
Indicates
management contract or compensation plans or arrangements filed
pursuant
to Item 601(b)(10) of Regulation SK.
|
+
|
Certain
confidential information has been deleted from this exhibit pursuant
to a
confidential treatment order that has been granted.
|
(1)
|
Filed
as an exhibit to Current Report on Form 8-K, dated April 30, 2002
and
incorporated herein by reference.
|
(2)
|
Filed
as an exhibit to Annual Report on Form 10-K for the year ended
October 31,
1997 and incorporated herein by reference.
|
(3)
|
Filed
as an exhibit to Annual Report on Form 10-K for the year ended
October 31,
1998 and incorporated herein by reference.
|
(4)
|
Filed
as an exhibit to Annual Report on Form 10-K for the year ended
October 31,
2002 and incorporated herein by reference.
|
(5)
|
Filed
as an exhibit to Annual Report on Form 10-K for the year ended
October 31,
1993 and incorporated herein by reference.
|
(6)
|
Filed
as an exhibit to Annual Report on Form 10-K for the year ended
October 31,
1995 and incorporated herein by reference.
|
(7)
|
Filed
as an exhibit to Registration Statement on Form S-3 dated May 23,
2002 and
incorporated herein by reference.
|
(8)
|
Filed
as an exhibit to Quarterly Report on Form 10-Q for the quarter
ended July
31, 2002 and incorporated herein by reference.
|
(9)
|
Filed
as an exhibit to Registration Statement on Form S-3 dated July
11, 2003
and incorporated herein by
reference.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized, on June 2, 2005.
|
|
|
|
SBE,
INC.
Registrant
|
|
|
|
Date: June
2, 2005 |
By: |
/s/ Daniel
Grey |
|
|
|
Daniel
Grey
Chief Executive Officer and President
(Principal Executive
Officer)
|
|
|
|
|
|
|
Date: June
2, 2005 |
By: |
/s/ David
W. Brunton |
|
|
|
David
W. Brunton
Chief Financial Officer, Vice President, Finance
and Secretary
(Principal Financial and Accounting
Officer)
|