UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 7, 2003
SBE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 0-8419 94-1517641
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Identification No.)
2305 Camino Ramon, Suite 200
San Ramon, CA 94583
(Address of principal executive offices, including zip code)
(925) 355-2000
(Registrant's telephone number, including area code)
INFORMATION TO BE INCLUDED IN THE REPORT
This Form 8-K/A amends the Form 8-K filed by SBE, Inc. (the "Company") on August
14, 2003, by providing the historical and pro forma financial information
required by Item 7 to Form 8-K, pursuant to paragraph (a) (4) thereof, in
connection with the acquisition of certain assets of Antares Microsystems, Inc.,
a California corporation.
ITEM 7 FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBIT
(a) Financial Statements of the Business Acquired
Audited financial statements of Antares Microsystems, Inc., a
California corporation, including Balance Sheets as of June 30, 2003
and June 30, 2002, Statements of Operations for the year ended June 30,
2003 (Successor), the period from April 1, 2002 (Commencement of
Operations) through June 30, 2002 (Successor) and the period June 1,
2001 through March 31, 2002. (Predecessor).
(b) Pro Forma Financial Information
The following pro forma consolidated financial information of SBE, Inc.
is provided herein:
Description of the transaction;
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of July 31,
2003.
Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the Nine Months Ended July 31, 2003 and the for the Year Ended October
31, 2002.
(c) Exhibits
Exhibit No. Description
----------- -----------
2.1* Asset Purchase Agreement dated August 8, 2003, by and between D.R.
Barthol & Company and SBE, Inc.
99.1* Press Release of SBE, Inc. dated August 11, 2003.
* Filed as an exhibit to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 14, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
SBE, INC.
Date: October 20, 2003 /s/ David Brunton
------------------------------------
David Brunton
Chief Financial Officer, Vice
President, Finance and Secretary
Antares Microsystems, Inc.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants 2
Balance Sheets 3
Statements of Operations 4
Statements of Changes in Stockholders' (Deficit) Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7 - 16
1
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors
Antares Microsystems, Inc.
Campbell, California
We have audited the accompanying balance sheets of Antares Microsystems, Inc. as
of June 30, 2003 and 2002 and the related statements of operations,
stockholders' deficit, and cash flows for the year ended June 30, 2003, the
three month period from April 1, 2002 to June 30, 2002 and the nine month
"Carve-out period" from July 1, 2001 to March 31, 2002 as described in Note 1 of
Notes to Financial Statements - The Company and Basis of Presentation. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As more fully described in Note 1 to the financial statements, on August 7,
2003, the Company Assigned for the Benefit of Creditors its assets to a third
party trustee who sold substantially all of these assets on August 7, 2003.
Consequently, the Company has ceased its operations, and intends to liquidate
and dissolve as soon as practicable.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of Antares
Microsystems, Inc. at June 30, 2003 and 2002, and the results of operations and
cash flows for the periods from July 1, 2002 to June 30, 2003, the three months
from April 1, 2002 to June 30, 2002 and the nine-month "Carve-out period" from
July 1, 2001 to March 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO Seidman, LLP
San Francisco, California
September 17, 2003
2
ANTARES MICROSYSTEMS INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
June 30 2003 2002
-------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Trade accounts receivable, net of allowance for doubtful
accounts of $8,000 and $14,000 at June 30, 2003 and 2002 $ 293 $ 645
Inventories 97 322
Other 20 95
Total current assets 410 1,062
Property and equipment, net 124 329
In process research and development 275 138
Other 17 --
------- -------
Total assets $ 826 $ 1,529
======= =======
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUTY
Current liabilities:
Bank overdraft $ 55 $ 20
Line of credit 227 --
Trade accounts payable 363 470
Due to officers 574 31
Due to other related parties 568 389
Accrued payroll and employee benefits 203 65
Other accrued expenses 77 28
Deferred revenue 7 6
Notes payable 475 483
------- -------
Total current liabilities 2,549 1,492
Commitments and contingencies (Notes 8, 9 and 10)
Stockholders' (deficit) equity:
Common stock ($0.01 par value);
authorized 100,000,000 shares; issued
4,650,000 shares at June 30, 2003 and 2002
47 47
Additional paid in capital 92 93
Accumulated deficit (1,862) (103)
------- -------
Total stockholders' (deficit) equity (1,723) 37
------- -------
Total liabilities and stockholders' (deficit) equity $ 826 $ 1,529
======= =======
The accompanying notes are an integral part of these financial statements.
3
ANTARES MICROSYSTEMS INC.
STATEMENTS OF OPERATIONS
(in thousands)
Period from
April 1, 2002 Period from
(Commencement of July 1, 2001
Year Ended Operations) through through
June 30, 2003 June 30, 2002 March 31, 2002
(Successor) (Successor) (Predecessor)
------- ------- -------
Net sales $ 2,068 $ 901 $ 2,903
Cost of sales 1,095 407 1,528
------- ------- -------
Gross profit 973 494 1,375
------- ------- -------
Product research and development 803 234 221
Sales and marketing 436 111 182
General and administrative 1,340 250 998
------- ------- -------
Total operating expenses 2,579 595 1,401
Operating loss (1,606) (101) (26)
------- ------- -------
Interest expense 152 2 --
------- ------- -------
Loss before income taxes (1,758) (103) (26)
Provision for income taxes (1) -- (1)
------- ------- -------
Net loss $(1,759) $ (103) $ (27)
======= ======= =======
The accompanying notes are an integral part of these financial statements.
4
ANTARES MICROSYSTEMS INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
The accompanying notes are an integral part of these financial statements.
(in thousands, except shares)
PERIOD FROM JULY 1, 2001 THROUGH MARCH 31, 2002 (PREDECESSOR)
Division
Deficit
------------
Balance, July 1, 2001 $ (1,709)
Net loss for the period (27)
------------
Balance, March 31, 2002 $ (1,736)
============
PERIOD FROM APRIL 1, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH JUNE 30, 2003
(SUCESSOR)
Common Stock and Additional
------------------------ Paid-in Accumulated
Shares Amount Capital deficit Total
---------- ---------- ---------- ---------- ----------
April 1, 2002 (Commencement of Operations) -- $ -- -- $ -- $ --
Issuance of common stock to founders 4,650,000 47 93 -- 140
Net loss for the period -- -- -- (103) (103)
---------- ---------- ---------- ---------- ----------
Balance, June 30, 2002 4,650,000 $ 47 $ 93 $ (103) 37
Stock issued in connection with stock option plan 9,000 -- 1 -- 1
Repurchase of common stock (9,000) -- (2) -- (2)
Net loss -- -- -- (1,759) (1,759)
---------- ---------- ---------- ---------- ----------
Balance, June 30, 2003 4,650,000 $ 47 $ 92 $ (1,862) $ (1,723)
========= ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
5
ANTARES MICROSYSTEMS INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Period from
April 1, 2002
(Commencement of Period from
Operations) July 1, 2001
Year Ended through through
June 30, 2003 June 30, 2002 March 31, 2002
(Successor) (Successor) (Predecessor)
------- ------- -------
Cash flows from operating activities:
Net loss for the period $(1,759) $ (103) $ (27)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 95 24 105
Impairment loss on fixed assets 132 -- --
Changes in operating assets and liabilities:
Trade accounts receivable 352 (645) --
Inventories 404 67 --
Other assets 58 (95) --
Trade accounts payable (107) 470 --
Deferred revenue 1 6
Other liabilities 187 93 --
------- ------- -------
Net cash (used in) provided by operating
activities (637) (183) 78
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment (22) (3) (7)
Purchases of in process research and development (137) (138) --
------- ------- -------
Net cash used in investing activities (159) (141) (7)
------- ------- -------
Cash flows from financing activities:
Checks issued against future deposits 35 20 --
Payment of borrowings from shareholders (30) -- --
Advances from shareholders 573 31 --
Proceeds from notes payable -- 145 --
Principal payments on notes payable (8) (12) --
Net borrowings on line of credit 227 -- --
Payments for repurchase of common stock (2) -- --
Proceeds from issuance of common stock and exercise of stock
options 1 140 --
------- ------- -------
Net cash provided by financing activities 796 324 --
------- ------- -------
Net assets and liabilities not acquired or assumed by Antares -- -- (114)
Net decrease in cash and cash equivalents -- -- (43)
Cash and cash equivalents at beginning of period -- -- 43
------- ------- -------
Cash and cash equivalents at end of period $ -- $ -- $ --
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest: $ 126 $ 2 $ --
Cash paid for income taxes
Non-cash activities: $ 1 $ 1 $ --
Inventory purchased from related party in exchange for unpaid accruals $ 179 $ 389 $ --
Property and equipment purchased in exchange for a note payable $ -- $ 350 $ --
The accompanying notes are an integral part of these financial statements.
6
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
The Company and Basis of Presentation
Antares Microsystems, Inc. (the "Company" or "Successor" or "Antares"), a
California Corporation was incorporated in March of 2002. The Company purchased
selected assets of the Antares division of InClose Design, Inc. (the
"Predecessor" or "InClose"), a California corporation, in exchange for a
Promissory Note on March 31, 2002 and began operations on April 1, 2002. The
Company is an independent full-line supplier of high-end enterprise networking
hardware, ranging from simple parallel ports to quadruple Ethernet controllers.
The Company primarily sells it products to manufacturers and distributors in the
high-end server market. The Company's business falls primarily within one
industry segment. The accompanying financial statements reflect the "carve out"
results of operations and cash flows of the Predecessor for the nine-month
period from July 1, 2001 through March 31, 2002 and the results of operations,
cash flows and changes in stockholders' deficit of the Company for the
three-month period from April 1, 2002 to June 30, 2002 and the year-ended July
1, 2002 to June 30, 2003. In connections with the sale of substantially all
assets and the assumption of certain liabilities of the Company, as described
below, the Company ceased its operations and intends to liquidate and dissolve
as soon as practicable. The financial statements of the Company reflect the
approximate liquidation value of the Company at June 30, 2003.
Sale of Substantially All Assets of the Company
On August 7, 2003 the Company entered into an Assignment for the Benefit of
Creditors with D. R. Barthol & Company ("Barthol") whereby the Company granted,
assigned and conveyed to Barthol, in trust, for the benefit of the Company's
creditors, all of the Company's property. Barthol was authorized a) to convert
assigned property into money with all reasonable diligence and to pay to the
Company's creditors, pro rata, the proceeds from such sale or disposition, after
deducting any costs incurred to discharge any lien on such property and b) to
appoint and compensate such agents and other professionals as deemed necessary.
Barthol was also entitled to a reasonable fee and payment of expenses, including
legal expenses.
On August 7, 2003, Barthol, solely as Assignee for the Benefit of Creditors of
Antares, entered into an Asset Purchase Agreement with SBE, Inc. ("SBE") whereby
SBE purchased substantially all of the assets of the Company for $75,000. After
consummation of the asset purchase by SBE, six of the Company's employees joined
SBE, Inc. while the remaining employees were terminated and the Company ceased
operations. It is contemplated that Barthol will liquidate the remaining assets
of the Company and undertake its winding down. The winding down will include
distribution of the net proceeds from the liquidation of assets, after payment
of fees and costs associated with the liquidation and winding down, to the
Company's creditors.
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. Such estimates include levels of reserves for
doubtful accounts, obsolete inventory, warranty costs and deferred tax assets.
Actual results could differ from those estimates.
7
Fair Value of Financial Instruments
The fair value of the Company's 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
The Company considers all highly liquid investments readily convertible into
cash with an original maturity of three months or less upon acquisition to be
cash equivalents.
Accounts Receivable
(i) Accounts receivable are customer obligations due under normal trade terms.
Management reviews accounts receivable on a monthly basis for collectibility.
The Company establishes an allowance for doubtful accounts when it determines
accounts receivable balances are uncollectible.
Inventories
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market value. Inventories include high-technology parts that may be
subject to rapid technological obsolescence. The Company considers technological
obsolescence in estimating required reserves to reduce recorded amounts to
market values. Such estimates could change in the future and may have a material
adverse impact on the Company's financial position and results of operations.
Property and Equipment
Property and equipment are carried at cost. The Company records depreciation
charges over the assets' estimated useful lives of three to five years, on a
straight-line basis. 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.
Impairment of Long-Lived Assets
(ii) In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment of Disposal of Long-Lived Assets," the
Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when the sum of the
undiscounted future net cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount. During the year
ended June 30, 2003, as a result of current and expected future negative net
operating cash flows, the Company recorded a $132,000 impairment loss relating
to the recoverability of certain property and equipment (see Note 4.)
Revenue Recognition and Warranty Costs
8
The Company records product sales at the time of product shipment provided that
it has received a customer-executed purchase order, the price is fixed, title
and risk of loss have transferred to the customer, collection of the resulting
receivable is reasonably assured, and there are no significant remaining
obligations. The Company offers limited price protection and stock rotation
rights to certain distributors. Accordingly, it establishes reserves based on
individual distributor incentive programs. The Company's sales transactions are
negotiated in U.S. dollars.
The Company also provides a reserve for estimated warranty costs, which have not
been significant, at the time of sale based on historical experience and
expectations of future conditions, and periodically adjusts such amount to
reflect actual expenses.
Shipping and Handling Costs
(iii) The Company records shipping and handling fees billed to customers as
revenue. Costs associated with shipping and handling activities are comprised of
outbound freight and associated direct labor costs, and are recorded in cost of
sales.
Product Research and Development Expenditures
Product research and development ("R&D") expenditures are charged to expense as
incurred.
Advertising Costs
(iv) The Company expenses advertising costs as incurred. For the years ended
June 30, 2003 and 2002, the Company incurred advertising costs of $42,000 and
$100,000 respectively, which are included in sales and marketing expenses in the
statement of operations.
Income Taxes
(v)
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 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. The Company records valuation allowances
against net deferred tax assets where, in the Company's 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.
Stock-Based Compensation
The Company follows the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", which requires pro forma disclosure of net income and
earnings per share as if the SFAS No. 123 fair value method had been applied.
The Company continues to apply the provisions of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," for the
preparation of its basic financial statements.
Under APB No. 25, expense for employee and director stock option grants is
recognized if the market price of the Company's common stock exceeds the
exercise price of the option on the date on which both the number of shares and
individual is entitled to receive and the exercise prices are known. This
measurement is referred to as the intrinsic value of an award.
9
The Company granted certain employees of the Company options to purchase 512,000
and 467,000 shares of Antares common stock during the years ended June 30, 2003
and 2002, respectively. The market price of the Company's common stock did not
exceed the exercise price of the option on the date the options were awarded;
therefore, the Company did not record any intrinsic value. The fair value for
these options were estimated a the date of grant using a Black-Scholes
option-pricing model with the following weighted-average assumptions:
2003 2002
Risk free interest rate 2.32% 4.01%
Expected dividend yield 0.00% 0.00%
Expected stock volatility 0.00% 0.00%
Expected life of options 5.0 years 5.0 years
For purposes of pro forma disclosure, the estimated fair values of the options
are amortized to expense over the options' vesting period.
The following table represents the effect on net loss if the Company had applied
the fair value based method and recognition provisions of SFAS No. 123 (in
thousands):
June 30, 2003 2002
--------------------------------------------------------------------------
Net loss, as reported $(1,759) $ (130)
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (2) --
--------------------------------------------------------------------------
Pro forma net loss $(1,761) $ (130)
--------------------------------------------------------------------------
Recent Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets." The adoption of
SFAS No. 144 on July 1, 2002 did not have a material impact on the Company's
financial position or results of operations. The Company performed an impairment
analysis of fixed assets at June 30, 2003, resulting in a write down of the net
book value of $132,000. (See Note 4).
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", an amendment of SFAS No. 123.
Although SFAS No 148 does not require use of fair value method of accounting for
stock-based employee compensation, it does provide alternative methods of
transition. It also amends the disclosure provisions of SFAS No. 123, to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in financial statements. The
Company has adopted the disclosure requirements of this standard in the
accompanying financial statements.
10
In November 2002, the FASB issued Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). The interpretation elaborates on
the existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at the time
a company issues a guarantee, the company must recognize an initial liability
for the fair value, or market value, of the obligations it assumes under the
guarantee and must disclose that information in its interim and annual financial
statements. The provisions related to recognizing a liability at inception of
the guarantee for the fair value of the guarantor's obligations do not apply to
product warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure provisions
are effective for financial statements for annual or interim periods ending
after December 15, 2002. The Company has adopted the disclosure requirements of
this standard in the accompanying financial statements.
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46), which requires the consolidation of
certain variable interest entities. FIN 46 is applicable to financial statements
issued after 2002, however, disclosures are required currently if the Company
expects to consolidate any variable interest entities. There are no entities
that will be consolidated with the Company's financial statements as a result of
FIN 46.
2. Business Acquisition
As described in Note 1, on April 1, 2002, the Company acquired certain assets of
InClose, Inc. in exchange for a $350,000 promissory note. (see Note 10.) The
acquisition has been accounted for under the purchase method of accounting in
accordance with SFAS No. 141, "Business Combinations." Under the purchase method
of accounting, the total purchase price is allocated to the tangible and
intangible assets acquired and the liabilities assumed based on their estimated
fair values. The excess of the purchase price over those fair values is recorded
as goodwill. The fair values assigned to the tangible and intangible assets
acquired and liabilities assumed are based on estimates and assumptions provided
by management, and other information compiled by management. The $350,000
purchase price was entirely allocated to fixed assets.
3. Inventories
Inventories at June 30, 2003 and 2002 comprise the following (in thousands):
2003 2002
-----------------------------------------------------------------------
Parts and materials $ 68 $ 157
Work in process 8 117
Finished goods 21 48
------------------ ------------------
Total inventory $ 97 $ 322
================== ==================
11
4. Property and Equipment
Property and equipment at June 30, 2003 and 2002 is comprised of the following
(in thousands):
2003 2002
---------------------------------------------------------------------------
Machinery and equipment $ 113 $ 155
Furniture and fixtures 1 57
Office equipment 88 141
------------------ ------------------
202 353
Less accumulated depreciation
and amortization (78) (24)
------------------ ------------------
$ 124 $ 329
================== ==================
Depreciation and amortization expense totaled $95,000 and $129,000 for the years
ended June 30, 2003 and 2002, respectively. Based on an impairment analysis
performed by the company, the Company recorded an impairment loss of $132,000
during the year ended June 30, 2003. This impairment loss is included in general
and administrative expenses on the statement of operations.
5. In Process Research and Development
In April of 2002, the Company entered into a license agreement that gives the
Company the right to use certain technology being developed by a third party.
This product reached technological feasibility prior to April 2002. The Company
received the final source code subsequent to June 30, 2003. Since the product
was not put into use prior to June 30, 2003, no amortization has been recorded
to date. This prepaid asset is recorded on the balance sheet as in process
research and development in the amount of $275,000 and $138,000 as of June 30,
2003 and 2002, respectively. (vii) 6. Stockholders' Equity
Common Stock
During the year ended June 30, 2003, the Company issued 9,000 shares of common
stock upon the exercise of stock options resulting in $720 of proceeds.
Stock Option Plan
On April 11, 2002, the Company's Board of Directors approved the 2002 Stock
Option Plan ("the Plan") which authorized the grant of options to purchase up to
1,250,000 shares of the Company's common stock. Under the Plan, incentive
options may be granted at a price per share no less than the fair market value
of common stock at the date of grant. Nonqualified stock options may be granted
at a price per share no less than 85% of the fair market value on the date of
grant. Options granted to any 10% stockholder may have an exercise price per
share that is not less than 110% of the fair market value per share of common
stock on the date of grant. Options granted generally have a maximum term of ten
years and generally vest over three years.
12
Stock option activity under the Plan is summarized as follows:
Options Outstanding
--------------------------------------------------------------------
Weighted
Average
Number of Exercise
Shares Price
--------------------------------------------------------------------
Balance, April 1, 2002 -- --
Granted 467,000 $0.08
Exercised -- --
Canceled -- --
--------------------------------------------------------------------
Balance, June 30, 2002 467,000 0.08
Granted 512,000 0.08
Exercised (9,000) 0.08
Canceled (71,000) 0.08
--------------------------------------------------------------------
Balance, June 30, 2003 899,000 $0.08
--------------------------------------------------------------------
Options Outstanding
At June 30, 2003, 351,000 shares were available under the Plan for future grant.
The following table summarizes information concerning stock options outstanding
as of June 30, 2003:
Options Outstanding Options Vested
----------------------------------------- ------------------------
Range of Exercise Weighted
Average Weighted Weighted
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Prices Shares Life (Years) Price Shares Price
------------ --------------- ------------ ----------- ------------
$0.08 899,000 8.89 $ 0.08 448,000 $ 0.08
7. Income Taxes
The Company has elected to be taxed as an "S" corporation and, therefore, its
taxable loss is reported on the shareholders' individual tax returns. As a
result, no federal income tax is imposed on the Company. State income taxes are
calculated as the greater of $800 or 1.5% of taxable income. The provision for
income taxes for the year ended June 30, 2003 consists of the minimum state
income tax.
At June 30, 2003 and 2002, deferred tax assets of approx $26,000 and $2,000
primarily represent the impact of temporary differences resulting from net
operating loss carryforwards for California income taxes. A 100% valuation
allowance has been recorded since management cannot determine it is probable
that the deferred tax asset will be realized.
13
Prior to April 1, 2002, the Predecessor was a California C corporation and, as
such, reported taxes based on its taxable income. The Predecessor reported only
the minimum California state tax of $800 during the period. Further, all
deferred tax assets resulting from net operating loss carryovers during the
period were fully reserved.
8. Commitments and Contingencies
Operating Leases
The Company leases a building under a non-cancelable operating lease from an
unrelated third party which will expire in February of 2005. Building rental
expense totaled $198,000 and $361,000 during the years ended June 30, 2003 and
2002, respectively. On August 30, 2003, the Company moved out of this building.
No formal termination agreement has been executed. Under the terms of the lease
agreement, the landlord is entitled to recover from the company unpaid rent at
the time of termination and other costs which would have been earned after
termination until the time of award exceeds the amount of such rental loss that
the landlord proves could have been reasonably avoided. Future minimum lease
payments under noncancelable operating leases, are as follows (in thousands):
Year ending June 30:
2004 $123
2005 82
------
Total minimum lease payments $ 205
======
Prior to April 1, 2002, in addition to the facilities leased from an unrelated
third party, the Predecessor had operations at InClose's facility. InClose
allocated a portion of the rent to the Antares Division.
Legal matters
The Company is involved in various legal proceedings incidental to its normal
business activities. The amount of ultimate liability with respect to these
actions cannot be reasonably estimated. However, in the opinion of management,
any liability resulting from an unfavorable outcome will not materially affect
the financial position of the Company.
Guarantees
In November 2002, the FASB issued 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." The following is a summary of agreements that the
Company has determined are within the scope of FIN 45 as of June 30, 2003:
o Product warranty liabilities are provided for as described in
Note 1 to these financial statements.
o Under its bylaws, the Company has agreed to indemnify its
officers and directors for certain events or occurrences
arising as a result of the officer or director's 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 the Company could be required to
make under these indemnification agreements is unlimited. The
Company believes the estimated fair value of these
indemnification agreements is minimal and has no liabilities
recorded for these agreements as of June 30, 2003.
14
o The Company also enters into indemnification provisions under
its agreements with other companies in its ordinary course of
business, typically with business partners, contractors,
customers, and landlords. Under these provisions the Company
generally indemnifies and holds harmless the indemnified party
for losses suffered or incurred by the indemnified party as a
result of the Company's 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 the
Company with regard to intellectual property rights. These
indemnification provisions generally survive termination of
the underlying agreement. The Company has not incurred
material costs to defend lawsuits or settle claims related to
these indemnification agreements. As a result, it believes the
estimated fair value of these agreements is minimal.
Accordingly, the Company has no liabilities recorded for these
agreements as of June 30, 2003.
9. Employee Benefit Plan
The Company has adopted a profit sharing plan and a 401(K) plan for certain
eligible employees. Under the plan, an eligible employee may elect to contribute
up to a certain percentage of his or her pre-tax income, not to exceed the
annual limits established by the Internal Revenue Service. For the years ended
June 30, 2003 and 2002, the Company did not make contributions to the profit
sharing plan. For the years ended June 30, 2003 and 2002, total expense under
the 401(K) plan was $3,000 and $1,000, respectively.
10. Credit Agreements
On March 31, 2002, the Company entered into an unsecured promissory note with
InClose in the amount of $350,000 in conjunction with the asset and product
purchase agreement in which the company purchased selected assets of the Antares
division of InClose Design, Inc. This note bears interest at 8% per annum with
principal and interest payments due monthly. All unpaid principal and any
accrued interest shall be due in full in November of 2003. The company made the
scheduled payments through September 25, 2002. This note was assigned to a third
party bank as a result of InClose's insolvency. Outstanding principal balance
was $330,000 and $338,000 at June 30, 2003 and 2002, respectively, and is shown
as a current liability on the balance sheet. Accrued interest is included in
accrued expenses on the balance sheet.
In May of 2002, the Company received a non-secured loan in the amount of
$145,200. There was no formal loan agreement relating to this loan, therefore
the company imputed interest at rate of 8%. This loan remained outstanding at
June 30, 2003 and 2002. Accrued interest is included in accrued expenses on the
balance sheet.
On August 9, 2002, the Company entered into a $600,000 Loan and Security
Agreement with a financial institution. Under the terms of the agreement, the
Company may borrow up to 80% of eligible accounts receivable. Interest is
charged at 5% per annum in excess of the Prime Rate as stated in the Wall Street
Journal; provided , however, that in no event shall the Interest Rate be less
than 9.75% per annum. Borrowings under agreement were fully collateralized by
substantially all of the Company's assets. On April 30, 2003, this agreement was
terminated and all amounts due were settled.
15
On April 28, 2003, the Company entered into a $300,000 Business Financing
Agreement ("line of credit') with a financial institution. Under the terms of
this line of credit, the Company may borrow up to 80% of eligible accounts
receivable. Interest is charged at 2.5% per month. Borrowings under the line of
credit are fully collateralized by substantially all of the Company's assets. At
June 30, 2003, $227,000 was due under this agreement and the Company did not
have sufficient additional eligible receivables to draw additional funds.
Subsequent to year-end, the Company settled this liability with proceeds from
collection of trade accounts receivable and with proceeds from the asset sale to
SBE, Inc.
11. Related Parties
During the period between May 2002 and August 2002 the Company purchased
$568,000 of inventory from the shareholders of the Predecessor on account. At
June 30, 2003 and 2002, $568,000 and $389,000, respectively, remained
outstanding.
Since the Company's inception in April 2002, certain officers of the Company
have funded the Company's operations through advances from their personal funds.
At June 30, 2003 and 2002, $574,000 and $31,000, respectively, in advances from
these officers remained outstanding. Currently, the Company does not have the
wherewithal to pay these advances.
12. Concentrations
During the year ended June 30, 2003, revenues from four customers accounted for
approximately 20%, 17%, 15% and 10% each. These customers account for
approximately 32%, 20%, 6% and 3% of the outstanding accounts receivable at June
30, 2003.
16
SBE, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
as of July 31, 2003
(in thousands)
Historical Historical Combined
SBE Antares Adjustments As Adjusted
------------------------------------------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,990 $ - $ (75) a $ 1,267
(484) c
(164) d
Trade accounts receivable, net 1,005 293 (293) b 1,005
Inventories 1,603 97 1,700
Other 281 20 (20) b 281
------------------------------------------------------ -----------------
Total current assets 4,879 410 (1,036) b 4,253
Property and equipment, net 343 124 (50) b 417
Capitalized software and Intellectual property 93 275 228 g 596
Other 79 17 (17) b 79
------------------------------------------------------ -----------------
Total assets $ 5,394 $ 826 $ (875) $ 5,345
====================================================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ - $ 55 $ (55) b $ -
Line of credit - 227 (227) b
Trade accounts payable 305 363 (363) b 305
Due to officers - 574 (574) b -
Due to other related parties - 568 (568) b
Accrued payroll and employee benefits 129 203 (203) b 473
344 e
Other accrued expenses 435 84 (84) b 486
51 f
Short-term debt - 475 (475) b -
------------------------------------------------------ -----------------
Total liabilities 869 2,549 (2,154) 1,264
------------------------------------------------------ -----------------
Stockholders' equity:
Common Stock and additional paid in capital 15,232 139 (139) b 15,492
260 h
Note receivable from stockholder (245) - (245)
Treasury stock (409) - (409)
Retained deficit (10,053) (1,862) 1,158 g & b (10,757)
------------------------------------------------------ -----------------
Total stockholders' equity 4,525 (1,723) 1,983 4,081
------------------------------------------------------ -----------------
Total liabilities and stockholders' equity $ 5,394 $ 826 $ (875) $ 5,345
====================================================== =================
Footnotes to the Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
July 31, 2003:
(a) Payment on August 7, 2003 by SBE to D.R. Barthol & Company (Assignee)
for the purchase of certain assets of Antares Microsystems, Inc.
("Antares").
(b) Adjustment to remove the value of assets of Antares not purchased by
SBE and liabilities not assumed by SBE. (c) Cash payments made by SBE
for personal loan payoffs, contract transfer fees, broker fees, audit
fees, legal fees, moving and other costs related to the purchase of
certain assets of Antares.
(d) Cash portion of purchase paid to the selling shareholders of Antares.
(e) Accrued future cash portion of purchase price paid to selling
shareholders of Antares plus the value of 98,945 shares of SBE common
stock at $2.86 per share to be paid to the selling shareholders of
Antares between January 2004 and March 2005.
(f) Accrued estimated payments for audit and legal services associated with
the acquisition of certain assets of Antares.
(g) Adjustment to allocate $1,207,000 to Intellectual Property, which is
the estimated fair value of the Antares intellectual property,
associated with current and future products acquired in the acquisition
of Antares. The intellectual property is estimated to have value for at
least 36 months and will be amortized to expense over that period.
Antares had $275,000 in product development costs capitalized prior to
the asset acquisition by SBE. The $932,000 net adjustment ($1,207,000
less $275,000) is to record the total value of the intellectual
property. This amount has been reduced by and adjustment of $704,000 to
recognize the amortization expense that would have been recorded if the
transaction had occurred on November 1, 2001. The net increase to
intellectual property after recognition of the amortization expense
adjustment is $228,000. The retained deficit has been increased by an
adjustment to reflect the $704,000 of amortization expense associated
with the intellectual property acquired in the Antares asset
acquisition.
(h) 189,569 shares of SBE common stock valued at $2.86 per share have been
committed for payment to the selling shareholders of Antares. The
Company issued 90,624 shares of unregistered common stock of the
189,569 committed shares on September 30, 2003 to one of the selling
shareholders of Antares. These shares of unregistered SBE common stock
can only be sold or transferred pursuant to the provisions of the
Securities and Exchange Commission's Regulation 144. The remaining
98,945 shares will be issued in 20,000 share increments beginning
January 2004 and ending March 2005 to the remaining selling
shareholder. The adjustment reflects the value of the 90,624 shares
issued with the value of the remaining 98,945 shares in Accrued
Expenses.
SBE, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
for the Nine Months ended July 31, 2003
(in thousands, except for per share amounts)
Historical Historical Combined
SBE Antares Adjustments Companies
-------------------------------------------------------------------------------
Net Sales $ 5,249 $ 1,389 $ $ 6,638
Cost of Sales 1,971 742 2,713
-------------------------------------------------------------------------------
Gross Profit 3,278 647 3,925
-------------------------------------------------------------------------------
Product research and development 913 438 162 a 1,513
Sales and marketing 1,004 277 100 b 1,381
General and administrative 1,259 1,105 302 c 2,666
Restructuring costs (benefit) (154) -- (154)
-------------------------------------------------------------------------------
Total operating expense 3,022 1,820 564 5,406
-------------------------------------------------------------------------------
Operating income (loss) 256 (1,173) (564) (1,481)
Interest income (expense) 21 (122) 122 d 21
Other income (expense) (10) -- (10)
-------------------------------------------------------------------------------
Net income (loss) before income taxes 267 (1,295) (442) (1,470)
Provision (benefit) for income taxes (17) 1 (1) (17)
-------------------------------------------------------------------------------
Net income (loss) $ 284 $ (1,296) $ (441) (1,453)
===============================================================================
Basic income (loss) per share $ 0.07 $ $ $ (0.34)
===============================================================================
Dliuted income (loss) per share $ 0.07 $ $ $ (0.33)
===============================================================================
Basic - shares used in per share
computations 4,145 e 4,335
===============================================================================
Diluted - shares used in per share
computations 4,276 e 4,466
===============================================================================
Footnotes to the Unaudited Pro Forma Condensed Combined Statement of Operations
for the nine months ended July 31, 2003:
(a) Adjustment to reflect the increase in salary for the Vice President of
Engineering and two engineers hired by SBE from Antares. The Antares
product research and development expenses include personnel expenses
for employees who will not be joining SBE. SBE does not expect to incur
a significant amount of the product research and development expenses
required by Antares.
(b) Adjustment to reflect the increase in salary of product management and
one technical support employee hired by SBE from Antares plus estimated
commissions paid and marketing materials to support the Antares product
line. The Antares sales and marketing expenses include personnel
expenses for employees who will not be joining SBE. SBE does not expect
to incur a significant amount of the sales and marketing expenses
required by Antares.
(c) The intellectual property acquired in the Antares acquisition is
amortized to expense over 36 months. This adjustment reflects nine
months amortization of intellectual property originally valued at
$1,207,000 acquired in the Antares asset acquisition. The Antares
general and administrative expenses include rent and personnel expenses
for employees who will not be joining SBE. SBE will not use the Antares
facility or take over the liabilities of Antares. SBE does not expect
to incur a significant amount of the general and administrative
expenses required by Antares.
(d) Adjustment to remove the interest expense related to Antares debt not
assumed by SBE.
(e) Combined pro forma shares include 189,569 shares of SBE common stock
committed to be issued to the selling shareholders of Antares.
SBE, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended October 31, 2002
(in thousands, except for per share amounts)
Historical Historical Combined
SBE Antares Adjustments Companies
--------------------------------------------------------------
Net Sales $ 6,898 $ 3,804 $ $ 10,702
Cost of Sales 3,170 1,935 5,105
--------------------------------------------------------------
Gross Profit 3,728 1,869 -- 5,597
--------------------------------------------------------------
Product research and development 3,027 455 216 a 3,698
Sales and marketing 2,151 293 189 b 2,633
General and administrative 2,364 1,248 402 c 4,014
Loan reserve 474 -- 474
Restructuring costs 446 -- 446
--------------------------------------------------------------
Total operating expense 8,462 1,996 807 11,265
--------------------------------------------------------------
Operating loss (4,734) (127) (807) (5,668)
Interest income (expense) 51 (2) 2 d 51
Forfeited deposit, net 2,712 -- 2,712
Other income 63 -- -- 63
--------------------------------------------------------------
Net loss before income taxes (1,908) (129) (805) (2,842)
Benefit for income taxes (177) -- -- (177)
--------------------------------------------------------------
Net loss $ (1,731) (129) $ (805) (2,665)
==============================================================
Basic loss per share $ (0.46) $ (0.67)
==============================================================
Dliuted loss per share $ (0.46) $ (0.67)
==============================================================
Basic - shares used in per share
computations 3,759 e 3,949
==============================================================
Diluted - shares used in per share
computations 3,759 e 3,949
==============================================================
Footnotes to the Unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended October 31, 2002:
(a) Adjustment to reflect the increase in salary for the Vice President of
Engineering and two engineers hired by SBE from Antares. The Antares
product research and development expenses include personnel expenses
for employees who will not be joining SBE. SBE does not expect to incur
a significant amount of the product and research development expenses
required by Antares.
(b) Adjustment to reflect the increase in salary of product management and
one technical support employee hired by SBE from Antares plus estimated
commissions paid and marketing materials to support the Antares product
line. The Antares sales and marketing expenses personnel expenses for
employees who will not be joining SBE. SBE does not expect to incur a
significant amount of the sales and marketing expenses required by
Antares.
(c) The intellectual property acquired in the Antares acquisition is
amortized to expense over 36 months This adjustment reflects one year
of amortization of intellectual property valued at $1,207,000 acquired
in the Antares asset acquisition. The Antares general and
administrative expenses include rent and personnel expenses for
employees who will not be joining SBE. SBE will not use the Antares
facility or take over the liabilities of Antares, SBE does not expect
to incur a significant amount of the general and administrative
expenses required by Antares.
(d) Adjustment to remove the interest expense related to Antares debt not
assumed by SBE.
(e) Combined pro forma shares include 189,569 shares of SBE common stock
committed to be issued to selling shareholders of Antares.
Basis of Pro Forma Presentation:
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") for a purchase price of $75,000 in cash plus $540,000 in
costs associated with the payment of certain loan guarantees, legal fees,
accounting fees, broker fees, contract transfer fees and moving expenses. We
also paid or committed to pay, the selling shareholders of Antares a total of
$220,000 in cash and 189,569 shares of SBE common stock at a market value at the
date of closing of $2.86 per share. We did not assume any of the liabilities
associated with Antares. In connection with the acquisition, we hired certain
shareholders and employees of Antares in order to continue the development of
the Antares TCP/IP Offload Engine ("TOE") technology, 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. In the
event TOE is successfully commercialized, we have committed to make certain
payments of cash and/or stock as bonuses to certain of these former
shareholders, as sales of the TOE products occur. We will account for the
acquisition under the purchase method of accounting.
The unaudited pro forma condensed combined balance sheet at July 31, 2003 is
presented to give effect to the acquisition of Antares by SBE as if the
transaction had been consummated on that date. The unaudited pro forma combined
condensed statement of operations of SBE and Antares for the year ended October
31, 2002 is presented as if the transaction had been consummated on November 1,
2001 and combines the results of operations of SBE for the year ended October
31, 2002 with the results of Antares for the year ended June 30, 2002. The
unaudited pro forma combined statement of operations for the nine months ended
July 31, 2003 combines the results of operations of SBE for the nine months
ended July 31, 2003 and Antares' results of operations for the nine months ended
June 30, 2003. Antares' results of operations for the nine months ended June 30,
2003 were calculated by deducting the results of operations for the three months
ended September 30, 2002, from the results of operations for the twelve months
ended June 30, 2003.
Under the purchase method of accounting, the total estimated purchase price is
allocated to Antares' net tangible and intangible assets based upon their
estimated fair value as of the date of completion of the acquisition. Based upon
the estimated purchase price and the preliminary valuation, the preliminary
purchase price allocation, which is subject to change based upon SBE's final
analysis, is as follows:
Cash acquired $ --
Tangible assets acquired 171,000
Intellectual property 1,207,000
----------
Total assets acquired 1,378,000
Liabilities assumed --
----------
Net assets acquired $1,378,000
==========
Cash consideration or costs paid or to be paid $ 835,000
Fair value of stock provided 543,000
----------
Total consideration $1,378,000
==========
A preliminary estimate of $1,207,000 has been allocated to amortizable
intangible assets consisting of intellectual property associated with current
and future products related to the TOE technology.
2. Pro Forma Adjustments
The accompanying unaudited pro forma combined condensed financial statements
have been prepared as if the acquisition was completed on July 31, 2003 for
balance sheet purposes and as of November 1, 2001 for statements of operations
purposes and reflect the pro forma adjustments as provided in the "Footnotes" to
adjustments.
See discussion of pro forma adjustments in the "Footnotes" to adjustments.
3. Pro Forma Combined Net Income (Loss) Per Share
Shares used to calculate unaudited pro forma combined net loss per share were
computed using SBE's weighted average shares outstanding during the respective
periods. Additionally, the issuance of 189,873 shares to the selling
shareholders of Antares was assumed to have occurred on November 1, 2001.
See discussion of pro forma adjustments in the "Footnotes" to adjustments.