UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2001
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the transition period from _______ to ________
Commission file number 0-8419
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SBE, INC.
_____________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 94-1517641
_______________________________ ________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4550 Norris Canyon Road, San Ramon, California 94583
_____________________________________________________
(Address of principal executive offices and zip code)
(925) 355-2000
_____________________________________________________
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
The number of shares of Registrant's Common Stock outstanding as of February 28,
2001 was 3,452,282.
1
SBE, INC.
INDEX TO JANUARY 31, 2001 FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of
January 31, 2001 and October 31, 2000 3
Condensed Consolidated Statements of Operations for the
three months ended January 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3 Quantitative and Qualitative Disclosures about
Market Risk 12
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
January 31, October 31,
2001 2000
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,697 $ 5,311
Trade accounts receivable, net 3,141 4,296
Inventories 5,393 4,918
Deferred income taxes 7 7
Other 408 420
------------- -------------
Total current assets 12,646 14,952
Property, plant and equipment, net 2,031 2,143
Capitalized software costs, net 240 293
Other 72 39
------------- -------------
Total assets $ 14,989 $ 17,427
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,590 $ 1,094
Accrued payroll and employee benefits 237 1,304
Accrued product warranties 144 145
Other accrued expenses 147 767
------------- -------------
Total current liabilities 2,118 3,310
Deferred tax liabilities 7 7
Deferred rent 265 281
------------- -------------
Total liabilities 2,390 3,598
------------- -------------
Stockholders' equity:
Common stock 13,931 13,855
Deferred stock compensation (158) (164)
Treasury stock (409) (409)
Note receivable from stockholder (744) (744)
Retained earnings (accumulated deficit) (21) 1,291
------------- -------------
Total stockholders' equity 12,599 13,829
------------- -------------
Total liabilities and stockholders' equity $ 14,989 $ 17,427
============= =============
See notes to condensed consolidated financial statements.
3
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 2001 AND 2000
(In thousands, except per share amounts)
(Unaudited)
Three months ended
January 31,
2001 2000
------- -------
Net sales $3,418 $6,969
Cost of sales 1,379 2,223
------- -------
Gross profit 2,039 4,746
Product research and development 1,634 1,503
Sales and marketing 803 1,205
General and administrative 985 1,070
------- -------
Total operating expenses 3,422 3,778
------- -------
Operating income (loss) (1,383) 968
Interest and other income, net 70 34
------- -------
Income (loss) before income taxes (1,313) 1,002
Provision for income taxes --- (41)
------- -------
Net income (loss) $(1,313) $ 961
======== =======
Basic earnings (loss) per share $ (0.39) $ 0.31
======== =======
Diluted earnings (loss) per share $ (0.39) $ 0.30
======== =======
Basic - shares used
in per share computations 3,331 3,080
======== =======
Diluted - shares used
in per share computations 3,331 3,199
======== =======
See notes to condensed consolidated financial statements.
4
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 2001 AND 2000
(In thousands)
(Unaudited)
Three months ended
January 31,
--------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $(1,313) $ 961
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization of deferred stock compensation 6 26
Depreciation and amortization:
Property and equipment 219 215
Software 53 59
Loss on disposal of equipment 2 --
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable 1,155 (3,120)
Increase in inventories (475) (797)
Increase in other assets (21) (311)
Increase in trade accounts payable 496 1,449
Increase (decrease) in other current liabilities (1,688) 512
Decrease in other noncurrent liabilities (15) (16)
-------- --------
Net cash used in operating activities (1,581) (1,022)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (109) (261)
Capitalized software costs -- (40)
-------- --------
Net cash used in investing activities (109) (301)
-------- --------
Cash flows from financing activities:
Proceeds from stock plans 76 85
-------- --------
Net cash provided by financing activities 76 85
-------- --------
Net decrease in cash and cash equivalents (1,614) (1,238)
Cash and cash equivalents at beginning of period 5,311 3,385
-------- --------
Cash and cash equivalents at end of period $ 3,697 $ 2,147
======== ========
See notes to condensed consolidated financial statements.
5
SBE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM PERIOD REPORTING:
These condensed consolidated financial statements of SBE, Inc. (the "Company")
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 condensed consolidated financial statements of the
Company include the financial position and results of operation of LAN Media
Corporation, which the Company acquired on July 14, 2000. The merger was
accounted for as a pooling of interests, and accordingly, financial statements
presented for all periods have been restated to reflect combined operations and
financial position. The results of operations for the three months ended January
31, 2001 are not necessarily indicative of expected results for the full 2001
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 the Company's Annual Report on Form 10-K for the year ended October
31, 2000.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Actual results could differ from these estimates. Significant estimates and
judgments made by management of the Company include matters such as
collectibility of accounts receivable, realizability of inventories and
recoverability of capitalized software and deferred tax assets.
2. INVENTORIES:
Inventories comprise the following (in thousands):
January 31, October 31,
2001 2000
---------- ----------
Finished goods $ 2,472 $ 2,144
Parts and materials 2,922 2,774
---------- ----------
$ 5,393 $ 4,918
========== ==========
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3. NET EARNINGS (LOSS) PER SHARE:
Basic earnings per common share for the three months ended January 31, 2001 and
2000 were computed by dividing net income (loss) by the weighted average number
of shares of common stock outstanding. Diluted earnings per common share for
the three months ended January 31, 2000 were computed by dividing net income by
the weighted average number of shares of common stock and common stock
equivalents outstanding.
The following table sets forth the computation of basic and diluted net income
(loss) per share for the periods indicated (in thousands, except per share
data):
THREE MONTHS ENDED JANUARY 31, 2001 2000
- ------------------------------ ------ ------
BASIC:
- -----
NUMERATOR:
NET INCOME (LOSS) $(1,313) $ 961
DENOMINATOR:
WEIGHTED AVERAGE SHARES 3,331 3,080
------ ------
BASIC NET INCOME (LOSS) PER SHARE (0.39) 0.31
------ ------
DILUTED:
- -------
NUMERATOR:
NET INCOME (LOSS) (1,313) 961
DENOMINATOR:
WEIGHTED AVERAGE SHARES 3,331 3,080
SHARES ISSUABLE UNDER STOCK OPTIONS --- 119
------ ------
DILUTED SHARES 3,331 3,199
------ ------
DILUTED NET INCOME (LOSS) PER SHARE (0.39) 0.30
------ ------
Diluted net loss per share for the three month period ended January 31, 2001
does not include the effect of 208,101 shares issuable under stock options as
such common stock equivalents have an antidilutive effect.
4. CONCENTRATION OF RISK:
In the first three months of fiscal 2001 and 2000, most of the Company's sales
were attributable to sales of wireless communications products and were derived
from a limited number of OEM customers. Sales to Compaq Computer Corporation
accounted for 36 percent and 78 percent of the Company's net sales in the first
three months of fiscal 2001 and 2000, respectively. Also, Compaq Computer
accounted for 41 percent and 89 percent of the Company's accounts receivable as
of January 31, 2001 and January 31, 2000, respectively. The Company expects
that sales to Compaq will continue to constitute a substantial portion of the
Company's net sales in the remainder of fiscal 2001. A significant reduction in
orders from any of the Company's OEM customers, particularly Compaq, could have
a material adverse effect on the Company's business, operating results and
financial condition.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements may be deemed to include
information that is not historical, including without limitation, the Company's
expectations regarding sales to Compaq Computer in fiscal 2001, the belief that
the market for client server networking products is growing, the adequacy of
anticipated sources of cash, planned capital expenditures, the effect of
interest rate increases and trends or expectations regarding the Company's
operations. 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 management's analysis only as of the
date hereof, and the Company 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. Factors that might cause such a
difference include, but are not limited to, those risks and uncertainties
discussed below under "Factors Affecting Operating Results" and elsewhere in
this Quarterly Report on Form 10-Q, as well as other risks set forth under the
caption "Risk Factors" in the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 2000. The following discussion should be read in
conjunction with the Financial Statements and the Notes thereto included in Item
1 of this Quarterly Report on Form 10-Q and in the Company's Form 10-K for the
fiscal year ended October 31, 2000.
SBE, Inc. designs, markets, sells and supports high-speed intelligent
communications controller and software products for use in telecommunications
systems worldwide. Our products enable both traditional and emerging
telecommunications service providers to deliver advanced communications products
and services, which we believe help these providers compete more effectively in
today's highly competitive telecommunications service market. Our products
include WAN interface adapters and high performance communications controllers
for workstations media gateways, routers, internet access devices, home location
registers and data messaging applications.
Our business is characterized by a concentration of sales to a small number of
OEM customers and consequently the timing of significant orders from major
customers and their product cycles causes fluctuation in our operating results.
Compaq Computer Corporation represents the largest of the our customers and
represented 67 percent of net sales in fiscal 2000. If any of our major
customers, especially Compaq Computer, reduces orders for our products, we could
lose revenues and suffer damage to our business reputation. Sales to Compaq
Computer accounted for 36 percent of our net sales in the three months ended
January 31, 2001 and 78 percent for the first three months of fiscal 2000.
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.
8
We are attempting to diversify our sales with the introduction of new products
that are targeted at large growing markets within the telecommunications
industry. Our Highwire products are focused on the telecommunications
applications market. We believe the growth in this market is driven by the
convergence of traditional telephony applications with the Internet. We cannot
assure you that we will be able to succeed in penetrating this market and
diversifying our sales.
On July 14, 2000, we acquired LAN Media Corporation, a privately held wide area
networking adapter company headquartered in Sunnyvale, California. In the
acquisition, we issued approximately 316,000 shares of our common stock for all
LAN Media's outstanding common stock. We also assumed all outstanding options
to acquire LAN Media common stock. The acquisition was accounted for as a
pooling of interests under Principles Board Opinion No. 16. Accordingly, our
financial statements have been restated for all periods prior to the merger to
reflect the combined results of operations, financial position and cash flows.
In connection with the acquisition, we recorded a charge to operating expenses
of $383,000 for acquisition-related costs in the fiscal third quarter ended July
31, 2000.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, consolidated
statements of operations data for the three months ended January 31, 2001 and
2000. These operating results are not necessarily indicative of our operating
results for any future period.
THREE MONTHS ENDED
JANUARY 31,
2001 2000
---- ----
Net sales 100% 100%
Cost of sales 40 32
---- ----
Gross profit 60 68
---- ----
Product research and development 48 22
Sales and marketing 23 17
General and administrative 29 15
---- ----
Total operating expenses 100 54
---- ----
Operating income (loss) (40) 14
Interest and other income, net 2 --
---- ----
Income (loss) before income taxes (38) 14
Provision for income taxes -- --
---- ----
Net income (loss) (38)% 14%
==== ====
9
NET SALES
Net sales for the first quarter of fiscal 2001 were $3.4 million, a 51 percent
decrease from the first quarter of fiscal 2000. This decrease was primarily
attributable to decreased sales of $4.2 million to Compaq Computer which was
only marginally offset by a $600,000 increase in sales of all other product
lines combined for the first quarter. Market and economic uncertainty as well
as product design delays at several of our large customers also contributed to
the decrease as product development cycles were pushed back to later quarters of
the year. Sales to Compaq Computer, primarily of VMEBus products, represented
36 percent of sales for the quarter. Sales to Lucent Technologies represented
12 percent of Net sales during the first quarter. No other customer accounted
for over 10 percent of sales in the three month period. We expect to continue
to experience fluctuation in product sales as large customers' needs change.
GROSS PROFIT
Gross profit as a percentage of sales in the first quarter of fiscal 2001 was 60
percent, and 68 percent during the first quarter of fiscal 2000. The decreases
from fiscal 2000 to fiscal 2001 were primarily attributable to higher material
costs and a less favorable product mix in the fiscal 2001 period.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses were $1.6 million in the first quarter
of fiscal 2001, an increase of 7 percent from $1.5 million in the first quarter
of fiscal 2000. The increase in research and development spending from the
fiscal 2000 period to the fiscal 2001 period was a result of accelerated
spending for development of our HighWire and other new telecommunications
products. We expect R&D spending to remain at or slightly below current levels
as additional new products are developed and as we continue to expand our
product lines to meet the demands of the telecommunications marketplace.
SALES AND MARKETING
Sales and marketing expenses for the first quarter of fiscal 2001 were $800,000,
a decrease of 33 percent from $1.2 million in the first quarter of fiscal 2000.
The decrease for fiscal 2001 was primarily due to lower marketing program
spending for products already introduced during previous quarters, but not yet
fully available in volume. We expect sales and marketing expenses will increase
slightly from the fiscal 2000 level during fiscal 2001 as additional new
products are introduced and as marketing and sales programs are expanded and/or
introduced to give even greater exposure to our newer products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1.0 million for the first quarter of
fiscal 2001, a decrease of eight percent from $1.1 million in the first quarter
of 2000. This decrease was due to maintaining spending levels in place in
response to lower income levels during the first quarter of fiscal 2001. In
future periods, we expect that general and administrative expenses may decrease
from current expenditure levels as overhead levels are reduced.
INTEREST AND OTHER INCOME, NET
Interest and other income, net increased in the first quarter of fiscal 2001
from the same periods in fiscal 2000 due to higher average cash balances and
decreased debt.
10
INCOME TAXES
We did not record any benefit for taxes in the first quarter of fiscal 2001 as
the benefit derived from our net operating losses and unused tax credits was
fully reserved against. We recorded a provision for taxes in the first quarter
of fiscal 2000 of $41,000. In the event of future taxable income, our effective
income tax rate in future periods could be lower than the statutory rate as
operating loss and tax credit carryforwards are recognized.
NET INCOME (LOSS)
As a result of the factors discussed above, we recorded a net loss of $1.3
million in the first quarter of fiscal 2001 as compared to a net income of $1.0
million in the first quarter of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2001 we had cash and cash equivalents of $3.7 million, as
compared to $5.3 million at October 31, 2000. In the first three months of
fiscal 2001, $1.6 million of cash was used for operating activities, primarily
as a result of a $1.3 million net loss, a $475,000 increase in inventories, and
a $1.7 million decrease in other current liabilities, partially offset by a $1.2
million decrease in accounts receivable and a $496,000 increase in accounts
payable. The accounts payable increase was due primarily to purchases of
components and services from the our contract manufacturers near quarter end.
The other current liabilities decrease was a result of the payment of accrued
sales commissions, bonuses, and company profit sharing earned in the previous
fiscal year. The accounts receivable decrease was primarily a result of
decreased sales. Inventory increased as a result of purchases of certain end of
life components to be used in future production of VME and LMC adapter products.
We believe that we have acquired sufficient components to meet backlog and
forecasted customer demand, to meet near term requirements, and are actively
working with the applicable customers to help them transition to new product
platforms. Working capital at January 31, 2001 was $10.5 million, as compared
to $11.6 million at October 31, 2000.
In the first three months of fiscal 2001, the Company purchased $109,000 of
fixed assets, consisting primarily of computer and engineering equipment. No
software costs were capitalized during the first three months of 2001. We
expect capital expenditures will remain at current levels for the remainder of
fiscal 2001.
We received $76,000 in the first three months of fiscal 2001 from payments
related to employee stock option exercises and purchases made by employees
pursuant to our employee stock purchase plan.
Based on the current operating plan, we anticipate that our current cash
balances and anticipated cash flows or usage from operations will allow for us
to meet our working capital needs over the next 12 months. However, in
the event additional financing is required, we may not be able to raise it on
acceptable terms or at all.
11
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. Our financial instrument holdings at January
31, 2001 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 percent, the expected effect on net income related to our
financial instruments would be immaterial.
12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
11.1 Statements of Computation of Net Income (Loss) per Share
(b) Reports on Form 8-K:
No report on Form 8-K was filed by the Company during the quarter ended January
31, 2001.
13
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 March 16, 2001.
SBE, INC.
----------
Registrant
/s/ Timothy J. Repp
-------------------
Timothy J. Repp
Chief Financial Officer, Vice President of
Finance and Secretary (Principal Financial
and Accounting Officer)
14