UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 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, 1996
[ ] 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
SBE, INC.
_____________________________________________________
(Exact name of registrant as specified in its charter)
California 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)
(510) 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
29, 1996 was 2,114,441.
SBE, INC.
INDEX TO JANUARY 31, 1996 FORM 10-Q
PART I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
January 31, 1996 and October 31, 1995 3
Condensed Consolidated Statements of Operations for the
three months ended January 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II Other Information
Items 1, 2, 3, 4, 5, and 6 12
SIGNATURES 13
2
Part I. Financial Information
Item 1. Financial Statements
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 1996 and October 31, 1995
(In thousands)
January 31, October 31,
1996 1995
(Unaudited)
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 946 $ 857
Trade accounts receivable, net 2,147 3,388
Inventories 3,390 2,611
Income tax receivable 9 1,836
Deferred income taxes 225 225
Other 430 378
------- -------
Total current assets 7,147 9,295
Property, plant and equipment, net 3,190 3,330
Deferred income taxes 654 654
Capitalized software costs, net 1,535 1,656
Other 43 42
------- -------
Total assets $12,569 $14,977
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 374 $ 941
Other accrued expenses 490 710
------- -------
Total current liabilities 864 1,651
Deferred tax liabilities 879 879
Deferred rent 436 339
------- -------
Total liabilities 2,179 2,869
------- -------
Shareholder's equity:
Common stock 7,951 7,680
Retained earnings 2,439 4,428
------- -------
Total shareholders' equity 10,390 12,108
------- -------
Total liabilities and shareholders' equity $12,569 $14,977
======= =======
See accompanying notes
3
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended January 31, 1996 and 1995
(In thousands, except per share amounts)
(Unaudited)
1996 1995
------- -------
Net sales $ 3,993 $ 5,115
Cost of sales 2,334 2,205
------- -------
Gross profit 1,659 2,910
Product research and development 1,525 1,585
Sales and marketing 1,209 766
General and administrative 920 1,025
------- -------
Total operating expenses 3,654 3,376
------- -------
Operating loss (1,995) (466)
Nonoperating income, net 6 120
------- -------
Loss before income taxes (1,989) (346)
Income tax benefit --- (96)
------- -------
Net loss $(1,989) $ (250)
======= =======
Net loss per common share $ (0.95) $ (0.12)
======= =======
Weighted average common shares 2,088 2,035
======= =======
See accompanying notes
4
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended January 31, 1996 and 1995
(In thousands)
(Unaudited)
1996 1995
-------- --------
Cash flows from operating activities:
Net loss $(1,989) $ (250)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 491 272
Other 3 ---
Changes in assets and liabilities:
Decrease in trade accounts receivable 1,241 194
Increase in inventories (778) (152)
Decrease in income tax recoverable 1,827 ---
Increase in other assets (53) (85)
(Decrease) increase in trade accounts payable (567) 190
Decrease in other liabilities (124) (99)
------- -------
Net cash provided by operating activities 51 70
------- -------
Cash flows from investing activities:
Purchases of property and equipment (216) (559)
Acquisition of capitalized software (17) (503)
Purchase of investments --- (95)
------- -------
Net cash used by investing activities (233) (1,157)
------- -------
Cash flows from financing activities:
Proceeds from borrowing on bank facilities --- 500
Proceeds from stock plans 271 2
------- -------
Net cash provided by financing activities 271 502
------- -------
Net increase (decrease) in cash and cash equivalents 89 (585)
Cash and cash equivalents at beginning of period 857 2,566
------- -------
Cash and cash equivalents at end of period $ 946 $ 1,981
======= =======
See accompanying notes
5
SBE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Interim Period Reporting:
The condensed consolidated financial statements 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 quarter ended January 31, 1996, are not necessarily
indicative of expected results for the full 1996 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 1995 Annual Report to Shareholders.
2. Inventories:
Inventories comprise the following (in thousands):
January 31, October 31,
1996 1995
----------- -----------
Finished goods $1,096 $ 841
Subassemblies 159 299
Parts and materials 2,135 1,471
------ ------
$3,390 $2,611
====== ======
3. Net Loss Per Common Share:
Net loss per common share was computed by dividing net loss by the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding. Common stock equivalents relate to stock options.
6
4. Bank Facility:
On May 23, 1995, the Company entered into a $4,000,000 revolving working
capital line of credit agreement which expires on April 30, 1996. The
agreement was modified on January 17, 1996. Borrowings under the line of
credit, as modified, bear interest at the bank's prime rate plus one percent
and are collateralized by accounts receivable and other assets. Borrowings are
limited to 70 percent of adjusted accounts receivable balances, and the Company
is required to maintain minimum tangible net worth of $7.0 million, a minimum
debt ratio of 0.7:1.0, a quick ratio of cash, investments, and receivables to
current liabilities of not less than 1.0:1.0, and minimum profitability levels.
The line of credit agreement also prohibits the payment of cash dividends
without consent of the bank.
As of January 31, 1996, there were no borrowings outstanding under the line of
credit.
5. Reclassifications:
Certain reclassifications have been made to the 1995 condensed consolidated
financial statements to conform to the 1996 presentation.
7
SBE, INC.
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company's sales are dependent upon a customer base that is highly
concentrated, and consequently the timing of significant orders from major
customers causes the Company's operating results to fluctuate. The Company,
over the last 18 months, has invested significant resources in the development
of new products and sales channels, and in September 1995 the Company began
shipping the netXpand(TM) family of remote internetworking products. The Company
expects that sales of netXpand products may reduce the concentration of its
customer base and provide significant sales growth as the Company develops its
sales channels. There are numerous risks associated with the sale of netXpand
products, and therefore the Company cannot determine whether or not it will be
successful in the distribution of netXpand products. Primarily as a result of
this investment in netXpand products and due to decreased sales of computer
board communications products attributable to the decline in business with
Cisco Systems and America Online, the Company has incurred substantial
operating losses in fiscal 1995 and in the first quarter of 1996.
Results of Operations
The following table sets forth, as a percentage of net sales, certain
consolidated statements of operations data for the fiscal quarters ended
January 31, 1996 and 1995. These operating results are not necessarily
indicative of Company's operating results for any future period.
Quarter Ended
January 31,
1996 1995
---- ----
Net sales 100% 100%
Cost of sales 58 43
---- ----
Gross profit 42 57
---- ----
Operating expenses:
Product research and development 39 31
Sales and marketing 30 15
General and administrative 23 20
---- ----
Total operating expenses 92 66
---- ----
Operating loss (50) (9)
---- ----
Nonoperating income, net 0 2
Loss before taxes (50) (7)
Income tax benefit 0 (2)
---- ----
Net loss (50) (5)
==== ====
8
Net Sales
Net sales for first quarter 1996 were $4.0 million, a 22 percent decrease from
fiscal 1995. This decrease was primarily attributable to a $1.4 million
decrease in sales to America Online. This decline was partially offset by
sales of netXpand products. Sales of netXpand products increased to 12 percent
of fiscal 1996 first quarter sales from no sales a year before, although such
sales were slower than expected. Sales to Tandem Computers represented 28
percent of net first quarter fiscal 1996 sales. There were no sales to America
Online in first quarter 1996. Sales to America Online and Tandem Computers,
respectively, represented 27 and 14 percent of sales in first quarter 1995. The
Company expects to experience fluctuation in computer board product sales as
large customers' needs change.
Gross Profit
Gross profit as a percentage of sales decreased to 42 percent in the first
quarter of 1996 from 57 percent in the first quarter of 1995. The decrease
from fiscal 1995 to fiscal 1996 was primarily attributable to higher manu-
facturing overhead costs incurred in connection with expanding manufacturing
capacity and additional capitalized software amortization related to the
netXpand products. The manufacturing overhead costs included the cost of
leasing additional high speed placement and testing equipment. The Company
believes this equipment will significantly increase manufacturing capacity and
reduce production cycle time, leading to lower cost of sales as a percentage of
net sales as production volumes increase for the netXpand product line.
However, there can be no assurance that the Company will be successful in
increasing volume sufficiently to offset the increased overhead costs.
Product Research and Development
Product research and development expenses net of capitalized software costs
decreased to $1.5 million for the first fiscal quarter of 1996 from $1.6
million for the first fiscal quarter of 1995. The decrease in product research
and development expenses was primarily attributable to decreased consulting
costs and contract professional expenses relating to development of the
netXpand product line, as initial netXpand product development was completed
prior to the first fiscal quarter of 1996. The Company capitalized no internal
software development costs in the first fiscal quarter of 1996. This compares
to $503,000 of software development costs capitalized in the first fiscal
quarter of 1995, in accordance with Statement of Financial Accounting Standards
No. 86. Capitalized software costs are amortized over a three year period.
Contractual reimbursements under joint development contracts are accounted for
as a reduction of product research and development expenses. The Company
received no such reimbursements in the first quarter of 1996, compared to
$51,000 of reimbursements in the first quarter of 1995. The Company does not
expect any significant reimbursements in the future. The Company expects that
product research and development expenses will continue at a similar level in
absolute dollars as it continues to expand and improve its remote LAN access
product line and enhance its traditional board-level product lines. However,
the Company may be required to reduce product research and development expenses
if it is not successful in the sales of its netXpand product line.
9
Sales and Marketing
Sales and marketing expenses for the first quarter of 1996 were $1.2 million, a
58 percent increase from the same period of fiscal 1995. This increase was
primarily attributable to expansion of the Company's worldwide sales operations
to support the netXpand product line. The expansion included hiring additional
sales and marketing and technical support personnel and implementing new
advertising programs. The Company expects sales and marketing expenses as a
percentage of net sales to decrease as sales of the netXpand products increase.
If the Company is not successful in increasing sales of netXpand products it
may be required to reduce sales and marketing expenses.
General and Administrative
General and administrative expenses decreased 10 percent to $920,000 for the
first quarter of fiscal 1996. The decrease from fiscal 1995 to fiscal 1996 was
primarily attributable to lower consulting fees related to general business
planning. If the Company is not successful in increasing sales of netXpand
products it may be required to reduce general and administrative expenses.
Nonoperating Income, Net
Interest income, net, decreased in the first quarter of fiscal 1996 from fiscal
1995 due to lower investment balances.
Income Taxes
The Company did not record any provision or benefit for taxes for the first
quarter of fiscal 1996, as the Company is unable to carry back and realize the
benefit of current operating losses. The Company has increased its valuation
allowance in the first quarter of fiscal 1996 primarily to offset the deferred
tax assets resulting from the first quarter operating losses. In the event of
future taxable income, the Company's effective income tax rate in future
periods could be lower than the statutory rate as such tax assets could be
realized.
Net Loss
As a result of the factors discussed above, the Company recorded a net loss of
$2.0 million in the first quarter of fiscal 1996 and a net loss of $250,000 for
the same period of fiscal 1995.
10
Liquidity and Capital Resources
At January 31, 1996, the Company had cash and cash equivalents of $946,000, as
compared to $857,000 at October 31, 1995. During the first quarter of fiscal
1996, $51,000 of cash was provided by operating activities, principally as a
result of a $1.8 million refund of federal income taxes and a $1.2 million
reduction in accounts receivable, offset principally by operating losses, a
decrease in accounts payable, and an increase in inventories due to lower-than-
expected sales of netXpand products. Inventories in the first quarter of
fiscal 1996 increased $778,000, primarily due to increases in netXpand product
materials. Working capital at January 31, 1996, was $6.3 million, as compared
to $7.6 million at October 31, 1995.
In the first quarter of fiscal 1996 the Company purchased $216,000 of fixed
assets, consisting primarily of computer and manufacturing equipment, compared
to $559,000 for the same period of fiscal 1995. The Company expects capital
expenditures during fiscal 1996 to decrease from fiscal 1995 levels because the
Company's current facilities were expanded in 1995 to meet production levels
anticipated through fiscal 1996.
The Company received $271,000 of proceeds from employee stock option and stock
purchase plans. Cash flow from employee stock option exercises and stock
purchase plans is subject to significant fluctuations depending upon numerous
factors including the market price of the Company's common stock and the timing
of employee stock option expirations.
On May 22, 1995, the Company signed a loan agreement for a $4.0 million
revolving line of credit for working capital purposes that expires on April 30,
1996. The agreement was modified on January 17, 1996. Borrowings under the
modified credit line bear interest at the bank's prime rate plus one percent
and are collateralized by accounts receivable and other assets. Borrowings are
limited to 70 percent of adjusted accounts receivable balances, and the Company
is subject to certain financial covenants, including the maintenance of minimum
tangible net worth of $7.0 million and a minimum debt ratio of 0.7:1.0. On
January 31, 1996, the Company had no balance outstanding under its revolving
line of credit. The Company is currently negotiating with its lender to extend
the term of its line of credit and modify some of the financial covenants. The
Company believes that it will be successful in modifying and extending the line
of credit. The Company is currently in compliance with the covenants of the
credit line and believes that it will be able to borrow sufficient funds to
meet short-term operating requirements in the second quarter of fiscal 1996.
Based on the current operating plan, the Company anticipates that cash and cash
equivalents, credit facilities and lease lines will be sufficient to meet short-
term operating requirements. The Company must obtain additional working
capital in 1996 to support its expansion of the netXpand product line.
Additional working capital would be used to support accounts receivable and
inventory growth, research and development activities, geographic sales
expansion and licensing of technology. The Company expects to seek additional
capital in the first half of fiscal 1996 through the sale of equity securities.
If the Company is unsuccessful in the sale of equity securities it will
initially scale back its efforts to gain additional market penetration for its
netXpand product and reduce its development of netXpand and communications
controller products. The Company may also need to seek alternative sources of
financing, including debt. There can be no assurance that the Company will be
successful in obtaining additional working capital or in expanding its netXpand
business.
11
SBE, INC.
Part II Other information
Items 1, 2, 3, 4 and 5
The above items have been omitted as inapplicable.
Item 6. Exhibits and Reports on Form 8-K
The following documents are filed as part of this report:
(a) Exhibits - EX-27 - Financial Data Schedule
(b) The Registrant did not file any reports on Form 8-K during the quarter
ended January 31, 1996.
12
SBE, INC.
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, as of March 12, 1996.
SBE, Inc.
Registrant
/S/ Timothy J. Repp
Timothy J. Repp
Chief Financial Officer, Vice President of
Finance (Principal Financial and Accounting
Officer)
13