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 April 30, 1997
[ ] 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 May 30,
1997 was 2,514,306.
SBE, INC.
INDEX TO APRIL 30, 1997 FORM 10-Q
PART I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
April 30, 1997 and October 31, 1996 3
Condensed Consolidated Statements of Operations for the
three and six months ended April 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the
six months ended April 30, 1997 and 1996 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, and 5 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
Part I. Financial Information
Item 1. Financial Statements
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, 1997 and October 31, 1996
(In thousands)
April 30, October 31,
1997 1996
(Unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,581 $ 41
Trade accounts receivable, net 2,274 2,044
Inventories 1,331 2,741
Deferred income taxes 291 291
Other 413 88
------- -------
Total current assets 5,890 5,205
Property, plant and equipment, net 1,264 2,070
Capitalized software costs, net 413 551
Other 68 68
------- -------
Total assets $ 7,635 $ 7,894
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ --- $ 980
Trade accounts payable 952 1,085
Accrued payroll and employee benefits 251 262
Other accrued expenses 443 829
------- -------
Total current liabilities 1,646 3,156
Deferred tax liabilities 318 318
Deferred rent 437 439
------- -------
Total liabilities 2,401 3,913
------- -------
Shareholders' equity:
Preferred stock --- 750
Common stock 9,216 8,427
Accumulated deficit (3,982) (5,196)
------- -------
Total shareholders' equity 5,234 3,981
------- -------
Total liabilities and shareholders' equity $ 7,635 $ 7,894
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three and six months ended April 30, 1997 and 1996
(In thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
April 30, April 30,
1997 1996 1997 1996
-------- -------- -------- --------
Net sales $ 5,852 $ 2,662 $ 10,069 $ 6,656
Cost of sales 3,259 1,810 5,515 4,144
-------- -------- -------- --------
Gross profit 2,593 852 4,554 2,512
Product research and development 611 1,463 1,049 2,989
Sales and marketing 889 1,404 1,668 2,613
General and administrative 710 867 1,297 1,787
Restructuring costs --- 255 --- 255
Writedown of software costs --- 794 --- 794
-------- -------- -------- --------
Total operating expenses 2,210 4,783 4,014 8,438
-------- -------- -------- --------
Operating income (loss) 383 (3,931) 540 (5,926)
Gain on sale of assets --- --- 685 ---
Interest and other income (expense), net 1 16 (11) 22
-------- -------- -------- --------
Income (loss) before income taxes 384 (3,915) 1,214 (5,904)
Provision for income taxes --- --- --- ---
-------- -------- -------- --------
Net income (loss) $ 384 $(3,915) $ 1,214 $(5,904)
======== ======== ======== ========
Net income (loss) per common share $ 0.15 $ (1.85) $ 0.50 $ (2.81)
======== ======== ======== ========
Shares used in per share computations 2,489 2,116 2,442 2,102
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended April 30, 1997 and 1996
(In thousands)
(Unaudited)
1997 1996
-------- --------
Cash flows from operating activities:
Net income (loss) $ 1,214 $ (5,904)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 517 904
Writedown of capitalized software --- 794
Gain from sale of property and equipment (685) ---
Expenses and reserves related to sale of property
and equipment (407) ---
Other 1 3
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable (230) 1,688
Decrease (increase) in inventories 1,410 (711)
Decrease in income tax recoverable --- 1,827
(Increase) decrease in other assets (325) 84
Decrease in trade accounts payable (133) (139)
(Decrease) increase in customer advances (294) 997
Decrease in other liabilities (105) (70)
-------- --------
Net cash provided (used) by operating activities 963 (527)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (82) (332)
Disposals of property and equipment 1,600 2
Acquisition of capitalized software --- (42)
-------- --------
Net cash provided (used) by investing activities 1,518 (372)
-------- --------
Cash flows from financing activities:
Repayments of borrowing on bank facilities (980) ---
Proceeds from stock plans 39 303
-------- --------
Net cash (used) provided by financing activities (941) 303
-------- --------
Net increase (decrease) in cash and cash equivalents 1,540 (596)
Cash and cash equivalents at beginning of period 41 857
-------- --------
Cash and cash equivalents at end of period $ 1,581 $ 261
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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 April 30, 1997 are not necessarily indicative
of expected results for the full 1997 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, 1996.
2. Inventories:
Inventories comprise the following (in thousands):
April 30, October 31,
1997 1996
-------- --------
Finished goods $ 699 $ 750
Subassemblies 6 175
Parts and materials 626 1,816
------- -------
$ 1,331 $ 2,741
======= =======
3. Net Income (Loss) Per Common Share:
Net income per common share for the three and six months ended April 30, 1997
was computed by dividing net income by the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding. Common stock
equivalents relate to stock options. Net loss per common share for the three
and six months ended April 30, 1996 was computed by dividing net loss by the
weighted average number of shares of common stock only as common stock
equivalents have an antidilutive effect.
4. Bank Facility:
The Company had a working capital credit facility for $500,000 that expired on
May 15, 1997. Borrowings under the line bore interest at the bank's prime rate
plus two percent and were collateralized by accounts receivable and other
assets. Borrowings were limited to 75 percent of adjusted accounts receivable
balances and the Company was required to maintain a minimum tangible net worth
of $4.0 million, a minimum debt ratio of 0.7:1.0, and a minimum quick ratio of
cash, investments and accounts receivable to current liabilities of 1.0:1.0.
Additionally, the line of credit prohibited the payment of cash dividends
without the consent of the bank.
As of April 30, 1997, there were no borrowings outstanding under the line of
credit. The Company is currently negotiating with its lender for a new line of
credit.
5. Sale of Manufacturing Assets:
On December 6, 1996 the Company sold all the assets of its manufacturing
operation to XeTel Corporation, a contract manufacturing company with
headquarters in Austin, Texas, for $1.6 million. Additionally, the Company
entered into a four-year exclusive agreement to purchase manufacturing services
from XeTel and subleased a portion of its San Ramon Facility to XeTel. The
sale resulted in a gain of $685,000, or 29 cents per share, in the first
quarter of fiscal 1997.
6. Writedown of Software Costs:
The Company recorded a writedown of its capitalized software costs of $794,000
in the three months ended April 30, 1996. The carrying value of the asset was
reduced due to the uncertainty of future realization of the asset, due to the
slower than expected sales of netXpand products.
7. Restructuring Costs:
In the three months ended April 30, 1996, the Company recorded $255,000 of
restructuring costs, principally comprised of severance payment expenses, in
connection with lower than expected sales.
8. Reclassifications:
Certain reclassifications have been made to the 1996 condensed consolidated
financial statements to conform to the 1997 presentation.
SBE, INC.
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and those
discussed in the Company's Annual Report on Form 10-K for the year ended
October 31, 1996, particularly in the section entitled "Business--Risk
Factors."
Overview
For more than 15 years, SBE, Inc. (the "Company") has shipped network
connectivity products that have helped customers grow and prosper through
deploying network-computing solutions. Historically, the Company's networking
products have provided connectivity solutions for large original equipment
manufacturers and system integrators throughout the world. Leveraging this
expertise in network communications technology, the Company is now delivering
new innovative products for Internet, Intranet, and small- to medium-sized
enterprise network users. The Company is committed to providing access
solutions that make networks more accessible, easier to use, manage, and
operate. The Company's comprehensive line of access solutions includes
products for Internet and Intranet access, branch office access, home-to-office
access, and access to wide area networks.
The Company completed its initial investment program in fiscal 1996 and is now
delivering standalone and server-based products for network access. The
Company's netXpand products are standalone network access products that provide
from one to ten ports of wide area network or remote access connections. The
Company's PCI products operate within a network server to provide high-speed
network access. Sales of these new access products constituted over 16 percent
of net sales for fiscal year 1996 and 37 percent of net sales for the first six
months of fiscal 1997. The Company expects the netXpand and PCI product lines
to constitute an increasing percentage of net sales in future periods; however,
there can be no assurance to that effect. The netXpand and PCI products are
targeted at the high-growth, price-sensitive sectors of the internetworking
market. Based upon market information supplied by market research firms, the
Company expects these segments to grow at a compounded annual rate in excess of
45 percent in the United States and at a greater rate in international markets.
However, there can be no assurance that the market will grow at this rate, if
at all, or that the Company will be successful in achieving widespread market
acceptance of its netXpand and PCI products.
The Company continues to support and expand its communication controller
business by developing new products for strategic customer accounts and by
focusing on emerging technologies that can be leveraged into current and new
sales channels. The Company believes that it is well-positioned with a number
of key telecommunication systems providers that have large contracts to develop
cellular, data and telephone system infrastructure.
The communication controller portion of the Company's business is characterized
by a concentration of sales to a small number of customers and consequently the
timing of significant orders from major customers and their product cycles
cause fluctuations in the Company's operating results.
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 April
30, 1997 and 1996. These operating results are not necessarily indicative of
Company's operating results for any future period.
Three Months Ended Six Months Ended
April 30, April 30,
1997 1996 1997 1996
---- ---- ---- ----
Net sales 100% 100% 100% 100%
Cost of sales 56 68 55 62
---- ---- ---- ----
Gross profit 44 32 45 38
---- ---- ---- ----
Product research and development 10 55 10 45
Sales and marketing 15 53 17 39
General and administrative 12 32 13 27
Restructuring costs -- 10 -- 4
Writedown of software costs -- 30 -- 12
---- ---- ---- ----
Total operating expenses 37 180 40 127
---- ---- ---- ----
Operating income (loss) 7 (148) 5 (89)
Gain on sale of assets -- -- 7 --
Interest and other income (expense), net -- 1 -- --
---- ---- ---- ----
Income (loss) before income taxes 7 (147) 12 (89)
Provision for income taxes -- -- -- --
---- ---- ---- ----
Net income (loss) 7% (147)% 12% (89)%
==== ==== ==== ====
Net Sales
Net sales for the second quarter of fiscal 1997 were $5.9 million, a 119
percent increase from the second quarter of fiscal 1996. This increase was
primarily attributable to a significant increase in netXpand and PCI product
sales as compared to the second quarter of fiscal 1996. Sales of netXpand and
PCI products increased $2.5 million from $163,000 in the second quarter of
fiscal 1996 to $2.7 million in the second quarter of fiscal 1997. Sales for
the six months ended April 30, 1997 were $10.1 million, up from $6.7 million
for the same period of 1996, principally due to increased sales of netXpand and
PCI products. Sales of all product lines to individual customers in excess of
10 percent of net sales of the Company for the six months included sales to
Silicon Graphics, Tandem Computers and Motorola, which represented 26, 16 and
10 percent, respectively, of net sales in the six months ended April 30, 1997.
This compares to 22 percent for Tandem Computers and less than 10 percent for
Silicon Graphics and Motorola in the six months ended April 30, 1996. The
Company expects to continue to experience fluctuation in communication
controller product sales as large customers' needs change.
International sales constituted 13 percent and 18 percent of net sales in the
six months ended April 30, 1997 and 1996, respectively. The decrease in
international sales is primarily attributable to decreased stocking levels for
an international OEM.
Gross Profit
Gross profit as a percentage of sales was 44 percent and 32 percent in the
second quarter of fiscal 1997 and the second quarter of fiscal 1996,
respectively. Gross profit as a percentage of sales in the first six months of
fiscal 1997 was 45 percent, up from 38 percent for the same period of 1996.
The increases from fiscal 1996 to fiscal 1997 were primarily attributable to
lower material costs for certain higher volume products and lower costs
associated with the long-term manufacturing service contract with XeTel
Corporation. This contract may decrease the volatility of the quarterly cost
of sales as a percentage of sales.
Product Research and Development
Product research and development expenses were $611,000 in the second quarter
of fiscal 1997 and $1.5 million in the second quarter of fiscal 1996. Product
research and development costs for the first six months of fiscal 1997
decreased 65 percent from the same period of fiscal 1996. The decreases in
research and development spending from fiscal 1996 to fiscal 1997 were a result
of the completion of the base netXpand product line and a corresponding
decrease in internal staff and third party consulting costs associated with the
launch of the netXpand products. The Company expects that product research and
development expenses will continue at current levels as the Company focuses its
resources on improving its netXpand and PCI product lines and enhancing
communication controller products to meet specific customers' needs.
Sales and Marketing
Sales and marketing expenses for the second quarter of fiscal 1997 were
$889,000, down from $1.4 million in the second quarter of fiscal 1996. Sales
and marketing expenses decreased 46 percent in the first six months of fiscal
1997 from the same period of 1996. These decreases were primarily due to lower
marketing program costs for advertising and tradeshows. The Company continues
to focus its sales and marketing expenditures on specific results-oriented
programs and does not expect to see significant increases in marketing program
costs in the short term. The Company expects sales and marketing expenses to
continue at a similar percentage of total sales.
General and Administrative
General and administrative expenses for the second quarter of fiscal 1997 were
$710,000, a decrease of 18 percent from $867,000 in the second quarter of
fiscal 1996. General and administrative expenses decreased 27 percent in the
first six months of fiscal 1997 from the same period of 1996. The decrease
represents reductions in consulting, accounting and other administrative costs.
The Company expects that general and administrative expenses will continue at
or near current levels.
Restructuring Costs
In the three months ended April 30, 1996, the Company recorded $255,000 of
restructuring costs, principally comprised of severance payment expenses, in
connection with lower than expected sales.
Writedown of Software Costs
The Company recorded a writedown of its capitalized software costs of $794,000
in the three months ended April 30, 1996. The carrying value of the asset was
reduced due to the uncertainty of future realization of the asset, due to the
slower than expected sales of netXpand products.
Gain on Sale of Assets
The Company recorded a $685,000 gain on the sale of assets in the first quarter
of fiscal 1997, consisting of cash proceeds of $1.6 million received from the
sale of the Company's manufacturing assets to XeTel Corporation less $508,000
in net book value of assets transferred and $407,000 in expenses and reserves
associated with the transaction.
Income Taxes
The Company did not record any provision for taxes in the second quarter or the
first six months of fiscal 1997 due to the utilization of net operating loss
carryforwards from fiscal 1996. The Company did not record any benefit for
taxes in the second quarter or the first six months of fiscal 1996 as a result
of not being able to realize any benefit from its net operating losses and
unused tax credits. 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 operating loss and tax credit carryforwards are recognized. The
Company has deferred tax assets of approximately $4.0 million that are reserved
due to the uncertainty of future events that will allow realization of the
benefit of these items.
Net Income (Loss)
As a result of the factors discussed above, the Company recorded net income of
$384,000 in the second quarter of fiscal 1997 and a net loss of $3.9 million in
the second quarter of fiscal 1996. Net income for the first six months of
fiscal 1997 was $1.2 million, as compared to a net loss of $5.9 million for the
same period of 1996.
Liquidity and Capital Resources
At April 30, 1997, the Company had cash and cash equivalents of $1.6 million,
as compared to $41,000 at October 31, 1996. In the first six months of fiscal
1997, $963,000 of cash was provided by operating activities, principally as a
result of a $1.4 million reduction in inventories, $1.2 million in net income,
and $517,000 in depreciation and amortization. These operating cash inflows
were partially offset by a $685,000 gain from the sale of property and
equipment. Working capital at April 30, 1997 was $4.2 million, as compared to
$2.0 million at October 31, 1996.
In the first six months of fiscal 1997 the Company purchased $82,000 of fixed
assets, consisting primarily of computer and product testing equipment. The
Company expects capital expenditures during fiscal 1997 to be similar to fiscal
1996 levels.
The Company received $39,000 in the first six months of fiscal 1997 from
employee stock purchase plan purchases and employee stock option exercises.
The Company had a working capital credit facility for $500,000 that expired on
May 15, 1997. Borrowings under the line bore interest at the bank's prime rate
plus two percent and were collateralized by accounts receivable and other
assets. Borrowings were limited to 75 percent of adjusted accounts receivable
balances and the Company was required to maintain a minimum tangible net worth
of $4.0 million, a minimum debt ratio of 0.7:1.0, and a minimum quick ratio of
cash, investments and accounts receivable to current liabilities of 1.0:1.0.
Additionally, the line of credit prohibited the payment of cash dividends
without the consent of the bank. As of April 30, 1997, there were no
borrowings outstanding under the line of credit. The Company is currently
negotiating with its lender for a new line of credit. There can be no
assurance that the Company will be able to obtain a new line of credit on
favorable terms or at all.
In the first quarter of fiscal 1997, the Company sold all the assets of its
manufacturing operation to XeTel Corporation for $1.6 million. Additionally,
the Company entered into a four-year exclusive agreement to purchase
manufacturing services from XeTel and to sublease a portion of its San Ramon
facility to XeTel. As a result of the sale, the Company reported a gain on the
sale of these assets, net of expenses, of $685,000 in the first quarter of
fiscal 1997.
Based on the current operating plan, the Company anticipates that its current
cash balances and anticipated cash flow from operations will be adequate to
finance operations over the next twelve months. Additional capital may be
required to meet operating requirements if the current operating plan is not
realized. If the Company exceeds its current operating plan, additional
working capital would be required to support the expansion of sales and
marketing programs as well as accounts receivable and inventory growth. The
Company is currently seeking additional capital through obtaining a new credit
facility. If the Company is not able to obtain a sufficient credit line, it
may seek alternative sources of financing, including equity sales, or it may
reduce overall expense and capital expenditure levels. There can be no
assurance that the Company will be successful in obtaining additional working
capital or in exceeding its operating plan.
SBE, INC.
Part II Other information
Items 1, 2, 3, and 5
The above items have been omitted as inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders of the Company was held on
Wednesday, April 16, 1997, at 5:00 p.m. at the Company's corporate offices
located at 4550 Norris Canyon Road, San Ramon, California.
The shareholders approved the following two items:
(i) Elected the following Directors to the Board:
For Withheld
--------- ---------
Raimon L. Conlisk 1,965,008 50,855
George E. Grega 1,963,428 52,435
William B. Heye, Jr. 1,962,477 53,386
Ronald J. Ritchie 1,964,514 51,349
Randall L-W. Caudill 1,964,768 51,095
(ii) Ratified the selection of Coopers & Lybrand LLP as the Company's
independent auditors for the fiscal year ending October 31, 1997. (For -
1,973,752; Against - 11,664; Abstain - 30,447)
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 April 30, 1997.
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 June 12, 1997.
SBE, Inc.
----------
Registrant
/S/ Timothy J. Repp
-------------------
Timothy J. Repp
Chief Financial Officer, Vice President of
Finance and Secretary (Principal Financial
and Accounting Officer)