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, 1998
[ ] 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)
Delaware 94-1517641
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4550 Norris Canyon Road, San Ramon, California 94583
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(Address of principal executive offices and zip code)
(510) 355-2000
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(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
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The number of shares of Registrant's Common Stock outstanding as of February
27, 1998 was 2,659,655.
SBE, INC.
INDEX TO JANUARY 31, 1998 FORM 10-Q
PART I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
January 31, 1998 and October 31, 1997 3
Condensed Consolidated Statements of Operations for the
three months ended January 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 1998 and 1997 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
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT 15
PART I. Financial Information
Item 1. Financial Statements
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 1998 and October 31, 1997
(In thousands)
January 31, October 31,
1998 1997
---------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,205 $ 5,569
Trade accounts receivable, net 3,579 2,780
Inventories 1,245 851
Deferred income taxes 513 513
Other 674 156
-------- --------
Total current assets 9,216 9,869
Property, plant and equipment, net 1,322 1,083
Capitalized software costs, net 265 276
Other 41 41
-------- --------
Total assets $ 10,844 $ 11,269
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,644 $ 1,029
Accrued payroll and employee benefits 329 950
Other accrued expenses 350 399
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Total current liabilities 2,323 2,378
Deferred tax liabilities 513 513
Deferred rent 407 412
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Total liabilities 3,243 3,303
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Stockholders' equity:
Common stock 9,933 9,829
Accumulated deficit (2,332) (1,863)
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Total stockholders' equity 7,601 7,966
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Total liabilities and stockholders' equity $ 10,844 $ 11,269
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended January 31, 1998 and 1997
(In thousands, except per share amounts)
(Unaudited)
Three months ended
January 31,
--------------------
1998 1997
-------- --------
Net sales $ 4,444 $ 4,217
Cost of sales 1,722 2,256
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Gross profit 2,722 1,961
Product research and development 1,128 438
Sales and marketing 1,326 779
General and administrative 791 587
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Total operating expenses 3,245 1,804
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Operating income (loss) (523) 157
Gain on sale of assets -- 685
Interest and other income (expense), net 54 (12)
-------- --------
Income (loss) before income taxes (469) 830
Provision for income taxes -- --
-------- --------
Net income (loss) $ (469) $ 830
======== ========
Basic earnings (loss) per share $ (0.18) $ 0.35
======== ========
Diluted earnings (loss) per share $ (0.18) $ 0.35
======== ========
Basic-Shares used in per share computations 2,652 2,393
======== ========
Diluted-Shares used in per share computations 2,652 2,399
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended January 31, 1998 and 1997
(In thousands)
(Unaudited)
Three months ended
January 31,
--------------------
1998 1997
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Cash flows from operating activities:
Net (loss) income $ (469) $ 830
Adjustments to reconcile net (loss) income
to net cash (used) provided by
operating activities:
Depreciation and amortization 247 274
Gain from sale of property and equipment -- (685)
Costs and reserves related to sale of property
and equipment -- (432)
Other -- 1
Changes in assets and liabilities:
Increase in trade accounts receivable (799) (166)
(Increase) decrease in inventories (394) 1,007
Increase in other assets (518) (748)
Increase in trade accounts payable 615 548
Decrease in other liabilities (675) (309)
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Net cash (used) provided by
operating activities (1,993) 320
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (417) (50)
Disposals of property and equipment -- 1,600
Capitalized software costs (58) --
-------- --------
Net cash (used) provided by investing activities (475) 1,550
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Cash flows from financing activities:
Repayments of borrowing on line of credit -- (980)
Proceeds from stock plans 104 26
-------- --------
Net cash provided (used) by financing activities 104 (954)
-------- --------
Net (decrease) increase in cash
and cash equivalents (2,364) 916
Cash and cash equivalents at beginning of period 5,569 41
-------- --------
Cash and cash equivalents at end of period $ 3,205 $ 957
======== ========
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 January 31, 1998 are not
necessarily indicative of expected results for the full 1998 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, 1997.
2. Inventories:
Inventories comprise the following (in thousands):
January 31, October 31,
1998 1997
Finished goods $ 1,245 $ 823
Parts and materials -- 28
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$ 1,245 $ 851
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3. Net Earnings (Loss) Per Share:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which
establishes standards for computing and presenting earnings (loss) per share.
Under the new standard, basic earnings per share is computed based on the
weighted average number of common shares outstanding and excludes any potential
dilution; diluted earnings per share reflects potential dilution from the
exercise or conversion of securities into common stock. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997 and earlier adoption is not permitted. The financial statements presented
have been prepared in accordance with SFAS No. 128 and earnings per share data
for all prior periods presented have been restated to conform with current year
presentation. Options to purchase 836,471 shares of common stock were
outstanding as of January 31, 1998 and were excluded from the loss per share
calculation for the quarter ended January 31, 1998 as they have the effect of
decreasing loss per share.
4. Bank Facility:
On August 26, 1997 the Company entered into a revolving working capital line
of credit agreement. The agreement allows for a $2,000,000 line of credit and
expires on September 1, 1998. Borrowings under the line of credit bear
interest at the bank's prime rate plus one half percent and are collateralized
by accounts receivable and all other assets. Borrowings are limited to 75
percent of adjusted accounts receivable balances, and the Company is required
to maintain a minimum tangible net worth of $4.5 million, a quick ratio of
cash, investments, and receivables to current liabilities of not less than
1.30:1.00, maximum debt to equity ratio of 1.00:1.00, 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, 1998 the Company was in default on the minimum profitability
covenant of its credit line. The Company has received a waiver letter from the
Bank that waives the default.
As of February 27, 1998, there were no borrowings outstanding under the 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. Also, a director of SBE, Inc. is also a director of XeTel Corporation.
The sale resulted in a gain of $685,000, or 29 cents per share, and is
included in the results of operations for the three months ended January 31,
1997.
6. Reincorporation:
On December 15, 1997 the Company reincorporated in the state of Delaware. In
connection with the event, the Company increased the number of its authorized
shares of preferred stock to 2,000,000 shares and established a par value of
$0.001 for both its common and preferred stock.
7. Recently Issued Accounting Pronouncements:
In March 1997, Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" was issued and is
effective for the Company's year ending October 31, 1998. In June 1997,
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of An Enterprise and Related Information" were issued and are
effective for the year ending October 31, 1999. The Company has not
determined the impact of the implementation of these pronouncements.
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, 1997,
particularly in the section entitled "Business--Risk Factors."
For more than 15 years, SBE, Inc. (the "Company") has shipped network
connectivity products that have helped customers deploy 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 and 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 offers two remote access/router product lines to meet the needs of
its customers: WanXL(TM) and netXpand(R). The Company's WanXL products operate
within a network server to provide from one to four ports of high-speed network
access. The Company's netXpand products provide from one to ten ports of wide
area network or remote access connections. Sales of these products constituted
over 20 percent of net sales for fiscal year 1997 and 7 percent of net sales
for the first quarter of fiscal 1998. The Company expects the WanXL and
netXpand product lines to constitute an increasing percentage of net sales in
future periods; however, there can be no assurance to that effect. The WanXL
and netXpand 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 market segments to grow at a
compounded annual rate in excess of 50 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 WanXL and netXpand
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
wireless, 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 such customers' product
cycles cause fluctuations in the Company's operating results. In particular,
sales to Tandem Computers, Motorola and Silicon Graphics constituted 35, 15 and
12 percent, respectively, of net sales in fiscal year 1997. Sales to Tandem
Computers and Motorola constituted 13 and 42 percent, respectively, of net
sales in the first quarter of fiscal 1998. The Company expects that sales to
Tandem Computers and Motorola will continue to be significant at least through
fiscal 1998. The loss of, or cancellation of any significant order by any of
these customers would likely have a material adverse impact on the Company's
business, financial condition and results of operations. There can be no
assurance that any large customer of the Company will continue to place orders
with the Company or, if orders are placed, that they will be at current or
higher levels.
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, 1998 and 1997. These operating results are not necessarily
indicative of Company's operating results for any future period.
Quarter Ended January 31,
-------------------------
1998 1997
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Net sales 100% 100%
Cost of sales 39 53
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Gross profit 61 47
Operating expenses:
Product research and development 25 10
Sales and marketing 30 19
General and administrative 18 14
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Total operating expenses 73 43
---- ----
Operating income (loss) (12) 4
Gain on sale of assets -- 16
Interest and other income (expense), net 1 0
---- ----
Income (loss) before income taxes (11) 20
Provision for income taxes 0 0
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Net income (loss) (11)% 20%
==== ====
Net Sales
Net sales for the first quarter of fiscal 1998 were $4.4 million, a 5 percent
increase from the first quarter of fiscal 1997. This increase was primarily
attributable to increased sales of VME communication controller products offset
by decreased sales of netXpand products as compared to the first quarter of
fiscal 1997. Sales of VME communication controller products increased 56% from
the first quarter of fiscal 1997. Sales of netXpand products decreased 92%
from the first quarter of fiscal 1997. Sales of all product lines to
individual customers in excess of 10 percent of net sales of the Company
consisted of sales to Motorola Inc. and Tandem Computers, which represented 42
and 13 percent, respectively, of net sales in the first quarter of fiscal
1998. This compares to sales to Tandem Computers, Motorola Inc. and D-Link
Inc. of 17, 16 and 13 percent, respectively, of net sales in the first quarter
of fiscal 1997. There were no sales to D-Link Inc. in the first quarter of
fiscal 1998. The Company expects to continue to experience fluctuation in
communication controller product sales as large customers' needs change.
International sales constituted 6 percent and 32 percent of net sales in the
first quarter of fiscal 1998 and the first quarter of fiscal 1997,
respectively. The decrease in international sales is primarily attributable to
decreased sales of netXpand products.
Gross Profit
Gross profit as a percentage of sales was 61 percent and 47 percent in the
first quarter of fiscal 1998 and the first quarter of fiscal 1997,
respectively. The increase from the first quarter of fiscal 1997 to the first
quarter of fiscal 1998 was primarily attributable to a favorable product mix
and lower material costs. The contract to purchase manufacturing services from
XeTel has and may continue to decrease the volatility of the quarterly cost of
sales as a percentage of total sales.
Product Research and Development
Product research and development expenses were $1,128,000 in the first quarter
of fiscal 1998 and $438,000 in the first quarter of fiscal 1997. The increase
in research and development spending from the first quarter of fiscal 1997 to
the first quarter of fiscal 1998 was a result of an increase in internal staff
and third party consulting costs as the Company expands its base of products.
The Company expects that product research and development expenses will
continue at current dollar levels as the Company focuses its resources on
improving its WanXL and netXpand product lines and enhancing its traditional
board-level products.
Sales and Marketing
Sales and marketing expenses for the first quarter of fiscal 1998 were
$1,326,000, up from $779,000 in the first quarter of fiscal 1997. Sales and
marketing expenses increased due to an increase in staff and higher marketing
program costs for advertising and tradeshows as the company focuses on
expanding its distribution channels. The Company expects sales and marketing
expenses to decrease as a percentage of net sales in future periods.
General and Administrative
General and administrative expenses for the first quarter of fiscal 1998 were
$791,000, an increase of 35 percent from $587,000 in the first quarter of
fiscal 1997. The increase represents an increase in recruiting, operations,
and other administrative costs. The Company expects that general and
administrative expenses will continue at current dollar levels.
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 $483,000
in net book value of assets transferred and $432,000 in costs and reserves
associated with the transaction.
Interest and Other Income (Expense), Net
Interest income increased in the first quarter of fiscal 1998 from the first
quarter of fiscal 1997 due to higher investment balances. Interest expense for
the first quarter of fiscal 1998 decreased from the first quarter of fiscal
1997 due to the repayment of borrowings.
Income Taxes
The Company did not record any benefit for taxes in the first quarter of fiscal
1998 as the benefit derived from its net operating losses and unused tax
credits was fully valued against. The Company did not record any provision for
taxes in the first quarter of fiscal 1997 due to the utilization of net
operating loss carryforwards from fiscal 1996. 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.
Net Income (Loss)
As a result of the factors discussed above, the Company recorded a net loss of
$469,000 in the first quarter of fiscal 1998 and net income of $830,000 in the
first quarter of fiscal 1997.
Liquidity and Capital Resources
At January 31, 1998, the Company had cash and cash equivalents of $3.2 million,
as compared to $5.6 million at October 31, 1997. In the first quarter of
fiscal 1998, $2.0 million of cash was used by operating activities, principally
as a result of a $799,000 increase in accounts receivable, a $675,000 decrease
in other liabilities, a $518,000 increase in other assets, a $469,000 net loss,
and $394,000 increase in inventories. These cash outflows were partially
offset by a $615,000 increase in accounts payable and $247,000 in other
credits. Working capital at January 31, 1998 was $6.9 million, as compared to
$7.5 million at October 31, 1997.
In the first quarter of fiscal 1998 the Company purchased $417,000 of fixed
assets, consisting primarily of computer equipment and software. The Company
expects capital expenditures during fiscal 1998 to be greater than fiscal 1997
levels.
The Company received $104,000 in the first quarter of fiscal 1998 from employee
stock option exercises and employee stock purchase plan purchases.
In August 1997 the Company entered into a revolving working capital line of
credit agreement. The agreement allows for a $2,000,000 line of credit and
expires on September 1, 1998. Borrowings under the line of credit bear
interest at the bank's prime rate plus one half percent and are collateralized
by accounts receivable and other assets. Borrowings are limited to 75 percent
of adjusted accounts receivable balances, and the Company is required to
maintain a minimum tangible net worth of $4.5 million, a quick ratio of cash,
investments, and receivables to current liabilities of not less than
1.30:1.00, and minimum profitability levels. The line of credit agreement
also prohibits the payment of cash dividends without consent of the bank. As
of February 27, 1998, there were no borrowings outstanding under the line of
credit. As of January 31, 1998 the Company was in default on the minimum
profitability covenant of its credit line. The Company has received a waiver
letter from the Bank that waives the default.
Based on the current operating plan, the Company anticipates that its current
cash balances, credit line and anticipated cash flow from operations will be
sufficient to meet its working capital needs over at least the next twelve
months.
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits:
11.1 Statements of Computation of Net Income per Share
27.1 Financial Data Schedule
Reports on Form 8-K:
The Registrant filed a Report on Form 8-K, dated December 15, 1997,
disclosing that it had changed its state of incorporation from California
to Delaware.
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 13, 1998.
SBE, Inc.
Registrant
/S/ Timothy J. Repp
Timothy J. Repp
Chief Financial Officer, Vice
President of Finance and Secretary
(Principal Financial and Accounting
Officer)
EXHIBIT 11.1
SBE, INC.
STATEMENTS OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
for the three months ended January 31, 1998 and 1997
(In thousands, except per share amounts)
(Unaudited)
Three months ended
January 31,
------------------
1998 1997
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BASIC
Weighted average number of common shares outstanding 2,652 2,393
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Number of shares for computation of net income (loss)
per share 2,652 2,393
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Net income (loss) $ (469) $ 830
======= =======
Net income (loss) per share $ (0.18) $ 0.35
======= =======
DILUTED
Weighted average number of common shares outstanding 2,652 2,393
Shares issuable pursuant to options granted under
employee stock option plan, less assumed repurchase
at the ending fair market value for the period -- 6
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Number of shares for computation of net income (loss)
per share 2,652 2,399
======= =======
Net income (loss) $ (469) $ 830
======= =======
Net income (loss) per share $ (0.18) $ 0.35
======= =======