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, 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
_______________________________ ________________
(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 May 29,
1998 was 2,674,753.
1
SBE, INC.
INDEX TO APRIL 30, 1998 FORM 10-Q
PART I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
April 30, 1998 and October 31, 1997............................3
Condensed Consolidated Statements of Operations for the
three and six months ended April 30, 1998 and 1997.............4
Condensed Consolidated Statements of Cash Flows for the
six months ended April 30, 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 4 Submission of Matters to a Vote of Security Holders....13
Item 6 Exhibits and Reports on Form 8-K.......................13
SIGNATURES........................................................14
EXHIBITS..........................................................15
2
PART I. Financial Information
Item 1. Financial Statements
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, 1998 and October 31, 1997
(In thousands)
April 30, October 31,
1998 1997
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,263 $ 5,569
Trade accounts receivable, net 3,113 2,780
Inventories 2,024 851
Deferred income taxes 513 513
Other 509 156
-------- --------
Total current assets 8,422 9,869
Property, plant and equipment, net 1,518 1,083
Capitalized software costs, net 250 276
Other 41 41
-------- --------
Total assets $ 10,231 $ 11,269
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,285 $ 1,029
Accrued payroll and employee benefits 384 950
Other accrued expenses 257 399
-------- --------
Total current liabilities 1,926 2,378
Deferred tax liabilities 513 513
Deferred rent 402 412
-------- --------
Total liabilities 2,841 3,303
-------- --------
Stockholders' equity:
Common stock 9,963 9,829
Accumulated deficit (2,573) (1,863)
-------- --------
Total stockholders' equity 7,390 7,966
-------- --------
Total liabilities and stockholders' equity $ 10,231 $ 11,269
======== ========
See accompanying notes
3
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three and six months ended April 30, 1998 and 1997
(In thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
April 30, April 30,
1998 1997 1998 1997
------ ------ ------ ------
Net sales $ 4,412 $ 5,852 $ 8,857 $ 10,069
Cost of sales 1,644 3,259 3,366 5,515
-------- -------- -------- --------
Gross profit 2,768 2,593 5,491 4,554
Product research and development 958 611 2,086 1,049
Sales and marketing 1,221 889 2,547 1,668
General and administrative 856 710 1,647 1,297
-------- -------- -------- --------
Total operating expenses 3,035 2,210 6,280 4,014
-------- -------- -------- --------
Operating income (loss) (267) 383 (789) 540
Gain on sale of assets -- -- -- 685
Interest and other income (expense), net 26 1 79 (11)
-------- -------- -------- --------
Income (loss) before income taxes (241) 384 (710) 1,214
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net income (loss) $ (241) $ 384 $ (710) $ 1,214
======== ======== ======== ========
Basic earnings (loss) per share $ (0.09) $ 0.15 $ (0.27) $ 0.50
======== ======== ======== ========
Diluted earnings (loss) per share $ (0.09) $ 0.15 $ (0.27) $ 0.50
======== ======== ======== ========
Basic - Shares used
in per share computations 2,661 2,483 2,656 2,440
======== ======== ======== ========
Diluted - Shares used
in per share computations 2,661 2,489 2,656 2,442
======== ======== ======== ========
See accompanying notes
4
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended April 30, 1998 and 1997
(In thousands)
(Unaudited)
Six months ended April 30,
1998 1997
-------- --------
Cash flows from operating activities:
Net (loss) income $ (710) $ 1,214
Adjustments to reconcile net (loss) income to net cash
(used) provided by operating activities:
Depreciation and amortization 482 517
Gain from sale of property and equipment -- (685)
Costs and reserves related to sale of
property and equipment -- (407)
Other -- 1
Changes in assets and liabilities:
Increase in trade accounts receivable (333) (230)
(Increase) decrease in inventories (1,173) 1,410
Increase in other assets (353) (325)
Decrease (increase) in trade accounts payable 256 (133)
Decrease in other liabilities (718) (399)
-------- --------
Net cash provided (used) by operating activities (2,549) 963
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (778) (82)
Disposals of property and equipment -- 1,600
Capitalized software costs (113) --
-------- --------
Net cash (used) provided by investing activities (891) 1,518
-------- --------
Cash flows from financing activities:
Repayments of borrowing on line of credit -- (980)
Proceeds from stock plans 134 39
-------- --------
Net cash provided (used) by financing activities 134 (941)
-------- --------
Net (decrease) increase in cash and cash equivalents (3,306) 1,540
Cash and cash equivalents at beginning of period 5,569 41
-------- --------
Cash and cash equivalents at end of period $ 2,263 $ 1,581
======== ========
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 April 30, 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):
April 30, October 31,
1998 1997
-------- --------
Finished goods $ 2,024 $ 823
Parts and materials -- 28
-------- --------
$ 2,024 $ 851
======== ========
3. Net Income (Loss) Per Common 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 827,596
shares of common stock were outstanding as of April 30, 1998 and were
excluded from the loss per share calculation for the three and six months
ended April 30, 1998 as they have the effect of decreasing loss per share.
6
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 April 30, 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 for the quarter ended
April 30, 1998.
As of May 29, 1998, there were no borrowings outstanding under the line of
credit.
5. 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 per share for both its common and preferred stock.
6. 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.
7
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 developed, marketed,
and sold communication controller products that have helped customers
deploy computer communications solutions. Historically, the Company's
controller products have provided connectivity solutions for large original
equipment manufacturers ("OEMs") and system integrators throughout the
world. Leveraging this expertise in communications technology, the Company
expanded its product offerings to include WanXL(TM) products which are
focused on the client/server market and the significant increases in
communications activity that are driven by applications such as email,
electronic commerce, geographically diverse corporate networks and general
computer communications. Additionally, the Company markets a line of remote
access router products under the trade name netXpand(R). These products are
targeted at the need for small businesses to connect their computers
together and provide remote access for traveling employees.
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 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 19 and 28 percent, respectively, of net sales in the first six
months 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 or cancellation of any significant order by any of these customers
would 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.
In past periods, the Company expended a significant portion of its
resources to market its netXpand products to end users as well as to OEMs.
In the future, it will stop marketing to end users and concentrate on sales
of netXpand to OEMs.
8
Results of Operations
The following table sets forth, as a percentage of net sales, certain
consolidated statements of operations data for the three and six months
ended April 30, 1998 and 1997. 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,
1998 1997 1998 1997
---- ---- ---- ----
Net sales 100% 100% 100% 100%
Cost of sales 37 56 38 55
---- ---- ---- ----
Gross profit 63 44 62 45
---- ---- ---- ----
Product research and development 22 10 23 10
Sales and marketing 28 15 29 17
General and administrative 19 12 19 13
---- ---- ---- ----
Total operating expenses 69 37 71 40
---- ---- ---- ----
Operating income (loss) (6) 7 (9) 5
Gain on sale of assets -- -- -- 7
Interest and other income (expense), net 1 -- 1 --
---- ---- ---- ----
Income (loss) before income taxes (5) 7 (8) 12
Provision for income taxes -- -- -- --
---- ---- ---- ----
Net income (loss) (5)% 7% (8)% 12%
==== ==== ==== ====
Net Sales
Net sales for the second quarter of fiscal 1998 were $4.4 million, a 25
percent decrease from the second quarter of fiscal 1997. This decrease was
primarily attributable to a significant decrease in netXpand and WanXL
product sales as compared to the second quarter of fiscal 1997. Sales of
netXpand and WanXL products decreased $2.5 million from $2.7 million in the
second quarter of fiscal 1997 to $164,000 in the second quarter of fiscal
1998. This decline was principally caused by a decline in sales to one
customer. Sales for the six months ended April 30, 1998 were $8.9 million,
down from $10.1 million for the same period of 1997, principally due to
decreased sales of netXpand and WanXL products partially offset by increased
sales of communication controller 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 Motorola, Tandem Computers and Lau
Technologies, which represented 28, 19 and 13 percent, respectively, of net
sales in the six months ended April 30, 1998. This compares to net sales
to Silicon Graphics, Tandem Computers and Motorola of 26, 16 and 10
percent, respectively, of net sales in the six months ended April 30, 1997.
There were no sales to Lau Technologies in the first six months of fiscal
1997. Sales to Silicon Graphics were less than 10% of net sales in the
first six months of fiscal 1998. The Company expects to continue to
experience fluctuation in product sales as large customers' needs change.
International sales constituted 6 percent and 13 percent of net sales in
the six months ended April 30, 1998 and 1997, respectively. The decrease in
international sales is primarily attributable to decreased sales of
netXpand products.
9
Gross Profit
Gross profit as a percentage of sales was 63 percent and 44 percent in the
second quarter of fiscal 1998 and the second quarter of fiscal 1997,
respectively. Gross profit as a percentage of sales in the first six
months of fiscal 1998 was 62 percent, up from 45 percent for the same
period of 1997. The increases from fiscal 1997 to fiscal 1998 were
primarily attributable to a more favorable product mix and lower material
costs in fiscal 1998. The Company's cost plus contract to purchase
manufacturing services 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 $958,000 in the second
quarter of fiscal 1998, an increase of 57 percent from $611,000 in the
second quarter of fiscal 1997. Product research and development costs for
the first six months of fiscal 1998 increased 99 percent from the same
period of fiscal 1997. The increases in research and development
spending from fiscal 1997 to fiscal 1998 were a result of an increase in
internal staff and third party consulting costs as the Company completes
new products in its communication controller and WanXL product lines for a
larger base of customers. The Company expects that product research and
development expenses will continue at current dollar levels as the Company
focuses its resources on expanding its product lines.
Sales and Marketing
Sales and marketing expenses for the second quarter of fiscal 1998 were $1.2
million, an increase of 37 percent from $889,000 in the second quarter of
fiscal 1997. Sales and marketing expenses increased 53 percent in the first
six months of fiscal 1998 from the same period of fiscal 1997. These
increases were primarily due to an increase in staff and higher marketing
program costs for advertising and trade shows as the Company focuses on
expanding its base of customers. The Company expects sales and marketing
expenses to decrease from current dollar levels.
General and Administrative
General and administrative expenses for the second quarter of fiscal 1998
were $856,000, an increase of 21 percent from $710,000 in the second
quarter of fiscal 1997. General and administrative expenses increased 27
percent in the first six months of fiscal 1998 from the same period of
fiscal 1997. The increase represents an increase in recruiting, outside
services and other administrative costs. In future periods, the Company
expects that general and administrative expenses will decrease from current
dollar levels.
10
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.
Interest and Other Income (Expense), Net
Interest income increased in the three and six months ended April 30, 1998
from the same periods of fiscal 1997 due to higher cash and cash equivalent
balances in the 1998 periods. Interest expense for the three and six months
ended April 30, 1998 decreased from the same periods of fiscal 1997 due to
the repayment of borrowings.
Income Taxes
The Company did not record any benefit for taxes in the second quarter or
the first six months 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 second quarter or the
first six months 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 $241,000 in the second quarter of fiscal 1998 and net income of $384,000
in the second quarter of fiscal 1997. Net loss for the first six months of
fiscal 1998 was $710,000, as compared to net income of $1.2 million for the
same period of 1997.
Liquidity and Capital Resources
At April 30, 1998, the Company had cash and cash equivalents of $2.3
million, as compared to $5.6 million at October 31, 1997. In the first six
months of fiscal 1998, $2.5 million of cash was used by operating
activities, principally as a result of a $1.2 million increase in
inventories, a $708,000 decrease in accrued liabilities and $710,000 in net
loss. The increase in inventory was the result of unexpected changes in
forecasted sales. Working capital at April 30, 1998 was $6.5 million, as
compared to $7.5 million at October 31, 1997.
In the first six months of fiscal 1998 the Company purchased $778,000 of
fixed assets, consisting primarily of computer equipment and software for
the implementation of a new enterprise reporting and planning system. The
Company expects capital expenditures to decrease in the remaining quarters
of fiscal 1998.
The Company received $134,000 in the first six months of fiscal 1998 from
employee stock purchase plan purchases and employee stock option exercises.
11
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 May 29, 1998, there were no borrowings
outstanding under the line of credit. As of April 30, 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
for the quarter ended April 30, 1998.
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.
12
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of the Company was held on Tuesday,
March 24, 1998, at 5:00 p.m. and continued on Tuesday, April 14, 1998,
at 5:00 p.m. at the Company's corporate offices located at 4550 Norris
Canyon Road, San Ramon, California.
The stockholders approved the following three items:
(i) Elected two directors to hold office until the 2001 Annual Meeting
of Stockholders:
For Against
--------- -------
Raimon L. Conlisk 2,061,580 26,114
Randall L-W. Caudill 2,061,615 26,079
(ii) Approved the Company's 1996 Stock Option Plan, as amended, to
increase the aggregate number of shares of Common Stock authorized for
issuance under such plan by 200,000 shares. (For - 719,151; Against -
464,483; Abstain - 15,353; Not Voted - 888,707)
(iii) Ratified the selection of Coopers & Lybrand LLP as the Company's
independent auditors for the fiscal year ending October 31, 1998.
(For - 2,048,546; Against - 21,176; Abstain - 17,972)
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 did not file any reports on Form 8-K during the quarter
ended April 30, 1998.
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, as of June 12, 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)
14
EXHIBIT 11.1
SBE, INC.
STATEMENTS OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
for the three and six months ended April 30, 1998 and 1997
(In thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
April 30, April 30,
1998 1997 1998 1997
---- ---- ---- ----
BASIC
Weighted average number of
common shares outstanding 2,661 2,483 2,656 2,440
------- ------- ------- -------
Number of shares for computation of
net income (loss) per share 2,661 2,483 2,656 2,440
======= ======= ======= =======
Net income (loss) $ (241) $ 384 $ (710) $ 1,214
======= ======= ======= =======
Net income (loss) per share $ (0.09) $ 0.15 $ (0.27) $ 0.50
======= ======= ======= =======
DILUTED
Weighted average number of
common shares outstanding 2,661 2,483 2,656 2,440
Shares issuable pursuant to options granted
under employee stock option plan, less
assumed repurchase at the ending
fair market value for the period -- 6 -- 2
------- ------- ------- -------
Number of shares for computation of
net income (loss) per share 2,661 2,489 2,656 2,442
======= ======= ======= =======
Net income (loss) $ (241) $ 384 $ (710) $ 1,214
======= ======= ======= =======
Net income (loss) per share $ (0.09) $ 0.15 $ (0.27) $ 0.50
======= ======= ======= =======
15