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 APRIL 30, 1999
[ ] 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 31, 1999
was 2,876,484.
1
SBE, INC.
INDEX TO APRIL 30, 1999 FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of
April 30, 1999 and October 31, 1998.........................................3
Condensed Consolidated Statements of Operations for the
three and six months ended April 30, 1999 and 1998..........................4
Condensed Consolidated Statements of Cash Flows for the
six months ended April 30, 1999 and 1998....................................5
Notes to Condensed Consolidated Financial Statements...........................6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................8
ITEM 3 Quantitative and Qualitative Disclosures about
Market Risk........................................................12
PART II OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders................13
ITEM 6 Exhibits and Reports on Form 8-K...................................13
SIGNATURES....................................................................14
EXHIBIT.......................................................................15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 30, 1999 AND OCTOBER 31, 1998
(In thousands)
April 30, October 31,
1999 1998
----------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,335 $ 3,381
Restricted cash 2,716 --
Trade accounts receivable, net 1,863 3,837
Inventories 1,538 1,754
Deferred income taxes 240 240
Other 248 417
----------- -------------
Total current assets 9,940 9,629
Property, plant and equipment, net 1,154 1,330
Capitalized software costs, net 260 185
Other 39 39
----------- -------------
Total assets $ 11,393 $ 11,183
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 531 $ 1,375
Accrued payroll and employee benefits 322 321
Other accrued expenses 249 323
----------- -------------
Total current liabilities 1,102 2,019
Deferred tax liabilities 240 240
Deferred rent 377 391
----------- -------------
Total liabilities 1,719 2,650
----------- -------------
Stockholders' equity:
Common stock 10,843 10,016
Note receivable from stockholder (744) --
Accumulated deficit (425) (1,483)
----------- -------------
Total stockholders' equity 9,674 8,533
----------- -------------
Total liabilities and stockholders' equity $ 11,393 $ 11,183
=========== =============
See notes to condensed consolidated financial statements.
3
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 1999 AND 1998
(In thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
April 30, April 30,
1999 1998 1999 1998
------- ------- -------- -------
Net sales $3,760 $4,412 $10,278 $8,857
Cost of sales 1,277 1,644 3,528 3,366
------- ------- -------- -------
Gross profit 2,483 2,768 6,750 5,491
Product research and development 1,218 958 2,223 2,086
Sales and marketing 971 1,221 1,958 2,547
General and administrative 536 856 1,569 1,647
------- ------- -------- -------
Total operating expenses 2,725 3,035 5,750 6,280
------- ------- -------- -------
Operating income (loss) (242) (267) 1,000 (789)
Interest and other income, net 60 26 99 79
------- ------- -------- -------
Income (loss) before income taxes (182) (241) 1,099 (710)
Provision for income taxes 10 -- (41) --
------- ------- -------- -------
Net income (loss) $ (172) $ (241) $ 1,058 $ (710)
======= ======= ======== =======
Basic earnings (loss) per share $(0.06) $(0.09) $ 0.37 $(0.27)
======= ======= ======== =======
Diluted earnings (loss) per share $(0.06) $(0.09) $ 0.35 $(0.27)
======= ======= ======== =======
Basic - Shares used
in per share computations 2,870 2,661 2,846 2,656
======= ======= ======== =======
Diluted - Shares used
in per share computations 2,870 2,661 3,007 2,656
======= ======= ======== =======
See notes to condensed consolidated financial statements.
4
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 1998
(In thousands)
(Unaudited)
Six months ended
April 30,
------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income (loss) $ 1,058 $ (710)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 373 482
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable 1,974 (333)
Decrease (increase) in inventories 216 (1,173)
Decrease (increase) in other assets 169 (353)
(Decrease) increase in trade accounts payable (844) 256
Decrease in other liabilities (87) (718)
-------- --------
Net cash provided by (used in) operating activities 2,859 (2,549)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (145) (778)
Capitalized software costs (127) (113)
Increase in restricted cash (2,716) --
-------- --------
Net cash used in investing activities (2,988) (891)
-------- --------
Cash flows from financing activities:
Proceeds from stock plans 83 134
-------- --------
Net cash provided by financing activities 83 134
-------- --------
Net decrease in cash and cash equivalents (46) (3,306)
Cash and cash equivalents at beginning of period 3,381 5,569
-------- --------
Cash and cash equivalents at end of period $ 3,335 $ 2,263
======== ========
See notes to condensed consolidated financial statements.
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 and six-month period ended April 30, 1999 are not
necessarily indicative of expected results for the full 1999 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, 1998.
2. INVENTORIES:
Inventories comprise the following (in thousands):
April 30, October 31,
1999 1998
---------- ------------
Finished goods $ 1,038 $ 1,657
Parts and materials 500 97
---------- ------------
$ 1,538 $ 1,754
========== ============
3. NET EARNINGS (LOSS) PER SHARE:
The Company computes earnings (loss) per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Basic earnings
per common share for the six months ended April 30, 1999 were computed by
dividing net income by the weighted average number of shares of common stock
outstanding. Diluted earnings per common share for the six months ended April
30, 1999 were computed by dividing net income by the weighted average number of
shares of common stock and common stock equivalents outstanding. Common stock
equivalents relate to outstanding options to purchase 780,975 shares of the
Company's common stock as of April 30, 1999. Common stock equivalents are
excluded from the diluted loss per common share (LPS) calculations for the three
months ended April 30, 1999 and for the three and six months ended April 30,
1998, as they have the effect of decreasing LPS.
6
4. NOTE RECEIVABLE FROM STOCKHOLDER:
On November 6, 1998 the Company made a loan to an officer and stockholder in the
amount of $622,800 under a two-year recourse promissory note bearing an interest
rate of 4.47 percent and collateralized by 145,313 shares of Common Stock of the
Company. The loan was used to pay for the exercise of 139,400 shares of Company
stock options and related taxes. On April 16, 1999 the loan was increased to
$743,800.
5. LETTER OF CREDIT; RESTRICTED CASH:
During the quarter ended April 30, 1999 the Company established a letter of
credit with a bank in connection with an arrangement with a vendor under which
the company will purchase parts valued at $2.7 million for use in products to be
sold to Compaq Computers. The letter of credit is secured by $2.7 million of
restricted cash and expires on September 30, 1999 with automatic six-month
extensions.
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, 1998, particularly in
the section entitled "Item 1--Business--Risk Factors."
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 causes fluctuations in the Company's
operating results. The Company is attempting to diversify its sales with the
introduction of new products that are targeted at large growing markets such as
telecommunications and client/server. The Company's WanXL(TM) products 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. While the Company believes the market for the WanXL
products is large, there can be no assurance that the Company will be able to
succeed in penetrating this market and diversifying its sales.
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, 1999 and 1998. 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,
--------- ---------
1999 1998 1999 1998
----- ----- ----- -----
Net sales 100% 100% 100% 100%
Cost of sales 34 37 34 38
----- ----- ----- -----
Gross profit 66 63 66 62
----- ----- ----- -----
Product research and development 32 22 22 23
Sales and marketing 26 28 19 29
General and administrative 14 19 15 19
----- ----- ----- -----
Total operating expenses 72 69 56 71
----- ----- ----- -----
Operating (loss) income (6) (6) 10 (9)
Interest and other income, net 1 1 1 1
----- ----- ----- -----
(Loss) income before income taxes (5) (5) 11 (8)
Provision for income taxes -- -- (1) --
----- ----- ----- -----
Net (loss) income (5)% (5)% 10% (8)%
===== ===== ===== =====
8
NET SALES
Net sales for the second quarter of fiscal 1999 were $3.8 million, a 15 percent
decrease from the second quarter of fiscal 1998. This decrease was primarily
attributable to decreased sales of VME communication controller and netXpand(R)
products offset by increased sales of WanXL products as compared to the second
quarter of fiscal 1998. Sales of VME communication controller products
decreased 28 percent and sales of netXpand products decreased 91 percent from
the second quarter of fiscal 1998. Sales of WanXL products increased 59 percent
from the second quarter of fiscal 1998. Sales for the six months ended April
30, 1999 were $10.3 million, up from $8.9 million for the same period of 1998,
principally due to increased sales of communication controller products
partially offset by decreased sales of netXpand and WanXL products. Sales of
all product lines to individual customers in excess of 10 percent of net sales
of the Company consisted of sales to Compaq Computers, which represented 73
percent of net sales in the first six months of fiscal 1999. This compares to
sales to Motorola, Inc., Compaq Computers (formerly Tandem Computers) and Lau
Technologies of 28, 19 and 13 percent, respectively, of net sales in the first
six months of fiscal 1998. The Company expects to continue to experience
fluctuation in communication controller product sales as large customers' needs
change.
International sales constituted 4 percent and 6 percent of net sales in the
first six months of fiscal 1999 and the first six months of fiscal 1998,
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 66 percent and 63 percent in the
second quarter of fiscal 1999 and the second quarter of fiscal 1998,
respectively. Gross profit as a percentage of sales in the first six months of
fiscal 1999 was 66 percent, up from 62 percent for the same period of 1998. The
increases from fiscal 1998 to fiscal 1999 were primarily attributable to lower
material costs and improved operational efficiencies.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses were $1.2 million in the second
quarter of fiscal 1999, an increase of 27 percent from $958,000 in the second
quarter of fiscal 1998. Product research and development costs for the first
six months of fiscal 1999 increased 7 percent from the same period of fiscal
1998. The increases in research and development spending fiscal 1998 to fiscal
1999 were a result of higher spending on new telecommunications product
development. The Company expects that product research and development expenses
will remain at current levels.
SALES AND MARKETING
Sales and marketing expenses for the second quarter of fiscal 1999 were
$971,000, down from $1.2 million in the second quarter of fiscal 1998. Sales
and marketing expenses decreased 23 percent in the first six months of fiscal
9
1999 from the same period of fiscal 1998. These decreases were primarily due to
lower marketing program costs for advertising and tradeshows. The Company
expects sales and marketing expenses, as new products are announced, to increase
slightly from current expenditure levels.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the second quarter of fiscal 1999 were
$536,000, a decrease of 37 percent from $856,000 in the second quarter of fiscal
1998. General and administrative expenses decreased 5 percent in the first six
months of fiscal 1999 from the same period of fiscal 1998. The decrease
expenses are a result of lower outside costs and continued expense control
efforts. In future periods, the Company expects that general and administrative
expenses will remain consistent with current dollar levels.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest income increased in the second quarter and first six months of fiscal
1999 from the same periods of fiscal 1998 due to higher investment balances.
INCOME TAXES
The Company recorded a benefit from income taxes of $10,000 in the second
quarter and a provision of $41,000 in the first six months of fiscal 1999. 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. 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
$172,000 in the second quarter of fiscal 1999 and a net loss of $241,000 in the
second quarter of fiscal 1998. Net income for the first six months of fiscal
1999 was $1.1 million, as compared to a net loss of $710,000 for the same period
of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999 the Company had cash and cash equivalents of $3.3 million, as
compared to $3.4 million at October 31, 1998. In the first six months of fiscal
1999, $143,000 of cash was provided by operating activities, primarily as a
result of net income of $1.1 million, a $1.9 million decrease in accounts
receivable, $373,000 in depreciation and amortization, a $216,000 decrease in
inventories, and a $169,000 decrease in other assets. These cash inflows were
partially offset by a $2.7 million increase in restricted cash, a $844,000
decrease in accounts payable and a $87,000 decrease in other liabilities.
Working capital at April 30, 1999 was $8.8 million, as compared to $7.6 million
at October 31, 1998.
In the first six months of fiscal 1999 the Company purchased $145,000 of fixed
10
assets, consisting primarily of computer and engineering equipment. Software
costs of $127,000 were also capitalized during the first six months of 1999.
The Company expects capital expenditures during fiscal 1999 to be less than
fiscal 1998 levels.
The Company received $83,000 in the first six months of fiscal 1999 from
employee stock option exercises and employee stock purchase plan purchases.
Based on the current operating plan, the Company anticipates that its current
cash balances and anticipated cash flow from operations will be sufficient to
meet its working capital needs over at least the next twelve months.
YEAR 2000 COMPLIANCE
Many older computer software programs refer to years in terms of their final two
digits only. Such programs may interpret the year 2000 to mean the year 1900
instead. If not corrected, those programs could cause date-related transaction
failures.
The Company's current products, to the extent they have the capability to
process date-related information, were designed to be Year 2000 compliant; in
other words, the products were designed to manage and manipulate data involving
the transition of dates from 1999 to 2000 without functional or data abnormality
and without inaccurate results relating to such dates. There can be no
assurance that systems operated by third parties that interface with or contain
the Company's products will timely achieve Year 2000 compliance. Any failure of
these third parties' systems to timely achieve Year 2000 compliance could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company believes it has identified substantially all of the major
information systems used in connection with its internal operations that must be
modified, upgraded or replaced to minimize the possibility of a material
disruption of its business. The Company is in the process of modifying,
upgrading and replacing systems that have been identified as potentially being
adversely affected and expects to complete this process before the end of its
1999 fiscal year. The Company does not expect the cost related to these efforts
to be material to its business, financial condition or operating results.
The Company depends on third party suppliers for the manufacturing of its
products. The Company has been gathering information from, and is communicating
with, these suppliers and, to the extent possible, has resolved issues involving
the Year 2000 problem. However, the Company has limited or no control over the
actions of its suppliers. Therefore, the Company cannot guarantee that its
manufacturing services suppliers will resolve any or all Year 2000 problems with
their systems before the occurrence of a material disruption to their
businesses. Any failure of these suppliers to resolve Year 2000 problems with
their systems in a timely manner could have a material adverse effect on the
Company's business, financial condition or operating results.
11
The Company is currently developing contingency plans to be implemented as part
of its efforts to identify and correct Year 2000 problems affecting its internal
systems. The Company expects to complete its contingency plans by the end of
its 1999 fiscal year. Depending on the systems affected, these plans could
include (a) accelerated replacement of affected equipment or software; (b)
increased work hours; and (c) other similar approaches. If the Company is
required to implement any of these contingency plans, such plans could have a
material adverse effect on its business, financial condition or operating
results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash and cash equivalents are subject to interest rate risk. The
Company invests primarily on a short-term basis. The Company's financial
instrument holdings at April 30, 1999 were analyzed to determine their
sensitivity to interest rate changes. The fair values of these instruments were
determined by net present values. In our sensitivity analysis, the same change
in interest rate was used for all maturities and all other factors were held
constant. If interest rates increased by 10%, the expected effect on net income
related to the Company's financial instruments would be immaterial.
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 23, 1999, 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 one director to hold office until the 2002 Annual Meeting
of Stockholders:
For Against
--- -------
Ronald J. Ritchie 2,586,051 118,319
(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 the plan by 100,000 shares. (For-2,139,933; Against-558,742;
Abstain-5,695)
(iii) Ratified the selection of PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year ending October 31, 1999.
(For-2,686,748; Against-7,880; Abstain-9,742)
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:
No report on Form 8-K was filed by the Company during the quarter ended
April 30, 1999.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on June 11, 1999.
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