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 July 31, 1996
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the transition period from _______ to ________
Commission file number 0-8419
SBE, INC.
_____________________________________________________
(Exact name of registrant as specified in its charter)
California 94-1517641
_______________________________ _________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4550 Norris Canyon Road, San Ramon, California 94583
_____________________________________________________
(Address of principal executive offices and zip code)
(510) 355-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of Registrant's Common Stock outstanding as of September
11, 1996 was 2,232,750.
<PAGE>
SBE, INC.
INDEX TO JULY 31, 1996 FORM 10-Q
PART I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 1996 and October 31, 1995 3
Condensed Consolidated Statements of Operations for the
three and nine months ended July 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended July 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II Other Information
Items 1, 2, 3, 4 and 5 14
Item 6 Exhibits and Reports on Form 8-K 14
SIGNATURES 15
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 1996 and October 31, 1995
(In thousands)
<CAPTION>
July 31, October 31,
1996 1995
(Unaudited)
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ (65) $ 857
Trade accounts receivable, net 1,804 3,388
Inventories 3,218 2,611
Income tax receivable 9 1,836
Other 426 603
-------- --------
Total current assets 5,392 9,295
Property, plant and equipment, net 2,670 3,330
Capitalized software costs, net 620 1,656
Other 695 696
-------- --------
Total assets $ 9,377 $ 14,977
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,053 $ 941
Customer advances 1,009 ---
Other accrued expenses 425 710
-------- --------
Total current liabilities 2,487 1,651
Deferred liabilities 1,319 1,218
-------- --------
Total liabilities 3,806 2,869
-------- --------
Shareholders' equity:
Convertible preferred stock 1,112 ---
Common stock 8,068 7,680
Retained earnings (accumulated deficit) (3,609) 4,428
-------- --------
Total shareholders' equity 5,571 12,108
-------- --------
Total liabilities and shareholders' equity $ 9,377 $ 14,977
======== ========
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three and nine months ended July 31, 1996 and 1995
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 2,909 $ 4,584 $ 9,565 $14,467
Cost of sales 1,854 2,410 5,998 6,964
------- ------- ------- -------
Gross profit 1,055 2,174 3,567 7,503
Product research and development 1,232 1,712 4,221 5,640
Sales and marketing 1,087 1,476 3,700 3,472
General and administrative 755 901 2,542 2,956
Restructuring costs --- --- 255 ---
Writeoff of deferred offering costs 105 --- 105 ---
Writedown of software costs --- --- 794 ---
------- ------- ------- -------
Total operating expenses 3,179 4,089 11,617 12,068
------- ------- ------- -------
Operating loss (2,124) (1,915) (8,050) (4,565)
Interest income (expense), net (9) (53) 13 85
------- ------- ------- -------
Loss before income taxes (2,133) (1,968) (8,037) (4,480)
Income tax benefit --- 723 --- 1,403
------- ------- ------- -------
Net loss $(2,133) $(1,245) $(8,037) $(3,077)
======= ======= ======= =======
Net loss per common share $ (1.00) $ (0.60) $ (3.81) $ (1.50)
======= ======= ======= =======
Weighted average common shares 2,125 2,058 2,110 2,049
======= ======= ======= =======
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended July 31, 1996 and 1995
(In thousands)
(Unaudited)
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(8,037) $(3,077)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,294 936
Writedown of capitalized software 794 ---
Other 5 ---
Changes in assets and liabilities:
Decrease in trade accounts receivable 1,584 583
Increase in inventories (607) (617)
Decrease (increase) in income tax recoverable 1,827 (1,475)
Decrease in other assets 178 155
Increase in trade accounts payable 112 206
Increase in customer advances 1,009 ---
(Decrease) increase in other liabilities (184) 178
------- -------
Net cash used by operating activities (2,025) (3,111)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (363) (1,744)
Proceeds from sale of fixed assets 8 ---
Acquisition of capitalized software (42) (849)
Proceeds from sale of investments --- 3,888
------- -------
Net cash (used) provided by investing activities (397) 1,295
------- -------
Cash flows from financing activities:
Proceeds from sale of preferred stock 1,112 ---
Proceeds from stock plans 388 162
------- -------
Net cash provided by financing activities 1,500 162
------- -------
Net decrease in cash and cash equivalents (922) (1,654)
Cash and cash equivalents at beginning of period 857 2,566
------- -------
Cash and cash equivalents at end of period $ (65) $ 912
======= =======
See accompanying notes
</TABLE>
<PAGE>
SBE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Interim Period Reporting:
The condensed consolidated financial statements of SBE, Inc. (the "Company")
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 the
nine-month period ended July 31, 1996 are not necessarily indicative of
expected results for the full 1996 fiscal year.
Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes contained in the Company's 1995 Annual Report to Shareholders.
2. Inventories:
Inventories comprise the following (in thousands):
July 31, October 31,
1996 1995
------- -------
Finished goods $ 1,133 $ 841
Subassemblies 185 299
Parts and materials 1,900 1,471
------- -------
$ 3,218 $ 2,611
======= =======
3. Net Loss Per Common Share:
Net loss per common share (LPS) was computed by dividing net loss by the
weighted average number of shares of common stock outstanding during each
period presented. Common stock equivalents representing stock options,
warrants and convertible preferred stock are excluded from the LPS calculation
as any exercise or conversion would be antidilutive.
<PAGE>
4. Bank Facility:
As of July 31, 1996 the Company was in default on the minimum profitability
covenant of its credit line, as amended. The Company has received a letter of
forbearance from the Bank that provides for a revised credit limit of $1.0
million with borrowings limited to 65 percent of adjusted accounts receivable
balances and for revised covenants. These revised covenants specify minimum
monthly profitability levels, a tangible net worth of $4,375,000 and a minimum
debt ratio of 1.0:1.0.
As of July 31, 1996, there were no borrowings outstanding under the credit
line.
5. Writeoff of deferred offering costs:
The Company recorded a charge of $105,000 during the quarter ended July 31,
1996 in connection with the retention of Prudential Securities to prepare for a
planned sale of securities of the Company. The Company terminated its
agreement with Prudential in July and engaged another investment banker to
assist in a private placement of the Company's securities. See Note 6.
6. Sale of Series A Preferred Stock:
On July 10, 1996 the Company raised net proceeds of $1.1 million through a
private placement of 167 shares of its Series A Preferred Stock. Each share is
convertible into the number of shares of SBE Common Stock equal to $7,500
divided by the lesser of $6.675 or 75 percent of the average closing bid price
of the common stock for the five trading days prior to conversion. The stock,
which is non-voting, is also entitled to cumulative dividends at the rate of
$600 per share per annum. As of September 6, 1996, 54 shares of Series A
Preferred Stock had been converted into 104,720 shares of common stock. In the
event of any liquidation, including any consolidation or merger subsequent to
which the existing shareholders of the company own less than 50 percent of the
outstanding shares, the holders of Series A Preferred Stock shall be entitled
to receive 150 percent of $6.675 for each share into which the Series A
Preferred Stock is then convertible plus all accrued dividends in preference to
any distribution to holders of common stock. In connection with this
transaction the Company also issued warrants to purchase 93,703 shares of its
Common Stock with an exercise price of $8.25 per share.
7. Reclassifications:
Certain reclassifications have been made to the 1995 condensed consolidated
financial statements to conform to the 1996 presentation.
<PAGE>
SBE, INC.
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company's sales are dependent upon a customer base that is highly
concentrated, and consequently the timing of significant orders from major
customers causes the Company's operating results to fluctuate. Over the last
seven quarters, the Company has invested significant resources in the
development of new products and sales channels, and in September 1995 the
Company began shipping the netXpand(R) family of remote internetworking
products. The Company expects that sales of netXpand products may reduce the
concentration of its customer base and provide sales growth as the Company
develops its sales channels. There are numerous risks associated with the sale
of netXpand products, and therefore the Company cannot determine whether or not
it will be successful in the distribution of netXpand products. Primarily as a
result of this investment in netXpand products and due to decreased sales of
computer board communications products attributable to the decline in business
with America Online and Siemens, the Company has incurred substantial operating
losses in the first nine months of fiscal 1996. If the Company is not
successful in increasing sales of netXpand products in the short term, it may
be required to adjust its cost structure to reduce overall spending levels.
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 Form 10-K for the year ended October 31,
1995.
Results of Operations
The following table sets forth, as a percentage of net sales, certain
consolidated statements of operations data for the three and nine months ended
July 31, 1996 and 1995. These operating results are not necessarily indicative
of the Company's operating results for any future period.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100 % 100 % 100 % 100 %
Cost of sales 64 53 63 48
----- ----- ----- -----
Gross profit 36 47 37 52
----- ----- ----- -----
Product research and development 42 37 44 39
Sales and marketing 37 32 39 24
General and administrative 26 20 27 21
Restructuring costs --- --- 2 ---
Writeoff of deferred offering costs 4 --- 1 ---
Writedown of software costs --- --- 8 ---
----- ----- ----- -----
Total operating expenses 109 89 121 84
----- ----- ----- -----
Operating loss (73) (42) (84) (32)
Interest income (expense), net 0 (1) 0 1
----- ----- ----- -----
Loss before income taxes (73) (43) (84) (31)
Income tax benefit 0 16 0 10
----- ----- ----- -----
Net loss (73)% (27)% (84)% (21)%
===== ===== ===== =====
</TABLE>
Net Sales
Net sales for the three months ended July 31, 1996 were $2.9 million, a 37
percent decrease from the same period in 1995. This decrease was primarily
attributable to a 48 percent decline in sales of board products, partially
offset by sales of netXpand products. The decline in board products related to
certain customers moving out their product requirements and to lower sales to
certain large customers. Sales of netXpand products accounted for $595,000, or
20 percent of sales for the three months ended July 31, 1996. Net sales for
the nine months ended July 31, 1996 were $9.6 million, down 34 percent from
$14.5 million for the same period of 1995, principally due to lower sales to
America Online and Siemens. Sales to Tandem Computers and one other customer
represented 26 and 11 percent, respectively, of sales in the third quarter of
fiscal 1996. Sales to Siemens represented 19 percent of sales in the third
quarter of fiscal 1995. The Company expects to continue to experience
fluctuation in computer board product sales as large customers' needs change.
Gross Profit
Gross profit as a percentage of sales decreased to 36 percent in the three
months ended July 31, 1996 from 47 percent in the same period in 1995. Gross
profit as a percentage of sales for the nine months ended July 31, 1996 was 37
percent, down from 52 percent for the same period of 1995. The decreases for
the three- and nine-month periods were primarily attributable to decreased
sales volume in relation to fixed manufacturing overhead costs and additional
capitalized software amortization related to the netXpand products.
<PAGE>
Product Research and Development
Product research and development expenses decreased 29 percent to $1.2 million
for the three months ended July 31, 1996 from $1.7 million for the same period
in 1995. Product research and development costs for the nine months ending
July 31, 1996 decreased 25 percent from the same period of 1995. The decreases
in the three and nine months of 1996 were attributable to decreased consulting
costs and contract professional expenses related to development of the netXpand
product line, as well as to lower development material cost. Also, expenses
for the nine months ended July 31, 1995 included a $650,000 writedown of
software costs previously capitalized. The Company capitalized no internal
software development costs in the three or nine months ended July 31, 1996.
Internal software development costs of $500,000 and $729,000 were capitalized
in the three- and nine- month periods of 1995. Capitalized software costs are
amortized over a three-year period. Software amortization for the three and
nine months ended July 31, 1996, respectively, was $69,000 and $284,000.
Software amortization for the three and nine months ended July 31, 1995 was
$31,000. Contractual reimbursements under joint development contracts are
accounted for as a reduction of product research and development expenses. The
Company received $3,000 and $60,000 of such reimbursements in the three and
nine months ended July 31, 1996, compared to $33,000 and $221,000 of
reimbursements in the three- and nine-month periods in 1995. The Company does
not expect any significant reimbursements in the future. The Company expects
that product research and development expenses will continue at a similar level
in absolute dollars as it continues to expand and improve its netXpand product
line and enhance its traditional board-level product lines.
Sales and Marketing
Sales and marketing expenses for the three months ended July 31, 1996 were $1.1
million, a 26 percent decrease from the same period in fiscal 1995. Sales and
marketing expenses increased 7 percent for the nine months ending July 31, 1996
from the same period of 1995. The decrease for the three months was a result
of reduced spending on trade shows and other marketing programs. The increase
for the nine months was primarily attributable to the reorganization of the
Company's worldwide sales operations to support the netXpand product line. The
reorganization included recruiting a new vice president of sales, hiring
additional sales and marketing and technical support personnel and implementing
new advertising programs. The Company expects sales and marketing expenses as
a percentage of net sales to decrease to the extent sales of the netXpand
products increase.
General and Administrative
General and administrative expenses for the three months ended July 31, 1996
were $755,000, a 16 percent decrease from the same period in 1995. General and
administrative expenses decreased for the nine months ending July 31, 1996 by
14 percent from the same period of 1995. The decreases were primarily a result
of staff reductions to lower overall administration expenses.
<PAGE>
Writeoff of Deferred Offering Costs
The Company recorded a charge of $105,000 during the quarter ended July 31,
1996 in connection with the retention of Prudential Securities to prepare for a
planned sale of securities of the Company. The Company terminated its
agreement with Prudential in July and engaged another investment banker to
assist in a private placement of the Company's securities.
Restructuring Costs
During the quarter 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
during the quarter 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.
Income Taxes
The Company did not record any provision or benefit for taxes for the three
months ended July 31, 1996, as the Company is unable to carry back and realize
the benefit of current operating losses. The Company has increased its
valuation allowance in the three months ended July 31, 1996 to offset the
deferred tax assets resulting from the third quarter operating losses. In the
event of future taxable income, the Company's effective income tax rate in
future periods could be lower than the statutory rate as such tax assets may be
realized.
Net Loss
As a result of the factors discussed above, the Company recorded a net loss of
$2.1 million in the three months ended July 31, 1996, as compared to a net loss
of $1.2 million for the same period in fiscal 1995. The net loss for the nine
months ended July 31, 1996 was $8.0 million, as compared to a net loss of $3.1
million for same period of 1995.
<PAGE>
Liquidity and Capital Resources
At July 31, 1996, the Company had a cash deficit of $65,000, as compared to
cash and cash equivalents of $857,000 at October 31, 1995. During the first
nine months of fiscal 1996, $2.0 million of cash was used in operating
activities, principally as a result of the $8.0 million loss, offset by an $1.8
million refund of federal income taxes, a $1.6 million reduction in accounts
receivable, a $1.2 million depreciation charge, a $1.0 million customer advance
and the $794,000 writedown of capitalized software. Inventories for the first
nine months of fiscal 1996 increased $607,000, primarily due to increases in
netXpand product materials and finished goods. Working capital at April 30,
1996, was $2.9 million, as compared to $7.6 million at October 31, 1995.
In the first nine months of fiscal 1996 the Company purchased $363,000 of fixed
assets, consisting primarily of computer and testing equipment, compared to
$1.7 million for the same period of fiscal 1995. No significant capital
expenditures are planned in the fourth quarter of 1996.
On July 10, 1996 the Company raised net proceeds of $1.1 million through a
private placement of 167 shares of its Series A Preferred Stock. Each share is
convertible into the number of shares of SBE Common Stock equal to $7,500
divided by the lesser of $6.675 or 75 percent of the average closing bid price
of the common stock for the five trading days prior to conversion. The stock,
which is non-voting, is also entitled to cumulative dividends at the rate of
$600 per share per annum. As of September 6, 1996, 54 shares of Series A
Preferred Stock had been converted into 104,720 shares of common stock. In the
event of any liquidation, including any consolidation or merger subsequent to
which the existing shareholders of the company own less than 50 percent of the
outstanding shares, the holders of Series A Preferred Stock shall be entitled
to receive 150 percent of $6.675 for each share into which the Series A
Preferred Stock is then convertible plus all accrued dividends in preference to
any distribution to holders of common stock. In connection with this
transaction the Company also issued warrants to purchase 93,703 shares of its
Common Stock with an exercise price of $8.25 per share.
The Company received $388,000 of proceeds from employee stock option and stock
purchase plans in the first nine months of fiscal 1996. Cash flow from
employee stock option exercises and the stock purchase plan is subject to
significant fluctuations, depending upon numerous factors, including the market
price of the Company's common stock and the timing of employee stock option
expirations.
On May 22, 1995, the Company entered into a revolving working capital line of
credit agreement. The agreement was amended in January and April 1996. As
amended, the agreement allowed for a $2.0 million line of credit for working
capital purposes that expired on April 30, 1997. Borrowings under the amended
credit line bore interest at the bank's prime rate plus one 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 subject to certain financial covenants, including the maintenance of
minimum tangible net worth of $4.9 million, a minimum debt ratio of 0.90:1.00,
a quick ratio of cash, investments, and receivables to current liabilities of
not less than 0.55:1.00, and minimum quarterly profitability levels. The line
of credit agreement also prohibited the payment of cash dividends without
consent of the bank. As of July 31, 1996, the Company had no balance
outstanding under its revolving line of credit.
<PAGE>
As of July 31, 1996, the Company was in default on the minimum profitability
covenant of the amended credit line. The Company has received a letter of
forbearance from the Bank that provides for a revised credit limit of $1.0
million with borrowings limited to 65 percent of adjusted accounts receivable
balances. The Company is also subject to minimum monthly profitability levels,
a tangible net worth of $4,375,000 and a minimum debt ratio of 1.0:1.0. As of
September 11, 1996, the Company had approximately $500,000 outstanding on the
line of credit. The Company believes it was in compliance with the revised
covenants as of August 31, 1996. There is no assurance that the Company will
be able to obtain alternative sources of cash.
Based on the current operating plan, the Company anticipates that it will
require additional working capital in excess of the working capital line of
credit to meet short-term operating requirements. The additional working
capital is required to support the expansion of sales of the netXpand product
line through planned sales channel expansion and marketing programs as well as
accounts receivable and inventory growth. The Company is currently seeking
additional capital through the sale of equity securities. If the Company is
unsuccessful in the sale of equity securities, it may seek alternative sources
of financing, including debt, or it may reduce overall expense levels. There
can be no assurance that the Company will be successful in obtaining additional
working capital or in expanding its netXpand business.
<PAGE>
SBE, INC.
Part II Other information
Items 1, 2, 3, 4 and 5
The above items have been omitted as inapplicable.
Item 6. Exhibits and Reports on Form 8-K
The following documents are filed as part of this report:
(a) Exhibits
(i) 4.1 Subscription Agreement for Series A Preferred Stock of the
Company
(i) 4.2 Certificate of Determination of Series A Preferred Stock of
the Company
27.1 Financial Data Schedule
(b) The Registrant did not file any reports on Form 8-K during the
quarter ended July 31, 1996.
The Registrant has filed a report on Form 8-K dated August 29, 1996
regarding the issuance and sale of Series A Preferred Stock of the
Company on July 10, 1996.
______________________________________________________________________________
(i) Filed as an exhibit to Report on Form 8-K dated August 29, 1996, and
incorporated herein by reference.
<PAGE>
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 September 13, 1996.
SBE, Inc.
Registrant
/s/ Timothy J. Repp
Timothy J. Repp
Chief Financial Officer, Vice President of
Finance (Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JUL-31-1996
<CASH> (65)
<SECURITIES> 0
<RECEIVABLES> 1,804
<ALLOWANCES> 0
<INVENTORY> 3,218
<CURRENT-ASSETS> 5,392
<PP&E> 2,670
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,377
<CURRENT-LIABILITIES> 2,487
<BONDS> 0
0
1,112
<COMMON> 8,068
<OTHER-SE> (3,609)
<TOTAL-LIABILITY-AND-EQUITY> 9,377
<SALES> 9,565
<TOTAL-REVENUES> 9,565
<CGS> 5,998
<TOTAL-COSTS> 5,998
<OTHER-EXPENSES> 11,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> (8,037)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,037)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,037)
<EPS-PRIMARY> (3.81)
<EPS-DILUTED> (3.81)
</TABLE>
