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 January 31, 1997
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the transition period from _______ to ________
Commission file number 0-8419
SBE, INC.
_____________________________________________________
(Exact name of registrant as specified in its charter)
California 94-1517641
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4550 Norris Canyon Road, San Ramon, California 94583
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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
---- ----
The number of shares of Registrant's Common Stock outstanding as
of February 28, 1997 was 2,482,420.
<PAGE>
SBE, INC.
INDEX TO JANUARY 31, 1997 FORM 10-Q
PART I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
January 31, 1997 and October 31, 1996 3
Condensed Consolidated Statements of Operations for the
three months ended January 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II Other Information
Items 1, 2, 3, 4, 5, and 6 13
SIGNATURES 14
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 1997 and October 31, 1996
(In thousands)
<CAPTION>
January 31, October 31,
1997 1996
(Unaudited)
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 957 $ 41
Trade accounts receivable, net 2,210 2,044
Inventories 1,735 2,741
Deferred income taxes 291 291
Other 835 88
------- -------
Total current assets 6,028 5,205
Property, plant and equipment, net 1,431 2,070
Capitalized software costs, net 482 551
Other 68 68
------- -------
Total assets $ 8,009 $ 7,894
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ --- $ 980
Trade accounts payable 1,633 1,085
Accrued payroll and employee benefits 209 262
Other accrued expenses 574 829
------- -------
Total current liabilities 2,416 3,156
Deferred tax liabilities 318 318
Deferred rent 438 439
------- -------
Total liabilities 3,172 3,913
------- -------
Shareholder's equity:
Preferred stock --- 750
Common stock 9,203 8,427
Accumulated deficit (4,366) (5,196)
------- -------
Total shareholders' equity 4,837 3,981
------- -------
Total liabilities and shareholders' equity $ 8,009 $ 7,894
======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended January 31, 1997 and 1996
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net sales $ 4,217 $ 3,993
Cost of sales 2,256 2,334
------- -------
Gross profit 1,961 1,659
Product research and development 438 1,525
Sales and marketing 779 1,209
General and administrative 587 920
------- -------
Total operating expenses 1,804 3,654
------- -------
Operating income (loss) 157 (1,995)
Gain on sale of assets 685 ---
Interest and other (expense) income, net (12) 6
------- -------
Income (loss) before income taxes 830 (1,989)
Provision for income taxes --- ---
------- -------
Net income (loss) $ 830 $(1,989)
======= =======
Net income (loss) per common share $ 0.35 $ (0.95)
======= =======
Weighted average common shares 2,393 2,088
======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended January 31, 1997 and 1996
(In thousands)
(Unaudited)
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 830 $(1,989)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 274 491
Gain from sale of property and equipment (685) ---
Expenses and reserves related to sale of property
and equipment (432) ---
Other 1 3
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable (166) 1,241
Decrease (increase) in inventories 1,007 (778)
Decrease in income tax recoverable --- 1,827
Increase in other assets (748) (53)
Increase (decrease) in trade accounts payable 548 (567)
Decrease in other liabilities (309) (124)
------- -------
Net cash provided by operating activities 320 51
------- -------
Cash flows from investing activities:
Purchases of property and equipment (50) (216)
Disposals of property and equipment 1,600 ---
Acquisition of capitalized software --- (17)
------- -------
Net cash provided (used) by investing activities 1,550 (233)
------- -------
Cash flows from financing activities:
Repayments of borrowing on bank facilities (980) ---
Proceeds from stock plans 26 271
------- -------
Net cash (used) provided by financing activities (954) 271
------- -------
Net increase in cash and cash equivalents 916 89
Cash and cash equivalents at beginning of period 41 857
------- -------
Cash and cash equivalents at end of period $ 957 $ 946
======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
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, 1997 are not
necessarily indicative of expected results for the full 1997
fiscal year.
Certain information and footnote disclosures normally contained
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read
in conjunction with the financial statements and notes contained
in the Company's Annual Report on Form 10-K for the year ended
October 31, 1996.
2. Inventories:
Inventories comprise the following (in thousands):
January 31, October 31,
1997 1996
----------- -----------
Finished goods $ 575 $ 750
Subassemblies --- 175
Parts and materials 1,159 1,816
------ ------
$1,734 $2,741
====== ======
3. Net Income (Loss) Per Common Share:
Net income per common share for the three months ended January
31, 1997 was computed by dividing net income by the weighted
average number of shares of common stock and dilutive common
stock equivalents outstanding. Common stock equivalents relate
to stock options. Net loss per common share for the three months
ended January 31, 1996 was computed by dividing net loss by the
weighted average number of shares of common stock only as common
stock equivalents have an antidilutive effect.
<PAGE>
4. Bank Facility:
The Company had a line of credit for $1.0 million that was
canceled on December 15, 1996. The Company has entered into a
new working capital credit facility for $500,000 which expires on
May 15, 1997. Borrowings under the new line bear interest at the
bank's prime rate plus two 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 minimum tangible net worth of
$4.0 million, a minimum debt ratio of 0.7:1.0, and a minimum
quick ratio of cash, investments and accounts receivable to
current liabilities of 1.0:1.0. Additionally, the line of credit
also prohibits the payment of cash dividends without the consent
of the bank.
As of January 31, 1997, 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. The
sale resulted in a net gain of $685,000, or 29 cents per share,
in the first quarter of fiscal 1997.
6. Reclassifications:
Certain reclassifications have been made to the 1996 condensed
consolidated financial statements to conform to the 1997
presentation.
<PAGE>
SBE, INC.
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Except for the historical information contained herein the
following discussion contains forward looking statements that
involve risks and uncertainties. The Company's actual results
could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, but are
not limited to, those discussed in this section and those
discussed in the Company's Annual Report on Form 10-K for the
year ended October 31, 1996, particularly in the section entitled
"Business--Risk Factors."
For the last decade, the Company has specialized in the
development of communication controller data communications
products for wide area networking and industrial computer
equipment. In 1994, the Company determined that a large
opportunity existed in the emerging remote LAN market for
affordable remote access router products. To seize that
opportunity, the Company has invested significant resources in
developing netXpand(R), a line of standalone remote LAN access
server/router products. In addition, the Company began and is
continuing to restructure its existing sales and marketing
channels and adding new sales channels to access customers for
its netXpand products. The Company also has added certain key
management personnel to better serve this emerging market.
The Company completed its initial investment program in fiscal
1996 and is now delivering four netXpand products. Sales of
these products constituted over 15 percent of net sales for
fiscal year 1996 and 22 percent of net sales for the first
quarter of fiscal 1997. The Company expects the netXpand product
line to constitute an increasing percentage of net sales in
future periods; however, there can be no assurance to that
effect. The 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 segments to grow at a compounded annual
rate in excess of 35 percent in the United States and at a
greater rate in international markets. However, there can be no
assurance that the market will grow at this rate, if at all, or
that the Company will be successful in achieving widespread
market acceptance of its netXpand 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 the sales channels the Company is
developing for its netXpand remote LAN access products. In
fiscal 1996 the Company introduced the PCI-360, a wide area
network controller specifically developed to provide high-speed
communications to workstations and network servers. The Company
expects this product to be marketed into remote access sales
channels and to leverage its network of value-added resellers.
As these products flow into new sales channels in fiscal 1997,
the Company expects to begin to reduce its dependence on a small
group of customers that represent a large portion of the
Company's sales. The communication controller portion of the
Company's business is characterized by a concentration of sales
to a small number of customers and consequently the timing of
significant orders from major customers and their product cycles
cause fluctuations in the Company's operating results.
<PAGE>
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, 1997 and 1996. These operating
results are not necessarily indicative of Company's operating
results for any future period.
Quarter Ended January 31,
-------------------------
1997 1996
---- ----
Net sales 100% 100%
Cost of sales 53 58
---- ----
Gross profit 47 42
---- ----
Operating expenses:
Product research and development 10 39
Sales and marketing 19 30
General and administrative 14 23
---- ----
Total operating expenses 43 92
---- ----
Operating income (loss) 4 (50)
Gain on sale of assets 16 ---
Interest and other (expense) income, net 0 0
---- ----
Income (loss) before income taxes 20 (50)
Provision for income taxes 0 0
---- ----
Net income (loss) 20% (50)%
==== ====
Net Sales
Net sales for the first quarter of fiscal 1997 were $4.2 million,
a 6 percent increase from the first quarter of fiscal 1996. This
increase was primarily attributable to a significant increase in
netXpand sales as compared to the first quarter of fiscal 1996.
Sales of netXpand product increased 89 percent from the first
quarter of fiscal 1996. Sales of all product lines to individual
customers in excess of 10 percent of net sales of the Company
included sales to Tandem Computers, Motorola Inc. and D-Link
Inc., which represented 17, 16 and 13 percent, respectively, of
sales in the first quarter of fiscal 1997. This compares to 28
percent for Tandem Computers and less than 10 percent for
Motorola Inc. and D-Link Inc. in the first quarter of fiscal
1996. The Company expects to continue to experience fluctuation
in communication controller product sales as large customers'
needs change.
International sales constituted 32 percent and 21 percent of net
sales in the first quarter of fiscal 1997 and the first quarter
of fiscal 1996, respectively. The increase in international
sales is primarily attributable to increased sales of netXpand
product. Sales of VMEbus-based communications products through
the Company's Channel Partner relationship with Hewlett-Packard
constituted 4 percent and 9 percent of net sales in the first
quarter of fiscal 1997 and the first quarter of fiscal 1996,
respectively. The Company expects that future sales through the
HP channel will continue; however, sales through this channel
will be subject to significant variability from quarter to
quarter.
<PAGE>
Gross Profit
Gross profit as a percentage of sales was 47 percent and 42
percent in the first quarter of fiscal 1997 and the first quarter
of fiscal 1996, respectively. The increase from the first
quarter of fiscal 1996 to the first quarter of fiscal 1997 was
primarily attributable to lower material costs for certain higher
volume products and lower costs associated with the long-term
manufacturing service contract with XeTel Corporation. This
contract may decrease the volatility of the quarterly cost of
sales as a percentage of sales.
Product Research and Development
Product research and development expenses were $438,000 in the
first quarter of fiscal 1997 and $1.5 million in the first
quarter of fiscal 1996. The decrease in research and development
spending from the first quarter of fiscal 1996 to the first
quarter of fiscal 1997 was a result of the completion of the base
netXpand product line and a corresponding decrease in internal
staff and third party consulting costs associated with the launch
of the netXpand products. The Company expects that product
research and development expenses will continue at current levels
as the Company focuses its resources on improving its netXpand
product line and enhancing its traditional board-level products.
Sales and Marketing
Sales and marketing expenses for the first quarter of fiscal 1997
were $779,000, down from $1.2 million in the first quarter of
fiscal 1996. Sales and marketing expenses decreased due to lower
marketing program costs for advertising and tradeshows. The
Company continues to focus its sales and marketing expenditures
on specific results-oriented programs and does not expect to see
significant increases in marketing program costs in the short
term. The Company expects sales and marketing expenses to
continue at a similar percentage of total sales.
General and Administrative
General and administrative expenses for the first quarter of
fiscal 1997 were $587,000, a decrease of 46 percent from $920,000
in the first quarter of fiscal 1996. The decrease represents
decreases in consulting, accounting and other administrative
costs. The Company expects that general and administrative
expenses will continue at current 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 expenses and reserves
associated with the transaction.
Interest and Other (Expense) Income, Net
Interest income decreased in the first quarter of fiscal 1997
from the first quarter of fiscal 1996 due to lower investment
balances. Interest expense for the first quarter of fiscal 1997
increased from the first quarter of fiscal 1996 due to interest
on increased borrowings.
<PAGE>
Income Taxes
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. The Company did not record
any benefit for taxes in the first quarter of fiscal 1996 as a
result of not being able to realize any benefit from its net
operating losses and unused tax credits. In the event of future
taxable income, the Company's effective income tax rate in future
periods could be lower than the statutory rate as operating loss
and tax credit carryforwards are recognized.
Net Income (Loss)
As a result of the factors discussed above, the Company recorded
net income of $830,000 in the first quarter of fiscal 1997 and a
net loss of $2.0 million in the first quarter of fiscal 1996.
Liquidity and Capital Resources
At January 31, 1997, the Company had cash and cash equivalents of
$957,000, as compared to $41,000 at October 31, 1996. In the
first quarter of fiscal 1997, $320,000 million of cash was
provided by operating activities, principally as a result of a
$1.0 million reduction in inventories, $830,000 in net income,
and a $548,000 increase in accounts payable due to the purchase
of inventory from a contract manufacturer. These cash inflows
were partially offset by a $748,000 increase in receivables for
sale of inventory to a contract manufacturer and a $685,000 gain
from the sale of property and equipment. Working capital at
January 31, 1997 was $3.6 million, as compared to $2.0 million at
October 31, 1996.
In the first quarter of fiscal 1997 the Company purchased $50,000
of fixed assets, consisting primarily of computer and product
testing equipment. The Company expects capital expenditures
during fiscal 1997 to be similar to fiscal 1996 levels.
The Company received $26,000 in the first quarter of fiscal 1997
from employee stock purchase plan purchases. There were no
employee stock option exercises in the first quarter of fiscal
1997.
The Company had a line of credit for $1.0 million that was
canceled on December 15, 1996. The Company has entered into a
new working capital credit facility for $500,000 which expires on
May 15, 1997. Borrowings under the new line bear interest at the
bank's prime rate plus two 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 minimum tangible net worth of
$4.0 million, a minimum debt ratio of 0.7:1.0, and a minimum
quick ratio of cash, investments and accounts receivable to
current liabilities of 1.0:1.0. Additionally, the line of credit
also prohibits the payment of cash dividends without the consent
of the bank. As of January 31, 1997, there were no borrowings
outstanding under the line of credit.
In the first quarter of fiscal 1997, the Company sold all the
assets of its manufacturing operation to XeTel Corporation for
$1.6 million. Additionally, the Company entered into a four-year
exclusive agreement to purchase manufacturing services from XeTel
and to sublease a portion of its San Ramon facility to XeTel. As
<PAGE>
a result of the sale, the Company reported a gain on the sale of
these assets, net of expenses, of $685,000 in the first quarter
of fiscal 1997.
Based on the current operating plan, the Company anticipates that
its current cash balances, credit line and anticipated cash flow
from operations will be adequate to finance operations over the
next twelve months. Additional capital in excess of its working
capital line of credit may be required to meet operating
requirements if the current operating plan is not realized. If
the Company exceeds its current operating plan, additional
working capital would be required to support the expansion of
sales and marketing programs as well as accounts receivable and
inventory growth. The Company is currently seeking additional
capital through an increase of credit facilities. If the Company
does not receive sufficient increases in credit facilities, it
may seek alternative sources of financing, including equity
sales, or it may reduce overall expense and capital expenditure
levels. There can be no assurance that the Company will be
successful in obtaining additional working capital or in
exceeding its operating plan.
<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 - EX-27 - Financial Data Schedule
(b) The Company filed a Report on Form 8-K, dated December
6, 1996, disclosing the sale of its manufacturing assets to
XeTel Corporation for $1.6 million and that the Company had
entered into a multi-year exclusive agreement to purchase
manufacturing services from XeTel and to sublease a portion
of its San Ramon facility to XeTel.
<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 March 12, 1997.
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> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 957
<SECURITIES> 0
<RECEIVABLES> 2,210
<ALLOWANCES> 0
<INVENTORY> 1,735
<CURRENT-ASSETS> 6,028
<PP&E> 1,431
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,009
<CURRENT-LIABILITIES> 2,416
<BONDS> 0
0
0
<COMMON> 9,203
<OTHER-SE> (4,336)
<TOTAL-LIABILITY-AND-EQUITY> 8,009
<SALES> 4,217
<TOTAL-REVENUES> 4,217
<CGS> 2,256
<TOTAL-COSTS> 2,256
<OTHER-EXPENSES> 1,804
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> 830
<INCOME-TAX> 0
<INCOME-CONTINUING> 830
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 830
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
