UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 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 February 28,
1999 was 2,870,484.
1
<PAGE>
SBE, INC.
INDEX TO JANUARY 31, 1999 FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of
January 31, 1999 and October 31, 1998.......................................3
Condensed Consolidated Statements of Operations for the
three months ended January 31, 1999 and 1998................................4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 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 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
<TABLE>
<CAPTION>
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1999 AND OCTOBER 31, 1998
(In thousands)
January 31, October 31,
1999 1998
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,354 $ 3,381
Trade accounts receivable, net 1,887 3,837
Inventories 1,793 1,754
Deferred income taxes 240 240
Other 237 417
------------- -------------
Total current assets 10,511 9,629
Property, plant and equipment, net 1,255 1,330
Capitalized software costs, net 182 185
Other 46 39
------------- -------------
Total assets $ 11,994 $ 11,183
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 802 $ 1,375
Accrued payroll and employee benefits 412 321
Other accrued expenses 330 323
------------- -------------
Total current liabilities 1,544 2,019
Deferred tax liabilities 240 240
Deferred rent 385 391
------------- -------------
Total liabilities 2,169 2,650
------------- -------------
Stockholders' equity:
Common stock 10,701 10,016
Note receivable from stockholder (623) ---
Accumulated deficit (253) (1,483)
------------- -------------
Total stockholders' equity 9,825 8,533
------------- -------------
Total liabilities and stockholders' equity $ 11,994 $ 11,183
============= =============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 1998
(In thousands, except per share amounts)
(Unaudited)
Three months ended
January 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Net sales $6,518 $4,444
Cost of sales 2,251 1,722
------- -------
Gross profit 4,267 2,722
Product research and development 1,005 1,128
Sales and marketing 987 1,326
General and administrative 1,033 791
------- -------
Total operating expenses 3,025 3,245
------- -------
Operating income (loss) 1,242 (523)
Interest and other income (expense), net 39 54
------- -------
Income (loss) before income taxes 1,281 (469)
Provision for income taxes (51) --
------- -------
Net income (loss) $1,230 $ (469)
======= =======
Basic earnings (loss) per share $ 0.44 $(0.18)
======= =======
Diluted earnings (loss) per share $ 0.41 $(0.18)
======= =======
Basic--Shares used in per share computations 2,823 2,652
======= =======
Diluted--Shares used in per share computations 3,030 2,652
======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 1998
(In thousands)
(Unaudited)
Three months ended
January 31,
-----------------
1999 1998
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $1,230 $ (469)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 177 247
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable 1,950 (799)
Increase in inventories (39) (394)
Decrease (increase) in other assets 173 (518)
(Decrease) increase in trade accounts payable (573) 615
Increase (decrease) in other liabilities 92 (675)
------- --------
Net cash provided by (used in) operating activities 3,010 (1,993)
------- --------
Cash flows from investing activities:
Purchases of property and equipment (80) (417)
Capitalized software costs (19) (58)
------- --------
Net cash used in investing activities (99) (475)
------- --------
Cash flows from financing activities:
Proceeds from stock plans 62 104
------- --------
Net cash provided by financing activities 62 104
------- --------
Net increase (decrease) in cash and cash equivalents 2,973 (2,364)
Cash and cash equivalents at beginning of period 3,381 5,569
------- --------
Cash and cash equivalents at end of period $6,354 $ 3,205
======= ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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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, 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):
January 31, October 31,
1999 1998
------------ ------------
Finished goods $ 1,563 $ 1,657
Parts and materials 230 97
------------ ------------
$ 1,793 $ 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 three months ended January 31, 1999 was computed by
dividing net income by the weighted average number of shares of common stock
outstanding. Diluted earnings per common share for the three months ended
January 31, 1999 was 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 891,950
shares of the Company's common stock as of January 31, 1999. Common stock
equivalents are excluded from the diluted loss per common share (LPS)
calculation for the three months ended January 31, 1998, as they have the effect
of decreasing LPS.
6
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4. BANK FACILITY:
On August 26, 1997 the Company entered into a revolving working capital line of
credit agreement with a bank. The agreement, as modified, allows for a
$2,000,000 line of credit and expired on March 1, 1999. 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 tangible 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 $6.1
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 March 1, 1999, there were no borrowings outstanding under the line of
credit.
5. LOAN TO OFFICER:
On November 6, 1998 the Company made a loan to an officer 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.
7
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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 fiscal quarters ended January
31, 1999 and 1998. These operating results are not necessarily indicative of
Company's operating results for any future period.
QUARTER ENDED JANUARY 31,
-------------------------
1999 1998
----- -----
Net sales 100% 100%
Cost of sales 35 39
----- -----
Gross profit 65 61
Operating expenses:
Product research and development 15 25
Sales and marketing 15 30
General and administrative 16 18
----- -----
Total operating expenses 46 73
----- -----
Operating income (loss) 19 (12)
Interest and other income (expense), net 1 1
----- -----
Income (loss) before income taxes 20 (11)
Provision for income taxes 1 0
----- -----
Net income (loss) 19% (11)%
===== =====
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NET SALES
Net sales for the first quarter of fiscal 1999 were $6.5 million, a 47 percent
increase from the first quarter of fiscal 1998. This increase was primarily
attributable to increased sales of VME communication controller products offset
by decreased sales of netXpand(R) and WanXL products as compared to the first
quarter of fiscal 1998. Sales of VME communication controller products
increased 84 percent from the first quarter of fiscal 1998. Sales of netXpand
products decreased 97 percent and sales of WanXL products decreased 46 percent
from the first quarter of fiscal 1998. 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 83 percent of net sales in the first
quarter of fiscal 1999. This compares to sales to Motorola, Inc. and Compaq
Computers (formerly Tandem Computers) of 42 and 13 percent, respectively, of net
sales in the first quarter of fiscal 1998. Sales to Motorola in the first
quarter of 1998 represented 3 percent of net sales. 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 quarter of fiscal 1999 and the first quarter 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 65 percent and 61 percent in the first
quarter of fiscal 1999 and the first quarter of fiscal 1998, respectively. The
increase from the first quarter of fiscal 1998 to the first quarter of fiscal
1999 was primarily attributable to lower material costs and improved operational
efficiencies.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses were $1.0 million in the first quarter
of fiscal 1999 and $1.1 million in the first quarter of fiscal 1998. The
decrease in research and development spending from the first quarter of fiscal
1998 to the first quarter of fiscal 1999 was a result of the completion of
software development programs for the WanXL product line. The Company expects
that product research and development expenses will decrease as a percentage of
sales as the Company focuses its resources on developing new telecommunications
product offerings and enhancing its traditional board-level products.
SALES AND MARKETING
Sales and marketing expenses for the first quarter of fiscal 1999 were $987,000,
down from $1.3 million in the first quarter of fiscal 1998. Sales and marketing
expenses decreased due to a decrease in staff and lower marketing program costs
for advertising and tradeshows. The Company expects sales and marketing
expenses, as new products are announced, to increase slightly as a percentage of
total sales from fiscal 1998 levels for the foreseeable future.
9
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GENERAL AND ADMINISTRATIVE
General and administrative expenses for the first quarter of fiscal 1999 were
$1.0 million, an increase of 31 percent from $791,000 in the first quarter of
fiscal 1998. The increase represents increases in variable compensation
expenses, insurance and other administrative costs.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest income decreased in the first quarter of fiscal 1999 from the first
quarter of fiscal 1998 due to lower investment balances.
INCOME TAXES
The Company recorded a provision for income taxes of $51,000 in the first
quarter of fiscal 1999. The Company did not record any benefit for taxes in the
first quarter of fiscal 1998 as the benefit derived from its net operating
losses and unused tax credits was fully valued against. 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
$1.2 million in the first quarter of fiscal 1999 and a net loss of $469,000 in
the first quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999 the Company had cash and cash equivalents of $6.4 million,
as compared to $3.4 million at October 31, 1998. In the first quarter of fiscal
1999, $2.4 million of cash was provided by operating activities, primarily as a
result of net income of $1.2 million, a $2.0 million decrease in accounts
receivable, $177,000 in depreciation and amortization, a $173,000 decrease in
other assets, and a $92,000 increase in other liabilities. These cash inflows
were partially offset by a $573,000 decrease in accounts payable and a $39,000
increase in inventories. Working capital at January 31, 1999 was $9.0 million,
as compared to $7.6 million at October 31, 1998.
In the first quarter of fiscal 1999 the Company purchased $80,000 of fixed
assets, consisting primarily of computer equipment and software. The Company
expects capital expenditures during fiscal 1999 to be less than fiscal 1998
levels.
The Company received $62,000 in the first quarter of fiscal 1999 from employee
stock option exercises and employee stock purchase plan purchases.
On August 26, 1997 the Company entered into a revolving working capital line of
credit agreement with a bank. The agreement expired on March 1, 1999. As of
10
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March 1, 1999, there were no borrowings outstanding under the line of credit.
The Company expects to renew the credit line.
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 has commenced 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 has initiated
communication 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.
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
11
<PAGE>
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 January 31, 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
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
List of Exhibits:
11.1 Statements of Computation of Net Income per Share
27.1 Financial Data Schedule
Reports on Form 8-K:
No report on Form 8-K was filed by the Company during the quarter ended
January 31, 1999.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on March 17, 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
EXHIBIT 11.1
<TABLE>
<CAPTION>
SBE, INC.
STATEMENTS OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 1998
(In thousands, except per share amounts)
(Unaudited)
Three months ended
January 31,
---------------
1999 1998
------ -------
<S> <C> <C>
BASIC
Weighted average number of common shares outstanding 2,823 2,652
------ -------
Number of shares for computation of net income (loss) per share 2,823 2,652
====== =======
Net income (loss) $1,230 $ (469)
====== =======
Net income (loss) per share $ 0.44 $(0.18)
====== =======
DILUTED
Weighted average number of common shares outstanding 2,823 2,652
Shares issuable pursuant to options granted under
stock option plans, less assumed repurchase at the
ending fair market value for the period 207 (a)
------ -------
Number of shares for computation of net income (loss) per share 3,030 2,652
====== =======
Net income (loss) $1,230 $ (469)
====== =======
Net income (loss) per share $ 0.41 $(0.18)
====== =======
<FN>
(a) In loss years, common share equivalents would have an antidilutive effect on
loss per share and therefore have been excluded.
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 6354
<SECURITIES> 0
<RECEIVABLES> 1887
<ALLOWANCES> 0
<INVENTORY> 1793
<CURRENT-ASSETS> 10511
<PP&E> 1255
<DEPRECIATION> 0
<TOTAL-ASSETS> 11994
<CURRENT-LIABILITIES> 1544
<BONDS> 0
0
0
<COMMON> 10701
<OTHER-SE> (876)
<TOTAL-LIABILITY-AND-EQUITY> 11994
<SALES> 6518
<TOTAL-REVENUES> 6518
<CGS> 2251
<TOTAL-COSTS> 2251
<OTHER-EXPENSES> 3025
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (39)
<INCOME-PRETAX> 1281
<INCOME-TAX> 51
<INCOME-CONTINUING> 1230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1230
<EPS-PRIMARY> .44
<EPS-DILUTED> .41
</TABLE>
