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, 2000
[ ] 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
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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, 2000
was 3,033,044.
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SBE, INC.
INDEX TO APRIL 30, 2000 FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of
April 30, 2000 and October 31, 1999 3
Condensed Consolidated Statements of Operations for the
six months ended April 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
six months ended April 30, 2000 and 1999 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
EXHIBITS 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 30, 2000 AND OCTOBER 31, 1999
(In thousands)
April 30, October 31,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,221 $ 3,326
Trade accounts receivable, net 6,420 3,290
Inventories 3,159 1,517
Deferred income taxes 158 158
Other 380 298
----------- -------------
Total current assets 13,338 8,589
Property, plant and equipment, net 1,636 1,513
Capitalized software costs, net 315 339
Other 39 39
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Total assets $ 15,328 $ 10,480
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,895 $ 935
Accrued payroll and employee benefits 1,175 320
Other accrued expenses 355 231
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Total current liabilities 3,425 1,486
Deferred tax liabilities 158 158
Deferred rent 314 345
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Total liabilities 3,897 1,989
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Stockholders' equity:
Common stock 11,172 10,924
Treasury stock (409) (358)
Note receivable from stockholder (744) (744)
Retained earnings (accumulated deficit) 1,412 (1,331)
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Total stockholders' equity 11,431 8,491
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Total liabilities and stockholders' equity $ 15,328 $ 10,480
=========== =============
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 2000 AND 1999
(In thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
April 30, April 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $7,852 $3,760 $14,433 $10,278
Cost of sales 2,661 1,277 4,720 3,528
------- ------- ------- -------
Gross profit 5,191 2,483 9,713 6,750
Product research and development 1,228 1,218 2,660 2,223
Sales and marketing 1,192 971 2,324 1,958
General and administrative 1,084 536 1,956 1,569
------- ------- ------- -------
Total operating expenses 3,504 2,725 6,940 5,750
------- ------- ------- -------
Operating income (loss) 1,687 (242) 2,773 1,000
Interest and other income, net 31 60 63 99
------- ------- ------- -------
Income (loss) before income taxes 1,718 (182) 2,836 1,099
Benefit from (provision for) income taxes (52) 10 (93) (41)
------- ------- ------- -------
Net income (loss) $1,666 $ (172) $2,743 $1,058
======= ======= ======= =======
Basic earnings (loss) per share $ 0.58 $(0.06) $ 0.97 $ 0.37
======= ======= ======= =======
Diluted earnings (loss) per share $ 0.50 $(0.06) $ 0.89 $ 0.35
======= ======= ======= =======
Basic - Shares used
in per share computations 2,863 2,870 2,840 2,846
======= ======= ======= =======
Diluted - Shares used
in per share computations 3,360 2,870 3,098 3,007
======= ======= ======= =======
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
(In thousands)
(Unaudited)
Six months ended
April 30,
------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,743 $ 1,058
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 519 373
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (3,130) 1,974
(Increase) decrease in inventories (1,642) 216
(Increase) decrease in other assets (82) 169
Increase (decrease) in trade accounts payable 960 (844)
Increase (decrease) in other liabilities 948 (87)
-------- --------
Net cash provided by operating activities 316 2,859
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (523) (145)
Capitalized software costs (95) (127)
Increase in restricted cash -- (2,716)
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Net cash used in investing activities (618) (2,988)
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Cash flows from financing activities:
Purchase of treasury stock (51) --
Proceeds from stock plans 248 83
-------- --------
Net cash provided by financing activities 197 83
-------- --------
Net decrease in cash and cash equivalents (105) (46)
Cash and cash equivalents at beginning of period 3,326 3,381
-------- --------
Cash and cash equivalents at end of period $ 3,221 $ 3,335
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
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SBE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM PERIOD REPORTING:
These 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 six months ended
April 30, 2000 are not necessarily indicative of expected results for the full
2000 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, 1999.
2. INVENTORIES:
Inventories comprise the following (in thousands):
April 30, October 31,
2000 1999
---------- ------------
Finished goods $ 944 $ 773
Parts and materials 2,215 744
---------- ------------
$ 3,159 $ 1,517
========== ============
3. NET EARNINGS (LOSS) PER SHARE:
Basic earnings per common share for the three and six months ended April 30,
2000 and 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 three and six months ended April 30, 2000 and 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 1,073,204
shares and 780,975 shares of the Company's common stock as of April 30, 2000 and
April 30, 1999, respectively. Common stock equivalents are excluded from the
diluted loss per common share (EPS) calculation for the three months ended April
30, 1999, as they have the effect of diluting EPS.
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4. CONCENTRATION OF RISK:
In the first six months of fiscal 2000 and 1999, most of the Company's sales
were attributable to sales of wireless communications products and were derived
from a limited number of OEM customers. Sales to Compaq Computer accounted for
83 percent and 73 percent of the Company's net sales in the first six months of
fiscal 2000 and 1999, respectively. Also, Compaq Computer accounted for 82
percent and 52 percent of the Company's accounts receivable as of April 30, 2000
and April 30, 1999, respectively. The Company expects that sales to Compaq will
continue to constitute a substantial portion of the Company's net sales in the
remainder of fiscal 2000. A significant reduction in orders from any of the
Company's OEM customers, particularly Compaq, could have a material adverse
effect on the Company's business, operating results and financial condition.
In December 1996, the Company sold all of its manufacturing operations to XeTel
Corporation ("XeTel"), a contract manufacturing company headquartered in Austin,
Texas. At the same time the Company and XeTel entered into an exclusive
manufacturing service agreement under which XeTel is to manufacture all of the
Company's products until at least December 2000. The Company is dependent on
XeTel's ability to manufacture the Company's products according to
specifications and in required volumes on a timely basis. The failure of XeTel
to perform its obligations under the manufacturing service agreement could have
a material adverse effect on the Company's business, operating results and
financial condition.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes the staff's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application
of the guidance in SAB 101 will be required in the Company's first quarter of
fiscal year 2001. The effects of applying this guidance will be reported as a
cumulative effect adjustment resulting from a change in accounting principle.
The Company has not completed its evaluation of SAB 101 and is therefore unable
to determine its impact.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, 1999, particularly in the section entitled "Item 1--Business--Risk
Factors."
SBE, Inc. (the "Company") designs and sells products to meet the combined needs
of traditional circuit-switched and emerging packet-based telecommunication
markets. The Company's products are designed for incorporation within high-end
computer systems for integration into signaling, switching and routing networks.
They include intelligent signalling controllers for switch manufacturers, WAN
interface adapters for workstations and servers, high-speed communications
controllers for computer systems and other specialized communications products.
The Company's products are sold worldwide through direct sales, OEM and System
Integration partners.
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 of their product cycles causes fluctuations in the Company's
operating results. This concentration, which is expected to continue, also
makes it difficult to project future sales and operating results. The Company's
sales to any single OEM customer are also subject to significant variability
from quarter to quarter. Such fluctuations may have a material adverse effect
on the Company's operating results. A significant reduction in orders from any
of the Company's OEM customers, particularly Compaq Computer, could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company is attempting to diversify its sales with the introduction of new
products that are targeted at large growing markets within the
telecommunications industry. The Company's Highwire products are focused on the
telecommunications applications market that is driven by the convergence of
traditional telephony applications with the Internet. 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, 2000 and 1999. These operating results are not necessarily indicative
of the Company's operating results for any future period.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
--------- ---------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 34 34 33 34
----- ----- ----- -----
Gross profit 66 66 67 66
----- ----- ----- -----
Product research and development 16 32 18 22
Sales and marketing 15 26 16 19
General and administrative 14 14 14 15
----- ----- ----- -----
Total operating expenses 45 72 48 56
----- ----- ----- -----
Operating income (loss) 21 (6) 19 10
Interest and other income, net 1 1 1 1
----- ----- ----- -----
Income (loss) before income taxes 22 (5) 20 11
Benefit from (provision for) income taxes (1) -- (1) (1)
----- ----- ----- -----
Net income (loss) 21% (5)% 19% 10%
===== ===== ===== =====
</TABLE>
NET SALES
Net sales for the second quarter of fiscal 2000 were $7.9 million, a 109 percent
increase from the second quarter of fiscal 1999. This increase was primarily
attributable to increased sales of 211% to Compaq, whose products have become
integrated into the Nextel wireless infrastructure and the Motorola SC series of
wireless equipment. Sales of VME communication controller products increased
119 percent and sales of PCIbus increased 87 percent from the second quarter of
fiscal 1999. Sales for the six months ended April 30, 2000 were $14.4 million,
a 40% increase from the same period of 1999, principally due to increases in the
above programs with Compaq. Sales to Compaq Computer represented 83 percent of
net sales in the first six months of fiscal 2000 and 73 percent of net sales in
the first six months of fiscal 1999. No other customer accounted for over 10
percent of sales. The Company expects to continue to experience fluctuation in
communication controller product sales as large customers' needs change.
GROSS PROFIT
Gross profit as a percentage of sales in the second quarter of fiscal 2000 and
the second quarter of fiscal 1999 was 66 percent. Gross profit as a percentage
of sales was 67 percent and 66 percent in the first six months of fiscal 2000
and fiscal 1999, respectively. The increase from fiscal 1999 to fiscal 2000 was
primarily attributable to lower material costs and a more favorable product mix
in the fiscal 2000 period.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses were $1.2 million in the second
quarter of fiscal 2000 and the second quarter of fiscal 1999. Product research
and development costs for the first six months of fiscal 2000 were $2.7 million,
a 20 percent increase from the same period in 1999. The increase in research
and development spending from fiscal 1999 to fiscal 2000 was a result of
accelerated spending on new telecommunications product development to meet
growing customer demand. The Company expects that product research and
development expenses will remain near or slightly above the current expenditure
levels for future periods.
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SALES AND MARKETING
Sales and marketing expenses for the second quarter of fiscal 2000 were $1.2
million, an increase of 23 percent from $971,000 in the second quarter of fiscal
1999. Sales and marketing expenses were $2.3 million in the first six months of
fiscal 2000, a 19 percent increase from the same period of fiscal 1999. The
increases for fiscal 2000 were primarily due to higher marketing program costs
for advertising and trade shows associated with new Highwire products. The
Company expects sales and marketing expenses will remain near the current
expenditure levels for future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1.1 million for the second quarter of
fiscal 2000, an increase of 102 percent from $536,000 in the second quarter of
1999. General and administrative expenses were $2.0 million in the first six
months of fiscal 2000, a 25 percent increase from the same period of fiscal
1999. These increases were due to increases in compensation programs for
retirement and bonus plans which were tied to company profitability. In future
periods, the Company expects that general and administrative expenses may
increase from current expenditure levels as a result of variable compensation to
the extent the Company is successful in increasing its profitability.
INTEREST AND OTHER INCOME, NET
Interest and other income, net decreased in the second quarter and the first six
months of fiscal 2000 from the same periods in fiscal 1999 due to lower cash
balances.
INCOME TAXES
The Company recorded a provision for income taxes of $52,000 in the second
quarter of fiscal 2000 and a benefit from income taxes of $10,000 in the second
quarter of fiscal 1999. The Company recorded a provision for income taxes of
$93,000 and $41,000 in the first six months of fiscal 2000 and fiscal 1999,
respectively. The Company's current effective income tax rate is lower than the
statutory rate as operating loss carryforwards are being utilized to offset
taxable income. The Company had net operating loss carryforwards for federal
and state purposes of approximately of $3.6 million and $2.6 million,
respectively, and research and experimentation tax credit carryforwards for
federal and state purpose of $1.4 million as of October 31, 1999 that can be
utilized to offset current and future tax liabilities.
NET INCOME
As a result of the factors discussed above, the Company recorded net income of
$1.7 million in the second quarter of fiscal 2000 and a net loss of $172,000 in
the second quarter of fiscal 1999. Net income for the first six months of
fiscal 2000 was $2.7 million, as compared to net income of $1.1 million for the
same period of 1999.
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LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2000 the Company had cash and cash equivalents of $3.2 million, as
compared to $3.3 million at October 31, 1999. In the first six months of fiscal
2000, $316,000 of cash was provided by operating activities, primarily as a
result of $2.7 million in net income, a $960,000 increase in accounts payable, a
$948,000 increase in other liabilities, and $519,000 in depreciation and
amortization, offset by a $3.1 million increase in accounts receivable and a
$1.6 million increase in inventories. The accounts payable increase was due
primarily to additional cost of sales resulting from increased sales volume.
The other current liabilities increase was a result of various compensation
increases. The accounts receivable increase was primarily a result of increased
sales. The inventory increase was a result of purchases of certain end of life
components to be used in the Company's VME products. The Company believes that
it has acquired sufficient components to meet forecasted customer demand over
the next few years, and is actively working with the applicable customers to
help them transition to new product platforms. Working capital at April 30,
2000 was $9.9 million, as compared to $7.1 million at October 31, 1999.
In the first six months of fiscal 2000 the Company purchased $523,000 of fixed
assets, consisting primarily of computer and engineering equipment. Software
costs of $95,000 were also capitalized during the first six months of 2000. The
Company expects capital expenditures will remain at current levels for the
foreseeable future.
The Company received $248,000 in the first six months of fiscal 2000 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 12 months.
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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, 2000 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.
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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 21, 2000, at the Company's corporate offices located at 4550 Norris
Canyon Road, San Ramon, California.
The stockholders approved the following two items:
(i) Elected one director to hold office until the 2003 Annual Meeting
of Stockholders:
For Against
--- -------
William B. Heye, Jr. 2,742,643 11,293
(ii) Ratified the selection of PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year ending October 31,
2000. (For--2,747,370; Against--1,431; Abstain--5,135)
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, 2000.
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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 June 14, 2000.
SBE, INC.
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Registrant
/s/ Timothy J. Repp
----------------------
Timothy J. Repp
Chief Financial Officer, Vice President of
Finance and Secretary (Principal Financial
and Accounting Officer)
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