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 JULY 31, 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
------
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 September 8,
2000 was 3,068,815.
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SBE, INC.
INDEX TO JULY 31, 2000 FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 2000 and October 31, 1999 3
Condensed Consolidated Statements of Operations for the
nine months ended July 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended July 31, 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 9
ITEM 3 Quantitative and Qualitative Disclosures about
Market Risk 13
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBITS 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, 2000 AND OCTOBER 31, 1999
(In thousands)
July 31, October 31,
2000 1999
---------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,953 $ 3,385
Trade accounts receivable, net 4,701 3,589
Inventories 4,319 1,864
Deferred income taxes 158 158
Other 257 320
---------- -------------
Total current assets 16,388 9,316
Property, plant and equipment, net 1,749 1,558
Capitalized software costs, net 338 338
Other 69 51
---------- -------------
Total assets $ 18,544 $ 11,263
========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,234 $ 1,120
Accrued payroll and employee benefits 1,241 449
Other accrued expenses 912 555
---------- -------------
Total current liabilities 4,387 2,124
Deferred tax liabilities 158 158
Deferred rent 301 345
Other 142 --
---------- -------------
Total liabilities 4,988 2,627
---------- -------------
Stockholders' equity:
Common stock 13,801 12,534
Deferred stock compensation (204) (122)
Treasury stock (404) (353)
Note receivable from stockholder (744) (744)
Retained earnings (accumulated deficit) 1,107 (2,679)
---------- -------------
Total stockholders' equity 13,556 8,636
---------- -------------
Total liabilities and stockholders' equity $ 18,544 $ 11,263
========== =============
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 NINE MONTHS ENDED JULY 31, 2000 AND 1999
(In thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
July 31, July 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 7,835 $ 3,919 $23,748 $15,134
Cost of sales 2,946 1,605 8,279 5,608
-------- -------- -------- --------
Gross profit 4,889 2,314 15,469 9,526
Product research and development 1,466 1,257 4,176 3,709
Sales and marketing 1,078 1,097 3,475 3,277
General and administrative 1,061 620 3,563 2,298
Acquisition costs 383 -- 383 --
-------- -------- -------- --------
Total operating expenses 3,988 2,974 11,597 9,284
-------- -------- -------- --------
Operating income (loss) 901 (660) 3,872 242
Interest and other income, net 38 77 104 179
-------- -------- -------- --------
Income (loss) before income taxes 939 (583) 3,976 421
Benefit from (provision for) income taxes (97) 10 (190) (32)
------ -------- -------- --------
Net income (loss) $ 842 $ (573) $ 3,786 $ 389
======== ======== ======== ========
Basic earnings (loss) per share $ 0.26 $ (0.18) $ 1.21 $ 0.13
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.21 $ (0.18) $ 1.02 $ 0.12
======== ========= ======== ========
Basic - shares used
in per share computations 3,238 3,100 3,141 3,054
======== ======== ======== ========
Diluted - shares used
in per share computations 3,989 3,100 3,703 3,275
======== ======== ======== ========
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2000 AND 1999
(In thousands)
(Unaudited)
Nine months ended
July 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,786 $ 389
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 819 572
Amortization of Deferred stock compensation (82) --
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (1,112) 1,358
Increase in inventories (2,455) (152)
Decrease in other assets 45 205
Increase (decrease) in trade accounts payable 1,114 (532)
Increase in other liabilities 1,248 217
-------- --------
Net cash provided by operating activities 3,363 2,057
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (818) (421)
Capitalized software costs (193) (212)
Increase in restricted cash -- (2,449)
-------- --------
Net cash used in investing activities (1,011) (3,082)
-------- --------
Cash flows from financing activities:
Purchase of restricted stock (51) (146)
Proceeds from stock plans 1,267 130
-------- --------
Net cash provided by (used in) financing activities 1,216 (16)
-------- --------
Net increase (decrease)
in cash and cash equivalents 3,568 (1,041)
Cash and cash equivalents at beginning of period 3,385 3,555
-------- --------
Cash and cash equivalents at end of period $ 6,953 $ 2,514
======== ========
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 condensed consolidated financial statements of the
Company include the financial position and results of operation of LAN Media
Corporation, which the Company acquired on July 14, 2000, (See note 5). The
merger was accounted for as a pooling of interests, and accordingly, financial
statements presented for all periods have been restated to reflect combined
operations and financial position. The results of operations for the nine months
ended July 31, 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.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Significant estimates and
judgments made by management of the Company include matters such as
collectibility of accounts receivable, realizability of inventories and
recoverability of capitalized software and deferred tax assets.
2. INVENTORIES:
Inventories comprise the following (in thousands):
July 31, October 31,
2000 1999
-------- -----------
Finished goods $ 1,898 $ 897
Parts and materials 2,421 967
-------- -----------
$ 4,319 $ 1,864
======== ===========
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3. NET EARNINGS (LOSS) PER SHARE:
Basic earnings per common share for the three and nine months ended July 31,
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 nine months ended July 31, 2000 and for the nine months ended
July 31, 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 750,975
shares and 220,900 shares of the Company's common stock at July 31, 2000 and
July 31, 1999, respectively. Common stock equivalents are excluded from the
diluted loss per common share (LPS) calculation for the three months ended July
31, 1999, as they have the effect of decreasing LPS.
4. CONCENTRATION OF RISK:
In the first nine 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 Corporation
accounted for 73 percent and 67 percent of the Company's net sales in the first
nine months of fiscal 2000 and 1999, respectively. Also, Compaq Computer
accounted for 73 percent and 45 percent of the Company's accounts receivable as
of July 31, 2000 and July 31, 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. MERGER WITH LAN MEDIA CORPORATION
On July 14, 2000 the Company acquired LAN Media Corporation ("LMC"), a privately
held manufacturer of wide area networking adapter products headquartered in
Sunnyvale, California. As a result, the outstanding LMC common stock was
converted into approximately 316,000 shares of SBE common stock, based on an
exchange ratio of approximately 12.51 shares of LMC common stock for each share
of SBE common stock. The acquisition was accounted for as a pooling -of
interests under Accounting Principles Board Opinion No. 16 and, accordingly,
financial statements presented for all periods have been restated to reflect
combined operations and financial position and all intercompany transactions
have been eliminated. As a result of the acquisition, the company recorded a
charge of $383,000 consisting primarily of fees for attorneys, accountants and
financial printing.
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Consolidated results of operations for the period November 1, 1999 through July
31, 2000 of the Company and LMC on a stand-alone basis are as follows (in
thousands of dollars):
SBE LMC Combined
------ ----- --------
Net sales 20,918 2,830 23,748
Net Income 3,292 494 3,786
6. 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 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. designs, markets, sells and supports high-speed intelligent
communications controller and software products for use in telecommunications
systems worldwide. Our products enable both traditional and emerging
telecommunications service providers to deliver advanced communications products
and services, which we believe help these providers compete more effectively in
today's highly competitive telecommunications service market.
We depend, and expect to remain dependent, on a small number of OEM customers,
particularly Compaq Computer Corporation. If any of our major customers,
especially Compaq, reduces orders for our products, we could lose revenues and
suffer damage to our business reputation. Sales to Compaq Computer accounted
for 73 percent of our net sales in the nine months ended July 31, 2000 and 70
percent, 49 percent and 35 percent of our net sales in fiscal 1999, 1998 and
1997. Orders by our OEM customers are affected by factors such as new product
introductions, product life cycles, inventory levels, manufacturing strategy,
contract awards, competitive conditions and general economic conditions.
We are attempting to diversify our sales with the introduction of new products
that are targeted at large growing markets within the telecommunications
industry. Our Highwire products are focused on the telecommunications
applications market. We believe the growth in this market is driven by the
convergence of traditional telephony applications with the Internet. There can
be no assurance that we will be able to succeed in penetrating this market and
diversifying our sales.
On July 14, 2000, we acquired LAN Media Corporation, a privately held wide area
networking adapter company headquartered in Sunnyvale, California. In the
acquisition, we issued approximately 316,000 shares of our common stock for all
LAN Media's outstanding common stock. We also assumed all outstanding options
to acquire LAN Media common stock. The acquisition was accounted for as a
pooling of interests under Principles Board Opinion No. 16. Accordingly, our
financial statements have been restated for all periods prior to the merger to
reflect the combined results of operations, financial position and cash flows.
In connection with the acquisition, we recorded a charge to operating expenses
of $383,000 for acquisition-related costs in the fiscal third quarter ended July
31, 2000.
9
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, consolidated
statements of operations data for the three and nine months ended July 31, 2000
and 1999. These operating results are not necessarily indicative of our
operating results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- ------------------
JULY 31, JULY 31,
------------ ------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 38 41 35 37
----- ----- ----- -----
Gross profit 62 59 65 63
----- ----- ----- -----
Product research and development 19 32 18 24
Sales and marketing 14 28 15 22
General and administrative 13 16 15 15
Acquisition costs 5 -- 1 --
----- ----- ----- -----
Total operating expenses 51 76 49 61
----- ----- ----- -----
Operating income (loss) 11 (17) 16 2
Interest and other income, net 1 2 1 1
----- ----- ----- -----
Income (loss) before income taxes 12 (15) 17 3
Benefit from (provision for) income taxes (1) -- (1) --
----- ----- ----- -----
Net income (loss) 11% (15)% 16% 3%
===== ===== ===== =====
</TABLE>
NET SALES
Net sales for the third quarter of fiscal 2000 were $7.8 million, a 100 percent
increase from the third quarter of fiscal 1999. This increase was primarily
attributable to increased sales of 105 percent to Compaq. Some of the Compaq
products into which our products are incorporated have become integrated into
the Nextel wireless infrastructure and the Motorola SC series of wireless
equipment. The increase in net sales is also attributable to a 300 percent
increase in sales of WAN adapter products by LAN Media Corporation. This
increase is primarily due to increased sales to large telecommunications network
providers. Net sales for the nine months ended July 31, 2000 were $23.7 million,
a 57 percent increase from the same period of 1999, principally due to increases
in sales to Compaq and sales of WAN adapter products. Sales to Compaq and
Lucent represented 69 and 13 percent of net sales in the third quarter ended
July 31, 2000. Sales to Compaq represented 67 percent of net sales for the same
period of 1999. Sales to Compaq represented 73 and 67 percent of sales for the
nine months ended July 31, 2000 and 1999, respectively. No other customer
accounted for over 10 percent of sales in either the three or nine month
periods. We expect to continue to experience fluctuation in product sales as
large customers' needs change.
GROSS PROFIT
Gross profit as a percentage of sales in the third quarter of fiscal 2000 was 62
percent, and 59 percent during the third quarter of fiscal 1999. Gross profit
as a percentage of sales was 65 percent in the nine months ended July 31, 2000
and 63 percent in the nine months ended July 31, 1999. The increases from
fiscal 1999 to fiscal 2000 were primarily attributable to lower material costs
and a more favorable product mix in the fiscal 2000 periods.
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PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses were $1.5 million in the third quarter
of fiscal 2000 and $1.3 million in the third quarter of fiscal 1999. Product
research and development expenses for the first nine months of fiscal 2000 were
$4.2 million, a 13 percent increase from the same period in 1999. The increases
in research and development spending from the fiscal 1999 periods to the fiscal
2000 periods were a result of accelerated spending on new telecommunications
product development. Some of the fiscal 2000 product research and development
costs were attributable to the new software design center in Madison, Wisconsin
that we opened in the third quarter of fiscal 2000. We expect that product
research and development expenses will remain near or slightly above the current
expenditure levels for future periods.
SALES AND MARKETING
Sales and marketing expenses for the third quarters of fiscal 2000 and 1999 were
$1.1 million. Sales and marketing expenses were $3.5 million in the first nine
months of fiscal 2000, a 6 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
telecommunications products. We expect 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 third quarter of
fiscal 2000, an increase of 71 percent from $620,000 in the third quarter of
1999. General and administrative expenses were $3.6 million in the first nine
months of fiscal 2000, a 55 percent increase from the same period of fiscal
1999. These increases were due to increases in compensation amounts under our
retirement and bonus plans, which are tied to company profitability. In future
periods, we expect that general and administrative expenses may increase from
current expenditure levels as a result of variable compensation to the extent we
are successful in increasing our profitability.
ACQUISITION COSTS
$383,000 of cost associated with the acquisition of LAN Media, Corp. were
incurred during the third quarter of fiscal 2000.
INTEREST AND OTHER INCOME, NET
Interest and other income, net decreased in the third quarter and the first nine
months of fiscal 2000 from the same periods in fiscal 1999 due to lower average
cash balances and increased debt.
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INCOME TAXES
We recorded a provision for income taxes of $97,000 in the third quarter of
fiscal 2000 and a benefit from income taxes of $10,000 in the third quarter of
fiscal 1999. We recorded a provision for income taxes of $190,000 in the first
nine months of fiscal 2000 and $32,000 in the first nine months of fiscal 1999.
Our current effective income tax rate is lower than the statutory rate as
operating loss carryforwards and tax credit carryforwards are being utilized to
offset taxable income. We had net operating loss carryforwards for federal and
state purposes of approximately $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 (LOSS)
As a result of the factors discussed above, we recorded net income of $842,000
in the third quarter of fiscal 2000 and a net loss of $573,000 in the third
quarter of fiscal 1999. Net income for the first nine months of fiscal 2000 was
$3.8 million, as compared to net income of $389,000 for the same period of 1999.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2000, we had cash and cash equivalents of $7.0 million, as compared
to $3.4 million at October 31, 1999. In the first nine months of fiscal 2000,
$3.4 million of cash was provided by operating activities, primarily as a result
of $3.8 million in net income, a $1.1 million increase in accounts payable, a
$1.2 million increase in other liabilities, and $819,000 in depreciation and
amortization, offset by a $1.1 million increase in accounts receivable and a
$2.5 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 our VME and LMC adapter products. We believes that we
have acquired sufficient components to meet forecasted customer demand over the
next few years, and are actively working with the applicable customers to help
them transition to new product platforms. Working capital at July 31, 2000 was
$12.0 million, as compared to $7.2 million at October 31, 1999.
In the first nine months of fiscal 2000, we purchased $818,000 of fixed assets,
consisting primarily of computer and engineering equipment. Software costs of
$193,000 were also capitalized during the first nine months of 2000. We expect
capital expenditures will remain at current levels for the foreseeable future.
We received $1.3 million in the first nine months of fiscal 2000 from employee
stock option exercises and employee stock purchase plan purchases.
Based on the current operating plan, we anticipate that our current cash
balances and anticipated cash flow from operations will be sufficient to meet
our working capital needs over at least the next 12 months.
12
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash and cash equivalents are subject to interest rate risk. We invest
primarily on a short-term basis. Our financial instrument holdings at July 31,
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 percent, the expected effect on net income related to our
financial instruments would be immaterial.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
11.1 Statements of Computation of Net Income (Loss) per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed with the Securities and Exchange Commission on
July 28, 2000. The report announced SBE's acquisition of LAN Media Corporation
on July 14, 2000.
14
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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 September 14, 2000.
SBE, INC.
----------
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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