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, 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 February 29,
2000 was 2,915,111.
1
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SBE, INC.
INDEX TO JANUARY 31, 2000 FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of
January 31, 2000 and October 31, 1999 . . . . . . . . . . . . . . . . . .3
Condensed Consolidated Statements of Operations for the
three months ended January 31, 2000 and 1999. . . . . . . . . . .. . . . 4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 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. . . . . . . . . . . . . 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, 2000 AND OCTOBER 31, 1999
(In thousands)
January 31, October 31,
2000 1999
------------- -------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,061 $ 3,326
Trade accounts receivable, net 6,538 3,290
Inventories 2,255 1,517
Deferred income taxes 158 158
Other 618 298
------------- --------------
Total current assets 11,630 8,589
Property, plant and equipment, net 1,529 1,513
Capitalized software costs, net 319 338
Other 39 40
------------- -------------
Total assets $ 13,517 $ 10,480
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,469 $ 935
Accrued payroll and employee benefits 636 320
Accrued product warranties 100 101
Other accrued expenses 171 130
------------- -------------
Total current liabilities 3,376 1,486
Deferred tax liabilities 158 158
Deferred rent 329 345
------------- -------------
Total liabilities 3,863 1,989
------------- -------------
Stockholders' equity:
Common stock 11,009 10,924
Note receivable from stockholder (744) (744)
Treasury stock (358) (358)
Accumulated deficit (253) (1,331)
------------- -------------
Total stockholders' equity 9,654 8,491
------------- -------------
Total liabilities and stockholders' equity $ 13,517 $ 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 months ended January 31, 2000 and 1999
(In thousands, except per share amounts)
(Unaudited)
Three months ended
January 31,
2000 1999
------ ------
<S> <C> <C>
Net sales $6,581 $6,518
Cost of sales 2,058 2,251
------ ------
Gross profit 4,523 4,267
Product research and development 1,333 1,005
Sales and marketing 1,065 987
General and administrative 1,038 1,033
------ ------
Total operating expenses 3,436 3,025
------ ------
Operating income 1,087 1,242
Interest and other (expense) income, net 33 39
------ ------
Income before income taxes 1,120 1,281
Provision for income taxes 41 51
------ ------
Net income $1,079 $1,230
====== ======
Basic earnings per common share $ 0.38 $ 0.44
====== ======
Diluted earnings per common share $ 0.37 $ 0.41
====== ======
Basic--shares used in per share computations 2,828 2,823
====== ======
Diluted--shares used in per share computations 2,946 3,030
====== ======
See notes to condensed 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, 2000 AND 1999
(In thousands)
(Unaudited)
Three months ended
January 31,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,079 $ 1,230
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 267 177
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (3,247) 1,950
(Increase) decrease in inventories (737) (39)
(Increase) decrease in other assets (321) 173
Increase (decrease) in trade accounts payable 1,533 (573)
Increase (decrease) in other current liabilities 357 97
Increase (decrease) in noncurrent liabilities (17) (5)
-------- --------
Net cash provided by (used in) operating activities (1,086) 3,010
-------- -------
Cash flows from investing activities:
Capital expenditures:
Purchases of property and equipment (224) (80)
Capitalized software costs (40) (19)
-------- --------
Net cash used in investing activities (264) (99)
-------- --------
Cash flows from financing activities:
Proceeds from stock plans 51 62
Other 34 -
-------- --------
Net cash provided by financing activities 85 62
-------- --------
Net increase (decrease) in cash and cash equivalents (1,265) 2,973
Cash and cash equivalents at beginning of period 3,326 3,381
-------- --------
Cash and cash equivalents at end of period $ 2,061 $ 6,354
======== ========
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 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 three months ended January 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.
2. INVENTORIES:
Inventories comprise the following (in thousands):
January 31, October 31,
2000 1999
---------- --- -------
Finished goods $ 999 $ 773
Parts and materials 1,256 744
----------- -----------
$ 2,255 $ 1,517
========== ===========
3. NET EARNINGS PER SHARE:
The Company computes earnings 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, 2000 and January 31,
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 months ended January 31, 2000 and for the three months ended January 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 1,075,700 shares and
891,950 shares of the Company's common stock as of January 31, 2000 and January
31, 1999, respectively.
6
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4. CONCENTRATION OF RISK:
In the first three 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 of the Company's net sales in the first three months of fiscal 2000
and 1999. Also, Compaq Computer accounted for 89 percent and 75 percent of the
Company's accounts receivable as of January 31, 2000 and January 31, 1999,
respectively. The Company expects that sales from 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.
All of the Company's cash and cash equivalents are held in one large financial
institution.
7
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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 needs of
traditional and converged telecommunication markets. The Company's products are
designed for incorporation within high-end computer systems and integrated into
signaling, switching and routing networks. They include SS7/AIN 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, 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 telecommunication
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. These products are designed to fully support the
Solaris 8 Operating Environment. In addition, the Company partnered with
Trillium Digital Systems and Data Connection Limited which will provide SS7
protocol software solutions for integration with the Company's Highwire
products. There can be no assurance that the Company will be able to succeed in
penetrating this market and diversifying its sales. The Company believes that to
be successful in the telecommunications applications market it will need to
continue to expand its product offerings through relationships with other
software and equipment providers.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
consolidated statements of operations data for the three months ended January
31, 2000 and 1999. These operating results are not necessarily indicative of
the Company's operating results for any future period.
8
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
------------
2000 1999
----- -----
<S> <C> <C>
Net sales 100% 100%
Cost of sales 32 35
----- -----
Gross profit 68 65
----- -----
Product research and development 20 15
Sales and marketing 16 15
General and administrative 16 16
----- -----
Total operating expenses 52 46
----- -----
Operating income 16 19
Interest and other income, net 1 1
----- -----
income before income taxes 17 20
Provision for income taxes 1 1
----- -----
Net income 16% 19%
===== =====
</TABLE>
NET SALES
Net sales for the first quarter of fiscal 2000 were $6.6 million, a 1 percent
increase from the first quarter of fiscal 1999. Sales of VME communication
controller products increased 1 percent and sales of PCIbus increased 76 percent
from the first quarter of fiscal 1999. Sales to Compaq Computer represented 83
percent of net sales in the first quarter of fiscal 2000 and the first quarter
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.
International sales constituted 3 percent and 4 percent of net sales in the
first quarter of fiscal 2000 and the first quarter of fiscal 1999, respectively.
The decrease in international sales was primarily attributable to decreased
demand for our products in Asia.
GROSS PROFIT
Gross profit as a percentage of sales in the first three months of fiscal 2000
was 69 percent, up from 65 percent for the same period of 1999. The increase
from fiscal 1999 to fiscal 2000 was primarily attributable to lower material
costs and a more favorable product mix.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses were $1.3 million in the first quarter
of fiscal 2000, an increase of 33 percent from $1.0 million in the first quarter
of fiscal 1999. The increase in research and development spending from fiscal
1999 to fiscal 2000 was a result of higher spending on new telecommunications
product development. The Company expects that product research and development
expenses will remain near the current expenditure levels for future periods.
9
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SALES AND MARKETING
Sales and marketing expenses for the first quarter of fiscal 2000 were $1.1
million, an increase of 8 percent from $987,000 in the first quarter of fiscal
1999. The increase for the first quarter of fiscal 2000 was 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 $1.0 million for the first quarter of
fiscal 2000 and the first quarter of 1999. 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 income decreased in the first quarter of fiscal 2000 from the same
periods in fiscal 1999 due to lower cash balances.
INCOME TAXES
The Company recorded a provision from income taxes of $41,000 in the first
quarter of fiscal 2000 and $51,000 in the first quarter of fiscal 1999. The
Company's current effective income tax rate is lower than the statutory rate as
operating loss and tax credit carryforwards are being recognized. 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, net income for the first quarter of
fiscal 2000 was $1.1 million, as compared to a net income of $1.2 million for
the same period of 1999.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2000 the Company had cash and cash equivalents of $2.1 million,
as compared to $3.3 million at October 31, 1999. In the first three months of
fiscal 2000, $1.1 million of cash was used in operating activities, primarily as
a result of a $3.2 million increase in accounts receivable, a $737,000 increase
in inventories, and a $321,000 increase in other assets. The accounts receivable
increase was primarily a result of a sales increase. The inventory increase was
a result of purchases of certain components to be used in the Company's VME
products. The Company believes that it has acquired sufficient components to
meet customer demand for the next three years. The other assets increase was
primarily a result of deposits made to some vendors. These cash outflows were
partially offset by $1.1 million in net income, $267,000 in depreciation and
10
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amortization, a $1.5 million increase in accounts payable, and a $357,000
increase in other current liabilities. The accounts payable increase was
primarily a result of a sales increase. The other current liabilities increase
was a result of various compensation increase. Working capital at January 31,
2000 was $8.3 million, as compared to $7.1 million at October 31, 1999.
In the first quarter of fiscal 2000 the Company purchased $224,000 of fixed
assets, consisting primarily of computer and engineering equipment. Software
costs of $40,000 were also capitalized during the first quarter of 2000. The
Company expects capital expenditures will remain at current levels.
The Company received $51,000 in the first quarter 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 twelve months.
11
<PAGE>
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, 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.
12
<PAGE>
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, 2000.
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 10, 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)
14
<TABLE>
<CAPTION>
EXHIBIT 11.1
SBE, INC.
STATEMENTS OF COMPUTATION OF NET INCOME PER SHARE
FOR THE THREE MONTHS ENDED JANUARY 31, 2000 AND 1999
(In thousands, except per share amounts)
(Unaudited)
Three months ended
January 31,
--------------------
2000 1999
-------- -------
BASIC
<S> <C> <C>
Weighted average number of
common shares outstanding 2,828 2,823
-------- --------
Number of shares for computation of
net income per share 2,828 2,823
======== ========
Net income $1,079 $1,230
======== ========
Net income per share $ 0.38 $ 0.44
======== ========
DILUTED
Weighted average number of
common shares outstanding 2,828 2,823
Shares issuable pursuant to options granted
under stock option plans, less assumed
repurchase at average market value
for the period 118 207
-------- --------
Number of shares for computation of
net income per share 2,946 3,030
======== ========
Net income $1,079 $1,230
======== ========
Net income per share $ 0.37 $ 0.41
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 2061
<SECURITIES> 0
<RECEIVABLES> 6538
<ALLOWANCES> 0
<INVENTORY> 2255
<CURRENT-ASSETS> 11630
<PP&E> 1529
<DEPRECIATION> 0
<TOTAL-ASSETS> 13517
<CURRENT-LIABILITIES> 3376
<BONDS> 0
0
0
<COMMON> 11009
<OTHER-SE> (1355)
<TOTAL-LIABILITY-AND-EQUITY> 13517
<SALES> 6581
<TOTAL-REVENUES> 6581
<CGS> 2058
<TOTAL-COSTS> 2058
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (33)
<INCOME-PRETAX> 1120
<INCOME-TAX> 41
<INCOME-CONTINUING> 1079
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1079
<EPS-BASIC> .38
<EPS-DILUTED> .37
</TABLE>
