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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, 2003
[ ] 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.
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(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.)
2305 Camino Ramon, Suite 200, San Ramon, California 94583
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(Address of principal executive offices and zip code)
(925) 355-2000
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(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
The number of shares of Registrant's Common Stock outstanding as of January 31,
2003 was 4,152,360.
-1-
SBE, INC.
INDEX TO JANUARY 31, 2003 FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of
January 31, 2003 and October 31, 2002..........................................................3
Condensed Consolidated Statements of Operations for the
three months ended January 31, 2003 and 2002...................................................4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 2003 and 2002...................................................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.........................................................................15
ITEM 4 Controls and Procedures.............................................................15
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K....................................................16
SIGNATURES............................................................................................18
EXHIBITS..............................................................................................23
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
January 31, October 31,
2003 2002
----------- -----------
Current assets:
Cash and cash equivalents $ 1,530 $ 1,582
Trade accounts receivable, net 845 888
Inventories 1,832 1,910
Other 225 220
------------ ------------
Total current assets 4,432 4,600
Property, plant and equipment, net 433 533
Capitalized software costs, net 105 110
Other 78 78
----------- -----------
Total assets $ 5,048 $ 5,321
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 330 $ 488
Accrued payroll and employee benefits 94 159
Current portion of refundable deposit 447 447
Other accrued expenses 340 521
----------- -----------
Total current liabilities 1,211 1,615
Other long-term liabilities 9 10
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Total liabilities 1,220 1,625
----------- -----------
Stockholders' equity:
Common stock 14,726 14,711
Treasury stock (409) (409)
Note receivable from stockholder (245) (270)
Accumulated deficit (10,244) (10,336)
------------ ------------
Total stockholders' equity 3,828 3,696
----------- -----------
Total liabilities and stockholders' equity $ 5,048 $ 5,321
=========== ===========
See notes to condensed consolidated financial statements.
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SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three months ended
January 31,
2003 2002
----------- ---------
Net sales $ 1,861 $ 1,283
Cost of sales 733 587
----------- -----------
Gross profit 1,128 696
Product research and development 285 794
Sales and marketing 307 540
General and administrative 441 591
----------- -----------
Total operating expenses 1,033 1,925
----------- -----------
Operating income (loss) 95 (1,229)
Interest and other income --- 11
----------- -----------
Income (loss) before income taxes 95 (1,218)
Provision for income taxes 4 ---
----------- -----------
Net income (loss) $ 91 $ (1,218)
=========== ============
Basic earnings (loss) per share $ 0.02 $ (0.35)
========== ============
Diluted earnings (loss) per share $ 0.02 $ (0.35)
========== ============
Shares used in per share computations:
Basic 4,064 3,457
=========== ===========
Diluted 4,082 3,457
=========== ===========
See notes to condensed consolidated financial statements.
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SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
January 31,
2003 2002
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 91 $ (1,218)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization:
Property and equipment 105 199
Capitalized software costs 4 24
Loss on disposal of equipment 7 14
Changes in operating assets and liabilities:
Trade accounts receivable 43 (892)
Inventories 78 869
Other assets (5) 25
Trade accounts payable (158) 61
Other current liabilities (247) (772)
------------ ------------
Net cash used in operating activities (82) (1,690)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (10) (126)
Capitalized software costs --- (42)
----------- ------------
Net cash used in investing activities (10) (168)
----------- -----------
Cash flows from financing activities:
Repayment of stockholder note 25 ---
Proceeds from stock plans 15 16
----------- -----------
Net cash provided by financing activities 40 16
----------- -----------
Net decrease in cash and cash equivalents (52) (1,842)
Cash and cash equivalents at beginning of period 1,582 3,644
----------- -----------
Cash and cash equivalents at end of period $ 1,530 $ 1,802
=========== ===========
See notes to condensed consolidated financial statements.
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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. 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, 2003 are not
necessarily indicative of expected results for the full 2003 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 our Annual Report on Form 10-K for the year ended October 31, 2002.
We incurred substantial losses and negative cash flows from operations during
the year ended October 31, 2002. Our operations produced a modest net income for
the first three months of fiscal 2003 as we began to realize the full effect of
our cost containment program to reduce our headcount, real estate obligations
and certain non-essential spending. With these reductions, we have reduced our
quarterly cash flow break-even point to approximately $1.7 million to $1.9
million in revenue at an expected 50% gross margin. Our sales are to a limited
number of new and existing original equipment manufacturer ("OEM") customers and
are based on internal and customer-provided estimates of future demand, not firm
customer orders. If our projected sales do not materialize, we will need to
reduce expenses further and raise additional capital through customer
prepayments or the issuance of debt or equity securities. If additional funds
are raised through the issuance of preferred stock or debt, these securities
could have rights, privileges or preferences senior to those of common stock,
and debt covenants could impose restrictions on our operations. The sale of
equity or debt could result in additional dilution to current stockholders, and
such financing may not be available to us on acceptable terms, if at all.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires us 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 us include matters such as
collectibility of accounts receivable, realizability of inventories and
recoverability of capitalized software and deferred tax assets.
-6-
2. INVENTORIES:
Inventories comprise the following (in thousands):
January 31,October 31,
2003 2002
------------ ----------
Finished goods $ 912 $ 985
Parts and materials 920 925
---------- ----------
$ 1,832 $ 1,910
========== ==========
3. RESTRUCTURING COSTS:
The following table sets forth an analysis of the components of the
restructuring reserve and the payments made against it during the quarter ended
January 31, 2003 (in thousands):
Restructuring reserve at October 31, 2002 $ 249
Less: Cash paid for accrued lease costs (135)
-----
Total restructuring costs included in other accrued expenses $ 114
=====
4. NET INCOME (LOSS) PER SHARE:
Basic income (loss) per common share for the three months ended January 31, 2003
and 2002 were computed by dividing net income (loss) by the weighted average
number of shares of common stock outstanding. Common stock equivalents for the
three months ended January 31, 2003 were 18,103 and have been included in the
calculation of diluted earnings per share. Common stock equivalents for the
three months ended January 31, 2002 were 393,521 and have been excluded from
shares used in calculating diluted loss per share because their effect would be
anti-dilutive.
5. CONCENTRATION OF RISK:
In the first three months of fiscal 2003 and 2002, most of our sales were
attributable to sales of wireless communications products and were derived from
a limited number of OEM customers. Sales to the Hewlett-Packard Company ("HP")
accounted for 43% and 33% of our net sales in the first three months of fiscal
2003 and 2002, respectively. Also, HP accounted for 16% of our accounts
receivable and Lockheed Martin accounted for 14% our accounts receivable at
January 31, 2003. Under a restructured product supply agreement entered into on
October 31, 2002, HP submitted an end-of-life non-cancelable purchase order for
approximately $1.6 million of our VME products to be shipped over the first two
quarters of fiscal 2003, of which $800,000 shipped in the first quarter. Upon
the fulfillment of this purchase order, we do not expect to receive future
purchase orders for significant amounts of VME products from HP. We expect to
continue to sell our Adapter products to HP. A significant reduction in orders
from any of our OEM customers could have a material adverse effect on our
business, operating results, financial condition and cash flows.
-7-
6. WARRANTY OBLIGATIONS AND OTHER GUARANTEES:
We accrue the estimated costs to be incurred in performing warranty services at
the time of revenue recognition and shipment of the products to the OEMs. Our
estimate of costs to service our warranty obligations is based on historical
experience and expectation of future conditions. To the extent we experience
increased warranty claim activity or increased costs associated with servicing
those claims, the warranty accrual will increase, resulting in decreased gross
margin.
The following table sets forth an analysis of our warranty reserve at January
31, 2003 (in thousands):
Warranty reserve at October 31, 2002 $ 55
Less: Cost to service warranty obligations -
------
Total warranty reserve included in other accrued expenses $ 55
======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Words such as "believes," "anticipates," "expects," "intends" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying such statements. Readers are cautioned
that the forward-looking statements reflect our analysis only as of the date
hereof, and we assume no obligation to update these statements. Actual events or
results may differ materially from the results discussed in or implied by the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those risks and uncertainties set forth under the
caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal year
ended October 31, 2002. Such risks and uncertainties include:
- our expectation regarding sales to HP in fiscal 2003;
- the belief that the market for data and telecommunications controller
products is growing;
- the adequacy of anticipated sources of cash and planned capital
expenditures;
- our expectations regarding quarterly operating expense levels and
gross profit for fiscal 2003;
- trends or expectations regarding our operations;
- the concentration of our customers;
- delays in testing and introducing new products;
- changes in product demand;
- rapid technology changes;
- the highly competitive market in which we operate;
- the pricing and availability of equipment, materials and inventories;
- the financial stability of our contract manufacturers;
- various inventory risks due to market conditions;
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- delays or cancellation of customer orders; and
- the entry of new well-capitalized competitors into our markets.
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q and in our Form 10-K for the fiscal year ended October 31, 2002.
OVERVIEW
SBE, Inc. designs, markets, sells and supports network communications controller
solutions for original equipment manufacturers in the global networking
marketplace. Our solutions enable both datacom and telecom companies to rapidly
deliver advanced networking products and services in order to compete
effectively in today's fast-evolving public switched telephone network ("PSTN")
and Internet environment. Our products include wide area network ("WAN") and
local area network ("LAN") interface adapters and high performance intelligent
communications controllers for workstations, media gateways, routers, internet
access devices, home location registers and data messaging applications. Our
products are distributed worldwide through a direct sales force, distributors,
independent manufacturers' representatives and value-added resellers.
We currently market, sell and support four lines of high-speed networking
products: HighWire(TM) , WAN Adapters, LAN Adapters and VMEbus. All of these
products are sold primarily to original equipment manufacturers ("OEMs"). These
products are often customized for a specific customer's application, and they
support applications in a broad spectrum of industrial and commercial markets.
Markets and application areas that our products serve include enterprise
servers, data storage, process control, medical imaging, CAE/automated test
equipment, government/military defense systems and telecommunications networks.
Our business is characterized by a concentration of sales to a small number of
original equipment manufacturers ("OEM") customers and, consequently, the timing
of significant orders from major customers and their product cycles causes
fluctuation in our operating results. The Hewlett-Packard Company ("HP") is the
largest of our customers and represented 30% of net sales in fiscal 2002. If any
of our major customers reduces orders for our products, we could lose revenues
and suffer damage to our business reputation. Sales to HP accounted for 43% of
our net sales in the three months ended January 31, 2003 and 33% for the first
three months of fiscal 2002. 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.
During the past 18 months, we have taken aggressive steps to reduce overall
operating costs, including reducing headcount, relocating our engineering and
headquarters facilities and closing our office in Madison, Wisconsin. We have
now begun to fully realize the effect of our cost containment program. Overall
operating expense was $1.0 million for the quarter ended January 31, 2003
compared to $1.9 million for the same quarter in fiscal 2002, a 44% reduction.
As we continue to focus on cost containment and monitor our expense levels very
closely, we expect quarterly operating expense levels to be maintained at the
current levels for the remainder of fiscal 2003.
-9-
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
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. Such estimates include levels
of reserves for doubtful accounts, obsolete inventory, warranty costs and
deferred tax assets. Actual results could differ from those estimates.
Our critical accounting policies and estimates include the following:
Revenue Recognition:
We record product sales at the time of product shipment. Our sales transactions
are negotiated in U.S. dollars. Our agreements with OEMs such as HP and Lockheed
Martin typically incorporate clauses reflecting the following understandings:
- all prices are fixed and determinable at the time of sale;
- title and risk of loss pass at the time of shipment;
- collectibility of the sales prices is probable. The OEM is obligated
to pay and such obligation is not contingent on the ultimate sale of
the OEM's integrated solution;
- the OEM's obligation to us would not be changed in the event of theft
or physical destruction or damage of the product;
- we do not have significant obligations for future performance to
directly bring about resale of the product by the OEMs; and
- there is no contractual right of return other than for defective
products; we can reasonably estimate such returns and record a
warranty reserve at the point of shipment.
Warranty Reserves
We accrue the estimated costs to be incurred in performing warranty services at
the time of revenue recognition and shipment of the products to the OEMs. Our
estimate of costs to service our warranty obligations is based on historical
experience and expectation of future conditions. To the extent we experience
increased warranty claim activity or increased costs associated with servicing
those claims, the warranty accrual will increase, resulting in decreased gross
margin.
Inventories
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market value. Our inventories include high-technology parts that may
be subject to rapid technological obsolescence. We consider technological
obsolescence in estimating required reserves to reduce recorded amounts to
market values. Such estimates could change in the future and have a material
adverse impact on our financial position and results of operations.
-10-
Property and Equipment
We review property and equipment for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. In
performing the review for recoverability, we estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. The
amount of the impairment loss, if any, would be calculated based on the excess
of the carrying amount of the asset over its fair value.
Capitalized Software Costs
Capitalized software costs consist of costs to purchase software and costs to
internally develop software. Capitalization of software costs begins upon the
establishment of technological feasibility. All capitalized software costs are
amortized as related sales are recorded on a per-unit basis with a minimum
amortization based on a straight-line method over a two-year estimated useful
life. We evaluate the estimated net realizable value of each software product
and record provisions to the asset value of each product for which the net book
value is in excess of the net realizable value.
Deferred Taxes
We record a valuation allowance to reduce our deferred taxes to the amount that
is more likely than not to be realized. Based on the uncertainty of future
pre-tax income, we have fully reserved our deferred tax assets as of January 31,
2003 and October 31, 2002, respectively. In the event we were to determine that
we would be able to realize our deferred tax assets in the future, an adjustment
to the deferred tax asset would increase income in the period such determination
was made.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, consolidated
statements of operations data for the three months ended January 31, 2003 and
2002. These operating results are not necessarily indicative of our operating
results for any future period.
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THREE MONTHS ENDED
------------------
JANUARY 31,
-----------
2003 2002
-------- ---------
Net sales 100% 100%
Cost of sales 39 46
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Gross profit 61 54
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Product research and development 15 62
Sales and marketing 17 42
General and administrative 24 46
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Total operating expenses 56 150
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Operating income (loss) 5 (96)
Interest income and provision for income taxes --- 1
-------- ---------
Net income (loss) 5% (95)%
======== ==========
NET SALES
Net sales for the first quarter of fiscal 2003 were $1.9 million, a 45% increase
from the first quarter of fiscal 2002. This increase was primarily attributable
to end-of-life product shipments to HP related to a restructured product supply
agreement. We continue to see an overall slowdown in demand from virtually all
of our telecommunications customers due to industry-wide adverse economic
conditions. These conditions resulted in our customers holding excess inventory
of our products. Sales to HP were $800,000 in the first quarter of fiscal 2003,
compared to $400,000 for the first quarter of fiscal 2002. Sales of our Adapter
products increased from $428,000 in the first quarter of fiscal 2002 to $566,000
for the quarter just ended, or a 32% increase, however, sales of our Highwire
products remained flat at $184,000 for the first quarter fiscal 2002 compared to
$188,000 for the quarter just ended. Sales to HP, primarily of VMEBus products,
represented 43% of total sales for the quarter compared to 33% during the
comparable quarter in fiscal 2002. On October 31, 2002, HP placed an end-of-life
purchase order for shipment of these VME products over the first two quarters of
fiscal 2003, of which half was shipped in the first quarter. We expect that
sales to HP will constitute a substantial portion of our net sales in fiscal
2003, both as a result of the end-of-life VME product orders and projected sales
of WAN Adapter products to HP. We do not expect sales of VME products to HP to
be a substantial portion of our revenues after fiscal 2003. No other customer
accounted for over 10% of sales in the three-month period just ended.
Due to the adverse economic conditions in the telecommunications industry, our
customers have cancelled or delayed many of their new design projects and new
product rollouts that included our products. Our sales backlog at January 31,
2003 was $1.3 million, including the HP end-of-life order of VME products of
$800,000 to be shipped in the second quarter, compared to $303,000 at January
31, 2002. While we anticipate an increase in our sales volume over the course of
fiscal 2003 as our customers slowly deploy existing inventory and gradually
return to new product design and product rollout, there can be no assurances
that such an increase will occur. Due to the current economic uncertainty, our
customers typically require a "just-in-time" ordering and delivery cycle where
they will place a purchase order with us after they receive an order from their
customer. This "just-in-time" inventory purchase cycle by our customers has made
forecasting of our future sales volumes very difficult. Because our sales are
-12-
generally concentrated with a small group of OEM customers, we could experience
significant fluctuations in our quarterly sales volumes due to fluctuating
demand from any major customer or delay in the rollout of any significant new
product by a major customer.
GROSS MARGIN
Gross margin as a percentage of sales in the first quarter of fiscal 2003 was
61% and 54% during the first quarter of fiscal 2002. The increase in the gross
margin from fiscal 2002 to fiscal 2003 was primarily attributable to lower
materials and manufacturing costs combined with a more profitable product mix in
fiscal 2003. We expect our gross margin to range between 50% and 57% for fiscal
2003. However, if market and economic conditions, particularly in the
telecommunications sector, deteriorate or fail to recover, gross margin may be
lower than projected.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses were $285,000 in the first quarter of
fiscal 2003, a decrease of 64% from $794,000 million in the first quarter of
fiscal 2002. The decrease resulted from staff reductions, the closing of our
Madison, Wisconsin facility during the fourth quarter of fiscal 2002 and a
continued focus on expense reductions in the engineering group. We expect
product research and development spending to remain at or slightly below current
levels in terms of absolute dollars as we continue to focus on expense
reductions during the remainder of fiscal 2003.
SALES AND MARKETING
Sales and marketing expenses for the first quarter of fiscal 2003 were $307,000,
a decrease of 43% from $540,000 in the first quarter of fiscal 2002. The
decrease is primarily due to lower marketing program spending for products in
addition to the effect of headcount reductions during the fourth quarter of
fiscal 2002. We expect our quarterly sales and marketing expenses to remain at
this level in terms of absolute dollars for the remainder of fiscal 2003.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $441,000 for the first quarter of
fiscal 2003, a decrease of 25% from $591,000 in the first quarter of 2002. This
decrease was due to the effect of reduced headcount and a continued focus on
controlling spending during the first quarter of fiscal 2003. We expect our
quarterly general and administrative expenses to remain at this level for the
remainder of fiscal 2003.
INTEREST INCOME
Interest income decreased in the first quarter of fiscal 2003 from the same
period in fiscal 2002 due to lower average cash balances.
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NET INCOME (LOSS)
As a result of the factors discussed above, we recorded net income of $91,000 in
the first quarter of fiscal 2003, as compared to a net loss of $1.2 million in
the first quarter of fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity is dependent on many factors, including sales volume, operating
profit and the efficiency of asset use and turnover. Our future liquidity will
be affected by, among other things:
- the actual versus anticipated increase in sales of our products;
- ongoing cost control actions and expenses, including for example,
research and development and capital expenditures;
- timing of product shipments which occur primarily during the last
month of the quarter; - the gross profit margin;
- the ability to raise additional capital, if necessary; and
- the ability to secure credit facilities, if necessary.
At January 31, 2003, we had cash and cash equivalents of $1.5 million, as
compared to $1.6 million at October 31, 2002. In the first three months of
fiscal 2003, $82,000 of cash was used in operating activities, primarily as a
result of $91,000 of net income, a $158,000 decrease in trade accounts payable
and a $246,000 decrease in other current liabilities, partially offset by a
$78,000 decrease in inventories and a $43,000 decrease in trade accounts
receivable. The decrease in trade accounts payable was primarily due to a final
end of contract payment to our discontinued contract manufacturer. The decrease
in other current liabilities was primarily the result of the payment of certain
restructuring costs related to the closing of our office in Madison, Wisconsin.
The decrease in inventory is reflective of our focus on just-in-time inventory
practices where we place orders with our contract manufacturers as we receive
purchase orders from our customers. Working capital at January 31, 2003 was $3.2
million, as compared to $3.0 million at October 31, 2002.
In the first three months of fiscal 2003, we purchased $10,000 of fixed assets,
consisting primarily of computer and engineering equipment. Capital expenditures
for each of the remaining quarters of fiscal 2003 are expected to range from
$25,000 to $100,000 per quarter.
We received $40,000 in the first three months of fiscal 2003 from payments
related to common stock purchases made by employees pursuant to our employee
stock purchase plan and the required principal payment on a shareholder loan.
We realized significant reductions in our operating expenses due to our
implementation of a program of controlled spending and headcount reduction
initially instituted in mid-fiscal 2001 and continued throughout fiscal 2002.
With these reductions, we have reduced our quarterly cash flow break-even point
to approximately $1.7 million to $1.9 million in revenue at an expected 50%
gross margin. Our projected sales are to a limited number of new and existing
OEM customers and are based on internal and customer-provided estimates of
-14-
future demand, not firm customer orders. If our projected sales do not
materialize, we will need to reduce expenses further and raise additional
capital through customer prepayments or the issuance of debt or equity
securities. If additional funds are raised through the issuance of preferred
stock or debt, these securities could have rights, privileges or preferences
senior to those of common stock, and debt covenants could impose restrictions on
our operations. The sale of equity or debt could result in additional dilution
to current stockholders, and such financing may not be available to us on
acceptable terms, if at all.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS:
Our only significant contractual obligations and commitments relate to certain
real estate operating leases for development and headquarters facilities and our
supply agreement with HP.
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 January
31, 2003 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 (loss) related to our financial
instruments would be immaterial.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our chief executive
officer and our chief financial officer, after evaluating the
effectiveness of our "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934 (the "Exchange Act") Rules
13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing
date of this quarterly report, have concluded that our disclosure
controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in our
internal controls or to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their
evaluation. There were no significant deficiencies or material
weaknesses, and therefore there were no corrective actions taken.
-15-
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1 Certificate of Incorporation, as amended through December 15, 1997.
(1)
3.2 Bylaws, as amended through December 8, 1998. (2)
4.1 Stock subscription agreement, dated April 30, 2002, between
Stonestreet L.P. and SBE, Inc. (3)
4.2 Warrant dated April 30, 2002, to purchase 111,111 shares of common
stock of SBE, Inc. in favor of Stonestreet L.P. (3)
4.3 Warrant dated April 30, 2002, to purchase 11,429 shares of common
stock of SBE, Inc. in favor of Vintage Partners L.L.C. (3)
4.4 Amendment dated August 22, 2002 to stock subscription agreement dated
April 30, 2002 between SBE, Inc. and Stonestreet L.P. (4)
10.1 1996 Stock Option Plan, as amended. (5)
10.2 1991 Non-Employee Directors' Stock Option Plan, as amended. (5)
10.3 1992 Employee Stock Purchase Plan, as amended. (5)
10.4 1998 Non-Officer Stock Option Plan, as amended. (5)
10.5 Lease for 4550 Norris Canyon Road, San Ramon, California, dated June
6, 1995 between SBE, Inc. and PacTel Properties. (6)
10.6 Amendment dated June 6, 1995 to lease for 4550 Norris Road, San Ramon,
California, between SBE, Inc. and CalProp (assignee of PacTel
Properties).(7)
10.7 Full Recourse Promissory Note executed by William B. Heye, Jr. in
favor of SBE, Inc., dated November 6, 1998, amended December 14, 2001.
(2)
10.8 Amendment No. S/M018-4 dated April 3, 2001, to the Purchase Agreement
dated May 6, 1991, between SBE, Inc. and Compaq Computer Corporation,
as amended October 30, 2002. (8)
10.9 Loan and security agreement dated May 13, 2002 between SBE, Inc. and
Silicon Valley Bank. (9)
10.10Amendment to the Full Recourse Promissory Note executed by William
Heye, Jr. in favor of SBE, Inc., dated December 14, 2001. (5)
11.1 Statements of Computation of Net Loss per Share
99.1 Certification by Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(1) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1997 and incorporated herein by reference.
-16-
(2) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to Form S-3 dated May 23, 2002 and
incorporated herein by reference.
(4) Filed as an exhibit to Quarterly Report on Form 10-Q for the
quarter ended July 31, 2002 and incorporated herein by reference.
(5) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 2002 and incorporated herein by reference.
(6) Filed as an exhibit to Form S-8 dated October 16, 1998 and
incorporated herein by reference.
(7) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to Quarterly Report on Form 10-Q for the
quarter ended April 30, 2001 and incorporated herein by
reference. (Certain confidential information has been deleted
from this exhibit pursuant to a confidential treatment order that
has been granted.)
(9) Filed as an exhibit to Quarterly Report on Form 10-Q for the
quarter ended April 30, 2002 and incorporated herein by
reference.
(b) Reports on Form 8-K:
No report on Form 8-K was filed by the Company during the quarter ended January
31, 2003.
-17-
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 3, 2003.
SBE, INC.
Registrant
Date: March 3, 2003 By: /s/ William B. Heye, Jr.
--------------------------
William B. Heye, Jr.
Chief Executive Officer and
President
(Principal Executive Officer)
Date: March 3, 2003 By: /s/ David W. Brunton
---------------------------
David W. Brunton
Chief Financial Officer,
Vice President, Finance
and Secretary
(Principal Financial and
Accounting Officer)
-18-
CERTIFICATIONS
I, William B. Heye, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of SBE, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
-19-
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 3, 2003
/s/ William B. Heye, Jr.
- ---------------------------
William B. Heye, Jr.
Chief Executive Officer and President
20
CERTIFICATIONS
I, David W. Brunton certify that:
1. I have reviewed this quarterly report on Form 10-Q of SBE, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
-21-
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 3, 2003
/s/ David W. Brunton
David W. Brunton
Chief Financial Officer,
Vice President, Finance
and Secretary
-22-
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3.1 Certificate of Incorporation, as amended through December 15, 1997.
(1)
3.2 Bylaws, as amended through December 8, 1998. (2)
4.1 Stock subscription agreement, dated April 30, 2002, between
Stonestreet L.P. and SBE, Inc. (3)
4.2 Warrant dated April 30, 2002, to purchase 111,111 shares of common
stock of SBE, Inc. in favor of Stonestreet L.P. (3)
4.3 Warrant dated April 30, 2002, to purchase 11,429 shares of common
stock of SBE, Inc. in favor of Vintage Partners L.L.C. (3)
4.4 Amendment dated August 22, 2002 to stock subscription agreement dated
April 30, 2002 between SBE, Inc. and Stonestreet L.P. (4)
10.1 1996 Stock Option Plan, as amended. (5)
10.2 1991 Non-Employee Directors' Stock Option Plan, as amended. (5)
10.3 1992 Employee Stock Purchase Plan, as amended. (5)
10.4 1998 Non-Officer Stock Option Plan, as amended. (5)
10.5 Lease for 4550 Norris Canyon Road, San Ramon, California, dated June
6, 1995 between SBE, Inc. and PacTel Properties. (6)
10.6 Amendment dated June 6, 1995 to lease for 4550 Norris Road, San Ramon,
California, between SBE, Inc. and CalProp (assignee of PacTel
Properties).(7)
10.7 Full Recourse Promissory Note executed by William B. Heye, Jr. in
favor of SBE, Inc., dated November 6, 1998, amended December 14, 2001.
(2)
10.8 Amendment No. S/M018-4 dated April 3, 2001, to the Purchase Agreement
dated May 6, 1991, between SBE, Inc. and Compaq Computer Corporation,
as amended October 30, 2002. (8)
10.9 Loan and security agreement dated May 13, 2002 between SBE, Inc. and
Silicon Valley Bank. (9)
10.10Amendment to the Full Recourse Promissory Note executed by William
Heye, Jr. in favor of SBE, Inc., dated December 14, 2001. (5)
11.1 Statements of Computation of Net Loss per Share
99.1 Certification by Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
- ---------------------------
(10) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1997 and incorporated herein by reference.
(11) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1998 and incorporated herein by reference.
-23-
(12) Filed as an exhibit to Form S-3 dated May 23, 2002 and incorporated herein
by reference.
(13) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
July 31, 2002 and incorporated herein by reference.
(14) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 2002 and incorporated herein by reference.
(15) Filed as an exhibit to Form S-8 dated October 16, 1998 and incorporated
herein by reference.
(16) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1995 and incorporated herein by reference.
(17) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
April 30, 2001 and incorporated herein by reference. (Certain confidential
information has been deleted from this exhibit pursuant to a confidential
treatment order that has been granted.)
(18) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
April 30, 2002 and incorporated herein by reference.
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