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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 APRIL 30, 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
---------------------------------------------------------
(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 the 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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares of Registrant's Common Stock outstanding as of May 31, 2003
was 4,175,085.
SBE, INC.
INDEX TO APRIL 30, 2003 FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
April 30, 2003 and October 31, 2002....................................3
Condensed Consolidated Statements of Operations for the
three and six months ended April 30, 2003 and 2002.....................4
Condensed Consolidated Statements of Cash Flows for the
six months ended April 30, 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.........................11
ITEM 3 Quantitative and Qualitative Disclosures about
Market Risk.................................................23
ITEM 4 Controls and Procedures.....................................23
PART II OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders.........24
ITEM 6 Exhibits and Reports on Form 8-K............................24
SIGNATURES....................................................................27
EXHIBITS......................................................................31
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
April 30, October 31,
2003 2002
-------------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,655 $ 1,582
Trade accounts receivable, net 868 888
Inventories 1,666 1,910
Other 199 220
----------- -----------
Total current assets 4,388 4,600
Property, plant and equipment, net 371 533
Capitalized software costs, net 103 110
Other 78 78
----------- -----------
Total assets $ 4,940 $ 5,321
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 151 $ 488
Accrued payroll and employee benefits 111 159
Other accrued liabilities 342 531
Current portion of refundable deposit 447 447
----------- -----------
Total current liabilities 1,051 1,625
Total liabilities 1,051 1,625
----------- -----------
Commitments
Stockholders' equity:
Common stock 14,737 14,711
Treasury stock (409) (409)
Note receivable from stockholder (245) (270)
Accumulated deficit (10,194) (10,336)
------------ ------------
Total stockholders' equity 3,889 3,696
----------- -----------
Total liabilities and stockholders' equity $ 4,940 $ 5,321
=========== ===========
See notes to condensed consolidated financial statements.
3
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
April 30, April 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 1,767 $ 1,724 $ 3,628 $ 3,007
Cost of sales 679 810 1,412 1,397
----------- ----------- ----------- -----------
Gross profit 1,088 914 2,216 1,610
Product research and development 294 771 579 1,565
Sales and marketing 336 569 643 1,109
General and administrative 437 543 878 1,134
----------- ----------- ----------- -----------
Total operating expenses 1,067 1,883 2,100 3,808
----------- ----------- ----------- -----------
Operating income (loss) 21 (969) 116 (2,198)
Interest income 8 8 9 20
----------- ----------- ----------- -----------
Income (loss) before income taxes 29 (961) 125 (2,178)
Income tax benefit (22) --- (18) ---
------------ ----------- ------------ -----------
Net income (loss) $ 51 $ (961) $ 143 $ (2,178)
=========== ============ =========== ============
Basic income (loss) per share $ 0.01 $ (0.28) $ 0.04 $ (0.63)
=========== =========== =========== ===========
Diluted income (loss) per share $ 0.01 $ (0.28) $ 0.04 $ (0.63)
=========== =========== =========== ===========
Basic - weighted average shares
used in per share computations 4,085 3,467 4,071 3,462
=========== =========== =========== ===========
Diluted - weighted average shares
used in per share computations 4,085 3,467 4,072 3,462
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
April 30,
2003 2002
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 143 $ (2,178)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization:
Property and equipment 200 362
Software 15 48
Repayment of note receivable from stockholder 25 ---
Loss on abandonment of equipment 4 14
Changes in operating assets and liabilities:
Accounts receivable 20 (894)
Inventories 244 803
Other assets 21 (173)
Trade accounts payable (337) 803
Other current liabilities (237) (625)
----------- -----------
Net cash provided by (used in) operating activities 98 (1,840)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (42) (145)
Capitalized software costs (9) (96)
----------- -----------
Net cash used in investing activities (51) (241)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and warrants --- 905
Proceeds from stock plans 26 16
----------- -----------
Net cash provided by financing activities 26 921
----------- -----------
Net increase (decrease) in cash and cash equivalents 73 (1,160)
Cash and cash equivalents at beginning of period 1,582 3,644
----------- -----------
Cash and cash equivalents at end of period $ 1,655 $ 2,484
=========== ===========
See notes to condensed consolidated financial statements.
5
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 six months ended April 30, 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 auditors stated in their opinion at October
31, 2002 that these losses and negative cash flows raise substantial doubt about
our ability to continue as a going concern. Our operations produced net income
for the first six months of fiscal 2003 as we began to realize the full effect
of our cost containment program due to reductions of our headcount, real estate
obligations and certain non-essential spending. Our sales are to a limited
number of 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. SFAS 148 now
requires the SFAS 123 reconciliation quarterly.
6
2. INVENTORIES:
Inventories comprise the following (in thousands):
April 30, October 31,
2003 2002
---------- -----------
(unaudited)
Finished goods $ 829 $ 985
Parts and materials 837 925
---------- -----------
$1,666 $ 1,910
========== ===========
3. RESTRUCTURING COSTS:
The following table sets forth an analysis of the restructuring accrual as of
October 31, 2002 and the payments made against it during the six months ended
April 30, 2003 (in thousands):
Restructuring accrual at October 31, 2002 $ 249
Less: Cash paid for accrued lease costs (145)
-----
Total restructuring accrual included in other accrued expenses $ 104
=====
4. NET INCOME (LOSS) PER SHARE (UNAUDITED):
Basic income (loss) per common share for the three and six months ended April
30, 2003 and 2002 was computed by dividing the net income (loss) by the weighted
average number of shares of common stock outstanding. Common stock equivalents
for the three months and six months ended April 30, 2003 were 672 and 598 and
have been included in the calculation of diluted net income per share. Common
stock equivalents for the three and six months ended April 30, 2002 were 36,952
and 18,351 have been excluded from shares used in calculating diluted loss per
share because their effect would be anti-dilutive.
Three months ended Six months ended
April 30, April 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
BASIC
Weighted average number of
common shares outstanding 4,085 3,467 4,071 3,462
----------- ----------- ----------- -----------
Number of shares for computation of
net income (loss) per share 4,085 3,467 4,071 3,462
=========== =========== =========== ===========
Net income (loss) $ 51 $ (961) $ 143 $ (2,178)
=========== ============ =========== ============
Net income (loss) per share $ 0.01 $ (0.28) $ 0.04 $ (0.63)
=========== =========== =========== ===========
7
DILUTED
Weighted average number of
common shares outstanding 4,085 3,467 4,071 3,462
Shares issuable pursuant to options granted
under stock option plans and warrants granted,
less assumed repurchase at the average fair
market value for the period --- (a) 1 (a)
----------- ----------- ----------- -----------
Number of shares for computation of
net income (loss) per share 4,085 3,467 4,072 3,462
=========== =========== =========== ===========
Net income (loss) $ 51 $ (961) $ 143 $ (2,179)
=========== ============ =========== ============
Net income (loss) per share $ 0.01 $ (0.28) $ 0.04 $ (0.63)
=========== =========== =========== ===========
(a) In loss periods, common share equivalents would have an anti-dilutive
effect on loss per share and therefore have been excluded.
5. STOCK BASED COMPENSATION:
At April 30, 2003, we had two stock-based employee compensation plans and one
stock-based directors compensation plan. We account for these plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly, no
stock-based employee compensation cost has been recognized in net income for the
stock option plans. Had compensation cost for our stock option plans been
determined based on the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," our net income (loss) and income
(loss) per share would have been as follows (in thousands):
Three Months Six Months
Ended April 30, Ended April 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported $ 51 $ (961) $ 143 $(2,178)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects --- (4) --- (16)
------- ------- ------ -------
Pro forma net income (loss) $ 51 $ (965) $ 143 $(2,194)
======= ======= ====== =======
Income (loss) per share:
Basic - as reported $ 0.01 $(0.28) $ 0.04 $ (0.63)
======= ======= ====== =======
Basic - pro forma $ 0.01 $(0.28) $ 0.04 $ (0.63)
======= ======= ====== =======
Diluted - as reported $ 0.01 $ (0.28) $0.04 $ (0.63)
======= ======= ====== =======
Diluted - pro forma $ 0.01 $ (0.28) $ 0.04 $ (0.63)
======= ======= ====== =======
8
There were 23,000 stock options granted in the quarter ended April 30, 2003. The
assumptions regarding the annual vesting of stock options were 25% per year for
options granted in 2003. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2003: Dividend yield of 0%;
expected volatility of 50%, risk-free interest rate of 3.0%, and expected life
of four years.
6. CONCENTRATION OF RISK:
In the three and six months ended April 30, 2003 and 2002, most of our sales
were attributable to sales of communications products and were derived from a
limited number of OEM customers. Sales to HP accounted for 54% and 15% of net
sales during the second quarter of fiscal 2003 and 2002, respectively, and 49%
and 24% of our net sales in the first six months of fiscal 2003 and 2002,
respectively. The other customer with sales of 10% or more for the second
quarter of fiscal 2003 was Data Connection Limited with sales of 13% compared to
fiscal 2002 where customers with sales of 10% or more were Lockheed Martin -
23%, Lucent - 11%, mBalance - 11% and Dell - 10%. For the six months ended April
30, 2002, the only other customer accounting for more than 10% of sales was
Lockheed Martin - 14%. HP accounted for 10% of our accounts receivable as of
April 30, 2003 and April 30, 2002. 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, all of which
shipped in the first two quarters of fiscal 2003. Subsequently, we received an
additional order for approximately $0.8 million of VME products, of which $0.2
million was shipped in the second quarter of fiscal 2003 with the remaining
amount to be shipped in the third quarter of fiscal 2003. 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 or failure to replace the
revenue previously earned from product shipments to HP could have a material
adverse effect on our business, operating results, financial condition and cash
flows.
7. WARRANTY OBLIGATIONS AND OTHER GUARANTEES:
Guarantees
In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others -- an interpretation of FASB Statements No. 5, 57 and 107
and rescission of FIN 34." The following is a summary of our agreements that we
have determined are within the scope of FIN 45.
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
9
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 April 30,
2003 (in thousands):
Warranty reserve at October 31, 2002 $ 55
Less: Cost to service warranty obligations (13)
Plus: Warranty accrual 11
----
Total warranty reserve included in other accrued expenses $ 53
====
Under our bylaws, we have agreed to indemnify our officers and directors for
certain events or occurrences arising as a result of the officer or director's
serving in such capacity. The term of the indemnification period is for the
officer's or director's lifetime. The maximum potential amount of future
payments we could be required to make under these indemnification agreements is
unlimited. However, we have a directors and officer liability insurance policy
that limits our exposure and enables us to recover a portion of any future
amounts paid. As a result of our insurance policy coverage, we believe the
estimated fair value of these indemnification agreements is minimal and have no
liabilities recorded for these agreements as of April 30, 2003 and October 31,
2002, respectively.
We enter into indemnification provisions under our agreements with other
companies in the ordinary course of business, typically with business partners,
contractors, customers, and our landlords. Under these provisions we generally
indemnify and hold harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of our activities or, in some
cases, as a result of the indemnified party's activities under the agreement.
These indemnification provisions often include indemnifications relating to
representations made by us with regard to intellectual property rights. These
indemnification provisions generally survive termination of the underlying
agreement. The maximum potential amount of future payments we could be required
to make under these indemnification provisions is unlimited. We have not
incurred material costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, we believe the estimated fair value of
these agreements is minimal. Accordingly, we have no liabilities recorded for
these agreements as of April 30, 2003 and October 31, 2002, respectively.
8. LOAN TO OFFICER
On November 6, 1998, we made a loan to an officer and stockholder in the amount
of $622,800 under a two-year recourse promissory note bearing an interest rate
of 4.47% and collateralized by 145,313 shares of our Common Stock. The loan was
used to pay for the exercise of an option to purchase 139,400 shares of our
Common Stock and related taxes. On April 16, 1999, the loan was increased to
$743,800. The loan was extended for a one-year term under the same terms and
conditions on November 6, 2000. On December 14, 2001, the note was amended,
restated and consolidated to extend the term to December 2003 and to require
certain mandatory repayments of principal of up to $100,000 a year while the
note is outstanding. On December 14, 2002 $25,000 in principal was repaid
pursuant to the loan agreement. The loan bears interest at a rate of 2.48% per
annum, with interest due annually and the entire amount of the principal due on
December 14, 2003. At April 30, 2003 all interest payments are current.
10
While the officer is current on his payments on the loan and we plan on pursuing
all available courses of action to collect the amounts ultimately due on the
loan, on October 31, 2002 we determined that it was probable that we will be
unable to fully recover the balance of the loan on its due date of December 14,
2003. Accordingly, a valuation allowance of $474,000 was recorded based
generally on the fair value of the Common Stock collateralizing the note at
October 31, 2002 and the amount of the officer's personal assets considered
likely to be available to settle the note in December 2003. This valuation
allowance is subject to adjustment in the future based on changes in the fair
value of the Common Stock and personal assets collateralizing the loan.
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 slowly recovering from an economic downturn;
- 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;
- 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.
11
RISK FACTORS
In addition to the other information in this Periodic Report on Form 10-Q,
stockholders or prospective investors should carefully consider the following
risk factors:
RISKS RELATED TO OUR BUSINESS
WE DEPEND UPON A SMALL NUMBER OF OEM CUSTOMERS, AND THE LOSS OF ANY OF THEM, OR
THEIR FAILURE TO SELL THEIR PRODUCTS, WOULD LIMIT OUR ABILITY TO GENERATE
REVENUES.
In fiscal 2002 and the first two quarters of fiscal 2003, most of our sales were
derived from a limited number of OEM customers. In the first two quarters of
fiscal 2003 and fiscal 2002, 2001 and 2000, sales of VME products to The
Hewlett-Packard Company (previously Compaq Computer) ("HP") accounted for 49%,
30%, 34% and 66%, respectively, of our net sales. A substantial portion of such
sales were attributable to sales of VME products pursuant to a long-term supply
agreement with HP. We shipped $1.6 million of VME products to HP over the first
two quarters of fiscal 2003 pursuant to an end of life purchase order. We do not
expect sales of VME products to HP to be a substantial portion of our revenues
after fiscal 2003 and are dependent on our ability to sell products to other
customer in sufficient quantities to replace the revenue previously generated by
sales of VME products to HP.
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. Our
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
our operating results. A significant reduction in orders from any of our OEM
customers, particularly HP, Nortel and Lockheed Martin, would have a material
adverse effect on our operating results, financial condition and cash flows. In
addition, we anticipate a significant portion of future sales will be dependent
on a few new OEM customers, and there can be no assurance that we will become a
qualified supplier with new OEM customers or that we will remain a qualified
supplier with existing OEM customers.
IF WE FAIL TO DEVELOP AND PRODUCE NEW HIGHWIRE AND ADAPTER PRODUCTS, WE MAY LOSE
SALES AND OUR REPUTATION MAY BE HARMED.
Since late 1998, we have focused a significant portion of our research and
development, marketing and sales efforts on HighWire and Adapter products. The
success of these products is dependent on several factors, including timely
completion of new product designs, achievement of acceptable manufacturing
quality and yields, introduction of competitive products by other companies and
market acceptance of our products. If the HighWire and Adapter products or other
new products developed by us do not gain market acceptance, our business,
operating results, financial condition and cash flows would be materially
adversely affected.
12
THE COMMUNICATIONS PRODUCTS MARKET IS INTENSELY COMPETITIVE, AND OUR FAILURE TO
COMPETE EFFECTIVELY COULD REDUCE OUR REVENUES AND MARGINS.
We compete directly with traditional vendors of terminal servers, modems, remote
control software, terminal emulation software and application-specific
communications solutions. We also compete with suppliers of routers, hubs,
network interface cards and other data communications products. In the future,
we expect competition from companies offering client/server access solutions
based on emerging technologies such as switched digital telephone services. In
addition, we may encounter increased competition from operating system and
network operating system vendors to the extent such vendors include full
communications capabilities in their products. We may also encounter future
competition from telephony service providers (such as AT&T or the regional Bell
operating companies) that may offer communications services through their
telephone networks.
Increased competition with respect to any of our products could result in price
reductions and loss of market share, which would adversely affect our business,
operating results, financial condition and cash flows. Many of our current and
potential competitors have greater financial, marketing, technical and other
resources than we do. There can be no assurance that we will be able to compete
successfully with our existing competitors or will be able to compete
successfully with new competitors.
OUR OPERATING RESULTS IN FUTURE PERIODS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY
AND MAY FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS,
CAUSING OUR STOCK PRICE TO FALL.
Our quarterly operating results have fluctuated significantly in the past and
are likely to fluctuate significantly in the future due to several factors, some
of which are outside our control, including timing of significant orders from
OEM customers, fluctuating market demand for, and declines in the average
selling prices of, our products, delays in the introduction of our new products,
competitive product introductions, the mix of products sold, changes in our
distribution network, the failure to anticipate changing customer product
requirements, the cost and availability of components and general economic
conditions. We generally do not operate with a significant order backlog, and a
substantial portion of our revenue in any quarter is derived from orders booked
in that quarter. Accordingly, our sales expectations are based almost entirely
on our internal estimates of future demand and not on firm customer orders.
Due to the adverse economic conditions in the telecommunications industry, our
OEM telecommunications customers may hold excess inventory of our products. A
result of the economic downturn is that certain of our customers have cancelled
or delayed many of their new design projects and new product rollouts that
included our products. Due to the current economic uncertainty, our customers
now 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.
Based on the foregoing, we believe that quarterly operating results are likely
to vary significantly in the future and that period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. Further, it is likely that in some
13
future quarter our revenue or operating results will be below the expectations
of public market analysts and investors. In such event, the price of our common
stock is likely to fall.
IF WE ARE UNABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL CHANGES THAT
CHARACTERIZE OUR INDUSTRY, OUR BUSINESS WOULD SUFFER.
The markets for our products are characterized by rapidly changing technologies,
evolving industry standards and frequent new product introductions. Our future
success will depend on our ability to enhance our existing products and to
introduce new products and features to meet and adapt to changing customer
requirements and emerging technologies such as Frame Relay, DSL ("Digital
Subscriber Line"), ATM ("Asynchronous Transfer Mode"),VoIP ("Voice over Internet
Protocol") and 3G Wireless ("Third Generation Wireless Services"). There can be
no assurance that we will be successful in identifying, developing,
manufacturing and marketing new products or enhancing our existing products. In
addition, there can be no assurance that services, products or technologies
developed by others will not render our products noncompetitive or obsolete.
WE DEPEND ON OUR KEY PERSONNEL. IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL
AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NEEDED, OUR BUSINESS WOULD BE HARMED.
We are highly dependent on the technical, management, marketing and sales skills
of a limited number of key employees. We do not have employment agreements with,
or life insurance on the lives of, any of our key employees. The loss of the
services of any key employees could adversely affect our business and operating
results. Our future success will depend on our ability to continue to attract
and retain highly talented personnel to the extent our business grows.
Competition for qualified personnel in the networking industry, and in the San
Francisco Bay Area, is intense. There can be no assurance that we will be
successful in retaining our key employees or that we can attract or retain
additional skilled personnel as required.
BECAUSE OF OUR DEPENDENCE ON SINGLE SUPPLIERS FOR SOME COMPONENTS, WE MAY BE
UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF SUCH COMPONENTS, OR WE MAY BE REQUIRED TO
PAY HIGHER PRICES OR TO PURCHASE COMPONENTS OF LESSER QUALITY.
The chipsets used in most of our products are currently available only from
Motorola. In addition, certain other components are currently available only
from single suppliers. The inability to obtain sufficient key components as
required, or to develop alternative sources if and as required in the future,
could result in delays or reductions in product shipments or margins that, in
turn, would have a material adverse effect on our business, operating results,
financial condition and cash flows.
OUR FUTURE CAPITAL NEEDS MAY EXCEED OUR ABILITY TO RAISE CAPITAL.
The development and marketing of our products is capital-intensive. While we
believe that our existing cash balances and our anticipated cash flow from
operations will satisfy our working capital needs for the next twelve months, we
cannot assure that this will be the case. Further declines in our sales or a
failure to keep expenses in line with revenues could require us to seek
additional financing in fiscal 2003 or the future. In addition, should we
experience a significant growth in customer orders, we may be required to seek
additional capital to meet our working capital needs. There can be no assurance
that additional financing, if required, will be available on reasonable terms or
14
at all. To the extent that additional capital is raised through the sale of
additional equity or convertible debt securities, the issuance of such
securities could result in additional dilution to our stockholders.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH COULD REDUCE ANY
COMPETITIVE ADVANTAGE WE HAVE.
Although we believe that our future success will depend primarily on continuing
innovation, sales, marketing and technical expertise, the quality of product
support and customer relations, we must also protect the proprietary technology
contained in our products. We do not currently hold any patents and rely on a
combination of copyright, trademark, trade secret laws and contractual
provisions to establish and protect proprietary rights in our products. There
can be no assurance that steps taken by us in this regard will be adequate to
deter misappropriation or independent third-party development of our technology.
Although we believe that our products and technology do not infringe on the
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims against us.
RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK
OUR COMMON STOCK IS AT RISK FOR DELISTING FROM THE NASDAQ SMALLCAP MARKET. IF IT
IS DELISTED, OUR STOCK PRICE AND YOUR LIQUIDITY MAY BE IMPACTED.
Our common stock is currently listed on the Nasdaq SmallCap Market. Nasdaq has
requirements that a company must meet in order to remain listed on the Nasdaq
SmallCap Market. These requirements include maintaining a minimum closing bid
price of $1.00 and minimum stockholders' equity of $2.5 million. The closing bid
price for our common stock has had periods of time when it traded below $1.00
for more than 30 consecutive trading days. We currently meet all the minimum
continued listing requirements for the Nasdaq SmallCap Market. Our stockholders'
equity as of April 30, 2002 is $3.9 million.
If we fail to maintain the standards necessary to be quoted on the Nasdaq
SmallCap Market and our common stock is delisted, trading in our common stock
would be conducted on the OTC Bulletin Board as long as we continue to file
reports required by the Securities and Exchange Commission. The OTC Bulletin
Board is generally considered to be a less efficient market than the Nasdaq
SmallCap Market, and our stock price, as well as the liquidity of our Common
Stock, may be adversely impacted as a result.
THE MARKET PRICE OF OUR COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. YOU
MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE PRICE AT WHICH YOU
PURCHASED SUCH SHARES.
The trading price of our common stock is subject to wide fluctuations in
response to quarter-to-quarter fluctuations in operating results, the failure to
meet analyst estimates, announcements of technological innovations or new
products by us or our competitors, general conditions in the computer and
communications industries and other events or factors. In addition, stock
markets have experienced extreme price and trading volume volatility in recent
years. This volatility has had a substantial effect on the market prices of
securities of many high technology companies for reasons frequently unrelated to
the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of our common stock.
15
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND THE DELAWARE GENERAL CORPORATION
LAW CONTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN CONTROL.
Our board of directors has the authority to issue up to 2,000,000 shares of
preferred stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by the stockholders. The
rights of the holders of common stock will be subject to, and may be materially
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. The issuance of preferred stock could have the effect
of making it more difficult for a third party to acquire a majority of our
outstanding voting stock. Furthermore, certain other provisions of our
certificate of incorporation and bylaws may have the effect of delaying or
preventing changes in control or management, which could adversely affect the
market price of our common stock. In addition, we are subject to the provisions
of Section 203 of the Delaware General Corporation Law, an anti-takeover law.
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 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. 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, computer-aided engineering/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 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. Sales to HP accounted for 54% and 49% of our net sales in the three
and six months ended April 30, 2003 and 15% and 24% % for the same periods in
fiscal 2002, respectively. In the second quarter of fiscal 2003, sales to Data
Connection Limited accounted for 13% of net sales. In the six months ended April
30, 2002, sales to Lockheed Martin constituted 14% of net sales. No other
customer accounted for greater than 10% of net sales in the three or six months
ended April 30, 2003 or 2002. HP accounted for 18% and 10% of our accounts
receivable as of April 30, 2003 and April 30, 2002, respectively. Data
Connection Limited accounted for 18% of our accounts receivable as of April 30,
2003. No other customers accounted for more than 10% of our accounts receivable
16
as of April 30, 2003 or 2002, respectively 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. If any of our major customers
reduces orders for our products, we could lose revenues and suffer damage to our
business reputation.
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, all of which shipped in the first two quarters of
fiscal 2003. Subsequently, we received an additional order for approximately
$0.8 million of VME products, of which $0.2 million was shipped in the second
quarter of fiscal 2003 with the remaining amount to be shipped in the third
quarter of fiscal 2003. We also signed a three year product support agreement
with HP with an annual fee of $135,000, effective May 1, 2003, which stipulates
that we will provide ongoing engineering and product warranty support for the
VME products sold under the HP product supply contract. 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.
During the past 18 to 24 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. Overall operating expense was $1.1 million for the quarter ended
April 30, 2003 compared to $1.9 million for the same quarter in fiscal 2002 and
$2.1 million for the six months ended April 30, 2003 compared to $3.8 million
for the same six month period in fiscal 2002. In both periods, the decrease from
year to year was the result of these cost reduction efforts. We continue to
focus on cost containment and cash preservation and monitor our expense levels
very closely. We expect our quarterly operating expense levels to be maintained
at the current levels for the remainder of fiscal 2003 and into the first half
of fiscal 2004.
The market environment for our products is extremely competitive and we have
limited visibility into customer activity due to the downturn in the
communications equipment marketplace. In spite of this uncertain market, we have
been successful in selling and shipping our Adapter and HighWire products to 26
new customers during the first six months of fiscal 2003. One of our primary
sales goals is to diversify our customer base and at the same time provide
sources of revenue to fill the gap left by the HP end-of-life purchase of our
VME products. Since the fourth quarter of fiscal 2001 we have 17 new "design
wins" and have added a substantial number of new customers to our growing base
of customers. A design win is defined as a program with an OEM customer that
will generate at least $400,000 in recurring annual revenue typically within 12
to 18 months after the customer accepts and confirms the use of our product in
their platform. We believe the combination of new customers and design wins will
provide future revenue growth once there is a discernable recovery in the
communications equipment marketplace. A variety of risks such as schedule
delays, cancellations and changes in customer markets and economic conditions
can adversely affect a design win before or after production is reached. With
the current economic climate in the communications equipment marketplace, design
activity has slowed and reaching production volumes is proving to be elusive for
those products that have been designed. In these difficult economic times, poor
customer visibility is causing ordering delays. These factors often result in a
substantial portion of our revenue being derived from orders placed with in the
quarter and shipped in the final month of the quarter.
17
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.
Maintenance Revenue
We record deferred revenue upon receipt of non-cancelable purchase order or
maintenance contract for extended maintenance and warranty services. We record
the revenue as the services are delivered.
Non-Recurring Engineering Expenses
Contractual reimbursements for research and development ("R&D") expenditures
under joint R&D contracts of purchase orders with customers are accounted for as
reductions of related expenses as incurred.
18
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.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, consolidated
statements of operations data for the three and six months ended April 30, 2003
and 2002. These operating results are not necessarily indicative of our
operating results for any future period.
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2003 2002 2003 2002
----------- --------- -------- --------
Net sales 100% 100% 100% 100%
Cost of sales 38 47 39 46
----------- --------- -------- --------
Gross profit 62 53 61 54
----------- --------- -------- --------
Product research and development 17 45 16 52
Sales and marketing 19 33 18 37
General and administrative 24 32 24 38
----------- --------- -------- --------
Total operating expenses 60 109 58 127
----------- --------- -------- --------
Operating income (loss) 1 (56) 3 (73)
Interest income 1 --- --- 1
Income tax benefit 1 --- 1 ---
----------- --------- -------- --------
Net income (loss) 3% (56)% 4% (72)%
=========== ========== ======== =========
NET SALES
Net sales for the second quarter of fiscal 2003 were $1.8 million, a 3% increase
from the second quarter of fiscal 2002. For the first six months of fiscal 2003,
net sales were $3.6 million, which represented a 21% increase over the same
period in fiscal 2002. This increase was primarily attributable to end-of-life
VME product shipments to HP related to a restructured product supply agreement.
Sales to HP were $962,000 and $1.7 million in the three and six months ended
April 30, 2003, compared to $327,000 and $727,000 for the same periods in fiscal
2002, a 194% and 138% increase, respectively. As discussed above, we do not
expect sales of VME products to HP to continue beyond the order to be fulfilled
in the third quarter of fiscal 2003. We expect sales of VME products to HP to be
minimal for the foreseeable future.
19
We continue to see an overall slowdown in demand from our telecommunications
customers due to adverse industry-wide economic conditions. These conditions
resulted in our customers holding excess inventory of our products. Sales of our
Adapter products decreased from $505,000 and $932,000 for the three and six
months ended April 30, 2002 to $364,000 and $929,000 for the three and six month
periods for fiscal 2003, respectively. Sales of our HighWire products decreased
from $314,000 and $498,000 for the three and six months ended April 30, 2002 to
$277,000 and $465,000 for the three and six month periods for fiscal 2003,
respectively. In the future, we expect our net sales to be generated
predominately by sales of our Adapter products followed by our Highwire
products. All of our design wins and new customer adds are for applications
using these product families. We will continue to sell and support our older VME
products, but expect them to become a small portion of our future net sales.
Due to the adverse economic conditions in the communications equipment industry,
our customers have cancelled or delayed many of their new design projects and
new product rollouts that included our products. We anticipate that our net
sales over the second half of fiscal 2003 will remain flat when compared with
the first half of fiscal 2003, as we expect our customers to slowly deploy
existing inventory and gradually return to new product design and product
rollout. One of our major challenges is the replacement of the net sales
previously provided by HP. HP (including its predecessors, Tandem Computer and
Compaq Computer), has accounted for the majority of our net sales for the past
five years. The market environment for our products is extremely competitive and
we have limited visibility into customer activity due to the downturn in the
communications equipment marketplace. In spite of this uncertain market, we have
been successful in selling and shipping our Adapter and HighWire products to 26
new customers during the first six months of fiscal 2003. Many of these new
customers are in the beginning stages of the product development but with their
addition we have increased our base of customers to an all time high. In
addition, since the fourth quarter of fiscal 2001 we have added 17 new "design
wins." We believe the combination of new customers and design wins will provide
future revenue growth once there is a discernable recovery in the communications
equipment marketplace.
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 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. Our sales backlog at April 30, 2003 was $900,000 ,
including the HP end-of-life order of VME products of $648,000 to be shipped in
the third quarter, compared to $1.3 million at April 30, 2002.
GROSS MARGIN
Gross margin as a percentage of net sales in the second quarter of fiscal 2003
was 62% compared to 53% during the second quarter of fiscal 2002. For the first
six months of fiscal 2003, the gross margin percentage was 61%, as compared to
54% during the same period of fiscal 2002. The increase in the gross margin in
fiscal 2003 as compared to fiscal 2002 was primarily attributable to lower
materials and manufacturing costs combined with a more profitable product mix in
20
fiscal 2003. We expect our gross margin to range between 60% and 65% for our
third quarter of fiscal 2003. As our the product mix of our net sales moves from
VME to Adapter products, we expect to see our gross margin range between 53% to
55%. Although the expected sales to customers when they reach production level
unit volume are expected to be higher than for VME or Highwire products, the
market for Adapter products is extremely competitive and as a result, at
production volumes, there is a greater downward price pressure than with our VME
and Highwire products. 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 for the three and six months period
ending April 30, 2003 were $294,000 and $579,000, respectively, a decrease from
$771,000 and $1.6 million for the same periods of fiscal 2002. The decrease
resulted primarily from staff reductions and the closing of our Madison,
Wisconsin facility during the fourth quarter of fiscal 2002. We continue to
maintain the engineering capability to develop new products and upgrade existing
products. During the first six months of fiscal 2003, we developed and released
to production our new lanAdapter high speed Gigabit Ethernet product family
including single, dual and 4-port copper and fiber ports. Where possible, we
require our customers to reimburse our non-recurring engineering costs ("NRE")
associated with certain product development or modifications projects. During
the three and six months ended April 30, 2003, we were reimbursed $37,500 and
$95,000 in NRE compared to $2,400 for the same three and six month periods in
fiscal 2002, respectively. We expect product research and development spending
to remain at current levels during the remainder of fiscal 2003.
SALES AND MARKETING
Sales and marketing expenses for the three and six months period ending April
30, 2003 were $336,000 and $643,000, respectively, a decrease from $643,000 and
$1.1 million for the same periods 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 for the second
half fiscal 2003.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three and six months period ending
April 30, 2003 were $437,000 and $878,000, respectively, a decrease from
$543,000 and $1.1 million for the same periods of fiscal 2002. This decrease was
due to the effect of reduced headcount and a reduction in facility related
spending. 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 six months of fiscal 2003 from the same period
in fiscal 2002 due to lower average interest earning cash balances.
21
INCOME TAXES
We recorded a benefit for income taxes of $22,000 in the second quarter of
fiscal 2003 related to the Job Creation and Workers Assistance Act of 2002
signed into law by the President of the United States on March 9, 2002, which
extended the net operating loss carryback from two to five years for losses
generated in tax years ending in 2001 and 2002. As of April 30, 2003, we
collected all of the tax benefits we recorded associated with the Job Creation
and Workers Assistance Act of 2002.
NET INCOME (LOSS)
As a result of the factors discussed above, we recorded net income of $51,000
and $143,000 in the three and six months ended April 30, 2003, as compared to a
net loss of $961,000 and $2.2 million in the same periods of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity is dependent on many factors, including sales volume, operating
expenses and the efficiency of inventory use and turnover and efficient
collection of our accounts receivable. 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;
- gross profit margin;
- the ability to raise additional capital, if necessary; and
- the ability to secure credit facilities, if necessary.
At April 30, 2003, we had cash and cash equivalents of $1.7 million, as compared
to $1.6 million at October 31, 2002. In the first six months of fiscal 2003,
$98,000 of cash was provided by operating activities, primarily as a result of
$143,000 of net income, a $20,000 decrease in trade accounts receivable and a
$244,000 decrease in inventories partially offset by a $337,000 decrease in
trade accounts payable and a $235,000 decrease in other current liabilities. 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. The decrease in trade accounts payable was
primarily due to a final end of contract payment to our discontinued contract
manufacturer, XeTel. 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. Working capital (current assets less current
liabilities) at April 30, 2003 was $3.3 million, as compared to $3.0 million at
October 31, 2002.
In the first six months of fiscal 2003, we purchased $42,000 of fixed assets,
consisting primarily of computer and engineering equipment and $9,000 in
software primarily for engineering and product design activities. Capital
expenditures for each of the remaining quarters of fiscal 2003 are expected to
range from $25,000 to $30,000 per quarter.
Cash provided by financing activities in the first six months of fiscal 2003 was
the results of $51,000 received in the first six months of fiscal 2003 from
payments related to common stock purchases made by employees pursuant to our
employee stock purchase plan and a required $25,000 principal payment on a loan
made to our Chief Executive Officer in 1998.
22
On May 14, 2002, we secured a twelve month revolving $1.0 million working
capital line of credit with a bank. On May 13, 2003, we renewed our working
capital line of credit for twelve months until May 14, 2004. The credit line is
secured by a first lien on all our assets and carries a floating annual interest
rate equal to the bank's prime rate of 4.25% at April 30, 2003 plus 1.50%. We
can draw down on the credit line based on a formula equal to 80% of our domestic
accounts receivable. As of April, 30, 2003, we have not drawn down on this line
of credit.
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 2003.
With these reductions, our quarterly operational cash flow breakeven point has
been reduced to$1.8 million to $2.0 million in net sales at an expected 53% to
55% 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 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.
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 April 30,
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 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
23
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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held on Tuesday, March 18, 2003, at
our corporate offices located at 2305 Camino Ramon, Suite 200, San Ramon,
California.
The stockholders approved the following two items:
(i) The election of one director to hold office until the 2006 Annual
Meeting of Stockholders:
For Against
William B. Heye, Jr. 4,002,383 38,847
(ii) The ratification of the selection of PricewaterhouseCoopers LLP as our
independent auditors for the fiscal year ending October 31, 2003.
(For--3,988,407; Against--14,052; Abstain--38,771)
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)
24
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)
10.10 Amendment to the Full Recourse Promissory Note executed by William Heye, Jr. in favor of SBE, Inc.,
dated December 14, 2001. (5)
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.
(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:
25
A report on Form 8-K was filed with the Securities and Exchange Commission on
April 25, 2003. The report announced our dismissal of PricewaterhouseCoopers LLP
as our independent accountants and the appointment of BDO Seidman LLP as our new
independent accountants effective April 22, 2003.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on June 6, 2003.
SBE, INC.
Registrant
Date: June 6, 2003 By: /s/ William B. Heye, Jr.
--------------------------
William B. Heye, Jr.
Chief Executive Officer and
President
(Principal Executive Officer)
Date: June 6, 2003 By: /s/ David W. Brunton
----------------------------------
David W. Brunton
Chief Financial Officer,
Vice President, Finance
and Secretary
(Principal Financial and
Accounting Officer)
27
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
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: June 6, 2003
/s/ William B. Heye, Jr.
- ---------------------------
William B. Heye, Jr.
Chief Executive Officer and President
28
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
29
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
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: June 6, 2003
/s/ David W. Brunton
- --------------------
David W. Brunton
Chief Financial Officer,
Vice President, Finance
and Secretary
30
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)
10.10 Amendment to the Full Recourse Promissory Note executed by William Heye, Jr. in favor of SBE, Inc.,
dated December 14, 2001. (5)
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.
31
(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.
32