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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, 2004
[ ] 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
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(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
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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 January 31,
2004 was 4,976,056.
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SBE, INC.
INDEX TO JANUARY 31, 2004 FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
January 31, 2004 and October 31, 2003..........................................................3
Condensed Consolidated Statements of Operations for the
three months ended January 31, 2004 and 2003...................................................4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 2004 and 2003...................................................5
Notes to Condensed Consolidated Financial Statements..............................................6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................10
ITEM 3 Quantitative and Qualitative Disclosures about
Market Risk.........................................................................24
ITEM 4 Controls and Procedures.............................................................24
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K....................................................25
SIGNATURES............................................................................................28
EXHIBITS..............................................................................................29
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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,
2004 2003
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Current assets:
Cash and cash equivalents $ 985 $ 1,378
Trade accounts receivable, net 3,277 1,818
Inventories 2,064 1,880
Other 540 240
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Total current assets 6,866 5,316
Property, plant and equipment, net 365 389
Capitalized software costs, net 109 120
Intellectual property, net 1,020 1,122
Other 28 28
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Total assets $ 8,388 $ 6,975
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,417 $ 696
Accrued payroll and employee benefits 146 184
Other accrued expenses 420 491
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Total current liabilities 1,984 1,371
Other long-term liabilities 93 217
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Total liabilities 2,077 1,588
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Stockholders' equity:
Common stock 15,557 15,302
Note receivable from stockholder --- (142)
Accumulated deficit (9,246) (9,773)
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Total stockholders' equity 6,311 5,387
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Total liabilities and stockholders' equity $ 8,388 $ 6,975
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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,
2004 2003
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Net sales $ 2,970 $ 1,861
Cost of sales 1,325 733
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Gross profit 1,645 1,128
Product research and development 505 285
Sales and marketing 489 307
General and administrative 364 441
Loan reserve (benefit) (239) ---
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Total operating expenses 1,119 1,033
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Operating income 526 95
Interest and other income 1 ---
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Income before income taxes 527 95
Provision for income taxes --- 4
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Net income $ 527 $ 91
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Basic earnings per share $ 0.11 $ 0.02
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Diluted earnings per share $ 0.09 $ 0.02
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Shares used in per share computations:
Basic 4,888 4,064
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Diluted 6,120 4,082
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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,
2004 2003
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Cash flows from operating activities:
Net income $ 527 $ 91
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization:
Property and equipment 53 105
Capitalized software costs 11 4
Amortization of intellectual property 102 ---
Loss on disposal of equipment --- 7
Changes in operating assets and liabilities:
Trade accounts receivable (1,459) 43
Inventories (184) 78
Other assets (300) (5)
Trade accounts payable 721 (158)
Other current liabilities (109) (247)
Other non-current liabilities (124) ---
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Net cash used in operating activities (762) (82)
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Cash flows from investing activities:
Purchases of property and equipment (29) (10)
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Net cash used in investing activities (29) (10)
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Cash flows from financing activities:
Repayment of stockholder note 142 25
Proceeds from issuance of common stock and warrants 130 ---
Proceeds from stock plans 126 15
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Net cash provided by financing activities 398 40
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Net decrease in cash and cash equivalents (393) (52)
Cash and cash equivalents at beginning of period 1,378 1,582
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Cash and cash equivalents at end of period $ 985 $ 1,530
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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
presented. The results of operation for the three month period ended January 31,
2004 are not necessarily indicative of expected results for the full 2004 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, 2003.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the U.S. requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, as well as certain
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of net sales 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
warrant obligations, indemnifications obligations, accounts receivable,
realizability of inventories and recoverability of capitalized software and
deferred tax assets.
2. INVENTORIES:
Inventories comprise the following (in thousands):
January 31, October 31,
2004 2003
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Finished goods $ 1,197 $ 726
Parts and materials 867 1,154
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$ 2,064 $ 1,880
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3. RESTRUCTURING COSTS:
The following table sets forth an analysis of the components of our
restructuring reserve and the payments made against it during the quarter ended
January 31, 2004 (in thousands):
Restructuring reserve at October 31, 2003 $58
Less: Cash paid for accrued lease costs (17)
---
Total restructuring costs included in other accrued expenses $41
===
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4. NET INCOME PER SHARE:
Basic net income per common share for the three month period ended January 31,
2004 and 2003 was computed by dividing the net income for the relevant period by
the weighted average number of shares of common stock outstanding. Common stock
equivalents for the three month period ended January 31, 2004 and 2003 were
1,232,000 and 18,103, respectively, and have been included in the calculation of
diluted net income per share.
Three months ended
January 31,
2004 2003
----------- -----------
BASIC (in thousands,
except per share amounts)
Weighted average number of
common shares outstanding 4,888 4,064
----------- -----------
Number of shares for computation of
net income per share 4,888 4,064
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Net income $ 527 $ 91
=========== ===========
Net income per share $ 0.11 $ 0.02
=========== ===========
DILUTED
Weighted average number of
common shares outstanding 4,888 4,064
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 1,232 18
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Number of shares for computation of
net income per share 6,120 4,082
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Net income $ 527 $ 91
=========== ===========
Net income per share $ 0.09 $ 0.02
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5. STOCK BASED COMPENSATION:
On January 31, 2004, we had two stock-based employee compensation plans and one
stock-based director compensation plan. We account for these plans under the
recognition and measurement principles of Accounting Principles Board 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 and
income per share would have been as follows
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Three Months
Ended January 31,
-----------------------
2004 2003
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(in thousands,
except per share amounts)
Net income, as reported $ 527 $ 91
Add: Total stock-based compensation
expense (benefit) included in the net loss
determined under the recognition and
measurement principles of APB Opinion 25 --- ---
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (414) (7)
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Pro forma net income $ 113 $ 84
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Net income per share:
Basic - as reported $ 0.11 $ 0.02
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Basic - pro forma $ 0.02 $ 0.02
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Diluted - as reported $ 0.09 $ 0.02
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Diluted - pro forma $ 0.02 $ 0.02
======= =======
Options to purchase 69,561 shares of common stock were granted in the quarter
ended January 31, 2004. The assumption regarding the annual vesting of stock
options was 25% per year for options granted during the quarter. 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 assumption used for
grants in 2004: Dividend yield of 0%; expected volatility of 79.33%; risk-free
interest rate of 2.0%; and expected life of five years.
6. CONCENTRATION OF RISK:
In the first three months of fiscal 2004 and 2003, most of our sales were
attributable to sales of wireless communications products and were derived from
a limited number of (Original Equipment Manufacturer) OEM customers. Sales to
the Hewlett-Packard Company ("HP") accounted for 44% and 43% of our net sales in
the first three months of fiscal 2004 and 2003, respectively and sales to Nortel
Networks accounted for 13% of our net sales for the quarter ended January 31,
2004. Also these same two customers combined accounted for 65% of our accounts
receivable at January 31, 2004. 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.
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7. WARRANTY OBLIGATIONS AND OTHER GUARANTEES:
The following is a summary of our agreements that we have determined are within
the scope of FIN 45, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. ("FIN") 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees.
Warranty Reserve:
We accrue the estimated costs to be incurred in performing warranty services at
the time of revenue recognition and shipment of our products to our customers.
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, 2004 (in thousands):
Warranty reserve at October 31, 2003 $ 53
Less: Cost to service warranty obligations 15
Plus: Warranty accrual ---
-----
Total warranty reserve included in other accrued expenses $ 38
=====
Indemnification Agreements:
We have agreed to indemnify each of our executive officers and directors for
certain events or occurrences arising as a result of the officer or director
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 officers' liability insurance
policy that should enable us to recover a portion of any future amount 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 January 31, 2004 and October 31, 2003.
We enter into agreements with other companies containing indemnifications
provisions in the ordinary course of business, typically with business partners,
contractors, customers and landlords. Under these provisions, we generally agree
to 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 relate to representations made by us with
regard to our 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. To date, we have not incurred material
costs to defend lawsuits or settle claims related to these indemnification
provisions. 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 January 31, 2004 and October 31, 2003.
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Other:
We are the secondary guarantor on the sublease of our previous headquarters.
However we believe we will have no liabilities on this guarantee and have not
recorded a liability at January 31, 2004.
8. LOAN TO OFFICER
On November 6, 1998, we made a loan to one of our officers and stockholders, 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 the exercise price of an option to purchase 139,400
shares of our common stock and related taxes. On April 16, 1999, the aggregate
principal amount of 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 was outstanding. The loan bore interest
at a rate of 2.48% per annum, with interest due annually and the entire amount
of the principal was due on December 14, 2003.
On October 31, 2002 we determined that it was probable that we would 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 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.
During the fourth quarter of fiscal 2003, the officer sold 139,400 shares of our
common stock and used the proceeds from the stock sale to repay $362,800 of the
loan from SBE. As a result of the fiscal 2003 loan payment, we recognized a
benefit in the fourth quarter of 2003 of $235,000 related to the reversal of the
loan impairment charge taken by us in fiscal 2002. In November 2003, the officer
sold additional shares of our common stock and used the proceeds to repay the
remaining loan balance in full. As a result, in our first quarter of fiscal 2004
we recorded a benefit of $239,000 resulting from the reversal of the remaining
loan impairment charge.
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" below.
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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, 2003.
RISK FACTORS
In addition to the other information in this Quarterly Report on Form 10-Q,
stockholders or prospective investors should carefully consider the following
risk factors:
RISKS RELATED TO OUR BUSINESS
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO REPLACE NET SALES PREVIOUSLY
GENERATED BY SALES OF VME PRODUCTS TO HP.
In the first quarter of fiscal 2004 and 2003, sales of Versa Module Europa
("VME") products to The Hewlett-Packard Company ("HP") accounted for 44% and
43%, 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 that is no longer in effect. We shipped $1.6 million of VME products to
HP over the first two quarters of fiscal 2003 pursuant to an end-of-life product
discontinuation purchase order under such contract. In September 2003, HP
notified us that they would purchase an additional $2.6 million of VME products,
with deliveries scheduled for our fourth quarter of fiscal 2003 and the first
two quarters of fiscal 2004. In our first quarter of 2004, we shipped $1.3
million of VME products to HP under the September 2003 purchase order. We can
provide no assurance that we will succeed in obtaining new orders from existing
or new customers sufficient to replace or exceed the net sales previously
attributable to HP.
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. Suppliers may discontinue or upgrade some of the
components used in our products, which could require us to redesign a product to
incorporate newer or alternative technology. 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 If enough components are
unavailable, we may have to pay a premium in order to meet customer demand.
Paying premiums for parts, building inventories of scarce parts and obsolesce of
existing inventories could lower or eliminate our profit margin, reduce our cash
flow and otherwise harm our business. To offset potential component shortages,
we have in the past, and may in the future, carry an inventory of these
components. As a result, our inventory of components parts may become obsolete
and may result in write-downs.
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WE SELL OUR PRODUCTS TO 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 NET SALES.
In fiscal 2003 and the first quarter of fiscal 2004, most of our sales were
derived from a limited number of OEM customers, primarily HP. We expect that we
will always derive most our sales from a limited number of OEM customers. Orders
by our OEM customers are affected by factors such as new product introductions,
product life cycles, inventory levels, manufacturing strategies, 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 would
have a material adverse effect on our operating results, financial condition and
cash flows. None of our customers is bound by a long-term purchase contract.
Thus, we cannot provide any assurance that we will continue to sell our products
at existing levels, if at all, to our 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 our 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.
THE COMMUNICATIONS AND STORAGE PRODUCTS MARKET IS INTENSELY COMPETITIVE, AND OUR
FAILURE TO COMPETE EFFECTIVELY COULD REDUCE OUR NET REVENUES AND MARGINS.
We compete directly with vendors of terminal servers, modems, remote control
software, terminal emulation software and application-specific communications
and storage solutions. We also compete with suppliers of routers, hubs, network
interface cards and other data communications and storage products. In the
future, we expect competition from companies offering client/server access
solutions based on emerging technologies such as switched digital telephone
services, SCSI, TOE and other technologies. In addition, we may encounter
increased competition from operating system and network operating system vendors
to the extent such vendors include full communications and storage 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
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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 SALES AND OPERATING RESULTS HAVE FLUCTUATED, AND ARE LIKELY TO CONTINUE TO
FLUCTUATE SIGNIFICANTLY IN FUTURE PERIODS CAUSING AND MAY CONTINUE TO CAUSE, OUR
STOCK PRICE TO FALL AS A RESULT OF FAILURE TO MEET THE EXPECTATIONS OF
SECURITIES ANALYSTS OR INVESTORS.
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 and which we may not be able to predict,
including the existence or absence of significant orders from OEM customers,
fluctuating market demand for, and declines in the average selling prices of,
our products, success in achieving design wins, 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 net sales 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, many
of our 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
future quarter our net sales 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"). The
development of new and enhanced technology and products is a complex and
uncertain process requiring high levels of innovation, highly skilled
engineering and development personnel, and the accurate anticipation of
technological and marketing trends. There can be no assurance that we will be
successful in identifying, developing, manufacturing, marketing or supporting
new products or enhancing our existing products on a timely basis, if at all. In
addition, there can be no assurance that services, products or technologies
developed by others will not render our products noncompetitive or obsolete.
- 13 -
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.
OUR FUTURE CAPITAL NEEDS MAY EXCEED OUR ABILITY TO RAISE CAPITAL.
We did not generate positive cash flow from operations in fiscal 2003 or the
first quarter of fiscal 2004. As a result, 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 give assurance that
this will be the case. Further declines in our sales or a failure to keep
expenses in line with net sales could require us to seek additional financing in
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 through the issuance of equity or debt securities and we not be
able to sell these equity or debt securities under then-existing market
conditions or on acceptable terms , if at all. If additional funds are raised
through the issuance of equity or debt securities, these equity securities could
have rights, privileges or preferences senior to those of common stock. If we
issue debt securities, we may be forced to pay high interest rates or agree to
debt covenants that impose onerous restrictions on our operations. The sale of
equity or debt securities could result in additional dilution to current
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.
- 14 -
RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK
OUR COMMON STOCK HAS BEEN 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. Our
stockholders' equity as of January 31, 2004 was approximately $6.3 million. The
closing bid price for our common stock was below $1.00 for more than 30
consecutive trading days during portions of fiscal 2003. Although we currently
meet all the minimum continued listing requirements for the Nasdaq SmallCap
Market, should our stock price again decline we could be subject to potential
delisting from the Nasdaq SmallCap Market.
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 price of the
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.
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
- 15 -
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
SBE, Inc. architects and provides board-level network communications solutions
for original equipment manufacturers ("OEM") in both the embedded and
enterprise-level information technology ("IT") computing markets. Our solutions
enable both data communications and telecommunications companies, in addition to
enterprise-class high-end server clients, to rapidly deliver advanced networking
and storage products and services. The addition of the Antares product line in
August 2003 enables us to introduce an impressive collection of wide area
network ("WAN"), local area network ("LAN"), SCSI, Fibre Channel, and carrier
cards across both the enterprise server and embedded markets. The Antares
products have been integrated into a variety of applications, including storage
area networks and mission-critical data centers. Our products with Linux and
Solaris drivers and software include WAN and LAN interface adapters, storage
network interface cards ("NICs") products such as SCSI and Fibre Channel, and
high performance intelligent communications controllers for high-end enterprise
level servers, 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 continue to operate
under a single segment.
Our business is characterized by a concentration of sales to a small number of
OEMs and distributors who provide products and services to the datacom and
telecommunications markets in addition to the enterprise high-end server IT
markets. Consequently, the timing of significant orders from major customers and
their product cycles cause fluctuation in our operating results. The Hewlett
Packard Company ("HP") is the largest of our customers and represented 44% and
43% of net VME sales in the quarters ended January 31, 2004 and 2003,
respectively. If any of our major customers reduces orders for our products, we
could lose revenues and suffer damage to our business reputation. Orders by our
OEM customers are affected by factors such as new product introductions, product
life cycles, inventory levels, manufacturing strategy, contract awards,
competitive conditions and general economic conditions.
We have begun to see a slight recovery in our markets and customers have been
increasing their ordering levels. As a result we have begun to increase our
headcount in our engineering and production departments. Although we are
responding to current and future customer design and support needs, we continue
to focus on cost containment and cash preservation and monitor our expense
levels very closely.
- 16 -
On January 31, 2004, we had a sales backlog of product orders of approximately
$3.6 million compared to a sales backlog of product orders of approximately $1.2
million one year ago.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the U.S. 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. Significant estimates and judgments made by us
include matters such as indemnifications obligations, accounts receivable,
realizability of inventories and recoverability of capitalized software and
deferred tax assets. Actual results could differ from those estimates.
Our critical accounting policies and estimates include the following:
Revenue Recognition:
Our policy is to recognize revenue for product sales when title transfers and
risk of loss has passed to the customer, which is generally upon shipment of our
products to our customers. We defer and recognize service revenue over the
contractual period or as services are rendered. We estimate expected sales
returns and record the amount as a reduction of revenue and cost of goods sold
("COGS") at the time of shipment. Our policy complies with the guidance provided
by Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements," issued by the Securities and Exchange Commission. Judgments are
required in evaluating the credit worthiness of our customers. Credit is not
extended to customers and revenue is not recognized until we have determined
that collectibility is reasonably assured. Our sales transactions are
denominated in U.S. dollars. The software component of our products is
considered incidental. We, therefore do not recognize software revenue
separately from the product sale.
Our agreements with OEMs, such as HP, Nortel Networks Corp. 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 (FOB
shipping point);
- collectibility of the sales price 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 will 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 assist in the resale of the product by the OEMs;
and
- there is no contractual right of return other than for
defective products.
Our agreements with our distributors include certain product rotation and price
protection rights. All distributors have the right to rotate slow moving
products once each fiscal quarter. The maximum dollar value of inventory
eligible for rotation is equal to 25% of our products purchased by the
distributor during the previous quarter. In order to take advantage of their
product rotation rights, the distributors must order and take delivery of
additional SBE products equal to at least the dollar value of the products that
they want to rotate.
- 17 -
Each distributor is also allowed certain price protection rights. If and when we
reduce or plan to reduce the price of any of our products and the distributor is
holding any of the affected products in inventory, we will credit the
distributor the difference in price when they place their next order with us. We
record an allowance for price protection, reducing our net sales and accounts
receivable. The allowance is based on the price difference of the inventory held
by our stocking distributors at the time we expect to reduce selling prices. We
believe we are able to fully evaluate potential returns and adjustments and
continue to recognize the sale based on shipment to our distributors. Reserves
for the right of return and restocking are established based on the requirements
of SFAS 48, "Revenue Recognition when Right of Return Exists."
During the quarter ended January 31, 2004, $229,000 or 8% of our sales were sold
to distributors compared to $0 in the same quarter of fiscal 2003.
Allowance for Doubtful Accounts:
Our policy is to maintain allowances for estimated losses resulting from the
inability of our customers to make required payments. Credit limits are
established through a process of reviewing the financial history and stability
of each customer. Where appropriate, we obtain credit rating reports and
financial statements of the customer when determining or modifying their credit
limits. We regularly evaluate the collectibility of our trade receivable
balances based on a combination of factors. When a customer's account balance
becomes past due, we initiate dialogue with the customer to determine the cause.
If it is determined that the customer will be unable to meet its financial
obligation to us, such as in the case of a bankruptcy filing, deterioration in
the customer's operating results or financial position or other material events
impacting their business, we record a specific allowance to reduce the related
receivable to the amount we expect to recover.
We also record an allowance for all customers based on certain other factors
including the length of time the receivables are past due and historical
collection experience with customers. We believe our reported allowances are
adequate. If the financial conditions of those customers were to deteriorate,
however, resulting in their inability to make payments, we may need to record
additional allowances which would result in additional general and
administrative expenses being recorded for the period in which such
determination was made.
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.
Because 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. 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.
- 18 -
Inventories
We are exposed to a number of economic and industry factors that could result in
portions of our inventory becoming either obsolete or in excess of anticipated
usage, or subject to lower of cost or market issues. These factors include, but
are not limited to, technological changes in our markets, our ability to meet
changing customer requirements, competitive pressures in products and prices,
and the availability of key components from our suppliers. Our policy is to
establish inventory reserves when conditions exist that suggest that our
inventory may be in excess of anticipated demand or is obsolete based upon our
assumptions about future demand for our products and market conditions. We
regularly evaluate our ability to realize the value of our inventory based on a
combination of factors including the following: historical usage rates,
forecasted sales or usage, product end-of-life dates, estimated current and
future market values and new product introductions. Purchasing practices and
alternative usage avenues are explored within these processes to mitigate
inventory exposure. When recorded, our reserves are intended to reduce the
carrying value of our inventory to its net realizable value. If actual demand
for our products deteriorates, or market conditions are less favorable than
those that we project, additional inventory reserves may be required.
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market 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,
2004 and October 31, 2003, 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 month period ended January 31, 2004
and 2003. These operating results are not necessarily indicative of our
operating results for any future period.
- 19 -
THREE MONTHS ENDED
JANUARY 31,
-------------------------
2004 2003
-------- ---------
Net sales 100% 100%
Cost of sales 45 39
-------- ---------
Gross profit 55 61
-------- ---------
Product research and development 17 15
Sales and marketing 17 17
General and administrative 12 24
Loan reserve (benefit) (8) ---
--------- ---------
Total operating expenses 38 56
-------- ---------
Operating income 17 5
Interest income and provision for income taxes --- ---
-------- ---------
Net income 17% 5%
======== =========
NET SALES
Net sales for the first quarter of fiscal 2004 were $3.0 million, a 60% increase
from $1.9 million in the first quarter of fiscal 2003. This increase was
primarily attributable to an increase in shipments to HP combined with an
increase in shipments of both WAN and LAN adapter products. Sales to HP were
$1.3 million in the first quarter of fiscal 2004, compared to $800,000 for the
first quarter of fiscal 2003. Sales to HP, primarily of VMEBus products,
represented 44% of total sales for the first quarter of fiscal 2004 compared to
43% of total sales during the comparable quarter in fiscal 2003. We will ship an
additional $700,000 in VME products to HP in our second fiscal quarter of 2004
and do not expect sales of VME products to HP to be a substantial portion of our
revenues after that point. No other customer accounted for over 10% of sales in
the three-month period ended January 31, 2004. Antares product sales for the
quarter were $314,000.
Sales of our adapter products were $1.3 million for the first quarter of fiscal
2004, as compared to $566,000 for the same quarter in fiscal 2003. Sales of our
HighWire products were $153,000 in the quarter ended January 31, 2004, as
compared to $188,000 in the same quarter in fiscal 2003. Our adapter products
are used primarily in edge-of-the-network applications such as Virtual Private
Network ("VPN") and other routers, Voice over Internet Protocol ("VoIP")
gateways and security devices, whereas our HighWire products are primarily
targeted at core-of-the-network applications used primarily by
telecommunications central offices. In the future, we expect our net sales to be
generated predominantly by sales of our adapter products with Linux and Solaris
software, followed by the Antares storage products. We expect to see a continued
slowness in the sale of our Highwire products due to the continued downturn in
the communications equipment markets. All of our design wins and new customers
are for applications using these product families. In addition, we will continue
to sell and support our older VME products, but expect them to become a
declining portion of our future net sales.
Our sales backlog at January 31, 2004 was $3.6 million, including an HP order of
VME products of $700,000 to be shipped in the second quarter, compared to $1.2
million at January 31, 2003 which included an HP order of VME products of
- 20 -
$800,000. While we anticipate an increase in our sales volume over the course of
fiscal 2004 as our customers deploy existing inventory and 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 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 2004 was
55% and 61% during the first quarter of fiscal 2003. Our gross margin on sales
of HP products for the quarter was 77% versus 71% in 2003. The decrease in the
gross margin is due primarily to an increase in our cost of goods that resulted
from the addition of approximately $102,000 of non-cash quarterly amortization
of the intellectual property acquired in the Antares transaction. We will
continue to amortize this intellectual property at the rate of $102,000 per
quarter for the next 10 quarters. Our decrease in gross margin is also partially
due to the additional of the Antares product lines with a gross margin of
approximately 54% in the first quarter of 2004. We expect our gross margin to
range between 50% and 57% for fiscal 2004.
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 $505,000 in the first quarter of
fiscal 2004, an increase of 77% from $285,000 million in the first quarter of
fiscal 2003. The increase resulted primarily from engineering staffing
increases. With the acquisition of the Antares assets, we hired a Vice President
of Engineering and three design engineers to enhance our product development and
support activities. We expect overall spending for our product research and
development to range between 15% and 18% of net sales in fiscal 2004 as we
remain committed to the development and enhancement of new and existing
products. We did not capitalize any internal software development costs in the
first quarter of fiscal 2004.
SALES AND MARKETING
Sales and marketing expenses for the first quarter of fiscal 2004 were $489,000,
an increase of 59% from $307,000 in the first quarter of fiscal 2003. The
increase is primarily due to increased marketing program spending for products,
in addition to new marketing and sales personnel hired during the latter part of
fiscal 2003. We hired a Vice President of Marketing, a product manager and a
technical support engineer in conjunction with the acquisition of the Antares
products. We expect our sales and marketing expenses to range between 16% and
18% of net sales in fiscal 2004 as we continue to accelerate our product
marketing efforts and attend an increasing number of industry specific trade
shows.
- 21 -
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $364,000 for the first quarter of
fiscal 2004, a decrease of 18% from $441,000 in the first quarter of 2003. This
decrease was due to the effect of a continued focus on controlling spending
during the first quarter of fiscal 2004. General and administrative expenses are
expected to range between 14% and 18% of sales for fiscal 2004.
LOAN RESERVE (BENEFIT)
On November 6, 1998, we made a loan to one of our officers and stockholders in
the amount of $622,800 pursuant to a two-year full recourse promissory note
bearing an interest rate of 4.47% and secured by 145,313 shares of our common
stock. The loan was used to pay the exercise price of an option to purchase
139,400 shares of our common stock and the related taxes. On April 16, 1999, the
aggregate principal amount of the loan was increased to $743,800. The loan was
extended for one year under the same terms and conditions as the original note
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 was
outstanding. The loan bore interest at a rate of 2.48% per annum, with interest
due annually and the outstanding principal was due on December 14, 2003.
On October 31, 2002 we determined that it was probable that we would 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 on the fair
value of the common stock securing the note as of October 31, 2002 and the
amount of the officer's personal assets considered likely to be available in the
future. During the fourth quarter of fiscal 2003, the officer sold 139,400
shares of our common stock and used the proceeds from the stock sale to repay a
portion of the loan. Subsequent to fiscal 2003, the officer sold additional
shares of our common stock in November 2003 and used the proceeds to repay the
remaining loan balance in full. As a result, we recorded a benefit of $239,000
in our results of operations for the first quarter of fiscal 2004 resulting from
the reversal of the remaining loan impairment charge.
NET INCOME
As a result of the factors discussed above, we recorded net income of $527,000
in the first quarter of fiscal 2004, as compared to net income of $91,000 in the
first quarter of fiscal 2003.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any transactions, arrangements, or other relationships with
unconsolidated entities that are reasonably likely to affect our liquidity or
capital resources. We have no special purpose or limited purpose entities that
provide off-balance sheet financing, liquidity, or market or credit risk
support. We also do not engage in leasing, hedging, research and development
services, or other relationships that could expose us to liability that is not
reflected on the face of the financial statements.
- 22 -
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, 2004, we had cash and cash equivalents of $1.0 million, as
compared to $1.4 million at October 31, 2003. In the first three months of
fiscal 2004, $762,000 of cash was used in operating activities primarily as a
result of an increase in our inventory and trade accounts receivable partially
offset by an increase in trade accounts payable. The increase in inventory is
reflective of receiving finished goods inventory from our contract manufacturers
at the end of January 2004 that was subsequently shipped to customers in
February 2004. The increase in trade accounts receivable is due to an increase
in sales during the first quarter of fiscal 2004 as compared to the fourth
quarter of fiscal 2003, combined with the fact that the majority of product
shipments occurred in the last month of the quarter. The increase in trade
accounts payable was primarily due to the receipt of finished goods inventory
from our contract manufacturers during the end of January 2004. Working capital,
comprised of our current assets less our current liabilities, at January 31,
2004 was $4.9 million, as compared to $3.9 million at October 31, 2003.
In the first three months of fiscal 2004, we purchased $29,000 of fixed assets,
consisting primarily of computer and engineering equipment. Capital expenditures
for each of the remaining quarters of fiscal 2004 are expected to range from
$25,000 to $100,000 per quarter.
We received $126,000 in the first three months of fiscal 2004 from payments
related to common stock purchases made by employees pursuant to our employee
stock purchase plan and the exercise of employee stock options. During the
quarter, we also received cash proceeds of $116,000 from an investor for the
purchase of 70,000 shares of our Common Stock pursuant to a warrant they
received in conjunction with a private placement of common stock transaction
that was completed in fiscal 2003.
During the fourth quarter of fiscal 2003, an officer and shareholder sold
139,400 shares of our common stock and used the proceeds from the stock sale to
repay $362,800 of an outstanding $743,800 loan we made to the officer. In
November 2003, we received an additional loan payment form the same officer of
$142,000 from stock that was sold prior to October 31, 2002. The officer sold an
additional 43,100 shares of our common stock in November 2003 and used proceeds
totaling $239,000 to repay the remaining loan balance in full.
- 23 -
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 and
2003. With these reductions, we have reduced our quarterly cash flow break-even
point to approximately $2.2 million to $2.4 million in revenue at an expected
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.
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, 2004 were analyzed to determine their sensitivity to interest rate changes.
The fair values of these instruments were determined by net present values. In
our sensitivity analysis, the same change in interest rate was used for all
maturities and all other factors were held constant. If interest rates increased
by 10%, the expected effect on net income related to our financial instruments
would be immaterial. We hold no assets or liabilities denominated in a foreign
currency. Since October 31, 2003, there has been no change in our exposure to
market risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
An evaluation as of January 31, 2004 was carried out under the
supervision of and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's "disclosure controls
and procedures," which are defined under SEC rules as controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files under the Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and
reported within required time periods. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective.
(b) Changes in Internal Controls over Financial Reporting
- 24 -
The Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated any changes in the company's
internal control over financial reporting that occurred during the quarter ended
January 31, 2004, and has concluded that there was no change during such quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)(3) List of Exhibits
Exhibit
Number Description
------- -----------
2.1(1) Asset Purchase Agreement dated August 8, 2003, by and
between D.R. Barthol & Company and SBE, Inc.
3.1(2) Certificate of Incorporation, as amended through
December 15, 1997.
3.2(3) Bylaws, as amended through December 8, 1998.
10.1(4)* 1996 Stock Option Plan, as amended.
10.2(4)* 1991 Non-Employee Directors' Stock Option Plan, as
amended.
10.3(4) 1992 Employee Stock Purchase Plan, as amended.
10.4(4) 1998 Non-Officer Stock Option Plan as amended.
10.5(5) Lease for 4550 Norris Canyon Road, San Ramon,
California dated November 2, 1992 between the Company
and PacTel Properties.
10.6(6) Amendment dated June 6, 1995 to lease for 4550 Norris
Canyon Road, San Ramon, California, between the
Company and CalProp L.P. (assignee of PacTel
Properties).
10.7(4)* Full Recourse Promissory Note executed by William B.
Heye, Jr. in favor of the Company dated November 6,
1998, as amended and restated on December 14, 2001.
10.8(4)+ Letter Agreement, dated October 30, 2001, amending
(i) Amendment No. S/M018-4 dated April 3, 2001, and
(ii) Purchase Agreement dated May 6, 1991, each
between SBE, Inc. and Compaq Computer Corporation
- 25 -
10.9(7) Stock subscription agreement and warrant to purchase
111,111 of SBE, Inc. Common Stock dated April 30,
2002 between SBE, Inc. and Stonestreet Limited
Partnership.
10.10(8) Amendment dated August 22, 2002 to stock subscription
agreement dated April 20, 2002 between SBE, Inc. and
Stonestreet LP.
10.11(9) Securities Purchase Agreement, dated July 27, 2003,
between SBE, Inc. and purchasers of SBE's common
stock thereunder, including form of warrant issued
thereunder
10.12(9) Form of warrant issued to associates of Puglisi & Co.
($1.50 exercise price)
10.13(9) Form of warrant issued to associates of Puglisi & Co.
($1.75 and $2.00 exercise price)
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Indicates management contract or compensation plans or
arrangements filed pursuant to Item 601(b)(10) of
Regulation SK.
+ Certain confidential information has been deleted
from this exhibit pursuant to a confidential
treatment order that has been granted.
(1) Filed as an exhibit to Current Report on Form 8-K,
dated April 30, 2002 and incorporated herein by
reference.
(2) Filed as an exhibit to Annual Report on Form 10-K for
the year ended October 31, 1997 and incorporated
herein by reference.
(3) Filed as an exhibit to Annual Report on Form 10-K for
the year ended October 31, 1998 and incorporated
herein by reference.
(4) Filed as an exhibit to Annual Report on Form 10-K for
the year ended October 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, 1993 and incorporated
herein by reference.
(6) Filed as an exhibit to Annual Report on Form 10-K for
the year ended October 31, 1995 and incorporated
herein by reference.
- 26 -
(7) Filed as an exhibit to Registration Statement on Form
S-3 dated May 23, 2002 and incorporated herein by
reference.
(8) Filed as an exhibit to Quarterly Report on Form 10-Q
for the quarter ended July 31, 2002 and incorporated
herein by reference.
(9) Filed as an exhibit to Registration Statement on Form
S-3 dated July 11, 2003 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, 2004.
- 27 -
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 8, 2004.
SBE, Inc.
----------
Registrant
Date: March 8, 2004 By: /s/ William B. Heye, Jr.
--------------------------
William B. Heye, Jr.
Chief Executive Officer and
President
(Principal Executive Officer)
Date: March 8, 2004 By: /s/ David W. Brunton
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David W. Brunton
Chief Financial Officer,
Vice President, Finance
and Secretary
(Principal Financial and
Accounting Officer)
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