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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, 2005
[ ] 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 ___
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,
2005 was 5,199,538.
SBE, INC.
INDEX TO JANUARY 31, 2005 FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of
January 31, 2005 (unaudited) and October 31, 2004 (audited)............3
Condensed Consolidated Statements of Operations for the
three months ended January 31, 2005 and 2004 (unaudited)...............4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 2005 and 2004 (unaudited)...............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
[DAVE: HAVE YOU CHECKED TO SEE WHETHER YOU HAVE ANY ITEM 2 (SALES
OF UNREGISTERED SECURITIES) DISCLOSURES?]
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)
January 31, October 31,
2005 2004
-------- --------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,564 $ 1,849
Trade accounts receivable, net 2,048 1,668
Inventories 1,638 1,926
Other 276 227
-------- --------
Total current assets 5,526 5,670
Property, plant and equipment, net 408 427
Capitalized software costs, net 41 48
Other 33 28
-------- --------
Total assets $ 6,008 $ 6,173
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 526 $ 856
Accrued payroll and employee benefits 377 391
Capital lease obligations - current portion 26 25
Other accrued expenses 260 459
-------- --------
Total current liabilities 1,189 1,731
Capital lease obligations, net of current portion 146 139
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Total liabilities 1,335 1,870
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Commitments (note 6)
Stockholders' equity:
Common stock 16,068 15,755
Deferred compensation (120) --
Accumulated deficit (11,275) (11,452)
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Total stockholders' equity 4,673 4,303
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Total liabilities and stockholders' equity $ 6,008 $ 6,173
======== ========
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,
2005 2004
------- -------
Net sales $ 2,815 $ 2,970
Cost of sales 1,230 1,325
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Gross profit 1,585 1,645
------- -------
Product research and development 473 505
Sales and marketing 559 489
General and administrative 369 364
Loan reserve (benefit) -- (239)
------- -------
Total operating expenses 1,401 1,119
------- -------
Operating income 184 526
Interest and other income (expense) (2) 1
------- -------
Income before income taxes 182 527
Provision for income taxes 5 --
------- -------
Net income $ 177 $ 527
======= =======
Basic earnings per share $ 0.03 $ 0.11
======= =======
Diluted earnings per share $ 0.03 $ 0.09
======= =======
Shares used in per share computations:
Basic 5,136 4,888
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Diluted 5,869 6,120
======= =======
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,
--------------------
2005 2004
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Cash flows from operating activities:
Net income $ 177 $ 527
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization:
Property and equipment 56 53
Capitalized software costs 16 11
Amortization of intellectual property -- 102
Changes in operating assets and liabilities:
Trade accounts receivable (380) (1,459)
Inventories 288 (184)
Other assets (53) (300)
Trade accounts payable (330) 721
Other current liabilities (98) (109)
Other non-current liabilities 7 (124)
------- -------
Net cash used in operating activities (317) (762)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (38) (29)
Purchased software (9) --
------- -------
Net cash used in investing activities (47) (29)
------- -------
Cash flows from financing activities:
Repayment of stockholder note -- 142
Proceeds from issuance of common stock and warrants -- 130
Proceeds from stock plans 79 126
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Net cash provided by financing activities 79 398
------- -------
Net decrease in cash and cash equivalents (285) (393)
Cash and cash equivalents at beginning of period 1,849 1,378
------- -------
Cash and cash equivalents at end of period $ 1,564 $ 985
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Non-cash stock portion of Antares purchase price $ 114 $ --
======= =======
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
(other than the balance sheet as of October 31, 2004), 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 operations for the three month period ended January
31, 2005 are not necessarily indicative of expected results for the full 2005
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, 2004.
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 warranty obligations,
indemnification obligations, collectibility of 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,
2005 2004
-------- --------
Finished goods $ 1,055 $ 1,343
Parts and materials 583 583
-------- --------
$ 1,638 $ 1,926
======== ========
3. NET INCOME PER SHARE:
Basic net income per common share for the three month periods ended January 31,
2005 and 2004 was computed by dividing the net income for the relevant period by
the weighted average number of shares of common stock outstanding. Common stock
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equivalents for the three month periods ended January 31, 2005 and 2004 were
733,000 and 1,232,000, respectively, and have been included in the calculation
of diluted net income per share.
Three months ended
January 31,
2005 2004
----------- -----------
(in thousands, except
BASIC per share amounts)
Weighted average number of
common shares outstanding 5,136 4,888
----------- -----------
Number of shares for computation of
net income per share 5,136 4,888
=========== ===========
Net income $ 177 $ 527
=========== ===========
Net income per share $ 0.03 $ 0.11
=========== ===========
DILUTED
Weighted average number of
common shares outstanding 5,136 4,888
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 733 1,232
----------- -----------
Number of shares for computation of
net income per share 5,869 6,120
=========== ===========
Net income $ 177 $ 527
=========== ===========
Net income per share $ 0.03 $ 0.09
=========== ===========
4. STOCK BASED COMPENSATION:
On January 31, 2005, 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
Statement of Financial Accounting Standards ("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,
2005 2004
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(in thousands, except
per share amounts)
Net income, as reported $ 177 $ 527
Add: Total stock-based compensation
expense (benefit) included in the net income
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 (640) (414)
------- -------
Pro forma net income (loss) $ (463) $ 113
======= =======
Net income (loss) per share:
Basic - as reported $ 0.03 $ 0.11
======= =======
Basic - pro forma $ (0.09) $ 0.02
======= =======
Diluted - as reported $ 0.03 $ 0.09
======= =======
Diluted - pro forma $ (0.09) $ 0.02
======= =======
Options to purchase 397,500 shares of common stock were granted in the quarter
ended January 31, 2005. 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 2005: Dividend yield of 0%; expected volatility of 76.29%; risk-free
interest rate of 3.0%; and expected life of five years.
In December 2004, the FASB issued SFAS No. 123R that amends SFAS No. 123
Accounting for Stock-Based Compensation, to require public entities (other than
those filing as small business issuers) to report stock-based employee
compensation in their financial statements. SFAS No. 123R will require us to
expense the fair value of unvested options and future grants of options over the
remaining vesting period. Unless modified, we will be required to comply with
the provisions of SFAS No. 123R as of the first interim period that begins after
June 15, 2005 (August 1, 2005 for us). We currently do not record compensation
expense related to our stock-based employee compensation plans in our financial
statements.
5. CONCENTRATION OF RISK:
In the first three months of fiscal 2005 and 2004, 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 36% and 44% of our net sales in
the first three months of fiscal 2005 and 2004, respectively, and sales to Data
Connection Limited and Nortel Networks accounted for 15% and 14% of our net
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sales for the quarter ended January 31, 2005, respectively. No other customer
accounted for more than 10% of our net sales in either quarter. The three
customers combined accounted for 60% of our accounts receivable at January 31,
2005. A significant reduction in orders from any of our OEM customers, or a
failure to collect outstanding accounts receivable from any of our OEM
customers, could have a material adverse effect on our business, operating
results, financial condition and cash flows.
6. WARRANTY OBLIGATIONS AND OTHER GUARANTEES:
The following is a summary of our agreements that we have determined are within
the scope of Financial Accounting Standards Board ("FASB") Interpretation("FIN")
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others.
We accrue the estimated costs to be incurred in performing warranty services at
the time of revenue recognition and shipment of the 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 (in
thousands):
January 31, January 31,
2005 2004
---- ----
Warranty reserve at beginning of period $ 20 $ 58
Less: Cost to service warranty obligations (4) (17)
Plus: Increases to reserves 4 --
---- ----
Total warranty reserve included in other accrued
expenses $ 20 $ 41
==== ====
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 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 January 31, 2005 and October 31, 2004, 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 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
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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 January 31, 2005 and October 31, 2004, respectively.
As discussed below, we are the secondary guarantor on the sublease of our
previous headquarters. We believe we will have no liabilities on this guarantee
and have not recorded a liability at January 31, 2005.
7. LOAN TO OFFICER
On November 6, 1998, we made a loan to our retiring president and CEO, which was
used by him to exercise an option to purchase 139,400 shares of our common stock
and pay related taxes. The loan, as amended, was collateralized by shares of our
common stock, bore interest at a rate of 2.48% per annum, and 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 against the loan at
October 31, 2002.
During the fourth quarter of fiscal 2003, the officer repaid $362,800 of the
loan and as a result, we recognized a benefit of $235,000 related to the
reversal of the loan impairment charge taken by us in fiscal 2002. During the
first quarter of fiscal 2004, the officer repaid the remaining loan balance in
full and as a result, we recorded a benefit of $239,000 relating to the reversal
of the remaining loan impairment charge.
8. DEFERRED COMPENSATION
On January 1, 2005, the Company's retiring President and Chief Executive Officer
was awarded options to purchase 75,000 shares of the Company's stock at a price
of $4.00 per share (closing price on December 31, 2004). The fair value of this
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model and is included as deferred compensation on the balance
sheet. The $120,000 deferred compensation is amortized to general and
administrative expense at the rate of $8,000 per month over the 15 month vesting
period ending March 2006.
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
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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.
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, 2004.
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
WE DEPEND UPON A SMALL NUMBER OF OEM CUSTOMERS. THE LOSS OF ANY OF THESE
CUSTOMERS, OR THEIR FAILURE TO SELL THEIR PRODUCTS, WOULD LIMIT OUR ABILITY TO
GENERATE REVENUES. IN PARTICULAR, WE EXPECT HP WILL CEASE TO BE A SIGNIFICANT
CUSTOMER OF OURS IN FISCAL 2005, AND OUR SUCCESS DEPENDS ON BEING ABLE TO
REPLACE NET SALES PREVIOUSLY ATTRIBUTABLE TO HP WITH SALES TO OTHER CUSTOMERS.
In the first quarter of fiscal 2005 and 2004, sales of Versa Module Europa
("VME") products to The Hewlett-Packard Company ("HP") accounted for 36% and
44%, respectively, of our net sales. We shipped the final $1.0 million of the
last order for VME products to HP in the first fiscal quarter of fiscal 2005.
Our success depends on being able to replace net sales previously attributable
to HP with sales to other customers. 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.
Even after HP ceases to be a customer, we expect to continue to depend on sales
to a small number of OEM customers, including Data Connection Limited and Nortel
Networks. Sales to Data Connection Limited and Nortel Networks accounted for 15%
and 14% of our net sales for the quarter ended January 31, 2005, respectively.
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.
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.
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Three customers, HP (29%), Data Connection Limited (20%) and Spectel, Inc.
(11%), combined accounted for 60% of our accounts receivable at January 31,
2005. A significant reduction in orders from any of our OEM customers, or a
failure to collect outstanding accounts receivable from any of our OEM
customers, could 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 OR USE OUR
EXISTING CREDIT LINE WITH A BANK.
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 12 months, we
cannot assure that this will be the case. Declines in our sales or a failure to
keep expenses in line with revenues could require us to seek additional
financing or force us to draw down on our existing line of credit with a bank in
fiscal 2005. In addition, should we experience a significant growth in customer
orders or wish to make strategic acquisitions of business or assets, 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 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.
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.
IF WE FAIL TO DEVELOP AND PRODUCE NEW HIGHWIRE, WAN AND LAN ADAPTERS, TOE AND
STORAGE PRODUCTS, WE MAY LOSE SALES AND OUR REPUTATION MAY BE HARMED
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 Voice over IP ("VoIP"), 3G
Wireless ("Third Generation Wireless Services") SATA ("Serial ATA"), SAS
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("Serial Attached SCSI"), Internet Small Computer System Interface ("iSCSI") ,
Gigabit Ethernet, 10 Gigabit Ethernet and TCP/IP Offload Engine ("TOE"). 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 have focused a significant portion of our research and development, marketing
and sales efforts on HighWire, WAN and LAN adapters, Encryption, iSCSI and TOE
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, market acceptance of our products and our ability to sell our
products. If the TOE, iSCSI, 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 REVENUES AND MARGINS.
We compete directly with traditional 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, iSCSI, SCSI, TOE, VoIP 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
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.
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
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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.
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
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
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.
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OUR SALES AND OPERATING RESULTS HAVE FLUCTUATED, AND ARE LIKELY TO CONTINUE TO
FLUCTUATE SIGNIFICANTLY IN FUTURE PERIODS, WHICH MAY 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
SBE, Inc. designs, develops and sells network communications and storage
solutions to original equipment manufacturers ("OEM") in the embedded computing
and storage markets. Our solutions enable data communications,
telecommunications and storage solution companies, in addition to enterprise
class high-end server customers, to rapidly deliver advanced networking and
storage products and services. Our products include wide area network ("WAN"),
local area network ("LAN"), Internet Small Computer System Interface ("iSCSI")
software, SCSI, Fibre Channel, intelligent carrier cards, Encryption and TCP/IP
Offload Engine ("TOE") cards. These products perform critical computing,
processing offload, Input/Output ("I/O") and storage tasks across both the
enterprise server and embedded markets such as high-end enterprise level
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servers, Linux super computing clusters, workstations, media gateways, routers,
internet access devices, home location registers, data messaging applications,
network attached storage ("NAS") and remote storage devices and networks.
SBE's has partnered with PyX Technologies, a California company, to provide
iSCSI software products that strategically support our TOE development plans by
offering a high value iSCSI storage software stack that utilizes the TOE
hardware to facilitate Internet based storage solutions to large, small and
medium sized businesses. iSCSI is an end-to-end protocol for transporting
storage I/O block data over an Internet Protocol ("IP") network. The protocol is
used on servers (initiators), storage devices (targets), and protocol transfer
gateway devices. iSCSI uses standard Ethernet switches and routers to move the
data from server to storage. The initiator is typically a host (PC, server,
laptop) that is running an iSCSI initiator driver (such as the PyX or Microsoft
iSCSI initiator) that will be accessing storage on the IP Storage Area Network
("SAN") and the target is any storage device such as disk drives, raid systems,
CDROM's, DVD's, tapes amongst others.
Managing storage is universally regarded as one of the most burdensome of IT
responsibilities. In direct-attached storage environments that most small to
mid-sized companies deploy, the process of managing storage is multiplied by the
number of physical connection points and the number of storage systems in an
organization. Imagine an environment with ten computers, each with its own
storage system. Not only does that create ten point-for-management for the
storage systems themselves, it also requires ten times the effort to handle
storage expansion, reallocation and repairs. With SANs, storage management is
consolidated to a single point from which an IT manager can partition, allocate,
expand, reassign, backup and repair storage. By moving to a SAN, small to
mid-sized organizations can scale their storage infrastructure much more easily.
When additional capacity is needed, simply add additional storage to the SAN. IP
SANs such as iSCSI provide higher-speed storage access than internal disks while
also enabling load balancing across multiple connections. Remote storage powered
by iSCSI also enables on-line data back up, disaster recover and high-speed
access to data by remote users.
The PyX iSCSI software uses the port aggregation and port failover features of
the SBE TOE dual port Gigabit Ethernet card to recover from transmission
failures . In addition, the PyX iSCSI software uses the SBE TOE acceleration
feature to obtain wire transmission speeds of up to 2 Gigabits per second. Our
TOE/iSCSI product has Error Recovery Level 0 ("ERL0") through Error Recovery
Level 2 ("ERL2") failure recovery functionality. ERL2 functionality is reached
when the TCP/IP and iSCSI transmission can recover from a breakdown in the
initiator, the target or the transport medium. When using the PyX ERL2 iSCSI
software and SBE TOE hardware, the transmission is resent from the point of
failure and not from the beginning of the transmission like other ERL0 iSCSI
products.
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,
telecommunications and storage 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.
HP has historically been the largest of our customers and represented 36% and
44% of net sales in the quarters ended January 31, 2005 and 2004, respectively.
We shipped the final order totaling $1.0 million in January 2005 and do not
expect to receive any future orders from HP for VME products. Even after HP
ceases to be a customer, we expect to continue to depend on sales to a small
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number of OEM customers, including Data Connection Limited and Nortel Networks.
Sales to Data Connection Limited and Nortel Networks accounted for 15% and 14%
of our net sales for the quarter ended January 31, 2005, respectively. 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. 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.
Three customers combined accounted for 59% of our accounts receivable at January
31, 2005. A significant reduction in orders from any of our OEM customers, or a
failure to collect outstanding accounts receivable from any of our OEM
customers, could have a material adverse effect on our business, operating
results, financial condition and cash flows.
Our products are distributed worldwide through a direct sales force,
distributors, independent manufacturers' representatives and value-added
resellers. Our business falls primarily within one industry segment.
On January 31, 2005, we had a sales backlog of product orders of approximately
$1.4 million compared to a sales backlog of product orders of approximately $2.5
million, including $1.0 million in orders from HP, at October 31, 2004.
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 warranty obligations, indemnification obligations,
collectibility of accounts receivable, realizability of inventories and
recoverability of capitalized software and deferred tax assets.
Our critical accounting policies and estimates include the following:
Revenue Recognition:
Our policy is to recognize revenues for product sales upon shipment of our
products to our customers provided that no significant obligation on our part
remains and collection of the receivable is considered probable. Shipping terms
are generally FOB shipping point. We defer and recognize service revenues 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
("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
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that collectibility is reasonably assured. Our sales transactions are
denominated in U.S. dollars. The software component of our hardware products is
considered incidental to our products. We therefore do not recognize software
revenues separately from the product sale.
Our agreements with OEMs, such as HP and Nortel Networks, 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.
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 it places its 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.
Reserves for the right of return and restocking are established based on the
requirements of SFAS 48, Revenue Recognition when Right of Return Exists because
we have visibility into our distributor's inventory and have sufficient history
to estimate returns.
During the quarters ended January 31, 2005 and 2004, $173,000, or 6% of net
sales, and $229,000, or 8% of net sales, were sold to distributors,
respectively.
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
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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 its 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 OEMs. Because
there is no contractual right of return other than for defective products or
stock rotation rights by certain distributors, 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 increased cost of goods sold and
decreased gross profit margin.
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. 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
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pre-tax income, we have fully reserved our deferred tax assets as of January 31,
2005 and October 31, 2004, 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.
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, which amends SFAS No. 123
Accounting for Stock-Based Compensation, to require public entities (other than
those filing as small business issuers) to report stock-based employee
compensation in their financial statements. Unless modified, we will be required
to comply with the provisions of SFAS No. 123R as of the first interim period
that begins after June 15, 2005 (for us, beginning with the quarter ending
October 31, 2005). We currently do not record compensation expense related to
our stock-based employee compensation plans in our financial statements.
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, 2005
and 2004. These operating results are not necessarily indicative of our
operating results for any future period.
THREE MONTHS ENDED
JANUARY 31,
2005 2004
---- ----
Net sales 100% 100%
Cost of sales 44 45
---- ----
Gross profit 56 55
---- ----
Product research and development 17 17
Sales and marketing 20 17
General and administrative 13 12
Loan reserve (benefit) -- (8)
---- ----
Total operating expenses 50 38
---- ----
Operating income 6 17
Interest income and provision for income taxes -- --
---- ----
Net income 6% 17%
==== ====
NET SALES
Net sales for the first quarter of fiscal 2005 was $2.8 million, a 5% decrease
from $3.0 million in the first quarter of fiscal 2004. This decrease was
primarily attributable to a decrease in shipments to HP offset in part by an
increase in shipments of our Highwire products to other customers. Sales to HP
were $1.0 million in the first quarter of fiscal 2005, compared to $1.3 million
for the first quarter of fiscal 2004. Sales to HP, primarily of VME products,
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represented 36% of total sales for the first quarter of fiscal 2005 compared to
44% of total sales during the comparable quarter in fiscal 2004. We shipped our
final order of VME products to HP in the first fiscal quarter of 2005 and do not
expect sales of VME products to HP to be a substantial portion of our net sales
in the future. Two other customers combined accounted for 29% of our sales for
the quarter ended January 31, 2005. No other customer accounted for over 10% of
sales in the first fiscal quarter of 2005 or 2004.
Sales of our adapter products were $965,000 for the first quarter of fiscal
2005, as compared to $1.3 million for the same quarter in fiscal 2004. Sales of
our HighWire products were $585,000 in the quarter ended January 31, 2005, as
compared to $153,000 in the same quarter in fiscal 2004. 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. During the quarter we shipped a small number
of TOE adapters to customers who will use the TOE to facilitate CPU acceleration
for use in iSCSI storage applications. We continue to test our TOE and iSCSI
products at customer sites and expect customer adoption of these new
technologies to begin during fiscal 2005. 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 sale of TOE adapters and iSCSI software
storage products. We expect to see a continued increase in the sales of our
Highwire products due to some prior design wins in the communications equipment
markets going into production. 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, 2005 was $1.4 million, compared to $3.6 million
at January 31, 2004, which included a $700,000 HP order for VME products. We
anticipate an increase in our sales volume for adapter and HighWire products
over the course of fiscal 2005 as our customers roll out their new products. We
also expect to see an increase in sales of TOE and iSCSI products as these
products gain market acceptance; however, there can be no assurances that such
an increase or adoption will occur. The communications markets continue to be
slow in recovering economically and due to the continuing 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 2005 was
56% and was 55% during the first quarter of fiscal 2004. Our gross margin on
sales of HP products for the quarter was 70% versus 77% in 2004. The slight
increase in overall gross profit margin in fiscal 2005 compared to fiscal 2004
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is partially due to the inclusion of $100,000 of non-cash intellectual property
amortization expense in costs of goods sold in the first quarter of fiscal 2004.
Intellectual property was fully amortized in the fiscal year ended October 31,
2004. We expect our gross margin to range between 48% and 50% for fiscal 2005.
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 representing engineering salaries and
benefits, contract services and other costs to develop and enhance our products
were $473,000 in the first quarter of fiscal 2004, a decrease of 6% from
$505,000 in the first quarter of fiscal 2004. The decrease is primarily due to a
decrease in project materials expense. We expect overall spending for our
product research and development to range between 17% and 20% of net sales in
fiscal 2005 as we remain committed to the development and enhancement of new and
existing products, particularly TOE, iSCSI and VoIP products. We did not
capitalize any internal software development costs in the first quarter of
fiscal 2005.
SALES AND MARKETING
Sales and marketing expenses for the first quarter of fiscal 2005 were $559,000,
an increase of 14% from $489,000 in the first quarter of fiscal 2004. The
increase is primarily due to increased marketing program spending for our new
TOE and iSCSI products. TOE/iSCSI are at the early stages of storage market
acceptance and we will continue to increase our spending on marketing activities
to capture market share in the emerging market space. We expect our sales and
marketing expenses to range between 20% and 24% of net sales in fiscal 2005 as
we continue to accelerate our product marketing efforts and attend an increasing
number of industry specific trade shows.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $369,000 for the first quarter of
fiscal 2005, virtually unchanged from $364,000 in the first quarter of 2004. We
do expect an increase in our general and administrative expense due to
compliance work related to the Sarbanes-Oxley Section 404 compliance. General
and administrative expenses are expected to range between 14% and 18% of net
sales for fiscal 2005.
LOAN RESERVE BENEFIT
On November 6, 1998, we made a loan to our retiring President and CEO, which was
used by him to exercise an option to purchase 139,400 shares of our common stock
and pay related taxes. The loan, as amended, was collateralized by shares of our
common stock, bore interest at a rate of 2.48% per annum and 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 against the loan at
October 31, 2002.
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During the fourth quarter of fiscal 2003, the officer repaid $362,800 of the
loan and as a result, we recognized a benefit of $235,000 related to the
reversal of the loan impairment charge taken by us in fiscal 2002. During the
first quarter of fiscal 2004, the officer repaid the remaining loan balance in
full and as a result, we recorded a benefit of $239,000 relating to the reversal
of the remaining loan impairment charge.
NET INCOME
As a result of the factors discussed above, we recorded net income of $177,000
in the first quarter of fiscal 2005, as compared to net income of $527,000 in
the first quarter of fiscal 2004.
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.
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
- the ability to secure credit facilities, if necessary, and
- the ability to successfully negotiate merger and partnership
agreements to acquire certain intellectual property rights related
to the storage and VoIP markets.
At January 31, 2005, we had cash and cash equivalents of $1.6 million, as
compared to $1.8 million at October 31, 2004. In the first three months of
fiscal 2005, $317,000 of cash was used in operating activities primarily as a
result of an increase in our trade accounts receivable and a decrease in our
accounts payable, partially offset by a decrease in inventory. The increase in
trade accounts receivable is due to large shipments made to HP and two other
customers during the later part of January. The decrease in accounts payable is
related to payments to our contract manufacturers for finished goods inventory
received at the end of October 2004. The decrease in inventory is due to the
shipment of VME products to HP with an inventory cost of approximately $300,000
was in inventory at October 31, 2004. Working capital, comprised of our current
assets less our current liabilities, at January 31, 2005 was $4.3 million, as
compared to $3.9 million at October 31, 2004.
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In the first three months of fiscal 2005, we purchased $38,000 of fixed assets,
consisting primarily of computer and engineering equipment. Capital expenditures
for each of the remaining quarters of fiscal 2005 are expected to range from
$25,000 to $100,000 per quarter.
Cash from financing activities in the first three months of fiscal 2005
consisted of $79,000 in payments related to common stock purchases made by
employees pursuant to the exercise of employee stock options.
We have a working capital line of credit with a Bank that with an annual renew
date of May 14. 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, plus
1.50%. Draw-downs on the credit line are based on a formula equal to 80% of our
domestic accounts receivable. We have not drawn down on this line of credit and
have no amounts payable at January 31, 2005.
We believe our projected net sales during fiscal 2005 will generate sufficient
cash flows to fund our operations through October 31, 2005 and beyond. Our
projected future quarterly operational cash flow breakeven point (the point at
which we would generate positive cash flow from operations) is expected to be
$2.6 million to $2.7 million of net sales, assuming an expected 48% to 50% gross
margin. Our projected net sales are based on a combination of increasing demand
for existing products and market acceptance of recently released products, such
as TOE and iSCSI, 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 the 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. We have embarked on a
strategy of acquiring certain intellectual property rights related to storage
and VoIP products and our future liquidity may be affected by our ability to
raise additional capital, if necessary. 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 our 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, 2005 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, 2004, there has been no change in our exposure to
market risk.
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ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
An evaluation as of January 31, 2005 was carried out under the
supervision of and with the participation of our management, including our 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, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective.
(b) Changes in Internal Controls over Financial Reporting
Our management, including our 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,
2005, and has concluded that there was no change during such quarter that has
materially affected, or is reasonably likely to materially affect our 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 March
29, 2004
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.
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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(7) Securities Purchase Agreement, dated July 27, 2003,
between SBE, Inc. and purchasers of SBE's common stock
thereunder, including form of warrant issued thereunder
10.9(7) Form of warrant issued to associates of Puglisi & Co.
($1.50 exercise price)
10.10(7) Form of warrant issued to associates of Puglisi & Co.
($1.75 and $2.00 exercise price)
10.11 Employment agreement dated January 1, 2005, between SBE
and Daniel Grey, President & CEO
10.12 Severance agreement, dated April 12, 2004, between SBE
and Daniel Grey, President and CEO
10.13 Severance agreement, dated April 12, 2004, between SBE
and David Brunton, Vice President Finance, Secretary,
Treasurer & CFO
10.14 Severance agreement dated April 12, 2004, between SBE
and Kirk Anderson, Vice President, Operations
10.15 Offer Letter, dated August 7, 2003, between SBE and Carl
Munio, Vice President, Engineering
10.16 Termination agreement, dated January 5, 2005, between
SBE and William Heye, Jr., retiring President & CEO
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
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+ 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.
(7) 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
A report on Form 8-K was filed with the Securities and Exchange Commission on
January 1, 2005. The report provided information regarding the granting of
options to purchase common stock to certain officers and directors on January 1,
2005.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on March 2, 2005.
SBE, INC.
Registrant
Date: March 2, 2005 By: /s/ Daniel B. Grey
--------------------------
Daniel B. Grey
Chief Executive Officer and
President
(Principal Executive Officer)
Date: March 2, 2005 By: /s/ David W. Brunton
--------------------------
David W. Brunton
Chief Financial Officer,
Vice President, Finance
and Secretary
(Principal Financial and
Accounting Officer)
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