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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 JULY 31, 2002
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the transition period from _______ to ________
Commission file number 0-8419
------
SBE, INC.
_____________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 94-1517641
__________________________________ ______________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2305 Camino Ramon, Suite 200, San Ramon, California 94583
---------------------------------------------------------
(Address of principal executive offices and zip code)
(925) 355-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----
The number of shares of Registrant's Common Stock outstanding as of August 20,
2002 was 4,129,936.
SBE, INC.
INDEX TO JULY 31, 2002 FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 2002 and October 31, 2001 . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the
three and nine months ended July 31, 2002 and 2001 . . . 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended July 31, 2002 and 2001 . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 9
ITEM 3 Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . . 17
PART II OTHER INFORMATION
ITEM 5 Other information . . . . . . . . . . . . . . . . . . . 17
ITEM 6 Exhibits and Reports on Form 8-K . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
11.1 Statements of Computation of Net Loss Per Share . . . . 20
12.1 Amendment to Stonestreet Agreement . . . . . . . . . . 21
99.1 Certification of Chief Executive Officer . . . . . 22
99.2 Certification of Chief Financial Officer . . . . . 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
July 31, October 31,
2002 2001
---------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,463 $ 3,644
Trade accounts receivable, net 2,383 760
Other receivables, net 195 131
Inventories 3,563 4,428
Other 366 333
---------- -------------
Total current assets 7,970 9,296
Property, plant and equipment, net 851 1,236
Capitalized software costs, net 161 86
Other 79 72
---------- -------------
Total assets $ 9,061 $ 10,690
========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,063 $ 545
Accrued payroll and employee benefits 216 343
Other accrued expenses 305 813
Current portion of refundable deposit 447 ---
---------- -------------
Total current liabilities 2,031 1,701
Non-current liabilities:
Warrant 101 ---
Refundable deposit 4,423 4,870
---------- -------------
Total liabilities 6,555 6,571
---------- -------------
Stockholders' equity:
Common stock 14,620 13,877
Treasury stock (409) (409)
Note receivable from stockholder (744) (744)
Accumulated deficit (10,961) (8,605)
---------- -------------
Total stockholders' equity 2,506 4,119
---------- -------------
Total liabilities and stockholders' equity $ 9,061 $ 10,690
========== =============
See notes to condensed consolidated financial statements.
3
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
July 31, July 31,
2002 2001 2002 2001
------- -------- -------- --------
Net sales $2,786 $ 1,449 $ 5,793 $ 6,680
Cost of sales 1,091 915 2,488 3,818
------- -------- -------- --------
Gross profit 1,695 534 3,305 2,862
------- -------- -------- --------
Product research and development 770 1,311 2,335 4,530
Sales and marketing 501 844 1,609 2,415
General and administrative 673 684 1,810 2,483
Restructuring costs --- --- --- 384
------- -------- -------- --------
Total operating expenses 1,944 2,839 5,754 9,812
------- -------- -------- --------
Operating loss (249) (2,305) (2,449) (6,950)
Interest income 8 62 30 182
Other income 63 --- 63 ---
------- -------- -------- --------
Net loss $ (178) $(2,243) $(2,356) $(6,768)
======= ======== ======== ========
Basic and diluted loss per share $(0.04) $ (0.66) $ (0.64) $ (2.01)
======= ======== ======== ========
Basic and diluted - shares used
in per share computations 4,042 3,421 3,659 3,373
======= ======== ======== ========
See notes to condensed consolidated financial statements.
4
SBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
July 31,
------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $(2,356) $(6,768)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred stock compensation --- 15
Effect of remeasured warrant (63) ---
Depreciation and amortization:
Property and equipment 514 649
Software 65 163
Loss on abandonment of equipment 15 ---
Changes in operating assets and liabilities:
Accounts and other receivables (1,687) 2,874
Inventories 865 (25)
Other assets (40) (63)
Trade accounts payable 518 (250)
Other current liabilities (635) (1,495)
Non current liabilities --- 4,822
-------- --------
Net cash used in operating activities (2,804) (68)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (143) (281)
Capitalized software costs (141) (10)
-------- --------
Net cash used in investing activities (284) (291)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock and warrants 891 ---
Proceeds from stock plans 16 172
-------- --------
Net cash provided by financing activities 907 172
-------- --------
Net decrease in cash and cash equivalents (2,181) (187)
Cash and cash equivalents at beginning of period 3,644 5,311
-------- --------
Cash and cash equivalents at end of period $ 1,463 $ 5,124
======== ========
See notes to condensed consolidated financial statements.
5
SBE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM PERIOD REPORTING:
These condensed consolidated financial statements of SBE, Inc. are unaudited and
include all adjustments, consisting of normal recurring adjustments, that are,
in the opinion of management, necessary for a fair presentation of our financial
position and results of operations and cash flows for the interim periods. The
results of operations for the nine months ended July 31, 2002 are not
necessarily indicative of expected results for the full 2002 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 consolidated financial
statements and notes contained in our Annual Report on Form 10-K for the year
ended October 31, 2001.
We have incurred substantial losses and negative cash flows from operations
during the year ended October 31, 2001 and the nine months ended July 31, 2002.
During fiscal 2001 and continuing throughout fiscal 2002, we implemented a cost
containment program to reduce our headcount, real estate needs and certain
non-essential spending and continue to monitor and reduce our expenses wherever
appropriate. On April 30, 2002, we closed a $1.0 million private placement of
shares of our common stock with Stonestreet L.P. and on May 14, 2002 secured a
$1.0 million working capital line of credit from a bank. We anticipate that our
current cash balances, working capital line of credit from a bank and cash flow
from operations will be sufficient to meet our working capital needs for the
next 12 months. However, we cannot be certain that additional financing will not
be required and, if additional financing is required, that it will be available
on acceptable terms, or at all.
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Significant estimates and judgments made by management include matters such as
the collectibility of accounts receivable, realizability of inventories and
recoverability of capitalized software and deferred tax assets.
6
2. INVENTORIES:
Inventories comprise the following (in thousands):
July 31, October 31,
2002 2001
--------- -----------
Finished goods $ 1,434 $ 3,220
Parts and materials 2,129 1,208
--------- -----------
$ 3,563 $ 4,428
========= ===========
During the nine months ended July 31, 2002 we sold $200,000 of inventory that
had been previously written-off as obsolete.
3. RESTRUCTURING COSTS:
The following table sets forth an analysis of the restructuring accrual as of
October 31, 2001 and the payments made against it during the nine months ended
July 31, 2002 (in thousands):
Restructuring accrual at October 31, 2001 $ 590
Less: Cash paid for accrued lease costs (480)
------
Total restructuring accrual included in other accrued expenses $110
======
4. REFUNDABLE DEPOSIT:
A refundable deposit associated with a multi-year supply agreement with CompaqHP
Computer Corporation of $4.9 million was received in April 2001. Pursuant to the
supply agreement, CompaqHP has agreed to purchase, and we agreed to sell,
certain hardware components. The refundable deposit represents a one-time
payment of cash to us from CompaqHP. In the normal course of business and
pursuant to the terms of the supply agreement, we will refund back to CompaqHP
certain dollar amounts according to milestones based on how many units we have
shipped to CompaqHP. If CompaqHP chooses to terminate the agreement prior to
reaching a specified milestone, we will refund to CompaqHP a set dollar amount
based on the number of units of our product purchased by CompaqHP since the
previous milestone reached by CompaqHP. Upon such termination, CompaqHP will
forfeit any remainder of the deposit not refunded pursuant to these terms. If
the supply agreement is terminated due to our default, we will immediately
refund to CompaqHP any unrefunded portion of the deposit. Upon termination by
the default of CompaqHP, CompaqHP will forfeit any unrefunded portion of the
deposit to us. We expect to reach the first milestone under the supply agreement
during the fourth quarter of the current fiscal year and have included $447,000
of the refundable deposit as a current liability. As future shipment milestones
are projected to be realized within the subsequent 12-month reporting period,
the payment amount associated with that milestone is reclassified to a current
liability.
7
5. SALE OF COMMON STOCK AND WARRANTS:
On April 30, 2002, we completed a private placement of 555,556 shares of common
stock at $1.80 per share plus a warrant to purchase 111,111 shares of common
stock, resulting in gross cash proceeds of approximately $1.0 million. The
warrant has a term of three years and is exercisable at $2.00 per share. The
equity investment was made by Stonestreet L.P., of Ontario, Canada. The shares
of common stock and the shares of common stock associated with the Stonestreet
LP and Vintage Partners LLC warrants were registered with the Securities and
Exchange Commission and the registration statement was declared effective on
June 14, 2002. The fair value of the warrant of $164,000 was computed using the
Black-Scholes option pricing model and was recorded as a liability pursuant to
the provisions of EITF 00-19, Determination of Whether Share Settlement is
Within the Control of the Issuer for Purposes of Applying Issue 96-3. The fair
value of the warrant was remeasured as of July 31, 2002 using the Black-Scholes
valuation method resulting in a reduction of $63,000 in the liability associated
with the warrant. The $63,000 is included in other income. See Note 8.
In connection with the private placement, we retained the services of Vintage
Partners LLC, of New York, New York, and paid to Vintage Partners a finder's fee
of $60,000 and a warrant to purchase 11,429 shares of common stock. The warrant
has a three-year term and is exercisable at $3.50 per share.
On June 17, 2002, we retained Agility Partners, LLC, to assist us in identifying
and evaluating potential strategic acquisition candidates. In connection with
these activities, we issued a warrant with a maximum term of three years to
Agility Partners, LLC to purchase 200,000 shares of common stock for $1.79 per
share. Agility Partners, LLC's right to purchase shares of common stock under
the warrant vests in connection with the achievement of certain milestones,
including the successful closing of strategic acquisitions.
6. NET LOSS PER SHARE:
Basic loss per common share for the three and nine months ended July 31, 2002
and 2001 was computed by dividing the net loss by the weighted average number of
shares of common stock outstanding. Common stock equivalents for the three
months ended July 31, 2002 and 2001 were 44,705 and 27,034 and for the nine
months ended July 31, 2002 and 2001 were 45,967 and 93,053, respectively, and
have been excluded from shares used in calculating diluted loss per share
because their effect would be anti-dilutive.
7. CONCENTRATION OF RISK:
In the three and nine months ended July 31, 2002 and 2001, most of our sales
were attributable to sales of communications products and were derived from a
limited number of OEM customers. Sales to CompaqHP accounted for 45% and 32% of
net sales during the third quarter of fiscal 2002 and 2001, respectively, and
34% and 39% of the Company's net sales in the first nine months of fiscal 2002
and 2001, respectively. The other customers with sales of 10% or more for the
third quarter of fiscal 2002 were Nortel - 15% and Lockheed Martin - 15%. For
the nine months ended July 31, 2002, the only other customer accounting for more
than 10% of sales was Lockheed Martin - 14%. CompaqHP accounted for 43% and 33%
8
of our accounts receivable as of July 31, 2002 and 2001, respectively. The other
customers with accounts receivable greater than 10% as of July 31, 2002 were
Nortel - 13% and Lockheed Martin - 10%. We expect that sales to CompaqHP will
continue to constitute a substantial portion of our net sales for the
foreseeable future. A significant reduction in orders from any of our OEM
customers, particularly CompaqHP, could have a material adverse effect on our
business, operating results and financial condition.
8. SUBSEQUENT EVENT:
In accordance with EITF 00-19, the warrant sold to Stonestreet L.P. (see Note 5)
was initially classified as a liability due to cash penalties which could be
payable to Stonestreet L.P. in the event a registration statement related to the
private placement was not declared and maintained effective. The registration
statement was declared effective on June 14, 2002. On August 22, 2002, the
private placement subscription agreement was amended such that no cash penalties
could now be payable with respect to the warrant. Accordingly, as of August 22,
2002, the warrant was reclassified from liabilities to equity.
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 management's analysis only as of the
date hereof, and we assume no obligation to update these statements. Actual
events or results may differ materially from the results discussed in or implied
by the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those risks and uncertainties set forth under
the caption "Risk Factors" in the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 2001. Such forward-looking statements include,
without limitation, statements regarding:
- - our expectation regarding sales to CompaqHP in fiscal 2002;
- - the belief that the market for telecommunications controller products is
growing;
- - the adequacy of anticipated sources of cash and planned capital
expenditures;
- - our expectation regarding quarterly operating expense levels and gross
profit for fiscal 2002;
- - the effect of interest rate increases;
- - trends or expectations regarding our operations;
- - the concentration of our customers;
- - delays in testing and introducing new products;
- - changes in product demand;
- - rapid technology changes;
9
- - the highly competitive market in which we operate;
- - the pricing and availability of equipment, materials and inventories;
- - the financial stability of our contract manufacturers;
- - various inventory risks due to market conditions;
- - delays or cancellation of customer orders; and
- - the entry of new, well-capitalized competitors into our markets.
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q and in our Form 10-K for the fiscal year ended October 31, 2001.
OVERVIEW
SBE, Inc. designs, manufactures and markets high-speed intelligent
communications controller and software products that are embedded within an
original equipment manufacturer's ("OEM") products. Our products enable both
traditional and emerging telecommunications service providers to deliver
advanced communications products and services, which we believe help these
providers compete more effectively in today's highly competitive
telecommunications service market. Our products include wide area network
("WAN") interface adapters and high performance communications controllers for
workstations, media gateways, routers, internet access devices, home location
registers and data messaging applications.
Our business is characterized by a concentration of sales to a small number of
OEMs who provide products and services to the telecommunications service market.
Consequently, the timing of significant orders from major customers and their
product cycles cause fluctuation in our operating results. CompaqHP is the
largest of our customers and represented 34% of net sales in fiscal 2001. Sales
to CompaqHP accounted for 45% and 34% of our net sales in the three months and
nine months ended July 31, 2002 and 32% and 39% for the comparable periods of
fiscal 2001. If any of our major customers, especially CompaqHP, 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.
Our recent and planned introduction of new products that are targeted at large
or growing markets within the telecommunications industry is designed to
diversify our product mix and customer base. Our Highwire and adapter products
are focused on the telecommunications applications market. We believe this
market will continue to grow, driven by the convergence of traditional wireline
and wireless telephony applications with the Internet along with a growing
demand to process and transport increasing amounts of data. OEMs are
increasingly outsourcing non-proprietary portions of their hardware development
to embedded systems companies such as SBE in order to take advantage of faster
time to market and product expertise. We expect to see this trend intensify
because of recent reductions in OEMs' engineering staffing levels coupled with
increased product time to market pressures.
One of our strategies to increase sales is to have our products designed into
new OEM product offerings. We believe these design wins result in long-term
10
revenue from the OEM if the OEM products is ultimately successful. We were
awarded one design win in the quarter ended July 31, 2002 for a total of eight
in the first nine months of fiscal 2002, compared to a total of three during the
fiscal year ended October 31, 2001. These design wins are for OEM product
applications using our WAN adapter products in a diverse set of applications
that include secure Virtual Private Network ("VPN") routers, wireless Internet
access, SS7 network analyzers, Voice over Internet Protocol ("VoIP") gateways
and storage area networks ("SANs").
During the second half of fiscal 2001, we took aggressive steps to reduce our
overall operating costs, including reducing headcount and relocating our
engineering and headquarters facilities. We reduced our overall operating
expense from $2.8 million in the third quarter of fiscal 2001 to $1.9 million
for the third quarter of fiscal 2002, a 32% decrease, and from $9.4 million,
excluding restructuring charges of $384,000, in the nine month period ended July
31, 2001 to $5.8 million for the nine months ended July 31, 2002, a 39%
decrease. We continue to focus on cost containment. We expect quarterly
operating expense levels to remain relatively constant for the remainder of
fiscal 2002 and into fiscal 2003.
During the quarter ended April 30, 2002 we completed a private placement of
shares of our common stock and a warrant to purchase common stock resulting in
gross cash proceeds of approximately $1.0 million, and on May 14, 2002 we
secured a $1.0 million line of credit from a bank.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Such estimates include
levels of reserves for doubtful accounts, obsolete inventory, warranty costs and
deferred tax assets. Actual results could differ from those estimates.
Our critical accounting policies and estimates include the following:
Revenue Recognition
We record product sales at the time of product shipment. Our sales transactions
are negotiated in U.S. dollars. Our agreements with OEMs, such as CompaqHP and
Lockheed Martin, typically incorporate clauses reflecting the following
understandings:
- - all prices are fixed and determinable at the time of sale;
- - collectibility of the sales prices is probable. The OEM is obligated to pay
and such obligation is not contingent on the ultimate sale of the OEM's
integrated solution;
- - the OEM's obligation to us would not be changed in the event of theft or
physical destruction or damage of the product;
- - we do not have significant obligations for future performance to directly
bring about resale of the product by the OEMs; and
- - there is no contractual right of return other than for defective products;
we can reasonably estimate such returns and record a warranty reserve at
the point of shipment.
11
Warranty Reserves
We accrue the estimated costs to be incurred in performing warranty services at
the time of revenue recognition and shipment of the products to the OEMs. Our
estimate of costs to service our warranty obligations is based on historical
experience and expectation of future conditions. To the extent we experience
increased warranty claim activity or increased costs associated with servicing
those claims, the warranty accrual will increase, resulting in decreased gross
margin.
Inventories
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market value. Our inventories include high-technology parts that may
be subject to rapid technological obsolescence. We consider technological
obsolescence in estimating required reserves to reduce recorded amounts to
market values. Such estimates could change in the future and have a material
adverse impact on our financial position and results of operations.
Property and Equipment
We review property and equipment for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable.
In performing the review for recoverability, we estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. The
amount of the impairment loss, if any, would be calculated based on the excess
of the carrying amount of the asset over its fair value.
Capitalized Software Costs
Capitalized software costs consist of costs to purchase software and costs to
internally develop software. Capitalization of software costs begins upon the
establishment of technological feasibility. All capitalized software costs are
amortized as related sales are recorded on a per-unit basis with a minimum
amortization based on a straight-line method over a two-year estimated useful
life. We evaluate the estimated net realizable value of each software product
and record provisions to the asset value of each product for which the net book
value is in excess of the net realizable value.
Refundable Deposit
A refundable deposit associated with a multi-year supply agreement with CompaqHP
of $4.9 million was received in April 2001. Pursuant to the supply agreement,
CompaqHP has agreed to purchase, and we agreed to sell, certain hardware
components. The refundable deposit represents a one-time payment of cash to us
from CompaqHP. In the normal course of business and pursuant to the terms of
the supply agreement, we will refund back to CompaqHP certain dollar amounts
according to milestones based on how many units we have shipped to CompaqHP. If
CompaqHP chooses to terminate the agreement prior to reaching a specified
12
milestone, we will refund to CompaqHP a set dollar amount based on the number of
units of our product purchased by CompaqHP since the previous milestone reached
by CompaqHP. Upon such termination, CompaqHP will forfeit any remainder of the
deposit not refunded pursuant to these terms. If the supply agreement is
terminated due to our default, we will immediately refund to CompaqHP any
unrefunded portion of the deposit. Upon termination by the default of CompaqHP,
CompaqHP will forfeit any unrefunded portion of the deposit to us. We expect to
reach the first milestone under the supply agreement during the fourth quarter
of the current fiscal year and have included $447,000 of the refundable deposit
as a current liability. As future shipment milestones are projected to be
realized within the subsequent 12-month reporting period, the payment amount
associated with that milestone is reclassified to a current liability.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, consolidated
statements of operations data for the three and nine months ended July 31, 2002
and 2001. These operating results are not necessarily indicative of our
operating results for any future period.
THREE NINE
MONTHS ENDED MONTHS ENDED
JULY 31, JULY 31,
--------- ---------
2002 2001 2002 2001
----- ------ ----- ------
Net sales 100% 100% 100% 100%
Cost of sales 39 63 43 57
----- ------ ----- ------
Gross profit 61 37 57 43
----- ------ ----- ------
Product research and development 28 90 40 68
Sales and marketing 18 58 28 36
General and administrative 24 47 31 37
Restructuring costs --- --- --- 6
----- ------ ----- ------
Total operating expenses (70) (195) (99) (147)
----- ------ ----- ------
Operating loss (9) (159) (42) (104)
Interest and other income 3 4 2 3
----- ------ ----- ------
Net loss (6)% (155)% (40)% (101)%
===== ====== ===== ======
Net Sales
Net sales for the third quarter of fiscal 2002 were $2.8 million, a 92% increase
from $1.4 million for the third quarter of fiscal 2001. This increase was
primarily attributable to an increase in sales to CompaqHP and increased sales
of our adapter and Highwire products. Net sales to CompaqHP were $1.1 million
for the third quarter of fiscal 2002 as compared to $450,000 for the same period
in fiscal 2001. Sales to CompaqHP, primarily of VMEBus products represented 45%
of net sales for the third quarter of fiscal 2002 compared to 32% during the
comparable quarter of fiscal 2001. The other customers with sales of 10% or more
during the third quarter of fiscal 2002 were Nortel - 15% and Lockheed Martin -
15%. Sales of our adapter products were $583,000 during the third quarter of
fiscal 2002, as compared to $107,000 in the comparable period in fiscal 2001.
Sales of our Highwire products were $301,000 in the third quarter of fiscal
2002, as compared to $15,000 for the comparable period in fiscal 2001. Our
13
adapter products are used primarily in edge-of-the-network applications such as
VPN and other routers, VoIP gateways and security devices, whereas our Highwire
products are primarily targeted at core-of-the-network applications used
primarily by telecommunications service providers. We expect our product mix to
continue to be heavily weighted towards our VME and adapter products.
Net sales for the first nine months of fiscal 2002 were $5.8 million, a 13%
decrease from the $6.7 million for the same period in fiscal 2001. This decrease
was primarily attributable to a slowdown in demand from virtually all of our
telecommunications customers due to industry-wide adverse economic conditions,
offset in part by the increased third quarter sales described above. Due to the
adverse economic conditions in the telecommunications industry, our
telecommunications customers hold excess inventory of our products. As a result,
our customers have cancelled or delayed many of their new design projects and
new products rollouts that included our products. Sales to CompaqHP were $2.0
million for the first nine months of fiscal 2002, a 23% decrease from $2.6
million in the first nine months of fiscal 2001. Sales to CompaqHP represented
34% of net sales for the first nine months of fiscal 2002 compared to 39% during
the comparable period in fiscal 2001. The other customer with sales of 10% or
more for the first nine months of fiscal 2002 was Lockheed Martin - 13%. Sales
of our adapter products were $1.6 million for the first nine months of fiscal
2002,. an 11% decrease from $1.8 million for the first nine months of fiscal
2001. Sales of our Highwire products were $799,000 for the first nine months of
fiscal 2002, more than doubling sales of $265,000 for the first nine months of
fiscal 2001.
Our sales backlog at August 13, 2002 is $359,000. We expect a leveling off of
the quarterly sales volume over the remainder of fiscal 2002 and into the first
part of fiscal 2003 as our customers slowly deploy existing excess inventory and
gradually return to new product design and product rollout. Over the past 12 to
18 months there has been a shift in the ordering patterns of our customers.
Previously our customers would typically place a purchase order with us based on
their forecasted sales volumes. 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 at best. 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 Profit
Gross profit as a percentage of net sales in the third quarter of fiscal 2002
was 61%, as compared to 37% for the same period of fiscal 2001. For the first
nine months of fiscal 2002 the gross profit percentage was 57%, as compared to
43% for the same period of fiscal 2001. The increase in the gross profit from
fiscal 2001 to fiscal 2002 was primarily attributable to lower materials costs
combined with a more advantageous product mix in fiscal 2002. We expect our
gross profit to range between 54% and 58% for the remainder of fiscal 2002.
However, if market and economic conditions, particularly in the
telecommunications sector, deteriorate or fail to recover as expected, gross
profit as a percentage of net sales may decline from the current level.
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Product Research and Development
Product research and development expenses were $770,000 in the third quarter of
fiscal 2002, a decrease of 41% from $1.3 million in the third quarter of fiscal
2001. For the first nine months of fiscal 2002, research and development
expenses were $2.3 million, a 49% decrease from $4.5 million for the first nine
months of fiscal 2001. The decrease resulted from staff reductions and other
expense reductions in the engineering group. We expect product research and
development expenses to remain at or slightly below current levels for the
remainder of fiscal 2002.
Sales and Marketing
Sales and marketing expenses for the third quarter of fiscal 2002 were $501,000,
a decrease of 41% from $844,000 in the third quarter of fiscal 2001. Sales and
marketing expenses for the first nine months of fiscal 2002 were $1.6 million, a
33% decrease from $2.4 million in fiscal 2001. The decrease is primarily due to
lower marketing program spending for products already introduced during previous
quarters, in addition to the effect of headcount reductions during the third and
fourth quarters of fiscal 2001. We expect our quarterly sales and marketing
expenses to remain relatively constant for the remainder of fiscal 2002.
General and Administrative
General and administrative expenses were $673,000 for the third quarter of
fiscal 2002, a slight decrease from $684,000 in the third quarter of fiscal
2001. For the first nine months of fiscal 2002, general and administrative
expenses were $1.8 million, a decrease of 27% from $2.5 million for the first
nine months of fiscal 2001. Our general and administrative expenses decreased
for the nine months just ended as we continue to carefully monitor and reduce
spending levels in response to lower revenue levels. We expect our quarterly
general and administrative expenses to range between $550,000 and $650,000 for
the remainder of fiscal 2002.
Restructuring Costs
Restructuring costs of $384,000 were recorded during the second fiscal quarter
of 2001 related to our consolidation and subleasing of facilities. The charge
represented the estimated costs of facilities leases net of estimated sublease
revenues.
Interest and Other Income
Net interest income decreased to $8,000 in the third quarter of fiscal 2002 from
$63,000 in the same period in fiscal 2001, a decrease of 87%. Also, for the
first nine months of fiscal 2002, net interest income was $45,000, a decrease of
75% from $183,000 in fiscal 2001. This decrease was due to lower average cash
balances. Other income attributable to remeasuring the fair value of the
warrants associated with the sale of stock to Stonestreet LP on April 30, 2002
was $63,000 for the three and nine months ended July 31, 2002
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Net Loss
As a result of the factors discussed above, we recorded a net loss of $178,000
in the third quarter of fiscal 2002, as compared to a net loss of $2.2 million
in the third quarter of fiscal 2001. For the first nine months of fiscal 2002,
our net loss was $2.4 million, compared to a net loss of $6.8 million for the
first nine months of fiscal 2001.
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:
- - actual versus anticipated sales of our products;
- - our actual versus anticipated operating expenses and results of ongoing
cost control actions;
- - the timing of product shipments, which occur primarily during the last
month of the quarter;
- - our actual versus anticipated gross profit margin;
- - our ability to raise additional capital, if necessary; and
- - our ability to secure credit facilities, if necessary.
At July 31, 2002, we had cash and cash equivalents of $1.5 million, as compared
to $3.6 million at October 31, 2001. In the first nine months of fiscal 2002,
$2.8 million of cash was used in operating activities, primarily as a result of
a $2.4 million net loss, a $1.7 million increase in accounts receivable, and a
$635,000 decrease in other current liabilities, partially offset by a $866,000
decrease in inventories and a $518,000 increase in trade accounts payable. The
increase in accounts receivable and decrease in inventories was primarily a
result of a significant portion of the fiscal 2002 third quarter sales taking
place near the end of the quarter. The decrease in other current liabilities was
primarily the result of the payment of restructuring costs related to the move
of the engineering and headquarters facility that were accrued in the previous
fiscal year. The increase in trade accounts payable was due primarily to
purchases of components and services from our contract manufacturers near the
end of the third quarter of fiscal 2002. Working capital at July 31, 2002 was
$5.9 million, as compared to $7.6 million at October 31, 2001.
In the first nine months of fiscal 2002, we purchased $143,000 of fixed assets,
consisting primarily of tenant improvements for our new engineering and
headquarters facility and computer and engineering equipment, and we capitalized
$141,000 of software costs. Capital expenditures for the remaining quarter of
fiscal 2002 and each quarter of fiscal 2003 are expected to be under $100,000
per quarter.
We received $16,000 in the first nine months of fiscal 2002 from payments
related to common stock purchases made by employees pursuant to the employee
stock purchase plan. During the second quarter of fiscal 2002, we sold 555,556
shares of common stock plus a warrant to purchase 111,111 shares of common stock
for approximately $1.0 million in a private placement transaction with
Stonestreet L.P. of Ontario, Canada. The net cash proceeds after expenses were
approximately $891,000.
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On May 14, 2002, we secured a 12 month revolving $1.0 million working capital
line of credit with a bank. 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 (currently 4.75%) plus 1.50%. We can draw down on the credit line based on
a formula equal to 80% of our domestic accounts receivable. As of July 31, 2002,
we have not drawn down on this line of credit.
We have incurred substantial losses and negative cash flows from operations
during the year ended October 31, 2001 and the nine months ended July 31, 2002.
During fiscal 2001 and continuing throughout fiscal 2002, we implemented a cost
containment program to reduce our headcount, real estate needs and certain
non-essential spending and continue to monitor and reduce our expenses wherever
appropriate. We anticipate that our current cash balances, cash flows from
operations and working capital line of credit will be sufficient to meet our
working capital needs for the next 12 months. We cannot assure you, however,
that our current cash balances and cash flow from operations will be sufficient
to meet our working capital needs for the next 12 months. If we require
additional capital resources to execute our operating plans, grow our business
or acquire complimentary technologies or businesses at any time in the future,
we may seek or be required to seek additional sources of funds though the sale
of equity or debt securities, securing lines of credit or other third party
financing. We cannot assure you that there will be additional sources of funds
available to us or, if available, they would have reasonable terms. In addition,
the sale of additional equity securities by us will result in additional
dilution to our stockholders.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS:
Our only significant contractual obligations and commitments relate to the real
estate operating leases for our development and headquarters facilities and our
Supply Agreement with CompaqHP Computer, (see "CRITICAL ACCOUNTING POLICIES AND
ESTIMATES", "Refundable Deposits").
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 July 31,
2002 were analyzed to determine their sensitivity to interest rate changes. The
fair values of these instruments were determined by net present values. In our
sensitivity analysis, the same change in interest rate was used for all
maturities and all other factors were held constant. If interest rates
increased by 10%, the expected effect on net loss related to our financial
instruments would be immaterial.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as
amended by Section 202 of the Sarbanes-Oxley Act of 2002 (the "Act"), we are
required to disclose the non-audit services approved by our Audit Committee to
be performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit
services are defined in the Act as services other than those provided in
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connection with an audit or a review of the financial statements of a company.
The Audit Committee has not approved the engagement of PricewaterhouseCoopers
LLP for any non-audit services.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
11.1 Statements of Computation of Net Loss per Share
12.1 Amendment to Stonestreet L.P. Agreement
99.1 Certification by Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.2 Certification by Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
No report on Form 8-K was filed by the Company during the quarter ended July 31,
2002.
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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 August 28, 2002.
SBE, INC.
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Registrant
/s/ David W. Brunton
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David W. Brunton
Chief Financial Officer, Vice President of
Finance and Secretary (Principal Financial
and Accounting Officer)
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