-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MmkZmCJnAliFNt+QhpQ5wC3ZhNfk8b7SOjA60dWqRdNuV35xAG4ta+WLulQeNiKM xSxqvMPuILOKCyTadbWwkA== 0001177651-02-000118.txt : 20020828 0001177651-02-000118.hdr.sgml : 20020828 20020828125506 ACCESSION NUMBER: 0001177651-02-000118 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020731 FILED AS OF DATE: 20020828 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SBE INC CENTRAL INDEX KEY: 0000087050 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 941517641 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08419 FILM NUMBER: 02750733 BUSINESS ADDRESS: STREET 1: 4550 NORRIS CANYON ROAD CITY: SAN RAMON STATE: CA ZIP: 94583 BUSINESS PHONE: 5103552000 MAIL ADDRESS: STREET 1: 4550 NORRIS CANYON RD CITY: SAN RAMON STATE: CA ZIP: 94583 10-Q 1 doc1.txt 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. 14 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 15 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. 16 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 17 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. 18 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. ---------- Registrant /s/ David W. Brunton ----------------------- David W. Brunton Chief Financial Officer, Vice President of Finance and Secretary (Principal Financial and Accounting Officer) 19 EX-11.1 3 doc2.txt EXHIBIT 11.1 SBE, INC. STATEMENTS OF COMPUTATION OF NET LOSS PER SHARE FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2002 AND 2001 (In thousands, except per share amounts) (Unaudited)
Three months ended Nine months ended July 31, July 31, ----------------- ------------------ 2002 2001 2002 2001 ------- -------- -------- -------- BASIC Weighted average number of common shares outstanding 4,042 3,421 3,659 3,373 ------- -------- -------- -------- Number of shares for computation of net loss per share 4,042 3,421 3,659 3,373 ======= ======== ======== ======== Net loss $ (178) $(2,243) $(2,356) $(6,768) ======= ======== ======== ======== Net loss per share $(0.04) $ (0.66) $ (0.64) $ (2.01) ======= ======== ======== ======== DILUTED Weighted average number of common shares outstanding 4,042 3,421 3,659 3,373 Shares issuable pursuant to options granted under stock option plans and warrants granted, less assumed repurchase at the average fair market value for the period (a) (a) (a) (a) ------- -------- -------- -------- Number of shares for computation of net loss per share 4,042 3,421 3,659 3,373 ======= ======== ======== ======== Net loss $ (178) $(2,243) $(2,356) $(6,768) ======= ======== ======== ======== Net loss per share $(0.04) $ (0.66) $ (0.64) $ (2.01) ======= ======== ======== ========
(a) In loss periods, common share equivalents would have an antidilutive effect on loss per share and therefore have been excluded. 20 EX-12.1 4 doc3.txt EXHIBIT 12.1 August 22, 2002 Via Facsimile (facsimile no. 416-956-8989) Stonestreet Limited Partnership C/o Canaccord Capital Corporation 320 Bay Street, Suite 1300 Toronto, ON M5H 4A6, Canada Ladies and Gentlemen: This letter is to evidence our agreement to amend the Subscription Agreement, dated as of April 30, 2002, between SBE, Inc. and Stonestreet Limited Partnership, in order to clarify our intent with respect to the calculation of penalties pursuant to Section 8.4 of such agreement. The language set forth below reflects our understanding as of and since April 30, 2002. The portion of Section 8.4 of the Subscription Agreement beginning immediately following the definition of "Non-Registration Event" therein is hereby amended, effective as of April 30, 2002, to read as follows: " then, for so long as such Non-Registration Event shall continue, the Company shall pay in cash as Liquidated Damages to each holder of any outstanding Company Shares an amount equal to one (1%) percent for the first thirty (30) days or part thereof and two (2%) per month for each month or part thereof thereafter, up to a maximum of twenty percent (20%) per year, in the aggregate, during the pendency of such Non-Registration Event, of one dollar and eighty cents ($1.80) for each Company Share (as adjusted for stock splits, combinations and the like after the date of issuance of each such share) owned of record by such holder as of or subsequent to the occurrence of such Non-Registration Event. Payments to be made pursuant to this Section 8.4 shall be due and payable within ten (10) business days after demand in immediately available funds. The parties agree that no penalty under this Section 8.4 shall be payable by the Company in respect of Warrants or the Warrant Shares in the case of a Non-Registration Event and that the sole penalty for a Non-Registration Event in respect of the Warrants and the Warrant Shares shall be a reduction in exercise price pursuant to Section 9 of the Warrants. Please evidence your agreement with the foregoing amendment by signing where provided below and faxing a copy back to me at (925) 355-2041. Very truly yours, Accepted and Agreed: SBE, Inc. Stonestreet Limited Partnership By: /s/ William B. Heye By: /s/ E.A. Leonard ------------------------ -------------------- William B. Heye Name: E.A. Leonard Chief Executive Officer Title: Chief Operating Officer Cc: Ed Grushko Grushko & Mittman (facsimile no. 212-697-3575) 21 EX-99.1 5 doc4.txt EXHIBIT 99.1 CERTIFICATION Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. 1350, as adopted), William B. Heye, the Chief Executive Officer of SBE, Inc. (the "Company") hereby certifies that, to the best of his knowledge: 1. The Company's Quarterly Report on Form 10-Q for the period ended July 31, 2002, to which this Certification is attached as Exhibit 99.1 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report. Dated: August 28, 2002 /s/ William B. Heye Jr. - --------------------------- William B. Heye Jr. Chief Executive Officer 22 EX-99.2 6 doc5.txt EXHIBIT 99.2 CERTIFICATION Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. 1350, as adopted), David W. Brunton, the Chief Financial Officer of SBE, Inc. (the "Company") hereby certifies that, to the best of his knowledge: 1. The Company's Quarterly Report on Form 10-Q for the period ended July 31, 2002, to which this Certification is attached as Exhibit 99.2 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report. Dated: August 28, 2002 /s/ David W. Brunton - ----------------------- David W. Brunton Chief Financial Officer 23 -----END PRIVACY-ENHANCED MESSAGE-----