SW would like you to take a look @ this company, will earn +.40 this qtr In a nut shell they make modems and wan cards that are designed into nextel's responders, they also do alot of business with motorola
should benifit from the wireless internet deal with motorola and nextel heres is some info, let me know what you think
john
January 29, 1999
SBE INC (SBEI)
Annual Report (SEC form 10-K)
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause
or contribute to such differences include, but are not limited to, those discussed in this section and the section entitled "Item
1-Business" (particularly "Item 1-Business-Risk Factors").
The Company's business is characterized by a concentration of sales to a small number of customers and consequently the
timing of significant orders from major customers and their product cycles causes fluctuations in the Company's operating
results. See "Item 1-Business-Risk Factors-Dependence on Limited Number of OEM Customers." The Company is attempting
to diversify its sales with the introduction of new products that are targeted at large growing markets such as
telecommunications and client/server. The Company's WanXL products are focused on the client/server market and the
significant increases in communications activity that are driven by applications such as email, electronic commerce,
geographically diverse corporate networks and general computer communications. While the Company believes the market for
the WanXL products is large, there can be no assurance that the Company will be able to succeed in penetrating this market
and diversifying its sales. See "Item 1-Business-Risk Factors-Future Success Dependent on New Product Lines."
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain consolidated statements of operations data for the fiscal
years ended October 31, 1998, 1997 and 1996. These operating results are not necessarily indicative of Company's operating
results for any future period.
YEAR ENDED OCTOBER 31,
----------------------
1998 1997 1996
Net sales 100% 100% 100%
Cost of sales 40 49 62
----- ----- -----
Gross profit 60 51 38
Operating expenses:
Product research and development 19 11 38
Sales and marketing 23 15 34
General and administrative 17 15 24
Restructuring and other --- --- 14
----- ----- -----
Total operating expenses 59 41 110
----- ----- -----
Operating income (loss) 1 10 (72)
Gain on sale of assets --- 3 ---
Interest and other expense, net 1 --- ---
----- ----- -----
Income (loss) before taxes 2 13 (72)
Income tax provision (benefit) --- --- ---
----- ----- -----
Net income (loss) 2% 13% (72)%
===== ===== =====
NET SALES
Net sales for fiscal 1998 were $19.0 million, a 24 percent decrease from fiscal 1997. Net sales for fiscal 1997 were $25.0
million, an 87 percent increase from fiscal 1996. The decrease from fiscal 1997 to fiscal 1998 was primarily attributable to
lower sales to Silicon Graphics and Lockheed Martin and certain telecommunications integrators that distribute product
primarily in Asia. The increase from fiscal 1996 to fiscal 1997 was primarily attributable to increased sales of controller
products and WanXL products. Sales to individual customers in excess of 10 percent of net sales of the Company included net
sales to Tandem and Motorola of $9.4 million and $2.8 million, respectively, in fiscal 1998; net sales to Tandem, Motorola,
and Silicon Graphics of $8.8 million, $3.8 million, and $3.0 million, respectively, in fiscal 1997; and net sales to Tandem of
$2.7 million in fiscal 1996. Net sales to Silicon Graphics were $175,000 in fiscal 1998. Net sales to Motorola were $700,000
in fiscal 1996. There were no sales to Silicon Graphics in fiscal 1996. The Company expects to continue to experience
fluctuation in communication controller product sales as large customers' needs change. See "Item 1-Business-Risk
Factors-Dependence on a Limited Number of OEM Customers."
International sales constituted 5 percent, 12 percent and 26 percent of net sales in fiscal 1998, fiscal 1997 and fiscal 1996,
respectively. The decrease in international sales from fiscal 1997 to fiscal 1998 is primarily attributable to lower demand in
Asia. The decrease from fiscal 1996 to fiscal 1997 is primarily attributable to lower sales to certain Korean customers. Sales of
VMEbus-based communications products through the Company's Channel Partner relationship with Hewlett Packard
constituted 2 percent of net sales in fiscal 1998 and fiscal 1997 and 11 percent of net sales in fiscal 1996. No customer within
this channel represented more than 5 percent of total sales. The Company expects that future sales through the HP channel will
continue at current levels; however, sales through this channel will be subject to significant variability from quarter to quarter.
GROSS PROFIT
Gross profit as a percentage of sales was 60 percent, 51 percent and 38 percent in fiscal 1998, fiscal 1997 and fiscal 1996,
respectively. The increase from fiscal 1997 to fiscal 1998 was primarily attributable to discontinuance of low-margin
netXpand(R) products and improved operational efficiencies. The increase from fiscal 1996 to fiscal 1997 was primarily
attributable to lower component costs and favorable pricing with XeTel. In late fiscal 1996, the Company concluded that it
would not be able to maintain a production facility that would allow it to be competitive with the production costs of its
competitors; therefore, in December 1996 the Company sold its manufacturing assets and operations to XeTel. The Company
also entered into a contract to purchase manufacturing services from XeTel, which has decreased, and may continue to
decrease, the volatility of the quarterly cost of sales as a percentage of sales. See "Item 1-Business-Risk Factors-Dependence
on Contract Manufacturer."
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses were $3.6 million in fiscal 1998, $2.8 million in fiscal 1997 and $5.1 million in
fiscal 1996, representing 19 percent, 11 percent and 38 percent of sales, respectively. The increase in research and
development spending from fiscal 1997 to fiscal 1998 was due to expanded software development programs for the WanXL
product line. The decrease from
fiscal 1996 to fiscal 1997 was a result of the completion of the base netXpand product line and a corresponding decrease in
third party consulting costs associated with the launch of the netXpand products. The Company expects that product research
and development expenses will decrease as a percentage of sales as the Company focuses its resources on developing new
telecommunications product offerings and enhancing its traditional board-level products. See "Item 1-Business-Risk
Factors-Future Success Dependent on New Product Lines; -Rapid Technological Change;-Ongoing Product Development
Requirements."
The Company capitalized no internal software development costs in fiscal 1998, fiscal 1997 or fiscal 1996. All previously
capitalized software development costs have been fully amortized.
SALES AND MARKETING
Sales and marketing expenses for fiscal 1998 were $4.3 million, up 12 percent from $3.8 million in fiscal 1997. This increase
was due to expanded marketing programs and the establishment of a UK branch office. Sales and marketing expenses for fiscal
1996 were $4.6 million. The decrease from fiscal 1996 to fiscal 1997 was due to lower sales and commission expenses and
the completion of one-time costs associated with product launch of the netXpand product line. The Company expects sales and
marketing expenses, as new products are announced, to increase slightly as a percentage of total sales from fiscal 1998 levels
for the foreseeable future.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 1998 decreased 11 percent from $3.7 million in fiscal 1997 to $3.3 million.
General and administrative expenses for fiscal 1997 were $3.7 million, an 18 percent increase from fiscal 1996. The decrease
from fiscal 1997 to fiscal 1998 represents lower variable expenses for profit sharing and bonuses. The increase from fiscal
1996 to fiscal 1997 represents increased variable compensation expense due to additional executive compensation and the
Company's employee profit sharing plan.
RESTRUCTURING COSTS AND OTHER
The Company incurred nonrecurring charges of $1.9 million in fiscal 1996 for severance costs, disposition of certain assets
related to a reorganization of the Company and writedown of capitalized software costs.
GAIN ON SALE OF ASSETS
In December 1996, the Company sold all the assets of its manufacturing operation to XeTel for $1.6 million. Additionally, the
Company entered into a four-year exclusive agreement to purchase manufacturing services from XeTel and subleased a portion
of its San Ramon facility to XeTel. The Company reported a gain of $685,000 net of expenses on the sale of these assets in
fiscal 1997.
INTEREST AND OTHER EXPENSE, NET
Interest income decreased in fiscal 1998 from fiscal 1997 due to lower cash balances in fiscal 1998. Interest income increased
in fiscal 1997 from fiscal 1996 due to higher cash balances in fiscal 1997. Interest expense for fiscal
1998 decreased from fiscal 1997 and from fiscal 1996 due to the repayment of borrowings in fiscal 1996 and fiscal 1997.
INCOME TAXES
The Company recorded a tax provision of $31,600 in fiscal 1998. The Company recorded a tax benefit of $82,000 in fiscal
1997 due to carryback of certain credits to prior year returns. The Company did not record any significant tax expense in fiscal
1996 as a result of not being able to realize any benefit from its net operating losses and unused tax credits. The Company's
effective tax rate was 7 percent and (3) percent in fiscal 1998 and 1997, respectively. The Company has recorded a valuation
allowance in fiscal 1998, 1997 and 1996 for certain deferred tax assets due to the uncertainty of realization. This valuation
allowance increased from approximately $3.4 million in fiscal 1997 to $3.9 million in fiscal 1998. In the event of future taxable
income, the Company's effective income tax rate in future periods could be lower than the statutory rate as such tax assets are
realized.
NET INCOME (LOSS)
As a result of the factors discussed above, the Company recorded net income of $380,000 and $3.3 million in fiscal 1998 and
fiscal 1997, respectively, and a net loss of $9.6 million in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998 the Company had cash and cash equivalents of $3.4 million, as compared to $5.6 million at October 31,
1997. In fiscal 1998, $1.2 million of cash was used by operating activities, principally as a result of a $1.1 million increase in
accounts receivable, a $903,000 increase in inventories, a $705,000 decrease in current liabilities, and $553,000 used by other
operating assets and liabilities. These decreases in cash were offset by $1.0 million in noncash depreciation and amortization
charges, $380,000 in net income, and $619,000 provided by other operating assets and liabilities. Working capital at October
31, 1998 was $7.6 million, as compared to $7.5 million at October 31, 1997.
In fiscal 1998 the Company purchased $971,000 of fixed assets, consisting primarily of a management information system, as
well as computer and engineering equipment, and purchased $207,000 of capitalized software. The Company expects capital
expenditures during fiscal 1999 to be less than fiscal 1998 levels.
The Company received $187,000 in fiscal 1998 from employee stock option exercises and stock purchase plan purchases, a
decrease of 70 percent from fiscal 1997 amounts.
In August 1997, the Company entered into a revolving working capital line of credit agreement. The agreement allows for a
$2,000,000 line of credit and expires on March 1, 1999. Borrowings under the line of credit bear interest at the bank's prime
rate plus one-half percent and are collateralized by accounts receivable and other assets. Borrowings are limited to 75 percent
of adjusted accounts receivable balances, and the Company is required to maintain a minimum tangible net worth of $6.1
million, a quick ratio of cash, investments, and receivables to current liabilities of not less than 1.30:1.00, and minimum
profitability levels. The line of credit agreement also prohibits the payment of cash dividends without consent of the bank.
As of January 4, 1999, there were no borrowings outstanding under the line of credit.
Based on the current operating plan, the Company anticipates that its current cash balances, cash flow from operations and
credit facilities will be sufficient to meet its working capital needs in the foreseeable future.
YEAR 2000 COMPLIANCE
Many older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the
year 2000 to mean the year 1900 instead. If not corrected, those programs could cause date-related transaction failures.
The Company's current products, to the extent they have the capability to process date-related information, were designed to
be Year 2000 compliant; in other words, the products were designed to manage and manipulate data involving the transition of
dates from 1999 to 2000 without functional or data abnormality and without inaccurate results relating to such dates. There can
be no assurance that systems operated by third parties that interface with or contain the Company's products will timely achieve
Year 2000 compliance. Any failure of these third parties' systems to timely achieve Year 2000 compliance could have a
material adverse effect on the Company's business, financial condition and results of operations.
The Company believes it has identified substantially all of the major information systems used in connection with its internal
operations that must be modified, upgraded or replaced to minimize the possibility of a material disruption of its business. The
Company has commenced the process of modifying, upgrading and replacing systems that have been identified as potentially
being adversely affected and expects to complete this process before the end of its 1999 fiscal year. The Company does not
expect the cost related to these efforts to be material to its business, financial condition or operating results.
The Company depends on third party suppliers for the manufacturing of its products. The Company has been gathering
information from, and has initiated communication with, these suppliers and, to the extent possible, has resolved issues involving
the Year 2000 problem. However, the Company has limited or no control over the actions of its suppliers. Therefore, the
Company cannot guarantee that its manufacturing services suppliers will resolve any or all Year 2000 problems with their
systems before the occurrence of a material disruption to their businesses. Any failure of these suppliers to resolve Year 2000
problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial
condition or operating results.
The Company is currently developing contingency plans to be implemented as part of its efforts to identify and correct Year
2000 problems affecting its internal systems. The Company expects to complete its contingency plans by the end of its 1999
fiscal year. Depending on the systems affected, these plans could include (a) accelerated replacement of affected equipment or
software; (b) increased work hours; and (c) other similar approaches. If the Company is required to implement any of these
contingency plans, such plans could have a material adverse effect on its business, financial condition or operating results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required under Item 8 are provided under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None. |
