________________________________________________________________________
______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________________________
______
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 33-10965
SSE TELECOM, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1466297
(State or other jurisdiction of (I.R.S. Employer incorporation or
organization) Identification No.)
8230 Leesburg Pike, Suite 710
Vienna, Virginia 22182
(Address of principal executive office)
Registrant's telephone number, including area code:
(703) 442-4503
Indicate by check mark whether the 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 the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ____
As of May 3, 1996, the following number of shares of each of the
issuer's classes of common stock were outstanding:
Common Stock 5,771,638
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements Page
Consolidated Balance Sheets as of March 30, 1996 and September 30, 1995 3
Consolidated Statements of Operations for the three months and six
months
ended March 30, 1996 and April 1, 1995 4
Consolidated Statements of Cash Flows for the six months ended March 30,
1996 and April 1, 1995 5
Notes to Consolidated Financial Statements 6-8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations 8-11
PART II - OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K 12-16
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SSE TELECOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets March 30, 1996 September 30,1995
Current Assets (Unaudited)
Cash and cash equivalents $ -- $3,547,574
Short term investments 1,018,151 4,350,132
Accounts receivable, net of allowance 12,175,662 6,968,103
for
doubtful accounts of $156,101 at March
30,
1996, and $223,439 at September 30,
1995
Inventory 11,185,346 6,093,315
Other current assets 1,357,025 915,249
Total current assets 25,736,184 21,874,373
Net property, equipment and leasehold 2,633,663 2,088,084
improvements
Long-term investments 31,002,900 13,575,197
Intangible assets 707,565 --
Other assets 371,176 285,064
Total assets $60,451,488 $37,822,718
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $5,385,434 $2,772,277
Short term debt 1,030,000 --
Accrued salaries and employee benefits 1,095,507 770,873
Other accrued liabilities 1,764,746 678,950
Total current liabilities 9,275,687 4,222,100
Deferred tax liabilities 9,896,470 4,617,524
Notes payable 9,724,196 9,426,252
Commitments and contingencies -- --
Stockholders' Equity
Common stock $.01 par value per share, 56,342 55,313
10,000,000 shares authorized;
5,746,306 and 5,531,346 shares issued
and outstanding in 1996 and 1995
respectively
Additional paid in capital 7,858,957 6,745,236
Retained earnings 6,002,848 6,594,253
Net unrealized gain on available for sale
investments 19,322,013 7,051,021
Treasury stock, at cost, 253,275 shares
and (1,685,025) (888,981)
143,275 shares at March 30, 1996, and
September 30, 1995 respectively
Total stockholders' equity 31,555,135 19,556,842
Total liabilities & stockholders' $60,451,488 $37,822,718
equity
See accompanying notes
SSE TELECOM, INC.
CONSOLIDATED STATEMENTS of OPERATIONS (Unaudited)
For The Three Months and Six Months Ended March 30, 1996 and April 1,
1995
Three Months Ended Six Months Ended
3/30/96 4/1/95 3/30/96 4/1/95
Revenue $12,930,954 $8,805,402 $21,950,296 $16,328,520
Cost of revenue 9,081,933 5,744,206 15,211,564 10,868,065
Gross margin 3,849,021 3,061,196 6,738,732 5,460,455
Expense
Research and development 933,824 791,338 1,620,629 1,391,068
Marketing, general and
administrative 1,964,089 1,369,185 3,344,608 2,600,845
Amortization - intangibles 30,128 8,375 30,128 16,750
Write off of acquired in-
process 1,403,747 -- 1,403,747 --
R & D
Acquisition-related asset
writeown 1,104,579 -- 1,104,579 --
Operating income (loss) (1,587,346) 892,298 (764,959) 1,451,792
Net interest expense 94,508 119,791 137,436 183,086
Other (income) and expense (43,234) 90,856 (22,108) 105,727
Income (loss) before income (1,638,620) 681,651 (880,287) 1,162,979
taxes
Provision (benefit) for income (553,882) 204,000 (288,882) 348,000
taxes
Net income (loss) $(1,084,738) $477,651 $(591,405) $814,979
Net income (loss) per share $(.20) $.09 $(.11) $.15
Shares used in computing
primary net income (loss) per 5,429,510 5,532,435 5,377,653 5,533,116
share
See accompanying notes
SSE TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Six Months Ended March 30, 1996 and April 1, 1995
Operating Activities: March 30, April 1, 1995
1996
Net income (loss) $(591,405) $814,979
Adjustments to reconcile net income (loss) to
net cash provided (used)by operating
activities:
Depreciation and amortization 506,645 306,758
Acquisition related charges 2,508,326 --
Interest expense 297,944 --
Changes in operating assets and liabilities:
Accounts receivable (3,372,559)
(594,715)
Inventory (2,360,736) (321,818)
Other current assets (647,670) (56,043)
Accounts payable 1,138,158 (729,800)
Accrued salaries and employee benefits 6,634 653,863
Other accrued liabilities 348,897 195,969
Net cash provided (used) by operating (2,165,766) 269,193
activities
Investing Activities:
Cash purchases of equipment (572,865) (366,222)
Purchases of short-term investments (7,769,084) (2,054,666)
Sales of short-term investments 11,081,201 --
Acquisition of net assets of Fairchild (4,400,000) --
Data
Other assets 39,236 (228,843)
Net cash provided (used) by operating (1,621,512) (2,649,731)
activities
Financing Activities:
Increase in short term debt 1,030,000 300,000
Proceeds from issuance of common stock -- 90,750
Payments on notes payable -- (751,635)
Treasury stock purchase (796,046) (270,027)
Payment of stockholders' notes -- 135,000
receivable
Other 5,750 --
Net cash provided (used) by financing 239,704 (495,912)
activities
Net (decrease) in cash and cash equivalents (3,547,574) (2,876,450)
Cash and cash equivalents beginning of 3,547,574 6,118,201
period
Cash and cash equivalents end of period -- 3,241,751
Short term investments end of period 1,018,151 2,054,666
Non-cash transactions
Acquisition of net assets of Fairchild Data
by issuance of common stock and warrants 1,109,000 --
The Notes are an integral part of these statements
See accompanying notes
SSE TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The financial information contained herein has been prepared by the
Company without audit except for information as of September 30, 1995
which has been audited. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present
fairly the financial position, results of operations and changes in cash
flows for the interim periods have been made.
On January 28, 1996 the Company acquired Fairchild Data in a transaction
accounted for as an asset purchase. Results of operations of Fairchild
Data from January 29, 1996 to March 30, 1996 have been included in the
Company's results of operations, and in the balance sheet as of March
30, 1996. The Company issued 100,000 shares of common stock, $4.4
million in cash, and warrants to purchase 50,000 shares of common stock
in exchange for net assets of Fairchild Data at January 28, 1996.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's
September 30, 1995 annual report on Form 10-K, and the Company's reports
on Form 8-K and 8-K/A, dated February 7, 1996 and April 11, 1996,
respectively. The results of operations for the period ended March 30,
1996 are not necessarily indicative of the operating results for the
full year.
2. INVENTORY
Inventory consists of manufacturing raw materials, work-in process and
finished goods. Inventories are valued at the lower of cost or
realizable current value. Cost is based on the average cost method,
which approximates actual cost on the first-in, first-out ("FIFO")
basis. At March 30, 1996 and September 30, 1995, inventory consisted
of:
($000's) March 30, 1996 September 30, 1995
(unaudited)
Manufacturing raw $6,696 $3,727
materials
Work-in-process 3,631 1,784
Finished Goods 858 582
Total $11,185 $6,093
3. COMMITMENTS, NOTES PAYABLE AND LONG TERM DEBT
The Company leases office and manufacturing space, for its SSE
Technologies subsidiary, under leases that expire in June 2001. The
terms of the leases provide for periodic escalation in rent payments
that have been expensed on a straight line basis over the term of the
lease. The Fairchild Data subsidiary leases office and manufacturing
space under a lease that expires in January 1998. The Company also
leases office space in Vienna, Virginia, and Singapore. The Virginia
lease expires in October 1996, while the Singapore lease expires in June
1997. The Company leases equipment under leases expiring in various
amounts through 1997. The Company also has short term lease agreements
related to office and manufacturing equipment.
Pursuant to its existing agreement with Media4, Inc., the Company
purchased $100,000 of 7% convertible debentures of Media4 Inc. on
February 1, 1996, and has a commitment to purchase an additional
$100,000 convertible debentures. Based upon the progress of Media4,
relative to product and market development, management anticipates the
purchase of additional debentures in fiscal year 1996.
The Company maintains a secured operating line of credit with a national
bank. On March 30, 1996 the maximum available under the line of credit
was approximately $3.2 million of which the Company utilized $1.0
million. Amounts borrowed under the line are subject to interest equal
to prime rate plus .375%. The Company has negotiated a new operating
line of credit facility with the same bank of $5.0 million and a $2.0
million equipment line of credit facility through May 30, 1997, and
December 31, 1996, respectively. The Company is subject to and in
compliance with certain financial covenants and requirements.
4. BUSINESS COMBINATIONS
On January 29, 1996, the Company completed the acquisition of the
business of Fairchild Data Corporation ("Fairchild Data"), a subsidiary
of The Fairchild Corporation, (NYSE:FA) via an asset purchase agreement.
Accordingly, the results of operation of Fairchild Data are included in
the financial statements from the date of acquisition.
The Company acquired substantially all the assets of Fairchild Data,
subject to certain liabilities at a cost of approximately $5.5 million,
consisting of approximately $4.4 million in cash, 100,000 shares of SSE
Telecom common stock, and a warrant to acquire 50,000 shares of SSE
Telecom common stock. A portion of the cash purchase price of
approximately $500,000 has not yet been paid and is subject to certain
adjustments under the asset purchase agreement.
The cash portion of the purchase of Fairchild Data was partially
financed with short-term bank financing under a separate loan agreement.
The Company borrowed $2.0 million on January 29, 1996 and the note was
retired on March 29, 1996 with the proceeds from the sale of the
Company's short term investments.
The allocation of the purchase price, as of March 30, 1996, based upon
independent valuation, is as follows:
(000's)
Net tangible assets acquired $3,368
In-process technology 1,404
Developed Technology 524
Other purchased assets- assembled
workforce, trade name, distributor
relationships 213
$5,509
=======
The in-process technology was expensed in connection with the
acquisition. After amortization of developed technology and other
purchased assets the March ending intangible balance is $708,000.
Current balances and associated valuations for net tangible assets
acquired were based upon initial negotiations and are subject to change
based on final negotiations which are pending.
The Company issued to the Fairchild Corporation an additional 100,000
contingent shares of SSE Telecom common stock on January 29, 1996. Such
shares are restricted as to transfer by Fairchild Corporation until the
contingency is finalized. The additional stock may be recorded as a
purchase price adjustment after twelve months based on the performance
of Fairchild Data during that same period. This consideration has not
yet been recorded and will not be until it is determined that the
related contingency has been satisfied, and as such the actual purchase
price may be adjusted. The shares are reflected as issued and
outstanding as of March 30, 1996.
The following unaudited pro-forma information assumes the acquisition
occurred at the beginning of the six months presented:
Year to date
(000's)
March 30, 1996 April 1, 1995
Net Sales $26,233 $23,177
Net Profit/(Loss) $ (912) $ 828
Net Profit/(Loss) per share $ (.17) $ .15
The Company filed an 8-K, related to the asset purchase of Fairchild
Data, on February 7, 1996, and a 8-K/A on April 11, 1996.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Safe Harbor" Statement: The statements contained in this management
discussion and analysis which are not historical facts may be deemed to
contain forward-looking statements with respect to events, the
occurrence of which involve risks and uncertainties, including, without
limitations, demand and competition for the Company's services and
products, and other risks or uncertainties detailed in the Company's
Securities and Exchange Commission filings.
RESULTS OF OPERATIONS
The following table sets forth consolidated results of operations and
includes two months of Fairchild Data operations, for the quarter ended
March 30, 1996, as compared to the quarter ended April 1, 1995, in which
Fairchild Data was not included.
03/30/96 04/01/95
Revenue 100% 100%
Gross margin 30% 35%
Research and development 7% 9%
Marketing, G&A expenses 15% 16%
Write off of acquired
asset in process R&D 11% --
Acquisition-related
asset write down 9% --
Operating income (loss) (12)% 10%
Net interest expense 1% 2%
Income(loss)before taxes (13)% 8%
Provision (benefit)for
income taxes (4)% 2%
Net income (loss) (9)% 6%
The Company's revenues increased by 47% from $8,805,000 for the second
quarter of fiscal year 1995 to $12,931,000 for second quarter of fiscal
year 1996. The increase in revenue reflected a 16% sales gain at the
Company's SSE Technologies subsidiary and sales of $2,688,000 at the
Company's Fairchild Data subsidiary for February and March. For the six
months ended March 30, 1996, revenue increased 34% to $21,950,000 from
$16,329,000 for the same period last year.
Gross margin increased $788,000 or 26%, as a result of higher revenue;
gross margin for the second quarter of fiscal 1996, was 30%, as compared
to 35% in the second quarter of fiscal year 1995. The Company, in this
year's second quarter, shipped an unusually high proportion of OEM
equipment and lower margin products. In addition the Company has
experienced some additional manufacturing costs related to the start up
of its newest generation of satellite transceiver products. The Company
commenced shipping production units of the transceivers (STAR), in the
second quarter of 1996. For the first six months of fiscal 1996 the
margin was 31% versus 33% for the same period in 1995. There can be no
assurance that competitive pressures or other factors will not impact
gross margins in the future.
The Company announced on May 9, 1996 that after tax income before non-
recurring write-offs associated with the acquisition of Fairchild Data,
increased 25% to $601,000, for the second quarter of fiscal 1996, from
$478,000, for the second quarter of fiscal 1995.
Research and development expense for the second quarter of fiscal 1996
was $934,000, a $143,000 or 18% increase over the same period in fiscal
1995. As a percentage of revenue, research and development expense was
7% in second quarter of 1996 and 9% in the second quarter of fiscal
1995. Research and development expense increased $230,000 for the first
six months from the same period a year ago. The Company expects to fund
its research and development programs at a higher dollar amount and a
higher percentage of revenue to support new product development. This
is due to the additional development of high power C and Ku band STAR
transceivers, as well new product introductions in the digital modem
markets.
Marketing, general and administrative expenses increased $595,000 or 43%
from second quarter of 1995. As a percentage of revenue, marketing,
general and administrative expenses decreased from 16% in 1995 to 15% in
1996. For six months the expense was $3,345,000 as compared to
$2,601,000 for the prior year.
In connection with the Fairchild Data acquisition, the Company recorded
non-recurring write-offs in the fiscal 1996 second quarter totaling
$2,509,000 before taxes. These one-time charges consisted of $1,404,000
related to the purchased in-process research and development at
Fairchild Data, and $1,105,000 write down of duplicative assets at SSE
Technologies as a result of the acquisition, including network software
and several models of modems.
Net interest expense was $95,000 for the second quarter 1996 as compared
to $120,000 in 1995. For the six months in fiscal 1996 net interest
expense was $137,000 as compared to $183,000 in fiscal 1995. Other
(income)/expense was $(43,000) in the second quarter of 1996 as compared
to $91,000 other (income)/expense for the same period in 1995. For the
six months ended March 30, 1996 other (income)/expense was $(22,000) in
1996, and $106,000 in 1995.
The benefit for income taxes in the second quarter of 1996 was
$(554,000) as compared to a income tax provision of $204,000 in 1995.
For the first six months of fiscal 1996 the benefit was $(289,000) as
compared to a tax provision of $348,000 in 1995. The tax rate decreased
from 35% in the first quarter of 1996 to 33% for the first six months of
fiscal 1996. The decease in the provisional tax rate was due to lower
expected income levels for 1996 as a result of the write down of assets
and write off of in-process R&D due to the Company's acquisition of
Fairchild Data in the March 1996 quarter.
The net loss was $(1,085,000) for the second quarter of fiscal 1996.
The second quarter of 1995 net profit was $478,000. For the six months
ended March 30, 1996 the net loss was $(591,000) as compared to a net
profit of $815,000 for the same period in 1995.
The Company's total backlog at March 30, 1996 was $8,400,000 including
$1,767,000 backlog at Fairchild Data, compared to backlog of $7,800,000
at December 30, 1995 and $7,000,000 at April 1, 1995. Backlog as of May
10, 1996 was approximately $10,800,000. The Company does not believe
that backlog is necessarily indicative of future revenues. Timing
differences from quarter to quarter as to the receipt of large orders
and changes in factory production make meaningful quarter to quarter
comparison of backlog difficult.
Liquidity and Capital Resources
Working capital decreased from $17.7 million on September 30, 1995 to
$16.4 million on March 30, 1996. The decreases of $6.9 million in cash,
cash equivalents, and short term investments were mainly attributable to
the cash used to purchase the net assets of Fairchild Data.
Accounts receivable increased from $6,968,000 at September 30, 1995 to
$12,176,000 at March 30, 1996, mainly attributable to increase in sales.
During the same period inventory increased from $6,093,000 to
$11,185,000 including $3,641,000 acquired from Fairchild Data.
Net fixed assets increased from $2,088,000 at September 30, 1995 to
$2,634,000 at March 30, 1996.
Other long-term assets, primarily the market value of the Company's
912,717 shares of Echostar Communication Corporation (NASD: DISH), Class
A common Stock increased $17.4 million. As of March 29, 1996, the last
trading day of the quarter, the Echostar stock closed at $33.75 per
share. This adjustment to the asset, net of deferred tax, is reflected
as a separate component of stockholders' equity.
The increase in other accrued liabilities was due mainly to the increase
in warranty accrual.
Short term debt increased $1,030,000 as the Company drew against its
operating line of credit. Amounts borrowed under the line are subject
to interest rate equal to prime plus .375%. The Company has re-
negotiated a new operating line of credit facility of $5.0 million and
$2.0 million equipment line of credit facility through May 30, 1997, and
December 31, 1996, respectively.
Deferred tax liabilities increased $5,279,000. This increase was due to
the deferred tax on the Company's holding of Echostar common stock.
In addition to the acquisition of the business of Fairchild Data, the
Company may pursue additional strategic acquisitions and investments in
the satellite communications and related markets that will complement
and expand its current position. The Company believes it has the
necessary capital resources available for such a program.
The Company's capital requirements could change in the event of factors
such as lower than anticipated demand for the Company's products,
unusual or unanticipated manufacturing or engineering costs, or
unanticipated limitations on debt financing. If any of these or other
events should occur, the Company could experience a need to raise
additional capital.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits included herein (numbered in accordance with Item 601 of
Regulation S-K)
Exhibit Number Description Sequential Page
Number
11 Computation of Per Share Page 14
Earnings
27 Financial Data Schedule Page 15
(b) Reports on Form 8-K
The Company filed the 8-K related to the asset purchase of
Fairchild Data, on February 7, 1996, and a 8-K/A on April 11, 1996.
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 hereunto duly authorized.
Dated: May 14, 1996 SSE TELECOM, INC.
By: /s/ Frederick C. Toombs
Frederick C. Toombs,
President
By: /s/ Daniel E. Moore
Daniel E. Moore,
Chief Financial Officer
EXHIBIT 11
Attached and Made Part of Part II
Of 10Q for the Quarters Ended March 30, 1996 and September 30, 1995
Three Months Ended Six Months Ended
03/30/96 04/01/95 03/30/96 04/01/95
Primary
Weighted common average
shares outstanding
before
applying the treasury
stock method 5,359,847 5,396,170 5,343,399 5,395,546
Increase in weighted
average
shares due to
repurchases
applying the treasury 0 136,265 0 137,570
stock
method for stock options
and
warrants
Weighted contingent shares
in connection with Fairchild
Data asset purchase 69,663 0 34,254 0
Primary weighted average 5,429,510 5,532,435 5,377,653 5,533,116
shares
Primary net income (loss) $(1,084,738) $477,651 $(591,405) $814,979
Net income (loss) per share $(.20) $.09 $(.11) $.15
Fully diluted
Weighted common average
shares outstanding
before
applying the treasury 5,359,847 5,396,170 5,343,399 5,395,546
stock method
Increase in weighted
average
shares due to
repurchases
applying the treasury
stock
method for stock options
and
warrants 0 145,778 0 145,198
Weighted contingent shares
in connection with Fairchild
Data asset purchase 69,663 0 34,254 0
Fully diluted weighted
average shares 5,429,510 5,541,948 5,377,653 5,540,744
Fully diluted net income $(1,084,738) $477,651 $(591,405) $814,979
(loss)
Fully diluted net income $(.20) $.09 $(.11) $.15
(loss) per share
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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