12
_______________________________________________________________________
_______
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 JUNE 29, 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 August 2, 1996, the following number of shares of each of the
issuer's classes of common stock were outstanding:
Common Stock 5,584,546
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Page
Consolidated Balance Sheets as of June 29, 1996 and September 30, 1995
3
Consolidated Statements of Operations for the three months and nine
months
ended June 29, 1996 and July 1, 1995 4
Consolidated Statements of Cash Flows for the nine months ended June
29, 5
1996 and July 1, 1995
Notes to Consolidated Financial Statements 6-
7
Item 2.
Management's Discussion and Analysis of Financial Condition and Results
of 8-10 Operations
PART II - OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K
11-14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SSE TELECOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Assets June 29, 1996 September 30,
1995
Current Assets (Unaudited)
Cash and cash equivalents $ 781 $3,548
Short-term investments -- 4,350
Accounts receivable, net of allowance 11,978 6,968
for
doubtful accounts of $328 at June 29,
1996, and $223 at September 30, 1995
Inventory 11,739 6,093
Other current assets 1,561 915
Total current assets 26,059 21,874
Net property, equipment and leasehold 3,199 2,088
improvements
Long-term investments 26,001 13,575
Intangible assets 659 --
Other assets 389 285
Total assets $56,30 $37,82
7 2
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $4,550 $2,772
Short term debt 3,280 --
Accrued salaries and employee benefits 1,900 771
Other accrued liabilities 645 679
Total current liabilities 10,375 4,222
Deferred tax liabilities 8,058 4,618
Notes payable 9,881 9,426
Commitments and contingencies -- --
Stockholders' Equity
Common stock $.01 par value per share, 60 55
10,000,000 shares authorized; 5,746,306
and 5,531,346 shares issued and
outstanding at June 29, 1996 and
September 30,1995, respectively.
Additional paid in capital 8,040 6,745
Retained earnings 5,478 6,594
Net unrealized gain on available for sale
investments 16,129 7,051
Treasury stock, at cost, 253,275 shares
and (1,714) (889)
143,275 shares at June 29, 1996, and
September 30, 1995 respectively
Total stockholders' equity 27,993 19,556
Total liabilities & stockholders' equity $56,30 $37,82
7 2
The Notes are an integral part of these statements
SSE TELECOM, INC.
CONSOLIDATED STATEMENTS of OPERATIONS (Unaudited)
For The Three Months and Nine Months Ended June 29, 1996 and July 1,
1995
(dollars in thousands, except earnings per share)
Three Months Ended Nine Months Ended
6/29/96 7/1/95 6/29/96 7/1/95
Sales $12,606 $9,180 $34,557 $25,509
Cost of sales 9,592 6,054 24,804 16,922
Gross margin 3,014 3,126 9,753 8,587
Expense
Research and development 1,238 754 2,858 2,145
Selling, general and
administrative 2,243 1,476 5,588 4,077
Amortization - intangibles 48 8 78 25
Write-off of acquired in-
process -- -- 1,404 --
R & D
Acquisition-related asset
write-off -- -- 1,105 --
Operating income (loss) (515) 888 (1,280) 2,340
Net interest expense 139 63 278 246
Other (income) and expense 58 49 34 155
Income (loss) before income (712) 776 (1,592) 1,939
taxes
Provision (benefit) for income (214) 233 (503) 581
taxes
Net income (loss) $(498 $543 $(1,089 $1,358
) )
Net income (loss) per share $(.09 $.10 $(.20 $.2
) ) 4
Shares used in computing primary
net income (loss) per share 5,514,87 5,547,01 5,406,43 5,554,8
9 7 1 70
The Notes are an integral part of these statements
SSE TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Nine Months Ended June 29, 1996 and July 1, 1995
(dollars in thousands)
Operating Activities: June 29, 1996 July 1, 1995
Net income (loss) $ (1,089) $ 1,358
Adjustments to reconcile net income (loss) to
net cash provided (used)by operating
activities:
Depreciation and amortization 813 457
Acquisition related charges 2,509 --
Interest expense 454 --
Changes in operating assets and liabilities:
Accounts receivable (3,174) (848)
Inventory (3,208) 75
Other current assets (608) (1)
Accounts payable 303 (502)
Accrued salaries and employee benefits 811 71
Other accrued liabilities (720) 363
Net cash provided (used) by operating (3,909) 973
activities
Investing Activities:
Cash purchases of equipment (1,398) (524)
Purchases of short-term investments (8,826) (2,500)
Sales of short-term investments 13,145 --
Acquisition of net assets of Fairchild (4,400) --
Data
Other assets 3 (720)
Net cash provided (used) by operating (1,476) (3,744)
activities
Financing Activities:
Increase/(decrease) in short term debt 3,280 (657)
Proceeds from issuance of common stock 191 124
Treasury stock purchase (825) (270)
Payment of stockholders' notes -- 135
receivable
Other (28) --
Net cash provided (used) by financing 2,618 (668)
activities
Net (decrease) in cash and cash equivalents (2,767) (3,439)
Cash and cash equivalents beginning of 3,548 6,118
period
Cash and cash equivalents end of period $ $
781 2,679
Non-cash transactions
Acquisition of net assets of Fairchild Data
by issuance of common stock and warrants $ 1,109 --
The Notes are an integral part of these statements
SSE TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements include the accounts of
SSE Telecom, Inc. and its wholly owned subsidiaries. Intercompany
accounts and transactions have been eliminated.
While the financial information furnished is unaudited, the financial
statements included in this report reflect all adjustments (consisting
only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the results of operations for the
interim periods covered and of the financial condition of the Company
at the date of the interim balance sheet.
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. The results
of operations for the period ended June 29, 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 June 29, 1996 and September 30, 1995, inventory consisted
of:
($000's) June 29, 1996 September 30,
(unaudited) 1995
Manufacturing raw $7,443 $3,727
materials
Work-in-process 4,143 1,784
Finished Goods 153 582
Total $11,73 $6,09
9 3
3. COMMITMENTS, NOTES PAYABLE, AND LONG TERM DEBT
The Company leases office and manufacturing space, for its operations,
under leases that expire from October 1996 to 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
Company also has short term lease agreements related to office and
manufacturing equipment.
The Company maintains a secured operating line of credit with a
national bank. The Company's lines of credit require the Company to
meet certain financial covenants, including minimum tangible net worth,
minimum debt coverage ratios, and profitability requirements. As of
June 29, 1996, the Company was not in compliance with certain of these
covenants. The Company has obtained a waiver for these covenants.
Under an agreement with Echostar Communications Corporation
("Echostar"), the Company sold to Echostar $8.8 million of the
Company's 6.5% seven-year convertible subordinated debentures in fiscal
year 1994. The debentures are convertible into the Company's common
stock at $12.00 per share. Interest expense has been accrued with
payment deferred until March 1997. The accrued interest balance was
$1.1 million at June 29, 1996.
4. NET INCOME (LOSS) PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares (stock options and warrants)
outstanding during the period (using the treasury stock method). Net
loss per share is computed using only the weighted average number of
common shares outstanding during the period. Common equivalent shares
are excluded in the calculation of the net loss per share because their
effect would be anti-dilutive.
5. 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 transaction is summarized in the Company's 8-K and 8-K/A filed
February 7, 1996 and April 11, 1996, respectively. A portion of the
cash purchase price has not yet been paid to The Fairchild Corporation.
The Company issued to the Fairchild Corporation 200,000 shares of SSE
Telecom common stock on January 29, 1996, 100,000 of which were
contingently issued and placed in escrow. These contingent shares will
be issued to The Fairchild Corporation only upon Fairchild Data
achieving certain performance requirements. 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 June 29, 1996.
6. SUBSEQUENT EVENTS
On July 25, 1996 the Company announced that it had agreed in principle
to sell 525,000 shares of its common stock to Alcatel Telspace, S.A., a
unit of Alcatel Telecom, at a price of $12.57 per share, for a total of
$6.6 million. In connection with this transaction, Alcatel Telspace
also would purchase an additional 100,000 SSE common shares for $12.28
per share from certain members of the Company's senior management.
Upon closing, Alcatel Telspace would own approximately 10% of SSE's
outstanding common stock. The closing is subject to completion of
definitive agreements and is expected to occur by the end of September
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 for the periods indicated, certain
income and expense items expressed as a percentage of the Company's
total sales.
Three months ended Nine months
ended
6/29/96 7/01/95 6/29/96 7/01/95
Sales 100% 100% 100% 100%
Gross margin 24% 34% 28% 34%
Research and development 10% 8% 8% 8%
Selling, G&A expenses 18% 16% 16% 16%
Write-off of acquired
asset
in-process R & D 4%
Acquisition-related
asset
write-offs 4%
Operating income (loss) (4)% 10% (4)% 10%
Net interest expense 2% 1% 1% 2%
Income(loss)before taxes (6)% 9% (5)% 8%
Provision (benefit)for
income taxes (2)% 3% (2)% 3%
Net income (loss) (4)% 6% (3)% 5%
Sales increased 37% to $12.6 million for the third quarter ending June
29, 1996 when compared to the corresponding period of fiscal 1995. The
increase in sales is mainly attributable to digital modems sales from
the consolidation of Fairchild Data. For the first nine months of
fiscal 1996, sales increased 35% to $34.6 million from $25.5 million
for the same period last year.
Gross margin as a percentage of sales decreased from 34% in the third
quarter of fiscal 1995 to 24% in the comparable quarter in fiscal 1996.
In the third quarter of fiscal 1996 higher costs and manufacturing
inefficiencies associated with the ramp-up of production of its newest
generation of the Company's transceivers contributed to the lower gross
margin. In addition the Company experienced price pressure for certain
of its products. There can be no assurance that competitive pressures
or other factors will not impact negatively gross margins in the
future. For the first nine months of fiscal 1996, gross margin was 28%
compared to 34% for the same period of fiscal 1995.
Research and development expenses were $1.2 million for the third
quarter of fiscal 1996, a $0.5 million or 64% increase over the same
period in fiscal 1995. As a percentage of sales, research and
development expense was 10% in third quarter of 1996 and 8% in the
third quarter of fiscal 1995. For the first nine months of fiscal
1996, research and development expense was $2.9 million compared to
$2.1 million in the same period last fiscal year. The Company has
funded and expects to fund its research and development programs at a
higher dollar amount in support of the development of high power C and
Ku band STAR transceivers, and in development of additional advanced
digital modem products. However, research and development expense may
vary as a percentage of sales.
Selling, general and administrative expenses in the third quarter of
fiscal 1996 were $2.2 million compared to $1.5 million for the similar
period of fiscal 1995. For the first nine months of fiscal 1996,
selling, general and administrative expenses were $5.6 million compared
to $4.1 million in the first nine months of fiscal 1995. The increases
were primarily the result of continued investment in customer service
personnel, as well as increased advertising and promotion of new
products. As a percentage of sales, these expenses increased in the
third quarter of fiscal 1996 to 18% from 16% in similar period in
fiscal 1995. On a nine month basis, the percentage remained at a 16%
of sales for fiscal 1995 and fiscal 1996.
Net interest expense in the third quarter of fiscal 1996 was $139,000
compared to $63,000 in the similar period of fiscal 1995. While the
Company did have the full effect of the Echostar debenture outstanding
in both fiscal 1996 and 1995, during the three months ended June 29,
1996 the Company borrowed against its operating line of credit, whereas
during the same period in fiscal 1995 the Company had reduced the line
outstanding. For the first nine months of fiscal 1996, net interest
expense was $278,000 as compared to $246,000 in the same period of
fiscal 1995.
The Company recorded a tax benefit of $214,000 in the third quarter of
fiscal 1996 compared to a tax provision of $233,000 in the similar
period in fiscal 1995. For the first nine months of fiscal 1996, the
Company booked a tax benefit of $503,000 compared to a tax provision of
$581,000 in the similar period of fiscal 1995. The effective tax
benefit rate was 32% for the first nine months of fiscal 1996 as
compared to 30% tax provision rate in the same period of fiscal 1995.
Liquidity and Capital Resources
At June 29, 1996, the Company had working capital of $15.7 million,
including cash, cash equivalents, and short-term investments of $0.8
million, compared to working capital of $17.7 million on September 30,
1995, including cash, cash equivalents, and short-term investments of
$7.9 million. Net cash used in operating activities was $3.9 million
for the nine months ended June 29, 1996. Cash flow from operations was
negative due to the operating loss, the working capital required to
fund the increase in accounts receivable from higher sales levels, and
increases in inventory to support new product introductions.
Net fixed assets increased from $2.1 million at September 30, 1995 to
$3.2 million at June 29, 1996. The Company acquired $.4 million in
fixed assets in conjunction with the Fairchild Data acquisition, and
has purchased $.7 million of capital consisting of production
equipment, R&D equipment, computer hardware and software, and leasehold
improvements.
Other long-term assets, primarily the market value of the Company's
912,717 shares of Echostar Communication Corporation (NASDAQ: DISH),
Class A common stock, increased $12.6 million from September 30, 1995.
As of June 28, 1996, the last trading day of the quarter, Echostar
stock closed at $28.25 per share. This adjustment to the asset, net of
deferred tax, is reflected as a separate component of stockholders'
equity.
For the nine month period ending June 29, 1996, the Company used cash
of $0.9 million to acquire an aggregate of 110,000 shares of the
Company's common stock under its stock repurchase program.
At June 29, 1996, the Company's principle sources of liquidity
consisted of $0.8 million in cash and cash equivalents, and the bank
lines of credit of $5.0 million for operations and $2.0 million for
capital equipment. $3.3 million of the operating line and none of the
capital equipment line was outstanding at June 29, 1996. These
facilities expire May 30, 1997, and December 31, 1996, respectively.
The lines of credit require the Company to meet certain financial
covenants, including minimum tangible net worth, minimum debt coverage
ratios, and profitability requirements. As of June 29, 1996, the
Company was not in compliance with certain of these covenants. The
Company has obtained a waiver for these covenants.
The Company believes that its current cash position, funds from
operations, funds available from its equity investment in Echostar
common stock, and funds from its credit facilities will be adequate to
meet its requirements for working capital, capital expenditures, debt
service, and external investments for the foreseeable future. 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 13
earnings
27 Financial Data Schedule Page 14
(b) Reports on Form 8-K
The Company filed a report 8-K/A related to the asset purchase of
Fairchild Data, 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: August 13, 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 June 29, 1996 and July 1, 1995
Three Months Ended Nine Months Ended
06/29/96 07/01/9 06/29/96 07/01/95
5
Primary
Weighted common average
shares outstanding
before
applying the treasury 5,514,879 5,399,6 5,350,18 5,401,74
stock method 68 1 6
Increase in weighted
average
shares due to
repurchases
applying the treasury 0 174,349 0 153,124
stock
method for stock options
and
warrants
Weighted contingent shares
in connection with Fairchild
Data asset purchase 0 56,250
0 0
Primary weighted average 5,514,879 5,574,0 5,406,43 5,554,87
shares 17 1 0
Primary net income (loss) ($498,357) $543,04 ($1,089,7 $1,358,0
3 61) 21
Net income (loss) per share ($.09) $.10 ($.20) $.24
Fully diluted
Weighted common average
shares outstanding
before
applying the treasury 5,514,879 5,399,6 5,350,18 5,401,74
stock method 68 1 6
Increase in weighted
average
shares due to
repurchases
applying the treasury 0 189,180 0 212,749
stock
method for stock options
and
warrants
Weighted contingent shares
in connection with Fairchild
Data asset purchase 0 56,250
0 0
Fully diluted weighted
average shares 5,514,879 5,588,8 5,406,43 5,614,49
48 1 5
Fully diluted net income ($498,357) $543,04 ($1,089,7 $1,358,0
(loss) 3 61) 21
Fully diluted net income
(loss) per share ($.09) $.10 ($.20) $.24
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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