3
_________________________________________________________________________
_____
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 29, 1997
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 9, 1997, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 5,949,504
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements Page
Consolidated Statements of Operations for the
three months and six months ended March 29, 1997
and March 30, 1996 3
Consolidated Balance Sheets as of March 29, 1997
and September 28, 1996 4
Consolidated Statements of Cash Flows
for the six months ended March 29, 1997
and March 30, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9-12
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SSE Telecom, Inc.
Consolidated Statements of Operations (Unaudited)
For The Three Months and Six Months Ended March 29, 1997 and March 30,
1996
(dollars and shares in thousands, except per share)
Three Months Six Months Ended
Ended
3/29/97 3/30/96 3/29/97 3/30/96
Revenue $11,167 $12,931 $23,462 $21,950
Cost of revenue 8,148 9,082 17,154 15,211
Gross margin 3,019 3,849 6,308 6,739
Expense
Research and development 1,313 934 2,501 1,621
Marketing, general and 2,243 1,964 4,115 3,345
administrative
Amortization - intangible 45 30 80 30
Write off of acquired in- -- 1,404 -- 1,404
process R&D
Acquisition-related asset -- 1,104 -- 1,104
write-off
Operating income (loss) (582) (1,587) (388) (765)
Net interest expense 134 95 261 137
Gain on sale of investment, -- -- (2,642) --
net
Other expense (income) (41) (43) (41) (22)
Income (loss) before income (675) (1,639) 2,034 (880)
taxes
Provision (benefit) for (236) (554) 712 (289)
income taxes
Net income (loss) $(439) $(1,085) $1,322 $(591)
Primary earnings (loss) per $(.07) $(.20) $0.22 $(.11)
share
Shares used in computing
primary earnings (loss) per 5,934 5,430 5,908 5,378
share
The Notes to Consolidated Financial Statements are an integral part of
these statements.
SSE Telecom, Inc.
Condensed Consolidated Balance Sheet
(dollars in thousands)
Assets March 29, 1997 September 28,
1996
Current Assets (unaudited) (audited)
Cash and cash equivalents $172 $1,241
Accounts receivable, net 10,047 11,041
Inventories 11,354 12,024
Other current assets 2,737 3,314
Total current assets 24,310 27,620
Net property, equipment and 4,585 3,501
leasehold improvements
Long-term investments 15,615 22,376
Intangible assets 633 611
Other assets 1,149 1,155
Total assets 46,292 55,263
Liabilities and Stockholders'
Equity
Current Liabilities
Accounts payable $3,294 $4,275
Short-term debt 2,521 3,342
Accrued salaries and employee 1,190 1,447
benefits
Other Liabilities 1,558 1,830
Total current liabilities $8,563 $10,894
Deferred tax liabilities 5,177 8,310
Convertible notes payable 4,205 4,771
Stockholders' Equity
Common stock $.01 par value 59 59
Additional paid in capital 12,456 12,276
Retained earnings 8,047 6,725
Net unrealized gain on available 9,296 12,730
for sale investments
Treasury stock (1,511) (502)
Total stockholders' equity 28,347 31,288
Total liabilities &
stockholders'equity $46,292 $55,263
The Notes to Consolidated Financial Statements are an
integral part of these statements.
SSE Telecom, Inc.
Consolidated Statements of Cash Flows (unaudited)
For the six months ended March 29, 1997, and March 30, 1996
(dollars in thousands)
1997 1996
Cash provided by operating activities:
Net income $1,322 $(591)
Adjustments to reconcile net income to net
cash (used) by operating activities:
Depreciation and amortization 719 507
Acquisition related charges -- 2,508
Gain on sale of Echostar stock (2,642) --
Deferred interest expense 110 298
Changes in operating assets and liabilities:
Accounts receivable 994 (3,373)
Inventories 669 (2,361)
Other current assets 578 (648)
Accounts payable (982) 1,138
Other accrued liabilities (529) 356
Net cash provided (used) by operating 239 (2,166)
activities
Cash provided by investing activities:
Purchases of equipment (1,723) (573)
Proceeds from sale of Echostar stock 2,835
Purchases of short-term investments -- (7,769)
Proceeds from sales of short-term investments -- 11,081
Acquisition of net assets of Fairchild Data -- (4,400)
Purchase of equity interest in Media4 (96) --
Other assets -- 39
Net cash provided (used) by investing 1,016 (1,622)
activities
Cash provided by financing activities:
Net (payments)/borrowings under lines of
credit (1,485) 1,030
Net borrowings under equipment line of credit 664 --
Net payments on convertible notes payable (675) --
Proceeds from issuance of common stock 181 --
Treasury stock purchases (1,009) (796)
Other -- 6
Net cash provided (used) by financing (2,324) 240
activities
Net (decrease) in cash and cash equivalents (1,069) (3,548)
Cash and cash equivalents beginning of period 1,241 3,548
Cash and cash equivalents end of period $ 172 $ --
Non-cash transactions:
Acquisition of net assets of Fairchild Data by -- $1,109
issuance of common stock and warrants
The Notes to Consolidated Financial Statements are an integral part of
these statements.
SSE TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The financial information at March 29, 1997, and for the three months and
six months periods ended March 29, 1997 and March 30, 1996, is unaudited.
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.
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 28, 1996 Form 10-K. The results of operations for the three
and six month periods ended March 29, 1997 are not necessarily indicative
of the operating results for the full year.
2. INVENTORIES
Inventories consist of manufacturing raw materials, work-in process and
finished goods. Inventories are valued at the lower of cost or market.
Cost is based on the average cost method, which approximates actual cost
on the first-in, first-out ("FIFO") basis. At March 29, 1997 and
September 28, 1996, inventories consisted of:
(in thousands) March 29, September 28,
1997 1996
(unaudited)
Manufacturing raw $6,851 $5,693
materials
Work-in-process 3,046 6,016
Finished goods 1,457 315
Total $11,354 $12,024
3. CONVERTIBLE NOTES PAYABLE
At March 29, 1997, the Company had an outstanding balance of $4.08
million on its 6 1/2% convertible subordinated debentures due March 1,
2001, payable to Echostar Communication Corporation. During the first
six months of fiscal 1997 the Company repaid $0.5 million of the
debenture principle and $0.2 million of debenture interest.
4. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and dilutive common equivalent shares (stock options and warrants)
outstanding during the period (using the treasury stock method).
5. FINANCIAL ACCOUNTING STANDARD NO. 128
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
SFAS 128 replaces primary earnings per share ("EPS") with basic EPS,
which excludes dilutive common equivalent shares, and requires
presentation of both basic and diluted EPS on the face of the statements
of income. Diluted EPS is computed similarly to the current fully
diluted EPS. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, and requires restatement of all
prior-period EPS data presented. The computed basic earnings per share
are not materially different to the earnings per share as reported for
the quarters ended March 29, 1997 and March 30, 1996, respectively. The
computed diluted earnings per share is not materially different from the
earnings per share as reported for these quarters.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Information contained in this Form 10-Q that is not historical facts,
including any statements about expectations for the fiscal year and
beyond, involve certain risks and uncertainties. This Form 10-Q
contains "forward-looking" statements: within the meaning of the Private
Securities Litigation Reform Act of 1995, many of which can be identified
by the use of forward-looking terminology such as "may", "will",
"believe", "expect", "anticipate", "estimate", "plan", "intend", or
"continue" or the negative thereof or other variations thereon or
comparable terminology. There are a number of important factors with
respect to such forward-looking statements that could cause actual
results to differ materially from those contemplated in such forward-
looking statements. Numerous factors, such as economic and competitive
conditions, incoming order levels, timing of product shipments, product
margins, new product development, and reliance on key consumers and
international sales could cause actual results to differ from those
described in these statements and prospective investors and stockholders
should carefully consider these factors in evaluating these forward-
looking statements.
The following table sets forth, for the three months and six months ended
on the dates indicated, certain income and expense items expressed as an
approximate percentage of the Company's total revenues:
Three months ended Six months ended
March March March March
29, 30, 29 30,
1997 1996 1997 1996
Revenue 100% 100% 100% 100%
Gross margin 27% 30% 27% 31%
Research and development expense 12% 7% 11% 7%
Marketing, general and administrative 20% 15% 18% 15%
expenses
Write off of acquired asset in - 11% - 6%
process R & D
Acquisition-related asset write-off - 9% - 5%
Operating income (loss) (5%) (12%) (2%) (3%)
Net interest expense 1% 1% 1% 1%
Other expense (income) - - - -
Gain on sale of investments, net - - 12% -
Income (loss) before income taxes (6%) (13%) 9% (4%)
Provision (benefit) for income taxes (2%) (4%) 3% (1%)
Net income (loss) (4%) (9%) 6% (3%)
Overview
On January 28, 1996, the Company acquired the business and assets of
Fairchild Data (the Company's SSE Datacom subsidiary), a leading
manufacturer of satellite modems and related earth station products.
Comparisons between the three months and six months results of fiscal
year 1997 and 1996 on an absolute and percentage change basis are
affected by the results of the Company's SSE Datacom subsidiary.
Revenue. Sales were $11.2 million for the second quarter of fiscal year
1997 as compared to $12.9 million for the same period in fiscal year
1996, representing a decrease of 14%. Sales for the first six months of
fiscal year 1997 were $23.5 million as compared to $22.0 million for the
same period in fiscal year 1996, representing an increase of 7%. The
decrease in the second quarter reflects lower than anticipated sales in
general as well as to several large accounts including the U.S.
Government. The sales increase for the first six months of fiscal year
1997 reflects $6 million in sales from SSE Datacom as opposed to $2.7
million from Datacom in the first six months of fiscal 1996.
Gross Margin. Gross margin was $3.0 million or 27% of sales in the
second quarter of fiscal year 1997, compared to $3.8 million or 30% of
sales for the second quarter of 1996. Gross margin for the first six
months was $6.3 million or 27% of sales in fiscal year 1997 versus $6.7
million or 31% in fiscal year 1996. The decline in gross margin
percentage from 1996 was due primarily to the loss of economies of scale
from lower sales and continued pricing pressures. The Company did
maintain the same gross margin percentage of 27% in the second quarter as
in the first quarter of fiscal year 1997 despite lower sales.
Research and Development. Research and development expenses grew by 41%
to $1.3 million or 12% of sales for the second quarter of fiscal 1997
from $.9 million or 7% of sales for the second quarter of fiscal 1996.
Research and development grew 51% to $2.5 million or 11% of sales for the
first six months of fiscal year 1997 from $1.6 million or 7% of sales in
fiscal year 1996. The increase in R&D expenditures reflect the Company's
focus on enhancing in-house capabilities in core technologies and the
development of advanced products including advanced modem products at SSE
Datacom.
Marketing, General and Administrative. Marketing, general and
administrative expenses were $2.2 million or 20% of sales in the second
quarter of fiscal year 1997 as compared to $2.0 million or 15% of sales
for the same period in fiscal 1996. For the first six months of fiscal
year 1997 expenses were $4.1 million or 18% of sales as compared to $3.3
million or 15% of sales in fiscal year 1996. The majority of the
increase in expense relates to the expansion of sales and marketing and
increased customer service activity including a new repair center in
Bangkok, Thailand.
Net Interest Expense. Net interest expense was $134,000 in the second
quarter of fiscal 1997. During the same period of last fiscal year, net
interest expense was $95,000. The increase in interest expense reflects
the redirection of funds previously invested in short term securities
that were utilized for the purchase of Fairchild Data, and a need of the
Company to borrow against its credit lines to fund operating and capital
expenditures.
Net (Gain) on Sale of Investments. During the first six months of fiscal
1997 the Company realized a gain of $2.6 million on sales of 92,937
shares of Echostar Communication Corporation (NASDAQ: DISH) common stock.
The proceeds generated from these sales were used for repayment of
convertible debentures payable to Echostar, purchase of treasury stock,
and to fund operating expenditures. As of March 29, 1997 the Company has
a total of 709,780 shares of Echostar common stock.
Provision for Income Taxes. The effective tax rate (benefit) was 35% for
the second quarter and first six months of fiscal year 1997 as well as
35% for the second quarter and first six months of fiscal year 1996.
Backlog. The Company's total backlog was $4.5 million at the end of the
second quarter of fiscal year 1997, as compared to backlog of $8.9
million at the end of fiscal year 1996. Management expects substantially
all backlog to be delivered in fiscal 1997. Timing differences from
quarter to quarter as to the receipt of large orders and changes in
factory production make meaningful quarter to quarter comparisons of
backlog difficult.
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1997, the Company had working capital of $15.8 million,
including $0.2 million in cash and cash equivalents, compared with
working capital of $16.7 million, including cash and cash equivalents of
$1.2 million at September 28, 1996.
Net cash provided by operating activities was $239,000 during the first
six months of fiscal year 1997 as compared to net cash used of $2,166,000
in the similar period of fiscal year 1996. Cash provided by operations
was primarily due to a decrease in accounts receivable, inventory and
other assets. The decrease in accounts receivable of $994,000 in the
first six months of fiscal year 1997 was due to lower sales and better
collections including the collection of a large receivable with the U.S.
Government. The lowering of inventories is a continuing effort by the
Company to reduce the dollar amount of inventory held in raw materials at
the same time maintain adequate levels to meet customers' needs.
The Company's investing activities provided $1.0 million during the first
six months of fiscal 1997 as compared to cash used of $1.6 million during
the same period in fiscal year 1996. During the first six months of
fiscal 1997 $2.8 million was realized from the sale of Echostar shares
which offset capital expenditures of $1.7 million. The Company
participated in Media4's recent equity funding of $2.4 million by
investing an additional $100,000 during the second quarter of fiscal year
1997. In addition, the Company converted $175,000 of Media4's 7%
convertible debentures into equity.
The Company's financing activities used $2.3 million during the first six
months of fiscal 1997 as compared to net cash provided of $240,000 during
the first six months of fiscal year 1996. The Company repaid its
operating line of credit by $1.5 million, reduced convertible debentures
by $675,000 and purchased 126,200 shares of treasury stock valued at $1.0
million.
At March 29, 1997 the Company's principal sources of liquidity consisted
of $0.2 million in cash, and bank lines of credit. At March 29, 1997,
$1.5 million was outstanding under the operating line of credit and $1.0
million under its equipment line of credit. The lines of credit require
the Company to be in compliance with certain financial covenants. As of
March 29, 1997 the Company was not in compliance with certain covenants
and has obtained a bank waiver for those covenants not in compliance.
The Company intends to renew these lines of credit in fiscal year 1997,
as well as seek additional capital equipment financing from other
sources.
The Company's capital requirements could change in the event of factors
such as lower than anticipated demand for the Company's products or
unanticipated limitations on debt financing. The Company believes that
its current cash position, funds generated from operations, funds
available from its equity holdings in Echostar common stock and its lines
of credit will be adequate to meet its requirements for working capital,
capital expenditures, debt services and external investment for the
foreseeable future. Due to certain constraints on the ability to sell
Echostar shares and potential volatility of the value of the stock, there
could be a significant reduction in funding available from the
liquidation of Echostar stock. If these events occur, the Company may be
required to raise additional capital using other means to meet all of its
needs.
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 11
Earnings
27 Financial Data Schedule Page 12
(b) Reports on Form 8-K
None.
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 13, 1997 SSE TELECOM, INC.
By:/s/ Frederick C.Toombs
Frederick C. Toombs,
President
By:/s/ Daniel E. Moore
Daniel E. Moore,
Chief Financial Officer
3
EXHIBIT 11
Attached and Made Part of Part II
Of 10Q for the Quarters Ended March 29, 1997 and March 30, 1996
(dollars and shares in thousands, except per share)
Three Months Ended Six Months Ended
March March March March
29, 30, 29, 30,
1997 1996 1997 1996
Primary
Weighted common average shares
outstanding 5,934 5,430 5,851 5,377
Increase in weighted average shares
due to applying the treasury stock
method for stock options and
warrants -- -- 57 --
Primary weighted average shares 5,934 5,430 5,908 5,377
Primary net income (loss) $(439) $(1,085) $1,322 $(591)
Net income (loss) per share $(.07) $(.20) $.22 $(.11)
Fully diluted
Weighted common average shares
outstanding 5,934 5,430 5,851 5,377
Increase in weighted average shares
due to applying the treasury stock
method for stock options and
warrants -- -- 57 --
Fully diluted weighted average shares 5,934 5,430 5,908 5,377
Net income (loss) $(439) $(1,085) $1,322 $(591)
Total fully diluted net income (loss) $(.07) $(.20) $.22 $(.11)
per share
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Sep-27-1997
<PERIOD-START> Sep-29-1996
<PERIOD-END> Mar-29-1997
<PERIOD-TYPE> 6-MOS
<CASH> 172
<SECURITIES> 0
<RECEIVABLES> 10,463
<ALLOWANCES> 416
<INVENTORY> 11,354
<CURRENT-ASSETS> 24,310
<PP&E> 11,959
<DEPRECIATION> 7,374
<TOTAL-ASSETS> 46,292
<CURRENT-LIABILITIES> 8,563
<BONDS> 4,205
0
0
<COMMON> 59
<OTHER-SE> 28,288
<TOTAL-LIABILITY-AND-EQUITY> 46,292
<SALES> 0
<TOTAL-REVENUES> 23,462
<CGS> 17,154
<TOTAL-COSTS> 6,696
<OTHER-EXPENSES> (2,642)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 261
<INCOME-PRETAX> 2,034
<INCOME-TAX> 712
<INCOME-CONTINUING> 1,322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,322
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
