__________________________________________________________________________
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 DECEMBER 27, 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 0-16473
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 January 23, 1998, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 5,730,919
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Condensed Consolidated Statements of Operations for the
three months ended December 27, 1997
and December 28, 1996 (unaudited) 3
Condensed Consolidated Balance Sheets as of December 27, 1997 (unaudited)
and September 27, 1997 4
Condensed Consolidated Statements of Cash Flows
for the three months ended December 27, 1997
and December 28, 1996 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11-13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SSE Telecom, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
For The Three Months Ended December 27, 1997 and December 28, 1996
(dollars and shares in thousands, except per share data)
December 27, 1997 December 28, 1996
Revenue $12,337 $12,295
Cost of revenue 9,105 9,006
Gross margin 3,232 3,289
Expense
Research and development 1,414 1,222
Marketing, general and
administrative 1,739 1,872
Operating income 79 195
Net interest expense 181 128
Gain on sale of investment, net (2,888) (2,642)
Other expense 39 --
Income before income taxes 2,747 2,709
Provision for income taxes 961 948
Net income $1,786 $1,761
Basic income per share $0.30 $0.30
Diluted earnings per share $0.29 $0.28
Shares used in computing basic
income per share 5,955 5,877
Shares used in computing diluted
earnings per share 6,185 6,320
The Notes to Condensed Consolidated Financial Statements are an integral part of
these statements.
SSE Telecom, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
December 27, 1997 September 27, 1997
(unaudited) (audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,422 $ 408
Accounts receivable, net 11,012 11,061
Inventories 14,536 12,888
Deferred tax assets 3,067 3,067
Other current assets 965 1,123
Total current assets 32,002 28,547
Property, plant and equipment 12,628 12,404
Less accumulated depreciation 8,340 8,063
Property, plant and equipment, net 4,288 4,341
Long-term investments 8,580 14,519
Other assets 121 150
TOTAL ASSETS $44,991 $ 47,557
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,959 $ 6,070
Accrued salaries and
employee benefits 1,081 1,503
Short-term debt 4,787 4,750
Other accrued liabilities 2,826 2,500
Total current liabilities 17,653 14,823
Deferred tax liabilities 2,414 4,461
Long-term debt 3,396 4,730
Stockholders' equity
Common stock and paid
in capital 12,548 12,546
Treasury stock (1,782) (1,782)
Retained earnings 6,620 4,835
Net unrealized gain on
available for sale investments 4,142 7,944
Total stockholders' equity 21,528 23,543
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $44,991 $ 47,557
The Notes to Condensed Consolidated Financial Statements are an integral part of
these statements.
SSE Telecom, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
For the three months ended December 27, 1997, and December 28, 1996
(dollars in thousands)
December 27, 1997 December 28, 1996
Cash provided by (used for)
operating activities:
Net income $ 1,786 $ 1,761
Adjustments to reconcile net income to
net cash provided by (used for):
Depreciation and amortization 297 171
Net gain on sale of Echostar stock (2,888) (2,642)
Deferred interest expense 58 48
Changes in operating assets and liabilities:
Accounts receivable 49 (1,185)
Inventories (1,648) 930
Other current assets 158 478
Accounts payable 2,888 (1,849)
Other accrued liabilities 80 (262)
Total adjustments (1,006) (4,311)
Net cash provided (used) by operating activities 780 (2,550)
Cash provided (used) by investing activities:
Purchases of equipment (224) (616)
Proceeds from sale of Echostar stock 3,162 2,835
Purchase of Media4 debenture (175) --
Net cash provided by investing activities 2,763 2,219
Cash provided by financing activities:
Net (payment)/borrowings under
operating lines of credit (30) 1,781
Net borrowings under equipment note -- 240
Net payments on convertible notes payable (1,335) (1,175)
Treasury stock purchases -- (874)
Payments of deferred interest (164) --
Other -- 29
Net cash (used) provided by financing activities (1,529) 1
Net increase (decrease) in cash and
cash equivalents 2,014 (330)
Cash and cash equivalents beginning of period 408 1,241
Cash and cash equivalents end of period $ 2,422 $ 911
The Notes to Condensed Consolidated Financial Statements are an integral part of
these statements.
SSE TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial information at December 27, 1997, and for the three month periods
ended December 27, 1997 and December 28, 1996, is unaudited. In the opinion of
management, all adjustments (consisting of 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 27, 1997 Form 10-K. The results of operations for the three months
ended December 27, 1997, are not necessarily indicative of the operating
results for the full year.
2. CONSOLIDATION AND OTHER CHARGES
The Company completed the consolidation of its manufacturing operation and
transfer of its satellite modem manufacturing operation from its facility in
Scottsdale, Arizona to the Company's Fremont, California facility during the
three month period ended December 27, 1997. All of the $850,000
restructuring charges accrued in the third quarter of fiscal 1997 have been
utilized.
3. CONTINGENT LIABILITIES
A special warranty expense of $1.8 million before tax was recognized as of
June 1997. This charge, of which $1.14 million remains accrued as of
December 27, 1997, reflects costs estimated to be incurred for retrofitting
certain of the Company's satellite transceiver products. The Company has
made progress on the program and has retrofitted a number of units within its
installed base. The Company presently anticipates the retrofit program to
continue for about 6 more months. The warranty cost accrued is an estimate,
actual results could differ materially.
4. 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 December 27, 1997 and
September 27, 1997, inventories consisted of:
(in thousands)
December 27, 1997 September 27, 1997
(unaudited)
Manufacturing raw materials $5,741 $5,000
Work-in-process 6,010 5,703
Finished goods 2,785 2,185
Total $14,536 $12,888
5. LONG TERM DEBT
At December 27, 1997, the Company had an outstanding principal balance of
$2.74 million on its 6 1/2% convertible subordinated debentures due
March 1, 2001, payable to Echostar Communication Corporation. During the
first three months of fiscal 1998 the Company repaid $1.3 million of the
debenture principle and $164,000 of debenture interest.
6. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share.
All earnings per share amounts for all prior periods have been presented, and
where necessary, restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted earnings
per shares:
(dollars and shares in thousands, except per share)
December 27, 1997 December 28, 1996
Numerator:
Net income $ 1,786 $ 1,761
Numerator for basic
earnings per share 1,786 1,761
Effect of dilutive securities:
Interest expense, net of taxes on
6 1/2% convertible debentures 38 43
Numerator for diluted
earnings per share $ 1,824 $ 1,804
Denominator:
Denominator for basic earnings
per share-weighted average shares 5,955 5,877
Effect of dilutive securities:
Employee stock options 2 68
Warrants 4
6 1/2% convertible debentures 228 371
Dilutive potential common shares 230 443
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
conversions 6,185 6,320
Basic earnings per share $0.30 $0.30
Diluted earnings per share $0.29 $0.29
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 fact,
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
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 vendors and consumers and
international sales could cause actual results to differ from those
descrscribed in these statements and current and prospective investors and
stockholders should carefully consider these factors in evaluating the
forward-looking statements.
Overview
The Company made strides in maximizing economies of scale by completion of
the consolidation of its manufacturing operation and transfer of its
satellite modem manufacturing operation from its facility in Scottsdale,
Arizona to the Company's Fremont, California facility. All manufacturing
and customer support has now been centralized in Fremont, California. The
Company maintains a modem engineering and R&D facility in Phoenix, Arizona.
The Company continues its program of retrofitting certain transceivers under
the special warranty program begun in June of 1997. This program, of which a
$1.14 million accrual remains as of December 27, 1997, reflects costs
estimated to be incurred for retrofitting certain of the Company's satellite
transceiver products. The problem stems from the identification by one of
the Company's vendors that a component sold to the Company and used in many
of the transceivers produced in fiscal year 1997 was found to be defective in
certain cases. The cost accrued is an estimate, actual results could differ
materially.
Results of Operations for the three months period ended December 27, 1997 and
December 28, 1996
Revenue: Sales were $12.3 million for the first quarter of fiscal 1998 and
for the same period in fiscal 1997. The Company successfully transferred the
modem production to the Fremont facility and began shipping the newly
released SM3000 satellite modem during the three month period ended
December 27, 1997. The Company continued to see a shift in revenue to its
STAR transceiver product line and continued shipments to support MCI's
FAATSAT program with the Federal Aviation Administration .
Gross Margin: Gross margin was $3.2 million or 26% of sales in the first
quarter of fiscal 1998, compared to $3.3 million or 27% of sales for the
first quarter of 1997. The relative stability of gross margin percentage
was primarily due the to two offsetting factors: (1) decreased satellite
modem orders in the first quarter of fiscal 1998, which typically have
higher margins, and (2) improvements in manufacturability of the STAR line
of transceivers. The cost reduction from consolidation of the manufacturing
operations was not fully recognized in the first quarter as the modem
production was moved at the end of October 1997. The Company estimates further
modest improvements in gross margin percentage from this consolidation and
improvements in the manufacturability of the STAR line of transceivers during
the remainder of fiscal year 1998, depending upon overall shipment levels.
Research and Development: Research and development expenses grew by 17% to
$1.4 million or 11% of sales for the first quarter of fiscal 1998 from $1.2
million or 10% of sales for the first quarter of fiscal 1997. The increase
reflects the continuing support and enhancement of manufacturability of the
STAR transceiver product line, the continued development of next generation
of modem products and continued development of Starlink, an integrated
transceiver/modem.
Marketing, General and Administrative: Marketing, general and administrative
expenses were $1.7 million or 14% of sales in the first quarter of fiscal
1998 as compared to $1.9 million or 15% of sales for the same period in
fiscal 1997.
Amortization of Intangible Assets. Amortization expense associated with
intangible assets were $20,000 and $35,000 for the three months ended
December 27,1997 and December 28, 1996, respectively.
Net Interest Expense. Net interest expense was $181,000 in the first quarter
of fiscal 1998. During the same period of last fiscal year, net interest
expense was $128,000. The increase in interest expense reflects the
increase in the amount outstanding under short term debt offset partially by
decreased expense associated with 6.5% subordinated debenture held by
Echostar Communication Corporation. The debenture principal was reduced from
$4.1 million at September 27, 1997 to $2.7 million at December 27, 1997.
Net (Gain) on Sale of Investments. During the first three months of fiscal
1998 the Company realized a gain of $2.9 million on sales of 147,975 shares
of Echostar Communication Corporation (NASDAQ: DISH) common stock at an
average selling price of $21.37 per share. The proceeds generated from these
sales were used for repayment of convertible debentures payable to Echostar,
to fund operating expenditures, and to increase cash available. As of
December 27, 1997 the Company holds a total of 477,805 shares of Echostar
common stock.
Provision for Income Taxes. The effective tax benefit rate was 35% for the
first quarter of fiscal year 1998 and for the first quarter of fiscal year
1997, respectively.
Backlog. The Company's total backlog was $6.7 million at the end of the
first quarter of fiscal year 1998, as compared to backlog of $11.0 million at
the end of fiscal year 1997. The strong shipments during the quarter
decreased the Company's backlog. The Company has experienced some reduction
in export orders, especially to the Asian market, as that part of the world
struggles with economic uncertainty. The Company continues to monitor that
market and is actively pursing opportunities in the Asian market. Management
expects substantially all backlog to be delivered in fiscal 1998. 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
At December 27, 1997, the Company had working capital of $14.3 million,
including $2.4 million in cash and cash equivalents, compared with working
capital of $13.4 million, including cash and cash equivalents of $408,000 at
September 27, 1997.
Net cash provided by operating activities was $712,000 during the first three
months of fiscal 1998 as compared to net cash used of $2.6 million in the
similar period of fiscal 1997. Cash was provided from net income and
increases in operating liabilities offset by increases in operating assets.
The Company's investing activities provided $2.8 million during the first
three months of fiscal 1998 as compared to cash provided of $2.2 million
during the same period in fiscal year 1997. During the first three months of
fiscal 1998 $3.2 million was realized from the sale of Echostar shares which
offset capital expenditures of $224,000. The Company increased its holding
of Media4's debentures by purchasing a 7% $175,000 convertible debenture of
Media4's from Alcatel Telspace at face value. The Company continues to
maintain its investment in Media4 on a cost basis of $1,316K, at
December 27, 1997.
The Company's financing activities used $1.5 million during the first three
months of fiscal 1998 as compared to net cash provided of $1,000 during the
first three months of fiscal year 1997. The Company reduced convertible
debentures by $1.3 million and made payments in debenture interest of $164,000.
At December 27, 1997, the Company's principal sources of liquidity consisted
of $2.4 million in cash and a bank line of credit. At December 27, 1997,
$4.1 million was outstanding on a $5.0 million operating line of credit. In
addition the Company had a term loan with a principal balance of $806,000.
The line of credit and term loan require the Company to be in compliance with
certain financial covenants. As of December 27, 1997 the Company was in
compliance with all covenants. In addition, the Company $447,00 outstanding
under capital lease financing with a limit of up to $700,000 for capital
equipment.
A principal source of capital, the value of the Company's holding of Echostar
common stock, is subject to the volatility of the stock price. On September
27, 1997 the Company held 625,780 shares of Echostar stock with a value of
$13 million and an unrealized gain of $8 million, net of tax. On
December 27, 1997 the Company held 477,805 shares of Echostar stock with a
value of $7 million and an unrealized gain of $4 million, net of tax.
The Company's capital requirements could change in the event of factors such
as lower than anticipated demand for the Company's products, the uncertainty
of the cost associated with the special warranty expense 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 service
and external investment for the forseeable future. Due to certain constraints
on the ability to sell Echostar shares and potential volatility of the value
of 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.
Impact of Year 2000
The Company is reviewing the material risk associated with the Year 2000
issue on computer hardware and software. Computer systems are at risk where
the date using "00" is recognized as the year 1900 rather than the year 2000.
The Company is currently assessing its exposure and will have a plan in place
by Q4 of FY '98. While the Company doesn't anticipate costs for the
Year 2000 issue to be material final results of this review could be
significantly different.
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
27 Financial Data Schedule Page 13
(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: February 9, 1998 SSE TELECOM, INC.
By: /s/ Daniel E. Moore
Daniel E. Moore,
Chief Executive Officer
By:/s/ Russ D. Kinsch
Russ D. Kinsch,
Chief Financial Officer
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