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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 26, 1998
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.)
47823 Westinghouse Dr.
Fremont, California 94539
(Address of principal
executive office)
Registrant's telephone number, including area code:
(510) 657-7552
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, 1999, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 6,016,099
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Statements of Income for the
three months ended December 26, 1998
and December 27, 1997 3
Condensed Consolidated Balance Sheets as of December 26, 1998
and September 26, 1998 4
Condensed Consolidated Statements of Cash Flows
for the three months ended December 26, 1998
and December 27, 1997 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
Item 3. Quantitative and Qualitative Disclosure About Market Risk 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12-14
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
SSE Telecom, Inc.
Condensed Consolidated Statements of Income
For The Three Months Ended December 26, 1998 and December 27, 1997
(in thousands, except per share data)
December 26, 1998 December 27, 1997
<S> <C> <C>
Revenue $7,703 $12,337
Cost of revenue 7,206 9,105
---------------------- ----------------------
Gross margin 497 3,232
Expense
Research and development 994 1,414
Marketing, general and
administrative 1,975 1,739
---------------------- ----------------------
Operating (loss) income (2,472) 79
Net interest expense 19 181
Gain on sale of investment, net (3,198) (2,888)
Other (income) expense (82) 39
---------------------- ----------------------
Income before income taxes 789 2,747
Provision for income taxes 276 961
---------------------- ----------------------
Net income $513 $1,786
---------------------- ----------------------
Basic net income per share $0.09 $0.30
====================== ======================
Diluted net income per share $0.09 $0.29
====================== ======================
Shares used in computing basic net income per share 5,779 5,955
====================== ======================
Shares used in computing diluted net income per share 5,854 6,185
====================== ======================
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
SSE Telecom, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
December 26, 1998 September 26, 1998*
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $3,756 $3,327
Accounts receivable, net 6,046 5,702
Inventories 7,594
8,894
Deferred tax assets 2,762 2,762
Other current assets 368
198
---------------------------------------------
Total current assets 20,526 20,883
Property, plant and equipment 11,801 11,692
Less accumulated depreciation 8,453 8,109
---------------------------------------------
Property, plant and equipment, net 3,348 3,583
Long-term investments 3,566 6,583
---------------------------------------------
TOTAL ASSETS $27,440 $31,049
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $3,434 $3,745
Accrued salaries and employee benefits 1,078
1,217
Short-term debt 2,794 3,036
Other accrued liabilities 2.894 2,492
---------------------------------------------
Total current liabilities 10,200 10,490
Deferred tax liabilities -- 930
Long-term debt 312 1,451
Stockholders' equity
Common stock and paid in capital 12,694 12,639
Treasury stock (1,782) (1,782)
Retained earnings 6,016 5,503
Net unrealized gain on available for sale investments -- 1,818
---------------------------------------------
Total stockholders' equity 16,928 18,178
---------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $27,440 $31,049
=============================================
</TABLE>
* Derived from audited Financial Statements
The Notes to Condensed Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
<TABLE>
<CAPTION>
SSE Telecom, Inc.
Condensed Consolidated Statements of
Cash Flows For the three months ended December 26, 1998 and December 27, 1997
(in thousands)
December 26, 1998 December 27, 1997
<S> <C> <C>
Cash provided by (used for) operating activities:
Net income $ 513 $ 1,786
Adjustments to reconcile net income to net cash provided by (used for):
Depreciation and amortization 343 297
Net gain on sale of Echostar stock (3,198) (2,888)
Deferred interest expense -- 58
Changes in operating assets and liabilities:
Accounts receivable (345) 49
Inventories 1,301 (1,648)
Other current assets (121) 158
Accounts payable (312) 2,888
Other accrued liabilities 264 80
----------------------------------------------
Net cash provided by (used for) operating activities (1,555) 780
----------------------------------------------
Cash provided by (used for) investing activities:
Purchases of equipment (109) (224)
Proceeds from sale of Echostar stock 3,419 3,162
Purchase of Media4 debenture -- (175)
----------------------------------------------
Net cash provided by investing activities 3,310 2,763
----------------------------------------------
Cash provided by (used for) financing activities:
Net payments under operating lines of credit -- (30)
Net payments under equipment note (160) --
Net payments on convertible notes payable (1,221) (1,335)
Payments of deferred interest -- (164)
Proceeds from issuance of common stock 55 --
----------------------------------------------
Net cash used for financing activities (1,326) (1,529)
----------------------------------------------
Net increase in cash and cash equivalents 429 2,014
----------------------------------------------
Cash and cash equivalents beginning of period 3,327 408
----------------------------------------------
Cash and cash equivalents end of period $ 3,756 $ 2,422
==============================================
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
SSE TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial information at December 26, 1998 and for the three month periods
ended December 26, 1998 and December 27, 1997 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 26, 1998 Form 10-K. The
results of operations for the three months ended December 26, 1998, 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 December 26, 1998 and September 26, 1998
inventories consisted of:
<TABLE>
<CAPTION>
(in thousands) December 26, 1998 September 26, 1998*
----------------- -------------------
<S> <C> <C>
(unaudited)
Manufacturing raw materials $3,279 $3,440
Work-in-process 3,770 3,657
Finished goods 545 1,797
========================= ==========================
Total $7,594 $8,894
========================= ==========================
</TABLE>
* Derived from audited financial statements
3. INVESTMENTS
During the three month period ended December 26, 1998, the Company disposed of
118,905 shares of Echostar Communications Corporation (NASDAQ: DISH). The
proceeds generated from the sale totaled approximately $3.4 million.
4. LONG TERM DEBT
At December 26, 1998, the Company's long term portion of capital lease balance
outstanding was $312,000. During the first three months of fiscal 1999 the
Company repaid $1.2 million of convertible subordinated debentures due Echostar
Communications Corporation.
<PAGE>
5. NET INCOME PER SHARE
<TABLE>
<CAPTION>
The following table sets forth the computation of basic and diluted net income per shares:
(in thousands, except per share)
December 26, 1998 December 27, 1997
---------------------- -----------------------
<S> <C> <C>
Numerator:
Net income $513 $1,786
Numerator for basic
net income per share 513 1,786
Effect of dilutive securities:
Interest expense, net of taxes on
61/2% convertible debentures 4 38
---------------------- -----------------------
Numerator for diluted
net income per share $517 $1,824
Denominator:
Denominator for basic net income
per share-weighted average shares 5,779 5,955
Effect of dilutive securities:
Employee stock options 16 2
Warrants
61/2% convertible debentures 59 228
---------------------- -----------------------
Dilutive potential common shares 75 230
Denominator for diluted net income
per share-adjusted weighted
average shares and assumed
conversions 5,854 6,185
====================== =======================
Basic net income per share $0.09 $0.30
====================== =======================
Diluted net income per share $0.09 $0.29
====================== =======================
</TABLE>
6. STOCKHOLDERS' EQUITY
Stock Option Repricing. During the first quarter of fiscal 1999, the Company
approved a cancellation and re-granting of outstanding stock options from all
holders of outstanding options with exercise prices in excess of $2.50 per share
as set by the Company's board of directors on October 16, 1998. 283,750 options
were repriced at an exercise price of $2.50 per share. The repriced options
become exercisable in accordance with the same exercise schedule in effect under
the higher priced option to which such new option relates except that no portion
of the option may be exercised prior to one year from the re-granting date. The
re-granting applied to all employees of the Company, except the chief executive
officer of the Company, who was excluded from the repricing agreements.
7. SUBSEQUENT EVENTS
As of December 26, 1998, the Company held an investment in Media4 consisting of
$966,000 in equity and $2,600,000 in convertible debentures. On February 1,
1999, Media4, Inc., a Georgia Corporation ("Media4") was merged with and into
Echostar Acquisition Corporation, a Colorado corporation ("Merger Sub") and
wholly owned subsidiary of Echostar Communications Corporation, a Nevada
corporation ("Echostar"), pursuant to an Agreement and Plan of Merger dated
February 1, 1999 (the "Merger Agreement").
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 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 vendors and consumers and international sales could cause actual
results to differ from those described in these statements and current and
prospective investors and stockholders should carefully consider these factors
in evaluating these forward-looking statements.
Overview
First quarter sales increased to approximately $7.7 million from approximately
$7.1 million in the fourth quarter and approximately $6.2 million in the third
quarter last year. New orders in the first quarter were below expectations, as
evidenced by the reduction in the Company's backlog to $3.7 million from $5.9
million at September 26, 1998. The Company reduced expenses, and reduced
manufacturing headcount by approximately 20 percent on January 22, 1999.
During the first quarter of fiscal 1999 the Company experienced production
difficulties and market pressure on price. In response to these difficulties the
Company made production improvements during the first quarter of fiscal 1999.
The first quarter results, which benefited from the sale of shares of common
stock of EchoStar Communications Corp. ("Echostar"), provided an improved
balance sheet. The Company's cash position was $3.8 million, inventories were
reduced to $7.6 million, and total debt was reduced to $3.1 million as of
December 26, 1998
Results of Operations for the three months period ended December 26, 1998 and
December 27, 1997
Revenue: Sales decreased to $7.7 million for the first quarter of fiscal 1999
from $12.1 million for the same period in fiscal 1998. The decline is in
response to lower demand in the market for satellite transceivers and modems and
reduction in orders due to past reliability problems with some of the Company's
products.
Gross Margin: Gross margin decreased to $497,000 or 6% of sales, in the first
quarter of fiscal 1999, compared to $3.2 million or 26% of sales for the first
quarter of fiscal 1998. The gross margin reduction is primarily due to a
reduction in volume, a lower average selling price for the Company's products,
and higher manufacturing costs.
Operating Expenses: Research and development expenses decreased to $994,000, or
13% of sales for the first quarter of fiscal 1999 from $1.4 million, or 11% of
sales, for the first quarter of fiscal 1998. The reduction of expenses is due to
lower labor costs associated with the closing of the Company's Arizona research
and development facilities, and the lower cost of contracted engineering
services.
Marketing, general and administrative expenses increased to $2.0 million, or
26% of sales, in the first quarter of fiscal 1999 as compared to $1.7 million,
or 14% of sales, for the same period in fiscal 1998. The increase in marketing,
general and administrative expenses is due to higher cost of outside marketing
and general and administrative services and increased travel.
Net Interest Expense. Net interest expense was $19,000 in the first quarter of
fiscal 1999. During the same period of last fiscal year, net interest expense
was $181,000. The lower interest expense was due to retirement of convertible
debentures held by Echostar and higher interest income from the Company's Media4
convertible debentures.
Net Gain on Sale of Investments. During the first quarter of fiscal 1999 the
Company realized a gain of $3.2 million on sales of 118,905 shares of Echostar
Common Stock (the "shares"). The proceeds generated from these sales were used
to repay convertible debentures payable to Echostar, to fund operating
expenditures, and to increase liquidity.
Provision for Income Taxes. The effective tax benefit rate was 35% for the first
quarter of fiscal year 1999 and for the first quarter of fiscal year 1998,
respectively.
Backlog. The Company's total backlog was $3.7 million at the end of the first
quarter of fiscal year 1999, as compared to backlog of $5.8 million at the end
of fiscal year 1998. The decline in customer orders is in response to lower
demand in the market for satellite transceivers and modems and reduction in
orders due to past reliability problems with some of the Company's products. The
Company has experienced some reduction in export orders, especially in the Asian
and Latin American markets. Management expects substantially all backlog to be
delivered in fiscal 1999. 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 December 26, 1998, the Company had working capital of $10.3 million,
including $3.8 million in cash and cash equivalents, compared with working
capital of $10.4 million, including cash and cash equivalents of $3.3 million at
September 26, 1998.
Net cash used by operating activities was $1.6 million during the first quarter
of fiscal 1999 as compared to net cash provided of $780,000 in the similar
period of fiscal 1998. Cash used by operating activities was principally due to
operating losses.
The Company's investing activities provided $3.3 million during the first
quarter of fiscal 1999 as compared to cash provided of $2.8 million during the
same period in fiscal year 1998. During the first quarter of fiscal 1999, $3.4
million was realized from the sale of Echostar Shares, which offset capital
expenditures of $109,000.
The Company's financing activities used $1.3 million during the first quarter of
fiscal 1999 as compared to net cash used of $1.5 million during the first
quarter of fiscal year 1998. The Company reduced convertible debentures by $1.2
million.
At December 26, 1998, the Company's principal sources of liquidity consisted of
$3.8 million in cash and a bank line of credit. At December 26, 1998, $2.2
million was outstanding on a $3.0 million operating line of credit. In addition,
the Company had a bank term loan with a principal balance of $455,000. The line
of credit and term loans require the Company to be in compliance with certain
financial covenants. As of December 26, 1998 the Company was in compliance with
all covenants, except the profitability covenant, for which the Company has
received a waiver.
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 lines of credit will be
adequate to meet its requirements for working capital, capital expenditures,
debt services and external investment for the foreseeable future.
Impact of Year 2000
The Company is aware that many existing Information Technology ("IT") systems,
such as computer and software products, as well as non-IT systems that included
embedded technology, were not designed to correctly process data after December
31, 1999. The Company has created a Year 2000 project team to review, and
evaluate the Company's products, computer systems, test equipment systems and
other non-IT systems. The Company has determined that it will be necessary to
modify or replace portions of its software so that its computer and non-IT
systems will properly utilize dates beyond 1999. The Company believes that with
modifications and conversions to new software, the Year 2000 issue can be
mitigated, and anticipates completion of all Year 2000 efforts by the end of
fiscal 1999. However, if such modifications and conversions are not made, or are
not completed in a timely manner, the Year 2000 issue could have a material
impact on the operations of the Company. The Company has also initiated
discussions with its suppliers regarding their plans to investigate and address
their Year 2000 problems, if any. Failures by the Company's suppliers' computer
systems could adversely affect the demand for product. There can be no assurance
that the systems of other companies on which the Company's systems, services,
and products rely will be timely converted, or that any such failure to convert
by another company would not have an adverse affect on the Company's business
financial conditions or results of operations.
The Company has been using both external and internal resources to upgrade its
commercial software programs for the Year 2000 issue. To date, the amounts
incurred and expensed for developing and carrying out the plan have not had a
material effect on the Company's operations. The Company plans to complete the
Year 2000 modifications, including testing, by the end of 1999. The total
remaining estimated cost for addressing the Year 2000 Issue of approximately
$220,000,which is based on management's current estimates, is not expected to be
material to the Company's operations. All remaining Year 2000 issue costs will
be funded through operating cash flows.
As the efforts of the Year 2000 project team continue, the Company may identify
situations that present material Year 2000 risks and/or that will require
substantial time and material expense to address. In addition, if any customers,
suppliers or service providers fail to appropriately address their Year 2000
issues, such failure could have a material adverse effect on the Company's
business, financial condition and results of operations. For example, because a
significant percentage of the purchase orders received from the Company's
customers are computer generated and electronically transmitted, a failure of
one or more of the computer systems of the Company's customers could have a
significant adverse effect on the level and timing of orders from such
customers. Similarly, if Year 2000 problems experienced by any of the Company's
significant suppliers or service providers cause or contribute to delays or
interruptions in the delivery of products or services to the Company, such delay
or interruptions could have a material adverse effect on the Company's business,
financial condition and results of operations. Finally, disruption in the
economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. Although the Year 2000 project team has not
determined the most likely worst-case Year 2000 scenarios or quantified the
likely impact of such scenarios, it is clear that the occurrence of one or more
of the risks described above could have a material adverse effect on the
Company's business, financial conditions or results of operations.
The Company's Year 2000 project team's activities will include the development
of contingency plans in the event the Company has not completed all of its
remediation programs in a timely manner. In addition, the Year 2000 project team
will develop contingency plans in the event that any third parties who provide
goods and services essential to the Company's business fail to appropriately
address their Year 2000 issues. The Year 2000 project team expects to conclude
the development of these contingency plans by the end of fiscal 1999. Even if
these plans are completed on time and put in place, there can be no assurance
that such plans will be sufficient to address any third party failures or that
unresolved or undetected internal and external Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition and
results of operations 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 '99. While the Company doesn't anticipate costs for the
Year 2000 issue to be material final results of this review could be
significantly different.
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of December 26, 1998, the Company had invested approximately $966,000 in
Media4 Common Stock and held $2,600,000 in Media4 convertible 7% & 9.5%
debentures.
At December 26, 1998, the Company was operating under a credit facility with
outstanding borrowings of $2.2 million. This facility allows for a $3.0 million
operating line-of-credit. Borrowings under this line-of-credit bear interest at
prime plus 1.25% (prime rate was 8.5% at December 26, 1998).
On August 14, 1998 the Company and the bank modified the borrowing agreement.
Pursuant to the amendment, the amount of the line-of-credit available was
reestablished at $3.0 million, the borrowing base was modified to measure
availability based on a formula and several covenants were modified. The Company
was in compliance with all covenants, except the profitability covenant, for
which the Company received a waiver for the quarter ending December 26, 1998.
The credit agreement was extended until March 15, 1999.
The Company also had a term note outstanding at December 26, 1998. The total
principal outstanding on this note was $455,000 with interest payable at prime
plus 1.25%. Interest payments are made on a monthly basis. The term note has a
maturity date of August 31, 1999.
The Company's exposure to market risk due to fluctuations in interest rates
primarily relates to the Company's credit facility and term note. If market
interest rates were to increase immediately and uniformly by 10% from levels
prevailing at December 26, 1998, the fair value of the debt obligations would
not change materially. The Company does not use derivative financial instruments
to mitigate interest rate risk.
Notwithstanding the foreign analysis of the direct effects of interest rate
risk, the indirect effects of fluctuations could have a material adverse effect
on the Company's business, financial condition and results of operations. For
example, worldwide demand for the Company's products could be effected by
interest rate fluctuations that could change the buying patterns of the
Company's customers.
<PAGE>
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)
<TABLE>
<CAPTION>
Exhibit Number Description Sequential Page Number
<S> <C> <C>
27 Financial Data Schedule Page 14
</TABLE>
(b) Reports on Form 8-K None.
<PAGE>
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, 1999 SSE TELECOM, INC.
By:/s/ Leon F. Blachowicz
Leon F. Blachowicz,
Chief Executive Officer
By:/s/ James J. Commendatore
James J. Commendatore,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Sep-25-1999
<PERIOD-START> Sep-27-1998
<PERIOD-END> Dec-26-1998
<PERIOD-TYPE> 3-MOS
<CASH> 3,756
<SECURITIES> 0
<RECEIVABLES> 6,701
<ALLOWANCES> 655
<INVENTORY> 7,594
<CURRENT-ASSETS> 20,526
<PP&E> 11,801
<DEPRECIATION> 8,453
<TOTAL-ASSETS> 27,440
<CURRENT-LIABILITIES> 10,200
<BONDS> 312
0
0
<COMMON> 60
<OTHER-SE> 16,868
<TOTAL-LIABILITY-AND-EQUITY> 26,432
<SALES> 0
<TOTAL-REVENUES> 7,703
<CGS> 7,207
<TOTAL-COSTS> 2,969
<OTHER-EXPENSES> (3,281)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 789
<INCOME-TAX> 276
<INCOME-CONTINUING> 513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 513
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
