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 24, 2000
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 August 2, 2000, the following number of shares of each of the issuer's
classes of common stock were outstanding: Common Stock 5,993,701
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SSE Telecom, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts; unaudited)
<CAPTION>
June 24, September 25,
2000 1999
-------- --------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,093 $ 3,828
Short-term investments 3,101 4,523
Accounts receivable (net of allowances of $375 and $584) 1,945 4,337
Related party accounts receivable 75 17
Inventories 4,419 4,184
Deferred tax assets 2,723 2,723
Other current assets 252 247
-------- --------
Total current assets 15,608 19,859
Property, equipment and leasehold improvements, at cost
Equipment 7,328 7,148
Furniture, fixtures and leasehold improvements 4,454 4,659
-------- --------
11,782 11,807
Less accumulated depreciation and amortization 10,175 9,298
-------- --------
Property, equipment and leasehold improvements, net 1,607 2,509
Notes receivable from employees 140 140
-------- --------
Total assets $ 17,355 $ 22,508
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit $ 404 $ 907
Accounts payable 2,174 2,689
Related party accounts payable 592 601
Accrued salaries and employee benefits 951 753
Warranty 1,312 2,312
Other accrued liabilities 201 138
Current portion of capital lease liability 109 109
-------- --------
Total current liabilities 5,743 7,509
Deferred tax liabilities 1,771 2,029
Capital lease liability 110 200
Stockholders' Equity:
Common stock $.01 par value per share (30,000,000 shares
authorized; 6,214,594 and 6,107,457 shares issued) 62 61
Additional paid in capital 13,177 12,739
Treasury stock (at cost, 224,643 shares) (1,782) (1,782)
Accumulated deficit (3,248) (242)
Accumulated other comprehensive income 1,522 1,994
-------- --------
Total stockholders' equity 9,731 12,770
-------- --------
Total liabilities and stockholders' equity $ 17,355 $ 22,508
======== ========
<FN>
The Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
SSE Telecom, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data; unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
------------------- -----------------
June 24, June 26, June 24, June 26,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 3,217 $ 4,758 $ 12,033 $ 17,180
Cost of revenue 2,625 4,552 10,785 16,725
-------- -------- -------- --------
Gross profit 592 206 1,248 455
Operating expenses:
Research and development 1,079 1,100 3,000 3,051
Marketing, general and administrative 1,875 1,912 5,604 5,949
-------- -------- -------- --------
Operating loss (2,362) (2,806) (7,356) (8,545)
Gain on sale of investments 885 935 4,217 4,134
Net interest expense (14) (47) (34) (96)
Other income (expense) 157 (27) 167 183
-------- -------- -------- --------
Loss before income taxes (1,334) (1,945) (3,006) (4,324)
Provision for income taxes -- 1,131 -- 97
-------- -------- -------- --------
Net loss $ (1,334) $ (3,076) $ (3,006) $ (4,421)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.22) $ (0.53) $ (0.51) $ (0.76)
======== ======== ======== ========
Shares used in per share calculation - basic and diluted 5,982 5,818 5,941 5,796
======== ======== ======== ========
<FN>
The Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
</FN>
</TABLE>
3
<PAGE>
SSE Telecom, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands; unaudited)
Nine Months Ended
-----------------
June 24, June 26,
2000 1999
------- -------
Operating Activities:
Net loss $(3,006) $(4,421)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 944 1,033
Gain on sale of investments (4,217) (4,134)
Deferred income taxes -- 1,360
Changes in operating assets and liabilities:
Accounts receivable 2,334 1,720
Inventories (235) 2,658
Other current assets (5) 49
Accounts payable (524) (521)
Other accrued liabilities (738) (1,060)
------- -------
Net cash used by operating activities (5,447) (3,316)
------- -------
Investing activities:
Purchases of equipment (42) (414)
Proceeds from sale of investments 4,908 6,188
------- -------
Net cash provided by investing activities 4,866 5,774
------- -------
Financing activities:
Net payment under debt obligations (593) (1,212)
Payments on convertible debentures -- (1,220)
Proceeds from issuance of common stock 439 148
------- -------
Net cash used by financing activities (154) (2,284)
------- -------
Net increase (decrease) in cash and
cash equivalents (735) 174
Cash and cash equivalents,
beginning of period 3,828 3,327
------- -------
Cash and cash equivalents, end of period $ 3,093 $ 3,501
======= =======
The Notes to Condensed Consolidated Financial Statements are an integral
part of these statements.
4
<PAGE>
SSE TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements included herein
contain all adjustments, consisting only of normal recurring adjustments which,
in the opinion of management, are necessary to fairly state the consolidated
financial position, results of operations and cash flows of SSE Telecom, Inc.
("SSET" or the "Company") for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these interim condensed
consolidated financial statements and notes thereto be read in conjunction with
the audited consolidated financial statements and notes thereto included in
SSET's Annual Report on Form 10-K for the fiscal year ended September 25, 1999.
Interim results of operations are not necessarily indicative of the results to
be expected for the fiscal year ending September 30, 2000.
2. INVENTORIES
June 24 September 25,
2000 1999
------ ------
(in thousands)
Raw materials $1,784 $2,030
Work-in-process 2,091 1,521
Finished goods 544 633
------ ------
Total $4,419 $4,184
====== ======
3. INVESTMENTS
On March 23, 2000, Echostar Communications Corporation ("Echostar") effected
a 2-for-1 split of its series A common stock for stockholders of record at the
close of business on March 10, 2000. All share information in this report has
been restated to reflect the split. During the quarter ended June 24, 2000, SSET
sold 30,000 shares of Echostar common stock for a realized gain before taxes of
$885,000. The proceeds generated from the sale totaled approximately $1.1
million. For the nine month period ended June 24, 2000, SSET sold 120,800 shares
of Echostar common stock for a realized gain before taxes of $4.2 million.
Proceeds generated from these sales in the first nine months of fiscal 2000
totaled approximately $4.9 million. For the nine months ended June 26, 1999,
SSET sold Echostar common stock for a realized gain before taxes of $4.1
million. At June 24, 2000, SSET had 81,344 shares of Echostar common stock
valued at $3.1 million.
4. PER SHARE COMPUTATION
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share is computed
using the weighted average number of common and potentially dilutive common
shares outstanding during the period. For the three and nine months ended June
24, 2000, potentially dilutive options and warrants to purchase 432,000 and
530,000 shares, respectively, were excluded from the diluted per share
calculation as they were antidilutive due to the net losses experienced in these
periods. Similarly, 2,000 and 10,000 potentially dilutive options were excluded
from the diluted per share calculation for the comparable periods in fiscal 1999
due to the net losses incurred.
5
<PAGE>
5. COMPREHENSIVE INCOME
<TABLE>
The components of comprehensive loss are as follows:
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
June 24 June 26, June 24, June 26,
2000 1999 2000 1999
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Net loss $ (1,334) $ (3,076) $ (3,006) $ (4,421)
Other comprehensive income (loss) (3,122) 1,172 (472) 518
------- ------- ------- -------
Total comprehensive loss (4,456) (1,904) (3,478) (3,903)
======= ======= ======= =======
</TABLE>
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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.
RESULTS OF OPERATIONS
Overview
Revenue for the third quarter of fiscal 2000 decreased $1.5 million, or 32%,
to $3.2 million from $4.8 million in the third quarter of last fiscal year.
Revenue for the second quarter of fiscal 2000 was $3.9 million. New orders in
the third quarter of fiscal 2000 increased approximately 39% from the second
quarter of fiscal 2000, as evidenced by the Company's backlog of $3.2 million
and $2.2 million at June 24, 2000 and March 25, 2000, respectively. 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.
During the second and early third quarter strong demand for certain
electronic components used in current products resulted in material shortages at
contract manufacturers and negatively impacted our manufacturing cycle times
and, correspondingly, ability to accept orders. This resulted in delays in
deliveries and loss of some orders, reducing our revenue in both the second and
third quarters. Management believes these materials problems have been
substantially resolved during the third quarter and that manufacturing lead
times and finished goods availability have returned to satisfactory levels.
However, there can be no assurance that these or other manufacturing problems
will not recur, that significant volumes of product can be produced in a timely
manner or that orders will continue to increase.
The Company is continuing its investment in the development of the iP3
satellite Internet gateway product line. The Company released basic versions of
this product to two prospective European customers for evaluation and testing
during the first quarter of fiscal 2000, and to a potential domestic customer in
the second quarter of fiscal 2000. Beta testing by the foreign customers was
satisfactorily completed during the second quarter. The final phase of beta
testing is currently ongoing by the domestic customer. As a result of these
programs certain product feature enhancements are underway. To date, SSET has
received no orders for this product line and no assurance can be given that
design or production problems will not arise. To the extent that development and
commercialization efforts with respect to the iP3 product line are unsuccessful,
or if these products do not achieve market acceptance, SSET's business,
financial condition and results of operations would be materially adversely
affected.
The Company's liquidity and capital resources as of June 24, 2000 have
decreased in comparison to the end of last fiscal year due, in part, to
continuing investment in iP3. Further, the value of SSET's short-term investment
in Echostar common stock has decreased significantly during the third quarter.
The Company's cash position was $3.1 million, working capital was approximately
$9.9 million, and short-term investments were $3.1 million as of June 24, 2000.
Results of Operations for the Three and Nine Month Periods Ended June 24, 2000
and June 26, 1999
Revenue: Revenue decreased by 32% from $4.8 million for the three months
ended June 26, 1999 to $3.2 million for the three months ended June 24, 2000,
and decreased by 30% from $17.2 million for the nine months ended June 26, 1999
to $12.0 million for the nine months ended June 24, 2000. The decrease is
primarily a result of
7
<PAGE>
lower unit volumes due to the aforementioned material shortages. Also
contributing to the decrease for the nine months ended June 24, 2000 as compared
to the same period last fiscal year was lower demand in the market for satellite
transceivers and modems in Latin America and Eastern Europe and a reduction in
orders and shipments to the U.S. government. Management currently expects that
fourth quarter revenue from existing products will increase slightly from the
level experienced during the third quarter. We are unable to predict with any
degree of certainty what revenue, if any, will result from shipments of the new
iP3 product line.
Gross Profit: Gross profit increased 187% from a $206,000 for the three
months ended June 26, 1999 to $592,000 for the three months ended June 24, 2000,
and increased 174% from $455,000 for the nine months ended June 26, 1999 to $1.2
million for the nine months ended June 24, 2000. As a percentage of revenue,
gross profit was 4% and 18% for the third quarter of 1999 and 2000,
respectively, and 3% and 10% for the first nine months of 1999 and 2000,
respectively. Cost of revenue for the third quarter of fiscal 2000 includes a
$500,000 benefit relating to a reduction in accrued liability for estimated
warranty expenses. Due primarily to continuing improvements in product quality,
SSET has experienced a reduction in warranty related returns and expects this
trend to continue. Excluding this benefit, the decrease in gross profit in the
third quarter of fiscal 2000 as compared to the same period of last fiscal year
is primarily due to a decrease in unit volume. Excluding the $500,000 benefit,
gross profit for the nine months ended June 24, 2000 was $748,000, or 6% of
sales. This increase is primarily due to cost reductions resulting from the
SSET's reorganization of manufacturing, including outsourcing the assembly of
certain products and components and a consolidation of the Company's
manufacturing into one facility. These cost reductions have been partially
offset by a decrease in unit volume.
Operating Expenses: Research and development expenses decreased 2% from
$1,100,000 for the three months ended June 26, 1999 to $1,079,000 for the three
months ended June 24, 2000, and decreased 2% from $3,051,000 for the nine months
ended June 26, 1999 to $3,000,000 for the nine months ended June 24, 2000.
Research and development expenses as a percentage of revenue were 23% and 33%
for the third quarter of 1999 and 2000, respectively, and were 18% and 25% for
the first nine months of 1999 and 2000, respectively. Marketing, general and
administrative expenses decreased 2% from $1,912,000 for the three months ended
June 26, 1999 to $1,875,000 for the three months ended June 24, 2000, and
decreased 6% from $5.9 million for the nine months ended June 26, 1999 to $5.6
million for the nine months ended June 24, 2000. Marketing, general and
administrative expenses as a percentage of revenue were 40% and 58% for the
third quarter of 1999 and 2000, respectively, and 35% and 47% for the first nine
months of 1999 and 2000, respectively. The small decrease in operating expenses
was due to lower average headcount. However, operating expenses are expected to
increase as overall headcount is increased in order to support iP3 development
and marketing.
Net Interest Expense. Net interest expense was $14,000 in the third quarter
of fiscal 2000 as compared to $47,000 during the same period of last fiscal
year. For the first nine months of fiscal year 2000 net interest expense was
$34,000 as compared to $96,000 for the same period last year. Net interest
expense for fiscal 2000 has decreased due primarily to lower average debt
balances as compared to fiscal 1999.
Gain on Sale of Investments. During the third quarter of fiscal 2000 the
Company realized a gain of $885,000 on sales of 30,000 shares of Echostar common
stock. For the first nine months of fiscal 2000 the Company realized a gain of
$4.2 million on sales of 120,800 Echostar shares. In the first nine months of
fiscal 1999, the Company realized a gain of $4.1 million on the sale of Echostar
shares.
Other Income. Other income for the third quarter of fiscal 2000 was $157,000
as compared to other expense of $27,000 for the same period last year. For the
first nine months of fiscal 2000 other income was $167,000 compared to $183,000
for the same period last year.
Provision for Income Taxes. The Company's effective tax rate was 0% for the
third quarter and first nine months of fiscal 2000. An income tax provision of
$1.1 million and $97,000 was provided on pretax losses for the three and nine
months ended June 26, 1999, respectively. No tax benefit was provided on the
pretax losses during fiscal 2000 due to limitations on net operating loss
carrybacks and a valuation allowance provided on deferred tax assets due to lack
of sufficient assurance that such assets will be realized in future periods.
SSET recorded a tax provision in the three months ended June 26, 1999 to reflect
a change in estimate in the tax benefit attributable to operations in fiscal
1999.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 24, 2000, the Company had working capital of $9.9 million, including
$3.1 million in cash and cash equivalents, compared with working capital of
$12.4 million, including cash and cash equivalents of $3.8 million, at September
25, 1999.
Net cash used by operating activities was $5.5 million during the nine
months ended June 24, 2000 as compared to net cash used of $3.3 million in the
same period of fiscal 1999. Cash used by operating activities was principally
due to operating losses partially offset by depreciation and amortization and by
a decrease in net assets related to operating activities.
The Company's investing activities provided $4.9 million during the nine
months ended June 24, 2000 as compared to cash provided of $5.8 million during
the same period in fiscal 1999. During the first nine months of fiscal 2000,
$4.9 million was realized from the sale of Echostar shares compared with $6.2
million for the same period last fiscal year.
The Company's financing activities used $154,000 during the nine months
ended June 24, 2000 as compared to net cash used of $2.3 million during the same
period in fiscal 1999. In fiscal 2000, net payments under debt obligations of
$593,000 were partially offset by cash received from issuance of common stock
pursuant to employee benefit plans. The Company reduced convertible debentures
by $1.2 million and other debt obligations by $1.2 million in the first nine
months of fiscal 1999.
At June 24, 2000, the Company's principal sources of liquidity consisted of
$3.1 million in cash and a bank line of credit. The credit facility allows for
borrowings up to the lesser of $5.0 million or 85% of qualifying receivables.
Qualifying receivables exclude certain receivables from the U.S. government,
certain uninsured foreign accounts and delinquent receivables. The average total
balance available to be borrowed under the line during the third quarter of
fiscal 2000 was approximately $879,000. At June 24, 2000, a total of $550,000
was available under the line of credit and borrowings of $404,000 were
outstanding. Additionally, a principal source of financing is the Company's
holdings of Echostar common stock, which is subject to the volatility of the
stock market. At quarter end, the Company held 81,344 shares of Echostar stock
with a value of $3.1 million and an unrealized gain, net of tax, of $1.5 million
recorded in stockholders' equity.
SSET expects to continue to incur quarterly losses until iP3 products are
shipping in significant volume. At the level of operations experienced during
the third quarter, the Company estimates that it will have used all of its
currently available capital resources during the second quarter of fiscal 2001.
SSET will need to increase revenue significantly in a relatively short period of
time in order to attain breakeven cash flow from operations with its existing
capital. If the Company cannot generate a significant increase in revenues and
gross profit or obtain additional funding, SSET would be unable to continue as a
going concern. Many factors could increase or decrease SSET's utilization of its
capital resources such as changes in product development schedules and expenses,
greater than anticipated time or costs to manufacture sufficient quantities of
new products, and greater than anticipated expenses. Further, the value of
short-term investments could decrease. Management cannot predict the timing or
the magnitude of these factors with any degree of certainty. Therefore, there
can be no assurance that cash and cash equivalents, short-term investments, and
available line of credit balances as of June 24, 2000, will be sufficient to
meet our capital requirements into the second quarter of fiscal 2001. SSET may
need additional funding at an earlier date. There can be no assurance that
additional financing will be available, or if available, will be on reasonable
terms. Further, any financing may be materially dilutive to our shareholders. If
SSET is unable to obtain additional financing on a timely basis when and if
needed, the Company will be required to reduce or even terminate its operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. Subsequently,
the SEC released SAB 101A, which delayed the implementation date of SAB 101 for
registrants with fiscal years that begin between December 16, 1999 and March 15,
2000. SSET is required to be in conformity with the provisions of SAB 101, as
amended by
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<PAGE>
SAB 101A, no latter than the fourth fiscal quarter of the fiscal year ending
September 29, 2001 and does not expect a material effect on its financial
position, results of operations or cash flows as a result of SAB 101.
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 137, which delayed the effective
date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which will be effective for SSET's fiscal year 2001. This statement
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivatives fair value be recognized in earnings unless specific hedge
accounting criteria are met. SSET has not entered into derivative contracts and
does not have near term plans to enter into derivative contracts, accordingly
the adoption of SFAS No. 133 and SFAS No. 137 is not expected to have a material
effect on its financial statements.
RISK FACTORS
SSET's business faces significant risks. If any of the events described in
the following risks actually occurs, SSET's business, financial condition and
results of operations could be materially and adversely affected. These risks
should be read in conjunction with the other information set forth in this
report. The risks and uncertainties described below are not the only ones facing
SSET. Additional risks and uncertainties not presently known to the Company, or
those currently considered immaterial, may also harm the Company.
Market Acceptance of Products
The market for SSET's products is subject to technological change, new
product introductions and continued market acceptance. Current competitors or
new market entrants may develop new products with features that could cause a
significant decline in sales, price reductions or loss of market acceptance of
SSET's existing and future products. SSET's success will depend, among other
factors, upon its ability to enhance its existing products and to introduce new
products on a timely basis. In particular, SSET's future results of operations
will be highly dependent on the successful completion of the design,
development, introduction, marketing and manufacture of its iP3 platform which
was recently introduced. To date, SSET has made no commercial shipments of these
products. This product line may require additional development work,
enhancement, testing or further refinement before it can be introduced and made
commercially available. If iP3 has performance, reliability, quality or other
shortcomings, then the product could fail to achieve market acceptance. The
failure by SSET's new or existing products to achieve or enjoy market
acceptance, whether for these or other reasons, could cause SSET to experience
reduced orders, higher manufacturing costs, delays in collecting accounts
receivable and additional warranty and service expenses, which in each case
could have a material adverse effect on SSET's reputation and financial
performance.
History of Losses and Failure to Achieve Profitability
As of June 30, 2000, SSET had no sales from the iP3 platform and had
accumulated deficit of $3.2 million. SSET's future results of operations will be
highly dependent on the successful completion of the design, development,
introduction, marketing and manufacture of its iP3 platform which was recently
introduced. Due to the need to establish the iP3 platform, SSET expects to incur
increasing sales and marketing, product development and administrative expenses.
As a result, SSET will continue to incur significant losses for at least the
next several quarters and may be required to raise additional capital. There can
be no assurance that additional financing will be available, or if available,
will be on reasonable terms. Further, any financing may be materially dilutive
to the shareholders. If SSET is unable to obtain additional financing on a
timely basis when and if need, the Company's business plan will be materially
affected.
Emerging Market For Internet-Over-Satellite Communications
Since approximately the second half of fiscal 1999, SSET has shifted
emphasis away from its previous RF transceiver and modem products to the
development and marketing of satellite Internet transport products and
applications. The market for satellite Internet transport communications
products is only beginning to emerge. SSET's future success will be largely
dependent on the demand for satellite Internet transport communications products
in general, and upon SSET's ability to develop and introduce new products and
technologies that meet
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<PAGE>
customer requirements. SSET faces challenges in demonstrating the value of its
satellite Internet transport products. If SSET is unable to successfully educate
potential customers as to the value of, and thereby obtain broad market
acceptance for, its products, it will continue to rely primarily on selling
existing products to its base of existing customers, which will significantly
limit any opportunity for profitability or growth. To the extent that a specific
method other than SSET's is adopted as the standard for implementing
Internet-over-satellite communications, sales of SSET's planned products in that
market segment would be adversely impacted, which would have a material adverse
effect on SSET's business. In addition, the commercial success of SSET's
Internet-over-satellite communications products will depend, in part, upon a
robust commercial industry and infrastructure for providing access to public
switched networks, such as the Internet. The infrastructure or complementary
products necessary to make these networks into viable commercial marketplaces
may not be fully developed, and once developed, these networks may not become
viable commercial marketplaces.
Potential Fluctuations in Quarterly Operating Results
SSET's operating results have fluctuated in the past and may fluctuate in
the future as a result of a number of factors, including market acceptance of
SSET's product line of STAR satellite transceivers and SSET's high speed high
data rate modems, delays in the delivery of SSET's products, delays in the
closing of sales, performance of SSET's suppliers, new product introductions,
such as iP3, and product enhancements by SSET or its competitors, the prices of
SSET's or its competitors products, the mix of products sold, manufacturing
costs, the level of warranty claims and changes in general economic conditions.
In addition, competitive pressure on pricing in a given quarter could adversely
affect SSET's operating results for such period, and such price pressure over an
extended period could materially adversely affect SSET's long term
profitability. SSET expects that the gross margin for existing products will
continue to be under pressure to decline due to price reductions as well as
continuing competitive price pressure in the satellite telecommunication
equipment market. SSET's ability to maintain or increase net revenues and gross
margin will depend upon its ability to increase unit sales volumes, reduce
manufacturing costs and introduce new products or product enhancements.
SSET typically ships a substantial amount of its products near the end of
each quarter. Accordingly, SSET's net revenues for any particular quarter cannot
be predicted with any degree of accuracy. In addition, SSET has, in the past,
experienced delays with shipping its products which has caused its revenues and
net income to fluctuate significantly from anticipated levels and from quarter
to quarter. Due to all of the foregoing factors, it is likely that in some
future quarter SSET's operating results will be below the expectations of public
market analysts and investors. In such event, the price of SSET's Common Stock
may decrease significantly.
Product Concentration
Sales of SSET's STAR transceivers accounted for approximately 45% of net
revenues in fiscal 1999. SSET anticipates that its STAR transceivers will
continue to account for a substantial portion of its net revenues during fiscal
2000. Any factor adversely affecting the demand or supply for the STAR
transceiver product line could materially adversely affect SSET's business and
financial performance.
Limited Number of Principal Customers
Sales of SSET's products are concentrated in a small number of customers.
For fiscal 1999, the largest five customers accounted for 40% of sales. SSET
expects that revenues from a relatively small number of customers will continue
to account for a significant portion of revenue through fiscal 2000. There can
be no assurance that SSET will realize equivalent sales from their top customers
in the future. The loss of any existing customer or a significant reduction in
the level of sales to any existing customer could have a material adverse effect
on SSET's business, financial condition and results of operations.
Dependence on Suppliers
SSET's manufacturing operations are highly dependent upon the timely
delivery of quality components, subassemblies, assemblies and other equipment by
outside suppliers. From time to time SSET has experienced delivery delays from
key suppliers which impacted sales. In addition, as was experienced in 1998 and
1997, certain vendor supplied materials may have quality issues which could
impact sales and increase customer support costs. There can be no assurance that
SSET will not experience material supply problems or component issues in the
future.
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Competition
The market for satellite telecommunication equipment is highly competitive
and subject to rapid technological change. SSET competes with a number of
companies that manufacture components of satellite earth station systems similar
to those manufactured by SSET. Certain of these companies have substantially
greater financial resources and production, marketing, engineering and other
capabilities than SSET with which to develop, manufacture, market and sell their
products. SSET believes that its ability to compete successfully will depend on
a number of factors both within and outside its control, including price,
quality, delivery, product performance and features, timing of new product
introductions by SSET and customer service and support.
SSET expects its competitors to continue to improve the performance of their
current products and to introduce new products or new technologies that provide
improved performance characteristics. New product introductions by existing
competitors and the entry of new competitors into the satellite
telecommunication equipment market has in the past and may in the future cause
SSET to reduce the prices of its products. SSET expects this increased
competitive pressure to lead to intensified price-based competition, resulting
in lower prices and may result in lower gross margins which would adversely
affect SSET's business, financial condition and results of operations.
Attraction and Retention of Qualified Personnel
SSET's manufacturing and development capabilities are highly dependent upon
hiring and retaining the required technical personnel. In particular, SSET will
need to hire additional qualified engineering and other employees in order to
continue the timely development of its iP3 product line. SSET competes for such
personnel with other companies, government entities and organizations. From time
to time SSET has experienced difficulties in recruiting and retaining key
qualified personnel which impacted operations. SSET may experience personnel
resource problems in the future.
Lengthy Sales Cycle
Sales of SSET's products often involve, or are integral components of,
significant capital commitments by customers, with the attendant delays
frequently associated with large capital expenditures. For these and other
reasons, the sales cycle associated with SSET's products is often lengthy and
subject to a number of significant risks over which SSET has little or no
control. SSET is often required to ship products shortly after it receives
orders and, consequently, order backlog at the beginning of any period has in
the past represented only a small portion of that period's expected revenue. As
a result, product revenue in any period is substantially dependent on orders
booked and shipped in that period. SSET typically plans its production and
inventory levels based on internal forecasts of customer demand, which are
highly unpredictable and can fluctuate substantially. If revenue falls
significantly below anticipated levels, as it has at times in the past, SSET's
financial condition and results of operations would be materially and adversely
affected. In addition, SSET's operating expenses are based on anticipated
revenue levels and a high percentage of SSET's expenses are generally fixed in
the short term. Based on these factors, a small fluctuation in the timing of
sales can cause operating results to vary significantly from period to period.
It is possible that in the future SSET's operating results will be below the
expectations of securities analysts and investors. In such an event, or in the
event that adverse conditions prevail or are perceived to prevail generally or
with respect to SSET's business, the price of SSET's Common Stock would likely
be materially adversely affected.
Risks Associated with International Sales
SSET plans to continue to expand its foreign sales channels and to enter
additional international markets, both of which will require significant
management attention and financial resources. International sales are subject to
a number of risks, including unexpected changes in regulatory requirements,
export control laws, tariffs and other trade barriers, political and economic
instability in foreign markets, difficulties in the staffing, management and
integration of foreign operations, longer payment cycles, greater difficulty in
collecting accounts receivable, currency fluctuations and potentially adverse
tax consequences. Since SSET's foreign sales are denominated in U.S. dollars,
SSET's products become less price competitive in countries in which local
currencies decline in value relative to the U.S. dollar. The uncertainty of
monetary exchange values has caused, and may in the future cause, some foreign
customers to delay new orders or delay payment for existing orders. The
long-term impact of such devaluation, including any possible effect on the
business outlook in other developing countries, cannot be predicted. SSET's
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ability to compete successfully in foreign countries is dependent in part on
SSET's ability to obtain and retain reliable and experienced in-country
distributors and other strategic partners. SSET does not have long-term
relationships with any of its value added resellers and distributors and,
therefore, has no assurance of a continuing relationship within a given market.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of June 24, 2000 the Company had 81,344 shares of Echostar common stock
with a closing price on that date of $38.125. As of August 3, 2000, the closing
price was $42.25. The 52 week range for Echostar's common stock as of August 3,
2000, giving retroactive effect to stock splits, was a low of $14.00 and a high
of $81.25.
At June 24, 2000, SSET was operating under a bank credit facility with
outstanding borrowings of $404,000. This facility allows for borrowings up to
the lesser of $5.0 million or 85% of qualifying receivables. Funds borrowed
under this line-of-credit bear interest at prime plus 2.00% (prime rate was
9.50% at June 25, 2000). Certain assets of the Company secure the line-of-credit
and the Company is required under this line-of-credit to be in compliance with a
tangible net worth covenant. The credit agreement expires July 30, 2001.
The Company's exposure to market risk due to fluctuations in interest rates
primarily relates to the Company's credit facility. If market interest rates
were to increase immediately and uniformly by 10% from levels prevailing at June
24, 2000, 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 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 affected by interest rate
fluctuations that could change the buying patterns of the Company's customers.
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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 16
(b) Reports on Form 8-K
None.
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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 8, 2000 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
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