-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O43tCuSmS91981JME24WacCr8fkLt52+Osx4ieGSjkcqTLpl1D8WtiOGEFV1nkPG KmZqcKEX8XnCAiuk4XH8KA== 0000950005-00-000608.txt : 20000510 0000950005-00-000608.hdr.sgml : 20000510 ACCESSION NUMBER: 0000950005-00-000608 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000325 FILED AS OF DATE: 20000509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SSE TELECOM INC CENTRAL INDEX KEY: 0000808220 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 521466297 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16473 FILM NUMBER: 622992 BUSINESS ADDRESS: STREET 1: 47823 WESTINGHOUSE DRIVE STREET 2: SUITE 1 CITY: FREMONT STATE: CA ZIP: 94539 BUSINESS PHONE: (510) 657-7552 MAIL ADDRESS: STREET 1: 47823 WESTINGHOUSE DRIVE STREET 2: STE 710 CITY: FREMONT STATE: CA ZIP: 94539 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 25, 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 May 8, 2000, the following number of shares of each of the issuer's classes of common stock were outstanding: Common Stock 5,989,951 PART I - FINANCIAL INFORMATION Item 1. Financial Statements SSE Telecom, Inc. Condensed Consolidated Balance Sheets (in thousands, except per share amounts; unaudited)
March 25, September 25, 2000 1999 -------- -------- Assets Current Assets: Cash and cash equivalents $ 4,074 $ 3,828 Short-term investments 8,476 4,523 Accounts receivable (net of allowances of $523 and $584) 3,485 4,337 Related party accounts receivable 41 17 Inventories 3,741 4,184 Deferred tax assets 2,723 2,723 Other current assets 308 247 -------- -------- Total current assets 22,848 19,859 Property, equipment and leasehold improvements, at cost Equipment 7,296 7,148 Furniture, fixtures and leasehold improvements 4,508 4,659 -------- -------- 11,804 11,807 Less accumulated depreciation and amortization 9,981 9,298 -------- -------- Property, equipment and leasehold improvements, net 1,823 2,509 Notes receivable from employees 140 140 -------- -------- Total assets $ 24,811 $ 22,508 ======== ======== Liabilities and Stockholders' Equity Current Liabilities: Line of credit $ -- $ 907 Accounts payable 3,044 2,689 Related party accounts payable 636 601 Accrued salaries and employee benefits 980 753 Warranty 1,812 2,312 Other accrued liabilities 194 138 Current portion of capital lease liability 108 109 -------- -------- Total current liabilities 6,774 7,509 Deferred tax liabilities 3,852 2,029 Capital lease liability 140 200 Stockholders' Equity: Common stock $.01 par value per share (30,000,000 shares authorized; 6,191,925 and 6,107,457 shares issued) . 62 61 Additional paid in capital 13,035 12,739 Treasury stock (at cost, 224,643 shares) (1,782) (1,782) Accumulated deficit (1,914) (242) Accumulated other comprehensive income 4,644 1,994 -------- -------- Total stockholders' equity 14,045 12,770 -------- -------- Total liabilities and stockholders' equity $ 24,811 $ 22,508 ======== ======== The Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
2 SSE Telecom, Inc. Condensed Consolidated Statements of Operations (in thousands, except per share data; unaudited)
Three Months Ended Six Months Ended ------------------------- -------------------------- March 25, March 27, March 25, March 27, 2000 1999 2000 1999 -------- -------- -------- -------- Revenue $ 3,945 $ 4,718 $ 8,816 $ 12,422 Cost of revenue 3,814 4,966 8,160 12,173 -------- -------- -------- -------- Gross profit (loss) 131 (248) 656 249 Operating expenses: Research and development 993 957 1,921 1,951 Marketing, general and administrative 1,853 2,062 3,729 4,037 -------- -------- -------- -------- Operating loss (2,715) (3,267) (4,994) (5,739) Gain on sale of investments 1,680 -- 3,332 3,198 Net interest expense 16 (29) (20) (49) Other income 5 128 10 211 -------- -------- -------- -------- Loss before income taxes (1,014) (3,168) (1,672) (2,379) Income tax benefit -- (1,310) -- (1,034) -------- -------- -------- -------- Net loss $ (1,014) $ (1,858) $ (1,672) $ (1,345) ======== ======== ======== ======== Basic and diluted net loss per share $ (0.17) $ (0.32) $ (0.28) $ (0.23) ======== ======== ======== ======== Shares used in per share calculation - basic and diluted 5,936 5,791 5,919 5,785 ======== ======== ======== ======== The Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
3 SSE Telecom, Inc. Condensed Consolidated Statements of Cash Flows (in thousands; unaudited)
Six Months Ended ---------------------------- March 25, March 27, 2000 1999 ------- ------- Operating Activities: Net loss $(1,672) $(1,345) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 695 680 Gain on sale of investments (3,332) (3,198) Deferred income taxes -- 26 Changes in operating assets and liabilities: Accounts receivable 828 516 Inventories 443 1,399 Other current assets (61) (16) Accounts payable 390 (577) Other accrued liabilities (217) (606) ------- ------- Net cash used by operating activities (2,926) (3,121) ------- ------- Investing activities: Purchases of equipment (8) (275) Proceeds from sale of investments 3,851 3,419 ------- ------- Net cash provided by investing activities 3,843 3,144 ------- ------- Financing activities: Net payment under debt obligations (968) (992) Payments on convertible debentures -- (1,220) Proceeds from issuance of common stock 297 55 ------- ------- Net cash used by financing activities (671) (2,157) ------- ------- Net increase (decrease) in cash and cash equivalents 246 (2,134) Cash and cash equivalents, beginning of period 3,828 3,327 ------- ------- Cash and cash equivalents, end of period $ 4,074 $ 1,193 ======= ======= The Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
4 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 March 25, September 25, 2000 1999 -------- ------- (in thousands) Raw materials $ 1,420 $ 2,030 Work-in-process 1,766 1,521 Finished goods 555 633 -------- ------- Total $ 3,741 $ 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 March 25, 2000, SSET sold 30,000 shares of Echostar common stock for a net realized gain before taxes of $1.7 million. The proceeds generated from the sale totaled approximately $1.9 million. For the six month period ended March 25, 2000, SSET sold 90,800 shares of Echostar common stock for a net realized gain before taxes of $3.3 million. Proceeds generated from these sales in the first half of fiscal 2000 totaled approximately $3.9 million. In the second half of fiscal 1999, SSET sold Echostar common stock for a net realized gain before taxes of $3.2 million. At March 25, 2000, SSET had 111,344 shares of Echostar common stock valued at $8.5 million. 4. PER SHARE COMPUTATION Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net 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 six months ended March 25, 2000, potentially dilutive options and warrants to purchase 755,282 and 579,454 shares, respectively, were excluded from the diluted per share calculation as they were antidilutive due to net losses experienced in these periods. Similarly, 13,225 and 14,670 potentially dilutive options were excluded from the diluted per share calculation for the comparable periods in fiscal 1999 due to net losses incurred. 5 5. COMPREHENSIVE INCOME The components of comprehensive loss are as follows:
Three Months Ended Six Months Ended ------------------------- -------------------------- March 25, March 27, March 25, March 27, 2000 1999 2000 1999 ------- ------- ------- ------- (in thousands) Net loss $(1,014) $(1,858) $(1,672) $(1,345) Other comprehensive income (loss) 1,192 1,164 2,650 (654) ------- ------- ------- ------- Total comprehensive income (loss) 178 (694) 978 (1,999) ======= ======= ======= =======
6 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 second quarter of fiscal 2000 decreased $773,000, or 16%, to $3.9 million from $4.7 million in the second quarter of last fiscal year. Revenue for the first quarter of fiscal 2000 was $4.9 million. New orders in the second quarter of fiscal 2000 decreased approximately 32% from the first quarter of fiscal 2000, as evidenced by the Company's backlog of $2.2 million and $3.0 million at March 25, 2000 and December 25, 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. During the second quarter of fiscal 2000 the Company continued to be affected by unfavorable economic conditions impacting satellite communications business in Latin America, Asia and Eastern Europe. Additionally, strong demand for certain electronic components used in current products has resulted in material shortages at contract manufacturers and negatively impacted our manufacturing cycle times. This resulted in delays in deliveries and loss of some orders, further reducing our revenue. Management believes the material shortages have been resolved and that manufacturing lead time and finished goods availability are returning 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 increase. The Company is continuing its investment in the development of the iP3TM 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 commercial 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 iP3TM 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 financial position as of March 25, 2000 has improved in comparison to the end of last fiscal year due, in part, to the increase in value of the Company's investment in Echostar. The Company's cash position was $4.1 million, inventories were reduced to $3.7 million, and short-term investments were $8.5 million as of March 25, 2000. Results of Operations for the Three and Six Month Periods Ended March 25, 2000 and March 27, 1999 Revenue: Revenue decreased by 16% from $4.7 million for the three months ended March 27, 1999 to $3.9 million for the three months ended March 25, 2000, and decreased by 29% from $12.4 million for the six months ended March 27, 1999 to $8.8 million for the six months ended March 25, 2000. The decrease is primarily a result of 7 lower unit volumes due to the aforementioned lower demand in the market for satellite transceivers and modems in Latin America, Asia and Eastern Europe and to material shortages. Also contributing to the decrease was a reduction in orders and shipments to the U.S. government. Management currently expects that revenue from existing products will remain at approximately the level experienced during the second quarter of fiscal 2000 for the remainder of the current fiscal year. We are unable to predict with any degree of certainty what revenue, if any, will result from shipments of the new iP3TM product line. Gross Profit: Gross profit increased $379,000 from a loss of $248,000 for the three months ended March 27, 1999 to gross profit of $131,000 for the three months ended March 25, 2000, and increased $407,000 from $249,000 for the six months ended March 27, 1999 to $656,000 for the six months ended March 25, 2000. As a percentage of revenue, gross profit was (5)% and 3% for the second quarter of 1999 and 2000, respectively, and 2% and 7% for the first six months of 1999 and 2000, respectively. The gross margin increase is primarily due to cost reductions resulting from the Company'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 increased 4% from $957,000 for the three months ended March 27, 1999 to $993,000 for the three months ended March 25, 2000, and decreased 2% from $2.0 million for the six months ended March 27, 1999 to $1.9 million for the six months ended March 25, 2000. Research and development expenses as a percentage of revenue were 20% and 25% for the second quarter of 1999 and 2000, respectively, and were 16% and 22% for the first six months of 1999 and 2000, respectively. Marketing, general and administrative expenses decreased 10% from $2.1 million for the three months ended March 27, 1999 to $1.9 million for the three months ended March 25, 2000, and decreased 8% from $4.0 million for the six months ended March 27, 1999 to $3.7 million for the six months ended March 25, 2000. Marketing, general and administrative expenses as a percentage of revenue were 44% and 47% for the second quarter of 1999 and 2000, respectively, and 32% and 42% for the first six 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 in absolute dollars in the remaining quarters of fiscal 2000 as overall headcount is increased in order to support iP3TM development and marketing. Net Interest Expense. Net interest income was $16,000 in the second quarter of fiscal 2000 as compared to net interest expense of $29,000 during the same period of last fiscal year. For the first six months of fiscal year 2000 interest expense was $20,000 as compared to $49,000 for the same period last year. Interest expense for fiscal 2000 has decreased due primarily to lower average debt balances as compared to fiscal 1999. Net Gain on Sale of Investments. During the second quarter of fiscal 2000 the Company realized a gain of $1.7 million on sales of 30,000 shares of Echostar common stock. For the first six months of fiscal 2000 the Company realized a gain of $3.3 million on sales of 90,800 Echostar shares. In the first quarter of fiscal 1999, the Company realized a gain of $3.2 million on the sale of Echostar shares. Other Income. Other income for the second quarter of fiscal 2000 was $5,000 as compared to $128,000 for the same period last year. For the first six months of fiscal 2000 other income was $10,000 compared to $211,000 for the same period last year. Other income in fiscal 1999 included a $100,000 payment to the Company pursuant to a sublease agreement for space at Westinghouse Drive and an insurance claim payment. Provision for Income Taxes. The Company's effective tax rate was 0% for the second quarter and first six months of fiscal 2000, and was 41% and 43% for the second quarter and first six months of fiscal 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. 8 LIQUIDITY AND CAPITAL RESOURCES At March 25, 2000, the Company had working capital of $16.1 million, including $4.1 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 $2.9 million during the first six months of fiscal 2000 as compared to net cash used of $3.1 million in the same period of fiscal 1999. The Company's investing activities provided $3.8 million during the first half of fiscal 2000 as compared to cash provided of $3.1 million during the same period in fiscal 1999. During the first half of fiscal 2000, $3.9 million was realized from the sale of Echostar shares compared with $3.4 million for the same period last fiscal year. The Company's financing activities used $671,000 during the first half of fiscal 2000 as compared to net cash used of $2.2 million during the first half of fiscal 1999. In fiscal 2000, net payments under debt obligations of $968,000 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 $1.0 million in the first half of fiscal 1999. At March 25, 2000, the Company's principal sources of liquidity consisted of $4.1 million in cash and a bank line of credit. The credit facility allows for borrowings up to the lesser of $5.0 million or 80% 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 second quarter of fiscal 2000 was approximately $1.2 million. At March 25, 2000, a total of $1.3 million was available under the line of credit and no balance was 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 111,344 shares of Echostar stock with a value of $8.5 million and an unrealized gain, net of tax, of $4.6 million recorded in stockholders' equity. SSET expects to continue to incur quarterly losses until iP3(TM) products are shipping in significant volume. At the level of operations experienced during the second quarter, the Company estimates that it will have used all of its currently available capital resources by the end of 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 March 25, 2000, will be sufficient to meet our capital requirements through 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. 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. 9 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 iP^3(TM) 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 iP^3(TM) 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. 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 Internet-over-satellite products and applications. The market for Internet-over-satellite communications products is only beginning to emerge. SSET's future success will be largely dependent on the demand for Internet-over-satellite communications products in general, and upon SSET's ability to develop and introduce new products and technologies that meet customer requirements. SSET faces challenges in demonstrating the value of its Internet-over-satellite communications 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 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 iP^3(TM), 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. 10 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. 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 iP^3TM 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 11 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 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 March 25, 2000 the Company had 111,344 shares of Echostar common stock with a closing price on that date of $76.125. As of April 25, 2000, the closing price was $58.375. The 52 week range for Echostar's common stock as of April 25, 2000, giving retroactive effect to stock splits, was a low of $10.25 and a high of $81.25. At March 25, 2000, the Company was operating under a bank credit facility with no outstanding borrowings. This facility allows for borrowings up to the lesser of $5.0 million or 80% of qualifying receivables. Funds borrowed under this line-of-credit bear interest at prime plus 2.00% (prime rate was 9.00% at March 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 March 25, 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. 12 PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Registrant's Annual Meeting of Shareholders was held on March 15, 2000. The vote of holders of record of 5,923,377 shares of SSET's common stock outstanding at the close of business on January 18, 2000 was solicited by proxy pursuant to Regulation 14A under the Securities Act of 1934. (b) The following directors were elected at the Annual Meeting: For Withheld --------- -------- Leon F. Blachowicz 4,725,797 390,942 Frank Trumbower 4,735,797 380,942 Daniel E. Moore 4,402,897 713,842 Joseph T. Pisula 4,725,897 390,842 Lawrence W. Roberts 4,725,897 390,842 D. Jonathan Merriman 4,725,897 390,842 Olin L. Wethington 4,725,897 390,842 (c) Other matters voted on at the Annual Meeting were the following: (i) To approve SSET's 1997 Equity Participation Plan, as amended, to increase the aggregate number of shares of common stock authorized for issuance under such plan by 400,000 shares. For 1,948,562 Against 760,049 Abstain 3,727 Broker non-votes 2,401,401 (ii) To approve SSET's 1997 Directors' Stock Option Plan, as amended, to increase the aggregate number of shares of common stock authorized for issuance under such plan by 100,000 shares, increase the annual grant from 2,500 to 5,000 shares of common stock and provide for an initial appointment grant of 10,000 shares of common stock. For 1,927,773 Against 762,413 Abstain 22,152 Broker non-votes 2,404,401 (iii) To ratify the selection of Deloitte & Touche LLP as independent auditors of the Company for its fiscal year ending September 30, 2000. For 5,079,562 Against 28,500 Abstain 8,677 (iv) To approve the issuance of stock option to Mr. Trumbower. For 1,878,703 Against 803,873 Abstain 29,762 Broker non-votes 2,404,401 13 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.
14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: May 9, 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 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 Sep-30-2000 Sep-26-1999 Mar-25-1999 6-MOS 4074 8476 4049 523 3741 22848 11,804 9981 24811 6774 0 0 0 62 13983 24811 8816 8816 8160 5650 (3342) 0 20 (1672) 0 (1672) 0 0 0 (1672) (0.28) (0.28)
-----END PRIVACY-ENHANCED MESSAGE-----