UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 30, 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 February 9, 2000, the following number of shares of each of the issuer's
classes of common stock were outstanding: Common Stock 6,032,965
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SSE Telecom, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except share amounts: unaudited)
December 30, September 30,
2000 2000
-------- --------
Assets
Current Assets:
Cash and cash equivalents $ 884 $ 1,075
Short-term investments -- 2,708
Accounts receivable (net of allowances of $231 and $240) 3,005 1,723
Related party accounts receivable 25 7
Inventories 5,058 4,999
Other current assets 167 179
-------- --------
Total current assets 9,139 10,691
Property, equipment and leasehold improvements, at cost
Equipment 7,488 7,488
Furniture, fixtures and leasehold improvements 4,258 4,322
-------- --------
11,746 11,810
Less accumulated depreciation and amortization (10,494) (10,332)
-------- --------
Property, equipment and leasehold improvements, net 1,252 1,478
Notes receivable from employees 175 205
-------- --------
Total assets $ 10,566 $ 12,374
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit $ -- $ 734
Accounts payable 3,102 2,395
Related party accounts payable 126 60
Accrued salaries and employee benefits 683 687
Warranty 794 1,166
Other accrued liabilities 873 222
Current portion of capital lease liability 108 108
-------- --------
Total current liabilities 5,686 5,372
Capital lease liability 58 82
Stockholders' Equity:
Common stock $.01 par value per share (30,000,000 shares
authorized; 6,257,608 and 6,218,877 shares issued) 63 62
Additional paid in capital 13,328 13,279
Treasury stock (at cost, 224,643 shares) (1,782) (1,782)
Accumulated deficit (6,787) (6,087)
Accumulated other comprehensive income -- 1,448
-------- --------
Total stockholders' equity 4,822 6,920
-------- --------
Total liabilities and stockholders' equity $ 10,566 $ 12,374
======== ========
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
December 30, December 25,
2000 1999
------- -------
Revenue $ 3,826 $ 4,871
Cost of revenue 3,165 4,346
------- -------
Gross profit 661 525
Operating expenses:
Research and development 1,179 928
Marketing, general and administrative 1,393 1,876
------- -------
Operating loss (1,911) (2,279)
Gain on sale of investments 2,266 1,652
Net interest expense (57) (36)
Other income (expense) (32) 5
------- -------
Income (loss) before income taxes 266 (658)
Provision for income taxes 966 --
------- -------
Net loss $ (700) $ (658)
======= =======
Basic and diluted net loss per share $ (0.12) $ (0.11)
======= =======
Shares used in per share calculation - basic and diluted 6,020 5,902
======= =======
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)
Three Months Ended
December 30, December 25,
2000 1999
------- -------
Operating Activities:
Net loss $ (700) $ (658)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 231 351
Gain on sale of investments (2,266) (1,652)
Interest on factoring of receivables 33 --
Deferred income taxes 966 80
Changes in operating assets and liabilities:
Accounts receivable (1,333) (5)
Inventories (59) 536
Other current assets 12 (152)
Accounts payable 773 (100)
Other accrued liabilities 276 (445)
------- -------
Net cash used by operating activities (2,067) (2,045)
------- -------
Investing activities:
Purchases of equipment (5) (8)
Proceeds from sale of investments 2,559 2,000
------- -------
Net cash provided by investing activities 2,554 1,992
------- -------
Financing activities:
Borrowings (payment) under debt obligations (758) 674
Payments on loans to employees 30 --
Proceeds from issuance of common stock 50 47
------- -------
Net cash provided (used) by financing activities (678) 721
------- -------
Net increase in cash and cash equivalents (191) 668
Cash and cash equivalents, beginning of period 1,075 3,828
------- -------
Cash and cash equivalents, end of period $ 884 $ 4,496
======= =======
The Notes to Condensed Consolidated Financial Statements are an integral
part of these statements.
4
SSE TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements, during the first quarter of fiscal 2001 and fiscal 2000 SSE Telecom,
Inc. ("SSET" or the "Company") incurred net losses of $700,000 and $658,000,
respectively. SSET incurred a net loss of approximately $5.8 million for the
fiscal year ended September 30, 2000. Additionally, SSET had an accumulated
deficit of approximately $6.8 million at December 30, 2000 and is highly
dependent on its ability to obtain sufficient additional financing in order to
fund the current and planned operating levels. These factors among others raise
substantial doubt about the ability of SSET to continue as a going concern for a
reasonable period of time. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should SSET be unable to continue as a going concern. SSET's continuation as a
going concern is dependent upon its ability to obtain additional financing to
continue the product development and commercial marketing of its new iP3
products, and ultimately obtain sufficient customer demand to attain profitable
operations. Management intends to obtain additional financing or sell certain
assets to cover SSET's additional cash flow requirements until it reaches a
break-even level of operations. Management is also pursuing the sale of the
entire Company. However, no assurance can be given that management will be
successful in these efforts.
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 SSET 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 30, 2000. Interim results of operations are not necessarily indicative
of the results to be expected for the fiscal year ending September 29, 2001.
2. INVESTMENTS
During the quarter ended December 30, 2000, SSET sold its remaining 51,344
shares of Echostar Communications Corporation ("Echostar") class A common stock
for a realized gain before income taxes of approximately $2.3 million. The
proceeds generated from the sale totaled approximately $2.6 million. In the
quarter ended December 25, 1999, SSET sold Echostar class A common stock for a
net realized gain before income taxes of approximately $1.7 million.
3. FACTORING OF ACCOUNTS RECEIVABLE
In the first quarter of fiscal 2001, SSET entered into an agreement under
which SSET may borrow against qualifying accounts receivable, with recourse,
from a financial institution ("Factor") for a financing fee of approximately 1%
for each 10 days the account is outstanding. On December 22, 2000, SSET borrowed
$625,000 from the Factor in exchange for $500,000 in cash and a Factor holdback
receivable of $92,000. Interest expense of $33,000 was recognized on the
transaction. The balance of $625,000 owed to the Factor is presented in other
accrued liabilities. As of February 9, 2001, $456,000 of the accounts receivable
had been collected in cash, $132,000 had been subsituted by SSET in exchange for
other accounts receivable, and $37,000 remained uncollected.
5
4. INVENTORIES
Inventories consist of manufacturing raw materials, work-in process and
finished goods. Inventories are valued at the lower of cost or market. Cost is
based on a method that approximates actual cost on a first-in, first-out (FIFO)
basis. At December 30, 2000 and September 30, 2000 inventories consisted of the
following (in thousands):
December, 30 September 30,
2000 2000
------ ------
(in thousands; unaudited)
Raw materials $1,951 $2,197
Work-in-process 2,513 2,066
Finished goods 594 736
------ ------
Total $5,058 $4,999
====== ======
5. CREDIT FACILITY
During the first quarter of fiscal 2001, SSET extinguished its liability
under its revolving line-of-credit facility. The related Loan and Security
Agreement between SSET and the bank has been terminated.
6. PER SHARE COMPUTATION
Basic earnings 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 earnings per share is computed using the
weighted average number of common shares and potentially dilutive common shares
outstanding during the period. Potentially dilutive common shares consist of
warrants and employee stock options based on the treasury stock method. For both
quarters presented, the reported net loss was used in the computation of basic
and diluted earnings per share.
For the first quarter of fiscal 2001 and fiscal 2000, potentially dilutive
options and warrants to purchase 32,000 and 403,000 shares, respectively, were
excluded from the diluted per share calculation as they were antidilutive due to
the net losses incurred. For the first quarter of fiscal 2001 and fiscal 2000,
options and warrants to acquire 1,071,000 common shares at a weighted-average
exercise price of $3.92, and 105,000 common shares at a weighted-average
exercise price of $10.25, respectively, were outstanding for which the exercise
price exceeded the average fair market value of the common stock for the period.
7. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
Three Months Ended
December 30, December 25,
2000 1999
-------- -----
(in thousands; unaudited)
Net loss $ (700) $ (658)
Other comprehensive income (loss) (1,448) 1,458
-------- ------
Total comprehensive income (loss) $ (2,148) $ 800
======== ======
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
This Report on Form 10-Q includes statements concerning future events and
financial performance. Statements which are not purely historical in nature are
called "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
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.
You should not rely too heavily on these forward-looking statements. There
are a number of important factors with respect to such forward-looking
statements, including certain risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. Numerous factors, such as the availability of adequate financing,
economic and competitive conditions, incoming order levels, timing of product
shipments, product margins, new product development, and reliance on key
consumers and international sales could cause actual results to differ from
those described in these statements and you should carefully consider these
factors in evaluating these forward-looking statements. For a description of
these risks see "Risk Factors" below. You should also consult the risk factors
listed from time to time in SSET's periodic filings with the SEC. All
forward-looking statements included in this document are based on information
available to us as of the date of this Report on Form 10-Q, and SSET assumes no
obligation to update any such forward-looking statements, or to update the
reasons why actual results could differ from those projected in the
forward-looking statements. The following discussion of the financial condition
and results of operations of SSET should be read in conjunction with the
condensed consolidated financial statements and notes thereto.
Overview
Revenue for the first quarter of fiscal 2001 decreased approximately 1.0
million, or 21%, to $3.8 million from $4.9 million in the first quarter of last
fiscal year. Revenue for the fourth quarter of fiscal 2000 was $2.8 million. New
orders in the first quarter of fiscal 2001 were significantly lower than in the
comparable period of last fiscal year and the fourth quarter of fiscal 2000. The
decrease in orders from the fourth quarter of fiscal 2000 is primarily due to a
decrease in orders for transportable satellite terminals from the U.S.
Government. The decrease in orders from the first quarter of last fiscal year
occurred across all product lines except iP3. The Company's backlog was
approximately $4.6 million, $5.7 million and $3.0 million at December 30, 2000,
September 30, 2000 and September 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.
SSET is continuing its investment in the development of the iP3 satellite
Internet gateway product line. In the first quarter of fiscal 2001, SSET
recognized revenue of $598,000 from sales of iP3 products to two customers.
SSET's liquidity and capital resources as of December 30, 2000 have
decreased in comparison to the end of last fiscal year due to operating losses
and to continuing investment in iP3. As a result, as of February 13, 2001, SSET
has exhausted substantially all of its currently available capital resources and
will be unable to continue operations unless additional liquidity is immediately
available. Management intends to obtain additional financing or sell certain
assets to cover SSET's additional cash flow requirements until it reaches a
break-even level of operations. Management is also pursuing the sale of the
entire Company.
Results of Operations for the Three Month Period Ended December 30, 2000 and
December 25, 1999
Revenue: Revenue decreased to $3.8 million for the first quarter of fiscal
2001 from $4.9 million for the same period in fiscal 2000. Revenue for the first
quarter of fiscal 2001 includes $598,000 from sales of the Company's new iP3
product line. Excluding iP3, decreased revenue results primarily from lower unit
volumes across all product lines. Given the financial condition of the Company
and the adverse effect this may be having on the willingness of customers to
place new orders, management is unable to predict with any degree of certainty
what revenue will be for any future quarter.
7
Gross Profit: Gross profit increased to $661,000, or 17% of sales, in the
first quarter of fiscal 2001 compared to $525,000 or 11% of sales for the first
quarter of fiscal 2000. Cost of revenue for the first quarter of fiscal 2001
includes a $372,000 benefit relating to a reduction in the liability for
estimated warranty expenses. Due primarily to continuing improvements in product
quality, SSET has experienced a continuing overall reduction in warranty related
returns and expects this trend to continue. Excluding this benefit, the decrease
in gross profit from the first quarter of last fiscal year is primarily due to a
decrease in unit volume.
Operating Expenses: Research and development expenses increased to $1.2
million, or 31% of sales, for the first quarter of fiscal 2001 from $928,000, or
19% of sales, for the first quarter of fiscal 2000. The increase was due to
higher average headcount and expenses for contract workers and consulting
expenses. Marketing, general and administrative expenses decreased to $1.4
million, or 36% of sales, in the first quarter of fiscal 2001 as compared to
$1.9 million, or 39% of sales, for the same period in fiscal 2000. Marketing,
general and administrative expenses were reduced significantly in the first
quarter of fiscal 2001 largely in response to the Company's lack of liquidity.
Discretionary spending for trade shows, outside consultants and professionals,
travel and other expenses has been reduced. To a lesser extent, payroll related
expenditures have also decreased.
Net Interest Expense: Net interest expense was $57,000 in the first quarter
of fiscal 2001. During the same period of last fiscal year, net interest expense
was $36,000. The increase is primarily due to the borrowing against accounts
receivable.
Gain on Sale of Investments: During the first quarter of fiscal 2001 SSET
sold its remaining 51,344 shares of Echostar common stock for a gain of
approximately $2.3 million. In the first quarter of fiscal 2000, the Company
realized a gain of approximately $1.7 million from the sale of Echostar common
stock.
Provision for Income Taxes: For the first quarter of fiscal 2001, an
income tax provision of $966,000 was provided on pretax income of $266,000. The
provision resulted from an increase in the tax valuation allowance in order to
fully reserve the net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
At December 30, 2000, SSET had working capital of $3.5 million, including
$884,000 in cash and cash equivalents, compared with working capital of $5.3
million, including cash and cash equivalents of $1.1 million at September 30,
2000.
Net cash used by operating activities was $2.1 million during the first
quarter of fiscal 2001 as compared to net cash used of $2.0 million in the same
period of fiscal 2000. Cash used by operating activities was principally due to
operating losses and an increase in net assets related to operating activities,
partially offset by noncash charges.
SSET's investing activities provided $2.6 million during the first quarter
of fiscal 2001 as compared to cash provided of $2.0 million during the same
period in fiscal 2000. During the first quarter of fiscal 2001, $2.6 million was
realized from the sale of Echostar common stock compared with $2.0 million in
the first quarter of fiscal 2000.
The Company's financing activities used $678,000 during the first quarter
of fiscal 2001 as compared to net cash provided of $721,000 during the first
quarter of fiscal 2000. In the first quarter of fiscal 2001, cash was used
primarily to extinguish SSET's liability under the line-of-credit facility. In
the first quarter of fiscal 2000, cash was provided primarily by borrowing's
under the line-of-credit facility.
At December 30, 2000, SSET's principal sources of liquidity consisted of
$884,000 in cash and accounts receivable qualifying for factoring. While SSET
has borrowed against $1.3 million additional receivables for cash in the amount
of $1.0 million subsequent to quarter end, the Company's ability to factor
significant additional receivables is limited. Management currently estimates
that SSET will exhaust all of its capital resources by the end of February 2001.
SSET
8
expects to continue to incur quarterly losses until such time, if ever, that iP3
products are shipping in significant volume at acceptable gross margins.
Accordingly, the Company has an immediate need for liquidity and will need
significant additional funding in order to continue operations for the remainder
of fiscal 2001. Management is currently pursuing various financing alternatives
and the potential sale of part or all of the business. However, there can be no
assurance that additional funding will be available, or if available, will be on
reasonable terms. Further, any funding may be materially dilutive to our
shareholders.
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 SAB 101A, no later 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 ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of SFAS 133," 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
did not have a material effect on its financial statements.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB No. 25." Interpretation No. 44 is
effective after July 1,2000. The Interpretation clarifies the application of
Opinion 25 for various issues, specifically: the definition of an employee, the
criteria for determining whether a plan qualifies as a non-compensatory plan,
the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and the accounting for an exchange of
stock compensation awards in a business combination. SSET does not anticipate
that the adoption of Interpretation No. 44 will have a material impact on our
financial position or results of 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 management, or
those currently considered immaterial, may also harm SSET. Particular factors
that may affect future financial results are:
History of Losses and Failure to Achieve Profitability; Immediate Need for
Additional Financing
As of December 30, 2000, SSET had only approximately $598,000 of revenue
derived from the iP3 platform and had an accumulated deficit of $6.8 million.
SSET's future results of operations will be highly dependent on further
enhancements to the design and development of iP3, and to successful
introduction, marketing and manufacture of this platform. 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 will be required to raise additional capital. SSET has exhausted
substantially all of its currently available capital resources. 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
stockholders. SSET is
9
also pursuing the sale of certain assets and, potentially, the entire Company.
If SSET is unable to obtain additional liquidity a timely basis, SSET will be
required to reduce or even terminate its operations.
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 further enhancements to the design and development
of iP3, and to successful introduction, marketing and manufacture of this
platform. To date, SSET has made only limited commercial shipments of these
products. This product line may require additional development work,
enhancement, testing or further refinement before it can be made commercially
successful. 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 for any reason
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 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 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, high data rate modems and
iP3 satellite Internet gateway products, 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
SSET's future 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 48% of net
revenues in fiscal 2000. SSET anticipates that its STAR transceivers will
continue to account for a substantial portion of its net revenues during fiscal
2001. 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 2000, the largest five customers accounted for 45% 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 2001. There can
be no assurance that SSET will realize equivalent sales from its 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 has been experienced in the
past, 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 have 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,
11
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 likely that SSET's future operating results will be below the expectations
of public market 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 uncertainties of
monetary exchange values have 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
SSET is exposed to a variety of risks, including changes in interest rates
affecting the return on its investments and foreign currency fluctuations. The
Company has established policies and procedures to manage its exposure to
fluctuations in interest rates and foreign currency exchanged.
SSET maintains any excess funds in money market and Certificate of Deposit
accounts at banks. The Company's exposure to market risk due to fluctuations in
interest rates relates primarily to its interest earnings on its cash deposits.
These securities are subject to interest rate risk inasmuch as their fair value
will fall if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10% from the levels prevailing at December
30, 2000, the fair value of the portfolio would not decline by a material
amount. In addition, interest rate fluctuations may affect the buying patterns
of the Company's customers. The Company does not use derivative financial
instruments to mitigate risks.
Although SSET transacts business in various foreign countries, settlement
amounts are based on U.S. currency. However, the indirect effects of significant
foreign currency fluctuations could have a material adverse effect on the
Company's business, financial condition and results of operations. For example,
international demand for the Company's products is affected by foreign currency
exchange rates. In addition, interest rate fluctuations may affect the buying
patterns of the Company's customers.
PART II - OTHER INFORMATION
None.
12
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 13, 2001
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
13