ITEM 1. BUSINESS
SSE Telecom, Inc.'s (the "Company" or "SSE Telecom") principal business is the manufacture and sale of satellite telecommunication equipment. The Company designs, manufactures and markets satellite communications products and systems for the transmission of voice, data, fax and video. SSE Telecom sells its products directly to domestic and international telecommunication system integrators as well as to certain sophisticated end users and has an installed base of over 40,000 transceivers and modems in satellite earth stations located in over 110 different countries.
The Company's principal executive offices and manufacturing operations are located in Fremont, California at 47823 Westinghouse Drive, Fremont, CA 94539-7437.
SATELLITE COMMUNICATION INDUSTRY OVERVIEW
Growing international demand for telecommunications capacity, technical innovation and deregulation trends continue to contribute to the growth in the worldwide satellite communications market. The growth is fueled by user requirements for information, particularly in developing countries. Satellite communication systems are often a preferred medium for communications over a large geographic area and have specific advantages over traditional terrestrial networks in many applications. The industry is driven by a high launch rate of geostationary communications satellites for international applications.
The equipment portion of the satellite communications market is generally segmented into earth station and component submarkets. The earth station market is further divided into large, medium, small, very small aperture terminal ("VSAT") and mobile segments. The Company's primary product focus is on the small and VSAT segments of the market.
PRODUCTS
A satellite earth station system generally consists of three primary components: (1) transceivers (2) modems and (3) antennas. SSE Telecom manufactures and sells two of the three key components for earth stations, transceivers and modems. These products are complex assemblies of devices and components designed to perform multiple-circuit functions in a single package. The Company's products, particularly transceivers, have a significant engineering content and require skilled technical labor for assembly and test. In addition to selling separate components, the Company designs and markets a wide range of integrated satellite hardware, including rack-mounted converters. The Company also selectively provides systems integration services to certain sophisticated end users of satellite earth station products.
The Company offers more than 20 different products, including STAR satellite transceivers, modems, rack converters, and T-Series outdoor converters. The Company is focused on three primary product areas: (1) microwave radio frequency ("RF") products which include X, C and Ku-band transceivers and converters, (2) digital products, primarily satellite modems, and (3) system product offerings for Federal government applications.
Transceivers
Transceivers manufactured by the Company contain microwave downconverters, upconverters, frequency synthesizers and power amplifiers. SSE Telecom designs and manufactures, or procures from qualified outside vendors, all of these individual subassemblies of the transceiver. The transceivers are designed for worldwide use in satellite earth stations such as those using standards set by Intelsat and Eutelsat. SSE Telecom manufactures a variety of transceivers at X, C and Ku-band frequencies. Specific power and frequency requirements may be adjusted to individual customer requirements.
Transceiver options support many different types of specific applications and, therefore, prices may vary over a wide range. However, most of these products are standard elements of communications systems and, as such, are competitively priced.
Modems
SSE Telecom manufactures a broad range of modems ranging from a low cost, low data rate closed network modem to a fully featured IBS/IDR high speed modem. The Company's modems and complementary redundancy switches provide voice, data, and video communications where industry standard modulation techniques and programmable coding options are required. These modems support industry standard BPSK, QPSK and 8PSK/TCM modulation methods.
Transportable Satellite Terminals
SSE Telecom manufactures several configurations of small transportable terminals (Fly-Away earth stations) for X, C, Ku and Tri-Band configurations. The transportable Tri-Band transceivers are lightweight and designed to permit rapid change to X, C and Ku frequencies with minimal changes to the physical configuration of the system. These are designed for maximum performance in a small package with quick and easy set up with no tools.
CUSTOMERS
Customers of the Company's products include domestic and international telecommunication systems integrators and service providers, private communication networks and foreign and domestic government agencies. These key customers represent a wide range of applications including internet access, business networks, government usage, training and distance learning. Companies in broadcast television also contribute to demand in some regions of the world. The Company's customer base, while diverse, includes a concentration of five customers which accounted for 42% of revenues in 1998. The U.S. Government and Loral/Orion, Inc. each accounted for 10% of revenues in 1998. The U.S. Government accounted for 11% of revenues in 1997 and Nortel Dasa accounted for 13% of revenues in 1996.
The evolving international markets continue to be an important source of revenue for the Company. Continued requirements for telephone service internationally drives the demand particularly in the market segments addressed by the Company. Satellite systems are very well suited for quick installation of telephonic service in remote geographic regions and interface well with other transmission media. The Company has an installed base of products in over 110 countries. Direct export revenues accounted for 44% of the Company's revenues in 1998, 45% of the Company's revenues in 1997 and 56% of the Company's revenues in 1996. No individual geographic region represented a significant portion of revenues.
SALES, MARKETING AND CUSTOMER SUPPORT
SSE Telecom directs its marketing activities and programs toward domestic and international systems integrators of telecommunications equipment and to establishing direct relationships with certain substantial companies or government agencies who provide their own systems installations. The Company markets and supports its products through a direct sales force, supplemented in international markets, by independent sales representatives. Sales promotion is accomplished by direct mail, participation in domestic and international trade shows, advertising in industry and trade publications, telemarketing, and through the World Wide Web.
The Company believes an essential element of its marketing strategy is its establishment and maintenance of close relationships with its customers through multi-functional teams composed of technical, marketing, sales, training, and manufacturing personnel. Field engineers, customer service representatives, application engineers and sales support personnel provide support services to customers. Customers receive direct support from customer service representatives throughout the order entry, manufacturing and delivery scheduling processes so that customer equipment specifications and scheduling may be met. Warranty and repair service is administered by the same representatives, thus enhancing the continuity of customer support. Technical and service support is offered directly by personnel based in Europe and Thailand which ensures that the majority of the Company's worldwide customers can contact a representative during business hours. Most support services are provided through direct contact via telephone, e-mail and facsimile. When appropriate, technical and training support is also provided in the field at customer sites. Customers may also receive training at the Company's facilities.
MANUFACTURING
The Company manufactures its products in Fremont, California. This facility is certified ISO 9001 compliant. The primary manufacturing focus during 1998 was the manufacture of STAR transceivers, and two modem products that had been introduced in 1997. The STAR transceivers, introduced in late 1996, are the Company's latest design in a series of advanced satellite transceiver products, utilizing Monolithic Microwave Integrated Circuit (MMIC) technology.
COMPETITION
The satellite communications equipment market is very competitive and the Company expects that competition will increase. Significant competitive factors include price, quality, delivery, product performance and features, timing of new product introductions by the Company and its competitors, and customer service and support. The Company believes it competes favorably in each of these areas. Price pressure is expected to continue in the satellite transceiver and modem market in the foreseeable future. As a result, the Company expects to continue to experience declining average sales prices for its products. The Company's future gross margin is dependent upon its ability to reduce costs in line with or faster than declines in sales prices.
RESEARCH AND DEVELOPMENT AND SUSTAINING ENGINEERING
The Company's research and development efforts focus on new product development, adding or enhancing features on existing products, and sustaining engineering on mature products. Research and development expenses were approximately $5.6 million, or 15.3% of revenue during fiscal 1998, $5.1 million, or 11.1% of revenue in fiscal 1997, and $4.2 million, or 9.0% of revenue in fiscal 1996. The increase in research and development expenditures principally relates to (1) the Company's development of advanced digital modem products, (2) increased integrated system products and content, and (3) sustaining engineering for the STAR product line. Research and development expenses are expected to decline in fiscal 1999 relative to fiscal 1998 due to the planned increased reliance on outside supplier relationships. However, the Company plans to continue with its commitment to research and development in fiscal 1999.
PERSONNEL
As of December 4, 1998, the Company employed a total of 172 regular fulltime employees and 17 temporary employees. The Company's employees are not represented by a labor organization nor is the Company party to any collective bargaining agreement. The Company has never experienced an employee strike or work stoppage. The Company considers its relations with its employees to be good.
BACKLOG
SSE Telecom had a backlog of firm orders of $5,931,000 at September 26, 1998, and management expects all of the orders to be delivered within fiscal 1999. The current backlog compares to a backlog of $11,027,000 at September 27, 1997 and $8,872,000 at September 28, 1996. The decrease in backlog in 1998 was due to lower order bookings primarily due to economic conditions in Latin America and Asia, in addition to reduced U.S. Government demand. The backlog is generally representative of the historical product and customer mix. Backlog as of December 4, 1998 was approximately $5,639,000.
Timing differences from year to year as to the receipt of large orders and changes in factory production make meaningful year to year comparisons of backlog difficult.
FOREIGN CURRENCY
All contracts with foreign customers are negotiated in United States dollars.
RISK FACTORS
Information contained in this document 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, 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 economic and competitive conditions, incoming order levels, timing of product shipments, product margins, new product development, and reliance on key consumers in international sales could cause actual results to differ from those described in these statements and prospective investors and stockholders should carefully consider these factors in evaluating these forward-looking statements. Particular factors that may affect future financial results are:
Potential Fluctuations in Quarterly Operating Results
The Company'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 the Company's product line of STAR satellite transceivers and the Company's new high speed high data rate modems, delays in the delivery of the Company's products, delays in the closing of sales, availability, quality, timely shipment of materials, equipment and components from the Company's suppliers, new product introductions and product enhancements by the Company or its competitors, the prices of the Company'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 the Company's operating results for such period, and such price pressure over an extended period could materially adversely affect the Company's long term profitability. For example, the Company's reduction in the list price of its STAR transceiver during fiscal 1998 had a negative impact on net revenues and gross margins. The Company expects that the gross margin will continue to be under pressure to decline due to such price reductions as well as continuing competitive price pressure in the satellite telecommunication equipment market. The Company'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. There can be no assurance that the Company will be able to increase unit sales volumes of existing products, introduce and sell new products or reduce its costs as a percentage of net revenues. The Company typically ships products near the end of each quarter. Accordingly, the Company's net revenues for any particular quarter cannot be predicted with any degree of accuracy. In addition, the Company 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 the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected.
Product Concentration; Market Acceptance of Products
Sales of the Company's STAR transceivers have accounted for approximately 44% of net revenues in 1998. The Company anticipates that its STAR transceivers will continue to account for a substantial majority of its net revenues during fiscal year 1999. Any factor adversely affecting the demand or supply for the STAR transceiver product line could materially adversely affect the Company's business, financial condition or results of operations. The market for the Company'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 the Company's existing products and future products. The Company's success will depend, among other factors, upon its ability to enhance its existing products and to introduce new products on a timely basis.
The Company's STAR transceivers and other products are extremely complex and the Company has, in the past, experienced problems with respect to the performance and reliability of these products. If the Company's products continue to have performance and reliability or quality problems, then the Company may experience reduced orders and additional warranty and service expenses. In addition, such problems may damage the Company's reputation and adversely affect its ability to attract new customers. There can be no assurance that the Company will not encounter performance or reliability issues in the future.
Limited Number of Principal Customers
Sales of the Company's products are concentrated in a small number of customers. For fiscal 1998, the largest five customers accounted for 42% of sales. There can be no assurance that the Company 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 the Company's business, financial condition and results of operations.
Dependence on Suppliers
The Company's manufacturing operations are highly dependent upon the timely delivery of quality components and other equipment by outside suppliers. From time to time the Company 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 the Company 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. The Company competes with a number of companies that manufacture components of satellite earth station systems similar to those manufactured by the Company. Certain of these companies have substantially greater financial resources and production, marketing, engineering and other capabilities than the Company with which to develop, manufacture, market and sell their products. The Company 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 the Company and customer service and support.
The Company 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 the Company to reduce the prices of its products. The Company 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 the Company's business, financial condition and results of operations.
Attraction and Retention of Qualified Personnel
The Company's manufacturing and development capabilities are highly dependent upon hiring and retaining the required technical personnel. The Company competes for such personnel with other companies, government entities and organizations. From time to time the Company has experienced difficulties in recruiting and retaining key qualified personnel which impacted operations. There can be no assurance that the Company will not experience personnel resource problems in the future.
Year 2000
The Company is aware that many existing Information Technology ("IT") systems, such as computer and software products, as well as non-IT systems that included embedded technology, were not designed to correctly process data after December 31, 1999. The Company has created a Year 2000 project team to review, and evaluate the Company's products, computer systems, test equipment systems and other non-IT systems. The Company has determined that it will be necessary to modify or replace portions of its software so that its computer and non-IT systems will properly utilize dates beyond 1999. The Company believes that with
modifications and conversions to new software, the Year 2000 issue can be mitigated, and anticipates completion of all Year 2000 efforts by the end of fiscal 1999. However, if such modifications and conversions are not made, or are not completed in a timely manner, the Year 2000 issue could have a material impact on the operations of the Company. The Company has also initiated discussions with its suppliers regarding their plans to investigate and address their Year 2000 problems, if any. Failures by the Company's suppliers' computer systems could adversely affect the demand for product. There can be no assurance that the systems of other companies on which the Company's systems, services, and products rely will be timely converted, or that any such failure to convert by another company would not have an adverse affect on the Company's business financial conditions or results of operations.
The Company has been using both external and internal resources to upgrade its commercial software programs for the Year 2000 issue. To date, the amounts incurred and expensed for developing and carrying out the plan have not had a material effect on the Company's operations. The Company plans to complete the Year 2000 modifications, including testing, by the end of 1999. The total remaining estimated cost for addressing the Year 2000 Issue of approximately $220,000,which is based on management's current estimates, is not expected to be material to the Company's operations. All remaining Year 2000 issue costs will be funded through operating cash flows.
As the efforts of the Year 2000 project team continue, the Company may identify situations that present material Year 2000 risks and/or that will require substantial time and material expense to address. In addition, if any customers, suppliers or service providers fail to appropriately address their Year 2000 issues, such failure could have a material adverse effect on the Company's business, financial condition and results of operations. For example, because a significant percentage of the purchase orders received from the Company's customers are computer generated and electronically transmitted, a failure of one or more of the computer systems of the Company's customers could have a significant adverse effect on the level and timing of orders from such customers. Similarly, if Year 2000 problems experienced by any of the Company's significant suppliers or service providers cause or contribute to delays or interruptions in the delivery of products or services to the Company, such delay or interruptions could have a material adverse effect on the Company's business, financial condition and results of operations. Finally, disruption in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. Although the Year 2000 project team has not determined the most likely worst-case Year 2000 scenarios or quantified the likely impact of such scenarios, it is clear that the occurrence of one or more of the risks described above could have a material adverse effect on the Company's business, financial conditions or results of operations.
The Company's Year 2000 project team's activities will include the development of contingency plans in the event the Company has not completed all of its remediation programs in a timely manner. In addition, the Year 2000 project team will develop contingency plans in the event that any third parties who provide goods and services essential to the Company's business fail to appropriately address their Year 2000 issues. The Year 2000 project team expects to conclude the development of these contingency plans by the end of fiscal 1999. Even if these plans are completed on time and put in place, there can be no assurance that such plans will be sufficient to address any third party failures or that unresolved or undetected internal and external Year 2000 issues will not have a material adverse effect on the Company's business, financial condition and results of operations
ITEM 2.
ITEM 2. PROPERTIES
SSE Telecom occupies two facilities: 37,700 square feet at 47823 Westinghouse Drive, Fremont, California which houses manufacturing and administration, and approximately 11,000 square feet at 47436 Fremont Boulevard, Fremont, California which houses research and development. Both facilities are leased with the lease on the first facility expiring in June 2001, and the lease on the second facility expiring in July 1999. The Company maintains its executive offices in the Fremont facilities. SSE Telecom also leases approximately 7,000 square feet of facilities in Phoenix, Arizona that was once occupied by SSE Datacom. This facility is not currently utilized and the Company is actively marketing the facility for sublease.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation and is not aware of any litigation that would have a material adverse effect on the Company or its business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company has one series of common stock, $.01 par value common stock, the holders of which have full voting rights. At December 4, 1998, there were approximately 157 holders of record of the Company's common stock. This number is based upon the number of stockholders of record as reported by the American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
The Company's common stock is listed on the National Association of Securities Dealers, Inc. Automated Quotation System (NASDAQ) under the trading symbol "SSET" and is listed in the Wall Street Journal and in other newspapers. The following table sets forth representative high and low closing prices in the NASDAQ system for the specified periods.
The Company follows the policy of reinvesting all earnings to finance expansion of its business. No change in this policy is contemplated in the foreseeable future. The board of directors has not declared dividends in the last five years and does not have present plans to declare dividends in the foreseeable future. The Company's credit facility requires the Company's bank to give prior written approval before declaring or paying cash dividends.
RECENT SALES OF UNREGISTERED SECURITIES
In fiscal 1998, the Company did not sell any of its securities in unregistered sales.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(dollars and shares in thousands except for per share data)
The table above sets forth selected consolidated financial data of SSE Telecom and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and notes thereto in Item 8. This Annual Report on Form 10-K contains certain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those herein. Factors that cause or contribute to such differences include, but are not limited to, those discussed in "Business-Risk Factors" in Part 1 of this Annual Report on Form 10-K and in the Company's other filings with the SEC.
OVERVIEW
Fiscal 1998 was a challenging year for SSE Telecom. The Company's financial results were adversely impacted by lower than anticipated order bookings resulting from unfavorable international economic conditions and production problems related to both the transceiver and modem product lines. The production process was affected by the restructuring and consolidation of the Company's modem development operations from the Phoenix, Arizona facility to the Fremont, California facilities.
The Company's 1998 year end backlog was $5.9 million. This was a 46.4% decrease from 1997 year end of $11.0 million, and a 33.7% decrease over the 1996 year end of $8.9 million. The decrease was due to poor economic conditions in Latin American and Asia, and decreased U.S. Government business resulting in reduced order bookings. The difficulties in factory throughput also negatively impacted order bookings.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS 1998, 1997 AND 1996
REVENUE: Revenues were $36.7 million for fiscal 1998 as compared to $45.8 million in fiscal 1997 and $46.2 million in fiscal 1996, representing a decrease from 1997 to 1998 of 19.7% compared to a decrease of 1.0% from 1996 to 1997. The decline in revenue for fiscal 1998 is principally attributable to lower bookings in addition to a decline in the average selling prices in the Company's transceiver products.
GROSS MARGIN: The gross margin was $2.1 million or 5.8% of revenues in fiscal 1998, compared to $9.3 million or 20.4% of revenues and $12.5 million or 27.1% of revenues in fiscal 1997 and fiscal 1996, respectively. The gross margin decline in 1998 was due to material manufacturing problems in the Company's satellite transceivers, the $3.9 million expense associated with the elimination of obsolete products, and a decline in the average selling price of the Company's products. Gross margin decrease in 1997 was due to a defective component in certain of the Company's satellite transceivers for which the Company recorded a $1.8 million special warranty charge, the impact of the restructuring of the modem manufacturing operations, and increased competition resulting in declines in the average selling price of the Company's products.
OPERATING EXPENSES: Research and development spending was $5.6 million in fiscal 1998, compared to $5.1 million in fiscal 1997, and $4.2 million in 1996. Research and development expenses as a percentage of sales were 15.3%, 11.1% and 9.0% in fiscal 1998, 1997 and 1996, respectively. The increase in research and development expense relates to the Company's continued sustaining engineering and improved manufacturability efforts on the STAR product line, development of advanced digital modem products, and increased system content in various products. The Company plans to continue its commitment to research and development in fiscal 1999.
Marketing, general and administrative expenses were $8.7 million or 23.6% of revenues in fiscal 1998, compared to $9.5 million or 20.8% of revenues in fiscal 1997, and $7.7 million or 16.7% of revenues in fiscal 1996. The decrease in absolute dollars in fiscal 1998 was due to the reduction of expenses as a result of the June 1997 consolidation of the Arizona operations. The increase in fiscal 1997 was due to increases in bad debts, certain compensation and severance costs associated with the Company's former president and higher commission expenses. The Company's investment in its marketing, general and administrative functions may vary as a percentage of sales in the future.
The fiscal 1998 restructuring expenses of $1.2 million principally includes charges associated with the closing and relocation of its modem development facility from Scottsdale, Arizona to Fremont, California, staffing adjustments and severance. The fiscal 1997 restructuring expense was for charges associated with the consolidation of the Company's manufacturing facilities and consisted of a write down for certain intangibles acquired as part of the purchase of the assets of Fairchild Data Corporation in fiscal 1996, severance for employees and other various costs incurred in transferring the manufacturing capability in Scottsdale, Arizona and consolidating it with the transceiver product line in Fremont, California.
GAIN ON SALES OF INVESTMENTS: During fiscal 1998, the Company sold 506,880 shares of its total of 625,780 shares of class A common stock (the "Stock") of Echostar Communications Corporation ("Echostar".) The Echostar Stock was acquired in December 1994 in exchange for the Company's 91.2% interest in Directsat Corporation, a direct broadcast satellite licensee. The Company realized a pre-tax gain of approximately $10.0 million, net of commission and transaction expenses, on the sale of the Stock in 1998. The proceeds generated from these sales were used for repayment of convertible debentures payable to Echostar, and to fund general
working capital requirements. A pre-tax gain of approximately $3.7 million and $2.6 million, net of commission and transaction expenses, were realized on the sale of the Stock in fiscal 1997 and fiscal 1996, respectively. As of September 26, 1998, the Company held a total of 118,900 Echostar common stock.
GAIN ON SALES OF ASSETS: In 1989, Corporate Telecom Services ("CTSI") a wholly-owned subsidiary of the Company, was an applicant before the Federal Communications Commission for the award of certain cellular telephone licenses for certain rural statistical areas ("RSA"). In 1989, in order to comply with certain FCC rules, the Company transferred its ownership interest in CTSI to Wilbur L. Pritchard (the "Trustee"), pursuant to a trust agreement among SSE Telecom, CTSI and the Trustee. On December 22, 1997, CTSI entered into an agreement with Western Wireless Corporation ("Western") under which agreement the parties agreed to seek FCC approval for the transfer by CTSI of its authorization to operate a cellular telephone system in Boone, Nebraska RSA. The application was approved and the transfer by CTSI to Western effected June 22, 1998. Upon the transfer of the license to Western, CTSI received $6,960,000. After the payment of all expenses and liabilities arising from the obtaining of the license and its transfer, the termination of the trust, and all expenses associated with such termination, CTSI had net assets of approximately $5.8 million, before provision for taxes. In July 1998, the Company, CTSI and the Trustee determined that the trust agreement should be terminated. On July 16, 1998, pursuant to an Agreement for Termination by and among SSE Telecom, CTSI and the Trustee, the trust was terminated and the ownership interest of CTSI conveyed by the Trustee to the Company. There is no material relationship between the Trustee, or any of his affiliates, on the one hand, and the Company and any of its affiliates, directors, or officers, or any associate of any director of officer of the Company, on the other hand, other than that arising out of the creation of the trust agreement, the ownership of the CTSI stock interest thereunder, and the Agreement for Termination of the trust. In 1989 Mr. Pritchard was an officer, director and principal shareholder of the Company. Mr. Pritchard has not been a director or officer, or held any material ownership interest in the Company in the past five (5) years.
NET INTEREST EXPENSE: Net interest expense was $411,000, $524,000 and $479,000 in fiscal 1998, 1997 and 1996, respectively. The decrease in interest expense during fiscal 1998 reflects lower levels of borrowing throughout the year and repayment of debenture principal. During fiscal 1998, 1997, and 1996 the Company had earned interest income, which lowered net interest expense.
PROVISION FOR INCOME TAXES: The Company's effective income tax rate was 42.0%, (35.0%) and 40.0% in fiscal 1998, fiscal 1997 and fiscal 1996 respectively. The higher tax rate in fiscal 1998 was principally due to an increase in state taxes from the gain on sale of the CTSI license. The income tax benefit for fiscal 1997 relates principally to the federal tax effect of that year's loss. The higher tax rate in fiscal 1996 was mainly attributable to the non-deductible nature of the cost associated with warrants issued to Echostar and lower tax benefits from foreign sales and research and development credit.
LIQUIDITY AND CAPITAL RESOURCES: At September 26, 1998, the Company had working capital of $10.4 million, including cash and cash equivalents of $3.3 million compared to working capital at September 27, 1997 of $13.7 million, including cash and cash equivalents of $408,000.
Net cash used in operating activities was $4.8 million in 1998 compared to net cash used in operating activities of $3.4 million and $6.0 million in 1997 and 1996, respectively. Cash flow from operations was negative in 1998 principally due to operating losses, decrease in accounts payable and non-cash charges, partially offset by decreases in accounts receivable, inventory, other assets and a non-cash consolidation charge.
The Company's investing activities provided $12.9 million in fiscal 1998 as compared to $2.7 million in fiscal 1997 and $257,000 used in fiscal 1996. The cash provided in fiscal 1998 resulted from the sale of Echostar common stock and the sale of the CTSI license. The Company financed a portion of its operating cash requirements and the payment of debt with these funds.
The Company's financing activities in fiscal 1998 included the expenditure of $5.2 million primarily for payment on the Company's 6-1/2% convertible subordinated debentures payable to Echostar and payment on the Company's bank line-of-credit.
During 1998, the Company purchased an additional $2.4 million of Media4 convertible debentures. See Note 4 in the Notes to Consolidated Financial Statements. Media4 is a privately held developer of products for distribution of multimedia information over wireless networks to personal computers. This emerging market is complementary to the Company's business and the Company offers Media4 products through its own international distribution channels.
At September 26, 1998, the Company's principal sources of liquidity consisted of $3.3 million in cash and cash equivalents. On October 21, 1997 (amended August 1998), the Company entered into a credit facility which allows for a line-of-credit of $3.0 million for operations ($2.2 million outstanding at September 26, 1998) and a $900,000 term loan. See Note 6 in the Notes to Consolidated Financial Statements.
A principal source of finance is the Company's holding of Echostar common stock which is subject to the volatility of the stock market. On September 26, 1998 the Company held 118,900 shares of Echostar stock with a value of $3.0 million and an unrealized gain, net of tax, of approximately $1.8 million recorded in stockholders' equity.
The Company believes that its current cash position, funds generated from operations, funds available from its equity holdings in Echostar common stock and its lines of credit and term loans will be adequate to meet its requirements for working capital, capital expenditures, debt services and external investment for the foreseeable future. Due to certain constraints on the ability to sell Echostar
shares and potential volatility of the value of the stock, there could be a significant reduction in funding available from the liquidation of Echostar stock.
YEAR 2000
The Company is aware that many existing Information Technology ("IT") systems, such as computer and software products, as well as non-IT systems that included embedded technology, were not designed to correctly process data after December 31, 1999. The Company has created a Year 2000 project team to review, and evaluate the Company's products, computer systems, test equipment systems and other non-IT systems. The Company has determined that it will be necessary to modify or replace portions of its software so that its IT and non-IT computer systems will properly utilize dates beyond 1999. The Company believes that with modifications and conversions to new software, the Year 2000 issue can be mitigated, and anticipates completion of all Year 2000 efforts by the end of fiscal 1999. However, if such modifications and conversions are not made, or are not completed in a timely manner, the Year 2000 issue could have a material impact on the operations of the Company. The Company has also initiated discussions with its suppliers regarding their plans to investigate and address their Year 2000 problems, if any. Failures by the Company's suppliers' computer systems could adversely affect the demand for product. There can be no assurance that the systems of other companies on which the Company's systems, services, and products rely will be timely converted, or that any such failure to convert by another company would not have an adverse affect on the Company's business financial conditions or results of operations.
The Company has been using both external and internal resources to upgrade its commercial software programs for the Year 2000 issue. To date, the amounts incurred and expensed for developing and carrying out the plan have not had a material effect on the Company's operations. The Company plans to complete the Year 2000 modifications, including testing, by the end of 1999. The total remaining estimated cost for addressing the Year 2000 Issue of approximately $220,000,which is based on management's current estimates, is not expected to be material to the Company's operations. All remaining Year 2000 Issue costs will be funded through operating cash flows.
As the efforts of the Year 2000 project team continue, the Company may identify situations that present material Year 2000 risks and/or that will require substantial time and material expense to address. In addition, if any customers, suppliers or service providers fail to appropriately address their Year 2000 issues, such failure could have a material adverse effect on the Company's business, financial condition and results of operations. For example, because a significant percentage of the purchase orders received from the Company's customers are computer generated and electronically transmitted, a failure of one or more of the computer systems of the Company's customers could have a significant adverse effect on the level and timing of orders from such customers. Similarly, if Year 2000 problems experienced by any of the Company's significant suppliers or service providers cause or contribute to delays or interruptions in the delivery of products or services to the Company, such delay or interruptions could have a material adverse effect on the Company's business, financial condition and results of operations. Finally, disruption in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. Although the Year 2000 project team has not determined the most likely worst-case Year 2000 scenarios or quantified the likely impact of such scenarios, it is clear that the occurrence of one or more of the risks described above could have a material adverse effect on the Company's business, financial conditions or results of operations.
The Company's Year 2000 project team's activities will include the development of contingency plans in the event the Company has not completed all of its remediation programs in a timely manner. In addition, the Year 2000 project team will develop contingency plans in the event that any third parties who provide goods and services essential to the Company's business fail to appropriately address their Year 2000 issues. The Year 2000 project team expects to conclude the development of these contingency plans by the end of fiscal 1999. Even if these plans are completed on time and put in place, there can be no assurance that such plans will be sufficient to address any third party failures or that unresolved or undetected internal and external Year 2000 issues will not have a material adverse effect on the Company's business, financial condition and results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. SFAS 130 is effective for financial statements issued for fiscal years beginning after December 15, 1997 and requires presentation of earlier periods as well. Had SFAS 130 been adopted for the year ending September 26, 1998 the comprehensive income would be $944,000. If adopted for the year ending September 27, 1997 comprehensive loss would be $4,252,000.
In June 1997, the FSAB issued SFAS 131, "Disclosures About Segments of an Enterprise and Related Information." This statement requires that financial information be reported on the basis used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS 131 will be effective for the Company's fiscal year 1999 and requires restatement of all previously reported information for comparative purposes. The Company has not yet evaluated the effects of this change on its reporting of segments.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivatives Instruments and Hedging Activities" was issued which defines derivatives, requires all derivatives be carried at fair value, and provides for hedging accounting when certain conditions are met. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Although the Company has not fully assessed the implications of this new statement, the Company does not believe adoption of this statement will have a material impact on the Company's financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
On December 30, 1994, the Company completed the exchange of its 91.2% interest in Directsat Corporation, a direct broadcast satellite licensee, which resulted in the receipt of 912,717 shares of Class A common stock (the "Shares") of Echostar. The Company sold 506,880 Shares and 176,937 Shares at net realized gains before taxes of $10,020,000 and $3,730,000 in fiscal 1998 and fiscal 1997, respectively. The value of these shares is subject to market risk and general economic conditions. As of September 26, 1998, the Company had 118,905 Shares remaining with the closing price on that date of $25.38. The 52-week range for Echostar's Common Stock as of December 4, 1998 was a low of $14.00 and a high of $42.13.
During fiscal 1998, the Company invested $2,425,000 in Media4 Inc. As of September 26, 1998, the Company had invested approximately $965,000 in Media4 Common Stock and held $2.6 million in Media4 convertible 9.5% and 7% debentures, due in March 1999 and May 2000, respectively. As of September 27, 1997, the Company had invested approximately $965,000 in Media4 Common Stock and held $175,000 in Media4 convertible 7% debentures. On October 14, 1998 Echostar announced it had signed a letter of intent to acquire Media4 through the exchange of Common Stock. The Company does not anticipate making any further investment in Media4 and believes Echostar Common Stock received from Echostar's acquisition of Media4 will be approximately equal value to the Media4 Common Stock and convertible debentures as of September 26, 1998.
At September 26, 1998, the Company was operating under a credit facility with outstanding borrowings of $2.2 million. This facility allows for a $3.0 million operating line-of-credit. Borrowings under this line-of-credit bear interest at prime plus 1.25% (prime rate was 8.5% at September 26, 1998). The Company is required under this line-of-credit to be in compliance with certain financial covenants.
Certain assets of the Company secure the line-of-credit. On August 14, 1998 the Company and the bank modified the borrowing agreement. Pursuant to the amendment, the amount of the line-of-credit available was reestablished at $3.0 million, the borrowing base was modified to be based on a formula and several covenants were modified. The Company was in compliance with all covenants as of September 26, 1998. The credit agreement expires January 15, 1999.
The Company also had a term note outstanding at September 26, 1998. The total principal outstanding on this note was $616,000 with interest payable at prime plus 1.25%. Interest payments are made on a monthly basis. The term note has a maturity date of August 31, 1999.
At September 26, 1998, the Company had an outstanding balance of $1.2 million related to 6.5% Convertible debentures due March 1, 2001 payable to EchoStar.
The Company's exposure to market risk due to fluctuations in interest rates primarily relates to the Company's credit facility, term note and convertible debentures. If market interest rates were to increase immediately and uniformly by 10% from levels prevailing at September 26, 1998, the fair value of the debt obligations would not change materially. The company does not use derivative financial instruments to mitigate interest rate risk.
Notwithstanding the foreign analysis of the direct effects of interest rate risk, the indirect effects of fluctuations could have a material adverse effect on the Company's business, financial condition and results of operations. For example, worldwide demand for the Company's products could be effected by interest rate fluctuations that could change the buying patterns of the Company's customers.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders of SSE Telecom, Inc.
We have audited the accompanying consolidated balance sheet of SSE Telecom, Inc. and subsidiaries ("Company") as of September 26, 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended. Our audit also included the financial statement schedule for the year ended September 26, 1998 listed at Item 14(a)2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1998 consolidated financial statements present fairly, in all material respects, the financial position of SSE Telecom, Inc. and subsidiaries at September 26, 1998 and the results of their operations and their cash flows for the then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the year ended September 26, 1998, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
San Jose, California /s/ Deloitte & Touche LLP November 25, 1998
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders SSE Telecom, Inc.
We have audited the accompanying consolidated balance sheet of SSE Telecom, Inc. as of September 27, 1997 and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the two years in the period ended September 27, 1997. Our audits also included the financial statement schedule listed in the index at Item 14(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We have conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SSE Telecom, Inc. at September 27, 1997 and the consolidated results of its operations and its cash flows for each of the two years in the period ended September 27, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California December 4, 1997
Consolidated Balance Sheets (dollars in thousands)
The Notes to Consolidated Financial Statements are an integral part of these statements.
Consolidated Statements of Operations For years ended September 26, 1998, September 27, 1997, and September 28, 1996 (dollars and shares in thousands, except per share data)
The Notes to Consolidated Financial Statements are an integral part of these statements.
Consolidated Statements of Cash Flows For years ended September 26, 1998, September 27, 1997, and September 28, 1996 (dollars in thousands)
The Notes to Consolidated Financial Statements are an integral part of these statements.
Consolidated Statements of Stockholders' Equity For years ended September 26, 1998, September 27, 1997, and September 28, 1996 (dollars and shares in thousands)
The Notes to Consolidated Financial Statements are an integral part of these statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and method of consolidation: The Company's principal business is the manufacture and sale of satellite telecommunications equipment. The Company conducts these operations through its wholly owned subsidiary SSE Telecom Inc.
The Company consolidates its majority owned subsidiaries and all intercompany amounts have been eliminated in consolidation.
Cash and cash equivalents: The Company considers all highly liquid investments with minimum yield risks and maturities of less than ninety days at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates market value.
Revenue recognition: Revenue from product sales is recognized when goods are shipped to customers. A warranty reserve for future costs related to product warranties is established and maintained based on estimated costs to be incurred for delivered products.
Inventories: Inventories consist of manufacturing raw materials, work-in-process and finished goods. Inventories are valued at the lower of cost or realizable current value. Cost is based on a method that approximates actual cost on a first-in, first-out (FIFO) basis.
At September 26, 1998 and September 27, 1997 inventories consisted of:
Depreciation and amortization: Depreciation and amortization is provided on a straight-line basis over estimated useful lives of the related assets ranging from two to five years. Asset purchases under capitalized lease arrangements are generally depreciated over the shorter of the assets estimated useful life or the lease term. Leasehold improvements are amortized over the term of the lease or their estimated useful lives, whichever is shorter.
Advertising expenses: The Company accounts for advertising costs as an expense in the period in which they are incurred. Advertising expenses for fiscal 1998, 1997, and 1996 were approximately $341,000, $515,000, and $365,000, respectively.
Net income (loss) per share: In 1997, the Financial Accounting Standards Board (FASB) issued SFAS 128 "Earning Per Share." SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share is computed using the weighted average number of common shares. Diluted earning 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 employee stock options, restricted stock, warrants, and convertible securities. The effects of options and warrants were not included in 1997 as they are anti-dilutive. The effects of the convertible debentures were not included in any of the fiscal years presented as they are anti-dilutive. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to SFAS 128 requirements.
The following table sets forth the computations of basic and diluted income (loss) per share:
(dollars and shares in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock-based compensation: The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Concentration of credit risk: The Company designs, develops, manufactures, markets, and supports satellite telecommunication equipment and systems for customers in diversified geographic locations. The Company performs ongoing credit evaluations of its customers' financial condition and in some cases requires a letter of credit or cash in advance for foreign customers. The Company has a policy that requires a letter of credit or credit insurance for credit-worthy customers that request sales under extended terms.
Market Risk: Sales of the Company's products are concentrated in a small number of customers. For fiscal 1998, five customers accounted for 42% of sales. The loss of any existing customer, a significant reduction in the level of sales to any existing customer, or the failure of the Company to gain additional customers could have a material adverse effect on the Company's business, financial condition and results of operations.
Long-lived Assets: Effective September 28, 1996 the Company adopted Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires recognition of impairment loss of long-lived assets and certain identifiable intangibles assets in the event the net book value of such assets exceeds the estimated future cash flows. The adoption of SFAS 121 had no material impact on the Company's financial position or results of operations.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such estimates relate to the useful lives of fixed assets, allowances for doubtful accounts, recoverability of deferred tax assets, inventory reserves, accrued liabilities, and other reserves. Actual results could differ from those estimates.
Effect of New Accounting Standards: The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. SFAS 130 is effective for financial statements issued for fiscal years beginning after December 15, 1997 and requires presentation of earlier periods as well. Had SFAS 130 been adopted for the year ended September 26, 1998 the comprehensive income would be $944,000. If adopted for the year ending September 27, 1997 comprehensive loss would be $4,252,000.
In June 1997, the FSAB issued SFAS 131, "Disclosures About Segments of an Enterprise and Related Information." This statement requires that financial information be reported on the basis used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS 131 will be effective for the Company's fiscal year 1999 and requires restatement of all previously reported information for comparative purposes. The Company has not yet evaluated the effects of this change on its reporting of segments.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivatives Instruments and Hedging Activities" was issued which defines derivatives, requires all derivatives be carried at fair value, and provides for hedging accounting when certain conditions are met. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Although the Company has not fully assessed the implications of this new statement, the Company does not believe adoption of this statement will have a material impact on the Company's financial statements.
2. ASSET ACQUISITION OF FAIRCHILD DATA CORPORATION:
On January 29, 1996, the Company completed the acquisition of the business of Fairchild Data Corporation ("Fairchild Data" or "SSE Data"), a subsidiary of The Fairchild Corporation, via an asset purchase agreement. Accordingly, the results of operations of SSE Data are included in the financial statements from the date of acquisition. Acquired assets and liabilities were recorded at their estimated fair values at the date of acquisition, and the aggregate purchase price plus costs directly attributable to the completion of the acquisition have been allocated to the assets and liabilities acquired.
The Company acquired substantially all the assets of Fairchild Data, at a cost of approximately $5.5 million, consisting of approximately $4.4 million in cash, 100,000 shares of the Company's common stock, and warrants to acquire 50,000 shares of the Company's common stock. An additional 100,000 contingent shares of the Company's common stock was to be issued if certain earnings levels were attained by SSE Data prior to January 1, 1997. Such earnings levels were not achieved and, accordingly, such shares were not issued to the Fairchild Corporation. The purchase price was allocated to the acquired assets and liabilities based on an independent valuation. Amounts allocated to developed technology, assembled workforce, trade name and distributor relationships are amortized on a straight-line basis over periods of two to eight years. In the third quarter of fiscal 1997, these amounts were written down an additional $417,000 as part of the restructuring charge (see Note 13). Amounts allocated to in-process research and development of approximately $1.4 million were expensed along with $1.1 million for the write off of duplicative assets at SSE Technologies, including network software and several models of modem products, in the second quarter of fiscal 1996.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following unaudited pro forma summary presents the consolidated results of operations of the Company as if the acquisition of Fairchild Data had occurred at the beginning of fiscal 1996 and does not purport to be indicative of results which may occur in the future.
* The write off of acquired in-process research and development of $1.4 million and the acquisition related asset writedown of $1.1 million, were not considered in the above pro forma summary.
3. RELATIONSHIP WITH ALCATEL TELSPACE
In September 1996, Alcatel Telspace S. A. ("Alcatel Telspace"), a unit of Alcatel Telecom of France, purchased 525,000 shares of the Company's common stock. In addition, Alcatel Telspace received a three year warrant to purchase up to another 300,000 shares of the Company's common stock at the quoted market price at the date of exercise but not less than $11.00 per share. The Company received aggregate proceeds of $6,751,500 in connection with this transaction. Additionally, in September 1996, Alcatel Telspace also purchased an additional 100,000 shares of common stock from two members of the Company's senior management for $1,075,000 or $10.75 per share, which was the fair market value of the Company's common stock at that time. As a result of these transactions Alcatel Telspace owns approximately 10% of the Company's outstanding common stock.
Alcatel Telspace and the Company also entered into an agreement outlined in a Joint Product Policy to identify certain satellite telecommunications products which may be jointly developed and marketed by each party. The intent of the Joint Product Policy is to add additional products to each company's product or systems offerings thereby potentially increasing market share. The two companies have collaborated in the development of certain satellite communications equipment in the past, although there can be no assurance that future products or systems will be jointly developed. Alcatel Telspace is currently a primary supplier of a key component in the Company's STAR satellite transceiver products.
4. INVESTMENTS
The Company has classified all investments, except its common stock investment in Media4, Inc. ("Media4") as available for sale. Available-for-sale securities are stated at fair value with the unrealized gain and losses, net of taxes, reported as a separate component of stockholders' equity. Realized gains and losses, and declines in value judged to be other than temporary on available-for-sale securities are included in the consolidated statements of income. The cost of securities sold is based on the average cost method.
Investments with maturities of less than one year at the balance sheet date are classified as short-term investments. Investments with maturities greater than one year at the balance sheet date are classified as long-term investments.
On December 30, 1994, the Company completed the exchange of its 91.2% interest in Directsat Corporation, a direct broadcast satellite licensee, which resulted in the receipt of 912,717 shares of Echostar Communications Corporation ("Echostar"), Class A common stock. The Company sold 506,880 shares and 176,937 shares of Echostar at net realized gains before taxes of $10,020,000 and $3,730,000 in fiscal 1998 and fiscal 1997, respectively. As of September 26, 1998, the Company had 118,905 of Echostar shares remaining. The quoted market price of Echostar stock on the NASDAQ exchange on September 26, 1998 was $25.38.
During fiscal 1998, the Company invested $2,425,000 in Media4. As of September 26, 1998, the Company had invested approximately $965,000 in Media4 common stock and held $2.6 million in Media4 convertible 7% and 9.5% debentures. As of September 27, 1997, the Company had invested approximately $965,000 in Media4 common stock and held $175,000 in Media4 convertible 7% debentures due May 2000. On October 14, 1998 Echostar announced it had signed a non-bending letter of intent to acquire Media4 through the exchange of common stock. The Company does not anticipate making any further investment in Media4 and believes the Echostar common stock received from Echostar's acquisition of Media4, if such transaction is consummated, will be of approximately of equal value to the Media4 common stock and debentures reported by the Company as of September 26, 1998. The Company's investment in Media4 is valued at cost.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a summary of available-for-sale securities at September, 26 1998:
The following is a reconciliation of the investment categories and their balance sheet classifications at September 26, 1998:
The following is a summary of available-for-sale securities at September 27, 1997:
The following is a reconciliation of the investment categories and their balance sheet classifications at September 27, 1997:
5. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment, the design, manufacturing and sale of satellite telecommunication equipment. The Company had exports of approximately 44% of revenue in 1998, 45% of revenue in 1997 and 56% of revenue in 1996. Export revenues are primarily to Western Europe, Asia Pacific, Latin America, Mexico, and Canada. In 1998 the U.S. Government and Loral/Orion, Inc. each accounted for 10% of the Company's revenue. In 1997, the U.S. Government accounted for 11% of the Company's total revenue. Nortel Dasa accounted for 13% of the Company's revenue in 1996. No other customers accounted for more than 10% during 1998, 1997, or 1996. All export sales were denominated in U.S. dollars.
6. CREDIT FACILITIES AND NOTES PAYABLE
At September 26, 1998, the Company was operating under a $3.0 million line-of-credit facility with outstanding borrowings of $2.2 million. Borrowings under this line-of-credit bear interest at prime (8.5% at September 26, 1998) plus 1.25%. The Company is required under this line-of-credit to be in compliance with certain financial covenants and certain assets of the Company secure the line-of-credit. The Company is in compliance with the covenants. The line-of-credit expires January 15, 1999.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company also had a bank note payable outstanding at September 26, 1998. The total principal outstanding on this note was $616,000 with interest payable at prime plus 1.25%. The term note has a maturity date of August 31, 1999. The term loan requires the Company to make $50,000 monthly principal payments.
At September 26, 1998, the Company had an outstanding balance of $1.2 million related to its 6 1/2% convertible subordinated debentures due March 1, 2001, payable to Echostar, the holder of the debentures. The debentures are convertible at the option of the holder into the Company's common stock at a conversion price of $12.00 per share at any time prior to maturity. During fiscal 1998, the Company repaid $2,854,000 of debenture principal and paid $302,000 of debenture interest.
Neither these debentures or the common shares issueable on exercise of the conversion right have been or will be registered under the federal securities laws or the securities laws of any state, and neither these debentures or any common shares acquired on exercise of the conversion right may be transferred, hypothecated, sold or assigned, except in compliance with the provisions of the Securities Act of 1933, and any applicable state securities laws. Neither these debentures or any such common shares may be sold, assigned, pledged, hypothecated or otherwise transferred, except after notice to the Company and with the Company's consent, and the Company need not consent to any such proposed transfer unless, in the opinion of legal counsel satisfactory to the Company, such transfer does not violate any applicable federal or state securities laws. The Company has granted certain registration rights with respect to common stock acquired on conversion of the debentures by Echostar.
At September 26, 1998 and September 27, 1997, long term debt obligations, excluding capital lease obligations disclosed in Note 9, consisted of the following:
Interest paid in fiscal 1998, 1997, and 1996 was approximately $768,000, $385,000, and $1,341,000, respectively.
The 6 1/2% convertible debentures are due in full in fiscal year 2001 and minimum principal payments of $82,000 are due annually from fiscal year 1997 through fiscal year 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
The following table accounts for the differences between the actual tax provision and the amounts obtained by applying the U.S. Federal income tax rate of 35% to the income before income taxes:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities consists of the following:
Income taxes paid were $ 567,500, $1,053,000, and $427,000 in 1998, 1997, and 1996, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. RETIREMENT PLAN
The Company maintains a 401(k) tax deferred plan that is available to all eligible employees. In fiscal year 1998, the Company's matching amount with respect to employees' contributions was $1,000, subject to a cap of 3% of the employees' salary, whichever is lower. The Company's contribution to this plan totaled $148,000 in 1998, $137,000 in 1997, and $74,000 in 1996.
9. CAPITAL LEASES
At September 26, 1998 equipment under capital leases amounted to $535,000 (before accumulated depreciation of $105,000). Lease terms range from three to five years.
The following is a schedule of future minimum lease payments under capital leases as of September 26, 1998 (in thousands):
10. OPERATING LEASE COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment, as well as its headquarters and manufacturing facilities under non-cancelable operating leases which expire at various periods through 2001. At September 26, 1998, the future minimum payment obligations under these leases were as follows (in thousands):
The total rent expense under all operating leases was approximately $806,000, $1,103,000, and $1,056,000 for fiscal years 1998, 1997, and 1996, respectively.
A special warranty cost of $1.8 million before tax is reflected in the results of operations for the fiscal year ended September 27, 1997. This charge, of which $532,000 remains accrued as of September 26, 1998, reflects costs incurred and estimated to be incurred for retrofitting certain of the Company's satellite transceiver products. The problem stems from the identification by one of the Company's vendors that a component sold to the Company, and used in many of the transceivers produced prior to July 1997, was found to be defective in certain cases. The warranty cost accrued is an estimate; actual results could differ materially.
11. STOCKHOLDERS' EQUITY
Stock Option Incentive Plan: At the Company's June 2, 1997 Annual Meeting of Shareholders, approval was granted on the Company's 1997 Equity Participation Plan, 1997 Directors' Stock Option Plan, and amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of the Company's common stock from 10,000,000 to 30,000,000. Under the 1997 Equity Participation Plan, the Company may grant incentive stock options and non-statutory stock options to employees, directors and consultants. The total shares authorized under the 1997 Equity Participation Plan are 250,000. Options may be granted to purchase common stock at an exercise price that may be no less than 100% of the market value of the stock at the grant date and will expire after ten years. The options generally become exercisable over four years from date of grant. The Company also has a 1992 Incentive Stock Option Plan which has terms similar to the 1997 plans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The 1997 Directors' Stock Option Plan gives management the ability to grant stock options to directors that are not employees of the Company or any subsidiary of the Company. The total shares authorized under the 1997 Directors' Stock Option Plan are 50,000. Options may be granted to purchase common stock at an exercise price that may be no less than 100% of the market value of the stock at the grant date and will expire after ten years. The options generally become exercisable over three years from date of grant.
In June 1997, the Board of Directors authorized the repricing of options granted to employees to purchase 113,750 shares of common stock effective as of the close of business on June 2, 1997, to the then fair market value of $7.00 per share. Under the terms of the repricing, the repriced options maintain the same vesting and expiration terms. No executive officers or members of the Company's Board of Directors participated in the repricing.
Following is a summary of activity under the stock option plans:
The following table summarizes the information about options outstanding at September 26, 1998:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
941,750 shares of common stock were reserved for future issuance as of September 26, 1998. At September 27, 1997, and September 28, 1996, options exercisable were 173,124, and 144,558, respectively.
Employee Stock Purchase Plan: The Company established an Employee Stock Purchase Plan (the "Purchase Plan") in 1997 under which 150,000 shares of common stock were reserved for purchase. At September 27, 1998, 121,281 shares remain reserved for future purchases. Each eligible employee may purchase shares of common stock through the accumulation of payroll deductions of up to 10% of each participating employee's gross wages not to exceed a maximum of $5,040 per purchase period. The Purchase Plan authorizes the purchase of shares of common stock at the end of semi-annual purchase periods beginning May 1 and November 1 of each year. The purchase price is the lower of 85% of its fair value determined as of the beginning of an offering period or the end of a purchase period. Employees purchased 28,719 shares in fiscal 1998 for $91,542 or a weighted average of $3.19 per share. The Purchase Plan will expire upon either the issuance of all shares reserved for issuance or at the discretion of the Board of Directors.
Stock-Based Compensation: As permitted under FASB Statement No. 123, "Accounting for Stock-Based Compensation" (FASB 123), the Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its stock-based awards to employees. Under APB 25, the Company generally recognizes no compensation expense with respect to such awards. Pro forma information regarding net income and earnings per share is required by FASB 123 and has been determined as if the Company had accounted for awards to employees under the fair value method of FASB 123. The fair value of options under the Company's option plans was estimated as of the date of grant using the Black-Scholes option pricing model. The Black-Scholes model was originally developed for use in estimating the fair value of traded options that do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models, in management's opinion, do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of options granted in fiscal years 1998, 1997 and 1996 was estimated at the date of grant assuming no expected dividends and the following weighted average assumptions:
The weighted-average fair value of stock options granted during 1998, 1997 and 1996 was $1.80, $3.44, and $4.56 per share, respectively. The weighted-average estimated fair value of options granted under the Purchase Plan during 1998 was $2.32 per share. For purposes of pro forma disclosures, the estimated fair value of stock-based awards is amortized against pro forma net income over the options' vesting period of four years and the Purchase Plan purchase period of six months. Because FASB 123 is applicable to only the Company's awards granted subsequent to September 30, 1995, the pro forma effect under the fair value method will not be fully reflected until approximately fiscal 2000. Had the Company accounted for stock-based awards to employees under the fair value method on a pro forma basis, the Company's net income for 1998 would have been $178,000 and $.03 per basic and diluted share: the Company's net loss would have been $2,326,000 and $65,000 in 1997 and 1996, respectively, and the net loss per basic and diluted share would have been $.40 and $.01 in 1997 and 1996, respectively.
Treasury stock: The Company acquired no shares of its common stock on the open market in fiscal 1998. In 1997 and 1996, the Company acquired 167,600, and 363,768 shares of its common stock on the open market. As of September 28, 1998, the Company had 224,643 shares of treasury stock.
Warrants: Warrants issued in 1998, 1997, and 1996 to acquire common stock were zero, 10,125, and zero, respectively. At September 26, 1998, outstanding warrants for the purchase of the Company's common stock were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. RELATED PARTY TRANSACTIONS
The Company has significant investments in Echostar and Media4, and also debentures due to Echostar In addition Alcatel Telespace owns approximately 10% of the Company's outstanding common stock (see notes 3, 4 and 6).
The Company had revenue from Alcatel Telspace of $917,000 and purchases from Alcatel Telspace of $1.8 million, during fiscal 1998. As of September 26, 1998, the Company had trade receivables and payables with Alcatel Telspace of $ 81,000 and $680,000, respectively. During fiscal 1997, revenue from Alcatel Telspace were $2.2 million and purchases from Alcatel Telspace were $3.5 million. As of September 27, 1997, the Company had trade receivables and payables with Alcatel Telspace of $ 795,000 and $2,237,000, respectively. During fiscal 1996, revenue from Alcatel Telspace were $1.3 million and purchases from Alcatel Telspace were $1.5 million. Gross margins realized on related party transactions in fiscal 1998, 1997, and 1996 have not been materially different from gross margins realized on similar types of transactions with unaffiliated companies.
During fiscal 1998, the Company purchased $55,000 of products for resale to Media4 and purchased $36,000 from Media4. At September 26, 1998, the Company had receivables and payables with Media4 of $225,000 and $38,000, respectively. During fiscal 1997, purchases for resale to Media4 were $156,000. At September 27, 1997, the Company had receivables of $170,000 from Media4. During fiscal 1996, purchases for resale to Media4 were $36,000.
13. RESTRUCTURING CHARGES
On June 25, 1998, the Company announced a program designed to focus the Company on its strengths in satellite communication transceivers and modems. As a result of this decision, the Company has recognized a restructuring charge of $1.2 million before taxes in the third quarter of fiscal 1998. The restructuring charge includes: $670,000 for personnel actions (36 technical and support personnel) of which $211,000 has been paid and the remaining amount will be paid in fiscal 1999: $429,000 for the write-off of certain fixed assets and for the write-off of intangibles assets associated with the acquisition of Fairchild Data: and $137,000 for facility closing costs in Arizona and Virginia. In addition, the Company charged $3,855,000 to cost of revenue for certain inventory write-offs. The costs associated with these charges are estimates and actual amounts may differ. Total remaining restructuring expenses accrued at September 26, 1998 was $710,000, consisting of $376,000 for personnel actions, $256,000 for fixed asset disposal, and $78,000 for facility closing cost.
In the third quarter of fiscal 1997, the Company approved a plan to consolidate its manufacturing operation and transfer its satellite modem manufacturing operation from its facility in Scottsdale, Arizona to the Company's Fremont, California facility. A charge of $2.1 million before tax for this consolidation was reflected in the results of operations for the three month period ended June 28, 1997 and includes the following components: $900,000 in cost of revenue, $350,000 for bad debt expense included in marketing, general and administrative, and $850,000 as restructuring charges. The restructuring amount included $193,000 for employee severance of which the balance was paid in early fiscal year 1998, $40,000 for the facility lease in Scottsdale, $100,000 reserve for certain liabilities, $100,000 for a write off on leasehold improvements and capital assets, and $417,000 write down of intangibles associated with the acquisition of Fairchild Data. The costs associated with this consolidation are estimates and actual amounts may differ.
14. DISPOSAL OF ASSETS
In 1989, Corporate Telecom Services ("CTSI") a wholly-owned subsidiary of the Company, was an applicant before the Federal Communications Commission for the award of certain cellular telephone licenses for certain rural statistical areas ("RSA"). In 1989, in order to comply with certain FCC rules, the Company transferred its ownership interest in CTSI to a former Board of Director of the Company (the "Trustee"), pursuant to a trust agreement among SSE Telecom, CTSI and the Trustee. On December 22, 1997, CTSI entered into an agreement with Western Wireless Corporation ("Western") under which agreement the parties agreed to seek FCC approval for the transfer by CTSI of its authorization to operate a cellular telephone system in Boone, Nebraska RSA. The application was approved and the transfer by CTSI to Western was effected June 22, 1998. Upon the transfer of the license to Western, CTSI received $6,960,000. After the payment of all expenses and liabilities arising from the obtaining of the license and its transfer, the termination of the trust, and all expenses associated with such termination, CTSI had net assets of approximately $5.8 million, before provision for taxes. In July 1998, the Company, CTSI and the Trustee determined that the trust agreement should be terminated. On July 16, 1998, pursuant to an Agreement for Termination by and among SSE Telecom, CTSI and the Trustee, the trust was terminated and the ownership interest of CTSI was conveyed by the Trustee to the Company.
The Company recognized a loss of $661,000 for the disposal of fixed assets in fiscal year 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
The results of operations for the third quarter in fiscal 1998 reflect the effects of a $1.2 million restructuring (refer to Note 13 of the Notes to Consolidated Financial Statements) and the Gain on sale in the 4th quarter of fiscal 1998 of $5.8 million relating to the CISI transaction (refer to Note 14 of the Notes to Consolidated Financial Statements).
The results of operations for the third quarter in fiscal 1997 reflect the effects of a $2.1 million charge for consolidation of manufacturing facilities and a special warranty reserve of $1.8 million (refer to Notes 10 and 13 of the Notes to Consolidated Financial Statements).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company dismissed Ernst & Young LLP as its independent auditors for the fiscal year ending September 26, 1998. Such dismissal was approved by the Company's Board of Directors on April 24, 1998.
The reports of Ernst & Young LLP on the Company's financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of the Company's financial statements for each of the two fiscal years ended September 27, 1997, and September 28, 1996 and in the subsequent interim period, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Ernst & Young LLP would have caused Ernst & Young LLP to make reference to the matter in their reports.
There has not occurred, during the two fiscal years ended September 27, 1997, and September 28, 1996 or any subsequent interim period prior to September 26, 1998, any reportable events, as defined in paragraph(a)(1)(v) of Item 304, with respect to Ernst & Young LLP, except as set forth in a letter from Ernst & Young LLP to Company's Audit Committee, dated December 4, 1997, noting a material weakness in Company's internal control structure relative to the preparation of accurate financial statements for the Company's fiscal year ended September 27, 1997. The Company believes that it has effectively addressed the issues raised in such letter.
The Company requested Ernst & Young LLP to furnish it a letter addressed to the Commission stating whether it agrees with the above statements. Ernst & Young LLP responded to the Company's request and a copy of the response of Ernst & Young LLP is filed as Exhibit 1 to Form 8-K, dated April 17, 1998, File #33-10965.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All information required by Items 10, 11, 12, and 13 is incorporated herein by reference to the Company's definitive proxy statement for its annual meeting of stockholders which will be filed with the Securities and Exchange Commission within 120 days of the company's fiscal year end pursuant to Regulation 14A.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements: Reference Page
COVERED BY REPORT OF INDEPENDENT AUDITORS
Report of Deloitte & Touche LLP, Independent Auditors 13
Report of Ernst & Young LLP, Independent Auditors 14
Consolidated Balance Sheets - September 26, 1998 and September 27, 1997 15
Consolidated Statements of Operations - Fiscal Years Ended September 26, 1998, September 27, 1997, and September 28, 1996 16
Consolidated Statements of Cash Flows - Fiscal Years Ended September 26, 1998, September 27, 1997, and September 28, 1996 17
Consolidated Statement of Stockholders' Equity - Fiscal Years Ended September 26, 1998, September 27, 1997, and September 28, 1996 18
Notes to Consolidated Financial Statements 19-29
NOT COVERED BY REPORT OF INDEPENDENT AUDITORS
Note 15 of Notes to Consolidated Financial Statements 29
2. Financial Statement Schedule: The following financial statement schedule of SSE Telecom for the fiscal years ended September 26, 1998, September 27, 1997, and September 28, 1996 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of SSE Telecom, Inc.
Schedule II Valuation and Qualifying Accounts 33
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits See Exhibits Index.
(b) Reports on Form 8-K:
Current report on Form 8-K dated July 16, 1998 reporting under Item 2 the fact that the Company has conveyed its ownership interest in Corporate Telecom Services, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SSE TELECOM, INC.
Dated: December 28, 1998 /s/ Leon F. Blachowicz ----------------------- Leon F. Blachowicz Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - --------- ----- ----
/s/ Daniel E. Moore Director & December 28, 1998 - ------------------- Chairman of the Board Daniel E. Moore
/s/ Leon F. Blachowicz Director & December 28, 1998 - ---------------------- Chief Executive Officer Leon F. Blachowicz
/s/ James J. Commendatore Chief Financial Officer December 28, 1998 - ------------------------- James J. Commendatore
/s/ Joseph T. Pisula Director December 28, 1998 - -------------------- Joseph T. Pisula
/s/ Erik H. van der Kaay Director December 28, 1998 - ------------------------ Erik H. van der Kaay
/s/ Olin L. Wethington Director December 28, 1998 - ---------------------- Olin L. Wethington
/s/ Lawrence W. Roberts Director December 28, 1998 - ----------------------- Lawrence W. Roberts
/s/ Jerome deVitry Director December 28, 1998 - ------------------ Jerome deVitry
SCHEDULE II
SSE TELECOM VALUATION AND QUALIFYING ACCOUNTS (dollars in thousands)
Allowance for Doubtful Accounts
Exhibit Index ------------- These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
Exhibit Number Description ------ ----------- 2.1 Plan and Agreement of Merger among Echostar Communications Corporation, Directsat Corporation and SSE Telecom (Incorporated by reference to Exhibit 2.1 filed with Form 8-K on March 29, 1994, #33-10965)
2.2 Asset Purchase Agreement among SSE Telecom, Inc., SSE Datacom, Inc., The Fairchild Corporation, Fairchild Data Corporation, and VSI Corporation, dated January 28, 1996 (Incorporated by reference to Exhibit 2.2, filed with Form 8-K dated January 28, 1996, #33-10965)
3.1 Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1, filed with Form S-8, #33-10965)
3.2 Certificate of Amendment to Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.2, filed with Form S-8 #33-10965)
3.3 Bylaws of Registrant (Incorporated by reference to Exhibit 3.3, with Form S-8 #33-10965)
3.4 Certificate of Amendment to Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.4, filed with Form 10-K dated September 30, 1989, #33-10965)
4.1 Specimen Stock Certificate (Incorporated by reference to Exhibit 4.1, filed with Form 10-K dated September 26, 1992 #33-10965)
4.4 Specimen Form of Debenture (Incorporated by reference to Exhibit 4.4, filed with Form 8-K dated March 29, 1994, #33-10965)
4.5 Security Pledge and Limited Recourse Agreement (Incorporated by reference to Exhibit 4.5, filed with Form 8-K dated March 29, 1994, #33-10965)
4.6 Warrant from SSE Telecom, Inc. to Fairchild Data Corporation dated January 28, 1996 (Incorporated by reference to Exhibit 4.6, filed with Form 8-K dated January 28, 1996, #33-10965)
4.7 Warrant from SSE Telecom, Inc. to Alcatel Telspace, S.A., dated September 6, 1996 (Incorporated by reference to Exhibit 4.7, filed with Form 8-K dated September 6, 1996, #33-10965)
9.2 Voting Agreement by and among SSE Telecom, Inc., Alcatel Telspace, S.A., and certain stockholders of SSE Telecom, Inc., dated September 6, 1996 (Incorporated by reference to Exhibit 9.2, filed with Form 8-K dated September 6, 1996, #33-10965)
9.3 Stockholder Agreement by and among SSE Telecom, Inc., Alcatel Telspace, S.A., and certain stockholders of SSE Telecom, Inc., dated September 6, 1996 (Incorporated by reference to Exhibit 9.3, filed with Form 8-K dated September 6, 1996, #33-10965)
10.14 Employment Agreement by and between the Company and Frederick Toombs (Incorporated by reference to Exhibit 10.14, 10-K September 26, 1992, #33-10965)
10.14.1 Amendment to Employment Agreement by and between the Company and Frederick C. Toombs dated May 21, 1997 (Incorporated by reference to Exhibit 10.14.1, filed with Form 10-K dated September 27, 1997, #0-16473)
10.16 Employment Agreement by and between the Company and Daniel Moore (Incorporated by reference to Exhibit 10.16, filed with Form 10-K dated October 1, 1994, #33-10965)
10.16.1 Amendment to Employment Agreement by and between the Company and Daniel E. Moore dated June 3, 1997 (Incorporated by reference to Exhibit 10.16.1, filed with Form 10-K dated September 27, 1997, #0-16473)
10.18 Non-Qualified Stock Option Agreement (Incorporated by reference, Exhibit 10.18, filed with Form 10-K, dated September 30, 1988, #33-10965) 10.19 1992 Stock Option Plan Agreement (Incorporated by reference, Exhibit 10.18.1, filed with Form 10-K dated September 25, 1993, #33-10965)
10.20 1997 Equity Participation Pan (Incorporated by reference to Exhibit 10.18.2 Proxy Statement, Form 14A, dated April 15, 1997, #33-10965)
10.21 Directors' Stock Option Plan (Incorporated by reference to Exhibit 10.18.3 Proxy Statement, Form 14A, dated April 15, 1997, #33-10965)
10.22 SSE Telecom 401(k) Profit Sharing Plan and Trust (Incorporated by reference to Exhibit 10.19, filed with Form 10-K dated September 25, 1988, #33-10965)
10.23 Lease regarding SSE Technologies' offices at 47823 Westinghouse Drive, Fremont, CA dated February 19, 1991 between SSE Technologies and Warm Springs Associates I Ltd. Partnership (Incorporated by reference to Exhibit 10.20, filed with Form 10-K dated September 26, 1992, #33-10965)
10.24 Lease regarding SSE Technologies' offices at 47823 Westinghouse Drive, Fremont, CA dated February 19, 1991 between SSE Technologies and Warm Springs Associates II Ltd. Partnership (Incorporated by reference to Exhibit 10.20.1, filed with Form 10-K dated September 26, 1992, #33-10965)
10.24.1 Amendment to lease regarding SSE Technologies offices at 47823 Westinghouse Drive, Fremont, CA between SSE Technologies and Warm Springs Associated II Ltd. Partnership (Incorporated by reference to Exhibit 10.20.2, filed with Form 10-K dated September 27, 1997, #0-16473)
10.25 Lease regarding SSE Technologies, Inc. offices at 47436 Fremont Blvd., Fremont, CA between SSE Technologies and Phylon Communications, Inc. (Incorporated by reference to Exhibit 10.20.3, filed with Form 10-K dated September 27, 1997 #0-16473)
10.26 Lease regarding SSE Datacom, Inc. offices at 5025 East Washington Drive, Phoenix, AZ between SSE Technologies and 5025 East Washington Associates (Incorporated by reference to Exhibit 10.20.4, filed with Form 10-K dated September 27, 1997 #0-16473)
10.27 Sublease Agreement regarding SSE Technologies, Inc. offices at 47835 Westinghouse Drive, Fremont, CA between SSE Technologies and Boehringer Mannheim (Incorporated by reference to Exhibit 10.20.5, filed with Form 10-K dated September 27, 1997 #0-16473)
10.28 Lease Amendment regarding the Company offices at 8230 Leesburg Pike, Vienna, VA between SSE Telecom, Inc. and NVC Limited Partnership (Incorporated by reference to Exhibit 10.20.6, filed with Form 10-K dated September 27, 1997 #0-16473)
10.29 Agreement dated March 14, 1994, between the Company and Echostar Communications Corporation (Incorporated by reference to Exhibit 10.21, filed with Form 8-K dated March 29, 1994, #33-10965)
10.30 Sublease Agreement between SSE Datacom, Inc. and Fairchild Data Corporation, dated January 28, 1996 (Incorporated by reference to Exhibit 10.22, filed with Form 8-K dated January 28, 1996, #33-10965)
10.31 Registration Agreement between the Company and Fairchild Data Corporation, dated January 28, 1996 (Incorporated by reference to Exhibit 10.23, filed with Form 8-K, dated January 28, 1996, #33-10965)
10.32 Stock Purchase and Investment Agreement by and between the Company and Alcatel Telspace, S.A., dated September 6, 1996 (Incorporated by reference to Exhibit 10.25, filed with Form 8-K dated September 6, 1996, #33-10965)
10.33 Registration Rights Agreement between the Company and Alcatel Telspace, S.A., dated September 6, 1996 (Incorporated by reference to Exhibit 10.26, filed with Form 8-K dated September 6, 1996, #33-10965)
10.34 Employment Agreement between the Company and Leon F. Blachowicz dated April 28, 1998.
10.35 Employment Agreement between the Company and Michael Wytyshyn dated May 18, 1998.
10.36 Employment Agreement between the Company and Myron Gilbert dated June 3, 1998.
10.37 Employment Agreement between the Company and James J. Commendatore dated November 23, 1998.
10.38 Agreement dated July 16, 1998 among SSE Telecom, Inc., Corporate Telecom Services Inc. and Wilbur L. Pritchard
10.39 Trust Agreement among SSE Telecom, Inc., Corporate Telecom Services Inc. and Wilbur L. Pritchard dated February 23, 1989 (Incorporated by reference to Exhibit 4 filed with Form 8-K dated March 2, 1989, #33-10965)
10.40 Loan and Security Agreement by and between the Company and Comerica Bank - California, dated October 21, 1997.
10.40.1 First Modification to Loan and Security Agreement by and between the Company and Comerica Bank - California dated August 14, 1998.
16.1 Letter from Ernst & Young LLP, dated April 17, 1998 (Incorporated by reference to Exhibit 16.1, filed with Form 8-K dated April 17, 1998 #33-10965)
21.2 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
23.2 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule (Page 42)