-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LWRgPAgpeRbzSKHnsWXrhpBF2B+gUCq4xWD2gei37wMybltSknQmp7XaftcBU7QK jz2l4w6taBOTYO/DP8NrDg== 0000082628-98-000002.txt : 19980212 0000082628-98-000002.hdr.sgml : 19980212 ACCESSION NUMBER: 0000082628-98-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980211 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYMMETRICOM INC CENTRAL INDEX KEY: 0000082628 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 951906306 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-02287 FILM NUMBER: 98531264 BUSINESS ADDRESS: STREET 1: 2300 ORCHARD PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95131-1017 BUSINESS PHONE: 4084287813 MAIL ADDRESS: STREET 1: 2300 ORCHARD PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95131-1017 FORMER COMPANY: FORMER CONFORMED NAME: SILICON GENERAL INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: REDCOR CORP DATE OF NAME CHANGE: 19820720 10-Q 1 QUARTERLY REPORT FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1997 or [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 0-2287 SYMMETRICOM, INC. (Exact name of registrant as specified in its charter) California No. 95-1906306 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2300 Orchard Parkway, San Jose, California 95131-1017 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 943-9403 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Applicable Only to Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No Applicable Only to Corporate Issuers: Indicate number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: CLASS OUTSTANDING AS OF January 31, 1998 Common Stock 15,832,052 SYMMETRICOM, INC. FORM 10-Q INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets December 31, 1997 and June 30, 1997 3 Consolidated Statements of Operations Three and six months ended December 31, 1997 and 1996 4 Consolidated Statements of Cash Flows Six months ended December 31, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market 16 Risk PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements SYMMETRICOM, INC. CONSOLIDATED BALANCE SHEETS (In thousands) December 31, June 30, 1997 1997 ---- ---- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 24,155 $ 28,203 Short-term investments 8,566 13,384 -------- -------- Cash and investments 32,721 41,587 Accounts receivable, net 22,160 21,349 Inventories 26,292 22,023 Other current assets 5,366 3,830 -------- -------- Total current assets 86,539 88,789 Property, plant and equipment, net 39,525 39,617 Other assets, net 556 899 -------- -------- $126,620 $129,305 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,986 $ 8,189 Accrued liabilities 14,940 16,546 Current maturities of long-term obligations 177 5,729 -------- ------- Total current liabilities 23,103 30,464 Long-term obligations 8,484 8,583 Deferred income taxes 2,664 2,655 Shareholders' equity: Preferred stock, no par value: Authorized-500 shares Issued-none -- -- Common stock, no par value: Authorized-32,000 shares Issued and outstanding-15,784 and 15,879 shares 24,258 25,608 Retained earnings 68,111 61,995 -------- -------- Total shareholders' equity 92,369 87,603 -------- -------- $126,620 $129,305 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 3 SYMMETRICOM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three months ended Six months ended December 31, December 31, 1997 1996 1997 1996 ---- ---- ---- ---- Net sales $34,337 $35,447 $68,320 $67,470 Cost of sales 17,621 19,337 35,423 37,703 ------- ------- ------- ------- Gross profit 16,716 16,110 32,897 29,767 Operating expenses: Research and development 5,017 4,425 9,620 8,379 Selling,general and admin. 7,411 7,789 15,552 14,892 ------- ------- ------- ------- Operating income 4,288 3,896 7,725 6,496 Interest income 461 454 981 912 Interest expense (182) (147) (474) (295) ------- ------- ------- ------- Earnings before income taxes 4,567 4,203 8,232 7,113 Income taxes 1,134 941 2,116 1,593 ------- ------- ------- ------- Net earnings $3,433 $3,262 $6,116 $5,520 ======= ======= ======= ======= Basic earnings per share $ .22 $ .21 $ .39 $ .35 ======= ======= ======= ======= Weighted average common shares 15,852 15,679 15,878 15,648 ======= ======= ======= ======= Diluted earnings per share $ .21 $ .20 $ .38 $ .34 ======= ======= ======= ======= Weighted average common and common equivalent shares 16,089 16,367 16,166 16,242 ======= ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 4 SYMMETRICOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six months ended December 31, 1997 1996 ---- ---- Cash flows from operating activities: Cash received from customers $66,768 $63,624 Cash paid to suppliers and employees (62,602) (55,663) Interest received 644 664 Interest paid (474) (295) Income taxes paid (1,926) (662) ------- ------- Net cash provided by operating activities 2,410 7,668 ------- ------- Cash flows from investing activities: Purchases of short-term investments (8,682) (10,531) Maturities of short-term investments 13,500 9,500 Purchases of plant and equipment, net (3,771) (5,221) Other assets (4) 126 ------- ------- Net cash provided by (used for) investing activities 1,043 (6,126) ------- ------- Cash flows from financing activities: Repayment of long-term debt (5,651) (27) Proceeds from issuance of common stock 1,101 1,084 Repurchase of common stock (2,951) - ------- ------- Net cash provided by (used for) financing activities (7,501) 1,057 ------- ------- Net increase (decrease) in cash and cash equivalents (4,048) 2,599 Cash and cash equivalents at beginning of period 28,203 31,327 ------- ------- Cash and cash equivalents at end of period $24,155 $33,926 ======= ======= Reconciliation of net earnings to net cash provided by operating activities: Net earnings $ 6,116 $ 5,520 Adjustments: Depreciation and amortization 4,170 3,118 Net deferred income taxes (1,004) 354 Changes in assets and liabilities: Accounts receivable (811) (3,936) Inventories (4,269) (471) Accounts payable (203) 943 Accrued liabilities (1,606) 2,372 Tax benefit from employee stock plan 500 300 Other (483) (532) ------- ------- Net cash provided by operating activities $ 2,410 $ 7,668 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 5 SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation. The consolidated financial statements included herein have been prepared by SymmetriCom, Inc., (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures which are made are adequate to make the information presented not misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 1997. In the opinion of the management, these unaudited statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company at December 31, 1997, the results of operations for the three and six month periods then ended and its cash flows for the six month period then ended. The results of operations for the periods presented are not necessarily indicative of those that may be expected for the full year. 2. Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of: December 31, June 30, 1997 1997 ---- ---- (In thousands) Raw materials $ 5,510 $ 6,454 Work-in-process 11,456 8,450 Finished goods 9,326 7,119 ------- ------- $26,292 $22,023 ======= ======= 3. Reclassifications. Certain amounts in the prior year's financial statements have been reclassified to conform to the current year's presentation. 4. Recent Accounting Pronouncements. Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share," which requires the presentation of basic and diluted earnings per share information. Basic earnings per share, which replaces primary earnings per share, is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share, which replaces fully diluted earnings per share, is computed by dividing net earnings by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options, using the treasury stock method. All prior period earnings per share data presented have been restated to conform with the provisions of this Statement. 6 5. Contingencies. In January 1994, a securities class action complaint was filed against the Company and three of its officers in the United States District Court, Northern District of California. The action was filed on behalf of a putative class of purchasers of the Company's stock during the period April 6, 1993 through November 10, 1993. The complaint seeks unspecified money damages and alleges that the Company and certain of its officers violated federal securities laws in connection with various public statements made during the putative class period. The Court dismissed the first and second amended complaints with leave to amend. The plaintiff filed a third amended corrected complaint in August 1997. The Company filed a motion to dismiss this third amended complaint which was denied on January 20, 1998. The Company and its officers believe that the complaint is entirely without merit, and intend to continue to defend the action vigorously. The Company is also a party to certain other claims in the normal course of its operations. While the results of such claims cannot be predicted with certainty, management, after consultation with counsel, believes that the final outcome of such matters will not have a material adverse effect on the Company's financial position or results of operations. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Business Outlook and Risk Factors The trend analyses and other non-historical information contained in Management's Discussion and Analysis of Financial Condition and Results of Operations are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor provisions of those Sections. The Company's actual results could differ materially from those discussed in the forward looking statements due to a number of factors including the factors listed below. Fluctuations in Operating Results. The Company's quarterly and annual operating results have fluctuated in the past and may continue to fluctuate in the future due to several factors, including, without limitation, the volume and timing of orders from customers and shipments to customers, the cancelation or rescheduling of customer orders, changes in the product or customer mix of sales, the gain or loss of significant customers, the Company's ability to introduce new products on a timely and cost-effective basis, the timing of new product introductions by the Company and its competitors, customer delays in qualification of new products, increased competition and competitive pricing pressures, market acceptance of new or enhanced versions of the Company's and its competitors' products, the long sales cycles associated with the Company's products, cyclical conditions in the telecommunications and semiconductor industries, fluctuations in manufacturing yields and other factors. A significant portion of the Company's operating and manufacturing expenses are relatively fixed in nature and planned expenditures are based in part on anticipated orders. If the Company is unable to adjust spending in a timely manner to compensate for any unexpected future sales shortfall, the Company's business, financial condition and results of operations could be materially and adversely affected. The Company's operations entail a high level of fixed costs and require an adequate volume of production and sales to maintain reasonable gross profit margins and positive net earnings. Accordingly, any significant decline in demand for the Company's products or reduction in the Company's average selling prices, or any material delay in customer orders would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company's future results depend in large part on growth in the markets for the Company's products. The growth in each of these markets may depend on, among other things, changes in general economic conditions, or conditions which relate specifically to the markets in which the Company competes, changes in regulatory conditions, legislation, export rules or conditions, interest rates and fluctuations in the business cycle for any particular market segment. Uncertainty of Timing of Product Sales; Limited Backlog. A substantial portion of the Company's quarterly net sales is often dependent upon orders received and shipped during that quarter, of which, a significant portion may be received during the last month or even the last few days of that quarter. The timing of the receipt and shipment of even one large order may have a significant impact on the Company's net sales and results of operations for such quarter. Furthermore, most orders in backlog can be rescheduled or canceled without significant penalty. As a result, it is difficult to accurately predict the Company's quarterly results even during the final days of a quarter. However, based on orders received through the first half of the third quarter of fiscal 1998 8 by the Company's Telecom Solutions division ("Telecom Solutions") and the Company's Linfinity Microelectronics Inc. subsidiary ("Linfinity"), the Company expects that net sales for the third quarter of fiscal 1998 will decline significantly as compared to net sales for the second quarter of fiscal 1998. Customer Concentration. A relatively small number of customers has historically accounted for, and is expected to continue to account for, a significant portion of the Company's net sales in any given fiscal period. In fiscal 1997, AT&T Corporation (AT&T), a Telecom Solutions' customer, accounted for 16% of the Company's net sales. In fiscal 1995, SBC Communications Inc., another Telecom Solutions' customer, accounted for 11% of the Company's net sales. No other single customer accounted for 10% or more of net sales in fiscal years 1997, 1996 or 1995. The timing and level of sales to the Company's largest customers have fluctuated significantly in the past and are expected to continue to fluctuate significantly from quarter-to-quarter and year-to-year in the future. For example, the Company's sales to AT&T increased to $22.5 million in fiscal 1997 from $2.6 million in fiscal 1996 but decreased to $4.8 million in the first half of 1998 from $8.7 million in the first half of fiscal 1997. There can be no assurance as to the timing or level of future sales to the Company's customers. The loss of one or more of the Company's significant customers or a significant reduction or delay in sales to any such customer, could have a material adverse effect on the Company's business, financial condition and results of operations. New Product Development. The market for the Company's products is characterized by rapidly changing technologies, frequent new product introductions, evolving industry standards and changes in end-user requirements. Technological advancements could render the Company's products obsolete and unmarketable. The Company's success will depend on its ability to respond to changing technologies and customer requirements and on its ability to develop and introduce new and enhanced products, in a cost-effective and timely basis. Delays in new product development or delays in production startup could have a material adverse effect on the Company's business, financial condition and results of operations. Such delays have happened in the past, and there can be no assurance that such delays will not recur or that the Company will successfully respond to technological changes and develop and introduce new or enhanced products, or that such new or enhanced products will achieve market acceptance. Product Performance and Reliability. The Company's customers establish demanding specifications for product performance and reliability. The Company's products are complex and often use state of the art components, processes and techniques. Undetected errors and design flaws have occurred in the past and there can be no assurance that new products or enhancements of existing products will not contain undetected errors, design flaws or other failures due to the complexities of such products. In addition to higher product service, warranty and replacement costs, such product defects may seriously harm the Company's customer relationships and industry reputation, further magnifying the adverse impact of such defects. Any such product performance or reliability problems could have a material adverse effect on the Company's business, operating results and financial condition. Competition. The Company believes that competition in the telecommunications and semiconductor industries in general, and in the new and existing markets served by the Company in particular, is intense and likely to increase substantially. The Company's ability to compete 9 successfully in the future will depend on, among other things: the cost effectiveness, quality, price, service and market acceptance of the Company's products; its response to the entry of new competitors or the introduction of new products by the Company's competitors; its ability to keep pace with changing technology and customer requirements; the timely development or acquisition of new or enhanced products; and the timing of new product introductions by the Company or its competitors. In the telecommunications market, Telecom Solutions' primary competitors are Datum Inc. and Hewlett-Packard Company. In addition, due, in part, to the enactment of The Telecommunications Act of 1996, which permits Regional Bell Operating Companies (RBOCs), which are among Telecom Solutions' largest customers, to manufacture telecommunications equipment, RBOCs may increasingly become significant competitors of Telecom Solutions. In the semiconductor market, Linfinity competes with a number of large multinational companies and smaller niche companies. Many of the Company's competitors or potential competitors are more established than the Company and have greater financial, manufacturing, technical and marketing resources. Furthermore, the Company expects its competitors to continually improve their design and manufacturing capabilities and to introduce new products and services with enhanced performance characteristics and/or lower prices. The Company continues to experience significant pricing pressures in these markets. This competitive environment could result in significant price reductions or the loss of orders from current and/or potential customers which, in each case, could materially adversely affect the Company's business, financial condition and operating results. Dependence on Foundries, Assembly and Test Services. Linfinity is utilizing IMP, Inc., an independent semiconductor foundry located in San Jose, California, to supply most of its BiCMOS wafer requirements. Linfinity uses its own semiconductor fabrication facility to manufacture bipolar wafers. Reliance on outside foundries, although it may reduce fixed costs and capital expenditures, increases certain significant risks including limited control of: delivery schedules; manufacturing yields; production costs; and wafer supply, particularly during periods of rapidly fluctuating demand from Linfinity and the foundry's other customers. In the event that Linfinity's outside foundry, as a result of financial or operating difficulties or otherwise, is unable or unwilling to continue supplying wafers to Linfinity in the quantities and with the yields required by Linfinity, there can be no assurance that Linfinity will be able to identify and qualify additional manufacturing sources in a timely manner, that any such additional manufacturing sources would be able to produce wafers with acceptable manufacturing yields or that Linfinity would not experience delays in product availability, quality problems, increased costs or disruption in product development activities. Irrespective of cause, delayed or reduced wafer supply or reduced manufacturing yields could result in delayed shipments or canceled orders which, in either case, could materially and adversely affect the Company's business, financial condition and operating results. Linfinity also relies on independent contract manufacturers in the Far East to assemble and test a significant percentage of its integrated circuits and most of its electronic modules. Reliance on independent contractors can lengthen manufacturing cycle times, especially if Linfinity is required, due to contractors' capacity constraints, to compete against others for these contractors' services. Any inability to obtain sufficient manufacturing capacity through existing or alternative sources at favorable prices, if and as required, could result in delays or reductions in product shipments which, in turn, could have a material adverse effect on the Company's business, financial condition and operating results. 10 Proprietary Technology. The Company's success will depend, in part, on its ability to protect trade secrets, obtain or license patents and operate without infringing on the rights of others. The Company relies on a combination of trademark, copyright and patent registration, contractual restrictions and internal security to establish and protect its proprietary rights. There can be no assurance that such measures will provide meaningful protection for the Company's trade secrets or other proprietary information. The Company has United States and international patents and patent applications pending covering certain technology used by its Telecom Solutions and Linfinity operations. However, while the Company believes that its patents have value, the Company relies primarily on innovation, technological expertise and marketing competence. The telecommunications and semiconductor industries are both characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. While the Company intends to continue its efforts to obtain patents whenever possible, there can be no assurance that patents will be issued or that new or existing patents will not be challenged, invalidated or circumvented or that the rights granted will provide any commercial benefit to the Company. The Company is also subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. Although the Company is not currently party to any intellectual property litigation, from time to time it has received claims asserting that the Company has infringed the proprietary rights of others. There can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such claims will not result in costly litigation or require the Company to obtain a license for such intellectual property rights regardless of the merit of such claims. No assurance can be given that any necessary licenses will be available or that, if available, such licenses can be obtained on commercially reasonable terms. Environmental Matters. The Company's operations are subject to numerous federal, state and local environmental regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process. While the Company has not experienced any materially adverse effects on its operations from environmental regulations, there can be no assurance that changes in such regulations will not impose the need for additional capital equipment or other requirements or restrict the Company's ability to expand its operations. Failure to comply with such regulations could result in suspension or cessation of the Company's operations, or could subject the Company to significant liabilities. Governmental Regulations. Federal and state regulatory agencies, including the Federal Communications Commission and the various state public utility commissions and public service commissions, regulate most of the Company's domestic telecommunications customers. Although the Company is generally not directly affected by such legislation, the effects of such regulation on the Company's customers may, in turn, adversely impact the Company's business and operating results. For instance, the sale of the Company's products may be affected by the imposition upon certain of the Company's customers of common carrier tariffs and the taxation of telecommunications services. These regulations are continuously reviewed and subject to change by the various governmental agencies. Changes in current or future laws or regulations, in the United States or elsewhere, could materially and adversely affect the Company's business. 11 Risks Associated with International Sales. The Company's export sales, which were primarily to the Far East, Canada and Western Europe, accounted for 26%, 28% and 24% of the Company's net sales in fiscal years 1997, 1996 and 1995, respectively. Export sales to the Far East accounted for 16%, 13% and 11% of net sales in fiscal years 1997, 1996 and 1995, respectively. International sales subject the Company to increased risks associated with political and economic instability and changes in diplomatic and trade relationships. For example, the Company believes that the recent economic instability being experienced by certain Asian countries may adversely affect export sales to the Far East during the third quarter of fiscal 1998 and subsequent periods. In addition to the potential loss of direct sales to the region, the economic instability in Asia could have a material adverse effect on the Company's business, financial condition and results of operations indirectly if, for example, the current situation in Asia adversely affects the Company's distributors, customers and suppliers causing more widespread reductions in sales, delays in collection and supply difficulties. International sales may be subject to certain additional risks, including but not limited to, foreign currency fluctuations, export restrictions, longer payment cycles and unexpected changes in regulatory requirements or tariffs. To date, sales and purchase obligations denominated in foreign currencies have not been significant. However, if, in the future, a higher portion of such sales and purchases are denominated in foreign currencies, gains and losses on the conversion to U.S. dollars of foreign currency accounts receivable and accounts payable arising from international operations may contribute to fluctuations in the Company's business and operating results. The Company does not currently engage in foreign currency hedging activities or derivative arrangements but may do so in the future to the extent that such obligations become more significant. Additionally, currency fluctuations could have an adverse effect on the demand for the Company's products in foreign markets. There can be no assurance that such factors will not materially and adversely affect the Company's operations in the future or require the Company to modify significantly its current business practices. In addition, the laws of certain foreign countries may not protect the Company's proprietary technology to the same extent as do the laws of the United States. Inventory Risks. In recent periods, the Company's, and, in particular, Linfinity's, inventory levels have increased significantly. Although the Company has provisions for inventory that has become obsolete or is in excess of anticipated demand, there can be no assurance that such provisions will be adequate. The Company's business, financial condition and operating results may be materially adversely affected if significant inventories become obsolete or are otherwise not able to be sold at favorable prices. Uncertainties Regarding Sales to Distributors. The percentage of the Company's sales sold through distributors has generally increased over the past several years, although such percentage fluctuates from quarter to quarter. These sales are primarily attributable to Linfinity. Sales to distributors, either contractually or by industry custom, may be subject to certain rights of return and other allowances for which the Company maintains reserves. However, there can be no assurance that such reserves will be adequate. The Company's business, financial condition and operating results may be materially adversely affected if actual allowances significantly exceed amounts reserved therefor. 12 Changes to Effective Tax Rate. The Company's effective tax rate is affected by the percentage of qualified Puerto Rico earnings compared to total earnings as most of the Company's Puerto Rico earnings are taxed under Section 936 of the U.S. Internal Revenue Code which exempts qualified Puerto Rico earnings from federal income taxes. This exemption is subject to certain wage-based limitations and expires at the end of fiscal 2006. In addition, this exemption will be further limited during fiscal years 2003 through 2006. Fluctuations in Stock Price. The Company's stock price has been and may continue to be subject to significant volatility. Many factors, including any shortfall in sales or earnings from levels expected by securities analysts and investors could have an immediate and significant adverse effect on the trading price of the Company's common stock. Year 2000 Compliance Risks. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' software, computer systems and other equipment may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. The Company's net sales could be adversely affected if the Company's customers or potential customers reallocate spending from the Company's products to their efforts to resolve the Year 2000 issue. Additionally, although preliminary estimates indicate that such expenditures will not be material, unforeseen consequences of the Year 2000 issue may require the Company to devote substantial resources to making its own products Year 2000 compliant. Finally, the Company utilizes third-party equipment and software that may not be Year 2000 compliant. There can be no assurance that the Year 2000 issue, due to the above factors or other unforeseen consequences, will not have a material adverse effect on the Company's business, financial condition and operating results. Results of Operations The Company operates in two different industry segments. Telecom Solutions, a division of the Company, designs, manufactures and markets advanced network synchronization systems and intelligent access systems for the telecommunications industry. Linfinity Microelectronics Inc., a subsidiary of the Company, designs, manufactures and markets linear and mixed signal integrated circuits, and modules for use in desktop power system, portable power system and data communications applications. 13 Net sales for the three and six month periods ended December 31, 1997 and 1996 were as follows: Three Months Six Months Ended Ended December 31, December 31, 1997 1996 Change 1997 1996 Change (In millions) ---- ---- ------ ---- ---- ------ Net sales data: Telecom Solutions $19.7 $21.6 (8)% $38.2 $41.6 (8)% Linfinity Microelectronics Inc. 14.6 13.9 5 % 30.1 25.9 16 % ----- ----- ----- ----- Total* $34.3 $35.4 (3)% $68.3 $67.5 1 % ===== ===== ===== ===== * May not add due to rounding Telecom Solutions net sales decreased by 8% in both the second quarter and first half of fiscal 1998 compared to the corresponding periods of fiscal 1997. These decreases were principally due to lower sales of transmission and domestic synchronization products which offset higher sales of international synchronization products. Linfinity net sales increased by 5% and 16% in the second quarter and first half of fiscal 1998, respectively, compared to the corresponding periods of fiscal 1997, primarily due to higher unit volume which more than offset the impact of lower sales prices. Although sales for future periods are difficult to accurately predict, based on orders received through the first half of the third quarter of fiscal 1998, the Company expects that net sales for the third quarter of fiscal 1998 will decline significantly as compared to net sales for the second quarter of fiscal 1998. The Company's gross margin percentage increased to 49% and 48% in the second quarter and first half of fiscal 1998, respectively, compared to 45% and 44% in the corresponding periods of fiscal 1997, principally due to a shift to higher profit margin products and increased manufacturing efficiencies at both operations. Future gross margins will largely depend on product mix, manufacturing efficiencies and selling prices. Research and development expense was $5.0 million (or 15% of net sales) and $9.6 million (or 14% of net sales) in the second quarter and first half of fiscal 1998, respectively, compared to $4.4 million (or 12% of net sales) and $8.4 million (or 12% of net sales) in the corresponding periods of fiscal 1997. These increases reflect the Company's continuing investment in new product development and enhancement of existing products. Selling, general and administrative expense decreased to $7.4 million (or 22% of net sales) in the second quarter of fiscal 1998 and increased to $15.6 million (or 23% of net sales) in the first half of fiscal 1998, compared to $7.8 million (or 22% of net sales) and $14.9 million (or 22% of net sales) in the corresponding periods of fiscal 1997. The decrease in the second quarter of fiscal 1998 resulted principally from the reversal of earnings-based incentive compensation accrued in the first quarter of fiscal 1998 due to a reduction in anticipated earnings for fiscal 1998. The increase in the first half 14 of fiscal 1998 was primarily due to costs related to Linfinity's higher sales and expanded administrative support, partially offset by lower earnings-based compensation at both operations. Interest income was $.5 million and $1.0 million in the second quarter and first half of fiscal 1998, respectively, compared to $.5 million and $.9 million in the corresponding periods of fiscal 1997. The Company's effective tax rate was 25% and 26% in the second quarter and first half of fiscal 1998, respectively, compared to 22% in both the corresponding periods of fiscal 1997. The effective tax rate for fiscal 1998 is expected to be lower than the federal tax rate primarily due to the benefit of lower income tax rates on Puerto Rico earnings. The Company's effective tax rate is affected by the percentage of qualified Puerto Rico earnings compared to total earnings as most of the Company's Puerto Rico earnings are taxed under Section 936 of the U.S. Internal Revenue Code which exempts qualified Puerto Rico earnings from federal income taxes. This exemption is subject to certain wage-based limitations and expires at the end of fiscal 2006. In addition, this exemption will be further limited during fiscal years 2003 through 2006. As a result of the factors discussed above, net earnings in the second quarter of fiscal 1998 were $3.4 million compared to $3.3 million in the same period of fiscal 1997; diluted earnings per share were $.21 and $.20, respectively. Net earnings in the first half of fiscal 1998 increased to $6.1 million from $5.5 million in the first half of fiscal 1997; diluted earnings per share were $.38 and $.34, respectively. Although results for future periods are difficult to accurately predict, based primarily on the Company's expectation of significantly lower net sales for the third quarter of fiscal 1998, net earnings for such period are expected to be significantly lower than net earnings for the second quarter of fiscal 1998. In addition, there can be no assurance that the Company will have positive net earnings for such period. Liquidity and Capital Resources Working capital increased to $63.4 million at December 31, 1997 from $58.3 million at June 30 1997, while the current ratio increased to 3.7 to 1.0 from 2.9 to 1.0. The increase in the current ratio resulted primarily from the repayment of a $5.7 million note. During the same period, cash, cash equivalents and short-term investments decreased to $32.7 million from $41.6 million primarily due to the early repayment of the note, $3.0 million used for the repurchase of the Company's common stock and $3.8 million used for capital expenditures which more than offset $2.4 million in cash provided by operating activities. At December 31, 1997, the Company had $7.0 million of unused credit available under its bank line of credit. The Company believes that cash, cash equivalents, short-term investments, funds generated from operations and funds available under its bank line of credit will be sufficient to satisfy working capital requirements and capital expenditures over the near term. At December 31, 1997, the Company had no material outstanding commitments to purchase capital equipment. 15 Year 2000 Issue The Company has recently commenced a Year 2000 compliance project to assess the impact of Year 2000 issues on its business. The Company is looking at (a) its internal information and operating systems, (b) possible effects on the Company of third parties' failure to fix their own Year 2000 issues, and (c) whether any material contingencies may exist related to products sold by the Company. The Company expects that these assessments will enable it to develop plans for any required changes, testing and implementation; to make estimates of likely time involved, and costs of any required changes; and to determine whether Year 2000 issues are likely to have a material impact on the Company's business, financial condition and operating results. Based on preliminary estimates, the Company does not believe that the Year 2000 issues will have a material impact on the Company's business, financial condition and operating results. See "Business Outlook and Risk Factors--Year 2000 Compliance Risks." Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable 16 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on October 29, 1997. (b) All director candidates, William D. Rasdal, Richard W. Oliver, Roger A. Strauch and Robert M. Wolfe were duly elected. (c)(i) The votes for the director candidates were as follows: Nominee Votes For Votes Withheld ------- --------- -------------- William D. Rasdal 14,888,848 216,244 Richard W. Oliver 14,804,563 300,529 Roger A. Strauch 14,890,288 214,804 Robert M. Wolfe 14,889,663 215,429 There were no abstentions or broker non-votes with respect to election of directors. (c)(ii)The shareholders ratified the appointment of Deloitte & Touche LLP as the Company's independent auditors for the current year. The votes were as follows: Broker For Against Abstain non-votes --- ------- ------- --------- 15,050,111 34,191 20,790 0 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended December 31, 1997. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYMMETRICOM, INC. (Registrant) DATE: February 11, 1998 By:/s/J. Scott Kamsler ------------------- J. Scott Kamsler Senior Vice President,Finance and Chief Financial Officer (for Registrant and as Principal Financial and Accounting Officer) 18 EX-27.1 2 FINANCIAL DATA SCHEDULE - 12/31/97
5 1000 6-MOS JUN-30-1998 JUL-01-1997 DEC-31-1997 24,155 8,566 22,957 797 26,292 5,366 75,576 36,051 126,620 23,103 0 0 0 24,258 0 126,620 68,320 68,320 35,423 35,423 0 0 474 8,232 2,116 6,116 0 0 0 6,116 .39 .38
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