-----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, Cpe2ZnAnU3b7gFTDFz6jAqlFqMKhGCVisXGOvsiiXLIlmVMZQJfw9LsrZlGhQBT3 YYMj07scgvBSkieEzs2KJw== 0001012870-99-001502.txt : 19990513 0001012870-99-001502.hdr.sgml : 19990513 ACCESSION NUMBER: 0001012870-99-001502 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 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: 99617847 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 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 March 31, 1999 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, CA 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 April 30, 1999 ----- -------------------------------- Common Stock 14,951,212 ================================================================================ SYMMETRICOM, INC. FORM 10-Q INDEX Page ---- PART I. FINANCIAL INFORMATION - ----------------------------- Item 1. Financial Statements: Consolidated Balance Sheets- March 31, 1999 and June 30, 1998 3 Consolidated Statements of Operations- Three and nine months ended March 31, 1999 and 1998 4 Consolidated Statements of Cash Flows- Nine months ended March 31, 1999 and 1998 5 Notes to Consolidated Financial Statements- 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II. OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings 18 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements SYMMETRICOM, INC. CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)
March 31, June 30, 1999 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 27,175 $ 31,369 Short-term investments 7,939 2,973 -------- -------- Cash and investments 35,114 34,342 Accounts receivable, net 14,349 10,541 Inventories 9,700 11,589 Other current assets 4,202 3,964 Net assets of discontinued operations 19,200 24,781 -------- -------- Total current assets 82,565 85,217 Property, plant and equipment, net 21,001 21,901 Other assets, net 1,111 807 -------- -------- $104,677 $107,925 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,744 $ 2,362 Accrued liabilities 12,326 10,793 Current maturities of long-term obligations 574 215 -------- -------- Total current liabilities 16,644 13,370 Long-term obligations 8,453 8,368 Deferred income taxes 1,804 1,830 Shareholders' equity: Preferred stock, no par value: Authorized - 500 shares Issued - none --- --- Common stock, no par value: Authorized - 32,000 shares Issued and outstanding - 14,964 and 15,772 shares 19,375 23,892 Retained earnings 58,401 60,465 -------- -------- Total shareholders' equity 77,776 84,357 -------- -------- $104,677 $107,925 ======== ========
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 Nine Months Ended March 31, March 31, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net sales $19,737 $16,786 $57,926 $54,976 Cost of sales 10,493 9,012 30,415 27,631 ------- ------- ------- ------- Gross profit 9,244 7,774 27,511 27,345 Operating expenses: Research and development 3,490 3,051 10,151 9,470 Selling, general and administrative 5,032 4,733 15,678 14,306 ------- ------- ------- ------- Operating income 722 (10) 1,682 3,569 Interest income 386 437 1,280 1,332 Interest expense (178) (183) (538) (549) ------- ------- ------- ------- Earnings from continuing operations before income taxes 930 244 2,424 4,352 Income taxes 195 55 509 975 ------- ------- ------- ------- Net earnings from continuing operations 735 189 1,915 3,377 Discontinued operations, net of tax: Earnings (loss) from operations 113 (7,672) (73) (4,744) Estimated loss on sale (3,906) --- (3,906) --- ------- ------- ------- ------- Loss from discontinued operations (3,793) (7,672) (3,979) (4,744) ------- ------- ------- ------- Net loss $(3,058) $(7,483) $(2,064) $(1,367) ======= ======= ======= ======= Earnings (loss) per share - basic and diluted: Earnings from continuing operations $ .05 $ .01 $ .12 $ .21 Discontinued operations (.25) (.49) (.26) (.30) ------- ------- ------- ------- Net loss $ (.20) $ (.47) $ (.13) $ (.09) ======= ======= ======= ======= Weighted average shares outstanding-basic and diluted 15,055 15,816 15,421 15,857 ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 4 SYMMETRICOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended March 31, 1999 1998 --------- ---------- Cash flows from operating activities: Cash received from customers $ 53,169 $ 55,094 Cash paid to suppliers and employees (48,460) (51,538) Loss from discontinued operations (3,979) (4,744) Interest received 1,321 1,332 Interest paid (538) (549) Income taxes refund (paid) 550 (529) -------- -------- Net cash provided by (used for) operating activities of continuing operations 2,063 (934) Net cash provided by (used for) discontinued operations 5,581 (4,026) -------- -------- Net cash provided by (used for) operating activities 7,644 (4,960) -------- -------- Cash flows from investing activities: Purchases of short-term investments (32,966) (17,198) Maturities of short-term investments 28,000 16,500 Purchases of plant and equipment, net (2,444) (2,369) Increase in notes receivable --- (900) Other (355) --- -------- -------- Net cash used for investing activities (7,765) (3,967) -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term obligations 595 176 Repayment of long-term obligations (151) (151) Proceeds from issuance of common stock 709 1,529 Repurchase of common stock (5,226) (2,951) -------- -------- Net cash used for financing activities (4,073) (1,397) -------- -------- Net decrease in cash and cash equivalents (4,194) (10,324) Cash and cash equivalents at beginning of period 31,369 28,203 -------- -------- Cash and cash equivalents at end of period $ 27,175 $ 17,879 ======== ========
(Continued) 5 SYMMETRICOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Continued (In thousands) (Unaudited)
Nine Months Ended March 31, 1999 1998 -------- ---------- Reconciliation of net earnings to net cash provided by operating activities: Net earnings from continuing operations $ 1,915 $ 3,377 Loss from discontinued operations (3,979) (4,744) Net cash provided by (used for) discontinued operations 5,581 (4,026) Depreciation and amortization 3,384 3,804 Net deferred income taxes 12 (159) Changes in assets and liabilities: Accounts receivable, net (3,808) 218 Inventories 1,889 432 Accounts payable 1,382 (2,234) Accrued liabilities 1,533 (1,809) Tax benefit from employee stock plan --- 500 Other (265) (319) ------- ------- Net cash provided by (used for) operating activities $ 7,644 $(4,960) ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 6 SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation. The consolidated financial statements included --------------------- herein have been prepared by Symmetricom, Inc. ("Symmetricom" or 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 notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 1998. 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 March 31, 1999, the results of operations for the three and nine month periods then ended and its cash flows for the nine 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. Discontinued Operations. On February 10, 1999, Symmetricom entered into a ------------------------ definitive agreement to sell its Linfinity Microelectronics Inc. ("Linfinity") subsidiary to Microsemi Corporation for $24.1 million in cash, of which $1.1 million is subject to an escrow agreement. The sale of Linfinity closed on April 14, 1999. The consideration to be paid to shareholders of Linfinity is $2.96 (the "Preferred Price Per Share") and $1.46 (the "Common Price Per Share"). The outstanding capital stock of Linfinity is comprised of 6,000,000 shares of Preferred Stock and 4,197,824 shares of Common Stock. There are stock options outstanding to purchase 121,449 and 109,000 shares of Linfinity's Common Stock at $0.50 and $0.80 per share, respectively. The holders of these options are entitled to receive in cash the difference between $1.46 and the option exercise price. Of the $24.1 million aggregate purchase price, $23.6 million is payable to Symmetricom (including amounts currently held in escrow) and $0.5 million is payable to the former minority shareholders and optionholders of Linfinity. The Linfinity business has been accounted for as a discontinued operation and, accordingly, its net assets to be disposed have been segregated from continuing operations in the consolidated balance sheets and the results of operations have been excluded from continuing operations in the consolidated statements of operations and cash flows for all periods presented. The loss from discontinued operations, net of tax, is comprised of:
Three Months Ended Nine Months Ended March 31, March 31, 1999 1998 1999 1998 --------- ---------- --------- ---------- (In thousands) - -------------- Net sales $12,000 $ 7,422 $34,013 $37,552 ------- -------- ------- ------- Earnings (loss) from operations before taxes $ 155 $(12,238) $ (81) $(8,114) Income taxes 42 (4,566) (8) (3,370) ------- -------- ------- ------- Net earnings (loss)from operations 113 (7,672) (73) (4,744) ------- -------- ------- ------- Estimated loss on sale (182) --- (182) --- Income taxes (3,724) --- (3,724) --- ------- -------- ------- ------- Net estimated loss on sale (3,906) --- (3,906) --- ------- -------- ------- ------- Loss from discontinued operations $(3,793) $ (7,672) $(3,979) $(4,744) ------- -------- ------- -------
7 The net assets retained and held for sale at March 31, 1999 are comprised of: Held (In thousands) Total Retained for Sale - -------------- ----- -------- -------- Current assets $17,733 $ 6,967 $10,766 Property, plant and equipment, net 14,596 --- 14,596 Other assets 17 --- 17 Current liabilities (5,869) (1,694) (4,175) Other liabilities (3,766) (1,762) (2,004) ------- ------- ------- Net assets of discontinued operations $22,711 $ 3,511 $19,200 ------- ------- ------- 3. Inventories. Inventories are stated at the lower of cost (first-in, first- ----------- out) or market. Inventories consist of: March 31, June 30, 1999 1998 (In thousands) ---- ---- -------------- Raw materials $ 2,808 $ 3,230 Work-in-process 2,952 2,027 Finished goods 3,940 6,332 ------- ------- $ 9,700 $11,589 ======= ======= 4. Recent Accounting Pronouncements. Effective September 30, 1998, the -------------------------------- Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," which requires the Company to report and display certain information related to comprehensive income. Comprehensive income includes net income and other comprehensive income. Other comprehensive income is classified separately into foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. At March 31, 1999 and 1998, and for the three and nine month periods then ended, other comprehensive income did not have any material impact on the Company's financial position and results of operations. In June 1997, Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," was issued, which requires the Company to report and display certain information related to operating segments. The statement is effective for fiscal years beginning after December 15, 1997. Accordingly, the Company will adopt SFAS 131 starting with its fiscal year ending June 30, 1999. It is not expected that the adoption of this statement will have any material impact on the Company's financial position and results of operations. In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative 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 position and results of operations. 5. Contingencies. In January 1994, a securities class action complaint was ------------- filed against the Company and certain of its present and former officers or directors in the United States District Court, Northern District of 8 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 present or former officers or directors 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 in January 1998. Discovery is proceeding. The trial is scheduled to begin on July 10, 2000. 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 any certainty, management believes that the final outcome of such matters will not have a material adverse effect on the Company's financial position and results of operations. 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. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and similar expressions identify such forward looking statements. Such forward looking statements include, without limitation, statements concerning the Company's future net sales, net earnings and other operating results. 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 cancellation 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, level and value of the Company's inventories, 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, fluctuations, especially declines, in the average selling prices received for its products, market acceptance of new or enhanced versions of the Company's and its competitors'products, the long sales cycle associated with the Company's products, cyclical conditions in the telecommunications industry, 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 achieve and maintain reasonable gross profit margins and 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 9 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 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 predict the Company's quarterly results even during the final days of a quarter. 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. Two customers, although not the same two customers in each year, accounted for 23%, 39% and 26% of the Company's net sales in fiscal years 1998, 1997 and 1996, respectively. 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 $8.1 million in fiscal 1998. 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 manner. 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, financial condition and results of operations. Competition; Pricing Pressure. The Company believes that competition in the telecommunications industry 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 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 10 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. The Company believes that its 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 the Company's largest customers, to manufacture telecommunications equipment, RBOCs may increasingly become significant competitors of the Company. 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 pricing pressures in all of its markets and has experienced price erosion in several product lines. 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 and adversely affect the Company's business, financial condition and results of operations. 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 that cover certain technology used by its operations. However, while the Company believes that its patents have value, the Company relies primarily on innovation, technological expertise and marketing competence to maintain its competitive position. The telecommunications industry is 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. Potential Future Acquisitions. In the future, the Company may pursue acquisitions of product lines, technologies or businesses. Future acquisitions by the Company may result in the use of significant amounts of cash, potentially dilutive issuances of equity, incurrence of debt and amortization expenses related to goodwill and other intangible assets, each of which could materially adversely affect the Company's business, financial condition and results of operations. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies and products of the acquired company, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no or limited direct prior experience, and the potential loss of key employees of the acquired company. In the event that such an acquisition does occur there can be no assurance as to the effect thereof on the Company's business, financial condition and results of operations. 11 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. Although the Company periodically reviews its facilities and internal operations for compliance with applicable environmental regulations, such reviews are necessarily limited in scope and frequency and, therefore, there can be no assurance that such reviews have revealed or will reveal all potential instances of noncompliance. The liabilities arising from any noncompliance with such environmental regulations could materially and adversely affect the Company's business, financial condition and results of operations. 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 the Company's domestic telecommunications customers. Similar government oversight also exists in the international market. 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, financial condition and results of operations. 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, financial condition and results of operations. Risks Associated with International Sales. The Company's export sales, which were primarily to Western Europe, Latin America, the Far East, and Canada accounted for 22%, 13% and 16% of the Company's net sales in fiscal years 1998, 1997 and 1996, 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 economic instability that continues to be experienced by certain Asian countries may adversely affect export sales to the Far East during the fourth quarter of fiscal 1999 and beyond. In addition to the 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 in the Asian region or elsewhere in the world, 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 business, financial condition and results of operations in the future or require the Company to modify significantly its current business practices. In addition, the laws of certain 12 foreign countries may not protect the Company's proprietary technology to the same extent as do the laws of the United States. Inventory Risks. Although the Company believes that it currently has appropriate provisions for inventory that has declined in value, 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 results of operations may be materially and adversely affected, if significant inventories become obsolete or are otherwise not able to be sold at favorable prices. 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 results in an overall lower effective tax rate for the Company. This exemption is subject to certain wage-based limitations and expires at the end of fiscal 2006. In addition, this exemption will be subject to further limitations 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. The Company is aware that many existing information technology (IT) systems, such as computer systems and software products, as well as non-IT systems that include embedded technology, were not designed to correctly process dates after December 31, 1999. The Company is currently assessing the impact of such "Year 2000" issues on its internal IT and non-IT systems, as well as on its customers, suppliers and service providers. The Company has formed a Year 2000 Project Team to identify and address Year 2000 compliance issues, including those related to the Company's significant non-IT systems used in the Company's buildings, plant, equipment and other infrastructure. The Year 2000 Project Team is continuing its testing and evaluation of the Company's products and the Company's IT systems and is compiling an inventory of all material Year 2000 issues related to the Company's non-IT systems. The Company has not identified any significant areas of non- compliance with respect to its products or IT systems and expects that the assessment and plans for remedial action for all of its products, IT systems and non-IT systems will be completed by the end of calendar 1999. The Company has also initiated discussions with its significant suppliers and service providers regarding their plans to investigate and remedy their Year 2000 issues. Although the Year 2000 Project Team has not yet 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 significant internal or external Year 2000 issues could have a material adverse effect on the Company's business, financial condition and results of operations. See "Results of Operations---Year 2000 Issue." The statements set forth above regarding Year 2000 matters are "Year 2000 Readiness Disclosures," as defined in the Year 2000 Readiness Disclosure Act of 1998, enacted October 19, 1998 (Public Law 105-271). Results of Operations The Company designs, manufactures and markets advanced network synchronization systems and intelligent access systems for the telecommunications industry. Synchronization is fundamental to telecommunications services, as it is required for reliable transmission of data throughout a network. The 13 Company's core synchronization products consist of Digital Clock Distributors based on quartz, rubidium and Global Positioning System ("GPS") technologies, which provide highly accurate and uninterruptible timing that meets synchronization requirements of digital networks. The Company's newest synchronization products are marketed to companies in high-speed data networking, Internet infrastructure, cable telephony and wireless communications industries. The Company sold its Linfinity Microelectronics Inc. (Linfinity) semiconductor subsidiary to Microsemi Corporation for $24.1 million in cash, of which $1.1 million is subject to an escrow agreement. The sale of Linfinity closed on April 14, 1999. The consideration to be paid to shareholders of Linfinity is $2.96 (the "Preferred Price Per Share") and $1.46 (the "Common Price Per Share"). The outstanding capital stock of Linfinity is comprised of 6,000,000 shares of Preferred Stock and 4,197,824 shares of Common Stock. There are stock options outstanding to purchase 121,449 and 109,000 shares of Linfinity's Common Stock at $0.50 and $0.80 per share, respectively. The holders of these options are entitled to receive in cash the difference between $1.46 and the option exercise price. Of the $24.1 million aggregate purchase price, $23.6 million is payable to Symmetricom (including amounts currently held in escrow) and $0.5 million is payable to the former minority shareholders and optionholders of Linfinity. The Linfinity business has been accounted for as a discontinued operation and, accordingly, its net assets to be disposed have been segregated from continuing operations in the consolidated balance sheets and the results of operations have been excluded for all periods from the results discussed below, except where specifically stated otherwise. See Note 2 of the Notes to Consolidated Financial Statements included in Item 1 above. The Company's net sales increased by $3.0 million (18%) to $19.7 million in the third quarter of fiscal 1999 from $16.8 million in the third quarter of fiscal 1998. Net sales increased by $3.0 million (5%) to $57.9 million in the first three quarters of fiscal 1999 from $55.0 million in the first three quarters of fiscal 1998. The increases in net sales in both the third quarter and first three quarters of fiscal 1999 compared to the corresponding periods of fiscal 1998 were primarily due to higher sales of synchronization and transmission products, partially offset by lower sales by the Company's Navstar subsidiary in the digitally enhanced cordless telephone (DECT) market. The Company's gross profit, as a percentage of net sales, increased to 47% in the third quarter of fiscal 1999 and decreased to 47% in the first three quarters of fiscal 1999, compared to 46% and 50% in the corresponding periods of fiscal 1998, respectively. The Company's gross profit decrease in the first three quarters of fiscal 1999 compared to the corresponding period of fiscal 1998 was primarily due to less favorable manufacturing efficiencies, lower production volumes and less favorable sales channel mix. Research and development expense was $3.5 million (or 18% of net sales) and $10.2 million (or 18% of net sales) in the third quarter and first three quarters of fiscal 1999, respectively, compared to $3.1 million (or 18% of net sales) and $9.5 million (or 17% of net sales) in the corresponding periods of fiscal 1998. These increases were primarily due to continued focus on investment in new products and core technology. Selling, general and administrative expense was $5.0 million (or 25% of net sales) and $15.7 million (or 27% of net sales) in the third quarter and first three quarters of fiscal 1999, respectively, compared to $4.7 million (or 28% of net sales) and $14.3 million (or 26% of net sales) in the corresponding periods of fiscal 1998. These increases were primarily due to higher sales-based incentive compensation, expanded sales support and product promotion, and higher administrative expenses. 14 Interest income was essentially flat at $0.4 million and $1.3 million in the third quarter and first three quarters of fiscal 1999, respectively, compared to the corresponding periods of fiscal 1998. Interest expense was flat at $0.2 million and $0.5 million in the third quarter and first three quarters of fiscal 1999, respectively, compared to the corresponding periods of fiscal 1998. The Company's effective tax rate was 21% in both the third quarter and first three quarters of fiscal 1999, compared to 23% and 22% in the corresponding periods of fiscal 1998. The effective tax rate for fiscal 1999 is expected to be lower than the federal tax rate 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 wage-based limitations and expires at the end of fiscal 2006. In addition, this exemption will be further limited, based on certain prior year Puerto Rico earnings during fiscal years 2003 through 2006. As a result of the factors discussed above, net earnings from continuing operations in the third quarter of fiscal 1999 were $0.7 million or $.05 per share (diluted) compared to $0.2 million or $.01 per share (diluted) in the same period of fiscal 1998. Net earnings from continuing operations for the first three quarters of fiscal 1999 were $1.9 million or $.12 per share (diluted) compared to $3.4 million or $.21 per share (diluted) in the same period of fiscal 1998. Loss from discontinued Linfinity operations in the third quarter of fiscal 1999 was $3.8 million or $.25 per share (diluted) compared to a loss of $7.7 million or $.49 per share (diluted) in the same period of fiscal 1998. Loss from discontinued Linfinity operations for the first three quarters of fiscal 1999 was $4.0 million or $.26 per share (diluted) compared to a loss of $4.7 million or $.30 per share (diluted) in the same period of fiscal 1998. As a result of the factors discussed above, the Company's net loss in the third quarter of fiscal 1999 including discontinued Linfinity operations was $3.1 million or $.20 per share (diluted) compared to a net loss of $7.5 million or $.47 per share (diluted) in the same period of fiscal 1998. The Company's net loss for the first three quarters of fiscal 1999 including discontinued Linfinity operations was $2.1 million or $.13 per share (diluted) compared to a net loss of $1.4 million or $.09 per share (diluted) in the same period of fiscal 1998. Liquidity and Capital Resources Working capital decreased to $65.9 million at March 31, 1999 from $71.8 million at June 30, 1998, and the current ratio decreased to 5.0 to 1.0 from 6.4 to 1.0. The decrease in the current ratio resulted primarily from the reduction in the net assets of discontinued operations and inventories, and increases in accounts receivable, incentive compensation and net deferred revenue. During the same period, cash, cash equivalents and short-term investments increased to $35.1 million from $34.3 million, primarily due to $7.6 million in cash provided by operating activities, $0.6 million in proceeds from issuance of long-term obligations and $0.7 million in proceeds from issuance of common stock, offset by $2.4 million used for capital expenditures, $5.2 million used for the repurchase of the Company's common stock and $0.5 million used for other investing and financing activities. At March 31, 1999, the Company had $6.7 million of unused credit available under its bank line of credit. 15 The Company believes that cash, cash equivalents, short-term investments, funds generated from operations, proceeds from the sale of Linfinity 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 March 31, 1999, the Company had no material outstanding commitments to purchase capital equipment. Year 2000 Issue The Company is aware that many existing information technology (IT) systems, such as computer systems and software products, as well as non-IT systems that include embedded technology, were not designed to correctly process dates after December 31, 1999. The Company is currently assessing the impact of such "Year 2000" issues on its internal IT and non-IT systems, as well as on its customers, suppliers and service providers. The Company has formed a Year 2000 Project Team to identify and address Year 2000 compliance issues, including those related to the Company's significant non-IT systems used in the Company's buildings, plant, equipment and other infrastructure. The Year 2000 Project Team is continuing its testing and evaluation of the Company's products and the Company's IT systems and is compiling an inventory of all material Year 2000 issues related to the Company's non-IT systems. The Company has not identified any significant areas of non-compliance with respect to its products or IT systems and expects that the assessment and plans for remedial action for all of its products, IT systems and non-IT systems will be completed by the end of calendar 1999. The Company has also initiated discussions with its significant suppliers and service providers regarding their plans to investigate and remedy their Year 2000 issues. Although the Company anticipates cooperation in these efforts from most of the Company's significant suppliers and service providers, the Company is also dependent on certain utility companies, telecommunications service companies and other service providers that are outside the Company's control. Therefore, it may be difficult for the Company to obtain assurances of Year 2000 readiness from such third parties. Although the Company believes that its Year 2000 Project Team will identify all of the Company's material Year 2000 issues in the course of its assessments, given the pervasiveness of Year 2000 issues and the complex interrelationships among Year 2000 issues both internal and external to the Company, there can be no assurance that the Company will be able to identify and accurately evaluate all such issues. The Company estimates that the expenses it has incurred to date to address Year 2000 issues have not been material and, although it has not completed its full assessment of its Year 2000 readiness, the Company does not expect to incur material expenses in connection with any required remediation efforts. As the process of compiling an inventory of non-IT systems proceeds and as other 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 delays 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 yet 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 condition and results of operations. 16 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 or 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 calendar year 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. The statements set forth above regarding Year 2000 matters are "Year 2000 Readiness Disclosures," as defined in the Year 2000 Readiness Disclosure Act of 1998, enacted October 19, 1998 (Public Law 105-271). Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk related to fluctuations in interest rates and in foreign currency exchange rates: Interest Rate Exposure. The Company's exposure to market risk due to fluctuations in interest rates relates primarily to its short-term investment portfolio, which consists of corporate debt securities, which are classified as available-for-sale and were reported at an aggregate fair value of $7.9 million as of March 31, 1999. These available-for-sale securities are subject to interest rate risk inasmuch as their fair value will fall, if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from the levels prevailing at March 31, 1999, the fair value of the portfolio would not decline by a material amount. The Company does not use derivative financial instruments to mitigate the risks inherent in these securities. However, the Company does attempt to reduce such risks by typically limiting the maturity date of such securities to no more than nine months, placing its investments with high credit quality issuers and limiting the amount of credit exposure with any one issuer. In addition, the Company believes that it currently has the ability to hold these investments until maturity, and therefore, believes that reductions in the value of such securities attributable to short-term fluctuations in interest rates would not materially affect the financial position, results of operations or cash flows of the Company. To the extent that the Company invests the proceeds from the sale of Linfinity in instruments subject to market risk, its overall exposure to market risk will correspondingly increase. Foreign Currency Exchange Rate Exposure. The Company's exposure to market risk due to fluctuations in foreign currency exchange rates relates primarily to the intercompany balance with its U.K. subsidiary. Although the Company transacts business with various foreign countries, settlement amounts are usually based on U.S. currency. Transaction gains or losses have not been significant in the past and there is no hedging activity on sterling or other currencies. Based on the intercompany balance of $1.3 million at March 31, 1999, a hypothetical 10% adverse change in sterling against U.S. dollars would not result in a material foreign exchange loss. Consequently, the Company does not expect that reductions in the value of such intercompany balances or of other accounts denominated in foreign currencies, resulting from even a sudden or significant fluctuation in foreign exchange rates, would have a direct material impact on the Company's financial position, results of operations or cash flows. 17 Notwithstanding the foregoing analysis of the direct effects of interest rate and foreign currency exchange rate fluctuations on the value of certain of the Company's investments and accounts, the indirect effects of such fluctuations could have a material adverse effect on the Company's business, financial condition and results of operations. For example, international demand for the Company's products is affected by foreign currency exchange rates. In addition, interest rate fluctuations may affect the buying patterns of the Company's customers. Furthermore, interest rate and currency exchange rate fluctuations have broad influence on the general condition of the U.S., foreign and global economies, which could materially and adversely affect the Company. PART II. OTHER INFORMATION Item 1. Legal Proceedings The information required by this Item is disclosed in Note 5 of Notes to Consolidated Financial Statements set forth in Item 1 of Part I, above. The text of such Note is hereby incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule. (b) Reports on Form 8-K. A current report on Form 8-K dated February 24, 1999 was filed to disclose on February 10, 1999, Symmetricom entered into a definitive agreement to sell its Linfinity Microelectronics Inc. subsidiary to Microsemi Corporation for $24.1 million in cash, of which $1.1 million is subject to an escrow agreement. A current report on Form 8-K dated April 29, 1999 was filed to disclose on April 14, 1999, Symmetricom completed the sale of its Linfinity Microelectronics Inc. subsidiary to Microsemi Corporation for $24.1 million in cash, of which $1.1 million is subject to an escrow agreement. 18 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: May 11, 1999 By: --------------------- /s/ Thomas W. Steipp --------------------------- Thomas W. Steipp Director, Chief Executive Officer and Chief Financial Officer (for Registrant, Principal Executive Officer and as Principal Financial and Accounting Officer) 19 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 9-MOS JUN-30-1999 JUL-01-1998 MAR-31-1999 27,175 7,939 14,671 322 9,700 82,565 38,512 17,511 104,677 16,644 0 0 0 19,375 58,401 104,677 57,926 57,926 30,415 30,415 25,829 0 538 2,424 509 1,915 (3,979) 0 0 (2,064) (.13) (.13)
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