10-Q 1 d10q.txt 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, 2001 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 our 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 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 29, 2001 ----- -------------------------------- Common Stock 23,721,101 -1- SYMMETRICOM, INC. FORM 10-Q INDEX
Page ---- PART I. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements: Condensed Consolidated Balance Sheets - March 31, 2001 and June 30, 2000 3 Condensed Consolidated Statements of Operations - Three and nine months ended March 31, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows - Nine months ended March 31, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 11 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 PART II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings 20 Item 2. Not Applicable Item 3. Not Applicable Item 4. Not Applicable Item 5. Not Applicable Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 Exhibit Index 22
-2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements SYMMETRICOM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited)
March 31, June 30, 2001 2000 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 39,886 $ 19,283 Short-term investments 16,054 36,016 Accounts receivable, net 22,891 19,588 Inventories, net 29,967 22,357 Prepaids and other current assets 2,718 909 -------- -------- Total current assets 111,516 98,153 Property, plant and equipment, net 21,475 19,960 Goodwill, net 2,754 3,002 Other intangible assets, net 9,422 10,607 Deferred tax assets 4,226 2,407 Notes receivable and other 586 540 -------- -------- $149,979 $134,669 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,398 $ 8,407 Accrued compensation 7,432 6,430 Other accrued liabilities 13,164 16,539 Current maturities of long-term obligations 467 391 -------- -------- Total current liabilities 28,461 31,767 Long-term obligations 7,322 7,679 Deferred income taxes 453 203 Shareholders' equity: Preferred stock, no par value; 500,000 shares authorized, none issued -- -- Common stock, no par value; 150,000,000 shares authorized, 23,733,468 and 22,913,510 shares issued and outstanding 28,208 20,503 Shareholder note receivable (555) Accumulated other comprehensive income 751 10,204 Retained earnings 85,339 64,313 -------- -------- Total shareholders' equity 113,743 95,020 -------- -------- $149,979 $134,669 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. -3- SYMMETRICOM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Nine Months Three Months Ended Ended March 31, March 31, 2001 2000 2001 2000 ------- ------- -------- ------- Net sales $39,286 $30,574 $113,428 $73,159 Cost of sales 22,221 17,611 63,977 41,336 ------- ------- -------- ------- Gross profit 17,065 12,963 49,451 31,823 Operating expenses: Research and development 3,464 4,761 9,972 12,818 Selling, general and administrative 7,643 6,619 22,026 18,180 Amortization of goodwill and intangibles 490 490 1,470 980 Non-recurring charges (gains) - (6,689) - 129 ------- ------- -------- ------- Operating income(loss) 5,468 7,782 15,983 (284) Gain on sale of equity investments - - 11,325 - Interest income 647 545 1,833 1,742 Interest expense (165) (172) (501) (522) ------- ------- -------- ------- Earnings before income taxes 5,950 8,155 28,640 936 Income tax provision (benefit) 1,214 200 4,854 (500) ------- ------- -------- ------- Net earnings $ 4,736 $ 7,955 $ 23,786 $ 1,436 ======= ======= ======== ======= Earnings per share - basic $0.20 $0.35 $1.02 $0.06 Weighted average shares outstanding - basic 23,638 22,538 23,404 22,542 Earnings per share - diluted $0.19 $0.33 $0.95 $0.06 Weighted average shares outstanding - diluted 25,123 23,880 25,000 23,334
The accompanying notes are an integral part of these consolidated financial statements. -4- SYMMETRICOM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended March 31, 2001 2000 ---- ---- Cash flows from operating activities: Net earnings $ 23,786 $ 1,436 Adjustments to reconcile net earnings to net cash provided by operating activities: In-process research and development write off - 3,468 Depreciation and amortization 4,942 4,725 Deferred income taxes (1,569) (1,272) Gain on disposition of investments and assets (11,424) (6,689) Changes in assets and liabilities: Accounts receivable (2,639) (4,451) Inventories (7,610) (5,771) Prepaids and other current assets (1,855) (95) Accounts payable (1,009) 9,682 Accrued compensation 1,002 820 Other accrued liabilities 5,361 312 -------- -------- Net cash provided by operating activities 8,985 2,165 -------- -------- Cash flows from investing activities: Purchases of short-term investments (37,836) (28,805) Maturities of short-term investments 40,583 34,672 Cash paid for acquisition and related costs (228) (19,419) Proceeds from sale of equity investments 12,851 - Proceeds from sale of GPS division - 9,453 Purchases of plant and equipment, net (5,253) (3,206) Other (108) (115) -------- -------- Net cash provided by (used in) investing activities 10,009 (7,420) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 5,264 3,137 Shareholder note receivable (317) - Repayment of long-term obligations (281) (211) Repurchase of common stock (3,057) (2,931) -------- -------- Net cash provided by (used in) financing activities 1,609 (5) -------- -------- Net increase (decrease) in cash and cash equivalents 20,603 (5,260) Cash and cash equivalents at beginning of period 19,283 44,897 -------- -------- Cash and cash equivalents at end of period $ 39,886 $ 39,637 ======== ======== Non-cash investing and financing activities: Unrealized gain (loss) on securities, net $ (9,453) $ 6,138 Issuance of common stock for note receivable (238) - Deferred taxes on unrealized gain (loss) (6,236) - Cash payments for: Interest $ 446 $ 522 Income taxes 4,283 972
The accompanying notes are an integral part of these consolidated financial statements. -5- SYMMETRICOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation. The unaudited condensed consolidated financial --------------------- statements included herein have been prepared by Symmetricom, Inc. ("Symmetricom", the "Company"), 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. These condensed consolidated financial statements should 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, 2000. 2. Summary of Significant Accounting Policies. For presentation purposes, ------------------------------------------ Symmetricom denotes the end of the third fiscal quarter as March 31. However, the Company's fiscal quarter ends on the Sunday closest to March 31. Fiscal quarter March 2001 actually ended April 1, 2001, and fiscal quarter March 2000 ended April 2, 2000. All references to the quarter refer to the Company's fiscal quarter. Fiscal year ended June 2000 actually ended on July 2, 2000. In the opinion of the management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company at March 31, 2001, the results of operations for the three and nine month period then ended and the 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. 3. Net Earnings Per Share. All share and per share amounts have been ---------------------- restated to reflect the three-for-two stock split effective August 2000. Basic 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 is calculated by dividing net earnings by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options using the treasury method except when antidilutive. The following table reconciles the number of shares utilized in the earnings per share calculations. (In thousands, except per share amounts)
Three Months Ended Nine Months Ended March 31, March 31, March 31, March 31, 2001 2000 2001 2000 ------- ------- ------- ------- Net earnings $ 4,736 $ 7,955 $23,786 $ 1,436 Weighted average shares outstanding - basic 23,638 22,538 23,404 22,542 Dilutive stock options 1,485 1,342 1,596 792 ------- ------- ------- ------- Weighted average shares outstanding - diluted 25,123 23,880 25,000 23,334 Basic earnings per share $ 0.20 $ 0.35 $ 1.02 $ 0.06 Diluted earnings per share $ 0.19 $ 0.33 $ 0.95 $ 0.06
-6- 4. Sale. On September 29, 2000, we sold the United Kingdom based ---- dielectric Antenna Division to a joint venture called Sarantel Limited for approximately $664 thousand cash subject to an escrow agreement. Symmetricom maintains approximately a 19% investment stake in Sarantel Limited. We realized a gain of $99 thousand or $80 thousand after taxes related to the sale of the Antenna Division, which is included in selling general and administrative expenses. Listed below is the detail of the gain on the sale (in thousands): Cash to be received subject to escrow $ 664 Tangible assets sold (337) Transaction costs (228) ----- Gain on sale $ 99 ===== 5. Investments. Short-term investments consist of corporate debt ----------- securities, which mature between three and twelve months, and marketable equity securities. All highly liquid investments purchased with a remaining maturity of three months or less are considered to be cash equivalents. All of the company's debt and marketable equity securities have been classified and accounted for as available-for-sale. These securities are carried at fair value with the unrealized gains and losses, net of taxes, reported as a component of shareholders' equity. Third-party managed funds consist of trading securities held for the benefit of certain employees who participate in a Company deferred compensation plan. Such funds are restricted to the payment of deferred compensation liabilities. Liabilities associated with the deferred compensation plan are included in "Accrued compensation" in the accompanying consolidated balance sheet at amounts equal to the fair value of the restricted funds. None of the third-party managed funds are invested in the common stock of the Company. The following table summarizes the Company's available-for-sale securities recorded as cash and cash equivalents or short-term investments as of March 31, 2001 and June 30, 2000 (in thousands):
Gross March 31, 2001 Amortized Unrealized Cost Gains (losses) Fair Value ---- ------------- ---------- Commercial paper $ 29,062 $ - $ 29,062 Corporate equity securities 1,533 1,418 2,951 -------- ------- -------- Total available-for-sale investments 30,595 1,418 32,013 Less amounts classified as cash equivalents (16,402) - (16,402) Add third-party managed funds 544 (101) 443 -------- ------- -------- Total short term investments $ 14,737 $ 1,317 $ 16,054 ======== ======= ======== June 30, 2000 Commercial paper $ 28,430 $ - $ 28,430 Corporate equity securities 3,060 17,006 20,066 -------- ------- -------- Total available-for-sale investments 31,490 17,006 48,496 Less amounts classified as cash equivalents (12,480) - (12,480) -------- ------- -------- Total short term investments $ 19,010 $17,006 $ 36,016 ======== ======= ========
-7- 6. Inventories. Inventories are stated at the lower of cost (first-in, ----------- first-out) or market. Inventories consist of (in thousands):
Mar 31, 2001 June 30, 2000 ------------ ------------- Raw materials $17,292 $14,390 Work-in-process 7,621 4,772 Finished goods 8,967 6,719 ------- ------- 33,880 25,881 Allowance for slow moving inventory (3,913) (3,524) ------- ------- Inventories, net $29,967 $22,357 ======= =======
7. Intangibles Assets. Intangible assets, including those that were ------------------ acquired from Hewlett-Packard Company, are carried at cost and consist of the following (in thousands):
Mar 31, 2001 June 30, 2000 ------------ ------------- Goodwill $ 3,245 $ 3,245 Less Accumulated Amortization (491) (243) ------- ------- Goodwill, Net $ 2,754 $ 3,002 ======= ======= Other intangibles: Technology 7,607 7,607 Customer lists, workforce, trademarks, other 4,282 4,227 ------- ------- Total gross other intangible assets 11,889 11,834 Less: Accumulated Amortization (2,467) (1,227) ------- ------- Other intangible assets, net $ 9,422 $10,607 ======= =======
Intangible assets associated with the acquisition of the HP Product Line business includes goodwill of $3.2 million, customer lists of $1.3 million, workforce of $1.4 million, SMARTCLOCK trademark of $0.9 million, current product technology of $7.6 million and other intangible assets of $0.4 million. Amortization is computed using the straight-line method over a life of 10 years for goodwill, 10 years for customer lists, 7 years for workforce, SMARTCLOCK trademark and for current product technology. The other intangible assets are amortized over 5 years. 8. Comprehensive Income. Comprehensive income is comprised of two -------------------- components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of shareholders' equity but are excluded from net income. The Company's other comprehensive income is comprised of unrealized gains and losses, net of taxes, on marketable securities categorized as available-for-sale. See Note 6 regarding unrealized gains on available-for-sale securities. The components of comprehensive income, net of tax, are as follows (in thousands):
Three Months Ended Nine Months Ended March 31, March 31, March 31, March 31, 2001 2000 2001 2000 ---- ---- ---- ---- Net income $ 4,736 $ 7,955 $23,786 $1,436 Other Comprehensive income: Unrealized gains (losses) on investments, net of taxes (4,382) 4,228 (2,977) 6,138 Reclassification adjustment for gains included in - - (6,476) - net income ------- ------- ------- ------ Total comprehensive income $ 354 $12,183 $14,333 $7,574 ======= ======= ======= ======
-8- 9. Contingencies. In January 1994, a securities class action complaint ------------- was filed against the Company and certain of our former officers or directors 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 sought unspecified money damages and alleges that the Company and certain of our former officers or directors violated federal securities laws in connection with various public statements made during the putative class period. The Court granted summary judgment to the Company and our former officers or directors in August 2000. The plaintiff has filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit. The Company believes that the complaint is without merit, and intends to continue to defend the action vigorously if necessary. 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, the Company believes that the final outcome of such matters will not have a material impact on the financial position and results of operations. 10. Business Segment Information. The Company has four reportable ---------------------------- segments: Synchronization ("Sync") Products, Wireless Products, Transmission Products, Contract Manufacturing and Other Products. Sync Products consist principally of digital Clock Distributors (DCDs) based on quartz, rubidium and Global Positioning System (GPS) technologies. Revenues for the Sync Products consist of sales of these products as well as services. Our Sync products provide highly accurate and uninterruptible timing to meet the synchronization requirements of digital networks. Our Wireless base station timing products are designed to deliver stable timing to cellular/PCS base station through a GPS receiver to capture a cesium-based time signals produced by GPS satellites. Our Transmission products include Secure7, Secure7 Lite and the Integrated Digital Services Terminal (IDST). These products are used primarily to support intelligent, fault-tolerant, digital transmission terminal that automatically reroutes disrupted high priority telephone data links. The IDST network access system is deployed as a transmission, monitoring and test access vehicle for the maintenance personnel. Contract Manufacturing involves the utilization of the Company's production facilities to manufacture third-party products. The Company generates revenue by fabricating finished goods inventory of third-party products on a contract basis. These segments are the segments of the Company for which separate financial information is available and for which gross profit amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. The Company does not allocate assets or specific operating expenses to these individual operating segments. Therefore, segment information reported includes only net sales and gross profit.
Three Months Ended Nine Months Ended March 31, March 31, 2001 2000 2001 2000 ---- ---- ---- ---- Net sales: Sync Products $ 29,658 $ 20,444 $ 81,834 $ 53,635 Wireless Product 6,362 7,856 21,345 12,687 Transmission Products 771 979 2,998 3,380 Contract Manufacturing and Other 2,495 1,295 7,251 3,457 -------- -------- -------- -------- Total net sales 39,286 30,574 113,428 73,159 Cost of sales: Sync Products 16,149 11,301 44,736 28,888 Wireless Products 3,414 4,886 11,867 7,969 Transmission Products 524 458 1,629 1,699 Contract Manufacturing and Other 2,134 966 5,745 2,780 -------- -------- -------- -------- Total cost of sales 22,221 17,611 63,977 41,336 Gross profit: Sync Products 13,509 9,143 37,098 24,747 Wireless Products 2,948 2,970 9,478 4,718 Transmission Products 247 521 1,369 1,681 Contract Manufacturing and Other 361 329 1,506 677 -------- -------- -------- -------- Total gross profit $ 17,065 $ 12,963 $ 49,451 $ 31,823 Gross margin:
-9- Sync Products 45.5% 44.7% 45.3% 46.1% Wireless Products 46.3% 37.8% 44.4% 37.2% Transmission Products 32.0% 53.2% 45.7% 49.7% Other Products 14.5% 25.4% 20.8% 19.6% ------- ------- -------- -------- Total gross margin 43.4% 42.4% 43.6% 43.5%
11. Pro forma Condensed Consolidated Statement of Operations. On -------------------------------------------------------- September 30, 1999 Symmetricom acquired certain assets of Hewlett-Packard Company's Communication Synchronization Business for $19.4 million in cash. The acquisition has been accounted for under the purchase method of accounting and accordingly, the operating results have been included in the Company's consolidated results of operations from the date of acquisition. The following unaudited pro forma consolidated results of operations are presented as if the acquisition of Hewlett-Packard Product Line had been made at the beginning of fiscal 2000. Nine Months Ended (in thousands of dollars except per share data) March 31, 2000 ------------------------------------------------ -------------- Net sales $79,558 Gross Profit 50,045 Net earnings 1,553 Earnings per share - basic $ 0.07 Earnings per share - diluted $ 0.07 The pro forma consolidated results of operations include adjustments to give effect to amortization of goodwill, interest income on cash used for the acquisition and certain other adjustments, together with related income tax effects and exclude non-recurring costs of $3.6 million related to the write-off of in-process research and development and the $3.5 million paid as employee retention bonuses. The unaudited pro forma information is not necessarily indicative of the results of operations that would have occurred had the purchase been made at the beginning of the periods presented or the future results of the combined operations. 12. Shareholder Note Receivable. During the third quarter of fiscal 2001, --------------------------- the Company issued a full-recourse promissory note in the amount of $555,000 to a senior executive of the Company. The note accrues interest at an annual rate of 7.75%. Interest payments are to be made annually and the entire principal balance is due and payable on January 31, 2006. The note is secured by Company stock pledged by the borrower. As of March 31, 2001, the entire principal balance was outstanding. -10- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The trend analyses and other non-historical information contained in Form 10-Q 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 markets for our products, operating results, our Broadband Access division, amortization of goodwill, customer concentration, competition and pricing pressure, the effective tax rate, gross margins, production activities, availability of key components, research and development expense, accounting pronouncements, liquidity and capital resources and market risk in interest rates and foreign currency exchange rates. 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. Overview On September 29, 2000, we sold our United Kingdom based dielectric Antenna Division to a joint venture called Sarantel Limited for approximately $0.6 million cash subject to an escrow agreement. Symmetricom maintains approximately 19% investment stake in Sarantel Limited. We realized a gain of $0.1 million or $0.08 million after taxes related to the sale of the Antenna Division. See Note 5 of the Notes to Consolidated Financial Statements. On March 30, 2000, we sold our GPS division to Silicon Systems, Ltd., ("SSL") for $9.5 million in cash. Additionally, Symmetricom made an irrevocable application for subscription shares of SSL for $3.0 million. We realized a gain of $6.7 million, or $4.2 million after taxes related to the sale of our GPS division. SSL changed its name to Parthus Technologies plc ("Parthus") prior to completing an initial public offering in May 2000. On September 30, 1999, Symmetricom acquired certain assets of Hewlett- Packard Company's Communications Synchronization Business ("HP Product Line business") for $19.4 million in cash. The acquisition has been accounted for under the purchase method of accounting. The net purchase price of $19.8 million, which includes cash paid of $19.0 million, transaction costs of $0.4 million and assumed liabilities of $0.4 million, was allocated to tangible assets acquired of $1.4 million, capitalized developed technology of $7.6 million, other intangible assets of $7.3 million and in-process research and development ("IP R&D") of $3.5 million. As part of the acquisition of the HP Product Line business, goodwill of approximately $14.9 million will be amortized as follows: $0.4 million over five years, $9.9 million over seven years, and $4.6 million over ten years, and is included in general and administrative expense. Pursuant to this transaction, we recorded $6.8 million of non- recurring charges, $3.5 million for IP R&D and $3.3 million for recruiting and employee expenses. Results of Operations Net sales increased by $8.7 million (or 28.5%) to $39.3 million in the third quarter of fiscal 2001 from $30.6 million in the third quarter of fiscal 2000. The $8.7 million increase is primarily comprised of an increase in the sales of Sync Products of $9.2 million, offset by a decrease in the sale of other products by $0.5 million. Third quarter increase in sales of Sync Products includes the following: $2.8 million from new products, $3.0 million from existing customers who were expanding their operations, and $3.4 million from all other sources. Net sales increased by $40.3 million (or 55%) to $113.4 million in the first nine months of fiscal 2001 from $73.2 million in the corresponding period of fiscal 2000. This $40.3 million increase in revenue is comprised primarily of a $28.2 million increase in sales of Sync products. The nine month increase in sales of Sync Products includes the following major items: $8.9 million from new products, $4.3 million from customers who were expanding their existing operations, and $13.1 million from all others. Gross profit as a percentage of net sales was 43.4% and 43.6% in the third quarter and first nine months of fiscal 2001, respectively, compared to 42.4% and 43.5% in the corresponding periods of fiscal 2000. The slight increase in the gross profit in the third quarter of fiscal 2001 compared to the corresponding period of fiscal 2000 -11- was primarily due to lower material costs resulting from favorable prices on higher volume component purchases as well as a favorable mix due to increased sales of higher margin products. Research and development expense was $3.5 million (or 8.8% of net sales) and $10 million (or 8.8% of net sales) in the third quarter and first nine months of fiscal 2001, respectively, compared to $4.8 million (or 15.6% of net sales) and $12.8 million (or 17.5% of net sales) in the corresponding periods of fiscal 2000. The decrease as a percentage of net sales is primarily due to higher net sales, management's decision to provide a more concentrated focus on specific research and development projects, and the sale of the GPS division in the third quarter of fiscal 2000. Selling, general and administrative expense was $8.1 million (or 20.7% of net sales) and $23.5 million (or 20.7% of net sales) in the third quarter and first nine months of fiscal 2001, respectively, compared to $7.1 million (or 23.3% of net sales) and $19.2 million (or 26.2 % of net sales) in the corresponding periods of fiscal 2000. The increase in aggregate dollars expensed was primarily due to higher marketing and sales expense associated with our increased sales. The gain of $0.1 million or $0.08 million after taxes on the sale of the United Kingdom based dielectric Antenna Division is also netted in the general and administrative expense. In March 2000 the Company recorded a non recurring gain on the sale of the GPS division of $6.7 million (or 21.9% of net sales for the third quarter of fiscal 2000). Similarly, in December 2000 the Company recorded a non-recurring gain on sale of equity investments (Parthus stock) of $9.5 million (or 24.9 % of net sales for the second quarter of fiscal 2001) and a $1.8 million non- recurring gain from the sale of equity investments during the first quarter of fiscal 2001. During the third quarter of fiscal 1999 the company recorded non- recurring charges of $6.8 million as a result of the acquisition of the HP Product Line business. The non-recurring charges were comprised of $3.5 million for the write-off of acquired in-process research and development expenses and $3.3 million for employee sign-on bonuses paid to the employees of the HP Product Line business. Interest income in the third quarter and first nine months of fiscal 2001 was $0.6 million and $1.8 million, respectively, compared to $0.5 million and $1.7 million in the corresponding periods of fiscal 2000. The increase in interest income is primarily due to the increase in cash, cash equivalents and short-term investments. Interest expense was flat at $0.2 million and $0.5 million in the third quarter and first nine months of fiscal 2001 and in the corresponding periods of fiscal 2000. Interest expense represents the interest on the capital lease for the building the Company leases in San Jose. The Company's effective tax rate was 20.4% in the third quarter of fiscal 2001, compared to 2.5% in the corresponding period of fiscal 2000. The effective tax rate during the first nine months of 2001 was 16.9% compared to (53.4)% for the first nine months of fiscal 2000. During the second quarter of fiscal 2001, management favorably revised its judgment of the realizability of certain deferred tax assets because of a combination of the following: increased income from investments and increased sales and pretax income forecasts. Accordingly, $3.3 million of the valuation allowance was released as certain deferred tax assets were judged to be more likely realized than not. During the third quarter of fiscal 2001, the release of $0.4 million from the valuation allowance reduced the Company's effective tax rate by about 6.4 %. . Symmetricom retains a valuation allowance on certain deferred tax assets related to stock option deductions, which will be credited to equity when realized. The effective tax rate is also affected by the percentage of qualified Puerto Rico earnings compared to our total earnings as most of our 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. The increase in effective tax rate for the first nine months of fiscal 2001 is partially due to our expectation that a higher percentage of total earnings will be subject to the full federal tax rate. The federal 936 exemption is subject to wage-based limitations and is scheduled to expire at the end of fiscal 2006. In addition, this exemption will be subject to further limitations during fiscal years 2003 through 2006. As a result of the factors discussed above, net income in the third quarter of fiscal 2001 was $4.7 million or $0.19 per share (diluted) compared to $8.0 million or $0.33 per share (diluted) during the same period of fiscal 2000. Net earnings was $23.8 million or $0.95 per share (diluted) in the first nine months of fiscal 2001, compared to $1.4 million or $0.06 per share (diluted) in the corresponding period of fiscal 2000. -12- Liquidity and Capital Resources Working capital increased to $83.1 million at March 31, 2001, from $66.4 million at June 30, 2000, and the current ratio increased to 3.9 from 3.1 The increase in the current ratio resulted primarily from increases in net receivables and net inventories. During the same period, cash, cash equivalents, and short-term investments increased to $55.9 million from $55.3 million, primarily due to $9.0 million provided by operating activities, $12.9 million provided from the sale of equity investments, and $4.9 million from the issuance of common stock. This was partially offset by $3.1 million used for repurchase of common stock and $5.3 million used for capital expenditure. At March 31, 2001, we had approximately $7.0 million of unused credit available under our bank line of credit. Accounts receivable at March 31, 2001 increased by $3.3 million (or 16.9%) to $22.9 million from $19.6 million at June 30, 2000. Approximately one- half of the increase is due to the increased sales volume and the balance of the increase is due to higher international sales. Days' sales outstanding in receivables increased to 53 days at March 31, 2001, compared to 52 days at June 30, 2000, primarily due to higher sales to international customers who have longer payment terms. Inventory levels at March 31, 2001 increased by $7.6 million from $22.4 million at June 30, 2000, to $30.0 million at March 31, 2001. The inventory turnover was 2.8 turns for the quarter ended March 31, 2001 compared to 4.1 turns for the quarter ended June 30, 2000. The increase in inventory is primarily due to a planned build up in raw material inventory to avoid component shortages and compensate for long lead-times while managing inventory requirements to meet higher sales for the newly acquired HP Product Line business. The Company anticipates that inventory turnover will also increase in the fourth quarter of the fiscal year 2001. During the three months ended March 31, 2001 and March 31, 2000, the Company made investments totaling $28.3 million and $21.0 million, respectively, in commercial paper. During the nine months ended March 31, 2001 and March 31,2000, proceeds from maturities and sales of commercial paper were $40.6 million and $34.7 million, respectively. The proceeds from the sales of equity investments totaled $12.9 million for the nine months ended March 31, 2001. We believe that cash, cash equivalents, funds generated from operations, investments, financing activities, and funds available under our bank line of credit will be sufficient to satisfy working capital requirements and capital expenditures in fiscal 2001. During the second quarter of fiscal 2001, we committed to implementing a new ERP system, which we anticipate to be completed by December 2001 at a total projected cost of approximately $5 million. Factors That May Affect Future Operating Results Our 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. Our 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: (a) the ability to obtain sufficient supplies of GPS products from SSL; (b) the ability to obtain sufficient supplies of sole or limited source components; (c) changes in the product or customer mix of sales; (d) the ability to manage fluctuations in manufacturing yields and other factors; (e) increases in the prices of the components the we purchase; (f) the ability to manage the level and value of inventories; -13- (g) the ability to accurately anticipate both the volume and timing of customer orders, including current and planned Communications Synchronization products; (h) the cancellation or rescheduling of customer orders; (i) the gain or loss of significant customers; (j) the ability to introduce new products on a timely and cost- effective basis; (k) the timing of new product introductions and that of our competitors; (l) customer delays in qualification of new products; (m) the ability to manage increased competition and competitive pricing pressures; (n) the ability to manage fluctuations, especially declines, in the average selling prices of products; (o) market acceptance of new or enhanced versions of our products and our competitors' products; (p) the ability to manage the long sales cycle associated with our products; (q) the ability to manage cyclical conditions in the telecommunications industry; (r) the ability to maintain quality levels for the product's, and (s) reduced rates of growth of telecommunications services and high- bandwidth applications. A significant portion of our operating and manufacturing expenses are relatively fixed in nature and planned expenditures are based in part on anticipated orders. If we are unable to adjust spending in a timely manner to compensate for any unexpected future sales shortfall, it may harm our business. Our 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. Therefore, any significant decline in demand for our products or reduction in our average selling prices, or any material delay in customer orders may harm our business, financial condition and results of operations. In addition, our future results depend in large part on growth in the markets for our 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 we compete, changes in regulatory conditions, legislation, export rules or conditions, interest rates and fluctuations in the business cycle for any particular market segment. If our quarterly or annual operating results do not meet the expectations of securities analysts and investors, the trading price of our common stock could significantly decline. Uncertainty of Timing of Product Sales; Limited Backlog. A substantial portion of our quarterly net sales depends on orders received and shipped during a particular 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 our net sales and results of operations for such a quarter. Furthermore, most orders in our backlog can be rescheduled or canceled without any significant penalty. As a result, it is difficult to predict our quarterly results even during the final days of a quarter. Delays in Obtaining Needed Standard Parts, Single Source Components and Services from Suppliers. Delays in standard parts and services from our suppliers are due to an overall worldwide parts shortage which has resulted in longer lead times for certain key parts. Additionally, we have experienced delays in our single source components from time to time. The inability to obtain sufficient key components as required could result in delays or reductions in product shipments, which could harm our business. For example we will be discontinuing our IDST product line because components are no longer readily available from our suppliers. -14- Customer Concentration. A relatively small number of customers have historically accounted for, and are expected to continue to account for, a significant portion of our net sales in any given fiscal period. Samsung accounted for 15% of our net sales and Acterna accounted for 15% of our net sales in the third quarter of fiscal 2001. The timing and level of sales to our 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 our sales to Samsung were 10.7 million in fiscal 2000 compared to zero in fiscal 1999 and 1998. This was primarily due to the acquisition of the HP Product Line business. We cannot be sure as to the timing or level of future sales to our customers. The loss of one or more of our significant customers, or a significant reduction or delay in sales to any such customer may harm our business. New Product Development. The market for our products is characterized by: (a) rapidly changing technology; (b) evolving industry standards; (c) changes in end-user requirements and (d) frequent new product introductions. Technological advancements could render our products obsolete and unmarketable. Our success will depend on our ability to respond to changing technologies, customer requirements and our ability to develop and introduce new and enhanced products, in a cost-effective and timely manner. We recently established a Broadband Access division and have not yet commercially shipped the GoLong solution. The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of our new products and enhancements. The introduction of new or enhanced products also requires that we manage a smooth transition from older products to new products. In the future, we expect to develop certain new products, that we may not successfully develop, introduce or manage such transitions. Furthermore, products such as those we currently offer may contain undetected or unresolved errors when they are first introduced or as new versions are released. Despite testing, errors may be found in new products or upgrades after the commencement of commercial shipments. These errors could result in delays; or loss of market acceptance and sales; diversion of development resources; injury to our reputation and increased service and warranty costs. Delays in new product development or delays in production startup could materially impact our business. Product Performance and Reliability. Our customers establish demanding specifications for product performance and reliability. Our 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 could occur in the future. In addition to higher service, warranty and replacement costs, such product defects may seriously harm our customer relationships and industry reputation, further magnifying the impact to our business. Competition; Pricing Pressure. We believe that competition in the telecommunications industry in general, and in the new and existing markets served by us in particular, is intense and likely to increase substantially. Our ability to compete successfully in the future will depend on, among other things: (a) the cost effectiveness, quality, price, service and market acceptance our products; (b) our response to the entry of new competitors or the introduction of new products by our competitors; (c) our ability to keep pace with changing technology and customer requirements; (d) the timely development or acquisition of new or enhanced products and -15- (e) the timing of new product introductions by our competitors or us. We believe that our primary competitor is Datum, Inc. Incumbent Local Exchange Carriers (ILECs) may become significant competitors due in part to the enactment of The Telecommunications Act of 1996, which permits ILECs, among our largest customers, to manufacture telecommunications equipment. Many of our competitors or potential competitors are more established than we are and have greater financial, manufacturing, technical and marketing resources. Furthermore, we expect: (a) our competitors to continually improve their design and manufacturing capabilities and to introduce new products and services with enhanced performance characteristics and/or lower prices and (b) to continue to experience pricing pressures in all of our markets and to continue to experience price erosion in several of our product lines. Proprietary Technology. Our success will depend, on our ability to protect trade secrets, obtain or license patents and operate without infringing on the rights of others. We rely on a combination of trademark, copyright and patent registration, contractual restrictions and internal security to establish and protect our proprietary rights. There can be no assurance that such measures will provide meaningful protection for our trade secrets or other proprietary information. We have United States and international patents and patent applications pending that cover certain technology used by our operations. However, while we believe that our patents have value, we rely primarily on innovation, technological expertise and marketing competence to maintain our 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 we intend to continue our 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 us. We are also subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. Although we are currently not a party to any intellectual property litigation, from time to time we have received claims asserting that we have infringed the proprietary rights of others. There can be no assurance that third parties will not assert infringement claims against us in the future, or that any such claims will not result in costly litigation or require us 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 Acquisition. As part of our growth strategy, we expect to review opportunities to buy other businesses or technologies that would complement our current products, expand our market coverage, enhance our technical capabilities and offer growth opportunities. In the event of any future transactions, we could: (a) issue stock that would dilute our current shareholders' percentage ownership; (b) incur debt; (c) assume liabilities or (d) incur significant one-time write-offs. These transactions also involve numerous risks, including: (a) problems combining the acquired operations, technologies or products; (b) unanticipated costs; (c) diversion of management's attention from our core business; -16- (d) adverse effects on existing business relationships with suppliers and customers; (e) risks associated with entering markets in which we have no or limited prior experience and (f) potential loss of key employees of the purchased organizations. We cannot assure that we will be able to successfully integrate any business, products, technologies or personnel from any future acquisitions. Environmental Matters. Our 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 our manufacturing process. While we have not experienced any significant effects on our operations from environmental regulations, we cannot assure you that changes in such regulations will not impose the need for additional capital equipment or other requirements or restrict our ability to expand our operations. Failure to comply with such regulations could result in suspension or cessation of our operations, or could subject us to significant liabilities. Although we periodically review our 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 impact our business. Power Interruptions and Pricing. The shortage of energy supplies in California could have a negative impact on the Company's future operating activities. California is currently experiencing prolonged energy alerts caused by the shortage and substantially increased costs of electricity and natural gas supplies. Although the majority of the Company's manufacturing operations are located outside of California, the Company conducts research and development activities as well as some pilot manufacturing and testing at its headquarters in San Jose, California. Future interruptions in our power supplies or further increases in our power costs could have a material adverse affect on our operations and our financial results. We do not presently have back-up power generating capacity at our San Jose, California facility. 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 our domestic telecommunications customers. Similar government oversight also exists in the international market. In general we are not directly affected by such legislation, but the effects of such regulation on our customers may, in turn, impact our business. For instance, the sale of our products may be affected by the imposition upon certain of our 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 impact our business. Risks Associated with International Sales. Our export sales, which are primarily to Western Europe, Latin America, the Far East, and Canada accounted for 31% of net sales in the third quarter of fiscal 2001 and 21% of net sales in the corresponding third quarter of fiscal 2000, respectively. International sales subject us to increased risks including: (a) foreign currency fluctuations; (b) export restrictions; (c) longer payment cycles; (d) unexpected changes in Regulatory Requirements or Tariffs; (e) protectionist laws and business practices that favor local competition; -17- (f) dependence on local vendors; (g) reduced or limited protections of intellectual property rights and political and economic instability. To date, almost none of our international revenue and cost obligations has been denominated in foreign currencies. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and thus less competitive in foreign markets. A portion of our international revenues may be denominated in foreign currencies in the future, including the Euro, which will subject us to risks associated with fluctuations in these foreign currencies. We do 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. Inventory Risks. Although we believe that we currently have 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. Our business could be materially affected, if significant inventories become obsolete, or are otherwise not able to be sold at favorable prices. Changes to Effective Tax Rate. Our effective tax rate is affected by the percentage of qualified Puerto Rico earnings compared to total earnings as most of our 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 us. 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. Our 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 effect on the trading price of our common stock. -18- 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 $12.7 million as of March 31, 2001. 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, 2001, the fair value of the portfolio would not decline by a material amount. Additionally, a 10% decrease in the market interest rates would not materially impact the fair value of the portfolio. 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 harm our business. 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 pound sterling or other currencies. Based on the company's foreign denominated net receivables of $0.1 million at March 31, 2001, 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 business. 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 materially harmful effect on the Company's business. 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 harm our business. -19- PART II. OTHER INFORMATION Item 1. Legal Proceedings The information required by this item is disclosed in Note 10 of Notes to Condensed Consolidated Financial Statements set forth in Item 1 of Part I, above. The text of such Note is hereby incorporated herein by reference. Item 2. Not Applicable Item 3. Not Applicable Item 4. Not Applicable Item 5. Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1(1) Symmetricom, Inc. Senior Executive Loan Program as adopted January 19, 2001. 10.2(1) Full Recourse Promissory Note of Thomas Steipp dated February 1, 2001. 10.3(1) Security Agreement by Thomas Steipp dated February 1, 2001. 10.4(1) Symmetricom, Inc. Deferred Compensation Plan effective October 1, 1999. Footnotes to Exhibits (1) Indicates a management contract or compensatory plan or arrangement. (b) No reports on Form 8-K were filed during the Quarter ended March 31, 2001. -20- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized. SYMMETRICOM, INC. (Registrant) DATE: May 14, 2001 By: /s/ William Slater ------------------------------------------ William Slater Chief Financial Officer (for Registrant and as Principal Financial and Accounting Officer) -21- Exhibit Index ------------- Exhibit No. Description ---------- ----------- 10.1 Symmetricom, Inc. Senior Executive Loan Program as adopted January 19, 2001. 10.2 Full Recourse Promissory Note of Thomas Steipp dated February 1, 2001. 10.3 Security Agreement by Thomas Steipp dated February 1, 2001. 10.4 Symmetricom, Inc. Deferred Compensation Plan effective October 1, 1999. -22-