-----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, Au0AD7+1Su0nsSaztuvvqMcB+eFC2laR3PudGGPrl3Cubanqjvo2SXr3mu4AV2BX lTPYa9uv28B85+v+C+wThQ== 0001012870-99-003322.txt : 19990924 0001012870-99-003322.hdr.sgml : 19990924 ACCESSION NUMBER: 0001012870-99-003322 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990923 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-K405 SEC ACT: SEC FILE NUMBER: 000-02287 FILM NUMBER: 99715682 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-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 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 of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2300 Orchard Parkway, San Jose, California 95131-1017 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (408) 943-9403 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value (Title of Class) ---------------- 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 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)29.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant at September 8, 1999 was approximately $122,057,206. The number of shares outstanding of the registrant's Common Stock at September 8, 1999 was 15,023,808. Documents Incorporated by Reference Portions of the Symmetricom, Inc. Proxy Statement for the 1999 Annual Meeting of Shareholders filed with the Commission on or about September 23, 1999 are incorporated by reference into Part III of this Annual Report on Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The trend analyses and other non-historical information contained in this Form 10-K 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, without limitation, the factors listed in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Business Outlook and Risk Factors" included below in Part II, Item 7. PART I Item 1. Business Symmetricom, Inc. (the "Company") was incorporated in California in 1956. Prior to April 14, 1999, the Company conducted its business through two separate operating units, Telecom Solutions, a telecommunications network equipment manufacturer, and Linfinity Microelectronics Inc. ("Linfinity"), an analog and mixed-signal integrated circuits manufacturer. On April 14, 1999, Symmetricom completed the sale of its Linfinity subsidiary to Microsemi Corporation, and the Company is now focused solely on its telecommunications network synchronization business. Symmetricom designs, manufactures, and markets advanced network synchronization and timing products, and intelligent access systems for the global communications marketplace. Symmetricom's time and frequency products control or "synchronize" the flow of information: voice, video, or data, in telecommunication networks. The Company's solutions play a critical role in the operation and quality of service of both traditional narrowband voice and data networks and emerging broadband multimedia communications networks, enabling its customers to maximize network efficiency in today's rapidly evolving public communications network environment. The Company, a pioneer in the development of Global Positioning System (GPS) based synchronization equipment, shipped its first network synchronization product in 1985. Since that time, Symmetricom has become a leading supplier of telecommunications network synchronization and timing equipment to global network service providers. Symmetricom products are installed in wireline and wireless networks in more than 60 countries, and the Company believes that over 70% of network synchronization equipment installed in North America was supplied by Symmetricom. The Company also supplies intelligent network access systems to global network service providers. The Company's customers include: public network providers, Incumbent Local Exchange Carriers (ILECs), Post Telephone and Telegraph companies (PTTs), Competitive Local Exchange Carriers (CLECs), other telephone companies, wireless service providers, cable TV operators, Internet Service Providers (ISPs) and communications original equipment manufacturers (OEMs). Industry Background The communications industry is undergoing rapid growth, driven by technology, global changes in government regulation, the needs of service providers and enterprises, and customer demand. Communications technology is moving from voice networking to data networking, and from circuit switching to packet switching. The factors driving this growth and change consist primarily of the following: increased demand for new, higher speed, higher capacity services such as Internet access; digital video and advanced wireless services; continuous technological development; the convergence of all voice, Internet/data and video network traffic into integrated multimedia services over public and private networks; and a changing regulatory and competitive environment. 2 The developing convergence of voice and data, wired and wireless, audio and video, and the Internet into integrated multimedia services transmitted over one network have prompted the development and use of "broadband" networks. Broadband networks feature the improved reliability and increased speed of transmission generally required for data and video transmission over the network. Growth in broadband network applications has resulted in increased investment in digital networks by network operators in order to expand network capacity and provide new applications and services to meet users' needs. The upgrading of existing networks from analog to digital and the installation of new wireline networks to meet this demand have resulted in an increased need for accurate and precise synchronization and timing equipment. Increased demand for new, higher-speed, higher-capacity services, such as Internet access, digital video, and advanced wireless services, has in turn resulted in substantial demands on network infrastructure over the past decade. Networks increasingly are required to transmit large volumes of data and video for the purpose of communicating information, conducting business, and delivering entertainment. In order to transfer voice, data, or video traffic from one line or network to another, both lines or segments of the network must operate at the same frequency within a very narrow tolerance. The failure to synchronize the components in digital networks may result in the loss of information, requiring re-transmission and thus decreasing network efficiency and increasing the costs to the network operator. As a result, digital systems have a greater need for accurate synchronization than traditional analog systems which is accomplished through the use of precise timing devices located throughout the networks. Markets Wireline Infrastructure Market. The principal customers for the Company's systems are network operators that provide wireline local, long distance, and international telecommunications services. This sector is growing as operators expand their networks in order to meet the growing demand for telecommunications services. Privatization, competition, and economic expansion have increased demand for networking systems in emerging markets. In these markets, new wireline networks are being installed to provide basic telephony service. In developed countries, increased demand for new services and government deregulation has encouraged the development of expanded networks, particularly in the local exchange and long distance markets. The expansion of wireline and wireless networks has led to an increased need for timing devices to synchronize the flow of information and maximize the efficiency of the networks. Network Access Market. In February 1996, the U.S. Congress enacted the Telecommunications Reform Act of 1996 (the "Telecommunications Act"), which opened competition for local loop access services to local telephone operators, long distance telephone companies, cable TV companies, electric utilities, and others. As a result of deregulation, new companies offering state-of-the-art, digital telecommunications networks that provide an alternative to the ILECs have entered the market. These companies, known as Competitive Local Exchange Carriers (CLECs), offer competitive services that include long distance, Internet, data transmission, private line, and local dial tone services. Traditionally, synchronization and timing have been provided to CLECs as part of the Service Level Agreements with ILECs who provide backhaul services to the CLECs. The Company believes that as these new service providers expand their wireline networks, the demand for timing devices will increase as the new competitive carriers elect to own their own synchronization equipment and maintain tighter control over the flow of information and the efficiency of their networks. Wireless Market. Investment in wireless network technology continues to grow, as wireless network operators convert older analog networks to digital technology and expand their digital wireless networks in order to improve transmission quality, increase network capacity, and expand network coverage. Both analog and digital cellular telecommunications networks consist of numerous cells located throughout a service area, each with its own base station connected to the wireline network through a network switch. In a wireless network, calls are segmented, transmitted over a wider spectrum of bandwidth, and reassembled by a receiver within the network. Without proper synchronization, signal degradation resulting from this process of segmentation and reassembly may result in dropped calls and loss of data, decreasing network efficiency and capacity. 3 Products Symmetricom designs and manufactures timing and frequency products and intelligent access products for telecommunications networks. Network Synchronization and Timing Equipment The Public Switched Telecommunications Network (PSTN) consists of a series of interconnected switching equipment and other components ("nodes") that route voice, video and data traffic throughout the network. In order for these networks to function efficiently, it is essential that each network be synchronized and individual nodes within the network operate within very precise tolerances. Precision synchronization equipment throughout these networks provides a frequency reference to enable digital switching and transmission systems to operate at a common, or synchronized, clock rate, therefore minimizing signal degradation and ensuring error-free transmission of data throughout a network. High quality synchronization is an essential requirement for modern telecommunications service providers as they move to high-capacity, high-speed digital transmission technologies such as the Synchronous Optical Network (SONET) and Synchronous Digital Hierarchy (SDH) networks. SONET/SDH elements require higher quality synchronization. Synchronization is also required in voice and video services carried on packet based network technologies, such as Asynchronous Transfer Mode (ATM) and Voice over Internet Protocol (VoIP). ATM requires synchronization to support certain interfaces, such as channelized T1/E1 and SONET/SDH signals. Wireline Products. The Company's core synchronization products consist principally of Digital Clock Distributors (DCDs) based on quartz, rubidium and Global Positioning System (GPS) technologies, which provide highly accurate and uninterruptible timing that meets the synchronization requirements of digital networks. Symmetricom has established itself as a leader in telephone network synchronization and has introduced a series of DCDs and related products. These products provide for the generation of a stable primary timing reference and distribution of that timing reference throughout a network, enabling telecommunications service providers to synchronize precisely such diverse telephone network elements as digital switches, digital cross-connect systems and multiplexers for customers who are dependent upon high quality data transmission. Symmetricom's DCD product family consists of three major product platforms: the DCD 500 Series, the DCD Local Primary Reference (LPR) Series, and the TimeSourceTM family of Local Primary Reference products. The DCD 500 Series is a third generation synchronization and timing distribution platform that provides the accurate clock references needed throughout a network to ensure reliable synchronization. The DCD filters the input timing signal to virtually eliminate digital signal impairments. If the input timing reference is lost or out of tolerance, the clock provides highly stable backup timing, or "holdover," to allow the network to operate error-free for several hours or days, depending on the accuracy of the installed clock. The platform can be equipped with additional cards to provide interfaces for a variety of applications, including network management, synchronization performance monitoring, and status and control measurement, which are becoming increasingly important for network maintenance and revenue protection. The Maintenance Interface System (MIS) card provides a communications gateway for both local maintenance personnel and remote network management systems, gathering all system alarm information in real time. The Precision Synchronization Monitor (PSM) card provides synchronization and performance monitoring, detecting early indications of network degradation and related troubles in network elements. The Multiple Reference Controller (MRC) card directly accepts up to four reference sources, based on cesium, local primary reference sources, local clock(s), and/or network feeds and selects the most desirable reference based on a number of quality parameters. The DCD 500 platform is designed to provide maximum flexibility and meets both domestic and international standards. The DCD-LPR Series provides the capability to effectively use either GPS or Long Range Navigation version C (LORAN-C) to provide direct Stratum 1 traceable synchronization to network sites equipped with DCD systems. The DCD- LPR employs an integrated, roof-mounted GPS antenna and Timing Receiver (GTR) to receive precision Universal Coordinated Time (UTC) timing signals from GPS satellites at virtually any location in the world or from LORAN-C radio stations in a number of locations in the world. The DCD-LPR is usually 4 fitted with one or two GPS Timing Interface (GTI) cards, which receive timing inputs from the GPS receiver and output two T1 or E1 signals, and, optionally, time- of-day. For LORAN-C based timing, the LORAN-C Timing Interface card (LTI) provides similar functionality. The DCD-LPR can also be used with a Local Oscillator Unit (LOU) to provide a complete stand-alone timing generation and distribution system for facilities where a DCD 500 distribution system is unavailable or not needed. The TimeSource family of products are low-cost Primary Reference Source (PRS) systems addressing synchronization and timing needs of small or remote central offices. TimeSource 2500 is a standalone Stratum 1 PRS designed to offer a high- performance, inexpensive alternative to cesium in GPS hostile environments. TimeSource 2500 combines new oscillator, antenna, receiver and holdover technologies to provide LPR timing and synchronization inside the office environment, with the GPS antenna mounted in a window or through a small hole bored through a wall. Timing outputs with Stratum 1 performance are achieved using advanced BesTime(TM) technology. BesTime(TM) is a flexible clock engine which provides robust performance in compromised GPS installations by continuing to predict GPS timing information during the loss of GPS signals. Using BesTime(TM) technology, TimeSource 2500 can deliver Stratum 1 performance with only one satellite in view for less than 10 hours a day. TimeSource 2700 is a standalone Stratum 1 PRS which works by using reference signals traceable to GPS tapped from the existing Code Division Multiple Access (CDMA) network. CDMA is one of the most widely deployed digital wireless networks in the United States. Most major metropolitan areas are served by at least one wireless carrier using CDMA. By its nature, CDMA is a source of very precise time and frequency references. Each CDMA base station is equipped with a GPS-based timing system. Using BesTime clock technology, a patented multiple input frequency locked loop approach, the TimeSource 2700 tracks and ensembles multiple CDMA pilot signals, seamlessly switching to the most stable, and least noisy ones. TimeSource 2700 is designed to deliver Stratum 1 PRS in office environments where GPS is not practical or available. TimeSource 3000 is a standalone Stratum 1 PRS with an integrated GPS receiver which meets GR2830 requirements for ILEC central office installations. Using patented multiple input frequency locked loop BesTime(TM) clock technology, TimeSource 3000 provides undisturbed Stratum 1 synchronization when locked to GPS, with continued Stratum 1 performance for up to 72 hours upon loss of GPS. The BesTime(TM) engine, GPS receiver, and low cost quartz local oscillator work together to produce precise timing inputs. T1 span line or remote oscillator inputs can be added to increase system reliability and holdover performance in the event GPS signals are interrupted. Designed for small or remote central offices of ILECs, TimeSource 3000 can be configured as a PRS to front-end an office Building Integrated Timing Service (BITS) or as an integrated PRS for remote or small offices. Wireless Products. Cellular and Personal Communications Services (PCS) networks require precise frequency control and timing information. The Company's TimeSource 1000 GPS Clock System is designed to deliver stable timing to cellular/PCS base stations and advanced transmission equipment such as ATM nodes. TimeSource 1000 uses a GPS receiver to capture cesium-based time signals produced by GPS satellites. Using patented BesTime(TM) clock technology, TimeSource 1000 combines GPS-based timing signals with an internal quartz oscillator to provide reliable timing output. Network synchronization and timing systems are typically priced from $3,000 to $40,000. Intelligent Network Access Systems The Intelligent Network (IN) utilizes a highly complex protocol called Common Channel Signaling System Seven (SS7) to provide the basis for new telecommunications services. The IN architecture uses two separate but parallel paths; one to handle the voice or data traffic and a second to carry the signaling information for call setup and routing. SS7 is used primarily to support intelligent services such as call set-up, 800-number calling and calling card verification. Symmetricom's transmission products are designed to provide nearly 100% 5 availability for these critical applications. The Company's network access systems are designed for use in telephone company central offices as transmission, monitoring, and test access vehicles for SS7 networks. They provide maintenance personnel with flexible, centralized remote access to SS7 links for troubleshooting and performance verification, resulting in a comprehensive solution to the monitoring and transport of links requiring increased reliability. Transmission Products. Symmetricom's transmission products include Secure7(R), Secure7 Lite and the Integrated Digital Services Terminal (IDST). Secure7 is a multi-bandwidth, intelligent, fault-tolerant, digital transmission terminal that automatically reroutes disrupted high priority telephone data links such as those used in the SS7 network and the 911 emergency network. Secure7 is designed to provide nearly 100% availability for these critical data applications. Secure7 Lite is designed to protect SS7 networks from switch isolations and simplex events and may be used as a standard replacement for channel banks in SS7 applications. Both Secure7 and Secure7 Lite make use of the Company's BestPath(TM) technology to take advantage of the existing SS7 network architecture to automatically route around problem areas and maintain links between network elements. The IDST is a network access system designed for use in telephone company central offices which has principally been deployed as a transmission, monitoring and test access vehicle for SS7 networks. The IDST provides maintenance personnel with flexible, centralized remote access to SS7 links for troubleshooting and performance verification, resulting in a comprehensive solution to the monitoring and transport of links requiring increased reliability. Transmission products are typically priced at less than $5,000 for a small system to more than $300,000 for a large system. Network Management The Company's network management systems provide the key to maximum performance, reliability, and efficiency for synchronization networks. Symmetricom's synchronization network management solutions include TimeScan/TMN, a Unix-based TMN and Q3 compliant full element management system for synchronization networks, TimeScan/NMS, a Windows NT-based proprietary network management system, and TimeScan/Craft, a Windows 95-based local craft maintenance terminal. TimeScan/TMN and TimeScan/NMS provide scaleable, centralized real-time security monitoring, performance monitoring, fault management, remote configuration, and inventory of a synchronization network. The TimeScan/TMN graphical user interface presents status at the network level and at the element level, providing real-time representations of configuration and status of both logical and physical properties of the network. The TimeScan/NMS graphical user interface presents network status using hierarchical overviews of both logical and geographical network topologies. TimeScan/Craft is a local craft maintenance terminal designed to provide local management and maintenance of one DCD at a time. Each of these products features tools for identifying customer troubles before they affect service. Acquisition On August 30, 1999, Symmetricom entered into a definitive agreement to acquire certain assets of Hewlett-Packard Company's ("Hewlett-Packard") Communications Synchronization business for approximately $30.0 million in cash, of which approximately $20.0 million will be paid to Hewlett-Packard at closing. This business, part of Hewlett-Packard's Santa Clara Division, designs and manufactures network synchronization and timing equipment for global wireline and wireless telecommunications networks. The acquisition will be accounted for under the purchase method and goodwill of approximately $16.0 million will be amortized over a five to ten year period. The transaction is scheduled to close by the end of September 1999, although no assurance can be given that the agreement will be consummated. 6 Linfinity Microelectronics Inc. 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 per share consideration paid to shareholders of Linfinity was $2.96 (the "Preferred Price Per Share") and $1.46 (the "Common Price Per Share"). The outstanding capital stock of Linfinity was comprised of 6,000,000 shares of Preferred Stock and 4,197,824 shares of Common Stock. There were 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 were 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 was payable to Symmetricom (including amounts currently held in escrow) and $0.5 million was 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 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. Business Segment Information Information as to net sales and gross profit margin attributable to each of the Company's three reportable business segments for each year in the three- year period ended June 30, 1999, is contained in Note J of the Notes to Consolidated Financial Statements. See Part IV, Item 14. "Exhibits, Financial Statement Schedule and Reports on Form 8-K." Marketing In the United States, the Company markets and sells most of its products through its own sales force to the ILECs, PTTs, CLECs, other telephone companies, wireless service providers, cable TV operators, Internet service providers and communications OEMs. Internationally, the Company markets and sells its products to telecommunications service providers through its own sales force, independent sales representatives, distributors and system integrators. Licensing and Patents The Company incorporates a combination of trademark, copyright and patent registration, contractual restrictions and internal security to establish and protect its proprietary rights. The Company has United States and international patents and patent applications pending covering certain technology used by its operations. In addition, the Company uses technology licensed from others. 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 advantage. The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. The Company intends to continue its efforts to obtain patents, whenever possible, but there can be no assurance that patents will be issued or that any existing patents or patents that are obtained will not be challenged, invalidated or circumvented or that the rights granted will provide any commercial benefit to the Company. Additionally, if any of the Company's processes or designs are identified as infringing upon patents held by others, there can be no assurances that a license will be available or that the terms of obtaining any such license will be acceptable to the Company. Manufacturing The Company's manufacturing process consists primarily of in-house electrical assembly and test performed by the Company's subsidiary in Aguada, Puerto Rico. Additionally, Symmetricom, Ltd., the Company's UK subsidiary, performs in-house electrical assembly and test of its GPS receivers and products. Both facilities are ISO 9001 certified. 7 The Company primarily uses standard parts and components which are generally available from multiple sources. The Company, to date, has not experienced any significant delays in obtaining needed standard parts, single source components or services from its suppliers but there can be no assurance that such problems will not develop in the future. However, the Company maintains a reserve of certain single source components and seeks alternative suppliers where possible. The Company believes that a lack of availability of single source components would have an adverse effect on the Company's operating results. Backlog The Company's backlog was approximately $9.2 million at June 30, 1999 compared to approximately $6.3 million at June 30, 1998. Backlog consists of customer orders which are expected to be shipped within the next twelve months. The Company does not believe that current or future backlog levels are meaningful indicators of future net sales. Most orders included in backlog can be rescheduled or canceled by customers without significant penalty. Historically, a substantial portion of net sales in any fiscal period has been derived from orders received during that fiscal period. Backlog may be affected by the cancelation or delay of customer orders, the overall condition of the telecommunications industry, overall worldwide economic conditions and the cyclical nature of customer demand in each of the Company's markets. See Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Business Outlook and Risk Factors." Key Customers and Export Sales No customer accounted for 10% or more of the Company's net sales in fiscal 1999. Two customers, although not the same two customers in each year, accounted for 23% and 39% of the Company's net sales in fiscal years 1998 and 1997, respectively. The Company's export sales, which were primarily to Western Europe, Latin America, the Far East, and Canada accounted for 29%, 22% and 13% of the Company's net sales in fiscal years 1999, 1998 and 1997, 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. See Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Business Outlook and Risk Factors--Risks Associated with International Sales." 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. See Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Business Outlook and Risk Factors--Risks Associated with International Sales." Gains and losses on the conversion to U.S. dollars of foreign currency accounts receivable and accounts payable arising from international operations may in the future contribute to fluctuations in the Company's business and operating results. Sales and purchase obligations denominated in foreign currencies have not been significant. Accordingly, 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. Competition 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. Many of the Company's competitors or potential competitors are more established than the Company and have greater financial, manufacturing, technical and marketing resources. The Company believes that its primary competitors are Datum Inc. and Hewlett- 8 Packard. Hewlett-Packard will cease being a competitor upon consummation of the agreement to acquire Hewlett-Packard's Communications Synchronization business. In addition, the enactment of The Telecommunications Act of 1996, which permits ILECs, under certain conditions, to manufacture telecommunications equipment may result in competition from these customers of the Company. The Company competes primarily on product reliability and performance, product features, adherence to standards, customer service and price. While the Company believes that overall it competes favorably with respect to its competitive factors, there can be no assurance that it will be able to compete successfully in the future. The Company's ability to compete successfully is dependent upon its response to the entry of new competitors or the introduction of new products by the Company's competitors, the average selling prices received for its products, changing technology and customer requirements, development or acquisition of new products, the timing of new product introductions by the Company or its competitors, continued improvement of existing products, changes in overall worldwide market and economic conditions, cost effectiveness, quality, price, service and market acceptance of the Company's products. See Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Business Outlook and Risk Factors--Competition; Pricing Pressure." Research and Development The Company has actively pursued the application of new technology in the telecommunications industry in which it competes and has its own staff of engineers and technicians who are responsible for the design and development of new products. In fiscal years 1999, 1998 and 1997, the Company's overall research and development expenditures were $13,671,000, $12,387,000 and $12,866,000, respectively. All research and development expenditures were expensed as incurred. At June 30, 1999, 76 engineering and engineering support employees were engaged in development activities. The Company continued to focus its development efforts in fiscal year 1999 on new products as well as the enhancement of core synchronization and transmission products. The new product development program included wireline and wireless synchronization, network management software and core GPS, antenna and clock technologies. The Company will continue to have significant research and development expenditures in order to maintain its competitive position, although there can be no assurance that the Company will be able to successfully develop new products or enhance existing products or that such new or enhanced products will achieve market acceptance. Government Regulation The telecommunications industry is subject to government regulatory policies regarding pricing, taxation and tariffs which may adversely impact the demand for the Company's telecommunications products. These policies are continuously reviewed and subject to change by the various governmental agencies. The Company is also subject to government regulations which set installation and equipment standards for newly installed hardware. Environmental Regulation 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. Failure to comply with such regulations could result in suspension or cessation of the Company's operations, or could subject the Company to significant future liabilities. Employees At June 30, 1999, the Company had 423 employees, including 234 in manufacturing, 76 in engineering and 113 in sales, marketing and administration. The Company believes that its future success is highly dependent on its ability to attract and retain highly qualified management, sales, marketing and technical personnel. Accordingly, the Company maintains employee incentive and stock plans for certain of its employees. No Company employees are represented by a labor union, and the Company has experienced no work stoppages. The Company believes that its employee relations are good. 9 Item 2. Properties The following are the principal facilities of the Company as of June 30, 1999:
Approximate Owned/Lease Floor Area Expiration Location Principal Operations (Sq. Ft.) Date - -------- -------------------- ----------- -------------- San Jose, California.... Administration, sales, engineering and 118,000 April 2009 manufacturing Aguada, Puerto Rico..... Manufacturing 45,000 September 1999 Aguada, Puerto Rico..... Manufacturing 22,000 September 2000 Northampton, England.... Symmetricom, Ltd. administration, sales, 18,000 April 2000 engineering and manufacturing
During fiscal 1997, the Company leased a newly constructed 118,000 square foot facility in San Jose, California to replace its previous San Jose facility, for which the lease expired in July 1997. The Company has sublet approximately 39,000 square feet of this facility through November 2000. The Company believes that its current facilities are well maintained and generally adequate to meet short-term requirements. Item 3. Legal Proceedings In January 1994, a securities class action complaint was filed against the Company and certain of its present or 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 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 or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the security holders of the Company during the last quarter of the fiscal year ended June 30, 1999. Executive Officers of the Company Following is a list of the executive officers of the Company as of August 1, 1999 and brief summaries of their business experience. All officers, including executive officers, are elected annually by the Board of Directors at its meeting following the annual meeting of shareholders. The Company is not aware of any officer who was elected to the office pursuant to any arrangement or understanding with another person.
Name Age Position ---- --- -------- Thomas W. Steipp........ 50 Chief Executive Officer and Chief Financial Officer Mary A. Rorabaugh....... 40 Vice President, Finance and Secretary Anthony A. Haddrell..... 47 Senior Vice President, Engineering Dale A. Pelletier....... 48 Senior Vice President, Operations Frederick B. Stroupe.... 56 Senior Vice President, Worldwide Sales and Service
Mr. Steipp has served as Chief Executive Officer and Chief Financial Officer of the Company since December 1998. Mr. Steipp served as President and Chief Operating Officer, Telecom Solutions, a division of 10 the Company, from March 1998 to December 1998. Prior to joining the Company, from February 1996 to February 1998, Mr. Steipp served as Vice President and General Manager of Broadband Data Networks, a division of Scientific-Atlanta. From January 1979 to January 1996, Mr. Steipp held various management positions in operations and marketing with Hewlett-Packard. Mr. Steipp served as General Manager of the Federal Computer Division from January 1991 to January 1996 and Manager of Federal Sales & Marketing from August 1990 to January 1991. From January 1989 to August 1990, Mr. Steipp was Manager, Systems Integration Operations. Ms. Rorabaugh has served as Vice President, Finance and Secretary of the Company since July 1998 and as Vice President, Finance of Telecom Solutions, a division of the Company, from April 1997 to June 1998. From April 1993 to March 1997, Ms. Rorabaugh served as Controller, Telecom Solutions. Prior to joining the Company, from April 1989 to March 1993, Ms. Rorabaugh was Director of Corporate Finance and Manager of Financial Planning at VLSI Technology, Inc., a semiconductor company. From April 1988 to March 1989, Ms. Rorabaugh was Division Controller for Conner Peripherals, Inc., a manufacturer of hard disk drives. From May 1984 to March 1988, Ms. Rorabaugh held various positions with VLSI Technology, Inc., including Operations Planning Manager, Manufacturing Controller and Senior Manufacturing Analyst. Previously, Ms. Rorabaugh was a consultant for two years with Putnam, Hayes, & Bartlett, Inc., a management consulting firm. Mr. Haddrell has served as Senior Vice President, Engineering for the Company since August 1998 and as Director, Technology from January 1996 to August 1998. From December 1991 to January 1996, Mr. Haddrell served as General Manager, Navstar Systems Ltd., a subsidiary of the Company as of August 1993. Previously, Mr. Haddrell served as the Technical Manager for Marconi Marine and Satellite Systems Manager for Racal-Decca. Mr. Pelletier has served as Senior Vice President, Operations of the Company since April 1999, and as Senior Vice President, Operations of Telecom Solutions, a division of the Company, since April 1997 and as Vice President, Operations of Telecom Solutions from November 1993 to April 1997. From July 1993 until November 1993, Mr. Pelletier served as Vice President and General Manager, Telecom Solutions. From July 1992 until July 1993, Mr. Pelletier served as General Manager, Synchronization Division, Telecom Solutions. From August 1990 until July 1992, he served as Synchronization Division Manager, Telecom Solutions. From August 1989 until August 1990, Mr. Pelletier served as Operations Manager, Telecom and Analog Solutions Divisions. From August 1986, when Mr. Pelletier joined the Company until August 1989, he held the position of Manufacturing Manager, Telecom Solutions. Previously, Mr. Pelletier served in various finance and manufacturing positions for nine years with several manufacturing companies. Mr. Stroupe has served as Senior Vice President, Worldwide Sales and Service of the Company since April 1997 and as Vice President, Sales from October 1993 to April 1997. From July 1991 to October 1993, Mr. Stroupe served as Vice President, Sales, Telecom Solutions, a division of the Company. From August 1990 to July 1991, Mr. Stroupe served as Director, Sales and as Director, Sales-West from August 1987 to August 1990. Prior to joining the Company Mr. Stroupe served in the telecommunications industry primarily with General Electric for 12 years and Rockwell International/Wescom for 13 years. 11 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The information required by this Item is described in Note K of the Notes to Consolidated Financial Statements. See Part IV, Item 14. "Exhibits, Financial Statement Schedule and Reports on Form 8-K." Item 6. Selected Financial Data The following selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included in Part IV, Item 14. "Exhibits, Financial Statement Schedule and Reports on Form 8-K." and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Item 7.
Year ended June 30, -------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- ------- ------- (In thousands, except per share amounts) Operating Results: Net sales $ 76,915 $ 73,311 $ 89,718 $68,243 $62,814 Operating income 2,322 4,192 9,625 5,325 5,694 Earnings from continuing operations before income taxes 3,524 5,175 11,431 6,872 6,717 Earnings from continuing operations 2,784 4,016 9,030 5,456 6,896 Earnings (loss) from discontinued operations (3,979) (5,546) 4,424 2,022 3,450 Net earnings (loss) (1,195) (1,530) 13,454 7,478 10,346 Basic earnings per share from continuing operations .18 .25 .57 .35 .47 Basic earnings (loss) per share from discontinued operations (.26) (.35) .28 .13 .24 Basic net earnings (loss) per share (.08) (.10) .85 .48 .71 Diluted earnings per share from continuing operations .18 .25 .56 .34 .44 Diluted earnings (loss) per share from discontinued operations (.26) (.35) .27 .13 .22 Diluted net earnings (loss) per share (.08) (.10) .83 .47 .66 Balance Sheet: Cash and investments 59,197 34,342 41,587 34,270 33,205 Working capital 66,591 71,997 74,639 65,290 57,753 Total assets 106,320 108,446 115,822 84,055 75,262 Long-term obligations 8,069 8,368 8,583 -- 231 Shareholders' equity 79,604 84,357 87,603 70,403 60,125
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto. 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 12 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 consummation of the agreement to acquire Hewlett-Packard Company's Communications Synchronization business, which is scheduled to close by the end of September 1999, difficulties in integrating the business, products and employees to be acquired from Hewlett-Packard with those of Symmetricom, reduced rates of growth of telecommunications services and high-bandwidth applications, the volume and timing of orders from customers and shipments to customers, including current and planned Communications Synchronization products, 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 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. No customer accounted for 10% or more of the Company's net sales in fiscal 1999. Two customers, although not the same two customers in each year, accounted for 23% and 39% of the Company's net sales in fiscal years 1998 and 1997, 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 were $22.5 million in fiscal 1997 but decreased to $8.1 million and $4.4 million in fiscal 1998 and 1999, respectively. 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. 13 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 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. Hewlett-Packard will cease being a competitor upon consummation of the agreement to acquire Hewlett-Packard's Communications Synchronization business. In addition, due in part to the enactment of The Telecommunications Act of 1996, which permits Incumbent Local Exchange Carriers (ILECs), among the Company's largest customers, to manufacture telecommunications equipment, ILECs 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, 14 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 Acquisition. The potential acquisition of Hewlett-Packard's Communications Synchronization business by the Company will result in the use of significant amounts of cash, dilutive issuances of stock options, and amortization expense related to goodwill and other intangible assets. In addition, the proposed acquisition involves 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 this acquisition does occur there can be no assurance as to the effect thereof on the Company's business, financial condition and results of operations. 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 of 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 29%, 22% and 13% of the Company's net sales in fiscal years 1999, 1998 and 1997, 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 first quarter of fiscal 2000 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. 15 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 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). 16 Results of Operations Symmetricom designs, manufactures and markets advanced network synchronization systems and intelligent access systems for global telecommunications markets. Synchronization is an essential requirement for modern telecommunications service providers as they move to high capacity and high-speed digital transmission technologies. The 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. The Company's products are marketed to public network providers, ILECs, Post Telephone and Telegraph companies (PTTs), Competitive Local Exchange Carriers (CLECs), other telephone companies, wireless service providers, cable TV operators, ISPs and communications OEMs. On August 30, 1999, Symmetricom entered into a definitive agreement to acquire certain assets of Hewlett-Packard's Communications Synchronization business for approximately $30.0 million in cash, of which approximately $20.0 million will be paid to Hewlett-Packard at closing. This business, part of Hewlett-Packard's Santa Clara Division, designs and manufactures network synchronization and timing equipment for global wireline and wireless telecommunications networks. The acquisition will be accounted for under the purchase method and goodwill of approximately $16.0 million will be amortized over a five to ten year period. The transaction is scheduled to close by the end of September 1999, although no assurance can be given that the agreement will be consummated. 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 per share consideration paid to shareholders of Linfinity was $2.96 (the "Preferred Price Per Share") and $1.46 (the "Common Price Per Share"). The outstanding capital stock of Linfinity was comprised of 6,000,000 shares of Preferred Stock and 4,197,824 shares of Common Stock. There were 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 were 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 was payable to Symmetricom (including amounts currently held in escrow) and $0.5 million was payable to the former minority shareholders and option holders of Linfinity. The Linfinity business has been accounted for as a discontinued operation and, accordingly, its net assets 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 B of the Notes to Consolidated Financial Statements. Net Sales Net sales increased by $3.6 million (5%) to $76.9 million in fiscal 1999 as compared to fiscal 1998 and decreased by $16.4 million (18%) to $73.3 million in fiscal 1998 as compared to fiscal 1997. The increase in fiscal 1999 net sales was due to higher sales of synchronization and transmission products, partially offset by lower sales of the Company's Symmetricom, Ltd. subsidiary in the digitally enhanced cordless telephone (DECT) market. The decrease in fiscal 1998 was principally due to lower sales to AT&T Corporation (AT&T), which decreased to $8.1 million in fiscal 1998 from $22.5 million in fiscal 1997, and the completion of the Secure7 contract with SBC Communications Inc., where Secure7 sales decreased to $0.9 million in fiscal 1998 from $8.1 million in fiscal 1997, partially offset by higher sales to international accounts, particularly in Italy, Germany and South Africa. Gross Profit Margin The Company's gross profit margin was 48%, 50% and 49% in fiscal 1999, 1998 and 1997, respectively. In fiscal 1999, the decrease in the gross profit margin was primarily due to less favorable manufacturing efficiencies and less favorable sales channel mix. In fiscal 1998, the higher gross profit margin reflects a slightly more favorable product mix. 17 Operating Expenses Research and development expense was $13.7 million (or 18% of net sales), $12.4 million (or 17% of net sales) and $12.9 million (or 14% of net sales) in fiscal 1999, 1998 and 1997, respectively. The increase in fiscal 1999 was primarily due to continued focus on investment in new products and core technology. The new product development program was focused on wireline and wireless synchronization, network management software and core GPS, antenna and clock technologies. The fiscal 1998 results reflect continued high investments in new products and core technology, with a slight reduction due to lower earnings-based incentive compensation. Selling, general and administrative expense was $20.8 million (or 27% of net sales), $19.7 million (or 27% of net sales) and $21.5 million (or 24% of net sales) in fiscal 1999, 1998 and 1997, respectively. The increase was primarily due to higher marketing and sales expenses associated with increased sales. The decrease in fiscal 1998 reflects lower selling expenses associated with lower sales and lower earnings-based incentive compensation. Operating Income Operating income decreased by 45% to $2.3 million in fiscal 1999 and decreased by 56% to $4.2 million in fiscal 1998 from $9.6 million in fiscal 1997. The decrease in fiscal 1999 is primarily due to lower gross profit margin and increased operating expenses. The decrease in fiscal 1998 is primarily attributable to the unfavorable impact of lower net sales partially offset by reductions in operating expenses. Interest Income (Expense) Interest income was $1.9 million, $1.7 million and $1.8 million in fiscal 1999, 1998 and 1997, respectively. The increase in fiscal 1999 reflects higher average invested cash balances. Interest expense was $0.7 million, $0.7 million and zero in fiscal 1999, 1998 and 1997, respectively. The fiscal 1999 and 1998 interest expense of the company was predominantly associated with the capital lease on the Company's building in San Jose. Income Taxes The income tax provision was $0.7 million (effective tax rate of 21%), $1.2 million (effective tax rate of 22%) and $2.4 million (effective tax rate of 21%) in fiscal 1999, 1998 and 1997, respectively. The effective tax rate was lower than the federal tax rate primarily due to the benefit of lower income tax rates on Puerto Rico earnings. The Company's effective tax rate is affected by the percentage of qualified Puerto Rico earnings compared to total earnings as most of the Company's Puerto Rico earnings are taxed under Section 936 of the U.S. Internal Revenue Code, which exempts qualified Puerto Rico earnings from federal income taxes. This exemption is subject to 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. Earnings from Continuing Operations As a result of the factors discussed above, net earnings from continuing operations were $2.8 million or $.18 per share (diluted) in fiscal 1999 compared to $4.0 million or $.25 per share (diluted) in fiscal 1998 and $9.0 million or $.56 per share (diluted) in fiscal 1997. Earnings (Loss) from Discontinued Operations As a result of the factors discussed above, net loss from discontinued operations was $4.0 million or $.26 per share (diluted) in fiscal 1999 compared to $5.5 million or $.35 per share (diluted) in fiscal 1998. Net earnings from discontinued operations were $4.4 million or $.27 per share (diluted) in fiscal 1997. Net Earnings (Loss) As a result of the factors discussed above, net loss was $1.2 million or $.08 per share (diluted) in fiscal 1999 compared to $1.5 million or $.10 per share (diluted) in fiscal 1998. Net earnings were $13.5 million or $.83 per share (diluted) in fiscal 1997. 18 New 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. The disclosures required by SFAS 130 are presented in the Consolidated Statements of Shareholders' Equity. Effective June 30, 1999, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," which requires the Company to report and display certain information related to operating segments. The adoption of SFAS 131 did not have a material impact on the Company's financial position and results of operations. See Note J of Notes to Consolidated Financial Statements. 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, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. 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. Liquidity and Capital Resources Working capital decreased to $66.6 million at June 30, 1999 from $72.0 million at June 30, 1998, while the current ratio decreased to 4.7 to 1.0 from 6.2 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 $59.2 million from $34.3 million, primarily due to $23.0 million in proceeds from the sale of discontinued operations, $11.0 million in cash provided by continuing operations, $0.6 million in proceeds from issuance of long-term obligations, $1.4 million in unrealized gain on securities and $0.7 million in proceeds from issuance of common stock, offset by $2.2 million in cash used for discontinued operations, $3.2 million used for capital expenditures, $5.7 million used for the repurchase of the Company's common stock and $0.7 million used for other investing and financing activities. At June 30, 1999, the Company had $6.5 million of unused credit available under its bank line of credit. The Company believes that cash, cash equivalents, short-term investments, funds generated from operations and funds available under its bank line of credit will be sufficient to satisfy working capital requirements and capital expenditures in fiscal 2000. At June 30, 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 19 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. 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 7A. 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 $14.0 million as of June 30, 1999. These 20 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 June 30, 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. 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 $1.2 million at June 30, 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. 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 adversely affect the Company. Item 8. Financial Statements and Supplementary Data The Company's financial statements follow Part IV, Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 21 PART III Item 10. Directors and Executive Officers of the Registrant Information regarding directors appearing under the caption "Proposal No. One--Election of Directors--Nominees" on pages 3 and 4 of the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders filed with the Commission on September 23, 1999, (the "Proxy Statement") is incorporated herein by reference. Information regarding executive officers is included in Part I hereof under the heading "Executive Officers of the Company" immediately following Item 4 in Part I hereof. Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the section entitled "Other Information--Section 16(a) Beneficial Ownership Reporting Compliance" on page 13 of the Proxy Statement. Item 11. Executive Compensation Incorporated herein by reference to the Proxy Statement under the captions "Proposal No. One--Election of Directors--Nominees" on pages 3 and 4, "Executive Officer Compensation" on pages 14, 15, 16 and 17, "Proposal No. One--Election of Directors--Director Compensation" on page 5 and "Certain Transactions" on pages 17 and 18. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated herein by reference to the Proxy Statement under the caption "Other Information--Share Ownership by Principal Shareholders and Management" on pages 13 and 14. Item 13. Certain Relationships and Related Transactions Incorporated herein by reference to the Proxy Statement under the caption "Certain Transactions" on pages 17 and 18. 22 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K (a) Financial Statements and Financial Statement Schedule 1. Financial Statements. The following financial statements of the Company and the report of Deloitte & Touche LLP, Independent Auditors, are included in this report on Form 10-K on the pages indicated.
Page ---- Consolidated Balance Sheets at June 30, 1999 and 1998.................. 24 Consolidated Statements of Operations for the years ended June 30, 1999, 1998 and 1997................................................... 25 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years ended June 30, 1999, 1998 and 1997............... 26 Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997................................................... 27 Notes to Consolidated Financial Statements............................. 28 Independent Auditors' Report........................................... 40
2. Financial Statement Schedule. The following financial statement schedule of the Company for the years ended June 30, 1999, 1998, and 1997 is filed as part of this report on Form 10-K and should be read in conjunction with the financial statements. Schedule II Valuation and Qualifying Accounts and Reserves All other schedules have been omitted because they are not applicable, not required, or the required information is included in the Consolidated Financial Statements or notes thereto. 3. Exhibits: See Item 14(c) below. (b) Reports on Form 8-K A current report on Form 8-K dated August 18, 1999 was filed to announce the resignation of Roger A. Strauch as a Director of the Company and the appointment of Richard N. Snyder as a Director of the Company. (c) Exhibits The exhibits listed on the accompanying index immediately following the signature page are filed as a part of this report. (d) Financial Statement Schedules See Item 14(a) above. 23 SYMMETRICOM, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
June 30, ----------------- 1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 44,897 $ 31,369 Short-term investments 14,300 2,973 -------- -------- Cash and investments 59,197 34,342 Accounts receivable, net of allowance for doubtful accounts of $180 and $329 10,915 10,541 Inventories 10,805 11,589 Other current assets 3,762 4,485 Net assets of discontinued operations -- 24,781 -------- -------- Total current assets 84,679 85,738 Property, plant and equipment, net 20,615 21,901 Other assets, net 1,026 807 -------- -------- $106,320 $108,446 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,564 $ 2,362 Accrued liabilities 13,929 11,164 Current maturities of long-term obligations 595 215 -------- -------- Total current liabilities 18,088 13,741 Long-term obligations 8,069 8,368 Deferred income taxes 559 1,980 Commitments and contingencies (Notes D & F) -- -- Shareholders' equity: Preferred stock, no par value; 500 shares authorized, none issued -- -- Common stock, no par value; 32,000 shares authorized, 14,926 and 15,772 shares issued and outstanding 18,934 23,892 Unrealized gain on securities, net of deferred taxes of $400 1,400 -- Retained earnings 59,270 60,465 -------- -------- Total shareholders' equity 79,604 84,357 -------- -------- $106,320 $108,446 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 24 SYMMETRICOM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year ended June 30, ------------------------- 1999 1998 1997 ------- ------- ------- Net sales $76,915 $73,311 $89,718 Cost of sales 40,169 37,018 45,703 ------- ------- ------- Gross profit 36,746 36,293 44,015 Operating expenses: Research and development 13,671 12,387 12,866 Selling, general and administrative 20,753 19,714 21,524 ------- ------- ------- Operating income 2,322 4,192 9,625 Interest income 1,917 1,713 1,806 Interest expense (715) (730) -- ------- ------- ------- Earnings from continuing operations before income taxes 3,524 5,175 11,431 Income taxes 740 1,159 2,401 ------- ------- ------- Earnings from continuing operations 2,784 4,016 9,030 Discontinued operations, net of tax: Earnings (loss) from operations (73) (5,546) 4,424 Estimated loss on sale (3,906) -- -- ------- ------- ------- Earnings (loss) from discontinued operations (3,979) (5,546) 4,424 ------- ------- ------- Net earnings (loss) $(1,195) $(1,530) $13,454 ======= ======= ======= Earnings (loss) per share--basic: Earnings from continuing operations $ .18 $ .25 $ .57 Earnings (loss) from discontinued operations (.26) (.35) .28 ------- ------- ------- Net earnings (loss) $ (.08) $ (.10) $ .85 ------- ------- ------- Weighted average shares outstanding--basic 15,301 15,845 15,755 ======= ======= ======= Earnings (loss) per share--diluted: Earnings from continuing operations $ .18 $ .25 $ .56 Earnings (loss) from discontinued operations (.26) (.35) .27 ------- ------- ------- Net earnings (loss) $ (.08) $ (.10) $ .83 ======= ======= ======= Weighted average shares outstanding--diluted 15,395 16,009 16,275 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 25 SYMMETRICOM, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands)
Total Total Compre- Common Stock Compre- Share- hensive --------------- hensive Retained holders' Income Shares Amounts Gain Earnings Equity (Loss) ------ ------- ------- -------- -------- ------- Balance at July 1, 1996 15,570 $21,862 $48,541 $70,403 Issuance of common stock: Stock option exercises, net of shares tendered upon exercise Employee stock purchase plan 325 1,730 -- 1,730 74 817 -- 817 Tax benefit from stock option plans -- 2,394 -- 2,394 Repurchase of common stock (90) (1,195) -- (1,195) Net earnings -- -- 13,454 13,454 $13,454 ------ ------- ------ ------- ------- ------- Balance at June 30, 1997 15,879 25,608 $ -- 61,995 87,603 $13,454 ------- Issuance of common stock: Stock option exercises 75 590 -- 590 Employee stock purchase plan 86 942 -- 942 Tax benefit from stock option plans -- 109 -- 109 Repurchase of common stock (268) (3,357) -- (3,357) Net loss -- -- (1,530) (1,530) $(1,530) ------ ------- ------ ------- ------- ------- Balance at June 30, 1998 15,772 23,892 -- 60,465 84,357 $(1,530) ------- Issuance of common stock: Stock option exercises, net of shares tendered upon exercise 12 13 -- 13 Employee stock purchase plan 138 712 -- 712 Repurchase of common stock (996) (5,683) -- (5,683) Comprehensive income: Earnings from continuing operations -- -- 2,784 2,784 $ 2,784 Loss from discontinued operations -- -- (3,979) (3,979) (3,979) Unrealized gain on securities, net of deferred taxes of $400 -- -- 1,400 -- 1,400 1,400 ------ ------- ------ ------- ------- ------- Balance at June 30, 1999 14,926 $18,934 $1,400 $59,270 $79,604 $ 205 ====== ======= ====== ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 26 SYMMETRICOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year ended June 30, ---------------------------- 1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net earnings (loss) $ (1,195) $ (1,530) $ 13,454 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Earnings (loss) from discontinued operations and loss on disposal 3,979 5,546 (4,424) Depreciation and amortization 4,556 5,023 3,575 Deferred income taxes (442) (1,262) 104 Changes in assets and liabilities: Accounts receivable (374) 683 (571) Inventories 784 1,692 (2,751) Accounts payable 1,202 (2,179) 1,090 Accrued liabilities 2,765 (1,256) 4,852 Tax benefit from employee stock plans -- 109 2,394 Other (256) (415) 107 -------- -------- -------- Net cash provided by continuing operations 11,019 6,411 17,830 Net cash used for discontinued operations (2,198) (8,282) (437) -------- -------- -------- Net cash provided by (used for) operating activities 8,821 (1,871) 17,393 -------- -------- -------- Cash flows from investing activities: Purchases of short-term investments (45,927) (19,289) (33,941) Maturities of short-term investments 36,000 29,700 23,500 Proceeds from sale of discontinued operations 23,000 -- -- Purchases of plant and equipment, net (3,214) (2,962) (11,324) Notes receivable 100 (800) -- Other (375) 233 43 -------- -------- -------- Net cash provided by (used for) investing activities 9,584 6,882 (21,722) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term obligations 595 -- -- Repayment of long-term obligations (514) (20) (147) Proceeds from issuance of common stock 725 1,532 2,547 Repurchase of common stock (5,683) (3,357) (1,195) -------- -------- -------- Net cash provided by (used for) financing activities (4,877) (1,845) 1,205 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 13,528 3,166 (3,124) Cash and cash equivalents at beginning of year 31,369 28,203 31,327 -------- -------- -------- Cash and cash equivalents at end of year $ 44,897 $ 31,369 $ 28,203 ======== ======== ======== Non-cash investing and financing activities: Unrealized gain on securities, net $ 1,400 $ -- $ -- Facility acquired under capital lease -- -- 8,750 Cash payments for: Interest $ 715 $ 730 $ -- Income taxes 351 3,475 1,702
The accompanying notes are an integral part of these consolidated financial statements. 27 SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A--Summary of Significant Accounting Policies Business. Symmetricom, Inc. ("the Company") designs, manufactures and markets advanced network synchronization and timing products and intelligent access systems for global telecommunications markets. Synchronization is an essential requirement for modern telecommunications service providers as they move to high capacity and high-speed digital transmission technologies. The 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. The Company's products are marketed to public network providers, Incumbent Local Exchange Carriers (ILECs), Post Telephone and Telegraph companies (PTTs), Competitive Local Exchange Carriers (CLECs), other telephone companies, wireless service providers, cable TV operators, ISPs and communications OEMs. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated. Fiscal Period. The Company, for presentation purposes, presents each fiscal year as if it ended on June 30. However, the Company's fiscal year ends on the Sunday closest to June 30. All references to years refer to the Company's fiscal years. Fiscal years 1999, 1998 and 1997 consisted of 52 weeks. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents. The Company considers all highly liquid debt investments purchased with an original maturity of three months or less to be cash equivalents. Short-term Investments. Short-term investments, consisting of corporate debt securities which mature through September 1999, are classified as available-for-sale and reported at fair value. Net unrealized gains and losses are excluded from earnings and included as a separate component of shareholders' equity. The cost of securities sold is based on the specific identification method. Fair Values of Financial Instruments. The estimated fair value of the Company's financial instruments, which include cash equivalents, short-term investments, accounts receivable and long-term obligations, approximate their carrying value. Concentrations of Credit Risk. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, short-term investments and accounts receivable. The Company places its investments with high-credit-quality corporations and financial institutions. Accounts receivable are derived primarily from sales to telecommunications service providers, original equipment manufacturers and distributors. Management believes that its credit evaluation, approval and monitoring processes substantially mitigate potential credit risks. Inventories. Inventories are stated at the lower of cost (first-in, first- out) or market. Property, Plant and Equipment. Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method based on the estimated useful lives of the assets (three to twelve years) or the lease term if shorter. Long-lived assets. In accordance with Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the 28 Company recognizes impairment losses, if significant, on long-lived assets and certain identifiable intangible assets in the event the net book value of such assets exceeds the estimated future cash flows. The adoption of SFAS 121 had no material impact on the Company's financial position or results of operations. Foreign Currency Translation. Foreign currency translation gains and losses and the effect of foreign currency exchange rate fluctuations have not been significant. Revenue Recognition. Sales are recognized upon shipment. Provisions are made for warranty costs, sales returns and price protection. Stock Options. The Company accounts for employee stock based compensation using the intrinsic value based method of accounting defined under Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." The Company provides additional pro froma disclosures as required under Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." Net Earnings (Loss) Per Share. Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net earnings (loss) 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 (loss) per share calculations.
Year ended June 30, ------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- (In thousands, except per share amounts) Earnings from continuing operations $ 2,784 $ 4,016 $ 9,030 Earnings (loss) from discontinued operations (3,979) (5,546) 4,424 ------------- ------------- ------------- Net earnings (loss) $ (1,195) $ (1,530) $ 13,454 ------------- ------------- ------------- Weighted average shares outstanding--basic 15,301 15,845 15,755 Dilutive stock options 94 164 520 ------------- ------------- ------------- Weighted average shares outstanding--diluted 15,395 16,009 16,275 ------------- ------------- ------------- Basic earnings (loss) per share $ (.08) $ (.10) $ .85 Diluted earnings (loss) per share $ (.08) $ (.10) $ .83
Reclassifications. Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 1999 presentation. Such reclassifications had no effect on previously reported results of operations or retained earnings. 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. The disclosures required by SFAS 130 are presented in the Consolidated Statements of Shareholders' Equity. Effective June 30, 1999, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," which requires the Company to report and display certain information related to operating segments. The adoption of SFAS 131 did not have an impact on the Company's financial position and results of operations. See Note J. 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 29 be carried at fair value, and provides for hedging accounting when certain conditions are met. This statement, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. 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. Note B--Discontinued Operations On February 10, 1999, the Company 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 per share consideration paid to shareholders of Linfinity was $2.96 (the "Preferred Price Per Share") and $1.46 (the "Common Price Per Share"). The outstanding capital stock of Linfinity was comprised of 6,000,000 shares of Preferred Stock and 4,197,824 shares of Common Stock. There were 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 were 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 was payable to the Company (including amounts currently held in escrow) and $0.5 million was payable to former minority shareholders and optionholders of Linfinity. The Linfinity business has been accounted for as a discontinued operation and, accordingly, its net assets 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 earnings (loss) from discontinued operations, net of tax, for the three years ended June 30, 1999, is comprised of:
Year ended June 30, ------------------------- 1999 1998 1997 ------- ------- ------- (In thousands) Net sales $37,115 $47,270 $54,637 Earnings (loss) from operations before taxes $ (81) $(9,315) $ 5,906 Income taxes (8) (3,769) 1,482 ------- ------- ------- Earnings (loss) from operations (73) (5,546) 4,424 ------- ------- ------- Estimated loss on sale (182) -- -- Income taxes (3,724) -- -- ------- ------- ------- Net estimated loss on sale (3,906) -- -- ------- ------- ------- Loss from discontinued operations $(3,979) $(5,546) $ 4,424 ------- ------- -------
The net assets retained and sold on April 14, 1999 were comprised of:
Total Retained Sold ------- -------- ------- (In thousands) Current assets $17,799 $ 5,640 $12,159 Property, plant and equipment, net 14,470 -- 14,470 Other assets 16 -- 16 Current liabilities (6,943) -- (6,943) Other liabilities (2,177) (2,177) -- ------- ------- ------- Net assets of discontinued operations $23,165 $ 3,463 $19,702 ------- ------- -------
30 The net assets retained and held for sale at June 30, 1998 were comprised of:
Held For Total Retained Sale ------- -------- ------- (In thousands) Current assets $21,862 $ 7,075 $14,787 Property, plant and equipment, net 16,433 -- 16,433 Other assets 8 -- 8 Current liabilities (9,592) (3,145) (6,447) Other liabilities (1,762) (1,762) -- ------- ------- ------- Net assets of discontinued operations $26,949 $ 2,168 $24,781 ------- ------- -------
Note C--Balance Sheet Detail
June 30, ------------------ 1999 1998 -------- -------- (In thousands) Inventories: Raw materials $ 3,859 $ 3,230 Work-in-process 3,173 2,027 Finished goods 3,773 6,332 -------- -------- $ 10,805 $ 11,589 ======== ======== Property, plant and equipment, net: Buildings and improvements $ 9,007 $ 9,007 Machinery and equipment 22,252 19,306 Leasehold improvements 7,997 7,959 -------- -------- 39,256 36,272 Accumulated depreciation and amortization (18,641) (14,371) -------- -------- $ 20,615 $ 21,901 ======== ========
Building and improvements includes $8,750,000 of costs capitalized under a capital lease for the Company's facility in San Jose, California which was completed in June 1997. At June 30, 1999 and 1998, accumulated amortization for this lease totaled $1,522,000 and $761,000, respectively. No amortization expense was recorded in 1997.
June 30, ---------------- 1999 1998 ------- ------- (In thousands) Accrued liabilities: Employee compensation and benefits $ 3,731 $ 3,364 Accrued warranty expense 4,319 3,994 Deferred revenue 1,152 347 Other 4,727 3,459 ------- ------- $13,929 $11,164 ======= ======= Long-term obligations: Capital lease $ 8,367 $ 8,583 Other 297 -- Current maturities (595) (215) ------- ------- $ 8,069 $ 8,368 ======= =======
A note payable bearing interest at 10.25% per annum was repaid in September 1997. The note was collateralized by land, building, and related personal property. 31 The Company has a $7,000,000 unsecured bank line of credit which expires on May 1, 2000 and bears interest at the bank's prime rate, 7.75% at June 30, 1999. The line of credit agreement contains certain financial ratios to be maintained by the Company. It also required the Company to have positive net income during the quarter ending March 31, 1999 and to maintain net income greater than zero not less than every other quarter after such period. At June 30, 1999, the Company had $6.5 million of unused credit available under its bank line of credit. Note D--Lease Commitments During 1997, the Company leased a facility in San Jose, California under which the land and building were accounted for as an operating lease and a capital lease, respectively. This lease expires in April 2009. A section of the facility has been sublet and accounted for as an operating lease. This sublease expires in November 2000. The minimum future sublease payments to be received at June 30, 1999 were $757,000 in 2000 and $324,000 in 2001. The Company leases certain other facilities and equipment under operating lease agreements which expire at various dates through 2001. Rental expense charged to operations was $1,229,000 in 1999, $1,406,000 in 1998, and $1,661,000 in 1997, respectively. Future minimum lease payments at June 30, 1999 are as follows:
Capital Operating Lease Lease ------- --------- (In thousands) For the years: 2000 $ 991 $1,010 2001 1,055 719 2002 1,121 606 2003 1,189 595 2004 1,261 595 Thereafter 7,140 2,859 ------- ------ Total minimum lease payments 12,757 $6,384 ====== Amount representing interest (8.5%) (4,390) ------- Present value of minimum lease payments 8,367 Current portion (298) ------- Long-term obligation $ 8,069 =======
Note E--Income Taxes Income tax provision consists of:
Year ended June 30, ---------------------- 1999 1998 1997 ------ ------ ------ (In thousands) Current: Federal $ 368 $1,055 $1,312 State (169) 242 23 Puerto Rico 1,030 1,034 588 Foreign (47) 90 374 ------ ------ ------ 1,182 2,421 2,297 ------ ------ ------ Deferred: Federal 26 (377) (22) State 241 (418) (45) Puerto Rico (709) (467) 171 ------ ------ ------ (442) (1,262) 104 ------ ------ ------ $ 740 $1,159 $2,401 ====== ====== ======
32 Deferred income tax provision (benefit) is recorded when income and expenses are recognized in different periods for financial reporting and tax purposes. The significant components of deferred income tax provision (benefit) are as follows:
Year ended June 30, ----------------------- 1999 1998 1997 ------- ------- ----- (In thousands) Tax credit and net operating loss carryforwards $ 1,707 $ (696) $ 983 Reserves and accruals (360) (290) (206) Depreciation and amortization (2,449) (264) (535) Deferred taxes on Puerto Rico earnings (622) (294) 481 Change in valuation allowance 1,282 282 (619) ------- ------- ----- $ (442) $(1,262) $ 104 ======= ======= =====
The effective income tax rate differs from the federal statutory income tax rate as follows:
Year ended June 30, ------------------- 1999 1998 1997 ----- ----- ----- Federal statutory income tax rate 35.0% 35.0% 35.0% Federal tax benefit of Puerto Rico operations (52.9) (16.6) (19.7) Puerto Rico taxes 9.1 10.9 6.6 Research and development tax credit -- (1.9) (1.4) State income taxes, net of federal benefit 2.0 (3.4) (.2) Other (3.1) (1.6) .7 Change in valuation allowance 30.9 -- -- ----- ----- ----- Effective income tax rate 21.0% 22.4% 21.0% ===== ===== =====
The principal components of deferred tax assets and liabilities are as follows:
June 30, ---------------- 1999 1998 ------- ------- (In thousands) Deferred tax assets: Tax credit and net operating loss carryforwards $ 7,717 $ 9,424 Reserves and accruals 2,486 2,126 Depreciation and amortization 3,465 1,016 ------- ------- 13,668 12,566 Valuation allowance (9,784) (8,502) ------- ------- 3,884 4,064 ------- ------- Deferred tax liabilities: Unremitted Puerto Rico earnings 1,861 2,483 ------- ------- Net deferred tax asset $ 2,023 $ 1,581 ======= =======
Net deferred tax assets (liabilities) are comprised of the following:
June 30, ---------------- 1999 1998 ------- ------- (In thousands) Current assets $ 2,582 $ 3,561 Non-current liabilities (559) (1,980) ------- ------- Net deferred tax assets $ 2,023 $ 1,581 ======= =======
33 At June 30, 1999, for federal income tax purposes, the Company had research and development and investment tax credit carryforwards of approximately $3,100,000 which expire in the years 2000 through 2013, and alternative minimum tax credit carryforwards of approximately $2,157,000 which have no expiration date. Additionally, for state income tax purposes, the Company had research and development tax credit carryforwards of approximately $1,214,000 which have no expiration date. Based on the Company's assessment of the future realizability of deferred tax assets, a valuation allowance has been provided as it is more likely than not that sufficient taxable income will not be generated to realize certain tax credit carryforwards. At June 30, 1999, approximately $4,612,000 of the valuation allowance was attributable to the potential tax benefit of stock option transactions, which would be credited to common stock if realized. The Company operates a subsidiary in Puerto Rico under a grant providing for a partial exemption from Puerto Rico taxes through fiscal 2008. In addition, this subsidiary is taxed under Section 936 of the U.S. Internal Revenue Code which exempts qualified Puerto Rico source earnings, subject to certain wage-based limitations, from federal income taxes through fiscal 2006. This exemption will be further limited during the fiscal years 2003 through 2006 based on certain prior year Puerto Rico earnings. Appropriate taxes have been provided on this subsidiary's earnings all of which are intended to be remitted to the parent company. At June 30, 1999, the total unremitted earnings of the Puerto Rico subsidiary and the related tax liability were approximately $7,852,000 and $1,861,000, respectively. Note F--Contingencies In January 1994, a securities class action complaint was filed against the Company and certain of its present or 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 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. Note G--Related Party Transactions In March 1998, the Company extended two loans in the amounts of $400,000 and $500,000 to an executive officer in connection with his employment by the Company. The $400,000 loan, together with interest at 6% per annum, is forgiven in four equal installments on June 30, 1998, 1999, 2000 and 2001. The company recognizes compensation expense in the amount of both the loan and interest to be forgiven during the applicable fiscal period. The $500,000 loan is interest free with a term of ten years to be repaid in 2008. Both loans are secured by a deed of trust pertaining to the executive officer's principal home in California. Pursuant to the loan agreements, any loan balance and/or accrued interest amount will become due and payable if the executive officer resigns or is terminated for cause. In July 1998, the Company funded an unsecured loan of $150,000 to another executive officer which was interest free and was forgiven in 1999. During 1999, the Company paid $113,000, $25,000 and $21,000 for consulting fees to three directors of the Company, respectively. During 1998, the Company paid $10,000 for consulting fees to a director of the Company. The Company paid $47,000 for marketing research in 1997 to a firm whose managing director was also a director of the Company until August 1996. During 1995, two executive officers exercised stock options 34 in exchange for notes of $43,000 bearing interest at approximately 6% per annum, payable annually. The notes were collateralized by the stock issued upon exercise of the stock options and were recorded as an offset against common stock. Such notes were repaid in 1998 and 1997, respectively. Note H--Benefit Plans 401(k) Plans. The Company's U.S. and Puerto Rico employees are eligible to participate in the Company's 401(k) plans. The Company's discretionary contributions vest immediately and were $94,000, $91,000 and $60,000 in 1999, 1998 and 1997, respectively. Note I--Shareholders' Equity Stock Options. The Company has a stock option plan under which employees and consultants may be granted non-qualified and incentive options to purchase shares of the Company's authorized but unissued common stock. Stock appreciation rights may also be granted under this plan, however, none has been granted. The Company's shareholders have approved a plan under which the number of shares reserved for issuance under the stock option plan will automatically increase each July by an amount equal to 3% of the Company's outstanding shares as of the last trading day of the Company's immediately preceding fiscal year. In July 1999, the number of shares reserved for issuance increased by 448,000. In addition, the Company has a director stock option plan under which non-employee directors are granted options each January to purchase 10,000 shares of the Company's authorized but unissued common stock. All options have been granted at the fair market value of the Company's common stock on the date of grant and expire no later than ten years from the date of grant. Options granted to employees and consultants prior to fiscal 1999 and options granted to non-employee directors are generally exercisable in annual installments of 25%, 25% and 50% at the end of each of the three years following the date of grant. Options granted to employees and consultants after fiscal 1998 are generally exercisable at 25% at the end of the first year and 2.08% for each month thereafter for the following three years. On August 6, 1999, the Board of Directors of Symmetricom adopted the 1999 Employee Stock Plan and the 1999 Director Stock Option Plan, subject to shareholder approval, and the number of shares reserved for issuance are 900,000 and 300,000, respectively. The Plans are intended to replace the Company's 1990 Employee Stock Plan and the Company's 1990 Director Stock Option Plan, which expire on October 23, 2000. Stock option activity for the three years ended June 30, 1999 is as follows:
Options Outstanding -------------------------- Share Available Number Weighted Average For Grant of Shares Exercise Price --------------- --------- ---------------- (In thousands, except per share amounts) Balances at July 1, 1996 429 1,651 $10.80 Authorized 467 -- -- Granted (483) 483 14.57 Exercised -- (333) 5.47 Canceled 262 (262) 15.30 ------ ------ Balances at June 30, 1997 675 1,539 12.37 Authorized 476 -- -- Granted (789) 789 12.61 Exercised 7.45 -- (75) 7.45 Canceled 123 (123) 14.80 Expired -- (5) 1.75 ------ ------ Balances at June 30, 1998 485 2,125 12.49 Authorized 473 -- -- Granted (1,839) 1,839 6.30 Exercised -- (19) 2.80 Canceled 1,747 (1,747) 13.70 ------ ------ Balances at June 30, 1999 866 2,198 6.45 ====== ======
35 At June 30, 1999, 1998 and 1997, the number of shares and weighted average exercise price underlying exercisable options were 1,097,000 at $6.43, 867,000 at $11.48 and 573,000 at $11.08, respectively. The weighted average fair value, using the Black-Scholes method, of options granted was $1.91 in 1999, $5.17 in 1998 and $6.62 in 1997. At the beginning of fiscal 1999, the Company offered its employees and directors a stock option repricing program in which new options were granted at an exchange rate of three shares for every four shares and one share for every two shares, respectively, of unexercised options as of July 14, 1998. The corresponding grant of new options in July 1998 was at an exercise price of $6.44, the fair market value on the date of the new grants. The new options retain the same vesting and expiration dates as the old options. The new options also contained a blackout period and were not exercisable until January 14, 1999. As a result, 1,260,000 old options were surrendered by employees for 945,000 new options, and 262,000 old options were returned by directors for 131,000 new options. Additional information regarding options outstanding as of June 30, 1999 is as follows:
Options Outstanding Options Exercisable - ---------------------------------------------------------------- ----------------------------- Weighted Range of Average Weighted Exercise Number of Remaining Weighted Average Number Average Prices Shares Contractual Life Exercise Price of Shares Exercise Price - -------------- -------------- ---------------- ---------------- ------------- -------------- (In thousands) (In years) (In thousands) $3.38 --$ 5.69 71 2.1 $3.79 71 $3.79 5.88 -- 6.00 594 9.1 5.88 190 5.88 6.44 -- 16.00 1,533 7.4 6.79 836 6.76 ----- ----- 3.38 -- 16.00 2,198 7.7 6.45 1,097 6.43 ===== =====
As discussed in Note A, the Company continues to account for its stock- based awards using the intrinsic value method in accordance with APB 25 and its related interpretations. Compensation expense has been recognized in the financial statements for employee stock arrangements when the fair market value of the stock exceeds the exercise price at the date of grant. SFAS 123 requires the disclosure of pro forma net income and earnings per share as if the Company had adopted the fair value method as of the beginning of 1996. Under SFAS 123, the fair value of stock based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998 and 1997: expected life, six months after vesting in 1999 and 1998, and one year after vesting in 1997; stock volatility, 58% in 1999, 1998 and 1997; three years average risk-free interest rates, approximately 5.0% in 1999, 5.8% in 1998 and 6.4% in 1997; and no dividends during the expected term. The Company's calculations are based on the multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the 1999, 1998 and 1997 awards had been amortized to expense over the vesting period of the awards, pro forma consolidated net loss would have been $5,325,000 ($.35 per share--basic, $.35 per share--diluted) in 1999, $5,647,000 ($.36 per share--basic, $.36 per share--diluted) in 1998, and pro forma consolidated net earnings would have been $10,527,000 ($.67 per share--basic, $.66 per share--diluted) in 1997. However, the impact of outstanding nonvested stock options granted prior to 1996 has been excluded from the pro forma calculation; accordingly, the 1999, 1998 and 1997 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options. Employee Stock Purchase Plan. The Company has an employee stock purchase plan under which eligible employees may authorize payroll deductions of up to 10% of their compensation to purchase shares of the 36 Company's common stock at 85% of the fair market value at certain specified dates. Under this plan, 467,000 shares of common stock have been reserved and were available for issuance as of June 30, 1999. Under SFAS 123, the fair value of the employees' purchase rights was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 6 months; stock volatility, 58% in 1999, 1998 and 1997; three years average risk-free interest rates, approximately 5.4% in 1999, 5.3% in 1998 and 4.9% in 1997; and no dividends during the expected term. The weighted average fair value of those purchase rights granted in 1999, 1998 and 1997 was $2.44, $4.51 and $4.68, respectively. Common Share Purchase Rights. The Company has a shareholder rights plan which authorizes the issuance of one common share purchase right for each share of common stock. The rights expire in December 2000 and are not exercisable or transferable apart from the common stock until the occurrence of certain events. Such events include the acquisition of 20% or more of the Company's outstanding common stock or the commencement of a tender or exchange offer for 30% or more of the Company's outstanding common stock. If the rights become exercisable, each right entitles its holder to purchase one new share of common stock at an exercise price of $25.00, subject to certain antidilution adjustments. Additionally, if the rights become exercisable, a holder will be entitled, under certain circumstances, to purchase, for the exercise price, shares of common stock of the Company or in other cases, of the acquiring company, having a market value of twice the exercise price of the right. Under certain conditions, the Company may redeem the rights for a price of $.01 per right or exchange each right not held by the acquirer for one share of the Company's common stock. Stock Repurchase Program. In April 1997 and September 1998, the Company's Board of Directors authorized programs to repurchase up to 500,000 shares and 1,000,000 shares, respectively, of the Company's common stock. The Company repurchased 996,000 shares, 268,000 shares and 90,000 shares in 1999, 1998 and 1997, respectively. Note J--Business Segment Information The Company has three reportable segments: Synchronization ("Sync") Products, Transmission Products, and Other Products. The Company does not allocate operating expenses or specific assets to these segments. Therefore, segment information reported includes only net sales and gross profit margin.
Transmission Sync Products Products Other Products Total ------------- ------------ -------------- ------- Fiscal Year 1999 Net sales $64,449 $ 8,056 $4,410 $76,915 Gross profit margin 31,580 4,350 816 36,746 Fiscal Year 1998 Net sales $63,475 $ 3,827 $6,009 $73,311 Gross profit margin 31,103 1,952 3,238 36,293 Fiscal Year 1997 Net sales $69,294 $13,150 $7,274 $89,718 Gross profit margin 34,516 7,125 2,374 44,015
The Company's export sales accounted for 29%, 22% and 13% of the Company's net sales in 1999, 1998 and 1997, respectively. The geographical components of export sales is as follows:
Year ended June 30, ---------------- 1999 1998 1997 ---- ---- ---- United States 71% 78% 87% International: United Kingdom 4% 7% 5% Africa 3% 2% --% Germany 2% 4% 1% Rest of the world 20% 9% 7%
37 A relatively small number of customers has historically accounted for a significant portion of the Company's net sales. No customer accounted for 10% or more of the Company's net sales in 1999. Two customers, although not the same two customers in each year, accounted for 23% and 39% of the Company's net sales in 1998 and 1997, respectively. Note K--Quarterly Results and Stock Market Data (Unaudited) Quarterly results and stock market data are as follows:
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ------- (In thousands, except per share amounts) Fiscal Year 1999 Net sales $18,586 $19,603 $19,737 $18,989 $76,915 Gross profit 8,971 9,296 9,244 9,235 36,746 Operating income 576 384 722 640 2,322 Earnings from continuing operations before income taxes 852 642 930 1,100 3,524 Earnings from continuing operations 673 507 735 869 2,784 Earnings (loss) from discontinued operations (336) 150 (3,793) -- (3,979) Net earnings (loss) 337 657 (3,058) 869 (1,195) Basic earnings per share from continuing operations .04 .03 .05 .06 .18 Basic earnings (loss) per share from discontinued operations (.02) .01 (.25) -- (.26) Basic net earnings (loss) per share .02 .04 (.20) .06 (.08) Diluted earnings per share from continuing operations .04 .03 .05 .06 .18 Diluted earnings (loss) per share from discontinued operations (.02) .01 (.25) -- (.26) Diluted net earnings (loss) per share .02 .04 (.20) .06 (.08) Common stock price range (A): High 7 1/2 7 3/4 8 3/4 9 7/8 9 7/8 Low 4 4 5/16 6 1/4 5 7/8 4 Fiscal Year 1998 Net sales $18,453 $19,737 $16,786 $18,335 $73,311 Gross profit 9,549 10,022 7,774 8,948 36,293 Operating income (loss) 1,636 1,943 (10) 623 4,192 Earnings from continuing operations before income taxes 1,901 2,207 244 823 5,175 Earnings from continuing operations 1,475 1,713 189 639 4,016 Earnings (loss) from discontinued operations 1,208 1,720 (7,672) (802) (5,546) Net earnings (loss) 2,683 3,433 (7,483) (163) (1,530) Basic earnings per share from continuing operations .09 .11 .01 .04 .25 Basic earnings (loss) per share from discontinued operations .08 .11 (.49) (.05) (.35) Basic net earnings (loss) per share .17 .22 (.47) (.01) (.10) Diluted earnings per share from continuing operations .09 .11 .01 .04 .25 Diluted earnings (loss) per share from discontinued operations .07 .11 (.49) (.05) (.35) Diluted net earnings (loss) per share .17 .21 (.47) (.01) (.10) Common stock price range (A): High 18 18 5/8 12 1/4 7 13/16 18 5/8 Low 14 1/8 10 3/8 6 15/16 5 3/8 5 3/8
- -------- (A) The Company's common stock trades on The Nasdaq Stock Market under the symbol SYMM. At June 30, 1999, there were approximately 1,289 shareholders of record. Common stock prices are closing prices as reported on the Nasdaq Stock Market System. The Company has not paid cash dividends during the last two fiscal years and has no present plans to do so. 38 Note L--Subsequent Events On August 30, 1999, Symmetricom entered into a definitive agreement to acquire certain assets of Hewlett-Packard Company's ("Hewlett-Packard") Communications Synchronization business for approximately $30.0 million in cash, of which approximately $20.0 million will be paid to Hewlett-Packard at closing. This business, part of Hewlett-Packard's Santa Clara Division, designs and manufactures network synchronization and timing equipment for global wireline and wireless telecommunications networks. The acquisition will be accounted for under the purchase method and goodwill of approximately $16.0 million will be amortized over a five to ten year period. The transaction is scheduled to close by the end of September 1999, although no assurance can be given that the agreement will be consummated. 39 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Symmetricom, Inc. We have audited the accompanying consolidated balance sheets of Symmetricom, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Symmetricom, Inc. and subsidiaries at June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP _____________________________________ Deloitte & Touche LLP San Jose, California July 21, 1999 (August 6, 1999 as to the second paragraph of Note I and August 30, 1999 as to Note L) 40 SCHEDULE II SYMMETRICOM, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In thousands)
Balance Charged at to Costs Balance Beginning and Deductions at End of Year Expenses (1) of Year --------- -------- ---------- ------- Year ended June 30, 1999: Accrued warranty expense $3,994 $1,925 $1,600 $4,319 Allowance for doubtful accounts $ 329 $ 86 $ 235 $ 180 Year ended June 30, 1998: Accrued warranty expense $2,741 $2,051 $ 798 $3,994 Allowance for doubtful accounts $ 307 $ 261 $ 239 $ 329 Year ended June 30, 1997: Accrued warranty expense $2,088 $1,966 $1,313 $2,741 Allowance for doubtful accounts $ 280 $ 338 $ 311 $ 307
- -------- (1) Deductions represent costs charged or amounts written off against the reserve or allowance. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ Thomas W. Steipp ---------------------------------- Date: September 23, 1999 (Thomas W. Steipp) Chief Executive Officer and Chief Financial Officer (Principal Executive Officer, Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Thomas W. Steipp Director, Chief Executive September 23, 1999 ______________________________________ Officer and Chief (Thomas W. Steipp) Financial Officer (Principal Executive Officer, Principal Financial and Accounting Officer) /s/ Mary A. Rorabaugh Vice President, Finance September 23, 1999 ______________________________________ and Secretary (Mary A. Rorabaugh) /s/ Richard W. Oliver Chairman of the Board September 23, 1999 ______________________________________ (Richard W. Oliver) /s/ Robert M. Neumeister Jr. Director September 23, 1999 ______________________________________ (Robert M. Neumeister Jr.) /s/ Krish A. Prabhu Director September 23, 1999 ______________________________________ (Krish A. Prabhu) /s/ William D. Rasdal Director September 23, 1999 ______________________________________ (William D. Rasdal) /s/ Richard N. Synder Director September 23, 1999 ______________________________________ (Richard N. Synder) /s/ Robert M. Wolfe Director September 23, 1999 ______________________________________ (Robert M. Wolfe)
42
Exhibit Number Index of Exhibits - ------- ----------------- 3.1(1) Restated Articles of Incorporation. 3.2(2) Certificate of Amendment to Restated Articles of Incorporation filed December 11, 1990. 3.3(9) Certificate of Amendment to Restated Articles of Incorporation filed October 27, 1993. 3.4(14) Bylaws, as amended December 1, 1998. 4.1(3) Common Shares Rights Agreement dated December 6, 1990, between Silicon General, Inc. and Manufacturers Hanover Trust Company of California, including the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A and B, respectively. 4.2(4) Amendment to the Common Shares Rights Agreement dated February 5, 1993 between Silicon General, Inc. and Chemical Trust Company of California, formerly Manufacturers Hanover Trust Company of California, including the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A and B, respectively. 10.1(5)(18) Amended and Restated Non-Qualified Stock Option Plan (1982), with form of Employee Non-Qualified Stock Option (1982 Plan). 10.2(10)(18) 1990 Director Option Plan (as amended through October 25, 1995). 10.3(5)(18) Form of Director Option Agreement. 10.4(16)(18) 1990 Employee Stock Plan (as amended through June 29, 1998). 10.5(5)(18) Forms of Stock Option Agreement, Restricted Stock Purchase Agreement, Tandem Stock Option/SAR Agreement, and Stock Appreciation Right Agreement for use with the 1990 Employee Stock Plan. 10.6(13)(18) 1994 Employee Stock Purchase Plan (as amended through July 27, 1998). 10.7(16)(18) Consulting Agreement between the Company and Richard W. Oliver dated June 1, 1998. 10.8(16)(18) Consulting Agreement between the Company and William D. Rasdal dated August 1, 1998. 10.9(9) Lease Agreement by and between Navstar Systems Limited, a subsidiary of the Company, and Baker Hughes Limited dated April 22, 1994. 10.10(11) Lease Agreement by and between the Company and Nexus Equity, Inc. dated June 10, 1996. 10.11(16) Fourth Amendment to the Revolving Credit Loan Agreement between the Company and Comerica Bank-California dated June 26, 1998. 10.12(16) First Amended and Restated Revolving Credit Loan Agreement between the Company and Comerica Bank-California dated June 29, 1998. 10.13(6) Form of Indemnification Agreement. 10.14(8) Linfinity Microelectronics Inc. Common Stock and Series A Preferred Stock Purchase Agreement dated June 28, 1993. 10.15(8) Tax Sharing Agreement between Linfinity Microelectronics Inc. and the Company dated June 28, 1993. 10.16(8) Intercompany Services Agreement between Linfinity Microelectronics Inc. and the Company dated June 28, 1993. 10.17(8)(18) Linfinity Microelectronics Inc. 1993 Stock Option Plan with form of Stock Option Agreement. 10.18(8) Linfinity Microelectronics Inc. Form of Indemnification Agreement. 10.19(16)(18) Employment offer letter by and between the Company and Thomas W. Steipp, President and Chief Operating Officer, Telecom Solutions dated February 19, 1998. 10.20(7) Agreement for Sale and Purchase of the Navstar Business of Radley Services Limited.
43
Exhibit Number Index of Exhibits - ------- ----------------- 10.21(7) Agreement for the Sale and Purchase of Certain Assets of Navstar Electronics, Inc. 10.22(16)(18) Promissory Notes Secured by Deed of Trust issued by Thomas W. Steipp to the Company dated March 24, 1998. 10.23(16) Intercompany Revolving Loan Agreement between Linfinity Microelectronics Inc. and the Company dated August 15, 1998. 10.24(16)(18) Promissory Note issued by James Peterson to Linfinity Microelectronics Inc. dated July 13, 1998. 10.25(14)(18) Employment offer letter by and between the Company and Roger A. Strauch dated November 9, 1998. 10.26(14) Strategic Partner Bonus Plan between Linfinity Microelectronics Inc. and James J. Peterson dated November 18, 1998. 10.27(14)(18) Retention Bonus Plan between Linfinity Microelectronics Inc. and James J. Peterson dated November 18, 1998. 10.28(14)(18) Promissory Note issued by Thomas W. Steipp to the Company dated January 25, 1999. 10.29(14)(18) Promissory Note Secured by Deed of Trust issued by Thomas W. Steipp to the Company dated January 25, 1999. 10.30(14)(18) Rider to Deed of Trust by Thomas W. Steipp and Debra L. Steipp, as Trustor, to First American Title Insurance Company, as Trustee, for the benefit of Symmetricom, Inc., a California corporation, as Beneficiary. 10.31(15) Agreement and Plan of Reorganization by and among Linfinity Microelectronics Inc., Symmetricom, Inc., Micro-Linfinity Acquisition Corporation, and Microsemi Corporation dated as of February 10, 1999. 10.32(17)(18) 1999 Director Plan. 10.33(17)(18) Form of Director Option Agreement. 10.34(17)(18) 1999 Stock Plan. 10.35(17)(18) Form of Stock Option Agreement. 21.1 Subsidiaries of the Company. 23.1 Independent Auditors' Consent and Report on Schedule. 27.1 Financial Data Schedule.
44 Footnotes to Exhibits (1) Incorporated by reference from Exhibits to Annual Report on Form 10-K for the fiscal year ended July 2, 1989. (2) Incorporated by reference from Exhibits to Annual Report on Form 10-K for the fiscal year ended June 30, 1991. (3) Incorporated by reference from Exhibits to Registration Statement on Form 8-A filed with the Securities and Exchange Commission on December 8, 1990. (4) Incorporated by reference from Exhibits to Registration Statement on Form 8-A filed with the Securities and Exchange Commission on February 11, 1993. (5) Incorporated by reference from Exhibits to Registration Statement on From S-8 filed with the Securities and Exchange Commission on December 24, 1990. (6) Incorporated by reference from Exhibits to the 1990 Proxy Statement. (7) Incorporated by reference from Exhibits to Current Report on Form 8-K filed with the Securities and Exchange Commission on September 2, 1993. (8) Incorporated by reference from Exhibits to Annual Report on Form 10-K for the fiscal year ended June 30, 1993. (9) Incorporated by reference from Exhibits to Annual Report on Form 10-K for the fiscal year endedJune 30, 1994. (10) Incorporated by reference from Exhibits to Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 19, 1996. (11) Incorporated by reference from Exhibits to Annual Report on Form 10-K for the fiscal year endedJune 30, 1996. (12) Incorporated by reference from Exhibits to Quarterly Report on Form 10-Q for the quarter endedDecember 31, 1996. (13) Incorporated by reference from Exhibits to Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 1998. (14) Incorporated by reference from Exhibits to Quarterly Report on Form 10-Q for the quarter endedDecember 31, 1998. (15) Incorporated by reference from Exhibits to Current Report on Form 8-K filed with the Securities and Exchange Commission on February 24, 1999. (16) Incorporated by reference from Exhibits to Annual Report on Form 10-K for the fiscal year endedJune 30, 1998. (17) Incorporated by reference from Exhibits to the 1999 Proxy Statement. (18) Indicates a management contract or compensatory plan or arrangement. 45 EX-21.1 2 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 SYMMETRICOM, INC. SUBSIDIARIES OF THE COMPANY Analog Solutions, Inc., a California corporation Telecom Solutions, Inc., a Delaware corporation Symmetricom Puerto Rico, Inc., a Delaware corporation Symmetricom, Ltd, a United Kingdom Corporation Navstar Systems, Ltd., a United Kingdom Corporation Manufacturing Solutions (Puerto Rico), Inc., a Delaware Corporation EX-23.1 3 INDEPENDENT AUDITORS EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE We consent to the incorporation by reference in Registration Statement Nos. 33- 38384, 33-3456, 33-11317, 2-70291, 33-56042, 33-57163, 333-00333, 333-21815, 333-47369, 333-68969, and 333-82935 on Form S-8 of our report dated July 21, 1999 (August 6, 1999 as to the second paragraph of Note I and August 30, 1999 as to Note L), appearing in this Annual Report on Form 10-K of Symmetricom, Inc. for the year ended June 30, 1999. Our audits of the consolidated financial statements referred to in our aforementioned report also included the consolidated financial statement schedule of Symmetricom, Inc., listed in Item 14(a)2. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP - ------------------------------- DELOITTE & TOUCHE LLP San Jose, California September 20, 1999 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 44,897 14,300 11,095 180 10,805 84,679 39,256 18,641 106,320 18,088 0 0 0 18,934 1,400 106,320 76,915 76,915 40,169 40,169 0 0 715 3,524 740 2,784 (3,979) 0 0 (1,195) (0.08) (0.08)
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