<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
----------------
For the Quarter Ended June 30, 1999
Commission File Number 333-48817
----------------
PHASE METRICS, INC.
(registrant)
----------------
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 33-0328048
10260 Sorrento Valley Road, San Diego, California 92121
(619) 646-4800
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
The number of shares outstanding of the Registrant's securities as of June
30, 1999 are as follows:
<TABLE>
<S> <C>
Common Stock............................................. 5,620,172 shares
Series A Preferred Stock................................. 8,250,000 shares
Series B Preferred Stock................................. 3,857,280 shares
Series C Preferred Stock................................. 7,610,000 shares
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PHASE METRICS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ITEM 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1998
and June 30, 1999.............................................. 3
Condensed Consolidated Statements of Operations for the three
and six months ended
June 30, 1998 and 1999......................................... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended
June 30, 1998 and 1999......................................... 5
Notes to Unaudited Condensed Consolidated Financial
Statements..................................................... 6
Management's Discussion and Analysis of Financial Condition and
ITEM 2. Results of Operations.......................................... 13
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..... 27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................. 27
ITEM 2. Changes in Securities.......................................... 27
ITEM 3. Defaults Upon Senior Securities................................ 27
ITEM 4. Submission of Matters to a Vote of Security Holders............ 27
ITEM 5 Other Information.............................................. 27
ITEM 6. Exhibits and Reports on Form 8-K............................... 27
Signatures.............................................................. 28
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHASE METRICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 24,714 $ 14,135
Accounts receivable, net........................... 13,577 8,324
Inventories........................................ 25,222 17,104
Prepaid expenses and other......................... 2,189 2,515
Income taxes receivable............................ 6,062 --
--------- ---------
Total current assets............................. 71,764 42,078
Property, plant and equipment, net................... 17,793 12,995
Intangible and other assets.......................... 6,558 7,195
--------- ---------
Total assets..................................... $ 96,115 $ 62,268
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................... $ 6,682 $ 2,615
Accrued expenses and other liabilities............. 16,966 16,212
Customer deposits.................................. 859 1,078
Current portion of debt............................ 1,374 1,212
--------- ---------
Total current liabilities........................ 25,881 21,117
Long-term liabilities:
Long-term debt..................................... 115,257 114,792
Accrued expenses and interest...................... 9,591 10,304
Series B redeemable preferred stock.................. 11,331 11,697
Series C redeemable preferred stock.................. 31,212 32,642
Commitments and contingencies (Note 5)
Stockholders' deficit:
Series A preferred stock........................... 3 3
Common stock....................................... 6,498 6,699
Retained deficit................................... (103,298) (134,035)
Accumulated other comprehensive loss............... (360) (951)
--------- ---------
Total stockholders' deficit...................... (97,157) (128,284)
--------- ---------
Total liabilities, redeemable preferred stock and
stockholders' deficit............................... $ 96,115 $ 62,268
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
3
<PAGE>
PHASE METRICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
------------------ ------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................. $ 31,400 $ 8,505 $ 63,902 $ 19,860
Cost of sales......................... 32,855 11,263 52,472 20,845
-------- -------- -------- --------
Gross profit (loss)................. (1,455) (2,758) 11,430 (985)
Operating expenses:
Research and development............ 9,689 6,779 19,158 13,169
Selling, general and
administrative..................... 5,224 3,265 9,686 6,267
Amortization of intangibles......... 1,642 93 3,280 186
Settlement charge................... 5,872 -- 5,872 --
Restructuring charge................ 3,046 1,995 3,046 1,995
-------- -------- -------- --------
Total operating expenses.......... 25,473 12,132 41,042 21,617
-------- -------- -------- --------
Loss from operations.................. (26,928) (14,890) (29,612) (22,602)
Interest expense...................... 3,770 3,460 7,201 6,798
Other (income) expense, net........... 25 (172) 120 (459)
-------- -------- -------- --------
Loss before income taxes and
extraordinary items.................. (30,723) (18,178) (36,933) (28,941)
Income tax expense.................... 11,434 -- 8,701 0
-------- -------- -------- --------
Loss before extraordinary items....... (42,157) (18,178) (45,634) (28,941)
Extraordinary loss, net of income
taxes................................ -- -- 941 --
-------- -------- -------- --------
Net loss.............................. $(42,157) $(18,178) $(46,575) $(28,941)
======== ======== ======== ========
Accretion for redemption value and
dividends on Series B and C
redeemable preferred stock........... $ (557) $ (902) $ (1,113) $ (1,796)
-------- -------- -------- --------
Net loss attributable to common
stockholders......................... $(42,714) $(19,080) $(47,688) $(30,737)
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
4
<PAGE>
PHASE METRICS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash used for operating activities................... $ (2,020) $ (9,390)
-------- --------
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment............. (1,294) (821)
Proceeds from sale of property plant and equipment....... -- 328
-------- --------
Net cash used for investing activities................. (1,294) (493)
-------- --------
FINANCING ACTIVITIES:
Proceeds from senior notes............................... 110,000 --
Repayment of term notes.................................. (79,200) --
Revolving loans--net..................................... (22,300) --
Payment of debt issuance costs........................... (4,839) --
Payments on capital lease obligations.................... (488) (661)
Issuance (repurchase) of common stock.................... (14) 2
-------- --------
Net cash provided by (used for) financing activities..... 3,159 (659)
-------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................. (13) (37)
-------- --------
Net decrease in cash and cash equivalents................ (168) (10,579)
Cash and cash equivalents, beginning of period........... 2,977 24,714
-------- --------
Cash and cash equivalents, end of period................. $ 2,809 $ 14,135
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
5
<PAGE>
PHASE METRICS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Phase Metrics, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation (consisting of normal recurring accruals) have been included.
Operating results for the three and six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31,
1998 included in the Company's 1998 Annual Report on Form 10-K. The Company's
first, second and third fiscal quarters end on the Sunday closest to March 31,
June 30 and September 30, respectively. For ease of reference, such quarter
end dates are used herein.
Note 2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30
1998 1999
------------ --------
<S> <C> <C>
Raw materials and components........................ $ 7,277 $ 4,581
Work-in-process..................................... 8,237 9,168
Finished goods...................................... 9,708 3,355
-------- --------
$ 25,222 $ 17,104
======== ========
Note 3. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
<S> <C> <C>
Equipment and furniture............................. $ 32,753 $ 30,934
Leasehold improvements.............................. 5,500 5,408
Construction in progress............................ 171 157
-------- --------
38,424 36,499
Accumulated depreciation and amortization............. (20,631) (23,504)
-------- --------
$ 17,793 $ 12,995
======== ========
</TABLE>
Note 4. Restructuring Charge
The data storage industry in general has been experiencing significant
weakness in demand for data storage products, intense competition and pricing
erosion, and overcapacity. Such adverse market conditions have resulted in the
delay, deferral or cancellation of orders by several of the Company's major
customers and have had a material adverse effect on the Company's business,
results of operations and financial condition over the past several quarters.
In light of these circumstances, and the Company's expectation that the
current adverse market conditions in the data storage industry will extend
through 1999, the Company implemented certain cost-cutting measures. In June
1999, the Company announced and implemented the consolidation of the Company's
Fremont facilities. In July 1999, the Company implemented a workforce
reduction of approximately 25 employees. While the Company believes its cost-
cutting measures are appropriate given the current and
6
<PAGE>
PHASE METRICS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
anticipated levels of net sales, there can be no assurance that such measures
will be sufficient and that additional cost-cutting measures will not be
necessary, or that any current or future cost-cutting measures will not have a
material adverse effect on the Company's ability to increase net sales. In the
second quarter of 1999, the Company recorded a charge of $2.0 million related
to this restructuring, including $0.7 million for future lease costs of
consolidated facilities and $1.3 million in asset impairment costs related to
facilities consolidation. As of June 30, 1999, $0.7 million was recorded as an
accrued liability related to the restructuring activities. In July 1999, $0.1
million was recorded as an accrued liability for severance related to the
workforce reduction.
In connection with the negative impact on the Company's operations of the
significant data storage industry downturn, for the three months ended June
30, 1999, the Company recorded a $5.0 million charge to cost of sales to
write-down excess and obsolete inventory.
Note 5. Commitments and Contingencies
Letter of Credit--As of December 31, 1998 and June 30, 1999, the Company had
a letter of credit outstanding to a third party beneficiary totaling $2.1
million. The letter of credit is secured by a certificate of deposit included
in non-current assets on the accompanying condensed consolidated balance
sheet.
Note 6. Comprehensive Loss
The components of comprehensive loss are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss........................... $(42,157) $(18,178) $(46,575) $(28,941)
Foreign currency translation
adjustments....................... (18) (61) (50) (591)
-------- -------- -------- --------
Comprehensive loss................. $(42,175) $(18,239) $(46,625) $(29,532)
======== ======== ======== ========
</TABLE>
Note 7. Industry and Geographic Information
The Company operates in one reportable segment. Sales to customers outside
the United States (primarily Asia) totaled approximately 36% and 53% of net
sales for the six months ended June 30, 1998 and 1999, respectively. As of
December 31, 1998 and June 30, 1999, balances due from foreign customers
(primarily located in Asia) were $4.0 million and $2.9 million, respectively.
The Company had sales to individual customers in excess of 10% of net sales,
as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
1998 1999
-------- --------
<S> <C> <C>
Customer:
A....................................................... 11% 34%
B....................................................... -- 13%
C....................................................... 26% --
D....................................................... 17% --
</TABLE>
As of December 31, 1998 and June 30, 1999, accounts receivable from
individual customers with balances due in excess of 10% of total accounts
receivable totaled $12.3 million (5 customers) and $7.4 million (3 customers),
respectively.
7
<PAGE>
PHASE METRICS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following presents net sales and long-lived assets by geographic
territory:
<TABLE>
<CAPTION>
Long-Lived Assets Net Sales
--------------------- ---------------------------
Six Months Ended June 30,
December 31, June 30, ---------------------------
1998 1999 1998 1999
------------ -------- ------------- -------------
<S> <C> <C> <C> <C>
United States operations:
Domestic............... $23,589 $19,401 $ 40,912 $ 9,348
Foreign................ -- -- 19,081 7,975
Asia operations.......... 762 789 3,909 2,537
------- ------- ------------- -------------
Total.................... $24,351 $20,190 $ 63,902 $ 19,860
======= ======= ============= =============
</TABLE>
Note 8. Financial Information for Guarantor Subsidiaries and Non-Guarantor
Subsidiaries
Phase Metrics' Senior Notes are fully and unconditionally guaranteed, on a
joint and several basis, by all of Phase Metrics' wholly-owned domestic
subsidiaries (the "Guarantor Subsidiaries").
Presented below is condensed consolidating financial information for Phase
Metrics, Inc. (the "Parent Company"), the Guarantor Subsidiaries and the
wholly-owned foreign subsidiaries (the "Non-Guarantor Subsidiaries") for the
three and six months ended June 30, 1998 and 1999. Separate financial
statements for the Guarantor Subsidiaries are not presented based on
management's determination that they would not provide additional information
that is material to investors.
The supplemental condensed consolidating financial information reflects the
investments of the Parent Company in the Guarantor and Non-Guarantor
Subsidiaries using the equity method of accounting.
8
<PAGE>
PHASE METRICS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 27,326 $ 5,821 $2,847 $(4,594) $ 31,400
Cost of sales........... 31,550 2,862 2,192 (3,749) 32,855
-------- ------- ------ ------- --------
Gross profit (loss)... (4,224) 2,959 655 (845) (1,455)
Research and development
expense................ 8,771 981 -- (63) 9,689
Selling, general and
administrative
expense................ 3,982 836 435 (29) 5,224
Amortization and write-
downs of intangible
assets................. 1,642 -- -- -- 1,642
Settlement charge....... 5,872 -- -- -- 5,872
Restructuring charge.... 2,439 607 -- -- 3,046
-------- ------- ------ ------- --------
Income (loss) from
operations........... (26,930) 535 220 (753) (26,928)
Interest expense........ 3,769 -- 1 -- 3,770
Other (income) expense--
net.................... 32 -- (7) -- 25
-------- ------- ------ ------- --------
Income (loss) before
equity in
subsidiaries and
taxes................ (30,731) 535 226 (753) (30,723)
Equity in net loss of
subsidiaries........... (59) -- -- 59 --
Income tax expense
(benefit).............. 11,367 (4) 71 -- 11,434
-------- ------- ------ ------- --------
Net income (loss)....... $(42,157) $ 539 $ 155 $ (694) $(42,157)
======== ======= ====== ======= ========
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended June 30, 1998
(Unaudited)
<CAPTION>
Foreign
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 56,736 $10,316 $5,755 $(8,905) $ 63,902
Cost of sales........... 50,553 5,263 4,842 (8,186) 52,472
-------- ------- ------ ------- --------
Gross profit.......... 6,183 5,053 913 (719) 11,430
Research and development
expense................ 17,421 1,800 -- (63) 19,158
Selling, general and
administrative
expense................ 7,484 1,443 797 (38) 9,686
Amortization and write-
downs of intangible
assets................. 3,280 -- -- -- 3,280
Settlement charge....... 5,872 -- -- -- 5,872
Restructuring charge.... 2,439 607 -- -- 3,046
-------- ------- ------ ------- --------
Income (loss) from
operations........... (30,313) 1,203 116 (618) (29,612)
Interest expense........ 7,201 (4) 4 -- 7,201
Other (income) expense--
net.................... 135 14 (29) -- 120
-------- ------- ------ ------- --------
Income (loss) before
equity in
subsidiaries, taxes
and extraordinary
items................ (37,649) 1,193 141 (618) (36,933)
Equity in net income of
subsidiaries........... 396 (396) --
Income tax expense...... 8,381 286 34 -- 8,701
-------- ------- ------ ------- --------
Net income (loss)
before extraordinary
items................ (45,634) 907 107 (1,014) (45,634)
Extraordinary items, net
of income taxes........ 941 -- -- -- 941
-------- ------- ------ ------- --------
Net income (loss)..... $(46,575) $ 907 $ 107 $(1,014) $(46,575)
======== ======= ====== ======= ========
</TABLE>
9
<PAGE>
PHASE METRICS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $(46,575) $ 907 $ 107 $(1,014) $(46,575)
Depreciation,
amortization and
write-downs of
intangible assets..... 7,533 394 45 -- 7,972
Equity in net income of
subsidiaries.......... (396) -- -- 396 --
Other non-cash
adjustments........... 2,279 -- -- -- 2,279
Extraordinary items.... 941 -- -- -- 941
Changes in working
capital............... 31,236 7,025 (5,516) 618 33,363
-------- ------- ------- ------- --------
Net cash provided by
(used for) operating
activities............. (4,982) 8,326 (5,364) -- (2,020)
-------- ------- ------- ------- --------
Investing activities:
Acquisition of
property, plant and
equipment............. (237) (998) (59) -- (1,294)
-------- ------- ------- ------- --------
Net cash used for
investing activities... (237) (998) (59) -- (1,294)
-------- ------- ------- ------- --------
Financing activities:
Proceeds from senior
notes................. 110,000 -- -- -- 110,000
Repayment of term and
subordinated notes.... (79,200) -- -- -- (79,200)
Revolving loans--net... (22,300) -- -- -- (22,300)
Payment of debt
issuance costs........ (4,839) -- (4,839)
Other.................. 1,730 (7,737) 5,505 -- (502)
-------- ------- ------- ------- --------
Net cash provided by
(used for) financing
activities............. 5,391 (7,737) 5,505 -- 3,159
-------- ------- ------- ------- --------
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- (13) -- (13)
Net increase (decrease)
in cash and cash
equivalents............ 172 (409) 69 -- (168)
Cash and cash
equivalents, beginning
of year................ 1,757 780 440 -- 2,977
-------- ------- ------- ------- --------
Cash and cash
equivalents, end of
year................... $ 1,929 $ 371 $ 509 $ -- $ 2,809
======== ======= ======= ======= ========
</TABLE>
10
<PAGE>
PHASE METRICS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents............ $ 13,258 $ 277 $ 600 $ -- $ 14,135
Accounts receivable--
net.................... 7,197 66 1,061 -- 8,324
Inventories............. 14,949 739 5,005 (3,589) 17,104
Other current assets.... 2,365 1 156 (7) 2,515
Property, plant and
equipment, net......... 12,034 595 366 -- 12,995
Intercompany balances... (661) 9,665 (9,004) -- --
Investment in
subsidiaries........... 5,653 -- -- (5,653) --
Other................... 6,769 3 423 -- 7,195
--------- ------- ------- ------- ---------
Total assets.......... $ 61,564 $11,346 $(1,393) $(9,249) $ 62,268
========= ======= ======= ======= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Other current
liabilities............ $ 19,309 $ 139 $ 457 $ -- $ 19,905
Current portion of
debt................... 1,212 -- -- -- 1,212
Long-term debt.......... 114,792 -- -- -- 114,792
Redeemable preferred
stock.................. 44,339 -- -- -- 44,339
Other................... 10,196 -- 108 -- 10,304
Stockholders' equity
(deficit).............. (128,284) 11,207 (1,958) (9,249) (128,284)
--------- ------- ------- ------- ---------
Total liabilities,
redeemable preferred
stock and
stockholders' equity
(deficit)............ $ 61,564 $11,346 $(1,393) $(9,249) $ 62,268
========= ======= ======= ======= =========
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 1999
(Unaudited)
<CAPTION>
Foreign
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 8,684 $ 753 $ 2,058 $(2,990) $ 8,505
Cost of sales........... 11,611 324 2,335 (3,007) 11,263
--------- ------- ------- ------- ---------
Gross profit (loss)... (2,927) 429 (277) 17 (2,758)
Research and development
expense................ 6,746 33 -- -- 6,779
Selling, general and
administrative
expense................ 2,554 104 607 -- 3,265
Amortization of
intangibles ........... 93 -- -- -- 93
Restructuring charge.... 1,995 -- -- -- 1,995
--------- ------- ------- ------- ---------
Income (loss) from
operations........... (14,315) 292 (884) 17 (14,890)
Interest expense........ 3,460 -- -- -- 3,460
Other (income) expense--
net.................... (239) -- 67 -- (172)
--------- ------- ------- ------- ---------
Income (loss) before
equity in
subsidiaries ........ (17,536) 292 (951) 17 (18,178)
Equity in net loss of
subsidiaries........... (642) -- -- 642 --
--------- ------- ------- ------- ---------
Net income (loss)..... $ (18,178) $ 292 $ (951) $ 659 $ (18,178)
========= ======= ======= ======= =========
</TABLE>
11
<PAGE>
PHASE METRICS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 19,559 $1,306 $ 3,678 $(4,683) $ 19,860
Cost of sales........... 21,216 493 4,071 (4,935) 20,845
-------- ------ ------- ------- --------
Gross profit (loss)... (1,657) 813 (393) 252 (985)
Research and development
expense................ 13,059 110 -- -- 13,169
Selling, general and
administrative
expense................ 4,945 259 1,063 -- 6,267
Amortization of
intangibles............ 186 -- -- -- 186
Restructuring charge.... 1,995 -- -- -- 1,995
-------- ------ ------- ------- --------
Income (loss) from
operations........... (21,842) 444 (1,456) 252 (22,602)
Interest expense........ 6,794 -- 4 -- 6,798
Other (income) expense--
net.................... (564) -- 105 -- (459)
-------- ------ ------- ------- --------
Income (loss) before
equity in
subsidiaries......... (28,072) 444 (1,565) 252 (28,941)
Equity in net loss of
subsidiaries........... (869) -- -- 869 --
-------- ------ ------- ------- --------
Net income (loss)..... $(28,941) $ 444 $(1,565) $ 1,121 $(28,941)
======== ====== ======= ======= ========
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1999
(Unaudited)
<CAPTION>
Foreign
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $(28,941) $ 444 $(1,565) $ 1,121 $(28,941)
Depreciation and
amortization of
intangibles........... 4,220 106 50 -- 4,376
Equity in net loss of
subsidiaries.......... 869 -- -- (869) --
Other non-cash
adjustments........... 2,292 -- -- -- 2,292
Changes in working
capital............... 12,326 4 805 (252) 12,883
-------- ------ ------- ------- --------
Net cash provided by
(used for) operating
activities............. (9,234) 554 (710) -- (9,390)
-------- ------ ------- ------- --------
Investing activities:
Acquisition of
property, plant and
equipment............. (660) -- (161) -- (821)
Proceeds from sale of
property, plant and
equipment............. 328 -- -- -- 328
-------- ------ ------- ------- --------
Net cash used for
investing activities... (332) -- (161) -- (493)
-------- ------ ------- ------- --------
Financing activities:
Payments on capital
lease obligations..... (661) -- -- -- (661)
Issuance of preferred
stock................. 2 -- -- -- 2
Other.................. (148) (290) 438 -- --
-------- ------ ------- ------- --------
Net cash provided by
(used for) financing
activities............. (807) (290) 438 -- (659)
-------- ------ ------- ------- --------
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- (37) -- (37)
Net increase (decrease)
in cash and cash
equivalents............ (10,373) 264 (470) -- (10,579)
Cash and cash
equivalents, beginning
of year................ 23,631 13 1,070 -- 24,714
-------- ------ ------- ------- --------
Cash and cash
equivalents, end of
year................... $ 13,258 $ 277 $ 600 $ -- $ 14,135
======== ====== ======= ======= ========
</TABLE>
12
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PHASE METRICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2.
Statements in this discussion and analysis and elsewhere in this report,
including, but not limited to statements regarding our strategy, financial
performance and revenue sources, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 21E
of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and are subject to the safe harbors
created by those sections. These and any other forward-looking statements
contained in this report are based on current expectations and involve various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements as a result of certain
factors set forth under "Risk Factors" and elsewhere in this report. Readers
are also urged to carefully review and consider the various risk factor
disclosures made in our other reports and filings with the SEC, including our
1998 Annual Report on Form 10-K. Readers are cautioned not to place undue
reliance on these forward-looking statements to reflect events or
circumstances occurring after the date of this filing. The following
discussion should be read in conjunction with our condensed consolidated
financial statements and notes thereto included elsewhere in this report.
Overview
We are a leading supplier of process and production-test equipment for the
data storage industry. Our systems are used primarily by manufacturers of disk
drives, thin-film disks and read/write heads to manage and improve their
respective product yields by analyzing product and process quality at critical
stages in their production processes. We were formed in 1989 as a single
product supplier to the data storage industry. Since 1993, we expanded our
product lines through the acquisition of seven specialized suppliers of
complementary systems for the disk drive and disk drive component industries.
Recent Events
The data storage industry in general has recently experienced significant
weakness in demand for products, intense competition, pricing erosion and
overcapacity. Such adverse market conditions have resulted, and may in the
future result, in the delay, deferral or cancellation of orders for our
products. Delays, deferrals and cancellations of orders for our products have
had a material adverse effect on our operating results and financial condition
over the last several quarters and fluctuations in demand for our products is
expected to continue through 1999 and beyond. Under current or future market
conditions, there can be no assurance that our business will generate adequate
cash flow or that any growth can be achieved. Because we must incur expenses
and purchase inventory based on anticipated and actual customer orders, any
significant delay, deferral or cancellation of such orders will have a
material adverse effect on our operating results.
As indicated above, our business, operating results and financial condition
continue to be adversely affected by a downturn in the data storage industry
and reduced or delayed capital equipment expenditures by data storage
companies. As we have done in the past, in June 1999, we implemented certain
cost-cutting measures. In June 1999, we announced and implemented the
consolidation of our Fremont facilities. In July 1999, we implemented a
workforce reduction of approximately 25 employees. While we believe our cost-
cutting measures are appropriate given the current and anticipated levels of
net sales, there can be no assurance that such measures will be sufficient and
that additional cost-cutting measures will not be necessary, or that any
current or future cost-cutting measures will not have a material adverse
effect on our ability to increase net sales. In connection with the negative
impact on our operations of the significant data storage industry downturn,
for the three months ended June 30, 1999, we recorded a $5.0 million charge to
cost of sales to write-down excess and obsolete inventory, as well as a
$2.0 million restructuring charge.
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<PAGE>
We believe that period-to-period comparisons of our results of operations
are not necessarily meaningful and should not be relied upon as indicators of
future performance. Quarterly results in the future may fluctuate due to the
factors discussed above or other factors.
Customer Concentration
There are a relatively small number of data storage manufacturers throughout
the world and we derive a significant portion of our net sales from a
relatively small number of customers. We expect that our dependence on
relatively few key customers will continue in the future. Approximately 55.3%
of our net sales were derived from sales to our three largest customers for
the six months ended June 30, 1999. Even though our customer mix will likely
change from period to period in the future, for the six months ended June 30,
1999, Seagate, Read-Rite and Komag accounted for 33.8%, 12.8% and 8.7% of net
sales, respectively. If net sales to these or any of our other significant
customers were to decrease in any material amount in the future, our business,
operating results and financial condition would be materially adversely
affected.
Results of Operations
Net Sales
Net sales consist primarily of revenue from sales of our process and
production-test equipment and, to a lesser extent, related upgrades, parts and
services. Net sales decreased 72.9% from $31.4 million for the second quarter
of 1998 to $8.5 million for the second quarter of 1999 and decreased 68.9%
from $63.9 million for the six months ended June 30, 1998 to $19.9 million for
the six months ended June 30, 1999. These decreases were primarily due to
decreased unit sales of our products due to the adverse market conditions in
the data storage industry.
Gross Profit (Loss)
Cost of sales includes material costs, direct labor and overhead costs
related to the production and installation of our products, including warranty
and other service costs. Gross profit (loss) decreased from ($1.5) million for
the second quarter of 1998 to ($2.8) million for the second quarter of 1999
and from $11.4 million for the six months ended June 30, 1998 to ($1.0)
million for the six months ended June 30, 1999. Gross profit (loss) as a
percentage of net sales ("gross margin") decreased from (4.6%) for the second
quarter of 1998 to (32.4%) for the second quarter of 1999 and from 17.9% for
the six months ended June 30, 1998 to (5.0%) for the six months ended June 30,
1999. These decreases were primarily due to higher unit costs resulting from
lower production volumes and underutilization of manufacturing capacity,
partially offset by a smaller inventory write down of $5.0 million in the
second quarter of 1999 compared to a $13.5 million write down in the second
quarter of 1998, and lower gross profit on products shipped in 1998 in
connection with the settlement agreement discussed below.
In April 1998, we entered into a settlement agreement to reimburse a major
customer for costs incurred in connection with the customer's cancellation of
a contract with a third party to purchase upgrades to certain production test
equipment originally purchased from us. We took this action to protect our
intellectual property and preserve a valued customer relationship. We
concluded that such action was necessary in order to discourage further
unauthorized use of our intellectual property in the future by this or other
third parties. We made the reimbursement provided for under the settlement
agreement by providing a credit to the customer for products purchased by the
customer. Products purchased under the settlement agreement were at favorable
pricing which negatively impacted our gross profit margin through the first
quarter of 1999.
We are unable to control with any degree of certainty our product sales
volume, linearity or mix from period to period and therefore our gross margin
in future periods may fluctuate from those achieved in past periods. In any
period when we experience an unfavorable product sales volume, linearity or
mix and/or provide significant volume pricing discounts or provision for
warranty costs, our gross margin may decrease.
14
<PAGE>
Research and Development Expense
Research and development expense consists primarily of salaries and related
costs of personnel and consultants, project materials and other costs
associated with our ongoing research and product development. Research and
development expense decreased from $9.7 million for the second quarter of 1998
to $6.8 million for the second quarter of 1999 and from $19.2 million for the
six months ended June 30, 1998 to $13.2 million for the six months ended June
30, 1999. Research and development expense as a percentage of net sales
increased from 30.9% for the second quarter of 1998 to 79.7% for the second
quarter of 1999, and from 30.0% for the six months ended June 30, 1998 to
66.3% for the six months ended June 30, 1999. These percentage increases were
primarily due to the decrease in net sales, partially offset by a decrease in
personnel costs as a result of workforce reductions, including those in
connection with the June and November 1998 restructurings, along with a
decrease in project material costs. We anticipate that we will continue to
devote a significant amount of financial resources to research and development
for the foreseeable future.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of salaries
and related costs of personnel and professional services, including certain
acquisition related earnout costs. Selling, general and administrative expense
decreased from $5.2 million for the second quarter of 1998 to $3.3 million for
the second quarter of 1999 and from $9.7 million for the six months ended June
30, 1998 to $6.3 million for the six months ended June 30, 1999. Selling,
general and administrative expense as a percentage of net sales increased from
16.6% for the second quarter of 1998 to 38.4% for the second quarter of 1999
and from 15.2% for the six months ended June 30, 1998 to 31.6% for the six
months ended June 30, 1999. These percentage increases were primarily due to
the decrease in net sales, partially offset by a decrease in personnel costs
as a result of workforce reductions, including those in connection with the
June and November 1998 restructurings.
Amortization of Intangible Assets
Amortization of intangible assets decreased from $1.6 million for the second
quarter of 1998 to $0.1 million for the second quarter of 1999 and from $3.3
million for the six months ended June 30, 1998 to $0.2 million for the six
months ended June 30, 1999. These decreases were due to intangible assets
becoming fully amortized.
Settlement Charge
In connection with the Settlement Agreement, discussed under "Results of
Operations Gross Profit (Loss)," the Company recorded a $5.9 million charge to
earnings in the second quarter of 1998.
Restructuring Charge
The data storage industry in general has been experiencing significant
weakness in demand for data storage products, intense competition and pricing
erosion, and overcapacity. Such adverse market conditions have resulted in the
rescheduling or cancellation of orders by several of our major customers and
have had a material adverse effect on our business, results of operations and
financial condition over the past several quarters. In light of these
circumstances, in June 1998 and June 1999, we implemented certain cost-cutting
measures to reduce our operating expenses to respond to this situation. In
June 1998 we implemented a workforce reduction of approximately 115 employees,
relocated and consolidated much of our Concord, California operations to our
Fremont, California facility and consolidated our San Diego, California
facility. In June 1999, we announced and implemented the consolidation of our
Fremont facilities. In July 1999 we implemented a workforce reduction of
approximately 25 employees. While we believe our cost-cutting measures are
appropriate given the current and anticipated levels of net sales, there can
be no assurance that such measures will be sufficient and that additional
cost-cutting measures will not be necessary, or that any current or future
cost-cutting measures will not have a material adverse effect on our ability
to increase net sales.
15
<PAGE>
In the second quarter of 1998, we recorded $3.0 million of restructuring
charges. The significant components included $0.9 million for employee
severance costs, $2.0 million in asset impairment costs related to property,
plant and equipment obsoleted due to restructuring activities, and $0.1
million of other costs. In the second quarter of 1999, we recorded $2.0
million of restructuring charges. The significant components included
$0.7 million for future lease costs of consolidated facilities and $1.3
million in asset impairment costs related to facilities consolidation. As of
June 30, 1999, $0.7 million was recorded as an accrued liability related to
the restructuring activities. In July 1999, $0.1 million was recorded as an
accrued liability for severence related to the workforce reduction.
Interest Expense
Interest expense for the first and second quarters of 1998 and 1999 and the
six months ended June 30, 1998 and 1999 relates primarily to interest incurred
on the senior and subordinated notes.
Other (Income) Expense, Net
There was no other (income) expense for the second quarter of 1998 compared
to $(0.2) million for the second quarter of 1999 and $0.1 million for the six
months ended June 30, 1998 compared to ($0.5) million for the six months ended
June 30, 1999. For the second quarter and six months ended June 30, 1999, the
amount consisted primarily of earnings on invested funds.
Income Taxes
Income tax expense was $11.4 million for the second quarter of 1998 and none
for the second quarter of 1999. Income tax expense was $8.7 million for the
six months ended June 30, 1998 and none for the six months ended June 30,
1999.
For the 1998 periods, the effective income tax rate differed from the
applicable statutory rate due primarily to the charge taken in the second
quarter of 1998 for a valuation allowance against our entire deferred tax
asset balance. Such charge was taken due to factors which give rise to
uncertainty as to whether the net deferred tax asset was realizable, including
the lack of history of consistent earnings and the significant loss in the
second quarter of 1998.
Extraordinary Loss, Net of Income Taxes
Extraordinary loss, net of income taxes, was $0.9 million for the six months
ended June 30, 1998, and consisted of the write-off of unamortized debt
issuance costs in connection with the January 30, 1998 repayment of debt
outstanding under our then-existing credit agreements.
Liquidity and Capital Resources
We have financed our capital requirements through sales of common and
preferred stock, and borrowings under senior and subordinated notes, as well
as term and revolving credit facilities. Our principal requirements for cash
are operating costs, debt service, working capital and capital expenditures.
As of June 30, 1999, our outstanding indebtedness included $105.9 million of
senior notes, net of $4.1 million of unamortized debt issuance costs, $8.0
million of convertible subordinated notes and $2.1 million of capital lease
obligations. At June 30, 1999, we had $4.9 million and $7.6 million of accrued
interest outstanding on the senior notes and convertible subordinated notes,
respectively. The convertible subordinated notes, including all accrued
interest, are convertible into 5,142,720 shares of common stock at the option
of the holders and will automatically convert upon a public equity offering.
As of the date of this filing, we do not have a working capital credit
facility in place.
The senior notes and the related indenture do not contain ongoing quarterly
or annual financial covenant requirements but do contain customary covenants
restricting our ability to, among other things, incur additional
16
<PAGE>
indebtedness, create liens or other encumbrances, pay dividends or make other
restricted payments, make investments, loans and guarantees or sell or
otherwise dispose of a substantial portion of assets to, or merge or
consolidate with, another entity.
Cash used for operating activities increased from $2.0 million to $9.4
million for the six months ended June 30, 1998 and 1999, respectively. Period
to period fluctuations in operations impacting this increase were a smaller
net loss for the six months ended June 30, 1999, decreases in depreciation and
amortization, deferred income taxes, extraordinary loss, an increase in
accounts receivable in 1998 compared to a decrease in 1999, a smaller decrease
in inventories, an increase in income taxes receivable in 1998 compared to a
decrease in 1999, and decreases in accounts payable, customer deposits,
accrued expenses and other liabilities in 1998 as compared to increases in
1999.
Cash used for investing activities was $1.3 million and $0.5 million for the
six months ended June 30, 1998 and 1999 and consisted of acquisition of
property, plant and equipment, net of proceeds from sale of property, plant
and equipment. Cash provided by (used for) financing activities was $3.2
million for the six months ended June 30, 1998 and $(0.7) million for the six
months ended June 30, 1999. For the six months ended June 30, 1998, financing
activities consisted primarily of the issuance of senior notes and repayment
of borrowings under our previous term notes and revolving loans. For the six
months ended June 30, 1999, financing activities consisted of payments on
capital lease obligations.
Based on currently available information, and subject to the success of our
working capital and inventory management, we believe that our available cash
and cash generated from operations will be adequate to fund our operations
through 1999. While operating activities may provide cash in certain periods
depending on the timing of any recovery in demand for our products, we may
require additional sources of financing. We may also from time to time
consider additional acquisitions of complementary businesses, products or
technologies, which may require additional financing. Additional sources of
funding could include additional debt and/or equity financings. However, we
continue to have limited capital resources and significant future obligations,
including our future principal and interest payments under the senior notes.
The existence of certain restrictive covenants in the indenture for the senior
notes may inhibit our ability to raise additional financing. There can be no
assurance we will be able to obtain alternative sources of financing on
favorable terms, if at all, at such time or times as we may require such
capital. See "Risk Factors--Because We Have a Substantial Amount of
Indebtedness, We May Be Unable to Pay Interest or Principal on The Senior
Notes."
17
<PAGE>
RISK FACTORS
Because We Have Substantial Indebtedness, We May Be Unable to Pay Interest or
Principal on The Senior Notes
At June 30, 1999, we had indebtedness of $116.0 million. Subject to certain
limitations, we may also incur additional indebtedness in the future under the
terms of the indenture related to the senior notes. Our ability to make
scheduled payments of principal and interest on, or to refinance, our
indebtedness (including the senior notes), and to fund our operations,
including planned capital expenditures and research and development expenses,
depends on our future performance and financial results, which, to a certain
extent, are subject to general conditions in the data storage industry as well
as general economic, financial, competitive and other factors that are beyond
our control. For the three and six months ended June 30, 1999, earnings were
inadequate to cover fixed charges by $19.1 million and $30.7 million,
respectively.
Over the past several quarters, the data storage industry and the production
and process-test equipment industry have been experiencing significant
weakness in demand for products, intense competition and pricing erosion, and
overcapacity. Such adverse market conditions have resulted, and may continue
to result in, the deferral or cancellation of orders for our products. Delays
or declines in product orders have had a material adverse effect on our
operating results and financial condition over the last several years and
fluctuations in demand for our products are expected to continue for the
foreseeable future. We cannot be certain that our business will generate
adequate cash flow or that any growth can be achieved under current or future
market conditions. If we are unable to generate sufficient cash flow from
operations to pay our debts and operate our business, including making
necessary capital expenditures, we may be required to refinance all or a
portion of our existing debt, including the senior notes, to sell assets or to
obtain additional financing. We cannot be certain that any such action would
be accomplished on acceptable terms.
Our high level of debt will have several important effects on our future
operations, including, but not limited to:
. making it more difficult for us to satisfy our obligations with
respect to the Senior Notes;
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, research and development and
other general corporate requirements;
. requiring a substantial portion of our cash flow from operations to
pay the principal of, and interest on, our indebtedness, thereby
reducing the availability of such cash flow to fund working capital,
capital expenditures, research and development or other operating
needs and uses; and
. limiting our flexibility in planning for, or reacting to, changes in
our business.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
Existing Financing Covenants Impose Restrictions on Our Operations Which We
May Not Be Able to Comply With Due to Reasons Beyond Our Control
The indenture related to the senior notes contains a number of covenants
that significantly restrict our operations, such as our ability to:
. incur indebtedness;
. make prepayments of certain indebtedness;
. pay dividends;
. make investments;
. engage in transactions with stockholders and affiliates;
. create liens;
. sell assets; and
. engage in mergers and other consolidations.
18
<PAGE>
We cannot be certain that we will be able to comply with such covenants or
restrictions in the future. Our ability to comply with such covenants and
restrictions may be affected by events beyond our control, including
prevailing economic and financial conditions and general conditions in the
data storage industry.
Proceeds May Become Unavailable to Make Payments to Holders of the Notes Due
to Senior Rights of Other Existing and Future Indebtedness
As of June 30, 1999, the Senior Notes and the note guarantees were
effectively subordinated to approximately $2.1 million of secured indebtedness
under our capital lease obligations.
If we incur any additional senior indebtedness in the future that is not
subordinated to the indebtedness outstanding under the senior notes, even if
such indebtedness were not secured, the holder of such debt would be entitled
to share ratably with the holders of the senior notes in any proceeds
distributed in connection with any insolvency, liquidation, reorganization,
dissolution or other winding-up of our business. This may have the effect of
reducing the amount of proceeds available to pay to holders of the Senior
Notes upon the occurrence of any such events.
We Have Experienced Significant Losses
We had net losses of approximately $18.2 million and $28.9 million for the
three and six months ended June 30, 1999. Such loss and accrual of certain
preferred stock dividends and accretion for the redemption value and dividends
of such preferred stock have contributed to a retained deficit of
approximately $134.0 million as of June 30, 1999. In addition, we used cash
for operating activities of approximately $9.4 million for the six months
ended June 30, 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Our Operating Results are Subject to Wide Variations and Continued Losses
In the past, we have experienced wide fluctuations in our quarterly and
annual operating results and have experienced net losses for the past several
quarters. We may continue to experience net losses and fluctuations in our
business due to a number of factors, not all of which are in our control.
These factors include, without limitation, the following:
. the continuing downturn in the data storage industry;
. the size, timing and rescheduling or cancellation of orders from, and
shipments to, major customers;
. the timing of introductions of our new products and product
enhancements or our competitors' introduction of such products;
. our ability to develop, introduce and market new, technologically
advanced products;
. the cyclicality of the data storage industry;
. the rescheduling or cancellation of capital expenditures by our
customers;
. variations in our customer base and product mix;
. the level of any of our significant volume pricing discounts;
. the availability and cost of key production materials and components;
. our ability to effectively manage our inventory and control costs;
. the financial stability of our major customers;
. personnel changes;
. expenses associated with acquisitions;
. restructurings;
. fluctuations in amortization and write-downs of intangible assets;
and
. foreign currency exchange rate fluctuations and general economic
factors in the United States and certain foreign countries, including
Japan, South Korea, Singapore, Malaysia and other parts of Southeast
Asia.
19
<PAGE>
Quarterly results in the future may fluctuate due to the factors discussed
above or other factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence on and Cyclicality of Data Storage Industry May Lead to Continued
Losses
Our business depends almost entirely upon capital expenditures by our
customers, which in turn depend upon market demand for their products. Our
industry is cyclical and historically has experienced varying growth rates and
periods of oversupply like the one currently being experienced causing higher
than anticipated inventory levels and intense price competition. The data
storage industry is currently experiencing one of its most severe and
prolonged downturns with continuing weakness in demand for products, intense
competition, significant price erosion and overcapacity. As a result of this
downturn, there is significantly reduced demand for our products. The current
downturn in the disk storage industry generally, and the slowdown in our
customers' orders in the last several quarters has had a material adverse
effect on our business, operating results and financial condition. It is
likely that this downturn in our market will continue for the foreseeable
future and, as a result, our customers will likely continue to delay or cancel
orders for our products and our business, operating results and financial
condition will be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
We Have Had to Restructure Operations and May Have to Again in the Future
The data storage industry in general has been experiencing significant
weakness in demand for data storage products, intense competition and pricing
erosion, and overcapacity. Such adverse market conditions have resulted in the
rescheduling or cancellation of orders by several of our major customers and
has had a material adverse effect on our business, results of operations and
financial condition over the past several quarters. In light of these
circumstances, and our expectation that the current adverse market conditions
in the data storage industry will extend through 1999, in June 1999, we
implemented certain cost-cutting measures to reduce our operating expenses to
respond to this situation. In June 1999, we announced and implemented the
consolidation of our Fremont facilities. In July 1999, we implemented a
workforce reduction of approximately 25 employees. While we believe our cost-
cutting measures are appropriate given the current and anticipated levels of
net sales, there can be no assurance that such measures will be sufficient and
that additional cost-cutting measures will not be necessary, or that any
current or future cost-cutting measures will not have a material adverse
effect on our ability to increase net sales. In the second quarter of 1999, we
recorded a charge of $2.0 million related to this restructuring, including
$0.7 million for future lease costs of consolidated facilities and $1.3
million in asset impairment costs related to facilities consolidation. As of
June 30, 1999, $0.7 million was recorded as an accrued liability related to
the restructuring activities. In July 1999, $0.1 million was recorded as an
accrued liability for severence related to the workforce reduction.
In connection with the negative impact on our operations of the significant
data storage industry downturn, for the three months ended June 30, 1999, we
recorded a $5.0 million charge to cost of sales to write-down excess and
obsolete inventory.
If We Are Not Able to Adapt to Rapid Technological Change, We May Lose
Customers
Rapid technological changes and evolving industry standards characterize the
data storage industry. Our customers frequently introduce new products and
enhancements, with relatively short product life cycles, typically between
nine and 18 months. In addition, our customers often develop multiple products
simultaneously, such that new products could be introduced as frequently as
every three months. Our customers' new product introductions typically result
in new technological challenges for us, both with respect to our installed
base and with respect to our next generation products. As a result, we must
continue to enhance our existing products and develop and manufacture new
products with improved capabilities. These technological changes require us to
make substantial investments in research and development. Although we
continually develop new products, there can be no assurance that we will be
able to accurately anticipate technological
20
<PAGE>
advances in the disk drive market and develop products incorporating such
advances in a timely manner or at all. Our failure to develop, manufacture and
market new or enhanced products, would have a material adverse effect on our
business, operating results and financial condition. In addition, we are
highly dependent on our close working relationships with our key customers to
advance our technologies. The termination of any one of these key
relationships could have a material adverse effect on our ability to
anticipate and develop necessary technological changes to our products.
Our customers are constantly striving to improve their production processes,
including improving the manufacturing of substrates, the deposition of
material on the substrate, the finish processing of magnetic media, and head
fabrication. If our customers modify their own design and internal production
processes without our products, demand for our equipment would likely decline.
Further, unless we are able to effectively respond to such changes,
manufacturing process changes for disk drives, disks and read/write heads
could also have a material adverse effect on our business, operating results
and financial condition.
Future technological innovations may reduce demand for disk drives.
Competing technologies to disk drive based data storage exist, including solid
state memory (flash memory), tape memory and re-writable optical technology
(CD and DVD technology). Although the current core technology for rotating
magnetic disk drive data storage has been the predominant technology in the
industry for many years, it is likely that some day this technology will be
replaced by an alternate technology. Our products may not be adaptable to any
successor technology. Our business, operating results and financial condition
could be materially adversely affected by any significant migration toward
technology that would replace disk drives as a computer data storage medium.
Because We Depend on a Small Number of Customers, Any Decrease in Net Sales
to or a Loss of a Customer Will Have a Significant Negative Impact on Our
Business
There are a relatively small number of data storage manufacturers throughout
the world and we derive a significant portion of our net sales from a
relatively small number of customers. We expect that our dependence on
relatively few key customers will continue in the future. Approximately 55.3%
of our net sales were derived from sales to our three largest customers for
the six months ended June 30, 1999. Even though our customer mix will likely
change from period to period in the future, for the six months ended June 30,
1999, Seagate, Read-Rite and Komag accounted for 33.8%, 12.8% and 8.7% of net
sales, respectively. If net sales to these or any of our other significant
customers were to decrease in any material amount in the future, our business,
operating results and financial condition would be materially adversely
affected.
In general, we do not enter into long-term purchase agreements with our
customers. If completed orders are not replaced on a timely basis by new
orders from the same or other customers, our net sales would be materially
adversely affected. In addition, the following could have a material adverse
effect on our business, operating results and financial condition:
. the loss of a key customer;
. any reduction, cancellation or rescheduling of an order from any key
customer, including reductions, delays or cancellations due to
customer departures from recent buying patterns; and
. economic or competitive conditions in our industry.
Any failure to collect or delay in collecting receivables could have a
material adverse effect on our business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
There has been a trend toward consolidation in the disk drive industry which
may result in a change in a current customer's purchasing habits, including a
loss of the customer, a decrease in orders from that customer or a
rescheduling or cancellation of orders previously made by a customer.
Moreover, acquisitions involving existing customers may cause the
concentration of our customer revenues to increase thereby increasing our
dependence on fewer customers.
21
<PAGE>
We Have a High Risk of Inventory Obsolescence Which Can Adversely Effect
Operating Results by Increasing Cost of Sales
Due to the cyclical nature of and rapid technological change in our
industry, our inventory is subject to substantial risk of obsolescence. To
address these risks, we monitor our inventories on a periodic basis and
provide inventory write-downs intended to cover these risks. Despite our
precautions, we may be required to take significant inventory charges which,
in turn, could materially and adversely affect our business, operating results
and financial condition due to the following:
. our dependence on a few customers and a limited number of product
programs for each customer;
. the magnitude of our commitment to support our customers' programs;
. our limited remedies in the event a customer cancels or materially
reduces one or more product orders; and
. the possibility that a customer may experience financial
difficulties.
The significant downturn in the data storage industry has negatively
impacted our operations. For example, during the three months ended June 30,
1999 we recorded a $5.0 million charge to cost of sales to write down excess
and obsolete inventory. We may be required to take additional inventory write-
downs in the future due to our inability to obtain necessary product
acceptance, or due to further cancellations by customers.
Our Industry is Highly Competitive
The disk drive process and production-test equipment industry is highly
competitive. In each of our product lines, we face substantial competition
from established merchant suppliers of process and production-test equipment,
some of which have greater financial, engineering, manufacturing, research and
development and marketing resources. For example, we face competition from
Zyratex, General Disk and Hitachi DECO for servowriters; Hitachi DECO and Sony
Techtronics for disk certifiers; Integral Solutions International for quasi-
static MR head testers; Koyo Precision Instruments, Inc. and Zygo Corporation
for flying height testers, and Technistar for automation technology.
Historically, there has also been competition from entrepreneurs with focused
market knowledge and new technology. We experience intense competition
worldwide from Hitachi DECO, a large, full-line manufacturer of process and
production-test equipment. Hitachi DECO has substantially greater financial,
technical, marketing, manufacturing, research and development and other
resources. We also experience competition from other full-line and partial-
line manufacturers of process and production-test equipment. Our competitors
may develop enhancements to, or future generations of, competitive products
that will offer price or performance features superior to our products, or new
competitors may enter our markets. Finally, as many of our competitors are
based in foreign countries, they have cost structures and equipment prices
based on foreign currencies. Accordingly, currency fluctuations could cause
our dollar-priced products to be less competitive than our competitors'
products priced in other currencies.
Many of our competitors are investing heavily in the development of new and
enhanced products aimed at applications currently addressed by our products.
We expect our competitors to continue to improve the design and performance of
their products and to introduce new products with competitive
price/performance characteristics. Competitive pressures often necessitate
price reductions which can adversely affect operating results. We will be
required to make significant investments in product development and research,
sales and marketing and ongoing customer service and support to remain
competitive. We cannot be certain that we will have sufficient resources to
continue to make such investments or that we will be able to achieve the
technological advances necessary to maintain our competitive position.
We believe that our future success will be dependent, in part, upon our
ability to compete successfully in the Japanese, South Korean and Southeast
Asian markets. Our largest competitor, Hitachi DECO, is headquartered in Japan
which gives it a competitive advantage in that market to the extent buying
decisions are influenced by Hitachi DECO's local presence. In addition, our
ability to compete in Japan, South Korea and
22
<PAGE>
Southeast Asia in the future is dependent upon continuing free trade between
these countries and the United States, our continuing ability to develop in a
timely manner products that meet the technical requirements of our foreign
customers and our continuing ability to develop and maintain satisfactory
relationships with leading companies in our industry in these areas. Moreover,
our sales in these areas will be affected by the overall economies of Japan,
South Korea and Southeast Asia. To the extent that recent economic troubles in
Asian markets have negatively impacted the capacity expansion and upgrade
plans of our customers or potential customers in affected regions, then such
economic troubles have also negatively impacted our operations. With respect
to existing customers, we do not believe that such Asian economic troubles
have had a significant impact on our operations. With respect to potential
customers, we are unable to quantify the impact that such Asian economic
troubles will have on our operations.
In addition to the competition from our competitors, most of our customers
develop at least a portion of their own process and production-test equipment
needs internally, especially servowriters and read/write head test equipment.
Accordingly, we must compete against the internal development efforts of this
captive market. Manufacturers within this captive market are often reluctant
to change their production lines to incorporate merchant-supplied process and
production-test technology. Moreover, rapid changes in data storage
technology, and the development of new process and production-test equipment
may be so closely linked to our customers' product development cycles that
certain customers and potential customers will find it more efficient to
develop their own process and production-testing equipment needs internally,
thereby placing us at a competitive disadvantage.
Because of the foregoing competitive factors, we may not be able to compete
successfully in the future. Increased competitive pressure could cause us to
lower our prices which would have an adverse effect on our business, financial
condition and results of operations.
Because We Sell a Small Number of Products, a Reduction in Demand for Any One
of These Products May Have a Significant Negative Effect on Our Business
We have historically derived a significant portion of our net sales from a
relatively small number of products. For the six months ended June 30, 1999,
we derived approximately 24.7% of our net sales from sales of our media
certifier products (excluding parts and service). Although we expect that net
sales from our media certifier products, including our MG series and our MC
series, will continue to account for a substantial portion of our total net
sales in the foreseeable future, we realize that the downturn in the data
storage industry is caused, in part, by the overcapacity of media certifiers
in the market today. Any material reduction in demand for our media certifier
products would have a material adverse effect on our business, operating
results and financial condition.
We May Not Be Able to Adequately Protect Our Proprietary Technology or May Be
Subject to Claims of Infringement
Our success is heavily dependent upon the establishment and maintenance of
proprietary technologies. We currently attempt to protect our intellectual
property rights through patents, copyrights, trade secrets and other measures.
These efforts may not be adequate to prevent misappropriation by third parties
and may not be adequate under the laws of some foreign countries which may not
protect our proprietary rights to the same extent as do laws of the United
States. Our competitors may be able to independently develop products that are
substantially equivalent or superior to our products, or design around our
patents. Any such adverse circumstances could have a material adverse effect
on our business, operating results and financial condition.
Although we do not believe any of our products or proprietary rights
infringe the rights of third parties, infringement claims may be asserted
against us in the future. Any such claims, with or without merit, could divert
the attention of management, result in costly litigation, cause product
shipment delays or require us to enter into
23
<PAGE>
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on acceptable terms, or at all. If infringement
were established, we could be required to pay damages or be enjoined from
making, using or selling the infringing product. Likewise, a third party's
product, if infringing on our proprietary rights, may not be prevented from
doing so without litigation. Any of the foregoing could have a material
adverse effect on our business, operating results and financial condition.
We cannot be certain that the claims allowed on any of our patents will be
sufficiently broad to protect our technology. Moreover, any patent we own
could be invalidated deemed unenforceable, circumvented or challenged. Also,
we cannot be certain that our patent rights will provide us competitive
advantages or that any of our pending or future patent applications will be
issued with claims of the scope that we desire, if at all. Furthermore, others
may develop similar products, duplicate our products or design around the
patents we own. In addition, foreign intellectual property laws or our
agreements may not protect our intellectual property rights in any foreign
country. Any failure to protect our intellectual property rights could have a
material adverse effect on our business, operating results and financial
condition.
The Complexity and Customization of Our Products May Lead to Technical
Difficulties and Unanticipated Costs
Our products have a large number of components and are highly complex. We
have experienced and may continue to experience manufacturing delays due to
technical difficulties. In addition, many of our products must be semi-
customized to meet individual product specification requirements. The
customization of a customer order may require new technical capabilities not
previously incorporated successfully into our products. As a result, we may be
unable to complete our customers' customized development or technical
specifications in a timely manner. Any significant failure in this regard
would have a material adverse effect on our business, operating results and
financial condition as well as our customer relationships. In addition, due to
the semi-customized nature of many of our products, we have incurred and may
continue to incur substantial unanticipated costs in a product's development
and production which cannot be passed on to the customer. Such unanticipated
costs include the increased cost of components due to expediting charges,
other purchasing inefficiencies and greater than expected engineering, quality
control, installation, upgrade, post-installation service and support and
warranty costs. The occurrence of any of these events could materially
adversely affect our business, operating results and financial condition.
Dependence on a Limited Group of Suppliers May Cause Delays in Product
Delivery
In certain instances we rely on a single source or a limited group of
suppliers for certain components and subassemblies used in our products. The
partial or complete loss of these sources could have at least a temporary
material adverse effect on our results of operations and damage customer
relationships due to the complexity of the products they supply and the
significant amount of time required to qualify new suppliers. In addition,
long lead times are often required to obtain critical components and
subassemblies used in certain of our products from these and other suppliers
which could impede our ability to quickly respond to changes in demand and
product specifications.
Shortages of critical components and subassemblies used in our products have
occurred in the past and may occur in the future. Also, the availability of
materials may have longer lead times. In addition, our manufacture and timely
delivery of products is often dependent on the ability of certain suppliers to
deliver sub assemblies and other components in a timely manner. The failure of
such suppliers to deliver these components in a timely manner may delay our
product delivery until alternative sourcing may be developed. Alternative
sources may not be located in time to avoid penalties or cancellation of our
product orders. If a significant order or orders were canceled for this reason
it could have a material adverse effect on our business, operating results and
financial condition. Further, a significant increase in the price of one or
more components used to produce our products would increase our production
costs.
24
<PAGE>
Risks Associated with Acquisitions
While we currently have no commitments, agreements or understandings with
respect to any future acquisitions, our business strategy includes the
expansion of our business, product lines and technology through acquisitions.
We regularly review various acquisition prospects, including companies,
technologies or products complementary to our business and periodically engage
in discussions regarding such possible acquisitions. Acquisitions involve
numerous risks, including:
. evaluating new technologies;
. difficulties in the assimilation of the operations, products,
personnel and cultures of the acquired companies;
. the ability to manage geographically remote units;
. the diversion of management's attention from other day-to-day
business concerns;
. the risks of entering markets in which we have limited or no direct
experience;
. the potential loss of key employees of the acquired companies;
. dilutive issuances of equity securities;
. the incurrence of additional debt;
. reduction of existing cash balances; and
. amortization expenses related to goodwill and other intangible assets
and other charges to operations that may materially adversely affect
our results of operations.
Moreover, any equity or debt financings proposed in connection with any
acquisition may not be available to us on acceptable terms or at all, when,
and if, suitable strategic acquisition opportunities arise. Although
management expects to carefully analyze any opportunity before committing our
resources, there can be no assurance that any completed acquisition will
result in long-term benefits or that our management will be able to manage
effectively the resulting business.
Any Future Inability to Obtain Additional Financing Will Have a Significant
Negative Effect on Our Business
To achieve our long-term strategic objectives and maintain our competitive
position, we will need additional financial resources over the next several
years to fund acquisitions, service debt, make capital expenditures, fund
working capital and pay for research and development. We are continually
investing in new technologies and our international infrastructure and, as a
result, our fixed costs may increase in the foreseeable future, depending on
the timing of any recovery in demand for our products. Our fixed costs may
also increase if we expand our infrastructure in South Korea, Japan, other
parts of Asia, or other locations. Any liquidity deficiency in the future
could delay or change our management's plans, including curtailing our
acquisition strategy, capital expenditures, facilities expansion and research
and development expenditures, which could materially adversely affect our
ability to pay our debts and our business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
Because We are Subject to Many Environmental Regulations, Any Violation Will
Subject Us to Significant Liabilities
We are subject to a variety of governmental regulations relating to the use,
storage, discharge, handling, emission, generation, manufacture, treatment and
disposal of toxic or other hazardous substances, chemicals, materials or
waste. We believe that we are in compliance, in all material respects, with
such regulations. Any failure to comply with current or future regulations
could result in civil penalties or criminal fines being imposed upon us, or
our officers, directors or employees, suspension of production, alteration of
our manufacturing process or cessation of operations. Such regulations could
require expensive remediation or abatement actions to comply with
environmental regulations. Any failure to properly manage the use, disposal or
storage of, or adequately restrict the release of, hazardous or toxic
substances could subject us to significant liabilities.
25
<PAGE>
Because We Depend on Key Personnel, The Loss of Any One of Them Could Have A
Material Adverse Effect on Our Business
Our future performance depends in significant part upon the continued
service of our chief executive officer, other senior management personnel and
our key technical personnel. We are dependent on our ability to identify,
hire, train, retain and motivate high quality personnel, especially highly
skilled engineers involved in the ongoing developments required to develop and
enhance our products and introduce new and enhanced future products and
applications. Our industry is characterized by a high level of employee
mobility and aggressive recruiting of skilled personnel. Our employees may
terminate their employment at any time. Accordingly, there can be no assurance
that any of our current employees will continue to work for us. The loss of
key employees could have a material adverse effect on our business, operating
results and financial condition. We have an employment agreement with our
chief executive officer, but we do not maintain key-man life insurance with
respect to such individual. The employment agreement is terminable at will by
either party upon 30-days written notice and contains a covenant not to
compete during the term of the agreement and for two years thereafter.
Our International Operations are Subject to Inherent Risks
Our sales and operating activities outside of the United States are subject
to inherent risks, including:
. fluctuations in the value of the United States dollar relative to
foreign currencies;
. tariffs;
. quotas
. taxes and other market barriers;
. political, economic and monetary instability;
. restrictions on the export or import of technology;
. potentially limited intellectual property protection;
. difficulties in staffing and managing international operations; and
. potentially adverse tax consequences.
These factors could have a material adverse effect on our business,
operating results or financial condition. In addition, although substantially
all of our export sales to date have been denominated in United States
dollars, such sales may not be denominated in dollars in the future. As a
result, currency exchange fluctuations in countries where we conduct business
could have a material adverse effect on our business, operating results and
financial condition. In this regard, several Asian countries, including South
Korea, Japan and Thailand, have recently experienced significant economic
downturns and significant declines in the value of their currencies relative
to the U.S. dollar. Due to these conditions, some of our customers may delay,
reschedule or cancel significant current or future product orders. If any such
orders are delayed, rescheduled or cancelled, our business, operating results
and financial condition would be adversely affected. to the extent that recent
economic troubles in Asian markets have negatively impacted the capacity
expansion and upgrade plans of our customers or potential customers in
affected regions, then such economic troubles have also negatively impacted
our operations. With respect to existing customers, we do not believe that
such Asian economic troubles have had a significant impact on our operation.
With respect to potential customers, we are unable to quantify the impact that
such Asian economic troubles will have on our operations.
Risks Related to the "Year 2000" Issue May Lead to Unanticipated Losses
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results. We are in the
process of assessing the readiness of our internal systems and our products
for handling the Year 2000 issue. Our ongoing assessment includes
identification of exposures, repair or replacement of deficient systems,
testing, implementation and contingency planning. Based on the assessments
performed to date, we believe that all of our critical internal systems are
Year 2000 ready. We are continuing to monitor the Year 2000 readiness of our
products, including
26
<PAGE>
our installed base of products. If it is ultimately determined that any of our
installed base of products have Year 2000 readiness issues, we currently plan
to offer to our customers upgrades for certain of such products. To date, we
have not incurred any material costs in connection with our assessment of our
Year 2000 readiness. We do not believe that the costs of any actions required
as a result of our assessment to date will have a material adverse effect on
our business, operating results or financial condition. There can be no
assurance, however, that we will successfully implement the correct solutions
or that there will be no delay in or increased costs associated with our Year
2000 readiness. Our inability to successfully implement such changes could
have a material adverse effect on our business, operating results or financial
condition. In addition, there can be no assurance that our critical product
and service providers, and their critical providers and so on, are or will
become Year 2000 ready on a timely basis. The failure of such critical product
and service providers and integrated information systems to be or become Year
2000 ready could have a material adverse effect on our business, operating
results or financial condition. In addition, it is possible that our revenue
may be adversely affected if current and prospective customers direct their
spending resources away from purchasing our products over the next two years
in order to correct or replace information systems which are not Year 2000
ready.
27
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes during the six months ended June 30,
1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 4, 1998, Phase Metrics filed suit against Vlad Pogrebinsky, Igor
Iosilevsky, Thomas Tucker, Jonathan Nguyen and Magnetic Recording Solutions
(MRS), Inc. alleging misappropriation of trade secrets, breach of contract,
copyright infringement, interference with prospective advantage and unfair
competition. (Phase Metrics, Inc. v. Magnetic Recording Solutions et. al.) The
case was filed in the U.S. District Court in the Northern District of
California. The individual defendants were former employees of Phase Metrics.
On July 29, 1998, the defendants in the case filed counterclaims against Phase
Metrics and its president and chief executive officer alleging intentional and
negligent interference with contractual relations, intentional and negligent
interference with prospective business advantage, trade libel, slander per se,
intentional and negligent infliction of emotional distress, unfair competition,
attempted monopolization, monopolization, and unfair practices in violation of
California Business and Professions Code Section 17000, et. Seq. On March 16,
1999, the court granted Phase Metrics' motion for a preliminary injunction and
enjoined the defendants from further marketing or selling the infringing
products and any derivative products and from continuing to use Phase Metrics'
copyrighted and trade secret technology.
On June 24, 1999, Phase Metrics, Inc. and MRS reached a settlement. The
result of the settlement agreement had an immaterial effect on our financial
position and results of operations.
Phase Metrics is also subject to various other legal matters in the normal
course of its business. While the results of litigation and claims cannot be
predicted with certainty, Phase Metrics believes that the final outcome of
these other matters will not have a material adverse effect on its business,
operating results or financial condition.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
28
<PAGE>
PHASE METRICS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHASE METRICS, INC.
(Registrant)
/s/ Dewey Hockemeyer
By: _________________________________
Dewey Hockemeyer
Vice President, Finance, Chief
Financial Officer
and Assistant Secretary
Date: August 16, 1999
29
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