UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
.
Commission file number 0-2287
SYMMETRICOM, INC.
(Exact name of registrant as specified in its charter)
California No. 95-1906306
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 Orchard Parkway, San Jose, California 95131-1017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(408) 943-9403
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Applicable Only to Issuers Involved in Bankruptcy Proceedings
During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a
court.
Yes No
Applicable Only to Corporate Issuers:
Indicate number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical
date:
CLASS OUTSTANDING AS OF April 30, 1998
Common Stock 15,833,302
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SYMMETRICOM, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
March 31, 1998 and June 30, 1997 3
Consolidated Statements of Operations -
Three and nine months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Nine months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market 16
Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYMMETRICOM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, June 30,
1998 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 17,879 $ 28,203
Short-term investments 14,082 13,384
-------- --------
Cash and investments 31,961 41,587
Accounts receivable, net 16,663 21,349
Inventories 19,136 22,023
Other current assets 8,242 3,830
------- --------
Total current assets 76,002 88,789
Property, plant and equipment, net 39,653 39,617
Other assets, net 1,176 899
-------- --------
$116,831 $129,305
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,444 $ 8,189
Accrued liabilities 13,925 16,546
Current maturities of long-term obligations 196 5,729
------ ------
Total current liabilities 20,565 30,464
Long-term obligations 8,432 8,583
Deferred income taxes 2,520 2,655
Shareholders'equity:
Preferred stock, no par value:
Authorized - 500 shares
Issued - none
Common stock, no par value:
Authorized - 32,000 shares
Issued and outstanding - 15,833 and 15,879 shares 24,686 25,608
Retained earnings 60,628 61,995
-------- --------
Total shareholders'equity 85,314 87,603
-------- --------
$116,831 $129,305
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $24,208 $37,754 $92,528 $105,224
Cost of sales* 24,349 20,243 59,772 57,946
------- ------- ------ ------
Gross profit (141) 17,511 32,756 47,278
Operating expenses:
Research and development 4,862 5,009 14,482 13,388
Selling, general and admin. 7,260 8,078 22,812 22,970
------ ------ ------ ------
Operating income (loss) (12,263) 4,424 (4,538) 10,920
Interest income 452 515 1,433 1,427
Interest expense (183) (147) (657) (442)
------ ------ ------ ------
Earnings (loss) before
income taxes (11,994) 4,792 (3,762) 11,905
Income tax provision (benefit) (4,511) 1,073 (2,395) 2,666
------ ------ ------ ------
Net earnings (loss) $(7,483) $3,719 $(1,367) $9,239
======== ====== ======== ======
Basic earnings (loss) per share $ (.47) $ .23 $ (.09) $ .59
====== ====== ====== ======
Weighted average common shares 15,816 15,859 15,857 15,718
====== ====== ====== ======
Diluted earnings(loss)per share $ (.47) $ .23 $ (.09) $ .57
====== ====== ====== ======
Weighted average common and
common equivalent shares 15,816 16,414 16,049 16,299
====== ======= ====== ======
* Includes an inventory provision of $8.5 million for the three and nine month
periods ended March 31, 1998.
The accompanying notes are an integral part of these consolidated financial
statement
4
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SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
March 31,
1998 1997
---- ----
Cash flows from operating activities:
Cash received from customers $96,632 $98,208
Cash paid to suppliers and employees (90,370) (85,463)
Interest received 1,016 1,046
Interest paid (657) (442)
Income taxes paid (2,424) (608)
------ ------
Net cash provided by operating activities 4,197 12,741
------ ------
Cash flows from investing activities:
Purchases of short-term investments (17,198) (24,397)
Maturities of short-term investments 16,500 13,500
Purchases of plant and equipment (5,827) (8,759)
Increase in notes receivable (900) -
Other assets 10 122
------- --------
Net cash used for investing activities (7,415) (19,534)
------- --------
Cash flows from financing activities:
Repayment of long-term debt (5,684) (38)
Proceeds from issuance of common stock 1,529 2,384
Repurchase of common stock (2,951) -
------ ------
Net cash provided by (used for) financing
activities (7,106) 2,346
------ ------
Net decrease in cash and cash equivalents (10,324) (4,447)
Cash and cash equivalents at beginning of period 28,203 31,327
------- -------
Cash and cash equivalents at end of period $17,879 $26,880
======= =======
Reconciliation of net earnings to net cash provided
by operating activities:
Net earnings (loss) $(1,367) $ 9,239
Adjustments:
Depreciation and amortization 6,264 4,766
Net deferred income taxes (4,254) 166
Changes in assets and liabilities:
Accounts receivable 4,786 (6,964)
Inventories 2,887 (2,141)
Accounts payable (1,745) 2,357
Accrued liabilities (2,621) 4,707
Tax benefit from employee stock plan 500 900
Other (253) (289)
------- -------
Net cash provided by operating activities $ 4,197 $12,741
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation. The consolidated financial statements included herein
have been prepared by SymmetriCom, Inc., (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such rules and regulations. Although
the Company believes that the disclosures which are made are adequate to make
the information presented not misleading, it is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1997.
In the opinion of the management, these unaudited statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of the Company at March 31, 1998, the
results of operations for the three and nine month periods then ended and its
cash flows for the nine month period then ended. The results of operations for
the periods presented are not necessarily indicative of those that may be
expected for the full year.
2. Inventories. Inventories are stated at the lower of cost (first-in,
first-out) or market. Inventories consist of:
March 31, June 30,
1998 1997
---- ----
(In thousands)
Raw materials $ 4,931 $ 6,454
Work-in-process 6,568 8,450
Finished goods 7,637 7,119
------- -------
$19,136 $22,023
======= =======
3. Reclassifications. Certain amounts in the prior year's financial statements
have been reclassified to conform to the current year's presentation.
4. Recent Accounting Pronouncements. Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings per Share," which requires the presentation of basic and diluted
earnings per share information. Basic earnings per share, which replaces primary
earnings per share, is computed by dividing net earnings by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share, which replaces fully diluted earnings per share, is computed by dividing
net earnings by the weighted average number of common shares outstanding and
common equivalent shares from dilutive stock options, using the treasury stock
method. All prior period earnings per share data presented have been restated to
conform with the provisions of this Statement.
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5. Contingencies. In January 1994, a securities class action complaint was filed
against the Company and three of its officers in the United States District
Court, Northern District of California. The action was filed on behalf of a
putative class of purchasers of the Company's stock during the period April 6,
1993 through November 10, 1993. The complaint seeks unspecified money damages
and alleges that the Company and certain of its officers violated federal
securities laws in connection with various public statements made during the
putative class period. The Court dismissed the first and second amended
complaints with leave to amend. The plaintiff filed a third amended corrected
complaint in August 1997. The Company filed a motion to dismiss this third
amended complaint which was denied in January 1998. Discovery is proceeding. 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, after
consultation with counsel, believes that the final outcome of such matters will
not have a material adverse effect on the Company's financial position or
results of operations.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Outlook and Risk Factors
The trend analyses and other non-historical information contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations are "forward looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbor provisions
of those Sections. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," and similar expressions identify such forward
looking statements. Such forward looking statements include, without limitation,
statements concerning the Company's future net sales, net earnings and other
operating results. The Company's actual results could differ materially from
those discussed in the forward looking statements due to a number of factors
including the factors listed below.
Fluctuations in Operating Results. The Company's quarterly and annual
operating results have fluctuated in the past and may continue to fluctuate in
the future due to several factors, including, without limitation, the volume and
timing of orders from customers and shipments to customers, the cancelation or
rescheduling of customer orders, changes in the product or customer mix of
sales, the gain or loss of significant customers, the Company's ability to
introduce new products on a timely and cost-effective basis, 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, market acceptance of
new or enhanced versions of the Company's and its competitors' products, the
long sales cycles associated with the Company's products, cyclical conditions in
the telecommunications and semiconductor industries, fluctuations in
manufacturing yields and other factors. For example, net sales for the third
quarter of fiscal 1998 were $24.2 million compared to $37.8 million for the
third quarter of fiscal 1997 and $34.3 million for the second quarter of fiscal
1998. 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 positive net earnings.
Accordingly, any significant decline in demand for the Company's products or
reduction in the Company's average selling prices, or any material delay in
customer orders would have a material adverse effect on the Company's business,
financial condition and results of operations. For example, when net sales
declined to $24.2 million for the third quarter of fiscal 1998 from $34.3
million for the second quarter of fiscal 1998, the Company's results before
income taxes fell to a loss of $12.0 million (including $9.2 million in
non-recurring charges) for the third quarter of fiscal 1998 from earnings of
$4.6 million for the second quarter of fiscal 1998 due, in part, to the factors
described above. Based on these losses, the Company expects to incur a loss for
fiscal 1998 as a whole. 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.
8
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Uncertainty of Timing of Product Sales; Limited Backlog. A substantial
portion of the Company's quarterly net sales is often dependent upon orders
received and shipped during that quarter, of which, a significant portion may be
received during the last month or even the last few days of that quarter. The
timing of the receipt and shipment of even one large order may have a
significant impact on the Company's net sales and results of operations for such
quarter. Furthermore, most orders in backlog can be rescheduled or canceled
without significant penalty. As a result, it is difficult to predict the
Company's quarterly results even during the final days of a quarter. However,
based on orders received through the first half of the fourth quarter of fiscal
1998 by the Company's Telecom Solutions division ("Telecom Solutions") and the
Company's Linfinity Microelectronics Inc. subsidiary ("Linfinity"), the Company
expects that net sales for the fourth quarter of fiscal 1998 will decline
significantly as compared to net sales for the fourth quarter of fiscal 1997.
Customer Concentration. A relatively small number of customers has
historically accounted for, and is expected to continue to account for, a
significant portion of the Company's net sales in any given fiscal period. In
fiscal 1997, AT&T Corporation (AT&T), a Telecom Solutions customer, accounted
for 16% of the Company's net sales. In fiscal 1995, SBC Communications Inc.,
another Telecom Solutions customer, accounted for 11% of the Company's net
sales. No other single customer accounted for 10% or more of net sales in fiscal
years 1997, 1996 or 1995. The timing and level of sales to the Company's largest
customers have fluctuated significantly in the past and are expected to continue
to fluctuate significantly from quarter-to-quarter and year-to-year in the
future. For example, the Company's sales to AT&T increased to $22.5 million in
fiscal 1997 from $2.6 million in fiscal 1996 but decreased to $5.8 million in
the first nine months of 1998 from $14.3 million in the first nine months of
fiscal 1997. There can be no assurance as to the timing or level of future sales
to the Company's customers. The loss of one or more of the Company's significant
customers or a significant reduction or delay in sales to any such customer,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
New Product Development. The market for the Company's products is
characterized by rapidly changing technologies, frequent new product
introductions, evolving industry standards and changes in end-user requirements.
Technological advancements could render the Company's products obsolete and
unmarketable. The Company's success will depend on its ability to respond to
changing technologies and customer requirements and on its ability to develop
and introduce new and enhanced products, in a cost-effective and timely basis.
Delays in new product development or delays in production startup could have a
material adverse effect on the Company's business, financial condition and
results of operations. Such delays have happened in the past, and there can be
no assurance that such delays will not recur or that the Company will
successfully respond to technological changes and develop and introduce new or
enhanced products, or that such new or enhanced products will achieve market
acceptance.
Product Performance and Reliability. The Company's customers establish
demanding specifications for product performance and reliability. The Company's
products are complex and often use state of the art components, processes and
techniques. Undetected errors and design flaws have occurred in the past and
there can be no assurance that new products or enhancements of existing products
will not contain undetected errors, design flaws or other failures due to the
complexities of such products. In addition to higher product service, warranty
and replacement
9
<PAGE>
costs, such product defects may seriously harm the Company's customer
relationships and industry reputation, further magnifying the adverse impact of
such defects. Any such product performance or reliability problems could have a
material adverse effect on the Company's business, operating results and
financial condition.
Competition. The Company believes that competition in the
telecommunications and semiconductor industries in general, and in the new and
existing markets served by the Company in particular, is intense and likely to
increase substantially. The Company's ability to compete successfully in the
future will depend on, among other things: the cost effectiveness, quality,
price, service and market acceptance of the Company's products; its response to
the entry of new competitors or the introduction of new products by the
Company's competitors; its ability to keep pace with changing technology and
customer requirements; the timely development or acquisition of new or enhanced
products; and the timing of new product introductions by the Company or its
competitors. In the telecommunications market, Telecom Solutions' primary
competitors are Datum Inc. and Hewlett-Packard Company. In addition, due, in
part, to the enactment of The Telecommunications Act of 1996, which permits
Regional Bell Operating Companies (RBOCs), which are among Telecom Solutions'
largest customers, to manufacture telecommunications equipment, RBOCs may
increasingly become significant competitors of Telecom Solutions. In the
semiconductor market, Linfinity competes with a number of large multinational
companies and smaller niche companies. Many of the Company's competitors or
potential competitors are more established than the Company and have greater
financial, manufacturing, technical and marketing resources. Furthermore, the
Company expects its competitors to continually improve their design and
manufacturing capabilities and to introduce new products and services with
enhanced performance characteristics and/or lower prices. The Company continues
to experience significant pricing pressures in all of its markets. In
particular, the continuing trend toward lower-priced personal computers has
intensified pricing pressures in certain related markets served by Linfinity.
This competitive environment could result in significant price reductions or the
loss of orders from current and/or potential customers which, in each case,
could materially adversely affect the Company's business, financial condition
and operating results.
Dependence on Foundries, Assembly and Test Services. Although Linfinity
uses its own semiconductor fabrication facility to manufacture bipolar wafers,
it utilizes IMP, Inc., an independent semiconductor foundry located in San Jose,
California, to supply most of its BiCMOS wafers. However, while reliance on an
outside foundry may reduce capital expenditures and fixed costs, it increases
certain risks significantly, including limited control of: delivery schedules;
manufacturing yields; production costs; and wafer supply, particularly during
periods of rapidly fluctuating demand. In the event that Linfinity's outside
foundry, as a result of financial or operating difficulties or otherwise, is
unable or unwilling to continue supplying wafers to Linfinity in the quantities
and with the yields required by Linfinity, there can be no assurance that
Linfinity will be able to identify and qualify additional manufacturing sources
in a timely manner, that any such additional manufacturing sources would be able
to produce wafers with acceptable manufacturing yields or that Linfinity would
not experience delays in product availability, quality problems, increased costs
or disruption in product development activities. Irrespective of cause, delayed
or reduced wafer supply or reduced manufacturing yields could result in delayed
shipments or canceled orders which, in either case, could materially and
adversely affect the Company's business, financial condition and operating
results.
10
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Linfinity also increasingly relies on independent contract manufacturers
in the Far East to assemble and test a significant percentage of its integrated
circuits and most of its electronic modules. Reliance on independent contractors
can lengthen manufacturing cycle times, especially if Linfinity is required, due
to contractors' capacity constraints, to compete against others for these
contractors' services. Any inability to obtain sufficient manufacturing capacity
through existing or alternative sources at favorable prices, if and as required,
could result in delays or reductions in product shipments which, in turn, could
have a material adverse effect on the Company's business, financial condition
and operating results.
Proprietary Technology. The Company's success will depend, in part, on its
ability to protect trade secrets, obtain or license patents and operate without
infringing on the rights of others. The Company relies on a combination of
trademark, copyright and patent registration, contractual restrictions and
internal security to establish and protect its proprietary rights. There can be
no assurance that such measures will provide meaningful protection for the
Company's trade secrets or other proprietary information. The Company has United
States and international patents and patent applications pending covering
certain technology used by its Telecom Solutions and Linfinity operations.
However, while the Company believes that its patents have value, the Company
relies primarily on innovation, technological expertise and marketing
competence. The telecommunications and semiconductor industries are both
characterized by the existence of a large number of patents and frequent
litigation based on allegations of patent infringement. While the Company
intends to continue its efforts to obtain patents whenever possible, there can
be no assurance that patents will be issued or that new or existing patents will
not be challenged, invalidated or circumvented or that the rights granted will
provide any commercial benefit to the Company. The Company is also subject to
the risk of adverse claims and litigation alleging infringement of the
intellectual property rights of others. Although the Company is not currently
party to any intellectual property litigation, from time to time it has received
claims asserting that the Company has infringed the proprietary rights of
others. There can be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such claims
will not result in costly litigation or require the Company to obtain a license
for such intellectual property rights regardless of the merit of such claims. No
assurance can be given that any necessary licenses will be available or that, if
available, such licenses can be obtained on commercially reasonable terms.
Environmental Matters. The Company's operations are subject to numerous
federal, state and local environmental regulations related to the storage, use,
discharge and disposal of toxic, volatile or otherwise hazardous chemicals used
in its manufacturing process. While the Company has not experienced any
materially adverse effects on its operations from environmental regulations,
there can be no assurance that changes in such regulations will not impose the
need for additional capital equipment or other requirements or restrict the
Company's ability to expand its operations. Failure to comply with such
regulations could result in suspension or cessation of the Company's operations,
or could subject the Company to significant liabilities.
Governmental Regulations. Federal and state regulatory agencies, including
the Federal Communications Commission and the various state public utility
commissions and public service commissions, regulate most of the Company's
domestic telecommunications customers. Although the Company is generally not
directly affected by such legislation, the effects of such regulation on the
Company's customers may, in turn, adversely impact the Company's business and
operating
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results. For instance, the sale of the Company's products may be
affected by the imposition upon certain of the Company's customers of common
carrier tariffs and the taxation of telecommunications services. These
regulations are continuously reviewed and subject to change by the various
governmental agencies. Changes in current or future laws or regulations, in the
United States or elsewhere, could materially and adversely affect the Company's
business.
Risks Associated with International Sales. The Company's export sales,
which were primarily to the Far East, Canada and Western Europe, accounted for
26%, 28% and 24% of the Company's net sales in fiscal years 1997, 1996 and 1995,
respectively. Export sales to the Far East accounted for 16%, 13% and 11% of net
sales in fiscal years 1997, 1996 and 1995, respectively. International sales
subject the Company to increased risks associated with political and economic
instability and changes in diplomatic and trade relationships. For example, the
Company believes that the recent economic instability being experienced by
certain Asian countries may continue to adversely affect export sales to the Far
East during the fourth quarter of fiscal 1998 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 causing
more widespread reductions in sales, delays in collection and supply
difficulties.
International sales may be subject to certain additional risks, including
but not limited to, foreign currency fluctuations, export restrictions, longer
payment cycles and unexpected changes in regulatory requirements or tariffs. To
date, sales and purchase obligations denominated in foreign currencies have not
been significant. However, if, in the future, a higher portion of such sales and
purchases are denominated in foreign currencies, gains and losses on the
conversion to U.S. dollars of foreign currency accounts receivable and accounts
payable arising from international operations may contribute to fluctuations in
the Company's business and operating results. The Company does not currently
engage in foreign currency hedging activities or derivative arrangements but may
do so in the future to the extent that such obligations become more significant.
Additionally, currency fluctuations could have an adverse effect on the demand
for the Company's products in foreign markets. There can be no assurance that
such factors will not materially and adversely affect the Company's operations
in the future or require the Company to modify significantly its current
business practices. In addition, the laws of certain foreign countries may not
protect the Company's proprietary technology to the same extent as do the laws
of the United States.
Inventory Risks. In the third quarter of fiscal 1998, the Company recorded
an $8.5 million inventory provision in view of lower sales prices and sales
volumes experienced by Linfinity. 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 operating results may be materially adversely affected if
significant inventories become obsolete or are otherwise not able to be sold at
favorable prices.
Uncertainties Regarding Sales to Distributors. The percentage of the
Company's sales sold through distributors, particularly at Linfinity, has
generally increased over the past several years, although such percentage
fluctuates from quarter to quarter. Sales to distributors, either contractually
or by industry custom, may be subject to certain rights of return and other
allowances for which the Company maintains reserves. However, there can be no
assurance that such reserves
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will be adequate. The Company's business, financial condition and operating
results may be materially adversely affected if actual allowances significantly
exceed amounts reserved therefor.
Changes to Effective Tax Rate. The Company's effective tax rate is
affected by the percentage of qualified Puerto Rico earnings compared to total
earnings as most of the Company's Puerto Rico earnings are taxed under Section
936 of the U.S. Internal Revenue Code which exempts qualified Puerto Rico
earnings from federal income taxes. This exemption is subject to certain
wage-based limitations and expires at the end of fiscal 2006. In addition, this
exemption will be further limited during fiscal years 2003 through 2006.
Fluctuations in Stock Price. The Company's stock price has been and may
continue to be subject to significant volatility. Many factors, including any
shortfall in sales or earnings from levels expected by securities analysts and
investors could have an immediate and significant adverse effect on the trading
price of the Company's common stock.
Year 2000 Compliance Risks. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, many
companies' software, computer systems and other equipment may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements. The
Company's net sales could be adversely affected if the Company's customers or
potential customers reallocate spending from the Company's products to their
efforts to resolve the Year 2000 issue. Additionally, unforeseen consequences of
the Year 2000 issue may require the Company to devote substantial resources to
making its own products Year 2000 compliant. Finally, the Company utilizes
third-party equipment and software that may not be Year 2000 compliant. Although
preliminary estimates indicate that the Year 2000 issue will not have a material
impact on the Company, there can be no assurance that the Year 2000 issue, due
to the above factors or other unforeseen consequences, will not have a material
adverse effect on the Company's business, financial condition and operating
results.
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Results of Operations
The Company operates in two different industry segments. Telecom Solutions, a
division of the Company, designs, manufactures and markets advanced network
synchronization systems and intelligent access systems for the
telecommunications industry. Linfinity Microelectronics Inc., a subsidiary of
the Company, designs, manufactures and markets linear and mixed signal
integrated circuits, and modules for use in desktop power system, portable power
system and data communications applications.
Net sales for the three and nine month periods ended March 31, 1998 and 1997
were as follows:
Three months ended Nine months ended
March 31, March 31,
1998 1997 Change 1998 1997 Change
---- ---- ------ ---- ---- ------
(Dollars in millions)
Net sales data:
Telecom Solutions $16.8 $23.5 (29) % $55.0 $65.1 (16)%
Linfinity
Microelectronics Inc. 7.4 14.2 (48) % 37.6 40.1 (6)%
----- ----- ----- ------
Total* $24.2 $37.8 (36) % $92.5 $105.2 (12)%
===== ===== ===== ======
* May not add due to rounding
Telecom Solutions' net sales decreased by 29% and 16% in the third quarter
and first three quarters of fiscal 1998, respectively, compared to the
corresponding periods of fiscal 1997. These decreases were primarily due to
lower domestic sales of synchronization products to AT&T Corporation and of
transmission products to SBC Communications Inc. which more than offset higher
international sales of synchronization products. Linfinity's net sales decreased
by 48% and 6% in the third quarter and first three quarters of fiscal 1998,
respectively, compared to the same periods of fiscal 1997. The decrease in the
third quarter of fiscal 1998 was principally due to a substantial decline in
unit sales volume whereas the decrease in the first three quarters of fiscal
1998 was principally due to lower sales prices which more than offset higher
unit sales volume. Although sales for future periods are difficult to predict,
the Company anticipates that net sales for the fourth quarter of fiscal 1998
will be significantly lower than net sales for the fourth quarter of fiscal
1997.
The Company's gross margin percentage, excluding a one-time inventory
provision of $8.5 million in the third quarter of fiscal 1998, decreased to 35%
in the third quarter of fiscal 1998 from 46% in the same quarter of fiscal 1997
and was unchanged at 45% in the first three quarters of fiscal 1998 compared to
the same period in fiscal 1997. The decrease in the third quarter of fiscal 1998
was primarily due to a significant drop in Linfinity's manufacturing volume and
sales prices. In addition, cost of sales for the third quarter and first three
quarters of fiscal 1998 included employee severance costs of $300,000 at
Linfinity. Future gross margins will largely depend on product mix,
manufacturing efficiencies and selling prices.
14
<PAGE>
Research and development expense was $4.9 million (or 20% of net sales)
and $14.5 million (or 16% of net sales) in the third quarter and first three
quarters of fiscal 1998, respectively, compared to $5.0 million (or 13% of net
sales) and $13.4 million (or 13% of net sales) in the corresponding periods of
fiscal 1997. The increase in the first three quarters of fiscal 1998 was
primarily due to Linfinity's increased investment in new product development and
existing product enhancement.
Selling, general and administrative expense decreased to $7.3 million (or
30% of net sales) and to $22.8 million (or 25% of net sales) in the third
quarter and first three quarters of fiscal 1998, respectively, compared to $8.1
million (or 21% of net sales) and $23.0 million (or 22% of net sales) in the
corresponding periods of fiscal 1997. The decreases resulted primarily from a
substantial reduction in incentive compensation at both operations which more
than offset Linfinity's higher expenses for expanded marketing, sales and
administrative support, bad debt and employee severance. Selling, general and
administrative expense for the third quarter and first three quarters of fiscal
1998 included employee severance costs of $400,000 at Linfinity.
Interest income was $.5 million and $1.4 million in the third quarter and
first three quarters of fiscal 1998, respectively, compared to $.5 million and
$1.4 million in the corresponding periods of fiscal 1997.
As a result of the loss incurred in the third quarter of fiscal 1998, the
Company recorded an income tax benefit of $4.5 million compared to an income tax
provision of $1.1 million in the corresponding period of fiscal 1997. On a
year-to-date basis, this resulted in an income tax benefit of $2.4 million in
fiscal 1998 compared to an income tax provision of $2.7 million in fiscal 1997.
The income tax provision (benefit) is substantially affected by the proportion
of earnings (loss) before income taxes that the Company derives from its Telecom
Solutions operation compared to its Linfinity operation. In particular, the
Company's effective tax rate is affected by the percentage of qualified Puerto
Rico earnings compared to total earnings as most of the Company's Puerto Rico
earnings are taxed under Section 936 of the U.S. Internal Revenue Code which
exempts qualified Puerto Rico earnings from federal income taxes. This exemption
is subject to certain wage-based limitations and expires at the end of fiscal
2006. In addition, this exemption will be further limited during fiscal years
2003 through 2006.
As a result of the factors discussed above, the net loss in the third
quarter of fiscal 1998 was $7.5 million, or $.47 per share (diluted), compared
to net earnings of $3.7 million, or $.23 per share (diluted), for the third
quarter of fiscal 1997. The net loss in the first three quarters of fiscal 1998
was $1.4 million, or $.09 per share (diluted), compared to net earnings of $9.2
million, or $.57 per share (diluted), in the same period of fiscal 1997.
Although results for future periods are difficult to predict, the Company
expects that net sales for the fourth quarter of fiscal 1998 will decline
significantly from net sales for the fourth quarter of fiscal 1997. There can be
no assurance that the Company will have positive net earnings for the fourth
quarter of fiscal 1998. As a result of losses incurred for the first three
quarters of fiscal 1998, the Company anticipates that it will incur a loss for
fiscal 1998 as a whole.
15
<PAGE>
Liquidity and Capital Resources
Working capital decreased to $55.4 million at March 31, 1998 from $58.3
million at June 30 1997, while the current ratio increased to 3.7 to 1.0 from
2.9 to 1.0. The increase in the current ratio resulted primarily from the
repayment of a $5.7 million note. During the same period, cash, cash equivalents
and short-term investments decreased to $32.0 million from $41.6 million
primarily due to the repayment of the $5.7 million note, $5.8 million used for
capital expenditures and $1.4 million used for the net repurchase of the
Company's common stock which more than offset $4.2 million in cash provided by
operating activities. In addition, at March 31, 1998, the Company had a $7.0
million unused bank line of credit available.
The Company believes that cash, cash equivalents, short-term investments,
funds generated from operations and funds available under its bank line of
credit will be sufficient to satisfy working capital requirements and capital
expenditures over the near term. At March 31, 1998, the Company had no material
outstanding commitments to purchase capital equipment.
Year 2000 Issue
The Company has recently commenced a Year 2000 compliance project to
assess the impact of Year 2000 issues on its business. The Company is looking at
(a) its internal information and operating systems, (b) possible effects on the
Company of third parties' failure to fix their own Year 2000 issues, and (c)
whether any material contingencies may exist related to products sold by the
Company. The Company expects that these assessments will enable it to develop
plans for any required changes, testing and implementation; to make estimates of
likely time involved, and costs of any required changes; and to determine
whether Year 2000 issues are likely to have a material impact on the Company's
business, financial condition and operating results. Based on preliminary
estimates, the Company does not believe that the Year 2000 issues will have a
material impact on the Company's business, financial condition and operating
results. See "Business Outlook and Risk Factors--Year 2000 Compliance Risks."
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
16
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule - Nine Months Ended March 31, 1998
27.2 Restated Financial Data Schedule - Three Months Ended
September 30, 1997
27.3 Restated Financial Data Schedule - Twelve Months Ended June
June 30, 1997
27.4 Restated Financial Data Schedule - Nine Months Ended
March 31, 1997
27.5 Restated Financial Data Schedule - Six Months Ended
December 31, 1996
27.6 Restated Financial Data Schedule - Twelve Months Ended
June 30, 1996
(b) Reports on Form 8-K
A current report on Form 8-K dated March 20, 1998 was filed with respect
to a press release issued by the Company commenting on the financial outlook for
its third quarter of fiscal 1998 ended March 31, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYMMETRICOM, INC.
(Registrant)
DATE: May 12, 1998 By:
/s/J. Scott Kamsler
---------------------
J. Scott Kamsler
Senior Vice President, Finance
and Chief Financial Officer
(for Registrant and as Principal
Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document
- ------- --------
27.1 Financial Data Schedule-Nine Months Ended March 31, 1998
27.2 Restated Financial Data Schedule-Three Months Ended September 30, 1997
27.3 Restated Financial Data Schedule-Twelve Months Ended June 30, 1997
27.4 Restated Financial Data Schedule-Nine Months Ended March 31, 1997
27.5 Restated Financial Data Schedule-Six Months Ended December 31, 1996
27.6 Restated Financial Data Schedule-Twelve Months Ended June 30, 1996
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
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<SECURITIES> 14,082
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<INCOME-TAX> (2,395)
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<EPS-DILUTED> (.09)
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<RECEIVABLES> 21,806
<ALLOWANCES> 457
<INVENTORY> 22,023
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<PP&E> 73,992
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<TOTAL-ASSETS> 129,305
<CURRENT-LIABILITIES> 30,464
<BONDS> 0
0
0
<COMMON> 25,608
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 129,305
<SALES> 144,355
<TOTAL-REVENUES> 144,355
<CGS> 78,411
<TOTAL-COSTS> 78,411
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<INCOME-TAX> 3,883
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<DISCONTINUED> 0
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<TOTAL-ASSETS> 113161
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0
0
<COMMON> 25146
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<TOTAL-COSTS> 57946
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<LOSS-PROVISION> 0
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<INCOME-TAX> 2666
<INCOME-CONTINUING> 9239
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<EPS-PRIMARY> .59
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