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 December 31, 1997
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 January 31, 1998
Common Stock 15,832,052
<PAGE>
SYMMETRICOM, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
December 31, 1997 and June 30, 1997 3
Consolidated Statements of Operations
Three and six months ended December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows
Six months ended December 31, 1997 and 1996 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 4. Submission of Matters to a Vote of Security Holders 17
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)
December 31, June 30,
1997 1997
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 24,155 $ 28,203
Short-term investments 8,566 13,384
-------- --------
Cash and investments 32,721 41,587
Accounts receivable, net 22,160 21,349
Inventories 26,292 22,023
Other current assets 5,366 3,830
-------- --------
Total current assets 86,539 88,789
Property, plant and equipment, net 39,525 39,617
Other assets, net 556 899
-------- --------
$126,620 $129,305
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,986 $ 8,189
Accrued liabilities 14,940 16,546
Current maturities of long-term obligations 177 5,729
-------- -------
Total current liabilities 23,103 30,464
Long-term obligations 8,484 8,583
Deferred income taxes 2,664 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-15,784 and 15,879 shares 24,258 25,608
Retained earnings 68,111 61,995
-------- --------
Total shareholders' equity 92,369 87,603
-------- --------
$126,620 $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 Six months ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $34,337 $35,447 $68,320 $67,470
Cost of sales 17,621 19,337 35,423 37,703
------- ------- ------- -------
Gross profit 16,716 16,110 32,897 29,767
Operating expenses:
Research and development 5,017 4,425 9,620 8,379
Selling,general and admin. 7,411 7,789 15,552 14,892
------- ------- ------- -------
Operating income 4,288 3,896 7,725 6,496
Interest income 461 454 981 912
Interest expense (182) (147) (474) (295)
------- ------- ------- -------
Earnings before income taxes 4,567 4,203 8,232 7,113
Income taxes 1,134 941 2,116 1,593
------- ------- ------- -------
Net earnings $3,433 $3,262 $6,116 $5,520
======= ======= ======= =======
Basic earnings per share $ .22 $ .21 $ .39 $ .35
======= ======= ======= =======
Weighted average common shares 15,852 15,679 15,878 15,648
======= ======= ======= =======
Diluted earnings per share $ .21 $ .20 $ .38 $ .34
======= ======= ======= =======
Weighted average common and
common equivalent shares 16,089 16,367 16,166 16,242
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
December 31,
1997 1996
---- ----
Cash flows from operating activities:
Cash received from customers $66,768 $63,624
Cash paid to suppliers and employees (62,602) (55,663)
Interest received 644 664
Interest paid (474) (295)
Income taxes paid (1,926) (662)
------- -------
Net cash provided by operating activities 2,410 7,668
------- -------
Cash flows from investing activities:
Purchases of short-term investments (8,682) (10,531)
Maturities of short-term investments 13,500 9,500
Purchases of plant and equipment, net (3,771) (5,221)
Other assets (4) 126
------- -------
Net cash provided by (used for) investing activities 1,043 (6,126)
------- -------
Cash flows from financing activities:
Repayment of long-term debt (5,651) (27)
Proceeds from issuance of common stock 1,101 1,084
Repurchase of common stock (2,951) -
------- -------
Net cash provided by (used for) financing activities (7,501) 1,057
------- -------
Net increase (decrease) in cash and cash equivalents (4,048) 2,599
Cash and cash equivalents at beginning of period 28,203 31,327
------- -------
Cash and cash equivalents at end of period $24,155 $33,926
======= =======
Reconciliation of net earnings to net cash provided
by operating activities:
Net earnings $ 6,116 $ 5,520
Adjustments:
Depreciation and amortization 4,170 3,118
Net deferred income taxes (1,004) 354
Changes in assets and liabilities:
Accounts receivable (811) (3,936)
Inventories (4,269) (471)
Accounts payable (203) 943
Accrued liabilities (1,606) 2,372
Tax benefit from employee stock plan 500 300
Other (483) (532)
------- -------
Net cash provided by operating activities $ 2,410 $ 7,668
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
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 December 31, 1997, the
results of operations for the three and six month periods then ended and its
cash flows for the six 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:
December 31, June 30,
1997 1997
---- ----
(In thousands)
Raw materials $ 5,510 $ 6,454
Work-in-process 11,456 8,450
Finished goods 9,326 7,119
------- -------
$26,292 $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.
6
<PAGE>
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 on January 20, 1998. 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 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. 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, 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. 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 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. In addition, the Company's future results depend in large
part on growth in the markets for the Company's products. The growth in each of
these markets may depend on, among other things, changes in general economic
conditions, or conditions which relate specifically to the markets in which the
Company competes, changes in regulatory conditions, legislation, export rules or
conditions, interest rates and fluctuations in the business cycle for any
particular market segment.
Uncertainty of Timing of Product Sales; Limited Backlog. A substantial
portion of the Company's quarterly net sales is often dependent upon orders
received and shipped during that quarter, of which, a significant portion may be
received during the last month or even the last 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 accurately 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 third quarter of
fiscal 1998
8
<PAGE>
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 third quarter of fiscal 1998 will decline
significantly as compared to net sales for the second quarter of fiscal 1998.
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 $4.8 million in
the first half of 1998 from $8.7 million in the first half 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 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
9
<PAGE>
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 these markets. 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. Linfinity is utilizing
IMP, Inc., an independent semiconductor foundry located in San Jose, California,
to supply most of its BiCMOS wafer requirements. Linfinity uses its own
semiconductor fabrication facility to manufacture bipolar wafers. Reliance on
outside foundries, although it may reduce fixed costs and capital expenditures,
increases certain significant risks including limited control of: delivery
schedules; manufacturing yields; production costs; and wafer supply,
particularly during periods of rapidly fluctuating demand from Linfinity and the
foundry's other customers. 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.
Linfinity also 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.
10
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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 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.
11
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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 adversely affect export sales to the Far East during
the third quarter of fiscal 1998 and subsequent periods. In addition to the
potential 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 recent periods, the Company's, and, in particular,
Linfinity's, inventory levels have increased significantly. Although the Company
has provisions for inventory that has 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 has generally increased over the past
several years, although such percentage fluctuates from quarter to quarter.
These sales are primarily attributable to Linfinity. 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 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.
12
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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, although preliminary
estimates indicate that such expenditures will not be material, 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. 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.
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.
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Net sales for the three and six month periods ended December 31, 1997
and 1996 were as follows:
Three Months Six Months
Ended Ended
December 31, December 31,
1997 1996 Change 1997 1996 Change
(In millions) ---- ---- ------ ---- ---- ------
Net sales data:
Telecom Solutions $19.7 $21.6 (8)% $38.2 $41.6 (8)%
Linfinity
Microelectronics Inc. 14.6 13.9 5 % 30.1 25.9 16 %
----- ----- ----- -----
Total* $34.3 $35.4 (3)% $68.3 $67.5 1 %
===== ===== ===== =====
* May not add due to rounding
Telecom Solutions net sales decreased by 8% in both the second quarter and
first half of fiscal 1998 compared to the corresponding periods of fiscal 1997.
These decreases were principally due to lower sales of transmission and domestic
synchronization products which offset higher sales of international
synchronization products. Linfinity net sales increased by 5% and 16% in the
second quarter and first half of fiscal 1998, respectively, compared to the
corresponding periods of fiscal 1997, primarily due to higher unit volume which
more than offset the impact of lower sales prices. Although sales for future
periods are difficult to accurately predict, based on orders received through
the first half of the third quarter of fiscal 1998, the Company expects that net
sales for the third quarter of fiscal 1998 will decline significantly as
compared to net sales for the second quarter of fiscal 1998.
The Company's gross margin percentage increased to 49% and 48% in the
second quarter and first half of fiscal 1998, respectively, compared to 45% and
44% in the corresponding periods of fiscal 1997, principally due to a shift to
higher profit margin products and increased manufacturing efficiencies at both
operations. Future gross margins will largely depend on product mix,
manufacturing efficiencies and selling prices.
Research and development expense was $5.0 million (or 15% of net sales) and
$9.6 million (or 14% of net sales) in the second quarter and first half of
fiscal 1998, respectively, compared to $4.4 million (or 12% of net sales) and
$8.4 million (or 12% of net sales) in the corresponding periods of fiscal 1997.
These increases reflect the Company's continuing investment in new product
development and enhancement of existing products.
Selling, general and administrative expense decreased to $7.4 million (or
22% of net sales) in the second quarter of fiscal 1998 and increased to $15.6
million (or 23% of net sales) in the first half of fiscal 1998, compared to $7.8
million (or 22% of net sales) and $14.9 million (or 22% of net sales) in the
corresponding periods of fiscal 1997. The decrease in the second quarter of
fiscal 1998 resulted principally from the reversal of earnings-based incentive
compensation accrued in the first quarter of fiscal 1998 due to a reduction in
anticipated earnings for fiscal 1998. The increase in the first half
14
<PAGE>
of fiscal 1998 was primarily due to costs related to Linfinity's higher sales
and expanded administrative support, partially offset by lower earnings-based
compensation at both operations.
Interest income was $.5 million and $1.0 million in the second quarter and
first half of fiscal 1998, respectively, compared to $.5 million and $.9 million
in the corresponding periods of fiscal 1997.
The Company's effective tax rate was 25% and 26% in the second quarter and
first half of fiscal 1998, respectively, compared to 22% in both the
corresponding periods of fiscal 1997. The effective tax rate for fiscal 1998 is
expected to be lower than the federal tax rate primarily due to the benefit of
lower income tax rates on Puerto Rico earnings. The Company's effective tax rate
is affected by the percentage of qualified Puerto Rico earnings compared to
total earnings as most of the Company's Puerto Rico earnings are taxed under
Section 936 of the U.S. Internal Revenue Code which exempts qualified Puerto
Rico earnings from federal income taxes. This exemption is subject to 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, net earnings in the second
quarter of fiscal 1998 were $3.4 million compared to $3.3 million in the same
period of fiscal 1997; diluted earnings per share were $.21 and $.20,
respectively. Net earnings in the first half of fiscal 1998 increased to $6.1
million from $5.5 million in the first half of fiscal 1997; diluted earnings per
share were $.38 and $.34, respectively. Although results for future periods are
difficult to accurately predict, based primarily on the Company's expectation of
significantly lower net sales for the third quarter of fiscal 1998, net earnings
for such period are expected to be significantly lower than net earnings for the
second quarter of fiscal 1998. In addition, there can be no assurance that the
Company will have positive net earnings for such period.
Liquidity and Capital Resources
Working capital increased to $63.4 million at December 31, 1997 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 $32.7 million from $41.6 million
primarily due to the early repayment of the note, $3.0 million used for the
repurchase of the Company's common stock and $3.8 million used for capital
expenditures which more than offset $2.4 million in cash provided by operating
activities. At December 31, 1997, the Company had $7.0 million of unused credit
available under its bank line of credit.
The Company believes that cash, cash equivalents, short-term investments,
funds generated from operations and funds available under its bank line of
credit will be sufficient to satisfy working capital requirements and capital
expenditures over the near term. At December 31, 1997, the Company had no
material outstanding commitments to purchase capital equipment.
15
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on October 29,
1997.
(b) All director candidates, William D. Rasdal, Richard W. Oliver, Roger
A. Strauch and Robert M. Wolfe were duly elected.
(c)(i) The votes for the director candidates were as follows:
Nominee Votes For Votes Withheld
------- --------- --------------
William D. Rasdal 14,888,848 216,244
Richard W. Oliver 14,804,563 300,529
Roger A. Strauch 14,890,288 214,804
Robert M. Wolfe 14,889,663 215,429
There were no abstentions or broker non-votes with respect to election
of directors.
(c)(ii)The shareholders ratified the appointment of Deloitte & Touche
LLP as the Company's independent auditors for the current year. The
votes were as follows:
Broker
For Against Abstain non-votes
--- ------- ------- ---------
15,050,111 34,191 20,790 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
December 31, 1997.
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: February 11, 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
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
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0
0
<COMMON> 24,258
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