<PAGE>
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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 SEPTEMBER 30, 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 October 16, 1998
----- ----------------------------------
Common Stock 15,731,619
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SYMMETRICOM, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements:
Consolidated Balance Sheets --
September 30, 1998 and June 30, 1998 3
Consolidated Statements of Operations --
Three months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows --
Three months ended September 30, 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 Risk 19
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
SYMMETRICOM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, June 30,
1998 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,732 $ 31,369
Short-term investments 16,321 2,973
-------- --------
Cash and investments 38,053 34,342
Accounts receivable, net 15,811 16,347
Inventories 15,196 16,798
Other current assets 8,976 8,257
-------- --------
Total current assets 78,036 75,744
Property, plant and equipment, net 37,113 38,334
Other assets, net 1,123 815
-------- --------
$116,272 $114,893
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,460 $ 5,585
Accrued liabilities 15,127 14,388
Current maturities of long-term obligations 532 215
-------- --------
Total current liabilities 21,119 20,188
Long-term obligations 8,596 8,368
Deferred income taxes 2,042 1,980
Shareholders' equity:
Preferred stock, no par value:
Authorized--500 shares
Issued--none -- --
Common stock, no par value:
Authorized--32,000 shares
Issued and outstanding--15,731 and 15,772 shares 23,713 23,892
Retained earnings 60,802 60,465
-------- --------
Total shareholders' equity 84,515 84,357
-------- --------
$116,272 $114,893
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three months ended
September 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $29,198 $33,983
Cost of sales 17,305 17,802
------- -------
Gross profit 11,893 16,181
Operating expenses:
Research and development 4,602 4,603
Selling, general and administrative 7,165 8,141
------- -------
Operating income 126 3,437
Interest income 477 520
Interest expense (180) (292)
------- -------
Earnings before income taxes 423 3,665
Income taxes 86 982
------- -------
Net earnings $ 337 $ 2,683
======= =======
Basic earnings per share $.02 $.17
======= =======
Weighted average shares outstanding--basic 15,801 15,903
======= =======
Diluted earnings per share $ .02 $ .17
======= =======
Weighted average shares outstanding--diluted 15,827 16,242
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
September 30,
----------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 29,061 $ 34,232
Cash paid to suppliers and employees (25,774) (32,522)
Interest received 510 319
Interest paid (180) (292)
Income taxes refund (paid) 866 (533)
-------- --------
Net cash provided by operating activities 4,483 1,204
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (15,348) (6,619)
Maturities of short-term investments 2,000 12,500
Purchases of plant and equipment, net (791) (1,549)
Other (347) (4)
-------- --------
Net cash provided by (used for) investing activities (14,486) 4,328
-------- --------
Cash flows from financing activities:
Repayment of long-term obligations (50) (5,620)
Proceeds from issuance of long-term obligations 595 --
Proceeds from issuance of common stock 402 777
Repurchase of common stock (581) (824)
-------- --------
Net cash provided by (used for) financing activities 366 (5,667)
-------- --------
Net decrease in cash and cash equivalents (9,637) (135)
Cash and cash equivalents at beginning of period 31,369 28,203
-------- --------
Cash and cash equivalents at end of period $ 21,732 $ 28,068
======== ========
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 337 $ 2,683
Depreciation and amortization 2,045 2,084
Net deferred income taxes (13) 131
Changes in assets and liabilities:
Accounts receivable, net 536 956
Inventories 1,602 (761)
Accounts payable (125) (1,712)
Accrued liabilities 739 (1,734)
Other (638) (443)
-------- --------
Net cash provided by operating activities $ 4,483 $ 1,204
======== ========
</TABLE>
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, 1998.
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 September 30, 1998, the
results of operations for the three month period then ended and its cash flows
for the three month period then ended. The results of operations for the period
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:
September 30, June 30,
1998 1998
---- ----
(In thousands)
Raw materials $ 2,813 $ 3,875
Work-in-process 6,171 6,215
Finished goods 6,212 6,708
------- -------
$15,196 $16,798
======= =======
3. 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.
Effective September 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income", which
requires the Company to report and display certain information related to
comprehensive income. Comprehensive income includes net income and other
comprehensive income. Other comprehensive income is classified separately into
foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities. At
September 30, 1998 and 1997, and for the three months then ended, other
comprehensive income did not have any material impact on the Company's financial
position and results of operations.
6
<PAGE>
In June 1997, Statement of Financial Accounting Standards No. 131 (SFAS
131), "Disclosures about Segments of an Enterprise and Related Information," was
issued, which requires the Company to report and display certain information
related to operating segments. The statement is effective for fiscal years
beginning after December 15, 1997. Accordingly, the Company will adopt SFAS 131
starting with its fiscal year ending June 30, 1999. It is not expected that the
adoption of this statement will have any material impact on the Company's
financial position and results of operations.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities," was
issued, which defines derivatives, requires all derivatives be carried at fair
value, and provides for hedging accounting when certain conditions are met. This
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Although the Company has not fully assessed the implications of
this new statement, the Company does not believe adoption of this statement will
have a material impact on the Company's financial statements.
4. Contingencies. In January 1994, a securities class action complaint was
filed against the Company and certain of its present or former officers or
directors in the United States District Court, Northern District of California.
The action was filed on behalf of a putative class of purchasers of the
Company's stock during the period April 6, 1993 through November 10, 1993. The
complaint seeks unspecified money damages and alleges that the Company and
certain of its present or former officers or directors violated federal
securities laws in connection with various public statements made during the
putative class period. The Court dismissed the first and second amended
complaints with leave to amend. The plaintiff filed a third amended corrected
complaint in August 1997. The Company filed a motion to dismiss this third
amended complaint, which was denied in January 1998. Discovery is proceeding.
The 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 cancellation
or rescheduling of customer orders, changes in the product or customer mix of
sales, the gain or loss of significant customers, the Company's ability to
introduce new products on a timely and cost-effective basis, level and value of
the Company's inventories, the timing of new product introductions by the
Company and its competitors, customer delays in qualification of new products,
increased competition and competitive pricing pressures, fluctuations,
especially declines, in the average selling prices received for its products,
market acceptance of new or enhanced versions of the Company's and its
competitors' products, the long sales 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 first quarter of fiscal 1999 were $29.2 million,
compared to $34.0 million for the first quarter of fiscal 1998, due in part to
the factors described above. A significant portion of the Company's operating
and manufacturing expenses are relatively fixed in nature and planned
expenditures are based in part on anticipated orders. If the Company is unable
to adjust spending in a timely manner to compensate for any unexpected future
sales shortfall, the Company's business, financial condition and results of
operations could be materially and adversely affected. The Company's operations
entail a high level of fixed costs and require an adequate volume of production
and sales to achieve and maintain reasonable gross profit margins and net
earnings. Accordingly, any significant decline in demand for the Company's
products or reduction in the Company's average selling prices, or any material
delay in customer orders would have a material adverse effect on the Company's
business, financial condition and results of operations. For example, when net
sales declined to $29.2 million for the first quarter of fiscal 1999 from $34.0
million for the first quarter of fiscal 1998, the Company's earnings before
income taxes fell to $.4 million for the first quarter of fiscal 1999 from
earnings before income taxes of $3.7 million for the first quarter of fiscal
1998, due, in part, to the factors described above. 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
<PAGE>
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
semiconductor industry has recently experienced a change towards significantly
shorter lead times resulting in an increased dependence by Linfinity upon orders
received and shipped during the same quarter. The timing of the receipt and
shipment of even one large order may have a significant impact on the Company's
net sales and results of operations for such quarter. Furthermore, most orders
in backlog can be rescheduled or canceled without significant penalty. As a
result, it is difficult to predict the Company's quarterly results even during
the final days of a quarter.
Customer Concentration. A relatively small number of customers has
historically accounted for, and is expected to continue to account for, a
significant portion of the Company's net sales in any given fiscal period. In
fiscal 1997, AT&T Corporation (AT&T), a Telecom Solutions customer, accounted
for 16% of the Company's total net sales. No customer accounted for 10% or more
of net sales in fiscal years 1998 and 1996. 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 $8.1 million in fiscal 1998. 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 manner.
Delays in new product development or delays in production startup could have a
material adverse effect on the Company's business, financial condition and
results of operations. Such delays have happened in the past, and there can be
no assurance that such delays will not recur, or that the Company will
successfully respond to technological changes and develop and introduce new or
enhanced products, or that such new or enhanced products will achieve market
acceptance.
Product Performance and Reliability. The Company's customers establish
demanding specifications for product performance and reliability. The Company's
products are complex and often use state of the art components, processes and
techniques. Undetected errors and design flaws have occurred in the past and
there can be no assurance that new products or enhancements of existing products
will not contain undetected errors, design flaws or other failures due to the
complexities of such products. In addition to higher product service, warranty
and replacement costs, such product defects may seriously harm the Company's
customer relationships and industry reputation, further magnifying the adverse
impact of such defects. Any such product performance or reliability problems
could have a material adverse effect on the Company's business, financial
condition and results of operations.
9
<PAGE>
Competition; Pricing Pressure. 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. In addition, as part of its license and
supply agreement with Linfinity, IMP, Inc. has the right to manufacture, market,
and sell the small computer system interface (SCSI) terminators line of products
through its own sales force in direct competition with Linfinity. 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 and has experienced price erosion in several product lines,
including low dropout regulators and pulse width modulators. In addition, the
continuing trend toward lower-priced personal computers has intensified pricing
pressures in certain related markets served by Linfinity. Linfinity's response
has been to attempt to increase the volume of units shipped and to attempt to
introduce new products with higher average selling prices, but there can be no
assurance that the Company will be able to fully offset the impact of this
severe price erosion. This competitive environment could result in significant
price reductions or the loss of orders from current and/or potential customers,
which, in each case, could materially and adversely affect the Company's
business, financial condition and results of operations.
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 bipolar complementary metal oxide
semiconductor (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 results of
operations.
10
<PAGE>
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 results of operations.
Proprietary Technology. The Company's success will depend, in part, on its
ability to protect trade secrets, obtain or license patents and operate without
infringing on the rights of others. The Company relies on a combination of
trademark, copyright and patent registration, contractual restrictions and
internal security to establish and protect its proprietary rights. There can be
no assurance that such measures will provide meaningful protection for the
Company's trade secrets or other proprietary information. The Company has
United States and international patents and patent applications pending that
cover certain technology used by its 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
to maintain its competitive position. 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. Although the Company
periodically reviews its facilities and internal operations for compliance with
applicable environmental regulations, such reviews are necessarily limited in
scope and frequency and, therefore, there can be no assurance that such reviews
have revealed or will reveal all potential instances of noncompliance. The
liabilities arising from any noncompliance with such environmental regulations
could materially and adversely affect the Company's business, financial
condition and results of operations.
11
<PAGE>
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,
financial condition and results of operations. For instance, the sale of the
Company's products may be affected by the imposition upon certain of the
Company's customers of common carrier tariffs and the taxation of
telecommunications services. These regulations are continuously reviewed and
subject to change by the various governmental agencies. Changes in current or
future laws or regulations, in the United States or elsewhere, could materially
and adversely affect the Company's business, financial condition and results of
operations.
Risks Associated with International Sales. The Company's export sales, which
were primarily to the Far East, Western Europe, Canada and Latin America
accounted for 27%, 26% and 28% of the Company's net sales in fiscal years 1998,
1997 and 1996, respectively. Export sales to the Far East accounted for 12%,
16% and 13% of the Company's net sales in fiscal years 1998, 1997 and 1996,
respectively. International sales subject the Company to increased risks
associated with political and economic instability and changes in diplomatic
and trade relationships. For example, the Company believes that the economic
instability that continues to be experienced by certain Asian countries may
adversely affect export sales to the Far East during the second quarter of
fiscal 1999 and beyond. In addition to the loss of direct sales to the region,
the economic instability in Asia could have a material adverse effect on the
Company's business, financial condition and results of operations indirectly
if, for example, the current situation in Asia adversely affects the Company's
distributors, customers and suppliers in the Asian region or elsewhere in the
world, causing more widespread reductions in sales, delays in collection and
supply difficulties.
International sales may be subject to certain additional risks, including but
not limited to, foreign currency fluctuations, export restrictions, longer
payment cycles and unexpected changes in regulatory requirements or tariffs. To
date, sales and purchase obligations denominated in foreign currencies have not
been significant. However, if, in the future, a higher portion of such sales
and purchases are denominated in foreign currencies, gains and losses on the
conversion to U.S. dollars of foreign currency accounts receivable and accounts
payable arising from international operations may contribute to fluctuations in
the Company's business and operating results. The Company does not currently
engage in foreign currency hedging activities or derivative arrangements, but
may do so in the future to the extent that such obligations become more
significant. Additionally, currency fluctuations could have an adverse effect
on the demand for the Company's products in foreign markets. There can be no
assurance that such factors will not materially and adversely affect the
Company's business, financial condition and results of operations in the future
or require the Company to modify significantly its current business practices.
In addition, the laws of certain foreign countries may not protect the Company's
proprietary technology to the same extent as do the laws of the United States.
Inventory Risks. Although the Company believes that it currently has
appropriate provisions for inventory that has declined in value, become obsolete
or is in excess of anticipated demand, there can be no assurance that such
provisions will be adequate. The Company's business, financial condition and
results of operations may be materially and adversely affected, if significant
inventories become obsolete or are otherwise not able to be sold at favorable
prices.
12
<PAGE>
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 will be adequate. The Company's business,
financial condition and results of operations may be materially and 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 proportion of earnings (loss) before income taxes that the Company
derives from its Telecom Solutions operation, compared to its Linfinity
operation. The effective tax rate in fiscal 1998 was magnified by the
significant loss at Linfinity, which was subject to higher tax rates from its
United States jurisdictions, offset by the earnings at Telecom Solutions. Most
of Telecom Solutions' Puerto Rico earnings are taxed under Section 936 of the
U.S. Internal Revenue Code, which exempts qualified Puerto Rico earnings from
federal income taxes. This results in an overall lower effective tax rate for
Telecom Solutions. This exemption is subject to certain wage-based limitations
and expires at the end of fiscal 2006. In addition, this exemption will be
subject to further limitations during fiscal years 2003 through 2006.
Fluctuations in Stock Price. The Company's stock price has been and may
continue to be subject to significant volatility. Many factors, including any
shortfall in sales or earnings from levels expected by securities analysts and
investors, could have an immediate and significant adverse effect on the trading
price of the Company's common stock.
Year 2000 Compliance Risks. The Company is aware that many existing
information technology (IT) systems, such as computer systems and software
products, as well as non-IT systems that include embedded technology, were not
designed to correctly process dates after December 31, 1999. The Company is
currently assessing the impact of such "Year 2000" issues on its internal IT and
non-IT systems, as well as on its customers, suppliers and service providers.
The Company has formed a Year 2000 Project Team to identify and address Year
2000 compliance issues, including those related to the Company's significant
non-IT systems used in the Company's buildings, plant, equipment and other
infrastructure. The Year 2000 Project Team is continuing its testing and
evaluation of the Company's products and the Company's IT systems and has
recently begun the process of compiling an inventory of all material Year 2000
issues related to the Company's non-IT systems. The Company has not identified
any significant areas of non-compliance with respect to its products or IT
systems and expects that the assessment and plans for remedial action for all of
its products, IT systems and non-IT systems will be completed by the end of
fiscal 1999. The Company has also initiated discussions with its significant
suppliers and service providers regarding their plans to investigate and
remediate their Year 2000 issues. Although the Company anticipates cooperation
in these efforts from most of the Company's significant suppliers and service
providers, the Company is also dependent on certain utility companies,
telecommunication service companies and other service providers that are outside
the Company's control. Therefore, it may be difficult for the Company to obtain
assurances of Year 2000 readiness from such third parties. Although the Company
believes that its Year 2000 Project Team will identify all of the Company's
material Year 2000 issues in the course of its assessments, given the
pervasiveness of Year 2000 issues and the complex interrelationships among Year
2000 issues both internal and external to the Company, there can be no assurance
that the Company will be able to identify and accurately evaluate all such
issues.
13
<PAGE>
The Company estimates that the expenses it has incurred to date to address
Year 2000 issues have not been material and, although it has not completed its
full assessment of its Year 2000 readiness, the Company does not expect to incur
material expenses in connection with any required remediation efforts.
As the process of compiling an inventory of non-IT systems proceeds and as the
other efforts of the Year 2000 Project Team continue, the Company may identify
situations that present material Year 2000 risks and/or that will require
substantial time and material expense to address. In addition, if any
customers, suppliers or service providers fail to appropriately address their
Year 2000 issues, such failure could have a material adverse effect on the
Company's business, financial condition and results of operations. For example,
because a significant percentage of the purchase orders received from the
Company's customers are computer generated and electronically transmitted, a
failure of one or more of the computer systems of the Company's customers could
have a significant adverse effect on the level and timing of orders from such
customers. Similarly, if Year 2000 problems experienced by any of the Company's
significant suppliers or service providers cause or contribute to delays or
interruptions in the delivery of products or services to the Company, such
delays or interruptions could have a material adverse effect on the Company's
business, financial condition and results of operations. Finally, disruption in
the economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. Although the Year 2000 Project Team has not yet
determined the most likely worst-case Year 2000 scenarios or quantified the
likely impact of such scenarios, it is clear that the occurrence of one or more
of the risks described above could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's Year 2000 Project Team's activities will include the development
of contingency plans in the event the Company has not completed all of its
remediation programs in a timely manner. In addition, the Year 2000 Project
Team will develop contingency plans in the event that any third parties who
provide goods or services essential to the Company's business, fail to
appropriately address their Year 2000 issues. The Year 2000 Project Team
expects to conclude the development of these contingency plans by the end of
fiscal 1999. Even if these plans are completed on time and put in place, there
can be no assurance that such plans will be sufficient to address any third
party failures or that unresolved or undetected internal and external Year 2000
issues will not have a material adverse effect on the Company's business,
financial condition and results of operations.
14
<PAGE>
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. (Linfinity), a
subsidiary of the Company, designs, manufactures and markets linear and mixed
signal integrated circuits, as well as systems-engineered modules primarily for
use in power management and communication applications in commercial,
industrial, and defense and space markets.
Net sales for the three months ended September 30, 1998 and 1997 were as
follows:
1998 1997
----- -----
(In millions)
Net sales:
Telecom Solutions $18.6 $18.5
Linfinity Microelectronics Inc. 10.6 15.5
----- -----
Total $29.2 $34.0
===== =====
Net sales decreased by $4.8 million (14%) to $29.2 million in the first
quarter of fiscal 1999 from $34.0 million in the first quarter of fiscal 1998.
Telecom Solutions net sales increased slightly by $0.1 million (1%) to $18.6
million in the first quarter of fiscal 1999 from $18.5 million in the
corresponding period of fiscal 1998. This increase reflects relatively flat
sales in synchronization products and lower sales by Telecom Solutions' Navstar
subsidiary into the digitally enhanced cordless telephone (DECT) market, offset
by slightly higher sales of transmission products. Linfinity's net sales
decreased by $4.9 million (32%) to $10.6 million in the first quarter of fiscal
1999 from $15.5 million in the first quarter of fiscal 1998, due to increased
price pressure from component manufacturers supplying the personal computer
market and a shift in sales to lower-priced products.
Gross profit percentages for the three months ended September 30, 1998 and
1997 were as follows:
1998 1997
---- ----
Gross profit percentages:
Telecom Solutions 48% 52%
Linfinity Microelectronics Inc. 28% 43%
The Company's gross profit, as a percentage of net sales, decreased to 41%
in the first quarter of fiscal 1999, compared to 48% in the first quarter of
fiscal 1998, primarily due to lower production volumes and lower average selling
prices. Telecom Solutions' gross profit decreased to 48% in the first quarter
of fiscal 1999, compared to 52% in the first quarter of fiscal 1998, due to less
favorable manufacturing efficiencies and lower production volumes. Linfinity's
gross profit decreased to 28% in the first quarter of fiscal 1999, compared to
43% in the first quarter of fiscal 1998, primarily due to increased price
pressure from component manufacturers supplying the personal computer market, a
shift in sales to lower-priced products and lower production volumes.
15
<PAGE>
Research and development expense for the three months ended September 30,
1998 and 1997 was as follows:
1998 1997
----- -----
(In millions)
Research and development expense:
Telecom Solutions $ 3.3 $ 3.2
Linfinity Microelectronics Inc. 1.3 1.4
----- -----
Total $ 4.6 $ 4.6
===== =====
Research and development expense was $4.6 million (or 16% of net sales) in
the first quarter of fiscal 1999, compared to $4.6 million (or 14% of net sales)
in the first quarter of fiscal 1998. Telecom Solutions' research and
development expense increased slightly by $0.1 million to $3.3 million (or 18%
of net sales) in the first quarter of fiscal 1999, compared to $3.2 million (or
17% of net sales) in the first quarter of fiscal 1998, primarily due to
continued high investments in new products and core technology, with a slight
increase due to higher prototyping expense. Linfinity's research and
development expense decreased slightly by $0.1 million to $1.3 million (or 12%
of net sales) in the first quarter of fiscal 1999, compared to $1.4 million (or
9% of net sales) in the first quarter of fiscal 1998, as Linfinity continues to
focus on new product development.
Selling, general and administrative expense for the three months ended
September 30, 1998 and 1997 was as follows:
1998 1997
----- -----
(In millions)
Selling, general and administrative expense:
Telecom Solutions $ 5.1 $ 4.7
Linfinity Microelectronics Inc. 2.1 3.5
----- -----
Total* $ 7.2 $ 8.1
===== =====
*May not add due to rounding.
Selling, general and administrative expense decreased to $7.2 million (or
25% of net sales) in the first quarter of fiscal 1999 from $8.1 million (or 24%
of net sales) in the first quarter of fiscal 1998. Telecom Solutions' selling,
general and administrative expense increased $0.4 million to $5.1 million (or
27% of net sales) in the first quarter of fiscal 1999, compared to $4.7 million
(or 25% of net sales) in the first quarter of fiscal 1998, primarily due to
increased sales and marketing expense related to higher sales-based incentive
compensation and expanded sales support and product promotion. Linfinity's
selling, general and administrative expense decreased $1.4 million to $2.1
million (or 20% of net sales) in the first quarter of fiscal 1999, compared to
$3.5 million (or 22% of net sales) in the first quarter of fiscal 1998,
primarily due to lower selling expenses associated with lower sales and lower
earnings-based incentive compensation.
Interest income was flat at $0.5 million for the first quarter of fiscal
1999 and 1998.
Interest expense decreased $0.1 million to $0.2 million in the first
quarter of fiscal 1999, compared to $0.3 million in the first quarter of fiscal
1998, primarily due to Linfinity's note payable, which was repaid in full in
September 1997.
16
<PAGE>
The Company's effective tax rate was 20% in the first quarter of fiscal
1999, compared to 27% in the first quarter of fiscal 1998. The fiscal 1999
effective tax rate is primarily affected by the proportion of earnings (loss)
before income taxes between Telecom Solutions and Linfinity. The effective tax
rate for fiscal 1999 is also expected to be lower than the federal tax rate,
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 earnings from federal income taxes. This exemption is
subject to wage-based limitations and expires at the end of fiscal 2006. In
addition, this exemption will be further limited, based on certain prior year
Puerto Rico earnings during fiscal years 2003 through 2006.
As a result of the factors discussed above, net income in the first quarter
of fiscal 1999 decreased to $0.3 million or $.02 per share (diluted), compared
to $2.7 million or $.17 per share (diluted) in the first quarter of fiscal 1998.
Liquidity and Capital Resources
Working capital increased to $56.9 million at September 30, 1998 from $55.6
million at June 30, 1998, while the current ratio slightly decreased to 3.7 to
1.0 from 3.8 to 1.0. The decrease in the current ratio resulted primarily from
the reduction in inventories. During the same period, cash, cash equivalents
and short-term investments increased to $38.1 million from $34.3 million,
primarily due to $4.5 million in cash provided from operating activities, $0.6
million in proceeds from issuance of long-term obligations and $0.4 million in
proceeds from issuance of common stock, offset by $0.8 million used for capital
expenditures and $0.6 million used for the repurchase of the Company's common
stock. At September 30, 1998, the Company had $6.7 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 September 30, 1998, the Company had no
material outstanding commitments to purchase capital equipment.
Year 2000 Issue
The Company is aware that many existing information technology (IT) systems,
such as computer systems and software products, as well as non-IT systems that
include embedded technology, were not designed to correctly process dates after
December 31, 1999. The Company is currently assessing the impact of such "Year
2000" issues on its internal IT and non-IT systems, as well as on its customers,
suppliers and service providers. The Company has formed a Year 2000 Project
Team to identify and address Year 2000 compliance issues, including those
related to the Company's significant non-IT systems used in the Company's
buildings, plant, equipment and other infrastructure. The Year 2000 Project
Team is continuing its testing and evaluation of the Company's products and the
Company's IT systems and has recently begun the process of compiling an
inventory of all material Year 2000 issues related to the Company's non-IT
systems. The Company has not identified any significant areas of non-compliance
with respect to its products or IT systems and expects that the assessment and
plans for remedial action for all of its products, IT systems and non-IT systems
will be completed by the end of fiscal 1999. The Company has also initiated
17
<PAGE>
discussions with its significant suppliers and service providers regarding their
plans to investigate and remediate their Year 2000 issues. Although the Company
anticipates cooperation in these efforts from most of the Company's significant
suppliers and service providers, the Company is also dependent on certain
utility companies, telecommunication service companies and other service
providers that are outside the Company's control. Therefore, it may be difficult
for the Company to obtain assurances of Year 2000 readiness from such third
parties. Although the Company believes that its Year 2000 Project Team will
identify all of the Company's material Year 2000 issues in the course of its
assessments, given the pervasiveness of Year 2000 issues and the complex
interrelationships among Year 2000 issues both internal and external to the
Company, there can be no assurance that the Company will be able to identify and
accurately evaluate all such issues.
The Company estimates that the expenses it has incurred to date to address
Year 2000 issues have not been material and, although it has not completed its
full assessment of its Year 2000 readiness, the Company does not expect to incur
material expenses in connection with any required remediation efforts.
As the process of compiling an inventory of non-IT systems proceeds and as
the other efforts of the Year 2000 Project Team continue, the Company may
identify situations that present material Year 2000 risks and/or that will
require substantial time and material expense to address. In addition, if any
customers, suppliers or service providers fail to appropriately address their
Year 2000 issues, such failure could have a material adverse effect on the
Company's business, financial condition and results of operations. For example,
because a significant percentage of the purchase orders received from the
Company's customers are computer generated and electronically transmitted, a
failure of one or more of the computer systems of the Company's customers could
have a significant adverse effect on the level and timing of orders from such
customers. Similarly, if Year 2000 problems are experienced by any of the
Company's significant suppliers or service providers cause or contribute to
delays or interruptions in the delivery of products or services to the Company,
such delays or interruptions could have a material adverse effect on the
Company's business, financial condition and results of operations. Finally,
disruption in the economy generally resulting from Year 2000 issues could also
materially and adversely affect the Company. Although the Year 2000 Project
Team has not yet determined the most likely worst-case Year 2000 scenarios or
quantified the likely impact of such scenarios, it is clear that the occurrence
of one or more of the risks described above could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company's Year 2000 Project Team's activities will include the
development of contingency plans in the event the Company has not completed all
of its remediation programs in a timely manner. In addition, the Year 2000
Project Team will develop contingency plans in the event that any third parties,
who provide goods or services essential to the Company's business, fail to
appropriately address their Year 2000 issues. The Year 2000 Project Team
expects to conclude the development of these contingency plans by the end of
fiscal 1999. Even if these plans are completed on time and put in place, there
can be no assurance that such plans will be sufficient to address any third
party failures or that unresolved or undetected internal and external Year 2000
issues will not have a material adverse effect on the Company's business,
financial condition and results of operations.
18
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to fluctuations in interest
rates and in foreign currency exchange rates:
Interest Rate Exposure. The Company's exposure to market risk due to
fluctuations in interest rates relates primarily to its short-term investment
portfolio, which consists of corporate debt securities, which are classified as
available-for-sale and were reported at an aggregate fair value of $16.3 million
as of September 30, 1998. These available-for-sale securities are subject to
interest rate risk inasmuch as their fair value will fall, if market interest
rates increase. If market interest rates were to increase immediately and
uniformly by 10% from the levels prevailing at September 30, 1998, the fair
value of the portfolio would not decline by a material amount. The Company does
not use derivative financial instruments to mitigate the risks inherent in these
securities. However, the Company does attempt to reduce such risks by typically
limiting the maturity date of such securities to no more than nine months,
placing its investments with high credit quality issuers and limiting the amount
of credit exposure with any one issuer. In addition, the Company believes that
it currently has the ability to hold these investments until maturity, and
therefore, believes that reductions in the value of such securities attributable
to short-term fluctuations in interest rates would not materially affect the
financial position, results of operations or cash flows of the Company.
Foreign Currency Exchange Rate Exposure. The Company's exposure to market
risk due to fluctuations in foreign currency exchange rates relates primarily to
the intercompany balance with its U.K. subsidiary. Although the Company
transacts business with various foreign countries, settlement amounts are
usually based on U.S. currency. Transaction gains or losses have not been
significant in the past and there is no hedging activity on sterling or other
currencies. Based on the intercompany balance of $1.7 million at September 30,
1998, a hypothetical 10% adverse change in sterling against U.S. dollars would
not result in a material foreign exchange loss. Consequently, the Company does
not expect that reductions in the value of such intercompany balances or of
other accounts denominated in foreign currencies, resulting from even a sudden
or significant fluctuation in foreign exchange rates, would have a direct
material impact on the Company's financial position, results of operations or
cash flows.
Notwithstanding the foregoing analysis of the direct effects of interest rate
and foreign currency exchange rate fluctuations on the value of certain of the
Company's investments and accounts, the indirect effects of such fluctuations
could have a material adverse effect on the Company's business, financial
condition and results of operations. For example, international demand for the
Company's products is affected by foreign currency exchange rates. In addition,
interest rate fluctuations may affect the buying patterns of the Company's
customers. Furthermore, interest rate and currency exchange rate fluctuations
have broad influence on the general condition of the U.S., foreign and global
economies, which could materially and adversely affect the Company.
19
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.6(1) 1994 Employee Stock Purchase Plan (as amended through
July 27, 1998).
27.1 Financial Data Schedule
(1) Incorporated by reference from Exhibits to 1998 Definitive Proxy
Materials filed with the Securities Exchange Commission on
October 5,1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 1998.
20
<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: October 23, 1998 By:
/s/ Roger A. Strauch
--------------------
Roger A. Strauch
Director, Chief Executive Officer
and Chief Financial Officer
(for Registrant, Principal Executive Officer and
as Principal Financial and Accounting Officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SYMMETRICOM,
INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998
<PERIOD-START> JUL-01-1998 JUL-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 21,732 31,369
<SECURITIES> 16,321 2,973
<RECEIVABLES> 17,811 18,476
<ALLOWANCES> 2,000 2,129
<INVENTORY> 15,196 16,798
<CURRENT-ASSETS> 78,036 75,744
<PP&E> 78,187 77,332
<DEPRECIATION> 41,074 38,998
<TOTAL-ASSETS> 116,272 114,893
<CURRENT-LIABILITIES> 21,119 20,188
<BONDS> 0 0
0 0
0 0
<COMMON> 23,713 23,892
<OTHER-SE> 60,802 60,465
<TOTAL-LIABILITY-AND-EQUITY> 116,272 114,893
<SALES> 29,198 33,983
<TOTAL-REVENUES> 29,198 33,983
<CGS> 17,305 17,802
<TOTAL-COSTS> 17,305 17,802
<OTHER-EXPENSES> 11,767 12,744
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 180 292
<INCOME-PRETAX> 423 3,665
<INCOME-TAX> 86 982
<INCOME-CONTINUING> 337 2,683
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 337 2,683
<EPS-PRIMARY> 0.02 0.17
<EPS-DILUTED> 0.02 0.17
</TABLE>
