<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 March 31, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-2287
SYMMETRICOM, INC.
(Exact name of registrant as specified in its charter)
California No. 95-1906306
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 Orchard Parkway, San Jose, CA 95131-1017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-9403
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Applicable Only to Issuers Involved in Bankruptcy Proceedings
During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
----- -----
Applicable Only to Corporate Issuers:
Indicate number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
CLASS OUTSTANDING AS OF April 30, 1999
----- --------------------------------
Common Stock 14,951,212
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SYMMETRICOM, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements:
Consolidated Balance Sheets-
March 31, 1999 and June 30, 1998 3
Consolidated Statements of Operations-
Three and nine months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows-
Nine months ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements- 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYMMETRICOM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,175 $ 31,369
Short-term investments 7,939 2,973
-------- --------
Cash and investments 35,114 34,342
Accounts receivable, net 14,349 10,541
Inventories 9,700 11,589
Other current assets 4,202 3,964
Net assets of discontinued operations 19,200 24,781
-------- --------
Total current assets 82,565 85,217
Property, plant and equipment, net 21,001 21,901
Other assets, net 1,111 807
-------- --------
$104,677 $107,925
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,744 $ 2,362
Accrued liabilities 12,326 10,793
Current maturities of long-term obligations 574 215
-------- --------
Total current liabilities 16,644 13,370
Long-term obligations 8,453 8,368
Deferred income taxes 1,804 1,830
Shareholders' equity:
Preferred stock, no par value:
Authorized - 500 shares
Issued - none --- ---
Common stock, no par value:
Authorized - 32,000 shares
Issued and outstanding - 14,964 and 15,772 shares 19,375 23,892
Retained earnings 58,401 60,465
-------- --------
Total shareholders' equity 77,776 84,357
-------- --------
$104,677 $107,925
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $19,737 $16,786 $57,926 $54,976
Cost of sales 10,493 9,012 30,415 27,631
------- ------- ------- -------
Gross profit 9,244 7,774 27,511 27,345
Operating expenses:
Research and development 3,490 3,051 10,151 9,470
Selling, general and
administrative 5,032 4,733 15,678 14,306
------- ------- ------- -------
Operating income 722 (10) 1,682 3,569
Interest income 386 437 1,280 1,332
Interest expense (178) (183) (538) (549)
------- ------- ------- -------
Earnings from
continuing operations
before income taxes 930 244 2,424 4,352
Income taxes 195 55 509 975
------- ------- ------- -------
Net earnings from
continuing operations 735 189 1,915 3,377
Discontinued operations,
net of tax:
Earnings (loss) from
operations 113 (7,672) (73) (4,744)
Estimated loss on sale (3,906) --- (3,906) ---
------- ------- ------- -------
Loss from discontinued
operations (3,793) (7,672) (3,979) (4,744)
------- ------- ------- -------
Net loss $(3,058) $(7,483) $(2,064) $(1,367)
======= ======= ======= =======
Earnings (loss) per share
- basic and diluted:
Earnings from continuing
operations $ .05 $ .01 $ .12 $ .21
Discontinued operations (.25) (.49) (.26) (.30)
------- ------- ------- -------
Net loss $ (.20) $ (.47) $ (.13) $ (.09)
======= ======= ======= =======
Weighted average shares
outstanding-basic
and diluted 15,055 15,816 15,421 15,857
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1999 1998
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 53,169 $ 55,094
Cash paid to suppliers and employees (48,460) (51,538)
Loss from discontinued operations (3,979) (4,744)
Interest received 1,321 1,332
Interest paid (538) (549)
Income taxes refund (paid) 550 (529)
-------- --------
Net cash provided by (used for) operating activities of
continuing operations 2,063 (934)
Net cash provided by (used for) discontinued operations 5,581 (4,026)
-------- --------
Net cash provided by (used for) operating activities 7,644 (4,960)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (32,966) (17,198)
Maturities of short-term investments 28,000 16,500
Purchases of plant and equipment, net (2,444) (2,369)
Increase in notes receivable --- (900)
Other (355) ---
-------- --------
Net cash used for investing activities (7,765) (3,967)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term obligations 595 176
Repayment of long-term obligations (151) (151)
Proceeds from issuance of common stock 709 1,529
Repurchase of common stock (5,226) (2,951)
-------- --------
Net cash used for financing activities (4,073) (1,397)
-------- --------
Net decrease in cash and cash equivalents (4,194) (10,324)
Cash and cash equivalents at beginning of period 31,369 28,203
-------- --------
Cash and cash equivalents at end of period $ 27,175 $ 17,879
======== ========
</TABLE>
(Continued)
5
<PAGE>
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1999 1998
-------- ----------
<S> <C> <C>
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings from continuing operations $ 1,915 $ 3,377
Loss from discontinued operations (3,979) (4,744)
Net cash provided by (used for) discontinued operations 5,581 (4,026)
Depreciation and amortization 3,384 3,804
Net deferred income taxes 12 (159)
Changes in assets and liabilities:
Accounts receivable, net (3,808) 218
Inventories 1,889 432
Accounts payable 1,382 (2,234)
Accrued liabilities 1,533 (1,809)
Tax benefit from employee stock plan --- 500
Other (265) (319)
------- -------
Net cash provided by (used for) operating activities $ 7,644 $(4,960)
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<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. ("Symmetricom" or 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 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 March 31, 1999, the
results of operations for the three and nine month periods then ended and its
cash flows for the nine month period then ended. The results of operations for
the periods presented are not necessarily indicative of those that may be
expected for the full year.
2. Discontinued Operations. On February 10, 1999, Symmetricom entered into a
------------------------
definitive agreement to sell its Linfinity Microelectronics Inc. ("Linfinity")
subsidiary to Microsemi Corporation for $24.1 million in cash, of which $1.1
million is subject to an escrow agreement. The sale of Linfinity closed on
April 14, 1999. The consideration to be paid to shareholders of Linfinity is
$2.96 (the "Preferred Price Per Share") and $1.46 (the "Common Price Per
Share"). The outstanding capital stock of Linfinity is comprised of 6,000,000
shares of Preferred Stock and 4,197,824 shares of Common Stock. There are stock
options outstanding to purchase 121,449 and 109,000 shares of Linfinity's Common
Stock at $0.50 and $0.80 per share, respectively. The holders of these options
are entitled to receive in cash the difference between $1.46 and the option
exercise price. Of the $24.1 million aggregate purchase price, $23.6 million is
payable to Symmetricom (including amounts currently held in escrow) and $0.5
million is payable to the former minority shareholders and optionholders of
Linfinity.
The Linfinity business has been accounted for as a discontinued operation
and, accordingly, its net assets to be disposed have been segregated from
continuing operations in the consolidated balance sheets and the results of
operations have been excluded from continuing operations in the consolidated
statements of operations and cash flows for all periods presented. The loss from
discontinued operations, net of tax, is comprised of:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
(In thousands)
- --------------
Net sales $12,000 $ 7,422 $34,013 $37,552
------- -------- ------- -------
Earnings (loss) from operations before taxes $ 155 $(12,238) $ (81) $(8,114)
Income taxes 42 (4,566) (8) (3,370)
------- -------- ------- -------
Net earnings (loss)from operations 113 (7,672) (73) (4,744)
------- -------- ------- -------
Estimated loss on sale (182) --- (182) ---
Income taxes (3,724) --- (3,724) ---
------- -------- ------- -------
Net estimated loss on sale (3,906) --- (3,906) ---
------- -------- ------- -------
Loss from discontinued operations $(3,793) $ (7,672) $(3,979) $(4,744)
------- -------- ------- -------
</TABLE>
7
<PAGE>
The net assets retained and held for sale at March 31, 1999 are comprised of:
Held
(In thousands) Total Retained for Sale
- -------------- ----- -------- --------
Current assets $17,733 $ 6,967 $10,766
Property, plant and
equipment, net 14,596 --- 14,596
Other assets 17 --- 17
Current liabilities (5,869) (1,694) (4,175)
Other liabilities (3,766) (1,762) (2,004)
------- ------- -------
Net assets of discontinued
operations $22,711 $ 3,511 $19,200
------- ------- -------
3. Inventories. Inventories are stated at the lower of cost (first-in, first-
-----------
out) or market. Inventories consist of:
March 31, June 30,
1999 1998
(In thousands) ---- ----
--------------
Raw materials $ 2,808 $ 3,230
Work-in-process 2,952 2,027
Finished goods 3,940 6,332
------- -------
$ 9,700 $11,589
======= =======
4. Recent Accounting Pronouncements. Effective September 30, 1998, the
--------------------------------
Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income," which requires the Company to report and
display certain information related to comprehensive income. Comprehensive
income includes net income and other comprehensive income. Other comprehensive
income is classified separately into foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on certain investments in
debt and equity securities. At March 31, 1999 and 1998, and for the three and
nine month periods then ended, other comprehensive income did not have any
material impact on the Company's financial position and results of operations.
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 position and results of
operations.
5. Contingencies. In January 1994, a securities class action complaint was
-------------
filed against the Company and certain of its present and former officers or
directors in the United States District Court, Northern District of
8
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California. The action was filed on behalf of a putative class of purchasers of
the Company's stock during the period April 6, 1993 through November 10, 1993.
The complaint seeks unspecified money damages and alleges that the Company and
certain of its present or former officers or directors violated federal
securities laws in connection with various public statements made during the
putative class period. The Court dismissed the first and second amended
complaints with leave to amend. The plaintiff filed a third amended corrected
complaint in August 1997. The Company filed a motion to dismiss this third
amended complaint, which was denied in January 1998. Discovery is proceeding.
The trial is scheduled to begin on July 10, 2000. The Company and its officers
believe that the complaint is entirely without merit, and intend to continue to
defend the action vigorously. The Company is also a party to certain other
claims in the normal course of its operations. While the results of such claims
cannot be predicted with any certainty, management believes that the final
outcome of such matters will not have a material adverse effect on the Company's
financial position and results of operations.
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 cycle associated with the Company's
products, cyclical conditions in the telecommunications industry, fluctuations
in manufacturing yields and other factors. A significant portion of the
Company's operating and manufacturing expenses are relatively fixed in nature
and planned expenditures are based in part on anticipated orders. If the
Company is unable to adjust spending in a timely manner to compensate for any
unexpected future sales shortfall, the Company's business, financial condition
and results of operations could be materially and adversely affected. The
Company's operations entail a high level of fixed costs and require an adequate
volume of production and sales to achieve and maintain reasonable gross profit
margins and net earnings. Accordingly, any significant decline in demand for
the Company's products or reduction in the Company's average selling prices, or
any material delay in customer orders would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the Company's future results depend in large part on growth in the
markets for the Company's products. The growth in each of these markets may
depend on, among other things, changes in general economic conditions, or
conditions which relate specifically to the markets in which the Company
competes, changes
9
<PAGE>
in regulatory conditions, legislation, export rules or conditions, interest
rates and fluctuations in the business cycle for any particular market segment.
Uncertainty of Timing of Product Sales; Limited Backlog. A substantial
portion of the Company's quarterly net sales is often dependent upon orders
received and shipped during that quarter, of which, a significant portion may be
received during the last month or even the last days of that quarter. The
timing of the receipt and shipment of even one large order may have a
significant impact on the Company's net sales and results of operations for such
quarter. Furthermore, most orders in backlog can be rescheduled or canceled
without significant penalty. As a result, it is difficult to predict the
Company's quarterly results even during the final days of a quarter.
Customer Concentration. A relatively small number of customers has
historically accounted for, and is expected to continue to account for, a
significant portion of the Company's net sales in any given fiscal period. Two
customers, although not the same two customers in each year, accounted for 23%,
39% and 26% of the Company's net sales in fiscal years 1998, 1997 and 1996,
respectively. The timing and level of sales to the Company's largest customers
have fluctuated significantly in the past and are expected to continue to
fluctuate significantly from quarter-to-quarter and year-to-year in the future.
For example, the Company's sales to AT&T 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.
Competition; Pricing Pressure. The Company believes that competition in the
telecommunications industry in general, and in the new and existing markets
served by the Company in particular, is intense and likely to increase
substantially. The Company's ability to compete successfully in the future will
depend on, among other things: the cost effectiveness, quality, price, service
and market acceptance of the Company's products; its response to the entry of
new competitors or the introduction of new products by the Company's
10
<PAGE>
competitors; its ability to keep pace with changing technology and customer
requirements; the timely development or acquisition of new or enhanced products;
and the timing of new product introductions by the Company or its competitors.
The Company believes that its primary competitors are Datum Inc. and Hewlett-
Packard 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 the Company's largest customers, to manufacture
telecommunications equipment, RBOCs may increasingly become significant
competitors of the Company. Many of the Company's competitors or potential
competitors are more established than the Company and have greater financial,
manufacturing, technical and marketing resources. Furthermore, the Company
expects its competitors to continually improve their design and manufacturing
capabilities and to introduce new products and services with enhanced
performance characteristics and/or lower prices. The Company continues to
experience pricing pressures in all of its markets and has experienced price
erosion in several product lines. This competitive environment could result in
significant price reductions or the loss of orders from current and/or potential
customers, which, in each case, could materially and adversely affect the
Company's business, financial condition and results of operations.
Proprietary Technology. The Company's success will depend, in part, on its
ability to protect trade secrets, obtain or license patents and operate without
infringing on the rights of others. The Company relies on a combination of
trademark, copyright and patent registration, contractual restrictions and
internal security to establish and protect its proprietary rights. There can be
no assurance that such measures will provide meaningful protection for the
Company's trade secrets or other proprietary information. The Company has
United States and international patents and patent applications pending that
cover certain technology used by its operations. However, while the Company
believes that its patents have value, the Company relies primarily on
innovation, technological expertise and marketing competence to maintain its
competitive position. The telecommunications industry is characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement. While the Company intends to continue its
efforts to obtain patents whenever possible, there can be no assurance that
patents will be issued or that new, or existing patents will not be challenged,
invalidated or circumvented, or that the rights granted will provide any
commercial benefit to the Company. The Company is also subject to the risk of
adverse claims and litigation alleging infringement of the intellectual property
rights of others. Although the Company is not currently party to any
intellectual property litigation, from time to time it has received claims
asserting that the Company has infringed the proprietary rights of others.
There can be no assurance that third parties will not assert infringement claims
against the Company in the future, or that any such claims will not result in
costly litigation or require the Company to obtain a license for such
intellectual property rights regardless of the merit of such claims. No
assurance can be given that any necessary licenses will be available or that, if
available, such licenses can be obtained on commercially reasonable terms.
Potential Future Acquisitions. In the future, the Company may pursue
acquisitions of product lines, technologies or businesses. Future acquisitions
by the Company may result in the use of significant amounts of cash, potentially
dilutive issuances of equity, incurrence of debt and amortization expenses
related to goodwill and other intangible assets, each of which could materially
adversely affect the Company's business, financial condition and results of
operations. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products of
the acquired company, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience, and the potential loss of key employees of the
acquired company. In the event that such an acquisition does occur there can be
no assurance as to the effect thereof on the Company's business, financial
condition and results of operations.
11
<PAGE>
Environmental Matters. The Company's operations are subject to numerous
federal, state and local environmental regulations related to the storage, use,
discharge and disposal of toxic, volatile or otherwise hazardous chemicals used
in its manufacturing process. While the Company has not experienced any
materially adverse effects on its operations from environmental regulations,
there can be no assurance that changes in such regulations will not impose the
need for additional capital equipment or other requirements or restrict the
Company's ability to expand its operations. Failure to comply with such
regulations could result in suspension or cessation of the Company's operations,
or could subject the Company to significant liabilities. Although the Company
periodically reviews its facilities and internal operations for compliance with
applicable environmental regulations, such reviews are necessarily limited in
scope and frequency and, therefore, there can be no assurance that such reviews
have revealed or will reveal all potential instances of noncompliance. The
liabilities arising from any noncompliance with such environmental regulations
could materially and adversely affect the Company's business, financial
condition and results of operations.
Governmental Regulations. Federal and state regulatory agencies, including
the Federal Communications Commission and the various state public utility
commissions and public service commissions, regulate most the Company's domestic
telecommunications customers. Similar government oversight also exists in the
international market. Although the Company is generally not directly affected
by such legislation, the effects of such regulation on the Company's customers
may, in turn, adversely impact the Company's business, financial condition and
results of operations. For instance, the sale of the Company's products may be
affected by the imposition upon certain of the Company's customers of common
carrier tariffs and the taxation of telecommunications services. These
regulations are continuously reviewed and subject to change by the various
governmental agencies. Changes in current or future laws or regulations, in the
United States or elsewhere, could materially and adversely affect the Company's
business, financial condition and results of operations.
Risks Associated with International Sales. The Company's export sales,
which were primarily to Western Europe, Latin America, the Far East, and Canada
accounted for 22%, 13% and 16% 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 fourth
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
12
<PAGE>
foreign countries may not protect the Company's proprietary technology to the
same extent as do the laws of the United States.
Inventory Risks. Although the Company believes that it currently has
appropriate provisions for inventory that has declined in value, become obsolete
or is in excess of anticipated demand, there can be no assurance that such
provisions will be adequate. The Company's business, financial condition and
results of operations may be materially and adversely affected, if significant
inventories become obsolete or are otherwise not able to be sold at favorable
prices.
Changes to Effective Tax Rate. The Company's effective tax rate is affected
by the percentage of qualified Puerto Rico earnings compared to total earnings
as most of the Company's Puerto Rico earnings are taxed under Section 936 of the
U.S. Internal Revenue Code, which exempts qualified Puerto Rico earnings from
federal income taxes. This results in an overall lower effective tax rate for
the Company. This exemption is subject to certain wage-based limitations and
expires at the end of fiscal 2006. In addition, this exemption will be subject
to further limitations during fiscal years 2003 through 2006.
Fluctuations in Stock Price. The Company's stock price has been and may
continue to be subject to significant volatility. Many factors, including any
shortfall in sales or earnings from levels expected by securities analysts and
investors, could have an immediate and significant adverse effect on the trading
price of the Company's common stock.
Year 2000 Compliance Risks. The Company is aware that many existing
information technology (IT) systems, such as computer systems and software
products, as well as non-IT systems that include embedded technology, were not
designed to correctly process dates after December 31, 1999. The Company is
currently assessing the impact of such "Year 2000" issues on its internal IT and
non-IT systems, as well as on its customers, suppliers and service providers.
The Company has formed a Year 2000 Project Team to identify and address Year
2000 compliance issues, including those related to the Company's significant
non-IT systems used in the Company's buildings, plant, equipment and other
infrastructure. The Year 2000 Project Team is continuing its testing and
evaluation of the Company's products and the Company's IT systems and is
compiling an inventory of all material Year 2000 issues related to the Company's
non-IT systems. The Company has not identified any significant areas of non-
compliance with respect to its products or IT systems and expects that the
assessment and plans for remedial action for all of its products, IT systems and
non-IT systems will be completed by the end of calendar 1999. The Company has
also initiated discussions with its significant suppliers and service providers
regarding their plans to investigate and remedy their Year 2000 issues.
Although the Year 2000 Project Team has not yet determined the most likely
worst-case Year 2000 scenarios or quantified the likely impact of such
scenarios, it is clear that the occurrence of one or more significant internal
or external Year 2000 issues could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Results
of Operations---Year 2000 Issue."
The statements set forth above regarding Year 2000 matters are "Year 2000
Readiness Disclosures," as defined in the Year 2000 Readiness Disclosure Act of
1998, enacted October 19, 1998 (Public Law 105-271).
Results of Operations
The Company designs, manufactures and markets advanced network
synchronization systems and intelligent access systems for the
telecommunications industry. Synchronization is fundamental to
telecommunications services, as it is required for reliable transmission of data
throughout a network. The
13
<PAGE>
Company's core synchronization products consist of Digital Clock Distributors
based on quartz, rubidium and Global Positioning System ("GPS") technologies,
which provide highly accurate and uninterruptible timing that meets
synchronization requirements of digital networks. The Company's newest
synchronization products are marketed to companies in high-speed data
networking, Internet infrastructure, cable telephony and wireless communications
industries.
The Company sold its Linfinity Microelectronics Inc. (Linfinity)
semiconductor subsidiary to Microsemi Corporation for $24.1 million in cash, of
which $1.1 million is subject to an escrow agreement. The sale of Linfinity
closed on April 14, 1999. The consideration to be paid to shareholders of
Linfinity is $2.96 (the "Preferred Price Per Share") and $1.46 (the "Common
Price Per Share"). The outstanding capital stock of Linfinity is comprised of
6,000,000 shares of Preferred Stock and 4,197,824 shares of Common Stock. There
are stock options outstanding to purchase 121,449 and 109,000 shares of
Linfinity's Common Stock at $0.50 and $0.80 per share, respectively. The holders
of these options are entitled to receive in cash the difference between $1.46
and the option exercise price. Of the $24.1 million aggregate purchase price,
$23.6 million is payable to Symmetricom (including amounts currently held in
escrow) and $0.5 million is payable to the former minority shareholders and
optionholders of Linfinity.
The Linfinity business has been accounted for as a discontinued operation
and, accordingly, its net assets to be disposed have been segregated from
continuing operations in the consolidated balance sheets and the results of
operations have been excluded for all periods from the results discussed below,
except where specifically stated otherwise. See Note 2 of the Notes to
Consolidated Financial Statements included in Item 1 above.
The Company's net sales increased by $3.0 million (18%) to $19.7 million in
the third quarter of fiscal 1999 from $16.8 million in the third quarter of
fiscal 1998. Net sales increased by $3.0 million (5%) to $57.9 million in the
first three quarters of fiscal 1999 from $55.0 million in the first three
quarters of fiscal 1998. The increases in net sales in both the third quarter
and first three quarters of fiscal 1999 compared to the corresponding periods of
fiscal 1998 were primarily due to higher sales of synchronization and
transmission products, partially offset by lower sales by the Company's Navstar
subsidiary in the digitally enhanced cordless telephone (DECT) market.
The Company's gross profit, as a percentage of net sales, increased to 47%
in the third quarter of fiscal 1999 and decreased to 47% in the first three
quarters of fiscal 1999, compared to 46% and 50% in the corresponding periods of
fiscal 1998, respectively. The Company's gross profit decrease in the first
three quarters of fiscal 1999 compared to the corresponding period of fiscal
1998 was primarily due to less favorable manufacturing efficiencies, lower
production volumes and less favorable sales channel mix.
Research and development expense was $3.5 million (or 18% of net sales) and
$10.2 million (or 18% of net sales) in the third quarter and first three
quarters of fiscal 1999, respectively, compared to $3.1 million (or 18% of net
sales) and $9.5 million (or 17% of net sales) in the corresponding periods of
fiscal 1998. These increases were primarily due to continued focus on investment
in new products and core technology.
Selling, general and administrative expense was $5.0 million (or 25% of net
sales) and $15.7 million (or 27% of net sales) in the third quarter and first
three quarters of fiscal 1999, respectively, compared to $4.7 million (or 28% of
net sales) and $14.3 million (or 26% of net sales) in the corresponding periods
of fiscal 1998. These increases were primarily due to higher sales-based
incentive compensation, expanded sales support and product promotion, and higher
administrative expenses.
14
<PAGE>
Interest income was essentially flat at $0.4 million and $1.3 million in
the third quarter and first three quarters of fiscal 1999, respectively,
compared to the corresponding periods of fiscal 1998.
Interest expense was flat at $0.2 million and $0.5 million in the third
quarter and first three quarters of fiscal 1999, respectively, compared to the
corresponding periods of fiscal 1998.
The Company's effective tax rate was 21% in both the third quarter and
first three quarters of fiscal 1999, compared to 23% and 22% in the
corresponding periods of fiscal 1998. The effective tax rate for fiscal 1999 is
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 Rico
earnings from federal income taxes. This exemption is subject to wage-based
limitations and expires at the end of fiscal 2006. In addition, this exemption
will be further limited, based on certain prior year Puerto Rico earnings during
fiscal years 2003 through 2006.
As a result of the factors discussed above, net earnings from continuing
operations in the third quarter of fiscal 1999 were $0.7 million or $.05 per
share (diluted) compared to $0.2 million or $.01 per share (diluted) in the same
period of fiscal 1998. Net earnings from continuing operations for the first
three quarters of fiscal 1999 were $1.9 million or $.12 per share (diluted)
compared to $3.4 million or $.21 per share (diluted) in the same period of
fiscal 1998.
Loss from discontinued Linfinity operations in the third quarter of fiscal
1999 was $3.8 million or $.25 per share (diluted) compared to a loss of $7.7
million or $.49 per share (diluted) in the same period of fiscal 1998. Loss
from discontinued Linfinity operations for the first three quarters of fiscal
1999 was $4.0 million or $.26 per share (diluted) compared to a loss of $4.7
million or $.30 per share (diluted) in the same period of fiscal 1998.
As a result of the factors discussed above, the Company's net loss in the
third quarter of fiscal 1999 including discontinued Linfinity operations was
$3.1 million or $.20 per share (diluted) compared to a net loss of $7.5 million
or $.47 per share (diluted) in the same period of fiscal 1998. The Company's
net loss for the first three quarters of fiscal 1999 including discontinued
Linfinity operations was $2.1 million or $.13 per share (diluted) compared to a
net loss of $1.4 million or $.09 per share (diluted) in the same period of
fiscal 1998.
Liquidity and Capital Resources
Working capital decreased to $65.9 million at March 31, 1999 from $71.8
million at June 30, 1998, and the current ratio decreased to 5.0 to 1.0 from 6.4
to 1.0. The decrease in the current ratio resulted primarily from the reduction
in the net assets of discontinued operations and inventories, and increases in
accounts receivable, incentive compensation and net deferred revenue. During
the same period, cash, cash equivalents and short-term investments increased to
$35.1 million from $34.3 million, primarily due to $7.6 million in cash provided
by operating activities, $0.6 million in proceeds from issuance of long-term
obligations and $0.7 million in proceeds from issuance of common stock, offset
by $2.4 million used for capital expenditures, $5.2 million used for the
repurchase of the Company's common stock and $0.5 million used for other
investing and financing activities. At March 31, 1999, the Company had $6.7
million of unused credit available under its bank line of credit.
15
<PAGE>
The Company believes that cash, cash equivalents, short-term investments,
funds generated from operations, proceeds from the sale of Linfinity and funds
available under its bank line of credit will be sufficient to satisfy working
capital requirements and capital expenditures over the near term. At March 31,
1999, the Company had no material outstanding commitments to purchase capital
equipment.
Year 2000 Issue
The Company is aware that many existing information technology (IT)
systems, such as computer systems and software products, as well as non-IT
systems that include embedded technology, were not designed to correctly
process dates after December 31, 1999. The Company is currently assessing the
impact of such "Year 2000" issues on its internal IT and non-IT systems, as
well as on its customers, suppliers and service providers. The Company has
formed a Year 2000 Project Team to identify and address Year 2000 compliance
issues, including those related to the Company's significant non-IT systems
used in the Company's buildings, plant, equipment and other infrastructure.
The Year 2000 Project Team is continuing its testing and evaluation of the
Company's products and the Company's IT systems and is compiling an inventory
of all material Year 2000 issues related to the Company's non-IT systems. The
Company has not identified any significant areas of non-compliance with
respect to its products or IT systems and expects that the assessment and
plans for remedial action for all of its products, IT systems and non-IT
systems will be completed by the end of calendar 1999. The Company has also
initiated discussions with its significant suppliers and service providers
regarding their plans to investigate and remedy their Year 2000 issues.
Although the Company anticipates cooperation in these efforts from most of the
Company's significant suppliers and service providers, the Company is also
dependent on certain utility companies, telecommunications service companies
and other service providers that are outside the Company's control. Therefore,
it may be difficult for the Company to obtain assurances of Year 2000
readiness from such third parties. Although the Company believes that its Year
2000 Project Team will identify all of the Company's material Year 2000 issues
in the course of its assessments, given the pervasiveness of Year 2000 issues
and the complex interrelationships among Year 2000 issues both internal and
external to the Company, there can be no assurance that the Company will be
able to identify and accurately evaluate all such issues.
The Company estimates that the expenses it has incurred to date to address
Year 2000 issues have not been material and, although it has not completed its
full assessment of its Year 2000 readiness, the Company does not expect to incur
material expenses in connection with any required remediation efforts.
As the process of compiling an inventory of non-IT systems proceeds and as
other efforts of the Year 2000 Project Team continue, the Company may identify
situations that present material Year 2000 risks and/or that will require
substantial time and material expense to address. In addition, if any
customers, suppliers or service providers fail to appropriately address their
Year 2000 issues, such failure could have a material adverse effect on the
Company's business, financial condition and results of operations. For example,
because a significant percentage of the purchase orders received from the
Company's customers are computer generated and electronically transmitted, a
failure of one or more of the computer systems of the Company's customers could
have a significant adverse effect on the level and timing of orders from such
customers. Similarly, if Year 2000 problems experienced by any of the Company's
significant suppliers or service providers cause or contribute to delays or
interruptions in the delivery of products or services to the Company, such
delays or interruptions could have a material adverse effect on the Company's
business, financial condition and results of operations. Finally, disruption in
the economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. Although the Year 2000 Project Team has not yet
determined the most likely worst-case Year 2000 scenarios or quantified the
likely impact of such scenarios, it is clear that the occurrence of one or more
of the risks described above could have a material adverse effect on the
Company's business, financial condition and results of operations.
16
<PAGE>
The Company's Year 2000 Project Team's activities will include the
development of contingency plans in the event the Company has not completed
all of its remediation programs in a timely manner. In addition, the Year 2000
Project Team will develop contingency plans in the event that any third
parties who provide goods or services essential to the Company's business,
fail to appropriately address their Year 2000 issues. The Year 2000 Project
Team expects to conclude the development of these contingency plans by the end
of calendar year 1999. Even if these plans are completed on time and put in
place, there can be no assurance that such plans will be sufficient to address
any third party failures or that unresolved or undetected internal and
external Year 2000 issues will not have a material adverse effect on the
Company's business, financial condition and results of operations.
The statements set forth above regarding Year 2000 matters are "Year 2000
Readiness Disclosures," as defined in the Year 2000 Readiness Disclosure Act of
1998, enacted October 19, 1998 (Public Law 105-271).
Item 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 $7.9 million
as of March 31, 1999. 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 March 31, 1999, the fair value of
the portfolio would not decline by a material amount. The Company does not use
derivative financial instruments to mitigate the risks inherent in these
securities. However, the Company does attempt to reduce such risks by typically
limiting the maturity date of such securities to no more than nine months,
placing its investments with high credit quality issuers and limiting the amount
of credit exposure with any one issuer. In addition, the Company believes that
it currently has the ability to hold these investments until maturity, and
therefore, believes that reductions in the value of such securities attributable
to short-term fluctuations in interest rates would not materially affect the
financial position, results of operations or cash flows of the Company. To the
extent that the Company invests the proceeds from the sale of Linfinity in
instruments subject to market risk, its overall exposure to market risk will
correspondingly increase.
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 $1.3 million at March 31,
1999, a hypothetical 10% adverse change in sterling against U.S. dollars would
not result in a material foreign exchange loss. Consequently, the Company does
not expect that reductions in the value of such intercompany balances or of
other accounts denominated in foreign currencies, resulting from even a sudden
or significant fluctuation in foreign exchange rates, would have a direct
material impact on the Company's financial position, results of operations or
cash flows.
17
<PAGE>
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is disclosed in Note 5 of Notes to
Consolidated Financial Statements set forth in Item 1 of Part I, above. The
text of such Note is hereby incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
A current report on Form 8-K dated February 24, 1999 was filed to
disclose on February 10, 1999, Symmetricom entered into a definitive agreement
to sell its Linfinity Microelectronics Inc. subsidiary to Microsemi Corporation
for $24.1 million in cash, of which $1.1 million is subject to an escrow
agreement.
A current report on Form 8-K dated April 29, 1999 was filed to disclose on
April 14, 1999, Symmetricom completed the sale of its Linfinity Microelectronics
Inc. subsidiary to Microsemi Corporation for $24.1 million in cash, of which
$1.1 million is subject to an escrow agreement.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYMMETRICOM, INC.
(Registrant)
DATE: May 11, 1999 By:
---------------------
/s/ Thomas W. Steipp
---------------------------
Thomas W. Steipp
Director, Chief Executive Officer
and Chief Financial Officer
(for Registrant, Principal Executive
Officer and as Principal Financial
and Accounting Officer)
19
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