<PAGE>
================================================================================
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, 2000
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 May 9, 2000
----- -----------------------------
Common Stock 15,106,689
================================================================================
<PAGE>
SYMMETRICOM, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements:
Consolidated Balance Sheets -
March 31, 2000 and June 30, 1999 3
Consolidated Statements of Operations -
Three and nine months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows -
Nine months ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
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)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
---- ----
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 39,637 $ 44,897
Short-term investments 14,571 14,300
-------- --------
Cash and investments 54,208 59,197
Accounts receivable, net 15,366 10,915
Inventories 16,394 10,805
Other current assets 4,792 3,762
-------- --------
Total current assets 90,760 84,679
Property, plant and equipment, net 19,776 20,615
Other assets, net 15,030 1,026
-------- --------
$125,566 $106,320
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,246 $ 3,564
Accrued liabilities 16,261 13,929
Current maturities of long-term obligations 664 595
-------- --------
Total current liabilities 30,171 18,088
Long-term obligations 7,789 8,069
Deferred income taxes 222 559
Shareholders' equity:
Preferred stock, no par value;
Authorized - 500 shares
Issued - none -- --
Common stock, no par value;
Authorized - 32,000 shares
Issued and outstanding - 15,088 and 14,926 shares 19,140 18,934
Unrealized gain on securities, net 7,538 1,400
Retained earnings 60,706 59,270
-------- --------
Total shareholders' equity 87,384 79,604
-------- --------
$125,566 $106,320
======== ========
</TABLE>
Note: The June 30, 1999 consolidated balance sheet has been derived from
audited financial statements at that date.
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,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $30,574 $19,737 $73,159 $57,926
Cost of sales 17,611 10,493 41,336 30,415
------- ------- ------- -------
Gross profit 12,963 9,244 31,823 27,511
Operating expenses:
Research and development 4,761 3,490 12,818 10,151
Selling, general and administrative 7,109 5,032 19,160 15,678
Non-recurring charges -- -- 6,818 --
Gain on sale of GPS division ( 6,689) -- (6,689) --
------- ------- ------- -------
Operating income (loss) 7,782 722 (284) 1,682
Interest income 545 386 1,742 1,280
Interest expense (172) (178) (522) (538)
------- ------- ------- -------
Earnings from continuing operations before
income taxes 8,155 930 936 2,424
Income taxes 200 195 (500) 509
------- ------- ------- -------
Earnings from continuing operations 7,955 735 1,436 1,915
Discontinued operations, net of tax:
Earnings (loss) from operations -- 113 -- (73)
Estimated loss on sale -- (3,906) -- (3,906)
------- ------- ------- -------
Loss from discontinued operations -- (3,793) -- (3,979)
------- ------- ------- -------
Net earnings (loss) $ 7,955 $(3,058) $ 1,436 $(2,064)
======= ======= ======= =======
Earnings (loss) per share - basic:
Earnings from continuing operations $ .53 $ .05 $ .10 $ .12
Loss from discontinued operations -- (.25) -- (.25)
------- ------- ------- -------
Net earnings (loss) $ .53 $ (.20) $ .10 $ (.13)
======= ======= ======= =======
Weighted average shares outstanding - basic 15,025 15,055 15,028 15,421
======= ======= ======= =======
Earnings (loss) per share - diluted:
Earnings from continuing operations $ .50 $ .05 $ .09 $ .12
Loss from discontinued operations -- (.25) -- (.25)
------- ------- ------- -------
Net earnings (loss) $ .50 $ (.20) $ .09 $ (.13)
======= ======= ======= =======
Weighted average shares outstanding - diluted 15,920 15,238 15,556 15,499
======= ======= ======= =======
</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,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,436 $ (2,064)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loss from discontinued operations and loss on disposal -- 3,979
In-process research and development write off 3,468 --
Depreciation and amortization 4,725 3,384
Deferred income taxes (1,272) 12
Gain on sale of GPS division (6,689) --
Changes in assets and liabilities, net of effect of acquisition
and disposition:
Accounts receivable (4,451) (3,808)
Inventories (5,771) 1,889
Accounts payable 9,682 1,382
Accrued liabilities 1,132 1,533
Other (95) (265)
-------- --------
Net cash provided by continuing operations 2,165 6,042
Net cash provided by discontinued operations -- 1,602
-------- --------
Net cash provided by operating activities 2,165 7,644
-------- --------
Cash flows from investing activities:
Cash paid for acquisition and related costs (19,419) --
Proceeds from sale of GPS division 9,453 --
Purchases of short-term investments (28,805) (32,966)
Maturities of short-term investments 34,672 28,000
Purchases of plant and equipment, net (3,206) (2,444)
Other (115) (355)
-------- --------
Net cash used for investing activities (7,420) (7,765)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term obligations -- 595
Repayment of long-term obligations (211) (151)
Proceeds from issuance of common stock 3,137 709
Repurchase of common stock (2,931) (5,226)
-------- --------
Net cash used for financing activities (5) (4,073)
-------- --------
Net decrease in cash and cash equivalents (5,260) (4,194)
Cash and cash equivalents at beginning of period 44,897 31,369
-------- --------
Cash and cash equivalents at end of period $ 39,637 $ 27,175
======== ========
</TABLE>
(continued)
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Nine Months Ended
March 31,
2000 1999
-------- --------
Non-cash investing and financing activities:
Unrealized gain on securities, net $ 6,138 $ --
Cash payments for:
Interest $ 522 $ 538
Income taxes 972 (550)
Detail of acquisition:
Tangible assets acquired $ 1,462 $ --
Intangible assets acquired 18,357 --
Cash paid for acquisition and related costs (19,419) --
-------- --------
Liabilities assumed $ 400 $ --
======== ========
Detail of sale of GPS division:
Cash proceeds from sale $ 9,453 $ --
Tangible assets sold (1,964) --
Liabilities incurred (800) --
-------- --------
Gain on sale $ 6,689 $ --
======== ========
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, 1999.
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, 2000, 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. Acquisition. On September 30, 1999 Symmetricom acquired certain assets of
-----------
Hewlett-Packard Company's Communications Synchronization Business ("HP Product
Line business") for $19.4 million in cash. The acquisition has been accounted
for under the purchase method of accounting. The net purchase price of
$19.8 million, which includes cash paid of $19.0 million, transaction costs of
$.4 million, assumed liabilities of $.4 million was allocated to tangible assets
acquired of $1.4 million, capitalized developed technology of $8.0 million,
other intangible assets of $6.9 million and in-process research and development
("IP R&D") of $3.5 million. Pursuant to this transaction, Symmetricom recorded
$6.8 million of non-recurring charges, $3.5 million for IP R&D and $3.3 million
for recruiting and employee expenses. Additionally, an estimated $11.0 million
will be paid to Hewlett-Packard Company over the next 9 to 12 months as
additional assets, primarily inventory and capital equipment,
are transferred to the Company.
3. Sale. On March 30, 2000 the Company sold its GPS division to Silicon
----
Systems, Ltd., ("SSL") for $9.5 million in cash. Additionally, Symmetricom made
an irrevocable application for subscription shares of SSL for $3.0 million. The
Company realized a gain of $6.7 million, or $4.2 million after taxes.
4. Inventories. Inventories are stated at the lower of cost (first-in, first-
-----------
out) or market. Inventories consist of (in thousands):
March 31, June 30,
2000 1999
--------- --------
Raw materials $ 7,609 $ 3,859
Work-in-process 2,666 3,173
Finished goods 6,119 3,773
------- -------
$ 16,394 $ 10,805
======= =======
5. Recent Accounting Pronouncements. 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, as amended, is effective for all
fiscal quarters of fiscal
7
<PAGE>
years beginning after June 15, 2000. 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.
6. 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 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 September 25, 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 this
Quarterly Report on Form 10-Q 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 payments to
Hewlett-Packard and amortization of goodwill, the outcome of litigation,
fluctuations in operating results, customer concentration, competition and
pricing pressure, the effective tax rate, year 2000 issues, gross margins,
production activities, research and development expense, liquidity and capital
resources, and market risk in interest rates and foreign currency exchange
rates. 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 and in other documents we file with the Securities and
Exchange Commission.
WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE FOR A NUMBER OF REASONS
Our 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 ability to integrate successfully and timely the Communications
Synchronization business, products and employees acquired from
Hewlett-Packard with those of Symmetricom;
. the ability to obtain sufficient supplies of GPS products from SSL;
. our ability to obtain sufficient supplies of sole or limited source
components;
. increases in the prices of the components we purchase;
. the ability to accurately anticipate both the volume and timing of
customer orders, including current and planned Communications
Synchronization products;
. the cancellation or rescheduling of customer
orders;
. changes in the product or customer mix of sales;
8
<PAGE>
. the gain or loss of significant customers;
. the ability to introduce new products on a timely and cost-effective
basis;
. the ability to manage the level and value of inventories;
. the timing of new product introductions and that of our competitors;
. customer delays in qualification of new products;
. the ability to manage increased competition and competitive pricing
pressures;
. the ability to manage fluctuations, especially declines, in the average
selling prices received for our products;
. market acceptance of new or enhanced versions of our products and our
competitors' products;
. the ability to manage the long sales cycle associated with our
products;
. the ability to manage cyclical conditions in the telecommunications
industry;
. the ability to manage fluctuations in manufacturing yields and other
factors, and
. reduced rates of growth of telecommunications services and
high-bandwidth applications.
A significant portion of our operating and manufacturing expenses are relatively
fixed in nature and planned expenditures are based in part on anticipated
orders. If we are unable to adjust spending in a timely manner to compensate for
any unexpected future sales shortfall, it may harm our business. Our 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. Therefore, any significant decline in demand for our products,
reduction in our average selling prices, or any material delay in customer
orders may harm our business. In addition, our future results depend in large
part on growth in the markets for our 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 we
compete, changes in regulatory conditions, legislation, export rules or
conditions, interest rates and fluctuations in the business cycle for any
particular market segment.
WE HAVE LIMITED BACKLOG AND A LIMITED VIEW OF WHEN A SALE WILL BE COMPLETED
WHICH MAY EFFECT SALES IN ANY GIVEN PERIOD
A substantial portion of our 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 our 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 our quarterly results even
during the final days of a quarter.
A SIGNIFICANT AMOUNT OF SALES COMES FROM OUR TOP CUSTOMERS
A relatively small number of customers has historically accounted for, and is
expected to continue to account for, a significant portion of our net sales in
any given fiscal period. No customer accounted for 10% or more of our net sales
in fiscal 1999. Two customers, although not the same two customers in each year,
accounted for 23% of our net sales in fiscal 1998 and 39% in fiscal 1997. The
timing and level of sales to our 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, our sales to AT&T were
$22.5 million in fiscal 1997 but decreased to $8.1 million in fiscal 1998 and
$4.4 million in fiscal 1999. We cannot be sure as to the timing or level of
future sales to our customers. The loss of one or more of our significant
customers or a significant reduction or delay in sales to any such customer may
harm our business.
9
<PAGE>
WE MUST DEVELOP AND SELL NEW PRODUCTS IN ORDER TO KEEP UP WITH RAPID
TECHNOLOGICAL CHANGE
The markets in which we compete are characterized by:
. rapidly changing technology;
. evolving industry standards and changes in end-user requirements and
. frequent new product introductions.
Technological advancements could render our products obsolete and unmarketable.
Our success will depend on our ability to respond to changing technologies and
customer requirements and on our 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 harm our business.
OUR SUCCESS IS CONTINGENT UPON OUR PRODUCT PERFORMANCE AND RELIABILITY
Our customers establish demanding specifications for product performance and
reliability. Our 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 could occur in the future. In addition to higher product service,
warranty and replacement costs, such product defects may seriously harm our
customer relationships and industry reputation, further magnifying the harm to
our business of such defects.
THE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES AND REDUCED PROFITS.
THE COMPETITION HAS LEAD TO PRICING PRESSURE
We believe that competition in the telecommunications industry in general, and
in the new and existing markets served by us in particular, is intense and
likely to increase substantially. Our ability to compete successfully in the
future will depend on, among other things:
. the cost effectiveness, quality, price, service and market acceptance
of our products;
. our response to the entry of new competitors or the introduction of new
products by our competitors;
. our 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 us or our competitors.
We believe that our primary competitor is Datum Inc. Incumbent Local Exchange
Carriers (ILECs) may increasingly become significant competitors due in part to
the enactment of The Telecommunications Act of 1996, which permits ILECs, among
our largest customers, to manufacture telecommunications equipment. Many of our
competitors or potential competitors are more established than we are and have
greater financial, manufacturing, technical and marketing resources.
Furthermore, we expect:
. our competitors to continually improve their design and manufacturing
capabilities and to introduce new products and services with enhanced
performance characteristics and/or lower prices and
. to continue to experience pricing pressures in all of our markets and
to continue to experience price erosion in several of our product
lines.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED
Our success will depend, in part, on our ability to protect trade secrets,
obtain or license patents and operate without infringing on the rights of
others. We rely on a combination of trademark, copyright and patent
10
<PAGE>
registration, contractual restrictions and internal security to establish and
protect our proprietary rights. We cannot be sure that such measures will
provide meaningful protection for our trade secrets or other proprietary
information. We have United States and international patents and patent
applications pending that cover certain technology used by our operations.
However, while we believe that our patents have value, we rely primarily on
innovation, technological expertise and marketing competence to maintain our
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 we intend to continue our efforts to obtain patents whenever
possible, we are not certain 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 us. We are also
subject to the risk of adverse claims and litigation alleging infringement of
the intellectual property rights of others. Although we are not currently party
to any intellectual property litigation, from time to time we have received
claims asserting that we have infringed the proprietary rights of others. There
can be no assurance that we will not face third party litigation against us in
the future, or that any such litigation will not be costly or require us to
obtain a license for such intellectual property rights regardless of the merit
of such claims. We cannot be sure that any necessary licenses will be available
or that, if available, such licenses can be obtained on commercially reasonable
terms.
WE RECENTLY ACQUIRED A BUSINESS AND ARE CURRENTLY INTEGRATING IT WITH OUR
BUSINESS
Our acquisition of Hewlett-Packard's Communications Synchronization business
resulted in the use of significant amounts of cash, dilutive issuances of stock
options, and amortization expense related to goodwill and other intangible
assets. In addition, the acquisition involves numerous risks, including:
. the ability to integrate the acquired operations, technologies and
products;
. potential disruption in sales and marketing;
. the diversion of management's attention from other business concerns;
. risks of entering markets in which we have no or limited direct prior
experience and
. the potential loss of key employees of the acquired company.
WE MAY ENGAGE IN FUTURE ACQUISITIONS OR DISPOSITIONS THAT DILUTE OUR
SHAREHOLDERS AND CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES
As part of our strategy, we expect to review acquisition or disposition
alternatives to buy other businesses or technologies that would complement our
current products, expand our market coverage, enhance our technical
capabilities, or offer growth opportunities. While we have no current agreements
or negotiations underway, we may buy or sell businesses, products or
technologies in the future. In the event of any future transactions, we could:
. issue stock that would dilute our current shareholders' percentage
ownership;
. incur debt;
. assume liabilities or
. incur significant one-time write-offs.
These transactions also involve numerous risks, including:
. problems combining the purchased operations, technologies or products;
. unanticipated costs;
11
<PAGE>
. diversion of management's attention from our core business;
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which we have no or limited
prior experience and
. potential loss of key employees of purchased organizations.
We cannot assure you that we will be able to successfully integrate any
business, products, technologies or personnel that we might purchase in the
future.
ENVIRONMENTAL MATTERS SUBJECT US TO ADDITIONAL BUSINESS RISKS
Our 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 we have not experienced any significant effects on our operations from
environmental regulations, we cannot assure you that changes in such regulations
will not impose the need for additional capital equipment or other requirements
or restrict our ability to expand our operations. Failure to comply with such
regulations could result in suspension or cessation of our operations, or could
subject us to significant liabilities. Although we periodically review our
facilities and internal operations for compliance with applicable environmental
regulations, such reviews are necessarily limited in scope and frequency and,
therefore, we cannot assure you that such reviews have revealed or will reveal
all potential instances of noncompliance. The liabilities arising from any
noncompliance with such environmental regulations could harm our business.
OUR PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND 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 our domestic telecommunications customers. Similar
government oversight also exists in the international market. Although we are
generally not directly affected by such legislation, the effects of such
regulation on our customers may, in turn, harm our business. For instance, the
sale of our products may be affected if common carrier tariffs and the taxation
of telecommunications services are imposed upon certain of our customers. These
regulations are continuously reviewed and subject to change by various
governmental agencies. Changes in current or future laws or regulations, in the
United States or elsewhere, could materially harm our business.
INTERNATIONAL SALES SUBJECT US TO ADDITIONAL BUSINESS RISKS
Our export sales, which were primarily to Western Europe, Latin America, the Far
East, and Canada accounted for 29% of our net sales in fiscal 1999, 22% in
fiscal 1998 and 13% in fiscal 1997. International sales subject us to increased
risks including:
. foreign currency fluctuations;
. export restrictions;
. longer payment cycles;
. unexpected changes in regulatory requirements or tariffs;
. protectionist laws and business practices that favor local competition;
. dependence on local vendors;
. reduced or limited protections of intellectual property rights and
. political and economic instability.
12
<PAGE>
To date, none of our international revenues and costs have been denominated in
foreign currencies. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and thus
less competitive in foreign markets. A portion of our international revenues may
be denominated in foreign currencies in the future, including the Euro, which
will subject us to risks associated with fluctuations in those foreign
currencies. We do 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.
INVENTORY RISKS COULD IMPACT OUR GROSS MARGIN
Although we believe that we currently have appropriate provisions for inventory
that has declined in value, become obsolete or is in excess of anticipated
demand, we cannot be sure that such provisions will be adequate. Our business
may be materially harmed, if significant inventories become obsolete or are
otherwise not able to be sold at favorable prices.
OUR EFFECTIVE TAX RATE IS LOWER DUE TO MANUFACTURING IN PUERTO RICO
Our effective tax rate is affected by the percentage of qualified Puerto Rico
earnings compared to total earnings as most of our 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 us. 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 2003 through
2006.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE WHICH MAY IMPACT YOUR
INVESTMENT
Our 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 harmful effect on the trading price of our common stock.
YEAR 2000 COMPLIANCE
The year 2000 computer problem refers to the potential for system and processing
failures of date-related data as a result of computer-controlled systems using
two digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date represented as
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
To date, we have not experienced any year 2000 issues with any of our internal
systems or our products, and we do not expect to experience any in the future.
To date, we have not experienced any year 2000 issues related to any of our key
third party suppliers and customers nor do we expect to experience any in the
future. Costs associated with remediating our internal systems were not
material.
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
and timing products and intelligent access systems for global telecommunications
markets. Synchronization is an
13
<PAGE>
essential requirement for modern telecommunications service providers as they
move to high capacity and high-speed digital transmission technologies. The
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. The Company's products
are marketed to public network providers, Incumbent Local Exchange Carriers
(ILECs), Post Telephone and Telegraph companies (PTTs), Competitive Local
Exchange Carriers (CLECs), other telephone companies, wireless service
providers, cable TV operators, Internet Service Providers (ISPs) and
communications OEMs.
On September 30, 1999 Symmetricom acquired certain assets of Hewlett-Packard
Company's Communications Synchronization Business ("HP Product Line business")
for $19.4 million in cash. The acquisition has been accounted for under the
purchase method of accounting. The net purchase price of $19.8 million, which
includes cash paid of $19.0 million, transaction costs of $.4 million, assumed
liabilities of $.4 million was allocated to tangible assets acquired of $1.4
million, capitalized developed technology of $8.0 million, other intangible
assets of $6.9 million and in-process research and development ("IP R&D") of
$3.5 million. Pursuant to this transaction, Symmetricom recorded $6.8 million of
non-recurring charges, $3.5 million for IP R&D and $3.3 million for recruiting
and employee expenses. Additionally, an estimated $11.0 million will be paid to
Hewlett-Packard Company over the next 9 to 12 months as additional assets,
primarily inventory and capital equipment, are transferred to the Company.
On March 30, 2000 the Company sold its GPS division to Silicon Systems, Ltd.,
("SSL") for $9.5 million in cash. Additionally, Symmetricom made an irrevocable
application for subscription shares of SSL for $3.0 million. The Company
realized a gain of $6.7 million, $4.2 million after taxes.
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 per share consideration paid to shareholders of
Linfinity was $2.96 per Preferred Share and $1.46 per Common Share. The
outstanding capital stock of Linfinity was comprised of 6,000,000 shares of
Preferred Stock and 4,197,824 shares of Common Stock. There were 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 were
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 was payable
to Symmetricom (including amounts currently held in escrow) and $0.5 million was
payable to the former minority shareholders and option holders of Linfinity.
The Linfinity business has been accounted for as a discontinued operation and,
accordingly, its net assets 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.
The Company's net sales increased by $10.8 million, or 55%, to $30.6 million
in the third quarter of fiscal 2000 from $19.7 million in the third quarter of
fiscal 1999. Net sales increased by $15.2 million, or 26%, to $73.2 million in
the first nine months of fiscal 2000 from $57.9 million in the first nine months
of fiscal 1999. The increases in net sales in the third quarter and first nine
months of fiscal 2000 compared to the corresponding periods of fiscal 1999 were
primarily due to sales from the new wireless products acquired in the Hewlett-
Packard transaction and higher sales of synchronization products, partially
offset by lower sales of transmission products.
The Company's gross profit, as a percentage of net sales, decreased to 42% and
43% in the third quarter and first nine months of fiscal 2000, respectively,
compared to 47% in the corresponding periods of fiscal
14
<PAGE>
1999 primarily due to lower margins resulting from sales of acquired Hewlett-
Packard products. The Company anticipates that, in the near-term, it will
continue to experience the lower margins associated with the acquired Hewlett-
Packard products until its plans to transfer production from Hewlett-Packard's
Korean and China manufacturing facilities to the Company's Puerto Rico facility
are implemented. The Company currently estimates that the production activities
will be fully transferred in the first half of fiscal 2001.
Research and development expense was $4.8 million or 16% of net sales and
$12.8 million or 18% of net sales in the third quarter and first nine months of
fiscal 2000, respectively, compared to $3.5 million or 18% of net sales and
$10.2 million or 18% of net sales in the corresponding periods of fiscal 1999.
The increased expenses were primarily due to the Company's continued focus on
investment in new products and core technology. In addition, as part of the
acquisition of the HP Product Line business, the Company added 23 additional
engineers. The Company anticipates that it will continue to emphasize investment
in research and development programs in future periods and continue to pursue
several existing product development programs acquired as part of the
acquisition.
Selling, general and administrative expense was $7.1 million or 23% of net
sales and $19.2 million or 26% of net sales in the third quarter and first nine
months of fiscal 2000, respectively, compared to $5.0 million or 25% of net
sales and $15.7 million or 27% of net sales in the corresponding periods of
fiscal 1999. These increases were primarily due to higher marketing and sales
expenses associated with increased sales, goodwill amortization and higher
administrative expenses. As part of the acquisition of the HP Product Line
business, goodwill of approximately $14.9 million will be amortized over a five
to ten year period and is included in general and administrative expense.
As part of the acquisition of the HP Product Line business, the
Company recorded non-recurring charges of $3.5 million for the write-off of
acquired in-process research and development expenses and $3.3 million for
recruiting and employee expenses. The in-process research and development
expenses arose from new product projects that were under development at the date
of the acquisition and expected to eventually lead to new products but had not
yet established technological feasibility and for which no future alternative
use was identified. The valuation of the in-process research and development
projects was based upon the discounted expected future net cash flows of the
products over the products' expected life, reflecting the estimated stage of
completion of the projects and the estimate of the costs to complete the
projects.
New product development projects were underway at Hewlett-Packard at the time
of the acquisition. Uncertainties that could impede the progress of converting a
development project to a developed technology include the availability of
financial resources to complete the project, failure of the technology to
function properly, continued economic feasibility of developed technologies,
customer acceptance, customer demand and customer qualification of such new
technology, and general competitive conditions in the industry. There can be no
assurance that the in-process research and development projects will be
successfully completed and commercially introduced.
Interest income increased by $159,000 to $0.5 million in the third quarter of
fiscal 2000 from $0.4 million in the third quarter of fiscal 1999. Interest
income increased by $0.5 million to $1.7 million in the first nine months of
fiscal 2000 from $1.3 million in the first nine months of fiscal 1999. The
increases were primarily due to the increase in cash, cash equivalents and
short-term investments from the $23.0 million in proceeds from the sale of
Linfinity and the $9.5 million in proceeds from the sale of the GPS division,
partially offset by the $19.4 million cash expenditure to acquire the HP Product
Line business and the $3.0 million cash expenditure for SSL subscription shares.
15
<PAGE>
Interest expense remained relatively constant at $0.2 million and $0.5 million
for the third quarter and first nine months of fiscal 2000, respectively,
compared to the corresponding periods of fiscal 1999.
The Company's effective tax rate was 2% in the third quarter of fiscal 2000,
compared to 21% in the corresponding period of fiscal 1999. The Company's
effective tax rate was (53)% in the first nine months of fiscal 2000, compared
to 21% in the corresponding period of fiscal 1999. The Company's deferred tax
assets are substantially subject to a valuation allowance. The loss generated
from the acquisition of the HP Product Line business in the second quarter of
fiscal 2000 did not result in a substantial tax benefit. However, upon
management review of the valuation allowance and the sale of the GPS division, a
significant net tax benefit was realized in the third quarter of fiscal 2000.
Additionally, the effective tax rate for fiscal 2000 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, earnings from continuing
operations were $8.0 million or $.50 per share (diluted) in the third quarter of
fiscal 2000, compared to $0.7 million or $.05 per share (diluted) in the
corresponding period of fiscal 1999. Earnings from continuing operations were
$1.4 million or $.09 per share (diluted) in the first nine months of fiscal
2000, compared to $1.9 million or $.12 per share (diluted) in the corresponding
period of fiscal 1999.
As a result of the factors discussed above, net loss from discontinued
operations was zero and $3.8 million or $.25 per share (diluted) in the third
quarter of fiscal 2000 and fiscal 1999, respectively. Net loss from discontinued
operations was zero and $4.0 million or $.25 per share (diluted) in the first
nine months of fiscal 2000 and fiscal 1999, respectively.
As a result of the factors discussed above, net earnings were $8.0 million or
$.50 per share (diluted) in the third quarter of fiscal 2000, compared to net
loss of $3.1 million or $.20 per share (diluted) in the corresponding period of
fiscal 1999. Net earnings were $1.4 million or $.09 per share (diluted) in the
first nine months of fiscal 2000, compared to net loss of $2.1 million or $.13
per share (diluted) in the corresponding period of fiscal 1999.
Liquidity and Capital Resources
Working capital decreased to $60.6 million at March 31, 2000 from $66.6
million at June 30, 1999, and the current ratio decreased to 3.0 to 1.0 from 4.7
to 1.0. The decrease in the current ratio resulted primarily from the decrease
in cash, cash equivalents and short-term investments due to the acquisition of
the HP Product Line business partially offset by the sale of the GPS division.
During the same period, cash, cash equivalents and short-term investments
decreased to $54.2 million from $59.2 million, primarily due to $19.8 million in
cash used for the acquisition of the HP Product Line business, $2.9 million used
for repurchase of common stock, $3.2 million used for capital expenditures,
offset by $2.2 million in cash provided by operating activities, $3.1 million in
proceeds from issuance of common stock, $6.1 million in unrealized gain on
securities and $9.5 in proceeds from sale of GPS division. At December 31, 1999,
the Company had $6.5 million of unused credit available under its bank line of
credit.
16
<PAGE>
The Company believes that cash, cash equivalents, short-term investments,
funds generated from operations, and funds available under its bank line of
credit will be sufficient to satisfy working capital requirements and capital
expenditures over the near term. At December 31, 1999, the Company had no
material outstanding commitments to purchase capital equipment.
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 $14.6 million
as of March 31, 2000. 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, 2000, 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 $3.2 million at March 31, 2000,
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.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is disclosed in Note 6 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
10.38 Audit Committee Charter
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
A current report on Form 8-K dated March 29, 2000 was filed to disclose
on March 30, 2000 the Company's sold its GPS division to Silicon Systems,
Ltd. ("SSL"), for $9.5 million in cash. Additionally, Symmetricom made
an irrevocable application for subscription shares of SSL for $3.0
million.
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 16, 2000 By:
----------------
/s/ Maurice Austin
------------------
Maurice Austin
Chief Financial Officer
(for Registrant and as Principal Financial
and Accounting Officer)
19
<PAGE>
EXHIBIT 10.38
SYMMETRICOM, INC.
AUDIT COMMITTEE CHARTER
I. PURPOSE
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities by reviewing the
Company's financial information, the system of internal controls and the
Company's audit process. The Audit Committee's primary duties and
responsibilities shall be:
. Overseeing that management has maintained the reliability and
integrity of the accounting policies and financial reporting and
disclosure practices of the Company;
. Overseeing that management has established and maintained processes
to assure that an adequate system of internal control is functioning
within the Company;
. Overseeing that management has established and maintained processes
to assure compliance by the Company with Company policy;
. Reviewing and appraising the audit efforts of the Company's
independent accountants and the internal audit function;
. Providing an open avenue of communication among the independent
accountants, financial and senior management, the internal audit
function and the Board of Directors.
II. COMPOSITION
The Audit Committee shall be comprised of two or more directors as
determined by the Board, each of whom shall be an independent director. A third
director shall be elected to the Audit Committee by June 14, 2000. All members
of the Committee shall have a working familiarity with basic finance and
accounting practices and at least one member of the Committee shall have
accounting or related financial management expertise.
III. RESPONSIBILITIES AND DUTIES
The Audit Committee shall have the following specific powers and duties:
1. Holding such regular meetings as may be necessary and such special
meetings as may be called by the Chairman of the Audit Committee or at
the request of the independent accountants;
2. Creating an agenda for the ensuing year;
3. Reviewing the performance of the independent accountants, making
recommendations to the Board of Directors regarding the appointment or
termination of the independent accountants and overseeing the
independence of the accountants.
4. Conferring with the independent accountants and the internal audit
function concerning the scope of their examinations of the books and
records of the Company and its subsidiaries; reviewing and approving the
independent accountants' annual engagement letter; reviewing and
approving the Company's internal audit charter, annual audit plans and
budget; directing the special attention of
<PAGE>
the audit function to specific matters or areas deemed by the Committee
or the audit function to be of special significance; and authorizing
the audit function to perform such supplemental reviews or audits as
the Committee may deem desirable;
5. Reviewing with management, the independent accountants and internal
audit function significant risks and exposures, audit activities and
significant audit findings;
6. Reviewing the range and cost of audit and non-audit services performed
by the independent accountants;
7. Reviewing the nature and extent of any significant changes in
accounting principles or the application therein;
8. Reviewing the adequacy of the Company's systems of internal control;
9. Obtaining from the independent accountants and the internal audit
function their recommendations regarding internal controls and other
matters relating to the accounting procedures and the books and records
of the Company and its subsidiaries and reviewing the correction of
controls deemed to be deficient;
10. Providing an independent, direct communication between the Board of
Directors, the internal audit function and independent accountants;
11. Reviewing the programs of the Company designed to ensure compliance
with Company policy and monitoring the results of these compliance
efforts;
12. Reporting through its Chairman to the Board of Directors following the
meetings of the Audit Committee;
13. Maintaining minutes or other records of meetings and activities of the
Audit Committee;
14. Reviewing the powers of the Committee annually and reporting and making
recommendations to the Board of Directors on these responsibilities;
15. Conducting or authorizing investigations into any matters with the
Audit Committee's scope of responsibilities. The Audit Committee shall
be empowered to retain independent counsel, accountants, or others to
assist it in the conduct of any investigation;
16. Considering such matters in relation to the financial affairs of the
Company and its accounts, and in relation to the internal and external
audit of the Company as the Audit Committee may, in its discretion,
determine to be advisable.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 39,637
<SECURITIES> 14,571
<RECEIVABLES> 15,608
<ALLOWANCES> 242
<INVENTORY> 16,394
<CURRENT-ASSETS> 90,760
<PP&E> 38,619
<DEPRECIATION> 18,843
<TOTAL-ASSETS> 125,566
<CURRENT-LIABILITIES> 30,171
<BONDS> 0
0
0
<COMMON> 19,140
<OTHER-SE> 7,538
<TOTAL-LIABILITY-AND-EQUITY> 125,566
<SALES> 73,159
<TOTAL-REVENUES> 73,159
<CGS> 41,336
<TOTAL-COSTS> 41,336
<OTHER-EXPENSES> 32,107
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 522
<INCOME-PRETAX> 936
<INCOME-TAX> (500)
<INCOME-CONTINUING> 1,436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,436
<EPS-BASIC> .10
<EPS-DILUTED> .09
</TABLE>
