<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 September 30, 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 our 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 November 7, 2000
_____ __________________________________
Common Stock 23,513,260
(adjusted proforma for the three-for two stock split effective August 18,2000)
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SYMMETRICOM, INC.
FORM 10-Q
INDEX
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<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
______________________________
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 2000 and June 30, 2000 3
Consolidated Statements of Income -
Three months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows -
Three months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
___________________________
Item 1. Legal Proceedings 18
Item 2. Not Applicable 18
Item 3. Not Applicable 19
Item 4. Not Applicable 19
Item 5. Not Applicable 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYMMETRICOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 23,011 $ 19,283
Short-term investments 39,506 36,016
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Cash and investments 62,517 55,299
Accounts receivable, net 24,124 19,588
Inventories 27,796 22,357
Other current assets 918 909
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Total current assets 115,355 98,153
Property, plant and equipment, net 19,068 19,960
Other assets, net 16,107 16,556
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$150,530 $134,669
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,521 $ 8,407
Accrued liabilities 25,114 22,969
Current maturities of long-term obligations 416 391
-------- --------
Total current liabilities 37,051 31,767
Long-term obligations 7,562 7,679
Deferred income taxes 369 203
Shareholders' equity:
Preferred stock, no par value; 500,000 shares authorized, none -- --
issued
Common stock, no par value; 32,000,000 shares authorized,
23,513,260 and 22,913,510 shares issued and outstanding 22,856 20,503
Unrealized gain on securities, net 12,896 10,204
Retained earnings 69,796 64,313
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Total shareholders' equity 105,548 95,020
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$150,530 $134,699
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
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<CAPTION>
Three Months Ended
September 30,
-----------------------
2000 1999
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<S> <C> <C>
Net sales $35,999 $19,617
Cost of sales 20,579 10,578
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Gross profit 15,420 9,039
Operating expenses:
Research and development 3,155 3,303
Selling, general and administrative 7,198 5,057
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Operating income 5,067 679
Gain on sale of investment 1,821 --
Interest income 592 677
Interest expense (169) (176)
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Earnings before income taxes 7,311 1,180
Income taxes 1,828 295
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Net earnings $ 5,483 $ 885
======= =======
Earnings per share - basic $ .24 $ .04
======= =======
Weighted average shares outstanding - basic 23,115 22,508
======= =======
Earnings per share - diluted $ .22 $ .04
======= =======
Weighted average shares outstanding - diluted 24,967 23,118
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,483 $ 885
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,660 1,197
Deferred income taxes 166 113
Gain on disposition of assets (1,920) --
Changes in assets and liabilities:
Accounts receivable (3,872) 275
Inventories (5,439) (282)
Accounts payable 3,114 (133)
Accrued liabilities (1,156) 118
Other 1,270 170
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Net cash provided by (used for) operating activities (694) 2,343
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (11,057) (10,096)
Maturities of short-term investments 10,586 13,000
Proceeds from sale of Parthus stock 3,288 --
Purchases of plant and equipment, net (589) (889)
Other (67) (210)
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Net cash provided by investing activities 2,161 1,805
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Cash flows from financing activities:
Proceeds from issuance of common stock 2,353 1,085
Repayment of long-term obligations (92) (68)
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Net cash provided by financing activities 2,261 1,017
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Net increase in cash and cash equivalents 3,728 5,165
Cash and cash equivalents at beginning of period 19,283 44,897
-------- --------
Cash and cash equivalents at end of period $ 23,011 $ 50,062
======== ========
Non-cash investing and financing activities:
Unrealized gain on securities, net $ 2,692 $ 860
Deferred taxes on unrealized gain (1,794) (1,110)
Cash payments for:
Interest $ 169 $ 176
Income taxes 386 219
</TABLE>
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<TABLE>
<S> <C> <C>
Detail of sale of antenna division:
Cash to be received subject to escrow $ 664 $ --
Equity interest in Sarantel Limited -- --
Tangible assets sold (337) --
Liabilities incurred (228) --
----- ----
Gain on sale $ 99 $ --
===== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation. The consolidated financial statements included
---------------------
herein have been prepared by Symmetricom, Inc. ("Symmetricom", 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 we believe that the disclosures, which are made, are
adequate to fairly present the financial information, 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, 2000.
In the opinion of the management, these unaudited statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of the Company at September 30, 1999 and
2000, the results of operations for the three-month period then ended and our
cash flows for the three-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.
Fiscal period. Symmetricom presents each fiscal quarter on a calendar
quarter ending basis. However our fiscal quarter ends on the Sunday closest to
the quarter ending month. All references to calendar quarter refer to our fiscal
quarter, namely, fiscal quarter ended September 2000 ended on October 1, 2000,
September 1999 ended on September 26, 1999, and fiscal year ended June 2000
ended on July 2, 2000.
2. Net Earnings (Loss)per share. Basic earnings (loss) per share is computed
----------------------------
by dividing net earnings (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share is calculated
by dividing net earnings (loss) by the weighted average number of common shares
outstanding and common equivalent shares from dilutive stock options using the
treasury method except when antidilutive.
The following table reconciles the number of shares utilized in the earnings
(loss) per share calculations.
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------
(In thousands, except per share amounts) 2000 1999
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<S> <C> <C>
Earnings from continuing operations $ 5,483 $ 885
Earnings (loss) from discontinued operations -- --
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Net earnings (loss) $ 5,483 $ 885
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Weighted average shares outstanding - basic 23,115 22,508
Dilutive stock options 1,852 610
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Weighted average shares outstanding - diluted 24,967 23,118
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Basic earnings (loss) per share $ 0.24 $ 0.04
Diluted earnings (loss) per share $ 0.22 $ 0.04
</TABLE>
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On August 18, 2000, the company effected a three-for-two stock split in the form
of a common stock dividend. Shareholders of record as of August 7, 2000
received three shares of common stock for every two shares they owned on the
record date. Share and per share data for all periods presented herein have
been adjusted to give effect to the three-for-two stock split
Reclassifications. Certain reclassifications have been made to the prior
year consolidated financial statements to conform to the fiscal year 2001
presentation. Such reclassifications have no effect on previously reported
results of operations, or retained earnings.
3. 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 $0.4
million and assumed liabilities of $0.4 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. Approximately $14.9 million of goodwill and other
intangible assets are being amortized as follows; $0.4 million over five years,
$9.9 million over seven years, and $4.6 million over ten years, and is included
in general and administrative expense. 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.
4. Sale. On September 29, 2000, we sold our United Kingdom based dielectric
----
Antenna Division to a joint venture called Sarantel Limited for approximately
$0.6 million cash subject to an escrow agreement. Symmetricom maintains a nearly
19% investment stake in Sarantel Limited. We realized a gain of $0.1 million or
$0.08 million after taxes related to the sale of the Antenna Division.
On March 30, 2000, we sold our 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. We realized a gain
of $6.7 million, or $4.2 million after taxes related to the sale of the GPS
division. SSL changed its name to Parthus Technologies plc ("Parthus") prior to
completing an initial public offering in May 2000.
On April 14, 1999, we sold our 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 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
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 the option exercise of $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 paid to Symmetricom
(including amounts currently held in escrow) and $0.5 million was paid to former
minority shareholders and option holders of Linfinity.
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5. Inventories. Inventories are stated at the lower of cost (first-in,
-----------
first-out) or market. Inventories consist of (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, June 30,
2000 2000
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Raw materials $15,634 $12,094
Work-in-process 6,516 4,710
Finished goods 5,646 5,553
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$27,796 $22,357
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</TABLE>
6. Recent Accounting Pronouncements. In March 2000 the FASB issued
--------------------------------
Interpretation No. 44 (FIN No. 44), Accounting for Certain Transactions
Involving Stock Compensation - an Interpretation of APB 25. FIN No. 44 clarifies
(i) the definition of employee for purposes of applying APB Opinion No. 25, (ii)
the criteria for determining whether a plan qualifies as a non compensatory
plan, (iii) the accounting consequences of various modifications to the terms of
a previously fixed stock option or award, and (iv) the accounting for an
exchange of stock compensation awards in a business combination. FIN No. 44 was
effective July 1, 2000, but certain conclusions in this interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of certain of the conclusions of FIN No. 44 covering events
occurring during the period after December 15, 1998 or January 12, 2000 did not
materially affect our business. Management does not expect that the adoption of
the remaining conclusions will materially affect our business.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
No. 101), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. Management does not expect that
SAB No. 101 will materially impact its revenue recognition policies. However,
there is no guarantee that future events, industry practices, or future
interpretations of SAB 101 will not impact our revenues.
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. The
adoption of this statement in July 2000 did not have a material impact on our
financial position and results of operations.
7. Contingencies. In January 1994, a securities class action complaint was
-------------
filed against us and certain of our 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 sought
unspecified money damages and alleges that we and certain of our former officers
or directors violated federal securities laws in connection with various public
statements made during the putative class period. The Court granted summary
judgment to us and our former officers and directors in August 2000. The
plaintiff has filed a notice of appeal to the United States Court of Appeals for
the Ninth Circuit. The Company and its former officers believe that the
complaint is without merit, and will continue to defend the action vigorously if
necessary. We are also a party to certain other claims in the normal course of
our operations. While the results of such claims cannot be predicted with any
certainty, we believe that the final outcome of such matters will not have an
adverse effect on our financial position and results of operations.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The trend analyses and other non-historical information contained in 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 markets for our products, operating results, our
Broadband Access division, amortization of goodwill, customer concentration,
competition and pricing pressure, the effective tax rate, gross margins,
production activities, availability of key components, research and development
expense, accounting pronouncements, liquidity and capital resources and market
risk in interest rates and foreign currency exchange rates.
Overview
Symmetricom designs, manufactures and markets advanced network
synchronization systems and intelligent access systems for the global
telecommunications market. Synchronization is an essential requirement for
modern telecommunications service providers as they move to high capacity and
high-speed digital transmission technologies. Our 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 products are marketed to public network providers,
ILEC's, Post Telephone and Telegraph companies (PTTs), Competitive Local
Exchange Carriers (CLEC's), other telephone companies, wireless service
providers, cable TV operators, ISPs and communications OEMs.
On September 29, 2000, we sold our United Kingdom based dielectric Antenna
Division to a joint venture called Sarantel Limited for approximately $0.6
million cash, subject to an escrow agreement. Symmetricom maintains a nearly
19% investment stake in Sarantel Limited. We realized a gain of $0.1 million,
or $0.08 million after taxes, related to the sale of the Antenna Division. See
Note 4 of the Notes to Consolidated Financial Statements.
On March 30, 2000, we sold our 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. We realized a gain
of $6.7 million, or $4.2 million after taxes related to the sale of the GPS
division. SSL changed its name to Parthus Technologies plc ("Parthus") prior to
completing an initial public offering in May 2000. See Note 4 of the Notes to
Consolidated Financial Statements.
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 $0.4
million and assumed liabilities of $0.4 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. As part of the acquisition of the HP
Product Line business, goodwill of approximately $14.9 million will be amortized
as follows; $0.4 million over five years, $9.9 million over seven years, and
$4.6 million over ten years, and is included in general and administrative
expense. Pursuant to this transaction, we recorded $6.8 million of non-recurring
charges, $3.5 million for IP R&D and $3.3 million for recruiting and employee
expenses. See Note 3 of the Notes to Consolidated Financial Statements.
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<PAGE>
On April 14, 1999, we sold our 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
per share consideration to be paid to shareholders of Linfinity is $2.96 per
Preferred Share and $1.46 per common Share. The outstanding capital stock of
Linfinity 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 the option price of $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 paid to
Symmetricom (including amounts currently held in escrow) and $0.5 million was
paid to former minority shareholders and option holders of Linfinity.
The Linfinity business has been accounted for as a discontinued operation
and, accordingly, our 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. See Note 4 of the Notes to Consolidated Financial
Statements.
Results of Operations
Our net sales increased by $16.4 million (84%) to $36.0 million in the
first quarter of fiscal 2001 from $19.6 million in the first quarter of fiscal
2000. The increase in net sales in the first quarter of fiscal 2001 compared to
the corresponding period of fiscal 2000 was primarily due to revenues from the
wireless products acquired from the HP's product line business, including
NetSync and wireless OEM products, as well as higher sales of synchronization
shelves and cards.
Our gross profit, as a percentage of net sales, was 42.8% in the first
quarter of fiscal 2001, compared to 46.1% in the corresponding period of fiscal
2000, respectively. Our gross profit decrease in the first quarter of fiscal
2001 compared to the corresponding period of fiscal 2000 was primarily due to
lower margins on the HP Product Line products.
Research and development expense was $3.2 million (or 8.8% of net sales) in
the first quarter of fiscal 2001, compared to $3.3 million (or 16.8% of net
sales) in the corresponding period of fiscal 2000. The decrease as a percentage
of net sales is primarily due to scales of economy achieved through the
acquisition of Hewlett-Packard products.
Selling, general and administrative expense was $7.2 million (or 20% of net
sales) in the first quarter of fiscal 2001, respectively, compared to $5.1
million (or 25.8% of net sales) in the corresponding period of fiscal 2000. The
increase was primarily due to higher marketing and sales expense associated with
increased sales, goodwill amortization and higher administrative expenses. As a
part of the acquisition of the HP Product Line business, goodwill of
approximately $14.9 million will be amortized as follows; $0.4 million over five
years, $9.9 million over seven years, and $4.6 million over ten years, and is
included in the general and administrative expense.
In August 2000, we recorded a non-recurring gain on sale of investment
(Parthus stock) of $1.8 million (or 5.1% of net sales). Interest income was $0.6
million in the first quarter of fiscal 2001 compared to $0.7 million in the
corresponding period of fiscal 2000. The decrease was primarily due to the $19.4
million cash expenditure to acquire the HP Product Line business, which resulted
in lower invested cash balances.
Interest expense was flat at $0.2 million in the first quarters of fiscal
2001 and fiscal 2000. The interest expense is predominantly associated with the
capital lease on the Company's building in San Jose.
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<PAGE>
Our effective tax rate was 25% in the first quarter of fiscal 2001,
compared to 21% in the corresponding period of fiscal 2000. Our effective tax
rate is affected by the percentage of qualified Puerto Rico earnings compared to
our 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. The increase in effective tax rate for first
quarter, fiscal 2001, is primarily due to our expectation that a higher
percentage of total earnings will be subject to the full federal tax rate. The
federal 936 exemption is subject to 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.
As a result of the factors discussed above, net earnings from continuing
operations in the first quarter of fiscal 2001 were $5.5 million or $.22 per
share (diluted) compared to $0.9 million or $.04 per share (diluted) in the same
period of fiscal 2000
Liquidity and Capital Resources
Working capital increased to $78.3 million at September 30, 2000 from $66.4
million at June 30, 2000, and the current ratio remained flat at 3.1. During
the same period, cash, cash equivalents, and short-term investments increased to
$62.5 million from $55.3 million, primarily due to the $1.8 million gain from
the sale of Parthus stock, $4.5 million in unrealized gains on securities, $2.4
million in proceeds from issuance of common stock, offset by $0.7 million used
for operating activities, and $0.8 million used for other investing and
financing activities. At September 30, 2000 we had approximately $7.0 million
of unused credit available under our bank line of credit.
We believe that cash, cash equivalents, funds generated from operations,
investments, financing activities, and funds available under our bank line of
credit will be sufficient to satisfy working capital requirements and capital
expenditures over the near term. At September 30, 2000, we had no outstanding
commitments to purchase capital equipment. However we expect to begin
implementation of an ERP system during the second half of fiscal 2001.
Factors That May Affect Future Operating Results
Our 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. 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 :
(a) the ability to integrate successfully and timely the Communications
Synchronization business, products and employees acquired from Hewlett-
Packard with our employees including the transfer of Korea production
lines to our Puerto Rico facility;
(b) the ability to obtain sufficient supplies of GPS products from SSL;
(c) the ability to obtain sufficient supplies of sole or limited source
components;
(d) changes in the product or customer mix of sales;
(e) the ability to manage fluctuations in manufacturing yields and other
factors;
(f) increases in the prices of the components that we purchase;
(g) the ability to manage the level and value of inventories;
(h) the ability to accurately anticipate both the volume and timing of
customer orders, including current and planned Communications
Synchronization products;
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(i) the cancellation or rescheduling of customer orders;
(j) the gain or loss of significant customers;
(k) the ability to introduce new products on a timely and cost-effective
basis;
(l) the timing of new product introductions and that of our competitors;
(m) customer delays in qualification of new products;
(n) the ability to manage increased competition and competitive pricing
pressures;
(o) the ability to manage fluctuations, especially declines, in the average
selling prices of products;
(p) market acceptance of new or enhanced versions of our products and our
competitors' products;
(q) the ability to manage the long sales cycle associated with our
products;
(r) the ability to manage cyclical conditions in the telecommunications
industry;
(s) the ability to maintain quality levels for the product's, and
(t) 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
or reduction in our average selling prices, or any material delay in customer
orders may harm our business, financial condition and results of operations. 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. If our
quarterly or annual operating results do not meet the expectations of securities
analysts and investors, the trading price our common stock could significantly
decline.
Uncertainty of Timing of Product Sales; Limited Backlog. A substantial
portion of our quarterly net sales depend on 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.
Delays in Obtaining Needed Standard Parts, Single Source Components and
Services from Suppliers. Delays in standard parts and services from our
suppliers are due to an overall worldwide parts shortage which has resulted in
longer lead times for certain key parts. Additionally, we have experienced
delays in our single source components from time to time. The inability to
obtain sufficient key components as required could result in delays or
reductions in product shipments, which could harm our business. For example we
will discontinue our IDST products line because components are no longer
available from our suppliers.
Customer Concentration. A relatively small number of customers have
historically accounted for, and is expected to continue to account for, a
significant portion of our net sales in any given fiscal period. Samsung
accounted for 18.3% of our net sales in the first quarter of fiscal 2001. The
timing and level of sales to our largest customers have fluctuated significantly
in the past and is expected to continue to fluctuate significantly from quarter
to quarter and year to year in the future. For example our sales to Samsung was
$10.7 million in fiscal 2000 compared to zero in fiscal 1999 and 1998, primarily
due to the acquisition of wireless business from the HP Product Line business.
We cannot be sure as to the timing or
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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.
New Product Development. The market for our products is characterized by:
(a) rapidly changing technology;
(b) evolving industry standards and changes in end-user requirements and
(c) 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. We
recently established a Broadband Access division and have not yet commercially
shipped the GoLong solution. The development of new or enhanced products is a
complex and uncertain process requiring the accurate anticipation of
technological and market trends. We may experience design, manufacturing,
marketing and other difficulties that could delay or prevent the development,
introduction or marketing of new products and enhancements. The introduction of
new or enhanced products also requires that we manage the transition from older
products in order to minimize disruption in customer ordering patterns and
ensure that adequate supplies of new products can be delivered to meet
anticipated customer demand. In the future, we expect to develop certain new
products, that we may not successfully develop, introduce, or manage the
transition of these new products. Furthermore, products such as those we
currently offer may contain undetected or unresolved errors when they are first
introduced, or as new versions are released. Despite testing, errors may be
found in new products or upgrades after commencement of commercial shipments.
These errors could result in delays; or loss of market acceptance and sales;
diversion of development resources; injury to our reputation and increased
service and warranty costs. Delays in new product development or delays in
production startup could harm our business.
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.
Competition; 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:
(a) the cost effectiveness, quality, price, service and market acceptance our
products;
(b) our response to the entry of new competitors or the introduction of new
products by our competitors;
(c) our ability to keep pace with changing technology and customer
requirements;
(d) the timely development or acquisition of new or enhanced products; and
(e) 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 permit Incumbent
Local Exchange Carriers (ILECs), among our largest customers, to manufacture
telecommunications equipment. Many of our competitors, or potential
competitors, are more established than us and have greater financial,
manufacturing, technical and marketing resources. Furthermore, we expect:
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(a) 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
(b) to continue to experience pricing pressures in all of our markets and to
continue to experience price erosion in several of our product lines.
Proprietary Technology. 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 registration, contractual restrictions and internal
security to establish and protect our proprietary rights. There can be no
assurance 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, 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 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 third parties will not assert infringement claims
against us in the future, or that any such claims will not result in costly
litigation or require us 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.
Business Acquisition and Integration. The 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:
(a) the ability to integrate the acquired operations, technologies and
products;
(b) the ability to successfully transfer the subcontractor manufacturing lines
in Korea to our Puerto Rico facility;
(c) potential disruption in sales and marketing;
(d) the diversion of management's attention from other business concerns;
(e) risks of entering markets in which we have no or limited direct prior
experience and
(f) the potential loss of key employees of the acquired company.
Potential Acquisition. 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, and offer growth opportunities. In the event of any
future transactions, we could:
(a) issue stock that would dilute our current shareholders' percentage
ownership;
(b) incur debt;
(c) assume liabilities or
(d) incur significant one-time write-offs.
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These transactions also involve numerous risks, including:
(a) problems combining the acquired operations, technologies or products;
(b) unanticipated costs;
(c) diversion of management's attention from our core business;
(d) adverse effects on existing business relationships with suppliers and
customers;
(e) risks associated with entering markets in which we have no or limited
prior experience and
(f) potential loss of key employees of purchased organizations.
We cannot assure that we will be able to successfully integrate any business,
products, technologies or personnel that we might purchase in the future.
Environmental Matters. 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 our
manufacturing process. While we have not experienced any significant effects on
our 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 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, 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 harm our business.
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 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 by the
imposition upon certain of our 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 harm our business.
Risks Associated with International Sales. Our export sales, which are
primarily to Western Europe, Latin America, the Far East, and Canada accounted
for 31% of net sales in first quarter of fiscal 2001 and 25% of net sales in the
corresponding first quarter of fiscal 2000, respectively. International sales
subject us to increased risks including:
(a) foreign currency fluctuations;
(b) export restrictions;
(c) longer payment cycles;
(d) unexpected changes in regulatory requirements or tariffs;
(e) protectionist laws and business practices that favor local competition;
(f) dependence on local vendors;
(g) reduced or limited protections of intellectual property rights and
(h) political and economic instability.
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To date, almost none of our international revenue and cost obligations 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 these 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. 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, there can be no assurance that such provisions
will be adequate. Our business could be materially affected, if significant
inventories become obsolete, or are otherwise not able to be sold at favorable
prices.
Changes to Effective Tax Rate. 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 years 2003 through 2006.
Fluctuations in Stock Price. 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 effect on the trading price of our
common stock.
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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 $39.5 million
as of September 30, 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 September 30, 2000, the fair
value of the portfolio would not decline by a material amount. Additionally, a
10% decrease in the market interest rates would not materially impact the fair
value of the portfolio. 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 harm our business.
Foreign Currency Exchange Rate Exposure. The Company's exposure to market risk
due to fluctuations in foreign currency exchange rates relates primarily to the
foreign denominated balances, including, 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 pound sterling or other currencies. Based on the company's foreign
denominated net receivables of $0.3 million at September 30, 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 business.
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 materially harmful effect on the Company's business.
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 harm
our business.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item is disclosed in Note 7 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 2. Not Applicable
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Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.5 Amended Articles of Incorporation (as to be filed with the
California Secretary of State)
3.6 Amended Bylaws
10.41 Employment offer letter by and between the Company and
William Slater dated August 7, 2000.
27.1 Financial Data Schedule.
(b) The Company filed no reports on Form 8-K this quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on our behalf by the
undersigned thereunto duly authorized.
SYMMETRICOM, INC.
(Registrant)
DATE: November 13, 2000 By:
-------------------
/s/ William Slater
-------------------
William Slater
Chief Financial Officer
(for Registrant and as Principal
Financial and Accounting Officer)
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