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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 0-2287
SYMMETRICOM, INC.
(Exact name of registrant as specified in its charter)
California No. 95-1906306
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 Orchard Parkway, San Jose, CA 95131-1017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-9403
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Applicable Only to Issuers Involved in Bankruptcy Proceedings
During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
Applicable Only to Corporate Issuers:
Indicate number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
CLASS OUTSTANDING AS OF January 31, 2000
----- ----------------------------------
Common Stock 15,002,266
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SYMMETRICOM, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements:
<TABLE>
<CAPTION>
Consolidated Balance Sheets -
<S> <C>
December 31, 1999 and June 30, 1999 3
Consolidated Statements of Operations -
Three and six months ended December 31, 1999 and 1998 4
Consolidated Statements of Cash Flows -
Six months ended December 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 20
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYMMETRICOM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,005 $ 44,897
Short-term investments 21,849 14,300
-------- --------
Cash and investments 35,854 59,197
Accounts receivable, net 13,783 10,915
Inventories 13,386 10,805
Other current assets 3,999 3,762
-------- --------
Total current assets 67,022 84,679
Property, plant and equipment, net 21,190 20,615
Other assets, net 15,525 1,026
-------- --------
$103,737 $106,320
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,999 $ 3,564
Accrued liabilities 15,028 13,929
Current maturities of long-term obligations 640 595
-------- --------
Total current liabilities 21,667 18,088
Long-term obligations 7,885 8,069
Deferred income taxes 255 559
Shareholders' equity:
Preferred stock, no par value;
Authorized - 500 shares
Issued - none -- --
Common stock, no par value;
Authorized - 32,000 shares
Issued and outstanding - 14,926 and 14,926 shares 17,869 18,934
Unrealized gain on securities, net 3,310 1,400
Retained earnings 52,751 59,270
-------- --------
Total shareholders' equity 73,930 79,604
-------- --------
$103,737 $106,320
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $22,968 $19,603 $42,585 $38,189
Cost of sales 13,147 10,307 23,725 19,922
------- ------- ------- -------
Gross profit 9,821 9,296 18,860 18,267
Operating expenses:
Research and development 4,754 3,374 8,057 6,661
Selling, general and administrative 6,994 5,538 12,051 10,646
Non-recurring charges 6,818 -- 6,818 --
------- ------- ------- -------
Operating income (loss) (8,745) 384 (8,066) 960
Interest income 520 438 1,197 894
Interest expense (174) (180) (350) (360)
------- ------- ------- -------
Earnings (loss) from continuing operations before
income taxes (8,399) 642 (7,219) 1,494
Income taxes (995) 135 (700) 314
------- ------- ------- -------
Earnings (loss) from continuing operations (7,404) 507 (6,519) 1,180
Earnings (loss) from discontinued operations, net of
tax -- 150 -- (186)
------- ------- ------- -------
Net earnings (loss) $(7,404) $ 657 $(6,519) $ 994
======= ======= ======= =======
Earnings (loss) per share - basic and diluted:
Earnings (loss) from continuing operations $(.49) $ .03 $(.43) $ .07
Earnings (loss) from discontinued operations -- .01 -- (.01)
------- ------- ------- -------
Net earnings (loss) $(.49) $ .04 $(.43) $ .06
======= ======= ======= =======
Weighted average shares outstanding - basic 15,055 15,406 15,030 15,604
======= ======= ======= =======
Weighted average shares outstanding - diluted 15,055 15,432 15,030 15,630
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1999 1998
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (6,519) $ 994
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Loss from discontinued operations -- 186
In-process research and development write off 3,468 --
Depreciation and amortization 2,909 2,305
Deferred income taxes (725) 12
Changes in assets and liabilities:
Accounts receivable (2,868) (277)
Inventories (1,857) 2,046
Accounts payable 2,435 210
Accrued liabilities 699 1,479
Other 184 (507)
-------- --------
Net cash provided by (used for) continuing operations (2,274) 6,448
Net cash provided by discontinued operations -- 1,057
-------- --------
Net cash provided by (used for) operating activities (2,274) 7,505
-------- --------
Cash flows from investing activities:
Cash paid for acquisition and related costs (19,419) --
Purchases of short-term investments (21,139) (24,943)
Maturities of short-term investments 15,500 14,000
Purchases of plant and equipment, net (2,250) (1,457)
Other (106) (354)
-------- --------
Net cash used for investing activities (27,414) (12,754)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term obligations -- 595
Repayment of long-term obligations (139) (100)
Proceeds from issuance of common stock 1,866 402
Repurchase of common stock (2,931) (4,484)
-------- --------
Net cash used for financing activities (1,204) (3,587)
-------- --------
Net decrease in cash and cash equivalents (30,892) (8,836)
Cash and cash equivalents at beginning of period 44,897 31,369
-------- --------
Cash and cash equivalents at end of period $ 14,005 $ 22,533
======== ========
</TABLE>
(continued)
5
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Non-cash investing and financing activities:
Unrealized gain on securities, net $ 1,910 $ --
Cash payments for:
Interest $ 350 $ 360
Income taxes 793 (681)
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 $ --
======== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
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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" 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 December 31, 1999, the
results of operations for the three and six month periods then ended and its
cash flows for the six month period then ended. The results of operations for
the periods presented are not necessarily indicative of those that may be
expected for the full year.
2. 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 estimated 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. Inventories. Inventories are stated at the lower of cost (first-in, first-
----------- out) or market. Inventories consist of (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
---- ----
<S> <C> <C>
Raw materials $ 4,397 $ 3,859
Work-in-process 3,286 3,173
Finished goods 5,703 3,773
------- -------
$13,386 $10,805
======= =======
</TABLE>
4. 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 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.
7
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5. Contingencies. In January 1994, a securities class action complaint was
-------------
filed against the Company and certain of its present and former officers or
directors in the United States District Court, Northern District of California.
The action was filed on behalf of a putative class of purchasers of the
Company's stock during the period April 6, 1993 through November 10, 1993. The
complaint seeks unspecified money damages and alleges that the Company and
certain of its present or former officers or directors violated federal
securities laws in connection with various public statements made during the
putative class period. The Court dismissed the first and second amended
complaints with leave to amend. The plaintiff filed a third amended corrected
complaint in August 1997. The Company filed a motion to dismiss this third
amended complaint, which was denied in January 1998. Discovery is proceeding.
The trial is scheduled to begin on July 10, 2000. The Company and its officers
believe that the complaint is entirely without merit, and intend to continue to
defend the action vigorously. The Company is also a party to certain other
claims in the normal course of its operations. While the results of such claims
cannot be predicted with any certainty, management believes that the final
outcome of such matters will not have a material adverse effect on the Company's
financial position and results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business Outlook and Risk Factors
The trend analyses and other non-historical information contained in 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.
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;
. 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 product;
. the cancellation or rescheduling of customer orders;
. changes in the product or customer mix of sales;
. 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;
8
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. 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.
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
9
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. 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. In addition, due in part
to the enactment of The Telecommunications Act of 1996, which permits Incumbent
Local Exchange Carriers (ILECs), among our largest customers, to manufacture
telecommunications equipment, ILECs may increasingly become significant
competitors. 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
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.
10
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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;
. 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.
11
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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.
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
12
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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 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
13
<PAGE>
(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 estimated 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.
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 $3.4 million, or 17%, to $23.0 million in
the second quarter of fiscal 2000 from $19.6 million in the second quarter of
fiscal 1999. Net sales increased by $4.4 million, or 12%, to $42.6 million in
the first half of fiscal 2000 from $38.2 million in the first half of fiscal
1999. The increases in net sales in the second quarter and first half 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, partially offset by lower sales of synchronization products.
The Company's gross profit, as a percentage of net sales, decreased to 43% and
44% in the second quarter and first half of fiscal 2000, respectively, compared
to 47% and 48% in the corresponding periods of fiscal 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 21% of net sales) and
$8.1 million (or 19% of net sales) in the second quarter and first half of
fiscal 2000, respectively, compared to $3.4 million (or 17% of net sales) and
$6.7 million (or 17% 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
14
<PAGE>
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 $7.0 million (or 30% of net
sales) and $12.1 million (or 28% of net sales) in the second quarter and first
half of fiscal 2000, respectively, compared to $5.5 million (or 28% of net
sales) and $10.6 million (or 28% 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 $80,000 to $0.5 million in the second quarter of
fiscal 2000 from $0.4 million in the second quarter of fiscal 1999. Interest
income increased by $0.3 million to $1.2 million in the first half of fiscal
2000 from $0.9 million in the first half 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,
partially offset by the $19.4 million cash expenditure to acquire the HP Product
Line business.
Interest expense remained relatively constant at $0.2 million and $0.4 million
for the second quarter and first half of fiscal 2000, respectively, compared to
the corresponding periods of fiscal 1999.
The Company's effective tax rate was 12% in the second quarter of fiscal 2000,
compared to 21% in the corresponding period of fiscal 1999. The Company's
effective tax rate was 10% in the first half 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. Therefore, the loss generated
from the acquisition of the HP Product Line business did not result in a tax
benefit. 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
15
<PAGE>
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, loss from continuing operations
was $7.4 million or $.49 per share (diluted) in the second quarter of fiscal
2000, compared to earnings from continuing operations of $0.5 million or $.03
per share (diluted) in the corresponding period of fiscal 1999. Loss from
continuing operations was $6.5 million or $.43 per share (diluted) in the first
half of fiscal 2000, compared to earnings from continuing operations of $1.2
million or $.08 per share (diluted) in the corresponding period of fiscal 1999.
As a result of the factors discussed above, earnings from discontinued
operations was zero and $0.2 million or $.01 per share (diluted) in the second
quarter of fiscal 2000 and fiscal 1999, respectively. Net loss from
discontinued operations was zero and $0.2 million or $.01 per share (diluted) in
the first half of fiscal 2000 and fiscal 1999, respectively.
As a result of the factors discussed above, net loss was $7.4 million or $.49
per share (diluted) in the second quarter of fiscal 2000, compared to net
earnings of $0.7 million or $.04 per share (diluted) in the corresponding period
of fiscal 1999. Net loss was $6.5 million or $.43 per share (diluted) in the
first half of fiscal 2000, compared to earnings from continuing operations of
$1.0 million or $.06 per share (diluted) in the corresponding period of fiscal
1999.
Liquidity and Capital Resources
Working capital decreased to $45.4 million at December 31, 1999 from $66.6
million at June 30, 1999, and the current ratio decreased to 3.1 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. During the same period, cash, cash equivalents
and short-term investments decreased to $35.9 million from $59.2 million,
primarily due to $19.8 million in cash used for the acquisition of the HP
Product Line business, $1.9 million in cash used for operating activities, $2.9
million used for repurchase of common stock, $2.3 million used for capital
expenditures, $0.2 million used for other expenditures, offset by $1.9 million
in proceeds from issuance of common stock and $1.9 million in unrealized gain on
securities. At December 31, 1999, the Company had $6.5 million of unused credit
available under its bank line of credit.
The Company believes that cash, cash equivalents, short-term investments,
funds generated from operations, and funds available under its bank line of
credit will be sufficient to satisfy working capital requirements and capital
expenditures over the near term. At December 31, 1999, the Company had no
material outstanding commitments to purchase capital equipment.
16
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to fluctuations in interest
rates and in foreign currency exchange rates:
Interest Rate Exposure. The Company's exposure to market risk due to
fluctuations in interest rates relates primarily to its short-term investment
portfolio, which consists of corporate debt securities, which are classified as
available-for-sale and were reported at an aggregate fair value of $21.8 million
as of December 31, 1999. These available-for-sale securities are subject to
interest rate risk inasmuch as their fair value will fall, if market interest
rates increase. If market interest rates were to increase immediately and
uniformly by 10% from the levels prevailing at December 31, 1999, the fair value
of the portfolio would not decline by a material amount. The Company does not
use derivative financial instruments to mitigate the risks inherent in these
securities. However, the Company does attempt to reduce such risks by typically
limiting the maturity date of such securities to no more than nine months,
placing its investments with high credit quality issuers and limiting the amount
of credit exposure with any one issuer. In addition, the Company believes that
it currently has the ability to hold these investments until maturity, and
therefore, believes that reductions in the value of such securities attributable
to short-term fluctuations in interest rates would not materially affect the
financial position, results of operations or cash flows of the Company.
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 $2.6 million at December 31,
1999, a hypothetical 10% adverse change in sterling against U.S. dollars would
not result in a material foreign exchange loss. Consequently, the Company does
not expect that reductions in the value of such intercompany balances or of
other accounts denominated in foreign currencies, resulting from even a sudden
or significant fluctuation in foreign exchange rates, would have a direct
material impact on the Company's financial position, results of operations or
cash flows.
Notwithstanding the foregoing analysis of the direct effects of interest rate
and foreign currency exchange rate fluctuations on the value of certain of the
Company's investments and accounts, the indirect effects of such fluctuations
could have a material adverse effect on the Company's business, financial
condition and results of operations. For example, international demand for the
Company's products is affected by foreign currency exchange rates. In addition,
interest rate fluctuations may affect the buying patterns of the Company's
customers. Furthermore, interest rate and currency exchange rate fluctuations
have broad influence on the general condition of the U.S., foreign and global
economies, which could materially and adversely affect the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is disclosed in Note 5 of Notes
to Consolidated Financial Statements set forth in Item 1 of Part I, above. The
text of such Note is hereby incorporated herein by reference.
17
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on October 25, 1999.
(b) All director candidates: Richard W. Oliver, Thomas W. Steipp, Robert M.
Neumeister, Krish A. Prabhu, William D. Rasdal and Richard N. Snyder were
duly elected.
(c)(i) The votes for the director candidates were as follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
-------- --------- --------------
<S> <C> <C>
Richard W. Oliver 14,089,496 235,705
Thomas W. Steipp 14,080,316 244,885
Robert M. Neumeister 14,082,866 242,335
Krish A. Prabhu 13,530,117 795,084
William D. Rasdal 13,890,628 434,573
Richard N. Snyder 14,089,028 236,173
</TABLE>
There were no abstentions or broker non-votes with respect to election of
directors.
(c)(ii) The Company's 1999 Employee Stock Plan and the reservation of 900,000
shares of the Company's Common Stock for issuance thereunder was
approved. The votes were as follows:
Broker
For Against Abstain non-votes
--- ------- ------- ---------
5,692,128 1,358,425 379,162 7,594,093
(c)(iii) The Company's 1999 Director Stock Option Plan and the reservation of
300,000 shares of the Company's Common Stock for issuance thereunder
was approved. The votes were as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain non-votes
--- ------- ------- ---------
<S> <C> <C> <C>
5,713,412 1,268,494 545,982 7,495,920
</TABLE>
(c)(iv) The shareholders ratified the appointment of Deloitte & Touche LLP as
the Company's independent auditors for the current fiscal year. The
votes were as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain non-votes
--- ------- ------- ---------
<S> <C> <C> <C>
13,958,972 196,592 40,637 827,607
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
18
<PAGE>
(b) Reports on Form 8-K
A current report on Form 8-K dated October 14, 1999, was filed to
disclose on September 30, 1999, the Company's acquisition of certain of
Hewlett-Packard's assets, operations and the business related to the
design, manufacture and marketing of network synchronization and timing
equipment for global communications networks for a net purchase price of
approximately $19.8 million.
An amended current report on Form 8-K dated December 14, 1999, was filed
to amend Item 7, financial statements and exhibits of its current report
on Form 8-K, originally filed with the Securities and Exchange
Commission on October 14, 1999, reporting the acquisition by Registrant
from Hewlett-Packard Company, its Communications Synchronization
Business pursuant to the Master Asset Purchase Agreement dated August
30, 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYMMETRICOM, INC.
(Registrant)
DATE: February 10, 2000 By:
---------------------
/s/ Maurice Austin
-------------------------------
Maurice Austin
Chief Financial Officer
(for Registrant and as Principal Financial and
Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,005
<SECURITIES> 21,849
<RECEIVABLES> 14,020
<ALLOWANCES> 237
<INVENTORY> 13,386
<CURRENT-ASSETS> 67,022
<PP&E> 41,603
<DEPRECIATION> 20,413
<TOTAL-ASSETS> 103,737
<CURRENT-LIABILITIES> 21,667
<BONDS> 0
0
0
<COMMON> 17,869
<OTHER-SE> 3,310
<TOTAL-LIABILITY-AND-EQUITY> 103,737
<SALES> 42,585
<TOTAL-REVENUES> 42,585
<CGS> 23,725
<TOTAL-COSTS> 23,725
<OTHER-EXPENSES> 26,926
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 350
<INCOME-PRETAX> (7,219)
<INCOME-TAX> (700)
<INCOME-CONTINUING> (6,519)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,519)
<EPS-BASIC> (.43)
<EPS-DILUTED> (.43)
</TABLE>
