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[LOGO OF SYMMETRICOM]
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Fellow Symmetricom shareholders:
We have just completed a year of record results for Symmetricom, achieving
our goal to become the leading supplier of synchronization and timing
solutions for global communications networks. We reported record revenue and
income; we added three times as many new customers than in any other year; we
streamlined our operations to improve profitability; and we strengthened our
balance sheet. Also during the year, we acquired the Communications
Synchronization business of Hewlett-Packard and divested our Global
Positioning System (GPS) research and development operation in the United
Kingdom. Both of these transactions had a significant impact on our record
operating results for the year. Our market leadership provides a solid
foundation of growth for the company, which I am confident will continue to
deliver value to our shareholders.
Looking to the future, our vision is to build on the foundation we have
laid in our core markets and transform the company to become a leading
supplier of broadband networking solutions. To address that goal, in FY2000 we
launched our new AccessMax division, a business focused on delivering
solutions which will maximize the delivery of broadband services over the
existing copper infrastructure. As our network service providers continue to
expand their networks and extend their offerings of broadband services, the
opportunities for Symmetricom will increase, driving demand for both our core
sync and timing products and also our new AccessMax broadband solutions.
Highlights of Fiscal Year 2000
. Net sales grew from $77 million in fiscal year 1999 to $108 million--a 40
percent increase.
. Earnings from continuing operations increased from $2.8 million in fiscal
year 1999 to $5 million--an increase of 81 percent. Earnings per share
from continuing operations was $0.21 (diluted), compared to $0.12
(diluted) in fiscal year 1999.
. We ended the year on sound financial footing, with $55 million in cash
and investments.
. Our core business delivered robust growth in each of our major market
areas. We added 278 new customers, an increase of over 230 percent of the
total number of new customers added in fiscal year 1999.
. We ended the year with record revenue, bookings and backlog. Ending
backlog in fiscal year 2000 was over 270% of fiscal year 1999 levels.
. Customers around the world are now choosing Symmetricom as the supplier
of choice for network synchronization and timing solutions. We are
installed in central offices, wireless base stations, wireless switching
centers, and other network nodes in over 60 countries around the world.
. Three years ago, our domestic business represented 83 percent of our
sales. Today, despite strong growth in our domestic business, sales to
international customers has increased as a percentage of total revenue,
and we expect that trend to continue in the current fiscal year. In
fiscal year 2000, we added major new customers in Europe, South America,
Mexico, and South Africa.
. We have continued to be recognized as best-of-breed in execution of our
corporate strategy. As proof, in fiscal year 2000, Symmetricom was
recognized for its technological advances and awarded Frost & Sullivan's
2000 Market Engineering Award for Merger & Acquisition Strategy.
All of this adds up to a benchmark year in terms of financial performance,
a year which I believe is a cornerstone upon which we will build our success
in the future. I am incredibly proud of everyone at Symmetricom for their
tireless efforts to deliver such extraordinary results.
Looking to the future for Symmetricom, our vision is to build upon our
position as a trusted supplier of synchronization and timing--an essential
element on which our customers rely for quality and reliability in their
networks--and leverage that expertise into service enhancement solutions that
touch everyone who accesses the network. Our vision is to become the company
that makes the "Net...Work" for everyone. This vision addresses an opportunity
of significant magnitude for our company, an opportunity that we believe will
be valuable to both our customers and to our shareholders. We are deeply
committed to making this vision a reality.
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Goals for Fiscal Year 2001
In fiscal year 2001, Symmetricom has four major goals: growth in our core
synchronization and timing business; growth in our new AccessMax broadband
networking business; improve operational excellence through leveraging
investment in Internet-based business processes; and continue to build a
culture in Symmetricom which fosters success.
Growth in our Core Synchronization and Timing Business.
Today we are the #1 supplier of network synchronization and timing
solutions to global networks. We hold the enviable position of being connected
to every major telecommunications service provider, both in the network
infrastructure, and in the rapidly growing network access space. Our hard-won
market leadership is absolutely crucial to our success in the future, because
it provides the customer connection, technology building blocks, and profits
we need to realize our vision. We will continue to invest in delivering our
valuable solutions to these customers and to new customers which will fuel our
growth in the future.
Growth in Our New Broadband Network Markets.
Today we stand at the dawn of an exciting new future for Symmetricom, a
future in which we will endeavor to broaden our market impact by delivering
solutions which make the "Net...Work" for everyone. Our AccessMax division is
at the hub of that vision, developing new solutions which are designed to
enable broadband access from anywhere and to enhance the delivery of broadband
services to anyone who accesses the telecommunications network.
Our first product, "GoLong," which we launched in June of this year, is
designed to extend the reach of ADSL services, allowing our customers to make
the "Net...Work" for their customers--people like you and me. We are targeting
field trials for GoLong in the current fiscal year, and if those trials are
successful, we expect to begin shipping the product in the summer of 2001.
GoLong is the first in a family of products planned for AccessMax. Look for
exciting new developments in this business in the current year.
Invest in Improving our Business Processes to Achieve Operational Excellence.
In fiscal year 2001, Symmetricom will invest in improving our business
processes in order to drive overall operational excellence in the company. Our
task is to build a platform which allows us to plan, measure, and achieve
continuous improvement in our dealings with our customers, as well as improve
productivity, efficiency, and profitability.
Maintain Our Strong Values.
We owe our success this year and in the future to the commitment, passion,
and daily sacrifice of the people of Symmetricom. Today, we operate in a world
where people resources have a greater impact on the success of a company than
ever before. Every year, billions of dollars are invested in improving the
productivity of people resources. I believe those dollars are wasted if a
company does not foster an environment in which its workers take pride and
ownership in their contribution to the company. At Symmetricom, we are
committed to an creating an environment which attracts, supports, and fosters
the continued growth of everyone who makes a contribution to our success. That
effort is the most valuable investment we make in the continued success of our
company.
In closing, I'd like you to look at why we at Symmetricom are so excited
about what we are doing here and our vision of making the "Net...Work" for
everyone: Today, our synchronization and timing solutions play an essential
role in the quality of the network. In the future, increased bandwidth will
result in richer content available on the network, attracting more and more
users. Our future vision is to build on what we have learned in our core
business to deliver solutions which will reach out to millions of more users
in a multi-billion dollar global market, making the "Net...Work" for everyone.
Best wishes to our customers, employees, and shareholders, and continued
success to all in fiscal year 2001.
Thomas W. Steipp
Chief Executive Officer
Symmetricom, Inc.
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 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 its charter)
California No. 95-1906306
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 Orchard Parkway, San Jose,
California
95131-1017
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (408) 943-9403
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
----------------
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
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)29.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant at September 5, 2000 was approximately $323,498,409. The number
of shares outstanding of the registrant's Common Stock at September 5, 2000
was 23,306,217.
Documents Incorporated by Reference
Portions of the Symmetricom, Inc. Proxy Statement for the 2000 Annual
Meeting of Shareholders filed with the Commission on or about September 26,
2000 are incorporated by reference into Part III of this Annual Report on Form
10-K.
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The trend analyses and other non-historical information contained in this
Form 10-K 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 AccessMax division, amortization of goodwill,
customer concentration, competition and pricing pressure, the effective tax
rate, year 2000 issues, 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. The Company's actual results could differ materially
from those discussed in the forward looking statements due to a number of
factors including, without limitation, the factors listed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Business Outlook and Risk Factors" included below in Part II, Item 7.
PART I
Item 1. Business
Symmetricom, Inc. (the "Company") was incorporated in California in 1956.
We design, manufacture, and market advanced network synchronization and timing
products, and intelligent access systems for the global communications
marketplace. Our time and frequency products control or "synchronize" the flow
of information: voice, video, or data, in telecommunication networks. Our
solutions play a critical role in the operation and quality of service of
traditional narrowband voice and data networks, CDMA wireless networks and
emerging broadband multimedia communications networks, enabling customers to
maximize network efficiency in today's rapidly evolving public communications
network environment.
The Company, a pioneer in the development of Global Positioning System
(GPS) based synchronization equipment, shipped its first network
synchronization product in 1985. In August 1999, we acquired certain assets of
Hewlett-Packard Company's Communications Synchronization Business, and we are
now the leading supplier of telecommunications network synchronization and
timing equipment to global network service providers. Our products are
installed in wireline and wireless networks in more than 60 countries, and we
believe that over 70% of network synchronization equipment installed in North
America was supplied by us. We also supply intelligent network access systems
to global network service providers. In June 2000, we announced the formation
of the AccessMax division, a business unit focused on developing solutions
that maximize bandwidth and services in the network access market, which is
the link between the core network and the customer premise, or the last mile.
Our customers include: public network providers, Incumbent Local Exchange
Carriers (ILECs), Post Telephone and Telegraph companies (PTTs), Competitive
Local Exchange Carriers (CLECs), other telephone companies, wireless service
providers, cable TV operators, Internet Service Providers (ISPs) and
communications original equipment manufacturers (OEMs).
Industry Background
The communications industry is undergoing rapid growth, driven by
technology, global changes in government regulation, the needs of service
providers and enterprises, and customer demand. Communications technology is
moving from voice networking to data networking, and from circuit switching to
packet switching.
The factors driving this growth and change consist primarily of the
following: increased demand for new, higher speed, higher capacity services
such as Internet access; digital video and advanced wireless services;
continuous technological development; the convergence of voice, Internet/data
and video network traffic into integrated multimedia services over public and
private networks; and a changing regulatory and competitive environment.
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The developing convergence of voice and data, wired and wireless, audio and
video, and the Internet into integrated multimedia services transmitted over
one network have prompted the development and use of "broadband" networks.
Broadband networks feature the improved reliability and increased speed of
transmission generally required for data and video transmission over the
network. Growth in broadband network applications has resulted in increased
investment in digital networks by network operators in order to expand network
capacity and provide new applications and services to meet users' needs.
The upgrading of existing networks from analog to digital and the
installation of new wireline networks to meet this demand have resulted in an
increased need for accurate and precise synchronization and timing equipment.
Increased demand for new, higher-speed, higher-capacity services, such as
Internet access, digital video, and advanced wireless services, has in turn
resulted in substantial demands on network infrastructure over the past decade.
Networks increasingly are required to transmit large volumes of data and video
for the purpose of communicating information, conducting business, and
delivering entertainment. In order to transfer voice, data, or video traffic
from one line or network to another, both lines or segments of the network must
operate at the same frequency within a very narrow tolerance. The failure to
synchronize the components in digital networks may result in the loss of
information, requiring re-transmission and thus decreasing network efficiency
and increasing the costs to the network operator. As a result, digital systems
have a greater need for accurate synchronization than traditional analog
systems which is accomplished through the use of precise timing devices located
throughout the networks.
Markets
Wireline Infrastructure Market. The principal customers for our systems are
network operators that provide wireline local, long distance, and international
telecommunications services. This sector is growing as operators expand their
networks in order to meet the growing demand for telecommunications services.
Privatization, competition, and economic expansion have increased demand for
networking systems in emerging markets. In these markets, new wireline networks
are being installed to provide basic telephony service. In developed countries,
increased demand for new services and government deregulation has encouraged
the development of expanded networks, particularly in the local exchange and
long distance markets. The expansion of wireline and wireless networks has led
to an increased need for timing devices to synchronize the flow of information
and maximize the efficiency of the networks.
Wireless Market. Investment in the wireless network continues to grow, as
wireless network operators convert older analog networks to digital technology
and expand their digital wireless networks in order to improve transmission
quality, increase network capacity, and expand network coverage. Both analog
and digital cellular telecommunications networks consist of numerous cells
located throughout a service area, each with its own base station connected to
the wireline network through a network switch. In a wireless network, calls are
segmented, transmitted over a wider spectrum of bandwidth, and reassembled by a
receiver within the network. Without proper synchronization, signal degradation
resulting from this process of segmentation and reassembly may result in
dropped calls and loss of data, decreasing network efficiency and capacity. In
order to minimize the problems which result from poor synchronization, cellular
operators and cellular base station manufacturers require precise timing
equipment to be installed in each base station.
Network Access Market. In February 1996, the U.S. Congress enacted the
Telecommunications Reform Act of 1996 (the "Telecommunications Act"), which
opened competition for local loop access services to local telephone operators,
long distance telephone companies, cable TV companies, electric utilities, and
others. As a result of deregulation, new companies offering state-of-the-art,
digital telecommunications networks that provide an alternative to the ILECs
have entered the market. These companies, known as Competitive Local Exchange
Carriers (CLECs), offer competitive services that include long distance,
Internet, data transmission, private line, and local dial tone services.
Traditionally, synchronization and timing have been provided to CLECs as part
of the Service Level Agreements with ILECs who provide backhaul services to the
CLECs. We believe that as these new service providers expand their wireline
networks, the demand for timing devices will increase as the new
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competitive carriers elect to rely on their own synchronization equipment and
maintain tighter control over the flow of information and the efficiency of
their networks.
Products
We design and manufacture timing and frequency products and intelligent
access products for telecommunications networks.
Network Synchronization and Timing Equipment
The Public Switched Telecommunications Network (PSTN) consists of a series
of interconnected switching equipment and other components ("nodes") that
route voice, video and data traffic throughout the network. In order for these
networks to function efficiently, it is essential that each network be
synchronized and individual nodes within the network operate within very
precise tolerances. Precision synchronization equipment throughout these
networks provides a frequency reference to enable digital switching and
transmission systems to operate at a common, or synchronized, clock rate,
therefore minimizing signal degradation and ensuring error-free transmission
of data throughout a network.
High quality synchronization is an essential requirement for modern
telecommunications service providers as they move to high-capacity, high-speed
digital transmission technologies such as the Synchronous Optical Network
(SONET) and Synchronous Digital Hierarchy (SDH) networks. SONET/SDH elements
require higher quality synchronization. Synchronization is also required in
voice and video services carried on packet based network technologies, such as
Asynchronous Transfer Mode (ATM) and Voice over Internet Protocol (VoIP). ATM
requires synchronization to support certain interfaces, such as channelized
T1/E1 and SONET/SDH signals.
Wireline Products. Our core synchronization products consist principally of
Digital Clock Distributors (DCDs) based on quartz, rubidium and Global
Positioning System (GPS) technologies, which provide highly accurate and
uninterruptible timing that meets the synchronization requirements of digital
networks. We have established ourselves as a leader in telephone network
synchronization and have introduced a series of DCDs and related products.
These products provide for the generation of a stable primary timing reference
and distribution of that timing reference throughout a network, enabling
telecommunications service providers to synchronize precisely such diverse
telephone network elements as digital switches, digital cross-connect systems
and multiplexers for customers who are dependent upon high quality data
transmission.
Our Building Integrated Timing Supply (BITS) and Synchronization Supply
Unit (SSU) product family consists of four major product platforms: the
Digital Clock Distributor (DCD) Series, including the DCD 500 and 55400A
platforms, the DCD Local Primary Reference (LPR) Series, the 55300A Primary
Reference Source (PRS), and the TimeSourceTM family of Local Primary Reference
products.
The DCD 500 is a third generation synchronization and timing distribution
platform that provides the accurate clock references needed throughout a
network to ensure reliable synchronization. The 55400A Network Synchronization
Unit is a modular, fully redundant timing and distribution unit for 2048
kbit/s primary rate networks where SDH technology is being deployed and
expanded. The DCD 500 and the 55400A are designed to filter input timing
signals to virtually eliminate digital signal impairments. If the input timing
reference is lost or out of tolerance, the clock provides highly stable backup
timing, or "holdover," to allow the network to operate error-free for several
hours or days, depending on the accuracy of the installed clock. These
platforms can be equipped with additional cards to provide interfaces for a
variety of applications, including network management, synchronization
performance monitoring, and status and control measurement, which are becoming
increasingly important for network maintenance and revenue protection. The
Maintenance Interface System (MIS) card provides a communications gateway for
both local maintenance personnel and remote network management systems,
gathering all system alarm information in real time. The Precision
Synchronization Monitor (PSM) card provides synchronization and performance
monitoring, detecting early indications of
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network degradation and related troubles in network elements. The Multiple
Reference Controller (MRC) card directly accepts up to four reference sources,
based on cesium, local primary reference sources, local clock(s), and/or
network feeds and selects the most desirable reference based on a number of
quality parameters. The DCD 500 platform and the 55400A Network
Synchronization Unit series are designed to provide maximum flexibility and
meet both domestic and international standards.
The DCD-LPR Series provides the capability to effectively use either GPS or
Long Range Navigation version C (LORAN-C) to provide direct Stratum 1
traceable synchronization to network sites equipped with DCD systems. The DCD-
LPR employs an integrated, roof-mounted GPS antenna and Timing Receiver (GTR)
to receive precision Universal Coordinated Time (UTC) timing signals from GPS
satellites at virtually any location in the world or from LORAN-C radio
stations in a number of locations in the world. The DCD-LPR is usually fitted
with one or two GPS Timing Interface (GTI) cards, which receive timing inputs
from the GPS receiver and output two T1 or E1 signals, and, optionally, time-
of-day. For LORAN-C based timing, the LORAN-C Timing Interface card (LTI)
provides similar functionality. The DCD-LPR can also be used with a Local
Oscillator Unit (LOU) to provide a complete stand-alone timing generation and
distribution system for facilities where a DCD 500 distribution system is
unavailable or not needed.
Our 55300A PRS is a compact, multi-purpose network synchronization and
timing system that uses our proprietary SmartClock(TM) technology in
combination with a high quality quartz oscillator to give performance that
exceeds ITU and ANSI requirements. Designed for SONET and SDH networks, the
55300A is compatible with any BITS or SSU and can be used to upgrade
synchronization in any office. It can also be deployed as a standalone unit,
providing complete synchronization for remote offices and network edge
facilities.
The TimeSource family of products consists of low-cost PRS systems
addressing synchronization and timing needs of small or remote central
offices.
TimeSource 2500 is a standalone Stratum 1 PRS designed to offer a high-
performance, inexpensive alternative to cesium in GPS hostile environments.
TimeSource 2500 combines new oscillator, antenna, receiver and holdover
technologies to provide LPR timing and synchronization inside the office
environment, with the GPS antenna mounted in a window or through a small hole
bored through a wall. Timing outputs with Stratum 1 performance are achieved
using advanced BesTime(TM) technology. BesTime is a flexible clock engine
which provides robust performance in compromised GPS installations by
continuing to predict GPS timing information during the loss of GPS signals.
Using BesTime technology, TimeSource 2500 can deliver Stratum 1 performance
with only one satellite in view for less than 10 hours a day.
TimeSource 2700 is a standalone Stratum 1 PRS which works by using
reference signals traceable to GPS tapped from the existing Code Division
Multiple Access (CDMA) network. CDMA is one of the most widely deployed
digital wireless networks in the United States. Most major metropolitan areas
are served by at least one wireless carrier using CDMA. By its nature, CDMA is
a source of very precise time and frequency references. Each CDMA base station
is equiped with a GPS-based timing system. Using BesTime clock technology, a
patented multiple input frequency locked loop approach, the TimeSource 2700
tracks and ensembles multiple CDMA pilot signals, seamlessly switching to the
most stable, and least noisy ones. TimeSource 2700 is designed to deliver
Stratum 1 PRS in office environments where GPS is not practical or available.
The TimeSource 3000 family is a standalone Stratum 1 PRS with an integrated
GPS receiver which meets GR2830 requirements for ILEC central office
installations. Using patented multiple input frequency locked loop BesTime
clock technology, TimeSource 3000 provides undisturbed Stratum 1
synchronization when locked to GPS, with continued Stratum 1 performance for
up to 72 hours upon loss of GPS. The BesTime engine, GPS receiver, and low
cost quartz local oscillator work together to produce precise timing inputs.
T1 span line or remote oscillator inputs can be added to increase system
reliability and holdover performance in the event GPS signals are interrupted.
Designed for small or remote central offices of ILECs, TimeSource 3000 can be
configured as a PRS to front-end an office Building Integrated Timing Service
(BITS) or as an integrated PRS for remote or small offices.
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Wireless Products. Cellular and Personal Communications Services (PCS)
networks require precise frequency control and timing information. Our wireless
base station timing products are designed to deliver stable timing to
cellular/PCS base stations through a GPS receiver to capture cesium-based time
signals produced by GPS satellites.
Network synchronization and timing systems are typically priced from $3,000
to $40,000.
Intelligent Network Access Systems
The Intelligent Network (IN) utilizes a highly complex protocol called
Common Channel Signaling System Seven (SS7) to provide the basis for new
telecommunications services. The IN architecture uses two separate but parallel
paths; one to handle the voice or data traffic and a second to carry the
signaling information for call setup and routing. SS7 is used primarily to
support intelligent services such as call set-up, 800-number calling and
calling card verification. Symmetricom's transmission products are designed to
provide nearly 100% availability for these critical applications. Our network
access systems are designed for use in telephone company central offices as
transmission, monitoring, and test access vehicles for SS7 networks. They
provide maintenance personnel with flexible, centralized remote access to SS7
links for troubleshooting and performance verification, resulting in a
comprehensive solution to the monitoring and transport of links requiring
increased reliability.
Transmission Products. Our transmission products include Secure7, Secure7
Lite and the Integrated Digital Services Terminal (IDST). Secure7 is a multi-
bandwidth, intelligent, fault-tolerant, digital transmission terminal that
automatically reroutes disrupted high priority telephone data links such as
those used in the SS7 network and the 911 emergency network. Secure7 is
designed to provide nearly 100% availability for these critical data
applications.
Secure7 Lite is designed to protect SS7 networks from switch isolations and
simplex events and may be used as a standard replacement for channel banks in
SS7 applications. Both Secure7 and Secure7 Lite make use of our BestPath
technology to take advantage of the existing SS7 network architecture to
automatically route around problem areas and maintain links between network
elements.
The IDST is a network access system designed for use in telephone company
central offices which has principally been deployed as a transmission,
monitoring and test access vehicle for SS7 networks. The IDST provides
maintenance personnel with flexible, centralized remote access to SS7 links for
troubleshooting and performance verification, resulting in a comprehensive
solution to the monitoring and transport of links requiring increased
reliability.
Transmission products are typically priced at less than $5,000 for a small
system to more than $300,000 for a large system.
Network Management
Our network management systems provide the key to maximum performance,
reliability, and efficiency for synchronization networks. Symmetricom's
synchronization network management solutions include Open Synchronization
Management Framework (OSMF), TimeScan/TMN, a Unix-based TMN and Q3 compliant
full element management system for synchronization networks, TimeScan/NMS, a
Windows NT-based proprietary network management system, and TimeScan/Craft, a
Windows 95-based local craft maintenance terminal. OSMF gives
telecommunications service providers the ability to remotely manage their
synchonization networks and quickly isolate synchronization-related problems.
TimeScan/TMN and TimeScan/NMS provide scaleable, centralized real-time security
monitoring, performance monitoring, fault management, remote configuration, and
inventory of a synchronization network. The TimeScan/TMN graphical user
interface presents status at the network level and at the element level,
providing real-time representations of configuration and status of both logical
and physical properties of the network. The TimeScan/NMS graphical user
interface presents network status using hierarchical overviews of both logical
and geographical network topologies. TimeScan/Craft is a
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local craft maintenance terminal designed to provide local management and
maintenance of one DCD at a time. Each of these products features tools for
identifying customer troubles before they affect service.
AccessMax
Our AccessMax division broadens our mission beyond synchronization.
AccessMax is focused on delivering solutions that provide enhancements to key
technologies within the fast-growing network access space, including Digital
Subscriber Line (DSL), asynchronous transfer mode (ATM) and Internet Protocol
(IP) technologies. In June 2000, we announced our first product--the GoLong
ADSL loop extender. GoLong is a repeater technology, designed to extend the
reach of ADSL in the network, delivering high-bandwidth performance to
distances up to 27,000 feet from the central office.
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. The amounts allocated to IP R&D were determined through
established valuation techniques in the high technology industry and were
expensed upon acquisition, because technological feasibility had not been
established and no future alternative uses existed. Management's conclusion
that the in-process development effort had no alternative future use was
reached in consultation with the engineering personnel from both Symmetricom
and HP. Research and development costs to complete development of the research
and development to technological feasibility are not expected to have a
material impact on our business. The $14.9 million of goodwill and other
intangible assets are being amortized over estimated useful lives of five to
ten years. 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.
The allocation of the purchase price to the capitalized developed technology
was based upon management's estimates of the present value of the projected
earnings that will be generated by the current products. The allocation of the
purchase price to the IP R&D 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. The allocation of the purchase price to the other
intangible assets was based on management's estimates of avoided costs related
to the customer list and workforce, and replacement costs related to the
trademark. The purchase price allocation and intangible valuation gave explicit
consideration to the Securities and Exchange Commission's views on purchased IP
R&D as set forth in its September 9, 1998 letter to the American Institute of
Certified Public Accountants. Specifically, the valuation gave consideration to
the following: (i) the employment of a fair market value premise excluding any
Symmetricom-specific considerations which could result in estimates of
investment value for the subject assets; (ii) comprehensive due diligence
concerning all potential intangible assets including trademarks/trade names,
patents, copyrights, non-compete agreements, assembled workforce, customer
relationships and sales channel; (iii) the value of existing technology was
specifically addressed, with a view toward ensuring the relative allocations to
existing technology and IP R&D were consistent with the relative contributions
of each to the final product; and (iv) the allocation to IP R&D was based on a
calculation that considered only the efforts completed as of the transaction
date, and only the cash flow associated with said completed efforts for one
generation of the products currently in process. The acquired IP R&D had not
reached technological feasibility as of the acquisition date and was in the
following stages of completion at the date of the acquisition;
7
<PAGE>
<TABLE>
<CAPTION>
% Completion
------------
<C> <S> <C>
Timing distribution platform/domestic rather than
T-1 Terminator international 70% complete
OSMF Software/ability to manage sync network remotely 50% complete
Mini-SSU E-1 frequency SSU 90% complete
S-7 OEM GPS Timing product 80% complete
RGPS Antenna for OEM's base stations 60% complete
</TABLE>
At the acquisition date the following costs were estimated for additional
development and we've achieved the following stages of completion at June 30,
2000;
<TABLE>
<CAPTION>
Cost to Complete
At Acquisition Date % Completion Status
------------------- ------------ ------
<S> <C> <C> <C>
T-1
Terminator $400,000 80% complete Available for sale estimate, December 2000
OSMF $600,000 95% complete Available for sale estimate, October 2000
Mini-SSU $180,000 100% complete Shipping started November 1999
S-7 $300,000 100% complete Shipping started December 1999
RGPS $200,000 100% complete Shipping started February 2000
</TABLE>
We will begin to benefit from the acquired research and development of some
of these products once they begin shipping. Failure to reach successful
completion of these projects could result in impairment of the associated
capitalized intangible assets and could require us to accelerate the time
period over which the intangibles are being amortized, which could materially
harm our business.
Significant assumptions used to determine the value of IP R&D included
several factors, including the following: (i) forecast of net cash flows that
were expected to result from the development effort using projections prepared
by us and HP's management; (ii) percentage complete for the projects estimated
by considering a number of factors, including the costs invested to date
relative to total cost of the development effort and the amount of progress
completed as of the acquisition date, on a technological basis, relative to
the overall technological achievements required to achieve the functionality
of the eventual product. The technological issues were addressed by
engineering representatives from both us and HP, and when estimating the value
of the technology, the projected financial results of the acquired assets were
estimated on a stand-alone basis without nay consideration to potential
synergistic benefits or "investment value" related to the acquisition.
Accordingly, separate projected cash flows were prepared for both the existing
as well as the in-process projects. These projected results were based on the
number of units sold times average selling price less the associated costs.
When estimating the value of the existing and in-process technologies,
discount rates of 20% and 25% were used, respectively. The discount rates
considered both the status and risks associated with the respective cash flows
at the acquisition date.
Sale
On March 30, 2000 we sold our GPS division to Silicon Systems, Ltd.,
("SSL") for $9.5 million in cash. Additionally, Symmetricom made a $3.0
million investment in subscription of shares of SSL. We realized a gain of
$6.7 million, or $4.2 million after taxes related to the sale of our GPS
division. SSL changed its name to Parthus Technologies plc ("Parthus") prior
to completing an initial public offering in May 2000.
Linfinity Microelectronics Inc.
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 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
8
<PAGE>
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 payable to the former minority shareholders and optionholders of
Linfinity.
The Linfinity business has been accounted for as a discontinued operation
and, accordingly, its net assets disposed have been segregated from continuing
operations in the consolidated balance sheets and the results of operations
have been excluded from continuing operations in the consolidated statements of
operations and cash flows for all periods presented.
Business Segment Information
Information as to net sales and gross profit margin attributable to each of
our four reportable business segments for each year in the three-year period
ended June 30, 2000, is contained in Note L of the Notes to Consolidated
Financial Statements. See Part IV, Item 14. "Exhibits, Financial Statement
Schedule and Reports on Form 8-K."
Marketing
In the United States, we market and sell most of our products through our
own sales force to the ILECs, PTTs, CLECs, other telephone companies, wireless
service providers, cable TV operators, Internet service providers and
communications OEMs. Internationally, we market and sell our products to
telecommunications service providers through our own sales force, independent
sales representatives, distributors and system integrators.
Licensing and Patents
We incorporate a combination of trademark, copyright and patent
registration, contractual restrictions and internal security to establish and
protect our proprietary rights. We have United States and international patents
and patent applications pending covering certain technology used by our
operations. In addition, we use technology licensed from others. However, while
we believe that our patents have value, we rely primarily on innovation,
technological expertise and marketing competence to maintain our competitive
advantage. The telecommunications industry is characterized by the existence of
a large number of patents and frequent litigation based on allegations of
patent infringement. We intend to continue our efforts to obtain patents,
whenever possible, but there can be no assurance that patents will be issued or
that any existing patents or patents that are obtained will not be challenged,
invalidated or circumvented or that the rights granted will provide any
commercial benefit to us. Additionally, if any of our processes or designs are
identified as infringing upon patents held by others, there can be no
assurances that a license will be available or that the terms of obtaining any
such license will be acceptable to us.
Manufacturing
Our manufacturing process consists primarily of in-house electrical assembly
and test performed by our subsidiary in Aguada, Puerto Rico. Our facility is
ISO 9001 certified.
We rely on a subcontractor in Korea for assembly of our wireless products.
We are in the process of transferring these Korea subcontract manufacturing
lines to our Puerto Rico facility. The transfer is scheduled to be completed in
October 2000 which will coincide with the subcontractor closing its operations.
This reliance on a subcontractor also involves various risks such as delays in
product delivery, the unavailability of or interruptions in access to certain
process technologies and reduced control over product quality, delivery
schedules, manufacturing yields and costs. The inability to successfully
transfer the Korea subcontract manufacturing lines to our Puerto Rico facility
in a timely manner could result in delays or reductions in product shipments
which, in turn, could materially harm our business.
9
<PAGE>
We primarily use standard parts and components which are generally available
from multiple sources. During fiscal 2001, we have been experiencing some
delays in obtaining needed standard parts and services from our suppliers due
to parts shortages. In addition, we have been experiencing delays in certain
single-sourced components. These delays in standard parts, single source
components and services from suppliers have resulted in delays in related
product deliveries. However, we attempt to manage our risk by maintaining a
reserve of certain single source components, alternative suppliers and
maintaining quality relationships with our suppliers. The inability to obtain
sufficient key components as required could result in delays or reductions in
product shipments which could materially harm our business.
Backlog
Our backlog was approximately $34.6 million at June 30, 2000 compared to
approximately $9.2 million at June 30, 1999. Backlog consists of customer
orders which are expected to be shipped within the next twelve months. We do
not believe that current or future backlog levels are meaningful indicators of
future net sales. Most orders included in backlog can be rescheduled or
canceled by customers without significant penalty. Historically, a substantial
portion of net sales in any fiscal period has been derived from orders received
during that fiscal period. Backlog may be affected by the cancelation or delay
of customer orders, the overall condition of the telecommunications industry,
overall worldwide economic conditions and the cyclical nature of customer
demand in each of our markets. See Part II, Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Business Outlook
and Risk Factors."
Key Customers and Export Sales
No customer accounted for 10% or more of our net sales in fiscal years 2000
and 1999. Two customers accounted for 23% of our net sales in fiscal 1998. Our
export sales, which were primarily to Western Europe, Latin America, the Far
East, and Canada accounted for 25%, 29% and 22% of our net sales in fiscal
years 2000, 1999 and 1998, respectively. International sales subject us to
increased risks associated with political and economic instability and changes
in diplomatic and trade relationships. See Part II, Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Business Outlook and Risk Factors--International Sales Subject us to Additional
Business Risks."
International sales may be subject to certain additional risks, including
but not limited to, foreign currency fluctuations, export restrictions, longer
payment cycles and unexpected changes in regulatory requirements or tariffs.
See Part II, Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Business Outlook and Risk Factors--
International Sales Subject us to Additional Business Risks." Gains and losses
on the conversion to U.S. dollars of foreign currency accounts receivable and
accounts payable arising from international operations may in the future
contribute to fluctuations in our business and operating results. Sales and
purchase obligations denominated in foreign currencies have not been
significant. Accordingly, 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. Additionally,
currency fluctuations could have an adverse effect on the demand for our
products in foreign markets.
Competition
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. Many of our competitors or potential competitors are
more established than us and have greater financial, manufacturing, technical
and marketing resources. We believe that our primary competitor is Datum Inc.
In addition, the enactment of the Telecommunications Act of 1996, which permits
ILECs, under certain conditions, to manufacture telecommunications equipment
may result in competition from these customers of Symmetricom.
We compete primarily on product reliability and performance, product
features, adherence to standards, customer service and price. While we believe
that overall we compete favorably with respect to our competitive
10
<PAGE>
factors, there can be no assurance that we will be able to compete successfully
in the future. Our ability to compete successfully is dependent upon our
response to the entry of new competitors or the introduction of new products by
our competitors, the average selling prices received for our products, changing
technology and customer requirements, development or acquisition of new
products, the timing of new product introductions by us or our competitors,
continued improvement of existing products, changes in overall worldwide market
and economic conditions, cost effectiveness, quality, price, service and market
acceptance of our products. See Part II, Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Business Outlook and
Risk Factors--Competition in our Markets may Result in Reduced Sales and
Reduced Profits and has Resulted in Pricing Pressure."
Research and Development
We have actively pursued the application of new technology in the
telecommunications industry in which we compete and we have our own staff of
engineers and technicians who are responsible for the design and development of
new products. In fiscal years 2000, 1999 and 1998, our overall research and
development expenditures were $16,575,000, $13,671,000 and $12,387,000,
respectively. All research and development expenditures were expensed as
incurred. At June 30, 2000, 53 engineering and engineering support employees
were engaged in development activities. We focused our development efforts in
fiscal year 2000 on software technology and new products acquired in the
acquisition of Hewlett-Packard's Communications Synchronization Business as
well as the enhancement of core synchronization products. The new product
development program included wireline and wireless synchronization, wireless
OEM products, network management software and core GPS, antenna and clock
technologies. We will continue to have significant research and development
expenditures in order to maintain our competitive position, although there can
be no assurance that we will be able to successfully develop new products or
enhance existing products or that such new or enhanced products will achieve
market acceptance.
Government Regulation
The telecommunications industry is subject to government regulatory policies
regarding pricing, taxation and tariffs which may adversely impact the demand
for our telecommunications products. These policies are continuously reviewed
and subject to change by the various governmental agencies. We are also subject
to government regulations which set installation and equipment standards for
newly installed hardware.
Environmental Regulation
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. Failure to comply with such regulations could result in suspension or
cessation of our operations, or could subject us to significant future
liabilities.
Employees
At June 30, 2000, we had 423 employees, including 258 in manufacturing, 53
in engineering and 112 in sales, marketing and administration. We believe that
our future success is highly dependent on our ability to attract and retain
highly qualified management, sales, marketing and technical personnel.
Accordingly, we maintain employee incentive, deferred compensation and stock
plans for certain of our employees. None of our employees are represented by a
labor union, and we have experienced no work stoppages. We believe that our
employee relations are good.
11
<PAGE>
Item 2. Properties
The following are our principal facilities as of June 30, 2000:
<TABLE>
<CAPTION>
Approximate Owned/Lease
Floor Area Expiration
Location Principal Operations (Sq. Ft.) Date
-------- -------------------- ----------- -----------
<C> <S> <C> <C>
San Jose, California........ Administration, sales, 118,000 April 2009
engineering and
manufacturing
Aguada, Puerto Rico......... Manufacturing 45,000 December 2000
Aguada, Puerto Rico......... Manufacturing 22,000 December 2000
</TABLE>
During fiscal 1997, we leased a newly constructed 118,000 square foot
facility in San Jose, California to replace our previous San Jose facility,
for which the lease expired in July 1997. We sublet approximately 39,000
square feet of this facility through December 2000. We believe that our
current facilities are well maintained and generally adequate to meet short-
term requirements.
Item 3. Legal Proceedings
In January 1994, a securities class action complaint was filed against us
and certain of our former officers and 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 present or 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. 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, management believes that the final outcome of such matters will not
have a material adverse effect on our financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders of Symmetricom
during the last quarter of the fiscal year ended June 30, 2000.
Executive Officers of the Company
Following is a list of our executive officers as of September 1, 2000 and
brief summaries of their business experience. All officers, including
executive officers, are elected annually by the Board of Directors at its
meeting following the annual meeting of shareholders. We are not aware of any
officer who was elected to the office pursuant to any arrangement or
understanding with another person.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Thomas W. Steipp............ 51 Chief Executive Officer
William Slater.............. 49 Chief Financial Officer and Secretary
Dale A. Pelletier........... 49 Senior Vice President, Operations
Frederick B. Stroupe........ 57 Executive Vice President and General
Manager of Sync and Timing Solutions
Division
Murli M. Thirumale.......... 39 Executive Vice President and General
Manager of Access Max Division
</TABLE>
Mr. Steipp has served as Chief Executive Officer of the Company since
October 1999. Mr. Steipp served as Chief Executive Officer and Chief Financial
Officer of the Company from December 1998 to October 1999. Mr. Steipp served
as President and Chief Operating Officer, Telecom Solutions, a division of the
Company, from March 1998 to December 1998. Prior to joining the Company, from
February 1996 to February 1998, Mr. Steipp
12
<PAGE>
served as Vice President and General Manager of Broadband Data Networks, a
division of Scientific-Atlanta. From January 1979 to January 1996, Mr. Steipp
held various management positions in operations and marketing with Hewlett-
Packard Company. Mr. Steipp served as General Manager of the Federal Computer
Division from January 1991 to January 1996 and Manager of Federal Sales &
Marketing from August 1990 to January 1991. From January 1989 to August 1990,
Mr. Steipp was Manager, Systems Integration Operations.
Mr. Slater has served as Chief Financial Officer and Secretary of the
Company since August 2000. From September 1992 to December 1999, Mr. Slater
served as Executive Vice President and Chief Financial Officer of Computer
Curriculum Corporation, an educational software company. Previously, Mr.
Slater served in the publishing industry with Simon & Schuster for six years.
Mr. Pelletier has served as Senior Vice President, Operations of the
Company since April 1999. Mr. Pelletier served as Senior Vice President,
Operations of Telecom Solutions, a division of the Company, from April 1997 to
April 1999 and as Vice President, Operations of Telecom Solutions from
November 1993 to April 1997. From July 1993 until November 1993, Mr. Pelletier
served as Vice President and General Manager, Telecom Solutions. From July
1992 until July 1993, Mr. Pelletier served as General Manager, Synchronization
Division, Telecom Solutions. From August 1990 until July 1992, he served as
Synchronization Division Manager, Telecom Solutions. From August 1989 until
August 1990, Mr. Pelletier served as Operations Manager, Telecom and Analog
Solutions Divisions. From August 1986, when Mr. Pelletier joined the Company
until August 1989, he held the position of Manufacturing Manager, Telecom
Solutions. Previously, Mr. Pelletier served in various finance and
manufacturing positions for nine years with several manufacturing companies.
Mr. Stroupe has served as Executive Vice President and General Manager of
Sync and Timing Solutions Division of the Company since June 2000. Mr. Stroupe
served as Senior Vice President, Worldwide Sales and Service of the Company
from April 1997 to June 2000 and as Vice President, Sales from October 1993 to
April 1997. From July 1991 to October 1993, Mr. Stroupe served as Vice
President, Sales, Telecom Solutions, a division of the Company. From August
1990 to July 1991, Mr. Stroupe served as Director, Sales and as Director,
Sales-West from August 1987 to August 1990. Prior to joining the Company Mr.
Stroupe served in the telecommunications industry primarily with General
Electric for 12 years and Rockwell International/Wescom for 13 years.
Mr. Thirumale has served as Executive Vice President and General Manager of
AccessMax Division of the Company since June 2000. Mr. Thirumale served as
Vice President, Marketing and New Business Development of the Company from
August 1999 to June 2000. Prior to joining the Company, Mr. Thirumale served
in various positions at Hewlett-Packard Company for nineteen years, the most
recent being General Manager, Timing Solutions for Communications Operations
from 1993 to August 1999.
13
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The information required by this Item is described in Note M of the Notes
to Consolidated Financial Statements. See Part IV, Item 14. "Exhibits,
Financial Statement Schedule and Reports on Form 8-K."
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
our Consolidated Financial Statements and the Notes thereto included in Part
IV, Item 14. "Exhibits, Financial Statement Schedule and Reports on Form 8-K."
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included in Part II, Item 7.
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Results:
Net sales $107,557 $ 76,915 $ 73,311 $ 89,718 $68,243
Operating income 3,654 2,322 4,192 9,625 5,325
Earnings from continuing
operations before income taxes 5,273 3,524 5,175 11,431 6,872
Earnings from continuing
operations 5,043 2,784 4,016 9,030 5,456
Earnings (loss) from
discontinued operations -- (3,979) (5,546) 4,424 2,022
Net earnings (loss) 5,043 (1,195) (1,530) 13,454 7,478
Basic earnings per share from
continuing operations .22 .12 .17 .38 .23
Basic earnings (loss) per share
from discontinued operations -- (.17) (.24) .19 .09
Basic net earnings (loss) per
share .22 (.05) (.07) .57 .32
Diluted earnings per share from
continuing operations .21 .12 .17 .37 .23
Diluted earnings (loss) per
share from discontinued
operations -- (.17) (.23) .18 .09
Diluted net earnings (loss) per
share .21 (.05) (.06) .55 .31
Balance Sheet:
Cash and investments 55,299 59,197 34,342 41,587 34,270
Working capital 66,386 66,591 71,997 74,639 65,290
Total assets 134,669 106,320 108,446 115,822 84,055
Long-term obligations 7,882 8,069 8,368 8,583 --
Shareholders' equity 95,020 79,604 84,357 87,603 70,403
</TABLE>
Share and per share data for all periods presented herein have been
adjusted to give effect to the three-for-two stock split on August 18, 2000.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto.
Business Outlook and Risk Factors
You should carefully consider the following risk factors and the other
information included herein and other reports and filings made with the
Securities and Exchange Commission before investing in our common stock.
14
<PAGE>
Our business and results of operations could be seriously harmed by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you may lose part or all of your investment.
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 including the transfer of Korea
production lines to our Puerto Rico facility;
. the ability to obtain sufficient supplies of GPS products from SSL;
. our ability to obtain sufficient supplies of sole or limited source
components;
. changes in the product or customer mix of sales;
. the ability to manage fluctuations in manufacturing yields and other
factors;
. increases in the prices of the components we purchase;
. the ability to manage the level and value of inventories;
. the ability to accurately anticipate both the volume and timing of
customer orders, including current and planned Communications
Synchronization products;
. the cancellation or rescheduling of customer orders;
. the gain or loss of significant customers;
. the ability to introduce new products on a timely and cost-effective
basis;
. the timing of new product introductions and that of our competitors;
. customer delays in qualification of new products;
. the ability to manage increased competition and competitive pricing
pressures;
. the ability to manage fluctuations, especially declines, in the average
selling prices of 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 maintain quality levels for our product's, 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. If our quarterly or annual operating results do not
meet the expectations of securities analysts and investors, the trading price
of our common stock could significantly decline.
15
<PAGE>
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.
We Have Experienced Delays in Obtaining Needed Standard Parts, Single Source
Components and Services from Our 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 product line because components are no longer available from our
suppliers.
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 2000 and 1999. Two customers accounted for 23% of our net
sales in fiscal 1998. 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 Samsung were $10.7 million in fiscal 2000
compared to zero in fiscal 1999 and 1998 due to the wireless business from the
acquisition of the HP Product Line business. The wireless business is volatile
and the loss of a significant wireless customer or a significant reduction or
delay in sales to any such customer may harm our business. Additionally, our
sales to AT&T were $22.5 million in fiscal 1997 but decreased to $8.1 million
in fiscal 1998, $4.4 million in fiscal 1999 and $0.9 million in fiscal 2000.
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;
. revolving industry standards and changes in end-user requirements and
. frequent new product introductions.
Technological advancements could render our products obsolete and
unmarketable. Our success will depend on our ability to respond to changing
technologies and customer requirements and on our ability to develop and
introduce new and enhanced products, in a cost-effective and timely manner. We
recently established our AccessMax division and have not yet commercially
shipped our 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 our 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 and 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
16
<PAGE>
commercial shipments. These errors could result in delays in 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.
We are Dependent on Widespread Market Acceptance of Our Products
Widespread market acceptance of our products is critical to our future
success. Factors that may affect the market acceptance of our products include
market acceptance of various broadband technologies, the performance, price
and total cost of ownership of our products, the availability and price of
competing products and technologies and the success and development of our
sales representatives, distributors and original equipment manufacturers. The
introduction of new and enhanced products may cause certain customers to defer
or return orders for existing products. Although we maintain reserves against
such returns, such reserves may not be adequate. We cannot be certain that we
will not experience delays in product development in the future. Failure of
our existing or future products to maintain and achieve meaningful levels of
market acceptance would 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.
Competition in Our Markets May Lead to Reduced Sales and Reduced Profits and
Has Resulted in Pricing Pressure
We believe that competition in the telecommunications industry in general,
and in the new and existing markets served by us in particular, is intense and
likely to increase substantially. Our ability to compete successfully in the
future will depend on, among other things:
. the cost effectiveness, quality, price, service and market acceptance of
our products;
. our response to the entry of new competitors or the introduction of new
products by our competitors;
. our ability to keep pace with changing technology and customer
requirements;
. the timely development or acquisition of new or enhanced products and
. the timing of new product introductions by us or our competitors.
We believe that our primary competitor is Datum Inc. Incumbent Local
Exchange Carriers (ILECs) may increasingly become significant competitors due
in part to the enactment of The Telecommunications Act of 1996, which permits
ILECs, among our largest customers, to manufacture telecommunications
equipment. Many of our competitors or potential competitors are more
established than we are and have greater financial, manufacturing, technical
and marketing resources. Furthermore, we expect:
. our competitors to continually improve their design and manufacturing
capabilities and to introduce new products and services with enhanced
performance characteristics and/or lower prices and
. to continue to experience pricing pressures in all of our markets and to
continue to experience price erosion in several of our product lines.
Emerging Telecommunications Service Providers May Reduce or Discontinue Their
Purchase of Our Products at Any Time
Our current and future customers include emerging telecommunications
service providers. The market for the services provided by telecommunications
service providers who compete against traditional telephone
17
<PAGE>
companies has only begun to emerge, and many of these service providers are
still in the initial stages of building their infrastructure and rolling out
their services. These telecommunications service providers require substantial
capital for the development, construction and expansion of their networks and
the introduction of their services. Financing may not be available to emerging
telecommunications service providers on favorable terms, if at all. The
inability of our current or potential emerging telecommunications service
provider customers to acquire and keep customers, to successfully raise needed
funds, or to respond to any other trends such as price reductions for their
services or diminished demand for telecommunications services generally, could
adversely affect their operating results or cause them to reduce their capital
spending programs. If our customers are unable to raise sufficient capital or
forced to defer or curtail their capital spending programs, our sales to those
telecommunication service providers may be adversely affected. In addition,
many of the industries in which telecommunications service providers operate
have recently experienced consolidation. The loss of one or more of our
telecommunications service provider customers, through industry consolidation
or otherwise, could reduce or eliminate our sales to such a customer.
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.
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;
. the ability to successfully transfer the subcontractor manufacturing
lines in Korea to our Puerto Rico facility;
. 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.
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<PAGE>
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. 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 acquired 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.
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 materially 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.
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<PAGE>
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 25% of our net sales in fiscal 2000,
29% of our net sales in fiscal 1999 and 22% of our net sales in fiscal 1998.
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, primarily none of our international revenues and costs have been
denominated in foreign currencies. As a result, an increase in the value of
the U.S. dollar relative to foreign currencies could make our products more
expensive and thus less competitive in foreign markets. A portion of our
international revenues may be denominated in foreign currencies in the future,
including the Euro, which will subject us to risks associated with
fluctuations in those foreign currencies. We do not currently engage in
foreign currency hedging activities or derivative arrangements, but may do so
in the future to the extent that such obligations become more significant.
Inventory Risks Could Impact Our Gross Margin
Although we believe that we currently have appropriate provisions for
inventory that has declined in value, become obsolete or is in excess of
anticipated demand, we cannot be sure that such provisions will be adequate.
Our business could be materially harmed, if significant inventories become
obsolete or are otherwise not able to be sold at favorable prices.
If We Lose Key Personnel, We May Not Be Able to Successfully Operate Our
Business
Our success depends to a significant degree upon the continued
contributions of the principal members of our management, sales, marketing and
technical personnel, many of whom perform important management functions and
would be difficult to replace. We do not have employment contracts with some
of our key personnel. In any event, employment contracts would not prevent key
personnel from terminating their employment with us. The loss of the services
of any key personnel, particularly senior management and engineers, could
materially harm our business.
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.
20
<PAGE>
Results of Operations
Symmetricom designs, manufactures and markets advanced network
synchronization systems 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. 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. Our products are marketed to public network providers,
ILECs, Post Telephone and Telegraph companies (PTTs), Competitive Local
Exchange Carriers (CLECs), other telephone companies, wireless service
providers, cable TV operators, ISPs and communications OEMs.
On September 30, 1999 Symmetricom acquired certain assets of Hewlett-Packard
Company's Communications Synchronization Business ("HP Product Line business")
for $19.4 million in cash. The acquisition has been accounted for under the
purchase method of accounting. The net purchase price of $19.8 million, which
includes cash paid of $19.0 million, transaction costs of $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, 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. See Note B 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 our GPS
division. SSL changed its name to Parthus Technologies plc ("Parthus") prior to
completing an initial public offering in May 2000. See Note C of the Notes to
Consolidated Financial Statements.
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 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 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.
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. See Note D of the Notes to Consolidated
Financial Statements.
Net Sales
Net sales increased by $30.6 million (40%) to $107.6 million in fiscal 2000
as compared to fiscal 1999 and increased by $3.6 million (5%) to $76.9 million
in fiscal 1999 as compared to fiscal 1998. The increase in fiscal 2000 net
sales was due to sales from the new wireless products acquired in the HP
Product Line transaction and higher sales of synchronization products,
partially offset by lower sales of transmission products. The increase in
fiscal 1999 net sales was due to higher sales of synchronization and
transmission products, partially offset by lower sales of our Symmetricom, Ltd.
subsidiary in the digitally enhanced cordless telephone (DECT) market.
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<PAGE>
Gross Profit Margin
Our gross profit margin was 43%, 48% and 50% in fiscal 2000, 1999 and 1998,
respectively. In fiscal 2000, the decrease in the gross profit margin was
primarily due to lower margins resulting from sales of acquired HP Product Line
products and less favorable manufacturing efficiencies. In fiscal 1999, the
decrease in the gross profit margin was primarily due to less favorable
manufacturing efficiencies and less favorable sales channel mix.
Operating Expenses
Research and development expense was $16.6 million or 15% of net sales,
$13.7 million or 18% of net sales and $12.4 million or 17% of net sales in
fiscal 2000, 1999 and 1998, respectively. The dollar increase in fiscal 2000
was primarily due to our continued focus on high investment in new products and
core technology. Additionally, as part of the acquisition of the HP Product
Line business, we added additional engineers. We anticipate that we 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. The fiscal 1999 focus was on wireline and
wireless synchronization, wireless OEM products, network management software
and core GPS, antenna and clock technologies.
Selling, general and administrative expense was $26.2 million or 24% of net
sales, $20.8 million or 27% of net sales and $19.7 million or 27% of net sales
in fiscal 2000, 1999 and 1998, respectively. The dollar increase was 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 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. The increase in fiscal 1999 was due to
higher marketing and sales expenses associated with increased sales.
As part of the acquisition of the HP Product Line business, we 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 that 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.
Operating Income
Operating income increased by 57% to $3.7 million in fiscal 2000 and
decreased by 45% to $2.3 million in fiscal 1999 from $4.2 million in fiscal
1998. The increase in fiscal 2000 was primarily due to higher net sales and
gross profit margin dollars. The decrease in fiscal 1999 was primarily due to
lower gross profit margin and increased operating expenses.
Interest Income (Expense)
Interest income was $2.3 million, $1.9 million and $1.7 million in fiscal
2000, 1999 and 1998, respectively. The increase in fiscal 2000 was primarily
due to the increase in cash, cash equivalents and short-term investments
22
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from the $23.0 million in proceeds from the sale of Linfinity in the third
quarter of fiscal 1999 and the $9.5 million in proceeds from the sale of the
GPS division, partially offset by the $19.4 million cash expenditure to
acquire the HP Product Line business and the $3.0 million cash expenditure for
Parthus subscription shares. Interest expense was constant at $0.7 million in
fiscal 2000, 1999 and 1998, respectively. Our interest expense for all three
years was predominantly associated with the capital lease on our building in
San Jose.
Income Taxes
The income tax provision was $0.2 million (effective tax rate of 4%), $0.7
million (effective tax rate of 21%) and $1.2 million (effective tax rate of
22%) in fiscal 2000, 1999 and 1998, respectively. Our deferred tax assets are
subject to a substantial valuation allowance. Our effective tax rate is
affected by the percentage of qualified Puerto Rico earnings compared to total
earnings as most of the Company's Puerto Rico earnings are taxed under Section
936 of the U.S. Internal Revenue Code, which exempts qualified Puerto Rico
earnings from federal income taxes. This exemption is subject to wage-based
limitations and expires at the end of fiscal 2006. In addition, this exemption
will be further limited, based on certain prior year Puerto Rico earnings
during fiscal years 2003 through 2006.
Earnings from Continuing Operations
As a result of the factors discussed above, net earnings from continuing
operations were $5.0 million or $.21 per share (diluted) in fiscal 2000
compared to $2.8 million or $.12 per share (diluted) in fiscal 1999 and $4.0
million or $.17 per share (diluted) in fiscal 1998.
Loss from Discontinued Operations
As a result of the factors discussed above, net loss from discontinued
operations was zero in fiscal 2000 compared to $4.0 million or $.17 per share
(diluted) in fiscal 1999 and $5.5 million or $.23 per share (diluted) in
fiscal 1998.
Net Earnings (Loss)
As a result of the factors discussed above, net earnings were $5.0 million
or $.21 per share (diluted) in fiscal 2000 compared to a net loss of $1.2
million or $.05 per share (diluted) in fiscal 1999 and a net loss of $1.5
million or $.06 per share (diluted) in fiscal 1998.
New 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 noncompensatory 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 is 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 harm our
business. We do not expect that the adoption of the remaining conclusions will
materially harm 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. SAB No. 101 should not
materially impact our revenue recognition policies.
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
23
<PAGE>
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. We have assessed the
implications of this new statement and adoption of this statement will not
have a material impact on our financial position and results of operations. We
will adopt SFAS 133 in our first quarterly filing of fiscal year 2001.
Liquidity and Capital Resources
Working capital decreased to $66.4 million at June 30, 2000 from $66.6
million at June 30, 1999, while 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 partially offset by the sale of
the GPS division. During the same period cash, cash equivalents and short-term
investments decreased to $55.3 million from $59.2 million, primarily due to
the $19.4 million in cash used for the acquisition of the HP Product Line
business, $4.6 million used for capital expenditures, $2.9 million used for
the repurchase of the Company's common stock and $0.5 million used for other
investing and financing activities offset by $1.0 million in cash provided by
operating activities, $4.2 million in proceeds from issuance of common stock,
$8.8 million in unrealized gain on securities and $9.5 million in proceeds
from the sale of the GPS division.
We believe that cash, cash equivalents, short-term investments and funds
generated from operations will be sufficient to satisfy working capital
requirements and capital expenditures in fiscal 2001. At June 30, 2000 we had
outstanding commitments of $4.3 million to purchase components and capital
equipment.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to fluctuations in interest rates and
in foreign currency exchange rates:
Interest Rate Exposure. Our exposure to market risk due to fluctuations in
interest rates relates primarily to our 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 $36.0 million as of June
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 June 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. We do not use derivative financial instruments to mitigate the
risks inherent in these securities. However, we do attempt to reduce such
risks by typically limiting the maturity date of such securities to no more
than nine months, placing our investments with high credit quality issuers and
limiting the amount of credit exposure with any one issuer. In addition, we
believe that we currently have the ability to hold these investments until
maturity, and therefore, believe 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. Our exposure to market risk due to
fluctuations in foreign currency exchange rates relates primarily to the
intercompany balance with our U.K. subsidiary. Although we transact 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 $0.4 million at June 30, 2000, a hypothetical 10%
adverse change in sterling against U.S. dollars would not result in a material
foreign exchange loss. Consequently, we do 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 our 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 our investments and accounts, the indirect effects of such fluctuations
could have a materially harmful effect on our business. For example,
international demand for our
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<PAGE>
products is affected by foreign currency exchange rates. In addition, interest
rate fluctuations may affect the buying patterns of our 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.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements follow Part IV, Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors appearing under the caption "Proposal No.
One--Election of Directors--Nominees" on pages 3, 4 and 5 of the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders filed with the
Commission on September 26, 2000, (the "Proxy Statement") is incorporated
herein by reference.
Information regarding executive officers is included in Part I hereof under
the heading "Executive Officers of the Company" immediately following Item 4
in Part I hereof.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated herein by reference from the
section entitled "Other Information--Section 16(a) Beneficial Ownership
Reporting Compliance" on page 10 of the Proxy Statement.
Item 11. Executive Compensation
Incorporated herein by reference to the Proxy Statement under the captions
"Proposal No. One--Election of Directors--Nominees" on pages 3, 4 and 5,
"Executive Officer Compensation" on pages 12, 13 and 14, "Proposal No. One--
Election of Directors--Director Compensation" on page 5 and "Certain
Transactions" on page 14.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the Proxy Statement under the caption
"Other Information--Share Ownership by Principal Shareholders and Management"
on pages 10 and 11.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the Proxy Statement under the caption
"Certain Transactions" on page 14.
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedule
1. Financial Statements. The following financial statements of the Company
and the report of Deloitte & Touche LLP, Independent Auditors, are included in
this report on Form 10-K on the pages indicated.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets at June 30, 2000 and 1999.................. 28
Consolidated Statements of Operations for the years ended June 30,
2000, 1999 and 1998................................................... 29
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the years ended June 30, 2000, 1999 and 1998............... 30
Consolidated Statements of Cash Flows for the years ended June 30,
2000, 1999 and 1998................................................... 31
Notes to Consolidated Financial Statements............................. 32
Independent Auditors' Report........................................... 46
</TABLE>
2. Financial Statement Schedule. The following financial statement schedule
of the Company for the years ended June 30, 2000, 1999, and 1998 is filed as
part of this report on Form 10-K and should be read in conjunction with the
financial statements.
Schedule II--Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because they are not applicable, not
required, or the required information is included in the Consolidated
Financial Statements or notes thereto.
3. Exhibits:
See Item 14(c) below.
(b) Reports on Form 8-K
A current report on Form 8-K dated April 13, 2000 was filed to announce the
March 29, 2000 signing of the agreement to dispose of Symmetricom, Inc.'s
Global Positioning System ("GPS") technology division.
A current report on Form 8-K dated June 12, 2000 was filed to amend Item 7,
financial statements and exhibits of its current report on Form 8-K originally
filed with the Securities Exchange Commission on April 13, 2000 reporting the
disposition of our GPS division.
(c) Exhibits
The exhibits listed on the accompanying index immediately following the
signature page are filed as a part of this report.
(d) Financial Statement Schedules
See Item 14(a) above.
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SYMMETRICOM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30,
-----------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,283 $ 44,897
Short-term investments 36,016 14,300
-------- --------
Cash and investments 55,299 59,197
Accounts receivable, net of allowance for doubtful accounts
of $322 and $180 19,588 10,915
Inventories 22,357 10,805
Other current assets 909 3,762
-------- --------
Total current assets 98,153 84,679
Property, plant and equipment, net 19,960 20,615
Intangible assets, net 13,609 68
Deferred tax assets 2,407 --
Note receivable from employee 500 600
Other assets, net 40 358
-------- --------
$134,669 $106,320
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,407 $ 3,564
Accrued liabilities 22,969 13,929
Current maturities of long-term obligations 391 595
-------- --------
Total current liabilities 31,767 18,088
Long-term obligations 7,679 8,069
Deferred income taxes 203 559
Commitments and contingencies (Notes F & H) -- --
Shareholders' equity:
Preferred stock, no par value; 500 shares authorized, none
issued -- --
Common stock, no par value; 32,000 shares authorized,
22,913
and 22,389 shares issued and outstanding 20,503 18,934
Unrealized gain on securities, net of deferred taxes of
$6,802 10,204 1,400
Retained earnings 64,313 59,270
-------- --------
Total shareholders' equity 95,020 79,604
-------- --------
$134,669 $106,320
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Net sales $107,557 $76,915 $73,311
Cost of sales 61,047 40,169 37,018
-------- ------- -------
Gross profit 46,510 36,746 36,293
Operating expenses:
Research and development 16,575 13,671 12,387
Selling, general and administrative 26,152 20,753 19,714
Non-recurring charges 6,818 -- --
Gain on sale of GPS division (6,689) -- --
-------- ------- -------
Operating income 3,654 2,322 4,192
Interest income 2,302 1,917 1,713
Interest expense (683) (715) (730)
-------- ------- -------
Earnings from continuing operations before
income taxes 5,273 3,524 5,175
Income taxes 230 740 1,159
-------- ------- -------
Earnings from continuing operations 5,043 2,784 4,016
Discontinued operations, net of tax:
Loss from operations -- (73) (5,546)
Estimated loss on sale -- (3,906) --
-------- ------- -------
Loss from discontinued operations -- (3,979) (5,546)
-------- ------- -------
Net earnings (loss) $ 5,043 $(1,195) $(1,530)
======== ======= =======
Earnings (loss) per share--basic:
Earnings from continuing operations $ .22 $ .12 $ .17
Loss from discontinued operations -- (.17) (.24)
-------- ------- -------
Net earnings (loss) $ .22 $ (.05) $ (.07)
======== ======= =======
Weighted average shares outstanding--basic 22,593 22,952 23,768
======== ======= =======
Earnings (loss) per share--diluted:
Earnings from continuing operations $ .21 $ .12 $ .17
Loss from discontinued operations -- (.17) (.23)
-------- ------- -------
Net earnings (loss) $ .21 $ (.05) $ (.06)
======== ======= =======
Weighted average shares outstanding--diluted 23,510 23,093 24,014
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Common Stock Total Total
--------------- Comprehensive Retained Shareholders' Comprehensive
Shares Amount Gain Earnings Equity Income (Loss)
------ ------- ------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1997 23,818 $25,608 $ -- $61,995 $87,603 $13,454
-------
Issuance of common
stock:
Stock option
exercises 113 590 -- 590
Employee stock
purchase plan 129 942 -- 942
Tax benefit from
stock option plans -- 109 -- 109
Repurchase of common
stock (402) (3,357) -- (3,357)
Net loss -- -- (1,530) (1,530) $(1,530)
------ ------- ------- ------- ------- -------
Balance at June 30,
1998 23,658 23,892 -- 60,465 84,357 $(1,530)
-------
Issuance of common
stock:
Stock option
exercises, net of
shares tendered
upon exercise 18 13 -- 13
Employee stock
purchase plan 207 712 -- 712
Repurchase of common
stock (1,494) (5,683) -- (5,683)
Comprehensive income:
Earnings from
continuing
operations -- -- 2,784 2,784 $ 2,784
Loss from
discontinued
operations -- -- (3,979) (3,979) (3,979)
Unrealized gain on
securities, net of
deferred taxes of
$400. -- -- 1,400 -- 1,400 1,400
------ ------- ------- ------- ------- -------
Balance at June 30,
1999 22,389 18,934 1,400 59,270 79,604 $ 205
-------
Issuance of common
stock:
Stock option
exercises, net of
shares tendered
upon exercise 1,002 3,566 -- 3,566
Employee stock
purchase plan 150 634 -- 634
Tax benefit from
stock option plans -- 300 -- 300
Repurchase of common
stock (628) (2,931) -- (2,931)
Comprehensive income:
Earnings from
continuing
operations -- -- 5,043 5,043 $ 5,043
Unrealized gain on
securities, net of
deferred taxes of
$6,802 -- -- 8,804 -- 8,804 8,804
------ ------- ------- ------- ------- -------
Balance at June 30,
2000 22,913 $20,503 $10,204 $64,313 $95,020 $13,847
====== ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 5,043 $ (1,195) $ (1,530)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Loss from discontinued operations and disposal -- 3,979 5,546
In-process research and development writeoff 3,468 -- --
Depreciation and amortization 6,426 4,556 5,023
Deferred income taxes (2,239) (442) (1,262)
Note receivable from employee 100 100 100
Gain on sale of GPS division (6,689) -- --
Changes in assets and liabilities net of effect
of acquisition and disposition:
Accounts receivable (8,673) (374) 683
Inventories (11,734) 784 1,692
Accounts payable 4,843 1,202 (2,179)
Accrued liabilities 8,140 2,765 (1,147)
Other current assets 272 (256) (415)
-------- -------- --------
Net cash provided by continuing operations (1,043) 11,119 6,511
Net cash used for discontinued operations -- (2,198) (8,282)
-------- -------- --------
Net cash provided by (used for) operating
activities (1,043) 8,921 (1,771)
-------- -------- --------
Cash flows from investing activities:
Cash paid for acquisition and related costs (19,419) -- --
Proceeds from sale of GPS division 9,453 -- --
Purchases of short-term investments (51,317) (45,927) (19,289)
Maturities of short-term investments 40,462 36,000 29,700
Proceeds from sale of discontinued operations -- 23,000 --
Purchases of plant and equipment, net (4,593) (3,214) (2,962)
Notes receivable -- -- (900)
Other 168 (375) 233
-------- -------- --------
Net cash provided by (used for) investing
activities (25,246) 9,484 6,782
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term obligations -- 595 --
Repayment of long-term obligations (594) (514) (20)
Proceeds from issuance of common stock 4,200 725 1,532
Repurchase of common stock (2,931) (5,683) (3,357)
-------- -------- --------
Net cash provided by (used for) financing
activities 675 (4,877) (1,845)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents (25,614) 13,528 3,166
Cash and cash equivalents at beginning of year 44,897 31,369 28,203
-------- -------- --------
Cash and cash equivalents at end of year $ 19,283 $ 44,897 $ 31,369
======== ======== ========
Non-cash investing and financing activities:
Unrealized gain on securities, net $ 8,804 $ 1,400 $ --
Deferred taxes on unrealized gain (6,802)
Cash payments for:
Interest $ 683 $ 715 $ 730
Income taxes 1,596 351 3,475
Detail of acquisition:
Tangible assets acquired $ 1,462 $ -- $ --
Intangible assets acquired 18,357 -- --
Cash paid for acquisition and related costs (19,419) -- --
-------- -------- --------
Liabilities assumed $ 400 $ -- $ --
======== ======== ========
Detail of sale of GPS division:
Cash proceeds from sale $ 9,453 $ -- $ --
Tangible assets sold (1,964) -- --
Liabilities incurred (800) -- --
-------- -------- --------
Gain on sale $ 6,689 $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A--Summary of Significant Accounting Policies
Business. Symmetricom, Inc. ("the Company", "Symmetricom") 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. 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. Our products are marketed to public network providers, Incumbent Local
Exchange Carriers (ILECs), Post Telephone and Telegraph companies (PTTs),
Competitive Local Exchange Carriers (CLECs), other telephone companies,
wireless service providers, cable TV operators, ISPs and communications OEMs.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and our wholly owned subsidiaries. All significant
intercompany accounts and transactions are eliminated.
Fiscal Period. Symmetricom, for presentation purposes, presents each fiscal
year as if it ended on June 30. However, our fiscal year ends on the Sunday
closest to June 30. All references to years refer to our fiscal years. Fiscal
year 2000 consisted of 53 weeks. Fiscal years 1999 and 1998 consisted of 52
weeks.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Cash Equivalents. We consider all highly liquid debt investments purchased
with an original maturity of three months or less to be cash equivalents.
Short-term Investments. Short-term investments, consisting of corporate
debt securities which mature through December 2000, are classified as
available-for-sale and reported at fair value. Net unrealized gains and losses
are excluded from earnings and included as a separate component of
shareholders' equity. The cost of securities sold is based on the specific
identification method.
Fair Values of Financial Instruments. The estimated fair value of our
financial instruments, which include cash equivalents, short-term investments,
accounts receivable and long-term obligations, approximate their carrying
value.
Concentrations of Credit Risk. Financial instruments which potentially
subject us to concentrations of credit risk consist principally of cash
equivalents, short-term investments and accounts receivable. We place our
investments with high-credit-quality corporations and financial institutions.
Accounts receivable are derived primarily from sales to telecommunications
service providers, original equipment manufacturers and distributors.
Management believes that its credit evaluation, approval and monitoring
processes substantially mitigate potential credit risks.
Inventories. Inventories are stated at the lower of cost (first-in, first-
out) or market.
Property, Plant and Equipment. Property, plant and equipment are stated at
cost. Depreciation and amortization are computed using the straight-line
method based on the estimated useful lives of the assets (three to twelve
years) or the lease term if shorter.
Intangible assets. Goodwill and other intangible assets primarily arising
from the acquisition of certain assets of Hewlett-Packard Company's
Communications Synchronization Business ("HP Product Line business")
32
<PAGE>
(Note B) are amortized over estimated useful lives of ten years for goodwill
and two to ten years for other intangible assets on a straight-line basis. The
Company annually evaluates the carrying value of goodwill and other intangible
assets for any impairment of value. At June 30, 2000, the Company believes
there has been no impairment of the value of goodwill and other intangible
assets.
Long-lived assets. In accordance with Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," we recognize impairment
losses, if significant, on long-lived assets and certain identifiable
intangible assets in the event the net book value of such assets exceeds the
estimated undiscounted future cash flows. As of June 30, 2000 no such
impairment has occurred.
Foreign Currency Translation. The functional currency of our foreign
subsidiaries is the local currency. We translate assets and liabilities to
U.S. dollars using year end exchange rates and translate revenues and expenses
using average exchange rates during the year. Exchange gains and losses
arising from translation of foreign entity financial statements have not been
material to our operating results in the periods presented.
Revenue Recognition. Sales are recognized upon shipment. Provisions are
made for warranty costs, sales returns and price protection.
Stock Options. We account for employee stock based compensation using the
intrinsic value based method of accounting defined under Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." We
provide additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation."
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>
Year ended June 30,
------------------------
2000 1999 1998
------- ------- -------
(In thousands, except
per share amounts)
<S> <C> <C> <C>
Earnings from continuing operations $ 5,043 $ 2,784 $ 4,016
Loss from discontinued operations -- (3,979) (5,546)
------- ------- -------
Net earnings (loss) $ 5,043 $(1,195) $(1,530)
------- ------- -------
Weighted average shares outstanding--basic 22,593 22,952 23,768
Dilutive stock options 917 141 246
------- ------- -------
Weighted average shares outstanding--diluted 23,510 23,093 24,014
------- ------- -------
Basic earnings (loss) per share $ .22 $ (.05) $ (.07)
Diluted earnings (loss) per share $ .21 $ (.05) $ (.06)
</TABLE>
Reclassifications. Certain reclassifications have been made to the prior
year consolidated financial statements to conform to the 2000 presentation.
Such reclassifications had no effect on previously reported results of
operations or retained earnings.
Comprehensive Income. Effective September 30, 1998, we adopted Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," which requires us to report and display certain information related
to comprehensive income. Comprehensive income includes net income and other
comprehensive income. Other comprehensive income is classified separately into
foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities. The
disclosures required by SFAS 130 are presented in the Consolidated Statements
of Shareholders' Equity.
33
<PAGE>
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
noncompensatory 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 is 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 harm our business. We do not expect that
the adoption of the remaining conclusions will materially harm 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. SAB No. 101 will not materially
impact our revenue recognition policies.
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. We have assessed the implications of this
new statement and adoption of this statement will not have a material impact
on our financial position and results of operations. We will adopt SFAS 133 in
our first quarterly filing of fiscal year 2001.
Note B--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. The amounts allocated to IP R&D were
determined through established valuation techniques in the high technology
industry and were expensed upon acquisition, because technological feasibility
had not been established and no future alternative uses existed. Management's
conclusion that the in-process development effort had no alternative future
use was reached in consultation with the engineering personnel from both
Symmetricom and HP. Research and development costs to complete development of
the research and development to technological feasibility are not expected to
have a material impact on our business. The $14.9 million of goodwill and
other intangible assets are being amortized over estimated useful lives of
five to ten years. 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.
The allocation of the purchase price to the capitalized developed
technology was based upon management's estimates of the present value of the
projected earnings that will be generated by the current products. The
allocation of the purchase price to the IP R&D 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. The allocation of the purchase price to
the other intangible assets was based on management's estimates of avoided
costs related to the customer list and workforce, and replacement costs
related to the trademark. The purchase price allocation and intangible
valuation gave explicit consideration to the Securities and Exchange
Commission's views on purchased IP R&D as set forth in its September 9, 1998
letter to the American Institute of Certified Public Accountants.
Specifically, the valuation gave consideration to the following: (i) the
employment of a fair market value premise excluding any Symmetricom-specific
considerations which could result in estimates of investment value for the
subject assets; (ii) comprehensive due diligence concerning all potential
intangible assets including trademarks/trade names,
34
<PAGE>
patents, copyrights, non-compete agreements, assembled workforce, customer
relationships and sales channel; (iii) the value of existing technology was
specifically addressed, with a view toward ensuring the relative allocations
to existing technology and IP R&D were consistent with the relative
contributions of each to the final product; and (iv) the allocation to IP R&D
was based on a calculation that considered only the efforts completed as of
the transaction date, and only the cash flow associated with said completed
efforts for one generation of the products currently in process. The acquired
IP R&D had not reached technological feasibility as of the acquisition date
and was in the following stages of completion at the date of the acquisition;
<TABLE>
<CAPTION>
% Completion
------------
<S> <C> <C>
T-1
Terminator Timing distribution platform/domestic rather than international 70% complete
OSMF Software/ability to manage sync network remotely 50% complete
Mini-SSU E-1 frequency SSU 90% complete
S-7 OEM GPS Timing product 80% complete
RGPS Antenna for OEM's base stations 60% complete
</TABLE>
At the acquisition date the following costs were estimated for additional
development and we've achieved the following stages of completion at June 30,
2000;
<TABLE>
<CAPTION>
Cost to Complete
At Acquisition Date % Completion Status
------------------- ------------- ------------------------------------------
<S> <C> <C> <C>
T-1
Terminator $400,000 80% complete Available for sale estimate, December 2000
OSMF $600,000 95% complete Available for sale estimate, October 2000
Mini-SSU $180,000 100% complete Shipping started November 1999
S-7 $300,000 100% complete Shipping started December 1999
RGPS $200,000 100% complete Shipping started February 2000
</TABLE>
We will begin to benefit from the acquired research and development of some
of these products once they begin shipping. Failure to reach successful
completion of these projects could result in impairment of the associated
capitalized intangible assets and could require us to accelerate the time
period over which the intangibles are being amortized, which could materially
harm our business.
Significant assumptions used to determine the value of IP R&D included
several factors, including the following: (i) forecast of net cash flows that
were expected to result from the development effort using projections prepared
by us and HP's management; (ii) percentage complete for the projects estimated
by considering a number of factors, including the costs invested to date
relative to total cost of the development effort and the amount of progress
completed as of the acquisition date, on a technological basis, relative to
the overall technological achievements required to achieve the functionality
of the eventual product. The technological issues were addressed by
engineering representatives from both us and HP, and when estimating the value
of the technology, the projected financial results of the acquired assets were
estimated on a stand-alone basis without nay consideration to potential
synergistic benefits or "investment value" related to the acquisition.
Accordingly, separate projected cash flows were prepared for both the existing
as well as the in-process projects. These projected results were based on the
number of units sold times average selling price less the associated costs.
When estimating the value of the existing and in-process technologies,
discount rates of 20% and 25% were used, respectively. The discount rates
considered both the status and risks associated with the respective cash flows
at the acquisition date.
Note C--Sale
On March 30, 2000 we sold our GPS division to Silicon Systems, Ltd.,
("SSL") for $9.5 million in cash. Additionally, Symmetricom made a $3.0
million investment in subscription of shares of SSL. We realized a gain of
$6.7 million, or $4.2 million after taxes related to the sale of our GPS
division. SSL changed its name to Parthus Technologies plc ("Parthus") prior
to completing an initial public offering in May 2000.
35
<PAGE>
Note D--Discontinued Operations
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 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 the option exercise 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 optionholders 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 from continuing operations in the consolidated statements
of operations and cash flows for all periods presented. The earnings (loss)
from discontinued operations, net of tax, for the three years ended June 30,
2000, is comprised of:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
2000 1999 1998
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net sales $ -- $37,115 $47,270
Earnings (loss) from operations before taxes $ -- $ (81) $(9,315)
Income taxes -- (8) (3,769)
------- ------- -------
Earnings (loss) from operations -- (73) (5,546)
------- ------- -------
Estimated loss on sale -- (182) --
Income taxes -- (3,724) --
------- ------- -------
Net estimated loss on sale -- (3,906) --
------- ------- -------
Loss from discontinued operations $ -- $(3,979) $(5,546)
======= ======= =======
The net assets retained and sold on April 14, 1999 were comprised of:
<CAPTION>
Total Retained Sold
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current assets $17,799 $ 5,640 $12,159
Property, plant and equipment, net 14,470 -- 14,470
Other assets 16 -- 16
Current liabilities (6,943) -- (6,943)
Other liabilities (2,177) (2,177) --
------- ------- -------
Net assets of discontinued operations $23,165 $ 3,463 $19,702
======= ======= =======
The net assets retained and held for sale at June 30, 1998 were comprised
of:
<CAPTION>
Held
Total Retained For Sale
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current assets $21,862 $ 7,075 $14,787
Property, plant and equipment, net 16,433 -- 16,433
Other assets 8 -- 8
Current liabilities (9,592) (3,145) (6,447)
Other liabilities (1,762) (1,762) --
------- ------- -------
Net assets of discontinued operations $26,949 $ 2,168 $24,781
======= ======= =======
</TABLE>
36
<PAGE>
Note E--Balance Sheet Detail
<TABLE>
<CAPTION>
June 30,
------------------
2000 1999
-------- --------
(In thousands)
<S> <C> <C>
Inventories:
Raw materials $ 12,094 $ 3,859
Work-in-process 4,710 3,173
Finished goods 5,553 3,773
-------- --------
$ 22,357 $ 10,805
======== ========
Property, plant and equipment, net:
Buildings and improvements $ 9,007 $ 9,007
Machinery and equipment 23,132 22,252
Leasehold improvements 7,683 7,997
-------- --------
39,822 39,256
Accumulated depreciation and amortization (19,862) (18,641)
-------- --------
$ 19,960 $ 20,615
======== ========
Intangible assets, net:
Goodwill $ 14,889 --
Other intangible assets 230 68
-------- --------
15,119 68
Accumulated amortization (1,510) --
-------- --------
$ 13,609 $ 68
======== ========
Building and improvements includes $8,750,000 of costs capitalized under a
capital lease for our facility in San Jose, California which was completed in
June 1997. At June 30, 2000 and 1999, accumulated amortization for this lease
totaled $2,283,000 and $1,522,000, respectively. No amortization expense was
recorded in 1997.
<CAPTION>
June 30,
------------------
2000 1999
-------- --------
(In thousands)
<S> <C> <C>
Accrued liabilities:
Employee compensation and benefits $ 6,430 $ 3,731
Income taxes payable 5,742 395
Accrued warranty expense 4,471 4,319
Deferred revenue 1,343 1,152
Other 4,983 4,332
-------- --------
$ 22,969 $ 13,929
======== ========
Long-term obligations:
Capital lease $ 8,070 $ 8,367
Other -- 297
Current maturities (391) (595)
-------- --------
$ 7,679 $ 8,069
======== ========
</TABLE>
Note F--Lease Commitments
During 1997, we leased a facility in San Jose, California under which the
land and building were accounted for as an operating lease and a capital
lease, respectively. This lease expires in April 2009. A section of the
facility has been sublet and accounted for as an operating lease. This
sublease expires in December 2000. At
37
<PAGE>
June 30, 2000 the minimum future sublease payments to be received were
$324,000 in 2001. We lease certain other facilities and equipment under
operating lease agreements which expire at various dates through 2001. Rental
expense charged to operations was $922,000 in 2000, $1,229,000 in 1999 and
$1,406,000 in 1998, respectively. Future minimum lease payments at June 30,
2000 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Lease Lease
------- ---------
(In thousands)
<S> <C> <C>
For the years:
2001 $ 1,055 $ 801
2002 1,121 678
2003 1,189 659
2004 1,261 595
2005 1,335 595
Thereafter 5,805 2,264
------- ------
Total minimum lease payments 11,766 $5,592
======
Amount representing interest (8.5%) (3,696)
-------
Present value of minimum lease payments 8,070
Current portion (391)
=======
Long-term obligation $ 7,679
=======
</TABLE>
Note G--Income Taxes
Income tax provision consists of:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------
2000 1999 1998
------ ------ -------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $1,863 $ 368 $ 1,055
State 161 (169) 242
Puerto Rico 414 1,030 1,034
Foreign 31 (47) 90
------ ------ -------
2,469 1,182 2,421
------ ------ -------
Deferred:
Federal (1,975) 26 (377)
State (148) 241 (418)
Puerto Rico (116) (709) (467)
------ ------ -------
(2,239) (442) (1,262)
------ ------ -------
$ 230 $ 740 $ 1,159
====== ====== =======
</TABLE>
38
<PAGE>
Deferred income tax provision (benefit) is recorded when income and
expenses are recognized in different periods for financial reporting and tax
purposes. The significant components of deferred income tax provision
(benefit) are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------
2000 1999 1998
------- ------ -------
(In thousands)
<S> <C> <C> <C>
Tax credit and net operating loss
carryforwards $ 1,845 $1,707 $ (696)
Reserves and accruals (401) (360) (290)
Depreciation and amortization (3,127) (2,449) (264)
Deferred taxes on unrealized gains 6,802 -- --
Deferred taxes on Puerto Rico earnings (81) (622) (294)
Change in valuation allowance (475) 1,282 282
------- ------ -------
$ 4,563 $ (442) $(1,262)
======= ====== =======
The effective income tax rate differs from the federal statutory income tax
rate as follows:
<CAPTION>
Year ended June 30,
--------------------------
2000 1999 1998
------- ------ -------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0 % 35.0 % 35.0 %
Federal tax benefit of Puerto Rico
operations (28.7) (52.9) (16.6)
Puerto Rico taxes 5.6 9.1 10.9
Research and development tax credit -- -- (1.9)
State income taxes, net of federal benefit 0.2 2.0 (3.4)
Other 3.9 (3.1) (1.6)
Change in valuation allowance (11.6) 30.9 --
------- ------ -------
Effective income tax rate 4.4 % 21.0 % 22.4 %
======= ====== =======
</TABLE>
The principal components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
June 30,
----------------
2000 1999
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Tax credit and net operating loss carryforwards $ 5,872 $ 7,717
Reserves and accruals 2,887 2,486
Depreciation and amortization 6,592 3,465
------- -------
15,351 13,668
Valuation allowance (9,309) (9,784)
------- -------
6,042 3,884
------- -------
Deferred tax liabilities:
Unrealized gains in comprehensive income 6,802 --
Unremitted Puerto Rico earnings 1,780 1,861
------- -------
8,582 1,861
------- -------
Net deferred tax asset (liability) $(2,540) $ 2,023
======= =======
</TABLE>
39
<PAGE>
Net deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
June 30,
---------------
2000 1999
------- ------
(In thousands)
<S> <C> <C>
Current assets $ -- $2,582
Non-current assets 2,407 --
Current liabilities (4,744) --
Non-current liabilities (203) (559)
------- ------
Net deferred tax assets (liabilities) $(2,540) $2,023
======= ======
</TABLE>
At June 30, 2000, for federal income tax purposes, we had research and
development tax credit carryforwards of approximately $2,252,000 which expire
in the years 2001 through 2013, and alternative minimum tax credit
carryforwards of approximately $2,427,000 which have no expiration date.
Additionally, for state income tax purposes, we had research and development
tax credit carryforwards of approximately $1,193,000 which have no expiration
date.
Based on our assessment of the future realizability of deferred tax assets,
a valuation allowance has been provided as it is more likely than not that
sufficient taxable income will not be generated to realize certain deferred
tax assets. At June 30, 2000, approximately $4,633,000 of the valuation
allowance was attributable to the potential tax benefit of stock option
transactions, which will be credited to common stock if realized.
We operate a subsidiary in Puerto Rico under a grant providing for a
partial exemption from Puerto Rico taxes through fiscal 2008. In addition,
this subsidiary is taxed under Section 936 of the U.S. Internal Revenue Code
which exempts qualified Puerto Rico source earnings, subject to certain wage-
based limitations, from federal income taxes through fiscal 2006. This
exemption will be further limited during the fiscal years 2003 through 2006
based on certain prior year's Puerto Rico earnings. Appropriate taxes have
been provided on this subsidiary's earnings, all of which are intended to be
remitted to the parent company. At June 30, 2000, the total unremitted
earnings of the Puerto Rico subsidiary and the related tax liability were
approximately $11,305,000 and $1,781,000, respectively.
Note H--Contingencies
In January 1994, a securities class action complaint was filed against us
and certain of our former officers and 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 present or 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 officers believe that the complaint is entirely
without merit, and intend to 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, management believes that the final outcome of such matters will not
have a material adverse effect on our financial position and results of
operations.
Note I--Related Party Transactions
In March 1998, we extended two loans in the amounts of $400,000 and
$500,000 to an executive officer in connection with his employment by us. The
$400,000 loan, together with interest at 6% per annum, is forgiven in four
equal installments on June 30, 1998, 1999, 2000 and 2001. We recognize
compensation expense in the amount of both the loan and interest to be
forgiven during the applicable fiscal period. The $500,000 loan is interest
free with a term of ten years to be repaid in 2008. Both loans are secured by
a deed of trust pertaining to
40
<PAGE>
the executive officer's principal home in California. Pursuant to the loan
agreements, any loan balance and/or accrued interest amount will become due
and payable if the executive officer resigns or is terminated for cause. In
July 1998, we funded an unsecured loan of $150,000 to another executive
officer which was interest free and was forgiven in 1999.
During 1999 we paid $113,000, $25,000 and $21,000 for consulting fees to
three directors of the Company, respectively. During 1998, we paid $10,000 for
consulting fees to a director of the Company. We paid $47,000 for marketing
research in 1997 to a firm whose managing director was also a director of ours
until August 1996. During 1995, two executive officers exercised stock options
in exchange for notes of $43,000 bearing interest at approximately 6% per
annum, payable annually. The notes were collateralized by the stock issued
upon exercise of the stock options and were recorded as an offset against
common stock. Such notes were repaid in 1998 and 1997, respectively.
Note J--Benefit Plans
401(k) Plans. Our U.S. and Puerto Rico employees are eligible to
participate in our 401(k) plans. Our discretionary contributions vest
immediately and were $95,000, $94,000 and $91,000 in 2000, 1999 and 1998,
respectively.
Note K--Shareholders' Equity
Stock Options. We have a stock option plan under which employees and
consultants may be granted non-qualifying and incentive options to purchase
shares of the Company's authorized but unissued common stock. Stock
appreciation rights may also be granted under this plan, however, none has
been granted. In addition, we have a director stock option plan under which
non-employee directors are granted options each January to purchase 10,000
shares of the Company's authorized but unissued common stock. All options have
been granted at the fair market value of our common stock on the date of grant
and expire no later than ten years from the date of grant. Options granted to
employees and consultants prior to fiscal 1999 and options granted to non-
employee directors are generally exercisable in annual installments of 25%,
25% and 50% at the end of each of the three years following the date of grant.
Options granted to employees and consultants after fiscal 1998 are generally
exercisable at 25% at the end of the first year and 2.08% for each month
thereafter for the following three years.
On October 25, 1999, the shareholders of Symmetricom approved the adoption
of the 1999 Employee Stock Plan and the 1999 Director Stock Option Plan, and
the number of shares reserved for issuance were 1,350,000 and 450,000,
respectively. The Plans replace our 1990 Employee Stock Plan and our 1990
Director Stock Option Plan, which expire on October 23, 2000.
41
<PAGE>
Stock option activity for the three years ended June 30, 2000 is as
follows:
<TABLE>
<CAPTION>
Options
Outstanding
----------------
Weighted
Shares Number Average
Available of Exercise
For Grant Shares Price
--------- ------ --------
(In thousands, except per
share amounts)
<S> <C> <C> <C>
Balances at July 1, 1997 1,013 2,309 $8.25
Authorized 714 -- --
Granted (1,184) 1,184 8.41
Exercised -- (112) 4.97
Canceled 185 (185) 9.87
Expired -- (8) 1.17
------ ------
Balances at June 30, 1998 728 3,188 8.33
Authorized 709 -- --
Granted (2,759) 2,759 4.20
Exercised -- (29) 1.87
Canceled 2,621 (2,621) 9.13
------ ------
Balances at June 30, 1999 1,299 3,297 4.30
Authorized 1,800 -- --
Granted (1,935) 1,935 5.65
Exercised -- (942) 4.14
Canceled 600 (600) 4.82
Expired (210) -- --
------ ------
Balances at June 30, 2000 1,554 3,690 4.96
====== ======
</TABLE>
At June 30, 2000, 1999 and 1998, the number of shares and weighted average
exercise price underlying exercisable options were 1,392,000 at $4.38,
1,636,000 at $4.30 and 1,305,000 at $7.65, respectively. The weighted average
fair value, using the Black-Scholes method, of options granted was $3.11 in
2000, $1.28 in 1999 and $3.45 in 1998.
At the beginning of fiscal 1999, we offered our employees and directors a
stock option repricing program in which new options were granted at an
exchange rate of three shares for every four shares and one share for every
two shares, respectively, of unexercised options as of July 14, 1998. The
corresponding grant of new options in July 1998 was at an exercise price of
$4.29, the fair market value on the date of the new grants. The new options
retain the same vesting and expiration dates as the old options. The new
options also contained a blackout period and were not exercisable until
January 14, 1999. As a result, 1,890,000 old options were surrendered by
employees for 1,417,500 new options, and 393,000 old options were returned by
directors for 196,500 new options.
Additional information regarding options outstanding as of June 30, 2000 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices Shares Life Price Shares Price
-------- -------------- ----------- -------- -------------- --------
(In thousands) (In years) (In thousands)
<S> <C> <C> <C> <C> <C>
$2.25 --
$ 4.00 417 7.1 $3.73 247 $3.60
4.29 --
4.29 937 5.7 4.29 788 4.29
4.67 --
5.08 1,328 8.7 4.91 253 4.74
5.13 --
10.67 1,011 8.8 6.17 104 6.02
----- -----
2.25 --
10.67 3,693 7.8 4.96 1,392 4.38
===== =====
</TABLE>
42
<PAGE>
As discussed in Note A, we continue to account for our stock-based awards
using the intrinsic value method in accordance with APB 25 and its related
interpretations. Compensation expense has been recognized in the financial
statements for employee stock arrangements when the fair market value of the
stock exceeds the exercise price at the date of grant. SFAS 123 requires the
disclosure of pro forma net income and earnings per share as if we had adopted
the fair value method as of the beginning of 1996. Under SFAS 123, the fair
value of stock based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from our stock option awards. These
models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. Our calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions for 2000, 1999 and 1998:
expected life, six months after vesting in 2000, 1999 and 1998, stock
volatility, 68% in 2000, 58% in 1999 and 1998; three years average risk-free
interest rates, approximately 6.0% in 2000, 5.0% in 1999 and 5.8% in 1998; and
no dividends during the expected term. Our calculations are based on the
multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the 2000, 1999 and 1998 awards had been
amortized to expense over the vesting period of the awards, pro forma
consolidated net earnings would have been $2,721,000 ($.12 per share--basic,
$.12 per share--diluted) and the proforma consolidated net loss would have
been $5,325,000 ($.23 per share--basic, $.23 per share--diluted) in 1999, and
$5,647,000 ($.24 per share--basic, $.24 per share--diluted) in 1998. However,
the impact of outstanding nonvested stock options granted prior to 1996 has
been excluded from the pro forma calculation; accordingly, the 2000, 1999 and
1998 pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock options.
Employee Stock Purchase Plan. We have an employee stock purchase plan under
which eligible employees may authorize payroll deductions of up to 10% of
their compensation to purchase shares of our common stock at 85% of the fair
market value at certain specified dates. Under this plan, 550,445 shares of
common stock have been reserved and were available for issuance as of June 30,
2000.
Under SFAS 123, the fair value of the employees' purchase rights was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, 1 years; stock volatility, 68% in
2000, and 58% in 1999 and 1998; three years average risk-free interest rates,
approximately 6.0% in 2000, 5.4% in 1999 and 5.3% in 1998; and no dividends
during the expected term. The weighted average fair value of those purchase
rights granted in 2000, 1999 and 1998 was $1.83, $1.63 and $3.01,
respectively.
Common Share Purchase Rights. We have a shareholder rights plan, which
authorizes the issuance of one common share purchase right for each share of
common stock. The rights expire in December 2000 and are not exercisable or
transferable apart from the common stock until the occurrence of certain
events. Such events include the acquisition of 20% or more of our outstanding
common stock or the commencement of a tender or exchange offer for 30% or more
of our outstanding common stock. If the rights become exercisable, each right
entitles its holder to purchase one new share of common stock at an exercise
price of $16.67, subject to certain antidilution adjustments. Additionally, if
the rights become exercisable, a holder will be entitled, under certain
circumstances, to purchase, for the exercise price, shares of common stock of
the Company or in other cases, of the acquiring company, having a market value
of twice the exercise price of the right. Under certain conditions, the
Company may redeem the rights for a price of $.01 per right or exchange each
right not held by the acquirer for one share of the Company's common stock.
Stock Repurchase Program. In April 1997, September 1998 and October 1999,
our Board of Directors authorized programs to repurchase up to 750,000 shares,
1,500,000 shares and 1,125,000 shares, respectively, of the Company's common
stock. We repurchased 628,000 shares, 1,494,000 shares and 537,000 shares in
2000, 1999, and 1998 and prior, respectively.
43
<PAGE>
Note L--Business Segment Information
We have four reportable segments: Synchronization ("Sync") Products,
Wireless Products, Transmission Products, and Other Products. We do not
allocate operating expenses or specific assets to these segments. Therefore,
segment information reported includes only net sales and gross profit.
<TABLE>
<CAPTION>
Sync Transmission Other
Products Wireless Products Products Total
-------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Fiscal Year 2000
Net sales $77,465 $16,464 $4,531 $9,097 $107,557
Gross profit 36,278 6,976 2,326 930 46,510
Fiscal Year 1999
Net sales $64,449 $ -- $8,056 $4,410 $ 76,915
Gross profit 31,580 -- 4,350 816 36,746
Fiscal Year 1998
Net sales $63,475 $ -- $3,827 $6,009 $ 73,311
Gross profit 31,103 -- 1,952 3,238 36,293
</TABLE>
Our export sales accounted for 25%, 29% and 22% of our net sales in 2000,
1999 and 1998, respectively. The geographical components of export sales are
as follows:
<TABLE>
<CAPTION>
Year ended
June 30,
----------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
United States 75% 71% 78%
International:
Brazil 2% 1% --%
United Kingdom 1% 4% 7%
Africa 1% 3% 2%
Mexico 1% 2% 2%
Germany --% 2% 4%
Rest of the world 20% 17% 7%
</TABLE>
A relatively small number of customers has historically accounted for a
significant portion of our net sales. No customer accounted for 10% or more of
our net sales in 2000 and 1999. Two customers accounted for 23% of our net
sales in 1998.
44
<PAGE>
Note M--Quarterly Results and Stock Market Data (Unaudited)
Quarterly results and stock market data are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Fiscal Year 2000
Net sales $19,617 $22,968 $30,574 $34,398 $107,557
Gross profit 9,039 9,821 12,963 14,687 46,510
Operating income (loss) 679 (8,745) 7,782 3,938 3,654
Earnings (loss) before income
taxes 1,180 (8,399) 8,155 4,337 5,273
Net earnings (loss) 885 (7,404) 7,955 3,607 5,043
Basic net earnings (loss) per
share .04 (.33) .35 .16 .22
Diluted net earnings (loss) per
share .04 (.33) .33 .15 .21
Common stock price range (A):
High 6 11/12 8 10 1/3 17 1/3 17 1/3
Low 4 3/4 4 11/24 5 13/24 5 5/6 4 11/24
Fiscal Year 1999
Net sales $18,586 $19,603 $19,737 $18,989 $ 76,915
Gross profit 8,971 9,296 9,244 9,235 36,746
Operating income 576 384 722 640 2,322
Earnings from continuing
operations before income taxes 852 642 930 1,100 3,524
Earnings from continuing
operations 673 507 735 869 2,784
Earnings (loss) from
discontinued operations (336) 150 (3,793) -- (3,979)
Net earnings (loss) 337 657 (3,058) 869 (1,195)
Basic earnings per share from
continuing operations .03 .02 .03 .04 .12
Basic earnings (loss) per share
from discontinued operations (.01) .01 (.17) -- (.17)
Basic net earnings (loss) per
share .01 .03 (.14) .04 (.05)
Diluted earnings per share from
continuing operations .03 .02 .03 .04 .12
Diluted earnings (loss) per
share from discontinued
operations (.01) .01 (.17) -- (.17)
Diluted net earnings (loss) per
share .01 .03 (.14) .04 (.05)
Common stock price range (A):
High 5 5 1/16 5 5/6 6 7/12 6 7/13
Low 2 2/3 2 1/6 4 1/6 3 11/12 2 2/3
</TABLE>
--------
(A) Our common stock trades on The Nasdaq Stock Market under the symbol SYMM.
At June 30, 2000, there were approximately 1,227 shareholders of record.
Common stock prices are closing prices as reported on the Nasdaq Stock
Market System. We have not paid cash dividends during the last two fiscal
years and have no present plans to do so.
Note N--Subsequent Event
On August 18, 2000 the Company effected a three-for-two stock split in the
form of a 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.
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Symmetricom, Inc.
We have audited the accompanying consolidated balance sheets of
Symmetricom, Inc. and subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended June 30, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Symmetricom, Inc. and
subsidiaries at June 30, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2000 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
_____________________________________
Deloitte & Touche LLP
San Jose, California
July 31, 2000
(August 18, 2000 as to Note N)
46
<PAGE>
SCHEDULE II
SYMMETRICOM, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
of Year Expenses Deductions(1) Year
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended June 30, 2000:
Accrued warranty expense $4,319 $2,227 $2,075 $4,471
Allowance for doubtful
accounts $ 180 $ 210 $ 68 $ 322
Year ended June 30, 1999:
Accrued warranty expense $3,994 $1,925 $1,600 $4,319
Allowance for doubtful
accounts $ 329 $ 86 $ 235 $ 180
Year ended June 30, 1998:
Accrued warranty expense $2,741 $2,051 $ 798 $3,994
Allowance for doubtful
accounts $ 307 $ 261 $ 239 $ 329
</TABLE>
--------
(1) Deductions represent costs charged or amounts written off against the
reserve or allowance.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ William Slater
By:__________________________________
(William Slater)
Date: September 26, 2000
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Thomas W. Steipp Director, Chief Executive September 26, 2000
______________________________________ Officer (Principal
(Thomas W. Steipp) Executive Officer)
/s/ William Slater Chief Financial Officer September 26, 2000
______________________________________ and Secretary (Principal
(William Slater) Financial and Accounting
Officer)
/s/ Richard W. Oliver Chairman of the Board September 26, 2000
______________________________________
(Richard W. Oliver)
/s/ Robert T. Clarkson Director September 26, 2000
______________________________________
(Robert T. Clarkson)
/s/ Robert M. Neumeister Jr. Director September 26, 2000
______________________________________
(Robert M. Neumeister Jr.)
/s/ Krish A. Prabhu Director September 26, 2000
______________________________________
(Krish A. Prabhu)
/s/ William D. Rasdal Director September 26, 2000
______________________________________
(William D. Rasdal)
/s/ Richard N. Snyder Director September 26, 2000
______________________________________
(Richard N. Synder)
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Index of Exhibits
------- -----------------
<C> <S>
3.1(1) Restated Articles of Incorporation.
3.2(2) Certificate of Amendment to Restated Articles of Incorporation
filed December 11, 1990.
3.3(9) Certificate of Amendment to Restated Articles of Incorporation
filed October 27, 1993.
3.4(14) Bylaws, as amended December 1, 1998.
4.1(3) Common Shares Rights Agreement dated December 6, 1990, between
Silicon General, Inc. and Manufacturers Hanover Trust Company of
California, including the form of Rights Certificate and the
Summary of Rights attached thereto as Exhibits A and B,
respectively.
4.2(4) Amendment to the Common Shares Rights Agreement dated February
5, 1993 between Silicon General, Inc. and Chemical Trust Company
of California, formerly Manufacturers Hanover Trust Company of
California, including the form of Rights Certificate and the
Summary of Rights attached thereto as Exhibits A and B,
respectively.
10.1(5)(22) Amended and Restated Non-Qualified Stock Option Plan (1982),
with form of Employee Non-Qualified Stock Option (1982 Plan).
10.2(10)(22) 1990 Director Option Plan (as amended through October 25, 1995).
10.3(5)(22) Form of Director Option Agreement.
10.4(16)(22) 1990 Employee Stock Plan (as amended through June 29, 1998).
10.5(5)(22) Forms of Stock Option Agreement, Restricted Stock Purchase
Agreement, Tandem Stock Option/SAR Agreement, and Stock
Appreciation Right Agreement for use with the 1990 Employee
Stock Plan.
10.6(13)(22) 1994 Employee Stock Purchase Plan (as amended through July 27,
1998).
10.7(16)(22) Consulting Agreement between the Company and Richard W. Oliver
dated June 1, 1998.
10.8(16)(22) Consulting Agreement between the Company and William D. Rasdal
dated August 1, 1998.
10.10(11) Lease Agreement by and between the Company and Nexus Equity,
Inc. dated June 10, 1996.
10.13(6) Form of Indemnification Agreement.
10.14(8) Linfinity Microelectronics Inc. Common Stock and Series A
Preferred Stock Purchase Agreement dated June 28, 1993.
10.15(8) Tax Sharing Agreement between Linfinity Microelectronics Inc.
and the Company dated June 28, 1993.
10.16(8) Intercompany Services Agreement between Linfinity
Microelectronics Inc. and the Company dated June 28, 1993.
10.17(8)(22) Linfinity Microelectronics Inc. 1993 Stock Option Plan with form
of Stock Option Agreement.
10.18(8) Linfinity Microelectronics Inc. Form of Indemnification
Agreement.
10.19(16)(22) Employment offer letter by and between the Company and Thomas W.
Steipp, President and Chief Operating Officer, Telecom Solutions
dated February 19, 1998.
10.20(7) Agreement for Sale and Purchase of the Navstar Business of
Radley Services Limited.
10.21(7) Agreement for the Sale and Purchase of Certain Assets of Navstar
Electronics, Inc.
10.22(16)(22) Promissory Notes Secured by Deed of Trust issued by Thomas W.
Steipp to the Company dated March 24, 1998.
10.23(16) Intercompany Revolving Loan Agreement between Linfinity
Microelectronics Inc. and the Company dated August 15, 1998.
10.24(16)(22) Promissory Note issued by James Peterson to Linfinity
Microelectronics Inc. dated July 13, 1998.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Index of Exhibits
------- -----------------
<C> <S>
10.25(14)(22) Employment offer letter by and between the Company and Roger A.
Strauch dated November 9, 1998.
10.26(14) Strategic Partner Bonus Plan between Linfinity Microelectronics
Inc. and James J. Peterson dated November18, 1998.
10.27(14)(22) Retention Bonus Plan between Linfinity Microelectronics Inc. and
James J. Peterson dated November 18, 1998.
10.28(14)(22) Promissory Note issued by Thomas W. Steipp to the Company dated
January 25, 1999.
10.29(14)(22) Promissory Note Secured by Deed of Trust issued by Thomas W.
Steipp to the Company dated January 25, 1999.
10.30(14)(22) Rider to Deed of Trust by Thomas W. Steipp and Debra L. Steipp,
as Trustor, to First American Title Insurance Company, as
Trustee, for the benefit of Symmetricom, Inc., a California
corporation, as Beneficiary.
10.31(15) Agreement and Plan of Reorganization by and among Linfinity
Microelectronics Inc., Symmetricom, Inc., Micro-Linfinity
Acquisition Corporation, and Microsemi Corporation dated as of
February 10, 1999.
10.32(17)(22) 1999 Director Plan.
10.33(17)(22) Form of Director Option Agreement.
10.34(17)(22) 1999 Stock Plan.
10.35(17)(22) Form of Stock Option Agreement.
10.36(18)(22) Employment offer letter by and between the Company and Maurice
Austin dated August 9, 1999.
10.37(18)(22) Employment offer letter by and between the Company and Murli
Thirumale dated August 4, 1999.
10.38(19) Master Asset Purchase Agreement between Symmetricom, Inc. and
Hewlett-Packard Company dated August 30, 1999.
10.39(20) Business Sale Agreement between Symmetricom, Inc., Symmetricom
Limited, Silicon Systems Limited, and KPMG Shelf Company (No 16)
Limited.
10.40(21) Audit Committee Charter
21.1 Subsidiaries of the Company.
23.1 Independent Auditors' Consent and Report on Schedule.
27.1 Financial Data Schedule.
</TABLE>
50
<PAGE>
Footnotes to Exhibits
(1) Incorporated by reference from Exhibits to Annual Report on Form 10-K for
the fiscal year ended July 2, 1989.
(2) Incorporated by reference from Exhibits to Annual Report on Form 10-K for
the fiscal year ended June 30, 1991.
(3) Incorporated by reference from Exhibits to Registration Statement on Form
8-A filed with the Securities and Exchange Commission on December 8, 1990.
(4) Incorporated by reference from Exhibits to Registration Statement on Form
8-A filed with the Securities and Exchange Commission on February 11,
1993.
(5) Incorporated by reference from Exhibits to Registration Statement on From
S-8 filed with the Securities and Exchange Commission on December 24,
1990.
(6) Incorporated by reference from Exhibits to the 1990 Proxy Statement.
(7) Incorporated by reference from Exhibits to Current Report on Form 8-K
filed with the Securities and Exchange Commission on September 2, 1993.
(8) Incorporated by reference from Exhibits to Annual Report on Form 10-K for
the fiscal year ended June 30, 1993.
(9) ncorporated by reference from Exhibits to Annual Report on Form 10-K for
the fiscal year ended June 30, 1994.
(10) Incorporated by reference from Exhibits to Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on January 19,
1996.
(11) Incorporated by reference from Exhibits to Annual Report on Form 10-K for
the fiscal year ended June 30, 1996.
(12) Incorporated by reference from Exhibits to Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996.
(13) Incorporated by reference from Exhibits to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
(14) Incorporated by reference from Exhibits to Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998.
(15) Incorporated by reference from Exhibits to Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 24, 1999.
(16) Incorporated by reference from Exhibits to Annual Report on Form 10-K for
the fiscal year ended June 30, 1998.
(17) Incorporated by reference from Exhibits to the 1999 Proxy Statement.
(18) Incorporated by reference from Exhibits to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999.
(19) Incorporated by reference from Exhibits to Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 14, 1999.
(20) Incorporated by reference from Exhibits to Current Report on Form 8-K
filed with the Securities and Exchange Commission on April 13, 2000.
(21) Incorporated by reference from Exhibits to Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
(22) Indicates a management contract or compensatory plan or arrangement.
51
