10-Q 1 h94193e10-q.txt TRUETIME INC - QUARTER ENDED DECEMBER 31, 2001 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001 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 000-28473 TRUETIME, INC. DELAWARE 94-3343279 (STATE OF (I.R.S. EMPLOYER INCORPORATION) IDENTIFICATION NO.) 3750 WESTWIND BLVD. SANTA ROSA, CALIFORNIA 95403 (707) 528-1230 (ADDRESS OF PRINCIPLE EXECUTIVE OFFICES) ---------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X ] No [ ] There were 5,950,000 shares of the Registrant's Common Stock outstanding as of the close of business on February 8, 2002. ================================================================================ 1 TRUETIME, INC.

2 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS AND NOTES TrueTime, Inc. BALANCE SHEETS (in thousands)

The accompanying notes are an integral part of the financial statements. 3 TrueTime, Inc. STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (unaudited)

The accompanying notes are an integral part of the financial statements. 4 TrueTime, Inc. STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

The accompanying notes are an integral part of the financial statements. 5 TRUETIME, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The balance sheet of TrueTime, Inc. at September 30, 2001 has been derived from the Company's audited financial statements at that date. The balance sheet at December 31, 2001, the statements of operations, and the statements of cash flows for the three months ended December 31, 2001 and 2000 have been prepared by the Company, unaudited. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows have been made. The results of operations for the three months ended December 31, 2001 and 2000 are not necessarily indicative of the operating results for a full year or for future operations. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Form 10-K for the year ended September 30, 2001. Certain prior year amounts have been reclassified to conform to the 2002 financial statement presentation. The reclassifications have no impact on previously reported 2001 net loss, cash flows or stockholders' equity. 2. EARNINGS (LOSS) PER COMMON SHARE The following table summarizes the calculation of net earnings (loss) and weighted average common shares and common equivalent shares outstanding for purposes of the computation of earnings (loss) per share: TrueTime, Inc. EARNINGS (LOSS) PER COMMON SHARE

* Due to their anti-dilutive effect, additional warrants and options of 1,095,500 and 1,028,700 shares equivalent for the three months ended December 31, 2000 and 2001, respectively, are excluded from the calculation above. 6 3. INVENTORIES Inventories consisted of the following (in thousands), net of reserves of $805 at September 30, 2001 and $275 at December 31, 2001:

4. RECENT ACCOUNTING PRONOUNCEMENTS Business Combinations and Goodwill and Other Intangible Assets On June 29, 2001, the Financial Accounting Standards Board (FASB) announced the issuance of Statement of Financial Accounting Standards SFAS 142, "Goodwill and Other Intangible Assets." The Company has goodwill for which amortization has been recorded against in prior periods. Amortization of goodwill per quarter is $6,444; amortization of goodwill for the year would be $25,776. Under the current guidelines, the Company will adopt the provisions of SFAS on October 1, 2002. The Company will likely have a write-down of goodwill upon adoption of SFAS 142. At this time the actual write-down amount is unknown. Currently, goodwill is carried at $758,556, the net book value. Accounting for the Impairment or Disposal of Long-Lived Assets On October 3, 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Early application is encouraged. This statement supercedes: - SFAS 121 - "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"; and - APB 30 - "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business". SFAS 144 sets forth that if the expected undiscounted cash flows from an asset are insufficient to recover its carrying cost and if the carrying cost exceeds its estimated market value, then an impairment must be recognized. SFAS 144 also develops one accounting model for long-lived assets that are to be disposed of by sale, as well as addressing the principal implementation issues. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS 144 expands the scope of discontinued operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company is in the process of evaluating the effect of SFAS 142 and 144 on its financial statements. 5. RESTRUCTURING COSTS In July 2001, the Company adopted a restructuring plan which included the abandonment and physical move from approximately 34,500 square feet of its existing leased facility at Westwind Blvd. and as a result the Company recorded a $998,204 lease loss accrual on September 30, 2001. The accrual represents costs recognized pursuant to EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring) and SAB 100, Restructuring and Impairment Charges. The Company committed to a sufficiently 7 detailed plan that identified significant actions to be taken and the activities that would not be continued (including the method of disposition and location of such activities). The expected date of completion of the plan was December 15, 2001; the Company completed the plan on December 13, 2001. During the quarter, leasehold expenses in the amount of $33,558, which were associated with the abandoned facility space were charged against the lease loss accrual. Approximately $19,229 of this charge would have been recognized in cost of goods sold and $14,329 would have been recognized in operating expenses. The following table summarizes the activity in the lease loss accrual (in thousands) : Lease loss accrual at September 30, 2001............................ $ 998 Less: Lease payments.............................................. 29 Building utilities, maintenance............................ 4 ----- Lease loss accrual at December 31, 2001............................. $ 965 =====

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of TrueTime, Inc. should be read in conjunction with the Financial Statements and Notes related thereto included elsewhere in this Form 10-Q. GENERAL TrueTime designs, develops, manufactures, markets, sells and services precision time and precision frequency products that are essential components used in telecommunications, computer networking, e-commerce, aerospace and various other commercial markets. Our products use a variety of external timing references, including most importantly the Global Positioning System, or GPS, together with advanced electronic circuitry and software to provide high quality signals and precise time. We offer a wide variety of products, which can be divided into the following broad categories: o precise time and frequency products o computer plug-in cards with precise timing capabilities o computer network time servers o time code products o time displays TrueTime, Inc. began trading on the Nasdaq National Market on December 17, 1999, under the symbol "TRUE". 8 RESULTS OF OPERATIONS The following table sets forth for the three months ended December 31, 2000 and 2001, the percentage of income statement items to total sales:

Three Months Ended December 31, 2001 compared to Three Months Ended December 31, 2000 Sales. Sales for the quarter ended December 31, 2001 were $3.9 million, a decrease of $1.0 million, or 20.4%, from $4.9 million for the quarter ended December 31, 2000. TrueTime has emphasized entering the computer networking and telecommunications markets as part of its strategy. These markets have experienced economic slowdowns, and in turn, TrueTime has also experienced a slowdown with regards to order growth in these markets. While order growth in these markets has slowed, actual orders in our other markets increased by $180,000 over the comparable quarter a year ago. Lower sales were the result of Government orders received late in the quarter that were unable to be shipped. Sales to government and indirect government customers totaled 55.2% of total sales for the quarter ended December 31, 2001 compared with 42.1% for the comparable period in 2000. International shipments for the quarter ended December 31, 2001 represented 16.9% of total sales compared with 15.0% for the comparable period in 2000. Cost of Sales. Cost of sales for the quarter ended December 31, 2001 was $2.3 million, a decrease of $0.1 million from $2.4 million for the quarter ended December 31, 2000. Cost of sales increased as a percentage of total sales to 59% in the quarter ended December 31, 2001 from 48.6% in the quarter ended December 31, 2000. This increase is primarily related to the following: o increased manufacturing overhead costs due to reorganization based on business strategy ($0.2 million or 50% or total increase); o decreasing inventories and lower than planned sales resulted in lower production volumes and hence labor and overhead were applied to inventory at a rate lower than planned resulting in an increase in unabsorbed manufacturing overhead expense ($ 0.1 million or 25% of total increase); and o increase in facility costs due to the move to a larger facility in January 2001 ($0.1 million or 25% of total increase). 9 Operating Expenses. Operating expenses for the quarter ended December 31, 2001 were $2.4 million, a decrease of $0.2 million , or 7.7%, from $2.6 million for the quarter ended December 31, 2000. Operating expenses increased as a percentage of total sales to 61.7% in the quarter ended December 31, 2001 from 53.1% in the quarter ended December 31, 2000. Decreases in operating expenses compared to the prior year are primarily related to lower sales commissions ($0.15 million) and decreased or deferred sales and marketing programs, due to the result of the September 11th attacks ($0.08 million). Higher facility overhead expenses of $0.05 million offset these decreases. Interest Income. Interest income for the quarter ended December 31, 2001 was $0.04 million, a decrease of $0.07 million from $0.11 million for the quarter ended December 31, 2000. Such decreases are the result of a decrease in cash and lower interest rates compared to the prior year. Interest Expense. Interest expense for the three months ended December 31, 2001 was $0.01 million. There was no interest expense in the three months ended December 31, 2000. Interest expense was the result of the Company entering into a $0.75 million sale leaseback transaction in April 2001. Income Taxes. Income taxes for the quarter ended December 31, 2001 were 38.7% of the loss before tax compared to 40% of income before tax for the quarter ended December 31, 2000. The taxes include federal and state income taxes and are included on an estimated basis for the current year. The decrease in the tax expense for the quarter ended December 31, 2001 is a result of the estimated impact of tax credits and other accrual adjustments. LIQUIDITY AND SOURCES OF CAPITAL At December 31, 2001, our cash and cash equivalents were $7.2 million compared to $7.8 million on September 30, 2001. For the three month period ended December 31, 2001, operating activities used $0.5 million. Net loss for the three month period was $0.5 million. The largest contributors of cash include $0.15 million provided by a reduction in trade receivables and $0.17 million provided by the reduction of inventories. Cash used by operating activities include $0.28 million in decreased accrued expenses which included lower accrued sales commissions and lower payroll accruals due to timing of payments, $0.14 million in decreased trade payables and accrued expenses, and $0.32 million in decreased federal and state deferred taxes. For the three month period ended December 31, 2001, investing activities used $0.06 million, all for capital expenditures. Of this amount, $0.05 million was used for the purchase of electronic equipment and $0.01 million was used for new computer equipment and software. Anticipated capital expenditures for the next three months are $0.5 million, primarily in the area of electronic test, and computer hardware and software. For the three month period ended December 31, 2001, financing activities used $0.04 million. The decrease was the result of the principal payments on the sale leaseback transaction made in fiscal 2001. RECENT ACCOUNTING PRONOUNCEMENTS On June 29, 2001, the Financial Accounting Standards Board (FASB or the "Board") unanimously voted in favor of issuing Statement No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition (i.e., the post-acquisition accounting). FAS 142 supercedes APB 17, Intangible Assets. The most significant changes made by SFAS 142 are: - Goodwill and indefinite lived intangible assets will no longer be amortized and will be tested for impairment at least annually. 10 - Goodwill will be tested at least annually at the reporting unit level. - The amortization period of intangible assets with finite lives is no longer limited to forty years SFAS 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. Early application is permitted for entities with fiscal years beginning after March 15, 2001 provided that the first interim period financial statements have not been issued previously. In all cases, the provisions of SFAS 142 should be applied at the beginning of a fiscal year. Retroactive application is not permitted. The Company has goodwill for which amortization has been recorded against in prior periods. Amortization of goodwill per quarter is $6,444; amortization of goodwill for the year would be $25,776. Under the current guidelines, the Company will adopt the provisions of SFAS on October 1, 2002. The Company will likely have a write-down of goodwill upon adoption of SFAS 142. At this time the actual write-down amount is unknown. Currently, goodwill is carried at $758,556, the net book value. On October 3, 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Early application is encouraged. This statement supercedes: - SFAS 121 - "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"; and - APB 30 - "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business". SFAS 144 sets forth that if the expected undiscounted cash flows from an asset are insufficient to recover its carrying cost and if the carrying cost exceeds its estimated market value, then an impairment must be recognized. SFAS 144 also develops one accounting model for long-lived assets that are to be disposed of by sale, as well as addressing the principal implementation issues. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS 144 expands the scope of discontinued operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. FORWARD LOOKING STATEMENTS Certain of the statements contained in this document and in documents incorporated by reference herein, including those made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included herein, including statements regarding potential future products and markets, the Company's future financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. We can give no assurance that such expectations will prove to have been correct. These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause actual results performance or achievements to differ materially from the Company's expectations are disclosed below and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2001 filed with the Securities and Exchange Commission, under the headings "Forward Looking Statements" and "Risk Factors" and elsewhere. Further, all written and verbal forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by such factors. 11 RISK FACTORS The following risks could impact our business and operations and should be considered by investors. OUR BUSINESS WILL SUFFER IF WE CONTINUE TO EXPERIENCE A GENERAL ECONOMIC SLOWDOWN IN THE U.S., PARTICULARLY AS THAT SLOWDOWN AFFECTS TECHNOLOGY MARKETS. Our commercial operations are cyclical and dependent for success on the general economic well-being of the United States and certain other world markets. If the United States or world economies were to continue to decline or the demand for technology continues its recent downward trends, we may continue to experience adverse impacts on our revenues and income. Further, other general market conditions such as increased inflation and higher interest rates, were they to occur, could also adversely impact our revenue, profitability, cash-flow, and appropriate levels of inventory. OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE AND PRODUCT OBSOLESCENCE. If we fail to maintain our technological leadership and good reputation with our customers in the areas of GPS, real-time operating systems and network technologies, the value of your investment in TrueTime will decrease. The markets for timing and frequency products are characterized by continual and rapid technological developments that have resulted in, and will likely continue to result in, substantial improvements in product function and performance. Our success will depend on our ability to anticipate changes in technology and industry requirements and to respond to technological developments on a timely basis, either internally or through strategic alliances. We will likely be constantly threatened by current competitors or new market entrants who may develop new technologies or products or establish new standards that could render our products obsolete and unmarketable. Thus, we can offer no assurances that we will be successful in developing and marketing, on a timely and cost effective basis, product enhancements or new products that respond to technological developments, that are accepted in the marketplace or that comply with industry standards. WE RELY ON A LIMITED NUMBER OF SUPPLIERS FOR CERTAIN CRITICAL COMPONENTS, AND WE USE A SINGLE SUPPLIER FOR MOST OF OUR GPS-BASED COMPONENTS, MAKING US SUBJECT TO SUPPLY AND QUALITY CONTROL PROBLEMS. Most of our products incorporate certain components or technology supplied in part by third parties. From time to time, we experience delays and disruptions in our supply chain. To date, these delays and disruptions have not materially adversely affected our business, but they could do so in the future. Wherever possible, we try to develop multiple sources of supply, but we do not always succeed. To the extent that we experience significant supply or quality control problems with our vendors, these problems can cause us to have difficulty in controlling our quality and can have a significant adverse effect on our ability to meet future production and delivery commitments to our customers. Currently, Trimble Navigation Limited provides most of our GPS receivers, a key component for our older GPS-based products. In addition, Trimble has begun competing in markets similar to our own. While there can be no assurances that we can ensure continuous supply of these components, we have partially mitigated this risk by developing and integrating our own proprietary GPS receiver technology that is based upon widely available GPS chip sets. Further, this technology has been integrated into several of our newer products. If we are unable to obtain adequate supplies of Trimble's component for any reason or to successfully integrate our own substitute technology, we will likely experience delays or reductions in production and increased expenses. Our operations will be negatively affected if we experience inadequate supplies of any key components. OUR TRADE SECRETS, TRADEMARKS AND PATENTS MAY NOT BE ADEQUATE OR ENFORCEABLE AND OTHERS MAY USE OUR PROPRIETARY TECHNOLOGY. Historically, we have not generally filed patents to protect our intellectual property. While we believe our intellectual property is adequately protected by our confidential trade-secret protection plans and programs, we cannot be sure that our competitors will be prevented from gaining access to our proprietary and confidential technologies. Furthermore, although we have applied for a patent related to a computer network timing product, we can offer no assurances that a patent will be issued for this patent application or other future applications and, if issued, that any patent will be enforceable. If the protection of our intellectual property proves to be inadequate or unenforceable, others may use our proprietary developments without compensation to us and in competition against us. 12 WE FACE THE RISK OF LITIGATION ALLEGING OUR INFRINGEMENT OF OTHER PEOPLE'S INTELLECTUAL PROPERTY RIGHTS. We do not know of any instances where our products violate the intellectual property rights of others or inappropriately use their technology. However, technology-based companies are often very litigious. Therefore, we face the risk of adverse claims and litigation alleging infringement of other people's intellectual property rights. These claims could result in costly litigation and divert management's attention from other matters. Alternatively, these claims could practically require us to obtain licenses in order to use, manufacture, and sell certain of our products, regardless of the merits of the infringement claims, in order to maintain business levels, or we could otherwise be excluded from participation in certain markets. We cannot be certain that any necessary licenses will be available or that, if available, they can be obtained on reasonable terms acceptable to us. OUR COMPETITORS MAY USE THEIR GREATER RESOURCES AND BROADER PRODUCT OFFERINGS TO INCREASE COMPETITION AND REDUCE OUR SALES AND PROFITABILITY. Many of our existing and potential competitors have substantially greater marketing, financial and technical resources than we have. In addition, some of our competitors have broader product offerings and manufacture internally certain critical components of time and frequency products. Currently, we do not have a complete offering of precise time and frequency products nor do we manufacture internally certain critical components, placing us at a disadvantage to some of our competitors. In addition, we believe that some of our competitors have obtained and maintained business that loses money - "loss leading" - in order to maintain a competitive advantage with regard to specific customers or products. If our competitors were to use such tactics in the future, we would be unable to maintain our market position without incurring a negative impact on our profitability. The race for a leading position in new technological advances is always very competitive. Advances in technology may reduce the cost for potential competitors to gain market entry, particularly for less expensive time and frequency products. We cannot assure you that sales of our products will continue at current volumes or prices in any event, but especially if our current competitors or new market entrants introduce new products with better features, better performance or lower prices or having other characteristics that are more attractive than our own. Competitive pressures or other factors also may result in significant price competition that could have a material adverse effect on our results of operations. OUR INDUSTRY MAY NOT GROW AS FORECASTED AND OUR REVENUES AND OPERATING RESULTS MAY BE DIMINISHED. Our future successful performance is inextricably tied to the growth of our industry. However, even if our industry grows, there can be no assurance that we will be able to grow consistently with our industry. OUR RELATIONSHIPS WITH OUR SALES REPRESENTATIVES COULD BE IMPAIRED AND CAUSE US TO LOSE ORDERS. More than 95% of our orders come through our 31 domestic and worldwide sales representative offices. Many of these representatives act as relationship brokers and the loss of any key representatives could have a negative effect on our revenue. WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, DELAYING PRODUCT DEVELOPMENT AND MANUFACTURING. Our success depends upon attracting and retaining highly skilled professionals. A number of our employees are highly skilled engineers and other technical professionals, and our failure to continue to attract and retain such individuals could adversely affect our ability to compete in the industry. In addition, our success will depend to a significant extent upon the abilities and efforts of several members of our senior management. MANY OF OUR KEY CUSTOMERS ARE UNITS OF THE U.S. GOVERNMENT AND ENTITIES THAT ARE DEPENDENT UPON U.S. GOVERNMENT FUNDING FOR PURCHASES, THEREFORE, DECREASED GOVERNMENT SPENDING COULD ADVERSELY AFFECT OUR BUSINESS. Our defense, military and aerospace based business depends largely on U.S. government expenditures, whether directly with us or indirectly with our customers who contract with the U.S. government. Sales to U.S. government units and indirect government customers have accounted for approximately 28%, 36% and 53% of our annual revenues for fiscal years ended 1999, 2000 and 2001, respectively. There can be no assurances as to whether future governmental spending will adequately 13 support our business in those areas, and substantial decreases in government spending or loss of U.S. governmental customers could materially and adversely affect our operations. OUR MARKET IS SEGMENTED INTO A LIMITED NUMBER OF CUSTOMER GROUPS, THE LOSS OR CHANGE OF WHICH COULD SIGNIFICANTLY DECREASE OUR SALES. While we sell our products to a large number of individual customers, the number of customer groups is limited. These groups include telecommunications, computer networking, aerospace, military, satellite, U.S. government and power utility customers. The loss, or changes in the purchasing behavior, of one or more of these groups of customers could cause a material decrease in the sale of our products. THE FAILURE OF GPS AND OTHER TIME AND FREQUENCY REFERENCES WOULD CAUSE OUR PRODUCTS TO FAIL TO PERFORM TO SPECIFICATION. The time and frequency products that we manufacture rely upon the availability of highly accurate timing references, primarily GPS operated by the U.S. Department of Defense, and to a lesser degree, other timing references operated by the U.S. National Institute of Science and Technology and other outside signal sources. The failure of these timing references, particularly GPS, would create many problems for our products and our customers and seriously disrupt the sale of our products. OUR PRODUCTS COULD FAIL TO PERFORM ACCORDING TO SPECIFICATION OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMER RELATIONSHIPS AND INDUSTRY REPUTATION AND RESULTING IN LOSS OF SALES. Our customers require demanding specifications for product performance and reliability. Because our precision time and frequency products are complex and often use state-of-the-art components, processes and techniques, undetected errors and design flaws may occur. Product defects result in higher product service and warranty and replacement costs and may cause serious damage to our customer relationships and industry reputation, all of which will negatively impact our sales and business. FLUCTUATIONS IN QUARTERLY PERFORMANCE CAN RESULT IN INCREASES IN OUR INVENTORY AND RELATED CARRYING COSTS, CAN DIMINISH OUR OPERATING RESULTS AND CASH FLOW AND CAN RESULT IN A LOWER TRUETIME STOCK PRICE. Historically, the rate of incoming orders for our products has varied substantially from quarter to quarter. In past fiscal years, our highest sales quarter has been as much as 250% of our lowest sales quarter. This quarter to quarter variation is not seasonal or predictable. We attempt to accurately forecast orders for our products and commence purchasing and manufacturing prior to the receipt of such orders. However, it is highly unlikely that we will consistently accurately forecast the timing and rate of orders. The flow of orders (or lack thereof) from governmental agencies has been particularly difficult to forecast in recent periods. This aspect of our business makes our planning inexact and, in turn, affects our shipments, costs, inventories, operating results and cash flow for any given quarter. In addition, our quarterly operating results are affected by competitive pricing, announcements regarding new product developments and cyclical conditions in the industry. Accordingly, we may experience wide quarterly fluctuations in our operating performance and profitability, which may adversely affect our stock price even if our year to year performance is more stable, which it also may not be. In addition, many of our products require significant manufacturing time, making it difficult to increase production on short notice. If we are unable to satisfy unexpected customer orders, our business and customer relationships could suffer. CARRYING VALUES OF INVENTORIES OF OUR PRODUCTS AND COMPONENTS THEREFORE MAY BE SUBJECT TO PERIODIC WRITE-DOWN, ADVERSELY AFFECTING OUR OPERATIONS. To be competitive in some of our markets, particularly our commercial markets, we will be required to build up inventories of certain products and services in anticipation of future orders. There can be no assurance that we will not experience problems of obsolete, excess or slow-moving inventory if we are not able to properly balance inventories against the prospect of future orders, and our operations may be adversely affected by inventory write-downs. 14 CARRYING VALUES OF INTANGIBLE ASSETS MAY BE SUBJECT TO PERIODIC WRITE-DOWN, ADVERSELY AFFECTING OUR OPERATIONS. Goodwill and other intangible assets are reviewed for impairment whenever an event or change in circumstances indicates that the carrying amount may not be recoverable. If the carrying value of our intangible assets exceeds the expected undiscounted future cash flows, a loss would be recognized to the extent the carrying amount of assets exceeds their fair values. This loss may negatively impact our results of operation. While the Company would not experience a loss under current accounting standards, the Company believes it could experience a loss under adoption of SFAS 142. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are exposed to market risks related to changes in interest rates in the future. The unused proceeds from our Initial Public Offering are invested in short-term financial instruments, the value of which is subject to interest rate risk and could fall if interest rates rise. These short-term instruments are in low-yield, high quality investments. The decline in interest rates during the quarter ended December 31, 2001 resulted in a decrease in interest income on these investments of approximately $20,000 for the quarter. Additionally, while we have no plans for future borrowings, any future borrowings will likely have a variable rate component that will fluctuate as interest rates change. If market interest rates were to increase immediately and uniformly by 10%, there would not be a material effect on the results of operations or on our balance sheet. 15 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. From time to time, the Company is a party to legal proceedings arising in the ordinary course of business. The Company is not currently a party to any litigation that it believes could have a material adverse effect on the results of operations, financial condition, or cash flows of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. The Company commenced the Initial Public Offering (the "Offering") of its common stock on December 16, 1999 pursuant to a Registration Statement on Form S-1 (Registration No. 333-90269), which was declared effective by the Securities and Exchange Commission on December 16, 1999. The Offering was terminated upon the sale of all of the securities covered by such Registration Statement. The Company has used approximately $8,508,909 of the initial net proceeds of $8,642,667 from the offering for day to day working capital requirements and capital improvements. As of December 31, 2001, the Company had invested unused net proceeds of the Offering in the amount of approximately $133,758 in short-term money market investments. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits filed with this Quarterly Report. None (b) Reports on Form 8-K. None. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TRUETIME, INC. By: /s/ ELIZABETH A. WITHERS ---------------------------------------------- Elizabeth A. Withers President and Chief Executive Officer (Principal Executive Officer) By: /s/ JOHN E. DUTIL ---------------------------------------------- John E. Dutil Chief Financial Officer (Principal Financial and Accounting Officer) Date: February 13, 2002 17

TRUETIME INC 10-Q