Item 1. Business
Overview
Symmetricom is a leading supplier of timing and synchronization hardware, software, and services. Our technology plays a critical role in network reliability and quality of service. We sell our solutions to communication service providers, government agencies, enterprises, and research facilities. Symmetricom products have been shipped to more than 90 countries in fiscal year 2007. Our products include atomic frequency references, including rubidium and cesium oscillators; hydrogen masers; GPS time and frequency receivers, as well as time and frequency distribution systems; network management software; and professional services.
We manufacture precision time products that allow our customers to keep accurate time within 40 billionths of a second over a 24-hour period. Our clocks tell us the time of day and allow us to measure the time interval between when an event starts and when it stops. The difference between conventional time measuring devices and our precise time products lies in the accuracy of the measurements. To place
the accuracy of our clocks in perspective, if a clock accumulates a 40 billionth of a second time error over a 24-hour period, it will require more than 500,000 years to accumulate an error of one second.
During fiscal 2007, in connection with the acquisition of QoSmetrics, S.A., we entered a new business and formed the Quality of Experience Assurance Division. This business develops products for use in the IPTV market that search for network impairments and review video packet integrity.
General Information
Symmetricom was incorporated in California in 1956 and reincorporated in Delaware in 2002. The principal executive offices are located at 2300 Orchard Parkway, San Jose, California 95131-1017, and the telephone number is (408) 433-0910.
Our website is located at www.symmetricom.com. We make available, free of charge on or through our website, our recorded conference calls, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as practical after we electronically file such material, or furnish it, to the SEC. Information contained or referenced on our website is not incorporated by reference into and does not form a part of this Form 10-K.
Industry Background
The markets served by Symmetricom include:
· Telecommunications and cable markets;
· Wireless/OEM telecommunications equipment manufacturers; and
· Aerospace, defense, metrology and enterprise.
Reportable Segments
Symmetricom is organized into five reportable segments that are within three divisions:
Telecom Solutions Division
· Wireline Products;
· Wireless/OEM (original equipment manufacturer) Products;
· Global Services
Timing, Test and Measurement Division
Quality of Experience Assurance Division
Information as to net revenue and gross profit margin attributable to each of these reportable segments for each year in the three-year period ended July 1, 2007, is contained in Note 16 of the notes to the consolidated financial statements.
Telecom Solutions Division
Our Telecom Solutions Division offers a full suite of timing and synchronization products that meet global standards requirements. Products include primary reference sources; edge clocks and distribution products for synchronization outside the network core; Building Integrated Timing Supply (BITS) and Sync Supply Unit (SSU) for the central office; network management and monitoring software; and synchronization subsystems for OEM integration. Symmetricom holds patents in advanced control
algorithms for deployments utilizing the Global Positioning System (GPS), DOCSIS™ Timing Interface (DTI) and Code Division Multiple Access (CDMA).
In fiscal 2007, we actively participated in the modernization of several synchronization networks with certain service providers and helped others develop future plans for such efforts. The carriers and operators are driven by network economics and competitive forces to evolve their network infrastructures toward integrated transmission and switching functions and packet-based technologies. We believe this evolutionary trend demands a more intelligent and reliable synchronization infrastructure.
Our Wireless/OEM segment serves the wireless market with synchronization and timing components and sub-system (module) products that are foundational to the operation of certain types of cellular base stations.
We continue to build a strong portfolio of precise time and frequency solutions to address the growing synchronization requirements of all layers of existing circuit switched network and next-generation packet networks.
Our Global Services segment provides services for Symmetricom’s product lines.
Timing, Test and Measurement Division
Our Timing, Test and Measurement Division provides precision time and frequency instruments and reference standards for the aerospace, defense, metrology and enterprise markets. Products include synchronized clocks, network time servers, network time displays, time code generators, computer plug-in cards, and primary reference standards, such as rubidium and cesium oscillator standards and ruggedized crystal oscillators. Customer applications include synchronization of communication networks, synchronization of computer networks, calibration of lab equipment, GNSS (Global Navigation Satellite Systems), and subsystem master timing. To support both a diverse customer and product base, the division built strong application engineering capabilities that allow for the tailoring of standard product platforms to meet a customer’s unique system requirements.
During fiscal 2007, we acquired Timing Solutions Corporation (TSC) in Boulder, Colorado, which strengthened our timing technology and provides access to a number of new government customers. TSC has been integrated into the Timing, Test and Measurement Division, and Dr. Sam Stein, the former President of TSC, has become the VP of Engineering for the division.
During fiscal 2007, the division continued to emphasize government program business in secure mobile, satellite, and wireline communications, as well as other defense platform upgrades including destroyers, submarines, and Unmanned Aerial Vehicles (UAVs). Key customers of the division included Boeing, DISA, Lockheed Martin, Northrop Grumman, Raytheon, and various military procurement and service agencies. New products introduced during the fiscal year included a line of Phase Noise and Allan Deviation Test Sets and several new time distribution systems which came from the TSC acquisition as well as a new ruggedized TCXO oscillator family, an IEEE-1588 test and validation solution, new module capabilities for our XLi GPS Time and Frequency Receiver family and two new models in our SyncServer network time server family.
Quality of Experience (QoE) Assurance Division
During fiscal 2007, we acquired QoSmetrics S.A., a privately held provider of quality of experience (QoE) solutions for IPTV (Internet Protocol Television). This acquisition became the foundation of our new Quality of Experience (QoE) Assurance Division. QoE provides hardware and software-based probes and/or embedded agents that are distributed throughout an IP (Internet Protocol) network in order to monitor network and application performance. The primary applications for these system-level solutions are to ensure end users’ Quality of Experience, or QoE, for IPTV (Internet Protocol Television) service. In
addition, we acquired certain intellectual property from Genista Corporation to accurately determine the quality of real-time video streams as delivered to end-user devices. The staff from QoSmetrics S.A., as well as research and development staff from Genista Corporation, joined Symmetricom. The market for QoE products is unproven. We believe the market will develop over the next two to three years. Until the market develops and we generate substantial revenue from QoE products and services, the expenses associated with this division will depress the profitability of the company overall. If the market does not develop as we expect and, if it does develop, and our products fail to gain acceptance, this will have a material adverse effect on our results of operations.
Wireline and Cable Infrastructure Markets and Products
Wireline and Cable Infrastructure Markets:
The wireline and cable infrastructure markets include local, long distance and international telecommunications service providers and carriers and cable service providers. Customers in the wireline market include worldwide public network providers, incumbent local exchange carriers (ILECs), public telephone and telegraph companies (PTTs), competitive local exchange carriers (CLECs), other telephone companies as well as cable companies. We believe that these telco providers will have to replace their legacy synchronization equipment in the future. Some companies have begun the upgrade process. Based on the size of the installed base of legacy equipment, we anticipate that this cycle could take at least several years to complete. The cable infrastructure market has an emerging requirement for synchronization within cable vendors’ equipment for which we have developed a line of synchronization products.
We have developed a product, called TimeCreator, for the cable market, which we believe, will be needed as cable providers move to next generation equipment.
Wireline and Cable Products:
The telecommunications network consists of a series of interconnected switching equipment and other components that route information (i.e., voice, video, data, etc.) through the network. For these networks to function efficiently, it is essential that each network be synchronized and the individual nodes within the network operate within precise tolerances. Precision synchronization equipment throughout these networks provides a frequency reference which enables digital switching, routing and transmission systems to operate at a common, synchronized clock rate, thereby aligning time slots, which increases bandwidth utilization while minimizing signal degradation and reducing errors throughout a network.
Our core system products are built on atomic clock (such as cesium and rubidium) and GPS technologies. The products belong to one of four classes:
· Primary Reference Sources (PRS)-consists of the GPS-based TimeSource family, and the cesium-based TimeCesium.
· Building Integrated Timing Supplies (BITS) or Synchronization Supply Units (SSUs)-consists of the versatile SSU 2000 and the carrier-class TimeHub, both intelligent sync distribution systems, and carrier class Network Time Protocol (NTP) plug-in server cards, supporting Quality of Service for next generation applications. PackeTime™ precise time transfer modules bring high precision, high availability, security, robust management and easy infrastructure integration to telecom operators building next generation networks. Other key products consists of Time Provider, the industry’s first node clock (hybrid SSU & PRS), TimeCreator, the first Data Over Cable Service Interface Specifications (DOCSIS) Timing Interface (DTI) server qualified by CableLabs, and other products currently under development to address emerging needs in the wireline and cable markets.
· Element Management Systems-consists of TimePictra, the carrier class HP-UX based system, and TimeScan, the PC-based system.
Wireless/OEM Market and Products
Wireless/OEM Market:
Symmetricom’s Wireless/OEM products are sold into the wireless market. Wireless telecommunications networks consist of numerous cells located throughout a service area. In a wireless network, calls are segmented, transmitted over the air, and reassembled by a receiver within the network. Certain engineering requirements demand a high level of synchronization at the base station. Our products are primarily sold into CDMA-based implementations throughout the world.
Wireless/OEM Products:
The primary use of our wireless products is in wireless base stations. Base stations are the infrastructure equipment used in all cellular and personal communication services worldwide. Many of the wireless technologies used today require high precision frequency and timing information to operate their services.
Our component and sub-system (module) products deliver stable timing to wireless base stations using a combination of GPS receivers for timing distribution, high precision quartz oscillators and rubidium atomic oscillators. Their use depends on the specific cellular technology such as CDMA2000 or UMTS, and the governing standards that apply. For example, in CDMA, most manufacturers require a GPS signal for every base station with either a high performance quartz or rubidium oscillator as a backup. These solutions are also available to other communication applications requiring high precision frequency and timing information, such as digital television transmission, high definition television, and instrumentation.
Specific products we provide are:
· Rubidium atomic oscillators with various performance levels.
· GPS accessory components, which include receiving antennas, timing antennas, splitters, amplifiers, and lightning protectors.
· Sub-system cards or modules used within another manufacturer’s equipment such as wireless base stations or broadband wireless solutions. These are customized for each manufacturer, using a combination of GPS, quartz oscillators, rubidium atomic oscillators, input/output signals and control algorithms. Some of the control algorithms are contained in our BesTime technology.
· Time module synchronization sub-systems, which are flexible GPS-disciplined time and frequency platforms optimized for WiMAX and other applications that require precise frequency or time. Our Time module is designed to be integrated into existing communications and transmission equipment used in WiMAX mobile base station timing, broadcast (DVB, DVB-H, DAB, DTV), satellite communications equipment, and cellular base stations (CDMA, TDMA, UMTS for GPS based timing).
Global Services Market and Products
Global Services Market:
We market our services exclusively to customers who purchase our products.
Global Services Products:
Our Global Services organization provides lifecycle services for Symmetricom product lines. Services products fall into five main categories:
· Engineering and installation-Our engineering and installation services help customers implement new Symmetricom product purchases.
· Operations and support programs-Our operations and support programs, such as Sync Office Audits, assist customers in maintenance of their sync networks, help ensure power and alarm diversity to avoid service outages and identify system capacity.
· Maintenance-Our maintenance offerings are designed to help customers minimize staff and expenses necessary for ongoing support of their Symmetricom products. These include 24 x 7 technical support, traditional return-to-factory repair services, and on-site repair labor.
· Training, certification programs and professional development courses-Our training courses enable customer personnel to successfully utilize and maintain our products. These programs are also available under license for customers who maintain their own training centers.
· Consulting and other professional services-Our consulting services assist customers in planning new sync communications networks and developing growth or disaster recovery plans for existing sync networks.
Timing, Test and Measurement Markets and Products
Timing, Test and Measurement Markets:
The aerospace, defense, metrology, and enterprise markets require precision time and frequency instruments and reference standards. Time and frequency solutions include GPS and time code instrumentation products, bus level timing cards, and precision frequency references (atomic standards). IP network timing products include dedicated network time servers and management and monitoring software that synchronizes the timing on enterprise networks. Space, defense, and avionics applications include highly reliable and ruggedized components and systems designed to address specific customer requirements.
Timing, Test and Measurement Products:
We offer a wide variety of precision time and frequency products sold primarily to the aerospace, defense, metrology and enterprise sectors. These products can generally be divided into the following broad categories:
· Precision Frequency References-Precision Frequency References form the basis of absolute time and frequency in many systems and applications. Our products include active hydrogen masers, cesium frequency standards, rubidium frequency standards, and quartz frequency standards. Our primary reference source instruments provide stand-alone dependability, ease of use, and ease of installation that make them suitable for the critical time or frequency systems found in telecommunications timing, calibration and metrology laboratories, satellite tracking stations and space-based master time standards.
· Bus Level Timing-We manufacture a broad line of precision timing products in the form of plug-in cards for computers. These cards provide precise timing capabilities to computers equipped with common bus components. We also offer software development tools to speed the integration of these cards into software applications.
· Enterprise Network Time Servers-We manufacture several products for enterprise network time distribution. These bring entire networks of computers into precise time synchronization.
· GPS & Time Code Instrumentation Products-We manufacture a wide variety of general purpose GPS receivers, time code generation, translation and distribution products. A time code is a data format for recording and processing time measurements.
· Space, Defense and Avionics-We provide ruggedized and militarized quartz and atomic clock platforms for the most demanding military applications. Our designs are vibration isolated with low-acceleration sensitivity. For space applications such as GPS, where there is a high degree of exposure to radiation, our products are protected by radiation-hardened designs.
· Test & Measurement Equipment-We provide a line of Time and Frequency test solutions including a family of Phase Noise and Allan Deviation Test Sets designed to measure critical performance specifications of precision time and frequency signals and sources.
Quality of Experience Assurance Market and Products
Quality of Experience Assurance Market:
As traditional telephone and broadband access services become increasingly competitive, communication service providers (CSPs) are investing in advanced services that are vital to generate new revenue streams. Delivering services such as IPTV, Video on Demand (VoD), VoIP, and other real time media over an IP network, however, faces a number of technical challenges that can easily degrade service, and thus, increase support costs and customer churn levels. To address such concerns, service providers may utilize real time Quality of Experience (QoE) monitoring solutions. These include software agents, network probes and Network Operations Center (NOC)-based management software.
Quality of Experience Assurance Products:
· Network Probes: Linux server-based components of Symmetricom’s QoE solution provide a benchmark (a MOS, or mean opinion score) that enables service providers to monitor and diagnose the perceptual impact of video, voice or data quality impairments that may be introduced by transmission over an IP network or perhaps by artifacts introduced from various encoding methodologies.
· Software Agents: Our software agents provide comprehensive, real time diagnostics and are resident on either an end user’s PC or other customer premise equipment (CPE) such as set-top boxes (STBs) or home gateways. Integration of these agents into various CPE is essential for communication service providers (CSPs) to diagnose problems that arise within the critical “last mile” of various distribution and access networks, as well as within “in-building” infrastructure.
· NOC-based Software: Collecting real time information from network probes and software agents, management software enables network administrators to diagnose critical issues as they arise, minimize support costs, monitor service level agreements (SLAs), and improve and refine network services on an ongoing basis. Key Performance Indicators (KPIs), MOS scores, traps, alarms, and other performance-related data are aggregated in a highly optimized and proprietary manner, and then stored in an integrated structured query language (SQL) database. This software platform is typically deployed in a highly integrated fashion with an industry-standard OSS already in use by the customer.
· V-Factor®: This product technology is at the core of delivering perceptual quality metrics for IP-based video in a no-reference system architecture. Based upon the Moving Picture Quality Metric (MPQM) model and adapted specifically for end-to-end video and audio quality scoring, it is the
first video quality metric that takes into account both network and content impairments. V-Factor-based software products can be embedded into a variety of network nodes and types of equipment that include network processors, IP-DSLAMs, test probes, STBs, PCs, home gateways, etc.
Sales Operations
We sell our products directly to customers, and through domestic and international distributors, as well as systems integrators and manufacturer sales representatives. In the United States, our wireline and cable products are primarily sold through our own sales force to ILECs, PTTs, CLECs, other telephone companies, wireless service providers, cable operators, Internet Service Providers (ISPs) and OEMs. Our instrumentation products are primarily sold through manufacturer sales representatives, and our enterprise products are primarily sold through telesales and the internet. Internationally, we market and sell our products through our internal sales force, independent sales representatives, distributors, and system integrators.
Licenses, Patents, Trademarks and Copyrights
We use a combination of trademark rights, copyrights and patent rights, as well as associated registrations, contractual restrictions, and internal security to establish and protect our proprietary rights. As of July 1, 2007, we had 51 active United States patents. The active patents issued will expire between August 2009 and September 2024. We believe that our patents have value, but 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 assurance that a license will be available, or that the terms of obtaining any such license will be acceptable to us. In addition, the laws of certain countries in which our products may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. In addition, we use technology licensed from others.
We generally enter into confidentiality agreements with our employees, consultants, and third parties in connection with our technology. These confidentiality agreements generally seek to control access to, and distribution of, our technology, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to obtain and use our proprietary information without authorization or to develop similar technology independently.
In addition, we use trademarks to help identify and market our products and services. We have a number of trademark registrations and pending applications both in the United States and around the world. We rely on these trademark registrations and applications as one of the tools to protect our rights in our trademarks and brands. We also rely on our common law trademark rights in those countries that recognize such rights, such as the United States. We can provide no assurance, however, that any of our trademark applications will be successful, or that our existing registrations will not be challenged or invalidated. Likewise, we can provide no assurance that our registrations, applications or common law rights will enable us to stop others from infringing upon our trademarks, or enable us to successfully defend against claims of trademark infringement. Furthermore, effective trademark protection may not be available in every country in which our products and services are distributed.
We also have copyrights on our software products, product documentation, marketing materials, and other documentation and materials. We rely on these copyrights to protect our rights in our copyrighted materials. We can provide no assurance, however, that our copyrighted materials will not be infringed. In addition, effective copyright protection may not be available in every country in which our products are distributed.
Manufacturing
Our manufacturing process for standard products consists primarily of assembly and test performed by our manufacturing sites in Aguadilla, Puerto Rico; Beverly, Massachusetts; Tuscaloosa, Alabama; San Jose, California and Hofolding, Germany. In addition, custom and semi-custom instrumentation products are developed, assembled, and tested in Santa Rosa, California and Boulder, Colorado. The Boulder, Colorado and Santa Rosa, California facilities are registered to ISO900:2000, while our Beverly, Massachusetts; Aguadilla, Puerto Rico and San Jose, California (engineering processes) are upgraded to meet the TL 9000 quality system standard (an advanced telecommunications standard for manufacturing and engineering). Our Beverly, Massachusetts facility is also registered to AS9100 which certifies the design, development, and production of high precision time and frequency references for commercial military and space markets.
Backlog
Our backlog consists of firm orders that have yet to be shipped to the customer. Our total backlog was $51.9 million as of July 1, 2007, compared with $48.9 million as of July 2, 2006. Of the $51.9 million backlog at July 1, 2007, $43.4 million, $6.1 million and $2.3 million is estimated to be shippable within six months, from six to 12 months and after 12 months, respectively. Most orders included in backlog can be rescheduled or cancelled by customers without significant penalty. Historically, a substantial portion of net revenue in any fiscal period has been derived from orders received during that fiscal period. Our backlog may also be affected by the cancellation 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.
Key Customers and Export Sales
During fiscal 2007, AT&T Inc. accounted for 13.7% of our net revenue and Verizon Communications Inc. accounted for 12.7% of our net revenue. No other single customer accounted for more than 10% of our net revenue in fiscal 2007. Our export sales to Europe, Latin America, Asia and Canada accounted for 29%, 30% and 35% of our net revenue in fiscal 2007, 2006 and 2005, respectively. For additional information regarding our export sales, see Note 16 to our consolidated financial statements. We shipped products to over 90 countries in fiscal 2007.
Gains and losses on the conversion to United States dollars of 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. We do not currently engage in currency hedging activities or derivative arrangements but may do so in the future to the extent that foreign currency transactions become more significant.
Competition
Competition in the telecommunications industry is intense. Some of our competitors or potential competitors are well established and have significant financial, manufacturing, technical and marketing resources. Competitors of our synchronization products include Emrise Corp., Frequency Electronics, Inc., Huawei Technologies Co. Ltd., and Oscilloquartz SA. Competitors of our Wireless/OEM products include
Frequency Electronics, Inc. and Trimble Navigation, Ltd. Competitors of our timing, test and measurement products include Brandywine Communications, EndRun Technologies, Frequency Electronics, Inc., Meinberg, Temex and Trak Systems, Inc. (a Veritas Corporation subsidiary). Competitors of our Quality of Experience Assurance products include Brix, Ineoquest, JDS Uniphase, Agilent Technologies, Tektronix and Telchemy.
Research and Development
Our development efforts include providing enhanced functionality to our existing products including the development of additional software-based features and functionality. We also utilize domestic and international contractors (primarily in India) to assist us in our research and development activities. We focused our development efforts in fiscal 2007 on the development of both hardware and software products. Our product development programs include wireline and wireless synchronization, network management software, government communication and infrastructure, network time server, video quality of experience hardware and software, and updates and maintenance on existing products. We are developing a number of new services that we expect to provide in the future as part of our next generation platform. These include network time protocol (NTP) and IEEE 1588 services, as well as others. In fiscal 2007, 2006 and 2005, overall research and development expenditures were $23.7 million, $18.8 million and $16.3 million, respectively. Fiscal year 2007 research and development expenditures include the partial year impact for the QoSmetrics S.A. and Timing Solutions Corporation acquisitions. We expensed all research and development expenditures as they were incurred. We expect to continue to support research and development efforts in order to enhance existing products and to design and develop new technologies and products.
Our primary product development centers are in Camarillo, California; San Jose, California; Santa Rosa, California; Beverly, Massachusetts and Austin, Texas.
Government Regulation
The telecommunications industry is subject to domestic and foreign regulatory policies regarding pricing, taxation and tariffs, which may adversely impact the demand for our products. These policies are continuously reviewed and subject to change by the various governmental agencies. We are also subject to government regulations and standards for our products.
Environmental Regulation
Our operations are subject to numerous foreign, federal, state and local environmental regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals and materials used in our manufacturing process and products. Failure to comply with such regulations could result in a suspension or cessation of our operations, or could subject us to significant future liabilities. See “Item 3. Legal Proceedings” and “Item 1A.
Item 1A. Risk Factors
The new Quality of Experience Assurance Division will incur substantial losses
During fiscal 2007, in connection with our acquisition of QoSmetrics, S.A., we entered a new business and formed the Quality of Experience Assurance Division. This business develops and sells products for
use in IP-based video markets that may require monitoring for network performance and the assurance of the quality of video delivery. We are currently investing in this business to develop products for this emerging market. This market may never develop and, if it does develop, our products may not be successful. If either of these occurs, then we will have incurred substantial losses in QoE over the course of several years and in a future period we would have to write off and expense substantial amounts of goodwill and intangibles. This business will incur substantial losses to develop and market products. There is no assurance that these products will attain market acceptance.
Investor confidence and share value may be adversely impacted by material weaknesses in our controls over financial reporting
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal controls over financial reporting.
During fiscal 2007, we identified two material weaknesses in our controls over financial reporting. Both material weaknesses resulted in quarterly restatements in fiscal 2007, one for the second quarter and the other for the third quarter. One of the material weaknesses was remediated prior to year end. Since the other material weakness was not remediated prior to July 1, 2007, our management has determined that our internal control over financial reporting was not effective as of July 1, 2007. We cannot assure you that we will not identify other material weaknesses in our internal controls in the future. As a result, we may experience a loss of public confidence, which could have an adverse effect on our business, financial condition and stock price.
We will need to continue to evaluate, upgrade and enhance our internal controls. Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements, errors or omissions, and any projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. We cannot be certain in future periods that other control deficiencies that may constitute one or more “significant deficiencies” (as defined by the relevant auditing standards) or material weaknesses in our internal control over financial reporting, will not be identified. If we fail to maintain the adequacy of our internal controls, including any failure to implement or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we could fail to be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls or meet our reporting obligations and there could be a material adverse effect on the price of our securities.
If we are unable to smoothly integrate the businesses we acquire, our operations and financial results could be harmed
As part of our business strategy we have engaged in acquisitions in the past, including the acquisitions of TrueTime and Datum, and other smaller acquisitions, and continue to evaluate other acquisition opportunities that could provide additional product or service offerings, technologies or additional industry expertise. Acquisitions involve risks, which include the following:
· we may be exposed to unknown liabilities of the acquired business;
· we may incur significant write-offs;
· we may experience problems in combining the acquired operations, technologies or products;
· we may not realize the revenue and profits that we expect the acquired businesses to generate;
· we may not achieve the cost savings we hope to obtain from combining the acquired operations with ours;
· we may experience regulatory difficulties and unbudgeted expenses in attempting to complete an acquisition;
· we may encounter unanticipated acquisition or integration costs that could cause our quarterly or annual operating results to fluctuate;
· we may incur substantial penalties if we do not relocate manufacturing operations as scheduled;
· our management’s attention may be diverted from our core business;
· our existing business relationships with suppliers and customers may be impaired;
· we may not be successful in entering new markets in which we have no or limited experience;
· key employees of the acquired businesses may have expertise and know-how, and we may not be able to retain some of these key employees, and some of them may join or start competing businesses;
· our earnings per share may be diluted if we pay for an acquisition with equity securities; and
· we may not be able to repay our debt used to make acquisitions.
We cannot assure you that we will be able to successfully integrate any business, products, technologies or personnel from any recent or future acquisitions. If we fail to successfully integrate acquisitions or to achieve any anticipated benefits of an acquisition, our operations and business could be harmed. Additionally, we may experience difficulty integrating and managing the acquired business operations. For these reasons, we cannot be certain what effect acquisitions may have on our business, financial condition and results of operations.
We may be required to record additional goodwill and intangible impairment charges in future quarters
As of July 1, 2007, we had recorded goodwill with a net book value of $54.7 million related to various acquisitions, most recently QoSmetrics S.A and Timing Solutions Corporation. We test for impairment at least annually, and more frequently whenever evidence of impairment exists. For example, we performed a goodwill impairment test on our Wireless/OEM business segment as of March 31, 2006 and determined that goodwill was impaired by approximately $7.0 million. If our future financial performance or other events indicate that the value of our recorded goodwill is impaired, we may record additional impairment charges that could have a material adverse effect on our reported results.
We may be impacted by disruptions and liquidity issues in the credit market, which may unfavorably impact our financial condition and results of operations
We invest excess funds in specific instruments and issuers approved for inclusion in our cash and short-term investment accounts. Our investment criteria are to invest only in top tier quality investments or federally sponsored investments. Top tier quality investments are determined by our investment advisor in conjunction with ratings of those investments provided by outside ratings agencies as well as our investment advisor’s internal credit specialists. Our cash consists of overnight instruments and instruments that will mature within ninety days after the end of our fiscal quarter. Our short-term investment portfolio consists of instruments that mature between ninety-one days and three years after the end of our fiscal quarter.
Based upon recent events in the credit market, we may be impacted by the following risks:
· We may experience temporary or permanent declines in the value of certain instruments which would be reflected in our financial statements;
· We may experience rating agency downgrades of instruments we currently own which may degrade our portfolio quality and cause us to take impairment charges;
· We may not be able to reasonably value our investments if there is not a liquid resale market for those instruments;
· We may experience losses on the sale of certain instruments if we do not have sufficient operating cash to run our business and are required to sell short-term investments to meet cash flow requirements; and
· Our 3.25% Contingent Convertible Subordinated Notes, principal value $120,000,000, due 2025 and subject to repurchase in 2012, may be convertible prior to the maturity date into cash, if, during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the notes for each such trading day was less than 95% of the average of the sale price of our common stock during such five trading-day period multiplied by the then current conversion rate.
In addition to the above risks, the recent events in the credit market may also impact our customers, and we may be impacted by the following risks:
· We may experience lower revenues if our customers decide to reduce their capital spending plans;
· Customers may delay payments to us reducing our operating cash flow; and
· We may experience an increase in accounts receivable write-offs if customers are unable to pay their obligations.
The accounting method for convertible debt securities with net share settlement, like our convertible notes, is expected to change
For the purpose of calculating diluted earnings per share, a convertible debt security providing for net share settlement of the conversion value and meeting specified requirements under Emerging Issues Task Force, or EITF, Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” is accounted for similar to non-convertible debt, with the stated coupon constituting interest expense and any shares issuable upon conversion of the security being accounted for under the treasury stock method. The effect of the treasury stock method is that the shares potentially issuable upon conversion of the convertible notes that we sold in June 2005 are not included in the calculation of our earnings per share except to the extent that the conversion value of the notes exceeds their principal amount, in which event we are treated for earnings per share purposes as having issued the number of shares of our common stock necessary to settle the conversion. For fiscal year 2007, the conversion value did not exceed the face value and therefore no additional shares are included in the calculation of our earnings per share.
On July 25, 2007, the FASB held a meeting to discuss, among other things, the accounting method for net share settled securities. As a result of the meeting, the FASB voted to adopt a new method for accounting for net share settled securities under which the debt and equity components of the security would be bifurcated and accounted for separately. The effect of this change is that the equity component would be included in the paid-in-capital section of stockholders’ equity on an issuer’s balance sheet and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the notes. As a result, net income attributable to our common stockholders is expected to be reduced by recognizing accretion of the discounted carrying value of the convertible debt
security to its face amount as additional interest expense. The diluted earnings per share calculation would continue to be calculated based on the treasury stock method. Moreover, the FASB will require that the new method be implemented retroactively.
The FASB has not yet published its final decision with respect to this proposed change to accounting treatment so there remains uncertainty as to the full impact of this accounting change.
We also cannot predict any other changes in GAAP that may be made affecting accounting for convertible debt securities. Any change in the accounting method for convertible debt securities could have an adverse impact on our reported or future financial results. These impacts could adversely affect the trading price of our common stock and in turn negatively impact the trading price of the convertible notes and increase the likelihood that the notes will be redeemed for cash in the first redemption period in 2012.
Existing common stockholders may experience dilution in connection with our sale of convertible notes in June 2005 and will experience immediate dilution if we sell shares of our common stock or other equity securities in future financings, and, as a result, our stock price may go down
Our common stockholders may experience dilution in connection with the sale in June 2005 of $120 million worth of convertible notes if our stock price reaches $12.49 or more per share. For example, to the extent the share price exceeds $12.49, the difference would be multiplied by 9.6 million shares and then divided by the share price to determine the number of shares due to noteholders. For instance, if the stock price was $15.00, the conversion value would be $2.51 ($15.00 less $12.49) multiplied by 9.6 million shares or $24.1 million which would be divided by the share price of $15.00 to provide 1.6 million additional shares to noteholders. These 1.6 million shares, when added to our number of shares outstanding, would dilute our earnings per share.
In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. If we issue common stock or securities convertible into common stock, our common stockholders will experience dilution.
We may perform increasing amounts of research and development and manufacturing offshore to lower cost; these efforts may impact our ability to deliver products to our customers, complete research and development projects on a timely basis, and cause potential misappropriation of our intellectual property
As a U.S. government contractor, we are subject to a number of rules and regulations
We must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. government contracts. Government contract laws and regulations affect how we do business and, in some instances, impose added costs on our business. A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts or debarment from bidding on contracts. In order to administer certain U.S. government contracts we are required to have employees with Top Secret Security Clearance. Because we have a limited number of employees with such clearance, the loss of these employees could adversely affect our ability to administer these contracts. We must also have auditors from our independent registered public accounting firm with proper security clearance levels to perform an annual audit of revenue for these transactions.
We have direct or indirect sales pursuant to contracts with U.S. government agencies, which can be terminated at the convenience of the government, and our revenue would decline if the government terminated these contracts
Approximately 15% to 20% of our net revenue has been generated from sales to U.S. government agencies either directly or indirectly through subcontracts. Government-related contracts and subcontracts are subject to standard provisions for termination at the convenience of the government. In such event,
however, we are generally entitled to reimbursement of costs incurred on the basis of work completed plus other amounts specified in each individual contract. These contracts and subcontracts are either fixed-price or cost reimbursable contracts. Fixed-price contracts provide fixed compensation for specified work. Under cost reimbursable contracts, we agree to perform specified work in return for reimbursement of costs (to the extent allowable under government regulations) and a specified fee. In general, while the risk of loss is greater under fixed-price contracts than under cost reimbursable contracts, the potential for profit under fixed-price contracts is greater than under cost reimbursable contracts. In addition, delays in approvals of the annual defense budget or supplemental funding bills may also impact government sales.
We have relied and may continue to rely on a limited number of customers for a significant portion of our net revenue, and our revenue could decline due to the delay of customer orders or cancellation of existing orders
During fiscal 2007, two customers each accounted for more than 10% of our revenue. We expect lower levels of revenue from these two large customers in the first half of fiscal 2008 and results for this period will be adversely impacted. We expect that we will continue to depend on a relatively small number of customers for a substantial portion of our net revenue for the foreseeable future. The timing and level of sales to our largest customers have fluctuated significantly in the past and are expected to continue to fluctuate significantly in the future. The loss of one or more of our significant customers, or a significant reduction or delay in sales to any customer, may harm our business and operating results. For instance, our Wireline revenue in 2006 decreased by $2.5 million in part because one large customer ordered less product in fiscal 2006 than 2005 as it completed a major project. Major customers also have significant leverage and may attempt to change the terms, including pricing, upon which we do business, which could also harm our business and operating results.
If we are unable to develop new products, or we are delayed in production startup, our sales could decline
The markets for our products are characterized by:
· rapidly changing technology;
· evolving industry standards; and
· changes in end-user requirements.
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 our ability to develop and introduce new and enhanced products in a cost-effective and timely manner. The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends. We may experience design, manufacturing, marketing, and other difficulties that could delay or prevent the development, introduction or marketing of our new products and enhancements.
The introduction of new or enhanced products also requires that we manage a smooth transition from older products to new products. Delays in new product development or delays in production startup could reduce our sales.
The telecommunications and government markets are highly competitive, and if we are unable to compete successfully in our markets, our revenue could decline
Competition in the telecommunications industry, in general, and in the markets we serve, is intense and likely to increase substantially. We face competition in all of our markets. Competitors of our synchronization products include Emrise Corp., Frequency Electronics, Inc., Huawei Technologies Co. Ltd., and Oscilloquartz SA. Competitors of our Wireless/OEM products include Frequency Electronics, Inc. and Trimble Navigation, Ltd. Competitors of our timing, test and measurement products
include Brandywine Communications, EndRun Technologies, Frequency Electronics, Inc., Meinberg, Temex and Trak Systems, Inc. (a Veritas Corporation subsidiary). Competitors of our Quality of Experience Assurance products include Brix, Ineoquest, JDS Uniphase, Agilent Technologies, Tektronix and Telchemy. In addition, the Telecommunications Act of 1996 permits ILECs to manufacture telecommunications equipment, which may result in increased competition. Our ability to compete successfully in the future will depend on many factors including:
· the cost-effectiveness, quality, price, service and market acceptance of our products;
· our ability to compete with competitors that perform low-cost research and development offshore;
· our response to the entry of new competitors into our markets or the introduction of new products by our competitors;
· the average selling prices for our products;
· increased industry consolidation among our customers, which may lead to decreased demand for, and downward pricing pressure on the prices of, our products;
· our ability to keep pace with changing technology and customer requirements;
· our continued improvement of existing products;
· the timely development or acquisition of new or enhanced products;
· the timing of new product introductions by our competitors or us; and
· changes in worldwide market and economic conditions.
Some of our competitors or potential competitors are well established and have significant financial, manufacturing, technical and marketing resources. These competitors may be able to respond more quickly to new and emerging technologies and changes in customer requirements, to devote greater resources to the development, promotion and sale of products, or to deliver competitive products at lower prices. We expect to continue to experience pricing pressures from our competitors in all of our markets. If we are unable to compete by delivering new products or by delivering competitive products at lower prices, we could lose market share and our revenue could decline.
Our quarterly and annual operating results have fluctuated in the past and will likely continue to fluctuate in the future, which could cause our stock price to decline and result in losses to our investors
We believe that period-to-period comparisons of our operating results may not be a good indication of our future performance. Our quarterly and annual operating results have fluctuated in the past and will likely continue to fluctuate in the future. Some of the factors that could cause our operating results to fluctuate include:
· the resumption of recent adverse economic conditions, particularly within the telecommunications equipment industry, which may result in revenue declines;
· restructuring and integration-related charges;
· goodwill impairment charges related to acquisitions;
· our ability to obtain sufficient supplies of sole or limited source components at commercially reasonable prices;
· changes in our products or mix of sales to customers;
· the possibility that, despite our having been approved as a supplier in requests for proposals from several major wireline customers, these proposals will not result in any purchases;
· our ability to manage fluctuations in manufacturing yields of rubidium oscillators and cesium tubes;
· our ability to manage the level and value of our inventories in relation to sales volume;
· our ability to accurately anticipate the volume and timing of customer orders or customer cancellations;
· our ability to collect receivables from our customers, including those in the telecommunications industry;
· the gain or loss of significant customers;
· fluctuations in government spending for infrastructure investment;
· timing of purchases from customers on projects, for example Verizon and AT&T, may be impacted due to spending delays, availability of resources for installation, and delays in new product availability;
· our ability to introduce new products in new and existing markets on a timely and cost-effective basis;
· customer delays in qualification of new products;
· market acceptance of new or enhanced versions of our products and our competitors’ products;
· our ability to manage increased competition and competitive pricing pressures;
· increased industry consolidation among our customers, which may lead to decreased demand for, and downward pricing pressure on the prices of, our products;
· our ability to timely implement changes developed as a result of our process improvement projects without negatively impacting operations;
· our ability to manage fluctuations in the average selling prices of our products;
· our ability to manage the long sales cycle associated with our products;
· our ability to manage cyclical conditions in the telecommunications industry;
· our ability to retain key employees, which could affect our ability to sell, develop and deliver our products;
· reduced rates of growth of telecommunications services;
· customers may delay upgrading their old equipment with our new products;
· our ability to establish in a timely fashion subsidiaries in new geographic regions, which our customers or potential customers may require to do business with us in those regions;
· international customers may delay purchasing products;
· customers in the wireless market may delay adding new base stations which require our products;
· customers may experience labor strikes which could result in reduced sales volume;
· customers in the wireless market may switch from buying rubidium-based products which are internally manufactured to quartz-based products which are purchased and sold at a lower price point, which may result in lower revenue and gross margins; and
· a global pandemic, if not contained.
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, our operating results will be negatively impacted. 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. If we increase the volume of product manufacturing by outside sources and decrease our internal production, we could incur higher fixed costs (per unit) and integration and restructuring charges. Significant decreases in demand for our products or reduction in our average selling prices, or any material delay in customer orders may negatively harm our business, financial condition and results of operations. 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 changes in general economic and regulatory conditions, conditions related 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 decline significantly.
If we incur net losses or substantially lower profit in the future, we may have to record a valuation allowance against some of our deferred tax assets, which would significantly increase our tax expense and hurt our net earnings
Future losses may create uncertainty about the realizability of our $47.3 million net deferred tax assets. If we record a valuation allowance against our deferred tax assets, we would record an additional tax expense, which would reduce net earnings. In addition, uncertainties about the realizability of our deferred tax assets could limit our ability to recognize future deferred tax assets on our balance sheet and correspondingly reduce net earnings. At the end of each fiscal quarter, our management reviews the results of operations for that quarter and forecasts for the remainder of the fiscal year and future years to determine if it is more likely than not that a valuation allowance for the deferred tax assets is needed.
The tax treatment of the restructuring of our Puerto Rico subsidiary may negatively impact our net earnings
In July 2006, Symmetricom Puerto Rico, a wholly-owned subsidiary, moved its place of legal organization from Delaware to Bermuda in a transaction intended to be a tax-free restructuring. We are in the process of submitting a ruling request to the Internal Revenue Service to confirm the tax-free treatment. We are undertaking this ruling request based upon our subsequent review of the 2006 restructuring. Although ruling requests of this nature are considered routine and we believe that it is more likely than not that the ruling will be granted, we cannot assure you that the ruling will be granted.
If the ruling is granted, Symmetricom Puerto Rico would be treated as a branch of Symmetricom, Inc. effective as of July 2006 and, accordingly, the profits of Symmetricom Puerto Rico would be currently taxable for federal income tax purposes. If granted, the ruling would result in an effective tax rate of approximately 25.0% for fiscal 2008 compared to an effective tax rate of approximately 56.4% for fiscal 2007.
If the ruling is not granted, then:
· we would be required to take a one-time, non-cash charge to our deferred tax assets of approximately $15.2 million;
· Symmetricom Puerto Rico would continue its election to indefinitely reinvest its future earnings outside of the United States and not repatriate future earnings back to Symmetricom, Inc.; and
· the effective tax rate for fiscal 2008 would be approximately 221.0%, compared to an effective tax rate of approximately 56.4% for fiscal 2007. The large increase in the effective tax rate for fiscal 2008 would be due primarily to the one-time $15.2 million charge.
Prior to fiscal 2007, Symmetricom Puerto Rico had elected to report its U.S. taxes under Section 936 of the United State Internal Revenue Code. This election exempted qualified Puerto Rico earnings from regular federal income taxes, subject to various limitations. Section 936 expired at the end of fiscal 2006.
We purchase certain key components from single or limited sources and could lose sales if these sources fail to fulfill our needs
We have limited suppliers for a number of our components. If single source components were to become unavailable on satisfactory terms, we would be required to purchase comparable components from other sources. If for any reason we could not obtain comparable replacement components from other sources in a timely manner, our business, results of operations and financial condition could be harmed. In addition, some of our suppliers require long lead times to deliver requested quantities of components. If we are unable to obtain sufficient quantities of components, we could experience delays or reductions in product shipments, which could also have a material adverse effect on our business, results of operations and financial condition. Due to rapid changes in technology, on occasion, one or more of the components used in our products could become unavailable, resulting in unanticipated redesign and related delays in shipments.
We cannot assure you that similar delays will not occur in the future. Our suppliers of components may be impacted by compliance with environmental regulations, including Restriction on the use of Hazardous Substances in electrical and electronic equipment, known as the RoHS Directive, and Waste Electrical and Electronic Equipment Directive, known as the WEEE Directive, which could affect our continued supply of components or cause additional costs for us to implement new components into our manufacturing process.
Our products are complex and may contain errors or design flaws, which could be costly to correct
Our products are complex and often use state-of-the-art components, processes and techniques. When we release new products, or new versions of existing products, they may contain undetected or unresolved errors or defects. Despite testing, errors or defects may be found in new products or upgrades after the commencement of commercial shipments. Undetected errors and design flaws have occurred in the past and could occur in the future. These errors could result in delays, loss of market acceptance and sales, diversion of development resources, damage to our reputation, legal action by our customers, failure to attract new customers, and increased service and warranty costs. The occurrence of any of these factors could cause our net revenue to decline.
Our critical business and manufacturing facilities in Puerto Rico; Beverly, Massachusetts; San Jose, California; Santa Rosa, California; Camarillo, California; Tuscaloosa, Alabama, and Boulder, Colorado, as well as many of our customers and suppliers, are located near known hurricane zones, earthquake fault zones, and flood plains, and the occurrence of these events or other catastrophic disasters could cause damage to our facilities and equipment, which could require us, as well as our customers and suppliers to cease, curtail or disrupt operations
Capacity constraints, systems failures or security breaches could prevent access to our computer systems, which could interrupt our business and harm our daily operations
Our business goals of performance, reliability and availability require that we have adequate capacity in our computer systems to support our operations. As our operations grow in size and scope, we will need to improve and upgrade our systems and infrastructure to offer internal personnel enhanced services, capacity, features and functionality. Our ability to provide high-quality service depends on the efficient and uninterrupted operation of our computer and communications systems. Our computer system has experienced system interruptions from time to time and could experience periodic system interruptions in the future. Our systems and operations are also vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, design defects, vandalism, denial-of-service attacks and similar events. Even though we have a formal disaster
recovery plan, it may not completely prevent any system failure or security breach that causes an interruption in our business and daily operations.
If we fail to protect our intellectual property, our competitive position could be weakened and our revenues may decline
We believe our success will depend in a large 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. These measures may not provide sufficient 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. While we intend to continue our efforts to obtain patents whenever possible, there can be no assurance that patents will be issued, or that new, or existing patents will not be challenged, invalidated or circumvented, or that the rights granted will provide us with any commercial benefit.
Third parties may assert intellectual property infringement claims, which would be difficult to defend, costly and may result in our loss of significant rights
The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. We are subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. Although we are currently not a party to any intellectual property litigation, from time to time we have received claims asserting that we have infringed the proprietary rights of others. We cannot assure you that third parties will not assert infringement claims against us in the future, or that any such claims will not result in costly litigation or require us to obtain a license for such intellectual property rights regardless of the merit of such claims. No assurance can be given that any necessary licenses will be available or that, if available, such licenses can be obtained on commercially reasonable terms. In the event any necessary licenses are not available, we may not be able to sell or distribute our products, which may have a material adverse effect on our business.
We are subject to environmental regulations that could result in costly environmental liability
Our operations are subject to numerous international, federal, state and local environmental regulations related to the storage, use, labeling, discharge, disposal and human exposure to toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. While we have not experienced any significant effects on our operations from environmental regulations, changes in these regulations may require additional capital expenditures 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. We could also be subject to fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. Although, we periodically review our facilities and internal operations for compliance with applicable environmental regulations, these reviews are necessarily limited in scope and frequency and may not reveal all potential instances of noncompliance, possible injury or possible contamination. There can be no assurance that violations of environmental laws or regulations will not occur in the future as a result of the inability to obtain permits, human error, equipment failure or other causes. The liabilities arising from any noncompliance with environmental regulations, or liability resulting from accidental contamination or injury from toxic or hazardous chemicals could result in liability that exceeds our resources. The risk of liabilities increases as we acquire
other companies, such as Datum, which use, or have used, hazardous substances at various current or former facilities.
A manufacturing facility previously operated by Datum in Austin, Texas is undergoing remediation for known subsurface contamination at that facility and adjoining properties. We believe that we will incur monitoring costs for years to come in connection with this subsurface contamination. Further, we have received a demand from adjoining landowner and may be subject to claims from other adjoining landowners, in addition to claims for remediation, and the amount of these costs and the extent of our exposure to these demands and claims cannot be determined at this time.
The determination of the existence and cost of any additional contamination could involve costly and time-consuming negotiations and litigation. Remediation activities and subsurface contamination may require us to incur additional unreimbursed costs and could harm on-site operations and the future use and value of the property. The remediation efforts, the property owner’s claims and any related governmental action may expose us to material liability and could significantly harm our business.
Our operating results may be adversely affected as a result of our required compliance with the adopted European Union Directives on Waste Electrical and Electronic Equipment and the Restriction of the Use of Hazardous Substances in electrical and electronic equipment, as well as other standards around the world
In January 2003, the European Union enacted Directive 2002/96/EC on Waste Electrical and Electronic Equipment Directive, known as the WEEE Directive. The WEEE Directive requires producers of certain electrical and electronic equipment to be financially responsible for the future disposal costs of this equipment. Some of our products fall within the scope of this Directive, and, as such, we will incur some financial responsibility for the collection, recycling, treatment and disposal of both new product sold, and product already sold prior to the WEEE Directive’s enforcement date, to customers within the European Union.
At the same time, the European Union also enacted Directive 2002/95/EC on the Restriction of the use of Hazardous Substances in electrical and electronic equipment, known as the RoHS Directive. This Directive restricts the use of certain hazardous substances, including mercury, lead, cadmium, hexavalent chromium and certain flame retardants, used in the construction of component parts of electrical and electronic equipment. We may need to change our manufacturing processes, redesign or reformulate some of our products, and change some components to eliminate these hazardous substances in our products, in order to be able to continue to offer them for sale within the European Union.
Individual European Union member states are required to transpose the Directives into national legislation. Although not all European Union member states have enacted legislation to implement these two Directives, we continue to review the applicability and impact of both Directives on the sale of our products within the European Union. If we fail to comply with these laws, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil or criminal penalties. We may incur increased manufacturing costs, and some products may be subject to production delays to comply with future legislation which implements these Directives, but we cannot currently estimate the extent of such increased costs or production delays, if any. However, to the extent that any such cost increases or delays are substantial, our operating results could be materially adversely affected. Also, we are aware that lead times for new, compliant components are longer and that older, non-compliant components are being discontinued at a fast pace. In addition, we are aware of similar legislation that may be enacted in other countries, such as Japan and China, and possible new federal and state legislation in the United States, the cumulative impact of which could significantly increase our operating costs and adversely affect our operating results.
We are subject to other significant domestic and foreign regulations relating to health and safety, packaging, product content and labor regulations
Our business is subject to various other significant international, federal, state and local, health and safety, packaging, product content and labor regulations. These regulations are complex, change frequently and have become more stringent over time. We may be required to incur significant expenses to comply with these regulations or to remedy past violations of these regulations. Any failure by us to comply with applicable government regulations could also result in cessation of our operations or portions of our operations, product recalls or impositions of fines and restrictions on our ability to carry on or expand our operations. In addition, because many of our products are regulated or sold into regulated industries, we must comply with additional regulations in marketing our products. Our products and operations are also often subject to the rules of industrial standards bodies, like the International Standards Organization, as well as regulation of other agencies such as the United States Federal Communications Commission. If we fail to adequately address any of these regulations, our business may suffer.
Our customers may be subject to governmental regulations, which, if changed, could negatively impact our business results
Federal and state regulatory agencies, including the United States 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. While we are not directly affected by this legislation, such regulation of our customers may negatively impact our business. For instance, the sale of our products may be affected by the imposition upon certain of our customers of common carrier tariffs and the taxation of telecommunications services. These regulations are continuously reviewed and changed by the various governmental agencies. Changes in current or future laws or regulations, in the United States or elsewhere, could negatively impact our business results.
Sales of a significant portion of our products to customers outside of the United States subjects us to business, economic and political risks
Our export sales to Europe, Latin America, Asia, and Canada continue to account for a significant portion of our revenue. We anticipate that sales to customers located outside of the United States will continue to be a significant part of our net revenue for the foreseeable future. Because significant portions of our sales are to customers outside of the United States we are subject to risks, including:
· foreign currency fluctuations;
· the effects of terrorist activity and armed conflict which may disrupt general economic activity and result in revenue shortfalls;
· export restrictions;
· a global pandemic if it does not continue to be contained;
· 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 protection of intellectual property rights and political and economic instability; and
· political and economic instability.
To date, very few of our international revenue and cost obligations have been denominated in foreign currencies. As a result, an increase in the value of the United States dollar relative to foreign currencies could make our products more expensive, and thus, less competitive in foreign markets. A portion of our international revenues may be denominated in foreign currencies in the future, including the Euro, which will subject us to risks associated with fluctuations in these foreign currencies. We do not currently engage in foreign currency hedging activities or derivative arrangements, but may do so in the future to the extent that such obligations become more significant.
If we have significant inventories that become obsolete or cannot be sold at acceptable prices, our results may be negatively impacted
Although we believe that we currently have made adequate adjustments for inventory that has declined in value, become obsolete, or is in excess of anticipated demand, there can be no assurance that such adjustments will be adequate. If significant inventories of our products become obsolete, or are otherwise not able to be sold at favorable prices, our results of operations could be materially affected.
We may be subject to additional taxes from tax reviews by foreign authorities
Although we believe that we have made adequate reserves for foreign tax provisions, there can be no assurance that such reserves will be adequate until the foreign authorities have reviewed the foreign tax filings.
Our sales and our cost may be affected by the ongoing movement towards environmentally friendly manufacturing (“green” manufacturing)
Various countries in the international marketplace are moving towards more environmentally friendly manufacturing requirements and carbon emission standards, and some companies or countries may require us to meet new standards, which could affect the sales of our products. These standards may impact the materials used and our manufacturing process. Changes to our materials and manufacturing process could cause delays in product availability and may increase our manufacturing costs.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
The following are our principal facilities as of July 1, 2007:
We also lease other facilities in the United States, Europe, and Asia to support research and development, sales and customer service. We believe that our current facilities are suitable and adequate to meet our anticipated needs for the foreseeable future, and we periodically evaluate whether additional facilities are necessary.
Item 3.
Item 3. Legal Proceedings
We formerly leased a tract of land for our operations in Texas. Those operations involved the use of solvents and, at the end of the lease, we remediated an area where the solvents had been deposited on the ground and obtained regulatory approval for that remedial activity. In 1996, an environmental investigation of the property detected those same contaminants in groundwater in excess of then current regulatory standards. The groundwater contamination has migrated to some adjacent properties. We have entered into the Texas Natural Resource Conservation Commission’s Voluntary Cleanup Program (the “Voluntary Cleanup Program”) to obtain regulatory approval for closure of this site and a release from liability to the State of Texas for subsequent landowners and lenders. We have notified adjacent property owners affected by the contamination of our participation in the Voluntary Cleanup Program. On May 20, 2004, we received a demand from the owner of several adjacent lots for damages in the amount of $1.3 million, as well as seeking an indemnity for the contamination and a promise to remediate the contamination. On March 14, 2006, the adjacent property owner filed suit in Probate Court No. 1, Travis County, Texas (Anna B. Miller, Individually and as Executrix of the Estate of Robert L. Miller, et al. vs. Austron, Inc., et al.), seeking damages. We have not yet been served in this matter. We are continuing to work on the remediation of the formerly leased site as well as the adjacent properties and intend to defend this lawsuit vigorously. As of July 1, 2007, we had an accrual of $0.5 million for remediation costs and other ongoing monitoring costs.
We are also a party to certain other claims in the normal course of our operations. While the results of these claims cannot be predicted with any certainty, we believe that the final outcome of these matters will not have a material adverse effect on our financial position and results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the Nasdaq Stock Market LLC, under the symbol “SYMM”. We had approximately 1,033 stockholders of record as of August 31, 2007.
The following table sets forth the high and low per share sale prices reported on the Nasdaq Stock Market LLC for our common stock for the periods indicated.
Symmetricom has never declared nor paid cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future.
The information required by this item regarding equity compensation plans is incorporated by reference to the information in Item 12 of this Form 10-K.
Stock Repurchase Program
On August 11, 2005, the Board of Directors authorized management to repurchase up to approximately 2.6 million shares of our common stock pursuant to a repurchase program established in fiscal 2002, adding 2.0 million shares to the program previously authorized. There were approximately 46.5 million shares of Symmetricom common stock outstanding as of July 1, 2007.
During fiscal 2007, we repurchased 0.5 million shares of common stock pursuant to the repurchase program for an aggregate price of approximately $4.0 million. A further 10,511 shares were repurchased to cover the cost of taxes on vested restricted stock. Upon termination of certain employees, 19,800 shares of restricted stock were forfeited pursuant to existing agreements.
On August 8, 2007, the Board of Directors authorized management to repurchase up to approximately 2.9 million shares of Symmetricom common stock, adding 2.0 million shares to a previously authorized program.
The following table provides a monthly detail of our share repurchases and forfeitures during fiscal 2007:
(*) Includes 10,511 shares that were repurchased to cover the cost of taxes on vested restricted stock.
Comparative Stock Performance
The graph below compares the cumulative total stockholders’ return on our common stock for the last five fiscal years with the total return on the S&P 500 Index and the S&P Technology Sector over the same period (assuming the investment of $100 in our common stock, the S&P 500 Index and the S&P Information Technology Index, and reinvestment of all dividends).
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Symmetricom, Inc., The S&P 500 Index
And The S&P Information Technology Index
* $100 invested on 6/30/02 in stock or index-including reinvestment of dividends. Fiscal year ending July 1, 2007.
Copyright© 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
Item 6.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read together with the consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Form 10-K.
(1) Reflects amounts related to gains (losses) on discontinued operations. The Trusted Time Division was discontinued in fiscal 2003. The Specialty Manufacturing/Other business segment was discontinued in the third quarter of fiscal 2007.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and related notes included elsewhere in this report.
Overview
Symmetricom is a leading supplier of synchronization and timing products to industry, government, research centers and aerospace markets. We supply solutions for customers who demand reliable products and engineering expertise in a variety of applications, including network synchronization, timing, testing, verification and/or the measurement of time and frequency-based signals. We design and/or manufacture rubidium clocks, crystal oscillators, cesium clocks and hydrogen maser clocks. Our products include synchronization network elements, timing elements and business broadband access devices for wireline and wireless networks as well as the provision of professional services. Our products play an essential role in network operations, quality of service of wireline, wireless and broadband communications networks, enabling our customers to increase performance and efficiency in their communications infrastructures. During fiscal 2007, we formed the Quality of Experience Assurance Division to pursue potential opportunities in the quality of experience (QoE) market for video services. We believe that the QoE market holds the promise of faster revenue growth in the future than our historic lines of businesses. The acquisition of QoSmetrics S.A. forms the nucleus of this business.
Symmetricom’s customers include worldwide public network providers, incumbent local exchange carriers (ILECs), public telephone and telegraph companies (PTTs), competitive local exchange carriers (CLECs), other telephone companies, wireless service providers, cable television operators, distributors and systems integrators, communications original equipment manufacturers (OEMs), aerospace contractors, governments and research facilities.
Our fiscal year is the 52 or 53 weeks ending on the Sunday closest to June 30. Fiscal 2007 and 2006 were 52-week fiscal years, and fiscal 2005 was a 53-week fiscal year.
During the third quarter of fiscal 2007, we discontinued the operation of our Specialty Manufacturing/Other business segment. Specialty Manufacturing/Other was part of our Telecommunications Solutions Division. This has been accounted for as a discontinued operation and, accordingly, the results of operations have been excluded from continuing operations in the consolidated statements of operations.
On January 2, 2007, we acquired QoSmetrics S.A., a privately held provider of quality of experience (QoE) solutions for IPTV (Internet Protocol Television). The purchase price of approximately $16.8 million was paid in cash. We acquired QoSmetrics S.A. for its technology, which we believe we can use to develop a line of products and services that will provide revenue growth in future years at a faster pace than our historic lines of business. Moreover, its target customers, as well as certain of its proprietary product features, are highly complementary with key parts of Symmetricom’s current operations. With the acquisition of QoSmetrics, we created a new business segment called the Quality of Experience Assurance Division.
On October 2, 2006, we acquired Timing Solutions Corporation, a privately held company based in Boulder, Colorado that provides high-performance time and frequency products and services for government, aerospace and military markets. This acquisition further strengthens and broadens our leadership position in the time and frequency field, as well as brings new technology to address the Test & Measurement market. The total purchase price of approximately $8.6 million was paid in cash.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures at the date of our financial statements. On an ongoing basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider the following accounting policies to be critical accounting estimates due to their subjective nature and judgments involved in each:
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development based on their estimated fair values. We engage an independent third-party appraisal firm to assist us in determining the fair values of the assets acquired and the liabilities assumed. Such valuations require management to make significant estimations and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements, acquired developed technologies and patents; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; and the brand awareness and the market position of the acquired products and assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our price is fixed or determinable and collectibility is reasonably assured. Our standard arrangement for our domestic and international customers includes a signed purchase order or contract and no right of return of delivered products.
We assess collectibility based on the creditworthiness of the customer and past transaction history. We perform periodic credit evaluations of our customers and do not require collateral from our customers. However, for some of our international customers, we require an irrevocable letter of credit to be issued by the customer before the purchase order is accepted. If we determine that collection of the invoice is not reasonably assured, we recognize the revenue at the time that collection becomes reasonably assured, which is generally upon the receipt of cash. We commonly have transactions that involve sales of both product and services to our customers. Product revenue is generated from the sale of synchronization and timing equipment with embedded software that is essential to product functionality. We account for these transactions in accordance with the rules applicable to software revenue recognition. Service revenue is recognized as the services are performed, provided collection of the related receivable is reasonably assured. Our sales to distributors are made under agreements allowing for returns or credits under certain circumstances. Accordingly, we defer an amount of revenue equal to our estimate of returns from distributors based on a historical average of distributor returns. We record commission expense when orders are shipped, at which time the commission is both earned and payable.
Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed price and cost-plus reimbursement. Revenue is recognized under the fixed price contracts using the percentage of completion method (cost-to-cost basis), principally based upon the costs incurred relative to the total estimated costs at completion on the individual contracts. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Revenue recognized under cost-plus contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as a performance based award fee. Revenue from long-term contracts is reviewed periodically, with adjustments recorded in the period in which the revisions are made.
Warranty
Our standard warranty agreement is one year from shipment. However, our warranty agreements are contract and component specific and can range to twenty years for selected components. We offer extended warranty contracts on products that are less than eight years old. The extended warranty contract is applicable for a maximum of nine years after the expiration of the standard one-year warranty. The income from extended warranty contracts is recognized ratably over the period of contract.
We accrue for anticipated warranty costs upon shipment. Our warranty reserve is based on the number of installed units, historical analysis of the volume of product returned to us under the warranty program, management’s judgment regarding anticipated rates of warranty claims and associated repair costs. We use the historical data to forecast our anticipated future warranty obligations. This analysis is updated on a quarterly basis.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts based on a continuous review of customer accounts, payment patterns and specific collection issues. Where specific collection issues are identified, we record a specific allowance based on the amount that we believe will be uncollected. For accounts where specific collection issues are not identified, we record a reserve based on the age of the receivable and historical collection patterns.
Inventory Valuation
Inventories are valued at the lower of cost or market, cost being determined on a first-in, first-out basis. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis. Obsolete inventory or inventory in excess of management’s estimated usage is written down to its estimated market value less costs to sell, if less than its cost. Inherent in the estimates of market value are management’s estimates related to current economic trends, future demand and technological obsolescence. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. If the inventory value is written down to its net realizable value, and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold.
Accounting for Income Taxes
We provide for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the financial statements in the period that includes the enactment date.
In July 2006, Symmetricom Puerto Rico, a wholly-owned subsidiary, moved its place of legal organization from Delaware to Bermuda in a transaction intended to be a tax-free restructuring. We are in the process of submitting a ruling request to the Internal Revenue Service to confirm the tax-free treatment. We are undertaking this ruling request based upon our subsequent review of the 2006 restructuring. Although ruling requests of this nature are considered routine and we believe that it is more likely than not that the ruling will be granted, we cannot assure you that the ruling will be granted.
If the ruling is granted, Symmetricom Puerto Rico would be treated as a branch of Symmetricom, Inc. effective as of July 2006 and, accordingly, the profits of Symmetricom Puerto Rico would be currently taxable for federal income tax purposes. If granted, the ruling would result in an effective tax rate of approximately 25.0% for fiscal 2008 compared to an effective tax rate of approximately 56.4% for fiscal 2007.
If the ruling is not granted, then:
· we would be required to take a one-time, non-cash charge to our deferred tax assets of approximately $15.2 million;
· Symmetricom Puerto Rico would continue its election to indefinitely reinvest its future earnings outside of the United States and not repatriate future earnings back to Symmetricom, Inc.; and
· the effective tax rate for fiscal 2008 would be approximately 221.0%, compared to an effective tax rate of approximately 56.4% for fiscal 2007. The large increase in the effective tax rate for fiscal 2008 would be due primarily to the one-time $15.2 million charge.
Prior to fiscal 2007, Symmetricom Puerto Rico had elected to report its U.S. taxes under Section 936 of the United State Internal Revenue Code. This election exempted qualified Puerto Rico earnings from regular federal income taxes, subject to various limitations. Section 936 expired at the end of fiscal 2006.
The carrying value of our net deferred tax assets, which are made up of tax deductions, net operating loss carryforwards and tax credits, assumes that we will be able to generate sufficient future income to fully realize these assets. We evaluate the weight of all available evidence in determining whether it is more likely than not that some portion of the deferred tax assets will not be realized. If we do not generate sufficient future income, the realization of these deferred tax assets may be impaired, resulting in an additional income tax expense. A portion of our tax credits is related to stock options and has a valuation allowance because of uncertainty regarding their realization. If these tax credits are realized, the benefit will be credited to common stock.
Valuation of Goodwill
We perform goodwill impairment tests in accordance with Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, on an annual basis, and between annual tests in certain circumstances for each reporting unit. During the third quarter of fiscal 2006, we performed a goodwill impairment test on the Wireless/OEM business segment because the product pricing pressures and gross margin pressures continued to decline in the third quarter of fiscal 2006 and we did not anticipate a significant improvement. As a result, we recorded a non-cash impairment charge of $7.0 million. Potential goodwill impairment is measured based upon a two-step process. In the first step, we compare the fair value of a reporting unit with its carrying amount using discounted cash flow valuation methodology. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.
Valuation of Long-Lived Assets Including Intangible Assets Subject to Amortization
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets primarily include purchased technology and trademarks. We review our intangible assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Factors we consider important that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, or significant negative industry or economic trends. If these criteria indicate that the value of the intangible asset may be impaired, an evaluation of the recoverability of the net carrying value of the asset over its remaining useful life is made. If this evaluation indicates that the intangible asset is not recoverable, the net carrying value of the related intangible asset will be reduced to fair value. Any such impairment charge could be significant and could have a material adverse effect on our financial statements if and when an impairment charge is recorded. If an impairment charge were recognized, the amortization related to intangible assets would decrease during the remainder of the life of the asset. In the third quarter of fiscal 2006, we recorded a non-cash impairment charge of $1.2 million for the write-down of the other intangibles entirely related to our wireless business segment purchase in connection with the Datum acquisition in October 2002.
Results of Operations
The following table presents the percentage of total revenue for the respective line items in our consolidated statement of operations:
Fiscal Year 2008 Outlook
During fiscal year 2007, revenue growth of 18.3% versus prior year was favorably impacted by two large customers beginning an upgrade cycle to replace their legacy equipment. Revenue for fiscal year 2008 from these two customers may not increase or continue at the fiscal year 2007 level. In particular, we do not currently expect substantial orders from these customers in the first half of fiscal 2008, which will cause our revenue in the first two quarters to be below the level in the second half of fiscal 2007. Fiscal year 2007 revenue was also favorably impacted by the acquisition of TSC in our fiscal second quarter. We also expect fluctuations in quarterly revenue, as the upgrade projects undertaken by our customers are not systematic.
We expect the pace of operating expense growth for fiscal year 2008 to be greater than the prior year due to the full year impact of the acquisitions of TSC and QoSmetrics, S.A. as well as increased spending levels in our emerging new Quality of Experience Assurance business segment. We expect fiscal year 2008 earnings to be unfavorably impacted by this increased spending, as well as an expected lower order volume from two large customers in the first half of 2008 compared to order levels at the end of fiscal year 2007.
We expect revenues for fiscal year 2008 to be between $210 million and $220 million and earnings to be between $0.05 and $0.15 per share, on a fully diluted basis. Our fiscal year 2008 investment in our emerging Quality of Experience Assurance business segment is projected to dilute annual earnings by approximately $0.22 per share, on a fully diluted basis.
Fiscal Years Ended July 1, 2007 and July 2,
Net revenue consists of sales of products, software licenses and services sales. Net revenue increased by $32.3 million or 18.3% to $208.4 million in fiscal year 2007 from $176.1 million in fiscal year 2006. The increase in net revenue was attributable to the Wireline products increase of $13.3 million or 16.5% (primarily due to increases as a result of deployments at AT&T and Verizon of our next generation sync products), the Wireless/OEM products increase of $2.8 million or 11.6% (due to increased sales to two major customers), the Global Services increase of $2.1 million or 16.7% (due to an increase in installation services for Verizon), and the Timing, Test and Measurement segment increase of $13.6 million or 23.1% (due primarily to the acquisition of TSC on October 2, 2006, increased sales of SAASM products and higher international sales). Net revenue for the newly formed Quality of Experience Assurance Division was $0.5 million.
Gross profit, excluding other cost of sales, increased $12.5 million in fiscal year 2007, or 14.6%, compared to fiscal year 2006. Gross profit for the Wireline products increased by $8.5 million or 18.7%, which was higher that the 16.5% revenue increase for the same period (due primarily to increased sales of higher margin newer products). Gross profit for the Wireless/OEM products increased by $1.6 million or 30.2%, which was higher than the revenue increase of 11.6% (due to increased sales of higher margin products and selling price increases). Gross profit for Global Services decreased by $2.3 million or 37.0%, as compared to the revenue increase of 16.7% for the same period (due primarily to the large volume increase in installation services, which is lower margin and in the prior year a high margin repair project for a major customer occurred which was not repeated in fiscal year 2007). Gross profit for the Timing, Test and Measurement Division increased by $4.4 million or 15.2%, which was lower than the revenue increase
of 23.1% for the same period (due primarily to the addition of the lower margin products acquired from TSC on October 2, 2006). Gross profit for the newly formed Quality of Experience Assurance Division was $0.4 million.
Gross profit due to other cost of sales for fiscal year 2007 was $2.4 million higher than fiscal year 2006 primarily due to the $1.2 million impairment charge for the write down of other intangibles principally related to our Wireless/OEM in fiscal 2006 and integration and restructuring charges which were $0.9 million higher in fiscal year 2006 versus fiscal year 2007 due to the acquisition of Agilent Technologies’ Frequency and Timing Standards product line.
Research and development expenses consist primarily of salaries and benefits, prototype expenses and fees paid to outside consultants. Research and development expenses were $23.7 million during fiscal year 2007 compared to $18.8 million for fiscal year 2006. The $4.9 million increase in the research and development expense was primarily attributable to $2.5 million for the Quality of Experience Assurance Division and $2.1 million for TSC, which were both acquired in fiscal year 2007. Fiscal year 2007 research and development expenditures include a partial year impact for the QoSmetrics S.A. and TSC acquisitions.
Selling, general and administrative expense, consists primarily of salaries, benefits, sales commissions and travel-related expenses for our sales and services, finance, human resources, information technology and related facility costs and part of the amortization expenses of our intangible assets. These expenses increased by 7.4% to $60.5 million for fiscal year 2007 compared to $56.4 million for fiscal year 2006. This $4.2 million increase in selling, general and administrative expenses was attributable primarily to $2.6 million for the newly formed Quality of Experience Assurance Division and higher compensation costs in fiscal year 2007. Fiscal year 2007 selling, general and administrative expenses include a partial year impact for the QoSmetrics S.A. and TSC acquisitions.
Amortization of intangibles increased $0.3 million in fiscal year 2007 over fiscal year 2006 due to the acquisitions of TSC and QoSmetrics.
Integration and restructuring charges were $0.5 million in fiscal year 2007 for the acquisitions of TSC and QoSmetrics. There were no such charges in fiscal 2006.
Interest income increased to $9.2 million in fiscal 2007 compared to $7.5 million in fiscal year 2006 due to higher average interest rates experienced in fiscal year 2007, which was approximately 5.3%, versus fiscal year 2006, which was 4.3%. The average cash and short-term investment balance was fairly consistent in fiscal 2007 and fiscal 2006.
Interest expense consists primarily of interest on our capital lease for our headquarters building in San Jose, California and interest for our 3.25% convertible notes. Interest expense decreased 3.2% to $4.8 million in fiscal year 2007 from $5.0 million in fiscal year 2006 due primarily to lower capital lease costs.
Our income tax provision increased to $7.5 million in fiscal year 2007 compared to a tax benefit of $0.4 million in fiscal year 2006. The income tax provision for fiscal year 2007 includes $3.4 million related to the planned legal entity liquidation of QoSmetrics S.A. and QoSmetrics, Inc., which were both acquired on January 2, 2007. As described above under Critical Accounting Estimates - Accounting for Income Taxes, we are in the process of submitting a ruling request to the Internal Revenue Service to confirm the tax-free treatment. We are undertaking this ruling request based upon our subsequent review of the 2006 restructuring. Although ruling requests of this nature are considered routine and we believe that it is more likely than not that the ruling will be granted, we cannot assure you that the ruling will be granted.
If the ruling is granted, Symmetricom Puerto Rico would be treated as a branch of Symmetricom, Inc. effective as of July 2006 and, accordingly, the profits of Symmetricom Puerto Rico would be currently taxable for federal income tax purposes. If granted, the ruling would result in an effective tax rate of approximately 25.0% for fiscal 2008 compared to an effective tax rate of approximately 56.4% for fiscal 2007.
If the ruling is not granted, then:
· we would be required to take a one-time, non-cash charge to our deferred tax assets of approximately $15.2 million;
· Symmetricom Puerto Rico would continue its election to indefinitely reinvest its future earnings outside of the United States and not repatriate future earnings back to Symmetricom, Inc.; and
· the effective tax rate for fiscal 2008 would be approximately 221.0%, compared to an effective tax rate of approximately 56.4% for fiscal 2007. The large increase in the effective tax rate for fiscal 2008 would be due primarily to the one-time $15.2 million charge.
Prior to fiscal 2007, Symmetricom Puerto Rico had elected to report its U.S. taxes under Section 936 of the United State Internal Revenue Code. This election exempted qualified Puerto Rico earnings from regular federal income taxes, subject to various limitations. Section 936 expired at the end of fiscal 2006.
Discontinued operations: During fiscal year 2007, we discontinued the operation of the Specialty Manufacturing/Other business segment and the results, net of tax, are reflected in the results of operations for fiscal years 2007 and 2006.
Fiscal Years Ended July 2, 2006 and July 3,
Net revenue consists of sales of products, software licenses and services sales. Net revenue decreased by $3.3 million or 1.8% to $176.1 million in fiscal year 2006 from $179.4 million in fiscal year 2005. The decrease in net revenue was attributable to the Wireline products decrease of $2.5 million or 3.0% (primarily due to large initial orders from a customer in fiscal year 2005 not repeated in fiscal year 2006) and the Wireless/OEM products decrease of $3.8 million or 13.8% (due to a product shift toward lower priced, lower performance quartz-based products from higher performance, lower maintenance rubidium-based solutions, continued overall pricing pressure and implementation of non-CDMA base stations that derive timing from a central office). These revenue decreases were partially offset by a $2.8 million or 29.1% increase in the Global Services segment (primarily due to an increase in total solution sales to customers) and a $0.2 million or 0.4% increase in the Timing, Test and Measurement segment (due primarily to the acquisition of the Agilent’s cesium products partially offset by decline in other products).
Gross profit for fiscal year 2006, excluding other cost of sales, decreased $5.1 million, or 5.6%, compared to fiscal year 2005. This decrease in total gross profit was greater than the revenue decrease of 1.8%. Gross profit for the Wireline products decreased by $2.1 million or 4.4%, which was fairly consistent with the 3.0% revenue decrease for the same period. Gross profit for the Wireless/OEM products decreased by $2.7 million or 32.7%, which was higher than the revenue decrease of 13.8% due to lower selling prices and increased sales of lower margin products. Gross profit for Global Services increased by $2.2 million or 52.1%, which was higher than the 29.1% revenue increase for the same period due to increased sales of lower cost services. Gross profit for the Timing, Test and Measurement Division decreased by $2.5 million or 8.1%, which was lower than the revenue increase of 0.4% for the same period due primarily to the addition of the higher cost cesium product acquired from Agilent Technologies in August 2005.
Gross profit due to other cost of sales for fiscal 2006 decreased $2.1 million in comparison to fiscal 2005 primarily due to the $1.2 million impairment charge for the write down of other intangibles principally related to our Wireless/OEM business segment and the acquisition of Agilent Technologies’ Frequency and Timing Standards product line, which includes costs associated with integration and restructuring and additional intangibles. In addition, during fiscal 2006, there were $1.2 million in integration and restructuring charges related to the acquisition of Agilent Technologies’ Frequency and Timing Standards product line. There were no integration expenses in fiscal 2005.
Research and development expenses consist primarily of salaries and benefits, prototype expenses and fees paid to outside consultants. Research and development expenses were $18.8 million during fiscal year 2006 compared to $16.3 million for fiscal year 2005. The overall increase in the research and development expense was primarily attributable to $0.5 million in stock-based compensation, salary increases, and increased spending in new R&D projects to comply with a new EU regulation, RoHS (restriction of the use of certain hazardous substances in electrical and electronic equipment). This regulation bans the placing in the EU market of new electrical and electronic equipment containing more than certain levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl (PBB) and polybrominated diphenyl ether (PBDE) flame retardants beginning July 1, 2006.
Selling, general and administrative expense consists primarily of salaries, benefits, sales commissions and travel-related expenses for our sales and services, finance, human resources, information technology and related facility costs. These expenses increased by 7.9% to $56.4 million for fiscal year 2006 compared to $52.2 million for the corresponding period of fiscal year 2005. This $4.1 million increase in selling, general and administrative expenses was attributable primarily to an increase in stock-based compensation of $3.6 million and annual merit increases.
Amortization of intangibles decreased 14.8% due to a writedown of intangibles related to our Wireless/OEM business.
Impairment of goodwill increased in fiscal year 2006 due to a third quarter non-cash impairment charge of $7.0 million for the write-down of goodwill principally related to our wireless business segment purchased in connection with the Datum acquisition in October 2002. For fiscal year 2005, there were no charges associated with goodwill.
Interest income increased to $7.5 million in fiscal year 2006 compared to $1.5 million in fiscal year 2005 due to higher cash investments balance attributable to the proceeds received from the convertible notes issued in June 2005 and higher average interest rates.
Interest expense consists primarily of interest on our capital lease for our headquarters building in San Jose, California and interest for our convertible notes. Interest expense increased 512.2% to $5.0 million in fiscal year 2006 from $0.8 million in fiscal year 2005 due primarily to interest expense on the convertible notes, which started accruing at 3.25% on June 15, 2005.
Income tax benefit was $0.4 million in fiscal year 2006 compared to an income tax provision $1.9 million in fiscal year 2005. The effective tax rate fluctuated significantly in fiscal year 2006 as a result of the write-off of goodwill for $7.0 million, since a substantial portion of the goodwill write-off was not deductible for tax reporting purposes. The increase in tax rate from the write-off of goodwill was offset by our Puerto Rico earnings, since a substantial percentage of our Puerto Rico earnings were taxed under Section 936 of the U.S. Internal Revenue Code, which exempts qualified Puerto Rico earnings from regular federal income taxes. Section 936 expired at the end of fiscal year 2006.
Discontinued operations: During fiscal year 2007, we discontinued the operation of the Specialty Manufacturing/Other business segment and the results, net of tax, are reflected in the results of operations for fiscal years 2006 and 2005.
Key Operating Metrics
Key operating metrics for measuring our performance include sales backlog, contract revenue, headcount and deferred revenue. These metrics, which compare fiscal year 2007 with fiscal year 2006, are listed below.
Sales backlog:
Our backlog consists of firm orders that have yet to be shipped to the customer, or may not be shippable to a customer until a future period. Most orders included in backlog can be rescheduled or cancelled by customers without significant penalty. Historically, a substantial portion of net revenue in any fiscal period has been derived from orders received during that fiscal period. Our total backlog amounted to $51.9 million as of July 1, 2007, compared to $48.9 million as of July 2, 2006. Our backlog, which is shippable within the next six months, was $43.4 million as of July 1, 2007, compared to $35.1 million as of July 2, 2006.
Contract revenue:
Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed price and cost-plus reimbursement. Revenue is recognized under the fixed price contracts using the percentage of completion method, (cost-to-cost basis) principally based upon the costs incurred relative to the total estimated costs at completion on the individual contracts. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Revenue recognized under cost-plus contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as performance based award fee. Revenue from long-term contracts is reviewed periodically, with adjustments recorded in the period in which the revisions are made. As of July 1, 2007, we had approximately $6.3 million in contract revenue to be performed and recognized within the next 36 months, compared to approximately $4.4 million in contract revenue that was to be performed and recognized within the following 36 months as of July 2, 2006. These amounts have been accounted for as part of our sales backlog discussed above.
Headcount:
Our consolidated headcount as of July 1, 2007 was comprised of 890 regular employees and 61 temporary employees, compared to 802 regular employees and 63 temporary employees as of July 2, 2006.
Deferred revenue:
Deferred revenue is comprised of deferred revenue on sales of goods with special terms, which are recognized when the special terms are satisfied; maintenance contracts, which are recognized ratably over the maintenance period; and distributor return allowances, which are based on historical return averages with certain distributors. Deferred revenue for sales of goods with special terms was $0.9 million as of July 1, 2007, compared to $0.4 million as of July 2, 2006. Deferred revenue for maintenance contracts was $2.6 million as of July 1, 2007, compared to $2.2 million as of July 2, 2006. Deferred revenue for distributor return allowances was $0.2 million as of July 1, 2007, compared to $0.3 million as of July 2, 2006.
Liquidity and Capital Resources
As of July 1, 2007, working capital was $216.9 million compared to $222.3 million as of July 2, 2006. Cash and cash equivalents as of July 1, 2007 decreased $44.6 million to $37.6 million from $82.2 million as of July 2, 2006. This decrease was primarily the result of acquisitions paid in cash in the amount of
$25.4 million and a shift from cash and cash equivalents to short-term investments. As a result, short-term investments increased from $106.7 million as of July 2, 2006 to $138.6 million as of July 1, 2007.
The $20.7 million net cash provided by operating activities in fiscal 2007 was primarily attributable to a net income of $6.1 million and non-cash expenses related to depreciation and amortization of $9.6 million and stock-based compensation of $6.4 million, which was partially offset by a $3.1 million increase in accounts receivable and $6.6 million increase in inventory. The increase in accounts receivable in fiscal 2007 was the result of higher sales during the fourth quarter of fiscal 2007 compared to fiscal 2006 and the increase in inventory was related to the TSC acquisition in October 2006 and higher finished goods inventory to meet customers’ shorter lead time requirements. The $62.3 million net cash used for investing activities in fiscal 2007 was primarily attributable to $225.4 million in purchases of short-term investments, $25.4 million cash payment for the acquisitions of QoSmetrics S.A. and TSC, and $5.1 million in purchases of plant and equipment. This was partially offset by $193.6 million in maturities of short-term investments. The $3.0 million net cash used for financing activities was primarily attributable to $4.0 million used to repurchase common stock and $2.2 million to repay long-term obligations. This was partially offset by $2.7 million in proceeds from the issuance of common stock.
Our total capital spending commitments outstanding as of July 2, 2007 were approximately $0.9 million. Days sales outstanding in accounts receivable was 59 days as of July 1, 2007, unchanged from July 2, 2006.
We believe that our existing cash resources will be sufficient to meet our anticipated operating and working capital expenditure needs in the ordinary course of business for at least the next 12 months and the foreseeable future. We base our expense levels in part on our expectation of future revenue levels. If our revenue for a particular period is lower than we expect, we may take steps to reduce our operating expenses accordingly. If cash generated from operations is insufficient to satisfy our liquidity requirements or if we require additional capital resources to grow our business or to acquire complementary technologies and businesses in the future, we may seek to issue additional equity securities or obtain additional debt financing. Additional financing may not be available at all or on terms favorable to us. Additional financing may also be dilutive to our existing stockholders. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources.
Wells Fargo Line of Credit
On May 1, 2004, we entered into a credit agreement with Wells Fargo Bank, National Association to obtain a revolving line of credit up to $5.0 million to be used as working capital. On June 1, 2005 this agreement was amended to allow us to increase the line of credit up to $10.0 million. On November 1, 2006 the agreement was amended to lower the line of credit to $3.0 million. The line of credit contains certain financial covenants and restrictions. The line of credit expires on November 1, 2007. No borrowings were outstanding under this facility as of July 1, 2007. This line of credit is used to support a letter of credit for the $2.4 million Massachusetts Development Finance Agency bond.
Convertible Subordinated Notes
On June 8, 2005, we sold $120 million of contingent convertible subordinated notes (the “Notes”), which mature on June 15, 2025 and bear interest at the rate of 3.25% per annum. Interest on the Notes is payable semi-annually in June and December of each year beginning on December 15, 2005. The Notes are unsecured obligations and are subordinated in right of payment to all of our existing and future senior debt, including our indebtedness under our senior credit facilities. The Notes are structurally subordinated to all indebtedness and liabilities of our subsidiaries.
The Notes are convertible, at the holder’s option, prior to the maturity date into cash and, if applicable, shares of our common stock in the following circumstances:
· Prior to June 15, 2023, if the common stock price for a least 20 trading days in the period of 30 consecutive days ending on the last trading day of the calendar quarter preceding the quarter in which the conversion occurs is more than 125% of the conversion price of the Notes in effect on that 30th trading day;
· On or after June 15, 2023, at all times on or after any date on which the common stock price is more than 125% of the then current conversion price;
· During the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the Notes for each such trading day was less than 95% of the average of the sale price of our common stock during such five trading-day period multiplied by the then current conversion rate;
· If we have called the particular Notes for redemption and the redemption has not yet occurred; or
· Upon the occurrence of specified corporate transactions.
Holders may convert any outstanding Notes into cash and, if applicable, shares of our common stock at an initial conversion price per share of $12.49, which was determined based on the reported closing price of our common stock of $9.91 per share on June 2, 2005.
Also, on or after June 20, 2012, we may redeem some or all of the Notes at any time or from time to time at a redemption price of 100% of the principal amount of the Notes, plus accrued and unpaid interest (including liquidated damages, if any) up to but not including the date of redemption, payable in cash. Holders may require us to repurchase all or a portion of their Notes on June 15, 2012, 2015 and 2020 for a repurchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest (including liquidated damages, if any) up to but not including the date of repurchase, payable in cash, in the event of certain change of control events related to us.
We may from time to time repurchase or redeem all or a portion of the Notes, if necessary, to comply with NASDAQ marketplace rule 4350(i)(1)(D). We may undertake such repurchase from time to time through privately negotiated or open market transactions or other available means.
In connection with the issuance of these Notes, Symmetricom recorded bond fees of approximately $3.8 million, which are being amortized using the straight-line method over a period of seven years until fiscal 2012.
As of July 1, 2007, none of the conditions that would trigger early redemption of the convertible subordinated notes had occurred.
Massachusetts Development Finance Agency Bond
In connection with the acquisition of Datum in October 2002, we assumed Datum’s liability relating to an industrial development bond that was issued by the Massachusetts Development Finance Agency on June 1, 2001, to finance the expansion by Datum of its manufacturing facility in Beverly, Massachusetts. The bond matures on May 1, 2021, and the balance is $2.4 million as of July 1, 2007. Interest on the bond is payable monthly at an adjustable rate of interest as determined by the remarketing agent for each rate period to be the lowest rate which in its judgment would permit the sale of the bonds at par. The bond is collateralized by the line of credit with Wells Fargo Bank.
Contractual Obligations
On November 18, 2005, we entered into a First Amendment to Lease, effective as of October 27, 2005, which amended our existing lease for approximately 117,739 square feet of space in an office building located in San Jose, California. The leased space serves as our corporate office. The amendment extended the termination date of the lease from April 15, 2009 to April 15, 2016. In addition, it provides that, commencing December 1, 2005, basic annual rent (as defined in the lease) would be reduced to $1.7 million, subject to 4% annual increases commencing on April 15, 2006. The building element of the original lease, which was accounted for from the outset as a capital lease for a property with a cost of $9.0 million, continues to be amortized over the initial lease period ending in April 2009, in accordance with SFAS No. 13, Accounting for Leases.
The balance on the bond issued by the Massachusetts Development Finance Agency is $2.4 million as of July 1, 2007. The bond is collateralized by a $2.4 million letter of credit issued under our credit facility with Wells Fargo Bank.
We operate in multiple locations domestically and internationally. As such, certain facilities and equipment are leased under capital lease agreements or operating lease agreements. Due to excess capacity on several non-cancelable leases as a result of the economic downturn, we subleased certain facilities and recognized lease loss liability for the remainder.
We incur purchase commitments during our normal course of business. As of July 1, 2007, our principal commitments totaled $20.7 million and related primarily to commitments to purchase inventory.
In connection with the Datum acquisition, we assumed Datum’s post-retirement health care benefits plan. Post-retirement benefits are recognized over the employee’s service period based on a 6.00% discounted rate to the employee and the employee’s beneficiaries after retirement. The health care plan was curtailed as of December 31, 2002, and only existing retired participants and former Datum employees, now employed by Symmetricom and who meet the retirement eligibility requirements by December 31, 2004, are eligible for participation. The health care plan is a contributory plan.
The following table summarizes our contractual cash obligations as of July 1, 2007, and the effect such obligations are expected to have on liquidity and cash flow in future periods.
(1) Operating lease obligation is net of the lease loss accrual
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements Nos. 87, 106, and 132(R).
SFAS No. 158 requires employers to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other post-retirement benefit plans. Previous standards required employers to disclose the complete funded status of its plans only in the notes to the financial statements. Additionally, SFAS No. 158 requires employers to measure plan assets and obligations at their year-end balance sheet date. Guidance relating to the recognition of the over or under funded status of the plan and additional disclosure requirements is effective for periods ending after December 15, 2006. Guidance relating to the measurement date of the plans is effective for the years ending after December 15, 2008. We determined that SFAS No. 158 does not have a material impact on our consolidated balance sheet, statement of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for more information about (1) the extent to which companies measure assets and liabilities at fair value, (2) the information used to measure fair value, and (3) the effect that fair-value measurements have on earnings. SFAS No. 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not believe that SFAS No. 157 will have a material impact on our consolidated balance sheet or statement of operations.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 establishes an approach that requires quantification of financial statement errors based on the effects of each of the company’s balance sheet and statement of operations and the related financial statement disclosures. SAB No. 108 permits existing public companies to record the cumulative effect of initially applying this approach in the first year ending after November 15, 2006 by recording the necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. We do not believe that SAB No. 108 has a material impact on our consolidated balance sheet or statement of operations.
In June 2006, the FASB issued Interpretation Number (FIN) No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 applies to all tax positions within the scope of FASB Statement No. 109, applies a “more likely than not” threshold for tax benefit recognition, identifies a defined methodology for measuring benefits and increases the disclosure requirements for companies. FIN No. 48 is mandatory for years beginning after December 15, 2006. We are still assessing the impact of the adoption of FIN No. 48, and have not yet determined the impact that its adoption will have on the consolidated financial statements. The final analysis will be completed in the first quarter of fiscal 2008.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Exposure
As of July 1, 2007, we had short-term investments of $138.6 million. These investments in corporate debt securities have maturity dates of greater than three months. Our corporate debt securities are subject to interest rate risk in as much 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 July 1, 2007, 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 these risks by typically limiting the maturity date of such securities to no more than 36 months, placing our investments with high credit quality issuers and limiting the amount of credit exposure with any one issuer. The possibility exists that some of these issues may be downgraded as a result of disruptions in the credit market; however, we believe that we currently have the ability and currently intend to hold these investments until maturity, and therefore, believe that reductions in the value of these securities attributable to short-term fluctuations in interest rates would not materially harm our business
On June 8, 2005, we issued convertible subordinated notes with a fixed rate of 3.25%, which would have no interest rate risk impact to our business.
Foreign Currency Exchange Rate Exposure
Our exposure to market risk due to fluctuations in currency exchange rates relates primarily to the intercompany balances with our subsidiaries in the United Kingdom and Germany. Although we transact business with various countries, settlement amounts are usually based on United States currency. Transaction gains or losses have not been significant in the past and we do not presently engage in hedging activity. A hypothetical 10% adverse change in sterling or Euro against United States dollars would not result in a material foreign exchange loss. Consequently, we do not expect that 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 currency exchange rate fluctuations on the value of certain of 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 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 United States, foreign and global economies which could materially harm our business.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data
Supplementary quarterly financial data (unaudited):
SYMMETRICOM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at July 1, 2007 and July 2, 2006
Consolidated Statements of Operations for the years ended July 1, 2007, July 2, 2006, and July 3, 2005
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the years ended July 1, 2007, July 2, 2006, and July 3, 2005
Consolidated Statements of Cash Flows for the years ended July 1, 2007, July 2, 2006 (As corrected), and July 3, 2005 (As corrected)
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Symmetricom, Inc.
San Jose, California
We have audited the accompanying consolidated balance sheets of Symmetricom, Inc. and subsidiaries (the “Company”) as of July 1, 2007 and July 2, 2006 and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended July 1, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15 Schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the Company as of July 1, 2007 and July 2, 2006 , and the results of its operations and its cash flows for each of the three years in the period ended July 1, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As described in Note 1 to the Consolidated Financial Statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” during fiscal 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of July 1, 2007, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 25, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
September 25,
SYMMETRICOM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
See notes to the consolidated financial statements.
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
See notes to the consolidated financial statements.
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
(1) Following the adoption of SFAS 123(R) in fiscal 2006, amounts that would previously have been recorded in this column are now included within Common Stock.
See notes to the consolidated financial statements.
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See notes to the consolidated financial statements.
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1-Summary of Significant Accounting Policies
Business
Symmetricom, Inc., incorporated in the state of Delaware, is a leading supplier of precise timing standards to industry, government, utilities, research centers and aerospace markets. The company also supplies QoE (Quality of Experience) solutions that enable communication service providers to monitor the performance, as perceived by end users, of IP-based video and other next generation network applications. Timing and synchronization products and services include network synchronization systems and timing elements used by network operators and users, governments and professional services. Such products play an important role in the operation, bandwidth utilization, and quality of service of wireline, wireless and cable networks enabling our customers to increase the reliability of their networks in today’s evolving communications environment.
Principles of Consolidation
The consolidated financial statements include the accounts of Symmetricom, Inc., and its wholly owned subsidiaries (“Symmetricom”, “we”, “our” or the “Company”). All significant intercompany accounts and transactions are eliminated.
Fiscal Year
Our fiscal year is the 52 or 53 weeks ending on the Sunday closest to June 30. Fiscal 2007 and 2006 were 52-week fiscal years, and fiscal 2005 was a 53-week fiscal year.
Reclassification
Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. Deferred revenue of $1.1 million as of July 2, 2006 that was previously reported as other accrued liabilities in current liabilities has been reclassified as long-term obligations. As of July 1, 2007, $1.1 million of deferred revenue was included in long-term obligations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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. These estimates include:
· Valuation of business combinations
· Revenue recognition
· Allowance for doubtful accounts
· Inventory valuation
· Accounting for income taxes
· Valuation of goodwill and intangible assets
· Stock options
· Accruals for contingent liabilities
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Actual results could differ from these estimates.
Cash and Cash Equivalents
We consider all highly liquid debt investments with a remaining maturity of three months or less when purchased to be cash and cash equivalents.
Short-term Investments
Short-term investments consist of corporate debt securities that mature between three and 36 months. All of our short-term investments are classified as available-for-sale. These securities are carried at fair value with the unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity.
The following table summarizes Symmetricom’s available-for-sale securities recorded as cash and cash equivalents or short-term investments:
Fair Values of Financial Instruments
The estimated fair value of our financial instruments, which include cash and cash equivalents, short-term investments, accounts receivable, capital lease obligations, accounts payable, notes payable, and bonds payable, approximate their carrying amount. The recorded amount of our capital lease obligation approximates the estimated fair value based on an analysis of the present value of future lease payments.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and 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, government agencies, defense contractors, and distributors. Management believes that its credit evaluation, approval, and monitoring processes mitigate potential credit risks. However, we still have significant credit risks as
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
our customers currently tend to consolidate by mergers or acquisitions, which could impact their ability to pay.
Inventories
Inventories are stated at the lower-of-cost (first-in, first-out) or market. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis. Obsolete inventory or inventory in excess of management’s estimated usage is written down to its estimated market value less costs to sell, if less than its cost. Inherent in the estimates of market value are management’s estimates related to current economic trends, future demand and technological obsolescence. Inventories consist of:
Property, Plant and Equipment, Net
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 except for land as follows:
Property, plant and equipment consists of the following:
Building and improvements includes $9.0 million of costs capitalized under a capital lease for our facility in San Jose, California, which was completed in June 1997. As of July 1, 2007 and July 2, 2006, accumulated amortization for this facility totaled $7.6 million and $6.9 million, respectively.
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill and Other Intangible Assets
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, as well as in-process research and development based on their estimated fair values. Such allocations require management to make significant estimations and assumptions, especially with respect to intangible assets.
Our accounting policy is to perform impairment tests in accordance with the SFAS No.142, Goodwill and Other Intangible Assets, on an annual basis, and between annual tests in certain circumstances, for each reporting unit using a discounted cash flow valuation method. Critical estimates in valuing certain intangible assets include, but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements, acquired developed technologies and patents; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; and the brand awareness and the market position of the acquired products and assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
Long-lived Assets Including Other Intangible Assets Subject to Amortization
The carrying value of long-lived assets is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset, including disposition, is less than the carrying value of the asset. Impairment is measured as the amount by which the carrying amount exceeds the fair value.
In the third quarter of fiscal 2006, we recorded a non-cash impairment charge of approximately $1.2 million for the write-down of the other intangibles related to our Wireless/OEM business segment purchased in connection with the Datum acquisition in October 2002. During the third quarter of fiscal 2006, we decided to perform an intangible impairment test on the Wireless/OEM business segment since the product pricing and gross margin continued to decline in the third quarter of fiscal 2006, and we did not anticipate any improvement. For the same periods during fiscal 2007 and 2005, there were no impairment charges associated with intangible assets.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income and its component. SFAS No.130 requires companies to report comprehensive income that includes unrealized holding gains and losses and other items that have previously been excluded from net income and reflected instead in stockholders’ equity.
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated other comprehensive income, consists of the following:
Warranty
Our standard warranty agreement is one year from shipment. However, our warranty agreements are contract and component specific and can range to twenty years for selected components. We offer extended warranty contracts to our customers. The extended warranty is offered on products that are less than eight years old. The extended warranty contract is applicable for a maximum of nine years after the expiration of the standard one-year warranty. The income from extended warranty contracts is recognized ratably over the period of contract.
We accrue for anticipated warranty costs upon shipment. Our warranty reserve is based on the number of installed units, historical analysis of the volume of product returned to us under the warranty program, management’s judgment regarding anticipated rates of warranty claims and associated repair costs. We use the historical data to forecast our anticipated future warranty obligations.
Acquired in-process research and development expenses
During fiscal 2007, $0.2 million of the purchase price of the TSC acquisition was allocated to purchased in-process research and development expense based upon the values assigned to the acquisitions. Projects that qualify as in-process research and development represent those that have not yet reached technological feasibility and have no alternative future use. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is no remaining risk relating to the development. The value of these projects was determined by estimating the discounted net cash flows from the sale of the products resulting from the completion of the projects, reduced by the portion of the revenue attributable to developed technology and the percentage of completion of the project.
The nature of the efforts to develop the purchased in-process research and development into commercially viable products principally relates to the completion of all prototyping and testing activities that are necessary to establish that the product can meet its design specification including function, features and technical performance requirements. Therefore, the amount allocated to in-process research and development has been charged to operations.
Software Development Costs
Costs for the development of new software and substantial enhancements to existing software are expensed as incurred until technological feasibility has been established, at which time any additional development costs would be capitalized in accordance with SFAS No. 86, Computer Software to Be Sold, Leased, or Otherwise Marketed. We believe the current process for developing software is essentially
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
completed concurrently with the establishment of technological feasibility; accordingly, no costs have been capitalized to date. Software cost for purchased software is capitalized and amortized when the useful life has been determined. During the fourth quarter of fiscal 2007, we capitalized $2.0 million of purchased software for use in research and development and have not yet determined its useful life.
Foreign Currency Translation
The functional currency of each of our international subsidiaries in the United Kingdom, China, France, and Hong Kong is the U.S. dollar, while in Germany, it is the Euro.
For our subsidiaries in which the U.S. Dollar is the functional currency, foreign currency denominated assets and liabilities are translated at the year-end exchange rates, except for inventories, prepaid expenses, and property and equipment, which are translated at historical exchange rates. Statements of operations are translated at the average exchange rates during the year except for those expenses related to the balance sheet amounts, which are translated using historical exchange rates. Net gains (losses) from these foreign exchange transactions have not been material to our operating results for any of the periods presented.
For our subsidiary in Germany, foreign currency denominated assets and liabilities are translated at the year-end exchange rates, while revenue and expenses are translated at average rates prevailing during the year. Translation adjustments are reported in other comprehensive income.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our price is fixed or determinable and collectibility is reasonably assured. Our standard arrangement for our domestic and international customers includes a signed purchase order or contract and no right of return of delivered products.
We assess collectibility based on the creditworthiness of the customer and past transaction history. We perform periodic credit evaluations of our customers and do not require collateral from our customers. However, for many of our international customers, we require an irrevocable letter of credit to be issued by the customer before the purchase order is accepted. If we determine that collection of the invoice is not reasonably assured, we recognize the revenue at the time that collection becomes reasonably assured, which is generally upon the receipt of cash. We commonly have transactions that involve sales of both product and services to our customers. Product revenue is generated from the sale of synchronization and timing equipment with embedded software that is essential to product functionality. We account for these transactions in accordance with the rules applicable to software revenue recognition. Service revenue is recognized as the services are performed provided collection of the related receivable is reasonably assured. Our sales to distributors are made under agreements allowing for returns or credits under certain circumstances. Accordingly, we defer an estimate of returns from distributors based on a historical average of distributor returns. We record commission expense when orders are shipped, at which time the commission is both earned and payable.
Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed price and cost-plus reimbursement. Revenue is recognized under the fixed price contracts using the percentage of completion method (cost-to-cost basis), principally based upon the costs incurred relative to the total estimated costs at completion on the individual contracts. Any anticipated losses on contracts are charged
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to operations as soon as they are determinable. Revenue recognized under cost plus contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as a performance based award fee. Revenue from long-term contracts is reviewed periodically, with adjustments recorded in the period in which the revisions are made. A contract is determined to be substantially complete when the physical deliverables are completed, shipped and accepted. Unbilled receivables totaled $3.0 as of July 1, 2007 compared to $1.6 million as of July 2, 2006. All of unbilled receivables as of July 1, 2007 are expected to be collected in fiscal 2008. Any anticipated losses on contracts are charged to operations as soon as they are determinable.
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-Based Compensation
Prior to fiscal 2006, we accounted for stock-based awards under the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The intrinsic value method of accounting resulted in compensation expense for restricted stock at fair value on date of grant based on the number of shares granted and the quoted price of our common stock, and for stock options to the extent option exercise prices were set below market prices on the date of grant. Also, to the extent we granted stock options or stock awards that were subject to an exchange offer, other modifications or performance criteria, such awards were subject to variable accounting treatment. To the extent stock awards were forfeited prior to vesting, the corresponding previously recognized expense related to the unvested portion of the awards was reversed as an offset to operating expenses.
As of fiscal 2006, we adopted SFAS No. 123(R), Share-Based Payment, using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of restricted stock is determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure. Such value is recognized as expense over the service period, net of estimated forfeitures, using the accelerated method under SFAS No. 123(R). Because we adopted SFAS No. 123(R), we no longer have employee stock awards subject to variable accounting treatment.
SFAS No. 123(R) resulted in stock-based compensation expense of $4.6 million for the fiscal year ended July 2, 2006, which includes the net cumulative impact of 5.94% estimated future forfeitures in the determination of the period expense, rather than recording forfeitures when they occur as previously permitted.
At July 2, 2006, the total compensation cost related to unvested stock-based awards granted to employees, directors and consultants under the Company’s stock option plans but not yet recognized was approximately $4.3 million, net of estimated forfeitures of $0.6 million. This cost will be amortized on an accelerated method basis over a period of approximately 1.1 years and will be adjusted for subsequent changes in estimated forfeitures.
Prior to the adoption of SFAS No. 123(R), cash retained as a result of tax deductions relating to stock-based compensation was presented in operating cash flows, along with other tax cash flows, in accordance with the provisions of the Emerging Issues Task Force (EITF) Issue No. 00-15, Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option. SFAS No. 123(R) supersedes EITF Issue No. 00-15, amends SFAS No. 95, Statement of Cash Flows, and requires tax benefits relating to excess stock-based compensation deductions to be prospectively presented in the statement of cash flows as financing cash inflows. There were no excess tax benefits resulting from the exercise of stock-based compensation deductions reported for financial reporting purposes for the fiscal period ended July 2, 2006.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position SFAS No. 123(R)-3 (FSP) Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. Under the FSP, an entity shall follow either:
1. The transition guidance for the additional paid-in capital pool (APIC pool) in paragraph 81 of SFAS No. 123(R), or
2. The alternative transition method described in the FSP.
Paragraph 81 of SFAS No. 123(R) indicates that, for purposes of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123(R), an entity shall include the net excess tax benefits that would have qualified as such had the entity adopted SFAS No. 123(R) for recognition purposes.
The alternative transition method is a simplified method to establish the beginning balance of the APIC pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123(R).
Based on our facts and circumstances, we have elected to use the alternative transition method.
Effect of Adoption of SFAS No. 123(R)
The application of SFAS No. 123(R) had the following effect on the reported amounts for the fiscal period ended July 2, 2006 relative to amounts that would have been reported using the intrinsic value method under previous accounting:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal 2005, prior to the adoption of SFAS 123(R), the Company had adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The Company accounted for employee stock-based compensation using the intrinsic-value-based method of accounting as defined under Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issue to Employees,” and its related interpretation. Accordingly, we recognized no compensation expense in our consolidated statements of operations with respect to options awarded to our employees with exercise prices greater than or equal to the fair value of the underlying common stock at the date of grant. However, we recognized compensation expense in our consolidated statements of operations with respect to restricted stock awarded to our employees. Had compensation cost for the Company’s stock-based compensation plans been determined using the fair-value method at the grant date for awards under those plans calculated using the Black-Scholes pricing model and recognized using the accelerated method over the option vesting periods, the Company’s net income for the year ended July 3, 2005, would have been decreased to the pro forma amounts indicated below (in thousands, except per share data):
Net Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options, warrants, and restricted stock using the treasury method, except when antidilutive.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the denominator used in the calculation of basic and diluted net income (loss) per share is as follows (in thousands):
Unvested restricted stock is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding for basic earnings (loss) per share.
The following common stock equivalents were excluded from the net earnings (loss) per share calculation, as their effect would have been antidilutive:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We account for our contingent convertible notes in accordance with EITF 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share,” which requires us to include the dilutive effect of the shares of our common stock issuable upon conversion of the outstanding convertible notes in our diluted earnings per share calculation regardless of whether the market price trigger or other contingent conversion feature has been met. Because our Notes include a mandatory cash settlement feature for the principal payment, we apply the treasury stock method. This method results in incremental dilutive shares when the average fair value of our common stock for a reporting period exceeds the initial conversion price per share of $12.49. However, because our share price did not exceed $12.49, no shares associated with the contingent convertible notes were included in our diluted earnings per share as of July 1, 2007.
Note 2-Correction of an error
Purchases of short-term investments and maturities of short-term investments that were previously reported net in the Consolidated Statements of Cash Flows have been corrected to present the gross activity as follows for the years ended July 2, 2006, and July 3, 2005, respectively:
Note 3-Acquisitions
QoSmetrics
On January 2, 2007, we acquired QoSmetrics S.A., a privately held provider of quality of experience (QoE) solutions for IPTV (Internet Protocol Television). QoSmetrics’ results are included in our consolidated statements of operations effective January 2, 2007. We acquired QoSmetrics S.A. for its technology, which we believe we can use to develop a line of products and services that will provide revenue growth in future years at a faster pace than our historic lines of business. Moreover, its target customers, as well as certain of its proprietary product features, are complementary with key parts of Symmetricom’s current operations. The purchase price of approximately $16.8 million was paid in cash. The purchase price was allocated to the assets acquired and the liabilities assumed based on management’s estimate of the fair value for purchase accounting purposes at the date of acquisition. We utilized an outside valuation consultant to assist with the determination of the purchase price allocation, based on a fair value of the intangible assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The purchase price was allocated to QoSmetrics’ assets and liabilities as follows (in thousands):
On January 2, 2007, we liquidated QoSmetrics Inc., a California corporation, and wholly owned subsidiary of QoSmetrics S.A., a French company. On March 28, 2007, we liquidated QoSmetrics S.A. As a result of these liquidations, we recorded a tax expense of $3.4 million, a reduction in goodwill of $3.1 million, and an increase of $0.3 million in other accrued liabilities.
Timing Solutions Corporation
On October 2, 2006, we acquired Timing Solutions Corporation (TSC), a privately held company based in Boulder, Colorado that provides high-performance time and frequency products and services for government, aerospace and military markets. TSC’s results are included in our consolidated statements of operations effective October 2, 2006. We acquired TSC because it has a high-end timing technology that is fundamental to building our next generation products, which we believe will allow us to introduce new products into the market at a faster rate. Management believes that this acquisition further strengthens the Company’s leadership position in the time and frequency technology field. The total purchase price of approximately $8.6 million was paid in cash. The purchase price was allocated to the assets acquired and the liabilities assumed based on management’s estimate of the fair value for purchase accounting purposes at the date of acquisition. We utilized an outside valuation consultant to assist with the determination of the purchase price allocation, based on a fair value of the intangible assets.
The purchase price was allocated to TSC’s assets and liabilities as follows (in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Acquisition of Agilent’s cesium product line assets
On August 1, 2005, the Company acquired Agilent Technologies’ Frequency and Timing Standards product line. This acquisition is expected to enhance the Company’s position in the area of cesium clocks used primarily by official time authorities and metrology institutes throughout the world and to further the Company’s leadership in generating high-precision frequency and timing references including rubidium oscillators, cesium clocks and hydrogen masers. The total purchase price of approximately $8.0 million was paid in cash. The purchase price was allocated to the assets acquired, including goodwill and the liabilities assumed, based on management’s preliminary estimate of the fair value for purchase accounting purposes at the date of acquisition. Management does not expect significant revisions to the purchase price allocations for the acquired businesses.
The purchase price was allocated to Agilent’s assets and liabilities as follows (in thousands):
Pro Forma Results of Operations
The following unaudited pro forma information presents a summary of our consolidated results of operations as if the Timing Solutions Corporation and QoSmetrics S.A. acquisitions had taken place at the beginning of each fiscal year presented:
The pro forma consolidated results of operations includes adjustments to net income (loss) to give effect to amortization of intangibles acquired and excludes adjustments for integration and restructuring charges, and acquired in-process research and development, including their related income tax effects as they are non-recurring.
On an after-tax basis, the twelve-month period ended July 1, 2007 includes an adjustment for amortization of intangibles of $0.6 million and excludes acquisition related costs for acquired in-process research and development of $0.2 million, and other integration and restructuring charges of $0.5 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On an after-tax basis, the twelve-month period ended July 2, 2006 includes an adjustment for amortization of intangibles of $1.7 million.
Note 4-Discontinued Operations
During the third quarter of fiscal 2007, we discontinued the operation of our Specialty Manufacturing/Other business segment. Specialty Manufacturing/Other was part of our Telecommunications Solutions Division. This has been accounted for as a discontinued operation and, accordingly, the results of operations have been excluded from continuing operations in the consolidated statements of operations. During fiscal 2007, we recognized a $0.2 million gain, net of taxes, all of which was attributable to income from discontinued operations.
During fiscal 2005, we recognized a gain of $162,000, net of taxes, for final payment for sale of software related to the Trusted Time Division, which was discontinued during fiscal 2003.
Note 5-Other Accrued Liabilities
Other accrued liabilities consists of the following:
Note 6-Post-Retirement Benefit Obligations
In connection with the Datum acquisition, we assumed Datum’s post-retirement health care benefits plan. Post-retirement benefits are recognized over the employee’s service period based on 6.00% discount rate to the employee and the employee’s beneficiaries after retirement. The health care plan was curtailed as of December 31, 2002, and only existing retired participants and former Datum employees, now employed by Symmetricom and meeting the retirement eligibility requirements by December 31, 2004, are eligible for participation. The health care plan is a contributory plan.
The following sets forth the post-retirement program’s status reconciled with amounts reported in the consolidated balance sheet (in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net periodic post-retirement benefit costs include only interest costs. For fiscal 2007, 2006, and 2005, the interest costs were $19,000, $26,000, and $28,000, respectively.
Our contribution to the plan is fixed for each eligible retiree. Therefore, fluctuations in health care costs have no effect on the liability. Upon the demise of the eligible retiree, the coverage for the spouse of the retiree is terminated.
Note 7-Warranties
Changes in our accrued warranty liability during fiscal 2007, 2006 and 2005 are as follows:
Note 8-Lease Commitments
In November 2005, we entered into a First Amendment to Lease, effective as of October 27, 2005, which amended our existing lease for approximately 117,739 square feet of space in an office building located in San Jose, California. The leased space serves as our corporate office. The amendment extended the termination date of the lease from April 15, 2009 to April 15, 2016. In addition, it provides that, commencing December 1, 2005, basic annual rent (as defined in the lease) would be reduced to $1.7 million, subject to 4% annual increases commencing on April 15, 2006. The building element of the original lease, which was accounted for from the outset as a capital lease for a property with a cost of $9.0 million, continues to be amortized over the initial lease period ending in April 2009, in accordance with SFAS No. 13, Accounting for Leases.
Lease loss liabilities were created as a result of discontinuing operations and consolidations. As of July 1, 2007 and July 2, 2006 the accrued lease loss liabilities were approximately $0.1 million and $0.3 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition, we lease certain other facilities and equipment under operating lease agreements. Rental expense charged to operations was $2.8 million in 2007, $1.7 million in 2006, and $1.4 million in 2005. Future minimum lease payments as of July 1, 2007 are as follows:
The total of minimal rentals to be received in the future under noncancelable subleases as of July 1, 2007 was $1.6 million.
Note 9-Goodwill and Intangible Assets
Goodwill
Changes in the carrying value of goodwill for the years ended July 1, 2007 and July 2, 2006 are as follows for our reportable segments:
In the third quarter of the fiscal 2006, we recorded a non-cash impairment charge of approximately $7.0 million for the write-down of the goodwill related to our Wireless/OEM business segment purchased in connection with the Datum acquisition in October 2002. The impairment charge reflects changing business conditions in the wireless segment surrounding product pricing, gross margins, new product acceptance and the increasingly prevalent use of wireless technologies that do not require a frequency reference at the cell site, but receive the required synchronization references from central office. During the third quarter of fiscal 2006, there was an impairment indicator and we performed a goodwill impairment test on the Wireless/OEM business segment since the product pricing pressures and gross
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
margin pressures discussed in prior quarters continued to decline in the third quarter of fiscal 2006 and we did not anticipate any improvement.
Critical estimates in valuing certain intangible assets include, but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements, acquired developed technologies and patents; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; and the brand awareness and the market position of the acquired products and assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
Potential goodwill impairment is measured based upon this two-step process. An internal evaluation identified the need to record an impairment loss for the Wireless/OEM segment in the third quarter of fiscal 2006 using a discounted cash flow valuation method. We performed our most recent annual goodwill impairment test as of July 1, 2007 and no impairment losses were recorded based on these evaluations.
Intangible Assets
In the third quarter of fiscal 2006, we recorded a non-cash impairment charge of approximately $1.2 million for the write-down of the other intangibles related to our Wireless/OEM business segment purchased in connection with the Datum acquisition in October 2002. During the third quarter of fiscal 2006, there was an impairment indicator and we performed an intangible impairment test on the Wireless/OEM business segment since the product pricing pressures and gross margin pressures discussed in prior quarters continued to decline in the third quarter of fiscal 2006 and we did not anticipate any improvement.
The carrying value of long-lived assets is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset, including disposition, is less than the carrying value of the asset. Impairment is measured as the amount by which the carrying amount exceeds the fair value.
Other intangible assets are recorded at cost, less accumulated amortization. Other intangible assets as of July 1, 2007 and July 2, 2006 consist of:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated future amortization expense is as follows:
(1) Does not include any amortization on $2.0 million of purchased technology where we have not yet determined the useful life.
Intangible asset amortization expense for fiscal 2007, 2006 and 2005 was approximately $4.1 million, $4.1 million, and $4.5 million, respectively.
Agilent Technologies
Increases in the other intangible assets during fiscal 2006 primarily resulted from the acquisition of Agilent Technologies’ Frequency and Timing Standards product line, which included $2.6 million in purchased technology, $0.2 million in backlog and $0.5 million in customer relationships. The $0.2 million in backlog was fully amortized in the first quarter of fiscal 2006.
For the intangibles related to Agilent Technologies’ Frequency and Timing Standards product line, the weighted-average amortization period in total is 8 years, 9 months. The weighted-average amortization period by major intangible asset class is as follows:
· Customer relationships-10 years
· Developed technology-9 years
· Backlog-less than 1 year
Increases in other intangible assets during fiscal 2007 resulted from the acquisition of TSC and the acquisition of QoSmetrics.
Timing Solutions Corporation
Increases in intangible assets related to TSC included $1.8 million relating to customer relationships, $1.4 million relating to developed technology, $1.0 million relating to backlog, and $0.2 million relating to trade names. The weighted-average amortization period in total is 6 years, 6 months. The weighted-average amortization period by major intangible asset class is as follows:
· Customer relationships-11 years, 9 months
· Developed technology-4 years, 9 months
· Backlog-1 year
· Trade Names-3 years, 9 months
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
QoSmetrics
Increases in intangible assets related to QoSmetrics included $1.3 million relating to customer relationships, $4.4 million relating to developed technology, and $1.5 million relating to trade names. The weighted-average amortization period in total is 5 years, 6 months. The weighted-average amortization period by major intangible asset class is as follows:
· Customer relationships-5 years, 6 months
· Developed technology-5 years, 6 months
· Trade Names-5 years, 6 months
Note 10-Income Taxes
The provision of federal, state and foreign income tax expense on income from continuing operations consists of the following:
The tax provision attributable to continuing operations and discontinued operations, included in the consolidated statements of operations, is as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effective income tax rate differs from the federal statutory income tax rate as follows:
The principal components of deferred tax assets and liabilities are as follows:
Net deferred tax assets are comprised of the following:
As of July 2, 2007, for federal income tax purposes, we had regular net operating loss carryforwards of approximately $52.8 million, which will expire in years 2023 through 2025. We had California regular net operating loss carryforwards of approximately $5.4 million, which will expire in years 2013 through 2015.
Also, we had federal research and development tax credit carryforwards of approximately $6.5 million that will expire in the years 2008 through 2027, alternative minimum tax credit carryforwards of approximately $3.7 million that have no expiration date, and approximately $0.5 million of foreign tax credits which will expire in 2017. Additionally, for state income tax purposes, we had research and development tax credit carryforwards of approximately $3.2 million that have no expiration date.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal 2007, we reviewed the realizability of deferred tax assets and determined that $0.8 million of the deferred tax assets related to stock option exercises were more likely than not to be realized. Accordingly, we recognized these deferred tax assets with a corresponding increase to common stock. We have provided a valuation allowance for certain deferred tax assets because we have determined that it is more likely than not that we will not have sufficient taxable income to realize these tax assets. At June 30, 2007, the valuation allowance of $2.8 million was attributable to the tax benefit of potentially expiring tax credits stemming from stock option transactions, which will be credited to common stock if realized rather than as a reduction of the tax provision.
During fiscal 2007, Symmetricom Puerto Rico, a wholly-owned subsidiary, moved its place of legal organization from Delaware to Bermuda in a transaction intended to be a tax-free restructuring. We are in the process of submitting a ruling request to the Internal Revenue Service to confirm the tax-free treatment. If granted, the effect of the ruling would be for the Puerto Rico subsidiary to be treated as a branch of Symmetricom, Inc. effective as of July 2006 and, accordingly, for the profits of the Puerto Rico subsidiary to be taxable to Symmetricom, Inc. We are undertaking this ruling request based upon our subsequent review of the 2006 restructuring.
If the ruling request is granted, the effective tax rate for fiscal 2008 is estimated to be approximately 25.0%. If the ruling request is not granted, the tax provision would be increased by a change to our deferred tax assets of approximately $15.2 million resulting in an estimated effective tax rate of 221.0%. Through the end of fiscal 2006, the Puerto Rico subsidiary was taxed under Section 936 of the U.S. Internal Revenue Code, which exempted qualified Puerto Rico source earnings, subject to various limitations, from regular federal income tax. Section 936 expired as of the end of fiscal 2006.
Note 11-Contingencies
We formerly leased a tract of land for our operations in Texas. Those operations involved the use of solvents and, at the end of the lease, we remediated an area where the solvents had been deposited on the ground and obtained regulatory approval for that remedial activity. In 1996, an environmental investigation of the property detected those same contaminants in groundwater in excess of current regulatory standards. The groundwater contamination has migrated to some adjacent properties. We have entered into the Texas Natural Resource Conservation Commission’s Voluntary Cleanup Program (the “Voluntary Cleanup Program”) to obtain regulatory approval for closure of this site and a release from liability to the State of Texas for subsequent landowners and lenders. We have notified adjacent property owners affected by the contamination of our participation in the Voluntary Cleanup Program. On May 20, 2004, we received a demand from the owner of several adjacent lots for damages in the amount of $1.3 million, as well as seeking an indemnity for the contamination and a promise to remediate the contamination. On March 14, 2006, the adjacent property owner filed suit in Probate Court No. 1, Travis County, Texas (Anna B. Miller, Individually and as Executrix of the Estate of Robert L. Miller, et al. vs. Austron, Inc., et al.), seeking damages. We have not yet been served in this matter. We are continuing to work on the remediation of the formerly leased site as well as the adjacent properties and intend to defend this lawsuit vigorously. As of July 1, 2007, we had an accrual of $0.5 million for remediation costs and other ongoing monitoring costs.
Under the indemnification provisions of the Company’s standard sales contracts, the Company agrees to defend the customer against third party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/customer. The exposure to the Company under these
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
indemnification provisions is generally limited to the total amount paid by the customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement. To date, there have been no claims under such indemnification provisions. As such, the Company believes the estimated fair value of these indemnification agreements is not material.
We are also a party to certain other claims in the normal course of our operations. While the results of these claims cannot be predicted with any certainty, we believe that the final outcome of these matters will not have a material adverse effect on our financial position and results of operations.
Note 12-Related Party Transactions
In March 1998, we loaned an officer $500,000 in the form of an interest-free full-recourse promissory note. The entire principal balance is due and payable on March 25, 2008. The note is secured by a deed of trust for the officer’s personal residence. As of July 1, 2007 the entire principal balance is outstanding.
During fiscal 2007, 2006 and 2005, we paid a total of $0, $7,500 and $12,500, respectively, for consulting fees to four directors of Symmetricom in addition to their regular director compensation for attendance at Board and Committee meetings.
During fiscal 2006, we sold products and services to Arris Group for a total of approximately $175,000, and acquired equipment for approximately $2,000. The CEO of Arris Group, Mr. Robert Stanzione, is a director of the Company.
Note 13-Long-Term Obligations
We have no maturities of debt within the next five years. The Bond Payable of $2.4 million and Convertible Subordinate Notes of $120.0 million, which comprise long-term debt, do not mature until 2021 and 2025, respectively.
Capital Lease
On November 18, 2005, we entered into a First Amendment to Lease, effective as of October 27, 2005, which amended that certain Lease dated June 10, 1996 between Symmetricom and Nexus Equity
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
II LLC, as successor in interest to Nexus Equity, Inc., for approximately 117,739 square feet of space in an office building located in San Jose, California. The leased space serves as our principal executive office.
The amendment extended the termination date of the lease from April 15, 2009 to April 15, 2016. In addition, it provides that, commencing December 1, 2005, basic annual rent (as defined in the lease) will be reduced to $1.7 million, subject to 4% annual increases commencing on April 15, 2006. The building element of the original lease, which was accounted for from the outset as a capital lease for a property with a cost of $9.0 million, continues to be amortized over the initial lease period ending in April 2009, in accordance with SFAS No. 13, Accounting for Leases.
Convertible Subordinated Notes
On June 8, 2005, we sold $120 million of contingent convertible subordinated notes (the “Notes”), which mature on June 15, 2025 and bear interest at the rate of 3.25% per annum. Interest on the Notes is payable semi-annually in June and December of each year beginning on December 15, 2005. The Notes are unsecured obligations and are subordinated in right of payment to all of our existing and future senior debt, including our indebtedness under our senior credit facilities. The Notes are structurally subordinated to all indebtedness and liabilities of our subsidiaries.
The Notes are convertible, at the holder’s option, prior to the maturity date into cash and, if applicable, shares of our common stock in the following circumstances:
· Prior to June 15, 2023, if the common stock price for a least 20 trading days in the period of 30 consecutive days ending on the last trading day of the calendar quarter preceding the quarter in which the conversion occurs is more than 125% of the conversion price of the Notes in effect on that 30th trading day;
· On or after June 15, 2023, at all times on or after any date on which the common stock price is more than 125% of the then current conversion price;
· During the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the Notes for each such trading day was less than 95% of the average of the sale price of our common stock during such five trading-day period multiplied by the then current conversion rate;
· If we have called the particular Notes for redemption and the redemption has not yet occurred; or
· Upon the occurrence of specified corporate transactions.
Holders may convert any outstanding Notes into cash and, if applicable, shares of our common stock at an initial conversion price per share of $12.49, which was determined based on the reported closing price of our common stock of $9.91 per share on June 2, 2005.
Also, on or after June 20, 2012, we may redeem some or all of the Notes at any time or from time to time at a redemption price of 100% of the principal amount of the Notes, plus accrued and unpaid interest (including liquidated damages, if any) up to but not including the date of redemption, payable in cash. Holders may require us to repurchase all or a portion of their Notes on June 15, 2012, 2015 and 2020 for a repurchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest (including liquidated damages, if any) up to but not including the date of repurchase, payable in cash, in the event of certain change of control events related to us.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We may from time to time repurchase or redeem all or a portion of the Notes, if necessary, to comply with NASDAQ marketplace rule 4350(i)(1)(D). We may undertake such repurchase from time to time through privately negotiated or open market transactions or other available means.
In connection with the issuance of these Notes, Symmetricom recorded bond fees of approximately $3.8 million, which are being amortized using the straight-line method over a period of seven years until fiscal 2012.
Massachusetts Development Finance Agency Bond
In connection with the acquisition of Datum in October 2002, we assumed Datum’s liability relating to an industrial development bond that was issued by the Massachusetts Development Finance Agency on June 1, 2001, to finance the expansion by Datum of its manufacturing facility in Beverly, Massachusetts. The bond matures on May 1, 2021, and the balance is $2.4 million as of July 1, 2007. The bond is collateralized by a line of credit with Wells Fargo Bank.
Note 14-Benefit Plans
401(k) Plan
The Company has a 401(k) plan (the “Plan”) that allows eligible U.S. and Puerto Rico employees to contribute up to 50 percent of their annual compensation to the Plan, subject to certain limitations. The employees’ funds are not directly invested in shares of the Company’s common stock. Each employee directs the investment of the funds across a series of mutual funds. Effective in fiscal 2004, Symmetricom matched up to $0.50 per $1.00 deferred up to 3% of eligible compensation. An additional match of $1.00 per $1.00 deferred up to 1% of eligible compensation will be made based upon achievement of company profit performance goals. Employee contributions vest immediately. Employer matching contributions vest ratably over three years. Symmetricom made matching contribution payments of $0.5 million, $0.5 million and $0.7 million in fiscal 2007, 2006 and 2005, respectively.
Deferred Compensation Plan
The Company has a deferred compensation plan that allows outside directors and certain U.S. employees to contribute up to 100% of their compensation, provided that their contribution does not reduce their salary to an amount that is less than the amount necessary to pay applicable employment taxes and other withholding obligations. The Board of Directors is authorized to make discretionary contributions to the accounts of participants. No discretionary contributions were made in fiscal 2007, 2006, and 2005.
Note 15-Stockholders’ Equity
Stock Options and Awards
Symmetricom has equity benefit plans under which employees, directors and consultants may be granted non-qualified and incentive options to purchase shares of our common stock and restricted stock. One of these plans was amended in fiscal 2003, in connection with the tender offer during the fourth quarter of fiscal 2003, to effectively provide that restricted stock could be granted and repurchased for no cash purchase price. Stock appreciation rights may also be granted under this plan; however, none have been granted to date. All options have been granted at the fair market value of our common stock on the date of grant and generally vest over three years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effective August 4, 2005, the Symmetricom Board of Directors approved a change in the terms for stock options granted on and after August 4, 2005 under the employee stock option plans to provide that the life of a new stock option will be 5 years instead of 10 years.
On October 26, 2006 at our annual meeting of shareholders, the shareholders approved the 2006 Incentive Award Plan that included an additional 3.7 million shares for future issuance. For the year ended July 1, 2007, we granted non performance-based options to purchase 1.2 million shares of Symmetricom’s common stock, and awarded 0.7 million shares of restricted stock. In addition we granted performance-based options to purchase 0.3 million shares. Our right to repurchase restricted shares generally lapses over the same three-year term as the vesting period applicable to the stock options. We received $2.7 million from the exercise of stock options during the year ended July 1, 2007.
We recorded stock-based compensation expenses of $6.4 million in fiscal 2007, $4.6 million in fiscal 2006, and $1.0 million in fiscal 2005. At July 1, 2007, the total compensation cost related to unvested stock-based awards granted to employees, directors and consultants under the Company’s stock option plans but not yet recognized was approximately $7.7 million, net of estimated forfeitures of $ 0.6 million.
The following table details stock option and award activity for fiscal years 2007, 2006, and 2005:
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Options
The total number of in-the-money options outstanding and exercisable as of July 1, 2007 was as follows:
The aggregate intrinsic value in the preceding table represents the total pre-tax value of stock options outstanding as of July 1, 2007, based on our common stock closing price of $8.40 on July 1, 2007, which would have been received by the option holders had all option holders exercised their options as of that date.
As of July 1, 2007, July 2, 2006, and July 3, 2005, the number of shares and weighted average exercise prices of exercisable options were 2,751,953 at $7.14, 1,567,540 at $4.59, and 2,387,119 at $5.75, respectively.
The total intrinsic value of options exercised during fiscal 2007, 2006, and 2005 was $1.9 million, $1.6 million, and $8.4 million, respectively.
The weighted average grant-date fair value of options granted was $3.00 in 2007, $3.67 in 2006 and $5.11 in 2005. Our calculations were made using the Black-Scholes option-pricing model. The fair value of our stock-based awards to employees was estimated assuming no expected dividend and the following weighted-average assumptions for fiscal 2007, 2006 and 2005:
Prior to July 3, 2005, we used our historical volatility as its basis to estimate expected volatility. In light of recent accounting guidance related to stock options, we reevaluated the volatility assumptions used to estimate the value of employee stock options granted in fiscal 2006. We determined that historical and implied volatility related to publicly traded options is more reflective of market conditions and a better indicator of expected volatility than historical volatility only.
Performance Awards
During fiscal 2007, we granted 0.3 million shares of performance stock options to certain employees. The number of stock options ultimately vested depends on actual business performance measured against certain targets such as backlog, revenue, and profitability for specific areas of the Company’s business. Once the targets are met, the options in each performance tranche will vest immediately. If any target is not met by June 30, 2009, the options relating to the target will be cancelled.
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock Awards
Our restricted stock awards are grants that entitle the holder to acquire shares of restricted common stock with certain designated prices or at no cost on a time or performance basis. The shares of restricted stock cannot be sold, pledged, or otherwise disposed of until the award vests and any unvested shares may be reacquired by us following the awardees’ termination of service. The restricted stock awards typically vest on the first, second or third anniversary of the grant date or on a graded vesting schedule over the designated service period with certain conditions and restrictions.
Stock Repurchase Program
On August 11, 2005, the Board of Directors authorized management to repurchase up to approximately 2.6 million shares of our common stock pursuant to a repurchase program established in fiscal 2002, adding 2.0 million shares to the program previously authorized. There were approximately 46.5 million shares of Symmetricom common stock outstanding as of July 1, 2007.
During fiscal 2007, we repurchased 0.5 million shares of common stock pursuant to the repurchase program for an aggregate price of approximately $4.0 million. A further 10,511 shares were repurchased to cover the cost of taxes on vested restricted stock. Upon termination of certain employees, 19,800 shares of restricted stock were forfeited pursuant to existing agreements.
On August 8, 2007, the Board of Directors authorized management to repurchase up to approximately 2.9 million shares of Symmetricom common stock, adding 2.0 million shares to a previously authorized program.
Preferred Stock
We have 500,000 shares of $0.0001 par value preferred stock authorized, of which 200,000 shares have been reserved for issuance in connection with our preferred stock rights plan. The right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock at a price of $72.82.The rights were distributed at the rate of one right for each share of common stock as a non-taxable dividend and will expire August 2011. The rights will be exercisable only in the event that a person or group acquires 15% or more of our outstanding common stock.
Warrants
On October 16, 2001, we acquired certain assets and products from Telmax Communications Corporation (“Telmax”), a developer of telecommunications equipment. The purchase price of the transaction included a warrant to purchase 300,000 shares of Symmetricom’s common stock with an exercise price of $7.00 per share and expiring on October 16, 2006. On October 2, 2006 Telmax exercised the warrant and received 36,346 shares pursuant to the net exercise provision based on an average price of $7.965 per share.
Note 16-Business Segment Information
Symmetricom is organized into five reportable segments that are within three divisions:
Telecom Solutions Division
There are three reportable segments within the Telecom Solutions Division:
· Wireline Products consist principally of Building Integrated Timing Supply, or BITS, based on quartz, rubidium and Global Positioning System (GPS) technologies. Our Wireline Products
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
provide highly accurate and uninterruptible timing to meet the synchronization requirements of telecommunication networks.
· Wireless/OEM Products includes our OEM base station timing products that 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.
· Global Services offers a broad portfolio of services for our customers around the world.
Timing, Test and Measurement Division
The Timing, Test and Measurement Division products are precision time and frequency systems that are important to communications systems of wireline, wireless, satellite and computer network technologies for government, power utilities, aerospace, defense and enterprise markets.
Quality of Experience Assurance Division
The Quality of Experience (QoE) Assurance Division products are hardware and software-based probes (and/or embedded agents) that are distributed throughout an IP (Internet Protocol) network in order to monitor network and application performance, and particularly to correlate how those factors impact end users’ QoE. The primary application for these system-level solutions is for IPTV (Internet Protocol Television), VoD (video on demand), ITV (Internet television), and other IP-based video delivery mechanisms.
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For each of our segments, we have separate financial information, including gross profit amounts, which are evaluated regularly by the Chief Operating Decision Maker in deciding how to allocate resources and in assessing performance. We do not allocate assets or specific operating expenses to these individual operating segments. Therefore, the segment information reported here includes only net revenue and gross profit.
* Includes amortization of purchased technology, impairment of intangibles and applicable integration, and restructuring charges.
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our export sales accounted for 29%, 30% and 35%, of our net revenue in fiscal 2007, 2006 and 2005 respectively. The geographical components of revenue are as follows:
In fiscal 2007, two customers each accounted for 13.7% and 12.7% of our net revenue in fiscal 2007, or revenues of $28.5 million and $26.5 million, respectively. No customer accounted for 10.0% or more of our net revenue in fiscal 2006 and 2005.
Note 17-Integration and Restructuring Charges
During fiscal 2007 we recorded integration and restructuring charges totaling $0.8 million related to the acquisitions of TSC and QoSmetrics. During fiscal 2006 we recorded integration and restructuring charges totaling $1.2 million related to the acquisition of Agilent Technologies’ Frequency and Timing Standards product line. These charges were recorded as cost of sales and paid out in their respective years.
The following tables show the details of the restructuring cost accruals, which consist of facilities and severance costs, for the years ended July 1, 2007 and July 2, 2006. The adjustments are for reclassifications of facility and benefit accruals:
The accrued balance of the $0.1 million lease loss accrual for facilities as of July 1, 2007 will be paid over the next five years. We expect to incur additional integration and restructuring charges amounting to $1.0 million for the QoSmetrics acquisition.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
On August 31, 2007 we filed Form 10-Q/A to amend our Form 10-Q for the quarter ended March 31, 2007, to correct a misstatement in our original filing. In that Form 10-Q/A, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were not effective. Because a material weakness in our control environment existed during the fourth quarter of fiscal 2007 and was not discovered until after July 1, 2007, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of July 1, 2007, solely because of this material weakness.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except for instituting a new process in our accounting procedures to help ensure the completeness and accuracy of the recording of expenses for outsourced labor. This was done to address a material weakness identified by management in the fourth quarter of 2007 that led us to restate our second quarter results, and file Form 10-Q/A to amend our Form 10-Q for the quarter ended Decmember 31, 2006.
During the first quarter of fiscal year 2008, we implemented a new financial policy and procedure for the treatment of complex transactions. We believe that implementation of this policy and compliance to this process will remediate the material weakness in our control environment that existed in the fourth quarter of fiscal 2007.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management concluded that its internal control over financial reporting was not effective as of July 1, 2007, because of a material weakness involving the insufficient review of significant and unusual transactions relating to accounting for income taxes.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent registered public accounting firm has audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of July 1, 2007 as stated in their report.
Item 9B.
Item 9B. Other Information
None.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Symmetricom, Inc.
San Jose, California
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Symmetricom, Inc. and its subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of July 1, 2007, because of the effect of the material weakness identified in management’s assessment based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment: insufficient review of significant and unusual transactions relating to accounting for income taxes.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended July 1, of the Company and this report does not affect our report on such financial statements and financial statement schedule.
In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of July 1, 2007, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of July 1, 2007, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended July 1, 2007, of the Company and our report dated September 25, 2007 expressed, an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the adoption of Statement of Financial Accounting Standards No. 123 (R), Share Based Payment in fiscal 2006.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
September 25, 2007
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
(a) Executive Officers
See the section entitled “Executive Officers of Symmetricom” in Part I of this report.
(b) Directors
The information required by this item is incorporated by reference from the information under the caption “Election of Directors-Nominees” contained in the Company’s Proxy Statement to be filed with the Securities and Exchange Commission (the “SEC”) in connection with the solicitation of proxies for the Company’s 2007 Annual Meeting of Shareholders to be held on October 25, 2007 (the “Proxy Statement”).
(c) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires a company’s directors, officers and beneficial owners of more than 10% of any class of equity securities of the company registered pursuant to section 12 of the Exchange Act to file with the SEC- initial reports of beneficial ownership and reports of changes in ownership of Common Stock and other equity securities of Symmetricom registered pursuant to section 12 of the Exchange Act. This information is contained in the section called “Section 16(A) Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.
(d) Code of Ethics
We have adopted a written code of ethics that applies to all of our employees and to our Board of Directors. A copy of the code is available on our website at http://www.symmetricom.com and is attached as an exhibit to this report.
(e) Corporate Governance
The information required by this item is incorporated by reference from the information under the captions “Election of Directors-Audit Committee” and “Election of Directors-Nominating and Governance Committee” contained in the Proxy Statement.
Item 11.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the information under the captions “Election of Directors-Nominees,” “Executive Officer Compensation,” “Election of Directors-Director Compensation,” and “Certain Transactions” contained in the Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
The information required by this item is incorporated by reference from the information under the caption “Other Information-Share Ownership by Principal Stockholders and Management” contained in the Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from the information under the caption “Certain Transactions” contained in the Proxy Statement.
Item 14.
Item 14. Principal Accounting Fees and Services
The information required by this item is included in “Ratification of Appointment of Registered Public Accounting Firm of the Company” in our Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements and Financial Statement Schedule
1. Financial Statements. Reference is made to the Index to Consolidated Statements of Symmetricom, Inc. under Item 8 of Part II hereof.
2. Financial Statement Schedules. The following financial statement schedule of Symmetricom for the years ended July 1, 2007, July 2, 2006, and July 3, 2005, 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 15(b) below. Each management contract or compensatory plan or arrangement required to be filed has been identified.
(b) Exhibits
Schedule 7.13(a)
Exhibit C-Form of Extended Employment Agreement
Exhibit D-Form of Three Month Employment Agreement
3.1(i)
Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference from Exhibit 3.1 to the Registrant’s current report on Form 8-K filed January 9, 2002).
3.1(ii)
Amended and Restated Bylaws of the Registrant (incorporated by reference from Exhibit 3.1 to the Registrant’s current report on Form 8-K filed August 10, 2005).
4.1
Form of Common Stock Certificate (incorporated by reference from Exhibit 4.1 to the Registrant’s annual report on Form 10-K filed August 30, 2002).
4.2
Rights Agreement dated as of August 9, 2001 between the Registrant and Mellon Investor Services (incorporated by reference from Exhibit 4.1 to the Registrant’s registration statement on Form 8-A (file no. 000-02287) filed August 9, 2001).
4.3
Indenture, dated as of June 8, 2005, between the Registrant and Wells Fargo Bank, National Association, as Trustee (incorporated by reference from Exhibit 4.1 to the Registrant’s current report on the Form 8-K filed June 8, 2005).
4.4
Form of 3¼% Contingent Convertible Subordinated Notes due 2025 (incorporated by reference to Exhibit A to Exhibit 4.3 hereof).
10.2#
1999 Director Stock Option Plan, as amended through December 28, 2005 and forms of agreements thereunder (incorporated by reference from Exhibit 99.3 to the Registrant’s 1999 proxy statement filed September 23, 1999 and Exhibit 10.2 to the Registrant’s quarterly report on Form 10-Q filed February 13, 2001).
10.3#
Amendment to the Symmetricom, Inc. 1999 Director Stock Option Plan effective December 28, 2005 and form of option agreement thereunder (incorporated by reference from Exhibits 10.1 and 10.2 to the Registrant’s quarterly report on Form 10-Q filed February 8, 2006).
10.4#
1999 Employee Stock Option Plan, as amended through October 23, 2001, and forms of agreements thereunder (incorporated by reference from Exhibit 99.1 to the Registrant’s proxy statement filed September 23, 1999 and Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q filed February 13, 2001).
10.5#
Amendment to the Symmetricom, Inc. 1999 Employee Stock Option Plan effective May 28, 2003 (incorporated by reference from Exhibit (d)(6) to the Registrant’s tender offer statement on Schedule TO, filed May 28, 2003).
10.6#
2002 Stock Option Plan (incorporated by reference from Exhibit 4.1 to Registrant’s registration statement on Form S-8 (file no. 333-97599) filed August 2, 2002).
10.7
Lease Agreement by and between the Registrant and Nexus Equity, Inc. dated June 10, 1996 (incorporated by reference from Exhibit 10.14 to the Registrant’s annual report on Form 10-K filed September 17, 1996).
10.8
First Amendment to Lease by and between the Registrant and Nexus Equity II LLC, as successor in interest to Nexus Equity, Inc., dated November 18, 2005, effective as of October 27, 2005 (incorporated by reference from Exhibit 10.2 to the Registrant’s current report on Form 8-K filed November 22, 2005).
10.9
Form of Indemnification Agreement (incorporated by reference from Exhibit 10.6 to the Registrant’s annual report on Form 10-K filed August 30, 2002).
10.10#
Symmetricom, Inc. Deferred Compensation Plan effective October 1, 1999 (incorporated by reference from Exhibit 10.4 to the Registrant’s quarterly report on Form 10-Q filed May 15, 2001).
10.14#
Promissory Note Secured by Deed of Trust issued by Thomas W. Steipp to the Registrant dated January 25, 1999 (incorporated by reference from Exhibit 10.29 to the Registrant’s quarterly report on Form 10-Q filed February 4, 1999).
10.15#
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., as Beneficiary (incorporated by reference from Exhibit 10.30 to the Registrant’s quarterly report on Form 10-Q filed February 4, 1999).
10.16#
Employment Agreement between the Registrant and Thomas W. Steipp dated July 1, 2001 (incorporated by reference from Exhibit 10.18 to the Registrant’s annual report on Form 10-K filed September 20, 2001).
10.17#
Change of Control Retention Agreement between the Registrant and Thomas W. Steipp dated July 1, 2001 (incorporated by reference from Exhibit 10.19 to the Registrant’s annual report on Form 10-K filed September 20, 2001).
10.19#
Form of Executive Severance Benefits Agreement between the Company and each of William Slater, Nancy J. Shemwell, Dale A. Pelletier, Bruce K. Bromage, William H. Minor, Jr. and David Cox (incorporated by reference from Exhibit 10.1 to the Registrant’s current report on Form 8-K filed May 23, 2006).
10.20#
Form of Restricted Stock Award Agreement (incorporated by reference from Schedule A to Exhibit (a)(1)(ii) to the Registrant’s tender offer statement on Schedule TO filed May 28, 2003).
10.21#
Form of Restricted Stock Award Agreement under Symmetricom, Inc. 1999 Employee Stock Option Plan, amended effective August 4, 2005 (incorporated by reference from Exhibit 10.21 to the Registrant’s annual report on Form 10-K filed September 13, 2006).
10.22
Standard Industrial Lease between Manor Development Co. and TrueTime, Inc. (incorporated herein by reference from Exhibit 10.9 to TrueTime, Inc.’s registration statement on Form S-1 (file no. 333-90269)).
10.23
Standard Industrial/Commercial Single-Tenant Lease-Net, dated as of January 24, 2000, by and between Cooperhill Development Corporation and TrueTime, Inc. (incorporated by reference from Exhibit 10.1 to TrueTime, Inc.’s quarterly report on Form 10-Q for the quarter ended March 30, 2000).
10.24
Amendment to the Standard Industrial/Commercial Single-Tenant Lease-Net, dated as of January 24, 2000, by and between Cooperhill Development Corporation and TrueTime, Inc. (incorporated by reference from Exhibit 10.7 to TrueTime, Inc.’s annual report on Form 10-K for the fiscal year ended September 30, 2000).
10.25
Standard Industrial Sublease dated as of December 11, 2000 by and between Innovadyne Technologies, Inc. and TrueTime, Inc. (incorporated by reference from Exhibit 10.1 to TrueTime, Inc.’s quarterly report on Form 10-Q for the quarterly period ended December 31, 2000).
10.26
Lease Intended as Security dated as of April 30, 2001 by and between Bank of America and TrueTime, Inc. (incorporated by reference from Exhibit 10.1 to TrueTime, Inc.’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2001).
10.28#
Datum Inc.’s Savings and Retirement Plan, as amended to date (incorporated by reference from Exhibit 10.19 to Datum Inc.’s annual report on Form 10-K for the fiscal year ended December 31, 1991).
10.37#
Service Agreement, by and between the Company and Eric van der Kaay (incorporated by reference from Exhibit 10.3 to the Registrant’s quarterly report on Form 10-Q filed May 14, 2003).
10.39
Loan and Trust Agreement, dated May 1, 2001, among Massachusetts Development Finance Agency, Frequency and Time Systems, Inc. and Wells Fargo Brokerage Services, LLC (incorporated by reference from Exhibit 10.57 to Datum Inc.’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2001).
10.40
Bond Purchase Agreement dated May 1, 2001, among Wells Fargo Brokerage Services, LLC, Frequency and Time Systems, Inc. and Wells Fargo Bank Minnesota, National Association, as trustee (incorporated by reference from Exhibit 10.58 to Datum Inc.’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2001).
10.41
Remarketing Agreement, dated May 1, 2001, among Wells Fargo Brokerage Services, LLC, Frequency and Time Systems, Inc. and Wells Fargo Bank Minnesota, National Association, as trustee (incorporated by reference to Exhibit 10.59 to Datum Inc.’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2001).
10.42
Credit Agreement dated May 1, 2004, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference from Exhibit 10.39 to the Registrant’s annual report on Form 10-K filed September 12, 2005).
10.43
Revolving Line of Credit Note dated June 1, 2005, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference from Exhibit 10.40 to the Registrant’s annual report on Form 10-K filed September 12, 2005).
10.44
First Amendment to Credit Agreement dated June 1, 2005, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference from Exhibit 10.41 to the Registrant’s annual report on Form 10-K filed September 12, 2005).
10.45
Second Amendment to Credit Agreement dated August 19, 2005, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference from Exhibit 10.45 to the Registrant’s annual report on Form 10-K filed September 13, 2006).
10.46
Third Amendment to Credit Agreement dated July 3, 2006, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference from Exhibit 10.46 to the Registrant’s annual report on Form 10-K filed September 13, 2006).
10.47#
2006 Incentive Award Plan and forms of agreements thereunder (incorporated by reference from Appendix A to the Registrant’s 2006 Proxy Statement filed with the Commission on September 25, 2006 and Exhibit 4.4 to the Registrant’s registration statement on Form S-8 (file no. 333-138546) filed November 9, 2007).
Code of Ethics (incorporated by reference to Exhibit 14.1 of the Registrant’s current report on Form 8-K filed August 10, 2005).
21.1
Subsidiaries of the Registrant.
23.1
Consent of Independent Registered Public Accounting Firm.
24.1
Power of Attorney (see page 94 of this Form 10-K).
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
# Management contract or compensatory plan or arrangement
(c) Financial Statement Schedules
See Item 15(a)(2) above.
SCHEDULE II
SYMMETRICOM, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
(1) Deductions represent costs charged or amounts written off against the reserve or allowance.
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.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas W. Steipp and William Slater, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
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.
/S/ RICHARD N. SNYDER
Director
September 25, 2007
Richard N. Snyder
/S/ ROBERT J. STANZIONE
Director
September 25, 2007
Robert J. Stanzione