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Symmetricom 10-K 2007

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

x                              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 1, 2007

or

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission file number 0-02287


SYMMETRICOM, INC.

(Exact name of registrant as specified in its charter)

Delaware

 

No. 95-1906306

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

2300 Orchard Parkway,
San Jose, California

 

95131-1017

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (408) 433-0910

Securities registered pursuant to Section 12(b) of the Act:

 

Name of each exchange on which registered:

Common Stock, $0.0001 Par Value

 

The NASDAQ Stock Market LLC

Series A Participating Preferred Stock Purchase Rights

 

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§29.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    o

Accelerated filer    x

Non-accelerated filer    o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o  No x

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant, computed by reference to the closing price at which the Common Stock was sold on December 31, 2006, as reported on the NASDAQ Stock Market LLC (formerly the NASDAQ National Market) was approximately $409,107,852. This calculation does not reflect a determination that such persons are affiliates of the Registrant for any other purpose.

As of August 31, 2007, there were approximately 45,547,558 shares of Registrant’s Common Stock outstanding.

Portions of the Proxy Statement for the Registrant’s 2007 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

 




SYMMETRICOM, INC.
FORM 10-K
For the Fiscal Year Ended July 1, 2007
INDEX

 

 

 

 

Page

 

 

 

 

PART I

 

 

 

Item 1.

 

Business

 

3

 

Item 1A.

 

Risk Factors

 

13

 

Item 1B.

 

Unresolved Staff Comments

 

26

 

Item 2.

 

Properties

 

26

 

Item 3.

 

Legal Proceedings

 

27

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

27

 

 

 

PART II

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

28

 

Item 6.

 

Selected Financial Data

 

30

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

31

 

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

47

 

Item 8.

 

Consolidated Financial Statements and Supplementary Data

 

49

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

87

 

Item 9A.

 

Controls and Procedures

 

87

 

Item 9B.

 

Other Information

 

87

 

 

 

PART III

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

89

 

Item 11.

 

Executive Compensation

 

89

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

89

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

89

 

Item 14.

 

Principal Accountant Fees and Services

 

89

 

 

 

PART IV

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

90

 

 

 

Signatures

 

96

 

 

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PART I

FORWARD-LOOKING INFORMATION

When used in this discussion, the words “expects,” “anticipates,” “estimates,” “believes,” “plans,” “will,” “intend,” “can,” “projects” and similar expressions are intended to identify forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

These risks and uncertainties include, but are not limited to, risks relating to general economic conditions in the markets we address and the telecommunications market in general, risks related to the development of our new products and services, the effects of competition and competitive pricing pressure, uncertainties associated with changing intellectual property laws, developments in and expenses related to litigation, increased competition in our markets, inability to obtain sufficient amounts of key components, the rescheduling or cancellations of key customer orders, the loss of a key customer, the effects of new and emerging technologies, the risk that excess inventory may result in write-offs, price erosion and decreased demand, fluctuations in the rate of exchange of foreign currency, changes in our effective tax rate, the impact on investor confidence due to material weaknesses in our controls over financial reporting, potential short-term investment losses and other risks due to credit market dislocation, changes in accounting for convertible debt, the tax treatment of the restructuring of our Puerto Rico subsidiary, market acceptance of our new products and services, technological advancements, undetected errors or defects in our products, the risks associated with our international sales, geopolitical risks and risk of terrorist activities, the risks associated with attempting to integrate other companies and businesses we acquire, and the risks set forth below in item 1A, “Risk Factors.”

These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances or on which any such statement is based.

In the sections of this report entitled “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Results,” all references to “Symmetricom,” “we,” “us,” and “our” mean Symmetricom, Inc. and its subsidiaries, except where it is made clear that the term means only the parent company.

TimeSource, SMARTCLOCK, BesTime, GoLong, GoWide, TimeHub, TimePictra, TimeCesium, TimeProvider, TimeCreator, TimeScan, V-Factor, NetAdvisor, NetWarrior and QoSmetrics are our trademarks. We also refer to trademarks of other corporations and organizations in this document.

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

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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

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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

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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.

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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.

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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.

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·       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

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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.

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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

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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. Risk Factors—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 their Restriction of the Use of Hazardous Substances in electrical and electronic equipment, as well as other standards around the world.”

Sources and Availability of Raw Materials

We endeavor to use standard parts and components, which are generally available from multiple sources. We make significant purchases of parts and components from third-party suppliers. Certain parts used in our manufacturing process are single sourced.

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Employees

At July 1, 2007, we had 951 employees, including 608 in manufacturing, 131 in engineering and 212 in sales, marketing, service and general and administration. This headcount represents an increase of 86 employees over the prior year, which includes 72 employees added for the QoSmetrics S.A. and TSC acquisitions that closed in fiscal year 2007. None of our employees are represented by a labor union, and we have experienced no work stoppages. We believe that our employee relations are good.

Executive Officers of Symmetricom

Following is a list of our executive officers as of July 1, 2007 and brief summaries of their business experience over the last five years. All officers, including executive officers, are appointed annually by the Board of Directors at its meeting following the annual meeting of stockholders. We are not aware of any officer who was appointed to the office pursuant to any arrangement or understanding with another person.

Name

 

 

 

Age

 

Position

Thomas W. Steipp

 

 

57

 

 

Chief Executive Officer

William Slater

 

 

55

 

 

Executive Vice President Finance and Administration, Chief Financial Officer and Secretary

Bruce Bromage

 

 

53

 

 

Executive Vice President and General Manager TT&M Division

Nancy Shemwell

 

 

51

 

 

Executive Vice President Global Sales & Support

David Cox

 

 

40

 

 

Executive Vice President & General Manager, QoE Assurance Division

 

Mr. Steipp has served as Chief Executive Officer of Symmetricom since December 1998. Mr. Steipp served as Chief Executive Officer and Chief Financial Officer of Symmetricom from December 1998 to October 1999. Mr. Steipp served as President and Chief Operating Officer, Telecom Solutions, a division of Symmetricom, from March 1998 to December 1998.

Mr. Slater has served as Executive Vice President Finance and Administration, Chief Financial Officer and Secretary of Symmetricom since July 2006. Mr. Slater served as Chief Financial Officer and Secretary of Symmetricom from August 2000 to June 2006.

Dr. Bromage has served as Executive Vice President and General Manager of the Timing, Test and Measurement Division since April 2004. Dr. Bromage joined Symmetricom in April 2002 and served as Vice President, Strategic Planning and Alliances from April 2002 to April 2004.

Ms. Shemwell joined Symmetricom in October 2004 as Senior Vice President Global Sales & Support and in July 2006 became Executive Vice President Global Sales & Support. From 2003 to 2004 Ms. Shemwell was Acquisition Partner/Consulting Affiliate at the Canux Group. From 2001 to 2002 Ms. Shemwell was President and CEO of Jovial Test Equipment.

Mr. Cox has served as Executive Vice President and General Manager, QoE Assurance Division, since October 2006. Mr. Cox joined Symmetricom as Vice President of Corporate Development in April 2006. From January 2006 to February 2006, Mr. Cox was the CEO of Norwegian-based mobile search firm Stochasto ASA. From July 2002 to December 2005, Mr. Cox was an independent consultant providing strategy consulting services to start-up companies and private equity firms.

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

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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;

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·       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.

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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

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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,

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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

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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;

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·       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

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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.

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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

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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

23




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.

24




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.

25




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.               Unresolved Staff Comments

None.

Item 2.                        Properties

The following are our principal facilities as of July 1, 2007:

Location

 

 

 

Primary Use

 

Owned/Leased

 

Segments Used by

San Jose , CA

 

Headquarters, Manufacturing

 

Leased

 

All

Aguadilla, Puerto Rico

 

Manufacturing

 

Leased

 

All but QoE

Beverly, MA

 

Manufacturing

 

Owned (no encumbrances)

 

All but QoE

Santa Rosa, CA

 

Manufacturing

 

Leased

 

TT&M

Boulder, CO

 

Manufacturing

 

Leased

 

TT&M

 

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.

26




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.                        Submission of Matters to a Vote of Security Holders

Not applicable.

27




PART II

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.

 

 

High

 

Low

 

Year ended July 2, 2006

 

 

 

 

 

First Quarter

 

$

11.04

 

$

7.29

 

Second Quarter

 

8.98

 

6.56

 

Third Quarter

 

10.11

 

8.04

 

Fourth Quarter

 

8.45

 

6.99

 

Year ended July 1, 2007

 

 

 

 

 

First Quarter

 

$

8.13

 

$

6.60

 

Second Quarter

 

9.31

 

7.81

 

Third Quarter

 

9.40

 

7.70

 

Fourth Quarter

 

8.92

 

7.44

 

 

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.

28




The following table provides a monthly detail of our share repurchases and forfeitures during fiscal 2007:

 

 

Total

 

 

 

Total

 

 

 

Number of

 

Average

 

Number of

 

 

 

Shares

 

Price Paid

 

Shares

 

Period

 

 

 

Purchased

 

per Share

 

Forfeited

 

July 1, 2006 through July 31, 2006

 

 

 

 

 

 

 

 

3,500

 

 

August 1, 2006 through August 31, 2006

 

 

84,989

 

 

 

$

6.97

 

 

 

3,000

 

 

September 1, 2006 through September 30, 2006

 

 

182,648

 

 

 

7.76

 

 

 

1,750

 

 

November 1, 2006 through November 30, 2006

 

 

 

 

 

 

 

 

2,675

 

 

February 1, 2007 through February 28, 2007

 

 

2,964

 

 

 

8.79

 

 

 

 

 

March 1, 2007 through March 31, 2007

 

 

240,000

 

 

 

8.06

 

 

 

6,625

 

 

May 1, 2007 through May 31, 2007

 

 

1,358

 

 

 

7.97

 

 

 

2,250

 

 

Total

 

 

511,959

(*)

 

 

$

7.78

 

 

 

19,800

 

 


(*)          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

GRAPHIC


*                    $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.

29




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.

 

 

Year ended

 

 

 

July 1, 2007

 

July 2, 2006

 

July 3, 2005

 

June 27, 2004

 

June 29, 2003

 

 

 

(In thousands, except per share amounts)

 

Net revenue

 

 

$

208,380

 

 

 

$

176,112

 

 

 

$

179,388

 

 

 

$

163,310

 

 

 

$

127,088

 

 

Operating income (loss)

 

 

8,928

 

 

 

(2,968

)

 

 

17,737

 

 

 

(5,445

)

 

 

(46,641

)

 

Income (loss) before income taxes

 

 

13,336

 

 

 

(473

)

 

 

18,845

 

 

 

(5,722

)

 

 

(47,094

)

 

Income (loss) from continuing operations

 

 

5,863

 

 

 

(102

)

 

 

16,931

 

 

 

(3,186

)

 

 

(34,708

)

 

Gain (loss) from discontinued operations (1)

 

 

242

 

 

 

921

 

 

 

985

 

 

 

949

 

 

 

(14,609

)

 

Net earnings (loss)

 

 

6,105

 

 

 

819

 

 

 

17,916

 

 

 

(2,237

)

 

 

(49,317

)

 

Basic earnings (loss) per share from continuing operations

 

 

0.13

 

 

 

 

 

 

0.37

 

 

 

(0.07

)

 

 

(0.97

)

 

Basic earnings (loss) per share from discontinued operations

 

 

 

 

 

0.02

 

 

 

0.02

 

 

 

0.02

 

 

 

(0.41

)

 

Basic net earnings (loss) per share

 

 

0.13

 

 

 

0.02

 

 

 

0.39

 

 

 

(0.05

)

 

 

(1.38

)

 

Diluted earnings (loss) per share
from continuing operations

 

 

0.13

 

 

 

 

 

 

0.36

 

 

 

(0.07

)

 

 

(0.97

)

 

Diluted earnings (loss) per share
from discontinued operations

 

 

 

 

 

0.02

 

 

 

0.02

 

 

 

0.02

 

 

 

(0.41

)

 

Diluted net earnings (loss) per share

 

 

0.13

 

 

 

0.02

 

 

 

0.38

 

 

 

(0.05

)

 

 

(1.38

)

 

 

 

 

July 1, 2007

 

July 2, 2006

 

July 3, 2005

 

June 27, 2004

 

June 29, 2003

 

 

 

(In thousands)

 

Total assets

 

 

$

409,279

 

 

 

$

392,418

 

 

 

$

392,171

 

 

 

$

247,590

 

 

 

$

233,890

 

 

Long-term obligations

 

 

125,550

 

 

 

126,670

 

 

 

126,967

 

 

 

8,827

 

 

 

10,057

 

 

Stockholders’ equity

 

 

$

236,180

 

 

 

$

224,561

 

 

 

$

226,175

 

 

 

$

196,484

 

 

 

$

183,432

 

 


(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.

30




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.

31




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.

32




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.

33




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.

34




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.

35




Results of Operations

The following table presents the percentage of total revenue for the respective line items in our consolidated statement of operations:

 

 

Year ended

 

 

 

 

July 1, 2007

 

July 2, 2006

 

July 3, 2005

 

Net revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telecom Solutions Division:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireline Products

 

 

45.1

%

 

 

45.8

%

 

 

46.3

%

 

 

Wireless/OEM Products

 

 

12.8

%

 

 

13.6

%

 

 

15.5

%

 

 

Global Services

 

 

7.0

%

 

 

7.1

%

 

 

5.4

%

 

 

Timing, Test and Measurement Division

 

 

34.9

%

 

 

33.5

%

 

 

32.8

%

 

 

Quality of Experience Assurance Division

 

 

0.2

%

 

 

%

 

 

%

 

 

Total net revenue

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

Cost of products and services

 

 

52.9

%

 

 

51.4

%

 

 

49.4

%

 

 

Amortization of purchased technology

 

 

1.6

%

 

 

2.1

%

 

 

2.2

%

 

 

Impairment of intangibles

 

 

%

 

 

0.7

%

 

 

%

 

 

Integration and restructuring charges

 

 

0.1

%

 

 

0.7

%

 

 

%

 

 

Gross profit

 

 

45.4

%

 

 

45.3

%

 

 

48.4

%

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

11.4

%

 

 

10.7

%

 

 

9.1

%

 

 

Selling, general and administrative

 

 

29.1

%

 

 

32.0

%

 

 

29.1

%

 

 

Acquired in-process research and development

 

 

0.1

%

 

 

%

 

 

%

 

 

Amortization of intangibles

 

 

0.4

%

 

 

0.3

%

 

 

0.3

%

 

 

Integration and restructuring charges

 

 

0.3

%

 

 

%

 

 

%

 

 

Impairment of goodwill

 

 

%

 

 

4.0

%

 

 

%

 

 

Operating income (loss)

 

 

4.3

%

 

 

(1.7

)%

 

 

9.9

%

 

 

Gain on equity investments, net

 

 

%

 

 

%

 

 

0.2

%

 

 

Interest income

 

 

4.4

%

 

 

4.2

%

 

 

0.9

%

 

 

Interest expense

 

 

(2.3

)%

 

 

(2.8

)%

 

 

(0.5

)%

 

 

Income (loss) before income taxes

 

 

6.4

%

 

 

(0.3

)%

 

 

10.5

%

 

 

Income tax provision (benefit)

 

 

3.6

%

 

 

(0.2

)%

 

 

1.1

%

 

 

Income (loss) from continuing operations

 

 

2.8

%

 

 

(0.1

)%

 

 

9.4

%

 

 

Gain from discontinued operations, net of tax

 

 

0.1

%

 

 

0.5

%

 

 

0.5

%

 

 

Net Income

 

 

2.9

%

 

 

0.5

%

 

 

10.0

%

 

 

 

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.

36




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, 2006

 

 

Year ended

 

 

 

 

 

 

 

July 1, 2007

 

July 2, 2006

 

$ Change

 

% Change

 

Net Revenue (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireline Products

 

 

$

93,908

 

 

 

$

80,636

 

 

$

13,272

 

 

16.5

%

 

Wireless/OEM Products

 

 

26,672

 

 

 

23,893

 

 

2,779

 

 

11.6

 

 

Global Services

 

 

14,627

 

 

 

12,539

 

 

2,088

 

 

16.7

 

 

Timing, Test and Measurement Division

 

 

72,672

 

 

 

59,044

 

 

13,628

 

 

23.1

 

 

Quality of Experience Assurance Division

 

 

501

 

 

 

 

 

501

 

 

100.0

 

 

Total Net Revenue

 

 

$

208,380

 

 

 

$

176,112

 

 

$

32,268

 

 

18.3

%

 

Percentage of Revenue

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

 

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.

 

 

Year ended

 

 

 

 

 

 

 

July 1, 2007

 

July 2, 2006

 

$ Change

 

% Change

 

Gross Profit (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireline Products

 

 

$

53,685

 

 

 

$

45,209

 

 

$

8,476

 

 

18.7

%

 

Wireless/OEM Products

 

 

7,096

 

 

 

5,452

 

 

1,644

 

 

30.2

 

 

Global Services

 

 

3,991

 

 

 

6,334

 

 

(2,343

)

 

(37.0

)

 

Timing, Test and Measurement Division

 

 

33,064

 

 

 

28,690

 

 

4,374

 

 

15.2

 

 

Quality of Experience Assurance Division

 

 

398

 

 

 

 

 

398

 

 

100.0

 

 

Other cost of sales

 

 

(3,542

)

 

 

(5,975

)

 

2,433

 

 

(40.7

)

 

Total Gross Profit

 

 

$

94,692

 

 

 

$

79,710

 

 

$

14,982

 

 

18.8

%

 

Percentage of Revenue

 

 

45.4

%

 

 

45.3

%

 

 

 

 

 

 

 

 

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

37




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.

 

 

Year ended

 

 

 

 

 

 

 

July 1, 2007

 

July 2, 2006

 

$ Change

 

% Change

 

Research and development expense (in thousands)

 

 

$

23,692

 

 

 

$

18,836

 

 

 

$

4,856

 

 

 

25.8

%

 

Percentage of Revenue

 

 

11.4

%

 

 

10.7

%

 

 

 

 

 

 

 

 

 

 

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.

 

 

Year ended

 

 

 

 

 

 

 

July 1, 2007

 

July 2, 2006

 

$ Change

 

% Change

 

Selling, general and administrative (in thousands)

 

 

$

60,543

 

 

 

$

56,357

 

 

 

$

4,186

 

 

 

7.4

%

 

Percentage of Revenue

 

 

29.1

%

 

 

32.0

%

 

 

 

 

 

 

 

 

 

 

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.

 

 

Year ended

 

 

 

 

 

 

 

July 1, 2007

 

July 2, 2006

 

$ Change

 

% Change

 

Amortization of intangibles (in thousands)

 

 

$

792

 

 

 

$

522

 

 

 

$

270

 

 

 

51.7

%

 

Percentage of Revenue

 

 

0.4

%

 

 

0.3

%

 

 

 

 

 

 

 

 

 

 

Amortization of intangibles increased $0.3 million in fiscal year 2007 over fiscal year 2006 due to the acquisitions of TSC and QoSmetrics.

 

 

Year ended

 

 

 

 

 

 

 

July 1, 2007

 

July 2, 2006

 

$ Change

 

% Change

 

Integration and restructuring charges (in thousands)

 

 

$

549

 

 

 

$

 

 

 

$

549

 

 

 

100.0

%

 

 

Percentage of Revenue

 

 

0.3

%

 

 

%

 

 

 

 

 

 

 

 

 

 

 

38




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.

 

 

Year ended

 

 

 

 

 

 

 

July 1, 2007

 

July 2, 2006

 

$ Change

 

% Change

 

Interest income (in thousands)

 

 

$

9,231

 

 

 

$

7,478

 

 

 

$

1,753

 

 

 

23.4

%

 

Percentage of Revenue

 

 

4.4

%

 

 

4.2

%

 

 

 

 

 

 

 

 

 

 

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.

 

 

Year ended

 

 

 

 

 

 

 

July 1, 2007

 

July 2, 2006

 

$ Change

 

% Change

 

Interest expense (in thousands)

 

 

$

(4,823

)

 

 

$

(4,983

)

 

 

$

160

 

 

 

(3.2

)%

 

Percentage of Revenue

 

 

(2.3

)%

 

 

(2.8

)%

 

 

 

 

 

 

 

 

 

 

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.

 

 

Year ended

 

 

 

 

 

 

 

July 1, 2007

 

July 2, 2006

 

$ Change

 

% Change

 

Income tax provision (benefit) (in thousands)

 

 

$

7,473

 

 

 

$

(371

)

 

 

$

7,844

 

 

 

(2,114.3

)%

 

Percentage of Revenue

 

 

3.6

%

 

 

(0.2

)%

 

 

 

 

 

 

 

 

 

 

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.

39




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.

 

 

Year ended

 

 

 

 

 

 

 

July 1, 2007

 

July 2, 2006

 

$ Change

 

% Change

 

Gain from discontinued operations, net of tax
(
in thousands)

 

 

$

242

 

 

 

$

921

 

 

 

$

(679

)

 

 

(73.7

)%

 

Percentage of Revenue

 

 

0.1

%

 

 

0.5

%

 

 

 

 

 

 

 

 

 

 

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, 2005

 

 

Year ended

 

 

 

 

 

 

 

July 2, 2006

 

July 3, 2005

 

$ Change

 

% Change

 

Net Revenue (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireline Products

 

 

$

80,636

 

 

 

$

83,129

 

 

 

$

(2,493

)

 

 

(3.0

)%

 

Wireless/OEM Products

 

 

23,893

 

 

 

27,723

 

 

 

(3,830

)

 

 

(13.8

)

 

Global Services

 

 

12,539

 

 

 

9,712

 

 

 

2,827

 

 

 

29.1

 

 

Timing, Test and Measurement Division

 

 

59,044

 

 

 

58,824

 

 

 

220

 

 

 

0.4

 

 

Quality of Experience Assurance Division

 

 

 

 

 

 

 

 

 

 

 

NA

 

 

Total Net Revenue

 

 

$

176,112

 

 

 

$

179,388

 

 

 

$

(3,276

)

 

 

(1.8

)%

 

Percentage of Revenue

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

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).

 

 

Year ended

 

 

 

 

 

 

 

July 2, 2006

 

July 3, 2005

 

$ Change

 

% Change

 

Gross Profit (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireline Products

 

 

$

45,209

 

 

 

$

47,281

 

 

 

$

(2,072

)

 

 

(4.4

)%

 

Wireless/OEM Products

 

 

5,452

 

 

 

8,102

 

 

 

(2,650

)

 

 

(32.7

)

 

Global Services

 

 

6,334

 

 

 

4,165

 

 

 

2,169

 

 

 

52.1

 

 

Timing, Test and Measurement Division

 

 

28,690

 

 

 

31,235

 

 

 

(2,545

)

 

 

(8.1

)

 

Quality of Experience Assurance Division

 

 

 

 

 

 

 

 

 

 

 

NA

 

 

Other cost of sales

 

 

(5,975

)

 

 

(3,899

)

 

 

(2,076

)

 

 

53.2

 

 

Total Gross Profit

 

 

$

79,710

 

 

 

$

86,884

 

 

 

$

(7,174

)

 

 

(8.3

)%

 

Percentage of Revenue

 

 

45.3

%

 

 

48.4

%

 

 

 

 

 

 

 

 

 

 

40




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.

 

 

Year ended

 

 

 

 

 

 

 

July 2, 2006

 

July 3, 2005

 

$ Change

 

% Change

 

Research and development expense (in thousands)

 

 

$

18,836

 

 

 

$

16,286

 

 

 

$

2,550

 

 

 

15.7

%

 

Percentage of Revenue

 

 

10.7

%

 

 

9.1

%

 

 

 

 

 

 

 

 

 

 

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.

 

 

Year ended

 

 

 

 

 

 

 

July 2, 2006

 

July 3, 2005

 

$ Change

 

% Change

 

Selling, general and administrative (in thousands)

 

 

$

56,357

 

 

 

$

52,248

 

 

 

$

4,109

 

 

 

7.9

%

 

Percentage of Revenue

 

 

32.0

%

 

 

29.1

%

 

 

 

 

 

 

 

 

 

 

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.

 

 

Year ended

 

 

 

 

 

 

 

July 2, 2006

 

July 3, 2005

 

$ Change

 

% Change

 

Amortization of intangibles (in thousands)

 

 

$

522

 

 

 

$

613

 

 

 

$

(91

)

 

 

(14.8

)%

 

Percentage of Revenue

 

 

0.3

%

 

 

0.3

%