UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2006 |
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 |
Securities registered pursuant to Section 12(g) of the Act:
None
Series A Participating Preferred Stock Purchase Rights
(Title of Class)
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, 2005, as reported on the NASDAQ Stock Market LLC (formerly the NASDAQ National Market) was approximately $391,397,548. This calculation does not reflect a determination that such persons are affiliates of the Registrant for any other purpose.
As of August 31, 2006, there were approximately 45,818,616 shares of Registrant’s Common Stock outstanding.
Portions of the Proxy Statement for the Registrant’s 2006 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 June 30, 2006
INDEX
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PART I
FORWARD-LOOKING INFORMATION
When used in this discussion, the words “expects,” “anticipates,” “estimates,” “believes,” “plans,” “will,” “intend,” “can” 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, 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 we acquire, and the risks set forth below under Item 1A, “Factors that may affect results.”
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 and TimeScan 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. Our products include atomic frequency references, including rubidium and cesium oscillators; hydrogen masers; GPS time and frequency receivers, as well as time and frequency distribution systems; network management software; and professional services.
We manufacture precision time products that allow our customers to keep accurate time within 40 billionths of a second over a 24-hour period. Our clocks tell us the time of day and allow us to measure the time interval between when an event starts and when it stops. The difference between conventional time measuring devices and our precise time products lies in the accuracy of the measurements. To place the accuracy of our clocks in perspective, if a clock accumulates a 40 billionth of a second time error over a 24-hour period, it will require more than 500,000 years to accumulate an error of one second.
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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 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 time and frequency markets served by Symmetricom include:
· Telecommunications and cable markets;
· Wireless/OEM telecommunications equipment manufacturers; and
· Aerospace, defense, metrology and enterprise.
Integration of Agilent Technologies’ Frequency and Timing Standards Product Line
On August 1, 2005, we acquired Agilent Technologies’ Frequency and Timing Standards product line. This acquisition has significantly enhanced Symmetricom’s market position in cesium clocks used by official time-keeping authorities and metrology institutes throughout the world. The total purchase price of approximately $8.0 million was paid in cash. The purchase price was allocated to the assets acquired, including goodwill and the liabilities assumed based on management’s preliminary estimate of the fair value for purchase accounting purposes at the date of acquisition. This acquisition is included in the Timing, Test, and Measurement division. Management does not expect significant revisions to the purchase price allocations for the acquired businesses.
Reportable Segments
The Company structure consists of five reportable segments. The Telecom Solutions Division consists of four reportable segments: Wireline Products; Wireless/OEM (original equipment manufacturer) Products; Global Services; and Specialty Manufacturing/Other. The fifth reportable segment is the Timing, Test and Measurement 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 June 30, 2006, is contained in Note O 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 distributors for synchronization outside the network core; BITS/SSU for the central office; network management and monitoring software; and synchronization subsystems for OEM integration. Symmetricom holds patents in advanced control algorithms and implementations using the Global Positioning System (GPS), DOCSIS™ Timing Interface (DTI) and Code Division Multiple Access (CDMA).
In fiscal 2006, 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
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toward integrated transmission and switching functions and packet-based technologies. We believe this evolutionary trend demands a more intelligent and reliable synchronization infrastructure.
Symmetricom played a role in the specification process at CableLabs™ where the next generation of cable services and infrastructure are defined. In this effort Symmetricom contributed technology and expertise to specify the first time and frequency synchronization standard for the cable market.
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 all of 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 displays, time code generators, computer plug-in cards, and primary reference standards such as rubidium and cesium oscillator standards and ruggized crystal oscillators. Customer applications include synchronization of communication networks, synchronization of computer networks, calibration of lab equipment and subsystem master timing. To support both a diverse customer and product base, the division has built strong application engineering capabilities that allow for the tailoring of standard product platforms to meet a customer’s unique system requirements.
During fiscal 2006, the division continued its emphasis on government program business in secure mobile, satellite, and wireline communications, as well as other defense platform upgrades on destroyers and submarines. 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 year included a line of high performance cesium frequency standards purchased from Agilent Technologies; a new product family of state-of- the-art network time servers; an industry-first IEEE-1588 GrandMaster clock used for precision time transfer over an IP network; and several new ruggedized rubidium and OCXO oscillator platforms for space and avionics applications.
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.
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
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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.
· Next Generation Timing Sources—consists of Time Provider, the industry’s first node clock (hybrid SSU & PRS), and other products currently under development to address emerging needs in the wireline and cable markets.
· Element Management Systems—consists of TimePictra, the carrier class HP-UX based system, and TimeScan, the PC-based system.
Wireless/OEM Market and Products
Wireless/OEM Market:
Symmetricom’s Wireless/OEM products are sold into the wireless and broadband access 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.
Broadband access is another part of the Wireless/OEM products market. Currently, our G.shdsl products serve a niche market primarily deployed in Europe.
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 GPS for every base station with either a high performance quartz or rubidium oscillator. 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
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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.
· SHDSL modems, which offer higher data rates, greater reach and enhanced spectral compatibility when compared to legacy transport technologies. These products deliver high speeds by bundling multiple DSL links, and focus on circuit emulation applications.
Specialty Manufacturing Markets and Products
Our production facility in Puerto Rico provides specialty (contract) manufacturing to select clients. Customers in this market are mainly from the semiconductor and medical industries.
On April 27, 2006, management announced plans to discontinue the contract manufacturing work being conducted at the Puerto Rico facility. We anticipate exiting this non-core business during fiscal 2007 and reallocating or downsizing manufacturing resources accordingly.
Global Services Market and Products
Global Services Market:
We market our services exclusively to customers who purchase our products.
Global Services Products:
Our Global Services organization provides lifecycle services for all 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:
Precision time and frequency instruments and reference standards are required by the aerospace, defense, metrology and enterprise markets. 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
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applications include highly reliable and ruggedized components and systems designed to address specific customer requirements.
Timing, Test and Measurement Products:
We offer a wide variety of precision time and frequency products sold primarily to the aerospace, defense, metrology and enterprise sectors. These products can generally be divided into the following broad categories:
· Precision Frequency References—Precision Frequency References form the basis of absolute time and frequency in many systems and applications. Our products include active hydrogen masers, cesium frequency standards, rubidium frequency standards and quartz frequency standards. Our primary reference source instruments provide stand-alone dependability, ease of use, and ease of installation that make them suitable for the critical time or frequency systems found in telecommunications timing, calibration and metrology laboratories, satellite tracking stations and space-based master time standards.
· Bus Level Timing—We manufacture a broad line of precision timing products in the form of plug-in cards for computers. These cards provide precise timing capabilities to computers equipped with common bus components. We also offer software development tools to speed the integration of these cards into software applications.
· Enterprise Network Time Servers—We manufacture several products for enterprise network time distribution. These bring entire networks of computers into precise time synchronization.
· GPS & Time Code Instrumentation Products—We manufacture a wide variety of general purpose GPS receivers, time code generation, translation and distribution products. A time code is a data format for recording and processing time measurements.
· Space, Defense and Avionics—We provide ruggedized and militarized quartz and atomic clock platforms for the most demanding military applications such as FA-22 Raptor and F-35 Joint Strike Fighter aircraft. 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.
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. As of June 30, 2006, we employed a sales, sales service, and marketing force of 125 people, including 95 employees in domestic sales and service, 8 employees in international sales and service and 22 employees in marketing.
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 June 30, 2006, we had 46 active United States patents. The active patents issued will expire between
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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 assurances that a license will be available or that the terms of obtaining any such license will be acceptable to us. In addition, the laws of certain countries in which our products may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. In addition, we use technology licensed from others.
We generally enter into confidentiality agreements with our employees, consultants, and third parties in connection with our technology. These confidentiality agreements generally seek to control access to, and distribution of, our technology, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to obtain and use our proprietary information without authorization or to develop similar technology independently.
In addition, we use trademarks to help identify and market our products and services. We have a number of trademark registrations and pending applications both in the United States and around the world. We rely on these trademark registrations and applications as one of the tools to protect our rights in our trademarks and brands. We also rely on our common law trademark rights in those countries that recognize such rights, such as the United States. We can provide no assurance, however, that any of our trademark applications will be successful, or that our existing registrations will not be challenged or invalidated. Likewise, we can provide no assurance that our registrations, applications or common law rights will enable us to stop others from infringing upon our trademarks, or enable us to successfully defend against claims of trademark infringement. Furthermore, effective trademark protection may not be available in every country in which our products and services are distributed.
We also have copyrights on our software products, product documentation, marketing materials, and other documentation and materials. We rely on these copyrights to protect our rights in our copyrighted materials. We can provide no assurances, 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 in-house electrical 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. All of our manufacturing facilities are certified and registered to the ISO 9001:2000 quality system standard. During fiscal 2005 our Beverly, Massachusetts and Puerto Rico facilities were upgraded to meet the TL 9000 quality system standard (a standard for manufacturing and engineering). Our San Jose, California facility was also upgraded to meet the TL 9000 quality system standard for its engineering process. We currently do not plan to upgrade our Santa Rosa, California, Tuscaloosa, Alabama and Hofolding, Germany facilities.
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Backlog
Our backlog consists of firm orders that have yet to be shipped to the customer. Our total backlog was $51.7 million as of June 30, 2006, compared with $31.0 million as of June 30, 2005. Of the $51.7 million backlog at June 30, 2006, $37.9 million, $8.6 million and $5.2 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. See “Risk Factors.”
Key Customers and Export Sales
No single customer accounted for more than 10% of our net revenue during fiscal 2006, 2005 and 2004. Our export sales to Western Europe, Latin America, Asia and Canada, accounted for 29.5%, 35.0% and 32.0% of our net revenue in fiscal 2006, 2005 and 2004, respectively. For additional information regarding our export sales, see Note O to our consolidated financial statements. We have shipped products over 90 countries.
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 for our Wireless/OEM Products include Frequency Electronics, Inc. and Trimble Navigation, Ltd. Competitors of our timing, test and measurement products include Brandywine Communications, EndRun Technologies, Frequency Electronics, Inc., Meinberg, Temex and Trak Systems, Inc. (a Veritas Corporation subsidiary).
Research and Development
As of June 30, 2006, we had 92 engineers and technicians directly involved in the research, design and development of our products. 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 2006 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, integrated access devices and updates and maintenance on existing products. In fiscal 2006, 2005 and 2004, overall research and development expenditures were $18.8 million, $16.3 million and $16.8 million, respectively. 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 San Jose, California; Santa Rosa, California; Beverly, Massachusetts and Austin, Texas.
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Government Regulation
The telecommunications industry is subject to government 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 “Factor That May Affect Results - - 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.”
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.
Employees
At June 30, 2006, we had 865 employees, including 575 in manufacturing, 92 in engineering and 198 in sales, marketing, service and general and administration. Our employee turnover rate for fiscal 2006 was 8.8%. 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.
Item 1A. Factors That May Affect Results
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
Although a relatively small number of customers have historically accounted for a significant portion of our net revenue, no single customer accounted for 10% or more of our net revenue during fiscal 2006, 2005 or 2004. However, 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.
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We have direct or indirect sales pursuant to contracts with United States government agencies, which can be terminated at the convenience of the government, and our revenue would decline if the government terminated these contracts
Historically, approximately 10% to 17% of our net revenue has been generated from sales to United States government agencies either directly or indirectly through subcontracts. Government-related contracts and subcontracts are subject to standard provisions for termination at the convenience of the government. In such event, however, we are generally entitled to reimbursement of costs incurred on the basis of work completed plus other amounts specified in each individual contract. These contracts and subcontracts are either fixed-price or cost reimbursable contracts. Fixed-price contracts provide fixed compensation for specified work. Under cost reimbursable contracts, we agree to perform specified work in return for reimbursement of costs (to the extent allowable under government regulations) and a specified fee. In general, while the risk of loss is greater under fixed-price contracts than under cost reimbursable contracts, the potential for profit under fixed-price contracts is greater than under cost reimbursable contracts.
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;
· changes in end-user requirements; and
· customers may perceive new products as deficient if there is miscommunication about product specifications.
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.
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The telecommunications market is 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 in our synchronization products segment include Frequency Electronics, Inc., Huawei Technologies Co. Ltd., Emrise Corp., and Oscilloquartz SA. Competitors in our wireless segment include Frequency Electronics, Inc. and Trimble Navigation, Ltd. Competitors in our timing and frequency, test and measurement segment include Brandywine Communications, EndRun Technologies, Frequency Electronics, Inc., Meinberg, Temex and Trak Systems, Inc. (a Veritas Corporation subsidiary). 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 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 may 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 may 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;
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· 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;
· although we have been approved as a supplier in requests for proposals from several major wireline customers, this does not guarantee any purchases;
· our ability to manage fluctuations in manufacturing yields of rubidium oscillators and cesium tubes;
· our ability to manage the level and value of our inventories in relation to sales volume;
· our ability to accurately anticipate the volume and timing of customer orders or customer cancellations;
· our ability to collect receivables from our customers, including those in the telecommunications industry;
· the gain or loss of significant customers;
· our ability to introduce new products 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 is internally manufactured to Quartz based products which is purchased and sold at a lower price point, which may result in lower revenue and gross margins; and
· a global pandemic, if not contained.
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A significant portion of our operating and manufacturing expenses are relatively fixed in nature and planned expenditures are based in part on anticipated orders. If we are unable to adjust spending in a timely manner to compensate for any unexpected future sales shortfall, our operating results will be negatively impacted. Our operations entail a high level of fixed costs and require an adequate volume of production and sales to achieve and maintain reasonable gross profit margins and net earnings. If we increase the volume of product manufacturing by outside sources and decrease our internal production, we could incur higher fixed costs (per unit) and integration and restructuring charges. Significant decreases in demand for our products or reduction in our average selling prices, or any material delay in customer orders may negatively harm our business, financial condition and results of operations. Our future results depend in large part on growth in the markets for our products.
The growth in each of these markets may depend on changes in general economic and regulatory conditions, conditions related to the markets in which we compete, changes in regulatory conditions, legislation, export rules or conditions, interest rates and fluctuations in the business cycle for any particular market segment. If our quarterly or annual operating results do not meet the expectations of securities analysts and investors, the trading price of our common stock could decline significantly.
If we incur net losses in the future, we may have to record a valuation allowance against most or all of our deferred tax assets, which would significantly increase our tax expense and hurt our net earnings
Although we had net earnings of $0.8 million and $17.9 million for fiscal 2006 and 2005 respectively, we had net losses for the preceding three fiscal years. Future losses may create uncertainty about the realizability of our $50.4 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 would 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.
Increases in our effective tax rate will negatively impact our net earnings
Our effective tax rate was affected by the percentage of qualified Puerto Rican earnings compared to our total earnings. Most of our Puerto Rico earnings were taxed under Section 936 of the United States Internal Revenue Code, which exempted qualified Puerto Rican earnings from regular federal income taxes. The Section 936 exemption was subject to a variety of limitations before it expired at the end of fiscal 2006. Historically, we reduced our effective tax rate using the Section 936 exemption.
In July 2006, the Puerto Rico subsidiary, formerly electing Section 936, moved its place of legal organization from Delaware to Bermuda in a tax-free reorganization. Consistent with a resolution by the Symmetricom, Inc. board of directors, this subsidiary has elected to indefinitely reinvest its future earnings outside the United States and not repatriate future earnings back to Symmetricom, Inc. Based on this change, we estimate that the fiscal 2007 effective tax rate will be approximately 32.0%.
Our effective tax rate decreased in fiscal 2006 because of the high percentage of Puerto Rican earnings to total earnings.
We purchase certain key components of our synchronization and timing and frequency equipment 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, which are key components of our synchronization and timing and frequency equipment. If single source components were to become unavailable on satisfactory terms, we would be required to purchase comparable components from other
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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 have 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 RoHS & WEEE, 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 and San Jose, California, as well as many our customers and suppliers are located near known hurricane zones and earthquake fault zones and the occurrence of an earthquake, hurricanes or other catastrophic disaster, 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 operation.
Our business goals of performance, reliability and availability require that we have adequate capacity in our computer systems to support our operations. As our operations grow in size and scope, we will need to improve and upgrade our systems and infrastructure to offer internal personnel enhanced services, capacity, features and functionality. Our ability to provide high-quality service depends on the efficient and uninterrupted operation of our computer and communications systems. Our computer system has experienced system interruptions from time to time and could experience periodic system interruptions in the future. Our systems and operations are also vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, design defects, vandalism, denial-of-service attacks and similar events. Even though we have a formal disaster recovery plan, it may not completely prevent any system failure or security breach that causes an interruption in our business and daily operation.
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
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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.
If we acquire other companies and 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 certain assets from Agilent Technologies, and continue to evaluate other acquisition opportunities that could provide additional product or service offerings, technologies or additional industry expertise. Acquisitions involve risks, which include the following:
· we may be exposed to unknown liabilities of the acquired business;
· we may incur significant write-offs;
· we may experience problems in combining the acquired operations, technologies or products;
· we may not realize the revenue and profits that we expect the acquired businesses to generate;
· we may not achieve the cost savings we hope to obtain from combining the acquired operations with ours;
· we may experience regulatory difficulties and unbudgeted expenses in attempting to complete an acquisition;
· we may encounter unanticipated acquisition or integration costs that could cause our quarterly or annual operating results to fluctuate;
· we may incur substantial penalties if we do not relocate manufacturing operations as scheduled;
· our management’s attention may be diverted from our core business;
· our existing business relationships with suppliers and customers may be impaired;
· we may not be successful in entering new markets in which we have no or limited experience;
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· 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.
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.
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 are subject to environmental regulations that could result in costly environmental liability
Our operations are subject to numerous international, federal, state and local environmental regulations related to the storage, use, labeling, discharge, disposal and human exposure to toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. While we have not experienced any significant effects on our operations from environmental regulations, changes in these regulations may require additional capital expenditures or restrict our ability to expand our operations. Failure to comply with such regulations could result in suspension or cessation of our operations or could subject us to significant liabilities. We could also be subject to fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. Although we periodically review our facilities and internal operations for compliance with applicable environmental regulations, these reviews are necessarily limited in scope and frequency and may not reveal all potential instances of noncompliance, possible injury or possible contamination. There can be no assurance that violations of environmental laws or regulations will not occur in the future as a result of the inability to obtain permits, human error, equipment failure or other causes. The liabilities arising from any noncompliance with environmental regulations, or liability resulting from accidental contamination or injury from toxic or hazardous chemicals could result in liability that exceeds our resources. The risk of liabilities increases as we acquire other companies, such as Datum, which use, or have used, hazardous substances at various current or former facilities.
A manufacturing facility previously operated by Datum in Austin, Texas is undergoing remediation for known subsurface contamination at that facility and adjoining properties. We believe that we will incur monitoring costs for years to come in connection with this subsurface contamination. Further, we have received a demand from adjoining landowner and may be subject to claims from other adjoining
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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
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 taking longer to get and that older, non-compliant components are being discontinued at a fast pace. In addition, we are aware of similar legislation which may be enacted in other countries, such as Japan and China, and possible new federal and state legislation in the United States, the cumulative impact of which could significantly increase our operating costs and adversely affect our operating results.
We are subject to other significant governmental 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
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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 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 Western Europe, Latin America, Asia and Canada accounted for 29.5% of net revenue during fiscal 2006, compared to 35.0% of net revenue during fiscal 2005. We anticipate that sales to customers located outside of the United States will continue to be a significant part of our net revenue for the foreseeable future. Because significant portions of our sales are to customers outside of the United States we are subject to risks, including:
· foreign currency fluctuations;
· the effects of terrorist activity and armed conflict which may disrupt general economic activity and result in revenue shortfalls;
· export restrictions;
· a global pandemic if it does not continue to be contained;
· longer payment cycles;
· unexpected changes in regulatory requirements or tariffs;
· protectionist laws and business practices that favor local competition;
· dependence on local vendors;
· reduced or limited protection of intellectual property rights and political and economic instability; and
· political and economic instability.
To date, very few of our international revenue and cost obligations have been denominated in foreign currencies. As a result, an increase in the value of the United States dollar relative to foreign currencies could make our products more expensive, and thus, less competitive in foreign markets. A portion of our international revenues may be denominated in foreign currencies in the future, including the Euro, which will subject us to risks associated with fluctuations in these foreign currencies. We do not currently engage
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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 required to record additional goodwill and intangibles impairment charges in future quarters
As of June 30, 2006, we had recorded goodwill with a net book value of $45.9 million related to acquisitions of Datum and TrueTime and Agilent Technologies’ Frequency and Timing Standards product line. We test for impairment at least annually, and more frequently whenever evidence of impairment exists. 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 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 some companies or countries may require us to meet new standards, which could affect the sales of our products. These standards could possibly be based on the production methods of our manufacturing process, and materials used in this process. If we have to change our methods or processes to comply, our manufacturing costs may increase.
Investor confidence and share value may be adversely impacted if we are unable to conclude that our internal controls over financial reporting are adequate, as required by Section 404 of the Sarbanes-Oxley Act of 2002
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of the end of each year beginning June 30, 2005, and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports beginning with this Report. 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.
Our management, including our CEO and CFO, does not expect that our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.
Although our management has determined, and our independent registered public accounting firm has attested, that our internal control over financial reporting was effective as of June 30, 2006, we cannot
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assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future. A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal controls as ineffective. If our internal controls over financial reporting are not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
The following are our principal facilities as of June 30, 2006:
| | | | Approximate | | | |
| | | | Floor Area | | Owned/Lease | |
Location | | | | Principal Operations | | (Sq. Ft.) | | Expiration Date | |
San Jose, California | | Corporate Headquarters (partial sublease) | | | 118,000 | | | April 2016 | |
Santa Rosa, California | | Manufacturing/Administrative (partial vacant) | | | 70,000 | | | December 2015 | |
Santa Rosa, California | | Manufacturing (partial sublease) | | | 25,000 | | | December 2008 | |
Irvine, California | | Administrative Office | | | 2,500 | | | December 2006* | |
Beverly, Massachusetts | | Manufacturing | | | 54,000 | | | Owned | |
Austin, Texas | | Administrative Office | | | 21,000 | | | December 2009 | |
Tuscaloosa, Alabama | | Manufacturing | | | 5,000 | | | March 2007 | |
Hofolding, Germany | | Manufacturing/Administrative | | | 7,000 | | | January 2009 | |
Crowthorne, UK | | Administrative | | | 1,200 | | | October 2008 | |
Subang Java, Malaysia | | Administrative | | | 700 | | | May 2008 | |
Aguadilla, Puerto Rico | | Manufacturing | | | 87,000 | | | February 2016 | |
Beijing, China | | Administrative | | | 200 | | | February 2008 | |
Beijing, China | | Administrative | | | 807 | | | February 2007 | |
Guangzhou, China | | Administrative | | | 600 | | | February 2007 | |
| | | | | | | | | | | |
* Monthly
We have sublet approximately 34,000 square feet of our San Jose facility through March 2007 and approximately 16,025 square feet and 18,810 square feet of our Santa Rosa facility through November 2008 and 2011, respectively. We believe that our current facilities are suitable and adequate to meet our anticipated needs for the foreseeable future.
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 June 30, 2006, we had an accrual of $0.6 million for remediation costs, appraisal fees 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.
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Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of Symmetricom
Following is a list of our executive officers as of June 30, 2006 and brief summaries of their business experience. 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 | | | 56 | | | Chief Executive Officer | |
William Slater | | | 54 | | | Executive Vice President Finance and Administration, Chief
Financial Officer and Secretary | |
Bruce Bromage | | | 52 | | | Executive Vice President and General Manager TT&M Division | |
Nancy Shemwell | | | 50 | | | Executive Vice President Global Sales & Support | |
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. Prior to joining Symmetricom, from February 1996 to February 1998, Mr. Steipp served as Vice President and General Manager of Broadband Data Networks, a division of Scientific-Atlanta.
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. From September 1991 to December 1999, Mr. Slater served as Executive Vice President and Chief Financial Officer of Computer Curriculum Corporation, an educational software company that was a division of Viacom. Mr. Slater was V.P of Financial Planning at Simon & Schuster from December 1985 though September 1991. Prior to that Mr. Slater was Controller of Revlon’s Professional Products Group. Mr. Slater worked for the public accounting firm of Touche Ross (predecessor to Deloitte & Touche) prior to joining Revlon.
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. Prior to joining Symmetricom, from February 2000 to April 2002, Dr. Bromage held senior management positions with two startup companies. From August 1993 to February 2000, Dr. Bromage held senior marketing and general management positions with Hewlett Packard.
Ms. Shemwell joined Symmetricom in October 2004 as Sr. VP Global Sales & Support and in July 2006 became Executive Vice President Global Sales & Support. Ms. Shemwell has held a variety of senior positions with global business responsibilities including assignments in Europe and North America. Her experience covers a broad spectrum of general management, sales, and marketing roles in rapidly developing markets. Previous positions include that of President and CEO of Jovial Test Equipment, a sixteen year career with Nortel Networks where she held titles of President, Micom Communications Corporation (a Nortel subsidiary), Vice President Business Segments, Vice President Sales and Marketing Wiltel (Nortel’s largest enterprise distributor) and Director Marketing for Europe, Middle East and Africa.
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PART II
Item 5. Market for the Registrant’s Common Stock, 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 1,108 stockholders of record as of August 31, 2006.
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 June 30, 2005 | | | | | |
First Quarter | | $ | 9.69 | | $ | 6.39 | |
Second Quarter | | 11.34 | | 8.35 | |
Third Quarter | | 11.33 | | 8.22 | |
Fourth Quarter | | 11.70 | | 9.19 | |
Year ended June 30, 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 | |
| | | | | | | |
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 pursuant to a repurchase program established in fiscal 2002, adding 2.0 million shares to the program previously authorized, of which approximately 0.6 million shares remained available for repurchase as of June 30, 2005. As of June 30, 2006, approximately 1.4 million shares remained eligible for repurchase. There were approximately 45.7 million shares of Symmetricom common stock outstanding as of June 30, 2006.
During fiscal 2006, we repurchased 1,172,349 shares for an aggregate price of approximately $9.7 million. Upon termination of some employees, 35,500 shares of restricted stock were forfeited pursuant to existing agreements.
The following table provides monthly detail of our share repurchases and forfeitures during the fourth quarter of fiscal 2006:
| | Total | | | | Total | |
| | Number of | | Average | | Number of | |
| | Shares | | Price Paid | | Shares | |
Period | | | | Purchased | | per Share | | Forfeited | |
May 1, 2006 through May 31, 2006 | | | 173,276 | | | | 7.50 | | | | | | |
June 1, 2006 through June 30, 2006 | | | 88,500 | | | | 7.45 | | | | 17,500 | | |
| | | 261,776 | | | | $ | 7.48 | | | | 17,500 | | |
| | | | | | | | | | | | | | | | |
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During fiscal 2005, we repurchased 186,400 shares for an aggregate price of approximately $1.8 million. Upon termination of employees, 19,009 shares of restricted stock were forfeited pursuant to existing agreements. The Company did not repurchase any shares during fiscal 2004.
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 June 30, | |
| | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
| | (In thousands, except per share amounts) | |
Net revenue | | $ | 188,211 | | $ | 189,147 | | $ | 172,847 | | $ | 132,049 | | $ | 72,643 | |
Operating income (loss) | | (1,526 | ) | 19,190 | | (4,096 | ) | (46,047 | ) | (11,141 | ) |
Income (loss) before income taxes | | 969 | | 20,298 | | (4,373 | ) | (46,500 | ) | (8,973 | ) |
Income (loss) from continuing operations | | 819 | | 17,754 | | (2,250 | ) | (34,347 | ) | (5,695 | ) |
Gain (loss) from discontinued operations(1) | | — | | 162 | | 13 | | (14,970 | ) | 410 | |
Net earnings (loss) | | 819 | | 17,916 | | (2,237 | ) | (49,317 | ) | (5,285 | ) |
Basic earnings (loss) per share from continuing operations | | 0.02 | | 0.39 | | (0.05 | ) | (0.96 | ) | (0.25 | ) |
Basic earnings (loss) per share from discontinued operations | | — | | — | | — | | (0.42 | ) | 0.02 | |
Basic net earnings (loss) per share | | 0.02 | | 0.39 | | (0.05 | ) | (1.38 | ) | (0.23 | ) |
Diluted earnings (loss) per share from continuing operations | | 0.02 | | 0.38 | | (0.05 | ) | (0.96 | ) | (0.25 | ) |
Diluted earnings (loss) per share from discontinued operations | | — | | — | | — | | (0.42 | ) | 0.02 | |
Diluted net earnings (loss) per share | | 0.02 | | 0.38 | | (0.05 | ) | (1.38 | ) | (0.23 | ) |
| | | | | | | | | | | | | | | | |
| | June 30, | |
| | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
| | (In thousands) | |
Total assets | | $ | 392,418 | | $ | 392,171 | | $ | 247,590 | | $ | 233,890 | | $ | 130,310 | |
Long-term obligations | | 125,620 | | 126,967 | | 8,827 | | 10,057 | | 6,574 | |
Stockholders’ equity | | $ | 224,561 | | $ | 226,175 | | $ | 196,484 | | $ | 183,432 | | $ | 104,189 | |
(1) Reflects amounts related to gains (losses) on discontinued operations. The Trusted Time Division was discontinued in fiscal 2003 and the Linfinity business was sold in fiscal 1999. The gain in fiscal 2005, 2004 and the loss in fiscal 2003 are from the discontinued Trusted Time Division. The gain in fiscal 2002 represents a release of funds from an escrow account that was established in connection with the sale of the Linfinity business.
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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 a 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, bandwidth optimization, and quality of service of wireline, wireless and broadband communications networks, enabling our customers to increase performance and efficiency in their communications infrastructures.
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 and communications original equipment manufacturers (OEMs). With the fiscal 2003 acquisition of TrueTime and Datum, we broadened our customer base to include aerospace contractors, governments and research facilities.
On April 27, 2006, we announced plans for the closure of the contract manufacturing work conducted at our Puerto Rico facility. Symmetricom’s Telecom Solution Division revenues contain a Specialty Manufacturing/Other segment that is related to this contract manufacturing work. We anticipate exiting this non-core business during fiscal 2007 and reallocating the majority of the related manufacturing resources to other activities. Revenues for this segment were $12.1 million, $9.8 million and $9.5 million for fiscal 2006, 2005 and 2004, respectively. Gross profit was $2.4 million, $1.6 million and $1.4 million for fiscal 2006, 2005 and 2004, respectively.
On August 1, 2005, we acquired Agilent Technologies’ Frequency and Timing Standards product line. including the 5071A cesium primary frequency standard. This acquisition has enhanced Symmetricom’s position in the area of cesium standards and Symmetricom’s leadership in generating high-precision frequency and timing references including rubidium, cesium and hydrogen masers. We acquired certain assets of Agilent Technologies for a cost of approximately $8.0 million which was accounted for as a purchase. In June 2003, we discontinued the operation of the Trusted Time Division and integrated the Broadband Network Division into the Telecom Solutions Division. The Trusted Time Division was acquired as part of the acquisition of Datum in October 2002. The division 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. Certain charges related to the discontinuance of this operation, including a non-cash impairment charge for goodwill and intangibles associated with this business, were taken in fiscal 2003.
On October 29, 2002, we completed our acquisition of Datum. Each share of Datum common stock outstanding was converted into the right to receive 2.7609 shares of Symmetricom common stock. The aggregate consideration was approximately 17.4 million shares of our common stock. The acquisition of Datum qualified as a tax-free reorganization within the meaning of Section 368(a) of Internal Revenue code and was accounted for as a purchase.
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Critical Accounting Policies, Significant Judgments and 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 disclosure at the date of our financial statements. On an on-going basis, management evaluates its estimates and judgments, including those related to allowances for doubtful accounts receivable, inventories, valuation of goodwill and intangible assets, excess and obsolete inventory, future warranty costs, stock options, and valuation of deferred tax assets, income taxes, and stock options. 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. The Company considers certain accounting policies related to revenue recognition and allowance for doubtful accounts, reserve for warranty, inventory valuation, accounting for income taxes, valuation of investments and valuation of intangible assets and goodwill to be critical policies due to the estimates 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; also 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
Our standard arrangement for our domestic and international customers includes a signed purchase order or contract and no right of return of delivered products. Revenue from sales of product and software licenses is recognized when: (1) we enter into a legally binding arrangement with a customer; (2) we deliver the products; (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenue from post-sale customer support is deferred and recognized ratably over the term of the support contract. Revenue from consulting and training services is recognized as the services are performed.
We assess collectibility based on the credit worthiness of the customer and past transaction history. We perform on-going credit evaluations of our customers and do not require collateral from our customers. 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
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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 probable. Our sales to distributors are made under agreements allowing for returns or credits under certain circumstances. Accordingly, we defer an amount of revenue equal to our estimate of returns from distributors based on a historical average of distributor returns. We record commission expense when orders are shipped, at which time the commission is both earned and payable.
Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed price and cost-plus reimbursement. Revenue is recognized under the fixed price contracts using the percentage of completion method, (cost-to-cost basis) principally based upon the costs incurred relative to the total estimated costs at completion on the individual contracts. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Revenue recognized under cost-plus contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as 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. During fiscal 2006, 2005 and 2004, we charged $1.7 million, $0.9 million and $0.9 million, respectively to cost of goods sold to write down excess and obsolete inventory.
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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 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.
We operate a subsidiary in Puerto Rico under a grant providing for partial exemption from Puerto Rico taxes through fiscal 2016. In addition, this subsidiary was taxed under Section 936 of the U.S. Internal Revenue Code, which exempted qualified Puerto Rico source earnings, subject to various limitations, from regular federal income taxes through fiscal 2006. Taxes have been calculated on this subsidiary’s earnings, all of which we intend to remit to the U.S. Section 936 expired as of the end of fiscal 2006.
In July 2006, the Puerto Rico subsidiary, formerly enjoying the benefits of Section 936, moved its place of legal organization from Delaware to Bermuda in a tax-free reorganization. Consistent with a resolution by the Symmetricom, Inc. board of directors, this subsidiary has elected to indefinitely reinvest its future earnings outside the United States. Under the applicable accounting rules, future earnings of this subsidiary will not be subject to U.S. taxes, as its future earnings will not be repatriated back to Symmetricom, Inc. We estimate that the fiscal 2007 effective tax rate will be approximately 32%, based on management’s estimate of pretax income and the split of income between U.S. and foreign jurisdictions.
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 Investments
We did not carry any investments in public or private companies during fiscal 2005 and 2006.
During fiscal 2003, we concluded that the decline in value of our investment in the common stock of Sarantel Ltd., a privately held company, was other than temporary. We recorded $0.2 million as a loss on equity investment. On March 3, 2005, Sarantel went public in the United Kingdom and began trading on the AIM market of the London Stock Exchange under the symbol SLG. Subsequently, the Company sold the stock of Sarantel Ltd. and recorded a gain of $0.4 million on the investment in June 2005.
Valuation of Goodwill
In the third quarter of the fiscal year 2006, we recorded a non-cash impairment charge of $7.0 million for the write-down of the goodwill entirely related to our Wireless/OEM business segment purchased in connection with the Datum acquisition in October 2002.
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 decided to perform a goodwill impairment test on the Wireless/OEM business segment since the product pricing pressures and gross margin pressures discussed in prior quarters continued to decline in the third quarter
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of fiscal 2006 and we did not anticipate any improvement. 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 method, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not 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. In fiscal 2005 and 2004, no impairment losses were recorded based on these evaluations.
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 the 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. In fiscal 2005 and 2004, no impairment losses were recorded based on this evaluation.
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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 June 30, | |
| | 2006 | | 2005 | | 2004 | |
Net revenue | | | | | | | |
Telecom Solutions Division: | | | | | | | |
Wireline Products | | 42.8 | % | 43.9 | % | 41.3 | % |
Wireless/OEM Products | | 12.7 | % | 14.7 | % | 20.0 | % |
Global Services | | 6.7 | % | 5.1 | % | 4.8 | % |
Specialty Manufacturing/Other | | 6.4 | % | 5.2 | % | 5.5 | % |
Timing, Test and Measurement Division | | 31.4 | % | 31.1 | % | 28.4 | % |
Total net revenue | | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of products and services | | 53.2 | % | 51.1 | % | 58.7 | % |
Amortization of purchased technology | | 1.9 | % | 2.1 | % | 2.3 | % |
Impairment of intangibles | | 0.6 | % | — | % | — | % |
Integration and restructuring charges | | 0.6 | % | — | % | 3.4 | % |
Gross profit | | 43.6 | % | 46.8 | % | 35.7 | % |
Operating expenses: | | | | | | | |
Research and development | | 10.0 | % | 8.6 | % | 9.7 | % |
Selling, general and administrative | | 30.4 | % | 27.7 | % | 26.5 | % |
Amortization of intangibles | | 0.3 | % | 0.3 | % | 0.5 | % |
Integration and restructuring charges | | — | % | — | % | 1.3 | % |
Impairment of goodwill | | 3.7 | % | — | % | — | % |
Operating income (loss) | | (0.8 | )% | 10.1 | % | (2.4 | )% |
Gain on equity investments, net | | — | % | 0.2 | % | — | % |
Interest income | | 4.0 | % | 0.8 | % | 0.2 | % |
Interest expense | | (2.6 | )% | (0.4 | )% | (0.3 | )% |
Income (loss) before income taxes | | 0.5 | % | 10.7 | % | (2.5 | )% |
Income tax provision (benefit) | | 0.1 | % | 1.3 | % | (1.2 | )% |
Income (loss) from continuing operations | | 0.4 | % | 9.4 | % | (1.3 | )% |
Gain from discontinued operations, net of tax | | — | % | 0.1 | % | — | % |
Net Income (loss) | | 0.4 | % | 9.5 | % | (1.3 | )% |
Fiscal Years Ended June 30, 2006 and 2005
Net revenue
| | Year ended | | | |
| | June 30, | | Percentage | |
| | 2006 | | 2005 | | Change | |
Net Revenue (in thousands): | | | | | | | | | |
Wireline Products | | $ | 80,635 | | $ | 83,129 | | | (3.0 | )% | |
Wireless/OEM Products | | 23,893 | | 27,723 | | | (13.8 | ) | |
Global Services | | 12,539 | | 9,712 | | | 29.1 | | |
Specialty Manufacturing/Other | | 12,100 | | 9,759 | | | 24.0 | | |
Timing, Test and Measurement Division | | 59,044 | | 58,824 | | | 0.4 | | |
Total Net Revenue | | $ | 188,211 | | $ | 189,147 | | | (0.5 | )% | |
Percentage of Revenue | | 100.0 | % | 100.0 | % | | | | |
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Net revenue consists of sales of products, software licenses and services sales. Net revenue decreased by $0.9 million or 0.5% to $188.2 million in fiscal 2006 from $189.1 million in fiscal 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 2005 not repeated in fiscal 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), the Specialty Manufacturing/Other segment increase of $2.3 million or 24.0% (due to an increase for a major customer to transition future production to another manufacturer in fiscal 2007), 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).
Cost of products and services
| | Year ended | | | |
| | June 30, | | Percentage | |
| | 2006 | | 2005 | | Change | |
Cost of Products and Services(in thousands): | | | | | | | | | |
Wireline Products | | $ | 35,427 | | $ | 35,848 | | | (1.2 | )% | |
Wireless/OEM Products | | 18,441 | | 19,621 | | | (6.0 | ) | |
Global Services | | 6,205 | | 5,547 | | | 11.9 | | |
Specialty Manufacturing/Other | | 9,726 | | 8,115 | | | 19.9 | | |
Timing, Test and Measurement Division | | 30,354 | | 27,589 | | | 10.0 | | |
Other cost of sales | | 5,975 | | 3,899 | | | 53.2 | | |
Total Cost | | $ | 106,128 | | $ | 100,619 | | | 5.5 | % | |
Percentage of Revenue | | 56.4 | % | 53.2 | % | | | | |
The cost of products and services, including other cost of sales, increased by $5.5 million or 5.5% during fiscal 2006 compared with fiscal 2005. The cost of products and services for Wireline products decreased by $0.4 million or 1.2%, which was fairly consistent with the revenue decrease of 3.0%. The cost of products and services for Wireless/OEM products decreased by $1.2 million or 6.0%, which was lower than the revenue decrease of 13.8% due to increased costs and lower selling prices. The cost of products and services for Global Services products increased by $0.7 million or 11.9%, which was lower than the revenue increase of 29.1%, due to favorable sales mix of higher revenue in the lower cost services. The cost of products and services for Specialty Manufacturing/Other products increased by $1.6 million or 19.9%, due to higher sales volume and was consistent with the revenue increase of 24.0%. The cost of products and services for Timing, Test and Measurement products increased by $2.8 million or 10.0% due to increased sales volume, but was higher than the revenue increase of 0.4% due to higher period cost.
Other cost of sales increased by $2.1 million or 53.2%, due to that in fiscal 2006, we recorded a non-cash impairment charge of $1.2 million for the write-down of the other intangibles principally related to our Wireless/OEM business segment purchased in connection with the Datum acquisition in October 2002. For fiscal 2005, there were no corresponding charges for this non-cash item. In addition, during fiscal 2006, there were $1.2 million in integration charges related to the acquisition of Agilent Technologies’ Frequency and Timing Standards product line. There were no integration expenses in fiscal 2005.
Per the adoption of SFAS No. 123(R), the cost of products and services included $0.6 million for stock-based compensation expense in fiscal 2006.
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Gross Profit
| | Year ended | | | |
| | June 30, | | Percentage | |
| | 2006 | | 2005 | | Change | |
Gross Profit(in thousands): | | | | | | | | | |
Wireline Products | | $ | 45,208 | | $ | 47,281 | | | (4.4 | )% | |
Wireless/OEM Products | | 5,452 | | 8,102 | | | (32.7 | ) | |
Global Services | | 6,334 | | 4,165 | | | 52.1 | | |
Specialty Manufacturing/Other | | 2,374 | | 1,644 | | | 44.4 | | |
Timing, Test and Measurement Division | | 28,690 | | 31,235 | | | (8.1 | ) | |
Other cost of sales | | (5,975 | ) | (3,899 | ) | | 53.2 | | |
Total Gross Profit | | $ | 82,083 | | $ | 88,528 | | | (7.3 | )% | |
Percentage of Revenue | | 43.6 | % | 46.8 | % | | | | |
In fiscal 2006, gross profit, excluding other cost of sales, decreased $4.4 million, or 4.7%, compared to fiscal 2005. This decrease in total gross profit was greater than the revenue decrease of 0.5%. 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 Specialty Manufacturing/Other products increased by $0.7 million or 44.4%, which was higher than the revenue increase of 24.0% for the same period due to lower manufacturing costs as a result of higher volume. Gross profit for the Timing, Test and Measurement products 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.
Other cost of sales for the fiscal 2006 increased $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.
Operating Expense
Research and development
| | Year ended | | | |
| | June 30, | | Percentage | |
| | 2006 | | 2005 | | Change | |
Research and development expense (in thousands) | | $ | 18,836 | | $ | 16,286 | | | 15.7 | % | |
Percentage of Revenue | | 10.0 | % | 8.6 | % | | | | |
| | | | | | | | | | | |
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 2006 compared to $16.3 million for fiscal 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 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
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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 on July 1, 2006.
Selling, general and administrative including amortization of intangibles
| | Year ended | | | |
| | June 30, | | Percentage | |
| | 2006 | | 2005 | | Change | |
Selling, general and administrative including amortization of intangibles(in thousands) | | $ | 57,810 | | $ | 53,052 | | | 9.0 | % | |
Percentage of Revenue | | 30.7 | % | 28.0 | % | | | | |
| | | | | | | | | | | |
Selling, general and administrative expense, including the amortization of intangibles, 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 9.0% to $57.8 million for fiscal 2006 compared to $53.1 million for the corresponding period of fiscal 2005. This $4.8 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.
Integration and restructuring charges
During fiscal 2006 and 2005, we did not incur any integration and restructuring charges for the operating expenses.
Impairment of goodwill
| | Year ended | | | |
| | June 30, | | Percentage | |
| | 2006 | | 2005 | | Change | |
Impairment of goodwill (in thousands) | | 6,963 | | | $ | — | | | | 100.0 | % | |
Percentage of Revenue | | 3.7 | % | | — | % | | | | | |
In the third quarter of the fiscal 2006, we recorded a non-cash impairment charge of $7.0 million for the write-down of goodwill principally related to our wireless business segment purchased in connection with the Datum acquisition in October 2002. For the fiscal year ended June 30, 2005, there were no charges associated with goodwill.
Gain on sale of equity investments
| | Year ended | | | |
| | June 30, | | Percentage | |
| | 2006 | | 2005 | | Change | |
Gain on equity investments (in thousands) | | | $ | — | | | $ | 389 | | | (100.0 | )% | |
Percentage of Revenue | | | — | % | | 0.2 | % | | | | |
| | | | | | | | | | | | | |
In fiscal 2006, we did not realize any gains or losses on equity investments. During fiscal 2005, we recorded a gain of $0.4 million from the sale of our investment in Sarantel Ltd., which was expensed in fiscal 2003 as fully impaired.
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Interest income
| | Year ended | | | |
| | June 30, | | Percentage | |
| | 2006 | | 2005 | | Change | |
Interest income (in thousands) | | $ | 7,478 | | $ | 1,533 | | | 387.8 | % | |
Percentage of Revenue | | 4.0 | % | 0.8 | % | | | | |
| | | | | | | | | | | |
Interest income increased to $7.5 million in fiscal 2006 compared to $1.5 million in fiscal 2005 due to higher cash investments balance attributable to the proceeds received from the convertible notes issued in June 2005 and higher average interest rates.
Interest expense
| | Year ended | | | |
| | June 30, | | Percentage | |
| | 2006 | | 2005 | | Change | |
Interest expense (in thousands) | | $ | (4,983 | ) | $ | (814 | ) | | 512.2 | % | |
Percentage of Revenue | | (2.6 | )% | (0.4 | )% | | | | |
| | | | | | | | | | | |
Interest expense consists primarily of interest on our capital lease for our headquarters building in San Jose, California and interest for our convertible note. Interest expense increased 512.2% to $5.0 million in fiscal 2006 from $0.8 million in fiscal 2005 due primarily to interest expense on the convertible notes, which started accruing at 3.25% on June 15, 2005.
Income tax provision (benefit)
| | Year ended | | | |
| | June 30, | | Percentage | |
| | 2006 | | 2005 | | Change | |
Income tax provision (in thousands) | | $ | 150 | | $ | 2,544 | | | (94.1 | )% | |
Percentage of Revenue | | 0.1 | % | 1.3 | % | | | | |
| | | | | | | | | | | |
Our income tax provision was $150,000 (effective tax provision rate of 15.5%) in fiscal 2006 compared to an income tax provision $2.5 million (effective tax provision rate of 12.5%) in fiscal 2005. The effective tax rate fluctuated significantly in fiscal 2006 as a result of the write-off of goodwill for $7.0 million, since a substantial portion of the goodwill write-off was not deductible for tax reporting purposes. The increase in tax rate from the write-off of goodwill was offset by our Puerto Rico earnings, since a substantial percentage of our Puerto Rico earnings were taxed under Section 936 of the U.S. Internal Revenue Code, which exempts qualified Puerto Rico earnings from regular federal income taxes. Section 936 expired at the end of fiscal 2006.
Gain from discontinued operations, net of tax
| | Year ended | | | |
| | June 30, | | Percentage | |
| | 2006 | | 2005 | | Change | |
Gain from discontinued operations, net of tax (in thousands) | | | $ | — | | | $ | 162 | | | (100.0 | )% | |
Percentage of Revenue | | | — | % | | 0.1 | % | | | | |
| | | | | | | | | | | | | |
During fiscal 2006 there was no gain or loss recorded for discontinued operations. During fiscal 2005, we recorded a gain of $162,000 from our discontinued operations, which was attributable to the final payment arising from the sale of software. In June 2003, we discontinued the operation of the Trusted
36
Time Division as part of our post-acquisition consolidation process. The division was acquired as part of the acquisition of Datum in October 2002. The division 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.
Net Income
| | Year ended | | | |
| | June 30, | | Percentage | |
| | 2006 | | 2005 | | Change | |
Net income (in thousands) | | $ | 819 | | $ | 17,916 | | | (95.4 | )% | |
Percentage of Revenue | | 0.4 | % | 9.5 | % | | | | |
| | | | | | | | | | | |
As a result of the factors above, net income was $0.8 million, or $0.02 per basic and diluted share, in fiscal 2006 compared to a net income of $17.9 million, or $0.39 per basic and $0.38 diluted share, in fiscal 2005.
Fiscal Years Ended June 30, 2005 and 2004
Net revenue
| | Year ended
June 30, | | Percentage | |
| | 2005 | | 2004 | | Change | |
Net Revenue (in thousands): | | | | | | | | | |
Wireline Products | | $ | 83,129 | | $ | 71,467 | | | 16.3 | % | |
Wireless/OEM Products | | 27,723 | | 34,617 | | | (19.9 | ) | |
Global Services | | 9,712 | | 8,315 | | | 16.8 | | |
Specialty Manufacturing/Other | | 9,759 | | 9,537 | | | 2.3 | | |
Timing, Test and Measurement Division | | 58,824 | | 48,911 | | | 20.3 | | |
Total Net Revenue | | $ | 189,147 | | $ | 172,847 | | | 9.4 | % | |
Percentage of Revenue | | 100.0 | % | 100.0 | % | | | | |
Net revenue increased 9.4% to $189.1 million in fiscal 2005 from $172.8 million in fiscal 2004. The increase in net revenue was attributable to the Wireline Products segment increase of $11.7 million, or 16.3%, which was due primarily to major customers upgrading their networks and growth in international business including a $2.3 million project in Costa Rica. The Timing, Test and Measurement segment increased $9.9 million, or 20.3%, as military-related purchases of our timing and frequency solutions for mobile communication applications drove a significant portion of the sales growth. The Global Services segment revenue increased $1.4 million, or 16.8%, primarily due to product sales volume increase. The Specialty Manufacturing/Other segment increased of $0.2 million, or 2.3%, due to overall increases in the electronics industry. These revenue increases were partially offset by a $6.9 million, or 19.9%, reduction in Wireless/OEM segment revenue due to reported softness in the wireless industry and a product shift toward lower priced, lower performance quartz-based products from higher performance, lower maintenance rubidium-based solutions.
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Cost of product and services
| | Year ended
June 30, | | Percentage | |
| | 2005 | | 2004 | | Change | |
Cost of Products and Services (in thousands): | | | | | | | | | |
Wireline Products | | $ | 35,848 | | $ | 37,084 | | | (3.3 | )% | |
Wireless/OEM Products | | 19,621 | | 25,781 | | | (23.9 | ) | |
Global Services | | 5,547 | | 4,832 | | | 14.8 | | |
Specialty Manufacturing/Other | | 8,115 | | 8,168 | | | (0.6 | ) | |
Timing, Test and Measurement Division | | 27,589 | | 25,545 | | | 8.0 | | |
Other cost of sales | | 3,899 | | 9,773 | | | (60.1 | ) | |
Total Cost | | $ | 100,619 | | $ | 111,183 | | | (9.5 | )% | |
Percentage of Revenue | | 53.2 | % | 64.3 | % | | | | |
Cost of products and services, including other cost of sales, decreased $10.6 million, or 9.5%, during the fiscal 2005 compared with fiscal 2004. Cost of products and services for Wireline products decreased $1.2 million, or 3.3%, while Wireline products revenue increased 16.3%. The improvement in Wireline products cost was due to overhead volume savings, material cost reductions and favorable mix due to increased revenue on higher margin products. Cost of products and services for Wireless/OEM products decreased $6.2 million, or 23.9%, which is in line with the revenue decrease of 19.9%. Cost of products and services for Global Services products increased $0.7 million, or 14.8%, which was lower than the revenue increase of 16.8% since the revenue increase was primarily higher margin services. Cost of products and services for Specialty Manufacturing/Other products decreased $53,000, or 0.6%, which was in line with flat revenue increase of 2.3%. Cost of products and services for Timing, Test and Measurement products increased $2.0 million, or 8.0%, which was much lower than the revenue increase of 20.3%.
This improvement was due to overhead volume savings, material cost savings, and savings due to the elimination of higher startup manufacturing costs at Beverly, Massachusetts after the shutdown of our Irvine, California facility.
Other cost of sales includes amortization of purchased technology, which remained constant during fiscal 2005 and 2004 at $3.9 million. In fiscal 2005, we had no charges for integration and restructuring as compared to the $5.9 million charge in fiscal 2004, which was primarily attributable to the closure of the Irvine, California manufacturing facility and the move of production to Beverly, Massachusetts.
Gross profit
| | Year ended
June 30, | | Percentage | |
| | 2005 | | 2004 | | Change | |
Gross Profit (in thousands): | | | | | | | | | |
Wireline Products | | $ | 47,281 | | $ | 34,383 | | | 37.5 | % | |
Wireless/OEM Products | | 8,102 | | 8,836 | | | (8.3 | ) | |
Global Services | | 4,165 | | 3,483 | | | 19.6 | | |
Specialty Manufacturing/Other | | 1,644 | | 1,369 | | | 20.1 | | |
Timing, Test and Measurement Division | | 31,235 | | 23,366 | | | 33.7 | | |
Other cost of sales | | (3,899 | ) | (9,773 | ) | | (60.1 | ) | |
Total Gross Profit | | $ | 88,528 | | $ | 61,664 | | | 43.6 | % | |
Percentage of Revenue | | 46.8 | % | 35.7 | % | | | | |
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In fiscal 2005, gross profit, excluding other cost of sales, increased $26.9 million, or 43.6%, compared to fiscal 2004. This increase was greater than the revenue increase of 9.4%. Gross profit for the Wireline products increased $12.9 million, or 37.5%, which was higher than the 16.3% revenue increase for the same period due to the improvements mentioned in the cost of product and services commentary. Gross profit for the Wireless/OEM products decreased $0.7 million, or 8.3%, which was lower than the 19.9% revenue decline for the same period due primarily to the 2004 shutdown of the Irvine, California manufacturing facility. Gross profit for Global Services increased $0.7 million, or 19.6%, which was higher than the 16.8% revenue increase for the same period due to an increase in sales of higher margin services. Gross profit for the Specialty Manufacturing/Other products increased $0.3 million, or 20.1%, which was lower than the 2.3% revenue increase for the same period. Gross profit for the Timing, Test and Measurement products increased $7.9 million, or 33.7%, which was higher than the 20.3% revenue increase for the same period due to the savings mentioned in the cost of product and services commentary. In fiscal 2005, gross margin improved $5.9 million for the other cost of sales due to the absence of integration and restructuring charges when compared to the same period of the prior year.
Operating Expense
Research and development
| | Year ended
June 30, | | Percentage | |
| | 2005 | | 2004 | | Change | |
Research and development expense (in thousands) | | $ | 16,286 | | $ | 16,772 | | | (2.9 | )% | |
Percentage of Revenue | | 8.6 | % | 9.7 | % | | | | |
| | | | | | | | | | | |
For fiscal 2005, research and development expenses were $16.3 million compared to $16.8 million in fiscal 2004. The decrease in the research and development expenses was primarily due to the reduction in force of the research and development employees at the Irvine, California site that closed in December 2003.
Selling, general and administrative including amortization of intangibles
| | Year ended
June 30, | | Percentage | |
| | 2005 | | 2004 | | Change | |
Selling, general and administrative including amortization of intangibles (in thousands) | | $ | 53,052 | | $ | 46,663 | | | 13.7 | % | |
Percentage of Revenue | | 28.0 | % | 27.0 | % | | | | |
| | | | | | | | | | | |
Selling, general and administrative expense, including the amortization of intangibles, consists primarily of salaries, benefits, sales commissions and travel related expenses for our sales and services, finance, human resources, information technology and facilities departments and part of the amortization expenses of our intangible assets. These expenses increased 13.7% to $53.1 million for fiscal 2005 compared to $46.7 million for the fiscal 2004. This $6.4 million increase in selling, general and administrative expenses was attributable primarily to salary increases for employees that become effective in July 2004, the hiring of three new senior sales and marketing executives, stock based compensation and external audit and internal testing costs associated with Sarbanes-Oxley section 404 compliance.
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Integration and restructuring charges
| | Year ended
June 30, | | Percentage | |
| | 2005 | | 2004 | | Change | |
Integration and restructuring charges (in thousands) | | | $ | — | | | $ | 2,325 | | | (100.0 | )% | |
Percentage of Revenue | | | — | % | | 1.3 | % | | | | |
| | | | | | | | | | | | | |
During fiscal 2005, we did not incur any integration and restructuring charges.
In fiscal 2004, we recorded integration and restructuring charges of $2.3 million in acquisition-related costs and other restructuring expenses. Of these costs, $1.6 million is related to our facility restructuring in Irvine, California and $0.7 million is for land remediation accruals related to a former Datum facility in Austin, Texas. See Note O of our notes to the consolidated financial statements for further discussion of integration and restructuring charges.
Impairment of goodwill
We performed an annual goodwill impairment test as of June 30, 2005 and June 30, 2004 and determined that goodwill was not impaired.
Gain on sale of equity investments
| | Year ended
June 30, | | Percentage | |
| | 2005 | | 2004 | | Change | |
Gain on equity investments (in thousands) | | $ | 389 | | | $ | — | | | | 100.0 | % | |
Percentage of Revenue | | 0.2 | % | | — | % | | | | | |
| | | | | | | | | | | | | |
During fiscal 2005, we recorded a gain of $0.4 million from the sale of our investment in Sarantel Ltd., which was expensed in fiscal 2003 as fully impaired. In fiscal 2004, we did not realize any gains or losses on equity investments.
Interest income
| | Year ended
June 30, | | Percentage | |
| | 2005 | | 2004 | | Change | |
Interest income (in thousands) | | $ | 1,533 | | $ | 308 | | | 397.7 | % | |
Percentage of Revenue | | 0.8 | % | 0.2 | % | | | | |
| | | | | | | | | | | |
Interest income increased to $1.5 million in fiscal 2005 compared to $0.3 million in fiscal 2004 due primarily to higher interest rates and cash levels in fiscal 2005. It was primarily resulted from interest on the proceeds from sale of our $120 million convertible notes, which started accruing on June 15, 2005.
Interest expense
| | Year ended
June 30, | | Percentage | |
| | 2005 | | 2004 | | Change | |
Interest expense (in thousands) | | $ | (814 | ) | $ | (585 | ) | | 39.1 | % | |
Percentage of Revenue | | (0.4 | )% | (0.3 | )% | | | | |
| | | | | | | | | | | |
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Interest expense consists primarily of interest on our capital lease for our headquarters building in San Jose, California. Interest expense increased 39.1% to $0.8 million in fiscal 2005 from $0.6 million in fiscal 2004 due primarily to interest expense on our convertible notes, which started accruing at 3.25% on June 15, 2005.
Income tax provision (benefit)
| | Year ended
June 30, | | Percentage | |
| | 2005 | | 2004 | | Change | |
Income tax provision (benefit) (in thousands) | | $ | 2,544 | | $ | (2,123 | ) | | (219.8 | )% | |
Percentage of Revenue | | 1.3 | % | (1.2 | )% | | | | |
| | | | | | | | | | | |
Our income tax provision was $2.5 million (effective tax provision rate of 12.5%) in fiscal 2005 compared to an income tax benefit of $2.1 million (effective tax benefit rate of 48.5%) in fiscal 2004. The effective tax rate fluctuated significantly as a result of recognition of deferred tax assets related to Puerto Rico operations and a return to full year profitability in fiscal 2005. Our effective tax rate has also been affected by the percentage of qualified Puerto Rico earnings compared to total earnings, as most of our Puerto Rico earnings are taxed under Section 936 of the U.S. Internal Revenue Code, which exempts qualified Puerto Rico earnings from federal income taxes. This exemption is subject to wage-based and other limitations and expired at the end of fiscal 2006.
Gain from discontinued operations, net of tax
| | Year ended
June 30, | | Percentage | |
| | 2005 | | 2004 | | Change | |
Gain from discontinued operations, net of tax (in thousands) | | $ | 162 | | $ | 13 | | | 1,146.2 | % | |
Percentage of Revenue | | 0.1 | % | 0.0 | % | | | | |
| | | | | | | | | | | |
In June 2003, we discontinued the operation of the Trusted Time Division as part of our post-acquisition consolidation process. The division was acquired as part of the acquisition of Datum in October 2002. The division has been accounted for as a discontinued operation and, accordingly, the results of operations have been excluded from continuing operations in the consolidated statements of operations. During fiscal 2005, we recorded a gain of $162,000 from our discontinued operations, which was attributable to the final payment arising from the sale of software. During fiscal 2004, we recorded a gain of $13,000 from our discontinued operation.
Net Income (loss)
| | Year ended
June 30, | | Percentage | |
| | 2005 | | 2004 | | Change | |
Net income (loss) (in thousands) | | $ | 17,916 | | $ | (2,237 | ) | | (900.9 | )% | |
Percentage of Revenue | | 9.5 | % | (1.3 | )% | | | | |
| | | | | | | | | | | |
As a result of the factors above, net income was $17.9 million, or $0.39 per basic and $0.38 per diluted share, in fiscal 2005 compared to a net loss of $2.2 million, or $0.05 per basic and diluted share, in fiscal 2004.
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Key Operating Metrics
Key operating metrics for measuring our performance include sales backlog, contract revenue, headcount and deferred revenue. These metrics, which compare fiscal 2006 with fiscal 2005, are listed below.
Sales backlog:
Our backlog consists of firm orders that have yet to be shipped to the customer, or may not be shippable to a customer until a future period. Most orders included in backlog can be rescheduled or cancelled by customers without significant penalty. Historically, a substantial portion of net revenue in any fiscal period has been derived from orders received during that fiscal period. Our total backlog amounted to $51.7 million as of June 30, 2006, compared to $31.0 million as of June 30, 2005. Our backlog, which is shippable within the next six months, was $37.9 million as of June 30, 2006, compared to $20.5 million as of June 30, 2005.
Contract revenue:
Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed price and cost-plus reimbursement. Revenue is recognized under the fixed price contracts using the percentage of completion method, (cost-to-cost basis) principally based upon the costs incurred relative to the total estimated costs at completion on the individual contracts. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Revenue recognized under cost-plus contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as performance based award fee. Revenue from long-term contracts is reviewed periodically, with adjustments recorded in the period in which the revisions are made. As of June 30, 2006, we have approximately $4.4 million in contract revenue to be performed and recognized within the next 36 months, compared to approximately $4.7 million in contract revenue that was to be performed and recognized within the following 36 months as of June 30, 2005. These amounts have been accounted for as part of our sales backlog discussed above.
Headcount:
Our consolidated headcount as of June 30, 2006 was comprised of 802 regular employees and 63 temporary employees, compared to 779 regular employees and 51 temporary employees as of June 30, 2005.
Deferred revenue:
Deferred revenue is comprised of deferred revenue on sales of goods with special terms, which are recognized when the special terms are satisfied; maintenance contracts, which are recognized ratably over the maintenance period; and distributor return allowances, which are based on historical return averages with certain distributors. Deferred revenue for sales of goods with special terms was $0.4 million as of June 30, 2006, compared to $0.2 million as of June 30, 2005. Deferred revenue for maintenance contracts was $2.2 million as of June 30, 2006, compared to $1.4 million as of June 30, 2005. Deferred revenue for distributor return allowances was $0.3 million as of June 30, 2006, compared to $0.6 million as of June 30, 2005.
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Liquidity and Capital Resources
As of June 30, 2006, working capital was $221.2 million compared to $223.1 million as of June 30, 2005. Cash and cash equivalents as of June 30, 2006 decreased $23.4 million to $82.2 million from $105.6 million as of June 30, 2005. This decrease was primarily the result of $34.6 million in cash used for investing activities, and $8.3 million in cash used for financing activities, offset by $19.3 million in cash provided by operating activities. Short-term investments increased from $89.5 million as of June 30, 2005 to $106.7 million as of June 30, 2006. This increase resulted primarily from the fact that we invested more in short-term investments during fiscal 2006.
The $19.3 million net cash provided by operating activities in fiscal 2006 was primarily attributable to a net profit of $0.8 million and non-cash expenses related to depreciation and amortization of $10.0 million, impairment of goodwill and intangibles of $8.2 million, and stock-based compensation of $4.6 million, which was partially offset by a $4.0 million increase in accounts receivable and $2.7 million increase in inventory. The increase in accounts receivable was the result of higher sales during the fourth quarter of fiscal 2006 compared to fiscal 2005 and the increase in inventory was the result of discontinuing the contract manufacturing works for our Telecom Solution Division in Puerto Rico manufacturing. The $34.6 million net cash used for investing activities in fiscal 2006 was primarily attributable to $77.7 million in purchases of short-term investments, $9.4 million in purchases of plant and equipment, and $8.0 million cash payment for the acquisition of the Agilent product line, which was partially offset by $60.7 million in maturities of short-term investments. The $8.3 million net cash provided by financing activities was primarily attributable to $1.9 million in proceeds from the issuance of common stock, which was offset by $9.7 million repurchase of common stock and $1.1 million for repayment of long-term obligation.
Our total capital spending commitments outstanding as of June 30, 2006 were $1.3 million. Days sales outstanding in accounts receivable was 59 days as of June 30, 2006, an increase from 58 days as of June 30, 2005, which is attributable to a larger amount of shipments made in the last month of the prior quarter, resulting in lower collections in the last quarter of fiscal 2006.
We believe that our existing cash resources will be sufficient to meet our anticipated operating and working capital expenditure needs in the ordinary course of business for at least the next 12 months and the foreseeable future. We base our expense levels in part on our expectation of future revenue levels. If our revenue for a particular period is lower than we expect, we may take steps to reduce our operating expenses accordingly. If cash generated from operations is insufficient to satisfy our liquidity requirements or if we require additional capital resources to grow our business or to acquire complementary technologies and businesses in the future, we may seek to issue additional equity securities or obtain additional debt financing. Additional financing may not be available at all or on terms favorable to us. Additional financing may also be dilutive to our existing stockholders. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources.
On June 8, 2005, the Company sold $120 million of contingent convertible subordinated notes (the “Notes”), which mature on June 15, 2025 and bear interest at the rate of 3.25 % per annum. Interest on the Notes is payable semi-annually in June and December of each year beginning on December 15, 2005. The Notes are unsecured obligations and are subordinated in right of payment to all of our existing and future senior debt, including our indebtedness under our senior credit facilities. The Notes are structurally subordinated to all indebtedness and liabilities of our subsidiaries.
The Notes are convertible, at the holder’s option, prior to the maturity date into cash and, if applicable, shares of our common stock in the following circumstances:
· Prior to June 15, 2023, if the common stock price for a least 20 trading days in the period of 30 consecutive days ending on the last trading day of the calendar quarter preceding the quarter in which the conversion occurs is more than 125% of the conversion price of the notes in effect on that 30th trading day;
43
· On or after June 15, 2023, at all times on or after any date on which the common stock price is more than 125% of the then current conversion price;
· During the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the notes for each such trading-day was less than 95% of the average of the sale price of our common stock during such five trading-day period multiplied by the then current conversion rate;
· If we have called the particular notes for redemption and the redemption has not yet occurred; or
· Upon the occurrence of specified corporate transactions.
Holders may convert any outstanding Notes into cash and, if applicable, shares of our common stock at an initial conversion price per share of $12.49. On June 30, 2006, the reported closing bid price of our common stock was $7.07 per share.
Also, on or after June 20, 2012, we may redeem some or all of the Notes at any time or from time to time at a redemption price of 100% of the principal amount of the Notes, plus accrued and unpaid interest, (including liquidated damages, if any) up to but not including the date of redemption, payable in cash. Holders may require us to repurchase all or a portion of their Notes on June 15, 2012, 2015 and 2020 for a repurchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest (including liquidated damages, if any) up to but not including the date of repurchase, payable in cash, plus, in the event of certain change of control events related to us.
We may from time to time repurchase or redeem all or a portion of the Notes, if necessary, to comply with NASDAQ marketplace rule 4350(i)(1)(D). We may undertake such repurchase from time to time through privately negotiated or open-market transactions or other available means.
In connection with the issuance of these Notes, Symmetricom recorded bond fees of approximately $3.8 million, which will be amortized over a period of seven years until fiscal 2012.
On May 1, 2004, we entered into a credit agreement with Wells Fargo Bank, National Association to obtain a revolving line of credit up to $5.0 million to be used as working capital. On June 1, 2005 this agreement was amended to allow the Company to obtain a revolving line of credit up to $10.0 million to be used as working capital. At the beginning of July 2006, we decided to reduce the credit note from $10 million to $3 million. On July 3, 2006, the note was amended accordingly. The line of credit contains certain financial covenants and restrictions. The new line of credit expires on November 1, 2006. No borrowings were outstanding as of June 30, 2006.
On June 1, 2001, the Massachusetts Development Finance Agency issued a $2.7 million industrial development bond on Datum’s behalf to finance the expansion of Datum’s manufacturing facility in Beverly, Massachusetts. The bond matures on May 1, 2021. Interest on the bond is payable monthly at an adjustable rate of interest. The remarketing agent establishes the interest rate for each rate period at the lowest rate that in its judgment would permit the sale of the bonds at par value. The bond is collateralized by the line of credit with Wells Fargo Bank described above. As of June 30, 2006, the bond balance was $2.4 million.
Contractual Obligations
On March 1, 2006 we entered into an Office Lease Agreement, effective as of March 1, 2006, between the Company and China Scientific Equipment Trading Company, for approximately 200 square feet of space in an office building located in Beijing, P.R. China. The lease period will end on February 28, 2008. The leased space serves as an administrative and sales office.
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On November 18, 2005, we entered into a First Amendment to Lease, effective as of October 27, 2005, which amends our existing lease for approximately 117,739 square feet of space in an office building located in San Jose, California. The leased space serves as our corporate office. The amendment extends the termination date of the lease from April 15, 2009 to April 15, 2016. In addition, it provides that, commencing December 1, 2005, basic annual rent (as defined in the lease) will be reduced to $1.7 million, subject to 4% annual increases commencing on April 15, 2006. The building element of the original lease, which was accounted for from the outset as a capital lease for a property with a cost of $9.0 million, continues to be amortized over the initial lease period ending in April 2009, in accordance with SFAS No. 13, Accounting for Leases.
In connection with the Datum acquisition, we assumed Datum’s liability relating to the $2.7 million industrial development bond that was issued by the Massachusetts Development Finance Agency on June 1, 2001, to finance the expansion by Datum of its manufacturing facility in Beverly, Massachusetts. The bond matures on May 1, 2021. Interest on the bond is payable monthly at an adjustable rate of interest as determined by the remarketing agent for each rate period to be the lowest rate that in its judgment would permit the sale of the bonds at par. The bond is collateralized by a $2.7 million letter of credit issued under our credit facility with Wells Fargo Bank. As of June 30, 2006, the bond balance was $2.4 million.
We operate in multiple locations domestically and internationally. As such, certain facilities and equipment are leased under capital lease agreements or operating lease agreements. Due to excess capacity on several non-cancelable leases as a result of the economic downturn, we subleased certain facilities and recognized lease loss liability for the remainder.
We incur purchase commitments during our normal course of business. As of June 30, 2006, our principal commitments totaled $16.5 million and related primarily to commitments to purchase inventory.
In connection with the Datum acquisition, we assumed Datum’s post-retirement health care benefits plan. Post-retirement benefits are recognized over the employee’s service period based on a 6.23% discounted rate to the employee and the employee’s beneficiaries after retirement. The health care plan was curtailed as of December 31, 2002, and only existing retired participants and former Datum employees, now employed by Symmetricom and who meet the retirement eligibility requirements by December 31, 2004, are eligible for participation. The health care plan is a contributory plan.
The following table summarizes our contractual cash obligations as of June 30, 2006, and the effect such obligations are expected to have on liquidity and cash flow in future periods.
| | Payments due by period | |
| | | | Less than | | | | | | More than | |
Contractual Obligations | | | | Total | | 1 year | | 1-3 years | | 3-5 years | | 5 years | |
| | (In thousands) | |
Bond payable | | $ | 2,405 | | | $ | 70 | | | $ | 140 | | | $ | 140 | | | $ | 2,055 | |
Convertible subordinate notes | | 120,000 | | | — | | | — | | | — | | | 120,000 | |
Capital lease obligations | | 4,393 | | | 1,492 | | | 2,901 | | | — | | | — | |
Operating leases obligations(1) | | 35,200 | | | 2,255 | | | 5,326 | | | 8,258 | | | 19,361 | |
Purchase obligations | | 16,525 | | | 12,652 | | | 3,873 | | | — | | | — | |
Post-retirement benefits liabilities | | 334 | | | 42 | | | 110 | | | 63 | | | 119 | |
Lease loss accrual | | 254 | | | 109 | | | 103 | | | 40 | | | 2 | |
Total contractual cash obligations | | 179,111 | | | 16,620 | | | 12,453 | | | 8,501 | | | 141,537 | |
Sublessor agreements | | (2,322 | ) | | (678 | ) | | (968 | ) | | (676 | ) | | — | |
Net | | $ | 176,789 | | | $ | 15,942 | | | $ | 11,485 | | | $ | 7,825 | | | $ | 141,537 | |
| | | | | | | | | | | | | | | | | | | | | | |
(1) Operating lease obligation is already net against the lease loss accrual
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Recent Accounting Pronouncements
In June 2006, the FASB issued Interpretation Number, or FIN, No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 applies to all tax positions within the scope of FASB Statement No. 109, applies a “more likely than not” threshold for tax benefit recognition, identifies a defined methodology for measuring benefits and increases the disclosure requirements for companies. FIN No. 48 is mandatory for years beginning after December 15, 2006. We are currently in the process of evaluating the effects of this new accounting standard.
In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140. SFAS No. 156 amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The effective date of this Statement is the date an entity adopts the requirements of this Statement. Adoption of SFAS No. 156 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140. SFAS No. 155 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Adoption of SFAS No. 155 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 establishes new standards on accounting for changes in accounting principles. Pursuant to the new rules, all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005. Adoption of SFAS No. 154 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
As of July 4, 2005, we adopted Statement of Financial Accounting Standard (SFAS) No. 123(R) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of restricted stock is determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure. Such value is recognized as expense over the service period, net of estimated forfeitures, using the accelerated method under SFAS No. 123(R). Because we adopted SFAS No. 123(R), we no longer have employee stock awards subject to variable accounting treatment.
46
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Exposure
As of June 30, 2006, we had short-term investments of $106.7 million. These investments in corporate debt securities have maturity dates of greater than three months. Our corporate debt securities are subject to interest rate risk in as much as their fair value will fall if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from the levels prevailing at June 30, 2006, the fair value of the portfolio would not decline by a material amount. Additionally, a 10% decrease in the market interest rates would not materially impact the fair value of the portfolio. We do not use derivative financial instruments to mitigate the risks inherent in these securities. However, we do attempt to reduce these risks by typically limiting the maturity date of such securities to no more than nine months, placing our investments with high credit quality issuers and limiting the amount of credit exposure with any one issuer. In addition, we believe that we currently have the ability to hold these investments until maturity, and therefore, believe that reductions in the value of these securities attributable to short-term fluctuations in interest rates would not materially harm our business.
On June 8, 2005, we issued convertible subordinate notes with a fixed rate of 3.25%, which would have no interest rate risk impact to our business.
Foreign Currency Exchange Rate Exposure
Our exposure to market risk due to fluctuations in currency exchange rates relates primarily to the intercompany balances with our subsidiaries in the United Kingdom and Germany. Although we transact business with various countries, settlement amounts are usually based on United States currency. Transaction gains or losses have not been significant in the past and we do not presently engage in hedging activity. Based on the intercompany balances of $0.2 million with the United Kingdom and $0.6 million with Germany at June 30, 2006, a hypothetical 10% adverse change in sterling or Euro against United States dollars would not result in a material foreign exchange loss. Consequently, we do not expect that reductions in the value of such intercompany balances, or of other accounts denominated in foreign currencies resulting from even a sudden or significant fluctuation in foreign exchange rates, would have a direct material impact on our business.
Notwithstanding the foregoing analysis of the direct effects of interest rate and currency exchange rate fluctuations on the value of certain of our investments and accounts, the indirect effects of such fluctuations could have a materially harmful effect on our business. For example, international demand for our products is affected by foreign currency exchange rates. In addition, interest rate fluctuations may affect the buying patterns of our customers. Furthermore, interest rate and currency exchange rate fluctuations have broad influence on the general condition of the United States, foreign and global economies which could materially harm our business.
47
Item 8. Consolidated Financial Statements and Supplementary Data
Supplementary quarterly financial data (unaudited):
| | First | | Second | | Third | | Fourth | | Total | |
| | Quarter | | Quarter | | Quarter | | Quarter | | Year | |
| | (In thousands, except per share amounts) | |
Fiscal Year 2006 | | | | | | | | | | | |
Net revenue | | $ | 44,267 | | $ | 47,909 | | $ | 45,538 | | $ | 50,497 | | $ | 188,211 | |
Gross profit | | 20,391 | | 21,713 | | 17,972 | | 22,007 | | 82,083 | |
Operating income (loss) | | 1,491 | | 3,134 | | (7,733 | ) | 1,582 | | (1,526 | ) |
Income (loss) from operations before income taxes | | 1,808 | | 3,637 | | (7,002 | ) | 2,526 | | 969 | |
Net income (loss) | | 1,373 | | 2,655 | | (5,187 | ) | 1,978 | | 819 | |
Basic net earnings (loss) per share | | 0.03 | | 0.06 | | (0.11 | ) | 0.04 | | 0.02 | |
Diluted earnings per share from continuing operations | | 0.03 | | 0.06 | | (0.11 | ) | 0.04 | | 0.02 | |
Diluted net earnings (loss) per share | | 0.03 | | 0.06 | | (0.11 | ) | 0.04 | | 0.02 | |
Fiscal Year 2005 | | | | | | | | | | | |
Net revenue | | $ | 51,958 | | $ | 47,964 | | $ | 43,815 | | $ | 45,410 | | $ | 189,147 | |
Gross profit | | 23,318 | | 22,879 | | 20,759 | | 21,572 | | 88,528 | |
Operating income | | 5,843 | | 6,374 | | 3,441 | | 3,532 | | 19,190 | |
Income from continuing operations before income taxes | | 5,854 | | 6,465 | | 3,702 | | 4,277 | | 20,298 | |
Income from continuing operations | | 4,485 | | 4,583 | | 2,819 | | 5,867 | | 17,754 | |
Gain on discontinued operations | | — | | 162 | | — | | — | | 162 | |
Net income | | 4,485 | | 4,745 | | 2,819 | | 5,867 | | 17,916 | |
Basic earnings per share from continuing operations | | 0.10 | | 0.10 | | 0.06 | | 0.13 | | 0.39 | |
Basic earnings per share from discontinued operations | | — | | — | | — | | — | | — | |
Basic net earnings per share | | 0.10 | | 0.10 | | 0.06 | | 0.13 | | 0.39 | |
Diluted earnings per share from continuing operations | | 0.10 | | 0.10 | | 0.06 | | 0.12 | | 0.38 | |
Diluted earnings per share from discontinued operations | | — | | — | | — | | — | | — | |
Diluted net earnings per share | | 0.10 | | 0.10 | | 0.06 | | 0.12 | | 0.38 | |
48
SYMMETRICOM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Symmetricom, Inc.
San Jose, California
We have audited the accompanying consolidated balance sheets of Symmetricom, Inc. and its subsidiaries (the “Company”) as of June 30, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended June 30, 2006. Our audits also included the financial statement schedule included in Item 15 Schedule II. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2006 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As described in Note A to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share Based Payment,” effective July 1, 2005, based on the modified prospective application transition method.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of June 30, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 12, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
September 12, 2006
50
SYMMETRICOM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
| | June 30, | |
| | 2006 | | 2005 | |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 82,193 | | $ | 105,635 | |
Short-term investments | | 106,696 | | 89,514 | |
Total cash and investments | | 188,889 | | 195,149 | |
Accounts receivable, net of allowance for doubtful accounts of $888 and $874 | | 33,015 | | 29,049 | |
Inventories | | 30,717 | | 26,698 | |
Prepaids and other current assets | | 10,240 | | 10,827 | |
Total current assets | | 262,861 | | 261,723 | |
Property, plant and equipment, net | | 26,553 | | 23,063 | |
Goodwill | | 45,899 | | 49,248 | |
Other intangible assets, net | | 8,200 | | 10,272 | |
Deferred taxes and other assets | | 48,405 | | 47,365 | |
Note receivable from employee | | 500 | | 500 | |
Total assets | | $ | 392,418 | | $ | 392,171 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 13,359 | | $ | 12,684 | |
Accrued compensation | | 10,352 | | 9,062 | |
Accrued warranty | | 3,547 | | 3,338 | |
Other accrued liabilities | | 13,074 | | 12,416 | |
Current maturities of long-term obligations | | 1,286 | | 1,110 | |
Total current liabilities | | 41,618 | | 38,610 | |
Long-term obligations | | 125,620 | | 126,967 | |
Deferred income taxes | | 619 | | 419 | |
Total liabilities | | 167,857 | | 165,996 | |
Stockholders’ equity: | | | | | |
Preferred stock, $0.0001 par value; 500 shares authorized, none issued | | — | | — | |
Common stock, $0.0001 par value; 70,000 shares authorized, 47,662 shares issued and 45,743 outstanding in 2006; 47,076 shares issued and 46,329 outstanding in 2005 | | 181,696 | | 184,292 | |
Accumulated other comprehensive income | | 263 | | 100 | |
Retained earnings | | 42,602 | | 41,783 | |
Total stockholders’ equity | | 224,561 | | 226,175 | |
Total liabilities and stockholders’ equity | | $ | 392,418 | | $ | 392,171 | |
See notes to the consolidated financial statements.
51
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | Year ended June 30, | |
| | 2006 | | 2005 | | 2004 | |
Net revenue | | $ | 188,211 | | $ | 189,147 | | $ | 172,847 | |
Cost of products and services | | 100,154 | | 96,720 | | 101,410 | |
Amortization of purchased technology | | 3,622 | | 3,899 | | 3,911 | |
Impairment of intangibles | | 1,198 | | — | | — | |
Integration and restructuring charges | | 1,154 | | — | | 5,862 | |
Gross profit | | 82,083 | | 88,528 | | 61,664 | |
Operating expenses: | | | | | | | |
Research and development | | 18,836 | | 16,286 | | 16,772 | |
Selling, general and administrative | | 57,288 | | 52,439 | | 45,825 | |
Amortization of intangibles | | 522 | | 613 | | 838 | |
Integration and restructuring charges | | — | | — | | 2,325 | |
Impairment of goodwill | | 6,963 | | — | | — | |
Operating income (loss) | | (1,526 | ) | 19,190 | | (4,096 | ) |
Gain on equity investments, net | | — | | 389 | | — | |
Interest income | | 7,478 | | 1,533 | | 308 | |
Interest expense | | (4,983 | ) | (814 | ) | (585 | ) |
Income (loss) before income taxes and discontinued
operations | | 969 | | 20,298 | | (4,373 | ) |
Income tax provision (benefit) | | 150 | | 2,544 | | (2,123 | ) |
Income (loss) from continuing operations | | 819 | | 17,754 | | (2,250 | ) |
Gain from discontinued operations, net of tax. | | — | | 162 | | 13 | |
Net income (loss) | | $ | 819 | | $ | 17,916 | | $ | (2,237 | ) |
Earnings (loss) per share—basic: | | | | | | | |
Earnings (loss) from continuing operations | | $ | 0.02 | | $ | 0.39 | | $ | (0.05 | ) |
Earnings from discontinued operations | | — | | — | | — | |
Net earnings (loss) | | $ | 0.02 | | $ | 0.39 | | $ | (0.05 | ) |
Weighted average shares outstanding—basic | | 45,913 | | 45,532 | | 43,691 | |
Earnings (loss) per share—diluted: | | | | | | | |
Earnings (loss) from continuing operations | | $ | 0.02 | | $ | 0.38 | | $ | (0.05 | ) |
Earnings from discontinued operations | | — | | — | | — | |
Net earnings (loss) | | $ | 0.02 | | $ | 0.38 | | $ | (0.05 | ) |
Weighted average shares outstanding—diluted | | 46,791 | | 46,936 | | 43,691 | |
See notes to the consolidated financial statements.
52
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
| | | | | | | | Accumulated | | (1) | | | | Total | | | |
| | | | | | Stockholder | | Other | | Deferred | | | | Stock- | | Total | |
| | Common Stock | | Note | | Comprehensive | | Stock-based | | Retained | | holders’ | | Comprehensive | |
| | Shares | | Amount | | Receivable | | Income (loss) | | Compensation | | Earnings | | Equity | | Income (loss) | |
Balance at June 30, 2003 | | | 42,491 | | | $ | 159,194 | | | $ | (555 | ) | | | $ | (178 | ) | | | $ | (1,133 | ) | | | $ | 26,104 | | | $ | 183,432 | | | $ | (49,377 | ) | |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock option exercises, net of shares tendered upon exercise | | | 1,805 | | | 7,568 | | | — | | | | — | | | | — | | | | — | | | 7,568 | | | — | | |
Employee stock purchase plan | | | 98 | | | 321 | | | — | | | | — | | | | — | | | | — | | | 321 | | | — | | |
Warrants exercised | | | 487 | | | 2,013 | | | — | | | | — | | | | — | | | | — | | | 2,013 | | | — | | |
Restricted stock issued | | | 34 | | | 237 | | | — | | | | — | | | | (237 | ) | | | — | | | — | | | — | | |
Stock option income tax benefit | | | — | | | 4,960 | | | — | | | | — | | | | — | | | | — | | | 4,960 | | | — | | |
Amortization of deferred compensation | | | — | | | — | | | — | | | | — | | | | 250 | | | | — | | | 250 | | | — | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss from continuing operations | | | — | | | — | | | — | | | | — | | | | — | | | | (2,250 | ) | | (2,250 | ) | | (2,250 | ) | |
Gain from discontinued operations, net of tax of $7 | | | — | | | — | | | — | | | | — | | | | — | | | | 13 | | | 13 | | | 13 | | |
Unrealized gain on short-term investments, net of taxes | | | — | | | — | | | — | | | | 265 | | | | — | | | | — | | | 265 | | | 265 | | |
Cumulative adjustments to foreign currency translation, net
of taxes | | | — | | | — | | | — | | | | (88 | ) | | | — | | | | — | | | (88 | ) | | (88 | ) | |
Balance at June 30, 2004 | | | 44,915 | | | 174,293 | | | (555 | ) | | | (1 | ) | | | (1,120 | ) | | | 23,867 | | | 196,484 | | | (2,060 | ) | |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock option exercises, net of shares tendered upon exercise | | | 1,619 | | | 8,012 | | | — | | | | — | | | | — | | | | — | | | 8,012 | | | — | | |
Reinstated stock option | | | — | | | 919 | | | — | | | | — | | | | — | | | | — | | | 919 | | | — | | |
Repurchase of common stock | | | (186 | ) | | (1,833 | ) | | — | | | | — | | | | — | | | | — | | | (1,833 | ) | | — | | |
Restricted stock canceled | | | (19 | ) | | (120 | ) | | — | | | | — | | | | 84 | | | | — | | | (36 | ) | | — | | |
Stock option income tax benefit | | | — | | | 3,021 | | | — | | | | — | | | | — | | | | — | | | 3,021 | | | — | | |
Amortization of deferred compensation | | | — | | | — | | | — | | | | — | | | | 1,036 | | | | — | | | 1,036 | | | — | | |
Loan payment | | | — | | | | | | 555 | | | | | | | | | | | | | | | 555 | | | — | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income from continuing
operations | | | — | | | — | | | — | | | | — | | | | — | | | | 17,754 | | | 17,754 | | | 17,754 | | |
Gain from discontinued operations, net of tax of $93 | | | — | | | — | | | — | | | | — | | | | — | | | | 162 | | | 162 | | | 162 | | |
Unrealized gain on short-term investments, net of taxes | | | — | | | — | | | — | | | | 84 | | | | — | | | | — | | | 84 | | | 84 | | |
Cumulative adjustments to foreign currency translation,
net of taxes | | | — | | | — | | | — | | | | 17 | | | | — | | | | — | | | 17 | | | 17 | | |
Balance at June 30, 2005 | | | 46,329 | | | 184,292 | | | — | | | | 100 | | | | — | | | | 41,783 | | | 226,175 | | | 18,017 | | |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock option exercises, net of shares tendered upon exercise | | | 402 | | | 1,904 | | | — | | | | — | | | | — | | | | — | | | 1,904 | | | — | | |
Restricted stock issued | | | 220 | | | — | | | — | | | | — | | | | — | | | | — | | | — | | | — | | |
Repurchase of common stock | | | (1,172 | ) | | (9,712 | ) | | — | | | | — | | | | — | | | | — | | | (9,712 | ) | | — | | |
Restricted stock canceled | | | (36 | ) | | — | | | — | | | | — | | | | — | | | | — | | | — | | | — | | |
Stock option income tax benefit | | | — | | | 592 | | | — | | | | — | | | | — | | | | — | | | 592 | | | — | | |
Stock-based compensation | | | — | | | 4,620 | | | — | | | | — | | | | — | | | | — | | | 4,620 | | | — | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income. | | | — | | | — | | | — | | | | — | | | | — | | | | 819 | | | 819 | | | 819 | | |
Unrealized gain on short-term investments, net of taxes | | | — | | | — | | | — | | | | 67 | | | | — | | | | — | | | 67 | | | 67 | | |
Cumulative adjustments to foreign currency translation,
net of taxes | | | — | | | — | | | — | | | | 96 | | | | — | | | | — | | | 96 | | | 96 | | |
Balance at June 30, 2006 | | | 45,743 | | | $ | 181,696 | | | $ | — | | | | $ | 263 | | | | $ | — | | | | $ | 42,602 | | | $ | 224,561 | | | $ | 982 | | |
(1) Following the adoption of SFAS 123R in fiscal 2006, amounts that would previously have been recorded in this column are now included within Common Stock.
See notes to the consolidated financial statements.
53
SYMMETRICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | Year ended June 30, | |
| | 2006 | | 2005 | | 2004 | |
Cash flows from operating activities: | | | | | | | |
Net income (loss) | | $ | 819 | | $ | 17,916 | | $ | (2,237 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating
activities: | | | | | | | |
Impairment of goodwill and intangibles | | 8,161 | | — | | — | |
Gain from disposal of discontinued operations | | — | | (162 | ) | — | |
Depreciation and amortization | | 9,966 | | 11,303 | | 11,646 | |
Deferred income taxes | | (1,693 | ) | (3,368 | ) | (6,540 | ) |
Gain on sale of equity investments | | — | | (389 | ) | — | |
Loss on disposal of fixed assets | | 211 | | 202 | | — | |
Gain on post-retirement benefit obligation | | (65 | ) | (118 | ) | — | |
Stock-based compensation | | 4,620 | | 1,001 | | 250 | |
Non-cash compensation | | — | | 919 | | — | |
Stock option income tax benefit | | — | | 3,021 | | 4,960 | |
Changes in assets and liabilities, net of effects of acquisitions: | | | | | | | |
Accounts receivable | | (3,966 | ) | (108 | ) | (5,165 | ) |
Inventories | | (2,662 | ) | 1,179 | | 1,165 | |
Prepaids and other assets | | 1,579 | | (378 | ) | 590 | |
Accounts payable | | 675 | | (2,688 | ) | 3,126 | |
Accrued compensation | | 1,265 | | (599 | ) | (2,530 | ) |
Other accrued liabilities | | 429 | | (555 | ) | 1,409 | |
Net cash provided by operating activities | | 19,339 | | 27,176 | | 6,674 | |
Cash flows from investing activities: | | | | | | | |
Change in restricted cash | | — | | — | | 3,396 | |
Acquisition and related costs, net of cash acquired | | (8,032 | ) | — | | — | |
Purchases of short-term investments | | (77,726 | ) | (83,478 | ) | (19,565 | ) |
Maturities of short-term investments | | 60,650 | | 7,460 | | 7,167 | |
Purchases of plant and equipment | | (9,443 | ) | (3,074 | ) | (3,897 | ) |
Proceeds from sale of assets | | — | | 1,585 | | — | |
Net cash used for investing activities | | (34,551 | ) | (77,507 | ) | (12,899 | ) |
Cash flows from financing activities: | | | | | | | |
Repayment of long-term obligations | | (1,110 | ) | (1,148 | ) | (1,660 | ) |
Proceeds from issuance of common stock | | 1,904 | | 8,011 | | 9,902 | |
Proceeds from repayment of employee note | | — | | 555 | | — | |
Proceeds from convertible notes | | — | | 116,151 | | — | |
Stock option income tax benefit | | 592 | | — | | — | |
Repurchase of common stock | | (9,712 | ) | (1,833 | ) | — | |
Net cash provided by (used for) financing activities | | (8,326 | ) | 121,736 | | 8,242 | |
Effect of exchange rate changes in cash | | 96 | | 17 | | (88 | ) |
Net increase (decrease) in cash and cash equivalents | | (23,442 | ) | 71,422 | | 1,929 | |
Cash and cash equivalents at beginning of year | | 105,635 | | 34,213 | | 32,284 | |
Cash and cash equivalents at end of year | | $ | 82,193 | | $ | 105,635 | | $ | 34,213 | |
Non-cash investing and financing activities: | | | | | | | |
Unrealized loss on securities, net | | $ | 67 | | $ | 84 | | $ | 265 | |
Cash payments for: | | | | | | | |
Interest | | $ | 5,073 | | $ | 544 | | $ | 585 | |
Income taxes | | 1,173 | | 1,427 | | 367 | |
See notes to the consolidated financial statements.
54
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A—Summary of Significant Accounting Policies
Business
Symmetricom, Inc., incorporated in the state of Delaware, is a leading supplier of precise timing standards to industry, government, utilities, research centers, and aerospace markets. Products and services include network synchronization systems and timing elements used by network operators and users, broadband access devices for business and residential applications, and professional services. Such products play an important role in the operation, bandwidth utilization, and quality of service of wireline, wireless and broadband communications networks enabling our customers to increase the efficiency of their networks in today’s evolving communications environment.
Principles of Consolidation
The consolidated financial statements include the accounts of Symmetricom, Inc., and its wholly owned subsidiaries (“Symmetricom”, “we”, “our” or the “Company”). All significant intercompany accounts and transactions are eliminated.
Fiscal Year
Symmetricom, for presentation purposes, presents each fiscal year as if it ended on June 30. However, our fiscal year ends on the Sunday closest to June 30. Fiscal year 2006 ended on July 2, 2006. All references to years refer to our fiscal years. Fiscal 2006, 2005 and 2004 consisted of 52, 53 and 52 weeks, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates include allowances for doubtful accounts receivable, valuation of goodwill and intangible assets, excess and obsolete inventory, future warranty costs, stock options, and valuation of deferred tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid debt investments with a remaining maturity of three months or less when purchased to be cash and cash equivalents.
Short-term Investments
Short-term investments consist of corporate debt and equity securities. Corporate debt securities mature between three and twelve months. All of our debt and marketable equity securities are classified as available-for-sale. These securities are carried at fair value with the unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes Symmetricom’s available-for-sale securities recorded as cash and cash equivalents or short-term investments:
| | | | Gross Unrealized | | | |
| | Amortized Cost | | Gains (losses) | | Fair Value | |
| | | | (In thousands) | | | |
June 30, 2006 | | | | | | | | | | | |
Commercial paper | | | $ | 170,718 | | | | $ | 107 | | | $ | 170,825 | |
Less amounts classified as cash equivalents | | | (66,859 | ) | | | — | | | (66,859 | ) |
Deferred compensation plan assets | | | 2,770 | | | | (40 | ) | | 2,730 | |
Total short term investments | | | $ | 106,629 | | | | $ | 67 | | | $ | 106,696 | |
June 30, 2005 | | | | | | | | | | | |
Commercial paper | | | $ | 177,313 | | | | $ | (27 | ) | | $ | 177,286 | |
Less amounts classified as cash equivalents | | | (89,726 | ) | | | — | | | (89,726 | ) |
Deferred compensation plan assets | | | 1,843 | | | | 111 | | | 1,954 | |
Total short term investments | | | $ | 89,430 | | | | $ | 84 | | | $ | 89,514 | |
Fair Values of Financial Instruments
The estimated fair value of our financial instruments, which include cash and cash equivalents, short-term investments, accounts receivable, capital lease obligations, accounts payable, notes payable, and bonds payable, approximate their carrying amount. The short-term investments in equity instruments are carried at market value. The recorded amount of our capital lease obligation approximates the estimated fair value based on an analysis of the present value of future lease payments.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and cash equivalents, short-term investments, and accounts receivable. We place our investments with high-credit-quality corporations and financial institutions. Accounts receivable are derived primarily from sales to telecommunications service providers, original equipment manufacturers, government agencies, defense contractors, and distributors. Management believes that its credit evaluation, approval, and monitoring processes mitigate potential credit risks. However, we still have significant credit risks as our customers currently tend to consolidate by mergers or acquisitions, which would impact their ability to pay.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories
Inventories are stated at the lower-of-cost (first-in, first-out) or market. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis. Obsolete inventory or inventory in excess of management’s estimated usage is written-down to its estimated market value less costs to sell, if less than its cost. Inherent in the estimates of market value are management’s estimates related to current economic trends, future demand and technological obsolescence. Inventories consist of:
| | June 30, | |
| | 2006 | | 2005 | |
| | (In thousands) | |
Raw materials | | $ | 15,354 | | $ | 12,207 | |
Work-in-process | | 9,043 | | 9,089 | |
Finished goods | | 6,320 | | 5,402 | |
Inventories | | $ | 30,717 | | $ | 26,698 | |
Property, Plant and Equipment, Net
Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method based on the estimated useful lives of the assets except for land as follows:
Buildings and improvements | | 15 - 39 years | |
Leasehold improvements | | 5 - 15 years, or life of lease if shorter | |
Machinery, equipment and computer software | | 3 - 7 years | |
Property, plant and equipment consists of the following:
| | June 30, | |
| | 2006 | | 2005 | |
| | (In thousands) | |
Property, plant and equipment: | | | | | |
Land | | $ | 200 | | $ | 200 | |
Buildings and improvements | | 14,672 | | 14,551 | |
Machinery and equipment | | 28,913 | | 34,713 | |
Computer software | | 8,486 | | 7,441 | |
Leasehold improvements | | 15,777 | | 10,025 | |
| | 68,048 | | 66,930 | |
Accumulated depreciation and amortization | | (41,495 | ) | (43,867 | ) |
| | $ | 26,553 | | $ | 23,063 | |
Building and improvements includes $9,007,000 of costs capitalized under a capital lease for our facility in San Jose, California, which was completed in June 1997. As of June 30, 2006 and 2005 accumulated amortization for this facility totaled $6,854,000 and $6,089,000, respectively.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill and Other Intangible Assets
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, as well as in-process research and development based on their estimated fair values. Such allocations require management to make significant estimations and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include, but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements, acquired developed technologies and patents; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; and the brand awareness and the market position of the acquired products and assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
Long-lived Assets Including Other Intangible Assets Subject to Amortization
The carrying value of long-lived assets is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset, including disposition, is less than the carrying value of the asset. Impairment is measured as the amount by which the carrying amount exceeds the fair value.
Comprehensive Income (Loss)
SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for reporting and display of comprehensive income and its component. SFAS No.130 requires companies to report “comprehensive income” that includes unrealized holding gains and losses and other items that have previously been excluded from net income and reflected instead in stockholders’ equity.
Accumulated other comprehensive income (loss), consists of the following:
| | June 30, | |
| | 2006 | | 2005 | | 2004 | |
| | (in thousands) | |
Foreign currency translation adjustments, net of taxes | | $ | 246 | | $ | 150 | | $ | 133 | |
Unrealized loss on investments, net of taxes | | 17 | | (50 | ) | (134 | ) |
Total accumulated other comprehensive income (loss) | | $ | 263 | | $ | 100 | | $ | (1 | ) |
Warranty
Our standard warranty agreement is one year from shipment. However, our warranty agreements are contract and component specific and can range to twenty years for selected components. We offer extended warranty contracts to our customers. The extended warranty is offered on products that are less than eight years old. The extended warranty contract is applicable for a maximum of nine years after the expiration of the standard one-year warranty. The income from extended warranty contracts is recognized ratably over the period of contract.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We accrue for anticipated warranty costs upon shipment. Our warranty reserve is based on the number of installed units, historical analysis of the volume of product returned to us under the warranty program, management’s judgment regarding anticipated rates of warranty claims and associated repair costs. We use the historical data to forecast our anticipated future warranty obligations.
Acquired in-process research and development expenses
During fiscal 2003, $1.6 million of the purchase price of the Datum and TrueTime acquisitions was allocated to purchased in-process research and development expense based upon the values assigned to the acquisitions. Projects that qualify as in-process research and development represent those that have not yet reached technological feasibility and have no alternative future use. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is no remaining risk relating to the development. The $1.6 million represented $1.2 million from Datum and $0.4 million from TrueTime. The value of these projects was determined by estimating the discounted net cash flows from the sale of the products resulting from the completion of the projects, reduced by the portion of the revenue attributable to developed technology and the percentage of completion of the project.
The nature of the efforts to develop the purchased in-process research and development into commercially viable products principally relates to the completion of all prototyping and testing activities that are necessary to establish that the product can meet its design specification including function, features and technical performance requirements. Therefore, the amount allocated to in-process research and development has been charged to operations.
Software Development Costs
Costs for the development of new software and substantial enhancements to existing software are expensed as incurred until technological feasibility has been established, at which time any additional development costs would be capitalized in accordance with SFAS No. 86, “Computer Software to Be Sold, Leased, or Otherwise Marketed.” We believe the current process for developing software is essentially completed concurrently with the establishment of technological feasibility; accordingly, no costs have been capitalized to date.
Foreign Currency Translation
The functional currency of each of our international subsidiaries in the United Kingdom, China, and Hong Kong is the U.S. dollar, while in Germany, it is the Euro.
For our subsidiaries in which the U.S. Dollar is the functional currency, foreign currency denominated assets and liabilities are translated at the year-end exchange rates, except for inventories, prepaid expenses, and property and equipment, which are translated at historical exchange rates. Statements of operations are translated at the average exchange rates during the year except for those expenses related to the balance sheet amounts, which are translated using historical exchange rates. Net gains (losses) from these foreign exchange transactions have not been material to our operating results for any of the periods presented.
For our subsidiary in Germany, foreign currency denominated assets and liabilities are translated at the year-end exchange rates, while revenue and expenses are translated at average rates prevailing during the year. Translation adjustments are reported in other comprehensive income.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 credit worthiness of the customer and past transaction history. We perform on-going credit evaluations of our customers and do not require collateral from our customers. For many of our international customers, we require an irrevocable letter of credit to be issued by the customer before the purchase order is accepted. If we determine that collection of the invoice is not reasonably assured, we recognize the revenue at the time that collection becomes reasonably assured, which is generally upon the receipt of cash. We commonly have transactions that involve sales of both product and services to our customers. Product revenue is generated from the sale of synchronization and timing equipment with embedded software that is essential to product functionality. We account for these transactions in accordance with the rules applicable to software revenue recognition. Service revenue is recognized as the services are performed provided collection of the related receivable is reasonably assured. Our sales to distributors are made under agreements allowing for returns or credits under certain circumstances. Accordingly, we defer an estimate of returns from distributors based on a historical average of distributor returns. We record commission expense when orders are shipped, at which time the commission is both earned and payable.
Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed price and cost-plus reimbursement. Revenue is recognized under the fixed price contracts using the percentage of completion method, (cost-to-cost basis) principally based upon the costs incurred relative to the total estimated costs at completion on the individual contracts. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Revenue recognized under cost plus contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as performance based award fee. Revenue from long-term contracts is reviewed periodically, with adjustments recorded in the period in which the revisions are made. A contract is determined to be substantially complete when the physical deliverables are completed, shipped and accepted. Unbilled receivables totaled $1.6 million as of June 30, 2006 and 2005. All of unbilled receivables as of June 30, 2006 are expected to be collected in fiscal 2007. Any anticipated losses on contracts are charged to operations as soon as they are determinable.
Stock-Based Compensation
Prior to fiscal 2006, we accounted for stock-based awards under the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The intrinsic value method of accounting resulted in compensation expense for restricted stock at fair value on date of grant based on the number of shares granted and the quoted price of our common stock, and for stock options to the extent option exercise prices were set below market prices on the date of grant. Also, to the extent we granted stock options or stock awards that were subject to an exchange offer, other modifications or performance criteria, such awards were subject to variable accounting treatment. To the extent stock awards were forfeited prior to vesting, the corresponding previously recognized expense related to the unvested portion of the awards was reversed as an offset to operating expenses.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of fiscal 2006, we adopted SFAS No. 123(R), Share-Based Payment, using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of restricted stock is determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure. Such value is recognized as expense over the service period, net of estimated forfeitures, using the accelerated method under SFAS No. 123(R). Because we adopted SFAS No. 123(R), we no longer have employee stock awards subject to variable accounting treatment.
SFAS No. 123(R) resulted in stock-based compensation expense of $4.6 million for the fiscal year ended June 30, 2006, which includes the net cumulative impact of 5.94% estimated future forfeitures in the determination of the period expense, rather than recording forfeitures when they occur as previously permitted.
At June 30, 2006, the total compensation cost related to unvested stock-based awards granted to employees, directors and consultants under the Company’s stock option plans but not yet recognized was approximately $4.3 million, net of estimated forfeitures of $0.6 million. This cost will be amortized on an accelerated method basis over a period of approximately 1.1 years and will be adjusted for subsequent changes in estimated forfeitures.
Prior to the adoption of SFAS No. 123(R), cash retained as a result of tax deductions relating to stock-based compensation was presented in operating cash flows, along with other tax cash flows, in accordance with the provisions of the Emerging Issues Task Force (EITF) Issue No. 00-15, Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option. SFAS No. 123(R) supersedes EITF Issue No. 00-15, amends SFAS No. 95, Statement of Cash Flows, and requires tax benefits relating to excess stock-based compensation deductions to be prospectively presented in the statement of cash flows as financing cash inflows. There were no excess tax benefits resulting from the exercise of stock-based compensation deductions reported for financial reporting purposes for the fiscal period ended June 30, 2006.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effect of Adoption of SFAS No. 123(R)
The application of SFAS No. 123(R) had the following effect on the reported amounts for the fiscal period ended June 30, 2006 relative to amounts that would have been reported using the intrinsic value method under previous accounting:
| | Year ended | |
| | June 30, 2006 | |
| | As | | SFAS 123R | |
| | Reported | | Adjustments | |
| | (In thousands, except
per share amounts) | |
Income (loss) from operations | | | $ | (1,526 | ) | | | $ | (4,620 | ) | |
Income (loss) before income taxes | | | $ | 969 | | | | (4,620 | ) | |
Net Income (loss) | | | 819 | | | | $ | (2,911 | ) | |
Basic earnings per share | | | | | | | | | |
Earnings (loss) | | | $ | 0.02 | | | | $ | (0.06 | ) | |
Diluted earnings per share | | | | | | | | | |
Earnings (loss) | | | $ | 0.02 | | | | $ | (0.06 | ) | |
| | Year ended | |
| | June 30, 2006 | |
| | (In thousands) | |
SFAS 123(R) adjustments: | | | | | |
Cost of products and services | | | $ | 564 | | |
Research and development | | | 481 | | |
Selling, general and administrative | | | 3,575 | | |
| | | $ | 4,620 | | |
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal 2004 and fiscal 2005, prior to the adoption of SFAS 123(R), the Company had adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The Company accounted for employee stock-based compensation using the intrinsic-value-based method of accounting as defined under Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issue to Employees,” and its related interpretation. Accordingly, we recognized no compensation expense in our consolidated statements of operations with respect to options awarded to our employees with exercise prices greater than or equal to the fair value of the underlying common stock at the date of grant. However, we recognized compensation expense in our consolidated statements of operations with respect to restricted stock awarded to our employees. Had compensation cost for the Company’s stock-based compensation plans been determined using the fair-value method at the grant date for awards under those plans calculated using the Black-Scholes pricing model and recognized using the accelerated method over the option vesting periods, the Company’s net income (loss) for the years ended June 30, 2005 and 2004, would have been decreased (increased) to the pro forma amounts indicated below (in thousands, except per share data):
| | Year ended June 30, | |
| | 2005 | | 2004 | |
| | (In thousands, except
per share amounts) | |
Net income (loss), as reported | | $ | 17,916 | | $ | (2,237 | ) |
Add: Stock-based employee compensation expense with respect to restricted stock awards included in reported net income (loss), net of related tax effects | | 620 | | 154 | |
Less: Stock-based employee compensation expense determined under fair value based method for all awards (including the restricted stock), net of related tax effects | | (6,131 | ) | (2,130 | ) |
Pro forma net income (loss) | | $ | 12,405 | | $ | (4,213 | ) |
Earnings (loss) per share—basic: | | | | | |
As reported | | $ | 0.39 | | $ | (0.05 | ) |
Pro forma | | $ | 0.27 | | $ | (0.10 | ) |
Earnings (loss) per share—diluted: | | | | | |
As reported | | $ | 0.38 | | $ | (0.05 | ) |
Pro forma | | $ | 0.26 | | $ | (0.10 | ) |
Net Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options, warrants, and restricted stock using the treasury method, except when antidilutive.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the denominator used in the calculation of basic and diluted net income (loss) per share is as follows (in thousands):
| | Year ended June 30, | |
| | 2006 | | 2005 | | 2004 | |
| | (In thousands, except
per share amounts) | |
Numerator: | | | | | | | |
Net income (loss) from continuing operations | | $ | 819 | | $ | 17,754 | | $ | (2,250 | ) |
Gain from discontinued operations | | — | | 162 | | 13 | |
Net income (loss) | | $ | 819 | | $ | 17,916 | | $ | (2,237 | ) |
Shares (Denominator): | | | | | | | |
Weighted average common shares outstanding | | 46,080 | | 45,654 | | 43,691 | |
Weighted average common shares outstanding subject to repurchase | | (167 | ) | (122 | ) | — | |
Weighted average shares outstanding—basic | | 45,913 | | 45,532 | | 43,691 | |
Weighted average dilutive share equivalents from stock options and warrants | | 824 | | 1,282 | | — | |
Weighted average common shares dilutive subject to repurchase | | 54 | | 122 | | — | |
Weighted average shares outstanding—diluted | | 46,791 | | 46,936 | | 43,691 | |
Net earnings (loss) per share—basic | | $ | 0.02 | | $ | 0.39 | | $ | (0.05 | ) |
Net earnings (loss) per share—diluted | | $ | 0.02 | | $ | 0.38 | | $ | (0.05 | ) |
Unvested restricted stock is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding for basic earnings (loss) per share.
The following common stock equivalents were excluded from the net earnings (loss) per share calculation, as their effect would have been antidilutive:
| | Year ended June 30, | |
| | 2006 | | 2005 | | 2004 | |
| | (In thousands) | |
Stock options and warrants | | 2,231 | | 1,861 | | 5,789 | |
Common shares subject to repurchase | | 1 | | — | | 267 | |
Total shares of common stock excluded from diluted net earnings (loss) per share calculation | | 2,232 | | 1,861 | | 6,056 | |
We account for our contingent convertible notes in accordance with EITF 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share,” which requires us to include the dilutive effect of the shares of our common stock issuable upon conversion of the outstanding convertible notes in our diluted earnings per share calculation regardless of whether the market price trigger or other contingent conversion feature has been met. Because our Notes include a mandatory cash settlement feature for the principal payment, we apply the treasury stock method. This method results in incremental dilutive shares when the average fair value of our common stock for a reporting period exceeds the initial conversion price per share of $12.49. However, because our share price did not exceed $12.49, no shares
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
associated with the contingent convertible notes were included in our diluted earnings per share as of June 30, 2006.
Note B—Acquisitions
Acquisition of Agilent’s cesium product line assets
On August 1, 2005, the Company completed the acquisition of Agilent Technologies’ Frequency and Timing Standards product line. This acquisition is expected to enhance the Company’s position in the area of cesium clocks used primarily by official time authorities and metrology institutes throughout the world and to further the Company’s leadership in generating high-precision frequency and timing references including rubidium oscillators, cesium clocks and hydrogen masers. The total purchase price of approximately $8.0 million was paid in cash. The purchase price was allocated to the assets acquired, including goodwill and the liabilities assumed, based on management’s preliminary estimate of the fair value for purchase accounting purposes at the date of acquisition. Management does not expect significant revisions to the purchase price allocations for the acquired businesses.
The purchase price was allocated to Agilent’s assets and liabilities as follows (in thousands):
Inventory | | $ | 1,357 | |
Prepaid and other current assets | | 92 | |
Property, plant and equipment | | 82 | |
Intangible assets | | 3,354 | |
Goodwill | | 3,614 | |
Liabilities assumed | | (467 | ) |
Total purchase price | | $ | 8,032 | |
Acquisition of Datum
On October 29, 2002, we completed our acquisition of Datum. The acquisition was accomplished pursuant to an Agreement and Plan of Merger, dated as of May 22, 2002 and was accounted for as a purchase. As a result of the merger, Datum became a wholly owned subsidiary of Symmetricom. We issued approximately 17.4 million shares of our common stock with a fair value of $97.5 million, converted Datum stock options into options to purchase approximately 2.3 million shares of our common stock with a fair value of $13.1 million and converted Datum warrants into warrants to purchase 486,754 shares of our common stock with an exercise price of $4.135 per share and a fair value of $1.8 million. In addition, we incurred direct acquisition costs of approximately $6.6 million.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The purchase price was allocated to Datum’s assets and liabilities as follows (in thousands):
Cash and cash equivalents | | $ | 3,034 | |
Property, plant, and equipment | | 12,120 | |
Other tangible assets | | 42,834 | |
Existing technology | | 13,856 | |
In-process research and development | | 1,156 | |
Other intangible assets | | 293 | |
Goodwill | | 68,549 | |
Assumed liabilities | | (22,904 | ) |
Total purchase price | | $ | 118,938 | |
In fiscal 2004, the amounts contained in the purchase price allocation were adjusted when final data on some of the preliminary estimates was received. The changes are reflected in the table above and include a $1.3 million increase in deferred tax assets identified when final tax returns were prepared, a $304,000 increase in the accrued warranty after confirming with the customers the amount of total liabilities for the rework and a $28,000 net increase in the inventory write-off after negotiating with the vendor to finalize the liabilities.
Note C—Discontinued Operations
During fiscal 2006 there was no gain or loss recorded for discontinued operations. During fiscal 2005 and 2004, we recognized gains of $162,000 and $13,000, respectively, for final payment for sale of software related to the Trusted Time Division, which was discontinued during fiscal 2003.
In June 2003, we discontinued the operation of the Trusted Time Division as part of our post-acquisition consolidation process. The division was acquired as part of the acquisition of Datum in October 2002. The division 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.
Note D—Other Accrued Liabilities
Other accrued liabilities consists of the following:
| | June 30, | |
| | 2006 | | 2005 | |
| | (In thousands) | |
Other accrued liabilities: | | | | | |
Income taxes payable | | $ | 4,529 | | $ | 4,408 | |
Deferred revenue | | 3,198 | | 2,847 | |
Accrued expenses | | 5,238 | | 4,494 | |
Accrued lease loss | | 109 | | 667 | |
Total | | $ | 13,074 | | $ | 12,416 | |
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note E—Post-Retirement Benefit Obligations
In connection with the Datum acquisition, we assumed Datum’s post-retirement health care benefits plan. Post-retirement benefits are recognized over the employee’s service period based on 6.23% discount rate to the employee and the employee’s beneficiaries after retirement. The health care plan was curtailed as of December 31, 2002, and only existing retired participants and former Datum employees, now employed by Symmetricom and meeting the retirement eligibility requirements by December 31, 2004, are eligible for participation. The health care plan is a contributory plan.
The following sets forth the Company’s post-retirement program’s status reconciled with amounts reported in the consolidated balance sheet (in thousands):
| | Year ended June 30, | |
| | 2006 | | 2005 | | 2004 | |
| | (In thousands) | |
Beginning balance accumulated post-retirement benefit obligations | | $ | 415 | | $ | 555 | | $ | 559 | |
Service cost | | — | | — | | — | |
Interest cost | | 26 | | 28 | | 34 | |
Actuarial gain | | (65 | ) | (123 | ) | 25 | |
Benefit payments | | (42 | ) | (45 | ) | (63 | ) |
Ending balance accumulated postretirement benefit obligations | | $ | 334 | | $ | 415 | | $ | 555 | |
Net periodic post-retirement benefit cost includes the following components:
| | Year ended June 30, | |
| | 2006 | | 2005 | | 2004 | |
| | (In thousands) | |
Service cost | | | $ | — | | | | $ | — | | | | $ | — | | |
Interest cost | | | 26 | | | | 28 | | | | 34 | | |
Net periodic post-retirement expense | | | $ | 26 | | | | $ | 28 | | | | $ | 34 | | |
The Company’s contribution to the plan is fixed for each eligible retiree. Therefore, fluctuations in health care costs have no effect on the Company’s liability. Upon the demise of the eligible retiree, the coverage for the spouse of the retiree is terminated.
Note F—Warranties
Changes in our accrued warranty liability during fiscal 2006, 2005 and 2004 are as follows:
| | Year ended June 30, | |
| | 2006 | | 2005 | | 2004 | |
| | (In thousands) | |
Beginning balance | | $ | 3,338 | | $ | 3,194 | | $ | 4,021 | |
Provision for warranty for the year | | 2,886 | | 2,546 | | 2,059 | |
Adjustment for expired warranties year | | — | | — | | (23 | ) |
Less: Actual warranty costs | | (2,677 | ) | (2,402 | ) | (2,863 | ) |
Ending balance | | $ | 3,547 | | $ | 3,338 | | $ | 3,194 | |
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note G—Lease Commitments
In March 2006, we entered into an office lease agreement, effective April 15, 2006 to December 31, 2009, for approximately 21,065 square feet of space in an office building located in Austin, Texas. The leased space is for offices.
In November 2005, we entered into a First Amendment to Lease, effective as of October 27, 2005, which amends our existing lease for approximately 117,739 square feet of space in an office building located in San Jose, California. The leased space serves as our corporate office. The amendment extends the termination date of the lease from April 15, 2009 to April 15, 2016. In addition, it provides that, commencing December 1, 2005, basic annual rent (as defined in the lease) will be reduced to $1.7 million, subject to 4% annual increases commencing on April 15, 2006. The building element of the original lease, which was accounted for from the outset as a capital lease for a property with a cost of $9.0 million, continues to be amortized over the initial lease period ending in April 2009, in accordance with SFAS No. 13, Accounting for Leases.
Lease loss liabilities were created as a result of discontinuing operations and consolidations. As of June 30, 2006, and 2005 the accrued lease loss liabilities were approximately $300,000 and $946,000, respectively.
In addition, we lease certain other facilities and equipment under operating lease agreements. Rental expense charged to operations was $1.7 million in 2006, $1.4 million in 2005 and $1.9 million in 2004. Future minimum lease payments, net of sublease income at June 30, 2006 are as follows:
| | Capital Lease | | Operating Lease | |
| | (In thousands) | |
For the fiscal year: | | | | | | | | | |
2007 | | | $ | 1,492 | | | | $ | 1,796 | | |
2008 | | | 1,576 | | | | 2,300 | | |
2009 | | | 1,325 | | | | 2,264 | | |
2010 | | | — | | | | 3,435 | | |
2011 | | | — | | | | 4,228 | | |
Thereafter | | | — | | | | 19,365 | | |
Total minimum lease payments | | | 4,393 | | | | $ | 33,388 | | |
Amount representing interest (weighted average rate of 8.5%) | | | (480 | ) | | | | | |
Present value of total minimum lease payments | | | 3,913 | | | | | | |
Current portion | | | (1,216 | ) | | | | | |
Capital lease obligation, net of current portion | | | $ | 2,697 | | | | | | |
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note H—Goodwill and Intangible Assets
The changes in the carrying value of goodwill for the years ended June 30, 2006 and 2005 are as follows for the different segments of Symmetricom (see Note B):
| | | | | | Timing, Test | | | |
| | | | | | and | | | |
| | Wireline | | Wireless/OEM | | Measurement | | Total | |
| | (In thousands) | |
Balances as of June 30, 2004 | | $ | 27,917 | | | $ | 6,963 | | | | $ | 14,368 | | | $ | 49,248 | |
Adjustments | | — | | | — | | | | — | | | — | |
Balances as of June 30, 2005 | | $ | 27,917 | | | $ | 6,963 | | | | $ | 14,368 | | | $ | 49,248 | |
Addition (see Note B) | | — | | | — | | | | 3,614 | | | 3,614 | |
Impairment of goodwill | | — | | | (6,963 | ) | | | — | | | (6,963 | ) |
Balances as of June 30, 2006 | | $ | 27,917 | | | $ | — | | | | $ | 17,982 | | | $ | 45,899 | |
In the third quarter of the fiscal 2006, we recorded a non-cash impairment charge of approximately $7.0 million for the write-down of the goodwill related to our Wireless/OEM business segment purchased in connection with the Datum acquisition in October 2002. The impairment charge reflects changing business conditions in the wireless segment surrounding product pricing, gross margins, new product acceptance and the increasingly prevalent use of wireless technologies that do not require a frequency reference at the cell site, but receive the required synchronization references from central office. Our accounting policy is to perform impairment tests in accordance with the SFAS No.142, Goodwill and Other Intangible Assets, on an annual basis, and between annual tests in certain circumstances, for each reporting unit using a discounted cash flow valuation method. During the third quarter of fiscal 2006, there was an impairment indicator and we performed a goodwill impairment test on the Wireless/OEM business segment since the product pricing pressures and gross margin pressures discussed in prior quarters continued to decline in the third quarter of fiscal 2006 and we did not anticipate any improvement.
Critical estimates in valuing certain intangible assets include, but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements, acquired developed technologies and patents; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; and the brand awareness and the market position of the acquired products and assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
The provisions of SFAS No. 142 also require an annual goodwill impairment test, and more frequently if impairment indicators arise. In testing for a potential impairment of goodwill, the provisions of SFAS No. 142 require the application of a fair value based test at the reporting unit level. The first step of the impairment test prescribed by SFAS No. 142 requires an estimate of the fair value of each unit. If the estimated fair value of any unit is less than the book value, SFAS No. 142 requires an estimate of the fair value of all identifiable assets and liabilities of the unit in a manner similar to a purchase price allocation for an acquired business. This estimate requires valuations of certain internally generated and unrecognized intangible assets such as in-process research and development and developed technology. Potential goodwill impairment is measured based upon this two-step process. An internal evaluation identified the need to record an impairment loss for the Wireless/OEM segment in the third quarter of
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
fiscal 2006 using a discounted cash flow valuation method. We performed our most recent annual goodwill impairment test as of June 2006 and no impairment losses were recorded based on these evaluations.
In the third quarter of fiscal 2006, we recorded a non-cash impairment charge of approximately $1.2 million for the write-down of the other intangibles related to our Wireless/OEM business segment purchased in connection with the Datum acquisition in October 2002. During the third quarter of fiscal 2006, there was an impairment indicator and we performed an intangible impairment test on the Wireless/OEM business segment since the product pricing pressures and gross margin pressures discussed in prior quarters continued to decline in the third quarter of fiscal 2006 and we did not anticipate any improvement. There were no charges associated with the intangible assets in fiscal 2005 and 2004.
The carrying value of long-lived assets is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset, including disposition, is less than the carrying value of the asset. Impairment is measured as the amount by which the carrying amount exceeds the fair value.
Other intangible assets are recorded at cost, less accumulated amortization. Other intangible assets as of June 30, 2006 and 2005 consist of:
| | Gross | | Accumulated | | Net | |
| | Carrying Amount | | Amortization | | Intangible Assets | |
| | (in thousands) | |
Purchased technology | | | $ | 23,768 | | | | $ | 14,557 | | | | $ | 9,211 | | |
Customer lists, trademarks, other | | | 3,730 | | | | 2,669 | | | | 1,061 | | |
Total as of June 30, 2005 | | | $ | 27,498 | | | | $ | 17,226 | | | | $ | 10,272 | | |
Purchased technology | | | $ | 22,671 | | | | $ | 15,515 | | | | $ | 7,156 | | |
Customer lists, trademarks, other | | | 3,973 | | | | 2,929 | | | | 1,044 | | |
Total as of June 30, 2006 | | | $ | 26,644 | | | | $ | 18,444 | | | | $ | 8,200 | | |
Fiscal year: | | | | (in thousands) | |
2007 | | | $ | 2,322 | | |
2008 | | | 1,427 | | |
2009 | | | 1,294 | | |
2010 | | | 1,011 | | |
2011 | | | 796 | | |
Thereafter | | | 1,350 | | |
Total amortization | | | $ | 8,200 | | |
The estimated future amortization expense is as follows:
Intangible asset amortization expense for fiscal 2006, 2005 and 2004 was approximately $4.1 million, $4.5 million and $4.7 million, respectively.
Increases in the other intangible assets during fiscal 2006 primarily resulted from the acquisition of Agilent Technologies’ Frequency and Timing Standards product line, which included $2.6 million in purchased technology, $0.2 million in backlog and $0.5 million in customer relationships. The $0.2 million in backlog was fully amortized in the first quarter of fiscal 2006.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I—Income Taxes
The provision of federal, state and foreign income tax expense on income from continuing operations consists of the following:
| | Year ended June 30, | |
| | 2006 | | 2005 | | 2004 | |
| | (In thousands) | |
Current: | | | | | | | |
Federal | | $ | 767 | | $ | 1,375 | | $ | (1,178 | ) |
State | | (45 | ) | 267 | | 283 | |
Puerto Rico | | 445 | | 847 | | 288 | |
Foreign | | 47 | | 635 | | 65 | |
| | 1,214 | | 3,124 | | (542 | ) |
Deferred: | | | | | | | |
Federal | | (881 | ) | (447 | ) | (1,445 | ) |
State | | (383 | ) | 196 | | (147 | ) |
Puerto Rico | | 200 | | (345 | ) | — | |
Foreign | | — | | 16 | | 11 | |
| | (1,064 | ) | (580 | ) | (1,581 | ) |
Total provision (benefit) | | $ | 150 | | $ | 2,544 | | $ | (2,123 | ) |
The effective income tax rate differs from the federal statutory income tax rate as follows:
| | Year ended June 30, | |
| | 2006 | | 2005 | | 2004 | |
Federal statutory income tax (benefit) expense rate | | 35.0 | % | 35.0 | % | (35.0 | )% |
Federal tax benefit of Puerto Rico operations | | (198.0 | ) | (26.5 | ) | (28.0 | ) |
Puerto Rico taxes | | 67.0 | | 2.5 | | 6.6 | |
State income taxes, net of federal benefit | | (50.0 | ) | 2.1 | | 2.9 | |
Goodwill | | 167.0 | | — | | 2.2 | |
Other | | (5.5 | ) | (0.6 | ) | 2.8 | |
Effective income tax rate | | 15.5 | % | 12.5 | % | (48.5 | )% |
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The principal components of deferred tax assets and liabilities are as follows:
| | June 30, | |
| | 2006 | | 2005 | |
| | (In thousands) | |
Deferred tax assets: | | | | | |
Net operating loss carryforwards | | $ | 23,292 | | $ | 23,458 | |
Tax credit carryforwards | | 11,621 | | 11,202 | |
Reserves and accruals | | 6,759 | | 6,312 | |
Depreciation and amortization | | 12,719 | | 11,517 | |
| | 54,391 | | 52,489 | |
Valuation allowance | | (2,822 | ) | (2,822 | ) |
Total deferred tax assets | | 51,569 | | 49,667 | |
Deferred tax liabilities: | | | | | |
Unremitted Puerto Rico earnings | | 1,177 | | 929 | |
| | 1,177 | | 929 | |
Net deferred tax assets | | $ | 50,392 | | $ | 48,738 | |
The increase of net deferred tax assets of $1.7 million during fiscal 2006 includes the deferred tax provision on continuing operations shown above of $1.1 million plus $0.6 million of deferred tax assets related to the recognition of stock option benefits.
Net deferred tax assets are comprised of the following:
| | June 30, | |
| | 2006 | | 2005 | |
| | (In thousands) | |
Current assets | | $ | 6,759 | | $ | 6,312 | |
Non-current assets | | 44,252 | | 42,845 | |
Non-current liabilities | | (619 | ) | (419 | ) |
Net deferred tax assets | | $ | 50,392 | | $ | 48,738 | |
As of June 30, 2006, for federal income tax purposes, we had regular net operating loss carryforwards of approximately $66.0 million, which will expire in years 2021 through 2025. We had California regular net operating loss carryforwards of approximately $15.9 million, which will expire in years 2013 through 2015.
Also, we had federal research and development tax credit carryforwards of approximately $5.8 million that will expire in the years 2008 through 2025, and alternative minimum tax credit carryforwards of approximately $3.5 million that have no expiration date. Additionally, for state income tax purposes, we had research and development tax credit carryforwards of approximately $2.1 million, which have no expiration date.
During fiscal 2006, we reviewed the realizability of deferred tax assets and determined that $0.6 million of the deferred tax assets related to stock option exercises were more likely than not to be realized. Accordingly, we recognized these deferred tax assets with a corresponding increase to common stock. We have provided a valuation allowance for certain deferred tax assets because we have determined that it is more likely than not that we will not have sufficient taxable income to realize these tax assets. At June 30, 2006, the valuation allowance of $2.8 million was attributable to the tax benefit of potentially
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
expiring tax credits stemming from stock option transactions, which will be credited to common stock if realized rather than as a reduction of the tax provision.
We operate a subsidiary in Puerto Rico under a grant providing for a partial exemption from Puerto Rico taxes through fiscal 2016. In addition, this subsidiary was taxed under Section 936 of the U.S. Internal Revenue Code, which exempted qualified Puerto Rico source earnings, subject to wage-based and other limitations, from federal income taxes through fiscal 2006. Taxes have been calculated on this subsidiary’s earnings, all of which we intend to remit to the U.S. As of June 30, 2006, the total unremitted earnings of the Puerto Rico subsidiary and the related tax liability were approximately $46.0 million and $1.1 million, respectively.
On July 10,2006, our Puerto Rico subsidiary, formerly electing the benefits of section 936, distributed $41.0 million as a dividend to its parent Symmetricom, Inc. On July 11, 2006, this Puerto Rico subsidiary moved its place of incorporation from Delaware to Bermuda in a tax-free reorganization. Consistent with a resolution approved by the Symmetricom board of directors, this subsidiary has elected to indefinitely reinvest its future profits outside the United States and not repatriate future earnings to its parent Symmetricom, Inc.
Note J—Contingencies
We formerly leased a tract of land for our operations in Texas. Those operations involved the use of solvents and, at the end of the lease, we remediate an area where the solvents had been deposited on the ground and obtained regulatory approval for that remedial activity. In 1996, an environmental investigation of the property detected those same contaminants in groundwater in excess of current regulatory standards. The groundwater contamination has migrated to some adjacent properties. We have entered into the Texas Natural Resource Conservation Commission’s Voluntary Cleanup Program (the “Voluntary Cleanup Program”) to obtain regulatory approval for closure of this site and a release from liability to the State of Texas for subsequent landowners and lenders. We have notified adjacent property owners affected by the contamination of our participation in the Voluntary Cleanup Program. On May 20, 2004, we received a demand from the owner of several adjacent lots for damages in the amount of $1.3 million, as well as seeking an indemnity for the contamination and a promise to remediate the contamination. On March 14, 2006, the adjacent property owner filed suit in Probate Court No. 1, Travis County, Texas (Anna B. Miller, Individually and as Executrix of the Estate of Robert L. Miller, et al. vs. Austron, Inc., et al.), seeking damages. We have not yet been served in this matter. We are continuing to work on the remediation of the formerly leased site as well as the adjacent properties and intend to defend this lawsuit vigorously. As of June 30, 2006, we had an accrual of $0.6 million for remediation costs, appraisal fees and other ongoing monitoring costs.
Under the indemnification provisions of the Company’s standard sales contracts, the Company agrees to defend the customer against third party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/customer. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid by the customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement. To date, there have been no claims under such indemnification provisions. As such, the Company believes the estimated fair value of these indemnification agreements is not material.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We are also a party to certain other claims in the normal course of our operations. While the results of these claims cannot be predicted with any certainty, we believe that the final outcome of these matters will not have a material adverse effect on our financial position and results of operations.
Note K—Related Party Transactions
In March 1998, we loaned an officer $500,000 in the form of an interest-free full-recourse promissory note. The entire principal balance is due and payable on March 25, 2008. The note is secured by a deed of trust for the officer’s personal residence. As of June 30, 2006, the entire principal balance is outstanding.
In February 2001, we loaned an officer $555,000 in the form of a full-recourse promissory note. The note accrued interest at an annual rate of 7.75%. On December 2004, the entire principal balance was paid.
During fiscal 2006, 2005 and 2004, we paid a total of $7,500, $12,500 and $9,000, respectively, for consulting fees to four directors of Symmetricom in addition to their regular director compensation for attendance at Board and Committee meetings.
During fiscal 2006, we sold products and services to Arris Group for a total of approximately $175,000, and acquired equipment for approximately $2,000. The CEO of Arris Group, Mr. Robert Stanzione, is a director of the Company.
Note L—Long Term Obligations
| | June 30, | |
| | 2006 | | 2005 | |
| | (In thousands) | |
Long-term obligations: | | | | | |
Capital lease | | $ | 3,913 | | $ | 4,953 | |
Less—current maturities | | (1,216 | ) | (1,040 | ) |
Lease loss accrual | | 145 | | 279 | |
Lease accrual | | 151 | | — | |
Bond payable | | 2,405 | | 2,475 | |
Less—current maturities | | (70 | ) | (70 | ) |
Convertible subordinate notes | | 120,000 | | 120,000 | |
Post-retirement benefits (Note E), net | | 292 | | 370 | |
Total | | $ | 125,620 | | $ | 126,967 | |
On June 8, 2005, the Company sold $120 million of contingent convertible subordinated notes (the “Notes”), which mature on June 15, 2025 and bear interest at the rate of 3.25 % per annum. Interest on the Notes is payable semi-annually in June and December of each year beginning on December 15, 2005. The Notes are unsecured obligations and are subordinated in right of payment to all of our existing and future senior debt, including our indebtedness under our senior credit facilities. The Notes are structurally subordinated to all indebtedness and liabilities of our subsidiaries.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Notes are convertible, at the holder’s option, prior to the maturity date into cash and, if applicable, shares of our common stock in the following circumstances:
· Prior to June 15, 2023, if the common stock price for a least 20 trading days in the period of 30 consecutive days ending on the last trading day of the calendar quarter preceding the quarter in which the conversion occurs is more than 125% of the conversion price of the notes in effect on that 30th trading day;
· On or after June 15, 2023, at all times on or after any date on which the common stock price is more than 125% of the then current conversion price;
· During the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the notes for each such trading-day was less than 95% of the average of the sale price of our common stock during such five trading-day period multiplied by the then current conversion rate;
· If we have called the particular notes for redemption and the redemption has not yet occurred; or
· Upon the occurrence of specified corporate transactions.
Holders may convert any outstanding Notes into cash and, if applicable, shares of our common stock at an initial conversion price per share of $12.49. On June 30, 2006, the reported closing bid price of our common stock was $7.07 per share.
Also, on or after June 20, 2012, we may redeem some or all of the Notes at any time or from time to time at a redemption price of 100% of the principal amount of the Notes, plus accrued and unpaid interest, (including liquidated damages, if any) up to but not including the date of redemption, payable in cash. Holders may require us to repurchase all or a portion of their Notes on June 15, 2012, 2015 and 2020 for a repurchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest (including liquidated damages, if any) up to but not including the date of repurchase, payable in cash, plus, in the event of certain change of control events related to us.
We may from time to time repurchase or redeem all or a portion of the Notes, if necessary, to comply with NASDAQ marketplace rule 4350(i)(1)(D). We may undertake such repurchase from time to time through privately negotiated or open-market transactions or other available means.
In connection with the issuance of these Notes, Symmetricom recorded bond fees of approximately $3.8 million, which will be amortized over a period of seven years until fiscal 2012.
On May 1, 2004, we entered into a credit agreement with Wells Fargo Bank, National Association to obtain a revolving line of credit up to $5.0 million to be used as working capital. On June 1, 2005 this agreement was amended to allow the Company to obtain a revolving line of credit up to $10.0 million to be used as working capital. At the beginning of July 2006, the Company decided to reduce the credit note from $10 million to $3 million. The line of credit contains certain financial covenants and restrictions. The new line of credit expires on November 1, 2006. No borrowings were outstanding as of June 30, 2006.
On June 1, 2001, the Massachusetts Development Finance Agency issued a $2.7 million industrial development bond on Datum’s behalf to finance the expansion of Datum’s manufacturing facility in Beverly, Massachusetts. The bond matures on May 1, 2021. Interest on the bond is payable monthly at an adjustable rate of interest. The remarketing agent establishes the interest rate for each rate period at the lowest rate that in its judgment would permit the sale of the bonds at par value. The bond is collateralized
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
by the line of credit with Wells Fargo Bank described above. As of June 30, 2006, the bond balance was $2.4 million.
Note M—Benefit Plans
401(k) Plan
The Company has a 401(k) plan (the “Plan”) that allows eligible U.S. and Puerto Rico employees to contribute up to 50 percent of their annual compensation to the Plan, subject to certain limitations. The employees’ funds are not directly invested in shares of the Company’s common stock. Each employee directs the investment of the funds across a series of mutual funds. Effective in fiscal 2004, Symmetricom matched up to $0.50 per $1.00 deferred up to 3% of eligible compensation. An additional match of $1.00 per $1.00 deferred up to 1% of eligible compensation will be made based upon achievement of company profit performance goals. Employee contributions vest immediately. Employer matching contributions vest ratably over three years. Symmetricom made matching contribution payments of $0.5 million, $0.7 million and $0.4 million in fiscal 2006, 2005 and 2004, respectively.
Deferred Compensation Plan
The Company has a deferred compensation plan that allows outside directors and certain U.S. employees to contribute up to 100% of their compensation, provided that their contribution does not reduce their salary to an amount that is less than the amount necessary to pay applicable employment taxes and other withholding obligations. The Board of Directors is authorized to make discretionary contributions to the accounts of participants. No discretionary contributions were made in fiscal 2006, 2005, and 2004.
Note N—Stockholders’ Equity
Stock Option Plans
The Company has several equity benefit plans under which employees, directors and consultants may be granted non-qualified and incentive options to purchase shares of the Company’s common stock and restricted stock. One of these plans was amended in fiscal 2003, in connection with the tender offer during the fourth quarter of fiscal 2003, to effectively provide that restricted stock could be granted and repurchased for no cash purchase price. Stock appreciation rights may also be granted under this plan; however, none have been granted to date. In addition, non-employee directors have previously been granted options each January to purchase 10,000 shares of Symmetricom’s common stock or a pro rata share based on the time served by a new director in the previous calendar year. All options have been granted at the fair market value of our common stock on the date of grant and, except with respect to grants made with the changes described below, expire no later than ten years from the date of grant. Options generally vest over three years.
Effective January 1, 2007, each non-employee director will receive an annual non-statutory stock option grant to purchase 7,500 shares of Symmetricom’s common stock and a grant of 3,750 shares of restricted stock, each with 100% vesting at the end of one year or upon the occurrence of a change of control. This automatic grant of options and restricted stock replaces the automatic annual grant of 10,000 options to purchase common stock that was previously in place for continuing non-employee directors. In addition, upon joining the Board of Directors, each non-employee director will receive a one-time grant of a non-statutory stock option to purchase 20,000 shares of the Company’s common stock.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effective August 4, 2005, the Symmetricom Board approved a change in the terms for stock options granted on and after August 4, 2005 under the employee stock option plans. In addition, effective December 28, 2005, the Symmetricom Board approved a change in the terms for stock options granted on and after December 28, 2005 to non-employee directors. These amendments provide that the life of a stock option made under these plans is now 5 years instead of 10 years. Vesting terms are generally unchanged. The Company’s right to repurchase restricted shares generally lapses over the same term as the vesting period applicable to the Company’s stock options.
Stock option activity for the three years ended June 30, 2006 is as follows:
| | | | Options Outstanding | |
| | Shares | | | | Weighted | |
| | Available | | Number of | | Average | |
| | For Grant | | Shares | | Exercise Price | |
| | (In thousands, except per share amounts) | |
Balances at June 30, 2003 | | | 3,758 | | | | 6,294 | | | | $ | 4.90 | | |
Granted* | | | (952 | ) | | | 918 | | | | 9.44 | | |
Exercised | | | — | | | | (1,805 | ) | | | 4.20 | | |
Canceled | | | 417 | | | | (417 | ) | | | 6.17 | | |
Expired | | | (186 | ) | | | — | | | | — | | |
Balances at June 30, 2004 | | | 3,037 | | | | 4,990 | | | | 5.88 | | |
Granted | | | (1,259 | ) | | | 1,259 | | | | 8.04 | | |
Exercised | | | — | | | | (1,619 | ) | | | 4.95 | | |
Canceled | | | 305 | | | | (305 | ) | | | 6.70 | | |
Expired | | | (69 | ) | | | — | | | | — | | |
Balances at June 30, 2005 | | | 2,014 | | | | 4,325 | | | | 6.81 | | |
Granted* | | | (959 | ) | | | 739 | | | | 9.03 | | |
Exercised | | | — | | | | (402 | ) | | | 4.74 | | |
Canceled | | | 263 | | | | (263 | ) | | | 9.30 | | |
Expired | | | (1 | ) | | | — | | | | — | | |
Balances at June 30, 2006 | | | 1,317 | | | | 4,399 | | | | $ | 7.22 | | |
* included restricted award
The total number of in-the-money options outstanding and exercisable as of June 30, 2006 was as follows:
| | | | Weighted | | | | | | | | | |
| | | | Average | | | | | | | | | |
| | | | Remaining | | Weighted | | 6/30/2006 | | Intrinsic | | Aggregate | |
| | Number of | | Contractual | | Average | | Closing | | Value | | Intrinsic | |
Option | | | | Shares | | Life | | Exercise Price | | Price | | Per Share | | Value | |
| | (In thousands) | | (In years) | | | | | | | | (In thousands) | |
Outstanding at June 30, 2006 | | | 1,578 | | | | 4.01 | | | | $ | 4.60 | | | | $ | 7.07 | | | | $ | 2.47 | | | | $ | 3,897 | | |
Exercisable at June 30, 2006 | | | 1,568 | | | | 3.99 | | | | $ | 4.59 | | | | $ | 7.07 | | | | $ | 2.48 | | | | $ | 3,888 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The aggregate intrinsic value in the preceding table represents the total pre-tax value of stock options outstanding as of June 30, 2006, based on the Company’s common stock closing price of $7.07 on
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2006, which would have been received by the option holders had all option holders exercised their options as of that date.
As of June 30, 2006, 2005 and 2004, the number of shares and weighted average exercise prices of exercisable options were 1,567,540 at $4.59, 2,387,119 at $5.75 and 3,112,002 at $5.26, respectively.
There were 2,361,169 shares of common stock subject to in-the-money options exercisable as of June 30, 2005, based on the Company’s closing stock price of $10.37 at the end of the fiscal year ended June 30, 2005.
The total intrinsic value of options exercised during the years ended June 30, 2006, 2005, and 2004, was $1.6 million, $8.4 million, and $7.2 million, respectively.
The weighted average grant-date fair value of options granted was $3.67 in 2006, $5.11 in 2005 and $6.07 in 2004. Our calculations were made using the Black-Scholes option-pricing model. The fair value of the Company’s stock-based awards to employees was estimated assuming no expected dividend and the following weighted-average assumptions for fiscal 2006, 2005 and 2004:
| | Stock Option Plans | |
| | 2006 | | 2005 | | 2004 | |
Expected life after vesting (in years) | | 0.9 | | 1.6 | | 2.3 | |
Expected dividends | | — | | — | | — | |
Risk-free interest rate | | 4.6 | % | 4.2 | % | 3.6 | % |
Volatility | | 57.3 | % | 77.1 | % | 82.2 | % |
Prior to June 30, 2005, the Company used its historical volatility as its basis to estimate expected volatility. In light of recent accounting guidance related to stock options, the Company reevaluated the volatility assumptions used to estimate the value of employee stock options granted in fiscal 2006. Management determined that historical and implied volatility related to publicly traded options is more reflective of market conditions and a better indicator of expected volatility than historical volatility only.
Restricted Stock Awards
Our restricted stock awards are grants that entitle the holder to acquire shares of restricted common stock with certain designated prices or at no cost on a time or performance basis. The shares of restricted stock cannot be sold, pledged, or otherwise disposed of until the award vests and any unvested shares may be reacquired by us following the awardees’ termination of service. The restricted stock awards typically vest on the first, second or third anniversary of the grant date or on a graded vesting schedule over the designated service period with certain conditions and restrictions. A summary of our unvested restricted stock awards as of June 30, 2006 and changes during the fiscal period then ended are presented below.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables summarize the activity for our restricted stock awards during fiscal 2006, 2005 and 2004:
| | Restricted Stock Awards
Outstanding | |
| | | | Weighted | |
| | | | Average | |
| | Number of | | Grant-Date | |
| | Shares | | Fair Value | |
| | (In thousands) | | | |
Nonvested balance at June 30, 2003 | | | 256 | | | | $ | 4.50 | | |
Granted | | | 34 | | | | 6.98 | | |
Vested | | | (4 | ) | | | 2.62 | | |
Forfeited | | | — | | | | — | | |
Nonvested at June 30, 2004 | | | 286 | | | | $ | 4.82 | | |
Granted | | | — | | | | — | | |
Vested | | | (145 | ) | | | 4.79 | | |
Forfeited | | | (19 | ) | | | 6.29 | | |
Nonvested at June 30, 2005 | | | 122 | | | | $ | 4.63 | | |
Granted | | | 220 | | | | 9.31 | | |
Vested | | | (122 | ) | | | 4.63 | | |
Forfeited | | | (36 | ) | | | 9.42 | | |
Nonvested at June 30, 2006 | | | 184 | | | | $ | 9.28 | | |
The intrinsic value of a stock-based award is the amount by which its market value exceeds its exercise price. The intrinsic value of restricted awards granted during fiscal 2006, 2005 and 2004 were $2.0 million, $0 and $0.2 million, respectively. Amortization of stock compensation expenses for the restricted awards were $0.7 million, $1.0 million and $0.3 million for fiscal 2006, 2005 and 2004, respectively.
Stock Repurchase Program
On August 11, 2005, the Board of Directors authorized management to repurchase up to approximately 2.6 million shares pursuant to a repurchase program established in fiscal 2002, adding 2.0 million shares to the program previously authorized, of which approximately 0.6 million shares remained available for repurchase as of June 30, 2005. As of June 30, 2006, approximately 1.4 million shares remained eligible for repurchase. There were approximately 45.7 million shares of Symmetricom common stock outstanding as of June 30, 2006.
During fiscal 2006, we repurchased 1.2 million shares for an aggregate price of approximately $9.7 million. Upon termination of some employees, 35,500 shares of restricted stock were forfeited pursuant to existing agreements.
Preferred Stock
We have 500,000 shares of $0.0001 par value preferred stock authorized, of which 200,000 shares have been reserved for issuance in connection with our preferred stock rights plan. The right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock at a price of $72.82.The rights were distributed at the rate of one right for each share of common stock as a
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
non-taxable dividend and will expire August 2011. The rights will be exercisable only in the event that a person or group acquires 15% or more of our outstanding common stock.
Option Repurchase
On May 28, 2003, we offered to purchase for cash from our eligible employees all outstanding stock options with exercise prices of $8.00 or greater that were granted under the Symmetricom 1999 Employee Stock Option Plan (the Symmetricom 1999 Plan) or the Datum Inc. 1994 Incentive Stock Plan (the Datum Plan).
Concurrently with this offer, we also offered to our eligible officers to exchange for shares of restricted stock all outstanding options with exercise prices equal to or greater than $8.00 granted under either of the Plans.
At the end of the offer period in June 2003, a total of 1,962,000 options were cancelled, 252,000 shares of restricted stock were issued, and $1.3 million was paid in July 2003 and was recorded as compensation expense during the fourth quarter of fiscal 2003. The shares related to the cancelled options were returned to the pool of shares available for the grant of options.
The options exchanged for restricted stock resulted in a deferred compensation charge of $1.1 million. This deferred charge was reflected on our consolidated financial statements as of June 30, 2004 and was initially amortized over the five-year vesting period of the restricted stock. However, the achievement of certain financial results during fiscal 2005 accelerated the vesting of the restricted stock, and we recorded a charge for all remaining deferred compensation.
Note O—Business Segment Information
The Company is organized into five reportable segments. There are four reportable segments within the Telecom Solutions Division: Wireline Products, Wireless/OEM Products, Global Services and Specialty Manufacturing/Other. The fifth reportable segment is the Timing, Test and Measurement Division. Wireline Products consist principally of Digital Clock Distributors, or DCDs, based on quartz, rubidium and Global Positioning System (GPS) technologies. Our Wireline Products provide highly accurate and uninterruptible timing to meet the synchronization requirements of telecommunication networks. Our OEM base station timing products are designed to deliver stable timing to cellular/PCS base stations through a GPS receiver to capture cesium-based time signals produced by GPS satellites. Our Broadband Networking products, which include GoWide, a product that provides a high-bandwidth solution for medium-sized businesses without access to optical networks, was reported as a segment in prior periods and now is included in Wireless/OEM Products due to changes in the management reporting structure. Through our Global Services division, we offer a broad portfolio of services for our customers around the world. The services we offer include system planning, network audits, network monitoring, maintenance, logistics, and installation. Transmission Products and Contract Manufacturing were reported as segments in prior periods, and are now included in Specialty Manufacturing/Other within the Telecom Solutions Division.
The Timing, Test and Measurement products are precision time and frequency systems that are important to communications systems of wireline, wireless, satellite and computer network technologies, for government, power utilities, aerospace, defense, and enterprise markets.
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For each of our segments, we have separate financial information, including gross profit amounts, which are evaluated regularly by management in deciding how to allocate resources and in assessing performance. We do not allocate assets or specific operating expenses to these individual operating segments. Therefore, the segment information reported here includes only net revenue and gross profit.
| | Year Ended June 30, | |
| | 2006 | | 2005 | | 2004 | |
| | (In thousands, except percentages) | |
Net revenue: | | | | | | | |
Telecom Solutions Division: | | | | | | | |
Wireline Products | | $ | 80,635 | | $ | 83,129 | | $ | 71,467 | |
Wireless/OEM Products | | 23,893 | | 27,723 | | 34,617 | |
Global Services | | 12,539 | | 9,712 | | 8,315 | |
Specialty Manufacturing/Other | | 12,100 | | 9,759 | | 9,537 | |
Timing, Test and Measurement Division | | 59,044 | | 58,824 | | 48,911 | |
Total net revenue | | 188,211 | | 189,147 | | 172,847 | |
Cost of sales: | | | | | | | |
Telecom Solutions Division: | | | | | | | |
Wireline Products | | 35,427 | | 35,848 | | 37,084 | |
Wireless/OEM Products | | 18,441 | | 19,621 | | 25,781 | |
Global Services | | 6,205 | | 5,547 | | 4,832 | |
Specialty Manufacturing/Other | | 9,726 | | 8,115 | | 8,168 | |
Timing, Test and Measurement Division | | 30,354 | | 27,589 | | 25,545 | |
Other cost of sales* | | 5,975 | | 3,899 | | 9,773 | |
Total cost of sales | | 106,128 | | 100,619 | | 111,183 | |
Gross profit: | | | | | | | |
Telecom Solutions Division: | | | | | | | |
Wireline Products | | 45,208 | | 47,281 | | 34,383 | |
Wireless/OEM Products | | 5,452 | | 8,102 | | 8,836 | |
Global Services | | 6,334 | | 4,165 | | 3,483 | |
Specialty Manufacturing/Other | | 2,374 | | 1,644 | | 1,369 | |
Timing, Test and Measurement Division | | 28,690 | | 31,235 | | 23,366 | |
Other cost of sales* | | (5,975 | ) | (3,899 | ) | (9,773 | ) |
Total gross profit | | $ | 82,083 | | $ | 88,528 | | $ | 61,664 | |
Gross margin: | | | | | | | |
Telecom Solutions Division: | | | | | | | |
Wireline Products | | 56.1 | % | 56.9 | % | 48.1 | % |
Wireless/OEM Products | | 22.8 | % | 29.2 | % | 25.5 | % |
Global Services | | 50.5 | % | 42.9 | % | 41.9 | % |
Specialty Manufacturing/Other | | 19.6 | % | 16.8 | % | 14.4 | % |
Timing, Test and Measurement Division | | 48.6 | % | 53.1 | % | 47.8 | % |
Other cost of sales as percentage of total revenue* | | (3.2 | )% | (2.1 | )% | (5.7 | )% |
Total gross margin | | 43.6 | % | 46.8 | % | 35.7 | % |
* Includes amortization of purchased technology, impairment of intangibles and applicable integration, and restructuring charges.
81
SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our export sales accounted for 29.5%, 35.0%, and 32.0%, of our net revenue in fiscal 2006, 2005, and 2004, respectively. The geographical components of revenue are as follows:
| | Year ended June 30, | |
| | 2006 | | 2005 | | 2004 | |
United States | | | 70 | % | | | 65 | % | | | 68 | % | |
International: | | | | | | | | | | | | | |
Asia | | | 10 | % | | | 11 | % | | | 12 | % | |
Europe | | | 11 | % | | | 16 | % | | | 14 | % | |
Canada | | | 3 | % | | | 2 | % | | | 2 | % | |
Latin America | | | 4 | % | | | 5 | % | | | 3 | % | |
Rest of the world | | | 2 | % | | | 1 | % | | | 1 | % | |
No customer accounted for 10.0% or more of our net revenue in fiscal 2006, 2005, and 2004.
Note P—Integration and Restructuring Charges
In connection with the acquisitions of Agilent Technologies’ Frequency and Timing Standards product line, we incurred $1.2 million integration charges under the other cost of sales in fiscal 2006. This acquisition is included in the Timing, Test, and Measurement division. Management does not expect significant revisions to the purchase price allocations for the acquired businesses.
In connection with the acquisitions of Datum and TrueTime in fiscal 2003, we initiated an integration plan to consolidate and restructure certain functions of the pre-acquisition Datum and TrueTime operations. During fiscal 2004, a majority of our manufacturing operations were consolidated into our facility in Aguadilla, Puerto Rico and we integrated our Irvine, California manufacturing into our Beverly, Massachusetts facility. Internally, we have consolidated the Broadband Networking Division, which is now part of our Wireless/OEM Products segment, into the Telecom Solutions Division and discontinued the Trusted Time Division. Related to the acquisitions, we accrued approximately $8.3 million of restructuring costs in connection with loss on several facility leases and employee terminations. These costs have been recognized as a liability assumed in the purchase business combination in accordance with EITF Issue No. 95-3, “Recognition of Liabilities in Connection with Purchase Business Combinations,” and reflected as an increase to goodwill. In addition, we expensed $1.2 million for additional lease loss accrual during the fourth quarter of fiscal 2003.
The facilities accruals from the integration plan represent the lease loss accruals for the Toledo Way facility in Irvine, California, the Westwind Boulevard facility in Santa Rosa, California, and the Via Del Oro facility in San Jose, California. These accruals are presented net of expected sublease income. The employee terminations were for personnel from manufacturing, engineering, sales, marketing and administration from the Datum and TrueTime sites in Beverly, Massachusetts; Austin, Texas; Santa Rosa, California; and Irvine, California.
During fiscal 2004, we had a restructuring plan to reduce headcount primarily in the Telecom Solution Division and to exit our Parker facility in Irvine, California, the Lindbergh Avenue facility in Livermore, California and the Brighton facility in the United Kingdom. We reported integration and restructuring expenses of $8.2 million in fiscal 2004, of which $5.9 million is in cost of goods sold and $2.3 million is in operating expenses. The $8.2 million total expense consisted of $2.3 million for facility costs, $3.7 million for severance and benefits, and $2.2 million for other integration and restructuring charges. The
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$5.9 million in gross cost of goods sold consists of $2.6 million in severance related costs for the terminated manufacturing employees when the Irvine plant was closed in December 2003 and production relocated to Beverly Massachusetts, $2.3 million for lease loss for the Irvine Parker facility and the Santa Rosa facility, a credit of $0.9 million for a contract settlement payment from a major customer for Datum obsolete inventory, and $1.9 million for all other plant shutdown, move costs, and employee relocation. The $2.3 million in operating expenses consists of $1.6 million for severance and related costs for the Irvine shutdown and other division integration, and $0.7 million for land remediation accruals for EPA issues related to a former Datum facility located in Austin, Texas.
In the second quarter of fiscal 2004, we recorded integration and restructuring charges of $6.8 million in acquisition-related costs, $5.2 million of which was recorded as cost of sales and the remaining $1.6 million as operating expenses. These $5.2 million of cost of goods charges is primarily for the closure of the former Datum Irvine, California manufacturing facility and move of production to Beverly, Massachusetts. The $1.6 million of operating expense charges relate to divisions restructuring after the acquisition of Datum and TrueTime.
During fiscal 2006, we incurred and paid $1.2 million in integration charges for the acquisition of Agilent Technologies’ Frequency and Timing Standards product line. All of the accrued severance expenses from the integration plan have been paid out. The balance of the $0.3 million lease loss accrual for the facilities and $0.6 million other liability accrual for the other integration and restructuring charges as of June 30, 2006 will be paid over the next six years.
The following tables show the details of the restructuring cost accruals, which consist of facilities and severance costs, for the years ended June 30, 2006 and 2005. The adjustments are for reclassifications of facility and benefit accruals:
| | Balance at | | | | | | Balance at | |
| | June 30, | | Expenses | | | | June 30, | |
| | 2003 | | Additions | | Payments | | 2004 | |
| | (in thousands) | |
Facilities (October 2002 to June 2003) | | | $ | 2,165 | | | | $ | 306 | | | | $ | (1,208 | ) | | | $ | 1,624 | | |
Facilities (fiscal 2004) | | | — | | | | 1,643 | | | | (315 | ) | | | 1,328 | | |
| | | 2,165 | | | | 1,949 | | | | (1,523 | ) | | | 2,952 | | |
Severance and benefits (October 2002 to June 2003) | | | 886 | | | | — | | | | (924 | ) | | | — | | |
Severance and benefits (fiscal 2004) | | | — | | | | 3,697 | | | | (3,682 | ) | | | 15 | | |
| | | 886 | | | | 3,697 | | | | (4,606 | ) | | | 15 | | |
Total severance and facilities | | | 3,051 | | | | 5,646 | | | | (6,129 | ) | | | 2,967 | | |
All other integration and restructuring changes (fiscal 2004) | | | — | | | | 2,143 | | | | (1,443 | ) | | | 700 | | |
Total | | | $ | 3,051 | | | | $ | 7,789 | | | | $ | (7,572 | ) | | | $ | 3,667 | | |
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SYMMETRICOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | Balance at | | | | | | Balance at | |
| | June 30, | | Expense | | | | June 30, | |
| | 2004 | | Additions | | Payments | | 2005 | |
| | (in thousands) | |
Facilities (October 2002 to June 2003) | | | $ | 1,624 | | | | $ | — | | | | $ | (1,080 | ) | | | $ | 544 | | |
Facilities (fiscal 2004) | | | 1,328 | | | | — | | | | (926 | ) | | | 402 | | |
Severance and benefits (fiscal 2004) | | | 15 | | | | — | | | | (15 | ) | | | — | | |
Total severance and facilities | | | 2,967 | | | | — | | | | (2,021 | ) | | | 946 | | |
All other integration and restructuring changes (fiscal 2004) | | | 700 | | | | — | | | | — | | | | 700 | | |
Total | | | $ | 3,667 | | | | $ | — | | | | $ | (2,021 | ) | | | $ | 1,646 | | |
| | Balance at | | | | | | Balance at | |
| | June 30, | | Expense | | | | June 30, | |
| | 2005 | | Additions | | Payments | | 2006 | |
| | (in thousands) | |
Facilities (October 2002 to June 2003) | | | $ | 544 | | | | $ | — | | | | $ | (544 | ) | | | $ | — | | |
Facilities (fiscal 2004) | | | 402 | | | | — | | | | (148 | ) | | | 254 | | |
Total facilities | | | 946 | | | | — | | | | (692 | ) | | | 254 | | |
All other integration and restructuring changes (fiscal 2004) | | | 700 | | | | — | | | | (122 | ) | | | 578 | | |
All other integration and restructuring changes (fiscal 2006) | | | — | | | | 1,154 | | | | (1,154 | ) | | | — | | |
Total | | | $ | 1,646 | | | | $ | 1,154 | | | | $ | (1,968 | ) | | | $ | 832 | | |
Note Q—Subsequent Events
Tax-Free Reorganization of Symmetricom Puerto Rico Inc. into Symmetricom Puerto Rico Ltd. on July 11, 2006
On July 2, 2006, the federal tax benefits available to Symmetricom Puerto Rico Inc. under Section 936 of the Internal Revenue Code expired.
On July 11, 2006, Symmetricom Puerto Rico Inc. moved its place of legal organization from Delaware to Bermuda under the name to Symmetricom Puerto Rico Ltd. in a tax-free reorganization. Symmetricom’s board of directors had previously approved a plan of indefinite reinvestment of Symmetricom Puerto Rico Ltd.’s future earnings. Pursuant to the plan, Symmetricom Puerto Rico Ltd.’s future earnings will not be repatriated back to Symmetricom Inc., future earnings of Symmetricom Puerto Rico Ltd. will be available for international investment and expansion, and Symmetricom will not be required to provide U.S. taxes on Symmetricom Puerto Rico Ltd.’s earnings.
The Company anticipates no significant changes to business operations stemming from the tax-free reorganization of Symmetricom Puerto Rico Ltd. However, if Symmetricom’s management changes the plan of indefinite reinvestment, U.S. taxes would need to be provided on the Symmetricom Puerto Rico Ltd. earnings that had been previously excluded from U.S. tax. Symmetricom Puerto Rico Ltd. has applied to the Puerto Rico Treasury for a renewed tax exemption grant.
84
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management concluded that its internal control over financial reporting was effective as of June 30, 2006.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent registered public accounting firm has audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2006 as stated in their report.
Item 9B. Other Information
None.
85
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Symmetricom, Inc.
San Jose, California
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Symmetricom, Inc. and its subsidiaries (the “Company”) maintained effective internal control over financial reporting as of June 30, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows and financial statement schedule as of and for the year ended June 30, 2006 of the Company and our report dated September 12, 2006 expressed an unqualified opinion on those financial statements and the financial statement schedule and included an explanatory paragraph regarding the adoption of Statement of Financial Accounting Standards No. 123(R), Share Based Payment.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
September 12, 2006
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PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Executive Officers
See the section entitled “Executive Officers of Symmetricom” in Part I of this report.
(b) Directors
The information required by this item is incorporated by reference from the information under the caption “Election of Directors—Nominees” contained in the Company’s Proxy Statement to be filed with the Securities and Exchange Commission (the “SEC”) in connection with the solicitation of proxies for the Company’s 2006 Annual Meeting of Shareholders to be held on October 26, 2006 (the “Proxy Statement”).
(c) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires a company’s directors, officers and beneficial owners of more than 10% of any class of equity securities of the company registered pursuant to section 12 of the Exchange Act to file with the SEC- initial reports of beneficial ownership and reports of changes in ownership of Common Stock and other equity securities of Symmetricom registered pursuant to section 12 of the Exchange Act. This information is contained in the section called “Section 16(A) Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.
(d) Code of Ethics
We have adopted a written code of ethics that applies to all of our employees and to our Board of Directors. A copy of the code is available on our website at http://www.symmetricom.com and is attached as an exhibit to this report.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the information under the captions “Election of Directors—Nominees,” “Executive Officer Compensation,” “Election of Directors—Director Compensation,” and “Certain Transactions” contained in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
The information required by this item is incorporated by reference from the information under the caption “Other Information—Share Ownership by Principal Stockholders and Management” contained in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the information under the caption “Certain Transactions” contained in the Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this item is included in “Ratification of Appointment of Registered Public Accounting Firm of the Company” in our Proxy Statement.
87
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements and Financial Statement Schedule
1. Financial Statements. Reference is made to the Index to Consolidated Statements of Symmetricom, Inc. under Item 8 of Part II hereof.
2. Financial Statement Schedules. The following financial statement schedule of Symmetricom for the years ended June 30, 2006, 2005, and 2004, is filed as part of this report on Form 10-K and should be read in conjunction with the financial statements: Schedule II—Valuation and Qualifying Accounts and Reserves. All other schedules have been omitted because they are not applicable, not required, or the required information is included in the Consolidated Financial Statements or notes thereto.
3. Exhibits. See Item 15(b) below. Each management contract or compensatory plan or arrangement required to be filed has been identified.
(b) Exhibits
Exhibit No. | | | | Description of Exhibits |
2.1 | | Agreement and Plan of Merger dated May 22, 2002, among the Registrant, Datum Inc., a Delaware corporation, and Dublin Acquisition Subsidiary, Inc., a Delaware corporation (incorporated by reference from Exhibit 2.1 to the Registrant’s current report on Form 8-K filed May 24, 2002). |
| | The following Exhibits and schedules to the Agreement and Plan of Merger have been omitted. The Registrant will furnish copies of the omitted schedules and Exhibits to the Commission upon request: |
| | Company Disclosure Schedule |
| | Parent Disclosure Schedule |
| | Schedule 1.1 |
| | Schedule 2.2(d) (if applicable) |
| | Exhibit A-1 Form of Support Agreement—Company |
| | Exhibit A-2 Form of Support Agreement—Parent |
| | Exhibit B Form of Lockup Agreement |
| | Exhibit C Form of Affiliate Agreement |
2.2 | | Agreement and Plan of Merger, dated January 3, 2002, among the Registrant and Symmetricom, Inc. a California corporation (incorporated by reference from Exhibit 2.1 to the Registrant’s current report on Form 8-K filed January 9, 2002). |
2.3 | | Agreement and Plan of Merger, dated as of March 27, 2002, together with the First Amendment thereto dated as of June 26, 2002, among the Registrant, TrueTime, Inc. and Sco-TRT Acquisition, Inc. (incorporated by reference from Exhibit 2.1 to the Registrant’s current report on Form 8-K filed April 1, 2002 and Annex B to the Registrant’s registration statement on Form S-4 (file no. 333-92392) filed July 15, 2002). |
| | The following Exhibits and schedules to the Agreement and Plan of Merger have been omitted. The Registrant will furnish copies of the omitted schedules and Exhibits to the Commission upon request: |
| | Disclosure Schedule |
| | Schedule 2.2(d) (if applicable) |
| | Schedule 7.13(a) |
| | Exhibit C—Form of Extended Employment Agreement |
| | Exhibit D—Form of Three Month Employment Agreement |
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3.1(i) | | Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference from Exhibit 3.1 to the Registrant’s current report on Form 8-K filed January 9, 2002). |
3.1(ii) | | Amended and Restated Bylaws of the Registrant (incorporated by reference from Exhibit 3.1 to the Registrant’s current report on Form 8-K filed August 10, 2005). |
4.1 | | Form of Common Stock Certificate (incorporated by reference from Exhibit 4.1 to the Registrant’s annual report on Form 10-K filed August 30, 2002). |
4.2 | | Rights Agreement dated as of August 9, 2001 between the Registrant and Mellon Investor Services (incorporated by reference from Exhibit 4.1 to the Registrant’s registration statement on Form 8-A filed August 9, 2001). |
4.3 | | Indenture, dated as of June 8, 2005, between the Registrant and Wells Fargo Bank, National Association, as Trustee (incorporated by reference from Exhibit 4.1 to the Registrant’s current report on the Form 8-K filed June 8, 2005). |
4.4 | | Form of 3¼% Contingent Convertible Subordinated Notes due 2025 (incorporated by reference to Exhibit A to Exhibit 4.3 hereof). |
4.5 | | Registration Rights Agreement, dated as of June 8, 2005, between the Registrant and the Initial Purchasers (incorporated by reference from Exhibit 4.3 to the Registrant’s current report on the Form 8-K filed June 8, 2005). |
10.1# | | 1994 Employee Stock Purchase Plan, as amended through July 27, 1988 (incorporated by reference from the Registrant’s 1998 proxy statement filed October 5, 1998). |
10.2# | | 1999 Director Stock Option Plan, as amended through December 28, 2005 and forms of agreements thereunder (incorporated by reference from Exhibit 99.3 to the Registrant’s 1999 proxy statement filed September 23, 1999 and Exhibit 10.2 to the Registrant’s quarterly report on Form 10-Q filed February 13, 2001). |
10.3# | | Amendment to the Symmetricom, Inc. 1999 Director Stock Option Plan effective December 28, 2005 and form of option agreement thereunder (incorporated by reference from Exhibits 10.1 and 10.2 to the Registrant’s quarterly report on Form 10-Q filed February 8, 2006). |
10.4# | | 1999 Employee Stock Option Plan, as amended through October 23, 2001, and forms of agreements thereunder (incorporated by reference from Exhibit 99.1 to the Registrant’s proxy statement filed September 23, 1999 and Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q filed February 13, 2001). |
10.5# | | Amendment to the Symmetricom, Inc. 1999 Employee Stock Option Plan effective May 28, 2003 (incorporated by reference from Exhibit (d)(6) to the Registrant’s tender offer statement on Schedule TO, filed May 28, 2003). |
10.6# | | 2002 Employee Stock Plan (incorporated by reference from Exhibit 4.1 to Registrant’s registration statement on Form S-8 (file no. 333-97599) filed August 2, 2002). |
10.7 | | Lease Agreement by and between the Registrant and Nexus Equity, Inc. dated June 10, 1996 (incorporated by reference from Exhibit 10.14 to the Registrant’s annual report on Form 10-K filed September 17, 1996). |
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10.8 | | First Amendment to Lease by and between the Registrant and Nexus Equity II LLC, as successor in interest to Nexus Equity, Inc., dated November 18, 2005, effective as of October 27, 2005 (incorporated by reference from Exhibit 10.2 to the Registrant’s current report on Form 8-K filed November 22, 2005). |
10.9 | | Form of Indemnification Agreement (incorporated by reference from Exhibit 10.6 to the Registrant’s annual report on Form 10-K filed August 30, 2002). |
10.10# | | Symmetricom, Inc. Deferred Compensation Plan effective October 1, 1999 (incorporated by reference from Exhibit 10.4 to the Registrant’s quarterly report on Form 10-Q filed May 15, 2001). |
10.11# | | Symmetricom, Inc. Senior Executive Loan Plan as adopted January 19, 2001 (incorporated by reference from Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q filed May 15, 2001). |
10.12# | | Promissory Note Secured by Deed of Trust issued by Thomas W. Steipp to the Registrant dated March 24, 1998 (incorporated by reference from Exhibit 10.22 to the Registrant’s annual report on Form 10-K filed September 24, 1998). |
10.13# | | Promissory Note issued by Thomas W. Steipp to the Registrant dated January 25, 1999 (incorporated by reference from Exhibit 10.28 to the Registrant’s quarterly report on Form 10-Q filed February 4, 1999). |
10.14# | | Promissory Note Secured by Deed of Trust issued by Thomas W. Steipp to the Registrant dated January 25, 1999 (incorporated by reference from Exhibit 10.29 to the Registrant’s quarterly report on Form 10-Q filed February 4, 1999). |
10.15# | | Rider to Deed of Trust by Thomas W. Steipp and Debra L. Steipp, as Trustor, to First American Title Insurance Company, as Trustee, for the benefit of Symmetricom, Inc., as Beneficiary (incorporated by reference from Exhibit 10.30 to the Registrant’s quarterly report on Form 10-Q filed February 4, 1999). |
10.16# | | Employment Agreement between the Registrant and Thomas W. Steipp dated July 1, 2001 (incorporated by reference from Exhibit 10.18 to the Registrant’s annual report on Form 10-K filed September 20, 2001). |
10.17# | | Change of Control Retention Agreement between the Registrant and Thomas W. Steipp dated July 1, 2001 (incorporated by reference from Exhibit 10.19 to the Registrant’s annual report on Form 10-K filed September 20, 2001). |
10.18# | | Executive Transition Employment Agreement between the Company and Frederick B. Stroupe dated June 9, 2005 (incorporated by reference from Exhibit 10.1 to the Registrant’s current report on Form 8-K filed June 13, 2005). |
10.19# | | Form of Executive Severance Benefits Agreement, dated May 22, 2006, between the Company and each of William Slater, Nancy J. Shemwell, Dale A. Pelletier, Bruce K. Bromage and William H. Minor, Jr. (incorporated by reference from Exhibit 10.1 to the Registrant’s current report on Form 8-K filed May 23, 2006). |
10.20# | | Form of Restricted Stock Award Agreement (incorporated by reference from Schedule A to Exhibit (a)(1)(ii) to the Registrant’s tender offer statement on Schedule TO, filed May 28, 2003). |
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10.21# | | Form of Restricted Stock Award Agreement under Symmetricom, Inc. 1999 Employee Stock Option Plan, amended effective August 4, 2005. |
10.22 | | Standard Industrial Lease between Manor Development Co. and TrueTime, Inc. (incorporated herein by reference from Exhibit 10.9 to TrueTime, Inc.’s Registration Statement on Form S-1, File No. 333-90269). |
10.23 | | Standard Industrial/Commercial Single-Tenant Lease—Net, dated as of January 24, 2000, by and between Cooperhill Development Corporation and TrueTime, Inc. (incorporated by reference from Exhibit 10.1 to TrueTime, Inc.’s quarterly report on Form 10-Q for the quarter ended March 30, 2000). |
10.24 | | Amendment to the Standard Industrial/Commercial Single-Tenant Lease—Net, dated as of January 24, 2000, by and between Cooperhill Development Corporation and TrueTime, Inc. (incorporated by reference from Exhibit 10.7 to TrueTime, Inc.’s annual report on Form 10-K for the fiscal year ended September 30, 2000). |
10.25 | | Standard Industrial Sublease dated as of December 11, 2000 by and between Innovadyne Technologies, Inc. and TrueTime, Inc. (incorporated by reference from Exhibit 10.1 to TrueTime, Inc.’s quarterly report on Form 10-Q for the quarterly period ended December 31, 2000). |
10.26 | | Lease Intended as Security dated as of April 30, 2001 by and between Bank of America and TrueTime, Inc. (incorporated by reference from Exhibit 10.1 to TrueTime, Inc.’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2001). |
10.27# | | Datum Inc.’s 1984 Stock Option Plan, as amended to date (incorporated by reference from Datum Inc.’s Registration Statement on Form S-8, File Nos. 2-96564, 33-10035 and 33-41709). |
10.28# | | Datum Inc.’s Savings and Retirement Plan, as amended to date (incorporated by reference from Exhibit 10.19 to Datum Inc.’s annual report on Form 10-K for the fiscal year ended December 31, 1991). |
10.29# | | Datum Inc.’s 1994 Stock Incentive Plan (incorporated by reference from Datum Inc.’s Registration Statement on Form S-8, File No. 33-79772). |
10.30# | | Amendment to Datum Inc.’s 1994 Stock Incentive Plan, effective March 17, 1995 (incorporated by reference from Exhibit 10.29.1 to Datum Inc.’s annual report on Form 10-K for the fiscal year ended December 31, 1994). |
10.31# | | Second Amendment to Datum Inc.’s 1994 Stock Incentive Plan, effective June 5, 1997 (incorporated by reference to Datum Inc.’s Registration Statement on Form S-8, File No. 33-79772). |
10.32 | | Lease Agreement dated September 15, 1986 by and between the Irvine Company and Efratom Division, Ball Corporation, for Efratom Time and Frequency Products, Inc.’s facility at 3 Parker, Irvine, California (incorporated by reference from Exhibit 10.32 to Datum Inc.’s annual report on Form 10-K for the fiscal year ended December 31, 1994). |
10.33 | | First Amendment to Lease dated March 15, 1995, between the Irvine Company and Efratom Division, Ball Corporation for Lease Agreement dated September 15, 1986 (incorporated by reference from Exhibit 10.32 to Datum Inc.’s annual report on Form 10-K for the fiscal year ended December 31, 1994). |
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10.34 | | Industrial Lease dated May 11, 1995 between the Irvine Company and Datum Inc. (incorporated by reference from Exhibit 10.34 to Datum Inc.’s quarterly report on Form 10-Q for the quarterly period ended June 30, 1995). |
10.35 | | Amendment to Lease dated May 11, 1995 between the Irvine Company and Datum Inc. (incorporated by reference from Exhibit 10.32 to Datum Inc.’s quarterly report on Form 10-Q for the quarterly period ended June 30, 1995). |
10.36 | | Second Amendment to Lease dated May 11, 1995 for 3 Parker (incorporated by reference from Exhibit 10.32.3 to Datum Inc.’s quarterly report on Form 10-Q for the quarterly period ended June 30, 1995). |
10.37# | | Service Agreement, by and between the Company and Eric van der Kaay (incorporated by reference from Exhibit 10.3 to the Registrant’s quarterly report on Form 10-Q for the quarterly period ended March 30, 2003). |
10.38 | | Agreement with Lucent Technologies, Inc., between Datum Inc. and Lucent Technologies, Inc. signed July 2, 1998 (incorporated by reference to Exhibit 10.45 to Datum Inc.’s quarterly report on Form 10-Q for the quarterly period ended September 30, 1998; portions of this exhibit are omitted and were filed separately with the Commission pursuant to the company’s application requesting confidential treatment under Rule 406 of the Securities Act of 1933). |
10.39 | | Loan and Trust Agreement, dated May 1, 2001, among Massachusetts Development Finance Agency, Frequency and Time Systems, Inc. and Wells Fargo Brokerage Services, LLC (incorporated by reference from Exhibit 10.57 to Datum Inc.’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2001). |
10.40 | | Bond Purchase Agreement dated May 1, 2001, among Wells Fargo Brokerage Services, LLC, Frequency and Time Systems, Inc. and Wells Fargo Bank Minnesota, National Association, as trustee (incorporated by reference from Exhibit 10.58 to Datum Inc.’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2001). |
10.41 | | Remarketing Agreement, dated May 1, 2001, among Wells Fargo Brokerage Services, LLC, Frequency and Time Systems, Inc. and Wells Fargo Bank Minnesota, National Association, as trustee (incorporated by reference to Exhibit 10.59 to Datum Inc.’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2001). |
10.42 | | Credit Agreement dated May 1, 2004, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference from Exhibit 10.39 to the Registrant’s annual report on Form 10-K filed September 12, 2005). |
10.43 | | Revolving Line of Credit Note dated June 1, 2005, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference from Exhibit 10.40 to the Registrant’s annual report on Form 10-K filed September 12, 2005). |
10.44 | | First Amendment to Credit Agreement dated June 1, 2005, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference from Exhibit 10.41 to the Registrant’s annual report on Form 10-K filed September 12, 2005). |
10.45 | | Second Amendment to Credit Agreement dated August 19, 2005, between the Registrant and Wells Fargo Bank, National Association. |
10.46 | | Third Amendment to Credit Agreement dated July 3, 2006, between the Registrant and Wells Fargo Bank, National Association. |
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14 | | Code of Ethics (incorporated by reference to Exhibit 14.1 of the Registrant’s current report on Form 8-K filed August 10, 2005). |
21.1 | | Subsidiaries of the Registrant. |
23.1 | | Consent of Independent Registered Public Accounting Firm. |
24.1 | | Power of Attorney (see page 95 of this Form 10-K). |
31 | | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
# Management contract or compensatory plan or arrangement
(c) Financial Statement Schedules
See Item 15(a)(2) above.
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SCHEDULE II
SYMMETRICOM, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
| | Balance at | | Charged to | | | | | |
| | Beginning of | | Costs and | | | | Balance at | |
| | Year | | Expenses | | Deductions (1) | | End of Year | |
Year ended June 30, 2006: | | | | | | | | | | | | | | | | | |
Accrued warranty expense | | | $ | 3,338 | | | | $ | 2,886 | | | | $ | 2,677 | | | | $ | 3,547 | | |
Allowance for doubtful accounts | | | 874 | | | | 173 | | | | 159 | | | | 888 | | |
Allowance for excess and obsolete inventory | | | 4,913 | | | | 1,743 | | | | 1,740 | | | | 4,916 | | |
Year ended June 30, 2005: | | | | | | | | | | | | | | | | | |
Accrued warranty expense | | | 3,194 | | | | 2,546 | | | | 2,402 | | | | 3,338 | | |
Allowance for doubtful accounts | | | 763 | | | | 295 | | | | 184 | | | | 874 | | |
Allowance for excess and obsolete inventory | | | 5,617 | | | | 934 | | | | 1,638 | | | | 4,913 | | |
Year ended June 30, 2004: | | | | | | | | | | | | | | | | | |
Accrued warranty expense | | | 4,021 | | | | 2,059 | (2) | | | 2,886 | | | | 3,194 | | |
Allowance for doubtful accounts | | | 974 | | | | 26 | | | | 237 | | | | 763 | | |
Allowance for excess and obsolete inventory | | | $ | 6,532 | | | | $ | 909 | | | | $ | 1,824 | | | | $ | 5,617 | | |
(1) Deductions represent costs charged or amounts written off against the reserve or allowance.
(2) Amount includes balances from Datum and TrueTime at acquisition.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | SYMMETRICOM, INC. |
Date: September 13, 2006 | | By: | | /S/ THOMAS W. STEIPP |
| | | | Thomas W. Steipp
Chief Executive Officer
(Principal Executive Officer) |
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas W. Steipp and William Slater, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signatures | | | | Title | | | | Date | |
/S/ THOMAS W. STEIPP | | Chief Executive Officer (Principal | | September 13, 2006 |
Thomas W. Steipp | | Executive Officer) and Director | | |
/S/ WILLIAM SLATER | | Executive Vice President Finance and | | September 13, 2006 |
William Slater | | Administration, Chief Financial Officer, and Secretary (Principal Financial and Accounting Officer) | | |
/S/ ROBERT T. CLARKSON | | Chairman of the Board | | September 13, 2006 |
Robert T. Clarkson | | | | |
/S/ ALFRED BOSCHULTE | | Director | | September 13, 2006 |
Alfred Boschulte | | | | |
/S/ ELIZABETH A. FETTER | | Director | | September 13, 2006 |
Elizabeth A. Fetter | | | | |
/S/ ROBERT M. NEUMEISTER JR. | | Director | | September 13, 2006 |
Robert M. Neumeister Jr. | | | | |
/S/ RICHARD W. OLIVER | | Director | | September 13, 2006 |
Richard W. Oliver | | | | |
/S/ RICHARD N. SNYDER | | Director | | September 13, 2006 |
Richard N. Snyder | | | | |
/S/ ROBERT J. STANZIONE | | Director | | September 13, 2006 |
Robert J. Stanzione | | | | |
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