XNAS:SYMM Annual Report 10-K Filing - 7/1/2012

Effective Date 7/1/2012

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

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

 

For the fiscal year ended July 1, 2012

For the fiscal year ended July 1, 2012

or

 

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

For the transition period from                     to                    

Commission file number 0-02287

 

 

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):   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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨     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  ¨    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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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.  ¨

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

 

Large accelerated filer

 

¨

     Accelerated filer   x      Non-accelerated filer   ¨      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    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 January 1, 2012 as reported on The NASDAQ Stock Market LLC, was approximately $226,983,000. This calculation does not reflect a determination that such persons are affiliates of the Registrant for any other purpose.

As of August 31, 2012, there were approximately 40,723,768 shares of Registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant’s 2012 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

 

 

 


Table of Contents

SYMMETRICOM, INC.

FORM 10-K

For the Fiscal Year Ended July 1, 2012

INDEX

 

          Page  
PART I   

Item 1.

  

Business

     3   

Item 1A.

  

Risk Factors

     13   

Item 1B.

  

Unresolved Staff Comments

     24   

Item 2.

  

Properties

     24   

Item 3.

  

Legal Proceedings

     24   

Item 4.

  

Mine Safety Disclosures

     24   
PART II   

Item 5.

  

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

     25   

Item 6.

  

Selected Financial Data

     27   

Item 7.

  

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

     28   

Item 7A.

  

Quantitative and Qualitative Disclosures about Market Risk

     40   

Item 8.

  

Consolidated Financial Statements and Supplementary Data

     41   

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     75   

Item 9A.

  

Controls and Procedures

     75   

Item 9B.

  

Other Information

     75   
PART III   

Item 10.

  

Directors, Executive Officers and Corporate Governance

     77   

Item 11.

  

Executive Compensation

     77   

Item 12.

  

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

     77   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     78   

Item 14.

  

Principal Accountant Fees and Services

     78   
PART IV   

Item 15.

  

Exhibits and Financial Statement Schedules

     79   
  

Signatures

     83   

 

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PART I

FORWARD-LOOKING INFORMATION

When used in this discussion, the words “expect,” “anticipate,” “estimate,” “believe,” “plan,” “will,” “may,” “intend,” “can,” “project” and similar expressions are intended to identify forward-looking statements. These statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere 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, reliance on our contract manufacturer for the manufacturing previously carried out at our Puerto Rico facility and by other third party vendors, the effects of increasing competition and competitive pricing pressure, uncertainties associated with changing intellectual property laws, developments in and expenses related to litigation, 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, difficulties in manufacturing our products, the risks associated with our international sales, potential short-term investment losses and other risks due to credit market dislocation, geopolitical risks and risk of terrorist activities, the risks associated with attempting to integrate other companies and businesses we acquire, and the risks set forth below in Item 1A, “Risk Factors.”

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

References in this report to “Symmetricom,” the “Company”, “we,” “us,” and “our” mean Symmetricom, Inc. and its subsidiaries, except where it is made clear that the term means only the parent company.

BesTime, ExacTime, PackeTime, Symmetricom, SymmTime, SyncServer, TimeCesium, TimeCreator, TimeHub, TimePieces, TimePictra, TimeProvider, TimeScan, TimeSource, TrueTime are our trademarks. We also refer to trademarks of other corporations and organizations in this document.

 

Item 1. Business

Overview

Symmetricom® is a leading source of highly precise timekeeping technologies, instruments and solutions worldwide. We provide timekeeping in GPS satellites, national time references, and national power grids as well as in critical military and civilian networks, including those that enable next generation data, voice, mobile and video networks and services.

Our product offerings include atomic instruments and components, hydrogen masers, timescale systems, GPS instrumentation, synchronous supply units, standards-based clients and servers, performance measurement and management tools and embedded subsystems and software solutions that generate, distribute and apply precise frequency and time.

Precise timekeeping is an essential component of modern life. Among other applications, it enables GPS navigation, the seamless handoff of cellular calls, the timely receipt of data packets, the management of the electric power grid, military range synchronization, electronic test and measurement, signals intelligence and the ability to detect, investigate and protect against cyber threats.

 

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Symmetricom products are critical in all these applications in markets that include national timekeeping, aerospace, power grid infrastructure, defense, intelligence, enterprise IT, metrology, telecom, cable TV, electronic manufacturing and a broad spectrum of scientific research.

General Information

Symmetricom was incorporated in California in 1956 and reincorporated in Delaware in 2002. Our principal executive offices are located at 2300 Orchard Parkway, San Jose, California 95131-1017, and our 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 reasonably practicable after we electronically file such material with, or furnish it to the Securities and Exchange Commission (“SEC”). Information contained or referenced on our website is not incorporated by reference into and does not form a part of this Form 10-K.

Industry Background

The markets we serve include:

 

   

Communications service providers;

 

   

Network equipment manufacturers (wireless base stations, routers, aggregation systems);

 

   

Silicon suppliers;

 

   

Space/Defense/Avionics;

 

   

Power utility infrastructure;

 

   

IT infrastructure;

 

   

Underwater exploration and navigation, and

 

   

Science and metrology.

Reportable Segments

Symmetricom operates in two reportable segments: Communications, and Government and Enterprise. Net revenue, gross profit, and operating income attributable to each of these reportable segments for each year in the three-year period ended July 1, 2012, is contained in Note 12 of the consolidated financial statements (Part II, Item 8 of this Form 10-K). We do not identify or allocate assets, corporate operating expenses (which includes restructuring and integration charges), interest income, interest expense, or taxes to these individual reportable segments.

Communications

Our Communications segment includes timing technologies and services for worldwide communications infrastructure. Specific products include primary reference sources; edge clocks and distribution products for synchronization outside the network core; Building Integrated Timing Supply (BITS) and Sync Supply Unit (SSU) for the central office; the PackeTime® product suite based on technologies such as IEEE 1588 (PTP) and Network Time Protocol (NTP); Synchronous Ethernet (SyncE); Data Over Cable Service Interface Specifications (DOCSIS) timing interface systems; network management and monitoring software; and embedded hardware and software solutions for integration with all elements of the communications ecosystem from silicon to routers, switches, microwave backhaul and base stations among others. Symmetricom owns intellectual property, including patents, in advanced control algorithms for various types of deployments.

 

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Network service providers are driven by a need for increased bandwidth and a need for reduced operating expenses to evolve their infrastructure toward packet-based technologies. In fiscal 2012, we continued to participate in the deployment and modernization of various synchronization networks around the world. Our products also enabled operators of multiple cable television systems to expand the performance of their broadband offering.

We continue to build a strong portfolio of precise timing and frequency solutions to address all layers of existing circuit switched network and the growing synchronization requirements of next-generation packet networks. The addition of a broader range of embedded solutions enables network equipment manufacturers and silicon solution developers to provide robust synchronization solutions as part of their own offerings. During fiscal 2012, we entered into additional relationships with silicon solution developers and network equipment manufacturers to integrate our timing technology as part of their offerings to network equipment manufacturers.

In 2011, we launched the SyncWorld™ Ecosystem Program to promote interoperability for synchronization and timing with mobile infrastructure vendors. In fiscal 2012, we expanded the program to include new partners, such as Altera, Raisecom and Fiberlogic, and new markets including communications test and microwave backhaul.

In addition, we launched several systems and embedded products to meet the needs of evolving network architectures to support Carrier Ethernet, 3G and LTE. These include TimeProvider 5000 Evolution chassis for SyncE as circuit emulation environments, Time Provider 5000 NTP support for residential Small Cell deployments, SoftClocks for macro base stations as well as Small Cells.

Government and Enterprise

Symmetricom’s Government and Enterprise segment includes time technology products for aerospace/defense, IT infrastructure, power infrastructure and science and metrology applications. Precision time and frequency systems enable a range of critical operations, including the international time scale, global navigation, the management of power grids, synchronization of complex control systems, and signals intelligence for securing communications in remote and hostile environments.

Product families include timescale clock sources, network time servers (both NTP and PTP), network time displays, time code generators, bus level timing cards, primary reference standards such as cesium oscillator standards, high stability masers, chip-scale atomic clocks, ruggedized crystal oscillators, and custom time and frequency systems. Customer applications include synchronization of government communication networks, synchronization of computer networks, reference timing for radar, ranging, fire-control and other defense electronic systems, calibration of lab equipment, GNSS (Global Navigation Satellite Systems), and subsystem master timing. To support both a diverse customer and product base, the products and technologies provide strong capabilities that allow for the tailoring of standard product platforms to meet a customer’s unique system requirements.

During fiscal 2012 we saw significant growth in this segment. We introduced our new bus cards for the high-performance computing market (notably high-frequency trading); we saw rapid adoption of our Quantum Chip-Scale Atomic Clock (CSAC), with over 100 different system applications sampled within the first year after introduction; and we saw significant growth in our Space/Defense/Avionics business.

Communications Segment: Markets and Products

Within our Communications business, we serve the wireless, wireline and cable infrastructure markets with systems, sub-systems modules, components, software solutions and GPS accessories.

 

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Synchronization Products

We sell our synchronization products to wireless, wireline and cable service provider markets. Commonly, our products are used to synchronize wireline communications; to provide the precise timing needed for DOCSIS 3.0 broadband services; and to provide synchronization and timing support to wireless network deployments.

The communications network consists of a series of interconnected switching equipment and other components that route information (i.e., voice, video, and data) through the network. For these networks to function efficiently, each network must be synchronized to a traceable time reference, and the individual nodes within the network must operate within precise tolerances. Precision synchronization equipment throughout these networks provides a frequency reference which enables digital switching, routing and transmission systems to operate at a common, synchronized clock rate, thereby aligning time slots, which increases bandwidth utilization while minimizing signal degradation and reducing errors throughout a network.

Our core system products are built on atomic clock, networking timing protocols (NTP and PTP) and GPS technologies and provide for the generation, distribution, and management of communications synchronization infrastructure.

 

   

Primary Reference Sources (PRS)—consists of the GPS-based TimeSource®, the cesium-based TimeCesium®, and the packet-based IEEE-1588 TimeProvider® 1500 solutions.

 

   

Building Integrated Timing Supplies (BITS) or Synchronization Supply Units (SSUs)—consists of the carrier class SSU 2000 and TimeHub®, both intelligent sync distribution systems, and carrier class Network Time Protocol (NTP) & IEEE 1588 (PTP) plug-in server cards supporting critical applications for next generation networks. Other key products include the TimeProvider® 5000 PTP Grandmaster, the TimeProvider 1000, the industry’s first node clock (hybrid SSU & PRS), TimeCreator®, the first DOCSIS Timing Interface (DTI) server qualified by CableLabs, and other products currently under development to address emerging needs in the wireless, wireline and cable markets.

 

   

IEEE 1588 Clients—consists of the TimeProvider 500, designed to deliver frequency synchronization in the metropolitan area network or access network.

 

   

Element Management Systems—consists of TimePictra, the carrier class HP-UX based system, TimeScan, the PC-based system, and TimeCraft, the advanced GUI management tool.

Embedded Solutions

Our embedded solutions consists of sub-systems (module), components, software solutions, and GPS accessories that enable cellular, broadcast and cable service providers to achieve precise timing and synchronization for seamless deployment of services offerings to their end users. Symmetricom solutions are deployed in wireless base stations, switches, routers, microwave backhaul, digital video broadcast and instrumentation equipment.

Specific embedded solutions we provide include:

 

   

Sub-system cards or modules customized for each manufacturer, using a combination of GPS, quartz oscillators, rubidium atomic oscillators, input/output signals and control algorithms. Some of the control algorithms are contained in our BesTime® technology. Symmetricom’s modules are designed to be integrated into existing communications and transmission equipment such as cellular base stations (GSM, CDMA, TD-SCDMA, W-CDMA, 4G / LTE and Femto), broadcast (DVB, DVB-H, DAB, DTV), and satellite communications equipment.

 

   

Components such as Rubidium atomic oscillators with various performance levels to ensure network holdover when a network timing reference is lost to guarantee quality of service (QoS).

 

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Software Solutions such as the 1588 soft client software which can be embedded into various generations of base stations, routers, switches, microwave backhaul and Small Cells to provide time and frequency capabilities, and interconnects with 1588 grand masters. The IEEE 1588-2088 packet-based protocol (PTP 1588) enables next generation services when operators transition from legacy TDM to IP-based infrastructure.

 

   

GPS accessory components including antenna receivers, timing antennas, splitters, amplifiers, and lightning protectors.

Services

We also provide lifecycle services for Symmetricom product lines. Service offerings fall into five main categories:

 

   

Engineering and installation—Engineering and installation services help customers implement new Symmetricom product purchases.

 

   

Operations and support programs—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—Offerings are designed to help customers with 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—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—Consulting services assist customers in planning new sync communications networks and developing growth or disaster recovery plans for existing sync networks.

Government and Enterprise Segment: Markets and Products

The aerospace, defense, metrology, power grid, timekeeping, and IT infrastructure markets require precision time and frequency instruments and reference standards. Time and frequency solutions include GPS and time code instrumentation products, bus level timing cards, and precision frequency references (atomic standards). IP network timing products include dedicated network time servers and management and monitoring software that synchronizes the timing on enterprise networks. Space, defense, and avionics applications include highly reliable and ruggedized components and systems designed to address specific customer requirements.

We offer a wide variety of precision time and frequency products sold primarily to the aerospace and defense, smart grid, metrology and IT infrastructure 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.

 

   

The Quantum™ Chip Scale Atomic Clock—We manufacture the SA.45s Chip Scale Atomic Clock (CSAC) which provides the accuracy and stability of atomic clock technology while achieving dramatic reductions in size, weight and power consumption. It is used in applications, especially those

 

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in GPS-denied environments that call for precise synchronization, accurate time keeping and maximum portability. It is only 16cc in volume, weighs only 35 grams, requires only 115mW of power and provides time accuracy two orders of magnitude better than the quartz-based solutions.

 

   

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. Bus cards are used across a range of embedded applications, and our newest offerings are used with servers in high-performance computing applications such as high-frequency trading.

 

   

Enterprise network time servers—We manufacture several products for enterprise network time distribution. These bring entire networks of computers into precise time synchronization.

 

   

GPS and time code instrumentation products—We manufacture a wide variety of general purpose and secure GPS receivers, time code generation, translation, measurement, and distribution products. A time code is a data format for recording and processing time measurements. These instruments service a variety of end markets, including defense and smart grid applications.

 

   

Space, defense and avionics—We provide ruggedized and militarized quartz and atomic clock platforms for the most demanding military applications. Our designs are vibration isolated with low sensitivity to acceleration. For space applications such as GPS, where there is a high degree of exposure to radiation, our products are protected by radiation-hardened designs.

 

   

Test and measurement equipment—We provide a line of time and frequency test solutions including a family of Phase Noise and Allan Deviation test sets designed to measure critical performance specifications of precision time and frequency signals and sources.

 

   

Custom time and frequency systems—We design and build custom time and frequency systems to address critical applications in aerospace/defense and government markets. For example, we provide time scale systems for national time keeping and two way time transfer systems for GPS autonomy to our customers.

Sales Operations

We sell our products directly to customers, through domestic and international distributors, through systems integrators, and manufacturer sales representatives. In the United States, our Communications segment’s products are primarily sold through our sales force and manufacturer sales’ representatives to network service operators and network equipment manufacturers. Our Government and Enterprise segment’s 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 systems integrators.

Licenses, Patents, Trademarks and Copyrights

We use a combination of trademark rights, copyrights and patent rights, as well as associated registrations, contractual restrictions, and internal security to establish and protect our proprietary rights. As of July 1, 2012, we had 51 active United States patents. The active patents issued will expire between July 2014 and September 2029. 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

 

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processes or designs are identified as infringing upon patents held by others, there can be no assurance that a license will be available, or that the terms of obtaining any such license will be acceptable to us. In addition, the laws of certain countries in which our products may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. In addition, we use technology licensed from others.

We generally enter into confidentiality agreements with our employees, consultants, and third parties in connection with our technology. These confidentiality agreements generally seek to control access to, and distribution of, our technology, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to obtain and use our proprietary information without authorization or to develop similar technology independently.

In addition, we use trademarks to help identify and market our products and services. We have a number of trademark registrations and pending applications both in the United States and around the world. We rely on these trademark registrations and applications as one of the tools to protect our rights in our trademarks and brands. We also rely on our common law trademark rights in those countries that recognize such rights, such as the United States. We can provide no assurance, however, that any of our trademark applications will be successful, or that our existing registrations will not be challenged or invalidated. Likewise, we can provide no assurance that our registrations, applications or common law rights will enable us to stop others from infringing upon our trademarks, or enable us to successfully defend against claims of trademark infringement. Furthermore, effective trademark protection may not be available in every country in which our products and services are distributed.

We also have copyrights on our software products, product documentation, marketing materials, and other documentation and materials. We rely on these copyrights to protect our rights in our copyrighted materials. We can provide no assurance, however, that our copyrighted materials will not be infringed. In addition, effective copyright protection may not be available in every country in which our products are distributed.

Manufacturing

Our manufacturing process primarily consists of assembly, test, configuration and logistics at our manufacturing sites in Beverly, Massachusetts and Tuscaloosa, Alabama. In addition, custom and semi-custom instrumentation products are developed, assembled, and tested in Boulder, Colorado. The Boulder, Colorado facility is registered to ISO9000:2000, while our Beverly, Massachusetts and San Jose, California (engineering processes) facilities meet the TL 9000 quality system standard (an advanced telecommunications standard for manufacturing and engineering). Our Beverly, Massachusetts facility is also registered to AS9100 which certifies the design, development, and production of high precision time and frequency references for commercial military and space markets.

In fiscal 2011, we transitioned all manufacturing previously performed at our Puerto Rico facility, which was our largest manufacturing facility, to Sanmina-SCI Corporation.

We also use various contract manufacturers to build our printed circuit board assemblies and a number of completed products.

Seasonality

Our business tends to generate stronger revenues in the second half of the fiscal year.

Backlog

Our backlog consists of firm orders that have yet to be shipped to the customer. Our total backlog was $45.4 million as of July 1, 2012, compared with $60.3 million as of July 3, 2011. Most orders included in backlog can be rescheduled or cancelled by customers without significant penalty. Historically, a substantial portion of net

 

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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, U.S. government spending on defense programs, overall worldwide economic conditions and the cyclical nature of customer demand in each of our markets.

Key Customers and Export Sales

During fiscal 2012, no single customer accounted for more than 10% of our net revenue. Our export sales outside the United States accounted for 38%, 35% and 33% of our net revenue in fiscal 2012, 2011, and 2010 respectively. For additional information regarding our export sales, see Note 12 to our consolidated financial statements (Part II, Item 8 of this Form 10-K) and Item 1A-Risk Factors- “Significant sales of our products to customers outside the United States subject us to business, economic and political risks”.

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 communications 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 Frequency Electronics, Inc., Huawei Technologies Co. Ltd., Oscilloquartz SA, and Juniper Networks (through its acquisition of Brilliant Telecommunications). Competitors of our embedded components and software products include Frequency Electronics, Inc., Trimble Navigation, Ltd., MicroSemi Inc., and Semtech Corporation.

Competitors of our Government and Enterprise products include Brandywine Communications, EndRun Technologies, Frequency Electronics, Inc., Meinberg, Orolia and Trak Systems, Inc. (a Veritas Corporation subsidiary).

Research and Development

Our development efforts include designing and developing hardware and software products, and providing enhanced functionality to our existing products. We also do primary research in fundamental time and frequency components and systems paid for by the U.S. government. In addition to our research and development programs listed below, we utilize domestic and international contractors to assist us in our research and development activities. Our product development programs include:

 

   

Communications synchronization

 

   

Network management software

 

   

Network time servers

 

   

Ruggedized time and frequency component for space, defense and avionic applications

 

   

Precision time and frequency references

 

   

Primary frequency references

 

   

GPS-based time and frequency instruments and bus cards

 

   

Time and frequency distribution products

 

   

Phase noise test sets

 

   

Timescale systems

 

   

Time and frequency reference systems

 

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In fiscal 2012, we enhanced our Communications portfolio by expanding our IEEE 1588 (PTP) offering to address embedded opportunities in LTE base stations, to extend our silicon partners for our PTP softclient, and to extend on PTP grandmaster products with expansion chassis. Our Government and Enterprise business expanded the product offerings by introducing: 9611B Intelligent Switch and Distribution System and SyncPoint™ PCIe-1000 PTP Clock Card which is targeted at financial services market.

In fiscal 2012, 2011 and 2010, overall research and development expenditure was $28.0, $27.0 and $23.7 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; Boulder, Colorado; Beijing, China and Beverly, Massachusetts.

Government Regulation

The telecommunications industry is subject to domestic and foreign regulatory policies regarding pricing, taxation and tariffs, which may adversely impact the demand for our products. These policies are continuously reviewed and subject to change by the various governmental agencies. We are also subject to government regulations and standards for our products, as well as import and export regulations. We must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. government contracts. Government contract laws and regulations affect how we do business and, in some instances, impose added costs on our business. A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts or debarment from bidding on contracts. See Item 1A-Risk Factors—“As a Government Contractor, we are subject to a number of rules and regulations”— for more information.

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 processes 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 Note 8 to our consolidated financial statements (Part II, Item 8 of this Form 10-K) and Item 1A. Risk Factors—“Our sales and 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, the Restriction of the Use of Hazardous Substances in electrical and electronic equipment and the Registration, Evaluation, Authorization and Restriction of Chemicals, as well as other standards around the world.”

Sources and Availability of Raw Materials

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

Employees

At July 1, 2012, we had approximately 570 employees. We believe that our employee relations are good.

 

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Executive Officers of Symmetricom

Following is a list of our executive officers as of August 31, 2012 and brief summaries of their business experience during at least the last five years. All officers, including executive officers, are appointed annually by the Board of Directors at its meeting following the annual meeting of stockholders. We are not aware of any officer who was appointed to the office pursuant to any arrangement or understanding with another person.

 

Name

   Age     

Position

David G. Côté

     58       President and Chief Executive Officer

Justin R. Spencer

     41       Executive Vice President, Finance and Chief Financial Officer

James Armstrong

     46       Chief Technology Officer

Daniel Scharre

     61       Executive Vice President, Products

Mr. Côté was appointed as President and Chief Executive Officer of Symmetricom in August 2009. Prior to joining Symmetricom, Mr. Côté was Chief Executive Officer and President at Packeteer, Inc., a leading provider of Internet application infrastructure systems, from 2002 to 2008.

Mr. Spencer has served as Chief Financial Officer of Symmetricom since September 2008. Prior to joining Symmetricom, Mr. Spencer served as Chief Financial Officer at Covad Communications, a provider of broadband integrated voice and data communications, from June 2007 until April 2008. From November 2002 until May 2007, Mr. Spencer served in various positions at Covad including Interim Chief Financial Officer, Vice President of Finance, and corporate development and product management roles.

Dr. Armstrong has served as the Chief Technology Officer of the Company since April 2012. Mr. Armstrong served as Executive Vice President and General Manager, Communications segment, from February 2008 to April 2012. Mr. Armstrong joined Symmetricom in September 2006 and served as Vice President of Engineering for the Communications Business Unit from September 2006 to January 2008. From July 2002 to May 2006, Mr. Armstrong was the Vice President of Engineering and later President of Movidis, Inc., a developer of network equipment for the OEM and enterprise markets.

Dr. Scharre has served as Executive Vice President, Products of the Company since April 2012. Dr. Scharre served as Executive Vice President and General Manager, Government and Enterprise Segment, from August 2010 to April 2012. Dr. Scharre joined Symmetricom in April 2010 and served as Vice President of Marketing and Business Development for the Government and Enterprise Segment from April 2010 to August 2010. From August 2007 to November 2009, Dr. Scharre was the Chief Executive Officer of Calient Networks, a manufacturer of fiber optic cross-connection systems for telecommunications service providers; from November 2006 to August 2007, he was the Chief Operations Officer of Teak Technologies, a provider of Ethernet switching solutions; and from December 2004 to June 2006, he was the Chief Executive Officer of Loea Corporation, a developer of high-bandwidth, wireless point-to-point networking solutions.

 

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Item 1A. Risk Factors

Our quarterly and annual operating results have fluctuated in the past and will likely continue to fluctuate in the future, which could cause our stock price to be volatile and result in losses to our investors

We believe that period-to-period comparisons of our operating results may not be a good indication of our future performance. Our quarterly and annual operating results have fluctuated in the past and will likely continue to fluctuate in the future. Some of the factors that could cause our future operating results to fluctuate include:

 

   

adverse changes in economic conditions, particularly within the telecommunications equipment industry, which may result in revenue declines;

 

   

our dependence upon obtaining orders during a quarter and shipping those orders in the same quarter to achieve our revenue objectives;

 

   

our ability to manage increased competition and competitive pricing pressures;

 

   

our ability to accurately anticipate the volume and timing of customer orders or customer cancellations;

 

   

the gain or loss of significant customers;

 

   

our ability to manage our outsourced manufacturing strategy, including with respect to product supply;

 

   

changes in our products or mix of sales to customers;

 

   

the possibility that, despite our having been approved as a supplier in requests for proposals from several major Communications business unit customers, these proposals will not result in any purchases;

 

   

the timing of customer purchases for special projects may be impacted due to spending delays, availability of resources for installation, and delays in new product availability;

 

   

market acceptance of new or enhanced versions of our products and our competitors’ products;

 

   

our ability to manage the long sales cycle associated with our products;

 

   

customer delays in upgrading their old equipment with our new products;

 

   

our ability to obtain sufficient supplies of sole or limited source components at commercially reasonable prices;

 

   

our ability to introduce new products in new and existing markets on a timely and cost-effective basis;

 

   

customer delays in qualification of new products;

 

   

fluctuations in government spending for defense or infrastructure;

 

   

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 manage cyclical conditions in the telecommunications industry;

 

   

reduced rates of growth of telecommunications services;

 

   

our ability to manage the level and value of our inventories in relation to sales volume;

 

   

our ability to manage fluctuations in the average selling prices of our products;

 

   

our ability to retain key employees, which could affect our ability to sell, develop and deliver our products;

 

   

our ability to manage fluctuations in manufacturing yields of chip-scale atomic clocks, rubidium oscillators or cesium tubes;

 

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our ability to timely implement changes developed as a result of our process improvement projects without negatively impacting operations;

 

   

customer labor strikes, which could result in reduced sales volume;

 

   

our ability to collect receivables from our customers;

 

   

deferring revenue for orders shipped in a period, especially for new markets;

 

   

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;

 

   

foreign currency fluctuations;

 

   

our ability to manage complex transactions with customers in new geographic regions;

 

   

restructuring and integration-related charges; and

 

   

intangible assets impairment charges related to acquisitions and related long-term assets.

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. 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 operating results.

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.

A substantial portion of our quarterly revenue is attributable to shipments made in the latter part of each respective quarter

Typically, approximately 50% or more of our quarterly shipments occur in the last month of the quarter. In addition, a substantial portion of these quarterly shipments are ordered by our customers and shipped within the same quarter. If these orders or shipments are either delayed or the orders are not received, material fluctuations in our quarterly revenues and operating results will occur, and could cause our quarterly profitability to fall significantly short of our predictions.

We transitioned manufacturing that was performed at our Puerto Rico facility to a contract manufacturer, on whom we are now dependent

In fiscal 2010, we contracted with Sanmina-SCI to produce sub-assemblies as part of our outsourced manufacturing strategy. In a significant expansion of this agreement, we announced in the fourth quarter of fiscal 2010 that we were transitioning all manufacturing at our Puerto Rico facility, which was our largest manufacturing facility, to Sanmina-SCI. We completed this transition in the third quarter of fiscal 2011.

Our reliance on one primary contract manufacturer to produce a significant portion of our products could expose us to the following potential risks in addition to others, each of which could have an adverse effect on our business and operating results:

 

   

less control over product quality, which could lead to product reliability problems and/or lower sales;

 

   

product shortages as a result of manufacturing or capacity issues at Sanmina-SCI or our failure to make adequate forecasts;

 

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increased costs; and/or

 

   

product shipment delays.

We recently contracted with Sanmina to provide logistics warehouse services for receiving and distributing our products from the same facility where the principal portion of our products are manufactured. We depend on the orderly operation of the receiving and distribution processes at the warehouse. Although we currently believe that receiving and distribution processes at the Sanmina logistics warehouse are efficient, unforeseen disruptions in operations, for example due to fires, hurricanes, earthquakes or other catastrophic events, labor shortages or disagreements, or shipping problems, may result in delays in the delivery of our products, which could adversely affect our business and operating results.

In addition, we cannot assure you that Sanmina-SCI will continue to be willing and able to meet our requirements for our outsourced operations according to existing terms or at all, which could have an adverse effect on our business and operating results.

The telecommunications and government markets are highly competitive, and if we are unable to compete successfully in our markets, our revenue could decline

Competition in the telecommunications industry, in general, and in the markets we serve, is intense and likely to increase substantially. We face competition in all of our markets. Competitors with our synchronization products include Frequency Electronics, Inc., Huawei Technologies Co. Ltd., Oscilloquartz SA and Juniper Networks (through its acquisition of Brilliant Telecommunications). Competitors with our embedded components products include Frequency Electronics, Inc., Trimble Navigation, Ltd., Micro Semi, Inc., and Semtech Corporation. Competitors with our Government business unit products include Brandywine Communications, EndRun Technologies, Frequency Electronics, Inc., and Meinberg, Orolia Group. In addition, the Telecommunications Act of 1996 permits incumbent local exchange carriers (ILECs) to manufacture telecommunications equipment, and they may enter the market resulting 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.

 

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We have relied and may continue to rely on a limited number of customers for a significant portion of our net revenue, and our net revenue could decline due to lower orders, the delay of orders or cancellation of existing orders by these customers

During fiscal 2012, 2011 and 2010, no single customer accounted for more than 10% of our net revenue. Nevertheless, 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 we expect them 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. 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.

We have direct or indirect sales pursuant to contracts with U.S. government agencies, which can be terminated at the convenience of the government, and our revenue would decline if the government terminated these contracts

Approximately 25% to 30% of our net revenue has been generated from sales to U.S. government agencies either directly or indirectly through subcontracts. Government-related contracts and subcontracts are subject to standard provisions for termination at the convenience of the government. In such event, however, we are generally entitled to reimbursement of costs incurred on the basis of work completed plus other amounts specified in each individual contract. These contracts and subcontracts are either fixed-price or cost reimbursable contracts. Fixed-price contracts provide fixed compensation for specified work. Under cost reimbursable contracts, we agree to perform specified work in return for reimbursement of costs (to the extent allowable under government regulations) and a specified fee. In general, while the risk of loss is greater under fixed-price contracts than under cost reimbursable contracts, the potential for profit under fixed-price contracts is greater than under cost reimbursable contracts.

We depend on U.S. government agency contracts. A decline or reprioritization of funding in the U.S. defense budget, that of other customers, or delays in the budget process could adversely affect our revenue, earnings, and cash flow.

We derive and expect to continue to derive a significant portion of our net revenue from work performed under U.S. government contracts. These contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds on a fiscal-year basis (September), even though contract performance may extend over many years. Delays in approvals of the annual defense budget or supplemental funding bills may adversely impact our government sales. The programs in which we participate must compete with other programs and policy imperatives for consideration during the budget and appropriation process. Concerns about increased deficit spending, along with continued economic challenges, continue to place pressure on U.S. and international customer budgets. While we believe that our programs are well aligned with national defense and other priorities, shifts in domestic and international spending and tax policy, changes in security, defense, and intelligence priorities, the affordability of our products and services, general economic conditions and developments, and other factors may affect a decision to fund or the level of funding for existing or proposed programs.

If we are unable to develop new products, or we are delayed in production startup, our sales could decline

The markets for our products are characterized by:

 

   

rapidly changing technology;

 

   

evolving industry standards; and

 

   

changes in end-user requirements.

 

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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.

Our customers may be subject to governmental regulations, which, if changed, could negatively impact our business results

Federal and state regulatory agencies, including the United States Federal Communications Commission and the various state public utility commissions and public service commissions, regulate most of our domestic telecommunications customers. Similar government oversight also exists in the international market. While we are not directly affected by this legislation, such regulation of our customers may negatively impact our business. For instance, the sale of our products may be affected by the imposition upon certain of our customers of common carrier tariffs and the taxation of telecommunications services. These regulations are continuously reviewed and changed by the various governmental agencies. Changes in current or future laws or regulations, in the United States or elsewhere, could negatively impact our business results.

We perform some research and development and manufacturing offshore to lower costs; these efforts may impact our ability to deliver products to our customers, complete research and development projects on a timely basis, and cause potential misappropriation of our intellectual property

We depend upon research and development and manufacturing activities outside of the United States, and are exposed to various legal, business, political and economic risks associated with these international operations. Over the past few years, we have developed a research and development facility in Beijing, China and outsourced a portion of our manufacturing to a contract manufacturer at a facility in Southern China. While these activities have allowed us to reduce costs, they have and will continue to expose us to risks inherent in doing business in the People’s Republic of China. We cannot assure you that labor disruptions, currency fluctuations, misappropriation of our intellectual property or other risks will not occur, any of which could materially adversely impact our ability to deliver products to our customers and our operating results.

We purchase certain key components from single or limited sources and could lose sales if these sources fail to fulfill our needs

We have limited or single source suppliers for a number of our components. If single source components were to become unavailable on satisfactory terms, we would be required to purchase comparable components from other sources. If for any reason we could not obtain comparable replacement components from other sources in a timely manner, our business, operating results and financial condition could be harmed. In addition, some of our suppliers require long lead times to deliver requested quantities of components. If we are unable to

obtain sufficient quantities of components, we could experience delays or reductions in product shipments, which could also have a material adverse effect on our business, results of operations and financial condition. Due to rapid changes in technology, on occasion, one or more of the components used in our products could become unavailable, resulting in unanticipated redesign and related delays in shipments.

As a U.S. government contractor, we are subject to a number of rules and regulations

We must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. government contracts. Government contract laws and regulations affect how we do business

 

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and, in some instances, impose added costs on our business. A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts or debarment from bidding on contracts. In order to administer certain U.S. government contracts we are required to have employees with Top Secret Security Clearance. Because we have a limited number of employees with such clearance, the loss of these employees could adversely affect our ability to administer these contracts. We must also have auditors from our independent registered public accounting firm with proper security clearance levels to perform an annual audit of revenue for these transactions.

We may pursue acquisitions and investments that could harm our operating results and may disrupt our business

We have engaged in acquisitions in the past, and we may pursue other acquisition and investment 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 not realize the revenue, cost savings or profits that we expect the acquired business to generate and incur significant write-offs;

 

   

we may encounter unanticipated acquisition or integration costs that could cause our quarterly or annual operating results to fluctuate;

 

   

our management’s attention may be diverted from our core business; and

 

   

we may not be successful in entering new markets in which we have no or limited experience.

If we fail to successfully integrate acquisitions or to achieve any anticipated benefits of an acquisition, our operations and business could be harmed.

Significant sales of our products to customers outside of the United States subjects us to business, economic and political risks

Our export sales to Europe, Asia, Canada, and Latin America continue to account for a significant portion of our net revenue. We anticipate that sales to customers located outside of the United States will continue to be a significant part of our net revenue for the foreseeable future. Because of our significant sales 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;

 

   

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.

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

 

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revenues may be denominated in foreign currencies in the future, including the Euro, which will subject us to risks associated with fluctuations in these foreign currencies. We do not currently engage in foreign currency hedging activities or derivative arrangements, but may do so in the future to the extent that such obligations become more significant.

In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to facilitate compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business.

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 operating results could be materially affected.

Our products are complex and may contain errors, design flaws or present start-up manufacturing difficulties, which could be costly and difficult to correct

Our products are complex and often use state-of-the-art components and manufacturing processes and techniques. When we release new products, or new versions of existing products, they may contain undetected or unresolved errors or defects or may be difficult to manufacture at economically acceptable costs. Despite testing, errors, defects or other manufacturing difficulties may be found in new products or upgrades after the commencement of commercial shipments. Undetected errors, design flaws and other manufacturing difficulties have occurred in the past and could occur in the future. These errors or other manufacturing difficulties could result in delays, higher manufacturing costs, loss of market acceptance and sales, diversion of development resources to correct errors and manufacturing processes, 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.

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. We cannot assure you 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.

 

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A manufacturing facility previously operated by Datum in Austin, Texas is undergoing remediation for known subsurface contamination at that facility and adjoining properties. We believe that we will incur monitoring costs for years to come in connection with this subsurface contamination. Further, we have received a demand from adjoining landowner and may be subject to claims from other adjoining landowners, in addition to claims for remediation, and the amount of these costs and the extent of our exposure to these demands and claims cannot be determined at this time.

The determination of the existence and cost of any additional contamination could involve costly and time-consuming negotiations and litigation. Remediation activities and subsurface contamination may require us to incur additional unreimbursed costs and could harm on-site operations and the future use and value of the property. The remediation efforts, the property owner’s claims and any related governmental action may expose us to material liability and could significantly harm our business.

Our sales and 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, the Restriction of the Use of Hazardous Substances in electrical and electronic equipment and the Registration, Evaluation, Authorization and Restriction of Chemicals, as well as other standards around the world

In January 2003, the European Union enacted Directive 2002/96/EC on the Waste Electrical and Electronic Equipment Directive, known as the WEEE Directive. The WEEE Directive requires producers of certain categories of 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 have been incurring 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. During 2012, this Directive was “recast” by the European Commission with the objectives of assuring both that a greater proportion of “electrical and electronic equipment” or “EEE” is recycled and that new EEE is “sustainable” by limiting its content of hazardous substances and through other measures, such as restrictions on reuse. Under the recast Directive, EU member states will have a transition period from August 2012 to August 2018 to apply its expanded scope to products covered under the prior version of the Directive, and thereafter, the recast Directive will extend to numerous additional EEE. Substantial uncertainty surrounds the timing and measures member states will use to implement the recast Directive, particularly its sustainability objective, but we expect to incur additional financial responsibility for the collection, recycling, treatment and disposal of both new product sold, and product already sold prior to the recast Directive’s implementation date; it is also possible that we may need to change our manufacturing processes, redesign or reformulate some of our products, and change some components in order to continue to offer them for sale in the EU.

In January of 2003, the European Union also enacted Directive 2002/95/EC on the Restriction of the use of Hazardous Substances in certain categories of electrical and electronic equipment, known as the RoHS Directive. This Directive bans the placing on the EU market of new electrical and electronic equipment containing more than specified levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl (PBB) and polybrominated diphenyl ether (PBDE) flame retardants. During 2011, this Directive was “recast” by the European Commission, and during 2013, many EU member states are expected to finalize their laws and regulations to implement the recast Directive. The recast Directive covers the same substances, but has an expanded scope to cover medical devices and industrial monitoring devices as of 2017 and all other previously uncovered electronics and electrical equipment by 2019. As a result of the recast Directive’s expanded scope, we may need to change our manufacturing processes, redesign or reformulate some of our products, and change some components to eliminate these substances in our products, in order to be able to continue to offer them for sale within the European Union.

As noted above, individual European Union member states are required to transpose Directives into national legislation. As member states enact new laws and regulations to implement the recast WEEE and RoHS 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

 

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which implements these Directives, but we cannot currently estimate the extent of such increased costs or production delays, if any. However, to the extent that any such cost increases or delays are substantial, our operating results could be materially adversely affected. Also, we are aware that lead times for new, compliant components are longer and that older, non-compliant components are being discontinued at a fast pace. In addition, we are aware of similar legislation that may be enacted in other countries 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.

If we fail to protect our intellectual property, our competitive position could be weakened and our revenues may decline

We believe our success will depend in a large part on our ability to protect trade secrets, obtain or license patents, and operate without infringing on the rights of others. We rely on a combination of trademark, copyright and patent registration, contractual restrictions and internal security to establish and protect our proprietary rights. These measures may not provide sufficient protection for our trade secrets or other proprietary information. In addition, although we have security measures in place, if our intellectual property is misappropriated through cyber attack or intrusion or theft, we could suffer monetary and other losses and reputational harm, which could harm our business and operating results.

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 costly to defend and may result in our loss of significant rights

The technology 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. From time to time we have received claims asserting that we have infringed the proprietary rights of others. We cannot assure you that third parties will not assert infringement claims against us in the future, or that any such claims will not result in costly litigation or require us to obtain a license for such intellectual property rights regardless of the merit of such claims. No assurance can be given that any necessary licenses will be available or that, if available, such licenses can be obtained on commercially reasonable terms. In the event any necessary licenses are not available, we may not be able to sell or distribute our products, which may have a material adverse effect on our business.

We are subject to other significant domestic and foreign regulations relating to health and safety, packaging, product content and labor regulations

Our business is subject to various other significant international, federal, state and local, health and safety, packaging, product content and labor regulations. These regulations are complex, change frequently and have become more stringent over time. We may be required to incur significant expenses to comply with these regulations or to remedy past violations of these regulations. Any failure by us to comply with applicable government regulations could also result in cessation of our operations or portions of our operations, product recalls or impositions of fines and restrictions on our ability to carry on or expand our operations. In addition, because many of our products are regulated or sold into regulated industries, we must comply with additional regulations in marketing our products. Our products and operations are also often subject to the rules of industrial standards bodies, like the International Standards Organization, as well as regulation of other agencies such as the United States Federal Communications Commission. If we fail to adequately address any of these regulations, our business may suffer.

 

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Our critical business and manufacturing facilities in Beverly, Massachusetts; San Jose, California; Tuscaloosa, Alabama, and Boulder, Colorado, as well as many of our customers, suppliers, contract manufacturers, are located near known hurricane zones, earthquake fault zones, tornado zones, and flood plains, and the occurrence of these events or other catastrophic disasters could cause damage to our facilities and equipment, which could require us, as well as our customers, suppliers, contract manufacturers, to cease, curtail or disrupt operations

Capacity constraints, systems interruptions or failures, cyber attacks or other damage to or interruption of our computer systems could disrupt our business, compromise sensitive, proprietary or confidential information, and harm our business and operating results

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 systems have experienced system interruptions from time to time and could experience periodic system interruptions or failures in the future.

We also face the ongoing challenge of security breaches and disruptions by computer hackers, foreign governments, cyber terrorists and others, as do most companies. We cannot assure you that our security efforts and measures will be effective to prevent security breaches or disruptions. A security breach or other significant disruption involving our computer systems could disrupt our operations; result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary or confidential information, including trade secrets; compromise sensitive customer information; require significant management attention and resources to remedy the damages that result; and subject us to claims for damages and/or damage our reputation among our customers and the public generally, any or all of which could harm our business and operating results.

Our systems and operations are also vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, design defects, vandalism 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 operations.

We may be impacted by disruptions and liquidity issues in the credit market, which may unfavorably impact our financial condition and results of operations

We invest excess funds in specific instruments and issuers approved for inclusion in our cash and short-term investment accounts. Our investment criteria are to invest only in top tier quality investments or federally sponsored investments. Top tier quality investments are determined by our investment advisor in conjunction with ratings of those investments provided by outside ratings agencies as well as our investment advisor’s internal credit specialists. Our cash consists of overnight instruments and instruments that will mature within ninety days from the date of purchase. Our short-term investment portfolio consists of instruments that mature between ninety-one days and three years from date of purchase.

We may be impacted by the following risks, among others, as a result of credit market disruptions and liquidity issues:

 

   

We may experience temporary or permanent declines in the value of certain instruments which would be reflected in our consolidated financial statements;

 

   

We may experience rating agency downgrades of instruments we currently own, which may degrade our portfolio quality and cause us to take impairment charges;

 

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We may not be able to reasonably value our investments if there is not a liquid resale market for those investments; and

 

   

We may experience losses on the sale of certain investments if we do not have sufficient operating cash to run our business and are required to sell short-term investments to meet cash flow requirements.

In addition to the above risks, credit market events may also impact our customers, which would subject us to the following risks, among others:

 

   

We may experience lower revenues if our customers decide to reduce their capital spending plans;

 

   

Customers may delay payments to us, reducing our operating cash flow; and

 

   

We may experience an increase in accounts receivable write-offs if customers are unable to pay us.

Public confidence and share value may be adversely impacted by material weaknesses in our internal controls over financial reporting

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports. Section 404 also requires our independent registered public accounting firm to attest to the effectiveness of our internal controls over financial reporting.

Several years ago, we had identified material weaknesses that led us to restate our consolidated financial statements. Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements, errors or omissions, and any projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. We cannot be certain in future periods that other control deficiencies that may constitute one or more “significant deficiencies” (as defined by the relevant auditing standards), or material weaknesses in our internal control over financial reporting, will not be identified. If we fail to maintain the adequacy of our internal controls, including any failure to implement or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we could fail to be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls or meet our reporting obligations, and there could be a material adverse effect on our stock price.

If we incur net losses or substantially lower profit in the future, we may have to record a valuation allowance against some of our deferred tax assets, which would significantly increase our tax expense and harm our net earnings

Future losses or low profitability may create uncertainty about the realizability of our $31 million net deferred tax assets. 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. If we record a valuation allowance against our deferred tax assets, we would record an additional tax expense, which would reduce net income. In addition, uncertainties about the realizability of our deferred tax assets could limit our ability to recognize future deferred tax assets on our balance sheet and correspondingly reduce net earnings.

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 our foreign tax filings.

 

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Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

The following are our principal facilities as of July 1, 2012:

 

Location

  

Primary Use

  

Owned/Leased

  

Segments Used by

San Jose, CA

   Headquarters, Research and Development    Leased    All

Beverly, MA

   Manufacturing    Owned (no encumbrances)/Leased    All

Boulder, CO

   Manufacturing    Leased    Government and Enterprise

Beijing, China

   Research and Development, Sales    Leased    Communications

We also lease other facilities in the United States, Europe, and Asia to support manufacturing, research and development, sales and customer service. We believe that our current facilities are suitable and adequate to meet our anticipated needs for the foreseeable future, and we periodically evaluate whether additional facilities are necessary.

 

Item 3. Legal Proceedings

See Note 8—Litigation and Contingencies—Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for information regarding legal proceedings in which we are involved.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

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PART II

 

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on The NASDAQ Stock Market LLC, under the symbol “SYMM”. We had approximately 871 stockholders of record as of August 31, 2012.

The following table sets forth the high and low per share sale prices reported on The NASDAQ Stock Market LLC for our common stock for the periods indicated.

 

     High      Low  

Year ended July 1, 2012

     

First Quarter .

   $ 6.26       $ 4.29   

Second Quarter

     5.76         3.91   

Third Quarter

     6.50         5.44   

Fourth Quarter

     6.05         5.27   

Year ended July 3, 2011

     

First Quarter

   $ 5.47       $ 4.81   

Second Quarter

     7.40         5.44   

Third Quarter

     7.45         5.52   

Fourth Quarter

     6.23         5.37   

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 Part III Item 12 of this Form 10-K.

Stock Repurchase Program

As of July 1, 2012, the total number of shares available for repurchase under the repurchase program authorized by our Board of Directors was approximately 2.8 million.

During fiscal 2012, we repurchased 2.9 million shares of common stock pursuant to our repurchase program for an aggregate price of approximately $16.0 million.

A further 24,000 shares were repurchased by us in fiscal 2012 for an aggregate price of approximately $0.1 million to cover the cost of taxes on vested restricted stock.

The following table provides monthly detail regarding our share repurchases during the three months ended July 1, 2012:

 

Period

   Total
Number
of Shares

Purchased
     Average
Price Paid
per Share
     Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
     Approximate
Number of Shares
That May Yet
Be Purchased
Under the Plans
or Programs
 

April 2, 2012 through April 29, 2012

     213,700       $ 5.63         213,700         3,630,000   

April 30, 2012 through May 27, 2012

     469,353       $ 5.54         469,353         3,160,647   

May 28, 2012 through July 1, 2012

     398,153       $ 5.57         398,153         2,762,494   
  

 

 

       

 

 

    

Total

     1,081,206       $ 5.57         1,081,206      
  

 

 

       

 

 

    

 

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Comparative Stock Performance

The graph below compares the cumulative total stockholders’ return on our common stock for the last five fiscal years with the total return on the S&P 500 Index and the S&P Information Technology Index over the same period (assuming the investment of $100 in our common stock, the S&P 500 Index and the S&P Information Technology Index, and reinvestment of all dividends).

 

LOGO

 

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Item 6. Selected Financial Data

The following selected consolidated financial data for the fiscal years ended July 1, 2012, July 3, 2011, June 27, 2010, June 28, 2009 and June 29, 2008 should be read in conjunction with our consolidated financial statements, the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. The historical results are not necessarily indicative of the results to be expected for any future period.

 

     Fiscal Year ended  
     July 1,
2012
     July 3,
2011
     June 27,
2010
    June 28,
2009
    June 29,
2008
 
     (In thousands, except per share amounts)  

Consolidated Statement of Operations Data:

            

Net revenue

   $ 237,716       $ 208,146       $ 221,316      $ 219,746      $ 206,386   

Operating income (loss) (1),(2)

     16,844         7,131         12,129        (32,713     6,947   

Income (loss) from continuing operations before income taxes (3)

     17,126         8,030         2,043        (43,218     1,089   

Income (loss) from continuing operations (4)

     11,355         1,169         2,546        (43,806     (805

Income (loss) from discontinued operations, net of
tax (5),(6)

     —           254         (20     (1,951     (16,942

Net income (loss)

     11,355         1,423         2,526        (45,757     (17,747

Basic income (loss) per share from continuing operations

     0.27         0.03         0.06        (1.01     (0.02

Basic income (loss) per share from discontinued operations

     —           —           —          (0.04     (0.38

Basic net income (loss) per share

     0.27         0.03         0.06        (1.05     (0.40

Diluted income (loss) per share from continuing operations

     0.27         0.03         0.06        (1.01     (0.02

Diluted income (loss) per share from discontinued operations

     —           —           —          (0.04     (0.38

Diluted net income (loss) per share

     0.27         0.03         0.06        (1.05     (0.40
     July 1,
2012
     July 3,
2011
     June 27,
2010
    June 28,
2009
    June 29,
2008
 
     (In thousands)  

Consolidated Balance Sheet Data:

            

Total assets

   $ 231,025       $ 235,840       $ 231,387      $ 272,387      $ 367,672   

Long-term obligations (7),(8)

     5,472         5,212         8,296        51,769        46,301   

Stockholders’ equity

     187,782         184,154         183,852        179,528        233,331   

 

(1) During fiscal 2011 and 2010, we recorded $8.1 million and $10.3 million, respectively, in restructuring charges related to the closure of our manufacturing operations in Puerto Rico, lease losses and facility related charges, one-time termination benefits, and other restructuring related charges.

 

(2) During fiscal 2009, we recorded an impairment charge of $48.1 million in goodwill, $9.7 million in restructuring charges related to lease losses and facility related charges and one-time termination benefits.

 

(3) During fiscal 2010 and 2009, we recorded $7.0 million and $5.6 million, respectively, in non-cash charges related to repayment of convertible notes.

 

(4) During fiscal 2011, we recorded a $4.5 million valuation allowance against California R&D tax credit deferred tax assets.

 

(5) Reflects amounts related to gains (losses) on discontinued operations. The Specialty Manufacturing / Other business segment was discontinued in the third quarter of fiscal 2007. Our Quality of Experience Assurance business segment was discontinued and sold in fiscal 2010.

 

(6) During fiscal 2008, we recorded an impairment charge of $6.5 million in goodwill and $7.8 million in intangible assets related to our Quality of Experience Assurance business.

 

(7) During fiscal 2010, we repurchased $56.9 million in aggregate principal amount of our outstanding convertible notes, which had a carrying value of $48.7 million.

 

(8) During fiscal 2009, we repurchased $63.1 million in aggregate principal amount of our outstanding convertible notes which had a carrying value of $48.6 million.

 

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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 accompanying consolidated financial statements and related notes included elsewhere in this report on Form 10-K.

Overview

Symmetricom, a worldwide leader in precision time and frequency technologies, sets the world’s standard for time. We generate, distribute and apply precise time for the communications, aerospace/defense, IT infrastructure and metrology industries. Symmetricom’s customers, from communications service providers and network equipment manufacturers to governments and their suppliers worldwide, are able to build more reliable networks and systems by using our advanced timing technologies, atomic clocks, services and solutions. Our products support today’s precise timing standards, including GPS-based timing, IEEE 1588 (PTP), Network Time Protocol (NTP), Synchronous Ethernet, Building Integrated Timing Supply (BITS) and Data Over Cable Service Interface Specifications (DOCSIS(R)) timing.

Dollar amounts in the tables in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are in thousands. Our fiscal year is the 52 or 53 weeks ending on the Sunday closest to June 30. Fiscal years 2010 and 2012 were 52-week fiscal years, and 2011 was a 53-week fiscal year.

Fiscal Year 2012 Summary

In fiscal 2012, we delivered record revenue and executed on our major growth initiatives in the midst of a difficult European economic climate, lower domestic wireline modernization spending, and declining federal defense budgets. We expanded our portfolio of solutions to support the ongoing service provider transition to packet-based networks and 4G LTE wireless technologies. We are leveraging our packet-synchronization expertise and market leadership in new products designed for government applications, enterprise time servers, the power utility industry, and high-performance computing applications.

Our QuantumTM Chip Scale Atomic Clock (CSAC) contributed to revenue growth as production increased during the year. CSAC’s significant size, weight, and power advantages over existing technologies continues to drive demand. With orders representing more than 100 applications and growing production output, we believe we are positioned for revenue growth and expansion into multiple vertical markets.

The Government and Enterprise segment delivered solid growth as overall development work performed over the past few years led to production level programs in fiscal 2012. Our Communications segment continued to experience growth in our PackeTime® revenue for wireless and Ethernet backhaul networks. Our technology and expertise are well aligned with the new defense priorities, and we plan continued investment in this area as we pursue long-term growth.

Known Trends and Uncertainties Impacting Future Results of Operations: Global Market and Economic Conditions

Current macro-economic factors are dynamic and uncertain and are likely to remain so in fiscal year 2013. If difficult economic conditions continue or markedly worsen or if there are reductions in government /defense spending or if there are further reductions in wireline modernization spending, our customers may delay or reduce capital expenditures. Among other things, these factors could result in reductions in sales of our products, longer sales cycles, difficulties in collecting accounts receivable, additional excess and obsolete inventory, gross margin deterioration, slower adoption of new technologies, increased price competition and supplier difficulties.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the

 

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reported amounts of assets, liabilities, revenue and expenses, and related disclosures at the date of our financial statements. On an ongoing basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider the following accounting policies to be critical accounting policies due to their subjective nature and judgments involved in each:

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 collectability 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. Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities. We assess collectability based on the creditworthiness of the customer and past transaction history. We perform periodic credit evaluations of our customers and do not require collateral from our customers. However, for many of our international customers, we require an irrevocable letter of credit to be issued by the customer before the product is shipped. If we determine that collection of the invoice is not reasonably assured, we recognize revenue at the time that collection becomes reasonably assured, which is generally upon the receipt of cash.

Generally, product revenue is generated from the sale of synchronization and timing equipment with embedded software that is incidental to product functionality. 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 record an estimate of returns from distributors based on a historical average of distributor returns. We record commission expense both when orders are received and shipped, at which times the commission is both earned and payable.

Periodically, we enter into revenue transactions with multiple product deliverables. Our multiple element product offerings generally include hardware, software and post-contract support (“PCS”) services, which are considered separate units of accounting. For multiple-element arrangements entered into prior to the first quarter of fiscal 2011, we recognized revenue based on the then relevant revenue recognition guidance that allowed us to utilize the residual method to determine the amount of revenue to be recognized on the delivered elements of the arrangement provided vendor specific objective evidence (“VSOE”) of fair value existed for the undelivered elements. Under the residual method, the fair value of the undelivered elements was deferred, such as post-contract support, and the remaining portion of the arrangement consideration was recognized as revenue. VSOE of fair value is limited to the price charged when the same element is sold separately. VSOE of fair value is established for post-contractual support based on the volume and pricing of the stand-alone sales within a narrow range. The fair value of the post-contractual support is recognized on a straight-line basis over the term of the related support period. We adopted new revenue accounting guidance at the beginning of fiscal 2011, on a prospective basis, for applicable transactions originating or materially modified after June 27, 2010. The adoption of this new authoritative guidance had no material impact on the Company’s financial position, results of operations or cash flows in the periods presented. In evaluating the revenue recognition for multiple element arrangements under the new accounting guidance, the total arrangement fees are allocated to all the deliverables based on their respective relative selling prices and the residual method is no longer permitted. The relative selling price is determined using VSOE when available. When VSOE cannot be established, we attempt to establish the selling price of deliverables based on relevant third party evidence (“TPE”). TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our competitors, and offerings may contain a significant level of proprietary technology, customization or differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, we typically are not able to determine TPE.

 

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When we are unable to establish selling price using VSOE or TPE, we use a Best Estimate Selling Price (“BESP”) for the allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service was sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. We determine BESP for a product or service by considering multiple factors including, but not limited to:

 

   

the price list established by our management which is typically based on general pricing practices, market conditions, geographies and targeted gross margin of products and services sold; and

 

   

analysis of pricing history of new arrangements, including multiple element and stand-alone transactions.

Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed price and cost-plus reimbursement. Revenue is recognized under the fixed price contracts using the percentage of completion method (cost-to-cost basis), principally based upon the costs incurred relative to the total estimated costs at completion on the individual contracts. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Revenue recognized under cost-plus contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as a performance based award fee. Revenue from long-term contracts is reviewed periodically, with adjustments recorded in the period in which the revisions are made.

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.

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 revenue 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.

Accounting for Income Taxes

We provide for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the consolidated financial statements in the period that includes the enactment date.

 

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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 are related to stock options and have a valuation allowance because of uncertainty regarding their realization. If these tax credits are realized, the benefit will be credited to common stock. Additionally, for state income tax purposes, we have research and development tax credit carryforwards that have no expiration date but we have full valuation allowance on such credits.

Short-term Investments

Short-term investments consist of government sponsored enterprise debt securities, mutual funds and corporate debt securities. Maturities for the government sponsored enterprise debt securities and corporate debt securities are between three and thirty six months. All of our short-term investments, except the mutual funds which are classified as trading securities, are classified as available-for-sale. Available-for-sale securities are carried at fair value with temporary unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity. Unrealized gains and losses related to trading securities are included in interest income in our consolidated statements of operations.

Available-for-sale investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. We consult with our investment manager and consider available quantitative and qualitative evidence in evaluating potential impairment of our investments on a quarterly basis. Other-than-temporary impairment charges exist when the entity has the intent to sell the security or it will more likely than not be required to sell the security before anticipated recovery. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded to operations and a new cost basis in the investment is established.

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. 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, we compare the respective book value to the projected undiscounted net cash flows associated with the related asset or group of assets over the asset’s remaining useful life. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets. 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.

 

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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  
     July 1, 2012     July 3, 2011     June 27, 2010  

Net revenue

      

Communications

     55.7     57.2     62.8

Government and Enterprise

     44.3     42.8     37.2
  

 

 

   

 

 

   

 

 

 

Total net revenue

     100.0     100.0     100.0

Cost of products and services

     55.5     51.9     52.8

Amortization of purchased technology

     0.3     0.5     0.6

Restructuring charges

     0.5     4.5     2.5
  

 

 

   

 

 

   

 

 

 

Gross profit

     43.8     43.1     44.1

Operating expenses:

      

Research and development

     11.8     13.0     10.7

Selling, general and administrative

     24.8     27.2     25.6

Amortization of intangible assets

     0.1     0.1     0.1

Restructuring charges

     —       (0.6 )%      2.1
  

 

 

   

 

 

   

 

 

 

Operating income

     7.1     3.4     5.5

Loss on repayment of convertible notes, net

     —       —       (3.2 )% 

Interest income

     0.1     0.5     0.7

Interest expense

     —       —       (2.1 )% 
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before taxes

     7.2     3.9     0.9

Income tax provision (benefit)

     2.4     3.3     (0.2 )% 
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     4.8     0.6     1.2

Income from discontinued operations, net of tax

     —       0.1     —  
  

 

 

   

 

 

   

 

 

 

Net income

     4.8     0.7     1.1
  

 

 

   

 

 

   

 

 

 

Fiscal 2012 compared to Fiscal 2011

 

     Year ended     $ Change      % Change  
     July 1, 2012     July 3, 2011               

Net Revenue:

         

Communications

   $ 132,345      $ 119,104      $ 13,241         11.1

Government and Enterprise

     105,371        89,042        16,329         18.3   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total Net Revenue

   $ 237,716      $ 208,146      $ 29,570         14.2

Percentage of Revenue

     100.0     100.0     

 

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Net revenue consists of sales of products, services and software licenses. In fiscal 2012, net revenue increased $29.6 million, or 14.2%, compared to fiscal 2011. The increase in Communications revenue is due in part to the completion of our transition to an outsourced manufacturing and logistics model that adversely impacted revenue in the second quarter of fiscal 2011. Further, in fiscal 2012, Communications revenue increased due to higher sales of DTI and PackeTime® products, and higher installation revenues, offset by lower sales of traditional sync, and embedded solutions products. The increase in Government and Enterprise segment revenue is due to an increase in our government programs business, enterprise products, partially offset by lower sales of clocks and instruments.

 

     Year ended     $ Change     % Change  
     July 1, 2012     July 3, 2011              

Gross Profit:

        

Communications

   $ 66,564      $ 58,992      $ 7,572        12.8

Government and Enterprise

     38,626        40,091        (1,465     (3.7

Corporate related

     (1,178     (9,351     8,173        (87.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Gross Profit

   $ 104,012      $ 89,732      $ 14,280        15.9

Percentage of Revenue

     43.8     43.1    

Gross profit: Gross profit in fiscal 2012 increased by $14.3 million, or 15.9%, compared to fiscal 2011. Gross profit as a percentage of revenue in fiscal 2012 increased to 43.8% compared to 43.1% in fiscal 2011 due primarily to a decrease in corporate-related restructuring charges.

Gross profit for our Communications segment increased by 12.8% in fiscal 2012 compared to fiscal 2011, while the revenue in this segment increased 11.1% compared to the prior year due to product mix shift to higher margin products, partially offset by an increase in installation revenue, which typically has lower margins. Gross profit for our Government and Enterprise segment decreased by 3.7% in fiscal 2012 compared to fiscal 2011 whereas revenue increased 18.3% compared to the same period in the prior year, due to a product mix shift to lower margin products (government programs business and CSAC) and higher manufacturing costs.

Corporate related charges decreased $8.2 million, or 87.4%, in fiscal 2012, due to higher restructuring charges in fiscal 2011 from activities associated with the phased closure of our Puerto Rico manufacturing facility, which was completed in fiscal 2011.

 

     Year ended     $ Change     % Change  
     July 1, 2012     July 3, 2011              

Operating Income:

        

Communications

   $ 28,697      $ 22,690      $ 6,007        26.5

Government and Enterprise

     11,625        15,840        (4,215     (26.6

Corporate related

     (23,478     (31,399     7,921        25.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

   $ 16,844      $ 7,131      $ 9,713        136.2

Percentage of Revenue

     7.1     3.4    

Operating income: Operating income for our Communications business increased due to the increase in revenue. Operating income for our Government and Enterprise business decreased due to lower gross profit and an increase in research and development, sales, marketing and administrative expenses. Corporate-related expenses in fiscal 2012 were lower compared to fiscal 2011 due to higher restructuring charges in fiscal 2011 from activities associated with the phased closure of our Puerto Rico manufacturing facility, which was completed in fiscal 2011.

 

     Year ended     $ Change      % Change  
     July 1, 2012     July 3, 2011               

Research and development expense

   $ 27,960      $ 27,045      $ 915         3.4

Percentage of Revenue

     11.8     13.0     

 

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Research and development expense consists primarily of salaries and benefits, prototype expenses and fees paid to outside consultants and facility costs. Research and development expense in fiscal 2012 increased compared to fiscal 2011 due to higher employee compensation and related costs and increase in outside consultants costs, partially offset by lower prototype expense and research project expenses.

 

     Year ended     $ Change      % Change  
     July 1, 2012     July 3, 2011               

Selling, general and administrative

   $ 58,921      $ 56,607      $ 2,314         4.1

Percentage of Revenue

     24.8     27.2     

Selling, general and administrative expense consists primarily of salaries, benefits, sales commissions and travel-related expenses for our sales and services, marketing, finance, human resources, information technology and facilities departments. In fiscal 2012, compared to fiscal 2011, there were higher employee compensation and related costs, commissions, travel costs, and consulting and outside services costs.

 

     Year ended     $ Change     % Change  
     July 1, 2012     July 3, 2011              

Amortization of intangible assets

   $ 242      $ 243      $ (1     (0.4 )% 

Percentage of Revenue

     0.1     0.1    

Amortization of intangible assets remained flat in fiscal 2012 compared to fiscal 2011 due to certain assets becoming fully amortized during fiscal 2012, off set by amortization on intangible assets acquired during fiscal 2012.

 

     Year ended     $ Change      % Change  
     July 1, 2012     July 3, 2011               

Restructuring charges

   $ 45      $ (1,294   $ 1,339         (103.5 )% 

Percentage of Revenue

     0.0     (0.6 )%      

Restructuring charges in fiscal 2012 consisted of severance and other charges partially offset by changes in lease loss liability. In fiscal 2011, restructuring charges consisted of a $2.3 million credit from utilization of a section of the San Jose facility that had previously been recorded as a lease loss at the time we ceased using the space and the sublease of a section of our Santa Rosa facility that had previously been recorded as a lease loss at the time we ceased using the space, partially offset by severance and other charges.

 

     Year ended     $ Change     % Change  
     July 1, 2012     July 3, 2011              

Interest income

   $ 282      $ 957      $ (675     (70.5 )% 

Percentage of Revenue

     0.1     0.5    

Interest income decreased in fiscal 2012 compared to the same period in the prior year due to a decline in fair value of investments (classified as trading securities) under our deferred compensation plan and lower yields.

 

     Year ended     $ Change     % Change  
     July 1, 2012     July 3, 2011              

Income tax provision

   $ 5,771      $ 6,861      $ (1,090     (15.9 )% 

Percentage of Revenue

     2.4     3.3    

Income tax provision: Our effective tax rate in fiscal 2012 was 33.7% on income from continuing operations before income taxes of $17.1 million, compared to an effective tax rate of 85.5% on income from continuing operations before income taxes of $8.0 million in fiscal 2011. The tax rate in fiscal 2012 benefited from the release of reserves on an uncertain tax position that is no longer necessary. The tax rate in fiscal 2011 was impacted by a $4.5 million valuation allowance related to state income tax credits primarily attributable to research and development credits that could not be utilized.

 

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Fiscal 2011 compared to Fiscal 2010

 

     Year ended      $ Change     % Change  
     July 3, 2011      June 27, 2010               

Net Revenue:

          

Communications

   $ 119,104       $ 139,079       $ (19,975     (14.4 )% 

Government

     89,042         82,237         6,805        8.3   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Net Revenue

   $ 208,146       $ 221,316       $ (13,170     (6.0 )% 

Net revenue consists of sales of products, services and software licenses. Our Communications unit revenue decreased due to manufacturing transition-related product fulfillment issues in the second and third quarters of fiscal 2011, somewhat offset by increases in PackeTime® products. Our Government business revenue increase was attributable to higher revenue from government programs and sales of network time servers.

 

     Year ended     $ Change     % Change  
     July 3, 2011     June 27, 2010              

Gross Profit:

        

Communications

   $ 58,992      $ 69,134      $ (10,142     (14.7 )% 

Government

     40,091        34,011        6,080        17.9   

Corporate related

     (9,351     (5,625     (3,726     66.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Gross Profit

   $ 89,732      $ 97,520      $ (7,788     (8.0 )% 

Percentage of Revenue

     43.1     44.1    

Gross profit: Gross profit for our Communications unit decreased in fiscal 2011 compared to fiscal 2010 due to a decline in revenue, which resulted from manufacturing transition-related product fulfillment issues in the second and third quarters of fiscal 2011. Gross profit for our Government unit increased in fiscal 2011 compared to fiscal 2010 due to increased revenue, better performance on long-term government contracts, and lower manufacturing costs.

Corporate related restructuring charges increased in fiscal 2011 compared to fiscal 2010 due primarily to severance and other charges related to the planned closure of our Puerto Rico manufacturing facility, which we announced in the fourth quarter of fiscal 2010 and completed in the third quarter of fiscal 2011.

 

     Year ended     $ Change     % Change  
     July 3, 2011     June 27, 2010              

Operating Income:

        

Communications

   $ 22,690      $ 31,997      $ (9,307     (29.1 )% 

Government

     15,840        12,645        3,195        25.3   

Corporate related

     (31,399     (32,513     1,114        (3.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

   $ 7,131      $ 12,129      $ (4,998     (41.2 )% 

Percentage of Revenue

     3.4     5.5    

Operating income: Operating income for our Communications unit decreased due to the decline in revenue. Operating income for our Government unit increased due to higher gross profit, partially offset by an increase in research and development expenses. Corporate-related operating expenses in fiscal 2011 were flat compared to fiscal 2010.

 

     Year ended     $ Change      % Change  
     July 3, 2011     June 27, 2010               

Research and development expense

   $ 27,045      $ 23,701      $ 3,344         14.1

Percentage of Revenue

     13.0     10.7     

 

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Research and development expense consists primarily of salaries and benefits, prototype expenses and fees paid to outside consultants and facility costs. Research and development expense in fiscal 2011 increased compared to fiscal 2010 due to higher engineering costs on development programs, recruiting fees, and depreciation and amortization expenses, partially offset by lower employee compensation and related costs.

 

     Year ended     $ Change     % Change  
     July 3, 2011     June 27, 2010              

Selling, general and administrative

   $ 56,607      $ 56,743      $ (136     (0.2 )% 

Percentage of Revenue

     27.2     25.6    

Selling, general and administrative expense consists primarily of salaries, benefits, sales commissions and travel-related expenses for our sales and services, marketing, finance, human resources, information technology and facilities departments. In fiscal 2011, there were lower employee compensation and related costs and commissions, compared to fiscal 2010, which were offset by higher consulting and outside services costs resulting in selling, general and administrative expenses remaining flat from fiscal 2010 to fiscal 2011.

 

     Year ended     $ Change     % Change  
     July 3, 2011     June 27, 2010              

Amortization of intangible assets

   $ 243      $ 281      $ (38     (13.5 )% 

Percentage of Revenue

     0.1     0.1    

Amortization of intangible assets decreased in fiscal 2011 compared to fiscal 2010 due to certain assets becoming fully amortized during fiscal 2011.

 

     Year ended     $ Change     % Change  
     July 3, 2011     June 27, 2010              

Restructuring charges

   $ (1,294   $ 4,666      $ (5,960     (127.7 )% 

Percentage of Revenue

     (0.6 ) %      2.1    

Restructuring charges decreased in fiscal 2011 compared to fiscal 2010 due to a $2.3 million credit from utilization of a section of the San Jose facility that had previously been recorded as a lease loss at the time we ceased using the space and the sublease of a section of our Santa Rosa facility that had previously been recorded as a lease loss at the time we ceased using the space.

 

     Year ended     $ Change      % Change  
     July 3, 2011     June 27, 2010               

Loss on repayment of convertible notes, net

   $ —        $ (7,026   $ 7,026         (100.0 )% 

Percentage of Revenue

     —       (3.2 )%      

Loss on repayment of convertible notes: In the fourth quarter of fiscal 2010, we repaid the remaining principal amount of $56.9 million of our convertible notes and incurred a loss of $7.0 million. The outstanding notes were repaid in June of fiscal 2010, and there were no notes outstanding in fiscal 2011.

 

     Year ended     $ Change     % Change  
     July 3, 2011     June 27, 2010              

Interest income

   $ 957      $ 1,594      $ (637     (40.0 )% 

Percentage of Revenue

     0.5     0.7    

Interest income decreased in fiscal 2011 compared to the same period in the prior year due to lower investment balances combined with lower yields on those investments.

 

     Year ended     $ Change      % Change  
     July 3, 2011     June 27, 2010               

Interest expense

   $ (58   $ (4,654   $ 4,596         (98.8 )% 

Percentage of Revenue

     (0.0 )%      (2.1 )%      

 

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Interest expense consisted primarily of interest on our convertible notes. Interest expense decreased in fiscal 2011 compared to fiscal 2010 due to the repayment of all outstanding notes in June of fiscal 2010. There were no notes outstanding in fiscal 2011.

 

     Year ended     $ Change      % Change  
     July 3, 2011     June 27, 2010               

Income tax provision (benefit)

   $ 6,861      $ (503   $ 7,364         (1,464.0 )% 

Percentage of Revenue

     3.3     (0.2 )%      

Income tax provision (benefit): Our effective tax rate in fiscal 2011 was 85.5% on income from continuing operations before income taxes of $8.0 million, compared to an effective tax rate of (24.6%) on income from continuing operations before income taxes of $2.0 million in fiscal 2010. The tax rate in fiscal 2011 was impacted by a $4.5 million valuation allowance related to state income tax credits primarily attributable to research and development credits that will not be utilized. Fiscal 2010 income taxes benefited favorably from various tax credits.

 

     Year ended     $ Change      % Change  
     July 3, 2011     June 27, 2010               

Income (loss) from discontinued operations, net of tax

   $ 254      $ (20   $ 274         (1,370.0 )% 

Percentage of Revenue

     0.1     (0.0 )%      

Discontinued Operations: In fiscal 2010, we completed the sale of our QoE business, which resulted in a gain on sale of discontinued operations of $0.9 million and partially offset the losses of the QoE business for the fiscal year. Income from discontinued operations in fiscal 2011 represents a gain on the release of funds that were held in escrow to satisfy indemnification and other obligations to the buyer.

Key Operating Metrics

Key operating metrics for measuring our performance include sales backlog and contract revenue. These metrics, which compare fiscal year 2012 with fiscal year 2011, are discussed 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 $45.4 million as of July 1, 2012, compared to $60.3 million as of July 3, 2011. The $14.9 million decrease in backlog between July 1, 2012 and July 3, 2011 was due primarily to shorter target lead times for our products. Our backlog shippable within the next six months was $34.9 million as of July 1, 2012, compared to $38.6 million as of July 3, 2011.

Contract revenue:

Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed price and cost-plus reimbursement. Revenue is recognized under the fixed price contracts using the percentage of completion method, (cost-to-cost basis) principally based upon the costs incurred relative to the total estimated costs at completion on the individual contracts. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Revenue recognized under cost-plus contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as performance based award fee. Revenue from long-term contracts is reviewed periodically, with adjustments recorded in the period in which the revisions are made. As of July 1, 2012, we had approximately $13.0 million in contract revenue to be

 

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performed and recognized within the next 36 months, compared to approximately $16.1 million in contract revenue that was to be performed and recognized within the following 36 months as of July 3, 2011. These amounts have been accounted for as part of our sales backlog discussed above.

Liquidity and Capital Resources

Balance Sheet and Cash Flows

The following table summarizes our cash, cash equivalents and short-term investments:

 

     July 1, 2012      July 3, 2011      Change $  

Cash and cash equivalents

   $ 27,659       $ 20,318       $ 7,341   

Short-term investments

     39,280         43,340         (4,060
  

 

 

    

 

 

    

 

 

 

Total

   $ 66,939       $ 63,658       $ 3,281   
  

 

 

    

 

 

    

 

 

 

As of July 1, 2012, our principal sources of liquidity consisted of cash, cash equivalents and short-term investments of $66.9 million and accounts receivable, net of $46.0 million.

As of July 1, 2012, working capital was $140.0 million compared to $132.8 million as of July 3, 2011. Cash, cash equivalents and short-term investments as of July 1, 2012 increased to $66.9 million from $63.7 million as of July 3, 2011. Our days sales outstanding in accounts receivable was 67 days as of July 1, 2012, compared to 65 days as of July 3, 2011.

Our principal uses of cash historically have consisted of the purchase of inventories, payroll and other operating expenses related to the manufacturing of products, development of new products and the purchase of property, plant and equipment.

Cash flows from operating activities

Net cash provided by operating activities in fiscal 2012 was $22.6 million. The net cash provided by operating activities consisted of non-cash charges of $19.5 million and net income of $11.4 million. The non-cash charges consisted of $4.5 million in deferred income taxes, $5.9 million in depreciation and amortization expenses, $6.1 million in stock-based compensation expense and $2.9 million in provision for excess and obsolete inventory. Cash provided by operating activities in fiscal 2012 was partially offset by $8.3 million of net changes in operating assets and liabilities. Those net changes consisted primarily of a $6.9 million decrease in accounts payable, a $5.3 million increase in accounts receivable, a $3.2 million increase in prepaids and other assets, and a $3.2 million decrease in other accrued liabilities, partially offset by a decrease in inventories of $9.5 million and an increase in accrued compensation of $0.8 million.

Cash flows from investing activities

Net cash used for investing activities was $2.4 million in fiscal 2012, which represented the purchase of short-term investments of $30.1 million, property, plant and equipment of $4.5 million, and acquisition of a business of $1.4 million, partially offset by the sale/maturities of short-term investments of $33.4 million.

Cash flows from financing activities

Net cash used for financing activities was $12.7 million in fiscal 2012, which represented the repurchase of common stock of $16.1 million, partially offset by cash generated from the exercise of common stock options of $3.5 million.

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

 

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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 debt financing. Additional financing may not be available at all or on terms acceptable 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.

Contractual Obligations

We operate in multiple locations domestically and internationally. As such, certain facilities and equipment are leased under operating lease agreements. Due to excess capacity on several non-cancelable leases as a result of the economic downturn and reorganization, we subleased certain facilities and recognized lease loss liabilities for the remainder.

We incur purchase commitments during our normal course of business. As of July 1, 2012, our principal commitments totaled $22.9 million and related primarily to commitments to purchase inventory.

The following table summarizes our contractual cash obligations as of July 1, 2012, and the effect such obligations are expected to have on liquidity and cash flow in future periods.

 

     Payments due by period  
     Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Contractual Obligations

  

Operating leases obligations(1)

     17,618         4,158         9,995         3,451         14   

Purchase obligations

     22,914         22,186         728         —           —     

Post-retirement benefits liabilities(2)

     217         32         56         47         82   

Lease obligations on abandoned space(3)

     1,908         668         968         272         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 42,657       $ 27,044       $ 11,747       $ 3,770       $ 96   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Consists of lease obligations on space used by the Company for operations and does not include lease obligations on space that has been abandoned.

 

(2) Relates to a post-retirement health care benefits plan, assumed during an acquisition in fiscal 2003. The plan was curtailed in fiscal 2003, and only existing retired participants and employees of the acquired company, 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.

 

(3) Consists of gross lease obligations on abandoned space whether sub-leased or not.

Uncertain tax positions of $16.1 million consist of amounts which reduce the net deferred tax asset balance to $31.0 million at July 1, 2012, which would affect our income tax expense if recognized. Due to the high degree of uncertainty regarding the settlement of these liabilities, we are unable to estimate the year in which the future cash flows may occur and therefore have not included them in the above table.

Recent Accounting Pronouncements

Refer to Note 1 of Notes to Consolidated Financial Statements in this Form 10-K for a discussion of the expected impact of recently issued accounting pronouncements.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Exposure

As of July 1, 2012, we had short-term investments of $39.3 million. These investments are mainly in government sponsored enterprise and corporate debt securities that have maturity dates of greater than three months. These securities are subject to interest rate risk in as much as their fair value will fall if market interest rates increase. A hypothetical 100 basis-point (one percentage point) increase or decrease in interest rates compared to rates at July 1, 2012 would not have materially affected the fair value of our investment portfolio. We do not use derivative financial instruments to mitigate the risks inherent in these securities.

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, Germany, China and India. Although we transact business in various countries, settlement amounts are usually based on United States currency. Transaction gains or losses have not been significant in the past and we do not presently engage in hedging activity. A hypothetical 10% adverse change in Pound Sterling, Euro, Chinese Yuan Renminbi or Indian Rupee against United States dollars would not result in a material foreign exchange loss. Consequently, we do not expect that a sudden or significant fluctuation in foreign exchange rates would have a direct material impact on our business.

Notwithstanding the foregoing analysis of the direct effects of interest rate and currency exchange rate fluctuations on the value of 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.

 

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Item 8. Consolidated Financial Statements and Supplementary Data

Supplementary quarterly financial data (unaudited):

The following table shows our unaudited condensed, consolidated quarterly statements of operations data for each of the quarters in the fiscal years ended July 1, 2012 and July 3, 2011. This information has been derived from our unaudited financial information, which, in the opinion of management, has been prepared on the same basis as our audited financial statements and includes all adjustments necessary for the fair presentation of the financial information for the quarters presented.

 

     First
Quarter
     Second
Quarter
    Third
Quarter
     Fourth
Quarter
 
     (In thousands, except per share amounts)  

Fiscal 2012

          

Net revenue

   $ 56,378       $ 58,294      $ 60,438       $ 62,606   

Gross profit

     25,945         25,210        24,661         28,196   

Operating income

     4,089         3,643        3,275         5,837   

Income before taxes

     4,155         3,347        3,500         6,124   

Net income

     2,749         2,445        2,204         3,957   

Basic net income per share

     0.06         0.06        0.05         0.10   

Diluted net income per share

     0.06         0.06        0.05         0.09   

Fiscal 2011

          

Net revenue

   $ 54,379       $ 41,844      $ 51,234       $ 60,689   

Gross profit

     23,739         14,445        22,866         28,682   

Operating income(loss)

     5,153         (5,988     3,639         4,327   

Income (loss) from continuing operations before taxes

     4,990         (5,657     4,080         4,617   

Income (loss) from continuing operations

     3,094         (3,476     2,985         (1,434

Income (loss) from discontinued operations, net of tax

     127         (49     19         157   

Net income (loss)

     3,221         (3,525     3,004         (1,277

Basic income (loss) per share from continuing operations

     0.07         (0.08     0.07         (0.03

Basic income (loss) per share from discontinued operations

     —           —          —           —     

Basic net income (loss) per share

     0.07         (0.08     0.07         (0.03

Diluted income (loss) per share from continuing operations

     0.07         (0.08     0.07         (0.03

Diluted income (loss) per share from discontinued operations

     —           —          —           —     

Diluted net income (loss) per share

     0.07         (0.08     0.07         (0.03

 

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SYMMETRICOM, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     43   

Consolidated Balance Sheets at July 1, 2012 and July 3, 2011

     44   

Consolidated Statements of Operations for the years ended July 1, 2012, July  3, 2011, and June 27, 2010

     45   

Consolidated Statements of Comprehensive Income for the years ended July 1, 2012, July  3, 2011, and June 27, 2010

     46   

Consolidated Statements of Stockholders’ Equity for the years ended July 1, 2012, July  3, 2011, and June 27, 2010

     47   

Consolidated Statements of Cash Flows for the years ended July 1, 2012, July  3, 2011, and June 27, 2010

     48   

Notes to the Consolidated Financial Statements

     49   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Symmetricom, Inc.

San Jose, California

We have audited the accompanying consolidated balance sheets of Symmetricom, Inc. and subsidiaries (the “Company”) as of July 1, 2012 and July 3, 2011, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended July 1, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15(a) 2. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Symmetricom, Inc. and subsidiaries as of July 1, 2012, and July 3, 2011, and the results of their operations and their cash flows for each of the three years in the period ended July 1, 2012, 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 discussed in Note 1 to the consolidated financial statements, in the year ended July 3, 2011, the Company changed its method of recognizing revenue for multiple element arrangements upon the adoption of new accounting guidance established by the Financial Accounting Standards Board.

As discussed in Note 1 to the consolidated financial statements, the Company has retrospectively adopted new accounting guidance issued by the Financial Accounting Standards Board related to the presentation of comprehensive income.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of July 1, 2012, 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 10, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

San Jose, California

September 10, 2012

 

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SYMMETRICOM, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

     July 1, 2012     July 3, 2011  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 27,659      $ 20,318   

Short-term investments

     39,280        43,340   

Accounts receivable, net of allowance for doubtful accounts of $108 in 2012 and $315 in 2011

     45,952        40,511   

Inventories

     47,618        61,368   

Prepaids and other current assets

     16,943        13,390   
  

 

 

   

 

 

 

Total current assets

     177,452        178,927   

Property, plant and equipment, net .

     22,702        23,255   

Intangible assets, net

     3,458        2,429   

Deferred taxes and other assets

     27,413        31,229   
  

 

 

   

 

 

 

Total assets

   $ 231,025      $ 235,840   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 9,300      $ 16,113   

Accrued compensation

     14,574        13,743   

Accrued warranty

     1,722        1,601   

Other accrued liabilities

     11,841        14,683   
  

 

 

   

 

 

 

Total current liabilities

     37,437        46,140   

Long-term obligations

     5,472        5,212   

Deferred income taxes

     334        334   
  

 

 

   

 

 

 

Total liabilities

     43,243        51,686   
  

 

 

   

 

 

 

Commitments and contingencies (Notes 7 and 8)

    

Stockholders’ equity:

    

Preferred stock, $0.0001 par value; 500 shares authorized, none issued

     —          —     

Common stock, $0.0001 par value; 70,000 shares authorized, 51,500 shares issued and 40,952 outstanding in 2012; 50,579 shares issued and 42,960 outstanding in 2011

     193,478        201,002   

Accumulated other comprehensive loss

     (232     (29

Accumulated deficit

     (5,464     (16,819
  

 

 

   

 

 

 

Total stockholders’ equity

     187,782        184,154   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 231,025      $ 235,840   
  

 

 

   

 

 

 

See notes to the consolidated financial statements.

 

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SYMMETRICOM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

     Year ended  
     July 1, 2012      July 3, 2011     June 27, 2010  

Net revenue

   $ 237,716       $ 208,146      $ 221,316   

Cost of products and services

     131,907         107,990        116,889   

Amortization of purchased technology

     619         1,073        1,282   

Restructuring charges

     1,178         9,351        5,625   
  

 

 

    

 

 

   

 

 

 

Total cost of sales

     133,704         118,414        123,796   
  

 

 

    

 

 

   

 

 

 

Gross profit

     104,012         89,732        97,520   

Operating expenses:

       

Research and development

     27,960         27,045        23,701   

Selling, general and administrative

     58,921         56,607        56,743   

Amortization of intangible assets

     242         243        281   

Restructuring charges

     45         (1,294     4,666   
  

 

 

    

 

 

   

 

 

 

Total operating expenses

     87,168         82,601        85,391   
  

 

 

    

 

 

   

 

 

 

Operating income

     16,844         7,131        12,129   

Loss on repayment of convertible notes

     —           —          (7,026

Interest income

     282         957        1,594   

Interest expense

     —           (58     (4,654
  

 

 

    

 

 

   

 

 

 

Income from continuing operations before taxes

     17,126         8,030        2,043   

Income tax provision (benefit)

     5,771         6,861        (503
  

 

 

    

 

 

   

 

 

 

Income from continuing operations

     11,355         1,169        2,546   

Income (loss) from discontinued operations, net of tax

     —           254        (20
  

 

 

    

 

 

   

 

 

 

Net income

   $ 11,355       $ 1,423      $ 2,526   
  

 

 

    

 

 

   

 

 

 

Earnings per share—basic:

       

Income from continuing operations

   $ 0.27       $ 0.03      $ 0.06   

Income (loss) from discontinued operations, net of tax

     —           —          —     
  

 

 

    

 

 

   

 

 

 

Net income

   $ 0.27       $ 0.03      $ 0.06   
  

 

 

    

 

 

   

 

 

 

Weighted average shares outstanding—basic

     41,981         43,188        43,380   
  

 

 

    

 

 

   

 

 

 

Earnings per share—diluted:

       

Income from continuing operations

   $ 0.27       $ 0.03      $ 0.06   

Income (loss) from discontinued operations, net of tax

     —           —          —     
  

 

 

    

 

 

   

 

 

 

Net income

   $ 0.27       $ 0.03      $ 0.06   
  

 

 

    

 

 

   

 

 

 

Weighted average shares outstanding—diluted

     42,697         43,782        43,897   
  

 

 

    

 

 

   

 

 

 

See notes to the consolidated financial statements.

 

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SYMMETRICOM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

     Year ended  
     July 1, 2012     July 3, 2011      June 27, 2010  

Income from continuing operations, net of tax

   $ 11,355      $ 1,169       $ 2,546   

Income (loss) from discontinued operations, net of tax

     —          254         (20
  

 

 

   

 

 

    

 

 

 

Net income.

     11,355        1,423         2,526   
  

 

 

   

 

 

    

 

 

 

Other Comprehensive income, net of tax

       

Foreign currency translation adjustments

     (199     278         (287

Unrealized gain (loss) on investments

     (4     49         (213
  

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss), net of tax

     (203     327         (500
  

 

 

   

 

 

    

 

 

 

Total comprehensive income

   $ 11,152      $ 1,750       $ 2,026   
  

 

 

   

 

 

    

 

 

 

See notes to the consolidated financial statements.

 

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SYMMETRICOM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

     Common Stock     Accumulated
Other
Comprehensive
Income (loss)
    Retained
Earnings
(accumulated
deficit)
    Total
Stock-
holders’
Equity
 
     Shares     Amount        

Balance at June 28, 2009

     43,556      $ 200,152      $ 144      $ (20,768   $ 179,528   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock:

          

Stock option exercises

     439        1,968        —          —          1,968   

Restricted stock issued

     127        —          —          —          —     

Repurchase of common stock

     (348     (1,824     —          —          (1,824

Restricted stock canceled

     (75     —          —          —          —     

Stock option income tax expense

     —          (949     —          —          (949

Stock-based compensation

     —          3,714        —          —          3,714   

Adjustment for repayment of convertible notes, net

     —          (611     —          —          (611

Comprehensive income:

          

Income from continuing operations

     —          —          —          2,546        2,546   

Loss from discontinued operations, net of tax

     —          —          —          (20     (20

Unrealized loss on short-term investments, net of taxes

     —          —          (213     —          (213

Cumulative adjustments to foreign currency translation, net of taxes

     —          —          (287     —          (287
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 27, 2010

     43,699      $ 202,450      $ (356   $ (18,242   $ 183,852   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock:

          

Stock option exercises

     462        2,167        —          —          2,167   

Restricted stock issued

     211        —          —          —          —     

Repurchase of common stock

     (1,385     (7,957     —          —          (7,957

Restricted stock canceled

     (27     —          —          —          —     

Stock option income tax expense

     —          (456     —          —          (456

Stock-based compensation

     —          4,798        —          —          4,798   

Comprehensive income:

          

Income from continuing operations

     —          —          —          1,169        1,169   

Income from discontinued operations, net of tax

     —          —          —          254        254   

Unrealized gain on short-term investments, net of taxes

     —          —          49        —          49   

Cumulative adjustments to foreign currency translation, net of taxes

     —          —          278        —          278   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at July 3, 2011

     42,960      $ 201,002      $ (29   $ (16,819   $ 184,154   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock:

          

Stock option exercises and others

     765        3,455        —          —          3,455   

Restricted stock issued

     156        —          —          —          —     

Repurchase of common stock

     (2,929     (16,136     —          —          (16,136

Stock option income tax expense.

     —          (985     —          —          (985

Stock-based compensation.

     —          6,142        —          —          6,142   

Comprehensive income:

          

Net Income

     —          —          —          11,355        11,355   

Unrealized loss on short-term investments, net of taxes

     —          —          (4     —          (4

Cumulative adjustments to foreign currency translation, net of taxes

     —          —          (199     —          (199
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at July 1, 2012

     40,952      $ 193,478      $ (232   $ (5,464   $ 187,782   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to the consolidated financial statements.

 

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SYMMETRICOM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Year ended  
     July 1,
2012
    July 3,
2011
    June 27,
2010
 

Cash flows from operating activities:

      

Net income

   $ 11,355      $ 1,423      $ 2,526   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     5,864        6,664        6,913   

Deferred income taxes

     4,515        6,953        (1,042

Non-cash interest on convertible bonds

     —          —          2,845   

Gain on sale of discontinued operations

     —          —          (915

Loss on repayment of convertible notes, net

     —          —          7,026   

Loss on disposal of fixed assets

     211        13        265   

Allowance for doubtful accounts

     (157     102        178   

Provision for excess and obsolete inventory

     2,944        1,760        971   

Stock-based compensation

     6,142        4,798        3,714   

Changes in assets and liabilities:

      

Accounts receivable

     (5,284     (538     2,102   

Inventories

     9,463        (27,153     241   

Prepaids and other assets

     (3,170     1,995        2,057   

Accounts payable

     (6,921     9,401        (1,568

Accrued compensation

     831        (4,987     (494

Other accrued liabilities

     (3,172     (206     2,870   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     22,621        225        27,689   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of short-term investments

     (30,089     (56,662     (86,956

Sale/maturities of short-term investments

     33,382        66,068        72,245   

Purchases of plant and equipment

     (4,503     (5,595     (8,075

Cash proceeds from sale of discontinued operations

     210        —          1,850   

Payment to acquire business

     (1,400     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     (2,400     3,811        (20,936
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from issuance of common stock

     3,455        2,167        1,968   

Repurchase of common stock

     (16,136     (7,957     (1,824

Repayment of convertible notes

     —          —          (56,880
  

 

 

   

 

 

   

 

 

 

Net cash used for financing activities

     (12,681     (5,790     (56,736
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes in cash

     (199     278        (287
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     7,341        (1,476     (50,270

Cash and cash equivalents at beginning of year

     20,318        21,794        72,064   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 27,659      $ 20,318      $ 21,794   
  

 

 

   

 

 

   

 

 

 

Non-cash investing and financing activities:

      

Unrealized gain (loss) on securities, net

   $ (4   $ 49      $ (213

Plant and equipment purchases included in accounts payable

     185        77        133   

Contingent consideration for acquisition of business

     540        —          —     

Cash payments for:

      

Interest

   $ —        $ 53      $ 1,733   

Income taxes

     1,080        371        835   

See notes to the consolidated financial statements.

 

48


Table of Contents

SYMMETRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Summary of Significant Accounting Policies

Business

Symmetricom® is a leading source of highly precise timekeeping technologies, instruments and solutions worldwide. We generate, distribute and apply precise time for the communications, aerospace/defense, IT infrastructure and metrology industries. Symmetricom’s customers, from communications service providers and network equipment manufacturers to governments and their suppliers worldwide, are able to build more reliable networks and systems by using our advanced timing technologies, atomic clocks, services and solutions. Our products support today’s precise timing standards, including GPS-based timing, IEEE 1588 (PTP), Network Time Protocol (NTP), Synchronous Ethernet (SyncE), Building Integrated Timing Supply (BITS) and Data Over Cable Service Interface Specifications (DOCSIS) timing.

Principles of Consolidation

The consolidated financial statements include the accounts of Symmetricom, Inc., and its wholly owned subsidiaries (“Symmetricom,” “we,” “our” or the “Company”). All significant intercompany accounts and transactions are eliminated.

Fiscal Year

Our fiscal year is the 52 or 53 weeks ending on the Sunday closest to June 30. Fiscal years 2010 and 2012 were 52-week fiscal years and 2011 was a 53-week fiscal year.

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:

 

   

Revenue recognition

 

   

Accounting for income taxes

 

   

Inventory valuation

 

   

Warranty accrual

 

   

Accruals for contingent liabilities (including restructuring charges)

 

   

Stock based compensation

 

   

Allowance for doubtful accounts

 

   

Valuation of short-term investments

 

   

Valuation of long-lived assets including intangible assets

These estimates are based on available information as of the date of these consolidated financial statements and actual results could differ from these estimates.

Cash and Cash Equivalents

We consider all highly liquid debt investments with a remaining maturity of three months or less when purchased to be cash and cash equivalents.

 

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SYMMETRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Short-term Investments

Short-term investments consist of government sponsored enterprise debt securities, mutual funds and corporate debt securities. Maturities of government sponsored enterprise debt securities and corporate debt securities are between three and thirty six months. All of our short-term investments, except the mutual funds which are classified as trading securities, are classified as available-for-sale. Available-for-sale securities are carried at fair value with temporary unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity. Unrealized gains and losses related to trading securities are included in interest income in our consolidated statements of operations.

Available-for-sale investments are considered to be impaired when the fair value declines below the cost basis. We consult with our investment manager and consider available quantitative and qualitative evidence in evaluating potential impairment of our investments on a quarterly basis. Other-than-temporary impairment charges exist when the entity has the intent to sell the impaired security or it will more likely than not be required to sell the security before anticipated recovery. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded to operations and a new cost basis in the investment is established.

Fair Values of Financial Instruments

The estimated fair value of our financial instruments, which include cash and cash equivalents, short-term investments, accounts receivable, and accounts payable, approximate their carrying amount.

Allowance for Doubtful Accounts

We record allowance for doubtful accounts based upon an assessment of various factors. We consider historical experience, the age of the accounts receivable balances, the credit quality of the customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required.

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.

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

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

 

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Table of Contents

SYMMETRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

differences are expected to be realized. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the financial statements in the period that includes the enactment date.

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.

Authoritative accounting guidance from income taxes prescribes a recognition threshold and measurement framework for the financial statement reporting and disclosure of an income tax position taken or expected to be taken on a tax return. Under this guidance, a tax position is recognized in the financial statements when it is more likely than-not, based on the technical merits, that the position will be sustained upon examination, including resolution of any related appeals or litigation processes. A tax position that meets the recognition threshold is then measured to determine the largest amount of the benefit that has a greater than 50% likelihood of being realized upon settlement.

Valuation of 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. An impairment loss is measured as the amount by which the carrying amount exceeds the fair value.

Comprehensive Income

Financial Accounting Standards Board (FASB) issued authoritative guidance on reporting comprehensive income, establishes standards for reporting and display of comprehensive income and its components. It also 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 loss, consists of the following:

 

     July 1, 2012     July 3, 2011     June 27, 2010  
     (in thousands)  

Foreign currency translation adjustments, net of taxes

   $ (239   $ (40   $ (318

Unrealized gain (loss) on investments, net of taxes.

     7        11        (38
  

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive loss

   $ (232   $ (29   $ (356
  

 

 

   

 

 

   

 

 

 

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 revenue 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, standard 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.

The change in accrued warranty expense is summarized as follows:

 

     Year ended  
     July 1, 2012     July 3, 2011     June 27, 2010  
     (In thousands)  

Beginning balance

   $ 1,601      $ 2,900      $ 3,737   

Provision for warranty for the year

     2,549        1,617        2,035   

Accruals related to changes in estimate

     286        (520     (478

Less: Actual warranty costs

     (2,714     (2,396     (2,394
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,722      $ 1,601      $ 2,900   
  

 

 

   

 

 

   

 

 

 

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 FASB issued authoritative guidance on Accounting for the Cost of 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 and China is the U.S. dollar, while in Germany it is the Euro and in India it is the Indian rupee.

For our subsidiaries in which the U.S. Dollar is the functional currency, foreign currency denominated assets and liabilities are translated at the period-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 remeasurements are charged to operations and have not been material to our consolidated operating results for any of the periods presented.

For our subsidiaries in Germany and India, foreign currency denominated assets and liabilities are translated at the period-end exchange rates, while revenue and expenses are translated at average rates prevailing during the year. Translation adjustments are reported in other comprehensive income (loss).

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 collectability 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. Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.

 

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SYMMETRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

We assess collectability based on the creditworthiness of the customer and past transaction history. We perform periodic credit evaluations of our customers and do not require collateral from our customers. However, for many of our international customers, we require an irrevocable letter of credit to be issued by the customer before the product is shipped. If we determine that collection of the invoice is not reasonably assured, we recognize revenue at the time that collection becomes reasonably assured, which is generally upon the receipt of cash.

Generally, product revenue is generated from the sale of synchronization and timing equipment with embedded software that is incidental to product functionality. 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 record an estimate of returns from distributors based on a historical average of distributor returns. We record commission expense both when orders are received and shipped, at which times the commission is both earned and payable.

Periodically, we enter into revenue transactions with multiple product deliverables, including hardware, software and post-contract support (“PCS”) services, which are considered separate units of accounting. For multiple-element arrangements entered into prior to the first quarter of fiscal 2011, we recognized revenue based on the then relevant revenue recognition guidance that allowed us to utilize the residual method to determine the amount of revenue to be recognized on the delivered elements of the arrangement provided vendor specific objective evidence (“VSOE”) of fair value existed for the undelivered elements. Under the residual method, the fair value of the undelivered elements was deferred, such as post-contract support, and the remaining portion of the arrangement consideration was recognized as revenue. VSOE of fair value is limited to the price charged when the same element is sold separately. VSOE of fair value is established for post-contractual support based on the volume and pricing of the stand-alone sales within a narrow range. The fair value of the post-contractual support is recognized on a straight-line basis over the term of the related support period. We adopted new revenue accounting guidance at the beginning of fiscal 2011, on a prospective basis, for applicable transactions originating or materially modified after June 27, 2010. The adoption of this new authoritative guidance had no material impact on the Company’s financial position, results of operations or cash flows in the periods presented. In evaluating the revenue recognition for multiple element arrangements under the new accounting guidance, the total arrangement fees are allocated to all the deliverables based on their respective relative selling prices and the residual method is no longer permitted. The relative selling price is determined using VSOE when available. When VSOE cannot be established, we attempt to establish the selling price of deliverables based on relevant third party evidence (“TPE”). TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our competitors, and offerings may contain a significant level of proprietary technology, customization or differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, we typically are not able to determine TPE.

When we are unable to establish selling price using VSOE or TPE, we use a best estimate of selling price (“BESP”) for the allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service was sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. We determine BESP for a product or service by considering multiple factors including, but not limited to:

 

   

the price list established by our management which is typically based on general pricing practices, market conditions, geographies and targeted gross margin of products and services sold; and

 

   

analysis of pricing history of new arrangements, including multiple element and stand-alone transactions.

 

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SYMMETRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed price and cost-plus reimbursement. Revenue is recognized under the fixed price contracts using the percentage of completion method (cost-to-cost basis), principally based upon the costs incurred relative to the total estimated costs at completion on the individual contracts. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Revenue recognized under cost-plus contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as a performance based award fee. Revenue from long-term contracts is reviewed periodically, with adjustments recorded in the period in which the revisions are made.

Unbilled receivables totaled $5.6 million as of July 1, 2012 compared to $3.5 million as of July 3, 2011 and are included within the “Prepaid and Other Current Assets” line item on our consolidated balance sheets. All unbilled receivables as of July 1, 2012 are expected to be collected in fiscal 2013.

Stock-Based Compensation

We account for stock-based compensation in accordance with FASB issued authoritative guidance on share-based compensation. Under this guidance, share-based compensation cost is measured at the grant date based on the fair value of the award using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires that we determine subjective variables including estimated term of the award and the estimated volatility in addition to other less subjective variables. The identified fair value resulting from this model is recognized as expense, net of estimated forfeitures, over the applicable vesting period of the stock award.

Research and Development Costs

Research and development expenditures, which include software development costs, are expensed as incurred.

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options, employee stock purchase plan and restricted stock using the treasury stock 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 earnings per share is as follows:

 

     Year ended  
     July 1, 2012     July 3, 2011     June 27, 2010  
     (In thousands, except per share amounts)  

Numerator:

      

Income from continuing operations

   $ 11,355      $ 1,169      $ 2,546   

Income (loss) from discontinued operations

     —          254        (20
  

 

 

   

 

 

   

 

 

 

Net income

   $ 11,355      $ 1,423      $ 2,526   
  

 

 

   

 

 

   

 

 

 

Shares (Denominator):

      

Weighted average common shares outstanding

     42,224        43,368        43,705   

Weighted average common shares outstanding subject to repurchase

     (243     (180     (325
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding—basic

     41,981        43,188        43,380   

Weighted average dilutive share equivalents from stock options

     583        530        278   

Weighted average dilutive common shares subject to repurchase

     133        64        239   
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding—diluted

     42,697        43,782        43,897   
  

 

 

   

 

 

   

 

 

 

Earnings per share—basic:

      

Income from continuing operations

   $ 0.27      $ 0.03      $ 0.06   

Income from discontinued operations

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net income

   $ 0.27      $ 0.03      $ 0.06   
  

 

 

   

 

 

   

 

 

 

Earnings per share—diluted:

      

Income from continuing operations

   $ 0.27      $ 0.03      $ 0.06   

Income from discontinued operations

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net income

   $ 0.27      $ 0.03      $ 0.06   
  

 

 

   

 

 

   

 

 

 

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 per share.

The following common stock equivalents were excluded from the diluted earnings per share calculation, as their effect would have been antidilutive:

 

     Year ended  
     July 1, 2012      July 3, 2011      June 27, 2010  
     (In thousands)  

Stock options

     4,155         2,777         4,128   
  

 

 

    

 

 

    

 

 

 

Total shares of common stock excluded from diluted net earnings per share calculation

     4,155         2,777         4,128   
  

 

 

    

 

 

    

 

 

 

Convertible Subordinated Notes outstanding at June 27, 2010, were antidilutive and therefore not included in our diluted earnings per share calculation for fiscal 2010. There were no contingently convertible notes outstanding during fiscal 2011 and 2012.

 

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SYMMETRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Convertible Subordinated Notes—Redemption—Fiscal 2010

During the fourth quarter of fiscal 2010, we purchased all remaining $56.9 million aggregate principal amount of our convertible subordinated notes (the “Notes”) in privately negotiated transactions, for a purchase price of $57.7 million, representing the par value principal amount of the Notes plus accrued and unpaid interest. The purchased Notes were retired and cancelled.

As a result of the full redemption of the Notes in the fourth quarter of fiscal 2010, we recognized a pre-tax loss of $7.0 million along with the write-off of the unamortized bond issuance costs, which represents the difference between the carrying value of the liability component of the redeemed amount and its fair value at the date of redemption in the fourth quarter of fiscal 2010.

Recent Accounting Pronouncements

In fiscal 2012, the Company adopted revised guidance related to the presentation of comprehensive income. This guidance eliminates the current option to report other comprehensive income (OCI) and its components in the statement of changes in stockholders’ equity. The Company adopted, and retrospectively applied this guidance during the fourth quarter of 2012 and elected to present the statement of other comprehensive income as a separate statement for the reporting periods.

Note 2—Balance Sheet Components

Inventories consist of the following:

 

     July 1, 2012      July 3, 2011  
     (In thousands)  

Raw materials

   $ 21,003       $ 26,537   

Work-in-process

     10,440         9,520   

Finished goods

     16,175         25,311   
  

 

 

    

 

 

 

Inventories

   $ 47,618       $ 61,368   
  

 

 

    

 

 

 

Certain inventories, not expected to be consumed within the next 12 months, are included in the consolidated balance sheet as non-current other assets (within “Deferred Tax and Other Assets”). These inventories consist of raw materials and finished goods and totaled $2.6 million and $1.3 million, as of July 1, 2012 and July 3, 2011, respectively.

Subsequent to the issuance of the fiscal 2011 consolidated financial statements, the Company identified that certain of its inventories as of July 3, 2011 should have been classified as a long-term assets given that the estimated period of consumption exceeded twelve months from the balance sheet date. Accordingly, we have corrected the classification of these inventories as of July 3, 2011, resulting in current inventories previously reported of $62.6 million decreasing by $1.3 million to $61.4 million. In addition, we have corrected the classification of those deferred tax assets which relate to the corresponding inventories, resulting in prepaid and current assets previously reported of $14.0 million decreasing by $0.6 million to $13.4 million. The effect of these two corrections resulted in Deferred Taxes and Other Assets previously reported of $29.4 million increasing by an aggregate of $1.8 million to $31.2 million.

 

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SYMMETRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Property, plant and equipment, net consist of the following:

 

     July 1, 2012     July 3, 2011  
     (In thousands)  

Property, plant and equipment, net:

    

Land

   $ 200      $ 200   

Buildings and improvements.

     16,119        16,199   

Machinery and equipment

     27,610        26,093   

Computer software

     12,384        11,967   

Leasehold improvements

     18,923        18,548   
  

 

 

   

 

 

 
     75,236        73,007   

Accumulated depreciation and amortization

     (52,534     (49,752
  

 

 

   

 

 

 
   $ 22,702      $ 23,255   
  

 

 

   

 

 

 

During fiscal years 2012, 2011, and 2010, depreciation expense was $5.0 million, $5.3 million, and $5.4 million, respectively.

Other accrued liabilities consist of the following:

 

     July 1, 2012      July 3, 2011  
     (In thousands)  

Other accrued liabilities:

     

Deferred revenue

   $ 6,996       $ 7,058   

Accrued expenses

     2,717         5,823   

Manufacturer sales representative commissions payable

     1,303         1,187   

Lease loss accrual, net

     668         570   

Income taxes payable

     157         45   
  

 

 

    

 

 

 

Total

   $ 11,841       $ 14,683   
  

 

 

    

 

 

 

Long-term obligations consist of the following:

 

     July 1, 2012      July 3, 2011  
     (In thousands)  

Long-term obligations:

     

Deferred revenue

   $ 2,254       $ 2,131   

Lease loss accrual, net

     1,240         1,793   

Rent accrual

     1,102         1,088   

Post-retirement benefits

     173         200   

Income tax

     216         —     

Contingent consideration for acquired business

     487         —     
  

 

 

    

 

 

 

Total

   $ 5,472       $ 5,212   
  

 

 

    

 

 

 

Note 3—Financial Instruments

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize

 

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SYMMETRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

   

Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;

 

   

Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

   

Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

Financial assets and liabilities measured at fair value on a recurring basis consisted of the following types of instruments as of July 1, 2012 and July 3, 2011:

 

     Fair Value as of
July 1, 2012
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant Other
Unobservable Inputs
(Level 3)
 
     (In thousands)  

Assets:

           

Money market funds

   $ 8,650       $ 8,650       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments:

           

Corporate debt securities

     23,703         —           23,703         —     

Government sponsored enterprise debt securities

     12,515         —           12,515         —     

Mutual funds

     3,062         3,062         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term investments

     39,280         3,062         36,218         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 47,930       $ 11,712       $ 36,218       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent Consideration

   $ 540       $ —         $ —         $ 540   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 540       $ —         $ —         $ 540   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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SYMMETRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Fair Value as of
July 3, 2011
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant Other
Unobservable Inputs
(Level 3)
 
     (In thousands)  

Assets:

           

Money market funds

   $ 12,630       $ 12,630       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments:

           

Corporate debt securities

     23,430         —           23,430         —     

Government sponsored enterprise debt securities

     16,456         —           16,456         —     

Mutual funds

     3,454         3,454         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term investments

     43,340         3,454         39,886         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 55,970       $ 16,084       $ 39,886       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair values of our money market funds and mutual funds were derived from quoted market prices as active markets for these instruments exist. The fair values of corporate debt securities and government sponsored enterprise debt securities were derived from non-binding market consensus prices that are corroborated by observable market data.

The investments in mutual funds are held in a Rabbi trust to support the terms of our deferred compensation plan discussed further in Note 10.

The following table summarizes available-for-sale and trading securities recorded as cash and cash equivalents or short-term investments:

 

     Amortized Cost
Basis
     Gross Unrealized
Gains (Losses)
    Fair Value  
     (In thousands)  
July 1, 2012        

Money market funds

   $ 8,650       $ —        $ 8,650   

Corporate debt securities

     23,705         (2     23,703   

Government sponsored enterprise debt securities

     12,513         2        12,515   

Mutual funds

     3,062         —          3,062   
  

 

 

    

 

 

   

 

 

 

Total financial assets

   $ 47,930       $ —        $ 47,930   
  

 

 

    

 

 

   

 

 

 
July 3, 2011        

Money market funds

   $ 12,630       $ —        $ 12,630   

Corporate debt securities

     23,424         6        23,430   

Government sponsored enterprise debt securities

     16,456         —          16,456   

Mutual funds

     3,454         —          3,454   
  

 

 

    

&nb