- Quarterly Report (10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 27, 2009

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 our 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)

Registrant’s telephone number: [phone]

 

 

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

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

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 the definitions 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		¨   (Do not check if a smaller reporting company)		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

Indicate number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:

 

Class		Outstanding as of October 25, 2009
Common Stock		43,704,834

 

 

 

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Table of Contents

SYMMETRICOM, INC.

FORM 10-Q

INDEX

 

						Page
PART I.		FINANCIAL INFORMATION
		Item 1.		Financial Statements:
				Condensed Consolidated Balance Sheets—September 27, 2009 and June 28, 2009		3
				Condensed Consolidated Statements of Operations—Three months ended September 27, 2009 and September 28, 2008		4
				Condensed Consolidated Statements of Cash Flows— Three months ended September 27, 2009 and September 28, 2008		5
				Notes to Condensed Consolidated Financial Statements		6
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk		27
		Item 4.		Controls and Procedures		27
PART II.		OTHER INFORMATION
		Item 1.		Legal Proceedings		28
		Item 1A.		Risk Factors		28
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		28
		Item 3.		Defaults Upon Senior Securities		28
		Item 4.		Submission of Matters to a Vote of Security Holders		28
		Item 5.		Other Information		28
		Item 6.		Exhibits		29
		SIGNATURES				30

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

SYMMETRICOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

		September 27, 2009				June 28, 2009
ASSETS
Current assets:
Cash and cash equivalents		$	78,134			$	72,064
Short-term investments			40,936				40,737
Accounts receivable, net of allowance for doubtful accounts of $382 and $361			34,337				42,389
Inventories, net			37,691				38,566
Prepaids and other current assets			16,002				16,143
Total current assets			207,100				209,899
Property, plant and equipment, net			21,136				20,749
Intangible assets, net			4,845				5,308
Deferred taxes and other assets			36,463				36,431
Total assets		$	269,544			$	272,387
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	7,085			$	8,116
Accrued compensation			15,721				19,093
Accrued warranty			3,775				3,737
Other accrued liabilities			9,642				9,810
Total current liabilities			36,223				40,756
Long-term obligations			52,655				51,769
Deferred income taxes			334				334
Total liabilities			89,212				92,859
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 500 shares authorized, none issued			—				—
Common stock, $0.0001 par value; 70,000 shares authorized, 49,685 shares issued and 43,723 outstanding at September 27, 2009; 49,442 shares issued and 43,556 outstanding at June 28, 2009			200,791				200,152
Accumulated other comprehensive income			135				144
Accumulated deficit			(20,594	)			(20,768	)
Total stockholders’ equity			180,332				179,528
Total liabilities and stockholders’ equity		$	269,544			$	272,387

See notes to the condensed consolidated financial statements.

 

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SYMMETRICOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended
		September 27, 2009				September 28, 2008
Net revenue		$	52,474			$	55,898
Cost of sales:
Cost of products and services			29,597				26,609
Amortization of purchased technology			368				368
Integration and restructuring charges			862				—
Total cost of sales			30,827				26,977
Gross profit			21,647				28,921
Operating expenses:
Research and development			6,334				7,304
Selling, general and administrative			13,660				15,679
Amortization of intangible assets			95				103
Integration and restructuring charges			476				585
Total operating expenses			20,565				23,671
Operating income			1,082				5,250
Loss on repayment of convertible notes, net			—				(5,623	)
Loss on short-term investments, net			—				(473	)
Interest income			461				768
Interest expense			(1,274	)			(1,654	)
Income (loss) before income taxes			269				(1,732	)
Income tax provision (benefit)			95				(556	)
Net income (loss)		$	174			$	(1,176	)
Earnings (loss) per share:
Basic		$	—			$	(0.03	)
Diluted		$	—			$	(0.03	)
Weighted average shares outstanding:
Basic			43,177				43,964
Diluted			43,815				43,964

See notes to the condensed consolidated financial statements.

 

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SYMMETRICOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Three Months Ended
		September 27, 2009				September 28, 2008
Cash flows from operating activities:
Net income (loss)		$	174			$	(1,176	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			1,923				2,131
Non-cash interest on convertible bonds			769				922
Deferred income taxes			(10	)			(974	)
Loss on investments			—				473
Loss on repayment of convertible notes			—				5,623
Loss on disposals of fixed assets			—				415
Stock-based compensation			604				1,006
Allowance for doubtful accounts			27				—
Provision for excess and obsolete inventory			663				354
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable			8,025				304
Inventories			212				(2,420	)
Prepaids and other assets			219				(564	)
Accounts payable			(1,154	)			1,660
Accrued compensation			(3,372	)			2,670
Other accrued liabilities			(13	)			(2,005	)
Net cash provided by operating activities			8,067				8,419
Cash flows from investing activities:
Purchases of short-term investments			(3,332	)			(112	)
Maturities of short-term investments			2,978				3,358
Purchases of property and equipment			(1,724	)			(1,060	)
Net cash provided by (used for) investing activities			(2,078	)			2,186
Cash flows from financing activities:
Repayment of long-term obligations			—				(390	)
Proceeds from issuance of common stock			500				103
Repurchase of common stock			(419	)			(2,128	)
Repayment of convertible notes			—				(62,489	)
Net cash provided by (used for) financing activities			81				(64,904	)
Effect of exchange rate changes on cash			—				(106	)
Net increase (decrease) in cash and cash equivalents			6,070				(54,405	)
Cash and cash equivalents at beginning of period			72,064				142,419
Cash and cash equivalents at end of period		$	78,134			$	88,014
Non-cash investing and financing activities:
Unrealized gain (loss) on securities, net		$	(9	)		$	104
Plant and equipment purchases included in accounts payable			171				139
Cash payments for:
Interest		$	—			$	255
Income taxes			542				96

See notes to the condensed consolidated financial statements.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation and Recently Issued Accounting Pronouncements

The condensed consolidated financial statements of Symmetricom, Inc. (“Symmetricom,” “we,” “us,” the “Company,” or “our”) included herein are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of the management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. In presenting the financial statements in accordance with accounting principles generally accepted in the United States (US GAAP), management makes certain estimates and assumptions that impact the amounts reported and related disclosures. Estimates, by their nature, are judgments based upon judgments and available information. Accordingly, actual results could differ from those estimates.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Symmetricom’s Annual Report on Form 10-K for the fiscal year ended June 28, 2009. The results of operations for the three months ended September 27, 2009 are not necessarily indicative of the results to be anticipated for the entire fiscal year ending June 27, 2010.

The condensed consolidated balance sheet as of June 28, 2009 has been derived from the audited consolidated financial statements as of that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Fiscal Quarter

Our fiscal quarter is 13 weeks ending on the Sunday closest to the end of the calendar quarter.

Adoption of New Accounting Standard for Convertible Notes

The Financial Accounting Standards Board (FASB) issued authoritative guidance, which became effective for us June 29, 2009, on accounting for contingent convertible subordinated notes, which requires retrospective adoption to previously disclosed consolidated financial statements. As such, certain prior period amounts have been revised in the unaudited condensed consolidated financial statements to reflect the adoption of the standard for all periods presented. See Note 5 for a discussion of the impact of the implementation of this standard.

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for us beginning June 28, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. In the event that early adoption is elected, we would be required to determine the relative selling price for all deliverables in a multiple element arrangement based on the hierarchy identified in the new standard. We would also be required to apply the standard retrospectively to the beginning of the year and to the comparable prior period for disclosure purposes. We are currently evaluating the impact this new guidance may have on our condensed consolidated financial statements and whether we will adopt the standard early.

In June 2009, the FASB issued authoritative guidance codifying a single source of authoritative nongovernmental U.S. GAAP. This guidance does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the FASB Codification will be considered non-authoritative. These provisions are effective for interim and annual periods ending after September 15, 2009 and, accordingly, are effective for us in the current fiscal reporting period. The adoption of this pronouncement did not have an impact on our condensed consolidated financial statements, but will impact our financial reporting process by eliminating all references to pre-codification standards. On the effective

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

date, the Codification superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative.

Note 2. Financial Instruments

The following table presents our financial instruments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs.

 

		Balance as of September 27, 2009			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)
		(In thousands)
Assets:
Cash equivalents		$	53,847		$	53,847		$	—
Government sponsored entities			21,544			21,544			—
Corporate debt securities			16,804			—			16,804
Mutual funds			2,588			1,885			703
Total financial assets		$	94,783		$	77,276		$	17,507

Our valuation techniques used to measure the fair values of our money market funds, government sponsored entity securities, and mutual funds were derived from quoted market prices as active markets for these instruments exist. Our valuation techniques used to measure the fair values of corporate debt securities and certain mutual funds were derived from non-binding market consensus prices that are corroborated by observable market data.

The following table summarizes Symmetricom’s available-for-sale and trading securities recorded as cash equivalents or short-term investments as of September 27, 2009:

 

		Cost Basis				Gross Unrealized Losses				Fair Value
		(In thousands)
Short-term investments		$	92,454			$	(259	)		$	92,195
Less amounts classified as cash equivalents			(53,847	)			—				(53,847	)
Deferred compensation plan assets			2,618				—				2,588
Total short-term investments		$	41,225			$	—			$	40,936

Note 3. Inventories

Components of inventories were as follows:

 

		September 27, 2009			June 28, 2009
		(In thousands)
Raw materials		$	20,613		$	19,992
Work-in-process			9,043			10,231
Finished goods			8,035			8,343
Inventories		$	37,691		$	38,566

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 4. Intangible Assets

Intangible assets as of September 27, 2009 and June 28, 2009 consist of:

 

		Gross Carrying Amount			Accumulated Amortization				Net Intangible Assets
		(in thousands)
Purchased technology		$	24,357		$	(20,861	)		$	3,496
Customer lists and trademarks			7,025			(5,213	)			1,812
Total as of June 28, 2009		$	31,382		$	(26,074	)		$	5,308
Purchased technology		$	24,357		$	(21,230	)		$	3,127
Customer lists and trademarks			7,025			(5,307	)			1,718
Total as of September 27, 2009		$	31,382		$	(26,537	)		$	4,845

The estimated future amortization expense by fiscal year is as follows:

 

Fiscal year:		(in thousands)
2010 (Remaining 9 months)			1,109
2011			1,307
2012			726
2013			502
2014			502
Thereafter			699
Total amortization		$	4,845

Intangible asset amortization expense for the first three months of fiscal 2010 and 2009 was $0.5 million.

Note 5. Long-term Obligations

Long-term obligations consist of:

 

		September 27, 2009			June 28, 2009
		(In thousands)
Long-term obligations:
Convertible subordinated notes, net		$	47,170		$	46,401
Deferred revenue			2,028			2,125
Lease loss accrual, net			1,942			1,749
Rent accrual			995			966
Income tax			300			300
Post-retirement benefits			220			228
Total		$	52,655		$	51,769

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Convertible Subordinated Notes

On June 8, 2005, we sold $120.0 million of contingent convertible subordinated notes (the “Notes”), which mature on June 15, 2025 and bear interest at the rate of 3.25% per annum. Interest on the Notes is payable semi-annually in June and December of each year beginning on December 15, 2005. The Notes are unsecured obligations and are subordinated in right of payment to all of our existing and future senior debt. The Notes are structurally subordinated to all indebtedness and liabilities of our subsidiaries.

The Notes are convertible, at the holder’s option, prior to the maturity date into cash and, if applicable, shares of our common stock in the following circumstances:

 

•

Prior to June 15, 2023, if the common stock price for at least 20 trading days in the period of 30 consecutive days ending on the last trading day of the calendar quarter preceding the quarter in which the conversion occurs is more than 125% of the conversion price of the Notes in effect on that 30th trading day;

 

•

On or after June 15, 2023, at all times on or after any date on which the common stock price is more than 125% of the then current conversion price;

 

•

During the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the Notes for each such trading day was less than 95% of the average of the sale price of our common stock during such five trading-day period multiplied by the then current conversion rate;

 

•

If we have called the particular Notes for redemption and the redemption has not yet occurred; or

 

•

Upon the occurrence of specified corporate transactions.

Holders may convert any outstanding Notes into cash and, if applicable, shares of our common stock at an initial conversion price per share of $12.49, which was determined based on the reported closing price of our common stock of $9.91 per share on June 2, 2005.

Also, on or after June 20, 2012, we may redeem some or all of the Notes at any time or from time to time at a redemption price of 100% of the principal amount of the Notes, plus accrued and unpaid interest (including liquidated damages, if any) up to but not including the date of redemption, payable in cash. Holders may require us to repurchase all or a portion of their Notes on June 15, 2012, 2015 and 2020 or at any date in the event of certain change of control events related to us for a repurchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest (including liquidated damages, if any) up to but not including the date of repurchase, payable in cash.

We may from time to time repurchase or redeem all or a portion of the Notes, if necessary, to comply with NASDAQ listing rule 5635(d). We may repurchase some or all of our remaining outstanding Notes in future periods prior to the maturity date. We may undertake such repurchases from time to time through privately negotiated or open market transactions or other available means.

Convertible Subordinated Notes – Redemption- Fiscal 2009

On May 7, 2008, we received a notice of acceleration from the trustee under the indenture governing the Notes. The notice stated that our failure to file our Quarterly Report on Form 10-Q for the quarter ended December 30, 2007 violated certain provisions of the indenture. The acceleration letter declared that the principal amount outstanding under the Notes, together with any accrued and unpaid interest, and fees and expenses, was immediately due and payable. This notice of acceleration related to the trustee’s and certain bondholders’ previous notice received by the Company on or about March 3, 2008 stating that our failure to file our Quarterly Report on Form 10-Q for the quarter ended December 30, 2007 with the Securities and Exchange Commission (“SEC”) violated provisions of the indenture.

On June 17, 2008, we filed our Form 10-Q for the quarter ended December 30, 2007 and our Form 10-Q for the quarter ended March 30, 2008, as well as other filings related to our restatement of financial results for fiscal years and interim periods from June 30, 2002 to July 1, 2007 and for the first quarter of fiscal 2008 ended September 30, 2007.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

On June 30, 2008, we offered to purchase for cash, on a pro rata basis, $63.1 million aggregate principal amount of the Notes, at a purchase price equal to $990 per $1,000 of the principal amount of the Notes, plus accrued and unpaid interest. The tender offer cap was equal to 52.6% of the $120.0 million aggregate principal amount outstanding. As of July 30, 2008, pursuant to the offer, Symmetricom accepted for payment $63.1 million aggregate principal amount of the Notes. The aggregate purchase price for the Notes surrendered was approximately $62.5 million, which included interest of $0.3 million. After the purchase pursuant to the offer, approximately $56.9 million aggregate principal amount of the Notes remains outstanding. In connection with the completion of the tender offer, the holder of a majority of the outstanding notes prior to the offer waived certain defaults alleged to have occurred under the indenture and rescinded an acceleration notice received by Symmetricom on May 7, 2008.

New Accounting for Convertible Subordinated Notes- Fiscal 2010

Effective June 29, 2009, we adopted new authoritative guidance on accounting for our contingent convertible subordinated notes. This guidance applies to certain convertible debt instruments that may be settled in cash or other assets, or partially in cash, upon conversion and is required to be applied retrospectively. The adoption impacted the accounting for the Notes by requiring the initial proceeds to be allocated between a liability and an equity component based on the fair value of the liability component as of the issuance date. The fair value of the liability component of the Notes was valued using the average value of the bond portion using the following two valuation approaches:

 

•

Binomial Lattice Approach

 

•

Discounted Cash Flow Analysis

The key inputs used in the discounted cash flow analysis included the estimated non-convertible borrowing rate as of June 8, 2005 — the date the senior subordinated convertible notes were issued, the amount and timing of cash flows, and the expected life of seven years.

Based on this valuation analysis, we determined that the initial liability component of the Notes was valued at $77.0 million, with the equity component representing the residual amount of the Notes proceeds. As a result, for fiscal 2005, we retrospectively recorded $43.0 million as a component of equity and a corresponding debt discount as of the date of issuance, and a deferred tax liability of $15.9 million.

In addition, we allocated $0.9 million, net of tax, of the total issuance costs of $4.0 million to the equity component of the Notes and the remaining $2.6 million of the issuance costs remained classified as long-term other assets. The issuance costs were allocated pro rata based on the relative carrying amounts of the liability and equity components. The debt discount and the issuance costs allocated to the liability component are amortized using the effective interest method as additional interest expense over a seven-year period ending June 2012 at which point the Notes may be redeemed by the holders. The equity component of the issuance costs of $1.4 million is included in common stock as additional paid-in-capital.

As a result of the partial redemption of the Notes in the first quarter of fiscal 2009, we recognized a pre-tax loss on partial redemption of $5.6 million, 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 first quarter of fiscal 2009.

The adoption of this guidance had no impact on total operating, investing, or financing cash flows in the prior periods condensed consolidated statement of cash flows. Adjustments to our tax provision were also recorded to reflect the impact of the foregoing adjustments.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following financial statement line items as of June 28, 2009 and for the three-month period ended September 28, 2008 that were impacted by the adoption of this guidance are detailed in the tables below:

 

		As of June 28, 2009
		As Previously Reported				Adjustments				As Adjusted
		(in thousands)
Consolidated Balance Sheet Data:
Deferred taxes and other assets		$	40,486			$	(4,055	)		$	36,431
Total assets			276,442				(4,055	)			272,387
Long-term obligations			62,248				(10,479	)			51,769
Total liabilities			103,338				(10,479	)			92,859
Common stock			179,633				20,519				200,152
Retained earnings (accumulated deficit)			(6,673	)			(14,095	)			(20,768	)
Stockholders’ equity			173,104				6,424				179,528
Total liabilities and stockholders’ equity			276,442				(4,055	)			272,387
		Three Months Ended September 28, 2008
		As Previously Reported				Adjustments				As Adjusted
		(In thousands, except per share amounts)
Consolidated Statement of Operations Data:
Loss on repayment of convertible notes, net		$	(522	)		$	(5,101	)		$	(5,623	)
Interest expense			(765	)			(889	)			(1,654	)
Income before income taxes			4,258				(5,990	)			(1,732	)
Income tax provision			1,660				(2,216	)			(556	)
Net income (loss)			2,598				(3,774	)			(1,176	)
Earnings (loss) per share-basic:
Net earnings (loss)		$	0.06							$	(0.03	)
Weighted average shares outstanding-basic			43,964								43,964
Earnings (loss) per share-diluted:
Net earnings (loss)		$	0.06							$	(0.03	)
Weighted average shares outstanding-diluted			44,582								43,964
		Three Months Ended September 28, 2008
		As Previously Reported				Adjustments				As Adjusted
		(In thousands)
Consolidated Statement of Cash Flows Data:
Net income (loss)		$	2,598			$	(3,774	)		$	(1,176	)
Deferred income taxes			1,242				(2,216	)			(974	)
Non-cash interest expense			—				922				922
Loss on repayment of convertible notes			522				5,101				5,623
Prepaids and other assets			(531	)			(33	)			(564	)
Net cash provided by operating activities			8,419				—				8,419

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

As of September 27, 2009 and June 28, 2009, the long-term debt and equity component (recorded in additional paid-in-capital, net of income tax) consisted of the following:

 

		September 27, 2009				June 28, 2009
		(In thousands)
Convertible subordinated notes:
Principal amount		$	56,880			$	56,880
Unamortized discount			(9,710	)			(10,479	)
Net carrying amount		$	47,170			$	46,401
Equity component, net of income tax		$	21,421			$	21,421

Upon adoption, interest expense increased on our Notes by adding a non-cash component to amortize a debt discount calculated based on the difference between the cash coupon rate (3.25% per year) of the Notes and the effective interest rate on the debt borrowing (10.69% per year). For the quarter ended September 27, 2009, the total interest expense relating to our Notes was $1.2 million, including $0.4 million related to the contractual interest coupon and $0.8 million related to amortization of the discount on the liability component. For the quarter ended September 28, 2008, the total interest expense relating to our Notes was $1.5 million, including $0.6 million related to the contractual interest coupon and $0.9 million related to amortization of the discount on the liability component.

Note 6. Stockholders’ Equity

Stock Award Activity

Stock award activity for the three months ended September 27, 2009 is as follows:

 

					Non Performance-based Options Outstanding						Performance-based Options Outstanding						Restricted Stock Outstanding
		Shares Available For Grant			Number of Shares			Weighted Average Exercise Price			Number of Shares			Weighted Average Exercise Price			Number of Shares			Weighted Average Grant-Date Fair Value
		(In thousands, except per share amounts)
Balances at June 28, 2009		7,181			5,290			$	6.53		125			$	8.53		540			$	6.22
Granted - options		(910	)		910				5.25		—				—		—				—
Granted - restricted shares		(127	)		—				—		—				—		127				5.25
Exercised		—			(117	)			4.27		—				—		—				—
Vested		—			—				—		—				—		(223	)			6.16
Cancelled		249			(124	)			6.43		(125	)			8.53		(1	)			5.17
Expired		(84	)		—				—		—				—		—				—
Balances at September 27, 2009		6,309			5,959			$	6.48		—			$	—		443			$	6.22

In-the-money options outstanding, vested and expected to vest, and exercisable as of September 27, 2009 were as follows:

 

Option		Number of Shares		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price			9/27/2009 Closing Price			Intrinsic Value Per Share			Aggregate Intrinsic Value
		(In thousands)		(In years)											(In thousands)
Outstanding		3,282		4.49		$	4.70		$	5.28		$	0.58		$	1,904
Vested and expected to vest		2,765		4.41		$	4.69		$	5.28		$	0.59		$	1,631
Exercisable		910		2.94		$	4.59		$	5.28		$	0.69		$	628

The aggregate intrinsic value in the preceding table represents the total pre-tax value of stock options outstanding as of September 27, 2009, based on our common stock closing price of $5.28 on September 27, 2009, which would have been received by the option holders had all option holders exercised their options as of that date.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The total intrinsic value of options exercised during the first quarter of fiscal 2010 was $0.2 million.

For the quarters ended September 27, 2009 and September 28, 2008, the weighted-average estimated fair value of options granted was $2.43 and $1.93 per share, respectively. Our calculations were made using the Black-Scholes option-pricing model. The fair value of Symmetricom stock-based awards to employees was estimated assuming no expected dividend and the weighted-average assumptions for the three months ended September 27, 2009 and September 28, 2008 as follows:

 

		Three months ended
		September 27, 2009			September 28, 2008
Expected life (in years)		4.5			3.8
Risk-free interest rate		2.0	%		2.6	%
Volatility		54.8	%		45.9	%

We recorded stock-based compensation expense of $0.6 million and $1.0 million in the first quarter of fiscal 2010 and 2009, respectively. We calculated these stock-based compensation expenses using a net cumulative impact of 10.0% to estimate future annual forfeitures. At September 27, 2009, the total cumulative compensation cost related to unvested stock-based awards granted to employees, directors and consultants under the Company’s stock option plans, but not yet recognized, was approximately $3.9 million, net of estimated forfeitures of $1.1 million. This cost will be amortized on an accelerated method basis over a period of approximately 1.5 years and will be adjusted for subsequent changes in estimated forfeitures.

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations:

 

		Three Months Ended
		September 27, 2009			September 28, 2008
		(In thousands)
Cost of sales		$	210		$	205
Research and development			200			329
Selling, general and administrative			194			472
Total		$	604		$	1,006

Stock Repurchases

No stock was repurchased in the first quarter of fiscal 2010 as part of the repurchase program. As of September 27, 2009, the total number of shares available for repurchase under the repurchase program authorized by the Board of Directors was approximately 1.6 million.

A total of 76,010 shares were repurchased by us in the first quarter of fiscal 2010 for an aggregate price of approximately $0.4 million to cover the cost of withholding of personal income taxes on vested restricted stock.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 7. Integration and Restructuring Charges

The following table shows the details of the restructuring cost accruals included in other accrued liabilities, which consist of facilities and severance costs, at September 27, 2009 and June 28, 2009:

 

		Balance at June 28, 2009			Expense Additions			Payments and Non-cash Settlements				Balance at September 27, 2009
		(in thousands)
Lease loss accrual (fiscal 2004)		$	216		$	2		$	(9	)		$	209
All other integration and restructuring charges (fiscal 2004)			181			—			(33	)			148
Lease loss accrual (fiscal 2009)			2,267			24			(187	)			2,104
Additional depreciation charges (fiscal 2009)			—			427			(427	)			—
All other integration and restructuring charges (fiscal 2009)			2,900			633			(1,841	)			1,692
Lease loss accrual (fiscal 2010)			—			252			—				252
Total		$	5,564		$	1,338		$	(2,497	)		$	4,405

In the first quarter of fiscal 2010, we incurred $0.3 million of integration and restructuring charges after determining that a portion of an existing facility would no longer be utilized. The balance of this accrual will be paid over the next eight years. During the quarter, we entered into a sublease with a third party to utilize this portion of the existing facility for one year starting October 2009 with two separate three year renewal periods. We have reduced the lease loss accrual based upon the anticipated sublease income estimated by management to be reasonable.

Over the next nine months, we expect to incur remaining integration and restructuring charges amounting to $4.6 million, including approximately $3.0 million in lease loss and facility related charges, approximately $0.4 million in additional depreciation charges for assets with shorter economic lives and approximately $1.2 million in one-time termination benefits and other restructuring related charges.

Note 8. Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of two components: net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of stockholders’ equity but are excluded from net income (loss). Other comprehensive income (loss) is comprised of unrealized gains and losses, net of taxes, on marketable securities categorized as available-for-sale and foreign currency translation adjustments. The components of comprehensive income (loss), net of tax, are as follows:

 

		Three Months Ended
		September 27,				September 28,
		2009				2008
		(in thousands)
Net income (loss)		$	174			$	(1,176	)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments			(1	)			(106	)
Unrealized gain on investments			(9	)			104
Other comprehensive income (loss)			(10	)			(2	)
Total comprehensive income (loss)		$	164			$	(1,178	)

Note 9. Net Income (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period less unvested shares of restricted common stock. Diluted earnings (loss) per share is calculated by dividing net income by the weighted-average number of common shares outstanding and common equivalent shares from stock options, warrants and unvested restricted stock using the treasury method, except when anti-dilutive.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table reconciles the number of shares utilized in the net income (loss) per share calculations:

 

		Three Months Ended
		September 27, 2009				September 28, 2008
		(In thousands, except per share amounts)
Numerator:
Net income (loss)		$	174			$	(1,176	)
Shares (Denominator):
Weighted average common shares outstanding			43,648				44,812
Weighted average common shares outstanding subject to repurchase			(471	)			(848	)
Weighted average shares outstanding—basic			43,177				43,964
Weighted average dilutive share equivalents from stock options			279				—
Weighted average dilutive common shares subject to repurchase			359				—
Weighted average shares outstanding— diluted			43,815				43,964
Net earnings (loss) per share—basic		$	—			$	(0.03	)
Net earnings (loss) per share—diluted		$	—			$	(0.03	)

The following common stock equivalents were excluded from the net income (loss) per share calculation as their effect would have been anti-dilutive:

 

		Three Months Ended
		September 27, 2009		September 28, 2008
		(In thousands)
Stock options		3,142		5,397
Common shares subject to repurchase		—		848
Total shares of common stock excluded from diluted net income (loss) per share calculation		3,142		6,245

Note 10. Contingencies

Former Texas Facility Environmental Cleanup

We formerly leased a tract of land in Texas for our operations. Those operations involved the use of solvents and, at the end of the lease, we obtained regulatory approval and then remediated an area where the solvents had been deposited on the ground. In 1996, an environmental investigation of the property detected those same contaminants in groundwater in excess of then current regulatory standards. The groundwater contamination has migrated to some adjacent properties. We have entered into the Texas Natural Resource Conservation Commission’s Voluntary Cleanup Program (the “Voluntary Cleanup Program”) to obtain regulatory approval for closure of this site and a release from liability to the State of Texas for subsequent landowners and lenders. We have notified adjacent property owners affected by the contamination of participation in the Voluntary Cleanup Program. On May 20, 2004, we received a demand from the owner of several adjacent lots for damages in the amount of $1.3 million, as well as a request for indemnity for the contamination and a promise to remediate the contamination. On March 14, 2006, the adjacent property owner filed suit in Probate Court No. 1, Travis County, Texas ( Anna B. Miller, Individually and as Executrix of the Estate of Robert L. Miller, et al. vs. Austron, Inc., et al. ), seeking damages. Symmetricom has not yet been served in this matter, but we intend to defend this lawsuit vigorously. We are continuing to work on the remediation of the formerly leased site as well as the adjacent properties, and we have also taken steps to begin work on the Miller property. As of September 27, 2009, we had an accrual remaining of $0.1 million included in other accrued liabilities on the accompanying condensed consolidated balance sheets for remediation costs, appraisal fees and other ongoing monitoring costs.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Shipments of Product with Lead-free Solder

In the fourth quarter of fiscal 2007 until the third quarter of fiscal 2008, we inadvertently shipped certain products that included lead-free solder in the product backplanes to two customers whose contracts specified that the products would be made with lead solder. As of September 27, 2009, we have received a waiver from one customer to use lead-free solder but not the other. The total sales value of product shipped with lead-free solder to the customer that has not as yet granted us the waiver is $1.2 million. Management believes that this customer will not request that the parts be replaced and that our existing warranty accrual is adequate to cover costs associated with any potential product failures. Also, beginning in March 2008, new product shipments to this customer included lead solder.

Other

Under the indemnification provisions of our standard sales contracts, we agree to defend our customers against third party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/customer. The exposure to us under these indemnification provisions is generally limited to the total amount paid by the customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose us to losses in excess of the amount received under the agreement. To date, there have been no claims under such indemnification provisions. We believe the estimated fair value of these indemnification agreements is not material.

We are also a party to certain other claims in the normal course of our operations. While the results of these claims cannot be predicted with any certainty, we believe that the final outcome of these matters will not have a material adverse effect on our financial position and results of operations.

Note 11. Business Segment Information

Symmetricom is organized into five reportable segments that are within two divisions. For each of our reporting segments, we have separate financial information, including gross profit amounts, which are evaluated regularly by the Chief Operating Decision Maker in deciding how to allocate resources and in assessing performance. We do not allocate assets or specific operating expenses to these individual reporting segments. Therefore, the segment information reported here includes only net revenue and gross profit.

The following describes our two divisions:

Telecom Solutions Division

There are four reportable segments within the Telecom Solutions Division:

 

•

Wireline Products consist principally of Building Integrated Timing Supply (“BITS”) based on quartz, rubidium and Global Positioning System (“GPS”) technologies. Our Wireline Products provide highly accurate and uninterruptible timing to meet the synchronization requirements of telecommunication networks.

 

•

Wireless/OEM Products includes our OEM base station timing products that are designed to deliver stable timing to cellular/PCS base stations through a GPS receiver to capture cesium-based time signals produced by GPS satellites.

 

•

Quality of Experience (“QoE”) Assurance products are hardware and software-based probes (and/or embedded agents) that are distributed throughout an Internet Protocol (“IP”) network in order to monitor network and application performance, and particularly to correlate how those factors impact end users’ QoE. The primary application for these system-level solutions is for Internet Protocol Television (“IPTV”), Video on Demand (“VoD”), Internet television (“ITV”), and other IP-based video delivery mechanisms.

 

•

Global Services offers a broad portfolio of services for our customers around the world.

Timing, Test and Measurement Division

The Timing, Test and Measurement Division products are precision time and frequency systems that are important to communications systems of wireline, wireless, satellite and computer network technologies for government, power utilities, aerospace, defense, and enterprise markets.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table provides information on revenues, cost of sales, gross profit and gross margins for each of our business segments:

 

		Three Months Ended
		September 27, 2009				September 28, 2008
		(Dollars in thousands)
Net revenue:
Telecom Solutions Division:
Wireline Products		$	22,511			$	27,772
Wireless/OEM Products			5,645				6,952
Global Services			4,237				4,051
Quality of Experience Assurance Division			206				226
Timing, Test and Measurement Division			19,875				16,897
Total net revenue		$	52,474			$	55,898
Cost of sales:
Telecom Solutions Division:
Wireline Products		$	9,600			$	9,097
Wireless/OEM Products			5,194				5,078
Global Services			2,856				3,023
Quality of Experience Assurance Division			60				123
Timing, Test and Measurement Division			11,887				9,288
Other cost of sales*			1,230				368
Total cost of sales		$	30,827			$	26,977
Gross profit:
Telecom Solutions Division:
Wireline Products		$	12,911			$	18,675
Wireless/OEM Products			451				1,874
Global Services			1,381				1,028
Quality of Experience Assurance Division			146				103
Timing, Test and Measurement Division			7,988				7,609
Other cost of sales*			(1,230	)			(368	)
Total gross profit		$	21,647			$	28,921
Gross margin:
Telecom Solutions Division:
Wireline Products			57.4	%			67.2	%
Wireless/OEM Products			8.0	%			27.0	%
Global Services			32.6	%			25.4	%
Quality of Experience Assurance Division			70.9	%			45.6	%
Timing, Test and Measurement Division			40.2	%			45.0	%
Other cost of sales as a percentage of total revenue*			(2.3	)%			(0.7	)%
Total gross margin			41.3	%			51.7	%

 

*	Includes amortization of purchased technology and applicable integration, and restructuring charges.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 12. Warranty

Warranty

Changes in our accrued warranty liability during the first three months of fiscal 2010 and 2009 were as follows:

 

		Three Months Ended
		September 27, 2009				September 28, 2008
		(In thousands)
Beginning balance		$	3,737			$	3,801
Provision for warranty			619				528
Accruals related to change in estimate			(182	)			(88	)
Less: Actual warranty costs			(399	)			(619	)
Ending balance		$	3,775			$	3,622

Note 13. Subsequent Events

We have evaluated subsequent events through November 6, 2009, the day our consolidated financial statements for the quarter ended September 27, 2009 were issued and concluded there are no additional adjustments to the consolidated financial statements or disclosures required.

 

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Item 2.

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 condensed consolidated financial statements and related notes included elsewhere in this report.

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

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

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

All references to “Symmetricom,” “we,” “us,” and “our” mean Symmetricom, Inc. and its subsidiaries, except where it is made clear that the term means only the parent company.

Overview

Symmetricom is a leading supplier of timing and synchronization hardware, software, and services. Our technology plays a critical role in network reliability and quality of service for wireline, wireless and cable networks. We also provide end-to-end quality monitoring solutions for triple-play voice, data, and digital video. We sell our solutions to telecom and cable service providers, government agencies, enterprises, and research facilities. Symmetricom products are deployed in more than 90 countries. Our products include atomic frequency references, such as rubidium and cesium oscillators; hydrogen masers; GPS time and frequency receivers, as well as time and frequency distribution systems; network management software; video quality monitoring solutions and professional services.

We manufacture precision time products that allow our customers to keep accurate time to within 40 billionths of a second over a 24-hour period. Our clocks tell us the time of day and allow us to measure the time interval between when an event starts and when it stops. The difference between conventional time measuring devices and our precise time products lies in the accuracy of the measurements. To place the accuracy or resolution of our clocks in perspective, if a clock accumulates a 40 billionth of a second time error over a 24-hour period, it would require more than 60,000 years to accumulate an error of one second.

On July 27, 2009, we announced that David G. Côté had been named as President and Chief Executive Officer, effective August 3, 2009. The Board of Directors has also appointed Mr. Côté to the Board of Directors.

New Accounting for Convertible Subordinated Notes- Fiscal 2010

Effective June 29, 2009, we adopted new authoritative guidance on accounting for our contingent convertible subordinated notes. This guidance applies to certain convertible debt instruments that may be settled in cash or other assets, or partially in cash, upon conversion and is required to be applied retrospectively. The adoption impacted the accounting for the Notes by requiring the initial proceeds to be allocated between a liability and an equity component based on the fair value of the liability component as of the issuance date.

We determined that the initial liability component of the Notes was valued at $77.0 million, with the equity component representing the residual amount of the Notes proceeds. As a result, for fiscal 2005, we retrospectively recorded $43.0 million as a component of equity and a corresponding debt discount as of the date of issuance, and a deferred tax liability of $15.9 million.

 

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In addition, we allocated $0.9 million, net of tax, of the total issuance costs of $4.0 million to the equity component of the Notes and the remaining $2.6 million of the issuance costs remained classified as long-term other assets. The issuance costs were allocated pro rata based on the relative carrying amounts of the liability and equity components. The debt discount and the issuance costs allocated to the liability component are amortized using the effective interest method as additional interest expense over a seven-year period ending June 2012 at which point the Notes may be redeemed by the holders. The equity component of the issuance costs of $1.4 million is included in common stock as additional paid-in-capital.

As a result of the partial redemption of the Notes in the first quarter of fiscal 2009, we recognized a pre-tax loss on partial redemption of $5.6 million, 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 first quarter of fiscal 2009.

Upon adoption, interest expense increased on our Notes by adding a non-cash component to amortize a debt discount calculated based on the difference between the cash coupon rate (3.25% per year) of the Notes and the effective interest rate on the debt borrowing (10.69% per year). For the quarter ended September 27, 2009, the total interest expense relating to our Notes was $1.2 million, including $0.4 million related to the contractual interest coupon and $0.8 million related to amortization of the discount on the liability component. For the quarter ended September 28, 2008, the total interest expense relating to our Notes was $1.5 million, including $0.6 million related to the contractual interest coupon and $0.9 million related to amortization of the discount on the liability component.

Critical Accounting Estimates

Our condensed 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 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.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Other than the adoption of Financial Accounting Standards Board (FASB) issued authoritative guidance on accounting for our contingent convertible subordinated notes (See Item 1 of Part I, Financial Statements — Note 1 — Basis of Presentation and Recently Issued Accounting Policies), we believe that there have been no significant changes during the three months ended September 27, 2009 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 28, 2009.

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

Financial markets in the U.S. and abroad have experienced a severe downturn arising from a multitude of factors, including concerns about the systemic impact of inflation and deflation, geopolitical issues, adverse credit conditions, higher energy costs, lower corporate profits and capital spending, and declining real estate and mortgage markets, combined with volatile oil prices, decreased business and consumer confidence and increased unemployment. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases cease, to provide funding to borrowers.

If current economic conditions or the constrained credit environment continue, our customers may delay or reduce capital expenditures. This could result in reductions in sales of our products, longer sales cycles, difficulties in collecting accounts receivable, additional excess and obsolete inventory, potential impairment charges related to our intangible assets, gross margin deterioration, slower adoption of new technologies, increased price competition and supplier difficulties.

 

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Results of Operations

The following table presents selected items in our condensed consolidated statements of operations as a percentage of total revenues for the three months ended September 27, 2009 and September 28, 2008:

 

		Three Months Ended
		September 27, 2009			September 28, 2008
Net revenue
Telecom Solutions Division:
Wireline Products		42.8	%		49.8	%
Wireless/OEM Products		10.8	%		12.4	%
Global Services		8.1	%		7.2	%
Quality of Experience Assurance		0.4	%		0.4	%
Timing, Test and Measurement Division		37.9	%		30.2	%
Total net revenue		100.0	%		100.0	%
Cost of products and services		56.4	%		47.6	%
Amortization of purchased technology		0.7	%		0.7	%
Integration and restructuring charges		1.6	%		—	%
Gross profit		41.3	%		51.7	%
Operating expenses:
Research and development		12.1	%		13.1	%
Selling, general and administrative		26.0	%		28.0	%
Amortization of intangible assets		0.2	%		0.2	%
Integration and restructuring charges		0.9	%		1.0	%
Operating income		2.1	%		9.4	%
Loss on repayment of convertible notes, net		—	%		(10.1	)%
Loss on short-term investments, net		—	%		(0.8	)%
Interest income		0.9	%		1.4	%
Interest expense		(2.4	)%		(3.0	)%
Income (loss) before income taxes		0.5	%		(3.1	)%
Income tax provision (benefit)		0.2	%		(1.0	)%
Net income (loss)		0.3	%		(2.1	)%

 

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Net Revenue:

 

		Three Months Ended								$ Change				% Change
		September 27, 2009				September 28, 2008
Net Revenue (dollars in thousands) :
Wireline Products		$	22,511			$	27,772			$	(5,261	)		(18.9	)%
Wireless/OEM Products			5,645				6,952				(1,307	)		(18.8	)
Global Services			4,237				4,051				186			4.6
Quality of Experience Assurance			206				226				(20	)		(8.8	)
Timing, Test and Measurement Division			19,875				16,897				2,978			17.6
Total Net Revenue		$	52,474			$	55,898			$	(3,424	)		(6.1	)%
Percentage of Revenue			100.0	%			100.0	%

Net revenue consists of sales of products, software licenses and services. In the first quarter of fiscal 2010, net revenue decreased $3.4 million, or 6.1%, compared to the corresponding quarter of fiscal 2009. Wireline revenue decreased $5.3 million, or 18.9%, compared to the same quarter for the prior year, due to a decline in sales of cable products. Wireless/OEM Products revenue decreased $1.3 million, or 18.8%, compared to the same quarter for the prior year, due primarily to a decline in legacy Code Division Multiple Access (CDMA) technology investments by wireless carriers. Revenue for Global Services and Quality of Experience Assurance Products was essentially flat in the first quarter of fiscal 2010 compared to the same quarter in the prior year. Timing, Test and Measurement Division revenue increased by $3.0 million, or 17.6%, compared to the same quarter for the prior year, due to higher international and government sales.

Gross Profit:

 

		Three Months Ended								$ Change				% Change
		September 27, 2009				September 28, 2008
Gross Profit (dollars in thousands) :
Wireline Products		$	12,911			$	18,675			$	(5,764	)		(30.9	)%
Wireless/OEM Products			451				1,874				(1,423	)		(75.9	)
Global Services			1,381				1,028				353			34.3
Quality of Experience Assurance			146				103				43			41.7
Timing, Test and Measurement Division			7,988				7,609				379			5.0
Other cost of sales			(1,230	)			(368	)			(862	)		234.2
Total Gross Profit		$	21,647			$	28,921			$	(7,274	)		(25.2	)%
Percentage of Revenue			41.3	%			51.7	%

Gross profit in the first quarter of fiscal 2010 decreased by $7.3 million or 25.2% compared to the corresponding quarter of fiscal 2009. Gross profit for Wireline Products decreased by $5.8 million, or 30.9%, which is greater than the revenue decrease of 18.9%, due to a lower sales mix of higher margin cable products and higher period costs. Gross profit for Wireless/OEM Products decreased by $1.4 million, or 75.9%, which was greater than the revenue decrease of 18.8% for the same period, due to higher period costs and a sales mix towards lower margin products. Gross profit for Global Services increased $0.4 million, or 34.3%, which is greater than the revenue increase of 4.6% for the same period due primarily to staff reductions, resulting in lower services labor costs, implemented at the end of the fourth quarter of fiscal 2009. Gross profit for Quality of Experience Products, increased by $43,000, or 41.7%, due to lower manufacturing cost. Gross profit for the Timing, Test and Measurement Division increased by $0.4 million, or 5.0%, which is less than the revenue increase of 17.6%, primarily due to higher government sales, which have lower margins.

Other cost of sales increased $0.9 million or 234.2% due to restructuring costs related to certain manufacturing facilities space no longer providing future benefit and the increase in depreciation costs for the shorter estimated life of the respective assets. We expect that other cost of sales will increase in the second quarter of fiscal 2010 compared to the first quarter of fiscal 2010, due to increased restructuring costs primarily related to certain manufacturing facilities space no longer providing future benefit.

 

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Operating Expenses:

Research and Development Expense:

 

		Three Months Ended								$ Change				% Change
		September 27, 2009				September 28, 2008
Research and development expense ( dollars in thousands )		$	6,334			$	7,304			$	(970	)		(13.3	)%
Percentage of Revenue			12.1	%			13.1	%

Research and development expense consists primarily of salaries and benefits, prototype expenses and fees paid to outside consultants. Research and development expense in the first quarter of fiscal 2010 decreased $1.0 million, or 13.3%, compared to the same quarter of fiscal 2009 due primarily to lower headcount as a result of the January 2009 restructuring, lower incentive compensation-related expenses, and lower stock-based compensation costs. In terms of dollar amount, we expect that research and development expenses in the second quarter of fiscal 2010 will be consistent with the first quarter of fiscal 2010.

Selling, General and Administrative:

 

		Three Months Ended								$ Change				% Change
		September 27, 2009				September 28, 2008
Selling, general and administrative (dollars in thousands)		$	13,660			$	15,679			$	(2,019	)		(12.9	)%
Percentage of Revenue			26.0	%			28.0	%

Selling, general and administrative expenses consist primarily of salaries, benefits, sales commissions and travel-related expenses for our sales and services, marketing, finance, human resources, information technology and facilities departments. These expenses decreased by 12.9% or $2.0 million, to $13.7 million for the first quarter of fiscal 2010, compared to $15.7 million for the corresponding quarter of fiscal 2009. The decrease in expenses consisted primarily of a $1.6 million reduction in compensation-related expenses including stock-based compensation and incentive compensation related expenses, and lower depreciation and commission expenses. In terms of dollar amount, we expect that selling, general and administrative expenses in the second quarter of fiscal 2010 will be consistent with the first quarter of fiscal 2010.

Amortization of intangibles:

 

		Three Months Ended								$ Change				% Change
		September 27, 2009				September 28, 2008
Amortization of intangible assets (dollars in thousands)		$	95			$	103			$	(8	)		(7.8	)%
Percentage of Revenue			0.2	%			0.2	%

Amortization of intangibles decreased in the first quarter of fiscal 2010 compared to the corresponding period of fiscal 2009 due to certain assets becoming fully amortized during the first quarter of fiscal 2010.

 

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Integration and restructuring charges:

 

		Three Months Ended								$ Change				% Change
		September 27, 2009				September 28, 2008
Integration and restructuring charges (dollars in thousands)		$	476			$	585			$	(109	)		(18.6	)%
Percentage of Revenue			0.9	%			1.0	%

Integration and restructuring charges decreased in the first three months of fiscal 2010 compared to the corresponding period of fiscal 2009 due the higher costs in the first quarter of fiscal 2009 related to the shutdown of the Austin, Texas engineering facility. We anticipate that integration and restructuring charges will decrease in the second quarter of fiscal 2010 compared to the first quarter of fiscal 2010.

Loss on repayment of convertible notes, net:

 

		Three Months Ended								$ Change			% Change
		September 27, 2009				September 28, 2008
Loss on repayment of converible notes, net (dollars in thousands)		$	—			$	(5,623	)		$	5,623		(100.0	)%
Percentage of Revenue			—	%			(10.1	)%

In the first quarter of fiscal 2009 we repaid $62.5 million principal amount of our convertible notes and incurred a loss of $5.6 million mostly related to the difference in the carrying value of the liability component of the redeemed amount compared to its fair value at redemption in the first quarter of fiscal 2009.

Loss on short-term investments, net:

 

		Three Months Ended								$ Change			% Change
		September 27, 2009				September 28, 2008
Loss on short-term investments, net (dollars in thousands)		$	—			$	(473	)		$	473		(100.0	)%
Percentage of Revenue			—	%			(0.8	)%

The $0.5 million net loss on short-term investments recognized in the first quarter of fiscal 2009 is attributable to an “other than temporary” loss of $0.6 million partially offset by a gain of $0.1 million related to a recovery on an investment for which we previously recognized an “other than temporary” loss in fiscal 2008.

 

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Interest income:

 

		Three Months Ended								$ Change				% Change
		September 27, 2009				September 28, 2008
Interest income ( dollars in thousands )		$	461			$	768			$	(307	)		(40.0	)%
Percentage of Revenue			0.9	%			1.4	%

Interest income decreased $0.3 million in the first quarter of fiscal 2010 compared to the same period in the prior year due to lower invested balances and lower interest rates.

Interest expense:

 

		Three Months Ended								$ Change			% Change
		September 27, 2009				September 28, 2008
Interest expense ( dollars in thousands )		$	(1,274	)		$	(1,654	)		$	380		(23.0	)%
Percentage of Revenue			(2.4	)%			(3.0	)%

Interest expense decreased $0.4 million in the first quarter of fiscal 2010 compared to the same period in the prior year due to the repayment of $62.5 million in convertible notes in the first quarter of fiscal 2009. Further, in the first quarter of fiscal 2010 we adopted FASB issued authoritative guidance on accounting for our contingent convertible subordinated notes. As a result of this adoption, interest expense includes non-cash interest costs of $0.8 million and $0.9 million in the first three months of fiscal 2010 and fiscal 2009, respectively.

Income taxes:

 

		Three Months Ended								$ Change			% Change
		September 27, 2009				September 28, 2008
Income tax expense ( dollars in thousands )		$	95			$	(556	)		$	651		(117.1	)%
Percentage of Revenue			0.2	%			(1.0	)%

Our income tax provision was $0.1 million in the first quarter of fiscal 2010, compared to a $0.6 million benefit in the corresponding quarter of fiscal 2009. Our effective tax rate in the first quarter of fiscal 2010 was 35.2 %, compared to an effective tax rate of 32.1% in the corresponding period of fiscal 2009.

Key Operating Metrics

Key operating metrics for measuring our performance include sales backlog and contract revenue. A comparison of these metrics at the end of the first quarter of fiscal 2010 with the end of fiscal 2009 is 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 backlog amounted to $50.3 million as of September 27, 2009, compared to $46.9 million as of June 28, 2009. Our backlog, which is shippable within the next six months, was $42.8 million as of September 27, 2009, compared to $42.1 million as of June 28, 2009.

 

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Contract Revenue:

As of September 27, 2009, we had approximately $7.1 million in contract revenue to be performed and recognized within the next 36 months, compared to approximately $6.4 million in contract revenue that was to be performed and recognized within 36 months following June 29, 2009. These amounts have been included in our sales backlog discussed above.

Liquidity and Capital Resources

As of September 27, 2009, working capital was $170.9 million compared to $169.1 million as of June 28, 2009. Cash and cash equivalents as of September 27, 2009 increased to $78.1 million from $72.1 million as of June 28, 2009. Short-term investments increased slightly from $40.7 million as of June 28, 2009 to $40.9 million as of September 27, 2009.

Net cash provided by operating activities in the first quarter of fiscal 2010 was $8.1 million. The net cash provided by operating activities was driven by the net income of $0.2 million and non-cash charges of: $1.9 million of depreciation and amortization expenses, $0.8 million in non-cash interest expense, $0.6 million of stock-based compensation expense, $0.6 million of provisions for excess and obsolete inventories, and a net $0.3 million for other non-cash adjustments to net income, for a total of $4.4 million of operating cash inflows. Changes in working capital assets and liabilities drove cash flow in operations of approximately $3.6 million, comprised of an $8.0 million decrease in accounts receivable, partially offset by a $3.4 million decrease in accrued compensation and a $1.2 million reduction in accounts payable. The $2.1 million net cash used for investing activities in the first quarter of fiscal 2010 was attributable to $3.3 million in purchases of short-term investments and $1.7 million in purchased of property and equipment, partially offset by $3.0 million in maturities of short-term investments.

Our days sales outstanding in accounts receivable was 60 days as of September 27, 2009, compared to 64 days as of June 28, 2009.

Contingencies

See Item 1 of Part I, Financial Statements — Note 10 — Contingencies.

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for us beginning June 28, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. In the event that early adoption is elected, we would be required to determine the relative selling price for all deliverables in a multiple element arrangement based on the hierarchy identified in the new standard. We would also be required to apply the standard retrospectively to the beginning of the year and to the comparable prior period for disclosure purposes. We are currently evaluating the impact this new guidance may have on our condensed consolidated financial statements and whether we will adopt the standard early.

In June 2009, the FASB issued authoritative guidance codifying a single source of authoritative nongovernmental U.S. GAAP. This guidance does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the FASB Codification will be considered non-authoritative. These provisions are effective for interim and annual periods ending after September 15, 2009 and, accordingly, are effective for us in the current fiscal reporting period. The adoption of this pronouncement did not have an impact on our condensed consolidated financial statements, but will impact our financial reporting process by eliminating all references to pre-codification standards. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative.

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Exposure

As of September 27, 2009, we had cash and cash equivalents of $78.1 million and short-term investments of $40.9 million. Currently our short-term investment portfolio consists mainly of government sponsored entity and corporate debt securities. Our exposure to market risk due to fluctuations in interest rates relates primarily to these debt securities, which are subject to interest rate risk in as much as their fair value will fall if market interest rates increase. If market interest rates were to increase or decrease immediately and uniformly by 10% from the levels prevailing as of September 27, 2009, the fair value of the portfolio would not change by a material amount. We do not use derivative financial instruments to mitigate the risks inherent in these securities. However, we do attempt to reduce these risks by typically limiting the maturity date of such securities, placing our investments with high credit quality issuers and limiting the amount of credit exposure with any one issuer. In addition, we have the ability and currently intend to hold these investments to recovery, which may be maturity, and therefore we believe that reductions in the value of these securities attributable to short-term fluctuations in interest rates would not materially harm our business.

On June 8, 2005, we issued convertible subordinated notes with a fixed rate of 3.25%, which have no interest rate risk impact to our business.

Foreign Currency Exchange Rate Exposure

Our exposure to market risk due to fluctuations in currency exchange rates relates primarily to the intercompany balances with our subsidiaries in the United Kingdom and Germany. Although we transact business with various countries, settlement amounts are usually based on U.S. currency. Transaction gains or losses have not been significant in the past and we do not presently engage in hedging activity. Based on our foreign currency denominated assets as of September 27, 2009, a hypothetical 10% adverse change in British Pounds or Euro against the U.S. dollar would not result in a material foreign exchange loss. Consequently, we do not expect that reductions in the value of such assets or other accounts denominated in foreign currencies resulting from even a sudden and significant fluctuation in foreign exchange rates would have a direct material impact on our business.

Notwithstanding the foregoing analysis of the direct effects of interest rate and currency exchange rate fluctuations on the value of certain of our investments and accounts, the indirect effects of such fluctuations could have a materially harmful effect on our business. For example, international demand for our products is affected by foreign currency exchange rates. In addition, interest rate fluctuations may affect the buying patterns of our customers. Furthermore, interest rate and currency exchange rate fluctuations have broad influence on the general condition of the U.S., foreign and global economies, which could materially harm our business.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed in the reports that we file or submit under the Exchange Act.

Changes in Internal Control Over Financial Reporting

There was no material change in our internal control over financial reporting that occurred during the quarter ended September 27, 2009 that has affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

See Item 1 of Part I, Financial Statements — Note 10 — Contingencies.

 

Item 1A.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended June 28, 2009. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

a) Not applicable.

b) Not applicable.

c) The following table provides monthly detail regarding our share repurchases during the three months ended September 27, 2009:

 

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
June 29, 2009 through July 26, 2009		13,347		$	5.85		—		1,570,870
July 27, 2009 through August 23, 2009		62,663		$	5.45		—		1,570,870
August 24, 2009 through September 27, 2009		—		$	—		—		1,570,870
Total		76,010		$	5.52		—

No stock was repurchased in the first quarter of fiscal 2010 as part of the repurchase program. As of September 27, 2009, the total number of shares available for repurchase under the repurchase program authorized by the Board of Directors was approximately 1.6 million.

A total of 76,010 shares were repurchased by us in the first quarter of fiscal 2010 for an aggregate price of approximately $0.4 million to cover the cost of withholding of personal income taxes on vested restricted stock.

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

 

Item 4.

Submission of Matters to a Vote of Security Holders

Not applicable.

 

Item 5.

Other Information

Paul Chermak, Executive Vice President Global Sales & Support of Symmetricom, Inc., informed us on November 3, 2009 of his intention to retire. Mr. Chermak is expected to leave the Company on November 13, 2009.

 

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Item 6.

Exhibits

 

Exhibit Number		Description of Exhibits
10.1		Employment Offer Letter, dated as of July 17, 2009, by and between Symmetricom, Inc. and David G. Côté (incorporated by reference from Exhibit 10.1 to Symmetricom’s Current Report on Form 8-K (file no. 000-02287) filed on July 27, 2009).
31		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.

 

		SYMMETRICOM, INC.
		(Registrant)
DATE: November 6, 2009		By:		/s/    D AVID G. C ÔTÉ
				David G. Côté
				Chief Executive Officer (Principal Executive Officer) and Director
DATE: November 6, 2009		By:		/s/    J USTIN S PENCER
				Justin Spencer
				Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

 

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