- 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 March 28, 2010

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 April 30, 2010
Common Stock		43,868,517

 

 

 

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SYMMETRICOM, INC.

FORM 10-Q

INDEX

 

				Page
PART I.       FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Condensed Consolidated Balance Sheets—March 28, 2010 and June 28, 2009		3
		Condensed Consolidated Statements of Operations—Three and nine months ended March 28, 2010 and March 29, 2009		4
		Condensed Consolidated Statements of Cash Flows— Nine months ended March 28, 2010 and March 29, 2009		5
		Notes to Condensed Consolidated Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		29
Item 4.		Controls and Procedures		30
PART II.       OTHER INFORMATION
Item 1.		Legal Proceedings		31
Item 1A.		Risk Factors		31
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 3.		Defaults Upon Senior Securities		32
Item 4.		[RESERVED.]		32
Item 5.		Other Information		32
Item 6.		Exhibits		32
SIGNATURES				33

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

SYMMETRICOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

		March 28, 2010				June 28, 2009
ASSETS
Current assets:
Cash and cash equivalents		$	49,072			$	72,064
Short-term investments			84,391				40,737
Accounts receivable, net of allowance for doubtful accounts of $397 and $361			36,685				42,389
Inventories, net			36,889				38,566
Prepaids and other current assets			14,699				16,143
Total current assets			221,736				209,899
Property, plant and equipment, net			23,095				20,749
Intangible assets, net			4,075				5,308
Deferred income taxes and other assets			33,627				36,431
Total assets		$	282,533			$	272,387
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	6,048			$	8,116
Accrued compensation			15,806				19,093
Accrued warranty			3,440				3,737
Other accrued liabilities			13,575				9,810
Total current liabilities			38,869				40,756
Long-term obligations			54,814				51,769
Deferred income taxes			334				334
Total liabilities			94,017				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, 49,907 shares issued and 43,846 outstanding at March 28, 2010; 49,442 shares issued and 43,556 outstanding at June 28, 2009			203,307				200,152
Accumulated other comprehensive income (loss)			(188	)			144
Accumulated deficit			(14,603	)			(20,768	)
Total stockholders’ equity			188,516				179,528
Total liabilities and stockholders’ equity		$	282,533			$	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								Nine Months Ended
		March 28, 2010				March 29, 2009				March 28, 2010				March 29, 2009
Net revenue		$	56,526			$	56,168			$	165,656			$	159,486
Cost of sales:
Cost of products and services			28,367				28,945				88,788				80,266
Amortization of purchased technology			278				368				1,014				1,105
Restructuring charges			448				2,275				2,241				2,275
Total cost of sales			29,093				31,588				92,043				83,646
Gross profit			27,433				24,580				73,613				75,840
Operating expenses:
Research and development			5,684				4,705				17,511				16,602
Selling, general and administrative			14,385				13,531				42,183				41,625
Amortization of intangible assets			62				102				219				308
Restructuring charges			998				3,635				2,009				4,472
Impairment of goodwill			—				48,144				—				48,144
Total operating expenses			21,129				70,117				61,922				111,151
Operating income (loss)			6,304				(45,537	)			11,691				(35,311	)
Loss on repayment of convertible notes, net			—				—				—				(5,623	)
Loss on short-term investments, net			—				—				—				(1,368	)
Interest income			350				322				1,316				1,581
Interest expense			(1,318	)			(1,243	)			(3,862	)			(4,102	)
Income (loss) from continuing operations before taxes			5,336				(46,458	)			9,145				(44,823	)
Income tax provision			1,648				292				3,018				991
Income (loss) from continuing operations			3,688				(46,750	)			6,127				(45,814	)
Income (loss) from discontinued operations, net of tax			804				(358	)			38				(1,428	)
Net income (loss)		$	4,492			$	(47,108	)		$	6,165			$	(47,242	)
Earnings (loss) per share — basic:
Income (loss) from continuing operations		$	0.08			$	(1.08	)		$	0.14			$	(1.05	)
Income (loss) from discontinued operations			0.02				(0.01	)			—				(0.03	)
Net income (loss)		$	0.10			$	(1.09	)		$	0.14			$	(1.08	)
Weighted average shares outstanding — basic			43,438				43,326				43,309				43,658
Earnings (loss) per share — diluted:
Income (loss) from continuing operations		$	0.08			$	(1.08	)		$	0.14			$	(1.05	)
Income (loss) from discontinued operations			0.02				(0.01	)			—				(0.03	)
Net income (loss)		$	0.10			$	(1.09	)		$	0.14			$	(1.08	)
Weighted average shares outstanding — diluted			43,934				43,326				43,828				43,658

See notes to the condensed consolidated financial statements.

 

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SYMMETRICOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Nine Months Ended
		March 28, 2010				March 29, 2009
Cash flows from operating activities:
Net income (loss)		$	6,165			$	(47,242	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Impairment of goodwill			—				48,144
Depreciation and amortization			5,219				6,690
Non-cash interest on convertible bonds			2,346				2,339
Deferred income taxes			2,604				(1,145	)
Gain on sale of discontinued operations			(915	)			—
Loss on short-term investments			—				1,368
Loss on repayment of convertible notes, net			—				5,623
Loss on disposals of fixed assets			129				607
Stock-based compensation			2,614				2,276
Allowance for doubtful accounts			141				(328	)
Provision for excess and obsolete inventory			1,239				1,777
Changes in assets and liabilities:
Accounts receivable			5,529				1,967
Inventories			313				(3,540	)
Prepaids and other assets			1,887				(2,285	)
Accounts payable			(2,221	)			(3,150	)
Accrued compensation			(3,419	)			1,341
Other accrued liabilities			3,879				689
Net cash provided by operating activities			25,510				15,131
Cash flows from investing activities:
Purchases of short-term investments			(79,789	)			(9,506	)
Maturities of short-term investments			35,364				3,724
Purchases of property and equipment			(6,660	)			(2,729	)
Cash proceeds from sale of discontinued operations			1,850				—
Net cash used for investing activities			(49,235	)			(8,511	)
Cash flows from financing activities:
Repayment of long-term obligations			—				(1,206	)
Proceeds from issuance of common stock			1,826				238
Repurchase of common stock			(909	)			(5,200	)
Repayment of convertible notes							(62,489	)
Net cash provided by (used for) financing activities			917				(68,657	)
Effect of exchange rate changes on cash			(184	)			(134	)
Net decrease in cash and cash equivalents			(22,992	)			(62,171	)
Cash and cash equivalents at beginning of period			72,064				142,419
Cash and cash equivalents at end of period		$	49,072			$	80,248
Non-cash investing and financing activities:
Unrealized gain (loss) on securities, net		$	(148	)		$	99
Property and equipment purchases included in accounts payable			66				72
Cash payments for:
Interest		$	924			$	1,200
Income taxes			745				844

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 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 (U.S. GAAP), management makes certain estimates and assumptions that impact the amounts reported and related disclosures. Estimates, by their nature, are management judgments based upon 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 and nine months ended March 28, 2010 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 U.S. GAAP 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.

Discontinued Operations

During the third quarter of fiscal 2010, we completed the sale of our video Quality of Experience (QoE) business to Cheetah Technologies, L.P. (Cheetah). Cheetah acquired the assets related to the QoE product line and has hired the remaining QoE employees. The total purchase price was $2.3 million, including $0.4 million held in escrow as of March 28, 2010. The escrowed funds are subject to forfeiture to satisfy indemnification and other obligations, if any, to Cheetah. The period of escrow for the $0.4 million will expire on July 1, 2011. As a result of this transaction, we recognized a gain on sale of discontinued operations of $0.9 million, net of income taxes, in the third quarter of fiscal 2010. This gain reflects $1.9 million in cash received in the third quarter of fiscal 2010, less transaction costs, the net carrying value of assets and liabilities transferred, and other related costs.

Selected financial information related to discontinued operations follows:

 

		Three Months Ended								Nine Months Ended
		March 28, 2010				March 29, 2009				March 28, 2010				March 29, 2009
		(In thousands)
Revenue		$	71			$	202			$	693			$	989
Loss on discontinued operations		$	(172	)		$	(581	)		$	(1,365	)		$	(2,325	)
Gain on sale of discontinued operations			1,423				—				1,423				—
Income (loss) from before income taxes			1,251				(581	)			58				(2,325	)
Income tax provision (benefit)			447				(223	)			20				(897	)
Income (loss) on discontinued operations, net		$	804			$	(358	)		$	38			$	(1,428	)

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued authoritative guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant non-observable inputs (Level 3 fair value measurements). The guidance became effective for us in the quarter ended March 28, 2010. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

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 of fair value 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. At the time of adoption 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 currently effective for us. The adoption of this pronouncement did not have an impact on our condensed consolidated financial statements, but has impacted 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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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 2. Financial Instruments

The following table contains our financial instruments which 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 March 28, 2010			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)
		(In thousands)
Assets:
Money market funds		$	17,827		$	17,827		$	—
Government sponsored enterprise debt securities			27,632			27,632			—
Corporate debt securities			53,636			—			53,636
Mutual funds			3,123			2,436			687
Total financial assets		$	102,218		$	47,895		$	54,323

The fair values of our money market funds, government sponsored enterprise securities, and certain mutual funds were derived from quoted market prices as active markets for these instruments exist. 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 tables summarize our available-for-sale and trading securities recorded as cash and cash equivalents or short-term investments:

 

March 28, 2010		Cost Basis				Gross Unrealized Losses				Fair Value
		(In thousands)
Short-term investments		$	99,134			$	(39	)		$	99,095
Less amounts classified as money market funds			(17,827	)			—				(17,827	)
Deferred compensation plan assets			3,123				—				3,123
Total short-term investments		$	84,430			$	(39	)		$	84,391
June 28, 2009		Cost Basis				Gross Unrealized Losses				Fair Value
		(In thousands)
Short-term investments		$	92,270			$	(273	)		$	91,997
Less amounts classified as money market funds			(53,572	)			—				(53,572	)
Deferred compensation plan assets			4,131				—				2,312
Total short-term investments		$	42,829			$	(273	)		$	40,737

The deferred compensation plan assets are classified as trading securities and all other investments are classified as available-for-sale. All of our debt securities classified as available-for-sale mature within the next two years.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 3. Inventories

Components of inventories were as follows:

 

		March 28, 2010			June 28, 2009
		(In thousands)
Raw materials		$	20,624		$	19,992
Work-in-process			8,183			10,231
Finished goods			8,082			8,343
Inventories		$	36,889		$	38,566

Note 4. Intangible Assets

Intangible assets as of March 28, 2010 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		$	(21,880	)		$	2,477
Customer lists and trademarks			7,025			(5,427	)			1,598
Total as of March 28, 2010		$	31,382		$	(27,307	)		$	4,075

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

 

Fiscal year:		(in thousands)
2010 (Remaining 3 months)		$	340
2011			1,303
2012			726
2013			502
2014			502
Thereafter			702
Total amortization		$	4,075

Intangible asset amortization expense for the third quarter of fiscal 2010 and 2009 was $0.3 million and $0.5 million, respectively. Intangible asset amortization expense for the first nine months of fiscal 2010 and 2009 was $1.2 million and $1.4 million, respectively.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 5. Long-term Obligations

Long-term obligations consist of:

 

		March 28, 2010			June 28, 2009
		(In thousands)
Long-term obligations:
Convertible subordinated notes, net		$	48,747		$	46,401
Deferred revenue			1,978			2,125
Lease loss accrual, net			2,529			1,749
Rent accrual			1,054			966
Income tax			300			300
Post-retirement benefits			206			228
Total		$	54,814		$	51,769

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.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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.

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 the 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 or by us. 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 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 statements 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 financial statement line items as of June 28, 2009 and for the three-month and nine-month periods ended March 29, 2009 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
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 March 29, 2009												Nine Months Ended March 29, 2009
		As Previously Reported (1)				Adjustments				As Adjusted				As Previously Reported (1)				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			(537	)			(706	)			(1,243	)			(1,845	)			(2,257	)			(4,102	)
Loss from continuing operations before taxes			(45,752	)			(706	)			(46,458	)			(37,465	)			(7,358	)			(44,823	)
Income tax provision			553				(261	)			292				3,714				(2,723	)			991
Loss from continuing operations			(46,305	)			(445	)			(46,750	)			(41,178	)			(4,636	)			(45,814	)
Net loss			(46,663	)			(445	)			(47,108	)			(42,606	)			(4,636	)			(47,242	)
Earnings per share-basic:
Loss from continuing operations		$	(1.07	)						$	(1.08	)		$	(0.94	)						$	(1.05	)
Net loss		$	(1.08	)						$	(1.09	)		$	(0.98	)						$	(1.08	)
Weighted average shares outstanding-basic			43,326								43,326				43,658								43,658
Earnings per share-diluted:
Loss from continuing operations		$	(1.07	)						$	(1.08	)		$	(0.94	)						$	(1.05	)
Net loss		$	(1.08	)						$	(1.09	)		$	(0.98	)						$	(1.08	)
Weighted average shares outstanding-diluted			43,326								43,326				43,658								43,658

 

(1)	Adjusted for the impact of discontinued operations. See Note 1.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

		Nine Months Ended March 29, 2009
		As Previously Reported				Adjustments				As Adjusted
		(In thousands)
Consolidated Statement of Cash Flows Data:
Net loss		$	(42,606	)		$	(4,636	)		$	(47,242	)
Deferred income taxes			1,578				(2,723	)			(1,145	)
Non-cash interest expense			—				2,339				2,339
Loss on repayment of convertible notes			522				5,101				5,623
Prepaids and other assets			(2,204	)			(81	)			(2,285	)
Net cash provided by operating activities			15,131				—				15,131

As of March 28, 2010 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:

 

		March 28, 2010				June 28, 2009
		(In thousands)
Convertible subordinated notes:
Principal amount		$	56,880			$	56,880
Unamortized discount			(8,133	)			(10,479	)
Net carrying amount		$	48,747			$	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 March 28, 2010, the total interest expense relating to our Notes was $1.3 million, including $0.5 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 March 29, 2009, the total interest expense relating to our Notes was $1.2 million, including $0.5 million related to the contractual interest coupon and $0.7 million related to amortization of the discount on the liability component. For the nine months ended March 28, 2010, the total interest expense relating to our Notes was $3.9 million, including $1.6 million related to the contractual interest coupon and $2.3 million related to amortization of the discount on the liability component. For the nine months ended March 29, 2009, the total interest expense relating to our Notes was $4.1 million, including $1.8 million related to the contractual interest coupon and $2.3 million related to amortization of the discount on the liability component. The remaining debt discount and issuance costs of $8.1 million and $0.4 million, respectively, as of March 28, 2010 will be amortized over the expected remaining life of the Notes, which is approximately 2.3 years.

As of March 28, 2010, the approximate fair value of the principal amount of our Notes, which includes the debt and equity components, was approximately $58.6 million, or 103.0% of the face value of the Notes. This valuation was derived using a discounted cash flow analysis for the debt portion and the Black-Scholes valuation method for the equity portion, using current market information as of March 28, 2010.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 6. Stockholders’ Equity

Stock Award Activity

Stock award activity for the nine months ended March 28, 2010 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		(2,398	)		2,398				4.90		—				—		—				—
Granted - restricted shares		(127	)		—				—		—				—		127				5.25
Exercised		—			(409	)			4.46		—				—		—				—
Vested		—			—				—		—				—		(363	)			6.65
Cancelled		882			(757	)			6.12		(125	)			8.53		(70	)			5.24
Expired		(574	)		—				—		—				—		—				—
Balances at March 28, 2010		4,964			6,522			$	6.11		—			$	—		234			$	5.33

Options outstanding, vested and expected to vest, and exercisable as of March 28, 2010 were as follows:

 

Option		Number of Shares		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price			Aggregate Intrinsic Value
		(In thousands)		(In years)					(In thousands)
Outstanding		6,522		3.91		$	6.11		$	4,707
Vested and expected to vest		5,934		3.76		$	6.23		$	4,084
Exercisable		3,072		2.08		$	7.50		$	1,131

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value of stock options outstanding as of March 28, 2010, based on our common stock closing price of $5.85 on March 28, 2010, which would have been received by the option holders had all option holders exercised their in-the-money options as of that date.

The total intrinsic value of options exercised during the first nine months of fiscal 2010 was $0.5 million.

For the three months ended March 28, 2010 and March 29, 2009, the weighted-average estimated fair value of options granted was $2.51 and $1.68 per share, respectively. For the nine months ended March 28, 2010 and March 29, 2009, the weighted-average estimated fair value of options granted was $2.41 and $1.87 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 and nine months ended March 28, 2010 and March 29, 2009 as follows:

 

		Three months ended						Nine months ended
		March 28, 2010			March 29, 2009			March 28, 2010			March 29, 2009
Expected life (in years)		5.1			4.0			4.9			3.8
Risk-free interest rate		2.0	%		1.2	%		1.9	%		1.7	%
Volatility		57.6	%		54.8	%		56.4	%		51.4	%

Prior to the second quarter of fiscal 2010, we calculated our expected volatility using a blend of historic and implied volatility. Due to the fact that our publicly traded option activity has declined, we are no longer able to calculate an implied volatility and therefore we began using historic volatility exclusively for calculating our expected volatility beginning in the second quarter of fiscal 2010.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

We recorded stock-based compensation expense of $0.8 million and $0.9 million in the third quarter of fiscal 2010 and 2009, respectively. We calculated these stock-based compensation expenses using a net cumulative impact of 8% to estimate future annual forfeitures. Prior to the second quarter of fiscal 2010, we used a net cumulative impact of 10% to estimate future annual forfeitures. At March 28, 2010, 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 $4.8 million, net of estimated forfeitures of $1.0 million. This cost will be amortized on an accelerated method basis over a period of approximately 1.4 years and will be adjusted for subsequent changes in estimated forfeitures.

The following table shows the breakout of total stock-based compensation expense by financial statement line item included in the condensed consolidated statements of operations:

 

		Three Months Ended							Nine Months Ended
		March 28, 2010			March 29, 2009				March 28, 2010			March 29, 2009
		(In thousands)
Cost of sales		$	169		$	153			$	641		$	448
Research and development			194			(20	)			622			434
Selling, general and administrative			457			723				1,351			1,394
Total		$	820		$	856			$	2,614		$	2,276

Stock Repurchases

No stock was repurchased in the third quarter of fiscal 2010 as part of the repurchase program. As of March 28, 2010, the total number of shares available for repurchase under the repurchase program authorized by the Board of Directors was approximately 1.5 million.

A total of 4,399 shares were repurchased by us in the third quarter of fiscal 2010 for an aggregate price of approximately $24,000 to cover the cost of withholding of personal income taxes on vested restricted stock.

Note 7. Restructuring Charges

The following table shows the details of the restructuring cost accruals included in other accrued liabilities and long-term obligations, which consist of facilities and severance costs, at March 28, 2010 and June 28, 2009:

 

		Balance at June 28, 2009			Expense Additions			Payments and Non-cash Settlements				Balance at March 28, 2010
		(in thousands)
Lease loss accrual (fiscal 2004)		$	216		$	18		$	(29	)		$	205
All other restructuring charges (fiscal 2004)			181			—			(79	)			102
Lease loss accrual (fiscal 2009)			2,267			1,209			(575	)			2,901
Additional depreciation charges (fiscal 2009)			—			610			(610	)			—
All other restructuring charges (fiscal 2009)			2,900			1,738			(4,398	)			240
Lease loss accrual (fiscal 2010)			—			675			(59	)			616
Total		$	5,564		$	4,250		$	(5,750	)		$	4,064

During the first nine months of fiscal 2010, we incurred approximately $2.6 million in lease loss and facility related charges. These expenses included approximately $1.9 million related to our San Jose, CA facility and approximately $0.7 million related to our Puerto Rico and other facilities for unused space at these respective facilities. The lease loss accruals are subject to periodic revisions based on current market estimates. The balance of these lease loss accruals will be paid over the next eight years.

During the first nine months of fiscal 2010, we also incurred approximately $1.7 million in one-time termination benefits and other restructuring related charges, mainly related to the transfer of our Cesium product line from our San Jose, CA facility to our Beverly, MA facility.

Over the next three months, we expect to incur remaining restructuring charges amounting to $3.3 million, including approximately $1.7 million in lease loss and facility related charges and approximately $1.6 million in one-time termination benefits and other restructuring related charges.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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 U.S. GAAP 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								Nine Months Ended
		March 28, 2010				March 29, 2009				March 28, 2010				March 29, 2009
		(in thousands)
Net income (loss)		$	4,492			$	(47,108	)		$	6,165			$	(47,242	)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments			(59	)			(190	)			(184	)			(134	)
Unrealized gain (loss) on investments			(19	)			(13	)			(148	)			99
Other comprehensive loss			(78	)			(203	)			(332	)			(35	)
Total comprehensive income (loss)		$	4,414			$	(47,311	)		$	5,833			$	(47,277	)

Note 9. Net Income (Loss) Per Share

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

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

 

		Three Months Ended								Nine Months Ended
		March 28, 2010				March 29, 2009				March 28, 2010				March 29, 2009
		(In thousands, except per share amounts)
Numerator:
Income (loss) from continuing operations		$	3,688			$	(46,750	)		$	6,127			$	(45,814	)
Income (loss) from discontinued operations			804				(358	)			38				(1,428	)
Net income (loss)		$	4,492			$	(47,108	)		$	6,165			$	(47,242	)
Shares (denominator):
Weighted average common shares outstanding			43,682				43,925				43,666				44,356
Weighted average common shares outstanding subject to repurchase			(244	)			(599	)			(357	)			(698	)
Weighted average shares outstanding—basic			43,438				43,326				43,309				43,658
Weighted average dilutive share equivalents from stock options			331				—				261				—
Weighted average dilutive common shares subject to repurchase			165				—				258				—
Weighted average shares outstanding—diluted			43,934				43,326				43,828				43,658
Earnings (loss) per share—basic:
Income (loss) from continuing operations		$	0.08			$	(1.08	)		$	0.14			$	(1.05	)
Income (loss) from discontinued operations			0.02				(0.01	)			—				(0.03	)
Net income (loss)		$	0.10			$	(1.09	)		$	0.14			$	(1.08	)
Earnings (loss) per share—diluted:
Income (loss) from continuing operations		$	0.08			$	(1.08	)		$	0.14			$	(1.05	)
Income (loss) from discontinued operations			0.02				(0.01	)			—				(0.03	)
Net income (loss)		$	0.10			$	(1.09	)		$	0.14			$	(1.08	)

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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				Nine Months Ended
		March 28, 2010		March 29, 2009		March 28, 2010		March 29, 2009
		(In thousands)
Stock options		4,846		5,778		4,082		5,700
Common shares subject to repurchase		—		599		—		698
Total shares of common stock excluded from diluted net income (loss) per share calculation		4,846		6,377		4,082		6,398

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 March 28, 2010, 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.

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 March 28, 2010, we have received a waiver from one such customer to use lead-free solder. The total sales value of product shipped with lead-free solder to the customer that has not granted us a 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.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 11. Business Segment Information

In the third quarter of fiscal 2010, we changed our segment reporting structure from four operating and reporting segments to two operating and reporting segments. This was done to better reflect how the Chief Operating Decision Maker (CODM) makes decisions about resource allocation and segment performance. The CODM, as defined by authoritative accounting guidance on Segment Reporting, is our President and Chief Executive Officer (CEO). The CODM allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest and taxes. Symmetricom is now organized into two operating segments corresponding to our two divisions: Communications and Government. Given the measure of profit reviewed by the CODM, we have changed our segment profit measure to operating income (loss). Prior to this change, the CODM used gross margin as the segment profit measure.

With the exception of intangible assets, we do not identify or allocate assets by operating segment, nor does the CODM evaluate operating segments using discrete asset information. We do not allocate integration and restructuring charges, interest and other income, interest expense, or taxes to operating segments.

During the second quarter of fiscal 2010, we classified our QoE business as a discontinued operation and its respective assets as held for sale. During the third quarter of fiscal 2010, we sold our Quality of Experience Assurance (QoE) business. QoE was a reportable segment within our Telecom Solutions Division segment under previous segment presentation. Due to this sale, the results of QoE have been removed from the Communications segment, shown as discontinued operations, and all comparative information from prior periods has been updated to reflect this change.

The following describes our two reporting segments:

Communications

Our Communications business supplies timing technologies and services for worldwide communications infrastructure. Products include primary reference sources, synchronization distribution systems, embedded components and software, and test and measurement equipment, all of which support the timing and synchronization requirements of telecommunications and cable networks and equipment.

Government

Our Government business sells time technology products to aerospace/defense markets, IT infrastructure and the science and metrology industries. Precision time and frequency systems enable a range of critical operations, including the international time scale, global navigation, the uninterrupted availability of power, and signals intelligence for securing communications in remote and hostile environments.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The comparative information from prior periods related to the following tables has been updated to reflect our change in segment reporting. Segment revenue, gross profit and operating income (loss) were as follows during the periods presented:

Three months ended March 28, 2010

		Communications				Government				Corporate				Total
		(In thousands)
Net revenue		$	35,184			$	21,342			$	—			$	56,526
Cost of sales			16,995				11,650				448				29,093
Gross profit			18,189				9,692				(448	)			27,433
Operating expenses			8,988				5,091				7,050				21,129
Operating income (loss)		$	9,201			$	4,601			$	(7,498	)		$	6,304
Three months ended March 29, 2009
		Communications				Government				Corporate				Total
		(In thousands)
Net revenue		$	33,424			$	22,744			$	—			$	56,168
Cost of sales			16,542				12,771				2,275				31,588
Gross profit			16,882				9,973				(2,275	)			24,580
Operating expenses			35,980				24,633				9,504				70,117
Operating income (loss)		$	(19,098	)		$	(14,660	)		$	(11,779	)		$	(45,537	)
Nine months ended March 28, 2010
		Communications				Government				Corporate				Total
		(In thousands)
Net revenue		$	102,811			$	62,845			$	—			$	165,656
Cost of sales			53,320				36,482				2,241				92,043
Gross profit			49,491				26,363				(2,241	)			73,613
Operating expenses			27,746				15,563				18,613				61,922
Operating income (loss)		$	21,745			$	10,800			$	(20,854	)		$	11,691
Nine months ended March 29, 2009
		Communications				Government				Corporate				Total
		(In thousands)
Net revenue		$	98,890			$	60,596			$	—			$	159,486
Cost of sales			48,175				33,196				2,275				83,646
Gross profit			50,715				27,400				(2,275	)			75,840
Operating expenses			55,952				34,944				20,255				111,151
Operating income (loss)		$	(5,237	)		$	(7,544	)		$	(22,530	)		$	(35,311	)

The information in the Corporate category above represents corporate-related costs that are not allocated to either of our two segments for the purpose of evaluating their performance. The following table outlines our major corporate-related costs:

 

		Three Months Ended						Nine Months Ended
		March 28, 2010			March 29, 2009			March 28, 2010			March 29, 2009
		(In thousands)						(In thousands)
Selling, general and administrative costs		$	6,052		$	5,869		$	16,604		$	15,783
Restructuring charges			1,446			5,910			4,250			6,747
Corporate-related total		$	7,498		$	11,779		$	20,854		$	22,530

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 12. Warranty

Warranty

Changes in our accrued warranty liability were as follows:

 

		Three Months Ended								Nine Months Ended
		March 28, 2010				March 29, 2009				March 28, 2010				March 29, 2009
		(In thousands)
Beginning balance		$	3,648			$	3,644			$	3,737			$	3,801
Provision for warranty			180				774				996				2,210
Accruals related to change in estimate			82				2				22				(47	)
Less: Actual warranty costs			(470	)			(820	)			(1,315	)			(2,364	)
Ending balance		$	3,440			$	3,600			$	3,440			$	3,600

Note 13. Subsequent Events

On April 6, 2010, we announced a restructuring plan to transfer product fabrication processes and related activities from our Aguadilla, Puerto Rico facility to Sanmina-SCI Corporation (Sanmina-SCI) facilities. As part of the plan, we plan to eliminate approximately 150 positions, or about 20% of our total workforce.

 

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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, changes in our effective tax rate, 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 or with attempting to divest a business, our efforts to maintain or reduce manufacturing and operating costs, 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. 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; 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.

Expansion of Our Outsourcing Arrangement with Sanmina-SCI

On April 6, 2010, we announced a restructuring plan to transfer product fabrication processes and related activities from our Aguadilla, Puerto Rico facility to Sanmina-SCI Corporation (Sanmina-SCI) facilities. As part of the plan, we plan to eliminate approximately 150 positions, or about 20% of our total workforce. We expect to incur restructuring charges of approximately $15.0 million in connection with the plan, including approximately $4.0 million during the current fiscal year. Total restructuring charges are expected to include approximately $7.0 million in one-time termination benefits, approximately $5.7 million in facility shutdown charges and approximately $2.3 million in transfer and other restructuring related charges. We anticipate that these charges will be recognized beginning in the fourth quarter of fiscal 2010 and will be completed by the fourth quarter of 2011. Total cash expenditures associated with the restructuring plan are expected to be approximately $13.5 million. We plan to build approximately $4.0 million in buffer inventory to support the transition. Upon completion, we expect the restructuring and other actions to reduce annual costs by approximately $6.0 million.

 

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Segment Reporting Change

In the third quarter of fiscal 2010, we changed our segment reporting structure from four operating and reporting segments to two operating and reporting segments. This was done to better reflect how the Chief Operating Decision Maker (CODM) makes decisions about resource allocation and segment performance. The CODM, as defined by authoritative accounting guidance on Segment Reporting, is our President and Chief Executive Officer (CEO). The CODM allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest and taxes. Symmetricom is now organized into two operating segments corresponding to our two divisions: Communications and Government. For each of these segments, we have separate financial information, including operating income (loss) amounts, which are evaluated regularly by the CODM. The comparative information from prior periods related in the following section, Results of Operations, has been updated to reflect this change.

Sale of Discontinued Operations

During the third quarter of fiscal 2010, we completed the sale of our video Quality of Experience (QoE) business to Cheetah Technologies, L.P. (Cheetah). Cheetah acquired the assets related to the QoE product line and has hired the remaining QoE employees. The total purchase price was $2.3 million, including $0.4 million held in escrow as of March 28, 2010. The escrowed funds are subject to forfeiture to satisfy indemnification and other obligations, if any, to Cheetah. The period of escrow for the $0.4 million will expire on July 1, 2011. As a result of this transaction, we recognized a gain on sale of discontinued operations of $0.9 million, net of income taxes, in the third quarter of fiscal 2010. This gain reflects $1.9 million in cash received in the third quarter of fiscal 2010, less transaction costs, the net carrying value of assets and liabilities transferred, and other related costs. During the first nine months of fiscal 2010, we recognized $38,000 in income, net of taxes, attributable to the discontinued operations of QoE. In addition, QoE will no longer be shown as a reportable segment within continuing operations and all comparative information from prior periods has been updated to reflect this change.

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 (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.

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 or by us. 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 March 28, 2010, the total interest expense relating to our Notes was $1.3 million, including $0.5 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 March 29, 2009, the total interest expense relating to our Notes was $1.2 million, including $0.5 million related to the contractual interest coupon and $0.7 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 and for the periods presented in 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.

 

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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 nine months ended March 28, 2010 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

In the second half of calendar year 2008, the financial markets in the U.S. and abroad experienced a severe downturn arising from a multitude of factors, including concerns about the systemic impact of large financial institutions experiencing acute credit crises, geopolitical issues, broad 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. While some of these conditions have abated in recent months, general concerns about the stability of the markets 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.

While there has been some improvement in general macro-economic conditions since late calendar year 2009 and early 2010, if difficult economic conditions or a constrained credit environment resume, 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.

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 and nine months ended March 28, 2010 and March 29, 2009:

 

		Three Months Ended						Nine Months Ended
		March 28, 2010			March 29, 2009			March 28, 2010			March 29, 2009
Net revenue
Communications		62.2	%		59.5	%		62.1	%		62.0	%
Government		37.8	%		40.5	%		37.9	%		38.0	%
Total net revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products and services		50.2	%		51.5	%		53.6	%		50.3	%
Amortization of purchased technology		0.5	%		0.7	%		0.6	%		0.7	%
Restructuring charges		0.8	%		4.1	%		1.4	%		1.4	%
Gross profit		48.5	%		43.8	%		44.4	%		47.6	%
Operating expenses:
Research and development		10.1	%		8.4	%		10.6	%		10.4	%
Selling, general and administrative		25.4	%		24.1	%		25.5	%		26.1	%
Amortization of intangible assets		0.1	%		0.2	%		0.1	%		0.2	%
Restructuring charges		1.8	%		6.5	%		1.2	%		2.8	%
Impairment of goodwill		—	%		85.7	%		—	%		30.2	%
Operating income (loss)		11.2	%		(81.1	)%		7.1	%		(22.1	)%
Loss on repayment of convertible notes, net		—	%		—	%		—	%		(3.5	)%
Loss on short-term investments, net		—	%		—	%		—	%		(0.9	)%
Interest income		0.6	%		0.6	%		0.8	%		1.0	%
Interest expense		(2.3	)%		(2.2	)%		(2.3	)%		(2.6	)%
Income (loss) from continuing operations before taxes		9.4	%		(82.7	)%		5.5	%		(28.1	)%
Income tax provision		2.9	%		0.5	%		1.8	%		0.6	%
Income from continuing operations		6.5	%		(83.2	)%		3.7	%		(28.7	)%
Income (loss) from discontinued operations, net of tax		1.4	%		(0.6	)%		—	%		(0.9	)%
Net income (loss)		7.9	%		(83.9	)%		3.7	%		(29.6	)%

 

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Net Revenue:

 

		Three Months Ended								$ Change				% Change			Nine Months Ended								$ Change			% Change
		March 28, 2010				March 29, 2009											March 28, 2010				March 29, 2009
Net Revenue (dollars in thousands):
Communications		$	35,184			$	33,424			$	1,760			5.3	%		$	102,811			$	98,890			$	3,921		4.0	%
Government			21,342				22,744				(1,402	)		(6.2	)			62,845				60,596				2,249		3.7
Total Net Revenue		$	56,526			$	56,168			$	358			0.6	%		$	165,656			$	159,486			$	6,170		3.9	%
Percentage of Revenue			100.0	%			100.0	%										100.0	%			100.0	%

Third Quarter of Fiscal 2010: Net revenue consists of sales of products, software licenses and services. In the third quarter of fiscal 2010, net revenue was flat, compared to the corresponding quarter of fiscal 2009. Communications revenue increased $1.8 million, or 5.3%, compared to the same quarter for the prior year, primarily due to higher sales of GPS timing modules for WiMax base stations and higher installation and service revenue. Government revenue decreased $1.4 million, or 6.2%, compared to the same quarter for the prior year, due primarily to lower sales of government communications and signal intelligence systems.

First Nine Months of Fiscal 2010: In the first nine months of fiscal 2010, net revenue increased $6.2 million, or 3.9%, compared to the corresponding period of fiscal 2009. Revenue for Communications increased $3.9 million, or 4.0%, compared to the same period for the prior year, due to stronger sales to telecommunications providers, higher shipments of GPS timing modules for WiMax base stations, and higher installation services. Government revenue increased by $2.2 million, or 3.7%, compared to the same period for the prior year, due to higher sales of atomic clocks and hydrogen masers offset by lower sales of government communication and signal intelligence systems.

Gross Profit:

 

		Three Months Ended								$ Change				% Change			Nine Months Ended								$ Change				% Change
		March 28, 2010				March 29, 2009											March 28, 2010				March 29, 2009
Gross Profit (dollars in thousands):
Communications		$	18,189			$	16,882			$	1,307			7.7	%		$	49,491			$	50,715			$	(1,224	)		(2.4	)%
Government			9,692				9,973				(281	)		(2.8	)			26,363				27,400				(1,037	)		(3.8	)
Corporate related			(448	)			(2,275	)			1,827			(80.3	)			(2,241	)			(2,275	)			34			(1.5	)
Total Gross Profit		$	27,433			$	24,580			$	2,853			11.6	%		$	73,613			$	75,840			$	(2,227	)		(2.9	)%
Percentage of Revenue			48.5				%43.8	%										44.4	%			47.6	%

Third Quarter of Fiscal 2010: Gross profit in the third quarter of fiscal 2010 increased by $2.9 million, or 11.6%, compared to the corresponding quarter of fiscal 2009. Gross profit as a percentage of revenue increased by 4.7% primarily due to lower restructuring costs and higher Communications business profit. Gross profit for Communications increased by $1.3 million, or 7.7%, which is greater than the revenue increase of 5.3%, primarily due to improved synchronization systems margins and lower period costs and variances. Gross profit for Government decreased by $0.3 million, or 2.8%, which is less than the revenue decrease of 6.2%, primarily due to better margins on our atomic clocks following the consolidation of our atomic clock facilities, and an improved mix of GPS timing products.

Corporate related restructuring charges decreased $1.8 million, or 80.3%, due to severance and facility shutdown costs related to the restructuring activities announced in the second half of fiscal 2009. We expect that restructuring charges will increase in the fourth quarter of fiscal 2010 due to the phased closure of our Puerto Rico manufacturing facility, which we anticipate will be complete by the fourth quarter of fiscal 2011.

First Nine Months of Fiscal 2010: Gross profit in the first nine months of fiscal 2010 decreased by $2.2 million, or 2.9%, compared to the corresponding period of fiscal 2009. Gross profit as a percentage of revenue declined by 3.2%. Gross profit for Communications decreased by $1.2 million, or 2.4%, despite a revenue increase of 4.0%, primarily due to a change in product mix towards lower margin products, including installation services. Gross profit for Government decreased by $1.0 million, or 3.8%, despite a revenue increase of 3.7%, primarily due to lower margins on government contracts, and higher period costs and variances.

Corporate related restructuring charges for the first nine months of fiscal 2010 were comparable to the same period in fiscal 2009.

 

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Operating Income :

 

 

		Three Months Ended								$Change			% Change			Nine Months Ended								$Change			% Change
		March 28, 2010				March 29, 2009										March 28, 2010				March 29, 2009
Operating Income (loss) (dollars in thousands) :
Communications		$	9,201			$	(19,098	)		$	28,299		148.2	%		$	21,745			$	(5,237	)		$	26,982		515.2	%
Government			4,601				(14,660	)			19,261		131.4				10,800				(7,544	)			18,344		243.2
Corporate related			(7,498	)			(11,779	)			4,281		(36.3	)			(20,854	)			(22,530	)			1,676		(7.4	)
Total Operating Income		$	6,304			$	(45,537	)		$	51,841		113.8	%		$	11,691			$	(35,311	)		$	47,002		(133.1	)%
Percentage of Revenue			11.2	%			(81.1	)%									7.1	%			(22.1	)%

Third Quarter of Fiscal 2010: Operating income for Communications increased by $28.3 million or 148.2% due primarily to a $28.0 million goodwill impairment charge taken in the third quarter of fiscal 2009. Operating income for Government increased $19.3 million or 131.4% due primarily to a $20.1 million goodwill impairment charge taken in the third quarter of fiscal 2009. Corporate related operating expenses decreased $4.3 million or 36.3% due to lower restructuring charges in the third quarter of fiscal 2010.

First Nine Months of Fiscal 2010: Operating income for Communications increased by $27.0 million or 515.2% due primarily to a $28.0 million goodwill impairment charge taken in the third quarter of fiscal 2009. Operating income for Government increased $18.3 million or 243.2% due to a $20.1 million goodwill impairment charge taken in the third quarter of fiscal 2009. Corporate related operating expenses decreased $1.7 million or 7.4% due to lower restructuring charges in the first nine months of fiscal 2010.

Operating Expenses:

Research and Development Expense:

 

		Three Months Ended								Change			% Change			Nine Months Ended								Change			% Change
		March 28, 2010				March 29, 2009										March 28, 2010				March 29, 2009
Research and development expense (dollars in thousands)		$	5,684			$	4,705			$	979		20.8	%		$	17,511			$	16,602			$	909		5.5	%
Percentage of Revenue			10.1	%			8.4	%									10.6	%			10.4	%

Third Quarter of Fiscal 2010: Research and development expense consists primarily of salaries and benefits, prototype expenses and fees paid to outside consultants. Research and development expense in the third quarter of fiscal 2010 increased $1.0 million, or 20.8%, compared to the same quarter of fiscal 2009 due primarily to higher incentive compensation and fringe benefit costs. We expect research and development expenses to increase modestly in the fourth quarter of fiscal 2010.

First Nine Months of Fiscal 2010: Research and development expense in the first nine months of fiscal 2010 increased $0.9 million, or 5.5%, compared to the same period of fiscal 2009 due primarily to higher incentive compensation, stock based compensation, and fringe benefit costs.

Selling, General and Administrative:

 

		Three Months Ended								$ Change			% Change			Nine Months Ended								$ Change			% Change
		March 28, 2010				March 29, 2009										March 28, 2010				March 29, 2009
Selling, general and administrative (dollars in thousands)		$	14,385			$	13,531			$	854		6.3	%		$	42,183			$	41,625			$	558		1.3	%
Percentage of Revenue			25.4	%			24.1	%									25.5	%			26.1	%

Third Quarter of Fiscal 2010: 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 increased by 6.3%, or $0.9 million, to $14.4 million for the third quarter of fiscal 2010, compared to $13.5 million for the corresponding quarter of fiscal 2009. The increase in expenses was due primarily to higher incentive compensation and fringe benefit costs in the third quarter of fiscal 2010, and higher sales commissions. These increases were partially offset by lower severance costs. We expect selling, general and administrative expenses to increase modestly in the fourth quarter of fiscal 2010.

 

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First Nine Months of Fiscal 2010: Selling, general and administrative expenses for the first nine months of fiscal 2010 were comparable to the corresponding period of fiscal 2009.

Amortization of intangibles:

 

		Three Months Ended								$ Change				% Change			Nine Months Ended								$ Change				% Change
		March 28, 2010				March 29, 2009											March 28, 2010				March 29, 2009
Amortization of intangible assets (dollars in thousands)		$	62			$	102			$	(40	)		(39.2	)%		$	219			$	308			$	(89	)		(28.9	)%
Percentage of Revenue			0.1	%			0.2	%										0.1	%			0.2	%

Amortization of intangibles decreased in fiscal 2010 compared to the respective corresponding periods of fiscal 2009 due to certain assets becoming fully amortized during the first nine months of fiscal 2010.

Restructuring charges:

 

		Three Months Ended							$ Change				% Change			Nine Months Ended								$ Change				% Change
		March 28, 2010			March 29, 2009											March 28, 2010				March 29, 2009
Restructuring charges (dollars in thousands)		$	998		$	3,635			$	(2,637	)		(72.5	)%		$	2,009			$	4,472			$	(2,463	)		(55.1	)%
Percentage of Revenue			1.8			%6.5	%										1.2	%			2.8	%

Restructuring charges decreased in the third quarter and first nine months of fiscal 2010 compared to the respective corresponding periods of fiscal 2009 due to severance and facility shutdown costs related to the restructuring activities announced in the second half of fiscal 2009. We expect that restructuring charges will increase in the fourth quarter of fiscal 2010 due to the phased closure of our Puerto Rico manufacturing facility, which we anticipate will be complete by the fourth quarter of fiscal 2011.

Goodwill impairment:

 

		Three Months Ended								$ Change				% Change			Nine Months Ended								$ Change				% Change
		March 28, 2010				March 29, 2009											March 28, 2010				March 29, 2009
Impairment of goodwill (dollars in thousands)		$	—			$	48,144			$	(48,144	)		(100.0	)%		$	—			$	48,144			$	(48,144	)		(100.0	)%
Percentage of Revenue			—	%			85.7	%										—	%			30.2	%

In the third quarter of fiscal 2009, we recognized goodwill impairment charges of $28.0 million and $20.1 million related to our Communications and Government reporting segments, respectively.

Loss on repayment of convertible notes, net:

 

		Three Months Ended							$ Change			% Change			Nine Months Ended								$ Change			% Change
		March 28, 2010				March 29, 2009									March 28, 2010				March 29, 2009
Loss on repayment of converible notes, net (dollars in thousands)		$	—			$	—		$	—		—	%		$	—			$	(5,623	)		$	5,623		(100.0	)%
Percentage of Revenue			—	%			%									—	%			(3.5	)%

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.

 

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Loss on short-term investments, net :

 

		Three Months Ended							$ Change			% Change			Nine Months Ended								$ Change			% Change
		March 28, 2010				March 29, 2009									March 28, 2010				March 29, 2009
Loss on short-term investments, net (dollars in thousands)		$	—			$	—		$	—		—	%		$	—			$	(1,368	)		$	1,368		(100.0	)%
Percentage of Revenue			—	%			%									—	%			(0.9	)%

The net loss on short-term investments recognized in the first three and nine months of fiscal 2009 is attributable to an “other than temporary” loss of $1.5 million related to corporate debt securities and mutual funds related to our deferred compensation plan, 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.

Interest income:

 

		Three Months Ended								$ Change			% Change			Nine Months Ended								$ Change				% Change
		March 28, 2010				March 29, 2009										March 28, 2010				March 29, 2009
Interest income ( dollars in thousands )		$	350			$	322			$	28		8.7	%		$	1,316			$	1,581			$	(265	)		(16.8	)%
Percentage of Revenue			0.6	%			0.6	%									0.8	%			1.0	%

Interest income decreased by $0.3 million in the first nine months of fiscal 2010 compared to the same period in the prior year due to lower interest rates.

Interest expense:

 

		Three Months Ended								$ Change				% Change			Nine Months Ended								$ Change			% Change
		March 28, 2010				March 29, 2009											March 28, 2010				March 29, 2009
Interest expense ( dollars in thousands )		$	(1,318	)		$	(1,243	)		$	(75	)		6.0	%		$	(3,862	)		$	(4,102	)		$	240		(5.9	)%
Percentage of Revenue			(2.3	)%			(2.2	)%										(2.3	)%			(2.6	)%

Interest expense decreased $0.2 million in the first nine months 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 $2.3 million in the first nine months of both fiscal 2010 and fiscal 2009.

Income taxes:

 

		Three Months Ended								$ Change			% Change			Nine Months Ended								$ Change			% Change
		March 28, 2010				March 29, 2009										March 28, 2010				March 29, 2009
Income tax expense ( dollars in thousands )		$	1,648			$	292			$	1,356		464.4	%		$	3,018			$	991			$	2,027		205	%
Percentage of Revenue			2.9	%			0.5	%									1.8	%			0.6	%

Third Quarter of Fiscal 2010 : Our income tax provision was $1.6 million in the third quarter of fiscal 2010, compared to $0.3 million in the corresponding quarter of fiscal 2009. Our effective tax rate in the third quarter of fiscal 2010 was 30.9 % on earnings before income taxes of $5.3 million, compared to an effective tax rate of 0.6% on losses before income taxes of $46.5 million in the corresponding period of fiscal 2009. The tax rate in the third quarter of fiscal 2010 was favorably impacted by increased research and development credits from the prior year, based on tax returns recently filed for fiscal 2009. The tax rate in the third quarter of fiscal 2009 was impacted by the impairment of goodwill, which provided no tax benefit. The tax rate in the third quarter of fiscal 2009 was also impacted by a state law change, which increased the provision in the quarter the state law was enacted.

First Nine Months of Fiscal 2010: Our income tax provision was $3.0 million in the first nine months of fiscal 2010, compared to a $1.0 million provision in the corresponding period of fiscal 2009. Our effective tax rate in the first nine months of fiscal 2010 was 33.0 % on earnings before income taxes of $9.1 million, compared to an effective tax rate of 2.2% on losses before income taxes of $44.8 million in the corresponding period of fiscal 2009. The tax rate in the first nine months of fiscal 2009 was impacted by the impairment of goodwill, which provided no tax benefit. The tax rate and provision are not readily comparable because the prior year goodwill impairment generated a large loss before income taxes, while in the first nine months of fiscal 2010, we reported $9.1 million as earnings before income taxes.

 

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Loss from discontinued operations:

 

		Three Months Ended								$ Change			% Change			Nine Months Ended								$ Change			% Change
		March 28, 2010				March 29, 2009										March 28, 2010				March 29, 2009
Income (loss) from discontinued operations, net of tax ( in thousands )		$	804			$	(358	)		$	1,162		(324.6	)%		$	38			$	(1,428	)		$	1,466		(103	)%
Percentage of Revenue			1.4	%			(0.6	)%									—	%			(0.9	)%

In the third quarter of fiscal 2010, we completed the sale of our QoE business. The $1.2 million increase in income from discontinued operations in the third quarter of fiscal 2010 and $1.5 million increase in income from discontinued operations in the first nine months of fiscal 2010 compared to the same periods in fiscal 2009 are mainly attributable to the gain on sale of discontinued operations of $0.9 million, net of income taxes.

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 third 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 $42.9 million as of March 28, 2010, compared to $46.9 million as of June 28, 2009. The $4.0 million decline in backlog from June 28, 2009 is consistent with normal seasonal patterns in our Communications business. Our backlog, which is shippable within the next six months, was $31.6 million as of March 28, 2010, compared to $42.1 million as of June 28, 2009.

Government Contract Revenue:

As of March 28, 2010, we had approximately $10.3 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 28, 2009. These amounts have been included in our sales backlog discussed above.

Liquidity and Capital Resources

As of March 28, 2010, working capital was $182.9 million compared to $169.1 million as of June 28, 2009. As of March 28, 2010, the combined balances of cash and cash equivalents and short-term investments was $133.5 million compared to $112.8 million as of June 28, 2009.

Net cash provided by operating activities in the first nine months of fiscal 2010 was $25.5 million. The net cash provided by operating activities was driven by net income of $6.2 million and non-cash charges of: $5.2 million of depreciation and amortization expenses, $2.6 million in deferred income taxes, $2.6 million of stock-based compensation expense, $2.3 million in non-cash interest expense, $1.2 million related to the provision for excess and obsolete inventory, $0.9 million related to the gain on sale of discontinued operations and a net $0.3 million for other non-cash adjustments to net income, for a total of $19.6 million of operating cash inflows. Changes in working capital assets and liabilities increased cash flows from operations by approximately $6.0 million, comprised of a $5.5 million decrease in accounts receivable, $1.9 million decrease in prepaids and other assets, $0.3 million decrease in inventories, and a $3.9 million increase in other accrued liabilities, partially offset by a $3.4 million decrease in accrued compensation and $2.2 million decrease in accounts payable. The $49.2 million net cash used for investing activities in the first nine months of fiscal 2010 was attributable to $79.8 million in purchases of short-term investments and $6.7 million in purchases of property and equipment, partially offset by $35.4 million in maturities of short-term investments and $1.9 million cash proceeds from the sale of QoE.

Our days sales outstanding in accounts receivable was 59 days as of March 28, 2010, compared to 64 days as of June 28, 2009.

 

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Contingencies

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

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued authoritative guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant non-observable inputs (Level 3 fair value measurements). The guidance became effective for us in the quarter ended March 28, 2010. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

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 currently effective for us. The adoption of this pronouncement did not have an impact on our condensed consolidated financial statements, but has impacted 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.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Exposure

As of March 28, 2010, we had cash and cash equivalents of $49.1 million and short-term investments of $84.4 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 March 28, 2010, 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 interest of 3.25%, which have no interest rate risk impact to our business.

 

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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 March 28, 2010, 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 were effective to ensure that information that we are required to disclose in reports that we file or submit under the Exchange Act was (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended March 28, 2010 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.

We added the following risk factor in the third quarter of fiscal 2010:

If we fail to properly transition our manufacturing currently performed at our Puerto Rico facility to our contract manufacturer, we may experience shipment delays, cost overruns, excess inventory and/or other problems, which may adversely impact our business and operating results, and we will be dependent on this contract manufacturer

Prior to the fourth quarter of 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 is our largest manufacturing facility, to Sanmina-SCI.

We expect to complete this transition by the fourth quarter of fiscal 2011. The transition will be inherently difficult. If the transition does not go as expected, it could result in the following, each of which could have an adverse effect on our business and operating results and our business reputation:

 

•

delay of shipments;

 

•

unexpected cost overruns;

 

•

overstock of inventory as a result of building excessive buffer stock; and

 

•

quality issues with outsourced products.

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

 

•

less control over product quality, leading to product reliability problems;

 

•

increased costs and/or product shipment delays; and

 

•

any financial problems at Sanmina-SCI either limiting supply or increasing our costs.

In addition, we cannot assure you that Sanmina-SCI will continue to be willing and able to meet our requirements for our outsourced operations, which could have an adverse effect on our business and 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 March 28, 2010:

 

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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
December 28, 2009 through January 24, 2010		4,399		$	5.42		—		1,495,338
January 25, 2010 through February 21, 2010		—		$	—		—		1,495,338
February 22, 2010 through March 28, 2010		—		$	—		—		1,495,338
Total		4,399		$	5.42		—

No stock was repurchased in the third quarter of fiscal 2010 as part of the repurchase program. As of March 28, 2010, the total number of shares available for repurchase under the repurchase program authorized by the Board of Directors was approximately 1.5 million.

A total of 4,399 shares were repurchased by us in the third quarter of fiscal 2010 for an aggregate price of approximately $24,000 to cover the cost of withholding of personal income taxes on vested restricted stock.

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

 

Item 4.

[RESERVED.]

 

Item 5.

Other Information

Not applicable.

Item 6. Exhibits

 

Exhibit Number		Description of Exhibits
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: May 7, 2010				By:		/s/    D AVID G. C ÔTÉ
						Dave G. Côté
						Chief Executive Officer (Principal Executive Officer) and Director
DATE: May 7, 2010				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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