Table of Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark One)
x
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the
quarterly period ended September 28, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from
to
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Commission file number 0-02287
SYMMETRICOM,
INC.
(Exact name of registrant as specified in our
charter)
Delaware
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No. 95-1906306
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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2300 Orchard
Parkway, San Jose, California 95131-1017
(Address of principal executive offices)
Registrants
telephone number:
(408) 433-0910
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
o
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
o
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Accelerated
filer
x
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Non-accelerated
filer
o
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Smaller
reporting company
o
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(Do not check if a
smaller reporting company)
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Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
x
Indicate number of shares outstanding of each of the
issuers classes of common stock, as of the latest practical date:
Class
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Outstanding
as of October 31, 2008
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Common Stock
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44,472,412
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Table of Contents
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
SYMMETRICOM,
INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands, except par value)
(Unaudited)
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September 28,
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June 29,
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2008
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2008
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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88,014
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$
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142,419
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Short-term investments
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18,383
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21,910
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Accounts receivable, net of allowance for
doubtful accounts of $733 and $731
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36,378
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36,682
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Inventories, net
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40,339
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38,273
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Prepaids and other current assets
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15,006
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14,402
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Total current assets
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198,120
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253,686
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Property, plant and equipment, net
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23,990
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25,036
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Goodwill
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48,144
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48,144
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Other intangible assets, net
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6,721
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7,191
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Deferred taxes and other assets
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41,689
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44,512
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Total assets
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$
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318,664
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$
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378,569
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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10,647
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$
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9,018
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Accrued compensation
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16,252
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13,582
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Accrued warranty
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3,622
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3,801
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Other accrued liabilities
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9,363
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11,233
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Current maturities of long-term obligations
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1,006
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64,515
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Total current liabilities
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40,890
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102,149
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Long-term obligations
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59,898
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59,855
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Deferred income taxes
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426
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426
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Total liabilities
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101,214
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162,430
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Commitments and contingencies (Notes 6 and
11)
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Stockholders equity:
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Preferred stock, $0.0001 par value; 500
shares authorized, none issued
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Common stock, $0.0001 par value; 70,000
shares authorized, 49,380 shares issued and 44,482 outstanding at
September 28, 2008; 49,395 shares issued and 44,925 outstanding at
June 29, 2008
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180,916
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182,201
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Accumulated other comprehensive loss
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(62
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)
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(60
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)
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Retained earnings
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36,596
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33,998
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Total stockholders equity
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217,450
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216,139
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Total liabilities and stockholders equity
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$
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318,664
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$
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378,569
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See notes to the
unaudited condensed consolidated financial statements.
3
Table of Contents
SYMMETRICOM,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
(Unaudited)
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Three Months Ended
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September 28,
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September 30,
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2008
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2007
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Net revenue
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$
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55,898
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$
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50,735
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Cost of products and services
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26,609
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28,027
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Amortization of purchased technology
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368
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805
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Integration and restructuring charges
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3
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Gross profit
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28,921
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21,900
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Operating expenses:
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Research and development
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7,304
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7,286
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Selling, general and administrative
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15,679
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15,516
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Amortization of intangible assets
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103
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260
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Integration and restructuring charges
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585
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293
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Operating income (loss)
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5,250
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(1,455
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)
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Loss on repayment of convertible notes, net
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(522
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)
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Loss on short-term investments, net
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(473
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)
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Interest income
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768
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2,210
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Interest expense
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(765
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)
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(1,195
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)
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Income (loss) before income taxes and
discontinued operations
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4,258
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(440
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)
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Income tax provision (benefit)
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1,660
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(129
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)
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Income (loss) from continuing operations
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2,598
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(311
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)
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Gain from discontinued operations, net of
tax
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68
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Net income (loss)
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$
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2,598
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$
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(243
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)
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Earnings (loss) per sharebasic:
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Earnings (loss) from continuing operations
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$
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0.06
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$
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(0.01
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)
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Gain from discontinued operations
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Net earnings (loss)
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$
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0.06
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$
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(0.01
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Weighted average shares outstandingbasic
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43,964
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45,474
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Earnings (loss) per sharediluted:
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Earnings (loss) from continuing operations
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$
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0.06
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$
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(0.01
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)
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Gain from discontinued operations
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Net earnings (loss)
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$
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0.06
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$
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(0.01
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)
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Weighted average shares outstandingdiluted
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44,582
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45,474
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See notes to the
unaudited condensed consolidated financial statements.
4
Table of Contents
SYMMETRICOM,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
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Three Months Ended
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September 28,
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September 30,
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2008
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2007
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Cash flows from operating activities:
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Net income (loss)
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$
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2,598
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$
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(243
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)
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Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
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Depreciation and amortization
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2,131
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2,537
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Deferred income taxes
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1,242
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(551
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)
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Loss on investments
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473
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Loss on repayment of convertible notes
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522
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Loss on disposal of fixed assets
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415
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Stock-based compensation
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1,006
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1,587
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Stock option excess income tax benefit
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(1
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)
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Changes in assets and liabilities, net of
effects of acquisitions:
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Accounts receivable
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304
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6,242
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Inventories
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(2,066
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)
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(2,894
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)
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Prepaids and other assets
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(531
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)
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(1,392
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)
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Accounts payable
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1,660
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(2,741
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)
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Accrued compensation
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2,670
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(528
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)
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Other accrued liabilities
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(2,005
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)
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1,079
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Net cash provided by operating activities
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8,419
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3,095
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Cash flows from investing activities:
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Purchases of short-term investments
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(112
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)
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(24,364
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)
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Maturities of short-term investments
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3,358
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42,229
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Purchases of plant and equipment
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(1,060
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)
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(1,025
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)
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Purchased technology related costs
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(36
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)
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Net cash provided by investing activities
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2,186
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16,804
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Cash flows from financing activities:
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Repayment of long-term obligations
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(390
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)
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(338
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)
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Proceeds from issuance of common stock
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103
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47
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Stock option excess income tax benefit
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1
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Repurchase of common stock
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(2,128
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)
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(4,944
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)
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Repayment of convertible notes
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(62,489
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)
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Net cash used for financing activities
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(64,904
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)
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(5,234
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)
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Effect of exchange rate changes in cash
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(106
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)
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(178
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)
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Net increase (decrease) in cash and cash
equivalents
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(54,405
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)
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14,487
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Cash and cash equivalents at beginning of
period
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142,419
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37,587
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Cash and cash equivalents at end of period
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$
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88,014
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$
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52,074
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Non-cash investing and financing
activities:
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|
|
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Unrealized gain (loss) on securities, net
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$
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104
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$
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(58
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)
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Plant and equipment purchases included in
accounts payable
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139
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516
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Cash payments for:
|
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Interest
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|
$
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255
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|
$
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75
|
|
Income taxes
|
|
96
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|
734
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|
See notes to the
unaudited condensed consolidated financial statements.
5
Table of Contents
SYMMETRICOM,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation, Summary of Significant
Accounting Policies and Recently Issued Accounting Pronouncements
The
condensed consolidated financial statements of Symmetricom, Inc. (Symmetricom,
we, us, the Company, or our) included herein are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of the management, necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
periods presented. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in Symmetricoms Annual Report on Form 10-K for the year
ended June 29, 2008. The results of operations for the three months ended September 28,
2008 are not necessarily indicative of the results to be anticipated for the
entire fiscal year ending June 28, 2009.
The
condensed consolidated balance sheet as of June 29, 2008 has been derived
from the audited financial statements as of that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
Fiscal Quarter
Our
fiscal quarter is 13 weeks ending on the Sunday closest to the end of the
calendar quarter.
Summary
of Significant Accounting
Policies
Revenue
Recognition
We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, our
price is fixed or determinable and collectibility is reasonably assured. Our
standard arrangement for our domestic and international customers includes a
signed purchase order or contract and no right of return of delivered products.
Revenue is recognized net of any taxes collected from customers and
subsequently remitted to governmental authorities.
Occasionally our customers may request that certain
transactions be on a bill and hold basis. For these transactions, we recognize
revenue in accordance with SAB 104.
We assess collectibility based on the
creditworthiness of the customer and past transaction history. We perform
periodic credit evaluations of our customers and do not require collateral from
our customers. However, for many of our international customers, we require an
irrevocable letter of credit to be issued by the customer before the purchase
order is accepted. If we determine that collection of the invoice is not
reasonably assured, we recognize the revenue at the time that collection
becomes reasonably assured, which is generally upon the receipt of cash. We
commonly have transactions that involve sales of both product and services to
our customers. Product revenue is generated from the sale of synchronization
and timing equipment with embedded software that is essential to product
functionality. We account for these transactions in accordance with the rules applicable
to software revenue recognition. Service revenue is recognized as the services
are performed provided collection of the related receivable is reasonably
assured. Our sales to distributors are made under agreements allowing for
returns or credits under certain circumstances. Accordingly, we defer an
estimate of returns from distributors based on a historical average of
distributor returns. We record commission expense when orders are shipped, at
which time the commission is both earned and payable.
Revenue from contracts that require development and
manufacture in accordance with customer specifications and have a lengthy
development period may be categorized into two types: firm fixed price and
cost-plus reimbursement. Revenue is recognized under the fixed price contracts
using the percentage of completion method (cost-to-cost basis), principally
based upon the costs incurred relative to the total estimated costs at
completion on the individual contracts. Any anticipated losses on contracts are
charged to operations as soon as they are determinable. Revenue recognized
under cost plus contracts is recognized on the basis of direct and indirect
costs incurred plus a negotiated profit calculated as a percentage of costs or
as a performance based award fee. Revenue from long-term contracts is reviewed
periodically, with adjustments recorded in the period in which the revisions
are made. A contract is determined to be substantially complete when the
physical deliverables are completed, shipped and accepted. Unbilled receivables
totaled $4.3 million as of September 28, 2008. All of unbilled
receivables as of September 28, 2008 are expected to be collected in
fiscal 2009. Any anticipated losses on contracts are charged to operations as
soon as they are determinable.
Recently Issued Accounting Pronouncements
In October 2008, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position FAS 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP
157-3). FSP 157-3 clarified the application of Statement of Financial
Accounting Standards (SFAS) 157,
Fair Value Measurements. FSP 157-3 demonstrated how the fair value of a
financial asset is determined when the market for that financial asset is
inactive. FSP 157-3 was effective upon issuance, including prior periods for
which financial statements had not been issued. The implementation of this
standard did not have an impact on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles. This statement
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States. We do not expect
that this statement will result in a change to any of our current accounting
practices.
In April 2008, the FASB adopted FASB Staff
Position FAS No. 142-3, Determination of the Useful Life of Intangible
Assets, amending the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets.
This FASB Staff Position is effective for intangible assets acquired on or
after June 29, 2009. We are currently evaluating the impact of the
implementation of FASB Staff Position SFAS No. 142-3 on our consolidated
financial statements.
In February 2008, the FASB issued FASB Staff Position FAS 157-2,
Effective Date of FASB Statement No. 157, which delays the effective date
of SFAS No. 157 to June 29, 2009 for us, for all nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually). We believe the adoption of the delayed items of SFAS No. 157
will not have a material impact on our financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activitiesan amendment of
SFAS No. 133. This statement changes the disclosure requirements for
derivative instruments and hedging activities. SFAS No. 161 will require
us to provide enhanced disclosures about (a) how and why we use derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect our financial position,
financial performance, and cash flows. SFAS No. 161 is effective for us
beginning June 29, 2009. We do not believe that SFAS No. 161 will
have a material impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statementsan amendment of
ARB No. 51. This Statement amends ARB 51, Consolidated Financial Statements,
to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that
a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial
6
Table of Contents
statements. It requires consolidated net income to
be reported at amounts that include the amounts attributable to both the parent
and the noncontrolling interest. This Statement establishes a single method of
accounting for changes in a parents ownership interest in a subsidiary that do
not result in deconsolidation. SFAS No. 160 is effective for our fiscal
year beginning June 29, 2009. We do not believe that SFAS No. 160
will have a material impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations (SFAS No. 141(R)). The standard
changes the accounting for business combinations including the measurement of
acquirer shares issued in consideration for a business combination, the
recognition of contingent consideration, the accounting for pre-acquisition
gain and loss contingencies, the recognition of capitalized in-process research
and development, the accounting for acquisition-related restructuring cost
accruals, the treatment of acquisition related transaction costs and the
recognition of changes in the acquirers income tax valuation allowance. SFAS No. 141(R) is
effective for us beginning June 29, 2009. We are currently assessing the
potential impact that adoption of SFAS No. 141(R) would have on our
consolidated financial statements.
Note 2. Income Taxes
Symmetricom reported in its Form 10-K for the
year ended June 29, 2008, that its subsidiary Symmetricom Puerto Rico Ltd
had applied to the Internal Revenue Service, or IRS, for a private letter
ruling related to its tax-free restructuring in July 2006.
Symmetricom Puerto Rico Ltd received a ruling from the IRS dated September 19,
2008 confirming the tax-free treatment.
Note 3. Financial Instruments
We adopted SFAS No. 157 on June 30, 2008
for all financial assets and liabilities and nonfinancial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). SFAS No. 157 defines
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements.
SFAS No. 157 defines fair value as the price
that would be received upon sale of an asset or paid upon transfer of a
liability in an orderly transaction between market participants at the
measurement date and in the principal or most advantageous market for that
asset or liability. The fair value should be calculated based on assumptions
that market participants would use in pricing the asset or liability, not on
assumptions specific to the entity. In addition, the fair value of liabilities
should include consideration of non-performance risk including our own credit
risk.
In addition to defining fair value, SFAS No. 157
expands the disclosure requirements around fair value and establishes a fair
value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into
three levels based on the extent to which inputs used in measuring fair value
are observable in the market. Each fair value measurement is reported in one of
the three levels which is determined by the lowest level input that is
significant to the fair value measurement in its entirety. These levels are:
·
Level 1 inputs
are based upon unadjusted quoted prices for identical instruments traded in
active markets.
·
Level 2 inputs
are based upon quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are
observable in the market or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
·
Level 3 inputs
are generally unobservable and typically reflect managements estimates of
assumptions that market participants would use in pricing the asset or
liability. The fair values are therefore determined using model-based
techniques that include option pricing models, discounted cash flow models, and
similar techniques.
7
Table of Contents
Financial
assets measured at fair value on a recurring basis consisted of the following
types of instruments as of September 28, 2008:
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
Active Markets for
|
|
Significant Other
|
|
|
|
Balance as of
|
|
Identical Assets
|
|
Observable Inputs
|
|
|
|
September 28, 2008
|
|
(Level 1)
|
|
(Level 2)
|
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
Bank deposits and money market funds
|
|
$
|
86,380
|
|
$
|
86,380
|
|
$
|
|
|
Repurchase agreements
|
|
1,634
|
|
1,634
|
|
|
|
Total cash and cash equivalents
|
|
88,014
|
|
88,014
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
14,911
|
|
$
|
|
|
$
|
14,911
|
|
Mutual funds
|
|
3,472
|
|
3,472
|
|
|
|
Total short-term investments
|
|
18,383
|
|
3,472
|
|
14,911
|
|
Total financial assets
|
|
$
|
106,397
|
|
$
|
91,486
|
|
$
|
14,911
|
|
Our valuation techniques used to measure the fair
values of our money market funds, repurchase agreements and mutual funds were
derived from quoted market prices as active markets for these instruments
exist. Our valuation techniques used to measure the fair values of corporate
debt securities were derived from non-binding market consensus prices that are
corroborated by observable market data.
Short-term investments
Components
of short-term investments were as follows:
|
|
September 28,
|
|
June 29,
|
|
|
|
2008
|
|
2008
|
|
|
|
(In thousands)
|
|
Corporate securities
|
|
$
|
14,911
|
|
$
|
15,331
|
|
Mutual funds
|
|
3,472
|
|
3,427
|
|
Other investments
|
|
|
|
3,152
|
|
|
|
$
|
18,383
|
|
$
|
21,910
|
|
Loss on investments
In the
fourth quarter of fiscal 2007, we purchased asset-backed commercial paper with
a $7.8 million par value maturing on March 13, 2008, and classified
this as a short-term investment. At the time of purchase, the investments
portfolio consisted primarily of triple-A rated assets, with sub-prime loan
assets making up approximately 23% of the investment. Subsequently, the
structured investment vehicle (SIV) issuing the commercial paper was declared
insolvent and entered receivership. On January 8, 2008, our investment
manager advised us that the fair value of this investment had declined, and
that an impairment loss should be considered other than temporary based on
discussions with the receiver and potential options expected to be made
available to senior debt holders of which Symmetricom was one. Our investment
manager determined the fair value of the investment using pricing levels of the
underlying portfolio by three different broker/dealers. Management then made an
independent valuation assessment of similar securities using the ABX index
(which is an index to track the performance of mortgage backed securities), to
confirm that the valuation results from our investment manager were reasonable.
Based on this assessment of fair value, Symmetricom recognized a loss of
$3.2 million related to this investment during fiscal year 2008. After the
receivers sold the SIV to an investment bank, we received a cash distribution
of $1.4 million, relating to the cash portion of the fund, in the fourth
quarter of fiscal 2008. In the first quarter of fiscal 2009, the investment
bank offered investors the option of cashing out of the fund or reinvesting in
a new investment vehicle. We elected to cash out and received a final capital
distribution of $3.3 million in the first quarter of fiscal 2009. As a
result of the final settlement with this investment, including a recovery on
previously recognized losses, we recognized a $0.1 million gain in the first
quarter of fiscal 2009.
In the
first quarter of fiscal 2009, we determined that three corporate debt
instruments, whose market values had declined, were other than temporarily
impaired. We made this determination
based on the uncertainty and volatility of the market, particularly since these
debt instruments were related to financial institutions, the failure of several
other large
8
Table of Contents
financial institutions and the continued downgrades
from credit rating agencies. As a result
of this assessment, we recognized a $0.6 million other than temporary loss in
the first quarter of fiscal 2009. This
amount was partially offset by the previously mentioned $0.1 million gain,
resulting in net loss on short-term investments of $0.5 million for the first
quarter of fiscal 2009.
Note 4. Inventories
Components
of inventories were as follows:
|
|
September 28, 2008
|
|
June 29, 2008
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
19,130
|
|
$
|
16,753
|
|
Work-in-process
|
|
9,807
|
|
10,162
|
|
Finished goods
|
|
11,402
|
|
11,358
|
|
Inventories
|
|
$
|
40,339
|
|
$
|
38,273
|
|
Note 5. Goodwill and Other Intangible Assets
Goodwill
Goodwill
has not changed from the amount as of June 29, 2008.
Other Intangible Assets
Other
intangible assets as of September 28, 2008 and June 29, 2008 consist
of:
|
|
Gross
|
|
|
|
Net
|
|
|
|
Carrying
|
|
Accumulated
|
|
Intangible
|
|
|
|
Amount
|
|
Amortization
|
|
Assets
|
|
|
|
(in thousands)
|
|
Purchased technology
|
|
$
|
24,357
|
|
$
|
19,380
|
|
$
|
4,977
|
|
Customer lists, trademarks, other
|
|
7,025
|
|
4,811
|
|
2,214
|
|
|
|
|
|
|
|
|
|
Total as of June 29, 2008
|
|
$
|
31,382
|
|
$
|
24,191
|
|
$
|
7,191
|
|
|
|
|
|
|
|
|
|
Purchased technology
|
|
$
|
24,357
|
|
19,749
|
|
4,608
|
|
Customer lists, trademarks, other
|
|
7,025
|
|
4,912
|
|
2,113
|
|
|
|
|
|
|
|
|
|
Total as of September 28, 2008
|
|
$
|
31,382
|
|
$
|
24,661
|
|
$
|
6,721
|
|
9
Table of Contents
The
estimated future amortization expense by fiscal year is as follows:
Fiscal year:
|
|
(in thousands)
|
|
|
|
|
|
2009 (remaining nine months)
|
|
$
|
1,412
|
|
2010
|
|
1,573
|
|
2011
|
|
1,307
|
|
2012
|
|
726
|
|
2013
|
|
502
|
|
Thereafter
|
|
1,201
|
|
|
|
|
|
Total amortization
|
|
$
|
6,721
|
|
Intangible
asset amortization expense for the first three months of fiscal 2009 and 2008
was $0.5 million and $1.1 million, respectively.
Note 6. Long-term Obligations
Long-term
obligations consist of:
|
|
September 28, 2008
|
|
June 29, 2008
|
|
|
|
(In thousands)
|
|
Long-term obligations:
|
|
|
|
|
|
Convertible subordinated notes
|
|
$
|
56,880
|
|
$
|
120,000
|
|
Deferred revenue
|
|
1,293
|
|
1,297
|
|
Capital lease
|
|
896
|
|
1,286
|
|
Lease accrual
|
|
780
|
|
706
|
|
Income tax
|
|
690
|
|
690
|
|
Post-retirement benefits
|
|
223
|
|
240
|
|
Conditional grant
|
|
109
|
|
109
|
|
Lease loss accrual, net
|
|
33
|
|
42
|
|
Lesscurrent maturities
|
|
(1,006
|
)
|
(64,515
|
)
|
Total
|
|
$
|
59,898
|
|
$
|
59,855
|
|
Convertible Subordinated Notes
On June 30,
2008, we offered to purchase for cash, on a pro rata basis, $63.1 million
aggregate principal amount of our $120.0 million convertible subordinated notes
(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 includes interest of $0.3 million. After the
purchase pursuant to the offer, approximately $56.9 million aggregate
principal amount of the Notes remains outstanding. In connection with the
completion of the tender offer, the holder of a majority of the outstanding
notes prior to the offer waived certain defaults alleged to have occurred under
the indenture and rescinded an acceleration notice received by Symmetricom on May 7,
2008. We may repurchase some or all of our remaining outstanding Notes.
In
connection with the issuance of the Notes, Symmetricom initially recorded bond
fees of approximately $4.0 million, which were amortized using the
straight-line method over a period of seven years ending in fiscal 2012. As of June 29,
2008, $2.2 million of unamortized costs remained. As a result of the
tender offer, $1.1 million of this unamortized cost was expensed in the
first quarter of fiscal 2009. This, combined with a $0.6 million gain relating
to difference between the principal amount and the purchase price of the Notes,
resulted in a $0.5 million net loss on repayment of convertible notes recognized
in the first quarter of fiscal 2009.
10
Table of Contents
Note 7. Stockholders Equity
Stock Award Activity
For the
three months ended September 28, 2008, we granted non performance-based
options to purchase 1.2 million shares of Symmetricoms common stock, and we
did not grant any shares of restricted stock.
|
|
|
|
Non Performance-based Options
Outstanding
|
|
Performance-based Options
Outstanding
|
|
Restricted Stock Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Available
|
|
Number of
|
|
Average
|
|
Number of
|
|
Average
|
|
Number of
|
|
Grant-Date
|
|
|
|
For Grant
|
|
Shares
|
|
Exercise Price
|
|
Shares
|
|
Exercise Price
|
|
Shares
|
|
Fair Value
|
|
|
|
(In thousands, except per share amounts)
|
|
Balances at
June 29, 2008
|
|
2,183
|
|
4,964
|
|
$
|
7.10
|
|
195
|
|
$
|
8.53
|
|
994
|
|
$
|
6.62
|
|
Granted - options
|
|
(1,150
|
)
|
1,150
|
|
4.78
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(27
|
)
|
3.85
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
(240
|
)
|
6.67
|
|
Canceled
|
|
316
|
|
(266
|
)
|
7.01
|
|
(50
|
)
|
8.53
|
|
(41
|
)
|
8.95
|
|
Expired
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at
September 28, 2008
|
|
1,327
|
|
5,821
|
|
$
|
6.66
|
|
145
|
|
$
|
8.53
|
|
713
|
|
$
|
6.47
|
|
The total
number of in-the-money options outstanding and exercisable as of September 28,
2008 was as follows:
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Weighted
|
|
9/28/2008
|
|
Intrinsic
|
|
Aggregate
|
|
|
|
Number of
|
|
Contractual
|
|
Average
|
|
Closing
|
|
Value
|
|
Intrinsic
|
|
Option
|
|
Shares
|
|
Life
|
|
Exercise Price
|
|
Price
|
|
Per Share
|
|
Value
|
|
|
|
(In thousands)
|
|
(In years)
|
|
|
|
|
|
|
|
(In thousands)
|
|
Outstanding at September 28, 2008
|
|
2,185
|
|
4.33
|
|
$
|
4.46
|
|
$
|
4.92
|
|
$
|
0.46
|
|
$
|
996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 28, 2008
|
|
525
|
|
3.22
|
|
$
|
4.11
|
|
$
|
4.92
|
|
$
|
0.81
|
|
$
|
424
|
|
The
aggregate intrinsic value in the preceding table represents the total pre-tax
value of stock options outstanding as of September 28, 2008, based on our
common stock closing price of $4.92 on September 28, 2008, which would
have been received by the option holders had all option holders exercised their
options as of that date.
For the quarters
ended
September 28, 2008
and September 30,
2007, the weighted average estimated fair values of
options granted was $1.93 and $2.05, respectively. Our calculations were
made using the Black-Scholes option-pricing model. The fair value of
Symmetricoms stock-based awards to employees was estimated assuming no
expected dividend and the following weighted-average assumptions for the first
three months of fiscal 2009 and 2008, as follows:
|
|
Three months ended
|
|
|
|
September 28,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
Expected life (in years)
|
|
3.8
|
|
3.8
|
|
Risk-free interest rate
|
|
2.6
|
%
|
4.5
|
%
|
Volatility
|
|
45.9
|
%
|
45.6
|
%
|
We
recorded stock-based compensation expense of $1.0 million and $1.6 million in
the first quarter of fiscal 2009 and 2008, respectively. At September 28,
2008, the total cumulative compensation cost related to unvested stock-based
awards granted to employees, directors and consultants under the Companys
stock option plans but not yet recognized was approximately $5.3 million, net
of estimated forfeitures of $0.9 million. This cost will be amortized on an
accelerated method basis over a period of approximately 1.6 years and will be
adjusted for subsequent changes in estimated forfeitures.
11
Table
of Contents
Stock Repurchase Program
During
the first three months of fiscal 2009, we repurchased 0.4 million shares of
common stock pursuant to our repurchase program for an aggregate price of
approximately $1.8 million.
As of September 28,
2008, the total number of shares available for repurchase under the repurchase
program authorized by the Board of Directors was approximately 0.5 million. On September 29,
2008, the Companys Board of Directors authorized management to repurchase an
additional 2.0 million shares of Symmetricom common stock.
A further
66,562 shares were repurchased by us in the first quarter of fiscal 2009 for an
aggregate price of approximately $0.3 million to cover the cost of taxes on
vested restricted stock.
Note 8. Integration and Restructuring Charges
The
following tables show the details of the restructuring cost accruals included
in other accrued liabilities, which consist of facilities and severance costs,
at September 28, 2008 and June 29, 2008:
|
|
Balance at
|
|
|
|
|
|
Balance at
|
|
|
|
June 29,
|
|
Expense
|
|
|
|
September 28,
|
|
|
|
2008
|
|
Additions
|
|
Payments
|
|
2008
|
|
|
|
(in thousands)
|
|
Lease loss accrual (fiscal 2004)
|
|
$
|
86
|
|
$
|
|
|
$
|
(13
|
)
|
$
|
73
|
|
All other integration and restructuring
changes (fiscal 2004)
|
|
299
|
|
|
|
(26
|
)
|
273
|
|
Austin facility shutdown (fiscal 2008)
|
|
588
|
|
585
|
|
(551
|
)
|
622
|
|
Total
|
|
$
|
973
|
|
$
|
585
|
|
$
|
(590
|
)
|
$
|
968
|
|
The
balance of the $0.1 million lease loss accrual for facilities as of September 28,
2008 will be paid over the next five years.
We expect to incur additional integration and restructuring charges
amounting to $0.2 million related to outsourcing certain of our Puerto Rico
operations to China. Also, we expect to
incur additional integration and restructuring charges amounting to $0.7
million related to shutting down our Austin, Texas facility in addition to the
$0.6 million accrued as of September 28, 2008. As of September 28,
2008, we have vacated this facility, written off any leasehold improvements and
are attempting to sublease the property.
Note 9. Comprehensive Income (Loss)
Comprehensive
income is comprised of two components: net income and other comprehensive
income. Other comprehensive income refers to revenue, expenses, gains and
losses that under generally accepted accounting principles are recorded as an
element of stockholders equity but are excluded from net income. Other
comprehensive income is comprised of unrealized gains and losses, net of taxes,
on marketable securities categorized as available-for-sale and foreign currency
translation adjustments. The components of comprehensive income (loss), net of
tax, are as follows:
|
|
Three Months Ended
|
|
|
|
September 28,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
Net income (loss)
|
|
$
|
2,598
|
|
$
|
(243
|
)
|
Other comprehensive income (loss), net of
taxes:
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(106
|
)
|
(178
|
)
|
Unrealized gain (loss) on investments
|
|
104
|
|
(58
|
)
|
Other comprehensive income (loss)
|
|
(2
|
)
|
(236
|
)
|
Total comprehensive income (loss)
|
|
$
|
2,596
|
|
$
|
(479
|
)
|
Note 10. Net Earnings (Loss) Per Share
Basic
earnings (loss) per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period less unvested shares
of restricted common stock. Diluted earnings (loss) per share is calculated by
dividing net income by the weighted average number of common shares outstanding
and common equivalent shares from stock options, warrants and unvested
restricted stock using the treasury method, except when anti-dilutive.
12
Table of Contents
The
following table reconciles the number of shares utilized in the earnings (loss)
per share calculations:
|
|
Three Months Ended
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
|
|
(In thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
Net income (loss) from continuing
operations
|
|
$
|
2,598
|
|
$
|
(311
|
)
|
Gain from discontinued operations
|
|
|
|
68
|
|
Net income (loss)
|
|
$
|
2,598
|
|
$
|
(243
|
)
|
|
|
|
|
|
|
Shares (Denominator):
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
44,812
|
|
46,498
|
|
Weighted average common shares outstanding
subject to repurchase
|
|
(848
|
)
|
(1,024
|
)
|
Weighted average shares outstandingbasic
|
|
43,964
|
|
45,474
|
|
Weighted average dilutive share equivalents
from stock options and warrants
|
|
54
|
|
|
|
Weighted average common shares dilutive
subject to repurchase
|
|
564
|
|
|
|
Weighted average shares outstandingdiluted
|
|
44,582
|
|
45,474
|
|
Earnings per sharebasic:
|
|
|
|
|
|
Earnings (loss) from continuing operations
|
|
$
|
0.06
|
|
$
|
(0.01
|
)
|
Gain from discontinued operations
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
0.06
|
|
$
|
(0.01
|
)
|
Earnings per sharediluted:
|
|
|
|
|
|
Earnings (loss) from continuing operations
|
|
$
|
0.06
|
|
$
|
(0.01
|
)
|
Gain from discontinued operations
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
0.06
|
|
$
|
(0.01
|
)
|
The
following common stock equivalents were excluded from the net earnings (loss)
per share calculation as their effect would have been anti-dilutive:
|
|
Three Months Ended
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Stock options
|
|
4,855
|
|
5,224
|
|
Common shares subject to repurchase
|
|
|
|
1,027
|
|
Total shares of common stock excluded from
diluted net earnings (loss) per share calculation
|
|
4,855
|
|
6,251
|
|
Note 11. 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 remediated an area where the solvents had been
deposited on the ground and obtained regulatory approval for that remedial
activity. In 1996, an environmental investigation of the property detected
those same contaminants in groundwater in excess of then current regulatory
standards. The groundwater contamination has migrated to some adjacent
properties. We have entered into the Texas Natural Resource Conservation
Commissions 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 seeking an indemnity for the
contamination and a promise to remediate the contamination. On March 14,
2006, the adjacent property owner filed suit in Probate Court No. 1,
Travis County, Texas (Anna B. Miller, Individually and as Executrix of the
Estate of Robert L. Miller, et al. vs. Austron, Inc., et al.), seeking
damages. 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 have also
taken steps to begin work on the Miller property. As of September 28,
2008, we had an accrual of $0.3 million, included in other accrued
liabilities on the accompanying condensed consolidated balance sheets, for
remediation costs, appraisal fees and other ongoing monitoring costs.
13
Table of Contents
Shipments of Product with
Lead-free Solder
In the fourth quarter of
fiscal 2007 until the third quarter of fiscal 2008, we inadvertently shipped
certain products that included lead-free solder in the product backplanes to
two customers whose contracts specified that the products would be made with
lead solder. As of September 28, 2008, we have received a waiver from one
customer to use lead-free solder but not the other. The total sales value of
product shipped with lead-free solder to the customer that has not as yet
granted us the waiver is $1.2 million. Management believes that this
customer will not request that the parts be replaced and that our existing
warranty accrual is adequate to cover costs associated with any potential
product failures. Also, beginning in March 2008, new product shipments to
this customer included lead solder.
Other
Under the indemnification
provisions of our standard sales contracts, we agree to defend the customer
against third party claims asserting infringement of certain intellectual
property rights, which may include patents, copyrights, trademarks or trade
secrets, and to pay any judgments entered on such claims against the
reseller/customer. The exposure to us under these indemnification provisions is
generally limited to the total amount paid by the customer under the agreement.
However, certain agreements include indemnification provisions that could potentially
expose us to losses in excess of the amount received under the agreement. To
date, there have been no claims under such indemnification provisions. We
believe the estimated fair value of these indemnification agreements is not
material.
We are also a party to
certain other claims in the normal course of our operations. While the results
of these claims cannot be predicted with any certainty, we believe that the
final outcome of these matters will not have a material adverse effect on our
financial position and results of operations.
Note 12. Business Segment Information
Symmetricom
is organized into five reportable segments that are within two divisions. For
each of our reporting segments, we have separate financial information,
including gross profit amounts, which are evaluated regularly by the Chief
Operating Decision Maker in deciding how to allocate resources and in assessing
performance. We do not allocate assets or specific operating expenses to these
individual reporting segments. Therefore, the segment information reported here
includes only net revenue and gross profit.
The
following describes our two divisions:
Telecom Solutions Division
There
are four reportable segments within the Telecom Solutions Division:
·
Wireline Products
consist principally of Building Integrated
Timing Supply, or BITS, based on quartz, rubidium and Global Positioning System
(GPS) technologies. Our Wireline Products provide highly accurate and
uninterruptible timing to meet the synchronization requirements of telecommunication
networks.
·
Wireless/OEM Products
includes our OEM base station timing
products that are designed to deliver stable timing to cellular/PCS base
stations through a GPS receiver to capture cesium-based time signals produced
by GPS satellites.
·
Quality of Experience (QoE) Assurance
products are hardware
and software-based probes (and/or embedded agents) that are distributed
throughout an IP (Internet Protocol) network in order to monitor network and
application performance, and particularly to correlate how those factors impact
end users QoE. The primary application for these system-level solutions is for
IPTV (Internet Protocol Television), VoD (video on demand), ITV (Internet
television), and other IP-based video delivery mechanisms.
·
Global Services
offers a broad portfolio of services for our
customers around the world.
Timing, Test and Measurement Division
The
Timing, Test and Measurement Division products are precision time and frequency
systems that are important to communications systems of wireline, wireless,
satellite and computer network technologies for government, power utilities,
aerospace, defense, and enterprise markets.
14
Table of Contents
|
|
Three Months Ended
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
|
|
(In thousands)
|
|
Net revenue:
|
|
|
|
|
|
Telecom Solutions Division:
|
|
|
|
|
|
Wireline Products
|
|
$
|
27,772
|
|
$
|
20,515
|
|
Wireless/OEM Products
|
|
6,952
|
|
5,538
|
|
Global Services
|
|
4,051
|
|
4,284
|
|
Quality of Experience Assurance Division
|
|
226
|
|
155
|
|
Timing, Test and Measurement Division
|
|
16,897
|
|
20,243
|
|
Total net revenue
|
|
$
|
55,898
|
|
$
|
50,735
|
|
Cost of sales:
|
|
|
|
|
|
Telecom Solutions Division:
|
|
|
|
|
|
Wireline Products
|
|
$
|
9,097
|
|
$
|
9,754
|
|
Wireless/OEM Products
|
|
5,078
|
|
3,686
|
|
Global Services
|
|
3,023
|
|
3,233
|
|
Quality of Experience Assurance Division
|
|
123
|
|
37
|
|
Timing, Test and Measurement Division
|
|
9,288
|
|
11,317
|
|
Other cost of sales*
|
|
368
|
|
808
|
|
Total cost of sales
|
|
$
|
26,977
|
|
$
|
28,835
|
|
Gross profit:
|
|
|
|
|
|
Telecom Solutions Division:
|
|
|
|
|
|
Wireline Products
|
|
$
|
18,675
|
|
$
|
10,761
|
|
Wireless/OEM Products
|
|
1,874
|
|
1,852
|
|
Global Services
|
|
1,028
|
|
1,051
|
|
Quality of Experience Assurance Division
|
|
103
|
|
118
|
|
Timing, Test and Measurement Division
|
|
7,609
|
|
8,926
|
|
Other cost of sales*
|
|
(368
|
)
|
(808
|
)
|
Total gross profit
|
|
$
|
28,921
|
|
$
|
21,900
|
|
|
|
|
|
|
|
Gross margin:
|
|
|
|
|
|
Telecom Solutions Division:
|
|
|
|
|
|
Wireline Products
|
|
67.2
|
%
|
52.5
|
%
|
Wireless/OEM Products
|
|
27.0
|
%
|
33.4
|
%
|
Global Services
|
|
25.4
|
%
|
24.5
|
%
|
Quality of Experience Assurance Division
|
|
45.6
|
%
|
76.1
|
%
|
Timing, Test and Measurement Division
|
|
45.0
|
%
|
44.1
|
%
|
Other cost of sales as percentage of total
revenue*
|
|
(0.7
|
)%
|
(1.6
|
)%
|
Total gross margin
|
|
51.7
|
%
|
43.2
|
%
|
|
|
|
|
|
|
|
|
|
* Includes amortization of
purchased technology and applicable integration, and restructuring charges.
Note 13. Warranty
Changes in our accrued
warranty liability during the first three months of fiscal 2009 were as
follows:
|
|
(In thousands)
|
|
Product warranty at June 29, 2008
|
|
$
|
3,801
|
|
Provision for warranty
|
|
528
|
|
Accruals related to change in estimate
|
|
(88
|
)
|
Less: Actual warranty costs
|
|
(619
|
)
|
Product warranty at September 28, 2008
|
|
$
|
3,622
|
|
15
Table of Contents
Item 2.
Managements 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, the words expects, anticipates,
estimates, believes, plans, will, intend, can and similar
expressions are intended to identify forward-looking statements. These
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected.
These risks and uncertainties include, but are not limited
to, risks relating to general economic conditions in the markets we address and
the telecommunications market in general, risks related to the development of
our new products and services, the effects of competition and competitive
pricing pressure, uncertainties associated with changing intellectual property
laws, developments in and expenses related to litigation, increased competition
in our markets, inability to obtain sufficient amounts of key components, the
rescheduling or cancellations of key customer orders, the loss of a key
customer, the effects of new and emerging technologies, the risk that excess
inventory may result in write-offs, price erosion and decreased demand,
fluctuations in the rate of exchange of foreign currency, changes in our
effective tax rate, the impact on investor confidence due to material
weaknesses in our controls over financial reporting, potential short-term
investment losses and other risks due to credit market dislocation, changes in
accounting for convertible debt, market
acceptance of our new products and services, technological advancements,
undetected errors or defects in our products, the risks associated with our
international sales, geopolitical risks and risk of terrorist activities, the
risks associated with attempting to integrate other companies and businesses we
acquire, and the risks set forth below
in Part II, Item 1A, Risk
Factors.
These forward-looking statements speak only as of the date
hereof. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances or on which any such statement is based.
All references to Symmetricom, we, us, and our mean
Symmetricom, Inc. and its subsidiaries, except where it is made clear that
the term means only the parent company.
Overview
Symmetricom
is a leading supplier of precise timing standards to industry, government,
utilities, research centers and aerospace markets. We also supply QoE (Quality
of Experience) solutions that enable communication service providers to monitor
the performance, as perceived by end users, of IP-based video and other next
generation network applications. Timing and synchronization products and
services include network synchronization systems and timing elements used by
network operators and users, governments and professional services. Such
products play an important role in the operation, bandwidth utilization, and
quality of service of wireline, wireless and cable networks enabling our
customers to increase the reliability of their networks in todays evolving
communications environment.
Symmetricoms customers include worldwide
public network providers, incumbent local exchange carriers (ILECs), public
telephone and telegraph companies (PTTs), competitive local exchange carriers
(CLECs), other telephone companies, wireless service providers, cable
television operators, distributors and systems integrators, communications
original equipment manufacturers (OEMs), aerospace contractors, governments and
research facilities.
Critical Accounting Estimates
Our
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, which
require us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosures at the date
of our financial statements. On an ongoing basis, management evaluates its
estimates and judgments. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
An
accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly
uncertain at the time the estimate is made, if different estimates reasonably
could have been used, or if changes in the estimate that are reasonably likely
to occur could materially impact the financial statements. We believe that
there have been no significant changes during the three months ended September 28,
2008 to the items that we disclosed as our critical accounting policies and
estimates in Managements Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the fiscal
year ended June 29, 2008.
16
Table of Contents
Known Trends and Uncertainties Impacting Future Results of
Operations: Global Market and Economic
Conditions
In the
U.S., recent market and economic conditions have been unprecedented and
challenging with tighter credit conditions and slower growth through the first
quarter of fiscal 2009. For the
three-month period ended September 28, 2008, continued concerns about the
systemic impact of inflation, energy costs, geopolitical issues, the
availability and cost of credit, the U.S. mortgage market and a declining real
estate market in the U.S. have contributed to increased market volatility and
diminished expectations for the U.S. economy.
In the first quarter of fiscal 2009, added concerns fueled by the
federal government conservatorship of the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association, the declared
bankruptcy of Lehman Brothers Holdings Inc., the U.S. government provided loan
to American International Group Inc. and other federal government interventions
in the US credit markets lead to increased market uncertainty and instability
in both US and international capital and credit markets. These conditions, combined with volatile oil
prices, declining business and consumer confidence and increased unemployment,
have in recent weeks subsequent to the end of the quarter contributed to market
volatility of unprecedented levels.
As a
result of these market conditions, the cost and availability of credit has been
and may continue to be adversely affected by illiquid credit markets and wider
credit spreads. Concern about the
stability of the markets generally and the strength of counterparties
specifically has lead many lenders and institutional investors to reduce, and
in some cases, cease to provide funding to borrowers. Continued turbulence in the U.S. and
international markets and economies may adversely affect our liquidity and
financial condition, and the liquidity and financial condition of our
customers. If these market conditions
continue, they may limit our ability, and the ability of our customers, to
timely replace maturing liabilities, and access the capital markets to meet
liquidity needs, resulting in adverse effects on our financial condition and
results of operations.
17
Table of Contents
Results of Operations
The following table presents selected items in our condensed
consolidated statements of operations as a percentage of total revenues for the
three months ended September 28, 2008 and September 30, 2007:
|
|
Three Months Ended
|
|
|
|
September 28,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
Net revenue
|
|
|
|
|
|
Telecom Solutions Division:
|
|
|
|
|
|
Wireline Products
|
|
49.8
|
%
|
40.4
|
%
|
Wireless/OEM Products
|
|
12.4
|
%
|
10.9
|
%
|
Global Services
|
|
7.2
|
%
|
8.4
|
%
|
Quality of Experience Assurance
|
|
0.4
|
%
|
0.4
|
%
|
Timing, Test and Measurement Division
|
|
30.2
|
%
|
39.9
|
%
|
Total net revenue
|
|
100.0
|
%
|
100.0
|
%
|
|
|
|
|
|
|
Cost of products and services
|
|
47.6
|
%
|
55.2
|
%
|
Amortization of purchased technology
|
|
0.7
|
%
|
1.6
|
%
|
Integration and restructuring charges
|
|
|
%
|
|
%
|
Gross profit
|
|
51.7
|
%
|
43.2
|
%
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
|
13.1
|
%
|
14.4
|
%
|
Selling, general and administrative
|
|
28.0
|
%
|
30.6
|
%
|
Amortization of intangible assets
|
|
0.2
|
%
|
0.5
|
%
|
Integration and restructuring charges
|
|
1.0
|
%
|
0.6
|
%
|
Operating income (loss)
|
|
9.4
|
%
|
(2.9
|
)%
|
Loss on repayment of convertible notes, net
|
|
(0.9
|
)%
|
|
%
|
Loss on short-term investments, net
|
|
(0.8
|
)%
|
|
%
|
Interest income
|
|
1.4
|
%
|
4.4
|
%
|
Interest expense
|
|
(1.4
|
)%
|
(2.4
|
)%
|
Income (loss) before income taxes
|
|
7.6
|
%
|
(0.9
|
)%
|
Income tax provision (benefit)
|
|
3.0
|
%
|
(0.3
|
)%
|
Income (loss) from continuing operations
|
|
4.6
|
%
|
(0.6
|
)%
|
Gain from discontinued operations, net of
tax
|
|
|
%
|
0.1
|
%
|
Net Income (loss)
|
|
4.6
|
%
|
(0.5
|
)%
|
18
Table of Contents
Net Revenue:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 28,
2008
|
|
September 30,
2007
|
|
$ Change
|
|
% Change
|
|
Net Revenue
(dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
Wireline Products
|
|
$
|
27,772
|
|
$
|
20,515
|
|
$
|
7,257
|
|
35.4
|
%
|
Wireless/OEM Products
|
|
6,952
|
|
5,538
|
|
1,414
|
|
25.5
|
|
Global Services
|
|
4,051
|
|
4,284
|
|
(233
|
)
|
(5.4
|
)
|
Quality of Experience Assurance
|
|
226
|
|
155
|
|
71
|
|
45.8
|
|
Timing, Test and Measurement Division
|
|
16,897
|
|
20,243
|
|
(3,346
|
)
|
(16.5
|
)
|
Total Net Revenue
|
|
$
|
55,898
|
|
$
|
50,735
|
|
$
|
5,163
|
|
10.2
|
%
|
Percentage of Revenue
|
|
100.0
|
%
|
100.0
|
%
|
|
|
|
|
Net
revenue consists of sales of products, software licenses and services. In the
first quarter of fiscal 2009, net revenue increased by $5.2 million to $55.9
million from $50.7 million in the corresponding quarter of fiscal 2008. This
increase was primarily attributable to a $7.3 million, or 35.4% increase in
Wireline Products revenue due to higher sales of cable products, and an
increase in Wireless/OEM Products revenue of $1.4 million, or 25.5%, due to an
increase in purchases for inventory ramp-ups for two major OEM customers.
Revenue for Quality of Experience Assurance Products increased by $71 thousand,
or 45.8%, for the first quarter of fiscal 2009. These increases were partially
offset by revenue decreases in Global Services and Timing, Test and Measurement
Division. Global Service revenue decreased by $0.2 million, or 5.4%, due to
lower revenue for repair services. Timing, Test and Measurement Division
revenue decreased by $3.3 million, or 16.5%, due primarily to lower government
sales of communication and electronic system programs.
Gross Profit:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
$ Change
|
|
% Change
|
|
Gross Profit
(dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
Wireline Products
|
|
$
|
18,675
|
|
$
|
10,761
|
|
$
|
7,914
|
|
73.5
|
%
|
Wireless/OEM Products
|
|
1,874
|
|
1,852
|
|
22
|
|
1.2
|
|
Global Services
|
|
1,028
|
|
1,051
|
|
(23
|
)
|
(2.2
|
)
|
Quality of Experience Assurance
|
|
103
|
|
118
|
|
(15
|
)
|
(12.7
|
)
|
Timing, Test and Measurement Division
|
|
7,609
|
|
8,926
|
|
(1,317
|
)
|
(14.8
|
)
|
Other cost of sales
|
|
(368
|
)
|
(808
|
)
|
440
|
|
(54.5
|
)
|
Total Gross Profit
|
|
$
|
28,921
|
|
$
|
21,900
|
|
$
|
7,021
|
|
32.1
|
%
|
Percentage of Revenue
|
|
51.7
|
%
|
43.2
|
%
|
|
|
|
|
Gross
profit in the first quarter of fiscal 2009 increased by $7.0 million or 32.1%
compared to the corresponding quarter of fiscal 2008. Gross profit for Wireline
Products increased by $7.9 million, or 73.5%, which was greater than the
revenue increase of 35.4%, primarily due to a favorable sales mix for higher
cable products which have a higher gross margin. The same period in the prior
year was negatively impacted by low margin sales to customers in Asia. Gross
profit for the Wireless/OEM Products increased by $22 thousand, or 1.2%, which
was lower than the revenue increase of 25.5% for the same period, due to the
impact of a selling price reduction on one product to a major OEM customer.
Gross profit for Global Services decreased $23 thousand, or 2.2%, which is in
line with a comparable revenue decrease of 5.4% for the same period. Gross
profit for the Timing, Test and Measurement Division decreased by $1.3 million,
or 14.8%, which was consistent with the revenue decrease of 16.5%. Gross profit
for Quality of Experience Products, decreased by $15 thousand, or 12.7%, which was
lower than the revenue increase of 45.8%, due primarily to higher manufacturing
period costs.
Gross
profit due to other cost of sales increased $0.4 million or 54.5% primarily as
a result of lower amortization of intangible assets. In the fourth quarter of
2008, we determined that certain intangible assets associated with the Quality
of Experience Assurance business segment were impaired and reduced those assets
accordingly.
Operating Expenses:
Research and Development Expense:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
$ Change
|
|
% Change
|
|
Research and development expense
(
dollars in thousands)
|
|
$
|
7,304
|
|
$
|
7,286
|
|
$
|
18
|
|
0.2
|
%
|
Percentage of Revenue
|
|
13.1
|
%
|
14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
expense
consists primarily of salaries and benefits, prototype expenses
and fees paid to outside consultants. Research and development expense was flat
for the first quarter of fiscal 2009 compared to the corresponding period of
fiscal 2008. Higher costs for prototype expenses were offset by lower stock
compensation costs.
19
Table of Contents
Selling, General and Administrative:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
$ Change
|
|
% Change
|
|
Selling, general and administrative
(dollars in thousands)
|
|
$
|
15,679
|
|
$
|
15,516
|
|
$
|
163
|
|
1.1
|
%
|
Percentage of Revenue
|
|
28.0
|
%
|
30.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 1.1% to $15.7 million for the first
quarter of fiscal 2009 compared to $15.5 million for the corresponding quarter
of fiscal 2008 and consisted of higher costs due to commissions for higher
revenue partially offset by lower stock based compensation expenses.
Amortization of intangibles:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
$ Change
|
|
% Change
|
|
Amortization of intangible assets
(dollars in thousands)
|
|
$
|
103
|
|
$
|
260
|
|
$
|
(157
|
)
|
(60.4
|
)%
|
Percentage of Revenue
|
|
0.2
|
%
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangibles decreased in the first quarter of fiscal 2009 compared to the
corresponding quarter of fiscal 2008 due to the write-off of $2.1 million in
non-purchased technology related intangible assets that were determined to be
impaired in the fourth quarter of fiscal 2008.
Integration and restructuring charges:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
$ Change
|
|
% Change
|
|
Integration and restructuring charges
(dollars in thousands)
|
|
$
|
585
|
|
$
|
293
|
|
$
|
292
|
|
99.7
|
%
|
Percentage of Revenue
|
|
1.0
|
%
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integration
and restructuring charges increased $0.3 million or 99.7% due to higher costs
related to the shutdown of the Austin, Texas engineering facility which has
been fully vacated as of September 2008.
Loss on repayment of convertible notes, net:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
$ Change
|
|
% Change
|
|
Loss on repayment of converible notes, net
(dollars in
thousands)
|
|
$
|
(522
|
)
|
$
|
|
|
$
|
(522
|
)
|
100.0
|
%
|
Percentage of Revenue
|
|
(0.9
|
)%
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the
first quarter of fiscal 2009 we repaid $63.1 million of our convertible notes
and incurred a loss of $0.5 million mostly related to the write-off of a portion
of capitalized bond costs that were previously being amortized. See the Liquidity
and Capital Resources section below for additional information regarding the
details of this loss.
20
Table of Contents
Loss on short-term investments, net:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
$ Change
|
|
% Change
|
|
Loss on short-term investments, net
(dollars in thousands)
|
|
$
|
(473
|
)
|
$
|
|
|
$
|
(473
|
)
|
100.0
|
%
|
Percentage of Revenue
|
|
(0.8
|
)%
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $0.5
million increase in net loss on short-term investments is attributable to an other
than temporary loss of $0.6 million partially offset by a gain of $0.1 million
related to a recovery on an investment for which we previously recognized an other
than temporary loss in fiscal 2008. See
the Liquidity and Capital Resources section below for additional information
regarding our determination of the fair value of these investments at September 28,
2008.
Interest income:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
$ Change
|
|
% Change
|
|
Interest income
(
dollars in thousands)
|
|
$
|
768
|
|
$
|
2,210
|
|
$
|
(1,442
|
)
|
(65.2
|
)%
|
Percentage of Revenue
|
|
1.4
|
%
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income decreased $1.4 million in the first quarter of fiscal 2009 compared to
the same period in the prior year due to lower interest rates and lower cash
and short-term investment balances.
Interest expense:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
$ Change
|
|
% Change
|
|
Interest expense
(
dollars in thousands).
|
|
$
|
(765
|
)
|
$
|
(1,195
|
)
|
$
|
430
|
|
(36.0
|
)%
|
Percentage of Revenue
|
|
(1.4
|
)%
|
(2.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense decreased $0.4 million in the first quarter of fiscal 2009 due to the
repayment of $63.1 million in convertible notes in the first quarter of fiscal
2009 and the repayment of a $2.4 million industrial development bond in the
second quarter of fiscal 2008.
Income taxes:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 28, 2008
|
|
September 30, 2007
|
|
$ Change
|
|
% Change
|
|
Income tax expense
(benefit)
(
dollars in
thousands)
|
|
$
|
1,660
|
|
$
|
(129
|
)
|
$
|
1,789
|
|
(1,386.8
|
)%
|
Percentage of Revenue
|
|
3.0
|
%
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
income tax provision was $1.7 million in the first quarter of fiscal 2009,
compared to an income tax benefit of $0.1 million in the corresponding quarter
of fiscal 2008. Our effective tax rate
in the first quarter of fiscal 2009 was 39.0%, compared to an effective tax
rate of 29.3% in the corresponding period of fiscal 2008. The estimated full
year rate is used as a basis for determining the quarterly effective tax rate,
with certain required adjustments. The fiscal 2009 full year rate is estimated
to be higher than the fiscal 2008 full year tax rate, primarily since the prior
year included the benefit of both federal and state research tax credits which
at this time are not included in the fiscal 2009 tax rate estimate.
Key Operating Metrics
Key
operating metrics for measuring our performance include sales backlog and
contract revenue. A comparison of these metrics at the end of the first quarter
of fiscal 2009 with the end of fiscal 2008 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.
21
Table
of Contents
Our
backlog amounted to $50.9 million as of September 28, 2008, compared to
$58.4 million as of June 29, 2008 and $50.4 million as of September 30,
2007. Our backlog, which is shippable within the next six months, was $37.4
million as of September 28, 2008, compared to $47.1 million as of June 29,
2008. The $7.5 million reduction in
backlog between September 28, 2008 and June 29, 2008 was primarily
due to the ramp up in supply capacity to meet pent-up demand and lower lead
times for our new cable timing product.
Contract Revenue:
As of September 28,
2008, we had approximately $11.2 million in contract revenue to be performed
and recognized within the next 36 months, compared to approximately $9.5
million in contract revenue that was to be performed and recognized within 36
months following June 29, 2008. These amounts have been included in our
sales backlog discussed above.
Liquidity and Capital Resources
As of September 28,
2008, working capital was $157.2 million compared to $151.5 million as of June 29,
2008. Cash and cash equivalents as of September 28, 2008 decreased to
$88.0 million from $142.4 million as of June 29, 2008. This decrease was
primarily the result of the repayment of $63.1 million of our convertible
notes. Short-term investments decreased from $21.9 million as of June 29,
2008 to $18.4 million as of September 28, 2008. This decrease was
attributable primarily to maturities of short-term investments during the first
three months of fiscal 2009.
The $8.4
million net cash provided by operating activities for the three months ended September 28,
2008 was primarily attributable to net income of $2.6 million and non-cash
expenses related to a $2.7 million increase in accrued compensation,
depreciation and amortization of $2.1 million, a $1.2 million decrease in
deferred income taxes, a $1.7 million increase in accounts payable, a $0.5
million net loss related to the repayment of convertible notes, stock-based
compensation expenses of $1.0 million and a $0.5 million net loss on short-term
investments. This was partially offset
by an inventory increase of $2.1 million, a decrease in other accrued
liabilities of $2.0 million and an increase in prepaids and other assets of
$0.5 million. The $2.2 million net cash provided by investing activities for
the three months ended September 29, 2008 was primarily attributable to
$3.4 million in maturities of short-term investments that was partially offset
by $1.1 million in purchases of plant and equipment. The $64.9 million net cash
used for financing activities was primarily attributable to $62.5 million used
for the repayment of convertible notes and $2.1 million to repurchase common
stock.
Our days
sales outstanding in accounts receivable was 59 days as of September 28,
2008, unchanged from June 29, 2008.
Loss on
Short-term Investment, Net
In the
fourth quarter of fiscal 2007, we purchased asset-backed commercial paper with
a $7.8 million par value maturing on March 13, 2008, and classified
this as a short-term investment. At the time of purchase, the investments
portfolio consisted primarily of triple-A rated assets, with sub-prime loan
assets making up approximately 23% of the investment. Subsequently, the
structured investment vehicle (SIV) issuing the commercial paper was declared
insolvent and entered receivership. On January 8, 2008, our investment
manager advised us that the fair value of this investment had declined, and
that an impairment loss should be considered other than temporary based on
discussions with the receiver and potential options expected to be made
available to senior debt holders of which Symmetricom was one. Our investment
manager determined the fair value of the investment using pricing levels of the
underlying portfolio by three different broker/dealers. Management then made an
independent valuation assessment of similar securities using the ABX index
(which is an index to track the performance of mortgage backed securities), to
confirm that the valuation results from our investment manager were reasonable.
Based on this assessment of fair value, Symmetricom recognized a loss of $3.2 million
related to this investment during fiscal year 2008. After the receivers sold
the SIV to an investment bank, we received a cash distribution of
$1.4 million, relating to the cash portion of the fund, in the fourth
quarter of fiscal 2008. In the first quarter of fiscal 2009, the investment
bank offered investors the option of cashing out of the fund or reinvesting in
a new investment vehicle. We elected to cash out and received a final capital
distribution of $3.3 million in the first quarter of fiscal 2009. As a
result of the final settlement with this investment, including a recovery on
previously recognized losses, we recognized a $0.1 million gain in the first
quarter of fiscal 2009.
In the
first quarter of fiscal 2009, we determined that three corporate debt
instruments, whose market values had declined, were other than temporarily
impaired. We made this determination
based on the uncertainty and volatility of the market, particularly since these
debt instruments were related to financial institutions, the failure of several
other large financial institutions and the continued downgrades from credit
rating agencies. As a result of this
assessment, we recognized a $0.6 million other than temporary loss in the first
quarter of fiscal 2009. This amount was
partially offset by the previously mentioned $0.1 million gain, resulting in
net loss on short-term investments of $0.5 million for the first quarter of
fiscal 2009.
22
Table of Contents
Convertible
Subordinated Notes
On June 30,
2008, we offered to purchase for cash, on a pro rata basis, $63.1 million
aggregate principal amount of our $120.0 million convertible subordinated notes
(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 includes interest of $0.3 million. After the
purchase pursuant to the offer, approximately $56.9 million aggregate
principal amount of the Notes remains outstanding. In connection with the
completion of the tender offer, the holder of a majority of the outstanding
notes prior to the offer waived certain defaults alleged to have occurred under
the indenture and rescinded an acceleration notice received by Symmetricom on May 7,
2008. We may repurchase some or all of our remaining outstanding Notes.
In
connection with the issuance of the Notes, Symmetricom initially recorded bond
fees of approximately $4.0 million, which were amortized using the
straight-line method over a period of seven years ending in fiscal 2012. As of June 29,
2008, $2.2 million of unamortized costs remained. As a result of the tender
offer, $1.1 million of this unamortized cost was expensed in the first
quarter of fiscal 2009. This, combined with a $0.6 million gain relating to
difference between the principal amount and the purchase price of the Notes,
resulted in a $0.5 million net loss on repayment of convertible notes
recognized in the first quarter of fiscal 2009.
Contingencies
See Item
1 of Part I, Financial Statements Note 11 Contingencies.
Recently Issued Accounting Pronouncements
In October 2008, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position FAS 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP
157-3). FSP 157-3 clarified the application of Statement of Financial
Accounting Standards (SFAS) 157,
Fair Value Measurements. FSP 157-3 demonstrated how the fair value of a
financial asset is determined when the market for that financial asset is
inactive. FSP 157-3 was effective upon issuance, including prior periods for
which financial statements had not been issued. The implementation of this
standard did not have an impact on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles. This statement
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States. We do not expect
that this statement will result in a change to any of our current accounting
practices.
In April 2008, the FASB adopted FASB Staff
Position FAS No. 142-3, Determination of the Useful Life of Intangible
Assets, amending the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets.
This FASB Staff Position is effective for intangible assets acquired on or
after June 29, 2009. We are currently evaluating the impact of the
implementation of FASB Staff Position SFAS No. 142-3 on our consolidated
financial statements.
In February 2008, the FASB issued FASB Staff Position FAS 157-2,
Effective Date of FASB Statement No. 157, which delays the effective date
of SFAS No. 157 to June 29, 2009 for us, for all nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually). We believe the adoption of the delayed items of SFAS No. 157
will not have a material impact on our financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activitiesan amendment of
SFAS No. 133. This statement changes the disclosure requirements for
derivative instruments and hedging activities. SFAS No. 161 will require
us to provide enhanced disclosures about (a) how and why we use derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect our financial position,
financial performance, and cash flows. SFAS No. 161 is effective for us
beginning June 29, 2009. We do not believe that SFAS No. 161 will
have a material impact on our consolidated financial statements.
23
Table
of Contents
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statementsan amendment of
ARB No. 51. This Statement amends ARB 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. It requires consolidated net income
to be reported at amounts that include the amounts attributable to both the
parent and the noncontrolling interest. This Statement establishes a single
method of accounting for changes in a parents ownership interest in a
subsidiary that do not result in deconsolidation. SFAS No. 160 is
effective for our fiscal year beginning June 29, 2009. We do not believe that
SFAS No. 160 will have a material impact on our consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations (SFAS No. 141(R)). The standard
changes the accounting for business combinations including the measurement of
acquirer shares issued in consideration for a business combination, the
recognition of contingent consideration, the accounting for pre-acquisition
gain and loss contingencies, the recognition of capitalized in-process research
and development, the accounting for acquisition-related restructuring cost
accruals, the treatment of acquisition related transaction costs and the
recognition of changes in the acquirers income tax valuation allowance. SFAS No. 141(R) is
effective for us beginning June 29, 2009. We are currently assessing the
potential impact that adoption of SFAS No. 141(R) would have on our
consolidated financial statements.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
Interest Rate Exposure
As of September 28,
2008, we had cash and cash equivalents of $88.0 million and short-term
investments of $18.4 million. Currently our short-term investment portfolio
consists mainly of corporate debt securities and mutual funds. Our exposure to
market risk due to fluctuations in interest rates relates primarily to our
corporate debt securities, which are subject to interest rate risk in as much
as their fair value will fall if market interest rates increase. If market
interest rates were to increase or decrease immediately and uniformly by 10%
from the levels prevailing as of September 28, 2008, 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 to no more than nine months, placing our investments
with high credit quality issuers and limiting the amount of credit exposure
with any one issuer. In addition, we have the ability and currently intend to
hold these investments to recovery, which may be maturity, and therefore we
believe that reductions in the value of these securities attributable to
short-term fluctuations in interest rates would not materially harm our
business.
On June 8,
2005, we issued convertible subordinated notes with a fixed rate of 3.25%,
which have no interest rate risk impact to our business.
Foreign Currency Exchange Rate Exposure
Our
exposure to market risk due to fluctuations in currency exchange rates relates
primarily to the intercompany balances with our subsidiaries in the United
Kingdom and Germany. Although we transact business with various countries,
settlement amounts are usually based on U.S. currency. Transaction gains or
losses have not been significant in the past and we do not presently engage in
hedging activity. Based on our foreign currency denominated assets as of September 28,
2008, a hypothetical 10% adverse change in British Pounds and Euro against U.S.
dollars 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 evaluated, with
the participation of our Chief Executive Officer and our Chief Financial
Officer, the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. On June 17,
2008 we filed an amendment to our Form 10-K for the fiscal year ended July 1,
2007 to amend and restate our consolidated balance sheets as of July 1,
2007 and July 2, 2006 and the related consolidated statements of
operations,
24
Table of Contents
stockholders equity and comprehensive income (loss), and cash flows
for the fiscal years ended July 1, 2007, July 2, 2006, and July 3,
2005. Also on June 17, we filed an
amendment to our Form 10-Q to amend our Form 10-Q for the quarter
ended September 30, 2007. Both of these amendments were filed to correct a
misstatement in our original filings related to errors in accounting for
accrued liabilities related to inventory receipts. In the Form 10-K/A and Form 10-Q/A,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) were not effective.
Because this material weakness related to the reconciliation and review of
accrued liabilities related to inventory receipts was not fully remediated as of
September 28, 2008, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were not
effective as of September 28, 2008, solely because of this material
weakness.
Changes
in Internal Control Over Financial Reporting
There
was no material change in the Companys internal control over financial
reporting that occurred during the quarter ended September 28, 2008 that
has affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
25
Table
of Contents
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Item
1 of Part I, Financial Statements Note 11 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 29,
2008. 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.
As of the
first quarter of fiscal 2009, the risk factor titled
The tax treatment of the
restructuring of our Puerto Rico subsidiary may negatively impact our net
earnings,
is no longer applicable. See
Item 1 of Part I, Financial Statements Note 2 Income Taxes.
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 and forfeitures during the three months ended September 28,
2008:
|
|
|
|
|
|
|
|
Approximate Number
|
|
|
|
Total
|
|
|
|
Total Number of Shares
|
|
of Shares That
|
|
|
|
Number of
|
|
Average
|
|
Purchased as Part of
|
|
May Yet Be
|
|
|
|
Shares
|
|
Price Paid
|
|
Publicly Announced
|
|
Purchased Under the
|
|
Period
|
|
Purchased
|
|
per Share
|
|
Plans or Programs
|
|
Plans or Programs
|
|
June 30, 2008 through July 27,
2008
|
|
|
|
$
|
|
|
|
|
901,174
|
|
July 28, 2008 through August 24,
2008
|
|
96,654
|
|
$
|
5.01
|
|
96,654
|
|
804,520
|
|
August 25, 2008 through
September 28, 2008
|
|
265,524
|
|
$
|
4.98
|
|
265,524
|
|
538,996
|
|
Total
|
|
362,178
|
|
$
|
4.99
|
|
362,178
|
|
|
|
During
the first three months of fiscal 2009, we repurchased 0.4 million shares of
common stock pursuant to our repurchase program for an aggregate price of
approximately $1.8 million.
As of September 28,
2008, the total number of shares available for repurchase under the repurchase program
authorized by the Board of Directors was approximately 0.5 million. On September 29,
2008, the Companys Board of Directors authorized management to repurchase an
additional 2.0 million shares of Symmetricom common stock.
A further 66,562 shares were repurchased by us in the first quarter of
fiscal 2009 for an aggregate price of approximately $0.3 million to cover the
cost of taxes on vested restricted stock.
On July 30, 2008, we purchased for cash $63.1 million aggregate
principal amount of our convertible subordinated notes.
Item 3. Defaults Upon Senior
Securities
Not
applicable.
Item 4. Submission of Matters to a
Vote of Security Holders
Not
applicable.
26
Table of Contents
Item 5. Other Information
On October 30,
2008, the compensation committee of our board of directors approved a Second
Amended and Restated Executive Severance Benefits Agreement for our new
executive officers, including Justin Spencer, our Executive Vice President,
Chief Financial Officer and Secretary. The new form of executive severance
benefits agreement provides that if at any time prior to a change of control of
Symmetricom or more than twelve months following a change of control of the
Symmetricom, the executive officers employment is terminated by us without
cause or by constructive termination, then the executive officer is entitled to
the following severance benefits:
·
base
salary for six, nine or twelve months depending on the length of the executive
officers employment with us (the severance period),
·
the
executives target bonus for the fiscal year during which the termination
occurs, prorated by the length of the severance period; and
·
health
benefits for the executive (and his or her dependents) for the severance period
(or the earlier expiration of the COBRA continuation period).
The new form of executive severance benefits agreement also provides
that if at any time within twelve months following a change of control of
Symmetricom, the executive officers employment is terminated by us without
cause or by constructive termination, then the executive officer is entitled to
the following severance benefits:
·
base
salary for twelve months;
·
the
sum of (a) the executive officers target annual bonus for the fiscal year
during which the termination occurs prorated by the portion of the fiscal year
that the executive officer was employed by the company plus (b) the full
target annual bonus for such fiscal year;
·
immediate
vesting of any unvested stock options and other stock-based awards; and
·
health
benefits for the executive officer and his or her dependents for twelve months
(or the earlier expiration of the COBRA continuation period).
Notwithstanding the foregoing, if a change of control occurs within
twelve months of the officers start date, the amount of acceleration of
vesting of stock options and other stock-based awards upon a triggering
termination will be limited to 50% of the unvested shares.
On October 31, 2008, at our annual meeting of
stockholders, our stockholders approved the amendment and restatement of our
2006 Incentive Award Plan (the 2006 Plan).
Generally, the amendments to the 2006 Plan provide that:
·
The
number of shares authorized for issuance thereunder is increased by 5,500,000
shares;
·
Each
share subject to an award other than a stock option or a stock appreciation
right will count against the share reserve as two shares;
·
Neither
(i) shares tendered or withheld to cover the payment of an option exercise
price or to satisfy tax withholding obligations, nor (ii) shares subject to a
stock-settled stock appreciation right which were not issued upon the net
settlement or exercise of the right, will be available for future grant under
the 2006 Plan;
·
There
is a maximum required term of seven years for any option or stock appreciation
right;
·
Repricing
(or cancellation and exchange) of underwater stock appreciation rights, as well
as the exchange of underwater options or stock appreciation rights for other
equity awards or a cash payment, is prohibited without stockholder approval of
such action;
·
Minimum
vesting restrictions applicable to certain full value awards (i.e., awards
other than those for which the participant directly or indirectly pays the
intrinsic value of the stock on the grant date) are removed; and
·
A
committee of the board of directors may accelerate the vesting of
performance-based awards.
The above description is qualified by reference to the full text of the
2006 Plan, a copy of which is attached as an exhibit to this Quarterly Report
on Form 10-Q.
Item 6. Exhibits
Exhibit
Number
|
|
Description of Exhibits
|
|
|
|
10.1
|
|
Form of Second Amended and Restated
Executive Severance Benefits Agreement with Justin Spencer.
|
|
|
|
10.2#
|
|
Amended and Restated 2006 Incentive Award
Plan
|
|
|
|
31
|
|
Certification of Chief Executive Officer
and Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32
|
|
Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
|
# Management contract or
compensatory plan or arrangement
27
Table
of Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on our behalf by the undersigned thereunto
duly authorized.
|
|
|
SYMMETRICOM, INC.
|
|
|
|
(Registrant)
|
|
|
|
|
DATE: November 6, 2008
|
|
By:
|
/s/ THOMAS W.
STEIPP
|
|
|
|
Thomas W.
Steipp
|
|
|
|
Chief
Executive Officer
(Principal Executive Officer) and Director
|
|
|
|
|
DATE: November 6, 2008
|
|
By:
|
/s/ JUSTIN
SPENCER
|
|
|
|
Justin
Spencer
|
|
|
|
Executive Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer)
|
28
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