Note 1—Summary of Significant Accounting Policies

Business

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

Principles of Consolidation

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

Fiscal Year

Our fiscal year is the 52 or 53 weeks ending on the Sunday closest to June 30. Fiscal years 2013 and 2012 were 52-week fiscal years and 2011 was a 53-week fiscal year.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates include:

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Revenue recognition

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Accounting for income taxes

•

Inventory valuation

•

Warranty accrual

•

Accruals for contingent liabilities (including restructuring charges)

•

Stock based compensation

•

Allowance for doubtful accounts

•

Valuation of short-term investments

•

Valuation of long-lived assets including intangible assets

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

Cash and Cash Equivalents

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

Short-Term Investments

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

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

Fair Values of Financial Instruments

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

Allowance for Doubtful Accounts

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

Inventories

Inventories are valued at the lower-of-cost (first-in, first-out) or market. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis. Obsolete inventory or inventory in excess of management’s estimated usage is written down to its estimated market value less costs to sell, if less than its cost. Inherent in the estimates of market value are management’s estimates related to current economic trends, future demand and technological obsolescence.

Property, Plant and Equipment, Net

Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method based on the estimated useful lives of the assets except for land as follows:


Buildings and improvements		15 - 39 years
Leasehold improvements		5 - 15 years, or life of lease, if shorter
Machinery, equipment and computer software		3 - 7 years

Accounting for Income Taxes

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

The carrying value of our net deferred tax assets, which are made up of tax deductions, net operating loss carryforwards and tax credits, assumes that we will be able to generate sufficient future income to fully realize these assets. We evaluate the weight of all available evidence in determining whether it is more likely than not that some portion of the deferred tax assets will not be realized. If we do not generate sufficient future income, the realization of these deferred tax assets may be impaired, resulting in an additional income tax expense.

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

Valuation of Long-lived Assets Including Other Intangible Assets Subject to Amortization

The carrying value of long-lived assets is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset, including disposition, is less than the carrying value of the asset. An impairment loss is measured as the amount by which the carrying amount exceeds the fair value.

Comprehensive Income (loss)

Financial Accounting Standards Board (FASB) issued authoritative guidance on reporting comprehensive income, establishes standards for reporting and display of comprehensive income and its components. It also requires companies to report comprehensive income that includes unrealized holding gains and losses and other items that have previously been excluded from net income and reflected instead in stockholders’ equity.

Accumulated other comprehensive loss, consists of the following:


	June 30, 2013			July 1, 2012			July 3, 2011
	(in thousands)
Foreign currency translation adjustments, net of taxes	$	(187	)	$	(239	)	$	(40	)
Unrealized gain (loss) on short-term investments, net of taxes		(89	)		7			11

Total accumulated other comprehensive loss	$	(276	)	$	(232	)	$	(29	)

Warranty

Our standard warranty agreement is one year from shipment. However, our warranty agreements are contract and component specific and can range to twenty years for selected components. We offer extended warranty contracts to our customers. The extended warranty is offered on products that are less than eight years old. The extended warranty contract is applicable for a maximum of nine years after the expiration of the standard one-year warranty. The revenue from extended warranty contracts is recognized ratably over the period of contract.

We accrue for anticipated warranty costs upon shipment. We estimate future warranty costs based on, historical warranty claim trends, management’s judgment regarding anticipated rates of warranty claims, and associated repair costs. This analysis is updated on a quarterly basis.

The change in accrued warranty expense is summarized as follows:


	Year ended
	June 30, 2013			July 1, 2012			July 3, 2011
	(In thousands)
Beginning balance	$	1,722		$	1,601		$	2,900
Provision for warranty for the year		2,733			2,549			1,617
Accruals related to changes in estimate		(352	)		286			(520	)
Less: Actual warranty costs		(2,553	)		(2,714	)		(2,396	)

Ending balance	$	1,550		$	1,722		$	1,601

Software Development Costs

Costs for the development of new software and substantial enhancements to existing software are expensed as incurred until technological feasibility has been established, at which time any additional development costs would be capitalized in accordance with FASB issued authoritative guidance on Accounting for the Cost of Computer Software to Be Sold, Leased, or Otherwise Marketed. We believe the current process for developing software is essentially completed concurrently with the establishment of technological feasibility; accordingly, no costs have been capitalized to date.

Foreign Currency Translation

The functional currency of each of our international subsidiaries in the United Kingdom and China is the U.S. dollar, while in Germany it is the Euro and in India it is the Indian rupee.

For our subsidiaries in which the U.S. Dollar is the functional currency, foreign currency denominated assets and liabilities are translated at the period-end exchange rates, except for inventories, prepaid expenses, and property and equipment, which are translated at historical exchange rates. Statements of operations are translated at the average exchange rates during the year except for those expenses related to the balance sheet amounts, which are translated using historical exchange rates. Net gains (losses) from these foreign exchange remeasurements are charged to operations and have not been material to our consolidated operating results for any of the periods presented.

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

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our price is fixed or determinable and collectability is reasonably assured. Our standard arrangement for our domestic and international customers includes a signed purchase order or contract and no right of return of delivered products. Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.

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

Generally, product revenue is generated from the sale of synchronization and timing equipment with embedded software that is incidental to product functionality. Service revenue is recognized as the services are performed, provided collection of the related receivable is reasonably assured. Our sales to distributors are made under agreements allowing for returns or credits under certain circumstances. Accordingly, we record an estimate of returns from distributors based on a historical average of distributor returns. We record commission expense both when orders are received and shipped, at which times the commission is both earned and payable.

Periodically, we enter into revenue transactions with multiple deliverables. Our multiple element product offerings generally include hardware, software and post-contract support (“PCS”) services, which are considered separate units of accounting. In evaluating the revenue recognition for multiple element arrangements under the accounting guidance, the total arrangement fees are allocated to all the deliverables based on their relative selling prices. The relative selling price is determined using vendor specific objective evidence (“VSOE”) when available. When VSOE cannot be established, we attempt to establish the selling price of deliverables based on relevant third party evidence (“TPE”). TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our competitors, and offerings may contain a significant level of proprietary technology, customization or differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, we typically are not able to determine TPE.

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

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

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

Revenue from contracts that require development and manufacture in accordance with customer specifications and have a lengthy development period may be categorized into two types: firm fixed price and cost reimbursable. 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 reimbursable contracts is recognized on the basis of direct and indirect costs incurred plus a negotiated profit calculated as a percentage of costs or as a performance based award fee. Revenue from long-term contracts is reviewed periodically, with adjustments recorded in the period in which the revisions are made.

Unbilled receivables totaled $5.7 million as of June 30, 2013 compared to $5.6 million as of July 1, 2012 and are included within the “Prepaid and Other Current Assets” line item on our consolidated balance sheets. All unbilled receivables as of June 30, 2013 are expected to be collected in fiscal 2014.

Stock-Based Compensation

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

Research and Development Costs

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

Earnings Per Share

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

A reconciliation of the denominator used in the calculation of basic and diluted net earnings (loss) per share is as follows:


	Year ended
	June 30, 2013			July 1, 2012			July 3, 2011
	(In thousands, except per share amounts)
Numerator:
Income (loss) from continuing operations	$	(2,705	)	$	11,355		$	1,169
Income from discontinued operations		—			—			254

Net income (loss)	$	(2,705	)	$	11,355		$	1,423


Shares (Denominator):
Weighted average common shares outstanding		40,802			42,224			43,368
Weighted average common shares outstanding subject to repurchase		(293	)		(243	)		(180	)

Weighted average shares outstanding—basic		40,509			41,981			43,188
Weighted average dilutive share equivalents from stock options		—			583			530
Weighted average dilutive common shares subject to repurchase		—			133			64

Weighted average shares outstanding—diluted		40,509			42,697			43,782

Earnings per share—basic:
Income (loss) from continuing operations	$	(0.07	)	$	0.27		$	0.03
Income from discontinued operations		—			—			—

Net income (loss)	$	(0.07	)	$	0.27		$	0.03

Earnings per share—diluted:
Income (loss) from continuing operations	$	(0.07	)	$	0.27		$	0.03
Income from discontinued operations		—			—			—

Net income (loss)	$	(0.07	)	$	0.27		$	0.03

Unvested restricted stock is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding for basic earnings per share.

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


	Year ended
	June 30, 2013		July 1, 2012		July 3, 2011
	(In thousands)

Stock options		8,086		4,155		2,777

Total shares of common stock excluded from diluted net earnings per share calculation		8,086		4,155		2,777

Recent Accounting Pronouncements

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

In February 2013, the FASB issued guidance on disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). This new guidance requires entities to present (either on the face of the income statement or in the notes) the effects on the line items of the income statement for amounts reclassified out of AOCI. The new guidance will be effective for us beginning July 1, 2013. Other than requiring additional disclosures, we do not anticipate material impacts on our financial statements upon adoption.