SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the year ended December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission File
No. 0-30821
TELECOMMUNICATION SYSTEMS,
INC.
(Exact name of registrant as
specified in its charter)
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Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
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52-1526369
(I.R.S. Employer Identification
No.)
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275 West Street, Annapolis, MD
(Address of principal executive
offices)
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21401
(Zip Code)
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(410) 263-7616
Registrants telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, Par Value $0.01 per share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act: Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act: Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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):
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Large accelerated
filer o
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Accelerated
filer þ
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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)
Indicate by check mark whether the registrant is a shell company
(as defined in
rule 12b-2
of the
Act): Yes o No þ
As of June 30, 2009, the aggregate market value of the
Class A Common Stock held by non-affiliates, as reported on
the NASDAQ Global Market, was approximately $278,597,585.*
As of February 28, 2010 there were 46,436,400 shares
of Class A Common Stock and 6,276,334 shares of
Class B Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
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Document
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Part of 10-K into which
incorporated
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Portions of the registrants Proxy Statement for the
Annual Meeting of Stockholders to be held June 10, 2010
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Part III
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* Excludes 2,040,008 shares of Class A Common Stock
and 6,501,334 shares of Class B Common Stock deemed to
be held by stockholders whose ownership exceeds ten percent of
the shares outstanding at June 30, 2009. Exclusion of
shares held by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of
the registrant, or that such person is controlled by or under
common control with the registrant.
Cautionary Note
Concerning Factors That May Affect Future Results
This document contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended (the Securities Act), and Section 21E
of the Securities Exchange Act of 1934, as amended (the
Exchange Act). Forward-looking statements are
statements other than historical information or statements of
current condition. We generally identify forward-looking
statements by the use of terms such as believe,
intend, expect, may,
should, plan, project,
contemplate, anticipate, or other
similar statements. Examples of forward looking statements in
this Annual Report on
Form 10-K
include, but are not limited to statements that
(i) our 2009 Commercial Segment acquisitions strengthen our
relationship with North American carriers;
(ii) cyber security will be a high growth communications
technology area for the foreseeable future;
(iii) we believe that the convertible debt provided the
optimal balance of expedited execution and least dilution;
(iv) we have strengthened our LBS leadership in the
industry;
(v) we now offer the most complete suite of LBS technology;
(vi) the proliferation of smart handheld devices has
increased the size of the market for our technology;
(vii) wireless growth is expected to continue to increase
in all regions around the world for the foreseeable future;
(viii) the number of short messaging services users and
messages per individual are projected to continue to increase
significantly and that we will benefit from ever expanding
application of SMS technology in new areas such as
machine-to-machine
messaging;
(ix) we are well positioned to address the evolving
integration needs of our commercial and government clients in
both messaging and location determination;
(x) we are developing relationships with communication
infrastructure providers in order to expand our sales channels;
(xi) we intend to expand our domestic and international
carrier customer base and will continue to develop network
software for wireless carriers and cable operators that operate
on all major types of networks;
(xii) we will continue to leverage our knowledge of complex
technologies to expand the range of capabilities that wireless
data technology can accomplish for our customers;
(xiii) we will continue to invest in technology and to
capitalize on our expertise to meet the growing demand for
sophisticated wireless applications;
(xiv) we intend to continue to selectively consider
acquisitions of companies and technologies in order to increase
the scale and scope of our operations, market presence,
products, services and customer base;
(xv) we now have contract vehicles for the
Governments surging demand for information technology
earned value management, cyber training, cyber technical
solutions, and related procurement support, and that steep
growth in spending to the multi-billion dollar level by
U.S. federal agencies on cyber initiatives is expected over
the next five years;
(xvi) we plan to continue to provide communication systems
integration, information technology services, software and
cyber-security solutions, including operation of secure
satellite teleport facilities and resale of satellite airtime,
to units of the U.s. Department of Defense and other government
customers;
(xvii) we believe that we enjoy a competitive advantage
because we can offer multiple system elements from a single
vendor;
(xviii) our portfolio of software, patented intellectual
property, and teams of wireless and encryption specialists
positions us to tap into opportunities in the U.S. federal
government market;
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(xix) we expect to realize a portion of our backlog in the
next twelve months;
(xx) we expect to compete primarily on the basis of the
factors set forth;
(xxi) the WWSS contract vehicle is expected to continue to
contribute to significant government systems sales through 2011;
(xxii) we believe we have sufficient capital resources to
meet our anticipated cash operating expenses, working capital
and capital expenditure and debt services needs for the next
twelve months;
(xxiii) that we believe our capitalized research and
development expense will be recoverable from future gross
profits generated by the related products;
(xxiv) we believe our intellectual property assets are
valuable and will contribute positively to our operational
results in 2010 and beyond;
(xxv) we believe we should not incur any material
liabilities from customer indemnification requests; we have
accurately estimated the amount of future non-cash stock
compensation;
(xxvi) our assumptions and expectations related to income
taxes and deferred tax assets are appropriate;
(xxvii) we do not expect that the adoption of new
accounting standards to have a material impact on the
companys financial statements;
(xxviii) we believe that we will continue to comply with
the covenants related to our loan agreements;
(xxix) we have limited exposure to financial market risks,
including changes in interest rates;
(xxx) we believe that our disclosure controls and
procedures were effective to provide reasonable assurance that
information we are required to disclose in reports we file or
submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the applicable
rules and forms, and that it is accumulated and communicated to
our management as appropriate to allow timely decisions
regarding required disclosures; and
(xxxi) we believe we can fund our future acquisitions with
our internally available cash, cash equivalents and marketable
securities, cash generated from operations, amounts available
under our existing debt capacity, additional borrowings or from
the issuance of additional securities.
Other such statements include without limitation risks and
uncertainties relating to our financial results and our ability
to (i) continue to rely on our customers and other third
parties to provide additional products and services that create
a demand for our products and services, (ii) conduct our
business in foreign countries, (iii) adapt and integrate
new technologies into our products, (iv) develop software
without any errors or defects, (v) protect our intellectual
property rights, (vi) implement our business strategy,
(vii) realize backlog, (viii) compete with small
business competitors, (ix) effectively manage our counter
party risks, and (x) achieve continued revenue growth in
the foreseeable future in certain of our business lines. This
list should not be considered exhaustive.
These forward-looking statements relate to our plans, objectives
and expectations for future operations. We base these statements
on our beliefs as well as assumptions made using information
currently available to us. In light of the risks and
uncertainties inherent in all projected operational matters, the
inclusion of forward-looking statements in this document should
not be regarded as a representation by us or any other person
that our objectives or plans will be achieved or that any of our
operating expectations will be realized. Revenues, results of
operations, and other matters are difficult to forecast and
could differ materially from those projected in the
forward-looking statements contained in this Annual Report on
Form 10-K
as a result of factors discussed in Managements
Discussion and Analysis of Financial Conditions and Results of
Operations, the matters discussed in Risk Factors
Affecting Our Business and Future Results, which are
included in Item 1A, and those factors discussed elsewhere
in this Annual Report on
Form 10-K
including, changes in economic conditions, technology and the
market in general, and our ability to adapt our products and
services to these changes. We undertake no obligation to release
publicly the results of any future revisions we make to forward-
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looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated
events. We caution you not to put undue reliance on these
forward-looking statements.
Overview
TeleCommunication Systems, Inc. develops and applies
high-availability and secure mobile communication technology.
For commercial customers our mobile cloud computing services
provide wireless applications for navigation, hyper-local
search, asset tracking, social applications, and telematics,
while TCS infrastructure forms the foundation for E9-1-1 call
routing and text messaging. Government customers depend on our
professional and engineering services, cyber security expertise,
and satellite-based deployable solutions for mission-critical
communications.
We are a Maryland corporation founded in 1987 with headquarters
at 275 West Street, Annapolis, Maryland 21401. Our Web
address is www.telecomsys.com. The information contained on our
Web site does not constitute part of this Annual Report on
Form 10-K.
All of our filings with the Securities and Exchange Commission
are available through a link on our website. The terms
TCS, we, us and
our as used in this Annual Report on
Form 10-K
refer to TeleCommunication Systems, Inc. and its subsidiaries as
a combined entity, except where it is made clear that such terms
mean only TeleCommunication Systems, Inc.
Our business is conducted through two operating segments,
Commercial (42% of 2009 revenue) and Government (58% of 2009
revenue). See discussion of segment reporting in Note 21 to
the audited Consolidated Financial Statements presented
elsewhere in this Annual Report on
Form 10-K
for additional segment information.
Commercial Segment: Our commercial services
and systems enable wireless carriers to deliver short text
messages, location-based information, internet content, and
other enhanced communication services to and from wireless
phones. Our hosted commercial services include E9-1-1 call
routing, mobile location-based applications, and inter-carrier
text message technology; that is, customers use our software
functionality through connections to and from our network
operations centers, paying us monthly fees based on the number
of subscribers, cell sites, call center circuits, or message
volume. We provide hosted services under contracts with wireless
carrier networks, as well as VoIP service providers. We earn
subscriber revenue through wireless applications including our
navigation, people finder, and asset tracking applications which
are available via many wireless carriers. We earn carrier
software-based revenue through the sale of licenses, deployment
and customization fees, and maintenance fees, pricing for which
is generally based on the volume of capacity purchased from us
by the carrier. As of December 31, 2009, we had deployed
138 of our software systems in wireless carrier networks around
the world.
Government Segment: Since our founding in
1987, we have provided communication systems integration,
information technology services, and software solutions to the
U.S. Department of Defense and other government customers.
We also own and operate secure satellite teleport facilities,
and resell access to satellite airtime (known as space segment.)
We design, furnish, install and operate wireless and data
network communication systems, including our
SwiftLink®
deployable communication systems which integrate high speed,
satellite, and internet protocol technology, with secure
Government-approved cryptologic devices. More than 2,000 of our
deployable communication systems are in use for security,
defense, and law enforcement activities around the world. In
2006, we were named one of six prime contractors on the
U.S. Armys Worldwide Satellite Systems (WWSS)
contract vehicle, with a ceiling value of up to $5 billion
in procurements through 2011. As of 2009, TCS supports
government agencies in their need of cyber technology and
associated training and support.
Our intellectual property portfolio has grown both through
organic development and acquisitions. At year-end 2009, we held
108 issued patents and more than 300 pending applications
worldwide. We monetize this portfolio primarily via licensing of
the technology and incorporation of our inventions in our
deliverables. In December 2009, we agreed to settlement of our
infringement action against Sybase 365, LLC, for the
inter-carrier messaging family of patents. The
$23.0 million settlement, netted $15.7 million for the
Company.
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In 2009, TeleCommunication Systems completed four acquisitions,
two each in our Commercial and Government segments.
Commercial
Segment 2009 acquisitions:
LocationLogic, LLC (LocationLogic), which was formerly part of
Autodesk, Inc., was acquired in May 2009, and is a provider of
infrastructure, applications and related technology for wireless
location-based services. The acquisition, in addition to
providing key authentication and privacy technology, expanded
our location based services (LBS) application portfolio beyond
navigation, traffic, and
points-of-interest
by adding people finder, mobile resource management, and phone
recovery and security applications.
Networks In Motion, Inc. (NIM), acquired in December 2009, is a
provider of large-scale wireless navigation solutions for mobile
phones. The acquisition accelerates the Companys position
in enabling mobile operators to offer enhanced location-based
data services, strengthens our position with market-leading
navigation technology, and adds an internationally recognized
navigation application to our suite of LBS application offerings.
Both of these acquisitions strengthen our longstanding
relationships with some of the largest North American carriers.
Together with our existing location infrastructure and wireless
E9-1-1 call routing technology, the acquisitions enable our
Company to offer broader and deeper LBS solutions.
Government
Segment 2009 acquisitions:
Solvern Innovations, Inc. (Solvern), acquired in November 2009,
is a provider of comprehensive communications products and
solutions, training, and technology services for multiple
security-based platforms. Increased threats of web-based
attacks, coupled with the U.S. governments growing
focus on protecting online assets, indicates that cyber security
will be a high growth communications technology area for the
foreseeable future. The acquisition of Solvern strengthens our
core competency in secure network communications and encryption.
Sidereal Solutions, Inc. (Sidereal), a satellite communications
technology engineering, operations and maintenance support
services company, was also acquired in November 2009. Sidereal
has been a business partner with TeleCommunication Systems since
2007, providing field engineering service support for satellite
communications and network engineering, technical writing and
training, and other information technology services in support
of our SwiftLink line of deployable systems. These acquisitions
enhance our capabilities in the areas of secure satcom and cyber
security within our Government Segment.
To fund these acquisitions, we used internally generated funds,
increased the size of our commercial bank facility and accessed
the convertible debt market. In November we raised gross
proceeds of $103.5 million through a 4.5% convertible note
offering. The bonds mature in 2014 and have a conversion price
of $10.35 per share. Simultaneously, the Company entered into
convertible note hedge and warrant transactions (the call
spread) with counterparties. The impact of the call spread
is to effectively raise the conversion price to $12.74 per
share. After paying the call spread and financing fees, the net
proceeds to the Company were approximately $90 million. Of
all the financing options available, management believes that
the convertible debt provided the optimal balance of expedited
execution and least dilution.
See additional discussion of acquisitions and financing in
Note 2 to the audited Consolidated Financial Statements
presented elsewhere in this Annual Report on
Form 10-K.
SwiftLink®,
Xypoint®,
AtlasBook®,
Gokivo®
and Enabling Convergent
Technologies®,
are trademarks or service marks of TeleCommunication Systems,
Inc. or our subsidiaries. This Annual Report on
Form 10-K
also contains trademarks, trade names and services marks of
other companies that are the property of their respective owners.
I. Commercial
Segment:
We provide software, related systems, hosted services,
maintenance, and customization services to wireless carriers,
Voice Over IP service providers, and users of electronic map and
related location-based technology, based on our portfolio of
patented intellectual property.
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A.
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Commercial
Product and Service Offerings
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1. Commercial services. We own and lease
network operation centers that host software for which customers
make recurring monthly usage payments. Our hosted offerings
include wireless and Voice over IP E9-1-1, and commercial
location-based applications. Through wireless carriers, we sell
subscriptions to services using our client software applications
such as navigation, traffic, and points of interest, as a
white label vendor to the carriers and in
collaboration with owners of brand names such as Rand
McNally®
and AAA
Mobile®.
Our primary commercial product offerings include:
a. Customer subscriptions through wireless carriers
to application-based services such as Navigation, People-Finder,
Asset-Tracking, and
Points-of-Interest. TCS
provides wireless subscriber applications that use
location-based technology, for which subscribers pay recurring
monthly fees. TCS offers real-time downloadable mobile
applications that deliver easy access to maps, directions,
points-of-interest
directories, film and event information, traffic conditions,
speed camera alerts and weather information. With the
acquisitions of NIM and LocationLogic, we have strengthened our
LBS leadership in the industry.
b. Hosted Location-Based Service (LBS)
infrastructure, including E9-1-1. Our E9-1-1
service bureau works with wireless carriers and local emergency
services in compliance with the Federal Communication Commission
requirements. When a wireless subscriber covered by this service
makes a 9-1-1 call from his or her wireless phone, the software
(1) identifies the call as an emergency call,
(2) accesses the handsets location information from
the wireless network, (3) routes the call to the
appropriate public safety jurisdiction, (4) translates the
information into a dispatcher-friendly format, and
(5) transmits the data to the local emergency service call
center. Our E9-1-1 service operates on a platform at our network
operations center in Seattle, Washington with data center
redundancy in Phoenix, Arizona. As of December 31, 2009, we
are under contract to provide E9-1-1 services to more than 40
customers including wireless carriers Verizon and AT&T
Mobility LLC, and Voice over IP service providers including
Comcast, Vonage, and Level 3.
c. Software and system maintenance. For
our installed base of systems in use by customers (see system
descriptions below), we provide ongoing operational support,
including administration of system components, system
optimization and configuration management. Maintenance services
include tracking customer support issues, trouble shooting, and
developing and installing maintenance releases. We typically
provide maintenance services for an annual or quarterly fee paid
in advance, which is generally priced based on the cumulative
license fees we have billed for the systems being supported.
d. Professional services and solutions involving
geographic information technology. We provide
custom software development and professional services to
customers engaged in telematics (the use of Global Positioning
System technology, electronic maps and related data integrated
with computers and mobile communications technology in
automotive navigation systems). Customers include DENSO
Corporation of Japan, and services include
points-of-interest
applications, and compilation and maintenance of geographic
information databases used in vehicle navigation systems for
products including Toyota, Lexus and others.
2. Commercial Licensed Software-based Systems: We
design and develop software products for wireless carrier and
enterprise networks that enable the delivery of secure and
personalized content, services, and transactions to wireless
devices. We design our software using industry standards for
easy implementation, customization, and interoperability with
other network components. Most of our commercial software is
designed and delivered together with third-party software and
related hardware, which is integrated into new and existing
networks by our engineers. Our primary commercial software-based
system offerings include:
a. Xypoint®
Location Platform (XLP) and Applications for Mobile
Location-based Services: Our Xypoint Location
Platform infrastructure system interacts with wireless networks
to extract the precise location (the X/Y
coordinates) of a users device. In order to determine a
users location with sufficient precision for
U.S. public safety compliance and for commercial
location-based applications, our technology interacts with
networks that have incorporated Assisted GPS systems that use
Global Positioning System (GPS) chips in user
handsets. Our XLP can also work with network triangulation
software which some carriers have added to cell towers and
switches in the network. We have been a leader in developing the
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location platform standard called Secure User Plane for Location
(SUPL) and have incorporated the technology in our
product. Our platform also provides privacy controls so that the
wireless device user controls access to the users location
information, and exposes location application programming
interfaces (APIs) to location-based services
applications.
For our LBS applications, the user devices X/Y
information is extracted from networks and used for E9-1-1 call
routing, navigation directions, identification of points of
interest locations near the user (such as gas stations,
restaurants, or hotels), and locating other network subscribers
near the users current position. With the 2009
acquisitions, TCS added proven, high volume software
applications that allow wireless carriers to deliver optimized
travel directions, generate device-appropriate maps, and search
for nearby points of interest when location-sensitive events
take place such as traffic on my route. TCS believes
that our company now offers the most complete suite of LBS
technology to wireless carriers around the world.
b. Short Message Service Center and Wireless
Intelligent Gateway. Our Short Message Service
Center software enables wireless carrier subscribers to send and
receive text or data messages to and from wireless devices. The
Wireless Intelligent Gateway is a portal for two-way data
communication between users of wireless networks and the
Internet. The Gateway allows users to customize the services
they receive on wireless devices by setting up a user profile
through a single Internet-based procedure. Wireless carriers can
access these user profiles and usage data to gain a better
understanding of customer behavior. The Wireless Intelligent
Gateway allows additional wireless applications to be added as
desired, as well as personalization, instant messaging and
spam-blocking capabilities that can be independently customized
by the end-user. It can interoperate with our location-based
service platform and applications.
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B.
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Commercial Market
Opportunities and Strategy
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We plan to continue to develop and sell software and engineered
systems which we deliver through deployment in customer networks
or through hosted and subscription business models. Our
development investment is focused on the delivery of Internet
content, proprietary third-party content, short messages,
location information, corporate network data and other enhanced
data-communication services to and from wireless devices. The
following trends are driving demand for our products and
services:
Improving Wireless Device
Functionality. Manufacturers continue to increase
the functionality of mobile devices including phones and
personal digital assistants through higher resolution, color
screens, and increased computing capability for sophisticated
applications. These devices enable the user to take advantage of
the high-speed data networks for Internet and data usage. Broad
adoption of location-based services has required, among other
things, handsets incorporating components for interoperation
with Global Positioning System satellites and with LBS network
components that we have developed and provide. A growing number
of handheld wireless devices, especially smart phones, contain
GPS chipsets which interoperate with our network platforms and
applications. Wireless carriers, in order to attract customers,
are offering smart phones at subsidized prices. This strategy
has encouraged purchases of these sophisticated phones, most of
which are capable of supporting location based applications.
Proliferation of smart handheld devices has increased the size
of the market for our technology.
Growth in Wireless and Voice over Internet Protocol (VoIP)
Subscribers. The use of wireless communications
continues to grow, driven by expanded wireless network coverage,
upgraded high-speed digital networks, more affordable service
plans, and higher quality and less expensive wireless devices.
VoIP service offers cost advantages over traditional wireline
service. Wireless growth is expected to continue to increase in
all regions around the world for the foreseeable future. Driving
this growth is the replacement of landline connections with
wireless connections. Some households are now using cellular
phones exclusively. This is especially true for young adults,
but also true in developing countries where wireless may often
be the only means of communications.
Cellular Network Improvements to Next Generation
Capabilities. Mobile operators are deploying
high-speed data networks based on third and fourth generation
technologies that, in many cases, equal or surpass data rates
that are typically available for residential wireline users. The
deployments of these high-speed wireless data networks have made
it possible for individuals and enterprises to
wireless-enable
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many services that previously required a wireline connection,
such as connecting to the Internet and accessing corporate data
outside the office. Our location-based technology and
applications incorporating map graphics take advantage of these
network enhancements.
The FCCs E9-1-1 Mandates. We are one of
the two leading providers of E9-1-1 service to wireless and VoIP
service providers in the U.S. The ability to call for help
or communicate with family members in need is the reason many
people cite for having a wireless phone. A key to enhancing
personal safety through a cell phone is the availability of
E9-1-1 wireless capabilities. In 1996, the Federal
Communications Commission (FCC) mandated the adoption of E9-1-1
technology by wireless carriers. In June 2005, the FCC ordered
providers of interconnected VoIP service to provide E9-1-1
services to all of their customers as a standard feature of the
service, rather than as an optional enhancement.
Growing Use of Commercial Location-Based Wireless
Services. A driver of wireless communication
subscriber revenue growth is the delivery of timely, highly
specialized, interactive and location-specific information.
Technology incorporated in a growing number of networks and
handsets now enables determination of the handsets
location with sufficient precision to allow useful applications
beyond public safetys E9-1-1. Wireless users benefit from
the ability to receive highly customized location-specific
information in response to their queries or via targeted opt-in
content delivered to the wireless device. Enterprises benefit
from wireless location technology by utilizing routing and
tracking applications for their mobile field forces. Our
software provides wireless location solutions to mobile
operators today through our
Xypoint®
Location Platform (XLP.) This technology is being used, via the
use of XLP systems hosted in our network operation centers or in
the carriers networks, by carriers including Verizon
Wireless, MetroPCS in the U.S., Bell Mobility in Canada,
Centennial in Puerto Rico, Iusacell in Mexico, Tata Teleservices
in India, and Hutchison Whampoas
3tm
networks in Europe and the Pacific.
Growing Use of Short Messaging and Internet
Applications. The number of short messaging
services (SMS) users and messages per individual are
projected to continue to increase significantly. Mobile
operators in the United States are experiencing rapid SMS
traffic growth, according to statistics from mobile operators.
Significant growth in the SMS traffic coupled with TCSs
share of the market, ensures that Company will benefit from ever
expanding application of SMS technology in new areas such as
Machine-to-Machine
(M2M) messaging. The Internet and internal corporate
data networks, or intranets, have emerged as global
communications channels that allow users to share information
and conduct business transactions electronically. We provide
solutions for mobile operators to receive and route
e-mail and
SMS messages through our Short Message Service Center and
Wireless Intelligent Gateway systems.
The key elements of our Commercial Segment strategy are to:
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Focus our Software and Integration Resources on Evolving
Carrier Network Capabilities. Mobile operators and the
federal government increasingly seek integrated solutions that
can harness both messaging capabilities of networks and location
information of end-users. We are well positioned to address the
evolving integration needs of our commercial and government
clients through our demonstrated expertise in both messaging and
location determination. Mobile operators have made large capital
expenditure investments in infrastructure for wireless data and
location determination technologies. Higher data consumption by
end users has put stress on carrier networks, leading operators
to upgrade and migrate them to fourth generation specifications.
While initially envisioned as separate technologies, messaging
and location determination technologies can be integrated to
provide value-added services and applications for the
operators end-users.
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Expand Our Sales and Marketing Relationships. We are
developing relationships with communication infrastructure
providers in order to expand our sales channels for our carrier
software products and services. We have historically leveraged
our strategic relationships with original equipment
manufacturers to market our Commercial Segment products to
wireless carriers worldwide. We have long-standing relationships
with Qualcomm Incorporated , and we are adding partnerships for
our location technologies, including a marketing alliance in
China established in January 2009.
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Grow Our Wireless Carrier and Voice Over IP Customer
Base. We now serve or are under contract with more than
60 wireless carrier networks and VoIP service providers in 16
countries. We intend to
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7
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expand our domestic and international carrier base by
capitalizing on our relationships with original equipment
manufacturers and establish new distribution partnerships and by
expanding our own sales and marketing initiatives. We will
continue to develop network software for wireless carriers and
cable operators that operate on all major types of networks.
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Leverage Our Expertise in Accessing Information Stored Inside
Wireless Networks. We will continue to leverage our
knowledge of complex call control technology, including
Signaling System 7 and Internet Protocol standards, to unlock
valuable information such as user location, device on/off
status, and billing and transaction records that reside inside
wireless networks and are difficult to retrieve and utilize.
Using this information, we intend to expand the range of
capabilities that wireless data technology can accomplish for
our customers.
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Develop and Enhance Our Technology. We will continue
to invest in our underlying technology and to capitalize on our
expertise to meet the growing demand for sophisticated wireless
applications. Including pre-acquisition investments by NIM and
LocationLogic, our companys technology reflects more than
$190 million invested in R&D over the last
15 years to develop proprietary wireless location based
services. We also have research and development relationships
with wireless handset manufacturers, wireless carriers, and
content and electronic commerce providers. Our Xypoint platform
architecture efficiently integrates our presence, location, call
control and messaging technology, resulting in reduced costs,
increased reliability, more efficient deployments, compatibility
with our existing products and a migration path to
third-generation services.
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Pursue Select Acquisitions. We intend to continue to
selectively consider acquisitions of companies and technologies
in order to increase the scale and scope of our operations,
market presence, products, services and customer base.
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II. Government
Segment:
We engineer and provide secure, communication solutions,
including deployable wireless communication systems and related
support services with emphasis on satellite-based technology, to
agencies of the U.S. Departments of Defense (DoD), State,
Justice, Homeland Security, as well as other government
customers.
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A.
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Government
Product and Service Offerings
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1. Government Services. We enter into
fee-for-service
contracts under which revenue is generated based on contract
labor billing rates or based on fixed fees for deliverables.
These services, typically under multi-year contracts or contract
vehicles, include:
a. Secure Satellite Teleport Data Landing and
Transmission Services. We own and operate a
high-speed satellite communications teleport in Manassas,
Virginia that is connected to the public switched telephone
network. These facilities provide transport services for
Internet Protocol (IP)-based media content consisting of Voice
over IP, Internet, video and messaging data using Very Small
Aperture Terminal (VSAT) satellite technology as
part of our communication solutions for our customers. We
provide
end-to-end
connectivity between users of our deployed SwiftLink systems in
remote locations back to our Teleports and eventually onto
customers back-office desktops and cell phones. We
purchase space segment and resell it to customers using our
facilities. Our Satellite Operations Center is co-located with
our headquarters in Annapolis, MD.
b. Integrated Logistics Support (ILS)
Services. We offer ILS services in support of our
SwiftLink systems. This includes basic and extended maintenance
services, training, depot support, product resets, and
documentation. The Sidereal acquisition bolstered our service
and support capabilities of SwiftLink products as well as
deployable communication systems sourced from companies other
than TeleCommunication Systems.
c. Information Technology and Cyber Security
Professional Services. We design, install, and
operate data networks that integrate computing and
communications, including systems that provide communications
via both satellite and terrestrial links. We can provide
complete network installation services
8
from cabling infrastructure to complex communications system
components. We also provide ongoing network operation and
management support services including telecom expense management
under multi-year contracts with government customers. The 2009
acquisition of Solvern extends our core competency in secure
network communication and encryption, to cyber security
training, project management, systems engineering, information
assurance, program and business management and enterprise
modernization. We now have contract vehicles for the
Governments surging demand for information technology
earned value management, cyber training, cyber technical
solutions, and related procurement support.
2. Government Systems. We have designed and
developed our SwiftLink product line, a series of ruggedized,
wireless and satellite-based secure communication systems, which
can be rapidly deployed in remote areas where other means of
reliable communication may not be available. We have four
families of products: VSAT solutions, Baseband kits, Wireless
Network Extension Devices, and Executive Travel Kits. SwiftLink
products provide secure voice, video and data communications for
multiple personnel. Since 2006 we have made large volume
shipments of systems under the US Armys Worldwide
Satellite Systems contract vehicle, including a SwiftLink
variation called SNAP (Secure / nonsecure
access point) and Wireless
Point-to-Point
Link (WPPL) systems. All of our SwiftLink systems
can be deployed by a single person in less than ten minutes,
creating critical communication channels from any location
around the world. Uses include critical communications for DoD
warfighters and command headquarters, emergency response, news
reporting, public safety, drilling and mining operations, field
surveys and other activities that require remote capabilities
for video and data transmission. Integration work which
typically accompanies customer purchases of our secure
deployable systems is reported together with the system sales
revenue. Our deployable VSAT multi-band terminals provide access
to a wide array of commercial and military satellites that make
broadband capabilities available on a global basis. The
Broadband Global Area Network upgrade of the Inmarsat satellite
constellation, which enables lower cost internet protocol
traffic with broader band capability, expands our opportunity
for SwiftLink sales. In addition, our deployable broadband
wireless systems provide extensions of secure wireless
communications services for up to 30 miles from a SwiftLink
point of presence.
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B.
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Government Market
Opportunities and Strategy
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We plan to continue to provide communication systems
integration, information technology services, software and
cyber-security solutions, including operation of secure
satellite teleport facilities and resale of satellite airtime,
to units of the U.S. Department of Defense, and other
government customers. The following trends are driving demand
for our products and services:
Expanded Need for Secure, Interoperable Deployable
Communication Solutions. In recognition of the
military imperative of enabling secure, broadband access to data
for missions in disparate, remote locations, the U.S. Army
awarded the WWSS
5-year
procurement contract vehicle to six prime contractors, including
TeleCommunication Systems, Inc. in the third quarter of 2006,
with a ceiling value of up to $5 billion in procurements
through 2011. This procurement encompasses systems like our
SwiftLink family of deliverables, and during 2009 and 2008 we
generated significant revenue under WWSS. We are continuing to
enhance our deployable communication systems product line to
take advantage of the evolving environment, including the
benefits of Very Small Aperture Terminal satellite
communications architectures deployable in multiple aperture
sizes from 0.45 meter man pack terminals to 2.4 meters where
desirable and the use of Inmarsat Broadband Global Area Network
enhancements to our satellite services.
Growing Need for Cyber Security. Escalating
focus by government agencies to protect their online assets has
brought the importance of cyber security and associated
solutions to the fore. By acquiring Solvern, we now have
contract vehicles for the governments surging demand for
information technology cyber security training, cyber technical
solutions, and related procurement support. Steep growth in
spending to the multi-billion dollar level by US federal
agencies on cyber initiatives is expected over the next five
years. The expertise and processes developed for Government
Segment could be adapted to meet the online security needs of
commercial clients. We are proficient in recruiting and
developing cyber professionals and our Art of Exploitation
training is based on intellectual property developed by the
company to support cyber security initiatives. The training
covers a clear set of leading cyber methodologies to produce a
certified cyber scientist.
9
Government Outsourcing of Network and Telecom Technical
Functions. Federal agencies, as well as state and
local governments, are increasingly contracting with specialist
teams for functions such as network management, and for
long-term projects such as software development and systems
integration. Since the founding of our Company, we have built
relationships with federal agencies, as well as the State of
Maryland and the City of Baltimore. Since early 2004, we have
made it a management priority to aggressively expand our base of
long-term service contract engagements. Weve made
strategic acquisitions during 2009, added experienced sales
personnel, and enhanced our relationships with systems
integrators and specialist vendors to expand our penetration of
the government service market.
Growing Use of Secure Wireless Communications and Location
Technology for Defense, Intelligence and Homeland
Security. Wireless communications and location
technology are key initiatives within the federal government for
both security and supply-chain management. Wireless
communications in emergencies are of paramount importance, as
emergency personnel need to be able to communicate and share
information across agencies and departments where wireline
systems may be unavailable. We believe that our expertise in the
areas of wireless E9-1-1, location and messaging services, and
secure satellite communications can be leveraged to provide the
needed wireless infrastructure for the U.S. Departments of
Homeland Security and Defense and we are currently pursuing
opportunities to provide such products and services. Our
SwiftLink deployable communication systems are also increasingly
used by military and other government agencies around the globe
for communications in times of emergencies. SwiftLink is
designed to provide secure voice and data communications through
encrypted satellite links.
Secure Teleport, Space Segment and Integration
Capabilities with Deployable Systems as a Bundled
Solution. Government customers can benefit from
single-sourcing secure communications solutions which include a
secure U.S. landing site for backhaul traffic as well as
network engineering expertise and secure remote terminals. We
believe that TCS enjoys a competitive advantage, because it can
offer all of these elements from a single vendor.
Application of Commercially Proven Technology to
Government Solutions. Government customers
increasingly are using commercial carrier networks. Procurement
officers have expressed a preference for solutions that
incorporate proven commercial technology, rather than reliance
on government research and development funding. Our portfolio of
software, patented intellectual property, and teams of wireless
and encryption specialists positions us to tap into this
opportunity.
Our Government Segment strategy is to be a leading secure
satellite communications solution vendor, by building scale and
a continuum of related technical capabilities. Our company has a
solid foundation as a vendor of deployable systems and related
field support and maintenance, operator of fixed teleports, and
reseller of space segment. Related extensions of these core
competencies include high growth professional service areas such
as cyber-security contract work. We intend to continue to
selectively consider acquisitions of companies and technologies
in order to increase the scale and scope of our operations,
market presence, products, services and customer base.
Customers
Commercial Segment. Our principal commercial
customers are wireless telecommunications carriers in the United
States and around the world, either directly or through our
channel partners. We provide licensed software-based systems,
and hosted applications to carrier subscribers around the world.
Our wireless carrier customers include Verizon Wireless,
AT&T Mobility LLC,
T-Mobile,
Sprint, MetroPCS, Leap Wireless, Telus and the Hutchison Whampoa
3 brand networks. Customers for our Voice Over IP
E9-1-1 services include Comcast, Vonage, and Level 3. We
provide electronic map technology solutions to telematics
vendors including DENSO Corporation. Our sales efforts target
wireless, wireline and Voice over IP service providers around
the world.
Government Segment. Our government customers include
major units of the U.S. Departments of Defense, Justice,
Homeland Security, and State, the General Services
Administration, and the City of Baltimore. In the aggregate,
U.S. federal government entities accounted for 44% of total
2009 revenue.
10
Backlog
As of December 31, 2009 and 2008, we had unfilled orders,
or funded contract and total backlog, as follows:
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December 31,
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2009 vs. 2008
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($ in millions)
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2009
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2008
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$
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%
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Commercial Segment
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$
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240.5
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$
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80.1
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|
|
$
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160.4
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|
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200
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%
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Government Segment
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98.0
|
|
|
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79.7
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|
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18.3
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|
|
|
23
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%
|
|
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|
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|
|
|
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|
|
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Total funded contract backlog
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$
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338.5
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|
|
$
|
159.8
|
|
|
$
|
178.7
|
|
|
|
112
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%
|
|
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|
|
|
|
|
|
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|
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Commercial Segment
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$
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240.6
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|
|
$
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91.0
|
|
|
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149.6
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|
|
|
164
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%
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Government Segment
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390.2
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|
|
|
354.0
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|
|
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36.2
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|
|
10
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%
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Total backlog of orders and commitments, including customer
options
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$
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630.8
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$
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445.0
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$
|
185.8
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|
|
|
42
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%
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Expected to be realized within next 12 months
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$
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216.1
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|
|
$
|
116.0
|
|
|
$
|
100.1
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|
|
|
86
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%
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|
|
|
|
|
|
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|
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|
|
|
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Funded contract backlog represents contracts for which fiscal
year funding has been appropriated by the companys
customers (mainly federal agencies), and for hosted services
(mainly for wireless carriers), backlog for which is computed by
multiplying the most recent months contract or
subscription revenue times the remaining months under existing
long-term agreements, which we believe is the best available
information for anticipating revenue under those agreements.
Total backlog, as is typically measured by government
contractors, includes orders covering optional periods of
service
and/or
deliverables, but for which budgetary funding may not yet have
been approved. Company backlog at any given time may be affected
by a number of factors, including the availability of funding,
contracts being renewed or new contracts being signed before
existing contracts are completed. Some of the companys
backlog could be canceled for causes such as late delivery, poor
performance and other factors. Accordingly, a comparison of
backlog from period to period is not necessarily meaningful and
may not be indicative of eventual actual revenue.
Acquisitions
in 2009
On May 19, 2009, we acquired substantially all of the
assets of LocationLogic LLC, formerly part of Autodesk Inc., a
provider of infrastructure, applications and services for
carriers and enterprises to deploy location-based services.
LocationLogics business and consumer applications and
platform software provide location-enabling services and tools
to deploy reliable, high tech information for wireless users.
The acquisition adds people finder, mobile resource management,
and phone recovery and security applications to our portfolio of
offerings. LocationLogic was acquired for a purchase price of
$25 million, comprised of $15 million cash and
$10 million, or approximately 1.4 million shares, paid
in the Companys Class A Common Stock. Operating
results of LocationLogic are reflected in the Companys
consolidated financial statements from the date of acquisition
and are integrated into the commercial services segment.
On November 3, 2009, we acquired all of the outstanding
stock of Solvern Innovations, Inc., a provider of comprehensive
communications products and solutions, training, and technology
services for multiple security-based platforms. Solvern is based
near Baltimore, Maryland and has about 100 employees.
Increased threats of web-based attacks, coupled with the
U.S. governments renewed focus on protecting online
assets, indicates that cyber security will be a high growth
communications technology area for the foreseeable future and
the acquisition of Solvern extends our core competency in secure
network communications and encryption. Solverns purchase
consideration included cash, approximately 1 million shares
of TCS Class A Common Stock, and contingent consideration
based on the businesss gross profit in 2010 and 2011.
Operating results of Solvern are reflected in the Companys
consolidated financial statements from the date of acquisition
and are integrated into the government services segment.
On November 16, 2009, we purchased substantially all of the
assets of Sidereal Solutions, Inc., a satellite communications
technology engineering, operations and maintenance support
services company. Sidereal is based in Atlanta, Georgia, and has
about 40 employees. Sidereal has been a business partner
with the Company since 2007, providing field service support for
satellite communications and network engineering, technical
11
writing and training, and other information technology services
in support of our SwiftLink line of deployable systems. Sidereal
professionals comprise personnel from all four
U.S. military service components with expertise in the
logistics support of military operations for tactical
communications, supporting multiple system designs in addition
to SwiftLink. Sidereals purchase consideration included
cash, approximately 244,000 shares of TCS Class A
Common Stock, and contingent consideration based on the
businesss gross profit in 2010 and 2011. Operating results
of Sidereal are reflected in the Companys consolidated
financial statements from the date of acquisition and are
integrated into the government services segment.
On December 15, 2009, we acquired all of the outstanding
stock of Networks In Motion, Inc., a provider of wireless
navigation solutions for GPS-enabled mobile phones. It is based
in California, and has about 200 employees. NIM has over
3.5 million subscribers and provides
turn-by-turn
navigation to carriers and their customers in 38 countries and
in 10 languages. The acquisition accelerates the
Companys position in enabling mobile operators, offering
enhanced location-based data services and strengthens our
position with market-leading navigation technology, and adds an
internationally recognized navigation application to our global
LBS application. Capabilities of TCS Location-Based
Services (LBS) assets combined with those of LocationLogic and
NIM create compelling comprehensive suite of location based
technology offerings. NIM delivers Tier 1 location based
wireless applications, with market-leading navigation technology
that shares the 99.999% reliability standard of other TCS
solutions. NIM was acquired for a purchase price of
$170 million, consisting of $110 million cash,
$20 million, or approximately 2.2 million shares, paid
in the Companys Class A Common Stock, and
$40 million in promissory notes. The promissory notes bear
simple annual interest of 6% and are due in three installments;
$30 million on the 12 month anniversary of the
closing, $5 million on the 18 month anniversary of the
closing, and $5 million on the 24 month anniversary of
the closing, subject to escrow adjustments. The promissory notes
are effectively subordinated to TCSs secured debt and
structurally subordinated to any present and future indebtedness
and other obligations of TCSs subsidiaries. Operating
results of NIM are reflected in the Companys consolidated
financial statements from the date of acquisition and are
included in the commercial services segment.
Sales and
Marketing
We sell our products and services through our direct sales force
and through indirect channels. Our direct sales and marketing
force consists of approximately 50 professionals in the
U.S. and Europe. We have also historically leveraged our
relationships with original equipment manufacturers (OEMs) to
market our commercial systems to wireless carrier customers.
These indirect sales relationships include Alcatel Lucent and
Qualcomm. We are also adding partnerships for our location
technologies, including a marketing alliance in China
established in January 2009. During the indirect sales process,
as well as during installation and maintenance, we maintain
extensive direct contact with prospective carrier customers.
We are pre-qualified as an approved vendor for some government
contracts, and some of our products and services are available
to government customers via the General Services
Administrations Information Technology Schedule 70,
and the Worldwide Satellite Services (WWSS) and the
Space and Naval Warfare Foreign Military Sales (SPAWAR
FMS) contract vehicles. We collaborate in sales efforts
under various arrangements with integrators. Our marketing
efforts also include advertising, public relations, speaking
engagements and attending and sponsoring industry conferences.
Competition
The markets for our products and services are competitive. The
adoption of industry standards may make it easier for new market
entrants to compete with us. We expect that we will continue to
compete primarily on the basis of the functionality, breadth,
time to market, ease of integration, price, and quality of our
products and services, as well as our market experience and
reputation. The market and competitive conditions are
continually developing. Our software products compete with many
similar products provided by other companies. It is difficult to
present a meaningful comparison between our competitors and us
because there is a large variation in revenue generated by
different customers, different products and services, as well as
the different combinations of products and services offered by
our competitors. We cannot, therefore, quantify our relative
competitive position.
12
Our current and potential competitors include:
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Commercial Segment. Intrado Inc. division of West
Corporation; Motorola Inc.; Siemens AG; Ericsson LM Telephone
Co.; Openwave Systems Inc.; Acision; Comverse Technology Inc;
and Nokia Corporation.
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Government Segment. General Dynamics Corp.; CACI
International Inc.; Globecomm Systems, Inc.; Computer Sciences
Corporation; Datapath Inc.; and ViaSat Inc.
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Many of our existing and potential competitors have
substantially greater financial, technical, marketing and
distribution resources than we do. Many of these companies have
greater name recognition and more established relationships with
their target customers. Furthermore, these competitors may be
able to adopt more aggressive pricing policies and offer
customers more attractive terms than we can. With time and
capital, it would be possible for our competitors to replicate
our products and services.
We partner with vendors of precise location technology. Certain
of our partners may attempt to compete with our operating
platform by developing their own transmission platform or by
purchasing another mobile location platform. The markets for
commercial location and other mobile wireless applications for
carriers and enterprises are relatively new and continually
developing. The convergence of wireless technologies and the
Internet is creating many initiatives to bring data and
transaction capabilities to wireless devices. There is a wide
array of potential competitors in this market, including
providers of competing location management platforms, competing
e-mail
products, competing enterprise mobility platforms and other
competing applications for wireless devices.
Research
and Development
Our success depends on a number of factors, which include, among
other items, our ability to identify and respond to emerging
technological trends in our target markets, to develop and
maintain competitive products, to enhance our existing products
by adding features and functionality that differentiate the
products from those of our competitors, and to bring products to
market on a timely basis and at competitive prices. As of
January 1, 2010, our overall staff included more than 560
professionals with technical expertise in wireless network,
client software development and satellite-based communication
technology. Since 1996, we have made substantial investments in
wireless technology research and development, most of which has
been devoted to the development of carrier and enterprise
network software products and services. We are primarily
focusing our current research and development investments in
cellular location-based and electronic map technology, including
E9-1-1 technology.
We support existing telecommunications standards and promote new
standards in order to expand the market for wireless data. We
actively participate in wireless standards-setting organizations
including the Open Mobile Alliance, and we are represented on
the Board of Directors for the E9-1-1 Institute. In 1996, we
co-founded the Intelligent Network Forum, an organization
dedicated to expanding the role of intelligent networks in
telecommunications. As part of our strategy to expand the role
of short messaging, we co-founded the Short Message
Peer-to-Peer
Forum in 1999. For the years ended December 31, 2009, 2008,
and 2007, our research and development expense in continuing
operations was $22.4 million, $16.2 million, and
$13.1 million, respectively.
Certain of our government customers contract with us from time
to time to conduct research on telecommunications software,
equipment and systems.
Intellectual
Property Rights
We rely on a combination of patent, copyright, trademark,
service mark, and trade secret laws and restrictions to
establish and protect certain proprietary rights in our products
and services.
As of the end of 2009, we held 108 issued patents, including
from acquisitions, relating to wireless text messaging,
inter-carrier messaging, number portability, GPS ephemeris data,
emergency public safety data routing and electronic commerce. We
have filed more than 300 additional patent applications for
certain apparatus and processes we believe we have invented to
enable key features of the location services, wireless text
alerts, Short Message Service Center, mobile-originated data and
E9-1-1 network software. The acquisition
13
of NIM added 13 patents and 44 applications that are
complementary to our existing patent portfolio, and
LocationLogic added 11 patents and 19 pending applications.
There is no assurance that our patent applications will result
in a patent being issued by the U.S. Patent and Trademark
Office or other patent offices, nor is there any guarantee that
any issued patent will be valid and enforceable. Additionally,
foreign patent rights may or may not be available or pursued in
any technology area for which U.S. patent applications have
been filed.
On December 23 2009, TeleCommunication Systems and Sybase 365,
LLC agreed to a settlement of $23 million in resolution of
inter-carrier messaging patent infringement litigation. After
deducting legal expenses, the net proceeds to the Company were
$15.7 million.
We developed our Short Message Service Center software in 1996
under our development agreement with Alcatel Lucent. Under the
development agreement, we share certain ownership rights in this
software application with Alcatel Lucent. The scope of each
partys ownership interest is subject to each partys
various underlying ownership rights in intellectual property and
also to confidential information contributed to the
applications, and is subject to challenge by either party.
As a member of various industry standard-setting forums, we have
agreed to license certain of our intellectual property to other
members on fair and reasonable terms to the extent that the
license is required to develop non-infringing products under the
specifications promulgated by those forums.
Employees
As of December 31, 2009, we had 1,048 employees, of
which 1,009 were full-time and 39 were part-time. We believe
relations with our employees are good. None of our employees is
represented by a union.
Geographical
Information
During 2009, 2008, and 2007, total revenue generated from
products and services of our continuing operations in the
U.S. were $290.7 million, $211.5 million, and
$138.6 million, respectively, and total revenue generated
from products and services outside of the U.S. were
$9.4 million, $8.6 million, and $5.6 million,
respectively. As of December 31, 2009, 2008, and 2007,
essentially all of the long-lived assets of our continuing
operations were located in the U.S.
We are subject to risks related to offering our products and
services in foreign countries. See the information under the
heading Risk Factors Because our product
offerings are sold internationally, we are subject to risks of
conducting business in foreign countries included in
Item 1A.
You should consider carefully each of the following risks and
all of the other information in this Annual Report on
Form 10-K
and the documents incorporated by reference herein. If any of
the following risks and uncertainties develops into actual
events, our business, financial condition or results of
operations could be materially adversely affected.
Risks Related to
Our Business
If wireless
carriers do not continue to provide our text messaging and
location-based wireless applications to their subscribers, our
business could be harmed.
If wireless carriers limit their product and service offerings
or do not purchase additional products containing our
applications, our business will be harmed. Wireless carriers
face implementation and support challenges in introducing
Internet-based services via wireless devices, which may slow the
rate of adoption or implementation of our products and services.
Historically, wireless carriers have been relatively slow to
implement complex new services such as Internet-based services.
Our future success depends upon a continued increase in the use
of wireless devices to access the Internet and upon the
continued development of wireless devices as a medium for the
delivery of network-based content and services. We have no
control over the pace at which wireless carriers implement these
new services. The failure of wireless carriers to introduce and
support services utilizing
14
our products in a timely and effective manner could reduce sales
of our products and services and have a material adverse effect
on our business, financial position, results of operations or
cash flows.
Network
failures, disruptions or capacity constraints in our third party
data center facilities or in our servers could affect the
performance of the products and services of our wireless
applications and E9-1-1 business and harm our reputation and our
revenue.
The products and services of our wireless applications business
are provided through a combination of our servers, which we
house at third party data centers, and the networks of our
wireless carrier partners. The operations of our wireless
applications business rely to a significant degree on the
efficient and uninterrupted operation of the third party data
centers we use. Our hosted data centers are currently located in
third party facilities located in the Irvine, California area.
We also use third party data center facilities in the Phoenix,
Arizona area to provide for disaster recovery. Depending on the
growth rate in the number of our end users and their usage of
the services of our wireless applications business, if we do not
timely complete and open additional data centers, we may
experience capacity issues, which could lead to service failures
and disruptions. In addition, if we are unable to secure data
center space with appropriate power, cooling and bandwidth
capacity, we may be unable to efficiently and effectively scale
our business to manage the addition of new wireless carrier
partners, increases in the number of our end users or increases
in data traffic.
Our data centers are potentially vulnerable to damage or
interruption from a variety of sources including fire, flood,
earthquake, power loss, telecommunications or computer systems
failure, human error, terrorist acts or other events. There can
be no assurance that the measures implemented by us to date, or
measures implemented by us in the future, to manage risks
related to network failures or disruptions in our data centers
will be adequate, or that the redundancies built into our
servers will work as planned in the event of network failures or
other disruptions. In particular, if we experienced damage or
interruptions to our data center in the Irvine, California area,
or if our disaster recovery data center in Phoenix was unable to
work properly in the event of a disaster at our Irvine center,
our ability to provide efficient and uninterrupted operation of
our services would be significantly impaired.
We could also experience failures of our data centers or
interruptions of our services, or other problems in connection
with our operations, as a result of:
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damage to or failure of our computer software or hardware or our
connections and outsourced service arrangements with third
parties;
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errors in the processing of data by our servers;
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computer viruses or software defects;
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physical or electronic break-ins, sabotage, intentional acts of
vandalism and similar events; or
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errors by our employees or third party service providers.
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Poor performance in or disruptions of the services of our
wireless applications business could harm our reputation, delay
market acceptance of our services and subject us to liabilities.
Our wireless carrier agreements require us to meet operational
uptime requirements, excluding scheduled maintenance periods, or
be subjected to penalties. If we are unable to meet these
requirements, our wireless carrier partners could terminate our
agreements or we may be required to refund a portion of monthly
subscriptions fees they have paid us.
In addition, if our end user base continues to grow, additional
strain will be placed on our technology systems and networks,
which may increase the risk of a network disruption. Any outage
in a network or system, or other unanticipated problem that
leads to an interruption or disruption of our of our wireless
applications business, could have a material adverse effect on
our operating results and financial condition.
If we are
unable to grow data center capacity as needed, our business will
be harmed.
Despite frequent testing of the scalability of our wireless
applications business in a test environment, the ability of our
wireless applications business to scale to support a substantial
increase in the use of those services or number of users in an
actual commercial environment is unproven. If our wireless
applications business does
15
not efficiently and effectively scale to support and manage a
substantial increase in the use of our services or number of
users while maintaining a high level of performance, our
business will be seriously harmed.
Our
operating results could be adversely affected by any
interruption of our data delivery services, system failure or
production interruptions.
Our E9-1-1, hosted location-based services and satellite
teleport services operations depend on our ability to maintain
our computer and telecommunications equipment and systems in
effective working order, and to protect our systems against
damage from fire, natural disaster, power loss,
telecommunications failure, sabotage, unauthorized access to our
system or similar events. Although all of our mission-critical
systems and equipment are designed with built-in redundancy and
security, any unanticipated interruption or delay in our
operations or breach of security could have a material adverse
effect on our business, financial condition and results of
operations.
Furthermore, any addition or expansion of our facilities to
increase capacity could increase our exposure to natural or
other disasters. Our property and business interruption
insurance may not be adequate to compensate us for any losses
that may occur in the event of a system failure or a breach of
security. Furthermore, insurance may not be available to us at
all or, if available, may not be available to us on commercially
reasonable terms.
Our past
and future acquisitions of companies or technologies could prove
difficult to integrate, disrupt our business, dilute shareholder
value or adversely affect operating results or the market price
of our Class A common stock.
We have in the past acquired a number of businesses and
technologies, and we may in the future acquire or make
investments in other companies, services and technologies. Any
acquisitions, strategic alliances or investments we may pursue
in the future will have a continuing, significant impact on our
business, financial condition and operating results. The value
of the companies or assets that we acquire or invest in may be
less than the amount we paid if there is a decline of their
position in the respective markets they serve or a decline in
general of the markets they serve. If we fail to properly
evaluate and execute acquisitions and investments, our business
and prospects may be seriously harmed. To successfully complete
an acquisition, we must:
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properly evaluate the technology;
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accurately forecast the financial impact of the transaction,
including accounting charges and transaction expenses;
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integrate and retain personnel;
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retain and cross-sell to acquired customers;
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combine potentially different corporate cultures; and
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effectively integrate products and services, and research and
development, sales and marketing and support operations.
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If we fail to do any of these, we may suffer losses, our
management may be distracted from
day-to-day
operations and the market price of our Class A common stock
may be materially adversely affected. In addition, if we
consummate future acquisitions using our equity securities or
convertible debt, existing shareholders may be diluted which
could have a material adverse effect on the market price of our
Class A common stock.
The companies and business units we have acquired or invested in
or may acquire or invest in are subject to each of the business
risks we describe in this section, and if they incur any of
these risks the businesses may not be as valuable as the amount
we paid. Further, we cannot guarantee that we will realize the
benefits or strategic objectives we are seeking to obtain by
acquiring or investing in these companies.
16
We are
substantially dependent on our wireless carrier partners to
market and distribute the products and services generated by our
wireless applications business to end users and our wireless
applications business may be harmed if our wireless carrier
partners elect not to broadly offer these
services.
We rely on our wireless carrier partners to introduce, market
and promote the products and services of our wireless
applications business to end users. None of our wireless carrier
partners is contractually obligated to continue to do so. If
wireless carrier partners do not introduce, market and promote
mobile phones that are GPS enabled and on which our client
software is preloaded and do not actively market the products
and services of our wireless applications business, the products
and services of our wireless applications business will not
achieve broader acceptance and our revenue may not grow as fast
as anticipated, or may decline.
Wireless carriers, including those with which we have existing
relationships, may decide not to offer our services
and/or may
enter into relationships with one or more of our competitors.
While our products and services may still be available to
customers of those wireless carriers as downloads from
application stores or our website, sales of the products and
services of our wireless applications business would likely be
much more limited than if they were preloaded as a white label
service actively marketed by the carrier or were included as
part of a bundle of services. Our inability to offer the
products and services of our wireless applications business
through a white label offering or as part of a bundle on popular
mobile phones would harm our operating results and financial
condition.
We expect that competitive pricing pressures will continue in
its industry. Our wireless carrier partners have the ability to
lower end user pricing on the products and services of our
wireless applications business which would have an immediate
adverse effect on our revenue. Our gross margin may decrease if
the average cost per end user to provide our services does not
decline proportionately. These costs include third party map and
other data costs and internal costs to provide our services.
Our success
depends on significantly increasing the number of end users that
purchase the products and services of our wireless
applications
business from our wireless carrier
partners.
A significant portion of our revenue is derived from
subscription fees that we receive from our wireless carrier
partners for end users who subscribe to our service on a stand
alone basis or in a bundle with other services. To date, a
relatively small number of end users have subscribed for our
services in connection with their wireless plans compared to the
total number of mobile phone users. The near term success of our
of our wireless applications business depends heavily on
achieving significantly increased subscriber adoption of the
products and services of our wireless applications business
either through stand alone subscriptions to our services or as
part of bundles from our existing wireless carrier partners. The
success of our wireless applications business also depends on
achieving widespread deployment of the products and services of
our wireless applications business by attracting and retaining
additional wireless carrier partners. The use of the products
and services of our wireless applications business will depend
on the pricing and quality of those services, subscriber demand
for those services, which may vary by market, as well as the
level of subscriber turnover experienced by our wireless carrier
partners. If subscriber turnover increases more than we
anticipate, our financial results could be adversely affected.
If our
current and future wireless carrier partners do not successfully
market the products and services of our wireless applications
business to their customers or if we are not successful in
maintaining and expanding our relationships with our wireless
carrier partners, we will not be able to maintain or increase
the number of end users that use the products and services of
our business, operating results and financial condition may be
materially adversely affected.
Our ability to increase or maintain our end user base and
revenue will be impaired if mobile phone manufacturers do not
allow us to customize our services for their new devices. We
typically deliver the services of our wireless applications
business through client software that has been customized to
work with a given mobile phones operating system, features
and form factors. Wireless carrier partners often insist that
mobile phone manufacturers permit us to customize our client
software for their devices in order to provide the end user with
a positive experience. Wireless carriers or mobile phone
manufacturers may enter into agreements
17
with other providers of products and services for new or popular
mobile phones. For this reason or others, some mobile phone
manufacturers may refuse to permit us to access preproduction
models of their mobile phones or the mobile phone manufacturers
may offer a competing service. If mobile phone manufacturers do
not permit us to customize our client software and preload it on
their devices, we may have difficulty attracting end users
because of poor user experiences or an inconvenient provisioning
process. If we are unable to provide seamless provisioning or
end users cancel their subscriptions to our services because
they have poor experiences, our revenue may be harmed.
Our
wireless carrier partners may change the pricing and other terms
by which they offer our wireless applications business, which
could result in increased end user churn, lower revenue and
adverse effects on our business.
Several of our wireless carrier partners sell unlimited data
service plans, which include the products and services of our
wireless applications business. As a result, end users do not
have to pay a separate monthly fee to use the services provided
by our wireless applications business. If our wireless carrier
partners were to eliminate the services provided by our wireless
applications business from their unlimited data service plans,
we could lose end users as they would be required to pay a
separate monthly fee to continue to use the services provided by
our wireless applications business. In addition, we could be
required to change our fee structure to retain end users, which
could negatively affect our gross margins. Our wireless carrier
partners may also seek to reduce the monthly fees per subscriber
that they pay us if their subscribers do not use the services
provided by our wireless applications business as often as the
wireless carriers expect or for any other reason in order to
reduce their costs. Our wireless carrier partners may also
decide to raise prices, impose usage caps or discontinue
unlimited data service plans, which could cause our end users
who receive the services provided by our wireless applications
business through those plans to move to a less expensive plan
that does not include those services or terminate their
relationship with the wireless carrier. If imposed, these
pricing changes or usage restrictions could make the products
and services of our wireless applications business less
attractive and could result in current end users abandoning
those products and services. If end user turnover increased, the
number of our end users and our revenue would decrease and our
business would be harmed. We are also required to give Verizon
Wireless certain most favored customer pricing on specified
products and in certain markets. In certain circumstances this
may require us to reduce the price per end user under the
Verizon Wireless contract.
New
entrants and the introduction of other distribution models in
the location- based services market may harm our competitive
position.
The markets for development, distribution and sale of
location-based products and services are rapidly evolving. New
entrants seeking to gain market share by introducing new
technology and new products may make it more difficult for us to
sell the products and services of our wireless applications
business, and could create increased pricing pressure, reduced
profit margins, increased sales and marketing expenses or the
loss of market share or expected market share, any of which may
significantly harm our business, operating results and financial
condition.
Although historically wireless carriers controlled provisioning
and access to the applications that could be used on mobile
phones connected to their networks, in recent years consumers
have been able to download and provision applications from
individual provider websites and to select from a menu of
applications through the Apple iTunes App Store, the Blackberry
App World and other application aggregators. Increased
competition from providers of location-based services which do
not rely on a wireless carrier may result in fewer wireless
carrier subscribers electing to purchase their wireless
carriers branded location-based services, which could harm
our business and revenue. In addition, these location-based
services may be offered for free or on a one time fee basis,
which could force us to reduce monthly subscription fees or
migrate to a one time fee model to remain competitive. We may
also lose end users or face erosion in our average revenue per
user if these competitors deliver their products without charge
to the consumer by generating revenue from advertising or as
part of other applications or services.
18
We rely on
our wireless carrier partners for timely and accurate subscriber
information. A failure or disruption in the provisioning of this
data to us would adversely affect our ability to manage our
wireless applications business effectively.
We rely on our wireless carrier partners to bill subscribers and
collect monthly fees for the products and services of our
wireless applications business, either directly or through third
party service providers. If our wireless carrier partners or
their third party service providers provide us with inaccurate
data or experience errors or outages in their own billing and
provisioning systems when performing these services, our revenue
may be less than anticipated or may be subject to adjustment
with the wireless carrier. In the past, we have experienced
errors in wireless carrier reporting. If we are unable to
identify and resolve discrepancies in a timely manner, our
revenue may vary more than anticipated from period to period and
this could harm our business, operating results and financial
condition.
We rely on
third party data and content to provide the services of our
wireless applications business, and if we were unable to obtain
content at reasonable prices, or at all, our gross margins and
our ability to provide the services of our wireless applications
business would be harmed.
Our wireless applications business relies on third party data
and content to provide those services including map data, points
of interest data, traffic information, gas prices, theater,
event, and weather information. If our suppliers of this data or
content were to enter into exclusive relationships with other
providers of location-based services or were to discontinue
providing such information and we were unable to replace them
cost effectively, or at all, our ability to provide the services
of our wireless applications business would be harmed. Our gross
margins may also be affected if the cost of third party data and
content increases substantially.
We obtain map data from companies owned by current and potential
competitors. Accordingly, these third party data and content
providers may act in a manner that is not in our best interest.
For example, they may cease to offer their map data to us.
We may not be able to upgrade our location-based services
platform to support certain advanced features and functionality
without obtaining technology licenses from third parties.
Obtaining these licenses may be costly and may delay the
introduction of such features and functionality, and these
licenses may not be available on commercially favorable terms,
or at all. The inability to offer advanced features or
functionality, or a delay in our ability to upgrade our
location-based services platform, may adversely affect consumer
demand for the products and services of our wireless
applications business, consequently, harm our business.
If a
substantial number of end users change mobile phones or if our
wireless carrier partners switch to subscription plans that
require active monthly renewal by end users, our revenue could
suffer.
Subscription fees represent the vast majority of our revenue for
our wireless applications business. As mobile phone development
continues and new mobile phones are offered at subsidized rates
to subscribers in connection with plan renewals, an increasing
percentage of end users who already subscribe to the services
provided by our wireless applications business will likely
upgrade from their existing mobile phones. With some wireless
carriers, subscribers are unable to automatically transfer their
existing subscriptions from one mobile phone to another. In
addition, wireless carriers may switch to subscription billing
systems that require subscribers to actively renew, or opt-in,
each month from current systems that passively renew unless
subscribers take some action to opt-out of their subscriptions.
In either case, unless we or our wireless carrier partners are
able to resell subscriptions to these subscribers or replace
these subscribers with other subscribers, the revenue of our
wireless applications business would suffer and this could harm
our business, operating results and financial condition.
The failure
of mobile phone providers selected by our wireless carrier
partners to keep pace with technological and market developments
in mobile phone design may negatively affect the demand for the
products and services of our wireless applications
business.
Successful sales of the products and services of our wireless
applications business depend on our wireless carrier partners
keeping pace with changing consumer preferences for mobile
phones. If our wireless carrier
19
partners do not select mobile phones with the design attributes
attractive to consumers, such as thin form factors, high
resolution screens and desired functionality, customers may
select wireless carriers with whom we do not have a relationship
and subscriptions for our products and services may decline and,
consequently, our business may be harmed.
Some of our
research and development operations are conducted in China,
India, and Russia and our ability to introduce new services and
support our existing services cost effectively depend on our
ability to manage those remote development sites
successfully.
Our success depends on our ability to enhance our current
services and develop new services and products rapidly and cost
effectively. We currently have research and development
employees in China and contractors in Russia and India. As we do
not have substantial experience managing product development
operations that are remote from our U.S. headquarters, we
may not be able to manage these remote centers successfully. We
could incur unexpected costs or delays in product development
that could impair our ability to meet market windows or cause it
to forego certain new product opportunities.
We may fail
to support our anticipated growth in operations which could
reduce demand for our services and materially adversely affect
our revenue.
Our business strategy is based on the assumption that the market
demand, the number of customers, the amount of information they
want to receive and the number of products and services we offer
will all increase. We must continue to develop and expand our
systems and operations to accommodate this growth. The expansion
and adaptation of our systems operations requires substantial
financial, operational and management resources. Deployment of
our Government systems has increased substantially and while we
have increased our production capabilities to satisfy the
increased demand, our ability to meet production schedules for
increasing demand could adversely impact our product quality and
reliability. Any failure on our part to develop and maintain our
wireless data services and government system production lines as
we experience rapid growth could significantly reduce demand for
our services and materially adversely affect our revenue. Also,
if we incorrectly predict the market areas that will grow
significantly, we could expend significant resources that could
have been expended on other areas that do show significant
growth.
Changes in
the U.S. and global market conditions that are beyond our
control may have a material adverse effect on
us.
The U.S. and global economies are currently experiencing a
period of substantial economic uncertainty with wide-ranging
effects, including the current disruption in global financial
markets. Possible effects of these economic events include those
relating to U.S. Government defense spending, business
disruptions caused by suppliers or subcontractors, impairment of
goodwill and other long-lived assets and reduced access to
capital and credit markets. Although governments worldwide,
including the U.S. Government, have initiated sweeping
economic plans, we are unable to predict the impact, severity,
and duration of these economic events, which could have a
material effect on our business, financial position, results of
operations or cash flows.
We could
incur substantial costs from product liability claims relating
to our software.
Our agreements with customers may require us to indemnify
customers for our own acts of negligence and non-performance.
Product liability and other forms of insurance are expensive and
may not be available in the future. We cannot be sure that we
will be able to maintain or obtain insurance coverage at
acceptable costs or in sufficient amounts or that our insurer
will not disclaim coverage as to a future claim. A product
liability or similar claim may have a material adverse effect on
our business, financial position, results of operations or cash
flows.
Our revenue
may decline if we fail to retain our largest customers for all
of the deliverables that we sell to them.
The largest customers for our product and service offerings in
terms of revenue generated have been the U.S. Government,
Verizon Wireless, AT&T Mobility, MetroPCS, and Hutchison
3G. For the years ended December 31, 2009 and 2008, each of
Verizon Wireless and the U.S. Government accounted for 10%
or more of
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our total revenue. For the year ended December 31, 2009,
the largest customers for our Commercial Segment was Verizon
Wireless and the largest customers for our Government Segment
were various U.S. Government agencies. Our wireless
applications business is substantially dependent on Verizon
Wireless. In addition, we expect to generate a significant
portion of our total revenue from Verizon Wireless and these
other customers for the foreseeable future. If these customers
reduce their expenditures for marketing services for which we
provide technology, change their plans to eliminate our
services, price our products and services at a level that makes
them less attractive, or offer and promote competing products
and services, in lieu of, or to a greater degree than, our
products and services, our revenue would be materially reduced
and our business, operating results and financial condition
would be materially and adversely affected.
Our growth depends on maintaining relationships with our major
customers and on developing other customers and distribution
channels. The loss of any of the customers discussed in this
paragraph would have a material adverse impact on our business,
financial position, results of operations or cash flows.
Because we
rely on key partners to expand our marketing and sales efforts,
if we fail to maintain or expand our relationships with
strategic partners and indirect distribution channels our
license revenues could decline.
We have announced strategic partnerships with Alcatel-Lucent and
are working on additional partnerships to provide supplemental
channels for the marketing and sale of our software applications
globally. Our growth depends on maintaining relationships with
these partners and on developing other distribution channels.
The loss of any of these partners would have a material adverse
impact on our business, financial position, results of
operations or cash flows.
Growing
market acceptance of open source software could have
a negative impact on us.
Growing market acceptance of open source software has presented
both benefits and challenges to the commercial software industry
in recent years. Open source software is made widely
available by its authors and is licensed as is for a
nominal fee or, in some cases, at no charge. For example, Linux
is a free Unix-type operating system, and the source code for
Linux is freely available.
We have incorporated some types of open source software into our
products, allowing us to enhance certain solutions without
incurring substantial additional research and development costs.
Thus far, we have encountered no unanticipated material problems
arising from our use of open source software. However, as the
use of open source software becomes more widespread, certain
open source technology could become competitive with our
proprietary technology, which could cause sales of our products
to decline or force us to reduce the fees we charge for our
products, which could have a material adverse effect on our
business, financial position, results of operations or cash
flows.
Because our
product offerings are sold internationally, we are subject to
risks of conducting business in foreign
countries.
Wireless carriers in Europe, Asia, Australia, Africa and Central
and South America have purchased our products. We believe our
revenue will increasingly include business in foreign countries,
and we will be subject to the social, political and economic
risks of conducting business in foreign countries, including:
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inability to adapt our products and services to local business
practices, customs and mobile user preferences;
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costs of adapting our product and service offerings for foreign
markets;
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inability to locate qualified local employees, partners and
suppliers;
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reduced protection of intellectual property rights;
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the potential burdens of complying with a variety of
U.S. and foreign laws, trade standards and regulatory
requirements, including tax laws, the regulation of wireless
communications and the Internet and uncertainty regarding
liability for information retrieved and replicated in foreign
countries;
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general geopolitical risks, such as political and economic
instability and changes in diplomatic and trade
relations; and
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unpredictable fluctuations in currency exchange rates.
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Any of the foregoing risks could have a material adverse effect
on our business, financial position, results of operations or
cash flows by diverting time and money toward addressing them or
by reducing or eliminating sales in such foreign countries.
Because
some of our competitors have significantly greater resources
than we do, we could lose customers and market
share.
Our business is highly competitive. Several of our potential
competitors are substantially larger than we are and have
greater financial, technical and marketing resources than we do.
In particular, larger competitors have certain advantages over
us which could cause us to lose customers and impede our ability
to attract new customers, including: larger bases of financial,
technical, marketing, personnel and other resources; more
established relationships with wireless carriers; more funds to
deploy products and services; and the ability to lower prices
(or not charge any price) of competitive products and services
because they are selling larger volumes.
The widespread adoption of open industry standards such as the
Secure User Plane for Location (SUPL) specifications may make it
easier for new market entrants and existing competitors to
introduce products that compete with our software products.
Because our Commercial Segment is part of an emerging market, we
cannot identify or predict which new competitors may enter the
mobile location services industry in the future. With time and
capital, it would be possible for competitors to replicate any
of our products and service offerings or develop alternative
products. Additionally, the wireless communications industry
continues to experience significant consolidation which may make
it more difficult for smaller companies like us to compete. Our
competitors include application developers, telecommunications
equipment vendors, location determination technology vendors and
information technology consultants, and may include traditional
Internet portals and Internet infrastructure software companies.
We expect that we will compete primarily on the basis of price,
time to market, functionality, quality and breadth of product
and service offerings.
These competitors could include wireless network carriers,
mobile
and/or
wireless software companies, wireless data services providers,
secure portable communication and wireless systems integrators
and database vendors and other providers of location-based
services. As discussed above, many of our potential competitors
have significantly greater resources than we do. Furthermore,
competitors may develop a different approach to marketing the
services we provide in which subscribers may not be required to
pay for the information provided by our services. Competition
could reduce our market share or force us to lower prices to
unprofitable levels.
While we
characterize our services revenue as being recurring
there is no guarantee that we will actually achieve this
revenue.
A significant portion of our revenue is generated from long-term
customer contracts that pay certain fees on a
month-to-month
basis. While we currently believe that these revenue streams
will continue, renegotiation of the contract terms, early
termination or non-renewal of material contracts could cause our
recurring revenues to be lower than expected, and growth depends
on maintaining relationships with these important customers and
on developing other customers and distribution channels.
We cannot
guarantee that our estimated contract backlog will result in
actual revenue.
As of December 31, 2009, our estimated contract backlog
totaled approximately $631 million, of which approximately
$339 million was funded. There can be no assurance that our
backlog will result in actual revenue in any particular period,
or at all, or that any contract included in backlog will be
profitable. There is a higher degree of risk in this regard with
respect to unfunded backlog. The actual receipt and timing of
any revenue is subject to various contingencies, many of which
are beyond our control. The actual receipt of revenue on
contracts included in backlog may never occur or may change
because a program schedule could change, the program could be
canceled, a contract could be reduced, modified or terminated
early, or an option that we had
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assumed would be exercised not being exercised. Further, while
many of our federal government contracts require performance
over a period of years, Congress often appropriates funds for
these contracts for only one year at a time. Consequently, our
contracts typically are only partially funded at any point
during their term, and all or some of the work intended to be
performed under the contracts will remain unfunded pending
subsequent Congressional appropriations and the obligation of
additional funds to the contract by the procuring agency.
Approximately 29% of our funded contract backlog consisted of
orders from the Government Segment. Our estimates are based on
our experience under such contracts and similar contracts.
However, there can be no assurances that all, or any, of such
estimated contract value will be recognized as revenue.
We derive a
significant portion of our revenue from sales to various
agencies of the U.S. Government which has special rights unlike
other customers and exposes us to additional risks that could
have a material adverse effect on us.
Sales to various agencies of the U.S. Government accounted
for approximately 44% of our total revenue for the fiscal year
ended December 31, 2009, all of which was attributable to
our Government Segment. Our ability to earn revenue from sales
to the U.S. Government can be affected by numerous factors
outside of our control, including:
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The U.S. Government may terminate the contracts it has with
us. All of the contracts we have with the U.S. Government
are, by their terms, subject to termination by the
U.S. Government either for its convenience or in the event
of a default by us. In the event of termination of a contract by
the U.S. Government, we may have little or no recourse.
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Our contracts with the U.S. Government may be terminated
due to Congress failing to appropriate funds. Our
U.S. Government contracts are conditioned upon the
continuing availability of Congressional appropriations.
Congress usually appropriates funds for a given program on a
fiscal-year basis even though contract performance may take more
than one year.
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The U.S. Government may audit and review our costs and
performance on their contracts, as well as our accounting and
general practices. The costs and prices under these contracts
may be subject to adjustment based upon the results of any
audits. Future audits that result in the increase in our costs
may adversely affect our business, financial position, results
of operations or cash flows.
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Any failure by Congress to appropriate funds to any program that
we participate in could materially delay or terminate the
program and could have a material adverse effect on our
business, financial position, results of operations or cash
flows.
Because we
are no longer a small business under some government size
standards, we could lose business to small-business set-aside
competitors.
Federal and state procurement laws require that certain
purchases be set-aside for small business competitors,
effectively giving a preference to those small businesses even
if we have better products and better prices. We have outgrown
the size standards set for many of the categories used to
purchase products of the nature that we sell. If a particular
procurement is set-aside for only small business participants,
we may lose customers and revenues and may not be able to
replace those sales with purchases from other customers.
If our
subcontractors and vendors fail to perform their contractual
obligations, our performance and reputation as a prime
contractor and our ability to obtain future business could
suffer.
As a prime contractor, we often rely significantly upon other
companies as subcontractors to perform work we are obligated to
perform for our clients and vendors to deliver critical
components. As we secure more work under our contract vehicles
such as the Worldwide Satellite Systems agreement, we expect to
require an increasing level of support from subcontractors and
vendors that provide complementary and supplementary products
and services to our offerings. Depending on labor market
conditions, we may not be able to identify, hire and retain
sufficient numbers of qualified employees to perform the task
orders we expect to win. In such cases, we will need to rely on
subcontracts with unrelated companies. Moreover, even in
favorable labor market conditions, we anticipate entering into
more subcontracts in the future as we expand our work under our
23
contract vehicles. We are responsible for the work performed by
our subcontractors, even though in some cases we have limited
involvement in that work. If one or more of our subcontractors
fail to satisfactorily perform the
agreed-upon
services on a timely basis or violate federal government
contracting policies, laws or regulations, our ability to
perform our obligations as a prime contractor or meet our
clients expectations may be compromised. In extreme cases,
performance or other deficiencies on the part of our
subcontractors could result in a client terminating our contract
for default. A termination for default could expose us to
liability, including liability for the agencys costs of
re-procurement, could damage our reputation and could hurt our
ability to compete for future contracts.
A
significant portion of our contracts with the U.S. Government
are on a fixed price basis which could negatively impact our
profitability.
A material portion of our annual revenues is derived from
fixed-price contracts. Due to their nature, fixed-price
contracts inherently have more risk than flexibly priced
contracts. Our operating margin is adversely affected when
contract costs that cannot be billed to customers are incurred.
While management uses its best judgment to estimate costs
associated with fixed-price contracts, future events could
result in either upward or downward adjustments to those
estimates which could negatively impact our profitability. The
increase in contract costs can occur if estimates to complete
increase or if initial estimates used for calculating the
contract cost were incorrect. The cost estimation process
requires significant judgment and expertise. Reasons for cost
growth may include unavailability and productivity of labor, the
nature and complexity of the work to be performed, the effect of
change orders, the availability of materials, interruptions in
our supply chain, the effect of any delays in performance,
availability and timing of funding from the customer, natural
disasters, and the inability to recover any claims included in
the estimates to complete. A significant change in cost
estimates on one or more programs could have a material effect
on our consolidated financial position or results of operations.
We are
subject to procurement and other related laws and regulation
which carry significant penalties for
non-compliance.
As a supplier to the U.S. Government, we must comply with
numerous regulations, including those governing security and
contracting practices. In addition, prime contracts with various
agencies of the U.S. Government and subcontracts with other
prime contractors are subject to numerous laws and regulations.
Failure to comply with these procurement regulations and
practices could result in fines being imposed against us or our
suspension for a period of time from eligibility for bidding on,
or for award of, new government contracts. If we are
disqualified as a supplier to government agencies, we would lose
most, if not all, of our U.S. Government customers and
revenues from sales of our products would decline significantly.
Among the potential causes for disqualification are violations
of various statutes, including those related to procurement
integrity, export control, U.S. Government security
regulations, employment practices, protection of the
environment, accuracy of records in the recording of costs, and
foreign corruption. The government could investigate and make
inquiries of our business practices and conduct audits of
contract performance and cost accounting. Based on the results
of such audits, the U.S. Government could adjust our
contract-related costs and fees. Depending on the results of
these audits and investigations, the government could make
claims against us, and if it were to prevail, certain incurred
costs would not be recoverable by us.
We may
incur losses if we are unable to resell products and services
for which we have contractual minimum purchase
obligations.
We have been able to negotiate favorable pricing terms for
certain services and supplies that are used in our product and
service offerings. Those favorable pricing terms are contingent
on various minimum purchase commitments. If we are unable to
find customers and negotiate favorable customer terms and
conditions for those services and supplies, we may incur related
losses.
24
We are
exposed to counterparty credit risk and there can be no
assurances that we will manage or mitigate this risk
effectively.
We are exposed to many different industries, counterparties, and
partnership agreements, and regularly interact with
counterparties in various industries.
The insolvency or other inability of a significant counterparty
or partner, including a counterparty to the significant
counterparty, to perform its obligations under an agreement or
transaction, including, without limitation, as a result of the
rejection of an agreement or transaction by a counterparty in
bankruptcy proceedings, could have a material adverse effect on
our business, financial position, results of operations or cash
flows.
The loss of
key personnel or inability to attract and retain personnel could
harm our business.
Our future success will depend in large part on our ability to
hire and retain a sufficient number of qualified personnel,
particularly in sales and marketing and research and
development. If we are unable to do so, our business could be
harmed. Our future success also depends upon the continued
service of our executive officers and other key sales,
engineering and technical staff. The loss of the services of our
executive officers and other key personnel could harm our
operations. We maintain key person life insurance on certain of
our executive officers. We would be harmed if one or more of our
officers or key employees decided to join a competitor or if we
failed to attract qualified personnel. Our ability to attract
qualified personnel may be adversely affected by a decline in
the price of our Class A common stock. In the event of a
decline in the price of our Class A common stock, the
retention value of stock options will decline and our employees
may choose not to remain with us, which could have a material
adverse effect on our business, financial position, results of
operations or cash flows.
Our
accounting policies and methods are fundamental to how we record
and report our financial position and results of operations, and
they require management to make estimates, judgments and
assumptions about matters that are inherently
uncertain.
Our accounting policies and methods are fundamental to how we
record and report our financial position and results of
operations. We have identified several accounting policies as
being critical to the presentation of our financial position and
results of operations because they require management to make
particularly subjective or complex judgments about matters that
are inherently uncertain and because of the likelihood that
materially different amounts would be recorded under different
conditions or using different assumptions. For example, we
account for income taxes in accordance with Accounting Standards
Codification Topic 740, Income Taxes (ASC 740).
Under ASC 740, deferred tax assets and liabilities are computed
based on the difference between the financial statement and
income tax basis of assets and liabilities using the enacted
marginal tax rate. ASC 740 requires that the net deferred tax
asset be reduced by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that
some portion of all of the net deferred tax asset will not be
realized. This process requires our management to make
assessments regarding the timing and probability of the ultimate
tax impact. Actual income taxes could vary from these estimates
due to future changes in income tax law, significant changes in
the jurisdictions in which we operate, our inability to generate
sufficient future taxable income or unpredicted results from the
final determination of each years liability by taxing
authorities. These changes could have a significant impact on
our business, financial position, results of operations or cash
flows.
Industry
Risks
Because the
wireless data industry is a rapidly evolving market, our product
and service offerings could become obsolete unless we respond
effectively and on a timely basis to rapid technological
changes.
The successful execution of our business strategy is contingent
upon wireless network operators launching and maintaining mobile
location services, our ability to create new network software
products and adapt our existing network software products to
rapidly changing technologies, industry standards and customer
needs. As a result of the complexities inherent in our product
offerings, new technologies may require long development
25
and testing periods. Additionally, new products may not achieve
market acceptance or our competitors could develop alternative
technologies that gain broader market acceptance than our
products. If we are unable to develop and introduce
technologically advanced products that respond to evolving
industry standards and customer needs, or if we are unable to
complete the development and introduction of these products on a
timely and cost effective basis, it could have a material
adverse effect on our business, financial position, results of
operations or cash flows.
New laws and regulations that impact our industry could increase
costs or reduce opportunities to earn revenue. The wireless
carriers that use our product and service offerings are subject
to regulation by domestic, and in some cases, foreign,
governmental and other agencies. Regulations that affect them
could increase our costs or reduce our ability to sell our
products and services. In addition, there are an increasing
number of laws and regulations pertaining to wireless telephones
and the Internet under consideration in the United States and
elsewhere.
The applicability to the Internet of existing laws governing
issues such as intellectual property ownership and infringement,
copyright, trademark, trade secret, taxation, obscenity, libel,
employment and personal privacy is uncertain and developing. Any
new legislation or regulation, or the application or
interpretation of existing laws, may have a material adverse
effect on our business, results of operations and financial
condition. Additionally, modifications to our business plans or
operations to comply with changing regulations or certain
actions taken by regulatory authorities might increase our costs
of providing our product and service offerings and could have a
material adverse effect on our business, financial position,
results of operations or cash flows.
Because the
industries which we serve are currently in a cycle of
consolidation, the number of customers may be reduced which
could result in a loss of revenue for our
business.
The telecommunications industry generally is currently
undergoing a consolidation phase. Many of our customers,
specifically wireless carrier customers of our Commercial
Segment, have or may become the target of acquisitions. If the
number of our customers is significantly reduced as a result of
this consolidation trend, or if the resulting companies do not
utilize our product offerings, our business, financial position,
results of operations or cash flows could be adversely affected.
Concerns
about personal privacy and commercial solicitation may limit the
growth of mobile location services and reduce demand for our
products and services.
In order for mobile location products and services to function
properly, wireless carriers must locate their subscribers and
store information on each subscribers location. Although
data regarding the location of the wireless user resides only on
the wireless carriers systems, users may not feel
comfortable with the idea that the wireless carrier knows and
can track their location. Carriers will need to obtain
subscribers permission to gather and use the
subscribers personal information, or they may not be able
to provide customized mobile location services which those
subscribers might otherwise desire. If subscribers view mobile
location services as an annoyance or a threat to their privacy,
that could reduce demand for our products and services and have
an adverse effect on our business, financial position, results
of operations or cash flows.
Because
wireless and next-generation E9-1-1 is undergoing rapid
technological and regulatory change, our future performance is
uncertain.
The Federal Communication Commission, or FCC, has mandated that
certain location information be provided to operators when they
receive an E9-1-1 call. Carriers obligations to provide
E9-1-1 services are subject to request by public safety
organizations. Technical failures, time delays or the
significant costs associated with developing or installing
improved location technology could slow down or stop the
deployment of our mobile location products. If deployment of
improved location technology is delayed, stopped or never
occurs, market acceptance of our products and services may be
adversely affected. The extent and timing of the deployment of
our products and services is dependent both on public safety
requests for such service and wireless carriers ability to
certify the accuracy of and deploy the precise location
technology. Because we will rely on third-party location
technology instead of developing the technology ourselves, we
have little or no influence over its improvement. If the
technology never becomes precise enough to satisfy wireless
users
26
needs or the FCCs requirements, we may not be able to
increase or sustain demand for our products and services, if at
all.
Our E9-1-1
business is dependent on state and local governments and the
regulatory environment for Voice over Internet Protocol (VoIP)
services is developing.
Under the FCCs mandate, wireless carriers are required to
provide E9-1-1 services only if state and local governments
request the service. As part of a state or local
governments decision to request E9-1-1, they have the
authority to develop cost recovery mechanisms. However, cost
recovery is no longer a condition to wireless carriers
obligation to deploy the service. If state and local governments
do not widely request that E9-1-1 services be provided or we
become subject to significant pressures from wireless carriers
with respect to pricing of E9-1-1 services, our E9-1-1 business
would be harmed and future growth of our business would be
reduced.
The FCC has determined that VoIP services are not subject to the
same regulatory scheme as traditional wireline and wireless
telephone services. If the regulatory environment for VoIP
services evolves in a manner other than the way we anticipate,
our E9-1-1 business would be significantly harmed and future
growth of our business would be significantly reduced. For
example, many states provide statutory and regulatory immunity
from liability for wireless and wireline E9-1-1 service
providers but provide no express immunities for VoIP E9-1-1
service providers. Additionally, the regulatory scheme for
wireless and wireline service providers require those carriers
to allow service providers such as us to have access to certain
databases that make the delivery of an E9-1-1 call possible. No
such requirements exist for VoIP service providers so carriers
could prevent us from continuing to provide VoIP E9-1-1 service
by denying us access to the required databases.
Technology
Risks
Because our
software may contain defects or errors, and our hardware
products may incorporate defective components, our sales could
decrease if these defects or errors adversely affect our
reputation or delays shipments of our
products.
The software products that we develop are complex and must meet
the stringent technical requirements of our customers. Our
hardware products are equally complex and integrate a wide
variety of components from different vendors. We must quickly
develop new products and product enhancements to keep pace with
the rapidly changing software and telecommunications markets in
which we operate. Products as complex as ours are likely to
contain undetected errors or defects, especially when first
introduced or when new versions are released. Our products may
not be error or defect free after delivery to customers, which
could damage our reputation, cause revenue losses, result in the
rejection of our products or services, divert development
resources and increase service and warranty costs, each of which
could have a serious harmful effect on our business, financial
position, results of operations or cash flows.
If we are
unable to protect our intellectual property rights or are sued
by third parties for infringing upon intellectual property
rights, we may incur substantial costs.
Our success and competitive position depends in large part upon
our ability to develop and maintain the proprietary aspects of
our technology. We rely on a combination of patent, copyright,
trademark, service mark, trade secret laws, confidentiality
provisions and various other contractual provisions to protect
our proprietary rights, but these legal means provide only
limited protection. Although a number of patents have been
issued to us and we have obtained a number of other patents as a
result of our acquisitions, we cannot assure you that our issued
patents will be upheld if challenged by another party.
Additionally, with respect to any patent applications which we
have filed, we cannot assure you that any patents will issue as
a result of these applications. If we fail to protect our
intellectual property, we may not receive any return on the
resources expended to create the intellectual property or
generate any competitive advantage based on it, and we may be
exposed to expensive litigation or risk jeopardizing our
competitive position. Similarly, some third parties have claimed
and others could claim that our existing and future products or
services infringe upon their intellectual property rights.
Claims like these could require us to enter into costly royalty
arrangements or cause us to lose the right to use critical
technology.
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Our ability to protect our intellectual property rights is also
subject to the terms of future government contracts. We cannot
assure you that the federal government will not demand greater
intellectual property rights or restrict our ability to
disseminate intellectual property. We are also a member of
standards-setting organizations and have agreed to license some
of our intellectual property to other members on fair and
reasonable terms to the extent that the license is required to
develop non-infringing products.
Pursuing
infringers of our patents and other intellectual property rights
can be costly.
Pursuing infringers of our proprietary rights could result in
significant litigation costs, and any failure to pursue
infringers could result in our competitors utilizing our
technology and offering similar products, potentially resulting
in loss of a competitive advantage and decreased revenues.
Despite our efforts to protect our proprietary rights, existing
patent, copyright, trademark and trade secret laws afford only
limited protection. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same
extent as do the laws of the United States. Protecting our
know-how is difficult especially after our employees or those of
our third party contract service providers end their employment
or engagement. Attempts may be made to copy or reverse-engineer
aspects of our products or to obtain and use information that we
regard as proprietary. Accordingly, we may not be able to
prevent the misappropriation of our technology or prevent others
from developing similar technology. Furthermore, policing the
unauthorized use of our products is difficult and expensive.
Litigation may be necessary in the future to enforce our
intellectual property rights or to determine the validity and
scope of the proprietary rights of others. The costs and
diversion of resources could significantly harm our business. If
we fail to protect our intellectual property, we may not receive
any return on the resources expended to create the intellectual
property or generate any competitive advantage based on it.
Third
parties may claim we are infringing their intellectual property
rights and we could be prevented from selling our products, or
suffer significant litigation expense, even if these claims have
no merit, and our customers also could demand indemnification
for such claims.
Our competitive position is driven in part by our intellectual
property and other proprietary rights. Third parties, however,
may claim that we, our products, operations or any products or
technology we obtain from other parties are infringing their
intellectual property rights, and we may be unaware of
intellectual property rights of others that may cover some of
our assets, technology and products. From time to time we
receive letters from third parties that allege we are infringing
their intellectual property and asking us to license such
intellectual property. We review the merits of each such letter
and respond as we deem appropriate.
At the same time, from time to time our customers are parties to
allegations of intellectual property rights infringements law
suits based on their offering products and services which
incorporate our products and services. In those instances, we
from time to time receive demands from our customers to
indemnify them for costs in defending those allegations. We
review the merits of each such demand and respond as we deem
appropriate.
Any litigation regarding patents, trademarks, copyrights or
intellectual property rights, even those without merit, and the
related indemnification demands of our customers, could be
costly and time consuming, and divert our management and key
personnel from operating our business. The complexity of the
technology involved and inherent uncertainty and cost of
intellectual property litigation increases our risks. If any
third party has a meritorious or successful claim that we are
infringing its intellectual property rights, we may be forced to
change our products or enter into licensing arrangements with
third parties, which may be costly or impractical. This also may
require us to stop selling our products as currently engineered,
which could harm our competitive position. We also may be
subject to significant damages or injunctions that prevent the
further development and sale of certain of our products or
services and may result in a material loss of revenue.
28
The
security measures we have implemented to secure information we
collect and store may be breached, which could cause us to
breach agreements with our partners and expose us to potential
investigation and penalties by authorities and potential claims
by persons whose information was disclosed.
We take reasonable steps to protect the security, integrity and
confidentiality of the information we collect and store but
there is no guarantee that inadvertent or unauthorized
disclosure will not occur or that third parties will not gain
unauthorized access despite our efforts. If such unauthorized
disclosure or access does occur, we may be required to notify
persons whose information was disclosed or accessed under
existing and proposed laws. We also may be subject to claims of
breach of contract for such disclosure, investigation and
penalties by regulatory authorities and potential claims by
persons whose information was disclosed.
Because the
market for most mobile content delivery and mobile location
products is new, our future success is
uncertain.
The market for mobile content delivery and mobile location
products and services is new and its potential is uncertain. In
order to be successful, we need wireless network operators to
launch and maintain mobile location services utilizing our
products, and need corporate enterprises and individuals to
purchase and use our mobile content delivery and mobile location
products and services. We cannot be sure that wireless carriers
or enterprises will accept our products or that a sufficient
number of wireless users will ultimately utilize our products.
If we are
unable to integrate our products with wireless service
providers systems we may lose sales to
competitors.
Our products operate with wireless carriers systems,
various wireless devices and, in the case of our E9-1-1
offering, with mobile telephone switches and VoIP service
provider systems. If we are unable to continue to design our
software to operate with these systems and devices, we may lose
sales to competitors. Mobile telephone switches and wireless
devices can be manufactured according to many different
standards and may have different variations within each
standard. Combining our products with each type of switch,
device or VoIP system requires a specialized interface and
extensive testing. If as a result of technology enhancements or
upgrades to carrier and VoIP provider systems our products can
no longer operate with such systems, we may no longer be able to
sell our products. Further, even if we successfully redesign our
products to operate with these systems, we may not gain market
acceptance before our competitors.
Failure to
meet our contractual obligations could adversely affect our
profitability and future prospects.
We design, develop and manufacture technologically advanced and
innovative products and services applied by our customers in a
variety of environments. Problems and delays in development or
delivery as a result of issues with respect to design,
technology, licensing and patent rights, labor, learning curve
assumptions, or materials and components could prevent us from
achieving contractual obligations. In addition, our products
cannot be tested and proven in all situations and are otherwise
subject to unforeseen problems. Examples of unforeseen problems
which could negatively affect revenue and profitability include
problems with quality, delivery of subcontractor components or
services, and unplanned degradation of product performance.
Because our
systems may be vulnerable to systems failures and security
risks, we may incur significant costs to protect against the
threat of these problems.
We provide for the delivery of information and content to and
from wireless devices in a prompt and timely manner. Any systems
failure that causes a disruption in our ability to facilitate
the transmission of information to these wireless devices could
result in delays in end users receiving this information and
cause us to lose customers. Our systems could experience such
failures as a result of unauthorized access by hackers, computer
viruses, hardware or software failures, power or
telecommunications failures and other accidental or intentional
actions which could disrupt our systems. We may incur
significant costs to prevent such systems disruptions.
29
Increasingly our products will be used to create or transmit
secure information and data to and from wireless devices. For
example, our software can be used to create private address
lists and to provide the precise location of an individual. To
protect private information like this from security breaches, we
may incur significant costs. If a third party were able to
misappropriate our proprietary information or disrupt our
operations, we could be subject to claims, litigation or other
potential liabilities that could materially adversely impact our
business. Further, if an individual is unable to use our service
to receive the precise location in a health or
life-and-death
situation, or if our service provides the wrong information, we
could be subject to claims, litigation or other potential
liabilities that could materially adversely impact our business.
The wireless data services provided by our Commercial Segment
are dependent on real-time, continuous feeds from map and
traffic data vendors and others. The ability of our subscribers
to receive critical location and business information requires
timely and uninterrupted connections with our wireless network
carriers. Any disruption from our satellite feeds or backup
landline feeds could result in delays in our subscribers
ability to receive information. We cannot be sure that our
systems will operate appropriately if we experience hardware or
software failure, intentional disruptions of service by third
parties, an act of God or an act of war. A failure in our
systems could cause delays in transmitting data, and as a result
we may lose customers or face litigation that could involve
material costs and distract management from operating our
business.
If mobile
equipment manufacturers do not overcome capacity, technology and
equipment limitations, we may not be able to sell our products
and services.
The wireless technology currently in use by most wireless
carriers has limited bandwidth, which restricts network capacity
to deliver bandwidth-intensive applications like data services
to a large number of users. Because of capacity limitations,
wireless users may not be able to connect to their network when
they wish to, and the connection is likely to be slow,
especially when receiving data transmissions. Data services also
may be more expensive than users are willing to pay. To overcome
these obstacles, wireless equipment manufacturers will need to
develop new technology, standards, equipment and devices that
are capable of providing higher bandwidth services at lower
cost. We cannot be sure that manufacturers will be able to
develop technology and equipment that reliably delivers large
quantities of data at a reasonable price. If more capacity is
not added, a sufficient market for our products and services is
not likely to develop or be sustained and sales of our products
and services would decline resulting in a material adverse
effect on our business, financial position, results of
operations or cash flows.
If wireless
handsets pose health and safety risks, we may be subject to new
regulations and demand for our products and services may
decrease.
Media reports have suggested that certain radio frequency
emissions from wireless handsets may be linked to various health
concerns, including cancer, and may interfere with various
electronic medical devices, including hearing aids and
pacemakers. Concerns over radio frequency emissions may have the
effect of discouraging the use of wireless handsets, which would
decrease demand for our services. In recent years, the FCC and
foreign regulatory agencies have updated the guidelines and
methods they use for evaluating radio frequency emissions from
radio equipment, including wireless handsets. In addition,
interest groups have requested that the FCC investigate claims
that wireless technologies pose health concerns and cause
interference with airbags, hearing aids and other medical
devices. There also are some safety risks associated with the
use of wireless handsets while driving. Concerns over these
safety risks and the effect of any legislation that may be
adopted in response to these risks could limit our ability to
market and sell our products and services.
Risks Related
to Our Class A Common Stock
The price
of our Class A common stock historically has been volatile.
This volatility may affect the price at which you could sell
your Class A common stock, and the sale of substantial
amounts of our Class A common stock could adversely affect
the price of our Class A common stock.
The market price for our Class A common stock has varied
between a high of $10.50 on April 30, 2009 and a low of
$6.19 on May 11, 2009 in the twelve month period ended
December 31, 2009. This volatility may affect the price at
which you could sell the Class A common stock and the sale
of substantial amounts of our Class A
30
common stock could adversely affect the price of our
Class A common stock. Our stock price is likely to continue
to be volatile and subject to significant price and volume
fluctuations in response to market and other factors, including
the other factors discussed in these risk factors; variations in
our quarterly operating results from our expectations or those
of securities analysts or investors; downward revisions in
securities analysts estimates; and announcement by us or
our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments.
A
significant percentage of our common stock is beneficially owned
by our President, Chief Executive Officer and Chairman of the
Board, and he can exert significant influence over
us.
We have two classes of common stock: Class A common stock
and Class B common stock. Holders of Class A common
stock generally have the same rights as holders of Class B
common stock, except that holders of Class A common stock
have one vote per share while holders of Class B common
stock have three votes per share. As of December 31, 2009,
Maurice B. Tosé, our President, Chief Executive Officer and
Chairman of the Board, beneficially owned 6,276,334 shares
of our Class B common stock and 2,516,887 shares of
our Class A common stock. Therefore, as of that date, in
the aggregate, Mr. Tosé beneficially owned shares
representing approximately 33% of our total voting power,
assuming no conversion or exercise of issued and outstanding
convertible or exchangeable securities held by our other
shareholders or holders of the notes. Accordingly, on this
basis, Mr. Tosé can exert significant influence over
us through his ability to influence the outcome of elections of
directors, amend our charter and by-laws and take other actions
requiring shareholder action, including mergers, going private
transactions and other extraordinary transactions.
Mr. Tosé may also able to deter or prevent a change of
control regardless of whether holders of Class A common
stock might benefit financially from such a transaction.
Because our
business may not generate sufficient cash to fund our
operations, we may not be able to continue to grow our business
if we are unable to obtain additional capital when
needed.
We believe that our cash and cash equivalents, and our bank line
of credit, coupled with the funds anticipated to be generated
from operations will be sufficient to finance our operations for
at least the next twelve months. However, unanticipated events
could cause us to fall short of our capital requirements. In
addition, such unanticipated events could cause us to violate
our bank line of credit covenants causing the bank to foreclose
on the line
and/or
opportunities may make it necessary for us to return to the
public markets, or establish new credit facilities or raise
capital in private transactions in order to meet our capital
requirements. We cannot assure you that we will be able to raise
additional capital in the future on terms acceptable to us, or
at all.
Our line of credit and term loan agreement contains covenants
requiring us to maintain a minimum adjusted quick ratio and a
minimum fixed charge coverage ratio; as well as other
restrictive covenants including, among others, restrictions on
our ability to merge, acquire or dispose of assets above
prescribed thresholds, undertake actions outside the ordinary
course of our business (including the incurrence and repayment
of indebtedness), guarantee debt, distribute dividends, and
repurchase our stock. The agreement also contains a subjective
event of default that requires (i) no material adverse
change in the business, operations, or condition (financial or
otherwise) of our Company occur, or (ii) no material
impairment of the prospect of repayment of the Companys
obligations under the bank credit agreement; or (iii) no
material impairment of perfection or priority of the lenders
security interests in the collateral under the bank credit
agreement. If our performance does not result in compliance with
any of the restrictive covenants, or if our line of credit
agreement lenders seek to exercise their rights under the
subjective acceleration clause referred to above, we would seek
to further modify our financing arrangements, but there can be
no assurance that our debt holders would not exercise their
rights and remedies under their agreements with us, including
declaring all outstanding debt due and payable.
Our
short-term investments are subject to market fluctuations which
may affect our liquidity.
Although we have not experienced any losses on our cash, cash
equivalents, and short-term investments, declines in the market
values of these investments in the future could have an adverse
impact on our financial condition and operating results.
Historically, we have invested in AAA rated money market funds
meeting certain criteria. These investments are subject to
general credit, liquidity, market, and interest rate risks,
which may be
31
directly or indirectly impacted by the
U.S. sub-prime
mortgage defaults that have affected various sectors of the
financial markets causing credit and liquidity issues. If an
issuer defaults on its obligations, or its credit ratings are
negatively affected by liquidity, losses or other factors, the
impact on liquidity could decline and could have a material
adverse effect on our business, financial position, results of
operations or cash flows.
Variations
in quarterly operating results due to factors such as changes in
demand for our products and changes in our mix of revenues and
costs may cause our Class A common stock price to
decline.
Our quarterly revenue and operating results are difficult to
predict and are likely to fluctuate from
quarter-to-quarter.
For example, 2009 systems revenue was significantly higher in
the first and fourth quarters than in the middle quarters. 2008
systems revenues were significantly higher in the second half of
the year than in the first half. In 2007, revenues were slightly
higher in the second half of the year than in the first, whereas
in 2006 systems revenues were higher in the first half of the
year than in the second half. We generally derive a significant
portion of wireless carrier systems revenue in our Commercial
Segment from initial license fees. The initial license fees that
we receive in a particular quarter may vary significantly. As
systems projects begin and end, quarterly results may vary. We
therefore believe that
quarter-to-quarter
comparisons of our operating results may not be a good
indication of our future performance, and you should not rely on
them to predict our future performance or the future performance
of our Class A common stock. Our quarterly revenues,
expenses and operating results could vary significantly from
quarter-to-quarter.
If our operating results in future quarters fall below the
expectations of market analysts and investors, the market price
of our stock may fall.
Additional factors that have either caused our results to
fluctuate in the past or that are likely to do so in the future
include:
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changes in our relationships with wireless carriers, the
U.S. Government or other customers;
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timing and success of introduction of new products and services
and our wireless carrier partners marketing expenditures;
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changes in pricing policies and product offerings by us or our
competitors;
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changes in projected profitability of acquired assets that would
require the write down of the value of the goodwill reflected on
our balance sheet;
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loss of subscribers by our wireless carrier partners or a
reduction in the number of subscribers to plans that include our
services;
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the timing and quality of information we receive from our
wireless carrier partners;
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the timing and success of new mobile phone introductions by our
wireless carrier partners;
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our inability to attract new end users;
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the extent of any interruption in our services;
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costs associated with advertising, marketing and promotional
efforts to acquire new customers;
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capital expenditures and other costs and expenses related to
improving our business, expanding operations and adapting to new
technologies and changes in consumer preferences; and
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our lengthy and unpredictable sales cycle.
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We may not
have, and may not have the ability to raise, the funds necessary
to repurchase our currently outstanding Convertible Senior Notes
upon a fundamental change, as required by the indenture
governing the Convertible Senior Notes.
Following a fundamental change as described in the indenture
governing the Convertible Senior Notes, holders of those notes
may require us to repurchase their notes for cash. A fundamental
change may also constitute an event of default or prepayment
under, and result in the acceleration of the maturity of, our
then-existing indebtedness. We cannot provide any assurance that
we will have sufficient financial resources, or will be able to
arrange financing, to pay the repurchase price in cash with
respect to any notes tendered by holders
32
for repurchase upon a fundamental change. In addition,
restrictions in our then- existing credit facilities or other
indebtedness, if any, may not allow us to repurchase the
Convertible Senior Notes. The failure of us to repurchase the
notes when required would result in an event of default with
respect to the Convertible Senior Notes which could, in turn,
constitute a default under the terms of our other indebtedness,
if any, and have an adverse effect on our business, financial
position, results of operations or cash flows.
Future
sales of our Class A common stock in the public market or
issuances of securities convertible into our Class A common
stock and hedging activities could lower the market price for
our Class A common stock and adversely impact the trading
price of the notes.
As of December 31, 2009, we had outstanding approximately
46.2 million shares of our Class A common stock and
options to purchase approximately 14.6 million shares of
our Class A common stock (approximately 10.4 million
of which have a strike price below $7.45 and an additional
4.2 million of which have a strike price above $7.95). In
the future, we may sell additional shares of our Class A
common stock to raise capital. In addition, a substantial number
of shares of our Class A common stock is reserved for
issuance upon the exercise of stock options and upon conversion
of the Convertible Notes. Our Class A common stock may also
be issued upon conversion of our Class B common stock,
which is convertible into our Class A common stock on a
one-for-one
basis. As of December 31, 2009, we had 6.3 million
shares of Class B common stock outstanding. We cannot
predict the size of future issuances or the effect, if any, that
they may have on the market price for our Class A common
stock. The issuance and sale of substantial amounts of
Class A common stock, or the perception that such issuances
and sales may occur, could adversely affect the trading price of
the Convertible Notes and the market price of our Class A
common stock and impair our ability to raise capital through the
sale of additional equity securities.
Our
convertible note hedge and warrant transactions may affect the
value of the Convertible Senior Notes and the trading price of
shares
of our common stock.
In connection with the 2009 sale of the Convertible Senior
Notes, we entered into privately-negotiated convertible note
hedge transactions with Deutsche Bank AG, Société
Générale and Royal Bank of Canada (each, a
counterparty and together, the
counterparties) which are expected to reduce the
potential dilution of shares of the our common stock upon any
conversion of the Convertible Senior Notes. In the event that
any of the counterparties in the transaction fails to deliver
shares to us as required under the note hedge documents or as a
result of a breach of the note hedge documents by us, we will be
required to issue shares in order to meet its share delivery
obligations with respect to the converted Convertible Senior
Notes. We also entered into warrant transactions with the
counterparties with respect to the shares of our common stock
pursuant to which we may issue shares of our common stock.
In connection with hedging these transactions, the
counterparties or their affiliates may purchase shares of our
common stock and enter into various
over-the-counter
derivative transactions with respect to shares of our common
stock and may purchase or sell shares of our common stock in
secondary market transactions. These activities could have the
effect of increasing or preventing a decline in the price of the
shares of our common stock. The counterparties or their
affiliates are likely to modify their respective hedge positions
from time to time prior to conversion or maturity of the
Convertible Senior Notes (including during any conversion period
related to any conversion of the Convertible Senior Notes) by
purchasing and selling shares of our common stock, of our other
securities or other instruments they may wish to use in
connection with such hedging. The magnitude of any of these
transactions and activities and their effect, if any, on the
market price of our common stock or the Convertible Senior Notes
will depend in part on market conditions and cannot be
ascertained at this time, but any of these activities could
adversely affect the value of the shares of our common stock
(including during any period used to determine the amount of
consideration deliverable upon conversion of the notes with
respect to any fractional shares).
Conversion
of the Convertible Senior Notes will dilute your ownership
interest.
The conversion of some or all of the Convertible Senior Notes
will dilute the ownership interests of our shareholders and
could adversely affect the prevailing market price of the shares
of our common stock. In
33
addition, the existence of the Convertible Senior Notes may
encourage short selling by market participants because the
conversion of the Convertible Senior Notes could depress the
price of the our common stock.
The
fundamental change purchase feature of the Convertible Senior
Notes may delay or prevent an otherwise beneficial attempt to
purchase us.
The terms of the Convertible Senior Notes require us to purchase
them for cash in the event of a fundamental change. A takeover
of our Company would trigger the requirement that we purchase
the Convertible Senior Notes. This may have the effect of
delaying or preventing a takeover that would otherwise be
beneficial to investors.
Our
governing corporate documents and Maryland law contain certain
anti-takeover provisions that could prevent a change of control
that may be favorable to shareholders.
We are a Maryland corporation. Anti-takeover provisions of
Maryland law and provisions contained in our charter and by-laws
could make it more difficult for a third party to acquire
control of us, even if a change in control would be beneficial
to shareholders. These provisions include the following:
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authorization of the board of directors to issue blank
check preferred stock;
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prohibition of cumulative voting in the election of directors;
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our classified board of directors;
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limitation of the persons who may call special meetings of
shareholders;
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prohibition on shareholders acting without a meeting other than
through unanimous written consent;
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supermajority voting requirement on various charter and by-law
provisions; and
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establishment of advance notice requirements for nominations for
election to the board of directors or for proposing matters that
can be acted on by shareholders at shareholder meetings.
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These provisions could delay, deter or prevent a potential
acquirer from attempting to obtain control of us, depriving
shareholders of an opportunity to receive a premium for
Class A common stock. These provisions could therefore
materially adversely affect the market price of our Class A
common stock.
Because
this report contains forward-looking statements, it may not
prove to be accurate.
This report, including the documents we incorporate by
reference, contains forward-looking statements and information
relating to our Company. These statements are based upon our
current expectations and assumptions that are subject to a
number of risks and uncertainties that would cause actual
results to differ materially from those anticipated. We
generally identify forward-looking statements using words like
believe, intend, expect,
may, should, plan,
project, contemplate,
anticipate, or other similar statements. We base
these statements on our beliefs as well as assumptions we made
using information currently available to us. We do not undertake
to update our forward-looking statements or risk factors to
reflect future events or circumstances.
Statements in this report that are forward-looking include, but
are not limited to, the following statements that
(i) our 2009 Commercial Segment acquisitions strengthen our
relationship with North American carriers;
(ii) cyber security will be a high growth communications
technology area for the foreseeable future;
(iii) we believe that the convertible debt provided the
optimal balance of expedited execution and least dilution;
(iv) we have strengthened our LBS leadership in the
industry;
(v) we now offer the most complete suite of LBS technology;
34
(vi) the proliferation of smart handheld devices has
increased the size of the market for our technology;
(vii) wireless growth is expected to continue to increase
in all regions around the world for the foreseeable future;
(viii) the number of short messaging services users and
messages per individual are projected to continue to increase
significantly and that we will benefit from ever expanding
application of SMS technology in new areas such as
machine-to-machine
messaging;
(ix) we are well positioned to address the evolving
integration needs of our commercial and government clients in
both messaging and location determination;
(x) we are developing relationships with communication
infrastructure providers in order to expand our sales channels;
(xi) we intend to expand our domestic and international
carrier customer base and will continue to develop network
software for wireless carriers and cable operators that operate
on all major types of networks;
(xii) we will continue to leverage our knowledge of complex
technologies to expand the range of capabilities that wireless
data technology can accomplish for our customers;
(xiii) we will continue to invest in technology and to
capitalize on our expertise to meet the growing demand for
sophisticated wireless applications;
(xiv) we intend to continue to selectively consider
acquisitions of companies and technologies in order to increase
the scale and scope of our operations, market presence,
products, services and customer base;
(xv) we now have contract vehicles for the
Governments surging demand for information technology
earned value management, cyber training, cyber technical
solutions, and related procurement support, and that steep
growth in spending to the multi-billion dollar level by
U.S. federal agencies on cyber initiatives is expected over
the next five years;
(xvi) we plan to continue to provide communication systems
integration, information technology services, software and
cyber-security solutions, including operation of secure
satellite teleport facilities and resale of satellite airtime,
to units of the U.s. Department of Defense and other government
customers;
(xvii) we believe that we enjoy a competitive advantage
because we can offer multiple system elements from a single
vendor;
(xviii) our portfolio of software, patented intellectual
property, and teams of wireless and encryption specialists
positions us to tap into opportunities in the U.S. federal
government market;
(xix) we expect to realize a portion of our backlog in the
next twelve months;
(xx) we expect to compete primarily on the basis of the
factors set forth;
(xxi) the WWSS contract vehicle is expected to continue to
contribute to significant government systems sales through 2011;
(xxii) we believe we have sufficient capital resources to
meet our anticipated cash operating expenses, working capital
and capital expenditure and debt services needs for the next
twelve months;
(xxiii) that we believe our capitalized research and
development expense will be recoverable from future gross
profits generated by the related products;
(xxiv) we believe our intellectual property assets are
valuable and will contribute positively to our operational
results in 2010 and beyond;
(xxv) we believe we should not incur any material
liabilities from customer indemnification requests; we have
accurately estimated the amount of future non-cash stock
compensation;
(xxvi) our assumptions and expectations related to income
taxes and deferred tax assets are appropriate;
35
(xxvii) we do not expect that the adoption of new
accounting standards to have a material impact on the
companys financial statements;
(xxviii) we believe that we will continue to comply with
the covenants related to our loan agreements;
(xxix) we have limited exposure to financial market risks,
including changes in interest rates;
(xxx) we believe that our disclosure controls and
procedures were effective to provide reasonable assurance that
information we are required to disclose in reports we file or
submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the applicable
rules and forms, and that it is accumulated and communicated to
our management as appropriate to allow timely decisions
regarding required disclosures; and
(xxxi) we believe we can fund our future acquisitions with
our internally available cash, cash equivalents and marketable
securities, cash generated from operations, amounts available
under our existing debt capacity, additional borrowings or from
the issuance of additional securities.
This list should not be considered exhaustive.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our principal executive office is located in Annapolis,
Maryland, as well as portions of our Commercial and Government
Segments, and includes a satellite operations center. Our office
in Seattle, Washington is used primarily for servicing and
hosting our wireless and VoIP E9-1-1 public safety support
services. Our design and development of our software based
systems and applications are located in our Annapolis, MD
location and also in our Oakland and Aliso Viejo, California,
and Calgary, Alberta offices. Our Government Segment
manufacturing facility is located Tampa, Florida. In addition to
our leased locations listed below, we also lease a hosting
facility in Phoenix, Arizona, which is utilized by our
Commercial Segment. We also own a
7-acre
teleport facility in Manassas, Virginia for teleport services
for our Government Segment customers.
The following table lists our most significant leased facilities
at December 31, 2009:
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Location:
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Size:
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Lease Expiration:
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Annapolis, Maryland
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31,250 square feet
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March 2011
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Seattle, Washington
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57,000 square feet
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September 2017
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Tampa, Florida
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45,600 square feet
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December 2014
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Aliso Viejo, California
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24,000 square feet
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June 2013
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Annapolis, Maryland
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17,000 square feet
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April 2013
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Oakland, California
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11,000 square feet
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August 2012
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Manassas, Virginia
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10,000 square feet
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February 2013
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Suwanee, Georgia
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6,250 square feet
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April 2013
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Catonsville, Maryland
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5,800 square feet
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March 2011
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Calgary, Alberta, Canada
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4,400 square feet
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March 2014
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Item 3.
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Legal
Proceedings
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In November 2001, a shareholder class action lawsuit was filed
against us, certain of our current officers and a director, and
several investment banks that were the underwriters of our
initial public offering (the Underwriters):
Highstein v. TeleCommunication Systems, Inc., et al.,
United States District Court for the Southern District of New
York, Civil Action
No. 01-CV-9500.
The plaintiffs seek an unspecified amount of damages. The
lawsuit purports to be a class action suit filed on behalf of
purchasers of our Class A Common Stock during the period
August 8, 2000 through December 6, 2000. The
plaintiffs allege that the Underwriters agreed to allocate our
Class A Common Stock offered for sale in our initial public
offering to certain purchasers in exchange for excessive and
undisclosed commissions and agreements by those purchasers to
make additional
36
purchases of our Class A Common Stock in the aftermarket at
pre-determined prices. The plaintiffs allege that all of the
defendants violated Sections 11, 12 and 15 of the
Securities Act, and that the underwriters violated
Section 10(b) of the Exchange Act, and
Rule 10b-5
promulgated thereunder. The claims against us of violation of
Rule 10b-5
have been dismissed with the plaintiffs having the right to
re-plead. On February 15, 2005, the District Court issued
an Order preliminarily approving a settlement agreement among
class plaintiffs, all issuer defendants and their insurers,
provided that the parties agree to a modification narrowing the
scope of the bar order set forth in the settlement agreement.
The parties agreed to a modification narrowing the scope of the
bar order, and on August 31, 2005, the court issued an
order preliminarily approving the settlement. On
December 5, 2006, the United States Court of Appeals for
the Second Circuit overturned the District Courts
certification of the class of plaintiffs who are pursuing the
claims that would be settled in the settlement against the
underwriter defendants. Plaintiffs filed a Petition for
Rehearing and Rehearing En Banc with the Second Circuit on
January 5, 2007 in response to the Second Circuits
decision. On April 6, 2007, the Second Circuit denied
plaintiffs rehearing petition, but clarified that the
plaintiffs may seek to certify a more limited class in the
District Court. On June 25, 2007, the District Court signed
an Order terminating the settlement. On November 13, 2007,
the issuer defendants in certain designated focus
cases filed a motion to dismiss the second consolidated
amended class action complaints that were filed in those cases.
On March 26, 2008, the District Court issued an Opinion and
Order denying, in large part, the motions to dismiss the amended
complaints in the focus cases. On April 2,
2009, the plaintiffs filed a motion for preliminary approval of
a new proposed settlement between plaintiffs, the underwriter
defendants, the issuer defendants and the insurers for the
issuer defendants. On June 10, 2009, the Court issued an
opinion preliminarily approving the proposed settlement, and
scheduling a settlement fairness hearing for September 10,
2009. On August 25, 2009, the plaintiffs filed a motion for
final approval of the proposed settlement, approval of the plan
of distribution of the settlement fund, and certification of the
settlement classes. A settlement fairness hearing was held on
September 10, 2009. On October 5, 2009, the Court
issued an opinion granting plaintiffs motion for final
approval of the settlement, approval of the plan of distribution
of the settlement fund, and certification of the settlement
classes. We intend to continue to defend the lawsuit until the
matter is resolved. We have purchased a Directors and Officers
insurance policy which we believe should cover any potential
liability that may result from these laddering class action
claims, but can provide no assurance that any or all of the
costs of the litigation will ultimately be covered by the
insurance. No reserve has been created for this matter. More
than 300 other companies have been named in nearly identical
lawsuits that have been filed by some of the same law firms that
represent the plaintiffs in the lawsuit against us.
On July 12, 2006, we filed suit in the United States
District Court for the Eastern District of Virginia against
Mobile 365 (now Sybase 365, a subsidiary of Sybase Inc.) and
WiderThan Americas for patent infringement related to
U.S. patent No. 6,985,748, Inter-Carrier Short
Messaging Service Providing Phone Number Only Experience
(the 748 patent), issued to the Company. We
resolved the matter with regard to WiderThan Americas, and,
during the second quarter of 2007, we received a favorable jury
decision that Sybase 365 infringed the claims of our patent. The
jury awarded us a one-time monetary payment in excess of
$10 million for past damages and a 12% royalty. The jury
also found Sybase 365s infringement willful and upheld the
validity of the patent. After the jury verdict, both parties
filed post-trial motions. The court denied Sybase 365s
post-trial motion for a new trial or a judgment in its favor,
granted our motion for a permanent injunction prohibiting any
further infringement by Sybase 365, but stayed the injunction
pending the outcome of any appeal that may be filed, reduced the
jury verdict damages award by $2.2 million and vacated the
jury finding of willful infringement. Sybase filed an appeal
from the final judgment of the district court to U.S. Court
of Appeals for the Federal Circuit. In the first quarter of
2008, Sybase 365 filed a request for reexamination of the
748 patent claiming that the patent is invalid. In the
second quarter of 2008, the United States Patent and Trademark
Office granted the request and began the requested reexamination
of the 748 patent.
On July 30, 2009, we filed suit in the United States
District Court for the Eastern District of Virginia against
Sybase 365, Inc., a subsidiary of Sybase Inc., for patent
infringement related to U.S. patent No. 7,460,425,
Inter-Carrier Digital Message with User Data Payload Service
Providing Phone Number Only Experience, which is related to the
patents subject to the prior jury award against Sybase 365. On
December 22, 2009, we entered into an agreement with Sybase
under which Sybase paid us a one-time amount of $23 million
in exchange for a
37
license to the Inter-Carrier Messaging family of patents. The
court entered a Dismissal Order on January 8, 2010 and both
cases were finally resolved.
On July 30, 2009, we filed suit in the United States
District Court for the Eastern District of Virginia against
Sybase 365, Inc., a subsidiary of Sybase Inc., for infringement
related to U.S. patent Nos. 6,891,811, Short Message
Service Center Mobile-Originated to Internet Communications, and
7,355,990, Mobile-Originated to HTTP Internet Communications, on
technology for permitting two-way communication of short
messages between an SMSC or wireless device and an HTTP device
or Universal Resource Locator (URL). Sybase 365 has filed
requests for reexamination of these patents claiming that the
patents are invalid.
On August 19, 2009, we filed suit in the United States
District Court for the District of Delaware against Sybase, Inc
and iAnywhere Solutions, Inc, a subsidiary of Sybase, Inc., for
patent infringement related to U.S. patent
No. 6,560,604, entitled System, Method, and Apparatus
for Automatically and Dynamically Updating Options, Features,
and/or
Services Available to Client Device, on technologies
permitting automatic initialization, configuration and updating
of client devices
over-the-air
(O-T-A) and other technology-based products,
services and systems that offer the automatic O-T-A
initialization, configuration and updating capability.
There can be no assurances to what extent these matters will be
successful, if at all. Additionally, we could become subject to
counterclaims or further challenges to the validity of the
patents.
On October 2, 2009, Sybase 365 LLC filed suit against us in
the United States District Court for the Eastern District of
Virginia, for patent infringement related to U.S. patent
No. 5,873,040, entitled Wireless 911 Emergency
Location on technology integrating wireless emergency 911
communications into a wireless voice network, and
U.S. patent No. 7,082,312, entitled, Short
Message Gateway, System and Method of Providing Information
Service for Mobile Telephones on technology permitting the
provision of location-based information service for mobile
telephones. We are reviewing the allegations made in
Sybases complaint and intend to defend the lawsuit
vigorously. No reserve has been created for this matter.
Other than the items discussed immediately above, we are not
currently subject to any other material legal proceedings.
However, we may from time to time become a party to various
legal proceedings arising in the ordinary course of our business.
Part II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Our Class A Common Stock has been traded on the NASDAQ
Global Market under the symbol TSYS since our
initial public offering on August 8, 2000. The following
table sets forth, for the periods indicated, the high and low
closing prices for our Class A Common Stock as reported on
the NASDAQ Global Market:
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High
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Low
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2010
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First Quarter 2010 (through March 4, 2010)
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$
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10.25
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$
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7.50
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2009
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First Quarter 2009
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$
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10.00
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$
|
6.86
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Second Quarter 2009
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$
|
10.25
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$
|
6.38
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Third Quarter 2009
|
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$
|
9.03
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$
|
6.46
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|
Fourth Quarter 2009
|
|
$
|
9.93
|
|
|
$
|
7.75
|
|
2008
|
|
|
|
|
|
|
|
|
First Quarter 2008
|
|
$
|
3.98
|
|
|
$
|
2.71
|
|
Second Quarter 2008
|
|
$
|
5.47
|
|
|
$
|
3.06
|
|
Third Quarter 2008
|
|
$
|
8.75
|
|
|
$
|
4.19
|
|
Fourth Quarter 2008
|
|
$
|
8.91
|
|
|
$
|
4.58
|
|
As of March 3, 2010 there were approximately 318 holders of
record of our Class A Common Stock, and there were 8
holders of record of our Class B Common Stock.
38
Dividend
Policy
We have never declared or paid cash dividends on our common
stock. We currently intend to retain any future earnings to fund
the development, growth and operation of our business.
Additionally, under the terms of our loan arrangements, our
lenders prior written consent is required to pay cash
dividends on our common stock. We do not currently anticipate
paying any cash dividends on our common stock in the foreseeable
future.
Issuer Purchases
of Equity Securities
None.
39
Stock Performance
Graph
The following graph compares the cumulative total shareholder
return on the Companys Class A Common Stock with the
cumulative total return of the Nasdaq Global Market
U.S. Index and a mobile data index prepared by the Company
of the following relevant publicly traded companies in the
commercial and government sectors in which we operate: Openwave
Systems, Inc.; Comtech Telecommunications Corp.; Sybase, Inc.;
General Dynamics Corp., LM Ericsson Telephone Company, Comverse
Technology Inc.; Globecomm Systems Inc.; NCI Inc.; NeuStar,
Inc.; Syniverse Holdings, Inc.; and ViaSat Inc. (the New
Peer Group)
The composition of the Mobile Data Index has been changed from
last year (the Old Peer Group) as follows: General
Dynamics Corp. and LM Ericsson Telephone Company were added to
the remaining companies to comprise the New Peer
Group because their satellite services business and mobile
communications systems lines have become more comparable to our
Government and Commercial Segment businesses, respectively.
The information provided is from January 1, 2004 through
December 31, 2009.
This performance graph shall not be deemed filed for
purposes of Section 18 of the Exchange Act, or incorporated
by reference into any filing of the Company under the Securities
Act or the Exchange Act, except as shall be expressly set forth
by specific reference in such filing. The stock price
performance shown on the graph below is not necessarily
indicative of future price performance.
40
|
|
Item 6.
|
Selected
Financial Data
|
The table that follows presents portions of our consolidated
financial statements. You should read the following selected
financial data together with our audited Consolidated Financial
Statements and related notes and with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the more complete financial information
included elsewhere in this
Form 10-K.
We have derived the statement of operations data for the years
ended December 31, 2009, 2008, and 2007 and the balance
sheet data as of December 31, 2009 and 2008 from our
consolidated financial statements which have been audited by
Ernst & Young LLP, independent registered public
accounting firm, and which are included in Item 15 of this
Form 10-K.
We have derived the statement of operations data for the years
ended December 31, 2006 and 2005 and the balance sheet data
as of December 31, 2007, 2006, and 2005, from our audited
financial statements which are not included in this
Form 10-K.
The historical results presented below are not necessarily
indicative of the results to be expected for any future fiscal
year. See Managements Discussion and Analysis of
Financial Condition and Results of Operations. As a result
of implementation of ASC
718-10 in
2006, our non-cash stock compensation expense has been allocated
to direct cost of revenue, research and development expense,
sales and marketing expense, and general and administrative
expense in our continuing operations as well as discontinued
operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions, except share and per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
151.9
|
|
|
$
|
101.4
|
|
|
$
|
88.1
|
|
|
$
|
88.4
|
|
|
$
|
75.0
|
|
Systems
|
|
|
148.2
|
|
|
|
118.8
|
|
|
|
56.1
|
|
|
|
36.6
|
|
|
|
27.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
300.1
|
|
|
|
220.2
|
|
|
|
144.2
|
|
|
|
124.9
|
|
|
|
102.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services revenue
|
|
|
84.1
|
|
|
|
61.6
|
|
|
|
52.2
|
|
|
|
52.5
|
|
|
|
39.2
|
|
Direct cost of systems revenue
|
|
|
102.1
|
|
|
|
77.3
|
|
|
|
37.9
|
|
|
|
17.9
|
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct cost of revenue
|
|
|
186.2
|
|
|
|
138.9
|
|
|
|
90.1
|
|
|
|
70.4
|
|
|
|
56.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services gross profit
|
|
|
67.8
|
|
|
|
39.8
|
|
|
|
35.9
|
|
|
|
35.8
|
|
|
|
35.8
|
|
Systems gross profit
|
|
|
46.1
|
|
|
|
41.5
|
|
|
|
18.2
|
|
|
|
18.7
|
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
|
113.9
|
|
|
|
81.3
|
|
|
|
54.1
|
|
|
|
54.5
|
|
|
|
45.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
22.3
|
|
|
|
16.2
|
|
|
|
13.1
|
|
|
|
12.6
|
|
|
|
13.9
|
|
Sales and marketing expense
|
|
|
16.0
|
|
|
|
13.7
|
|
|
|
11.9
|
|
|
|
11.7
|
|
|
|
10.5
|
|
General and administrative expense
|
|
|
35.4
|
|
|
|
28.2
|
|
|
|
19.3
|
|
|
|
17.0
|
|
|
|
15.0
|
|
Depreciation and amortization of property and equipment
|
|
|
6.0
|
|
|
|
5.9
|
|
|
|
6.2
|
|
|
|
8.0
|
|
|
|
8.6
|
|
Amortization of goodwill and other intangible assets
|
|
|
0.9
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
80.6
|
|
|
|
64.2
|
|
|
|
50.6
|
|
|
|
49.3
|
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent related gains, net of expenses
|
|
|
15.7
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations
|
|
|
49.0
|
|
|
|
25.2
|
|
|
|
3.5
|
|
|
|
5.2
|
|
|
|
(3.0
|
)
|
Interest expense
|
|
|
(1.8
|
)
|
|
|
(0.9
|
)
|
|
|
(1.8
|
)
|
|
|
(1.8
|
)
|
|
|
(0.7
|
)
|
Amortization of debt discount and debt issuance expenses,
including $2,458 write-off in 2007
|
|
|
(0.4
|
)
|
|
|
(0.2
|
)
|
|
|
(3.2
|
)
|
|
|
(1.4
|
)
|
|
|
(0.5
|
)
|
Other (expense)/income, net
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations before income taxes
|
|
|
47.1
|
|
|
|
24.3
|
|
|
|
(1.0
|
)
|
|
|
2.0
|
|
|
|
(4.3
|
)
|
(Provision)/benefit for income taxes
|
|
|
(18.8
|
)
|
|
|
33.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations
|
|
|
28.3
|
|
|
|
57.6
|
|
|
|
(1.0
|
)
|
|
|
2.0
|
|
|
|
(4.3
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(23.7
|
)
|
|
|
(7.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
28.3
|
|
|
$
|
57.6
|
|
|
$
|
(1.3
|
)
|
|
$
|
(21.7
|
)
|
|
$
|
(11.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations per share
|
|
$
|
0.59
|
|
|
$
|
1.34
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.11
|
)
|
Loss from discontinued operations per share
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
(0.60
|
)
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share basic
|
|
$
|
0.59
|
|
|
$
|
1.34
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations per share (1)
|
|
$
|
0.53
|
|
|
$
|
1.23
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.11
|
)
|
Loss from discontinued operations per share
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
(0.59
|
)
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share diluted
|
|
$
|
0.53
|
|
|
$
|
1.23
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares used in computation (in thousands)
|
|
|
47,623
|
|
|
|
43,063
|
|
|
|
41,453
|
|
|
|
39,430
|
|
|
|
38,823
|
|
Diluted shares used in computation (in thousands)
|
|
|
53,946
|
|
|
|
46,644
|
|
|
|
41,453
|
|
|
|
40,166
|
|
|
|
38,823
|
|
41
|
|
|
(1) |
|
In calculating 2009 diluted earnings per share requires adding
to net income the interest expense, net of taxes, of
$0.4 million associated with the 4.5% convertible senior
notes, see Note 4 presented in the Notes to Consolidated
Financial Statements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
61.4
|
|
|
$
|
39.0
|
|
|
$
|
16.0
|
|
|
$
|
10.4
|
|
|
$
|
9.3
|
|
Working capital
|
|
|
77.7
|
|
|
|
79.1
|
|
|
|
35.0
|
|
|
|
25.4
|
|
|
|
27.5
|
|
Total assets
|
|
|
472.2
|
|
|
|
182.0
|
|
|
|
82.1
|
|
|
|
83.6
|
|
|
|
90.6
|
|
Capital leases and long-term debt (including current portion)
|
|
|
183.0
|
|
|
|
11.8
|
|
|
|
16.1
|
|
|
|
17.6
|
|
|
|
16.5
|
|
Total liabilities
|
|
|
286.4
|
|
|
|
67.7
|
|
|
|
38.2
|
|
|
|
48.6
|
|
|
|
41.5
|
|
Total stockholders equity
|
|
|
185.8
|
|
|
|
114.3
|
|
|
|
44.0
|
|
|
|
35.1
|
|
|
|
49.1
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Critical
Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition
and Results of Operations addresses our consolidated financial
statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The
preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going 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 value of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions. We have identified our most critical accounting
policies and estimates to be those related to the following:
Revenue Recognition. The Company records
revenue from multiple element arrangements under the guidance
governed by the Financial Accounting Standards Board
(FASB) and the Accounting Standard Codification
(ASC). These standards state that at the time of
entering into each customer agreement or arrangement, each
element is identified and the revenue, cost of revenue, and
gross profit for each deliverable is recorded and presented
separately as either systems or services. Sales of products and
product related solutions to customers are classified as systems
revenue within the Companys Statement of Operations. These
typically are integrated solutions that may include licenses,
hardware and labor to deliver the product
and/or
solution per the customers specifications. Services
revenue includes the elements of the contract typically related
to maintenance or other recurring services performed over an
extended period. Each of the services and systems captions
represents more than 10 percent of the Companys total
revenue. There is no other category of revenue described in
Rule 5-03
of
Regulation S-X
in which the Company is currently engaged. The Company
considered
Rule 5-03
of
Regulation S-X
as it relates to the labor portion of systems revenue, and will
continue to periodically assess the materiality of the labor
portion of systems revenue and classify the amount as services
if significant.
We sell communications systems incorporating our licensed
software for enhanced services, including text messaging and
location-based services to wireless carriers. These systems are
designed to incorporate our licensed software. If significant
customization is not required, the Company recognizes revenue
for all delivered elements of a software sale at the point when
all four criteria of revenue recognition are met and, the
Company has vendor-specific objective evidence (VSOE) of fair
value for all identified undelivered elements. Systems revenue
typically contains multiple elements, which may include the
product license, installation, integration, and hardware. The
total arrangement fee is allocated among elements based on VSOE
of the fair value of each of the elements. Fair value is
generally determined based on the price charged when the element
is sold separately. In the absence of evidence of fair value of
a delivered element, revenue is allocated first to the
undelivered elements based on fair value and the residual
revenue to the delivered elements. Software licenses are
generally
42
perpetual licenses for a specified volume of usage, along with
the purchase of annual maintenance at a specified rate. We
recognize license fee revenue when each of the following has
occurred: (1) evidence of an arrangement is in place;
(2) we have delivered the software; (3) the fee is
fixed or determinable; and (4) collection of the fee is
probable.
Software projects that require significant customization are
accounted for under the
percentage-of-completion
method. We measure progress to completion using costs incurred
compared to estimated total costs or labor costs incurred
compared to estimated total labor costs for contracts that have
a significant component of third-party materials costs. We
recognize estimated losses under long-term contracts in their
entirety upon discovery. If we did not accurately estimate total
costs to complete a contract or do not manage our contracts
within the planned budget, then future margins may be negatively
affected or losses on existing contracts may need to be
recognized. Software license fees billed and not recognized as
revenue are included in deferred revenue. The Company recognizes
contract revenue as billable costs are incurred and for
fixed-price product delivery contracts using the
percentage-of-completion
method or proportional performance method, measured by either
total labor costs or total costs incurred compared to total
estimated labor costs or total costs to be incurred in
accordance with the ASC guidance. We recognize estimated losses
on contracts in their entirety upon discovery. If we did not
accurately estimate total labor costs or total costs to complete
a contract or do not manage our contracts within the planned
budget, then our future margins may be negatively affected or
losses on existing contracts may need to be recognized.
Acquired Intangible Assets. The acquired
intangible assets are amortized over their useful lives of
between five and nineteen years, based on the greater of the
straight-line method or the revenue curve method. We evaluate
acquired intangible assets when events or changes in
circumstances indicate that the carrying values of such assets
might not be recoverable. Our review of factors present and the
resulting appropriate carrying value of our acquired intangible
assets are subject to judgments and estimates by management.
Future events such as a significant underperformance relative to
historical or projected future operating results, significant
changes in the manner of our use of the acquired assets, and
significant negative industry or economic trends could cause us
to conclude that impairment indicators exist and that our
acquired intangible assets might be impaired. There have been no
impairment charges in 2009. The amortization expense recognized
in 2009 relates to the intangible assets acquired in 2009,
including LocationLogic, Solvern, Sidereal and Networks In
Motion and the 2004 acquisition of assets of Kivera Inc.
(Kivera). The expense recognized in 2008 and 2007
relates to the intangible assets acquired with the 2004
acquisition of assets from Kivera, including customer lists,
customer contracts, trademarks, and patents, see Note 9 to
the Consolidated Financial Statements.
Impairment of Goodwill. The Company performs
an annual analysis of our goodwill for impairment. The analysis
of goodwill includes, among other factors, estimating future
cash flows to be received from the assets. At December 31,
2009, goodwill was $164.4 million and we determined that
the fair value of our reporting units exceeded their carrying
value, so there was no impairment charge in 2009. Material
differences in our assumptions and valuations in the future
could result in a future impairment loss.
Stock Compensation Expense. We have adopted
the fair value recognition provisions using the modified
prospective transition method. Under the fair value recognition
provisions, we estimate the fair value of our employee stock
awards at the date of grant using the Black-Scholes option
pricing model, which requires the use of certain subjective
assumptions. The most significant of these assumptions are our
estimates of expected volatility of the market price of our
stock and the expected term of the stock award. We have
determined that historical volatility is the best predictor of
expected volatility and the expected term of our awards was
determined taking into consideration the vesting period of the
award, the contractual term and our historical experience of
employee stock option exercise behavior. We review our valuation
assumptions at each grant date and, as a result, we could change
our assumptions used to value employee stock-based awards
granted in future periods. In addition, we are required to
estimate the expected forfeiture rate and only recognize expense
for those awards expected to vest. If our actual forfeiture rate
were materially different from our estimate, the stock-based
compensation expense would be different from what we have
recorded in the current period. Our employee stock-based
compensation costs are recognized over the vesting period of the
award and are recorded using the straight-line method.
43
Income Taxes. We use the asset and liability
method of accounting for deferred income taxes. Under this
method, deferred tax assets and liabilities are determined based
on temporary differences between financial reporting basis and
the tax basis of assets and liabilities. We also recognize
deferred tax assets for tax net operating loss carryforwards.
The deferred tax assets and liabilities are measured using the
enacted tax rates and laws expected to be in effect when such
amounts are projected to reverse or be utilized. The realization
of total deferred tax assets is contingent upon the generation
of future taxable income in the tax jurisdictions in which the
deferred tax assets are located. When appropriate, we recognize
a valuation allowance to reduce such deferred tax assets to
amounts more likely than not to be realized. The calculation of
deferred tax assets (including valuation allowances) and
liabilities require management to apply significant judgment
related to such factors as the application of complex tax laws
and the changes in such laws. We have also considered our future
operating results, which require assumptions such as future
market penetration levels, forecasted revenues and the mix of
earnings in the jurisdictions in which we operate, in
determining the need for a valuation allowance. Changes in our
assessment of the need for a valuation allowance could give rise
to a change in such allowance, potentially resulting in material
amounts of additional tax expense or benefit in the period of
change.
Effective January 1, 2007, the Company began recognizing
the benefits of tax positions in the financial statements if
such positions are more likely than not to be sustained upon
examination by the taxing authority and satisfy the appropriate
measurement criteria. If the recognition threshold is met, the
tax benefit is generally measured and recognized as the tax
benefit having the highest likelihood, based on our judgment, of
being realized upon ultimate settlement with the taxing
authority, assuming full knowledge of the position and all
relevant facts. At December 31, 2009, we had unrecognized
tax benefits totaling approximately $3.3 million. The
determination of these unrecognized amounts requires significant
judgments and interpretation of complex tax laws. Different
judgments or interpretations could result in material changes to
the amount of unrecognized tax benefits.
Business Combinations. During 2009 the
Company acquired four businesses. Pursuant to FASB Accounting
Standards Codification (ASC) 805, Business
Combinations (ASC 805), the business
combinations were each accounted for under the acquisition
method. Accordingly, the total estimated purchase prices
were allocated to the net tangible and intangible assets
acquired in connection with each acquisition, based on their
estimated fair values as of the effective date of the
acquisition. The preliminary allocation of the purchase prices
on each of the acquisitions were based upon managements
preliminary valuation of the fair value of tangible and
intangible assets acquired and liabilities assumed and such
estimates and assumptions are subject to change (generally one
year from their acquisition date). The purchase price allocation
process requires management to make significant estimates and
assumptions, especially at acquisition date with respect to
intangible assets and deferred revenue obligations assumed.
Although we believe the assumptions and estimates we have made
are reasonable, they are based in part on historical experience
and information obtained from the managements of the acquired
companies and are inherently uncertain. Examples of critical
estimates in valuing certain of the intangible assets we have
acquired or may acquire in the future include but are not
limited to:
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future expected cash flows from software license sales,
subscriptions, support agreements, consulting contracts and
acquired developed technologies and patents;
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expected costs to develop the in-process research and
development into commercially viable products and estimated cash
flows from the projects when completed;
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the acquired companys trade name and trademarks as well as
assumptions about the period of time the acquired trade name and
trademarks will continue to be used in the combined
companys product portfolio; and
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discount rates
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Unanticipated events and circumstances may occur which may
affect the accuracy or validity of such assumptions, estimates
or actual results.
Legal and Other Contingencies. We are
currently involved in various claims and legal proceedings. As
required, we review the status of each significant matter and
assess our potential financial exposure. If the
44
potential loss from any claim or legal proceeding is considered
probable and the amount can be reasonably estimated, we accrue a
liability for the estimated loss. Significant judgment is
required in both the determination of probability and the
determination as to whether the amount of an exposure is
reasonably estimable. Because of uncertainties related to these
matters, accruals are based only on the best information
available at the time. As additional information becomes
available, we reassess the potential liability related to our
pending claims and litigation and may revise our estimates. Such
revisions in the estimates of the potential liabilities could
have a material impact on our results of operations and
financial position.
Overview
Our business is reported using two business segments:
(i) our Commercial Segment, which consists principally of
enhanced communication technology for wireless networks,
principally based on text messaging and location-based services,
including our E9-1-1 application and other applications for
wireless carriers and Voice Over IP service providers, and
(ii) our Government Segment, which includes the design,
development and deployment of information processing and
communication systems, mainly satellite-based, and related
services to government agencies.
Recent
Acquisitions
An opportunistic acquisition approach is part of our long-term
corporate strategy. We pursue specific targets that complement
our portfolio of existing products and services. Our aim is to
explore business combinations through exclusivity rather than
participation in an open auction process. This approach has dual
benefits of favorable pricing and expedited execution. We
believe we can fund our future acquisitions with our internally
available cash, cash equivalents and marketable securities, cash
generated from operations, amounts available under our existing
debt capacity, additional borrowings or from the issuance of
additional securities. We evaluate the financial impact of any
potential acquisition and associated financing with regard to
earnings, operating margin, cash flow and return on invested
capital targets before deciding to move forward with an
acquisition.
During 2009, our company completed four acquisitions, the
details of which are described in the Business Section and
Financial Statement Footnote 2 of this report on
Form 10-K.
No acquisitions were made in 2008 or 2007.
For the Commercial Segment:
On May 19, 2009, we acquired substantially all of the
assets of LocationLogic LLC (LocationLogic), a provider of
infrastructure, applications and services for carriers and
enterprises to deploy location-based services.
On December 15, 2009, we acquired Networks In Motion, Inc.,
(NIM) a provider of wireless navigation solutions for
GPS-enabled mobile phones.
For the Government Segment:
On November 3, 2009, we acquired Solvern Innovations, Inc.,
(Solvern) a provider of comprehensive communications products
and solutions, training, and technology services for cyber
security-based platforms.
On November 16, 2009, we purchased substantially all of the
assets of Sidereal Solutions, Inc., (Sidereal) a satellite
communications technology engineering, operations and
maintenance support services company.
Operating results of each acquired business are reflected in the
Companys consolidated financial statements from the date
of acquisition.
Indicators of Our
Financial and Operating Performance
Our management monitors and analyzes a number of performance
indicators in order to manage our business and evaluate our
financial and operating performance. Those indicators include:
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Revenue and gross profit. We derive revenue from the
sales of systems and services including recurring monthly
service and subscriber fees, maintenance fees, software licenses
and related service fees for the design, development, and
deployment of software and communication systems, and products
and
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45
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services derived from the delivery of information processing and
communication systems to governmental agencies.
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Gross profit represents revenue minus direct cost of revenue,
including certain non-cash expenses. The major items
comprising our cost of revenue are compensation and benefits,
third-party hardware and software, amortization of software
development costs, non-cash stock-based compensation, and
overhead expenses. The costs of hardware and third-party
software are primarily associated with the delivery of systems,
and fluctuate from period to period as a result of the relative
volume, mix of projects, level of service support required and
the complexity of customized products and services delivered.
Amortization of software development costs, including acquired
technology, is associated with the recognition of systems
revenue from our Commercial Segment.
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Operating expenses. Our operating expenses are
primarily compensation and benefits, professional fees, facility
costs, marketing and sales-related expenses, and travel costs as
well as certain non-cash expenses such as non-cash stock
compensation expense, depreciation and amortization of property
and equipment, and amortization of acquired intangible assets.
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Liquidity and cash flows. The primary driver of our
cash flows is the results of our operations. Other important
sources of our liquidity are our convertible debt agreement,
financial institution loan agreement, lease financings secured
for the purchase of equipment and potential borrowings under our
credit lines.
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Balance sheet. We view cash, working capital, and
accounts receivable balances and days revenues outstanding as
important indicators of our financial health.
|
Results of
Operations
Impact of
Acquisitions
The comparability of our operating results in 2009 to 2008 is
affected by our 2009 acquisitions, but most acquisition activity
occurred in the mid to late fourth quarter of 2009, so that the
impact on 2009 revenue and cost and expense totals is small.
Where changes in our results of operations from fiscal 2009
compared to 2008 are clearly related to the acquisitions, such
as revenue and increases in amortization of intangibles, we
quantify the effects. Operation of the acquired businesses has
been fully integrated into our existing operations. Our
acquisitions did not result in the our entry into a new line of
business or product category; they added products and services
with substantially similar features and functionality.
Revenue and Cost
of Revenue
The following discussion addresses the revenue and cost of
revenue for the two segments of our business.
During the first half of 2007 we sold operations that had been
operated as an Enterprise division. For information regarding
the results of the Enterprise assets, see Discontinued
Operations Enterprise assets below.
46
Commercial
Segment:
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2009 vs. 2008
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2008 vs. 2007
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($ in millions)
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2009
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2008
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|
$
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%
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|
|
2007
|
|
|
$
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%
|
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|
Services revenue
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|
$
|
89.7
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|
$
|
64.4
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|
$
|
25.3
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|
|
|
39
|
%
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|
$
|
58.8
|
|
|
$
|
5.6
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|
|
|
10
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%
|
Systems revenue
|
|
|
37.6
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|
|
|
37.4
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|
|
|
0.2
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|
1
|
%
|
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|
16.5
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|
|
|
20.9
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|
|
|
127
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%
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Total Commercial Segment revenue
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|
127.3
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|
|
|
101.8
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25.5
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|
25
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%
|
|
|
75.3
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|
|
26.5
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|
|
|
35
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Direct cost of services
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|
35.3
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|
|
|
32.4
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|
|
|
2.9
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|
|
|
9
|
%
|
|
|
29.4
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|
|
|
3.0
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|
|
|
10
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%
|
Direct cost of systems
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|
10.6
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|
|
|
8.9
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|
|
|
1.7
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|
|
|
19
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%
|
|
|
5.0
|
|
|
|
3.9
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|
|
|
78
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total Commercial Segment cost of revenue
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|
45.9
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|
|
|
41.3
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|
|
4.6
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|
11
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%
|
|
|
34.4
|
|
|
|
6.9
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|
|
|
20
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%
|
|
|
|
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|
|
|
|
|
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|
|
|
|
|
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|
|
|
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|
Services gross profit
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|
|
54.4
|
|
|
|
32.0
|
|
|
|
22.4
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|
|
|
70
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%
|
|
|
29.4
|
|
|
|
2.6
|
|
|
|
9
|
%
|
Systems gross profit
|
|
|
27.0
|
|
|
|
28.5
|
|
|
|
(1.5
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)
|
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|
(5
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%)
|
|
|
11.5
|
|
|
|
17.0
|
|
|
|
148
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%
|
|
|
|
|
|
|
|
|
|
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Total Commercial Segment gross profit (1)
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$
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81.4
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$
|
60.5
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$
|
20.9
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|
|
|
35
|
%
|
|
$
|
40.9
|
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|
$
|
19.6
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|
|
|
48
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%
|
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|
|
|
|
|
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Segment gross profit as a percent of revenue
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64
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%
|
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|
59
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%
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|
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|
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54
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%
|
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|
|
|
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(1) |
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See discussion of segment reporting in Note 21 to the
audited Consolidated Financial Statements presented elsewhere in
this Annual Report on
Form 10-K. |
Commercial
Services Revenue and Cost of Revenue:
Services revenue includes hosted Location Based Service (LBS)
applications including navigation, people-finder, asset tracker
and E9-1-1 service for wireless and E9-1-1 for Voice over
Internet Protocol (VoIP) service providers, and hosted wireless
LBS infrastructure including Position Determining Entity (PDE)
service. This revenue primarily consists of monthly recurring
service fees recognized in the month earned. Subscriber service
revenue is generated by client software applications for
wireless subscribers, generally on a per-subscriber per month
basis. E9-1-1, PDE, VoIP and hosted LBS service fees are priced
based on units served during the period, such as the number of
customer cell sites, the number of connections to Public Service
Answering Points (PSAPs), or the number of customer subscribers.
Maintenance fees on our systems and software licenses are
usually collected in advance and recognized ratably over the
contractual maintenance period. Unrecognized maintenance fees
are included in deferred revenue. Custom software development,
implementation and maintenance services may be provided under
time and materials or fixed-fee contracts.
Our commercial services revenue increased $25.3 million or
39% over 2008 from increased subscriber revenue for LBS
applications, service connection deployments of our E9-1-1
services for cellular and VoIP service providers, and an
increase in software maintenance revenue. Approximately
$13 million of subscriber service revenue may be ascribed
to the acquisitions of LocationLogic and NIM. Our commercial
services revenue increased $5.6 million or 10% in 2008 from
2007 due to growth in hosted service customer volume and new
hosted service customers and increased maintenance fees due to
higher cumulative system license sales.
The direct cost of our services revenue consists primarily of
compensation and benefits, network access, data feed and circuit
costs, and equipment and software maintenance. The direct cost
of maintenance revenue consists primarily of compensation and
benefits expense. For the year ended December 31, 2009, the
direct cost of services revenue increased 9% over 2008 primarily
due to increases in labor and other direct costs related to
addition of the LocationLogic and NIM businesses, and custom
development work responding to customer requests and deployment
requirements for VoIP E9-1-1 technology. For the year ended
December 31, 2008, the direct cost of service revenue
increased 10% over 2007 in direct relation to the increase in
revenues. While we increased the number of cell sites,
subscribers and public safety answering points served, our
overall circuit and data access costs were relatively consistent
year to year, and have declined as a percentage of segment
services revenue. The cost of non-labor circuit and other data
access costs accounted for approximately 12% of total direct
costs of commercial services revenues in 2009, 13% in 2008, and
15% in 2007.
47
Commercial services gross profit for the year ended
December 31, 2009 was $54.4 million, and was 70%
higher than in 2008 as a result of higher revenue, improved
operating efficiencies and the inclusion of the 2009
acquisitions. Commercial services gross profit for the year
ended December 31, 2008 was 9% higher than in 2007 on
higher revenue.
Commercial
Systems Revenue and Cost of Revenue
We sell communications systems to wireless carriers
incorporating our licensed software for enhanced services,
including text messaging and location-based services. These
systems are designed to incorporate our licensed software. We
design our software to ensure that it is compliant with all
applicable standards. Licensing fees for our carrier software
are generally a function of its volume of usage in our
customers networks. As a carriers subscriber base or
usage increases, the carrier must purchase additional capacity
under its license agreement and we receive additional revenue.
Commercial systems revenue in 2009 was $37.6 million
compared to $37.4 million in 2008. Commercial systems
revenue increased primarily due to higher sales of text
messaging software licenses and location platform systems,
partly offset by reduced equipment-component revenue due to a
customer hardware refresh in 2008 with no comparable project in
2009. Commercial systems revenue in 2008 was 127% higher than in
2007 due to higher sales of licenses for text messaging capacity
and customer hardware upgrades.
The direct cost of commercial systems revenue consists primarily
of compensation and benefits, third-party hardware and software
purchased for integration and resale, travel expenses, and
consulting fees as well as the amortization of both acquired and
capitalized software development costs. The direct cost of
commercial systems increased 19% in 2009 primarily due to costs
of location platform systems projects. The direct cost of the
license component of systems is normally very low, and the gross
profit very high since much of the software development cost was
expensed in prior periods. The direct cost of systems includes
amortization of capitalized software development costs of
$3.1 million, $2.1 million, and $1.5 million,
respectively, in 2009, 2008, and 2007.
Our commercial systems gross profit was $27.0 million in
2009, down 5% or $1.5 million from 2008. Our commercial
systems gross profit was $28.5 million in 2008, a 148% or
$17.0 million increase from 2007. Systems gross margins are
higher in periods when systems revenue includes a higher
proportion of software licenses relative to third party system
components and integration labor, as was the case in 2008.
Government
Segment:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
|
|
2008 vs. 2007
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Services revenue
|
|
$
|
62.2
|
|
|
$
|
36.9
|
|
|
$
|
25.3
|
|
|
|
69%
|
|
|
$
|
29.3
|
|
|
$
|
7.6
|
|
|
|
26%
|
|
Systems revenue
|
|
|
110.6
|
|
|
|
81.4
|
|
|
|
29.2
|
|
|
|
36%
|
|
|
|
39.6
|
|
|
|
41.8
|
|
|
|
106%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Government Segment revenue
|
|
|
172.8
|
|
|
|
118.3
|
|
|
|
54.5
|
|
|
|
46%
|
|
|
|
68.9
|
|
|
|
49.4
|
|
|
|
72%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services
|
|
|
48.8
|
|
|
|
29.2
|
|
|
|
19.6
|
|
|
|
67%
|
|
|
|
22.8
|
|
|
|
6.4
|
|
|
|
28%
|
|
Direct cost of systems
|
|
|
91.5
|
|
|
|
68.3
|
|
|
|
23.2
|
|
|
|
34%
|
|
|
|
32.9
|
|
|
|
35.4
|
|
|
|
108%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Government Segment cost of revenue
|
|
|
140.3
|
|
|
|
97.5
|
|
|
|
42.8
|
|
|
|
44%
|
|
|
|
55.7
|
|
|
|
41.8
|
|
|
|
75%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services gross profit
|
|
|
13.4
|
|
|
|
7.7
|
|
|
|
5.7
|
|
|
|
74%
|
|
|
|
6.5
|
|
|
|
1.2
|
|
|
|
18%
|
|
Systems gross profit
|
|
|
19.1
|
|
|
|
13.1
|
|
|
|
6.0
|
|
|
|
46%
|
|
|
|
6.7
|
|
|
|
6.4
|
|
|
|
96%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Government Segment gross profit (1)
|
|
$
|
32.5
|
|
|
$
|
20.8
|
|
|
$
|
11.7
|
|
|
|
56%
|
|
|
$
|
13.2
|
|
|
$
|
7.6
|
|
|
|
58%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit as a percent of revenue
|
|
|
19
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See discussion of segment reporting in Note 21 to the
audited Consolidated Financial Statements presented elsewhere in
this Annual Report on
Form 10-K. |
48
For 2009, Government Segment revenue increased 46% reflecting
increases in both services and systems revenue. Government
Segment revenue in 2008 and 2007 increased 72% and 44%,
respectively, reflecting increases in both services and systems
revenue. During the third quarter of 2006, we were one of six
vendors selected by the U.S. Army to provide secure
satellite services and systems under a five-year Worldwide
Satellite Systems (WWSS) contract vehicle, with a maximum value
of up to $5 billion for the six vendors. The WWSS contract
vehicle is expected to continue to contribute significant
government systems sales through 2011. The Companys
Government Segment has been awarded participation as a prime or
sub-contractor
to provide similar satellite-based technology under several
other contract vehicles.
Government
Services Revenue and Cost of Revenue:
Government services revenue primarily consists of professional
communications engineering and field support, program
management, help desk outsource, network design and management
for government agencies, as well as operation of teleport (fixed
satellite ground terminal) facilities for data connectivity via
satellite including resale of satellite airtime. System
maintenance fees are collected in advance and recognized ratably
over the maintenance periods. Government services revenue
increased to $62.2 million in 2009 from $36.9 million
in 2008 and $29.3 million in 2007. These increases were
generated by new and expanded-scope contracts for satellite
airtime services using our teleport facilities, and professional
services including about $2.9 million of revenue associated
with the acquisitions of Solvern and Sidereal.
Direct cost of government service revenue consists of
compensation, benefits and travel incurred in delivering these
services, as well as satellite space segment purchased for
resale. These costs increased as a result of the increased
volume of service in all three years.
Our gross profit from government services increased to
$13.4 million in 2009 from $7.7 million in 2008 and
$6.5 million in 2007. Gross profit in 2009 increased as a
result of higher revenue for maintenance and satellite services
with improved utilization of our facilities and satellite
airtime. Higher gross profit in 2008 was realized from volume
increases in professional services, teleport usage, and
maintenance on the installed base of systems.
Government
Systems Revenue and Cost of Revenue:
We generate government systems revenue from the design,
development, assembly and deployment of communication systems,
primarily deployable satellite-based ground stations, and
integration of these systems into customer networks. These are
largely variations on our SwiftLink product line, which are
lightweight, secure, deployable communication systems, sold to
units of the U.S. Departments of Defense, State, and other
government agencies. Government systems sales increased to
$110.6 million in 2009 from $81.4 million in 2008,
which was more than double the $39.6 million in 2007. The
increases over the last three years in systems revenues were
primarily due to volume from the fulfillment of task orders
under the WWSS
5-year
contract vehicle, for which TCS was one of six awardees in
September 2006.
The cost of our government systems revenue consists of purchased
system components, compensation and benefits, the costs of
third-party contractors, and travel. These costs have increased
over the three years presented as a direct result of the
increase in volume. These equipment and third-party costs are
variable for our various types of products, and margins may
fluctuate between periods based on pricing and product mix.
Our government systems gross profit was $19.1 million,
$13.1 million and $6.7 million in 2009, 2008 and 2007,
respectively. The increase in gross profit is primarily due to
higher sales volume under the WWSS procurement vehicle.
49
Operating
Expenses:
Research and
Development Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
2008 vs. 2007
|
($ in millions)
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
2007
|
|
$
|
|
%
|
|
Research and development expense
|
|
$
|
22.3
|
|
|
$
|
16.2
|
|
|
$
|
6.1
|
|
|
|
38
|
%
|
|
$
|
13.1
|
|
|
$
|
3.1
|
|
|
|
24
|
%
|
Percent of revenue
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
Our research and development expense consists of compensation,
benefits, and a proportionate share of facilities and corporate
overhead. The costs of developing software products are expensed
prior to establishing technological feasibility. Technological
feasibility is established for our software products when a
detailed program design is completed. We incur research and
development costs to enhance existing packaged software products
as well as to create new software products including software
hosted in network operations centers. These costs primarily
include compensation and benefits as well as costs associated
with using third-party laboratory and testing resources. We
expense such costs as they are incurred unless technological
feasibility has been reached and we believe that capitalized
costs will be recoverable, in which we capitalize and amortize
over the products expected life.
The expenses we incur relate to software applications which are
being marketed to new and existing customers on a global basis.
Throughout 2009, 2008, and 2007, research and development was
primarily focused on wireless location-based subscriber and
carrier applications, including cellular E9-1-1 and Voice over
IP E9-1-1, enhancements to our hosted LBS platform for carrier
infrastructure, and enhancement of our text messaging
deliverables. Management continually assesses our spending on
research and development to ensure resources are focused on
products that are expected to achieve the highest level of
success. In 2009, 2008, and 2007, we capitalized
$1.0 million, $0.5 million, and $1.5 million,
respectively, of software development costs for software
projects. The capitalized costs relate to wireless
location-based and VoIP E9-1-1 software, and will be amortized
on a
product-by-product
basis using the straight-line method over the products
estimated useful life, not longer than three years. Amortization
is also computed using the ratio that current revenue for the
product bears to the total of current and anticipated future
revenue for that product (the revenue curve method). If this
revenue curve method results in amortization greater than the
amount computed using the straight-line method, amortization is
recorded at that greater amount. Amortization of software
development costs is recorded as a direct cost of revenue. We
believe that these capitalized costs will be recoverable from
future gross profits generated by these products.
Research and development expense increased 38% in 2009 from
2008, primarily as a result of increased software development
labor costs for continued work on location platform, electronic
map applications, VoIP and wireless E9-1-1, text messaging, and
deployable sitcom technology, including enhancement of
LocationLogic and NIM software following the acquisitions of
those businesses. Research and development expense increased 24%
in 2008 from 2007, as software developers spent less time on
work that was subject to capitalized expenditure accounting
(discussed above), more Company personnel assigned to software
development work, and variable compensation was higher in 2008
than 2007.
Our research and development expenditures and acquisitions have
yielded a portfolio of more than 100 patents, and more than 300
patent applications are pending, primarily for wireless
messaging and location technology. We believe that the
intellectual property represented by these patents is a valuable
asset that will contribute positively to our results of
operations in 2010 and beyond.
Sales and
Marketing Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
2008 vs. 2007
|
($ in millions)
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
2007
|
|
$
|
|
%
|
|
Sales and marketing expense
|
|
$
|
16.0
|
|
|
$
|
13.7
|
|
|
$
|
2.3
|
|
|
|
17
|
%
|
|
$
|
11.9
|
|
|
$
|
1.8
|
|
|
|
15
|
%
|
Percent of revenue
|
|
|
5
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
50
Our sales and marketing expense includes fixed and variable
compensation and benefits, trade show expenses, travel costs,
advertising and public relations costs as well as a
proportionate share of facility-related costs which are expensed
as incurred. Our marketing efforts also include speaking
engagements, and attending and sponsoring industry conferences.
We sell our software products and services through our direct
sales force and through indirect channels. We have also
historically leveraged our relationships with original equipment
manufacturers to market our software products to wireless
carrier customers. We sell our products and services to agencies
and departments of the U.S. government primarily through
direct sales professionals. Sales and marketing costs increased
17%, 15% and 2% in 2009, 2008 and 2007, respectively, primarily
as a result of adding additional sales personnel, increased
public relations fees, and increased variable compensation.
General and
Administrative Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
|
|
2008 vs. 2007
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
General and administrative expense
|
|
$
|
35.4
|
|
|
$
|
28.2
|
|
|
$
|
7.2
|
|
|
|
26
|
%
|
|
$
|
19.3
|
|
|
$
|
8.9
|
|
|
|
46
|
%
|
Percent of revenue
|
|
|
12
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
General and administrative (G&A) expense consists primarily
of management, finance, legal, human resources and internal
information system functions. These costs include compensation,
benefits, professional fees, travel, and a proportionate share
of rent, utilities and other facilities costs which are expensed
as incurred. The increase in 2009 includes increased costs to
support our newly acquired LocationLogic, Solvern, Sidereal and
NIM operations, as well as investments for process control,
legal and professional costs associated with protection and
monetization of intellectual property, and accruals for variable
compensation based mainly on profit and growth performance
metrics. Approximately $3 million of fees and expenses were
incurred during the fourth quarter of 2009 in connection with
closing the NIM acquisition. The increase in 2008 G&A
included a charge for vacating a leased facility in Tampa,
Florida, earlier than its December 2009 expiration, and variable
compensation of $8 million related to record revenue,
operating profit, and net income for the year in accordance with
formulas established for key employees at the beginning of the
year.
Depreciation and
Amortization of Property and Equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs.
|
|
|
|
2008 vs.
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
($ in millions)
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
2007
|
|
$
|
|
%
|
|
Depreciation and amortization of property and equipment
|
|
$
|
6.0
|
|
|
$
|
5.9
|
|
|
$
|
0.1
|
|
|
|
2
|
%
|
|
$
|
6.2
|
|
|
$
|
(0.3
|
)
|
|
|
(5
|
%)
|
Average gross cost of property and equipment
|
|
$
|
60.7
|
|
|
$
|
50.4
|
|
|
$
|
10.3
|
|
|
|
20
|
%
|
|
$
|
50.3
|
|
|
$
|
0.1
|
|
|
|
NM
|
|
(NM = Not meaningful)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
represents the period costs associated with our investment in
information technology and telecommunications equipment,
software, furniture and fixtures, and leasehold improvements. We
compute depreciation and amortization using the straight-line
method over the estimated useful lives of the assets, generally
range from five years for furniture, fixtures, and leasehold
improvements to three to four years for most other types of
assets including computers, software, telephone equipment and
vehicles. In 2009, our depreciable asset base increased
primarily as a result of property and equipment acquired with
our four acquisitions during 2009, and organic capital spending
of about $10 million. In 2008 and 2007, our depreciable
asset base has decreased as a result of assets purchased in
previous years becoming fully depreciated.
Amortization of
Acquired Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs.
|
|
|
|
|
|
2008 vs.
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Amortization of acquired intangible assets
|
|
$
|
0.9
|
|
|
$
|
0.1
|
|
|
$
|
0.8
|
|
|
|
800
|
%
|
|
$
|
0.1
|
|
|
$
|
|
|
|
|
NM
|
|
51
The amortization of acquired non-goodwill intangible assets
relates to the and the wireless location-based application and
infrastructure technology assets acquired from LocationLogic and
NIM, and the cyber security assets acquired from Solvern in
2009, and Kivera digital mapping business assets acquired in
2004. These assets are being amortized over their useful lives
of between five and nineteen years. The expense recognized in
2009 relates to customer lists, customer relationships,
coursework, and patents. The expense recognized in 2008 and 2007
relates to the intangible assets associated with the 2004 Kivera
acquisition, including customer lists and patents.
Patent-Related
Gains, Net of Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
|
|
|
2008 vs. 2007
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Patent-related gains, net of expenses
|
|
$
|
15.7
|
|
|
$
|
8.1
|
|
|
$
|
7.6
|
|
|
|
94
|
%
|
|
$
|
|
|
|
$
|
|
|
|
|
NM
|
|
In December 2009, the company reached a settlement of patent
litigation under which Sybase paid TCS $23 million in
January 2010 to license its patents related to cell phone
carrier messaging technology. TCS incurred $7.3 million in
legal and other expenses related to the settlement. In June
2008, the company sold a wireless
e-mail-related
patent for net proceeds of $8.1 million, after legal fees
and other costs concluding litigation involving the patent. TCS
retains a limited license in the patent for use in its own
operations.
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs.
|
|
|
|
|
|
2008 vs.
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Interest expense incurred on bank and other notes payable
|
|
$
|
0.7
|
|
|
$
|
0.7
|
|
|
$
|
|
|
|
|
NM
|
|
|
$
|
1.6
|
|
|
$
|
(0.9
|
)
|
|
|
(56
|
%)
|
Interest expense incurred on 4.5% convertible debt financing
|
|
|
0.6
|
|
|
|
|
|
|
|
0.6
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense incurred on capital lease obligations
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
33
|
%
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
50
|
%
|
Amortization of deferred financing fees
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
100
|
%
|
|
|
0.3
|
|
|
|
(0.1
|
)
|
|
|
(33
|
%)
|
Amortization of debt discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
(0.5
|
)
|
|
|
(100
|
%)
|
Write-off of unamortized debt discount and debt issuance expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
|
(2.4
|
)
|
|
|
(100
|
%)
|
Less: capitalized interest
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
NM
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest and Financing Expense
|
|
$
|
2.2
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
|
100
|
%
|
|
$
|
4.9
|
|
|
$
|
(3.8
|
)
|
|
|
(78
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense is incurred under notes payable, convertible
debt financing, and capital lease obligations, and financing
expense reflects amortization of deferred up-front financing
expenditures at the time of contracting for financing
arrangements, which are being amortized over the term of the
note or the life of the facility.
On November 16, 2009, the Company issued
$103.5 million aggregate principal amount of
4.5% Convertible Senior Notes due 2014. Interest on the
notes is payable semiannually on November 1 and May 1 of each
year, beginning May 1, 2010. The notes will mature on
November 1, 2014, unless previously converted in accordance
with their terms. The notes are TCSs senior unsecured
obligations and will rank equally with all of its present and
future senior unsecured debt and senior to any future
subordinated debt. The notes are structurally subordinate to all
present and future debt and other obligations of TCSs
subsidiaries and will be effectively subordinate to all of
TCSs present and future secured debt to the extent of the
collateral securing that debt. The notes are not redeemable by
TCS prior to the maturity date.
Interest on the bank term loan is at the banks prime rate
plus 0.5% per annum with a minimum rate of 4%. Interest on our
capital leases is primarily at stated rates averaging about
7%.We have a commercial bank line of credit that has not been
used for borrowings, and has therefore generated no interest
expense, during the three
52
years
2007-9.
Interest on our line of credit borrowing would be at the
banks prime rate which was 3.25% per annum as of
December 31, 2009, with a minimum rate of 4%. In June 2009,
we entered into the Third Amended and Restated Loan and Security
Agreement with our principal bank. The Loan Agreement provided
for a $30 million revolving line of credit that replaced
the Companys prior $22 million line of credit and a
$20 million five year term loan that replaced the
Companys prior $10 million term loan. On
June 25, 2007, we refinanced $10 million secured notes
with a new five year term loan payable to our principal bank.
The funds were used primarily to retire the March 2006 secured
notes. This refinancing resulted in the $2.4 million
write-off of unamortized debt discount and debt issuance
expenses in 2007. Further details about our bank facilities are
provided under Liquidity and Capital Resources.
December 15, 2009,we issued $40 million in promissory
notes as part of the consideration paid for the acquisition of
NIM. The promissory notes bear simple interest at 6% and are due
in three installments: $30 million on the 12 month
anniversary of the closing, $5 million on the 18 month
anniversary of the closing, and $5 million on the
24 month anniversary of the closing, subject to escrow
adjustments. The promissory notes are effectively subordinated
to TCSs secured debt and structurally subordinated to any
present and future indebtedness and other obligations of
TCSs subsidiaries.
Our capital lease obligations include interest at various
amounts depending on the lease arrangement. Our interest under
capital leases fluctuates depending on the amount of capital
lease obligations in each year, and the interest under those
leases, has remained relatively constant since 2007. The
interest cost of capital lease financings increased slightly in
2009 due to additional funding and was about the same in the
years ending 2008 and 2007.
Overall our interest and financing increased as a result of the
increase in amount financed including the 4.5% convertible debt
financing in November 2009. Our interest and financing expense
decreased in 2008 over 2007 primarily as a result of retiring
our March 2006 and December 2006 borrowings. Cash interest
expense on notes payable was about the same in 2009 as in 2008,
and was lower in 2008 than in 2007 due to the lower-cost
refinancing in 2007 of higher priced March 2006 debt, and lower
average bank borrowings. Interest on the 4.5% convertible debt
placement was $0.6 million in 2009. Interest on capital
lease financing was slightly higher in 2009 than in 2008 due to
increased lease financing of new property and equipment. The
higher 2009 amortization reflects the proration of fees to
refinance our bank term loan, the write-off of the previous term
loan fees upon its early retirement, and fees associated with
the 4.5% convertible debt financing.
Other Income,
Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs.
|
|
|
|
|
|
2008 vs.
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Foreign currency translation/ transaction (loss)/gain
|
|
$
|
|
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
|
|
(100
|
%)
|
|
$
|
(0.1
|
)
|
|
$
|
0.2
|
|
|
|
200
|
%
|
Miscellaneous other (expense)/ income
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
200
|
%
|
|
|
0.6
|
|
|
|
(0.5
|
)
|
|
|
(83
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
|
|
0.1
|
|
|
|
50
|
%
|
|
$
|
0.5
|
|
|
|
(0.3
|
)
|
|
|
(60
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2009, Other Income, net consisted primarily of
$0.4 million interest income earned on investment accounts,
offset by a loss from sale of securities received in connection
with divestiture of enterprise operations. The net foreign
currency translation/transaction was immaterial for the year
ended December 31, 2009. We record the effects of foreign
currency translation on our cash, receivables and deferred
revenues that are stated in currencies other than our functional
currency.
For 2008, Other Income, net consisted primarily of $0.7 interest
income earned on investment accounts, and $0.1 million net
gain on foreign currency translation/transaction, which is
dependent on fluctuations in currency exchange rates. The
Company also recorded a 2008 loss of $0.8 million from the
decline in the fair market value of divestiture-related
securities considered to be other than temporary. The other
components of other income, net, were about the same as in 2007.
53
Income
Taxes:
The Company accounts for income taxes in accordance with ASC
740, Accounting for Income Taxes. Deferred tax assets and
liabilities are computed based on the difference between the
financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate. Upon the
adoption of ASC 740 on January 1, 2007, the estimated value
of the Companys uncertain tax positions was a liability of
$2.7 million resulting from unrecognized net tax benefits
which did not include interest and penalties and increased to
$3.7 million as of December 31, 2009. The Company
recorded the estimated value of its uncertain tax position by
reducing the value of certain tax attributes. The Company would
classify any interest and penalties accrued on any unrecognized
tax benefits as a component of the provision for income taxes.
There were no interest or penalties recognized in the
consolidated statement of income for year ended
December 31, 2009 and the consolidated balance sheet at
December 31, 2009. The Company does not currently
anticipate that the total amounts of unrecognized tax benefits
will significantly increase within the next 12 months. The
Company files income tax returns in U.S. and various state
jurisdictions and with the acquisitions in 2009, expects to file
income tax returns in several foreign jurisdictions. As of
December 31, 2009, open tax years in the federal and some
state jurisdictions date back to 1999, due to the taxing
authorities ability to adjust operating loss carry
forwards.
ASC 740 requires that the net deferred tax asset be reduced by a
valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion of the
net deferred tax asset will not be realized. This process
requires the Companys management to make assessments
regarding the timing and probability of the ultimate tax impact.
The Company records valuation allowances on deferred tax assets
if determined it is more likely than not that the asset will not
be realized. Additionally, the Company establishes reserves for
uncertain tax positions based upon our judgment regarding
potential future challenges to those positions. Actual income
taxes could vary from these estimates due to future changes in
income tax law, significant changes in the jurisdictions in
which the Company operates, our inability to generate sufficient
future taxable income or unpredicted results from the final
determination of each years liability by taxing
authorities. These changes could have a significant impact on
the Companys financial position.
Deferred tax assets consist primarily of net operating loss and
tax credit carryforwards as well as deductible temporary
differences. Prior to 2008, the Company provided a full tax
valuation allowance for federal and state deferred tax assets
based on managements evaluation that the Companys
ability to realize such assets did not meet the criteria of
more likely than not. The Company has continuously
evaluated additional facts representing positive and negative
evidence in the determination of its ability to realize the
deferred tax assets. In the year ended December 31, 2008,
management has determined, as the result of cumulative income
and anticipated future taxable income, that it is now more
likely than not that these deferred tax assets will be realized
in the future. Accordingly, the Company determined that it is
appropriate to reverse the deferred tax asset valuation. This
has resulted in a benefit to deferred tax expense of
$33.3 million for the year 2008.
Discontinued
Operations:
In 2007, the Company sold its Enterprise division operations,
which had previously been included in our Commercial Segment.
Accordingly, the assets, liabilities, and results of operations
for the Enterprise assets have been classified as discontinued
operations in the Consolidated Financial Statements included
elsewhere in this Annual Report on
Form 10-K
in accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (Statement No. 144). Effective
January 1, 2007, the Company sold two of its three
Enterprise units to strategic buyers for common stock in the
acquiring publicly traded companies valued at approximately
$1 million, and earn-out arrangements. As at
December 31, 2008, we wrote down those investments by
$0.8 million, and immaterial amounts have been received
under the earn-out arrangements, which are now complete. During
May 2007, the last Enterprise unit was sold for $4 million
in cash, a $1 million
18-month
note which was paid in full in November 2008, and
$0.2 million of equity in the private-company buyer.
54
The following table presents income statement data for the
Enterprise division, reported as discontinued operations for
2007.
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
Total revenue
|
|
$
|
5.6
|
|
|
|
|
|
|
Total gross profit
|
|
|
0.8
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(0.3
|
)
|
|
|
|
|
|
Net
Income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009vs.
|
|
|
|
|
|
2008 vs.
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Net income/(loss) from continuing operations
|
|
$
|
28.3
|
|
|
$
|
57.6
|
|
|
$
|
(29.3
|
)
|
|
|
(51
|
%)
|
|
$
|
(1.0
|
)
|
|
$
|
58.6
|
|
|
|
5,860
|
%
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
0.3
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
28.3
|
|
|
$
|
57.6
|
|
|
$
|
(29.3
|
)
|
|
|
(51
|
%)
|
|
$
|
(1.3
|
)
|
|
$
|
58.9
|
|
|
|
4,531
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) changes for each year are as a result of the
factors set forth above.
55
Liquidity and
Capital Resources
The following table summarizes our comparative statements of
cash flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net cash and cash equivalents provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
28.3
|
|
|
$
|
57.6
|
|
|
$
|
(1.3
|
)
|
Less: loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations
|
|
|
28.3
|
|
|
|
57.6
|
|
|
|
(1.0
|
)
|
Non-cash charges
|
|
|
15.8
|
|
|
|
12.8
|
|
|
|
15.5
|
|
(Benefit)/provision for income taxes
|
|
|
17.5
|
|
|
|
(34.0
|
)
|
|
|
|
|
Net changes in working capital
|
|
|
(7.3
|
)
|
|
|
(10.4
|
)
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities of continuing operations
|
|
|
54.3
|
|
|
|
26.0
|
|
|
|
9.1
|
|
Operating activities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating activities
|
|
|
54.3
|
|
|
|
26.0
|
|
|
|
5.5
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(148.2
|
)
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2.5
|
)
|
|
|
(3.7
|
)
|
|
|
(2.6
|
)
|
Capitalized software development costs
|
|
|
(1.0
|
)
|
|
|
(0.5
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities for continuing operations
|
|
|
(151.7
|
)
|
|
|
(4.2
|
)
|
|
|
(4.1
|
)
|
Investing activities for discontinued operations
|
|
|
|
|
|
|
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investing activities
|
|
|
(151.7
|
)
|
|
|
(4.2
|
)
|
|
|
(0.1
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible debt financing
|
|
|
103.5
|
|
|
|
|
|
|
|
|
|
Proceeds from bank and other borrowings
|
|
|
50.0
|
|
|
|
|
|
|
|
10.0
|
|
Payments on long-term debt and capital lease obligations
|
|
|
(30.0
|
)
|
|
|
(7.7
|
)
|
|
|
(16.0
|
)
|
Call spread component of convertible debt financing: Purchase of
call options
|
|
|
(23.8
|
)
|
|
|
|
|
|
|
|
|
Call spread component of convertible debt financing: Sale of
common stock warrants
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
1.7
|
|
|
|
2.5
|
|
|
|
2.2
|
|
Proceeds from employee option exercises
|
|
|
5.5
|
|
|
|
6.4
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net financing activities
|
|
|
119.8
|
|
|
|
1.2
|
|
|
|
0.2
|
|
Change in cash and cash equivalents from continuing operations
|
|
|
22.4
|
|
|
|
23.0
|
|
|
|
5.2
|
|
Change in cash and cash equivalents from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
22.4
|
|
|
$
|
23.0
|
|
|
$
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days revenue outstanding in accounts receivable including
unbilled receivables
|
|
|
88
|
|
|
|
95
|
|
|
|
87
|
|
Capital resources: We have funded our operations,
acquisitions, and capital expenditures primarily using cash
generated by our operations, as well as the net proceeds from
capital, including:
|
|
|
|
|
November 2009 issuance of 4.5% convertible debt financing of
$103.5 million.
|
|
|
|
December 2009 issuance of $40 million of promissory notes.
|
|
|
|
2009 bank term loan borrowings of $30 million, including
refinancing of debt under previous facility.
|
|
|
|
Capital leases to fund fixed asset purchases.
|
Sources and uses of cash: The Companys cash
and cash equivalents balance was approximately
$61.4 million at December 31, 2009, a
$22.4 million increase from $39.0 million at
December 31, 2008.
56
Operating activities: Cash generated by continuing
operations increased to $54.3 million in 2009 from
$26.0 million in 2008. Cash from operating profits during
2008 and 2009 have been largely sheltered from income taxes due
to the use of loss carry-forwards generated in prior years. The
cash generated by continuing operations in 2008 increased to
$26.0 million from $5.5 million in 2007 in due mainly
to higher profits from operations, including proceeds from a
patent sale. Discontinued operations used $3.6 million in
2007. The Company has had no significant involvement in the
discontinued operations since the disposal transactions.
Investing activities: Cash of $148.2 million, net of
cash acquired, was used for the completion of the acquisitions
of LocationLogic, Solvern, Sidereal and NIM. Fixed asset
additions not funded with capital lease financing in 2009, 2008,
and 2007 were $2.5, $3.7, and $2.6 million, respectively.
Investments made in the development of carrier software for
resale which had reached the stage of development calling for
capitalization increased by approximately $0.5 million in
2009. The amounts capitalized decreased by approximately
$1 million in 2008 to about $0.5 million in 2007,
reflecting the mix of projects in the respective periods.
Discontinued operations generated $4 million from the sale
of assets in 2007 and $1 million from collection of a note
in 2008.
Financing activities: On November 16, 2009, the
Company issued $103.5 million aggregate principal amount of
4.5% Convertible Senior Notes due 2014 (the
Convertible Notes) to fund corporate initiatives
which included significant financing required for the NIM
acquisition. Holders may convert the Convertible Notes at their
option on any day prior to the close of business on the second
scheduled trading day (as defined in the Indenture)
immediately preceding November 1, 2014. The conversion rate
will initially be 96.637 shares of Class A common
stock per $1,000 principal amount of Notes, equivalent to an
initial conversion price of approximately $10.348 per share of
Class A common stock. At the time of this transaction,
while this represented an approximately 30% conversion premium
over the closing price of the Companys Class A common
stock on November 10, 2009 of $7.96 per share, the effect
of the convertible note hedge and warrant transactions,
described below increased the effective conversion premium of
the Notes to 60% above the November 10th closing
price, to $12.74 per share.
In connection with the sale of the Convertible Notes, the
Company entered into convertible note hedge transactions with
respect to the Class A common stock with certain
counterparties. The convertible note hedge transactions cover,
subject to adjustments, 10,001,303 shares of Class A
common stock. Also, in connection with the sale of the
Convertible Notes, the Company entered into separate warrant
transactions with certain counterparties (collectively, the
Warrant Dealers). The Company sold to the Warrant
Dealers, warrants to purchase in the aggregate
10,001,303 shares of Class A common stock, subject to
adjustments, at an exercise price of $12.736 per share of
Class A common stock. The Company offered and sold the
warrants to the Warrant Dealers in reliance on the exemption
from registration provided by Section 4(2) of the
Securities Act. The Company used a portion of the gross proceeds
of the offering to pay the Companys cost of the
convertible note hedge transactions. The convertible note hedge
and the warrant transactions are separate transactions; each
entered into by the Company with the counterparties, is not part
of the terms of the Convertible Notes and will not affect the
holders rights under the Convertible Notes.
December 15, 2009,we issued $40 million in promissory
notes as part of the consideration paid for the acquisition of
NIM. The promissory notes bear simple interest at 6% and are due
in three installments: $30 million on the 12 month
anniversary of the closing, $5 million on the 18 month
anniversary of the closing, and $5 million on the
24 month anniversary of the closing, subject to escrow
adjustments. The promissory notes are effectively subordinated
to TCSs secured debt and structurally subordinated to any
present and future indebtedness and other obligations of
TCSs subsidiaries.
On December 31, 2009, we increased our revolving line of
credit (the Line of Credit) to $35 million from
$30 million with our with our principal bank and extended
the maturity date to June 2012 from June 2010. Availability
under the Line of Credit available is reduced by the amount of
letters of credit outstanding and cash management services
sublimit, which was $1.6 million at December 31, 2009.
As of December 31, 2009, we had no borrowings outstanding
under our bank Line of Credit and had approximately
$33.4 million of unused borrowing availability under the
line.
On December 31, 2009, we refinanced facilities under our
June 2009 commercial bank Revolving Credit and Term Loan
agreement (the Loan Agreement). A $40 million
five year term loan (the Term Loan) replaced the
57
Companys $20 million prior term loan with the bank.
The company drew $30 million of the funds available. The
remaining $10 million is available to draw no later than
September 2010. The term loan maturity date is June 2014.
Under the new Loan Agreement, the Company is obligated to repay
all advances or credit extensions made pursuant to the Loan
Agreement. The Loan Agreement is secured by substantially all of
the Companys tangible and intangible assets as collateral,
except that the collateral does not include any of the
Companys intellectual property. The principal amount
outstanding under the Term Loan accrues interest at the greater
of (i) 4% per annum, or (ii) a floating per annum rate
equal to one-half of one percentage point (0.5%) above the
Interest Rate (3.25% at December 31, 2009). The principal
amount outstanding under the Term Loan is payable in sixty
(60) equal installments of principal beginning on
January 29, 2010 and interest is payable on a monthly basis
($0.6 million plus interest per month). As of
December 31, 2009, the amount outstanding under the Term
Loan was $30 million. Funds from the increase in the amount
of the Term Loan were used primarily to retire the June 2009
term loan. In June of 2009, we refinanced the unamortized
balance under our June 2007 $10 million five-year note
payable loan with a $20 million five-year note.
The Line of Credit includes three
sub-facilities: (i) a
letter of credit
sub-facility
pursuant to which the bank may issue letters of credit,
(ii) a foreign exchange
sub-facility
pursuant to which the Company may purchase foreign currency from
the bank, and (iii) a cash management
sub-facility
pursuant to which the bank may provide cash management services
(which may include, among others, merchant services, direct
deposit of payroll, business credit cards and check cashing
services) and in connection therewith make loans and extend
credit to the Company. The principal amount outstanding under
the Line of Credit accrues interest at a floating per annum rate
equal to the rate which is the greater of (i) 4% per annum,
or (ii) the banks most recently announced prime
rate, even if it is not the Interest Rate. The principal
amount outstanding under the Line of Credit is payable either
prior to or on the maturity date and interest on the Line of
Credit is payable monthly. Our potential borrowings under the
Line of Credit are reduced by the amounts of letters of credit
outstanding and cash management services sublimit which totaled
$1.6 million at December 31, 2009. As of
December 31, 2009 there were no borrowings on our Line of
Credit.
The bank Loan Agreement contains customary representations and
warranties and customary events of default. Availability under
the Line of Credit is subject to certain conditions, including
the continued accuracy of the Companys representations and
warranties. The Loan Agreement also contains subjective
covenants that requires (i) no material impairment in the
perfection or priority of the banks lien in the collateral
of the Loan Agreement, (ii) no material adverse change in
the business, operations, or condition (financial or otherwise)
of the Company, or (iii) no material impairment of the
prospect of repayment of any portion of the borrowings under the
Loan Agreement. The Loan Agreement also contains covenants
requiring the Company to maintain a minimum adjusted quick ratio
and a fixed charge coverage ratio as well as other restrictive
covenants including, among others, restrictions on the
Companys ability to dispose part of their business or
property; to change their business, liquidate or enter into
certain extraordinary transactions; to merge, consolidate or
acquire stock or property of another entity; to incur
indebtedness; to encumber their property; to pay dividends or
other distributions or enter into material transactions with an
affiliate of the Company.
As of December 31, 2009, we were in compliance with the
covenants related to the Loan Agreement and we believe that we
will continue to comply with these covenants. If our performance
does not result in compliance with any of these restrictive
covenants, we would seek to further modify our financing
arrangements, but there can be no assurance that the bank would
not exercise its rights and remedies under the Loan Agreement,
including declaring all outstanding debt due and payable.
In June 2007, we refinanced $10 million of March 2006
secured notes with a with a five-year note payable to our
principal bank. The remaining unamortized debt discount and
deferred debt issuance expenses of $2.4 million were
written off in 2007 as a result of early retirement of the March
2006 note. In December 2008, the holders of warrants relating to
our March 2006 financing exercised their warrants and
1.1 million shares were issued for proceeds of
$2.5 million. In 2009, the holders of the remaining
warrants relating to our March 2006 financing exercised their
warrants and 0.7 million shares were issued for proceeds of
$1.7 million.
58
We currently believe that we have sufficient capital resources
with cash generated from operations as well as cash on hand to
meet our anticipated cash operating expenses, working capital,
and capital expenditure and debt service needs for the next
twelve months. We have borrowing capacity available to us in the
form of capital leases as well as the bank Line of Credit
arrangement which expires in June 2012. We may also consider
raising capital in the public markets as a means to meet our
capital needs and to invest in our business. Although we may
need to return to the capital markets, establish new credit
facilities or raise capital in private transactions in order to
meet our capital requirements, we can offer no assurances that
we will be able to access these potential sources of funds on
terms acceptable to us or at all.
Off-Balance Sheet
Arrangements
We had standby letters of credit totaling approximately
$1.6 million at year-end 2009 and $2.3 million at
year-end 2008 in support of processing credit card payments from
our customers, as collateral with a vendor, and security for
office space.
Contractual
Commitments
As of December 31, 2009, our most significant commitments
consisted of purchase obligations, term debt, obligations under
capital leases and non-cancelable operating leases. Other
long-term debt consists of contingent consideration included as
part of the purchase price allocation of certain acquisitions,
see Note 2. We lease certain furniture and computer
equipment under capital leases. We lease office space and
equipment under non-cancelable operating leases. Purchase
obligations represent contracts for parts and services in
connection with our government satellite services and systems
offerings. As of December 31, 2009 our commitments
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 12
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
|
|
|
($ in millions)
|
|
Months
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Term loan
|
|
$
|
7.9
|
|
|
$
|
14.9
|
|
|
$
|
10.3
|
|
|
$
|
|
|
|
$
|
33.1
|
|
4.5% Convertible debt interest obligation
|
|
|
4.7
|
|
|
|
9.4
|
|
|
|
9.4
|
|
|
|
|
|
|
|
23.5
|
|
Promissory note payable
|
|
|
31.8
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
42.4
|
|
Other long-term debt
|
|
|
4.6
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
7.8
|
|
Capital lease obligations
|
|
|
3.6
|
|
|
|
5.8
|
|
|
|
1.0
|
|
|
|
|
|
|
|
10.4
|
|
Operating leases
|
|
|
5.0
|
|
|
|
10.0
|
|
|
|
2.0
|
|
|
|
3.9
|
|
|
|
20.9
|
|
Purchase obligations
|
|
|
8.2
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments
|
|
$
|
65.8
|
|
|
|
59.4
|
|
|
$
|
22.7
|
|
|
$
|
3.9
|
|
|
$
|
151.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Party
Transactions
In February 2003, we entered into an agreement with Annapolis
Partners LLC to explore the opportunity of relocating our
Annapolis offices to a planned new real estate development. Our
President and Chief Executive Officer own a controlling voting
and economic interest in Annapolis Partners LLC and he also
serves as a member. The financial and many other terms of the
agreement have not yet been established. The lease is subject to
several contingencies and rights of termination. For example,
the agreement can be terminated at the sole discretion of our
Board of Directors if the terms and conditions of the
development are unacceptable to us, including without limitation
the circumstances that market conditions make the agreement not
favorable to us or the overall cost is not in the best interest
to us or our shareholders, or any legal or regulatory
restrictions apply. Our Board of Directors will evaluate this
opportunity along with alternatives that are or may become
available in the relevant time periods and there is no assurance
that we will enter into a definitive lease at this new
development site.
59
|
|
Item 7A.
|
Qualitative and Quantitative Disclosures about Market
Risk
|
Interest Rate
Risk
We have limited exposure to financial market risks, including
changes in interest rates. As discussed above under
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources, we have a
$35 million line of credit. A hypothetical 100 basis
point adverse movement (increase) in the prime rate would have
increased our interest expense for the year ended
December 31, 2009 by approximately $0.1 million,
resulting in no significant impact on our consolidated financial
position, results of operations or cash flows.
At December 31, 2009, we had cash and cash equivalents of
$61.4 million. Cash and cash equivalents consisted of
demand deposits and money market accounts that are interest rate
sensitive. However, these investments have short maturities
mitigating their sensitivity to interest rates. A hypothetical
100 basis point adverse movement (decrease) in interest
rates would have decrease our net income for 2009 by
approximately $0.5 million, resulting in no significant
impact on our consolidated financial position, results of
operations or cash flows.
Foreign Currency
Risk
For the year ended December 31, 2009, we generated
$9.4 million of revenue outside the U.S. A majority of
our transactions generated outside the U.S. are denominated
in U.S. dollars and a change in exchange rates would not
have a material impact on our Consolidated Financial Statements.
As of December 31, 2009, we had approximately
$0.1 million of billed and $0.1 million unbilled
accounts receivable that would expose us to foreign currency
exchange risk. During 2009, our average receivables and deferred
revenue subject to foreign currency exchange risk were
$0.4 million and $0.8 million, respectively. We
recorded transaction income of approximately $0.1 million
on foreign currency denominated receivables and deferred revenue
for the year ended December 31, 2009.
|
|
Item 8.
|
Financial Statements and Supplementary
Data
|
The financial statements listed in Item 15 are included in
this Annual Report on
Form 10-K
beginning on
page F-1.
|
|
Item 9.
|
Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure
|
None.
|
|
Item 9A.
|
Controls and Procedures
|
Evaluation of
Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on
Form 10-K,
we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures.
There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding
of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.
Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls
and procedures (as defined in
Rule 13a-15(e)
or 15d-15(e)
of the Exchange Act) were effective to provide reasonable
assurance that information we are required to disclose in
reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the applicable rules and forms, and that it is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
60
Managements
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in Exchange Act
Rule 13a-15(f).
Management, including our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the
framework in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management
concluded that our internal control over financial reporting was
effective as of December 31, 2009. Management reviewed the
results of their assessment with our Audit Committee. The
effectiveness of our internal control over financial reporting
as of December 31, 2009 has been audited by
Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included in
Item 9A of this Annual Report on
Form 10-K.
Changes in
Internal Control over Financial Reporting
There were no changes in the Companys internal controls
over financial reporting during the quarter ended
December 31, 2009, that are materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
61
Report of
Independent Registered Public Accounting Firm
The Board of Directors and
Stockholders
TeleCommunication Systems, Inc.
We have audited TeleCommunication Systems, Inc.s internal
control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
TeleCommunication Systems, Inc.s management is responsible
for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the
accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, TeleCommunication Systems, Inc. maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2009, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of TeleCommunication Systems, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2009 of
TeleCommunication Systems, Inc. and subsidiaries and our report
dated March 8, 2010 expressed an unqualified opinion
thereon.
Baltimore, Maryland
March 8, 2010
62
Part III
|
|
Item 10.
|
Directors
, Executive Officers, and Corporate Governance
|
The information required by this Item 10 is incorporated
herein by reference from the information captioned Board
of Directors and Security Ownership of Certain
Beneficial Owners and Management to be included in the
Companys definitive proxy statement to be filed in
connection with the 2010 Annual Meeting of Stockholders, to be
held on June 10, 2010 (the Proxy Statement).
The Companys Code of Ethics and Whistleblower Procedures
may be found at
http://www1.telecomsys.com/investor
info/corp governance.cfm.
|
|
Item 11.
|
Executive Compensation
|
The information required by this Item 11 is incorporated
herein by reference from the information captioned Board
of Directors and Executive Compensation to be
included in the Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and
Management
|
The information required by this Item 12 is incorporated
herein by reference from the information captioned
Security Ownership of Certain Beneficial Owners and
Management to be included in the Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
The information required by this Item 13 is incorporated
herein by reference from the information captioned Certain
Relationships and Related Transactions and General
Information Concerning the Board of Directors to be
included in the Proxy Statement.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this Item 14 is incorporated
herein by reference from the information captioned
Principal Accountant Fees and Services to be
included in the Proxy Statement.
63
Part IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a)(1) Financial
Statements
The financial statements listed in Item 15 are included in
this Annual Report on
Form 10-K
beginning on
page F-1.
(a)(2) Financial
Statement Schedules
The financial statement schedule required by Item 15 is
included in Exhibit 12 to this Annual Report on
Form 10-K.
Exhibits
The exhibits are listed in the Exhibit Index immediately
preceding the exhibits.
64
Report of
Independent Registered Public Accounting Firm
The Board of Directors and
Stockholders
TeleCommunication Systems, Inc.
We have audited the accompanying consolidated balance sheets of
TeleCommunication Systems, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2009. Our audit also included the financial
statement schedule listed in the Index at Item 15. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of TeleCommunication Systems, Inc. and
subsidiaries at December 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
TeleCommunication Systems, Inc.s internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 8, 2010
expressed an unqualified opinion thereon.
Baltimore, Maryland
March 8, 2010
F-2
TeleCommunication
Systems, Inc.
(amounts
in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
61,426
|
|
|
$
|
38,977
|
|
Accounts receivable, net of allowance of $389 in 2009 and $285
in 2008
|
|
|
65,476
|
|
|
|
61,827
|
|
Unbilled receivables
|
|
|
23,783
|
|
|
|
21,797
|
|
Inventory
|
|
|
9,331
|
|
|
|
2,715
|
|
Deferred income taxes
|
|
|
9,507
|
|
|
|
9,736
|
|
Receivable from settlement of patent matter
|
|
|
15,700
|
|
|
|
|
|
Income tax refund receivable
|
|
|
5,438
|
|
|
|
|
|
Other current assets
|
|
|
8,945
|
|
|
|
3,869
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
199,606
|
|
|
|
138,921
|
|
Property and equipment, net of accumulated depreciation and
amortization of $46,960 in 2009 and $41,268 in 2008
|
|
|
20,734
|
|
|
|
12,391
|
|
Software development costs, net of accumulated amortization of
$9,941 in 2009 and $6,873 in 2008
|
|
|
45,384
|
|
|
|
2,773
|
|
Acquired intangible assets, net of accumulated amortization of
$1,526 in 2009 and $656 in 2008
|
|
|
33,975
|
|
|
|
562
|
|
Goodwill
|
|
|
164,350
|
|
|
|
1,813
|
|
Deferred income taxes
|
|
|
|
|
|
|
24,309
|
|
Other assets
|
|
|
8,176
|
|
|
|
1,190
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
472,225
|
|
|
$
|
181,959
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
52,999
|
|
|
$
|
34,345
|
|
Accrued payroll and related liabilities
|
|
|
19,265
|
|
|
|
17,243
|
|
Deferred revenue
|
|
|
9,938
|
|
|
|
4,349
|
|
Current portion of capital lease obligations and notes payable
|
|
|
39,731
|
|
|
|
3,837
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
121,933
|
|
|
|
59,774
|
|
Capital lease obligations and notes payable, less current portion
|
|
|
143,316
|
|
|
|
7,913
|
|
Deferred income taxes
|
|
|
15,435
|
|
|
|
|
|
Other long-term liabilities
|
|
|
5,755
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Class A Common Stock; $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized shares 225,000,000; issued and
outstanding shares of 46,157,025 in 2009 and 38,527,234 in 2008
|
|
|
462
|
|
|
|
385
|
|
Class B Common Stock; $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized shares 75,000,000; issued and outstanding
shares of 6,276,334 in 2009 and 6,876,334 in 2008
|
|
|
63
|
|
|
|
69
|
|
Additional paid-in capital
|
|
|
283,733
|
|
|
|
240,559
|
|
Accumulated other comprehensive income
|
|
|
12
|
|
|
|
12
|
|
Accumulated deficit
|
|
|
(98,484
|
)
|
|
|
(126,753
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
185,786
|
|
|
|
114,272
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
472,225
|
|
|
$
|
181,959
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to
Consolidated Financial Statements.
F-3
TeleCommunication
Systems, Inc.
(amounts
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
151,944
|
|
|
$
|
101,359
|
|
|
$
|
88,062
|
|
Systems
|
|
|
148,143
|
|
|
|
118,783
|
|
|
|
56,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
300,087
|
|
|
|
220,142
|
|
|
|
144,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services
|
|
|
84,122
|
|
|
|
61,594
|
|
|
|
52,161
|
|
Direct cost of systems, including amortization of software
development costs of $3,069, $2,090 and $1,522, respectively
|
|
|
102,111
|
|
|
|
77,291
|
|
|
|
37,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct cost of revenue
|
|
|
186,233
|
|
|
|
138,885
|
|
|
|
90,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services gross profit
|
|
|
67,822
|
|
|
|
39,765
|
|
|
|
35,901
|
|
Systems gross profit
|
|
|
46,032
|
|
|
|
41,492
|
|
|
|
18,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
|
113,854
|
|
|
|
81,257
|
|
|
|
54,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
22,351
|
|
|
|
16,161
|
|
|
|
13,072
|
|
Sales and marketing expense
|
|
|
15,967
|
|
|
|
13,715
|
|
|
|
11,917
|
|
General and administrative expense
|
|
|
35,387
|
|
|
|
28,238
|
|
|
|
19,334
|
|
Depreciation and amortization of property and equipment
|
|
|
6,035
|
|
|
|
5,865
|
|
|
|
6,200
|
|
Amortization of acquired intangible assets
|
|
|
870
|
|
|
|
147
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
80,610
|
|
|
|
64,126
|
|
|
|
50,671
|
|
Patent-related gains, net of expenses
|
|
|
15,700
|
|
|
|
8,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
48,944
|
|
|
|
25,191
|
|
|
|
3,430
|
|
Interest expense
|
|
|
(1,794
|
)
|
|
|
(922
|
)
|
|
|
(1,776
|
)
|
Amortization of debt discount and debt issuance expenses,
including write-off of $2,458 in 2007
|
|
|
(401
|
)
|
|
|
(180
|
)
|
|
|
(3,176
|
)
|
Other income, net
|
|
|
315
|
|
|
|
222
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations before income
taxes
|
|
|
47,064
|
|
|
|
24,311
|
|
|
|
(1,014
|
)
|
(Provision)/benefit for income taxes
|
|
|
(18,795
|
)
|
|
|
33,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations
|
|
|
28,269
|
|
|
|
57,568
|
|
|
|
(1,014
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
28,269
|
|
|
$
|
57,568
|
|
|
$
|
(1,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share from continuing operations
|
|
$
|
0.59
|
|
|
$
|
1.34
|
|
|
$
|
(0.02
|
)
|
Loss per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share basic
|
|
$
|
0.59
|
|
|
$
|
1.34
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share from continuing operations
|
|
$
|
0.53
|
|
|
$
|
1.23
|
|
|
$
|
(0.02
|
)
|
Loss per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share-diluted
|
|
$
|
0.53
|
|
|
$
|
1.23
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic
|
|
|
47,623
|
|
|
|
43,063
|
|
|
|
41,453
|
|
Weighted average shares outstanding-diluted
|
|
|
53,946
|
|
|
|
46,644
|
|
|
|
41,453
|
|
See accompanying Notes to
Consolidated Financial Statements.
F-4
TeleCommunication
Systems, Inc.
(amounts
in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
322
|
|
|
$
|
76
|
|
|
$
|
217,739
|
|
|
$
|
|
|
|
$
|
(183,032
|
)
|
|
$
|
35,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised for the purchase of 1,347,301 shares of
Class A Common Stock
|
|
|
14
|
|
|
|
|
|
|
|
3,461
|
|
|
|
|
|
|
|
|
|
|
|
3,475
|
|
|
|
|
|
Issuance of 173,833 shares of Class A Common Stock
under Employee Stock Purchase Plan
|
|
|
2
|
|
|
|
|
|
|
|
541
|
|
|
|
|
|
|
|
|
|
|
|
543
|
|
|
|
|
|
Exercise of warrants to purchase 886,787 shares of
Class A Common Stock
|
|
|
9
|
|
|
|
|
|
|
|
2,208
|
|
|
|
|
|
|
|
|
|
|
|
2,217
|
|
|
|
|
|
Surrender of 19,358 restricted shares of Class A Common
Stock as payment for payroll tax withholdings
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
Conversion of 224,338 shares of Class B Common Stock
to Class A Common Stock
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense for issuance of Class A Common
Stock options for continuing operations
|
|
|
|
|
|
|
|
|
|
|
3,963
|
|
|
|
|
|
|
|
|
|
|
|
3,963
|
|
|
|
|
|
Stock compensation expense for issuance of Class A Common
Stock options for discontinued operations
|
|
|
|
|
|
|
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
132
|
|
|
|
|
|
Unrealized loss on securities and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
Net loss for 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,289
|
)
|
|
|
(1,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
349
|
|
|
$
|
74
|
|
|
$
|
227,987
|
|
|
$
|
(125
|
)
|
|
$
|
(184,321
|
)
|
|
$
|
43,964
|
|
|
|
|
|
Options exercised for the purchase of 1,927,284 shares of
Class A Common Stock
|
|
|
19
|
|
|
|
|
|
|
|
5,853
|
|
|
|
|
|
|
|
|
|
|
|
5,872
|
|
|
|
|
|
Issuance of 134,000 shares of Class A Common Stock
under Employee Stock Purchase Plan
|
|
|
1
|
|
|
|
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
452
|
|
|
|
|
|
Exercise of warrants to purchase 1,050,000 shares of
Class A Common Stock
|
|
|
11
|
|
|
|
|
|
|
|
2,510
|
|
|
|
|
|
|
|
|
|
|
|
2,521
|
|
|
|
|
|
Conversion of 425,000 shares of Class B Common Stock
to Class A Common Stock
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense for issuance of Class A Common
Stock options
|
|
|
|
|
|
|
|
|
|
|
3,758
|
|
|
|
|
|
|
|
|
|
|
|
3,758
|
|
|
|
|
|
Unrealized loss on securities and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
137
|
|
|
|
|
|
Net income for 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,568
|
|
|
|
57,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
385
|
|
|
$
|
69
|
|
|
$
|
240,559
|
|
|
$
|
12
|
|
|
$
|
(126,753
|
)
|
|
$
|
114,272
|
|
|
|
|
|
Options exercised for the purchase of 1,361,674 shares of
Class A Common Stock
|
|
|
14
|
|
|
|
|
|
|
|
4,952
|
|
|
|
|
|
|
|
|
|
|
|
4,966
|
|
|
|
|
|
Issuance of 88,096 shares of Class A Common Stock
under Employee Stock Purchase Plan
|
|
|
1
|
|
|
|
|
|
|
|
578
|
|
|
|
|
|
|
|
|
|
|
|
579
|
|
|
|
|
|
Exercise of warrants to purchase 700,002 shares of
Class A Common Stock
|
|
|
7
|
|
|
|
|
|
|
|
1,673
|
|
|
|
|
|
|
|
|
|
|
|
1,680
|
|
|
|
|
|
Issuance of 1,393,715 shares of Class A Common Stock
in connection with the acquisition of the assets of
LocationLogic LLC
|
|
|
14
|
|
|
|
|
|
|
|
10,313
|
|
|
|
|
|
|
|
|
|
|
|
10,327
|
|
|
|
|
|
Issuance of 1,008,603 shares of Class A Common Stock
in connection with the acquisition of Solvern Innovations,
Inc.
|
|
|
10
|
|
|
|
|
|
|
|
9,098
|
|
|
|
|
|
|
|
|
|
|
|
9,108
|
|
|
|
|
|
Issuance of 244,200 shares of Class A Common Stock in
connection with the acquisition of the assets of Sidereal
Solutions, Inc.
|
|
|
2
|
|
|
|
|
|
|
|
1,963
|
|
|
|
|
|
|
|
|
|
|
|
1,965
|
|
|
|
|
|
Issuance of 2,236,258 shares of Class A Common Stock
in connection with the acquisition of Networks In Motion, Inc
|
|
|
22
|
|
|
|
|
|
|
|
19,545
|
|
|
|
|
|
|
|
|
|
|
|
19,567
|
|
|
|
|
|
Purchase of call spread options
|
|
|
|
|
|
|
|
|
|
|
(23,775
|
)
|
|
|
|
|
|
|
|
|
|
|
(23,775
|
)
|
|
|
|
|
Sale of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
12,959
|
|
|
|
|
|
|
|
|
|
|
|
12,959
|
|
|
|
|
|
Conversion of 600,000 shares of Class B Common Stock
to Class A Common Stock
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Restricted Class A Common Stock
|
|
|
1
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Stock compensation expense for issuance of Class A Common
Stock options for continuing operations
|
|
|
|
|
|
|
|
|
|
|
5,859
|
|
|
|
|
|
|
|
|
|
|
|
5,859
|
|
|
|
|
|
Net income for 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,269
|
|
|
|
28,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
462
|
|
|
$
|
63
|
|
|
$
|
283,733
|
|
|
$
|
12
|
|
|
$
|
(98,484
|
)
|
|
$
|
185,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to
Consolidated Financial Statements.
F-5
TeleCommunication
Systems, Inc.
(amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
28,269
|
|
|
$
|
57,568
|
|
|
$
|
(1,289
|
)
|
Less: Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations
|
|
|
28,269
|
|
|
|
57,568
|
|
|
|
(1,014
|
)
|
Adjustments to reconcile net income/(loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
6,035
|
|
|
|
5,865
|
|
|
|
6,200
|
|
Amortization of acquired intangible assets
|
|
|
870
|
|
|
|
147
|
|
|
|
148
|
|
Deferred tax provision/(benefit)
|
|
|
17,499
|
|
|
|
(34,045
|
)
|
|
|
|
|
Non-cash stock compensation expense employee
|
|
|
5,859
|
|
|
|
3,758
|
|
|
|
4,333
|
|
Amortization of software development costs
|
|
|
3,069
|
|
|
|
2,090
|
|
|
|
1,522
|
|
Write-off of capitalized software development costs
|
|
|
763
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
|
|
|
|
|
|
|
|
480
|
|
Amortization of deferred financing fees
|
|
|
401
|
|
|
|
181
|
|
|
|
313
|
|
Impairment of marketable securities
|
|
|
48
|
|
|
|
802
|
|
|
|
|
|
Write-off of unamortized debt discount and debt issuance fees
|
|
|
|
|
|
|
|
|
|
|
2,458
|
|
Other non-cash (income)/expenses
|
|
|
(23
|
)
|
|
|
(40
|
)
|
|
|
19
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
9,623
|
|
|
|
(41,403
|
)
|
|
|
1,120
|
|
Unbilled receivables
|
|
|
2,681
|
|
|
|
(6,568
|
)
|
|
|
(7,593
|
)
|
Inventory
|
|
|
(6,616
|
)
|
|
|
2,658
|
|
|
|
(80
|
)
|
Other current assets
|
|
|
(18,222
|
)
|
|
|
958
|
|
|
|
(1,870
|
)
|
Other noncurrent assets
|
|
|
(6,986
|
)
|
|
|
187
|
|
|
|
541
|
|
Accounts payable and accrued expenses
|
|
|
7,914
|
|
|
|
21,886
|
|
|
|
2,038
|
|
Accrued payroll and related liabilities
|
|
|
(2,065
|
)
|
|
|
12,328
|
|
|
|
(748
|
)
|
Deferred revenue
|
|
|
5,144
|
|
|
|
(336
|
)
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing
operations
|
|
|
54,263
|
|
|
|
26,036
|
|
|
|
9,067
|
|
Net used in operating activities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(3,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net cash provided by operating activities
|
|
|
54,263
|
|
|
|
26,036
|
|
|
|
5,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(148,239
|
)
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,494
|
)
|
|
|
(3,703
|
)
|
|
|
(2,577
|
)
|
Capitalized software development costs
|
|
|
(981
|
)
|
|
|
(461
|
)
|
|
|
(1,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
(151,714
|
)
|
|
|
(4,164
|
)
|
|
|
(4,102
|
)
|
Net cash provided by investing activities of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(151,714
|
)
|
|
|
(4,164
|
)
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible debt offering
|
|
|
103,500
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
50,000
|
|
|
|
|
|
|
|
10,000
|
|
Payments on long-term debt and capital lease obligations
|
|
|
(30,002
|
)
|
|
|
(7,695
|
)
|
|
|
(15,996
|
)
|
Purchase of call options
|
|
|
(23,775
|
)
|
|
|
|
|
|
|
|
|
Sale of common stock warrants
|
|
|
12,959
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
1,673
|
|
|
|
2,521
|
|
|
|
2,208
|
|
Proceeds from exercise of employee stock options and sale of
stock
|
|
|
5,545
|
|
|
|
6,324
|
|
|
|
4,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities of continuing
operations
|
|
|
119,900
|
|
|
|
1,150
|
|
|
|
230
|
|
Net cash provided by financing activities of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
119,990
|
|
|
|
1,150
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash from continuing operations
|
|
|
22,449
|
|
|
|
23,022
|
|
|
|
5,195
|
|
Net increase/(decrease) in cash from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
22,449
|
|
|
|
23,022
|
|
|
|
5,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
38,977
|
|
|
|
15,955
|
|
|
|
10,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
$
|
61,426
|
|
|
$
|
38,977
|
|
|
$
|
15,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to
Consolidated Financial Statements.
F-6
TeleCommunication
Systems, Inc.
(amounts in thousands, except share and per share
data)
|
|
1.
|
Significant
Accounting Policies
|
Description of
Business
TeleCommunication Systems, Inc. develops and applies
high-availability and secure mobile communications technology.
We manage our business in two segments, Commercial and
Government:
Commercial Segment. Our carrier software
system products enable wireless carriers to deliver premium
services including short text messages, location information,
internet content, and other enhanced communication services to
and from wireless phones. We provide enhanced 9-1-1 (E9-1-1)
services, commercial location-based services, and inter-carrier
text message distribution services as a hosted service; that is,
customers use our software functionality through connections to
and from our network operations centers, paying us monthly based
on the number of subscribers, cell sites, or call center
circuits, or message volume. As of December 31, 2009, we
provide hosted services under contracts with more than 40
wireless carrier networks and
Voice-over-Internet-Protocol
(VoIP) service providers. We also earn subscriber revenue
through wireless applications including our navigation, people
finder, and asset tracking applications which are available via
many major US wireless carriers. We earn carrier software-based
systems revenue through the sale of licenses, deployment and
customization fees and maintenance fees. Pricing is generally
based on the volume of capacity purchased from us by the carrier.
Government Segment. We provide communication
systems integration, information technology services, and
software solutions to the U.S. Department of Defense and
other government customers. We design, furnish, install and
operate wireless and data network communication systems,
including our SwiftLink deployable communication systems which
integrate high speed, satellite, and internet protocol
technology, with secure Government-approved cryptologic devices.
We also own and operate secure satellite teleport facilities,
and resell access to satellite airtime (known as space segment).
Use of Estimates. The preparation of financial
statements in conformity with accounting principles generally
accepted in the U.S. requires management to make estimates
and assumptions that affect the reported amounts and related
disclosures. Actual results could differ from those estimates.
Principles of Consolidation. The accompanying
financial statements include the accounts of our wholly owned
subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents. Cash and cash equivalents
include cash and highly liquid investments with a maturity of
three months or less when purchased. Cash equivalents are
reported at fair value, which approximates cost.
Allowances for Doubtful Accounts
Receivable. Substantially all of our accounts
receivable are trade receivables generated in the ordinary
course of our business. We use estimates to determine the amount
of the allowance for doubtful accounts necessary to reduce
accounts receivable to their expected net realizable value. We
estimate the amount of the required allowance by reviewing the
status of significant past-due receivables and by establishing
provisions for estimated losses by analyzing current and
historical bad debt trends. Changes to our allowance for
doubtful accounts are recorded as a component of general and
administrative expenses in our accompanying Consolidated
Statements of Operations. Our credit and collection policies and
the financial strength of our customers are critical to us in
maintaining a relatively small amount of write-offs of
receivables. We generally do not require collateral from or
enter netting agreements with our customers. Receivables that
are ultimately deemed uncollectible are charged-off as a
reduction of receivables and the allowance for doubtful accounts.
Deferred Compensation Plan. During 2009, the Company
adopted a non-qualified deferred compensation arrangement to
fund certain supplemental executive retirement and deferred
income plans. Under the terms of
F-7
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
the arrangement, the participants may elect to defer the receipt
of a portion of their compensation and each participant directs
the manner in which their investments are deemed invested. The
funds are held by the Company in a rabbi trust which include
fixed income funds, equity securities, and money market
accounts, or other investments for which there is an active
quoted market. The funds are included in Other assets and Other
long-term liability on the Consolidated Balance Sheet.
Inventory. We maintain inventory of component parts
and finished product for our Government deployable
communications systems. Inventory is stated at the lower of cost
or market. Cost is based on the weighted average method. The
cost basis for finished units includes manufacturing cost.
Investments in Marketable Securities and Note
Receivable. During 2007, the Company received a $1,000
note and some marketable securities as partial consideration
from three small divestitures. For the year ended
December 31, 2007, the Company reported $152 net
unrealized losses in stockholders equity as a component of
accumulated other comprehensive income.
During 2008, the Company wrote down the value of these
securities by approximately $802, which write-down was included
in Other income, net. At December 31, 2008, the marketable
securities were valued at $78, and were included in other
current assets and classified as
available-for-sale.
The note receivable was reported in other current assets for
2007 and was collected in full in November of 2008, including
interest at 8.25%.
In 2009, we sold all of our remaining investments in marketable
securities and recorded a loss of $48, which is included in
Other income, net.
Property and Equipment. Property and equipment is
stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method based on the estimated
useful lives of equipment, generally five years for furniture
and fixtures and three to four years for computer equipment,
software and vehicles. Our depreciable asset base includes
equipment in our network operations centers related to our
hosted service offerings, development costs for computer
software for internal use, and company-wide computer hardware.
Amortization of leasehold improvements is provided using the
straight-line method over the lesser of the useful life of the
asset or the remaining term of the lease. Assets held under
capital leases are stated at the lesser of the present value of
future minimum lease payments or the fair value of the property
at the inception of the lease. The assets recorded under capital
leases are amortized over the lesser of the lease term or the
estimated useful life of the assets in a manner consistent with
our depreciation policy for owned assets.
Goodwill. Goodwill represents the excess of cost
over the fair value of assets of acquired businesses. Goodwill
acquired in a purchase business combination is not amortized,
but instead is evaluated annually for impairment using a
discounted cash flow model.
Software Development Costs. Acquired technology,
representing the estimated value of the proprietary technology
acquired, has been recorded as capitalized software development
costs. We also capitalize software development costs after we
establish technological feasibility, and amortize those costs
over the estimated useful lives of the software beginning on the
date when the software is available for general release.
Costs are capitalized when technological feasibility has been
established. For new products, technological feasibility is
established when an operative version of the computer software
product is completed in the same software language as the
product to be ultimately marketed, performs all the major
functions planned for the product, and has successfully
completed initial customer testing. Technological feasibility
for enhancements to an existing product is established when a
detail program design is completed. Costs that are capitalized
include direct labor, related overhead and other direct costs.
These costs are amortized on a
product-by-product
basis using the straight-line method over the products
estimated useful life, which has not been greater than three
years. Amortization is also computed using the ratio that
current revenue for the product bears to the total of current
and anticipated future revenue for that product (the revenue
curve method). If this revenue curve method results in
amortization greater than the amount computed using the
straight-line method, amortization is
F-8
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
recorded at that greater amount. Our policies to determine when
to capitalize software development costs and how much to
amortize in a given period require us to make subjective
estimates and judgments. If our software products do not achieve
the level of market acceptance that we expect and our future
revenue estimates for these products change, the amount of
amortization that we record may increase compared to prior
periods. The amortization of capitalized software development
costs has been recorded as a cost of revenue.
Acquired technology is amortized over the products
estimated useful life based on the valuation procedures
performed at the time of the acquisition. Amortization is
calculated using the ratio of the estimated future cash flows
generated in each period to the estimated total cash flows to be
contributed from each product or the straight-line method,
whichever is greater.
The Company capitalizes all costs related to software developed
or obtained for internal use when management commits to funding
the project and the project completes the preliminary project
stage. Capitalization of such costs ceases when the project is
substantially complete and ready for its intended use.
Acquired Intangible Assets. Our acquired intangible
assets have useful lives of 5 to 19 years. We are
amortizing these assets using the greater of the straight-line
method or the revenue curve method.
Impairment of Long-Lived Assets. Long-lived assets,
including intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset or group of assets may not be fully
recoverable.
If an impairment indicator is present, we evaluate
recoverability by a comparison of the carrying amount of the
assets to future discounted net cash flows that we expect to
generate from these assets. If the assets are impaired, we
recognize an impairment charge equal to the amount by which the
carrying amount exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of carrying values or
fair values, less estimated costs of disposal.
Other Comprehensive Income/(Loss). Comprehensive
income/(loss) includes changes in the equity of a business
during a period from transactions and other events and
circumstances from non-owner sources. Other comprehensive
income/(loss) refers to revenue, expenses, gains and losses that
under U.S. generally accepted accounting principles are
included in comprehensive income, but excluded from net income.
For operations outside the U.S. that prepare financial
statements in currencies other than the U.S. dollar,
results of operations and cash flows are translated at average
exchange rates during the period, and assets and liabilities are
translated at
end-of-period
exchange rates. Translation adjustments for our European
subsidiary are included as a component of accumulated other
comprehensive loss in stockholders equity. Also included
are any unrealized gains or losses on marketable securities that
are classified as
available-for-sale.
Revenue Recognition. Revenue is generated from our
two segments as described below:
Services Revenue. Revenue from hosted and subscriber
services consists of monthly recurring service fees and is
recognized in the month earned. Maintenance fees are generally
collected in advance and recognized ratably over the maintenance
period, which is typically annual. Any unearned revenue,
including unrecognized maintenance fees, is included in deferred
revenue.
We also recognize services revenue from the design, development
and deployment of information processing and communication
systems primarily for government enterprises. These services are
provided under time and materials contracts, cost plus fee
contracts, or fixed price contracts. Revenue is recognized under
time and materials contracts and cost plus fee contracts as
billable costs are incurred. Fixed-price service contracts are
accounted for using the proportional performance method. These
contracts generally allow for monthly billing or billing upon
achieving certain specified milestones. Any estimated losses on
contracts are recognized in their entirety at the date that they
become evident.
F-9
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
Systems Revenue. We design, develop, and deploy
communications systems. These systems may include packaged
software licenses. Systems typically contain multiple elements,
which may include the product license, installation,
integration, and hardware. The total arrangement fee is
allocated among each element based on vendor-specific objective
evidence of the fair value of each of the elements. Fair value
is generally determined based on the price charged when the
element is sold separately. In the absence of evidence of fair
value of a delivered element, revenue is allocated first to the
undelivered elements based on fair value and the residual
revenue to the delivered elements. The software licenses are
generally perpetual licenses for a specified number of users
that allow for the purchase of annual maintenance at a specified
rate. All fees are recognized as revenue when four criteria are
met. These four criteria are (i) evidence of an arrangement
(ii) delivery has occurred, (iii) the fee is fixed or
determinable and (iv) the fee is probable of collection.
Software license fees billed and not recognized as revenue are
included in deferred revenue. Systems containing software
licenses include a
90-day
warranty for defects. We have not incurred significant warranty
costs on any software product to date, and no costs are
currently accrued upon recording the related revenue.
Systems revenue is also derived from fees for the development,
implementation and maintenance of custom applications. Fees from
the development and implementation of custom applications are
generally performed under time and materials and fixed fee
contracts. Revenue is recognized under time and materials
contracts and cost plus fee contracts as billable costs are
incurred. Fixed-price product delivery contracts are accounted
for using the
percentage-of-completion
or proportional performance method, measured either by total
costs incurred as a percentage of total estimated costs at the
completion of the contract, or direct labor costs incurred
compared to estimated total direct labor costs for projects for
which third-party hardware represents a significant portion of
the total estimated costs. These contracts generally allow for
monthly billing or billing upon achieving certain specified
milestones. Any estimated losses under long-term contracts are
recognized in their entirety at the date that they become
evident. Revenue from hardware sales to our monthly subscriber
customers is recognized as systems revenue.
Under our contracts with the U.S. government for both
systems and services, contract costs, including the allocated
indirect expenses, are subject to audit and adjustment by the
Defense Contract Audit Agency. We record revenue under these
contracts at estimated net realizable amounts.
Our accounting for revenues from systems and services contracts
that are not accounted for using the proportional performance or
percentage of completion methods, follows the ASC guidance for
recognizing revenue arrangements with multiple deliverables for
determining of the number of units of accounting and the
allocation of the total fair value among the multiple elements.
Deferral of Costs Incurred. We defer direct costs
incurred in certain situations as dictated by authoritative
accounting literature. In addition, if the revenue for a
delivered item is not recognized because it is not separable
from the arrangement, then we defer incremental costs related to
that delivered but unrecognized element. Deferred costs are
included in Other current assets on the Consolidated Balance
Sheet.
Advertising Costs. Advertising costs are expensed as
incurred. Advertising expense totaled $54, $1, and $34, for the
years ended December 31, 2009, 2008, and 2007, respectively.
Capitalized Interest. Total interest incurred was
$2,216, $1,120, and $5,026 for the years ended December 31,
2009, 2008, and 2007, respectively. Approximately $21, $18, and
$74 of total interest incurred was capitalized as a component of
software development costs during the year ended
December 31, 2009, 2008, and 2007 respectively.
Stock-Based Compensation. We have two stock-based
employee compensation plans, which are described more fully in
Note 17. Both stock compensation plans, incentive stock
options and employee stock purchase plan, are considered equity
plans. The fair value of stock option grants are estimated on
the date of grant using a Black-Scholes option-pricing model and
expensed on a straight-line basis over the requisite service
F-10
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
period of the options, which is generally three to five years.
The employee stock purchase plan gives all employees an
opportunity to purchase shares of our Class A Common Stock
at a discount of 15% of the fair market value.
Research and Development Expense. We incur research
and development costs which are primarily comprised of
compensation and travel expenses related to our engineers
engaged in the development and enhancement of new and existing
software products. All costs are expensed as incurred prior to
reaching technological feasibility.
Income Taxes. Income tax amounts and balances are
accounted for using the asset and liability method of accounting
for income taxes as prescribed by ASC 740. Under this method,
deferred income tax assets and liabilities are measured using
the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Effective January 1, 2007, the Company began recognizing
the benefits of tax positions in the financial statements if
such positions are more likely than not to be sustained upon
examination by the taxing authority and satisfy the appropriate
measurement criteria. If the recognition threshold is met, the
tax benefit is generally measured and recognized as the tax
benefit having the highest likelihood, based on our judgment, of
being realized upon ultimate settlement with the taxing
authority, assuming full knowledge of the position and all
relevant facts. At December 31, 2009, we had unrecognized
tax benefits totaling approximately $3.3 million. The
determination of these unrecognized amounts requires significant
judgments and interpretation of complex tax laws. Different
judgments or interpretations could result in material changes to
the amount of unrecognized tax benefits.
Fair Value of Financial Instruments. The
Companys major categories of financial assets and
liabilities subject to fair value measurements include cash and
cash equivalents and marketable securities that are held as
available for sale. Both categories use observable inputs only
and are measured using a market approach based on quoted prices,
see Note 15.
Recent Accounting Pronouncements. In June 2009, the
Financial Accounting Standards Board (FASB) issued
FASB Accounting Standards Codification (ASC)
effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The ASC is an
aggregation of previously issued authoritative GAAP in one
comprehensive set of guidance organized by subject area. In
accordance with the ASC, references to previously issued
accounting standards have been replaced by ASC references.
Subsequent revisions to GAAP will be incorporated into the ASC
through Accounting Standards Updates (ASU). The
adoption of the Codification had no impact on the Companys
financial condition or results of operations.
In January 2010, the FASB issued ASU
2010-6,
Improving Disclosures About Fair Value Measurements
, that amends existing disclosure requirements ASC 820 by adding
required disclosures about items transferring into and out of
levels 1 and 2 in the fair value hierarchy; adding separate
disclosures about purchase, sales, issuances, and settlements
relative to level 3 measurements; and clarifying, among
other things, the existing fair value disclosures about the
level of disaggregation. This ASU is effective for fiscal years
beginning after December 15, 2009, except for the
requirement to provide level 3 activity of purchases,
sales, issuances, and settlements on a gross basis, which is
effective beginning the first quarter of 2011. Since this
standard impacts disclosure requirements only, its adoption will
not have a material impact on our consolidated results of
operations or financial condition.
In October 2009, the FASB issued Accounting ASU
2009-14 to
ASC topic 985, Certain Revenue Arrangements That Include
Software Elements. that removes tangible products from the
scope of software revenue guidance and provides guidance on
determining whether software deliverables in an arrangement that
includes a tangible product are covered by the scope of the
software revenue guidance. ASU
2009-14 will
be applied prospectively for new or materially modified
arrangements in fiscal years beginning after June 15, 2010
F-11
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
and early adoption is permitted. The Company is currently
evaluating the impact the adoption will have on its consolidated
financial statements.
In October 2009, the FASB issued ASU
2009-13 to
ASC topic 605 Revenue Recognition Multiple
Deliverable Revenue Arrangements. This update addresses
how to determine whether an arrangement involving multiple
deliverables contains one or more than one unit of accounting,
and how the arrangement consideration should be allocated among
the separate units of accounting. This update also established a
selling price hierarchy for determining the selling price of a
deliverable. The selling price used for each deliverable will be
based on vendor-specific objective evidence if available,
third-party evidence if vendor-specific evidence is not
available, or estimated selling price if neither
vendor specified or third-party evidence is
available. ASU
2009-13 may
be applied retrospectively or prospectively for new or
materially modified arrangements in fiscal years beginning on or
after June 15, 2010, with early adoption permitted. The
Company is currently evaluating the impact the adoption will
have on its consolidated financial statements.
During 2009 the Company acquired four businesses. These
acquisitions were accounted for using acquisition method;
accordingly, their total estimated purchase prices are allocated
to the net tangible and intangible assets acquired and
liabilities assumed, based on their estimated fair values as of
the effective date of the acquisition. The preliminary
allocations of purchase price were based upon managements
preliminary valuation of the fair value of tangible and
intangible assets acquired and liabilities assumed, and such
estimates and assumptions are subject to change as the company
finalizes the allocation for each of the acquisitions. The
financial information provided herein includes the effects of
the Companys acquisitions of net assets and liabilities
assumed on their completed acquisition dates.
On May 19, 2009, the company acquired substantially all the
assets of LocationLogic, LLC (LocationLogic), formerly Autodesk,
Incs location services business. The LocationLogic
business is reported as part of TCSs commercial services
segment. The purchase price of the LocationLogics assets
was $25 million, comprised of $15 million cash and
$10 million, or approximately 1.4 million shares, in
the Companys Class A Common Stock. The acquisition
was financed from a combination of available funds from
operations and borrowings against the Companys new term
debt facility.
On November 3, 2009, we purchased all of the outstanding
stock of Solvern Innovations, Inc. (Solvern), a communications
technology company focused on cyber-security. The Solvern
business is reported as part of our government services segment
category. Solverns purchase consideration included cash,
approximately 1 million shares of the Companys
Class A common stock, and contingent consideration based on
the businesss gross profit in 2010 and 2011.
On November 16, 2009, the Company completed the acquisition
of substantially all of the assets of Sidereal Solutions, Inc.
(Sidereal), a satellite communications technology engineering,
operations and maintenance support service company. The Sidereal
business is reported as part of the government services segment
category. Consideration for the purchase of the Sidereal assets
of included cash and approximately 244,200 shares of the
Companys Class A common stock, and contingent
consideration based on the businesss gross profit in 2010
and 2011.
Under the acquisition method of accounting, the total estimated
purchase price is allocated to net tangible and intangible
assets and assumed liabilities based on their estimated fair
values as of the acquisition completion dates. Based on the
Companys preliminary valuation of the fair value of
tangible and intangible assets acquired and liabilities assumed,
which are based on estimates and assumptions that are subject to
change, and other
F-12
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
factors, the preliminary estimated purchase price in aggregate
for the LocationLogic, Solvern and Sidereal acquisitions is
allocated as follows:
The preliminary fair value allocation of consideration for
LocationLogic, Solvern and Sidereal at acquisition date (in
thousands) is:
|
|
|
|
|
|
|
As of
|
|
|
|
Acquisition dates
|
|
|
Cash and cash equivalents
|
|
$
|
(129
|
)
|
Accounts receivable
|
|
|
3,980
|
|
Prepaid expenses and other current assets
|
|
|
284
|
|
Property and equipment
|
|
|
870
|
|
Capitalized software development costs
|
|
|
8,720
|
|
Other intangibles customer list and other
|
|
|
12,200
|
|
Other assets
|
|
|
1,078
|
|
Accounts payable
|
|
|
(747
|
)
|
Other accrued liabilities
|
|
|
(1,738
|
)
|
Deferred tax liability, net
|
|
|
(3,813
|
)
|
|
|
|
|
|
Total net assets
|
|
|
20,705
|
|
Goodwill
|
|
|
49,049
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
69,754
|
|
|
|
|
|
|
We completed the acquisition of Networks in Motion, Inc. (NIM)
on December 15, 2009. The acquisition was made pursuant to
an Agreement and Plan of Merger dated November 25, 2009
(the Merger Agreement.)
Under the terms of the Merger Agreement, immediately prior to
the effective time of the acquisition on December 15, 2009,
(i) shares of NIMs outstanding preferred stock
automatically converted into shares of NIM common stock in
accordance with the terms of NIMs Certificate of
Incorporation, as amended, and (ii) shares of NIMs
outstanding common stock, warrants and certain options were
canceled and converted in exchange for the right to receive,
following surrender of stock certificates, if applicable, and
the execution and delivery of certain other documents required
by the Merger Agreement, the following: (i) an aggregate
amount in cash equal to $110 million, plus or minus
customary working capital and excess cash adjustments;
(ii) 2,236,258 shares of Class A common stock,
par value $0.01 per share, of the Company; (iii) an
aggregate of $20 million principal amount payable in
promissory notes of the Company, which mature on the one-year
anniversary of the closing date of the acquisition; and
(iv) an aggregate of $20 million principal amount payable
in promissory notes of the Company, $10 million of which
matures on the one-year anniversary of the closing date of the
acquisition, $5 million of which matures on the date which
is eighteen months following the closing date of the acquisition
and $5 million of which matures on the second anniversary
of the closing date of the acquisition. The promissory notes are
effectively subordinated to TCSs secured debt and
structurally subordinated to any present and future indebtedness
and other obligations of TCSs subsidiaries.
Preliminary fair value of consideration for NIM at acquisition
date (in thousands)
|
|
|
|
|
|
|
As of
|
|
|
|
December 15, 2009
|
|
|
Cash and cash equivalents
|
|
$
|
110,000
|
|
Promissory notes
|
|
|
40,000
|
|
Class A common stock (2,236,258 shares)
|
|
|
20,000
|
|
|
|
|
|
|
Total fair value of consideration
|
|
$
|
170,000
|
|
|
|
|
|
|
Total acquisition price
|
|
$
|
170,000
|
|
|
|
|
|
|
F-13
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
The preliminary allocation of fair value of consideration for
Networks in Motion at acquisition date (in thousands) is:
|
|
|
|
|
|
|
As of
|
|
|
|
December 15, 2009
|
|
|
Cash and cash equivalents
|
|
$
|
1,736
|
|
Accounts receivable
|
|
|
12,880
|
|
Prepaid expenses and other current assets
|
|
|
10,337
|
|
Property and equipment
|
|
|
3,293
|
|
Capitalized software development costs
|
|
|
34,405
|
|
Other intangibles customer relationships
|
|
|
20,138
|
|
Other assets
|
|
|
425
|
|
Accounts payable
|
|
|
(3,619
|
)
|
Other accrued liabilities
|
|
|
(6,092
|
)
|
Deferred revenue
|
|
|
(445
|
)
|
Deferred tax liability, net
|
|
|
(16,939
|
)
|
|
|
|
|
|
Total net assets
|
|
|
56,119
|
|
Goodwill
|
|
|
113,881
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
170,000
|
|
|
|
|
|
|
Prior to the end of the measurement period for finalizing the
purchase price allocation, if information becomes available
which would indicate adjustments are required to the purchase
price allocation, such adjustments will be included in the
purchase price allocation retrospectively.
Of the total estimated NIM purchase price of $170 million,
approximately $113.9 million has been preliminarily
allocated to goodwill and $54.5 million to acquired
definite-lived intangible assets, consisting of the value
assigned to NIMs customer relationships of
$20.1 million, and developed technology of
$34.4 million classified as capitalized software
development costs.
|
|
|
|
|
|
|
As of
|
|
|
|
December 15, 2009
|
|
|
Goodwill and intangibles acquired (In thousands)
|
|
|
|
|
Capitalized software development costs
|
|
$
|
34,405
|
|
Customer relationships
|
|
|
20,138
|
|
Preliminary estimate of goodwill
|
|
|
113,881
|
|
|
|
|
|
|
Total goodwill and intangible assets acquired
|
|
$
|
168,424
|
|
|
|
|
|
|
The value assigned to NIMs customer relationships was
determined by discounting the estimated cash flows associated
with the existing customers as of the acquisition date, taking
into consideration estimated future attrition. The estimated
cash flows were based on revenues for those existing customers
net of operating expenses and net of capital charges for other
tangible and intangible assets that contribute to the projected
cash flow from those customers. The projected revenues were
based on assumed revenue growth rates and customer renewal
rates. Operating expenses were estimated based on the supporting
infrastructure expected to sustain the assumed revenue. Net
capital charges for assets that contribute to projected customer
cash flow were based on the estimated fair value of those
assets. A discount rate of 18% was deemed appropriate for
valuing the existing customer base and was based on the risks
associated with the respective cash flows taking into
consideration the Companys weighted average cost of
capital and the risk of other tangible and intangible assets.
TCS expects to amortize the value of NIMs customer
relationships using a straight-line basis over seven and half
years. Amortization of customer relationships is not deductible
for tax purposes.
F-14
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
The value assigned to NIMs acquired technology was
determined by discounting the estimated future cash flows to
existing and new customer sales projections. The existing
technology discounted cash flows were determined by discounting
a royalty charge for the use of NIMs technology sold to
existing customers. The valuation of existing technology was
then added to the present value of the new technology
intangible, which was based on a discounted value on the
projection of future sales. The revenue projections used to
value the developed technology were based on estimates of
relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product
introductions by NIM and its competitors. A discount rate of 18%
was deemed appropriate for valuing developed technology and was
based on the risks associated with the respective cash flows,
taking into consideration the Companys weighted average
cost of capital. TCS expects to amortize the developed
technology on a straight-line basis over five years.
Amortization of developed technology is not deductible for tax
purposes.
Of the total estimated purchase price, approximately
$113.9 million is allocated to goodwill. Goodwill
represents the excess of the purchase price of an acquired
business over the fair value of the net tangible and intangible
assets acquired. In accordance with ASC 350,
Intangibles-Goodwill and Other, goodwill will not be
amortized but instead will be tested for impairment at least
annually (more frequently if indicators of impairment arise).
The Company amortizes acquired developed technology as part of
cost of services revenue. NIMs acquired intangibles are
amortized based on the straight-line method using the useful
lives in the following table:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
December 15, 2009
|
|
|
Useful lives
|
|
|
Definite-lived intangible amortization (In thousands)
|
|
|
|
|
|
|
|
|
Capitalized software development costs
|
|
$
|
34,405
|
|
|
|
5.0 years
|
|
Customer relationships
|
|
|
20,138
|
|
|
|
7.5 years
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unaudited pro forma financial information, for years ended
2009 and 2008, in the table below summarizes the consolidated
results of operations for TCS and NIM (which was assessed as a
significant and material acquisition for purposes of unaudited
pro forma financial information disclosure), as though NIM was
acquired at the beginning of 2008.
The following pro forma information is presented to include the
effects of the acquisition of NIM using the acquisition method
of accounting and the related TCS Class A common stock and
promissory notes issued as part of consideration. The unaudited
pro forma financial information is presented to also include the
effects of $103.5 million Convertible Notes offering, as
described in Note 12, and its related hedging and warrant
agreements, as if the notes financing was completed at the
beginning of 2008. The pro forma financial information for
periods presented also includes the business combination
accounting effects resulting from the acquisition including
amortization charges from acquired intangible assets,
adjustments to amortization of borrowing costs, and interest
expense and the related tax effects, as though NIM was
consolidated as of the beginning of 2008.
The pro forma financial information is not intended to represent
or be indicative of the consolidated results of operations or
financial condition of TCS that would have been reported had the
acquisition been completed as of the dates presented, and should
not be construed as representative of the future consolidated
results of operations or financial condition of a consolidated
entity.
The following unaudited pro forma financial information is
presented below for informational purposes only and is not
indicative of the results of operations that would have been
achieved if the acquisitions and any borrowings undertaken to
finance the acquisition had taken place at the beginning of 2008.
F-15
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Year Ended
|
|
|
Pro Forma Year Ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
Pro forma information (In thousands, except for per share data)
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
369,413
|
|
|
$
|
261,680
|
|
Net income
|
|
$
|
30,855
|
|
|
$
|
57,312
|
|
Weighted average common share outstanding
|
|
|
49,762
|
|
|
|
45,299
|
|
Diluted weighted average share outstanding
|
|
|
64,853
|
|
|
|
58,882
|
|
Basic earnings per share
|
|
$
|
0.62
|
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.52
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
Enterprise
Assets-Discontinued Operations
|
In 2007, the Company sold its Enterprise division operations,
which had previously been included in the Commercial Segment.
The operations and cash flows of the business have been
eliminated from those of continuing operations and the Company
has no significant involvement in the operations since the
disposal transactions. Accordingly, the assets, liabilities, and
results of operations for the Enterprise assets have been
classified as discontinued operations for all periods presented
in the Consolidated Financial Statements.
|
|
4.
|
Income/(loss) Per
Common Share
|
Basic income/(loss) per common share is based upon the average
number of shares of common stock outstanding during the period.
Stock options to purchase approximately 2.0 million,
2.6 million and 2.5 million shares were excluded from
the computation of diluted net income per share because their
inclusion would have been anti-dilutive for the years ended
2009, 2008, and 2007, respectively. Because we incurred a loss
from continuing operations in 2007 potentially dilutive
securities were excluded from the computation because the result
would be anti-dilutive. These potentially dilutive securities
consist of stock options, restricted stock, and warrants as
discussed in Notes 1 and 17, using the treasury-stock
method and from convertible stock as discussed in Note 12,
using the if converted.
F-16
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
The following table summarizes the computations of basic and
diluted earnings per share for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss), basic
|
|
$
|
28,269
|
|
|
$
|
57,568
|
|
|
$
|
(1,014
|
)
|
Adjustment for assumed dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible debt, net of taxes
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss), diluted
|
|
$
|
28,649
|
|
|
$
|
57,568
|
|
|
$
|
(1,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, basic and diluted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic weighted-average common shares outstanding
|
|
|
47,623
|
|
|
|
43,063
|
|
|
|
41,453
|
|
Net effect of dilutive stock options based on treasury stock
method
|
|
|
4,797
|
|
|
|
3,195
|
|
|
|
|
|
Net effect of dilutive warrants based on treasury stock method
|
|
|
292
|
|
|
|
386
|
|
|
|
|
|
Net effect of dilutive 4.5% convertible bonds
|
|
|
1,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average diluted shares
|
|
|
53,946
|
|
|
|
46,644
|
|
|
|
41,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share from continuing operations
|
|
$
|
0.59
|
|
|
$
|
1.34
|
|
|
$
|
(0.02
|
)
|
Loss per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share basic
|
|
$
|
0.59
|
|
|
$
|
1.34
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share from continuing operations
|
|
$
|
0.53
|
|
|
$
|
1.23
|
|
|
$
|
(0.02
|
)
|
Loss per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share-diluted
|
|
$
|
0.53
|
|
|
$
|
1.23
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Supplemental
Disclosure of Cash Flow Information
|
Property and equipment acquired under capital leases totaled
$7,566, $3,343, and $1,979 during the years ended
December 31, 2009, 2008, and 2007, respectively.
Interest paid totaled $1,138, $922, and $1,002 during the years
ended December 31, 2009, 2008, and 2007, respectively.
Income taxes and estimated state income taxes paid totaled
$1,366 and $559 during the years ended December 31, 2009
and 2008, respectively. No income taxes were paid for 2007.
As partial consideration for our 2007 divestitures, we received
publicly trade common stock in two of the acquiring companies
valued at approximately $1,000 at the time of January 2007
closing on the transactions. During 2008, the Company returned a
portion of the common stock of one of the acquiring companies in
settlement of a divestiture post closing adjustment claim. We
recorded a $140 expense as part of this settlement.
F-17
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
Unbilled receivables consist of the excess of revenue earned in
accordance with generally accepted accounting principles over
the amounts billable at contract milestones. Substantially all
unbilled receivables are expected to be billed and collected
within twelve months.
Inventory consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Component parts
|
|
$
|
5,658
|
|
|
$
|
1,763
|
|
Finished goods
|
|
|
3,673
|
|
|
|
952
|
|
|
|
|
|
|
|
|
|
|
Total inventory at year end
|
|
$
|
9,331
|
|
|
$
|
2,715
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Property and
Equipment
|
Property and equipment consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Computer equipment
|
|
$
|
39,995
|
|
|
$
|
28,456
|
|
Computer software
|
|
|
20,721
|
|
|
|
18,408
|
|
Furniture and fixtures
|
|
|
2,695
|
|
|
|
2,520
|
|
Leasehold improvements
|
|
|
3,176
|
|
|
|
3,168
|
|
Land
|
|
|
1,000
|
|
|
|
1,000
|
|
Vehicles
|
|
|
107
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment at cost at year end
|
|
|
67,694
|
|
|
|
53,659
|
|
Less: accumulated depreciation and amortization
|
|
|
(46,960
|
)
|
|
|
(41,268
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment at year end
|
|
$
|
20,734
|
|
|
$
|
12,391
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Acquired
Intangible Assets and Capitalized Software Development
Costs
|
Our acquired intangible assets and capitalized software
development costs consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and other
|
|
$
|
13,735
|
|
|
$
|
1,151
|
|
|
$
|
12,584
|
|
|
$
|
606
|
|
|
$
|
521
|
|
|
$
|
85
|
|
Customer relationships
|
|
|
20,402
|
|
|
|
113
|
|
|
|
20,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and patents
|
|
|
1,364
|
|
|
|
262
|
|
|
|
1,102
|
|
|
|
612
|
|
|
|
135
|
|
|
|
477
|
|
Software development costs, including acquired technology
|
|
|
55,325
|
|
|
|
9,941
|
|
|
|
45,384
|
|
|
|
9,646
|
|
|
|
6,873
|
|
|
|
2,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets and software dev. costs
|
|
$
|
90,826
|
|
|
$
|
11,467
|
|
|
$
|
79,359
|
|
|
$
|
10,864
|
|
|
$
|
7,529
|
|
|
$
|
3,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
|
|
|
|
|
Estimated future amortization expense:
|
|
|
|
|
Year ending December 31, 2010
|
|
$
|
16,295
|
|
Year ending December 31, 2011
|
|
$
|
15,039
|
|
Year ending December 31, 2012
|
|
$
|
13,675
|
|
Year ending December 31, 2013
|
|
$
|
13,022
|
|
Year ending December 31, 2014
|
|
$
|
11,095
|
|
Thereafter
|
|
$
|
10,233
|
|
|
|
|
|
|
|
|
$
|
79,359
|
|
|
|
|
|
|
For 2009, 2008, and 2007 we capitalized $982, $461, and $1,525,
respectively, of software development costs of continuing
operations for certain software projects after the point of
technological feasibility had been reached but before the
products were available for general release. Accordingly, these
costs have been capitalized and are being amortized over their
estimated useful lives beginning when the products are available
for general release. The capitalized costs relate to our
location-based software. We believe that these capitalized costs
will be recoverable from future gross profits generated by these
products.
We routinely update our estimates of the recoverability of the
software products that have been capitalized. Management uses
these estimates as the basis for evaluating the carrying values
and remaining useful lives of the respective assets. During the
third quarter of 2009, the Company wrote off $763 after
determining certain capitalized software developments costs were
not recoverable based on decreased projected revenues and sales
pipeline. This expense is recorded within research and
development on the Consolidated Statement of Operations.
|
|
10.
|
Accounts Payable
and Accrued Expenses
|
Our accounts payable and accrued expenses consisted of the
following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Accounts payable
|
|
$
|
26,620
|
|
|
$
|
21,223
|
|
Accrued expenses
|
|
|
26,379
|
|
|
|
13,122
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses at year end
|
|
$
|
52,999
|
|
|
$
|
34,345
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses consist primarily of costs incurred for which
we have not yet been invoiced, accrued sales taxes, and amounts
due to our E9-1-1 customers that we have billed and collected
from regulating agencies on their behalf under cost recovery
arrangements.
We have maintained a line of credit arrangement with our
principal bank since 2003. On December 31, 2009, we amended
our June 2009 Third Amended and Restated Loan Agreement with our
principal bank. The amended agreement increased the line of
credit to a $35,000 revolving line of credit (the Line of
Credit,) from the June 2009 amount of $30,000. Our 2009
line of credit replaces the Companys 2007 revolving line
of credit availability of $22,000 with the bank. The Line of
Credit maturity date is June 25, 2012.
The Line of Credit includes three
sub-facilities:
(i) a letter of credit
sub-facility
pursuant to which the bank may issue letters of credit,
(ii) a foreign exchange
sub-facility
pursuant to which the Company may purchase foreign currency from
the bank, and (iii) a cash management
sub-facility
pursuant to which the bank may provide cash management services
(which may include, among others, merchant services, direct
deposit of payroll, business credit cards and check cashing
services) and in connection therewith make loans and extend
credit to the Company. The principal amount outstanding under
the Line of Credit accrues interest at a floating per annum
F-19
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
rate equal to the rate which is the greater of (i) 4% per
annum, or (ii) the banks most recently announced
prime rate, even if it is not the banks lowest
prime rate. The principal amount outstanding under the Line of
Credit is payable either prior to or on the maturity date and
interest on the Line of Credit is payable monthly. Our potential
borrowings under the Line of Credit are reduced by the amounts
of letters of credit outstanding and a cash management services
sublimit which totaled $1,597 at December 31, 2009. As of
December 31, 2009 and 2008, there were no borrowings on the
line of credit and we had approximately $33,400 and $19,300,
respectively, of unused borrowing availability under this line.
Long-term debt consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
4.5% Convertible notes dated November 16, 2009
|
|
$
|
103,500
|
|
|
$
|
|
|
Promissory note payable to NIM sellers dated December 16,
2009
|
|
|
40,000
|
|
|
|
|
|
Note payable to commercial banks dated December 31, 2009
|
|
|
30,000
|
|
|
|
|
|
Note payable dated June 2007, paid in full
|
|
|
|
|
|
|
7,167
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
173,500
|
|
|
|
7,167
|
|
Less: current portion
|
|
|
(36,667
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
Non-current portion of long-term debt
|
|
$
|
136,833
|
|
|
$
|
5,167
|
|
|
|
|
|
|
|
|
|
|
Aggregate maturities of long-term debt at December 31, 2009
are as follows:
|
|
|
|
|
2010
|
|
$
|
36,667
|
|
2011
|
|
|
11,667
|
|
2012
|
|
|
11,667
|
|
2013
|
|
|
6,667
|
|
2014
|
|
|
106,832
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
173,500
|
|
|
|
|
|
|
During 2009, the Company entered into multiple financing
agreements to fund corporate initiatives.
On November 10, 2009, the Company entered into an agreement
(the Purchase Agreement) under which it agreed to
sell $103.5 million aggregate principal amount of
4.5% Convertible Senior Notes (the Notes) due
2014. The Notes are not registered and were offered under
Rule 144A of the Securities Act of 1933. Concurrent with
the issuance of the Notes, we entered into convertible note
hedge transactions and warrant transactions, also detailed
below, that are expected to reduce the potential dilution
associated with the conversion of the Notes. Holders may convert
the Notes at their option on any day prior to the close of
business on the second scheduled trading day (as
defined in the Indenture) immediately preceding November 1,
2014. The conversion rate will initially be 96.637 shares
of Class A common stock per $1,000 principal amount of
Notes, equivalent to an initial conversion price of
approximately $10.35 per share of Class A common stock. The
effect of the convertible note hedge and warrant transactions,
described below, is an increase in the effective conversion
premium of the Notes to 60% above the
November 10th closing price, to $12.74 per share.
The convertible note hedge transactions cover, subject to
adjustments, 10,001,303 shares of Class A common
stock. Also, in connection with the sale of the Notes, the
Company entered into separate warrant transactions with certain
counterparties (collectively, the Warrant Dealers).
The Company sold to the Warrant Dealers the warrants to purchase
in the aggregate 10,001,303 shares of Class A common
stock, subject to adjustments, at an exercise price of $12.74
per share of Class A common stock. The Company offered and
sold
F-20
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
the warrants to the Warrant Dealers in reliance on the exemption
from registration provided by Section 4(2) of the
Securities Act of 1933, as amended.
The convertible note hedge and the warrant transactions are
separate transactions, each entered into by the Company with the
counterparties, which are not part of the terms of the Notes and
will not affect the holders rights under the Notes. The
cost of the convertible note hedge transactions to the Company
was approximately $23.8 million, and has been accounted for
as an equity transaction in accordance with ASC
815-40,
Contracts in Entitys own Equity. The Company received
proceeds of approximately $13 million related to the sale
of the warrants, which has also been classified as equity as the
warrants meet the classification criteria under ASC
815-40-25,
in which the warrants and the convertible note hedge
transactions require settlements in shares and provide the
Company with the choice of a net cash or common shares
settlement. As the convertible note hedge and warrants are
indexed to our common stock, we recognized them in permanent
equity in Additional paid-in capital, and will not
recognize subsequent changes in fair value as long as the
instruments remain classified as equity.
Interest on the Notes will be payable semiannually on November 1
and May 1 of each year, beginning May 1, 2010. The notes
will mature and convert on November 1, 2014, unless
previously converted in accordance with their terms. The notes
will be TCSs senior unsecured obligations and will rank
equally with all of its present and future senior unsecured debt
and senior to any future subordinated debt. The notes will be
structurally subordinate to all present and future debt and
other obligations of TCSs subsidiaries and will be
effectively subordinate to all of TCSs present and future
secured debt to the extent of the collateral securing that debt.
The notes are not redeemable by TCS prior to the maturity date.
On December 15, 2009, the Company issued $40 million
in promissory notes as part of the consideration paid for the
acquisition of NIM. The promissory notes bear simple interest at
6% and are due in three installments: $30 million on the
12 month anniversary of the closing, $5 million on the
18 month anniversary of the closing, and $5 million on
the 24 month anniversary of the closing, subject to escrow
adjustments. The promissory notes are effectively subordinated
to TCSs secured debt and structurally subordinated to any
present and future indebtedness and other obligations of
TCSs subsidiaries.
On December 31, 2009, we refinanced our June 2009
commercial bank term loan agreement with a $40 million five
year term loan (the Term Loan) that replaces the
Companys $20 million prior term loan. The company
drew $30 million of the term funds available with a
maturity date in June 2014, and the remaining $10 million
is available to draw no later than September 2010. The principal
amount outstanding under the Term Loan accrues interest at a
floating per annum rate equal to the rate which is the greater
of (i) 4% per annum, or (ii) 0.5% above the banks
prime rate (3.25% at December 31, 2009). The principal
amount outstanding under the Term Loan is payable in sixty equal
installments of principal of $556 beginning on January 29,
2010 and interest is payable on a monthly basis. Funds from the
increase in the amount of the Term Loan were used primarily to
retire the June 2009 term loan. In June 2009, we financed a
$20,000, five year term loan with interest calculated at a
floating per annum rate equal to the rate which is the greater
of (i) 4% per annum, or (ii) 0.5% above the banks
prime rate, which was repayable in monthly installments of $333
plus interest. The additional funds provided in our June 2009
agreement were used primarily to retire our June 2007 five year
bank term loan and for the acquisition of substantially of the
assets of LocationLogic. Our bank Loan Agreement contains
customary representations and warranties and customary events of
default. Availability under the Line of Credit is subject to
certain conditions, including the continued accuracy of the
Companys representations and warranties. The Loan
Agreement also contains subjective covenants that require
(i) no material impairment in the perfection or priority of
the banks lien in the collateral of the Loan Agreement,
(ii) no material adverse change in the business,
operations, or condition (financial or otherwise) of the
Borrowers, or (iii) no material impairment of the prospect
of repayment of any portion of the borrowings under the Loan
Agreement. The Loan Agreement also contains covenants requiring
the Company to maintain a minimum adjusted quick ratio and a
fixed charge coverage ratio as well as other restrictive
covenants including, among others, restrictions on the
Companys ability to dispose
F-21
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
part of its business or property; to change its business,
liquidate or enter into certain extraordinary transactions; to
merge, consolidate or acquire stock or property of another
entity; to incur indebtedness; to encumber its property; to pay
dividends or other distributions or enter into material
transactions with an affiliate. As of December 31, 2009, we
were in compliance with the covenants related to the Loan
Agreement and we believe that we will continue to comply with
these covenants in the foreseeable future. If our performance
does not result in compliance with any of these restrictive
covenants, we would seek to further modify our financing
arrangements, but there can be no assurance that the bank would
not exercise its rights and remedies under the Loan Agreement,
including declaring all outstanding debt due and payable.
On June 25, 2007, we refinanced $10 million of March
2006 secured notes with a five year bank term loan that was
repaid in full in June of 2009. The borrowing rate under the new
term loan was the prime rate plus 0.25% per annum (3.5% at
December 31, 2008) and payments are due in equal
monthly installments of $167 plus interest. In March 2006, we
issued (i) $10 million of secured notes due
March 10, 2009, with cash interest at 14% per annum, and
(ii) warrants to purchase an aggregate of 1.75 million
shares of our Class A Common Stock at an exercise price of
$2.40 per share. In December 2008, the holders of
1.1 million of the warrants exercised those warrants and
1.1 million shares were issued. The remaining
0.7 million warrants were exercised in 2009 and
0.7 million shares were issued. The resulting carrying
value of the debt at issuance was $6,500, net of the original
discount of $3,500 which was being amortized to interest expense
over its three-year term using the effective interest method,
yielding an effective interest rate of 15.2%. The remaining
unamortized debt discount and issuance expenses of
$2,458 million were written off in 2007 as a result of
early retirement of the March 2006 note.
We lease certain equipment under capital leases. Property and
equipment included the following amounts for capital leases at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Computer equipment
|
|
$
|
10,356
|
|
|
$
|
5,340
|
|
Computer software
|
|
|
2,636
|
|
|
|
1,654
|
|
Furniture and fixtures
|
|
|
95
|
|
|
|
18
|
|
Leasehold improvements
|
|
|
33
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Total equipment under capital lease at cost
|
|
|
13,120
|
|
|
|
7,037
|
|
Less: accumulated amortization
|
|
|
(3,934
|
)
|
|
|
(2,090
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment under capital leases
|
|
$
|
9,186
|
|
|
$
|
4,947
|
|
|
|
|
|
|
|
|
|
|
Capital leases are collateralized by the leased assets. Our
capital leases generally contain provisions whereby we can
purchase the equipment at the end of the lease for a one dollar
buyout or the current fair market value capped at 18.5% of the
original purchase price. Amortization of leased assets is
included in depreciation and amortization expense.
Future minimum payments under capital lease obligations
consisted of the following at December 31, 2009:
|
|
|
|
|
2010
|
|
$
|
3,617
|
|
2011
|
|
|
3,322
|
|
2012
|
|
|
2,496
|
|
2013
|
|
|
962
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
10,397
|
|
Less: amounts representing interest
|
|
|
(1,081
|
)
|
|
|
|
|
|
Present value of net minimum lease payments (including current
portion of $3,064)
|
|
$
|
9,316
|
|
|
|
|
|
|
F-22
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
Our Class A common stockholders are entitled to one vote
for each share of stock held for all matters submitted to a vote
of stockholders. Our Class B stockholders are entitled to
three votes for each share owned.
|
|
15.
|
Fair Value of
Financial Instruments
|
ASC 820-10
discusses valuation techniques, such as the market approach
(comparable market prices), the income approach (present value
of future income or cash flows), and the cost approach (cost to
replace the service capacity of an asset or replacement cost).
The statement utilizes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value
into three broad levels. The following is a brief description of
those three levels:
Level 1: Observable inputs such as quoted prices
(unadjusted) in active markets for identical assets or
liabilities.
Level 2: Inputs other than quoted prices that are
observable for the asset or liability, either directly or
indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or
similar assets or liabilities in markets that are not active.
Level 3: Observable inputs that reflect the reporting
entitys own assumptions.
Our population of assets and liabilities subject to fair value
measurements and the necessary disclosures are as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
Fair Value Measurements at 12/31/2009
|
|
|
|
12/31/2009
|
|
|
Using Fair Value Hierarchy
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
61,426
|
|
|
$
|
61,426
|
|
|
$
|
|
|
|
$
|
|
|
Deferred compensation plan investments
|
|
|
2,434
|
|
|
|
2,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value
|
|
$
|
63,860
|
|
|
$
|
63,860
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
2,554
|
|
|
$
|
2,554
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at Fair Value
|
|
$
|
2,554
|
|
|
$
|
2,554
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
Fair Value Measurements at 12/31/2008
|
|
|
|
12/31/2008
|
|
|
Using Fair Value Hierarchy
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,977
|
|
|
$
|
38,977
|
|
|
$
|
|
|
|
$
|
|
|
Marketable securities available for sale
|
|
|
78
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value
|
|
$
|
39,055
|
|
|
$
|
39,055
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company holds trading securities as part of a rabbi trust to
fund certain supplemental executive retirement plans and
deferred income plans. The funds held are all managed by a third
party, and include fixed income funds, equity securities, and
money market accounts, or other investments for which there is
an active quoted market. The related deferred compensation
liabilities are valued based on the underlying investment
selections held in each participants account. The fair
values of the 2008 marketable securities were based on quoted
market prices from various stock exchanges.
F-23
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
The Companys assets and liabilities that are measured at
fair value on a non-recurring basis include long-lived assets,
intangible assets, and goodwill. These items are recognized at
fair value when they are considered to be other than temporarily
impaired. For the year ended December 31, 2009, there were
no required fair value measurements for assets and liabilities
measured at fair value on a non-recurring basis, except as
discussed in Note 2 Acquisitions and Related Financing.
The Company accounts for income taxes using the asset and
liability approach. Deferred tax assets and liabilities are
determined based upon differences between financial reporting
and tax basis of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Net deferred tax assets are
recorded when it is more likely than not that the tax benefits
will be realized.
The provision for income taxes consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,242
|
|
|
$
|
636
|
|
State
|
|
|
1,057
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
2,299
|
|
|
|
788
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
15,004
|
|
|
|
(29,938
|
)
|
State
|
|
|
1,492
|
|
|
|
(4,107
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
16,496
|
|
|
|
(34,045
|
)
|
|
|
|
|
|
|
|
|
|
Total provision/(benefit) for income taxes from continuing
operations
|
|
$
|
18,795
|
|
|
$
|
(33,257
|
)
|
|
|
|
|
|
|
|
|
|
Prior to 2008, the Company recorded a full valuation allowance
against its deferred tax assets due to uncertainty surrounding
the realization of the benefits of such assets; therefore, there
was no tax provision in 2007. For 2008, based on historical
taxable income from continuing operations and projections for
future taxable income, the Company determined that it is more
likely than not that its deferred tax assets are expected to be
realized, and reversed the valuation allowance. The reversal of
the valuation allowance and other adjustments to the deferred
tax assets resulted in the recognition of income tax benefits of
$33,257 in 2008, $29,302 for federal and $3,955 for state. The
Company recorded a tax provision in 2009 of $18,795, $16,246 for
federal and $2,549 for state.
F-24
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
Significant components of our deferred tax assets and
liabilities at December 31 were related to:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
10,488
|
|
|
$
|
26,746
|
|
Research and development tax credit carryforwards
|
|
|
1,880
|
|
|
|
294
|
|
Stock-based compensation expense
|
|
|
2,360
|
|
|
|
1,513
|
|
Depreciation and amortization
|
|
|
219
|
|
|
|
4,079
|
|
Reserves and accrued expenses
|
|
|
2,296
|
|
|
|
1,432
|
|
Alternative minimum tax credit
|
|
|
1,687
|
|
|
|
636
|
|
Deferred revenue
|
|
|
1,343
|
|
|
|
108
|
|
Other
|
|
|
91
|
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
20,364
|
|
|
|
35,181
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Identifiable intangibles accounting
|
|
|
(22,069
|
)
|
|
|
|
|
Capitalized software development costs
|
|
|
(2,845
|
)
|
|
|
(1,132
|
)
|
Cash to accrual adjustment
|
|
|
(676
|
)
|
|
|
|
|
Other
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(25,594
|
)
|
|
|
(1,136
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
(5,230
|
)
|
|
|
34,045
|
|
Valuation allowance for net deferred tax asset
|
|
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax (liability)/asset in the consolidated balance
sheets
|
|
$
|
(5,928
|
)
|
|
$
|
34,045
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, we had U.S. federal net
operating loss carryforwards for income tax purposes of
approximately $24 million, of which $12.2 million
relates to net operating losses acquired in the Xypoint
acquisition in 2001. In addition, we had $14.1 million of
net operating losses from the excess tax benefits related to
stock-based compensation deductions which will increase
additional paid- in capital once the benefit is realized through
a reduction of income taxes payable. The net operating loss
carryforwards acquired in connection with the purchase of
Xypoint in 2001 will begin to expire in 2018. The remaining net
operating loss carryforwards will expire from 2019 through 2027.
The timing and manner in which we may utilize the net operating
loss carryforwards and tax credits in future tax years will be
limited by the amounts and timing of future taxable income and
by the application of the ownership change rules under
Section 382 of the Internal Revenue Code. Utilization of
the Xypoint net operating losses are limited as a result of
ownership changes occurring in 1997 and 2001. Additionally, the
Company determined that it had an ownership change in December
2001, which imposes an annual limitation of the net operating
losses created in 1999 to 2001. As of December 31, 2007,
the Company reduced its deferred tax assets related to the
portion of the research and development tax credits acquired
from Xypoint that are limited under Section 382, which
cannot be used before they expire.
The remaining U.S. federal net operating loss carryforwards
may become subject to limitations under the Internal Revenue
Code as well. We have state net operating loss carryforwards
available which expire through 2027, utilization of which will
be limited in a manner similar to the federal net operating loss
carryforwards. At December 31, 2009, the Company had
federal alternative minimum tax credit carryforwards of
approximately $1.7 million, which are available to offset
future regular federal taxes. Research and development credits
of approximately $1.9 million will begin to expire in 2011.
F-25
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
The reconciliations of the reported income tax provision
(benefit) to the amount that would result by applying the
U.S. federal statutory rate of 35% to the income or loss
from continuing operations for the year ended December 31,
2009, and 34% in 2008 and 2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income tax (benefit) at statutory rate
|
|
$
|
16,472
|
|
|
$
|
8,266
|
|
|
$
|
(364
|
)
|
Change in valuation allowances
|
|
|
|
|
|
|
(45,053
|
)
|
|
|
(887
|
)
|
Write-down of tax attributes
|
|
|
|
|
|
|
874
|
|
|
|
1,894
|
|
Non deductible items
|
|
|
673
|
|
|
|
1,612
|
|
|
|
255
|
|
Non deductible stock compensation expense
|
|
|
681
|
|
|
|
473
|
|
|
|
(705
|
)
|
Research and development tax credit
|
|
|
(395
|
)
|
|
|
(230
|
)
|
|
|
(130
|
)
|
Change in tax rates on deferred assets/liabilities
|
|
|
96
|
|
|
|
(53
|
)
|
|
|
(41
|
)
|
State tax (benefit)
|
|
|
1,261
|
|
|
|
1,066
|
|
|
|
(8
|
)
|
Other
|
|
|
7
|
|
|
|
(212
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) as reported
|
|
$
|
18,795
|
|
|
$
|
(33,257
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company adopted the provisions of ASC
740-20
effective January 1, 2007 and recorded a liability of
$2.7 million resulting from unrecognized net tax benefits,
which did not include interest and penalties, and increased it
to $3.3 million as of December 31, 2009. It is
reasonably possible that these unrecognized deferred tax
benefits will be recognized in the next twelve months through
the tax provision. The Company does not currently anticipate
that the total amounts of unrecognized tax benefits will
significantly increase within the next 12 months. The
Company recorded the estimated value of its uncertain tax
positions by reducing the value of certain tax attributes.
The following table summarizes the activity related to the
Companys unrecognized tax benefits (excluding interest,
penalties and related tax carry forwards):
|
|
|
|
|
|
|
Total
|
|
|
Balance at December 31, 2006
|
|
|
|
|
Gross increases related to prior year tax positions
|
|
$
|
|
|
Gross decreases related to prior year tax positions
|
|
|
|
|
Gross increases related to current year tax positions
|
|
|
2,736
|
|
Settlements/lapse in statute of limitation
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
2,736
|
|
Gross increases related to prior year tax positions
|
|
|
|
|
Gross decreases related to prior year tax positions
|
|
|
|
|
Gross increases related to current year tax positions
|
|
|
|
|
Settlements/lapse in statute of limitation
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
2,736
|
|
Gross increases related to prior year tax positions
|
|
|
|
|
Gross decreases related to prior year tax positions
|
|
|
|
|
Gross increases related to current year tax positions
|
|
|
534
|
|
Settlements/lapse in statute of limitation
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
3,270
|
|
|
|
|
|
|
If the Companys positions are sustained by the taxing
authority in favor of the Company, approximately,
$3.3 million (excluding interest and penalties) of
uncertain tax position liabilities would favorably impact the
Companys effective tax rate. The Companys policy is
to classify any interest and penalties accrued on any
F-26
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
unrecognized tax benefits as a component of the provision for
income taxes. There were no interest or penalties recognized in
the consolidated statement of income for the year ended
December 31, 2009.
The Company files income tax returns in the U.S. and
various state jurisdictions and with the acquisitions in 2009,
expects to file income tax returns in several foreign
jurisdictions. As of December 31, 2009, open tax years in
the federal and some state jurisdictions date back to 1996, due
to the taxing authorities ability to adjust operating loss
carryforwards.
|
|
17.
|
Employee Benefit
Plan
|
The Company maintains a 401(k) plan covering defined employees
who meet established eligibility requirements. Under the
provisions of the plan, the Company may contribute a
discretionary match. The plan may also contribute a non-elective
contribution determined by the Company. For 2009, the Company
matched 35% of employee deferrals. The Company contribution was
$1,646, $798, and $575 for the years ended December 31,
2009, 2008, and 2007 respectively.
|
|
18.
|
Stock-based
Compensation Plans
|
We maintain two stock-based compensation plans: a stock
incentive plan, and an employee stock purchase plan.
Stock Incentive Plan. We maintain a stock incentive
plan that is administered by our Compensation Committee of our
Board of Directors. Options granted under the plan vest over
periods ranging from one to five years and expire ten years from
the date of grant. Under the principal share-based compensation
plans, the Company may grant certain employees, directors and
consultants options to purchase common stock, stock appreciation
rights and restricted stock units. Options are rights to
purchase common stock of the Company at the fair market value on
the date of the grant. Stock appreciation rights are equity
settled share-based compensation arrangements whereby the number
of shares that will ultimately be issued is based upon the
appreciation of the Companys common stock and the number
of awards granted to an individual. Restricted stock units are
equity settled share-based compensation arrangements of a number
of share of the Companys common stock. Restricted stock
unit holders do not have voting rights until the restrictions
lapse.
We recognized compensation expense net of estimated forfeitures
over the requisite service period, which is generally the
vesting period of 5 years. The Company estimates the fair
value of each stock option award on the date of grant using the
Black-Scholes option-pricing model. Expected volatilities are
based on historical volatility of the Companys stock. The
Company estimates forfeitures based on historical experience and
the expected term of the options granted are derived from
historical data on employee exercises. The risk free interest
rate is based on the U.S. Treasury yield curve in effect at
the time of the grant. The Company has not paid and does not
anticipate paying dividends in the near future.
F-27
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
A summary of our stock option activity and related information
consisted of the following for the years ended December 31 (all
share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding, beginning of year
|
|
|
11,676
|
|
|
$
|
3.77
|
|
|
|
11,144
|
|
|
$
|
3.69
|
|
|
|
11,622
|
|
|
$
|
3.62
|
|
Granted
|
|
|
4,768
|
|
|
|
8.71
|
|
|
|
3,056
|
|
|
|
3.57
|
|
|
|
2,537
|
|
|
|
3.69
|
|
Exercised
|
|
|
(1,362
|
)
|
|
|
3.65
|
|
|
|
(1,927
|
)
|
|
|
3.04
|
|
|
|
(1,347
|
)
|
|
|
2.58
|
|
Forfeited
|
|
|
(470
|
)
|
|
|
5.95
|
|
|
|
(597
|
)
|
|
|
3.58
|
|
|
|
(1,668
|
)
|
|
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
14,612
|
|
|
$
|
5.32
|
|
|
|
11,676
|
|
|
$
|
3.77
|
|
|
|
11,144
|
|
|
$
|
3.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, at end of year
|
|
|
6,986
|
|
|
$
|
3.94
|
|
|
|
6,308
|
|
|
$
|
4.12
|
|
|
|
6,515
|
|
|
$
|
4.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest, at end of year
|
|
|
13,181
|
|
|
$
|
5.07
|
|
|
|
9,992
|
|
|
$
|
3.84
|
|
|
|
7,510
|
|
|
$
|
3.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated weighted-average grant- date fair value of options
granted during the year
|
|
$
|
4.86
|
|
|
|
|
|
|
$
|
2.07
|
|
|
|
|
|
|
$
|
3.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining contractual life of options
outstanding at end of year
|
|
|
6.9 years
|
|
|
|
|
|
|
|
6.5 years
|
|
|
|
|
|
|
|
6.6 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of options vested during the year
|
|
$
|
4,465
|
|
|
|
|
|
|
$
|
3,964
|
|
|
|
|
|
|
$
|
3,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of options exercised during the year
|
|
$
|
6,838
|
|
|
|
|
|
|
$
|
7,084
|
|
|
|
|
|
|
$
|
2,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise prices for options outstanding at December 31,
2009 ranged from $1.07 to $26.05 as follows (all share amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
|
|
|
Weighted-Average
|
|
|
Contractual Life
|
|
|
|
|
|
|
Exercise Prices
|
|
|
Contractual Life
|
|
|
Options
|
|
|
Exercise Prices
|
|
|
of Options
|
|
|
|
Options
|
|
|
of Options
|
|
|
of Options
|
|
|
Vested and
|
|
|
of Options Vested
|
|
|
Vested and
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Outstanding (years)
|
|
|
Exercisable
|
|
|
and Exercisable
|
|
|
Exercisable (years)
|
|
|
$1.07 $1.84
|
|
|
85
|
|
|
$
|
1.71
|
|
|
|
3.07
|
|
|
|
85
|
|
|
$
|
1.71
|
|
|
|
3.07
|
|
$1.92 $2.99
|
|
|
2,599
|
|
|
$
|
2.47
|
|
|
|
5.76
|
|
|
|
2,166
|
|
|
$
|
2.47
|
|
|
|
5.70
|
|
$3.05 $4.68
|
|
|
5,354
|
|
|
$
|
3.33
|
|
|
|
6.02
|
|
|
|
2,946
|
|
|
$
|
3.35
|
|
|
|
4.57
|
|
$4.83 $7.45
|
|
|
2,332
|
|
|
$
|
6.72
|
|
|
|
5.25
|
|
|
|
1,759
|
|
|
$
|
6.72
|
|
|
|
3.97
|
|
$7.95 $17.37
|
|
|
4,238
|
|
|
$
|
8.86
|
|
|
|
9.61
|
|
|
|
26
|
|
|
$
|
8.89
|
|
|
|
3.40
|
|
$26.05 $26.05
|
|
|
4
|
|
|
$
|
26.05
|
|
|
|
0.40
|
|
|
|
4
|
|
|
$
|
26.05
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total end of year
|
|
|
14,612
|
|
|
|
|
|
|
|
|
|
|
|
6,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the aggregate intrinsic value of
options outstanding was $67,416 and the aggregate intrinsic
value of options vested and exercisable was $41,940. As of
December 31, 2009, we estimate that we will recognize
$19,324 in expense for outstanding, unvested options over their
weighted average remaining vesting period of 4 years.
F-28
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
In calculating the fair value of our stock options using
Black-Scholes for the years ended December 31, 2009, 2008,
and 2007, respectively, our assumptions were as follows:
|
|
|
|
|
|
|
|
|
For The Years Ended
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Expected life (in years)
|
|
5.5
|
|
5.5
|
|
5.5
|
Risk-free interest rate (%)
|
|
1.65%-2.61%
|
|
2.65%-3.33%
|
|
4.24%-4.90%
|
Volatility (%)
|
|
60%-64%
|
|
60%-67%
|
|
68.1%-83%
|
Dividend yield (%)
|
|
0%
|
|
0%
|
|
0%
|
For the years ended December 31, 2009, 2008, and 2007, the
Company granted a total of 30,213, 20,556, and 89,600 of
restricted shares of Class A Common Stock to directors and
certain key executives. The restrictions expired at the end of
one year for directors and expire in annual increments over
three years for executives conditional on continued employment.
The fair value of the restricted stock on the date of issuance
is recognized as non-cash stock compensation expense over the
period over which the restrictions expire. We recognized $155,
$105, and $328 of non-cash stock compensation expense related to
these grants for the years ended December 31, 2009, 2008,
and 2007, respectively. We expect to record future stock
compensation expense of $105 as a result of these restricted
stock grants that will be recognized over the remaining vesting
periods.
Employee Stock Purchase Plan. We have an employee
stock purchase plan (the Plan) that gives all employees an
opportunity to purchase shares of our Class A Common Stock.
The Plan allows for the purchase of 1,384,932 shares of our
Class A Common Stock at a discount of 15% of the fair
market value. The discount of 15% is calculated based on the
average daily share price on either the first or the last day of
each quarterly enrollment period, whichever date is more
favorable to the employee. Option periods are three months in
duration. As of December 31, 2009, 1,180,465 shares of
Class A Common Stock have been issued under the Plan.
Compensation expense relating to the Employee Stock Purchase
Plan is not material.
As of December 31, 2009, our total shares of Class A
Common Stock reserved for future issuance is comprised of:
|
|
|
|
|
|
|
(in thousands)
|
|
|
Stock incentive plan
|
|
|
216
|
|
Outstanding stock options
|
|
|
14,612
|
|
Convertible notes (see Note 12)
|
|
|
10,002
|
|
Note warrant hedge (see Note 12)
|
|
|
10,002
|
|
For B to A conversion
|
|
|
6,276
|
|
Employee stock purchase plan
|
|
|
205
|
|
|
|
|
|
|
Total shares restricted for future use
|
|
|
41,313
|
|
|
|
|
|
|
As of December 31, 2009, the composition of non-cash stock
compensation expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Direct costs of revenue
|
|
$
|
3,773
|
|
|
$
|
2,494
|
|
|
$
|
2,080
|
|
Research and development expense
|
|
|
1,366
|
|
|
|
822
|
|
|
|
867
|
|
Sales and marketing expense
|
|
|
472
|
|
|
|
272
|
|
|
|
628
|
|
General and administrative expense
|
|
|
248
|
|
|
|
170
|
|
|
|
758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash stock compensation expense
|
|
$
|
5,859
|
|
|
$
|
3,758
|
|
|
$
|
4,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
We lease certain office space and equipment under non-cancelable
operating leases that expire on various dates through 2017.
Future minimum payments under non-cancelable operating leases
with initial terms of one year or more consisted of the
following at December 31, 2009:
|
|
|
|
|
2010
|
|
$
|
4,964
|
|
2011-2012
|
|
|
10,027
|
|
2013-2014
|
|
|
2,007
|
|
Beyond
|
|
|
3,857
|
|
|
|
|
|
|
|
|
$
|
20,855
|
|
|
|
|
|
|
Our leases include our offices in Annapolis, Maryland under a
lease expiring in March 2011, a second facility in Annapolis
under a lease expiring in April 2013, a facility in Seattle,
Washington under a lease expiring in September 2017, a facility
in Oakland, California under a lease expiring August 2012, and
we lease a production facility in Tampa, Florida under a lease
expiring in December 2014. The Annapolis facilities are utilized
for executive and administrative offices, as well as portions of
our Commercial and Government Segments. The Seattle and Oakland
facilities are utilized by our Commercial Segment and the Tampa
facility is utilized by our Government Segment. As a result of
our 2009 acquisitions, we lease office space in Aliso Viejo,
California under a lease expiring in June 2013, a facility in
Calgary, Alberta, Canada under a lease expiring March 2014, a
facility just outside of Atlanta, Georgia under a lease expiring
April 2013 and an office space at the University of Maryland
under a lease that expires March of 2011. Future payments on all
of our leases are estimated based on future payments including
the minimum future rent escalations, if any, stipulated in the
respective agreements.
Rent expense for continuing operations was $3,938, $4,079, and
$3,823 for the years ended December 31, 2009, 2008, and
2007, respectively.
|
|
20.
|
Concentrations of
Credit Risk and Major Customers
|
Financial instruments that potentially subject us to significant
concentrations of credit risk consist primarily of accounts
receivable and unbilled receivables. Those customers that
comprised 10% or more of our revenues, accounts receivable, and
unbilled receivables from continuing operations are summarized
in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Revenues
|
|
|
|
|
|
|
For The Year Ended
|
|
|
|
|
|
|
December 31,
|
|
Customer
|
|
Segment
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
U.S. Government
|
|
|
Government
|
|
|
|
44
|
%
|
|
|
42
|
%
|
|
|
37
|
%
|
Customer A
|
|
|
Commercial
|
|
|
|
22
|
%
|
|
|
22
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Accounts
|
|
|
Unbilled
|
|
|
Accounts
|
|
|
Unbilled
|
|
Customer
|
|
Receivable
|
|
|
Receivables
|
|
|
Receivable
|
|
|
Receivables
|
|
|
U.S. Government
|
|
|
42
|
%
|
|
|
43
|
%
|
|
|
54
|
%
|
|
|
73
|
%
|
Customer A
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
22
|
%
|
|
|
<10
|
%
|
Customer B
|
|
|
<10
|
%
|
|
|
<10
|
%
|
|
|
<10
|
%
|
|
|
10
|
%
|
As of December 31, 2009, our total exposure to credit risk
was $49,456 based on the amount due to us by the above
customers. As of December 31, 2008, our exposure to such
risks was $69,532. We did not
F-30
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
experience significant losses from amounts due to us by any
customers for the year ended December 31, 2009 or 2008.
|
|
21.
|
Business and
Geographic Segment Information
|
Our two reporting segments are the Commercial Segment and the
Government Segment.
Our Commercial Segment products and services enable wireless
carriers to deliver short text messages, location-based
information, internet content, and other enhanced communication
services to and from wireless phones. Commercial Segment also
provides E9-1-1 call routing, mobile location-based
applications, and inter-carrier text message technology; that
is, customers use our software functionality through connections
to and from our network operations centers, paying us monthly
fees based on the number of subscribers, cell sites, call center
circuits, or message volume. We also provide hosted services
under contracts with wireless carrier networks, as well as VoIP
service providers.
Our Government Segment provides communication systems
integration, information technology services, and software
solutions to the U.S. Department of Defense and other
government customers. We also own and operate secure satellite
teleport facilities, and resell access to satellite airtime
(known as space segment.) We design, furnish, install and
operate wireless and data network communication systems,
including our SwiftLink deployable communication systems which
integrate high speed, satellite, and internet protocol
technology, with secure Government-approved cryptologic devices.
Management evaluates segment performance based on gross profit.
We do not maintain information regarding segment assets.
Accordingly, asset information by reportable segment is not
presented.
For the years ended December 31, 2009, 2008, and 2007,
respectively, our revenues include approximately $9,387, $8,598,
and $5,551 of revenues generated from customers outside of the
United States.
The following table sets forth results for our reportable
segments as of December 31, 2009. All revenues reported
below are from external customers. A reconciliation of segment
gross profit to net loss for the respective periods is also
included below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Comm.
|
|
|
Gvmt
|
|
|
Total
|
|
|
Comm.
|
|
|
Gvmt
|
|
|
Total
|
|
|
Comm.
|
|
|
Gvmt
|
|
|
Total
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
89,715
|
|
|
$
|
62,229
|
|
|
$
|
151,944
|
|
|
$
|
64,441
|
|
|
$
|
36,918
|
|
|
$
|
101,359
|
|
|
$
|
58,793
|
|
|
$
|
29,269
|
|
|
$
|
88,062
|
|
Systems
|
|
|
37,554
|
|
|
|
110,589
|
|
|
|
148,143
|
|
|
|
37,429
|
|
|
|
81,354
|
|
|
|
118,783
|
|
|
|
16,521
|
|
|
|
39,585
|
|
|
|
56,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
127,269
|
|
|
|
172,818
|
|
|
|
300,087
|
|
|
|
101,870
|
|
|
|
118,272
|
|
|
|
220,142
|
|
|
|
75,314
|
|
|
|
68,854
|
|
|
|
144,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services
|
|
|
35,318
|
|
|
|
48,804
|
|
|
|
84,122
|
|
|
|
32,402
|
|
|
|
29,192
|
|
|
|
61,594
|
|
|
|
29,346
|
|
|
|
22,815
|
|
|
|
52,161
|
|
Direct cost of systems
|
|
|
10,608
|
|
|
|
91,503
|
|
|
|
102,111
|
|
|
|
8,993
|
|
|
|
68,298
|
|
|
|
77,291
|
|
|
|
5,024
|
|
|
|
32,882
|
|
|
|
37,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Direct Costs
|
|
|
45,926
|
|
|
|
140,307
|
|
|
|
186,233
|
|
|
|
41,395
|
|
|
|
97,490
|
|
|
|
138,885
|
|
|
|
34,370
|
|
|
|
55,697
|
|
|
|
90,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services gross profit
|
|
|
54,397
|
|
|
|
13,425
|
|
|
|
67,822
|
|
|
|
32,039
|
|
|
|
7,726
|
|
|
|
39,765
|
|
|
|
29,447
|
|
|
|
6,454
|
|
|
|
35,901
|
|
Systems gross profit
|
|
|
26,946
|
|
|
|
19,086
|
|
|
|
46,032
|
|
|
|
28,436
|
|
|
|
13,056
|
|
|
|
41,492
|
|
|
|
11,497
|
|
|
|
6,703
|
|
|
|
18,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit
|
|
$
|
81,343
|
|
|
$
|
32,511
|
|
|
$
|
113,854
|
|
|
$
|
60,475
|
|
|
$
|
20,782
|
|
|
$
|
81,257
|
|
|
$
|
40,944
|
|
|
$
|
13,157
|
|
|
$
|
54,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Total segment gross profit
|
|
$
|
113,854
|
|
|
$
|
81,257
|
|
|
$
|
54,101
|
|
Research and development expense
|
|
|
(22,351
|
)
|
|
|
(16,161
|
)
|
|
|
(13,072
|
)
|
Sales and marketing expense
|
|
|
(15,967
|
)
|
|
|
(13,715
|
)
|
|
|
(11,917
|
)
|
General and administrative expense
|
|
|
(35,387
|
)
|
|
|
(28,238
|
)
|
|
|
(19,334
|
)
|
Depreciation and amortization of property and equipment
|
|
|
(6,035
|
)
|
|
|
(5,865
|
)
|
|
|
(6,200
|
)
|
Amortization of acquired intangible assets
|
|
|
(870
|
)
|
|
|
(147
|
)
|
|
|
(148
|
)
|
Interest expense
|
|
|
(1,794
|
)
|
|
|
(922
|
)
|
|
|
(1,776
|
)
|
Amortization of debt discount and debt issuance expenses,
including $2,458 write-off in 2007
|
|
|
(401
|
)
|
|
|
(180
|
)
|
|
|
(3,176
|
)
|
Patent-related gains, net of expenses
|
|
|
15,700
|
|
|
|
8,060
|
|
|
|
|
|
(Provision)/benefit for income taxes
|
|
|
(18,795
|
)
|
|
|
33,257
|
|
|
|
|
|
Other income, net
|
|
|
315
|
|
|
|
222
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations
|
|
|
28,269
|
|
|
|
57,568
|
|
|
|
(1,014
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
28,269
|
|
|
$
|
57,568
|
|
|
$
|
(1,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.
|
Quarterly
Financial Information (Unaudited)
|
The following is a summary of the quarterly results of
operations for the years ended December 31, 2009 and 2008.
The quarterly information has not been audited, but in our
opinion, includes all normal recurring adjustments, which are,
in the opinion of the Management, necessary for fair statement
of the results of the interim periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
Three Months Ended
|
|
|
|
(unaudited)
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Revenue
|
|
$
|
70,501
|
|
|
$
|
67,136
|
|
|
$
|
71,609
|
|
|
$
|
90,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
25,244
|
|
|
$
|
30,050
|
|
|
$
|
28,211
|
|
|
$
|
30,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,867
|
|
|
$
|
6,606
|
|
|
$
|
5,411
|
|
|
$
|
11,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic
|
|
$
|
0.11
|
|
|
$
|
0.14
|
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted
|
|
$
|
0.10
|
|
|
$
|
0.13
|
|
|
$
|
0.10
|
|
|
$
|
0.20
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Note that in calculating 2009 diluted earnings per share
requires adding to net income the interest expense, net of
taxes, of $0.4 million associated with the 4.5% convertible
senior notes. |
F-32
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Three Months Ended
|
|
|
|
(unaudited)
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Revenue
|
|
$
|
40,413
|
|
|
$
|
43,911
|
|
|
$
|
56,531
|
|
|
$
|
79,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
19,564
|
|
|
$
|
19,212
|
|
|
$
|
17,457
|
|
|
$
|
25,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations
|
|
$
|
4,618
|
|
|
$
|
11,965
|
|
|
$
|
2,757
|
|
|
$
|
38,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic
|
|
$
|
0.11
|
|
|
$
|
0.28
|
|
|
$
|
0.06
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted
|
|
$
|
0.11
|
|
|
$
|
0.26
|
|
|
$
|
0.06
|
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.
|
Commitments and
Contingencies
|
The Company has been notified that some customers may seek
indemnification under its contractual arrangements with those
customers for costs associated with defending lawsuits alleging
infringement of certain patents through the use of our products
and services in combination with the use of products and
services of multiple other vendors. The Company will continue to
negotiate with these customers in good faith because the Company
believes its technology does not infringe on the cited patents
and due to specific clauses within the customer contractual
arrangements that may or may not give rise to an indemnification
obligation. Although the Company cannot currently predict the
outcome of these matters, we do not expect the resolutions will
have a material effect on our consolidated results of
operations, financial position or cash flows.
In November 2001, a shareholder class action lawsuit was filed
against us, certain of our current officers and a director, and
several investment banks that were the underwriters of our
initial public offering (the Underwriters):
Highstein v. TeleCommunication Systems, Inc., et al.,
United States District Court for the Southern District of New
York, Civil Action
No. 01-CV-9500.
The plaintiffs seek an unspecified amount of damages. The
lawsuit purports to be a class action suit filed on behalf of
purchasers of our Class A Common Stock during the period
August 8, 2000 through December 6, 2000. The
plaintiffs allege that the Underwriters agreed to allocate our
Class A Common Stock offered for sale in our initial public
offering to certain purchasers in exchange for excessive and
undisclosed commissions and agreements by those purchasers to
make additional purchases of our Class A Common Stock in
the aftermarket at pre-determined prices. The plaintiffs allege
that all of the defendants violated Sections 11, 12 and 15
of the Securities Act, and that the underwriters violated
Section 10(b) of the Exchange Act, and
Rule 10b-5
promulgated thereunder. The claims against us of violation of
Rule 10b-5
have been dismissed with the plaintiffs having the right to
re-plead. On February 15, 2005, the District Court issued
an Order preliminarily approving a settlement agreement among
class plaintiffs, all issuer defendants and their insurers,
provided that the parties agree to a modification narrowing the
scope of the bar order set forth in the settlement agreement.
The parties agreed to a modification narrowing the scope of the
bar order, and on August 31, 2005, the court issued an
order preliminarily approving the settlement. On
December 5, 2006, the United States Court of Appeals for
the Second Circuit overturned the District Courts
certification of the class of plaintiffs who are pursuing the
claims that would be settled in the settlement against the
underwriter defendants. Plaintiffs filed a Petition for
Rehearing and Rehearing En Banc with the Second Circuit on
January 5, 2007 in response to the Second Circuits
decision. On April 6, 2007, the Second Circuit denied
plaintiffs rehearing petition, but clarified that the
plaintiffs may seek to certify a more limited class in the
District Court. On June 25, 2007, the District Court signed
an Order terminating the settlement. On November 13, 2007,
the issuer defendants in certain designated focus
cases filed a motion to dismiss the second consolidated
amended class action complaints that were filed in those cases.
On March 26, 2008, the District Court issued an Opinion and
Order denying, in large part, the motions to dismiss the amended
complaints in the focus cases. On April 2,
2009, the plaintiffs filed a motion for preliminary approval of
a new proposed settlement between plaintiffs, the underwriter
defendants, the issuer defendants and the insurers for the
issuer defendants. On
F-33
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
June 10, 2009, the Court issued an opinion preliminarily
approving the proposed settlement, and scheduling a settlement
fairness hearing for September 10, 2009. On August 25,
2009, the plaintiffs filed a motion for final approval of the
proposed settlement, approval of the plan of distribution of the
settlement fund, and certification of the settlement classes. A
settlement fairness hearing was held on September 10, 2009.
On October 5, 2009, the Court issued an opinion granting
plaintiffs motion for final approval of the settlement,
approval of the plan of distribution of the settlement fund, and
certification of the settlement classes. We intend to continue
to defend the lawsuit until the matter is resolved. We have
purchased a Directors and Officers insurance policy which we
believe should cover any potential liability that may result
from these laddering class action claims, but can provide no
assurance that any or all of the costs of the litigation will
ultimately be covered by the insurance. No reserve has been
created for this matter. More than 300 other companies have been
named in nearly identical lawsuits that have been filed by some
of the same law firms that represent the plaintiffs in the
lawsuit against us.
On July 12, 2006, we filed suit in the United States
District Court for the Eastern District of Virginia against
Mobile 365 (now Sybase 365, a subsidiary of Sybase Inc.) and
WiderThan Americas for patent infringement related to
U.S. patent No. 6,985,748, Inter-Carrier Short
Messaging Service Providing Phone Number Only Experience
(the 748 patent), issued to the Company. We
resolved the matter with regard to WiderThan Americas, and,
during the second quarter of 2007, we received a favorable jury
decision that Sybase 365 infringed the claims of our patent. The
jury awarded us a one-time monetary payment in excess of
$10 million for past damages and a 12% royalty. The jury
also found Sybase 365s infringement willful and upheld the
validity of the patent. After the jury verdict, both parties
filed post-trial motions. The court denied Sybase 365s
post-trial motion for a new trial or a judgment in its favor,
granted our motion for a permanent injunction prohibiting any
further infringement by Sybase 365, but stayed the injunction
pending the outcome of any appeal that may be filed, reduced the
jury verdict damages award by $2.2 million and vacated the
jury finding of willful infringement. Sybase filed an appeal
from the final judgment of the district court to U.S. Court
of Appeals for the Federal Circuit. In the first quarter of
2008, Sybase 365 filed a request for reexamination of the
748 patent claiming that the patent is invalid. In the
second quarter of 2008, the United States Patent and Trademark
Office granted the request and began the requested reexamination
of the 748 patent.
On July 30, 2009, we filed suit in the United States
District Court for the Eastern District of Virginia against
Sybase 365, Inc., a subsidiary of Sybase Inc., for patent
infringement related to U.S. patent No. 7,460,425,
Inter-Carrier Digital Message with User Data Payload Service
Providing Phone Number Only Experience, which is related to the
patents subject to the prior jury award against Sybase 365. On
December 22, 2009, we entered into an agreement with Sybase
under which Sybase paid us a one-time amount of $23 million
in exchange for a license to the Inter-Carrier Messaging family
of patents. The court entered a Dismissal Order on
January 8, 2010 and both cases were finally resolved.
On July 30, 2009, we filed suit in the United States
District Court for the Eastern District of Virginia against
Sybase 365, Inc., a subsidiary of Sybase Inc., for infringement
related to U.S. patent Nos. 6,891,811, Short Message
Service Center Mobile-Originated to Internet Communications, and
7,355,990, Mobile-Originated to HTTP Internet Communications, on
technology for permitting two-way communication of short
messages between an SMSC or wireless device and an HTTP device
or Universal Resource Locator (URL). Sybase 365 has filed
requests for reexamination of these patents claiming that the
patents are invalid.
On August 19, 2009, we filed suit in the United States
District Court for the District of Delaware against Sybase, Inc
and iAnywhere Solutions, Inc, a subsidiary of Sybase, Inc., for
patent infringement related to U.S. patent
No. 6,560,604, entitled System, Method, and Apparatus
for Automatically and Dynamically Updating Options, Features,
and/or
Services Available to Client Device, on technologies
permitting automatic initialization, configuration and updating
of client devices
over-the-air
(O-T-A) and other technology-based products,
services and systems that offer the automatic O-T-A
initialization, configuration and updating capability.
F-34
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
(amounts in
thousands, except share and per share data)
There can be no assurances to what extent these matters will be
successful, if at all. Additionally, we could become subject to
counterclaims or further challenges to the validity of the
patents.
On October 2, 2009, Sybase 365 LLC filed suit against us in
the United States District Court for the Eastern District of
Virginia, for patent infringement related to U.S. patent
No. 5,873,040, entitled Wireless 911 Emergency
Location on technology integrating wireless emergency 911
communications into a wireless voice network, and
U.S. patent No. 7,082,312, entitled, Short
Message Gateway, System and Method of Providing Information
Service for Mobile Telephones on technology permitting the
provision of location-based information service for mobile
telephones. We are reviewing the allegations made in
Sybases complaint and intend to defend the lawsuit
vigorously. No reserve has been created for this matter.
Other than the items discussed immediately above, we are not
currently subject to any other material legal proceedings.
However, we may from time to time become a party to various
legal proceedings arising in the ordinary course of our business.
|
|
24.
|
Related Party
Transactions
|
In February 2003, we entered into an agreement with Annapolis
Partners LLC to explore the opportunity of relocating our
Annapolis offices to a planned new real estate development. Our
President and Chief Executive Officer owns a controlling voting
and economic interest in Annapolis Partners LLC and he also
serves as a member. The financial and many other terms of the
agreement have not yet been established. The lease is subject to
several contingencies and rights of termination. For example,
the agreement can be terminated at the sole discretion of our
Board of Directors if the terms and conditions of the
development are unacceptable to us, including without limitation
the circumstances that market conditions make the agreement not
favorable to us or the overall cost is not in the best interest
to us or our shareholders, or any legal or regulatory
restrictions apply. Our Board of Directors will evaluate this
opportunity along with alternatives that are or may become
available in the relevant time periods and there is no assurance
that we will enter into a definitive agreement at this new
development site.
F-35
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TeleCommunication Systems, Inc.
Maurice B. Tosé
Chief Executive Officer, President and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated. The undersigned hereby constitute and appoint
Maurice B. Tosé, Thomas M. Brandt, Jr. and Bruce A.
White, and each of them, their true and lawful agents and
attorneys-in-fact with full power and authority in said agents
and attorneys-in-fact, and in any one or more of them, to sign
for the undersigned and in their respective names as directors
and officers of TeleCommunication Systems, any amendment or
supplement hereto. The undersigned hereby confirm all acts taken
by such agents and attorneys-in-fact, and any one or more of
them, as herein authorized
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
/s/ Maurice
B. Tosé
Maurice
B. Tosé
|
|
Chief Executive Officer, President and Chairman of the Board
(Principal Executive Officer)
|
|
March 8, 2010
|
/s/ Thomas
M. Brandt, Jr.
Thomas
M. Brandt, Jr.
|
|
Chief Financial Officer and Senior Vice President (Principal
Financial Officer) and Director
|
|
March 8, 2010
|
/s/ James
M. Bethmann
James
M. Bethmann
|
|
Director
|
|
March 8, 2010
|
/s/ Clyde
A. Heintzelman
Clyde
A. Heintzelman
|
|
Director
|
|
March 8, 2010
|
/s/ Jan
C. Huly
Jan
C. Huly
|
|
Director
|
|
March 8, 2010
|
/s/ Richard
A. Kozak
Richard
A. Kozak
|
|
Director
|
|
March 8, 2010
|
/s/ Weldon
H. Latham
Weldon
H. Latham
|
|
Director
|
|
March 8, 2010
|
/s/ Richard
A. Young
Richard
A. Young
|
|
Executive Vice President, Chief Operating Officer and Director
|
|
March 8, 2010
|
65
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Numbers
|
|
Description
|
|
|
4
|
.1
|
|
Amended and Restated Articles of Incorporation. (Incorporated by
reference to the companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004)
|
|
4
|
.2
|
|
Second Amended and Restated Bylaws. (Incorporated by reference
to the Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004)
|
|
4
|
.3
|
|
Form of Class A Common Stock certificate. (Incorporated by
reference to the Companys Registration Statement on
Form S-1
(No. 333-35522))
|
|
4
|
.4
|
|
Indenture dated as of November 16, 2009, by and between the
Company and The Bank of New York Mellon Trust Company, as
Trustee (Incorporated by reference to the Companys Current
Report on
Form 8-K
filed on November 16, 2009)
|
|
10
|
.1
|
|
West Garrett Office Building Full service Lease Agreement dated
October 1, 1997 by and between the Company and West Garrett
Joint Venture. (Incorporated by reference to the Companys
Registration Statement on
Form S-1
(No. 333-35522))
|
|
10
|
.2
|
|
Form of Indemnification Agreement. (Incorporated by reference to
the Companys Registration Statement on
Form S-1
(No. 333-35522))
|
|
10
|
.3
|
|
Fourth Amended and Restated 1997 Stock Incentive Plan.
(Incorporated by reference to Appendix A to the
Companys definitive proxy statement for its 2004 Annual
Meeting of stockholders as filed with the SEC on June 17,
2004
(No. 000-30821))
|
|
10
|
.4
|
|
First Amended and Restated Employee Stock Purchase Plan.
(Incorporated by reference to the Companys Registration
Statement on Form S-8
(No. 333-136072))
|
|
10
|
.5
|
|
401(k) and Profit Sharing Plan of the Company dated
January 1, 1999. (Incorporated by reference to the
Companys Registration Statement on
Form S-4
(No. 333-51656))
|
|
10
|
.6
|
|
Deed of Lease by and between Annapolis Partner, LLC and the
Company. (Incorporated by reference to the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2002)
|
|
10
|
.7
|
|
Form of Incentive Stock Option Agreement (Incorporated by
reference to the Companys Annual Report on
Form 10-K
for the year ended December 31, 2006)
|
|
10
|
.8
|
|
Form of Non-Qualified Stock Option Agreement (Incorporated by
reference to the Companys Annual Report on
Form 10-K
for the year ended December 31, 2006)
|
|
10
|
.9
|
|
Form of Restricted Stock Grant Agreement (Incorporated by
reference to the Companys Annual Report on
Form 10-K
for the year ended December 31, 2006)
|
|
10
|
.10
|
|
Fifth Amended and Restated 1997 Stock Incentive Plan.
(Incorporated by reference to Appendix A to the
Companys definitive proxy statement for its 2007 Annual
Meeting of stockholders as filed with the SEC on April 30,
2007
(No. 000-30821))
|
|
10
|
.11
|
|
Employment Agreement dated February 1, 2010, by and between
the Company and Richard A. Young
|
|
10
|
.12
|
|
Employment Agreement dated February 1, 2010, by and between
the Company and Thomas M. Brandt, Jr.
|
|
10
|
.13
|
|
Employment Agreement dated February 1, 2010, by and between
the Company and Drew A. Morin
|
|
10
|
.14
|
|
Employment Agreement dated February 1, 2010, by and between
the Company and Timothy J. Lorello
|
|
10
|
.15
|
|
Loan and Security Agreement by and between the Company and its
principal subsidiaries, Longhorn Acquisition, LLC, Solvern
Innovations, Inc., Quasar Acquisition, LLC, and Networks in
Motion, Inc., and Silicon Valley Bank (Incorporated by reference
to the Companys Current Report on
Form 8-K
filed January 7, 2010)
|
|
10
|
.16
|
|
Agreement and Plan of Merger dated November 25, 2009 by and
among the Company, Networks in Motion, Inc., Olympus Merger Sub
Inc., and G. Bradford Jones, as Stockholders
Representative (Incorporated by reference to the Companys
Current Report on
Form 8-K
filed December 15, 2009)
|
|
10
|
.17
|
|
Form of Twelve Month Note (Incorporated by reference to the
Companys Current Report on
Form 8-K
filed on December 15, 2009)
|
|
10
|
.18
|
|
Form of Indemnification Note (Incorporated by reference to the
Companys Current Report on
Form 8-K
filed on December 15, 2009)
|
66
|
|
|
|
|
Exhibit
|
|
|
Numbers
|
|
Description
|
|
|
10
|
.19
|
|
Purchase Agreement dated as of November 10, 2009, by and
among the Company and Oppenheimer & Co. Inc. and
Raymond James & Associates, Inc. (Incorporated by
reference to the Companys Current Report on
Form 8-K
filed on November 16, 2009)
|
|
10
|
.20
|
|
Convertible Bond Hedging Transaction Confirmation dated
November 10, 2010, by and between the Company and Deutsche
Bank AG, London Branch (Incorporated by reference to the
Companys Current Report on
Form 8-K
filed on November 16, 2009)
|
|
10
|
.21
|
|
Convertible Bond Hedging Transaction Confirmation dated
November 10, 2009, by and between the Company and
Société Générale (Incorporated by reference
to the Companys Current Report on
Form 8-K
filed on November 16, 2009)
|
|
10
|
.22
|
|
Convertible Bond Hedging Transaction Confirmation dated
November 10, 2009, by and between the Company and Royal
Bank of Canada (Incorporated by reference to the Companys
Current Report on
Form 8-K
filed on November 16, 2009)
|
|
10
|
.23
|
|
Confirmation of Warrants dated November 10, 2009, by and
between the Company and Deutsche Bank AG, London Branch
(Incorporated by reference to the Companys Current Report
on
Form 8-K
filed on November 16, 2009)
|
|
10
|
.24
|
|
Confirmation of Warrants dated November 10, 2009, by and
between the Company and Société Générale
(Incorporated by reference to the Companys Current Report
on
Form 8-K
filed on November 16, 2009)
|
|
10
|
.25
|
|
Confirmation of Warrants dated November 10, 2009, by and
between the Company and Royal Bank of Canada (Incorporated by
reference to the Companys Current Report on
Form 8-K
filed on November 16, 2009)
|
|
10
|
.26
|
|
Convertible Bond Hedging Transaction Confirmation dated
November 11, 2009, by and between the Company and Deutsche
Bank AG, London Branch (Incorporated by reference to the
Companys Current Report on
Form 8-K
filed on November 16, 2009)
|
|
10
|
.27
|
|
Convertible Bond Hedging Transaction Confirmation dated
November 11, 2009, by and between the Company and
Société Générale (Incorporated by reference
to the Companys Current Report on
Form 8-K
filed on November 16, 2009)
|
|
10
|
.28
|
|
Confirmation of Warrants dated November 11, 2009, by and
between the Company and Deutsche Bank AG, London Branch
(Incorporated by reference to the Companys Current Report
on
Form 8-K
filed on November 16, 2009)
|
|
10
|
.29
|
|
Confirmation of Warrants dated November 11, 2009, by and
between the Company and Société Générale
(Incorporated by reference to the Companys Current Report
on
Form 8-K
filed on November 16, 2009)
|
|
12
|
.1
|
|
Supplemental Financial Statement Schedule II
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
31
|
.1
|
|
Certification of CEO required by the Securities and Exchange
Commission
Rule 13a-14(a)
or 15d-14(a)
|
|
31
|
.2
|
|
Certification of CFO required by the Securities and Exchange
Commission
Rule 13a-14(a)
or 15d-14(a)
|
|
32
|
.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
32
|
.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
Management contract, compensatory plans or arrangement required
to be filed as an exhibit pursuant to Item 15(a)(3) of
Form 10-K. |
67