SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarter ended September 30, 2010
OR
|
|
|
|
|
TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Commission File No. 0-30821
TELECOMMUNICATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
|
|
|
MARYLAND
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
52-1526369
(I.R.S. Employer Identification No.)
|
|
|
|
275 West Street, Annapolis, MD
(Address of principal executive offices)
|
|
21401
(Zip Code)
|
(410) 263-7616
(Registrants telephone number, including area code)
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):
|
|
|
|
|
|
|
Large accelerated filer
o
|
|
Accelerated filer
þ
|
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act): Yes
o
No
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
|
|
|
|
|
|
|
Shares outstanding
|
|
|
|
as of October 31,
|
|
Title of Each Class
|
|
2010
|
|
Class A Common Stock, par value
$0.01 per share
|
|
|
47,180,810
|
|
Class B Common Stock, par value
$0.01 per share
|
|
|
6,016,334
|
|
|
|
|
|
Total Common Stock Outstanding
|
|
|
53,197,144
|
|
|
|
|
|
INDEX
TELECOMMUNICATION SYSTEMS, INC.
2
TeleCommunication Systems, Inc.
Consolidated Statements of Income
(amounts in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
66,195
|
|
|
$
|
39,300
|
|
|
$
|
189,468
|
|
|
$
|
104,518
|
|
Systems
|
|
|
36,754
|
|
|
|
32,309
|
|
|
|
97,060
|
|
|
|
104,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
102,949
|
|
|
|
71,609
|
|
|
|
286,528
|
|
|
|
209,246
|
|
Direct costs of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services revenue
|
|
|
38,977
|
|
|
|
21,245
|
|
|
|
109,195
|
|
|
|
58,434
|
|
Direct cost of systems revenue, including
amortization of software development costs of
$2,327, $781, $6,934 and $2,103, respectively
|
|
|
27,233
|
|
|
|
22,153
|
|
|
|
73,857
|
|
|
|
67,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct cost of revenue
|
|
|
66,210
|
|
|
|
43,398
|
|
|
|
183,052
|
|
|
|
125,741
|
|
Services gross profit
|
|
|
27,218
|
|
|
|
18,055
|
|
|
|
80,273
|
|
|
|
46,084
|
|
Systems gross profit
|
|
|
9,521
|
|
|
|
10,156
|
|
|
|
23,203
|
|
|
|
37,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
|
36,739
|
|
|
|
28,211
|
|
|
|
103,476
|
|
|
|
83,505
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
7,523
|
|
|
|
5,823
|
|
|
|
22,612
|
|
|
|
15,612
|
|
Sales and marketing expense
|
|
|
5,988
|
|
|
|
3,579
|
|
|
|
17,934
|
|
|
|
11,742
|
|
General and administrative expense
|
|
|
10,060
|
|
|
|
7,665
|
|
|
|
28,324
|
|
|
|
22,955
|
|
Depreciation and amortization of property and equipment
|
|
|
2,572
|
|
|
|
1,571
|
|
|
|
6,805
|
|
|
|
4,459
|
|
Amortization of acquired intangible assets
|
|
|
1,161
|
|
|
|
222
|
|
|
|
3,504
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
27,304
|
|
|
|
18,860
|
|
|
|
79,179
|
|
|
|
55,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9,435
|
|
|
|
9,351
|
|
|
|
24,297
|
|
|
|
28,356
|
|
Interest expense
|
|
|
(2,299
|
)
|
|
|
(371
|
)
|
|
|
(6,888
|
)
|
|
|
(784
|
)
|
Amortization of debt discount and debt issuance expenses
|
|
|
(187
|
)
|
|
|
(16
|
)
|
|
|
(563
|
)
|
|
|
(74
|
)
|
Other income, net
|
|
|
996
|
|
|
|
43
|
|
|
|
1,981
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7,945
|
|
|
|
9,007
|
|
|
|
18,827
|
|
|
|
27,825
|
|
Provision for income taxes
|
|
|
(3,623
|
)
|
|
|
(3,596
|
)
|
|
|
(6,400
|
)
|
|
|
(10,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,322
|
|
|
$
|
5,411
|
|
|
$
|
12,427
|
|
|
$
|
16,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-basic
|
|
$
|
0.08
|
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-diluted
|
|
$
|
0.08
|
|
|
$
|
0.10
|
|
|
$
|
0.22
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic
|
|
|
53,127
|
|
|
|
48,233
|
|
|
|
52,902
|
|
|
|
46,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding- diluted
|
|
|
64,573
|
|
|
|
52,862
|
|
|
|
66,068
|
|
|
|
51,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
3
TeleCommunication Systems, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
82,176
|
|
|
$
|
61,426
|
|
Marketable securities
|
|
|
30,641
|
|
|
|
|
|
Accounts receivable, net of allowance of $427 in 2010 and
$389 in 2009
|
|
|
62,479
|
|
|
|
65,476
|
|
Unbilled receivables
|
|
|
28,156
|
|
|
|
23,783
|
|
Inventory
|
|
|
8,612
|
|
|
|
9,331
|
|
Deferred income taxes
|
|
|
6,992
|
|
|
|
9,507
|
|
Receivable from settlement of patent matter
|
|
|
|
|
|
|
15,700
|
|
Income tax refund receivable
|
|
|
|
|
|
|
5,438
|
|
Other current assets
|
|
|
6,090
|
|
|
|
8,945
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
225,146
|
|
|
|
199,606
|
|
Property and equipment, net of accumulated depreciation and
amortization of $53,743 in 2010 and $46,960 in 2009
|
|
|
36,330
|
|
|
|
20,734
|
|
Software development costs, net of accumulated amortization of
$16,875 in 2010 and $9,941 in 2009
|
|
|
40,086
|
|
|
|
45,384
|
|
Acquired intangible assets, net of accumulated amortization of
$5,030 in 2010 and $1,526 in 2009
|
|
|
29,424
|
|
|
|
33,975
|
|
Goodwill
|
|
|
168,212
|
|
|
|
164,350
|
|
Other assets
|
|
|
8,120
|
|
|
|
8,176
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
507,318
|
|
|
$
|
472,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
51,064
|
|
|
$
|
52,999
|
|
Accrued payroll and related liabilities
|
|
|
14,550
|
|
|
|
19,265
|
|
Deferred
revenue
|
|
|
22,853
|
|
|
|
9,938
|
|
Current portion of capital lease obligations and notes
payable
|
|
|
49,185
|
|
|
|
39,731
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
137,652
|
|
|
|
121,933
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations and notes payable, less current
portion
|
|
|
143,707
|
|
|
|
143,316
|
|
Deferred income taxes
|
|
|
14,075
|
|
|
|
15,435
|
|
Other long-term liability
|
|
|
3,374
|
|
|
|
5,755
|
|
Stockholders
equity:
|
|
|
|
|
|
|
|
|
Class A Common Stock; $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized shares - 225,000,000; issued
and outstanding
shares of 47,156,997 in 2010 and
46,157,025 in 2009
|
|
|
472
|
|
|
|
462
|
|
Class B Common Stock; $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized shares - 75,000,000; issued
and outstanding shares
of 6,016,334 in 2010 and 6,276,334 in
2009
|
|
|
60
|
|
|
|
63
|
|
Additional paid-in capital
|
|
|
293,966
|
|
|
|
283,733
|
|
Accumulated other comprehensive income
|
|
|
69
|
|
|
|
12
|
|
Accumulated deficit
|
|
|
(86,057
|
)
|
|
|
(98,484
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
208,510
|
|
|
|
185,786
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity
|
|
$
|
507,318
|
|
|
$
|
472,225
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
4
TeleCommunication Systems, Inc.
Consolidated Statement of Stockholders Equity
(amounts in thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Total
|
|
Balance at January 1, 2010
|
|
$
|
462
|
|
|
$
|
63
|
|
|
$
|
283,733
|
|
|
$
|
12
|
|
|
$
|
(98,484
|
)
|
|
$
|
185,786
|
|
Options exercised for the purchase of 554,108 shares
of Class A Common Stock
|
|
|
5
|
|
|
|
|
|
|
|
1,903
|
|
|
|
|
|
|
|
|
|
|
|
1,908
|
|
Issuance of 185,764 shares of Class A Common Stock
under Employee Stock Purchase Plan
|
|
|
2
|
|
|
|
|
|
|
|
895
|
|
|
|
|
|
|
|
|
|
|
|
897
|
|
Conversion of 260,000 shares of Class B Common Stock
to Class A Common Stock
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of 15,107 Restricted Class A Common
Stock
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
7,418
|
|
|
|
|
|
|
|
|
|
|
|
7,418
|
|
Net unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
56
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Net income for the nine-months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,427
|
|
|
|
12,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
472
|
|
|
$
|
60
|
|
|
$
|
293,966
|
|
|
$
|
69
|
|
|
$
|
(86,057
|
)
|
|
$
|
208,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
5
TeleCommunication Systems, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
12,427
|
|
|
$
|
16,884
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
6,805
|
|
|
|
4,459
|
|
Amortization of acquired intangible assets
|
|
|
3,504
|
|
|
|
381
|
|
Amortization of software development costs
|
|
|
6,934
|
|
|
|
2,103
|
|
Deferred tax provision
|
|
|
6,400
|
|
|
|
9,987
|
|
Stock-based compensation expense
|
|
|
7,418
|
|
|
|
3,546
|
|
Impairment of capitalized software
|
|
|
|
|
|
|
763
|
|
Amortization of debt discount and debt issuance expenses
|
|
|
563
|
|
|
|
74
|
|
Impairment of marketable securities
|
|
|
225
|
|
|
|
15
|
|
Amortization of discount on marketable securities
|
|
|
121
|
|
|
|
|
|
Other non-cash adjustments
|
|
|
87
|
|
|
|
37
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
2,853
|
|
|
|
19,390
|
|
Unbilled receivables
|
|
|
(4,577
|
)
|
|
|
117
|
|
Inventory
|
|
|
719
|
|
|
|
(6,164
|
)
|
Other current assets
|
|
|
21,962
|
|
|
|
54
|
|
Other assets
|
|
|
(169
|
)
|
|
|
(2,739
|
)
|
Accounts payable and accrued expenses
|
|
|
(4,589
|
)
|
|
|
(7,849
|
)
|
Accrued payroll and related liabilities
|
|
|
(5,601
|
)
|
|
|
(4,844
|
)
|
Other liabilities
|
|
|
(2,816
|
)
|
|
|
|
|
Deferred revenue
|
|
|
12,915
|
|
|
|
5,334
|
|
|
|
|
|
|
|
|
Subtotal Changes in operating assets and liabilities
|
|
|
20,697
|
|
|
|
3,299
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
65,181
|
|
|
|
41,548
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(30,706
|
)
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
|
|
|
|
(15,000
|
)
|
Purchases of property and equipment
|
|
|
(14,541
|
)
|
|
|
(937
|
)
|
Capitalized software development costs
|
|
|
(3,973
|
)
|
|
|
(823
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(49,220
|
)
|
|
|
(16,760
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
10,000
|
|
|
|
20,000
|
|
Payments on long-term debt and capital lease obligations
|
|
|
(8,015
|
)
|
|
|
(10,224
|
)
|
Proceeds from exercise of warrants
|
|
|
|
|
|
|
1,680
|
|
Proceeds from exercise of employee stock options and sale of stock
|
|
|
2,805
|
|
|
|
4,075
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,790
|
|
|
|
15,531
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
20,751
|
|
|
|
40,319
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
61,425
|
|
|
|
38,977
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
82,176
|
|
|
$
|
79,296
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
6
TeleCommunication Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2010
(amounts in thousands, except per share amounts)
(unaudited)
1.
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three- and nine-months ended September 30, 2010 are not
necessarily indicative of the results that may be expected for the year ended December 31, 2010.
These consolidated financial statements should be read in conjunction with our audited financial
statements and related notes included in our 2009 Annual Report on Form 10-K. The terms TCS,
we, us and our as used in this Form 10-Q 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.
Use of Estimates.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts and related disclosures. Actual results could differ from those estimates.
Marketable Securities.
The Companys marketable securities are classified as
available-for-sale. The Companys primary objectives when investing are to preserve principal,
maintain liquidity, and obtain higher yield. The Companys intent is not specifically to invest and
hold securities with longer term maturities. The Company has the ability and intent, if necessary,
to liquidate any of these investments in order to meet the Companys operating needs within the
next twelve months. The securities are carried at fair market value based on quoted market price
with net unrealized gains and losses in stockholders equity as a component of accumulated other
comprehensive income. If the Company determines that a decline in fair value of the marketable
securities is other than temporary, a realized loss would be recognized in earnings. Gains or
losses on securities sold are based on the specific identification method and are recognized in
earnings, see Note 7.
Goodwill.
Goodwill represents the excess of cost over the fair value of assets of acquired
businesses. Goodwill is not amortized, but instead is evaluated annually for impairment using a
discounted cash flow model and other measurements of fair value such as market comparable
transactions, etc. The authoritative guidance for the goodwill impairment model includes a two-step
process. First, it requires a comparison of the book value of net assets to the fair value of the
reporting units that have goodwill assigned to them. If the fair value is determined to be less
than the book value, a second step is performed to compute the amount of the impairment. In the
second step, a fair value for goodwill is estimated, based in part on the fair value of the
reporting unit used in the first step, and is compared to its carrying value. The shortfall of the
fair value below carrying value, if any, represents the amount of goodwill impairment.
The Company assesses goodwill for impairment in the fourth quarter of each fiscal year, or
sooner should there be an indicator of impairment. The Company periodically analyzes whether any
such indicators of impairment exist. A significant amount of judgment is involved in determining if
an indicator of impairment has occurred. Such indicators include a sustained, significant decline
in the Companys stock price and market capitalization, a decline in the Companys expected future
cash flows, a significant adverse change in legal factors or in the business climate, unanticipated
competition, and/or slower growth rate, among others. As of September 30, 2010, the Company has not
identified any indicators of impairment with respect to its goodwill.
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 foreign subsidiary are included as a component of accumulated other
comprehensive income in stockholders equity. Also included are any unrealized gains or losses on
marketable securities that are classified as available-for-sale.
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 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. Funds of $1.1 million are included in Other assets and funds
7
of $1.0 million are included in Other long-term liability on the Consolidated Balance Sheet.
Company contributions were made to the plan in 2009, but not in 2010.
Stock-Based Compensation.
We have two stock-based employee compensation plans: our Amended
and Restated Stock Incentive Plan (the Stock Incentive Plan) and our Second Amended and Restated
Employee Stock Purchase Plan (the ESPP). In the past, we have issued restricted stock to
directors and certain executives. We record compensation expense for all stock-based compensation
plans using the fair value method prescribed by Financial Accounting Standards Board (the FASB)
Accounting Standards Codification (ASC) 718-10. Our stock-based compensation expense has been
allocated to direct cost of revenue, research and development expense, sales and marketing expense,
and general and administrative expense as detailed in Note 3.
Earnings per share.
Basic income per common share is based upon the average number of shares
of common stock outstanding during the period. Stock options to purchase approximately 11.1 million
shares for the three-months ended September 30, 2010 and 7.8 million shares for the nine-months
ended September 30, 2010, and approximately 2.1 million shares for both the three- and nine-months
ended September 30, 2009 were excluded from the computation of diluted net income per share because
their inclusion would have been anti-dilutive. A reconciliation of basic to diluted weighted
average common shares outstanding is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, basic
|
|
$
|
4,322
|
|
|
$
|
5,411
|
|
|
$
|
12,427
|
|
|
$
|
16,884
|
|
Adjustment for assumed dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible debt, net of taxes
|
|
|
757
|
|
|
|
|
|
|
|
2,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, diluted
|
|
$
|
5,079
|
|
|
$
|
5,411
|
|
|
$
|
14,664
|
|
|
$
|
16,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic weighted-average common shares outstanding
|
|
|
53,127
|
|
|
|
48,233
|
|
|
|
52,902
|
|
|
|
46,865
|
|
Effect of dilutive stock options based on treasury stock method
|
|
|
1,444
|
|
|
|
4,629
|
|
|
|
3,164
|
|
|
|
4,939
|
|
Effect of dilutive 4.5% convertible debt, based on if converted method
|
|
|
10,002
|
|
|
|
|
|
|
|
10,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares
|
|
|
64,573
|
|
|
|
52,862
|
|
|
|
66,068
|
|
|
|
51,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
0.08
|
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-diluted
|
|
$
|
0.08
|
|
|
$
|
0.10
|
|
|
$
|
0.22
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
The Company recognizes the benefits of tax positions in the financial statements which 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 September 30, 2010, we had unrecognized tax benefits totaling
approximately $1.7 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.
Recent Accounting Pronouncements.
In October 2009, the FASB issued Accounting Standards Update (ASU) 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 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
8
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.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures:
Improving Disclosures about Fair Value Measurements. This update requires additional disclosures
and clarifies existing disclosure requirements about fair value measurement as set forth in ASC
Topic 820, Fair Value Measurements and Disclosures. We implemented the new disclosures and
clarifications of existing disclosure requirements under ASU 2010-06 effective with the first
quarter of 2010, except for certain disclosure requirements regarding activity in Level 3 fair
value measurements which are effective for fiscal years beginning after December 15, 2010.
In February 2010, the FASB issued ASU No. 2010-09, Amendments to Certain Recognition and
Disclosure Requirements, which is included in the FASB ASC Topic 855 (Subsequent Events). ASU
2010-09 clarifies that an SEC filer is required to evaluate subsequent events through the date that
the financial statements are issued. ASU 2010-09 is effective upon the issuance of the final update
and did not have a significant impact on the Companys financial statements.
2. Acquisitions
During 2009 the Company acquired four businesses. These acquisitions were accounted for using
the acquisition method; accordingly, their total estimated purchase prices were allocated to the
net tangible and intangible assets acquired and liabilities assumed, based on their estimated fair
values as of the effective dates of the acquisitions. The 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.
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 our commercial services. 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 following table summarizes the final purchase price allocation of the fair values of the
assets acquired and liabilities assumed at the date of the acquisition:
|
|
|
|
|
Assets:
|
|
|
|
|
Accounts receivable, net
|
|
$
|
145
|
|
Unbilled accounts receivable
|
|
|
1,081
|
|
Other current assets
|
|
|
205
|
|
Property and equipment
|
|
|
865
|
|
Acquired technology and software development costs
|
|
|
3,703
|
|
Acquired intangible assets
|
|
|
8,720
|
|
Goodwill
|
|
|
12,206
|
|
|
|
|
|
Total assets
|
|
|
26,925
|
|
Liabilities:
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
1,273
|
|
Accrued payroll and related liabilities
|
|
|
325
|
|
|
|
|
|
Total liabilities
|
|
|
1,598
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
25,327
|
|
|
|
|
|
On November 3, 2009, the Company 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. 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
our government services. Consideration for the purchase of the Sidereal assets 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.
9
The total estimated purchase price for the three acquisitions described above was $70 million.
Approximately $49 million was preliminarily allocated to goodwill, approximately $0.1 million for
other current and long-term assets net of liabilities, and $21 million to acquired definite-lived
intangible assets, consisting of the value assigned to customer relationships of $3.7 million for
LocationLogic, $7.3 million for Solvern and $2.0 million for Sidereal and developed technology of
$8.7 million classified as capitalized software development costs for LocationLogic.
We also completed the acquisition of Networks in Motion, Inc. (NIM) on December 15, 2009.
Pursuant to the merger agreement, TCS issued former NIM shareholders approximately $110 million in
cash, $40 million in promissory notes, and approximately 2.2 million shares of the Companys common
stock valued at $20 million. 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. For $20 million of the obligation due in December 2010, the Company has the
option to settle using common stock, but the Company currently plans to satisfy this debt for cash.
Of the total estimated NIM purchase price of $170 million, approximately $113.9 million was
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 and approximately
$1.6 million for other current and long-term assets, net of liabilities.
In May 2010, we made final adjustments to the preliminary purchase price allocations for
LocationLogic, detailed above. During the nine months ended September 30, 2010, we also made
adjustments to goodwill relating to the preliminary purchase price allocations for the other three
2009 acquisitions for $3.5 million. These adjustments were recorded as a result information not
initially available and primarily related to 2009 deferred tax asset adjustments and
indemnification costs relating to pre-acquisition third-party intellectual claims. 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. The measurement
period is not to exceed 12 months from the acquisition dates.
The unaudited pro forma financial information for the three and nine-months ended September
30, 2009 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 2009.
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.
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 2009.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Pro forma information
|
|
2009
|
|
|
2009
|
|
Revenue
|
|
$
|
93,988
|
|
|
$
|
267,354
|
|
Net income
|
|
$
|
8,575
|
|
|
$
|
22,186
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.17
|
|
|
$
|
0.45
|
|
Diluted earnings per share
|
|
$
|
0.15
|
|
|
$
|
0.40
|
|
3.
Stock-Based Compensation
We recognize compensation expense net of estimated forfeitures over the requisite service
period for grants under our option plan, 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
10
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.
We also recognize non-cash stock-based compensation expense for restricted stock issued to
directors and certain key executives. The restrictions expire at the end of one year for directors
and expire in annual increments over three years for executives and are based on continued
employment. We had 53 shares and 30 shares of restricted stock outstanding, respectively, as of
September 30, 2010 and September 30, 2009. We expect to record future stock-based compensation
expense of $163 as a result of the restricted stock grants outstanding as of September 30, 2010
that will be recognized over the remaining vesting period in 2010 and 2011.
The material components of our stock-based compensation expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted at fair value
|
|
$
|
1,942
|
|
|
$
|
1,290
|
|
|
$
|
7,083
|
|
|
$
|
3,364
|
|
Restricted stock
|
|
|
54
|
|
|
|
52
|
|
|
|
176
|
|
|
|
117
|
|
Employee stock purchase plan
|
|
|
51
|
|
|
|
21
|
|
|
|
159
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
2,047
|
|
|
$
|
1,363
|
|
|
$
|
7,418
|
|
|
$
|
3,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation is included in our operations in the accompanying Consolidated
Statements of Income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of revenue
|
|
$
|
1,287
|
|
|
$
|
878
|
|
|
$
|
4,665
|
|
|
$
|
2,284
|
|
Research and development expense
|
|
|
534
|
|
|
|
317
|
|
|
|
1,936
|
|
|
|
826
|
|
Sales and marketing expense
|
|
|
125
|
|
|
|
110
|
|
|
|
451
|
|
|
|
286
|
|
General and administrative expense
|
|
|
101
|
|
|
|
58
|
|
|
|
366
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation included in operating expenses
|
|
$
|
2,047
|
|
|
$
|
1,363
|
|
|
$
|
7,418
|
|
|
$
|
3,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of our stock option activity and related information for the nine-months ended
September 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
(Share amounts in thousands)
|
|
Options
|
|
|
Price
|
|
Outstanding, beginning of year
|
|
|
14,612
|
|
|
$
|
5.32
|
|
Granted
|
|
|
2,557
|
|
|
$
|
7.05
|
|
Exercised
|
|
|
(554
|
)
|
|
$
|
3.47
|
|
Expired
|
|
|
(185
|
)
|
|
$
|
6.10
|
|
Forfeited
|
|
|
(920
|
)
|
|
$
|
8.04
|
|
|
|
|
|
|
|
|
|
Outstanding, at September 30, 2010
|
|
|
15,510
|
|
|
$
|
5.50
|
|
|
|
|
|
|
|
|
|
Exercisable, at September 30, 2010
|
|
|
8,320
|
|
|
$
|
4.05
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2010
|
|
|
14,409
|
|
|
$
|
5.35
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining contractual life of options outstanding at September 30, 2010
|
|
6.6 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Estimated weighted-average grant-date fair value of options granted during the period
|
|
$
|
3.88
|
|
|
$
|
4.56
|
|
|
|
|
|
|
|
|
Total fair value of options vested during the period
|
|
$
|
11,212
|
|
|
$
|
4,131
|
|
|
|
|
|
|
|
|
Intrinsic value of options exercised during the period
|
|
$
|
2,316
|
|
|
$
|
4,889
|
|
|
|
|
|
|
|
|
11
Exercise prices for options outstanding at September 30, 2010 ranged from $1.07 to $9.86 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
|
|
|
78
|
|
|
$
|
1.70
|
|
|
|
2.30
|
|
|
|
78
|
|
|
$
|
1.70
|
|
|
|
2.30
|
|
$1.92 $2.99
|
|
|
2,372
|
|
|
$
|
2.47
|
|
|
|
5.05
|
|
|
|
2,224
|
|
|
$
|
2.47
|
|
|
|
5.02
|
|
$3.05 $4.68
|
|
|
5,628
|
|
|
$
|
3.41
|
|
|
|
5.85
|
|
|
|
3,830
|
|
|
$
|
3.34
|
|
|
|
4.77
|
|
$4.83 $7.45
|
|
|
2,201
|
|
|
$
|
6.74
|
|
|
|
4.53
|
|
|
|
1,784
|
|
|
$
|
6.73
|
|
|
|
3.62
|
|
$7.95 $9.86
|
|
|
5,231
|
|
|
$
|
8.66
|
|
|
|
9.01
|
|
|
|
404
|
|
|
$
|
8.17
|
|
|
|
8.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,510
|
|
|
|
|
|
|
|
|
|
|
|
8,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, the aggregate intrinsic value of options outstanding was $6,486 and
the aggregate intrinsic value of options vested and exercisable was $5,564. As of September 30,
2010, we estimate that we will recognize $19,700 in expense for outstanding, unvested options over
their weighted average remaining vesting period of 3.5 years, of which we estimate $2,900 will be
recognized during the remainder of 2010.
In using the Black-Scholes model to calculate the fair value of our stock options, our
assumptions were as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Expected life (in years)
|
|
|
5.5
|
|
|
|
5.5
|
|
Risk-free interest rate(%)
|
|
|
1.9%-2.8
|
%
|
|
|
1.65%-2.61
|
%
|
Volatility(%)
|
|
|
59%-60
|
%
|
|
|
63%-64
|
%
|
Dividend yield(%)
|
|
|
0
|
%
|
|
|
0
|
%
|
4.
Supplemental Disclosure of Cash Flow Information
Property and equipment acquired under capital leases totaled $2,153 and $7,859 during the
three- and nine-months ended September 30, 2010, respectively. We acquired $913 and $5,492 of
property under capital leases during the three- and nine-months ended September 30, 2009,
respectively.
Interest paid totaled $598 and $3,204 during the three- and nine-months ended September 30,
2010, respectively. We paid $371 and $784 in interest for the three- and nine-months ended
September 30, 2009, respectively.
Income taxes paid totaled $806 and $2,978 during the three- and nine-months ended September
30, 2010 and were $221 and $1,100 for the three- and nine-months ended September 30, 2009,
respectively.
5.
Fair Value Measurements
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.
|
12
Our population of assets and liabilities subject to fair value measurements on a recurring
basis and the necessary disclosures are as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Fair Value Measurements at
|
|
|
|
as of
|
|
|
9/30/2010
|
|
|
|
9/30/2010
|
|
|
Using Fair Value Hierarchy
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
82,176
|
|
|
$
|
82,176
|
|
|
$
|
|
|
|
$
|
|
|
Marketable securities
|
|
|
30,641
|
|
|
|
30,641
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan investments
|
|
|
1,143
|
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value
|
|
$
|
113,960
|
|
|
$
|
113,960
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
989
|
|
|
$
|
989
|
|
|
$
|
|
|
|
$
|
|
|
Contractual acquisition earnouts
|
|
|
5,680
|
|
|
|
|
|
|
|
|
|
|
|
5,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at Fair Value
|
|
$
|
6,669
|
|
|
$
|
989
|
|
|
$
|
|
|
|
$
|
5,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company holds marketable securities that are investment grade and are classified as
available-for-sale. The securities include corporate bonds, commercial paper, mortgage and asset
backed securities that are carried at fair market value based on quoted market price, see Note 7.
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 contractual acquisition earnouts were part of the consideration paid for certain 2009
acquisitions and were initially valued at the acquisition date at $7,753. The fair value of the
earnouts is based on probability-weighted payouts under different scenarios, discounted using a
discount rate commensurate with the risk.
The following table provides a summary of the changes in the Companys contractual acquisition
earnouts measured at fair value on a recurring basis using significant unobservable inputs (Level
3) during the three-months ended September 30, 2010:
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Measurements
|
|
|
|
Using Significant
|
|
|
|
Unobservable
|
|
|
|
Inputs (level 3)
|
|
Balance at January 1, 2010
|
|
$
|
7,753
|
|
Fair value adjustment recognized in earnings
|
|
|
(2,073
|
)
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
5,680
|
|
|
|
|
|
The Companys long-term debt consists of borrowings under a commercial bank term loan
agreement, 4.5% convertible senior notes, and promissory notes payable to sellers of Networks in
Motion, Inc., see Note 12. The long-term debt is currently reported at the borrowed amount
outstanding and the fair value of the Companys long-term debt approximates its carrying amount.
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. In the first nine-months
ending September 30, 2010, there were no required fair value measurements for assets and
liabilities measured at fair value on a non-recurring basis.
6.
Segment Information
Our two operating segments are the Commercial and Government Segments.
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. Our Commercial Segment also provides E9-1-1 call routing, mobile
location-based applications, and inter-carrier text message technology. 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.
13
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.
The following table sets forth results for our reportable segments for the three- and
nine-months ended September 30, 2010 and 2009, respectively. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Comm.
|
|
|
Gvmt.
|
|
|
Total
|
|
|
Comm.
|
|
|
Gvmt.
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
42,990
|
|
|
$
|
23,205
|
|
|
$
|
66,195
|
|
|
$
|
23,619
|
|
|
$
|
15,681
|
|
|
$
|
39,300
|
|
Systems
|
|
|
11,615
|
|
|
|
25,139
|
|
|
|
36,754
|
|
|
|
9,512
|
|
|
|
22,797
|
|
|
|
32,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
54,605
|
|
|
|
48,344
|
|
|
|
102,949
|
|
|
|
33,131
|
|
|
|
38,478
|
|
|
|
71,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services
|
|
|
22,872
|
|
|
|
16,105
|
|
|
|
38,977
|
|
|
|
8,770
|
|
|
|
12,475
|
|
|
|
21,245
|
|
Direct cost of systems
|
|
|
3,685
|
|
|
|
23,548
|
|
|
|
27,233
|
|
|
|
2,543
|
|
|
|
19,610
|
|
|
|
22,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
26,557
|
|
|
|
39,653
|
|
|
|
66,210
|
|
|
|
11,313
|
|
|
|
32,085
|
|
|
|
43,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services gross profit
|
|
|
20,118
|
|
|
|
7,100
|
|
|
|
27,218
|
|
|
|
14,849
|
|
|
|
3,206
|
|
|
|
18,055
|
|
Systems gross profit
|
|
|
7,930
|
|
|
|
1,591
|
|
|
|
9,521
|
|
|
|
6,969
|
|
|
|
3,187
|
|
|
|
10,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
28,048
|
|
|
$
|
8,691
|
|
|
$
|
36,739
|
|
|
$
|
21,818
|
|
|
$
|
6,393
|
|
|
$
|
28,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Comm.
|
|
|
Gvmt.
|
|
|
Total
|
|
|
Comm.
|
|
|
Gvmt.
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
123,591
|
|
|
$
|
65,877
|
|
|
$
|
189,468
|
|
|
$
|
62,074
|
|
|
$
|
42,444
|
|
|
$
|
104,518
|
|
Systems
|
|
|
26,930
|
|
|
|
70,130
|
|
|
|
97,060
|
|
|
|
29,706
|
|
|
|
75,022
|
|
|
|
104,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
150,521
|
|
|
|
136,007
|
|
|
|
268,528
|
|
|
|
91,780
|
|
|
|
117,466
|
|
|
|
209,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services
|
|
|
62,606
|
|
|
|
46,589
|
|
|
|
109,195
|
|
|
|
25,337
|
|
|
|
33,097
|
|
|
|
58,434
|
|
Direct cost of systems
|
|
|
10,574
|
|
|
|
63,283
|
|
|
|
73,857
|
|
|
|
6,874
|
|
|
|
60,433
|
|
|
|
67,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
73,180
|
|
|
|
109,872
|
|
|
|
183,052
|
|
|
|
32,211
|
|
|
|
93,530
|
|
|
|
125,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services gross profit
|
|
|
60,985
|
|
|
|
19,288
|
|
|
|
80,273
|
|
|
|
36,737
|
|
|
|
9,347
|
|
|
|
48,084
|
|
Systems gross profit
|
|
|
16,356
|
|
|
|
6,847
|
|
|
|
23,203
|
|
|
|
22,832
|
|
|
|
14,589
|
|
|
|
37,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
77,341
|
|
|
$
|
26,135
|
|
|
$
|
103,476
|
|
|
$
|
59,569
|
|
|
$
|
23,936
|
|
|
$
|
83,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Total segment gross profit
|
|
$
|
36,739
|
|
|
$
|
28,211
|
|
|
$
|
103,476
|
|
|
$
|
83,505
|
|
Research and development expense
|
|
|
(7,523
|
)
|
|
|
(5,823
|
)
|
|
|
(22,612
|
)
|
|
|
(15,612
|
)
|
Sales and marketing expense
|
|
|
(5,988
|
)
|
|
|
(3,579
|
)
|
|
|
(17,934
|
)
|
|
|
(11,742
|
)
|
General and administrative expense
|
|
|
(10,060
|
)
|
|
|
(7,665
|
)
|
|
|
(28,324
|
)
|
|
|
(22,955
|
)
|
Depreciation and amortization of property and equipment
|
|
|
(2,572
|
)
|
|
|
(1,571
|
)
|
|
|
(6,805
|
)
|
|
|
(4,459
|
)
|
Amortization of acquired intangible assets
|
|
|
(1,161
|
)
|
|
|
(222
|
)
|
|
|
(3,504
|
)
|
|
|
(381
|
)
|
Interest expense
|
|
|
(2,299
|
)
|
|
|
(371
|
)
|
|
|
(6,888
|
)
|
|
|
(784
|
)
|
Amortization debt discount and debt issuance expenses
|
|
|
(187
|
)
|
|
|
(16
|
)
|
|
|
(563
|
)
|
|
|
(74
|
)
|
Other income, net
|
|
|
996
|
|
|
|
43
|
|
|
|
1,981
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7,945
|
|
|
|
9,007
|
|
|
|
18,827
|
|
|
|
27,825
|
|
Provision for income taxes
|
|
|
(3,623
|
)
|
|
|
(3,596
|
)
|
|
|
(6,400
|
)
|
|
|
(10,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,322
|
|
|
$
|
5,411
|
|
|
$
|
12,427
|
|
|
$
|
16,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Marketable Securities
The Company invests in marketable securities that are investment grade and are classified as
available-for-sale. The Companys primary objectives when investing are to preserve principal,
maintain liquidity, and obtain higher yield. The Companys intent is not
specifically to invest and hold securities with longer term maturities. The Company has the
ability and intent, if necessary, to liquidate any of these investments in order to meet the
Companys operating needs within the next twelve months. The securities are carried at fair market
value based on quoted market price with net unrealized gains and losses in stockholders equity as
a component of accumulated other comprehensive income. The Company did not hold any marketable
securities as at December 31, 2009.
14
If the Company determines that a decline in fair value of the marketable securities is other
than temporary, a realized loss would be recognized in earnings. Gains or losses on securities sold
are based on the specific identification method and are recognized in earnings.
The following is a summary of available-for-sale investments, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Cost
|
|
|
Gross Unrealized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Corporate bonds
|
|
$
|
22,109
|
|
|
$
|
77
|
|
|
$
|
7
|
|
|
$
|
22,179
|
|
Mortgage-backed and asset-backed securities
|
|
|
5,224
|
|
|
|
2
|
|
|
|
17
|
|
|
|
5,209
|
|
Agency bonds
|
|
|
2,003
|
|
|
|
1
|
|
|
|
|
|
|
|
2,004
|
|
Commercial paper
|
|
|
1,249
|
|
|
|
|
|
|
|
|
|
|
|
1,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
30,585
|
|
|
$
|
80
|
|
|
$
|
24
|
|
|
$
|
30,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the amortized cost and estimated fair value of
available-for-sale investments by contractual maturity at September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
Due within 1 year or less
|
|
$
|
7,053
|
|
|
$
|
7,058
|
|
Due within 1-2 years
|
|
|
8,042
|
|
|
|
8,057
|
|
Due within 2-3 years
|
|
|
15,490
|
|
|
|
15,526
|
|
|
|
|
|
|
|
|
|
|
$
|
30,585
|
|
|
$
|
30,641
|
|
|
|
|
|
|
|
|
8.
Inventory
Inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
|
2010
|
|
|
2009
|
|
Component parts
|
|
$
|
3,436
|
|
|
$
|
5,658
|
|
Finished goods
|
|
|
5,176
|
|
|
|
3,673
|
|
|
|
|
|
|
|
|
Total inventory at period end
|
|
$
|
8,612
|
|
|
$
|
9,331
|
|
|
|
|
|
|
|
|
9.
Acquired Intangible Assets and Capitalized Software Development Costs
Our acquired intangible assets and capitalized software development costs of our continuing
operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and other
|
|
$
|
12,951
|
|
|
$
|
2,484
|
|
|
$
|
10,467
|
|
|
$
|
13,735
|
|
|
$
|
1,151
|
|
|
$
|
12,584
|
|
Customer relationships
|
|
|
20,138
|
|
|
|
2,148
|
|
|
|
17,990
|
|
|
|
20,402
|
|
|
|
113
|
|
|
|
20,289
|
|
Trademarks and patents
|
|
|
1,364
|
|
|
|
398
|
|
|
|
966
|
|
|
|
1,364
|
|
|
|
262
|
|
|
|
1,102
|
|
Software development costs, including acquired technology
|
|
|
56,960
|
|
|
|
16,874
|
|
|
|
40,086
|
|
|
|
55,325
|
|
|
|
9,941
|
|
|
|
45,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets and software dev. costs
|
|
$
|
91,413
|
|
|
$
|
21,904
|
|
|
$
|
69,509
|
|
|
$
|
90,826
|
|
|
$
|
11,467
|
|
|
$
|
79,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future amortization expense:
|
|
|
|
|
Three Months ending December 31, 2010
|
|
$
|
3,507
|
|
Year ending December 31, 2011
|
|
|
13,914
|
|
Year ending December 31, 2012
|
|
|
13,750
|
|
Year ending December 31, 2013
|
|
|
13,699
|
|
Year ending December 31, 2014
|
|
|
11,997
|
|
Thereafter
|
|
|
12,642
|
|
|
|
|
|
|
|
$
|
69,509
|
|
|
|
|
|
For the three- and nine-months ended September 30, 2010, we capitalized $1,801 and $3,973,
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 cash flows
generated by these products. For the three- and nine-months ended September 30, 2009 we capitalized
$188 and $823 of software development costs.
Preliminary gross carrying amounts have been adjusted during the nine-months ended September
30, 2010 as a result of information not initially available. Prior to the end of the measurement
period for the finalized purchase price allocation, which is 12 months from
15
the acquisition dates,
if information becomes available which would indicate adjustments are required to the purchase
price these adjustments will be included in the purchase price allocation retrospectively.
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.
10.
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. Accounts receivable are
generally due within thirty days and no collateral is required. We maintain allowances for
potential credit losses and historically such losses have been within our expectations.
The following tables summarize revenue and accounts receivable concentrations from our
significant customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
|
% of Total Revenue For
|
|
|
Revenue For
|
|
|
|
|
|
|
|
the Three
|
|
|
the Nine
|
|
|
|
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Customer
|
|
Segment
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Federal Agencies
|
|
Government
|
|
|
35
|
%
|
|
|
42
|
%
|
|
|
35
|
%
|
|
|
42
|
%
|
Customer A
|
|
Commercial
|
|
|
28
|
%
|
|
|
24
|
%
|
|
|
28
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
|
|
|
|
Accounts
|
|
|
Unbilled
|
|
Customer
|
|
Segment
|
|
|
Receivable
|
|
|
Receivables
|
|
U.S. Government
|
|
Government
|
|
|
21
|
%
|
|
|
51
|
%
|
Customer A
|
|
Commercial
|
|
|
38
|
%
|
|
|
26
|
%
|
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. The Line of Credit maturity
date is June 25, 2012. Our potential borrowings under the Line of Credit are reduced by the amounts
of cash management services sublimit which totaled $1,525 at September 30, 2010. As of September
30, 2010 and December 31, 2009, there were no borrowings on the line of credit and we had
approximately $33,500 and $33,400, respectively, of unused borrowing availability under this line
of credit.
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 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.
12. Long-term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
|
2010
|
|
|
2009
|
|
4.5% Convertible notes dated November 16, 2009
|
|
$
|
103,500
|
|
|
$
|
103,500
|
|
6.0% Promissory note payable to NIM sellers dated December 16, 2009
|
|
|
40,000
|
|
|
|
40,000
|
|
Term loan from commercial bank dated December 31, 2009
|
|
|
25,000
|
|
|
|
30,000
|
|
Term loan from commercial bank dated September 30, 2010
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
178,500
|
|
|
|
173,500
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(44,333
|
)
|
|
|
(36,667
|
)
|
|
|
|
|
|
|
|
Non-current portion of long-term debt
|
|
$
|
134,167
|
|
|
$
|
136,833
|
|
|
|
|
|
|
|
|
16
Aggregate maturities of long-term debt (including interest) at September 30, 2010 are as
follows:
|
|
|
|
|
2010
|
|
$
|
37,450
|
|
2011
|
|
|
25,868
|
|
2012
|
|
|
14,848
|
|
2013
|
|
|
14,428
|
|
2014
|
|
|
112,886
|
|
|
|
|
|
Total long-term debt
|
|
$
|
205,480
|
|
|
|
|
|
During 2009, the Company entered into multiple financing agreements to fund corporate
initiatives.
On November 10, 2009, the Company sold $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, as amended. 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 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
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 is 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, see Note 2 for a description of the terms of these
notes.
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), with a maturity date of July 2014, that replaces
the Companys $20 million prior term loan. The Company initially drew $30 million of the term funds
available on December 31, 2009 and drew the remaining $10 million available balance on September
30, 2010. The principal amount outstanding under the Term Loan accrues interest at a floating per
annum rate equal to the rate which is 0.5% plus the greater of (i) 4% per annum, or (ii) the banks
prime rate (3.25% at September 30, 2010). The principal amount outstanding under the Term Loan is
payable in sixty equal installments of principal of $556 beginning on January 29, 2010 plus an
additional forty five equal installments of principal of $222 beginning October 31, 2010. Interest
is payable on a monthly
basis. Funds from the initial $30 million draw on the Term Loan were used primarily to retire
the June 2009 term loan and funds from the additional $10 million drawn in September 2010 were used
for general corporate purposes.
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.
17
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 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 September 30, 2010, 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.
13. Capital leases
We lease certain equipment under capital leases. Capital leases are collateralized by the
leased assets. Amortization of leased assets is included in depreciation and amortization expense.
Future minimum payments under capital lease obligations consisted of the following at
September 30, 2010:
|
|
|
|
|
2010
|
|
$
|
1,442
|
|
2011
|
|
|
5,667
|
|
2012
|
|
|
4,841
|
|
2013
|
|
|
3,248
|
|
2014
|
|
|
787
|
|
|
|
|
|
Total minimum lease payments
|
|
|
15,985
|
|
Less: amounts representing interest
|
|
|
(1,593
|
)
|
|
|
|
|
Present value of net minimum lease payments (including current portion of $4,852)
|
|
$
|
14,392
|
|
|
|
|
|
14.
Income taxes
Our provision for income taxes totaled $3,623 and $6,400 for the three- and nine-months ended
September 30, 2010, respectively, as compared to $3,596 and $10,941 being recorded for the three-
and nine-months ended September 30, 2009. The expense recorded for the nine-month period ended
September 30, 2010 is comprised of current year tax expense of $8,050 recorded based on pretax
income plus a discrete tax benefit of $1,650 recorded primarily related to Research &
Experimentation tax credits. Excluding discrete items, the effective tax rate was approximately 46%
for the three- months ended September 30, 2010 and approximately 34% for the nine-months ended
September 30, 2010. The effective tax rate was approximately 39% for both the three- and
nine-months ended September 30, 2009.
The significant changes to unrecognized tax benefits during the three- and nine-months ended
September 30, 2010 apply to the reduction for Research & Experimentation tax credits as a result of
the Company completing an in-depth analysis during first quarter. We do not anticipate a
significant change to the total amount of unrecognized tax benefits within the next twelve months.
15.
Commitments and Contingencies
The Company has been notified that some customers will or 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 and the use of our
products and services in combination with the use of products and services of multiple other
vendors. In some cases we have agreed to assume the defense of the case. In others, 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. The
Company cannot currently predict the outcome of these matters and the resolutions could 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
18
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 October 5, 2009, the Court approved
a settlement of this and approximately 300 similar cases. On January 14, 2010, an Order and Final
Judgment was entered. Various notices of appeal of the Courts October 5, 2009 order were
subsequently filed. On October 7, 2010, all but two parties who had filed a notice of appeal filed
a stipulation with the Court withdrawing their appeals with prejudice, and the two remaining
objectors filed briefs in support of their appeals. 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.
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.
19
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations
should be read in conjunction with the consolidated financial statements, related notes, and other
detailed information included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended
September 30, 2010 (this Form 10-Q). This Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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 Quarterly Report on Form 10-Q include, but are not limited to statements: (a)
regarding our belief that our technology does not infringe the patents related to customer
indemnification requests and our estimates of the indemnification requests effects on our results
of operations; (b) regarding our expectations with regard to the notes hedge transactions; (c) that
we believe we have sufficient capital resources to fund our operations for the next twelve months
and that we currently plan to settle the December 2010 debt obligation with cash; (d) as to the
sufficiency of our capital resources to meet our anticipated working capital and capital
expenditures for at least the next twelve months, (e) that we expect to realize approximately
$178.1 million of backlog in the next twelve months, (f) that we believe that capitalized software
development costs will be recoverable from future cash flows
generated by these products, (g) regarding our belief that we
were in compliance with our loan covenants and that we believe that we will continue to comply with
these covenants, (h) regarding our expectations with regard to income tax assumptions and
assumptions related to future stock-based compensation expenses, (i) regarding our expectations
related to allowances for potential credit losses, (j) indicating our insurance policies should
cover all of the costs of the claims in the IPO laddering class action lawsuit, and (k) regarding
our objectives when investing in marketable securities.
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 such projected
operational matters, the inclusion of forward-looking statements in this report 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 our actual financial results realized
could differ materially from the statements made herein, as a result of the risks and uncertainties
described in our filings with the Securities and Exchange Commission. These 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 counterparty risks, (x) achieve continued revenue growth in the foreseeable
future in certain of our business lines, (xi) have sufficient capital resources to fund the
Companys operations, (xii) make estimates, judgments, and
assumptions underlying our accounting policies and methods, and (xiii) successfully integrate the assets and personnel obtained in our
acquisitions. These factors should not be considered exhaustive; we undertake no obligation to
release publicly the results of any future revisions we may make to forward-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.
The information in this Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations discusses our unaudited consolidated financial statements, which have
been prepared in accordance with GAAP for interim financial information.
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 for interim financial information. 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,
|
|
|
-
|
|
Acquired intangible assets,
|
20
|
-
|
|
Impairment of goodwill,
|
|
|
-
|
|
Stock-based compensation expense,
|
|
|
-
|
|
Income taxes,
|
|
|
-
|
|
Marketable securities,
|
|
|
-
|
|
Software development costs,
|
|
|
-
|
|
Business combinations, and
|
|
|
-
|
|
Legal and other contingencies.
|
This discussion and analysis should be read in conjunction with our consolidated financial
statements and related notes included in our Annual Report on Form 10-K for the year ended December
31, 2009 (the 2009 Form 10-K). See Note 1 to the unaudited interim consolidated financial
statements included elsewhere in this Form 10-Q for a list of the standards implemented for the
nine-months ended September 30, 2010.
Overview
Our business is reported using two business segments: (i) the Commercial Segment, which
consists principally of 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) the Government Segment, which
includes the engineering, deployment and field support of information processing and communication
solutions, mainly satellite-based, and related services to government agencies.
2009 Acquisitions
During 2009, our company completed four acquisitions, the details of which are described in
the Business Section and Financial Statement Footnote 2 of our 2009 Form 10-K.
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 acquired 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 of these acquisitions are reflected in the Companys consolidated
financial statements from the date of acquisition.
This Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations provides information that our management believes to be necessary to achieve a clear
understanding of our financial statements and results of operations. You should read this Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations together
with Item 1A Risk Factors and Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations in our
2009 Form 10-K as well as the unaudited interim consolidated financial statements and the
notes thereto located elsewhere in this Form 10-Q.
21
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:
|
|
|
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 services derived from the delivery of information
processing and communication systems to governmental agencies.
|
|
|
|
|
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.
|
|
|
|
|
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-based compensation expense,
depreciation and amortization of property and equipment, and amortization of acquired
intangible assets.
|
|
|
|
|
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.
|
|
|
|
|
Balance sheet.
We view cash, working capital, accounts receivable balances and days
revenues outstanding as important indicators of our financial health.
|
Results of Operations
The comparability of our operating results in the three- and nine-month period ended September
30, 2010 to the three- and nine-month period ended September 30, 2009 is affected by our 2009
acquisitions, three of the four acquisitions occurred in the fourth quarter of 2009, so there was
no impact on the revenue and costs and expense total in the first nine-months of 2009. Our
acquisitions did not result in the entry into a new line of business or product category; they
added products and services with substantially similar features and functionality to our incumbent
business. Where variances in our results of operations for the first nine-months of 2010 compared
to the first nine-months of 2009 were clearly related to the acquisitions, such as revenue and
increases in amortization of intangibles, we describe the effects. Operation of the acquired
businesses has been fully integrated into our existing operations.
Revenue and Cost of Revenue
The following discussion addresses the revenue, direct cost of revenue, and gross profit for
our two business segments.
Commercial Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
2010 vs. 2009
|
|
|
Ended September 30,
|
|
|
2010 vs. 2009
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
Services revenue
|
|
$
|
43.0
|
|
|
$
|
23.6
|
|
|
$
|
19.4
|
|
|
|
82
|
%
|
|
$
|
123.6
|
|
|
$
|
62.1
|
|
|
$
|
61.5
|
|
|
|
99
|
%
|
Systems revenue
|
|
|
11.6
|
|
|
|
9.5
|
|
|
|
2.1
|
|
|
|
22
|
%
|
|
|
26.9
|
|
|
|
29.7
|
|
|
|
(2.8
|
)
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial segment revenue
|
|
|
54.6
|
|
|
|
33.1
|
|
|
|
21.5
|
|
|
|
65
|
%
|
|
|
150.5
|
|
|
|
91.8
|
|
|
|
58.7
|
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services revenue
|
|
|
22.9
|
|
|
|
8.8
|
|
|
|
14.1
|
|
|
|
160
|
%
|
|
|
62.6
|
|
|
|
25.3
|
|
|
|
37.3
|
|
|
|
147
|
%
|
Direct cost of systems revenue
|
|
|
3.7
|
|
|
|
2.5
|
|
|
|
1.2
|
|
|
|
48
|
%
|
|
|
10.6
|
|
|
|
6.9
|
|
|
|
3.7
|
|
|
|
54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial segment cost of revenue
|
|
|
26.6
|
|
|
|
11.3
|
|
|
|
15.3
|
|
|
|
135
|
%
|
|
|
73.2
|
|
|
|
32.2
|
|
|
|
41.0
|
|
|
|
127
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services gross profit
|
|
|
20.1
|
|
|
|
14.8
|
|
|
|
5.3
|
|
|
|
36
|
%
|
|
|
61.0
|
|
|
|
36.8
|
|
|
|
24.2
|
|
|
|
66
|
%
|
% of revenue
|
|
|
47
|
%
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
|
49
|
%
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems gross profit
|
|
|
7.9
|
|
|
|
7.0
|
|
|
|
0.9
|
|
|
|
13
|
%
|
|
|
16.3
|
|
|
|
22.8
|
|
|
|
(6.5
|
)
|
|
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
68
|
%
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
|
|
61
|
%
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
Commercial segment gross profit
1
|
|
$
|
28.0
|
|
|
$
|
21.8
|
|
|
$
|
6.2
|
|
|
|
28
|
%
|
|
$
|
77.3
|
|
|
$
|
59.6
|
|
|
$
|
17.7
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
51
|
%
|
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
51
|
%
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
See discussion of segment reporting in Note 6 to the accompanying unaudited
consolidated financial statements
|
22
Commercial Services Revenue, Cost of Revenue, and Gross Profit:
Commercial services revenue increased by 82% and 99% for the three- and nine-months ended
September 30, 2010, respectively, versus the comparable periods of 2009.
Services revenue includes hosted wireless Location Based Service (LBS) applications including
turn-by-turn 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.
Commercial services revenue in the three- and nine-months ended September 30, 2010 was $19.4
million and $61.5 million higher, respectively, than the same periods for 2009 from increased
subscriber revenue for LBS applications, more service connection deployments of our E9-1-1 services
for cellular and VoIP service providers, and an increase in software maintenance revenue. The NIM
acquisition contributed additional subscriber applications revenue during the three-months ended
September 30, 2010. The increase in subscriber applications revenue for the nine-months ended
September 30, 2010 was as a result of the NIM and LocationLogic acquisitions.
The direct cost of commercial services revenue consists primarily of compensation and
benefits, network access, data feed and circuit costs, and equipment and software maintenance. The
direct costs of maintenance revenue consist primarily of compensation and benefits expense. For the
three-months ended September 30, 2010, the direct cost of services revenue was $14.1 million higher
than the three-months ended September 30, 2009 primarily due to increase in labor and other direct
costs related to the addition of the NIM business. For the nine-months ended September 30, 2010,
the direct costs of services revenue as $37.3 million higher than the nine-months ended September
30, 2009 due to increase in labor and other direct costs related to the addition of the
LocationLogic and NIM businesses. We also incurred an increase in labor and direct costs related to
custom development efforts responding to customer requests and deployment requirements for E9-1-1
VoIP.
Commercial services gross profit was $20.1 million and $14.8 million for the three-months
ended September 30, 2010 and 2009, respectively, based on higher revenue. Commercial services gross
profit was $61.0 million for the nine-months ended September 30, 2010 compared to $36.8 million for
the same period in 2009. Commercial services gross profit for the three-months ended September 30,
2010 was approximately 36% higher than the three-months ended September 30, 2009 primarily due to
the contributions of the NIM acquisition. Commercial services gross profit for the nine-months
ended September 30, 2010 was approximately 66% higher than the nine-months ended September 30, 2009
primarily due to the contributions of the LocationLogic and NIM acquisitions. The inclusion of this
subscriber application revenue in the 2010 mix brought the gross profit as a percentage of revenue
from 63% to 47% in the three-months ended September 30, 2010 and from 59% to 49% in the nine-months
ended September 30, 2010.
Commercial Systems Revenue, Cost of Revenue, and Gross Profit:
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. We also realize license revenue from patents.
Commercial systems revenue for the three-ended September 30, 2010 was 22% higher compared to
the three-months ended September 30, 2009, due mainly to increased location-based services.
Commercial systems revenue for the nine-months ended was 9% lower than in the comparable period of
2009, due mainly to lower revenue from high-margin messaging systems, which was partly offset by
increased revenue from location-based infrastructure systems.
The direct cost of our commercial systems consists primarily of compensation and benefits,
purchased equipment, third-party hardware and software, travel expenses, consulting fees as well as
the amortization of both acquired and capitalized software development costs for all reported
periods. During the three- and nine-months ended September 30, 2010, direct costs of systems
included $2.3 million and $6.9 million, respectively, of amortization of software development
costs. In the three- and nine-months ended September 30, 2009, the composition of the direct cost
of our systems was about the same except for $0.8 million and $2.1 million, respectively, of
amortization of software development costs. The increase of 48% and 54% in the direct costs of
systems
23
in the three- and nine-months ended September 30, 2010, respectively, compared to the
same periods in 2009, reflects an increase in labor and direct costs related to custom development
efforts responding to customer requests and deployment requirements for location-based systems.
Our commercial systems gross profit was $7.9 million and $16.3 million in the three- and
nine-months ended September 30, 2010, respectively, versus $7.0 million and $22.8 in the comparable
periods of 2009. Commercial systems gross profit increased 13% for the three-months ended September
30, 2010 compared to the same period in 2009, due to higher location systems revenue. Commercial
systems gross profit decreased 29% for the nine-months ended September 30, 2010 compared to the
same period in 2009, due to less high-margin messaging systems revenue offset partially by
increased revenue from location systems.
Government Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
2010 vs. 2009
|
|
|
Ended September 30,
|
|
|
2010 vs. 2009
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
Services revenue
|
|
$
|
23.2
|
|
|
$
|
15.7
|
|
|
$
|
7.5
|
|
|
|
48
|
%
|
|
$
|
65.9
|
|
|
$
|
42.4
|
|
|
$
|
23.5
|
|
|
|
55
|
%
|
Systems revenue
|
|
|
25.1
|
|
|
|
22.8
|
|
|
|
2.3
|
|
|
|
10
|
%
|
|
|
70.1
|
|
|
|
75.0
|
|
|
|
(4.9
|
)
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government segment revenue
|
|
|
48.3
|
|
|
|
38.5
|
|
|
|
9.8
|
|
|
|
25
|
%
|
|
|
136.0
|
|
|
|
117.4
|
|
|
|
18.6
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services revenue
|
|
|
16.1
|
|
|
|
12.5
|
|
|
|
3.6
|
|
|
|
29
|
%
|
|
|
46.6
|
|
|
|
33.1
|
|
|
|
13.5
|
|
|
|
41
|
%
|
Direct cost of systems revenue
|
|
|
23.5
|
|
|
|
19.6
|
|
|
|
3.9
|
|
|
|
20
|
%
|
|
|
63.3
|
|
|
|
60.4
|
|
|
|
2.9
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government segment cost of revenue
|
|
|
39.6
|
|
|
|
32.1
|
|
|
|
7.5
|
|
|
|
23
|
%
|
|
|
109.9
|
|
|
|
93.5
|
|
|
|
16.4
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services gross profit
|
|
|
7.1
|
|
|
|
3.2
|
|
|
|
3.9
|
|
|
|
122
|
%
|
|
|
19.3
|
|
|
|
9.3
|
|
|
|
10.0
|
|
|
|
108
|
%
|
% of revenue
|
|
|
31
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
29
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
Systems gross profit
|
|
|
1.6
|
|
|
|
3.2
|
|
|
|
(1.6
|
)
|
|
|
(50
|
)%
|
|
|
6.8
|
|
|
|
14.6
|
|
|
|
(7.8
|
)
|
|
|
(53
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
6
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
10
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
Government segment gross profit
1
|
|
|
8.7
|
|
|
$
|
6.4
|
|
|
|
2.3
|
|
|
|
36
|
%
|
|
|
26.1
|
|
|
$
|
23.9
|
|
|
|
2.2
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
18
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
19
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
See discussion of segment reporting in Note 6 to the accompanying unaudited
consolidated financial statements
|
On October 6, 2010, the Company announced it was named the sole awardee of a delivery order
for our Integrated Communication systems, for the U.S. Marine Corps with a potential value of up to
$269 million over the next 12 months. We received initial funding of $12.3 million to deliver our
Wireless Point-to-Point Link-Delta Solutions (WPPL-D) and associated field services. This delivery
order is managed under the Armys $5 billion World-Wide Satellite Systems (WWSS) contract vehicle.
Government Services Revenue, Cost of Revenue, and Gross Profit:
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. Systems maintenance fees
are usually collected in advance and recognized ratably over the contractual maintenance periods.
Government services revenue increased $7.5 million or 48% and $23.5 million or 55% for the three-
and nine-months ended September 30, 2010 compared to the three- and nine-months ended September 30,
2009, respectively, as a result of revenue contributions from the Solvern and Sidereal operations
added to our business during the fourth quarter of 2009, as well as new and expanded-scope
contracts for professional services, satellite airtime services using our teleport facilities, and
maintenance and field support. Direct cost of government services revenue consists of compensation,
benefits and travel expenses 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
services.
Our gross profit from government services increased to $7.1 million and $19.3 in the three-
and nine-months ended September 30, 2010, respectively, up from $3.2 million and $9.3 million in
the three- and nine-months ended September 30, 2009, as a result of a higher volume of services,
including business arising from the acquisitions of Sidereal and Solvern in November 2009.
Government services gross profit was 31% and 20% of revenue for the three-months ended September
30, 2010 and 2009, respectively. Government services gross profit was 29% compared to 22% of
revenue for the nine-months ended September 30, 2010 and 2009, respectively, reflecting a more
favorable mix of contracts.
Government Systems Revenue, Cost of Revenue, and Gross Profit:
We generate government systems revenue from the design, development, assembly and deployment
of information processing and communication systems, primarily deployable satellite-based and
line-of-sight communications systems, and integration of those systems into customer networks.
These are largely variations on our SwiftLink
®
products, which are lightweight, secure,
deployable communications systems, sold mainly to units of the U.S. Department of Defense, and
other federal agencies.
24
Government systems sales were $25.1 million and $70.1 million in the three- and nine-months
ended September 30, 2010, compared to $22.8 million and $75.0 for the three- and nine-months ended
September 30, 2009. The fluctuations in the periods reported reflect changes in sales volume of our
SwiftLink
®
and deployable communication systems due to the timing of government project
funding.
The cost of our government systems revenue consists of costs related to purchased system
components, compensation, benefits, travel, and the costs of third-party contractors. These costs
have decreased as a direct result of the decrease 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 mixes.
Our government systems gross profit was $1.6 million or 6% of revenue in the three-months
ended September 30, 2010, down from $3.2 million or 14% of revenue in the comparable period of
2009, due mainly to an increase of lower margin equipment pass-through sales. Our government
systems gross profit was $6.8 million or 10% of revenue in the nine-months ended September 30,
2010, down from $14.6 million or 19% of revenue in the nine-months ended September 30, 2009, due
mainly to an increase in lower margin equipment pass-through sales and lower sales volume of our
SwiftLink
®
product line.
Revenue Backlog
As of September 30, 2010 and 2009, we had unfilled orders or backlog as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
2010 vs. 2009
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
Commercial Segment
|
|
$
|
228.9
|
|
|
$
|
90.6
|
|
|
$
|
138.3
|
|
|
|
153
|
%
|
Government Segment
|
|
|
107.6
|
|
|
|
109.0
|
|
|
|
(1.4
|
)
|
|
|
(1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funded contract backlog
|
|
$
|
336.5
|
|
|
$
|
199.6
|
|
|
$
|
136.9
|
|
|
|
69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Segment
|
|
$
|
228.9
|
|
|
$
|
90.6
|
|
|
$
|
138.3
|
|
|
|
153
|
%
|
Government Segment
|
|
|
646.5
|
|
|
|
348.3
|
|
|
|
298.2
|
|
|
|
86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total backlog of orders and commitments, including customer options
|
|
$
|
875.4
|
|
|
$
|
438.9
|
|
|
$
|
436.5
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to be realized within next 12 months
|
|
$
|
178.1
|
|
|
$
|
158.2
|
|
|
$
|
19.9
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded contract backlog on September 30, 2010 was $336.5 million, of which the Company expects
to recognize $178.1 million in the next twelve months. Total backlog was $875.4 million at
September 30, 2010. Funded contract backlog represents contracts for which fiscal year funding has
been appropriated by our customers (mainly federal agencies), and for our hosted services is
computed by multiplying the most recent months recurring revenue times the remaining months under
existing long-term agreements, which we believe is the best available information for anticipating
revenue under those agreements. Total backlog, as is typically measured by government contractors,
includes orders covering optional periods of service and/or deliverables for which budgetary
funding may not yet have been approved. Company backlog at any given time may be affected by a
number of factors, including the availability of funding, contracts being renewed or new contracts
being signed before existing contracts are completed. Some of our backlog could be canceled for
causes such as late delivery, poor performance and other factors. Accordingly, a comparison of
backlog from period to period is not necessarily meaningful and may not be indicative of eventual
actual revenue.
Operating Expenses
Research and development expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
2010 vs. 2009
|
|
|
September 30,
|
|
|
2010 vs. 2009
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
Research and development expense
|
|
$
|
7.5
|
|
|
$
|
5.8
|
|
|
$
|
1.7
|
|
|
|
29
|
%
|
|
$
|
22.6
|
|
|
$
|
15.6
|
|
|
$
|
7.0
|
|
|
|
45
|
%
|
% of total revenue
|
|
|
7
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
8
|
%
|
|
|
7
|
%
|
Our research and development expense consists primarily of compensation, benefits, travel
costs, and a proportionate share of facilities and corporate overhead. The costs of developing
software products to be sold, leased, or otherwise marketed 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
our 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
25
as they are incurred, unless technological feasibility has been reached and we believe that
the capitalized costs will be recoverable, in which we capitalize and amortize over the products
expected life.
The expenses we incur relate mainly to software applications which are being marketed to new
and existing customers on a global basis. Throughout the three- and nine-months ended September 30,
2010 and 2009, research and development was primarily focused on wireless location-based subscriber
and carrier applications, including navigation, people-locator, cellular E9-1-1 and Voice over IP
E9-1-1, enhancements to our hosted LBS platform for carrier infrastructure, and enhancements to our
text messaging deliverables.
For the three- and nine-months ended September 30, 2010, we capitalized $1.8 million and $4.0
million, respectively, of research and development costs for certain software projects in
accordance with the above policy versus $0.2 million and $0.8 for the comparable periods in 2009.
These costs will be amortized on a product-by-product basis using the straight-line method over the
products estimated useful life, between three and five years. Amortization is also computed using
the ratio that current revenue for the product bears to the total of current and anticipated future
revenue for that product (the revenue curve method). If this revenue curve method results in
amortization greater than the amount computed using the straight-line method, amortization is
recorded at that greater amount. We believe that these capitalized costs will be recoverable from
future gross profits generated by these products.
Research and development expenses increased 29% and 45% for the three- and nine-months ended
September 30, 2010 versus the comparable period of 2009 primarily as a result of expenditures to
improve location based application software for customers of the acquired NIM and LocationLogic
businesses.
Sales and marketing expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
2010 vs. 2009
|
|
|
September 30,
|
|
|
2010 vs. 2009
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
Sales and marketing expense
|
|
$
|
6.0
|
|
|
$
|
3.6
|
|
|
$
|
2.4
|
|
|
|
67
|
%
|
|
$
|
17.9
|
|
|
$
|
11.7
|
|
|
$
|
6.2
|
|
|
|
53
|
%
|
% of total revenue
|
|
|
6
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
6
|
%
|
|
|
6
|
%
|
Our sales and marketing expenses include 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 relationship 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 expenses increased $2.4 million and $6.2 for the three- and nine-months
ended September 30, 2010 versus the comparable periods of 2009 due to increases in sales personnel,
public relations fees, and variable compensation resulting mainly in support of the expansion
enhanced by 2009 acquisitions.
General and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
2010 vs. 2009
|
|
|
September 30,
|
|
|
2010 vs. 2009
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
General and administrative expense
|
|
$
|
10.1
|
|
|
$
|
7.7
|
|
|
$
|
2.4
|
|
|
|
31
|
%
|
|
$
|
28.3
|
|
|
$
|
23.0
|
|
|
$
|
5.3
|
|
|
|
23
|
%
|
% of total revenue
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
General and administrative expense consists primarily of management, finance, legal, human
resources and internal information systems 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 $2.4 million and $5.3 million increase in general and administrative expense for the
three- and nine-months ended September 30, 2010 compared to the same periods in 2009 was due
primarily to the increased costs to support the operations we acquired during 2009, as well as
investments for process control and security enhancement and legal and professional costs
associated with intellectual property.
Depreciation and amortization of property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
2010 vs. 2009
|
|
|
Ended September 30,
|
|
|
2010 vs. 2009
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
Depreciation
and amortization of
property and
equipment
|
|
$
|
2.6
|
|
|
$
|
1.6
|
|
|
$
|
1.0
|
|
|
|
63
|
%
|
|
$
|
6.8
|
|
|
$
|
4.5
|
|
|
$
|
2.3
|
|
|
|
51
|
%
|
Average gross cost
of property and
equipment during
the period
|
|
$
|
87.3
|
|
|
$
|
60.1
|
|
|
|
|
|
|
|
|
|
|
$
|
78.8
|
|
|
$
|
57.3
|
|
|
|
|
|
|
|
|
|
26
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 5 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.
Our depreciable asset base increased primarily as a result of additions to property and
equipment including purchases of about $22.4 million in the nine-months ended September 30, 2010.
Amortization of acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
2010 vs. 2009
|
|
|
September 30,
|
|
|
2010 vs. 2009
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
Amortization
of acquired
intangible assets
|
|
$
|
1.2
|
|
|
$
|
0.2
|
|
|
$
|
1.0
|
|
|
|
500
|
%
|
|
$
|
3.5
|
|
|
$
|
0.4
|
|
|
$
|
3.1
|
|
|
|
775
|
%
|
The amortization of acquired non-goodwill intangible assets relates to the 2009 acquisitions
of wireless location-based application and infrastructure technology assets acquired from
LocationLogic and NIM, the cyber security assets acquired from Solvern, and the 2004 acquisition of
Kivera digital mapping business assets. These assets are being amortized over their useful lives of
between five and nineteen years. The expense recognized in the three- and nine-months ended
September 30, 2010 relates to customer lists, customer relationships, courseware, and patents. The
expense recognized in the three- and nine-months ended September 30, 2009 relates to the intangible
assets, including customer lists and patents, associated with the 2004 Kivera acquisition and a
proportion of the May 19, 2009 LocationLogic acquisition.
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
2010 vs. 2009
|
|
|
September 30,
|
|
|
2010 vs. 2009
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
Interest expense incurred on bank
and other notes payable
|
|
$
|
1.0
|
|
|
$
|
0.2
|
|
|
$
|
0.8
|
|
|
|
400
|
%
|
|
$
|
2.9
|
|
|
$
|
0.4
|
|
|
$
|
2.5
|
|
|
|
625
|
%
|
Interest expense incurred on 4.5%
convertible debt financing
|
|
|
1.1
|
|
|
|
|
|
|
|
1.1
|
|
|
|
100
|
%
|
|
|
3.4
|
|
|
|
|
|
|
|
3.4
|
|
|
|
100
|
%
|
Interest expense incurred on capital
lease obligations
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
100
|
%
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
100
|
%
|
Amortization of deferred financing fees
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
100
|
%
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
500
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and financing expense
|
|
$
|
2.5
|
|
|
$
|
0.4
|
|
|
$
|
2.1
|
|
|
|
525
|
%
|
|
$
|
7.5
|
|
|
$
|
0.8
|
|
|
$
|
6.7
|
|
|
|
838
|
%
|
Interest expense is incurred under bank and other notes payable, convertible debt financing,
and capital lease obligations. 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 0.5% plus the greater of (i) 4% per annum, or (ii) the
banks prime rate. 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 periods reported. Interest on our line of credit
borrowing would be at the greater of the banks prime rate which was 3.25% as of September 30, 2010
or 4% per annum. Further details about our bank facilities are provided under Liquidity and Capital
Resources.
On 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.
27
Our capital lease obligations include interest at various amounts depending on the lease
arrangements. Our interest under capital leases fluctuates depending on the amount of capital lease
obligations in each year.
Overall our interest and financing expense was higher in the three- and nine-months ended
September 30, 2010 as a result of the increase in amounts financed in the fourth quarter of 2009,
including the 4.5% convertible debt financing in November 2009. Interest expense on bank and other
notes payable increased in the three- and nine-months ended September 30, 2010 compared to the same
periods in 2009 as a result of the NIM promissory notes and the December 2009 bank term loan.
Interest on capital lease financing for the three- and nine-months ended September 30, 2010
increased slightly for the three- and nine-months ended September 30, 2009 due to additional
funding for purchases of property and equipment. The higher 2010 amortization expense reflects the
proration of fees to refinance our bank term loan and fees associated with the 4.5% convertible
debt financing.
Other income/(expense), net:
Other income/(expense), net includes interest earned on investment accounts and foreign
currency translation/transaction gain or loss, which is dependent on fluctuations in exchange
rates. The other components of other income/(expense), net typically remain comparable between
periods.
Income taxes:
Income tax expense was $6.4 million against pre-tax income of $18.8 million for the for the
nine-months ended September 30, 2010, representing an effective tax rate of approximately 34%. The
tax provision for the nine-month ended September 30, 2010 was lower than would be normally expected
as a result of a discrete adjustment to reduce the reserve against our deferred tax asset by about
$1.7 million. Absent this adjustment, our effective tax rate for the nine-months ended September
30, 2010 would have been approximately 43%. For the nine-months ended September 30, 2009, we
recorded a tax provision of $10.9 million, representing an effective tax rate of about 39%.
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
2010 vs. 2009
|
|
|
Ended September 30,
|
|
|
2010 vs. 2009
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
Net income
|
|
$
|
4.3
|
|
|
$
|
5.4
|
|
|
$
|
(1.1
|
)
|
|
|
(20
|
)%
|
|
$
|
12.4
|
|
|
$
|
16.9
|
|
|
$
|
(4.5
|
)
|
|
|
(27
|
)%
|
Net income decreased for the three- and nine-months ended September 30, 2010 versus the
comparable periods of 2009. The Companys higher revenue and gross profit were offset by an
increase in interest expense as a result of our fourth quarter 2009 financing and an increase in
operating expenses and depreciation and amortization expenses, primarily as a result of our 2009
acquisitions, and other factors discussed above.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
2010 vs. 2009
|
|
($ in millions)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
Net cash and cash equivalents provided by/(used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
$
|
12.4
|
|
|
$
|
16.9
|
|
|
$
|
(4.5
|
)
|
|
|
(27
|
)%
|
Non-cash charges
|
|
|
25.7
|
|
|
|
11.4
|
|
|
|
14.3
|
|
|
|
125
|
%
|
Deferred income tax provision
|
|
|
6.4
|
|
|
|
10.0
|
|
|
|
(3.6
|
)
|
|
|
(36
|
)%
|
Net changes in working capital including changes in other assets
|
|
|
20.7
|
|
|
|
3.3
|
|
|
|
17.4
|
|
|
|
527
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
65.2
|
|
|
|
41.6
|
|
|
|
23.6
|
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities, net
|
|
|
(30.7
|
)
|
|
|
|
|
|
|
(30.7
|
)
|
|
|
100
|
%
|
Acquisition of LocationLogic assets
|
|
|
|
|
|
|
(15.0
|
)
|
|
|
15.0
|
|
|
|
100
|
%
|
Purchases of property and equipment
|
|
|
(22.4
|
)
|
|
|
(6.4
|
)
|
|
|
(16.0
|
)
|
|
|
(250
|
)%
|
Capital purchases funded through leases
|
|
|
7.9
|
|
|
|
5.5
|
|
|
|
2.4
|
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, excluding assets funded by leasing
|
|
|
(14.5
|
)
|
|
|
(0.9
|
)
|
|
|
(13.6
|
)
|
|
|
(1511
|
)%
|
Capitalized software development costs
|
|
|
(4.0
|
)
|
|
|
(0.8
|
)
|
|
|
(3.2
|
)
|
|
|
(400
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from new borrowings
|
|
|
10.0
|
|
|
|
20.0
|
|
|
|
(10.0
|
)
|
|
|
(50
|
)%
|
Other financing activities
|
|
|
(5.2
|
)
|
|
|
(4.6
|
)
|
|
|
(0.6
|
)
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
20.8
|
|
|
$
|
40.3
|
|
|
$
|
(19.5
|
)
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days revenue in accounts receivable, including unbilled receivables at quarter-end
|
|
|
79
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
28
Capital resources:
We have funded our operations, acquisitions, and capital
expenditures primarily using cash generated by our operations, borrowings as described in the
Financings activities below, as well as the capital leases to fund fixed asset purchases.
Sources and uses of cash:
The Companys cash and cash equivalents balance was
approximately $82.2 million at September 30, 2010, a $2.9 million increase from $79.3 million at
September 30, 2009.
Operations:
Cash generated by operating activities was $65.2 million for the nine-months
ended September 30, 2010 as compared to $41.6 million for the nine-months ended September 30, 2009.
The increase in the nine-months ended September 30, 2010 is primarily due to the receipt of $15.7
million cash payment for a 2009 patent-related gain, as well as an increase in deferred revenue due
to timing of percentage of completion projects, a decrease in accounts payable relating to the
timing of vendor payments, and a decrease in accrued payroll and related liabilities due to the
timing of payments.
Investing activities:
Fixed asset additions, excluding assets funded by leasing, were
approximately $14.5 million and $0.9 million, for the nine-months ended September 30, 2010 and
2009, respectively. Also, investments were made in development of carrier software for resale which
had reached the stage of development calling for capitalization, in the amounts approximately $4.0
million and $0.8 million for the nine-months ended September 30, 2010 and 2009, respectively. On
May 19, 2009, the company completed the transaction to purchase the LocationLogic business for
seller proceeds of $25 million consisting of $15 million in cash and approximately 1.4 million of
Company shares valued at $10 million. During the third quarter of 2010, the Company invested $30.7
million in marketable securities that are investment grade and are classified as
available-for-sale. The Companys primary objectives when investing are to preserve principal,
maintain liquidity and obtain higher yield.
Financing activities:
Financing activities during the nine-months ended September 30, 2010
included a draw of $10 million of the remaining funds that were available under our $40 million
Term Loan agreement with our commercial bank, debt service payments, and capital leasing. Fixed
assets purchases funded through capital leases were $7.9 million and $5.5 million during the
nine-months ended September 30, 2010 and 2009, respectively.
Capital Resources:
We have a $35 million revolving Line of Credit with our principal bank
through June 2012. Borrowings at any time are limited to an amount based principally on accounts
receivable levels and working capital ratio, each as defined in the Line of Credit agreement. The
Line of Credit available is also reduced by the amount of cash management services sublimit, which
was $1.5 million September 30, 2010. As of September 30, 2010, we had no borrowings outstanding
under our bank Line of Credit and had approximately $33.5 million of unused borrowing availability
under this line of credit.
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.
On November 16, 2009, the Company issued 4.5% Convertible Senior Notes to fund corporate
initiatives which included the acquisition of NIM. 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 our Class A common stock per $1,000 principal amount of the 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 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 Notes, the Company entered into separate warrant
transactions with certain counterparties 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
29
into by the Company with the counterparties, is not part of the terms of the Notes and will
not affect the holders rights under the Notes.
On 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. For $20 million of the obligation due in December 2010, the Company has the option to settle using common stock, but the Company currently plans to satisfy this debt for cash.
On December 31, 2009, we refinanced facilities under our bank Loan Agreement. A $40 million
five-year Term Loan replaced the Companys $20 million prior term loan with the bank. On December
31, 2009, the Company initially drew $30 million of the funds available and the remaining $10
million was drawn on September 30, 2010. The Term Loan maturity date is June 2014.
Under the 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 a floating per annum rate equal to one-half of one percentage point (0.5%) plus
the greater of (i) 4%, or (ii) the banks prime rate (3.25% at September 30, 2010). The initial draw
of $30 million under the Term Loan is payable in sixty equal installments of $0.6 million of
principal beginning on January 29, 2010 and the additional $10 million draw is payable in forty
five equal installments of $0.2 million of principal beginning on October 31, 2010. Interest is
payable on a monthly basis. As of September 30, 2010, the total amount outstanding under the Term
Loan was $35 million. Funds from the initial draw of $30 million on the Term Loan were used
primarily to retire the June 2009 term loan and funds from the additional $10 million draw in
September 2010 were used for general corporate purposes.
The 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 September 30, 2010, 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.
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 a line of credit
arrangement with our principal bank 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.
Contractual Commitments
As of September 30, 2010, 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. 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 September 30, 2010 our commitments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 12
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
|
|
|
($ in millions)
|
|
Months
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Total
|
|
Term loan from commercial bank dated December 31, 2009
|
|
$
|
7.7
|
|
|
$
|
14.5
|
|
|
$
|
5.1
|
|
|
$
|
|
|
|
$
|
27.3
|
|
Term loan from commercial bank dated September 30, 2010
|
|
|
3.1
|
|
|
|
5.8
|
|
|
|
2.0
|
|
|
|
|
|
|
|
10.9
|
|
4.5% Convertible debt interest obligation
|
|
|
4.7
|
|
|
|
9.4
|
|
|
|
6.9
|
|
|
|
|
|
|
|
21.0
|
|
Promissory notes payable
|
|
|
37.7
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
43.0
|
|
Other long-term debt
|
|
|
3.2
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
5.6
|
|
Capital lease obligations
|
|
|
5.7
|
|
|
|
8.8
|
|
|
|
1.5
|
|
|
|
|
|
|
|
16.0
|
|
Operating leases
|
|
|
5.6
|
|
|
|
11.6
|
|
|
|
4.8
|
|
|
|
2.1
|
|
|
|
24.1
|
|
Purchase obligations
|
|
|
4.7
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments
|
|
$
|
72.4
|
|
|
$
|
58.5
|
|
|
$
|
20.3
|
|
|
$
|
2.1
|
|
|
$
|
153.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
There have not been any material changes to our interest rate risk as described in Item 7A of
our 2010 Annual Report on Form 10-K.
Foreign Currency Risk
For the three-and -nine months ended September 30, 2010, we generated $3.1 million and $9.3
million, respectively, of revenue outside the U.S, mostly denominated in U.S. dollars. A change in
exchange rates would not have a material impact on our Consolidated Financial Statements. As of
September 30, 2010, we had approximately $0.9 million of billed accounts receivable that are
denominated in foreign currencies and would be exposed to foreign currency exchange risk. During
the nine-months ended September 30, 2010, our average receivables subject to foreign currency
exchange risk was $1.4 million and our average deferred revenue balances subject to foreign
currency exchange risk was $0.9 million. We had an average balance of $0.2 million of unbilled
receivables denominated in foreign currency during the nine-months ended September 30, 2010. We
recorded immaterial transaction gains or losses on foreign currency denominated receivables and
deferred revenue for the nine-months ended September 30, 2010.
There have not been any other material changes to our foreign currency risk as described in
Item 7A of our 2009 Annual Report on Form 10-K.
Item 4.
Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys reports filed under the Securities Exchange
Act of 1934, as amended, is recorded, processed, and summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange Commission, and that such
information is accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management necessarily
was required to apply its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
As required by Rule 13a-15(b), the Company carried out an evaluation, under the supervision
and with the participation of the Companys management, including the Companys Chief Executive
Officer and the Companys Chief Financial Officer, of the effectiveness of the design and operation
of the Companys disclosure controls and procedures as of the end of the quarter covered by this
report. Based on the foregoing, the Companys Chief Executive Officer and Chief Financial Officer
have concluded that the Companys disclosure controls and procedures were effective at a reasonable
assurance level as of September 30, 2010.
There have been no changes in the Companys internal control over financial reporting during
the latest fiscal quarter that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
31
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
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 October 5, 2009, the Court approved a settlement of this and approximately
300 similar cases. On January 14, 2010, an Order and Final Judgment was entered. Various notices of
appeal of the Courts October 5, 2009 order were subsequently filed. On October 7, 2010, all but
two parties who had filed a notice of appeal filed a stipulation with the Court withdrawing their
appeals with prejudice, and the two remaining objectors filed briefs in support of their appeals.
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.
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.
Item 1A.
Risk Factors
There have not been any material changes to the information previously disclosed in Item 1A.
Risk Factors in our 2009 Annual Report on Form 10-K, except as follows:
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:
|
|
|
properly evaluate the technology;
|
|
|
|
|
accurately forecast the financial impact of the transaction, including accounting
charges and transaction expenses;
|
|
|
|
|
integrate and retain personnel;
|
|
|
|
|
retain and cross-sell to acquired customers;
|
|
|
|
|
combine potentially different corporate cultures; and
|
|
|
|
|
effectively integrate products and services, and research and development, sales and
marketing and support operations.
|
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. At least annually, or more frequently if facts
and circumstances warrant, we are required to test goodwill and other intangible assets with
indefinite lives to determine if impairment has occurred, including the value of the companies or
assets we acquire. If the testing performed indicates that impairment has occurred, we are
required to record a non-cash impairment charge for the difference between the carrying value of
the goodwill or other intangible assets with indefinite lives and the implied fair value of the
goodwill or the fair value of other intangible assets with indefinite lives in the period the
determination is made. We cannot accurately predict the amount and timing of any impairment of
assets. We may be required to record a significant charge in our financial statements during the
period in which any impairment of our goodwill or amortizable intangible assets is determined,
negatively impacting our results of operations.
32
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.
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.
Under accounting principles generally accepted in the United States, we review our goodwill
and other intangible assets with indefinite lives for impairment when events or changes in
circumstances indicate the carrying value of the goodwill and other intangible assets with
indefinite lives may not be recoverable. Goodwill is tested for impairment at least annually or
more frequently if facts and circumstances warrant. Factors that may be considered a change in
circumstances, indicating that the carrying value of our goodwill or other intangible assets with
indefinite lives may not be recoverable, include a decline in stock price and market
capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may
be required to record a significant charge in our financial statements during the period in which
any impairment of our goodwill or other intangible assets with indefinite lives is determined,
negatively impacting our results of operations.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Removed and Reserved
Item 5.
Other Information
(a) None
(b) None.
Item 6.
Exhibits
|
|
|
Exhibit
|
|
|
Numbers
|
|
Description
|
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
|
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized on the 8th day of November 2010.
|
|
|
|
|
|
TELECOMMUNICATION SYSTEMS, INC.
|
|
|
By:
|
/s/
Maurice B. Tosé
|
|
|
|
Maurice B. Tosé
|
|
|
|
Chairman, President and Chief Executive Officer
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Reporthas been signed below by the following persons on behalf of the Registrant in the capacities and on
the dates indicated.
|
|
|
/s/
Maurice B. Tosé
|
|
Chairman, President and Chief Executive Officer
|
Maurice B. Tosé November 8, 2010
|
|
(Principal
Executive Officer)
|
|
|
|
/s/
Thomas M. Brandt, Jr.
|
|
Senior Vice President and Chief Financial Officer
|
Thomas M. Brandt, Jr. November 8, 2010
|
|
(Principal
Financial Officer)
|
34
Telecommunication Systems (NASDAQ:TSYS)
Historical Stock Chart
From Sep 2024 to Oct 2024
Telecommunication Systems (NASDAQ:TSYS)
Historical Stock Chart
From Oct 2023 to Oct 2024