Attached files
file | filename |
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EX-32.1 - EX-32.1 - TELECOMMUNICATION SYSTEMS INC /FA/ | w78366exv32w1.htm |
EX-31.2 - EX-31.2 - TELECOMMUNICATION SYSTEMS INC /FA/ | w78366exv31w2.htm |
EX-32.2 - EX-32.2 - TELECOMMUNICATION SYSTEMS INC /FA/ | w78366exv32w2.htm |
EX-31.1 - EX-31.1 - TELECOMMUNICATION SYSTEMS INC /FA/ | w78366exv31w1.htm |
EX-10.30 - EX-10.30 - TELECOMMUNICATION SYSTEMS INC /FA/ | w78366exv10w30.htm |
EX-10.32 - EX-10.32 - TELECOMMUNICATION SYSTEMS INC /FA/ | w78366exv10w32.htm |
EX-10.31 - EX-10.31 - TELECOMMUNICATION SYSTEMS INC /FA/ | w78366exv10w31.htm |
EX-10.33 - EX-10.33 - TELECOMMUNICATION SYSTEMS INC /FA/ | w78366exv10w33.htm |
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
March 31, 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) 275 West Street, Annapolis, MD (Address of principal executive offices) |
52-1526369
(I.R.S. Employer Identification No.) 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 | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the 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 March 31, |
||||
Title of Each Class
|
2010 | |||
Class A Common Stock, par value
|
||||
$0.01 per share
|
46,609,031 | |||
Class B Common Stock, par value
|
||||
$0.01 per share
|
6,176,334 | |||
Total Common Stock Outstanding
|
52,785,365 | |||
INDEX
TELECOMMUNICATION
SYSTEMS, INC.
Page | ||||||||
PART I. FINANCIAL INFORMATION
|
||||||||
Item 1.
|
Financial Statements
|
|||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
20 | ||||||||
33 | ||||||||
33 | ||||||||
PART II. OTHER INFORMATION
|
||||||||
35 | ||||||||
36 | ||||||||
36 | ||||||||
36 | ||||||||
36 | ||||||||
36 | ||||||||
37 | ||||||||
38 |
TeleCommunication
Systems, Inc.
Consolidated Statements of Income
(amounts in thousands, except per share data)
(unaudited)
Consolidated Statements of Income
(amounts in thousands, except per share data)
(unaudited)
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Revenue
|
||||||||
Services
|
$ | 59,844 | $ | 30,624 | ||||
Systems
|
31,073 | 39,877 | ||||||
Total revenue
|
90,917 | 70,501 | ||||||
Direct costs of revenue
|
||||||||
Direct cost of services
|
34,332 | 18,369 | ||||||
Direct cost of systems, including amortization of software
development costs of $2,306 and $560, respectively
|
23,036 | 26,888 | ||||||
Total direct cost of revenue
|
57,368 | 45,257 | ||||||
Services gross profit
|
25,512 | 12,255 | ||||||
Systems gross profit
|
8,037 | 12,989 | ||||||
Total gross profit
|
33,549 | 25,244 | ||||||
Operating costs and expenses
|
||||||||
Research and development expense
|
8,518 | 4,874 | ||||||
Sales and marketing expense
|
5,979 | 3,991 | ||||||
General and administrative expense
|
8,462 | 6,892 | ||||||
Depreciation and amortization of property and equipment
|
1,976 | 1,454 | ||||||
Amortization of acquired intangible assets
|
1,172 | 37 | ||||||
Total operating costs and expenses
|
26,107 | 17,248 | ||||||
Operating income
|
7,442 | 7,996 | ||||||
Interest expense
|
(2,352 | ) | (188 | ) | ||||
Amortization of debt discount and debt issuance expenses
|
(160 | ) | (5 | ) | ||||
Other income, net
|
490 | 179 | ||||||
Income before income taxes
|
5,420 | 7,982 | ||||||
Provision for income taxes
|
(410 | ) | (3,115 | ) | ||||
Net income
|
$ | 5,010 | $ | 4,867 | ||||
Net income per share-basic
|
$ | 0.10 | $ | 0.11 | ||||
Net income per share-diluted
|
$ | 0.08 | $ | 0.10 | ||||
Weighted average shares outstanding-basic
|
52,654 | 45,567 | ||||||
Weighted average shares outstanding-diluted
|
67,245 | 51,225 |
See accompanying Notes to Consolidated Financial Statements
1
TeleCommunication
Systems, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share data)
Consolidated Balance Sheets
(amounts in thousands, except share data)
March 31, |
December 31, |
|||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Assets
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 76,415 | $ | 61,426 | ||||
Accounts receivable, net of allowance of $381 in 2010 and $389
in 2009
|
67,939 | 65,476 | ||||||
Unbilled receivables
|
28,597 | 23,783 | ||||||
Inventory
|
13,182 | 9,331 | ||||||
Deferred income taxes
|
10,575 | 9,507 | ||||||
Receivable from settlement of patent matter
|
| 15,700 | ||||||
Income tax refund receivable
|
| 5,438 | ||||||
Other current assets
|
6,513 | 8,945 | ||||||
Total current assets
|
203,221 | 199,606 | ||||||
Property and equipment, net of accumulated depreciation and
amortization of $48,926 in 2010 and $46,960 in 2009
|
24,121 | 20,734 | ||||||
Software development costs, net of accumulated amortization of
$12,246 in 2010 and $9,941 in 2009
|
41,562 | 45,384 | ||||||
Acquired intangible assets, net of accumulated amortization of
$2,698 in 2010 and $1,526 in 2009
|
31,755 | 33,975 | ||||||
Goodwill
|
164,748 | 164,350 | ||||||
Other assets
|
6,817 | 8,176 | ||||||
Total assets
|
$ | 472,224 | $ | 472,225 | ||||
Liabilities and stockholders equity
|
||||||||
Current liabilities:
|
||||||||
Accounts payable and accrued expenses
|
$ | 45,424 | $ | 52,999 | ||||
Accrued payroll and related liabilities
|
10,867 | 19,265 | ||||||
Deferred revenue
|
21,280 | 9,938 | ||||||
Current portion of capital lease obligations and notes payable
|
40,278 | 39,731 | ||||||
Total current liabilities
|
117,849 | 121,933 | ||||||
Capital lease obligations and notes payable, less current portion
|
142,856 | 143,316 | ||||||
Deferred income taxes
|
11,768 | 15,435 | ||||||
Other long-term liabilities
|
4,370 | 5,755 | ||||||
Stockholders equity:
|
||||||||
Class A Common Stock; $0.01 par value:
|
||||||||
Authorized shares: 225,000,000; issued and outstanding shares of
46,609,031 in 2010 and 46,157,025 in 2009
|
466 | 462 | ||||||
Class B Common Stock; $0.01 par value:
|
||||||||
Authorized shares: 75,000,000; issued and outstanding shares of
6,176,334 in 2010 and 6,276,334 in 2009
|
62 | 63 | ||||||
Additional paid-in capital
|
288,314 | 283,733 | ||||||
Accumulated other comprehensive income
|
13 | 12 | ||||||
Accumulated deficit
|
(93,474 | ) | (98,484 | ) | ||||
Total stockholders equity
|
195,381 | 185,786 | ||||||
Total liabilities and stockholders equity
|
$ | 472,224 | $ | 472,225 | ||||
See accompanying Notes to Consolidated Financial Statements
2
TeleCommunication
Systems, Inc.
Consolidated Statement of Stockholders Equity
(amounts in thousands, except share data)
(unaudited)
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/(Loss) | Deficit | Total | |||||||||||||||||||
Balance at January 1, 2010
|
$ | 462 | $ | 63 | $ | 283,733 | $ | 12 | $ | (98,484 | ) | $ | 185,786 | |||||||||||
Options exercised for the purchase of 323,561 shares of
Class A Common Stock
|
3 | | 1,244 | | | 1,247 | ||||||||||||||||||
Issuance of 28,345 shares of Class A Common Stock
under Employee Stock Purchase Plan
|
| | 215 | | | 215 | ||||||||||||||||||
Conversion of 100,000 shares of Class B Common Stock
to Class A Common Stock
|
1 | (1 | ) | | | | | |||||||||||||||||
Stock compensation expense
|
| | 3,122 | | | 3,122 | ||||||||||||||||||
Foreign currency translation adjustment
|
1 | 1 | ||||||||||||||||||||||
Net income for the three-months ended March 31, 2010
|
| | | | 5,010 | 5,010 | ||||||||||||||||||
Balance at March 31, 2010
|
$ | 466 | $ | 62 | $ | 288,314 | $ | 13 | $ | (93,474 | ) | $ | 195,381 | |||||||||||
See accompanying Notes to Consolidated Financial Statements
3
TeleCommunication
Systems, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Operating activities:
|
||||||||
Net income
|
$ | 5,010 | $ | 4,867 | ||||
Adjustments to reconcile net income to net cash provided
by/(used in) operating activities:
|
||||||||
Depreciation and amortization of property and equipment
|
1,976 | 1,454 | ||||||
Amortization of acquired intangible assets
|
1,172 | 37 | ||||||
Deferred tax provision
|
410 | 2,965 | ||||||
Stock compensation expense
|
3,122 | 966 | ||||||
Amortization of software development costs
|
2,306 | 560 | ||||||
Amortization of deferred financing fees
|
160 | 5 | ||||||
Other non-cash adjustments
|
1,282 | (6 | ) | |||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable, net
|
(2,503 | ) | 3,299 | |||||
Unbilled receivables
|
(4,766 | ) | 971 | |||||
Inventory
|
(3,851 | ) | (1,242 | ) | ||||
Other current assets
|
21,655 | (2,092 | ) | |||||
Other assets
|
1,359 | (137 | ) | |||||
Accounts payable and accrued expenses
|
(7,048 | ) | (11,208 | ) | ||||
Accrued payroll and related liabilities
|
(8,428 | ) | (9,951 | ) | ||||
Deferred revenue
|
11,342 | 4,882 | ||||||
Other liabilities
|
(3,572 | ) | | |||||
Subtotal Changes in operating assets and liabilities
|
4,187 | (15,478 | ) | |||||
Net cash provided by/(used in) operating activities
|
19,625 | (4,630 | ) | |||||
Investing activities:
|
||||||||
Purchases of property and equipment, net of cash acquired
|
(2,724 | ) | 184 | |||||
Capitalized software development costs
|
(821 | ) | (143 | ) | ||||
Net cash provided by/(used in) investing activities
|
(3,545 | ) | 41 | |||||
Financing activities:
|
||||||||
Payments on long-term debt and capital lease obligations
|
(2,552 | ) | (1,081 | ) | ||||
Proceeds from exercise of employee stock options and sale of
stock
|
1,462 | 2,022 | ||||||
Net cash provided by/(used in) financing activities
|
(1,090 | ) | 941 | |||||
Net increase/(decrease) in cash
|
14,990 | (3,648 | ) | |||||
Cash and cash equivalents at the beginning of the period
|
61,425 | 38,977 | ||||||
Cash and cash equivalents at the end of the period
|
$ | 76,415 | $ | 35,329 | ||||
See accompanying Notes to Consolidated Financial Statements
4
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial Statements
March 31, 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 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-months ended March 31, 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 accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts and
related disclosures. Actual results could differ from those
estimates.
Other Comprehensive
Income/(Loss). Comprehensive income/(loss)
includes changes in the equity of a business during a period
from transactions and other events and circumstances from
non-owner sources. Other comprehensive income/loss refers to
revenue, expenses, gains and losses that under
U.S. generally accepted accounting principles are included
in comprehensive income, but excluded from net income. For
operations outside the U.S. that prepare financial
statements in currencies other than the U.S. dollar,
results of operations and cash flows are translated at average
exchange rates during the period, and assets and liabilities are
translated at
end-of-period
exchange rates. Translation adjustments for our European
subsidiary are included as a component of accumulated other
comprehensive income in stockholders equity.
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. The
funds are included in Other assets and Other long-term liability
on the Consolidated Balance Sheet.
Stock-Based Compensation. We have two
stock-based employee compensation plans: our Fifth Amended and
Restated 1997 Stock Incentive Plan (the Stock Incentive
Plan) and our Employee Stock Purchase Plan (the
ESPP). We have also previously 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 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. At March 31, 2010 and 2009,
stock options to purchase
5
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
approximately 5.5 million and 1.6 million shares,
respectively, were excluded from the computation of diluted net
income per share because their inclusion would have been
anti-dilutive.
The following table summarizes the computations of basic and
diluted earnings per share for the quarters ended March 31:
2010 | 2009 | |||||||
Numerator:
|
||||||||
Net income, basic
|
$ | 5,010 | $ | 4,867 | ||||
Adjustment for assumed dilution:
|
||||||||
Interest on convertible debt, net of taxes
|
671 | | ||||||
Net income, diluted
|
$ | 5,681 | $ | 4,867 | ||||
Denominator:
|
||||||||
Total basic weighted-average common shares outstanding
|
52,654 | 45,567 | ||||||
Effect of dilutive stock options based on treasury stock method
|
4,589 | 5,160 | ||||||
Effect of dilutive warrants based on treasury stock method
|
| 498 | ||||||
Effect of dilutive 4.5% convertible debt, based on if
converted method
|
10,002 | | ||||||
Weighted average diluted shares
|
67,245 | 51,225 | ||||||
Basic earnings per common share:
|
||||||||
Net income per share basic
|
$ | 0.10 | $ | 0.11 | ||||
Diluted earnings per common share:
|
||||||||
Net income per share-diluted
|
$ | 0.08 | $ | 0.10 | ||||
Income Taxes. Income tax amounts and balances
are accounted for using the asset and liability method of
accounting for income taxes as prescribed by ASC 740. Under
this method, deferred income tax assets and liabilities are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Effective January 1, 2007, the Company began recognizing
the benefits of tax positions in the financial statements 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
March 31, 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 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
6
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 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.
2. | Acquisitions |
During 2009 the Company acquired four businesses. These
acquisitions were accounted for using the acquisition method;
accordingly, their total estimated purchase prices are allocated
to the net tangible and intangible assets acquired and
liabilities assumed, based on their estimated fair values as of
the effective dates of the acquisitions. The preliminary
allocations of purchase price were based upon managements
preliminary valuation of the fair value of tangible and
intangible assets acquired and liabilities assumed, and such
estimates and assumptions are subject to change as the company
finalizes the allocation for each of the acquisitions.
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.
On November 3, 2009, we purchased all of the outstanding
stock of Solvern Innovations, Inc. (Solvern), a
communications technology company focused on cyber-security. The
Solvern business is reported as part of our government services.
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.
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 million for
LocationLogic, $7.3 million for Solvern and $2 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
7
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
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. Note that 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 the first quarter of 2010, we made adjustments to the
preliminary purchase price allocations for all four acquisitions
for a total adjustment to goodwill of $0.4 million, as a
result of information not initially available. 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.
3. | Stock-Based Compensation |
We recognize compensation expense net of estimated forfeitures
over the requisite service period, which is generally the
vesting period of 5 years. The Company estimates the fair
value of each stock option award on the date of grant using the
Black-Scholes option-pricing model. Expected volatilities are
based on historical volatility of the Companys stock. The
Company estimates forfeitures based on historical experience and
the expected term of the options granted are derived from
historical data on employee exercises. The risk free interest
rate is based on the U.S. Treasury yield curve in effect at
the time of the grant. The Company has not paid and does not
anticipate paying dividends in the near future.
We also recognize non-cash stock 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 15 shares and
10 shares of restricted stock outstanding, respectively, as
of March 31, 2010 and March 31, 2009. We expect to
record future stock compensation expense of $53 as a result of
the restricted stock grants outstanding as of March 31,
2010 that will be recognized over the remaining vesting period
in 2010.
The material components of our stock compensation expense are as
follows:
Three Months |
||||||||
Ended March 31, | ||||||||
2010 | 2009 | |||||||
Stock compensation:
|
||||||||
Stock options
|
$ | 3,031 | $ | 925 | ||||
Restricted stock
|
53 | 25 | ||||||
Employee stock purchase plan
|
38 | 16 | ||||||
Total stock compensation
|
$ | 3,122 | $ | 966 | ||||
8
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Stock compensation is included in our operations in the
accompanying Consolidated Statements of Income as follows:
Three Months Ended March 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Comm. | Gvmt | Total | Comm. | Gvmt | Total | |||||||||||||||||||
Stock compensation included in direct cost of revenue:
|
||||||||||||||||||||||||
Direct cost of services
|
$ | 650 | $ | 825 | $ | 1,475 | $ | 270 | $ | 121 | $ | 391 | ||||||||||||
Direct cost of systems
|
70 | 418 | 488 | 45 | 186 | 231 | ||||||||||||||||||
Total stock compensation included in direct cost of revenue
|
$ | 720 | $ | 1,243 | $ | 1,963 | $ | 315 | $ | 307 | $ | 622 | ||||||||||||
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Stock compensation included in operating expenses:
|
||||||||
Research and development expense
|
$ | 815 | $ | 225 | ||||
Sales and marketing expense
|
190 | 78 | ||||||
General and administrative expense
|
154 | 41 | ||||||
Total stock compensation included in operating expenses
|
$ | 1,159 | $ | 344 | ||||
A summary of our stock option activity and related information
for the three-months ended March 31, 2010 is as follows:
Weighted |
||||||||
Average |
||||||||
Number of |
Exercise |
|||||||
(Share amounts in thousands)
|
Options | Price | ||||||
Outstanding, beginning of year
|
14,612 | $ | 5.32 | |||||
Granted
|
1,448 | $ | 8.52 | |||||
Exercised
|
(324 | ) | $ | 3.85 | ||||
Expired
|
(7 | ) | $ | 7.67 | ||||
Forfeited
|
(329 | ) | $ | 8.34 | ||||
Outstanding, at March 31, 2010
|
15,400 | $ | 5.58 | |||||
Exercisable, at March 31, 2010
|
8,297 | $ | 4.03 | |||||
Vested and expected to vest at March 31, 2010
|
14,171 | $ | 5.37 | |||||
Weighted-average remaining contractual life of options
outstanding at March 31, 2010
|
6.7 years | |||||||
9
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Three Months March 31, | ||||||||
2010 | 2009 | |||||||
Estimated weighted-average grant-date fair value of options
granted during the period
|
$ | 4.70 | $ | 4.58 | ||||
Total fair value of options vested during the period
|
$ | 4,490 | $ | 3,527 | ||||
Intrinsic value of options exercised during the period
|
$ | 1,684 | $ | 2,817 | ||||
Exercise prices for options outstanding at March 31, 2010
ranged from $1.07 to $26.05 as follows (all share amounts in
thousands):
Weighted-Average |
||||||||||||||||||||||||
Weighted-Average |
Remaining |
|||||||||||||||||||||||
Weighted-Average |
Remaining |
Weighted-Average |
Contractual Life |
|||||||||||||||||||||
Exercise Prices |
Contractual Life |
Options |
Exercise Prices |
of Options |
||||||||||||||||||||
Options |
of Options |
of Options |
Vested and |
of Options Vested |
Vested and |
|||||||||||||||||||
Exercise Prices
|
Outstanding | Outstanding | Outstanding (Years) | Exercisable | and Exercisable | Exercisable (Years) | ||||||||||||||||||
$ 1.07 - $ 1.84
|
83 | $ | 1.71 | 2.82 | 83 | $ | 1.71 | 2.82 | ||||||||||||||||
$ 1.92 - $ 2.99
|
2,508 | $ | 2.47 | 5.52 | 2,210 | $ | 2.47 | 5.49 | ||||||||||||||||
$ 3.05 - $ 4.68
|
5,149 | $ | 3.33 | 5.84 | 3,901 | $ | 3.34 | 5.26 | ||||||||||||||||
$ 4.83 - $ 7.45
|
2,248 | $ | 6.73 | 5.03 | 1,699 | $ | 6.73 | 3.77 | ||||||||||||||||
$ 7.95 - $17.37
|
5,408 | $ | 8.75 | 9.48 | 400 | $ | 8.08 | 8.54 | ||||||||||||||||
$26.05 - $26.05
|
4 | $ | 26.05 | 0.15 | 4 | $ | 26.05 | 0.15 | ||||||||||||||||
15,400 | 8,297 | |||||||||||||||||||||||
As of March 31, 2010, the aggregate intrinsic value of
options outstanding was $36,903 and the aggregate intrinsic
value of options vested and exercisable was $36,155. As of
March 31, 2010, we estimate that we will recognize $22,065
in expense for outstanding, unvested options over their weighted
average remaining vesting period of 3.8 years, of which we
estimate $6,982 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:
Three Months Ended March 31, | ||||
2010 | 2009 | |||
Expected life (in years)
|
5.5 | 5.5 | ||
Risk-free interest rate(%)
|
2.4%-2.8% | 1.7%-1.9% | ||
Volatility(%)
|
60% | 63%-64% | ||
Dividend yield(%)
|
0% | 0% |
4. | Supplemental Disclosure of Cash Flow Information |
Property and equipment acquired under capital leases totaled
$2,638 and $2,050 during the three-months ended March 31,
2010 and 2009, respectively.
Interest paid totaled $540 and $188 during the three-months
ended March 31, 2010 and 2009, respectively.
Income taxes and state income taxes paid totaled $1,229 and $379
during the three-months ended March 31, 2010 and 2009,
respectively.
10
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
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.
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 |
3/31/2010 |
|||||||||||||||
3/31/2010 | Using Fair Value Hierarchy | |||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets
|
||||||||||||||||
Cash and cash equivalents
|
$ | 76,415 | $ | 76,415 | $ | | $ | | ||||||||
Deferred compensation plan investments
|
1,118 | 1,118 | | | ||||||||||||
Assets at Fair Value
|
$ | 77,533 | $ | 77,533 | $ | | $ | | ||||||||
Liabilities
|
||||||||||||||||
Deferred compensation
|
$ | 931 | $ | 931 | $ | | $ | | ||||||||
Contractual acquisition earnouts
|
7,280 | | | 7,280 | ||||||||||||
Liabilities at Fair Value
|
$ | 8,211 | $ | 931 | $ | | $ | 7,280 | ||||||||
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.
The Companys long-term debt consists of borrowings under a
commercial bank term loan agreement, a 4.5% convertible senior
notes, and promissory notes, see Note 10. 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 quarter of 2010, there were no required
fair value measurements for assets and liabilities measured at
fair value on a non-recurring basis.
11
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
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; that
is, customers use our software functionality through connections
to and from our network operations centers, paying us monthly
fees based on the number of subscribers, cell sites, call center
circuits, or message volume. We also provide hosted services
under contracts with wireless carrier networks, as well as VoIP
service providers.
Our Government Segment provides communication systems
integration, information technology services, and software
solutions to the U.S. Department of Defense and other
government customers. We also own and operate secure satellite
teleport facilities, and resell access to satellite airtime (
known as space segment.) We design, furnish, install and operate
wireless and data network communication systems, including our
SwiftLink®
deployable communication systems which integrate high speed,
satellite, and internet protocol technology, with secure
Government-approved cryptologic devices.
Management evaluates segment performance based on gross profit.
We do not maintain information regarding segment assets.
Accordingly, asset information by reportable segment is not
presented.
The following table sets forth results for our reportable
segments for the three-months ended March 31, 2010 and
2009, respectively. All revenues reported below are from
external customers. A reconciliation of segment gross profit to
net income for the respective periods is also included below:
Three Months Ended March 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Comm. | Gvmt | Total | Comm. | Gvmt | Total | |||||||||||||||||||
Revenue
|
||||||||||||||||||||||||
Services
|
$ | 39,278 | $ | 20,566 | $ | 59,844 | $ | 17,807 | $ | 12,817 | $ | 30,624 | ||||||||||||
Systems
|
8,645 | 22,428 | 31,073 | 7,763 | 32,114 | 39,877 | ||||||||||||||||||
Total revenue
|
47,923 | 42,994 | 90,917 | 25,570 | 44,931 | 70,501 | ||||||||||||||||||
Direct costs of revenue
|
||||||||||||||||||||||||
Direct cost of services
|
19,264 | 15,068 | 34,332 | 8,191 | 10,178 | 18,369 | ||||||||||||||||||
Direct cost of systems
|
3,441 | 19,595 | 23,036 | 1,888 | 25,000 | 26,888 | ||||||||||||||||||
Total direct costs of revenue
|
22,705 | 34,663 | 57,368 | 10,079 | 35,178 | 45,257 | ||||||||||||||||||
Gross profit
|
||||||||||||||||||||||||
Services gross profit
|
20,014 | 5,498 | 25,512 | 9,616 | 2,639 | 12,255 | ||||||||||||||||||
Systems gross profit
|
5,204 | 2,833 | 8,037 | 5,875 | 7,114 | 12,989 | ||||||||||||||||||
Total gross profit
|
$ | 25,218 | $ | 8,331 | $ | 33,549 | $ | 15,491 | $ | 9,753 | $ | 25,244 | ||||||||||||
12
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Total segment gross profit
|
$ | 33,549 | $ | 25,244 | ||||
Research and development expense
|
(8,518 | ) | (4,874 | ) | ||||
Sales and marketing expense
|
(5,979 | ) | (3,991 | ) | ||||
General and administrative expense
|
(8,462 | ) | (6,892 | ) | ||||
Depreciation and amortization of property and equipment
|
(1,976 | ) | (1,454 | ) | ||||
Amortization of acquired intangible assets
|
(1,172 | ) | (37 | ) | ||||
Interest expense
|
(2,352 | ) | (188 | ) | ||||
Amortization of debt discount and debt issuance expenses
|
(160 | ) | (5 | ) | ||||
Other income/(expense), net
|
490 | 179 | ||||||
Income before income taxes
|
5,420 | 7,982 | ||||||
Provision for income taxes
|
(410 | ) | (3,115 | ) | ||||
Net income
|
$ | 5,010 | $ | 4,867 | ||||
7. | Inventory |
Inventory consisted of the following:
Mar. 31, |
Dec. 31, |
|||||||
2010 | 2009 | |||||||
Component parts
|
$ | 4,193 | $ | 5,658 | ||||
Finished goods
|
8,989 | 3,673 | ||||||
Total inventory at period end
|
$ | 13,182 | $ | 9,331 | ||||
13
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
8. | 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:
March 31, 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 | $ | 1,596 | $ | 11,355 | $ | 13,735 | $ | 1,151 | $ | 12,584 | ||||||||||||
Customer relationships
|
20,138 | 793 | 19,345 | 20,402 | 113 | 20,289 | ||||||||||||||||||
Trademarks and patents
|
1,364 | 309 | 1,055 | 1,364 | 262 | 1,102 | ||||||||||||||||||
Software development costs, including acquired technology
|
53,808 | 12,246 | 41,562 | 55,325 | 9,941 | 45,384 | ||||||||||||||||||
Total acquired intangible assets and software dev. costs
|
$ | 88,261 | $ | 14,944 | $ | 73,317 | $ | 90,826 | $ | 11,467 | $ | 79,359 | ||||||||||||
Estimated future amortization expense:
|
||||||||||||||||||||||||
Nine Months ending December 31, 2010
|
$ | 10,557 | ||||||||||||||||||||||
Year ending December 31, 2011
|
$ | 13,570 | ||||||||||||||||||||||
Year ending December 31, 2012
|
$ | 13,406 | ||||||||||||||||||||||
Year ending December 31, 2013
|
$ | 13,355 | ||||||||||||||||||||||
Year ending December 31, 2014
|
$ | 11,589 | ||||||||||||||||||||||
Thereafter
|
$ | 10,840 | ||||||||||||||||||||||
$ | 73,317 | |||||||||||||||||||||||
For the three-months ended March 31, 2010 and 2009, we
capitalized $821 and $144, respectively, of software development
costs of continuing operations for certain software projects
after the point of technological feasibility had been reached
but before the products were available for general release.
Accordingly, these costs have been capitalized and are being
amortized over their estimated useful lives beginning when the
products are available for general release. The capitalized
costs relate to our location-based software. We believe that
these capitalized costs will be recoverable from future gross
profits generated by these products.
The gross carrying amounts decreased in the first quarter of
2010 due to adjustments to the preliminary purchase price
allocations 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 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.
9. | 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
14
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 |
||||||||||||||||||
Revenue For |
||||||||||||||||||
the Three |
||||||||||||||||||
Months Ended |
||||||||||||||||||
March 31, | ||||||||||||||||||
Customer
|
Segment | 2010 | 2009 | |||||||||||||||
U.S. Government
|
Government | 36 | % | 48 | % | |||||||||||||
Customer A
|
Commercial | 29 | % | 20 | % |
As of March 31, 2010 | ||||||||||
Accounts |
Unbilled |
|||||||||
Customer
|
Segment | Receivable | Receivables | |||||||
U.S. Government
|
Government | 25 | % | 55 | % | |||||
Customer A
|
Commercial | 40 | % | 31 | % |
10. | Lines of Credit and Financing Arrangements |
We have maintained a line of credit arrangement with our
principal bank since 2003. On December 31, 2009, we amended
our June 2009 Third Amended and Restated Loan Agreement with our
principal bank. The amended agreement increased the line of
credit to a $35,000 revolving line of credit (the Line of
Credit,) from the June 2009 amount of $30,000. Our 2009
line of credit replaces the Companys 2007 revolving line
of credit availability of $22,000 with the bank. The Line of
Credit maturity date is June 25, 2012.
The Line of Credit includes three
sub-facilities:
(i) a letter of credit
sub-facility
pursuant to which the bank may issue letters of credit,
(ii) a foreign exchange
sub-facility
pursuant to which the Company may purchase foreign currency from
the bank, and (iii) a cash management
sub-facility
pursuant to which the bank may provide cash management services
(which may include, among others, merchant services, direct
deposit of payroll, business credit cards and check cashing
services) and in connection therewith make loans and extend
credit to the Company. The principal amount outstanding under
the Line of Credit accrues interest at a floating per annum rate
equal to the rate which is the greater of (i) 4% per annum,
or (ii) the banks most recently announced prime
rate, even if it is not the banks lowest prime rate.
The principal amount outstanding under the Line of Credit is
payable either prior to or on the maturity date and interest on
the Line of Credit is payable monthly. Our potential borrowings
under the Line of Credit are reduced by the amounts of letters
of credit outstanding and a cash management services sublimit
which totaled $1,596 at March 31, 2010. As of
March 31, 2010 and 2009, there were no borrowings on the
line of credit and we had approximately $33,400 and $19,700,
respectively, of unused borrowing availability under this line.
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
15
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
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) that replaces the
Companys $20 million prior term loan. The company
drew $30 million of the term funds available with a
maturity date in June 2014, and the remaining $10 million
is available to draw no later than September 2010. The principal
amount outstanding under the Term Loan accrues interest at a
floating per annum rate equal to the rate which is the greater
of (i) 4% per annum, or (ii) 0.5% above the banks
prime rate (3.25% at March 31, 2010). The principal amount
outstanding under the Term Loan is payable in sixty equal
installments of principal of $556 beginning on January 29,
2010 and interest is payable on a monthly basis. Funds from the
increase in the amount of the Term Loan were used primarily to
retire the June 2009 term loan. As of March 31, 2010, the
amount outstanding under the Term Loan was $28,333. In June
2009, we financed a $20,000, five year term loan with interest
calculated at a floating per annum rate equal to the rate which
is the greater of (i) 4% per annum, or (ii) 0.5% above
the banks prime rate, which was repayable in monthly
installments of $333 plus interest. The additional funds
provided in our June 2009 agreement were used primarily to
retire our June 2007 five year bank term loan and for the
acquisition of substantially of the assets of LocationLogic.
Our bank Loan Agreement contains customary representations and
warranties and customary events of default. Availability under
the Line of Credit is subject to certain conditions, including
the
16
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
continued accuracy of the Companys representations and
warranties. The Loan Agreement also contains subjective
covenants that require (i) no material impairment in the
perfection or priority of the banks lien in the collateral
of the Loan Agreement, (ii) no material adverse change in
the business, operations, or condition (financial or otherwise)
of the Borrowers, or (iii) no material impairment of the
prospect of repayment of any portion of the borrowings under the
Loan Agreement. The Loan Agreement also contains covenants
requiring the Company to maintain a minimum adjusted quick ratio
and a fixed charge coverage ratio as well as other restrictive
covenants including, among others, restrictions on the
Companys ability to dispose 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 March 31, 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.
11. | Income taxes |
The provision for income taxes totaled $410 for the three-months
ended March 31, 2010, as compared to $3,115 being recorded
for the three-months ended March 31, 2009. The expense
recorded for the three-months ended March 31, 2010 is
comprised of current year tax expense of $2,161 recorded based
on pretax income plus a discrete tax benefit of $1,751 recorded
related to Research & Experimentation tax credits.
Excluding discrete items, the effective tax rate was
approximately 39.5% for the three months ended March 31,
2010 and 39% for the three months ended March 31, 2009.
The significant changes to unrecognized tax benefits during the
three-months ended March 31, 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.
12. | Commitments and Contingencies |
The Company has been notified that some customers may seek
indemnification under its contractual arrangements with those
customers for costs associated with defending lawsuits alleging
infringement of certain patents through the use of our products
and services in combination with the use of products and
services of multiple other vendors. 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. Although the Company cannot
currently predict the outcome of these matters, we do not expect
the resolutions will have a material effect on our consolidated
results of operations, financial position or cash flows.
In November 2001, a shareholder class action lawsuit was filed
against us, certain of our current officers and a director, and
several investment banks that were the underwriters of our
initial public offering (the Underwriters):
Highstein v. TeleCommunication Systems, Inc., et al.,
United States District Court for the Southern District of New
York, Civil Action
No. 01-CV-9500.
The plaintiffs seek an unspecified amount of damages. The
lawsuit purports to be a class action suit filed on behalf of
purchasers of our Class A Common Stock during the period
August 8, 2000 through December 6, 2000. The
plaintiffs allege that the Underwriters agreed to allocate our
Class A Common Stock offered for sale in
17
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
our initial public offering to certain purchasers in exchange
for excessive and undisclosed commissions and agreements by
those purchasers to make additional purchases of our
Class A Common Stock in the aftermarket at pre-determined
prices. The plaintiffs allege that all of the defendants
violated Sections 11, 12 and 15 of the Securities Act, and
that the underwriters violated Section 10(b) of the
Exchange Act, and
Rule 10b-5
promulgated thereunder. The claims against us of violation of
Rule 10b-5
have been dismissed with the plaintiffs having the right to
re-plead. On February 15, 2005, the District Court issued
an Order preliminarily approving a settlement agreement among
class plaintiffs, all issuer defendants and their insurers,
provided that the parties agree to a modification narrowing the
scope of the bar order set forth in the settlement agreement.
The parties agreed to a modification narrowing the scope of the
bar order, and on August 31, 2005, the court issued an
order preliminarily approving the settlement. On
December 5, 2006, the United States Court of Appeals for
the Second Circuit overturned the District Courts
certification of the class of plaintiffs who are pursuing the
claims that would be settled in the settlement against the
underwriter defendants. Plaintiffs filed a Petition for
Rehearing and Rehearing En Banc with the Second Circuit on
January 5, 2007 in response to the Second Circuits
decision. On April 6, 2007, the Second Circuit denied
plaintiffs rehearing petition, but clarified that the
plaintiffs may seek to certify a more limited class in the
District Court. On June 25, 2007, the District Court signed
an Order terminating the settlement. On November 13, 2007,
the issuer defendants in certain designated focus
cases filed a motion to dismiss the second consolidated
amended class action complaints that were filed in those cases.
On March 26, 2008, the District Court issued an Opinion and
Order denying, in large part, the motions to dismiss the amended
complaints in the focus cases. On April 2,
2009, the plaintiffs filed a motion for preliminary approval of
a new proposed settlement between plaintiffs, the underwriter
defendants, the issuer defendants and the insurers for the
issuer defendants. On June 10, 2009, the Court issued an
opinion preliminarily approving the proposed settlement, and
scheduling a settlement fairness hearing for September 10,
2009. On August 25, 2009, the plaintiffs filed a motion for
final approval of the proposed settlement, approval of the plan
of distribution of the settlement fund, and certification of the
settlement classes. A settlement fairness hearing was held on
September 10, 2009. On October 5, 2009, the Court
issued an opinion granting plaintiffs motion for final
approval of the settlement, approval of the plan of distribution
of the settlement fund, and certification of the settlement
classes. We intend to continue to defend the lawsuit until the
matter is resolved. We have purchased a Directors and Officers
insurance policy which we believe should cover any potential
liability that may result from these laddering class action
claims, but can provide no assurance that any or all of the
costs of the litigation will ultimately be covered by the
insurance. No reserve has been created for this matter. More
than 300 other companies have been named in nearly identical
lawsuits that have been filed by some of the same law firms that
represent the plaintiffs in the lawsuit against us.
On July 30, 2009, we filed suit in the United States
District Court for the Eastern District of Virginia against
Sybase 365, Inc., a subsidiary of Sybase Inc., for infringement
related to U.S. patent Nos. 6,891,811, Short Message
Service Center Mobile-Originated to Internet Communications, and
7,355,990, Mobile-Originated to HTTP Internet Communications, on
technology for permitting two-way communication of short
messages between an SMSC or wireless device and an HTTP device
or Universal Resource Locator (URL). Sybase 365 has filed
requests for reexamination of these patents claiming that the
patents are invalid.
On August 19, 2009, we filed suit in the United States
District Court for the District of Delaware against Sybase, Inc
and iAnywhere Solutions, Inc, a subsidiary of Sybase, Inc., for
patent infringement related to U.S. patent
No. 6,560,604, entitled System, Method, and Apparatus
for Automatically and Dynamically Updating Options, Features,
and/or
Services Available to Client Device, on technologies
permitting automatic initialization, configuration and updating
of client devices
over-the-air
(O-T-A) and other technology-based products,
services and systems that offer the automatic O-T-A
initialization, configuration and updating capability.
18
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
On October 2, 2009, Sybase 365 LLC filed suit against us in
the United States District Court for the Eastern District of
Virginia, for patent infringement related to U.S. patent
No. 5,873,040, entitled Wireless 911 Emergency
Location on technology integrating wireless emergency 911
communications into a wireless voice network, and
U.S. patent No. 7,082,312, entitled, Short
Message Gateway, System and Method of Providing Information
Service for Mobile Telephones on technology permitting the
provision of location-based information service for mobile
telephones. We are reviewing the allegations made in
Sybases complaint and intend to defend the lawsuit
vigorously. No reserve has been created for this matter.
On March 24, 2010, we agreed to a confidential settlement
with Sybase on all outstanding patent litigation between the
parties.
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 March 31, 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 that
indemnification claims should not have a material effect 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
$197.8 million of backlog in the next twelve months,
(f) that we believe that capitalized software development
costs will be recoverable from future gross profits
(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 future stock
compensation expenses and (i) indicating our insurance
policies should cover all of the costs of the claims in the IPO
laddering class action lawsuit.
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, and (xii) 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
20
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,
- Impairment of goodwill,
- Stock compensation expense,
- Income taxes,
- 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 three months
ended March 31, 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. |
21
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.
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 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, and 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 first quarter
of 2010 to the first quarter of 2009 is affected by our 2009
acquisitions, most of the acquisition activity occurred in the
mid to late fourth quarter of 2009, so there was no impact on
the revenue and costs and expense total in the first quarter of
2009. Where changes in our results of operations from the first
quarter of 2010 compared to the first quarter of 2009 are
clearly related to the acquisitions, such as revenue and
increases in amortization of intangibles, we quantify the
effects. Operation of the acquired businesses has been fully
integrated into our existing operations. Our acquisitions did
not result in the our entry into a new line of business or
product category; they added products and services with
substantially similar features and functionality.
22
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 |
||||||||||||||||
Ended March 31, | 2010 vs. 2009 | |||||||||||||||
($ in millions)
|
2010 | 2009 | $ | % | ||||||||||||
Services revenue
|
$ | 39.3 | $ | 17.8 | $ | 21.5 | 121 | % | ||||||||
Systems revenue
|
8.6 | 7.8 | 0.8 | 10 | % | |||||||||||
Commercial Segment revenue
|
47.9 | 25.6 | 22.3 | 87 | % | |||||||||||
Direct cost of services revenue
|
19.3 | 8.2 | 11.1 | 135 | % | |||||||||||
Direct cost of systems revenue
|
3.4 | 1.9 | 1.5 | 79 | % | |||||||||||
Commercial Segment cost of revenue
|
22.7 | 10.1 | 12.6 | 125 | % | |||||||||||
Services gross profit
|
20.0 | 9.6 | 10.4 | 108 | % | |||||||||||
Systems gross profit
|
5.2 | 5.9 | (0.7 | ) | (12 | )% | ||||||||||
Commercial Segment gross
profit1
|
$ | 25.2 | $ | 15.5 | $ | 9.7 | 63 | % | ||||||||
Segment gross profit as a percent of revenue
|
53 | % | 61 | % | ||||||||||||
1 | See discussion of segment reporting in Note 6 to the accompanying unaudited consolidated financial statements |
Commercial
Services Revenue, Cost of Revenue, and Gross Profit:
Commercial services revenue increased 121% for the three-months
ended March 31, 2010 versus the comparable period of 2009.
Services revenue includes hosted Location Based Service (LBS)
applications including navigation, people-finder, asset tracker
and E9-1-1 service for wireless and E9-1-1 for Voice over
Internet Protocol (VoIP) service providers, and hosted wireless
LBS infrastructure including Position Determining Entity (PDE)
service. This revenue primarily consists of monthly recurring
service fees recognized in the month earned. Subscriber service
revenue is generated by client software applications for
wireless subscribers, generally on a per-subscriber per month
basis. E9-1-1, PDE, VoIP and hosted LBS service fees are priced
based on units served during the period, such as the number of
customer cell sites, the number of connections to Public Service
Answering Points (PSAPs), or the number of customer subscribers.
Maintenance fees on our systems and software licenses are
usually collected in advance and recognized ratably over the
contractual maintenance period. Unrecognized maintenance fees
are included in deferred revenue. Custom software development,
implementation and maintenance services may be provided under
time and materials or fixed-fee contracts.
Commercial services revenue in the first quarter of 2010 was up
$21.5 million or more than double than the first quarter of
2009 from increased maintenance and E9-1-1 services revenue as
well as an increase in subscriber applications revenue of
approximately $17 million, due mainly to contributions from
the NIM and LocationLogic businesses acquired subsequent to the
first quarter of 2009.
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
March 31, 2010, the direct cost of commercial services
revenue increased 135% as compared to the first quarter of 2009,
primarily due to increases in labor and other direct costs
related to the addition of NIM and LocationLogic businesses. We
also incurred an increase in labor and direct costs related to
23
custom development efforts responding to customer requests and
deployment requirements for
E-9-1-1 and
VoIP.
Commercial services gross profit was $20 million and
$9.6 million for the three-months ended March 31, 2010
and 2009, respectively, based on higher revenue. Commercial
services gross profit was approximately 51% and 54% of revenue
March 31, 2010 and 2009, respectively, mainly due to
additional labor and fringe costs associated with costs
associated with the NIM and LocationLogic businesses acquired
subsequent to the first quarter of 2009.
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 increased 10% for the three-months
ended March 31, 2010 versus the comparable period of 2009
due mainly to increased revenue from systems for location-based
services, which was offset by lower revenue from messaging
systems.
The direct cost of our commercial systems consists primarily of
compensation, 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. In the first quarter of 2010, direct costs of
systems consisted primarily of compensation, benefits,
third-party hardware and software, and $2.3 million of
amortization of software development costs.
Our commercial systems gross profit was $5.2 million in the
three-months ended March 31, 2010 versus $5.9 million
in the comparable period of 2009. Commercial systems gross
profit was approximately 60% and 76% of revenue March 31,
2010 and 2009, respectively, down due to less license revenue
partially offset by higher location systems revenue in the 2010
first quarters revenue mix.
Government
Segment:
Three Months |
||||||||||||||||
Ended March 31, | 2010 vs. 2009 | |||||||||||||||
($ in millions)
|
2010 | 2009 | $ | % | ||||||||||||
Services revenue
|
$ | 20.6 | $ | 12.8 | $ | 7.8 | 61 | % | ||||||||
Systems revenue
|
22.4 | 32.1 | (9.7 | ) | (30 | )% | ||||||||||
Government Segment revenue
|
43.0 | 44.9 | (1.9 | ) | (4 | )% | ||||||||||
Direct cost of services revenue
|
15.1 | 10.2 | 4.9 | 48 | % | |||||||||||
Direct cost of systems revenue
|
19.6 | 25.0 | (5.4 | ) | (22 | )% | ||||||||||
Government Segment cost of revenue
|
34.7 | 35.2 | (0.5 | ) | (1 | )% | ||||||||||
Services gross profit
|
5.5 | 2.6 | 2.9 | 112 | % | |||||||||||
Systems gross profit
|
2.8 | 7.1 | (4.3 | ) | (61 | )% | ||||||||||
Government Segment gross
profit1
|
$ | 8.3 | $ | 9.7 | $ | (1.4 | ) | (14 | )% | |||||||
Segment gross profit as a percent of revenue
|
19 | % | 22 | % |
1 | See discussion of segment reporting in Note 6 to the accompanying unaudited consolidated financial statements |
24
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 61% for the three-months ended
March 31, 2010 compared to the three-months ended
March 31, 2009 as a result of 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
$5.5 million in the first quarter of 2010 from
$2.6 million in the first quarter of 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 27% and 20% of revenue
March 31, 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
communications systems, and integration of those systems into
customer networks. These are largely variations on our
SwiftLink®
product line, which are lightweight, secure, deployable
communications systems, sold to units of the
U.S. Department of Defense, and other agencies.
Government systems sales were $22.4 million in the first
quarter of 2010, down from $32.1 million for the
three-months ended March 31, 2009. This decrease represents
lower unit 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 $2.8 million in the
first quarter of 2010, down from $7.1 million in the
comparable period of 2009, due mainly to decreased sales volume.
Government systems gross profit was 13% and 22% of revenue
March 31, 2010 and 2009, respectively, reflecting a mix
that included more lower margin pass-through sales in the first
quarter of 2010.
25
Revenue
Backlog
As of March 31, 2010 and 2009, we had unfilled orders or
backlog as follows:
Three Months |
||||||||||||||||
Ended March 31, | 2010 vs. 2009 | |||||||||||||||
($ in millions)
|
2010 | 2009 | $ | % | ||||||||||||
Commercial Segment
|
$ | 227.7 | $ | 87.8 | $ | 139.9 | 159 | % | ||||||||
Government Segment
|
73.4 | 68.9 | 4.5 | 7 | % | |||||||||||
Total funded contract backlog
|
$ | 301.1 | $ | 156.7 | $ | 144.4 | 92 | % | ||||||||
Commercial Segment
|
$ | 227.7 | $ | 91.1 | $ | 136.6 | 150 | % | ||||||||
Government Segment
|
358.4 | 323.4 | 35.0 | 11 | % | |||||||||||
Total backlog of orders and commitments, including customer
options
|
$ | 586.1 | $ | 414.5 | $ | 171.6 | 41 | % | ||||||||
Expected to be realized within next 12 months
|
$ | 197.8 | $ | 115.5 | $ | 82.3 | 71 | % | ||||||||
Funded contract backlog on March 31, 2010 was
$301.1 million, of which the Company expects to recognize
$197.8 million in the next twelve months. Total backlog was
$586.1 million at the end of the first quarter of 2010.
Funded contract backlog represents contracts for which fiscal
year funding has been appropriated by our customers (mainly
federal agencies), and for our hosted services is computed by
multiplying the most recent months recurring revenue times
the remaining months under existing long-term agreements, which
we believe is the best available information for anticipating
revenue under those agreements. Total backlog, as is typically
measured by government contractors, includes orders covering
optional periods of service
and/or
deliverables for which budgetary funding may not yet have been
approved. Company backlog at any given time may be affected by a
number of factors, including the availability of funding,
contracts being renewed or new contracts being signed before
existing contracts are completed. Some of our backlog could be
canceled for causes such as late delivery, poor performance and
other factors. Accordingly, a comparison of backlog from period
to period is not necessarily meaningful and may not be
indicative of eventual actual revenue.
Operating
Expenses
Research and
development expense:
Three Months |
||||||||||||||||
Ended |
||||||||||||||||
March 31, | 2010 vs. 2009 | |||||||||||||||
($ in millions)
|
2010 | 2009 | $ | % | ||||||||||||
Research and development expense
|
$ | 8.5 | $ | 4.9 | $ | 3.6 | 74 | % | ||||||||
Percent of total revenue
|
9 | % | 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 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 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-months ended March 31,
2010 and 2009, research and development was primarily focused on
wireless location-based subscriber and carrier
26
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-months ended March 31, 2010, we capitalized
$0.8 million of research and development costs for certain
software projects in accordance with the above policy versus
$0.1 million for the comparable quarter in 2009. These
costs will be amortized on a
product-by-product
basis using the straight-line method over the products
estimated useful life, not longer than three years. Amortization
is also computed using the ratio that current revenue for the
product bears to the total of current and anticipated future
revenue for that product (the revenue curve method). If this
revenue curve method results in amortization greater than the
amount computed using the straight-line method, amortization is
recorded at that greater amount. We believe that these
capitalized costs will be recoverable from future gross profits
generated by these products.
Research and development expenses increased 74% for the
three-months ended March 31, 2010 versus the comparable
period of 2009 primarily as a result of increased employee
compensation associated with acquisition of NIM.
Sales and
marketing expense:
Three Months |
||||||||||||||||
Ended |
||||||||||||||||
March 31, | 2010 vs. 2009 | |||||||||||||||
($ in millions)
|
2010 | 2009 | $ | % | ||||||||||||
Sales and marketing expense
|
$ | 6.0 | $ | 4.0 | $ | 2.0 | 50 | % | ||||||||
Percent of total revenue
|
7 | % | 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 costs increased
$2 million for the three-months period ended March 31,
2010 versus the comparable period of 2009 due to increases in
sales personnel, public relations fees, and variable
compensation resulting mainly from the 2009 acquisitions of four
companies.
General and
administrative expense:
Three Months |
||||||||||||||||
Ended |
||||||||||||||||
March 31, | 2010 vs. 2009 | |||||||||||||||
($ in millions)
|
2010 | 2009 | $ | % | ||||||||||||
General and administrative expense
|
$ | 8.5 | $ | 6.9 | $ | 1.6 | 23 | % | ||||||||
Percent of total revenue
|
9 | % | 10 | % |
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 $1.6 million increase in the first quarter
of 2010 was due primarily to the increased costs to support the
operations we acquired during 2009, as well as investments for
process control enhancement and legal and professional costs
associated with the protection and monetization of our
intellectual property.
27
Depreciation and
amortization of property and equipment:
Three Months |
||||||||||||||||
Ended |
||||||||||||||||
March 31, | 2010 vs. 2009 | |||||||||||||||
($ in millions)
|
2010 | 2009 | $ | % | ||||||||||||
Depreciation and amortization of property and equipment
|
$ | 2.0 | $ | 1.5 | $ | 0.5 | 33 | % | ||||||||
Average gross cost of property and equipment during the period
|
$ | 70.4 | $ | 54.6 |
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. In the first quarter of 2010, our depreciable asset
base increased primarily as a result of additions to property
and equipment, including our 2009 acquisitions, and organic
capital spending of about $2.7 million.
Amortization of
acquired intangible assets:
Three Months |
||||||||||||||||
Ended |
||||||||||||||||
March 31 | 2010 vs. 2009 | |||||||||||||||
($ in millions)
|
2010 | 2009 | $ | % | ||||||||||||
Amortization of acquired intangible
|
||||||||||||||||
assets
|
$ | 1.1 | $ | 0.1 | $ | 1.0 | 1000 | % |
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, NIM, and 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-months ended March 31, 2010 relates
to customer lists, customer relationships, courseware, and
patents. The expense recognized in the three-months ended
March 31, 2009 relates to the intangible assets associated
with the 2004 Kivera acquisition, including customer lists and
patents.
Interest
expense:
Three Months |
||||||||||||||||
Ended |
||||||||||||||||
March 31 | 2010 vs. 2009 | |||||||||||||||
($ in millions)
|
2010 | 2009 | $ | % | ||||||||||||
Interest expense incurred on bank and other notes payable
|
$ | 1.1 | $ | 0.1 | $ | 1.0 | 1000 | % | ||||||||
Interest expense incurred on 4.5% convertible debt financing
|
1.1 | | 1.1 | 1000 | % | |||||||||||
Interest expense incurred on capital lease obligations
|
0.1 | 0.1 | | | ||||||||||||
Amortization of deferred financing fees
|
0.2 | | 0.2 | 100 | % | |||||||||||
Total interest and financing expense
|
$ | 2.5 | $ | 0.2 | $ | 2.3 | 115 | % |
Interest expense is incurred under notes payable, convertible
debt financing, and capital lease obligations, and financing
expense reflects amortization of deferred up-front financing
expenditures at the time of contracting for financing
arrangements, which are being amortized over the term of the
note or the life of the facility.
On November 16, 2009, the Company issued
$103.5 million aggregate principal amount of
4.5% Convertible Senior Notes due 2014. Interest on the
notes is payable semiannually on November 1 and May 1 of each
year, beginning May 1, 2010. The notes will mature on
November 1, 2014, unless previously converted in accordance
with their terms. The notes are TCSs senior unsecured
obligations and will rank
28
equally with all of its present and future senior unsecured debt
and senior to any future subordinated debt. The notes are
structurally subordinate to all present and future debt and
other obligations of TCSs subsidiaries and will be
effectively subordinate to all of TCSs present and future
secured debt to the extent of the collateral securing that debt.
The notes are not redeemable by TCS prior to the maturity date.
Interest on the bank term loan is at the banks prime rate
plus 0.5% per annum with a minimum rate of 4%. Interest on our
capital leases is primarily at stated rates averaging about
7%.We have a commercial bank line of credit that has not been
used for borrowings, and has therefore generated no interest
expense, during the periods reported. Interest on our line of
credit borrowing would be at the banks prime rate which
was 3.25% per annum as of March 31, 2010 with a minimum
rate of 4%. In June 2009, we entered into the Third Amended and
Restated Loan and Security Agreement with our principal bank.
The Loan Agreement provided for a $30 million revolving
line of credit that replaced the Companys prior
$22 million line of credit and a $20 million five year
term loan that replaced the Companys prior
$10 million term loan. 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.
Our capital lease obligations include interest at various
amounts depending on the lease arrangement. Our interest under
capital leases fluctuates depending on the amount of capital
lease obligations in each year, and the interest under those
leases, has remained relatively.
Overall our interest and financing expense was higher in the
first quarter of 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
notes payable increased in the first quarter of 2010 over the
first quarter of 2009 as a result of the NIM promissory notes
and the December 2009 bank term loan. Interest on capital lease
financing for the first quarter of 2010 was about the same as
for the first quarter of 2009. 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 international fluctuations
in exchange rates. The other components of other
income/(expense), net typically remain comparable between
periods.
Income
taxes:
Income tax expense was $0.4 million for the first quarter
of 2010 against pre-tax income of $5.4 million for the
first quarter of 2010, representing an effective tax rate of
approximately 8%. The first quarter 2010 tax provision was lower
than would be normally expected as a result of a discrete
adjustment to a deferred tax asset reserve which resulted in a
reduction of the reserve against our deferred tax asset by about
$1.8 million. Absent this adjustment, our effective tax
rate for the first quarter of 2010 would have been approximately
39.5%. In the first quarter of 2009, we recorded a tax provision
of $3.1 million, representing an effective tax rate of
about 39%.
Net
income:
Three Months |
||||||||||||||||
Ended |
||||||||||||||||
March 31, | 2010 vs. 2009 | |||||||||||||||
($ in millions)
|
2010 | 2009 | $ | % | ||||||||||||
Net income
|
$ | 5.0 | $ | 4.9 | $ | 0.1 | 2 | % |
29
Net income increased for the three-months ended March 31,
2010 versus the comparable period of 2009 due primarily to
higher revenue and gross profit and other factors discussed
above.
Liquidity and
Capital Resources
Three Months |
||||||||||||||||
Ended |
||||||||||||||||
March 31, | 2010 vs. 2009 | |||||||||||||||
($ in millions)
|
2010 | 2009 | $ | % | ||||||||||||
Net cash and cash equivalents provided by/(used in):
|
||||||||||||||||
Income
|
$ | 5.0 | $ | 4.9 | $ | 0.1 | 2 | % | ||||||||
Non-cash charges
|
10.0 | 3.0 | 7.0 | 233 | % | |||||||||||
Deferred income tax provision
|
0.4 | 3.0 | (2.6 | ) | (87 | )% | ||||||||||
Net changes in working capital including changes in other assets
|
4.2 | (15.5 | ) | 19.7 | 127 | % | ||||||||||
Operating activities
|
19.6 | (4.6 | ) | 24.2 | 526 | % | ||||||||||
Purchases of property and equipment, excluding assets funded by
leasing
|
(2.7 | ) | 0.1 | (2.8 | ) | 2800 | % | |||||||||
Capitalized software development costs
|
(0.8 | ) | (0.1 | ) | (0.7 | ) | 700 | % | ||||||||
Payments on long-term debt and capital leases
|
(2.6 | ) | (1.1 | ) | (1.5 | ) | 136 | % | ||||||||
Other financing activities
|
1.5 | 2.0 | 0.5 | 25 | % | |||||||||||
Net increase/(decrease) in cash
|
$ | 15.0 | $ | (3.7 | ) | $ | 18.7 | 505 | % | |||||||
Days revenue in receivables, including unbilled receivables
|
96 | 101 |
Capital resources: We have funded our
operations, acquisitions, and capital expenditures primarily
using cash generated by our operations, 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 $76.4 million at March 31, 2010, a
$41.1 million increase from $35.3 million at
March 31, 2009.
Operations: Cash generated by operations was
$19.6 million for the first quarter of 2010 as compared to
$4.6 million in 2009. Higher first quarter 2010 cash 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, for the first quarter of
2010 was approximately $2.7 million. Fixed asset additions,
excluding assets funded by leasing, were approximately
$0.1 million for the first quarter of 2009. 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 $0.8 million
and $0.1 million for the three-months ended March 31,
2010 and 2009, respectively.
Financing activities: Financing activities
during the first quarter of 2010 were limited to scheduled term
debt service payments and capital leasing. Fixed assets acquired
under capital leases were valued at $2.6 million and
$2.1 million during the three-months ended March 31,
2010 and 2009, respectively.
We have a $35 million revolving Line of Credit with our
principal bank through June 2012 with borrowing available at the
banks prime rate which was 3.25% per annum at
March 31, 2010. Borrowings at any time are limited to an
amount based principally on the 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 letters of credit outstanding and cash management
services sublimit, which was $1.6 million March 31,
2010. As of March 31, 2010, we had no borrowings
outstanding under our bank Line of Credit and had approximately
$33.4 million of unused borrowing availability under the
line.
30
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 Convertible Notes
to fund corporate initiatives which included significant
financing required for the acquisition of NIM. Holders may
convert the Convertible Notes at their option on any day prior
to the close of business on the second scheduled trading
day (as defined in the Indenture) immediately preceding
November 1, 2014. The conversion rate will initially be
96.637 shares of our Class A common stock per $1,000
principal amount of Convertible Notes, equivalent to an initial
conversion price of approximately $10.348 per share of
Class A common stock. At the time of this transaction,
while this represented an approximately 30% conversion premium
over the closing price of the Companys Class A common
stock on November 10, 2009 of $7.96 per share, the effect
of the convertible note hedge and warrant transactions,
described below increased the effective conversion premium of
the Notes to 60% above the November 10th closing
price, to $12.74 per share.
In connection with the sale of the Convertible Notes, the
Company entered into convertible note hedge transactions with
respect to the Class A common stock with certain
counterparties. The convertible note hedge transactions cover,
subject to adjustments, 10,001,303 shares of Class A
common stock. Also, in connection with the sale of the
Convertible Notes, the Company entered into separate warrant
transactions with certain counterparties the Warrant Dealers.
The Company sold to the Warrant Dealers, warrants to purchase in
the aggregate 10,001,303 shares of Class A common
stock, subject to adjustments, at an exercise price of $12.736
per share of Class A common stock. The Company offered and
sold the warrants to the Warrant Dealers in reliance on the
exemption from registration provided by Section 4(2) of the
Securities Act. The Company used a portion of the gross proceeds
of the offering to pay the Companys cost of the
convertible note hedge transactions. The convertible note hedge
and the warrant transactions are separate transactions; each
entered into by the Company with the counterparties, is not part
of the terms of the Convertible Notes and will not affect the
holders rights under the Convertible Notes.
December 15, 2009, we issued $40 million in promissory
notes as part of the consideration paid for the acquisition of
NIM. The promissory notes bear simple interest at 6% and are due
in three installments: $30 million on the 12 month
anniversary of the closing, $5 million on the 18 month
anniversary of the closing, and $5 million on the
24 month anniversary of the closing, subject to escrow
adjustments. The promissory notes are effectively subordinated
to TCSs secured debt and structurally subordinated to any
present and future indebtedness and other obligations of
TCSs subsidiaries.
On December 31, 2009, we refinanced facilities under Loan
Agreement. A $40 million five year Term Loan replaced the
Companys $20 million prior term loan with the bank.
The Company drew $30 million of the funds available. The
remaining $10 million is available to draw no later than
September 2010. The Term Loan maturity date is June 2014.
Under the Loan Agreement, the Company is obligated to repay all
advances or credit extensions made pursuant to the Loan
Agreement. The Loan Agreement is secured by substantially all of
the Companys tangible and intangible assets as collateral,
except that the collateral does not include any of the
Companys intellectual property. The principal amount
outstanding under the Term Loan accrues interest at the greater
of (i) 4% per annum, or (ii) a floating per annum rate
equal to one-half of one percentage point (0.5%) above the
Interest Rate (3.25% at March 31, 2010). The principal
amount outstanding under the Term Loan is payable in sixty
(60) equal installments of principal beginning on
31
January 29, 2010 and interest is payable on a monthly basis
($0.6 million plus interest per month). As of
March 31, 2010, the amount outstanding under the Term Loan
was $28 million. Funds from the increase in the amount of
the Term Loan were used primarily to retire the June 2009 term
loan. In June of 2009, we refinanced the unamortized balance
under our June 2007 $10 million five-year note payable loan
with a $20 million five-year note.
The 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 March 31, 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.
Off-Balance Sheet
Arrangements
As of March 31, 2010, we had standby letters of credit
issued on our behalf of approximately $0.1 million,
principally pursuant to a contracting requirement for our
Government Segments City of Baltimore services contract.
Contractual
Commitments
As of March 31, 2010, our most significant commitments
consisted of purchase obligations, term debt, obligations under
capital leases and non-cancelable operating leases. Other
long-term debt consists of contingent consideration included as
part of the purchase price allocation of certain acquisitions.
We lease certain furniture and computer equipment under capital
leases. We lease office space and equipment under non-cancelable
operating leases. Purchase obligations represent contracts for
parts and
32
services in connection with our government satellite services
and systems offerings. As of March 31, 2010 our commitments
consisted of the following:
Within 12 |
1-3 |
3-5 |
More than |
|||||||||||||||||
($ in millions)
|
Months | Years | Years | 5 Years | Total | |||||||||||||||
Term loan
|
$ | 7.8 | $ | 14.7 | $ | 8.6 | $ | | $ | 31.1 | ||||||||||
4.5% Convertible debt interest obligation
|
4.7 | 9.4 | 9.4 | | 23.5 | |||||||||||||||
Promissory notes payable
|
31.8 | 10.6 | | | 42.4 | |||||||||||||||
Other long-term debt
|
3.8 | 3.4 | | | 7.2 | |||||||||||||||
Capital lease obligations
|
4.3 | 7.0 | 1.3 | | 12.6 | |||||||||||||||
Operating leases
|
5.0 | 9.4 | 3.2 | 2.1 | 19.7 | |||||||||||||||
Purchase obligations
|
6.6 | 4.6 | | | 11.2 | |||||||||||||||
Total contractual commitments
|
$ | 64.0 | $ | 59.1 | $ | 22.5 | $ | 2.1 | $ | 147.7 | ||||||||||
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-months ended March 31, 2010, we generated
$3.2 million 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 March 31, 2010, we had approximately
$1.4 million of billed accounts receivable that are
denominated in foreign currencies and would be exposed to
foreign currency exchange risk. During the first quarter of
2010, our average receivables subject to foreign currency
exchange risk was $1.3 million and our average deferred
revenue balances subject to foreign currency exchange risk was
$1 million. We had an average balance of $0.2 million
of unbilled receivables denominated in foreign currency during
the first quarter of 2010. We recorded immaterial transaction
gains or losses on foreign currency denominated receivables and
deferred revenue for the three-months ended March 31, 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.
33
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 March 31,
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.
34
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 February 15, 2005, the District Court issued
an Order preliminarily approving a settlement agreement among
class plaintiffs, all issuer defendants and their insurers,
provided that the parties agree to a modification narrowing the
scope of the bar order set forth in the settlement agreement.
The parties agreed to a modification narrowing the scope of the
bar order, and on August 31, 2005, the court issued an
order preliminarily approving the settlement. On
December 5, 2006, the United States Court of Appeals for
the Second Circuit overturned the District Courts
certification of the class of plaintiffs who are pursuing the
claims that would be settled in the settlement against the
underwriter defendants. Plaintiffs filed a Petition for
Rehearing and Rehearing En Banc with the Second Circuit on
January 5, 2007 in response to the Second Circuits
decision. On April 6, 2007, the Second Circuit denied
plaintiffs rehearing petition, but clarified that the
plaintiffs may seek to certify a more limited class in the
District Court. On June 25, 2007, the District Court signed
an Order terminating the settlement. On November 13, 2007,
the issuer defendants in certain designated focus
cases filed a motion to dismiss the second consolidated
amended class action complaints that were filed in those cases.
On March 26, 2008, the District Court issued an Opinion and
Order denying, in large part, the motions to dismiss the amended
complaints in the focus cases. On April 2,
2009, the plaintiffs filed a motion for preliminary approval of
a new proposed settlement between plaintiffs, the underwriter
defendants, the issuer defendants and the insurers for the
issuer defendants. On June 10, 2009, the Court issued an
opinion preliminarily approving the proposed settlement, and
scheduling a settlement fairness hearing for September 10,
2009. On August 25, 2009, the plaintiffs filed a motion for
final approval of the proposed settlement, approval of the plan
of distribution of the settlement fund, and certification of the
settlement classes. A settlement fairness hearing was held on
September 10, 2009. On October 5, 2009, the Court
issued an opinion granting plaintiffs motion for final
approval of the settlement, approval of the plan of distribution
of the settlement fund, and certification of the settlement
classes. We intend to continue to defend the lawsuit until the
matter is resolved. We have purchased a Directors and Officers
insurance policy which we believe should cover any potential
liability that may result from these laddering class action
claims, but can provide no assurance that any or all of the
costs of the litigation will ultimately be covered by the
insurance. No reserve has been created for this matter. More
than 300 other companies have been named in nearly identical
lawsuits that have been filed by some of the same law firms that
represent the plaintiffs in the lawsuit against us.
On July 30, 2009, we filed suit in the United States
District Court for the Eastern District of Virginia against
Sybase 365, Inc., a subsidiary of Sybase Inc., for infringement
related to U.S. patent Nos. 6,891,811, Short Message
Service Center Mobile-Originated to Internet Communications, and
7,355,990, Mobile-Originated to HTTP Internet Communications, on
technology for permitting two-way communication of short
messages between an SMSC or wireless device and an HTTP device
or Universal Resource Locator (URL). Sybase 365 has filed
requests for reexamination of these patents claiming that the
patents are invalid.
35
On August 19, 2009, we filed suit in the United States
District Court for the District of Delaware against Sybase, Inc
and iAnywhere Solutions, Inc, a subsidiary of Sybase, Inc., for
patent infringement related to U.S. patent
No. 6,560,604, entitled System, Method, and Apparatus
for Automatically and Dynamically Updating Options, Features,
and/or
Services Available to Client Device, on technologies
permitting automatic initialization, configuration and updating
of client devices
over-the-air
(O-T-A) and other technology-based products,
services and systems that offer the automatic O-T-A
initialization, configuration and updating capability.
On October 2, 2009, Sybase 365 LLC filed suit against us in
the United States District Court for the Eastern District of
Virginia, for patent infringement related to U.S. patent
No. 5,873,040, entitled Wireless 911 Emergency
Location on technology integrating wireless emergency 911
communications into a wireless voice network, and
U.S. patent No. 7,082,312, entitled, Short
Message Gateway, System and Method of Providing Information
Service for Mobile Telephones on technology permitting the
provision of location-based information service for mobile
telephones. We are reviewing the allegations made in
Sybases complaint and intend to defend the lawsuit
vigorously. No reserve has been created for this matter.
On March 24, 2010, we agreed to a confidential settlement
with Sybase on all outstanding patent litigation between the
parties.
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.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Item 5. | Other Information |
(a) None
(b) None.
36
Item 6. | Exhibits |
Exhibit |
||||
Numbers
|
Description
|
|||
10 | .30 | Amendment to Employment Agreement dated February 1, 2010, by and between the Company and Richard A. Young | ||
10 | .31 | Amendment to Employment Agreement dated February 1, 2010, by and between the Company and Thomas M. Brandt, Jr. | ||
10 | .32 | Amendment to Employment Agreement dated February 1, 2010, by and between the Company and Drew A. Morin | ||
10 | .33 | Amendment to Employment Agreement dated February 1, 2010, by and between the Company and Timothy J. Lorello | ||
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 |
37
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 5th day of
May 2009.
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 Report has been signed below by the
following persons on behalf of the Registrant in the capacities
and on the dates indicated.
/s/ Maurice B. Tosé
Maurice B. Tosé May 5, 2010 |
Chairman, President and Chief Executive Officer (Principal Executive Officer) |
|
/s/ Thomas M. Brandt, Jr.
Thomas M. Brandt, Jr. May 5, 2010 |
Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
38