SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-K

 

 

Commission File No. 0-30821

 

TELECOMMUNICATION SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

 

(410) 263-7616

Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, Par Value $0.01 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s 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):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Act):  Yes o     No þ

 

As of June 30, 2010, the aggregate market value of the Class A Common Stock held by non-affiliates, as reported on the NASDAQ Global Market, was approximately $184,708,977.*

 

As of February 28, 2011 there were 50,866,566 shares of Class A Common Stock and 5,741,334 shares of Class B Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

* Excludes 2,351,240 shares of Class A Common Stock and 6,116,334 shares of Class B Common Stock deemed to be held by stockholders whose ownership exceeds ten percent of the shares outstanding at June 30, 2010. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant.

 

 

TABLE OF CONTENTS

 

Cautionary Note Concerning Factors That May Affect Future Results

 

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements other than historical information or statements of current condition. We generally identify forward-looking statements by the use of terms such as “believe”, “intend”, “expect”, “may”, “should”, “plan”, “project”, “contemplate”, “anticipate”, or other similar statements. Examples of forward looking statements in this Annual Report on Form 10-K include, but are not limited to statements that

 

(i) we intend to continue to selectively consider acquisitions of companies and technologies in order to increase the scale and scope of our operations, market presence, products, services and customer base;

 

(ii) we believe that TCS offers the most complete suite of LBS technology to wireless carriers around the world;

 

(iii) we plan to continue to develop and sell software and engineered systems which we deliver through deployment in customer wireless networks or through hosted and subscription business models;

 

(iv) wireless growth is expected to continue to increase in all regions of the world for the foreseeable future;

 

(v) short messaging services users and messages per individual are projected to continue to increase but that the declining rate of growth in the use of text messaging is expected to continue affecting our sales of licenses into 2011;

 

(vi) we intend to expand our domestic and international carrier base through channels and by expanding our own global sales and field support organizations;

 

(vii) we are well positioned to provide carrier-branded enhanced services that efficiently use the carriers’ capacity to deliver a user experience that merits incremental service payments and continuous use;

 

(viii) we are developing relationships with communication infrastructure providers in order to expand our sales channels for our carrier software products and services;

 

(ix) we will continue to invest in our underlying technology and to capitalize on our expertise to meet the growing demand for sophisticated wireless applications;

 

(x) we will continue to leverage our knowledge of complex call control technologies to unlock valuable information such as user location, device on/off status, and billing and transaction records that reside inside wireless networks;

 

(xi) we expect the Trident acquisition to enhance our ability to continue to reduce the form factor of deployable communications solutions;

 

(xii) we plan to continue to provide technology solutions to U.S. government and international customers;

 

(xiii) we have prepared for competing to participate in U.S. military procurement successors to WWSS that are expected to be awarded in 2011;

 

(xiv) steep growth in spending to the multi-billion dollar level by U.S. federal agencies on cyber initiatives is expected over the next five years;

 

(xv) we believe that our expertise in the areas of wireless E9-1-1, location and messaging services, and secure satellite communications can be leveraged to provide the needed wireless infrastructure for the U.S. Departments of Homeland Security and Defense and we are currently pursuing opportunities to provide such products and services;

 

(xvi) we believe that TCS enjoys a competitive advantage by being able to offer secure teleport, space segment and integration capabilities with deployable systems as a bundled solution;

 

(xvii) we expect to realize a portion of our backlog in the next twelve months;

(xviii) we expect that we will continue to compete primarily on the basis of functionality, breadth, time to market, ease of integration, price and quality of our products and services, as well as our market experience, reputation and price;

 

(xix) the WWSS contract vehicle is expected to continue to contribute to significant government systems sales through 2011;

 

(xx) we believe we have sufficient capital resources to meet our anticipated cash operating expenses, working capital and capital expenditure and debt services needs for the next twelve months;

 

(xxi) that we believe our capitalized research and development expense will be recoverable from future gross profits generated by the related products;

 

(xxii) we believe we have invented key features of the location services, wireless text alerts, Short Message Service Center, mobile-originated data and E9-1-1 network services and we believe our intellectual property assets are valuable and will contribute positively to our operational results in 2011 and beyond;

 

(xxiii) we believe we should not incur any material liabilities from customer indemnification requests;

 

(xxiv) we have accurately estimated the amount of future non-cash stock compensation;

 

(xxv) our assumptions and expectations related to income taxes and deferred tax assets are appropriate;

 

(xxvi) we do not expect that the adoption of new accounting standards to have a material impact on the company’s financial statements;

 

(xxvii) we believe that we will continue to comply with the covenants related to our loan agreements;

 

(xxviii) we have limited exposure to financial market risks, including changes in interest rates;

 

(xxix) we believe that our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosures; and

 

(xxx) we believe we can fund our future acquisitions with our internally available cash, cash equivalents and marketable securities, cash generated from operations, amounts available under our existing debt capacity, additional borrowings or from the issuance of additional securities.

 

Other such statements include without limitation risks and uncertainties relating to our financial results and our ability to (i) continue to rely on our customers and other third parties to provide additional products and services that create a demand for our products and services, (ii) conduct our business in foreign countries, (iii) adapt and integrate new technologies into our products, (iv) develop software without any errors or defects, (v) protect our intellectual property rights, (vi) implement our business strategy, (vii) realize backlog, (viii) compete with small business competitors, (ix) effectively manage our counter party risks, and (x) achieve continued revenue growth in the foreseeable future in certain of our business lines. This list should not be considered exhaustive.

 

These forward-looking statements relate to our plans, objectives and expectations for future operations. We base these statements on our beliefs as well as assumptions made using information currently available to us. In light of the risks and uncertainties inherent in all projected operational matters, the inclusion of forward-looking statements in this document should not be regarded as a representation by us or any other person that our objectives or plans will be achieved or that any of our operating expectations will be realized. Revenues, results of operations, and other matters are difficult to forecast and could differ materially from those projected in the forward-looking statements contained in this Annual Report on Form 10-K as a result of factors discussed in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”, the matters discussed in “Risk Factors Affecting Our Business and Future Results”, which are included in Item 1A, and those factors discussed elsewhere in this Annual Report on Form 10-K including, changes in economic conditions, technology and the market in general, and our ability to adapt our products and services to these

changes. We undertake no obligation to release publicly the results of any future revisions we make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We caution you not to put undue reliance on these forward-looking statements.

 

 

Overview

 

TeleCommunication Systems, Inc. develops and delivers highly reliable and secure wireless communication technology. For commercial customers our mobile cloud computing services provide wireless applications for navigation, hyper-local search, asset tracking, social applications, and telematics, while TCS infrastructure forms the foundation for E9-1-1 call routing and text messaging. Government customers depend on our professional and engineering services, cyber security expertise, and satellite-based deployable solutions for mission-critical communications.

 

We are a Maryland corporation founded in 1987 with headquarters at 275 West Street, Annapolis, Maryland 21401. Our web address is www.telecomsys.com. The information contained on our website does not constitute part of this Annual Report on Form 10-K. All of our filings with the Securities and Exchange Commission are available through links on our website. The terms “TCS”, “we”, “us” and “our” as used in this Annual Report on Form 10-K refer to TeleCommunication Systems, Inc. and its subsidiaries as a combined entity, except where it is made clear that such terms mean only TeleCommunication Systems, Inc.

 

We deliver wireless communication technology through two operating segments, Commercial (52% of 2010 revenue) and Government (48% of 2010 revenue). See discussion of segment reporting in Note 21 to the audited Consolidated Financial Statements presented elsewhere in this Annual Report on Form 10-K for additional segment information.

 

Commercial Segment:  Our commercial services and systems enable wireless carriers to deliver location-based information, internet content, short text messages, and other enhanced communication services to and from wireless phones. Our hosted commercial services include mobile location-based applications including turn-by-turn navigation, E9-1-1 call routing, and inter-carrier text message technology; that is, customers use our software functionality through connections to and from network operations centers, paying us monthly fees based on the number of subscribers, cell sites, call center circuits, or message volume. We provide hosted services under contracts with wireless carrier networks, as well as Voice over Internet Protocol (“VoIP”) service providers. We earn subscriber revenue through wireless applications including our navigation, people finder, and asset tracking applications which are available via many wireless carriers. We earn carrier software-based revenue through the sale of licenses, deployment and customization fees, and maintenance fees, pricing for which is generally based on the volume of capacity purchased from us by the carrier.

 

Government 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. We also own and operate secure satellite teleport facilities, resell access to satellite airtime (known as space segment,) and provide professional services including field support of our systems and cyber security training to the U.S. Department of Defense and other government and foreign customers. More than 2,500 of our deployable communication systems are in use for security, defense, and law enforcement activities around the world. In 2006, we were named one of six prime contractors on the U.S. Army’s Worldwide Satellite Systems (“WWSS”) contract vehicle, with a ceiling value of up to $5 billion in procurements through 2011.

 

Our intellectual property portfolio includes 136 issued patents and more than 300 pending applications worldwide as of the end of 2010. We monetize this portfolio primarily via incorporation of our inventions in our deliverables, and also engage in licensing of the technology.

 

An important element to our corporate strategy is to acquire or make investments in other companies, services and technologies. On January 31, 2011, we completed the purchase of privately-held Trident Space and Defense, LLC, (“Trident”) a leading provider of engineering and electronics solutions for global space and defense markets. Consideration for the acquisition included payment in cash and three million shares of TCS

Class A common stock. In 2009, we completed four acquisitions which provided enhancements to our products and services enhancing our position as specialists in highly reliable, secure mobile communications technology. We intend to continue to selectively consider acquisitions of companies and technologies in order to increase the scale and scope of our operations, market presence, products, services and customer base.

 

SwiftLink^®, Xypoint^®, AtlasBook^®, Gokivo^® and Enabling Convergent Technologies^®, are trademarks or service marks of TeleCommunication Systems, Inc. or our subsidiaries. This Annual Report on Form 10-K also contains trademarks, trade names and services marks of other companies that are the property of their respective owners.

 

I. Commercial Segment:

 

We provide software, related systems, hosted services, maintenance, and customization services to wireless carriers, VoIP service providers, and users of electronic map and related location-based technology, based on our portfolio of patented intellectual property.

 

 

1. Commercial Services. We operate network operation centers at several locations that host software for which customers make recurring monthly usage payments, usually based on a measure of the volume of usage. Our hosted services include wireless and VoIP E9-1-1, and commercial location-based applications. The hosted aspect of our service delivery is sometimes called cloud computing. Through wireless carriers, we sell subscriptions to services using our client software applications such as navigation, traffic, and points of interest, as a “white label” vendor to the carriers. Our primary commercial product offerings include:

 

a. Customer subscriptions through wireless carriers to application-based services such as Turn-by-Turn Navigation, People-Finder, and Asset-Tracking. We provide wireless subscriber applications that use location-based technology, for which subscribers pay recurring monthly fees. We also offer real-time downloadable mobile applications that deliver easy access to maps, directions, points-of-interest directories, film and event information, traffic conditions, speed camera alerts and weather information.

 

b. Hosted Location-Based Service (LBS) Infrastructure, including E9-1-1. Our E9-1-1 service bureau works with wireless carriers and local emergency services in compliance with the Federal Communication Commission requirements. When a wireless subscriber covered by this service makes a 9-1-1 call from his or her wireless phone, the software (1) identifies the call as an emergency call, (2) accesses the handset’s location information from the wireless network, (3) routes the call to the appropriate public safety jurisdiction, (4) translates the information into a dispatcher-friendly format, and (5) transmits the data to the local emergency service call center. As of December 31, 2010, we are under contract to provide E9-1-1 services to more than 40 customers including wireless carriers and VoIP service providers.

 

c. Software and System Maintenance. For our installed base of systems in use by customers (see system descriptions below), we provide ongoing operational support, including administration of system components, system optimization, and configuration management. Maintenance services include tracking customer support issues, trouble shooting, and developing and installing maintenance releases. We typically provide maintenance services for an annual or quarterly fee paid in advance, which is generally priced based on the cumulative license fees we have billed for the systems being supported.

 

d. Professional Services and Solutions for Telematics. We provide custom software development and professional services to customers engaged in telematics, which is the use of Global Positioning System technology, electronic maps and related data integrated with computers and mobile communications technology in automotive navigation systems. Customers include Denso Corporation, Mercedes-Benz, and ATX Group for Hyundai Motors America and services include points-of-interest applications, and compilation and maintenance of geographic information databases used in vehicle navigation systems for products including Toyota, Lexus, and others.

 

2. Commercial Licensed Software-Based Systems: We design and develop software products for wireless carrier and enterprise networks that enable the delivery of secure and personalized content, services,

and transactions to wireless devices. We design our software using industry standards for easy implementation, customization, and interoperability with other network components. Most of our commercial software is designed and delivered together with third-party software and related hardware, which is integrated into new and existing networks by our engineers. Our primary commercial software-based system offerings include: 

 

a. Xypoint^® Location Platform (XLP) for Mobile Location-based Services: Our Xypoint Location Platform infrastructure system interacts with wireless networks to extract the precise location (the “X/Y” coordinates) of a user’s device. In order to determine a user’s location with sufficient precision for U.S. public safety compliance and for commercial location-based applications, our technology interacts with networks that have incorporated Assisted GPS systems that use Global Positioning System (“GPS”) chips in user handsets. Our XLP can also work with network triangulation software which some carriers have added to cell towers and switches in the network. We have been a leader in developing the location platform standard called Secure User Plane for Location (“SUPL”) and have incorporated the technology in our products. Our platform also provides privacy controls so that the wireless device user controls access to the user’s location information, and exposes location application programming interfaces (“APIs”) to location-based services applications.

 

For our LBS applications, the user device’s “X/Y” information is extracted from networks and used for E9-1-1 call routing, navigation directions, identification of points of interest locations near the user (such as gas stations, restaurants, or hotels), and locating other network subscribers near the user’s current position. We provide high volume software applications that allow wireless carriers to deliver optimized travel directions, generate device-appropriate maps, and search for nearby points of interest when location-sensitive events take place such as “traffic on my route.” We believe that our company offers the most complete suite of LBS technology to wireless carriers around the world.

 

b. Short Message Service Center and Wireless Intelligent Gateway. Our Short Message Service Center software enables wireless carrier subscribers to send and receive text or data messages to and from wireless devices. The Wireless Intelligent Gateway is a portal for two-way data communication between users of wireless networks and the Internet. The Gateway allows users to customize the services they receive on wireless devices by setting up a user profile through a single Internet-based procedure. Wireless carriers can access these user profiles and usage data to gain a better understanding of customer behavior. The Wireless Intelligent Gateway allows additional wireless applications to be added as desired, as well as personalization, instant messaging and spam-blocking capabilities that can be independently customized by the end-user. It can interoperate with our location-based service platform and applications.

 

 

We plan to continue to develop and sell software and engineered systems which we deliver through deployment in customer wireless networks or through hosted and subscription business models. Our development investment is focused on the delivery of location information, short messages, corporate network and internet data, and other enhanced data-communication services to and from wireless devices. Our engineers design solutions to optimize the balance of functionality between the device and the hosted network components, or “cloud.” The following trends are driving demand for our products and services:

 

Improving Wireless Device Functionality. Manufacturers continue to increase the functionality of mobile devices including phones and personal digital assistants through higher resolution, color screens, and increased computing capability for sophisticated applications. These devices enable the user to take advantage of the high-speed data networks for Internet and data usage. Broad adoption of location-based services has required, among other things, handsets incorporating components for interoperation with GPS satellites and with LBS network components that we have developed and provide. A growing number of handheld wireless devices contain GPS chipsets which interoperate with our network platforms and applications. Proliferation of improved handheld devices has increased the size of the market for our technology.

 

Cellular Network Improvements to Next Generation Capabilities. Mobile operators are deploying high-speed data networks based on third and fourth generation technologies that, in many cases, equal or surpass data rates that are typically available for residential wireline users. The deployments of these high-

speed wireless data networks have made it possible to “wireless-enable” many services that previously required a wireline connection. Our location-based technology and applications incorporating map graphics take advantage of these network enhancements.

 

Growth in Wireless and VoIP Subscribers. The worldwide use of wireless communications continues to grow, driven by expanded wireless network coverage, upgraded high-speed digital networks, more affordable service plans, and higher quality and less expensive wireless devices. Wireless growth is expected to continue to increase in all regions of the world for the foreseeable future. Driving this growth is the replacement of landline connections with wireless connections. Some households are now using cellular phones exclusively, including young adult households and those in developing countries where wireless may be the only available communications. VoIP service offers cost advantages over previous wireline service.

 

The FCC’s E9-1-1 Mandates. A key to enhancing personal safety through a cell phone is the availability of E9-1-1 wireless capabilities. We are one of the two leading providers of E9-1-1 service to wireless and VoIP service providers in the U.S. In 1996, the Federal Communications Commission (FCC) mandated the adoption of E9-1-1 technology by wireless carriers, and in 2005, the FCC ordered providers of interconnected VoIP service to provide E9-1-1 services to all of their customers as a standard feature of the service. We are actively pursuing next generation E9-1-1 business and are working toward deploying solutions in three states.

 

Growing Use of Commercial Location-Based Wireless Services. A driver of wireless communication subscriber revenue growth is the delivery of timely, highly specialized, interactive and location-specific information. Technology incorporated in a growing number of networks and handsets now enables determination of the handset’s location with sufficient precision to allow useful applications beyond E9-1-1. Wireless users benefit from the ability to receive highly customized location-specific information in response to their queries or via targeted opt-in content delivered to the wireless device. Enterprises benefit from wireless location technology for routing and tracking their mobile field forces. Our Xypoint^® Location Platform (“XLP”) systems enable device location determination for carriers including Verizon Wireless, MetroPCS in the U.S., Bell Mobility in Canada, Centennial in Puerto Rico, Iusacell in Mexico, Tata Teleservices in India, and Hutchison Whampoa’s “3‘^tm networks in Europe and the Pacific.

 

Growing Use of Short Messaging and Internet Applications. The number of short messaging services (“SMS”) users and messages per individual are projected to continue to increase. Mobile operators in the United States are experiencing rapid SMS traffic growth, according to statistics from mobile operators. Significant growth in the SMS traffic coupled with our share of the market ensures that Company will benefit from expanding application of SMS technology in new areas such as Machine-to-Machine (“M2M”) messaging. We provide solutions for mobile operators to receive and route e-mail and SMS messages through our Short Message Service Center and Wireless Intelligent Gateway systems.

 

The key elements of our Commercial Segment strategy are to:

 

 

 

II.  Government Segment:

 

We engineer and provide secure, communication solutions, including deployable wireless communication systems and related support services with emphasis on satellite-based technology, to agencies of the U.S. Departments of Defense (DoD), State, Justice, Homeland Security, as well as other government customers.

 

 

1. Government Services. We enter into fee-for-service contracts under which revenue is generated based on contract labor billing rates or based on fixed fees for deliverables. These services, typically under multi-year contracts or contract vehicles, include:

 

a. Integrated Logistics Support (“ILS”) Services. We offer field and maintenance support of wireless deployable communication systems including our SwiftLink systems, as well as other vendors’ systems. This includes basic and extended maintenance services, training, depot support, product resets, and documentation.

 

b. Cyber Security and Other Information Technology Training and Professional Services. We provide cyber security training, secure network communication and encryption engineering, project management, information assurance, program and business management and enterprise modernization. We design, install, and operate data networks that integrate computing and communications, including systems that provide communications via both satellite and terrestrial links. We can provide complete network installation services from cabling infrastructure to complex communications system components. We also provide ongoing network operation and management support services including telecom expense management under multi-year contracts with government customers.

 

c. Secure Satellite Teleport Data Landing and Transmission Services. We own and operate a high-speed satellite communications teleport in Manassas, Virginia that is connected to the public switched telephone network, and operate two facilities in Europe for government customers. These facilities provide transport services for Internet Protocol (“IP”)-based media content consisting of VoIP, Internet, video and messaging data using Very Small Aperture Terminal (“VSAT”) satellite technology as part of our communication solutions for our customers. We provide end-to-end connectivity between users of our deployed SwiftLink systems in remote locations back to our Teleports and eventually onto customers’ back-office

desktops and cell phones. We purchase space segment and resell it to customers using our facilities. With the January 31, 2011 acquisition of Trident Space and Defense, TCS maintains two base stations in the Pacific.

 

2. Government Systems. Our SwiftLink product line is a series of ruggedized, secure communication systems, which can be rapidly deployed in remote areas for wireless satellite-based or point-to-point communications where other means of reliable communication may not be available. SwiftLink products provide secure voice, video and data communications for multiple personnel. Since 2006 we have made large volume shipments of systems under the US Army’s Worldwide Satellite Systems contract vehicle, including a SwiftLink variation called “SNAP” (Secure / nonsecure access point) and Wireless Point-to-Point Link (“WPPL”) systems. All of our SwiftLink systems can be deployed by a single person in less than ten minutes, creating critical communication channels from any location around the world. Uses include critical communications for DoD warfighters and command headquarters, emergency response, news reporting, public safety, drilling and mining operations, field surveys and other activities that require remote capabilities for video and data transmission. Revenue from integration work which typically accompanies customer purchases of our secure deployable systems is reported together with the system sales revenue. Our deployable VSAT multi-band terminals provide access to a wide array of commercial and military satellites that make broadband capabilities available on a global basis. In addition, our deployable broadband wireless systems provide extensions of secure wireless communications services for up to 30 miles from a SwiftLink point of presence.

 

Our January 31, 2011 acquisition of Trident Space and Defense adds engineering depth to our solutions team. The Trident organization is proficient in development of electronic components and solid state drives for aerospace applications, which we expect to enhance TCS’s ability to continue to reduce the form factor of deployable communications solutions.

 

 

We plan to continue to provide technology solutions to U.S. government and international customers. The following trends are driving demand for our products and services:

 

Expanding Need for Secure, Deployable, Wireless Communication Solutions. TCS has sold its SwiftLink deployable communication system kits to federal government customers for about a decade. The U.S. Army awarded the 2006-11 Worldwide Satellite Communication Systems (“WWSS”) 5-year procurement contract vehicle to six prime contractors including TeleCommunication Systems, Inc. with a ceiling value of up to $5 billion in procurements. WWSS procurement encompasses systems like our SwiftLink family of deliverables, and we have generated significant revenue under WWSS. We are continuing to enhance our deployable communication systems product line to take advantage of the evolving environment, including the benefits of Very Small Aperture Terminal satellite communications architectures deployable in multiple aperture man pack where desirable and the use of Inmarsat Broadband Global Area Network enhancements to our satellite services. TCS has prepared for competing to participate in U.S. military procurement successors to WWSS that are expected to be awarded in 2011.

 

Growing Need for Cyber Security. Escalating focus by government agencies to protect their online assets has brought the importance of cyber security and associated solutions to the fore. By acquiring Solvern in late 2009, we have contract vehicles for the government’s surging demand for information technology cyber security training, cyber technical solutions, and related procurement support. Steep growth in spending to the multi-billion dollar level by U.S. federal agencies on cyber initiatives is expected over the next five years. The expertise and processes developed for Government Segment could be adapted to meet the online security needs of commercial clients. We are proficient in recruiting and developing cyber professionals and our Art of Exploitation training is based on intellectual property developed by the company to support cyber security initiatives. The training covers a clear set of leading cyber methodologies to produce a certified cyber scientist.

 

Government Outsourcing of Network and Telecom Technical Functions. Federal agencies, as well as state and local governments, are increasingly contracting with specialist teams for functions such as network management, and for long-term projects such as software development and systems integration. Since the founding of our Company, we have built relationships with federal agencies, as well as the State of Maryland

and the City of Baltimore. Since early 2004, we have made it a management priority to aggressively expand our base of long-term service contract engagements. We made strategic acquisitions during 2009, added experienced sales personnel, and enhanced our relationships with systems integrators and specialist vendors to expand our penetration of the government service market.

 

Growing Use of Secure Wireless Communications and Location Technology for Defense, Intelligence and Homeland Security. Wireless communications and location technology are key initiatives within the federal government for both security and supply-chain management. Wireless communications in emergencies are of paramount importance, as emergency personnel need to be able to communicate and share information across agencies and departments where wireline systems may be unavailable. We believe that our expertise in the areas of wireless E9-1-1, location and messaging services, and secure satellite communications can be leveraged to provide the needed wireless infrastructure for the U.S. Departments of Homeland Security and Defense and we are currently pursuing opportunities to provide such products and services. Our SwiftLink deployable communication systems are also increasingly used by military and other government agencies around the globe for communications in times of emergencies. SwiftLink is designed to provide secure voice and data communications through encrypted satellite links.

 

Secure Teleport, Space Segment and Integration Capabilities with Deployable Systems as a Bundled Solution. Government customers can benefit from single-sourcing secure communications solutions which include a secure U.S. landing site for backhaul traffic as well as network engineering expertise and secure remote terminals. We believe that TCS enjoys a competitive advantage, because it can offer all of these elements from a single vendor.

 

Application of Commercially Proven Technology to Government Solutions. Government customers increasingly are using commercial carrier networks. Procurement officers have expressed a preference for solutions that incorporate proven commercial technology, rather than reliance on government research and development funding. Our portfolio of software, patented intellectual property, and teams of wireless and encryption specialists’ positions us to tap into this opportunity.

 

Our Government Segment strategy is to be a leading secure wireless communications solution vendor, by building scale and a continuum of related technical capabilities. Our company has a solid foundation as a provider of deployable, tactical systems and related field support and maintenance, operator of fixed teleports, and reseller of space segment. Related extensions of these core competencies include high growth professional service areas such as cyber-security contract work. We intend to continue to selectively consider acquisitions of companies and technologies in order to increase the scale and scope of our operations, market presence, products, services and customer base.

 

Customers

 

Commercial Segment. Our principal commercial customers are wireless telecommunications carriers in the United States and around the world, either directly or through our channel partners. We provide licensed software-based systems, and hosted applications to carrier subscribers around the world. Our wireless carrier customers include Verizon Wireless, AT&T Mobility, T-Mobile, Sprint, MetroPCS, Cricket Communications, Telus and the Hutchison Whampoa “3” brand networks. Customers for our VoIP E9-1-1 services include Comcast and Level 3. We provide electronic map technology solutions to telematics vendors including Denso Corporation, Mercedes-Benz and ATX Group for Hyundai Motors America. Our sales efforts target wireless, wireline and VoIP service providers around the world.

 

Government Segment. Our government customers include major units of the U.S. Departments of Defense, Justice, Homeland Security, and State, the General Services Administration, and the City of Baltimore. In the aggregate, U.S. federal government entities accounted for 36% of total 2010 revenue. Customers also include international space agencies.

Backlog

 

As of December 31, 2010 and 2009, we had unfilled orders, or funded contract and total backlog, as follows:

 

 

Funded contract backlog represents contracts for which fiscal year funding has been appropriated by the company’s customers (mainly federal agencies), and for hosted services (mainly for wireless carriers), backlog for which is computed by multiplying the most recent month’s contract or subscription revenue times the remaining months under existing long-term agreements, which we believe is the best available information for anticipating revenue under those agreements. Total backlog, as is typically measured by government contractors, includes orders covering optional periods of service and/or deliverables, but for which budgetary funding may not yet have been approved. Company backlog at any given time may be affected by a number of factors, including the availability of funding, contracts being renewed or new contracts being signed before existing contracts are completed. Some of the company’s 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. As of February 28, 2011, the Congress has not approved the President’s fiscal year 2011 budget request. Consequently, the U.S. government, including the Department of Defense, is operating under a continuing resolution, which funds the pentagon at fiscal year 2010 funding levels through early March 2011, and which could affect funding of some unfunded TCS government backlog.

 

Acquisitions

 

On January 31, 2011, we acquired Trident Space & Defense LLC, a leading provider of engineering and electronics solutions for global space and defense markets. Consideration for the acquisition included the payment of cash and three million shares of TCS Class A Common Stock.

 

On December 15, 2009, we acquired all of the outstanding stock of Networks In Motion, Inc., a provider of wireless navigation solutions for GPS-enabled mobile phones. NIM has over 3.5 million subscribers and provides turn-by-turn navigation to carriers and their customers in 38 countries and in 10 languages. The acquisition accelerates the Company’s position in enabling mobile operators, offering enhanced location-based data services and strengthens our position with market-leading navigation technology, and adds an internationally recognized navigation application to our global LBS application. Capabilities of TCS’ Location-Based Services (LBS) assets combined with those of LocationLogic and NIM create a compelling comprehensive suite of location based technology offerings. NIM delivers Tier 1 location based wireless applications, with market-leading navigation technology that shares the 99.999% reliability standard of other TCS solutions. NIM was acquired for a purchase price of $170 million, consisting of $110 million cash, $20 million, or approximately 2.2 million shares, paid in the Company’s Class A Common Stock, and $40 million in promissory notes. The promissory notes bear simple annual interest of 6% and are due in three installments; $30 million on the 12 month anniversary of the closing, $5 million on the 18 month anniversary of the closing, and $5 million on the 24 month anniversary of the closing, subject to escrow adjustments. The promissory notes are effectively subordinated to TCS’s secured debt and structurally subordinated to any present and future indebtedness and other obligations of TCS’s subsidiaries.

Operating results of NIM are reflected in the Company’s consolidated financial statements from the date of acquisition and are included in the commercial services segment.

 

On November 16, 2009, we purchased substantially all of the assets of Sidereal Solutions, Inc., a satellite communications technology engineering, operations and maintenance support services company. Sidereal has been a business partner with the Company since 2007, providing field service support for satellite communications and network engineering, technical writing and training, and other information technology services in support of our SwiftLink line of deployable systems. Sidereal professionals comprise personnel from all four U.S. military service components with expertise in the logistics support of military operations for tactical communications, supporting multiple system designs in addition to SwiftLink. Sidereal’s purchase consideration included cash, approximately 244,000 shares of TCS Class A Common Stock, and contingent consideration based on the business’s gross profit in 2010 and 2011. Operating results of Sidereal are reflected in the Company’s consolidated financial statements from the date of acquisition and are integrated into the government services segment.

 

On November 3, 2009, we acquired all of the outstanding stock of Solvern Innovations, Inc., a provider of comprehensive communications products and solutions, training, and technology services for multiple security-based platforms. Increased threats of web-based attacks, coupled with the U.S. government’s renewed focus on protecting online assets, indicates that cyber security will be a high growth communications technology area for the foreseeable future and the acquisition of Solvern extends our core competency in secure network communications and encryption. Solvern’s purchase consideration included cash, approximately 1 million shares of TCS Class A Common Stock, and contingent consideration based on the business’s gross profit in 2010 and 2011. Operating results of Solvern are reflected in the Company’s consolidated financial statements from the date of acquisition and are integrated into the government services segment.

 

On May 19, 2009, we acquired substantially all of the assets of LocationLogic LLC, formerly part of Autodesk Inc., a provider of infrastructure, applications and services for carriers and enterprises to deploy location-based services. LocationLogic’s business and consumer applications and platform software provide location-enabling services and tools to deploy reliable, high tech information for wireless users. The acquisition adds people finder, mobile resource management, and phone recovery and security applications to our portfolio of offerings. Operating results of LocationLogic are reflected in the Company’s consolidated financial statements from the date of acquisition and are integrated into the commercial services segment.

 

Sales and Marketing

 

We sell our products and services through our direct sales force and through indirect channels. Our direct sales and marketing force consists of approximately 75 professionals in the U.S., Europe, Latin America, and Asia. We also leverage our relationships with original equipment manufacturers (OEMs) to market our commercial systems. These indirect sales relationships include Huawei, Alcatel Lucent and Qualcomm. During the indirect sales process, as well as during installation and maintenance, we maintain extensive direct contact with prospective carrier customers.

 

We are pre-qualified as an approved vendor for some government contracts, and some of our products and services are available to government customers via the General Services Administration’s Information Technology Schedule 70, and the Worldwide Satellite Services (“WWSS”) and the Space and Naval Warfare Foreign Military Sales (“SPAWAR FMS”) contract vehicles. We collaborate in sales efforts under various arrangements with integrators. Our marketing efforts also include advertising, public relations, speaking engagements and attending and sponsoring industry conferences.

 

Competition

 

The markets for our products and services are competitive. The adoption of industry standards may make it easier for new market entrants to compete with us. We expect that we will continue to compete primarily on the basis of the functionality, breadth, time to market, ease of integration, price, and quality of our products and services, as well as our market experience, reputation, and price. The market and competitive conditions are continually developing. Our software-based deliverables compete with alternatives provided by other companies.

It is difficult to present a meaningful comparison between our competitors and us because there is a large variation in revenue generated by different customers, different products and services, as well as the different combinations of products and services offered by our competitors. We cannot, therefore, quantify our relative competitive position.

 

Our current and potential competitors include:

 

 

Many of our existing and potential competitors have substantially greater financial, technical, marketing and distribution resources than we do. Many of these companies have greater name recognition and more established relationships with their target customers. Furthermore, these competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can. With time and capital, it would be possible for our competitors to replicate our products and services.

 

We partner with vendors of precise location technology. Certain of our partners may attempt to compete with our operating platform by developing their own transmission platform or by purchasing another mobile location platform. The markets for commercial location and other mobile wireless applications for carriers and enterprises are relatively new and continually developing. The convergence of wireless technologies and the Internet is creating many initiatives to bring data and transaction capabilities to wireless devices. There is a wide array of potential competitors in this market, including providers of competing location management platforms, competing e-mail products, competing enterprise mobility platforms and other competing applications for wireless devices.

 

Research and Development

 

Our success depends on a number of factors, which include, among other items, our ability to identify and respond to emerging technological trends in our target markets, to develop and maintain competitive products, to enhance our existing products by adding features and functionality that differentiate the products from those of our competitors, and to bring products to market on a timely basis and at competitive prices. As of December 31, 2010, our overall staff included more than 680 professionals with technical expertise in wireless network, client software development and satellite-based communication technology. Since 1996, we have made substantial investments in wireless technology research and development, most of which has been devoted to the development of carrier and enterprise network software products and services. We are primarily focusing our current research and development investments in cellular location-based and electronic map technology, including E9-1-1 technology.

 

We support existing telecommunications standards and promote new standards in order to expand the market for wireless data. We actively participate in wireless standards-setting organizations including the Open Mobile Alliance, and we are represented on the Board of Directors for the E9-1-1 Institute. In 1996, we co-founded the Intelligent Network Forum, an organization dedicated to expanding the role of intelligent networks in telecommunications. As part of our strategy to expand the role of short messaging, we co-founded the Short Message Peer-to-Peer Forum in 1999. For the years ended December 31, 2010, 2009, and 2008, our research and development expense was $30.1 million, $22.4 million, and $16.2 million, respectively.

 

Certain of our government customers contract with us from time to time to conduct research on telecommunications software, equipment and systems.

 

Intellectual Property Rights

 

We rely on a combination of patent, copyright, trademark, service mark, and trade secret laws and restrictions to establish and protect certain proprietary rights in our products and services.

As of the end of 2010, we held 136 issued patents relating to wireless text messaging, inter-carrier messaging, number portability, GPS ephemeris data, emergency public safety data routing, and electronic commerce. We have filed more than 300 additional patent applications for certain apparatus and processes we believe we have invented to enable key features of the location services, wireless text alerts, Short Message Service Center, mobile-originated data and E9-1-1 network software. There is no assurance that our patent applications will result in a patent being issued by the U.S. Patent and Trademark Office or other patent offices, nor is there any guarantee that any issued patent will be valid and enforceable. Additionally, foreign patent rights may or may not be available or pursued in any technology area for which U.S. patent applications have been filed.

 

On December 23 2009, TeleCommunication Systems and Sybase 365, LLC agreed to a settlement of $23 million in resolution of inter-carrier messaging patent infringement litigation. After deducting legal expenses, the net proceeds to the Company were $15.7 million.

 

We developed our Short Message Service Center software in 1996 under our development agreement with Alcatel Lucent. Under the development agreement, we share certain ownership rights in this software application with Alcatel Lucent. The scope of each party’s ownership interest is subject to each party’s various underlying ownership rights in intellectual property and also to confidential information contributed to the applications, and is subject to challenge by either party.

 

As a member of various industry standard-setting forums, we have agreed to license certain of our intellectual property to other members on fair and reasonable terms to the extent that the license is required to develop non-infringing products under the specifications promulgated by those forums.

 

Employees

 

As of December 31, 2010, we had 1,205 employees, of which 1,189 were full-time and 16 were part-time. We believe relations with our employees are good. None of our employees is represented by a union.

 

Geographical Information

 

During 2010, 2009, and 2008, total revenue generated from products and services of our continuing operations in the U.S. were $376.3 million, $290.7 million, and $211.5 million, respectively, and total revenue generated from products and services outside of the U.S. were $12.5 million, $9.4 million, and $8.6 million, respectively. As of December 31, 2010, 2009, and 2008, essentially all of the long-lived assets of our operations were located in the U.S.

 

We are subject to risks related to offering our products and services in foreign countries. See the information under the heading “Risk Factors — Because our product offerings are sold internationally, we are subject to risks of conducting business in foreign countries” included in Item 1A.

 

 

You should consider carefully each of the following risks and all of the other information in this Annual Report on Form 10-K and the documents incorporated by reference herein. If any of the following risks and uncertainties develops into actual events, our business, financial condition or results of operations could be materially adversely affected.

 

Risks Related to Our Business

 

If wireless carriers do not continue to provide our location-based wireless applications and text messaging to their subscribers, our business could be harmed.

 

If wireless carriers limit their product and service offerings or do not purchase additional products containing our applications, our business will be harmed. Wireless carriers face implementation and support challenges in introducing Internet-based services via wireless devices, which may slow the rate of adoption or implementation of our products and services. Historically, wireless carriers have been relatively slow to implement complex new services such as Internet-based services. Our future success depends upon a continued increase in the use of

wireless devices to access the Internet and upon the continued development of wireless devices as a medium for the delivery of network-based content and services. We have no control over the pace at which wireless carriers implement these new services. The failure of wireless carriers to introduce and support services utilizing our products in a timely and effective manner could reduce sales of our products and services and have a material adverse effect on our business, financial position, results of operations or cash flows.

 

Additionally, competitors could begin offering location-based technology that have functionality similar to ours for free. For example, Google offers free voice guided, turn-by-turn navigation as part of its Google Maps product for mobile devices based certain Android operating system platforms and Nokia Corporation or Nokia provides a download for its latest version of Ovi Maps on its smartphones which also provides turn-by-turn navigation functions. Microsoft also provides a free turn-by-turn navigation solution with its current Windows Mobile operating system via their Bing for Mobile application. Competition from these free offerings may reduce our revenue and harm our business. If our wireless carrier partners can offer these location-based services to their subscribers for free, they may elect to cease their relationships with us, alter or reduce the manner or extent to which they market or offer our services or require us to substantially reduce our subscription fees or pursue other business strategies that may not prove successful for us and have a material adverse effect on our business, financial position, results of operations or cash flows.

 

Network failures, disruptions or capacity constraints in our third party data center facilities or in our servers could affect the performance of the products and services of our wireless applications and E9-1-1 business and harm our reputation and our revenue.

 

The products and services of our wireless applications business are provided through a combination of our servers, which we house at third party data centers, and the networks of our wireless carrier partners. The operations of our wireless applications business rely to a significant degree on the efficient and uninterrupted operation of the third party data centers we use. We use third party data center facilities in locations such as Phoenix, Arizona and Irvine and San Francisco, California to support certain operations such as our E9-1-1 operations and for disaster recovery purposes. Depending on the growth rate in the number of our end users and their usage of the services of our wireless applications business, if we do not timely complete and open additional data centers, we may experience capacity issues, which could lead to service failures and disruptions. In addition, if we are unable to secure data center space with appropriate power, cooling and bandwidth capacity, we may be unable to efficiently and effectively scale our business to manage the addition of new wireless carrier partners, increases in the number of our end users or increases in data traffic.

 

Our data centers are potentially vulnerable to damage or interruption from a variety of sources including fire, flood, earthquake, power loss, telecommunications or computer systems failure, human error, terrorist acts or other events. There can be no assurance that the measures implemented by us to date, or measures implemented by us in the future, to manage risks related to network failures or disruptions in our data centers will be adequate, or that the redundancies built into our servers will work as planned in the event of network failures or other disruptions. In particular, if we experienced damage or interruptions to our data center in the Irvine, California area, or if our disaster recovery data center in Phoenix was unable to work properly in the event of a disaster at our Irvine center, our ability to provide efficient and uninterrupted operation of our services would be significantly impaired.

 

We could also experience failures of our data centers or interruptions of our services, or other problems in connection with our operations, as a result of:

 

 

Poor performance in or disruptions of the services of our wireless applications business could harm our reputation, delay market acceptance of our services and subject us to liabilities. Our wireless carrier agreements require us to meet operational uptime requirements, excluding scheduled maintenance periods, or be subjected to penalties. If we are unable to meet these requirements, our wireless carrier partners could terminate our agreements or we may be required to refund a portion of monthly subscriptions fees they have paid us.

 

In addition, if our end user base continues to grow, additional strain will be placed on our technology systems and networks, which may increase the risk of a network disruption. Any outage in a network or system, or other unanticipated problem that leads to an interruption or disruption of our of our wireless applications business, could have a material adverse effect on our operating results and financial condition.

 

If we are unable to grow data center capacity as needed, our business will be harmed.

 

Despite frequent testing of the scalability of our wireless applications business in a test environment, the ability of our wireless applications business to scale to support a substantial increase in the use of those services or number of users in an actual commercial environment is unproven. If our wireless applications business does not efficiently and effectively scale to support and manage a substantial increase in the use of our services or number of users while maintaining a high level of performance, our business will be seriously harmed.

 

Our operating results could be adversely affected by any interruption of our data delivery services, system failure or production interruptions.

 

Our E9-1-1, hosted location-based services and satellite teleport services operations depend on our ability to maintain our computer and telecommunications equipment and systems in effective working order, and to protect our systems against damage from fire, natural disaster, power loss, telecommunications failure, sabotage, unauthorized access to our system or similar events. Although all of our mission-critical systems and equipment are designed with built-in redundancy and security, any unanticipated interruption or delay in our operations or breach of security could have a material adverse effect on our business, financial condition and results of operations.

 

Furthermore, any addition or expansion of our facilities to increase capacity could increase our exposure to natural or other disasters. Our property and business interruption insurance may not be adequate to compensate us for any losses that may occur in the event of a system failure or a breach of security. Furthermore, insurance may not be available to us at all or, if available, may not be available to us on commercially reasonable terms.

 

Our past and future acquisitions of companies or technologies could prove difficult to integrate, disrupt our business, dilute shareholder value or adversely affect operating results or the market price of our Class A common stock.

 

We have made several recent acquisitions and intend to continue to selectively consider acquisitions of companies and technologies in order to increase the scale and scope of our operations, market presence, products, services and customer base. Any acquisitions, strategic alliances or investments we may pursue in the future will have a continuing, significant impact on our business, financial condition and operating results. The value of the companies or assets that we acquire or invest in may be less than the amount we paid if there is a decline of their position in the respective markets they serve or a decline in general of the markets they serve. If we fail to properly evaluate and execute acquisitions and investments, our business and prospects may be seriously harmed. Acquisitions involve numerous risks, including:

 

 

 

If we fail to do any of these, we may suffer losses, our management may be distracted from day-to-day operations and the market price of our Class A common stock may be materially adversely affected. In addition, if we consummate future acquisitions using our equity securities or convertible notes, existing shareholders may be diluted which could have a material adverse effect on the market price of our Class A common stock.

 

The companies and business units we have acquired or invested in or may acquire or invest in are subject to each of the business risks we describe in this section, and if they incur any of these risks the businesses may not be as valuable as the amount we paid. Further, we cannot guarantee that we will realize the benefits or strategic objectives we are seeking to obtain by acquiring or investing in these companies.

 

We are substantially dependent on our wireless carrier partners to market and distribute the products and services generated by our wireless applications business to end users and our wireless applications business may be harmed if our wireless carrier partners elect not to broadly offer these services.

 

We rely on our wireless carrier partners to introduce, market and promote the products and services of our wireless applications business to end users. None of our wireless carrier partners is contractually obligated to continue to do so. If wireless carrier partners do not introduce, market and promote mobile phones that are GPS enabled and on which our client software is preloaded and do not actively market the products and services of our wireless applications business, the products and services of our wireless applications business will not achieve broader acceptance and our revenue may not grow as fast as anticipated, or may decline.

 

Wireless carriers, including those with which we have existing relationships, may decide not to offer our services and/or may enter into relationships with one or more of our competitors. While our products and services may still be available to customers of those wireless carriers as downloads from application stores or our website, sales of the products and services of our wireless applications business would likely be much more limited than if they were preloaded as a white label service actively marketed by the carrier or were included as part of a bundle of services. Our inability to offer the products and services of our wireless applications business through a white label offering or as part of a bundle on popular mobile phones would harm our operating results and financial condition.

 

We expect that competitive pricing pressures will continue in its industry. Our wireless carrier partners have the ability to lower end user pricing on the products and services of our wireless applications business which would have an immediate adverse effect on our revenue. Our gross margin may decrease if the average cost per end user to provide our services does not decline proportionately. These costs include third party map and other data costs and internal costs to provide our services.

 

Our success depends on significantly increasing the number of end users that purchase the products and services of our wireless applications business from our wireless carrier partners.

 

A significant portion of our revenue is derived from subscription fees that we receive from our wireless carrier partners for end users who subscribe to our service on a standalone basis or in a bundle with other services. To date, a relatively small number of end users have subscribed for our services in connection with their wireless plans compared to the total number of mobile phone users. The near term success of our of our wireless applications business depends heavily on achieving significantly increased subscriber adoption of the products and services of our wireless applications business either through stand alone subscriptions to our services or as part of bundles from our existing wireless carrier partners. The success of our wireless applications business also depends on achieving widespread deployment of the products and services of our wireless applications business by attracting and retaining additional wireless carrier partners. The use of the products and services of our wireless applications business will depend on the pricing and quality of those services, subscriber demand for those services, which may vary by market, as well as the level of subscriber

turnover experienced by our wireless carrier partners. If subscriber turnover increases more than we anticipate, our financial results could be adversely affected.

 

If our current and future wireless carrier partners do not successfully market the products and services of our wireless applications business to their customers or if we are not successful in maintaining and expanding our relationships with our wireless carrier partners, we will not be able to maintain or increase the number of end users that use the products and services of our business, operating results and financial condition may be materially adversely affected.

 

Our ability to increase or maintain our end user base and revenue will be impaired if mobile phone manufacturers do not allow us to customize our services for their new devices. We typically deliver the services of our wireless applications business through client software that has been customized to work with a given mobile phone’s operating system, features and form factors. Wireless carrier partners often insist that mobile phone manufacturers permit us to customize our client software for their devices in order to provide the end user with a positive experience. Wireless carriers or mobile phone manufacturers may enter into agreements with other providers of products and services for new or popular mobile phones. For this reason or others, some mobile phone manufacturers may refuse to permit us to access preproduction models of their mobile phones or the mobile phone manufacturers may offer a competing service. If mobile phone manufacturers do not permit us to customize our client software and preload it on their devices, we may have difficulty attracting end users because of poor user experiences or an inconvenient provisioning process. If we are unable to provide seamless provisioning or end users cancel their subscriptions to our services because they have poor experiences, our revenue may be harmed.

 

Our wireless carrier partners may change the pricing and other terms by which they offer our wireless applications business, which could result in increased end user churn, lower revenue and adverse effects on our business.

 

Several of our wireless carrier partners sell unlimited data service plans, which include the products and services of our wireless applications business. As a result, end users do not have to pay a separate monthly fee to use the services provided by our wireless applications business. If our wireless carrier partners were to eliminate the services provided by our wireless applications business from their unlimited data service plans, we could lose end users as they would be required to pay a separate monthly fee to continue to use the services provided by our wireless applications business. In addition, we could be required to change our fee structure to retain end users, which could negatively affect our gross margins. Our wireless carrier partners may also seek to reduce the monthly fees per subscriber that they pay us if their subscribers do not use the services provided by our wireless applications business as often as the wireless carriers expect or for any other reason in order to reduce their costs. Our wireless carrier partners may also decide to raise prices, impose usage caps or discontinue unlimited data service plans, which could cause our end users who receive the services provided by our wireless applications business through those plans to move to a less expensive plan that does not include those services or terminate their relationship with the wireless carrier. If imposed, these pricing changes or usage restrictions could make the products and services of our wireless applications business less attractive and could result in current end users abandoning those products and services. If end user turnover increased, the number of our end users and our revenue would decrease and our business would be harmed. We are also required to give certain customers most favored customer pricing on specified products and in certain markets. In some circumstances this may require us to reduce the price per end user under certain contracts.

 

New entrants and the introduction of other distribution models in the location- based services market may harm our competitive position.

 

The markets for development, distribution and sale of location-based products and services are rapidly evolving. New entrants seeking to gain market share by introducing new technology and new products may make it more difficult for us to sell the products and services of our wireless applications business, and could create increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of

market share or expected market share, any of which may significantly harm our business, operating results and financial condition.

 

Although historically wireless carriers controlled provisioning and access to the applications that could be used on mobile phones connected to their networks, in recent years consumers have been able to download and provision applications from individual provider websites and to select from a menu of applications through the Apple iTunes App Store, the Blackberry App World, the Android Market, and other application aggregators. In addition, applications from other LBS providers may be preloaded on mobile devices by OEMs or offered by OEMs directly. Increased competition from providers of location-based services which do not rely on a wireless carrier may result in fewer wireless carrier subscribers electing to purchase their wireless carrier’s branded location-based services, which could harm our business and revenue. In addition, these location-based services may be offered for free or on a onetime fee basis, which could force us to reduce monthly subscription fees or migrate to a onetime fee model to remain competitive. We may also lose end users or face erosion in our average revenue per user if these competitors deliver their products without charge to the consumer by generating revenue from advertising or as part of other applications or services.

 

We rely on our wireless carrier partners for timely and accurate subscriber information. A failure or disruption in the provisioning of this data to us would adversely affect our ability to manage our wireless applications business effectively.

 

We rely on our wireless carrier partners to bill subscribers and collect monthly fees for the products and services of our wireless applications business, either directly or through third party service providers. If our wireless carrier partners or their third party service providers provide us with inaccurate data or experience errors or outages in their own billing and provisioning systems when performing these services, our revenue may be less than anticipated or may be subject to adjustment with the wireless carrier. In the past, we have experienced errors in wireless carrier reporting. If we are unable to identify and resolve discrepancies in a timely manner, our revenue may vary more than anticipated from period to period and this could harm our business, operating results and financial condition.

 

We rely on third party data and content to provide the services of our wireless applications business, and if we were unable to obtain content at reasonable prices, or at all, our gross margins and our ability to provide the services of our wireless applications business would be harmed.

 

Our wireless applications business relies on third party data and content to provide those services including map data, points of interest data, traffic information, gas prices, theater, event, and weather information. If our suppliers of this data or content were to enter into exclusive relationships with other providers of location-based services or were to discontinue providing such information and we were unable to replace them cost effectively, or at all, our ability to provide the services of our wireless applications business would be harmed. Our gross margins may also be affected if the cost of third party data and content increases substantially.

 

We obtain map data from companies owned by current and potential competitors. Accordingly, these third party data and content providers may act in a manner that is not in our best interest. For example, they may cease to offer their map data to us.

 

We may not be able to upgrade our location-based services platform to support certain advanced features and functionality without obtaining technology licenses from third parties. Obtaining these licenses may be costly and may delay the introduction of such features and functionality, and these licenses may not be available on commercially favorable terms, or at all. The inability to offer advanced features or functionality, or a delay in our ability to upgrade our location-based services platform, may adversely affect consumer demand for the products and services of our wireless applications business, consequently, harm our business.

 

If a substantial number of end users change mobile phones or if our wireless carrier partners switch to subscription plans that require active monthly renewal by end users, our revenue could suffer.

 

Subscription fees represent the vast majority of our revenue for our wireless applications business. As mobile phone development continues and new mobile phones are offered at subsidized rates to subscribers in

connection with plan renewals, an increasing percentage of end users who already subscribe to the services provided by our wireless applications business will likely upgrade from their existing mobile phones. With some wireless carriers, subscribers are unable to automatically transfer their existing subscriptions from one mobile phone to another. In addition, wireless carriers may switch to subscription billing systems that require subscribers to actively renew, or opt-in, each month from current systems that passively renew unless subscribers take some action to opt-out of their subscriptions. In either case, unless we or our wireless carrier partners are able to resell subscriptions to these subscribers or replace these subscribers with other subscribers, the revenue of our wireless applications business would suffer and this could harm our business, operating results and financial condition.

 

The failure of mobile phone providers selected by our wireless carrier partners to keep pace with technological and market developments in mobile phone design may negatively affect the demand for the products and services of our wireless applications business.

 

Successful sales of the products and services of our wireless applications business depend on our wireless carrier partners keeping pace with changing consumer preferences for mobile phones. If our wireless carrier partners do not select mobile phones with the design attributes attractive to consumers, such as thin form factors, high resolution screens and desired functionality, customers may select wireless carriers with whom we do not have a relationship and subscriptions for our products and services may decline and, consequently, our business may be harmed.

 

Some of our research and development operations are conducted in China, India, and Russia and our ability to introduce new services and support our existing services cost effectively depend on our ability to manage those remote development sites successfully.

 

Our success depends on our ability to enhance our current services and develop new services and products rapidly and cost effectively. We currently have research and development employees in China and contractors in Russia and India. As we do not have substantial experience managing product development operations that are remote from our U.S. headquarters, we may not be able to manage these remote centers successfully. We could incur unexpected costs or delays in product development that could impair our ability to meet market windows or cause it to forego certain new product opportunities.

 

We may fail to support our anticipated growth in operations which could reduce demand for our services and materially adversely affect our revenue.

 

Our business strategy is based on the assumption that the market demand, the number of customers, the amount of information they want to receive and the number of products and services we offer will all increase. We must continue to develop and expand our systems and operations to accommodate this growth. The expansion and adaptation of our systems operations requires substantial financial, operational and management resources. We experience variations in our Government systems revenues and while we increase our production capabilities to satisfy the increased demand, our ability to meet production schedules for increasing demand could adversely impact our product quality and reliability. Any failure on our part to develop and maintain our wireless data services and government system production lines as we experience rapid growth could significantly reduce demand for our services and materially adversely affect our revenue. Also, if we incorrectly predict the market areas that will grow significantly, we could expend significant resources that could have been expended on other areas that do show significant growth.

 

Changes in the U.S. and global market conditions that are beyond our control may have a material adverse effect on us.

 

The U.S. and global economies are currently experiencing a period of substantial economic uncertainty with wide-ranging effects, including the current disruption in global financial markets. Possible effects of these economic events include those relating to business disruptions caused by suppliers or subcontractors, impairment of goodwill and other long-lived assets and reduced access to capital and credit markets. We depend on the U.S. Government for a significant portion of our revenues. There is no assurance that historical budgets

will be sustained at current levels. In addition, competing demands for federal funds could pressure all areas of spending, which could further impact the U.S. Government budget. Although governments worldwide, including the U.S. Government, have initiated sweeping economic plans, we are unable to predict the impact, severity, and duration of these economic events, which could have a material effect on our business, financial position, results of operations or cash flows.

 

We could incur substantial costs from product liability claims relating to our software.

 

Our agreements with customers may require us to indemnify customers for our own acts of negligence and non-performance. Product liability and other forms of insurance are expensive and may not be available in the future. We cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or that our insurer will not disclaim coverage as to a future claim. A product liability or similar claim may have a material adverse effect on our business, financial position, results of operations or cash flows.

 

Our revenue may decline if we fail to retain our largest customers for all of the deliverables that we sell to them.

 

The largest customers for our product and service offerings in terms of revenue generated have been the U.S. Government, Verizon Wireless, AT&T Mobility, MetroPCS, and Hutchison 3G. For the years ended December 31, 2010 and 2009, each of Verizon Wireless and the U.S. Government accounted for 10% or more of our total revenue. For the year ended December 31, 2010, the largest customers for our Commercial Segment was Verizon Wireless and the largest customers for our Government Segment were various U.S. Government agencies. Our wireless applications business is substantially dependent on Verizon Wireless. In addition, we expect to generate a significant portion of our total revenue from Verizon Wireless and these other customers for the foreseeable future. If these customers reduce their expenditures for marketing services for which we provide technology, change their plans to eliminate our services, price our products and services at a level that makes them less attractive, or offer and promote competing products and services, in lieu of, or to a greater degree than, our products and services, our revenue would be materially reduced and our business, operating results and financial condition would be materially and adversely affected.

 

Our growth depends on maintaining relationships with our major customers and on developing other customers and distribution channels. The loss of any of the customers discussed in this paragraph would have a material adverse impact on our business, financial position, results of operations or cash flows.

 

Because we rely on key partners to expand our marketing and sales efforts, if we fail to maintain or expand our relationships with strategic partners and indirect distribution channels our license revenues could decline.

 

We have announced strategic partnerships with Alcatel-Lucent and are working on additional partnerships to provide supplemental channels for the marketing and sale of our software applications globally. Our growth depends on maintaining relationships with these partners and on developing other distribution channels. The loss of any of these partners would have a material adverse impact on our business, financial position, results of operations or cash flows.

 

Growing market acceptance of “open source” software could have a negative impact on us.

 

Growing market acceptance of open source software has presented both benefits and challenges to the commercial software industry in recent years. “Open source” software is made widely available by its authors and is licensed “as is” for a nominal fee or, in some cases, at no charge. For example, Linux is a free Unix-type operating system, and the source code for Linux is freely available.

 

We have incorporated some types of open source software into our products, allowing us to enhance certain solutions without incurring substantial additional research and development costs. Thus far, we have encountered no unanticipated material problems arising from our use of open source software. However, as the use of open source software becomes more widespread, certain open source technology could become competitive with our proprietary technology, which could cause sales of our products to decline or force us to

reduce the fees we charge for our products, which could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

Because our product offerings are sold internationally, we are subject to risks of conducting business in foreign countries.

 

We believe our revenue will increasingly include business in foreign countries, and we will be subject to the social, political and economic risks of conducting business in foreign countries. Our international business may pose different risks than our business in the U.S. In some countries there is increased chance for economic, legal or political changes. Government customers in newly formed free-market economies typically have procurement procedures that are less mature, which can complicate the contracting process. In this context, our international business may be sensitive to changes in a foreign government’s leadership, national priorities and budgets. International transactions can involve increased financial and legal risks arising from foreign exchange-rate variability and differing legal systems. In addition, some international government customers may require contractors to agree to specific in-country purchases, manufacturing agreements or financial support arrangements, known as offsets, as a condition for a contract award. The contracts may include penalties if we fail to meet the offset requirements. Other risks include:

 

 

Any of the foregoing risks could have a material adverse effect on our business, financial position, results of operations or cash flows by diverting time and money toward addressing them or by reducing or eliminating sales in such foreign countries.

 

Because some of our competitors have significantly greater resources than we do, we could lose customers and market share.

 

Our business is highly competitive. Several of our potential competitors are substantially larger than we are and have greater financial, technical and marketing resources than we do. In particular, larger competitors have certain advantages over us which could cause us to lose customers and impede our ability to attract new customers, including: larger bases of financial, technical, marketing, personnel and other resources; more established relationships with wireless carriers; more funds to deploy products and services; and the ability to lower prices (or not charge any price) of competitive products and services because they are selling larger volumes.

 

The widespread adoption of open industry standards such as the Secure User Plane for Location (SUPL) specifications may make it easier for new market entrants and existing competitors to introduce products that compete with our software products. Because our Commercial Segment is part of an emerging market, we

cannot identify or predict which new competitors may enter the mobile location services industry in the future. With time and capital, it would be possible for competitors to replicate any of our products and service offerings or develop alternative products. Additionally, the wireless communications industry continues to experience significant consolidation which may make it more difficult for smaller companies like us to compete. Our competitors include application developers, telecommunications equipment vendors, location determination technology vendors and information technology consultants, and may include traditional Internet portals and Internet infrastructure software companies. We expect that we will compete primarily on the basis of price, time to market, functionality, quality and breadth of product and service offerings.

 

These competitors could include wireless network carriers, mobile and/or wireless software companies, wireless data services providers, secure portable communication and wireless systems integrators and database vendors and other providers of location-based services. As discussed above, many of our potential competitors have significantly greater resources than we do. Furthermore, competitors may develop a different approach to marketing the services we provide in which subscribers may not be required to pay for the information provided by our services. Competition could reduce our market share or force us to lower prices to unprofitable levels.

 

While we characterize our services revenue as being “recurring” there is no guarantee that we will actually achieve this revenue.

 

A significant portion of our revenue is generated from long-term customer contracts that pay certain fees on a month-to-month basis. While we currently believe that these revenue streams will continue, renegotiation of the contract terms, early termination or non-renewal of material contracts could cause our recurring revenues to be lower than expected, and growth depends on maintaining relationships with these important customers and on developing other customers and distribution channels.

 

We cannot guarantee that our estimated contract backlog will result in actual revenue.

 

As of December 31, 2010, our estimated contract backlog totaled approximately $1.14 billion, of which approximately $322.3 million was funded. There can be no assurance that our backlog will result in actual revenue in any particular period, or at all, or that any contract included in backlog will be profitable. There is a higher degree of risk in this regard with respect to unfunded backlog. The actual receipt and timing of any revenue is subject to various contingencies, many of which are beyond our control. The actual receipt of revenue on contracts included in backlog may never occur or may change because a program schedule could change, the program could be canceled, a contract could be reduced, modified or terminated early, or an option that we had assumed would be exercised not being exercised. Further, while many of our federal government contracts require performance over a period of years, Congress often appropriates funds for these contracts for only one year at a time. Consequently, our contracts typically are only partially funded at any point during their term, and all or some of the work intended to be performed under the contracts will remain unfunded pending subsequent Congressional appropriations and the obligation of additional funds to the contract by the procuring agency. There are two primary risks associated with this process. First, the process may be delayed or disrupted. Changes in Congressional schedules due to elections or other legislative priorities, negotiations for program funding levels or unforeseen world events can interrupt the funding for a contract. Second, future revenues under existing multi-year contracts are conditioned on the continuing availability of Congressional appropriations. Approximately 25% of our funded contract backlog consisted of orders from the Government Segment. Our estimates are based on our experience under such contracts and similar contracts. However, there can be no assurances that all, or any, of such estimated contract value will be recognized as revenue.

 

We derive a significant portion of our revenue from sales to various agencies of the U.S. Government which has special rights unlike other customers and exposes us to additional risks that could have a material adverse effect on us.

 

Sales to various agencies of the U.S. Government accounted for approximately 36% of our total revenue for the fiscal year ended December 31, 2010, all of which was attributable to our Government Segment. Our ability

to earn revenue from sales to the U.S. Government can be affected by numerous factors outside of our control, including:

 

 

Any failure by Congress to appropriate funds to any program that we participate in could materially delay or terminate the program and could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

Because we are no longer a small business under some government size standards, we could lose business to small-business set-aside competitors.

 

Federal and state procurement laws require that certain purchases be set-aside for small business competitors, effectively giving a preference to those small businesses even if we have better products and better prices. We have outgrown the size standards set for many of the categories used to purchase products of the nature that we sell. If a particular procurement is set-aside for only small business participants, we may lose customers and revenues and may not be able to replace those sales with purchases from other customers.

 

If our subcontractors and vendors fail to perform their contractual obligations, our performance and reputation as a prime contractor and our ability to obtain future business could suffer.

 

As a prime contractor, we often rely significantly upon other companies as subcontractors to perform work we are obligated to perform for our clients and vendors to deliver critical components. As we secure more work under our contract vehicles such as the Worldwide Satellite Systems agreement, we expect to require an increasing level of support from subcontractors and vendors that provide complementary and supplementary products and services to our offerings. Depending on labor market conditions, we may not be able to identify, hire and retain sufficient numbers of qualified employees to perform the task orders we expect to win. In such cases, we will need to rely on subcontracts with unrelated companies. Moreover, even in favorable labor market conditions, we anticipate entering into more subcontracts in the future as we expand our work under our contract vehicles. We are responsible for the work performed by our subcontractors, even though in some cases we have limited involvement in that work. If one or more of our subcontractors fail to satisfactorily perform the agreed-upon services on a timely basis or violate federal government contracting policies, laws or regulations, our ability to perform our obligations as a prime contractor or meet our clients’ expectations may be compromised. In extreme cases, performance or other deficiencies on the part of our subcontractors could result in a client terminating our contract for default. A termination for default could expose us to liability, including

liability for the agency’s costs of re-procurement, could damage our reputation and could hurt our ability to compete for future contracts.

 

A significant portion of our contracts with the U.S. Government are on a fixed price basis which could negatively impact our profitability.

 

A material portion of our annual revenues is derived from fixed-price contracts. Due to their nature, fixed-price contracts inherently have more risk than flexibly priced contracts. Our operating margin is adversely affected when contract costs that cannot be billed to customers are incurred. While management uses its best judgment to estimate costs associated with fixed-price contracts, future events could result in either upward or downward adjustments to those estimates which could negatively impact our profitability. The increase in contract costs can occur if estimates to complete increase or if initial estimates used for calculating the contract cost were incorrect. The cost estimation process requires significant judgment and expertise. Reasons for cost growth may include unavailability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, interruptions in our supply chain, the effect of any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover any claims included in the estimates to complete. A significant change in cost estimates on one or more programs could have a material effect on our consolidated financial position or results of operations.

 

We are subject to procurement and other related laws and regulation which carry significant penalties for non-compliance.

 

As a supplier to the U.S. Government, we must comply with numerous regulations, including those governing security and contracting practices. In addition, prime contracts with various agencies of the U.S. Government and subcontracts with other prime contractors are subject to numerous laws and regulations.

 

Failure to comply with these procurement regulations and practices could result in fines being imposed against us or our suspension for a period of time from eligibility for bidding on, or for award of, new government contracts. If we are disqualified as a supplier to government agencies, we would lose most, if not all, of our U.S. Government customers and revenues from sales of our products would decline significantly. Among the potential causes for disqualification are violations of various statutes, including those related to procurement integrity, export control, U.S. Government security regulations, employment practices, protection of the environment, accuracy of records in the recording of costs, and foreign corruption. The government could investigate and make inquiries of our business practices and conduct audits of contract performance and cost accounting. Based on the results of such audits, the U.S. Government could adjust our contract-related costs and fees. Depending on the results of these audits and investigations, the government could make claims against us, and if it were to prevail, certain incurred costs would not be recoverable by us.

 

We may incur losses if we are unable to resell products and services for which we have contractual minimum purchase obligations.

 

We have been able to negotiate favorable pricing terms for certain services and supplies that are used in our product and service offerings. Those favorable pricing terms are contingent on various minimum purchase commitments. If we are unable to find customers and negotiate favorable customer terms and conditions for those services and supplies, we may incur related losses.

 

We are exposed to counterparty credit risk and there can be no assurances that we will manage or mitigate this risk effectively.

 

We are exposed to many different industries, counterparties, and partnership agreements, and regularly interact with counterparties in various industries.

 

The insolvency or other inability of a significant counterparty or partner, including a counterparty to the significant counterparty, to perform its obligations under an agreement or transaction, including, without limitation, as a result of the rejection of an agreement or transaction by a counterparty in bankruptcy

proceedings, could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

The loss of key personnel or inability to attract and retain personnel could harm our business.

 

Our future success will depend in large part on our ability to hire and retain a sufficient number of qualified personnel, particularly in sales and marketing and research and development. If we are unable to do so, our business could be harmed. Our future success also depends upon the continued service of our executive officers and other key sales, engineering and technical staff. The loss of the services of our executive officers and other key personnel could harm our operations. We maintain key person life insurance on certain of our executive officers. We would be harmed if one or more of our officers or key employees decided to join a competitor or if we failed to attract qualified personnel. Our ability to attract qualified personnel may be adversely affected by a decline in the price of our Class A common stock. In the event of a decline in the price of our Class A common stock, the retention value of stock options will decline and our employees may choose not to remain with us, which could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations, and they require management to make estimates, judgments and assumptions about matters that are inherently uncertain.

 

Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations. We have identified several accounting policies as being critical to the presentation of our financial position and results of operations because they require management to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be recorded under different conditions or using different assumptions. For example, we account for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are computed based on the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate. ASC 740 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion of all of the net deferred tax asset will not be realized. This process requires our management to make assessments regarding the timing and probability of the ultimate tax impact. Actual income taxes could vary from these estimates due to future changes in income tax law, significant changes in the jurisdictions in which we operate, our inability to generate sufficient future taxable income or unpredicted results from the final determination of each year’s liability by taxing authorities. These changes could have a significant impact on our business, financial position, results of operations or cash flows.

 

Industry Risks

 

Because the wireless data industry is a rapidly evolving market, our product and service offerings could become obsolete unless we respond effectively and on a timely basis to rapid technological changes.

 

The successful execution of our business strategy is contingent upon wireless network operators launching and maintaining mobile location services, our ability to maintain a technically skilled development and engineering team, our ability to create new network software products and adapt our existing products to rapidly changing technologies, industry standards and customer needs. As a result of the complexities inherent in our product offerings, new technologies may require long development and testing periods. Additionally, new products may not achieve market acceptance or our competitors could develop alternative technologies that gain broader market acceptance than our products. If we are unable to develop and introduce technologically advanced products that respond to evolving industry standards and customer needs, or if we are unable to complete the development and introduction of these products on a timely and cost effective basis, it could have a material adverse effect on our business, financial position, results of operations or cash flows or could result in our technology becoming obsolete.

New laws and regulations that impact our industry could increase costs or reduce opportunities to earn revenue. The wireless carriers that use our product and service offerings are subject to regulation by domestic, and in some cases, foreign, governmental and other agencies. Regulations that affect them could increase our costs or reduce our ability to sell our products and services. In addition, there are an increasing number of laws and regulations pertaining to wireless telephones and the Internet under consideration in the United States and elsewhere.

 

The applicability to the Internet of existing laws governing issues such as intellectual property ownership and infringement, copyright, trademark, trade secret, taxation, obscenity, libel, employment and personal privacy is uncertain and developing. Any new legislation or regulation, or the application or interpretation of existing laws, may have a material adverse effect on our business, results of operations and financial condition. Additionally, modifications to our business plans or operations to comply with changing regulations or certain actions taken by regulatory authorities might increase our costs of providing our product and service offerings and could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

Because the industries which we serve are currently in a cycle of consolidation, the number of customers may be reduced which could result in a loss of revenue for our business.

 

The telecommunications industry generally is currently undergoing a consolidation phase. Many of our customers, specifically wireless carrier customers of our Commercial Segment, have or may become the target of acquisitions. If the number of our customers is significantly reduced as a result of this consolidation trend, or if the resulting companies do not utilize our product offerings, our business, financial position, results of operations or cash flows could be adversely affected.

 

Concerns about personal privacy and commercial solicitation may limit the growth of mobile location services and reduce demand for our products and services.

 

In order for mobile location products and services to function properly, wireless carriers must locate their subscribers and store information on each subscriber’s location. Although data regarding the location of the wireless user resides only on the wireless carrier’s systems, users may not feel comfortable with the idea that the wireless carrier knows and can track their location. Carriers will need to obtain subscribers’ permission to gather and use the subscribers’ personal information, or they may not be able to provide customized mobile location services which those subscribers might otherwise desire. If subscribers view mobile location services as an annoyance or a threat to their privacy, that could reduce demand for our products and services and have an adverse effect on our business, financial position, results of operations or cash flows.

 

Because wireless and next-generation E9-1-1 is undergoing rapid technological and regulatory change, our future performance is uncertain.

 

The Federal Communication Commission, or FCC, has mandated that certain location information be provided to operators when they receive an E9-1-1 call. Carriers’ obligations to provide E9-1-1 services are subject to request by public safety organizations. Technical failures, greater regulation by federal, state or foreign governments or regulatory authorities, time delays or the significant costs associated with developing or installing improved location technology could slow down or stop the deployment of our mobile location products. If deployment of improved location technology is delayed, stopped or never occurs, market acceptance of our products and services may be adversely affected. The extent and timing of the deployment of our products and services is dependent both on public safety requests for such service and wireless carrier’s ability to certify the accuracy of and deploy the precise location technology. Because we will rely on some third-party location technology instead of developing all of the technology ourselves, we have little or no influence over its improvement. If the technology never becomes precise enough to satisfy wireless users’ needs or the FCC’s requirements, we may not be able to increase or sustain demand for our products and services, if at all.

Our E9-1-1 business is dependent on state and local governments and the regulatory environment for Voice over Internet Protocol (VoIP) services is developing.

 

Under the FCC’s mandate, wireless carriers are required to provide E9-1-1 services only if state and local governments request the service. As part of a state or local government’s decision to request E9-1-1, they have the authority to develop cost recovery mechanisms. However, cost recovery is no longer a condition to wireless carriers’ obligation to deploy the service. If state and local governments do not widely request that E9-1-1 services be provided or we become subject to significant pressures from wireless carriers with respect to pricing of E9-1-1 services, our E9-1-1 business would be harmed and future growth of our business would be reduced.

 

The FCC has determined that VoIP services are not subject to the same regulatory scheme as traditional wireline and wireless telephone services. If the regulatory environment for VoIP services evolves in a manner other than the way we anticipate, our E9-1-1 business would be significantly harmed and future growth of our business would be significantly reduced. For example, many states provide statutory and regulatory immunity from liability for wireless and wireline E9-1-1 service providers but provide no express immunities for VoIP E9-1-1 service providers. Additionally, the regulatory scheme for wireless and wireline service providers require those carriers to allow service providers such as us to have access to certain databases that make the delivery of an E9-1-1 call possible. No such requirements exist for VoIP service providers so carriers could prevent us from continuing to provide VoIP E9-1-1 service by denying us access to the required databases.

 

Our operations are subject to government regulations, and failure to comply with them will harm our business.

 

We are subject to various federal laws and regulations, which may have negative effects on our business. We operate FCC licensed teleports in Manassas, Virginia and Republic of Kiribati subject to the Communications Act of 1934, as amended, or the FCC Act, and the rules and regulations of the FCC. We cannot guarantee that the FCC will grant renewals when our existing licenses expire, nor are we assured that the FCC will not adopt new or modified technical requirements that will require us to incur expenditures to modify or upgrade our equipment as a condition of retaining our licenses. We are also required to comply with FCC regulations regarding the exposure of humans to radio frequency radiation from our teleports. These regulations, as well as local land use regulations, restrict our freedom to choose where to locate our teleports. In addition, prior to a third party acquisition of us, we would need to seek approval from the FCC to transfer the radio transmission licenses we have obtained to the third party upon the consummation of the acquisition. However, we cannot assure you that the FCC will permit the transfer of these licenses. These approvals may make it more difficult for a third party to acquire us.

 

In addition, regulatory schemes in countries in which we may seek to provide our satellite-delivered services may impose impediments on our operations. We cannot assure you that the present regulatory environment in any of those countries will not be changed in a manner that may have a material adverse impact on our business. Either we or our local partners typically must obtain authorization from each country in which we provide our satellite-delivered services. The regulatory schemes in each country are different, and thus there may be instances of noncompliance of which we are not aware. We cannot assure you that our licenses and approvals are or will remain sufficient in the view of foreign regulatory authorities, or that necessary licenses and approvals will be granted on a timely basis in all jurisdictions in which we wish to offer our services and products or that restrictions applicable thereto will not be unduly burdensome.

 

The sale of our products outside the U.S. is subject to compliance with the United States Export Administration Regulations and, in certain circumstances, with the International Traffic in Arms Regulations. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. In addition, in order to ship our products into and implement our services in some countries, the products must satisfy the technical requirements of that particular country. If we were unable to comply with such requirements with respect to a significant quantity of our products, our sales in those countries could be restricted, which could have a material adverse effect on our business, results of operations and financial condition.

We may, in the future, be required to seek FCC or other government approval if foreign ownership of our stock exceeds certain specified criteria. Failure to comply with these policies could result in an order to divest the offending foreign ownership, fines, denial of license renewal and/or license revocation proceedings against the licensee by the FCC, or denial of certain contracts from other U.S. Government agencies.

 

Technology Risks

 

Because our software may contain defects or errors, and our hardware products may incorporate defective components, our sales could decrease if these defects or errors adversely affect our reputation or delays shipments of our products.

 

The software products that we develop are complex and must meet the stringent technical requirements of our customers. Our hardware products are equally complex and integrate a wide variety of components from different vendors. We must quickly develop new products and product enhancements to keep pace with the rapidly changing software and telecommunications markets in which we operate. Products as complex as ours are likely to contain undetected errors or defects, especially when first introduced or when new versions are released. Our products may not be error or defect free after delivery to customers, which could damage our reputation, cause revenue losses, result in the rejection of our products or services, divert development resources and increase service and warranty costs, each of which could have a serious harmful effect on our business, financial position, results of operations or cash flows.

 

If we are unable to protect our intellectual property rights or are sued by third parties for infringing upon intellectual property rights, we may incur substantial costs.

 

Our success and competitive position depends in large part upon our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of patent, copyright, trademark, service mark, trade secret laws, confidentiality provisions and various other contractual provisions to protect our proprietary rights, but these legal means provide only limited protection. Although a number of patents have been issued to us and we have obtained a number of other patents as a result of our acquisitions, we cannot assure you that our issued patents will be upheld if challenged by another party. Additionally, with respect to any patent applications which we have filed, we cannot assure you that any patents will issue as a result of these applications. If we fail to protect our intellectual property, we may not receive any return on the resources expended to create the intellectual property or generate any competitive advantage based on it, and we may be exposed to expensive litigation or risk jeopardizing our competitive position. Similarly, some third parties have claimed and others could claim that our existing and future products or services infringe upon their intellectual property rights. Claims like these could require us to enter into costly royalty arrangements or cause us to lose the right to use critical technology.

 

Our ability to protect our intellectual property rights is also subject to the terms of future government contracts. We cannot assure you that the federal government will not demand greater intellectual property rights or restrict our ability to disseminate intellectual property. We are also a member of standards-setting organizations and have agreed to license some of our intellectual property to other members on fair and reasonable terms to the extent that the license is required to develop non-infringing products.

 

Pursuing infringers of our patents and other intellectual property rights can be costly.

 

Pursuing infringers of our proprietary rights could result in significant litigation costs, and any failure to pursue infringers could result in our competitors utilizing our technology and offering similar products, potentially resulting in loss of a competitive advantage and decreased revenues. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Protecting our know-how is difficult especially after our employees or those of our third party contract service providers end their employment or engagement. Attempts may be made to copy or reverse-engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent the misappropriation of our technology or prevent others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult and

expensive. Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. The costs and diversion of resources could significantly harm our business. If we fail to protect our intellectual property, we may not receive any return on the resources expended to create the intellectual property or generate any competitive advantage based on it.

 

Third parties may claim we are infringing their intellectual property rights and we could be prevented from selling our products, or suffer significant litigation expense, even if these claims have no merit, and our customers also could demand indemnification for such claims.

 

Our competitive position is driven in part by our intellectual property and other proprietary rights. Third parties, however, may claim that we, our products, operations or any products or technology we obtain from other parties are infringing their intellectual property rights, and we may be unaware of intellectual property rights of others that may cover some of our assets, technology and products. From time to time we receive letters from third parties that allege we are infringing their intellectual property and asking us to license such intellectual property. We review the merits of each such letter and respond as we deem appropriate.

 

At the same time, from time to time our customers are parties to allegations of intellectual property rights infringements law suits based on their offering products and services which incorporate our products and services. In those instances, we from time to time receive demands from our customers to indemnify them for costs in defending those allegations. We review the merits of each such demand and respond as we deem appropriate.

 

Any litigation regarding patents, trademarks, copyrights or intellectual property rights, even those without merit, and the related indemnification demands of our customers, could be costly and time consuming, and divert our management and key personnel from operating our business. The complexity of the technology involved and inherent uncertainty and cost of intellectual property litigation increases our risks. If any third party has a meritorious or successful claim that we are infringing its intellectual property rights, we may be forced to change our products or enter into licensing arrangements with third parties, which may be costly or impractical. This also may require us to stop selling our products as currently engineered, which could harm our competitive position. We also may be subject to significant damages or injunctions that prevent the further development and sale of certain of our products or services and may result in a material loss of revenue.

 

The security measures we have implemented to secure information we collect and store may be breached, which could cause us to breach agreements with our partners and expose us to potential investigation and penalties by authorities and potential claims by persons whose information was disclosed.

 

We take reasonable steps to protect the security, integrity and confidentiality of the information we collect and store but there is no guarantee that inadvertent or unauthorized disclosure will not occur or that third parties will not gain unauthorized access despite our efforts. If such unauthorized disclosure or access does occur, we may be required to notify persons whose information was disclosed or accessed under existing and proposed laws. We also may be subject to claims of breach of contract for such disclosure, investigation and penalties by regulatory authorities and potential claims by persons whose information was disclosed.

 

Because the market for most mobile content delivery and mobile location products is undergoing rapid changes, our future success is uncertain.

 

The market for mobile content delivery and mobile location products and services is undergoing rapid changes and its potential is uncertain. In order to be successful, we need wireless network operators to launch and maintain mobile location services utilizing our products, and need corporate enterprises and individuals to purchase and use our mobile content delivery and mobile location products and services. We cannot be sure that wireless carriers or enterprises will accept our products or that a sufficient number of wireless users will ultimately utilize our products.

If the satellite communications industry fails to continue to develop or new technology makes it obsolete, our business and financial condition will be harmed.

 

As a result of the Trident acquisition, our business will be dependent on the continued success and development of satellite communications technology, which competes with terrestrial communications transport technologies like terrestrial microwave, coaxial cable and fiber optic communications systems. Fiber optic communications systems have penetrated areas in which we have traditionally provided services. If the satellite communications industry fails to continue to develop, or if any technological development significantly improves the cost or efficiency of competing terrestrial systems relative to satellite systems, then our business and financial condition would be materially harmed.

 

If we are unable to integrate our products with wireless service providers’ systems we may lose sales to competitors.

 

Our products operate with wireless carriers’ systems, various wireless devices and, in the case of our E9-1-1 offering, with mobile telephone switches and VoIP service provider systems. If we are unable to continue to design our software to operate with these systems and devices, we may lose sales to competitors. Mobile telephone switches and wireless devices can be manufactured according to many different standards and may have different variations within each standard. Combining our products with each type of switch, device or VoIP system requires a specialized interface and extensive testing. If as a result of technology enhancements or upgrades to carrier and VoIP provider systems our products can no longer operate with such systems, we may no longer be able to sell our products. Further, even if we successfully redesign our products to operate with these systems, we may not gain market acceptance before our competitors.

 

Failure to meet our contractual obligations could adversely affect our profitability and future prospects.

 

We design, develop and manufacture technologically advanced and innovative products and services applied by our customers in a variety of environments. Problems and delays in development or delivery as a result of issues with respect to design, technology, licensing and patent rights, labor, learning curve assumptions, or materials and components could prevent us from achieving contractual obligations. In addition, our products cannot be tested and proven in all situations and are otherwise subject to unforeseen problems. Examples of unforeseen problems which could negatively affect revenue and profitability include problems with quality, delivery of subcontractor components or services, and unplanned degradation of product performance.

 

Because our systems may be vulnerable to systems failures and security risks, we may incur significant costs to protect against the threat of these problems.

 

We provide for the delivery of information and content to and from wireless devices in a prompt and timely manner. Any systems failure that causes a disruption in our ability to facilitate the transmission of information to these wireless devices could result in delays in end users receiving this information and cause us to lose customers. Our systems could experience such failures as a result of unauthorized access by hackers, computer viruses, hardware or software failures, power or telecommunications failures and other accidental or intentional actions which could disrupt our systems. We may incur significant costs to prevent such systems disruptions.

 

Increasingly our products will be used to create or transmit secure information and data to and from wireless devices. For example, our software can be used to create private address lists and to provide the precise location of an individual. To protect private information like this from security breaches, we may incur significant costs. If a third party were able to misappropriate our proprietary information or disrupt our operations, we could be subject to claims, litigation or other potential liabilities that could materially adversely impact our business. Further, if an individual is unable to use our service to receive the precise location in a health or life-and-death situation, or if our service provides the wrong information, we could be subject to claims, litigation or other potential liabilities that could materially adversely impact our business.

 

The wireless data services provided by our Commercial Segment are dependent on real-time, continuous feeds from map and traffic data vendors and others. The ability of our subscribers to receive critical location and

business information requires timely and uninterrupted connections with our wireless network carriers. Any disruption from our satellite feeds or backup landline feeds could result in delays in our subscribers’ ability to receive information. We cannot be sure that our systems will operate appropriately if we experience hardware or software failure, intentional disruptions of service by third parties, an act of God or an act of war. A failure in our systems could cause delays in transmitting data, and as a result we may lose customers or face litigation that could involve material costs and distract management from operating our business.

 

If mobile equipment manufacturers do not overcome capacity, technology and equipment limitations, we may not be able to sell our products and services.

 

The wireless technology currently in use by most wireless carriers has limited bandwidth, which restricts network capacity to deliver bandwidth-intensive applications like data services to a large number of users. Because of capacity limitations, wireless users may not be able to connect to their network when they wish to, and the connection is likely to be slow, especially when receiving data transmissions. Data services also may be more expensive than users are willing to pay. To overcome these obstacles, wireless equipment manufacturers will need to develop new technology, standards, equipment and devices that are capable of providing higher bandwidth services at lower cost. We cannot be sure that manufacturers will be able to develop technology and equipment that reliably delivers large quantities of data at a reasonable price. If more capacity is not added, a sufficient market for our products and services is not likely to develop or be sustained and sales of our products and services would decline resulting in a material adverse effect on our business, financial position, results of operations or cash flows.

 

If wireless handsets pose health and safety risks, we may be subject to new regulations and demand for our products and services may decrease.

 

Media reports have suggested that certain radio frequency emissions from wireless handsets may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. Concerns over radio frequency emissions may have the effect of discouraging the use of wireless handsets, which would decrease demand for our services. In recent years, the FCC and foreign regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions from radio equipment, including wireless handsets. In addition, interest groups have requested that the FCC investigate claims that wireless technologies pose health concerns and cause interference with airbags, hearing aids and other medical devices. There also are some safety risks associated with the use of wireless handsets while driving. Concerns over these safety risks and the effect of any legislation that may be adopted in response to these risks could limit our ability to market and sell our products and services.

 

Risks Related to Our Class A Common Stock

 

The price of our Class A common stock historically has been volatile. This volatility may affect the price at which you could sell your Class A common stock, and the sale of substantial amounts of our Class A common stock could adversely affect the price of our Class A common stock.

 

The market price for our Class A common stock has varied between a high of $10.55 on January 20, 2010, and a low of $2.96 on August 12, 2010 in the twelve month period ended December 31, 2010. This volatility may affect the price at which you could sell the Class A common stock and the sale of substantial amounts of our Class A common stock could adversely affect the price of our Class A common stock. Our stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including the other factors discussed in these risk factors; variations in our quarterly operating results from our expectations or those of securities analysts or investors; downward revisions in securities analysts’ estimates; and announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments.

A significant percentage of our common stock is beneficially owned by our President, Chief Executive Officer and Chairman of the Board, and he can exert significant influence over us.

 

We have two classes of common stock: Class A common stock and Class B common stock. Holders of Class A common stock generally have the same rights as holders of Class B common stock, except that holders of Class A common stock have one vote per share while holders of Class B common stock have three votes per share. As of December 31, 2010, Maurice B. Tosé, our President, Chief Executive Officer and Chairman of the Board, beneficially owned 5,741,334 shares of our Class B common stock and 2,783,544 shares of our Class A common stock. Therefore, as of that date, in the aggregate, Mr. Tosé beneficially owned shares representing approximately 31% of our total voting power, assuming no conversion or exercise of issued and outstanding convertible or exchangeable securities held by our other shareholders or holders of the notes. Accordingly, on this basis, Mr. Tosé can exert significant influence over us through his ability to influence the outcome of elections of directors, amend our charter and by-laws and take other actions requiring shareholder action, including mergers, going private transactions and other extraordinary transactions. Mr. Tosé may also able to deter or prevent a change of control regardless of whether holders of Class A common stock might benefit financially from such a transaction.

 

Because our business may not generate sufficient cash to fund our operations, we may not be able to continue to grow our business if we are unable to obtain additional capital when needed.

 

We believe that our cash and cash equivalents, and our bank line of credit, coupled with the funds anticipated to be generated from operations will be sufficient to finance our operations for at least the next twelve months. However, unanticipated events could cause us to fall short of our capital requirements. In addition, such unanticipated events could cause us to violate our bank line of credit covenants causing the bank to foreclose on the line and/or opportunities may make it necessary for us to return to the public markets, or establish new credit facilities or raise capital in private transactions in order to meet our capital requirements. We cannot assure you that we will be able to raise additional capital in the future on terms acceptable to us, or at all.

 

Our line of credit and term loan agreement contains covenants requiring us to maintain a minimum adjusted quick ratio and a minimum fixed charge coverage ratio; as well as other restrictive covenants including, among others, restrictions on our ability to merge, acquire or dispose of assets above prescribed thresholds, undertake actions outside the ordinary course of our business (including the incurrence and repayment of indebtedness), guarantee debt, distribute dividends, and repurchase our stock. The agreement also contains a subjective event of default that requires (i) no material adverse change in the business, operations, or condition (financial or otherwise) of our Company occur, or (ii) no material impairment of the prospect of repayment of the Company’s obligations under the bank credit agreement; or (iii) no material impairment of perfection or priority of the lenders security interests in the collateral under the bank credit agreement. If our performance does not result in compliance with any of the restrictive covenants, or if our line of credit agreement lenders seek to exercise their rights under the subjective acceleration clause referred to above, we would seek to further modify our financing arrangements, but there can be no assurance that our debt holders would not exercise their rights and remedies under their agreements with us, including declaring all outstanding debt due and payable.

 

Our short-term investments are subject to market fluctuations which may affect our liquidity.

 

Although we have not experienced any losses on our cash, cash equivalents, and short-term investments, declines in the market values of these investments in the future could have an adverse impact on our financial condition and operating results. Historically, we have invested in AAA rated money market funds meeting certain criteria. These investments are subject to general credit, liquidity, market, and interest rate risks, which may be directly or indirectly impacted by the U.S. sub-prime mortgage defaults that have affected various sectors of the financial markets causing credit and liquidity issues. If an issuer defaults on its obligations, or its credit ratings are negatively affected by liquidity, losses or other factors, the impact on liquidity could decline and could have a material adverse effect on our business, financial position, results of operations or cash flows.

Variations in quarterly operating results due to factors such as changes in demand for our products and changes in our mix of revenues and costs may cause our Class A common stock price to decline.

 

Our quarterly revenue and operating results are difficult to predict and are likely to fluctuate from quarter-to-quarter. For example, 2010 systems revenue was higher in the first and third quarters than in the second and fourth quarters. 2009 systems revenues were significantly higher in the first and fourth quarters than in the middle quarters. We generally derive a significant portion of wireless carrier systems revenue in our Commercial Segment from initial license fees. The initial license fees that we receive in a particular quarter may vary significantly. As systems projects begin and end, quarterly results may vary. We therefore believe that quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance, and you should not rely on them to predict our future performance or the future performance of our Class A common stock. Our quarterly revenues, expenses and operating results could vary significantly from quarter-to-quarter. If our operating results in future quarters fall below the expectations of market analysts and investors, the market price of our stock may fall.

 

Additional factors that have either caused our results to fluctuate in the past or that are likely to do so in the future include:

 

 

We may not have, and may not have the ability to raise, the funds necessary to repurchase our currently outstanding Convertible Senior Notes upon a fundamental change, as required by the indenture governing the Convertible Senior Notes.

 

Following a fundamental change as described in the indenture governing the Convertible Senior Notes, holders of those notes may require us to repurchase their notes for cash. A fundamental change may also constitute an event of default or prepayment under, and result in the acceleration of the maturity of, our then-existing indebtedness. We cannot provide any assurance that we will have sufficient financial resources, or will be able to arrange financing, to pay the repurchase price in cash with respect to any notes tendered by holders for repurchase upon a fundamental change. In addition, restrictions in our then- existing credit facilities or other indebtedness, if any, may not allow us to repurchase the Convertible Senior Notes. The failure of us to repurchase the notes when required would result in an event of default with respect to the Convertible Senior Notes which could, in turn, constitute a default under the terms of our other indebtedness, if any, and have an adverse effect on our business, financial position, results of operations or cash flows.

Future sales of our Class A common stock in the public market or issuances of securities convertible into our Class A common stock and hedging activities could lower the market price for our Class A common stock and adversely impact the trading price of the notes.

 

As of December 31, 2010, we had outstanding approximately 47.7 million shares of our Class A common stock and options to purchase approximately 15.4 million shares of our Class A common stock (approximately 10.4 million of which have a strike price below $7.45 and an additional 5.0 million of which have a strike price above $7.45). In the future, we may sell additional shares of our Class A common stock to raise capital. In addition, a substantial number of shares of our Class A common stock is reserved for issuance upon the exercise of stock options and upon conversion of the Convertible Notes. Our Class A common stock may also be issued upon conversion of our Class B common stock, which is convertible into our Class A common stock on a one-for-one basis. As of December 31, 2010, we had 5.7 million shares of Class B common stock outstanding. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our Class A common stock. The issuance and sale of substantial amounts of Class A common stock, or the perception that such issuances and sales may occur, could adversely affect the trading price of the Convertible Notes and the market price of our Class A common stock and impair our ability to raise capital through the sale of additional equity securities.

 

Our convertible note hedge and warrant transactions may affect the value of the Convertible Senior Notes and the trading price of shares of our common stock.

 

In connection with the 2009 sale of the Convertible Senior Notes, we entered into privately-negotiated convertible note hedge transactions with Deutsche Bank AG, Société Générale and Royal Bank of Canada (each, a “counterparty” and together, the “counterparties”) which are expected to reduce the potential dilution of shares of the our common stock upon any conversion of the Convertible Senior Notes. In the event that any of the counterparties in the transaction fails to deliver shares to us as required under the note hedge documents or as a result of a breach of the note hedge documents by us, we will be required to issue shares in order to meet its share delivery obligations with respect to the converted Convertible Senior Notes. We also entered into warrant transactions with the counterparties with respect to the shares of our common stock pursuant to which we may issue shares of our common stock.

 

In connection with hedging these transactions, the counterparties or their affiliates may purchase shares of our common stock and enter into various over-the-counter derivative transactions with respect to shares of our common stock and may purchase or sell shares of our common stock in secondary market transactions. These activities could have the effect of increasing or preventing a decline in the price of the shares of our common stock. The counterparties or their affiliates are likely to modify their respective hedge positions from time to time prior to conversion or maturity of the Convertible Senior Notes (including during any conversion period related to any conversion of the Convertible Senior Notes) by purchasing and selling shares of our common stock, of our other securities or other instruments they may wish to use in connection with such hedging. The magnitude of any of these transactions and activities and their effect, if any, on the market price of our common stock or the Convertible Senior Notes will depend in part on market conditions and cannot be ascertained at this time, but any of these activities could adversely affect the value of the shares of our common stock (including during any period used to determine the amount of consideration deliverable upon conversion of the notes with respect to any fractional shares).

 

Conversion of the Convertible Senior Notes will dilute your ownership interest.

 

The conversion of some or all of the Convertible Senior Notes will dilute the ownership interests of our shareholders and could adversely affect the prevailing market price of the shares of our common stock. In addition, the existence of the Convertible Senior Notes may encourage short selling by market participants because the conversion of the Convertible Senior Notes could depress the price of the our common stock.

The fundamental change purchase feature of the Convertible Senior Notes may delay or prevent an otherwise beneficial attempt to purchase us.

 

The terms of the Convertible Senior Notes require us to purchase them for cash in the event of a fundamental change. A takeover of our Company would trigger the requirement that we purchase the Convertible Senior Notes. This may have the effect of delaying or preventing a takeover that would otherwise be beneficial to investors.

 

Our governing corporate documents and Maryland law contain certain anti-takeover provisions that could prevent a change of control that may be favorable to shareholders.

 

We are a Maryland corporation. Anti-takeover provisions of Maryland law and provisions contained in our charter and by-laws could make it more difficult for a third party to acquire control of us, even if a change in control would be beneficial to shareholders. These provisions include the following:

 

 

These provisions could delay, deter or prevent a potential acquirer from attempting to obtain control of us, depriving shareholders of an opportunity to receive a premium for Class A common stock. These provisions could therefore materially adversely affect the market price of our Class A common stock.

 

 

None.

 

 

Our principal executive office is located in Annapolis, Maryland, as well as portions of our Commercial and Government Segments, and includes a satellite operations center. Our office in Seattle, Washington is used primarily for servicing and hosting our wireless and VoIP E9-1-1 public safety support services. The design and development of our software based systems and applications are located in Annapolis, Maryland and also in our Oakland and Aliso Viejo, California, Calgary, Alberta, and Tianjin, China offices. Our Government Segment manufacturing facility is located Tampa, Florida. In addition to our leased locations listed below, we also lease a hosting facility in Phoenix, Arizona, which is utilized by our Commercial Segment. We also own a 7-acre teleport facility in Manassas, Virginia for teleport services for our Government Segment customers.

 

The following table lists our most significant leased facilities at December 31, 2010:

 

 

In November 2001, a shareholder class action lawsuit was filed against us, certain of our current officers and a director, and several investment banks that were the underwriters of our initial public offering (the “Underwriters”): Highstein v. TeleCommunication Systems, Inc., et al., United States District Court for the Southern District of New York, Civil Action No. 01-CV-9500. The plaintiffs seek an unspecified amount of damages. The lawsuit purports to be a class action suit filed on behalf of purchasers of our Class A Common Stock during the period August 8, 2000 through December 6, 2000. The plaintiffs allege that the Underwriters agreed to allocate our Class A Common Stock offered for sale in our initial public offering to certain purchasers in exchange for excessive and undisclosed commissions and agreements by those purchasers to make additional purchases of our Class A Common Stock in the aftermarket at pre-determined prices. The plaintiffs allege that all of the defendants violated Sections 11, 12 and 15 of the Securities Act, and that the underwriters violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder. The claims against us of violation of Rule 10b-5 have been dismissed with the plaintiffs having the right to re-plead. On October 5, 2009, the Court approved a settlement of this and approximately 300 similar cases. On January 14, 2010, an Order and Final Judgment was entered. Various notices of appeal of the Court’s October 5, 2009 order were subsequently filed. On October 7, 2010, all but two parties who had filed a notice of appeal filed a stipulation with the Court withdrawing their appeals with prejudice, and the two remaining objectors filed briefs in support of their appeals. We intend to continue to defend the lawsuit until the matter is resolved. We have purchased a Directors and Officers insurance policy which we believe should cover any potential liability that may result from these laddering class action claims, but can provide no assurance that any or all of the costs of the litigation will ultimately be covered by the insurance. No reserve has been recorded for this matter.

 

 

Our Class A Common Stock has been traded on the NASDAQ Global Market under the symbol “TSYS” since our initial public offering on August 8, 2000. The following table sets forth, for the periods indicated, the high and low closing prices for our Class A Common Stock as reported on the NASDAQ Global Market:

 

 

There are approximately 12,000 shareholders of our Class A Common Stock and as of February 28, 2011, approximately 270 were holders of record. As of February 28, 2011, there were 8 holders of record of our Class B Common Stock.

Dividend Policy

 

We have never declared or paid cash dividends on our common stock. We currently intend to retain any future earnings to fund the development, growth and operation of our business. Additionally, under the terms of our loan arrangements, our lender’s prior written consent is required to pay cash dividends on our common stock. We do not currently anticipate paying any cash dividends on our common stock in the foreseeable future.

 

Issuer Purchases of Equity Securities

 

None.

Stock Performance Graph

 

The following graph compares the cumulative total shareholder return on the Company’s Class A Common Stock with the cumulative total return of the Nasdaq Global Market U.S. Index and a mobile data index prepared by the Company of the following relevant publicly traded companies in the commercial and government sectors in which we operate: Openwave Systems, Inc.; Comtech Telecommunications Corp.; General Dynamics Corp., LM Ericsson Telephone Company, Comverse Technology Inc.; Globecomm Systems Inc.; NCI Inc.; NeuStar, Inc.; TeleNav, Inc.; Motricity, Inc.; and ViaSat Inc. (the “New Peer Group”)

 

The composition of the Mobile Data Index has been changed from last year (the “Old Peer Group”) as follows: (1) Sybase, Inc. and Syniverse Holdings, Inc. both have recapitalized to become privately held and no longer provide the data necessary for inclusion; and (2) TeleNav, Inc. and Motricity, Inc. were added to the remaining companies to comprise the “New Peer Group” because their navigation and mobile data systems and services lines have become more comparable to our Commercial Segment businesses. The data for the Old Peer Group and the New peer Group overlap on the graph below.

 

The information provided is from January 1, 2005 through December 31, 2010.

 

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of the Company under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. The stock price performance shown on the graph below is not necessarily indicative of future price performance.

 

 

The table that follows presents portions of our consolidated financial statements. You should read the following selected financial data together with our audited Consolidated Financial Statements and related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the more complete financial information included elsewhere in this Form 10-K. We have derived the statement of operations data for the years ended December 31, 2010, 2009, and 2008 and the balance sheet data as of December 31, 2010 and 2009 from our consolidated financial statements which have been audited by Ernst & Young LLP, independent registered public accounting firm, and which are included in Item 15 of this Form 10-K. We have derived the statement of operations data for the years ended December 31, 2007 and 2006 and the balance sheet data as of December 31, 2008, 2007, and 2006, from our audited financial statements which are not included in this Form 10-K. The historical results presented below are not necessarily indicative of the results to be expected for any future fiscal year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

 

 

Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified our most critical accounting policies and estimates to be those related to the following:

 

Revenue Recognition. The Company records revenue from multiple element arrangements under the guidance provided by the Accounting Standard Codification (“ASC”). These standards state that at the time of entering into each customer agreement or arrangement, each element is identified and the revenue, cost of revenue, and gross profit for each deliverable is recorded and presented separately as either systems or services. Sales of products and product related solutions to customers are classified as systems revenue within the Company’s Statement of Income. These typically are integrated solutions that may include licenses, hardware and labor to deliver the product and/or solution per the customer’s specifications. Services revenue includes the elements of the contract typically related to maintenance or other recurring services performed over an extended period. Each of the services and systems captions represents more than 10 percent of the Company’s total revenue. There is no other category of revenue described in Rule 5-03 of Regulation S-X in which the Company is currently engaged. The Company considered Rule 5-03 of Regulation S-X as it relates to the labor portion of systems revenue, and will continue to periodically assess the materiality of the labor portion of systems revenue and classify the amount as services if significant.

 

We sell communications systems incorporating our licensed software for enhanced services, including location-based services and text messaging, to wireless carriers. These systems are designed to incorporate our licensed software. If significant customization is not required, the Company recognizes revenue for all delivered elements of a software sale at the point when all four criteria of revenue recognition are met and, the Company has vendor-specific objective evidence (“VSOE”) of fair value for all identified undelivered elements. Systems revenue typically contains multiple elements, which may include the product license, installation, integration, and hardware. The total arrangement fee is allocated among elements based on VSOE of the fair value of each of the elements. Fair value is generally determined based on the price charged when the element is sold separately. In the absence of evidence of fair value of a delivered element, revenue is allocated first to the undelivered elements based on fair value and the residual revenue to the delivered elements. Software licenses are generally perpetual licenses for a specified volume of usage, along with the purchase of annual maintenance at a specified rate. We recognize license fee revenue when each of the following has occurred: (1) evidence of an arrangement is in place; (2) we have delivered the software; (3) the fee is fixed or determinable; and (4) collection of the fee is probable.

Software projects that require significant customization are accounted for under the percentage-of-completion method. We measure progress to completion using costs incurred compared to estimated total costs or labor costs incurred compared to estimated total labor costs for contracts that have a significant component of third-party materials costs. We recognize estimated losses under long-term contracts in their entirety upon discovery. If we did not accurately estimate total costs to complete a contract or do not manage our contracts within the planned budget, then future margins may be negatively affected or losses on existing contracts may need to be recognized. Software license fees billed and not recognized as revenue are included in deferred revenue. The Company recognizes contract revenue as billable costs are incurred and for fixed-price product delivery contracts using the percentage-of-completion method or proportional performance method, measured by either total labor costs or total costs incurred compared to total estimated labor costs or total costs to be incurred in accordance with the ASC guidance. We recognize estimated losses on contracts in their entirety upon discovery. If we did not accurately estimate total labor costs or total costs to complete a contract or do not manage our contracts within the planned budget, then our future margins may be negatively affected or losses on existing contracts may need to be recognized.

 

Acquired Intangible Assets. The acquired intangible assets are amortized over their useful lives of between five and nineteen years, based on the straight-line method. We evaluate acquired intangible assets when events or changes in circumstances indicate that the carrying values of such assets might not be recoverable. Our review of factors present and the resulting appropriate carrying value of our acquired intangible assets are subject to judgments and estimates by management. Future events such as a significant underperformance relative to historical or projected future operating results, significant changes in the manner of our use of the acquired assets, and significant negative industry or economic trends could cause us to conclude that impairment indicators exist and that our acquired intangible assets might be impaired. There were no impairment charges in 2010.

 

Impairment of Goodwill. The Company performs an annual analysis of our goodwill for impairment. The analysis of goodwill includes, among other factors, estimating future cash flows to be received from the assets. At December 31, 2010, goodwill was $159.1 million and we determined that the fair value of our reporting units exceeded their carrying value, such that we did not believe any reporting units were at significant risk of failing our impairment test. Material differences in our assumptions and valuations in the future could result in a future impairment loss.

 

Stock Compensation Expense. We use the fair value recognition provisions provided by the ASC for stock compensation. Under the fair value recognition provisions, we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of expected volatility of the market price of our stock and the expected term of the stock award. We have determined that historical volatility is the best predictor of expected volatility and the expected term of our awards was determined taking into consideration the vesting period of the award, the contractual term and our historical experience of employee stock option exercise behavior. We review our valuation assumptions at each grant date and, as a result, we could change our assumptions used to value employee stock-based awards granted in future periods. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those awards expected to vest. If our actual forfeiture rate were materially different from our estimate, the stock-based compensation expense would be different from what we have recorded in the current period. Our employee stock-based compensation costs are recognized over the vesting period of the award and are recorded using the straight-line method.

 

Marketable Securities. The Company’s marketable securities are classified as available-for-sale. The Company’s primary objectives when investing are to preserve principal, maintain liquidity, and obtain higher yield. The Company’s intent is not specifically to invest and hold securities with longer term maturities. The Company has the ability and intent, if necessary, to liquidate any of these investments in order to meet the Company’s operating needs within the next twelve months. The securities are carried at fair market value based on quoted market price with net unrealized gains and losses in stockholders’ equity as a component of accumulated other comprehensive income. If the Company determines that a decline in fair value of the marketable securities is

other than temporary, a realized loss would be recognized in earnings. Gains or losses on securities sold are based on the specific identification method and are recognized in earnings.

 

Software Development Costs. Acquired technology, representing the estimated value of the proprietary technology acquired, has been recorded as capitalized software development costs. We also capitalize software development costs after we establish technological feasibility, and amortize those costs over the estimated useful lives of the software beginning on the date when the software is available for general release. We believe that these capitalized costs will be recoverable from future gross profits generated by these products.

 

Costs are capitalized when technological feasibility has been established. For new products, technological feasibility is established when an operative version of the computer software product is completed in the same software language as the product to be ultimately marketed, performs all the major functions planned for the product, and has successfully completed initial customer testing. Technological feasibility for enhancements to an existing product is established when a detail program design is completed. Costs that are capitalized include direct labor and other direct costs. In 2010, 2009, and 2008, we capitalized $5.7 million, $1.0 million, and $0.5 million, respectively, of software development costs for software projects.

 

These costs are amortized on a product-by-product basis using the straight-line method over the product’s estimated useful life, between three and five years. Amortization is also computed using the ratio that current revenue for the product bears to the total of current and anticipated future revenue for that product (the revenue curve method). If this revenue curve method results in amortization greater than the amount computed using the straight-line method, amortization is recorded at that greater amount. Our policies to determine when to capitalize software development costs and how much to amortize in a given period require us to make subjective estimates and judgments. If our software products do not achieve the level of market acceptance that we expect and our future revenue estimates for these products change, the amount of amortization that we record may increase compared to prior periods. The amortization of capitalized software development costs is recorded as a cost of revenue.

 

The Company capitalizes all costs related to software developed or obtained for internal use when management commits to funding the project and the project completes the preliminary project stage. Capitalization of such costs ceases when the project is substantially complete and ready for its intended use.

 

Income Taxes. We use the asset and liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between financial reporting basis and the tax basis of assets and liabilities. We also recognize deferred tax assets for tax net operating loss carryforwards. The deferred tax assets and liabilities are measured using the enacted tax rates and laws expected to be in effect when such amounts are projected to reverse or be utilized. The realization of total deferred tax assets is contingent upon the generation of future taxable income in the tax jurisdictions in which the deferred tax assets are located. When appropriate, we recognize a valuation allowance to reduce such deferred tax assets to amounts more likely than not to be realized. The calculation of deferred tax assets (including valuation allowances) and liabilities requires management to apply significant judgment related to such factors as the application of complex tax laws and the changes in such laws. We have also considered our future operating results, which require assumptions such as future market penetration levels, forecasted revenues and the mix of earnings in the jurisdictions in which we operate, in determining the need for a valuation allowance. Changes in our assessment of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in material amounts of additional tax expense or benefit in the period of change.

 

The Company recognizes the benefits of tax positions in the financial statements, if such positions are more likely than not to be sustained upon examination by the taxing authority and satisfy the appropriate measurement criteria. If the recognition threshold is met, the tax benefit is generally measured and recognized as the tax benefit having the highest likelihood, based on our judgment, of being realized upon ultimate settlement with the taxing authority, assuming full knowledge of the position and all relevant facts. At December 31, 2010, we had unrecognized tax benefits totaling approximately $3.0 million. The determination of these unrecognized amounts requires significant judgments and interpretation of complex tax laws. Different judgments or interpretations could result in material changes to the amount of unrecognized tax benefits.

Business Combinations. During 2009 the Company acquired four businesses. Pursuant to ASC 805 for Business Combinations, the business combinations were each accounted for under the “acquisition method.” Accordingly, the total estimated purchase prices were allocated to the net tangible and intangible assets acquired in connection with each acquisition, based on their estimated fair values as of the effective date of the acquisition. The preliminary allocation of the purchase prices on each of the acquisitions were based upon management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed and such estimates and assumptions are subject to change (generally one year from their acquisition date). The purchase price allocation process requires management to make significant estimates and assumptions, especially at acquisition date with respect to intangible assets and deferred revenue obligations assumed.

 

Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the managements of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:

 

 

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

 

Legal and Other Contingencies. We are currently involved in various claims and legal proceedings. As required, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.

 

Overview

 

Our wireless communication technology business is reported using two business segments: (i) our Commercial Segment, which consists principally of enhanced communication technology for wireless networks, principally based on location-based services including our E9-1-1 application and other applications, and text messaging and (ii) our Government Segment, which designs, develops, deploys, supports and maintains secure and highly reliable information processing and communication solutions, mainly to government agencies.

 

Recent Acquisitions

 

Opportunistic acquisitions are part of our long-term corporate strategy. We pursue specific targets that complement our portfolio of existing products and services. Our aim is to explore business combinations through exclusivity rather than participation in auction processes, which we believe enables favorable pricing and expedited execution. We believe we can fund our future acquisitions with our internally available cash, cash equivalents and marketable securities, cash generated from operations, amounts available under our existing debt capacity, additional borrowings or from the issuance of additional securities. We evaluate the financial impact of any potential acquisition and associated financing with regard to earnings, operating margin, cash flow and return on invested capital targets before deciding to move forward with an acquisition.

On January 31, 2011, we acquired privately-held Trident Space & Defense, LLC, a leading provider of engineering and electronics solutions for global space and defense markets, located in Torrance, California. Consideration for the acquisition includes the payment of cash and three million shares of TCS Class A common stock. Trident will bring significant advantages to TCS and expand the overall market reach of the combined entities. The majority of Trident’s business is from international customers which we expect to help TCS grow in those markets and move Trident’s solutions into the U.S. military and space markets. Trident also adds engineering and design depth.

 

No acquisitions were made in 2010 or 2008. During 2009, our company completed four acquisitions, the details of which are described in the Business Section and in Financial Statement Footnote 2 of this report on Form 10-K. The 2009 acquisitions were:

 

For the Commercial Segment:

 

On May 19, 2009, we acquired substantially all of the assets of LocationLogic LLC (LocationLogic), a provider of infrastructure, applications and services for carriers and enterprises to deploy location-based services.

 

On December 15, 2009, we acquired Networks In Motion, Inc., (NIM) a provider of wireless navigation solutions for GPS-enabled mobile phones.

 

For the Government Segment:

 

On November 3, 2009, we acquired Solvern Innovations, Inc., (Solvern) a provider of comprehensive communications products and solutions, training, and technology services for cyber security-based platforms.

 

On November 16, 2009, we purchased substantially all of the assets of Sidereal Solutions, Inc., (Sidereal) a satellite communications technology engineering, operations and maintenance support services company.

 

Operating results of each acquired business are reflected in the Company’s consolidated financial statements from the date of acquisition.

 

Indicators of Our Financial and Operating Performance

 

Our management monitors and analyzes a number of performance indicators in order to manage our business and evaluate our financial and operating performance. Those indicators include:

 

 

 

Results of Operations

 

Impact of Acquisitions

 

The comparability of our operating results in 2010 to 2009 and 2009 to 2008 is affected by our 2009 acquisitions. Because the most significant acquisition activity occurred in the mid to late fourth quarter of 2009, the impact of acquisitions on 2009 revenue and cost and expense totals was small. Where changes in our results of operations from fiscal 2010 compared to 2009 and 2009 compared to 2008 are clearly related to the acquisitions, such as revenue and increases in amortization of intangibles, we quantify the effects in the discussion that follows. Operation of the acquired businesses has been fully integrated into our existing operations during 2010. Our acquisitions did not result in our entry into a new line of business or product category; they added products and services with features and functionality similar to our previous operations.

 

Revenue and Cost of Revenue

 

The following discussion addresses the revenue, cost of revenue, and gross profit from our company’s two business segments.

 

Commercial Segment

 

 

 

 

Commercial Services Revenue and Cost of Revenue:

 

Services revenue includes hosted Location Based Service (“LBS”) applications including turn-by-turn navigation, people-finder, asset tracker and E9-1-1 service for wireless and E9-1-1 for Voice over Internet Protocol (“VoIP”) service providers, and hosted wireless LBS infrastructure. 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. Hosted LBS service and E9-1-1 fees are generally 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 or sessions using our technology. 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 increased $79.3 million or 88% over 2009 from increased subscriber revenue for LBS applications, as a result of the LocationLogic and NIM acquisitions in 2009, additional service connection deployments of our E9-1-1 services for cellular and VoIP service providers, and an increase in software maintenance revenue. Approximately $83 million of 2010 subscriber services revenue may be ascribed to the businesses acquired during 2009. Our commercial services revenue increased $25.3 million or 39% in 2009 from 2008 from increased subscriber revenue for LBS applications, more service connection deployments of our E9-1-1 services for cellular and VoIP service providers, and an increase in software maintenance revenue. Approximately $13 million of 2009 subscriber services revenue may be ascribed to the LocationLogic and NIM businesses.

 

The direct cost of our services revenue consists primarily of compensation and benefits, network access, data feed and circuit costs, and equipment and software maintenance. Direct costs of services revenue increased 143% for 2010 over 2009 and 9% for 2009 over 2008, primarily due to increases in labor and other direct costs related to addition of the acquired businesses, and custom development work responding to customer requests and deployment requirements for VoIP E9-1-1 technology. The direct cost of services includes amortization of capitalized software development costs of $6.7 million and $0.3 million in 2010 and 2009, respectively. The direct costs of services for 2008 did not include any amortization of capitalized software development costs.

 

Commercial services gross profit for the year ended December 31, 2010 was $83.3 million, 53% higher than in 2009 as a result of higher revenue, improved operating efficiencies, and the full year inclusion of the 2009 acquisitions. Commercial services gross profit for the year ended December 31, 2009 was 70% higher than in 2008 as a result of higher revenue, improved operating efficiencies and the partial year inclusion of the 2009 acquisitions.

 

Commercial Systems Revenue and Cost of Revenue:

 

We sell communication systems to wireless carriers incorporating our licensed software for non-voice carrier services, mainly for location-based services and text messaging. Licensing fees for our carrier software are generally a function of its volume of usage in our customers’ networks. As a carrier’s subscriber base or usage increases, the carrier must purchase additional capacity under its license agreement and we receive additional revenue.

 

Commercial systems revenue in 2010 was $32.7 million compared to $37.6 million in 2009. Commercial systems revenue decreased primarily due to lower sales of text messaging software licenses, partly offset by higher revenue from sales of location-based infrastructure systems. The rate of growth in the use of text messaging declined in 2010, affecting our sales of new licenses and is expected to continue into 2011. Commercial systems revenue in 2009 was 1% higher than in 2008 due to higher sales of text messaging software licenses and location platform systems, partly offset by reduced equipment-component revenue for a customer hardware refresh in 2008 with no comparable project in 2009.

 

The direct cost of commercial systems revenue consists primarily of compensation and benefits, third-party hardware and software purchased for integration and resale, travel expenses, and consulting fees as well as the amortization of acquired and capitalized software development costs. The direct cost of commercial systems increased 36% in 2010 compared to 2009, reflecting an increase in labor and direct costs for customer-requested custom messaging and location-based system development projects. The direct cost of commercial systems increased 19% in 2009 compared to 2008 primarily due to costs of location platform systems projects. The direct cost of the license component of systems is normally very low, and the gross profit very high since much of the software development cost was expensed in prior periods, so that changes in the license component of the systems revenue mix significantly affects the average gross margin in a period. The direct cost of systems includes amortization of capitalized software development costs of $2.6 million, $2.8 million, and $2.1 million, respectively, in 2010, 2009, and 2008.

 

Our commercial systems gross profit was $18.3 million in 2010, down 32% or $8.7 million from 2009, as messaging license sales declined and were a lower portion of the year’s revenue mix. Our commercial systems gross profit was $27.0 million in 2009, a 5% or $1.5 million decrease from 2008.

Government Segment

 

 

 

 

For 2010, Government Segment revenue increased 8%, reflecting an increase in services and a decline in systems revenue. Government Segment revenue in 2009 and 2008 increased 46% and 72%, respectively, reflecting increases in both services and systems volume. Since 2006 we have been one of six vendors selected by the U.S. Army to provide secure satellite services and systems under a five-year Worldwide Satellite Systems (WWSS) contract vehicle, with a maximum value of up to $5 billion for the six vendors. The WWSS contract vehicle is expected to continue to contribute significant government systems sales through 2011. The Company’s Government Segment has been awarded participation as a prime or sub-contractor to provide similar wireless technology under several other contract vehicles.

 

Government Services Revenue and Cost of Revenue:

 

Government services revenue primarily consists of professional communications engineering and field support, program management, help desk outsource, network design and management for government agencies, as well as operation of teleport (fixed satellite ground terminal) facilities for data connectivity via satellite including resale of satellite airtime. System maintenance fees are collected in advance and recognized ratably over the maintenance periods. Government services revenue increased to $93.3 million in 2010 from $62.2 million in 2009 and $36.9 million in 2008. These increases were generated as a result of the revenue contributions from the Solvern and Sidereal acquisitions in late 2009, as well as by new and expanded-scope contracts for satellite airtime services using our teleport facilities, and field support.

 

Direct cost of government service revenue consists of compensation, benefits and travel incurred in delivering these services, as well as satellite space segment purchased for resale. These costs increased as a result of the increased volume of service in all three years.

 

Our gross profit from government services increased to $26.8 million in 2010 from $13.4 million in 2009 and $7.7 million in 2008. Higher gross profit in 2010 was realized from volume increases in professional services, including from businesses acquired in late 2009, as well as higher teleport usage, and maintenance on the installed base of systems. Gross profit in 2009 increased over 2008 as a result of higher revenue for maintenance and satellite services with improved utilization of our facilities and satellite airtime.

Government Systems Revenue and Cost of Revenue:

 

We generate government systems revenue from the design, development, assembly and deployment of information processing and communication systems, primarily deployable satellite-based and line-of-sight deployable systems, and integration of these systems into customer networks. These are largely variations on our SwiftLink products, which are lightweight, secure, deployable communication kits, sold mainly to units of the U.S. Departments of Defense and other federal agencies. Government systems sales decreased to $93.8 million in 2010 from $110.6 million in 2009, reflecting changes in sales volume of our SwiftLink           and deployable communications systems due to lower volume of sales due to federal budget pressures on defense vendors and the timing of government project funding. Government systems sales increased to $110.6 million in 2009 from $81.4 million in 2008 this increase is primarily due to volume from the fulfillment of task orders under the WWSS 5-year contract vehicle, for which TCS was one of six awardees in 2006.

 

The cost of our government systems revenue consists of purchased system components, compensation and benefits, the costs of third-party contractors, and travel. These costs have varied over the three years presented as a direct result of changes in volume. These equipment and third-party costs are variable for our various types of products, and margins may fluctuate between periods based on pricing and product mix.

 

Our government systems gross profit was $9.6 million in 2010, down from $19.1 million in 2009 due to lower volume and a proportion of lower margin equipment pass-through sales. The increase in gross profit in 2009 to $19.1 from $13.1 in 2008 is primarily due to higher sales volume under the WWSS procurement vehicle.

 

Operating Expenses

 

Research and Development Expense:

 

 

Our research and development expense consists of compensation, benefits, and a proportionate share of facilities and corporate overhead. The costs of developing software products are expensed prior to establishing technological feasibility. Technological feasibility is established for our software products when a detailed program design is completed. We incur research and development costs to enhance existing packaged software products as well as to create new software products including software hosted in network operations centers. These costs primarily include compensation and benefits as well as costs associated with using third-party laboratory and testing resources. We expense such costs as they are incurred unless technological feasibility has been reached, and we believe that capitalized costs will be recoverable, in which case we capitalize and amortize them over the product’s expected life.

 

We incur R&D expense for software applications which are being marketed to new and existing customers on a global basis. Throughout 2010, 2009, and 2008, research and development was primarily focused on wireless location-based infrastructure, middleware, and applications (including navigation, people and asset-locator, and cellular E9-1-1) VoIP E9-1-1, text messaging deliverables, and highly reliable tactical communication solutions. Management continually assesses our spending on research and development to ensure resources are focused on technology that is expected to achieve the highest level of success.

 

Research and development expense increased 35% in 2010 from 2009, primarily as a result of expenditures to improve location-based application software for VoIP and Wireless E9-1-1, and application businesses acquired in 2009. Research and development expense increased 38% in 2009 from 2008, primarily as a result of increased software development labor costs for continued work on location-based products (including those of businesses acquired in 2009), electronic map applications, VoIP and wireless E9-1-1, text messaging, and deployable satcom technology.

Our research and development expenditures and acquisitions have yielded a portfolio of more than 130 patents, and more than 300 patent applications are pending, primarily for wireless messaging and location technology. We believe that the intellectual property represented by these patents is a valuable asset that will contribute positively to our results of operations in 2011 and beyond.

 

Sales and Marketing Expense:

 

 

Our sales and marketing expense includes fixed and variable compensation and benefits, trade show expenses, travel costs, advertising and public relations costs as well as a proportionate share of facility-related costs which are expensed as incurred. Our marketing efforts also include speaking engagements, and participation in industry conferences including our annual SwiftLink Users Forum. We sell our software products and services through our direct sales force and through indirect channels. We have also historically leveraged our relationships with original equipment manufacturers to market our software products to wireless carrier customers. We sell our products and services to agencies and departments of the U.S. government, primarily through direct sales professionals. Sales and marketing costs increased 49%, 17% and 15% in 2010, 2009 and 2008, respectively, as a result of adding additional sales personnel, increased variable compensation, broader trade event visibility, and support of business acquired in 2009.

 

General and Administrative Expense:

 

 

General and administrative (G&A) expense consists primarily of management, finance, legal, human resources and internal information system functions. These costs include compensation, benefits, professional fees, travel, and a proportionate share of rent, utilities and other facilities costs which are expensed as incurred. The increase in 2010 and 2009 includes increased costs to support our 2009 acquired businesses, as well as investments for process control, legal and professional costs associated with protection and monetization of intellectual property, offset by lower expenses for variable compensation based mainly on profit and growth performance metrics. Approximately $3 million of fees and expenses were incurred during the fourth quarter of 2009 in connection with closing the NIM acquisition.

 

Depreciation and Amortization of Property and Equipment:

 

 

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, as well as amortization of capitalized software developed for internal use, including for hosted applications. We compute depreciation and amortization using the straight-line method over the estimated useful lives of the assets, generally range from five years for furniture, fixtures, and leasehold improvements to

three to four years for most other types of assets including computers, software, telephone equipment and vehicles. Our depreciable asset base increased in 2010 primarily as a result of additions to property and equipment including purchases of about $28 million. In 2009, our depreciable asset base increased primarily as a result of property and equipment acquired with our four acquisitions during 2009, and organic capital spending of about $10 million.

 

Amortization of Acquired Intangible Assets:

 

 

The amortization of acquired non-goodwill intangible assets relates to the 2009 acquisitions of wireless location-based application and infrastructure technology assets acquired from LocationLogic and NIM, and the cyber security assets acquired from Solvern, and Kivera digital mapping business assets acquired in 2004. These assets are being amortized over their useful lives of between five and nineteen years. The expense recognized in 2010 represents a full year of amortization of customer lists, customer relationships, coursework, and patents acquired during 2009, while the 2009 expense is includes partial year of such expense. The expense recognized in 2008 arose only from the 2004 Kivera acquisition, including customer lists and patents.

 

Patent-Related Gains, Net of Expenses:

 

 

In December 2009, the company reached a settlement of patent litigation under which Sybase paid TCS $23 million in January 2010 to license its patents related to cell phone carrier messaging technology. TCS incurred $7.3 million in legal and other expenses related to the settlement, yielding a net of $15.7 million to TCS. In June 2008, the company sold a wireless e-mail-related patent for net proceeds of $8.1 million, after legal fees and other costs, concluding litigation involving the patent.

 

Interest Expense:

 

 

Interest expense is incurred under notes payable, convertible notes 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. Overall our interest and financing expense increased in 2010 and 2009 as a result of the net increase in amount financed.

Interest on the bank term loan is at 0.5% plus the greater of (i) 4% per annum, or (ii) the bank’s prime rate, or an effective rate of 4.5% in 2010. Interest on our capital leases is primarily at stated rates averaging about 7%.We have a commercial bank line of credit that has not been used for borrowings, and has therefore generated no interest expense during the three years 2008-10. Interest on our line of credit borrowing would be at the greater of (i) 4% per annum, or (ii) the bank’s prime rate. Further details of our bank facility are provided under Liquidity and Capital Resources.

 

Our capital lease obligations include interest at various amounts depending on the lease arrangement. Our interest under capital leases fluctuates depending on the amount of capital lease obligations in each year, and the interest under those leases, has remained relatively constant since 2007. The interest cost of capital lease financings increased over period reported due to additional funding.

 

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 TCS’s senior unsecured obligations and will rank equally with all of its present and future senior unsecured debt and senior to any future subordinated debt. The notes are structurally subordinate to all present and future debt and other obligations of TCS’s subsidiaries and will be effectively subordinate to all of TCS’s 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, 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%, to be paid in three installments: $30 million paid December 15, 2010, $5 million due on June 15, 2011, and $5 million on December 15, 2011, subject to escrow adjustments. The promissory notes are effectively subordinated to TCS’s secured debt and structurally subordinated to any present and future indebtedness and other obligations of TCS and subsidiaries.

 

Other Income, Net

 

 

Other Income, net, includes adjustments to the estimated payments under earn-out arrangements that were part of two 2009 acquisitions, as well as interest income earned and realized gains on investment accounts and foreign currency translation/transaction gain or loss, which is dependent on fluctuation in exchange rates. We record the effects of foreign currency translation on our cash, receivables and deferred revenues that are stated in currencies other than U.S dollars.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740, Accounting for Income Taxes. Deferred tax assets and liabilities are computed based on the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate. Upon the adoption of ASC 740 on January 1, 2007, the estimated value of the Company’s uncertain tax positions was a liability of $2.7 million resulting from unrecognized net tax benefits which did not include interest and penalties and increased to $3.0 million as of December 31, 2010. The Company recorded the estimated value of its uncertain tax position by reducing the value of certain tax attributes. The Company would classify any interest and penalties accrued on any unrecognized tax benefits as a component of the provision for income taxes. There were no interest or penalties recognized in the consolidated statement of income for 2010 and the consolidated balance sheet at December 31, 2010. The Company does not currently anticipate that the total amounts of unrecognized tax benefits will significantly increase within the next 12 months. The Company files income tax returns in U.S. and

various state jurisdictions and with the 2009 acquisitions, expects to file income tax returns in several foreign jurisdictions. As of December 31, 2010, open tax years in the federal and some state jurisdictions date back to 1999, due to the taxing authorities’ ability to adjust operating loss carry forwards.

 

ASC 740 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion of the net deferred tax asset will not be realized. This process requires the Company’s management to make assessments regarding the timing and probability of the ultimate tax impact. The Company records valuation allowances on deferred tax assets if determined it is more likely than not that the asset will not be realized. Additionally, the Company establishes reserves for uncertain tax positions based upon our judgment regarding potential future challenges to those positions. Actual income taxes could vary from these estimates due to future changes in income tax law, significant changes in the jurisdictions in which the Company operates, our inability to generate sufficient future taxable income or unpredicted results from the final determination of each year’s liability by taxing authorities. These changes could have a significant impact on the Company’s financial position.

 

Deferred tax assets consist primarily of net operating loss and tax credit carryforwards as well as deductible temporary differences. Prior to 2008, the Company provided a full tax valuation allowance for federal and state deferred tax assets based on management’s evaluation that the Company’s ability to realize such assets did not meet the criteria of “more likely than not”. The Company has continuously evaluated additional facts representing positive and negative evidence in the determination of its ability to realize the deferred tax assets. In 2008, management has determined, as the result of cumulative income and anticipated future taxable income, that it was more likely than not that these deferred tax assets will be realized in the future. Accordingly, the Company determined that it was appropriate to reverse the deferred tax asset valuation, resulting in a benefit to deferred tax expense of $33.3 million for 2008.

 

Net Income

 

 

The impact on 2010 net income from Company’s higher revenue and gross profit was offset by the absence of the effect the 2009 one-time gain of $15.7 million net from the sale of a patent, by an increase in interest expense as a result of 2009 borrowings, and by an increase in operating expenses and depreciation and amortization expenses, primarily as a result of the 2009 acquisitions. Net income in 2009 was lower than for 2008, as the absence of the $33 million effect of the 2008 reversal of the deferred tax asset valuation allowance, and recording of a 2009 tax provision, all not offsetting the effect of higher 2009 revenue and operating profit.

Liquidity and Capital Resources

 

The following table summarizes our comparative statements of cash flow: