SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended March 31, 2013
OR
TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 0-30821
TELECOMMUNICATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND | 52-1526369 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
275 West Street, Annapolis, MD | 21401 | |
(Address of principal executive offices) | (Zip Code) |
(410) 263-7616
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes þ No ¨
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 þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | þ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Title of Each Class |
Shares outstanding as of April 29, 2013 |
|||
Class A Common Stock, par value |
||||
$0.01 per share |
53,587,554 | |||
Class B Common Stock, par value |
||||
$0.01 per share |
5,247,769 | |||
|
|
|||
Total Common Stock Outstanding |
58,835,323 | |||
|
|
TELECOMMUNICATION SYSTEMS, INC.
2
TeleCommunication Systems, Inc.
(amounts in thousands, except share data)
March 31, 2013 |
December 31, 2012 |
|||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 43,872 | $ | 36,623 | ||||
Marketable securities |
13,675 | 14,875 | ||||||
Accounts receivable, net of allowance of $443 in 2013 and $394 in 2012 |
68,186 | 83,013 | ||||||
Unbilled receivables |
15,245 | 23,095 | ||||||
Inventory |
9,481 | 11,084 | ||||||
Deferred tax assets |
10,612 | 9,813 | ||||||
Deferred project costs and other current assets |
15,777 | 15,394 | ||||||
|
|
|
|
|||||
Total current assets |
176,848 | 193,897 | ||||||
Property and equipment, net of accumulated depreciation and amortization of $75,435 in 2013 and $72,050 in 2012 |
48,307 | 49,270 | ||||||
Software development costs, net of accumulated amortization of $29,071 in 2013 and $27,317 in 2012 |
18,081 | 18,929 | ||||||
Acquired intangible assets, net of accumulated amortization of $11,038 in 2013 and $9,895 in 2012 |
25,029 | 26,172 | ||||||
Goodwill |
112,450 | 112,450 | ||||||
Deferred tax assets |
6,233 | 6,233 | ||||||
Other assets |
6,267 | 6,761 | ||||||
|
|
|
|
|||||
Total assets |
$ | 393,215 | $ | 413,712 | ||||
|
|
|
|
|||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 37,019 | $ | 37,703 | ||||
Accrued payroll and related liabilities |
9,346 | 18,406 | ||||||
Deferred revenue |
24,603 | 26,527 | ||||||
Current portion of bank borrowings, notes payable, and capital lease obligations |
22,400 | 28,657 | ||||||
|
|
|
|
|||||
Total current liabilities |
93,368 | 111,293 | ||||||
Notes payable and capital lease obligations, less current portion |
135,909 | 138,939 | ||||||
Other liabilities |
1,660 | 2,378 | ||||||
Stockholders equity: |
||||||||
Class A Common Stock; $0.01 par value: |
||||||||
Authorized shares225,000,000; issued and outstanding shares of 53,552,778 in 2013 and 53,037,097 in 2012 |
536 | 531 | ||||||
Class B Common Stock; $0.01 par value: |
||||||||
Authorized shares75,000,000; issued and outstanding shares of 5,247,769 in 2013 and 5,247,769 in 2012 |
52 | 52 | ||||||
Additional paid-in capital |
336,068 | 334,058 | ||||||
Accumulated other comprehensive income |
40 | 50 | ||||||
Accumulated deficit |
(174,418 | ) | (173,589 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
162,278 | 161,102 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 393,215 | $ | 413,712 | ||||
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
3
TeleCommunication Systems, Inc.
Consolidated Statements of Operations
(amounts in thousands, except per share data)
(unaudited)
Three Months
Ended March 31, |
||||||||
2013 | 2012 | |||||||
Revenue |
||||||||
Services |
$ | 73,518 | $ | 72,348 | ||||
Systems |
21,276 | 27,687 | ||||||
|
|
|
|
|||||
Total revenue |
94,794 | 100,035 | ||||||
Direct costs of revenue |
||||||||
Direct cost of services revenue |
41,801 | 44,241 | ||||||
Direct cost of systems revenue |
17,512 | 21,404 | ||||||
|
|
|
|
|||||
Total direct cost of revenue |
59,313 | 65,645 | ||||||
|
|
|
|
|||||
Services gross profit |
31,717 | 28,107 | ||||||
Systems gross profit |
3,764 | 6,283 | ||||||
|
|
|
|
|||||
Total gross profit |
35,481 | 34,390 | ||||||
Operating expenses |
||||||||
Research and development expense |
8,526 | 8,662 | ||||||
Sales and marketing expense |
8,049 | 7,505 | ||||||
General and administrative expense |
13,648 | 12,367 | ||||||
Depreciation and amortization of property and equipment |
3,508 | 3,439 | ||||||
Amortization of acquired intangible assets |
1,142 | 1,374 | ||||||
|
|
|
|
|||||
Total operating expenses |
34,873 | 33,347 | ||||||
Income from operations |
608 | 1,043 | ||||||
Interest expense |
(1,844 | ) | (1,642 | ) | ||||
Amortization of deferred financing fees |
(297 | ) | (188 | ) | ||||
Other income (expense), net |
(95 | ) | 104 | |||||
|
|
|
|
|||||
Net loss before income taxes |
(1,628 | ) | (683 | ) | ||||
Income tax benefit |
799 | 314 | ||||||
|
|
|
|
|||||
Net loss |
$ | (829 | ) | $ | (369 | ) | ||
|
|
|
|
|||||
Net loss per share-basic |
$ | (0.01 | ) | $ | (0.01 | ) | ||
|
|
|
|
|||||
Net loss per share-diluted |
$ | (0.01 | ) | $ | (0.01 | ) | ||
|
|
|
|
|||||
Weighted average shares outstanding-basic |
58,573 | 57,572 | ||||||
Weighted average shares outstanding-diluted |
58,573 | 57,572 |
See accompanying Notes to Consolidated Financial Statements.
4
TeleCommunication Systems, Inc.
Consolidated Statements of Comprehensive Loss
(amounts in thousands)
(unaudited)
Three Months Ended March 31, |
||||||||
2013 | 2012 | |||||||
Net loss |
$ | (829 | ) | $ | (369 | ) | ||
Other comprehensive loss: |
||||||||
Foreign currency translation adjustments |
(7 | ) | | |||||
Unrealized gains (loss) on securities |
||||||||
Arising during the period |
(1 | ) | 46 | |||||
Reclassification to net income (loss) |
(2 | ) | 3 | |||||
|
|
|
|
|||||
Net unrealized gains (loss) |
(3 | ) | 49 | |||||
|
|
|
|
|||||
Other comprehensive income (loss) |
(10 | ) | 49 | |||||
|
|
|
|
|||||
Comprehensive loss |
$ | (839 | ) | $ | (320 | ) | ||
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
5
TeleCommunication Systems, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
Three Months Ended March 31, |
||||||||
2013 | 2012 | |||||||
Operating activities: |
||||||||
Net loss |
$ | (829 | ) | $ | (369 | ) | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization of property and equipment |
3,508 | 3,439 | ||||||
Stock-based compensation expense |
2,452 | 2,807 | ||||||
Amortization of capitalized software development costs |
1,754 | 2,798 | ||||||
Amortization of acquired intangible assets |
1,142 | 1,374 | ||||||
Amortization of investment premiums and accretion of discounts, net |
60 | 132 | ||||||
Deferred tax benefit |
(799 | ) | (314 | ) | ||||
Amortization of deferred financing fees |
297 | 188 | ||||||
Other non-cash adjustments |
1,299 | 1,143 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
14,814 | 6,212 | ||||||
Unbilled receivables |
7,850 | 241 | ||||||
Inventory |
1,603 | (1,166 | ) | |||||
Deferred project costs and other current assets |
(383 | ) | 864 | |||||
Other assets |
197 | 963 | ||||||
Accounts payable and accrued expenses |
(1,973 | ) | (4,653 | ) | ||||
Accrued payroll and related liabilities |
(9,060 | ) | (8,549 | ) | ||||
Deferred revenue |
(1,924 | ) | 3,438 | |||||
Other liabilities |
(718 | ) | (1,075 | ) | ||||
|
|
|
|
|||||
SubtotalChanges in operating assets and liabilities |
10,406 | (3,725 | ) | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
19,290 | 7,473 | ||||||
Investing activities: |
||||||||
Purchases of property and equipment |
(1,941 | ) | (6,289 | ) | ||||
Purchases of marketable securities |
(1,625 | ) | (862 | ) | ||||
Proceeds from sale and maturity of marketable securities |
2,763 | 2,823 | ||||||
Capitalized software development costs |
(898 | ) | (92 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(1,701 | ) | (4,420 | ) | ||||
Financing activities: |
||||||||
Payments on bank borrowings and capital lease obligations |
(9,903 | ) | (13,471 | ) | ||||
Proceeds from bank and other borrowings |
| 3,500 | ||||||
Payments of tax witholdings on restricted stock |
(456 | ) | | |||||
Proceeds from exercise of employee stock options and sale of stock |
19 | 125 | ||||||
|
|
|
|
|||||
Net cash used in financing activities |
(10,340 | ) | (9,846 | ) | ||||
|
|
|
|
|||||
Net Increase (decrease) in cash |
7,249 | (6,793 | ) | |||||
Cash and cash equivalents at the beginning of the period |
36,623 | 40,898 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at the end of the period |
$ | 43,872 | $ | 34,105 | ||||
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
6
TeleCommunication Systems, Inc.
Notes to Consolidated Financial Statements
March 31, 2013
(amounts in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. These consolidated financial statements should be read in conjunction with our audited financial statements and related notes included in our 2012 Annual Report on Form 10-K. The terms TCS, Company, we, us and our as used in this Form 10-Q refer to TeleCommunication Systems, Inc. and its subsidiaries as a combined entity, except where it is made clear that such terms mean only TeleCommunication Systems, Inc.
Use of Estimates. The preparation of these financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Significant estimates and assumptions in these consolidated financial statements include estimates used in revenue recognition, fair value of business combinations, fair value associated with goodwill, intangible assets and long-lived asset impairment tests, estimated values of software development costs, income taxes and deferred valuation allowances, the fair value of marketable securities and stock based compensation, and legal and contingency fees. Actual results could differ from those estimates.
Goodwill. Goodwill represents the excess of cost over the fair value of net assets of acquired businesses. Goodwill is not amortized, but instead is evaluated annually for impairment using a discounted cash flow model and other measurements of fair value such as market comparable transactions. The authoritative guidance for the goodwill impairment model includes a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the reporting units that have goodwill assigned to them. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of the impairment. In the second step, a fair value for goodwill is estimated, based in part on the fair value of the reporting unit used in the first step, and is compared to its carrying value. The shortfall of the fair value below carrying value, if any, would represent the amount of goodwill impairment.
We assess goodwill for impairment in the fourth quarter of each fiscal year, or sooner should there be an indicator of impairment. We periodically analyze whether any such indicators of impairment, such as a sustained, significant decline in the Companys stock price and market capitalization, a decline in the Companys expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower growth rate, among others.
For goodwill impairment testing, we have four reporting units: two Commercial Segment units, Navigation and Other Commercial (which comprises our text messaging and location-based technology businesses, including E9-1-1 call routing); and two Government Segment units, the Government Solutions Group (GSG) unit and the Cyber Intelligence unit.
In performing our annual goodwill impairment testing during the fourth quarter of 2012, we used a market approach based on observable public comparable company multiples for all reporting units. For our Navigation and Cyber Intelligence reporting units, we also used a discounted cash flow analysis. Where multiple approaches were used, we may weight the results from different methods to estimate the reporting units fair value. Our discounted cash flow models are based on our expectation of future market conditions for each of the reporting units, as well as discount rates that would be used by market participants in an arms-length transaction. Future events could cause us to conclude that market conditions have declined or discount rates have increased to the extent that our goodwill could be impaired. It is not possible at this time to determine if any such future impairment charge would result.
There was no indication of any further impairment in any of our reporting units during the 2012 annual testing and accordingly, the second step of the goodwill impairment analysis was not performed.
Earnings per share. Basic net income per common share is based upon the average number of shares of common stock outstanding during the period. At March 31, 2013 and 2012, stock options to purchase approximately 15,500 and 17,300 shares, respectively, were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive.
7
At March 31, 2013 and 2012, shares issuable upon conversion of convertible debt were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive. Concurrent with the issuance of the convertible notes, we entered into convertible note hedge and warrant transactions. If the Companys share price is greater than the warrant exercise price of $12.74 per share for any period presented, the warrants would be dilutive to the Companys earnings per share. The convertible note hedge is excluded from the calculation of diluted earnings per share as the impact is always considered anti-dilutive since the call option would be exercised by us when the exercise price is lower than the market price. At March 31, 2013 and 2012, the Companys share price was less than the warrant exercise price of $12.74, therefore no value was assigned to the warrants because the effect of their inclusion would have been anti-dilutive.
Recent Accounting Pronouncements.
In February 2013, the FASB amended the disclosure requirements regarding the reporting of amounts reclassified out of accumulated other comprehensive income. The amendment does not change the current requirement for reporting net income or other comprehensive income, but requires additional disclosures about significant amounts reclassified out of accumulated other comprehensive income including the effect of the reclassification on the related net income line items. This amendment was adopted prospectively effective January 1, 2013.
In March 2013, the FASB amended guidance related to a parent companys accounting for the release of the cumulative translation adjustment into net income upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This guidance is effective for fiscal periods beginning after December 15, 2013, and is to be applied prospectively to derecognition events occurring after the effective date. We do not anticipate the adoption of this amendment will have a material impact on our financial statements.
2. Acquisitions
On July 6, 2012, we acquired all of the outstanding shares of privately-held microDATA GIS, Inc. (microDATA), in accordance with a Purchase and Sale Agreement. microDATA is a leading provider of Next Generation 9-1-1 software and solutions. Its technology and expertise is expected to enhance our end-to-end public safety communications business with expanded Geographical Information Systems emergency services information network software and additional Public Safety Answering Point-based customer premise equipment software. The microDATA acquisition was accounted for using the acquisition method; accordingly, microDATAs operating results are reflected in the consolidated financial statements and are integrated into the Commercial Segment.
The purchase price of $35,544 was comprised of $20,786 in cash, net of cash acquired, and $14,250 in promissory notes, and performance-based earn-out opportunities was allocated to the acquired assets and assumed liabilities based on managements preliminary valuation of the fair values as of July 6, 2012.
The acquisition cash was funded by incremental bank debt; see Note 12. The total purchase price has been allocated based on the estimated fair value of the acquired tangible and intangible assets and assumed liabilities, with the excess of the purchase price over the assets acquired and liabilities assumed being allocated to goodwill. The weighted average amortization period for the other intangibles is 6.5 years. The valuation has resulted in $22,032 of goodwill, which will be deductible for tax purposes over 15 years.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of the acquisition:
Accounts receivable |
$ | 2,190 | ||
Other current assets |
1,228 | |||
Deferred tax asset |
553 | |||
Property and equipment |
175 | |||
Acquired intangible assets |
12,834 | |||
Software development costs |
5,969 | |||
Accounts payable and accrued expenses |
(2,099 | ) | ||
Accrued payroll and related liabilities |
(353 | ) | ||
Deferred revenue |
(6,985 | ) | ||
|
|
|||
Total net assets |
13,512 | |||
Goodwill |
22,032 | |||
|
|
|||
Total estimated purchase price |
$ | 35,544 | ||
|
|
The Consolidated Balance Sheets as of March 31, 2013 reflect this preliminary allocation. We are completing analysis of the fair value of the identifiable intangible assets, as well as consideration of the deferred taxes acquired in the acquisition. The analysis will be finalized in a timely manner, not to exceed 12 months from the acquisition date. The microDATA operations have been included in our consolidated results of operations since the acquisition date of July 6, 2012. A pro forma statement of operations was omitted because the acquisition of the outstanding shares of microDATA did not have a significant impact on our results of operations or income (loss) per share attributable to common stockholders.
8
3. Stock-Based Compensation
Restricted Stock
We had 1,498 and 1,285 restricted stock units outstanding at a weighted-average grant date fair value per share of $2.54 and $3.24 as at March 31, 2013 and 2012, respectively. Share-based compensation expense is recognized on a straight line basis, for only those shares expected to vest over the requisite service period of the award, which is generally the vesting over one year for directors and vest in annual increments over three years for executives conditional on continued employment.
Stock Options
We had 18,103 and 17,109 stock options outstanding as at March 31, 2013 and 2012, respectively. During the first quarter of 2013, we granted 1,415 options and had exercises of 9 options. Share-based compensation expense is recognized on a straight line basis, net of any estimated forfeiture rate, for only those shares expected to vest over the requisite service period of the award, which is generally 5 years.
Total Stock-Based Compensation
We recognized total share-based compensation expense of $2,452 and $2,807 in the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013 and 2012, we had $10,371 and $12,957 of total unrecognized share-based compensation expense, which is expected to be recognized over a weighted-average period of approximately 3 years, respectively.
4. Supplemental Disclosure of Cash Flow Information
Property and equipment acquired under capital leases totaled $648 and $1,879 during the three months ended March 31, 2013 and 2012, respectively.
Interest paid totaled $602 and $517 during the three months ended March 31, 2013 and 2012, respectively.
Income taxes and estimated state income taxes paid totaled $198 and $494, respectively, during the three months ended March 31, 2013 and 2012.
5. Marketable Securities
Available-for-sale marketable securities at March 31, 2013 were:
Amortized Cost Basis |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
Corporate bonds |
$ | 11,944 | $ | 37 | $ | (1 | ) | $ | 11,980 | |||||||
Mortgage-backed and asset-backed securities |
1,693 | 3 | (1 | ) | 1,695 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total marketable securities |
$ | 13,637 | $ | 40 | $ | (2 | ) | $ | 13,675 | |||||||
|
|
|
|
|
|
|
|
The original cost and estimated fair value of available-for-sale marketable securities by contractual maturity at March 31, 2013 were:
Original Cost |
Fair Value | |||||||
Due within 1 year or less |
$ | 6,648 | $ | 6,414 | ||||
Due within 1-2 years |
3,379 | 2,776 | ||||||
Due within 2-3 years |
3,570 | 4,485 | ||||||
|
|
|
|
|||||
$ | 13,597 | $ | 13,675 | |||||
|
|
|
|
9
Available-for-sale marketable securities at December 31, 2012 were:
Amortized Cost Basis |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
Corporate bonds |
$ | 13,102 | $ | 42 | $ | (3 | ) | $ | 13,141 | |||||||
Mortgage-backed and asset-backed securities |
1,732 | 3 | (1 | ) | 1,734 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total marketable securities |
$ | 14,834 | $ | 45 | $ | (4 | ) | $ | 14,875 | |||||||
|
|
|
|
|
|
|
|
The original cost and estimated fair value of available-for-sale marketable securities by contractual maturity at December 31, 2012 were:
Original Cost |
Fair Value | |||||||
Due within 1 year or less |
$ | 7,567 | $ | 7,251 | ||||
Due within 1-2 years |
3,626 | 3,557 | ||||||
Due within 2-3 years |
4,075 | 4,067 | ||||||
|
|
|
|
|||||
$ | 15,268 | $ | 14,875 | |||||
|
|
|
|
6. Fair Value Measurements
Our assets and liabilities subject to fair value measurements on a recurring basis and the required disclosures were:
As of March 31, 2013 | Fair Value Total |
Fair Value Measurements Using Fair Value Hierarchy |
||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 43,872 | $ | 43,872 | $ | | $ | | ||||||||
Corporate bonds |
11,980 | 11,980 | | | ||||||||||||
Mortgage-backed and asset-backed securities |
1,695 | 1,695 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Marketable securities |
13,675 | 13,675 | | | ||||||||||||
Deferred compensation plan investments |
801 | 801 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Assets at fair value |
$ | 58,348 | $ | 58,348 | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Contractual acquisition earnouts |
$ | 517 | $ | | $ | | $ | 517 | ||||||||
Deferred compensation |
480 | 480 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities at fair value |
$ | 997 | $ | 480 | $ | | $ | 517 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
As of December 31, 2012 | Fair
Value Total |
Fair Value Measurements Using Fair Value Hierarchy |
||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 36,623 | $ | 36,623 | $ | | $ | | ||||||||
Corporate bonds |
13,141 | 13,141 | | | ||||||||||||
Mortgage-backed and asset-backed securities |
1,734 | 1,734 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Marketable securities |
14,875 | 14,875 | | | ||||||||||||
Deferred compensation plan investments |
690 | 690 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Assets at Fair Value |
$ | 52,188 | $ | 52,188 | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Deferred compensation |
$ | 394 | $ | 394 | $ | | $ | | ||||||||
Contractual acquisition earn-outs |
508 | | | 508 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities at Fair Value |
$ | 902 | $ | 394 | $ | | $ | 508 | ||||||||
|
|
|
|
|
|
|
|
We hold marketable securities that are investment grade and are classified as available-for-sale. The securities include corporate bonds, and mortgage and asset backed securities that are carried at fair market value based on quoted market prices.
We hold trading securities as part of a rabbi trust to fund supplemental executive retirement plans and deferred income plans. The funds held are all managed by a third party, and include fixed income funds, equity securities, and money market accounts, or other investments for which there is an active quoted market. The related deferred compensation liabilities are valued based on the underlying investment selections in each participants account.
10
The contractual acquisition earnouts were part of the consideration paid for the 2012 acquisition of microDATA. The fair value of the earnouts is based on probability-weighted payouts under different scenarios, discounted using a discount rate commensurate with the risk. The following table provides a summary of the changes in the our contractual acquisition earnouts measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2013:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||
Balance at January 1, 2013 |
$ | 508 | ||
Fair value adjustment recognized in earnings |
9 | |||
|
|
|||
Balance at March 31, 2013 |
$ | 517 | ||
|
|
Long-term debt, excluding leases, consists of borrowings under a commercial bank term loan agreement and 4.5% convertible senior notes, and promissory notes; see Note 12. The long-term debt, excluding leases, is currently reported at the borrowed amounts outstanding. At March 31, 2013, the estimated fair value of long-term debt, excluding leases, was $141,000 versus a carrying value of $146,935. At March 31, 2012, the estimated fair value of long-term debt, excluding leases, was $115,700 versus a carrying value of $124,500. The estimated fair value is based on a market approach using quoted market prices or current market rates for similar debt with approximately the same remaining maturities, where possible.
Assets and liabilities that are measured at fair value on a non-recurring basis include long-lived assets, intangible assets, and goodwill. These items are recognized at fair value when they are considered to be impaired. For the three months ended March 31, 2013 and 2012, there was no required fair value adjustments for assets and liabilities measured at fair value on a non-recurring basis.
7. Segment Information
Our two reporting segments are the Commercial and Government Segments.
Government Segment: We provide professional services including field support of deployable wireless systems and cybersecurity training to the U.S. Department of Defense and other government and foreign customers. We own and operate secure satellite teleport facilities, resell access to satellite airtime (known as space segment), and design, furnish, install and operate wireless communication systems and components, including our SwiftLink® deployable communication systems which integrate high speed, satellite, and, internet protocol technology with secure, federal government-approved cryptologic devices.
Commercial Segment: We are one of two leading companies that enable 9-1-1 call routing via cellular, Voice over Internet Protocol, and next generation technology. Other TCS hosted and managed services include cellular carrier infrastructure for text messaging and location-based platforms and applications, including turn-by-turn navigation. Commercial segment customers include wireless carrier network operators, Voice over Internet Protocol service providers, wireless device manufacturers, automotive industry suppliers, and state and local governments.
Management evaluates segment performance based on gross profit and all revenues reported below are from external customers. We do not maintain information regarding segment assets. According, asset information by reportable segment is not presented. The following tables sets forth the results of our reportable segments and a reconciliation of segment gross profit to net loss:
Three Months Ended March 31, | ||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||
Gvmt | Comm. | Total | Gvmt | Comm. | Total | |||||||||||||||||||
Revenue |
||||||||||||||||||||||||
Services |
$ | 36,095 | $ | 37,423 | $ | 73,518 | $ | 33,313 | $ | 39,035 | $ | 72,348 | ||||||||||||
Systems |
16,744 | 4,532 | 21,276 | 23,525 | 4,162 | 27,687 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenue |
52,839 | 41,955 | 94,794 | 56,838 | 43,197 | 100,035 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Direct costs of revenue |
||||||||||||||||||||||||
Direct cost of services |
25,415 | 16,386 | 41,801 | 25,211 | 19,030 | 44,241 | ||||||||||||||||||
Direct cost of systems |
13,925 | 3,587 | 17,512 | 18,355 | 3,049 | 21,404 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total direct costs of revenue |
39,340 | 19,973 | 59,313 | 43,566 | 22,079 | 65,645 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross profit |
||||||||||||||||||||||||
Services gross profit |
10,680 | 21,037 | 31,717 | 8,102 | 20,005 | 28,107 | ||||||||||||||||||
Systems gross profit |
2,819 | 945 | 3,764 | 5,170 | 1,113 | 6,283 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total gross profit |
$ | 13,499 | $ | 21,982 | $ | 35,481 | $ | 13,272 | $ | 21,118 | $ | 34,390 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
11
Three Months
Ended March 31, |
||||||||
2013 | 2012 | |||||||
Total segment gross profit |
$ | 35,481 | $ | 34,390 | ||||
Research and development expense |
(8,526 | ) | (8,662 | ) | ||||
Sales and marketing expense |
(8,049 | ) | (7,505 | ) | ||||
General and administrative expense |
(13,648 | ) | (12,367 | ) | ||||
Depreciation and amortization of property and equipment |
(3,508 | ) | (3,439 | ) | ||||
Amortization of acquired intangible assets |
(1,142 | ) | (1,374 | ) | ||||
Interest expense |
(1,844 | ) | (1,642 | ) | ||||
Amortization of deferred finance fees |
(297 | ) | (188 | ) | ||||
Other income (expense), net |
(95 | ) | 104 | |||||
|
|
|
|
|||||
Loss before income taxes |
(1,628 | ) | (683 | ) | ||||
Income tax benefit |
799 | 314 | ||||||
|
|
|
|
|||||
Net loss |
$ | (829 | ) | $ | (369 | ) | ||
|
|
|
|
8. Inventory
Inventory consisted of the following:
March 31, 2013 |
December 31, 2012 |
|||||||
Component parts |
$ | 6,752 | $ | 8,018 | ||||
Finished goods |
2,729 | 3,066 | ||||||
|
|
|
|
|||||
Total inventory |
$ | 9,481 | $ | 11,084 | ||||
|
|
|
|
9. Acquired Intangible Assets, Capitalized Software Development Costs, and Goodwill
Our acquired intangible assets and capitalized software development costs consisted of the following:
March 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net | Gross Carrying Amount |
Accumulated Amortization |
Net | |||||||||||||||||||
Acquired intangible assets: |
||||||||||||||||||||||||
Customer lists and other |
$ | 34,733 | $ | 10,212 | $ | 24,521 | $ | 34,733 | $ | 9,115 | $ | 25,618 | ||||||||||||
Trademarks and patents |
1,334 | 826 | 508 | 1,334 | 780 | 554 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total acquired intangible assets |
36,067 | 11,038 | 25,029 | 36,067 | 9,895 | 26,172 | ||||||||||||||||||
Software development costs, including acquired technology |
47,152 | 29,071 | 18,081 | 46,246 | 27,317 | 18,929 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total acquired intangible assets and software dev. costs |
$ | 83,219 | $ | 40,109 | $ | 43,110 | $ | 82,313 | $ | 37,212 | $ | 45,101 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Estimated future amortization expense: |
||||||||||||||||||||||||
Nine-months ending December 31, 2013 |
$ | 8,801 | ||||||||||||||||||||||
Year ending December 31, 2014 |
8,851 | |||||||||||||||||||||||
Year ending December 31, 2015 |
7,309 | |||||||||||||||||||||||
Year ending December 31, 2016 |
5,869 | |||||||||||||||||||||||
Year ending December 31, 2017 |
4,097 | |||||||||||||||||||||||
Thereafter |
8,183 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
$ | 43,110 | |||||||||||||||||||||||
|
|
For the three months ended March 31, 2013 and 2012, we capitalized $906 and $1,239, respectively, of software development costs for certain software projects after the point of technological feasibility had been reached but before the software was available for general release. Accordingly, these costs have been capitalized and are being amortized over their estimated useful lives beginning when the products are available for general release. The capitalized costs relate to our location-based software. We believe that these capitalized costs will be recoverable from future gross profits generated by these products.
We routinely update our estimates of the recoverability of the software products that have been capitalized. Management uses these estimates as the basis for evaluating the carrying values and remaining useful lives of the respective assets.
The carrying amount of goodwill is as follows:
Commercial Segment |
Government Segment |
Total | ||||||||||
Balance as of March 31, 2013 and December 31, 2012 |
$ | 58,154 | $ | 54,296 | $ | 112,450 | ||||||
|
|
|
|
|
|
12
Adjustments to purchase price allocations are required if new information becomes available prior to the end of the 12-month measurement periods.
10. Concentrations of Credit Risk and Major Customers
The financial instruments that potentially subject us to concentrations of credit risk are accounts receivable and unbilled receivables. Those customers that comprised 10% or more of our revenue, accounts receivable and unbilled receivables are summarized in the following tables:
Percentage of total revenue for the three months ended March 31:
Customer |
Segment | 2013 | 2012 | |||||||
U.S. Government |
Government | 38 | % | 32 | % | |||||
Customer A |
Commercial | 14 | % | 16 | % | |||||
Customer B |
Commercial | < 10 | % | 10 | % | |||||
Customer C |
Commercial | < 10 | % | < 10 | % |
Percentage of receivables (billed and unbilled) as of March 31:
Customer |
Segment | 2013 | 2012 | |||||||
U.S. Government |
Government | 34 | % | 35 | % | |||||
Customer A |
Commercial | 16 | % | 16 | % | |||||
Customer B |
Commercial | < 10 | % | <10 | % | |||||
Customer C |
Commercial | 10 | % | <10 | % |
11. Line of Credit
We have maintained a line of credit arrangement with our principal bank since 2003. In July 2012, we entered into the Fourth Amendment to the Loan and Security Agreement (the Amendment.) No changes were made to the $35,000 amount we could borrow under the revolving line of credit (the Line of Credit.) Our potential borrowings under the Line of Credit are reduced by a cash management services sublimit of $3,585 at March 31, 2013.
The Line of Credit maturity date is June 30, 2014. The principal amount outstanding under the Line of Credit is payable prior to or on the maturity date, and interest on the Line of Credit is payable monthly. The principal amount outstanding under the Line of Credit accrues interest at a floating per annum rate equal to one-half of one percentage point (0.5%) above the prime rate (3.25% at March 31, 2013.)
The Line of Credit includes three sub-facilities: (i) a letter of credit sub-facility pursuant to which the bank may issue letters of credit, (ii) a foreign exchange sub-facility pursuant to which the Company may purchase foreign currency from the bank, and (iii) a cash management sub-facility pursuant to which the bank may provide cash management services (which may include, among others, merchant services, direct deposit of payroll, business credit cards and check cashing services) and in connection therewith make loans and extend credit to the Company.
As of March 31, 2013, there were no borrowings on our Line of Credit, and we had approximately $31,400 of unused borrowing availability. As of December 31, 2012, we had $6,000 of borrowings outstanding under the Line of Credit and had approximately $25,400 of unused borrowing availability under this Line of Credit.
12. Long-Term Debt
Long-term debt consisted of the following:
March 31, 2013 |
December 31, 2012 |
|||||||
4.5% Convertible notes |
$ | 93,500 | $ | 93,500 | ||||
Term loan from commercial bank |
39,458 | 41,779 | ||||||
Promissory notes payable to microDATA sellers |
13,977 | 14,010 | ||||||
|
|
|
|
|||||
Total long-term debt |
146,935 | 149,289 | ||||||
Less: current portion |
(16,784 | ) | (16,784 | ) | ||||
|
|
|
|
|||||
Non-current portion of long-term debt |
$ | 130,151 | $ | 132,505 | ||||
|
|
|
|
13
Aggregate maturities of long-term debt (including interest) at March 31, 2013 are as follows:
2013 |
$ | 20,198 | ||
2014 |
114,819 | |||
2015 |
10,042 | |||
2016 |
9,671 | |||
2017 |
4,696 | |||
|
|
|||
Total long-term debt, including interest |
$ | 159,426 | ||
|
|
4.5% Convertible notes
On November 16, 2009, we sold $103,500 aggregate principal amount of 4.5% Convertible Senior Notes (the Original Notes) due 2014 and during the fourth quarter of 2012, we repurchased $10,000 of the outstanding Original Notes, plus accrued and unpaid interest. On May 2, 2013, we entered into separate, privately-negotiated exchange agreements under which we will retire $50,000 in aggregate principal of the Original Notes, in exchange for issuance of $50,000 in aggregate principal of new 7.75% Convertible Senior Notes due 2018 (the New Notes) as set forth in Subsequent Event Note 16.
The Original Notes are not registered and were offered under Rule 144A of the Securities Act of 1933. Concurrent with the issuance of the Original Notes, we entered into convertible note hedge transactions and warrant transactions, also detailed below, that are expected to reduce the potential dilution associated with the conversion of the Original Notes. Holders may convert the Original Notes at their option on any day prior to the close of business on the second scheduled trading day (as defined in the Indenture) immediately preceding November 1, 2014. The conversion rate will initially be 96.637 shares of Class A common stock per $1 (one thousand) principal amount of Original Notes, equivalent to an initial conversion price of approximately $10.35 per share of Class A common stock. The effect of the convertible note hedge and warrant transactions is an increase in the effective conversion premium of the Original Notes to $12.74 per share.
The convertible note hedge and the warrant transactions are separate transactions, each entered into by the Company with the counterparties, which are not part of the terms of the Original Notes and will not affect the holders rights under the Original Notes. The cost of the convertible note hedge transactions to the Company was approximately $23,800, and was accounted for as an equity transaction in accordance with ASC 815-40, Contracts in Entitys own Equity. The Company received proceeds of approximately $13,000 related to the sale of the warrants, which has also been classified as equity as the warrants meet the classification criteria under ASC 815-40-25, in which the warrants and the convertible note hedge transactions require settlements in shares and provide the Company with the choice of a net cash or common shares settlement. As the convertible note hedge and warrants are indexed to our common stock, we recognized them in permanent equity in Additional paid-in capital, and will not recognize subsequent changes in fair value as long as the instruments remain classified as equity.
Interest on the Original Notes is payable semiannually on November 1 and May 1 of each year, beginning May 1, 2010. The Original Notes will mature and convert on November 1, 2014, unless previously converted in accordance with their terms. The Original Notes are TCSs senior unsecured obligations and rank equally with all of its present and future senior unsecured debt and senior to any future subordinated debt. The Original Notes are structurally subordinate to all present and future debt and other obligations of TCSs subsidiaries and will be effectively subordinate to all of TCSs present and future secured debt to the extent of the collateral securing that debt.
During the fourth quarter of 2012, we repurchased $10,000 of the outstanding Original Notes, plus accrued and unpaid interest. The convertible note hedge was adjusted to reflect the reduced number of outstanding Original Notes. The convertible note hedge transactions originally covering 10,001 shares was adjusted to cover 9,036 of shares of Class A common stock. The warrants were not affected by the early conversion of the Original Notes in 2012. The warrants to purchase in the aggregate 10,001 shares of Class A common stock, subject to adjustments, at an exercise price of $12.74 per share of Class A common stock, remain outstanding.
Term loan from commercial bank
On July 6, 2012, we entered into the Fourth Amendment to the Loan and Security Agreement. As amended, the Loan Agreement provides for a $45,000 term loan (Term Loan) with the Silicon Valley Bank, as administrative agent and collateral agent (SVB), on behalf of certain entities that are parties to the Loan Agreement. Approximately $19,400 of the borrowings under the new term loan were used to pay off the existing indebtedness under its prior term loan with SVB and transaction fees associated with the Amendment, and approximately $20,000 were used as part of the acquisition of microDATA.
The Term Loan maturity date is June 30, 2017, except that if the Company fails to refinance, convert or extend its Original Notes which are scheduled to be paid in November 2014, all amounts due and outstanding on the Term Loan shall be due on June 30, 2014.
14
The amount outstanding under the Term Loan is payable as follows: (i) commencing with the monthly period ending July 31, 2012, three equal consecutive monthly installments of principal, each in the amount of $300 plus monthly payments of accrued interest and (ii) commencing with the monthly period ending October 31, 2012, fifty-seven equal consecutive monthly installments of principal, each in an amount equal to $774 plus monthly payments of accrued interest. The principal amount outstanding under the Term Loan shall accrue interest at a floating per annum rate equal to three-quarters of one percentage point (0.75%) above the Prime Rate (3.25% at March 31, 2013), which interest shall be payable monthly. The interest rate payable by the Company on the Term Loan prior to the Amendment was half of one percentage point (0.5%) above the Prime Rate.
The Loan Agreement contains customary representations and warranties of the Company and customary events of default. The Loan Agreement also contains covenants that requires (i) no material impairment in the perfection or priority of the Lenders lien in the collateral of the Loan Agreement, (ii) no material adverse change in the business, operations, or condition (financial or otherwise) of the Company, or (iii) no material impairment of the prospect of repayment of any portion of the borrowings under the Loan Agreement.
The Loan Agreement also contains covenants requiring the Company to maintain a minimum adjusted quick ratio and a fixed charge coverage ratio as well as other restrictive covenants including, among others, restrictions on the Companys ability to (i) dispose part of their business, property; (ii) change their business, liquidate or enter into certain extraordinary transactions; (iii) merge, consolidate or acquire stock or property of another entity; (iv) incur indebtedness, other that certain permitted indebtedness; (v) encumber their property; (vi) maintain certain accounts; (vii) pay or make dividends, other distributions or directly or indirectly make certain investments; (viii) enter into material transactions with an affiliate of the Company; (ix) repay indebtedness, (x) amend the terms of subordinated debt; and (xi) permit any subsidiary to maintain assets above a certain amount. As of March 31, 2013, we were in compliance with the covenants related to the Loan Agreement. If our future performance does not result in compliance with any of these restrictive covenants, we would seek to modify our financing arrangements. There can be no assurance that lenders would not exercise their rights and remedies under the Loan Agreement, including declaring all outstanding debt due and payable.
Promissory notes payable
On July 6, 2012, we issued $14,250 in promissory notes as part of the consideration paid for our acquisition of microDATA. The promissory notes are due in two installments: $7,500 plus interest due June 30, 2013 and $6,750, less adjustments of $273 as of March 31, 2013 for post-closing indemnifications, up to a maximum of $2,000, plus interest due June 30, 2014 and bear simple interest at 6%. The promissory notes are effectively subordinated to TCSs structured debt.
13. Capital Leases
We lease certain equipment under capital leases. Capital leases are collateralized by the leased assets. Amortization of leased assets is included in depreciation and amortization expense.
Future minimum payments under capital lease obligations consisted of the following at March 31, 2013:
2013 |
$ | 4,741 | ||
2014 |
4,038 | |||
2015 |
2,374 | |||
2016 |
835 | |||
2017 |
57 | |||
|
|
|||
Total minimum lease payments |
12,045 | |||
Less: amounts representing interest |
(671 | ) | ||
|
|
|||
Present value of net minimum lease payments (including current portion of $5,616) |
$ | 11,374 | ||
|
|
14. Income Taxes
The benefit for income taxes for the three months ended March 31, 2013 and 2012, respectively, totaled $799 and $314. The effective tax rate was 49% for the three months ended March 31, 2013.
We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.
15
15. Commitments and Contingencies
Some customers seek indemnification under their contractual arrangements with the Company for costs associated with defending lawsuits alleging infringement of certain patents through the use of our products and services, and the use of our products and services in combination with products and services of other vendors. In some cases we have agreed to assume the defense of the case. In others, the Company will continue to negotiate with these customers in good faith because the Company believes its technology does not infringe the cited patents and due to specific clauses within the customer contractual arrangements that may or may not give rise to an indemnification obligation. The Company cannot currently predict the outcome of these matters and the resolutions could have a material effect on our consolidated results of operations, financial position or cash flows.
Other than the items discussed immediately above, we are not currently subject to any other material legal proceedings. However, we may from time to time become a party to various legal proceedings arising in the ordinary course of our business.
16. Subsequent Event
On May 2, 2013, the Company entered into separate, privately-negotiated exchange agreements with existing noteholders under which it will retire, upon closing of the exchange transactions, $50,000 in aggregate principal of its outstanding 4.5% Convertible Senior Notes due 2014 issued in 2009 (the Original Notes) in exchange for its issuance of $50,000 in aggregate principal of new 7.75% Convertible Senior Notes due 2018 (the New Notes). The closing of the exchange transactions is expected to occur on May 7, 2013. Following these transactions, $43,500 in aggregate principal amount of the Original Notes will remain outstanding.
The New Notes will be issued pursuant to an indenture, dated as of May 7, 2013 (the Indenture), between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee).
The Company offered the New Notes to certain holders of the Original Notes in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. Shares of the Companys Class A common stock, into which the New Notes are convertible, have been reserved for issuance by the Company and will be listed on the Nasdaq Global Select Market.
The New Notes bear interest at a rate of 7.75% per year, payable semiannually in arrears in cash on June 30 and December 30 of each year, beginning on December 30, 2013.
Holders may convert the New Notes at their option on any day prior to the close of business on the second scheduled trading day (as defined in the Indenture) immediately preceding June 30, 2018. The conversion rate will initially be 96.637 shares of Class A common stock per $1 (one thousand) principal amount of New Notes, equivalent to an initial conversion price of approximately $10.348 per share of Class A common stock. This is the same conversion rate as the Original Notes.
The Company may redeem some or all of the New Notes at any time on or after June 30, 2014 at the redemption prices set forth in the Indenture plus accrued and unpaid interest to the redemption date. In addition, subject to certain exceptions, holders may require the Company to repurchase, for cash, all or part of their New Notes upon a fundamental change (as defined in the Indenture) at a price equal to the purchase prices set forth in the Indenture, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.
The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of not less than 25% in aggregate principal amount of the New Notes then outstanding may declare the entire principal amount of all the New Notes plus accrued interest, if any, to be immediately due and payable.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 (this Form 10-Q). This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. We generally identify forward-looking statements by the use of terms such as believe, intend, expect, may, should, plan, project, contemplate, anticipate, or other similar statements. Examples of forward looking statements in this Quarterly Report on Form 10-Q include, but are not limited to statements: (a) regarding our belief that our technology does not infringe the patents related to customer indemnification requests and that indemnification claims should not have a material effect on our results of operations; (b) regarding our expectations with regard to the notes and notes hedge transactions; (c) that we believe we have sufficient capital resources to fund our operations for the next twelve months; (d) relating to our backlog; (e) that we believe that capitalized software development costs will be recoverable from future gross profits; (f) regarding our belief that we were in compliance with our
16
loan covenants and that we believe that we will continue to comply with these covenants; (g) regarding our expectations with regard to income tax assumptions and future stock based compensation expenses; (h) regarding our assumptions related to goodwill; (i) that a significant underperformance relative to historical or projected future operating results, significant change in the manner of our use of 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; (j) relating to our R&D spending; and (k) regarding our reliance on funding by the U.S. government and any decrease in expenditures, the elimination or curtailment of a material program in which we are involved, or changes in payment patterns of our customers as a result of changes in U.S. government spending, could have a material adverse effect on our operating results, financial condition, and/or cash flows.
These forward-looking statements relate to our plans, objectives and expectations for future operations. We base these statements on our beliefs as well as assumptions made using information currently available to us. In light of the risks and uncertainties inherent in all such projected operational matters, the inclusion of forward-looking statements in this report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved or that any of our operating expectations will be realized. Revenues, results of operations, and other matters are difficult to forecast and our actual financial results realized could differ materially from the statements made herein, as a result of the risks and uncertainties described in our filings with the Securities and Exchange Commission. These include without limitation risks and uncertainties relating to our financial results and our ability to (i) continue to rely on our customers and other third parties to provide additional products and services that create a demand for our products and services, (ii) conduct our business in foreign countries, (iii) adapt and integrate new technologies into our products, (iv) develop software without any errors or defects, (v) protect our intellectual property rights, (vi) implement our business strategy, (vii) realize backlog, (viii) compete with small business competitors, (ix) effectively manage our counterparty risks, (x) achieve continued revenue growth in the foreseeable future in certain of our business lines, (xi) have sufficient capital resources to fund the Companys operations, and (xii) successfully integrate the assets and personnel obtained in our acquisitions. These factors should not be considered exhaustive; we undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We caution you not to put undue reliance on these forward-looking statements.
The information in this Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited consolidated financial statements, which have been prepared in accordance with GAAP for interim financial information.
Critical Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The preparation of these financial 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, |
| Business combinations, |
| Acquired intangible assets, |
| Goodwill, |
| Software development costs, |
| Marketable securities, |
| Stock compensation expense, |
| Income taxes, and |
| Legal and other contingencies |
17
This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in our 2012 Form 10-K.
Overview
Our business is reported using two business segments: (i) the Government Segment: We provide professional services including field support of deployable wireless systems and cybersecurity training to the U.S. Department of Defense and other government and foreign customers. We own and operate secure satellite teleport facilities, resell access to satellite airtime (known as space segment), and design, furnish, install and operate wireless communication systems and components, including our SwiftLink® deployable communication systems which integrate high speed, satellite, and, internet protocol technology with secure, federal government-approved cryptologic devices. (ii) the Commercial Segment: We are one of two leading companies that enable 9-1-1 call routing via cellular, Voice Over Internet Protocol (VoIP), and next generation technology. Other TCS hosted and managed services include cellular carrier infrastructure for text messaging and location-based platforms and applications, including turn-by-turn navigation and E9-1-1 call routing. Commercial segment customers include wireless carrier network operators, VoIP service providers, wireless device manufacturers, automotive industry suppliers, and state and local governments.
This Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations provides information that our management believes to be necessary to achieve a clear understanding of our financial statements and results of operations. You should read this Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations together with Item 1A Risk Factors and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in our 2012 Form 10-K as well as the unaudited interim consolidated financial statements and the notes thereto located elsewhere in this Form 10-Q.
Indicators of Our Financial and Operating Performance
Our management monitors and analyzes a number of performance indicators in order to manage our business and evaluate our financial and operating performance. Those indicators include:
| Revenue. We derive revenue from the sales of systems and services including recurring monthly service and subscriber fees, maintenance fees, software licenses and related service fees for the design, development, and deployment of software and communication systems, and products and services derived from the delivery of information processing, communication systems and components for governmental agencies. |
| Gross profit (revenue minus direct cost of revenue, including certain non-cash expenses). The major items comprising our cost of revenue are compensation and benefits, third-party hardware and software, network operation center and co-location facility operating expenses, amortization of capitalized software development costs, stock-based compensation, and overhead expenses. The costs of hardware and third-party software are primarily associated with the delivery of systems, and fluctuate from period to period as a result of the relative volume, mix of projects, level of service support required and the complexity of customized products and services delivered. Amortization of capitalized software development costs, including acquired technology, is associated with the recognition of revenue from our Commercial Segment. |
| Operating expenses. Our operating expenses are primarily compensation and benefits, professional fees, facility costs, marketing and sales-related expenses, and travel costs as well as certain non-cash expenses such as stock based compensation expense, depreciation and amortization of property and equipment, and amortization of acquired intangible assets. |
| Liquidity and cash flows. The primary driver of our cash flows is the results of our operations. Other important sources of our liquidity are our capacity to borrow, through our bank credit and term loan facility and other markets; lease financing for the purchase of equipment; and access to the public equity market. |
| Balance sheet. We view cash, working capital, and accounts receivable balances and days revenue outstanding as important indicators of our financial health. |
Results of Operations
We develop and deliver highly reliable and secure wireless communication technology. Our mobile cloud computing services provide wireless applications and operator infrastructure for 9-1-1 call routing, navigation, asset and social applications, telematics, and text messaging. Our engineered satellite-based solutions incorporate cybersecurity expertise, and include base station management, deployable solutions for mission-critical communications with expert field support, and professional services including training.
18
The comparability of our operating results in the first quarter of 2013 to the first quarter of 2012 is affected by our 2012 acquisition of microDATA, GSI, Inc. which occurred on July 6, 2012. Where changes in our results of operations from the first quarter of 2013 compared to the first quarter of 2012 are clearly related to this acquisition, such as revenue and increases in amortization of intangibles, we quantify the effects. This acquisition did not result in our entry into a new line of business or product category since it added products and services similar to those provided by our Commercial Segment.
Revenue and Cost of Revenue
The following discussion addresses the revenue, direct cost of revenue, and gross profit for our two business segments:
Government Segment
Three Months Ended March 31, |
2013 vs. 2012 | |||||||||||||||
($ in millions) | 2013 | 2012 | $ | % | ||||||||||||
Services revenue |
$ | 36.1 | $ | 33.3 | $ | 2.8 | 8 | % | ||||||||
Systems Revenue |
16.7 | 23.5 | (6.8 | ) | (29 | %) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total Government Segment Revenue |
52.8 | 56.8 | (4.0 | ) | (7 | %) | ||||||||||
Direct cost of services |
25.4 | 25.2 | 0.2 | 1 | % | |||||||||||
Direct cost of systems |
13.9 | 18.3 | (4.4 | ) | (24 | %) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total Government Segment cost of revenue |
39.3 | 43.5 | (4.2 | ) | (10 | %) | ||||||||||
Services gross profit |
10.7 | 8.1 | 2.6 | 32 | % | |||||||||||
% of revenue |
30 | % | 24 | % | ||||||||||||
Systems gross profit |
2.8 | 5.2 | (2.4 | ) | (46 | %) | ||||||||||
|
|
|
|
|
|
|||||||||||
% of revenue |
17 | % | 22 | % | ||||||||||||
Total Government Segment gross profit1 |
$ | 13.5 | $ | 13.3 | $ | 0.2 | 2 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Segment gross profit as a percentage of revenue |
26 | % | 23 | % |
1 | See discussion of segment reporting in Note 7 to the accompanying unaudited consolidated financial statements. |
The primary customers of this segment are U.S. government agencies such as Department of Defense (DoD) and Homeland Security, and the contractors that supply products and services to these government customers. TCS is a prime contractor on several multi-year, multi-billion dollar contracts, some of which are indefinite-delivery, indefinite quantity or IDIQ contracts, through which this segment generates much of its revenue. As a result, we rely on funding by the U.S. government for the programs in which we are involved. These funding levels follow the cycle of general public policy and political support for this type of spending. Moreover, although our contracts often contemplate that our services will be performed over a period of several years, the Executive Branch must propose and Congress must approve funds for a given program each government fiscal year and may significantly change increase, reduce or eliminate funding for a program. A decrease in expenditures, the elimination or curtailment of a material program in which we are involved, or changes in payment patterns of our customers as a result of changes in U.S. government spending, could have a material adverse effect on our operating results, financial condition, and/or cash flows.
Government Services Revenue, Cost of Revenue, and Gross Profit:
Government services revenue is generated from professional communications engineering and field support, cyber security training, program management, help desk outsource, network design and management for government agencies, as well as operation of teleport (fixed satellite ground terminal) facilities for data connectivity via satellite, including resale of satellite airtime. Systems maintenance fees are usually collected in advance and recognized ratably over the contractual maintenance periods. Government services revenue increased $2.8 million, or 8% for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, as a result of higher volume of field service support work and in-building wireless projects, and higher cyber security training revenue.
Direct cost of government services revenue consists of compensation, benefits and travel expenses incurred in delivering these services, as well as satellite space segment purchased for resale. These costs increased as a result of the increased volume of services.
Our gross profit from government services increased $2.6 million, or 32% in the first quarter of 2013 compared to the first quarter of 2012, reflecting the higher volume and more favorable margin mix of service business. Government services gross profit was 30% and 24% of government services revenue first quarter of 2013 and 2012, respectively.
19
Government Systems Revenue, Cost of Revenue, and Gross Profit:
We generate government systems revenue from selling secure wireless 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. Department of Defense and other federal agencies. Our government systems revenue also includes electronic components. Government systems sales decreased $6.8 million, or 29% in the first quarter of 2013 as compared the first quarter of 2012, due mainly to the timing of shipments of our foreign space program components and our deployable communication systems.
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 periods as a direct result of changes in volume. These equipment and third-party costs are variable for our different products, so that margins fluctuate between periods based on pricing and product mix.
Our government systems gross profit was $2.4 million, or 46% lower in the first quarter of 2013 than in the first quarter of 2012, on lower sales volume. Government systems gross profit was 17% and 22% of government systems revenue in the first quarter of 2013 and 2012, respectively.
Commercial Segment
Three Months Ended March 31, |
2013 vs. 2012 | |||||||||||||||
($ in millions) | 2013 | 2012 | $ | % | ||||||||||||
Services revenue |
$ | 37.4 | $ | 39.0 | $ | (1.6 | ) | (4 | %) | |||||||
Systems Revenue |
4.6 | 4.2 | 0.4 | 10 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Commercial Segment Revenue |
42.0 | 43.2 | (1.2 | ) | (3 | %) | ||||||||||
Direct cost of services |
16.4 | 19.0 | (2.6 | ) | (14 | %) | ||||||||||
Direct cost of systems |
3.6 | 3.1 | 0.5 | 16 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total Commercial Segment cost of revenue |
20.0 | 22.1 | (2.1 | ) | (10 | %) | ||||||||||
Services gross profit |
21.0 | 20.0 | 1.0 | 5 | % | |||||||||||
% of revenue |
56 | % | 51 | % | ||||||||||||
Systems gross profit |
1.0 | 1.1 | (0.1 | ) | (9 | %) | ||||||||||
|
|
|
|
|
|
|||||||||||
% of revenue |
22 | % | 26 | % | ||||||||||||
Total Commercial Segment gross profit1 |
$ | 22.0 | $ | 21.1 | $ | 0.9 | 4 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Segment gross profit as a percentage of revenue |
52 | % | 49 | % |
1 | See discussion of segment reporting in Note 7 to the accompanying unaudited consolidated financial statements. |
Commercial Services Revenue, Cost of Revenue, and Gross Profit:
Our commercial services revenue is generated from hosting and maintaining software and networks for public safety 9-1-1 service for wireless, Voice over Internet Protocol (VoIP) service providers, and operators of next generation 9-1-1 infrastructure (mainly state and local governments), as well as applications and infrastructure software for Location-Based Services (LBS) including turn-by-turn navigation and locator applications, and maintenance of text messaging platform software. This revenue primarily consists of monthly recurring service fees recognized in the month earned. 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. Subscriber service revenue is generated by client software applications for wireless subscribers, generally on a per-subscriber per month basis. 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. Services also include custom software development, implementation and related service projects under time and materials or fixed-fee contracts, which are reported using percentage-of-completion accounting.
Commercial services revenue in the first quarter of 2013 was 4% lower than the first quarter of 2012. Higher revenue from 9-1-1 business, network monitoring, and other professional services revenue over the first quarter of 2012 was offset by lower pricing and volume from navigation application services, mainly due to a wireless carrier navigation application contract change reported in the second quarter of 2012. Commercial services revenue in the first quarter of 2013 includes $0.8 million from the acquired microDATA business.
20
The direct cost of our services revenue consists primarily of compensation and benefits, licensed location-based application content, network access, data feed and circuit costs for network operation centers and co-location facilities, and equipment and software maintenance. For the three months ended March 31, 2013, the direct cost of commercial services revenue decreased $2.6 million, or 14% compared to the first quarter of 2012, reflecting a decrease in labor and direct costs related to custom development efforts responding to customer requests, and deployment requirements for wireless and VoIP E-9-1-1. The direct cost of services includes amortization of capitalized software development costs of $0.3 million and $1.7 million in each of the three months ended March 31, 2013 and 2012, respectively. The decrease in amortization of capitalized software development costs in the first quarter of 2013 compared to the first quarter of 2012 reflects the write-down of some intangible assets in the second quarter of 2012.
Commercial services gross profit in the first quarter of 2013 was $1.0 million, or 5% higher than in the three months ended March 31, 2012, reflecting the shifts in mix of business between public safety 9-1-1 and carrier-branded wireless applications.
Commercial Systems Revenue, Cost of Revenue, and Gross Profit:
We sell communications systems to wireless carriers and state and local governments incorporating our licensed software for enablement of 9-1-1- call routing and computer-aided responder dispatch, including Next Generation 9-1-1 technology, enabling the public to transmit text, images and video to Public Service Answering Points, and location-based wireless services and text messaging. In July 2012, we acquired microDATA, which expanded our share of the market for Next Generation 9-1-1 technology. Revenue from our larger deployments of Next Generation 9-1-1 technology, incorporating our software and third party components, are long term contracts reported using percentage of completion accounting. We recognize revenue from the sale of patents and licensing of our intellectual property including payments for past patent infringement liabilities, upfront and non-refundable license fees, and royalty fees. Licensing fees for our carrier software are generally a function of its volume of usage in our customers networks during the relevant period. In all cases, revenue from the licensing of our intellectual property is recognized when all of four of the revenue recognition criteria are met.
Commercial systems revenue increased $0.4 million, or 10%, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Our Next Generation 9-1-1 technology contributed $1.6 million of new systems revenue during the first quarter of 2013 compared to $1.4 million generated in the first quarter of 2012, including a full quarter of microDATA sales. First quarter 2013, also includes proceeds from our intellectual property monetization activity, which was not included in the first quarter of 2013. This additional first quarter 2013 revenue was offset by lower commercial wireless carrier infrastructure sales compared to the first quarter of 2012.
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, consulting fees as well as the amortization of acquired and capitalized software development costs. The direct cost of commercial systems increased $0.5 million, or 16% in the first three months of 2013 as compared to the first three months of 2012, reflecting an increase in labor and direct costs for customer-requested custom messaging and location-based system development projects. The direct cost of systems includes amortization of capitalized software development costs of $1.4 million and $0.9 million for the three months ended March 31, 2013 and 2012, respectively.
Our commercial systems gross profit decreased $0.1 million, or 9% in the three months ended March 31, 2013 versus the comparable period of 2012, as the mix in 2013 included Next Generation 9-1-1 deployment projects, which had lower margins.
Revenue Backlog
We had unfilled orders or backlog as follows:
Three Months Ended March 31, |
2013 vs. 2012 | |||||||||||||||
($ in millions) |
2013 | 2012 | $ | % | ||||||||||||
Funded backlog: |
||||||||||||||||
Commercial Segment |
$ | 225.7 | $ | 235.0 | $ | (9.3 | ) | (4 | %) | |||||||
Government Segment |
83.4 | 179.8 | (96.4 | ) | (54 | %) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total funded contract backlog |
$ | 309.1 | $ | 414.8 | $ | (105.7 | ) | (25 | %) | |||||||
|
|
|
|
|
|
|||||||||||
Total backlog: |
||||||||||||||||
Commercial Segment |
$ | 225.7 | $ | 235.0 | $ | (9.3 | ) | (4 | %) | |||||||
Government Segment |
841.5 | 996.2 | (154.7 | ) | (16 | %) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total backlog of orders and commitments, including customer options |
$ | 1,067.2 | $ | 1,231.2 | $ | (164.0 | ) | (13 | %) | |||||||
|
|
|
|
|
|
|||||||||||
Backlog expected to be realized within next 12 months |
$ | 195.2 | $ | 283.1 | $ | (87.9 | ) | (31 | %) | |||||||
|
|
|
|
|
|
21
Funded contract backlog represents contracts for which fiscal year funding has been appropriated by the our customers (mainly federal agencies), and for hosted services (mainly for wireless carriers); backlog is computed by multiplying the most recent months contract or subscription revenue times the remaining months under existing long-term agreements, which 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, and could expire unused. Our 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. The timing and amounts of government contract funding may be adversely affected by federal budget policy decision like handling of sequestration and can lead to delays in procurement of our products and services due to lack of funding. Some of our backlog could be canceled for causes such as late delivery, poor performance and other factors. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual revenue.
Operating Expenses
Research and development expense:
Three Months Ended March 31, |
2013 vs. 2012 | |||||||||||||||
($ in millions) |
2013 | 2012 | $ | % | ||||||||||||
Research and development expense |
$ | 8.5 | $ | 8.7 | (0.2 | ) | (2 | %) | ||||||||
Percent of total revenue |
9 | % | 9 | % |
Our research and development (R&D) 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 R&D 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 until technological feasibility has been reached and we believe that capitalized costs will be recoverable, upon which we capitalize and amortize them over the products expected life.
We incur R&D expense for software mainly used by commercial network operators and government customers. Throughout the reporting periods our R&D efforts were primarily focused on wireless location Voice over IP E9-1-1 and Next Generation 9-1-1, secure satellite-based communication technology for government customers and applications for network operators, telematics supply chain and network security. We continually assess our spending on R&D to ensure our resources are focused on technology that is expected to achieve the highest level of success.
R&D expense decreased $0.2 million, or 2% in 2013 from 2012 as of some developers worked on custom development efforts (reported as cost of revenue), and there was a reduction in headcount.
Our R&D expenditures and acquisitions have yielded a portfolio of more than 275 patents, and more than 360 patent applications are pending, primarily for wireless messaging and location technology. During 2012 we began a systematic program of monetizing this portfolio through patent and license sales and other arrangements with partners and licensees.
Sales and marketing expense:
Three Months Ended March 31, |
2013 vs. 2012 | |||||||||||||||
($ in millions) |
2013 | 2012 | $ | % | ||||||||||||
Sales and marketing expense |
$ | 8.1 | $ | 7.5 | $ | 0.6 | 8 | % | ||||||||
Percent of total revenue |
8 | % | 8 | % |
Our sales and marketing expenses include fixed and variable compensation and benefits, trade show expenses, travel costs, advertising and public relations costs as well as a proportionate share of facility-related costs which are expensed as incurred. Our marketing efforts also include speaking engagements and attending and sponsoring industry conferences including our annual SwiftLink Users Forum. We sell our solutions 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 $0.6 million, or 8% in the first three months of 2013 compared to the first quarter of 2012 reflecting expenditures for higher key trade event visibility.
22
General and administrative expense:
Three Months Ended March 31, |
2013 vs. 2012 | |||||||||||||||
($ in millions) |
2013 | 2012 | $ | % | ||||||||||||
General and administrative expense |
$ | 13.7 | $ | 12.4 | $ | 1.3 | 10 | % | ||||||||
Percent of total revenue |
14 | % | 12 | % |
General and administrative (G&A) expense primarily represents management, finance, legal (including intellectual property management), 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 $1.3 million, or 10% increase in the first quarter of 2013 compared to the first quarter of 2012 is mainly due to nonrecurring expenses associated with staffing level adjustments, higher healthcare benefit costs, and incremental G&A costs associated with the microDATA acquisition.
Depreciation and amortization of property and equipment:
Three Months Ended March 31, |
2013 vs. 2012 | |||||||||||||||
($ in millions) |
2013 | 2012 | $ | % | ||||||||||||
Depreciation and amortization of property and equipment |
$ | 3.5 | $ | 3.4 | $ | 0.1 | 3 | % | ||||||||
Average gross cost of property and equipment during the period |
$ | 122.5 | $ | 117.3 |
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 hosted applications. We compute depreciation and amortization using the straight-line method over the estimated useful lives of the assets, generally five years for furniture, fixtures, and leasehold improvements, and three to seven years for other types of assets including computers, software, and telephone equipment. Depreciation expense has increased year-over-year as a result of cumulative capital expenditures made over time. Our depreciable asset base increased in the first quarter of 2013 primarily as a result of additions to property and equipment of about $2.5 million.
Amortization of acquired intangible assets:
Three Months Ended March 31, |
2013 vs. 2012 | |||||||||||||||
($ in millions) |
2013 | 2012 | $ | % | ||||||||||||
Amortization of acquired intangible assets |
$ | 1.1 | $ | 1.4 | $ | (0.3 | ) | 21 | % |
The amortization of acquired intangible assets results from our acquisitions.These assets are being amortized over their estimated useful lives of between four and nineteen years. Amortization of acquired intangibles decreased $0.3 million, or 21% in the first three months of 2013 compared to the first three months of 2012 as a result of the lower accounting basis for amortization after the 2012 write-down of the acquired Navigation (formerly Networks in Motion) reporting unit intangibles, partly offset by the additional amortization resulting from the 2012 acquisition of microDATA.
Interest expense:
Three Months Ended March 31, |
2013 vs. 2012 | |||||||||||||||
($ in millions) |
2013 | 2012 | $ | % | ||||||||||||
Interest expense incurred on bank and other notes payable |
$ | 0.6 | $ | 0.2 | $ | 0.4 | 200 | % | ||||||||
Interest expense incurred on 4.5% convertible notes financing |
1.1 | 1.2 | (0.1 | ) | 8 | % | ||||||||||
Interest expense incurred on capital lease obligations |
0.2 | 0.2 | | | ||||||||||||
Amortization of deferred financing fees |
0.3 | 0.2 | 0.1 | 50 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total interest and financing expense |
$ | 2.2 | $ | 1.8 | $ | 0.4 | 22 | % | ||||||||
|
|
|
|
|
|
Interest expense is incurred on bank and other notes payable, convertible notes financing, and capital lease obligations. Financing expense reflects amortization of deferred up-front fees at the time of contracting for financing arrangements, which are being amortized over the term of the debt or the life of the facility.
Our interest and financing expense was higher in the first quarter of 2013 compared to the first quarter of 2012 as a result of higher average term debt outstanding, and interest on the microDATA seller notes.
23
On July 6, 2012 our bank term loan and revolving credit facility was amended. Interest on our term loan was reduced to a floating per annum rate equal to three quarters of a percentage point (0.75%) above the banks prime rate (3.25% at March 31, 2013.) See Liquidity and Capital Resources for additional details. Prior to the amendment the interest rate was 0.5% plus the greater of (i) 4% or (ii) the banks prime rate.
Effective on July 6, 2012, interest on any borrowings under our line of credit arrangement is 0.5% above the prime rate. Prior to the amendment the interest rate was at the greater of (i) 4% per annum, or (ii) the banks prime rate. At March 31, 2013 we had no borrowings under the line and approximately $31.4 million of availability. Interest and fees on our line of credit in the three months ended March 31, 2013 and 2012 were de minimis.
On November 16, 2009, we sold $103.5 million of 4.5% convertible senior notes due 2014 (Original Notes), see Note 12 in the Notes to the Consolidated Financial Statements above. Interest on the Original Notes is payable semiannually on November 1 and May 1 of each year, beginning May 1, 2010. The Original Notes will mature and convert on November 1, 2014, unless previously converted in accordance with their terms. Interest expense on the term loan decreased $0.1 million, or 8%, as a result of the fourth quarter of 2012 repurchase of $10 million of the Original Notes.
On July 6, 2012, we issued $14.3 million in promissory notes to sellers as part of the consideration for the acquisition of microDATA. The promissory notes bear simple interest at 6% and are due in two installments: $7.5 million plus interest due June 30, 2013 and $6.8 million, less adjustments for post-closing indemnifications of $0.3 million as of March 31, 2013 up to $2.0 million, plus interest due June 30, 2014.
Our capital lease obligations include interest at various stated rates averaging about 5% per annum. Our interest under capital leases fluctuates depending on the amount of capital lease obligations in each year.
Other income/(expense), net:
Other income (expense), net, includes adjustments to the estimated payments under earnout arrangements that were part of the consideration for our 2012 acquisition, as well as interest income, realized gain or loss on disposals of property and equipment, realized gain or loss on investment accounts and foreign currency transaction gain or loss, which is dependent on exchange rate fluctuations. Other income (expense), net also includes the effects of foreign currency revaluation on our cash, receivables, and deferred revenues that are stated in currencies other than U.S dollars.
Income taxes:
In the first quarter of 2013, we recorded a tax benefit of $0.8 million, representing an effective tax rate of 49%. Income tax benefit was $0.3 million for the first quarter of 2012, representing an effective tax rate of 46%.
Net loss:
Three Months Ended March 31, |
2013 vs. 2012 | |||||||||||||||
($ in millions) |
2013 | 2012 | $ | % | ||||||||||||
Net loss |
$ | (0.8 | ) | $ | (0.4 | ) | $ | (0.4 | ) | (100 | )% |
24
First quarter 2013 net loss was $0.4 million higher than for the first quarter of 2012 due to the factors detailed above.
Liquidity and Capital Resources
Three Months Ended March 31, |
2013 vs . 2012 | |||||||||||||||
($ in millions) |
2013 | 2012 | $ | % | ||||||||||||
Net cash and cash equivalents provided by/(used in): |
||||||||||||||||
Operating activities: |
||||||||||||||||
Net loss |
$ | (0.8 | ) | $ | (0.4 | ) | $ | (0.4 | ) | 100 | % | |||||
Non-cash charges |
10.5 | 11.9 | (1.4 | ) | (12 | )% | ||||||||||
Deferred income tax provision |
(0.8 | ) | (0.3 | ) | (0.5 | ) | 167 | % | ||||||||
Net changes in working capital including changes in other assets |
10.4 | (3.7 | ) | 14.1 | 381 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Net operating activities |
19.3 | 7.5 | 11.8 | 157 | % | |||||||||||
Investing activities: |
||||||||||||||||
Proceeds from sale and maturity of marketable securities, net |
1.1 | 2.0 | (0.9 | ) | (45 | )% | ||||||||||
Purchases of property and equipment |
(2.5 | ) | (8.2 | ) | 5.7 | (0.7 | ) | |||||||||
Capital purchases funded through leases |
0.6 | 1.9 | (1.3 | ) | (68 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Purchases of property and equipment, net of assets funded through leases |
(1.9 | ) | (6.3 | ) | 4.4 | 70 | % | |||||||||
Capitalized software development costs |
(0.9 | ) | (0.1 | ) | (0.8 | ) | (800 | )% | ||||||||
|
|
|
|
|
|
|||||||||||
Net investing activities |
(1.7 | ) | (4.4 | ) | 2.7 | (61 | )% | |||||||||
Financing activities: |
||||||||||||||||
Payments on long-term debt and capital leases |
(9.9 | ) | (13.5 | ) | 3.6 | 27 | % | |||||||||
Proceeds from bank borrowings |
| 3.5 | ||||||||||||||
Other financing activities |
(0.4 | ) | 0.1 | (0.5 | ) | (500 | )% | |||||||||
|
|
|
|
|
|
|||||||||||
Net financing activities |
(10.3 | ) | (9.9 | ) | (0.4 | ) | (4 | )% | ||||||||
Net change in cash and cash equivalents |
$ | 7.3 | $ | (6.8 | ) | 14.1 | 207 | % | ||||||||
|
|
|
|
|||||||||||||
Days revenue outstanding in accounts receivable including unbilled receivables |
79 | 81 |
Capital resources: We have funded our operations, acquisitions, and capital expenditures primarily using cash generated by operations, debt and capital leases, and issuance of public equity.
Sources and uses of cash: At March 31, 2013, our cash and cash equivalents balance was $43.9 million and when added to marketable securities, our total liquid funds were $57.5 million. At the beginning of the quarter, our cash and cash equivalents were $36.6 million, and when marketable securities were added, our total liquid funds were $51.5 million.
Operations: Cash of $19.3 million was provided by operations during the first quarter of 2013, compared to $7.5 million cash generated by operations in the first quarter of 2012. The first quarter 2013 increase in working capital over the year end 2012 level was comprised of a decrease in accounts receivable and unbilled receivables, a decrease in deferred revenue due to timing of percentage of completion projects, and a decrease in accrued payroll and related liabilities to do the timing of payments.
Investing activities: First quarter of 2013 fixed asset additions, including software for internal use and excluding assets funded by leasing, was $1.9 million compared to $6.3 million in 2012. Also, first quarter investments in development of carrier software for resale which had reached the stage of development calling for capitalization were $0.9 million in 2013 and $0.1 million in 2012. We received a net $1.1 million from the sale and maturity of marketable securities in the first quarter of 2013, compared to $2.2 million received in marketable securities during the first quarter of 2012.
Financing activities: Financing activities during the first quarter of 2013 included $9.9 million of scheduled payments on bank borrowings and capital leasing. Fixed assets acquired under capital leases cost $0.6 and $1.9 million during the three months ended March 31, 2013 and 2012, respectively.
Capital Resources: Subsequent to the end of the first quarter 2013, we entered into separate, privately-negotiated exchange agreements under with existing noteholders under which we will retire, upon closing of the exchange transactions, $50.0 million in aggregate principal of our outstanding 4.5% Convertible Senior Notes due 2014 issued in 2009 (the Original Notes) in exchange for issuance of $50.0 million in aggregate principal of new 7.75% Convertible Senior Notes due 2018 (the New Notes). The closing of the exchange transactions is expected to occur on May 7, 2013. Following these transactions, $43.5 million in aggregate principal amount of the Original Notes will remain outstanding.
25
The New Notes will be issued pursuant to an indenture, dated as of May 7, 2013 (the Indenture), between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee).
The Company offered the New Notes to certain holders of the Original Notes in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. Shares of the Companys Class A common stock, into which the New Notes are convertible, have been reserved for issuance by the Company and will be listed on the Nasdaq Global Select Market.
The New Notes bear interest at a rate of 7.75% per year, payable semiannually in arrears in cash on June 30 and December 30 of each year, beginning on December 30, 2013.
Holders may convert the New Notes at their option on any day prior to the close of business on the second scheduled trading day (as defined in the Indenture) immediately preceding June 30, 2018. The conversion rate will initially be 96.637 shares of Class A common stock per $0.1 (one thousand) principal amount of New Notes, equivalent to an initial conversion price of approximately $10.348 per share of Class A common stock. This is the same conversion rate as the Original Notes
The Company may redeem some or all of the New Notes at any time on or after June 30, 2014 at the redemption prices set forth in the Indenture plus accrued and unpaid interest to the redemption date. In addition, subject to certain exceptions, holders may require the Company to repurchase, for cash, all or part of their New Notes upon a fundamental change (as defined in the Indenture) at a price equal to the purchase prices set forth in the Indenture, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.
The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of not less than 25% in aggregate principal amount of the New Notes then outstanding may declare the entire principal amount of all the New Notes plus accrued interest, if any, to be immediately due and payable.
The Original Notes are not registered and were offered under Rule 144A of the Securities Act of 1933. Concurrent with the issuance of the Original Notes, we entered into convertible note hedge transactions and warrant transactions, also detailed below, that are expected to reduce the potential dilution associated with the conversion of the Original Notes. Holders may convert the Original Notes at their option on any day prior to the close of business on the second scheduled trading day (as defined in the Indenture) immediately preceding November 1, 2014. The conversion rate is initially be 96.637 shares of Class A common stock per $0.1 (one thousand) principal amount of Original Notes, equivalent to an initial conversion price of approximately $10.35 per share of Class A common stock. The effect of the convertible note hedge and warrant transactions, described below, is an increase in the effective conversion premium of the Original Notes to 60% above the November 10th closing price, to $12.74 per share.
The convertible note hedge and the warrant transactions are separate transactions, each entered into by the Company with the counterparties, which are not part of the terms of the Original Notes and will not affect the holders rights under the Original Notes. The cost of the convertible note hedge transactions to the Company was approximately $23.8 million, and has been accounted for as an equity transaction in accordance with ASC 815-40, Contracts in Entitys own Equity. The Company received proceeds of approximately $13 million related to the sale of the warrants, which has also been classified as equity as the warrants meet the classification criteria under ASC 815-40-25, in which the warrants and the convertible note hedge transactions require settlements in shares and provide the Company with the choice of a net cash or common shares settlement. As the convertible note hedge and warrants are indexed to our common stock, we recognized them in permanent equity in Additional paid-in capital, and will not recognize subsequent changes in fair value as long as the instruments remain classified as equity.
During the fourth quarter of 2012, we repurchased $10 million of the Original Notes, plus accrued and unpaid interest and we recorded a gain on the early retirement of $0.4 million. The convertible note hedge was adjusted to reflect the reduced amount of outstanding Original Notes. The convertible note hedge transactions originally covering 10 million shares was adjusted to cover 9 million of shares of Class A common stock. The warrants were not affected by the partial repurchase of the Original Notes in 2012. The warrants to purchase in the aggregate 10 million shares of Class A common stock, subject to adjustments, at an exercise price of $12.74 per share of Class A common stock, remain outstanding.
Effective July 6, 2012, our Loan Agreement was amended (the Amendment.) The $35 million revolving Line of Credit (the Line of Credit) maximum availability amount was unchanged. The Line of Credit maturity date is June 30, 2014 and accrues interest at a floating per annum rate equal to one-half of one percentage point (0.50%) above the Prime Rate (3.25% at March 31, 2013.) Prior to the Amendment, the interest on the Line of Credit was accrued at the greater of (i) 4% per annum, or (ii) the banks prime rate. The principal amount under the Line of Credit is payable either prior to or on the maturity date and interest on the Line of Credit is payable
26
monthly. As of March 31, 2013, there was no outstanding borrowing under the Line of Credit and we had approximately $31.4 million of unused borrowing availability. Borrowings under the Line of Credit at any time are limited to an amount based principally on accounts receivable levels and working capital ratio. The Line of Credit available is also reduced by the amount of letters of credit outstanding and a cash management services sublimit of $3.6 million as of March 31, 2013. The principal amount outstanding under the Line of Credit is payable either prior to or on the maturity date and interest on the Line of Credit is payable monthly.
The amended Loan Agreement provides for a $45 million term loan (the Term Loan) replacing our existing $40 million term loan with Silicon Valley Bank (SVB), as administrative and collateral agent, on behalf of entities that are parties to the Loan Agreement. On July 6, 2012, we borrowed $45 million under the Term Loan. Approximately $19 of the borrowings under the Term Loan were used to pay off our existing indebtedness under its prior term loan with SVB and transaction fees associated with the Amendment, and approximately $20 million was used as part of the acquisition of privately-held microDATA.
The principal amount outstanding under the Term Loan is payable as follows: (i) three equal monthly installments of principal of $0.3 million plus monthly payments of accrued interest beginning on July 31, 2012, and (ii) fifty seven equal monthly installments of principal of $0.8 million plus monthly payments of accrued interest beginning October 31, 2012. The principal amount outstanding under the Term Loan accrues interest at a floating per annum rate equal to three quarters of one percentage point (0.75%) above the Prime Rate. The interest rate payable on our Term Loan prior to the Amendment was half of one percentage point (0.5%) above the Prime Rate. The prior definition of Prime Rate had a 4.0% minimum, and the current definition does not have such a minimum.
The Term Loan matures on June 30, 2017, except that if the Company fails to refinance, convert or extend its existing convertible Original Notes which are scheduled to be paid in November 2014, by June 30, 2014, all amounts due and outstanding on the Term Loan will be due and payable on June 30, 2014.
The Loan Agreement is secured by all of the Companys tangible and intangible assets, including all intellectual property. In addition, any notes issued by the Company and any earn-out arrangements entered into by the Company are subordinated to the Loan Agreement.
The Loan Agreement contains customary representations and warranties of the Company and customary events of default. The Loan Agreement also contains covenants that require (i) no material impairment in the perfection or priority of the lenders lien in the collateral of the Loan Agreement, (ii) no material adverse change in the business, operations, or condition (financial or otherwise) of the Companys, or (iii) no material impairment of the prospect of repayment of any portion of the borrowings under the Loan Agreement. The Loan Agreement also contains covenants requiring the Company to maintain a minimum adjusted quick ratio and a fixed charge coverage ratio as well as other restrictive covenants including, among others, restrictions on the Companys ability to (i) dispose of part of their business, property; (ii) change their business, liquidate or enter into certain extraordinary transactions; (iii) merge, consolidate or acquire stock or property of another entity; (iv) incur indebtedness, other than certain permitted indebtedness; (v) encumber their property; (vi) maintain certain accounts; (vii) pay or make dividends, other distributions or directly or indirectly make certain investments; (viii) enter into material transactions with an affiliate of the Company; (ix) repay indebtedness, (x) amend the terms of subordinated debt; and (xi) permit any subsidiary to maintain assets above a certain amount. As of March 31, 2013, we were in compliance with the covenants related to the Loan Agreement. We believe that we will continue to comply with these covenants. If our future performance does not result in compliance with any of these restrictive covenants, we would seek to modify our financing arrangements. There can be no assurance that the lenders would not exercise their rights and remedies under the Loan Agreement, including declaring all outstanding debt due and payable.
On July 6, 2012, we issued $14.3 million in promissory notes as part of the consideration paid for the acquisition of microDATA. The promissory notes bear simple interest at 6% and are due in two installments: $7.5 million plus interest due June 30, 2013 and $6.8 million, less adjustments for post-closing indemnifications, of $0.3 million, up to $2.0 million, plus interest due June 30, 2014. The promissory notes are effectively subordinated to our structured debt and structurally subordinated to any of our present and future indebtedness and other obligations of our subsidiaries.
We currently believe that we have sufficient capital resources with cash generated from operations as well as cash on hand to meet our anticipated cash operating expenses, working capital, and capital expenditure and debt service needs for the next twelve months. We have a Line of Credit arrangement through June 2014, and borrowing capacity available to us under a capital lease facility. The remainder of the outstanding Original Notes mature in December 2014 and the New Notes mature in 2018. We may also consider raising capital in the public markets as a means to meet our capital needs and to invest in our business. Although we may need to return to the capital markets, establish new credit facilities, raise capital in private transactions in order to meet our capital requirements, or repurchase the remainder of the outstanding Original Notes, we can offer no assurances that we will be able to access these potential sources of funds on terms acceptable to us or at all.
27
Contractual Commitments
As of March 31, 2013, our most significant commitments consisted term debt, non-cancelable operating leases, purchase obligations, and obligations under capital leases. Contractual acquisition earnouts consist of contingent consideration included as part of the purchase price allocation for our 2012 acquisition. We lease certain furniture and computer equipment under capital leases. We lease office space and equipment under non-cancelable operating leases. Purchase obligations represent contracts for parts and services in connection with our government satellite services and systems offerings. As of March 31, 2013 our commitments consisted of the following:
($ in millions) |
Within 12 Months |
1-3 Years |
3-5 Years |
More than 5 Years |
Total | |||||||||||||||
4.5% Convertible notes obligation |
$ | 4.2 | $ | 97.7 | $ | | $ | | $ | 101.9 | ||||||||||
Operating lease |
7.1 | 15.6 | 2.2 | | 24.9 | |||||||||||||||
Commercial bank debt |
10.7 | 20.3 | 11.9 | | 42.9 | |||||||||||||||
Promissory note, adjusted for post-closing indemnifications |
8.0 | 6.6 | | | 14.6 | |||||||||||||||
Capital lease obligations |
6.0 | 5.5 | 0.3 | 0.2 | 12.0 | |||||||||||||||
Purchase obligations |
7.4 | 2.9 | | | 10.3 | |||||||||||||||
Contractual acquisition earnouts |
0.5 | | | | 0.5 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total contractual commitments |
$ | 43.9 | $ | 148.6 | $ | 14.4 | $ | 0.2 | $ | 207.1 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
There have not been any material changes to our interest rate risk as described in Item 7A of our 2012 Annual Report on Form 10-K.
Foreign Currency Risk
For the three months ended March 31, 2013, we generated $9.7 million of revenue outside the U.S, mostly denominated in U.S. dollars. A change in exchange rates would not have a material impact on our Consolidated Financial Statements. As of March 31, 2013, we had approximately $2.5 million of billed accounts receivable that are denominated in foreign currencies and would be exposed to foreign currency exchange risk. During the first quarter of 2013, our average receivables subject to foreign currency exchange risk was $0.7 million. We had an average balance of $0.1 million of unbilled receivables and an average balance of $0.2 million of deferred revenue denominated in foreign currency during the first quarter of 2013. We recorded immaterial transaction gains or losses on foreign currency denominated receivables and deferred revenue for the three months ended March 31, 2013.
There have not been any other material changes to our foreign currency risk as described in Item 7A of our 2012 Annual Report on Form 10-K.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Companys reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, and summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and the Companys Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, the Companys Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2013.
There have been no changes in the Companys internal control over financial reporting during the latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
28
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
From time to time, some of our customers have sought indemnification under their contractual arrangements with us for costs associated with defending lawsuits alleging infringement of certain patents through the use of our products and services and the use of our products and services in combination with products and services of other vendors. In some cases we have agreed to assume the defense of the case. In others, the Company will continue to negotiate with these customers in good faith because the Company believes its technology does not infringe the cited patents and due to specific clauses within the customer contractual arrangements that may or may not give rise to an indemnification obligation. The Company cannot currently predict the outcome of these matters and the resolutions could have a material effect on our consolidated results of operations, financial position or cash flows.
Item 1A. | Risk Factors |
There have not been any material changes to the information previously disclosed in Item 1A. Risk Factors in our 2012 Annual Report on Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine and Safety Disclosures |
None.
Item 5. | Other Information |
(a) | None |
(b) | None. |
29
Item 6. | Exhibits |
Exhibit Numbers |
Description | |
31.1 | Certification of CEO required by the Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a) | |
31.2 | Certification of CFO required by the Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a) | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
30
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 3rd day of May 2013.
TELECOMMUNICATION SYSTEMS, INC. | ||
By: | /s/ MAURICE B. TOSÉ | |
Maurice B. Tosé Chairman, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
/s/ MAURICE B. TOSÉ | Chairman, President and Chief Executive Officer | |||||
Maurice B. Tosé May 3, 2013 | (Principal Executive Officer) | |||||
/s/ THOMAS M. BRANDT, JR. | Senior Vice President and Chief Financial Officer | |||||
Thomas M. Brandt, Jr. May 3, 2013 | (Principal Financial Officer) |
31
Exhibit 31.1
|
CERTIFICATIONS
I, Maurice B. Tosé, certify that:
a) | I have reviewed this quarterly report on Form 10-Q of TeleCommunication Systems, Inc.; |
b) | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
c) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
d) | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrants internal control over financial reporting; and |
e) | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting. |
/s/ Maurice B. Tosé | ||
Maurice B. Tosé Chairman, CEO and President Date: May 3, 2013 |
Exhibit 31.2
CERTIFICATIONS
I, Thomas M. Brandt, Jr, certify that:
a) | I have reviewed this quarterly report on Form 10-Q of TeleCommunication Systems, Inc.; |
b) | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
c) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
d) | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrants internal control over financial reporting; and |
e) | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting. |
/s/ Thomas M. Brandt, Jr. |
Thomas M. Brandt, Jr. Sr. Vice President & CFO Date: May 3, 2013 |
EXHIBIT 32.1 |
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Maurice B. Tosé, President and Chief Executive Officer (principal executive officer) of TeleCommunication Systems, Inc. (the Registrant), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2013 (the Report) fully complies with the requirements of Section 13(a) of the Securities Act of 1934 (15 U.S.C. 78m); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Maurice B. Tosé | ||
Maurice B. Tosé Date: May 3, 2013 |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Thomas M. Brandt, Jr., Chief Financial Officer (principal financial officer) of TeleCommunication Systems, Inc. (the Registrant), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2013 (the Report) fully complies with the requirements of Section 13(a) of the Securities Act of 1934 (15 U.S.C. 78m); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Thomas M. Brandt, Jr. | ||
Thomas M. Brandt, Jr. Date: May 3, 2013 |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Summary of Available-for-Sale Marketable Securities by Contractual Maturity (Detail) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2013
|
Dec. 31, 2012
|
---|---|---|
Schedule of Available-for-sale Securities [Line Items] | ||
Available-for-sale securities, contractual maturity, Due within 1 year or less, Original Cost | $ 6,648 | $ 7,567 |
Available-for-sale securities, contractual maturity, Due within 1-2 years, Original Cost | 3,379 | 3,626 |
Available-for-sale securities, contractual maturity, Due within 2-3 years, Original Cost | 3,570 | 4,075 |
Available-for-sale securities, contractual maturity, Total Original Cost | 13,597 | 15,268 |
Available-for-sale securities, contractual maturity, Due within 1 year or less, Fair Value | 6,414 | 7,251 |
Available-for-sale securities, contractual maturity, Due within 1-2 years, Fair Value | 2,776 | 3,557 |
Available-for-sale securities, contractual maturity, Due within 2-3 years, Fair Value | 4,485 | 4,067 |
Available-for-sale marketable securities, Estimated Fair Value | $ 13,675 | $ 14,875 |
Long-Term Debt - Additional Information (Detail) (USD $)
In Thousands, except Share data, unless otherwise specified |
3 Months Ended | 1 Months Ended | 1 Months Ended | 3 Months Ended | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2013
|
Dec. 31, 2012
|
Jul. 06, 2012
|
Mar. 31, 2012
|
Jul. 06, 2012
microDATA
|
Mar. 31, 2013
Promissory notes
microDATA
Debt Instrument Periodic Payment
Installment
|
Mar. 31, 2013
Promissory notes
microDATA
Maximum
Debt Instrument Periodic Payment
|
Mar. 31, 2013
Promissory notes
microDATA
Minimum
Debt Instrument Periodic Payment
|
Nov. 16, 2009
4.5% Convertible notes
|
Mar. 31, 2013
4.5% Convertible notes
|
Dec. 31, 2012
4.5% Convertible notes
|
May 07, 2013
4.5% Convertible notes
Refinancing of Debt
|
Mar. 31, 2013
Convertible Note Hedge
Adjusted
|
Mar. 31, 2013
Term loan from commercial banks
|
Dec. 31, 2012
Term loan from commercial banks
|
Jul. 06, 2012
Term loan from commercial banks
|
Dec. 31, 2011
Term loan from commercial banks
|
May 07, 2013
7.75% Convertible Senior Notes
New Debt Financing
|
|
Debt Instrument [Line Items] | ||||||||||||||||||
Debt instrument, amount | $ 103,500 | $ 50,000 | ||||||||||||||||
Debt instrument, interest rate percentage | 6.00% | 4.50% | 4.50% | 4.50% | 7.75% | |||||||||||||
Debt Instrument , amount will retire | 50,000 | |||||||||||||||||
Debt Instrument , maturity year | 2014 | 2018 | ||||||||||||||||
Number of common shares in conversion rate of notes | 96.637 | 96.637 | ||||||||||||||||
Principal amount of notes to be considered in conversion rate | 1 | 1 | ||||||||||||||||
Debt Instrument, convertible, conversion price | $ 10.35 | $ 10.348 | ||||||||||||||||
Effective conversion premium of notes due to hedge and warrant transactions | $ 12.74 | |||||||||||||||||
Cost of convertible note hedge | 23,800 | |||||||||||||||||
Proceeds from sale of warrants | 13,000 | |||||||||||||||||
Amount of outstanding Notes repurchased | 10,000 | |||||||||||||||||
Number of shares covered by notes | 10,001,000 | 9,036,000 | ||||||||||||||||
Warrants to purchase aggregate shares of Class A common stock | 10,001,000 | |||||||||||||||||
Warrant exercise price | 12.74 | 12.74 | ||||||||||||||||
Carrying amount of long-term debt | 146,935 | 149,289 | 93,500 | 93,500 | 43,500 | 39,458 | 41,779 | 45,000 | ||||||||||
Borrowing under new loan pay off | 19,400 | |||||||||||||||||
Funds borrowed for business acquisition | 20,000 | |||||||||||||||||
Debt instrument, frequency of periodic payment commencing July 31, 2012 | 3 months | |||||||||||||||||
Debt instrument, frequency of periodic payment commencing October 31, 2012 | 57 months | |||||||||||||||||
Amount of the required period payment applied to principal, commencing July 31, 2012 | 300 | |||||||||||||||||
Amount of the required period payment applied to principal, commencing October 31, 2012 | 774 | |||||||||||||||||
Debt Instrument description of interest | The principal amount outstanding under the Term Loan shall accrue interest at a floating per annum rate equal to three-quarters of one percentage point (0.75%) above the Prime Rate (3.25% at March 31, 2013), which interest shall be payable monthly. The interest rate payable by the Company on the Term Loan prior to the Amendment was half of one percentage point (0.5%) above the Prime Rate. | |||||||||||||||||
Term loan accrue interest at a floating rate per annum | 0.50% | 0.75% | 0.50% | |||||||||||||||
Purchase price paid in promissory notes | 14,250 | |||||||||||||||||
Promissory note payable first installment | 7,500 | |||||||||||||||||
Promissory note payable second installment | 6,750 | |||||||||||||||||
First installment payment due date | Jun. 30, 2013 | |||||||||||||||||
Second installment payment due date | Jun. 30, 2014 | |||||||||||||||||
Debt instrument adjustments for post-closing indemnifications | $ 2,000 | $ 273 | ||||||||||||||||
Number of installment payments | 2 |
Balances and Changes in Amount of Goodwill (Detail) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2013
|
Dec. 31, 2012
|
---|---|---|
Goodwill [Line Items] | ||
Beginning Balance | $ 112,450 | $ 112,450 |
Ending Balance | 112,450 | 112,450 |
Commercial Segment
|
||
Goodwill [Line Items] | ||
Beginning Balance | 58,154 | 58,154 |
Ending Balance | 58,154 | 58,154 |
Government Segment
|
||
Goodwill [Line Items] | ||
Beginning Balance | 54,296 | 54,296 |
Ending Balance | $ 54,296 | $ 54,296 |
Future Minimum Payments Under Capital Lease Obligations (Detail) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2013
|
---|---|
Leases [Line Items] | |
2013 | $ 4,741 |
2014 | 4,038 |
2015 | 2,374 |
2016 | 835 |
2017 | 57 |
Total minimum lease payments | 12,045 |
Less: amounts representing interest | (671) |
Present value of net minimum lease payments (including current portion of $5,616) | $ 11,374 |
Estimated Future Amortization Expense (Detail) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2013
|
Dec. 31, 2012
|
---|---|---|
Estimated future amortization expense: | ||
Nine-months ending December 31, 2013 | $ 8,801 | |
Year ending December 31, 2014 | 8,851 | |
Year ending December 31, 2015 | 7,309 | |
Year ending December 31, 2016 | 5,869 | |
Year ending December 31, 2017 | 4,097 | |
Thereafter | 8,183 | |
Net | $ 43,110 | $ 45,101 |
Basis of Presentation and Summary of Significant Accounting Policies - Additional Information (Detail)
|
3 Months Ended | |
---|---|---|
Mar. 31, 2013
|
Mar. 31, 2012
|
|
Significant Accounting Policies [Line Items] | ||
Number of shares excluded from computation of diluted net income per share | 15,500 | 17,300 |
Warrant exercise price | 12.74 | 12.74 |
Earnings per share, dilutive effect, description | If the Company's share price is greater than the warrant exercise price of $12.74 per share for any period presented, the warrants would be dilutive to the Company's earnings per share. The convertible note hedge is excluded from the calculation of diluted earnings per share as the impact is always considered anti-dilutive since the call option would be exercised by us when the exercise price is lower than the market price. |
Income taxes - Additional Information (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2013
|
Mar. 31, 2012
|
|
Income Taxes [Line Items] | ||
Benefit (provision) for income taxes | $ 799 | $ 314 |
Effective tax rate | 49.00% |
Marketable Securities (Tables)
|
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2013
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Available-for-Sale Marketable Securities | Available-for-sale marketable securities at March 31, 2013 were:
Available-for-sale marketable securities at December 31, 2012 were:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Available-for-Sale Marketable Securities by Contractual Maturity | The original cost and estimated fair value of available-for-sale marketable securities by contractual maturity at March 31, 2013 were:
The original cost and estimated fair value of available-for-sale marketable securities by contractual maturity at December 31, 2012 were:
|
Lines of Credit - Additional Information (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2013
|
Dec. 31, 2012
|
|
Line of Credit Facility [Line Items] | ||
Line of credit facility, amount | $ 35,000 | |
Line of credit, borrowing capacity, cash management services sublimit | 3,585 | |
Line of Credit, maturity date | Jun. 30, 2014 | |
Line of credit facility, interest rate above prime rate | 0.50% | |
Line of credit facility, interest rate at end of period | 3.25% | |
Line of credit facility, interest rate description | The principal amount outstanding under the Line of Credit accrues interest at a floating per annum rate equal to one-half of one percentage point (0.5%) above the prime rate (3.25% at March 31, 2013.) | |
Line of credit facility, amount outstanding | 6,000 | |
Line of credit facility, unused borrowing capacity | $ 31,400 | $ 25,400 |
Fair Value Measurements - Additional Information (Detail) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2013
|
Mar. 31, 2012
|
Mar. 31, 2013
4.5% Convertible notes
|
Dec. 31, 2012
4.5% Convertible notes
|
Nov. 16, 2009
4.5% Convertible notes
|
---|---|---|---|---|---|
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | |||||
Interest rate on convertible senior notes | 4.50% | 4.50% | 4.50% | ||
Estimated Fair value of long term debt | $ 141,000 | $ 115,700 | |||
Carrying value of long term debt | $ 146,935 | $ 124,500 |
Supplemental Disclosure of Cash Flow Information - Additional Information (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2013
|
Mar. 31, 2012
|
|
Cash Flow Supplemental Disclosures [Line Items] | ||
Property and equipment acquired under capital leases | $ 648 | $ 1,879 |
Interest paid | 602 | 517 |
Income taxes paid | $ 198 | $ 494 |
Long-term Debt (Parenthetical) (Detail) (4.5% Convertible notes)
|
Mar. 31, 2013
|
Dec. 31, 2012
|
Nov. 16, 2009
|
---|---|---|---|
4.5% Convertible notes
|
|||
Debt Instrument [Line Items] | |||
Convertible notes, interest rate | 4.50% | 4.50% | 4.50% |
Acquired Intangible Assets, Capitalized Software Development Costs, and Goodwill - Additional Information (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2013
|
Mar. 31, 2012
|
|
Finite-Lived Intangible Assets [Line Items] | ||
Capitalized software development costs | $ 906 | $ 1,239 |
Stock-Based Compensation
|
3 Months Ended |
---|---|
Mar. 31, 2013
|
|
Stock-Based Compensation | 3. Stock-Based Compensation Restricted Stock We had 1,498 and 1,285 restricted stock units outstanding at a weighted-average grant date fair value per share of $2.54 and $3.24 as at March 31, 2013 and 2012, respectively. Share-based compensation expense is recognized on a straight line basis, for only those shares expected to vest over the requisite service period of the award, which is generally the vesting over one year for directors and vest in annual increments over three years for executives conditional on continued employment. Stock Options We had 18,103 and 17,109 stock options outstanding as at March 31, 2013 and 2012, respectively. During the first quarter of 2013, we granted 1,415 options and had exercises of 9 options. Share-based compensation expense is recognized on a straight line basis, net of any estimated forfeiture rate, for only those shares expected to vest over the requisite service period of the award, which is generally 5 years. Total Stock-Based Compensation We recognized total share-based compensation expense of $2,452 and $2,807 in the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013 and 2012, we had $10,371 and $12,957 of total unrecognized share-based compensation expense, which is expected to be recognized over a weighted-average period of approximately 3 years, respectively. |