SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarter ended
March 31, 2008
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OR
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TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission File
No. 0-30821
TELECOMMUNICATION SYSTEMS,
INC.
(Exact name of registrant as specified in its charter)
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MARYLAND
(State or Other Jurisdiction of
Incorporation or Organization)
275 West Street, Annapolis, MD
(Address of principal executive offices)
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52-1526369
(I.R.S. Employer Identification No.)
21401
(Zip Code)
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(410) 263-7616
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for the past
90 days: Yes
þ
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large accelerated
filer
o
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Accelerated
filer
þ
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Non-accelerated
filer
o
(Do not check if a smaller reporting company)
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Smaller reporting
company
o
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act): Yes
o
No
þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Shares outstanding
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as of March 31,
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Title of Each Class
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2008
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Class A Common Stock, par value
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$0.01 per share
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35,043,467
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Class B Common Stock, par value
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$0.01 per share
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7,301,334
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Total Common Stock Outstanding
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42,344,801
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INDEX
TELECOMMUNICATION
SYSTEMS, INC.
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Page
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PART I. FINANCIAL INFORMATION
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Item 1.
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Financial Statements (Unaudited)
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Consolidated Statements of Operations for the three-months
ended March 31, 2008 and 2007
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1
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Consolidated Balance Sheets as of March 31, 2008 and
December 31, 2007
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2
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Consolidated Statement of Stockholders Equity for the
three-months ended March 31, 2008
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3
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Consolidated Statements of Cash Flows for the three-months
ended March 31, 2008 and 2007
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4
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Notes to Consolidated Financial Statements
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5
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Item 2.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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16
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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30
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Item 4.
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Controls and Procedures
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30
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PART II. OTHER INFORMATION
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Item 1.
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Legal Proceedings
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31
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Item 1A.
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Risk Factors
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32
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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32
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Item 3.
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Defaults Upon Senior Securities
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32
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Item 4.
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Submission of Matters to a Vote of Security Holders
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32
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Item 5.
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Other Information
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32
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Item 6.
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Exhibits
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33
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SIGNATURES
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34
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Three Months Ended
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March 31,
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2008
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2007
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Revenue
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Services
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$
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22,766
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$
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20,885
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Systems
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17,647
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13,234
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Total revenue
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40,413
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34,119
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Direct costs of revenue
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Direct cost of services revenue
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13,658
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12,948
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Direct cost of systems revenue, including amortization of
software development costs of $409, and $344, respectively
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7,191
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6,876
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Total direct cost of revenue
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20,849
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19,824
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Services gross profit
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9,108
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7,937
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Systems gross profit
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10,456
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6,358
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Total gross profit
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19,564
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14,295
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Operating costs and expenses
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Research and development expense
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4,088
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3,105
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Sales and marketing expense
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3,099
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|
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3,163
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General and administrative expense
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5,318
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4,652
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Depreciation and amortization of property and equipment
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1,490
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1,668
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Amortization of acquired intangible assets
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37
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37
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|
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|
|
|
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Total operating costs and expenses
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14,032
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12,625
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Income from operations
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5,532
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1,670
|
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Interest expense
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(329
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)
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(552
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)
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Amortization of debt discount and debt issuance expenses
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(124
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)
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(411
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)
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Other income/(expense), net
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(413
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)
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60
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Income from continuing operations before income taxes
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4,666
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767
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Provision for income taxes
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(48
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)
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Income from continuing operations
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4,618
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|
767
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Loss from discontinued operations
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(124
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)
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|
|
|
|
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Net income
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$
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4,618
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$
|
643
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Income/(loss) per share-basic and diluted:
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Income per share from continuing operations
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$
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0.11
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$
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0.02
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Loss per share from discontinued operations
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(0.00
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)
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Net income per share-basic and diluted
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$
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0.11
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$
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0.02
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Weighted average shares outstanding-basic
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42,273
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40,630
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Weighted average shares outstanding-diluted
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43,778
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42,471
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See accompanying Notes to Consolidated Financial Statements
1
TeleCommunication
Systems, Inc.
(amounts in
thousands, except share data)
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March 31,
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December 31,
|
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2008
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2007
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(unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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18,461
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$
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15,955
|
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Accounts receivable, net of allowance of $158 in 2008 and $266
in 2007
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23,749
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20,424
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Unbilled receivables
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12,770
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15,229
|
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Inventory
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4,513
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|
|
|
5,373
|
|
Other current assets
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7,429
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|
|
|
5,561
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|
|
|
|
|
|
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Total current assets
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66,922
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|
|
|
62,542
|
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Property and equipment, net of accumulated depreciation and
amortization of $37,459 in 2008 and $35,969 in 2007
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|
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11,456
|
|
|
|
11,209
|
|
Software development costs, net of accumulated amortization of
$5,192 in 2008 and $4,783 in 2007
|
|
|
4,216
|
|
|
|
4,406
|
|
Acquired intangible assets, net of accumulated amortization of
$546 in 2008 and $509 in 2007
|
|
|
672
|
|
|
|
709
|
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Goodwill
|
|
|
1,813
|
|
|
|
1,813
|
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Other assets
|
|
|
1,291
|
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
86,370
|
|
|
$
|
82,124
|
|
|
|
|
|
|
|
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|
|
Liabilities and stockholders equity
|
|
|
|
|
|
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|
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Current liabilities:
|
|
|
|
|
|
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|
|
Accounts payable and accrued expenses
|
|
$
|
12,474
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|
|
$
|
12,459
|
|
Accrued payroll and related liabilities
|
|
|
3,800
|
|
|
|
4,915
|
|
Deferred revenue
|
|
|
7,281
|
|
|
|
4,685
|
|
Current portion of capital lease obligations and notes payable
|
|
|
3,836
|
|
|
|
5,444
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
27,391
|
|
|
|
27,503
|
|
Capital lease obligations and notes payable, less current portion
|
|
|
8,976
|
|
|
|
10,657
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Class A Common Stock; $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized shares 225,000,000; issued and
outstanding shares of 35,043,467 in 2008 and 34,970,394 in 2007
|
|
|
350
|
|
|
|
349
|
|
Class B Common Stock; $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized shares 75,000,000; issued and outstanding
shares of 7,301,334 in 2008 and 7,301,334 in 2008
|
|
|
74
|
|
|
|
74
|
|
Additional paid-in capital
|
|
|
229,150
|
|
|
|
227,987
|
|
Accumulated other comprehensive income/(loss)
|
|
|
132
|
|
|
|
(125
|
)
|
Accumulated deficit
|
|
|
(179,703
|
)
|
|
|
(184,321
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
50,003
|
|
|
|
43,964
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
86,370
|
|
|
$
|
82,124
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income/(Loss)
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance at January 1, 2008
|
|
$
|
349
|
|
|
$
|
74
|
|
|
$
|
227,987
|
|
|
$
|
(125
|
)
|
|
$
|
(184,321
|
)
|
|
$
|
43,964
|
|
Options exercised for the purchase of 51,020 shares of
Class A Common Stock
|
|
|
1
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
116
|
|
Issuance of 22,053 shares of Class A Common Stock
under Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
Stock compensation expense for continuing operations
|
|
|
|
|
|
|
|
|
|
|
975
|
|
|
|
|
|
|
|
|
|
|
|
975
|
|
Unrealized loss on securities and other
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
(225
|
)
|
|
|
|
|
|
|
(216
|
)
|
Realization of unrealized loss on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482
|
|
|
|
|
|
|
|
482
|
|
Net income for the three-months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,618
|
|
|
|
4,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
$
|
350
|
|
|
$
|
74
|
|
|
$
|
229,150
|
|
|
$
|
132
|
|
|
$
|
(179,703
|
)
|
|
$
|
50,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
3
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,618
|
|
|
$
|
643
|
|
Less: Loss from discontinued operations
|
|
|
|
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
4,618
|
|
|
|
767
|
|
Adjustments to reconcile net loss from continuing operations to
net cash provided by/(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
1,490
|
|
|
|
1,668
|
|
Amortization of acquired intangible assets
|
|
|
37
|
|
|
|
37
|
|
Non-cash stock compensation expense
|
|
|
975
|
|
|
|
988
|
|
Amortization of software development costs
|
|
|
409
|
|
|
|
344
|
|
Amortization of debt discount
|
|
|
|
|
|
|
288
|
|
Amortization of deferred financing fees included in interest
expense
|
|
|
128
|
|
|
|
123
|
|
Impairment of marketable securities
|
|
|
482
|
|
|
|
|
|
Other non-cash income
|
|
|
14
|
|
|
|
11
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(3,325
|
)
|
|
|
(8,053
|
)
|
Unbilled receivables
|
|
|
2,459
|
|
|
|
1,262
|
|
Inventory
|
|
|
860
|
|
|
|
357
|
|
Other current assets
|
|
|
(2,093
|
)
|
|
|
(3,796
|
)
|
Other assets
|
|
|
86
|
|
|
|
(259
|
)
|
Accounts payable and accrued expenses
|
|
|
15
|
|
|
|
2,943
|
|
Accrued payroll and related liabilities
|
|
|
(1,115
|
)
|
|
|
(3,730
|
)
|
Deferred revenue
|
|
|
2,596
|
|
|
|
1,640
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities of
continuing operations
|
|
|
7,636
|
|
|
|
(5,410
|
)
|
Net cash used in operating activities of discontinued operations
|
|
|
|
|
|
|
(2,370
|
)
|
|
|
|
|
|
|
|
|
|
Total net cash provided by/(used in) operating activities
|
|
|
7,636
|
|
|
|
(7,780
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(442
|
)
|
|
|
(389
|
)
|
Capitalized software development costs
|
|
|
(219
|
)
|
|
|
(445
|
)
|
|
|
|
|
|
|
|
|
|
Total net cash used in investing activities
|
|
|
(661
|
)
|
|
|
(834
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payments on long-term debt and capital lease obligations
|
|
|
(4,584
|
)
|
|
|
(1,677
|
)
|
Proceeds from short-term line of credit, net
|
|
|
|
|
|
|
8,000
|
|
Proceeds from exercise of warrants
|
|
|
|
|
|
|
2,208
|
|
Proceeds from exercise of employee stock options and sale of
stock
|
|
|
115
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities from
continuing operations
|
|
|
(4,469
|
)
|
|
|
9,019
|
|
Net cash used in financing activities of discontinued operations
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Total net cash provided by/(used in) financing activities
|
|
|
(4,469
|
)
|
|
|
9,014
|
|
Net increase in cash from continuing operations
|
|
|
2,506
|
|
|
|
2,775
|
|
Net decrease in cash from discontinued operations
|
|
|
|
|
|
|
(2,375
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
2,506
|
|
|
|
400
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
15,955
|
|
|
|
10,358
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
18,461
|
|
|
$
|
10,758
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
4
TeleCommunication
Systems, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(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, 2008
are not necessarily indicative of the results that may be
expected for the year ended December 31, 2008. These
consolidated financial statements should be read in conjunction
with our audited financial statements and related notes included
in our 2007 Annual Report on
Form 10-K.
Use of Estimates.
The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts and
related disclosures. Actual results could differ from those
estimates.
Investments in Marketable Securities and Note
Receivable.
The Company holds $0.6 million
of marketable securities and a $1.0 million note
receivable, which were obtained as partial consideration from
three small divestitures during 2007. The marketable securities
and note receivable are included in other current assets and the
marketable securities are classified as available-for-sale in
accordance with the provision of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities
. The Company determined the decline in the fair
market value of its shares in MobilePro Corporation to be other
than temporary and accordingly has written down the security by
approximately $0.5 million which was recognized in the
current period income statement as other expense. After the
write down of MobilePro shares, these securities are carried at
fair market value based on quoted market price with net
unrealized loss of $0.2 million reported in
stockholders equity as a component of accumulated other
comprehensive income. Gains or losses on securities sold will be
based on the specific identification method. The note receivable
bears simple interest at 8.25% over an
18-month
term and is due in November of 2008.
Other Comprehensive
Income/(Loss).
Comprehensive income/(loss)
includes changes in the equity of a business during a period
from transactions and other events and circumstances from
non-owner sources. Other comprehensive income/(loss) refers to
revenue, expenses, gains and losses that under
U.S. generally accepted accounting principles are included
in comprehensive income, but excluded from net income. For
operations outside the U.S. that are denominated in
currencies other than the U.S. dollar, results of
operations and cash flows are translated at average exchange
rates during the period, and assets and liabilities are
translated at end-of-period exchange rates. Translation
adjustments for our European subsidiary are included as a
component of our accumulated other comprehensive loss in
stockholders equity. Also included are any unrealized
gains or losses on marketable securities that are classified as
available-for-sale.
Stock-Based Compensation.
We have two
stock-based employee compensation plans: our Fifth Amended and
Restated 1997 Stock Incentive Plan (the Stock Incentive
Plan) and our Employee Stock Purchase Plan (the
ESPP). We have also previously issued restricted
stock to directors and certain key executives. We recorded
compensation expense for all stock-based compensation plans
using the fair value method prescribed by Financial Accounting
Standards Board (FASB) Statement No. 123,
Share Based
Payment
, as revised (SFAS 123(R)). Our
non-cash stock compensation expense has been allocated to direct
cost of revenue, research and development expense, sales and
marketing expense, and general and administrative expense as
detailed in Note 2.
5
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Earnings per share.
Basic income/(loss) per
common share is based upon the average number of shares of
common stock outstanding during the period. At March 31,
2008 and 2007, stock options to purchase approximately
5.1 million and 5.4 million shares, respectively, were
excluded from the computation of diluted net income per share
because their inclusion would have been anti-dilutive. A
reconciliation of basic to diluted weighted average common
shares outstanding is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Basic weighted average common shares outstanding
|
|
|
42,273
|
|
|
|
40,630
|
|
Dilutive options outstanding
|
|
|
1,035
|
|
|
|
1,270
|
|
Dilutive warrants outstanding
|
|
|
470
|
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding used in the
calculation of diluted income/(loss)
|
|
|
43,778
|
|
|
|
42,471
|
|
|
|
|
|
|
|
|
|
|
Income Taxes.
The Company has a net deferred
tax asset of approximately $49 million, against which it
maintains a full valuation allowance. In accordance with
requirements of FAS 109, the Company has considered
criteria for determining whether it is more likely than not that
its deferred tax assets will be realized, including the
Companys history of net operating losses from 1999 through
2007.
Income tax amounts and balances are accounted for using the
liability method of accounting for income taxes, and deferred
income tax assets and liabilities are measured using the enacted
tax rates and laws that will be in effect when the differences
are expected to reverse. Income tax expense of $0.1 was recorded
for the three-months ended March 31, 2008 for alternative
minimum tax due on income generated for the quarter.
If the Company generates sustained future taxable income against
which these tax attributes may be applied, some or all of the
valuation allowance would be reversed. If the valuation
allowance were reversed, a portion would be recorded as an
increase to paid in capital and the remainder would be recorded
as a reduction in income tax expense.
The Company adopted FIN 48 on January 1, 2007 for
which there was no cumulative effect of applying its provisions.
The Company classifies interest and penalties accrued on any
unrecognized tax benefits as a component of the provision for
income taxes. There were no interest or penalties recognized in
the consolidated statement of income for the three-months ended
March 31, 2008 and 2007, respectively, and the consolidated
balance sheet at March 31, 2008. The Company does not
currently anticipate that the total amounts of unrecognized tax
benefits will significantly increase within the next
12 months. The Company files income tax returns in
U.S. and state jurisdictions. The Company is no longer
subject to U.S. federal, state, and local tax examinations
in major tax jurisdictions for periods before 2003.
Recent Accounting
Pronouncements.
In September 2006, the FASB issued SFAS 157, Fair
Value Measurements, which defines fair value, establishes
a framework for measuring fair value and expands disclosures
about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. In February
2008, the FASB decided to issue a final Staff Position to allow
a one-year deferral of adoption of SFAS 157 for
non-financial assets and non-financial liabilities that are
recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The FASB also decided to
amend SFAS 157 to exclude FASB Statement No. 13 and
its related interpretive accounting pronouncements that address
leasing transactions. The adoption of SFAS 157 for
financial assets and liabilities in the first quarter of 2008
did not have an effect on the Companys results of
operations and financial position. The Company is evaluating the
6
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
impact of the non financial asset and liability provisions of
this standard and does not expect the adoption of those
provisions to have a material impact on its financial statements.
In February 2007, the FASB issued SFAS 159, Fair
Value Option for Financial Assets and Liabilities.
SFAS 159 allows companies to elect to measure certain
assets and liabilities at fair value and is effective for fiscal
years beginning after November 15, 2007. The Company did
not elect the fair value measurement of SFAS 159.
In December 2007, the FASB issued SFAS 141(R),
Business Combinations. This standard establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non-controlling interest
in the acquired and the goodwill acquired. This statement also
establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business
combination. SFAS 141(R) is effective for us for
acquisitions made after November 30, 2009. The Company is
evaluating the impact of this standard. The adoption of
SFAS 141(R) may have a material impact on the
Companys financial statements for business acquired
post-adoption.
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(SFAS 160). SFAS 160 amends ARB No. 51 to
establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also amends certain of ARB
No. 51s consolidation procedures for consistency with
the requirements of SFAS 141(R). This statement is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The
statement shall be applied prospectively as of the beginning of
the fiscal year in which the statement is initially adopted. The
adoption of SFAS 160 will not have a material impact on the
Companys financial statements.
In March 2008, the FASB issued SFAS 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement 133
(SFAS 161). SFAS 161 amends and expands the
disclosure requirements of SFAS 133 with the intent to
provide users of financial statements with an enhanced
understanding of: (i) How and why an entity uses derivative
instruments; (ii) How derivative instruments and related
hedged items are accounted for under SFAS 133 and its
related interpretations and (iii) How derivative
instruments and related hedged items affect an entitys
financial position, financial performance and cash flows. This
statement is effective for financial statements issued for
fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The
Company is evaluating the impact of this standard and does not
expect the adoption of SFAS 161 to have a material impact
on its financial statements.
|
|
2.
|
Stock-Based
Compensation
|
We have two stock-based employee compensation plans: our Fifth
Amended and Restated 1997 Stock Incentive Plan (the Stock
Incentive Plan) and our Employee Stock Purchase Plan (the ESPP).
We adopted SFAS 123(R) using the modified prospective
method. Stock based compensation expense for all awards granted
after December 31, 2005 is based on the grant date fair
value estimated in accordance with SFAS 123(R). Consistent
with the requirements of SFAS 123(R), we recognized
compensation expense net of estimated forfeitures, so that we
have recognized expense for those shares expected to vest over
their requisite service period, which is generally the vesting
period of 5 years. The Company estimates the fair value of
each stock option award on the date of grant using the
Black-Scholes option-pricing model. Expected volatilities are
based principally on historical volatility of the Companys
stock. The Company estimates forfeitures based on historical
experience and the expected term of the options granted are
derived from historical data on employee exercises. The risk
free interest rate is based on the U.S. Treasury yield
curve in effect at the time of the grant. The Company has not
paid and does not anticipate paying dividends in the near future.
7
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The material components of our stock compensation expense are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
Stock options granted at fair value
|
|
$
|
931
|
|
|
$
|
900
|
|
Restricted stock
|
|
|
33
|
|
|
|
65
|
|
Employee stock purchase plan
|
|
|
11
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Total stock compensation expense included in continuing
operations
|
|
$
|
975
|
|
|
$
|
988
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Stock options granted at fair value
|
|
$
|
|
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
Total stock compensation expense included in discontinued
operations
|
|
$
|
|
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock compensation included in our continuing
operations in the accompanying Consolidated Statements of
Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Comm.
|
|
|
Gvmt
|
|
|
Total
|
|
|
Comm.
|
|
|
Gvmt
|
|
|
Total
|
|
|
Stock compensation included in direct cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services
|
|
$
|
301
|
|
|
$
|
129
|
|
|
$
|
430
|
|
|
$
|
257
|
|
|
$
|
158
|
|
|
$
|
415
|
|
Direct cost of systems
|
|
|
45
|
|
|
|
172
|
|
|
|
217
|
|
|
|
39
|
|
|
|
20
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock compensation included in direct costs of revenue
|
|
$
|
346
|
|
|
$
|
301
|
|
|
$
|
647
|
|
|
$
|
296
|
|
|
$
|
178
|
|
|
$
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Stock compensation included in operating expenses:
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
$
|
213
|
|
|
$
|
198
|
|
Sales and marketing expense
|
|
|
71
|
|
|
|
143
|
|
General and administrative expense
|
|
|
44
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
Total stock compensation included in operating expenses
|
|
$
|
328
|
|
|
$
|
514
|
|
|
|
|
|
|
|
|
|
|
8
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
A summary of our stock option activity and related information
for the three-months ended March 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
(Share amounts in thousands)
|
|
Options
|
|
|
Price
|
|
|
Outstanding, beginning of year
|
|
|
11,144
|
|
|
$
|
3.69
|
|
Granted
|
|
|
2,384
|
|
|
$
|
3.14
|
|
Exercised
|
|
|
(51
|
)
|
|
$
|
2.27
|
|
Forfeited
|
|
|
(151
|
)
|
|
$
|
3.43
|
|
|
|
|
|
|
|
|
|
|
Outstanding, at March 31, 2008
|
|
|
13,326
|
|
|
$
|
3.60
|
|
|
|
|
|
|
|
|
|
|
Exercisable, at March 31, 2008
|
|
|
7,556
|
|
|
$
|
3.99
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2008
|
|
|
9,246
|
|
|
$
|
3.69
|
|
|
|
|
|
|
|
|
|
|
Estimated weighted-average grant- date fair value of options
granted during the year
|
|
$
|
3.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining contractual life of options
outstanding at March 31, 2008
|
|
|
6.9 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Fair
|
|
|
|
Options
|
|
|
Value
|
|
|
Non-vested, beginning of year
|
|
|
4,629
|
|
|
$
|
2.30
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(151
|
)
|
|
$
|
2.41
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
1,106
|
|
|
$
|
2.29
|
|
|
|
|
|
|
|
|
|
|
Exercisable, at March 31, 2008
|
|
|
7,556
|
|
|
$
|
3.53
|
|
|
|
|
|
|
|
|
|
|
Non-vested, at March 31, 2008
|
|
|
5,771
|
|
|
$
|
2.12
|
|
|
|
|
|
|
|
|
|
|
Exercise prices for options outstanding at March 31, 2008
ranged from $0.01 to $26.05 as follows (all share amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Remaining Contractual
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Options
|
|
|
Exercise Prices of
|
|
|
Life of Options
|
|
|
Options
|
|
|
Exercise Prices of
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Options Outstanding
|
|
|
Outstanding (Years)
|
|
|
Exercisable
|
|
|
Options Exercisable
|
|
|
$0.01 - $ 2.61
|
|
|
4,003
|
|
|
$
|
2.31
|
|
|
|
6.82
|
|
|
|
2,464
|
|
|
$
|
2.25
|
|
$2.61 - $ 5.21
|
|
|
7,106
|
|
|
$
|
3.32
|
|
|
|
7.52
|
|
|
|
2,875
|
|
|
$
|
3.32
|
|
$5.21 - $ 7.82
|
|
|
2,187
|
|
|
$
|
6.75
|
|
|
|
5.32
|
|
|
|
2,187
|
|
|
$
|
6.75
|
|
$7.82 - $26.05
|
|
|
30
|
|
|
$
|
11.07
|
|
|
|
4.76
|
|
|
|
30
|
|
|
$
|
11.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,326
|
|
|
|
|
|
|
|
|
|
|
|
7,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008, we estimate that we will recognize
$5,068 in expense for outstanding, unvested options over their
weighted average remaining vesting period of 3.83 years, of
which we estimate $2,500 will be recognized during the remainder
of 2008.
9
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
In using the Black-Scholes model to calculate the fair value of
our stock options, our assumptions were as follows:
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
|
|
|
March 31,
|
|
|
2008
|
|
2007
|
|
Expected life (in years)
|
|
5.5
|
|
5.5
|
Risk-free interest rate(%)
|
|
2.8%-3.28%
|
|
4.66%-4.76%
|
Volatility(%)
|
|
66%-67%
|
|
79%-83%
|
Dividend yield(%)
|
|
0%
|
|
0%
|
|
|
3.
|
Supplemental
Disclosure of Cash Flow Information
|
Property and equipment acquired under capital leases totaled
$1,295 and $321 during the three-months ended March 31,
2008 and 2007, respectively.
Interest paid totaled $329 and $552 during the three-months
ended March 31, 2008 and 2007, respectively.
Alternative minimum income taxes paid totaled $48 and nil during
the three-months ended March 31, 2008 and 2007,
respectively.
|
|
4.
|
Fair Value
Measurement
|
In the first quarter of 2008, we adopted SFAS 157
Fair Value Measurements for financial assets and
liabilities. This standard defines fair value, provides guidance
for measuring fair value and requires certain disclosures. This
standard does not require any new fair value measurements, but
rather applies to all other accounting pronouncements that
require or permit fair value measurements. This standard does
not apply measurements related to share-based payments, nor does
it apply to measurements related to inventory.
SFAS 157 discusses valuation techniques, such as the market
approach (comparable market prices), the income approach
(present value of future income or cash flows), and the cost
approach (cost to replace the service capacity of an asset or
replacement cost). The statement utilizes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels. The following is a
brief description of those three levels:
Level 1: Observable inputs such as quoted prices
(unadjusted) in active markets for identical assets or
liabilities.
Level 2: Inputs other than quoted prices that are
observable for the asset or liability, either directly or
indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or
similar assets or liabilities in markets that are not active.
Level 3: Observable inputs that reflect the reporting
entitys own assumptions.
10
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Our population of financial assets and liabilities subject to
fair value measurements and the necessary disclosures are as
follow ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
as of
|
|
|
Fair Value Measurements at 3/31/2008
|
|
|
|
3/31/2008
|
|
|
Using Fair Value Hierarchy
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,461
|
|
|
$
|
18,461
|
|
|
$
|
|
|
|
$
|
|
|
Marketable securities available for sale
|
|
|
648
|
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,109
|
|
|
$
|
19,109
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of marketable securities are based on quoted
market prices from various stock exchanges
Our two operating segments are the Commercial and Government
Segments.
Our Commercial Segment solutions enable wireless carriers to
deliver short text messages, location information, internet
content, and other enhanced communication services to and from
wireless phones. Our Commercial Segment also provides E9-1-1
services, commercial location-based services, inter-carrier text
message distribution services, and carrier technology on a
hosted, or service bureau, basis. We also earn subscriber
revenue through wireless applications including our Rand
McNally
®
Traffic application.
Our Government Segment designs, assembles, sells and maintains
data network communication systems, including our
SwiftLink
®
deployable communication systems. We also own and operate secure
satellite teleport facilities, resell access to satellite
airtime (known as space segment), and provide communication
systems integration, information technology services, and
software systems and services to the U.S. Department of
Defense and other government customers.
Management evaluates segment performance based on gross profit.
We do not maintain information regarding segment assets.
Accordingly, asset information by reportable segment is not
presented.
11
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The following table sets forth results for our reportable
segments for the three-months ended March 31, 2008 and
2007, respectively. All revenues reported below are from
external customers. A reconciliation of segment gross profit to
net loss for the respective periods is also included below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Comm.
|
|
|
Gvmt
|
|
|
Total
|
|
|
Comm.
|
|
|
Gvmt
|
|
|
Total
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
15,536
|
|
|
$
|
7,230
|
|
|
$
|
22,766
|
|
|
$
|
13,641
|
|
|
$
|
7,244
|
|
|
$
|
20,885
|
|
Systems
|
|
|
10,706
|
|
|
|
6,941
|
|
|
|
17,647
|
|
|
|
6,810
|
|
|
|
6,424
|
|
|
|
13,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
26,242
|
|
|
|
14,171
|
|
|
|
40,413
|
|
|
|
20,451
|
|
|
|
13,668
|
|
|
|
34,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services
|
|
|
7,959
|
|
|
|
5,699
|
|
|
|
13,658
|
|
|
|
7,323
|
|
|
|
5,625
|
|
|
|
12,948
|
|
Direct cost of systems
|
|
|
2,046
|
|
|
|
5,145
|
|
|
|
7,191
|
|
|
|
1,442
|
|
|
|
5,434
|
|
|
|
6,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct costs
|
|
|
10,005
|
|
|
|
10,844
|
|
|
|
20,849
|
|
|
|
8,765
|
|
|
|
11,059
|
|
|
|
19,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services gross profit
|
|
|
7,577
|
|
|
|
1,531
|
|
|
|
9,108
|
|
|
|
6,318
|
|
|
|
1,619
|
|
|
|
7,937
|
|
Systems gross profit
|
|
|
8,660
|
|
|
|
1,796
|
|
|
|
10,456
|
|
|
|
5,368
|
|
|
|
990
|
|
|
|
6,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
16,237
|
|
|
$
|
3,327
|
|
|
$
|
19,564
|
|
|
$
|
11,686
|
|
|
$
|
2,609
|
|
|
$
|
14,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Total segment gross profit
|
|
$
|
19,564
|
|
|
$
|
14,295
|
|
Research and development expense
|
|
|
(4,088
|
)
|
|
|
(3,105
|
)
|
Sales and marketing expense
|
|
|
(3,099
|
)
|
|
|
(3,163
|
)
|
General and administrative expense
|
|
|
(5,318
|
)
|
|
|
(4,652
|
)
|
Depreciation and amortization of property and equipment
|
|
|
(1,490
|
)
|
|
|
(1,668
|
)
|
Amortization of acquired intangible assets
|
|
|
(37
|
)
|
|
|
(37
|
)
|
Interest expense
|
|
|
(329
|
)
|
|
|
(552
|
)
|
Amortization of debt discount and debt issuance expenses
|
|
|
(124
|
)
|
|
|
(411
|
)
|
Other income/(expense), net
|
|
|
(413
|
)
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
4,666
|
|
|
|
767
|
|
Provision for income taxes
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
4,618
|
|
|
|
767
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,618
|
|
|
$
|
643
|
|
|
|
|
|
|
|
|
|
|
12
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Component parts
|
|
$
|
2,682
|
|
|
$
|
2,670
|
|
Finished goods
|
|
|
1,831
|
|
|
|
2,703
|
|
|
|
|
|
|
|
|
|
|
Total inventory at period end
|
|
$
|
4,513
|
|
|
$
|
5,373
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Acquired
Intangible Assets and Capitalized Software Development
Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Lists
|
|
$
|
606
|
|
|
$
|
434
|
|
|
$
|
172
|
|
|
$
|
606
|
|
|
$
|
405
|
|
|
$
|
201
|
|
Trademarks & Patents
|
|
|
612
|
|
|
|
112
|
|
|
|
500
|
|
|
|
612
|
|
|
|
104
|
|
|
|
508
|
|
Software development costs, including acquired technology
|
|
|
9,408
|
|
|
|
5,192
|
|
|
|
4,216
|
|
|
|
9,189
|
|
|
|
4,783
|
|
|
|
4,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,626
|
|
|
$
|
5,738
|
|
|
$
|
4,888
|
|
|
$
|
10,407
|
|
|
$
|
5,292
|
|
|
$
|
5,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future
amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-months ending December 31, 2008
|
|
$
|
1,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31, 2009
|
|
$
|
1,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31, 2010
|
|
$
|
738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31, 2011
|
|
$
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
$
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
8.
|
Concentrations
of Credit Risk and Major Customers
|
Financial instruments that potentially subject us to significant
concentrations of credit risk consist primarily of accounts
receivable and unbilled receivables. Accounts receivable are
generally due within thirty days and no collateral is required.
We maintain allowances for potential credit losses and
historically such losses have been within our expectations.
The following tables summarize revenue and accounts receivable
concentrations from our significant customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
Revenue For
|
|
|
|
|
the Three
|
|
|
|
|
Months Ended
|
|
|
|
|
March 31,
|
Customer
|
|
Segment
|
|
2008
|
|
2007
|
|
U.S. Government
|
|
Government
|
|
|
24
|
%
|
|
|
27
|
%
|
Customer A
|
|
Commercial
|
|
|
35
|
%
|
|
|
27
|
%
|
13
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
|
|
|
Accounts
|
|
Unbilled
|
Customer
|
|
Segment
|
|
Receivable
|
|
Receivables
|
|
U.S. Government
|
|
Government
|
|
24%
|
|
61%
|
Customer A
|
|
Commercial
|
|
18%
|
|
15%
|
|
|
9.
|
Lines of
Credit and Financing Arrangements
|
We have maintained a line of credit arrangement with our
principal bank since 2003. In June 2007, we amended the
agreement to extend our line of credit and decrease the cost of
borrowing. Under the amended line of credit agreement, the
availability of the line was extended to June 2010, and the
borrowing rate decreased from prime plus 1.25% to the
banks prime rate which was 5.25% per annum at
March 31, 2008. Our maximum borrowing availability remained
the same at $22,000. Borrowings at any time are limited to an
amount based principally on accounts receivable levels and a
working capital ratio, each as defined in the amended line of
credit agreement. Our potential borrowings under the amended
line of credit agreement is also reduced by the amounts of
letters of credit outstanding which totaled $1,060 at
March 31, 2008. There were no borrowings on the line of
credit at March 31, 2008 or December 31, 2007.
Our amended line of credit and term loan agreement contains
covenants requiring us to maintain a minimum adjusted quick
ratio and a minimum liquidity ratio as well as other restrictive
covenants including, among others, restrictions on our ability
to merge, acquire assets above prescribed thresholds, undertake
actions outside the ordinary course of our business (including
the incurrence of indebtedness), guarantee debt, distribute
dividends, and repurchase our stock, and maintenance of a
minimum tangible net worth. The agreement also contains a
subjective covenant that requires (i) no material adverse
change in the business, operations, or financial condition of
our company occur, or (ii) no material impairment of the
prospect of repayment of any portion of the borrowings under the
agreement; or (iii) no material impairment of value or
priority of the lenders security interests in the collateral of
the bank credit agreement. As of March 31, 2008, we were in
compliance with the covenants related to our line of credit and
we believe that the Company will continue to comply with its
restrictive covenants. If our performance does not result in
compliance with any of these restrictive covenants, we would
seek to further modify our financing arrangements, but there can
be no assurance that the bank would not exercise its rights and
remedies under its agreement with us, including declaring all
outstanding debt due and payable.
In December 2006, we borrowed $5,000 under 3 year notes
secured by accounts receivable of one customer. Effective
March 28, 2008, we paid this debt in full and modified the
terms of the note to a line of credit. Under the line of credit
agreement, the maximum indebtedness of the line is equal to the
current maximum debt ($3,237 at March 31, 2008) less
$150 per month for the number of full months that have expired
since the effective date. The remaining term of the line of
credit is twenty-one months at March 31, 2008, and the
maturity date of the line is December 28, 2009. The
borrowing rate is London InterBank Offered Rate (LIBOR) plus 500
basis points. As of March 31, 2008, the Company had not
borrowed against this line.
As of March 31, 2008 we had approximately $17,500 of unused
borrowing availability under available lines of credit.
In October 2006, two former shareholders of Xypoint Corporation
sued the former officers and directors of that corporation for
breach of fiduciary duty and violation of certain Washington
state securities and consumer protection acts when they
approved, and recommended that shareholders approve, the merger
of Xypoint into TeleCommunication Systems, Inc. The plaintiffs
request unspecified
14
TeleCommunication
Systems, Inc.
Notes to
Consolidated Financial
Statements (Continued)
damages. The merger agreement from 2001 provided that we would
indemnify the officers and directors of Xypoint for a period of
six years after the merger (ending January 2007) for their
actions in approving the merger. In December 2006, the complaint
was amended to include TCS and Windward Acquisition Corporation
(our acquisition subsidiary), an extinguished corporation, as
defendant. On May 7, 2007, the Honorable Jeffrey M.
Ramsdell of the King County Superior Court (Washington) entered
an order dismissing the complaint, with prejudice. On
October 19, 2007, the plaintiffs filed an appeal of the
dismissal order with the Washington Court of Appeals. The
briefing on plaintiffs appeal is completed, but no date
has been set for the appeal hearing. We intend to continue to
defend the lawsuit vigorously. We have purchased Directors and
Officers insurance policies to cover claims against the former
officers and directors of Xypoint and us, and believe that one
or more of those insurance policies may cover some or all of the
costs of this lawsuit. On January 4, 2008, we filed suit in
the King County Superior Court (Washington) against Great
American Insurance Company for the costs we have incurred in
defending the suit and any potential settlement or judgment.
There can be no assurances that the outcome will be favorable to
us or that the insurance policies will be sufficient to cover
the costs incurred or any settlement or judgment that may result.
15
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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, 2008 (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 as to the sufficiency of our capital resources to
meet our anticipated working capital and capital expenditures
for at least the next twelve months, (b) that we expect to
realize approximately $78 million of backlog in the next
twelve months, (c) that we believe our location-based
software is positioned for early adoption by carriers,
(d) that we believe that capitalized software development
costs will be recoverable from future gross profits
(e) regarding our belief that we were in compliance with
our loan covenants and that we believe that we the Company will
continue to comply with our restrictive covenants and
(f) indicating that one or both of our insurance policies
may cover some or all of the costs of the claims against the
former officers and directors of Xypoint and the Company. These
forward-looking statements relate to our plans, objectives and
expectations for future operations. 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. Our
actual financial results realized could differ materially from
the statements made herein, depending in particular upon 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) reach and sustain
profitability, (ii) 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,
(iii) conduct our business in foreign countries,
(iv) adapt and integrate new technologies into our
products, (v) expand our sales and business offerings in
the wireless communications industry, (vi) develop software
without any errors or defects, (vii) have sufficient
capital resources to fund the Companys operations,
(viii) protect our intellectual property rights,
(ix) implement our sales and marketing strategy, and
(x) 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.
Critical
Accounting Policies and Estimates
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. 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. Our most significant estimates relate to:
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accounting for our percentage-of-completion and proportional
performance contracts involving multiple elements and software,
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accounts receivable realizability,
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inventory value,
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16
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evaluating goodwill for impairment,
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the realizability and remaining useful lives of long-lived
assets, and
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contingent liabilities.
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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 to be
those related to:
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revenue recognition for our software and other contracts with
multiple elements,
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revenue recognition for our contracts accounted for using the
percentage-of-completion and proportional performance methods,
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capitalized software development costs,
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acquired intangible assets, and
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income taxes.
|
We describe these accounting policies in relevant sections of
this discussion and analysis. This discussion and analysis
should be read in conjunction with our consolidated financial
statements and related notes included in our Annual Report on
Form 10-K
for the year ended December 31, 2007 (the 2007
Form 10-K).
Overview
Our business is reported across two market segments:
(i) the Commercial Segment, which consists principally of
enhanced communication services to and from wireless phones,
location application software, our E9-1-1 application and other
hosted services, and (ii) the Government Segment, which
includes the design, development and deployment of information
processing and communication systems and related services to
government agencies.
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 2007
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 key performance
indicators in order to manage our business and evaluate our
financial and operating performance. Those indicators include:
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Revenue and gross profit.
We derive revenue
from the sales of systems and services including recurring
monthly service and subscriber fees, software licenses and
related service fees for the design, development, and deployment
of software and communication systems, and products and services
derived from the delivery of information processing and
communication systems to governmental agencies.
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Gross profit represents revenue minus direct cost of revenue,
including certain non-cash expenses.
The major items
comprising our cost of revenue are compensation and benefits,
third-party hardware and software, amortization of software
development costs, non-cash stock-based compensation, and
overhead expenses. The costs of hardware and third-party
software are
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17
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primarily associated with the delivery of systems, and fluctuate
from period to period as a result of the relative volume, mix of
projects, level of service support required and the complexity
of customized products and services delivered. Amortization of
software development costs, including acquired technology, is
associated with the recognition of systems revenue from our
Commercial Segment.
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Operating expenses.
Our operating expenses are
primarily compensation and benefits, professional fees, facility
costs, marketing and sales-related expenses, and travel costs as
well as certain non-cash expenses such as non-cash stock
compensation expense, depreciation and amortization of property
and equipment, and amortization of acquired intangible assets.
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Liquidity and cash flows.
The primary driver
of our cash flows is the results of our operations. Other
important sources of our liquidity are our lease financings
secured for the purchase of equipment and potential borrowings
under our credit lines.
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Balance sheet.
We view cash, working capital,
and accounts receivable balances and days revenues outstanding
as important indicators of our financial health.
|
Results of
Operations
Revenue and Cost
of Revenue
The following discussion addresses the revenue, direct cost of
revenue, and gross profit for our two business segments:
Commercial
Segment:
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Three Months
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Ended
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March 31,
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2008 vs. 2007
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($ in millions)
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2008
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2007
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$
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%
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Services revenue
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$
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15.5
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$
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13.7
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$
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1.8
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|
13
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%
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Systems revenue
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10.7
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6.8
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3.9
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57
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%
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Commercial Segment revenue
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26.2
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20.5
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5.7
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|
28
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%
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Direct cost of services revenue
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7.9
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7.4
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0.5
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|
7
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%
|
Direct cost of systems revenue
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2.0
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1.4
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0.6
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43
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%
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Commercial Segment cost of revenue
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9.9
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8.8
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1.1
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13
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%
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Services gross profit
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7.6
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6.3
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1.3
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21
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%
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Systems gross profit
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8.7
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5.4
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3.3
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61
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%
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Commercial Segment gross
profit
1
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|
$
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16.3
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$
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11.7
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|
$
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4.6
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|
39
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%
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Segment gross profit as a percent of revenue
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62
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%
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57
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%
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1
See
discussion of segment reporting in Note 5 to the
accompanying unaudited consolidated financial statements
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Commercial
Services Revenue, Cost of Revenue, and Gross Profit:
Commercial services revenue increased 13% for the three-months
ended March 31, 2008 versus the comparable period of 2007.
Our hosted services offerings include our E9-1-1 service for
wireless and Voice over Internet Protocol (VoIP) E9-1-1 service
providers, hosted Position Determining Entity (PDE) service, and
hosted Location Based Service (LBS) applications. Revenue from
these offerings primarily consists of monthly recurring service
fees and is recognized in the month earned.
E-911,
PDE,
VoIP and hosted LBS service fees are
18
priced based on units served during the period, such as the
number of customer cell sites served, the number of connections
to Public Service Answering Points (PSAPs), or the number of
customer subscribers served. Subscriber service revenue is
generated by client software applications such as Rand
McNally
®
Traffic. Maintenance fees on our systems and software licenses
are collected in advance and recognized ratably over the
maintenance period. Unrecognized maintenance fees are included
in deferred revenue. Custom software development, implementation
and maintenance services may be provided under time and
materials or fixed-fee contracts. Commercial services revenue in
the first quarter of 2008 was up $1.8 million or 13% higher
than in the first quarter of 2007 from increased service
connection deployments of our E9-1-1 services for cellular and
VoIP service providers, an increase in maintenance revenue, and
an increase in the number of carriers and carrier billable units
served.
The direct cost of commercial services revenue consists
primarily of network access, data feed and circuit costs,
compensation and benefits, equipment and software maintenance.
The direct costs of maintenance revenue consist primarily of
compensation and benefits expense. For the three-months ended
March 31, 2008, the direct cost of service revenue
increased 7% as compared to the first quarter of 2007, based on
the increase in revenue. We incurred an increase in labor and
direct costs related to custom development efforts responding to
customer requests and deployment requirements for VoIP. Our
total circuit and data access costs for the first quarter of
2008 increased as compared to the first quarter of 2007 as a
result of the increased number of cell sites, subscribers and
PSAPs served. The cost of circuit and other data access costs
accounted for approximately 13% and 14% of the total direct
costs of our commercial service revenues for the three-months
ended March 31, 2008 and 2007, respectively.
Gross profit was 49% and 46% for the three-months ended
March 31, 2008 and 2007, respectively based on improved
operating efficiencies enabled higher revenue with only nominal
increases in labor, fringe and contractor costs.
Commercial
Systems Revenue, Cost of Revenue, and Gross Profit:
We sell communications systems for enhanced services, including
text messaging and location-based services, to wireless carriers.
These systems are designed to incorporate our licensed software.
We design our software to ensure that it is compliant with all
applicable standards, including the GSM/UMTS standards for
location-based wireless services that were established in 2005
and, as such, we believe our software is positioned for early
adoption by carriers.
Licensing fees for our carrier software are generally a function
of its volume of usage in our customers networks. As a
carriers subscriber base or usage increases, the carrier
must purchase additional capacity under its license agreement
and we receive additional revenue. Systems revenues typically
contain multiple elements, which may include the product
license, installation, integration, and hardware. The total
arrangement fee is allocated among each element based on
vendor-specific objective evidence of the relative fair value of
each of the elements. Fair value is generally determined based
on the price charged when the element is sold separately. In the
absence of evidence of fair value of a delivered element,
revenue is allocated first to the undelivered elements based on
fair value and the residual revenue to the delivered elements.
The software licenses are generally perpetual licenses for a
specified volume of usage, along with the purchase of annual
maintenance at a specified rate. We recognize license fee
revenue when each of the following has occurred:
(1) evidence of an arrangement is in place; (2) we
have delivered the software; (3) the fee is fixed or
determinable; and (4) collection of the fee is probable.
Software projects that require significant customization are
accounted for under the percentage-of-completion method. We
measure progress to completion using costs incurred compared to
estimated total costs or labor costs incurred compared to
estimated total labor costs for contracts that have a
significant component of third-party materials costs. We
recognize estimated losses under long-term contracts in their
entirety upon discovery. If we did not accurately estimate total
costs to complete a contract or do not manage our contracts
within the planned budget, then future margins may be negatively
affected or losses on existing contracts may need to be
recognized. Software license fees
19
billed and not recognized as revenue are included in deferred
revenue. We may also realize proceeds as a result of
infringement claims that we make in enforcing our patents. In
2006, we reached a settlement for $1 million on a patent
infringement case and won a jury award of more than
$10 million in another infringement case; no revenue has
been recognized on the second case pending post trial motions,
appeals, and potential settlement.
Commercial systems revenue increased 57% for the three-months
ended March 31, 2008 versus the comparable period of 2007
due mainly to higher sales of licensed text messaging software.
A major carrier customer made a large license purchase for
increased capacity in the first quarter of 2008, compared to a
smaller capacity purchase in the first quarter of 2007. Other
than the difference in these license purchases, commercial
systems revenues were about the same in first quarters of 2008
and 2007.
The direct cost of our commercial systems consists primarily of
compensation, benefits, purchased equipment, third-party
software, travel expenses, and consulting fees as well as the
amortization of both acquired and capitalized software
development costs for all reported periods. There is no
significant direct cost associated with customer purchases of
licensed capacity. In the first quarter of 2008, direct costs of
systems consisted primarily of compensation, benefits,
third-party hardware and software, and $0.4 million of
amortization of software development costs.
Our commercial systems gross profit was $8.7 million in the
three-months ended March 31, 2008 versus $5.4 million
in the comparable period of 2007. The increase in gross margin
is due to the larger license sale in the first quarter of 2008.
Commercial systems gross profit was approximately 81% and 79% of
revenue March 31, 2008 and 2007, respectively.
Government
Segment:
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Three Months
|
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|
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Ended
|
|
|
|
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|
|
March 31,
|
|
|
2008 vs. 2007
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Services revenue
|
|
$
|
7.3
|
|
|
$
|
7.3
|
|
|
$
|
|
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|
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Systems revenue
|
|
|
6.9
|
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|
6.4
|
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|
0.5
|
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8
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%
|
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Government Segment revenue
|
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14.2
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13.7
|
|
|
|
0.5
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services revenue
|
|
|
5.7
|
|
|
|
5.7
|
|
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|
|
|
|
|
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|
Direct cost of systems revenue
|
|
|
5.1
|
|
|
|
5.4
|
|
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|
(0.3
|
)
|
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(6
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)%
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Government Segment cost of revenue
|
|
|
10.8
|
|
|
|
11.1
|
|
|
|
(0.3
|
)
|
|
|
(3
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)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services gross profit
|
|
|
1.5
|
|
|
|
1.6
|
|
|
|
(0.1
|
)
|
|
|
(6
|
)%
|
Systems gross profit
|
|
|
1.8
|
|
|
|
1.0
|
|
|
|
0.8
|
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Segment gross
profit
1
|
|
$
|
3.3
|
|
|
$
|
2.6
|
|
|
$
|
0.7
|
|
|
|
27
|
%
|
|
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|
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|
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Segment gross profit as a percent of revenue
|
|
|
23
|
%
|
|
|
19
|
%
|
|
|
|
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|
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|
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1
See
discussion of segment reporting in Note 5 to the
accompanying unaudited consolidated financial statements
|
We provide products and services to government customers under
long-term contracts. We recognize contract revenue as billable
costs are incurred and for fixed-price product delivery
contracts using the percentage-of-completion method or
proportional performance method, measured by either total labor
costs or total costs incurred compared to total estimated labor
costs or total costs to be incurred. We recognize estimated
losses on contracts in their entirety upon discovery. If we have
not accurately estimated total labor hours or costs to complete
a contract or do not manage our contracts within the planned
budget, then future margins may be negatively affected or losses
on existing contracts may need to be recognized. Under our
contracts with the U.S. Government, contract costs,
including the allocated indirect expenses, are subject to audit
and adjustment by the Defense Contract Audit Agency. Since the
20
Companys inception, no significant adjustment has resulted
from a DCAA audit. We record revenue under these contracts at
estimated net realizable amounts.
Government
Services Revenue, Cost of Revenue, and Gross Profit:
Government services revenue primarily consists of communications
engineering, program management, help desk outsource, satellite
space segment and airtime, network design and
management for government agencies. Our Government Segment also
operates teleport facilities for data connectivity via
satellite. Such services are delivered under time and materials
or fixed price contracts. For fixed price delivery contracts we
recognize revenue using the percentage-of-completion method or
proportional performance method, measured by either total labor
costs or total costs incurred compared to total estimated labor
costs or total costs to be incurred.
Services revenues were about the same at $7.3 million for
the three-months ended March 31, 2008 and 2007. Direct cost
of government services revenue consists of compensation,
benefits and travel incurred in delivering these services, as
well as satellite space segment purchased for resale to
government customers. These costs were also about the same at
$5.7 million.
Our gross profit from government services was about the same at
$1.5 million in the first quarter of 2008 and 2007.
Government
Systems Revenue, Cost of Revenue, and Gross Profit:
We generate government systems revenue from the design,
development, assembly and deployment of information processing
and communication systems, primarily deployable communications
systems, and integration of those systems into customer
networks, which are largely variations on our
SwiftLink
®
product line. These are lightweight, secure, deployable
communications systems, sold to units of the
U.S. Departments of State, Justice, and Defense, and other
agencies. We recognize contract revenue as billable costs are
incurred, and for fixed-price product delivery contracts using
the percentage-of-completion method, measured by either total
labor costs, total costs incurred, or units shipped compared to
total estimated labor costs, total costs, or units as
appropriate under the contract. We recognize estimated losses on
contracts in their entirety upon discovery. If we do not
accurately estimate total labor costs or total costs to complete
a contract or do not manage our contracts within the planned
budget, then future margins may be negatively affected or losses
on existing contracts may need to be recognized, or contract
terms must be renegotiated.
Systems sales in our Government Segment were $6.9 million
for the three-months ended March 31, 2008 versus
$6.4 million in the first quarter of 2007. The increase in
the first quarter of 2008 over the same period in 2007
represents higher sales volume of unit sales of our
Swiftlink
®
and deployable communication systems resulting from competitive
wins, largely under the World Wide Satellite Systems Army
procurement vehicle.
The cost of our government systems revenue consists of costs
related to purchased equipment components, compensation,
benefits, travel, and the costs of third-party contractors that
we engage. These equipment and third-party costs are variable
for our various types of products, and margins may fluctuate
between periods based on the respective product mixes.
Our government systems gross profit was $1.8 million in the
first quarter of 2008, up from $1.0 million in the
comparable period of 2007 due mainly to increased sales volume
and slightly higher margins.
Major
Customers
For the three-months ended March 31, 2008, customers that
accounted for 10% or more of total revenue were Verizon Wireless
and agencies of the U.S. federal Government. The loss of
either of these customers would have a material adverse impact
on our business. Verizon Wireless and various
U.S. Government agencies also accounted for 10% or more of
total revenue for the three-months ended
21
March 31, 2007. Verizon Wireless is a customer of the
Commercial Segment, and the various U.S. Government
agencies are customers of the Government Segment.
Revenue
Backlog
As of March 31, 2008 and 2007, we had unfilled orders or
backlog as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
March 31,
|
|
|
2008 vs. 2007
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Commercial Segment
|
|
$
|
89.9
|
|
|
$
|
39.2
|
|
|
$
|
50.7
|
|
|
|
129
|
%
|
Government Segment
|
|
|
34.9
|
|
|
|
29.6
|
|
|
|
5.3
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funded contract backlog
|
|
$
|
124.8
|
|
|
$
|
68.8
|
|
|
$
|
56.0
|
|
|
|
81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Segment
|
|
$
|
98.6
|
|
|
$
|
39.2
|
|
|
$
|
59.4
|
|
|
|
152
|
%
|
Government Segment
|
|
|
126.4
|
|
|
|
50.4
|
|
|
|
76.0
|
|
|
|
151
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total backlog of orders and commitments, including customer
options
|
|
$
|
225.0
|
|
|
$
|
89.6
|
|
|
$
|
135.4
|
|
|
|
151
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to be realized within next 12 months
|
|
$
|
78.0
|
|
|
$
|
57.8
|
|
|
$
|
20.2
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded contract backlog on March 31, 2008 was approximately
$125 million, of which the Company expects to recognize
approximately $78 million in the next twelve months. Total
backlog was approximately $225 million at the end of the
first quarter of 2008. Funded contract backlog represents
contracts for which fiscal year funding has been appropriated by
our customers (mainly federal agencies), and for our hosted
services is computed by multiplying the most recent months
recurring revenue times the remaining months under existing
long-term agreements, which we believe is the best available
information for anticipating revenue under those agreements.
Total backlog, as is typically measured by government
contractors, includes orders covering optional periods of
service
and/or
deliverables, but for which budgetary funding may not yet have
been approved. Company backlog at any given time may be affected
by a number of factors, including the availability of funding,
contracts being renewed or new contracts being signed before
existing contracts are completed. Some of our backlog could be
canceled for causes such as late delivery, poor performance and
other factors. Accordingly, a comparison of backlog from period
to period is not necessarily meaningful and may not be
indicative of eventual actual revenue.
Operating
Expenses
Research and
development expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
March 31,
|
|
2008 vs. 2007
|
($ in millions)
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
Research and development expense
|
|
$
|
4.1
|
|
|
$
|
3.1
|
|
|
$
|
1.0
|
|
|
|
32
|
%
|
Percent of total revenue
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
Our research and development expense consists primarily of
compensation, benefits, travel costs, and a proportionate share
of facilities and corporate overhead. The costs of developing
software products are expensed prior to establishing
technological feasibility. Technological feasibility is
established for our software products when a detailed program
design is completed. We incur research and development costs to
enhance existing packaged software products as well as to create
new software products, including software hosted in our network
operations center. These costs primarily include compensation
and benefits as well as costs associated with using third-party
laboratory and testing resources. We expense such costs as they
are incurred unless technological feasibility has been reached
and we believe that the capitalized costs will be recoverable.
22
The expenses we incur relate mainly to software applications
which are being marketed to new and existing customers on a
global basis. Throughout the three-months ended March 31,
2008 and 2007, research and development was primarily focused on
cellular and hosted location-based applications, including Voice
over IP E9-1-1, enhancements to our hosted location-based
service platform, wireless location-based service applications
such as navigation, traffic, and point-of-interest finder, and
other feature enhancements.
For the three-months ended March 31, 2008, we capitalized
$0.2 million of research and development costs for certain
software projects in accordance with the above policy versus
$0.4 million for the comparable quarter in 2007. The
capitalized costs relate to our location-based software. These
costs will be amortized on a
product-by-product
basis using the straight-line method over the products
estimated useful life, not longer than three years. Amortization
is also computed using the ratio that current revenue for the
product bears to the total of current and anticipated future
revenue for that product (the revenue curve method). If this
revenue curve method results in amortization greater than the
amount computed using the straight-line method, amortization is
recorded at that greater amount. We believe that these
capitalized costs will be recoverable from future gross profits
generated by these products.
Research and development expenses increased in the three-months
ended March 31, 2008 versus the comparable period of 2007
primarily as a result of increased company personnel assigned to
software development work, and increased corporate allocations
related to non-recurring facilities and variable compensation
charges.
Sales and
marketing expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
March 31,
|
|
2008 vs. 2007
|
($ in millions)
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
Sales and marketing expense
|
|
$
|
3.1
|
|
|
$
|
3.2
|
|
|
$
|
(0.1
|
)
|
|
|
(3
|
)%
|
Percent of total revenue
|
|
|
8
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
Our sales and marketing expenses include compensation and
benefits, trade show expenses, travel costs, advertising and
public relations costs as well as a proportionate share of
facility-related costs which are expensed as incurred. Our
marketing efforts also include speaking engagements and
attending and sponsoring industry conferences. We sell our
software products and services through our direct sales force
and through indirect channels. We have also historically
leveraged our relationship with original equipment manufacturers
to market our software products to wireless carrier customers.
We sell our products and services to the U.S. Government
primarily through direct sales professionals. Sales and
marketing costs decreased for the three-months ended
March 31, 2008 and 2007, respectively due to reduction in
commercial sales management expenditures more than offsetting
increased government sales expenditures.
General and
administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
March 31,
|
|
2008 vs. 2007
|
($ in millions)
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
General and administrative expense
|
|
$
|
5.3
|
|
|
$
|
4.7
|
|
|
$
|
0.6
|
|
|
|
13
|
%
|
Percent of total revenue
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
General and administrative expense consists primarily of
compensation costs and other costs associated with management,
finance, human resources and internal information systems. 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
$0.6 million increase in the first quarter of 2008 was due
to an allocated portion of a $0.5 million charge for
vacating one of our facility leases in Tampa,
23
Florida, which was due to expire in December 2009 and an
allocated portion of a $0.7 million charge for
non-executive variable compensation.
Depreciation and
amortization of property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
March 31,
|
|
2008 vs. 2007
|
($ in millions)
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
Depreciation and amortization of property and equipment
|
|
$
|
1.5
|
|
|
$
|
1.7
|
|
|
$
|
( 0.2
|
)
|
|
|
( 12
|
)%
|
Average gross cost of property and equipment during the period
|
|
$
|
48.0
|
|
|
$
|
53.6
|
|
|
$
|
(5.6
|
)
|
|
|
(10
|
)%
|
Depreciation and amortization of property and equipment
represents the period costs associated with our investment in
computers, telephone equipment, software, furniture and
fixtures, and leasehold improvements. We compute depreciation
and amortization using the straight-line method over the
estimated useful lives of the assets. The estimated useful life
of our assets generally ranges from 5 years for furniture,
fixtures, and leasehold improvements to 3 to 4 years for
most other types of assets including computers, software,
telephone equipment and vehicles. Depreciation expense in the
first quarter of 2008 reflects a lower balance of net fixed
asset cost than a year ago and assets bought more than three
years ago having become fully depreciated.
Amortization of
acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
March 31
|
|
2008 vs. 2007
|
($ in millions)
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
Amortization of acquired intangible assets
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
|
|
|
The amortization of acquired intangible assets relates to the
assets acquired from Kivera, Inc. in 2004, which are being
amortized over their useful lives of between three and nineteen
years using the greater of the straight-line method or the
revenue curve method.
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
March 31
|
|
|
2008 vs. 2007
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Interest expense incurred on notes payable
|
|
$
|
0.3
|
|
|
$
|
0.5
|
|
|
$
|
(0.2
|
)
|
|
|
(40
|
)%
|
Interest expense incurred on capital lease obligations
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
NM
|
|
Amortization of deferred financing fees
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
NM
|
|
Amortization of debt discount
|
|
|
|
|
|
|
0.3
|
|
|
|
(0.3
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and financing expense
|
|
$
|
0.5
|
|
|
$
|
1.0
|
|
|
$
|
( 0.5
|
)
|
|
|
(50
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense is incurred under notes payable, a line of
credit, and capital lease obligations. Interest on our notes
payable is primarily at stated interest rates at the banks
prime rate plus 0.25% per annum (5.5% at March 31,
2008) and interest on line of credit borrowing is at the
banks prime rate, which was 5.25% per annum as of
March 31, 2008.
On June 25, 2007, we refinanced our $10 million long
term debt with a new five year note payable to our principal
bank. The borrowing rate under the new note was the banks
prime rate plus 0.25% per annum, (5.5% at March 31,
2008) and the note is repayable in equal monthly
installments of $0.2 million plus interest. The funds were
used primarily to retire the March 2006 secured notes (2006
Notes). This refinancing resulted in the $2.4 million
write-off of unamortized debt discount and debt issuance
expenses in the second quarter of 2007. In March 2006, we issued
and sold $10 million in principal
24
amount of secured notes due March 10, 2009 (2006 Notes),
with cash interest at the rate of 14% per annum, along with
warrants to purchase an aggregate of 1.75 million shares of
our Class A Common Stock at an exercise price of $2.40 per
share (2006 Warrants). The 2006 Notes provide for optional
in-kind interest payments, but we have paid all interest due
under the 2006 Notes in cash.
Our bank line of credit expires in June 2010, and our maximum
line of credit is $22 million, subject to borrowing base
limitations and working capital metrics. There were no
borrowings outstanding under our line of credit at
March 31, 2008.
In December 2006, we borrowed $5 million under 3 year
notes secured by accounts receivable of one customer. Effective
March 28, 2008, we paid this debt in full and modified the
terms of the note to a line of credit. Under the line of credit
agreement, the maximum indebtedness of the line is equal to the
current maximum debt ($3.2 million at March 31,
2008) less $0.2 million per month for the number of
full months that have expired since the effective date. The
remaining term of the line of credit is twenty-one months at
March 31, 2008, and the maturity date of the line of credit
is December 28, 2009. The borrowing rate is London
InterBank Offered Rate (LIBOR) plus 500 basis points. As of
March 31, 2008, the Company had not borrowed against this
line.
Cash interest expense on notes payable in the first quarter of
2008 was lower than in the first quarter of 2007 due the effect
of higher priced March 2006 debt. The interest cost of capital
lease financings was about the same in both periods.
Deferred financing fees relate to the up-front expenditures at
the time of contracting for notes payable and our revolving line
of credit facility, which are being amortized over the term of
the note or the life of the facility. The higher 2007
amortization reflects fees to borrow the 2006 Notes.
The amortization of debt discount relates to the 2006 Warrants
as well as adjustment to the terms of warrants issued in
connection with 2004 financings. The value of the 2006 Warrants
was estimated to be $2.9 million, determined using the
Black-Scholes option-pricing model, which was recorded as a debt
discount and additional paid-in capital in 2004. The value of
the adjustments to the 2004 Warrants was estimated to be
$0.6 million using the Black-Scholes option-pricing model,
which was recorded as a debt discount and additional paid-in
capital in the first quarter of 2006. The total debt discount at
issuance was being amortized to interest expense over the three
year life of the 2006 Notes, yielding an effective interest rate
of 15.2%. The remaining balance of unamortized debt discount was
fully expensed upon the retirement of those notes in the second
quarter of 2007.
Our total interest and financing expense decreased for the
three-months ended March 31, 2008 versus the comparable
period of 2007 primarily as a result of retiring our incremental
March 2006 and December 2006 borrowings.
Other
income/(expense), net:
Other income/(expense), net consists primarily of interest
earned on investment accounts, foreign currency
translation/transaction gain or loss, which is dependent on
international fluctuations in exchange rates. For the
three-months ended March 31, 2008, the Company recorded a
loss of $0.5 million from the decline in the fair market
value of a certain security considered to be other than
temporary and recognized a corresponding expense for the
three-months ended March 31, 2008. The other components of
other income/(expense), net typically remain comparable between
periods.
Income
taxes:
We have recorded a full valuation allowance for deferred tax
assets as a result of the uncertainty regarding our ability to
fully realize our net operating loss carry-forwards and other
deferred tax assets. Income tax expense was recorded for the
three-months ended March 31, 2008 for alternative minimum
tax due on income generated for the quarter. No income tax
provision for federal or state income taxes was made for the
three-months ended March 31, 2007.
25
Discontinued
Operations Enterprise assets
In 2007, the Company sold its Enterprise division operations,
which had previously been included in our Commercial Segment.
Their operations and cash flows of the business have been
eliminated from those of continuing operations and the Company
has no significant involvement in the operations since the
disposal transactions. Accordingly, the assets, liabilities,
results of operations, and cash flows for the Enterprise assets
have been classified as discontinued operations for all periods
presented in the Consolidated Financial Statements included in
this Quarterly Report on
Form 10-Q
in accordance with Statement of Financial Accounting Standards
No. 144,
Accounting for the Impairment or Disposal of
Long-Lived Assets
(Statement No. 144).
Effective January 1, 2007, the Company sold two of its
three Enterprise units to strategic buyers for common stock in
the acquiring publicly traded companies valued at approximately
$1 million and earn-out arrangements. During the first
quarter of 2008, we wrote down one of the investments by about
$0.5 million. The Company does not currently expect to
receive material payments from the earn-out arrangement. During
May 2007, the last Enterprise unit was sold for $4 million
in cash of which $0.2 is in escrow, a $1 million
18-month
note, and $0.2 million in equity interest.
The following table presents income statement data for the
discontinued Enterprise operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
March 31
|
|
|
2008 vs. 2007
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Enterprise revenue
|
|
$
|
|
|
|
$
|
3.9
|
|
|
$
|
(3.9
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise gross profit
|
|
|
|
|
|
|
0.5
|
|
|
|
(0.5
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.1
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter 2007 revenue, gross profit, and operating expenses
include only Mobile Asset Management division operations, and
the revenue and costs of the two subscriber-based divisions that
were sold effective January 1, 2007. Other income in 2007
represents the estimated earn-out payments earned during the
quarter under our subscriber unit divestiture agreements.
Net
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
March 31,
|
|
2008 vs. 2007
|
($ in millions)
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
Net income
|
|
$
|
4.6
|
|
|
$
|
0.6
|
|
|
$
|
4.0
|
|
|
|
667
|
%
|
Net income increased for the three-months ended March 31,
2008 versus the comparable period of 2007 due primarily to
increased revenue and gross profit from continuing operations,
the absence of the effect of discontinued operations, and other
factors discussed above.
26
Liquidity and
Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
March 31,
|
|
|
2008 vs. 2007
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Net cash and cash equivalents provided by/(used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
$
|
4.6
|
|
|
$
|
0.8
|
|
|
$
|
3.8
|
|
|
|
475
|
%
|
Non-cash charges
|
|
|
3.5
|
|
|
|
3.4
|
|
|
|
0.1
|
|
|
|
3
|
%
|
Net changes in working capital including changes in other assets
|
|
|
(0.5
|
)
|
|
|
(9.6
|
)
|
|
|
9.1
|
|
|
|
95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
7.6
|
|
|
|
(5.4
|
)
|
|
|
13.0
|
|
|
|
240
|
%
|
Purchases of property and equipment
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
|
|
NM
|
|
|
|
NM
|
|
Capitalized software development costs
|
|
|
(0.2
|
)
|
|
|
(0.4
|
)
|
|
|
0.2
|
|
|
|
50
|
%
|
Proceeds from new borrowings
|
|
|
|
|
|
|
8.0
|
|
|
|
(8.0
|
)
|
|
|
100
|
%
|
Payments on long-term debt and capital lease payments
|
|
|
(4.6
|
)
|
|
|
(1.6
|
)
|
|
|
(3.0
|
)
|
|
|
(188
|
)%
|
Other financing activities
|
|
|
0.1
|
|
|
|
2.6
|
|
|
|
(2.5
|
)
|
|
|
(96
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by continuing operations
|
|
|
2.5
|
|
|
|
2.8
|
|
|
|
(0.3
|
)
|
|
|
(107
|
)%
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in operating activities in discontinued operations
|
|
|
|
|
|
|
(2.4
|
)
|
|
|
2.4
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
2.5
|
|
|
$
|
0.4
|
|
|
$
|
2.1
|
|
|
|
525
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days revenues outstanding in accounts receivable, including
unbilled receivables
|
|
|
81
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
Capital resources:
We have funded our
operations, acquisitions, and capital expenditures primarily
using cash generated by our operations, as well as the capital
leases to fund fixed asset purchases.
Sources and uses of cash:
The
Companys cash and cash equivalents balance was
approximately $18.5 million at March 31, 2008, a
$7.7 million increase from $10.8 million at
March 31, 2007.
Operations:
Cash generated by continuing
operations increased to $7.6 million for the first quarter
of 2008 compared to cash used in by continuing operations of
$5.4 million in 2007. This change is primarily due to
higher earnings for the quarter and changes in working capital.
Discontinued operations used $2.4 million in the first
quarter of 2007. The operations and cash flows of the
discontinued operations have been eliminated from those of
continuing operations and the Company has no significant
involvement in the operations since the disposal transaction.
Investing activities:
Fixed asset additions
were approximately $0.4 million for both the three-months
ended March 31, 2008, and 2007. Also, investments were made
in development of carrier software for resale which had reached
the stage of development calling for capitalization, in the
amounts approximately $0.2 million and $0.4 million
for the three-months ended March 31, 2008 and 2007,
respectively.
Financing activities:
On June 25, 2007,
we refinanced $10 million of secured notes with a five year
bank term loan. The borrowing rate under the new term loan was
prime plus 0.25% per annum (5.5% at March 31,
2008) and the loan is repayable in equal monthly
installments of $0.2 million plus interest. The funds were
used primarily to retire the March 2006 secured notes. In March
2006, we issued (i) $10 million of secured notes due
March 10, 2009, with cash interest at 14% per annum, and
(ii) warrants to purchase an aggregate of 1.75 million
shares of our Class A Common Stock at an exercise price of
$2.40 per share. Also, some warrants that we had previously
issued in 2004 contained provisions which required an adjustment
in both the warrant price and the number of warrants outstanding
as a consequence of the
27
issuance of 2006 Warrants. The resulting carrying value of the
debt at issuance was $6.5 million, net of the original
discount of $3.5 million which was amortized to interest
expense over its three-year term using the effective interest
method, yielding an effective interest rate of 15.2%. The
remaining unamortized debt discount and deferred debt issuance
expenses of $2.4 million were written off in the second
quarter of 2007 as a result of early retirement of the March
2006 note.
We have a $22 million revolving credit line with our
principal bank through June 2010. Upon amendment of our
agreement with the bank in the second quarter of 2007, the
borrowing rate was reduced from prime plus 1.25% to the
banks prime rate, which was 5.25% per annum at
March 31, 2008. Borrowings at any time are limited based
mainly on accounts receivable levels and a working capital
ratio, each as defined in the amended line of credit agreement.
The line of credit available is also reduced by the amount of
letters of credit outstanding, which was $1.1 million at
March 31, 2008. As of March 31, 2008, we had no
borrowings outstanding under our bank line of credit and had
approximately $14.3 million of unused borrowing
availability under the line.
Our line of credit and term loan agreement contains covenants
requiring us to maintain a minimum adjusted quick ratio and a
minimum liquidity ratio; as well as other restrictive covenants
including, among others, restrictions on our ability to merge,
acquire assets above prescribed thresholds, undertake actions
outside the ordinary course of our business (including the
incurrence of indebtedness), guarantee debt, distribute
dividends, and repurchase our stock, and minimum tangible net
worth. The bank credit agreement also contains a subjective
covenant that requires (i) no material adverse change in
the business, operations, or financial condition of the Company
to occur, or (ii) no material impairment of the prospect of
repayment of any portion of the borrowings under the agreement;
or (iii) no material impairment of value or priority of the
lenders security interests in the collateral of the agreement.
If our performance does not result in compliance with any of our
restrictive covenants, we would seek to further modify our
financing arrangements, but there can be no assurance that the
bank would not exercise its rights and remedies under its
agreement with us, including declaring all outstanding debt due
and payable. As of March 31, 2008, we were in compliance
with the covenants related to our line of credit and term loan
agreement and we believe that the Company will continue to
comply with these covenants.
On December 28, 2006, we issued a $5 million note for
a term of three years, with cash interest at 10.35% per annum,
secured by accounts receivable of one customer to an
institutional lender. Effective March 28, 2008, we paid our
December 2006 term loan in full and modified the terms of the
note to a line of credit. Under the line of credit agreement,
the maximum indebtedness of the line is equal to the current
maximum debt ($3.2 million at March 31,
2008) less $0.2 million per month for the number of
full months that have expired since the effective date. The
remaining term of the line of credit is twenty-one months at
March 31, 2008, and the maturity date of the line of credit
is December 28, 2009. The borrowing rate is London
InterBank Offered Rate (LIBOR) plus 500 basis points. As of
March 31, 2008, we had no borrowings outstanding and
$3.2 million in unused borrowing availability under the
line.
We currently believe that we have sufficient capital resources
with cash generated from operations as well as cash on hand to
meet our anticipated cash operating expenses, working capital,
and capital expenditure and debt service needs for the next
twelve months. We have borrowing capacity available to us in the
form of capital leases as well as a line of credit arrangement
with our principal bank which expires in June 2010. We may also
consider raising capital in the public markets as a means to
meet our capital needs and to invest in our business. Although
we may need to return to the capital markets, establish new
credit facilities or raise capital in private transactions in
order to meet our capital requirements, we can offer no
assurances that we will be able to access these potential
sources of funds on terms acceptable to us or at all.
28
Off-Balance Sheet
Arrangements
As of March 31, 2008, we had standby letters of credit
issued on our behalf of approximately $1.1 million,
principally pursuant to a contracting requirement for our
Government Segments City of Baltimore services contract.
Contractual
Commitments
As of March 31, 2008, our most significant commitments
consisted of long-term debt, obligations under capital leases
and non-cancelable operating leases. We lease certain furniture
and computer equipment under capital leases. We lease office
space and equipment under non-cancelable operating leases. As of
March 31, 2008 our commitments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 12
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
|
|
|
($ in millions)
|
|
Months
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Notes payable
|
|
$
|
2.7
|
|
|
$
|
4.8
|
|
|
$
|
2.8
|
|
|
$
|
|
|
|
$
|
10.3
|
|
Capital lease obligations
|
|
|
2.1
|
|
|
|
2.0
|
|
|
|
0.5
|
|
|
|
|
|
|
|
4.6
|
|
Operating leases
|
|
|
3.3
|
|
|
|
6.8
|
|
|
|
1.1
|
|
|
|
0.3
|
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments
|
|
$
|
8.1
|
|
|
$
|
13.6
|
|
|
$
|
4.4
|
|
|
$
|
0.3
|
|
|
$
|
26.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
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 2007 Annual Report on
Form 10-K.
Foreign Currency
Risk
For the three-months ended March 31, 2008, we generated
$1.5 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, 2008, we had approximately $1.4 million
of billed accounts receivable that are denominated in foreign
currencies and would be exposed to foreign currency exchange
risk. During 2008, our average receivables and average deferred
revenue balances subject to foreign currency exchange risk were
$0.3 and $0.5 million, respectively. We have not had a
material balance of unbilled receivables denominated in foreign
currency at any point in 2008. We recorded immaterial
transaction gains or losses on foreign currency denominated
receivables and deferred revenue for the three-months ended
March 31, 2008.
There have not been any other material changes to our foreign
currency risk as described in Item 7A of our 2007 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,
2008.
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.
30
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
In November 2001, a shareholder class action lawsuit was filed
against us, certain of our current officers and a director, and
several investment banks that were the underwriters of our
initial public offering (the Underwriters):
Highstein v. Telecommunication Systems, Inc., et al.,
United States District Court for the Southern District of New
York, Civil Action
No. 01-CV-9500.
The plaintiffs seek an unspecified amount of damages. The
lawsuit purports to be a class action suit filed on behalf of
purchasers of our Class A Common Stock during the period
August 8, 2000 through December 6, 2000. The
plaintiffs allege that the Underwriters agreed to allocate our
Class A Common Stock offered for sale in our initial public
offering to certain purchasers in exchange for excessive and
undisclosed commissions and agreements by those purchasers to
make additional purchases of our Class A Common Stock in
the aftermarket at pre-determined prices. The plaintiffs allege
that all of the defendants violated Sections 11, 12 and 15
of the Securities Act, and that the underwriters violated
Section 10(b) of the Exchange Act, and
Rule 10b-5
promulgated thereunder. The claims against us of violation of
Rule 10b-5
have been dismissed with the plaintiffs having the right to
re-plead. On February 15, 2005, the District Court issued
an Order preliminarily approving a settlement agreement among
class plaintiffs, all issuer defendants and their insurers,
provided that the parties agree to a modification narrowing the
scope of the bar order set forth in the settlement agreement.
The parties agreed to a modification narrowing the scope of the
bar order, and on August 31, 2005, the court issued an
order preliminarily approving the settlement. On
December 5, 2006, the United States Court of Appeals for
the Second Circuit overturned the District Courts
certification of the class of plaintiffs who are pursuing the
claims that would be settled in the settlement against the
underwriter defendants. Plaintiffs filed a Petition for
Rehearing and Rehearing En Banc with the Second Circuit on
January 5, 2007 in response to the Second Circuits
decision. On April 6, 2007, the Second Circuit denied
plaintiffs rehearing petition, but clarified that the
plaintiffs may seek to certify a more limited class in the
District Court. On June 25, 2007, the District Court signed
an Order terminating the settlement. We intend to continue to
defend the lawsuit until the matter is resolved. We have
purchased Directors and Officers insurance policy which we
believe should cover any potential liability that may result
from these claims, but can provide no assurance that any or all
of the costs of the litigation will ultimately be covered by the
insurance. No reserve has been created for this matter. More
than 300 other companies have been named in nearly identical
lawsuits that have been filed by some of the same law firms that
represent the plaintiffs in the lawsuit against us.
On July 12, 2006, we filed suit in the US District Court
for the Eastern District of Virginia against Mobile 365 (now
Sybase 365, a subsidiary of Sybase Inc.) and WiderThan Americas
for patent infringement related to U.S. patent
No. 6,985,748, Inter-Carrier Short Messaging Service
Providing Phone Number Only Experience, issued to the Company.
We resolved the matter with regard to WiderThan Americas, and
during the second quarter of 2007 we received a favorable jury
decision that Sybase 365 infringed the claims of our patent. The
jury awarded us a one-time monetary payment in excess of
$10 million for past damages and a 12% royalty. The jury
also found Sybase 365s infringement willful and upheld the
validity of the patent. The jurys findings remain subject
to post trial motions. After the judge rules on the post trial
motions, either side may appeal to the US Court of Appeals for
the Federal Circuit. There can be no assurances to what extent
the matter will continue to be successful, if at all.
Additionally, we could be subject to counter claims. To date,
the Company has not received or recorded any amounts related to
this jury award.
In October 2006, two former shareholders of Xypoint Corporation
sued the former officers and directors of that corporation for
breach of fiduciary duty and violation of certain Washington
state securities and consumer protection acts when they
approved, and recommended that shareholders approve, the merger
of Xypoint into TeleCommunication Systems, Inc. The plaintiffs
request unspecified damages. The merger agreement from 2001
provided that we would indemnify the officers and directors of
Xypoint for a period of six years after the merger (ending
January 2007) for their actions in approving the merger. In
December 2006, the complaint was amended to include TCS and
Windward Acquisition
31
Corporation (our acquisition subsidiary), an extinguished
corporation, as defendant. On May 7, 2007, the Honorable
Jeffrey M. Ramsdell of the King County Superior Court
(Washington) entered an order dismissing the complaint, with
prejudice. On October 19, 2007, the plaintiffs filed an
appeal of the dismissal order with the Washington Court of
Appeals. The briefing on plaintiffs appeal is completed,
but no date has been set for the appeal hearing. We intend to
continue to defend the lawsuit vigorously. We have purchased
Directors and Officers insurance policies to cover claims
against the former officers and directors of Xypoint and us, and
believe that one or more of those insurance policies may cover
some or all of the costs of this lawsuit. On January 4,
2008, we filed suit in the King County Superior Court
(Washington) against Great American Insurance Company for the
costs we have incurred in defending the suit and any potential
settlement or judgment. There can be no assurances that the
outcome will be favorable to us or that the insurance policies
will be sufficient to cover the costs incurred or any settlement
or judgment that may result.
On December 21, 2007, we filed suit in the US District
Court for the Eastern District of Virginia against Research In
Motion Limited (RIM) for patent infringement related to
U.S. patent No. 6,871,215, Universal Mail Wireless
Email Reader (U-mail), issued to the Company. On April 11,
2008, we entered into a stand still agreement with RIM through
June 12, 2008, and dismissed the suit without prejudice so
that we can continue settlement discussions. There can be no
assurances to what extent the matter will be successful, if at
all, and we could become subject to counter claims.
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.
There have not been any material changes to the information
previously disclosed in Item 1A. Risk Factors
in our 2007 Annual Report on
Form 10-K.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
None.
|
|
Item 3.
|
Defaults
Upon Senior Securities
|
None.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
|
|
Item 5.
|
Other
Information
|
(a) None
(b) None.
32
|
|
|
|
|
Exhibit
|
|
|
Numbers
|
|
Description
|
|
|
31
|
.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
31
|
.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
32
|
.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
32
|
.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 5th day of
May 2008.
TELECOMMUNICATION SYSTEMS, INC.
Maurice B. Tosé
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this Report has been signed below by the
following persons on behalf of the Registrant in the capacities
and on the dates indicated.
|
|
|
/s/
Maurice B. Tosé
Maurice B. Tosé
May 5, 2008
|
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/
Thomas M. Brandt, Jr.
Thomas M. Brandt, Jr.
May 5, 2008
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
|
34
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