10-K 1 tsys-10k_20131231.htm 10-K

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2013

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-30821

 

TELECOMMUNICATION SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

52-1526369

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

275 West Street, Annapolis, MD

 

21401

(Address of principal executive offices)

 

(Zip Code)

(410) 263-7616

(Registrant’s telephone number, including area code)

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

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

 

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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

 

Large accelerated filer ¨

 

Accelerated filer þ

 

Non-accelerated filer ¨

 

Smaller reporting company ¨

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

As of June 30, 2013, the aggregate market value of the Class A Common Stock held by non-affiliates, as reported on the NASDAQ Global Market, was approximately $110,421,822.*

As of February 21, 2014 there were 54,595,507 shares of Class A Common Stock and 4,997,769 shares of Class B Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

 

Document

 

Part of 10-K into which incorporated

Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 29, 2014

 

Part III

* Excludes 7,891,107 shares of Class A Common Stock and 5,147,769 shares of Class B Common Stock deemed to be held by stockholders whose ownership exceeds ten percent of the shares outstanding at June 30, 2013. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

  

Page
Number

Part I

  

 

 

Item 1

 

Business

  

 

5

Item 1A

 

Risk Factors

  

 

12

Item 1B

 

Unresolved Staff Comments

  

 

24

Item 2

 

Properties

  

 

24

Item 3

 

Legal Proceedings

  

 

25

Item 4

 

Mine Safety Disclosures

  

 

25

Part II

  

 

 

Item 5

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

 

26

Item 6

 

Selected Financial Data

  

 

27

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

 

29

Item 7A

 

Qualitative and Quantitative Disclosure About Market Risk

  

 

45

Item 8

 

Financial Statements and Supplementary Data

  

 

46

Item 9

 

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

  

 

46

Item 9A

 

Controls and Procedures

  

 

46

Item 9B

 

Other Information

  

 

47

Part III

  

 

 

Item 10

 

Directors, Executive Officers and Corporate Governance

  

 

49

Item 11

 

Executive Compensation

  

 

49

Item 12

 

Security Ownership of Certain Beneficial Owners and Management

  

 

49

Item 13

 

Certain Relationships and Related Transactions and Director Independence

  

 

49

Item 14

 

Principal Accountant Fees and Services

  

 

49

Part IV

  

 

 

Item 15

 

Exhibits, Financial Statement Schedules

  

 

50

Signatures

  

 

51

Exhibit Index

  

 

52

Index to Consolidated Financial Statements

  

F

1

 

 

 

2


Cautionary Note Concerning Factors That May Affect Future Results

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

(i)

we intend to continue to selectively consider acquisitions of companies and technologies in order to increase the scale and scope of our operations, market presence, products, services and customer base and that could enhance both our business segments;

(ii)

we intend to expand our domestic and international carrier base through channels and by re-deploying our direct sales and field support organizations;

(iii)

we intend to expand our adaptation of our technology for device platform and other non-carrier customers and our penetration of such customers;

(iv)

we intend to retain any future earnings to fund the business and do not currently anticipate paying any cash dividends in the foreseeable future;

(v)

we believe that our expertise in the areas of 9-1-1, location-based and messaging services, and secure satellite communications can be leveraged to provide the needed wireless infrastructure for the U.S. Departments of Homeland Security and Defense, and we are pursuing opportunities to provide such products and services;

(vi)

we believe that TCS enjoys a competitive advantage, because our government customers can benefit from a single-source vendor;

(vii)

we believe we have invented to enable key features of the location services, wireless text alerts, Short Message Service Center, mobile-originated data and E9-1-1 network software;

(viii)

we believe relations with our employees are good;

(ix)

we believe our technology does not infringe the cited patents and due to specific clauses within the customer contractual arrangements that may or may not give rise to an indemnification obligation, and that we believe we should not incur any material liabilities from customer indemnification requests;

(x)

we believe the assumptions and estimates we have made regarding our valuation of certain of the intangible assets are reasonable and that unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results;

(xi)

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

(xii)

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

(xiii)

we believe we have sufficient capital resources including cash generated from operations as well as cash on hand to meet our anticipated cash operating expenses, working capital and capital expenditure and debt services needs for the next twelve months;

(xiv)

we expect our deployable communication system terminals will be provided more broadly in the U.S. military;

(xv)

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

(xvi)

we expect our revenue from messaging to continue declining, text messaging continues to be the most popular type of messaging for mobile users;

(xvii)

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

(xviii)

we expect to realize revenue from our backlog;

(xix)

a sustained, significant decline in the Company’s stock price and market capitalization, a decline in the Company’s expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower growth , among others, may indicate an impairment of our goodwill;

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(xx)

our methods used to value our goodwill and long-lived assets and our exercise of significant judgment in those matters are reasonable;

(xxi)

our estimated amounts of future non-cash stock compensation are reasonable or appropriate;

(xxii)

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

(xxiii)

our expectations relating to our R&D spending are reasonable and appropriate;

(xxiv)

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

(xxv)

our expectations with regard to our senior credit facility, notes and notes hedge transactions are reasonable;

(xxvi)

we plan to provide technology solutions to a broadening body of U.S. federal, state and local, and international government customers;

(xxvii)

our approaches to monetization of our patent portfolios and intellectual property will generate a material return;

(xxviii)

a decrease in expenditures, the elimination or curtailment of a material program in which we are involved, the expiration of a contracting vehicle (like the WWSS contract vehicle) or changes in payment patterns of our customers as a result of changes in U.S. government spending, could have a material adverse effect on our operating results, financial condition, and/or cash flows;

(xxix)

we continue to develop and sell software and engineered systems which we deliver through deployment in customer wireless networks, through hosted and subscription business models, and fee for service contracts;

(xxx)

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

(xxxi)

we are actively pursuing Next Generation 9-1-1 business;

(xxxii)

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

(xxxiii)

we will continue to develop network software for wireless carriers and cable operators that operate on all major types of networks;

(xxxiv)

we will continue to leverage our knowledge of complex call control technologies, including Signaling System 7 and IP standards, to unlock valuable information such as user location, device on/off status, and billing and transaction records that reside inside wireless networks and are difficult to retrieve and utilize;

(xxxv)

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

(xxxvi)

our engineers are proficient in development of electronic components and solid state drives for aerospace applications, which we expect to enhance TCS’s ability to continue to reduce the form factor of deployable communications solutions;

(xxxvii)

TCS continues to submit proposals to participate in large government procurement vehicles;

(xxxviii)

foreign patent rights may or may not be available or pursued in any technology area for which U.S. patent applications have been filed;

(xxxix)

we have limited exposure to financial market risks, including changes in interest rates; and

(xl)

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

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

4


These forward-looking statements relate to our plans, objectives and expectations for future operations. We base these statements on our beliefs as well as assumptions made using information currently available to us. In light of the risks and uncertainties inherent in all projected operational matters, the inclusion of forward-looking statements in this document should not be regarded as a representation by us or any other person that our objectives or plans will be achieved or that any of our operating expectations will be realized. Revenues, results of operations, and other matters are difficult to forecast and could differ materially from those projected in the forward-looking statements contained in this Annual Report on Form 10-K as a result of factors discussed in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”, the matters discussed in “Risk Factors Affecting Our Business and Future Results”, which are included in Item 1A, and those factors discussed elsewhere in this Annual Report on Form 10-K including, changes in economic conditions, technology and the market in general, and our ability to adapt our products and services to these changes. We undertake no obligation to release publicly the results of any future revisions we make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We caution you not to put undue reliance on these forward-looking statements.

 

Item 1. Business

Overview

TeleCommunication Systems, Inc. develops and delivers highly reliable and secure wireless communication technology, the development of which has led to ownership of 349 patents and nearly 400 patent applications as of December 31, 2013. We deliver cellular network computing services that include public safety solutions for 9-1-1 call delivery, precision location platforms, and applications that include navigation, locator applications and text messaging, as well as secure wireless communications systems and professional services, including cybersecurity training and technology for defense and other government customers. Customers use our “mobile cloud” software functionality through connections to and from network operations centers, paying us monthly fees based on the number of subscribers, cell sites, call center circuits, or other metrics. We do business with the U.S. federal government as a prime contractor under major technology contract vehicles, as well as state, local and foreign government entities. We also monetize our intellectual property portfolio via patent sales and licensing of the technology as well as incorporation of our inventions in our deliverables.

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

We report two operating segments, Government (53% of 2013 revenue) and Commercial (47% of 2013 revenue). TCS is increasingly working to deliver solutions contributed by engineers from both segments of the company. See further detail about the segment operations below, and discussion of segment reporting in Note 21 to the audited Consolidated Financial Statements presented elsewhere in this Annual Report on Form 10-K.

Government Segment: We provide professional services including field support of deployable wireless systems and cybersecurity training to the U.S. Department of Defense and other government and foreign customers. We own and operate secure satellite teleport facilities, resell access to satellite airtime (known as space segment), and design, furnish, install and operate wireless communication systems and components, including our SwiftLink® deployable communication systems which integrate high speed, satellite, and, internet protocol technology with secure, federal government-approved cryptologic devices.

Commercial Segment: We are one of two leading companies that enable 9-1-1 call routing via cellular, Voice over Internet Protocol (VoIP), and next generation technology. Other TCS hosted and managed services include cellular carrier infrastructure for text messaging and location-based platforms and applications, including turn-by-turn navigation. Commercial segment customers include wireless carrier network operators, Voice over Internet Protocol service providers, wireless device manufacturers, automotive industry suppliers, and state and local governments.

SwiftLink®, Xypoint®, AtlasBook®, Gokivo®, Connections that Matter®, Designed for Mobility®, Secure the Edge®, Art of Exploitation®, and Enabling Convergent Technologies® are registered trademarks or service marks of TeleCommunication Systems, Inc. or our subsidiaries. This Annual Report on Form 10-K also contains trademarks, trade names and services marks of other companies that are the property of their respective owners.

Government Segment Products and Services

We engineer and provide secure, wireless communication solutions, including deployable communication systems and related support services with emphasis on satellite-based technology, to agencies of the U.S. Departments of Defense (“DoD”), Homeland

5


Security, State, Justice and other state and local government customers. We present a TCS TotalCom™ solution opportunity to customers. From 2006 through early 2014 we provided systems and services under the U.S. Army’s Worldwide Satellite Systems contract vehicle, including a SwiftLink variation called “SNAP” (Secret / Nonsecure Access Point) and Wireless Point-to-Point Link systems. In late 2012, we were selected as a prime vendor under two additional, 5-year indefinite delivery, indefinite quantity defense contract vehicles: the Army’s Global Tactical Advanced Communications Systems (“GTACS”) contract with twenty awardees and a maximum value of $10 billion, and the Defense Information Systems Agency’s Customs SATCOM Solutions (“CS2”) contract with eight awardees and a maximum value of $2.6 billion.

We enter into fee-for-service contracts under which revenue is generated based on contract labor billing rates or based on fixed fees for deliverables. Revenue from integration work which typically accompanies customer purchases of our secure deployable systems is reported together with the system sales revenue.

Our products and services, typically delivered under multi-year contracts or contract vehicles, include:

Cybersecurity and Other Information Technology Training and Professional Services. We provide cybersecurity training and services encompassing all areas of Computer Network Operations which includes: Computer Network Defense, Computer Network Attack, and Computer Network Exploitation. We develop software tools and database applications related to system testing, security, engineering, and analysis. We enhance secure network communication and encryption engineering and provide a wide range of project management, information assurance oversight, and business management. We design, install, and operate data networks that integrate computing and communications, including systems that provide communications via both satellite and terrestrial links. We can provide complete network installation services from cabling infrastructure to complex communications system components. We also provide ongoing network operation and management support services including telecom expense management under multi-year contracts with government customers.

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

Secure Satellite Teleport Data Landing and Transmission Services. We own and operate a high-speed satellite communications teleport in Manassas, Virginia that is connected to the public switched telephone network, and operate two facilities in Europe for government customers. These facilities provide transport services for IP-based media content consisting of VoIP, internet, video and messaging data using VSAT satellite technology as part of our communication solutions for our customers. We provide end-to-end connectivity between users of our deployed SwiftLink systems in remote locations back to our teleport and eventually onto customers’ back-office desktops and cell phones. We purchase space segment (satellite airtime) and resell it to customers using our facilities. TCS also maintains two satellite earth stations on Pacific islands.

Communication Systems and Components. Our SwiftLink products provide secure voice, video and data communications via ruggedized modules that can be rapidly deployed in harsh, remote areas for satellite-based or point-to-point communications, where other means of reliable communication may not be available. Our deployable Very Small Aperture Terminal (“VSAT”) multi-band terminals provide access to a wide array of commercial and military satellites that make broadband capabilities available on a global basis. The tropo version of this technology can achieve significant cost efficiency by enabling beyond-line-of-sight communication by bouncing radio signals off the lowest portion of the Earth’s atmosphere rather than via satellite transponders. Most of our SwiftLink systems can be deployed by a single person in less than twenty minutes, creating critical communication channels from any worldwide location. Uses include critical communications for DoD warfighters in command and control headquarters, emergency response, news reporting, public safety, drilling and mining operations, field surveys and other activities that require remote capabilities for voice, video, and data transmission. We also design, produce and sell communication system components as well as electronic components and solid state drives for aerospace applications.

Government Segment Market Opportunities and Strategy. Our strategy is to be a leading secure wireless communications solution vendor by building scale and a continuum of related technical capabilities. We have a history as a provider of deployable, tactical systems and related field support and maintenance, cybersecurity training and professional service work, and as an operator of fixed teleports, and reseller of space segment. Extensions of these competencies include professional service areas such as cyber-security training. We have developed partner relationships with large, global technology companies engaged in systems integration, handheld devices, and integrated circuits. We intend to selectively consider acquisitions of companies and technologies in order to increase the scale and scope of our operations, market presence, products, services and customer base. We plan to provide communications technology solutions to a broadening body of U.S. federal, state and local, and international government customers.

Trends and our strategy for our Government Segment products and services are:

Expanding Need for Secure, Deployable, Wireless Communication Solutions. Technology to avoid interception or jamming of wireless communications is a growing need for many network operations. TCS has sold deployable communication system terminals to federal government customers for more than a decade. We expect that similar terminals will be provided more broadly in the U.S. military. We are continuing to enhance our deployable communication systems product line to enable

6


broader use of Very Small Aperture Terminal satellite terminals and components. In addition to the aforementioned GTACS and CS2 contract vehicles. TCS continues to submit proposals to participate in large government procurement vehicles. There can be no assurance that our proposals will be successful or that we will receive additional awards or contracts.

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

Government Outsourcing of Network and Telecom Technical Functions. Federal defense and civilian agencies, as well as state and local governments, are increasingly contracting with specialist teams for functions such as network management, and for projects such as enablement of reliable, comprehensive in-building wireless communication service. TCS field support and network operations professionals enjoy a favorable reputation for work in harsh environments. We have long-term relationships with federal agencies, the State of Maryland and the City of Baltimore.

Growing Use of Secure Wireless Communications for Defense, Intelligence and Homeland Security. Wireless communications and location technology are key initiatives within the federal government for both defense and civil infrastructure including the Commerce Department’s FirstNet broadband network which is dedicated to public safety. Wireless communications in emergencies are very important, as first responders need to be able to share information across agencies and departments where wireline systems may be unavailable. We believe that our expertise in the areas of 9-1-1, location-based and messaging services, and secure satellite communications can be leveraged to provide the needed wireless infrastructure for the U.S. Departments of Homeland Security and Defense, and we are pursuing opportunities to provide such products and services. SwiftLink is designed to provide secure voice and data communications through encrypted satellite links.

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

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

Commercial Segment Products and Services

We engineer and develop software for cellular carrier and enterprise networks that enables the delivery of secure and personalized content, services, and transactions to wireless devices. Our extensive research and development investment has led to a large patent portfolio, mostly related to our commercial solutions. We design our software using industry standards for easy implementation, customization, and interoperability with other network components and we have service and technology partnerships with companies around the world.  We manage several network operation centers that host software and equipment for which customers, mainly wireless network operators, make recurring monthly usage payments, usually based on a measure of the volume of usage.

Our primary deliverables are:

Licensed Software-Based Infrastructure: Xypoint® Location Platform (“XLP”) for mobile location-based services: Our Xypoint Location Platform infrastructure system interacts with wireless networks to extract the precise location of a user’s device. In order to determine a user’s location with sufficient precision for U.S. public safety compliance and for commercial location-based applications, our technology interacts with networks that have incorporated Assisted GPS systems that use Global Positioning System (“GPS”) chips in user handsets. Our XLP can also work with network triangulation software which some carriers have added to cell towers and switches in the network. We have been a leader in developing the location platform standard called Secure User Plane for Location (“SUPL”) and have incorporated the technology in our products. Our platform also provides privacy controls so that the wireless device user may control access to the user’s location information, and exposes location application programming interfaces (“APIs”) to location-based applications. We offer carriers around the world the complete LBS solution continuum, with the expertise to enable infrastructure, middleware and application functionality. Mobile operators have made large capital investments in infrastructure for wireless data and location determination technologies, and are motivated to grow subscriber use of services that enhance subscriber loyalty and average revenue per user. We are well positioned to provide carrier-branded enhanced services that efficiently use the carriers’ capacity to deliver a user experience that merits incremental service payments and continuous use.

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Application-based services such as Turn-by-Turn Navigation, People-Finder, and Asset-Tracking through wireless carrier subscriptions and contracts with wireless device/“platform” companies. For our applications with location-based services (“LBS”), the user device’s precise location (its “X/Y” coordinates) is extracted and used for E9-1-1 call routing, navigation directions, identifying points of interest locations near the user (such as gas stations, restaurants, or hotels), and locating other network subscribers near the user’s current position. We provide high volume software applications that incorporate real-time location-sensitive data such as traffic, and enable the delivery of optimized travel directions, device-appropriate maps, and search for nearby points of interest. Through wireless carriers, we sell subscriptions to services using our client software as a “white label” vendor to the operators. For device and platform companies, we have engineered software development kits and application program interfaces that enable location-based functionality involving the device.

Short Message Service Center and Related Text Messaging Solutions. Our Short Message Service Center software has been used by wireless carrier subscribers to send and receive text or data messages to and from wireless devices since 1997.  More recently we have been engaged to work with major carriers for enabling the use of text messaging to communicate with 9-1-1 public safety answering points. For our installed base of systems in use by customers, we provide ongoing operational support, including administration of system components, system optimization, and configuration management. Maintenance services include tracking customer support issues, trouble shooting, and developing and installing maintenance releases. We typically provide maintenance services for an annual or quarterly fee paid in advance.

Professional Services and Solutions for Telematics. We provide custom software development and professional services, using our core geo-services platform, to customers engaged in telematics, which is the use of mobile communications technology and related data for application within vehicles on the move. Automotive navigation systems are a form of telematics that involve GPS technology, electronic maps and related spatial data for local searches.

Commercial Segment Market Opportunities and Strategy. Our company is a leader in public safety communications technology for delivery of 9-1-1 calls. We continue to develop software and engineered systems which we deliver through deployment in customer wireless networks, through hosted and subscription business models, and fee for service contracts. Our engineers design solutions to optimize the balance of functionality between the device and the hosted network components, or “cloud.” We are continuing to make development investments focused on the delivery of location information, internet and corporate network data, and other enhanced data-communication services to and from wireless devices, with emphasis on data and network security.

Trends and our strategy  for our products and services include:

9-1-1 Mandate and Technology Advances. A key to enhancing personal safety through a cell phone is the availability of E9-1-1 wireless capabilities. We are one of the two leading providers of E9-1-1 service to wireless and VoIP service providers in the U.S., and to state and county governments for Next Generation, or NextGen, 9-1-1. In 1996, the Federal Communications Commission (“FCC”) mandated the adoption of E9-1-1 technology by wireless carriers, and in 2005, the FCC ordered providers of interconnected VoIP service to provide E9-1-1 services to all of their customers as a standard feature of the service. We are actively pursuing Next Generation 9-1-1 business and have deployed solutions in six states. We now have distribution to state and local governments as well as federal agencies for NextGen solutions through relationships with AT&T, CenturyLink, and Cincinnati Bell.

Expanded Penetration of Wireless and VoIP Network Operator Customer base.  TCS does business with about 60 wireless and VoIP service providers in 13 countries. We intend to expand our domestic and international carrier base through channels and by re-deploying our direct sales and field support organizations. Mobile operators are investing in high-speed data fourth generation networks whose data rates surpass residential wireline rates, and our infrastructure components are subject to inclusion in that investment.  Our location-based technology and applications incorporating map graphics take advantage of these network enhancements. We will continue to develop network software for wireless carriers and cable operators that operate on all major types of networks.

Adaptation of our Technology for Device Platform and Other Non-carrier Customers. Our applications software has been developed in a modular fashion which enables collaborations with hardware customers on solutions using our software development kits and application program interfaces.  We intend to expand our penetration of such customers.

Growing Use of Commercial Location-Based Wireless Services. A driver of wireless communication subscriber revenue growth is the delivery of timely, highly specialized, interactive and location-specific information. Technology incorporated in networks and handsets enables determination of the handset’s location with sufficient precision to allow useful applications beyond E9-1-1. Wireless users benefit from the ability to receive highly customized location-specific information in response to their queries or via targeted opt-in content delivered to the wireless device. Enterprises benefit from wireless location technology for routing and tracking their mobile field forces.

Text Messaging (SMS) Trend. While we expect our revenue from messaging to continue declining, text messaging continues to be the most popular type of messaging for mobile users. We have applied our expertise in SMS to enable text to 9-1-1 service, and have developed a hosted messaging service.

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Enhancement of our Global Channel Relationships. We are developing relationships with communication infrastructure providers in order to expand our sales channels for our carrier software products and services. We have historically leveraged our strategic relationships with original equipment manufacturers to market our Commercial Segment products to wireless carriers worldwide. Our partners include AT&T, CenturyLink, Huawei, Alcatel-Lucent, and Level 3.

Monetization of our Patent Portfolio. We are systematically evaluating our patents together with third parties.  In some cases we are selling patents with license-back rights, and in others entering into arrangements towards licensing of the intellectual property.  We have initiated approximately 30 such projects.  

Customers and Markets

Our company’s technology addresses the converging digital, wireless, internet protocol networks operated by governments, carriers and enterprises.

Our principal government customers are major units of the U.S. Departments of Defense, Homeland Security, and State, and the General Services Administration. In the aggregate, U.S. federal government entities accounted for 32% of our total 2013 revenue. We compete for business through federal, state and local procurement processes that typically involve requests for proposal from multiple bidders. Customers also include international space agencies. Customers for NextGen 9-1-1 are mainly state and local government entities that manage first responder dispatch, to whom we sell directly and through channels.  This business is managed and reported as part of our Commercial Segment.

Our principal commercial customers are wireless network operators in the United States and around the world, either directly or through our channel partners. Our wireless carrier customers include Verizon Wireless, MetroPCS, AT&T Mobility, T-Mobile, Sprint, Telefonica International, Cricket Communications, and Telus. Our carrier customers typically use their brands to market our applications, which in turn compete with those of other carriers and in some cases downloadable applications for smartphones sold by third parties such as Apple Inc. Customers for our VoIP E9-1-1 services include Comcast and Level 3. We provide electronic map technology solutions to telematics vendors including Denso Corporation and XM/Sirius. Our sales efforts target wireless, wireline and VoIP service providers around the world, as well as new device and hardware customers who may use our technology and software in their products.

The markets for our products and services are highly competitive. The adoption of industry standards may make it easier for new market entrants to compete with us. We expect that we will continue to compete primarily on the basis of the functionality, breadth, time to market, ease of integration, price, and quality of our products and services, as well as our market experience, reputation, and price. The market and competitive conditions are continually developing. Our software-based deliverables compete with alternatives provided by other companies. It is difficult to present a meaningful comparison between our competitors and us because there is a large variation in revenue generated by different customers, different products and services, as well as the different combinations of products and services offered by our competitors. We cannot, therefore, quantify our relative competitive position.

Our current and potential competitors include:

·

Government Segment. General Dynamics Corp.; CACI International Inc.; Globecomm Systems, Inc.; Computer Sciences Corporation; Rockwell Collins, Inc.; KEYW Corporation, and large government systems integrators.

·

Commercial Segment. Intrado Inc. division of West Corporation; TeleNav, Inc.; Ericsson LM Telephone Co.; Comverse Technology Inc; Google Inc.; Garmin Ltd.; Ericsson; TomTom Inc.; and Nokia Solutions and Networks.

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

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

9


Backlog

We had unfilled orders, or funded contract and total backlog at December 31, as follows:

 

 

  

 

 

  

2013 vs. 2012

($ in millions)

  

2013

 

  

2012

 

  

$

 

 

%

Commercial Segment funded contract backlog

  

$

223.7

  

  

$

215.5

  

  

$

8.2

 

 

 

4

%

Government Segment funded contract backlog

  

 

64.4

  

  

 

93.1

  

  

 

(28.7

 

 

(31

%) 

Total funded contract backlog

  

$

288.1

  

  

$

308.6

  

  

$

(20.5

 

 

(7

%) 

 

Commercial Segment un-funded customer options

  

$

223.7

  

  

$

215.5

  

  

$

8.2

 

 

 

4

Government Segment un-funded customer options

  

 

788.9

  

  

 

872.4

  

  

 

(83.5

 

 

(10

%) 

Total backlog of orders and commitments, including customer options

  

$

1,012.6

  

  

$

1,087.9

  

  

$

(75.3

 

 

(7

%) 

 

Expected to be realized within next 12 months

  

$

158.7

  

  

$

218.3

  

  

$

(59.6

 

 

(27

%) 

Funded contract backlog represents contracts for which fiscal year funding has been appropriated by our customers (mainly federal agencies), and for hosted services (mainly for wireless carriers). Backlog is computed by multiplying the most recent month’s contract or subscription revenue by the months remaining under the existing long-term agreements, which is considered to be the best available information for anticipating revenue under those agreements. Total backlog, as is typically measured by government contractors, includes orders covering optional periods of service and/or deliverables, but for which budgetary funding may not yet have been approved, and could expire unused. At December 31, 2013 our total backlog had $683 million of unfunded orders related to the Worldwide Satellite Systems contract vehicle which will expire on March 31, 2014, so most will likely expire unused.

Our backlog at any given time may be affected by a number of factors, including the availability of funding, contracts being renewed, or new contracts being signed before existing contracts are completed and the other factors described in the Company’s Risk Factors as filed with the Securities and Exchange Commission from time to time. The timing and amounts of government contract funding may be adversely affected by federal budget policy decision like handling of sequestration and continuing resolutions, and can lead to delays in procurement of our products and services due to lack of funding. Some of our backlog could be canceled for causes such as late delivery, poor performance and other factors. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual revenue.

Sales and Marketing

We sell our products and services through our direct sales force and through indirect channels. Our direct sales and marketing force consists of approximately 75 professionals in the U.S., Europe, Latin America, Africa and Asia as of December 31, 2013. We also leverage our relationships with larger companies to market our commercial systems. These indirect sales relationships include AT&T, Huawei, and Alcatel-Lucent.

We are pre-qualified as an approved vendor for some government contracts, and some of our products and services are available to government customers via the General Services Administration’s Information Technology Schedule 70, GTACS, CS2, and the Space and the Naval Warfare Foreign Military Sales contract vehicles. We collaborate in sales efforts under various arrangements with integrators. Our marketing efforts also include advertising, public relations, speaking engagements and attending and sponsoring industry conferences.

Research and Development

Our success depends on a number of factors, which include, among other items, our ability to identify and respond to emerging technological trends in our target markets, to develop and maintain competitive products, to enhance our existing products by adding features and functionality that differentiate the products from those of our competitors, and to bring products to market on a timely basis and at competitive prices. As of December 31, 2013, our overall staff included more than 780 professionals with technical expertise in wireless network, client software development and satellite-based communication technology. Since 1996, we have made substantial investments in wireless technology research and development, most of which has been devoted to the development of carrier and enterprise network software products and services. We are primarily focusing our current research and development investments in cellular location-based and electronic map technology, including 9-1-1 call routing and dispatch solutions, and highly reliable tactical communication solutions.

We support existing telecommunications standards and promote new standards in order to expand the market for wireless data. We actively participate in wireless standards-setting organizations including the Open Mobile Alliance, and our CEO is a member of

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the FCC Communications, Reliability, Interoperability Council (“CSRIC”). For the years ended December 31, 2013, 2012, and 2011, our research and development expense was $34.3 million, $36.6 million, and $37.1 million, respectively.

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

Intellectual Property Rights

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

The present size of our patent portfolio allows us to build meaningful partnerships with other companies through direct licensing, cross licensing, and other forms of agreements. Our commitment to protecting our intellectual property ensures continued differentiation and freedom to operate in the industry. We monetize our intellectual property portfolio via patent sales and licensing of the technology as well as incorporating our inventions in our deliverables. No single patent or group of patents, patent applications or patent license agreement is or are material to the Company’s operations.

As of February 5, 2014, we own 352 issued patents relating to wireless location-based services, text messaging, GPS ephemeris data, emergency public safety data routing, electronic commerce, and other areas. We have filed nearly 400 additional patent applications for certain apparatus and processes we believe we have invented to enable key features of the location services, wireless text alerts, Short Message Service Center, mobile-originated data and E9-1-1 network software. There is no assurance that our patent applications will result in a patent being issued by the U.S. Patent and Trademark Office or other patent offices, nor is there any guarantee that any issued patent will be valid and enforceable. Additionally, foreign patent rights may or may not be available or pursued in any technology area for which U.S. patent applications have been filed.

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

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

Employees

As of December 31, 2013, we had 1,286 employees, of which 1,257 were full-time and 29 were part-time or temporary. We believe relations with our employees are good. None of our employees is represented by a union.

Geographical Information

During 2013, 2012, and 2011, total revenue generated from products and services in the U.S. were $324.1 million, $445.6 million, and $392.1 million, respectively, and total revenue generated from products and services outside of the U.S. were $38.2 million, $41.8 million, and $33.3 million, respectively. As of December 31, 2013, 2012, and 2011, essentially all of the long-lived assets of our operations were located in the U.S.

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

 

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Item 1A. Risk Factors

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

Risks Related to Our Business

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

We depend on the U.S. government for a significant portion of our revenues. Competing demands for federal funds could pressure all areas of spending, which will impact the U.S. government budget. Cost cutting, efficiency initiatives, reprioritization and other affordability analysis by the U.S. government and changes in budgetary priorities could adversely impact our Government Segment. Although governments worldwide, including the U.S. government, have initiated sweeping economic plans, we are unable to predict the impact, severity, and duration of these economic events, which could have a material effect on our business, financial position, results of operations or cash flows.

We rely on particular levels of U.S. government spending on our communication solutions and our backlog depends in a large part on continued funding by the U.S. government for the programs in which we are involved. These spending levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of spending. Moreover, although our contracts often contemplate that our services will be performed over a period of several years, the Executive Branch must propose and Congress must approve funds for a given program each government fiscal year and may significantly change - increase, reduce or eliminate - funding for a program. A decrease in DoD and/or Homeland Security expenditures, the elimination or curtailment of a material program in which we are involved, or changes in payment patterns of our customers as a result of changes in U.S. government spending, could have a material adverse effect on our operating results, financial condition, and/or cash flows.

There remains therefore a significant level of uncertainty and lack of detail available to predict specific future government spending on the solutions that we offer. While we are unable to predict the exact impact on our Government Segment, these factors, could in the aggregate have material adverse operational and financial consequences, depending on how the cuts are allocated across the federal government budget.

Agencies of the U.S. government have special rights unlike other customers, exposing us to additional risks that could have a material adverse effect on us.

Sales to various agencies of the U.S. government accounted for approximately 32% of our 2013 revenue, all of which was reported as Government Segment revenue. Our ability to earn revenue from sales to the U.S. government can be affected by numerous factors outside of our control, including:

·

The U.S. government may terminate its contracts it with us. All of the contracts we have with the U.S. government are, by their terms, subject to termination by the U.S. government either for its convenience or in the event of a default by us. In the event of termination of a contract by the U.S. government, we may have little or no recourse.

·

The U.S. government may audit and review our costs and performance on their contracts, as well as our accounting and general practices. The costs and prices under these contracts may be subject to adjustment based upon the results of any audits. Future audits that result in the increase in our costs may adversely affect our business, financial position, results of operations or cash flows.

Most of our Government contracts are on a fixed price basis which could negatively impact our profitability.

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

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

As of December 31, 2013, our estimated contract backlog totaled approximately $1.0 billion, of which $288.1 million was funded. There can be no assurance that our backlog will result in actual revenue in any particular period, or at all, or that any contract included in backlog will be profitable. There is a higher degree of risk in this regard with respect to unfunded backlog. The actual receipt and timing of any revenue is subject to various contingencies, many of which are beyond our control. The actual receipt of revenue on contracts included in backlog may never occur or may change because a program schedule could change, the program could be canceled, a contract could be reduced, modified or terminated early, or an option that we had assumed would be exercised not being exercised. Approximately 20% of our funded contract backlog consisted of Government Segment orders and the fluctuations in political and fiscal policy priorities and processes materially influence the funding of our backlog and our ability to convert backlog into revenue. Our estimates are based on our experience under such contracts and similar contracts. However, there can be no assurances that all, or any, of such estimated contract value will be recognized as revenue.

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

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

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

Technological and regulatory change to wireless and next-generation 9-1-1 could affect our future performance.

The Federal Communication Commission, or FCC, requires that certain location information be provided to network operators for public safety answering points when a subscriber makes a 9-1-1 call. Technical failures, greater regulation by federal, state or foreign governments or regulatory authorities, time delays or the significant costs associated with developing or installing improved location technology could slow down or stop the deployment of our mobile location products. If deployment of improved location technology is delayed, stopped or never occurs, market acceptance of our products and services may be adversely affected. Because we will rely on some third-party location technology instead of developing all of the technology ourselves, we have little or no influence over its improvement.

The technology employed with next-generation 9-1-1 services generally anticipates a migration to internet-protocol (or IP) based communication. Since many companies are proficient in IP-based communication protocols, the barriers to entry to providing next-generation 9-1-1 products and services are lower than exist for the traditional switch-based protocols. If we are unable to develop unique and proprietary solutions that are superior to and more cost effective than other market offers, our 9-1-1 business could get replaced by new market entrants, resulting in material adverse impacts on our overall business, financial position, results of operations or cash flows.

Our 9-1-1 business is dependent on state and local governments and the regulatory environment for Voice over Internet Protocol (VoIP) services is developing.

Under the FCC’s mandate, wireless carriers are required to provide 9-1-1 services only if state and local governments request the service. As part of a state or local government’s decision to request 9-1-1, they have the authority to develop cost recovery mechanisms. However, cost recovery is no longer a condition to wireless carriers’ obligation to deploy the service. If state and local governments do not widely request that 9-1-1 services be provided or we become subject to significant pressures from wireless carriers with respect to pricing of 9-1-1 services, our 9-1-1 business would be harmed and future growth of our business would be reduced.

The FCC has determined that VoIP services are not subject to the same regulatory scheme as traditional wireline and wireless telephone services. If the regulatory environment for VoIP services evolves in a manner other than the way we anticipate, our 9-1-1 business would be significantly harmed and future growth of our business would be significantly reduced. For example, the regulatory scheme for wireless and wireline service providers requires those carriers to allow service providers such as us to have access to

13


certain databases that make the delivery of an 9-1-1 call possible. No such requirements exist for VoIP service providers so carriers could prevent us from continuing to provide VoIP 9-1-1 service by denying us access to the required databases.

Failure to meet our contractual obligations, including sufficiently reliable software and  successful integration with customer networks, could adversely affect our profitability and future prospects.

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

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

We operate FCC licensed teleports in Manassas, Virginia and the Republic of Kiribati subject to the Communications Act of 1934, as amended, or the FCC Act, and the rules and regulations of the FCC. We cannot guarantee that the FCC will grant renewals when our existing licenses expire, nor are we assured that the FCC will not adopt new or modified technical requirements that will require us to incur expenditures to modify or upgrade our equipment as a condition of retaining our licenses. We are also required to comply with FCC regulations regarding the exposure of humans to radio frequency radiation from our teleports. These regulations, as well as local land use regulations, restrict our freedom to choose where to locate our teleports.

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

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

If wireless carriers do not continue to provide our wireless applications to their subscribers, our business could be harmed. Our success with applications depends on increasing the number of end users that purchase the products and services of our wireless applications business from our wireless carrier partners. Our wireless carrier partners may change the pricing and other terms by which they offer our wireless applications business, which could result in increased end user churn, lower revenue and adverse effects on our business.

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

Competitors offer technology that has functionality similar to ours for free, under different business models. Competition from these free offerings may reduce our revenue and harm our business. If our wireless carrier partners can offer these location-based services to their subscribers for free, they may elect to cease their relationships with us, alter or reduce the manner or extent to which they market or offer our services or require us to substantially reduce our subscription fees or pursue other business strategies that may not prove successful for us and have a material adverse effect on our business, financial position, results of operations or cash flows.

14


Network failures, disruptions or capacity constraints in our third party data center facilities or in our servers could affect the performance of the products and services of our wireless applications and 9-1-1 business and harm our reputation and our revenue.

The products and services of our wireless applications business are provided through a combination of our servers, which we house at third party data centers, and the networks of our wireless carrier partners. The operations of our wireless applications business rely to a significant degree on the efficient and uninterrupted operation of the third party data centers we use. Our hosted data centers are currently located in third party facilities located in the Irvine and San Francisco, California areas, and we may use others as required. We also use third party data center facilities in the Phoenix, Arizona area to provide for disaster recovery.

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

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

Our 9-1-1, hosted location-based services and satellite teleport services operations depend on our ability to maintain our computer and telecommunications equipment and systems in effective working order, and to protect our systems against damage from fire, natural disaster, power loss, telecommunications failure, sabotage, unauthorized access to our system or similar events. Although all of our mission-critical systems and equipment are designed with built-in redundancy and security, any unanticipated interruption or delay in our operations or breach of security could have a material adverse effect on our business, financial condition and results of operations. Our property and business interruption insurance may not be adequate to compensate us for any losses that may occur in the event of a system failure or a breach of security. Insurance may not be available to us at all or, if available, may not be available to us on commercially reasonable terms.

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

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

·

properly evaluating the technology;

·

accurately forecasting the financial impact of the transaction, including accounting charges and transaction expenses;

·

integrating and retaining personnel;

·

retaining and cross-selling to acquired customers;

·

combining potentially different corporate cultures;

·

the potential of significant goodwill and intangibles write-offs in the future in the event that an acquisition or investment does not meet expectations; and

·

effectively integrating products and services, and research and development, sales and marketing and support operations.

If we fail to do any of these, we may suffer losses or incur impairment charges, our management may be distracted from day-to-day operations and the market price of our Class A common stock may be materially adversely affected. In addition, if we consummate future acquisitions using our equity securities or convertible notes, existing shareholders may be diluted which could have a material adverse effect on the market price of our Class A common stock. The companies and business units we have acquired or invested in or may acquire or invest in are subject to each of the business risks we describe in this section, and if they incur any of these risks the businesses may not be as valuable as the amount we paid. Further, we cannot guarantee that we will realize the benefits or strategic objectives we are seeking to obtain by acquiring or investing in these companies.

15


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

New entrants seeking to gain market share by introducing new technology and new products may make it more difficult for us to sell our products and services and could create increased pricing pressure, reduced profit margins, increased sales and marketing expenses, or the loss of market share or expected market share, any of which may significantly harm our business, operating results and financial condition.  Consumers can now download and provision applications from individual provider websites and select from a menu of applications through the Apple iTunes App Store, the Blackberry App World, the Android Market, and other application aggregators. Applications from other LBS providers may be preloaded on mobile devices by OEMs or offered by OEMs directly. Increased competition from providers of location-based services which do not rely on a wireless carrier may result in fewer wireless carrier subscribers electing to purchase their wireless carrier’s branded location-based services, which could harm our business and revenue. In addition, these location-based services may be offered for free or on a onetime fee basis, which could force us to reduce monthly subscription fees or migrate to a onetime fee model to remain competitive. We may also lose end users or face erosion in our average revenue per user if these competitors deliver their products without charge to the consumer by generating revenue from advertising or as part of other applications or services.

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

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

We obtain map data from companies owned by current and potential competitors, who may act in a manner that is not in our best interest. We may not be able to upgrade our location-based services platform to support certain advanced features and functionality without obtaining technology licenses from third parties. Obtaining these licenses may be costly and may delay the introduction of such features and functionality, and these licenses may not be available on commercially favorable terms, or at all. The inability to offer advanced features or functionality, or a delay in our ability to upgrade our location-based services platform, may adversely affect consumer demand for the products and services of our wireless applications business, consequently, harm our business.

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

Our success depends on our ability to enhance our current services and develop new services and products rapidly and cost effectively. We currently have research and development employees in China and Australia, and contractors in India. Managing product development operations that are remote from our U.S. headquarters is difficult and we may not be able to manage these remote centers successfully. We could incur unexpected costs or delays in product development that could impair our ability to meet market windows or cause it to forego certain new product opportunities. In addition, if our carrier customers become adverse to introducing products into their networks that have been developed in these remote centers, the market for our products could be adversely affected.

Our research and development investments may not lead to successful new products, services or enhancements.

We will continue to invest in research and development for the introduction of new and enhanced products and services designed to improve the capacity, data processing rates and features. We must also continue to develop new features and to improve functionality of our software. Research and development in our industry is complex, expensive and uncertain. We believe that we must continue to dedicate a significant amount of resources to research and development efforts to maintain our competitive position. If we continue to expend a significant amount of resources on research and development, but our efforts do not lead to the successful introduction of product and service enhancements that are competitive in the marketplace, our business, financial position, results of operations or cash flows could be negatively impacted.

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

Our agreements with customers may require us to indemnify customers for our own acts of negligence and non-performance. Product liability and other forms of insurance are expensive and may not be available in the future. We cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or that our insurer will not disclaim coverage

16


as to a future claim. A product liability or similar claim may have a material adverse effect on our business, financial position, results of operations or cash flows.

Our revenue may decline if we fail to retain our largest customers for all of the deliverables that we sell to them, and if we fail to maintain or expand our relationships with strategic partners and indirect distribution channels our license revenues could decline.

Our growth depends on maintaining relationships with our major customers and on developing other customers and distribution channels. If our largest customers reduce their expenditures for marketing the services for which we provide technology, change their plans to eliminate our services, price our products and services at a level that makes them less attractive, or offer and promote competing products and services, in lieu of, or to a greater degree than, our products and services, our revenue would be materially reduced and our business, operating results and financial condition would be materially and adversely affected.

Our growth also depends on maintaining relationships with distribution channels for Nextgen 9-1-1 solutions. The loss of these relationships would have a material adverse impact on our business, financial position, results of operations or cash flows.

Government regulation of the mobile industry is evolving, and unfavorable changes or our failure to comply with regulations could harm our business and operating results.

As the mobile industry continues to evolve, we believe greater regulation by federal, state or foreign governments or regulatory authorities is likely. For example, we believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information, could affect our customers’ ability to use and share data, potentially reducing our ability to utilize this information for the purpose of continued improvement of the overall mobile subscriber experience. In addition, any regulation of the requirement to treat all content and application provider services the same over the mobile Internet, sometimes referred to as net neutrality regulation, could reduce our customers’ ability to make full use of the value of our services.

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

We have incorporated some types of open source software into our products, allowing us to enhance certain solutions without incurring substantial additional research and development costs. Thus far, we have encountered no unanticipated material problems arising from our use of open source software. However, as the use of open source software becomes more widespread, certain open source technology could become competitive with our proprietary technology, which could cause sales of our products to decline or force us to reduce the fees we charge for our products, which could have a material adverse effect on our business, financial position, results of operations or cash flows.

From time to time, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Some open source licenses contain requirements that we make available source code for modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. If we combine our proprietary software products with open source software in a certain manner, we could under certain of the open source licenses, be required to release our proprietary source code. Open source license terms may be ambiguous and many of the risks associated with usage of open source cannot be eliminated, and could if not properly addressed, negatively affect our business. If we were found to have inappropriately used open source software, we may be required to release our proprietary source code, re-engineer our products and client applications, discontinue the sale of our products or services in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business, operating results and financial condition.

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

We believe our revenue will increasingly include business in foreign countries, and we will be subject to the social, political and economic risks of conducting business in foreign countries. Laws and regulations for foreign business include internal control and disclosure rules, data privacy and filtering requirements, anti-corruption laws, such as the Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, and antitrust and competition regulations, among others.  Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and our international expansion efforts.  Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies. Some international government customers may require contractors to agree to specific in-country purchases, manufacturing agreements or financial support arrangements, known as offsets, as a condition for a contract award. The contracts may include penalties if we fail to meet the offset requirements. Other risks include:

17


·

our inability to adapt our products and services to local business practices, customs and mobile user preferences;

·

the costs of adapting our product and service offerings for foreign markets and compliance with applicable laws and regulations;

·

our inability to locate qualified local employees, partners and suppliers;

·

reduced protection of intellectual property rights;

·

changes in regulatory requirements which could restrict our ability to deliver services to our international customers, including the addition of a country to the list of sanctioned countries under the International Emergency Economic Powers Act or similar legislation;

·

general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relations; and

·

unpredictable fluctuations in currency exchange rates.

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

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

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

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

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

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

We are exposed to many different industries, counterparties, and agreements, and regularly interact with counterparties in various industries.  The insolvency or other inability of a significant counterparty or partner, including a counterparty to a significant counterparty, to perform its obligations under an agreement or transaction, including without limitation, as a result of the rejection of an agreement or transaction by a counterparty in bankruptcy proceedings, could have a material adverse effect on our business financial position, results of operations or cash flows.  Examples of our counterparty risks include counterparties to our credit agreement, large customers and suppliers, and partners on major procurements.

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

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

Our accounting policies and methods for reporting of our financial position and results of operations require management to make estimates, judgments and assumptions about matters that are inherently uncertain.

Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations. We have identified several accounting policies as being critical to the presentation of our financial position and results of

18


operations because they require management to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be recorded under different conditions or using different assumptions For example, we assess goodwill for impairment in the fourth quarter of each fiscal year, or sooner should there be an indicator of impairment.  We periodically analyze whether any such indicators of impairment exist, such as a sustained significant decline in our stock price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower growth rate, among others.   The impairment test is based on several factors requiring judgments determined as of that date. Changes in market conditions may indicate a potential future impairment of recorded goodwill. If goodwill becomes impaired, we would record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill is determined, which may significantly reduce or eliminate our profits.

Because of the uncertainty of the estimates, judgments and assumptions associated with our accounting policies, we cannot provide any assurances that we will not make subsequent significant adjustments to our consolidated financial statements.

Industry Risks

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

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

Wireless network operator consolidating, future business combinations could result in a loss of revenue for our business.

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

Concerns about personal privacy and commercial solicitation may limit the growth of mobile location-based services and change the business models appropriate for service delivery, affecting our business opportunities.

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

Technology Risks

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

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

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

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

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

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

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

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

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

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

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

We take reasonable steps to protect the security, integrity and confidentiality of the information we collect and store but there is no guarantee that inadvertent or unauthorized disclosure will not occur or that third parties will not gain unauthorized access despite our efforts. If such unauthorized disclosure or access does occur, we may be required to notify persons whose information was disclosed or accessed under existing and proposed laws. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We also may be subject to claims of breach of contract for such disclosure, investigation and penalties by regulatory authorities and potential claims by persons whose information was disclosed.

If there is a security breach or if there is an inappropriate disclosure of any of these types of information, we could be exposed to investigations, litigation, fines and penalties. Remediation of and liability for loss or misappropriation of end user or employee personal information could have a material adverse effect on our business and financial results. Even if we were not held liable for such event, a security breach or inappropriate disclosure of personal, private or confidential information could harm our reputation and our relationships with current and potential customers and end users. Even the perception of a security risk could inhibit market acceptance of our products and services. We may be required to invest additional resources to protect against damages caused by any actual or perceived disruptions of our services. We may also be required to provide information about the location of an end user’s mobile device to government authorities, which could result in public perception that we are providing the government with intelligence information and deter some end users from using our services. Any of these developments could harm our business.

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

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

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

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

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

Risks Related to Our Class A Common Stock

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

The market price for our Class A common stock has experienced significant volatility. This volatility may affect the price at which you could sell the Class A common stock and the sale of substantial amounts of our Class A common stock could adversely affect the price of our Class A common stock. Our stock price is likely to continue to be volatile and subject to significant price and

21


volume fluctuations in response to market and other factors, including the other factors discussed in these risk factors; variations in our quarterly operating results from our expectations or those of securities analysts or investors; downward revisions in securities analysts’ estimates; and announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments.

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

We have two classes of common stock: Class A common stock and Class B common stock. Holders of Class A common stock generally have the same rights as holders of Class B common stock, except that holders of Class A common stock have one vote per share while holders of Class B common stock have three votes per share. As of December 31, 2013, Maurice B. Tosé, our President, Chief Executive Officer and Chairman of the Board, beneficially owned 4,997,769 shares of our Class B common stock and 3,113,335 shares of our Class A common stock. Therefore, as of that date, in the aggregate, Mr. Tosé beneficially owned shares representing approximately 26% of our total voting power, assuming no conversion or exercise of issued and outstanding convertible or exchangeable securities held by our other shareholders or holders of the notes. Mr. Tosé can exert significant influence over us through his ability to influence the outcome of elections of directors, amendments to our charter and by-laws and other actions requiring shareholder action, including mergers, going private transactions and other extraordinary transactions. Mr. Tosé may also be able to deter or prevent a change of control regardless of whether holders of Class A common stock might benefit financially from such a transaction.

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

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

Our bank credit facility contains covenants requiring us to maintain fixed charge coverage and leverage ratios; as well as other restrictive covenants. The agreement also provides subjective events of default based upon (i) no material adverse change in the business, operations, or condition (financial or otherwise) of our Company occur, or (ii) no material impairment of the prospect of repayment of the Company’s obligations under the bank credit agreement; or (iii) no material impairment of perfection or priority of the lenders security interests in the collateral under the bank credit agreement. If our performance does not result in compliance with any of the restrictive covenants, and our lenders exercise their rights under the subjective acceleration clause referred to above, we would seek to further modify our financing arrangements, but there can be no assurance that our debt holders would not exercise their rights and remedies under their agreements with us, including declaring all outstanding debt due and payable. If we are not in compliance with one or more of our covenants which if not complied with could result in an event of default under our line of credit or term loan, there can be no assurance that our lenders would waive such non-compliance. In such an event, we would be prohibited from drawing funds against the line of credit and our indebtedness under the line of credit and term loan could be accelerated. This could have a material adverse effect on our business, financial condition, results of operation, liquidity, or stock price.

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

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

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

Our revenue and operating results are difficult to predict and are likely to fluctuate from quarter-to-quarter. For example, 2013 systems revenue was lower in the fourth quarter of the year compared to 2012 systems revenue was lower in the first quarter. We generally derive a significant portion of wireless carrier systems revenue in our Commercial Segment from initial license fees. The initial license fees that we receive in a particular quarter may vary significantly. As systems projects begin and end, quarterly results may vary. We therefore believe that quarter-to-quarter comparisons of our operating results may not be a good indication of our future

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performance, and you should not rely on them to predict our future performance or the future performance of our Class A common stock. If our operating results in future quarters fall below the expectations of market analysts and investors, the market price of our stock may fall.

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

·

changes in our relationships with wireless carriers, the U.S. government or other customers;

·

timing and success of introduction of new products and services and our wireless carrier partners’ marketing expenditures;

·

changes in pricing policies and product offerings by us or our competitors;

·

changes in projected profitability of acquired assets requiring the write down of the value of the goodwill reflected on our balance sheet;

·

loss of subscribers by our wireless carrier partners or a reduction in the number of subscribers to plans that include our services;

·

the timing and quality of information we receive from our wireless carrier partners;

·

the timing and success of new mobile phone introductions by our wireless carrier partners;

·

our ability to attract new end users;

·

the extent of any interruption in our services;

·

costs associated with advertising, marketing and promotional efforts to acquire new customers;

·

capital expenditures and other costs and expenses related to improving our business, expanding operations and adapting to new technologies and changes in consumer preferences; and

·

our lengthy and unpredictable sales cycle.

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

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

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

As of December 31, 2013, we had outstanding approximately 56 million shares of our Class A common stock and options to purchase approximately 17 million shares of our Class A common stock. In the future, we may sell additional shares of our Class A common stock to raise capital. In addition, a substantial number of shares of our Class A common stock is reserved for issuance upon the exercise of stock options and upon conversion of the Convertible Notes. Our Class A common stock may also be issued upon conversion of our Class B common stock, which is convertible into our Class A common stock on a one-for-one basis. As of December 31, 2013, we had 5 million shares of Class B common stock outstanding. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our Class A common stock. The issuance and sale of substantial amounts of Class A common stock, or the perception that such issuances and sales may occur, could adversely affect the trading price of the Convertible Notes and the market price of our Class A common stock and impair our ability to raise capital through the sale of additional equity securities.

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

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

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

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

·

authorization of the board of directors to issue “blank check” preferred stock;

·

prohibition of cumulative voting in the election of directors;

·

our classified board of directors;

·

limitation of the persons who may call special meetings of shareholders;

·

prohibition on shareholders acting without a meeting other than through unanimous written consent;

·

supermajority voting requirement on various charter and by-law provisions; and

·

establishment of advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by shareholders at shareholder meetings.

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

 

Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

Our principal executive office is located in Annapolis, Maryland, as well as portions of our Commercial and Government Segments, and includes a satellite operations center. Our office in Seattle, Washington is used primarily for servicing and hosting our wireless and VoIP E9-1-1 public safety support services. The design and development of our software based systems and applications are located in Annapolis, Maryland, Seattle, Washington, Aliso Viejo, California, Calgary, Canada, North Wollongong, Australia, and Tianjin, China offices. Major Government Segment operations are in Tampa, Florida and Hanover, Maryland. We also own a 7-acre teleport facility in Manassas, Virginia for teleport services for our Government Segment customers.

The following table lists significant leased facilities at December 31, 2013:

 

Location:

 

Size:

  

Lease Expiration:

 

Annapolis, Maryland

 

 

 

52,000 square feet

  

 

December 2016

Seattle, Washington

 

57,000 square feet

  

September 2017

Tampa, Florida

 

45,600 square feet

  

December 2014

Hanover, Maryland

 

36,000 square feet

  

August 2017

Torrance, California

 

35,000 square feet

  

January 2018

Aliso Viejo, California

 

29,000 square feet

  

December 2017

Tianjin, China

 

18,000 square feet

  

January 2017

Greenwood Village, Colorado

 

17,000 square feet

  

May 2020

Danville, Vermont

 

14,000 square feet

  

July 2014

Richardson, Texas

 

13,000 square feet

  

April 2015

Manassas, Virginia

 

10,000 square feet

  

November 2017

Suwanee, Georgia

 

  9,500 square feet

  

May 2015

North Wollongong, Australia

 

  8,000 square feet

  

April 2017

Calgary, Canada

 

  6,500 square feet

  

March 2014

24


 

Item 3. Legal Proceedings

From time to time, some of our customers have sought indemnification under their contractual arrangements with us for costs associated with defending lawsuits alleging infringement of certain patents through the use of our products and services and the use of our products and services in combination with products and services of other vendors. In some cases we have agreed to assume the defense of the case. In others, the Company will continue to negotiate with these customers in good faith because the Company believes its technology does not infringe the cited patents and due to specific clauses within the customer contractual arrangements that may or may not give rise to an indemnification obligation. The Company cannot currently predict the outcome of these matters and the resolutions could have a material effect on our consolidated results of operations, financial position or cash flows.

 

Item 4. Mine Safety Disclosure

Not applicable.

 

 

 

25


Part II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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

 

 

  

High

 

  

Low

 

2014

  

 

 

 

  

 

 

 

First Quarter 2014 (through February 21, 2014)

  

$

2.50

  

  

$

2.11

  

 

2013

  

 

 

 

  

 

 

 

First Quarter 2013

  

$

2.65

  

  

$

2.11

  

Second Quarter 2013

  

$

2.42

  

  

$

1.82

  

Third Quarter 2013

  

$

3.21

  

  

$

2.31

  

Fourth Quarter 2013

  

$

2.59

  

  

$

2.10

  

 

2012

  

 

 

 

  

 

 

 

First Quarter 2012

  

$

3.09

  

  

$

2.25

  

Second Quarter 2012

  

$

2.88

  

  

$

1.20

  

Third Quarter 2012

  

$

2.28

  

  

$

1.10

  

Fourth Quarter 2012

  

$

2.70

  

  

$

1.69

  

There are approximately 7,100 shareholders of our Class A Common Stock and as of February 21, 2014, approximately 260 were holders of record. As of February 21, 2014, there were 8 holders of record of our Class B Common Stock.

Dividend Policy

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

Issuer Purchases of Equity Securities

None.

Stock Performance Graph

The following graph compares the cumulative total shareholder return on the Company’s Class A Common Stock with the cumulative total return of the Nasdaq Global Market U.S. Index and a mobile data index prepared by the Company of the following relevant publicly traded companies in the commercial and government sectors in which we operate: BlackBerry Limited; CACI International Inc.; Comtech Telecommunications Corp.; Garmin Ltd.; General Dynamics Corp.; Harris Corp.; The KEYW Holding Corporation; Kratos Defense & Security Solutions, Inc.; NCI Inc.; NeuStar, Inc.; Rockwell Collins, Inc.; LM Ericsson Telephone Company; Telenav, Inc.; and ViaSat, Inc. (the “New Peer Group”).

The composition of the Mobile Data Index has been changed from last year (the “Old Peer Group”) as follows: (1) Comverse Technology, Inc. and Globecomm Systems, Inc. were removed because they have become privately owned and no longer report relevant data, and (2) The KEYW Holding Corporation, and Blackberry Limited and Garmin Ltd. were added to the New Peer Group because their business lines, have become more comparable to our Government Segment and Commercial Segment businesses, respectively.

The information provided is from January 1, 2008 through December 31, 2013.

26


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

 

 

Item 6.  Selected Financial Data

The table that follows presents portions of our consolidated financial statements. You should read the following selected financial data together with our audited Consolidated Financial Statements and related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the more complete financial information included elsewhere in this Form 10-K. We have derived the statements of operations data for the years ended December 31, 2013, 2012, and 2011 and the balance sheet data as of December 31, 2013 and 2012 from our consolidated financial statements which have been audited by Ernst & Young LLP, independent registered public accounting firm, and which are included in Item 15 of this Form 10-K. We have derived the statements of operations data for the years ended December 31, 2010 and 2009 and the balance sheet data as of December 31, 2011, 2010, and 2009, from our audited financial statements which are not included in this Form 10-K. The historical results presented below are not necessarily indicative of the results to be expected for any future fiscal year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

27


 

 

  

Year Ended December 31,

 

 

  

2013

 

 

2012

 

 

2011

 

 

2010

 

 

2009

 

 

  

(in millions, except share and per share data)

 

Statement of Operations Data:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

  

$

281.4

  

 

$

305.1

  

 

$

303.9

  

 

$

262.3

  

 

$

151.9

  

Systems

  

 

80.9

  

 

 

182.3

  

 

 

121.5

  

 

 

126.5

  

 

 

148.2

  

Total revenue

  

 

362.3

  

 

 

487.4

  

 

 

425.4

  

 

 

388.8

  

 

 

300.1

  

 

Direct cost of services revenue

  

 

156.3

  

 

 

178.3

  

 

 

171.0

  

 

 

152.2

  

 

 

84.1

  

Direct cost of systems revenue

  

 

67.0

  

 

 

148.9

  

 

 

103.2

  

 

 

98.6

  

 

 

102.1

  

Total direct cost of revenue

  

 

223.3

  

 

 

327.2

  

 

 

274.2

  

 

 

250.8

  

 

 

186.2

  

 

Services gross profit

  

 

125.1

  

 

 

126.8

  

 

 

132.9

  

 

 

110.1

  

 

 

67.8

  

Systems gross profit

  

 

13.9

  

 

 

33.4

  

 

 

18.3

  

 

 

27.9

  

 

 

46.1

  

Total gross profit

  

 

139.0

  

 

 

160.2

  

 

 

151.2

  

 

 

138.0

  

 

 

113.9

  

 

Research and development expense

  

 

34.3

  

 

 

36.6

  

 

 

37.1

  

 

 

30.1

  

 

 

22.3

  

Sales and marketing expense

  

 

28.5

  

 

 

30.7

  

 

 

29.4

  

 

 

23.9

  

 

 

16.0

  

General and administrative expense

  

 

54.7

  

 

 

54.3

  

 

 

46.2

  

 

 

37.2

  

 

 

35.4

  

Depreciation and amortization of property and equipment

  

 

14.8

  

 

 

14.2

  

 

 

12.1

  

 

 

9.7

  

 

 

6.0

  

Amortization of goodwill and other intangible assets

  

 

4.6

  

 

 

4.4

  

 

 

5.5

  

 

 

4.7

  

 

 

0.9

  

Impairment of goodwill and long-lived assets

  

 

32.0

  

 

 

125.7

  

 

 

  

 

 

  

 

 

  

Total operating costs and expenses

  

 

168.9

  

 

 

265.9

  

 

 

130.3

  

 

 

105.6

  

 

 

80.6

  

Patent related gains, net of expenses

  

 

  

 

 

  

 

 

  

 

 

  

 

 

15.7

  

 

Income (loss) from operations

  

 

(29.9

)  

 

 

(105.7

 

 

20.9

  

 

 

32.4

  

 

 

49.0

  

 

Interest expense

  

 

(8.2

 

 

(7.4

 

 

(7.3

 

 

(9.2

 

 

(1.8

Amortization of deferred financing fees

  

 

(3.4

 

 

(0.8

 

 

(0.8

 

 

(0.8

 

 

(0.4

Gain (loss) on early retirement of debt

  

 

(0.2

)  

 

 

0.4

  

 

 

  

 

 

  

 

 

  

Other income (expense), net

  

 

(0.3

 

 

  

 

 

(0.4

 

 

1.6

  

 

 

0.3

  

 

Income (loss) before income taxes

  

 

(42.0

)  

 

 

(113.5

 

 

12.4

  

 

 

24.0

  

 

 

47.1

  

Benefit (provision) for income taxes

  

 

(16.6

 

 

15.5

  

 

 

(5.4

 

 

(8.1

 

 

(18.8

Net income (loss)

  

$

(58.6

 

$

(98.0

 

$

7.0

  

 

$

15.9

  

 

$

28.3

  

 

Net income (loss) per share — basic

  

$

(1.00

)  

 

$

(1.69

 

$

0.12

  

 

$

0.30

  

 

$

0.59

  

 

Net income (loss) per share — diluted1

  

$

(1.00

)  

 

$

(1.69

 

$

0.12

  

 

$

0.28

  

 

$

0.53

  

 

Basic shares used in computation (in thousands)

  

 

58,611

  

 

 

57,889

  

 

 

56,722

  

 

 

53,008

  

 

 

47,623

  

Diluted shares used in computation (in thousands)

  

 

58,611

  

 

 

57,889

  

 

 

58,581

  

 

 

56,032

  

 

 

53,946

  

1 

Shares issuable via the convertible notes are included if diluted, in which case tax-effected interest expense on the debt is excluded from the determination of Net income (loss) per share – diluted, see Note 3 presented in the Notes to Consolidated Financial Statements.

 

As of December 31:

  

2013

 

  

2012

 

  

2011

 

  

2010

 

  

2009

 

 

  

(in millions)

 

Balance Sheet Data:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Cash and cash equivalents

  

$

41.9

  

  

$

36.6

  

  

$

40.9

  

  

$

45.2

  

  

$

61.4

  

Working capital

  

 

55.2

  

  

 

82.6

  

  

 

87.0

  

  

 

89.6

  

  

 

77.7

  

Total assets

  

 

321.5

  

  

 

413.7

  

  

 

489.6

  

  

 

462.8

  

  

 

472.2

  

Capital leases and long-term debt (including current portion)

  

 

147.5

  

  

 

167.6

  

  

 

140.8

  

  

 

160.5

  

  

 

183.0

  

Total liabilities

  

 

212.2

  

  

 

252.6

  

  

 

238.9

  

  

 

247.3

  

  

 

286.4

  

Total stockholders’ equity

  

 

109.3

  

  

 

161.1

  

  

 

250.7

  

  

 

215.5

  

  

 

185.8

  

 

 

28


Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies and Estimates

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

Revenue Recognition. We recognize revenue according to the guidance in the Accounting Standards Update (“ASU”) 2009-14 (ASC topic 985) “Certain Revenue Arrangements That Include Software Elements” and the ASU 2009-13 (ASC topic 605) “Revenue Recognition — Multiple Deliverable Revenue Arrangements”. We recognize revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) the fee is probable of collection.

Revenue is reported as described below:

Services Revenue. Revenue from hosted and subscriber services consists of monthly recurring service fees and is recognized in the month earned. Maintenance fees are generally collected in advance and recognized ratably over the maintenance period. Services revenue for consulting, training and the design, development, deployment, field support and maintenance of communication systems is generated under time and materials contracts, cost plus fee contracts, or fixed price contracts. Revenue is recognized under time and materials contracts and cost plus fee contracts as billable costs are incurred. Fixed-price service contracts are accounted for using the proportional performance method. These contracts generally allow for monthly billing or billing upon achieving certain specified milestones.

Systems Revenue. We design, develop, and deploy custom communications products, components, and systems. Custom systems typically contain multiple elements, which may include hardware, installation, integration, and product licenses, which are either incidental or provide essential functionality.

We allocate the fees in a multi-element arrangement to each element based on the relative fair value of each element, using vendor-specific objective evidence (“VSOE”) of the fair value of each of the elements, if available. VSOE is generally determined based on the price charged when an element is sold separately. In the absence of VSOE of fair value, the fee is allocated among each element based on third-party evidence (“TPE”) of fair value, which is determined based on competitor pricing for similar deliverables when sold separately. When the Company is unable to establish fair value using VSOE or TPE, the Company uses estimated selling price (“ESP”) to allocate value to each element. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold separately. The Company determines ESP for deliverables by considering multiple factors including, but not limited to, prices it charges for similar offerings, market conditions, competitive landscape, and pricing practices.

Fees from the development and implementation of custom systems are generally performed under time and materials and fixed fee contracts. Revenue is recognized under time and materials contracts and cost plus fee contracts as billable costs are incurred. Fixed-price product delivery contracts are accounted for using the percentage-of-completion or proportional performance method, measured either by total costs incurred as a percentage of total estimated costs at the completion of the contract, or direct labor costs incurred compared to estimated total direct labor costs for projects for which third-party hardware represents a significant portion of the total estimated costs. These contracts generally allow for monthly billing or billing upon achieving certain specified milestones. Any estimated losses under long-term contracts are recognized in their entirety at the date that it becomes probable of occurring. Revenue from hardware sales to monthly subscriber customers is recognized as systems revenue. The Company has contracts and purchase orders where revenue is recognized at the time products or services are delivered, or when the product is shipped and the risk of the loss is transferred to the buyer, net of discounts.

Software licenses are generally perpetual licenses for a specified number of users that allow for the purchase of annual maintenance at a specified rate. All fees are recognized as revenue when the four criteria described above are met. For multiple element arrangements that contain only software and software-related elements, we allocate the fees to each element based on the VSOE of fair value of each element. Systems containing software licenses include a 90-day warranty for defects. We have not incurred significant warranty costs on any software product to date, and no costs are currently accrued upon recording the related revenue.

29


Revenue generated from our intellectual property consists of patent infringement liabilities, upfront and non-refundable license fees, royalty fees, and sales of our patents. Revenue from upfront and non-refundable payments is recognized when the arrangement is executed. When patent licensing arrangements include royalties for future sales of products using our licensed patented technology, revenue is recognized when earned during the applicable period. Due to the nature of some of the agreements it may be difficult to establish VSOE of separate elements of an agreement, in these circumstances the appropriate recognition of revenue may require the use of judgment based on the particular facts and circumstances. In all cases, revenue from the licensing of our intellectual property is recognized when all of four of the revenue recognition criteria are met, and included in Commercial systems revenue.

When a customer is billed or we receive payment and we have not met all of the criteria for revenue recognition, the billed or paid amount is recorded as deferred revenue on the Company’s consolidated balance sheet. As the revenue recognition criteria are met, the deferred amounts are recognized as revenue. We defer direct project costs incurred in certain situations as dictated by authoritative accounting literature. The Company classifies deferred revenue and deferred project costs on the consolidated balance sheet as either current or long-term depending on the expected product delivery dates or service coverage periods. Long-term deferred revenue is included in other liabilities and long-term deferred project costs are included in other assets on the Company’s consolidated balance sheet.

Under our contracts with the U.S. government for both systems and services, contract costs, including the allocated indirect expenses, are subject to audit and adjustment by the Defense Contract Audit Agency. We record revenue under these contracts at estimated net realizable amounts.

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

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

·

future expected cash flows from application subscriptions, software license sales, support agreements, consulting contracts and acquired developed technologies and patents;

·

expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed;

·

the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company’s product portfolio;

·

variable seller consideration arrangements; and

·

discount rates

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

Acquired Intangible Assets. The acquired intangible assets are amortized over their useful lives of between four and nineteen years, based on the straight-line method. We evaluate acquired intangible assets when events or changes in circumstances indicate that the carrying values of such assets might not be recoverable. Our review of factors present and the resulting appropriate carrying value of our acquired intangible assets are subject to judgments and estimates by management. Future events such as a significant underperformance relative to historical or projected future operating results, significant changes in the manner of our use of the acquired assets, and significant negative industry or economic trends could cause us to conclude that impairment indicators exist and that our acquired intangible assets might be impaired.

In the fourth quarter of 2013, after adjusting projections for uncertainty at a significant customer, we recorded an impairment charge of $0.6 million to acquired intangible assets.  In the second quarter of 2012, after adjusting projections for the impact of a customer contract renegotiation, we recorded an impairment charge of $14.0 million to acquired intangible assets.  

Goodwill. Goodwill represents the excess of cost over the fair value of assets of acquired businesses. Goodwill is not amortized, but instead is evaluated for impairment in the fourth quarter of each fiscal year, or sooner should there be an indicator of impairment. We may assess qualitative factors to determine whether it is more likely than not an event or circumstance might indicate the fair

30


value of the reporting unit is less than its carrying value. Such indicators include a sustained, significant decline in the Company’s stock price and market capitalization, a decline in the Company’s expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower expected growth, among others. After completing our assessment of such qualitative factors, and if it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value we perform a two-step process. The first step requires a comparison of the book value of net assets to the fair value of the reporting units that have goodwill assigned to them. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of the impairment. In the second step, a fair value for goodwill is estimated, based in part on the fair value of the reporting unit used in the first step, and is compared to its carrying value. The shortfall of the fair value below carrying value, if any, would represent the amount of goodwill impairment.

For goodwill impairment testing, we have four reporting units. In 2013, we reorganized the Commercial Segment in order to better conform and integrate the product lines and create efficiencies, so that one management team is now responsible for all Commercial Platforms & Applications other than the 9-1-1 Safety and Security part of the Commercial Segment. Previously, our Commercial Segment was comprised of Navigation and Other Commercial reporting units. Our two Government Segment reporting units, the Government Solutions Group (“GSG”) unit and the Cyber Intelligence unit, remain the same.

Our year-end goodwill balances by reporting unit were:

 

 

  

2013

 

  

Platforms and Applications

  

$

27.9

  

  

Safety and Security Group

  

 

22.0

  

  

Government Solutions Group

  

 

26.1

  

  

Cyber Intelligence

  

 

28.2

  

  

Total goodwill

  

$

104.2

  

  

 

 

 

  

2012

 

  

Navigation

  

$

22.1

  

  

Other Commercial

  

 

36.1

  

  

Government Solutions Group

  

 

26.1

  

  

Cyber Intelligence

  

 

28.2

  

  

Total goodwill

  

$

112.5

  

  

 

Following our fourth quarter 2013 testing, we wrote down the values of our Platforms and Applications reporting unit’s goodwill and long-lived assets from a carrying value of $65.4 million to their estimated fair value of $33.4 million at December 31, 2013, resulting in an impairment charge of $32.0 million. We valued the existing technology using a discounted cash flow method to determine whether a write-down was necessary, and after concluding that a write-down was necessary, used a relief from royalty method to value the licensable technology. We then used a discounted cash flow method to determine the fair value of our Platforms and Applications reporting unit. We consulted with a third party valuation firm to assist in the work.

 

In performing our 2013 testing for our Safety and Security and Cyber Intelligence reporting units, we used a discounted cash flow method as well as a market approach based on observable public comparable company multiples of revenue and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and weighted the results from the two methods to estimate the reporting units’ fair values. For our Government Solutions Group we used only a discounted cash flow method. Determining fair value requires the exercise of significant judgment, including judgment about appropriate discount rates, the amount and timing of expected future cash flows, as well as relevant comparable company multiples for the market comparable approach and the relevant weighting of the methods utilized.

For the market comparable approaches, we evaluated comparable company public trading values and valued our reporting units using multiples of EBITDA ranging from approximately 6 to 8 times. Comparable company public trading values are based on the market’s view of future industry conditions and the comparable companies’ future financial results. Adverse changes in any of these variables would negatively influence the valuation of our reporting units. It is not possible to determine the impact of such potential adverse changes on the valuation of our reporting units.

Our discounted cash flow models are based on our most recent long-range forecast and, for years beyond the forecast, we estimated terminal values based on estimated exit multiples ranging from approximately 6 to 7 times the final forecasted year EBITDA. They reflect management’s expectation of future market conditions and expected levels of financial performance for our reporting units, as well as discount rates and estimated terminal values that would be used by market participants in an arms-length transaction. Business operational risks which could impact profits are detailed in our “Risk Factors” disclosures. Discount rates used were intended to reflect the risks inherent in the future cash flows of the respective reporting units and were between 13% and 15%.

31


A summary of the impairment charge recorded in 2013 is as follows:

 

 

 

Carrying

Value

 

 

Fair Value

 

 

Impairment

Charge

 

Goodwill – Platforms and Applications

 

$

36.1

 

 

$

27.9

 

 

$

8.2

 

Property and equipment, including capitalized software for internal use

 

 

18.1

 

 

 

5.5

 

 

 

12.6

 

Software development costs

 

 

9.3

 

 

 

 

 

 

9.3

 

Other assets

 

 

1.3

 

 

 

 

 

 

1.3

 

Acquired intangible assets

 

 

0.6

 

 

 

 

 

 

0.6

 

 

 

$

65.4

 

 

$

33.4

 

 

$

32.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In the second quarter of 2012, we received notice from a significant navigation application customer that it intended to adjust pricing for TCS services. Management considered this to be an indicator that we should evaluate the long-lived assets (including goodwill and other intangible assets) related to the Company’s 2009 acquisition of Networks In Motion, operating as the Company’s Navigation reporting unit, for potential impairment. No triggering events occurred with regard to other reporting units, so an interim analysis of other units was not completed.

 

We completed Step 1 of the goodwill impairment testing for the Navigation reporting unit using a discounted cash flow (“DCF”) method supported by a market comparable approach. The DCF model was based on our updated long-range forecast for the Navigation reporting unit. For years beyond the forecast, our estimated terminal value was based on a discount rate of approximately 12% and a perpetual cash flow growth rate of 3%. For the market comparable approach, we evaluated comparable company public trading values, using sales and EBITDA multiples. The estimated fair value of the Navigation reporting unit was compared to the carrying amount including goodwill, and the results of the Step 1 goodwill testing indicated a potential impairment.

 

Accordingly, we proceeded with Step 2 of the impairment test to measure the amount of potential impairment. We allocated the fair value of the Navigation reporting unit to its assets and liabilities as of the date of the impairment analysis. As a result of our analysis as described above, an impairment charge of $86.3 million was recorded in 2012 for the excess of the carrying value of goodwill over the estimated fair value.

 

Our Navigation reporting unit’s goodwill, acquired intangibles, capitalized software development costs, and long-lived assets with a carrying value of $164.5 million were written down to estimated fair value of $38.8 million, resulting in a total impairment charge of $125.7 million. We engaged a third party valuation firm to assist in the determination of the fair value of goodwill, acquired intangibles, capitalized software, and long-lived assets.

 

A summary of the impairment charge recorded in the second quarter of 2012 is as follows:

 

 

 

Carrying

Value

March 31,

2012

 

 

Fair Value

June 30,

2012

 

 

Total

Impairment

Charge

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and Equipment, including capitalized software for internal use

 

$

23.3

 

 

$

10.3

 

 

$

13.0

 

Software development costs

 

 

18.8

 

 

 

6.4

 

 

 

12.4

 

Acquired intangible assets

 

 

14.0

 

 

 

 

 

 

14.0

 

Goodwill – Navigation

 

 

108.4

 

 

 

22.1

 

 

 

86.3

 

 

 

$

164.5

 

 

$

38.8

 

 

$

125.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We performed our annual fourth quarter 2012  goodwill Step 1 testing and  there was no indication of any further impairment in any of our reporting units, so the second step of the goodwill impairment analysis was not performed. For all reporting units, we used a market approached based on observable public comparable company multiples. For our Navigation and Cyber Intelligence reporting units, we also used a DCF analysis. Where multiple approaches were used, we weight the results from different methods to estimate the reporting unit’s fair value. The cash flows employed in 2012 DCF analyses were based on our most recent long-range forecast and, for years beyond the forecast, we estimated terminal value based on estimated exit multiples ranging from 6 to 7 times the final forecasted year earnings before interest, taxes, depreciation and amortization. The discount rates used in the DCF analyses were intended to reflect the risks inherent in the future cash flows of the respective reporting units and were approximately 12%. For the market comparable approaches, we evaluated comparable company public trading values, using multiples of earnings before interest, taxes, depreciation and amortization ranging from 6 to 12 times and multiples of revenue ranging from 1 to 2 times.

 

For 2011, all of our reporting units passed the first step of the goodwill impairment testing, indicating no impairments.

32


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

For new products, technological feasibility is established when an operative version of the computer software product is completed in the same software language as the product to be ultimately marketed, performs all the major functions planned for the product, and has successfully completed initial customer testing. Technological feasibility for enhancements to an existing product is established when a detail program design is completed. Costs that are capitalized include direct labor and other direct costs. In 2013, 2012, and 2011, we capitalized $2.0 million, $1.9 million, and $2.4 million, respectively, of software development costs for software developed for resale.

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

We capitalize all costs related to software developed or obtained for internal use when management commits to funding the project and the project completes the preliminary project stage. Capitalization of such costs ceases when the project is substantially complete and ready for its intended use. Capitalized software development costs for internal use are included in Property and Equipment on the Consolidated Balance Sheets.

In 2013, we recorded an impairment charge of $9.3 million related to our Platforms and Applications reporting unit. In 2012, we recorded an impairment charge of $12.4 million after determining the capitalized software development costs related to our Navigation reporting unit were not recoverable based on decreased projected revenues and sales pipeline.

Marketable Securities. Our marketable securities are classified as available-for-sale. Our primary objectives when investing are to preserve principal, maintain liquidity, and obtain higher returns than from cash equivalents. Our intent is not specifically to invest and hold securities with longer term maturities. We have the ability and intent, if necessary, to liquidate any of these investments in order to meet our operating needs within the next twelve months. The securities are carried at fair market value based on quoted market price with net unrealized gains and losses in stockholders’ equity as a component of accumulated other comprehensive income. If we determine that a decline in fair value of the marketable securities is other than temporary, a realized loss would be recognized in earnings. Gains or losses on securities sold are based on the specific identification method and are recognized in earnings.

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

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

33


in our assessment of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in material amounts of additional tax expense or benefit in the period of change.

We recognize the benefits of tax positions in the financial statements, if such positions are more likely than not to be sustained upon examination by the taxing authority and satisfy the appropriate measurement criteria. If the recognition threshold is met, the tax benefit is generally measured and recognized as the tax benefit having the highest likelihood, based on our judgment, of being realized upon ultimate settlement with the taxing authority, assuming full knowledge of the position and all relevant facts. At December 31, 2013, we had unrecognized tax benefits totaling approximately $4.8 million. The determination of these unrecognized amounts requires significant judgments and interpretation of complex tax laws. Different judgments or interpretations could result in material changes to the amount of unrecognized tax benefits.

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

Acquisitions

We did not make any material acquisitions in 2013. Opportunistic acquisitions are part of our long-term corporate strategy. We pursue specific targets that complement our portfolio of existing products and services, and try to pursue business combinations through exclusivity rather than participation in auction processes. We believe we can fund future acquisitions with our internally available cash, equivalents and marketable securities, cash generated from operations, amounts available under our existing debt facilities, additional borrowings or from the issuance of additional securities. We evaluate the financial impact of any potential acquisition and associated financing with regard to earnings, operating margin, cash flow and return on invested capital targets before deciding to move forward with an acquisition.

Effective July 6, 2012, we completed the acquisition of all of the outstanding shares of privately-held microDATA, GIS, Inc., (“microDATA.”) microDATA is a leading provider of Next Generation 9-1-1 software and solutions. Consideration for the acquisition was approximately $35 million, comprised of $21 million in cash at closing, plus $14 million in promissory notes and performance-based earn-out opportunities. microDATA’s business operations are included in our Commercial Segment.

On January 31, 2011, we acquired privately-held Trident Space & Defense, LLC, (“Trident”) a leading provider of engineering and electronics solutions for global space and defense markets, located in Torrance, California. Total consideration for the acquisition was $29.5 million including $17.2 million paid in cash and three million shares of our Class A common stock worth approximately $12.3 million. The acquired business operations are included in our Government Segment.

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

Indicators of Our Financial and Operating Performance

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

·

Revenue. We derive revenue from the sales of systems and services including recurring monthly service and subscriber fees, maintenance fees, software licenses and related service fees for the design, development, and deployment of software and communication systems, and products and services derived from the delivery of information processing, communication systems and components for governmental agencies.

·

Gross profit (revenue minus direct cost of revenue, including certain non-cash expenses). The major items comprising our cost of revenue are compensation and benefits, third-party hardware and software, network operation center and co-location facility operating expenses, amortization of capitalized software development costs, stock-based compensation, and overhead expenses. The costs of hardware and third-party software are primarily associated with the delivery of systems, and fluctuate from period to period as a result of the relative volume, mix of projects, level of service support required and the complexity of customized products and services delivered. Amortization of capitalized software development costs, including acquired technology, is associated with the recognition of revenue from our Commercial Segment.

34


·

Operating expenses. Our operating expenses are primarily compensation and benefits, professional fees, facility costs, marketing and sales-related expenses, and travel costs as well as certain non-cash expenses such as stock based compensation expense, depreciation and amortization of property and equipment, and amortization of acquired intangible assets.

·

Liquidity and cash flows. The primary driver of our cash flows is the results of our operations. Other important sources of our liquidity are our capacity to borrow, through our bank credit and term loan facility; lease financing for the purchase of equipment; and access to the public equity market.

·

Balance sheet. We view cash, working capital, and accounts receivable balances and days revenue outstanding as important indicators of our financial health.

Results of Operations

Operation of acquired businesses has been fully integrated into our existing operations. Our acquisitions did not result in our entry into a new line of business or product category; they added products, services and technical depth with features and functionality similar to our previous operations. The comparability of our operating results from 2012 to 2011 is affected by the July 6, 2012 acquisition of microDATA, so where changes in our 2012 results of operations from those of 2011 are clearly related to the acquisitions, such as revenue and increases in amortization of intangibles, we quantify the effects in the discussion that follows.

Revenue, Cost of Revenue, and Gross Profit

The following discussion addresses by segment our revenue, cost of revenue, and gross profit. See discussion of segment reporting in Note 21 to the audited Consolidated Financial Statements presented elsewhere in this Annual Report on Form 10-K.

Government Segment:

 

 

  

 

 

 

 

 

 

2013 vs. 2012 

 

 

 

 

2012 vs. 2011

($ in millions)

  

2013

 

 

2012

 

 

$

 

 

%

 

2011

 

 

$

 

 

%

Services revenue

  

$

131.1

  

 

$

146.1

 

 

$

(15.0

)

 

 

(10

%)

 

$

129.2

  

 

$

16.9

  

 

 

13

%

Systems revenue

  

 

61.1

  

 

 

158.6

 

 

 

(97.5

)

 

 

(61

%)

 

 

105.0

  

 

 

53.6

  

 

 

51

%

Total Government Segment revenue

  

 

192.2

  

 

 

304.7

 

 

 

(112.5

)

 

 

(37

%)

 

 

234.2

  

 

 

70.5

  

 

 

30

%

 

Direct cost of services

  

 

92.3

  

 

 

107.9

 

 

 

(15.6

)

 

 

(14

%)

 

 

90.0

  

 

 

17.9

  

 

 

20

%

Direct cost of systems

  

 

50.4

  

 

 

133.7

 

 

 

(83.3

)

 

 

(62

%)

 

 

89.9

  

 

 

43.8

  

 

 

49

%

Total Government Segment cost of revenue

  

 

142.7

  

 

 

241.6

 

 

 

(98.9

)

 

 

(41

%)

 

 

179.9

  

 

 

61.7

  

 

 

34

%

 

Services gross profit

  

 

38.8

  

 

 

38.2

 

 

 

0.6

 

 

 

2

%

 

 

39.2

  

 

 

(1.0

)

 

 

(3

%)

Systems gross profit

  

 

10.7

  

 

 

24.9

 

 

 

(14.2

)

 

 

(57

%)

 

 

15.1

  

 

 

9.8

  

 

 

65

%

Total Government Segment gross profit  

  

$

49.5

  

 

$

63.1

 

 

$

(13.6

)

 

 

(22

%)