F-8
TeleCommunication Systems, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except per share data)
1. Significant Accounting Policies
Description of Business
TeleCommunication Systems, Inc. develops and delivers highly reliable and secure wireless communication technology. While
we manage and have historically reported two business segments, digital wireless voice and data communication technology is
converging, so engineers from either segment are increasingly collaborating to address solution needs for customers of the other
segment. We report two operating segments, Government (53% of 2013 revenue) and Commercial (47% of 2013 revenue).
Government Segment:
We provide professional services including field support of deployable wireless systems and
cybersecurity training to the U.S. Department of Defense and other government and foreign customers. We own and operate secure
satellite teleport facilities, resell access to satellite airtime (known as space segment), and design, furnish, install and operate wireless
communication systems and components, including our SwiftLink
®
deployable communication systems which integrate high speed,
satellite, and, internet protocol technology with secure, federal government-approved cryptologic devices.
Commercial Segment:
We are one of two leading companies that enable 9-1-1 call routing via cellular, Voice over Internet
Protocol, and next generation technology. Other TCS hosted and managed services include cellular carrier infrastructure for text
messaging and location-based platforms and applications, including turn-by-turn navigation. Commercial segment customers include
wireless carrier network operators, Voice over Internet Protocol service providers, wireless device manufacturers, automotive industry
suppliers, and state and local governments.
Use of Estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Significant
estimates and assumptions in these consolidated financial statements include estimates used in revenue recognition, fair value of
business combinations, fair value associated with goodwill, intangible assets and long-lived asset impairment tests, estimated values of
software development costs, income taxes and deferred tax valuation allowances, the fair value of marketable securities and stock
based compensation, and legal and contingent liabilities. Actual results could differ from those estimates.
In 2013, TCS’s Platforms and Applications reporting unit’s goodwill and long-lived assets with a carrying value of $65,406
were written down to estimated fair value of $33,429, resulting in an impairment charge of $31,977 to goodwill and long-lived assets.
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.
A summary of the impairment charge is set forth below:
Carrying
Value
January 1,
2013
Fair Value
December 31,
2013
Total
Impairment
Charge
Goodwill – Platforms and Applications............................ $
36,121 $
27,912 $
8,209
Property and equipment, including capitalized software for
internal use......................................................................
18,082
5,517
12,565
Software development costs .............................................
9,270
—
9,270
Acquired intangible assets ................................................
599
—
599
Other assets.......................................................................
1,334
—
1,334
$
65,406 $
33,429 $
31,977
In 2012, TCS’s Navigation reporting unit’s goodwill and long-lived assets with a carrying value of $164,500 were written down
to estimated fair value of $38,797, resulting in an impairment charge of $125,703 to Goodwill, Acquired intangibles, and Long-lived
(fixed) assets. We used a discounted cash flow model to determine the fair value of goodwill and an income approach to determine the
fair values of acquired intangibles, capitalized software, and long-lived assets.
Principles of Consolidation.
The accompanying financial statements include the accounts of our wholly owned subsidiaries.
All intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents.
Cash and cash equivalents include cash and highly liquid investments with a maturity of three
months or less when purchased. Cash equivalents are reported at fair value, which approximates cost.
