SVR-06.30.13-10Q (WORD)
Table of Contents

 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
 _________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    
COMMISSION FILE NUMBER    333-176382 
_________________________
SYNIVERSE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
__________________________
 
Delaware
30-0041666
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
8125 Highwoods Palm Way
Tampa, Florida 33647
(Address of principal executive office)
(Zip code)
(813) 637-5000
(Registrant’s telephone number, including area code)
________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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  x    No  o
    
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company  o       
 
 
(Do not check if a smaller  reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of shares of common stock of the registrant outstanding at August 14, 2013 was 1,000.
 
 
 
 
 


1
Table of Contents


TABLE OF CONTENTS

 
 
Page
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2
Table of Contents

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SYNIVERSE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
June 30,
2013
 
December 31,
2012
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
273,795

 
$
232,195

Accounts receivable, net of allowances of $8,579 and $9,912, respectively
187,760

 
148,697

Deferred tax assets
31,755

 
11,942

Income taxes receivable
6,287

 
6,075

Prepaid and other current assets
48,968

 
25,195

Assets held for sale
15,661

 
—

Total current assets
564,226

 
424,104

Property and equipment, net
103,071

 
85,152

Capitalized software, net
263,601

 
202,114

Deferred costs, net
60,050

 
42,071

Goodwill
2,079,561

 
1,682,171

Identifiable intangibles, net
639,965

 
477,083

Deferred tax assets
963

 
1,290

Other assets
11,051

 
45,054

Total assets
$
3,722,488

 
$
2,959,039

LIABILITIES AND STOCKHOLDER EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
35,387

 
$
17,761

Income taxes payable
8,469

 
6,197

Accrued liabilities
119,313

 
79,590

Deferred revenues
8,256

 
5,711

Deferred tax liabilities
243

 
243

Current portion of capital lease obligation
6,476

 
3,943

Current portion of long-term debt, net of original issue discount
13,539

 
7,082

Liabilities related to assets held for sale
2,693

 
—

Total current liabilities
194,376

 
120,527

Long-term liabilities:
 
 
 
Deferred tax liabilities
234,698

 
212,676

Long-term capital lease obligation, net of current maturities
1,816

 
4,320

Long-term debt, net of current portion and original issue discount
2,084,677

 
1,398,136

Other long-term liabilities
45,222

 
26,953

Total liabilities
2,560,789

 
1,762,612

Commitments and contingencies


 


Redeemable noncontrolling interest
203

 
—

Stockholder equity:
 
 
 
Common stock $0.01 par value; one thousand shares authorized, issued and outstanding as of June 30, 2013 and December 31, 2012
—

 
—

Additional paid-in capital
1,220,513

 
1,215,350

Accumulated deficit
(62,508
)
 
(24,713
)
Accumulated other comprehensive loss
(2,716
)
 
(970
)
Total Syniverse Holdings, Inc. stockholder equity
1,155,289

 
1,189,667

Nonredeemable noncontrolling interest
6,207

 
6,760

Total equity
1,161,496

 
1,196,427

Total liabilities and stockholder equity
$
3,722,488

 
$
2,959,039

See accompanying notes to unaudited condensed consolidated financial statements

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Table of Contents

SYNIVERSE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
Revenues
$
193,271

 
$
183,208

 
$
377,153

 
$
368,273

Costs and expenses:
 
 
 
 
 
 
 
Cost of operations (excluding depreciation and amortization shown separately below)
71,934

 
67,308

 
143,865

 
134,324

Sales and marketing
16,528

 
16,935

 
36,677

 
34,758

General and administrative
28,690

 
28,011

 
59,831

 
53,021

Depreciation and amortization
49,500

 
44,089

 
94,587

 
87,273

Restructuring and management termination benefits
2,452

 
257

 
3,510

 
631

Acquisition expenses
16,553

 
5,490

 
20,945

 
5,490

 
185,657

 
162,090

 
359,415

 
315,497

Operating income
7,614

 
21,118

 
17,738

 
52,776

Other income (expense), net:
 
 
 
 
 
 
 
Interest income
162

 
272

 
211

 
504

Interest expense
(31,117
)
 
(31,567
)
 
(57,961
)
 
(58,101
)
Debt extinguishment costs
—

 
(6,458
)
 
—

 
(6,458
)
Other, net
(553
)
 
(833
)
 
(1,237
)
 
481

 
(31,508
)
 
(38,586
)
 
(58,987
)
 
(63,574
)
Loss before provision for (benefit from) income taxes
(23,894
)
 
(17,468
)
 
(41,249
)
 
(10,798
)
Provision for (benefit from) income taxes
250

 
(2,122
)
 
(4,058
)
 
35

Net loss
(24,144
)
 
(15,346
)
 
(37,191
)
 
(10,833
)
Net income attributable to nonredeemable noncontrolling interest
192

 
425

 
604

 
1,656

Net loss attributable to Syniverse Holdings, Inc.
$
(24,336
)
 
$
(15,771
)
 
$
(37,795
)
 
$
(12,489
)

See accompanying notes to unaudited condensed consolidated financial statements


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SYNIVERSE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(IN THOUSANDS)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
Net loss
$
(24,144
)
 
$
(15,346
)
 
$
(37,191
)
 
$
(10,833
)
Other comprehensive loss (net of tax):
 
 
 
 
 
 
 
Foreign currency translation adjustment (1)
(912
)
 
(646
)
 
(1,999
)
 
(1,098
)
Amortization of unrecognized loss included in net periodic pension cost (2)
36

 
—

 
36

 
—

Other comprehensive loss
(876
)
 
(646
)
 
(1,963
)
 
(1,098
)
Comprehensive loss
(25,020
)
 
(15,992
)
 
(39,154
)
 
(11,931
)
Less: comprehensive (loss) income attributable to nonredeemable noncontrolling interest
(140
)
 
169

 
387

 
1,306

Comprehensive loss attributable to Syniverse Holdings, Inc.
$
(24,880
)
 
$
(16,161
)
 
$
(39,541
)
 
$
(13,237
)

(1)
Foreign currency translation adjustments are shown net of income tax expense (benefit) of $317 and $(273) for the three and six months ended June 30, 2013, respectively, and net of income tax benefit of ($1,129) and ($558) for the three and six months ended June 30, 2012, respectively.
(2)
Amortization of unrecognized loss included in net periodic cost is shown net of income tax expense of $15 for the three and six months ended June 30, 2013, respectively.
See accompanying notes to unaudited condensed consolidated financial statements


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SYNIVERSE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER EQUITY
(IN THOUSANDS)

 
Stockholder of Syniverse Holdings, Inc.
 
 
 
 
 
    Common Stock
 

 

 

 
 
 

 
 
 
Shares
 
Amount
 
Additional Paid-In Capital
 
Accumulated Deficit
 
  Accumulated Other
Comprehensive 
Income (Loss)
 
Total Syniverse Holdings, Inc.
 
Nonredeemable noncontrolling Interest
 
Total
Balance, December 31, 2011
1

 
$
—

 
$
1,208,365

 
$
(21,472
)
 
$
2,400

 
$
1,189,293

 
$
4,820

 
$
1,194,113

Net (loss) income
—

 
—

 
—

 
(12,489
)
 
—

 
(12,489
)
 
1,656

 
(10,833
)
Other comprehensive loss (net of tax) -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(748
)
 
(748
)
 
(350
)
 
(1,098
)
Stock-based compensation
—

 
—

 
4,426

 
—

 
—

 
4,426

 
—

 
4,426

Distribution to Buccaneer Holdings, Inc.
—

 
—

 
(26
)
 
—

 
—

 
(26
)
 
0

 
(26
)
Balance, June 30, 2012 (Unaudited)
1
 
$
—

 
$
1,212,765

 
$
(33,961
)
 
$
1,652

 
$
1,180,456

 
$
6,126

 
$
1,186,582

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2012
1
 
$
—

 
$
1,215,350

 
$
(24,713
)
 
$
(970
)
 
$
1,189,667

 
$
6,760

 
$
1,196,427

Net (loss) income
—

 
—

 
—

 
(37,795
)
 
—

 
(37,795
)
 
604

 
(37,191
)
Other comprehensive loss (net of tax) -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(1,782
)
 
(1,782
)
 
(217
)
 
(1,999
)
Amortization of unrecognized loss included in net periodic pension cost
—

 
—

 
—

 
—

 
36

 
36

 
—

 
36

Stock-based compensation
—

 
—

 
5,180

 
—

 
—

 
5,180

 
—

 
5,180

Distribution to nonredeemable noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
(940
)
 
(940
)
Distribution to Buccaneer Holdings, Inc.
—

 
—

 
(17
)
 
—

 
—

 
(17
)
 
—

 
(17
)
Balance, June 30, 2013 (Unaudited)
1

 
$
—

 
$
1,220,513

 
$
(62,508
)
 
$
(2,716
)
 
$
1,155,289

 
$
6,207

 
$
1,161,496

See accompanying notes to unaudited condensed consolidated financial statements


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SYNIVERSE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
 
Six months ended June 30,
 
2013
 
2012
 
(Unaudited)
Cash flows from operating activities
 
 
 
Net loss
$
(37,191
)
 
$
(10,833
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
94,587

 
87,273

Amortization of deferred debt issuance costs and original issue discount
4,454

 
3,972

Allowance for uncollectible accounts
352

 
517

Allowance for credit memos
4,174

 
3,279

Deferred income tax benefit
(6,066
)
 
(1,066
)
Debt modification costs
—

 
6,115

Debt extinguishment costs
—

 
6,458

Stock-based compensation
5,180

 
4,426

Other, net
2,290

 
1,285

Changes in operating assets and liabilities, net of effect of acquisition:
 
 
 
Accounts receivable
(17,042
)
 
(10,310
)
Income tax receivable or payable
(34
)
 
(2,186
)
Prepaid and other current assets
(10,758
)
 
(2,424
)
Accounts payable
8,558

 
11,544

Accrued liabilities and deferred revenues
9,240

 
(8,425
)
Other assets and long-term liabilities
(2,926
)
 
291

Net cash provided by operating activities
54,818

 
89,916

Cash flows from investing activities
 
 
 
Capital expenditures
(41,743
)
 
(39,690
)
Acquisition, net of acquired cash
(628,191
)
 
—

Capital expenditures, Assets held for sale
(4,615
)
 
—

Net cash used in investing activities
(674,549
)
 
(39,690
)
Cash flows from financing activities
 
 
 
Debt issuance costs paid
(25,236
)
 
(10,181
)
Payments on capital lease obligation
(4,931
)
 
(58
)
Principal payments on Old Senior Credit Facility
—

 
(1,014,750
)
Principal payments on Initial Term Loans
(4,750
)
 
—

Borrowings under Initial Term Loans, net of original issue discount
—

 
940,500

Borrowings under Tranche B Term Loans, net of original issue discount
696,500

 
—

Distribution to Buccaneer Holdings, Inc.
(17
)
 
(26
)
Distribution to nonredeemable noncontrolling interest
(940
)
 
—

Net cash provided by (used in) financing activities
660,626

 
(84,515
)
Effect of exchange rate changes on cash
705

 
(1,868
)
Net increase (decrease) in cash
41,600

 
(36,157
)
Cash at beginning of period
232,195

 
226,753

Cash at end of period
$
273,795

 
$
190,596

 
 
 
 
Supplemental noncash investing and financing activities
 
 
 
Assets acquired under capital lease
$
4,985

 
$
11,905

Supplemental cash flow information
 
 
 
Interest paid
$
53,190

 
$
50,725

Income taxes paid
$
2,040

 
$
3,310


See accompanying notes to unaudited condensed consolidated financial statements  

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SYNIVERSE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business
We are a leading global provider of technology solutions for mobile operators and the broader wireless ecosystem. Our integrated solutions enable wireless services across disparate networks, technologies and geographies. For over 25 years, we have served as an integral third-party intermediary to stakeholders across the telecommunications industry including mobile operators and enterprise customers, among others. Our product offerings include roaming clearinghouse and financial settlement services between operators; applications which facilitate connectivity across the wireless ecosystem; and text and multimedia message delivery services. After closing our acquisition of MACH on June 28, 2013 (see Note 4 to the unaudited condensed consolidated financial statements for more information), we currently provide our services to over 1,000 telecommunications operators and more than 500 enterprise customers in over 200 countries and territories.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements of Syniverse Holdings, Inc. have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and on a basis that is consistent with the accounting principles applied in our audited financial statements for the fiscal year ended December 31, 2012 (the “2012 financial statements”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in our 2012 financial statements. Operating results for the interim periods noted herein are not necessarily indicative of the results that may be achieved for a full year.

The unaudited condensed consolidated financial statements include the accounts of Syniverse Holdings, Inc. and all of its wholly owned subsidiaries and a variable interest entity for which Syniverse Holdings, Inc. is deemed to be the primary beneficiary. References to “Syniverse,” “the Company,” “us,” or “we” include all of the consolidated companies. Redeemable and nonredeemable noncontrolling interest is recognized for the portion of consolidated joint ventures not owned by us. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

We have prepared our financial statements in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the period. Actual results could differ from those estimates.

Customer Accounts

We provide financial settlement services to wireless operators to support the payment of roaming related charges to their roaming network partners. In accordance with our customer contracts, funds are held by us as an agent on behalf of our customers to settle their roaming related charges to other operators. These funds and the corresponding liability are not reflected in our unaudited condensed consolidated balance sheets. The off-balance sheet amounts totaled approximately $453.6 million and $132.4 million as of June 30, 2013 and December 31, 2012, respectively. The increase from December 31, 2012 includes $296.7 million resulting from the Acquisition (defined below) (see Note 4 for additional details regarding the Acquisition).

Capitalized Software Costs             

We capitalize the cost of externally purchased software, internal-use software and developed technology that has a useful life in excess of one year. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they enable the software to perform a task it previously was unable to perform. Software maintenance and training costs are expensed in the period in which they are incurred. Capitalized software and developed technology are amortized using the straight-line method over a period of 3 years and 3 to 7 years, respectively.
    

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During the three months ended June 30, 2013, we determined that one of our internal use software projects would not be completed and, therefore, recorded a loss on abandonment of approximately $4.3 million. The loss was recorded in depreciation and amortization in the unaudited condensed consolidated statement of operations.

Foreign Currencies

We have operations in subsidiaries in Europe, primarily the United Kingdom, Germany, Luxembourg, India, and the Asia-Pacific region, each of whose functional currency is their local currency. Gains and losses on transactions denominated in currencies other than the relevant functional currencies are included in “other, net” in the unaudited condensed consolidated statements of operations. For the three and six months ended June 30, 2013, we recorded a foreign currency transaction loss of $0.6 million and $1.2 million, respectively. For the three and six months ended June 30, 2012, we recorded a foreign currency transaction loss of $0.8 million and gain of $0.5 million, respectively.

The assets and liabilities of subsidiaries whose functional currency is other than the U.S. dollar are translated at the period-end rate of exchange. The resulting translation adjustment is recorded as a component of accumulated other comprehensive loss and is included in stockholder equity. Transaction gains and losses on intercompany balances which are deemed to be of a long-term investment nature are also recorded as a component of other comprehensive loss. Items within the statement of operations are translated at the average rates prevailing during the period.

Seasonality

Generally, there is a seasonal increase in wireless roaming usage and corresponding revenues in the high-travel months of our second and third fiscal quarters. Products primarily affected by this seasonality include signaling solutions, interstandard roaming, Mobile Data Roaming (“MDR”) and roaming clearing house.

Segment Information

In accordance with the applicable accounting guidance, we have evaluated our portfolio of service offerings, reportable segments and the financial information reviewed by our chief operating decision maker for purposes of making resource allocation decisions. We currently operate as a single operating segment, as our Chief Executive Officer reviews financial information on the basis of our unaudited condensed consolidated financial results for the purposes of making resource allocation decisions.

Revenues by service offerings were as follows:
 
Three months ended June 30,
 
2013
 
2012
(In thousands)
(Unaudited)
Network services
$
95,490

 
$
84,861

Messaging services
46,753

 
44,442

Roaming services
47,301

 
48,087

Other
3,727

 
5,818

Revenues
$
193,271

 
$
183,208


 
Six months ended June 30,
 
2013
 
2012
(In thousands)
(Unaudited)
Network services
$
183,203

 
$
169,497

Messaging services
93,475

 
91,450

Roaming services
93,181

 
97,230

Other
7,294

 
10,096

Revenues
$
377,153

 
$
368,273


Revenues by geographic region, based on the “bill to” location on the invoice, were as follows:

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Three months ended June 30,
 
2013
 
2012
(In thousands)
(Unaudited)
North America
$
146,046

 
$
137,706

Asia Pacific
16,600

 
18,086

Caribbean and Latin America
14,302

 
13,200

Europe, Middle East and Africa
16,323

 
14,216

Revenues
$
193,271

 
$
183,208



 
Six months ended June 30,
 
2013
 
2012
(In thousands)
(Unaudited)
North America
$
281,913

 
$
279,644

Asia Pacific
32,866

 
34,447

Caribbean and Latin America
30,608

 
26,323

Europe, Middle East and Africa
31,766

 
27,859

Revenues
$
377,153

 
$
368,273


For the three months ended June 30, 2013 and 2012, we derived 71.0% and 70.1% of our revenues from customers in the United States, respectively. For the six months ended June 30, 2013 and 2012, we derived 69.9% and 70.6% of our revenues from customers in the United States, respectively. During the three and six months ended June 30, 2013 and 2012, we did not generate revenue in excess of 10% of total revenues in any other individual country.

Long-lived assets, which consist of property and equipment, net and capitalized software, net, by geographic location were as follows:  
 
June 30, 2013
 
December 31, 2012
(In thousands)
(Unaudited)
 
 
North America
$
269,412

 
$
273,880

Asia Pacific
7,226

 
6,307

Caribbean and Latin America
1,089

 
219

Europe, Middle East and Africa
88,945

 
6,860

Total long-lived assets, net
$
366,672

 
$
287,266


Reclassifications of Prior Year Presentation

Certain reclassifications of 2012 financial information have been made to conform to the current year presentation. The reclassifications had no effect on our reported results of operations. Effective June 30, 2013, we reclassified Acquisition expenses out of General and administrative costs and expenses into a single line item on our unaudited condensed consolidated statement of operations. Acquisition expenses consist primarily of professional services costs, such as legal, tax, audit and transaction advisory costs, all of which were incurred in conjunction with the Acquisition (defined below) (see Note 4 for additional details regarding the Acquisition).

3. Recent Accounting Pronouncements
    
In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which is included in the ASC in Topic 350 “Intangibles-Goodwill and Other”. ASU 2012-02 permits companies to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. If a greater than 50 percent likelihood exists that the indefinite-lived intangible asset is impaired then the quantitative impairment test, as described in Topic 350, must be performed. Under the amendments in this ASU, a company has the option to bypass the qualitative assessment for any indefinite-lived intangible assets and proceed directly to performing the quantitative impairment test by comparing the fair value with the carrying amount

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as described in Topic 350. A company may resume performing the qualitative assessment in any subsequent period. This accounting standard was effective for our financial statements beginning January 1, 2013. The adoption of this standard did not have a material impact on our unaudited condensed consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which is included in the ASC in Topic 220 “Comprehensive Income”. ASU 2013-02 requires entities to provide information about significant amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This accounting standard was effective for our financial statements beginning January 1, 2013. The adoption of this standard did not have a material impact on our unaudited condensed consolidated financial statements and related disclosures.    
    
4. MACH Acquisition

On June 28, 2013 (the “Acquisition Date”), we completed our acquisition of WP Roaming III S.à r.l. (“WP Roaming”), for a total purchase price of approximately $712.0 million. As part of this transaction, we acquired from WP Roaming S.à r.l., a Luxembourg limited liability company (the “Seller”), all the shares and preferred equity certificates (whether convertible or not) in WP Roaming (the “Acquisition”). The purchase price was funded through a portion of the net proceeds from a new $700.0 million senior secured credit facility and the Deposit (as defined below) of €30.0 million that was paid to the Seller on July 2, 2012.

WP Roaming is a holding company which conducts the business of MACH S.à r.l. (“MACH”). The purpose of the Acquisition is to give Syniverse added global scale and increased reach with more direct connections to support roaming, messaging and network solutions that enable its customers to deliver superior experiences to their end users.

At the closing of the Acquisition, Syniverse paid to the Seller an amount equal to approximately €140.0 million, representing €172.7 million (the “Base Amount”), less preliminary adjustments of €37.2 million, plus €4.5 million, representing €250.0 per month from December 31, 2011 through the Acquisition Date, reflecting a “locked box” approach, such that Syniverse Holdings, Inc. acquired WP Roaming with economic effect from December 31, 2011. In addition, at the Acquisition Date, Syniverse, on behalf of WP Roaming, paid €313.0 million and $81.5 million for amounts outstanding to WP Roaming's two third-party lenders in order to ensure the release of all related guarantees and security interests. On July 2, 2012, Syniverse Holdings, Inc. paid the Seller a deposit of €30.0 million (the “Deposit”) which was applied to the purchase price at the Acquisition Date. For purposes of the purchase price allocation, the Deposit and amounts paid in Euros at the Acquisition Date were converted to U.S. dollars using an exchange rate of 1.3058 or $630.5 million.

The Acquisition was accounted for under the purchase method of accounting. The total purchase price was allocated to the acquired assets and liabilities assumed based on their estimated fair values at the Acquisition Date. The fair value of the net assets acquired was based on a preliminary valuation and our estimates and assumptions are subject to change within the measurement period. As the Acquisition closed two days prior to the balance sheet date, the Company is continuing to evaluate (i) certain purchase price adjustments under the purchase agreement; (ii) valuation of intangible assets, including further assessment of customer relationships for attrition statistics, historical attrition patterns and the impact of the Acquisition on such statistics; (iii) valuation of accounts receivable; (iv) valuation of redeemable noncontrolling interest; (v) valuation of equity investment; (vi) income taxes, including uncertain tax positions; and (vii) pre-Acquisition contingencies, including legal and customer claims and disputes. Syniverse will finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the Acquisition Date.

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The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed in connection with the Acquisition:

(In thousands)
 
Total purchase price
$
712,009

Less: cash acquired
44,644

Cash consideration
$
667,365

 
 
Fair value of net assets acquired:
 
Cash
44,644

Accounts receivable
26,887

Prepaid and other current assets
10,456

Assets held for sale
11,046

Property and equipment
7,157

Capitalized software
74,229

Customer relationships
207,037

Other identifiable intangible assets
2,103

Deferred tax assets
897

Other assets
5,657

Accounts payable
(8,847
)
Income taxes payable
(1,993
)
Accrued liabilities
(32,638
)
Deferred revenues
(1,484
)
Liabilities related to assets held for sale
(2,693
)
Deferred tax liabilities
(27,636
)
Redeemable noncontrolling interest
(203
)
Net assets acquired
314,619

Allocation to goodwill
$
397,390


The excess of the purchase price over the fair value of the net assets acquired resulted in goodwill of $397.4 million, which is primarily attributable to assembled workforce, operating synergies and potential expansion into other global markets. We do not expect goodwill to be deductible for tax purposes. We incurred Acquisition related expenses of $16.6 million and $20.9 million for the three and six months ended June 30, 2013, respectively, and $5.5 million for the three and six months ended June 30, 2012. These costs were recorded in Acquisition expenses in our unaudited condensed consolidated statements of operations. As of June 30, 2013 we have incurred total Acquisition related expenses of $35.6 million, $14.7 million of which was recorded during the year ended December 31, 2012.

Customer relationships were valued using discounted future cash flows and capitalized software was valued using a relief from royalty method under the income approach. Other identifiable intangibles include a non-solicitation agreement for key employees. This asset was valued using a discounted future cash flow method assuming a with and without analysis. The valuations considered historical financial results and expected and historical trends. The future cash flows for the customer relationships were discounted using a weighted-average cost of capital, which was based on an analysis of the cost of capital for guideline companies within the technology industry. We determined useful lives of the intangible assets based on the period over which we expect those assets to contribute directly or indirectly to future cash flows. Customer relationships will be amortized over their useful lives using the pattern of consumption method. Capitalized software assets will be amortized over their useful lives using the straight-line method. The weighted average amortization period for customer relationships, capitalized software and other identifiable intangible assets is 14.7 years, 6.5 years and 3.5 years, respectively, and 12.4 years in total.

The fair value of accounts receivable acquired is $26.9 million, with the gross contractual amount being $37.4 million. We expect $10.5 million to be uncollectible.


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Other assets include $1.3 million of restricted cash related to an amount due under a purchase agreement existing at the Acquisition Date. The amount due relates to additional cash payments that will be made to the former owner of an entity acquired by MACH in 2011. The amount is currently held in escrow as required by the purchase agreement and is not subject to change.

The impact of the Acquisition was insignificant to our results of operations for the three and six months ended June 30, 2013, as the transaction was completed within two days of the period end. As such, these results have not been included in our condensed consolidated statement of operations.

Supplemental Pro Forma Financial Information
    
The following unaudited pro forma financial information for the six months ended June 30, 2013 and 2012 represent combined revenue and loss from continuing operations as if the Acquisition had taken place on January 1, 2012. The unaudited pro forma results reflect certain adjustments including additional estimated amortization expense associated with acquired intangible assets and interest expense associated with debt used to fund the Acquisition. The pro forma financial information does not purport to be indicative of the results of operations that would have been achieved had the Acquisition taken place on the date indicated or the results of operations that may result in the future.

 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenues
$
231,955

 
$
218,216

 
$
451,467

 
$
441,696

(Loss) income from continuing operations attributable to Syniverse Holdings, Inc.
$
(8,628
)
 
$
(8,137
)
 
$
(17,476
)
 
$
3,766


Assets Held for Sale
        
The approval of the Acquisition granted by the European Commission (the “Commission”) was conditioned upon the Company's commitment to divest certain assets supporting MACH's data clearing and near real-time roaming data exchange (“NRTRDE”) business in the European Economic Area, which includes European Union countries plus Iceland, Liechtenstein and Norway (the “EEA”), including technology platforms, necessary employees, customer contracts and the MACH brand (the “Divestment Business”).

On June 3, 2013, Interfact S.à r.l., a Luxembourg limited liability company and the MACH group company that is the immediate shareholder of the Divestment Business, signed a definitive agreement (the “Divestment Agreement”) to sell the Divestment Business to Starhome, B.V., a private limited liability company incorporated under the laws of The Netherlands, upon the completion of the Acquisition.



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The assets and liabilities of the Divestment Business at June 30, 2013 are summarized in the table below:

 
 
June 30, 2013
 
 
(Unaudited)
Assets
 
 
Cash and cash equivalents
 
$
17

Accounts receivable
 
4,055

Prepaid expenses
 
1,165

Other receivables
 
55

Property and equipment
 
2,964

Capitalized software
 
7,405

Total assets held for sale
 
$
15,661

 
 
 
Liabilities
 
 
Accounts payable
 
$
138

Deferred revenues
 
475

Accrued liabilities
 
2,080

Total liabilities related to assets held for sale
 
$
2,693


Assets held for sale include $4.6 million of capital expenditures incurred by Syniverse to support the Divestment Business, as a condition of closing the sale transaction.

Assets are considered to be held for sale when management approves and commits to a formal plan to actively market the assets for sale at a sales price reasonable in relation to its fair value, the asset is available for immediate sale in its present condition, the sale of the asset is probable and expected to be completed within one year, and it is unlikely that significant changes will be made to the plan. Newly acquired assets that are held for sale are recorded at their estimated fair value, less cost to sell.

5. Goodwill

The following table summarizes the changes in the carrying amount of goodwill for the six months ended June 30, 2013:

(In thousands)
 
 
Balance at December 31, 2012
 
$
1,682,171

Acquisition goodwill
 
397,390

Balance at June 30, 2013
 
$
2,079,561


Goodwill is not subject to amortization and the change in goodwill represents the impact of the Acquisition.
    
6. Detail of Accrued Liabilities

Accrued liabilities consisted of the following:

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June 30, 2013
 
December 31, 2012
(In thousands)
(Unaudited)
 
 
Accrued payroll and related benefits
$
40,409

 
$
20,285

Accrued interest
29,252

 
29,353

Accrued network and data processing expenses
6,164

 
6,266

Accrued revenue share expenses
3,307

 
2,288

Other accrued liabilities
40,181

 
21,398

Total accrued liabilities
$
119,313

 
$
79,590


7. Income Taxes
    
We provide for federal, state and foreign income taxes currently payable, as well as for those deferred due to timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates is recognized as income or expense in the period that includes the enactment date. The effective tax rate for the three months ended June 30, 2013, was a provision of 1.0% and a benefit of 9.8%, respectively. The effective tax rate for the six months ended June 30, 2012, was a benefit of 12.1% and a provision of 0.3%, respectively. The change in our effective tax rate was chiefly attributable to costs related to the acquisition of MACH, some of which are non-deductible for income tax purposes, the inclusion of the forecasted earnings impact of the MACH entities in calculating the annual effective tax rate, certain favorable permanent items and a shift in taxable income to lower foreign tax rate jurisdictions.

We, and our eligible subsidiaries, file a consolidated U.S. federal income tax return under Buccaneer Holdings, Inc. All subsidiaries incorporated outside of the U.S. are consolidated for financial reporting purposes; however, they are not eligible to be included in our consolidated U.S. federal income tax return. Separate provisions for income taxes have been recorded for these entities. We intend to reinvest substantially all of the unremitted earnings of our non-U.S. subsidiaries and postpone their remittance indefinitely. Accordingly, no provision for U.S. income taxes for these non-U.S. subsidiaries was recorded in the accompanying unaudited condensed consolidated statements of operations.

8. Debt and Credit Facilities

Our total outstanding debt as of June 30, 2013 and December 31, 2012 was as follows:
 
June 30, 2013
 
December 31, 2012
(In thousands)
(Unaudited)
 
 
Senior Credit Facility:
 
 
 
Initial Term Loans, due 2019
$
940,500

 
$
945,250

Original issue discount
(13,833
)
 
(15,032
)
Tranche B Term Loans, due 2019
700,000

 
—

Original issue discount
(3,451
)
 
—

Senior Notes:
 
 
 
9.125% senior unsecured notes, due 2019
475,000

 
475,000

Total debt
2,098,216

 
1,405,218

Less: Current portion
 
 
 
Long-term debt, current portion
(16,500
)
 
(9,500
)
Original issue discount, current portion
2,961

 
2,418

Long-term debt
$
2,084,677

 
$
1,398,136



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Maturities of long-term debt excluding original issue discount for each of the next five years and thereafter are as follows:
(In thousands)
 
Year ended December 31, 2013
$
8,250

Year ended December 31, 2014
16,500

Year ended December 31, 2015
16,500

Year ended December 31, 2016
16,500

Year ended December 31, 2017
16,500

Thereafter
2,041,250

 
$
2,115,500


During the three and six months ended June 30, 2013, we paid $3.5 million in upfront fees associated with the Escrow Term Loans (as defined below) which were refinanced through the proceeds from the Tranche B Term Loans (as defined below). We recorded the upfront fees as original issue discount to be amortized over the life of the Tranche B Term Loans using the effective interest method.
    
During the three and six months ended June 30, 2012, we incurred costs of $19.7 million associated with our New Senior Credit Facility (as defined below) consisting of $9.5 million of original issue discount, $4.1 million of deferred financing fees and $6.1 million of interest expense.

Amortization of original issue discount and deferred financing fees for the three and six months ended June 30, 2013 was $2.5 million and $4.5 million, respectively, and was related to our New Senior Credit Facility and Senior Notes (as defined below). Amortization of original issue discount and deferred financing fees for the three and six months ended June 30, 2012 was $2.0 million and $4.0 million, respectively, and was related to our Old Senior Credit Facility (as defined below), New Senior Credit Facility and Senior Notes. During the three months ended June 30, 2012 we incurred $6.5 million of debt extinguishment costs for a write-off of original issue discount and deferred financing fees related to the refinancing of our Old Senior Credit Facility, and $6.1 million of debt modification costs.

Amortization is included in interest expense in the unaudited condensed consolidated statement of operations. The net book value of deferred financing fees included in the accompanying unaudited condensed consolidated balance sheets was as follows:
 
 
June 30,
2013
 
December 31,  
2012
(In thousands)
(Unaudited)
 
 
Prepaid and other current assets
$
7,760

 
$
3,709

Deferred costs, net (1)
60,050

 
42,071

Total
$
67,810

 
$
45,780

(1) Includes $20.9 million of financing fees related to our Tranche B Term Loan under the New Senior Credit Facility (as defined below).

Old Senior Credit Facility

On December 21, 2010, we entered into a senior credit facility consisting of a $150.0 million revolving credit facility and a $1,025.0 million Term Loan B (the “Old Senior Credit Facility”), and on January 13, 2011, our Old Senior Credit Facility became effective. The Old Senior Credit Facility was used to fund, in part, the Carlyle merger. The Company received net proceeds of $1,012.5 million after payment of upfront fees of $12.5 million to Barclays Capital, Credit Suisse Securities (USA) LLC, Goldman Sachs Bank USA and Sumitomo Mitsui Banking Corporation. We recorded the upfront fees as an original issue discount to be amortized over the life of the debt using the effective interest method. In addition, we incurred debt issuance costs of $36.2 million.


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Borrowings bore interest at a floating rate which could have been, at our option, either (i) a Eurodollar borrowing rate for a specified interest period plus an applicable margin or, (ii) an alternative base rate plus an applicable margin, in each case, subject to a Eurodollar rate floor of 1.50% or a base rate floor of 2.50%, as applicable. The applicable margin for the term loan and revolving loans under our Old Senior Credit Facility was 3.75% per annum for Eurodollar loans and 2.75% per annum for base rate loans, and in the case of the revolving loans, subject to an adjustment based on a total net leverage ratio test.

New Senior Credit Facility

On April 23, 2012, we entered into a credit agreement (the “New Credit Agreement”) with Buccaneer Holdings, Inc. (“Holdings”), Barclays Bank PLC, as administrative agent, swing line lender and letters of credit issuer, and the other financial institutions and lenders from time to time party thereto, providing for a new senior credit facility (the “New Senior Credit Facility”) consisting of (i) a $950.0 million term loan facility (the “Initial Term Loans”); and (ii) a $150.0 million revolving credit facility (the “Revolving Credit Facility”) for the making of revolving loans, swing line loans and issuance of letters of credit.

On June 28, 2013 the Company borrowed $700.0 million of incremental term loans (the “Tranche B Term Loans”), pursuant to an incremental amendment (the “Incremental Amendment”) to its New Credit Agreement. The proceeds of the Tranche B Term Loans were used to refinance, in full, the Escrow Term Loans (as defined below), a portion of which were used to fund the Acquisition.
    
Subject to specified conditions, without the consent of the then existing lenders (but subject to the receipt of commitments), the Initial Term Loans, the Tranche B Term Loans (together the “Term Loan Facilities”) or the Revolving Credit Facility may be expanded (or a new term loan facility or revolving credit facility added to the New Senior Credit Facility) by an amount as will not cause the net senior secured leverage ratio, after giving effect to the incurrence of such additional amount, to exceed 4.0:1.0 (calculated by treating any unsecured debt incurred in reliance on this ratio as if it were secured).
    
The Term Loan Facilities will mature at the earliest of (i) April 23, 2019, (ii) the date of termination in whole of the commitments under the Term Loan Facilities and (iii) the date the loans under the Term Loan Facilities are declared due and payable in connection with an event of default; provided that (a) in the event that more than $50.0 million of the Senior Notes remain outstanding on the date that is 91 days prior to the stated maturity of the Senior Notes (the “First Springing Maturity Date”), the maturity date for the Term Loan Facilities will be the First Springing Maturity Date and (b) in the event that more than $50.0 million in aggregate principal amount of any refinancing indebtedness in respect of the Senior Notes remains outstanding on the date that is 91 days prior to the stated maturity of such refinancing indebtedness (the “Second Springing Maturity Date”), the maturity date for the Term Loan Facilities will be the earlier of the Second Springing Maturity Date and April 23, 2019.

Our Revolving Credit Facility will mature at the earlier of (i) April 23, 2017 and (ii) the date of termination in whole of the commitments under the Revolving Credit Facility, the letter of credit sublimit, and the swing line facility under the New Credit Agreement.

We may voluntarily prepay loans or reduce commitments under our New Senior Credit Facility, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty (other than described below for the Tranche B Term Loans). If we repay our Tranche B Term Loans on or prior to June 28, 2014 with the proceeds of debt incurred for the primary purpose of refinancing the Tranche B Term Loans at a lower applicable rate, or replace the lenders through an equivalent amendment to the New Credit Agreement, the relevant lenders will be entitled to a 1% prepayment premium. We must prepay our Term Loan Facilities with the net cash proceeds of asset sales, casualty and condemnation events, the incurrence or issuance of indebtedness (other than indebtedness permitted to be incurred under our New Senior Credit Facility, unless specifically incurred to refinance a portion of our New Senior Credit Facility) and, for the year ended December 31, 2013 and thereafter, 50% of excess cash flow (such percentage to be subject to a reduction to zero based on the achievement of a net senior secured leverage ratio of 2.75:1.0), in each case, subject to certain reinvestment rights and other exceptions, as well as the right of the lenders to decline certain prepayments.

The following fees are applicable under our Revolving Credit Facility: (i) an unused line fee of 0.50% per annum, subject to an adjustment to 0.25% based on a net senior secured leverage ratio of 1.75:1.0; (ii) a letter of credit participation fee on the aggregate stated amount of each letter of credit available to be drawn equal to the applicable margin for Eurodollar rate loans; (iii) a letter of credit fronting fee equal to 0.125% per annum on the daily amount of each letter of credit available to be drawn; and (iv) certain other customary fees and expenses payable to our letter of credit issuers.

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Our obligations under our New Senior Credit Facility are guaranteed by Holdings and each of our current and future direct and indirect wholly owned domestic subsidiaries (the “Subsidiary Guarantors”) (other than (i) subsidiaries designated as unrestricted, (ii) immaterial subsidiaries, (iii) any subsidiary that is prohibited by applicable law or certain contractual obligations from guaranteeing our New Senior Credit Facility or which would require governmental approval to provide a guarantee, (iv) certain holding companies of foreign subsidiaries, (v) not-for-profit subsidiaries, if any, (vi) certain receivables financing subsidiaries, (vii) any subsidiary with respect to which the Company and the administrative agent reasonably agree that the burden, cost or other consequences of providing a guarantee will be excessive in view of the benefits obtained by the lenders therefrom and (viii) any subsidiary whose guaranteeing of the New Senior Credit Facility would result in a material adverse tax consequence will be secured by a first lien on substantially all of their assets, including capital stock of subsidiaries (subject to certain exceptions). The Subsidiary Guarantors under our New Senior Credit Facility also guarantee the Senior Notes and are the same guarantors of the Old Senior Credit Facility, as follows: Syniverse Technologies, LLC (formerly known as Syniverse Technologies, Inc.), Syniverse ICX Corporation, The Rapid Roaming Company.

Our New Senior Credit Facility contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants include limitations or restrictions on (i) our ability to incur debt, grant liens, enter into fundamental corporate transactions, pay subsidiary distributions, enter into transactions with affiliates, make further negative pledges, sell or otherwise transfer assets, make certain payments, investments or acquisitions, repay certain indebtedness in the event of a change of control, and amend certain debt documents and (ii) the activities engaged in by Holdings. The negative covenants are subject to the customary exceptions.

There are no financial covenants included in our New Senior Credit Facility other than a springing maximum net senior secured leverage ratio of 4.25 to 1.0, which will be tested only for the benefit of the revolving lenders and only (i) when, at the end of a fiscal quarter, (a) the aggregate amount of any revolving loans, any swing line loans or any letter of credit obligations outstanding exceeds 10% of all commitments under the Revolving Credit Facility in effect as of April 23, 2012 or (b) the aggregate amount of any letter of credit obligations outstanding exceeds 15% of all commitments under the Revolving Credit Facility in effect as of April 23, 2012 and (ii) upon an extension of credit under the Revolving Credit Facility in the form of the making of a revolving loan or a swing line loan, or the issuance of a letter of credit. The events set forth in clauses (i) and (ii) in the preceding sentence have not occurred during or as of the end of the three months ended June 30, 2013.

Initial Term Loans

On April 23, 2012, we received net proceeds of $940.5 million under the Initial Term Loans and paid upfront fees of $11.3 million. The proceeds from the Initial Term Loans plus cash on hand were used to repay the Old Senior Credit Facility. We recorded $9.5 million of the upfront fees as an original issue discount to be amortized over the life of the Initial Term Loans using the effective interest method. Since we had no amounts drawn under the Revolving Credit Facility at June 30, 2012, we recorded $1.8 million of the upfront fees as deferred financing costs to be amortized over the life of the Revolving Credit Facility using the effective interest method. We had $148.1 million of unused commitments under this facility, including an outstanding Euro letter of credit of $1.9 million at June 30, 2013 and December 31, 2012, respectively. This is considered a reduction against the facility under the credit agreement.

During the three months ended June 30, 2012, we incurred additional debt issuance costs of $8.3 million in connection with the refinancing of the Old Senior Credit Facility, which was determined to be a partial debt modification and partial debt extinguishment under the applicable accounting guidance. We therefore recorded $6.1 million to interest expense related to the modification and recorded the remaining $2.2 million as deferred financing fees, of which $1.2 million is being amortized over the life of the Initial Term Loans and $1.0 million is being amortized over the life of the Revolving Credit Facility. We recorded additional debt extinguishment costs of $6.5 million related to the write-off of a portion of the original issue discount and deferred financing fees associated with the Old Senior Credit Facility in the debt extinguishment costs line item on the unaudited condensed consolidated statement of operations.
    
Borrowings bear interest at a floating rate which can be, at our option, either (i) a Eurodollar borrowing rate for a specified interest period plus an applicable margin or, (ii) an alternative base rate plus an applicable margin, in the case of term loans under the New Senior Credit Facility, subject to a Eurodollar rate floor of 1.25% or a base rate floor of 2.25%, as applicable. The applicable margin for the Initial Term Loans under our New Senior Credit Facility is 3.75% per annum for Eurodollar loans and 2.75% per annum for base rate loans, and in the case of the revolving loans, subject to an adjustment to 3.50% and 2.50%, respectively, based on a net senior secured leverage ratio of 1.75:1.0.


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Effective September 30, 2012, our Initial Term Loans amortizes in equal quarterly installments in an amount equal to 0.25% per quarter of the original principal amount thereof, with the remaining balance due at final maturity.
 
Tranche B Term Loans

On June 28, 2013, we received net proceeds of $696.5 million under the Tranche B Term Loans, the proceeds of which were used to refinance the Escrow Term Loans (as defined below) in full. We paid upfront fees of $3.5 million associated with the Escrow Term Loans which were recorded as original issue discount to be amortized over the life of the Tranche B Term Loans using the effective interest method. We incurred $25.2 million of debt issuance costs which were recorded as deferred financing costs to be amortized over the life of the Tranche B Term Loans using the effective interest method.
    
Borrowings bear interest at a floating rate which can be, at our option, either (i) a Eurodollar borrowing rate for a specified interest period plus an applicable margin or, (ii) an alternative base rate plus an applicable margin, in the case of the Tranche B Term Loans under the New Senior Credit Facility, subject to a Eurodollar rate floor of 1.00% or a base rate floor of 2.00%, as applicable. The applicable margin for the Tranche B Term Loans under our New Senior Credit Facility is 3.00% per annum for Eurodollar loans and 2.00% per annum for base rate loans.
    
Effective June 28, 2013, our Tranche B Term Loans amortizes in equal quarterly installments in an amount equal to 0.25% per quarter of the original principal amount thereof, with the remaining balance due at final maturity.

Delayed Draw Credit Agreement

On February 4, 2013, Syniverse Magellan Finance, LLC (the “Finance Sub”), our direct wholly owned subsidiary, entered into a delayed draw credit agreement (the “Delayed Draw Credit Agreement”) with Barclays Bank PLC, as administrative agent, and the other financial institutions and lenders from time to time party thereto, providing for a new senior credit facility consisting of a $700.0 million delayed draw term loan facility (the “Delayed Draw Facility”). On May 28, 2013, Finance Sub entered into an amendment to the Delayed Draw Credit Agreement (the “Escrow Credit Agreement”). Upon the closing of this amendment, the lenders funded the Delayed Draw Facility into an escrow account (“Escrow Term Loans”) and the Company pre-funded the interest, upfront fees and ticking fees of $7.2 million, $3.5 million and $3.6 million, respectively (the “Escrowed Funds”). The Escrowed funds were released to Finance Sub on June 28, 2013 (the “Release”). In addition to the pre-funded amount, we paid additional ticking fees of $1.0 million during the second quarter. These fees were paid to Barclays Bank PLC as administrative agent to compensate for the time lag between the commitment allocation and actual funding for the Delayed Draw Facility.

Following the Release, Finance Sub merged with and into the Company with the Company as the survivor to such merger (the “Merger”). In connection with the Merger, the Company assumed the obligations of Finance Sub under the Escrow Credit Agreement (the “Debt Assumption”).

Following the Debt Assumption, on June 28, 2013 the Company borrowed $700.0 million of Tranche B Term Loans, pursuant to the Incremental Amendment to its New Credit Agreement. The proceeds of the Tranche B Term Loans were used to refinance the Escrow Term Loans in full.

9.125% senior unsecured notes due 2019

On December 22, 2010, we issued $475.0 million senior unsecured notes bearing interest at 9.125% that will mature on January 15, 2019 (the “Senior Notes”). Interest on the notes must be paid on January 15 and July 15 of each year.

The Senior Notes are guaranteed on a senior basis by the Subsidiary guarantors. In addition, we have the ability to designate certain of our subsidiaries as unrestricted subsidiaries pursuant to the terms of the indenture governing our Senior Notes, and any subsidiary so designated will not be a guarantor of the notes. The right of noteholders to receive payment on the Senior Notes is effectively subordinated to the rights of our existing and future secured creditors.

The Senior Notes contain customary negative covenants including, but not limited to, restrictions on our and our restricted subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or otherwise transfer assets, optionally prepay certain subordinated indebtedness or enter into transactions with affiliates.


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Table of Contents

We incurred financing fees of $20.4 million in connection with the issuance of the Senior Notes which have been amortized over the term of the notes using the effective interest method.
    
9. Fair Value Measurements

The accounting standards for fair value require disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy under which these assets and liabilities must be grouped, based on significant levels of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:

Level 1—Quoted prices for identical assets and liabilities in active markets.

Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Unobservable inputs for the asset or liability.

Transfers between levels are determined at the end of the reporting period. No transfers between levels have been recognized for the three or six months ending June 30, 2013 and 2012.

Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the financial statements at their carrying value, which approximate their fair value due to their short maturity.

The carrying amounts and fair values of our long-term debt as of June 30, 2013 and December 31, 2012 were as follows:
 
June 30, 2013
 
December 31, 2012

Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
(In thousands)
(Unaudited)
 
 
 
 
Initial Term Loans
$
940,500

 
$
944,027

 
$
945,250

 
$
958,247

Tranche B Term Loans
700,000

 
698,250

 
—

 
—

Senior Notes
475,000

 
515,375

 
475,000

 
515,375


The fair values of the Initial Term Loans, Tranche B Term Loans and the Senior Notes were based upon quoted market prices in inactive markets for similar instruments (Level 2).

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

In connection with the pending sale of the Divestment Business (see additional discussion in Note 4), the assets summarized in the table below are classified as held for sale in the unaudited condensed consolidated balance sheets and are measured at their fair value less cost to sell. The fair value of the assets held for sale is based on the negotiated price in the executed share purchase agreement with an unrelated third party.

 
 
 
 
Fair Value Measurements at June 30, 2013 Using
(In thousands)
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets held for sale
 
$
15,661

 
$
—

 
$
15,661

 
$
—

Liabilities related to assets held for sale
 
2,693

 
—

 
2,693

 
—

Total
 
$
12,968

 
$
—

 
$
12,968

 
$
—


10. Commitments and Contingencies


20
Table of Contents

Purchase Agreement with Starhome
    
On May 29, 2013, the Commission granted approval of the Acquisition, conditioned upon the Company's commitment to divest the Divestment Business.

On June 3, 2013, Interfact S.à r.l., a Luxembourg limited liability company and the MACH group company that is the immediate shareholder of the Divestment Business, signed the Divestment Agreement to sell the Divestment Business to Starhome, B.V., a private limited liability company incorporated under the laws of The Netherlands, for a sale price of €10.0 million, subject to certain sale price adjustments, upon the completion of the Acquisition.

On June 28, 2013, the Commission approved Starhome as the Purchaser of the Divestment Business and the Divestment Agreement. All other necessary approvals by the relevant authorities of other applicable jurisdictions were also obtained by that date.

We expect to complete the sale of the Divestment Business by the fourth quarter 2013.

Other

We are currently a party to various claims and legal actions that arise in the ordinary course of business. We believe such claims and legal actions, individually and in the aggregate, will not have a material adverse effect on our business, financial condition, results of operations or cash flows. As of June 30, 2013, we have considered all of the claims and disputes of which we are aware and have provided for probable losses, which are not significant.

11. Stock-Based Compensation
    
Effective April 6, 2011, Holdings established the 2011 Equity Incentive Plan (the "BHI Plan") for the employees, consultants, and directors of Holdings and its subsidiaries. The BHI Plan provides incentive compensation through grants of incentive or non-qualified stock options, stock purchase rights, restricted stock awards, restricted stock units, or any combination of the foregoing. Holdings will issue shares of common stock of Holdings to satisfy equity based compensation instruments.     

Stock-based compensation expense for the three and six months ended June 30, 2013 and 2012 was as follows:

 
Three months ended June 30,

2013
 
2012
(In thousands)
(Unaudited)
Cost of operations
$
130

 
$
125

Sales and marketing
553

 
939

General and administrative
799

 
674

Total stock-based compensation
$
1,482

 
$
1,738


 
Six months ended June 30,

2013
 
2012
(In thousands)
(Unaudited)
Cost of operations
$
369

 
$
335

Sales and marketing
2,152

 
2,390

General and administrative
2,659

 
1,701

Total stock-based compensation
$
5,180

 
$
4,426


In February 2013, the Compensation Committee of the Board of Directors, utilizing the discretion afforded under the BHI Plan, approved the vesting of the 2012 performance-based stock options resulting in a modification of the vesting terms, for which we recorded additional stock compensation expense of $2.1 million.


21
Table of Contents

The following table summarizes our stock option activity for the six months ended June 30, 2013:
 
Stock Options
Shares
 
Weighted-
Average
Exercise
Price
Outstanding at December 31, 2012
8,150,003

 
$
10.21

Granted
150,001

 
12.00

Exercised
(170,000
)
 
10.00

Canceled or expired
(410,000
)
 
10.18

Outstanding at June 30, 2013
7,720,004

 
$
10.25

 
    
The fair value of options granted during the quarter ended June 30, 2013 was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:
 Risk-free interest rate
1.2%
 Volatility factor
57.0%
 Dividend yield
—%
 Weighted average expected life of options (in years)
6.50

12. Restructuring and Management Termination Benefits

In December 2010, we implemented a restructuring plan primarily to realign certain senior management functions. As a result of this plan, we incurred severance related costs of $2.3 million. During March 2013, we increased the reserve by $0.3 million. As of June 30, 2013, we have paid $2.1 million related to this plan.

     In December 2011, we implemented a restructuring plan primarily to regionalize our customer support workforce for better alignment with our customers’ needs. As a result of this plan, we incurred severance related costs of $3.7 million and contract termination costs of $0.4 million related to the exit of a leased facility. We have paid $3.8 million related to this plan as of June 30, 2013.
    
In December 2012, we implemented a restructuring plan primarily to align certain functions and address our cost structure in the messaging business. As a result of this plan, we incurred severance related costs of $1.8 million in 2012 and an additional $0.1 million during the first quarter of 2013. We have paid $1.4 million related to this plan as of June 30, 2013.

In March 2013, we implemented a restructuring plan primarily to realign certain senior management functions. As a result of this plan, we incurred severance related costs of $0.8 million. We have paid $0.1 million related to this plan as of June 30, 2013.
    
In June 2013, we implemented a restructuring plan primarily to allocate proper resources to key positions within the company. As a result of this plan, we incurred severance related costs of $2.2 million. We have paid $0.3 million related to this plan as of June 30, 2013.

The following table shows the activity in our restructuring accruals for the six months ended June 30, 2013:

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Table of Contents

 
December 31, 2012
 
 
 
 
 
 
 
June 30, 2013
(In thousands)
Balance
 
Additions
 
Payments
 
Reductions
 
Balance
December 2010 Plan
$
189

 
$
336

 
$
—

 
$
—

 
$
525

December 2011 Plan
479

 
—

 
(184
)
 
—

 
295

December 2012 Plan
1,663

 
112

 
(1,297
)
 
—

 
478

March 2013 Plan
—

 
845

 
(92
)
 
—

 
753

June 2013 Plan
—

 
2,217

 
(311
)
 
—

 
1,906

Total
$
2,331

 
$
3,510

 
$
(1,884
)
 
$
—

 
$
3,957


We do not expect to incur material additions to any of our current restructuring plans. We expect to pay the remaining outstanding balances under each of these plans by the end of the second quarter of 2016.

13. Related Party Transactions

Consulting Agreement with Carlyle
    
On January 13, 2011 we entered into a ten-year consulting agreement with Carlyle pursuant to which we pay Carlyle a fee for consulting services Carlyle provides to us and our subsidiaries. During the three and six months ended June 30, 2013, we recorded $0.8 million and $1.8 million, respectively, associated with the consulting fee and the reimbursement of out-of-pocket expenses. During the three and six months ended June 30, 2012, we recorded $0.8 million and $1.5 million, respectively.

During the three months ended June 30, 2013, under the Consulting Agreement with Carlyle, we paid a $10.0 million transaction fee associated with the Acquisition and related debt issuance. We recorded $5.0 million of the transaction fee in Acquisition expenses and $5.0 million was included in capitalized financing costs.
    
Carlyle, from time to time, participates in the trading of the debt securities under our Initial Term Loans and Tranche B Term loans.

14. Supplemental Consolidating Financial Information
    
We have presented supplemental consolidating balance sheets, statements of operations, statements of comprehensive (loss) income and statements of cash flows for Syniverse Holdings, Inc., which we refer to in this footnote only as Syniverse, Inc., the Subsidiary Guarantors and the subsidiary non-guarantors for all periods presented to reflect the guarantor structure under the Senior Notes as discussed in Note 8. The supplemental financial information reflects the investment of Syniverse, Inc. using the equity method of accounting.
 
Syniverse, Inc.’s payment obligations under the Senior Notes are guaranteed by the 100% owned Subsidiary Guarantors. Highwoods Corporation, Syniverse Technologies B.V., Syniverse Technologies Holdings LLC, Syniverse Technologies K.K., Syniverse Technologies (India) Private Limited and Syniverse Brience LLC, MACH Americas Inc., CB Holdings Inc., CB Holdings Ventures, Inc., and Cibernet Corporation Inc., are included as non-guarantors (collectively, the “Subsidiary Non-Guarantors”). Such guarantees are irrevocable, unconditional and joint and several.

On July 29, 2013, MACH Americas Inc., CB Holdings Inc., CB Holdings Ventures, Inc., and Cibernet Corporation Inc. became guarantors of the Senior Notes. For the period ended June 30, 2013 they are included in the non-guarantor presentation and in subsequent periods and for so long as they remain guarantors of the Senior Notes they will be included in the Subsidiary Guarantor presentation.

23
Table of Contents

CONSOLIDATING BALANCE SHEET (UNAUDITED)
AS OF JUNE 30, 2013
(IN THOUSANDS)
 
Syniverse, Inc.
 
Subsidiary
Guarantors
 
Subsidiary
Non-Guarantors 
 
Adjustments 
 
Consolidated 
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash
$
—

 
$
206,115

 
$
67,680

 
$
—

 
$
273,795

Accounts receivable, net of allowances
—

 
137,098

 
50,662

 
—

 
187,760

Accounts receivable - affiliates
1,908,137

 
1,580,350

 
167,659

 
(3,656,146
)
 
—

Interest receivable - affiliates
—

 
—

 
14,894

 
(14,894
)
 
—

Deferred tax assets
25,375

 
4,321

 
2,059

 
—

 
31,755

Income taxes receivable
—

 
4,591

 
1,696

 
—

 
6,287

Prepaid and other current assets
7,930

 
24,867

 
16,171

 
—

 
48,968

Assets held for sale
—

 
—

 
15,661

 
—

 
15,661

Total current assets
1,941,442

 
1,957,342

 
336,482

 
(3,671,040
)
 
564,226

Property and equipment, net
—

 
82,700

 
20,371

 
—

 
103,071

Capitalized software, net
—

 
186,711

 
76,890

 
—

 
263,601

Deferred costs, net
60,050

 
—

 
—

 
—

 
60,050

Goodwill
—

 
1,682,171

 
397,390

 
—

 
2,079,561

Identifiable intangibles, net
—

 
428,623

 
211,342

 
—

 
639,965

Long-term note receivable - affiliates
—

 
619,262

 
13,364

 
(632,626
)
 
—

Deferred tax assets
—

 
—

 
963

 
—

 
963

Other assets
—

 
4,632

 
6,419

 
—

 
11,051

Investment in subsidiaries
2,288,876

 
176,334

 
—

 
(2,465,210
)
 
—

Total assets
$
4,290,368

 
$
5,137,775

 
$
1,063,221

 
$
(6,768,876
)
 
$
3,722,488

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDER EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
21,894

 
$
13,493

 
$
—

 
$
35,387

Accounts payable - affiliates
996,874

 
2,525,210

 
134,062

 
(3,656,146
)
 
—

Income taxes payable
—

 
—

 
8,469

 
—

 
8,469

Accrued liabilities
29,239

 
47,464

 
42,610

 
—

 
119,313

Accrued interest - affiliates
—

 
14,894

 
—

 
(14,894
)
 
—

Deferred revenues
—

 
3,885

 
4,371

 
—

 
8,256

Deferred tax liabilities
—

 
—

 
243

 
—

 
243

Current portion of capital lease obligation
—

 
6,329

 
147

 
—

 
6,476

Current portion of long-term debt, net of original issue discount
13,539

 
—

 
—

 
—

 
13,539

Liabilities related to assets held for sale
—

 
—

 
2,693

 
—

 
2,693

Total current liabilities
1,039,652

 
2,619,676

 
206,088

 
(3,671,040
)
 
194,376

Long-term liabilities:
 
 
 
 
 
 
 
 
 
Long-term note payable - affiliates
6,181

 
7,183

 
619,262

 
(632,626
)
 
—

Deferred tax liabilities
4,569

 
186,942

 
43,187

 
—

 
234,698

Long-term capital lease obligation, net of current maturities
—

 
1,666

 
150

 
—

 
1,816

Long-term debt, net of current portion and original issue discount
2,084,677

 
—

 
—

 
—

 
2,084,677

Other long-term liabilities
—

 
33,432

 
11,790

 
—

 
45,222

Total liabilities
3,135,079

 
2,848,899

 
880,477

 
(4,303,666
)
 
2,560,789

Commitments and contingencies:
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interest
—

 
—

 
203

 
—

 
203

Stockholder equity:
 
 
 
 
 
 
 
 
 
Common stock
—

 
—

 
1,030

 
(1,030
)
 
—

Additional paid-in capital
1,220,513

 
2,169,631

 
112,365

 
(2,281,996
)
 
1,220,513

(Accumulated deficit) retained earnings
(62,508
)
 
118,293

 
72,793

 
(191,086
)
 
(62,508
)
Accumulated other comprehensive (loss) income
(2,716
)
 
952

 
(3,647
)
 
2,695

 
(2,716
)
Total Syniverse Holdings Inc. stockholder equity
1,155,289

 
2,288,876

 
182,541

 
(2,471,417
)
 
1,155,289

Nonredeemable noncontrolling interest
—

 
—

 
—

 
6,207

 
6,207

Total equity
1,155,289

 
2,288,876

 
182,541

 
(2,465,210
)
 
1,161,496

Total liabilities and stockholder equity
$
4,290,368

 
$
5,137,775

 
$
1,063,221

 
$
(6,768,876
)
 
$
3,722,488

 

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Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2013
(IN THOUSANDS)
 
Syniverse, Inc.
 
Subsidiary
Guarantors
 
Subsidiary
Non-Guarantors
 
Adjustments
 
Consolidated
Revenues
$
—

 
$
168,363

 
$
24,908

 
$
—

 
$
193,271

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of operations (excluding depreciation and amortization shown separately below)
—

 
61,624

 
10,310

 
—

 
71,934

Sales and marketing
—

 
11,257

 
5,271

 
—

 
16,528

General and administrative
—

 
31,294

 
(2,604
)
 
—

 
28,690

Depreciation and amortization
—

 
47,865

 
1,635

 
—

 
49,500

Restructuring and management termination benefits
—

 
1,847

 
605

 
—

 
2,452

Acquisition expenses
—

 
16,553

 
—

 
—

 
16,553

 
—

 
170,440

 
15,217

 
—

 
185,657

Operating income
—

 
(2,077
)
 
9,691

 
—

 
7,614

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Income from equity investment
(4,076
)
 
(720
)
 
—

 
4,796

 
—

Interest income
9

 
78

 
75

 
—

 
162

Interest expense
(30,950
)
 
(151
)
 
(16
)
 
—

 
(31,117
)
Other, net
2,350

 
(1,947
)
 
(1,348
)
 
392

 
(553
)
 
(32,667
)
 
(2,740
)
 
(1,289
)
 
5,188

 
(31,508
)
(Loss) income before (benefit from) provision for income taxes
(32,667
)
 
(4,817
)
 
8,402

 
5,188

 
(23,894
)
(Benefit from) provision for income taxes
(7,939
)
 
(741
)
 
8,930

 
—

 
250

Net (loss) income
(24,728
)
 
(4,076
)
 
(528
)
 
5,188

 
(24,144
)
Net income attributable to nonredeemable noncontrolling interest
—

 
—

 
—

 
192

 
192

Net (loss) income attributable to Syniverse Holdings, Inc.
$
(24,728
)
 
$
(4,076
)
 
$
(528
)
 
$
4,996

 
$
(24,336
)
 





25
Table of Contents

CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2013
(IN THOUSANDS)
 
Syniverse, Inc.
 
Subsidiary
Guarantors
 
Subsidiary
Non-Guarantors
 
Adjustments
 
Consolidated
Net (loss) income
$
(24,728
)
 
$
(4,076
)
 
$
(528
)
 
$
5,188

 
$
(24,144
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax expense of $317
—

 
—

 
(912
)
 
—

 
(912
)
Amortization of unrecognized loss included in net periodic cost, net of tax expense of $15
—

 
—

 
36

 
—

 
36

Other comprehensive loss
—

 
—

 
(876
)
 
—

 
(876
)
Comprehensive (loss) income
(24,728
)
 
(4,076
)
 
(1,404
)
 
5,188

 
(25,020
)
Less: comprehensive income attributable to nonredeemable noncontrolling interest
—

 
—

 
—

 
(140
)
 
(140
)
Comprehensive (loss) income attributable to Syniverse Holdings, Inc.
$
(24,728
)
 
$
(4,076
)
 
$
(1,404
)
 
$
5,328

 
$
(24,880
)

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Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2013
(IN THOUSANDS)
 
Syniverse, Inc.
 
Subsidiary
Guarantors
 
Subsidiary
Non-Guarantors
 
Adjustments
 
Consolidated
Revenues
$
—

 
$
327,440

 
$
49,713

 
$
—

 
$
377,153

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of operations (excluding depreciation and amortization shown separately below)
—

 
123,431

 
20,434

 
—

 
143,865

Sales and marketing
—

 
25,936

 
10,741

 
—

 
36,677

General and administrative
—

 
62,481

 
(2,650
)
 
—

 
59,831

Depreciation and amortization
—

 
91,251

 
3,336

 
—

 
94,587

Restructuring and management termination benefits
—

 
2,556

 
954

 
—

 
3,510

Acquisition expenses
—

 
20,945

 
—

 
—

 
20,945

 
—

 
326,600

 
32,815

 
—

 
359,415

Operating income
—

 
840

 
16,898

 
—

 
17,738

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Income from equity investment
4,170

 
12,649

 
—

 
(16,819
)
 
—

Interest income
9

 
79

 
123

 
—

 
211

Interest expense
(57,602
)
 
(331
)
 
(28
)
 
—

 
(57,961
)
Other, net
2,350

 
(2,733
)
 
(900
)
 
46

 
(1,237
)
 
(51,073
)
 
9,664

 
(805
)
 
(16,773
)
 
(58,987
)
(Loss) income before (benefit from) provision for income taxes
(51,073
)
 
10,504

 
16,093

 
(16,773
)
 
(41,249
)
(Benefit from) provision for income taxes
(13,232
)
 
6,334

 
2,840

 
—

 
(4,058
)
Net (loss) income
(37,841
)
 
4,170

 
13,253

 
(16,773
)
 
(37,191
)
Net income attributable to nonredeemable noncontrolling interest
—

 
—

 
—

 
604

 
604

Net (loss) income attributable to Syniverse Holdings, Inc.
$
(37,841
)
 
$
4,170

 
$
13,253

 
$
(17,377
)
 
$
(37,795
)



27
Table of Contents

CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2013
(IN THOUSANDS)
 
Syniverse, Inc.
 
Subsidiary
Guarantors
 
Subsidiary
Non-Guarantors
 
Adjustments
 
Consolidated
Net (loss) income
$
(37,841
)
 
$
4,170

 
$
13,253

 
$
(16,773
)
 
$
(37,191
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax benefit of ($273)
—

 
—

 
(1,999
)
 
—

 
(1,999
)
Amortization of unrecognized loss included in net periodic cost, net of tax expense of $15
—

 
—

 
36

 
—

 
36

Other comprehensive loss
—

 
—

 
(1,963
)
 
—

 
(1,963
)
Comprehensive (loss) income
(37,841
)
 
4,170

 
11,290

 
(16,773
)
 
(39,154
)
Less: comprehensive income attributable to nonredeemable noncontrolling interest
—

 
—

 
—

 
387

 
387

Comprehensive (loss) income attributable to Syniverse Holdings, Inc.
$
(37,841
)
 
$
4,170

 
$
11,290

 
$
(17,160
)
 
$
(39,541
)


28
Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2013
(IN THOUSANDS)
 
Syniverse, Inc.
 
Subsidiary
Guarantors
 
Subsidiary
Non-Guarantors
 
Adjustments
 
Consolidated
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(37,841
)
 
$
4,170

 
$
13,253

 
$
(16,773
)
 
$
(37,191
)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
—

 
91,251

 
3,336

 
—

 
94,587

Amortization of deferred debt issuance costs and original issue discount
4,454

 
—

 
—

 
—

 
4,454

Allowance for uncollectible accounts
—

 
394

 
(42
)
 
—

 
352

Allowance for credit memos
—

 
3,993

 
181

 
—

 
4,174

Deferred income tax (benefit) expense
(18,915
)
 
13,029

 
(180
)
 
—

 
(6,066
)
Income from equity investment
(4,170
)
 
(12,649
)
 
—

 
16,819

 
—

Stock-based compensation
5,180

 
—

 
—

 
—

 
5,180

Other, net
—

 
—

 
2,336

 
(46
)
 
2,290

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
 
 
 
 

Accounts receivable
—

 
(16,479
)
 
(563
)
 
—

 
(17,042
)
Accounts receivable - affiliates
(733,177
)
 
(956,806
)
 
1,689,983

 
—

 
—

Income tax receivable or payable
—

 
(987
)
 
953

 
—

 
(34
)
Prepaid and other current assets
(30
)
 
(9,237
)
 
(1,491
)
 
—

 
(10,758
)
Accounts payable
—

 
7,718

 
840

 
—

 
8,558

Accounts payable - affiliates
802,897

 
892,438

 
(1,695,335
)
 
—

 
—

Accrued liabilities and deferred revenues
60

 
8,567

 
613

 
—

 
9,240

Other assets and long-term liabilities
(684,955
)
 
8,256

 
673,773

 
—

 
(2,926
)
Net cash provided by (used in) operating activities
(666,497
)
 
33,658

 
687,657

 
—

 
54,818

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(37,085
)
 
(4,658
)
 
—

 
(41,743
)
Acquisitions, net of acquired cash
—

 
34,381

 
(662,572
)
 
—

 
(628,191
)
Assets held for sale
—

 
—

 
(4,615
)
 
—

 
(4,615
)
Net cash used in investing activities
—

 
(2,704
)
 
(671,845
)
 
—

 
(674,549
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
Debt issuance costs paid
(25,236
)
 
—

 
—

 
—

 
(25,236
)
Payments on capital lease obligation
—

 
(4,836
)
 
(95
)
 
—

 
(4,931
)
Principal Payments on Initial Term Loans
(4,750
)
 
—

 
—

 
—

 
(4,750
)
Borrowings under Tranche B Term Loans, net of original issue discount
696,500

 
—

 
—

 
—

 
696,500

Borrowings under New Senior Credit Facility, net of original issue discount
—

 
—

 
—

 
—

 
—

Distributions to Buccaneer Holdings, Inc.
(17
)
 
—

 
—

 
—

 
(17
)
Distribution of noncontrolling interest
—

 
—

 
(940
)
 
—

 
(940
)
Net cash used in financing activities
666,497

 
(4,836
)
 
(1,035
)
 
—

 
660,626

Effect of exchange rate changes on cash
—

 
(2,872
)
 
3,577

 
—

 
705

Net decrease in cash
—

 
23,246

 
18,354

 
—

 
41,600

Cash at beginning of period
—

 
182,869

 
49,326

 
—

 
232,195

Cash at end of period
$
—

 
$
206,115

 
$
67,680

 
$
—

 
$
273,795



29
Table of Contents

CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2012
(IN THOUSANDS)
 
Syniverse, Inc.
 
Subsidiary
Guarantors
 
Subsidiary
Non-Guarantors
 
Adjustments
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash
$
—

 
$
182,869

 
$
49,326

 
$
—

 
$
232,195

Accounts receivable, net of allowances
—

 
124,937

 
23,760

 
—

 
148,697

Accounts receivable - affiliates
1,166,304

 
628,810

 
93,267

 
(1,888,381
)
 
—

Interest receivable - affiliates
—

 
—

 
14,894

 
(14,894
)
 
—

Deferred tax assets
6,460

 
4,321

 
1,161

 
—

 
11,942

Income taxes receivable
—

 
3,604

 
2,471

 
—

 
6,075

Prepaid and other current assets
3,851

 
15,647

 
5,697

 
—

 
25,195

Total current assets
1,176,615

 
960,188

 
190,576

 
(1,903,275
)
 
424,104

Property and equipment, net
—

 
74,945

 
10,207

 
—

 
85,152

Capitalized software, net
—

 
198,936

 
3,178

 
—

 
202,114

Deferred costs, net
42,071

 
—

 
—

 
—

 
42,071

Goodwill
—

 
1,682,171

 
—

 
—

 
1,682,171

Identifiable intangibles, net
—

 
474,200

 
2,883

 
—

 
477,083

Long-term note receivable - affiliates
—

 
—

 
7,183

 
(7,183
)
 
—

Deferred tax assets
—

 
—

 
1,290

 
 
 
1,290

Other assets
—

 
44,793

 
261

 
—

 
45,054

Investment in subsidiaries
1,603,922

 
96,861

 
—

 
(1,700,783
)
 
—

Total assets
$
2,822,608

 
$
3,532,094

 
$
215,578

 
$
(3,611,241
)
 
$
2,959,039

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDER EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
14,213

 
$
3,548

 
$
—

 
$
17,761

Accounts payable - affiliates
193,976

 
1,635,043

 
59,362

 
(1,888,381
)
 
—

Income taxes payable
—

 
—

 
6,197

 
—

 
6,197

Accrued liabilities
29,178

 
39,216

 
11,196

 
—

 
79,590

Accrued interest - affiliates
—

 
14,894

 
—

 
(14,894
)
 
—

Deferred revenues
—

 
2,346

 
3,365

 
—

 
5,711

Deferred tax liabilities
—

 
—

 
243

 
—

 
243

Current portion of capital lease obligation
—

 
3,791

 
152

 
—

 
3,943

Current portion of long term debt, net of original issue discount
7,082

 
—

 
—

 
—

 
7,082

Total current liabilities
230,236

 
1,709,503

 
84,063

 
(1,903,275
)
 
120,527

Long-term liabilities:
 
 
 
 
 
 
 
 
 
Long-term note payable - affiliates
—

 
7,183

 
—

 
(7,183
)
 
—

Deferred tax liabilities
4,569

 
192,361

 
15,746

 
—

 
212,676

Long-term capital lease obligation, net of current maturities
—

 
4,075

 
245

 
—

 
4,320

Long-term debt, net of current portion and original issue discount
1,398,136

 
—

 
—

 
—

 
1,398,136

Other long-term liabilities
—

 
15,050

 
11,903

 
—

 
26,953

Total liabilities
1,632,941

 
1,928,172

 
111,957

 
(1,910,458
)
 
1,762,612

 
 
 
 
 
 
 
 
 
 
Stockholder equity:
 
 
 
 
 
 
 
 
 
Common stock
—

 
—

 
207

 
(207
)
 
—

Additional paid-in capital
1,215,350

 
1,489,267

 
45,377

 
(1,534,644
)
 
1,215,350

(Accumulated deficit) retained earnings
(24,713
)
 
114,122

 
59,540

 
(173,662
)
 
(24,713
)
Accumulated other comprehensive (loss) income
(970
)
 
533

 
(1,503
)
 
970

 
(970
)
Total Syniverse Holdings Inc. stockholder equity
1,189,667

 
1,603,922

 
103,621

 
(1,707,543
)
 
1,189,667

Noncontrolling interest
—

 
—

 
—

 
6,760

 
6,760

Total equity
1,189,667

 
1,603,922

 
103,621

 
(1,700,783
)
 
1,196,427

Total liabilities and stockholder equity
$
2,822,608

 
$
3,532,094

 
$
215,578

 
$
(3,611,241
)
 
$
2,959,039

 

30
Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2012
(IN THOUSANDS)
 
Syniverse, Inc.
 
Subsidiary
Guarantors
 
Subsidiary
Non-Guarantors
 
Adjustments
 
Consolidated
Revenues
$
—

 
$
157,706

 
$
25,502

 
$
—

 
$
183,208

Costs and expenses:
 
 
 
 
—

 
 
 
 
Cost of operations (excluding depreciation and amortization shown separately below)
—

 
57,471

 
9,837

 
—

 
67,308

Sales and marketing
—

 
11,710

 
5,225

 
—

 
16,935

General and administrative
—

 
34,917

 
(6,906
)
 
—

 
28,011

Depreciation and amortization
—

 
42,341

 
1,748

 
—

 
44,089

Restructuring and management termination benefits
—

 
195

 
62

 
—

 
257

Acquisition expenses
—

 
5,490

 
—

 
—

 
5,490

 
—

 
152,124

 
9,966

 
—

 
162,090

Operating income
—

 
5,582

 
15,536

 
—

 
21,118

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Income from equity investment
23,466

 
23,415

 
—

 
(46,881
)
 
—

Interest income
—

 
181

 
91

 
—

 
272

Interest expense
(31,567
)
 
—

 
—

 
—

 
(31,567
)
Debt extinguishment costs
(6,458
)
 
—

 
—

 
—

 
(6,458
)
Other, net
—

 
(497
)
 
(336
)
 
—

 
(833
)
 
(14,559
)
 
23,099

 
(245
)
 
(46,881
)
 
(38,586
)
(Loss) income before provision for (benefit from) income taxes
(14,559
)
 
28,681

 
15,291

 
(46,881
)
 
(17,468
)
Provision for (benefit from) income taxes
1,212

 
5,215

 
(8,549
)
 
—

 
(2,122
)
Net (loss) income
(15,771
)
 
23,466

 
23,840

 
(46,881
)
 
(15,346
)
Net income attributable to noncontrolling interest
—

 
—

 
—

 
425

 
425

Net (loss) income attributable to Syniverse Holdings, Inc.
$
(15,771
)
 
$
23,466

 
$
23,840

 
$
(47,306
)
 
$
(15,771
)
 

31
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CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2012
(IN THOUSANDS)
 
Syniverse, Inc.
 
Subsidiary
Guarantors
 
Subsidiary
Non-Guarantors
 
Adjustments
 
Consolidated
Net (loss) income
$
(15,771
)
 
$
23,466

 
$
23,840

 
$
(46,881
)
 
$
(15,346
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax benefit of ($1,129)
—

 
—

 
(646
)
 
—

 
(646
)
Other comprehensive loss
—

 
—

 
(646
)
 
—

 
(646
)
Comprehensive (loss) income
(15,771
)
 
23,466

 
23,194

 
(46,881
)
 
(15,992
)
Less: comprehensive income attributable to noncontrolling interest
—

 
—

 
—

 
169

 
169

Comprehensive (loss) income attributable to Syniverse Holdings, Inc.
$
(15,771
)
 
$
23,466

 
$
23,194

 
$
(47,050
)
 
$
(16,161
)

32
Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2012
(IN THOUSANDS)
 
Syniverse, Inc.
 
Subsidiary
Guarantors
 
Subsidiary
Non-Guarantors
 
Adjustments
 
Consolidated
Revenues
$
—

 
$
319,677

 
$
48,596

 
$
—

 
$
368,273

Costs and expenses:
 
 
 
 
—

 
 
 
 
Cost of operations (excluding depreciation and amortization shown separately below)
—

 
115,918

 
18,406

 
—

 
134,324

Sales and marketing
—

 
24,477

 
10,281

 
—

 
34,758

General and administrative
—

 
61,259

 
(8,238
)
 
—

 
53,021

Depreciation and amortization
—

 
83,979

 
3,294

 
—

 
87,273

Restructuring and management termination benefits
—

 
593

 
38

 
—

 
631

Acquisition expenses
—

 
5,490

 
—

 
—

 
5,490

 
—

 
291,716

 
23,781

 
—

 
315,497

Operating income
—

 
27,961

 
24,815

 
—

 
52,776

Other income (expense), net:
 
 
 
 
 
 
 
 
 
Income from equity investment
46,621

 
30,632

 
—

 
(77,253
)
 
—

Interest income
—

 
243

 
261

 
—

 
504

Interest expense
(58,101
)
 
—

 
—

 
—

 
(58,101
)
Debt extinguishment costs
(6,458
)
 
—

 
—

 
—

 
(6,458
)
Other, net
—

 
(406
)
 
887

 
—

 
481

 
(17,938
)
 
30,469

 
1,148

 
(77,253
)
 
(63,574
)
(Loss) income before provision for (benefit from) income taxes
(17,938
)
 
58,430

 
25,963

 
(77,253
)
 
(10,798
)
(Benefit from) provision for income taxes
(5,449
)
 
11,809

 
(6,325
)
 
—

 
35

Net (loss) income
(12,489
)
 
46,621

 
32,288

 
(77,253
)
 
(10,833
)
Net income attributable to noncontrolling interest
—

 
—

 
—

 
1,656

 
1,656

Net (loss) income attributable to Syniverse Holdings, Inc.
$
(12,489
)
 
$
46,621

 
$
32,288

 
$
(78,909
)
 
$
(12,489
)



33
Table of Contents

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2012
(IN THOUSANDS)
 
Syniverse, Inc.
 
Subsidiary
Guarantors
 
Subsidiary
Non-Guarantors
 
Adjustments
 
Consolidated
Net (loss) income
$
(12,489
)
 
$
46,621

 
$
32,288

 
$
(77,253
)
 
$
(10,833
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax benefit of ($558)
—

 
—

 
(1,098
)
 
—

 
(1,098
)
Other comprehensive loss
—

 
—

 
(1,098
)
 
—

 
(1,098
)
Comprehensive (loss) income
(12,489
)
 
46,621

 
31,190

 
(77,253
)
 
(11,931
)
Less: comprehensive income attributable to noncontrolling interest
—

 
—

 
—

 
1,306

 
1,306

Comprehensive (loss) income attributable to Syniverse Holdings, Inc.
$
(12,489
)
 
$
46,621

 
$
31,190

 
$
(78,559
)
 
$
(13,237
)


34
Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2012
(IN THOUSANDS)
 
Syniverse, Inc.
 
Subsidiary
Guarantors
 
Subsidiary
Non-Guarantors
 
Adjustments
 
Consolidated
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(12,489
)
 
$
46,621

 
$
32,288

 
$
(77,253
)
 
$
(10,833
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
—

 
83,979

 
3,294

 
—

 
87,273

Amortization of deferred debt issuance costs and original issue discount
3,972

 
—

 
—

 
—

 
3,972

Allowance for uncollectible accounts
—

 
283

 
234

 
—

 
517

Allowance for credit memos
—

 
2,284

 
995

 
—

 
3,279

Deferred income tax expense (benefit)
19,454

 
656

 
(21,176
)
 
—

 
(1,066
)
Debt modification costs
6,115

 
—

 
—

 
—

 
6,115

Debt extinguishment costs
6,458

 
—

 
—

 
—

 
6,458

Income from equity investment
(46,621
)
 
(30,632
)
 
—

 
77,253

 
—

Stock-based compensation
4,426

 
—

 
—

 
—

 
4,426

Other, net
—

 
1,388

 
(103
)
 
—

 
1,285

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
 
 
 
 
 
Accounts receivable
—

 
(4,265
)
 
(6,045
)
 
—

 
(10,310
)
Accounts receivable - affiliates
105,947

 
—

 
4,267

 
(110,214
)
 
—

Income tax receivable or payable
—

 
880

 
(3,066
)
 
—

 
(2,186
)
Prepaid and other current assets
(75
)
 
(2,075
)
 
(274
)
 
—

 
(2,424
)
Accounts payable
—

 
10,279

 
1,265

 
—

 
11,544

Accounts payable - affiliates
—

 
(110,274
)
 
60

 
110,214

 
—

Accrued liabilities and deferred revenues
(2,730
)
 
(4,935
)
 
(760
)
 
—

 
(8,425
)
Other assets and long-term liabilities
—

 
224

 
67

 
—

 
291

Net cash provided by (used in) operating activities
84,457

 
(5,587
)
 
11,046

 
—

 
89,916

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(36,953
)
 
(2,737
)
 
—

 
(39,690
)
Net cash used in investing activities
—

 
(36,953
)
 
(2,737
)
 
—

 
(39,690
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
Debt issuance costs paid
(10,181
)
 
—

 
—

 
—

 
(10,181
)
Payments on capital lease obligation
—

 
(58
)
 
—

 
—

 
(58
)
Principal payment on Old Senior Credit Facility
(1,014,750
)
 
—

 
—

 
—

 
(1,014,750
)
Borrowings under Initial Term Loans, net of original issue discount
940,500

 
—

 
—

 
—

 
940,500

Distributions to Buccaneer Holdings, Inc.
(26
)
 
—

 
—

 
—

 
(26
)
Net cash used in financing activities
(84,457
)
 
(58
)
 
—

 
—

 
(84,515
)
Effect of exchange rate changes on cash
—

 
—

 
(1,868
)
 
—

 
(1,868
)
Net increase (decrease) in cash
—

 
(42,598
)
 
6,441

 
—

 
(36,157
)
Cash at beginning of period
44

 
201,750

 
24,959

 
—

 
226,753

Cash at end of period
$
44

 
$
159,152

 
$
31,400

 
$
—

 
$
190,596



 





 

 
 
 


35
Table of Contents

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
Certain of the statements in this Quarterly Report on Form 10-Q, including, without limitation, those related to our future operations or results under the caption entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute “forward-looking statements” for purposes of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, targets, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and which may cause our actual results, performance or achievements, or the performance of the global telecommunications industry or economy generally, to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.
All statements other than statements of historical fact are statements that may be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “target,” “point to,” “project,” “predict,” “could,” “intend,” “potential,” and other similar words and expressions of the future or otherwise regarding the outlook for our future business and financial performance and/or the performance of the global telecommunications industry and economy generally. Such forward-looking statements include, without limitation, statements regarding:
•
expectations of growth of the global wireless telecommunications industry, including increases in new wireless technologies such as smartphones and other connected devices, wireless subscribers, wireless usage, roaming, mobile data, number portability and text and multimedia messaging;
•
increases in demand for our services due to growth of the global wireless telecommunications industry, greater technology complexity and the introduction of new and incompatible wireless technologies;
•
expectations of changes in our revenues from prior periods to future periods;
•
our beliefs concerning the effects that the current economic conditions will have on our business;
•
the cost and difficulties of acquiring and integrating complementary businesses and technologies, including the integration of MACH;
•
capital expenditures in future periods; and
•
the sufficiency of our cash on hand, cash available from operations and cash available from the revolving portion of our New Senior Credit Facility (as defined under Note 8 to the unaudited condensed consolidated financial statements) to fund our operations, debt service and capital expenditures.
These statements are based on certain assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in these circumstances. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions. Many factors could affect our actual financial results and could cause actual results to differ materially from those expressed in the forward-looking statements.
The forward-looking statements may not be realized due to a variety of factors, including, without limitation:
•
system failures, delays and other problems;
•
security breaches;
•
the loss of major customers and the resulting decrease in revenue;
•
the lack of minimum payments in our customer contracts;
•
future consolidation among our customers that may cause decreased transaction volume and/or a reduction in our pricing;
•
the failure to adapt to rapid technological changes in the telecommunications industry;

36
Table of Contents

•
intense competition in our market for services and the advantages that many of our competitors have or may develop over us, through acquisitions or technological innovations;
•
customer migrations from our services to in-house solutions;
•
the failure to achieve or sustain desired pricing levels or transaction volumes;
•
certain risks with our continued expansion into international markets, including risks associated with anti-corruption laws and international tax compliance;
•
the costs and difficulties of acquiring and integrating complementary businesses and technologies, including the integration of MACH;
•
the inability of our customers to successfully implement our services;
•
the risk exposure related to our reliance on third-party providers for communications software, hardware and infrastructure;
•
our inability to develop or maintain relationships with material vendors;
•
fluctuations in currency exchange rates;
•
the failure to obtain additional capital on acceptable terms, or at all;
•
the impairment of our intangible assets or goodwill;
•
regulations affecting our customers and us and future regulations to which they or we become subject;
•
the capacity limits on our network and application platforms and inabilities to expand and upgrade our systems to meet demand;
•
the inability to obtain or retain licenses or authorizations that may be required to sell our services internationally;
•
the failure to protect our intellectual property rights;
•
claims that we are in violation of intellectual property rights of others and any indemnities to our customers that may result therefrom;
•
the loss of key personnel and the potential inability to successfully attract and retain personnel;
•
unfavorable general economic conditions in the U.S. or in other major global markets;
•
our exposure to, and the expense of defending and resolving, lawsuits that arise in the ordinary course of business;
•
other factors disclosed in this Quarterly Report on Form 10-Q; and
•
other factors beyond our control.
    
In light of these risks, uncertainties and assumptions, the forward-looking statements contained in this Quarterly Report on Form 10-Q might not prove to be accurate and you should not place undue reliance upon them. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date made, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except as otherwise may be required by law.
    
The following discussion of our financial condition and results of operations is provided as a supplement to, and should be read in conjunction with, the audited consolidated financial statements, the accompanying notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 6, 2013, as well as the unaudited condensed consolidated financial statements and the related notes presented in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Business
    
In today’s evolving and highly competitive wireless industry, a key priority is the need to provide a seamless user experience to mobile subscribers across varied networks, devices, standards, and content types. When subscribers communicate on their own mobile operator’s network or with other subscribers of the same mobile operator, this objective is easily achieved. However, when subscribers roam on other networks or communicate with subscribers of a different mobile operator, new layers of complexity are introduced as a result of varying and incompatible technologies, networks and devices. The latter scenario

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requires inter-carrier roaming agreements and physical access by the mobile operator to other mobile operators’ networks. It is often preferable to have a neutral and trusted third-party intermediary, such as Syniverse, to sit between mobile operators.
We clear, process, route, translate and transport over two billion transactions each day on average. A “transaction” is generated by, among other things, an individual phone call, a text or a multimedia message that is sent or received, or the initiation of a mobile data session between different operators’ networks or while roaming. We also operate a secure physical network infrastructure that provides the connections required to complete these transactions. After consummating our acquisition of MACH on June 28, 2013, our physical network infrastructure consists of 27 data centers globally, of which 17 are network points-of-presence. The connections provided by our network infrastructure can be between mobile operators or between mobile operators and enterprises, multiple service operators (“MSOs”) or others. Our Network services provide connectivity to mobile operators and other telecommunications providers, allow subscribers to keep (or “port”) their phone numbers when switching mobile operators, and allow subscribers to utilize caller identification (“caller ID”) services. Our Messaging services allow mobile operators’ subscribers to send text and multimedia messages to other mobile operators’ subscribers and also facilitate text and multimedia messaging between enterprises and their customers. Through the use of our Roaming services, mobile operators enable their subscribers to make phone calls, send and receive text messages, multimedia messages, and email and browse the web or use applications while roaming on another mobile operator’s network.
We generate the majority of our revenues on a per-transaction basis, often generating multiple transactions from a single subscriber call, text message or data session. Growing demand for transactions is driven primarily by the volume of wireless voice calls and data sessions, the frequency of subscriber roaming activity, the amount of data downloaded while roaming, the number of text and multimedia messages exchanged, subscriber adoption of new wireless data services and evolving wireless technology.
Services
We provide an integrated suite of Network, Messaging and Roaming services for our customers, which are primarily utilized when mobile operators need to interact with one another. We also provide technology turnkey solutions to customers primarily in the Asia Pacific region. Most of our customers utilize two or more of our service offerings.
Our primary service offerings are as follows:
Network services. We offer Network services which primarily consist of our intelligent network products such as Signaling System 7 (“SS7”) solutions, interstandard roaming solutions, Mobile Data Roaming (“MDR”), call setup and tear down, internet protocol (“IP”) platform solutions, Real-Time Intelligence (“RTI”) tools, database solutions and number portability services.
•
Signaling solutions provide cost effective connectivity to other networks, thereby avoiding the cost and complexity of managing individual network connections with multiple operators, and facilitate the signaling requirements for call delivery and Short Messaging Service (“SMS”) delivery when roaming on Global System for Mobile Communication (“GSM”) and Code Division Multiple Access (“CDMA”) Networks around the world. We have recently enhanced this platform to address interoperability for 4G devices to enable effective, real-time communication between devices on 4G networks and devices on networks that utilize other technology. For example, this platform now supports communication between 4G and 3G networks.
•
Interstandard roaming solutions and MDR services enable CDMA roaming. Interstandard roaming solutions allow certain CDMA handsets to roam on GSM networks. MDR services allow CDMA data devices to roam on other CDMA operator networks.
•
Call setup and tear down involves the process of retrieving, processing and routing information in order for a call to transpire.
•
IP platform solutions provide operators a means of secure transport of roaming, messaging, interworking packet exchange (“IPX”) and signaling traffic to consolidate global network connections via one network for all traffic types. These services optimize streams of data delivered to mobile devices accelerating download speeds and relieving network load by reducing the volume of data being exchanged between our customers’ networks.
•
RTI tools analyze the real and near real time traffic data being processed through our platforms and networks to provide multiple use cases that enable our customers to more effectively manage their subscriber’s quality of experience (“QoE”) and satisfaction.

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•
Database solutions enable caller ID on various technology platforms provided to subscriber devices and intelligent network-based queries to support accurate call routing.
•
Number portability services allow subscribers to retain their phone numbers when changing mobile service providers.
In addition to the services described above, we provide our customers with the ability to connect to various third-party intelligent network database providers (“Off-Network Database Queries”).
Messaging services. We provide mobile operators with routing, translation and delivery services for SMS and Multimedia Messaging Service (“MMS”) messages sent from one operator’s network to another. While mobile operators have routing and delivery capabilities for subscribers within their own networks, they do not generally have an efficient way to directly route and deliver messages to other operators’ networks as this would require a direct connection with each of over a thousand mobile operators throughout the world, as well as sophisticated translation capabilities between numerous mobile standards. Once one of our customers has determined that an SMS or an MMS message needs to be delivered outside of its network, the message is sent to us. From there, we determine where the message is going, translate the message so it can be read by the receiving network and deliver it. This is known as Peer-to-Peer (“P2P”) messaging. As part of our enterprise messaging business, known as Application-to-Peer (“A2P”) messaging, we provide enterprise customers with routing, translation and delivery services for direct communication with their customers and employees via SMS and MMS alerts.
Roaming services. We operate the largest roaming clearing house in the world and process hundreds of billions of roaming transactions each year. A roaming transaction is generated when a subscriber from one mobile operator makes or receives a call, sends or receives an SMS or MMS message, or initiates a data session, in each case, while roaming on another operator’s network. Subscribers typically roam in places where their home operator’s network coverage is relatively limited or non-existent. In order to provide seamless global coverage, mobile operators enter into roaming agreements with one another to provide access for their subscribers to other operators’ networks in a given geography. When its subscribers roam, the home operator must pay the visited operator for use of the network. Through our clearing house, we clear and settle these roaming transactions. The information we provide determines the amount of roaming charges owed by one mobile operator to another and enables the home operator to issue retail bills to its subscribers for their usage while roaming. Fees are paid to us by the visited operator who ultimately bills the home operator for use of its network. In addition to this core service, we provide mobile operators a number of other value-added services, including roaming data analytics, roaming agreement management, fraud prevention and financial settlement services.
Other services. We provide technology turnkey solutions, including operator solutions for number portability readiness, prepaid applications, interactive video, value-added roaming services and mobile broadband solutions. Our turnkey solutions business provides software services to customers primarily in the Asia Pacific region.
Generally, there is a seasonal increase in wireless roaming usage and corresponding revenues in the high-travel months of our second and third fiscal quarters. Products primarily affected by this seasonality include signaling solutions, interstandard roaming, MDR and roaming clearing house.
Executive Overview
Financial Highlights
For the three months ended June 30, 2013, revenues increased $10.1 million, or 5.5%, to $193.3 million from $183.2 million for the comparable prior year period. The increase was driven primarily by new business and volume increases in our Network service offering, specifically signaling solutions and MDR, and new business and volume increases in our enterprise messaging business. The increase was partially offset by the impact of the Verizon Wireless contract renewal which was executed at lower pricing effective May 1, 2012, and declines in our Asia-Pacific turnkey operations due to the timing of completed customer projects. In addition, SMS revenues declined due to lower volumes resulting from higher amounts of messaging traffic competing with over the top (“OTT”) messaging platforms and group text messages carried over alternative MMS platforms. For the three months ended June 30, 2013, cost of operations increased $4.6 million due primarily to higher message termination fees, network costs and data processing and hosting costs. Sales, marketing, general and administrative expenses increased $0.3 million, driven by an increase in compensation costs of $2.8 million resulting from higher headcount as compared to the prior year, and $3.6 million of integration planning costs. This increase was partially offset by lower professional services costs of $4.6 million due to business development activities in the prior year period which were unrelated to MACH, as well as a decrease in travel expenses of $1.3 million. Depreciation and amortization expenses increased $5.4 million to $49.5 million for the three months ended June 30, 2013 from $44.1 million for the same period in 2012 primarily due to accelerated amortization related

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to the abandonment of an internal software development project during the quarter. Restructuring and management termination benefits expense increased $2.2 million due to severance costs resulting from a restructuring plan entered into during the quarter. Acquisition expenses were $16.6 million for the three months ended June 30, 2013 and consisted of professional services costs including legal, tax, audit and transaction advisory costs related to the Acquisition (defined below). Operating income decreased $13.5 million to $7.6 million for the three months ended June 30, 2013 from $21.1 million for the same period in 2012.

Business Developments

MACH Acquisition

On June 28, 2013 (the “Acquisition Date”), we completed our acquisition of WP Roaming III S.à r.l. (“WP Roaming”), for a total purchase price of approximately $712.0 million. As part of the transaction, we acquired from WP Roaming S.à r.l., a Luxembourg limited liability company (the “Seller”), all the shares and preferred equity certificates (whether convertible or not) in WP Roaming (the “Acquisition”). The purchase price was funded through a portion of the net proceeds from a new $700.0 million senior secured credit facility and the Deposit (as defined below) of €30.0 million that was paid to the Seller on July 2, 2012.

WP Roaming is a holding company which conducts the business of MACH S.à r.l. (“MACH”). The purpose of the Acquisition is to give Syniverse added global scale and increased reach with more direct connections to support roaming, messaging and network solutions that will enable its customers to deliver superior experiences to their end users.

At the closing of the Acquisition, Syniverse paid to the Seller an amount equal to approximately €140.0 million, representing €172.7 million (the “Base Amount”), less preliminary adjustments of €37.2 million, plus €4.5 million, representing €250.0 per month from December 31, 2011 through the Acquisition Date, reflecting a “locked box” approach, such that Syniverse Holdings, Inc. acquired WP Roaming with economic effect from December 31, 2011. In addition, at the Acquisition Date, Syniverse, on behalf of WP Roaming, paid €313.0 million and $81.5 million, respectively, for amounts outstanding to WP Roaming's two third-party lenders in order to ensure the release of all related guarantees and security interests. On July 2, 2012, Syniverse Holdings, Inc. paid the Seller an initial deposit of €30.0 million (the “Deposit”) which was applied to the purchase price at the Acquisition Date. For purposes of the purchase price allocation, the Deposit and amounts paid in Euros at the Acquisition Date were converted to U.S. dollars using an exchange rate of 1.3058 or $630.5 million.

Refer to Note 4 to the unaudited condensed consolidated financial statements included herein for additional information regarding the Acquisition.

Assets Held for Sale
    
The approval of the Acquisition granted by the European Commission (the “Commission”) was conditioned upon the Company's commitment to divest certain assets supporting MACH's data clearing and near real-time roaming data exchange (“NRTRDE”) business in the European Economic Area, which includes European Union countries plus Iceland, Liechtenstein and Norway (the “EEA”), including technology platforms, necessary employees, customer contracts and the MACH brand (the “Divestment Business”).

On June 3, 2013, Interfact S.à r.l., a Luxembourg limited liability company and the MACH group company that is the immediate shareholder of the Divestment Business, signed a definitive agreement (the “Divestment Agreement”) to sell the Divestment Business to Starhome, B.V., a private limited liability company incorporated under the laws of The Netherlands, upon the completion of the Acquisition.

Refer to Note 4 to the unaudited condensed consolidated financial statements included herein for additional information regarding assets classified as held for sale.

Tranche B Term Loans

On June 28, 2013, we received net proceeds of $696.5 million under the Tranche B Term Loans, the proceeds of which were used to refinance the Escrow Term Loans (as defined below) in full. We paid upfront fees of $3.5 million associated with the Escrow Term Loans which were recorded as original issue discount to be amortized over the life of the Tranche B Term Loans using the effective interest method. We incurred $25.2 million of debt issuance costs which were recorded as deferred financing costs to be amortized over the life of the Tranche B Term Loans using the effective interest method.

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Borrowings bear interest at a floating rate which can be, at our option, either (i) a Eurodollar borrowing rate for a specified interest period plus an applicable margin or, (ii) an alternative base rate plus an applicable margin, in the case of the Tranche B Term Loans under the New Senior Credit Facility, subject to a Eurodollar rate floor of 1.00% or a base rate floor of 2.00%, as applicable. The applicable margin for the Tranche B Term Loans under our New Senior Credit Facility is 3.00% per annum for Eurodollar loans and 2.00% per annum for base rate loans.
    
Effective June 28, 2013, our Tranche B Term Loans amortizes in equal quarterly installments in an amount equal to 0.25% per quarter of the original principal amount thereof, with the remaining balance due at final maturity.

Refer to Note 8 to the unaudited condensed consolidated financial statements included herein for additional details regarding the Tranche B Term Loans.

Delayed Draw Facility and Escrow Term Loans

On February 4, 2013, Syniverse Magellan Finance, LLC (the “Finance Sub”), our direct wholly owned subsidiary, entered into a delayed draw credit agreement (the “Delayed Draw Credit Agreement”) with Barclays Bank PLC, as administrative agent, and the other financial institutions and lenders from time to time party thereto, providing for a new senior credit facility consisting of a $700.0 million delayed draw term loan facility (the “Delayed Draw Facility”). On May 28, 2013, the Finance Sub entered into an amendment to the Delayed Draw Credit Agreement (the “Escrow Credit Agreement”). Upon the closing of this amendment, the lenders funded the Delayed Draw Facility into an escrow account (the “Escrow Term Loans”) and the Company pre-funded the interest, upfront fees and ticking fees of $7.2 million, $3.5 million and $3.6 million, respectively (the “Escrowed Funds”). The Escrowed Funds were released on June 28, 2013 (the “Release”).

Following the Release, Finance Sub merged with and into the Company with the Company as the survivor to such merger (the “Merger”). In connection with the Merger the Company assumed the obligations of Finance Sub under the Escrow Credit Agreement (the “Debt Assumption”).

Following the Debt Assumption, on June 28, 2013 the Company borrowed $700.0 million of Tranche B Term Loans, pursuant to the Incremental Amendment to its New Credit Agreement. The proceeds of the Tranche B Term Loans were used to refinance, in full, the Escrow Term Loans, a portion of which were used to fund the Acquisition.
    
Refer to Note 8 to the unaudited condensed consolidated financial statements included herein for additional details regarding the Delayed Draw Facility.

Revenues
The majority of our revenues are derived from transaction-based charges under long-term contracts, typically with terms averaging three years in duration. From time to time, if a contract expires and we have not previously negotiated a new contract or renewal with the customer, we continue to provide services under the terms of the expired contract as we negotiate new agreements or renewals. Most of the services and solutions we offer to our customers are based on applications, network connectivity and technology platforms owned and operated by us. We generate our revenues through the sale of our Network, Messaging, Roaming and Other services to telecommunications operators and enterprise customers throughout the world. Generally, there is a seasonal increase in wireless roaming usage and corresponding revenues in the high-travel months of our second and third fiscal quarters. Products primarily affected by this seasonality include signaling solutions, interstandard roaming, MDR and roaming clearing house.
Future increases or decreases in revenues are dependent on many factors, such as industry subscriber growth, subscriber habits, and volume and pricing trends, with few of these factors known in advance. From time to time, specific events such as a customer contract renewal at different terms, a customer contract termination, a customer’s decision to change technologies or to provide solutions in-house, or a consolidation of operators will be known to us and we can then estimate their impact on our revenues.

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Costs and Expenses
Our costs and expenses consist of cost of operations, sales and marketing, general and administrative, depreciation and amortization, restructuring and management termination benefits expenses and Acquisition expenses.
•
Cost of operations includes data processing costs, network costs, revenue share service provider arrangements, message termination fees, facilities costs, hardware costs, licensing fees, personnel costs associated with service implementation, training and customer care and off-network database query charges.
•
Sales and marketing includes personnel costs, advertising and website costs, trade show costs and related marketing costs.
•
General and administrative includes research and development expenses, a portion of the expenses associated with our facilities, business development expenses, and expenses for executive, finance, legal, human resources and other administrative departments and professional service fees relating to those functions. Our research and development expenses, consisting primarily of personnel costs, relate to technology creation, enhancement and maintenance of new and existing services.
•
Depreciation and amortization relate primarily to our property and equipment including our SS7 network, computer equipment, infrastructure facilities related to information management, capitalized software and other intangible assets recorded as a result of purchase accounting.
•
Restructuring and management termination benefits represents termination costs including severance, benefits and other employee related costs as well as contract termination costs.
•
Acquisition expenses include professional services costs, such as legal, tax, audit and transaction advisory costs related to the Acquisition.


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Results of Operations
The following tables present an overview of our results of operations for the three and six months ended June 30, 2013 and 2012:
 
Three months ended June 30,
 
 
 
Three months ended June 30,
 
 
 
Three months ended June 30,
 
 
% of
 
 
% of
 
2013 vs.
 
2013 vs.
(In thousands)
2013
 
Revenues
 
2012
 
Revenues
 
2012 $
 
2012 %
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Network services
$
95,490

 
49.4
 %
 
$
84,861

 
46.3
 %
 
$
10,629

 
12.5
 %
Messaging services
46,753

 
24.2
 %
 
44,442

 
24.3
 %
 
2,311

 
5.2
 %
Roaming services
47,301

 
24.5
 %
 
48,087

 
26.2
 %
 
(786
)
 
(1.6
)%
Other
3,727

 
1.9
 %
 
5,818

 
3.2
 %
 
(2,091
)
 
(35.9
)%
Revenues
193,271

 
100.0
 %
 
183,208

 
100.0
 %
 
10,063

 
5.5
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of operations
71,934

 
37.2
 %
 
67,308

 
36.7
 %
 
4,626

 
6.9
 %
Sales and marketing
16,528

 
8.6
 %
 
16,935

 
9.2
 %
 
(407
)
 
(2.4
)%
General and administrative
28,690

 
14.8
 %
 
28,011

 
15.3
 %
 
679

 
2.4
 %
Depreciation and amortization
49,500

 
25.6
 %
 
44,089

 
24.1
 %
 
5,411

 
12.3
 %
Restructuring and management termination benefits
2,452

 
1.3
 %
 
257

 
0.1
 %
 
2,195

 
854.1
 %
Acquisition expenses
16,553

 
8.6
 %
 
5,490

 
3.0
 %
 
11,063

 
201.5
 %
 
185,657

 
96.1
 %
 
162,090

 
88.4
 %
 
23,567

 
14.5
 %
Operating income
7,614

 
3.9
 %
 
21,118

 
11.6
 %
 
(13,504
)
 
(63.9
)%
Other income (expense), net:
 
 
 
 
 
 
 
 
 
 
 
Interest income
162

 
0.1
 %
 
272

 
0.1
 %
 
(110
)
 
(40.4
)%
Interest expense
(31,117
)
 
(16.1
)%
 
(31,567
)
 
(17.2
)%
 
450

 
(1.4
)%
Debt extinguishment costs
—

 
—
 %
 
(6,458
)
 
(3.5
)%
 
6,458

 
—
 %
Other, net
(553
)
 
(0.2
)%
 
(833
)
 
(0.5
)%
 
280

 
(33.6
)%
 
(31,508
)
 
(16.3
)%
 
(38,586
)
 
(21.1
)%
 
7,078

 
(18.3
)%
Loss before provision for (benefit from) income taxes
(23,894
)
 
(12.4
)%
 
(17,468
)
 
(9.5
)%
 
(6,426
)
 
36.8
 %
Provision for (benefit from) income taxes
250

 
0.1
 %
 
(2,122
)
 
(1.2
)%
 
2,372

 
(111.8
)%
Net loss
(24,144
)
 
(12.5
)%
 
(15,346
)
 
(8.3
)%
 
(8,798
)
 
57.3
 %
Net income attributable to noncontrolling interests
192

 
0.1
 %
 
425

 
0.2
 %
 
(233
)
 
(54.8
)%
Net loss attributable to Syniverse Holdings, Inc.
$
(24,336
)
 
(12.6
)%
 
$
(15,771
)
 
(8.5
)%
 
$
(8,565
)
 
54.3
 %


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Six months ended June 30,
 
 
 
Six months ended June 30,
 
 
 
Six months ended June 30,
 
 
% of
 
 
% of
 
2013 vs.
 
2013 vs.
(In thousands)
2013
 
Revenues
 
2012
 
Revenues
 
2012 $
 
2012 %
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Network services
$
183,203

 
48.6
 %
 
$
169,497

 
46.0
 %
 
$
13,706

 
8.1
 %
Messaging services
93,475

 
24.8
 %
 
91,450

 
24.8
 %
 
2,025

 
2.2
 %
Roaming services
93,181

 
24.7
 %
 
97,230

 
26.4
 %
 
(4,049
)
 
(4.2
)%
Other
7,294

 
1.9
 %
 
10,096

 
2.8
 %
 
(2,802
)
 
(27.8
)%
Revenues
377,153

 
100.0
 %
 
368,273

 
100.0
 %
 
8,880

 
2.4
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of operations
143,865

 
38.1
 %
 
134,324

 
36.5
 %
 
9,541

 
7.1
 %
Sales and marketing
36,677

 
9.7
 %
 
34,758

 
9.4
 %
 
1,919

 
5.5
 %
General and administrative
59,831

 
15.9
 %
 
53,021

 
14.4
 %
 
6,810

 
12.8
 %
Depreciation and amortization
94,587

 
25.1
 %
 
87,273

 
23.7
 %
 
7,314

 
8.4
 %
Restructuring and management termination benefits
3,510

 
0.9
 %
 
631

 
0.2
 %
 
2,879

 
456.3
 %
Acquisition expenses
20,945

 
5.6
 %
 
5,490

 
1.5
 %
 
15,455

 
281.5
 %
 
359,415

 
89.7
 %
 
315,497

 
84.2
 %
 
43,918

 
13.9
 %
Operating income
17,738

 
4.7
 %
 
52,776

 
15.8
 %
 
(35,038
)
 
(66.4
)%
Other income (expense), net:
 
 
 
 
 
 
 
 
 
 
 
Interest income
211

 
0.1
 %
 
504

 
0.1
 %
 
(293
)
 
(58.1
)%
Interest expense
(57,961
)
 
(15.4
)%
 
(58,101
)
 
(15.8
)%
 
140

 
(0.2
)%
Debt extinguishment costs
—

 
0.0
 %
 
(6,458
)
 
(1.8
)%
 
6,458

 
0.0
 %
Other, net
(1,237
)
 
(0.2
)%
 
481

 
0.1
 %
 
(1,718
)
 
(357.2
)%
 
(58,987
)
 
(15.6
)%
 
(63,574
)
 
(17.4
)%
 
4,587

 
(7.2
)%
Loss before (benefit from) provision for income taxes
(41,249
)
 
(10.9
)%
 
(10,798
)
 
(1.6
)%
 
(30,451
)
 
282.0
 %
(Benefit from) provision for income taxes
(4,058
)
 
(1.1
)%
 
35

 
0.0
 %
 
(4,093
)
 
(11,694.3
)%
Net loss
(37,191
)
 
(9.9
)%
 
(10,833
)
 
(1.6
)%
 
(26,358
)
 
243.3
 %
Net income attributable to noncontrolling interests
604

 
0.2
 %
 
1,656

 
0.4
 %
 
(1,052
)
 
(63.5
)%
Net loss attributable to Syniverse Holdings, Inc.
$
(37,795
)
 
(10.0
)%
 
$
(12,489
)
 
(2.0
)%
 
$
(25,306
)
 
202.6
 %
Revenues
Revenues increased $10.1 million to $193.3 million for the three months ended June 30, 2013 from $183.2 million for the same period in 2012. Revenues increased $8.9 million to $377.2 million for the six months ended June 30, 2013 from $368.3 million for the same period in 2012. The increase in revenues was primarily due to new business and volume growth in our Network service offering and enterprise messaging product. The increase was partially offset by the impact of the Verizon Wireless contract renewal at lower pricing that was effective May 1, 2012, the timing of completed projects in our Asia-Pacific turnkey operations service offering and lower SMS revenue due to a decline in volume.
Network services revenue increased $10.6 million, or 12.5%, to $95.5 million for the three months ended June 30, 2013 from $84.9 million for the same period in 2012. Network services revenue increased $13.7 million, or 8.1%, to $183.2 million for the six months ended June 30, 2013 from $169.5 million for the same period in 2012. New business and continued volume growth across signaling solutions, MDR, interstandard roaming solutions and IPX contributed a revenue increase of $11.5 million and $17.8 million on a quarter- and year-to-date basis, respectively. The increase was partially offset by a decline in wireless local number portability revenue due to lower volumes compared to the prior year period.


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Messaging services revenue increased $2.3 million, or 5.2%, to $46.8 million for the three months ended June 30, 2013 from $44.4 million for the same period in 2012. Messaging services revenue increased $2.0 million, or 2.2%, to $93.5 million for the six months ended June 30, 2013 from $91.5 million for the same period in 2012. The increase in revenue was primarily due to new business and volume growth in our enterprise messaging business, partially offset by a decline in SMS driven by lower volumes resulting from increased use of OTT messaging platforms and group text messages carried over alternative MMS platforms. In addition, PictureMail revenue declined primarily as a result of contractual price reductions from a 2010 renewal that included progressive rate reductions through the end of the contract term.
Roaming services revenue decreased $0.8 million, or 1.6%, to $47.3 million for the three months ended June 30, 2013 from $48.1 million for the same period in 2012. Roaming services revenue decreased $4.0 million, or 4.2%, to $93.2 million for the six months ended June 30, 2013 from $97.2 million for the same period in 2012. The decrease was primarily driven by the pricing impact of the Verizon Wireless contract renewal in May 2012. While volume growth in our data clearing house continues to be predominantly driven by data sessions, we saw a slight improvement in SMS and voice sessions compared to the prior year for both quarter-to-date and year-to-date periods.
Other services revenue decreased $2.1 million, or 35.9%, to $3.7 million for the three months ended June 30, 2013 from $5.8 million for the same period in 2012. Other services revenue decreased $2.8 million, or 27.8%, to $7.3 million for the six months ended June 30, 2013 from $10.1 million for the same period in 2012. The decrease was driven by the timing of completion of customers’ projects.
Costs and Expenses
Cost of operations increased $4.6 million to $71.9 million for the three months ended June 30, 2013 from $67.3 million for the three months ended June 30, 2012. Cost of operations increased $9.5 million to $143.9 million for the six months ended June 30, 2013 from $134.3 million for the comparable prior year period. The table below summarizes our cost of operations by category of spending.
 
Three months ended June 30,
 
Increase/
 
Increase/
(In thousands)
2013
 
2012
 
(Decrease) $
 
(Decrease) %
Cost of operations:
 
 
 
 
 
 
 
Headcount and related costs
$
22,453

 
$
23,056

 
$
(603
)
 
(2.6
)%
Variable costs
16,110

 
13,496

 
2,614

 
19.4
 %
Data processing, hosting and support costs
19,874

 
19,115

 
759

 
4.0
 %
Network costs
10,837

 
9,079

 
1,758

 
19.4
 %
Other operating related costs
2,660

 
2,562

 
98

 
3.8
 %
Cost of operations
$
71,934

 
$
67,308

 
$
4,626

 
6.9
 %
 
Six months ended June 30,
 
Increase/
 
Increase/
(In thousands)
2013
 
2012
 
(Decrease) $
 
(Decrease) %
Cost of operations:
 
 
 
 
 
 
 
Headcount and related costs
$
45,788

 
$
45,686

 
$
102

 
0.2
 %
Variable costs
31,681

 
26,995

 
4,686

 
17.4
 %
Data processing, hosting and support costs
39,338

 
37,447

 
1,891

 
5.0
 %
Network costs
21,519

 
18,645

 
2,874

 
15.4
 %
Other operating related costs
5,539

 
5,551

 
(12
)
 
(0.2
)%
Cost of operations
$
143,865

 
$
134,324

 
$
9,541

 
7.1
 %

Variable costs increased for both quarter- and year-to-date periods due primarily to higher volumes in our enterprise messaging business resulting in higher messaging termination fees. The year-to-date increase in variable costs was partially offset by a decline in revenue share cost resulting from a decline in the associated revenue. The increase in data processing, hosting and support costs is primarily due to investments in data center expansion to support additional capacity and additional network points of presence, as well as higher processing costs resulting from transactional volume growth. The increase in network costs was primarily driven by investments in our internal infrastructure to support global business growth. We intend to continue investing in our network infrastructure in the foreseeable future in order to support future growth opportunities. As a percentage

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of revenues, cost of operations increased to 37.2% and 38.1% for the three and six months ended June 30, 2013, from 36.7% and 36.5% for the three and six months ended June 30, 2012.
Sales and marketing expense decreased $0.4 million to $16.5 million for the three months ended June 30, 2013 from $16.9 million for the same period in 2012, primarily due to lower travel expenses of $0.6 million, sales promotions of $0.5 million and sales incentives of $0.3 million. This decrease was partially offset by higher headcount related costs of $1.0 million associated with the expansion of our global sales force to support growth in developing markets. As a percentage of revenues, sales and marketing expense decreased to 8.6% for the three months ended June 30, 2013 from 9.2% for the three months ended June 30, 2012.
Sales and marketing expense increased $1.9 million to $36.7 million for the six months ended June 30, 2013 from $34.8 million for the same period in 2012, primarily due to higher headcount related costs of $1.9 million associated with our global sales force expansion and higher performance-based compensation of $0.9 million. In addition, stock-based compensation increased $0.5 million as compared to the prior year period driven by the modification to the vesting terms of certain 2012 equity awards (as discussed in Note 11 to the unaudited condensed consolidated financial statements included herein). This year-to-date increase was partially offset by lower travel expenses of $0.7 million and sales incentives of $0.4 million. As a percentage of revenues, sales and marketing expense increased to 9.7% for the six months ended June 30, 2013 from 9.4% for the six months ended June 30, 2012.
General and administrative expense increased $0.7 million to $28.7 million for the three months ended June 30, 2013 from $28.0 million for the same period in 2012, primarily due to higher headcount related costs of $1.8 million associated with additional resources to support global business growth and new product development initiatives and integration planning costs of $3.6 million related to the Acquisition. This decrease was partially offset by lower professional service costs of $4.7 million and travel expenses of $0.7 million related to business development activities in the prior year period. Additionally, foreign value added taxes increased $0.7 million. As a percentage of revenues, general and administrative expense decreased to 14.8% for the three months ended June 30, 2013, from 15.3% for the comparable prior year period.
General and administrative expense increased $6.8 million to $59.8 million for the six months ended June 30, 2013 from $53.0 million for the same period in 2012. The year-to-date increase was primarily due to higher headcount related costs of $3.7 million, integration planning expenses of $4.4 million, performance-based compensation of $0.7 million, and foreign value added taxes of $0.8 million. These increases were partially offset by lower professional service costs of $2.1 million and travel expenses of $0.7 million. As a percentage of revenues, general and administrative expense increased to 15.9% for the six months ended June 30, 2013, from 14.4% for the comparable prior year period.
Effective June 30, 2013, expenses related the Acquisition, which were previously recorded in General and administrative, are presented in the Acquisition expenses line item in the unaudited condensed consolidated statement of operations.
Depreciation and amortization expense increased $5.4 million to $49.5 million for the three months ended June 30, 2013 from $44.1 million for the same period in 2012. Depreciation and amortization expense increased $7.3 million to $94.6 million for the six months ended June 30, 2013 from $87.3 million for the comparable prior year period. The increase for the quarter- and year-to date periods was driven by accelerated amortization of $4.3 million resulting from the abandonment of a software development project, as well as $1.3 million and $2.6 million, respectively, related to the depreciation and amortization of assets acquired under capital leases entered into during the last twelve months.
Restructuring and management termination benefits expense was $2.5 million and $3.5 million for the three and six months ended June 30, 2013, driven by severance costs related to the June 2013 Plan and additions to the March 2013 Plan. See Note 12 to our unaudited condensed consolidated financial statements for additional details regarding our restructuring plans.
Acquisition expenses were $16.6 million and $20.9 million for the three and six months ended June 30, 2013, respectively. The quarter-to-date expenses consisted of professional services costs including legal, tax, audit and transaction advisory costs of $15.9 million and travel expenses of $0.4 million. The year-to-date expenses consisted of $19.8 million of professional services costs and $0.9 million of travel expenses.
Other Income (Expense), net

The decrease in Other Income (Expense), net for the three and six months ended June 30, 2013 is primarily due to $6.5 million of third party fees associated with the New Senior Credit Facility that were paid during the three months ended June 30, 2012 as a result of the partial debt modification and partial debt extinguishment of our Initial Term Loans on April 23, 2012. Refer to Note 8 to the unaudited condensed consolidated financial statements included herein for additional information.


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Interest expense decreased $0.5 million to $31.1 million for the three months ended June 30, 2013 from $31.6 million for the same period in 2012. Interest expense decreased $0.1 million to $58.0 million for the six months ended June 30, 2013 from $58.1 million for the same period in 2012. This decrease was driven by our debt refinancing on April 23, 2012, offset by interest expense of $2.6 million and amortization of deferred financing fees of $0.4 million, both related to the Tranche B Term Loans and incurred during the three months ended June 30, 2013. In addition, during the six months ended June 30, 2013, we paid ticking fees of $4.6 million to Barclays Bank PLC as administrative agent to compensate for the time lag between the commitment allocation and actual funding for the Delayed Draw Facility. We expect to incur approximately $30.0 million of interest expense and $3.5 million of amortization of deferred financing fees and original issue discount on a quarterly basis.
Other, net increased $0.3 million to a $0.6 million loss for the three months ended June 30, 2013 from a $0.8 million loss for the same period in 2012. Other, net decreased $1.7 million to a $1.2 million loss for the six months ended June 30, 2013 from a $0.5 million gain for the same period in 2012. The year-to-date decrease was primarily due to a non-cash foreign exchange loss on the €30.0 million deposit associated with the Acquisition.

Provision for (Benefit from) Income Taxes
We recorded an income tax provision of $0.3 million and an income tax benefit of $4.1 million for the three and six months ended June 30, 2013, respectively, compared to a benefit of $2.1 million and a provision of $0.03 million for the same period in 2012. During the three months ended June 30, 2013, the effective tax rate was a provision of 1.0% and a benefit of 9.8%, respectively. During the six months ended June 30, 2012, the effective tax rate was a benefit of 12.1% and a provision of 0.3%, respectively. The change in our effective tax rate is chiefly attributable to costs related to the acquisition of MACH, some of which are non-deductible for income tax purposes, the inclusion of the forecasted earnings impact of the MACH entities in calculating the annual effective tax rate, certain favorable permanent items, and a shift in taxable income to lower foreign tax rate jurisdictions.

 Liquidity and Capital Resources
    
Our primary sources of liquidity are expected to be cash flow from operations as well as funds available under the revolving portion of our New Senior Credit Facility. We believe that we have sufficient liquidity to meet currently anticipated growth plans, including short and long-term capital expenditures and working capital requirements. In addition, we believe that our liquidity is sufficient to fund our debt repayment obligations. Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. Our indebtedness requires us to dedicate a substantial portion of our cash flow from operations to debt service, thereby reducing the availability of our cash flow to fund acquisitions, working capital, capital expenditures, research and development efforts and other general corporate purposes. Historically, we have been successful in obtaining financing, although the marketplace for such investment capital can become restricted depending on a variety of economic factors. On June 28, 2013, we completed the Acquisition. The Acquisition was funded primarily through proceeds from the Escrow Term Loans, which were refinanced through the Tranche B Term Loans as described in “Debt and Credit Facilities” below.
    
We believe that our cash on hand, together with cash flow from operations and, if required, borrowings under the revolving portion of our New Senior Credit Facility, will be sufficient to meet our cash requirements for the next twelve months. We may need supplemental funding for those activities, which we believe could be available from the debt markets.

Cash Flow
    
Cash and cash equivalents were $273.8 million at June 30, 2013 as compared to $232.2 million at December 31, 2012. The following table summarizes our unaudited condensed consolidated cash flow activity.
 
Six months ended June 30,
(In thousands)
2013
 
2012
Net cash provided by operating activities
$
54,818

 
$
89,916

Net cash used in investing activities
(674,549
)
 
(39,690
)
Net cash provided by (used in) financing activities
660,626

 
(84,515
)
Effect of exchange rate changes on cash
705

 
(1,868
)
Net (decrease) increase in cash
$
41,600

 
$
(36,157
)
    

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Net cash provided by operating activities decreased $35.1 million to $54.8 million for the six months ended June 30, 2013 from $89.9 million for the same period in 2012. Net income adjusted for non-cash items decreased $33.6 million, primarily due to the Acquisition expenses and related integration costs, and higher operating costs during the six months ended June 30, 2013 as compared to the prior year period. Cash used for working capital increased $1.5 million due primarily to higher accounts receivable resulting from the increase in revenue combined with the timing of collections and higher prepaid and other current assets driven by an increase in prepaid software maintenance. This decrease was partially offset by the timing of performance-based compensation payments.
    
Net cash used in investing activities was $674.5 million for the six months ended June 30, 2013, and included $628.2 million of cash consideration, net of cash acquired for the Acquisition, $41.7 million for capital expenditures and $4.6 million for capital expenditures to support the assets held for sale, as a condition of closing the sale transaction. Net cash used in investing activities was $39.7 million for the six months ended June 30, 2012, all related to capital expenditures. The increase in capital expenditures was driven by higher costs associated with capitalized software for new products and services, data center capacity increases and investments in our internal infrastructure.

Net cash provided by financing activities was $660.6 million for the six months ended June 30, 2013, which included $696.5 million of net proceeds under the Tranche B Term Loans, $25.2 million of debt issuance costs paid and principal payments on our Initial Term Loans of $4.8 million. Net cash used in financing activities was $84.5 million for the six months ended June 30, 2012, which includes $940.5 million of net proceeds under the New Senior Credit Facility offset by $1.0 billion of payments on our Old Senior Credit Facility and $10.2 million of debt issuance costs paid.

Debt and Credit Facilities

New Senior Credit Facility

On April 23, 2012, we entered into the New Credit Agreement with Barclays Bank PLC, as administrative agent, swing line lender and letters of credit issuer, and the other financial institutions and lenders from time to time party thereto, providing for the New Senior Credit Facility consisting of (i) the Initial Term Loans; and (ii) the Revolving Credit Facility for the making of revolving loans, swing line loans and issuance of letters of credit.

On June 28, 2013 the Company borrowed $700.0 million of Tranche B Term Loans, pursuant to the Incremental Amendment to its New Credit Agreement. The proceeds of the Tranche B Term Loans were used to refinance, in full, the Escrow Term Loans (as defined below), a portion of which were used to fund the Acquisition.
Subject to specified conditions, without the consent of the then existing lenders (but subject to the receipt of commitments), the Initial Term Loans, the Tranche B Term Loans (together the “Term Loan Facilities”) or the Revolving Credit Facility may be expanded (or a new term loan facility or revolving credit facility added to the New Senior Credit Facility) by an amount as will not cause the net senior secured leverage ratio after giving effect to the incurrence of such additional amount to exceed 4.0:1.0 (calculated by treating any unsecured debt incurred in reliance on this ratio as if it were secured).

The Term Loan Facilities will mature at the earliest of (i) April 23, 2019, (ii) the date of termination in whole of the commitments under the Term Loan Facilities or (iii) the date the loans under the Term Loan Facilities are declared due and payable in connection with an event of default; provided that (a) in the event that more than $50.0 million of the Senior Notes remain outstanding on the First Springing Maturity Date, the maturity date for the Term Loan Facilities will be the First Springing Maturity Date and (b) in the event that more than $50.0 million in aggregate principal amount of any refinancing indebtedness in respect of the Senior Notes remains outstanding on the Second Springing Maturity Date, the maturity date for the Term Loan Facilities will be the earlier of the Second Springing Maturity Date and April 23, 2019.

Our Revolving Credit Facility will mature at the earlier of (i) April 23, 2017 and (ii) the date of termination in whole of the commitments under the Revolving Credit Facility, the letter of credit sublimit, and the swing line facility under the New Credit Agreement.

As of June 30, 2013, we had a carrying amount of $940.5 million, excluding original issue discount, of outstanding indebtedness under the Initial Term Loans. At June 30, 2013, the applicable interest rate was 5.00% on the Initial Term Loans based on the Eurodollar option.


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As of June 30, 2013, we had a carrying amount of $700.0 million, excluding original issue discount, of outstanding indebtedness under the Tranche B Term Loans. At June 30, 2013, the applicable interest rate was 4.00% on the Tranche B Term Loans based on the Eurodollar option.

Our Revolving Credit Facility had an outstanding Euro letter of credit of $1.9 million at June 30, 2013, which was considered a reduction against our Revolving Credit Facility under the New Credit Agreement. The unused commitment under the Revolving Credit Facility was $148.1 million at June 30, 2013.

9.125% Senior Unsecured Notes Due 2019

On December 22, 2010, we issued $475.0 million senior unsecured notes bearing interest at 9.125% (“Senior Notes”) that mature on January 15, 2019. Interest on the Senior Notes is paid on January 15 and July 15 of each year.

The indenture governing our outstanding Senior Notes contains certain covenants that among other things, limit our ability to incur additional indebtedness and issue preferred stock, pay dividends, make other restricted payments and investments, create liens, incur restrictions on the ability of our subsidiaries to pay dividends or other payments to them, sell assets, merge or consolidate with other entities, and enter into transactions with affiliates. As of June 30, 2013, we are in compliance with all of the covenants contained in the indenture governing our outstanding Senior Notes.

Delayed Draw Credit Agreement

On February 4, 2013, Finance Sub, our direct wholly-owned subsidiary entered into the Delayed Draw Credit Agreement with Barclays Bank PLC, as administrative agent, and the other financial institutions and lenders from time to time party thereto, providing for the Delayed Draw Facility. On May 28, 2013, Finance Sub entered into the Escrow Credit Agreement. Upon the closing of this amendment, the lenders funded the Delayed Draw Facility into an escrow account and the Company pre-funded the interest, upfront fees and ticking fees of $7.2 million, $3.5 million and $3.6 million, respectively. The Escrowed Funds were released to Finance Sub on June 28, 2013.

Following the Release, Finance Sub merged with and into the Company with the Company as the survivor to such merger. In connection with the Merger the Company assumed the obligations of Finance Sub under the Escrow Credit Agreement.

Following the Debt Assumption, on June 28, 2013 the Company borrowed $700.0 million of Tranche B Term Loans, pursuant to the Incremental Amendment to its New Credit Agreement. The proceeds of the Tranche B Term Loans were used to refinance the Escrow Term Loans in full.

Non-GAAP Financial Measures
We believe that Adjusted EBITDA and Free Cash Flow are measures commonly used by investors to evaluate our performance and that of our competitors. We believe issuers of “high-yield” debt securities also present Adjusted EBITDA and the related ratio data because investors, analysts and rating agencies consider it useful in measuring the ability of those issuers to meet debt service obligations. We further believe that the disclosure of Adjusted EBITDA and Free Cash Flow is useful to investors, as these non-GAAP measures form the basis of how our executive team and Board of Directors evaluate our performance. By disclosing these non-GAAP measures, we believe that we create for investors a greater understanding of, and an enhanced level of transparency into, some of the means by which our management team operates and evaluates our company. Adjusted EBITDA and Free Cash Flow are not presentations made in accordance with U.S. GAAP and our use of the terms Adjusted EBITDA and Free Cash Flow may vary from that of others in our industry. Adjusted EBITDA and Free Cash Flow should not be considered as alternatives to net income (loss), operating income (loss), revenues or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance or operating cash flows or liquidity.
In addition, these non-GAAP measures may not be comparable to other similarly titled measures of other companies. Because of these limitations, Adjusted EBITDA and Free Cash Flow should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We attempt to compensate for these limitations by relying primarily upon our U.S. GAAP results and using Adjusted EBITDA and Free Cash Flow as supplemental information only.
Adjusted EBITDA and Free Cash Flow have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. For example, Adjusted EBITDA:
•
excludes certain tax payments that may represent a reduction in cash available to us;

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•
does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;
•
does not reflect changes in, or cash requirements for, our working capital needs; and
•
does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, including original issue discount amortization on our Initial Term Loans and Tranche B Term Loans.
Adjusted EBITDA is determined by adding the following items to net loss: other income (expense), net, provision for (benefit from) income taxes, depreciation and amortization, restructuring and management termination benefits, non-cash stock compensation, Acquisition expenses, business development, integration and other related expenses including transition and integration costs generally and the Carlyle annual management fee including related expenses.
We believe that Adjusted EBITDA is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. We rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our management team in connection with our executive compensation and bonus plans. We also review Adjusted EBITDA to compare our current operating results with prior periods and with the operating results of other companies in our industry. In addition, we utilize Adjusted EBITDA as an assessment of our overall liquidity and our ability to meet our debt service obligations.
Free Cash Flow is determined by adding the result of net cash provided by or used in operating activities and Acquisition expenses less capital expenditures. We believe that Free Cash Flow is a useful financial metric to assess our ability to pursue opportunities to enhance our growth. We also use Free Cash Flow as a measure to review and assess the operating performance of our management team in connection with our executive compensation and bonus plans. Additionally, we believe this is a useful metric for investors to assess our ability to repay debt.  
Reconciliation of Non-GAAP Measures to GAAP
A reconciliation of net loss, the closest GAAP measure, to Adjusted EBITDA is presented in the following table:
 
Three months ended June 30,
(In thousands)
2013
 
2012
Reconciliation to Adjusted EBITDA
 
 
 
Net loss
$
(24,144
)
 
$
(15,346
)
Other expense, net
31,508

 
38,586

Provision for (benefit from) income taxes
250

 
(2,122
)
Depreciation and amortization
49,500

 
44,089

Restructuring and management termination benefits (a)
2,452

 
257

Non-cash stock compensation (b)
1,482

 
1,738

Acquisition expenses (c)
16,553

 
5,490

Business development, integration and other expenses (d)
3,597

 
5,118

Management fee and related expenses (e)
798

 
750

Adjusted EBITDA
$
81,996

 
$
78,560


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Six months ended June 30,
(In thousands)
2013
 
2012
Reconciliation to Adjusted EBITDA
 
 
 
Net loss
$
(37,191
)
 
$
(10,833
)
Other expense, net
58,987

 
63,574

(Benefit from) provision for income taxes
(4,058
)
 
35

Depreciation and amortization
94,587

 
87,273

Restructuring and management termination benefits (a)
3,510

 
631

Non-cash stock compensation (b)
5,180

 
4,426

Acquisition expenses (c)
20,945

 
5,490

Business development, integration and other expenses (d)
4,392

 
5,628

Management fee and related expenses (e)
1,829

 
1,486

Adjusted EBITDA
$
148,181

 
$
157,710

(a)
Restructuring and management termination benefits expense is comprised primarily of severance benefits associated with our cost rationalization initiatives and contract termination costs associated with the exit of a leased facility.
(b)
Reflects non-cash expenses related to equity compensation awards.
(c)
Reflects items associated with the Acquisition including professional services costs, such as legal, tax, audit and transaction advisory costs.
(d)
Reflects items associated with business development activities, integration expenses, such as incremental contractor, travel and marketing costs and certain advisory services and employee retention costs.
(e)
Reflects management fees paid to Carlyle and related expenses.
A reconciliation of net cash provided by operating activities, the closest GAAP measure, to Free Cash Flow is presented in the following table:
 
Three months ended June 30,
(In thousands)
2013
 
2012
Reconciliation to Free Cash Flow
 
 
 
Net cash provided by operating activities
$
34,467

 
$
72,244

Acquisition expenses
16,553

 
5,490

Capital expenditures
(22,658
)
 
(29,803
)
Free Cash Flow
$
28,362

 
$
47,931

 
Six months ended June 30,
(In thousands)
2013
 
2012
Reconciliation to Free Cash Flow
 
 
 
Net cash provided by operating activities
$
54,818

 
$
89,916

Acquisition expenses
20,945

 
5,490

Capital expenditures
(41,743
)
 
(39,690
)
Free Cash Flow
$
34,020

 
$
55,716

 
Off-Balance Sheet Arrangements
We provide financial settlement services to mobile operators to support the payment of roaming related charges to their roaming network partners. In accordance with our customer contracts, funds are held by us as an agent on behalf of our customers to settle their roaming related charges to other operators. These funds and the corresponding liability are not reflected in our unaudited condensed consolidated balance sheets. The off-balance sheet amounts totaled approximately $453.6 million and $132.4 million as of June 30, 2013 and December 31, 2012, respectively. Off-balance sheet amounts at June 30, 2013 included $296.7 million resulting from the Acquisition.

51

We have also used off-balance sheet financing in recent years primarily in the form of operating leases for facility space and equipment and we expect to continue these practices. We do not use any other type of joint venture or special purpose entities that would create off-balance sheet financing. We believe that our decision to lease office space is similar to that used by many other companies of our size and does not have a material impact on our financial statements. We intend to continue to enter into operating leases for facilities and equipment as these leases expire or additional capacity is required.

Related Party Transactions

Consulting Agreement with Carlyle

On January 13, 2011, we entered into a ten-year consulting agreement with Carlyle under which we pay Carlyle a fee for consulting services Carlyle provides to us and our subsidiaries. During the three and six months ended June 30, 2013, we recorded $0.8 million and $1.8 million, respectively, associated with the consulting fee and the reimbursement of out-of-pocket expenses. During the three and six months ended June 30, 2012, we recorded $0.8 million and $1.5 million, respectively.

During the three months ended June 30, 2013, we paid a $10.0 million transaction fee associated with the Acquisition and related debt issuance under the Consulting Agreement with Carlyle. $5.0 million of the transaction fee was recorded in Acquisition expenses and $5.0 million was included in deferred financing costs.

Carlyle, from time to time, participates in the trading of the debt securities under our Initial Term Loans and Tranche B Term loans.

Contractual Obligations
    
During the six months ended June 30, 2013, we entered into equipment leases that increased our total capital lease obligation to $12.6 million as of June 30, 2013 from $8.3 million at December 31, 2012. The leases have terms between two and three years with payments due at the beginning of each month.
    
During the three months ended June 30, 2013, we borrowed $700.0 million under the Tranche B Term Loans which increased our total long-term debt obligations (excluding interest) to $2.1 billion as of June 30, 2013 from $1.4 billion at December 31, 2012. Commencing on September 30, 2013, the Tranche B Term Loans will begin amortizing in equal quarterly installments in an amount equal to 0.25% per quarter of the original principal amount with the remaining balance due at final maturity.

The Acquisition did not have a material impact on our contractual obligations as of June 30, 2013 other than noted above.

There have been no other material changes to the disclosure on this matter made in our Annual Report on Form 10-K.

Critical Accounting Policies and Estimates
    
The preparation of our unaudited condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses. We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances.
    
We have no material changes to our Critical Accounting Policies and Estimates disclosure as filed in our Annual Report on Form 10-K for the year ended December 31, 2012.


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ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Market Risk
We have exposure to fluctuations in interest rates on our Term Loan Facilities. Our Term Loan Facilities are subject to variable interest rates dependent upon the Eurodollar floor. Under the credit agreement governing our Term Loan Facilities, the Eurodollar rate floor was 1.25% and 1.00% for the Initial Term Loans and Tranche B Term Loans, respectively, and the base rate floor was 2.25% and 2.00% for the Initial Term Loans and Tranche B Term Loans, respectively, as of June 30, 2013. Interest rate changes therefore generally do not affect the market value of such debt but do impact the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant. As of June 30, 2013, a one-eighth percent change in assumed interest rates on our Term Loan Facilities would result in $2.1 million of additional interest expense during the next year.
Foreign Currency Market Risk
Although the majority of our operations are conducted in U.S. dollars, a portion of our foreign operations are conducted in Euros and Great British Pounds. On a less significant basis, we conduct operations in the various currencies of the Asia-Pacific region, Canada and Latin America. Consequently, a portion of our revenues and expenses are affected by fluctuations in foreign currency exchange rates. We are also affected by fluctuations in exchange rates on assets and liabilities related to our foreign operations. We have not hedged our translation risk on foreign currency exposure through the use of derivative instruments.
A 10% change in average foreign currency rates against the U.S. dollar during the six months ended June 30, 2013 would have increased or decreased our revenues and net loss by approximately $4.9 million and $0.3 million, respectively.

ITEM 4.     CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
Our management, including our principal executive officer and principal financial officer, concluded an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of June 30, 2013. Based on the evaluation, as of June 30, 2013, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
In making its assessment of changes in internal control over financial reporting as of June 30, 2013, management has excluded MACH as it was acquired on June 28, 2013. We are currently assessing the control environment and intend to disclose all material changes resulting from the Acquisition within or prior to the time our first annual assessment of internal control over financial reporting that is required to include this entity.

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PART II

OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS
We are currently a party to various claims and legal actions that arise in the ordinary course of business. We believe such claims and legal actions, individually and in the aggregate, will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

ITEM 1A.     RISK FACTORS
Our business, financial condition, operating results and cash flows can be impacted by a number of factors, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual results to differ materially from those anticipated, see the discussion of risk factors disclosed under the caption “Risk Factors” in our 2012 Annual Report on Form 10-K, and disclosed elsewhere in this Quarterly Report on Form 10-Q. There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

ITEM 2.           UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.

ITEM 3:    DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4.     MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5:    OTHER INFORMATION
None.


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ITEM 6: EXHIBITS
Exhibit No.
 
Description
3.1
 
Third Amended and Restated Certificate of Incorporation of Syniverse Holdings, Inc. (1)
3.2
 
Amended and Restated Bylaws of Syniverse Holdings, Inc. (1)
4.1
 
Indenture, dated as of December 22, 2010, as supplemented on January 13, 2011 by the First Supplemental Indenture, among Buccaneer Merger Sub, Inc. (which merged into Syniverse Holdings, Inc.) and Wilmington Trust, National Association, as successor by merger to Wilmington Trust FSB, as trustee, governing the 9.125% Senior Notes due 2019 (1)
4.2
 
Form of Senior Notes due 2019 (1)
*10.1
 
Escrow Agreement, dated as of May 28, 2013, by and among Syniverse Holdings, Inc., Barclays Bank PLC as administrative agent, and Wilmington Trust, N.A. as escrow agent.
*10.2
 
Amendment, dated as of May 28, 2013, to the Commitment Letter by and among Syniverse Holdings, Inc., Barclays Bank PLC, Deutsche Bank Trust Company Americas, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank Securities Inc., Credit Suisse AG, Credit Suisse Securities (USA) LLC and Goldman Sachs Bank.
*10.3
 
Amendment, dated as of May 28, 2013, to the Credit Agreement by and among Syniverse Magellan Finance, LLC, Barclays Bank PLC, as administrative agent, and the other financial institutions and lenders from time to time party thereto.
*10.4
 
Amendment, dated as of June 21, 2013, to the Stock Purchase Agreement by and between Syniverse Holdings, Inc. and WP Roaming S.à.r.l.
*10.5
 
Incremental Commitment Amendment, dated as of June 28, 2013, to the Credit Agreement by and among Syniverse Holdings, Inc., Buccaneer Holdings Inc., Barclays Bank PLC as administrative agent, swing line lender and l/c issuer, and the other financial institutions and lenders from time to time party thereto.
*31.1
 
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.
*31.2
 
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.
**32.1
 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.
**32.2
 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.
***101
 
The following financial information from Syniverse Holdings, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2013, filed with the SEC, formatted in Extensible Business Reporting Language (XBRL): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statement of Changes in Stockholders Equity, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.
 
Notes:
(1)
Incorporated by reference from the Registrants’ Registration Statement on Form S-4 (Registration No. 333-176382) filed by the Company and the co-registrants named therein on August 18, 2011.
(2)
Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed by Syniverse Holdings, Inc. on March 6, 2013.
*
Filed herewith
**
Furnished herewith
***
Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act and shall not be deemed part of a registration statement, prospectus or other document filed under Sections 11 or 12 of the Securities Act, except as shall be expressly set forth by specific reference in such filings, and otherwise subject to liability under these sections.



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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of August, 2013.
 
SYNIVERSE HOLDINGS, INC.
By:
 
/S/  DAVID W. HITCHCOCK
 

David W. Hitchcock
Chief Financial and Administrative Officer
(Principal Financial Officer)
 
 
 
 

/S/  MARTIN A. PICCIANO 
 

Martin A. Picciano
Chief Accounting Officer
(Principal Accounting Officer)
    



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INDEX OF EXHIBITS
Exhibit No.
 
Description
3.1
 
Third Amended and Restated Certificate of Incorporation of Syniverse Holdings, Inc. (1)
3.2
 
Amended and Restated Bylaws of Syniverse Holdings, Inc. (1)
4.1
 
Indenture, dated as of December 22, 2010, as supplemented on January 13, 2011 by the First Supplemental Indenture, among Buccaneer Merger Sub, Inc. (which merged into Syniverse Holdings, Inc.) and Wilmington Trust, National Association, as successor by merger to Wilmington Trust FSB, as trustee, governing the 9.125% Senior Notes due 2019 (1)
4.2
 
Form of Senior Notes due 2019 (1)
*10.1
 
Escrow Agreement, dated as of May 28, 2013, by and among Syniverse Holdings, Inc., Barclays Bank PLC as administrative agent, and Wilmington Trust, N.A. as escrow agent.
*10.2
 
Amendment, dated as of May 28, 2013, to the Commitment Letter by and among Syniverse Holdings, Inc., Barclays Bank PLC, Deutsche Bank Trust Company Americas, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank Securities Inc., Credit Suisse AG, Credit Suisse Securities (USA) LLC and Goldman Sachs Bank.
*10.3
 
Amendment, dated as of May 28, 2013, to the Credit Agreement by and among Syniverse Magellan Finance, LLC, Barclays Bank PLC, as administrative agent, and the other financial institutions and lenders from time to time party thereto.
*10.4
 
Amendment, dated as of June 21, 2013, to the Stock Purchase Agreement by and between Syniverse Holdings, Inc. and WP Roaming S.à.r.l.
*10.5
 
Incremental Commitment Amendment, dated as of June 28, 2013, to the Credit Agreement by and among Syniverse Holdings, Inc., Buccaneer Holdings Inc., Barclays Bank PLC as administrative agent, swing line lender and l/c issuer, and the other financial institutions and lenders from time to time party thereto.
*31.1
 
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.
*31.2
 
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.
**32.1
 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.
**32.2
 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.
***101
 
The following financial information from Syniverse Holdings, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2013, filed with the SEC, formatted in Extensible Business Reporting Language (XBRL): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statement of Changes in Stockholders Equity, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.
 
Notes:
(1)
Incorporated by reference from the Registrants’ Registration Statement on Form S-4 (Registration No. 333-176382) filed by the Company and the co-registrants named therein on August 18, 2011.
(2)
Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed by Syniverse Holdings, Inc. on March 6, 2013.
*
Filed herewith
**
Furnished herewith
***
Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act and shall not be deemed part of a registration statement, prospectus or other document filed under Sections 11 or 12 of the Securities Act, except as shall be expressly set forth by specific reference in such filings, and otherwise subject to liability under these sections.


57