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TeleCommunication Systems 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
e10vq
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2010
OR
     
    TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-30821
TELECOMMUNICATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
     
MARYLAND
(State or Other Jurisdiction of
Incorporation or Organization)
  52-1526369
(I.R.S. Employer Identification No.)
     
275 West Street, Annapolis, MD
(Address of principal executive offices)
  21401
(Zip Code)
(410) 263-7616
(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 preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No þ
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
         
    Shares outstanding  
    as of October 31,  
Title of Each Class   2010  
Class A Common Stock, par value $0.01 per share
    47,180,810  
Class B Common Stock, par value $0.01 per share
    6,016,334  
 
     
Total Common Stock Outstanding
    53,197,144  
 
     
 
 

 


 

INDEX
TELECOMMUNICATION SYSTEMS, INC.
         
    Page  
       
       
    3  
    4  
    5  
    6  
    7  
    20  
    31  
    31  
       
    32  
    32  
    33  
    33  
    33  
    33  
    33  
    34  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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TeleCommunication Systems, Inc.
Consolidated Statements of Income
(amounts in thousands, except per share data)
(Unaudited)
                                 
    Three Months ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Revenue
                               
Services
  $ 66,195     $ 39,300     $ 189,468     $ 104,518  
Systems
    36,754       32,309       97,060       104,728  
 
                       
Total revenue
    102,949       71,609       286,528       209,246  
Direct costs of revenue
                               
Direct cost of services revenue
    38,977       21,245       109,195       58,434  
Direct cost of systems revenue, including amortization of software development costs of $2,327, $781, $6,934 and $2,103, respectively
    27,233       22,153       73,857       67,307  
 
                       
Total direct cost of revenue
    66,210       43,398       183,052       125,741  
Services gross profit
    27,218       18,055       80,273       46,084  
Systems gross profit
    9,521       10,156       23,203       37,421  
 
                       
Total gross profit
    36,739       28,211       103,476       83,505  
Operating costs and expenses
                               
Research and development expense
    7,523       5,823       22,612       15,612  
Sales and marketing expense
    5,988       3,579       17,934       11,742  
General and administrative expense
    10,060       7,665       28,324       22,955  
Depreciation and amortization of property and equipment
    2,572       1,571       6,805       4,459  
Amortization of acquired intangible assets
    1,161       222       3,504       381  
 
                       
Total operating costs and expenses
    27,304       18,860       79,179       55,149  
 
                       
Income from operations
    9,435       9,351       24,297       28,356  
Interest expense
    (2,299 )     (371 )     (6,888 )     (784 )
Amortization of debt discount and debt issuance expenses
    (187 )     (16 )     (563 )     (74 )
Other income, net
    996       43       1,981       327  
 
                       
Income before income taxes
    7,945       9,007       18,827       27,825  
Provision for income taxes
    (3,623 )     (3,596 )     (6,400 )     (10,941 )
 
                       
 
                               
Net income
  $ 4,322     $ 5,411     $ 12,427     $ 16,884  
 
                       
 
                               
Net income per share-basic
  $ 0.08     $ 0.11     $ 0.23     $ 0.36  
 
                       
Net income per share-diluted
  $ 0.08     $ 0.10     $ 0.22     $ 0.33  
 
                       
 
                               
Weighted average shares outstanding-basic
    53,127       48,233       52,902       46,865  
 
                       
Weighted average shares outstanding- diluted
    64,573       52,862       66,068       51,804  
 
                       
See accompanying Notes to Consolidated Financial Statements.

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TeleCommunication Systems, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share data)
                 
    September 30,     December 31,  
    2010     2009  
    (unaudited)          
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 82,176     $ 61,426  
Marketable securities
    30,641        
Accounts receivable, net of allowance of $427 in 2010 and $389 in 2009
    62,479       65,476  
Unbilled receivables
    28,156       23,783  
Inventory
    8,612       9,331  
Deferred income taxes
    6,992       9,507  
Receivable from settlement of patent matter
          15,700  
Income tax refund receivable
          5,438  
Other current assets
    6,090       8,945  
 
           
Total current assets
    225,146       199,606  
Property and equipment, net of accumulated depreciation and amortization of $53,743 in 2010 and $46,960 in 2009
    36,330       20,734  
Software development costs, net of accumulated amortization of $16,875 in 2010 and $9,941 in 2009
    40,086       45,384  
Acquired intangible assets, net of accumulated amortization of $5,030 in 2010 and $1,526 in 2009
    29,424       33,975  
Goodwill
    168,212       164,350  
Other assets
    8,120       8,176  
 
           
Total assets
  $ 507,318     $ 472,225  
 
           
 
               
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 51,064     $ 52,999  
Accrued payroll and related liabilities
    14,550       19,265  
Deferred revenue
    22,853       9,938  
Current portion of capital lease obligations and notes payable
    49,185       39,731  
 
           
Total current liabilities
    137,652       121,933  
 
               
Capital lease obligations and notes payable, less current portion
    143,707       143,316  
Deferred income taxes
    14,075       15,435  
Other long-term liability
    3,374       5,755  
Stockholders’ equity:
               
Class A Common Stock; $0.01 par value:
               
Authorized shares - 225,000,000; issued and outstanding shares of 47,156,997 in 2010 and 46,157,025 in 2009
    472       462  
Class B Common Stock; $0.01 par value:
               
Authorized shares - 75,000,000; issued and outstanding shares of 6,016,334 in 2010 and 6,276,334 in 2009
    60       63  
Additional paid-in capital
    293,966       283,733  
Accumulated other comprehensive income
    69       12  
Accumulated deficit
    (86,057 )     (98,484 )
 
           
Total stockholders’ equity
    208,510       185,786  
 
           
Total liabilities and stockholders’ equity
  $ 507,318     $ 472,225  
 
           
See accompanying Notes to Consolidated Financial Statements.

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TeleCommunication Systems, Inc.
Consolidated Statement of Stockholders’ Equity
(amounts in thousands, except share data)
(unaudited)
                                                 
                            Accumulated              
    Class A     Class B     Additional     Other              
    Common     Common     Paid-In     Comprehensive     Accumulated        
    Stock     Stock     Capital     Income     Deficit     Total  
Balance at January 1, 2010
  $ 462     $ 63     $ 283,733     $ 12     $ (98,484 )   $ 185,786  
Options exercised for the purchase of 554,108 shares of Class A Common Stock
    5             1,903                   1,908  
Issuance of 185,764 shares of Class A Common Stock under Employee Stock Purchase Plan
    2             895                   897  
Conversion of 260,000 shares of Class B Common Stock to Class A Common Stock
    3       (3 )                        
Issuance of shares of 15,107 Restricted Class A Common Stock
                17                   17  
Stock-based compensation expense
                7,418                   7,418  
Net unrealized gain on marketable securities
                      56             56  
Foreign currency translation adjustment
                      1             1  
Net income for the nine-months ended September 30, 2010
                            12,427       12,427  
 
                                   
Balance at September 30, 2010
  $ 472     $ 60     $ 293,966     $ 69     $ (86,057 )   $ 208,510  
 
                                   
See accompanying Notes to Consolidated Financial Statements.

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TeleCommunication Systems, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
Operating activities:
               
Net Income
  $ 12,427     $ 16,884  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of property and equipment
    6,805       4,459  
Amortization of acquired intangible assets
    3,504       381  
Amortization of software development costs
    6,934       2,103  
Deferred tax provision
    6,400       9,987  
Stock-based compensation expense
    7,418       3,546  
Impairment of capitalized software
          763  
Amortization of debt discount and debt issuance expenses
    563       74  
Impairment of marketable securities
    225       15  
Amortization of discount on marketable securities
    121        
Other non-cash adjustments
    87       37  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    2,853       19,390  
Unbilled receivables
    (4,577 )     117  
Inventory
    719       (6,164 )
Other current assets
    21,962       54  
Other assets
    (169 )     (2,739 )
Accounts payable and accrued expenses
    (4,589 )     (7,849 )
Accrued payroll and related liabilities
    (5,601 )     (4,844 )
Other liabilities
    (2,816 )      
Deferred revenue
    12,915       5,334  
 
           
Subtotal — Changes in operating assets and liabilities
    20,697       3,299  
 
           
Net cash provided by operating activities
    65,181       41,548  
Investing activities:
               
Purchases of marketable securities
    (30,706 )      
Acquisitions, net of cash acquired
          (15,000 )
Purchases of property and equipment
    (14,541 )     (937 )
Capitalized software development costs
    (3,973 )     (823 )
 
           
Net cash used in investing activities
    (49,220 )     (16,760 )
Financing activities:
               
Proceeds from issuance of long-term debt
    10,000       20,000  
Payments on long-term debt and capital lease obligations
    (8,015 )     (10,224 )
Proceeds from exercise of warrants
          1,680  
Proceeds from exercise of employee stock options and sale of stock
    2,805       4,075  
 
           
Net cash provided by financing activities
    4,790       15,531  
 
           
Net increase in cash
    20,751       40,319  
Cash and cash equivalents at the beginning of the period
    61,425       38,977  
 
           
Cash and cash equivalents at the end of the period
  $ 82,176     $ 79,296  
 
           
See accompanying Notes to Consolidated Financial Statements.

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TeleCommunication Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2010
(amounts in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
     Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. These consolidated financial statements should be read in conjunction with our audited financial statements and related notes included in our 2009 Annual Report on Form 10-K. The terms “TCS”, “we”, “us” and “our” as used in this Form 10-Q refer to TeleCommunication Systems, Inc. and its subsidiaries as a combined entity, except where it is made clear that such terms mean only TeleCommunication Systems, Inc.
     Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
     Marketable Securities. The Company’s marketable securities are classified as available-for-sale. The Company’s primary objectives when investing are to preserve principal, maintain liquidity, and obtain higher yield. The Company’s intent is not specifically to invest and hold securities with longer term maturities. The Company has the ability and intent, if necessary, to liquidate any of these investments in order to meet the Company’s operating needs within the next twelve months. The securities are carried at fair market value based on quoted market price with net unrealized gains and losses in stockholders’ equity as a component of accumulated other comprehensive income. If the Company determines that a decline in fair value of the marketable securities is other than temporary, a realized loss would be recognized in earnings. Gains or losses on securities sold are based on the specific identification method and are recognized in earnings, see Note 7.
     Goodwill. Goodwill represents the excess of cost over the fair value of assets of acquired businesses. Goodwill is not amortized, but instead is evaluated annually for impairment using a discounted cash flow model and other measurements of fair value such as market comparable transactions, etc. The authoritative guidance for the goodwill impairment model includes a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the reporting units that have goodwill assigned to them. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of the impairment. In the second step, a fair value for goodwill is estimated, based in part on the fair value of the reporting unit used in the first step, and is compared to its carrying value. The shortfall of the fair value below carrying value, if any, represents the amount of goodwill impairment.
     The Company assesses goodwill for impairment in the fourth quarter of each fiscal year, or sooner should there be an indicator of impairment. The Company periodically analyzes whether any such indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators include a sustained, significant decline in the Company’s stock price and market capitalization, a decline in the Company’s expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower growth rate, among others. As of September 30, 2010, the Company has not identified any indicators of impairment with respect to its goodwill.
     Other Comprehensive Income/(Loss). Comprehensive income/(loss) includes changes in the equity of a business during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income/loss refers to revenue, expenses, gains and losses that under U.S. generally accepted accounting principles are included in comprehensive income, but excluded from net income. For operations outside the U.S. that prepare financial statements in currencies other than the U.S. dollar, results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at end-of-period exchange rates. Translation adjustments for our foreign subsidiary are included as a component of accumulated other comprehensive income in stockholders’ equity. Also included are any unrealized gains or losses on marketable securities that are classified as available-for-sale.
     Deferred Compensation Plan. During 2009, the Company adopted a non-qualified deferred compensation arrangement to fund certain supplemental executive retirement and deferred income plans. Under the terms of the arrangement, the participants may elect to defer the receipt of a portion of their compensation and each participant directs the manner in which their investments are deemed invested. The funds are held by the Company in a rabbi trust which include fixed income funds, equity securities, and money market accounts, or other investments for which there is an active quoted market. Funds of $1.1 million are included in Other assets and funds

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of $1.0 million are included in Other long-term liability on the Consolidated Balance Sheet. Company contributions were made to the plan in 2009, but not in 2010.
     Stock-Based Compensation. We have two stock-based employee compensation plans: our Amended and Restated Stock Incentive Plan (the “Stock Incentive Plan”) and our Second Amended and Restated Employee Stock Purchase Plan (the “ESPP”). In the past, we have issued restricted stock to directors and certain executives. We record compensation expense for all stock-based compensation plans using the fair value method prescribed by Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 718-10. Our stock-based compensation expense has been allocated to direct cost of revenue, research and development expense, sales and marketing expense, and general and administrative expense as detailed in Note 3.
     Earnings per share. Basic income per common share is based upon the average number of shares of common stock outstanding during the period. Stock options to purchase approximately 11.1 million shares for the three-months ended September 30, 2010 and 7.8 million shares for the nine-months ended September 30, 2010, and approximately 2.1 million shares for both the three- and nine-months ended September 30, 2009 were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive. A reconciliation of basic to diluted weighted average common shares outstanding is as follows:
                                 
    Three Months     Nine Months  
    Ended     Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Numerator:
                               
Net income, basic
  $ 4,322     $ 5,411     $ 12,427     $ 16,884  
Adjustment for assumed dilution:
                               
Interest on convertible debt, net of taxes
    757             2,237        
 
                       
Net income, diluted
  $ 5,079     $ 5,411     $ 14,664     $ 16,884  
 
                       
 
                               
Denominator:
                               
Total basic weighted-average common shares outstanding
    53,127       48,233       52,902       46,865  
Effect of dilutive stock options based on treasury stock method
    1,444       4,629       3,164       4,939  
Effect of dilutive 4.5% convertible debt, based on “if converted” method
    10,002             10,002        
 
                       
Weighted average diluted shares
    64,573       52,862       66,068       51,804  
 
                       
 
                               
Basic earnings per common share:
                               
Net income per share — basic
  $ 0.08     $ 0.11     $ 0.23     $ 0.36  
 
                       
Diluted earnings per common share:
                               
Net income per share-diluted
  $ 0.08     $ 0.10     $ 0.22     $ 0.33  
 
                       
     Income Taxes. Income tax amounts and balances are accounted for using the asset and liability method of accounting for income taxes as prescribed by ASC 740. Under this method, deferred income tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
     The Company recognizes the benefits of tax positions in the financial statements which are more likely than not to be sustained upon examination by the taxing authority and satisfy the appropriate measurement criteria. If the recognition threshold is met, the tax benefit is generally measured and recognized as the tax benefit having the highest likelihood, based on our judgment, of being realized upon ultimate settlement with the taxing authority, assuming full knowledge of the position and all relevant facts. At September 30, 2010, we had unrecognized tax benefits totaling approximately $1.7 million. The determination of these unrecognized amounts requires significant judgments and interpretation of complex tax laws. Different judgments or interpretations could result in material changes to the amount of unrecognized tax benefits.
     Recent Accounting Pronouncements.
     In October 2009, the FASB issued Accounting Standards Update (“ASU”) ASU 2009-14 to ASC topic 985, “Certain Revenue Arrangements That Include Software Elements.” that removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-14 will be applied prospectively for new or materially modified arrangements in fiscal years beginning after June 15, 2010 and early adoption is permitted. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.
     In October 2009, the FASB issued ASU 2009-13 to ASC topic 605 “Revenue Recognition — Multiple Deliverable Revenue Arrangements.” This update addresses how to determine whether an arrangement involving multiple deliverables contains one or more than one unit of accounting, and how the arrangement consideration should be allocated among the separate units of accounting. This update also established a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each

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deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific evidence is not available, or estimated selling price if neither vendor — specified or third-party evidence is available. ASU 2009-13 may be applied retrospectively or prospectively for new or materially modified arrangements in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.
     In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements”. This update requires additional disclosures and clarifies existing disclosure requirements about fair value measurement as set forth in ASC Topic 820, Fair Value Measurements and Disclosures. We implemented the new disclosures and clarifications of existing disclosure requirements under ASU 2010-06 effective with the first quarter of 2010, except for certain disclosure requirements regarding activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010.
     In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements”, which is included in the FASB ASC Topic 855 (Subsequent Events). ASU 2010-09 clarifies that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued. ASU 2010-09 is effective upon the issuance of the final update and did not have a significant impact on the Company’s financial statements.
2. Acquisitions
     During 2009 the Company acquired four businesses. These acquisitions were accounted for using the acquisition method; accordingly, their total estimated purchase prices were allocated to the net tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values as of the effective dates of the acquisitions. The allocations of purchase price were based upon management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, and such estimates and assumptions are subject to change as the Company finalizes the allocation for each of the acquisitions.
     On May 19, 2009, the Company acquired substantially all the assets of LocationLogic, LLC (“LocationLogic”), formerly Autodesk, Inc’s location services business. The LocationLogic business is reported as part of our commercial services. The purchase price of the LocationLogic’s assets was $25 million, comprised of $15 million cash and $10 million, or approximately 1.4 million shares, in the Company’s Class A Common Stock.
     The following table summarizes the final purchase price allocation of the fair values of the assets acquired and liabilities assumed at the date of the acquisition:
         
Assets:
       
Accounts receivable, net
  $ 145  
Unbilled accounts receivable
    1,081  
Other current assets
    205  
Property and equipment
    865  
Acquired technology and software development costs
    3,703  
Acquired intangible assets
    8,720  
Goodwill
    12,206  
 
     
Total assets
    26,925  
Liabilities:
       
Accounts payable and accrued expenses
    1,273  
Accrued payroll and related liabilities
    325  
 
     
Total liabilities
    1,598  
 
     
Fair value of net assets acquired
  $ 25,327  
 
     
     On November 3, 2009, the Company purchased all of the outstanding stock of Solvern Innovations, Inc. (“Solvern”), a communications technology company focused on cyber-security. The Solvern business is reported as part of our government services. Solvern’s purchase consideration included cash, approximately 1 million shares of the Company’s Class A common stock, and contingent consideration based on the business’s gross profit in 2010 and 2011.
     On November 16, 2009, the Company completed the acquisition of substantially all of the assets of Sidereal Solutions, Inc. (“Sidereal”), a satellite communications technology engineering, operations and maintenance support service company. The Sidereal business is reported as part of our government services. Consideration for the purchase of the Sidereal assets included cash and approximately 244,200 shares of the Company’s Class A common stock, and contingent consideration based on the business’s gross profit in 2010 and 2011.

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     The total estimated purchase price for the three acquisitions described above was $70 million. Approximately $49 million was preliminarily allocated to goodwill, approximately $0.1 million for other current and long-term assets net of liabilities, and $21 million to acquired definite-lived intangible assets, consisting of the value assigned to customer relationships of $3.7 million for LocationLogic, $7.3 million for Solvern and $2.0 million for Sidereal and developed technology of $8.7 million classified as capitalized software development costs for LocationLogic.
     We also completed the acquisition of Networks in Motion, Inc. (“NIM”) on December 15, 2009. Pursuant to the merger agreement, TCS issued former NIM shareholders approximately $110 million in cash, $40 million in promissory notes, and approximately 2.2 million shares of the Company’s common stock valued at $20 million. The promissory notes bear simple interest at 6% and are due in three installments: $30 million on the 12 month anniversary of the closing, $5 million on the 18 month anniversary of the closing, and $5 million on the 24 month anniversary of the closing, subject to escrow adjustments. For $20 million of the obligation due in December 2010, the Company has the option to settle using common stock, but the Company currently plans to satisfy this debt for cash.
     Of the total estimated NIM purchase price of $170 million, approximately $113.9 million was preliminarily allocated to goodwill and $54.5 million to acquired definite-lived intangible assets, consisting of the value assigned to NIM’s customer relationships of $20.1 million, and developed technology of $34.4 million classified as capitalized software development costs and approximately $1.6 million for other current and long-term assets, net of liabilities.
     In May 2010, we made final adjustments to the preliminary purchase price allocations for LocationLogic, detailed above. During the nine months ended September 30, 2010, we also made adjustments to goodwill relating to the preliminary purchase price allocations for the other three 2009 acquisitions for $3.5 million. These adjustments were recorded as a result information not initially available and primarily related to 2009 deferred tax asset adjustments and indemnification costs relating to pre-acquisition third-party intellectual claims. Prior to the end of the measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively. The measurement period is not to exceed 12 months from the acquisition dates.
     The unaudited pro forma financial information for the three and nine-months ended September 30, 2009 in the table below summarizes the consolidated results of operations for TCS and NIM (which was assessed as a significant and material acquisition for purposes of unaudited pro forma financial information disclosure), as though NIM was acquired at the beginning of 2009.
     The following pro forma information is presented to include the effects of the acquisition of NIM using the acquisition method of accounting and the related TCS Class A common stock and promissory notes issued as part of consideration. The unaudited pro forma financial information is presented to also include the effects of $103.5 million Convertible Notes offering.
     The pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of TCS that would have been reported had the acquisition been completed as of the dates presented, and should not be construed as representative of the future consolidated results of operations or financial condition of a consolidated entity.
     The following unaudited pro forma financial information is presented below for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions and any borrowings undertaken to finance the acquisition had taken place at the beginning of 2009.
                 
    Three Months     Nine Months  
    ended     ended  
    September 30,     September 30,  
Pro forma information   2009     2009  
Revenue
  $ 93,988     $ 267,354  
Net income
  $ 8,575     $ 22,186  
 
               
Basic earnings per share
  $ 0.17     $ 0.45  
Diluted earnings per share
  $ 0.15     $ 0.40  
3. Stock-Based Compensation
     We recognize compensation expense net of estimated forfeitures over the requisite service period for grants under our option plan, which is generally the vesting period of 5 years. The Company estimates the fair value of each stock option award on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on historical volatility of the Company’s stock. The Company estimates forfeitures based on historical experience and the expected term of the options granted are derived from historical

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data on employee exercises. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The Company has not paid and does not anticipate paying dividends in the near future.
     We also recognize non-cash stock-based compensation expense for restricted stock issued to directors and certain key executives. The restrictions expire at the end of one year for directors and expire in annual increments over three years for executives and are based on continued employment. We had 53 shares and 30 shares of restricted stock outstanding, respectively, as of September 30, 2010 and September 30, 2009. We expect to record future stock-based compensation expense of $163 as a result of the restricted stock grants outstanding as of September 30, 2010 that will be recognized over the remaining vesting period in 2010 and 2011.
     The material components of our stock-based compensation expense are as follows:
                                 
    Three Months     Nine Months  
    Ended     Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Stock-based compensation:
                               
Stock options granted at fair value
  $ 1,942     $ 1,290     $ 7,083     $ 3,364  
Restricted stock
    54       52       176       117  
Employee stock purchase plan
    51       21       159       65  
 
                       
Total stock-based compensation expense
  $ 2,047     $ 1,363     $ 7,418     $ 3,546  
 
                       
     Stock-based compensation is included in our operations in the accompanying Consolidated Statements of Income as follows:
                                 
    Three Months     Nine Months  
    Ended     Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Stock-based compensation:
                               
Direct cost of revenue
  $ 1,287     $ 878     $ 4,665     $ 2,284  
Research and development expense
    534       317       1,936       826  
Sales and marketing expense
    125       110       451       286  
General and administrative expense
    101       58       366       150  
 
                       
Total stock-based compensation included in operating expenses
  $ 2,047     $ 1,363     $ 7,418     $ 3,546  
 
                       
     A summary of our stock option activity and related information for the nine-months ended September 30, 2010 is as follows:
                 
            Weighted  
            Average  
    Number of     Exercise  
(Share amounts in thousands)   Options     Price  
Outstanding, beginning of year
    14,612     $ 5.32  
Granted
    2,557     $ 7.05  
Exercised
    (554 )   $ 3.47  
Expired
    (185 )   $ 6.10  
Forfeited
    (920 )   $ 8.04  
 
             
Outstanding, at September 30, 2010
    15,510     $ 5.50  
 
             
Exercisable, at September 30, 2010
    8,320     $ 4.05  
 
             
Vested and expected to vest at September 30, 2010
    14,409     $ 5.35  
 
             
Weighted-average remaining contractual life of options outstanding at September 30, 2010
  6.6 years        
 
             
                 
    Nine Months  
    September 30,  
    2010     2009  
Estimated weighted-average grant-date fair value of options granted during the period
  $ 3.88     $ 4.56  
 
           
Total fair value of options vested during the period
  $ 11,212     $ 4,131  
 
           
Intrinsic value of options exercised during the period
  $ 2,316     $ 4,889  
 
           

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     Exercise prices for options outstanding at September 30, 2010 ranged from $1.07 to $9.86 as follows (all share amounts in thousands):
                                                 
                                            Weighted-Average  
                    Weighted-Average                     Remaining  
            Weighted-Average     Remaining             Weighted-Average     Contractual Life  
            Exercise Prices     Contractual Life     Options     Exercise Prices     of Options  
    Options     of Options     of Options     Vested and     of Options Vested     Vested and  
Exercise Prices   Outstanding     Outstanding     Outstanding (years)     Exercisable     and Exercisable     Exercisable (years)  
$1.07 – $1.84
    78     $ 1.70       2.30       78     $ 1.70       2.30  
$1.92 – $2.99
    2,372     $ 2.47       5.05       2,224     $ 2.47       5.02  
$3.05 – $4.68
    5,628     $ 3.41       5.85       3,830     $ 3.34       4.77  
$4.83 – $7.45
    2,201     $ 6.74       4.53       1,784     $ 6.73       3.62  
$7.95 – $9.86
    5,231     $ 8.66       9.01       404     $ 8.17       8.05  
 
                                           
 
    15,510                       8,320                  
 
                                           
     As of September 30, 2010, the aggregate intrinsic value of options outstanding was $6,486 and the aggregate intrinsic value of options vested and exercisable was $5,564. As of September 30, 2010, we estimate that we will recognize $19,700 in expense for outstanding, unvested options over their weighted average remaining vesting period of 3.5 years, of which we estimate $2,900 will be recognized during the remainder of 2010.
     In using the Black-Scholes model to calculate the fair value of our stock options, our assumptions were as follows:
                 
    Nine Months Ended September 30,  
    2010     2009  
Expected life (in years)
    5.5       5.5  
Risk-free interest rate(%)
    1.9%-2.8 %     1.65%-2.61 %
Volatility(%)
    59%-60 %     63%-64 %
Dividend yield(%)
    0 %     0 %
4. Supplemental Disclosure of Cash Flow Information
     Property and equipment acquired under capital leases totaled $2,153 and $7,859 during the three- and nine-months ended September 30, 2010, respectively. We acquired $913 and $5,492 of property under capital leases during the three- and nine-months ended September 30, 2009, respectively.
     Interest paid totaled $598 and $3,204 during the three- and nine-months ended September 30, 2010, respectively. We paid $371 and $784 in interest for the three- and nine-months ended September 30, 2009, respectively.
     Income taxes paid totaled $806 and $2,978 during the three- and nine-months ended September 30, 2010 and were $221 and $1,100 for the three- and nine-months ended September 30, 2009, respectively.
5. Fair Value Measurements
     ASC 820-10 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flows), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
      Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
      Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
      Level 3: Observable inputs that reflect the reporting entity’s own assumptions.

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     Our population of assets and liabilities subject to fair value measurements on a recurring basis and the necessary disclosures are as follow:
                                 
    Fair Value     Fair Value Measurements at  
    as of     9/30/2010  
    9/30/2010     Using Fair Value Hierarchy  
    Total     Level 1     Level 2     Level 3  
Assets
                               
Cash and cash equivalents
  $ 82,176     $ 82,176     $     $  
Marketable securities
    30,641       30,641              
Deferred compensation plan investments
    1,143       1,143              
 
                       
Assets at Fair Value
  $ 113,960     $ 113,960     $     $  
 
                       
Liabilities
                               
Deferred compensation
  $ 989     $ 989     $     $  
Contractual acquisition earnouts
    5,680                   5,680  
 
                       
Liabilities at Fair Value
  $ 6,669     $ 989     $     $ 5,680  
 
                       
     The Company holds marketable securities that are investment grade and are classified as available-for-sale. The securities include corporate bonds, commercial paper, mortgage and asset backed securities that are carried at fair market value based on quoted market price, see Note 7. The Company holds trading securities as part of a rabbi trust to fund certain supplemental executive retirement plans and deferred income plans. The funds held are all managed by a third party, and include fixed income funds, equity securities, and money market accounts, or other investments for which there is an active quoted market. The related deferred compensation liabilities are valued based on the underlying investment selections held in each participant’s account. The contractual acquisition earnouts were part of the consideration paid for certain 2009 acquisitions and were initially valued at the acquisition date at $7,753. The fair value of the earnouts is based on probability-weighted payouts under different scenarios, discounted using a discount rate commensurate with the risk.
     The following table provides a summary of the changes in the Company’s contractual acquisition earnouts measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three-months ended September 30, 2010:
         
    Fair Value  
    Measurements  
    Using Significant  
    Unobservable  
    Inputs (level 3)  
Balance at January 1, 2010
  $ 7,753  
Fair value adjustment recognized in earnings
    (2,073 )
 
     
Balance at September 30, 2010
  $ 5,680  
 
     
     The Company’s long-term debt consists of borrowings under a commercial bank term loan agreement, 4.5% convertible senior notes, and promissory notes payable to sellers of Networks in Motion, Inc., see Note 12. The long-term debt is currently reported at the borrowed amount outstanding and the fair value of the Company’s long-term debt approximates its carrying amount.
     The Company’s assets and liabilities that are measured at fair value on a non-recurring basis include long-lived assets, intangible assets, and goodwill. These items are recognized at fair value when they are considered to be other than temporarily impaired. In the first nine-months ending September 30, 2010, there were no required fair value measurements for assets and liabilities measured at fair value on a non-recurring basis.
6. Segment Information
Our two operating segments are the Commercial and Government Segments.
     Our Commercial Segment products and services enable wireless carriers to deliver short text messages, location-based information, internet content, and other enhanced communication services to and from wireless phones. Our Commercial Segment also provides E9-1-1 call routing, mobile location-based applications, and inter-carrier text message technology. Customers use our software functionality through connections to and from our network operations centers, paying us monthly fees based on the number of subscribers, cell sites, call center circuits, or message volume. We also provide hosted services under contracts with wireless carrier networks, as well as VoIP service providers.
     Our Government Segment provides communication systems integration, information technology services, and software solutions to the U.S. Department of Defense and other government customers. We also own and operate secure satellite teleport facilities, and resell access to satellite airtime ( known as space segment.) We design, furnish, install and operate wireless and data network communication systems, including our SwiftLink® deployable communication systems which integrate high speed, satellite, and internet protocol technology, with secure Government-approved cryptologic devices.

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     Management evaluates segment performance based on gross profit. We do not maintain information regarding segment assets. Accordingly, asset information by reportable segment is not presented.
     The following table sets forth results for our reportable segments for the three- and nine-months ended September 30, 2010 and 2009, respectively. All revenues reported below are from external customers. A reconciliation of segment gross profit to net loss for the respective periods is also included below:
                                                 
    Three Months Ended September 30,  
    2010     2009  
    Comm.     Gvmt.     Total     Comm.     Gvmt.     Total  
Revenue
                                               
Services
  $ 42,990     $ 23,205     $ 66,195     $ 23,619     $ 15,681     $ 39,300  
Systems
    11,615       25,139       36,754       9,512       22,797       32,309  
 
                                   
Total revenue
    54,605       48,344       102,949       33,131       38,478       71,609  
 
                                   
Direct costs of revenue
                                               
Direct cost of services
    22,872       16,105       38,977       8,770       12,475       21,245  
Direct cost of systems
    3,685       23,548       27,233       2,543       19,610       22,153  
 
                                   
Total direct costs
    26,557       39,653       66,210       11,313       32,085       43,398  
 
                                   
Gross profit
                                               
Services gross profit
    20,118       7,100       27,218       14,849       3,206       18,055  
Systems gross profit
    7,930       1,591       9,521       6,969       3,187       10,156  
 
                                   
Total gross profit
  $ 28,048     $ 8,691     $ 36,739     $ 21,818     $ 6,393     $ 28,211  
 
                                   
                                                 
    Nine Months Ended September 30,  
    2010     2009  
    Comm.     Gvmt.     Total     Comm.     Gvmt.     Total  
Revenue
                                               
Services
  $ 123,591     $ 65,877     $ 189,468     $ 62,074     $ 42,444     $ 104,518  
Systems
    26,930       70,130       97,060       29,706       75,022       104,728  
 
                                   
Total revenue
    150,521       136,007       268,528       91,780       117,466       209,246  
 
                                   
Direct costs of revenue
                                               
Direct cost of services
    62,606       46,589       109,195       25,337       33,097       58,434  
Direct cost of systems
    10,574       63,283       73,857       6,874       60,433       67,307  
 
                                   
Total direct costs
    73,180       109,872       183,052       32,211       93,530       125,741  
 
                                   
Gross profit
                                               
Services gross profit
    60,985       19,288       80,273       36,737       9,347       48,084  
Systems gross profit
    16,356       6,847       23,203       22,832       14,589       37,421  
 
                                   
Total gross profit
  $ 77,341     $ 26,135     $ 103,476     $ 59,569     $ 23,936     $ 83,505  
 
                                   
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Total segment gross profit
  $ 36,739     $ 28,211     $ 103,476     $ 83,505  
Research and development expense
    (7,523 )     (5,823 )     (22,612 )     (15,612 )
Sales and marketing expense
    (5,988 )     (3,579 )     (17,934 )     (11,742 )
General and administrative expense
    (10,060 )     (7,665 )     (28,324 )     (22,955 )
Depreciation and amortization of property and equipment
    (2,572 )     (1,571 )     (6,805 )     (4,459 )
Amortization of acquired intangible assets
    (1,161 )     (222 )     (3,504 )     (381 )
Interest expense
    (2,299 )     (371 )     (6,888 )     (784 )
Amortization debt discount and debt issuance expenses
    (187 )     (16 )     (563 )     (74 )
Other income, net
    996       43       1,981       327  
 
                       
Income before income taxes
    7,945       9,007       18,827       27,825  
Provision for income taxes
    (3,623 )     (3,596 )     (6,400 )     (10,941 )
 
                       
Net income
  $ 4,322     $ 5,411     $ 12,427     $ 16,884  
 
                       
7. Marketable Securities
     The Company invests in marketable securities that are investment grade and are classified as available-for-sale. The Company’s primary objectives when investing are to preserve principal, maintain liquidity, and obtain higher yield. The Company’s intent is not specifically to invest and hold securities with longer term maturities. The Company has the ability and intent, if necessary, to liquidate any of these investments in order to meet the Company’s operating needs within the next twelve months. The securities are carried at fair market value based on quoted market price with net unrealized gains and losses in stockholders’ equity as a component of accumulated other comprehensive income. The Company did not hold any marketable securities as at December 31, 2009.

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     If the Company determines that a decline in fair value of the marketable securities is other than temporary, a realized loss would be recognized in earnings. Gains or losses on securities sold are based on the specific identification method and are recognized in earnings.
     The following is a summary of available-for-sale investments, at fair value:
                                 
    Adjusted Cost     Gross Unrealized     Gross Unrealized     Estimated  
    Basis     Gains     Losses     Fair Value  
Corporate bonds
  $ 22,109     $ 77     $ 7     $ 22,179  
Mortgage-backed and asset-backed securities
    5,224       2       17       5,209  
Agency bonds
    2,003       1             2,004  
Commercial paper
    1,249                   1,249  
 
                       
Total marketable securities
  $ 30,585     $ 80     $ 24     $ 30,641  
 
                       
     The following table summarizes the amortized cost and estimated fair value of available-for-sale investments by contractual maturity at September 30, 2010.
                 
    Cost     Fair Value  
Due within 1 year or less
  $ 7,053     $ 7,058  
Due within 1-2 years
    8,042       8,057  
Due within 2-3 years
    15,490       15,526  
 
           
 
  $ 30,585     $ 30,641  
 
           
8. Inventory
     Inventory consisted of the following:
                 
    Sept. 30,     Dec. 31,  
    2010     2009  
Component parts
  $ 3,436     $ 5,658  
Finished goods
    5,176       3,673  
 
           
Total inventory at period end
  $ 8,612     $ 9,331  
 
           
9. Acquired Intangible Assets and Capitalized Software Development Costs
     Our acquired intangible assets and capitalized software development costs of our continuing operations consisted of the following:
                                                 
    September 30, 2010     December 31, 2009  
    Gross                     Gross              
    Carrying     Accumulated             Carrying     Accumulated        
    Amount     Amortization     Net     Amount     Amortization     Net  
Acquired intangible assets:
                                               
Customer lists and other
  $ 12,951     $ 2,484     $ 10,467     $ 13,735     $ 1,151     $ 12,584  
Customer relationships
    20,138       2,148       17,990       20,402       113       20,289  
Trademarks and patents
    1,364       398       966       1,364       262       1,102  
Software development costs, including acquired technology
    56,960       16,874       40,086       55,325       9,941       45,384  
 
                                   
Total acquired intangible assets and software dev. costs
  $ 91,413     $ 21,904     $ 69,509     $ 90,826     $ 11,467     $ 79,359  
 
                                   
         
Estimated future amortization expense:
       
Three Months ending December 31, 2010
  $ 3,507  
Year ending December 31, 2011
    13,914  
Year ending December 31, 2012
    13,750  
Year ending December 31, 2013
    13,699  
Year ending December 31, 2014
    11,997  
Thereafter
    12,642  
 
     
 
  $ 69,509  
 
     
     For the three- and nine-months ended September 30, 2010, we capitalized $1,801 and $3,973, respectively, of software development costs of continuing operations for certain software projects after the point of technological feasibility had been reached but before the products were available for general release. Accordingly, these costs have been capitalized and are being amortized over their estimated useful lives beginning when the products are available for general release. The capitalized costs relate to our location-based software. We believe that these capitalized costs will be recoverable from future cash flows generated by these products. For the three- and nine-months ended September 30, 2009 we capitalized $188 and $823 of software development costs.
     Preliminary gross carrying amounts have been adjusted during the nine-months ended September 30, 2010 as a result of information not initially available. Prior to the end of the measurement period for the finalized purchase price allocation, which is 12 months from

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the acquisition dates, if information becomes available which would indicate adjustments are required to the purchase price these adjustments will be included in the purchase price allocation retrospectively.
     We routinely update our estimates of the recoverability of the software products that have been capitalized. Management uses these estimates as the basis for evaluating the carrying values and remaining useful lives of the respective assets.
10. Concentrations of Credit Risk and Major Customers
     Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of accounts receivable and unbilled receivables. Accounts receivable are generally due within thirty days and no collateral is required. We maintain allowances for potential credit losses and historically such losses have been within our expectations.
     The following tables summarize revenue and accounts receivable concentrations from our significant customers:
                                         
                            % of Total  
            % of Total Revenue For     Revenue For  
            the Three     the Nine  
            Months Ended     Months Ended  
            September 30,     September 30,  
Customer   Segment     2010     2009     2010     2009  
Federal Agencies
  Government     35 %     42 %     35 %     42 %
Customer A
  Commercial     28 %     24 %     28 %     24 %
                         
            As of September 30, 2010  
            Accounts     Unbilled  
Customer   Segment     Receivable     Receivables  
U.S. Government
  Government     21 %     51 %
Customer A
  Commercial     38 %     26 %
     
11.   Lines of Credit
     We have maintained a line of credit arrangement with our principal bank since 2003. On December 31, 2009, we amended our June 2009 Third Amended and Restated Loan Agreement with our principal bank. The amended agreement increased the line of credit to a $35,000 revolving line of credit (the “Line of Credit,”) from the June 2009 amount of $30,000. The Line of Credit maturity date is June 25, 2012. Our potential borrowings under the Line of Credit are reduced by the amounts of cash management services sublimit which totaled $1,525 at September 30, 2010. As of September 30, 2010 and December 31, 2009, there were no borrowings on the line of credit and we had approximately $33,500 and $33,400, respectively, of unused borrowing availability under this line of credit.
     The Line of Credit includes three sub-facilities: (i) a letter of credit sub-facility pursuant to which the bank may issue letters of credit, (ii) a foreign exchange sub-facility pursuant to which the Company may purchase foreign currency from the bank, and (iii) a cash management sub-facility pursuant to which the bank may provide cash management services (which may include, among others, merchant services, direct deposit of payroll, business credit cards and check cashing services) and in connection therewith make loans and extend credit to the Company. The principal amount outstanding under the Line of Credit accrues interest at a floating per annum rate equal to the rate which is the greater of (i) 4% per annum, or (ii) the bank’s most recently announced “prime rate,” even if it is not the bank’s lowest prime rate. The principal amount outstanding under the Line of Credit is payable either prior to or on the maturity date and interest on the Line of Credit is payable monthly.
12. Long-term Debt
     Long-term debt consisted of the following:
                 
    Sept. 30,     Dec. 31,  
    2010     2009  
4.5% Convertible notes dated November 16, 2009
  $ 103,500     $ 103,500  
6.0% Promissory note payable to NIM sellers dated December 16, 2009
    40,000       40,000  
Term loan from commercial bank dated December 31, 2009
    25,000       30,000  
Term loan from commercial bank dated September 30, 2010
    10,000        
 
           
Total long-term debt
    178,500       173,500  
 
               
Less: current portion
    (44,333 )     (36,667 )
 
           
Non-current portion of long-term debt
  $ 134,167     $ 136,833  
 
           

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     Aggregate maturities of long-term debt (including interest) at September 30, 2010 are as follows:
         
2010
  $ 37,450  
2011
    25,868  
2012
    14,848  
2013
    14,428  
2014
    112,886  
 
     
Total long-term debt
  $ 205,480  
 
     
     During 2009, the Company entered into multiple financing agreements to fund corporate initiatives.
     On November 10, 2009, the Company sold $103.5 million aggregate principal amount of 4.5% Convertible Senior Notes (the “Notes”) due 2014. The Notes are not registered and were offered under Rule 144A of the Securities Act of 1933, as amended. Concurrent with the issuance of the Notes, we entered into convertible note hedge transactions and warrant transactions, also detailed below, that are expected to reduce the potential dilution associated with the conversion of the Notes. Holders may convert the Notes at their option on any day prior to the close of business on the second “scheduled trading day” (as defined in the Indenture) immediately preceding November 1, 2014. The conversion rate will initially be 96.637 shares of Class A common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $10.35 per share of Class A common stock. The effect of the convertible note hedge and warrant transactions, described below, is an increase in the effective conversion premium of the Notes to 60% above the November 10th closing price, to $12.74 per share.
     The convertible note hedge transactions cover, subject to adjustments, 10,001,303 shares of Class A common stock. Also, in connection with the sale of the Notes, the Company entered into separate warrant transactions with certain counterparties (collectively, the “Warrant Dealers”). The Company sold to the Warrant Dealers the warrants to purchase in the aggregate 10,001,303 shares of Class A common stock, subject to adjustments, at an exercise price of $12.74 per share of Class A common stock. The Company offered and sold the warrants to the Warrant Dealers in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.
     The convertible note hedge and the warrant transactions are separate transactions, each entered into by the Company with the counterparties, which are not part of the terms of the Notes and will not affect the holders’ rights under the Notes. The cost of the convertible note hedge transactions to the Company was approximately $23.8 million, and has been accounted for as an equity transaction in accordance with ASC 815-40, Contracts in Entity’s own Equity. The Company received proceeds of approximately $13 million related to the sale of the warrants, which has also been classified as equity as the warrants meet the classification criteria under ASC 815-40-25, in which the warrants and the convertible note hedge transactions require settlements in shares and provide the Company with the choice of a net cash or common shares settlement. As the convertible note hedge and warrants are indexed to our common stock, we recognized them in Additional paid-in capital, and will not recognize subsequent changes in fair value as long as the instruments remain classified as equity.
     Interest on the Notes is payable semiannually on November 1 and May 1 of each year, beginning May 1, 2010. The notes will mature and convert on November 1, 2014, unless previously converted in accordance with their terms. The notes will be TCS’s senior unsecured obligations and will rank equally with all of its present and future senior unsecured debt and senior to any future subordinated debt. The notes will be structurally subordinate to all present and future debt and other obligations of TCS’s subsidiaries and will be effectively subordinate to all of TCS’s present and future secured debt to the extent of the collateral securing that debt. The notes are not redeemable by TCS prior to the maturity date.
     On December 15, 2009, the Company issued $40 million in promissory notes as part of the consideration paid for the acquisition of NIM, see Note 2 for a description of the terms of these notes.
     On December 31, 2009, we refinanced our June 2009 commercial bank term loan agreement with a $40 million five year term loan (the “Term Loan”), with a maturity date of July 2014, that replaces the Company’s $20 million prior term loan. The Company initially drew $30 million of the term funds available on December 31, 2009 and drew the remaining $10 million available balance on September 30, 2010. The principal amount outstanding under the Term Loan accrues interest at a floating per annum rate equal to the rate which is 0.5% plus the greater of (i) 4% per annum, or (ii) the banks prime rate (3.25% at September 30, 2010). The principal amount outstanding under the Term Loan is payable in sixty equal installments of principal of $556 beginning on January 29, 2010 plus an additional forty five equal installments of principal of $222 beginning October 31, 2010. Interest is payable on a monthly basis. Funds from the initial $30 million draw on the Term Loan were used primarily to retire the June 2009 term loan and funds from the additional $10 million drawn in September 2010 were used for general corporate purposes.
     Our bank Loan Agreement contains customary representations and warranties and customary events of default. Availability under the Line of Credit is subject to certain conditions, including the continued accuracy of the Company’s representations and warranties.

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The Loan Agreement also contains subjective covenants that require (i) no material impairment in the perfection or priority of the bank’s lien in the collateral of the Loan Agreement, (ii) no material adverse change in the business, operations, or condition (financial or otherwise) of the Borrowers, or (iii) no material impairment of the prospect of repayment of any portion of the borrowings under the Loan Agreement. The Loan Agreement also contains covenants requiring the Company to maintain a minimum adjusted quick ratio and a fixed charge coverage ratio as well as other restrictive covenants including, among others, restrictions on the Company’s ability to dispose part of its business or property; to change its business, liquidate or enter into certain extraordinary transactions; to merge, consolidate or acquire stock or property of another entity; to incur indebtedness; to encumber its property; to pay dividends or other distributions or enter into material transactions with an affiliate. As of September 30, 2010, we were in compliance with the covenants related to the Loan Agreement and we believe that we will continue to comply with these covenants in the foreseeable future. If our performance does not result in compliance with any of these restrictive covenants, we would seek to further modify our financing arrangements, but there can be no assurance that the bank would not exercise its rights and remedies under the Loan Agreement, including declaring all outstanding debt due and payable.
13. Capital leases
     We lease certain equipment under capital leases. Capital leases are collateralized by the leased assets. Amortization of leased assets is included in depreciation and amortization expense.
     Future minimum payments under capital lease obligations consisted of the following at September 30, 2010:
         
2010
  $ 1,442  
2011
    5,667  
2012
    4,841  
2013
    3,248  
2014
    787  
 
     
Total minimum lease payments
    15,985  
Less: amounts representing interest
    (1,593 )
 
     
Present value of net minimum lease payments (including current portion of $4,852)
  $ 14,392  
 
     
14. Income taxes
     Our provision for income taxes totaled $3,623 and $6,400 for the three- and nine-months ended September 30, 2010, respectively, as compared to $3,596 and $10,941 being recorded for the three- and nine-months ended September 30, 2009. The expense recorded for the nine-month period ended September 30, 2010 is comprised of current year tax expense of $8,050 recorded based on pretax income plus a discrete tax benefit of $1,650 recorded primarily related to Research & Experimentation tax credits. Excluding discrete items, the effective tax rate was approximately 46% for the three- months ended September 30, 2010 and approximately 34% for the nine-months ended September 30, 2010. The effective tax rate was approximately 39% for both the three- and nine-months ended September 30, 2009.
     The significant changes to unrecognized tax benefits during the three- and nine-months ended September 30, 2010 apply to the reduction for Research & Experimentation tax credits as a result of the Company completing an in-depth analysis during first quarter. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.
15. Commitments and Contingencies
     The Company has been notified that some customers will or may seek indemnification under its contractual arrangements with those customers for costs associated with defending lawsuits alleging infringement of certain patents through the use of our products and services and the use of our products and services in combination with the use of products and services of multiple other vendors. In some cases we have agreed to assume the defense of the case. In others, the Company will continue to negotiate with these customers in good faith because the Company believes its technology does not infringe on the cited patents and due to specific clauses within the customer contractual arrangements that may or may not give rise to an indemnification obligation. The Company cannot currently predict the outcome of these matters and the resolutions could have a material effect on our consolidated results of operations, financial position or cash flows.
     In November 2001, a shareholder class action lawsuit was filed against us, certain of our current officers and a director, and several investment banks that were the underwriters of our initial public offering (the “Underwriters”): Highstein v. TeleCommunication Systems, Inc., et al., United States District Court for the Southern District of New York, Civil Action No. 01-CV-9500. The plaintiffs seek an unspecified amount of damages. The lawsuit purports to be a class action suit filed on behalf of purchasers of our Class A Common Stock during the period August 8, 2000 through December 6, 2000. The plaintiffs allege that the Underwriters agreed to allocate our Class A Common Stock offered for sale in our initial public offering to certain purchasers in exchange for excessive and undisclosed commissions and agreements by those purchasers to make additional purchases of our Class A Common Stock in the

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aftermarket at pre-determined prices. The plaintiffs allege that all of the defendants violated Sections 11, 12 and 15 of the Securities Act, and that the underwriters violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder. The claims against us of violation of Rule 10b-5 have been dismissed with the plaintiffs having the right to re-plead. On October 5, 2009, the Court approved a settlement of this and approximately 300 similar cases. On January 14, 2010, an Order and Final Judgment was entered. Various notices of appeal of the Court’s October 5, 2009 order were subsequently filed. On October 7, 2010, all but two parties who had filed a notice of appeal filed a stipulation with the Court withdrawing their appeals with prejudice, and the two remaining objectors filed briefs in support of their appeals. We intend to continue to defend the lawsuit until the matter is resolved. We have purchased a Directors and Officers insurance policy which we believe should cover any potential liability that may result from these laddering class action claims, but can provide no assurance that any or all of the costs of the litigation will ultimately be covered by the insurance. No reserve has been created for this matter.
     Other than the items discussed immediately above, we are not currently subject to any other material legal proceedings. However, we may from time to time become a party to various legal proceedings arising in the ordinary course of our business.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 (this “Form 10-Q”). This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. We generally identify forward-looking statements by the use of terms such as “believe”, “intend”, “expect”, “may”, “should”, “plan”, “project”, “contemplate”, “anticipate”, or other similar statements. Examples of forward looking statements in this Quarterly Report on Form 10-Q include, but are not limited to statements: (a) regarding our belief that our technology does not infringe the patents related to customer indemnification requests and our estimates of the indemnification requests effects on our results of operations; (b) regarding our expectations with regard to the notes hedge transactions; (c) that we believe we have sufficient capital resources to fund our operations for the next twelve months and that we currently plan to settle the December 2010 debt obligation with cash; (d) as to the sufficiency of our capital resources to meet our anticipated working capital and capital expenditures for at least the next twelve months, (e) that we expect to realize approximately $178.1 million of backlog in the next twelve months, (f) that we believe that capitalized software development costs will be recoverable from future cash flows generated by these products, (g) regarding our belief that we were in compliance with our loan covenants and that we believe that we will continue to comply with these covenants, (h) regarding our expectations with regard to income tax assumptions and assumptions related to future stock-based compensation expenses, (i) regarding our expectations related to allowances for potential credit losses, (j) indicating our insurance policies should cover all of the costs of the claims in the IPO laddering class action lawsuit, and (k) regarding our objectives when investing in marketable securities.
     These forward-looking statements relate to our plans, objectives and expectations for future operations. We base these statements on our beliefs as well as assumptions made using information currently available to us. In light of the risks and uncertainties inherent in all such projected operational matters, the inclusion of forward-looking statements in this report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved or that any of our operating expectations will be realized. Revenues, results of operations, and other matters are difficult to forecast and our actual financial results realized could differ materially from the statements made herein, as a result of the risks and uncertainties described in our filings with the Securities and Exchange Commission. These include without limitation risks and uncertainties relating to our financial results and our ability to (i) continue to rely on our customers and other third parties to provide additional products and services that create a demand for our products and services, (ii) conduct our business in foreign countries, (iii) adapt and integrate new technologies into our products, (iv) develop software without any errors or defects, (v) protect our intellectual property rights, (vi) implement our business strategy, (vii) realize backlog, (viii) compete with small business competitors, (ix) effectively manage our counterparty risks, (x) achieve continued revenue growth in the foreseeable future in certain of our business lines, (xi) have sufficient capital resources to fund the Company’s operations, (xii) make estimates, judgments, and assumptions underlying our accounting policies and methods, and (xiii) successfully integrate the assets and personnel obtained in our acquisitions. These factors should not be considered exhaustive; we undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We caution you not to put undue reliance on these forward-looking statements.
     The information in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our unaudited consolidated financial statements, which have been prepared in accordance with GAAP for interim financial information.
Critical Accounting Policies and Estimates
     Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified our most critical accounting policies and estimates to be those related to the following:
  -   Revenue recognition,
 
  -   Acquired intangible assets,

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  -   Impairment of goodwill,
 
  -   Stock-based compensation expense,
 
  -   Income taxes,
 
  -   Marketable securities,
 
  -   Software development costs,
 
  -   Business combinations, and
 
  -   Legal and other contingencies.
     This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”). See Note 1 to the unaudited interim consolidated financial statements included elsewhere in this Form 10-Q for a list of the standards implemented for the nine-months ended September 30, 2010.
Overview
     Our business is reported using two business segments: (i) the Commercial Segment, which consists principally of communication technology for wireless networks, principally based on text messaging and location-based services, including our E9-1-1 application and other applications for wireless carriers and Voice Over IP service providers, and (ii) the Government Segment, which includes the engineering, deployment and field support of information processing and communication solutions, mainly satellite-based, and related services to government agencies.
2009 Acquisitions
     During 2009, our company completed four acquisitions, the details of which are described in the Business Section and Financial Statement Footnote 2 of our 2009 Form 10-K.
For the Commercial Segment:
    On May 19, 2009, we acquired substantially all of the assets of LocationLogic LLC (“LocationLogic”), a provider of infrastructure, applications and services for carriers and enterprises to deploy location-based services.
 
    On December 15, 2009, we acquired Networks In Motion, Inc., (“NIM”) a provider of wireless navigation solutions for GPS-enabled mobile phones.
For the Government Segment:
    On November 3, 2009, we acquired Solvern Innovations, Inc., (“Solvern”) a provider of comprehensive communications products and solutions, training, and technology services for cyber security-based platforms.
 
    On November 16, 2009, we acquired substantially all of the assets of Sidereal Solutions, Inc., (“Sidereal”), a satellite communications technology engineering, operations and maintenance support services company.
     Operating results of each of these acquisitions are reflected in the Company’s consolidated financial statements from the date of acquisition.
     This “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” provides information that our management believes to be necessary to achieve a clear understanding of our financial statements and results of operations. You should read this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” together with Item 1A “Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2009 Form 10-K as well as the unaudited interim consolidated financial statements and the notes thereto located elsewhere in this Form 10-Q.

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Indicators of Our Financial and Operating Performance
     Our management monitors and analyzes a number of performance indicators in order to manage our business and evaluate our financial and operating performance. Those indicators include:
    Revenue and gross profit. We derive revenue from the sales of systems and services including recurring monthly service and subscriber fees, maintenance fees, software licenses and related service fees for the design, development, and deployment of software and communication systems, and products and services derived from the delivery of information processing and communication systems to governmental agencies.
 
    Gross profit represents revenue minus direct cost of revenue, including certain non-cash expenses. The major items comprising our cost of revenue are compensation and benefits, third-party hardware and software, amortization of software development costs, non-cash stock-based compensation, and overhead expenses. The costs of hardware and third-party software are primarily associated with the delivery of systems, and fluctuate from period to period as a result of the relative volume, mix of projects, level of service support required and the complexity of customized products and services delivered. Amortization of software development costs, including acquired technology, is associated with the recognition of systems revenue from our Commercial Segment.
 
    Operating expenses. Our operating expenses are primarily compensation and benefits, professional fees, facility costs, marketing and sales-related expenses, and travel costs as well as certain non-cash expenses such as non-cash stock-based compensation expense, depreciation and amortization of property and equipment, and amortization of acquired intangible assets.
 
    Liquidity and cash flows. The primary driver of our cash flows is the results of our operations. Other important sources of our liquidity are our convertible debt agreement, financial institution loan agreement, lease financings secured for the purchase of equipment and potential borrowings under our credit lines.
 
    Balance sheet. We view cash, working capital, accounts receivable balances and days revenues outstanding as important indicators of our financial health.
Results of Operations
     The comparability of our operating results in the three- and nine-month period ended September 30, 2010 to the three- and nine-month period ended September 30, 2009 is affected by our 2009 acquisitions, three of the four acquisitions occurred in the fourth quarter of 2009, so there was no impact on the revenue and costs and expense total in the first nine-months of 2009. Our acquisitions did not result in the entry into a new line of business or product category; they added products and services with substantially similar features and functionality to our incumbent business. Where variances in our results of operations for the first nine-months of 2010 compared to the first nine-months of 2009 were clearly related to the acquisitions, such as revenue and increases in amortization of intangibles, we describe the effects. Operation of the acquired businesses has been fully integrated into our existing operations.
Revenue and Cost of Revenue
     The following discussion addresses the revenue, direct cost of revenue, and gross profit for our two business segments.
Commercial Segment:
                                                                 
    Three Months                     Nine Months        
    Ended September 30,     2010 vs. 2009     Ended September 30,     2010 vs. 2009  
($ in millions)   2010     2009     $     %     2010     2009     $     %  
Services revenue
  $ 43.0     $ 23.6     $ 19.4       82 %   $ 123.6     $ 62.1     $ 61.5       99 %
Systems revenue
    11.6       9.5       2.1       22 %     26.9       29.7       (2.8 )     (9 )%
 
                                                   
Commercial segment revenue
    54.6       33.1       21.5       65 %     150.5       91.8       58.7       64 %
 
                                                   
Direct cost of services revenue
    22.9       8.8       14.1       160 %     62.6       25.3       37.3       147 %
Direct cost of systems revenue
    3.7       2.5       1.2       48 %     10.6       6.9       3.7       54 %
 
                                                   
Commercial segment cost of revenue
    26.6       11.3       15.3       135 %     73.2       32.2       41.0       127 %
 
                                                   
Services gross profit
    20.1       14.8       5.3       36 %     61.0       36.8       24.2       66 %
% of revenue
    47 %     63 %                     49 %     59 %                
 
                                                               
Systems gross profit
    7.9       7.0       0.9       13 %     16.3       22.8       (6.5 )     (29 )%
 
                                                   
% of revenue
    68 %     74 %                     61 %     77 %                
Commercial segment gross profit1
  $ 28.0     $ 21.8     $ 6.2       28 %   $ 77.3     $ 59.6     $ 17.7       30 %
 
                                                   
% of revenue
    51 %     66 %                     51 %     65 %                
 
                                                       
 
1   See discussion of segment reporting in Note 6 to the accompanying unaudited consolidated financial statements

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Commercial Services Revenue, Cost of Revenue, and Gross Profit:
     Commercial services revenue increased by 82% and 99% for the three- and nine-months ended September 30, 2010, respectively, versus the comparable periods of 2009.
     Services revenue includes hosted wireless Location Based Service (LBS) applications including turn-by-turn navigation, people-finder, asset tracker and E9-1-1 service for wireless and E9-1-1 for Voice over Internet Protocol (VoIP) service providers, and hosted wireless LBS infrastructure including Position Determining Entity (PDE) service. This revenue primarily consists of monthly recurring service fees recognized in the month earned. Subscriber service revenue is generated by client software applications for wireless subscribers, generally on a per-subscriber per month basis. E9-1-1, PDE, VoIP and hosted LBS service fees are priced based on units served during the period, such as the number of customer cell sites, the number of connections to Public Service Answering Points (PSAPs), or the number of customer subscribers. Maintenance fees on our systems and software licenses are usually collected in advance and recognized ratably over the contractual maintenance period. Unrecognized maintenance fees are included in deferred revenue. Custom software development, implementation and maintenance services may be provided under time and materials or fixed-fee contracts.
     Commercial services revenue in the three- and nine-months ended September 30, 2010 was $19.4 million and $61.5 million higher, respectively, than the same periods for 2009 from increased subscriber revenue for LBS applications, more service connection deployments of our E9-1-1 services for cellular and VoIP service providers, and an increase in software maintenance revenue. The NIM acquisition contributed additional subscriber applications revenue during the three-months ended September 30, 2010. The increase in subscriber applications revenue for the nine-months ended September 30, 2010 was as a result of the NIM and LocationLogic acquisitions.
     The direct cost of commercial services revenue consists primarily of compensation and benefits, network access, data feed and circuit costs, and equipment and software maintenance. The direct costs of maintenance revenue consist primarily of compensation and benefits expense. For the three-months ended September 30, 2010, the direct cost of services revenue was $14.1 million higher than the three-months ended September 30, 2009 primarily due to increase in labor and other direct costs related to the addition of the NIM business. For the nine-months ended September 30, 2010, the direct costs of services revenue as $37.3 million higher than the nine-months ended September 30, 2009 due to increase in labor and other direct costs related to the addition of the LocationLogic and NIM businesses. We also incurred an increase in labor and direct costs related to custom development efforts responding to customer requests and deployment requirements for E9-1-1 VoIP.
     Commercial services gross profit was $20.1 million and $14.8 million for the three-months ended September 30, 2010 and 2009, respectively, based on higher revenue. Commercial services gross profit was $61.0 million for the nine-months ended September 30, 2010 compared to $36.8 million for the same period in 2009. Commercial services gross profit for the three-months ended September 30, 2010 was approximately 36% higher than the three-months ended September 30, 2009 primarily due to the contributions of the NIM acquisition. Commercial services gross profit for the nine-months ended September 30, 2010 was approximately 66% higher than the nine-months ended September 30, 2009 primarily due to the contributions of the LocationLogic and NIM acquisitions. The inclusion of this subscriber application revenue in the 2010 mix brought the gross profit as a percentage of revenue from 63% to 47% in the three-months ended September 30, 2010 and from 59% to 49% in the nine-months ended September 30, 2010.
Commercial Systems Revenue, Cost of Revenue, and Gross Profit:
     We sell communications systems to wireless carriers incorporating our licensed software for enhanced services, including text messaging and location-based services. These systems are designed to incorporate our licensed software. We design our software to ensure that it is compliant with all applicable standards. Licensing fees for our carrier software are generally a function of its volume of usage in our customers’ networks. As a carrier’s subscriber base or usage increases, the carrier must purchase additional capacity under its license agreement and we receive additional revenue. We also realize license revenue from patents.
     Commercial systems revenue for the three-ended September 30, 2010 was 22% higher compared to the three-months ended September 30, 2009, due mainly to increased location-based services. Commercial systems revenue for the nine-months ended was 9% lower than in the comparable period of 2009, due mainly to lower revenue from high-margin messaging systems, which was partly offset by increased revenue from location-based infrastructure systems.
     The direct cost of our commercial systems consists primarily of compensation and benefits, purchased equipment, third-party hardware and software, travel expenses, consulting fees as well as the amortization of both acquired and capitalized software development costs for all reported periods. During the three- and nine-months ended September 30, 2010, direct costs of systems included $2.3 million and $6.9 million, respectively, of amortization of software development costs. In the three- and nine-months ended September 30, 2009, the composition of the direct cost of our systems was about the same except for $0.8 million and $2.1 million, respectively, of amortization of software development costs. The increase of 48% and 54% in the direct costs of systems

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in the three- and nine-months ended September 30, 2010, respectively, compared to the same periods in 2009, reflects an increase in labor and direct costs related to custom development efforts responding to customer requests and deployment requirements for location-based systems.
     Our commercial systems gross profit was $7.9 million and $16.3 million in the three- and nine-months ended September 30, 2010, respectively, versus $7.0 million and $22.8 in the comparable periods of 2009. Commercial systems gross profit increased 13% for the three-months ended September 30, 2010 compared to the same period in 2009, due to higher location systems revenue. Commercial systems gross profit decreased 29% for the nine-months ended September 30, 2010 compared to the same period in 2009, due to less high-margin messaging systems revenue offset partially by increased revenue from location systems.
Government Segment:
                                                                 
    Three Months                     Nine Months        
    Ended September 30,     2010 vs. 2009     Ended September 30,     2010 vs. 2009  
($ in millions)   2010     2009     $     %     2010     2009     $     %  
Services revenue
  $ 23.2     $ 15.7     $ 7.5       48 %   $ 65.9     $ 42.4     $ 23.5       55 %
Systems revenue
    25.1       22.8       2.3       10 %     70.1       75.0       (4.9 )     (7 )%
 
                                                   
Government segment revenue
    48.3       38.5       9.8       25 %     136.0       117.4       18.6       16 %
 
                                                   
Direct cost of services revenue
    16.1       12.5       3.6       29 %     46.6       33.1       13.5       41 %
Direct cost of systems revenue
    23.5       19.6       3.9       20 %     63.3       60.4       2.9       5 %
 
                                                   
Government segment cost of revenue
    39.6       32.1       7.5       23 %     109.9       93.5       16.4       18 %
 
                                                   
Services gross profit
    7.1       3.2       3.9       122 %     19.3       9.3       10.0       108 %
% of revenue
    31 %     20 %                     29 %     22 %                
Systems gross profit
    1.6       3.2       (1.6 )     (50 )%     6.8       14.6       (7.8 )     (53 )%
 
                                                   
% of revenue
    6 %     14 %                     10 %     19 %                
Government segment gross profit1
    8.7     $ 6.4       2.3       36 %     26.1     $ 23.9       2.2       10 %
 
                                                   
% of revenue
    18 %     17 %                     19 %     20 %                
 
                                                       
 
1   See discussion of segment reporting in Note 6 to the accompanying unaudited consolidated financial statements
     On October 6, 2010, the Company announced it was named the sole awardee of a delivery order for our Integrated Communication systems, for the U.S. Marine Corps with a potential value of up to $269 million over the next 12 months. We received initial funding of $12.3 million to deliver our Wireless Point-to-Point Link-Delta Solutions (WPPL-D) and associated field services. This delivery order is managed under the Army’s $5 billion World-Wide Satellite Systems (WWSS) contract vehicle.
Government Services Revenue, Cost of Revenue, and Gross Profit:
     Government services revenue primarily consists of professional communications engineering and field support, program management, help desk outsource, network design and management for government agencies, as well as operation of teleport (fixed satellite ground terminal) facilities for data connectivity via satellite including resale of satellite airtime. Systems maintenance fees are usually collected in advance and recognized ratably over the contractual maintenance periods. Government services revenue increased $7.5 million or 48% and $23.5 million or 55% for the three- and nine-months ended September 30, 2010 compared to the three- and nine-months ended September 30, 2009, respectively, as a result of revenue contributions from the Solvern and Sidereal operations added to our business during the fourth quarter of 2009, as well as new and expanded-scope contracts for professional services, satellite airtime services using our teleport facilities, and maintenance and field support. Direct cost of government services revenue consists of compensation, benefits and travel expenses incurred in delivering these services, as well as satellite space segment purchased for resale. These costs increased as a result of the increased volume of services.
     Our gross profit from government services increased to $7.1 million and $19.3 in the three- and nine-months ended September 30, 2010, respectively, up from $3.2 million and $9.3 million in the three- and nine-months ended September 30, 2009, as a result of a higher volume of services, including business arising from the acquisitions of Sidereal and Solvern in November 2009. Government services gross profit was 31% and 20% of revenue for the three-months ended September 30, 2010 and 2009, respectively. Government services gross profit was 29% compared to 22% of revenue for the nine-months ended September 30, 2010 and 2009, respectively, reflecting a more favorable mix of contracts.
Government Systems Revenue, Cost of Revenue, and Gross Profit:
     We generate government systems revenue from the design, development, assembly and deployment of information processing and communication systems, primarily deployable satellite-based and line-of-sight communications systems, and integration of those systems into customer networks. These are largely variations on our SwiftLink® products, which are lightweight, secure, deployable communications systems, sold mainly to units of the U.S. Department of Defense, and other federal agencies.

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     Government systems sales were $25.1 million and $70.1 million in the three- and nine-months ended September 30, 2010, compared to $22.8 million and $75.0 for the three- and nine-months ended September 30, 2009. The fluctuations in the periods reported reflect changes in sales volume of our SwiftLink® and deployable communication systems due to the timing of government project funding.
     The cost of our government systems revenue consists of costs related to purchased system components, compensation, benefits, travel, and the costs of third-party contractors. These costs have decreased as a direct result of the decrease in volume. These equipment and third-party costs are variable for our various types of products, and margins may fluctuate between periods based on pricing and product mixes.
     Our government systems gross profit was $1.6 million or 6% of revenue in the three-months ended September 30, 2010, down from $3.2 million or 14% of revenue in the comparable period of 2009, due mainly to an increase of lower margin equipment pass-through sales. Our government systems gross profit was $6.8 million or 10% of revenue in the nine-months ended September 30, 2010, down from $14.6 million or 19% of revenue in the nine-months ended September 30, 2009, due mainly to an increase in lower margin equipment pass-through sales and lower sales volume of our SwiftLink® product line.
Revenue Backlog
     As of September 30, 2010 and 2009, we had unfilled orders or backlog as follows:
                                 
    Nine Months        
    Ended        
    September 30,     2010 vs. 2009  
($ in millions)   2010     2009     $     %  
Commercial Segment
  $ 228.9     $ 90.6     $ 138.3       153 %
Government Segment
    107.6       109.0       (1.4 )     (1 %)
 
                         
Total funded contract backlog
  $ 336.5     $ 199.6     $ 136.9       69 %
 
                         
Commercial Segment
  $ 228.9     $ 90.6     $ 138.3       153 %
Government Segment
    646.5       348.3       298.2       86 %
 
                         
Total backlog of orders and commitments, including customer options
  $ 875.4     $ 438.9     $ 436.5       100 %
 
                         
Expected to be realized within next 12 months
  $ 178.1     $ 158.2     $ 19.9       13 %
 
                         
     Funded contract backlog on September 30, 2010 was $336.5 million, of which the Company expects to recognize $178.1 million in the next twelve months. Total backlog was $875.4 million at September 30, 2010. Funded contract backlog represents contracts for which fiscal year funding has been appropriated by our customers (mainly federal agencies), and for our hosted services is computed by multiplying the most recent month’s recurring revenue times the remaining months under existing long-term agreements, which we believe is the best available information for anticipating revenue under those agreements. Total backlog, as is typically measured by government contractors, includes orders covering optional periods of service and/or deliverables for which budgetary funding may not yet have been approved. Company backlog at any given time may be affected by a number of factors, including the availability of funding, contracts being renewed or new contracts being signed before existing contracts are completed. Some of our backlog could be canceled for causes such as late delivery, poor performance and other factors. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual revenue.
Operating Expenses
Research and development expense:
                                                                 
    Three Months                     Nine Months        
    Ended                     Ended        
    September 30,     2010 vs. 2009     September 30,     2010 vs. 2009  
($ in millions)   2010     2009     $     %     2010     2009     $     %  
Research and development expense
  $ 7.5     $ 5.8     $ 1.7       29 %   $ 22.6   $ 15.6   $ 7.0 45 %
% of total revenue
    7 %     8 %                     8 %     7 %
     Our research and development expense consists primarily of compensation, benefits, travel costs, and a proportionate share of facilities and corporate overhead. The costs of developing software products to be sold, leased, or otherwise marketed are expensed prior to establishing technological feasibility. Technological feasibility is established for our software products when a detailed program design is completed. We incur research and development costs to enhance existing packaged software products as well as to create new software products, including software hosted in our network operations centers. These costs primarily include compensation and benefits as well as costs associated with using third-party laboratory and testing resources. We expense such costs

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as they are incurred, unless technological feasibility has been reached and we believe that the capitalized costs will be recoverable, in which we capitalize and amortize over the product’s expected life.
     The expenses we incur relate mainly to software applications which are being marketed to new and existing customers on a global basis. Throughout the three- and nine-months ended September 30, 2010 and 2009, research and development was primarily focused on wireless location-based subscriber and carrier applications, including navigation, people-locator, cellular E9-1-1 and Voice over IP E9-1-1, enhancements to our hosted LBS platform for carrier infrastructure, and enhancements to our text messaging deliverables.
     For the three- and nine-months ended September 30, 2010, we capitalized $1.8 million and $4.0 million, respectively, of research and development costs for certain software projects in accordance with the above policy versus $0.2 million and $0.8 for the comparable periods in 2009. These costs will be amortized on a product-by-product basis using the straight-line method over the product’s estimated useful life, between three and five years. Amortization is also computed using the ratio that current revenue for the product bears to the total of current and anticipated future revenue for that product (the revenue curve method). If this revenue curve method results in amortization greater than the amount computed using the straight-line method, amortization is recorded at that greater amount. We believe that these capitalized costs will be recoverable from future gross profits generated by these products.
     Research and development expenses increased 29% and 45% for the three- and nine-months ended September 30, 2010 versus the comparable period of 2009 primarily as a result of expenditures to improve location based application software for customers of the acquired NIM and LocationLogic businesses.
Sales and marketing expense:
                                                                 
    Three Months                     Nine Months        
    Ended                     Ended        
    September 30,     2010 vs. 2009     September 30,     2010 vs. 2009  
($ in millions)   2010     2009     $     %     2010     2009     $     %  
Sales and marketing expense
  $ 6.0     $ 3.6     $ 2.4       67 %   $ 17.9     $ 11.7     $ 6.2   53 %
% of total revenue
    6 %     5 %                     6 %     6 %
     Our sales and marketing expenses include fixed and variable compensation and benefits, trade show expenses, travel costs, advertising and public relations costs as well as a proportionate share of facility-related costs which are expensed as incurred. Our marketing efforts also include speaking engagements and attending and sponsoring industry conferences. We sell our software products and services through our direct sales force and through indirect channels. We have also historically leveraged our relationship with original equipment manufacturers to market our software products to wireless carrier customers. We sell our products and services to agencies and departments of the U.S. Government primarily through direct sales professionals.
     Sales and marketing expenses increased $2.4 million and $6.2 for the three- and nine-months ended September 30, 2010 versus the comparable periods of 2009 due to increases in sales personnel, public relations fees, and variable compensation resulting mainly in support of the expansion enhanced by 2009 acquisitions.
General and administrative expense:
                                                                 
    Three Months                     Nine Months        
    Ended                     Ended        
    September 30,     2010 vs. 2009     September 30,     2010 vs. 2009  
($ in millions)   2010     2009     $     %     2010     2009     $     %  
General and administrative expense
  $ 10.1     $ 7.7     $ 2.4       31 %   $ 28.3     $ 23.0     $ 5.3       23 %
% of total revenue
    10 %     11 %                     10 %     11 %                
     General and administrative expense consists primarily of management, finance, legal, human resources and internal information systems functions. These costs include compensation, benefits, professional fees, travel, and a proportionate share of rent, utilities and other facilities costs which are expensed as incurred.
     The $2.4 million and $5.3 million increase in general and administrative expense for the three- and nine-months ended September 30, 2010 compared to the same periods in 2009 was due primarily to the increased costs to support the operations we acquired during 2009, as well as investments for process control and security enhancement and legal and professional costs associated with intellectual property.
Depreciation and amortization of property and equipment:
                                                                 
    Three Months                     Nine Months        
    Ended September 30,     2010 vs. 2009     Ended September 30,     2010 vs. 2009  
($ in millions)   2010     2009     $     %     2010     2009     $     %  
Depreciation and amortization of property and equipment
  $ 2.6     $ 1.6     $ 1.0       63 %   $ 6.8     $ 4.5     $ 2.3       51 %
Average gross cost of property and equipment during the period
  $ 87.3     $ 60.1                     $ 78.8     $ 57.3                  

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     Depreciation and amortization of property and equipment represents the period costs associated with our investment in information technology and telecommunications equipment, software, furniture and fixtures, and leasehold improvements. We compute depreciation and amortization using the straight-line method over the estimated useful lives of the assets, generally range from 5 years for furniture, fixtures, and leasehold improvements to three to four years for most other types of assets including computers, software, telephone equipment and vehicles.
     Our depreciable asset base increased primarily as a result of additions to property and equipment including purchases of about $22.4 million in the nine-months ended September 30, 2010.
Amortization of acquired intangible assets:
                                                                 
    Three Months                     Nine Months        
    Ended                     Ended        
    September 30,     2010 vs. 2009     September 30,     2010 vs. 2009  
($ in millions)   2010     2009     $     %     2010     2009     $     %  
Amortization of acquired intangible assets
  $ 1.2     $ 0.2     $ 1.0       500 %   $ 3.5     $ 0.4     $ 3.1       775 %
     The amortization of acquired non-goodwill intangible assets relates to the 2009 acquisitions of wireless location-based application and infrastructure technology assets acquired from LocationLogic and NIM, the cyber security assets acquired from Solvern, and the 2004 acquisition of Kivera digital mapping business assets. These assets are being amortized over their useful lives of between five and nineteen years. The expense recognized in the three- and nine-months ended September 30, 2010 relates to customer lists, customer relationships, courseware, and patents. The expense recognized in the three- and nine-months ended September 30, 2009 relates to the intangible assets, including customer lists and patents, associated with the 2004 Kivera acquisition and a proportion of the May 19, 2009 LocationLogic acquisition.
Interest expense:
                                                                 
    Three Months                     Nine Months        
    Ended                     Ended        
    September 30,     2010 vs. 2009     September 30,     2010 vs. 2009  
($ in millions)   2010     2009     $     %     2010     2009     $     %  
Interest expense incurred on bank and other notes payable
  $ 1.0     $ 0.2     $ 0.8       400 %   $ 2.9     $ 0.4     $ 2.5       625 %
Interest expense incurred on 4.5% convertible debt financing
    1.1             1.1       100 %     3.4             3.4       100 %
Interest expense incurred on capital lease obligations
    0.2       0.1       0.1       100 %     0.6       0.3       0.3       100 %
Amortization of deferred financing fees
    0.2       0.1       0.1       100 %     0.6       0.1       0.5       500 %
 
                                                   
Total interest and financing expense
  $ 2.5     $ 0.4     $ 2.1       525 %   $ 7.5     $ 0.8     $ 6.7       838 %
     Interest expense is incurred under bank and other notes payable, convertible debt financing, and capital lease obligations. Financing expense reflects amortization of deferred up-front financing expenditures at the time of contracting for financing arrangements, which are being amortized over the term of the note or the life of the facility.
     On November 16, 2009, the Company issued $103.5 million aggregate principal amount of 4.5% Convertible Senior Notes due 2014. Interest on the Notes is payable semiannually on November 1 and May 1 of each year, beginning May 1, 2010. The Notes will mature on November 1, 2014, unless previously converted in accordance with their terms. The Notes are TCS’s senior unsecured obligations and will rank equally with all of its present and future senior unsecured debt and senior to any future subordinated debt. The Notes are structurally subordinate to all present and future debt and other obligations of TCS’s subsidiaries and will be effectively subordinate to all of TCS’s present and future secured debt to the extent of the collateral securing that debt. The Notes are not redeemable by TCS prior to the maturity date.
     Interest on the bank term loan is at 0.5% plus the greater of (i) 4% per annum, or (ii) the banks prime rate. Interest on our capital leases is primarily at stated rates averaging about 7%.We have a commercial bank line of credit that has not been used for borrowings, and has therefore generated no interest expense, during the periods reported. Interest on our line of credit borrowing would be at the greater of the bank’s prime rate which was 3.25% as of September 30, 2010 or 4% per annum. Further details about our bank facilities are provided under Liquidity and Capital Resources.
     On December 15, 2009,we issued $40 million in promissory notes as part of the consideration paid for the acquisition of NIM. The promissory notes bear simple interest at 6% and are due in three installments: $30 million on the 12 month anniversary of the closing, $5 million on the 18 month anniversary of the closing, and $5 million on the 24 month anniversary of the closing, subject to escrow adjustments. The promissory notes are effectively subordinated to TCS’s secured debt and structurally subordinated to any present and future indebtedness and other obligations of TCS’s subsidiaries.

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     Our capital lease obligations include interest at various amounts depending on the lease arrangements. Our interest under capital leases fluctuates depending on the amount of capital lease obligations in each year.
     Overall our interest and financing expense was higher in the three- and nine-months ended September 30, 2010 as a result of the increase in amounts financed in the fourth quarter of 2009, including the 4.5% convertible debt financing in November 2009. Interest expense on bank and other notes payable increased in the three- and nine-months ended September 30, 2010 compared to the same periods in 2009 as a result of the NIM promissory notes and the December 2009 bank term loan. Interest on capital lease financing for the three- and nine-months ended September 30, 2010 increased slightly for the three- and nine-months ended September 30, 2009 due to additional funding for purchases of property and equipment. The higher 2010 amortization expense reflects the proration of fees to refinance our bank term loan and fees associated with the 4.5% convertible debt financing.
Other income/(expense), net:
     Other income/(expense), net includes interest earned on investment accounts and foreign currency translation/transaction gain or loss, which is dependent on fluctuations in exchange rates. The other components of other income/(expense), net typically remain comparable between periods.
Income taxes:
     Income tax expense was $6.4 million against pre-tax income of $18.8 million for the for the nine-months ended September 30, 2010, representing an effective tax rate of approximately 34%. The tax provision for the nine-month ended September 30, 2010 was lower than would be normally expected as a result of a discrete adjustment to reduce the reserve against our deferred tax asset by about $1.7 million. Absent this adjustment, our effective tax rate for the nine-months ended September 30, 2010 would have been approximately 43%. For the nine-months ended September 30, 2009, we recorded a tax provision of $10.9 million, representing an effective tax rate of about 39%.
Net income:
                                                                 
    Three Months                     Nine Months        
    Ended September 30,     2010 vs. 2009     Ended September 30,     2010 vs. 2009  
($ in millions)   2010     2009     $     %     2010     2009     $     %  
Net income
  $ 4.3     $ 5.4     $ (1.1 )     (20 )%   $ 12.4     $ 16.9     $ (4.5 )     (27 )%
     Net income decreased for the three- and nine-months ended September 30, 2010 versus the comparable periods of 2009. The Company’s higher revenue and gross profit were offset by an increase in interest expense as a result of our fourth quarter 2009 financing and an increase in operating expenses and depreciation and amortization expenses, primarily as a result of our 2009 acquisitions, and other factors discussed above.
Liquidity and Capital Resources
                                 
    Nine Months        
    Ended        
    September 30,     2010 vs. 2009  
($ in millions)   2010     2009     $     %  
Net cash and cash equivalents provided by/(used in):
                               
Income
  $ 12.4     $ 16.9     $ (4.5 )     (27 )%
Non-cash charges
    25.7       11.4       14.3       125 %
Deferred income tax provision
    6.4       10.0       (3.6 )     (36 )%
Net changes in working capital including changes in other assets
    20.7       3.3       17.4       527 %
 
                         
Operating activities
    65.2       41.6       23.6       57 %
 
                               
Purchases of marketable securities, net
    (30.7 )           (30.7 )     100 %
Acquisition of LocationLogic assets
          (15.0 )     15.0       100 %
Purchases of property and equipment
    (22.4 )     (6.4 )     (16.0 )     (250 )%
Capital purchases funded through leases
    7.9       5.5       2.4       44 %
 
                         
Purchases of property and equipment, excluding assets funded by leasing
    (14.5 )     (0.9 )     (13.6 )     (1511 )%
Capitalized software development costs
    (4.0 )     (0.8 )     (3.2 )     (400 )%
 
                               
Proceeds from new borrowings
    10.0       20.0       (10.0 )     (50 )%
Other financing activities
    (5.2 )     (4.6 )     (0.6 )     13 %
 
                         
Net increase in cash
  $ 20.8     $ 40.3     $ (19.5 )     48 %
 
                         
 
                               
Days revenue in accounts receivable, including unbilled receivables at quarter-end
    79       82                  

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     Capital resources: We have funded our operations, acquisitions, and capital expenditures primarily using cash generated by our operations, borrowings as described in the “Financings activities” below, as well as the capital leases to fund fixed asset purchases.
     Sources and uses of cash: The Company’s cash and cash equivalents balance was approximately $82.2 million at September 30, 2010, a $2.9 million increase from $79.3 million at September 30, 2009.
     Operations: Cash generated by operating activities was $65.2 million for the nine-months ended September 30, 2010 as compared to $41.6 million for the nine-months ended September 30, 2009. The increase in the nine-months ended September 30, 2010 is primarily due to the receipt of $15.7 million cash payment for a 2009 patent-related gain, as well as an increase in deferred revenue due to timing of percentage of completion projects, a decrease in accounts payable relating to the timing of vendor payments, and a decrease in accrued payroll and related liabilities due to the timing of payments.
     Investing activities: Fixed asset additions, excluding assets funded by leasing, were approximately $14.5 million and $0.9 million, for the nine-months ended September 30, 2010 and 2009, respectively. Also, investments were made in development of carrier software for resale which had reached the stage of development calling for capitalization, in the amounts approximately $4.0 million and $0.8 million for the nine-months ended September 30, 2010 and 2009, respectively. On May 19, 2009, the company completed the transaction to purchase the LocationLogic business for seller proceeds of $25 million consisting of $15 million in cash and approximately 1.4 million of Company shares valued at $10 million. During the third quarter of 2010, the Company invested $30.7 million in marketable securities that are investment grade and are classified as available-for-sale. The Company’s primary objectives when investing are to preserve principal, maintain liquidity and obtain higher yield.
     Financing activities: Financing activities during the nine-months ended September 30, 2010 included a draw of $10 million of the remaining funds that were available under our $40 million Term Loan agreement with our commercial bank, debt service payments, and capital leasing. Fixed assets purchases funded through capital leases were $7.9 million and $5.5 million during the nine-months ended September 30, 2010 and 2009, respectively.
     Capital Resources: We have a $35 million revolving Line of Credit with our principal bank through June 2012. Borrowings at any time are limited to an amount based principally on accounts receivable levels and working capital ratio, each as defined in the Line of Credit agreement. The Line of Credit available is also reduced by the amount of cash management services sublimit, which was $1.5 million September 30, 2010. As of September 30, 2010, we had no borrowings outstanding under our bank Line of Credit and had approximately $33.5 million of unused borrowing availability under this line of credit.
     The Line of Credit includes three sub-facilities: (i) a letter of credit sub-facility pursuant to which the bank may issue letters of credit, (ii) a foreign exchange sub-facility pursuant to which the Company may purchase foreign currency from the bank, and (iii) a cash management sub-facility pursuant to which the bank may provide cash management services (which may include, among others, merchant services, direct deposit of payroll, business credit cards and check cashing services) and in connection therewith make loans and extend credit to the Company. The principal amount outstanding under the Line of Credit accrues interest at a floating per annum rate equal to the rate which is the greater of (i) 4% per annum, or (ii) the bank’s most recently announced “prime rate,” even if it is not the Interest Rate. The principal amount outstanding under the Line of Credit is payable either prior to or on the maturity date and interest on the Line of Credit is payable monthly.
     On November 16, 2009, the Company issued 4.5% Convertible Senior Notes to fund corporate initiatives which included the acquisition of NIM. Holders may convert the Notes at their option on any day prior to the close of business on the second “scheduled trading day” (as defined in the Indenture) immediately preceding November 1, 2014. The conversion rate will initially be 96.637 shares of our Class A common stock per $1,000 principal amount of the Notes, equivalent to an initial conversion price of approximately $10.348 per share of Class A common stock. At the time of this transaction, while this represented an approximately 30% conversion premium over the closing price of the Company’s Class A common stock on November 10, 2009 of $7.96 per share, the effect of the convertible note hedge and warrant transactions, described below increased the effective conversion premium of the Notes to 60% above the November 10th closing price, to $12.74 per share.
     In connection with the sale of the Notes, the Company entered into convertible note hedge transactions with respect to the Class A common stock with certain counterparties. The convertible note hedge transactions cover, subject to adjustments, 10,001,303 shares of Class A common stock. Also, in connection with the sale of the Notes, the Company entered into separate warrant transactions with certain counterparties the Warrant Dealers. The Company sold to the Warrant Dealers, warrants to purchase in the aggregate 10,001,303 shares of Class A common stock, subject to adjustments, at an exercise price of $12.736 per share of Class A common stock. The Company offered and sold the warrants to the Warrant Dealers in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. The Company used a portion of the gross proceeds of the offering to pay the Company’s cost of the convertible note hedge transactions. The convertible note hedge and the warrant transactions are separate transactions; each entered

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into by the Company with the counterparties, is not part of the terms of the Notes and will not affect the holders’ rights under the Notes.
     On December 15, 2009, we issued $40 million in promissory notes as part of the consideration paid for the acquisition of NIM. The promissory notes bear simple interest at 6% and are due in three installments: $30 million on the 12 month anniversary of the closing, $5 million on the 18 month anniversary of the closing, and $5 million on the 24 month anniversary of the closing, subject to escrow adjustments. The promissory notes are effectively subordinated to TCS’s secured debt and structurally subordinated to any present and future indebtedness and other obligations of TCS’s subsidiaries. For $20 million of the obligation due in December 2010, the Company has the option to settle using common stock, but the Company currently plans to satisfy this debt for cash.
     On December 31, 2009, we refinanced facilities under our bank Loan Agreement. A $40 million five-year Term Loan replaced the Company’s $20 million prior term loan with the bank. On December 31, 2009, the Company initially drew $30 million of the funds available and the remaining $10 million was drawn on September 30, 2010. The Term Loan maturity date is June 2014.
     Under the Loan Agreement, the Company is obligated to repay all advances or credit extensions made pursuant to the Loan Agreement. The Loan Agreement is secured by substantially all of the Company’s tangible and intangible assets as collateral, except that the collateral does not include any of the Company’s intellectual property. The principal amount outstanding under the Term Loan accrues interest at a floating per annum rate equal to one-half of one percentage point (0.5%) plus the greater of (i) 4%, or (ii) the banks prime rate (3.25% at September 30, 2010). The initial draw of $30 million under the Term Loan is payable in sixty equal installments of $0.6 million of principal beginning on January 29, 2010 and the additional $10 million draw is payable in forty five equal installments of $0.2 million of principal beginning on October 31, 2010. Interest is payable on a monthly basis. As of September 30, 2010, the total amount outstanding under the Term Loan was $35 million. Funds from the initial draw of $30 million on the Term Loan were used primarily to retire the June 2009 term loan and funds from the additional $10 million draw in September 2010 were used for general corporate purposes.
     The Loan Agreement contains customary representations and warranties and customary events of default. Availability under the Line of Credit is subject to certain conditions, including the continued accuracy of the Company’s representations and warranties. The Loan Agreement also contains subjective covenants that requires (i) no material impairment in the perfection or priority of the bank’s lien in the collateral of the Loan Agreement, (ii) no material adverse change in the business, operations, or condition (financial or otherwise) of the Company, or (iii) no material impairment of the prospect of repayment of any portion of the borrowings under the Loan Agreement. The Loan Agreement also contains covenants requiring the Company to maintain a minimum adjusted quick ratio and a fixed charge coverage ratio as well as other restrictive covenants including, among others, restrictions on the Company’s ability to dispose part of their business or property; to change their business, liquidate or enter into certain extraordinary transactions; to merge, consolidate or acquire stock or property of another entity; to incur indebtedness; to encumber their property; to pay dividends or other distributions or enter into material transactions with an affiliate of the Company.
     As of September 30, 2010, we were in compliance with the covenants related to the Loan Agreement and we believe that we will continue to comply with these covenants. If our performance does not result in compliance with any of these restrictive covenants, we would seek to further modify our financing arrangements, but there can be no assurance that the bank would not exercise its rights and remedies under the Loan Agreement, including declaring all outstanding debt due and payable.
     We currently believe that we have sufficient capital resources with cash generated from operations as well as cash on hand to meet our anticipated cash operating expenses, working capital, and capital expenditure and debt service needs for the next twelve months. We have borrowing capacity available to us in the form of capital leases as well as a line of credit arrangement with our principal bank which expires in June 2012. We may also consider raising capital in the public markets as a means to meet our capital needs and to invest in our business. Although we may need to return to the capital markets, establish new credit facilities or raise capital in private transactions in order to meet our capital requirements, we can offer no assurances that we will be able to access these potential sources of funds on terms acceptable to us or at all.
Contractual Commitments
     As of September 30, 2010, our most significant commitments consisted of purchase obligations, term debt, obligations under capital leases and non-cancelable operating leases. Other long-term debt consists of contingent consideration included as part of the purchase price allocation of certain acquisitions. We lease certain furniture and computer equipment under capital leases. We lease office space and equipment under non-cancelable operating leases. Purchase obligations represent contracts for parts and services in connection with our government satellite services and systems offerings. As of September 30, 2010 our commitments consisted of the following:
                                         
    Within 12     1-3     3-5     More than        
($ in millions)   Months     Years     Years     5 Years     Total  
Term loan from commercial bank dated December 31, 2009
  $ 7.7     $ 14.5     $ 5.1     $     $ 27.3  
Term loan from commercial bank dated September 30, 2010
    3.1       5.8       2.0             10.9  
4.5% Convertible debt interest obligation
    4.7       9.4       6.9             21.0  
Promissory notes payable
    37.7       5.3                   43.0  
Other long-term debt
    3.2       2.4                   5.6  
Capital lease obligations
    5.7       8.8       1.5             16.0  
Operating leases
    5.6       11.6       4.8       2.1       24.1  
Purchase obligations
    4.7       0.7                   5.4  
 
                             
Total contractual commitments
  $ 72.4     $ 58.5     $ 20.3     $ 2.1     $ 153.3  
 
                             

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
     There have not been any material changes to our interest rate risk as described in Item 7A of our 2010 Annual Report on Form 10-K.
Foreign Currency Risk
     For the three-and -nine months ended September 30, 2010, we generated $3.1 million and $9.3 million, respectively, of revenue outside the U.S, mostly denominated in U.S. dollars. A change in exchange rates would not have a material impact on our Consolidated Financial Statements. As of September 30, 2010, we had approximately $0.9 million of billed accounts receivable that are denominated in foreign currencies and would be exposed to foreign currency exchange risk. During the nine-months ended September 30, 2010, our average receivables subject to foreign currency exchange risk was $1.4 million and our average deferred revenue balances subject to foreign currency exchange risk was $0.9 million. We had an average balance of $0.2 million of unbilled receivables denominated in foreign currency during the nine-months ended September 30, 2010. We recorded immaterial transaction gains or losses on foreign currency denominated receivables and deferred revenue for the nine-months ended September 30, 2010.
     There have not been any other material changes to our foreign currency risk as described in Item 7A of our 2009 Annual Report on Form 10-K.
Item 4. Controls and Procedures
     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, and summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
     As required by Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2010.
     There have been no changes in the Company’s internal control over financial reporting during the latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. — OTHER INFORMATION
Item 1. Legal Proceedings
     In November 2001, a shareholder class action lawsuit was filed against us, certain of our current officers and a director, and several investment banks that were the underwriters of our initial public offering (the “Underwriters”): Highstein v. TeleCommunication Systems, Inc., et al., United States District Court for the Southern District of New York, Civil Action No. 01-CV-9500. The plaintiffs seek an unspecified amount of damages. The lawsuit purports to be a class action suit filed on behalf of purchasers of our Class A Common Stock during the period August 8, 2000 through December 6, 2000. The plaintiffs allege that the Underwriters agreed to allocate our Class A Common Stock offered for sale in our initial public offering to certain purchasers in exchange for excessive and undisclosed commissions and agreements by those purchasers to make additional purchases of our Class A Common Stock in the aftermarket at pre-determined prices. The plaintiffs allege that all of the defendants violated Sections 11, 12 and 15 of the Securities Act, and that the underwriters violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder. The claims against us of violation of Rule 10b-5 have been dismissed with the plaintiffs having the right to re-plead. On October 5, 2009, the Court approved a settlement of this and approximately 300 similar cases. On January 14, 2010, an Order and Final Judgment was entered. Various notices of appeal of the Court’s October 5, 2009 order were subsequently filed. On October 7, 2010, all but two parties who had filed a notice of appeal filed a stipulation with the Court withdrawing their appeals with prejudice, and the two remaining objectors filed briefs in support of their appeals. We intend to continue to defend the lawsuit until the matter is resolved. We have purchased a Directors and Officers insurance policy which we believe should cover any potential liability that may result from these laddering class action claims, but can provide no assurance that any or all of the costs of the litigation will ultimately be covered by the insurance. No reserve has been created for this matter.
     Other than the items discussed immediately above, we are not currently subject to any other material legal proceedings. However, we may from time to time become a party to various legal proceedings arising in the ordinary course of our business.
Item 1A. Risk Factors
     There have not been any material changes to the information previously disclosed in “Item 1A. Risk Factors” in our 2009 Annual Report on Form 10-K, except as follows:
Our past and future acquisitions of companies or technologies could prove difficult to integrate, disrupt our business, dilute shareholder value or adversely affect operating results or the market price of our Class A common stock.
     We have in the past acquired a number of businesses and technologies, and we may in the future acquire or make investments in other companies, services and technologies. Any acquisitions, strategic alliances or investments we may pursue in the future will have a continuing, significant impact on our business, financial condition and operating results. The value of the companies or assets that we acquire or invest in may be less than the amount we paid if there is a decline of their position in the respective markets they serve or a decline in general of the markets they serve. If we fail to properly evaluate and execute acquisitions and investments, our business and prospects may be seriously harmed. To successfully complete an acquisition, we must:
    properly evaluate the technology;
 
    accurately forecast the financial impact of the transaction, including accounting charges and transaction expenses;
 
    integrate and retain personnel;
 
    retain and cross-sell to acquired customers;
 
    combine potentially different corporate cultures; and
 
    effectively integrate products and services, and research and development, sales and marketing and support operations.
     If we fail to do any of these, we may suffer losses, our management may be distracted from day-to-day operations and the market price of our Class A common stock may be materially adversely affected. In addition, if we consummate future acquisitions using our equity securities or convertible debt, existing shareholders may be diluted which could have a material adverse effect on the market price of our Class A common stock. At least annually, or more frequently if facts and circumstances warrant, we are required to test goodwill and other intangible assets with indefinite lives to determine if impairment has occurred, including the value of the companies or assets we acquire. If the testing performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other intangible assets with indefinite lives and the implied fair value of the goodwill or the fair value of other intangible assets with indefinite lives in the period the determination is made. We cannot accurately predict the amount and timing of any impairment of assets. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively impacting our results of operations.

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     The companies and business units we have acquired or invested in or may acquire or invest in are subject to each of the business risks we describe in this section, and if they incur any of these risks the businesses may not be as valuable as the amount we paid. Further, we cannot guarantee that we will realize the benefits or strategic objectives we are seeking to obtain by acquiring or investing in these companies.
Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations, and they require management to make estimates, judgments and assumptions about matters that are inherently uncertain.
     Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations. We have identified several accounting policies as being critical to the presentation of our financial position and results of operations because they require management to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be recorded under different conditions or using different assumptions. For example, we account for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are computed based on the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate. ASC 740 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion of all of the net deferred tax asset will not be realized. This process requires our management to make assessments regarding the timing and probability of the ultimate tax impact. Actual income taxes could vary from these estimates due to future changes in income tax law, significant changes in the jurisdictions in which we operate, our inability to generate sufficient future taxable income or unpredicted results from the final determination of each year’s liability by taxing authorities. These changes could have a significant impact on our business, financial position, results of operations or cash flows.
     Under accounting principles generally accepted in the United States, we review our goodwill and other intangible assets with indefinite lives for impairment when events or changes in circumstances indicate the carrying value of the goodwill and other intangible assets with indefinite lives may not be recoverable. Goodwill is tested for impairment at least annually or more frequently if facts and circumstances warrant. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or other intangible assets with indefinite lives may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or other intangible assets with indefinite lives is determined, negatively impacting our results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     None.
Item 3. Defaults Upon Senior Securities
     None.
Item 4. Removed and Reserved
Item 5. Other Information
     (a) None
     (b) None.
Item 6. Exhibits
     
Exhibit    
Numbers   Description
31.1
  Certification of CEO required by the Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a)
 
   
31.2
  Certification of CFO required by the Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a)
 
   
32.1
  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
   
32.2
  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 8th day of November 2010.
         
  TELECOMMUNICATION SYSTEMS, INC.
 
 
  By:   /s/ Maurice B. Tosé    
    Maurice B. Tosé   
    Chairman, President and Chief Executive Officer   
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Reporthas been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
     
/s/ Maurice B. Tosé
  Chairman, President and Chief Executive Officer
 
Maurice B. Tosé November 8, 2010
   (Principal Executive Officer)
 
   
/s/ Thomas M. Brandt, Jr.
  Senior Vice President and Chief Financial Officer
 
Thomas M. Brandt, Jr. November 8, 2010
   (Principal Financial Officer)

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