This excerpt taken from the TSYS 10-Q filed May 5, 2008.
TeleCommunication Systems, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(amounts in thousands, except per share amounts)
Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. These consolidated financial statements should be read in conjunction with our audited financial statements and related notes included in our 2007 Annual Report on Form 10-K.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
Investments in Marketable Securities and Note Receivable. The Company holds $0.6 million of marketable securities and a $1.0 million note receivable, which were obtained as partial consideration from three small divestitures during 2007. The marketable securities and note receivable are included in other current assets and the marketable securities are classified as available-for-sale in accordance with the provision of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company determined the decline in the fair market value of its shares in MobilePro Corporation to be other than temporary and accordingly has written down the security by approximately $0.5 million which was recognized in the current period income statement as other expense. After the write down of MobilePro shares, these securities are carried at fair market value based on quoted market price with net unrealized loss of $0.2 million reported in stockholders equity as a component of accumulated other comprehensive income. Gains or losses on securities sold will be based on the specific identification method. The note receivable bears simple interest at 8.25% over an 18-month term and is due in November of 2008.
Other Comprehensive Income/(Loss). Comprehensive income/(loss) includes changes in the equity of a business during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income/(loss) refers to revenue, expenses, gains and losses that under U.S. generally accepted accounting principles are included in comprehensive income, but excluded from net income. For operations outside the U.S. that are denominated in currencies other than the U.S. dollar, results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at end-of-period exchange rates. Translation adjustments for our European subsidiary are included as a component of our accumulated other comprehensive loss in stockholders equity. Also included are any unrealized gains or losses on marketable securities that are classified as available-for-sale.
Stock-Based Compensation. We have two stock-based employee compensation plans: our Fifth Amended and Restated 1997 Stock Incentive Plan (the Stock Incentive Plan) and our Employee Stock Purchase Plan (the ESPP). We have also previously issued restricted stock to directors and certain key executives. We recorded compensation expense for all stock-based compensation plans using the fair value method prescribed by Financial Accounting Standards Board (FASB) Statement No. 123, Share Based Payment, as revised (SFAS 123(R)). Our non-cash stock compensation expense has been allocated to direct cost of revenue, research and development expense, sales and marketing expense, and general and administrative expense as detailed in Note 2.
TeleCommunication Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
Earnings per share. Basic income/(loss) per common share is based upon the average number of shares of common stock outstanding during the period. At March 31, 2008 and 2007, stock options to purchase approximately 5.1 million and 5.4 million shares, respectively, were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive. A reconciliation of basic to diluted weighted average common shares outstanding is as follows:
Income Taxes. The Company has a net deferred tax asset of approximately $49 million, against which it maintains a full valuation allowance. In accordance with requirements of FAS 109, the Company has considered criteria for determining whether it is more likely than not that its deferred tax assets will be realized, including the Companys history of net operating losses from 1999 through 2007.
Income tax amounts and balances are accounted for using the liability method of accounting for income taxes, and deferred income tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income tax expense of $0.1 was recorded for the three-months ended March 31, 2008 for alternative minimum tax due on income generated for the quarter.
If the Company generates sustained future taxable income against which these tax attributes may be applied, some or all of the valuation allowance would be reversed. If the valuation allowance were reversed, a portion would be recorded as an increase to paid in capital and the remainder would be recorded as a reduction in income tax expense.
The Company adopted FIN 48 on January 1, 2007 for which there was no cumulative effect of applying its provisions. The Company classifies interest and penalties accrued on any unrecognized tax benefits as a component of the provision for income taxes. There were no interest or penalties recognized in the consolidated statement of income for the three-months ended March 31, 2008 and 2007, respectively, and the consolidated balance sheet at March 31, 2008. The Company does not currently anticipate that the total amounts of unrecognized tax benefits will significantly increase within the next 12 months. The Company files income tax returns in U.S. and state jurisdictions. The Company is no longer subject to U.S. federal, state, and local tax examinations in major tax jurisdictions for periods before 2003.