TSYS » Topics » TeleCommunication Systems, Inc. Notes to Consolidated Financial Statements March 31, 2009 (amounts in thousands, except per share amounts) (unaudited)

This excerpt taken from the TSYS 10-Q filed May 1, 2009.
 
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 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, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009. These consolidated financial statements should be read in conjunction with our audited financial statements and related notes included in our 2008 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 marketable securities, which are valued at $78 at March 31, 2009, are included in other current assets and are classified as available-for-sale in accordance with the provision of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. These securities are carried at fair market value based on quoted market price. We had not realized or unrealized gains or losses related to these securities during the first quarter of 2009. In the first quarter of 2008, the Company determined that the losses in fair market value of some of the marketable securities held were other-than-temporary and wrote down the value of these securities by approximately $480, which the write-down is included in Other income/(expense), net. Gains or losses on securities sold will be based on the specific identification method.
 
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 European 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.
 
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 record 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.
 
Earnings per share.  Basic income per common share is based upon the average number of shares of common stock outstanding during the period. At March 31, 2009 and 2008, stock options to purchase approximately 1.6 million and 5.1 million shares, respectively, were excluded from the computation of


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TeleCommunication Systems, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
 
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
 
    Ended
 
    March 31,  
    2009     2008  
 
Basic weighted average common shares outstanding
    45,567       42,273  
Dilutive options outstanding
    5,160       1,035  
Dilutive warrants outstanding
    498       470  
                 
Diluted weighted average common shares outstanding used in the calculation of diluted income
    51,225       43,778  
                 
 
Income Taxes.  Income tax amounts and balances are accounted for using the asset and liability method of accounting for income taxes as prescribed by SFAS 109. Deferred tax assets and liabilities are determined based on temporary differences between financial reporting basis and tax basis of assets and liabilities. Deferred tax assets are also recognized for tax net operating loss and income tax credit carryforwards. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when such amounts are projected to reverse or be utilized. The realization of total deferred tax assets is contingent upon the generation of future taxable income in the tax jurisdictions in which the deferred tax assets are located. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.
 
Income tax provision or benefit includes U.S. federal, state and local income taxes and is based on pre-tax income or loss. The interim period provision or benefit for income taxes is based upon the Company’s estimate of its annual effective income tax rate. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes and the ability of the Company to use income tax credits and net operating loss carryforwards.
 
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) which prescribes a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting interim periods, disclosure and transition. If a tax position does not meet the more-likely-than-not initial recognition threshold, no benefit is recorded in the financial statements. Upon the adoption of FIN 48 on January 1, 2007, the estimated value of the Company’s uncertain tax positions was a liability of $2,736 resulting from unrecognized net tax benefits which did not include interest and penalties. The Company recorded the estimated value of its uncertain tax position by reducing the value of certain tax attributes. The Company would classify any 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 three-months ended March 31, 2009 and 2008 or the consolidated balance sheet at March 31, 2009 and 2008. The Company is subject to U.S. federal income tax as well as state and local tax in various jurisdictions. As of March 31, 2009, open tax years in the federal and some state jurisdictions date back to 1999, due to the taxing authorities’ ability to adjust operating loss carry forwards.
 
Fair Value of Financial Instruments.  The fair value of the Company’s financial instruments approximates their carrying value.


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TeleCommunication Systems, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
 
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