SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarter ended March 31, 2003 | ||
OR | ||
[ ] | THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 0-30821
TELECOMMUNICATION SYSTEMS, INC.
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
Indicate by check mark whether the registrant (1) has fled all reports required to be fled 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 fling requirements for the past 90 days: Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Shares outstanding | ||||
Title of Each Class | as of April 15, 2003 | |||
Class A Common Stock, par value $0.01 per share | 19,742,661 | |||
Class B Common Stock, par value $0.01 per share | 9,849,960 | |||
Total Common Stock Outstanding | 29,592,621 | |||
Index
Page | ||||||||
PART I. FINANCIAL INFORMATION | ||||||||
Item 1. | Financial Statements | |||||||
Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 | 3 | |||||||
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 | 4 | |||||||
Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 | 5 | |||||||
Notes to Consolidated Financial Statements | 6 | |||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||||||
Item 3. | Qualitative and Quantitative Disclosures about Market Risk | 18 | ||||||
Item 4. | Controls and Procedures | 19 | ||||||
PART II. OTHER INFORMATION | ||||||||
Item 1. | Legal Proceedings | 20 | ||||||
Item 2. | Changes in Securities and Use of Proceeds | 20 | ||||||
Item 3. | Defaults Upon Senior Securities | 21 | ||||||
Item 4. | Submission of Matters to a Vote of Security Holders | 21 | ||||||
Item 5. | Other Information | 21 | ||||||
Item 6. | Exhibits and Reports on Form 8-K | 21 | ||||||
SIGNATURES | 22 | |||||||
CERTIFICATIONS | 23 |
2
TeleCommunication Systems, Inc.
Consolidated Statements of Operations
Three months ended | |||||||||||
March 31, | |||||||||||
2003 | 2002 | ||||||||||
Revenue | |||||||||||
Network software | |||||||||||
Network software licenses | $ | 2,467 | $ | 2,343 | |||||||
Network software services | 1,141 | 2,220 | |||||||||
Network software total | 3,608 | 4,563 | |||||||||
Service bureau | 7,555 | 5,920 | |||||||||
Network solutions | 8,129 | 6,367 | |||||||||
Total revenue | 19,292 | 16,850 | |||||||||
Operating costs and expenses | |||||||||||
Direct cost of network software | 1,685 | 2,927 | |||||||||
Direct cost of service bureau | 4,006 | 2,699 | |||||||||
Direct cost of network solutions | 5,360 | 4,629 | |||||||||
Research and development | 3,915 | 4,136 | |||||||||
Sales and marketing | 2,393 | 3,009 | |||||||||
General and administrative | 2,903 | 3,176 | |||||||||
Non-cash stock compensation expense | 373 | 424 | |||||||||
Depreciation and amortization of property and equipment | 1,545 | 1,572 | |||||||||
Amortization of software development costs | 1,030 | 1,334 | |||||||||
Amortization of goodwill and other intangible assets | 138 | 138 | |||||||||
Total operating costs and expenses | 23,348 | 24,044 | |||||||||
Loss from operations | (4,056 | ) | (7,194 | ) | |||||||
Interest expense | (276 | ) | (308 | ) | |||||||
Other income | 284 | 196 | |||||||||
Net loss | $ | (4,048 | ) | $ | (7,306 | ) | |||||
Loss per common share, basic and diluted | $ | (0.14 | ) | $ | (0.25 | ) | |||||
Weighted average shares — basic and diluted | 29,568 | 28,870 |
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TeleCommunication Systems, Inc.
Consolidated Balance Sheets
March 31, | December 31, | ||||||||||
2003 | 2002 | ||||||||||
(unaudited) | |||||||||||
Assets | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents | $ | 21,146 | $ | 27,402 | |||||||
Accounts receivable | 18,278 | 23,872 | |||||||||
Unbilled receivables, less allowance of $419 in 2003 and $361 in 2002 | 8,138 | 6,987 | |||||||||
Other current assets | 2,214 | 1,675 | |||||||||
Total current assets | 49,776 | 59,936 | |||||||||
Property and equipment, net of accumulated depreciation and amortization of $15,670 in 2003 and $14,125 in 2002 | 11,441 | 11,814 | |||||||||
Software development costs, net of accumulated amortization of $2,377 in 2003 and $1,347 in 2002 | 7,807 | 7,688 | |||||||||
Tradename, net of accumulated amortization of $1,208 in 2003 and $1,070 in 2002 | 392 | 530 | |||||||||
Other assets | 1,459 | 1,457 | |||||||||
Total assets | $ | 70,875 | $ | 81,425 | |||||||
Liabilities and stockholders’ equity | |||||||||||
Current liabilities | |||||||||||
Accounts payable and accrued expenses | $ | 11,816 | $ | 17,235 | |||||||
Accrued payroll and related liabilities | 3,279 | 3,395 | |||||||||
Deferred revenue | 2,772 | 2,846 | |||||||||
Current portion of capital lease obligations and notes payable | 4,634 | 4,770 | |||||||||
Total current liabilities | 22,501 | 28,246 | |||||||||
Capital lease obligations and notes payable, less current portion | 4,341 | 5,543 | |||||||||
Commitments and contingent liabilities | — | — | |||||||||
Stockholders’ equity | |||||||||||
Class A Common Stock; $0.01 par value: | |||||||||||
Authorized shares — 225,000,000; issued and outstanding shares of 19,698,433 in 2003 and 19,632,123 in 2002 | 197 | 196 | |||||||||
Class B Common Stock; $0.01 par value: | |||||||||||
Authorized shares — 75,000,000; issued and outstanding shares of 9,890,960 in 2003 and 2002 | 99 | 99 | |||||||||
Additional paid-in capital | 165,620 | 165,176 | |||||||||
Accumulated deficit | (121,883 | ) | (117,835 | ) | |||||||
Total stockholders’ equity | 44,033 | 47,636 | |||||||||
Total liabilities and stockholders’ equity | $ | 70,875 | $ | 81,425 | |||||||
4
TeleCommunication Systems, Inc.
Consolidated Statements of Cash Flows
Three months ended | ||||||||||
March 31, | ||||||||||
2003 | 2002 | |||||||||
Operating activities: | ||||||||||
Net loss | $ | (4,048 | ) | $ | (7,306 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||
Depreciation and amortization of property and equipment | 1,613 | 1,572 | ||||||||
Amortization of software development costs | 1,030 | 1,334 | ||||||||
Non-cash employee stock compensation expense | 373 | 424 | ||||||||
Amortization of goodwill and other intangible assets | 138 | 138 | ||||||||
State of Maryland loan forgiveness | (100 | ) | (100 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||
Accounts receivable, net | 5,594 | 2,980 | ||||||||
Unbilled receivables, net | (1,151 | ) | (2,452 | ) | ||||||
Other current assets | (539 | ) | (271 | ) | ||||||
Accounts payable and accrued expenses | (5,419 | ) | (4,003 | ) | ||||||
Accrued payroll and related liabilities | (116 | ) | 208 | |||||||
Deferred revenue | (74 | ) | 1,019 | |||||||
Net cash used in operating activities | (2,699 | ) | (6,457 | ) | ||||||
Investing activities: | ||||||||||
Purchases of property and equipment | (1,240 | ) | (1,214 | ) | ||||||
Capitalized software development costs | (1,149 | ) | (1,155 | ) | ||||||
Change in other assets | (2 | ) | 586 | |||||||
Net cash used in investing activities | (2,391 | ) | (1,783 | ) | ||||||
Financing activities: | ||||||||||
Payments on capital lease obligations | (856 | ) | (832 | ) | ||||||
Payments on long-term debt | (400 | ) | — | |||||||
Proceeds from long-term debt | 18 | — | ||||||||
Proceeds from exercise of employee stock options and sale of stock to employees | 72 | 289 | ||||||||
Net cash used in financing activities | (1,166 | ) | (543 | ) | ||||||
Net decrease in cash | (6,256 | ) | (8,783 | ) | ||||||
Cash and cash equivalents at the beginning of the period | 27,402 | 42,928 | ||||||||
Cash and cash equivalents at the end of the period | $ | 21,146 | $ | 34,145 | ||||||
5
TeleCommunication Systems, Inc.
Notes to Consolidated Financial Statements
1. 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-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. These consolidated financial statements should be read in conjunction with our audited financial statements and related notes included in our 2002 Annual Report on Form 10-K.
Use of Estimates.The preparation of financial statements in conformity with 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.
We use estimates to determine tax liabilities to state and local governments and estimate these liabilities based on our knowledge of applicable laws and regulations. Based on a review of such laws, we revised our estimate of these liabilities and recorded a reduction of the related expense of $300 for the three months ended March 31, 2003.
2. Supplemental Disclosure of Cash Flow Information
Property and equipment acquired under capital leases totaled $17 for the three months ended March 31, 2002. We did not acquire any property and equipment under capital leases for the three months ended March 31, 2003.
Interest paid totaled $287 and $307 for the three months ended March 31, 2003 and 2002, respectively.
3. Segment Information
During the fourth quarter of 2002, management began evaluating our performance within three operating segments: network software, service bureau and network solutions. Management also began evaluating our performance based on gross profit. Gross profit is defined as revenue less direct cost of revenue, excluding the amortization of software development costs, which under accounting principles generally accepted in the United States, is considered in determining gross profit from
6
Notes to Consolidated Financial Statements — (Continued)
software license revenues. We have restated prior period segment information for comparative purposes.
Three months ended | ||||||||||
March 31, | ||||||||||
2003 | 2002 | |||||||||
Revenue: | ||||||||||
Network software | ||||||||||
Network software licenses | $ | 2,467 | $ | 2,343 | ||||||
Network software services | 1,141 | 2,220 | ||||||||
Network software total | 3,608 | 4,563 | ||||||||
Service bureau | 7,555 | 5,920 | ||||||||
Network solutions | 8,129 | 6,367 | ||||||||
Total revenue | $ | 19,292 | $ | 16,850 | ||||||
Segment gross profit: | ||||||||||
Network software | $ | 1,923 | $ | 1,636 | ||||||
Service bureau | 3,549 | 3,221 | ||||||||
Network solutions | 2,769 | 1,738 | ||||||||
Total segment gross profit | $ | 8,241 | $ | 6,595 | ||||||
A reconciliation of segment gross profit for our three segments to net loss is as follows:
Three months ended | |||||||||
March 31, | |||||||||
2003 | 2002 | ||||||||
Total segment gross profit | $ | 8,241 | $ | 6,595 | |||||
Research and development expense | (3,915 | ) | (4,136 | ) | |||||
Sales and marketing expense | (2,393 | ) | (3,009 | ) | |||||
General and administrative expense | (2,903 | ) | (3,176 | ) | |||||
Non-cash stock compensation expense | (373 | ) | (424 | ) | |||||
Depreciation and amortization of property and equipment | (1,545 | ) | (1,572 | ) | |||||
Amortization of software development costs | (1,030 | ) | (1,334 | ) | |||||
Amortization of goodwill and other intangibles | (138 | ) | (138 | ) | |||||
Interest expense | (276 | ) | (308 | ) | |||||
Other income | 284 | 196 | |||||||
Net loss | $ | (4,048 | ) | $ | (7,306 | ) | |||
7
Notes to Consolidated Financial Statements — (Continued)
4. Intangible Assets
Intangible assets consisted of the following as of:
March 31, 2003 | December 31, 2002 | |||||||||||||||||
Gross | Gross | |||||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||||
Amortized intangible assets: | ||||||||||||||||||
Tradename | $ | 1,600 | $ | 1,208 | $ | 1,600 | $ | 1,070 | ||||||||||
Software development costs | 10,184 | 2,377 | 9,035 | 1,347 | ||||||||||||||
Total | $ | 11,784 | $ | 3,585 | $ | 10,635 | $ | 2,417 | ||||||||||
Estimated Future Amortization Expense: | ||||||||||||||||||
For the nine month period ending December 31, 2003 | $ | 2,882 | ||||||||||||||||
Year ending December 31, 2004 | $ | 2,825 | ||||||||||||||||
Year ending December 31, 2005 | $ | 2,251 | ||||||||||||||||
Year ending December 31, 2006 | $ | 241 |
5. 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 reserves for potential credit losses and historically such losses have been insignificant and within our expectations.
% of Total Revenue | ||||||||||
For the three months | ||||||||||
ended March 31, | ||||||||||
Customer | Segment | 2003 | 2002 | |||||||
Federal Agencies | Network Solutions and Network Software | 27% | 32% | |||||||
Customer A | Network Software | 13% | 15% | |||||||
Customer B | Network Software | N/A | 10% | |||||||
Customer C | Service Bureau | 10% | 11% |
As of March 31, 2003 | ||||||||
Accounts | Unbilled | |||||||
Customer | Receivable | Receivables | ||||||
Federal Agencies | 12% | 34% | ||||||
Customer A | 15% | N/A | ||||||
Customer B | N/A | 42% | ||||||
Customer D | 18% | N/A |
6. Stock-Based Compensation
We have two stock-based employee compensation plans, our Amended and Restated 1997 Stock Incentive Plan and our Employee Stock Purchase Plan. We record compensation expense for all stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(APB No. 25) and related Interpretations.
8
Notes to Consolidated Financial Statements — (Continued)
Under APB 25, compensation expense is recorded over the vesting period to the extent that the fair value of the underlying stock on the date of grant exceeds the exercise or acquisition price of the stock or stock-based award. The following table illustrates the effect on net loss attributable to common stockholders and loss per common share if we had applied the fair value recognition provisions of Financial Accounting Standards Board Statement No. 123,Accounting for Stock-Based Compensation(Statement No. 123), to stock-based employee compensation.
For the three months | |||||||||
ended March 31, | |||||||||
2003 | 2002 | ||||||||
Net loss attributable to common stockholders, as reported | $ | (4,048 | ) | $ | (7,306 | ) | |||
Add: Stock-based employee compensation expense included in reported net loss | 373 | 424 | |||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards | (1,117 | ) | (1,738 | ) | |||||
Pro forma net loss per share attributable to common stockholders | $ | (4,792 | ) | $ | (8,620 | ) | |||
Loss per share: | |||||||||
Basic and diluted — as reported | $ | (0.14 | ) | $ | (0.25 | ) | |||
Basic and diluted — pro forma | $ | (0.16 | ) | $ | (0.30 | ) | |||
In making the 2003 and 2002 pro forma estimates of stock compensation expense, we were required by generally accepted accounting principles to use the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including our expected stock price volatility. Because our stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect our fair value estimate, in our opinion, this model does not provide a reliable single measure of the fair value of our stock-based awards. In calculating the fair value of our stock options using Black-Scholes, we assumed that the expected life was 5 years, that the risk free interest rate was 3%, and that there was no dividend yield. We also assumed that the expected volatility of our stock was 139% for options granted in 2002, 164% for options granted in 2001 and 60% for options granted in 2000.
Prior to our initial public offering in 2000, we granted incentive stock options to employees and directors to purchase 885,983 shares of Class A Common Stock. The options were granted at an exercise price less than the estimated market value of Class A Common Stock at the date of grant. Net loss attributable to common stockholders, as reported, includes $373 and $424 of non-cash stock compensation expense related to these grants for the three months ended March 31, 2003 and 2002, respectively. We expect to record future stock compensation expense of $2,542 as a result of option grants that will be recognized over the remaining vesting period of three years.
Stock option grants to consultants and advisors are accounted for at the estimated fair value on the date at which performance is complete, or if earlier, the date at which a commitment for performance to earn the equity instruments is reached.
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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. This report 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. Some forward-looking statements may be identified by the use of such terms as “believes”, “anticipates”, “intends”, or “expects”. For example, the statement regarding our belief as to the sufficiency of our capital resources to meet our anticipated working capital and capital expenditures for at least the next twelve months is a forward-looking statement. These forward-looking statements relate to our plans, objectives and expectations for future operations. 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. Our actual financial results realized could differ materially from the statements made herein, depending in particular upon 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) reach profitability as early as anticipated or at all, (ii) 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, (iii) conduct our business in foreign countries, (iv) adapt and integrate new technologies into our products, (v) develop software without any errors or defects, (vi) protect our intellectual property rights, and (vii) implement our business strategy. 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.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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, including those related to intangible assets and contingencies and litigation. 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 identified our most critical accounting policies to be those related to revenue recognition for our software contracts with multiple elements, contracts accounted for using the percentage of completion method, capitalized software, intangible assets and evaluation of impairment. We describe these accounting policies in relevant sections of this discussion and analysis. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in our 2002 Annual Report on Form 10-K.
Overview
We manage our business in three segments: network software, service bureau and network solutions. Our network software segment consists of the development and licensing of software
10
Three months ended | ||||||||||
March 31, | ||||||||||
2003 | 2002 | |||||||||
Revenue: | ||||||||||
Network software | ||||||||||
Network software licenses | $ | 2,467 | $ | 2,343 | ||||||
Network software services | 1,141 | 2,220 | ||||||||
Network software total | 3,608 | 4,563 | ||||||||
Service bureau | 7,555 | 5,920 | ||||||||
Network solutions | 8,129 | 6,367 | ||||||||
Total revenue | $ | 19,292 | $ | 16,850 | ||||||
Segment gross profit: | ||||||||||
Network software | $ | 1,923 | $ | 1,636 | ||||||
Service bureau | 3,549 | 3,221 | ||||||||
Network solutions | 2,769 | 1,738 | ||||||||
Total segment gross profit | $ | 8,241 | $ | 6,595 | ||||||
Gross profit is defined as revenue less direct cost of revenue, excluding the amortization of software development costs, which under accounting principles generally accepted in the United States, is considered in determining gross profit from software license revenues. A reconciliation of segment gross profit to loss before income taxes and extraordinary item is as follows:
Three months ended | |||||||||
March 31, | |||||||||
2003 | 2002 | ||||||||
Total segment gross profit | $ | 8,241 | $ | 6,595 | |||||
Research and development expense | (3,915 | ) | (4,136 | ) | |||||
Sales and marketing expense | (2,393 | ) | (3,009 | ) | |||||
General and administrative expense | (2,903 | ) | (3,176 | ) | |||||
Non cash stock compensation expense | (373 | ) | (424 | ) | |||||
Depreciation and amortization of property and equipment | (1,545 | ) | (1,572 | ) | |||||
Amortization of software development costs | (1,030 | ) | (1,334 | ) | |||||
Amortization of goodwill and other intangibles | (138 | ) | (138 | ) | |||||
Interest expense | (276 | ) | (308 | ) | |||||
Other income | 284 | 196 | |||||||
Net loss | $ | (4,048 | ) | $ | (7,306 | ) | |||
For the three months ended March 31, 2003, customers that accounted for 10% or more of total revenue were Verizon Wireless, U.S. Cellular and various U.S. Government agencies. In addition, as of March 31, 2003, 42% of our total unbilled receivables were due from Hutchison 3G and 34% of our total unbilled receivables were due from various U.S. Government agencies. The loss of any of these customers would have a material adverse impact on our business.
11
Total company backlog at March 31, 2003 was $81.8 million of which we expect to realize $40.2 million of our total backlog in the next twelve months. The backlog at any given time may be affected by a number of factors, including contracts being renewed or new contracts being signed before existing contracts are completed. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments or future revenue.
Network Software Revenue and Related Direct Cost.We market our network software products and services by responding to requests for proposals, through our direct sales force and through channel partners. We generate network software revenue from licensing of our software products, and providing related maintenance and deployment services. We also sell custom software applications. The Wireless Internet Gateway, TCS Xypoint® Location Platform products, Short Message Service Center (SMSC), as well as Prepaid Wireless and alerting and message notification applications are the principal generators of software license fees.
We sell all of our software products directly to carriers. Initial licensing fees are a function of the number of subscribers in the network where our software is deployed. As a carrier’s subscriber base increases, the carrier must purchase additional capacity under its license agreement and we receive additional revenue. Generally, we recognize license fee revenue when each of the following has occurred: (1) evidence of an arrangement is in place; (2) we have delivered software; (3) the fee is fixed or determinable; and (4) collection of the fee is probable. Software projects that require significant customization are accounted for under the percentage of completion method. We measure progress to completion using costs incurred compared to estimated total costs. Software license fees billed and not recognized as revenue are included in deferred revenue.
We have also historically sold some of our network software products through our channel relationship with Lucent. This sales process typically includes participation of our engineers along with Lucent in presenting our products to prospective customers. Lucent pays us initial license fees generally equal to 50% of the revenue it generates from sales of the Short Message Service Center application that we developed under our 1996 development agreement. For sales of our Wireless Internet Gateway, Lucent pays us initial fees ranging between 75% and 90% of the sale value which we negotiate on a case-by-case basis.
Our network software service revenue arises from annual maintenance fees for our packaged and custom software products and fees from custom development and implementation of software products. Maintenance fees on packaged software are collected in advance and recognized ratably over the 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. We also occasionally sell computer equipment as part of our packaged software sales. We recognize fixed-fee contract revenue using the percentage-of-completion method. We measure progress to completion using costs incurred compared to estimated total costs. We recognize estimated losses under long-term contracts in their entirety upon discovery. If we did not accurately estimate total costs to complete a contract or do not manage our contracts within the planned budget, then future margins may be negatively affected or losses on existing contracts may need to be recognized.
The direct cost of our network software revenue consists primarily of compensation, benefits, purchased equipment, third-party software and travel expenses incurred when providing our services.
Service Bureau Revenue and Direct Cost of Revenue.Our service bureau offerings include our E9-1-1 application, hosted Position Determining Entity (PDE) software and Message Distribution Center applications. Revenue from our service bureau offerings consists of monthly recurring service fees and is recognized in the month earned. E9-1-1 and PDE service fees are primarily dependent on the number of subscribers the carrier covers, Public Service Answering Points (PSAPs) served or cell sites that provide E9-1-1 services for the carrier. As the carrier’s number of subscribers, PSAPs, or cell sites increases, the monthly recurring service fees increase. Message Distribution Center revenue is priced based on message volume.
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The direct cost of our service bureau revenue consists primarily of compensation, benefits, purchased equipment, third-party software and travel expenses incurred when providing our services, as well as the cost of our network operations centers circuits for connectivity to carrier customers and local governments’ PSAPS.
Network Solutions Revenue and Related Direct Cost.We generate network solutions revenue from the design, development and deployment of information processing and communication systems for corporate and government enterprises. Representative examples of recent network solutions projects include delivery of our SwiftLink™ product, lightweight, secure, deployable communications systems to the U.S. Departments of State and Defense. SwiftLink™ provides secure voice, video and data communications, supports a worldwide network during trips abroad and throughout the United States and provides full network functionality and IP telephony capability using landlines and satellite-based technologies. During the first quarter of 2002, we began operation of our teleport facility in Baltimore, MD, which supports the integration of satellite communications and terrestrial wireless broadband with U.S. broadband networks. Through this teleport facility we now offer voice, video and data connectivity via satellite to North and South America, as well as Africa and Europe. We generally provide network solutions under long-term contracts. We recognize revenue under long-term contracts as billable costs are incurred and for fixed-price contracts using the percentage-of-completion method, measured by total costs incurred compared to total estimated costs. We recognize estimated losses on contracts in their entirety upon discovery. If we did not accurately estimate total costs to complete a contract or do not manage our contracts within the planned budget, then future margins may be negatively affected or losses on existing contracts may need to be recognized. Under our contracts with the U.S. government, contract costs, including the allocated indirect expenses, are subject to audit and adjustment by the Defense Contract Audit Agency. We record revenue under these contracts at estimated net realizable amounts.
The direct cost of our network solutions revenue consists primarily of compensation, benefits, travel, purchased equipment and the costs of third-party contractors that we engage. Our direct costs of providing services under long-term contracts include an allocation of indirect costs at rates that comply with federal contractor cost accounting regulations.
Research and Development Expense.Our research and development expense consists of the costs of developing software products incurred prior to establishing technological feasibility. For new products, technological feasibility is established when an operative version of the computer software product is completed in the same software language as the product to be ultimately marketed, performs all the major functions planned for the product, and has successfully completed initial customer testing. Technological feasibility for enhancements to an existing product is established when a detail program design is completed. We incur research and development costs to enhance existing packaged software products as well as to create new software products. These costs primarily include compensation and benefits as well as costs associated with using third party laboratory and testing resources. We expense research and development costs as they are incurred.
Sales and Marketing Expense.Our sales and marketing expenses include compensation and benefits, trade show, travel, advertising and public relations costs which are expensed as incurred. Our marketing efforts also include speaking engagements and attending and sponsoring industry conferences. We sell our network software products and services through our direct sales force and through indirect channels. We have also historically leveraged our relationship with Lucent to market our network software products to wireless carrier customers and we added Motorola as a sales channel in 2001. We sell our network solutions primarily through direct sales professionals.
General and Administrative Expense.General and administrative expense consists primarily of compensation costs and other costs associated with management, finance, human resources and internal information systems. These costs include compensation and benefits, rent, utilities and other facilities costs which are expensed as incurred.
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Non-Cash Stock-Based Compensation Expense.During the second and third quarters of 2000, we granted options to purchase 885,983 shares of Class A Common Stock to employees and directors at an exercise price less than the fair market value of our Class A Common Stock at the date of grant. We will record future additional stock compensation expense of approximately $2.5 million as a result of these option grants that will be recognized ratably over the remaining vesting period of approximately three years. During the three months ended March 31, 2003 and 2002, we recognized approximately $0.4 million of stock compensation expense related to these grants.
Depreciation and Amortization Expense.Depreciation and amortization expense (other than amortization of software development costs) represents the period costs associated with our investment in computers, telephony 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.
Amortization of Software Development Costs.We capitalize software development costs after we establish technological feasibility, and amortize those costs over the estimated useful lives of the software beginning on the date when the software is first available for general release. We calculate amortization of software development costs on a product-by-product basis using the straight-line method over the remaining estimated economic life of the product, which is never greater than three years. We also compute amortization using the ratio that current revenue for the product bears to the total of current and anticipated future revenue for that product. If this revenue curve method results in amortization greater than the amount computed using the straight-line method, we record amortization at that greater amount. Amortization as a percentage of software license fees is generally a higher percentage in the early stages of a product’s life cycle. Our policies to determine when to capitalize software development costs and how much to amortize in a given period requires us to make subjective estimates and judgments. If our software products do not achieve the level of market acceptance that we expect and our future revenue estimates for these products change, the amount of amortization that we record may increase compared to prior periods.
Amortization of Other Intangible Asset.Other intangible asset consists of the Xypoint® tradename. The cost of the tradename is being amortized over its estimated useful life of three years using the straight-line method.
Other Income.Other income consists primarily of income earned on cash equivalents, foreign currency transaction gain or loss and other income related to recording our derivative investment activities.
Results of Operations
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31, 2002
Revenue.Total revenue increased $2.4 million, or 14%, to $19.3 million in the first three months of 2003 from $16.9 million in the same period in 2002.
Total network software revenue decreased $1.0 million, or 21%, to $3.6 million in the first quarter of 2003 from $4.6 million in the same period in 2002. Network software license revenue increased $0.2 million, or 5%, to $2.5 million in the first quarter of 2003 from $2.3 million in the same period in 2002. Network software service revenue decreased $1.1 million, or 49%, to $1.1 million in the first quarter of 2003 from $2.2 million in the same period in 2002. This decrease was primarily due to the completion of custom software application projects for government agencies in the fourth quarter of 2002. In late 2002, we decided to not pursue new opportunities for developing custom software applications for government agencies.
Service bureau revenue increased $1.7 million, or 28%, to $7.6 million in the first three months of 2003 from $5.9 million in the same period in 2002. The increase in revenue is due to an increase in the number of customers and related E9-1-1 deployments. As of March 31, 2003, the number of PSAP connections we served increased to 3,150, up 64% from the 1,920 PSAP connections served
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Network solutions revenue increased $1.7 million, or 28%, to $8.1 million in the first three months of 2003 from $6.4 million in the same period in 2002. Revenue increased in the first three months of 2003 primarily due to increased volume of deployable communication system sales.
Direct Cost of Revenue.Total direct cost of revenue increased $0.8 million, or 8%, to $11.1 million in the first three months of 2003 from $10.3 million in the same period in 2002. As a percentage of revenue, direct cost of revenue decreased to 57% in the first three months of 2003 from 61% in the same period in 2002.
Direct cost of network software decreased $1.2 million, or 42%, to $1.7 million in the first three months of 2003 from $2.9 million in the same period in 2002. As a percentage of related revenue, direct cost of network software decreased to 47% in the first three months of 2003 from 64% in the same period in 2002. This decrease is primarily a result of a change in the makeup of software revenue and direct cost of network software. In the first three months of 2002, a greater portion of license revenue and direct cost of software was related to several custom software development projects which are accounted for under the percentage-of-completion method which generally achieve lower margins than those typically associated with off-the-shelf license revenue. In the first three months of 2003, a smaller portion of revenue and direct cost is related to percentage-of-completion projects, resulting in higher margins.
Direct cost of service bureau increased $1.3 million, or 48%, to $4.0 million in the first three months of 2003 from $2.7 million in the same period in 2002. The increase in costs is related to a significantly greater number of deployments in 2003 completed compared to the prior year. As a percentage of related revenue, direct cost of service bureau increased from 46% in the first three months of 2002 to 53% in the first three months of 2003. The increase in direct cost of service bureau as a percentage of revenue is due to lower average per unit pricing under new long-term contracts plus the higher costs in the quarter related to deployment activity.
Direct cost of network solutions increased $0.8 million, or 16%, to $5.4 million in the first three months of 2003 from $4.6 million in the same period in 2002. As a percentage of related revenue, direct cost of network solutions decreased to 66% in the first three months of 2003 from 73% in the same period in 2002. Network solutions projects have variable margins that fluctuate based on the type and complexity of the projects. Any variances in margins between periods are primarily due to changes in the mix of projects.
Research and Development Expense.Research and development expense decreased $0.2 million, or 5%, to $3.9 million in the first three months of 2003 from $4.1 million for the same period in 2002. The decrease is due to the timing and mix of projects in development and the amount of capitalized software projects. Management continually assesses our spending on research and development to ensure resources are focused on products that are expected to achieve the highest level of success.
Sales and Marketing Expense.Sales and marketing expense decreased $0.6 million, or 20%, to $2.4 million in the first three months of 2003 from $3.0 million in the same period in 2002. Our sales and marketing expenses have decreased largely due to reduced headcount and the alignment of resources with products and services to more effectively target certain markets while reducing overall operating expenses.
General and Administrative Expense.General and administrative expense decreased $0.3 million, or 9%, to $2.9 million in the first three months of 2003 from $3.2 million in the same period in 2002. The decrease in general and administrative expenses reflects savings realized through combining systems and processes of acquired companies into our central operations and reduced headcount as well as a reduction related to the revision of an estimate for potential tax liabilities to state and local governments.
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Depreciation and Amortization Expense.Depreciation and amortization of property and equipment was approximately $1.5 million for the first three months of 2003 and 2002.
Amortization of Software Development Costs.Amortization of software development costs were $1.0 million in the first three months of 2003 compared to $1.3 million for the same period in 2002. Amortization expense as a percentage of software license fees decreased to 42% in the first three months of 2003 from 57% in the same period in 2002 as a result of an increase in fully amortized projects.
Interest Expense.Interest expense was approximately $0.3 million for the three months ended March 31, 2003 and 2002.
Other Income.Other income was $0.3 million in the first three months of 2003 compared to $0.2 million in the same period in 2002. The increase is due to recording foreign currency transaction gains.
Liquidity and Capital Resources
We have funded our recent operations and capital expenditures primarily using net proceeds from our initial public offering in August 2000, which generated cash of approximately $83.2 million, as well as revenue from our operations and various borrowing arrangements. In 2001, our borrowing arrangements provided funding primarily through capital lease obligations. During the second half of 2002, as an alternative to leasing, we borrowed $5.2 million under a long-term debt arrangement to fund fixed asset purchases. As of March 31, 2003, we had $21.1 million in cash and cash equivalents and working capital of $27.3 million. We have an agreement with Silicon Valley Bank for a $15.0 million line of credit. We can borrow an amount equal to up to 80% of receivables less than 90 days old. The line of credit is secured by accounts receivable and bears interest at prime plus 1.5% (5.75% at March 31, 2003). The line of credit will expire in April 2004.
Three months ended | |||||||||
March 31, | |||||||||
2003 | 2002 | ||||||||
Net cash used in: | |||||||||
Operating activities | $ | (2,699 | ) | $ | (6,457 | ) | |||
Investing activities | (2,391 | ) | (1,783 | ) | |||||
Financing activities | (1,166 | ) | (543 | ) |
Our net cash used in operating activities was $2.7 million in the first three months of 2003 and $6.5 million in the same period in 2002. The $2.7 million in net cash used in operating activities for the first three months of 2003 reflects a net loss of $4.0 million, a net decrease in operating assets and liabilities of $1.7 million, partly offset by non-cash expenses of $3.0 million. The changes in our operating assets and liabilities vary primarily based on the timing of billings and collections for long-term projects and license sales.
Net cash used in investing activities was $2.4 million in the first three months of 2003 and $1.8 million in the first three months of 2002. In the first quarter of 2003, cash used in investing activities includes $1.1 million for the development of our software products and $1.2 million for the purchase of property and equipment.
Net cash used in financing activities was $1.2 million in the first three months of 2003 and $0.5 million in the same period in 2002. In the first quarter of 2003, we repaid capital lease obligations of $0.9 million and notes payable of $0.4 million.
During the second half of 2002, we borrowed approximately $5.2 million to primarily fund equipment purchases. The debt bears interest at 7.75% and is secured by the accounts receivable of one customer.
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On September 24, 2002 we acquired substantially all of the assets of Open Telephone Network, Inc. The purchase price of approximately $1.1 million includes $0.3 million of common stock, $0.2 million of cash payments and $0.6 million of acquisition and integration costs. We issued 232,210 shares of Class A Common Stock, valued at $1.13 per share, the average market price per share of our Class A Common Stock for the period two days before and including September 24, 2002, the closing date of the acquisition. An additional 232,210 shares of our Class A Common Stock are being held in escrow until gross profits of $1.0 million related to Otelnet products is realized. If the gross profit target is not met by December 31, 2003, then the shares held in escrow will be returned to us. Additional contingent consideration will be calculated as a percentage of gross profits achieved. For example, if gross profits from the sale of Otelnet products reach $2.0 million by December 31, 2003 and are over and above the criteria to earn the escrow shares, the value of the additional consideration would be $0.8 million. There are no contingent payments beyond the year ended December 31, 2003. The additional payments can be made either in cash or Class A Common Stock at our option. Any contingent payments made will be accounted for as additional consideration. The additional payments can be made either in cash or Class A Common Stock at our option. No contingent payments have been made or are due as of March 31, 2003.
As of March 31, 2003, our most significant commitments consisted of long-term debt, obligations under capital leases and non-cancelable operating leases. We lease certain furniture and computer equipment under capital leases. We lease office space and equipment under non-cancelable operating leases. As of March 31, 2003 our commitments consisted of the following (amounts in thousands):
2003 | 2004-2005 | 2006-2007 | Total | |||||||||||||
Notes payable | $ | 1,262 | $ | 3,514 | $ | 8 | $ | 4,784 | ||||||||
Capital lease obligations | 2,187 | 1,992 | 12 | 4,191 | ||||||||||||
Operating leases | 2,171 | 3,023 | 501 | 5,695 | ||||||||||||
$ | 5,620 | $ | 8,529 | $ | 521 | $ | 14,670 | |||||||||
We currently believe that we have sufficient capital resources to meet our anticipated working capital and capital expenditures for at least the next twelve months, but unanticipated events and opportunities may make it necessary for us to return to the public markets or establish new credit facilities or raise capital in private transactions in order to meet our capital requirements.
Related Party Transactions
We have entered into a lease with Annapolis Partners LLC to explore the opportunity of relocating our Annapolis offices to a planned new real estate development. Our President and Chief Executive Officer owns a controlling voting and economic interest in Annapolis Partners LLC and he also serves as a member. The financial and many other terms of the lease have not yet been established. The lease is subject to several contingencies and rights of termination. For example, the lease can be terminated at the sole discretion of our Board of Directors if the terms and conditions of the development are unacceptable to us, including without limitation the circumstances that market conditions make the lease not favorable to us or the overall cost is not in the best interest to us or our shareholders, or any legal or regulatory restrictions apply. Our Board of Directors will evaluate this opportunity along with alternatives that are or may become available in the relevant time periods and there is no assurance that we will enter into a definitive lease at this new development site.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
We have limited exposure to financial market risks, including changes in interest rates. In May 2002, we entered into an agreement with Silicon Valley Bank for a $15.0 million line of credit. The line bears an interest rate of prime plus 1.5% (5.75% at March 31, 2003). As of March 31, 2003, we had $6.5 million available and unused under the line of credit. As of April 15, 2003, there were no borrowings outstanding under the line of credit.
During the second half of 2002, we borrowed approximately $5.2 million to primarily fund equipment purchases. The debt bears interest at a fixed rate of 7.75%.
At March 31, 2003, we had cash and cash equivalents of $21.1 million. Cash and cash equivalents consisted of demand deposits and money market accounts that are interest rate sensitive. However, these investments have short maturities mitigating their sensitivity to interest rates. A hypothetical 100 basis point adverse movement (decrease) in interest rates would have increased our net loss for the first quarter of 2003 by approximately $70,000, resulting in no significant impact on our consolidated financial position, results of operations or cash flows.
Foreign Currency Risk
In January 2002, we entered into a contract for the sale of our products and services, which is denominated in British Pounds Sterling. Fluctuations in the value of the British Pound Sterling relative to the United States dollar could cause us to incur foreign currency exchange gains or losses. Under the terms of this contract, we will be paid in British Pounds Sterling which exposes us to foreign currency exchange risk.
In April 2002, we entered into several foreign currency option contracts. A portion of the option contracts, notional amount of £4.6 million British Pound Sterling, were entered into to manage our exposure to changes in the foreign currency exchange rate related to the forecasted cash receipts under this contract. These foreign currency options were used to convert the variable exchange rate on forecasted cash receipts into fixed exchange rates. Because of the effectiveness of our hedge associated with the forecasted cash receipts, the change in fair value of our foreign currency options resulting from changes in the exchange rate is reported as a component of other comprehensive income. These options have various expiration dates between October 2002 and March 2003.
We also entered into foreign currency options, notional amount of £2.3 million British Pound Sterling, for speculative purposes in April 2002. These option contracts do not meet the criteria for hedge accounting treatment. The change in fair value of these options of approximately $445,300 is reflected in Other Income on our Consolidated Statements of Operations. These options had various expiration dates between October 2002 and March 2003.
During 2002, we settled options with a notational value of £1.4 million British Pound Sterling and options with a notational value of £2.9 million British Pound Sterling expired and were not exercised. Cash paid to settle options was $0.3 million.
As of March 31, 2003, we did not have any outstanding option contracts. Cash paid to settle options during the first quarter was approximately $0.4 million.
As of March 31, 2003 we have approximately $3.4 million in unbilled receivables and $1.2 million in accounts receivable that are exposed to foreign currency exchange risk. For the three months ended March 31, 2003, we recorded $75,000 foreign exchange gain on unbilled receivables and $54,000 foreign exchange gain on accounts receivable.
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Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, 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 Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.
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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 common stock during the period August 8, 2000 through December 6, 2000. The plaintiffs allege that the Underwriters agreed to allocate 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 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 of 1933, as amended, and that the underwriters violated Section 10(b) of the Securities Exchange Act of 1934, as amended, 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. We intend to vigorously defend the lawsuit. We believe that more than 300 other companies have been named in nearly identical lawsuits that have been filed by some of the same law firms that represent the plaintiffs in the lawsuit against us.
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 2. Change in Securities and Use of Proceeds
From August 7, 2000, the effective date of our Registration Statement on Form S-1, to March 31, 2003, our use of net proceeds was as follows:
(000’s) | |||||
Net offerings to issuer | $ | 83,190 | |||
Use of proceeds: | |||||
Acquisitions | 3,956 | ||||
Property and equipment | 9,447 | ||||
Working capital | 37,503 | ||||
Repayment of indebtedness | 11,138 | ||||
Temporary investments: | |||||
Cash and cash equivalents | 21,146 | ||||
$ | 83,190 | ||||
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit | ||||
Numbers | Description | |||
99.02 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
99.03 | 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 25th day of April, 2003.
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 Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
/s/ MAURICE B. TOSÉ Maurice B. Tosé | Chairman, President and Chief Executive Officer (Principal Executive Officer) | April 29, 2003 | ||
/s/ THOMAS M. BRANDT, JR. Thomas M. Brandt, Jr. | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | April 29, 2003 |
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CERTIFICATIONS
I, Maurice B. Tosé, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TeleCommunication Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | |
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 29, 2003 | |
/s/ MAURICE B. TOSÉ | |
Maurice B. Tosé | |
Chairman, Chief Executive Officer and President |
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1. I have reviewed this quarterly report on Form 10-Q of TeleCommunication Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | |
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 29, 2003 | |
/s/ THOMAS M. BRANDT, JR. | |
Thomas M. Brandt, Jr. | |
Senior Vice President & Chief Financial Officer |
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