FINANCIAL STATEMENTS AND
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM’S REPORT
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM’S REPORT
TELECOMMUNICATION SYSTEMS, INC
EMPLOYEE STOCK PURCHASE PLAN
EMPLOYEE STOCK PURCHASE PLAN
JANUARY 31, 2007, 2006 AND 2005
Telecommunication Systems, Inc. Employee Stock Purchase Plan
TABLE OF CONTENTS
| PAGE | ||||
| INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S REPORT | 3 | |||
| FINANCIAL STATEMENTS | ||||
| STATEMENTS OF FINANCIAL CONDITION | 4 | |||
| STATEMENTS OF INCOME AND CHANGES IN PLAN EQUITY | 5 | |||
| NOTES TO FINANCIAL STATEMENTS | 6 | |||
| CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 9 | |||
| Reznick Group, P.C. 500 East Pratt Street Suite 200 Baltimore, MD 21202-3100 | Tel: (410) 783-4900 Fax: (4101 727-0460 www.reznickgroup.com |
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S REPORT
Board of Directors of TeleCommunication Systems, Inc. Employee Stock Purchase Plan as Administrator of the TeleCommunication Systems, Inc. Employee Stock Purchase Plan
We have audited the accompanying statements of financial condition of the TeleCommunication Systems, Inc. Employee Stock Purchase Plan as of January 31, 2007, 2006 and 2005, and the related statements of income and changes in plan equity for each of the three years in the period ended January 31, 2007. These financial statements are the responsibility of the administrator. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial condition of the TeleCommunication Systems, Inc. Employee Stock Purchase Plan as of January 31, 2007, 2006 and 2005, and the related statements of income and changes in plan equity for each of the three years in the period ended January 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
| /s/ Reznick Group, P.C. | ||||
Baltimore, Maryland
April 27, 2007
April 27, 2007
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TeleCommunication Systems, Inc. Employee Stock Purchase Plan
STATEMENTS OF FINANCIAL CONDITION
January 31, 2007, 2006 and 2005
| 2007 | 2006 | 2005 | |||||||||||||
| Assets | |||||||||||||||
| Participant deposits due from employer | $ | 157,171 | $ | 67,120 | $ | 158,925 | |||||||||
| $ | 157,171 | $ | 67,120 | $ | 158,925 | ||||||||||
| Liabilities | |||||||||||||||
| Stock purchase payable | $ | 131,498 | $ | 66,641 | $ | 158,701 | |||||||||
| Refunds payable | 25,673 | 479 | 224 | ||||||||||||
| Total liabilities | 157,171 | 67,120 | 158,925 | ||||||||||||
| Plan equity | $ | — | $ | — | $ | — | |||||||||
See notes to financial statements
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TeleCommunication Systems, Inc. Employee Stock Purchase Plan
STATEMENTS OF INCOME AND CHANGES IN PLAN EQUITY
Years ended January 31, 2007, 2006 and 2005
| 2007 | 2006 | 2005 | ||||||||||
| Participant contributions | $ | 483,881 | $ | 290,457 | $ | 413,947 | ||||||
| Total additions to plan equity | 483,881 | 290,457 | 413,947 | |||||||||
| Terminations and withdrawals | 28,782 | 255 | 4,855 | |||||||||
| Contributions used for stock purchases | 323,601 | 223,561 | 250,391 | |||||||||
| Contributions held for future stock purchases | 131,498 | 66,641 | 158,701 | |||||||||
| Total deductions to plan equity | 483,881 | 290,457 | 413,947 | |||||||||
| Net change in plan equity | — | — | — | |||||||||
| Plan equity, beginnning of year | — | — | — | |||||||||
| Plan equity, end of year | $ | — | $ | — | $ | — | ||||||
See notes to financial statements
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TeleCommunication Systems, Inc. Employee Stock Purchase Plan
NOTES TO FINANCIAL STATEMENTS
January 31, 2007, 2006 and 2005
NOTE 1 — PLAN DESCRIPTION
The TeleCommunication Systems, Inc. Employee Stock Purchase Plan (the Plan) was approved by the shareholders of TeleCommunication Systems, Inc. (the Employer) effective November 1, 2000, to enable eligible employees of the Employer and its designated subsidiaries to purchase shares of the Employer’s common stock at a discount from fair market value. The Plan is intended to benefit the Employer by increasing the employees’ interest in the Employer’s growth and success, and encouraging employees to remain employees of the Employer or its designated subsidiaries. The Plan covers substantially all of the employees of the Employer and its designated subsidiaries. The Plan is governed by Section 423 of the Internal Revenue Code and is not subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). More details regarding the Plan provisions may be found in the Plan document.
As of January 31, 2007, 2006 and 2005 the total number of shares of $0.01 par value common stock of the Employer that are registered for purchase by participants is 1,384,932, 684,932 and 684,932. Common stock reserved for future employee purchases under the Plan aggregated 599,944 shares as of January 31, 2007. There are no other investment options for participants.
All regular full-time employee or regular part-time employee of the Employer may participate in the Plan, provided that they are scheduled to work at least 20 hours per week and they own less than 5% of the Employer’s common stock. An option period is determined at the discretion of the Employer’s Board of Directors (the Administrator). For the years ended January 31, 2007, 2006 and 2005, there were four option periods: February 1 through January 31, in three month intervals each.
Participants contribute after-tax payroll deductions of any whole number percentage of the base salary and overtime excluding bonuses, commissions and vacation pay. The employee may also deposit money into the plan directly by personal check given to the plan administrator in accordance with the plan document The Employer does not provide a matching or discretionary contribution, and contributions do not earn interest. Participants’ payroll deductions are accumulated during the option period. Shares are purchased on the last day of the option period at a purchase price equal to 85% of the fair market value of the common stock on the first or last trading day of the option period, whichever is lower. All shares purchased are deposited in the participant’s account at the Agent Broker. Generally, any balance remaining in an employee’s account after the exercise will be carried forward
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TeleCommunication Systems, Inc. Employee Stock Purchase Plan
NOTES TO FINANCIAL STATEMENTS — CONTINUED
January 31, 2007, 2006 and 2005
into the employee’s account for the next Option period. If the employee does not participate in that Option period, the amount remaining will be refunded.
Full-year participants are not permitted to purchase common stock in any one calendar year having an aggregate fair market value in excess of $10,500 determined as of the first trading date of the purchase period as to shares purchased during such period.
All funds contributed to the Plan may be used by the Employer for any corporate purpose until applied to the purchase of common stock or refunded to the participant. Funds are commingled with other general corporate funds and are not segregated by the Employer.
In the event of a participant’s termination, death or retirement, any remaining account balance will be distributed to the participant or the participant’s estate.
The Plan may be terminated at any time by the Company’s Board of Directors.
NOTE 2— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements
The accompanying financial statements are presented on the accrual basis of accounting. The Employer performs various administrative services for the Plan, including maintenance of participants’ payroll records.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
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TeleCommunication Systems, Inc. Employee Stock Purchase Plan
NOTES TO FINANCIAL STATEMENTS — CONTINUED
January 31, 2007, 2006 and 2005
Income Tax Status
The Administrator believes that the Plan is currently designed and being operated in compliance with Section 423 of the Internal Revenue Code as of the date of these financial statements. Participants are required to hold shares two years from the grant date or 21 months from the date of purchase under the plan to avoid additional income tax liabilities.
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