##### 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 March 31, 2011
 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.
  MARYLAND
    
    52-1526369(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)275 West Street, Annapolis, MD
    
    21401(Address of principal executive offices)
    
    (Zip Code)
 (410) 263-7616
 þ o
 o o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Shares outstandingas of April 30,Title of Each Class
    
    2011Class A Common Stock, par value
$0.01 per share
    
    
    51,118,734Class B Common Stock, par value
$0.01 per share
    
    
    5,591,334Total Common Stock Outstanding
    
    
    56,710,068




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##### 



INDEX
 TELECOMMUNICATION SYSTEMS, INC.
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010
    
    
    3Consolidated Statements of Income for the three-months ended March 31, 2011 and 2010
(Unaudited)
    
    
    4Consolidated Statement of Stockholders Equity for the three-months ended March 31,
2011 (Unaudited)
    
    
    5Consolidated Statements of Cash Flows for the three-months ended March 31, 2011 and
2010 (Unaudited)
    
    
    6Notes to Consolidated Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    31SIGNATURES
    
    
    32EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



TeleCommunication Systems, Inc.
 
 Consolidated Balance Sheets
(amounts in thousands, except share data)
 March 31,
    
    
    December 31,2011
    
    
    2010(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    16,394
    
    
    $
    45,220Marketable securities
    
    
    38,315
    
    
    
    36,307Accounts receivable, net of allowance of $442 in 2011 and $447 in 2010
    
    
    63,491
    
    
    
    52,073Unbilled receivables
    
    
    23,401
    
    
    
    32,358Inventory
    
    
    5,764
    
    
    
    5,440Deferred income tax assets
    
    
    6,737
    
    
    
    8,179Deferred project costs and other current assets
    
    
    16,364
    
    
    
    8,961Total current assets
    
    
    170,466
    
    
    
    188,538Property and equipment, net of accumulated depreciation and
amortization of $60,014 in 2011 and 56,696 in 2010
    
    
    42,684
    
    
    
    39,337Software development costs, net of accumulated amortization of
$21,792 in 2011 and $19,241 in 2010
    
    
    37,854
    
    
    
    39,427Acquired intangible assets, net of accumulated amortization of
$7,516 in 2011 and $6,190 in 2010
    
    
    36,032
    
    
    
    28,264Goodwill
    
    
    176,495
    
    
    
    159,143Other assets
    
    
    13,093
    
    
    
    8,100Total assets
    
    $
    476,624
    
    
    $
    462,809Liabilities and stockholders equityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    33,026
    
    
    $
    42,833Accrued payroll and related liabilities
    
    
    13,544
    
    
    
    13,570Deferred revenue
    
    
    21,666
    
    
    
    18,063Current portion of note payable and capital lease obligations
    
    
    24,818
    
    
    
    24,519Total current liabilities
    
    
    93,054
    
    
    
    98,985Notes payable and captial lease obligations, less current portion
    
    
    133,147
    
    
    
    135,981Non-current deferred income tax liabilities
    
    
    7,741
    
    
    
    8,382Other liabilities
    
    
    9,735
    
    
    
    3,916Stockholders equity:Class A Common Stock; $0.01 par value:Authorized shares - 225,000,000; issued and outstanding
shares of 51,060,884 in 2011 and 47,749,762 in 2010
    
    
    511
    
    
    
    478Class B Common Stock; $0.01 par value:Authorized shares - 75,000,000; issued and outstanding shares
of 5,591,334 in 2011 and 5,741,334 in 2010
    
    
    56
    
    
    
    57Additional paid-in capital
    
    
    312,913
    
    
    
    297,585Accumulated other comprehensive income
    
    
    13
    
    
    
    30Accumulated deficit
    
    
    (80,546
    )
    
    
    (82,605
    )Total stockholders equity
    
    
    232,947
    
    
    
    215,545Total liabilities and stockholders equity
    
    $
    476,624
    
    
    $
    462,809
  3




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TeleCommunication Systems, Inc.
 
 Consolidated Statements of Income
(amounts in thousands, except per share data)
(unaudited)
 Three Months EndedMarch 31,2011
    
    
    2010RevenueServices
    
    $
    74,802
    
    
    $
    59,844Systems
    
    
    15,564
    
    
    
    31,073Total revenue
    
    
    90,366
    
    
    
    90,917Direct costs of revenueDirect cost of services revenue
    
    
    41,707
    
    
    
    34,332Direct cost of systems revenue
    
    
    12,065
    
    
    
    23,036Total direct cost of revenue
    
    
    53,772
    
    
    
    57,368Services gross profit
    
    
    33,095
    
    
    
    25,512Systems gross profit
    
    
    3,499
    
    
    
    8,037Total gross profit
    
    
    36,594
    
    
    
    33,549Operating expensesResearch and development expense
    
    
    8,543
    
    
    
    8,518Sales and marketing expense
    
    
    7,350
    
    
    
    5,979General and administrative expense
    
    
    10,566
    
    
    
    8,462Depreciation and amortization of property and equipment
    
    
    3,099
    
    
    
    1,976Amortization of acquired intangible assets
    
    
    1,325
    
    
    
    1,172Total operating expenses
    
    
    30,883
    
    
    
    26,107Income from operations
    
    
    5,711
    
    
    
    7,442Interest expense
    
    
    (1,920
    )
    
    
    (2,352
    )Amortization of deferred financing fees
    
    
    (187
    )
    
    
    (160
    )Other income, net
    
    
    35
    
    
    
    490Income before income taxes
    
    
    3,639
    
    
    
    5,420Provision for income taxes
    
    
    (1,580
    )
    
    
    (410
    )Net income
    
    $
    2,059
    
    
    $
    5,010Net income per share-basic
    
    $
    0.04
    
    
    $
    0.10Net income per share-diluted
    
    $
    0.04
    
    
    $
    0.08Weighted average shares outstanding-basic
    
    
    55,530
    
    
    
    52,654Weighted average shares outstanding-diluted
    
    
    57,837
    
    
    
    67,245
  4




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TeleCommunication Systems, Inc.
 
 Consolidated Statement of Stockholders Equity
(amounts in thousands, except share data)
(unaudited)
 AccumulatedClass A
    
    
    Class B
    
    
    Additional
    
    
    OtherCommon
    
    
    Common
    
    
    Paid-In
    
    
    Comprehensive
    
    
    AccumulatedStock
    
    
    Stock
    
    
    Capital
    
    
    Income/(Loss)
    
    
    Deficit
    
    
    TotalBalance at January 1, 2011
    
    $
    478
    
    
    $
    57
    
    
    $
    297,585
    
    
    $
    30
    
    
    $
    (82,605
    )
    
    $
    215,545Issuance of 3,000,000 shares of Class A Common
Stock in connection with the acquisition of
Trident Space & Defense, LLC
    
    
    30
    
    
    
    
    
    
    
    12,240
    
    
    
    
    
    
    
    
    
    
    
    12,270Options exercised for the purchase of 96,454 shares
of Class A Common Stock
    
    
    1
    
    
    
    
    
    
    
    282
    
    
    
    
    
    
    
    
    
    
    
    283Issuance of 64,569 shares of Class A Common Stock
under Employee Stock Purchase Plan
    
    
    1
    
    
    
    
    
    
    
    225
    
    
    
    
    
    
    
    
    
    
    
    226Conversion of 150,000 shares of Class B Common
Stock to Class A Common Stock
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock based compensation expense
    
    
    
    
    
    
    
    
    
    
    2,581
    
    
    
    
    
    
    
    
    
    
    
    2,581Net unrealized loss on securities and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    (17
    )Net income for the three-months ended March 31, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,059
    
    
    
    2,059Balance at March 31, 2011
    
    $
    511
    
    
    $
    56
    
    
    $
    312,913
    
    
    $
    13
    
    
    $
    (80,546
    )
    
    $
    232,947
  5




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##### Table of Contents



TeleCommunication Systems, Inc.
 
 Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
 Three Months EndedMarch 31,2011
    
    
    2010Operating activities:Net Income
    
    $
    2,059
    
    
    $
    5,010Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of property and equipment
    
    
    3,099
    
    
    
    1,976Amortization of capitalized software development costs
    
    
    2,551
    
    
    
    2,306Stock based compensation expense
    
    
    2,581
    
    
    
    3,122Deferred tax provision
    
    
    1,579
    
    
    
    410Amortization of acquired intangible assets
    
    
    1,325
    
    
    
    1,172Amortization of deferred financing fees
    
    
    187
    
    
    
    160Other non-cash adjustments
    
    
    1,698
    
    
    
    1,282Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (9,018
    )
    
    
    (2,503
    )Unbilled receivables
    
    
    8,957
    
    
    
    (4,766
    )Inventory
    
    
    (324
    )
    
    
    (3,851
    )Deferred project costs and other current assets
    
    
    (1,647
    )
    
    
    21,655Other assets
    
    
    234
    
    
    
    1,359Accounts payable and accrued expenses
    
    
    (11,110
    )
    
    
    (7,048
    )Accrued payroll and related liabilities
    
    
    (642
    )
    
    
    (8,428
    )Deferred revenue
    
    
    1,415
    
    
    
    11,342Other liabilities
    
    
    (550
    )
    
    
    (3,573
    )Subtotal  Changes in operating assets and liabilities
    
    
    (12,687
    )
    
    
    4,187Net cash provided by operating activities
    
    
    2,393
    
    
    
    19,625Investing activities:Acquisitions, net of cash acquired
    
    
    (16,376
    )
    
    
    Earnout payment related to 2009 acquisition
    
    
    (3,213
    )
    
    
    Purchases of marketable securities
    
    
    (9,952
    )
    
    
    Proceeds from sale and maturity of marketable securities
    
    
    7,683
    
    
    
    Purchases of property and equipment
    
    
    (5,268
    )
    
    
    (2,724
    )Capitalized software development costs
    
    
    (978
    )
    
    
    (821
    )Net cash used in investing activities
    
    
    (28,104
    )
    
    
    (3,545
    )Financing activities:Payments on long-term debt and capital lease obligations
    
    
    (3,624
    )
    
    
    (2,552
    )Proceeds from exercise of employee stock options and sale of stock
    
    
    509
    
    
    
    1,462Net cash used in financing activities
    
    
    (3,115
    )
    
    
    (1,090
    )Net (decrease)/increase in cash
    
    
    (28,826
    )
    
    
    14,990Cash and cash equivalents at the beginning of the period
    
    
    45,220
    
    
    
    61,425Cash and cash equivalents at the end of the period
    
    $
    16,394
    
    
    $
    76,415
  6




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TeleCommunication Systems, Inc.
 
 Notes to Consolidated Financial Statements
March 31, 2011
(amounts in thousands, except share and per share amounts)
(unaudited)
 1. Basis of Presentation and Summary of Significant Accounting Policies
 Basis of Presentation.
 Use of Estimates.
 Revenue Recognition.
   Services Revenue.
  Systems Revenue.
   7




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##### Table of Contents



Earnings per share.
  2011
    
    
    2010Numerator:Net income, basic
    
    $
    2,059
    
    
    $
    5,010Adjustment for assumed dilution:Interest on convertible notes, net of taxes, for if-converted method
    
    
    
    
    
    
    671Net income, diluted
    
    $
    2,059
    
    
    $
    5,681Denominator:Total basic weighted-average common shares outstanding
    
    
    55,530
    
    
    
    52,654Effect of dilutive stock options based on treasury stock method
    
    
    2,307
    
    
    
    4,589Effect of dilutive warrants based on treasury stock method
    
    
    
    
    
    
    Effect of dilutive 4.5% convertible notes, based on if converted method
    
    
    
    
    
    
    10,002Weighted average diluted shares
    
    
    57,837
    
    
    
    67,245Basic earnings per common share:Net income per share  basic
    
    $
    0.04
    
    
    $
    0.10Diluted earnings per common share:Net income per share-diluted
    
    $
    0.04
    
    
    $
    0.08
 8




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##### Table of Contents



Comprehensive Income.
  2011
    
    
    2010Net income
    
    $
    2,059
    
    
    $
    5,010Other comprehensive income:Change in foreign currency translation
    
    
    (1)
    
    
    
    1Change in unrealized gains/(loss) on marketable securities
    
    
    (16
    )
    
    
    Total comprehensive income
    
    $
    2,042
    
    
    $
    5,011
 Recent Accounting Pronouncements.
  2. Acquisitions
     Assets:Cash
    
    $
    1,124Accounts receivable
    
    
    2,400Other current assets
    
    
    5,755Deferred income taxes
    
    
    779Property and equipment
    
    
    89Acquired intangible assets
    
    
    9,094Other long-term assets
    
    
    5,413Accounts payable and accrued expenses
    
    
    (3,063
    )Accrued payroll and related liabilities
    
    
    (616
    )Deferred revenue
    
    
    (2,188
    )Other liabilities
    
    
    (6,369
    )Total net assets
    
    
    12,418Goodwill
    
    
    17,352Net assets acquired
    
    $
    29,770
  9




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3. Stock Based Compensation
    Three MonthsEnded March 31,2011
    
    
    2010Stock based compensation:Stock options
    
    $
    2,299
    
    
    $
    3,031Restricted stock
    
    
    198
    
    
    
    53Employee stock purchase plan
    
    
    84
    
    
    
    38Total stock based compensation
    
    $
    2,581
    
    
    $
    3,122
  Three MonthsEndedMarch 31,2011
    
    
    2010Stock based compensation included in expenses:Direct cost of revenue
    
    $
    1,722
    
    
    $
    1,963Research and development expense
    
    
    503
    
    
    
    815Sales and marketing expense
    
    
    135
    
    
    
    190General and administrative expense
    
    
    221
    
    
    
    154Total stock based compensation included in expenses:
    
    $
    2,581
    
    
    $
    3,122
  WeightedAverageNumber of
    
    
    Exercise(Share amounts in thousands)
    
    Options
    
    
    PriceOutstanding, beginning of year
    
    
    15,446
    
    
    $
    5.42Granted
    
    
    2,202
    
    
    $
    4.43Exercised
    
    
    (96
    )
    
    $
    2.89Expired
    
    
    (220
    )
    
    $
    7.28Forfeited
    
    
    (480
    )
    
    $
    6.61Outstanding, at March 31, 2011
    
    
    16,852
    
    
    $
    5.25Exercisable, at March 31, 2011
    
    
    9,869
    
    
    $
    4.52Vested and expected to vest at March 31, 2011
    
    
    15,557
    
    
    $
    5.17Weighted-average remaining contractual life of options outstanding at March 31, 2011
    
    6.6 years
 Three Months March 31,2011
    
    
    2010Estimated weighted-average grant-date fair value of options granted during the period
    
    $
    2.45
    
    
    $
    4.70Total fair value of options vested during the period
    
    $
    4,686
    
    
    $
    4,490Intrinsic value of options exercised during the period
    
    $
    132
    
    
    $
    1,684
 10




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Weighted-AverageWeighted-Average
    
    
    
    
    
    
    
    
    
    RemainingWeighted-Average
    
    Remaining
    
    
    
    
    
    Weighted-Average
    
    Contractual LifeExercise Prices
    
    Contractual Life
    
    Options
    
    Exercise Prices
    
    of OptionsOptions
    
    of Options
    
    of Options
    
    Vested and
    
    of Options Vested
    
    Vested andExercise Prices
    
    Outstanding
    
    Outstanding
    
    Outstanding (years)
    
    Exercisable
    
    and Exercisable
    
    Exercisable (years)$1.07   $1.84
    
    
    69
    
    
    $
    1.68
    
    
    
    1.76
    
    
    
    69
    
    
    $
    1.68
    
    
    
    1.76$1.92   $2.99
    
    
    2,255
    
    
    $
    2.47
    
    
    
    4.56
    
    
    
    2,227
    
    
    $
    2.47
    
    
    
    4.55$3.05   $4.68
    
    
    7,509
    
    
    $
    3.64
    
    
    
    6.61
    
    
    
    4,344
    
    
    $
    3.32
    
    
    
    4.66$4.76  $7.20
    
    
    2,284
    
    
    $
    6.43
    
    
    
    4.96
    
    
    
    1,634
    
    
    $
    6.73
    
    
    
    3.39$7.45  $9.86
    
    
    4,735
    
    
    $
    8.62
    
    
    
    8.46
    
    
    
    1,595
    
    
    $
    8.49
    
    
    
    8.1316,852
    
    
    
    
    
    
    
    
    
    
    
    9,869
   Three Months Ended March 31,2011
    
    2010Expected life (in years)
    
    
    5.5
    
    
    
    5.5Risk-free interest rate (%)
    
    
    2.2%-2.5%
    
    
    
    2.4%-2.8%Volatility (%)
    
    
    61%
    
    
    
    60%Dividend yield (%)
    
    
    0%
    
    
    
    0%
 4. Supplemental Disclosure of Cash Flow Information
    5. Marketable Securities
  Amortized
    
    
    Gross
    
    
    GrossCost
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedBasis
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCorporate bonds
    
    $
    25,906
    
    
    $
    51
    
    
    $
    (27
    )
    
    $
    25,930Mortgage-backed and asset-backed securities
    
    
    4,810
    
    
    
    4
    
    
    
    (16
    )
    
    
    4,798Agency bonds
    
    
    4,500
    
    
    
    
    
    
    
    (13
    )
    
    
    4,487Government bonds
    
    
    2,249
    
    
    
    1
    
    
    
    
    
    
    
    2,250Commercial paper
    
    
    850
    
    
    
    
    
    
    
    
    
    
    
    850Total marketable securities
    
    $
    38,315
    
    
    $
    56
    
    
    $
    (56
    )
    
    $
    38,315
  OriginalCost
    
    
    Fair ValueDue within 1 year or less
    
    $
    14,852
    
    
    $
    14,652Due within 1-2 years
    
    
    17,579
    
    
    
    17,324Due within 2-3 years
    
    
    6,412
    
    
    
    6,339$
    38,843
    
    
    $
    38,315
 11




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##### Table of Contents



6. Fair Value Measurements
  Fair Value
    
    
    Fair Value Measurements atas of
    
    
    3/31/20113/31/2011
    
    
    Using Fair Value HierarchyTotal
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Cash and cash equivalents
    
    $
    16,394
    
    
    $
    16,394
    
    
    $
    
    
    
    $
    Corporate bonds
    
    
    25,930
    
    
    
    25,930Mortgage-backed and asset-backed securities
    
    
    4,798
    
    
    
    4,798Agency bonds
    
    
    4,487
    
    
    
    4,487Government bonds
    
    
    2,250
    
    
    
    2,250Commercial paper
    
    
    850
    
    
    
    850
    
    
    
    
    
    
    
    Marketable securities
    
    
    38,315
    
    
    
    38,315
    
    
    
    
    
    
    
    Deferred compensation plan investments
    
    
    670
    
    
    
    670
    
    
    
    
    
    
    
    Assets at fair value
    
    $
    55,379
    
    
    $
    55,375
    
    
    $
    
    
    
    $
    Liabilities:Contractual acquisition earnouts
    
    $
    3,162
    
    
    $
    
    
    
    $
    
    
    
    $
    3,162Deferred compensation
    
    
    394
    
    
    
    394
    
    
    
    
    
    
    
    Liabilities at fair value
    
    $
    3,556
    
    
    $
    394
    
    
    $
    
    
    
    $
    3,162
 Fair Value
    
    
    Fair Value Measurements atas of
    
    
    3/31/20103/31/2010
    
    
    Using Fair Value HierarchyTotal
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3AssetsCash and cash equivalents
    
    $
    76,415
    
    
    $
    76,415
    
    
    $
    
    
    
    $
    Deferred compensation plan investments
    
    
    1,118
    
    
    
    1,118
    
    
    
    
    
    
    
    Assets at fair value
    
    $
    77,533
    
    
    $
    77,533
    
    
    $
    
    
    
    $
    LiabilitiesContractual acquisition earnouts
    
    $
    7,280
    
    
    $
    
    
    
    $
    
    
    
    $
    7,280Deferred compensation
    
    
    931
    
    
    
    931
    
    
    
    
    
    
    
    Liabilities at fair value
    
    $
    8,211
    
    
    $
    931
    
    
    $
    
    
    
    $
    7,280
       12




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Fair ValueMeasurementsUsing SignificantUnobservableInputs (Level 3)Balance at January 1, 2011
    
    $
    6,174Fair value adjustment recognized in earnings
    
    
    201Purchases, issuances, and settlements, net
    
    
    (3,213
    )Transfers in and/or out of Level 3
    
    
    Balance at March 31, 2011
    
    $
    3,162
   7. Segment Information
   ®
   Three Months Ended March 31,2011
    
    
    2010Comm.
    
    
    Gvmt
    
    
    Total
    
    
    Comm.
    
    
    Gvmt
    
    
    TotalRevenueServices
    
    $
    44,227
    
    
    $
    30,575
    
    
    $
    74,802
    
    
    $
    39,278
    
    
    $
    20,566
    
    
    $
    59,844Systems
    
    
    4,747
    
    
    
    10,817
    
    
    
    15,564
    
    
    
    8,645
    
    
    
    22,428
    
    
    
    31,073Total revenue
    
    
    48,974
    
    
    
    41,392
    
    
    
    90,366
    
    
    
    47,923
    
    
    
    42,994
    
    
    
    90,917Direct costs of revenueDirect cost of services
    
    
    19,859
    
    
    
    21,848
    
    
    
    41,707
    
    
    
    19,264
    
    
    
    15,068
    
    
    
    34,332Direct cost of systems
    
    
    3,164
    
    
    
    8,901
    
    
    
    12,065
    
    
    
    3,441
    
    
    
    19,595
    
    
    
    23,036Total direct costs of revenue
    
    
    23,023
    
    
    
    30,749
    
    
    
    53,772
    
    
    
    22,705
    
    
    
    34,663
    
    
    
    57,368Gross profitServices gross profit
    
    
    24,368
    
    
    
    8,727
    
    
    
    33,095
    
    
    
    20,014
    
    
    
    5,498
    
    
    
    25,512Systems gross profit
    
    
    1,583
    
    
    
    1,916
    
    
    
    3,499
    
    
    
    5,204
    
    
    
    2,833
    
    
    
    8,037Total gross profit
    
    $
    25,951
    
    
    $
    10,643
    
    
    $
    36,594
    
    
    $
    25,218
    
    
    $
    8,331
    
    
    $
    33,549
 13




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##### Table of Contents



Three Months EndedMarch 31,2011
    
    
    2010Total segment gross profit
    
    $
    36,594
    
    
    $
    33,549Research and development expense
    
    
    (8,543
    )
    
    
    (8,518
    )Sales and marketing expense
    
    
    (7,350
    )
    
    
    (5,979
    )General and administrative expense
    
    
    (10,566
    )
    
    
    (8,462
    )Depreciation and amortization of property and equipment
    
    
    (3,099
    )
    
    
    (1,976
    )Amortization of acquired intangible assets
    
    
    (1,325
    )
    
    
    (1,172
    )Interest expense
    
    
    (1,920
    )
    
    
    (2,352
    )Amortization of deferred finance fees
    
    
    (187
    )
    
    
    (160
    )Other income, net
    
    
    35
    
    
    
    490Income before income taxes
    
    
    3,639
    
    
    
    5,420Provision for income taxes
    
    
    (1,580
    )
    
    
    (410
    )Net income
    
    $
    2,059
    
    
    $
    5,010
  8. Inventory
  Mar. 31,
    
    
    Dec. 31,2011
    
    
    2010Component parts
    
    $
    1,904
    
    
    $
    2,564Finished goods
    
    
    3,860
    
    
    
    2,876Total inventory
    
    $
    5,764
    
    
    $
    5,440
 9. Acquired Intangible Assets, Capitalized Software Development Costs, and Goodwill
  March 31, 2011
    
    
    December 31, 2010Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetAcquired intangible assets:Customer lists and other
    
    $
    22,046
    
    
    $
    3,537
    
    
    $
    18,509
    
    
    $
    12,952
    
    
    $
    2,928
    
    
    $
    10,024Customer relationships
    
    
    20,138
    
    
    
    3,489
    
    
    
    16,649
    
    
    
    20,138
    
    
    
    2,818
    
    
    
    17,320Trademarks and patents
    
    
    1,364
    
    
    
    490
    
    
    
    874
    
    
    
    1,364
    
    
    
    444
    
    
    
    920Software development costs, including acquired technology
    
    
    59,646
    
    
    
    21,792
    
    
    
    37,854
    
    
    
    58,668
    
    
    
    19,241
    
    
    
    39,427Total acquired intangible 
assets and software dev. costs
    
    $
    103,194
    
    
    $
    29,308
    
    
    $
    73,886
    
    
    $
    93,122
    
    
    $
    25,431
    
    
    $
    67,691Estimated future amortization expense:Nine-months ending December 31, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    10,783Year ending December 31, 2012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,265Year ending December 31, 2013
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,248Year ending December 31, 2014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    12,257Year ending December 31, 2015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,585Thereafter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,748$
    73,886
    Commercial
    
    
    GovernmentSegment
    
    
    Segment
    
    
    TotalBalance as of December 31, 2010
    
    $
    122,454
    
    
    $
    36,689
    
    
    $
    159,143Goodwill from acquisitions
    
    
    
    
    
    
    17,352
    
    
    
    17,352Balance as of March 31, 2011
    
    $
    122,454
    
    
    $
    54,041
    
    
    $
    176,495
 14




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10. Concentrations of Credit Risk and Major Customers
   % of Total Revenue For the ThreeMonths EndedMarch 31,Customer
    
    Segment
    
    2011
    
    2010U.S. Government
    
    Government
    
    
    23
    %
    
    
    36
    %Customer A
    
    Commercial
    
    
    21
    %
    
    
    29
    %Customer B
    
    Commercial
    
    
    12
    %
    
    
    < 10
    %
 As of March 31, 2011Accounts
    
    UnbilledCustomer
    
    Segment
    
    Receivable
    
    ReceivablesU.S. Government
    
    Government
    
    
    28
    %
    
    
    31
    %Customer A
    
    Commercial
    
    
    21
    %
    
    
    32
    %Customer B
    
    Commercial
    
    
    < 10
    %
    
    
    11
    %Customer C
    
    Commercial
    
    
    < 10
    %
    
    
    10
    %
 11. Lines of Credit
    12. Long-term Debt
  Mar. 31,
    
    
    Dec. 31,2011
    
    
    20104.5% Convertible notes dated November 16, 2009
    
    $
    103,500
    
    
    $
    103,500Promissory note payable to NIM sellers dated December 16, 2009
    
    
    10,000
    
    
    
    10,000Term loan from commercial bank dated December 31, 2009
    
    
    21,667
    
    
    
    23,333Term loan from commercial bank dated September 30, 2010
    
    
    8,666
    
    
    
    9,333Total long-term debt
    
    
    143,833
    
    
    
    146,166Less: current portion
    
    
    (19,333
    )
    
    
    (19,333
    )Non-current portion of long-term debt
    
    $
    124,500
    
    
    $
    126,833
 15




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2011
    
    $
    25,7632012
    
    
    14,7432013
    
    
    14,3242014
    
    
    110,508Total long-term debt
    
    $
    165,338
    , Contracts in Entitys own Equity
    16




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13. Capital leases
   2011
    
    $
    4,7152012
    
    
    5,4602013
    
    
    3,8672014
    
    
    1,3752015
    
    
    46Total minimum lease payments
    
    
    15,463Less: amounts representing interest
    
    
    (1,331
    )Present value of net minimum lease payments (including current portion of $5,485)
    
    $
    14,132
 14. Income taxes
   15. Commitments and Contingencies
  Within 12
    
    
    1-3
    
    
    3-5
    
    
    More thanMonths
    
    
    Years
    
    
    Years
    
    
    5 Years
    
    
    TotalPurchase obligations
    
    $
    7,410
    
    
    $
    948
    
    
    $
    7
    
    
    $
    
    
    
    $
    8,365Contractual acquisition earnouts
    
    
    3,162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,162Total contractual commitments
    
    $
    10,572
    
    
    $
    948
    
    
    $
    7
    
    
    $
    
    
    
    $
    11,527
  17




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18




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    Critical Accounting Policies and Estimates
  -
    
    Revenue recognition,-
    
    Acquired intangible assets,
 19




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-
    
    Impairment of goodwill,-
    
    Stock based compensation expense,-
    
    Marketable securities,-
    
    Software development costs,-
    
    Income taxes,-
    
    Business combinations, and-
    
    Legal and other contingencies.
  Overview
  2011 Acquisition
   Indicators of Our Financial and Operating Performance
  
    
    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, communication systems and components for 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, network operation center and co-location facility
operating expenses, amortization of capitalized software development costs, stock-based
compensation, and overhead
expenses. The costs of hardware and third-party software are primarily associated with the
delivery of systems, and fluctuate
 20




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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 capitalized software development costs, including
acquired technology, is associated with the recognition of 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 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 capacity to borrow, through our
bank credit and term loan facility and other markets; lease financing for the purchase of
equipment; and access to the public equity market.
    
    Balance sheet.We view cash, working capital, and accounts receivable balances and days
revenue outstanding as important indicators of our financial health.
 Results of Operations
  Revenue and Cost of Revenue
  Commercial Segment:
 Three MonthsEnded March 31,
    
    
    2011 vs. 2010($ in millions)
    
    2011
    
    
    2010
    
    
    $
    
    
    %Services revenue
    
    $
    44.2
    
    
    $
    39.3
    
    
    $
    4.9
    
    
    
    12
    %Systems revenue
    
    
    4.8
    
    
    
    8.6
    
    
    
    (3.8
    )
    
    
    (44
    )%Commercial Segment revenue
    
    
    49.0
    
    
    
    47.9
    
    
    
    1.1
    
    
    
    2
    %Direct cost of services revenue
    
    
    19.8
    
    
    
    19.3
    
    
    
    0.5
    
    
    
    3
    %Direct cost of systems revenue
    
    
    3.2
    
    
    
    3.4
    
    
    
    (0.2
    )
    
    
    (6
    )%Commercial Segment cost of revenue
    
    
    23.0
    
    
    
    22.7
    
    
    
    0.3
    
    
    
    1
    %Services gross profit
    
    
    24.4
    
    
    
    20.0
    
    
    
    4.4
    
    
    
    22
    %Systems gross profit
    
    
    1.6
    
    
    
    5.2
    
    
    
    (3.6
    )
    
    
    (69
    )%Commercial Segment gross profit(1)
    
    $
    26.0
    
    
    $
    25.2
    
    
    $
    0.8
    
    
    
    3
    %Segment gross profit as a percent of revenue
    
    
    53
    %
    
    
    53
    %
 
 1
    
    See discussion of segment reporting in Note 7 to the accompanying unaudited
consolidated financial statements. Commercial Services Revenue, Cost of Revenue, and Gross Profit:
   21




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Commercial Systems Revenue, Cost of Revenue, and Gross Profit:
     22




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Government Segment:
 Three MonthsEnded March 31,
    
    
    2011 vs. 2010($ in millions)
    
    2011
    
    
    2010
    
    
    $
    
    
    %Services revenue
    
    $
    30.6
    
    
    $
    20.6
    
    
    $
    10.0
    
    
    
    49
    %Systems revenue
    
    
    10.8
    
    
    
    22.4
    
    
    
    (11.6
    )
    
    
    (52
    )%Government Segment revenue
    
    
    41.4
    
    
    
    43.0
    
    
    
    (1.6
    )
    
    
    (4
    )%Direct cost of services revenue
    
    
    21.9
    
    
    
    15.1
    
    
    
    6.8
    
    
    
    45
    %Direct cost of systems revenue
    
    
    8.9
    
    
    
    19.6
    
    
    
    (10.7
    )
    
    
    (55
    )%Government Segment cost of revenue
    
    
    30.8
    
    
    
    34.7
    
    
    
    (3.9
    )
    
    
    (11
    )%Services gross profit
    
    
    8.7
    
    
    
    5.5
    
    
    
    3.2
    
    
    
    58
    %Systems gross profit
    
    
    1.9
    
    
    
    2.8
    
    
    
    (0.9
    )
    
    
    (32
    )%Government Segment gross profit(1)
    
    $
    10.6
    
    
    $
    8.3
    
    
    $
    2.3
    
    
    
    28
    %Segment gross profit as a percent of revenue
    
    
    26
    %
    
    
    19
    %
 
 1
    
    See discussion of segment reporting in Note 7 to the accompanying unaudited
consolidated financial statements. Government Services Revenue, Cost of Revenue, and Gross Profit:
    Government Systems Revenue, Cost of Revenue, and Gross Profit:
    23




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Revenue Backlog
  Three MonthsEnded March 31,
    
    
    2011 vs. 2010($ in millions)
    
    2011
    
    
    2010
    
    
    $
    
    
    %Commercial Segment
    
    $
    224.3
    
    
    $
    227.7
    
    
    $
    (3.4
    )
    
    
    (1
    )%Government Segment
    
    
    83.8
    
    
    
    73.4
    
    
    
    10.4
    
    
    
    14
    %Total funded contract backlog
    
    $
    308.1
    
    
    $
    301.1
    
    
    $
    7.0
    
    
    
    2
    %Commercial Segment
    
    $
    224.3
    
    
    $
    227.7
    
    
    $
    (3.4
    )
    
    
    (1
    )%Government Segment
    
    
    896.7
    
    
    
    358.4
    
    
    
    538.3
    
    
    
    150
    %Total backlog of orders and commitments, including customer options
    
    $
    1,121.0
    
    
    $
    586.1
    
    
    $
    534.9
    
    
    
    91
    %Expected to be realized within next 12 months
    
    $
    177.5
    
    
    $
    197.8
    
    
    $
    (20.3
    )
    
    
    (10
    )%
  Operating Expenses
 Research and development expense:
 Three MonthsEndedMarch 31,
    
    2011 vs. 2010($ in millions)
    
    2011
    
    2010
    
    $
    
    %Research and development expense
    
    $
    8.5
    
    
    $
    8.5
    
    
    
    
    
    
    
    Percent of total revenue
    
    
    9
    %
    
    
    9
    %
    24




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Sales and marketing expense:
 Three MonthsEndedMarch 31,
    
    2011 vs. 2010($ in millions)
    
    2011
    
    2010
    
    $
    
    %Sales and marketing expense
    
    $
    7.4
    
    
    $
    6.0
    
    
    $
    1.4
    
    
    
    23
    %Percent of total revenue
    
    
    8
    %
    
    
    7
    %
  General and administrative expense:
 Three MonthsEndedMarch 31,
    
    2011 vs. 2010($ in millions)
    
    2011
    
    2010
    
    $
    
    %General and administrative expense
    
    $
    10.6
    
    
    $
    8.5
    
    
    $
    2.1
    
    
    
    25
    %Percent of total revenue
    
    
    12
    %
    
    
    9
    %
  Depreciation and amortization of property and equipment:
 Three MonthsEndedMarch 31,
    
    2011 vs. 2010($ in millions)
    
    2011
    
    2010
    
    $
    
    %Depreciation and amortization of property and equipment
    
    $
    3.1
    
    
    $
    2.0
    
    
    $
    1.1
    
    
    
    55
    %Average gross cost of property and equipment during the period
    
    $
    99.4
    
    
    $
    70.4
  Amortization of acquired intangible assets:
 Three MonthsEndedMarch 31
    
    2011 vs. 2010($ in millions)
    
    2011
    
    2010
    
    $
    
    %Amortization of acquired intangible assets
    
    $
    1.3
    
    
    $
    1.1
    
    
    $
    0.2
    
    
    
    18
    %
  25




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Interest expense:
 Three MonthsEndedMarch 31
    
    
    2011 vs. 2010($ in millions)
    
    2011
    
    
    2010
    
    
    $
    
    
    %Interest expense incurred on bank and other notes payable
    
    $
    0.5
    
    
    $
    1.1
    
    
    $
    (0.6
    )
    
    
    (55
    )%Interest expense incurred on 4.5% convertible notes financing
    
    
    1.2
    
    
    
    1.1
    
    
    
    0.1
    
    
    
    9
    %Interest expense incurred on capital lease obligations
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    100
    %Amortization of deferred financing fees
    
    
    0.2
    
    
    
    0.2
    
    
    
    
    
    
    
    Total interest and financing expense
    
    $
    2.1
    
    
    $
    2.5
    
    
    $
    (0.4
    )
    
    
    (16
    )%
       Other income/(expense), net:
  Income taxes:
  26




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Net income:
 Three MonthsEndedMarch 31,
    
    2011 vs. 2010($ in millions)
    
    2011
    
    2010
    
    $
    
    %Net income
    
    $
    2.1
    
    
    $
    5.0
    
    
    $
    (2.9
    )
    
    
    (58
    )%
  Liquidity and Capital Resources
 Three MonthsEndedMarch 31,
    
    
    2011 vs. 2010($ in millions)
    
    2011
    
    
    2010
    
    
    $
    
    
    %Net cash and cash equivalents provided by/(used in):Operating activities:Net Income
    
    $
    2.1
    
    
    $
    5.0
    
    
    $
    (2.9
    )
    
    
    (58
    )%Non-cash charges
    
    
    11.4
    
    
    
    10.0
    
    
    
    1.4
    
    
    
    14
    %Deferred income tax provision
    
    
    1.6
    
    
    
    0.4
    
    
    
    1.2
    
    
    NMNet changes in working capital including changes in other assets
    
    
    (12.7
    )
    
    
    4.2
    
    
    
    (16.9
    )
    
    NMNet operating activities
    
    
    2.4
    
    
    
    19.6
    
    
    
    (17.2
    )
    
    
    (88
    )%Investing activities:Acquisition, net of cash acquired
    
    
    (16.4
    )
    
    
    
    
    
    
    (16.4
    )
    
    NMPurchases of marketable securities, net
    
    
    (2.2
    )
    
    
    
    
    
    
    (2.2
    )
    
    NMEarnout payment related to 2009 acquisition
    
    
    (3.2
    )
    
    
    
    
    
    
    (3.2
    )
    
    NMPurchases of property and equipment
    
    
    (6.4
    )
    
    
    (5.3
    )
    
    
    (1.1
    )
    
    
    (21
    )%Capital purchases funded through leases
    
    
    1.1
    
    
    
    2.6
    
    
    
    (1.5
    )
    
    
    (58
    )%Purchases of property and equipment, net of assets funded through leases
    
    
    (5.3
    )
    
    
    (2.7
    )
    
    
    (2.6
    )
    
    
    (96
    )%Capitalized software development costs
    
    
    (1.0
    )
    
    
    (0.8
    )
    
    
    (0.2
    )
    
    
    (25
    )%Net investing activities
    
    
    (28.1
    )
    
    
    (3.5
    )
    
    
    (24.6
    )
    
    NMFinancing activities:Payments on long-term debt and capital leases
    
    
    (3.6
    )
    
    
    (2.6
    )
    
    
    (1.0
    )
    
    
    (38
    )%Other financing activities
    
    
    0.5
    
    
    
    1.5
    
    
    
    (1.0
    )
    
    
    (67
    )%Net financing activities
    
    
    (3.1
    )
    
    
    (1.1
    )
    
    
    (2.0
    )
    
    NMNet change in cash and cash equivalents
    
    $
    (28.8
    )
    
    $
    15.0
    
    
    $
    (43.8
    )
    
    NMDays revenue outstanding in accounts receivable including unbilled receivables
    
    
    87
    
    
    
    96
   Capital resources:
 Sources and uses of cash:
 Operations:
 Investing activities:
 27




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##### Table of Contents



Financing activities:
 Capital resources:
      28




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##### Table of Contents



Contractual Commitments
  Within 12
    
    
    1-3
    
    
    3-5
    
    
    More than($ in millions)
    
    Months
    
    
    Years
    
    
    Years
    
    
    5 Years
    
    
    TotalTerm loan from commercial bank
    
    $
    10.5
    
    
    $
    19.7
    
    
    $
    2.4
    
    
    $
    
    
    
    $
    32.64.5% Convertible notes obligation
    
    
    4.7
    
    
    
    9.3
    
    
    
    108.1
    
    
    
    
    
    
    
    122.1Promissory notes payable
    
    
    10.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.6Contractual acquisition earnouts
    
    
    3.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.2Capital lease obligations
    
    
    6.3
    
    
    
    8.4
    
    
    
    0.8
    
    
    
    
    
    
    
    15.5Operating leases
    
    
    7.0
    
    
    
    13.3
    
    
    
    5.2
    
    
    
    1.2
    
    
    
    26.7Purchase obligations
    
    
    7.4
    
    
    
    0.9
    
    
    
    0.1
    
    
    
    
    
    
    
    8.4Total contractual commitments
    
    $
    49.7
    
    
    $
    51.6
    
    
    $
    116.6
    
    
    $
    1.2
    
    
    $
    219.1
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  Foreign Currency Risk
   
 Item 4. Controls and Procedures
  29




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##### Table of Contents



PART II.  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 5. Other Information
   30




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumbers
    
    Description31.1
    
    
    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 200232.2
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 31




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##### Table of Contents



SIGNATURES
  TELECOMMUNICATION SYSTEMS, INC.By:
    /s/  Maurice B. ToséMaurice B. ToséChairman, President and Chief Executive Officer  /s/ Maurice B. Tosé

Maurice B. Tosé May 3, 2011
    
    Chairman, President and Chief Executive Officer
(Principal Executive Officer)/s/ Thomas M. Brandt, Jr.

Thomas M. Brandt, Jr. May 3, 2011
    
    Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
 32