<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: June 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number: 1-8443
TELOS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-0880974
(State of Incorporation) (I.R.S. Employer Identification No.)
19886 Ashburn Road, Ashburn, Virginia 20147-2358
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number,
including area code: (703) 427-3800
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed 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 filing
requirements for the past 90 days. YES X NO
As of August 1, 1996, the registrant had 23,076,753 shares of
Class A Common Stock, no par value, and 4,037,628 shares of Class
B Common Stock, no par value; and 3,595,586 shares of 12%
Cumulative Exchangeable Redeemable Preferred Stock par value $.01
per share, outstanding.
No public market exists for the registrant's Common Stock.
Number of pages in this report (excluding exhibits): 19
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1996 and 1995 3
Condensed Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(amounts in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales
Systems and Support Services $26,223 $27,231 $52,455 $51,920
Systems Integration 17,643 8,055 31,574 23,563
Consulting 8,117 6,516 15,197 13,080
51,983 41,802 99,226 88,563
Costs and expenses
Cost of sales 44,792 35,264 86,617 73,154
Selling, general and
administrative expenses 7,789 4,338 14,705 11,112
Goodwill amortization 390 795 780 1,589
Operating (loss) income (988) 1,405 (2,876) 2,708
Other income (expenses)
Other income (expenses) (352) 4 (349) 9
Interest expense (1,618) (1,382) (3,127) (2,615)
(Loss) income before taxes (2,958) 27 (6,352) 102
Income tax provision - - - -
Net (loss) income $(2,958) $ 27 $(6,352) $ 102
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(amounts in thousands)
(Unaudited)
June 30, 1996 December 31, 1995
<S> <C> <C>
Current assets
Cash and cash equivalents $ 5,761 $ 735
(includes restricted cash
of $327 at June 30, 1996)
Accounts receivable, net 50,018 44,112
Inventories, net 16,097 15,877
Other current assets 1,913 1,921
Total current assets 73,789 62,645
Property and equipment, net of
accumulated depreciation of
$19,467 and $18,600, respectively 15,444 2,671
Goodwill 22,034 22,814
Other assets 6,669 6,362
$117,936 $94,492
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Accounts payable $ 31,266 $26,528
Other current liabilities 8,152 6,951
Accrued compensation and benefits 8,813 8,804
Total current liabilities 48,231 42,283
Senior credit facility 44,256 32,312
Subordinated notes 15,014 15,004
Capital lease obligation 12,450 --
Other long-term liabilities 552 1,109
Total liabilities 120,503 90,708
Redeemable preferred stock
Senior redeemable preferred stock 4,660 4,494
Class B redeemable preferred stock 10,667 10,252
Redeemable preferred stock 21,431 18,646
Total preferred stock 36,758 33,392
Stockholders' investment
Common stock 78 78
Capital in excess of par 4,304 7,670
Retained earnings (deficit) (43,707) (37,356)
Total stockholders' investment (39,325) (29,608)
$117,936 $94,492
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
Six Months
Ended June 30,
1996 1995
<S> <C> <C>
Operating activities:
Net (loss) income $(6,352) $ 102
Adjustments to reconcile net (loss)
income to cash used in operating
activities:
Depreciation and amortization 1,365 1,602
Goodwill amortization 780 1,589
Provision for legal settlement 355 --
Other noncash items 90 (313)
Changes in assets and liabilities (1,024) (6,408)
Cash used in operating activities (4,786) (3,428)
Investing activities:
Proceeds from sale of property
and equipment -- 3
Investment in products (668) --
Purchase of property and equipment (1,643) (340)
Cash used in investing activities (2,311) (337)
Financing activities:
Proceeds from borrowings under senior
credit facility 10,823 4,314
Proceeds from issuance of subordinated
bridge notes -- 6,494
Proceeds from capital lease transaction 1,300 --
Repayment of senior subordinated notes -- (5,800)
Cash provided by financing activities 12,123 5,008
Increase in cash and cash equivalents 5,026 1,243
Cash and cash equivalents at beginning
of period 735 441
Cash and cash equivalents at end
of period $5,761 $1,684
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. General
The accompanying condensed consolidated financial statements
of Telos Corporation ("Telos") and its wholly owned subsidiaries,
Telos Corporation (California), Telos Field Engineering Inc.,
enterWorks.com ("enterWorks") and Telos International Corporation
(collectively, the "Company") have been prepared without audit.
Certain information and note disclosures normally included in the
financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted.
The Company believes the disclosures made are adequate to make
the information presented consistent with past practices.
However, these condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's annual report on Form
10-K for the fiscal year ended December 31, 1995.
In the opinion of the Company, the accompanying condensed
consolidated financial statements reflect all adjustments and
reclassifications (which include only normal recurring
adjustments) necessary to present fairly the financial position
of the Company as of June 30, 1996 and December 31, 1995, and the
results of its operations and its cash flows for three and the
six months ended June 30, 1996 and 1995. Interim results are not
necessarily indicative of fiscal year performance because of the
impact of seasonal and short-term variations.
In 1996, the Company reviewed and changed its organizational
structure to more efficiently support customer needs and address
changing market conditions. As a result of these organizational
changes, the Company's business segment disclosure has been
modified to reflect the systems integration division as one
business segment and the consolidation of software and hardware
support services into one business segment. The consulting
division remains a separate business segment.
Certain reclassifications have been made to the prior year's
financial statements to conform to the classifications used in
the current period.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2. Accounts Receivable
The components of accounts receivable are as follows (in
thousands):
<TABLE>
June 30, December 31,
1996 1995
<S> <C> <C>
Billed accounts receivable $40,975 $30,286
Unbilled accounts receivable 9,778 14,550
50,753 44,836
Allowance for doubtful accounts (735) (724)
$50,018 $44,112
</TABLE>
Note 3. Debt Obligations
Senior Credit Facility
At June 30, 1996, the Company had a $45 million senior
credit facility ("Facility") with a bank maturing on July 1,
1997. The Company was not compliant with certain covenants
contained in the Facility at June 30, 1996 and the bank has
waived such covenant noncompliance.
Senior Subordinated Note, Series A
At June 30, 1996, the Company had a Senior Subordinated
Note, Series A, of $675,000 outstanding with an affiliated entity
of Mr. John R.C. Porter ("Porter"), the Company's majority common
shareholder. The Company was not in compliance with the
financial maintenance covenants of the note as of June 30, 1996,
and the entity has agreed to waive such non compliance.
Note 4. Preferred Stock
Senior Redeemable Preferred Stock
The components of the senior redeemable preferred stock are
Series A-1 and Series A-2 redeemable preferred stock each with
$.01 par value and 1,250 and 1,750 shares authorized, issued and
outstanding, respectively.
The Series A-1 and A-2 each carry a cumulative per annum
dividend rate equal to 11.125% of their liquidation value of
$1,000 per share through June 30, 1997 the annual dividend rate
and increases to 14.125% per annum thereafter. The liquidation
preference of the preferred stock is the face amount of the
Series A-1 and A-2 Stock ($1,000 per share), plus all accrued and
unpaid dividends. The Series A-1 and A-2 Preferred Stock is
senior to all other present and future equity of the Company.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Series A-1 is senior to the Series A-2. The Company is
required to redeem all of the outstanding shares of the Series A-
1 and A-2 on December 31, 2001, subject to legal availability of
funds. At June 30, 1996 and December 31, 1995 undeclared, unpaid
dividends relating to Series A-1 and A-2 Preferred Stock totaled
$1,660,000 and $1,494,000, respectively.
Class B Redeemable Preferred Stock
The Class B Redeemable Preferred Stock has a $.01 par value,
with 7,500 shares authorized, issued and outstanding. The Class
B Redeemable Preferred Stock has a cumulative dividend calculated
at a rate per annum equal to 11.125% of its liquidation value of
$1,000 per share through June 30, 1997 and increases again to
14.125% per annum thereafter. The Class B Redeemable Preferred
Stock may be redeemed at its liquidation value together with all
accrued and unpaid dividends at any time at the option of the
Company. The liquidation preference of the preferred stock is
the face amount, $1,000 per share, plus all accrued and unpaid
dividends.
The Company is required to redeem all of the outstanding
shares of the stock on December 31, 2001, subject to the legal
availability of funds. At June 30, 1996 and December 31, 1995
undeclared, unpaid dividends relating to the Class B Redeemable
Preferred Stock totaled $3,167,000 and $2,752,000 respectively.
12% Cumulative Exchangeable Redeemable Preferred Stock
A maximum of 6,000,000 shares of 12% Cumulative Exchangeable
Redeemable Preferred Stock, (the "Preferred Stock") par value
$.01 per share, have been authorized for issuance. At June 30,
1996 the Company has 3,595,586 shares of Preferred Stock issued
and outstanding. The Preferred Stock accrues a semi-annual
dividend at the annual rate of 12% ($1.20) per share, based on
the liquidation preference of $10 per share and is fully
cumulative.
Through November 21, 1995, the Company had the option to pay
dividends in additional shares of Preferred Stock in lieu of
cash. Dividends are payable by the Company, provided the Company
has legally available funds under Maryland law, when and if
declared by the Board of Directors, commencing June 1, 1990, and
on each six month anniversary thereof. Dividends in additional
shares of the Preferred Stock are paid at the rate of 0.06 of a
share of the Preferred Stock for each $.60 of such dividends not
paid in cash. No dividends were declared or paid during fiscal
years 1995, 1994, 1993 and 1992. Cumulative undeclared dividends
as of June 30, 1996, accrued for financial reporting purposes,
totaled $8,264,000. Dividends for the years 1992 through 1994 and
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
for the dividend payable June 1, 1995 were accrued under the
assumption that the dividend will be paid in additional shares of
preferred stock and are valued at $3,950,000. Had the Company
accrued these dividends on a cash basis, the total amount accrued
would have been $15,101,000. Dividends payable of $2,157,000 for
the dividend periods that ended December 1, 1995 and June 1, 1996
were accrued on a cash basis. All future dividends will accrue
on a cash basis.
The Company has not declared or paid dividends since 1991
due to restrictions and ambiguities relating to the payment of
dividends contained within its charter, its working capital
facility agreement and under Maryland law.
Note 5. Stock Option Plans
Telos stock option plan
During 1996, the Board of Directors of the Company approved
and the shareholders ratified a new stock option plan for certain
key executives and employees of the Company. Under the plan, the
Company may award up to 6,644,974 shares of common stock at an
exercise price of not lower than fair market value with vesting
based upon the passage of time or occurrence of certain
significant events. Through June 30, 1996, the Company has
awarded 4,401,490 options for shares of common stock at an
exercise price of $.95 per share.
enterWorks.com stock option plan
In 1996 enterWorks, a wholly owned subsidiary of the
Company, initiated a stock option plan under which up to
3,000,000 shares of enterWorks common stock may be awarded to key
employees and associates. The exercise price of the stock options
may not be lower than fair market value with vesting based on the
passage of time or occurrence of certain significant events.
Through June 30, 1996, the Company has awarded 2,112,500 options
for shares of enterWorks common stock at an exercise price of
$.12 per share.
Note 6. Litigation
The Company has entered into an agreement with Rosecliff to
settle certain litigation initiated by Rosecliff in 1994 in
connection with a failed equity/subordinated debt private
placement transaction. Accordingly, in the second quarter of
1996, the Company recorded $355,000 of additional non-operating
expense to fully record the provisions of the settlement.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 7. Commitments
During the first quarter of 1996, the Company entered into a
twenty year lease with annual payments of $1,447,000 commencing
March 1, 1996 for a building that serves as its corporate
headquarters. The building provides significant additional
manufacturing and integration space. The Company has accounted
for this transaction as a capital lease and has accordingly
recorded assets and a corresponding liability of approximately
$12.4 million. Under the terms of the lease, the landlord
furnished the Company with $1.3 million to fund tenant
improvements and other building costs of which the Company has
utilized approximately $973,000 for such purposes as of June
30, 1996 with the remaining balance of $327,000 recorded as
restricted cash. The Company's move to its new facilities was
substantially completed in July 1996. The Company is reviewing
alternative uses of its former Corporate facility.
The following is a schedule by years of future minimum
payments under the capital lease, together with the present value
of the net minimum lease payments as of June 30 1996:
<TABLE>
<C> <C>
1996 $ 722,000
1997 1,447,000
1998 1,447,000
1999 1,447,000
2000 1,447,000
Later years 21,946,000
Total minimum payments 28,456,000
Less: Amounts representing interest (16,006,000)
Present value of minimum lease payments $12,450,000
</TABLE>
Note 8. Subsequent events
In July 1996, the Company completed a private financing of
approximately $3 million of enterWorks subordinated debt with
warrants for the purchase of enterWorks common stock. The
subordinated debt has a five year maturity with an interest rate
of 8% payable semi-annually beginning January 1, 1998. The debt
also includes warrants to purchase shares of enterWorks common
stock. The proceeds of this offering are being used by the
Company for working capital purposes.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
In the first half of 1996, the Company had increased
revenues as compared to the first half of 1995. However, the
Company's profitability decreased in the first half of 1996 as
compared to 1995 as a result of lower than anticipated sales and
order volume on certain large equipment contracts that continued
to be negatively impacted by the Federal government budget
impasse of early 1996. Also, the Company experienced reduced
gross margins on certain equipment contracts and in certain
services, as well as increased infrastructure costs associated
with supporting contracts awarded in late 1995. The combination
of the above factors adversely impacted the Company's
profitability.
Total backlog from existing contracts was $1.3 billion as of
June 30, 1996 and is approximately the same as the total backlog
as of December 31, 1995. As of June 30, 1996, the funded backlog
of the Company totaled $70.5 million, an increase of $4.9 million
from December 31, 1995. Funded backlog represents aggregate
contract revenues remaining to be earned by the Company at a
given time, but only to the extent, in the case of government
contracts, funded by a procuring government agency and allocated
to the contracts.
Results of Operations
The condensed consolidated statements of income include the
results of operations of Telos Corporation and its wholly owned
subsidiaries Telos Corporation (California), Telos Field
Engineering Inc., enterWorks.com and Telos International
Corporation ("the Company"). The major elements of the Company's
operating expenses as a percentage of sales for the three and six
month periods ended June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 86.2 84.4 87.2 82.6
SG&A expenses 15.0 10.4 14.8 12.5
Goodwill amortization .8 1.9 .8 1.8
Operating (loss) income (1.9) 3.3 (2.8) 3.1
Other income (expense) (.7) -- (.4) --
Interest expense (3.1) (3.3) (3.2) (3.0)
Income tax provision -- -- -- --
Net (loss)income (5.7)% 0.0% (6.4)% 0.1%
</TABLE>
<PAGE>
Financial Data by Market Segment
During 1996, the Company modified its view of the business
segments in which it operates given the expansion of network
based computer solutions in the market that the Systems
Integration Group operates and the merger of the Company's
hardware and software support divisions into a single operating
unit in response to changing market conditions.
The Company operates in three market segments: systems and
support services (the "Systems and Support Services Group"),
which consists of hardware and software support services; systems
integration (the "Systems Integration Group"); and consulting
services (the "Consulting Group").
Sales, gross profit, and gross margin by market segment for
the periods designated below are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
(amounts in thousands)
<S> <C> <C> <C> <C>
Revenues:
Systems and Support Services $26,223 $27,231 $52,455 $51,920
Systems Integration 17,643 8,055 31,574 23,563
Consulting 8,117 6,516 15,196 13,080
Total $51,983 $41,802 $99,226 $88,563
Gross Profit:
Systems and Support Services $4,130 $ 3,831 $ 7,010 $ 8,050
Systems Integration 1,384 1,685 2,764 4,933
Consulting 1,677 1,023 2,835 2,426
Total $7,191 $ 6,539 $12,609 $15,409
Gross Margin:
Systems and Support Services 15.8% 14.1% 13.4% 15.5%
Systems Integration 7.8% 20.9% 8.8% 20.9%
Consulting 20.7% 15.7% 18.7% 18.5%
Total 13.8% 15.6% 12.7% 17.4%
</TABLE>
For the three month period ended June 30, 1996, revenue
increased by $10.2 million, or 24.3%, to $52.0 million from $41.8
million for the comparable 1995 period. The increase for the
three month period includes an $8.4 million increase in systems
integration revenue, a $1.6 million increase in consulting
revenue and a $200,000 increase in systems and support services
revenue.
<PAGE>
The increase in the Systems Integration Group revenue of
$8.4 million results from approximately $6 million of increased
shipments from programs and contracts that existed in the
comparable 1995 period and $2.4 million of shipments on recently
awarded contracts. Despite the 91% increase in revenue for the
second quarter of 1996 as compared to 1995, the 1996 sales level
is below management's expectations given the Company's recent
contract awards. Management believes that certain of its large
equipment contracts continue to be negatively impacted by the
Federal Government budget impasse that occurred in early 1996 as
many of the equipment procuring agencies and departments did not
have available funding until late in the Company's second
quarter. The Company anticipates that the last half of 1996 will
show stronger order and revenue volume. However, there can be no
assurance that such order and sales volume growth will
materialize.
The Consulting Group revenue increase of $1.6 million for
the three month period is primarily due to continued growth of
billable hours in the Group's traditional information technology
marketplace. The growth in billable hours is highlighted by the
growth in headcount as consultants have increased to 275 as of
June 30, 1996, an increase of 66 from 209 consultants in the
comparable 1995 period.
The Systems and Support Services Group revenue increase of
$200,000 is due to an $800,000 increase in enterWorks revenue and
an $800,000 increase in software support revenue, offset by a
$1.4 million decrease in hardware support revenue. The increase
in enterWorks revenue is due to the subsidiary's expanded
marketing efforts leading to increased sales of its Pangaea(TM)
products and related consulting. The increase in software
support is due to increased services under certain of the
Company's large labor contracts. The decrease in the hardware
support revenues is a result of the continued migration from
mainframe to network based computing as the servers and desktop
computers that support network computing generally provide lower
maintenance revenue. Additionally, the hardware support area
continues to experience a shift from fixed price contracts to
time and material contracts which produce less predictable
revenue streams.
Revenue increased $10.6 million or 12.0% to $99.2 million
for the six months ended June 30, 1996 from $88.6 million for the
comparable 1995 period. The increase for the six month period
includes an $8.0 million systems integration revenue increase, a
$2.1 million consulting revenue increase and a $500,000 increase
in systems and support services revenue. The reasons for these
revenue increases are discussed above.
Cost of sales increased by $9.5 million or 27.0%, to $44.8
million in the three month period ended June 30, 1996, from $35.3
million in the comparable 1995 period. The increase in cost of
sales for the three month period includes an $8.7 million
increase in systems integration, a $946,000 increase in
consulting offset by a $107,000 decrease in systems and support
services cost of sales.
<PAGE>
The increase in systems integration cost of sales is due to
the combination of increased sales volume, a shift in the
equipment sales mix to higher cost products and the expansion of
staffing levels to support recent contract awards Additionally,
during the second quarter, the Systems Integration Group
introduced a number of new portable and ruggedized products that
required a higher than anticipated manufacturing effort. The
Company believes that its manufacturing efficiency will improve
in the second half of 1996, although there can be no assurance
that such improvement will occur. The increase in consulting
cost of sales is due primarily to the increased sales volume as
discussed above. The decrease in systems and support services
cost of sales is due to a decrease in cost of sales in the
hardware support area as a result of lower sales, offset by
increased cost of sales in the software support area due to
increased costs resulting from the aforementioned increase in
software support revenues.
For the six months ended June 30, 1996, cost of sales
increased $13.5 million, or 18.4%, to $86.7 million from $73.2
million for the same period in 1995. The increase in cost of
sales includes a $10.2 million increase in systems integration
cost of sales, a $1.7 million increase in consulting cost of
sales and a $1.6 million increase in systems and support services
cost of sales. The reasons for these cost of sales increases are
discussed above.
Gross profit increased $653,000 in the three month period to
$7.2 million, from $6.5 million in the comparable 1995 period.
The increase in gross profit includes $654,000 increase in
consulting gross profit, a $299,000 increase in systems and
support services gross profit, offset by a $301,000 decrease in
systems integration gross profit. For the six month period,
gross profit decreased by $2.8 million to $12.6 million from
$15.4 million. This decrease includes a $2.2 million decrease in
systems integration gross profit, a $1.0 million decrease in
Systems and Services gross profit, offset by a $409,000 increase
in Consulting gross profit. The reasons for the gross profit
decrease for the periods ended June 30, 1996 related to the
changes in revenues and cost of sales for the respective periods.
Gross margins were 13.8% and 12.7%, respectively, for the
three and six month periods of 1996 as compared to 15.6% and
17.4%, respectively, for the comparable periods of 1995.
Selling, general, and administrative expense ("SG&A")
increased by approximately $3.5 million or 31.4%, to $7.8 million
in the second quarter of 1996 from $4.3 million in the comparable
period of 1995. For the six month period of 1996, SG&A increased
$3.6 million to $14.7 million from $11.1 million in 1995. These
increases are primarily due to increased spending by the Company
in the information technology area and in its bid and proposal
and marketing efforts including significant efforts at its
enterWorks subsidiary. SG&A as a percentage of revenues
increased to 15.0% for the second quarter of 1996 from 10.4% in
the comparable 1995 period. SG&A as a percentage of revenues for
the six month period ended June 30, 1996 increased to 14.8% from
12.6% compared to the same period in 1995.
<PAGE>
Goodwill amortization expense decreased $405,000 to $390,000
for the three months and decreased by $809,000 to $780,000 for
the six months ended June 30, 1996. These reductions are due to
the completion of the amortization of goodwill from an earlier
acquisition by the Company in mid 1995. The Company continues to
amortize its remaining goodwill balance which resulted primarily
from the acquisition of Telos Corporation (California).
Operating income decreased by $2.4 million to a $988,000
operating loss in the 1996 three month period from $1.4 million
of operating profit in the comparable 1995 period. Operating
income decreased $5.5 million to a $2.9 million operating loss
from a $2.7 million operating profit for the six month period
ended June 30, 1996. These decreases resulted from the
aforementioned decreases in gross profit and increased SG&A.
Non operating expense in the three and six month periods
ended June 30, 1996 increased over the comparable 1995 periods
due to the $355,000 Rosecliff litigation settlement provision
that the Company recorded in the second quarter of 1996.
Interest expense increased approximately $200,000 to $1.6
million in the second quarter of 1996 period from $1.4 million in
the comparable 1995 period, and increased approximately $500,000
to $3.1 million for the six months ended June 30, 1996 from $2.6
million for the comparable 1995 period. These increases are due
to increased debt levels in 1996.
The Company did not have an income tax provision for the
three month and six month periods ended June 30, 1996 or 1995 due
to its net loss in 1996 and as a result of utilization of net
operating loss carryforwards in 1995.
Liquidity and Capital Resources
For the six months ended June 30, 1996, the Company used
$4.8 million of cash in operating activities. This was primarily
the result of the Company's net loss for the period then ended.
The Company funded its net loss, purchases of property and
equipment and investments in products through increased
borrowings.
During the first half of 1996, the Company's liquidity was
adversely impacted by the 1996 Federal government budget impasse
which resulted in lower than anticipated order levels on certain
equipment contracts. This reduced order and revenue volume
combined with the lower gross margins generated on certain
existing contracts, the investment in contract support
infrastructure and increased SG&A expenses has resulted in
liquidity constraints at the Company. In response, the Company
has implemented an aggressive cash management program which is
reducing discretionary spending and includes obtaining extended
payment terms with certain of the Company's vendors. The Company
anticipates an improvement in order levels and revenues in the
second half of 1996 which should alleviate some of the liquidity
constraints currently being experienced. However, there can be
no assurance that increased revenues and profitability will
materialize. Additionally, should the Company receive a
significant increase in order volume, financing such growth could
also negatively impact liquidity. Given its current revenue
level, the Company believes that its current credit facility is
adequate through at least the third quarter of 1996. The Company
believes that additional financing may be required to support
additional revenue growth and is reviewing with its senior lender
its financing options.
The Company continues to actively review its business
opportunities surrounding its enterWorks products. Through June
30, 1996, the Company had funded all product development and
sales and marketing efforts. In July 1996, the Company completed
a private financing of approximately $3 million of enterWorks
subordinated debt with warrants to fund working capital
requirements of the Company. The Company continues to explore
other external capital sources to allow it to fully exploit the
growth potential for this emerging market including either
additional private or public financing.
At June 30, 1996, the Company had outstanding debt of $59.2
million, consisting of $44.2 million under the secured senior
credit facility and $15.0 million in subordinated debt. The
senior credit facility was refinanced in second quarter of 1996
and has a maturity date of July 1, 1997. Under the terms of the
refinancing, the total commitment under the senior credit
facility is $45 million, with terms and conditions similar to the
previous senior credit facility except for amendments made to
certain of the financial and non-financial covenants.
At June 30, 1996, the Company had a senior subordinated
notes, Series A, $675,000 outstanding with an affiliated entity
of Mr. John R.C. Porter ("Porter"), the Company's majority common
shareholder. The Company was not in compliance with the
financial maintenance covenants of the senior subordinated notes,
Series A as of June 30, 1995. The entity holding the notes has
agreed to waive such non compliance.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Litigation
The Company has entered into an agreement with Rosecliff to
settle certain litigation initiated by Rosecliff in 1994 in
connection with a failed equity/subordinated debt private
placement transaction. Accordingly, in the second quarter of
1996, the Company recorded $355,000 of additional non-operating
expense to fully record the provisions of the settlement.
Item 3. Defaults Upon Senior Securities
Senior and Class B Redeemable Preferred Stocks
The Company has not declared dividends on its Senior
Redeemable Preferred Stock, series A-1 and A-2 since their
issuance. Total undeclared unpaid dividends accrued for
financial reporting purposes are $1,660,000 for the series A-1
and A-2 Preferred Stock and $3,167,000 for the Class B Preferred
Stock at June 30, 1996.
12% Cumulative Exchangeable Redeemable Preferred Stock
The Company has not declared or paid dividends on its 12%
Cumulative Exchangeable Redeemable Preferred Stock since 1991,
due to restrictions and abiguities related to the payment of such
dividends contained in its charter, its working capital facility
agreement and under Maryland law. Through November 1995, the
Company had the option of paying such dividends in additional
shares of preferred stock provided the Company had funds required
under Maryland law. Cumulative undeclared dividends accrued for
financial reporting purposes at June 30, 1996 totaled $8,264,000.
The dividends for 1992 through June 1, 1995 have been accrued as
if the dividends would be paid in additional preferred stock
shares and are valued at $3,950,000. If these dividends were paid
in cash, the total amount accrued would have been $15.1 million.
The dividends payable after June 1, 1995 total $4,314,000 and
have been accrued on a cash basis.
Item 4. Submission of Matters to a Vote of Security Holders
On April 5, 1996, at a special meeting of the Common
shareholders a vote was taken regarding the establishment of a
new stock option plan. The stock option plan was approved by
unanimous vote of all shareholders present at the meeting which
represented a majority of the Company's common shares
outstanding.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.76 Sixteenth Amendment to Credit Facility and Tenth
Amended and Restated Promissory Note
10.77 enterWorks.com 1996 Stock Option Plan
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DATE: Telos Corporation
August 14, 1996 /s/ Lorenzo Tellez
Lorenzo Tellez
(Principal Financial Officer &
Principal Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
Telos Corporation
Exhibit Index
<S>
Exhibit Number Exhibit Name Page
<C> <S> <C>
10.76 Sixteenth Amendment to Credit Facility 22
and Tenth Amended and Restated Promissory
Note
10.75 enterWorks.com 1996 Stock Option Plan 32
27 Financial Data Schedule 43
</TABLE>
<PAGE>
THIS SIXTEENTH AMENDMENT TO CREDIT AGREEMENT (this
"Amendment") is made and entered into as of the 19th day of April
1996, by and among Telos Corporation, a Maryland corporation
(formerly known as C3, Inc., a Maryland corporation), Telos
Corporation, a California corporation (individually, "Borrower"
and collectively, "Borrowers") and NationsBank, N.A., a national
banking association, successor by merger to American Security
Bank, N.A. (the "Bank" or "Agent").
WITNESSETH:
A. Borrowers, the Bank and the Agent entered into that
certain Revolving and Reducing Senior Facility Credit Agreement,
dated as of January 14, 1992 (the "Original Credit Agreement").
B. Borrowers, the Bank and the Agent entered into an
Agreement and Waiver dated as of July 20, 1992, an Amendment
dated as of October 1, 1992, an Amendment dated as of January 15,
1993, an Amendment dated as of June 30, 1993, an Amendment dated
as of August 31, 1993, an Amendment dated as of October 5, 1993,
an Amendment dated as of December 31, 1993, an Amendment dated as
of April 11, 1994, an Amendment dated as of June 8, 1994, an
Amendment dated as of October 7, 1994, an Amendment dated as of
January 5, 1995, an Amendment dated as of January 12, 1995, an
Amendment and Waiver dated as of April 17, 1995, an Amendment
dated as of August 4, 1995 and an Amendment dated as of October
13, 1995, whereby Borrowers, the Agent and the Bank agreed, among
other things, to amend certain provisions of the Original Credit
Agreement (the Original Credit Agreement, as so amended, shall be
hereinafter referred to as the "Credit Agreement").
C. Borrowers, the Agent and the Bank now desire, pursuant
to Section 11.1 of the Credit Agreement, to further amend certain
provisions of the Credit Agreement on the terms and conditions
set forth below.
NOW THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
Section 1. Definitions.
All capitalized terms used in this Amendment and not
otherwise defined shall have the meanings ascribed to such terms
in the Credit Agreement.
<PAGE>
Section 2. Amendment to Maturity Date.
Pursuant to Section 11.1 of the Credit Agreement, Section
2.1(d) of the Credit Agreement is hereby amended by changing the
date in the first sentence from "July 1, 1996" to "July 1,
1997".
Section 3. Amendments to Borrowing Base.
Pursuant to Section 11.1 of the Credit Agreement, Section
2.2(b)(i)(D) is hereby amended by changing the amount
"$7,000,000" to "11,000,000".
Section 4. Additional Fees.
Pursuant to Section 11.1 of the Credit Agreement, Section
2.6 of the Credit Agreement is hereby amended by the addition of
the following subsection (m):
"(m) Facility Fee. On or before April 19th, 1996, Borrowers
shall pay to the Agent a facility fee equal to $25,000."
Section 5. Amendment to Certain Covenants.
(a) Pursuant to Section 11.1 of the Credit Agreement,
Section 6.18 of the Credit Agreement is hereby deleted and
amended in its entirety to read as follows:
"6.18 Capital Expenditures. Borrowers will not,
directly or indirectly, make Capital Expenditures in any fiscal
year in excess of $2,700,000, or such other amount approved by
the Bank in advance upon submission by Borrowers of the annual
budget for capital expenditures which submission shall be in
writing no later than February 15 of each fiscal year, which
approval shall not be unreasonably withheld."
(b) Pursuant to Section 11.1 of the Credit Agreement,
Section 7.2 is hereby deleted and amended in its entirety to read
as follows:
"7.2.Minimum Tangible Capital Funds. On a
consolidated basis, Tangible Capital Funds shall not be less
than the following during any of the periods described below:
<PAGE>
<TABLE>
Period Required Amount
<S> <C>
March 31, 1996 through ($6 ,216,000)
June 29, 1996
June 30, 1996 through ($4,945,000)
September 29, 1996
September 30, 1996 through ($3,940,000)
December 30, 1996
December 31, 1996 through ($2,845,000)"
the Maturity Date
</TABLE>
(c) Pursuant to Section 11.1 of the Credit Agreement,
Section 7.3 is hereby deleted and amended in its entirety to read
as follows:
"Minimum Net Worth. On a consolidated basis,
the Borrowers' Net Worth shall not be less than the following
for any of the periods described below:
<TABLE>
Period Required Amount
<S> <C>
March 31, 1996 through $3,785,000
June 29, 1996
June 30, 1996 through $4,085,000
September 29, 1996
September 30, 1996 through $4,685,000
December 30, 1996
December 31, 1996 through $5,385,000"
the Maturity Date
</TABLE>
<PAGE>
Section 6. Conditions Precedent to the Effectiveness of
this Amendment.
The provisions of this Amendment are conditioned upon, and
shall not become effective until the occurrence of, each of the
following:
(a) Borrowers shall have executed and delivered
to the Agent the Tenth Amended and Restated
Promissory Note, dated the date hereof, in the
maximum principal amount of $45,000,000.
(b) Borrowers shall have delivered to the Agent
certified corporate resolutions approving the
transactions described herein, the form and
substance of which shall be satisfactory to the
Agent in its sole and absolute discretion.
(c) Borrowers shall have paid to the Agent all
fees due and payable on and as of the date hereof.
(d) No litigation, proceeding or any other action
shall have been filed, or threatened to be filed,
by any party which challenges, seeks to enjoin,
restrain or prohibit or to obtain damages in
respect of or which is related to the transactions
contemplated by this Amendment.
Section 7. No Waiver.
Notwithstanding execution of this Amendment and the
extension of Loans by the Bank to Borrowers in accordance with
the provisions hereof, neither the Bank nor the Agent is waiving,
and shall not be deemed to have waived, any of their respective
rights under any provisions of the Credit Agreement, the Note or
the other Revolving Loan Documents. The Bank's or the Agent's
failure to insist upon the strict performance of any term,
condition, or other provision of the Credit Agreement, the Note
or the other Revolving Loan Documents or to exercise any right or
remedy hereunder or thereunder shall not constitute a waiver by
the Bank or the Agent of any such term, condition or other
provision or default or Event of Default in connection therewith.
Section 8. Continued Effect of Credit Agreement.
Except as specifically amended herein, the Credit Agreement
is and shall continue to be in full force and effect and is
hereby ratified and confirmed in all respects.
<PAGE>
Section 9. Counterparts.
This Amendment may be executed in one or more counterparts,
all of which shall be considered one and the same Amendment, and
shall become effective when one or more of the same counterparts
have been signed by each of the parties to this Amendment and
delivered (by facsimile or otherwise) to the other parties, it
being understood that each party need not sign the same
counterpart.
<PAGE>
IN WITNESS WHEREOF, the Bank, the Agent, and Borrowers have
each executed this Amendment as of the date first written above.
NATIONSBANK, N.A.
By: /s/ Catherine S. Grimm
Name: Catherine S. Grimm
Title: Vice President
NATIONSBANK, N.A., as the Agent
By:/s/ Catherine S. Grimm
Name: Catherine S. Grimm
Title: Vice President
TELOS CORPORATION, formerly
known as C3, Inc.
By: /s/ Lorenzo Tellez
Name: Lorenzo Tellez
Title: Chief Financial Officer & Treasurer
TELOS CORPORATION
By: /s/ Lorenzo Tellez
Name: Lorenzo Tellez
Title: Chief Financial Officer & Treasurer
<PAGE>
TENTH AMENDED AND RESTATED
PROMISSORY NOTE
$45,000,000 April 19, 1996
Preliminary Statement:
A NationsBank, N.A., successor by merger to American
Security Bank, N.A. (the Bank), for itself and as the Agent, and
Telos Corporation, a Maryland corporation (formerly known as C3,
Inc., a Maryland corporation) and Telos Corporation, a California
corporation (collectively, the Borrowers) entered into a
Revolving and Reducing Senior Facility Credit Agreement dated as
of January 14, 1992 (the Original Credit Agreement), pursuant to
which the Bank agreed, under certain terms and conditions, to
make revolving loans to the Borrowers, evidenced by a promissory
note in the maximum principal amount of $35,000,000.
B. On July 20, 1992, the Borrowers, the Bank and the Agent
entered into the First Amendment to the Original Credit Agreement
pursuant to which the Bank agreed to extend funds to the Borrower
in a maximum principal amount of $39,000,000 on the terms and
conditions therein. In connection with the First Amendment to
the Original Credit Agreement, the Borrowers executed an Amended
and Restated Promissory Note in the maximum principal amount of
$39,000,000 dated July 20, 1992.
C. The Borrowers, the Bank and the Agent entered into
further amendments to the Original Credit Agreement dated as of
October 1, 1992, January 15, 1993 and June 30, 1993, which
amended certain other provisions of the Original Credit
Agreement. According to the amendment dated as of January 15,
1993, the maximum principal amount of the Loans automatically
reduced to $32,500,000 on April 30, 1993. In connection with the
amendment to the Original Credit Agreement dated June 30, 1993,
the Borrowers executed a Second Amended and Restated Promissory
Note.
D. On August 31, 1993, the Borrowers, the Bank and the
Agent entered into a Fifth Amendment to the Original Credit
Agreement whereby the Maturity Date of the Loans was extended
from August 31, 1993 to September 24, 1993. The Borrowers
executed the Third Amended and Restated Promissory Note, dated
August 31, 1993.
E. On October 5, 1993, the Borrowers, the Bank and the
Agent entered into a Sixth Amendment to the Original Credit
Agreement whereby, among other things, the Maturity Date was
extended from September 24, 1993 to September 30, 1994 and the
maximum principal amount of the Loans was reduced to $30,000,000,
subject to a reduction to $28,000,000 on February 28, 1994. The
Borrowers executed the Fourth Amended and Restated Promissory
Note, dated October 5, 1993. The Borrowers, the Bank and the
Agent entered into the Seventh Amendment to Original Credit
Agreement, dated as of December 31, 1993, whereby certain
covenants were amended.
F. On April 11, 1994, the Borrowers, the Bank and the
Agent entered into an Eighth Amendment to the Original Credit
Agreement whereby the maximum principal amount of the Loans was
increased to $30,000,000, subject to a reduction to $28,000,000
upon the occurrence of certain conditions. In connection with
the Eighth Amendment, a Fifth Amended and Restated Promissory
Note was executed by the Borrowers.
G. On June 8, 1994, the Borrowers, the Bank and the Agent
entered into a Ninth Amendment to the Original Credit Agreement
whereby the Original Credit Agreement was amended by, among other
things, increasing the maximum principal amount of the Loans to
$34,000,000 and extending the Maturity Date of the Loans. In
connection with the Ninth Amendment, the Borrowers executed a
Sixth Amended and Restated Promissory Note. The Borrowers, the
Bank and the Agent entered into a Tenth Amendment to the Original
Credit Agreement on October 7, 1994, whereby certain other
provisions were amended.
H. On January 5, 1995, the Bank, the Borrowers and the
Agent entered into an Eleventh Amendment to the Original Credit
Agreement whereby, among other things, the maximum principal
amount of the Loans was increased to $36,000,000, subject to a
reduction to $34,000,000 on January 18, 1995. In connection with
the Eleventh Amendment, the Borrowers executed a Seventh Amended
and Restated Promissory Note.
I. On January 12, 1995, the Borrowers, the Bank and the
Agent entered into a Twelfth Amendment to the Original Credit
Agreement whereby, among other things, the principal amount of
the Loan was increased to $45,000,000. In connection with the
Twelfth Amendment, the Borrowers executed an Eighth Amended and
Restated Promissory Note.
J. On April 17, 1995, the Borrowers, the Bank and the
Agent have entered a Thirteenth Amendment and Waiver to the
Original Credit Agreement, pursuant to which the Borrowers
executed a Ninth Amended and Restated Promissory Note (the Ninth
Amended Note). The Borrowers, the Bank and the Agent also
entered into the Fourteenth Amendment to Original Credit
Agreement dated as of August 4, 1995 and the Fifteenth Amendment
to Original Credit Agreement dated as of October 13, 1995.
K. On the date hereof, the Borrowers, the Bank and the
Agent have entered into a Sixteenth Amendment to Credit Agreement
(the Sixteenth Amendment). The Borrowers are required to execute
and deliver this Tenth Amended and Restated Promissory Note (this
Note) as a condition of the Bank's performance under the
Sixteenth Amendment. The Original Credit Agreement, as amended
through and including the date hereof, shall be referred to
herein as the Credit Agreement.
<PAGE>
L. This Note amends and restates the terms and conditions
of the underlying obligations of the Borrowers, as created on
January 14, 1992.
NOW, THEREFORE, the parties acknowledge the receipt of
sufficient consideration and agree as follows:
1. This Note amends and restates the Ninth Amended Note in
its entirety. If there is any conflict between the provisions of
the Ninth Amended Note and the provisions of this Note, the
provisions of this Note shall prevail.
2. The Borrowers, for value received, hereby jointly and
severally promise to pay to the Bank, or its assigns, the
principal amount of Forty-Five Million United States Dollars
($45,000,000.00) or such lesser amount as may, at the maturity
hereof, whether by acceleration or otherwise, be the aggregate
unpaid principal amount of this Note, together with interest
thereon. The maximum principal amount of $45,000,000 includes an
overadvance amount of $2,000,000 (the Overadvance Amount). The
outstanding principal amount of this Note (exclusive of the
Overadvance Amount) shall bear interest at the Bank's Base Rate
plus 1.5% per annum. The Overadvance Amount shall bear interest
at the Bank's Base Rate plus 3.0% per annum. Interest shall be
payable monthly in arrears on the last day of each month,
commencing January 31, 1992, and from and after June 8, 1994, on
the first day of the month following the month for which interest
has accrued, commencing July 1, 1994, and at maturity (whether by
acceleration or otherwise). The outstanding principal amount of
this Note (exclusive of the Overadvance Amount) shall be due and
payable on July 1, 1997 or on such earlier date on which such
amount becomes due and payable, whether by declaration of
acceleration, optional or mandatory prepayment or otherwise. The
Overadvance Amount shall be due and payable on June 30, 1996 or
on such earlier date on which such amount becomes due and
payable, whether by declaration of acceleration, optional or
mandatory prepayment or otherwise. If the Borrowers shall fail
to make any payment of principal of or interest on this Note when
due, whether at maturity or at a date fixed for the payment of
any installment or prepayment thereof or by declaration,
acceleration or otherwise, the Borrowers shall pay to the holder
of this Note on demand by such holder, interest on such unpaid
principal or unpaid interest from the date due until paid in full
at a rate per annum equal to two percentage points (2%) above the
rate otherwise applicable under the terms of the Credit
Agreement; provided, however, that in no event shall the amount
contracted for and agreed to be paid by the Borrowers as interest
on this Note exceed the highest lawful rate permissible under any
law applicable hereto.
3. This Note evidences Loan Outstandings under, and is
subject to the provisions of, the Credit Agreement and is secured
by the Security Documents, as further set forth in the Credit
Agreement. The holder of this Note is entitled to the benefits
of the Credit Agreement and the Security Documents. Neither this
<PAGE>
reference to such Credit Agreement or the Security Documents nor
any provision thereof shall affect or impair the absolute and
unconditional obligation of the Borrowers to pay all principal,
interest, fees, costs and expenses due and payable to the Bank as
provided herein or in the Credit Agreement or in the Security
Documents. All payments of principal, interest, fees, costs and
expenses due and payable to the Bank shall be payable in U.S.
Dollars in immediately available funds at the Bank's office at
1501 Pennsylvania Avenue, N.W., Washington, D.C. 20005, to an
account to be designated in writing by the Bank.
4. This Note is subject to prepayment, in whole or in
part, and to acceleration and other remedies upon an Event of
Default at the times and in the manner specified in the Credit
Agreement. The makers and all endorsers of this Note hereby
waive presentment, demand, notice, protest and all other demands
and notices in connection with the delivery, acceptance,
performance or enforcement of this Note.
5. The Bank may assign this Note and sell participations
in it as provided in the Credit Agreement.
6. Capitalized terms used herein without definition shall
have the meanings ascribed to them in the Credit Agreement.
7. THE BORROWERS HEREBY WAIVE, TO THE EXTENT PERMITTED BY
APPLICABLE LAW, TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH
RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS NOTE, THE
CREDIT AGREEMENT ANY OTHER REVOLVING LOAN DOCUMENT, THE
COLLATERAL OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT TO
THIS NOTE, OR THE VALIDITY, PROTECTION, INTERPRETATION,
COLLECTION OR ENFORCEMENT THEREOF, OR ANY OTHER CLAIM OR DISPUTE
HOWSOEVER ARISING, BETWEEN THE BORROWERS ON THE ONE HAND, AND THE
AGENT OR ANY ONE OR MORE OF THE BANKS, ON THE OTHER HAND; AND THE
BORROWERS HEREBY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE
LAW, THE RIGHT TO INTERPOSE ANY SETOFF OR COUNTERCLAIM OR CROSS-
CLAIM IN CONNECTION WITH ANY SUCH LITIGATION, IRRESPECTIVE OF THE
NATURE OF SUCH SETOFF, COUNTERCLAIM OR CROSS-CLAIM EXCEPT TO THE
EXTENT THAT THE FAILURE SO TO ASSERT ANY SUCH SETOFF,
COUNTERCLAIM OR CROSS-CLAIM WOULD PERMANENTLY PRECLUDE THE
PROSECUTION OF OR RECOVERY UPON SAME. THE BORROWERS HEREBY
IRREVOCABLY CONSENT TO THE NONEXCLUSIVE JURISDICTION OF THE
COURTS OF THE COMMONWEALTH OF VIRGINIA AND, TO THE EXTENT
PERMITTED BY APPLICABLE LAW, OF ANY FEDERAL COURT LOCATED IN THE
COMMONWEALTH OF VIRGINIA IN CONNECTION WITH ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO ANY ONE OR MORE OF THIS
AGREEMENT, ANY OTHER REVOLVING LOAN DOCUMENT OR ANY DOCUMENT OR
INSTRUMENT DELIVERED PURSUANT TO THIS NOTE.
8. No modification or waiver of any provision hereof and
no consent by the Bank or any holder of this Note to any
departure from any such provision shall be effective unless such
modification or waiver shall be given in accordance with the
Credit Agreement.
<PAGE>
9. If a default occurs under this Note, the Borrowers
hereby appoint Claudette M. Christian, Esquire or Dennis K.
Moyer, Esquire as the Borrowers' true and lawful attorney-in-
fact, for the Borrowers, in the Borrowers' name, place and stead,
to confess judgment against the Borrowers, in the office of the
Clerk of the Circuit Court of Fairfax County, Virginia, for the
Obligations, hereby ratifying and confirming the acts of said
attorney-in-fact as fully as if done by the Borrowers. The
Borrowers consent to immediate execution of such confessed
judgment and waive the benefit of any exemption law.
10. The Borrowers covenant (to the extent they may lawfully
do so) that they will not at any time insist upon, or plead, or
in any manner whatsoever claim or take the benefit or advantage
of, any stay or extension law wherever enacted, now or at any
time hereafter in force, which may affect the covenants or
performance of this Note; and the Borrowers (to the extent they
may lawfully do so) hereby expressly waive all benefit or
advantage of any such law and covenant that they will not hinder,
delay or impede the execution of any power granted herein to the
holder of this Note, but will suffer and permit the execution of
every such power as though no such law had been enacted.
11. All liability of all Persons included in the
"Borrowers" shall be joint and several. All references in this
Note to the Borrowers shall be interpreted as references to each
such Person individually and to all such Persons collectively.
12. This Note is governed by the laws of the Commonwealth
of Virginia (without regards to the laws with respect to conflict
of laws) and is executed as of the date first above written.
13. In case of the pendency of any receivership,
insolvency, liquidation, bankruptcy, reorganization, arrangement,
adjustment, composition or other judicial proceeding relative to
the Borrowers or any other obligor upon this Note or the property
of the Borrowers or of such other obligor or their creditors, the
holder of this Note (irrespective of whether the principal of
this Note shall then be due and payable as therein expressed or
by declaration or otherwise and irrespective of whether the
holder of this Note shall have made any demand on the Borrowers
for the payment of overdue principal, interest or premium) shall
be entitled and empowered, by intervention in such proceeding or
otherwise to file and prove a claim for the whole amount of
principal and interest owing and unpaid in respect of this Note
and to file such other papers or documents as may be necessary or
advisable in order to have the claims of the holder of this Note
allowed in such judicial proceeding.
<PAGE>
14. The Borrowers agree to pay all reasonable expenses,
including fees and disbursements of counsel to the holder of this
Note, which the holder of this Note may hereafter incur in
connection with this Note and all other documents related hereto
(including any amendment, consent or waiver or other negotiations
relating hereto or thereto) and the transactions contemplated
hereby or the enforcement of the rights of the holder hereof (or
any agent therefor).
TELOS CORPORATION, a Maryland
corporation (formally known as C3, Inc.)
By: /s/ Lorenzo Tellez
Name: Lorenzo Tellez
Title: Chief Financial Officer & Treasurer
TELOS CORPORATION, a California
corporation
By: /s/ Lorenzo Tellez
Name: Lorenzo Tellez
Title: Chief Financial Officer & Treasurer
<PAGE>
enterWorks.com, inc.
1996 STOCK OPTION PLAN
1. Purpose.
The purpose of this plan (the "Plan") is to secure for
enterWorks.com, inc., a Delaware corporation, (the "Company") and
its shareholder(s) the benefits arising from capital stock
ownership by employees, officers and directors of, consultants
and advisors to, the Company, who are expected to contribute to
the Company's future growth and success. Except where the
context otherwise requires, the term "Company" shall include the
parents and all future subsidiaries of the Company as defined in
Sections 424(e) and 424(f) of the Internal Revenue Code of 1986,
as amended or replaced from time to time (the "Code"). Those
provisions of the Plan which make express reference to
Section 422 shall apply only to Incentive Stock Options (as that
term is defined in the Plan).
2. Type of Options and Administration.
(a) Types of Options. Options granted pursuant to the Plan
may be either incentive stock options ("Incentive Stock Options")
meeting the requirements of Section 422 of the Code or Non-
Statutory Options which are not intended to meet the requirements
of Section 422 of the Code ("Non-Statutory Options").
(b) Administration.
(i) The Plan will be administered by the Board of
Directors of the Company, whose construction and interpretation
of the terms and provisions of the Plan shall be final and
conclusive. The Board of Directors may in its sole discretion
grant options to purchase shares of the Company's Common Stock
("Common Stock") which are shares of Class A Common Stock and
issue shares upon exercise of such options as provided in the
Plan. The Board shall have authority, subject to the express
provisions of the Plan, to construe the respective option
agreements and the Plan, to prescribe, amend and rescind rules
and regulations relating to the Plan, to determine the terms and
provisions of the respective option agreements, which need not be
identical, and to make all other determinations which are, in the
judgment of the Board of Directors, necessary or desirable for
the administration of the Plan. The Board of Directors may
correct any defect, supply any omission or reconcile any
inconsistency in the Plan or in any option agreement in the
manner and to the extent it shall deem expedient to carry the
Plan into effect and it shall be the sole and final judge of
<PAGE>
such expediency. No director or person acting pursuant to
authority delegated by the Board of Directors shall be liable for
any action or determination under the Plan made in good faith.
(ii) To the full extent permitted by or consistent with
applicable laws or regulations and Section 3(b) of this Plan
(A) the Board of Directors may delegate any or all of its powers
under the Plan to a committee appointed by the Board of Directors
for the purpose of granting and administering options to persons
to whom Section 16(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") applies, and (B) any and all other powers of the
Board of Directors under the Plan, including the granting and
administration of all other options, may be vested in the Chief
Executive Officer of the Company, provided that the Chief
Executive Officer is and remains a member of the Board of
Directors. References to the Board of Directors in the Plan
shall mean and relate to the Chief Executive Officer.
(c) Applicability of Rule 16b-3. Those provisions of the
Plan which make express reference to Rule 16b-3 promulgated under
the Exchange Act, or any successor rule ("Rule 16b-3"), or which
are required in order for certain option transactions to qualify
for exemption under Rule 16b-3, shall apply only to such persons
as are required to file reports under Section 16(a) of the
Exchange Act (a "Reporting Person").
3. Eligibility.
(a) General. Options may be granted to persons who are, at
the time of grant, employees, officers or directors of, or
consultants or advisors to, the Company; provided, that the class
of employees to whom Incentive Stock Options may be granted shall
be limited to all employees of the Company. A person who has
been granted an option may, if he or she is otherwise eligible,
be granted additional options if the Board of Directors shall so
determine. Subject to adjustment as provided in Section 15
below, the maximum number of shares with respect to which options
may be granted to any employee under the Plan shall not exceed
one million (1,000,000) shares of common stock during the ten-
year term of the Plan. For the purpose of calculating such
maximum number, (a) an option shall continue to be treated as
outstanding notwithstanding its repricing, cancellation or
expiration and (b) the repricing of an outstanding option or the
issuance of a new option in substitution for a cancelled option
shall be deemed to constitute the grant of a new additional
option separate from the original grant of the option that is
repriced or cancelled.
(b) Grant of Options to Officers. From and after the
registration of the Common Stock of the Company under the
Exchange Act, the selection of an officer (as the term "officer"
is defined for purposes of Rule 16b-3) as a recipient of an
option, the timing of the option grant, the exercise price of the
option and the number of shares subject to the option shall be
determined either (i) by the Board of Directors, of which all
members shall be "disinterested persons" (as hereinafter
defined), or (ii) by two or more directors having full authority
to act in the matter, each of whom shall be a "disinterested
<PAGE>
person." For the purposes of the Plan, a director shall be
deemed to be a "disinterested person" only if such person
qualifies as a "disinterested person" within the meaning of
Rule 16b-3, as such term is interpreted from time to time.
4. Stock Subject to Plan.
Subject to adjustment as provided in Section 15 below, the
maximum number of shares of Common Stock which may be issued and
sold under the Plan is three million (3,000,000). If an option
granted under the Plan shall expire or terminate for any reason
without having been exercised in full, the unpurchased shares
subject to such option shall again be available for subsequent
option grants under the Plan. If shares issued upon exercise of
an option under the Plan are tendered to the Company in payment
of the exercise price of an option granted under the Plan, such
tendered shares shall again be available for subsequent option
grants under the Plan; provided, that in no event shall such
shares be made available for issuance to Reporting Persons or
pursuant to exercise of Incentive Stock Options.
5. Forms of Option Agreements.
As a condition to the grant of an option under the Plan,
each recipient of an option shall execute an option agreement in
such form not inconsistent with the Plan as may be approved by
the Board of Directors. Such option agreements may differ among
recipients.
6. Purchase Price.
(a) General. Subject to Section 3(b), the purchase price
per share of stock deliverable upon the exercise of an option
shall be determined by the Board of Directors, provided, however,
(i) that in the case of an Incentive Stock Option, the exercise
price shall not be less than 100% of the fair market value of
such stock, as determined by the Board of Directors, at the time
of grant of such option, or less than 110% of such fair market
value in the case of options described in Section 11(b), and (ii)
in no event shall the exercise price be less than $0.12 (twelve
cents) per share (subject to appropriate adjustment for stock
splits, stock dividends, combinations and other similar
recapitalizations, subsequent to the date of this Plan, affecting
the shares subject to the options.)
<PAGE>
(b) Payment of Purchase Price. Options granted under the
Plan may provide for the payment of the exercise price by
delivery of cash or a check to the order of the Company in an
amount equal to the exercise price of such options, or, to the
extent provided in the applicable option agreement, (i) by
delivery to the Company of shares of Common Stock of the Company
already owned by the optionee having a fair market value equal in
amount to the exercise price of the options being exercised or
(ii) by any other means (including, without limitation, by
delivery of a promissory note of the optionee payable on such
terms as are specified by the Board of Directors) which the Board
of Directors determines are consistent with the purpose of the
Plan and with applicable laws and regulations (including, without
limitation, the provisions of Regulation T promulgated by the
Federal Reserve Board). The fair market value of any shares of
the Company's Common Stock or other non-cash consideration which
may be delivered upon exercise of an option shall be determined
by the Board of Directors.
7. Option Period.
Each option and all rights thereunder shall expire on such
date as shall be set forth in the applicable option agreement,
except that, in the case of an Incentive Stock Option, such date
shall not be later than ten (10) years after the date on which
the option is granted and, in all cases, options shall be subject
to earlier termination as provided in the Plan.
8. Exercise of Options.
Each option granted under the Plan shall be exercisable
either in full or in installments at such time or times and
during such period as shall be set forth in the agreement
evidencing such option, subject to the provisions of the Plan.
Options to persons (other than persons determined by the Board of
Directors for purposes of this Plan to be key employees ("Key
Employees") or founders ("Founders")) who are employees on the
date of this Plan shall be exercisable to the extent of ten
percent (10%) of the shares subject thereto and to the extent of
an incremental twenty percent (20%) on each of the first four
anniversaries of the date of grant; an additional ten percent
(10%) of the shares will be exercisable at the event of a capital
raising, if any; and options to such persons who become employees
after the date of the Plan shall be exercisable to the extent of
twenty percent (20%) cumulatively on each of the first five
anniversaries of the date of grant. A "capital raising" under
this Plan shall mean an initial public offering or a private
placement by the Company, as further defined in the agreement
evidencing the option. No options to Key Employees who become
employees after the date of the Plan will be exercisable on or
prior to the date of grant of such options, and no shares
becoming exercisable over time will be exercisable prior to the
first anniversary of employment, except at the discretion of the
Board of Directors.
<PAGE>
9. Nontransferability of Options.
Options shall not be assignable or transferable by the
person to whom they are granted, either voluntarily or by
operation of law, except by will or the laws of descent and
distribution, and, during the life of the optionee, shall be
exercisable only by the optionee; provided, however, that
(i) subject to clause (ii) hereof, options to persons subject to
the provisions of Section 16(b) of the Securities Exchange Act of
1934, as amended, may be transferred to the extent allowed by
Rule 16b-3 as in effect from time to time, and (ii) Incentive
Stock Options may be transferred to the extent allowed by
Section 422 of the Code or any successor provision with respect
to Incentive Stock Options as in effect from time to time.
10. Effect of Termination of Employment or Other Relationship.
Except as provided in Section 11(d) with respect to
Incentive Stock Options, and subject to the provisions of the
Plan, the Board of Directors shall determine the period of time
during which an optionee may exercise an option following (i) the
termination of the optionee's employment or other relationship
with the Company or (ii) the death or disability of the optionee.
Such periods shall be set forth in the agreement evidencing such
option.
11. Incentive Stock Options.
Options granted under the Plan which are intended to be
Incentive Stock Options shall be subject to the following
additional terms and conditions:
(a) Express Designation. All Incentive Stock Options
granted under the Plan shall, at the time of grant, be
specifically designated as such in the option agreement covering
such Incentive Stock Options.
(b) 10% Shareholder. If any employee to whom an Incentive
Stock Option is to be granted under the Plan is, at the time of
the grant of such option, the owner of stock possessing more than
10% of the total combined voting power of all classes of stock of
the Company (after taking into account the attribution of stock
ownership rules of Section 424(d) of the Code), then the
following special provisions shall be applicable to the Incentive
Stock Option granted to such individual
(i) The purchase price per share of the Common
Stock subject to such Incentive Stock Option shall not be less
than 110% of the fair market value of one share of Common Stock
at the time of grant; and
(ii) the option exercise period shall not exceed
five years from the date of grant.
<PAGE>
(c) Dollar Limitation. For so long as the Code shall so
provide, options granted to any employee under the Plan (and any
other incentive stock option plans of the Company) which are
intended to constitute Incentive Stock Options shall not
constitute Incentive Stock Options to the extent that such
options, in the aggregate, become exercisable for the first time
in any one calendar year for shares of Common Stock with an
aggregate fair market value (determined as of the respective date
or dates of grant) of more than $100,000.
(d) Termination of Employment, Death or Disability. No
Incentive Stock Option may be exercised unless, at the time of
such exercise, the optionee is, and has been continuously since
the date of grant of his or her option, employed by the Company,
except that:
(i) an Incentive Stock Option may be exercised
within the period of three months after the date the optionee
ceases to be an employee of the Company by reason of termination
without cause by the Company (or within such lesser period as may
be specified in the applicable option agreement), provided, that
the agreement with respect to such option may designate a longer
exercise period and that the exercise after such three-month
period shall be treated as the exercise of a non-statutory option
under the Plan;
(ii) if the optionee dies while in the employ of
the Company, or within three months after the optionee ceases to
be such an employee, the Incentive Stock Option may be exercised
by the person to whom it is transferred by will or the laws of
descent and distribution within the period of six months after
the date of death (or within such lesser period as may be
specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the
meaning of Section 22(e)(3) of the Code or any successor
provision thereto) while in the employ of the Company, the
Incentive Stock Option may be exercised within the period of six
months after the date the optionee ceases to be such an employee
because of such disability (or within such lesser period as may
be specified in the applicable option agreement).
For all purposes of the Plan and any option granted hereunder,
"employment" shall be defined in accordance with the provisions
of Section 1.421-7(h) of the Income Tax Regulations (or any
successor regulations). Notwithstanding the foregoing
provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. Additional Provisions.
(a) Additional Option Provisions. The Board of Directors
may, in its sole discretion, include additional provisions in
option agreements covering options granted under the Plan,
including without limitation restrictions on transfer, repurchase
<PAGE>
rights, commitments to pay cash bonuses, to make, arrange for or
guaranty loans or to transfer other property to optionees upon
exercise of options, or such other provisions as shall be
determined by the Board of Directors; provided that such
additional provisions shall not be inconsistent with any other
term or condition of the Plan and such additional provisions
shall not cause any Incentive Stock Option granted under the Plan
to fail to qualify as an Incentive Stock Option within the
meaning of Section 422 of the Code.
(b) Acceleration, Extension, Etc. The Board of Directors
may, in its sole discretion, (i) accelerate the date or dates on
which all or any particular option or options granted under the
Plan may be exercised or (ii) extend the dates during which all,
or any particular, option or options granted under the Plan may
be exercised; provided, however, that prior to the time that the
Common Stock of the Company is registered under the Exchange Act,
unless such action has been approved by the holders of a majority
of the then outstanding shares of the Company's Common Stock,
such actions (i) may be taken with respect to not more than
twenty-five percent (25%) of the maximum number of shares which
may be issued under options to persons other than Key Employees
or Founders and (ii) may not be taken with respect to an option
to a Key Employee or Founder.
13. General Restrictions.
(a) Investment Representations. The Company may require
any person to whom an option is granted, as a condition of
exercising such option, to give written assurances in substance
and form satisfactory to the Company to the effect that such
person is acquiring the Common Stock subject to the option for
his or her own account for investment and not with any present
intention of selling or otherwise distributing the same, and to
such other effects as the Company deems necessary or appropriate
in order to comply with federal and applicable state securities
laws, or with covenants or representations made by the Company in
connection with any public offering of its Common Stock.
(b) Compliance With Securities Laws. Each option shall be
subject to the requirement that if, at any time, counsel to the
Company shall determine that the listing, registration or
qualification of the shares subject to such option upon any
securities exchange or under any state or federal law, or the
consent or approval of any governmental or regulatory body, or
that the disclosure of non-public information or the satisfaction
of any other condition is necessary as a condition of, or in
connection with, the issuance or purchase of shares thereunder,
such option may not be exercised, in whole or in part, unless
such listing, registration, qualification, consent or approval,
or satisfaction of such condition shall have been effected or
obtained on conditions acceptable to the Board of Directors.
Nothing herein shall be deemed to require the Company to apply
for or to obtain such listing, registration or qualification, or
to satisfy such condition.
<PAGE>
14. Rights as a Shareholder.
The holder of an option shall have no rights as a
shareholder with respect to any shares covered by the option
(including, without limitation, any rights to receive dividends
or non-cash distributions with respect to such shares) until the
date of issue of a stock certificate to him or her for such
shares. No adjustment shall be made for dividends or other
rights for which the record date is prior to the date such stock
certificate is issued.
15. Adjustment Provisions for Recapitalizations and Related
Transactions.
(a) General. If, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of
the Company, reorganization, recapitalization, reclassification,
stock dividend, stock split, reverse stock split or other similar
transaction, (i) the outstanding shares of Common Stock are
increased, decreased or exchanged for a different number or kind
of shares or other securities of the Company, or (ii) additional
shares or new or different shares or other securities of the
Company or other non-cash assets are distributed with respect to
such shares of Common Stock or other securities, an appropriate
and proportionate adjustment may be made in (x) the maximum
number and kind of shares reserved for issuance under the Plan,
(y) the number and kind of shares or other securities subject to
any then outstanding options under the Plan, and (z) the price
for each share subject to any then outstanding options under the
Plan, without changing the aggregate purchase price as to which
such options remain exercisable. Notwithstanding the foregoing,
no adjustment shall be made pursuant to this Section 15 if such
adjustment would cause the Plan to fail to comply with
Section 422 of the Code.
(b) Board Authority to Make Adjustments. Any adjustments
under this Section 15 will be made by the Board of Directors,
whose determination as to what adjustments, if any, will be made
and the extent thereof will be final, binding and conclusive. No
fractional shares will be issued under the Plan on account of any
such adjustments.
16. Merger, Consolidation, Asset Sale, Liquidation, etc.
(a) General. Except as otherwise provided in any
applicable option, in the event of a consolidation or merger or
sale of all or substantially all of the assets of the Company in
which outstanding shares of Common Stock are exchanged for
securities, cash or other property of any other corporation or
business entity or in the event of a liquidation of the Company,
the Board of Directors of the Company, or the board of directors
of any corporation assuming the obligations of the Company, may,
in its discretion, take any one or more of the following actions,
as to outstanding options: (i) provide that such options shall
be assumed, or equivalent options shall be substituted, by the
<PAGE>
acquiring or succeeding corporation (or an affiliate thereof),
provided that any such options substituted for Incentive Stock
Options shall meet the requirements of Section 424(a) of the
Code, (ii) upon written notice to the optionees, provide that all
unexercised options will terminate immediately prior to the
consummation of such transaction unless exercised by the optionee
within a specified period following the date of such notice,
(iii) in the event of a merger under the terms of which holders
of the Common Stock of the Company will receive upon consummation
thereof a cash payment for each share surrendered in the merger
(the "Merger Price"), make or provide for a cash payment to the
optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such
outstanding options (to the extent then exercisable at prices not
in excess of the Merger Price) and (B) the aggregate exercise
price of all such outstanding options in exchange for the
termination of such options, and (iv) provide that all or any
outstanding options shall become exercisable in full immediately
prior to such event.
(b) Substitute Options. The Company may grant options
under the Plan in substitution for options held by employees of
another corporation who become employees of the Company, or a
subsidiary of the Company, as the result of a merger or
consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by
the Company, or one of its subsidiaries, of property or stock of
the employing corporation. The Company may direct that
substitute options be granted on such terms and conditions as the
Board of Directors considers appropriate in the circumstances.
17. No Special Employment Rights.
Nothing contained in the Plan or in any option shall confer
upon any optionee any right with respect to the continuation of
his or her employment by the Company or interfere in any way with
the right of the Company at any time to terminate such employment
or to increase or decrease the compensation of the optionee.
18. Other Employee Benefits.
Except as to plans which by their terms include such amounts
as compensation, the amount of any compensation deemed to be
received by an employee as a result of the exercise of an option
or the sale of shares received upon such exercise will not
constitute compensation with respect to which any other employee
benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing,
life insurance or salary continuation plan, except as otherwise
specifically determined by the Board of Directors.
<PAGE>
19. Amendment of the Plan.
(a) The Board of Directors may at any time, and from time
to time, modify or amend the Plan in any respect, except that if
at any time the approval of the shareholders of the Company is
required under Section 422 of the Code or any successor provision
with respect to Incentive Stock Options, or under Rule 16b-3, the
Board of Directors may not effect such modification or amendment
without such approval.
(b) The termination or any modification or amendment of the
Plan shall not, without the consent of an optionee, affect his or
her rights under an option previously granted to him or her.
With the consent of the optionee affected, the Board of Directors
may amend outstanding option agreements in a manner not
inconsistent with the Plan. The Board of Directors shall have
the right to amend or modify (i) the terms and provisions of the
Plan and of any outstanding Incentive Stock Options granted under
the Plan to the extent necessary to qualify any or all such
options for such favorable federal income tax treatment
(including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code and
(ii) the terms and provisions of the Plan and of any outstanding
option to the extent necessary to ensure the qualification of the
Plan under Rule 16b-3.
20. Withholding.
(a) The Company shall have the right to deduct from
payments of any kind otherwise due to the optionee any federal,
state or local taxes of any kind required by law to be withheld
with respect to any shares issued upon exercise of options under
the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the
optionee may elect to satisfy such obligations, in whole or in
part, (i) by causing the Company to withhold shares of Common
Stock otherwise issuable pursuant to the exercise of an option or
(ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall
have a fair market value equal to such withholding obligation.
The fair market value of the shares used to satisfy such
withholding obligation shall be determined by the Company as of
the date that the amount of tax to be withheld is to be
determined. An optionee who has made an election pursuant to
this Section 20(a) may only satisfy his or her withholding
obligation with shares of Common Stock which are not subject to
any repurchase, forfeiture, unfulfilled vesting or other similar
requirements.
(b) Notwithstanding the foregoing, in the case of a
Reporting Person, no election to use shares for the payment of
withholding taxes shall be effective unless made in compliance
with any applicable requirements of Rule 16b-3 (unless it is
intended that the transaction not qualify for exemption under
Rule 16b-3).
<PAGE>
21. Cancellation and New Grant of Options, Etc.
The Board of Directors shall have the authority to effect,
at any time and from time to time, with the consent of the
affected optionees, (i) the cancellation of any or all
outstanding options under the Plan and the grant in substitution
therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option
exercise price per share which may be lower or higher than the
exercise price per share of the cancelled options or (ii) the
amendment of the terms of any and all outstanding options under
the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of
such outstanding options; provided, however, that prior to the
time that the Common Stock of the Company is registered under
the Exchange Act, any such action shall be effective only with
the approval of the holders of a majority of the then outstanding
shares of the Company's Common Stock.
22. Effective Date and Duration of the Plan.
(a) Effective Date. The Plan shall become effective when
adopted by the Board of Directors, but no option granted under
the Plan shall become exercisable unless and until the Plan shall
have been approved by the Company's shareholders. If such
shareholder approval is not obtained within twelve months after
the date of the Board's adoption of the Plan, options previously
granted under the Plan shall not vest and shall terminate and no
options shall be granted thereafter. Amendments to the Plan not
requiring shareholder approval shall become effective when
adopted by the Board of Directors; amendments requiring
shareholder approval (as provided in Section 19) shall become
effective when adopted by the Board of Directors, but no option
granted after the date of such amendment shall become exercisable
(to the extent that such amendment to the Plan was required to
enable the Company to grant such option to a particular person)
unless and until such amendment shall have been approved by the
Company's shareholders. If such shareholder approval is not
obtained within twelve months of the Board's adoption of such
amendment, any options granted on or after the date of such
amendment shall terminate to the extent that such amendment was
required to enable the Company to grant such option to a
particular optionee. Subject to this limitation, options may be
granted under the Plan at any time after the effective date and
before the date fixed for termination of the Plan.
(b) Termination. Unless sooner terminated in accordance
with Section 16, the Plan shall terminate upon the close of
business on the day next preceding the tenth anniversary of the
date of its adoption by the Board of Directors. Options
outstanding on such date shall continue to have force and effect
in accordance with the provisions of the instruments evidencing
such options.
<PAGE>
23. Provision for Foreign Participants.
The Board of Directors may, without amending the Plan,
modify awards or options granted to participants who are foreign
nationals or employed outside the United States to recognize
differences in laws, rules, regulations or customs of such
foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
Adopted by the Board of Directors on June 14, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1996 STATEMENT OF OPERATIONS AND BALANCE SHEET, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,761,000
<SECURITIES> 0
<RECEIVABLES> 50,753,000
<ALLOWANCES> 735,000
<INVENTORY> 16,097,000
<CURRENT-ASSETS> 73,789,000
<PP&E> 34,911,000
<DEPRECIATION> 19,467,000
<TOTAL-ASSETS> 117,936,000
<CURRENT-LIABILITIES> 48,231,000
<BONDS> 59,270,000
36,758,000
0
<COMMON> 78,000
<OTHER-SE> (39,325,000)
<TOTAL-LIABILITY-AND-EQUITY> 117,936,000
<SALES> 31,574,000
<TOTAL-REVENUES> 99,226,000
<CGS> 28,810,000
<TOTAL-COSTS> 86,817,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 16,000
<INTEREST-EXPENSE> 3,127,000
<INCOME-PRETAX> (6,352,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,352,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,352,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
