<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: September 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) 724-3800
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 November 13, 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): 17
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Income for the
Three Months and Nine Months Ended September 30, 1996
and 1995 3
Condensed Consolidated Balance Sheets as of September 30,
1996 and December 31, 1995 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 3. Defaults upon Senior Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(amounts in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales
Systems and Support Services $27,150 $26,834 $79,605 $78,754
Systems Integration 21,789 22,585 53,363 46,148
Consulting 8,840 6,710 24,037 19,790
57,779 56,129 157,005 144,692
Costs and expenses
Cost of sales 49,573 46,987 136,190 120,141
Selling, general and
administrative expenses 8,307 6,778 23,012 17,890
Goodwill amortization 390 525 1,170 2,114
Operating (loss) income (491) 1,839 (3,367) 4,547
Other income (expenses)
Other income (expenses) 3 7 (346) 16
Interest expense (1,867) (1,428) (4,994) (4,043)
Income (loss) before taxes (2,355) 418 (8,707) 520
Income tax benefit 421 -- 421 --
Net (loss) income $(1,934) $418 $(8,286) $520
</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
(Unaudited)
(amounts in thousands)
ASSETS
September 30, 1996 December 31, 1995
<S> <C> <C>
Current assets
Cash and cash equivalents $1,284 $ 735
(includes restricted cash of
$231 at September 30, 1996)
Accounts receivable, net 47,638 44,112
Inventories, net 14,228 15,877
Other current assets 3,232 1,921
Total current assets 66,382 62,645
Property and equipment, net of
accumulated depreciation of
$19,922 and $18,600 respectively 15,894 2,671
Goodwill 21,644 22,814
Other assets 6,751 6,362
$110,671 $94,492
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Accounts payable $26,945 $26,528
Other current liabilities 8,621 6,951
Accrued compensation and benefits 10,831 8,804
Senior credit facility 37,129 --
Total current liabilities 83,526 42,283
Senior credit facility -- 32,312
Subordinated notes 18,056 15,004
Capital lease obligation 12,395 --
Other long-term liabilities 329 1,109
Total liabilities 114,306 90,708
Redeemable preferred stocks
Senior redeemable preferred stock 4,744 4,494
Class B redeemable preferred stock 10,877 10,252
Redeemable preferred stock 21,745 18,646
Total preferred stock 37,366 33,392
Stockholders' investment
Common stock 78 78
Capital in excess of par 4,562 7,670
Retained earnings (deficit) (45,641) (37,356)
Total stockholders' investment (41,001) (29,608)
$110,671 $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)
Nine Months
Ended September 30,
1996 1995
<S> <C> <C>
Operating activities:
Net (loss) income $(8,286) $ 520
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and amortization 2,226 2,409
Goodwill amortization 1,170 2,114
Other noncash items 1,833 (450)
Changes in assets and liabilities
that used cash (2,314) (2,685)
Cash (used in) provided by
operating activities (5,371) 1,908
Investing activities:
Proceeds from sales of property
and equipment -- 3
Investment in products (1,079) --
Purchase of property and equipment (2,196) (621)
Cash (used in) investing activities (3,275) (618)
Financing activities:
Proceeds (repayment of) from senior
credit facility 4,817 (1,963)
Proceeds from issuance of enterWorks
subordinated notes 3,078 --
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 (used in) financing
activities 9,195 (1,269)
Increase in cash and cash equivalents 549 21
Cash and cash equivalents at beginning
of period 735 441
Cash and cash equivalents at end of
period $1,284 $462
</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, inc.("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
reclassificcations necessary to present fairly the financial
position of the Company as of September 30, 1996 and December 31,
1995, and the results of its operations and its cash flows for
the nine months ended September 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.
Note 2. Accounts Receivable
The components of accounts receivable are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
<S> <C> <C>
Billed accounts receivable $32,442 $30,286
Unbilled accounts receivable 15,630 14,550
48,072 44,836
Allowance for doubtful accounts (434) (724)
$47,638 $44,112
</TABLE>
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Debt Obligations
Senior Credit Facility
At September 30, 1996, the Company had a $45 million senior
credit facility ("Facility") with a bank maturing on July 1,
1997. There is an overadvance amount associated with the
Facility which has been extended in full to December 2, 1996.
From December 2 to its maturity on July 1, 1997, the overadvance
amount reduces ratably at the beginning of each month. The
Company was not compliant with certain covenants contained in the
Facility at September 30, 1996 and the bank has waived such
covenant noncompliance. Due to the Facility maturity date of
July 1, 1997, the balance has been classified as a current
liability at September 30, 1996.
Senior Subordinated Note, Series A
At September 30, 1996, the Company had $675,000 of the
senior subordinated notes, Series A, 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 as of September 30, 1996. The entity has
agreed to waive such non compliance.
enterWorks.com, inc. Subordinated Notes
During the third quarter of 1996, the Company substantially
completed a private financing whereby $3,077,960 of 8%
subordinated debt of enterWorks, a wholly-owned subsidiary of the
Company, was issued. Investors included certain Board of
Director members, certain members of Company management and
certain shareholders of the Company. The subordinated debt has a
five year maturity with interest payable semi-annually beginning
January 1, 1998. In connection with the debt, the Company issued
1,923,725 of warrants to purchase shares of enterWorks common
stock. The Company has assigned a value to the warrants of
$865,676 which has been included in paid-in capital at September
30, 1996.
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.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Series A-1 and A-2 each carry a cumulative dividend rate
equal to 11.125% per annum of their liquidation value of $1,000
per share through June 30, 1997. The annual dividend rate
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.
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 the legal
availability of funds. At September 30, 1996 and December
31, 1995 undeclared, unpaid dividends relating to Series A-1 and
A-2 Preferred Stock totaled $1,744,000 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 equal to 11.125% per annum of its liquidation value of
$1,000 per share through June 30, 1997. The annual dividend rate
increases 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 September 30, 1996 and December 31,
1995 undeclared, unpaid dividends relating to the Class B
Redeemable Preferred Stock totaled $3,377,000 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 September
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.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 September
30, 1996 have been accrued for financial reporting purposes
totaled $8,264,000. Dividends for the years 1992 through 1994
and 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. 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 $1,069,000 for such purposes as of
September 30, 1996 with the remaining balance of $231,000
recorded as restricted cash. The Company's move to its new
facilities was substantially completed in July 1996. In the third
quarter, the Company recorded a non-recurring expense of $781,000
for the remaining lease stream associated with its former
headquarters facility.
Note 6. Income Taxes
The Company, as a result of recently enacted tax
legislation, has filed amended Federal income tax returns
claiming certain deductions previously disallowed during an audit
of the Company by the Internal Revenue Service. These amended
returns will provide the Company a refund of income taxes and
interest previously paid. Accordingly, the Company has recorded
an income tax benefit of $421,000 at September 30, 1996.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
In the first nine months of 1996, the Company had increased
revenue as compared to the first nine months of 1995. However,
the Company's profitability decreased in the first nine months of
1996 as compared to 1995 as a result of lower than anticipated
sales on certain large equipment contracts which were negatively
impacted by the Federal government budget impasse of early 1996.
Also, the Company experienced reduced gross margins on certain
equipment and services contracts as well as increased
infrastructure costs associated with supporting contracts awarded
in late 1995. The combination of the above factors has adversely
impacted the Company's profitability. The Company did experience
an increase in order flow late in the third quarter. However,
there can be no assurance that such order flow will continue. In
response to the decreased profitability, the Company implemented
an aggressive cost reduction program in the third quarter to
reduce infrastructure cost. The Company expects that this
program will provide a cost savings during the fourth quarter of
1996 and in 1997.
Total backlog from existing contracts was $1.3 billion as of
September 30, 1996 and is approximately the same as the total
backlog as of December 31, 1995. As of September 30, 1996, the
funded backlog of the Company totaled $106.1 million, an increase
of $40.5 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, inc. and Telos International
Corporation (collectively, "the Company"). The major elements of
the Company's operating expenses as a percentage of sales for the
three and nine month periods ended September 30, 1996 and 1995
are as follows:<TABLE>
<CAPTION> Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 85.8 83.7 86.7 83.0
SG&A expenses 14.3 12.1 14.7 12.4
Goodwill amortization 0.7 .9 0.7 1.5
Operating (loss) income (0.8) 3.3 (2.1) 3.1
Other income (expense) -- -- (0.2) --
Interest expense (3.2) (2.5) (3.2) (2.8)
Income tax benefit 0.7 -- 0.3 --
Net (loss) income (3.3)% 0.8% (5.2)% 0.3%
</TABLE>
<PAGE>
Financial Data by Market Segment
During 1996, the Company modified its view of the business
segments in which it operates for primarily two reasons. First,
there was an expansion of network based computer solutions in the
market in which the Systems Integration Group operates. Second,
the Company merged its 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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(amounts in thousands)
<S> <C> <C> <C> <C>
Sales:
Systems and Support Services $27,150 $26,834 $79,605 $78,754
Systems Integration 21,789 22,585 53,363 46,148
Consulting Services 8,840 6,710 24,037 19,790
Total $57,779 $56,129 $157,005 $144,692
Gross Profit:
Systems and Support Services $3,920 $3,409 $10,930 $11,459
Systems Integration 2,362 4,502 5,126 9,434
Consulting Services 1,924 1,231 4,759 3,658
Total $8,206 $9,142 $20,815 $24,551
Gross Margin:
Systems and Support Services 14.4% 12.7% 13.7% 14.5%
Systems Integration 10.8% 19.9% 9.6% 20.4%
Consulting Services 21.8% 18.4% 19.8% 18.5%
Total 14.2% 16.3% 13.2% 17.0%
</TABLE>
For the three month period ended September 30, 1996, revenue
increased by $1.7 million, or 2.9%, to $57.8 million from $56.1
million for the comparable 1995 period. The increase for the
three month period includes a $2.1 million increase in consulting
revenue, a $300,000 increase in systems and support services
revenue, and a $800,000 decrease in systems integration revenue.
The decrease in the Systems Integration Group revenue of
$800,000 results from unusually high sales volume on its
government contracts in the comparable 1995 period. However, the
1996 third quarter order volume for systems integration did
improve over the previous two quarters of 1996. While the
Company is encouraged by this positive trend, there can be no
assurance that such trend will continue in the fourth quarter.
<PAGE>
The Consulting Group revenue increase of $2.1 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 301 as of
September 30, 1996, an increase of 58 from 243 consultants in the
comparable 1995 period.
The Systems and Support Services Group revenue increase of
$300,000 is due to an $500,000 increase in enterWorks revenue and
a $900,000 increase in software support revenue, offset by a $1.1
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 PangaeaTM products and
related consulting. The increase in software support revenue is
due to increased services under certain of the Company's large
labor contracts. The decrease in the hardware support revenue 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 $12.3 million or 8.5% to $157.0 million
for the nine months ended September 30, 1996 from $144.7 million
for the comparable 1995 period. The increase for the nine month
period includes a $7.2 million systems integration revenue
increase, a $4.2 million consulting revenue increase and a
$900,000 increase in systems and support services revenue. The
reasons for these revenue increases are discussed above, with the
exception of the systems integration increase, which was due to
$6.9 million of shipments and services on recently awarded
contracts.
Cost of sales increased by $2.6 million, or 5.5%, to $49.6
million in the three month period ended September 30, 1996, from
$47.0 million in the comparable 1995 period. For the nine months
ended September 30, 1996, cost of sales increased $16.0 million,
or 13.4%, to $136.2 million from $120.1 million for the same
period in 1995. These increases are the result of the increases
in sales for both periods, as well as increases in contract
infrastructure costs. In addition, the cost of sales increase
was attributable to a portion of the non-recurring operating
expense recorded for the remaining lease obligation for the
Company's idle headquarters facility. This expense is discussed
below.
Gross profit decreased $900,000 in the three month period to
$8.2 million, from $9.1 million in the comparable 1995 period.
For the nine month period, gross profit decreased by $3.7 million
to $20.8 million from $24.5 million. Gross margins were 14.2% and
13.2% for the three and nine month periods of 1996 as compared to
16.3% and 17.0% for the comparable periods of 1995. The decrease
in gross profit results from changes in product mix on certain of
the systems integration contracts and from the business shift
being experienced by the hardware support group as discussed
above.
Selling, general, and administrative expense ("SG&A")
increased for the three month period by approximately $1.5
million, to $8.3 million in 1996 from $6.8 million in 1995 for
the three month period. For the nine month period, SG&A
increased from $17.9 million to $23.0 million, approximately $5.1
million. 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 14.3% for the third quarter of 1996 from 12.1 in the
comparable 1995 period. SG&A as a percentage of revenues for the
nine month period ended September 30, 1996 increased to 14.7%
from 12.4% compared to the same period in 1995.
Goodwill amortization expense was $390,000 and $1.2 million
for the three and nine month periods ended September 30, 1996
compared to $525,000 and $2.1 million for the three and nine
month periods ended September 30, 1995. These reductions are due
to the completion in mid 1995 of the amortization of the goodwill
from an earlier acquisition by the Company. The Company
continues to amortize its goodwill balance which resulted from
the acquisition of Telos Corporation (California).
Operating income decreased by $2.3 million to $(500,000) in
the three month period from $1.8 million in the comparable 1995
period and decreased $7.9 million to $(3.4) million from $4.5
million for the nine month period. These declines are a result
of the aforementioned decreases in gross profit and increases in
SG&A. In response to the decrease in operating profit, the
Company has implemented an aggressive cost reduction program
focusing on non contract related expenses and labor. The Company
expects to continue this program for the next 6 to 12 months in
order to reduce infrastructure costs.
The decrease in operating income is also a result of a
$781,000 non-recurring operating expense recorded for the
remaining rent obligation for the Company's idle headquarters
facility in Herndon, VA. The Company substantially vacated the
facility when it moved to its new headquarters location in the
third quarter.
Other non-operating income was approximately $3,000 in the
three month period of 1996 compared to approximately $7,000 of
other non-operating income in the comparable 1995 period. For
the 1996 nine month period, non-operating expense was $346,000 as
compared to income of $16,000 for the comparable 1995 period.
The increase in expense is due to the $355,000 litigation
settlement provision that the company recorded in the second
quarter of 1996.
Interest expense increased approximately $440,000 to $1.9
million in the third quarter of 1996 from $1.4 million in the
comparable 1995 period. Interest expense for the nine month
period ended September 30, 1996 increased $1.0 million to $5.0
million from $4.0 million in the 1995 period. The variance is a
result of the increase in the outstanding balance of the senior
credit facility as well as an increase in the outstanding balance
of the subordinated debt.
<PAGE>
The Company had an income tax benefit for the three month
and nine month periods ended September 30, 1996 of $421,000.
This benefit is a result of the Company filing amended Federal
income tax returns for deductions previously disallowed by the
Internal Revenue Service. Such deductions are now allowable as a
result of recently enacted legislation.
Liquidity and Capital Resources
For the nine months ended September 30, 1996, the Company
used $5.4 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 nine months 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 has also implemented an aggressive cost
reduction program that includes reduced spending on non-contract
items as well as employee reductions in selected areas. The
Company anticipates that these cost control measures will
continue to be in place for the next six to twelve months. The
Company did see improved order levels late in the third quarter
of 1996 which should benefit the fourth quarter. However, there
can be no assurance that the increased order flow will continue.
Additionally, with the increase in order volume, financing this
growth is also adversely impacting liquidity. The Company
believes that while its current working capital facility is
adequate to finance steady controlled revenue growth, the recent
increase in order flow will cause an additional capital strain on
the Company's financial resources. The Company is therefore
exploring other capital and financing options.
The Company continues to actively review its business
opportunities surrounding its enterWorks products. Through the
second quarter of 1996, the Company had funded all product
development and sales and marketing efforts. In the third
quarter, the Company completed a private financing of
approximately $3.2 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.
<PAGE>
At September 30, 1996, the Company had outstanding debt of
$55.2 million, consisting of $37.1 million under the secured
senior credit facility and $18.1 million in subordinated debt.
The senior credit facility has a maturity date of July 1, 1997
and accordingly has been classified as a current liability.
At September 30, 1996 the Company had a senior subordinated
note, 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 note,
Series A as of September 30, 1996. The entity holding the note
has agreed to waive such non compliance.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Part II, Item 1 in the Company's June
30, 1996 Form 10-Q and Part I, Item 3 in the Company's December
31, 1995 Form 10-K. No reportable legal events or material legal
developments have occurred during the third quarter of 1996.
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 or Class B
Preferred Stock since their issuance. Total undeclared unpaid
dividends accrued for financial reporting purposes are $1,744,000
for the series A-1 and A-2 Preferred Stock and $3,377,000 for the
Class B Preferred Stock at September 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 ambiguities 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.78 Form of enterWorks.com, inc. Series A Senior Subordinated
Unsecured Note
10.79 Form of enterWorks.com, inc. Capital Stock Purchase
Series A Warrant
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
November 14, 1996 /s/ Lorenzo Tellez
Lorenzo Tellez
(Principal Financial Officer &
Principal Accounting Officer)
<PAGE>
Telos Corporation
Exhibit Index
Exhibit
Number Exhibit Name
10.78 Form of enterWorks.com, inc. Series A Senior Subordinated
Unsecured Note
10.79 Form of enterWorks.com, inc. Capital Stock Purchase
Series A Warrant
27 Financial Data Schedule
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED UNLESS IT IS SO REGISTERED OR AN
EXEMPTION FROM REGISTRATION IS AVAILABLE UNDER SAID ACT AND LAWS.
THIS NOTE IS SUBORDINATE AND JUNIOR IN RIGHT OF PAYMENT TO SENIOR
INDEBTEDNESS DUE TO NATIONSBANK, N.A. AND/OR CERTAIN OTHER BANKS
OR FINANCIAL INSTITUTIONS, AS PROVIDED IN THE SUBORDINATION
AGREEMENT DATED AS OF ______________, 1996 BY AND AMONG
ENTERWORKS.COM, INC., A DELAWARE CORPORATION, TELOS CORPORATION,
A MARYLAND CORPORATION, NATIONSBANK, N.A. AND THE HOLDERS
IDENTIFIED IN SCHEDULE A THERETO.
Ashburn, Virginia
______________, 1996
SERIES A SENIOR SUBORDINATED UNSECURED NOTE DUE _____________,
2001
FOR VALUE RECEIVED, enterWorks.com, inc., a Delaware
corporation, with offices at 19886 Ashburn Road, Ashburn,
Virginia 20147 (hereinafter referred to as "the Borrower" or the
"Company"), promises to pay to the order of
_____________________________, or assigns, (hereinafter referred
to as "_______________" or "Lender"), at
________________________________ or at such other offices or at
such other place or places as the holder hereof may from time to
time designate in writing, the principal sum of
_______________________________ ($______________) on
____________, 2001 together with interest on the principal amount
hereof from time to time outstanding at the rate hereinafter
provided until paid in full.
This is one of a series of the Company's Notes known as its
Series A Senior Subordinated Unsecured Notes Due _________, 2001
(collectively referred to herein as the "Series A Notes", all of
like tenor, except as to the identifying number and principal
amount thereof. Each of the Series A notes are accompanied by
Warrants for stock of the Company, all of like tenor, save for
identifying number and amount of shares under Warrant. The
Series A Notes have been issued in the approximate principal
amount of $________________________.
I. GENERAL TERMS
1.1 Interest only shall be payable at the rate of eight
percent (8%) per annum, on the principal balance of this Note
from time to time outstanding from and after the date hereof, and
shall be due and payable quarterly, until the principal has been
<PAGE>
paid in full, on the first day of April, July, October, and
January in each year. Interest shall accrue from the date
hereof, but the first interest payment shall not be due until
January 1, 1998. Such payment shall include all interest accrued
from the date hereof until the date of such interest payment.
1.2 If not sooner paid, the outstanding and unpaid
principal balance shall be paid on _____________, 2001, together
with accrued and unpaid interest on this Note.
1.3 Principal and interest on this note are payable in
lawful money of the United States. The principal of this Note may
be prepaid at any time after ten (10) days, written notice to the
Lender, in whole or in part, and shall be accompanied by payment
in cash of all accrued and unpaid interest on the amount so
prepaid.
1.4 In the event of a Public Offering of the common
stock of the Company, or in the event of a Refinancing, the
principal then outstanding shall become immediately due and
payable, together with, accrued and unpaid interest thereon.
1.5 In the event of a Merger or Dissolution, the
principal then outstanding shall become immediately due and
payable, together with accrued and unpaid interest thereon.
1.6 Definitions.
(i) "Public Offering" shall mean the distribution and
sale of the Company's common stock (some of the
proceeds of which sale are available to the Company)
pursuant to a registration statement (other than a
registration statement on Form S-4 or Form S-8) which
has been filed with the U.S. Securities and Exchange
Commission and become effective.
(ii) "Refinancing" shall mean a sale of securities
of the Company which results in Net Proceeds to the
Company in excess of $10,000,000, other than (a)
obligations for borrowed money due and payable within
one year which are not extended, renewed or refinanced
beyond such due date; or (b) other obligations for
money borrowed money from NationsBank and/or its
successors, substitutes and participants and their
respective assigns and any refinancing thereof.
(iii) "Net Proceeds" shall mean the proceeds to the
Company after expenses of sale and distribution,
including discounts, commissions and brokerage and
legal fees.
<PAGE>
(iv) "Merger" shall mean a merger, consolidation or
other combination to which the Company or any
subsidiary is a party, in which the Company is not the
surviving corporation or which results in the
acquisition of "beneficial ownership" of securities of
the Company representing 50% or more of the total
number of votes that may be cast for the election of
directors by any "person" or "group" (as such terms are
defined in Rule 13(d) promulgated under the Securities
Exchange Act of 1934, as amended), or a sale by
the Company of all or substantially all of its assets.
(v) "Dissolution" shall mean the adoption by the Board
of Directors and/or the shareholders of the Company of
a resolution to dissolve the Company and liquidate its
assets, the filing by the Company of articles of
dissolution or a similar application for dissolution
with the appropriate officer of the state of
incorporation of the Company, the entry of an order or
other action by such state dissolving the Company, or
the adoption by the Board of Directors or the
shareholders of the Company of a plan of liquidation or
a resolution approving a liquidating distribution of
the Company's assets, whichever shall first occur.
1.7 If any payment of principal or interest on this Note
shall become due on a Saturday, Sunday, or legal holiday under
the laws of the Commonwealth of Virginia, or any other day on
which banking institutions in the Commonwealth of Virginia are
obligated or authorized by law or executive order to close, such
payment shall be made on the next succeeding business day in
Virginia and any such extended time of the payment of principal
shall not be included in computing compound interest in
connection with such payment.
1.8 Upon receipt by the Borrower of evidence reasonably
satisfactory to it of the mutilation, destruction, loss or theft
of this Note, the Borrower will make and deliver to the owner a
new note of like tenor in lieu of this Note so mutilated,
destroyed, lost or stolen.
1.9 Payments made on account hereof shall be applied
first to accrued and unpaid interest and then to principal.
1.10 All payments made by the Company on account of the
Series A Notes or any of them shall be made pro rata, in
proportion to the outstanding principal balance of each of the
Series A Notes outstanding at the time of any such payment.
<PAGE>
II. DEFAULT
2.1 It is expressly agreed by Borrower that the
following shall be deemed to be Events of Default under this
Note: (a) the failure to pay, when due, any amount of principal,
or interest on this Note, or (b) in the event the Borrower files
any petition, or any petition is filed against it and not
dismissed within sixty (60) days, under any bankruptcy or
insolvency law or for the appointment of a receiver for
substantially all its assets or in the event the Borrower makes a
general assignment for the benefit of creditors, (c) or any
failure by the Borrower to perform or observe any of the other
covenants, agreements or provisions to be performed or observed
by it under this Note, and such default shall not be rectified or
cured within 10 days after written notice thereof by the Lender
to the Company, or (d) an event of default as specified in the
Revolving and Reducing Senior Facility Credit Agreement among the
Company, Telos Corporation (a Maryland corporation) and
NationsBank, N.A. (the "Senior Credit Agreement") shall have
occurred and be continuing, if (and only if) such event results
in acceleration of the maturity of the indebtedness under such
Senior Credit Agreement and such acceleration continues in
effect.
2.2 If an Event of Default occurs, the Lender, at his
option, may accelerate this Note and may by written notice to
Borrower declare the entire unpaid principal amount of this Note
and all interest accrued and unpaid thereon to be immediately due
and payable whereupon the unpaid principal amount and all such
accrued interest shall become and be forthwith due and payable,
without presentment, demand, protest or further notice of any
kind. The failure of the Lender to give such notice shall, in no
event, be deemed a waiver of any of the Lender rights hereunder
as long as the Event of Default continues.
2.3 Upon default in the payment of the principal of this
Note or any other sum payable hereunder then due upon demand, at
maturity or by reason of acceleration of maturity, or upon the
occurrence of any other Event of Default hereunder Borrower
agrees to pay all reasonable costs of collection incurred by the
holder of the Note, including reasonable attorneys' fees, whether
suit is brought or not, and all other costs and expenses
reasonably connected with collection of the indebtedness
evidenced hereby.
<PAGE>
III. SUBORDINATION
3.1 Payment of the principal and the interest on this Note
are subordinate and subject in right of payment to the prior
indefeasible payment in full in cash or cash equivalents of all
Senior Indebtedness (as such term is defined in the Subordination
Agreement) in the manner and to the extent provided in the
Subordination Agreement, and each holder of this Note by such
holder's acceptance hereof, acknowledges and confirms such
subordination, represents and warrants that such holder has
received and reviewed and become a party to the Subordination
Agreement, and covenants and agrees to comply with the provisions
of the Subordination Agreement applicable to holders of the
Series A Notes.
This Note shall be construed and enforced in accordance
with, and governed by the laws of, the Commonwealth of Virginia
without giving effect to conflict of laws principles.
The parties hereto, including the undersigned Borrower and
all guarantors and endorsers, hereby waive presentment, demand,
notice, protest and all other demands and notices in connection
with the delivery, acceptance, performance and enforcement of
this Note, and assent to extensions of time of payment, or
forbearance or other indulgence without notice.
enterWorks.com, inc.
By:
__________________________
Robert Lewis
Title: President
<PAGE>
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED
UNLESS IT IS SO REGISTERED OR AN EXEMPTION FROM REGISTRATION IS
AVAILABLE UNDER SAID ACT AND LAWS. THIS NOTE IS SUBORDINATE AND
JUNIOR IN RIGHT OF PAYMENT TO SENIOR INDEBTEDNESS DUE TO
NATIONSBANK, N.A. AND/OR CERTAIN OTHER BANKS OR FINANCIAL
INSTITUTIONS, AS PROVIDED IN THE SUBORDINATION AGREEMENT DATED AS
OF JULY 12, 1996 BY AND AMONG ENTERWORKS.COM, INC., A DELAWARE
CORPORATION, TELOS CORPORATION, A MARYLAND CORPORATION,
NATIONSBANK, N.A. AND THE HOLDERS IDENTIFIED IN SCHEDULE A
THERETO.
enterWorks.com, inc.
CAPITAL STOCK PURCHASE
SERIES A WARRANT
This certifies that, for value received, ___________________
___________________________________________________ is entitled to
purchase and receive from enterWorks.com, inc. (the "Company"),
during the period hereinafter provided, ______ fully paid and non-
assessable shares of the $.01 par value common voting stock of
the Company (the "Capital Stock" or "Common Stock") upon
surrender hereof, at the principal office of the Company in
Ashburn, Virginia, and simultaneous payment of the purchase price
of $1.00 for each share of the Capital Stock so to be purchased;
such number of shares and such purchase price per share being
subject, however, to adjustment as hereinafter provided. The
purchase price per share, as adjusted from time to time, is
hereinafter referred to as the "Purchase Price."
This Warrant shall be exercisable commencing July 12, 1996,
that being the issuance date of that certain Series A Senior
Subordinated Unsecured Note Due July 11, 2001, issued by the
Company to the Holder of this Series A Warrant, and shall expire
on July 11, 2006.
1. Purchase Price Adjustments.
a. General. The Purchase Price shall be subject to
adjustment from time to time pursuant to the terms of this
Section 1.
b. Diluting Issuances.
(1) Special Definitions. For purposes of this
Subsection 1b, the following definitions shall apply:
(A) "Option" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire Common
Stock or Convertible Securities, excluding options to acquire
shares described in clauses (i) or (ii) of subsection 1b(1)(D)
below.
(B) "Original Issue Date" shall mean the
date on which this Warrant was first issued.
<PAGE>
(C) "Convertible Securities" shall mean any
evidences of indebtedness, shares or other securities directly or
indirectly convertible into or exchangeable for Common Stock.
(D) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to
Subsection 1b(2) below, deemed to be issued) by the Company after
the Original Issue Date, other than shares of Common Stock issued
or issuable:
(i) by reason of a dividend, stock
split, split-up or other distribution on shares of Common Stock
that are excluded from the definition of Additional Shares of
Common Stock by this clause; or
(ii) to employees or directors of, or
consultants to, the Company pursuant to a plan adopted by the
Board of Directors of the Company;
(2) No Adjustment of Purchase Price. No
adjustments to the Purchase Price shall be made unless the
consideration per share (determined pursuant to Subsection 1b(5))
for an Additional Share of Common Stock issued or deemed to be
issued by the Company is less than the Purchase Price in effect
on the date of, and immediately prior to, the issue of such
Additional Shares.
(3) Issue of Securities Deemed Issue of Additional
Shares of Common Stock. If the Company at any time or from time
to time after the Original Issue Date shall issue any Options or
Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to
receive any such Options or Convertible Securities, then the
maximum number of shares of Common Stock (as set forth in the
instrument relating thereto without regard to any provision
contained therein for a subsequent adjustment of such number )
issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of
the close of business on such record date, provided that
Additional Shares of Common Stock shall not be deemed to have
been issued unless the consideration per share (determined
pursuant to Subsection 1b(5) hereof) of such Additional Shares of
Common Stock would be less than the Purchase Price in effect on
the date of and immediately prior to such issue, or such record
date, as the case may be, and provided further that in any such
case in which Additional Shares of Common Stock are deemed to be
issued:
(A) No further adjustment in the Purchase
Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such
Options or conversion or exchange of such Convertible Securities;
<PAGE>
(B) If such Options or Convertible
Securities by their terms provide, with the passage of time or
otherwise, for any increase in the consideration payable to the
Company, upon the exercise, conversion or exchange thereof, the
Purchase Price computed upon the original issue thereof (or upon
the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such
increase becoming effective, be recomputed to reflect such
increase insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities;
(C) Upon the expiration or termination of
any unexercised Option, the Purchase Price shall not be
readjusted, but the Additional Shares of Common Stock deemed
issued as the result of the original issue of such Option shall
not be deemed issued for purposes of any subsequent adjustment of
the Purchase Price;
(D) In the event of any change in the number
of shares of Common Stock issuable upon the exercise, conversion
or exchange of any Option or Convertible Security, including, but
not limited to, a change resulting from the anti-dilution
provisions thereof, the Purchase Price then in effect shall
forthwith be readjusted to such Purchase Price as would have
obtained had the adjustment which was made upon the issuance of
such Option or Convertible Security not exercised or converted
prior to such change been made upon the basis of such change; and
(E) No readjustment pursuant to Clause (B)
or (D) above shall have the effect of increasing the Purchase
Price to an amount which exceeds the lower of (i) the Purchase
Price on the original adjustment date, or (ii) the Purchase Price
that would have resulted from any issuances of Additional Shares
of Common Stock between the original adjustment date and such
readjustment date.
(4) Adjustment of Purchase Price Upon Issuance of
Additional Shares of Common Stock. In the event the Company
shall at any time after the Original Issue Date issue Additional
Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Subsection 1b(3), but
excluding shares issued as a dividend or distribution or upon a
stock split or combination as provided in Subsection 1c), without
consideration or for a consideration per share less than the
Purchase Price in effect on the date of and immediately prior to
such issue, then and in such event, such Purchase Price shall be
reduced, concurrently with such issue, to a price (calculated to
the nearest cent) determined by multiplying such Purchase Price
by a fraction, (A) the numerator of which shall be (1) the number
of shares of Common Stock outstanding immediately prior to such
issue plus (2) the number of shares of Common Stock which the
aggregate consideration received or to be received by the Company
for the total number of Additional Shares of Common Stock so
issued would purchase at such Purchase Price; and (B) the
denominator of which shall be the number of shares of Common
<PAGE>
Stock outstanding immediately prior to such issue plus the number
of such Additional Shares of Common Stock so issued; provided
that, (i) for the purpose of this Subsection 1b(4), all shares of
Common Stock issuable upon exercise or conversion of Options or
Convertible Securities outstanding (other than shares excluded
from the definition of "Additional Shares of Common Stock" by
virtue of Clause (ii) of subsection 1b(1)(D)), and (ii) the
number of shares of Common Stock deemed issuable upon the
conversion of such outstanding Options and Convertible Securities
shall not give effect to any adjustments to the conversion price
or conversion rate of such Option or Convertible Security
resulting from the issuance of Additional Shares of Common Stock
that is the subject of this calculation.
Notwithstanding the foregoing, the applicable
Purchase Price shall not be so reduced at such time if the amount
of such reduction would be an amount less than $.05, but any such
amount shall be carried forward and reduction with respect
thereto made at the time of and together with any subsequent
reduction which, together with such amount and any other amount
or amounts so carried forward, shall aggregate $.05 or more.
(5) Determination of Consideration. For purposes
of this Subsection 1b, the consideration received by the Company
for the issue of any Additional Shares of Common Stock shall be
computed as follows:
(A) Cash and Property: Such consideration
shall:
(i) insofar as it consists of cash, be
computed at the aggregate of cash received by the Company,
excluding amounts paid or payable for accrued interest or accrued
dividends;
(ii) insofar as it consists of property
other than cash, be computed at the fair market value thereof at
the time of such issue, as determined in good faith by the Board
of Directors; and
(iii) in the event Additional
Shares of Common Stock are issued together with other shares or
securities or other assets of the Company for consideration which
covers both, be the proportion of such consideration so received,
computed as provided in Clauses (i) and (ii) above, as determined
in good faith by the Board of Directors.
(B) Options and Convertible Securities. The
consideration per share received by the Company for Additional
Shares of Common Stock deemed to have been issued pursuant to
Subsection 1b(3), relating to Options and Convertible Securities,
shall be determined by dividing
<PAGE>
(x) the total amount, if any, received
or receivable by the Company as consideration for the issue of
such Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such
consideration) payable to the Company upon the exercise of such
Options or the conversion or exchange of Convertible Securities,
or in the case of Options for Convertible Securities, the
exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a
subsequent adjustment of such number) issuable upon the exercise
of such Options or the conversion or exchange of such Convertible
Securities.
(6) Multiple Closing Dates. In the event the
Company shall issue on more than one date Additional Shares of
Common Stock which are comprised of shares of the same series or
class of Preferred Stock, and such issuance dates occur within a
period of no more than 120 days, then the Purchase Price shall be
adjusted only once on account of such issuances, with such
adjustment to occur upon the final such issuance and to give
effect to all such issuances as if they occurred on the date of
the final such issuance.
c. Recapitalizations. If outstanding shares of the
Company's Common Stock shall be subdivided into a greater number
of shares or a dividend in Common Stock shall be paid in respect
of Common Stock, the Purchase Price in effect immediately prior
to such subdivision or at the record date of such dividend shall
simultaneously with the effectiveness of such subdivision or
immediately after the record date of such dividend be
proportionately reduced. If outstanding shares of Common Stock
shall be combined into a smaller number of shares, the Purchase
Price in effect immediately prior to such combination shall,
simultaneously with the effectiveness of such combination, be
proportionately increased.
d. Mergers, etc. If there shall occur any capital
reorganization or reclassification of the Company's Common Stock
(other than a change in par value or a subdivision or combination
as provided for in Subsection 1c, above), or any consolidation or
merger of the Company with or into another corporation, or a
transfer of all or substantially all of the assets of the
Company, then, as part of any such reorganization,
reclassification, consolidation, merger or sale, as the case may
be, lawful provision shall be made so that the Registered Holder
of this Warrant shall have the right thereafter to receive upon
the exercise hereof the kind and amount of shares of stock or
other securities or property which such Registered Holder would
have been entitled to receive if, immediately prior to any such
reorganization, reclassification, consolidation, merger or sale,
as the case may be, such Registered Holder had held the number of
<PAGE>
shares of Common Stock which were then purchasable upon the
exercise of this Warrant. In any such case, appropriate
adjustment (as reasonably determined in good faith by the Board
of Directors of the Company) shall be made in the application of
the provisions set forth herein with respect to the rights and
interests thereafter of the Registered Holder of this Warrant,
such that the provisions set forth in this Section 1 (including
provisions with respect to adjustment of the Purchase Price)
shall thereafter be applicable, as nearly as is reasonably practicable,
in relation to any shares of stock or other securities or property
thereafter deliverable upon the exercise of this Warrant.
e. Certificate of Adjustment. When any adjustment is
required to be made pursuant to this Section 1, the Company shall
promptly mail to the Registered Holder a certificate setting
forth the Purchase Price after such adjustment and setting forth
a brief statement of the facts requiring such adjustment. Such
certificate shall also set forth the kind and amount of stock or
other securities or property into which this Warrant shall be
exercisable following such adjustment.
2. Registration Rights.
a. Certain Definitions. As used in this Warrant, the
following terms shall have the following respective meanings:
"Commission" means the Securities and Exchange
Commission, or any other Federal agency at the time administering
the Securities Act.
"Capital Stock" or "Common Stock" means the common
stock, $.01 par value per share, of the Company.
"Exchange Act" means the Securities Exchange Act
of 1934, as amended, or any similar Federal statute, and the
rules and regulations of the Commission issued under such Act, as
they each may, from time to time, be in effect.
"Registration Statement" means a registration
statement filed by the Company with the Commission for a public
offering and sale of Common Stock (other than a registration
statement on Form S-8 or Form S-4, or their successors, or any
other form for a similar limited purpose, or any registration
statement covering only securities proposed to be issued in
exchange for securities or assets of another corporation).
"Registration Expenses" means the expenses
described in Subsection e.
"Registrable Shares" means the shares of Common
Stock issued or issuable upon exercise of this Warrant or other
Series A Warrants issued contemporaneously; provided, however,
that shares of Common Stock which are Registrable Shares shall
cease to be Registrable Shares upon any sale of such Registrable
Shares pursuant to a Registration Statement or Rule 144 under the
Securities Act. Wherever reference is made in this Warrant to a
request or consent of holders of a certain percentage of
Registrable Shares, the determination of such percentage shall
<PAGE>
include shares of Common Stock issuable upon exercise of the
Warrant even if such exercise conversion has not yet been
effected.
"Securities Act" means the Securities Act of 1933,
as amended, or any similar Federal statute, and the rules and
regulations of the Commission issued under such Act, as they each
may, from time to time, be in effect.
"Stockholders" means the Holders and any persons
or entities to whom the rights granted under this Warrant are
transferred by any Holders, their successors or assigns pursuant
to Section 4 hereof.
b. Required Registrations.
(1) At any time after the Company becomes
eligible to file a Registration Statement on Form S-3 (or any
successor form relating to secondary offerings), a Stockholder or
Stockholders holding in the aggregate at least 20% of the
Registrable Shares issued pursuant to the Series A Warrants may
request the Company, in writing, to effect the registration on
Form S-3 (or such successor form), of Registrable Shares having
an aggregate offering price of at least Five Hundred Thousand
Dollars ($500,000) (based on the then current public market
price). Upon receipt of any such request, the Company shall
promptly give written notice of such proposed registration to all
Stockholders. Such Stockholders shall have the right, by giving
written notice to the Company within 30 days after the Company
provides its notice, to elect to have included in such
registration such of their Registrable Shares as such
Stockholders may request in such notice of election; provided
that if the underwriter (if any) managing the offering determines
that, because of marketing factors, all of the Registrable Shares
requested to be registered by all Stockholders may not be
included in the offering, then all Stockholders who have
requested registration shall participate in the registration pro
rata based upon the number of Registrable Shares which they have
requested to be so registered. Thereupon, the Company shall, as
expeditiously as possible, use its best efforts to effect the
registration on Form S-3 (or such successor form) of all
Registrable Shares which the Company has been requested to so
register.
(2) The Company shall not be required to effect
more than 3 registrations pursuant to Subparagraph (1) above nor
within six months after the effective date of any other
Registration Statement of the Company (other than on Form S-3, or
S-8, or any successor form).
(3) If at the time of any request to register
Registrable Shares pursuant to this Subsection b, the Company is
engaged or has fixed plans to engage within 30 days of the time
of the request in a registered public offering as to which the
Stockholders may include Registrable Shares pursuant to
Subsection c or is engaged in any other activity which, in the
good faith determination of the Company's Board of Directors,
would be adversely affected by the requested registration to the
<PAGE>
material detriment of the Company, then the Company may at its
option direct that such request be delayed for a period not in
excess of six months from the effective date of such offering or
the date of commencement of such other material activity, as the
case may be.
c. Incidental Registration.
(1) Whenever the Company proposes to file a
Registration Statement (other than pursuant to Subsection b(2))
at any time and from time to time, it will, prior to such filing,
give written notice to all Stockholders of its intention to do so
and, upon the written request of a Stockholder or Stockholders
given within 20 days after the Company provides such notice
(which request shall state the intended method of disposition of
such Registrable Shares), the Company shall use its best efforts
to cause all Registrable Shares which the Company has been
requested by such Stockholder or Stockholders to register to be
registered under the Securities Act to the extent necessary to
permit their sale or other disposition in accordance with the
intended methods of distribution specified in the request of such
Stockholder or Stockholders; provided that the Company shall have
the right to postpone or withdraw any registration effected
pursuant to this Subsection c without obligation to any
Stockholder.
(2) In connection with any registration under
this Subsection c involving an underwriting, the Company shall
not be required to include any Registrable Shares in such
registration unless the holders thereof accept the terms of the
underwriting as agreed upon between the Company and the
underwriters selected by it (provided that such terms must be
consistent with this Warrant). If in the opinion of the managing
underwriter it is appropriate because of marketing factors to
limit the number of Registrable Shares to be included in the
offering, then the Company shall be required to include in the
registration only that number of Registrable Shares, if any,
which the managing underwriter believes should be included
therein. If the number of Registrable Shares to be included in
the offering in accordance with the foregoing is less than the
total number of shares which the holders of Registrable Shares
have requested to be included, then the holders of Registrable
Shares who have requested registration and other holders of
securities entitled to include them in such registration shall
participate in the registration pro rata based upon their total
ownership of shares of Common Stock (giving effect to the
conversion into Common Stock of all securities convertible
thereinto). If any holder would thus be entitled to include more
securities than such holder requested to be registered, the
excess shall be allocated among other requesting holders pro rata
in the manner described in the preceding sentence.
d. Registration Procedures. If and whenever the
Company is required by the provisions of this Warrant to use its
best efforts to effect the registration of any of the Registrable
Shares under the Securities Act, the Company shall:
<PAGE>
(1) file with the Commission a Registration
Statement with respect to such Registrable Shares and use its
best efforts to cause that Registration Statement to become and
remain effective;
(2) as expeditiously as possible prepare and file
with the Commission any amendments and supplements to the
Registration Statement and the prospectus included in the
Registration Statement as may be necessary to keep the
Registration Statement effective, in the case of a firm
commitment underwritten public offering, until each underwriter
has completed the distribution of all securities purchased by it
and, in the case of any other offering, until the earlier of the
sale of all Registrable Shares covered thereby or 120 days after
the effective date thereof;
(3) as expeditiously as possible furnish to each
selling Stockholder such reasonable numbers of copies of the
prospectus, including a preliminary prospectus, in conformity
with the requirements of the Securities Act, and such other
documents as the selling Stockholder may reasonably request in
order to facilitate the public sale or other disposition of the
Registrable Shares owned by the selling Stockholder; and
(4) as expeditiously as possible use its best
efforts to register or qualify the Registrable Shares covered by
the Registration Statement under the securities or Blue Sky laws
of such states as the selling Stockholders shall reasonably
request, and do any and all other acts and things that may be
necessary or desirable to enable the selling Stockholders to
consummate the public sale or other disposition in such states of
the Registrable Shares owned by the selling Stockholder; provided,
however, that the Company shall not be required in connection with
this Subparagraph (4) to qualify as a foreign corporation or execute
a general consent to service of process in any jurisdiction.
If the Company has delivered preliminary or final
prospectuses to the selling Stockholders and after having done so
the prospectus is amended to comply with the requirements of the
Securities Act, the Company shall promptly notify the selling
Stockholders and, if requested, the selling Stockholders shall
immediately cease making offers of Registrable Shares and return
all prospectuses to the Company. The Company shall promptly
provide the selling Stockholders with revised prospectuses and,
following receipt of the revised prospectuses, the selling
Stockholders shall be free to resume making offers of the
Registrable Shares.
e. Allocation of Expenses. The Company will pay all
Registration Expenses of all registrations under this Warrant;
provided, however, that if a registration under Subsection b is
withdrawn at the request of the Stockholders requesting such
registration (other than as a result of information concerning
the business or financial condition of the Company which is made
known to the Stockholders after the date on which such
registration was requested) and if the requesting Stockholders
elect not to have such registration counted as a registration
requested under Subection b, the requesting Stockholders shall
<PAGE>
pay the Registration Expenses of such registration pro rata in
accordance with the number of their Registrable Shares included
in such registration. For purposes of this Subsection e, the
term "Registration Expenses" shall mean all expenses incurred by
the Company in complying with this Warrant, including, without
limitation, all registration and filing fees, exchange listing
fees, printing expenses, fees and expenses of counsel for the
Company and the fees and expenses of one counsel selected by the
selling Stockholders to represent the selling Stockholders, state
Blue Sky fees and expenses, and the expense of any special audits
incident to or required by any such registration, but excluding
underwriting discounts, selling commissions and the fees and
expenses of selling Stockholders' own counsel (other than the
counsel selected to represent all selling Stockholders).
f. Indemnification and Contribution.
(1) In the event of any registration of any of
the Registrable Shares under the Securities Act pursuant to this
Warrant, the Company will indemnify and hold harmless the seller
of such Registrable Shares, each underwriter of such Registrable
Shares, and each other person, if any, who controls such seller
or underwriter within the meaning of the Securities Act or the
Exchange Act against any losses, claims, damages or liabilities,
joint or several, to which such seller, underwriter or
controlling person may become subject under the Securities Act,
the Exchange Act, state securities or Blue Sky laws or otherwise,
insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement under which such
Registrable Shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to such
Registration Statement, or arise out of or are based upon the
omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; and the Company will reimburse such seller,
underwriter and each such controlling person for any legal or any
other expenses reasonably incurred by such seller, underwriter or
controlling person in connection with investigating or defending
any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to
the extent that any such loss, claim, damage or liability arises
out of or is based upon any untrue statement or omission made in
such Registration Statement, preliminary prospectus or final
prospectus, or any such amendment or supplement, in reliance upon
and in conformity with information furnished to the Company, in
writing, by or on behalf of such seller, underwriter or
controlling person specifically for use in the preparation
thereof.
(2) In the event of any registration of any of
the Registrable Shares under the Securities Act pursuant to this
Warrant, each seller of Registrable Shares, severally and not
jointly, will indemnify and hold harmless the Company, each of
its directors and officers and each underwriter (if any) and each
person, if any, who controls the Company or any such underwriter
<PAGE>
within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities, joint or
several, to which the Company, such directors and officers,
underwriter or controlling person may become subject under the
Securities Act, Exchange Act, state securities or Blue Sky laws
or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement of a material fact contained in
any Registration Statement under which such Registrable Shares
were registered under the Securities Act, any preliminary
prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to the Registration
Statement, or arise out of or are based upon any omission to
state a material fact required to be stated therein or necessary
to make the statements therein not misleading, if the statement
or omission was made in reliance upon and in conformity with
information relating to such seller furnished in writing to the
Company by or on behalf of such seller specifically for use in
connection with the preparation of such Registration Statement,
prospectus, amendment or supplement; provided, however, that the
obligations of such Stockholders hereunder shall be limited to an
amount equal to the proceeds to each Stockholder of Registrable
Shares sold in connection with such registration.
(3) Each party entitled to indemnification under
this Subsection f (the "Indemnified Party") shall give notice to
the party required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has actual
knowledge of any claim as to which indemnity may be sought, and
shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom; provided, that
counsel for the Indemnifying Party, who shall conduct the defense
of such claim or litigation, shall be approved by the Indemnified
Party (whose approval shall not be unreasonably withheld); and,
provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying
Party of its obligations under this Subsection f. The Indemnified
Party may participate in such defense at such party's expense;
provided, however, that the Indemnifying Party shall pay such
expense if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate
due to actual or potential differing interests between the
Indemnified Party and any other party represented by such counsel
in such proceeding. No Indemnifying Party, in the defense of any
such claim or litigation shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into
any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect of
such claim or litigation, and no Indemnified Party shall consent
to entry of any judgment or settle such claim or litigation
without the prior written consent of the Indemnifying Party.
<PAGE>
(4) In order to provide for just and equitable
contribution to joint liability under the Securities Act in any
case in which either (i) any holder of Registrable Shares
exercising rights under this Warrant, or any controlling person
of any such holder, makes a claim for indemnification pursuant to
this Subsection f but it is judicially determined (by the entry
of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial
of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this
Subsection f provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part
of any such selling Stockholder or any such controlling person in
circumstances for which indemnification is provided under this
Subsection f; then, in each such case, the Company and such
Stockholder will contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after
contribution from others) in such proportions so that such holder
is responsible for the portion represented by the percentage that
the public offering price of its Registrable shares offered by
the Registration Statement bears to the public offering price of
all securities offered by such Registration Statement, and the
Company is responsible for the remaining portion; provided,
however, that, in any such case, (A) no such holder will be
required to contribute any amount in excess of the proceeds to it
of all Registrable Shares sold by it pursuant to such
Registration Statement, and (B) no person or entity guilty of
fraudulent misrepresentation, within the meaning of Section 11(f)
of the Securities Act, shall be entitled to contribution from any
person or entity who is not guilty of such fraudulent
misrepresentation.
g. Indemnification with Respect to Underwritten
Offering. In the event that Registrable Shares are sold pursuant
to a Registration Statement in an underwritten offering pursuant
to Subsection b, the Company agrees to enter into an underwriting
agreement containing customary representations and warranties
with respect to the business and operations of an issuer of the
securities being registered and customary covenants and
agreements to be performed by such issuer, including without
limitation customary provisions with respect to indemnification
by the Company of the underwriters of such offering.
h. Information by Holder. Each Stockholder including
Registrable Shares in any registration shall furnish to the
Company such information regarding such Stockholder and the
distribution proposed by such Stockholder as the Company may
reasonably request in writing and as shall be required in
connection with any registration, qualification or compliance
referred to in this Warrant.
<PAGE>
i. "Stand-Off" Agreement". Each Stockholder, if
requested by the Company and the managing underwriter of an
offering by the Company of Common Stock or other securities of
the Company pursuant to a Registration Statement, shall agree not
to sell publicly or otherwise transfer or dispose of any
Registrable Shares or other securities of the Company held by
such Stockholder for a specified period of time (not to exceed
180 days) following the effective date of such Registration
Statement; provided, that:
(1) such agreement shall only apply to the first
Registration Statement covering Common Stock to be sold on its
behalf to the public in an underwritten offering; and
(2) all Stockholders holding not less than the
number of shares of Common Stock held by such Stockholder
(including shares of Common Stock issuable upon the conversion of
Shares, or other convertible securities, or upon the exercise of
options, warrants or rights) and all officers and directors of
the Company enter into similar agreements.
j. Termination. All of the Company's obligations to
register Registrable Shares under this Warrant shall terminate on
the tenth anniversary of this Warrant.
3. Exercise of Warrant.
a. The Company covenants that it will at all times
maintain an available and adequate reserve of duly authorized but
unissued share of its Capital Stock, free from preemptive rights,
sufficient to effect the full exercise of this Warrant as herein
provided, and that it will at all times maintain in full force
and effect an appropriate permit of the Delaware Commissioner of
Corporations authorizing the issuance and sale by the Company of
all shares of Capital Stock issuable upon exercise of this
Warrant by the holder.
The Company covenants that all shares of Capital Stock
issuable upon the exercise of this Warrant will, upon issuance,
be validly issued, fully paid and non-assessable, and free from
all taxes, liens and charges with respect to the issue thereof.
The holder hereof may surrender this Warrant for
exchange at the principal office of the Company. Within a
reasonable time thereafter and without expense (other than
transfer taxes, if any) to each holder, the Company shall issue
in exchange therefor, in such denominations (of not less than 100
shares) and issued in such name or names as the holder shall
designate (if permitted by the Federal Securities laws and the
relevant Blue Sky law(s), as amended from time to time), a new
certificate or certificates dated the date hereof evidencing the
right to purchase the same aggregate number of shares of Capital
Stock as are evidenced hereby, and otherwise containing the same
provisions and subject to the same terms and conditions of this
certificate.
<PAGE>
Upon surrender of this Warrant at the office of the
Company accompanied by payment of the appropriate Purchase Price
of the Capital Stock in cash or as otherwise allowed herein, the
Company shall forthwith cause to be executed, issued and
delivered to the holder of the Warrant a certificate or
certificates for the proper number of shares of capital stock or
other securities of the Company; and the Company covenants that
the issuance of this Warrant shall constitute full authority to
those of its officers who are charged with the duty of issuing
stock certificates to promptly execute, issue and deliver to the
holder of the Warrant the necessary certificate for shares of
Capital Stock or other securities of the Company required by such
exercise.
This Warrant may be exercised in accordance with its
terms prior to expiration as a whole, or from time to time in
part. In the event of partial exercise of the Warrant, the
Company shall, in addition to delivery of the securities thereby
purchased, deliver to the holder of the Warrant, a new Warrant
for the remaining shares then subject to the unexercised portion
of the Warrant; such new Warrant being dated the date hereof and
otherwise containing the same provisions and subject to the same
conditions and subject to the same terms and conditions as this
Warrant. Certificates for shares of Capital Stock or other
securities of the Company issuable by reason of the exercise of
Warrants shall be dated and shall be effective as of the date of
the surrender of the Warrants for exercise or acceptance of the
offering of shares or other securities, as the case may be, and
the payment of the appropriate Purchase Price, notwithstanding
any delay in the actual execution, issuance or delivery of the
certificates or securities so purchased.
This Warrant shall be registered on the books of the
Company, which shall be kept at its principal office for that
purpose, and shall be transferable only on said books by the
holder hereof in person or by duly authorized attorney upon
surrender of this Warrant properly endorsed.
b. This Warrant may be exercised by the holder
hereof, in whole or in part, by surrendering this Warrant at the
principal office of the Company, or at such other office or
agency as the Company may designate, accompanied by payment in
full, in lawful money of the United States, of the Purchase Price
payable in respect of the number of Warrant Shares purchased upon
such exercise.
c. The holder hereof may, at its option, elect to pay
some or all of the Purchase Price payable upon an exercise of
this Warrant by canceling a portion of this Warrant exercisable
for such number of Warrant Shares as is determined by dividing
(i) the total Purchase Price payable in respect of the number of
Warrant Shares being purchased upon such exercise by (ii) the
excess of the Fair Market Value per share of Common Stock as of
the effective date of exercise (the "Exercise Date") over the
Purchase Price per share. The Fair Market Value per share of
Common Stock shall be determined as follows:
<PAGE>
(1) If the Common Stock is listed on a national
securities exchange, the NASDAQ National Market System, the
NASDAQ system, or another nationally recognized exchange or
trading system as of the Exercise Date, the Fair Market Value per
share of Common Stock shall be deemed to be the last reported
sale price per share of Common Stock thereon on the Exercise
Date; or, if no such price is reported on such date, such price
on the next preceding business day (provided that if no such
price is reported on the next preceding business day, the Fair
Market Value per share of Common Stock shall be determined
pursuant to Clause (2)).
(2) If the Common Stock is not listed on a
national securities exchange, the NASDAQ National Market System,
the NASDAQ system or another nationally recognized exchange or
trading system as of the Exercise Date, the Fair Market Value per
share of Common Stock shall be deemed to be the amount most
recently determined by the Board of Directors to represent the
fair market value per share of the Common Stock (including
without limitation a determination for purposes of granting
Common Stock options or issuing Common Stock under an employee
benefit plan of the Company); and, upon request of the holder
hereof, the Board of Directors (or a representative thereof)
shall promptly notify the holder hereof of the Fair Market Value
per share of Common Stock. Notwithstanding the foregoing, if the
Board of Directors has not made such a determination within the
three-month period prior to the Exercise Date, then (A) the Fair
Market Value per share of Common Stock shall be the amount next
determined by the Board of Directors to represent the fair market
value per share of the Common Stock (including without limitation
a determination for purposes of granting Common Stock options or
issuing Common Stock under an employee benefit plan of the
Company), (B) the Board of Directors shall make such a
determination within 30 days of a request by the holder hereof
that it do so, and (C) the exercise of this Warrant pursuant to
this Subsection 3c shall be delayed until such determination is
made.
4. Transfers of Rights. This Warrant, and the rights
and obligations of each holder hereof, may be assigned by such
holder hereof to any person or entity to which not fewer than 100
Shares (issued or issuable under this Warrant) are transferred by
such holder hereof, and such transferee shall be deemed a "holder
hereof" for purposes of this Warrant; provided that the
transferee provides written notice of such assignment to the
Company.
<PAGE>
5. Co-Sale. If Telos Corporation ("Telos") intends
at any time to sell equity securities of the Company (the
"Offered Shares") (a) having the right, or (b) in a transaction
providing the prospective purchaser with the right, to elect a
majority of the Board of Directors of the Company, Telos shall
promptly give notice (the "Notice") to the holders hereof of the
material terms of the proposed sale, and the holders hereof shall
indicate within twenty (20) days of such notice the number of
shares of Capital Stock which they wish to sell in such
transaction. Telos shall use its best efforts to interest the
prospective purchaser in purchasing, in addition to the Offered
Shares, the shares the holders hereof wish to sell. If the
prospective purchaser does not wish to purchase all of the shares
made available by Telos and the holders hereof, then each holder
hereof and Telos shall be entitled to sell, at the price and on
the terms and conditions set forth in the Notice, a portion of
the shares being sold to the prospective purchaser, in the same
proportion as Telos' or the holder's ownership of shares bears to
the aggregate number of shares owned by Telos and the holders
hereof.
6. General.
a. Notices. All notices, requests, consents,
and other communications under this Warrant shall be in writing
and shall be delivered by hand or mailed by first class certified
or registered mail, return receipt requested, postage prepaid:
If to the Company, at 19886 Ashburn Road, Ashburn,
VA 20147, Attention: President, or at such other address or
addresses as may have been furnished in writing by the Company to
the Holders, with a copy to the Chief Financial Officer and
General Counsel; or
If to a holder hereof, at his or its address set
forth above, or at such other address or addresses as may have
been furnished to the Company in writing by such holder hereof.
Notices provided in accordance with this Section 6
shall be deemed delivered upon personal delivery or two business
days after deposit in the mail.
b. Entire Agreement. This Warrant embodies the
entire agreement and understanding between the parties hereto
with respect to the subject matter hereof and supersedes all
prior agreements and understandings relating to such subject
matter.
<PAGE>
c. Amendments and Waivers. Any term of this Warrant
may be amended and the observance of any term of this Warrant may
be waived (either generally or in a particular instance and
either retroactively or prospectively), with the written consent
of the Company and the holders of at least 90% of the Registrable
Shares; provided, that this Warrant may be amended with
the consent of the holders of less than all Registrable Shares
only in a manner which affects all Registrable Shares in the same
fashion. No waivers of or exceptions to any term, condition or
provision of this Warrant, in any one or more instances, shall be
deemed to be, or construed as, a further or continuing waiver of
any such term, condition or provision.
d. Fractional Shares. The Company shall not be
required upon the exercise of this Warrant to issue any
fractional shares, but shall make an adjustment therefor in cash
on the basis of the Fair Market Value per share of Common Stock,
as determined in good faith by the Board of Directors or as
quoted if the Common Stock is publicly traded on the day the
Warrant was exercised.
Executed in Ashburn, Virginia as of the 12th day of July, 1996.
enterWorks.com, inc.
By:
Robert Lewis
President
[SEAL]
Attest:
Gerald D. Calhoun, Secretary
TELOS CORPORATION
(as to Clause 5 only)
By:
William L.P. Brownley
Vice President and General Counsel
[SEAL]
Attest:
Gerald D. Calhoun, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of income for Telos Corporation and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1284000
<SECURITIES> 0
<RECEIVABLES> 48072000
<ALLOWANCES> 434000
<INVENTORY> 14228000
<CURRENT-ASSETS> 66382000
<PP&E> 35816000
<DEPRECIATION> 19922000
<TOTAL-ASSETS> 110671000
<CURRENT-LIABILITIES> 83526000
<BONDS> 55185000
37366000
0
<COMMON> 78000
<OTHER-SE> (41079000)
<TOTAL-LIABILITY-AND-EQUITY> 110671000
<SALES> 53363000
<TOTAL-REVENUES> 157005000
<CGS> 48237000
<TOTAL-COSTS> 136190000
<OTHER-EXPENSES> 346000
<LOSS-PROVISION> 31000
<INTEREST-EXPENSE> 4994000
<INCOME-PRETAX> (8707000)
<INCOME-TAX> (421000)
<INCOME-CONTINUING> (8286000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8286000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
