<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, 1997
[ ] 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, 1997 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): 15
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Condensed Consolidated Statements of Income for the
Three Months and Nine Months Ended September 30, 1997
and 1996....................................................................................................3
Condensed Consolidated Balance Sheets as of September 30,
1997 and December 31, 1996..................................................................................4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996...............................................................5
Notes to Condensed Consolidated Financial Statements........................................................6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................................................9-13
PART II. OTHER INFORMATION
Item 3. Defaults upon Senior Securities..............................................................................14
Item 6. Exhibits and Reports on Form 8-K.............................................................................14
SIGNATURES.................................................................................................................15
</TABLE>
<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,
-------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales
Systems and Support Services $33,425 $27,150 $92,725 $79,605
Systems Integration 34,576 21,789 87,710 53,363
------ ------ ------ ------
68,001 48,939 180,435 132,968
Costs and expenses
Cost of sales 59,406 42,657 154,565 116,912
Selling, general and
administrative expenses 6,422 7,466 19,816 20,287
Goodwill amortization 210 275 644 825
------ ------ ------ ------
Operating income (loss) 1,963 (1,459) 5,410 (5,056)
Other income (expenses)
Other income (expenses) 22 3 45 (346)
Interest expense (1,908) (1,393) (5,551) (3,929)
----- ----- ----- -----
Income (loss) before taxes 77 (2,849) (96) (9,331)
Income tax benefit -- 421 -- 421
----- ----- ----- -----
Income (loss) from continuing
operations 77 (2,428) (96) (8,910)
Discontinued operations:
Income from discontinued
operations -- 494 -- 624
----- ----- ---- -----
Net income (loss) $ 77 $(1,934) $ (96) $(8,286)
===== ===== ==== =====
</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, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 424 $ 2,781
(includes restricted cash of
$231 at December 31, 1996)
Accounts receivable, net 56,818 51,549
Inventories, net 14,497 17,066
Other current assets 3,521 2,567
------ ------
Total current assets 75,260 73,963
Property and equipment, net of
accumulated depreciation of
$22,324 and $20,390 respectively 16,504 16,486
Goodwill 12,901 13,545
Other assets 7,082 6,070
------- -------
$111,747 $110,064
======= =======
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Accounts payable $ 21,958 $35,730
Other current liabilities 7,494 11,708
Accrued compensation and benefits 10,389 10,163
------ ------
Total current liabilities 39,841 57,601
Senior credit facility 36,030 15,418
Subordinated notes 16,893 17,439
Capital lease obligation 12,163 12,537
Other long-term liabilities -- 154
------- -------
Total liabilities 104,927 103,149
Redeemable preferred stocks
Senior redeemable preferred stock 5,100 4,828
Class B redeemable preferred stock 11,767 11,087
Redeemable preferred stock 27,431 24,230
------ ------
Total preferred stock 44,298 40,145
------ ------
Stockholders' investment
Common stock 78 78
Capital in excess of par -- 4,048
Retained earnings (deficit) (37,556) (37,356)
------ ------
Total stockholders' investment (37,478) (33,230)
------- -------
$111,747 $110,064
======= =======
</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,
-------------------
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net (loss) income $ (96) $(8,286)
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,988 2,226
Goodwill amortization 644 1,170
Other noncash items 1,604 1,833
Changes in assets and liabilities
that used cash (23,287) (2,314)
------ -----
Cash (used in) operating activities (18,147) (5,371)
------ -----
Investing activities:
Investment in products (1,989) (1,079)
Purchase of property and equipment (1,877) (2,196)
----- -----
Cash (used in) investing activities (3,866) (3,275)
----- -----
Financing activities:
Proceeds from senior credit facility 20,612 4,817
Proceeds from issuance of enterWorks
subordinated notes -- 3,078
Proceeds from capital lease transaction -- 1,300
Payments under capital leases (281) --
Repayment of senior subordinated notes (675) --
------ -----
Cash provided by financing activities 19,656 9,195
------ -----
(Decrease) increase in cash and cash equivalents (2,357) 549
Cash and cash equivalents at beginning of period 2,781 735
----- -----
Cash and cash equivalents at end of
period $ 424 $1,284
===== =====
</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., Telos International Corporation,
and its majority owned subsidiary, enterWorks.com, inc. ("enterWorks")
(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,
1996.
In the opinion of the Company, the accompanying condensed consolidated
financial statements reflect all adjustments and reclassifications (which
include only normal recurring adjustments) necessary to present fairly the
financial position of the Company as of September 30, 1997 and December 31,
1996, and the results of its operations and its cash flows for the nine months
ended September 30, 1997 and 1996. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
In December 1996, the Company sold substantially all of the assets of its
consulting division, Telos Consulting Services (TCS), to COMSYS Technical
Services, Inc., a subsidiary of COREStaff, Inc. for approximately $31.6 million.
The sale of TCS was treated as a discontinued operation in accordance with APB
Opinion Number 30. Accordingly, the results of operations for TCS included in
the three and nine month periods ended September 30, 1996 have been reported
separately as "income from discontinued operations".
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, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Billed accounts receivable $44,810 $40,225
Unbilled accounts receivable 13,369 12,249
------ ------
58,179 52,474
Allowance for doubtful accounts (1,361) (925)
------ ------
$56,818 $51,549
====== ======
</TABLE>
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Debt Obligations
Senior Credit Facility
- - ----------------------
At September 30, 1997, the Company had a $45 million senior credit facility
("Facility") with a bank maturing on July 1, 2000. The Company was not compliant
with certain covenants contained in the Facility at September 30, 1997 and the
bank has waived such covenant noncompliance.
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. From July 1, 1995
through June 30, 1997, the Series A-1 and A-2 each carry a cumulative dividend
rate equal to 11.125% per annum of its liquidation value, and increases to
14.125% per annum thereafter. The dividends are payable semi-annually on June 30
and December 31 of each year. The liquidation preference of the preferred stock
is the face amount, $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 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, 1997 and December 31, 1996 cumulative
undeclared, unpaid dividends relating to Series A-1 and A-2 Preferred Stock were
accrued for financial reporting purposes in the amount of $2,100,000 and
$1,828,000, 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 payable semi-annually at June 30 and December
31. From July 1, 1995 through June 30, 1997, the dividend is calculated at a
rate equal to 11.125% per annum of its liquidation value, and 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, 1997 and December 31, 1996 cumulative undeclared, unpaid
dividends relating to the Class B Redeemable Preferred Stock were accrued for
financial reporting purposes in the amount of $4,267,000 and $3,587,000
respectively.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12% Cumulative Exchangeable Redeemable Preferred Stock
- - ------------------------------------------------------
A maximum of 6,000,000 shares of 12% Cumulative Exchangeable Redeemable
Preferred Stock, par value $.01 per share, have been authorized for issuance.
The Company has issued 3,595,586 shares of 12% Cumulative Exchangeable
Redeemable Preferred Stock (the "Preferred Stock"). The Preferred Stock accrues
a semi-annual dividend at the annual rate of 12% ($1.20) per share, based on the
liquidation preference of $10 per share and is fully cumulative.
Through November 21, 1995, the Company had the option to pay dividends in
additional shares of Preferred Stock in lieu of cash (provided there were no
blocks on payment as further discussed below). Dividends are payable by the
Company, provided the Company has legally available funds under Maryland law and
is able to pay dividends under its charter and other corporate documents, 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 were paid at the rate of 0.06 of a share for each $.60 of such dividends
not paid in cash. No dividends have been declared or paid during fiscal years
1992 through 1996. Cumulative undeclared dividends as of September 30, 1997
accrued for financial reporting purposes totaled $12,578,000. 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.
The dividends payable on December 1, 1995, June 1, 1996, December 1, 1996, and
June 1, 1997 totaling $8,628,000 were accrued 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
----------------------
General
In the first nine months of 1997, the Company had increased revenue and
profitability as compared to 1996. The increased revenue resulted from increased
order volume in the Systems Integration Group, as well as revenue generated from
contracts awarded in 1997 to the Systems and Support Services Group. The
increase in profitability was also attributable to the cost reductions and
branch consolidation measures implemented by the Company in the last half of
1996. The profitability was further enhanced by an improvement in the product
mix on the Company's long term contracts and improved profit margins realized on
new contracts.
Total backlog from existing contracts was $1.2 billion as of September 30,
1997 and is approximately the same as the total backlog as of December 31, 1996.
As of September 30, 1997, the funded backlog of the Company totaled $126.2
million, an increase of $11.2 million from December 31, 1996. 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., Telos International
Corporation, and its majority owned subsidiary enterWorks.com, inc.
("enterWorks") (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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 87.4 87.2 85.7 87.9
SG&A expenses 9.4 15.2 11.0 15.3
Goodwill amortization 0.3 0.6 0.3 0.6
---- ---- ---- ----
Operating income (loss) 2.9 (3.0) 3.0 (3.8)
Other income (expense) -- -- -- (0.2)
Interest expense (2.8) (2.8) (3.1) (3.0)
Income tax benefit -- 0.8 -- 0.3
---- ---- ---- ----
Income (loss) from continuing
operations 0.1 (5.0) (0.1) (6.7)
Discontinued operations:
Income from discontinued
operations -- 1.0 -- 0.5
--- ---- --- ---
Net income (loss) 0.1% (4.0)% (0.1)% (6.2)%
=== === === ===
</TABLE>
<PAGE>
Financial Data by Market Segment
The Company operates in two market segments; systems and support services
(the "Systems and Support Services Group"), which consists of enterWorks and
hardware and software support services; and the Systems Integration 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,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
(amounts in thousands)
<S> <C> <C> <C> <C>
Sales:
Systems and Support Services $33,425 $27,150 $ 92,725 $79,605
Systems Integration 34,576 21,789 87,710 53,363
------ ------ ------ ------
Total $68,001 $48,939 $180,435 $132,968
====== ====== ======= =======
Gross Profit:
Systems and Support Services 5,622 $3,920 $15,275 $10,930
Systems Integration 2,973 2,362 10,595 5,126
----- ----- ------ -----
Total $8,595 $6,282 $25,870 $16,056
===== ===== ====== ======
Gross Margin:
Systems and Support Services 16.8% 14.4% 16.5% 13.7%
Systems Integration 8.6% 10.8% 12.1% 9.6%
---- ---- ---- ----
Total 12.6% 12.8% 14.3% 12.1%
==== ==== ==== ====
</TABLE>
For the three month period ended September 30, 1997, revenue increased by
$19.1 million, or 38.9%, to $68.0 million from $48.9 million for the comparable
1996 period. The increase for the three month period includes a $12.8 million
increase in Systems Integration revenue, and a $6.3 million increase in Systems
and Support Services revenue.
The increase in Systems Integration revenue of $12.8 million results from
orders under its Joint Recruiting Information Support System ("JRISS") Blanket
Purchase Agreement as well as its U.S. Courts System Data Communication Network
contract which were both awarded in 1997, as well as increased revenue in other
business lines of the segment.
The Systems and Support Services Group revenue increase of $6.3 million is
due to an increase in software support revenue of $6.5 million, offset by a
decrease in hardware support revenue of $200,000. The enterWorks division
revenue remained constant at $1.0 million from the third quarter 1997 compared
to the third quarter 1996. The increase in software support is mostly
attributable to the revenue recognized on its Immigration and Naturalization
Service Blanket Purchase Agreement for Field Operation Support contract, as well
as slight increases in sales on certain labor contracts. The decline in hardware
support revenue is due to the loss of one of the division's contracts in June of
1997. The decrease is also attributable to the continued migration from
mainframe to network based computing which generally provides 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.
Based on the Company's backlog position and increased order flow in the
third quarter 1997, the fourth quarter should experience continued revenue
growth. However, there can be no assurance that such revenue improvement will
occur.
Revenue increased $47.5 million or 35.7% to $180.4 million for the nine
months ended September 30, 1997 from $132.9 million for the comparable 1996
period. The increase for the nine month period includes a $34.3 million Systems
Integration revenue increase, and a $13.2 million increase in Systems and
Support Services revenue. The reasons for these revenue increases are discussed
above.
<PAGE>
Cost of sales increased by $16.7 million, or 39.3%, to $59.4 million in the
three month period ended September 30, 1997, from $42.7 million in the
comparable 1996 period. For the nine months ended September 30, 1997, cost of
sales increased $37.6 million, or 32.2%, to $154.5 million from $116.9 million
for the same period in 1996. These increases are the result of the increases in
sales for both periods, as well as increases in certain operational reserves.
Gross profit increased $2.3 million in the three month period to $8.6
million, from $6.3 million in the comparable 1996 period. The increase includes
a $1.7 million increase in Systems and Support Services gross profit and a
$600,000 increase in Systems Integration gross profit. For the nine month
period, gross profit increased by $9.8 million to $25.9 million from $16.1
million. This increase includes a $4.3 million increase in Systems and Support
Services gross profit and a $5.5 million increase in Systems Integration gross
profit. The reasons for the gross profit increases for the periods ending
September 30, 1997 compared to September 30, 1996 related to the changes in
revenues and cost of sales for the respective periods. In addition, the Systems
Integration Group experienced shifts in product mix on its large contracts which
improved profit margins. The Systems and Support Services Group improved its
gross margin by maximizing its efforts on profitable contracts. The Group
further enhanced its gross profit through cost reduction measures implemented in
the fourth quarter of 1996. Gross margins were 12.6% and 14.3% for the three and
nine month periods of 1997 as compared to 12.8% and 12.1% for the comparable
periods of 1996.
Selling, general, and administrative expense ("SG&A") decreased for the
three month period by approximately $1.0 million, to $6.4 million in 1997 from
$7.4 million in 1996. For the nine month period, SG&A decreased from $20.3
million to $19.8 million, approximately $500,000. These decreases are
attributable to a decline in bid and proposal and sales and marketing expense in
both the Systems Integration Group and most of the Systems and Support Services
Group. Additionally, the decreases are a result of the cost reduction and branch
consolidation measures implemented by the Company in the fourth quarter of 1996.
The Company continues to aggressively manage non-contract related and
discretionary spending. This overall decrease in SG&A was offset by the
Company's increased spending in the product development and sales and marketing
efforts of its enterWorks subsidiary. For the nine months ended September 30,
1997, enterWorks sales, marketing and product development (prior to
capitalization) expenses totaled $1.6 million, $1.1 million and $2.1 million,
respectively. SG&A as a percentage of revenues decreased to 9.4% for the third
quarter of 1997 from 15.2% in the comparable 1996 period. SG&A as a percentage
of revenues for the nine month period ended September 30, 1997 decreased to
11.0% from 15.3% compared to the same period in 1996.
Goodwill amortization expense was $210,000 and $644,000 for the three and
nine month periods ended September 30, 1997 compared to $275,000 and $825,000
for the three and nine month periods ended September 30, 1996. These reductions
are due to adjustments to the goodwill balance from realization of acquired tax
benefits resulting from the 1992 acquisition of Telos Corporation (California)
and a writedown in the goodwill balance from the sale of TCS in 1996.
<PAGE>
Operating income increased by $3.4 million to $1.9 million in the three
month period from a loss of $1.5 million in the comparable 1996 period and
increased $10.4 million to $5.4 million from a loss of $5.0 million for the nine
month period. These increases resulted from the aforementioned increases in
gross profit and decreases in SG&A.
Other non-operating income was approximately $22,000 in the three month
period of 1997 compared to approximately $3,000 of other non-operating income in
the comparable 1996 period. For the 1997 nine month period, non-operating income
was $45,000 as compared to expense of $346,000 for the comparable 1996 period.
The increase in income is due to the $355,000 of additional litigation
settlement provision that the Company recorded as non-operating expense in the
second quarter of 1996.
Interest expense increased approximately $515,000 to $1.9 million in the
third quarter of 1997 from $1.4 million in the comparable 1996 period. Interest
expense for the nine month period ended September 30, 1997 increased $1.6
million to $5.5 million from $3.9 million in the 1996 period. These increases
are primarily due to increases in the average debt levels in 1997 as well as an
increase in interest recorded for capital lease payments for leases entered into
throughout 1996.
The Company did not have an income tax provision for the three month and
nine month periods ended September 30, 1997, due to its cumulative net losses in
the nine month 1997 period. The Company had an income tax benefit for the three
month and nine month periods ended September 30, 1996 of $421,000. This benefit
was a result of the Company filing amended Federal income tax returns for
deductions previously disallowed by the Internal Revenue Service.
Liquidity and Capital Resources
For the nine months ended September 30, 1997, the Company used $18.1
million of cash in its operating activities primarily as a result of a
significant reduction in trade accounts payable and other current liabilities.
The use of cash was also a result of a significant investment by the Company in
its enterWorks division. The Company funded its net loss and use of operating
cash as well as its investing activities such as capital expenditures of $1.9
million and capitalized software costs in its enterWorks division of $2.0
million through increased borrowings under its term facility.
As a result of the Company's sale of its TCS division for $31.6 million in
December 1996, the Company's short-term liquidity constraints have improved.
However, the Company continues to aggressively manage its cash and reduce its
discretionary spending. The Company also continues to evaluate its cost
reduction programs and its investment in enterWorks.
At September 30, 1997, the Company had outstanding debt of $65.1 million,
consisting of $36.0 million under the secured senior credit facility, $16.9
million in subordinated debt and $12.2 million in long-term capital lease
obligations. In 1997, the Company's bank entered into an agreement with the
Company to refinance its $45 million term facility and extend the maturity date
to July 1, 2000. The terms and conditions of the new facility are similar to the
previous senior credit facility except for amendments made to certain of the
financial and non financial covenants. The Company was not compliant with
certain covenants contained in the Facility at September 30, 1997 and the bank
has waived such covenant noncompliance.
<PAGE>
The Company is actively reviewing its financing requirements for
enterWorks, and continues to fund on-going product development, sales and
marketing, and business activities of the subsidiary. The Company will continue
to evaluate various financing alternatives to maintain the enterWorks
operations.
The Company continually evaluates its financing requirements to support its
business base and anticipated growth. The Company anticipates that its current
Facility will be adequate for 1997. However, should faster than anticipated
growth occur, the Company believes that an expanded senior credit facility would
be required through a multi-bank syndication arrangement.
<PAGE>
PART II - OTHER INFORMATION
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, and its Class B Redeemable Preferred Stock since
their issuance. Total undeclared unpaid dividends accrued for financial
reporting purposes are $2,100,000 for the Series A-1 and A-2 Preferred Stock and
$4,267,000 for the Class B Preferred Stock at September 30, 1997.
12% Cumulative Exchangeable Redeemable Preferred Stock
Through November 21, 1995, the Company had the option to pay dividends in
additional shares of Preferred Stock in lieu of cash (provided there were no
blocks on payment as further discussed below). Dividends are payable by the
Company, provided the Company has legally available funds under Maryland law and
is able to pay dividends under its charter and other corporate documents, 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 were paid at the rate of 0.06 of a share for each $.60 of such dividends
not paid in cash. No dividends have been declared or paid during fiscal years
1992 through 1996. Cumulative undeclared dividends as of September 30, 1997
accrued for financial reporting purposes totaled $12,578,000. 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.
The dividends payable on December 1, 1995, June 1, 1996, December 1, 1996, and
June 1, 1997 totaling $8,628,000 were accrued 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.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K: Registrant filed a Current Report on Form
8-K, dated September 15, 1997, in respect of the Change in
Registrant's Certifying Accountants.
<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, 1997 /s/ Lorenzo Tellez
------------------
Lorenzo Tellez
(Principal Financial Officer &
Principal Accounting Officer)
<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-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 424,000
<SECURITIES> 0
<RECEIVABLES> 58,179,000
<ALLOWANCES> 1,361,000
<INVENTORY> 14,497,000
<CURRENT-ASSETS> 75,260,000
<PP&E> 38,828,000
<DEPRECIATION> 22,324,000
<TOTAL-ASSETS> 111,747,000
<CURRENT-LIABILITIES> 39,841,000
<BONDS> 52,923,000
44,298,000
0
<COMMON> 78,000
<OTHER-SE> (37,556,000)
<TOTAL-LIABILITY-AND-EQUITY> 111,747,000
<SALES> 87,710,000
<TOTAL-REVENUES> 180,435,000
<CGS> 77,115,000
<TOTAL-COSTS> 154,565,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,551,000
<INCOME-PRETAX> (96,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (96,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (96,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
