<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, 1998
[ ] 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 1, 1998, the registrant had 21,238,980 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): 16
----
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TELOS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
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Page
<S> <C>
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1998 and 1997...........................................3
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 ............................................................................4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997.....................................................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 1. Legal Proceedings..........................................................................14
Item 2. Changes in Securities and Use of Proceeds..................................................14
Item 3. Defaults Upon Senior Securities.........................................................14-15
Item 4. Submission of Matters to a Vote of Security Holders........................................15
Item 6. Exhibits and Reports on Form 8-K...........................................................15
SIGNATURES................................................................................................16
</TABLE>
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(amounts in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Systems and Support Services $22,347 $32,380 $75,671 $90,406
Systems Integration 16,802 34,576 51,148 87,710
Enterworks 1,309 1,045 4,142 2,319
------ ------ ------ --------
40,458 68,001 130,961 180,435
Costs and expenses
Cost of revenue 37,399 59,406 117,514 154,565
Selling, general and
administrative expenses 6,446 6,422 19,119 19,816
Goodwill amortization 132 210 457 644
----- ----- ------ ------
Operating (loss) income (3,519) 1,963 (6,129) 5,410
Other income (expenses)
Gain on sale of assets -- -- 5,683 --
Other income 14 22 40 45
Interest expense (1,662) (1,908) (4,978) (5,551)
----- ----- ----- -----
(Loss) income before taxes (5,167) 77 (5,384) (96)
Income tax provision (117) -- (928) --
--- ---- --- ---
Net (loss) income $(5,284) $ 77 $(6,312) $(96)
===== ===== ===== ==
The accompanying notes are an integral part of these
condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
ASSETS
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 471 $ 587
Accounts receivable, net 36,268 57,972
Inventories, net 12,581 12,390
Deferred income taxes 1,752 4,632
Other current assets 725 676
------ ------
Total current assets 51,797 76,257
Property and equipment, net of
accumulated depreciation of
$24,217 and $22,609, respectively 14,660 15,730
Goodwill, net 7,051 12,466
Other assets 7,961 5,265
------ -------
$81,469 $109,718
====== =======
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Accounts payable $20,728 $16,912
Accrued compensation and benefits 7,608 8,684
Other current liabilities 7,699 6,835
------ ------
Total current liabilities 36,035 32,431
Senior credit facility 21,117 39,945
Senior subordinated notes 17,054 16,930
Capital lease obligations 11,762 12,085
------ -------
Total liabilities 85,968 101,391
------ -------
Redeemable preferred stock
Senior redeemable preferred stock 5,524 5,207
Class B redeemable preferred stock -- 12,035
Redeemable preferred stock 33,265 29,951
------ ------
Total preferred stock 38,789 47,193
------ ------
Stockholders' investment
Common stock 78 78
Capital in excess of par 1,905 --
Retained earnings (deficit) (45,271) (38,944)
------ ------
Total stockholders' investment (deficit) (43,288) (38,866)
------ ------
$81,469 $109,718
====== =======
The accompanying notes are an integral part of these
condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
Nine Months
Ended September 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net loss $(6,312) $ (96)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Gain on sale of assets (5,683) --
Depreciation and amortization 3,169 2,988
Goodwill amortization 457 644
Other noncash items 574 1,604
Changes in assets and liabilities 20,931 (23,287)
------ ------
Cash provided by (used in) operating activities 13,136 (18,147)
------ ------
Investing activities:
Proceeds from sale of assets 14,675 --
Investment in software products (1,806) (1,989)
Purchase of property and equipment (970) (1,877)
------ -----
Cash provided by (used in) investing activities 11,899 (3,866)
------ -----
Financing activities:
(Repayment of) proceeds from borrowings under
senior credit facility (18,828) 20,612
Payments under capital leases (323) (281)
Retirement of Class B redeemable preferred stock (6,000) --
Repayment of senior subordinated notes -- (675)
------ ------
Cash (used in) provided by financing activities (25,151) 19,656
------ ------
Decrease in cash and cash equivalents (116) (2,357)
Cash and cash equivalents at beginning
of period 587 2,781
--- -----
Cash and cash equivalents at end
of period $ 471 $ 424
==== ====
The accompanying notes are an integral part of these
condensed consolidated financial statements.
</TABLE>
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying interim financial statements include the accounts of
Telos Corporation ("Telos") and its wholly-owned subsidiaries Telos Corporation
(California), Telos Field Engineering, Inc., and Telos International
Corporation, and its substantially owned subsidiary, Enterworks, Inc.
(collectively, the "Company"). Significant intercompany transactions have been
eliminated. In the opinion of management, the accompanying interim financial
statements include all adjustments (consisting only of normal recurring items)
necessary for their fair presentation in conformity with generally accepted
accounting principles. Interim results are not necessarily indicative of results
for a full year. The information included in this Form 10-Q should be read in
conjunction with Management's Discussion and Analysis and financial statements
and notes thereto included in the Company's 1997 Form 10-K. Certain
reclassifications have been made to conform to the current period presentation.
Note 2. Sale of Assets
In February 1998, Telos sold substantially all of the net assets of one
of its support services divisions, Telos Information Systems ("TIS"), to NYMA,
Inc., a subsidiary of Federal Data Corporation of Bethesda, Maryland, for
approximately $14.7 million in cash. In connection with this sale, the Company
has recorded a gain of $5.7 million in its condensed consolidated statement of
operations for the nine months ended September 30, 1998.
Note 3. Senior Credit Facility
The Company has a $45 million Senior Credit Facility ("the Facility")
with a bank which matures on July 1, 2000. Borrowings under the Facility are
collateralized primarily by the Company's accounts receivable and inventory, and
the amount of available borrowings fluctuates based on the underlying asset
borrowing base. At September 30, 1998, the Company was not in compliance with
several of the covenants contained within the Facility, including covenants
relating to certain leverage, net worth, tangible capital and fixed charge
coverage goals. The bank has waived this noncompliance.
Note 4. Redeemable Preferred Stock
Senior Redeemable Preferred Stock
The components of the Senior Redeemable Preferred Stock are Series A-1
and Series A-2 Redeemable Preferred Stock each with $.01 par value and 1,250 and
1,750 shares authorized, issued and outstanding, respectively. The Series A-1
and Series A-2 each carry a cumulative per annum dividend rate of 14.125% of
their liquidation value of $1,000 per share. 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 of the Series A-1 and A-2
($1,000 per share), plus all accrued and unpaid dividends. 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. Mandatory
redemptions are required from excess cash flows, as defined in the stock
agreements. Through September 30, 1998, there has been no available cash flow
permitting mandatory redemption. 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.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has not declared dividends on its Senior Redeemable
Preferred Stock since its issuance. At September 30, 1998 and December 31, 1997
cumulative undeclared, unpaid dividends relating to Series A-1 and A-2 totaled
$2,524,000, and $2,207,000, respectively, and have been accrued as a component
of the carrying value of the Senior Redeemable Preferred Stock balances in the
accompanying financial statements.
Class B Redeemable Preferred Stock
- ----------------------------------
In May 1998 the Company entered into an agreement with one of its
shareholders, Union de Banques Suisses (Luxembourg) S.A. ("UBS"), to retire all
of UBS's equity holdings in the Company. These equity holdings included all of
the 7,500 shares of the Company's Class B Preferred Stock with a liquidation
preference of $1,000 per share, and the cumulative unpaid dividends of
approximately $4.8 million, 1,837,773 shares of the Company's Class A Common
Stock, and 1,312,695 of the Company's Class A Common Stock warrants. The
purchase price to retire these interests was $6.5 million, of which $5 million
was paid in cash, and the remaining $1.5 million was funded by two separate
letters of credit secured by the Company's lender. UBS was paid using the first
letter of credit, in the amount of $1.0 million, in September 1998, and the
second letter of credit of $500,000 matures in November 1998.
The $5.9 million excess of the carrying amount of the Class B
Redeemable Preferred Stock over the redemption price was recorded as an increase
in capital in excess of par; there was no impact on income from this
transaction.
12% Cumulative Exchangeable Redeemable Preferred Stock
- ------------------------------------------------------
A maximum of 6,000,000 shares of 12% Cumulative Exchangeable Redeemable
Preferred Stock (the "Public Preferred Stock"), par value $.01 per share, have
been authorized for issuance. The Company has issued 3,595,586 shares of the
Public Preferred Stock. The Public 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.
The Public Preferred Stock has a 20 year maturity, however, the Company
must redeem, out of funds legally available, 20% of the Public Preferred Stock
on the 16th 17th, 18th and 19th anniversaries of November 12, 1989, leaving 20%
to be redeemed at maturity. On any dividend payment date after November 21,
1991, the Company may exchange the Public Preferred Stock, in whole or in part,
for 12% Junior Subordinated Debentures that are redeemable upon terms
substantially similar to the Public Preferred Stock and subordinated to all
indebtedness for borrowed money and like obligations of the Company.
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 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 1998. Cumulative undeclared dividends as of
September 30, 1998 accrued for financial reporting purposes totaled $16,892,000.
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.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
Revenue for the first nine months of 1998 was $131.0 million, a
decrease of $49.5 million or 27% as compared to the same 1997 period. This
decrease was primarily attributable to a $36.6 million decline in revenue from
the Company's Systems Integration Group, which was impacted by the expiration of
the Immigration and Naturalization Services contract in September 1997. In
addition, Systems and Support Services revenue for the first nine months of 1998
were $14.7 million less than the same 1997 period, principally due to the sale
of TIS in February 1998.
Operating losses through the first nine months of 1998 were $6.1
million as compared to an operating profit of $5.4 million during the same 1997
period. Operating profitability declined as a result of the decreases in revenue
noted in the preceding paragraph, the under absorption of certain infrastructure
costs, and a less profitable product mix for the Systems Integration Group in
1998 as compared to 1997.
As of September 30, 1998, the funded backlog of the Company totaled
$89.6 million, a decrease from $104.0 million as of December 31, 1997. This
decrease is primarily due to the sale of TIS in the first quarter of 1998.
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 allotted to the
contracts. Total backlog from existing contracts was approximately $994 million
and $1.07 billion as of September 30, 1998 and December 31, 1997, respectively.
Of the $994 million in total backlog, $799.6 million is backlog under the
Company's SMC-II contract which expires on January 31, 1999.
Results of Operations
The condensed consolidated statements of operations include the results
of operations of Telos Corporation and its subsidiaries. The major elements of
the Company's operating expenses as a percentage of revenue for the three and
nine month periods ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ----- ----
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 92.4 87.4 89.7 85.7
SG&A expenses 15.9 9.4 14.6 11.0
Goodwill amortization 0.4 0.3 0.4 0.3
--- ---- --- ----
Operating (loss) income (8.7) 2.9 (4.7) 3.0
Other income (expense) -- -- -- --
Gain on sale of assets -- -- 4.3 --
Interest expense (4.1) (2.8) (3.8) (3.1)
Income tax provision (0.3) -- (0.7) --
--- --- --- ---
Net (loss) income (13.1)% 0.1% (4.9)% (0.1)%
==== === === ===
</TABLE>
<PAGE>
Financial Data by Market Segment
Revenue, 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,
------------------ ---------------------
1998 1997 1998 1997
---- ---- ---- ----
(amounts in thousands)
<S> <C> <C> <C> <C>
Revenue:
Systems and Support Services $22,347 $32,380 $ 75,671 $ 90,406
Systems Integration 16,802 34,576 51,148 87,710
Enterworks 1,309 1,045 4,142 2,319
------ ------ ------- -------
Total $40,458 $68,001 $130,961 $180,435
====== ====== ======= =======
Gross Profit:
Systems and Support Services $ 3,119 $ 5,792 $ 11,531 $ 15,837
Systems Integration 808 2,973 2,919 10,595
Enterworks (868) (170) (1,003) (562)
----- ----- ------ ------
Total $ 3,059 $ 8,595 $ 13,447 $ 25,870
====== ====== ======= =======
Gross Margin:
Systems and Support Services 14.0% 17.9% 15.2% 17.5%
Systems Integration 4.8% 8.6% 5.7% 12.1%
Enterworks (66.3)% (16.3)% (24.2)% (24.2)%
Total 7.6% 12.6% 10.3% 14.3%
</TABLE>
Revenue for the quarter ended September 30, 1998 was $40.5 million, a $27.5
million or 40% decrease from the comparable 1997 period. Approximately $17.8
million of this decrease was attributable to the Systems Integration Group,
which experienced lower revenue primarily due to the completion of two separate
projects during the third quarter of 1997: the Immigration and Naturalization
Services Contract ("INS Contract") and the Joint Recruiting Information Support
System Blanket Purchase Agreement ("JRISS BPA"). The INS Contract and JRISS BPA
contributed revenue of $7.2 million and $7.6 million, respectively, in the third
quarter of 1997. In addition, the Systems and Support Services Group experienced
a $10.0 million decrease in revenue from the third quarter of 1998 compared to
the third quarter of 1997. This decrease was primarily due to the sale of TIS in
February 1998 and the expiration of its Immigration and Naturalization Services
Blanket Purchase Agreement for Field Operation Support Contract ("INS BPA") in
the fourth quarter of 1997. TIS and INS BPA contributed revenue of $6.4 million
and $4.5 million, respectively, during the third quarter of 1997 with no
corresponding 1998 revenues. The declines in Systems Integration and Systems and
Support Services revenue were partially offset by an increase of $264,000 in
Enterworks revenue for the third quarter of 1998 compared to the third quarter
of 1997.
For the nine months ended September 30, 1998 as compared to the same
1997 period, revenue decreased $49.5 million or 27.4% to $131.0 million. The
decrease for the nine month period includes a $36.6 million decrease in Systems
Integration revenue and a $14.7 million decrease in Systems and Support Services
revenue, partially offset by an increase of $1.8 million in Enterworks revenue.
The revenue decreases are primarily attributable to the factors noted in the
preceding paragraph, including INS contract, JRISS BPA, INS BPA and TIS revenue
which were $23.9 million, $7.6 million, $8.9 million and $18.0 million higher,
respectively, during the first nine months of 1997 than the first nine months of
1998.
<PAGE>
Cost of revenue was 92.4% of revenue for the quarter and 89.7% of
revenue for the nine months ended September 30, 1998, as compared to 87.4% and
85.7% for the comparable 1997 periods. The increases in cost of revenue as a
percentage of revenue are primarily attributable to unfavorable changes in
product mix and the under absorption of infrastucture costs. On a dollar basis,
the decreases in cost of revenue for the quarter and nine months as compared to
the same 1997 periods are primarily attributable to the decreases in revenue.
Selling, general and administrative expenses ("SG&A") were $6.4 million
in both the third quarter of 1998 and 1997. For the nine month period SG&A
decreased $697,000 to $19.1 million in 1998 from $19.8 million in 1997. During
the first nine months of 1998, the Company increased expenditures for Enterworks
research and development and sales and marketing by $1.0 million and $1.8
million, respectively, as compared to the same 1997 period. However, these
increases were more than offset by reductions in SG&A expenditures, relating
principally to the consolidation of certain administrative support functions.
Goodwill amortization expense decreased $78,000 to $132,000 for the
three months and decreased by $187,000 to $457,000 for the nine months ended
September 30, 1998. These reductions are due to a decrease in the goodwill
balance associated with the sale of TIS, one of Telos' divisions, in early 1998.
Telos sold substantially all of the net assets of TIS in the first
quarter of 1998. The transaction generated $14.7 million in cash proceeds and a
gain of $5.7 million. The Company expects that future quarterly revenues and
operating profits will decrease, when compared to 1997, as a result of the TIS
sale. Although the Company continues to seek to offset effects of the TIS sale
by expanding its business base, there is no assurance that such expansion will
occur.
Interest expense decreased approximately $246,000 to $1.7 million in
the third quarter of 1998 from $1.9 million in the comparable 1997 period, and
decreased approximately $573,000 to $5.0 million for the nine months ended
September 30, 1998 from $5.5 million for the comparable 1997 period. These
decreases are due principally to decreased debt levels in 1998.
The income tax provision was $117,000 for the quarter and $928,000 for
the nine months ended September 30, 1998. These tax provisions were primarily
attributable to state income taxes and increases in allowances relating to the
recoverability of deferred tax assets. An income tax provision was not recorded
for the three or nine month periods ended September 30, 1997, principally
because federal and state net operating loss carryforwards were sufficient to
offset taxes due for those periods.
Liquidity and Capital Resources
For the nine months ended September 30, 1998, the Company generated
$13.1 million of cash from its operating activities. This cash was generated
largely by reductions of accounts receivable of $21.7 million, offset by the net
loss from operations. Cash provided by investing activities for the nine months
was $11.9 million, which was primarily attributable to the proceeds from the
sale of TIS of $14.7 million. Cash used in financing activities during the nine
month period of $25.2 million was principally due to an $18.8 million net
repayment of the senior credit facility and the $6.0 million retirement of
preferred stock.
At September 30, 1998, the Company had outstanding debt and long-term
obligations of $50.0 million, consisting of $21.1 million under the senior
credit facility, $17.1 million in subordinated debt and $11.8 million in capital
lease obligations.
<PAGE>
The Company regularly evaluates its financing requirements to support
its business base. Certain revenues are seasonal and are significantly
influenced by customer order activity near the federal government's fiscal year
end of September 30. The Company anticipates that its projected cash flows from
operations together with amounts available under its senior credit facility will
be adequate to fund operations at least through 1998. For 1999, in addition to
projected cash flows from operations and amounts available under its senior
credit facility, the Company expects to continue to evaluate various financing
options to fund its activities.
In May 1998, the Company retired all of the equity holdings of Union de
Banques Suisses (Luxembourg) S.A. for $6.5 million, of which $5 million was paid
in cash in May 1998, and the remaining $1.5 million was funded by two separate
letters of credit secured by the Company's lender. UBS was paid using the first
letter of credit, in the amount of $1.0 million, in September 1998, and the
second letter of credit of $500,000 matures in November 1998.
At September 30, 1998, the Company was not in compliance with certain
financial covenants contained in its senior credit facility. The Company's bank
has waived this noncompliance.
Year 2000
The Company, like most owners of computer software, will be required to
modify significant portions of its internal use software so that it will
function properly in the year 2000. Systems that do not properly recognize
date-sensitive information could generate erroneous data or cause a system to
fail. The Company expects to continue to incur internal staff costs as well as
consulting and other expenses related to software and infrastructure
enhancements necessary to prepare the systems for the year 2000. However,
management estimates that the total amount of these future costs will not have a
material adverse effect on the Company's business or results of operations.
Maintenance, modification costs and software purchased with the express purpose
of fixing the year 2000 problem will be expensed as incurred.
The Company has been informed by its suppliers that software licensed
to the Company for resale will be compliant by the year 2000. If this
information is not correct, there could be a material adverse effect on the
Company. Agencies of the United States Government are principal customers of the
Company. If such agencies experience significant year 2000 system failures,
under terms of typical government contracts, the Company's performance could be
delayed or contracts could be terminated for convenience, which could have a
material adverse effect on the Company. If similar failures are experienced by
other customers or potential customers of the Company, this would also have an
impact on the Company.
Based on its internal review and the compliance information received
from its suppliers, the Company does not believe that there is a need for a
contingency plan for year 2000 system non-compliance. Such a plan will be
developed if the Company becomes aware of any year 2000 non-compliance that
would impact its critical operations. The cost of developing and implementing
such a plan, if required, may in itself be material.
Management believes that software created and sold by the Company is
compliant or will be compliant by the year 2000. However, because the Company is
in the business of selling computer systems, the Company's risk of being
subjected to lawsuits relating to year 2000 issues is likely to be greater than
that of other industries. Computer systems may involve different hardware and
software components from different manufacturers; therefore, it may be difficult
to determine which component in a computer system may cause a year 2000 issue.
As a result, the Company may be subjected to year 2000 related lawsuits
independent of whether its products and services are year 2000 compliant. The
outcomes of such lawsuits and the impact on the Company cannot be determined at
this time.
<PAGE>
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual
results to differ materially from those indicated by forward-looking statements
made in this Quarterly Report on Form 10-Q and presented elsewhere by management
from time to time.
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, general economic conditions,
the timing and approval of the federal government's fiscal year budget, business
growth through obtaining new business and, once obtained, the Company's ability
to perform successfully at a profit, the Company's ability to convert contract
backlog to revenue, the Company's ability to secure adequate capital and
financing to support continued business growth, and the risk of the federal
government terminating contracts with the Company. While the Company has not
experienced significant contract terminations with the federal government, the
federal government can terminate at its convenience. Should this occur, the
Company's operating results could be materially adversely impacted.
As a high percentage of the Company's revenue is derived from business
with the federal government, the Company's operating results could be adversely
impacted should the federal government not approve and implement its annual
budget in a timely fashion.
While the Company believes it has adequate financing to support its
revenue base anticipated for the remainder of 1998, the Company's growth depends
upon its ability to obtain additional capital and financing sources. The Company
regularly reviews the requirements for additional financing. However, no
assurance can be made on whether such financing, if necessary, can be obtained
on acceptable terms.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various lawsuits arising in the ordinary course
of business. In the opinion of management, while the results of litigation
cannot be predicted with certainty, the final outcome of such matters will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
Item 2. Changes in Securities and Use of Proceeds
On May 8, 1998 the Company entered into an agreement with one of its
shareholders, Union de Banques Suisses (Luxembourg) S.A. ("UBS"), to retire all
of UBS's equity holdings in the Company. These equity holdings included all of
the 7,500 shares of the Company's Class B Preferred Stock with a liquidation
preference of $1,000 per share, and the cumulative unpaid dividends of
approximately $4.8 million, 1,837,773 shares of the Company's Class A Common
Stock, and 1,312,695 of the Company's Class A Common stock warrants. The
purchase price to retire these interests was $6.5 million, of which $5 million
was paid in cash, and the remaining $1.5 million was funded by two separate
letters of credit secured by the Company's lender. The first letter of credit
matured 120 days after the date of the transaction, and the second letter of
credit will mature 180 days from the date of the transaction.
Item 3. Defaults Upon Senior Securities
Senior Redeemable Preferred Stock
The Company has not declared dividends on its Senior Redeemable
Preferred Stock, Series A-1 and A-2, since their issuance. Total undeclared
unpaid dividends accrued for financial reporting purposes are $2,524,000 for the
Series A-1 and A-2 Preferred Stock at September 30, 1998.
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 1998. Cumulative undeclared dividends as of September 30, 1998
accrued for financial reporting purposes totaled $16,892,000. 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.
For the cash dividends payable since December 1, 1995 the Company has accrued
$12,942,000.
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders
On July 31, 1998, at a special meeting of the holders of the 12% Cumulative
Exchangeable Redeemable Preferred Stock ("12% Preferred Stock"), a vote was
taken to elect two new Class D directors. Mr. Julio E. Heurtematte, Jr. and Mr.
Malcolm M.B. Sterrett were elected by plurality vote of all shareholders present
at the meeting, in person or by proxy, which represented a majority of the
Company's 12% Preferred Stock outstanding. Specifically, Mr. Heurtematte
received 2,617,736 votes, and Mr. Sterrett also received 2,617,736 votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
Item 5 and Item 7 are not applicable and have been omitted.
<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 16, 1998 /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> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 471,000
<SECURITIES> 0
<RECEIVABLES> 36,268,000
<ALLOWANCES> 785,000
<INVENTORY> 12,581,000
<CURRENT-ASSETS> 477,000
<PP&E> 38,877,000
<DEPRECIATION> 24,270,000
<TOTAL-ASSETS> 81,469,000
<CURRENT-LIABILITIES> 36,035,000
<BONDS> 49,933,000
38,789,000
0
<COMMON> 78,000
<OTHER-SE> (43,288,000)
<TOTAL-LIABILITY-AND-EQUITY> 81,469,000
<SALES> 16,802,000
<TOTAL-REVENUES> 40,458,000
<CGS> 15,640
<TOTAL-COSTS> 37,399,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,662,000
<INCOME-PRETAX> 0
<INCOME-TAX> 117,000
<INCOME-CONTINUING> (5,284,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,284,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
