SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d)
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
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number,
including area code: (703) 724-3800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
No public market exists for the registrant's Common Stock.
As of March 27, 1998, the registrant had 23,076,753 shares of Class A
Common Stock, no par value; 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.
Incorporation by Reference: None
Number of pages in this report (excluding exhibits): 55
<PAGE>
PART 1
Item 1. Business
History and Introduction
Founded in 1968, Telos Corporation ("Telos" or "the Company") provides
enterprise integration services and solutions primarily to the U.S. Federal
Government and industry. In addition to its core competency of software
development and systems support services, Telos delivers information security,
enterprise integration and networking infrastructure solutions to its customers.
The Company is headquartered in Ashburn, VA, part of Northern Virginia's growing
netplex region of high technology companies. There are approximately 70 other
offices throughout the United States and around the world.
In today's dynamic business environment, timely and accurate information
flow is critical for business's success. Telos' unique approach to this
information challenge is based on leveraging customers' IT infrastructure,
delivering user centric information, and achieving a fast return on investment.
Many customers are turning to the virtual enterprise as a model for doing
business. The virtual enterprise is a demand driven partnership of customers,
employees, partners and suppliers to deliver solutions. Telos' solutions
overcome the critical barriers that face the virtual enterprise: (1) the
difficulty in accessing disparate data without extensive programming, (2) the
inability to quickly integrate data to ensure customer responsiveness,
manufacturing and distribution efficiency and overall competitive strength, (3)
the problem of effectively distributing information quickly and securely and (4)
the challenge of making the organizational and technological complexity
invisible to end users.
In February 1998, Telos sold its contract labor division, Telos Information
Systems ("TIS") for approximately $15 million to NYMA, a subsidiary of Federal
Data Corporation of Bethesda, Maryland. In December 1996, Telos sold its other
contract labor division, Telos Consulting Services ("TCS"), for approximately
$32 million to COMSYS Technical Services, Inc., a subsidiary of COREStaff, Inc.
Telos determined that these businesses were not a core part of its long term
strategy described above.
Operating Groups
During 1997, the Company provided its services through two operating
groups: Telos Systems Integration Group and Systems and Support Services Group.
In addition, there are two Telos substantially wholly-owned or wholly-owned
subsidiaries: Enterworks, Inc., formerly enterWorks.com ("Enterworks") and Telos
International Corporation.
Systems and Support Services
The Company's Systems and Support Services Group provides software
development and support services for software and hardware including technology
insertion, system redesign, software re-engineering, Help Desk, and third party
maintenance.
Until the time of its sale in February 1998, the TIS division was part of
the Systems and Support Services Group. During 1997, the TIS division provided
engineering services for the California Institute of Technology's Jet Propulsion
Laboratory. The estimated gain resulting from this sale is disclosed as a
subsequent event in the Company's consolidated financial statements. For 1997,
the Systems and Support Services Group had revenues of $124.5 million or
approximately 49% of the Company's consolidated revenues.
<PAGE>
Systems Integration
The Systems Integration Group delivers information security, enterprise
integration and networking infrastructure solutions to its customers. These
solutions include providing commercial hardware, software and services to its
customers. The Systems Integration Group is capable of staging, installing and
deploying large network infrastructures with virtually no disruption to
customers' ongoing operations.
For 1997, the Systems Integration Group had revenues of $129.3 million or
approximately 51.0% of the Company's consolidated revenues.
Enterworks
Enterworks, Telos' substantially wholly-owned subsidiary, was formed to
help companies build the fast and flexible information infrastructure they need
to compete in a global economy. Through Web-enabled integration of disparate
data and intelligent business process flows, their software links employees,
customers, and partners in ways that make the virtual enterprise a reality.
Their products include Virtual DB and soon to be released process automation
software. Enterworks' advanced solutions serve telecommunications, healthcare,
financial services, manufacturing, and government customers worldwide.
For 1997, Enterworks had revenues of $3.4 million or approximately 1.3% of
the Company's consolidated revenues. Enterworks' financial information is
included in the Systems and Support Services Group.
Telos International Corporation
Telos International Corporation ("TIC") was formed in 1996 to identify and
pursue opportunities for Telos products and services in overseas markets. TIC's
approach to new business development is to concentrate on establishing local
partnerships in regions with healthy economies and a strong market for
information technology goods and services. International revenues are reported
as part of each operating group's financial results and were less than 1% of the
Company's consolidated revenues for 1997.
Revenues by Major Market and Significant Customers
Revenues by major market for the Company are as follows:
<TABLE>
<CAPTION>
Percentage of Total Consolidated Revenues For
---------------------------------------------
1997 1996(1) 1995
---- ---- ----
<S> <C> <C> <C>
Federal government 94.6% 84.8% 80.6%
Commercial 3.9 13.6 15.2
State and local governments 1.5 1.6 4.2
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
(1) 1996 major market revenue percentages exclude TCS revenues. TCS was sold in 1996.
</TABLE>
<PAGE>
Total consolidated revenue derived from the federal government for 1997
includes 58.1% of revenue from contracts with the Department of Defense, 25.1%
of revenue from contracts with Department of Justice, 7.3% of revenue from the
National Aeronautics and Space Administration ("NASA"), and 9.5% of revenue from
subcontracts with U.S. government prime contractors.
Competition
The segments of the information services industry in which the Company
operates are highly fragmented with no single company or small group of
companies in a dominant position. Some of the Company's competitors also operate
in international markets, along with other entities, which operate exclusively
or primarily outside the United States. Some of the large competitors offer
services in a number of markets which overlap many of the same areas in which
the Company offers services, while certain companies are focused on only one or
a few of these markets. The firms which compete with the Company are computer
services firms, applications software companies and accounting firms, as well as
the computer service arms of computer manufacturing companies and defense and
aerospace firms. Thousands of firms fall into these categories. As the Company
becomes more focused on network-enabled enterprise computing, the competition
shifts to include companies that perform enterprise integration for large and
complex information technology environments. Among the major competitors are
Lockheed Martin, AT&T, Boeing Computer Services Corp., Computer Data Systems,
Computer Sciences Corp., Electronic Data Systems Corporation, Scientific
Applications International Corporation, GTE Corp. and General Electric
Corporation. In addition, the internal staffs of client organizations,
non-profit federal contract research centers and universities are competitors of
the Company.
The Company believes that the principal competitive factors in the segments
of the information and network technology market in which it competes include
project management capability, technical expertise, reputation for providing
quality service, and price. The Company believes its technical competence in
computer engineering, systems software, engineering, system and network
integration, and hardware maintenance will enable it to compete favorably in the
information and network technology market.
Employees
The Company employed 1,454 persons as of December 31, 1997. The services
the Company provides require proficiency in many fields, such as computer
science, mathematics, physics, engineering, operations research, economics, and
business administration.
Of the total Company personnel, 1,069 provide Systems and Support Services,
73 are employed by Enterworks and 168 provide System Integration Services. An
additional 144 employees provide corporate and business services functions.
Backlog
Many of the Company's contracts with the U.S. Government are funded by the
procuring government agency from year to year, primarily based upon the
government's fiscal requirements. This results in two different categories of
backlog: funded and unfunded. Total backlog consists of the aggregate contract
revenues remaining to be earned by the Company at a given time over the life of
its contracts, whether or not funded. Funded backlog consists of the 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. Unfunded backlog is the
difference between total backlog and funded backlog. Included in unfunded
backlog are revenues which may be earned only if customers exercise delivery
orders and/or renewal options to continue existing contracts.
A number of contracts undertaken by the Company extend beyond one year, and
accordingly, portions of contracts are carried forward from one year to the next
as part of the backlog. Because many factors affect the scheduling and
continuation of projects, no assurance can be given as to when or if revenue
will be realized on projects included in the Company's backlog.
<PAGE>
At December 31, 1997 and 1996, the Company had total backlog from existing
contracts of approximately $1.0 billion and $1.2 billion, respectively. This is
the maximum value of additional future orders for systems, products, maintenance
and other support services presently allowable under those contracts, including
renewal options available on the contracts if exercised by the client, over
periods extending up to seven years. Included in the backlog at December 31,
1997 is $844 million from indefinite delivery, indefinite quantity contracts of
which the SMC-II contract comprises $838 million. This SMC-II contract is due to
expire September 30, 1998. Approximately $104 million and $115 million of the
total was funded backlog at December 31, 1997 and 1996, respectively.
While backlog remains an important measurement criteria, during 1996 and
1997 the Company, as well as other federal contractors, experienced a change in
the manner in which the federal government procures equipment and services.
These procurement changes include the growth in the use of General Services
Administration ("GSA") schedules which allow agencies of the federal government
to purchase significant amounts of equipment and services. The use of the GSA
schedules results in a significantly shorter and much more flexible procurement
cycle as well as increased competition as many companies hold such schedules.
Along with the GSA schedules, the federal government is awarding a large number
of omnibus contracts with multiple awardees. These contracts generally require
extensive marketing efforts by the awardees to procure business. The use of GSA
schedules and omnibus contracts, while generally not providing immediate
backlog, provide areas of potential growth that the Company is aggressively
pursuing.
Overview of 1997
The Company was well positioned at the start of 1997 to leverage its assets
in pursuit of new business. The Company has significantly restructured its
operations to contain costs, reduce discretionary spending, and identify new
business more selectively with the objective of increasing its margins. The
Company had organized its selling and new business development to profit from
changes in the federal government's procurement methods especially in its use of
the GSA schedule. The Company had revenue growth of approximately 34% to $253.8
million in 1997 from $188.9 million in 1996. The revenue improvement is
primarily a result of increased order volume in several of the Company's large
contracts for equipment and services. These contracts included the Army's SMC-II
network integration contract, the Joint Recruiting Information Support System
blanket purchase agreement, and the Immigration and Naturalization Service
blanket purchase agreement. Operating income grew to $7.4 million in 1997 from a
loss of $9.4 million in 1996, an increase of $16.8 million. The operating income
improvement is primarily attributable to the increased order volume as well as
improved gross margins associated with the product mix in 1997 compared to 1996.
Cost reduction measures implemented in late 1996 also had a significant impact
on operating income in 1997.
From an international perspective, the Company continues to broaden its
business base through contracts in the Philippines and Kuwait. Through its joint
ventures the Company is actively pursuing other opportunities in the Pacific Rim
and Middle East.
The Company has continued to invest in Enterworks, primarily in product
development and in the sales and marketing areas. In 1997, Enterworks' revenue
was approximately $3.4 million and it is expected to continue to expand in both
the federal government and the commercial marketplace.
The Company, along with other companies that contract with the federal
government, experienced a shift in the manner in which the government procures
equipment and services. This shift from long lead time multi-year sole source
contracts to multiple awardee contracts and GSA schedules has resulted in the
Company modifying its new business development efforts. The Company has been
successful in this area with a number of contract wins in 1997 and the
establishment of a comprehensive GSA schedule. However, while the Company has
been successful in obtaining new contract vehicles, there can be no assurance
that orders and revenue will result.
<PAGE>
In February 1998, the Company sold its TIS group for approximately $15
million. In late 1996, the Company sold its TCS division for $31.6 million. The
Company has determined that these operations were not a core part of its
long-term business strategy and that the sales would provide the Company with
additional liquidity to fund operations and to invest in strategic business
areas.
During 1997, the Company continued the streamlining and consolidation of
its infrastructure and general and administrative functions. The Company
continuously evaluates its organizational structure in response to customer and
market demands as well as to ensure it is providing cost effective solutions. In
order to gain further operational efficiencies in 1998, the Company expects to
continue to further consolidate and streamline certain reporting units or
business functions.
Item 2. Properties
The Company leases 191,700 square feet of space in Ashburn, Virginia for
its corporate headquarters, integration facility, and primary service depot.
This lease expires in March 2016, with a ten year extension available at the
Company's option.
The Company leases additional space for regional field engineering,
contract work sites, training, and sales offices in 51 separate facilities
located in 19 states, the District of Columbia, and Europe under various leases,
each of which expires on different dates through February 2007. The Company also
owns two buildings and a warehouse in Amery, Wisconsin.
Item 3. Legal Proceedings
The Company is a 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 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1997, no matters were submitted to a vote of
security holders.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
No public market exists for the Company's Class A or B Common Stock. As of
March 1, 1998, there were 83 holders of the Company's Class A Common Stock and 3
holders of the Company's Class B Common Stock.
Item 6. Selected Financial Data
The following should be read in connection with the accompanying
information presented in Item 7 and Item 8 of this document.
<TABLE>
<CAPTION>
OPERATING RESULTS
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Sales $253,787 $188,895 $175,759 $150,676 $187,285
Income (loss) from
continuing operations 1,412 (9,816) 592 (11,838) 1,250
Discontinued Operations: (1)
Income (loss) from
discontinued operations -- 500 423 (583) (702)
Gain on sale of
Consulting Services -- 11,524 -- -- --
Income (loss) before
extraordinary items 1,412 2,208 1,015 (12,421) 548
Extraordinary items -- -- -- (196) --
Net income (loss) 1,412 2,208 1,015 (12,617) 548
FINANCIAL CONDITION
As of December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(amounts in thousands)
Total assets $109,718 $110,064 $94,492 $86,872 $84,796
Long-term debt (2) 56,875 32,857 47,316 40,414 30,790
Capital lease obligations,
long-term (3) 12,085 12,537 -- -- --
Senior redeemable
preferred stock (4) 5,207 4,828 4,494 4,192 3,922
Class B redeemable
preferred stock (4) 12,035 11,087 10,252 9,497 8,822
Redeemable preferred
Stock (4) 29,951 24,230 18,647 14,263 11,417
(1) See Note 2 to the Consolidated Financial Statements in Item 8 regarding the sale of TCS.
(2) See Note 4 to the Consolidated Financial Statements in Item 8 regarding long-term debt obligations of the Company.
Total long-term debt obligations include amounts due under the Senior Credit Facility and subordinated notes.
(3) See Note 8 to the Consolidated Financial Statements in Item 8 regarding the capital lease obligations of the Company.
(4) See Note 5 to the Consolidated Financial Statements in Item 8 regarding redeemable preferred stock of the Company.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Over the last three years, the Company has invested significant resources
into sales and marketing, development of certain software and hardware products,
and into contract and Company infrastructure to support the contracts awarded to
the Company. Company backlog decreased from $1.2 billion at December 31, 1996 to
$1.0 billion at December 31, 1997. Backlog grew from $328 million at December
31, 1994 to $1.3 billion at December 31, 1995. Additionally, the Company has
established a comprehensive offering of products and services on its GSA
schedule. These investments and efforts have allowed the Company to win all of
its significant contract rebids, as well as providing significant new business
opportunities.
During 1997, the Company experienced a turnaround year from an operations
perspective. The Company generated net income in 1997, despite incurrence of
operating losses at Enterworks of approximately $5.8 million (prior to certain
separate company adjustments) primarily due to the start-up nature of its
operations and the continued development of its software products. The Company's
investment in new software and hardware products provides the Company with an
expanded product line that, the Company believes, offers its customers unique
value added solutions for their computing and information gathering and analysis
problems. The investment in software products is primarily through Enterworks
and is focused on data integration and information processing (workflow). This
investment in hardware products has historically been through Telos' Systems
Integration Group, however, based on market conditions no significant investment
in hardware product development is expected in the near term.
While 1996 was a difficult year from an operational perspective due to the
federal government budget impasse in early 1996, the Company continued to invest
in contract and Company infrastructure to support a number of contracts awarded
in late 1995. This investment included additional personnel in program and
contract management and in sales and marketing. The Company also moved to a
larger headquarters and systems integration facility in 1996 which resulted in
increased rent expense and other costs associated with the move in 1996. The
Company continually evaluates its cost structure and in the fourth quarter of
1996 implemented a cost reduction plan focused on indirect costs and personnel.
In February 1998 the Company sold substantially all of the net assets of
one of its groups, Telos Information Systems (TIS) for approximately $15
million. Late in 1996 the Company sold the net assets of its Telos Consulting
Services (TCS) division for $31.6 million. These transactions allow the Company
to further focus its efforts on strategic business opportunities. See the
discussions included in the "Results of Operations" and "Liquidity and Capital
Resources" sections below.
Revenue by Contract Type
Approximately 96.1% of the Company's total revenues in 1997 were
attributable to contracts with federal, state, and local governments, including
94.6% attributable to the federal government. This represents an increase of
11.2% from 1996 and relates primarily to several significant contracts awarded
during 1997. The Company's revenues are generated from various contract
vehicles. In general, the Company believes its contract portfolio is
characterized as having low to moderate financial risk as the Company has
minimal long-term fixed price development contracts. The Company's firm fixed
price contracts, for the most part, represent either contracts for the purchase
of computer equipment at established contract prices or contracts for
maintenance of computer hardware. A significant portion of the Company's revenue
is from time and material and cost reimbursable contracts, which generally allow
the pass-through of allowable costs plus a profit margin. For 1997, revenue by
contract type was as follows: time and materials, 28.7%; firm fixed price,
49.4%; cost reimbursable, 15.9%; fixed monthly rate, 5.5%; and other, 0.5%.
While the Company has not experienced any significant recent terminations or
renegotiations, government contracts may be terminated or renegotiated at any
time at the convenience of the government.
<PAGE>
Statement of Income Data
The following table sets forth certain consolidated financial data and
related percentages for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Sales $253,787 100.0% $188,895 100.0% $175,759 100.0%
Cost of sales 218,430 86.1 168,281 89.1 145,522 82.8
Selling, general and
administrative expenses 27,054 10.7 29,055 15.4 23,262 13.2
Goodwill amortization 892 0.3 1,001 0.5 1,950 1.1
------- ----- ------- ----- ------- -----
Operating income (loss) 7,411 2.9 (9,442) (5.0) 5,025 2.9
Interest expense (7,455) (2.9) (5,668) (3.0) (4,385) (2.5)
Other income (expense) 124 -- (445) (0.2) 27 --
------- ----- ------- ----- ------- -----
Income (loss) before taxes
and minority interest 80 -- (15,555) (8.2) 667 0.4
Income tax (benefit) provision (1,332) (0.6) (5,739) (3.0) 75 --
------- ----- ------- ----- ------- -----
Income (loss) from
continuing operations 1,412 0.6 (9,816) (5.2) 592 0.4
Discontinued Operations:
Income from discontinued
operations -- -- 500 0.2 423 0.2
Gain on sale of TCS -- -- 11,524 6.1 -- --
------- ----- ------- ----- ------- -----
Net income $ 1,412 0.6% $ 2,208 1.1% $ 1,015 0.6%
======= ===== ======= ===== ======= =====
</TABLE>
Financial Data by Market Segment
The Company operates in two principal market segments: Systems and Support
Services, which consists of Enterworks and software and hardware services, and
Systems Integration. In 1998, the Company expects to further consolidate and
reorganize certain reporting units or business functions.
Sales, gross profit and gross margin by market segment for the periods
designated below are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
------ ------ ------
(dollar amounts in thousands)
<S> <C> <C> <C>
Sales:
Systems and Support Services $124,450 $103,675 $105,801
Systems Integration 129,337 85,220 69,958
------- ------- -------
Total $253,787 $188,895 $175,759
======= ======= =======
Gross Profit:
Systems and Support Services 20,482 12,192 15,122
Systems Integration 14,875 8,422 15,115
------- ------- -------
Total $ 35,357 $ 20,614 $ 30,237
======= ======= =======
Gross Margin:
Systems and Support Services 16.5% 11.8% 14.3%
Systems Integration 11.5% 9.9% 21.6%
Total 13.9% 10.9% 17.2%
</TABLE>
<PAGE>
Results of Operations
Years ended December 31, 1997 and 1996
Sales increased $64.9 million, or 34.4%, from $188.9 million in 1996 to
$253.8 million in 1997. This increase was attributable both to the Systems
Integration Group which reported an increase in sales of $44.1 million and the
Systems and Support Services Group with an increase in sales of $20.8 million.
The increase in Systems Integration Group's revenue was primarily due to
orders under its Joint Recruiting Information Support System Blanket Purchase
Agreement ($15.1 million) as well as its U.S. Courts Systems Data Communication
Network contract ($10.6 million) which were both awarded in 1997. In general,
those 1996 contracts that continued into 1997 experienced reduced order volume,
except for the Small Multi-User Computer II ("SMC-II") contract which had an
increase in order volume of $25.7 million from 1996 to 1997.
The increase in the Systems and Support Services Group's revenue is
primarily attributable to the effect of a Blanket Purchase Agreement won and
completed in 1997 for the Immigration and Naturalization Service ($12.8
million). The TIS division, which held Jet Propulsion Laboratory contracts,
experienced an increase in revenue of $6.1 million in 1997, compared to 1996.
Hardware support revenues remained fairly consistent between 1997 and 1996.
Based on the Company's backlog position, 1998 should continue to present
significant opportunities for revenue generation. Part of the Company's
strategic direction is to market business opportunities with more profitable
product margins. These markets are highly competitive and revenue projections
remain uncertain. The Company expects reduced revenue volume in 1998, due to the
sale of the TIS group which had total revenue of approximately $24 million in
1997.
Cost of sales increased by $50.1 million, or 29.8%, to $218.4 million in
1997 from $168.3 million in 1996. This increase is the result of increased sales
during the year and changes in the revenue product mix. The Systems and Support
Services Group benefited significantly as a result of new contract revenues
described above. The cost of labor required to support these new contracts, as a
percentage of revenue, was much less than to support traditional services
contracts, on a per hour basis. Additionally, the Systems and Support Services
Group implemented a cost reduction program to reduce labor and material costs in
the hardware support area. The Systems Integration Group benefited from the
insertion of new technology with lower cost components as part of the solutions
provided in its larger contracts. However, in the second half of 1997, certain
additional reserves for the write-off of inventory and software and product
development costs of approximately $3 million were recorded. Such write-offs
included approximately $900,000 for a net realizable value adjustment to
deferred software costs which resulted from changes in the marketplace and
future cash flow projections.
Gross profit increased by $14.8 million for the year to $35.4 million in
1997, from $20.6 million in 1996. The increase is primarily attributable to the
increased order flow and the increases in revenue and changes in cost of sales
discussed above. Gross profit also reflects the result of cost cutting measures
initiated in 1996 and continued in 1997, including staff reductions and branch
consolidation. The Company believes that its gross profit will continue to
improve by the end of 1998, though there is no assurance that such improvement
will occur.
Selling, general and administrative (SG&A) expenses decreased for the year
by approximately $2.0 million, from $29.1 million in 1996 to $27.1 million in
1997. A reduction in SG&A costs in 1997 resulted from the Company's relocation
to a new headquarters facility in May 1996. The lease for the new facility is
considered a capital lease rather than the previous operating lease. The Company
also realized a reduction in facility and operating costs as a result of the
sale of TCS in late 1996. Additionally, aggressive cost reduction programs
implemented in late 1996, reduced bid and proposal and sales and marketing
expenses as well as other discretionary expenses contributed to the decrease in
SG&A expenses. SG&A as a percentage of sales decreased to 10.7% for 1997 from
15.4% in 1996.
<PAGE>
Goodwill amortization expense was $892,000 for 1997 compared to $1.0
million for 1996. The reduction in goodwill amortization is attributable to
adjustments in the goodwill balance as a result of realization of acquired tax
benefits resulting from the 1992 acquisition of Telos Corporation (California).
The change from an operating loss of $9.4 million in 1996 to operating
income of $7.4 million in 1997 is a result of the increases in gross profit and
the decreases in SG&A discussed above.
Other non-operating income of $124,000 for 1997 is compared to an expense
of $445,000 in 1996. The expense in 1996 was primarily attributable to costs
required to settle a previous non-operating related lawsuit.
Interest expense increased approximately $1.8 million to $7.5 million for
1997, as compared to $5.7 million in 1996. The increase is a result of the
significant increase in the average outstanding balance of the Senior Credit
Facility for most of 1997, as well as an increase in interest recorded for
capital lease obligations associated with the mid-1996 move by the Company to
its new manufacturing and support facility in Ashburn, Virginia. The Company
believes its interest expense in 1998 will be less than the 1997 levels with a
reduced Senior Credit Facility balance and anticipated 1998 operating
performance. However, there can be no assurance that the reduction in interest
expense will occur.
The income tax benefit recognized for 1997 of $1.3 million represents the
reduction of the valuation allowance related principally to net operating loss
carryforwards which are expected to be utilized to offset the taxable gain to be
recognized related to the sale of TIS in February 1998.
Years ended December 31, 1996 and 1995
Sales increased $13.1 million, or 7.5%, from $175.8 million to $188.9
million for 1996 as compared to 1995. This increase was primarily attributable
to the Systems Integration Group, which reported an increase in sales of $15.3
million for the year. This increase was offset by a decline in sales in the
Systems and Support Services Group of $2.1 million for the year.
The increase in the Systems Integration Group's revenue was due to
increased order volume during the second half of 1996. Increased orders in the
Systems Integration Group were due to the SMC-II contract, as well as increased
sales under the GSA schedule and other contract vehicles.
The revenue decline in the Systems and Support Services Group is primarily
due to a decrease in hardware support revenue of $5.2 million from 1995 to 1996.
This decline is a result of the continued migration from mainframe to network
based computing as the servers and desktop computers generally provide lower
maintenance revenue. Additionally, the hardware support area continues to
experience a shift from fixed price contracts to time and materials contracts
which produce less predictable revenue streams. This decrease was offset by
increases in Enterworks revenue of $800,000 and software support revenue of $2.3
million from 1995 to 1996. The Enterworks increase was attributable to expanded
sales and marketing efforts of the subsidiary's products and related consulting.
The software support revenue increase is due to increased services under certain
of the Company's large labor contracts.
Cost of sales increased by $22.8 million, or 15.6%, to $168.3 million in
1996, from $145.5 million in 1995. This increase is the result of the increase
in sales for the period, changes in the revenue product mix and increases in
contract infrastructure costs. Revenue, particularly within the Systems
Integration Group, for 1996 included certain higher cost equipment and software
as compared to 1995. This mix change was a result of new contracts, such as
SMC-II, having increased sales of older technology equipment where the Company
has higher costs as well as increased sales of new products developed by the
Company that had higher manufacturing costs than anticipated. Additionally,
within the Systems and Support Services Group, the Company experienced increased
labor and material costs in the hardware support area. Cost of sales also
increased due to higher rent expense in 1996 as a result of the move to a new
facility.
<PAGE>
Gross profit decreased by $9.6 million for 1996 to $20.6 million from $30.2
million in 1995. The decrease is primarily attributable to the cost of sales
increases discussed above. The Company undertook a number of cost-cutting
measures such as staff reduction and branch consolidation to increase its
profitability. The Company's gross margin was 10.9% for 1996 as compared to
17.2% for 1995.
SG&A expenses increased for 1996 by approximately $5.8 million, to $29.1
million in 1996 from $23.3 million in 1995. These increases were primarily due
to an increase in sales and marketing in 1996 as compared to 1995, as well as an
increased investment in infrastructure for contracts won in late 1995. Also, in
1996, based on a review of its operations and requirements, the Company had
certain adjustments which increased SG&A by $1.6 million in the area of accounts
receivable, loss contracts and other reserves. This coupled with certain 1995
adjustments, which reduced SG&A by $1.7 million in such areas as employee
benefits and certain closure reserves, led to the increase in SG&A. SG&A as a
percentage of sales increased to 15.4% for 1996 from 13.2% in 1995.
Goodwill amortization expense was $1.0 million for 1996 compared to $2.0
million for 1995. The reduction in goodwill amortization is attributable to
adjustments in the goodwill balance as a result of realization of acquired tax
benefits resulting from the 1992 acquisition of Telos Corporation (California).
Also, goodwill amortization declined due to the completion of the goodwill
amortization associated with the 1989 leveraged buy out of the Company.
Operating income decreased by $14.4 million to a loss of $9.4 million in
1996 from income of $5.0 million in 1995 as a result of the aforementioned
decreases in gross profit and the increase in SG&A in 1996.
Other non-operating expense was approximately $445,000 for 1996 compared
with $27,000 of other non-operating income in 1995. The expense in 1996 was
primarily attributable to an additional reserve to fully record the provision
for the settlement of litigation.
Interest expense increased approximately $1.3 million to $5.7 million for
1996 from $4.4 million in 1995. The increase is a result of the increase in the
average outstanding balance of the Senior Credit Facility for most of 1996, as
well as the effect of the subordinated debt issued in 1995 being outstanding for
the entire year in 1996. Also, as the Company is accounting for its new building
lease as a capital lease, $600,000 of the increased interest expense relates to
the building.
For 1996, the Company had a combined federal and state income tax provision
of $1.2 million including both continuing operations and discontinued
operations. The Company, using SFAS 109 allocation methodology, recorded a
benefit in continuing operations of $5.7 million. For the comparable period, the
Company had a tax provision of $75,000.
On December 27, 1996, the Company sold substantially all of the assets of
its consulting division, TCS, to COMSYS Technical Services, Inc., a subsidiary
of COREStaff, Inc. for approximately $31.6 million. The resulting gain from the
sale of TCS of $11.5 million included a write-off of $6.9 million of goodwill
allocated to the TCS operations and is net of $6.3 million of related income tax
expense. The sale of TCS has been treated as a discontinued operation in
accordance with APB Opinion Number 30 ("APB 30"). Pursuant to APB 30, the
revenue, costs and expenses of TCS have been excluded from their respective
captions in the Company's consolidated statements of income and the net results
of these operations have been reported separately as "Income from discontinued
operations." Included in the results of the discontinued operations is allocated
interest expense of $1.5 million and $1.1 million for 1996 and 1995,
respectively. Interest has been allocated based on the net assets of the
discontinued operation in relation to the Company's consolidated net assets plus
non-specific debt. Additionally, goodwill amortization of $418,000 and $420,000
for 1996 and 1995, respectively, has been included in the results of the
discontinued operations.
<PAGE>
Liquidity and Capital Resources
The Company's capital structure consists of a revolving credit facility,
subordinated notes, redeemable preferred stock and common stock.
At December 31, 1997, the Company had an outstanding balance of $39.9
million on its $45 million Senior Credit Facility ("Facility"). The Facility is
collateralized by certain assets of the Company (primarily inventory and
accounts receivable) and the amount of borrowings fluctuate based on the
underlying asset borrowing base as well as the Company's working capital
requirements. At December 31, 1997, the Company, under its borrowing base
formula, had $5.1 million of unused availability.
The Facility has various covenants, which may, among other things, restrict
the ability of the Company to merge with another entity, sell or transfer
certain assets, pay dividends and make other distributions beyond certain
limitations. The Facility also requires the Company to meet certain leverage,
net worth and tangible capital goals, a fixed charge coverage ratio as well as
certain financial results related to Enterworks. At December 31, 1997, the
Company was not compliant with certain covenants contained in the Facility and
the bank has waived such non-compliance.
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 1998. However, should faster than anticipated
growth occur, the Company believes that an expanded Facility would be required.
The Company's subordinated notes are held principally by shareholders
and/or management and approximate $16.9 million at December 31, 1997. These
notes bear interest at various rates between 8% and 17% and become payable in
2000 through 2001. During 1997, the Company repaid one of its notes with the
Company's principal common shareholder resulting in a decrease in subordinated
notes of approximately $651,000. This decrease was offset by $143,000 of
accretion of the subordinated notes required as a result of the issuance of
certain notes with warrants in 1996.
The Company has several classes of redeemable preferred stock. The
redeemable preferred stock currently carries cumulative dividend rates of 12%
and 14.125%. At December 31, 1997 the total amount of redeemable preferred stock
including accumulated and unpaid dividends is $47.2 million. The Company accrues
dividends and provides for accretion related to the redeemable preferred stock.
Mandatory redemption for both the senior redeemable preferred stock and the
Class B redeemable preferred stock, including all dividends payable, is required
on December 31, 2001. Mandatory redemption for the Company's 12% public
preferred stock is required between 2005 and 2009.
The Company is actively reviewing its financing requirements for
Enterworks. While Enterworks issued $3.2 million of subordinated debt with
warrants in 1996, the Company is continuing to fund the on-going product
development, sales and marketing, and business activities of its subsidiary. The
Company will continue to evaluate the necessity of bringing external capital to
fully exploit this emerging market and to build the Enterworks business.
Cash used by operating activities was $15.3 million in 1997 due in large
part to prior year purchase accruals, the timing of the accounts payable
processing and an increase in accounts receivable as a result of sales growth.
Cash used by investing activities was $5.7 million in 1997, reflecting capital
expenditures of $2.6 million and $3.1 million in continued investments in
software and product development costs related to Enterworks products.
Management continues to develop and enhance their products in anticipating
market demands. To provide cash for operating and investing activities as noted
above, the Company had cash flows from financing activities of approximately
$18.8 million in 1997, reflecting principally net proceeds from draws under the
Facility.
Effective February 28, 1998, the Company sold the TIS group for
approximately $15 million. The Company used, as required, the proceeds from the
sale to pay down amounts outstanding under the Facility.
The Company has a net deferred tax asset of $5.0 million at December 31,
1997. Management believes that the asset is fully realizable given the Company's
existing backlog, projected taxable gains primarily as a result of the sale of
TIS in 1998, and potential tax planning strategies existing at December 31,
1997.
<PAGE>
Capital Expenditures
The Company believes that its business is generally not capital intensive.
Capital expenditures for property and equipment were $2.6 million in each of
1997 and 1996 and $1.0 million in 1995. The Company incurred capital
expenditures in 1996 as a result of moving to a new headquarters and integration
facility. In 1996, the Company entered into a twenty year lease for a building
that provides significantly more integration and warehouse space. The Company
expects capital expenditures to increase during 1998, however, there can be no
assurances that the additional capital expenditures will occur.
Inflation
The rate of inflation has been moderate over the past five years and,
accordingly, has not had a significant impact on the Company. The Company has
generally been able to pass through increased costs to customers through higher
prices to the extent permitted by competitive pressures. The Company's cost
reduction efforts have offset the effects of inflation, if any, on the Company's
performance.
Year 2000
The Company, like most owners of computer software, will be required to
modify significant portions of its 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
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. Maintenance or modification costs will be expensed as incurred,
while the costs of new software will be capitalized and amortized over the
software's useful life. Management believes that the year 2000 compliance
expense will not have a material effect on the Company.
The Company expects its year 2000 date conversion project to be completed
on a timely basis. However, there can be no assurance that the systems of other
companies on which the Company's systems rely also will be timely converted or
that any such failure to convert by another company would not have an adverse
effect on the Company's systems.
Newly Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income." SFAS
No. 130 becomes effective for the Company in 1998 and requires disclosure of
"comprehensive income" as defined, and its components. The Company believes the
adoption of SFAS No. 130 will not have a material effect on its consolidated
financial statements.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement changes the
way segment information is required to be reported. It also requires entity-wide
disclosure about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Statement is effective for the Company in 1998. The Company
believes the adoption of SFAS No. 131 will not have a material effect on the
disclosures in its consolidated financial statements.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and supersedes SOP 91-1. Among
other matters, the provisions of SOP 97-2 establish the requirement that the
allocation of revenue to the various individual elements of those arrangements
that provide for the sale of several products and/or services are to be based on
the fair value of each element. The provisions of SOP 97-2 are effective for the
Company for transactions entered into after December 31, 1997. On March 18,
1998, the Financial Accounting Standards Board cleared a Statement of Position
that provides for a one year deferral of certain provisions of the SOP
pertaining to its requirements for what constitutes vendor specific evidence of
the fair value of multiple elements included in an arrangement. It is AcSEC's
intention to immediately begin a project to consider whether guidance is needed
on any restrictions that should be placed on what constitutes evidence of fair
value and, if so, what the guidance should be. Because of the uncertainties with
respect to the outcome of any such project, the impact of the SOP upon
expiration of the one year deferral period is not currently determinable.
<PAGE>
Forward-Looking Statements
This Annual Report on Form 10-K 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 forwarding-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 Annual Report on Form 10-K 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 successfully perform 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 contract terminations with the federal government, the federal
government can terminate at its convenience. Should this occur, the Company's
operating results could be 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 1998, the Company's growth depends upon its ability to
obtain additional capital and financing sources. The Company continually reviews
the requirements for additional financing. However, no assurance can be made on
whether such financing, if necessary, can be obtained, or if available, that it
will be available on acceptable terms.
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
<S> <C>
Report of Independent Accountants - Price Waterhouse LLP....................................................17
Report of Independent Accountants - Coopers & Lybrand L.L.P.................................................18
Consolidated Statements of Income for the Years Ended
December 31, 1997, December 31, 1996 and December 31, 1995.................................................19
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996.......................................................................................20-21
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, December 31, 1996 and December 31, 1995..............................................22
Consolidated Statements of Changes In Stockholders' Investment (Deficit)
for the Years Ended December 31, 1997, December 31, 1996
and December 31, 1995...................................................................................23
Notes to Consolidated Financial Statements..................................................................24-40
INDEX TO SCHEDULES
All schedules are omitted because they are not applicable or the required information is included
in the consolidated financial statements or notes thereto.
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of Telos Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in stockholders'
investment (deficit) present fairly, in all material respects, the financial
position of Telos Corporation and its subsidiaries at December 31, 1997, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. The consolidated financial statements of Telos Corporation and its
subsidiaries for the years ended December 31, 1996 and 1995 were audited by
other independent accountants whose report dated March 28, 1997 expressed an
unqualified opinion on those statements.
PRICE WATERHOUSE LLP
Washington, DC
March 27, 1998
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of Telos Corporation
We have audited the accompanying consolidated balance sheet of Telos
Corporation and Subsidiaries as of December 31, 1996, and the related
consolidated statements of income, stockholders' investment (deficit), and cash
flows for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Telos Corporation
and Subsidiaries as of December 31, 1996, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P
Washington, DC
March 28, 1997
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands)
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales
Systems and Support Services $124,450 $103,675 $105,801
Systems Integration 129,337 85,220 69,958
------- ------- -------
253,787 188,895 175,759
------- ------- -------
Costs and expenses
Cost of Systems and
Support Services 103,968 91,483 90,679
Cost of Systems Integration 114,462 76,798 54,843
Selling, general and
administrative expenses 27,054 29,055 23,262
Goodwill amortization 892 1,001 1,950
------- ------- -------
246,376 198,337 170,734
------- ------- -------
Operating income (loss) 7,411 (9,442) 5,025
Other income (expenses)
Non-operating income (expense) 124 (445) 27
Interest expense (7,455) (5,668) (4,385)
------- ------- -------
Income (loss) before income taxes 80 (15,555) 667
(Benefit) provision for income taxes (1,332) (5,739) 75
------- ------- -------
Income (loss) from continuing
operations 1,412 (9,816) 592
Discontinued operations:
Income from discontinued
operations (net of income tax
provision of $566 for 1996) -- 500 423
Gain on sale of Consulting
Services, (net of income tax
provision of $6,327) -- 11,524 --
------- ------- -------
Net income $ 1,412 $ 2,208 $ 1,015
======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
ASSETS
December 31,
------------------------------------
1997 1996
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents
(includes restricted cash of
$231 at December 31, 1996) $ 587 $ 2,781
Accounts receivable, net 57,972 51,549
Inventories, net 12,390 17,066
Deferred income taxes 4,632 1,643
Prepaid income taxes 268 694
Other current assets 408 230
------- -------
Total current assets 76,257 73,963
------- -------
Property and equipment
Land and building 346 408
Furniture and equipment 21,469 20,174
Leasehold improvements 2,750 2,650
Property and equipment
under capital leases 13,774 13,644
------- -------
38,339 36,876
Accumulated depreciation
and amortization (22,609) (20,390)
------- -------
15,730 16,486
------- -------
Goodwill, net 12,466 13,545
Deferred income taxes 385 1,468
Other assets 4,880 4,602
------- -------
$109,718 $110,064
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' INVESTMENT (DEFICIT)
December 31,
----------------------------------
1997 1996
---- ----
<S> <C> <C>
Current liabilities
Accounts payable $ 16,912 $ 35,730
Accrued compensation and benefits 8,553 10,163
Unearned warranty revenue 1,135 1,575
Current portion, capital lease obligations 430 357
Other current liabilities 5,401 9,776
------- -------
Total current liabilities 32,431 57,601
Senior credit facility 39,945 15,418
Senior subordinated notes 16,930 17,439
Capital lease obligations 12,085 12,537
Other long-term liabilities -- 154
------- -------
Total liabilities 101,391 103,149
------- -------
Commitments and contingencies (Note 8)
Redeemable preferred stock
Senior redeemable preferred stock, $.01 par value,
Series A-1 and A-2, 1,250 and 1,750 shares authorized, issued
and outstanding, respectively (aggregate liquidation preference
of $3,000) 5,207 4,828
Class B Redeemable Preferred Stock, $.01 par value, 7,500 shares
authorized, issued and outstanding (aggregate liquidation
preference of $7,500) 12,035 11,087
Redeemable preferred stock, $.01 par value, issued and outstanding,
6,000,000 shares authorized, 3,595,586 shares (aggregate liquidation
preference of $35,956) 29,951 24,230
------- -------
47,193 40,145
------- -------
Stockholders' investment
Class A common stock, no par value, 50,000,000 shares authorized,
23,076,753 shares issued and outstanding 65 65
Class B common stock, no par value, 50,000,000 shares authorized,
4,037,628 shares issued and outstanding 13 13
Capital in excess of par -- 4,048
Accumulated deficit (38,944) (37,356)
------- -------
Total stockholders' investment (deficit) (38,866) (33,230)
------- -------
$109,718 $110,064
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Ended December 31,
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 1,412 $ 2,208 $ 1,015
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation and amortization 4,098 3,058 3,376
Gain on sale of TCS -- (17,176) --
Loss on disposal of fixed assets 715 -- --
Goodwill amortization 892 1,418 2,370
Amortization of debt issuance costs 243 78 17
Accretion of subordinated notes 143 -- --
Provision for inventory obsolescence 2,150 1,008 312
Provision for doubtful accounts receivable 490 647 103
Provision for loss on shutdown of division -- -- (760)
Provision for net realizable value of other assets 887 -- --
Deferred income tax (benefit) provision (1,719) 900 --
Provision for employee benefits -- -- 974
Provision for employee insurance -- -- (891)
Changes in assets and liabilities
Increase in accounts receivable (6,913) (14,487) (3,870)
Decrease (increase) in inventories 2,186 (2,364) (8,582)
Decrease (increase) decrease in other assets 795 (2,076) 1,845
Decrease (increase) in accounts payable and
other liabilities (20,559) 11,283 (2,342)
------ ------ ------
Cash used in operating activities (15,180) (15,503) (6,433)
------ ------ ------
Investing activities:
Proceeds from sale of discontinued operations -- 31,579 --
Purchase of property and equipment (2,589) (2,558) (1,013)
Investment in other assets (3,083) (1,422) (680)
------ ------ ------
Cash (used in) provided by investing activities (5,672) 27,599 (1,693)
------ ------ ------
Financing activities:
Proceeds (payments) from Senior Credit Facility 24,526 (16,894) (1,688)
Proceeds from debt issuance -- 3,278 14,373
(Decrease) increase in book overdrafts (4,838) 3,833 2,722
Repayment of long-term debt (651) -- (5,800)
Debt issue costs -- -- (1,187)
Payments under capital lease obligations (379) (267) --
------ ------ ------
Cash provided by (used in) financing
activities 18,658 (10,050) 8,420
------ ------ ------
(Decrease) increase in cash and cash equivalents (2,194) 2,046 294
Cash and cash equivalents at beginning of the year 2,781 735 441
------ ------ ------
Cash and cash equivalents at end of year $ 587 $ 2,781 $ 735
====== ====== ======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,872 $ 5,760 $ 5,348
====== ====== ======
Income taxes paid (refunded) $ 92 $ 187 $(2,155)
====== ====== ======
Supplemental schedule of non-cash investing activities:
Assets under capital lease $ -- $13,154 $ --
====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT (DEFICIT)
(amounts in thousands)
Total
Class A Class B Capital Stockholders'
Common Common In Excess Accumulated Investment
Stock Stock of Par Deficit (Deficit)
----- ----- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 $ 65 $ 13 $12,095 $(37,356) $(25,183)
Senior redeemable preferred stock dividend -- -- -- (302) (302)
Class B redeemable preferred stock dividend -- -- (42) (713) (755)
Redeemable preferred stock dividend -- -- (3,236) -- (3,236)
Redeemable preferred stock accretion -- -- (1,148) -- (1,148)
Net income for the year -- -- -- 1,015 1,015
--- --- ------ ------ ------
Balance December 31, 1995 65 13 7,669 (37,356) (29,609)
Senior redeemable preferred stock dividend -- -- -- (334) (334)
Class B redeemable preferred stock dividend -- -- -- (835) (835)
Redeemable preferred stock dividend -- -- (3,272) (1,039) (4,311)
Redeemable preferred stock accretion -- -- (1,270) -- (1,270)
Enterworks common stock warrants -- -- 921 -- 921
Net income for the year -- -- -- 2,208 2,208
--- --- ------ ------ ------
Balance December 31, 1996 65 13 4,048 (37,356) (33,230)
Senior redeemable preferred stock dividend -- -- (379) -- (379)
Class B redeemable preferred stock dividend -- -- (948) -- (948)
Redeemable preferred stock dividend -- -- (2,721) (1,594) (4,315)
Redeemable preferred stock accretion -- -- -- (1,406) (1,406)
Net income for the year -- -- -- 1,412 1,412
--- --- ------ ------ ------
Balance December 31, 1997 $ 65 $ 13 $ -- $(38,944) $(38,866)
=== === ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business and Organization
Telos Corporation ("Telos" or "the Company") provides enterprise
integration services and solutions primarily to the U.S. Federal Government and
industry. In addition to its core competency of software development and
systems support services, Telos delivers information security, enterprise
integration and networking infrastructure solutions to its customers.
The Company, founded in 1968, is incorporated under the laws of the State
of Maryland.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Telos Corporation and its wholly-owned subsidiaries, Telos Corporation
(California), Telos Field Engineering, Inc., and Telos International Corporation
and its substantially owned subsidiary Enterworks, Inc., formerly,
enterWorks.com ("Enterworks") (collectively, the "Company"). Significant
intercompany transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates and assumptions used in the preparation
of the Company's consolidated financial statements include revenue recognition
under contract percentage of completion methodology, allowance for accounts
receivable, allowance for inventory obsolescence, valuation of goodwill and
other noncurrent assets, the valuation allowance for deferred tax assets,
employee benefits and estimated useful lives of goodwill, property and equipment
and other noncurrent assets. Actual results could differ from those estimates.
Revenue Recognition
The majority of the Company's sales are made directly or indirectly to the
federal government. A substantial portion of the Company's revenues are derived
from time and materials and cost reimbursement contracts, under which revenue is
recognized as services are performed and costs are incurred. The Company
generally recognizes equipment revenue as products are shipped, although certain
revenue recognition practices are dependent upon contract terms. Revenue for
maintenance contracts is recognized as such services are performed. Revenue from
the licensing of software is recognized in accordance with American Institute of
Certified Public Accountants (AICPA) Statement of Position 91-1 (SOP
91-1),"Software Revenue Recognition", whereby revenue is recognized when a
noncancelable revenue agreement is in force, the product has been shipped and no
significant obligations remain. Revenue generated from warranty service
contracts is recognized ratably over the warranty service period. The Company
records loss provisions for its contracts, if required, at the time such losses
are identified.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash equivalents.
The Company's cash management program utilizes zero balance accounts.
Accordingly, all book overdraft balances have been reclassified to accounts
payable.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined primarily on the first-in, first-out method. Substantially all
inventories consist of purchased hardware and component computer parts used in
connection with systems integration services performed by the Company.
Inventories also include spare parts of $1,329,000 and $1,414,000 at December
31, 1997 and 1996, respectively, which are utilized to support maintenance
contracts. Spare parts inventory is amortized on a straight line basis over five
years. An allowance for obsolete, slow-moving or non-salable inventory is
provided for all other inventory. This allowance is based on the Company's
overall obsolescence experience and its assessment of future inventory
requirements.
At December 31, 1997 and 1996, the Company's allowance for inventory
obsolescence was $3,915,000 and $2,357,000, respectively. The components of the
allowance for inventory obsolescence are set forth below (in thousands):
<TABLE>
<CAPTION>
Additions
Balance, Charged to Balance,
Beginning Costs and End
of Year Expense Deductions(1) of Year
-------------- -------------- ------------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997 $2,357 $2,150 $592 $3,915
Year Ended December 31, 1996 $1,385 $1,008 $ 36 $2,357
Year Ended December 31, 1995 $1,078 $ 312 $ 5 $1,385
(1) Inventories written off.
</TABLE>
Property and Equipment
Property and equipment is recorded at cost. Depreciation is provided on the
straight-line method at rates based on the estimated useful lives of the
individual assets or classes of assets as follows:
Buildings 20 Years
Machinery and equipment 3-7 Years
Office furniture and fixtures 5-7 Years
Leasehold improvements Life of Lease
Leased property meeting certain criteria is capitalized at the present
value of the related minimum lease payments. Amortization of property and
equipment under capital leases is computed on the straight-line method over the
term of the related lease.
Upon sale or retirement of property and equipment, the costs and related
accumulated depreciation are eliminated from the accounts, and any gain or loss
on such disposition is reflected in the statement of income. Expenditures for
repairs and maintenance are charged to operations as incurred.
Depreciation and amortization expense related to property and equipment,
including property and equipment under capital leases, was $2,630,000,
$2,255,000 and $1,865,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill arose principally from the acquisition of Telos Corporation
(California) in 1992 and has been assigned a useful life of twenty years. The
useful life considered a number of factors including the Company's maintenance
of long-term significant customer relationships for periods of up to
twenty-seven years and its strong positions in the marketplace.
The Company assesses the potential impairment and recoverability of
goodwill on an annual basis and more frequently if factors dictate. Management
forecasts are used to evaluate the recovery of goodwill through determining
whether amortization of goodwill can be recovered through projected undiscounted
future cash flows. If an impairment of goodwill is indicated, the impairment is
measured based on projected discounted cash flows using a discount rate
reflecting the Company's cost of funds. In addition, the Company may assess the
net carrying amount of goodwill using internal and/or independent valuations of
the Company.
Accumulated amortization of goodwill at December 31, 1997 and 1996 was
$7,947,000 and $7,055,000, respectively.
Other Assets
Other noncurrent assets consist principally of deferred software
development costs and debt issuance costs. The Company expenses all research and
development costs incurred in connection with software development projects
until such software achieves technological feasibility, determined based on the
achievement of a working model or a detailed program design. All costs
thereafter are capitalized. The Company amortizes such capitalized costs on a
product-by-product basis over the greater of the amount computed using an
estimated product life of three years or the ratio that current gross revenues
bears to the total of current and anticipated future gross revenues. The Company
periodically evaluates the realizability of these capitalized costs through
evaluation of anticipated revenue and gross margin as compared to current
revenue and gross margin. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software product, a loss is recognized.
Unamortized software and product costs at December 31, 1997 and 1996 were
$3.6 million and $2.5 million, respectively. Amortization expense associated
with these capitalized software and product costs was $1,128,000, $689,000 and
$170,000 in 1997, 1996 and 1995, respectively. Additionally, $887,000 was
written as a net realizable value adjustment in 1997.
Debt issuance costs are amortized over the term of the underlying financial
instrument, which amortization method does not differ significantly from the
effective interest method. Unamortized costs amounted to $668,000 and $911,000
at December 31, 1997 and 1996, respectively.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under this
asset and liability method, deferred tax assets and liabilities are recognized
for the estimated future tax consequences of temporary differences and income
tax credits. Deferred tax assets and liabilities are measured by applying
enacted statutory tax rates that are applicable to the future years in which
deferred tax assets or liabilities are expected to be settled or realized to the
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. Any change in tax rates on deferred tax
assets and liabilities is recognized in net income in the period in which the
tax rate change is enacted. The Company provides a valuation allowance that
reduces deferred tax assets when it is "more likely than not" that deferred tax
assets will not be realized.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting for Stock Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method provided by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Pro forma disclosures are made as if
the fair value measurement provisions of SFAS No. 123 had been used in
determining compensation expense.
Research and Development
The Company charges all research and development costs to expense as
incurred, until, in the case of software, technological feasibility is reached
after which time such costs are capitalized (see discussion in Other Assets,
above). During 1997, 1996 and 1995, the Company expensed $1.0 million, $1.2
million and $1.4 million in research and development costs, respectively.
Earnings per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share." This Statement establishes standards for
computing and presenting earnings per share (EPS). As the Company does not have
publicly held common stock or potential common stock, this Statement is not
applicable and, accordingly, no EPS data is reported for any of the years
presented.
Financial Instruments
The Company uses various methods and assumptions to estimate the fair value
of its financial instruments. Due to their short-term nature, the carrying value
of cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximates fair value. The fair value of long-term debt is based on
the discounted cash flows for similar term borrowings based on market prices for
the same or similar issues. The Company has not estimated the fair value of its
subordinated debt or its redeemable preferred stock. The Company does not deem
such estimation practicable due to the unique features of these instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information. These estimates are subjective in nature and
involve matters of judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Newly Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income." SFAS
No. 130 becomes effective for the Company in 1998 and requires disclosure of
"comprehensive income," as defined, and its components. The Company believes
that the adoption of SFAS No. 130 will not have a material effect on its
consolidated financial statements.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement changes the
way segment information is required to be reported. It also requires entity-wide
disclosure about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Statement is effective for the Company for 1998. The Company
believes that the adoption of SFAS No. 131 will not have a material effect on
the disclosures in its consolidated financial statements.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and supersedes SOP 91-1. Among
other matters, the provisions of SOP 97-2 establish the requirement that the
allocation of revenue to the various individual elements of those arrangements
that provide for the sale of several products and/or services are to be based on
the fair value of each element. The provisions of SOP 97-2 are effective for the
Company for transactions entered into after December 31, 1997. On March 18,
1998, the Financial Accounting Standards Board cleared a Statement of Position
that provides for a one year deferral of certain provisions of the SOP
pertaining to its requirements for what constitutes vendor specific evidence of
the fair value of multiple elements included in an arrangement. It is AcSEC's
intention to immediately begin a project to consider whether guidance is needed
on any restrictions that should be placed on what constitutes evidence of fair
value and, if so, what the guidance should be. Because of the uncertainties with
respect to the outcome of any such project, the impact of the SOP upon
expiration of the one year deferral period is not currently determinable.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Discontinued Operations
On December 27, 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 resulting gain from the sale of TCS of $11.5 million included a write-off of
$6.9 million of goodwill allocated to the TCS operations.
The sale of TCS has been treated as a discontinued operation in accordance
with APB Opinion Number 30 ("APB 30"). Pursuant to APB 30, the revenue, costs
and expenses of TCS have been excluded from their respective captions in the
Company's consolidated statements of income and the net results of these
operations have been reported separately as "Income from discontinued
operations." Included in the results of the discontinued operation is allocated
interest expense of $1.5 million and $1.1 million for 1996 and 1995,
respectively. Interest has been allocated based on the net assets of the
discontinued operations in relation to the Company's consolidated net assets
plus non-specific debt. Additionally, goodwill amortization of $418,000 and
$420,000 for 1996 and 1995, respectively, has been included in the results of
the discontinued operations.
TCS had revenue of $33.1 million and $27.1 million for 1996 and 1995,
respectively.
Note 3. Revenue and Accounts Receivable
Revenue resulting from contracts and subcontracts with federal, state, and
local governments accounted for 96.1%, 86.4% and 84.8% of consolidated revenue
in 1997, 1996 and 1995, respectively. As the Company's primary customer is the
federal government, the Company has a concentration of credit risk associated
with its accounts receivable. However, the Company does not believe the
likelihood of loss arising from such concentration is significant. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral from its customers. The Company maintains allowances for
potential losses.
<TABLE>
<CAPTION>
The components of accounts receivable are as follows (in thousands):
December 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Billed accounts receivable $48,207 $40,225
------ ------
Amounts billable upon acceptance by customer 3,236 5,165
Amounts currently billable 7,493 7,084
------ ------
Total unbilled accounts receivable 10,729 12,249
------ ------
Allowance for doubtful accounts (964) (925)
------ ------
$57,972 $51,549
====== ======
</TABLE>
The provision for doubtful accounts receivable was $490,000, $647,000 and
$103,000 for 1997, 1996 and 1995, respectively. Reductions to the allowance were
primarily due to write-offs of accounts receivable and other adjustments.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Debt Obligations
Senior Revolving Credit Facility
At December 31, 1997, the Company has a $45 million Senior Revolving Credit
Facility (the "Facility") with a bank which expires on July 1, 2000 and has an
outstanding balance of $39.9 million. Borrowings under the Facility are
collateralized by certain assets of the Company (primarily accounts receivable
and inventory), and the amount of the available borrowings fluctuates based on
the underlying asset borrowing base and the Company's working capital
requirements. The agreement requires payment of a fee of .25% of the unused
portion of the Facility. The Facility bears interest at 1.0% over the bank's
base rate or 9.5% at December 31, 1997. The weighted average interest rate on
the outstanding borrowings under the Facility was 9.44% for 1997 compared with
10.45% for 1996. At December 31, 1997, the Company had approximately $5.1
million available under the Facility.
The Facility has various covenants which may, among other things, restrict
the ability of the Company to merge with another entity, sell or transfer
certain assets, pay dividends and make other distributions beyond certain
limitations. The Facility also requires the Company to meet certain leverage,
net worth and tangible capital goals, a fixed charge coverage ratio as well as
certain financial results related to Enterworks. At December 31, 1997, the
Company was not compliant with certain covenants contained in the Facility and
the bank has waived such non-compliance.
The carrying value of the Facility at December 31, 1997 and 1996
approximates fair value.
Senior Subordinated Notes
At December 31, 1996, the Company had a $675,000 Senior Subordinated Note,
Series A with a balance of $651,000 outstanding with John R. C. Porter, the
Company's principal common shareholder. The note had an interest rate per annum
of 11.875% from January 1, 1992 through January 14, 1995, then increased to 14%
per annum from January 15, 1995 through January 14, 1997, and increased to 17%
thereafter. Interest was payable in semi-annual installments on June 30 and
December 31 of each year. The note was collateralized by certain assets of the
Company. The note was issued in 1992 and matures on January 14, 2002. The
Company retired this note in 1997.
In 1995 the Company issued additional Senior Subordinated Notes ("Notes")
to certain shareholders. The Notes are classified as either Series B or Series
C. Series B Notes, which total $6.5 million at December 31, 1997 and 1996, are
collateralized by fixed assets of the Company. Series C Notes, which total $7.9
million at December 31, 1997 and 1996, are unsecured. Both the Series B and
Series C Notes have a maturity date of October 1, 2000 and have interest rates
ranging from 14% to 17%. The Notes can be prepaid at the Company's option.
Additionally, these Notes have a cumulative payment premium of 13.5% per annum
payable only upon certain circumstances. These circumstances include an initial
public offering of the Company's common stock or a significant refinancing, to
the extent that net proceeds from either of the above events are received and
are sufficient to pay the premium. Due to the contingent nature of the premium
payment, the associated premium expense will only be recorded after occurrence
of a triggering event. At December 31, 1997, the prepayment premium that would
be due upon a triggering event is $4,664,000.
Enterworks Subordinated Notes
During 1996, the Company completed a private financing whereby $3,277,960
of 8% subordinated debt of Enterworks was issued. Investors included certain
members of the Board of Directors and management and certain shareholders of the
Company. The subordinated debt has a five year maturity. Interest is paid
quarterly on January 1, April 1, July 1, and October 1 of each year. In
connection with the debt, the Company issued 2,048,725 of warrants to purchase
shares of Enterworks common stock. The warrants have an exercise price of one
dollar and an exercise period of ten years. The Company has assigned a value to
the warrants of $921,926 which has been included in capital in excess of par.
The amount outstanding of this subordinated debt was approximately $2,557,000
and $2,414,000 at December 31, 1997 and 1996, respectively.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. 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. Through June 30,
1995, the Series A-1 and Series A-2 carried a cumulative per annum dividend rate
of 9% of their liquidation value of $1,000 per share. 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%, which increased again 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
Company is required to redeem all of the outstanding shares of the stock on
December 31, 2001, subject to the legal availability of funds. The Series A-1
and A-2 redeemable 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. At December
31, 1997 and 1996 undeclared, unpaid dividends relating to Series A-1 and A-2
redeemable preferred stock totaled $2,207,000 and $1,828,000, respectively, and
have been accrued and are included in the Series A-1 and A-2 redeemable
preferred stock balances. Mandatory redemptions are required from excess cash
flows, as defined in the stock agreements. Through December 31, 1997, there has
been no available cash flow permitting mandatory redemption.
Class B Redeemable Preferred Stock
The Class B Redeemable Preferred Stock has a $.01 par value, with 7,500
shares authorized, issued and outstanding. Through June 30, 1995, the Class B
Redeemable Preferred Stock carried a cumulative per annum dividend rate of 9% of
its liquidation value of $1,000 per share. From July 1, 1995 through June 30,
1997, the Class B Redeemable Preferred Stock had a cumulative dividend rate per
annum equal to 11.125%, which increased 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 Class B Redeemable 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 December 31,
1997 and 1996, undeclared and unpaid dividends relating to the Class B
redeemable preferred stock totaled $4,535,000 and $3,587,000, respectively, and
have been accrued and are included in the Class B redeemable preferred stock
balance. Redemption of the stock may occur after payment in full of the
principal and interest amount due on the Notes, and the redemption of the Series
A-1 and A-2 redeemable preferred stock. Mandatory redemptions are required from
excess cash flows, as defined in the stock agreements. Through December 31,
1997, there has been no available cash flow permitting mandatory redemption.
12% Cumulative Exchangeable Redeemable Preferred Stock
The Company initially issued 2,858,723 shares of 12% Cumulative
Exchangeable Redeemable Preferred Stock (the "Public Preferred Stock"), par
value $.01 per share, pursuant to the acquisition of the Company during 1990.
The Public Preferred Stock was recorded at fair value on the date of original
issue, November 21, 1989, and the Company is making periodic accretions under
the interest method of the excess of the redemption value over the recorded
value. Accretion for the years ended December 31, 1997 and 1996 was $1,406,000
and $1,270,000, respectively.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 21, 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.
The Public Preferred Stock accrues a semi-annual dividend at an annual rate
of 12% ($1.20) per share, based on the liquidation preference of $10 per share,
and is fully cumulative. Through November 21, 1995, the Company had the option
to pay dividends in additional shares of Preferred Stock in lieu of cash.
Dividends in additional shares of the Preferred Stock are paid at the rate of
0.06 of a share of the Preferred Stock for each $.60 of such dividends not paid
in cash. 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.
For the years 1992 through 1994 and for the dividend payable June 1, 1995, the
Company has accrued undeclared dividends in additional shares of preferred
stock. These accrued dividends are valued at $3,950,000. Had the Company accrued
such 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 $6,471,000.
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 Facility, and under Maryland law.
Note 6. Stockholders' Investment and Employee Benefit Plans
Common Stock
The relative rights, preferences, and limitations of the Class A common
stock and the Class B common stock are in all respects identical. The holders of
the common stock have one vote for each share of common stock held. Subject to
the prior rights of the Public Preferred Stock or any series of the Series A
redeemable preferred stock, holders of Class A and the Class B common stock are
entitled to receive such dividends as may be declared.
Stock Warrants
In 1992, the Company issued to the holder of the Class B Redeemable
Preferred Stock a common stock warrant to purchase up to 3,150,468 shares of
Class A common stock of the Company. The stock warrant was valued at $1,109,000
and such amount was shown as an increase in capital in excess of par. The
warrant was initially exercisable to purchase up to 1,181,425 shares at any
time. The warrant increased by 656,348 shares on June 30, 1993, by 656,348
shares on July 1, 1994 and by 656,347 shares on July 1, 1995. Through December
31, 1997, 1,837,773 shares of Class A Common Stock has been purchased under the
warrant. The price per share at which shares have been purchased and are
purchasable upon the exercise of the warrant is $.0025.
In 1994, Mr. John R. C. Porter deposited $3 million with the Company's bank
to provide the Company with increased borrowing capability under its Facility
(see Note 5). In exchange, Mr. Porter was issued 500,000 shares of Class A
common stock for which the Company recorded additional interest expense of
$410,000. The Company also granted Mr. Porter a warrant to acquire 7,228,916
shares of the Company's Class A common stock at a purchase price of $.83 per
share which approximated the estimated market value of the Company's common
stock at the issuance date. The warrant is fully exercisable and has a term of
ten years from the date of issue.
Stock Options
The Company has granted stock options to certain employees of the Company
under three plans. The Long-Term Incentive Compensation Plan was adopted in 1990
("1990 Stock Option Plan") and had option grants under it through 1991. In 1993,
stock option plan agreements were reached with certain employees. In 1996, the
Board of Directors approved and the shareholders ratified the 1996 Stock Option
Plan ("1996 Stock Option Plan").
The Company also approved an Enterworks stock option plan ("1996 Enterworks
Option Plan") during 1996. The Company generally grants options under its
respective plans at the estimated fair value at the date of grant. Fair value is
determined by management and approved by the Company's Board of Directors and is
generally based on third party appraisals and information with respect to the
business operations.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1990 Stock Option Plan
Under the terms of the 1990 Stock Option Plan, 2,168,215 shares of the
Company's Class A common stock are available for issuance under options to key
employees, including officers and directors. The option price of $1.42 per share
was not less than the fair market value at the date of the grant and the options
are generally exercisable over a four year period. Additional information as to
these options is as follows:
<TABLE>
<CAPTION>
Stock Option Activity
----------------------------------------------
Numbers of Shares Weighted Average
(000's) Exercise Price
----------------- --------------
<S> <C> <C>
Outstanding at December 31, 1994 626 $1.42
Granted -- --
Exercised -- --
Canceled (28) 1.42
--- ----
Outstanding at December 31, 1995 598 1.42
Granted -- --
Exercised -- --
Canceled (13) 1.42
--- ----
Outstanding at December 31, 1996 585 1.42
Granted -- --
Exercised -- --
Canceled (55) 1.42
--- ----
Outstanding at December 31, 1997 530 $1.42
=== ====
</TABLE>
1996 Stock Option Plan
The 1996 Stock Option Plan allows for the award of up to 6,644,974 shares
of common stock at an exercise price of not lower than fair market value at the
date of grant. Vesting of the stock options for key employees is based both upon
the passage of time and certain key events occurring including an initial public
offering or a change in control. Vesting for options granted to employees is
based upon the passage of time, generally four years. The stock options may be
exercised over a ten year period subject to the vesting requirements.
Additional information as to these options follows:
<TABLE>
<CAPTION>
Stock Option Activity
--------------------------------------------
Number of Shares Weighted Average
(000's) Exercise Price
---------------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995 -- --
Granted 3,897 $0.95
Exercised -- --
Canceled (29) 0.97
------ ----
Outstanding at December 31, 1996 3,868 0.95
Granted 1,425 1.01
Exercised -- --
Canceled (286) 0.97
---- ----
Outstanding at December 31, 1997 5,007 $0.97
===== ====
</TABLE>
Other Option Plans
In 1993, stock option plan agreements were reached to provide Mr. John
Wood, CEO and President, and Mr. Joseph Beninati, former Chairman, with options
to each purchase up to 700,459 shares of the Company's Class A common stock from
the Company at $0.50 per share. Under the terms of the agreements, 350,230
shares vested immediately and the remainder vested ratably over the next twelve
months. The Company recorded compensation expense related to these options based
upon the difference between the exercise price and the estimated fair value of
$0.82 per share at the measurement date of the stock option. Mr. Beninati's
agreement was canceled in 1996 and the shares now available will be administered
under the same terms as the 1996 Stock Option Plan. John Wood has the option to
cancel the 1993 stock options discussed above and receive an equal number of
options under the 1996 Plan at an exercise price of $.95 per share.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, the effect on the 1996 Stock Option Plan as of December 31, 1997
would be to increase the number of shares outstanding to 5,707,000 with a
weighted average exercise price of $0.96 per share.
1996 Enterworks Option Plan
In 1996, Enterworks implemented a stock option plan that allows for the
award of up to 5,000,000 shares of common stock at an exercise price of not
lower than fair market value at the date of grant. Vesting of the stock options
for key employees is based both upon the passage of time and certain key events
occurring including an initial public offering or a change in control. Vesting
for options granted to employees is based upon the passage of time, generally
four years. The stock options may be exercised over a ten year period subject to
the vesting requirements. Additional information as to these options follows:
<TABLE>
<CAPTION>
Stock Option Activity
-----------------------------------------------
Number of Shares Weighted Average
(000's) Exercise Price
---------------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995 -- --
Granted 2,744 $0.22
Exercised -- --
Canceled (15) 0.12
------ ----
Outstanding at December 31, 1996 2,729 0.22
Granted 691 0.77
Exercised (163) 0.12
Canceled (362) 0.29
----- ----
Outstanding at December 31, 1997 2,895 $0.35
===== ====
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (000's) Life in Years Price (000's) Price
-------- ------- ------------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
1990 Stock
Option Plan $1.42 530 2.5 years $1.42 530 $1.42
============= ===== ========= ===== === =====
1996 Stock
Option Plan $0.95 - $1.01 5,007 8.6 years $0.97 1,436 $0.96
============= ===== ========= ===== ===== =====
1996 Enterworks
Option Plan $0.12 1,865 8.5 years $0.12 590 $0.12
0.77 1,030 9.3 years 0.77 149 0.77
------------- ----- --------- ----- --- -----
$0.12 - $0.77 2,895 8.8 years $0.35 739 $0.25
============= ===== ========= ===== === =====
</TABLE>
The weighted-average fair value of options granted under the 1996 Stock
Option Plan and the 1996 Enterworks Option Plan was $0.28 per share and $0.22
per share in 1997 and $0.31 per share and $0.04 per share in 1996, respectively.
Had the Company determined compensation cost consistent with SFAS No. 123
methodology, net income would have been $1,000,000 and $2,100,000 in 1997 and
1996, respectively. Significant assumptions used in determining the fair value
of each option grant at the date of grant were as follows:
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1996 Stock 1996 Enterworks
Option Plan Option Plan
--------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
Expected stock price volatility 0.0% 0.0% 0.0% 0.0%
Risk free interest rate 6.28% 6.66% 6.10% 6.73%
Expected life of options 5.5 years 6.0 years 5.7 years 6.0 years
</TABLE>
Because the pro forma disclosures under SFAS No. 123 only apply to stock
options granted in or after 1995, pro forma net income for 1996 and 1997 is not
necessarily indicative of future periods.
Telos Shared Savings Plan
The Company sponsors a defined contribution employee savings plan (the
"Plan") under which substantially all full-time employees are eligible to
participate. The Company matches one-half of voluntary participant contributions
to the Plan up to a maximum Company contribution of 3% of a participant's
salary. Total Company contributions to this Plan for 1997, 1996 and 1995 were
$1,335,000, $1,679,000 and $2,397,000, respectively.
Note 7. Income Taxes
The (benefit) provision for income taxes includes the following (in
thousands):
<TABLE>
<CAPTION>
For The Year Ended December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current provision (benefit)
Federal $ -- $ (421) $ --
State 387 -- 75
----- ----- ---
Total current 387 (421) 75
----- ----- ---
Deferred (benefit)
Federal(1,464) (4,527) --
State (255) (791) --
----- ----- ---
Total deferred (1,719) (5,318) --
----- ----- ---
Total (benefit) provision $(1,332) $(5,739) $ 75
===== ===== ===
</TABLE>
The (benefit) provision for income taxes varies from the amount determined
by applying the federal income tax statutory rate to the income or loss before
income taxes. The reconciliation of these differences is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed expected income tax
provision (benefit) 34.0% (34.0)% 34.0%
Goodwill amortization 379.6 2.2 99.4
State income taxes, net of
federal income tax benefit 5.9 (5.9) 5.9
Change in valuation allowance
for deferred tax assets (2,214.0) 0.2 (136.2)
Meals and entertainment 111.8 -- --
Other 17.2 0.6 8.1
------- ---- -----
(1,665.5)% (36.9)% 11.2%
======= ==== =====
</TABLE>
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Accounts receivable, principally due
to allowance for doubtful accounts $ 201 $ 195
Allowance for inventory obsolescence and
amortization 1,728 1,091
Accrued liabilities not currently
deductible 999 1,326
Accrued compensation 2,190 1,425
Deferred office rent and accrued
sublease liabilities 25 633
Property and equipment, principally due
to differences in depreciation methods 1,165 1,655
Net operating loss carryforwards 3,140 2,272
Alternative minimum tax credit carryforward 703 573
------ -----
Total gross deferred tax assets 10,151 9,170
Less valuation allowance (2,974) (4,702)
------ -----
Net deferred tax assets 7,177 4,468
------ -----
Deferred tax liabilities:
Unbilled accounts receivable, deferred for tax purposes (800) (747)
Software development costs (1,360) (610)
------ -----
Total deferred tax liabilities (2,160) (1,357)
------ -----
Net deferred tax assets $ 5,017 $3,111
====== =====
</TABLE>
The net change in the valuation allowance was a decrease of $1,728,000 and
$3,453,000 for 1997 and 1996, respectively. The decreases resulted principally
from changes in judgments with respect to realizability of net operating loss
carryforwards due to specific transactions which give rise to future taxable
income. Included in the change in the valuation allowance were decreases of
approximately $187,000 and $926,000 for 1997 and 1996, respectively, related to
the reversal of temporary differences acquired from Telos Corporation
(California). The reversals of the temporary differences related to the 1992
Telos Corporation (California) acquisition reduce goodwill. The total tax
benefits of future deductible temporary differences acquired in connection with
the Telos Corporation (California) acquisition were $6,097,000 at January 14,
1992. As of December 31, 1997, $437,000 of tax benefits remain and are expected
to reverse in future years.
At December 31, 1997, for federal income tax purposes, the Company had net
operating loss carryforwards of approximately $7,863,000 available to offset
future regular taxable income. These net operating loss carryforwards expire in
2010 through 2013. Additionally, $5,313,000 of alternative minimum tax net
operating loss carryforwards are available to offset future alternative minimum
taxable income. These alternative minimum tax net operating loss carryforwards
also expire from 2010 to 2013. In addition, the Company has $703,000 of
alternative minimum tax credits available to be carried forward indefinitely to
reduce future regular tax liabilities.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Commitments and Contingencies
Leases
The Company leases office space and equipment under non-cancelable
operating and capital leases with various expiration dates, some of which
contain renewal options.
On March 1, 1996, the Company entered into a twenty year lease for a
building that serves as its corporate headquarters. The Company has accounted
for this transaction as a capital lease and has accordingly recorded assets and
a corresponding liability of approximately $12.3 million. Under the terms of the
lease, the landlord furnished the Company with $1.3 million to fund tenant
improvements and other building costs. The Company's former headquarters
facility was leased with a lease expiration date of March 31, 1997. In 1996, the
Company recorded $781,000 of additional expense for the remaining lease
obligation of its former headquarters facility.
The following is a schedule by years of future minimum payments under
capital leases together with the present value of the net minimum lease payments
as of December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Property Equipment Total
-------- --------- -----
<S> <C> <C> <C>
1998 $1,447 $197 $ 1,644
1999 1,447 132 1,579
2000 1,447 99 1,546
2001 1,447 44 1,491
2002 1,447 -- 1,447
Remainder 19,102 -- 19,102
------ --- ------
Total minimum obligations 26,337 472 26,809
Less amounts representing interest (14,182) (112) (14,294)
------ --- ------
Net present value of
minimum obligations 12,155 360 12,515
Less current portion (248) (182) (430)
------ --- ------
Long term capital lease
obligations at December 31, 1997 $11,907 $178 $12,085
====== === ======
</TABLE>
Accumulated amortization for property and equipment under capital leases at
December 31, 1997 and 1996 is $1,196,000 and $397,000, respectively.
Future minimum lease payments for all non-cancelable operating leases at
December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998 $2,747
1999 1,927
2000 1,215
2001 496
2002 254
Remainder 1,128
-----
Total minimum lease payments 7,767
Less total minimum
sublease rentals (66)
-----
Net minimum lease payments $7,701
=====
</TABLE>
Net rent expense charged to operations for 1997, 1996, and 1995 totaled
$2,545,000, $4,556,000, and $4,119,000, respectively.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal
The Company is a 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.
Note 9. Related Parties
In 1996, the Company paid previously accrued advisory fees of $525,000 to
the firm Beninati and Wood, Inc. Mr. John B. Wood became an employee of the
Company in 1992 and serves as President and Chief Executive Officer and a
Director of the Company. Mr. Joseph P. Beninati served as Chairman of the Board
for the majority of 1994 before resigning January 5, 1995. The Company paid Mr.
Beninati $165,000 annually subject to a three year employment agreement that
began in 1995. Mr. Beninati resigned from the Board in 1996.
Mr. John R. C. Porter has a consulting agreement with the Company whereby
he is compensated for specific services. Expense recorded pursuant to this
agreement was $200,000 in 1997.
Mr. Byers, a Director of the Company, has a consulting agreement with the
Company to help the Company expand its business operations into the
international marketplace. Under this agreement Mr. Byers receives $10,500 a
month for his services. Mr. Byers was compensated $130,000, $128,000 and
$121,500 for 1997, 1996 and 1995, respectively.
Note 10. Business Segments
The Company has two reportable segments: Systems and Support Services and
Systems Integration. The Company's Systems and Support Services Group provides
software development and support services for software and hardware including
technology insertion, system redesign and software re-engineering. The Systems
Integration Group delivers information security, enterprise integration and
networking infrastructure solutions to its customers. These solutions include
providing commercial hardware, software and services to its customers. The
Systems Integration Group is capable of staging, installing and deploying large
network infrastructures with virtually no disruption to customers' ongoing
operations.
The Company has excluded TCS amounts from the operating revenues and
operating income (loss) segment disclosures as this business was sold in
December 1996 and has been treated as a disposal of a segment of a business
under APB 30 (Note 2).
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Selected financial information for the Company's business segments is
presented below (in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
Operating Revenues(1)
Systems and Support Services $124,450 $103,675 $105,801
Systems Integration 129,337 85,220 69,958
------- ------- -------
Total Revenues $253,787 $ 188,895 $175,759
======= ======== =======
Operating Income (Loss)
Systems and Support Services $ 3,435 $ (4,081) $ 1,955
Systems Integration 3,976 (5,361) 3,070
------ ------- -------
Total Operating Income (Loss) $ 7,411 $ (9,442) $ 5,025
======= ======= =======
Identifiable Assets (2)
Systems and Support Services $ 62,208 $ 58,259 $ 47,436
Systems Integration 24,323 27,885 27,282
Corporate (3) 23,187 23,920 7,665
------- ------- -------
Total Consolidated Assets $109,718 $110,064 $ 82,383
======= ======= =======
Depreciation and Amortization (4)
Systems and Support Services $ 1,791 $ 1,919 $ 2,531
Systems Integration 929 949 1,885
Corporate 2,270 1,126 853
------- ------- -------
Total Depreciation
and Amortization $ 4,990 $ 3,994 $ 5,269
======= ======= =======
Capital Expenditures (5)
Systems and Support Services $810 $ 704 $ 294
Systems Integration 688 1,087 311
Corporate 1,091 656 348
------- ------- -------
Total Capital Expenditures $ 2,589 $ 2,447 $ 953
======= ======= =======
(1) Revenues between segments are not material.
(2) The identifiable assets above are net of the TCS assets in 1995 of $12,109.
(3) Corporate assets are principally property and equipment, cash, and other assets. Goodwill and related amortization
from the acquisitions of C3 and Telos Corporation (California) has been allocated to their respective industry segments.
(4) Depreciation and amortization includes amounts relating to property and equipment, goodwill, deferred software costs and
spare parts inventory. The depreciation and amortization disclosure above is net of TCS depreciation and
amortization of $482 and $478 for 1996 and 1995, respectively.
(5) The capital expenditures disclosure above is net of TCS capital expenditures of $111 and $60 for 1996 and
1995, respectively.
</TABLE>
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Subsequent Event
On February 28, 1998, the Company sold substantially all of the net assets
of one of its groups, Telos Information Systems, to NYMA, Inc., a subsidiary
of Federal Data Corporation of Bethesda, Maryland, for approximately $15 million
in cash. The sale price is subject to an adjustment to be finalized within 60
days from the date of closing. Based on the $15 million purchase price, the
Company will record a gain, net of applicable income taxes, of approximately $4
million in the first quarter of 1998.
The purchase price is subject to increase or decrease on a dollar for
dollar basis by the amount by which the net tangible assets, as defined in the
asset purchase agreement dated February 20, 1998, deviate from $3.3 million,
however, the total purchase price must not exceed $15 million. All proceeds from
the sale will be used to pay down amounts outstanding under the Facility.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Dr. Fred Charles Ikle, Chairman of the Board
- --------------------------------------------
Dr. Ikle (age 73) was elected to the Company's Board of Directors on
January 31, 1994 and was elected Chairman of the Board in January 1995. He is
Chairman of Conservation Management Corporation and Director of the
Zurich-American Insurance Companies. Dr. Ikle is also a Director of the National
Endowment for Democracy and a Distinguished Scholar at the Center for Strategic
& International Studies. From 1981 to 1988, Dr. Ikle served as Under Secretary
of Defense for Policy.
John B. Wood, Director, President and Chief Executive Officer
- -------------------------------------------------------------
Mr. Wood (age 34) was elected President and Chief Executive Officer on
February 16, 1994. Mr. Wood was appointed Chief Operating Officer on October 8,
1993 after serving as Executive Vice President from May of 1992. He was elected
to the Board of Directors on May 13, 1992. Mr. Wood joined the Company on
February 13, 1992. Prior to joining the Company, Mr. Wood was a founder of
Beninati & Wood, Inc., an investment banking firm which had provided services to
the Company.
Dr. Stephen D. Bryen, Director
- ------------------------------
Dr. Stephen Bryen (55) was elected to the Company's Board of Directors on
January 31, 1994. He currently serves as a Director in Jefferson Partners,
L.L.C., a strategic management consulting and merchant banking firm with offices
in Washington, D.C. and New York. Dr. Bryen currently serves on the board of
C-MAC Industries in Mechanicsburgh, Pennsylvania and is the senior technical
advisor to Hollinger Digital Corporation in New York. From 1981 to 1988 Dr.
Bryen served as the Deputy Under Secretary of Defense for Trade Security Policy
and as the Director of the Defense Technology Security Administration, which he
founded.
Norman P. Byers, Director
- -------------------------
Mr. Byers (age 51) was elected to the Board of Directors on January 31,
1994. He has been president of Byers Consulting, a Fairfax County, Virginia
international business consulting firm since July 1996. Before that
appointment, he had served as the President of International Strategies Limited,
another local international business consulting firm. From 1968 until his
retirement in 1989, Mr. Byers served in a variety of operational and staff
positions in the United States Air Force.
David S. Aldrich, Vice President, Corporate Development and Strategy
- --------------------------------------------------------------------
Mr. Aldrich (age 38) joined the Company in September 1996 as Vice
President, Corporate Development and Strategy. Prior to joining the Company, he
was a partner in the Financial Advisory Services Group - Corporate Finance at
Coopers & Lybrand L.L.P. Prior to joining Coopers & Lybrand L.L.P. in 1991, Mr.
Aldrich was Senior Vice President at Dean Witter Capital Corp., the merchant
banking arm of Dean Witter Reynolds, Inc.
William L. Prieur Brownley, Vice President and General Counsel
- --------------------------------------------------------------
Mr. Brownley (age 41) joined the Company in April 1991 and is responsible
for the management of the Company's legal affairs. For the five years prior to
joining the Company, he served as Assistant General Counsel and then as General
Counsel at Infotechnology Inc., an investment company whose holdings included
various companies in the communications industry.
Gerald D. Calhoun, Vice President, Human Resources, and Secretary,
Telos Corporation
- --------------------------------------------------------------------
Mr. Calhoun (age 48) joined the Company as Vice President, Human Resources,
in August 1989. Prior to joining the Company he served as Director, Risk and
Financial Management of BDM International, a government contractor which
provides consulting services, Vice President, Human Resources of Halifax Corp. a
government contractor providing technical services and third party computer
maintenance, and as Director for the U.S. Department of Labor, Employment
Standards Administration.
<PAGE>
Mark W. Hester, Executive Vice President and Chief Operating Officer,
Telos Corporation
- ---------------------------------------------------------------------------
Mr. Hester (age 45) joined Telos in 1979 and was appointed as Executive
Vice President and Chief Operating Officer in 1998. He is responsible for all
business operation activities at Telos. Previously he has held progressive
positions with Telos as President of Telos Systems Solutions, President of Telos
Field Engineering, Regional Manager of Operations and Vice President of
Marketing. Mr. Hester received extensive training from IBM Corporation after a
successful military commitment of nearly eight years.
Robert W. Lewis, President, Enterworks, Inc.
- --------------------------------------------
Mr. Lewis (age 36) has served as the President of Enterworks, Inc. since
its inception in 1996. Mr. Lewis' prior experience has been with Telos
Corporation. From 1991 to 1995, he was Director, Business Development with
responsibility for major customer development and technology integration.
Robert J. Marino, Executive Vice President and Chief Marketing and
Sales Officer
- ---------------------------------------------------------------------------
Mr. Marino (age 61) joined the Company in 1988 as Senior Vice President of
Sales and Marketing. In 1990, his responsibilities were expanded to include
Program Management in addition to Sales and Marketing. On January 1, 1994, Mr.
Marino was appointed to President of Telos Systems Integration, and on January
1, 1998, he was appointed to his current position. Prior to joining the Company
in February 1988, Mr. Marino held the position of Sr. Vice President of Sales
and Marketing with Centel Federal Systems and M/A-COM Information Systems, both
of which are U.S. Government contractors.
Lorenzo Tellez, Chief Financial Officer, Treasurer, and Vice President
- ----------------------------------------------------------------------
Mr. Tellez (age 40) was appointed Chief Financial Officer of the Company in
1993 and Treasurer in 1994. He joined Telos Corporation (California) in 1989
where he was responsible for all financial and regulatory functions. Prior to
joining Telos Corporation, Mr. Tellez served as a Senior Manager with Arthur
Andersen & Company.
Each of the directors and executive officers of the Company is a United
States citizen.
<PAGE>
Item. 11. Executive Compensation
Information is set forth in the Summary Compensation Table included on the
following page with respect to all forms of compensation for service rendered in
all capacities to the Company during the fiscal years ended December 31, 1997,
1996, and 1995, of the Chief Executive Officer and four other most highly paid
executive officers during 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation (3)
Annual Compensation Awards Payouts
------------------- ------ -------
Name Other All
and Annual Other
Principal Compen- Options/ Compen-
Position Year Salary Bonus(1) sation(2) SARs(#)(4) sation (5)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John B. Wood 1997 $299,298 $492,000 $32,000 -- $4,750
(President, Chief 1996 291,921 -- 23,000 2,017,531 4,750
Executive Officer) 1995 234,990 325,000 24,000 -- 7,029
Mark W. Hester 1997 174,990 275,000 6,000 150,000 3,525
(Executive V. P. and 1996 184,607 80,000 6,000 185,000 2,850
Chief Operating Officer) 1995 181,695 40,000 6,000 -- 4,992
Lorenzo Tellez 1997 195,000 195,000 24,000 150,000 4,750
(V.P., Treasurer, Chief 1996 188,269 145,000 15,000 465,000 4,750
Financial Officer) 1995 166,624 50,000 6,000 -- 6,846
David S. Aldrich 1997 150,010 195,000 6,000 300,000 --
(V.P., Corporate Development 1996 45,580 -- -- 200,000 --
and Strategy)
Gerald D. Calhoun 1997 157,997 120,000 6,000 50,000 4,750
(V.P., Human Resources, 1996 165,970 85,000 6,000 130,000 --
& Secretary) 1995 143,943 40,000 6,000 -- 4,603
(1) 1997 amounts include bonuses relating to the TIS sale completed in 1998.
(2) Other annual compensation represents automobile and living allowances provided to executives. Additionally,
compensation for John B. Wood includes directors fees.
(3) There are no restricted stock awards or payouts pursuant to long-term investment plans.
(4) Options granted are in both the Company's common stock as well as in Enterworks, Inc., common stock.
(5) All other compensation represents Company contributions made on behalf of the executive officers to the Telos
Shared Savings Plan.
</TABLE>
<PAGE>
Stock Option Grants
The Summary Table of Options/SAR Grants in the Last Fiscal Year is set
forth below for the stock option grants in 1997.
<TABLE>
<CAPTION>
Number of % of Potential Realizable
Securities Total Value at Assumed
Underlying Options/ Exercise Rates of Stock Price
Name and Principal Options/SARS SARS or Base Expiration Appreciation for
Position Granted Granted Price Date Option Term
---------------------------------------------------------------------------------------------------------------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
John B. Wood
(President, Chief Executive
Officer) -- -- -- -- -- -- --
Mark W. Hester
(Executive V.P. and Chief
Operating Officer)
150,000 10.5% $1.01 February 2007 $95,278 $241,452
Lorenzo Tellez
(V.P., Treasurer, Chief
Financial Officer)
150,000 10.5 1.01 February 2007 95,278 241,452
David S. Aldrich
(V.P., Corporate Development
Strategy)
300,000 21.0 1.01 February 2007 190,555 482,904
Gerald D. Calhoun
(V.P., Human Resources,
& Secretary)
50,000 3.5 1.01 February 2007 31,759 80,484
</TABLE>
<PAGE>
Management Stock Options
The following table shows, as to the individuals named in the Summary
Compensation table, the number of shares acquired during such period through the
exercise of options, and the number of shares subject to and value of all
unexercised options held as of December 31, 1997.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End at FY-End (1)(2)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John B. Wood -- -- 1,305,718/1,412,272 $481,433/191,733
(President, Chief Executive
Officer)
Mark W. Hester -- -- 85,500/249,500 14,025/35,725
(Executive V.P. and Chief
Operating Officer)
Lorenzo Tellez -- -- 169,500/445,500 28,875/70,375
(V.P., Treasurer,
Chief Financial Officer)
David S. Aldrich -- -- 120,000/380,000 42,600/105,400
(V.P. Corporate Development
& Strategy)
Gerald D. Calhoun -- -- 118,900/131,000 10,050/24,450
(V.P. Human Resources,
and Secretary)
(1) Based on an estimated fair market value of the Company's Class A common stock of $1.07 per share at December 31, 1997.
(2) Based on an estimated fair market value of Enterworks common stock of $0.77 per share at December 31, 1997.
</TABLE>
Compensation of Directors
During the fiscal year ended December 31, 1997, employee directors were
paid a fee of $2,000 for each Board meeting attended. Outside directors Mr.
Byers and Dr. Bryen were paid an annual fee of $25,000, and further compensated
at a rate of $750 for each meeting in excess of four meetings a year. Chairman
of the Board, Dr. Ikle, is paid $25,000 quarterly for his service on the Board.
In addition, Mr. Byers receives $5,000 per annum for his service as Proxy
Chairman. The compensation paid to the outside directors is paid pursuant to a
proxy agreement between the Company, the Defense Security Service and certain of
the Company shareholders. During the fiscal year ended December 31, 1997, no
directors of the Company were awarded options.
Employment Contracts
As of December 31, 1997, the Company was a party to agreements with certain
of its executive officers. Mr. David S. Aldrich, V.P. Corporate Development and
Strategy, Mr. William L. P. Brownley, V.P. and General Counsel, Mr. Gerald D.
Calhoun, V.P. Human Resources and Secretary, Mr. Mark W. Hester, Executive V.P.
and Chief Operating Officer, Mr. Robert J. Marino, Executive V.P. and Chief
Marketing and Sales Officer, Mr. Lorenzo Tellez, Chief Financial Officer,
Treasurer and V.P. and Mr. John B. Wood, Director, President and Chief Executive
Officer, have agreements with the Company which provide for a payment of two
years base salary then in effect if involuntarily terminated. Accordingly,
Mssrs. Aldrich, Brownley, Calhoun, Hester, Marino, Tellez and Wood would
receive, given their present salary levels, $150,000, $150,000, $158,000,
$175,000, $195,000, $195,000 and $300,000, respectively for a two year period.
In addition, these agreements provide for bonus payments should certain
operating results be attained. Each year the Company renegotiates these
employment contracts as part of the yearly review process. Accordingly, in 1998,
the Company expects to review the contracts described above.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
<TABLE>
<CAPTION>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(1) (2) (3) (4)
Amount and Nature
Name and Address of Beneficial Ownership Percent of
Title of Class of Beneficial Owner as of March 1, 1998 Class
-------------- ------------------- ----------------------- ----------
<S> <C> <C> <C>
Class A Common Stock John R. C. Porter 23,030,718 shares(A) 75.99%
15 Bernes St.
London SW1W 9EA England
Class A Common Stock Telos Shared Savings Plan 3,658,536 shares 15.85%
19886 Ashburn Road
Ashburn, Virginia 20147
Class A Common Stock Union de Banques 3,150,468 shares(B) 12.92%
Suisses (Luxembourg) S.A.
299 Park Ave., 37th Fl.
New York, NY 10171
Class B Common Stock F&C Nominees Limited 3,143,358 shares 77.85%
11 Devonshire Square
London EC 2M 4YR England
Class B Common Stock Bank of Scotland (London) 815,700 shares 20.20%
Nominees Limited
11 Devonshire Square
London EC 2M 4YR England
Class A Common Stock David S. Aldrich 98,392 shares (C) 0.43%
Class A Common Stock Gerald A. Calhoun 133,293 shares (C) 0.58%
Class A Common Stock Mark W. Hester 160,778 shares (C) 0.70%
Class A Common Stock Lorenzo Tellez 317,440 shares (C) 1.38%
Class A Common Stock John B. Wood 1,296,650 shares (C) 5.62%
Class A Common Stock
All Officers and Directors As A Group (8 persons) 2,458,403 shares (D) 10.65%
12% Cumulative Exchangeable Value Partners, Ltd. 714,317 shares (E) 19.87%
Redeemable Preferred Stock 2200 Ross Avenue, Ste 4660
Dallas, TX 75201
Fisher Ewing Partners
2200 Ross Avenue, Ste 4660
Dallas, TX 75201
12% Cumulative Exchangeable Wynnefield Partners/Small Value Cap 215,000 shares 5.98%
Redeemable Preferred Stock One Penn Plaza, Suite 4720
New York, NY 10119
(A) Mr. Porter's holdings include 7,228,916 shares of Class A Common Stock purchasable upon exercise of a warrant.
(B) Union de Banques Suisses (Luxembourg) S.A. holdings include 1,312,695 shares of Class A Common Stock purchasable
upon exercise of a warrant.
(C) Messrs. Aldrich, Calhoun, Hester, Tellez and Wood hold options to acquire 90,000, 114,900, 90,000, 165,000 and 1,288,000
shares of the Company's Class A Common Stock, respectively, in addition to their current common stock holdings.
These shares are purchasable upon exercise of warrant and are exercisable within 60 days of March 1, 1998.
(D) Under the Company's stock option plans and certain stocks option agreements, all officers and directors as a group
hold options to acquire 2,071,218 shares of Class A Common Stock exercisable within 60 days after March 1, 1998.
(E) Value Partners Ltd. and Fisher Ewing Partners have filed jointly a Schedule 13D under which they disclosed that they may
act as a "group" within the meaning of Section 13(d) of the Securities Exchange Act. Each of the reporting persons
disclosed that it may be deemed to beneficially own the aggregate of 714,317 shares of the Public Preferred Stock
held of record by the reporting persons collectively.
</TABLE>
<PAGE>
Item 13. Certain Relationships and Related Transactions
Mr. Joseph P. Beninati served as Chairman of the Board for the majority of
1994 before resigning January 5, 1995. The Company paid $165,000 annually
subject to a three year employment agreement that began in 1995 and terminated
January 8, 1998. Mr. Beninati resigned from the Board in 1996.
Mr. John R. C. Porter has a consulting agreement with the Company whereby
he will be compensated for specific services. Expense recorded pursuant to this
agreement was $200,000 for 1997.
Mr. Byers, a Director of the Company, has a consulting agreement with the
Company to help the Company expand its business operations into the
international marketplace. Under this agreement Mr. Byers receives $10,500 a
month for his services. Mr. Byers was compensated $130,000, $128,000 and
$121,500 for 1997, 1996 and 1995, respectively.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
All financial statements of the registrant as set forth under Item
8 of this report on Form 10-K.
(a) 2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is included in the consolidated financial
statements or notes thereto.
(a) 3. Exhibits:
Exhibits marked with (1*) are incorporated by reference to the Company's
Registration Statement No. 2-84171 filed June 2, 1983. Exhibits marked with (3*)
are incorporated by reference to the Company's Form 10-K report for the fiscal
year ended March 31, 1987. Exhibits marked with (4*) are incorporated by
reference to the Company's Form 10-K report for the fiscal year ended March 31,
1989. The registrant will furnish to stockholders a copy of other exhibits upon
payment of $.20 per page to cover the expense of furnishing such copies.
Requests should be directed to the attention of Investor Relations at Telos
Corporation, 19886 Ashburn Road, Ashburn, Virginia 20147-2358.
2.6 Stock Purchase Agreement dated as of January 14, 1992,
by and among C3, Inc., Telos Corporation and Contel
Federal Systems, Inc. (Incorporated by reference to C3,
Inc. Form 8-K filed January 29, 1992)
3.1 (1*) Articles of Amendment and Restatement of C3, Inc.
3.2 (1*) Articles of Amendment of C3, Inc. dated August 31, 1981.
3.3 (3*) Articles supplementary of C3, Inc. dated May 31, 1984.
3.4 (4*) Articles of Amendment of C3, Inc. dated August 18, 1988.
3.5 Articles of Amendment and Restatement Supplementary to
the Articles of Incorporation dated August 3, 1990.
(Incorporated by reference to C3, Inc. 10-Q for the
quarter ended June 30, 1990)
3.6 Restated Bylaws of C3, Inc. (Incorporated by reference
to C3, Inc. 10-Q for the quarter ended December 31, 1990)
3.7 Articles of Amendment of C3, Inc. dated April 13, 1995
4.1 Form of Indenture between the Registrant and Bankers Trust
Company, as Trustee, relating to the 12% Junior
Subordinated Debentures Due 2009. (Incorporated herein by
reference to C3's Registration Statement on Form S-4 filed
October 20, 1989)
4.3 Form of the terms of the 12% Cumulative Exchangeable
Redeemable Preferred Stock of the Registrant.
(Incorporated herein by reference to C3's Registration
Statement on Form S-4 filed October 20, 1989)
4.4 Shareholders Agreement dated as of August 3, 1990 by
and among C3, Inc.; Union de Banques Suisses
(Luxembourg), S.A.; C3 Investors, L.P.; Anthony Craig,
together with the investors; the Class A holders; MIM
Limited; Knoll and Associates, Inc.; Murray Enterprises
PLC; Electra Development Holdings; and Hartley Limited.
(Incorporated by reference to C3, Inc. 10-Q for the
quarter ended June 30, 1990)
4.5 Articles of Amendment and Restatement of the Company,
filed with the Secretary of State of the State of
Maryland on January 14, 1992. (Incorporated by
reference to C3, Inc. Form 8-K filed January 29, 1992)
10.20 Revolving and Reducing Senior Facility Credit Agreemen
dated as of January 14, 1992, among C3, Inc., Telos
Corporation and NationsBank, N.A. (Incorporated by
reference to C3, Inc. Form 8-K filed January 29, 1992)
10.31 September 27, 1993 Settlement Agreement among John R.C.
Porter, Toxford Corporation, Cantrade Nominees Ltd.,
Cantrade Trust Company (Cayman) Ltd., Cantrade Trustee,
AG, Fred Knoll, Cottonwood Holdings, C3 Investors L.P.,
C3, Inc., Telos Corporation, Joseph P. Beninati, John
B. Wood and Beninati & Wood, Inc. (Incorporated by
reference to C3, Inc.Form 8-K filed October 18, 1993)
<PAGE>
10.32 September 27, 1993 Stock Purchase and Sale Agreement
between Mr. John R.C. Porter and C3 Investors, L.P.
(Incorporated by reference to C3, Inc. Form 8-K filed
October 18, 1993)
10.33 September 27, 1993 Stock Purchase and Sale Agreement
between Mr. John R.C.Porter and Cottonwood Holdings, Inc.
(Incorporated by reference to C3, Inc. Form 8-K filed
October 18, 1993)
10.34 September 27, 1993 Note Interest Purchase and Sale
Agreement among Mr. John R.C.Porter, Cottonwood and C3,
Inc.(Incorporated by reference to C3, Inc. Form 8-K filed
October 18, 1993)
10.35 October 8, 1993 Promissory Note in the amount of $8,438,000
issued by Mr. John R.C.Porter in favor of C3 Investors,
L.P.(Incorporated by reference to C3, Inc. Form 8-K filed
October 18, 1993)
10.36 October 8, 1993 Promissory Note in the amount of $1,562,000
issued by Mr. John R.C. Porter in favor of Cottonwood
Holdings, Inc. (Incorporated by reference to C3, Inc. Form
8-K filed October 18, 1993)
10.37 September 27, 1993 Collateral Agency, Security and Pledge
Agreement among Mr. John R.C. Porter, Mr. Fred Knoll,
Cottonwood Holdings, C3 Investors, L.P., C3, Inc., Telos
Corporation, Toxford Corporation, Cantrade Nominees
Limited, Mr. Robert M. Ercole and Mr. Frank S. Jones, Jr.
(Incorporated by reference to C3, Inc. Form 8-K filed
October 18, 1993)
10.38 September 27, 1993 Standstill Agreement among Mr. John R.C.
Porter, Mr. Fred Knoll, Mr. Alfredo Frohlich and C3, Inc.
(Incorporated by reference to C3, Inc. Form 8-K filed
October 18, 1993)
10.39 September 27, 1993 Mutual Release among Mr. John R.C.
Porter, Mr. Fred Knoll, Cottonwood Holdings, C3 Investors,
L.P., C3, Inc., Telos Corporation, Mr. Joseph P. Beninati,
Mr. John B. Wood, and Beninati & Wood, Inc. (Incorporated
by reference to C3, Inc. Form 8-K filed October 18, 1993)
10.40 September 27, 1993 Consulting Agreement among Mr. Fred
Knoll, C3, Inc. and Telos Corporation. (Incorporated by
reference to C3, Inc. Form 8-K filed October 18, 1993)
10.43 Amendment to Revolving and Reducing Senior Credit Facility
dated as of December 31, 1993 among C3, Inc., Telos
Corporation and NationsBank, N.A.
10.44 Amendment to Revolving and Reducing Senior Credit Facility
dated as of April 11, 1994 among C3, Inc., Telos
Corporation and NationsBank, N.A.
10.45 Amendment to Revolving and Reducing Senior Credit Facility
dated as of June 8, 1994 among C3, Inc., Telos Corporation
and NationsBank, N.A.
10.46 Amendment to Revolving and Reducing Senior Credit Facility
dated as of October 7, 1994 among C3, Inc., Telos
Corporation and NationsBank, N.A.
10.47 October 7, 1994 Letter Agreement among C3, Inc., Toxford
Corporation, and NationsBank, N.A. regarding cash
collateral held on behalf of the Company.
10.48 October 25, 1994 General Release and Settlement memorandum
among Sapiens International Corporation N.V., Sapiens
International Corporation B.V., Sapiens U.S.A., Inc., C3,
Inc. and Telos Corporation.
10.49 Amendment to Revolving and Reducing Senior Credit Facility
dated as of January 5, 1995 among C3, Inc., Telos
Corporation and NationsBank, N.A.
10.50 Amendment to Revolving and Reducing Senior Credit Facility
dated as of January 12, 1995 among C3, Inc., Telos
Corporation and NationsBank, N.A.
<PAGE>
10.51 Waiver and Amendment to Revolving and Reducing Senior
Credit Facility dated as of April 17, 1995 among C3, Inc.,
Telos Corporation and NationsBank, N.A.
10.58 Series B Senior Subordinated Secured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and Drayton English and International Investment
Trust
10.59 Series B Senior Subordinated Secured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and J. O. Hambro Investment Management, Ltd.
10.60 Series B Senior Subordinated Secured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and North Atlantic Smaller Companies Investment
Trust, PLC
10.61 Series B Senior Subordinated Secured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and Mr. John R.C. Porter
10.62 Series B Senior Subordinated Secured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and Sir Leslie Porter
10.63 Series B Senior Subordinated Secured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and Second Consolidated Trust, PLC
10.64 Series B Senior Subordinated Secured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and Toxford Corp.
10.65 Series C Senior Subordinated Unsecured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and Drayton English and International Investment
Trust
10.66 Series C Senior Subordinated Unsecured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and J.O. Hambro Investment Management, Ltd.
10.67 Series C Senior Subordinated Unsecured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and North Atlantic Smaller Companies Investment
Trust, PLC
10.68 Series C Senior Subordinated Unsecured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and Mr. John R.C. Porter
10.69 Series C Senior Subordinated Unsecured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and Sir Leslie Porter
10.70 Series C Senior Subordinated Unsecured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and Second Consolidated Trust, PLC
10.71 Series C Senior Subordinated Unsecured Note due October 1,
2000 as of October 13, 1995 between Telos Corporation
(Maryland) and Toxford Corp.
10.72 Amendment to Revolving and Reducing Senior Credit Facility
dated as of August 4, 1995 Telos Corporation (Maryland),
Telos Corporation (California) and NationsBank N.A.
10.73 Amendment to Revolving and Reducing Senior Credit Facility
dated as of October 13, 1995 Telos Corporation (Maryland),
Telos Corporation (California) and NationsBank N.A.
10.74 1996 Stock Option Plan
10.75 None
10.76 Sixteenth Amendment to Credit Facility and Tenth Amended d
an Restated Promissory Note
<PAGE>
10.77 Enterworks, Inc. 1996 Stock Option Plan
10.78 Form of Series A Senior Subordinated Unsecured Note
10.79 Form of Enterworks, Inc., inc. Capital Stock Purchase
Series A Warrant
10.80 Asset Purchase Agreement
10.81 Amendment No. 1 to Asset Purchase Agreement
10.82 Asset Purchase Agreement
10.83 Interim Agreement
21 Schedule of Subsidiaries.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Telos Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELOS CORPORATION
By: John B. Wood
------------------------
President and
Chief Executive Officer
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Telos Corporation
and in the capacities and on the date indicated.
Signature Title Date
/s/ Fred Charles Ikle
- ---------------------- Chairman of the March 31, 1998
Fred Charles Ikle Board of Directors
/s/ John B. Wood
- ---------------------- President, Chief Executive
John B. Wood Officer & Director March 31, 1998
(Principal Executive Officer)
/s/ Stephen D. Bryen
- ---------------------- Director March 31, 1998
Stephen D. Bryen
/s/ Norman P. Byers
- ---------------------- Director March 31, 1998
Norman P. Byers
/s/ Lorenzo Tellez
- ---------------------- Chief Financial Officer March 31, 1998
Lorenzo Tellez (Principal Financial Officer
& Principal Accounting Officer)
<PAGE>
<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>
<CIK> 0000320121
<NAME> Telos Corporation
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 587,000
<SECURITIES> 0
<RECEIVABLES> 58,936,000
<ALLOWANCES> 964,000
<INVENTORY> 12,390,000
<CURRENT-ASSETS> 76,257,000
<PP&E> 38,339,000
<DEPRECIATION> 22,609,000
<TOTAL-ASSETS> 109,718,000
<CURRENT-LIABILITIES> 32,431,000
<BONDS> 56,875,000
47,193,000
0
<COMMON> 78,000
<OTHER-SE> (38,944,000)
<TOTAL-LIABILITY-AND-EQUITY> 109,718,000
<SALES> 129,337,000
<TOTAL-REVENUES> 253,787,000
<CGS> 114,462,000
<TOTAL-COSTS> 218,430,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 490,000
<INTEREST-EXPENSE> 7,455,000
<INCOME-PRETAX> 80,000
<INCOME-TAX> (1,332,000)
<INCOME-CONTINUING> 1,412,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,412,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
