<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: June 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number: 1-8443
TELOS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-0880974
(State of Incorporation) (I.R.S. Employer Identification No.)
19886 Ashburn Road, Ashburn, Virginia 20147-2358
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number,
including area code: (703) 724-3800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
As of August 1, 1998, the registrant had 21,238,980 shares of Class A Common
Stock, no par value, and 4,037,628 shares of Class B Common Stock, no par value;
and 3,595,586 shares of 12% Cumulative Exchangeable Redeemable Preferred Stock
par value $.01 per share, outstanding.
No public market exists for the registrant's Common Stock.
Number of pages in this report (excluding exhibits): 17
-----
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
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<TABLE>
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Page
<S> <C>
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1998 and 1997.....................................................3
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 ................................................................................4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997...............................................................5
Notes to Condensed Consolidated Financial Statements....................................................6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................................9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................15
Item 2. Changes in Securities and Use of Proceeds......................................................15
Item 3. Defaults Upon Senior Securities.............................................................15-16
Item 4. Submission of Matters to a Vote of Security Holders............................................16
Item 6. Exhibits and Reports on Form 8-K...............................................................16
SIGNATURES....................................................................................................17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(amounts in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales
Systems and Support Services $27,024 $32,189 $53,324 $58,025
Systems Integration 18,153 24,907 34,346 53,134
Enterworks 1,532 993 2,833 1,275
------ ------ ------ -------
46,709 58,089 90,503 112,434
Costs and expenses
Cost of sales 39,634 48,511 80,115 95,159
Selling, general and
administrative expenses 6,431 6,869 12,673 13,394
Goodwill amortization 132 209 325 434
----- ----- ----- ------
Operating income (loss) 512 2,500 (2,610) 3,447
Other income (expenses)
Gain on sale of assets -- -- 5,683 --
Other income (expenses) 6 11 26 23
Interest expense (1,537) (1,883) (3,316) (3,643)
----- ----- ----- -----
(Loss) income before taxes (1,019) 628 (217) (173)
Income tax provision (686) -- (811) --
------ ----- ----- -----
Net (loss) income $(1,705) $ 628 $(1,028) $ (173)
===== ===== ===== =====
The accompanying notes are an integral part of these
condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
ASSETS
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 141 $ 587
Accounts receivable, net 41,670 57,972
Inventories, net 10,024 12,390
Deferred income taxes 2,204 4,632
Other current assets 634 676
------ ------
Total current assets 54,673 76,257
Property and equipment, net of
accumulated depreciation of
$23,592 and $22,609, respectively 15,146 15,730
Goodwill, net 7,183 12,466
Other assets 7,546 5,265
------ -------
$84,548 $109,718
====== =======
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Accounts payable $17,841 $16,912
Other current liabilities 7,296 6,835
Accrued compensation and benefits 6,007 8,684
------ ------
Total current liabilities 31,144 32,431
Senior credit facility 23,750 39,945
Senior subordinated notes 17,011 16,930
Capital lease obligations 11,856 12,085
------ -------
Total liabilities 83,761 101,391
------ -------
Redeemable preferred stock
Senior redeemable preferred stock 5,417 5,207
Class B redeemable preferred stock -- 12,035
Redeemable preferred stock 32,880 29,951
------ ------
Total preferred stock 38,297 47,193
------ ------
Stockholders' investment
Common stock 79 78
Capital in excess of par 2,397 --
Retained earnings (deficit) (39,986) (38,944)
------ ------
Total stockholders' investment (deficit) (37,510) (38,866)
------ ------
$84,548 $109,718
====== =======
The accompanying notes are an integral part of these
condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
Six Months
Ended June 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net loss $(1,028) $ (173)
Adjustments to reconcile net loss to cash
(used in) provided by operating activities:
Gain on sale of assets (5,683) --
Depreciation and amortization 1,668 1,919
Goodwill amortization 325 434
Other noncash items 381 39
Changes in assets and liabilities 12,541 (19,128)
------ ------
Cash provided by (used in) operating activities 8,204 (16,909)
------ ------
Investing activities:
Proceeds from sale of assets 14,675 --
Investment in products (1,111) (1,154)
Purchase of property and equipment (790) (1,106)
------ -----
Cash provided by (used in) investing activities 12,774 (2,260)
------ -----
Financing activities:
(Repayment of) proceeds from borrowings under
senior credit facility (16,195) 18,003
Payments under capital leases (229) (183)
Retirement of Class B redeemable preferred stock (5,000) --
Repayment of senior subordinated notes -- (675)
------ ------
Cash (used in) provided by financing activities (21,424) 17,145
------ ------
Decrease in cash and cash equivalents (446) (2,024)
Cash and cash equivalents at beginning
of period 587 2,781
----- -----
Cash and cash equivalents at end
of period $ 141 $ 757
===== =====
The accompanying notes are an integral part of these
condensed consolidated financial statements.
</TABLE>
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. General
The accompanying condensed consolidated financial statements of Telos
Corporation ("Telos") and its wholly-owned subsidiaries, Telos Corporation
(California), Telos Field Engineering, Inc., Telos International Corporation,
and its majority-owned subsidiary, Enterworks, Inc. (collectively, the
"Company") have been prepared without audit. Certain information and note
disclosures normally included in the financial statements presented in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of the Company, the accompanying condensed consolidated
financial statements reflect all adjustments and reclassifications (which
include only normal recurring adjustments) necessary to present fairly the
financial position of the Company as of June 30, 1998 and December 31, 1997, and
the results of its operations and its cash flows for the three and six month
periods ended June 30, 1998 and 1997. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the fiscal year
ended December 31, 1997.
Certain reclassifications have been made to the prior year's financial
statements to conform to the classifications used in the current period.
Note 2. Sale of Assets
On February 28, 1998, Telos sold substantially all of the net assets of one
of its support services divisions, Telos Information Systems ("TIS"), to NYMA,
Inc., a subsidiary of Federal Data Corporation of Bethesda, Maryland for
approximately $14.7 million in cash. The Company has recorded a gain of $5.7
million in its condensed consolidated statement of operations for the six months
ended June 30, 1998.
Note 3. Debt Obligations
The Company has a $45 million Senior Credit Facility ("Facility") with a
bank which matures on July 1, 2000. Borrowings under the Facility are
collateralized by certain assets of the Company (primarily accounts receivable
and inventory), and the amount of available borrowings fluctuates based on the
underlying asset borrowing base and the Company's working capital requirements.
At June 30, 1998, the Company was not in compliance with certain financial
covenants contained within the Facility. The bank has waived this noncompliance.
Note 4. Preferred Stock
Senior Redeemable Preferred Stock
- ---------------------------------
The components of the senior redeemable preferred stock are Series A-1 and
Series A-2 redeemable preferred stock each with $.01 par value and 1,250 and
1,750 shares authorized, issued and outstanding, respectively. The Series A-1
and Series A-2 each carry a cumulative per annum dividend rate of 14.125% of
their liquidation value of $1,000 per share. The dividends are payable
semi-annually on June 30 and December 31 of each year. The liquidation
preference of the preferred stock is the face amount of the Series A-1 and A-2
($1,000 per share), plus all accrued and unpaid dividends. The Series A-1 and
A-2 Preferred Stock is senior to all other present and future equity of the
Company. The Company is required to redeem all of the outstanding shares of the
Series A-1 and A-2 on December 31, 2001, subject to the legal availability of
funds. At June 30, 1998 and December 31, 1997 cumulative undeclared, unpaid
dividends relating to Series A-1 and A-2 Preferred Stock were accrued for
financial reporting purposes in the amount of $2,417,000 and $2,207,000
respectively.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Class B Redeemable Preferred Stock
- ----------------------------------
On May 8, 1998 the Company entered into an agreement with one of its
shareholders, Union de Banques Suisses (Luxembourg) S.A. ("UBS"), to retire all
of UBS's equity holdings in the Company. These equity holdings included all of
the 7,500 shares of the Company's Class B Preferred Stock with a liquidation
preference of $1,000 per share, and the cumulative unpaid dividends of
approximately $4.8 million, 1,837,773 shares of the Company's Class A Common
Stock, and 1,312,695 of the Company's Class A Common Stock warrants. The
purchase price to retire these interests was $6.5 million, of which $5 million
was paid in cash, and the remaining $1.5 million was funded by two separate
letters of credit secured by the Company's lender. These will mature in 120 and
180 days from the date of the transaction.
The $5.9 million excess of the carrying amount of the Class B Redeemable
Preferred Stock over the redemption price was recorded as an increase in capital
in excess of par; there was no impact on income from this transaction.
12% Cumulative Exchangeable Redeemable Preferred Stock
- ------------------------------------------------------
A maximum of 6,000,000 shares of 12% Cumulative Exchangeable Redeemable
Preferred Stock (the "Public Preferred Stock"), par value $.01 per share, have
been authorized for issuance. The Company has issued 3,595,586 shares of the
Public Preferred Stock. The Public Preferred Stock accrues a semi-annual
dividend at the annual rate of 12% ($1.20) per share, based on the liquidation
preference of $10 per share and is fully cumulative.
The Public Preferred Stock has a 20 year maturity, however, the Company
must redeem, out of funds legally available, 20% of the Public Preferred Stock
on the 16th 17th, 18th and 19th anniversaries of November 12, 1989, leaving 20%
to be redeemed at maturity. On any dividend payment date after November 21,
1991, the Company may exchange the Public Preferred Stock, in whole or in part,
for 12% Junior Subordinated Debentures that are redeemable upon terms
substantially similar to the Public Preferred Stock and subordinated to all
indebtedness for borrowed money and like obligations of the Company.
Through November 21, 1995, the Company had the option to pay dividends in
additional shares of Preferred Stock in lieu of cash. Dividends are payable by
the Company, provided the Company has legally available funds under Maryland law
and is able to pay dividends under its charter and other corporate documents,
when and if declared by the Board of Directors, commencing June 1, 1990, and on
each six month anniversary thereof. Dividends in additional shares of the
Preferred Stock were paid at the rate of 6% of a share for each $.60 of such
dividends not paid in cash. No dividends have been declared or paid during
fiscal years 1992 through 1997. Cumulative undeclared dividends as of June 30,
1998 accrued for financial reporting purposes totaled $16,892,000. Dividends for
the years 1992 through 1994 and for the dividend payable June 1, 1995 were
accrued under the assumption that the dividend will be paid in additional shares
of preferred stock and are valued at $3,950,000. Had the Company accrued these
dividends on a cash basis, the total amount accrued would have been $15,101,000.
The Company has not declared or paid dividends since 1991, due to
restrictions and ambiguities relating to the payment of dividends contained
within its charter, its working capital facility agreement, and under Maryland
law.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
In the first six months of 1998, the Company experienced a decrease in
revenue of $21.9 million as compared to the same period in 1997. This decrease
was largely attributable to a decrease of $18.8 million of revenue from the
Company's Systems Integration Group. The Systems Integration Group was impacted
by the expiration of the Immigration and Naturalization Services Contract in
September 1997 and a lack of follow-up work from certain large contracts which
were in place in 1997. In addition, Systems and Support Services revenues for
the first six months of 1998 were $4.7 million less than the same 1997 period
principally due to the sale of TIS in February 1998.
Operating profitability decreased during the first six months of 1998 as
compared to the same 1997 period, principally due to the effect of the revenue
decreases summarized above, a less profitable product mix in 1998 on certain
System Integration Group contracts, and under absorption of infrastructure and
the fixed nature of facility costs.
Total backlog from existing contracts was approximately $1.01 billion and
$1.07 billion as of June 30, 1998 and December 31, 1997, respectively. Of the
$1.01 billion in total backlog, $818.7 million is backlog under the Company's
SMC-II contract. The SMC-II contract expires on September 30, 1998. As of June
30, 1998, the funded backlog of the Company totaled $61.7 million, a decrease
from $104.3 million from December 31, 1997. This decrease is primarily due to
the sale of TIS which decreased funded backlog by $24.9 million in the first
quarter of 1998. Funded backlog represents aggregate contract revenues remaining
to be earned by the Company at a given time, but only to the extent, in the case
of government contracts, funded by a procuring government agency and allotted to
the contracts.
Results of Operations
The condensed consolidated statements of operations include the results of
operations of Telos Corporation and its wholly owned subsidiaries Telos
Corporation (California), Telos Field Engineering Inc. ("TFE"), Telos
International Corporation ("TIC"), and it majority owned subsidiary Enterworks,
Inc. ("Enterworks") ("the Company"). The major elements of the Company's
operating expenses as a percentage of sales for the three and six month periods
ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 84.8 83.5 88.5 84.6
SG&A expenses 13.8 11.8 14.1 11.9
Goodwill amortization 0.3 0.4 0.3 0.4
--- ---- --- ----
Operating income (loss) 1.1 4.3 (2.9) 3.1
Other income (expense) -- -- -- --
Gain on sale of assets -- -- 6.3 --
Interest expense (3.3) (3.2) (3.6) (3.2)
Income tax provision (1.5) -- (0.9) --
--- --- --- ---
Net (loss) income (3.7)% 1.1% (1.1)% (0.1)%
=== === === ===
</TABLE>
<PAGE>
Financial Data by Market Segment
Sales, gross profit, and gross margin by market segment for the periods
designated below are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
(amounts in thousands)
<S> <C> <C> <C> <C>
Revenues:
Systems and Support Services $27,024 $32,189 $53,324 $ 58,025
Systems Integration 18,153 24,907 34,346 53,134
Enterworks 1,532 993 2,833 1,275
------ ------ ------ -------
Total $46,709 $58,089 $90,503 $112,434
====== ====== ====== =======
Gross Profit:
Systems and Support Services $4,228 $6,126 $8,412 $10,045
Systems Integration 1,947 3,692 2,111 7,622
Enterworks 900 (240) (135) (392)
----- ----- ----- ------
Total $7,075 $9,578 $10,388 $17,275
===== ===== ====== ======
Gross Margin:
Systems and Support Services 15.6% 19.0% 15.8% 17.3%
Systems Integration 10.7% 14.8% 6.1% 14.3%
Enterworks 58.7% (24.2)% (4.8)% (30.7)%
Total 15.1% 16.5% 11.5% 15.4%
</TABLE>
For the three month period ended June 30, 1998, revenue decreased by $11.4
million, or 19.6% to $46.7 million from $58.1 million for the comparable 1997
period. Of the $11.4 million decrease, $6.7 million was attributable to the
Systems Integration Group, which experienced this loss of revenue primarily
because of the expiration of its Immigration and Naturalization Services
contract ("INS contract") in September 1997. The INS contract contributed
revenues of $7.6 million in the second quarter of 1997. The Systems and Support
Services Group also experienced a $5.2 million decrease in revenue from second
quarter 1998 compared to second quarter 1997. This decrease is primarily due to
a $6.3 million decrease in revenue resulting from the sale of the TIS division
in February 1998. This loss of revenue was partially offset by an increase in
software solutions sales related to an order under the Artillery Training
Simulation Devices product line. The declines in System Integration and Systems
and Support Services revenue were also partially offset by an increase of
$539,000 in Enterworks revenue for the second quarter of 1998 compared to the
second quarter of 1997. The increase is primarily due to Enterworks sales to the
Army Logistics market segment.
Revenue decreased $21.9 million or 19.5% to $90.5 million for the six
months ended June 30, 1998, from $112.4 million for the comparable 1997 period.
The decrease for the six month period includes an $18.8 million decrease in
Systems Integration revenue and a $4.7 million decrease in Systems and Support
Services revenue, partially offset by an increase of $1.6 million in Enterworks
revenue. This decrease in the six month revenue is primarily due to the lack of
revenue from the INS contract, which expired in September 1997 and had revenue
of $17.3 million in the first six months of 1997, the sale of TIS in February
1998, and the lack of follow-up work from large contracts which were in place in
1997. These decreases were slightly offset by sales under the Artillery Training
Simulation Devices product line of $3.0 million, and Enterworks sales to the
Army Logistics and health care market segments.
<PAGE>
Cost of sales decreased by $8.9 million or 18.3%, to $39.6 million in the
three month period ended June 30, 1998, from $48.5 million in the comparable
1997 period. The decrease in cost of sales for the three month period includes a
$5.0 million decrease in systems integration cost of sales, a $3.3 million
decrease in systems and support services cost of sales, and a $600,000 decrease
in Enterworks cost of sales. Except for Enterworks, the decrease in cost of
sales resulted from the decreases in sales for the period. Additionally, cost of
sales increased due to unfavorable changes in product mix and by an under
absorption of infrastructure and the fixed nature of facilities costs.
For the six months ended June 30, 1998, cost of sales decreased $15.0
million, or 15.8%, to $80.1 million from $95.1 million for the same period in
1997. The change in cost of sales includes a $13.3 million decrease in systems
integration cost of sales and a $3.0 million decrease in systems and support
services cost of sales, and a $1.3 million increase in Enterworks cost of sales.
The reasons for these cost of sales decreases are consistent with those
summarized in the preceding paragraph.
Gross profit decreased $2.5 million in the three month period to $7.1
million in 1998, from $9.6 million in the comparable 1997 period. The decrease
in gross profit includes a $1.7 million decrease in systems integration gross
profit, and a $1.9 million decrease in systems and support services gross
profit, partially offset by an increase in Enterworks gross profit of $1.1
million. For the six month period, gross profit decreased by $6.9 million to
$10.4 million from $17.3 million. This decrease includes a $5.5 million decrease
in systems integration gross profit and a $1.6 million decrease in systems and
support services gross profit, offset by a $257,000 decline in Enterworks gross
loss. The reasons for the gross profit decrease for the periods ended June 30,
1998 compared to June 30, 1997 related to the reduced revenue base in both the
Systems Integration and Systems and Support Services Groups. In addition, the
Systems Integration Group experienced shifts in product mix which significantly
impacted gross margin.
Gross margins were 15.1% and 11.5%, respectively, for the three and six
month periods of 1998 as compared to 16.5% and 15.4%, respectively, for the
comparable periods of 1997.
Selling, general, and administrative expense ("SG&A") decreased by
approximately $438,000 or 6.4%, to $6.4 million in the second quarter of 1998
from $6.9 million in the comparable period of 1997. For the six month period of
1998, SG&A decreased $721,000 to $12.7 million from $13.4 million in 1997. These
decreases are due primarily to the Company's consolidation of its administrative
support functions and were partially offset by an increased investment in
research and development and sales and marketing for Enterworks. Excluding the
additional expense incurred for Enterworks research and development of $545,000
and Enterworks sales and marketing costs of $824,000, selling general and
administrative expense decreased $2.1 million for the six months ended June 30,
1998 compared to the same period in 1997.
SG&A as a percentage of revenues increased to 13.8% for the second quarter
of 1998 from 11.8% in the comparable 1997 period. SG&A as a percentage of
revenues for the six month period ended June 30, 1998 increased to 14.1% from
11.9% compared to the same period in 1997.
Goodwill amortization expense decreased $77,000 to $132,000 for the three
months and decreased by $109,000 to $325,000 for the six months ended June 30,
1998. These reductions are due to a decrease in the goodwill balance associated
with the sale of TIS in early 1998.
Operating income decreased by $2.0 million to $512,000 in the three month
period ended June 30, 1998 from $2.5 million of operating profit in the
comparable 1997 period. Operating income decreased $6.1 million to a $2.6
million operating loss for the six months ended June 30, 1998 from a $3.4
million operating profit for the six month period ended June 30, 1997. These
decreases resulted from the aforementioned decreases in gross profit.
<PAGE>
Telos sold substantially all of the net assets of one of its divisions,
TIS, in the first quarter of 1998. The transaction generated approximately $14.7
million in cash proceeds and a gain of $5.7 million. The Company expects that
future 1998 quarterly revenues and operating profits will decrease, when
compared to 1997, as a result of the TIS sale. Although the Company expects to
offset effects of the TIS sale by expanding its business base, there is no
assurance that such expansion will occur.
Interest expense decreased approximately $346,000 to $1.5 million in the
second quarter of 1998 from $1.9 million in the comparable 1997 period, and
decreased approximately $327,000 to $3.3 million for the six months ended June
30, 1998 from $3.6 million for the comparable 1997 period. These decreases are
due to decreased debt levels in 1998.
The income tax provision was $686,000 and $811,000 for the three and six
months ended June 30, 1998, respectively. The tax provisions were primarily
attributable to provisions for state income taxes and increases and allowances
relating to the recoverability of deferred tax assets. An income tax provision
was not recorded for the three or six month periods ended June 30, 1997,
principally because federal and state net operating loss carryforwards were
sufficient to offset taxes due for those periods.
Liquidity and Capital Resources
For the six months ended June 30, 1998, the Company generated $8.2 million
of cash from its operating activities. This cash was provided by reductions of
accounts receivable of $16.3 million, offset by increased losses incurred in
operations. Cash provided by investing activities was $12.8 million, which is
primarily attributable to the proceeds from the sale of TIS of $14.7 million.
Cash used by financing activities during the first half of the year was
principally due to $16.2 million of net repayment of debt and $5.0 million
relating to the retirement of preferred stock.
At June 30, 1998, the Company had outstanding debt and long term
obligations of $52.6 million, consisting of $23.7 million under the secured
senior credit facility, $17.0 million in subordinated debt, and $11.9 million in
capital lease obligations.
The Company regularly evaluates its financing requirements to support its
business base. Company revenues are seasonal and are significantly influenced by
the federal government's fiscal year end, which is September 30. The Company
anticipates that its projected cash flows from operations together with amounts
available under its senior credit facility will be adequate to fund operations
at least through 1998. In addition, the Company has and continues, from time to
time, to evaluate various financing options for additional capital infusion and
long-term growth.
In May 1998, the Company retired all of the equity holdings of Union de
Banques Suisses (Luxembourg) S.A. for $6.5 million, of which $5 million was paid
in cash in May 1998, and the remaining $1.5 million was funded by two separate
letters of credit secured by the Company's lender. These will mature in 120 and
180 days from the date of transaction.
At June 30, 1998, the Company was noncompliant with certain financial
covenants contained in its senior credit facility. The Company's bank has waived
this noncompliance.
Year 2000
The Company, like most owners of computer software, will be required to
modify significant portions of its 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, modification costs and software purchased with the
express purpose of fixing the year 2000 problem will be expensed as incurred.
Management believes that on the basis of its review of its own computer based
systems, the Company is or will be year 2000 compliant without incurring
additional material costs. All software created and sold by the Company is
believed to be compliant or will be compliant by the year 2000. The Company has
been informed by its suppliers that all software licensed to the Company for
resale will be compliant by the year 2000. Agencies of the United States
Government are principal customers of the Company. If such agencies experience
significant year 2000 system failures, under terms of typical government
contracts, the Company's performance could be delayed or contracts could be
terminated for convenience. If similar failures are experienced by customers or
potential customers of the Company, this would also have an impact on the
Company's financial performance.
<PAGE>
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time.
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, general economic conditions,
the timing and approval of the federal government's fiscal year budget, business
growth through obtaining new business and, once obtained, the Company's ability
to perform successfully at a profit, the Company's ability to convert contract
backlog to revenue, the Company's ability to secure adequate capital and
financing to support continued business growth, and the risk of the federal
government terminating contracts with the Company. While the Company has not
experienced significant contract terminations with the federal government, the
federal government can terminate at its convenience. Should this occur, the
Company's operating results could be 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 regularly reviews
the requirements for additional financing. However, no assurance can be made on
whether such financing, if necessary, can be obtained on acceptable terms.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 1, 1998, the U.S. District Court for the Eastern District of
Virginia entered its final order in Telos Corporation v. Cede & Co., Case No.
1:97CVO439. In its final order, the court held that dividends payable on Telos'
12% Cumulative Exchangeable Redeemable Preferred Stock (the "Preferred Stock")
had been in arrears and unpaid for more than three consecutive full semi-annual
periods and that the holders of the Preferred Stock were entitled to elect two
Class D directors on or before July 31, 1998. Said election was held on July 31,
1998, and the Preferred Stock shareholders elected two Class D directors.
Item 2. Changes in Securities and Use of Proceeds
On May 8, 1998 the Company entered into an agreement with one of its
shareholders, Union de Banques Suisses (Luxembourg) S.A. ("UBS"), to retire all
of UBS's equity holdings in the Company. These equity holdings included all of
the 7,500 shares of the Company's Class B Preferred Stock with a liquidation
preference of $1,000 per share, and the cumulative unpaid dividends of
approximately $4.8 million, 1,837,773 shares of the Company's Class A Common
Stock, and 1,312,695 of the Company's Class A Common Stock warrants. The
purchase price to retire these interests was $6.5 million, of which $5 million
was paid in cash, and the remaining $1.5 million was funded by two separate
letters of credit secured by the Company's lender. These will mature in 120 and
180 days from the date of the transaction.
Item 3. Defaults Upon Senior Securities
Senior Redeemable Preferred Stocks
The Company has not declared dividends on its Senior Redeemable Preferred
Stock, Series A-1 and A-2, since their issuance. Total undeclared unpaid
dividends accrued for financial reporting purposes are $2,417,000 for the Series
A-1 and A-2 Preferred Stock at June 30, 1998.
12% Cumulative Exchangeable Redeemable Preferred Stock
Through November 21, 1995, the Company had the option to pay dividends in
additional shares of Preferred Stock in lieu of cash (provided there were no
blocks on payment as further discussed below). Dividends are payable by the
Company, provided the Company has legally available funds under Maryland law and
is able to pay dividends under its charter and other corporate documents, when
and if declared by the Board of Directors, commencing June 1, 1990, and on each
six month anniversary thereof. Dividends in additional shares of the Preferred
Stock were paid at the rate of 0.06 of a share for each $.60 of such dividends
not paid in cash. No dividends have been declared or paid during fiscal years
1992 through 1997. Cumulative undeclared dividends as of June 30, 1998 accrued
for financial reporting purposes totaled $16,892,000. Dividends for the years
1992 through 1994 and for the dividend payable June 1, 1995 were accrued under
the assumption that the dividend will be paid in additional shares of preferred
stock and are valued at $3,950,000. Had the Company accrued these dividends on a
cash basis, the total amount accrued would have been $15,101,000. For the cash
dividends payable since December 1, 1995 the Company has accrued $12,942,000.
The Company has not declared or paid dividends since 1991, due to
restrictions and ambiguities relating to the payment of dividends contained
within its charter, its working capital facility agreement, and under Maryland
law.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On May 11, 1998 at the annual meeting of common shareholders a vote was
taken to elect the following directors: Dr. Fred Charles Ikle, John B. Wood,
Norman P. Byers and Dr. Stephen Bryen. The persons nominated were approved to be
directors of the Corporation by unanimous vote of all shareholders present at
the meeting which represented a majority of the Company's common shares
outstanding.
On July 31, 1998, at a special meeting of the holders of the 12% Cumulative
Exchangeable Redeemable Preferred Stock ("12% Preferred Stock"), a vote was
taken to elect two new Class D directors. Mr. Julio E. Heurtematte, Jr. and
Malcolm M.B. Sterrett were elected by plurality vote of all shareholders present
at the meeting, in person or by proxy, which represented a majority of the
Company's 12% Preferred Stock outstanding.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.85 Share Purchase Agreement between Telos Corporation, a
Maryland Corporation, formerly named and known as C3,
Inc. and Union Bank of Switzerland dated May 7, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: Telos Corporation
August 14, 1998 /s/ Lorenzo Tellez
--------------------------------
Lorenzo Tellez
(Principal Financial Officer &
Principal Accounting Officer)
<PAGE>
Telos Corporation
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Name Page
------ ------------ ----
<S> <C> <C>
10.85 Share Purchase Agreement between Telos Corporation, a Maryland 19
Corporation, formerly named and known as C3, Inc. and Union
Bank of Switzerland dated May 7, 1998.
27 Financial Data Schedule 27
</TABLE>
SHARE PURCHASE AGREEMENT
------------------------
THIS SHARE PURCHASE AGREEMENT ("Agreement") is made this 7th day of May,
1998, between Telos Corporation, a Maryland corporation, formerly named and
known as C3, Inc. ("Telos"), and Union Bank of Switzerland ("UBS"), and
consented and agreed to by Union de Banques Suisses (Luxembourg) S.A.
R E C I T A L S
---------------
1. UBS is the owner and holder of all of the authorized, issued and
outstanding Class B Redeemable Preferred Stock of Telos, with a face value of
seven million, five hundred thousand dollars and 00/100 ($7,500,000.00), which
stock from July 1, 1995 through June 30, 1997 had a cumulative dividend rate per
annum equal to 11.125% which increased to 14.125% per annum thereafter, and
which stock as of the date hereof has undeclared and unpaid dividends relating
to the Class B Redeemable Preferred Stock totaling approximately four million,
nine hundred thousand dollars ($4,900,000.00) (the "Preferred Shares").
2. UBS is also the owner and holder of one million, eight hundred
thirty-seven thousand, seven hundred and seventy-three(1,837,773) shares of
Telos' Class A Common Stock, no par value, and has the ability to purchase an
additional one million, three hundred twelve thousand, six hundred and
ninety-five (1,312,695) shares of Class A Common Stock purchasable upon exercise
of a Warrant pursuant to the terms of a certain Warrant Agreement between Telos
and UBS dated January 14, 1992 (the "Common/Warrant Stock").
3. The Preferred Stock and the Common/Warrant Stock are sometimes
collectively referred to herein as the "Shares".
4. Telos and UBS have agreed that Telos will purchase the Shares from UBS
as provided in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereby agree as follows:
ARTICLE I
---------
RECITALS
--------
SECTION 1.1 The foregoing Recitals are hereby made a part of this
Agreement.
ARTICLE II
----------
ACQUISITION OF THE SHARES
The sale by UBS and the purchase by Telos of the Shares shall be
consummated as set forth in this Article II.
SECTION 2.1 PURCHASE OF THE SHARES
2.1.1 Purchase of the Shares by Telos. Subject to the terms
and conditions herein, UBS agrees to sell to Telos and Telos agrees to purchase
from UBS, the Shares, which are all the equity interests UBS has in Telos for a
purchase price of five million, five hundred thousand dollars and 00/100
($5,500,000.00) payable as follows:
(a) The sum of five million dollars ($5,000,000.00)
by federal wired funds at the Closing, and
<PAGE>
(b) The sum of five hundred thousand dollars
($500,000.00), without interest, on or before November 7, 1998, secured by
a Letter of Credit from Nations Bank, N.A., in the form of the Letter of Credit
attached hereto as Exhibit A.
SECTION 2.2 CLOSING
2.2.1 Closing Date. The closing of the sale and purchase of
the Shares shall take place at the offices of Union Bank of Switzerland, New
York Branch, 299 Park Avenue, New York, N.Y. 10171 on May 7, 1998 at 2:30 P.M.,
unless the parties hereto otherwise mutually shall agree. The time and date on
which the closing hereunder occurs is herein called the "Closing."
2.2.2 Deliveries by UBS. At Closing, UBS will deliver the
following to Telos:
Stock certificates representing the Shares
accompanied by stock powers duly executed in blank or duly executed instruments
of transfer, and any other documents that are necessary to transfer to Telos
good title to such Shares.
2.2.3 Deliveries by Telos. At Closing, Telos will deliver to
UBS the following:
(a) By same day funds to a bank account designated in
advance by UBS, an amount equal to Five Million Dollars and 00/100
($5,000,000.00).
(b) The Letter of Credit for five hundred thousand
dollars and 00/100 ($500,000.00) attached hereto as Exhibit A.
(c) The opinion of counsel referred to in Section
2.6.2(d) hereof.
SECTION 2.3 REPRESENTATIONS AND WARRANTIES OF UBS
UBS hereby represents and warrants to Telos the following:
2.3.1 No Encumbrance. UBS has good title to and has not sold,
transferred or otherwise encumbered any of the Shares. The Shares represent all
equity interests acquired by UBS in Telos, pursuant to or in connection with any
of the following agreements, including any amendments, modifications,
supplements or restructuring of any of such agreements or any debt or equity
issued pursuant to such agreements: (i) $20,000,000 principal amount of Senior
Exchange Notes due 1994 issued by C3, Inc. under an indenture dated as of
November 21, 1989 between C3, Inc. and The Connecticut National Bank, as trustee
(the "Trustee") and (ii) $45,747,000 principal amount of Senior Subordinated
Exchange Notes due 1999 issued by C3, Inc. under an indenture dated as of
November 21, 1989 between C3, Inc. and the Trustee.
2.3.2 Corporate Powers' Non-Contravention of Laws. UBS has the
corporate power and authority to execute, deliver and carry out the terms and
provisions of this Agreement. UBS has taken all necessary corporate action to
authorize the execution, delivery and performance of this Agreement. This
Agreement has been duly executed and delivered by UBS and constitutes the legal,
valid and binding obligation of UBS enforceable in accordance with its terms,
subject, as to enforcement, to bankruptcy, insolvency, reorganization, and other
laws of general applicability relating to or affecting creditors' rights and to
general equitable principles. Neither the execution, delivery or performance by
UBS of this Agreement nor compliance with any of the terms and provisions
hereof, nor the consummation of any of the transactions contemplated hereby will
contravene any law, statute, rule or regulation of the United States, New York
or Luxembourg or any existing order, writ, injunction or decree of any
governmental authority.
<PAGE>
2.3.3 Brokers. UBS has not incurred any liability, contingent
or otherwise, for any brokerage fee, commission or financial advisory fee in
connection with the transactions contemplated by this Agreement.
2.3.4 Offering of the Shares. Neither UBS or any person
authorized or employed by UBS as agent, broker, dealer or otherwise has offered
the Shares for sale to, or solicited any offers to buy the Shares of UBS from,
or otherwise approached or negotiated with respect thereto with, any person or
persons other than Telos, and neither UBS nor any person acting on its behalf
has taken any action (including without limitation any offer, issuance or sale
of the Shares) which might subject the offering, issuance or sale of the Shares
to the registration provisions of the Securities Act.
SECTION 2.4 REPRESENTATIONS AND WARRANTIES OF TELOS
Telos hereby represents and warrants to UBS the following:
2.4.1 Organization and Good Standing; Business. Telos (i) is a
corporation, duly organized and existing in good standing under the laws of
Maryland with all requisite corporate power and authority to own its properties
and conduct its business as now being conducted, (ii) is duly qualified to do
business as a foreign corporation in good standing in each jurisdiction where it
conducts its business or owns or leases property.
2.4.2 Authority. Telos has full power and authority to enter
into and perform this Agreement in accordance with its terms and has duly
authorized, executed and delivered this Agreement, except to the extent as may
be limited by bankruptcy, insolvency or similar laws and the exercise of
judicial discretion in applying general principles of equity.
2.4.3 No Violation. The execution, delivery and performance of
this Agreement by Telos does not and will not (i) conflict with any provision of
the Certificate of Incorporation or By-Laws of Telos or any law, regulation,
order or similar governmental act applicable to Telos, (ii) conflict with, or
result in the creation of any encumbrance, security interest, equity or right of
others upon any of the properties or assets of Telos under any of the terms,
conditions or provisions of any agreement, instrument or obligation to which
Telos may be bound or affected or (iii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Telos and its assets.
2.4.4 Consents. No consent, approval, permit or license from
or filing with any governmental or regulatory authority or other person is
required to be obtained or made by Telos in connection with the execution,
delivery and performance by Telos of this Agreement.
2.4.5 No Defaults. Telos is (i) not in violation of any
provision of its Certificate of Incorporation or By-Laws (or other analogous
organizational documents) or in default under or in violation of any agreement,
instrument or obligation to which it is a party or by which it is bound or to
which any of its properties are subject and (ii) in compliance with all laws,
regulations, governmental orders and other governmental action applicable to it
or its business.
2.4.6 Brokers. Telos has not incurred any liability,
contingent or otherwise, for any brokerage fee, commission or financial advisory
fee (other than in favor of UBS or an affiliate of UBS) in connection with the
transactions contemplated by this Agreement.
<PAGE>
SECTION 2.5 CONDITIONS TO CLOSING OF SHARE ACQUISITION
2.5.1 Conditions to Obligations of Telos. The obligations of
Telos under Article II of this Agreement are subject to satisfaction or to
waiver by Telos, on or prior to Closing, of each of the following conditions
precedent:
(a) Representations and Warranties; Performance;
Certificate. The representations and warranties of UBS contained in
Article II of this Agreement or in any instrument, list, certificate or
writing delivered to Telos pursuant to Article II of this Agreement shall be
correct in all material respects on and as of Closing with the same effect as
though made on and as of such date by reference to the facts and circumstances
then existing; UBS shall have performed in all material respects each of their
obligations and agreements hereunder to be performed by it pursuant to this
Article II at or prior to Closing.
(b) Absence of Orders. No order shall have been
issued by any court or other governmental body and not have expired or been
lifted or dissolved, and no statute, rule or regulation shall be enacted or
issued, that would have as an effect to restrain or prohibit consummation of the
transactions contemplated by this Agreement.
(c) Approvals. UBS shall have obtained all required
consents and approvals to the consummation of the transaction contemplated by
this Agreement. UBS does not require the consent or approval of any third
party in order to enter into and perform this Agreement.
2.6.2 Conditions to Obligations of UBS. The obligations of UBS
under Article II of this Agreement are subject to satisfaction or to waiver by
UBS, on or prior to Closing, of each of the following conditions precedent:
(a) Representations and Warranties; Performance;
Certificate. The representations and warranties of Telos contained in
Article II of this Agreement or in any instrument, list, certificate or
writing delivered to UBS pursuant to Article II of this Agreement shall be
correct in all material respects on and as of Closing with the same effect as
though made on and as of such date by reference to the facts and circumstances
then existing; Telos shall have performed in all material respects each
of its obligations and agreements hereunder to be performed by it pursuant
to this Article II at or prior to Closing.
(b) Absence of Orders. No order shall have been
issued by any court or other governmental body and not have expired or been
lifted or dissolved, and no statute, rule or regulation shall be enacted or
issued, that would have as an effect to restrain or prohibit consummation of
the transactions contemplated by this Agreement.
(c) Approvals. Telos shall have obtained all required
consents and approvals to the consummation of the transaction contemplated
by this Agreement. Executed counterpart copies of all consents referred to in
the preceding sentence will be delivered to UBS at Closing.
(d) Opinion of Counsel for Telos. UBS shall have
received an opinion of Telos' counsel, dated the date of the Closing, in form
and substance satisfactory to UBS' counsel, to the effect that:
<PAGE>
(i) Telos is a corporation duly organized,
validly existing and in good standing under the laws of Maryland with the
corporate power and authority to carry on its business;
(ii) all corporate and other proceedings
required by law, by the Certificate of Incorporation or By-Laws (or other
analogous organizational documents) of Telos, or by the provisions of this
Agreement to be taken by Telos in connection with the execution and delivery of
this Agreement and/or the due consummation of the transactions contemplated
by Article II hereby have been duly and validly taken;
(iii) neither the execution or delivery of this
Agreement by UBS nor the consummation of the transactions contemplated by
Article II hereby (A) violates any statute or law or any rule, regulation,
order, judgment or decree of any court or governmental authority normally
applicable to transactions of the type contemplated by this Agreement based on
such counsel's experience, (B) violates or conflicts with or constitutes
a default under the Certificate of Incorporation or By-Laws (or other
analogous organizational documents) of Telos, or any contract, commitment,
agreement, understanding, arrangement or restriction of any kind to which
Telos is a party, or (C) will cause, or give any person valid grounds to
cause, the maturity of any liability or obligation of UBS to be accelerated or
will increase any such liability or obligation; and
(iv) this Agreement has been duly executed and
delivered by, and is a valid and binding obligation of Telos, enforceable
against Telos in accordance with its respective terms, except that (a) such
enforcement may be subject to applicable bankruptcy, reorganization, insolvency
or other laws, now or hereafter in effect, affecting creditors' rights
generally, and (b) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
(v) the repurchase by Telos of the Shares is
lawful under applicable Maryland law.
<PAGE>
ARTICLE III
MISCELLANEOUS
SECTION 3.1 NOTICES
-------
Any notice, request, instruction or other document to be given
under this Agreement after the date hereof by any party hereto to any other
party shall be in writing and shall be delivered personally or sent by
registered or certified mail, postage prepaid, to the following persons and
addresses, or to such other addresses or persons as any party may designate by
written notice to the other parties:
(a) UBS:
Union Bank of Switzerland
c/o Union Bank Switzerland
New York Branch
299 Park Avenue
New York, New York 10171
Attn: L. Thomas Sperry
Phone: (212) 821-3308
Facsimile: (212) 821-3008
(b) Union de Banques Suisses (Luxembourg) S.A.
c/o Union Bank Switzerland
299 Park Avenue
New York, New York 10171
Attn: L. Thomas Sperry
Phone: (212) 821-3308
Facsimile: (212) 821-3008
(b) TELOS:
William L.P. Brownley, V.P. and
General Counsel
Telos Corporation
19886 Ashburn Road
Ashburn, Virginia 20147
Phone: (703) 724-3645
Facsimile: (703) 724-3855
SECTION 3.2 SURVIVAL OF RIGHTS
------------------
Except as herein otherwise provided to the contrary, this
Agreement shall be binding upon and inure to the benefit of the parties hereto,
their successors and assigns. Notwithstanding any other provision of this
Agreement, the parties hereto acknowledge that (i) the rights and obligations of
UBS hereunder are those of UBS and its legal successors, and accordingly that
this Agreement will survive the merger of UBS and Swiss Bank Corporation ("SBC")
and (ii) UBS and its affiliates may provide to SBC and its affiliates
information related to the transactions contemplated hereby or other parties to
said transactions for reasons related to such merger.
SECTION 3.3 INTERPRETATION AND GOVERNING LAW
--------------------------------
When the context in which words are used in this Agreement
indicates that such is the intent, words in the singular number shall include
the plural and vice versa. The Article headings or titles and the tables of
contents shall not define, limit, extend or interpret the scope of this
Agreement or any particular Article. This Agreement shall be governed and
construed in accordance with the laws of the State of Maryland without giving
effect to the conflicts of law provisions thereof.
SECTION 3.4 SEVERABILITY
------------
If any provision, sentence, phrase or word of this Agreement
or the application thereof to any person or circumstances shall be held invalid,
the remainder of this Agreement, or the application of such provision, sentence,
phrase, or word to persons or circumstances, other than those as to which it is
held invalid, shall not be affected thereby.
<PAGE>
SECTION 3.5 AGREEMENT IN COUNTERPARTS
-------------------------
This Agreement may be executed in several counterparts, each
of which shall be deemed an original, but all of which shall constitute one and
the same instrument. In addition, this Agreement may contain more than one
counterpart of the signature page and this Agreement may be executed by the
affixing of the signatures of each of the parties to one of such counterpart
signature pages; all of such signature pages shall be read as though one, and
they shall have the same force and effect as though all of the signers had
signed a single signature page.
SECTION 3.6 THIRD PARTIES
-------------
The agreements, covenants and representations contained herein
are for the benefit of the parties hereto inter se and are not for the benefit
of any third parties.
SECTION 3.7 ENTIRE AGREEMENT
----------------
This Agreement and the documents referred to herein set forth
all the covenants, promises, agreements, conditions and understandings among the
parties herein, and there are no other covenants, promises, agreements,
conditions or understandings, whether oral or written, among the parties hereto.
SECTION 3.8 ATTORNEYS' FEES
---------------
In the event attorneys' fees or other costs are incurred to
secure performance of any of the obligations herein provided for, or to
establish damages for the breach thereof, or to obtain any other appropriate
relief, whether by way of prosecution or defense, the prevailing party shall be
entitled to recover reasonable attorneys' fees and costs necessarily incurred
therein.
SECTION 3.9 ADDITIONAL DOCUMENTS
--------------------
Each party hereto agrees to execute any and all documents, and
to perform such other acts that may be necessary or expedient to further the
purposes of this Agreement.
SECTION 3.10 EXHIBITS
--------
All exhibits referred to in this Agreement are incorporated
into and made a part of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the day and year above written.
ATTEST OR WITNESS: TELOS CORPORATION, a Maryland
corporation, formerly named
and known as C3, Inc.
_________________________ By: /s/ William L.P. Brownley
Name: William L.P. Brownley
Title: V.P. General Counsel
UNION BANK OF SWITZERLAND
_________________________ By:/s/ Bruce H. Mendelsohn
Name:Bruce H. Mendelsohn
Title: Attorney-In-Fact
_________________________ By:/s/ M. Terri Reilly
Name: M. Terri Reilly
Title: Attorney-In-Fact
AGREED AND CONSENTED TO BY:
Union de Banques Suisses
(Luxembourg) S.A.
By:/s/ Bruce H. Mendelsohn
Name: Bruce H. Mendelsohn
Title: Attorney-In-Fact
By: /s/ N, Terri Reilly
Name: M. Terri Reilly
Title: Attorney-In-Fact
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statemens of income for Telos Corporation and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Jun-30-1998
<CASH> 141,000
<SECURITIES> 0
<RECEIVABLES> 42,450,000
<ALLOWANCES> 780,000
<INVENTORY> 10,024,000
<CURRENT-ASSETS> 54,673,000
<PP&E> 38,738,000
<DEPRECIATION> 23,592,000
<TOTAL-ASSETS> 84,548,000
<CURRENT-LIABILITIES> 31,144,000
<BONDS> 40,761,000
38,297,000
0
<COMMON> 79,000
<OTHER-SE> (39,986,000)
<TOTAL-LIABILITY-AND-EQUITY> 84,548,000
<SALES> 34,346,000
<TOTAL-REVENUES> 90,503,000
<CGS> 32,235,000
<TOTAL-COSTS> 80,115,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,316,000
<INCOME-PRETAX> (217,000)
<INCOME-TAX> (811,000)
<INCOME-CONTINUING> (1,028,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,028,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
