<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: March 31, 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 May 15, 1998 the registrant had 21,238,980 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.
No public market exists for the registrant's Common Stock.
Number of pages in this report (excluding exhibits): 16
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1997 (Unaudited)...............................................................3
Condensed Consolidated Balance Sheets as of March 31, 1998 (Unaudited)
and December 31, 1997...................................................................................4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 (Unaudited)...............................................................5
Notes to Condensed Consolidated Financial Statements (Unaudited)........................................6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................9-13
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities................................................................14
Item 5. Other Events...................................................................................14
Item 6. Exhibits and Reports on Form 8-K...............................................................15
SIGNATURES....................................................................................................16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(amounts in thousands)
Three Months Ended
March 31,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Sales
Systems and Support Services $26,300 $25,836
Systems Integration 16,193 28,227
Enterworks 1,301 282
------- ------
43,794 54,345
Costs and expenses
Cost of sales 40,481 46,648
Selling, general and
administrative expenses 6,242 6,525
Goodwill amortization 193 225
------ ------
Operating (loss) income (3,122) 947
Other income (expenses)
Gain on sale of assets 5,683 --
Other income 20 12
Interest expense (1,779) (1,760)
------ -----
Income (loss) before taxes 802 (801)
Income tax provision (125) --
------ -----
Net income (loss) $ 677 $ (801)
====== =====
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
ASSETS
(amounts in thousands)
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 412 $ 587
Accounts receivable, net 35,427 57,972
Inventories, net 9,899 12,390
Deferred income taxes 4,806 4,632
Other current assets 688 676
------ ------
Total current assets 51,232 76,257
Property and equipment, net of
accumulated depreciation of
$22,715 and $22,609, respectively 15,502 15,730
Goodwill 7,316 12,466
Other assets 6,002 5,265
------ -------
80,052 109,718
====== =======
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Accounts payable 10,617 16,912
Other current liabilities 10,949 6,966
Accrued compensation and benefits 7,608 8,553
------ ------
Total current liabilities 29,174 32,431
Senior credit facility 12,914 39,945
Senior subordinated notes 16,970 16,930
Capital lease obligations 11,990 12,085
------ -------
Total liabilities 71,048 101,391
Redeemable preferred stocks
Senior redeemable preferred stock 5,312 5,207
Class B redeemable preferred stock 12,296 12,035
Redeemable preferred stock 30,336 29,951
------ -------
Total preferred stock 47,944 47,193
Stockholders' investment
Common stock 78 78
Capital in excess of par -- --
Retained deficit (39,018) (38,944)
------ -------
Total stockholders' investment $80,052 $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)
Three Months
Ended March 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) $ 677 $ (801)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Gain on sale of assets (5,683) --
Depreciation and amortization 897 989
Goodwill amortization 193 225
Other non-cash items 128 220
Changes in assets and liabilities that
provided (used) cash 17,135 (16,459)
------ ------
Cash provided by (used in) operating
activities 13,347 (15,826)
------ ------
Investing activities:
Proceeds from sale of assets 14,675 --
Purchase of property and equipment (544) (553)
Investment in other assets (527) (563)
------ -----
Cash provided by (used in) investing
activities 13,604 (1,116)
------ -----
Financing activities:
(Repayment of) Proceeds from senior credit facility (27,031) 15,900
Repayment of long-term debt -- (675)
Payments under capital leases (95) (85)
------ ------
Cash (used in) provided by financing
activities (27,126) 15,140
------ ------
Decrease in cash and cash equivalents (175) (1,802)
Cash and cash equivalents at beginning of period 587 2,781
------ -----
Cash and cash equivalents at end of period $ 412 $ 979
====== ======
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. The Company believes the disclosures made are adequate to make the
information presented consistent with past practices. However, these condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the fiscal year ended December 31, 1997.
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 March 31, 1998 and December 31, 1997,
and the results of its operations and its cash flows for the three month periods
ended March 31, 1998 and 1997. Interim results are not necessarily indicative of
fiscal year performance because of the impact of seasonal and short-term
variations.
During the first quarter of 1998, the Company modified its view of the
business segments that it operates given the increased activities of its
majority-owned subsidiary, Enterworks, Inc. The Company now analyzes its
business in three distinct market segments: systems and support services which
consists of the Company's hardware services, software systems and solutions
services; systems integration and Enterworks, Inc.
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" became effective for the Company on January 1, 1998.
Because the Company has no items of other comprehensive income, FAS 130 did not
affect the Company's financial statements presentation or disclosure.
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 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 income for the three months ended March 31,
1998.
Note 3. 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 March 31, 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 $2,312,000 and $2,207,000
respectively.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Class B Redeemable Preferred Stock
- ----------------------------------
The Class B Redeemable Preferred Stock has a $.01 par value, with 7,500
shares authorized, issued and outstanding. The Class B Redeemable Preferred
Stock has a cumulative dividend payable semi-annually at June 30 and December
31. The dividend is calculated at a rate equal to 14.125% per annum of its
liquidation value. 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 March 31, 1998 and December 31, 1997, cumulative undeclared and unpaid
dividends relating to the Class B redeemable preferred stock were accrued for
financial reporting purposes in the amount of $4,796,000 and $4,535,000,
respectively. The Class B Redeemable Preferred Stock was retired in May 1998.
See Note 4. - Subsequent Event.
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 $.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 March 31,
1998 accrued for financial reporting purposes totaled $14,735,000. 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.
Note 4. Subsequent Event
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 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 $5.5 million.
In addition, the Company agreed to pay UBS $1.0 million for the termination
of a letter agreement between UBS and the Company, as well as a negotiation fee
for certain expenses UBS incurred in connection with past services performed on
behalf of the Company.
The total price of $6.5 million was funded by borrowings under the
Company's term facility as well as 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 will be recorded as an increase in
stockholders' investment; there is no impact on income from this transaction.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.
--------------------------
General
In the first three months of 1998, the Company had decreased revenue and
profitability as compared to 1997. The decreased revenue and profitability
resulted primarily from the expiration of the Systems Integration Group's
Immigration and Naturalization Services Contract in September 1997. Overall,
Systems Integration revenues decreased by $12 million in 1998 compared to 1997.
As a result, absorption of facility and infrastructure costs was
disproportionate with associated revenues. A change in product mix also
contributed to a decrease in profitability from 1997 to 1998. Accordingly,
product margins were significantly impacted in the first quarter of 1998.
Total backlog from existing contracts was approximately $1.01 billion and
$1.07 billion as of March 31, 1998 and December 31, 1997, respectively. As of
March 31, 1998, the funded backlog of the Company totaled $70.4 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 income include the results of
operations of Telos Corporation and its wholly owned subsidiaries Telos
Corporation (California), Telos Field Engineering, Inc. ("TFE"), Telos
International Corporation, and its majority owned subsidiary Enterworks, Inc.
("Enterworks") (collectively, "the Company"). The major elements of the
Company's operating expenses as a percentage of sales for the three month
periods ended March 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales (92.4) (85.8)
SG&A expenses (14.2) (12.0)
Goodwill amortization (0.4) (0.4)
----- -----
Operating (loss) income (7.0) 1.8
Gain on sale of Assets 13.0 --
Other income -- --
Interest expense (4.1) (3.2)
---- ----
Income (loss) before taxes 1.9 (1.4)
Income tax provision (0.3) --
---- ---
Net income (loss) $ 1.6% $(1.4)%
==== ===
</TABLE>
Financial Data by Market Segment
During the first quarter of 1998, the Company modified its view of the
business segments that it operates given the increased activities of its
majority-owned subsidiary, Enterworks, Inc. The Company now analyzes its
business in three distinct market segments: systems and support services which
consists of the Company's hardware services and software systems and solutions
services; systems integration and Enterworks, Inc.
<PAGE>
Sales, gross profit, and gross margin by market segment for the first
quarter of 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1998 1997
---- ----
(amounts in thousands)
<S> <C> <C>
Sales:
Systems and Support Services $26,300 $25,836
Systems Integration 16,193 28,227
Enterworks 1,301 282
------ ------
Total $43,794 $54,345
====== ======
Gross Profit:
Systems and Support Services $ 4,184 $3,919
Systems Integration 164 3,930
Enterworks (1,035) (152)
------ -----
Total $ 3,313 $7,697
====== =====
Gross Margin:
Systems and Support Services 15.9% 15.2%
Systems Integration 1.0% 13.9%
Enterworks (79.6)% (53.9)%
Total 7.6% 14.2%
</TABLE>
For the three month period ended March 31, 1998 sales decreased by
approximately $10.5 million, or 19.4%, to $43.8 million from $54.3 million for
the comparable 1997 period. This decrease for the three month period is due to
the Systems Integration Group, which reported decreased sales of $12.0 million.
Offsetting this decrease was increased sales during the period by the Systems
and Support Services Group and Enterworks of approximately $500,000 and $1.0
million, respectively.
Systems Integration Group sales decreased by $12.0 million during the first
quarter of 1998 as compared to the first quarter of 1997. The decrease was
primarily due to the Immigration and Naturalization Services Contract, which
ended on September 30, 1997.
Within the Systems and Support Services Group, software services sales
increased approximately $500,000 due to the start up of MIS Services-II contract
supporting Air Force Material Command Sites.
Enterworks sales for the three months ended March 31, 1998 of $1.3 million
increased approximately 361% or $1.0 million from $282,000 for the comparable
period ended 1997. The increase is primarily due to Enterworks sales to the Army
Logistics and healthcare market segments.
Cost of sales decreased by $6.2 million or 13.2% to $40.5 million during
the three month period ended March 31, 1998, from $46.6 million in the
comparable 1997 period. The decrease in cost of sales resulted from the decrease
in sales for the period, offset by a change in product mix.
Gross profit decreased by $4.4 million in the first quarter of 1998 to $3.3
million from $7.7 million in the comparable 1997 period as a result of the
matters discussed above. The Systems and Support Services Group improved gross
margin was attributed to the MIS Services-II contract. The Systems Integration
Group reduced revenue base resulted in increased costs of sales due to
disproportionate absorption of its facility and infrastructure costs. In
addition, the Systems Integration Group experienced shifts in product mix which
significantly impacted gross margin. The result was a decrease in gross margins
of 12.9% percent for the Systems Integration Group. Accordingly, gross margin
decreased significantly from 1997 to 1998. The decrease in the Enterworks gross
margin is directly attributed to increased product amortization costs and
increased staff in anticipation of future growth. Total Company gross margins
were 7.6% and 14.2% for the three month periods ended March 31, 1998 and 1997,
respectively.
<PAGE>
Selling, general and administrative costs decreased for the three month
period by approximately $300,000 to $6.2 million in 1998 from $6.5 million in
1997. This decrease is due to the Company's consolidation of its administrative
support functions. This decrease was slightly offset by increased investment in
research and development and sales and marketing for its Enterworks division.
SG&A as a percentage of sales was 14.2% and 12.0% for the three month periods
ended March 31, 1998 and 1997, respectively.
Goodwill amortization expense was $193,000 for the three months ended March
31, 1998 compared to $225,000 for the period ended March 1997. The decrease in
Goodwill amortization was a result of the Goodwill writedown associated with the
sale of TIS.
Operating income decreased by $4.1 million during the three months ended
March 31, 1998 to $3.1 million in operating loss. The Company had an operating
income of $947,000 in the comparable period of 1997. The decrease in operating
profit resulted primarily from the aforementioned sales and gross profit
decreases.
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 proceeds and a gain of $5.7 million. The sale had no material impact
on the operating results for the first quarter of 1998 as compared to 1997. 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 increased by approximately $19,000 to $1.8 million during
the three month period ended March 31, 1998, from $1.8 million in the comparable
period of 1997.
The Company had a tax provision of $125,000 for the three month period
ended 1998, the Company did not have a tax provision in the three month period
ended March 31, 1997.
Liquidity and Capital Resources
For the three months ended March 31, 1998, the Company provided $13.3
million of cash in its operating activities. Excluding the effect of the TIS
transaction, this cash was provided by reductions of accounts receivable of
$22.5 million, offset by decreases in accounts payable of $6.3 million and
increased losses incurred in operations. Cash provided by investing activities
was $13.6 million, which is a result of the proceeds from the sale of TIS of
$14.7 million. Cash was used by financing activities during the quarter to pay
down approximately $27.0 million in debt.
At March 31, 1998, the Company had outstanding debt and long term
obligations of $41.9 million, consisting of $12.9 million under the secured
senior credit facility, $17.0 million in subordinated debt, and $12.0 million in
capital lease obligations.
The Company continually evaluates its financing requirements to support its
business base. Company revenues are seasonal primarily due to the federal
government's fiscal year ending in September 30, of each year. The Company
anticipates that its current secured senior credit facility will be adequate for
1998. The Company has and continues to evaluate various financing options for
additional capital infusion and long-term growth.
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 for approximately $5.5 million. In
addition, the Company agreed to pay UBS $1.0 million for the termination of a
letter agreement between UBS and the Company, as well as a negotiation fee for
certain expenses UBS incurred in connection with past services performed on
behalf of the Company. The total price of $6.5 million was funded by borrowings
under the Company's term facility as well as two separate letters of credit
secured by the Company's lender.
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.
<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 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>
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
-------------------------------
Senior and Class B Redeemable Preferred Stocks
- ----------------------------------------------
The Company has not declared dividends on its Senior Redeemable Preferred
Stock, Series A-1 and A-2, and its Class B Redeemable Preferred Stock since
their issuance. Total undeclared unpaid dividends, accrued for financial
reporting purposes, are $2,312,000 for the Series A-1, A-2 Preferred stock and
$4,796,000 for the Class B Preferred Stock at March 31, 1998. The Class B
Redeemable Preferred stock was retired in May 1998. See Subsequent Event
discussed in Note 4 to financial statements for quarter ended March 31, 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 March 31, 1998 accrued
for financial reporting purposes totaled $14,735,000. 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 $10,795,000.
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.
Item 5. Other Events
------------
Sale of Assets
- --------------
On February 28, 1998, Telos Corporation sold substantially all of the net
assets of one of its 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 on its condensed consolidated statement of income for the three months
ended March 31, 1998.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K: Registrant filed a Current Report on Form
8-K/A, dated March 18, 1998, in respect of
the Registrant's selling its software
support division, Telos Information Systems,
on February 28, 1998.
<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
May 15, 1998 /s/ Lorenzo Tellez
------------------
Lorenzo Tellez
(Principal Financial Officer &
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of income for Telos Corporation and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Mar-31-1998
<CASH> 412,000
<SECURITIES> 0
<RECEIVABLES> 36,642,000
<ALLOWANCES> 1,215,000
<INVENTORY> 9,899,000
<CURRENT-ASSETS> 5,494,000
<PP&E> 38,217,000
<DEPRECIATION> 22,715,000
<TOTAL-ASSETS> 80,052,000
<CURRENT-LIABILITIES> 29,174,000
<BONDS> 41,874,000
47,944,000
0
<COMMON> 78,000
<OTHER-SE> (39,018,000)
<TOTAL-LIABILITY-AND-EQUITY> 80,052,000
<SALES> 16,193,000
<TOTAL-REVENUES> 43,794,000
<CGS> 16,029,000
<TOTAL-COSTS> 40,481,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,779,000
<INCOME-PRETAX> 0
<INCOME-TAX> 125,000
<INCOME-CONTINUING> 677,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 677,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
