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, 2000
[ ] 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 1, 2000 the registrant had 21,241,980 shares of Class A Common Stock,
no par value, 4,037,628 shares of Class B Common Stock, no par value; and
3,185,586 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:
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and 1999 (Unaudited)................................................................3
Condensed Consolidated Balance Sheets as of March 31, 2000 (Unaudited)
and December 31, 1999....................................................................................4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 (Unaudited)................................................................5
Notes to Condensed Consolidated Financial Statements (Unaudited)...........................................6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................................11-14
PART II. OTHER INFORMATION
------- -----------------
Item 1. Legal Proceedings...............................................................................15
Item 3. Defaults Upon Senior Securities.................................................................15
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 OPERATIONS
(UNAUDITED)
(amounts in thousands)
Three Months Ended
March 31,
------------------
2000 1999
---- ----
<S> <C> <C>
Sales
Systems and Support Services $19,161 $21,932
Products 12,933 16,699
------ ------
32,094 38,631
Costs and expenses
Cost of sales 28,093 34,176
Selling, general and administrative expenses 4,210 4,381
Goodwill amortization 89 132
------ ------
Operating loss (298) (58)
Other income (expenses)
Other income 20 31
Equity in net losses of Enterworks -- (4,023)
Interest expense (1,137) (1,550)
------- -------
Loss before taxes (1,415) (5,600)
Income tax benefit 487 1,478
------ ------
Net loss $( 928) $(4,122)
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(Unaudited)
ASSETS
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Current assets
Cash and cash equivalents (includes restricted cash of
$54 at March 31, 2000 and December 31, 1999) $ 150 $ 315
Accounts receivable, net 28,129 27,030
Inventories, net 4,311 4,779
Deferred income taxes, current 5,001 4,802
Other current assets 184 83
------ ------
Total current assets 37,775 37,009
Property and equipment, net of accumulated depreciation of
$8,714 and $23,093, respectively 12,280 12,236
Goodwill 4,195 4,284
Investment in Enterworks -- --
Deferred income taxes, long term 3,266 2,930
Other assets 491 427
------ ------
$ 58,007 $ 56,886
====== ======
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Accounts payable $ 8,126 $13,792
Other current liabilities 3,581 3,421
Unearned revenue 6,582 5,183
Accrued compensation and benefits 7,165 7,645
----- ------
Total current liabilities 25,454 30,041
Senior credit facility 23,241 16,508
Senior subordinated notes 8,537 8,537
Capital lease obligations 11,266 11,362
------ ------
Total liabilities 68,498 66,448
------
Redeemable preferred stock
Senior redeemable preferred stock 6,160 6,054
Redeemable preferred stock 37,360 36,975
------ ------
Total preferred stock 43,520 43,029
Stockholders' investment
Common stock 78 78
Capital in excess of par -- --
Retained deficit (54,089) (52,669)
-------- ------
Total stockholders' investment (54,011) (52,591)
------ ------
$58,007 $56,886
======= ======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Three Months
Ended March 31,
-----------------------
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net loss $ (928) $ (4,122)
Adjustments to reconcile net loss to
cash (used in) provided by operating activities:
Gain on sale of fixed assets -- (88)
Depreciation and amortization 415 1,027
Goodwill amortization 89 132
Other non-cash items 124 666
Changes in assets and liabilities, net (6,119) 17,422
------- ------
Cash (used in) provided by operating activities (6,419) 15,037
------- ------
Investing activities:
Proceeds from sale of fixed assets -- 171
Purchase of property and equipment (392) (382)
Investment in capitalized software and other assets -- (762)
Cash used in investing activities ------ ----
(392) (973)
------ ----
Financing activities:
Proceeds from (repayments of) senior credit
facility, net 6,733 (13,983)
Payments under capital leases (87) (102)
------- ------
Cash provided by (used in) financing activities 6,646 (14,085)
------ ------
Decrease in cash and cash equivalents (165) (21)
Cash and cash equivalents at beginning of period 315 408
----- ------
Cash and cash equivalents at end of period $ 150 $ 387
======== ======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. GENERAL
The accompanying condensed consolidated financial statements are
unaudited and include the accounts of Telos Corporation ("Telos") and its wholly
owned subsidiaries, Telos Corporation (California), and Telos International
Corporation (collectively, the "Company"). Significant intercompany transactions
have been eliminated. In the opinion of the Company, the accompanying financial
statements reflect all adjustments and reclassifications (which include only
normal recurring adjustments) necessary for their fair presentation in
conformity with generally accepted accounting principles. Interim results are
not necessarily indicative of fiscal year performance because of the impact of
seasonal and short-term variations. These 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, 1999.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting or Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS 133, as amended by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective date of FASB
Statement No. 133, an amendment of FASB Statement No. 133", is effective for all
quarters of the Company's year ending December 31, 2001. The Company currently
does not engage or plan to engage in the use of derivative instruments, and does
not expect SFAS 133 to have a material impact on the results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 "Revenue Recognition in Financial Statements" ("SAB
101") to provide guidance regarding the recognition, presentation and disclosure
of revenue in the financial statements. The Company expects to adopt the
provisions of SAB 101 (as amended by SAB 101A which deferred the implementation
date by one quarter) on April 1, 2000. Management does not anticipate the
adoption of SAB 101 to have a material impact on its results of operations or
financial condition.
In April 2000, the FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation; Interpretation of APB Opinion
No.25" ("FIN 44"). The Company is evaluating the provisions of FIN 44.
Certain reclassifications have been made to the prior year's financial
statements to conform to the classifications used in the current period.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. DECONSOLIDATION OF ENTERWORKS, INC. SUBSIDIARY
On December 30, 1999, Enterworks, Inc. ("Enterworks"), a majority-owned
subsidiary of the Company, completed a private placement of 21,739,127 shares of
Series A Convertible Preferred Stock ("Preferred Stock") at a price of $1.15 per
share. The sale generated gross proceeds of $25,000,000. In addition, the
Company entered into a series of concurrent transactions pursuant to which the
Company's voting interest in Enterworks was reduced to approximately 34.8%. The
concurrent transactions were as follows:
1. The Company converted approximately $7.6 million of its Senior Subordinated
Notes, Series B, C and D held by investors, plus the accrued interest and
the waiver of prepayment premium associated with these notes, into shares
of Enterworks' Common Stock owned by the Company at an exchange ratio of
one share of Enterworks' Common Stock for each $1.00 principal amount of
notes payable. These subordinated notes had a maturity date of October 1,
2000.
2. Enterworks purchased 5,000,000 shares of Enterworks' Common Stock owned by
the Company at a price of $1.00 per share. This amount was reduced by 20%
of the Agent's fee, the Company's pro rata share of the proceeds from the
transaction. The net amount received was $4.7 million. This transaction,
together with the one described above, resulted in an extraordinary gain,
net of tax of $5.3 million, of $8.0 million, which is included in the
Company's statement of operations for the year ended December 31, 1999.
3. Enterworks' payable to the Company, which was approximately $24.4 million
at December 30, 1999, was cancelled in its entirety before the issuance of
Series A Preferred Stock. The forgiveness of the payable increased the
Company's investment in Enterworks. Funding required to cover Enterworks'
working capital needs from November 30, 1999 to the date of closing was
funded by the Company and will be repaid through collections from
Enterworks' trade accounts receivable. This funding approximated $2.0
million. This forgiveness of intercompany debt is deemed by management to
be a normal occurrence of a capital raising transaction.
4. Enterworks issued 4,000,000 shares of Enterworks' Common Stock to Telos
concurrent with the issuance of Series A Preferred Stock. This issuance
increased the Company's investment in Enterworks as it increased the number
of shares the Company owned in Enterworks.
5. Enterworks issued a warrant to acquire 350,000 shares of Enterworks' Common
Stock to Telos' primary lender, Bank of America, in connection with
obtaining the necessary approvals for this offering. The exercise price of
the warrant equaled $1.15 per share, the same per share price of the Series
A Preferred Stock. This warrant was recorded at its fair market value as a
charge to interest expense and a reduction to the Company's investment in
Enterworks.
6. Telos contributed 210,912 shares of Enterworks' Common Stock owned by Telos
to the Enterworks Treasury for the subsequent grant of warrants to the
Agent, Deutsche Bank Alex. Brown. This issuance of warrants was also part
of the Agent's fee. This contribution of shares was also a charge to
interest expense and a reduction to the Company's investment in Enterworks.
As a result of the reduction of the Company's ownership percentage in
Enterworks the Company changed its method of accounting for its investment in
Enterworks from the consolidation method to the equity method. Pursuant to this
change the Company's interest in the losses of Enterworks have been reported
separately as "Equity in Net Losses of Enterworks" in the Company's consolidated
statement of operations for the three months ended March 31, 2000. Additionally,
the Company established an "Investment in Enterworks" account in accordance with
APB 18. As of March 31, 2000 and December 30, 1999, respectively, the balance is
zero in the Investment in Enterworks account due to the fact that the Company's
share of cumulative losses exceeds its investment basis.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. SALE OF ASSETS
On September 29, 1999, the Company sold substantially all of the assets of
its computer maintenance and service business, Telos Field Engineering, Inc.
("TFE"), to TFE Technology Holdings, LLC ("TFE Holdings"), an affiliate of Carr
& Company, for $10 million. As a result of this sale, the Company recorded a
gain of $4.7 million in its consolidated statement of operations for the year
ended December 31, 1999. This gain included a write-off of $2.1 million of
goodwill allocated to TFE operations. The Company and TFE Holdings entered into
a one-year corporate services agreement on the date of the sale. Under the terms
of the Agreement, Telos will continue to provide certain administrative support
functions to TFE Holdings, including but not limited to finance and accounting
and human resources, in return for a monthly payment.
NOTE 4. DEBT OBLIGATIONS
Senior Credit Facility
The Company has a $35 million Senior Credit Facility ("the Facility")
with a bank which matures on July 1, 2001. Borrowings under the Facility are
collateralized by a majority of the Company's assets including accounts
receivable, inventory, and Telos' stock in Enterworks, Inc. The amount of
available borrowings fluctuates based on the underlying asset borrowing base. At
March 31, 2000, the Company was not in compliance with several covenants
contained within the Facility, including covenants relating to certain leverage,
net worth, tangible capital and fixed charge coverage goals. The bank has waived
this non-compliance.
Senior Subordinated Notes
In 1995 the Company issued Senior Subordinated Notes ("Notes") to
certain shareholders. The Notes are classified as either Series B or Series C.
Series B Notes are collateralized by fixed assets of the Company. Series C Notes
are unsecured. Both the Series B and Series C Notes have a maturity date of
April 1, 2001 and have interest rates ranging from 14% to 17%. Interest is paid
quarterly on January 1, April 1, July 1, and October 1 of each year. The Notes
can be prepaid at the Company's option. Additionally, these Notes have a
cumulative payment premium of 13.5% per annum payable only upon certain
circumstances. These circumstances include an initial public offering of the
Company's common stock or a significant refinancing, to the extent that net
proceeds from either of the above events are received and are sufficient to pay
the premium. Due to the contingent nature of the premium payment, the associated
premium expense will only be recorded after the occurrence of a triggering
event. At March 31, 2000, the prepayment premium that would be due upon a
triggering event is $6.8 million.
In conjunction with the Enterworks private placement offering (Note 2),
the Company retired approximately $1.0 million of Series B Notes, and $4.8
million of Series C Notes in exchange for shares of Enterworks' common stock
owned by the Company at an exchange ratio of one share of Enterworks' common
stock for each $1.00 principal amount of notes payable. In addition to the
retirement of these notes, accrued interest of approximately $300,000 was
forgiven and the holders of these notes waived their rights to the prepayment
premium associated with these notes.
The balances of the Series B and Series C Notes were $5.5 million and
$3.0 million, respectively, at March 31, 2000 and December 31, 1999.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. PREFERRED STOCK
SENIOR REDEEMABLE PREFERRED STOCK
The components of the senior redeemable preferred stock are Series A-1
and Series A-2, 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 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 Stock ($1,000 per share), plus all
accrued and unpaid dividends. The Company is required to redeem all of the
outstanding shares of the stock on December 31, 2001, subject to the legal
availability of funds. Mandatory redemptions are required from excess cash
flows, as defined in the stock agreements. The Series A-1 and A-2 redeemable
preferred stock is senior to all other present and future equity of the Company.
The Series A-1 is senior to the Series A-2. The Company has not declared
dividends on its senior redeemable preferred stock since its issuance. At March
31, 2000 and December 31, 1999 undeclared, unpaid dividends relating to Series
A-1 and A-2 redeemable preferred stock totaled $3,160,000 and $3,054,000,
respectively.
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, has
been authorized for issuance. The Company initially issued 2,858,723 shares of
12% Cumulative Exchangeable Redeemable Preferred Stock (the "Public Preferred
Stock") pursuant to the acquisition of the Company during fiscal year 1990. The
Public Preferred Stock was recorded at fair value on the date of original issue,
November 21, 1989, and the Company is making periodic accretions under the
interest method of the excess of the redemption value over the recorded value.
Accretion for the three months ended March 31, 2000 was $385,000. The Company
declared stock dividends totaling 736,863 shares in 1990 and 1991.
In November 1998, the Company retired 410,000 shares of the Public
Preferred Stock held by certain shareholders. The Company repurchased the stock
at $4.00 per share. The carrying value of these shares was determined to be $3.8
million, and the $2.2 million excess of the carrying amount of these shares of
Public Preferred Stock over the redemption price of $1.6 million was recorded as
an increase in capital in excess of par; there was no impact on income from this
transaction.
The Public Preferred Stock has a 20 year maturity; however, the Company
must redeem, out of funds legally available, 20% of the Public Preferred Stock
on the 16th, 17th, 18th and 19th anniversaries of November 21, 1989, leaving 20%
to be redeemed at maturity. On any dividend payment date after November 21,
1991, the Company may exchange the Public Preferred Stock, in whole or in part,
for 12% Junior Subordinated Debentures that are redeemable upon terms
substantially similar to the Public Preferred Stock and subordinated to all
indebtedness for borrowed money and like obligations of the Company.
The Public Preferred Stock accrues a semi-annual dividend at an annual
rate of 12% ($1.20) per share, based on the liquidation preference of $10 per
share, and is fully cumulative. Through November 21, 1995, the Company had the
option to pay dividends in additional shares of Preferred Stock in lieu of cash.
Dividends in additional shares of the Preferred Stock are paid at the rate of 6%
of a share of the Preferred Stock for each $.60 of such dividends not paid in
cash. Dividends are payable by the Company, provided the Company has legally
available funds under Maryland law, when and if declared by the Board of
Directors, commencing June 1, 1990, and on each six month anniversary thereof.
For the years 1992 through 1994 and for the dividend payable June 1, 1995, the
Company has accrued undeclared dividends in additional shares of preferred
stock. These accrued dividends are valued at $3,950,000. Had the Company accrued
such dividends on a cash basis, the total amount accrued would have been
$15,101,000. For the cash dividends payable since December 1, 1995, the Company
has accrued $18,677,000.
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>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. REPORTABLE BUSINESS SEGMENTS
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in 1998 which changes the way the Company
reports information about its operating segments.
At March 31, 2000, the Company has two reportable segments: Systems and
Support Services and Products. The Company evaluates the performance of its
operating segments based on revenue, gross profit and income before goodwill
amortization, income taxes, non-recurring items and interest income or expense.
Summarized financial information concerning the Company's reportable
segments for the three months ended March 31, 2000 and 1999 is shown in the
following table. The "other" column includes corporate related items.
Enterworks, Inc. (Note 2) was disclosed as a segment in 1999 filed reports and
therefore it is still identified as a segment in the 1999 captions below.
<TABLE>
<CAPTION>
Systems and
Support Services Products Enterworks Other Total
MARCH 31, 2000
<S> <C> <C> <C> <C> <C>
External Revenues $ 19,161 $ 12,933 $ -- $ -- $ 32,094
Intersegment Revenues $ -- $ -- $ -- $ -- $ --
Gross Profit $ 2,704 $ 1,297 $ -- $ -- $ 4,001
Segment profit (loss) $ 44 $ (253) $ -- $ -- $ (209)
Total assets $ 15,139 $ 18,940 $ -- $ 23,928 $ 58,007
Capital Expenditures $ 192 $ 2 $ -- $ 198 $ 392
Depreciation & Amortization $ 131 $ 69 $ -- $ 304 $ 504
MARCH 31, 1999
External Revenues $ 21,932 $ 16,699 $ -- $ -- $ 38,631
Intersegment Revenues $ 151 $ -- $ -- $ -- $ 151
Gross Profit $ 3,637 $ 818 $ -- $ -- $ 4,455
Segment profit (loss) $ (649) $ 723 $ -- $ -- $ 74
Total assets $ 43,281 $ 3,647 $ 5,595 $ 18,517 $ 71,040
Capital Expenditures $ 34 $ 6 $ 302 $ 40 $ 382
Depreciation & Amortization $ 235 $ 65 $ 529 $ 330 $ 1,159
</TABLE>
The Company does not have material international revenues, profit
(loss), assets or capital expenditures. The Company's business is not
concentrated in a specific geographical area within the United States, as it has
12 separate facilities located in 4 states and Europe and Asia.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Sales for the first three months of 2000 were $32.1 million, a decrease
of $6.5 million or 16.9% as compared to the same 1999 period. This decrease was
primarily attributable to a $2.8 million decline in sales from the Company's
Systems and Support Services Group, which was impacted by the sale of the
Company's field engineering division ("TFE") in September 1999. The decrease was
also attributable to a decline in the Company's Product Group sales of $3.7
million which was primarily due to the protracted start up period of its
Infrastructure Solutions 1 contract which was the follow-on to the Small
Multi-user Computer II ("SMCII") contract which expired in April 1999.
Operating losses through the first three months of 2000 were approximately
$298,000 as compared to an operating loss of $58,000 during the same 1999
period. Operating profitability declined principally because of the reduced
sales volume discussed above.
Total backlog from existing contracts was approximately $229.2 million
and $242.2 million as of March 31, 2000 and December 31, 1999, respectively. As
of March 31, 2000, the funded backlog of the Company totaled $56.8 million, an
increase of $12.1 million from December 31, 1999. 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. The major
elements of the Company's operating expenses as a percentage of sales for the
three-month periods ended March 31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales (87.5) (88.5)
SG&A expenses (13.1) (11.3)
Goodwill amortization (0.3) (0.3)
----- ------
Operating loss (0.9) (0.1)
Equity in net losses of Enterworks -- (10.4)
Other income -- --
Interest expense (3.5) (4.0)
----- ------
Loss before taxes (4.4) (14.5)
Income tax benefit (provision) 1.5 3.8
---- ------
Net loss (2.9)% (10.7)%
====== ====
</TABLE>
<PAGE>
FINANCIAL DATA BY MARKET SEGMENT
Sales, gross profit, and gross margin by market segment for the first
quarter of 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
MARCH 31,
------------------
2000 1999
---- ----
(amounts in thousands)
<S> <C> <C>
Sales:
Systems and Support Services $19,161 $21,932
Products 12,933 16,699
------ ------
Total $32,094 $38,631
====== ======
Gross Profit:
Systems and Support Services $ 2,704 $ 3,637
Products 1,297 818
----- ---
Total $ 4,001 $ 4,455
===== =====
Gross Margin:
Systems and Support Services 14.1% 16.6%
Products 10.0% 4.9%
Total 12.5% 11.5%
</TABLE>
For the three-month period ended March 31, 2000, sales decreased by
$6.5 million, or 16.9%, to $32.1 million from $38.6 million for the comparable
1999 period. Of the $6.5 million decrease, $2.8 million was attributable to the
Systems and Support Services Group. The Group's comparable revenues were
impacted by the sale of the Company's field engineering division ("TFE") in
September 1999. The TFE division generated sales of $8.3 million in the first
quarter of 1999. The decrease in the Group's revenue was partially offset by
increases in the Company's Ft. Monmouth and Ft. Sill contracts and increases in
the Company's information security and advanced messaging businesses. The
overall decline in sales was also attributable to a decrease in the Company's
Product Group Sales of $3.7 million primarily due to the protracted start up
period of its Infrastructure Solutions 1 Contract.
Cost of sales was 87.5% of sales the three-month period ended March 31,
2000, as compared to 88.5% in the comparable 1999 period. The decrease in cost
of sales as a percentage of sales primarily resulted from the increase of the
Company's new business area's portion of total Company sales. The Company's new
businesses, such as information security, wireless, enterprise management and
advanced messaging, have higher margin sales than all other groups.
Gross profit decreased by approximately $500,000 in the first quarter
of 2000 to $4.0 million from $4.5 million in the comparable 1999 period as a
result of the decline in sales discussed above. Total Company gross margins were
12.5% and 11.5% for the three-month periods ended March 31, 2000 and 1999,
respectively.
Selling, general and administrative costs decreased for the three-month
period by approximately $200,000 to $4.2 million in 2000 from $4.4 million in
1999. This decrease is primarily due to the sale of TFE in September 1999. The
Company no longer funds the general and administrative effort for that division.
SG&A as a percentage of sales were 13.1% and 11.3% for the three-month periods
ended March 31, 2000 and 1999, respectively.
Goodwill amortization expense was $89,000 for the three months ended
March 31, 2000 compared to $132,000 for the period ended March 1999. The
decrease in goodwill amortization was a result of the goodwill write-off
associated with the sale of TFE.
Operating profitability declined by $240,000 during the three months
ended March 31, 2000 to approximately $298,000 in operating loss. The Company
had an operating loss of $58,000 in the comparable period of 1999. The decrease
in operating profit resulted primarily from the aforementioned decline in sales.
Interest expense decreased by approximately $400,000 to $1.1 million during
the three-month period ended March 31, 2000, from $1.5 million in the comparable
period of 1999. The decrease was attributable to decreased debt levels in 2000.
<PAGE>
The Company recorded a tax benefit of approximately $500,000 and $1.5
million for the three-month periods ended March 31, 2000 and 1999, respectively,
principally due to the net operating loss carryforwards generated by the
Company.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2000, the Company used $6.4
million of cash in its operating activities. This cash was used to reduce the
Company's accounts payable balance of $5.7 million and fund losses incurred in
operations. Cash used in investing activities was $392,000. Cash was provided by
financing activities during the quarter under borrowings under the Company's
credit facility of $6.7 million.
At March 31, 2000, the Company had outstanding debt and long term
obligations of $43.0 million, consisting of $23.2 million under the secured
senior credit facility, $8.5 million in subordinated debt, and $11.3 million in
capital lease obligations. The Company believes it will generate enough funds in
the ordinary course of business during the next twelve months to fund its
operations and service its debt and capital lease obligations.
At March 31, 2000, the Company had an outstanding balance of $23.2
million on its $35 million Senior Credit Facility (the "Facility"). The Facility
matures on July 1, 2001 and is collateralized by a majority of the Company's
assets (including inventory, accounts receivable and Telos' stock in
Enterworks). The amount of borrowings fluctuates based on the underlying asset
borrowing base as well as the Company's working capital requirements. At March
31, 2000, the Company, under its borrowing base formula, had $1.4 million of
unused availability. The Facility has various covenants that may, among other
things, restrict the ability of the Company to merge with another entity, sell
or transfer certain assets, pay dividends and make other distributions beyond
certain limitations. The Facility also requires the Company to meet certain
leverage, net worth, interest coverage and operating goals. At March 31, 2000,
the Company was not in compliance with several covenants contained in the
Facility; however, the bank has waived this non-compliance.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting or Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS 133, as amended by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective date of FASB
Statement No. 133, an amendment of FASB Statement No. 133", is effective for all
quarters of the Company's year ending December 31, 2001. The Company currently
does not engage or plan to engage in the use of derivative instruments, and does
not expect SFAS 133 to have a material impact on the results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 "Revenue Recognition in Financial Statements" ("SAB
101") to provide guidance regarding the recognition, presentation and disclosure
of revenue in the financial statements. The Company expects to adopt the
provisions of SAB 101 (as amended by SAB 101A which deferred the implementation
date by one quarter) on April 1, 2000. Management does not anticipate the
adoption of SAB 101 to have a material impact on its results of operations or
financial condition.
In April 2000, the FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation; Interpretation of APB Opinion
No.25" ("FIN 44"). The Company is evaluating the provisions of FIN 44.
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.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's long-term debt obligations.
The Company is exposed to interest rate volatility with regard to its
variable rate debt obligations under its Senior Credit Facility. This facility
bears interest at 1.00%, subject to certain adjustments, over the bank's base
rate. The weighted average interest rate in 1999 was 9.89%. This facility
expires on July 1, 2001 and has an outstanding balance of $23.2 million at
March 31, 2000.
The Company's other long-term debt at March 31, 2000 consists of Senior
Subordinated Notes B and C which bear interest at fixed rates ranging from 14%
to 17%. The Senior Subordinated Notes mature as to principal in the aggregate
amount of $8,537,000 on April 1, 2001. The Company has no cash flow exposure
due to rate changes for its Senior Subordinated Notes.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various lawsuits arising in the ordinary course
of business. In the opinion of management, while the results of litigation
cannot be predicted with certainty, the final outcome of such matters will not
have a material adverse effect on the Company's consolidated financial position,
results of operations, or of cash flows.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
SENIOR PREFERRED STOCK
The Company has not declared dividends on its Senior Redeemable
Preferred Stock, Series A-1 and A-2, since its issuance. Total undeclared unpaid
dividends, accrued for financial reporting purposes, are $3,160,000 for the
Series A-1, A-2 Preferred stock at March 31, 2000.
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 6% of a share for each $.60 of such dividends not
paid in cash. Cumulative undeclared dividends as of March 31, 2000 accrued for
financial reporting purposes totaled $2.6 million. 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 $18,677,000.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K: Report on Form 8-K filed January 18, 2000
concerning the deconsolidation of the
Company's Enterworks subsidiary.
Items 2, 4, and 5 are not applicable and have been omitted.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: MAY 15, 2000 TELOS CORPORATION
/S/ THOMAS J. FERRARA
----------------------
Thomas J. Ferrara
(Principal Financial Officer)
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<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of operations for Telos Corporation
and is qualified in its entirety by reference to such financial statements.
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