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, 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 August 1, 2000, the registrant had 21,241,980 shares of Class A Common
Stock, no par value, and 4,037,628 shares of Class B Common Stock, no par value;
and 3,185,586 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): 24
--
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
------ ---------------------
<TABLE>
<CAPTION>
Item 1. Financial Statements:
<S> <C>
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999 (unaudited).........................................4
Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999 ................................................................................5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 (unaudited) .................................................6
Notes to Condensed Consolidated Financial Statements (unaudited).......................................7-19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................................20-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................23
PART II. OTHER INFORMATION
------- -----------------
Item 1. Legal Proceedings..............................................................................24
Item 3. Defaults Upon Senior Securities................................................................24
Item 6. Exhibits and Reports on Form 8-K...............................................................24
SIGNATURES....................................................................................................25
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales
Systems and Support Services $16,759 $23,068 $32,459 $43,402
Products 15,046 30,876 29,297 47,979
Xacta 3,671 2,196 5,814 3,390
------ ------ ------ ------
35,476 56,140 67,570 94,771
Costs and expenses
Cost of sales 29,402 46,418 57,495 80,594
Selling, general and administrative expenses 4,237 4,073 8,447 8,454
Goodwill amortization 90 132 179 264
------ ------ ------ ------
Operating income 1,747 5,517 1,449 5,459
Other income (expenses)
Equity in net losses of Enterworks -- (5,145) -- (9,168)
Other income 18 21 38 52
Interest expense (1,226) (1,469) (2,363) (3,019)
------ ------ ------ ------
Income(loss) before taxes 539 (1,076) (876) (6,676)
Income tax(provision)benefit (304) 71 183 1,548
----- ----- ------ ------
Net income (loss) $ 235 $(1,005) $ (693) $(5,128)
====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
Current assets
<S> <C> <C>
Cash and cash equivalents (includes
restricted cash of $54 at June 30,
2000 and December 31, 1999) $ 313 $ 315
Accounts receivable, net 28,114 27,030
Inventories, net 5,008 4,779
Deferred income taxes, current 5,129 4,802
Other current assets 570 83
------ ------
Total current assets 39,134 37,009
Property and equipment, net of accumulated depreciation
of $9,059 and $23,093, respectively 12,307 12,236
Goodwill, net 4,106 4,284
Investment in Enterworks -- --
Deferred income taxes, long term 2,886 2,930
Other assets 511 427
------ ------
$ 58,944 $ 56,886
====== ======
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Accounts payable $ 9,618 $13,792
Other current liabilities 2,533 3,421
Unearned revenue 6,544 5,183
Senior subordinated notes 8,537 --
Accrued compensation and benefits 8,191 7,645
------ ------
Total current liabilities 35,423 30,041
Senior credit facility 22,069 16,508
Senior subordinated notes -- 8,537
Capital lease obligations 11,190 11,362
------ ------
Total liabilities 68,682 66,448
Redeemable preferred stock
Senior redeemable preferred stock 6,266 6,054
Redeemable preferred stock 39,656 36,975
------ ------
Total preferred stock 45,922 43,029
------ ------
Stockholders' investment
Common stock 78 78
Capital in excess of par -- --
Retained deficit (55,738) (52,669)
------- --------
Total stockholders' investment (deficit) (55,660) (52,591)
------- ------
$ 58,944 $ 56,886
====== =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net loss $ (693) $(5,128)
Adjustments to reconcile net loss to cash (used in)
provided by operating activities:
Gain on sale of fixed assets -- (88)
Depreciation and amortization 829 2,146
Goodwill amortization 179 264
Other noncash items 344 1,003
Changes in assets and liabilities (5,098) 14,283
----- ------
Cash (used in) provided by operating activities (4,439) 12,480
------- ------
Investing activities:
Proceeds from sale of fixed assets -- 171
Investment in capitalized software and other assets -- (762)
Purchase of property and equipment (961) (666)
------- -------
Cash used in investing activities (961) (1,257)
------- -------
Financing activities:
Proceeds from (repayment of) borrowings under senior credit facility 5,561 (10,688)
Payments under capital leases (163) (191)
---- ----
Cash provided by (used in) financing activities 5,398 (10,879)
------ --------
(Decrease) increase in cash and cash equivalents (2) 344
Cash and cash equivalents at beginning of period 315 408
------ -------
Cash and cash equivalents at end of period $ 313 $ 752
======= =======
</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 (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 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 SFAS 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 June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" which amends SFAS 133. SFAS 138
amends SFAS 133 to 1)expand the scope of the "normal sales and normal purchases"
exception; 2)introduce the benchmark rate as an interest rate that may be
hedged; 3)permit a recognized foreign currency denominated asset to be hedged
and; 4)allow certain intercompany derivatives that are offset net to be
designated as hedging instruments. The Company does not anticipate SFAS 138 to
have a material impact on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 "Revenue Recognition in Financial Statements"
("SAB101")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 101B which deferred the
implementation date by three quarters) on October 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.
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.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 was 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 the Enterworks' 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 six months ended June 30, 2000. Additionally,
the Company established an "Investment in Enterworks" account in accordance with
APB 18. As of June 30, 2000 and December 31, 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 ("Facility") with
a bank that matures on July 1, 2001. As of July 1, 2000, the Facility will be
classified as a current liability as the Facility will have a term of less than
one year. 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.
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.
Fixed assets of the Company collateralize Series B Notes. 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 June 30,
2000, the prepayment premium that would be due upon a triggering event is $7.4
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 June 30, 2000 and December 31, 1999. At June
30, 2000, the Series B and Series C notes are classified as current
liabilities as they have a term of less than one year.
<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 senior preferred
stock is the face amount of the Series A-1 and A-2 ($1,000 per share), plus all
accrued and unpaid dividends. The Company is required to redeem all of the
outstanding shares of the 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 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 June 30, 2000
and December 31, 1999 cumulative undeclared, unpaid dividends relating to Series
A-1 and A-2 redeemable preferred stock totaled $3,266,000 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
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 six months ended June 30, 2000 was
$770,000. 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.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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. 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 were paid at the rate of
6% of a share 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 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 $20,588,000.
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 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 the beginning of the second
quarter 2000, management determined that it evaluates the financial performance
of the Company in three reportable operating segments:
Systems and Support Services: provides software development and
support services for software including technology insertion, system
redesign and software re-engineering. This segment consists of two
divisions - solutions and international.
Products: delivers enterprise integration and networking
infrastructure solutions to its customers. These solutions include
providing commercial hardware, software and services to its customers. This
group is capable of staging, installing and deploying large network
infrastructures with virtually no disruption to customer's ongoing
operations.
Xacta: an emerging e-commerce integrator providing "B2B" trusted
e-marketplace solutions to global 2000 companies and emerging digital
businesses. Xacta professionals architect, engineer, integrate and support
complex "B2B" e-marketplaces and extranets, focusing on security,
reliability, scalability and integration with existing systems and
processes.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 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 Xacta Enterworks Other (1) Total
---------------- -------- ----- ---------- --------- -----
June 30, 2000
<S> <C> <C> <C> <C> <C> <C>
External Revenues $16,759 $ 15,046 $ 3,671 $ -- $ -- $35,476
Intersegment Revenues 88 -- -- -- -- 88
Gross Profit 2,689 2,055 1,330 -- -- 6,074
Segment profit(loss)(3) 1,250 424 163 -- -- 1,837
Total assets 11,596 17,375 5,433 -- 24,540 58,944
Capital Expenditures 13 219 126 -- 211 569
Depreciation &
Amortization(2) $ 111 $ 73 $ 12 $ -- $ 308 $ 504
Systems and
Support Services Products Xacta Enterworks Other (1) Total
---------------- -------- ----- ---------- --------- -----
June 30, 1999
External Revenues $23,068 $30,876 $ 2,196 $ -- $ -- $56,140
Intersegment Revenues -- -- 151 -- -- 151
Gross Profit 4,181 4,205 1,336 -- -- 9,722
Segment profit(loss)(3) 3,137 2,198 314 -- -- 5,649
Total assets 26,200 13,766 4,237 6,190 26,402 76,795
Capital Expenditures 10 3 24 133 114 284
Depreciation &
Amortization(2) $ 229 $ 56 $ 8 $ 635 $ 323 $ 1,251
<FN>
(1) Corporate assets are principally property and equipment, cash and other
assets.
(2) Depreciation and amortization includes amounts relating to property and
equipment, goodwill, deferred software costs and spare parts inventory.
(3) Segment profit (loss) represents operating income (loss) before
goodwill amortization.
</FN>
</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>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7. Subsequent Event
On July 28, 2000, the Company entered into a Subscription Agreement with
certain investors ("Investors"), which provided for the formation of an Oklahoma
Limited Liability Company named Telos OK, L.L.C. ("Telos OK"). The Company
contributed all of the assets of its Digital Systems Test and Training
Simulators ("DSTATS") business as well as its Government Contract with the
Department of the Army at Ft. Sill (hereafter referred to as the Company's Ft.
Sill business) to Telos OK. The Investors contributed $3.0 million in cash to
Telos OK, and at closing Telos OK borrowed $4.0 million cash from a bank. The
Company and the Investors have each guaranteed the loan of Telos OK. The Company
has guaranteed $2 million and the Investors have guaranteed $1 million. In
addition, Telos OK entered into a $500,000 senior credit facility with the same
bank, which expires August 1, 2001. Borrowings under the facility, should there
be any, will be collateralized by certain assets of Telos OK (primarily accounts
receivable). The Company and the Investors have agreed to guarantee this credit
facility in the amount of $250,000 each, when and if drawn.
In compliance with the subscription agreement, on the closing date the
following consideration was given to the Company for its contribution of assets
to Telos OK:
The Company received $6 million in cash, retained $2.5 million in trade
receivables of the Ft. Sill and DSTATS businesses, and received a $500,000
receivable from Telos OK for a total consideration of $ 9 million for the
contribution of the net assets.
The Company and the Investors on the closing date will each own a 50%
voting membership interest in Telos OK, and have signed an operating agreement
which provides for three subclasses of membership units, Classes A, B and C. The
ownership of these classes is as follows and can change upon Class B redemption:
Class A - owns 20% of Telos OK. The Company and the Investors each own 50% of
the 200,000 units of this class. This class has all voting rights of Telos OK
and has the sole right to elect the directors of Telos OK. The units in this
class do not have redemptive rights.
Class B - owns 40% of Telos OK. The Investors own all 2.9 million units of this
class. This class does not have voting rights, but can request the redemption of
all or a portion of the units Class B outstanding beginning one year after the
closing date, subject to certain restrictions. Class B can redeem no more than
500,000 units per quarter at a price of $1.00 per unit, and such redemption can
only be made from the excess cash flow of Telos OK as defined in the agreement.
Class C- owns 40% of Telos OK. The Company owns all 2.9 million units of this
class. This class does not have voting rights, and has the same redemptive
rights as class B above, except that no right of redemption will exist until all
Class B units have been redeemed. In addition, when any of the Class B units
have been redeemed, the Company will receive a warrant to purchase a number of
Class C units equal to the amount of the Class B units redeemed at a price of
$0.01 per unit.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As indicated in the operating agreement, one of the Investors will
initially serve as Chairman of the Board and may designate a Secretary, and
David Aldrich, President and CEO of the Company, and Thomas Ferrara, Treasurer
of the Company, will initially serve in those same capacities for Telos OK. The
Company has entered into a corporate services agreement with Telos OK whereby
the Company will provide certain administrative support functions to Telos OK,
including but not limited to finance and accounting and human resources, in
return for a monthly payment.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited Pro Forma Consolidated Balance Sheet as of June
30, 2000 presents the pro forma impact of the transaction as if it occurred on
June 30, 2000. The unaudited Pro Forma Consolidated Statements of Operations for
the year ended December 31, 1999 and for the six months ended June 30, 2000
("pro forma financial information") present the pro forma effect of the
transaction as if it occurred as of January 1, 1999.
The objective of pro forma financial information is to provide investors
with information about the estimated continuing impact of particular completed
or probable transactions by indicating how the transactions might have affected
historical financial statements had they occurred at an earlier date.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
TELOS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Elimination
Form 10-Q of Operations Pro Forma
Balances of Telos OK Adjustments Balances
-------- ---------- ----------- --------
Sales
<S> <C> <C> <C> <C>
Systems and Support Services $32,459 $(11,565)(d) $ -- $20,894
Products 29,297 -- -- 29,297
Xacta 5,814 -- -- 5,814
------ ------- --- ------
67,570 (11,565) -- 56,005
Costs and expenses
Cost of sales 57,495 (9,558)(d) -- 47,937
Selling, general and administrative expenses 8,447 -- -- 8,447
Goodwill amortization 179 -- -- 179
------- ----- ----- ------
Operating income (loss) 1,449 (2,007) -- (558)
Other income (expenses)
Equity in net losses of Enterworks -- -- -- --
Equity in earnings of Telos OK -- -- 1,004 (e) 1,004
Other income 38 -- -- 38
Interest expense (2,363) -- -- (2,363)
------ --- --- --------
(Loss) income before taxes (876) (2,007) 1,004 (1,879)
Income tax benefit 183 -- 459 (f) 642
--- ----- ------- ----
Net (loss)income $ (693) $(2,007) $ 1,463 $(1,237)
======== ======== ======== ========
</TABLE>
Please see Notes to the unaudited Pro Forma Consolidated Statement of Operations
and Consolidated Balance Sheet.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
TELOS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(Unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Elimination
Form 10-K of Operations Pro Forma
Balances of Telos OK Adjustments Balances
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Sales
Systems and Support Services $93,538 $(19,614)(d) $ -- $73,924
Products 77,826 -- -- 77,826
Enterworks -- -- -- --
-------- -------- --- -------
171,364 (19,614) -- 151,750
Costs and expenses
Cost of sales 151,216 (17,806)(d) -- 133,410
Selling, general and administrative expenses 17,459 -- -- 17,459
Goodwill amortization 489 -- -- 489
------- ----- ----- ------
Operating income (loss) 2,200 (1,808) -- 392
Other income (expenses)
Equity in net losses of Enterworks (18,765) -- -- (18,765)
Equity in earnings of Telos OK -- -- 904 (e) 904
Other income 67 -- -- 67
Gain on sale of assets 4,731 -- -- 4,731
Interest expense (6,065) -- -- (6,065)
------ --- --- --------
(Loss) income before taxes (17,832) (1,808) 904 (18,736)
Income tax benefit 7,853 -- 404 (f) 8,257
----- ----- ------- ------
(Loss) income before extraordinary item (9,979) (1,808) 1,308 (10,479)
Extraordinary item 8,015 -- -- 8,015
----- -- -- -----
Net (loss)income $ (1,964) $(1,808) $ 1,308 $(2,464)
========== ======== ======== ========
</TABLE>
Please see Notes to the unaudited Pro Forma Consolidated Statement of Operations
and Consolidated Balance Sheet.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
TELOS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT JUNE 30, 2000
(Unaudited)
(amounts in thousands)
ASSETS
<TABLE>
<CAPTION>
Adjustments and
Form 10-Q Contribution Pro Forma
Balances to Telos OK Adjustments Balances
-------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 313 $6,500(a) $ (500)(g) $ 6,313
Accounts receivable, net 28,114 (1,322)b) -- 26,792
Inventories, net 5,008 -- -- 5,008
Deferred income taxes, current 5,129 -- 367(f) 5,496
Other current assets 570 (31)(b) 500(g) 1,039
------ ------- ----- -------
Total current assets 39,134 5,147 367 44,648
Property and equipment, net 12,307 (50)(b) -- 12,257
Goodwill, net 4,106 (1,232)(b) -- 2,874
Investment in Enterworks -- -- -- --
Investment in Telos OK -- -- -- --
Deferred income taxes, long term 2,886 -- -- 2,886
Other assets 511 -- -- 511
------ ------ ------ ------
$58,944 $3,865 $ 367 $63,176
====== ====== ====== =======
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Accounts payable $ 9,618 $ (216)(b) $ -- $ 9,402
Other current liabilities 2,533 (16)(b) (92)(f) 2,425
Unearned revenue 6,544 -- -- 6,544
Senior subordinated notes 8,537 -- -- 8,537
Accrued compensation and benefits 8,191 (1,873)(b) -- 6,318
----- ------ ----- ------
Total current liabilities 35,423 (2,105) (92) 33,226
Senior credit facility 22,069 -- -- 22,069
Capital lease obligations 11,190 -- -- 11,190
------ ----- ----- ------
Total liabilities 68,682 (2,105) (92) 66,485
Redeemable preferred stock
Senior redeemable preferred stock 6,266 -- -- 6,266
Redeemable preferred stock 39,656 -- -- 39,656
------ ------ ----- ------
Total preferred stock 45,922 -- -- 45,922
------ ------ ----- ------
Stockholders' investment
Common stock 78 -- -- 78
Capital in excess of par -- 5,970 (c) -- 5,970
Retained deficit (55,738) -- 459(f) (55,279)
-------- ----- ------ --------
Total stockholders' investment (55,660) 5,970 459 (49,231)
-------- ----- ------ --------
$ 58,944 $3,865 $ 367 $63,176
======== ====== ====== =======
</TABLE>
Please see Notes to the unaudited Pro Forma Consolidated Statement of Operations
and Consolidated Balance Sheet.
<PAGE>
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pro Forma Adjustments
The pro forma adjustments outlined below present adjustments related
to the transaction:
a) Reflects the net receipt of $6.0 million from Telos OK in connection with
the subscription agreement. The Company received $7.0 million less $1.0
million retained in the business of Telos OK.
b) Reflects the elimination of the June 30, 2000 FT. Sill and DSTATS
businesses' accounts from the Company's balance sheet. These net assets
consist of the following:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Accounts receivable $ 1,322
Property and equipment, net 50
Other current assets 31
Goodwill 1,232
Accounts payable (216)
Accrued expenses (1,889)
-------
$ 530
=======
c) Reflects the $6.0 million excess of the cash received over the net assets
contributed. There is no impact on income from this transaction.
d) Reflects the adjustment to the Statements of Operations for the six month
period ended June 30, 2000 and the year ended December 31, 1999 to separate
the operations of the Ft. Sill and DSTATS businesses from the respective
periods.
e) Reflects the Company's 50% interest in the net income of Telos OK for the
six months ended June 30, 2000 and the year ended December 31, 1999.
f) Reflects the changes to the income tax provision and corresponding deferred
tax assets and liabilities in order to present a stand-alone income tax
provision for the Company in accordance with SFAS 109 for the six months
ended June 30, 2000 and for the year ended December 31, 1999.
g) Reflects additional $500,000 to be received from Telos OK at a future date
for the Company's contribution of receivables.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Sales for the first six months of 2000 were $67.6 million, a decrease
of $27.2 million or 28.7% as compared to the same 1999 period. This decrease was
primarily attributable to a $18.7 million decrease in sales from the Company's
Products Group which experienced decreased sales from its Joint Recruitive
Information Support Services Blanket Purchase Agreement. This decrease is also
attributable to the sale of the Company's Field Engineering division ("TFE") in
September 1999.
Operating income through the first six months of 2000 was $1.4 million
as compared to operating income of $5.5 million during the same 1999 period.
Operating profitability declined principally as a result of the sale of TFE and
the decline in sales in the Products Group as discussed above.
Total backlog from existing contracts was approximately $237.2 million
and $242.2 million as of June 30, 2000 and December 31, 1999, respectively. As
of June 30, 2000, the funded backlog of the Company totaled $56.9 million, an
increase of $12.2 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 and six month periods ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 82.9 82.7 85.1 85.0
SG&A expenses 11.9 7.3 12.5 8.9
Goodwill amortization 0.3 0.2 0.3 0.3
----- ---- ---- ----
Operating income 4.9 9.8 2.1 5.8
Other income 0.1 -- 0.1 0.1
Equity in net losses of Enterworks -- (9.1) -- (9.7)
Interest expense (3.4) (2.6) (3.5) (3.2)
Income tax(provision) benefit (0.9) 0.1 0.3 1.6
---- --- --- ---
Net income (loss) 0.7% (1.8)% (1.0)% (5.4)%
=== ==== === ===
</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,
------------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
(amounts in thousands)
<S> <C> <C> <C> <C>
Sales:
Systems and Support Services $ 16,759 $ 23,068 $ 32,459 $ 43,402
Products 15,046 30,876 29,297 47,979
Xacta 3,671 2,196 5,814 3,390
------ ------ ------- ------
Total $ 35,476 $ 56,140 $ 67,570 $ 94,771
====== ====== ======= ======
Gross Profit:
Systems and Support Services $ 2,689 $ 4,181 $ 4,725 $ 7,562
Products 2,055 4,205 3,423 5,134
Xacta 1,330 1,336 1,927 1,481
----- ----- ----- ------
Total $ 6,074 $ 9,722 $ 10,075 $ 14,177
===== ====== ====== ======
Gross Margin:
Systems and Support Services 16.1% 18.1% 14.6% 17.4%
Products 13.7% 13.6% 11.7% 10.7%
Xacta 36.2% 60.9% 33.2% 43.7%
Total 17.1% 17.3% 14.9% 15.0%
</TABLE>
For the three month period ended June 30, 2000, sales decreased by
$20.7 million, or 36.8% to $35.5 million from $56.1 million for the comparable
1999 period. Of the $20.7 million decrease, $15.8 million was attributable to
the Products Group, which experienced decreased sales from its Joint Recruitive
Information Support Services Blanket Purchase Agreement ("JRISS BPA"). The
decrease in sales was also attributable to the Systems and Support Services
Group, which experienced a decline of $6.3 million in sales for the three month
period ended June 30, 2000 compared to the same period in 1999. This decline is
mostly due to the sale of TFE in September 1999. TFE sales were $8.6 million for
the second quarter of 1999. Offsetting these decreases was an increase in Xacta
revenue of $1.5 million from second quarter 2000 compared to second quarter
1999. This increase is primarily due to increased sales in the Company's
information security product line.
Sales decreased $27.2 million or 28.7% to $67.6 million for the six
months ended June 30, 2000, from $94.8 million for the comparable 1999 period.
The decrease for the six month period includes an $18.7 million decrease in
Product sales, a decrease of $10.9 million in Systems and Support Services
revenue, partially offset by a $2.4 million increase in sales in its Xacta
group. This decrease in the six month revenue is primarily due to the decrease
in revenue from the JRISS BPA as well as the sale of TFE. These decreases were
slightly offset by increased sales under the Information Security product line
of $2.0 million.
<PAGE>
Cost of sales was 82.9% of sales for the quarter and 85.1% of sales for the
six months ended June 30, 2000, as compared to 82.7% and 85.0% for the same
periods in 1999. The slight increases in cost of sales as a percentage of sales
are primarily attributable to a one-time high margin transaction with one of the
Company's partners recorded in the second quarter of 1999.
Gross profit decreased $3.6 million in the three-month period to $6.1
million in 2000, from $9.7 million in the comparable 1999 period. In the six
month period, gross profit decreased $4.1 million to $10.1 million from $14.2
million in 1999. These declines are mostly attributable to the decreases in
sales volume discussed above. Gross margins were 17.1% and 14.9%, respectively,
for the three and six month periods of 2000 as compared to 17.3% and 15.0%,
respectively, for the comparable periods of 1999.
Selling, general, and administrative expense ("SG&A")increased by
approximately $164,000 or 4.0%, to $4.2 million in the second quarter of 2000
from $4.1 million in the comparable period of 1999. For the six-month period of
2000, SG&A remained at $8.4 million compared to the same period in 1999.
SG&A as a percentage of revenues increased to 11.9% for the second quarter
of 2000 from 7.3% in the comparable 1999 period. SG&A as a percentage of
revenues for the six-month period ended June 30, 2000 increased to 12.5% from
8.9% compared to the same period in 1999.
Goodwill amortization expense decreased $42,000 for the comparative
three-month periods of 2000 and 1999, and decreased by $85,000 to $179,000 for
the six months ended June 30, 2000 compared to the same period in 1999. The
reductions are due to a write off of the goodwill balance associated with the
sale of TFE in September 1999.
Operating income decreased by $3.8 million to $1.7 million in the three
month period ended June 30, 2000 from $5.5 million of operating profit in the
comparable 1999 period. Operating income decreased $4.0 million to $1.5 million
for the six months ended June 30, 2000 from $5.5 million for the six month
period ended June 30, 1999. These decreases in operating profit for the three
and six-month periods are mostly attributable to the decrease in gross profit.
Interest expense decreased approximately $200,000 to $1.2 million in the
second quarter of 2000 from $1.4 million in the comparable 1999 period, and
decreased approximately $700,000 to $2.3 million for the six months ended June
30, 2000 from $3.0 million for the comparable 1999 period. These decreases are
due to decreased debt levels in 2000.
The Company recorded an income tax provision for the three months ended
June 30, 2000 of approximately $300,000. This tax provision was primarily
attributable to provisions for state income taxes. The income tax benefit was
$183,000 for the six months ended June 30, 2000. This tax benefit was
principally due to the net operating loss carryforwards generated by the
Company. The Company's net deferred tax asset includes substantial amounts of
net operating loss carryforwards. Failure to achieve forecasted taxable income
may affect the ultimate realization of the net deferred tax assets. Management
believes the Company will generate taxable income in excess of operating losses
sufficient in amounts to realize the net deferred tax assets. The Company has a
valuation allowance of approximately $600,000 for primarily state net operating
losses it does not believe it will realize. The Company recorded income tax
benefits of $71,000 and $1.5 million for the three and six months ended June 30,
1999, respectively. These tax benefits were also due to net operating loss
carryforwards generated during the first quarter of 1999.
Liquidity and Capital Resources
For the six months ended June 30, 2000, the Company used $4.4 million of
cash in its operating activities. This cash was used to reduce the Company's
accounts payable balance by $4.2 million and fund losses incurred in operations.
Cash used in investing activities was approximately $1.0 million. Cash was
provided by financing activities during the quarter under borrowings under the
Company's credit facility of $5.6 million.
At June 30, 2000, the Company had outstanding debt and long term
obligations of $41.8 million, consisting of $22.1 million under the secured
senior credit facility, $8.5 million in subordinated debt, and $11.2 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 June 30, 2000, the Company had an outstanding balance of $22.1 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. 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.
<PAGE>
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 June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" which amends SFAS 133. SFAS 138
amends SFAS 133 to 1) expand the scope of the "normal sales and normal
purchases" exception; 2) introduce the benchmark rate as an interest rate that
may be hedged; 3) permit a recognized foreign currency denominated asset to be
hedged and; 4) allow certain intercompany derivatives that are offset net to be
designated as hedging instruments. The Company does not anticipate SFAS 138 to
have a material impact on its financial statements.
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 101B which deferred the implementation
date by three quarters) on October 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.
Item 3. 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 for the first six months of 2000 was
9.86%. This facility expires on July 1, 2001 and has outstanding balance of
$22.1 million at June 30, 2000.
The Company's other long-term debt at June 30, 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 Redeemable 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 $3.3 million for the
Series A-1 and A-2 Preferred Stock at June 30, 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 June 30, 2000 accrued for
financial reporting purposes totaled $24.5 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 $20,588,000.
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: None.
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: Telos Corporation
August 14, 2000 /s/ Thomas J. Ferrara
----------------------
Thomas J. Ferrara
(Principal Financial Officer &
Principal Accounting Officer)
