UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: March 31,June 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number: 1-8443
TELOS CORPORATION(Exact
(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
(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 MayAugust 1, 2002, the registrant had 21,171,202 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): 21
TELOS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
------ ---------------------
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended March 31,June 30, 2002 and 2001 (Unaudited)....................................3(unaudited)..............3
Condensed Consolidated Balance Sheets as of March 31,June 30, 2002 (Unaudited)(unaudited)
and December 31, 2001........................................................42001 .....................................................4
Condensed Consolidated Statements of Cash Flows for the
ThreeSix Months Ended March 31,June 30, 2002 and 2001 (Unaudited)..........................................5(unaudited) ......................5
Notes to Condensed Consolidated Financial Statements (Unaudited)............6-11(unaudited)..........6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................12-16Operations..........................14-18
Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk............17
Risk.......19 PART II. OTHER INFORMATION
------- -----------------
Item 1. Legal Proceedings.....................................................18Proceedings............................................... 20
Item 3. Defaults Upon Senior Securities.......................................18Securities..................................20
Item 6. Exhibits and Reports on Form 8-K......................................18
SIGNATURES....................................................................19
8-K.................................21
SIGNATURES...................................................................22
PART I - FINANCIAL INFORMATION
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(amounts in thousands)
Three Months Ended March 31,Six Months Ended
June 30, June 30,
---------------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Sales
Systems and Support Services $14,355 $13,887$9,063 $16,813 $23,418 $30,700
Products 16,581 27,47716,537 18,958 33,118 46,435
Xacta 2,403 2,5653,025 3,578 5,428 6,143
----- ------ ----- 33,339 43,929------
28,625 39,349 61,964 83,278
Costs and expenses
Cost of sales 29,929 37,03924,628 31,924 54,557 68,964
Selling,general and
administrative expenses 5,271 5,7135,251 6,838 10,522 12,551
Goodwill amortization -- 6263 -- 125
------ ------ ----- ------
Operating (loss) income (1,861) 1,115(1,254) 524 (3,115) 1,638
Other income (expenses)
Other income 2(2) 22 -- 22
Interest expense (796) (1,287)
----(859) (1,007) (1,655) (2,294)
----- ------ ------- --------
Loss before taxes (2,655) (172)(2,115) (461) (4,770) (634)
Income tax benefit (provision) 1,088 (1)146 150 1,234 149
---- --- ----- -----------
Net loss $ (1,567)(1,969) $ (173)(311) $ (3,536) $ (485)
========= ======== ================ ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
(unaudited)
ASSETS
March 31,June 30, 2002 December 31, 2001
--------------------------- -----------------
Current assets
Cash and cash equivalents (includes
restricted cash of $54 at March 31,June 30,
2002 and December 31, 2001) $ 349109 $ 115
Accounts receivable, net 26,24124,571 26,353
Inventories, net 3,8114,001 4,227
Deferred income taxes, current 3,2693,307 3,146
Other current assets 64106 540
-------------- ------
Total current assets 33,73432,094 34,381
------ ------
Property and equipment, net of
accumulated depreciation of $10,868$11,132
and $10,628, respectively 11,06510,834 11,370
Goodwill, net 2,499 2,499
Deferred income taxes, long term 6,1456,216 5,143
Other assets 260549 168
------ -----
-----
$53,703 $53,561
======= =======$52,192 $ 53,561
====== ======
LIABILITIES AND STOCKHOLDERS' INVESTMENT
(DEFICIT)
Current liabilities
Accounts payable $11,368 $10,603$11,834 $ 10,603
Other current liabilities 1,8991,293 1,394
Unearned revenue 7,4138,402 8,710
Senior subordinated notes 8,179 --
Senior credit facility 14,57313,278 --
Accrued compensation and benefit 6,608benefits 7,615 6,948
----------- ------
Total current liabilities 41,86150,601 27,655
Senior credit facility -- 12,387
Senior subordinated notes 8,179-- 8,179
Capital lease obligations 10,61210,509 10,722
------ ------
Total liabilities 60,65261,110 58,943
Redeemable preferred stock
Senior redeemable preferred stock 7,0087,113 6,903
Redeemable preferred stock 48,33750,709 47,876
------ ------
Total preferred stock 55,34557,822 54,779
Stockholders' investment (deficit)
Common stock 78 78
Capital in excess of par -- --
Retained deficit (62,372)(66,818) (60,239)
-------- --------
Total stockholders'
investment (deficit) (62,294)(66,740) (60,161)
-------- --------
$53,703 $53,561
======= =======$52,192 $ 53,561
====== ======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
ThreeSix Months
Ended March 31,
-----------------June 30,
--------------
2002 2001
---- ----
Operating activities:
Net loss $(1,567) $ (173)(3,536) $ (485)
Adjustments to reconcile net loss to cash
(used in) provided by operating activities:
Depreciation and amortization 447 490902 944
Goodwill amortization -- 62125
Other non-cashnoncash items 130 308260 802
Changes in assets and liabilities net (786) 1,9041,903 10,510
----- -----
Cash (used------
Cash(used in)provided by operating activities (1,776) 2,591(471) 11,896
----- -----------
Investing activities:
Purchase of property and equipment (91) (308)
--- ----(248) (449)
------ -------
Cash used in investing activities (91) (308)
----- ------(248) (449)
------- -------
Financing activities:
Proceeds from(repaymentsfrom (repayment of) borrowings under
senior credit facility net 2,186 (2,359)891 (9,528)
Repayment of Series C subordinated note -- (358)
Payments under capital leases (85) (96)
-----(178) (176)
------- -------
Cash provided by (used in) financing
activities 2,101 (2,455)
----- -------
Increase(decrease)713 (10,062)
--- ---------
(Decrease) increase in cash and cash equivalents 234 (172)(6) 1,385
Cash and cash equivalents at beginning of period 115 286
----------- ------
Cash and cash equivalents at end of period $ 349109 $ 114
======= =======1,671
===== =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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), ubIQuity.com, Inc., Telos
International Corporation, Xacta Corporation, Telos.com, Inc., and Telos
Delaware, Inc.(collectively, (collectively, the "Company"). Significant intercompany
transactions have been eliminated.
As discussed in Note 7 - Subsequent Events, on July 19, 2002, the Company
sold all of the issued and outstanding shares of its wholly-owned subsidiary,
Telos Corporation (California), to L-3 Communications Corporation for $20
million.
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
accounting principles generally accepted accounting principles.in the United States. Interim results
are not necessarily indicative of fiscal year performance for a variety of
reasons including 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, 2001.
In June 2001, the Financial Accounting Standards Board ("FASB") approved Statement of Financial Accounting Standards ("SFAS") No 142, "Goodwill and Other Intangible Assets". SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Implementation of this Statement requires the Company to cease amortization of goodwill, and goodwill is tested for impairment at least annually at the reporting unit level. Goodwill is tested for impairment on an interim basis if any event occurs or circumstances change that would "more likely than not" reduce the fair value of a reporting unit below its carrying value. Intangible assets that are subject to amortization will be reviewed for impairment in accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of". The Company adopted the provisions of SFAS 142 on January 1, 2002. The Company no longer amortizes goodwill to expense, but instead reviews goodwill periodically for impairment. The adoption of SFAS 142 reduced goodwill amortization expense by $250,000 annually. No material changes to the carrying value of goodwill were made as a result of the adoption of SFAS 142.
In September 2001, FASB Statement No. 143 (SFAS 143) "Accounting for Asset Retirement Obligations" was issued. SFAS 143 provides guidance on the initial measurement and subsequent accounting for obligations associated with the sale, abandonment, or other type of disposal of long-lived tangible assets. The Company is currently evaluating the provisions of SFAS 143, but does not anticipate the implementation of SFAS 143 to have a material impact on the results of operations, cash flows or financial position.
In October 2001, FASB Statement No. 144 (SFAS 144) "Accounting for the
Impairment ofor Disposal of Long-Lived Assets" was issued. SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and this statement supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed of".
The Company has adopted the provisions of SFAS 144, and the adoption of SFAS 144
did not have a material impact on the Company's financial statements.
TELOS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In April 2002, SFAS No. 145 (SFAS 145) "Rescission on FASB Statements 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections" was issued. Under SFAS 145, gains and losses related to the extinguishment of debt should no longer be segregated on the income statement as extraordinary items. Instead, such gains and losses should be included as a component of income from continuing operations. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002. The Company is currently reviewing the provisions of SFAS 145, but does not believe that its adoption will have a material impact on the Company's financial statements. In July 2002, SFAS No. 146 (SFAS 146) "Accounting for Costs Associated with Exit or Disposal Activities" was issued. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 replaces EITF Issue. No. 94-3, "Liability recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the provisions of SFAS 146 to determine the Statements impact on the Company's financial statements. Certain reclassifications have been made to the prior year's financial statements to conform to the classifications used in the current period. Note 2. Investment in Enterworks
During the first quarter of 2001, the Company and Enterworks, Inc. ("Enterworks") entered into an agreement whereby the Company, as a participant in an additional round of financing for Enterworks, substituted approximately $530,000 of receivables owed to the Company and in addition funded Enterworks $470,000 of cash in three equal installments during the quarter. The receivables included rent owed to the Company, services performed by the Company under a service agreement between the Company and Enterworks, and expenses advanced by the Company on behalf of Enterworks for which the Company is reimbursed. In return, the Company received four separate Demand 10% Convertible Promissory Notes from Enterworks totaling $1 million, as well as warrants to purchase 2.5 million of underlying shares of Enterworks common stock. The warrants to purchase 2.5 million underlying shares of Enterworks common stock have an exercise price of $0.01 per share and an exercise period of five years.
During the second quarter of 2001, the Company and Enterworks entered into an agreement whereby the Company, as a participant in an additional round of financing for Enterworks, committed an additional $800,000 which represented the estimate of amounts owed to the Company for the period May through December 2001 for rent and services performed by the Company under a service agreement. In return, the Company received a $300,000 Demand 10% Convertible Promissory Note from Enterworks, as well as a warrant to purchase 750,000 of underlying shares of Enterworks common stock. The warrants to purchase the shares of Enterworks common stock have an exercise price of $0.01 per share and an exercise period of five years.
During the third and fourth quarters of 2001, the Company received five separate Demand 10% Convertible Promissory Notes from Enterworks totaling $500,000, as well as warrants to purchase 1,250,000 of underlying shares of Enterworks common stock. The warrants to purchase the shares of Enterworks common stock have an exercise price of $0.01 per share and an exercise period of five years.
March 31,June 30, 2002, as the Company's share of
the Enterworks losses exceeded the carrying value of the Notes.
TELOS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 3. Debt Obligations
Senior Credit Facility
The Company has a $20 million Senior Credit Facility ("the Facility") with Endeavour, LLC whicha
bank that matures on January 15, 2003. At March 31,June 30, 2002, the Facility was
classified as a current liability as the Facility has 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
its subsidiaries and affiliates. The amount of available borrowings fluctuates
based on the underlying asset borrowingasset-borrowing base, as defined in the Facility
agreement.
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 fixed charge and operating goals. At June 30, 2002, the Company was not in compliance with one of the financial covenants contained in the Facility. The Company's bank has waived this noncompliance. See Note 7 - Subsequent Events for changes made to the Credit Facility. 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. The Notes mature on May 23, 2003. The2003, and have been classified as a
current liability as the Notes have interest rates ranging from 14% to 17%.a term of less than one year at June 30,
2002. 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, but are not limited to, 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
subsequent to the occurrence of a triggering event. At March 31,June 30, 2002, the
prepayment premium that would be due upon a triggering event is approximately
$10.9$11.6 million.
In April 2001, the Company retired one of its Series C Subordinated notesNotes
with a principal amount of $358,000.
The balances of the Series B and Series C Notes were $5.5 million and $2.6
million, respectively, at March 31,June 30, 2002 and December 31, 2001.
In November 1998, the Company issued additional Senior Subordinated Notes to certain shareholders which were classified as Series D. The Series D Notes totaled $1.8 million and were unsecured. In connection with the debt, the Company issued two warrants to purchase a total of 1,500,000 shares of the Company's Class A Common Stock. As previously discussed, the Warrants had an exercise price of $.01 and an exercise period of 22 months and expired on October 1, 2000. The Series D Notes were retired in conjunction with the Enterworks private placement in 1999.
TELOS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 4. 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 30th30 and
December 31st31 of each year. The liquidation preference of the senior 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 May 23, 2003, 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 stockPreferred
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,June 30, 2002
and December 31, 2001 cumulative undeclared, unpaid dividends relating to Series
A-1 and A-2 redeemable preferred stock totaled $4,008,000$4,113,000 and $3,903,000
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 threesix months ended March 31,June 30, 2002 was
$461,000.$922,000. The Company declared stock dividends totaling 736,863 shares in 1990
and 1991. No other dividends, in stock dividendsor cash, have been declared since 1991.
In November 1998, the Company retired 410,000 shares of the Public Preferred
Stock held by certain shareholders.
The Public Preferred Stock has a 20-year maturity;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 21,12, 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 anthe 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 arewere 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 suchthese 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 $26,323,000.
Based$28,234,000 as of June
30, 2002.
The Company has not declared or paid dividends on its Public Preferred
Stock since 1991, based upon the Company's interpretation of charter provisions
pertaining to restrictions upon payment of dividends, similar dividend payment
restrictions contained in its Senior Credit Facility, and limitations pursuant
to Maryland law, the Company has not declared or paid dividends on its Public Preferred Stock since 1991.
TELOS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 5. 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,June 30, 2002, the Company has three reportable segments:
Systems and Support Services -Services: provides post-deployment and post-production
software and systems development and support services including technology
insertion, systemsystems redesign and software re-engineering. ThisThe Group's largest
customer is the U.S. Army's Communications and Electronics Command ("CECOM").
The System and has significantSupport Services Group's principal operations are located at Ft.Fort
Monmouth, in New JerseyNJ and Ft. Sill, OK. This Group was part of the Company's wholly owned
subsidiary, Telos Corporation (California) ("TCC"), which was sold on July 19,
2002 (See Note 7). Results from the Systems and Support Services Group at Ft.
Sill were included in Oklahoma. Tasks are performed onthe Company's financial results until its deconsolidation
in July 2000. During July 2000 the Company contributed its Ft. Sill business to
TelosOK, LLC. The Company continues to have a time and materials basis and on a firm fixed price basis.
Products -50% investment in TelosOK.
Products: delivers solutions that combine information technology products
and services to solve customer problems. These solutionsCustomers of the Products Group include
agencies of the U.S. Government such as: military services, Defense Agencies,
Treasury Department, U.S. Courts and others. Solutions from the Products Group
consist of a combination of commercial-off-the-shelf (COTS)("COTS") products from
major original equipment manufacturers (OEM's)("OEMs"), Telos proprietary products,
Telos and subcontractor services and Telos proprietary practices. Key customers of this group include agencies of the US Government such as: military services, Defense Agencies, Treasury Department, US Courts and others. Significant government procurement vehicles for customers ofFor example,
the Products Group include: Infrastructure Solutions - 1 (government-wide); GSA schedule (government-wide); Data Communications Network Equipment/Software (US Courts); and Treasury Distributed Processing Infrastructure (Treasury).
In addition to the above, The Product's Group includes the Company'ssells secure wireless networking and secure messaging
solutions. Telos' secure wireless networking solutions allow customers to
securely access databases from non-networked locations so that they can perform
a variety of tasks safely. Telos' secure messaging solution is known as the
Automated Message Handling System ("AMHS") and is a value added reseller for Xacta's information security products intostandard within the
federal government.
Xacta -Department of Defense. The AMHS allows users to securely access, send, search,
and profile message traffic.
Xacta: develops enterprise risk management softwaresolutions to help organizations to
proactively manage and monitor the security of their network environments in
accordance with informationinternationally recognized industry and security standards.
Xacta currently provides its solutions to agencies of the U.S. Government as
well as credit unions.
Xacta has developed and privacy standards. The applications,is selling two products: Xacta Web C&A and Xacta
Commerce Trust. Xacta Web C&A automates the rigorous and time-consuming process
of security certification and accreditation. Xacta Web C&A simplifies
certification and accreditation by guiding users through a step-by-step process
which determines the customer's information security posture and assesses system
and network configuration compliance with applicable regulations, standards, and
industry best practices and processes. With Xacta Commerce Trust, leverage information assurance technologyorganizations
are able to perform holistic security risk management on a continuous basis in
accordance with internationally recognized industry standards and processes that Xacta has proven in the government's most secure and demanding agencies, departments, and branches (Defense, Intelligence, and Treasury). Xacta customers include agencies of the U.S. Government and a number of commercial credit unions.
best practices. 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.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized financial information concerning the Company's reportable
segments for the three months ended March 31,June 30, 2002 and 2001 is shown in the
following table. The "other" column includes corporate related items.
Systems and
Support Services Products Xacta Other(1) Total
---------------- -------- ----- -------------- -----
March 31,June 30, 2002
External Revenues $14,355 $16,581 $ 2,403$9,063 $16,537 $3,025 $ -- $33,339$28,625
Intersegment Revenues 216 1,94464 2,668 -- -- 2,1602,732
Gross Profit 1,258 1,891 261875 2,367 755 -- 3,4103,997
Segment profit (loss)profit(loss)(3) (276) 281 (1,866)(308) 387 (1,333) -- (1,861)(1,254)
Total assets 9,510 19,802 1,608 22,783 53,7037,544 20,948 822 22,878 52,192
Capital Expenditures -- 47 12 32 9145 20 92 157
Depreciation &
Amortiz-
ation (2) 11 97 67 272 447
March 31,Amortization(2) $ 5 $ 101 $ 74 $ 275 $ 455
Systems and
Support Services Products Xacta Other(1) Total
---------------- -------- ----- -------- -----
June 30, 2001
External Revenues $13,887 $27,477$16,813 $18,958 $ 2,5653,578 $ -- $43,92939,349
Intersegment Revenues 569 1,963349 3,654 -- -- 2,5324,003
Gross Profit 1,249 5,095 5461,667 4,305 1,453 -- 6,8907,425
Segment profit (loss)profit(loss)(3) (434) 2,651 (1,040)(1,135) 2,209 (487) -- 1,177587
Total assets 8,521 32,830 5,149 23,273 69,7739,136 24,289 3,854 25,379 62,658
Capital Expenditures 1364 26 101 10 95 67 308141
Depreciation &
Amortiz-
ation (2) 90 93 52 317 552Amortization(2) $ 65 $ 114 $ 60 $ 278 $ 517
(1) Corporate assets are principally property and equipment, cash and other
assets.
(2) Depreciation and amortization includes amounts relating to property and
equipment, goodwill, capital leases and spare parts inventory.
(3) Segment profit (loss) represents operating income (loss) before goodwill
amortization.
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 5five separate
facilities located in various states, the District of Columbia and Europe.
Note 6. Write-off of Investment in Telos International - Filinvest, Inc.
Since 1997, one of the Company's wholly owned subsidiaries, Telos
International Corporation ("TIC"), has been a 50% owner of a joint venture
between TIC and Filinvest Capital, Inc., a Philippine company. The Company
accounts for this joint venture under the equity method of accounting as
prescribed by APB No. 18. In the second quarter of 2001, the Company became
uncertain as to whether operations under the joint venture will continue as a
going concern. Therefore, the Company determined that its investment in Telos
International - Filinvest, Inc. was impaired, and reduced its investment balance
in the joint venture to zero. The amount of the write-off totaled approximately
$600,000, and is included in the Selling, general and administrative caption in
the statement of operations for the three months and six months ended June 30,
2001.
Event
Events
Amendment to Credit Facility
On April 30,July 19, 2002, the Company receivedsigned the thirteenth amendment to its
Amended and Restated Credit Agreement. This amendment included a Senior Demand Promissory Noteconsent for the
Company's sale of Telos Corporation (California), the Company's wholly owned
subsidiary, to L-3 Communications, Inc. Under this new amendment, the maximum
principal amount of the facility was reduced from Enterworks totaling $305,945.$20,000,000 to $5,000,000. The
amendment also changed the maturity date of the facility to August 18, 2002, and
reduced the borrowing ratios used to calculate the borrowing base.
Substantially all of the proceeds from the sale of Telos Corporation
(California) discussed below were used to pay down the facility balance to zero
at July 19, 2002.
On August 13, 2002, the Company signed the fourteenth amendment to its
Amended and Restated Credit Agreement. This Note represents amounts owedamendment included a waiver of the
June 30, 2002 financial covenants and a reduction of the maximum principal
amount of the Facility from $5,000,000 to $3,000,000. The amendment also changed
the maturity date of the facility to August 30, 2002.
Disposition of Business
On July 19, 2002 Telos Corporation, a Maryland corporation ("the Company")
and L-3 Communications Corporation ("L-3") entered into a purchase agreement
whereby the Company sold all of the issued and outstanding shares of its wholly
owned subsidiary, Telos Corporation - California ("TCC") to L-3 for a purchase
price of approximately $20 million. The parties agreed to pay the full amount of
the purchase price as follows: 1) approximately $15.3 million to the Company at
closing; 2) $2.0 million held in an escrow account which will be paid to the
Company over the next 30 months. During the 30 month period after July 19, 2002
the escrow amount may be subject to a reduction if any claims for
rentindemnification by L-3 arise that are finally determined in favor of L-3 per the
terms and services performedconditions of the mutually agreed upon dispute resolution process; 3)
approximately $2.7 million held back as deposits for liabilities relating to
leased properties in which at the time of closing TCC was a lessee or guarantor.
It is anticipated that $1 million will be released in the immediate future with
the remaining $1.7 million being released upon certain events, terms and
conditions over the course of the next five years.
The purchase price shall be increased or decreased on a dollar for dollar
basis by the Company under a serviceamount by which the closing date net assets, as defined in the
Purchase Agreement, deviate from $2.3 million. This adjustment of the sale price
will be determined within 75 days from the date of closing. In accordance with
the Company's loan agreement duringall proceeds from the first quarter 2002. The billings represented in this Notesale have been fully reservedused to pay
down the Company's Senior Revolving Credit Facility.
As additional consideration for at March 31, 2002. This Note containsthe sale of the shares of TCC, the Company
and its affiliates committed to certain "Non-Compete" and "No Solicitation"
provisions relating primarily to the business and employees associated with its
TCC/Ft. Monmouth operations.
The sale of TCC has been treated as a maturity datediscontinued operation in accordance
with SFAS 144, "Accounting for the Impairment or Disposal of April 30, 2007, and also includes a provision for repayment of four times principal and accrued interest in the event that Enterworks liquidates, enters into dissolution or seeks the protection of bankruptcy.
Item 2.2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Operations - -------------------------------------------------------------------------------- General
Sales for the first threesix months of 2002 were $33.3$62.0 million, a decrease of
$10.6$21.3 million or 24.1%25.6% as compared to the same 2001 period. This decrease was
primarily attributable to a $10.9$13.3 million decrease in sales from the Company's
Products Group, which was impacted byexperienced decreased sales from its traditional contracts
with the federal government such as the Infrastructure Solutions 1 ("IS-1")
contract, the Realtime Automated Personnel Identification System contract
("RAPIDS"), and decreased order volume under both its traditional businesses and itsfrom the Group's wireless product line.
The Company incurred andecrease in sales was also attributable to a decrease in the Company's
Systems And Support Services Group sales of $7.3 million which was primarily due
to the novation of the Ft. Sill contract during the second quarter of 2002. The
Xacta Group also experienced a decrease in revenue, mostly due to decreased
orders of its information security products and solutions.
The Company's operating loss through the first six months of approximately $1.92002 was $3.1
million for the three months ended March 31, 2002 as compared to an operating profitincome of $1.1approximately $1.6 million during
the same 2001 period. Operating profitability declined principally because of
the decreased sales volume discussed above coupled withand reduced profit margins onin the Company's traditional business contractsProduct's Group and
information security product line.
increased investment in Xacta.
Total backlog (funded and unfunded) from existing contracts was
approximately $808.1$37.9 million and $830.0 million as of March 31,June 30, 2002 and December
31, 2001, respectively. The significant decline in total backlog is due to the
sale of Telos Corporation (California) in July 2002, which holds the Company's
50% interest in Itel Solutions, Inc. Itel Solutions, Inc. was the recipient of
the dual award of the US Army CECOM SEC contract. TCC was a subcontractor to
this joint venture, and had estimated that upon successful award of competing
task orders under the contract, total backlog from this contract would have been
$700 million. As of March 31,June 30, 2002, the funded backlog of the Company totaled
$29.4$34.3 million, an increase of $1.4$6.3 million from December 31, 2001. 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-monththree and six month periods ended March 31,June 30, 2002 and 2001 wereare as follows:
Three Months Ended March 31,
--------------------Six Months Ended
June 30, June 30,
---------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales (89.8) (84.3)86.0 81.1 88.0 82.8
SG&A expenses (15.8) (13.1)18.3 17.4 17.0 15.1
Goodwill amortization -- (0.1)
------0.2 -- 0.2
--- ----- --- ----
Operating (loss) income (5.6) 2.5(4.3) 1.3 (5.0) 1.9
Other income -- 0.1 -- --
Interest expense (2.4) (2.9)(3.0) (2.6) (2.7) (2.8)
----- ----- ----- -----
Loss before taxes (8.0) (0.4)(7.3) (1.2) (7.7) (0.9)
Income tax benefit (provision) 3.3 --
----- -----0.5 0.4 2.0 0.2
--- ---- --- ----
Net loss (4.7)(6.8)% (0.4)(0.8)% (5.7)% (0.7)%
===== ==== ========= ===
Financial Data by Market Segment
Sales, gross profit, and gross margin by market segment for the first quarter
of 2002 and 2001 wereperiods
designated below are as follows:
Three Months Ended March 31,
---------------------------Six Months Ended
June 30, June 30,
------------------- -----------------
2002 2001 2002 2001
---- ---- ---- ----
(amounts in thousands)
Sales:
Systems and Support Services $ 14,355 $13,8879,063 $ 16,813 $23,418 $ 30,700
Products 16,581 27,47716,537 18,958 33,118 46,435
Xacta 2,403 2,565
-----3,025 3,578 5,428 6,143
------ ------ ------ -------
Total $28,625 $ 33,339 $43,92939,349 $61,964 $ 83,278
====== ====== ====== ======== =======
Gross Profit:
Systems and Support Services $ 1,258875 $ 1,2491,667 $2,132 $ 2,916
Products 1,891 5,0952,367 4,305 4,259 9,401
Xacta 261 546755 1,453 1,016 1,997
--- ------- ----- -----------
Total $ 3,4103,997 $ 6,890
======== =======7,425 $7,407 $ 14,314
===== ===== ===== ======
Gross Margin:
Systems and Support Services 8.8% 9.0%9.7% 9.9% 9.1% 9.5%
Products 11.4% 18.5%14.3% 22.7% 12.9% 20.3%
Xacta 10.9% 21.3%25.0% 40.6% 18.7% 32.5%
Total 10.2% 15.7%
14.0% 18.9% 12.0% 17.2%
For the three-monththree month period ended March 31,June 30, 2002, sales decreased by $10.6$10.7
million, or 24.1%,27.3% to $33.3$28.6 million from $43.9$39.3 million for the comparable 2001
period. Of the $10.6$10.7 million decrease, $10.9$2.4 million was attributable to the
Products Group. The Products Group's comparable revenues declined principally due toGroup, which experienced decreased sales under the Group'sfrom its revenue on
traditional contracts such as Infrastructure Solutions-1 and DCN Courts, as well as decreasedRAPIDS. The decrease in sales from the Group's wireless product line. The decreases in revenue were partially offset by increases in the revenue ofwas also
attributable to the Systems and Support Services Group, which experienced a
decrease of $7.7 million in sales for the three month period ended June 30, 2002
compared to the same period in 2001. This decrease is mostly due to the novation
of the Ft. Sill contract during the second quarter of 2002. In addition, Xacta
revenue growth of $468,000. Thedeclined approximately $500,000 from second quarter 2002 compared to
second quarter 2001. This decrease is primarily due to decreased sales levels in the
Xacta group's firm-fixed price contracts.
Sales for the first six months of 2002 were $62.0 million, a decrease of
$21.3 million or 25.6% as compared to the same 2001 period. This decrease was
primarily attributable to a $13.3 million decrease in sales from the Company's
Products Group, remained unchangedwhich experienced decreased sales from its traditional contracts
with the federal government such as the Infrastructure Solutions 1 ("IS-1")
contract, the Realtime Automated Personnel Identification System contract
("RAPIDS"), and decreased order volume from the Group's wireless product line.
The decrease in sales was also attributable to a decrease in the comparable periods.
Company's
Systems And Support Services Group sales of $7.3 million which was primarily due
to the novation of the Ft. Sill contract during the second quarter of 2002. The
Xacta Group also experienced a decrease in revenue, mostly due to decreased
orders of its information security products and solutions.
Cost of sales was 89.8%86.0% of sales for the three-month periodquarter and 88.0% of sales for the
six months ended March 31,June 30, 2002, as compared to 84.3%81.1% and 82.8% for the same
periods in the comparable 2001 period.2001. The increaseincreases in cost of sales as a percentage of sales is mainlyare
primarily attributable to decreased profits realized on Product Group contracts
such as the Company's subcontracts to the Bureau of Census, and from reduced
profits under the Products Group's wirelessCompany' information security product line as well as reduced profits on some of the Xacta Group's firm fixed price contracts.
and wireless
products business.
Gross profit decreased by $3.5$3.4 million in the first quarter ofthree-month period to $4.0
million in 2002, to $3.4 million from $6.9$7.4 million in the comparable 2001 period. In the
six-month period, as a result ofgross profit decreased $6.9 million to $7.4 million from $14.3
million in 2001. These decreases are mostly attributable to the decreasedecreases in
sales and increases in cost of salesvolume discussed above. Total Company grossGross margins were 10.2%14.0% and 15.7%12.0%, respectively,
for the three-monththree and six month periods ended March 31,of 2002 as compared to 18.9% and 2001, respectively.
17.2%,
respectively, for the comparable periods of 2001.
Selling, general, and administrative costsexpense ("SG&A") decreased for the three-month period by
approximately $442,000$1.5 million or 23.2%, to $5.3 million in the second quarter of
2002 from $5.7$6.8 million in the comparable period of 2001. This decrease isFor the six-month
period of 2002, SG&A decreased $2.1 million to $10.5 million compared to $12.6
million for the same period in 2001. The decreases in S,G & A expenses from 2001
to 2002 are primarily due to indirect cost control measures implemented in early
2002.
sales was 15.8% and 13.1%revenues increased to 18.3% for the second quarter
of 2002 from 17.4% in the comparable 2001 period. SG&A as a percentage of
revenues for the six-month period ended June 30, 2002 increased to 17.0% from
15.1% in the same period in 2001.
Goodwill amortization expense decreased $63,000 for the comparative
three-month periods ended March 31,of 2002 and 2001, respectively.
Goodwill amortization expense was zeroand decreased $125,000 for the threesix months
ended March 31,June 30, 2002 compared to $62,000 for the same period ended Marchin 2001. The decrease in goodwill amortization was a result ofreductions are
exclusively due to the application of SFAS 142. Under SFAS 142, the Company no
longer depreciates its goodwill asset.
Operating profitability declinedincome decreased by $3.0$1.8 million duringto a loss of approximately $1.3
million in the threethree-month period ended June 30, 2002 from approximately
$500,000 of operating profit in the comparable 2001 period. This decrease in
operating profit is due to the gross profit decreases discussed above. Operating
income decreased $4.7 million to a $3.1 million loss for the six months ended
March 31,June 30, 2002 to approximately $1.9from a $1.6 million operating profit for the six-month period
ended June 30, 2001. This decrease in operating loss. The Company had an operating profit for the six-month period
is mostly attributable to the decrease in gross profit discussed above.
Interest expense decreased approximately $150,000 to $850,000 in the second
quarter of $1.12002 from approximately $1.0 million in the comparable 2001 period,
of 2001. The decrease in operating profit resulted primarily fromand decreased approximately $600,000 to $1.7 million for the aforementioned gross profit decreases.
Interest expense decreased by approximately $491,000 to $796,000 during the three-month periodsix months ended
March 31,June 30, 2002 from $1.3$2.3 million infor the comparable period of 2001. The decrease was attributable2001 period. These decreases
are primarily due to decreased debt levels in 2002.
the second quarter of 2002
compared to 2001.
The Company recorded aan income tax benefit for the three and six month
periods ended June 30, 2002 of approximately $1.1$150,000 and $1.2 million,
and arespectively. The income tax provision ofbenefit was approximately $1,000$150,000 for the three-month periodsthree
and six months ended March 31, 2002 and 2001, respectively. TheJune 30, 2001. These tax benefit recorded for the first quarter of 2002 is attributablebenefits were principally due to
the net operating losslosses generated by the Company.
The Company's net deferred tax assets totaled $9.5 million at June 30, 2002. 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. Liquidity and Capital Resources
For the threesix months ended March 31,June 30, 2002, the Company used $1.8 million$500,000 of cash
for its operating activities. This usage of cash was principally due to losses
incurred in operations. Cash used in investingInvesting activities wasaccounted for approximately
$91,000.$200,000 of cash utilization. The Company generated cash duringfrom borrowings under
the quarter by drawing on itsCompany's credit facility in the amount of $2.2 million.
approximately $900,000.
At March 31,June 30, 2002, the Company had outstanding debt and long-term
obligations of $33.4$32.0 million, consisting of $14.6$13.3 million under the secured
senior credit facility, $8.2 million in subordinated debt, and $10.6$10.5 million in
capital lease obligations.
At March 31,June 30, 2002, the Company had an outstanding balance of $14.6$13.3 million
on its $20 million Senior Credit Facility (the "Facility"). Subsequent to the
sale of the Company's wholly owned subsidiary, Telos Corporation (California) on
July 19, 2002 (see note 7), the balance on the Facility was paid off from the
proceeds of the sale. The Facility matureswas amended on January 15, 2003August 13, 2002 to reduce the
maximum balance of the Facility to $3 million, and the maturity date was changed
to August 30, 2002. The Facility is collateralized by a majority of the
Company's assets (including inventory, accounts receivable and Telos' stock in
its subsidiaries and affiliates). 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, to sell or
transfer certain assets, the payment ofpay dividends and make other distributions beyond
certain limitations. The Facility also requires the Company to meet certain
fixed coveragecharge and operating goals. At June 30, 2002, the Company was not in
compliance with one of the financial covenants contained in the Facility. The
Company's bank has waived this noncompliance. The Facility has been classified
as a current liability at June 30, 2002 as it has a term of less than one year.
The Company is currently in the process of negotiating a replacement for the
Facility.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") approved Statement of Financial Accounting Standards ("SFAS") No 142, "Goodwill and Other Intangible Assets". SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Implementation of this Statement requires the Company to cease amortization of goodwill, and goodwill is tested for impairment at least annually at the reporting unit level. Goodwill is tested for impairment on an interim basis if any event occurs or circumstances change that would "more likely than not" reduce the fair value of a reporting unit below its carrying value. Intangible assets that are subject to amortization will be reviewed for impairment in accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of". The Company adopted the provisions of SFAS 142 on January 1, 2002. The Company no longer amortizes goodwill to expense, but instead reviews goodwill periodically for impairment. The adoption of SFAS 142 reduced goodwill amortization expense by $250,000 annually. No material changes to the carrying value of goodwill were made as a result of the adoption of SFAS 142.
In September 2001, FASB Statement No. 143 (SFAS 143) "Accounting for Asset Retirement Obligations" was issued. SFAS 143 provides guidance on the initial measurement and subsequent accounting for obligations associated with the sale, abandonment, or other type of disposal of long-lived tangible assets. The Company is currently evaluating the provisions of SFAS 143, but does not anticipate the implementation of SFAS 143 to have a material impact on the results of operations, cash flows or financial position.
In October 2001, FASB Statement No. 144 (SFAS 144) "Accounting for the
Impairment ofor Disposal of Long-Lived Assets" was issued. SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and this statement supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed of".
The Company has adopted the provisions of SFAS 144, and the adoption of SFAS 144
did not have a material impact on the Company's financial statements.
The sale of TCC in the third quarter of 2002 (see Note 7) has qualified for discontinued operations treatment under SFAS 144. In April 2002, SFAS No. 145 (SFAS 145) "Rescission on FASB Statements 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections" was issued. Under SFAS 145, gains and losses related to the extinguishment of debt should no longer be segregated on the income statement as extraordinary items. Instead, such gains and losses should be included as a component of income from continuing operations. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002. The Company is currently reviewing the provisions of SFAS 145, but does not believe that its adoption will have a material impact on the Company's financial statements. In July 2002, SFAS No. 146 (SFAS 146) "Accounting for Costs Associated with Exit or Disposal Activities" was issued. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 replaces EITF Issue. No. 94-3, "Liability recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the provisions of SFAS 146 to determine the Statements impact on the Company's financial statements. 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.
success of the Company's investment in Enterworks and TelosOK, the
success of the Company's wholly-owned subsidiary, Xacta, and the Company's
continued access to ongoing development and product support and viable channel partner relationships with Enterworks and Xacta.
support.
While in the past the Company has not experienced contract terminations
with the U.S. Government, the U.S. Government can terminate at its convenience.
Should such a termination occur, the Company's operating results could be
adversely impacted. The Company's total backlog (referenced above) includes $700 million attributable to the dual award of the U.S. Army CECOM SEC contract to the Company's 50% owned joint venture, ITel Solutions. The Company will be a subcontractor to this joint venture, and estimates that upon the successful award of each competing task order, its total backlog relating to such contract could be up to $700 million. Conversely, failure to be awarded the majority of the competing task orders for such contract would adversely impact the Company.
It should also be noted that post September 11, 2001, all U.S. Government programs, especially those pertaining to national security, have been subject to review and reprioritization. While the Company believes its products and services are well positioned to benefit from such post September 11 demands, the magnitude of such events certainly serves to emphasize how the Company's high percentage of revenue derived from business with the U.S. Government could alternatively be dramatically, swiftly and adversely impacted.
The Company has many patents and patents pending, trademarks and copyrights
and other valuable proprietary information, and the Company has taken reasonable
and prudent steps to so protect its intellectual property. With regard to the
Company's wholly owned subsidiary, Xacta, whose software products require
constant monitoring as it develops future releases and creates additional
intellectual property, vigilant oversight of such intellectual property rights
is imperative. Similarly, the intellectual property associated with our wireless
division and our automated message handling system division requirerequires constant
oversight with regard to the development and protection of their respective
intellectual property. Accordingly, any event that brings into question the
Company's ownership of its intellectual property could, therefore, materially
and adversely impact the Company.
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 1.5%2.0%, subject to certain adjustments, over the bank's base
rate. This rate will escalate 25 basis points every other month from April 1, 2002 until
expiration. The weighted average interest rate infor the first threesix months of 2002
was 6.5%6.6%. This facility expires on January 15, 2003August 18, 2002 and had anhas outstanding balance
of $14.6$13.3 million at March 31,June 30, 2002.
The Company's other debt at March 31,June 30, 2002 consists of Senior Subordinated
Notes B, and C, which bear interest at fixed rates ranging from 14% to 17%. The
Senior Subordinated Notes principal balance at March 31,June 30, 2002 is approximately
$8.2 million, and this principal amount matures on May 23, 2003. The Company has no
cash flow exposure due to rate changes for its Senior Subordinated Notes.
PART II - OTHER INFORMATION
Item 1.Legal Proceedings
The Company is party to various lawsuits arising in the ordinary course of
business. While the results of litigation cannot be predicted with certainty,
based upon the Company's present understanding of its pending legal matters, it is of
the opinion such matters for this quarter 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 $4,008,000$4.1 million for the Series A-1 and
A-2 Preferred stockStock at March 31,June 30, 2002.
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,June 30, 2002 accrued for
financial reporting purposes totaled $30.3$32.2 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 $26,323,000.
Based$28,234,000.
The Company has not declared or paid dividends on its public preferred
stock since 1991, based upon the Company's interpretation of charter provisions
pertaining to restrictions upon payment of dividends, similar dividend payment
restrictions contained in its Senior Credit Facility, and limitations pursuant
to Maryland law, the Company has not declared or paid dividends on its public preferred stock since 1991.
Item 5. Other Events
On March 20, 2002, Dr. Stephen Bryen resigned as both a Proxy Holder and Director. On March 26, 2002, Dr. Fred Ikle resigned as Chairman of the Board of Directors, but remains on the Board as a Director and Proxy Holder.
law.
(a) Exhibits: None
1) 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002; 2)99.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K: None
The Company reported its sale of its wholly-owned subsidiary, Telos Corporation (California) on Form 8-K filed with the Commission on August 5, 2002. Items 2, 4 and 5 are not applicable and have been omitted.
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.