UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report : January 18, 2000
Commission File Number: 1-8443
TELOS CORPORATION
(Exact name of registrant as specified in 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
Number of pages (excluding exhibits): 10
Item 2. Acquisition or Disposition of Assets
On December 30, 1999, Enterworks, Inc. ("Enterworks"), a majority-owned
subsidiary of Telos Corporation (the "Company"), completed the sale of
21,739,127 shares of Series A Convertible Preferred Stock ("Preferred Stock")
under a private placement offering which was approved by both Boards of
Directors of the Company and of Enterworks. The sale price was $1.15 per share
and the sale generated gross proceeds of $25,000,000. The majority of the
proceeds from this offering were from funds provided by institutional investors
such as General Electric Pension Trust, which is managed by GE Investment Corp.,
Chartwell Capital Investors II, and J & W Seligman & Company. In addition, 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 currently 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. This transaction will
be recognized in the Company's financial statements as of and for the year ended
December 31, 1999.
As a result of the sale of the Series A Preferred Stock, the conversion of
the subordinated debt and the concurrent transactions described below, the
Company's ownership percentage in Enterworks was reduced to a 35% common voting
interest. The third party preferred stock investors and other common
stockholders hold the 65% majority voting shares, consisting of common and
preferred securities. Prior to the private placement transaction, the Company,
holding the majority of Enterworks shares outstanding, controlled the
Enterworks' Board of Directors. Subsequent to the transaction, the Company will
be entitled to designate 1 of the 5 Enterworks' Board members. The Company has,
therefore, changed its method of accounting for its Enterworks subsidiary from
the consolidation method to the equity method. Pursuant to this change, the
revenues, costs and expenses of Enterworks will be excluded from their
respective captions in the Company's consolidated statement of operations, and
the Company's interest in the losses of Enterworks will be reported separately
as "Equity in Net Losses of Enterworks." Additionally, the assets, liabilities,
and equity of Enterworks will be excluded from their respective consolidated
balance sheet captions and the Company will establish an "Investment in
Enterworks" account in accordance with APB 18.
The Company's Board of Directors approved the transactions as part of its
overall strategic goals. In order to increase its equity capital and decrease
its debt, the Company effected several concurrent transactions simultaneously
with the closing of the issuance and sale of the Preferred Stock and the
conversion of the subordinated debt. The transactions of the Company and their
impact to the Company's financial statements are discussed below.
The impact of the following transactions will be recognized if and as
appropriate in the Company's financial statements as of and for the year ended
December 31, 1999.
- - Enterworks' payable to the Company, which was approximately $26.7 million at
September 30, 1999, was contributed to capital in its entirety before the
issuance of Series A Preferred Stock; however, funding required to cover
Enterworks' working capital needs from November 30, 1999 to the date of closing
was funded by the Company and will be repaid through collections from
Enterworks' trade accounts receivable. This funding is estimated to be $2.0
million.
- - Enterworks issued 4,000,000 shares of Enterworks' Common Stock to Telos
concurrent with the issuance of Series A Preferred Stock.
- - Enterworks issued a warrant to acquire 350,000 shares of Enterworks' Common
Stock to Telos' primary lender in connection with obtaining the necessary
approvals for the offering of Enterworks' preferred stock. The exercise price of
the warrant equaled $1.15 per share, the same per share price of the Series A
Preferred Stock.
- - 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.
- - 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 and decreases the Company's net investment in Enterworks. The
Company incurred an additional $303,000 in offering costs related to the
Enterworks' private placement of preferred stock.
Item 7 of this Form 8-K presents the unaudited Pro forma Condensed
Consolidated Statements of Operations for the nine month period ended September
30, 1999 and for the year ended December 31, 1998, as well as the Pro forma
Condensed Consolidated Balance Sheet as of September 30, 1999.
Item 7. Financial Statements and Exhibits
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited Pro Forma Consolidated Balance Sheet as of
September 30, 1999 presents the pro forma impact of the transactions as if the
events occurred on September 30, 1999. The unaudited Pro Forma Consolidated
Statements of Operations for the year ended December 31, 1998 and for the nine
months ended September 30, 1999 ("pro forma financial information") present the
pro forma effect of the transactions and deconsolidation since January 1, 1998.
The objective of pro forma financial information is to provide investors
with information about the 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.
TELOS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
(amounts in thousands)
Deconsoli-
Form 10-Q dation of Intercompany Pro forma
Balances Enterworks(1) Adjustments(3) Adjustments Balances
-------- ------------- ----------- ----------- --------
Sales
Systems and Support Services $ 74,567 -- -- -- $ 74,567
Products 62,313 -- -- -- 62,313
Enterworks, Inc. 7,092 (7,602) 510 -- --
----- ------ ----- ----- -------
143,972 (7,602) 510 -- 136,880
Costs and expenses
Cost of sales 122,479 (4,787) (285) -- 117,407
Selling, general and
administrative expenses 27,081 (15,196) 426 -- 12,311
Goodwill amortization 397 -- -- -- 397
------- ------ ----- ----- -------
Operating (loss) income (5,985) 12,381 369 -- 6,765
Other income (expenses)
Gain on sale of assets 4,731 -- -- -- 4,731
Other income 63 (4) -- -- 59
Interest expense (5,284) 1,935 (1,454) 347(f) (4,456)
------ ------ ----- ----- ------
(Loss) income before taxes, and
Equity in net losses of Enterworks (6,475) 14,312 (1,085) 347 7,099
Income tax benefit (provision) 976 (5,378) -- 3,877(c) (525)
------ ------ ----- ----- ------
(Loss) income before Equity
in net losses of Enterworks (5,499) 8,934 (1,085) 4,224 6,574
Equity in net losses of Enterworks -- -- -- -- --
----- ----- ----- ----- -----
Net (loss) income $ (5,499) $ 8,934 $(1,085) $ 4,224 $ 6,574
========= ========= ==== ======== ========
Please see Notes to the unaudited Pro Forma Consolidated Statement of
Operations and Consolidated Balance Sheet.
TELOS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
(amounts in thousands)
Deconsoli-
Form 10-K dation of Intercompany Pro forma
Balances Enterworks(1) Adjustments(3) Adjustments Balances
-------- ------------- ----------- ----------- --------
Sales
Systems and Support Services $ 98,277 -- -- -- $ 98,277
Products 101,736 -- -- -- 101,736
Enterworks, Inc. 7,073 (7,074) 1 -- --
----- ------ ----- ------ -------
207,086 (7,074) 1 -- 200,013
Costs and expenses
Cost of sales 182,915 (5,530) (1) -- 177,384
Selling, general and
administrative expenses 30,842 (13,078) (12) -- 17,752
Goodwill amortization 589 -- -- -- 589
------- ------ ----- ------ -------
Operating (loss) income (7,260) 11,534 14 -- 4,288
Other income (expenses)
Gain on sale of assets 5,683 -- -- -- 5,683
Other income 64 (1) -- -- 63
Interest expense (6,555) 2,143 (1,598) 264(f) (5,746)
------- ------ ----- ------ ------
(Loss) income before taxes and
equity in net losses of Enterworks (8,068) 13,676 (1,584) 264 4,288
Income tax (provision) benefit (1,103) (4,946) -- 3,349(c) (2,700)
------- ------ ----- ------ ------
(Loss) income before equity in
net losses of Enterworks (9,171) 8,730 (1,584) 3,613 1,588
Equity in net losses of Enterworks -- -- -- -- --
------- ------ ----- ------ ------
Net (loss) income $ (9,171) $ 8,730 $(1,584) $ 3,613 $ 1,588
========= ======== ===== ========= ========
Please see Notes to the unaudited Pro Forma Consolidated Statement of
Operations and Consolidated Balance Sheet.
TELOS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT SEPTEMBER 30, 1999
(Unaudited)
(amounts in thousands)
ASSETS
Deconsoli- Other
Form 10-Q dation of Intercompany Concurrent Pro forma
Balances Enterworks(2) Adjustments(3) Transactions Adjustments Balances
-------- ------------- ----------- ------------ ----------- --------
Current assets
Cash and cash equivalents $ 503 -- -- $ 4,697(b) -- $ 5,200
Accounts receivable, net 31,550 (4,765) 346 -- -- 27,131
Inventories, net 5,194 -- -- -- -- 5,194
Deferred income taxes 4,632 (348) 348 -- (348)(c) 4,284
Other current assets 995 (262) -- -- -- 733
------- ------- ------- ------- ------- -------
Total current assets 42,874 (5,375) 694 4,697 (348) 42,542
Property and equipment, net 13,551 (965) -- -- -- 12,586
Goodwill, net 4,377 -- -- -- -- 4,377
Other assets 3,003 (2,367) 977 -- (467)(c) 1,146
Due from Enterworks -- -- 26,740 (26,740)(g) -- --
Investment in Enterworks -- -- 261 26,740(g) -- --
-- -- 4,165 1,170(h) -- --
-- -- -- (100)(e) -- --
-- -- -- (211)(i) -- --
-- -- -- (859)(j) -- --
-- -- -- (753)(a) -- --
-- -- -- (30,413)(d) -- --
------- ------- ------ ------ ------- ------
$ 63,805 $ (8,707) $32,837 $(26,469) $ (815) $60,651
======== ======== ======= ======= ======== =======
Please see Notes to the unaudited Pro Forma Consolidated Statement of
Operations and Consolidated Balance Sheet.
TELOS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999
(Unaudited)
(amounts in thousands)
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deconsoli- Other
Form 10-Q dation of Intercompany Concurrent Pro forma
Balances Enterworks(2) Adjustments(3) Transactions Adjustments Balances
-------- ------------- ----------- ------------ ----------- --------
Current liabilities
Accounts payable $ 12,471 $(1,439) $ (56) -- -- $10,976
Other current liabilities 10,294 (1,126) 94 4,312(j) 686(c) 14,260
Senior credit facility 16,791 -- -- -- -- 16,791
Accrued compensation
and benefits 8,053 (2,045) 13 -- -- 6,021
------ ------ ------ ----- ---- ------
Total current liabilities 47,609 (4,610) 51 4,312 686 48,048
Deferred income taxes -- (475) 475 -- -- --
Senior subordinated notes 18,796 (2,868) -- (7,391)(a) -- 8,537
Payable to Telos -- (26,740) 26,740 -- -- --
Capital lease obligations 11,457 -- -- -- -- 11,457
------ ------- ------ ------ ---- ------
Total liabilities 77,862 (34,693) 27,266 (3,079) 686 68,042
------ ------- ------ ------ ---- ------
Redeemable preferred stock
Senior redeemable
preferred stock 5,948 -- -- -- -- 5,948
Redeemable preferred stock 34,707 -- -- -- -- 34,707
------ ------- ------ ----- ------- ------
Total preferred stock 40,655 -- -- -- -- 40,655
Stockholders' investment
Common stock 78 (261) 261 -- -- 78
Capital in excess of par -- (953) -- 1,170(h) -- (30,196)
-- -- -- (30,413)(d) -- --
Retained deficit (54,790) 27,200 5,310 (4,312)(j) (1,501)(c) (17,928)
-- -- -- (100)(e) -- --
-- -- -- (211)(i) -- --
-- -- -- (303)(b) -- --
-- -- -- (859)(j) -- --
-- -- -- 5,000(b)(j) -- --
-- -- -- 6,638(a)(j) -- --
------ ------ ------ ------ ------- ------
Total stockholders'
investment (deficit) (54,712) 25,986 5,571 (23,390) (1,501) (48,046)
------ ------ ------ ------ ------ ------
$ 63,805 $(8,707) $32,837 $(26,469) $ (815) $60,651
======== ======= ======= ======= ======== =======
Please see Notes to the unaudited Pro Forma Consolidated Statement of
Operations and Consolidated Balance Sheet.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
AND CONSOLIDATED BALANCE SHEET
For the Year Ended December 31, 1998 and as of and for the Nine Months Ended
September 30, 1999
NOTE 1. Pro Forma Adjustments
The pro forma adjustments outlined below present separate adjustments
related to the deconsolidation and concurrent transactions with Enterworks.
These adjustments have been made in accordance with Article 11 of Regulation
S-X.
1) Reflects the operations of Enterworks presented on a separate company stand
alone basis, eliminated from the Company's consolidated accounts.
2) Reflects the assets, liabilities and equity of Enterworks on a separate
company stand alone basis as of September 30, 1999, eliminated from the
Company's consolidated accounts.
3) Reflects the balances which were previously eliminated in consolidation, such
as intercompany payables, receivables, profit and the Company's investment in
Enterworks eliminated from the Company's consolidated accounts. Presents Pro
Forma financial statements on a stand alone basis for the Company in accordance
with the equity method of accounting for the Company's investment in Enterworks.
a) The settlement of $7.6 million of notes payable (carrying value of these
notes at September 30, 1999 was $7.4 million) with shares of Enterworks common
stock held by the Company is shown as a reduction of the subordinated debt
balance as of September 30, 1999.
b) Records the sale of 5,000,000 shares of Enterworks stock held by the Company
back to the Enterworks treasury (net of commissions to the Agent of
approximately $303,000).
c) 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 nine months ended
September 30, 1999 and for the year ended December 31, 1998 as if Enterworks had
been deconsolidated at the beginning of the respective periods.
d) Reduces the investment in Enterworks account to the Company's interest under
the equity method taking into effect the concurrent transactions as described.
e) Reflects the issuance of 350,000 warrants to the Company's primary
lender to acquire shares of Enterworks common stock in connection with obtaining
necessary approvals for the offering of Enterworks preferred stock.
f) Reflects the estimated interest expense generated from the portion of the
Company's line of credit allocable to Enterworks and not relating to ongoing
operations of the Company on a stand-alone basis.
g) Reflects contribution to Enterworks capital of approximately $26.7 million of
intercompany accounts payable to the Company.
h) Reflects change of interest gain from the issuance of Enterworks common
stock. Though the Company policy is to recognize change of interest gains
through the income statement, this gain is reported as an adjustment to equity
given the parameters of SAB 51 and the early stage of Enterworks' operations.
i) Reflects the contribution of 210,912 shares of Enterworks common stock
held by the Company to Enterworks' treasury for the subsequent grant of
warrants to the Agent.
j) Adjustment reduces the Company's ending net investment in Enterworks to
a zero carrying value, given the deficit net asset position of Enterworks
(excluding preferred stock) at September 30, 1999 and taking into effect the
concurrent transactions as described. The Company expects to recognize a net
gain of approximately $6.5 million ($10.8 million net of $4.3 million taxes),
in connection with the consummation of the transactions described.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed and on its behalf by the
undersigned hereunto duly authorized.
Telos Corporation
By: /s/ Thomas J. Ferrara
----------------------
Date: January 18, 2000
Thomas J. Ferrara
Vice President, Finance & Accounting