UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: March 31, 1995
[ ] 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.)
460 Herndon Parkway, Herndon, Virginia 22070-5201
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number,
including area code: (703) 471-6000
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 April 28, 1995 the registrant had 23,076,753 shares of Class A
Common Stock, no par value, 4,037,628 shares of Class B Common
Stock, no par value; and 3,595,586 shares of 12% Cumulative
Exchangeable Redeemable Preferred Stock, par value $.01 per share,
outstanding.
No public market exists for the registrant's Common Stock.
Number of pages in this report (excluding exhibits): 13
TELOS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 1995 and 1994 3
Condensed Consolidated Balance Sheets as of March 31, 1995
and December 31, 1994 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
PART I - FINANCIAL INFORMATION
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(amounts in thousands)
Three Months Ended
March 31,
1995 1994
Sales
Systems and Services $31,714 $29,931
Field Engineering 8,483 8,704
Consulting 6,564 5,414
46,761 44,049
Costs and expenses
Cost of sales 37,890 36,328
Selling, general and
administrative expenses 6,774 6,122
Goodwill amortization 794 794
Operating income 1,303 805
Other income (expenses)
Other income 5 28
Interest expense (1,233) (744)
Income before taxes 75 89
Income tax provision -- 386
Net income (loss) $ 75 $ (297)
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
(amounts in thousands)
March 31, 1995 December 31, 1994
Current assets
Cash and cash equivalents $ 662 $ 441
Accounts receivable, net 46,151 40,345
Inventories, net 8,056 8,696
Other current assets 3,398 3,918
Total current assets 58,267 53,400
Property and equipment, net of
accumulated depreciation of $17,281
and $16,769 respectively 3,143 3,483
Goodwill 26,028 26,822
Other assets 2,964 3,167
$90,402 $86,872
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Accounts payable $18,197 $20,302
Other current liabilities 8,626 10,174
Accrued compensation and benefits 11,137 10,272
Senior subordinated notes 6,418 6,414
Total current liabilities 44,378 47,162
Senior credit facility 40,764 34,000
Other long-term liabilities 2,416 2,941
Total liabilities 87,558 84,103
Redeemable preferred stocks
Senior redeemable preferred stock 4,259 4,192
Class B redeemable preferred stock 9,663 9,497
Redeemable preferred stock 14,546 14,263
Total preferred stock 28,468 27,952
Stockholders' investment
Common stock 78 78
Capital in excess of par 11,579 12,095
Retained earnings (deficit) (37,281) (37,356)
Total stockholders' investment (25,624) (25,183)
$90,402 $86,872
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)
Three Months
Ended March 31,
1995 1994
Operating activities:
Net income (loss) $ 75 $ (297)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization 869 759
Goodwill amortization 794 794
Other non-cash items 647 1,686
Changes in assets and liabilities
that used cash (8,723) (5,909)
Cash used in operating activities (6,338) (2,967)
Investing activities:
Purchase of property and equipment (205) (374)
Cash used in investing activities (205) (374)
Financing activities:
Proceeds from senior credit facility 6,764 3,405
Cash provided by financing activities 6,764 3,405
Increase in cash and cash equivalents 221 64
Cash and cash equivalents at beginning
of period 441 744
Cash and cash equivalents at end of period $ 662 $ 808
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
of Telos Corporation ("Telos") (formerly C3, Inc.) and its wholly
owned subsidiaries, Telos Corporation (California) and Telos Field
Engineering, Inc. (collectively, the "Company") have been prepared
without audit. Certain information and note disclosures normally
included in the financial statements presented in accordance with
generally accepted accounting principles have been condensed or
omitted. The Company believes the disclosures made are adequate
to make the information presented consistent with past practices.
However, these condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's annual report on Form
10-K for the fiscal year ended December 31, 1994.
In the opinion of the Company, the accompanying condensed
consolidated financial statements reflect all adjustments and
reclassifications (which include only normal recurring
adjustments) necessary to present fairly the financial position
of the Company as of March 31, 1995 and December 31, 1994, and
the results of its operations and its cash flows for the three
month periods ended March 31, 1995 and 1994. Interim results are
not necessarily indicative of fiscal year performance because of
the impact of seasonal and short-term variations.
Included in Systems and Services sales for the three months
ended March 31, 1995 are Product sales of $14,308,000.
Certain reclassifications have been made to the prior year's
financial statements to conform to the classifications used in
the current period.
Note 2. Accounts Receivable
The components of accounts receivable are as follows (in
thousands):
March 31, 1995 December 31, 1994
Billed accounts receivable $34,304 $32,483
Unbilled accounts receivable 12,580 9,149
46,884 41,632
Allowance for doubtful accounts (733) (1,287)
$46,151 $40,345
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Debt Obligations
Senior Credit Facility
At March 31, 1995, the Company had a $45 million senior
credit facility ("Facility") with a bank maturing on June 30,
1995. On April 17, 1995, the Company refinanced the Facility
with its existing lender. The new Facility remains a $45 million
commitment with a maturity date of July 1, 1996. Other terms and
conditions of the Facility are similar to the Company's previous
Facility except that certain financial and non financial
covenants have been amended.
In the first quarter of 1995, certain of the Company's
common shareholders deposited $4 million with the Company's bank
to provide the Company with increased borrowing capability under
its Facility. Total shareholder deposits with the Company's bank
total $7 million. The Company and its shareholders have agreed
to negotiate appropriate compensation to the shareholders for
this provision of capital. Such negotiations are in process.
Senior Subordinated Note, Series A
At March 31, 1995, the Company had $675,000 of the senior
subordinated note, Series A outstanding with John R.C. Porter
("Porter"), the majority common shareholder. The Company was not
in compliance with the financial maintenance covenants of the
senior subordinated note, Series A as of March 31, 1995. Porter
has agreed to waive such noncompliance.
Senior Subordinated Notes, Series B
At March 31, 1995 the Company was not in compliance with the
financial maintenance covenants contained in the subordinated
note agreements, Series B-1 and B-2 with Union de Banques Suisses
(Luxembourg) S.A. ("UBS"). Under the terms of the various debt
agreements, such noncompliance is an event of default. On June
15, 1994, UBS sent the Company a notice of acceleration with
respect to these notes as a result of past noncompliance with
the financial covenants. In December 1994, UBS filed a lawsuit
accelerating all indebtedness under the notes. Currently, the
Company and certain shareholders are negotiating possible
settlement or purchase of the notes held by UBS. At this time
there can be no assurance that such negotiations will be
successful. However, management believes that a judgment for
payment will not have a material impact on the Company's on-going
operations since the Company received undertakings from two of
its shareholders to provide funds should it become necessary.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
In the first three months of 1995, the Company had increased
revenue and profitability as compared to 1994. The higher revenue
volume results from increased order volume in the Systems and
Services Group and increased billable hours in the Consulting
Group.
Total backlog from existing contracts was $393 million as of
March 31, 1995, as compared to $328 million at December 31, 1994.
As of March 31, 1995, the funded backlog of the Company totaled
$101 million, an increase of $8 million from December 31, 1994.
Funded backlog represents aggregate contract revenues remaining
to be earned by the Company at a given time, but only to the
extent, in the case of government contracts, funded by a
procuring government agency and allotted to the contracts.
Results of Operations
The condensed consolidated statements of income include the
results of operations of Telos Corporation and its wholly owned
subsidiaries Telos Corporation (California) and Telos Field
Engineering, Inc., ("the Company"). The major elements of the
Company's operating expenses as a percentage of sales for the
three month periods ended March 31, 1995 and 1994 were as follows:
Three Months Ended
March 31,
1995 1994
Sales 100.0% 100.0%
Cost of sales (81.0) (82.5)
SG&A expenses (14.5) (13.9)
Goodwill amortization (1.7) (1.8)
Operating income 2.8 1.8
Other income -- .1
Interest expense (2.6) (1.7)
Income tax provision -- (.9)
Net income (loss) .2% (.7)%
Financial Data by Market Segment
The Company operates in three market segments: systems and
services ( the "Systems and Services Group"), which consists of
systems integration and software services; computer hardware
maintenance (the "Field Engineering Group"); and consulting
services (the "Consulting Group").
Sales, gross profit, and gross margin by market segment for
the first quarter of 1995 and 1994 were as follows:
Three Months Ended
March 31,
1995 1994
(amounts in thousands)
Sales:
Systems and Services $31,714 $29,931
Field Engineering 8,483 8,704
Consulting Services 6,564 5,414
Total $46,761 $44,049
Gross Profit:
Systems and Services $6,248 $5,446
Field Engineering 1,219 1,409
Consulting Services 1,404 866
Total $8,871 $7,721
Gross Margin:
Systems and Services 19.7% 18.2%
Field Engineering 14.4% 16.2%
Consulting Services 21.4% 16.0%
Total 19.0% 17.5%
For the three month period ended March 31, 1995 sales
increased by $2.7 million, or 6.2%, to $46.8 million from $44.1
million for the comparable 1994 period. This increase for the
three month period is primarily attributable to the Systems and
Services Group, which reported increased sales of $1.8 million,
and to the Consulting Group, which reported increased sales of
$1.1 million, offset by lower sales in the Field Engineering
Group of $200,000.
Within the Systems and Services Group, systems integration
sales accounted for the majority of the increase, as sales
increased $3.7 million in the first quarter of 1995 as compared
to the similar 1994 period due to increased order volume from the
INS contract, awarded in September 1994, as well as increased
sales in other business lines of the division. Services sales
declined $1.9 million in the three month period ended March 31,
1995 due to reduced contract volume in certain areas of the
services business. The increase in sales within the Consulting
Group of $1.1 million for the three month period ended March 31,
1995 is a result of increased billable hours resulting from
obtaining new customers and expanding services to existing
customers.
Cost of sales increased by $1.6 million, or 4.3%, to $37.9
million in the three month period ended March 31, 1995, from
$36.3 million in the comparable 1994 period. The increase is the
result of the increase in sales.
Gross profit increased $1.2 million in the first quarter of
1995 to $8.9 million, from $7.7 million in the comparable 1994
period. The increase in the period is primarily attributable to
the higher sales volume previously discussed within the Systems
and Services Group and the Consulting Group. The Consulting
Group also benefited from lower costs as a result of reduced non
billable support staff. Total Company gross margins were 19.0%
and 17.5% for the three month periods of 1995 and 1994,
respectively.
Selling, general, and administrative expense ("SG&A")
increased by $652,000 to $6.8 million in 1995 from $6.1 million
in 1994 primarily due to increased marketing and bid and proposal
costs, as well as funding of new product development. SG&A as a
percentage of sales increased to 14.5% for the first quarter of
1995 from 13.9% in the comparable 1994 period.
Goodwill amortization expense was $794,000 for each of the
three month periods in 1995 and 1994, as the Company continues to
amortize its goodwill balance which resulted primarily from the
acquisition of Telos Corporation.
Operating income increased by $498,000 to $1.3 million
in the three month period ended March 31, 1995 from $805,000
in the comparable 1994 period as a result of the aforementioned
increase in sales and gross profit.
Interest expense increased approximately $489,000 to $1.2
million in the first quarter of 1995 from $744,000 in the
comparable 1994 period. The variance is primarily a result of
the increase in the outstanding balance of the senior credit
facility and the related interest rate, offset by a decline in the
outstanding balance of the subordinated debt in 1995 from 1994.
The Company did not have an income tax provision for the
three month period ended March 31, 1995 as a result of
utilization of net operating loss carryforwards. For the
comparable period of 1994, the Company had a provision for income
taxes of $386,000.
Liquidity and Capital Resources
For the three months ended March 31, 1995, the Company used
$6.3 million of cash in its operating activities. This was
primarily a result of funding the increase in accounts receivable
and reductions to the Company's current liabilities. Operating
cash uses and purchases of property and equipment were funded
from borrowings of $6.8 million from the senior credit facility.
The Company continues to suffer from liquidity constraints
and believes such constraints will continue through the first
half of 1995. The Company has an active cash management program
designed to monitor and control significant cash commitments as
well as to ensure sufficient funds for Company operations and
growth.
At March 31, 1995, the Company had outstanding debt of $47.2
million, consisting of $40.8 million under the secured senior
credit facility and $6.4 million in subordinated debt. The
senior credit facility was refinanced on April 17, 1995 and has a
maturity date of July 1, 1996. Under the terms of the
refinancing, the total commitment remains at $45 million with
terms and conditions similar to the previous senior credit
facility except for amendments made to certain of the financial
and non financial covenants.
At March 31, 1995, the Company had $675,000 of the senior
subordinated note, Series A outstanding with John R.C. Porter
("Porter"), a majority common shareholder of the Company. The
Company was not in compliance with certain of the financial
maintenance covenants of the senior subordinated note, Series A
as of March 31, 1995. Porter has agreed to waive such
noncompliance.
The Company was not in compliance with the financial
maintenance covenants contained in the subordinated note
agreements, Series B-1 and B-2 with Union de Banques Suisses
(Luxembourg) S.A. ("UBS") at March 31, 1995. Under the terms of
the various debt agreements, such noncompliance is an event of
default. On June 15, 1994, UBS sent the Company a notice of
acceleration with respect to these notes as a result of past non-
compliance with the financial covenants at the quarterly
measurement dates. In December 1994, UBS filed a lawsuit
accelerating all indebtedness under the notes. The Company and
certain shareholders are negotiating possible settlement or
purchase of the notes held by UBS. At this time there can be no
assurance that such negotiations will be successful. However,
management believes that a judgment for payment will not have a
material impact on the Company's on-going operations since the
Company received undertakings from two of its shareholders to
provide funds should it become necessary.
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
A maximum of 6,000,000 shares of 12% Cumulative Exchangeable
Redeemable Preferred Stock, par value $.01 per share, have been
authorized for issuance. The Company initially issued 2,858,723
shares of 12% Cumulative Exchangeable Redeemable Preferred Stock
(the "Preferred Stock"), par value $.01 per share, in connection
with the merger. The 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 has the option to pay
dividends in additional shares of Preferred Stock in lieu of
cash. Dividends are payable by the Company, provided the Company
has legally available funds under Maryland law, 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 are paid at the rate of 0.06 of a
share of the Preferred Stock for each $.60 of such dividends not
paid in cash.
No dividends were declared or paid during fiscal years 1994,
1993 and 1992. Cumulative undeclared dividends as of December
31, 1994 are equal to $2,871,000. The Company has accrued these
dividends for the periods although the Company is uncertain when
or if these dividends will be declared or paid. Dividends were
not paid because of certain inconsistencies and ambiguities in
the Company's articles of incorporation and certain of its debt
agreements.
In order to make clear the Company's ability to pay such
dividends, the Company would have to amend its charter and
certain of its debt instruments. Among other things, such
amendment would require the permission of UBS.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DATE: May 3, 1995 TELOS CORPORATION
/s/ Lorenzo Tellez
Lorenzo Tellez
(Principal Financial Officer &
Principal Accounting Officer)
Telos Corporation
Exhibit Index
Exhibit Number Exhibit Name Page Number
27 Financial Data Schedule 15