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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
[ ]Transition Report Pursuant to Section 13 or 15(d)
The Securities Exchange Act of 1934
Commission file number: 1-8443
TELOS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-0880974
(State of Incorporation) (I.R.S. Employer Identification No.)
19886 Ashburn Road, Ashburn, Virginia 20147
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number,
including area code: (703) 724-3800
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
No public market exists for the registrant's Common Stock.
As of March 28, 2000, the registrant had 21,241,980 shares of Class A Common
Stock, no par value; 4,037,628 shares of Class B Common Stock, no par value; and
3,185,586 shares of 12% Cumulative Exchangeable Redeemable Preferred Stock, par
value $.01 per share, outstanding.
Incorporation by Reference: None
NUMBER OF PAGES IN THIS REPORT (EXCLUDING EXHIBITS): 58
PART 1
ITEM 1. BUSINESS
HISTORY AND INTRODUCTION
Founded in 1968, Telos Corporation ("Telos" or the "Company") delivers
enterprise integration solutions and services to customers in the U.S. federal
government and industry. Telos' product and service offerings span the entire
systems life cycle, including network and systems design, software development,
systems integration, hardware and software maintenance, and solutions for
emerging needs for enterprise network infrastructure management, data
integration, and information security. The Company is headquartered in Ashburn,
Virginia, part of Northern Virginia's growing Netplex region of high technology
companies.
In today's dynamic business environment, timely and accurate
information flow is critical for success. Telos' specialized approach to this
information challenge is based on leveraging customers' IT infrastructure,
delivering user centric information, and enabling customers to achieve a fast
return on investment. Many customers are turning to the virtual enterprise as a
model for improving business performance through enhanced communications and
business processes. The virtual enterprise is a demand driven partnership of
customers, employees, partners and suppliers to deliver solutions. Telos'
solutions are aimed at overcoming the critical barriers that face the virtual
enterprise: (1) the difficulty in accessing disparate data without extensive
programming, (2) the inability to quickly integrate data to ensure customer
responsiveness, manufacturing and distribution efficiency and overall
competitive strength, (3) the problem of effectively distributing information
quickly and securely and (4) the challenge of making the organizational and
technological complexity invisible to end users.
Over each of the past three years, Telos has made significant
investments in the development of software and service solutions to facilitate
the transition of its business toward a larger mix of fixed price commerce
solutions. As part of this strategy, the Company has discontinued or divested
itself of those elements of its traditional business which were not consistent
with this strategy. In February 1998, Telos sold Telos Information Systems
("TIS"), a contract labor division, for $14.7 million. In September 1999, the
Company sold Telos Field Engineering ("TFE"), its computer maintenance division,
for $10 million.
On December 30, 1999, Enterworks completed a private placement of
convertible preferred stock, and the Company and Enterworks completed a series
of concurrent transactions. As a result, Enterworks deconsolidated from Telos
(See Note 2 of Notes to Consolidated Financial Statements).
REPORTABLE OPERATING SEGMENTS
During 1999, the Company provided its business solutions through three
operating segments: Systems and Support Services, the Products Group, and its
Enterworks subsidiary. On December 30, 1999, the Enterworks subsidiary was
deconsolidated due to a private placement offering and concurrent transactions
(See Note 2 to the Consolidated Financial Statements).
SYSTEMS AND SUPPORT SERVICES
The Company's Systems and Support Services Group provides software
development and support services for software and hardware including technology
insertion, system redesign, software re-engineering, Help Desk, and third party
maintenance. Key customers of this segment include: The U.S. Army at Ft. Sill in
Lawton, Oklahoma; the U.S. Army at Ft. Monmouth in Red Bank, New Jersey; and
until September, 1999 the U.S. Army's Redstone Arsenal in Huntsville, Alabama.
Telos is one of the largest providers of software engineering services to the
U.S. Army, maintaining over 50 million lines of software code for fire support
systems. In addition, the Company has supported seventy-nine tactical land and
satellite communications systems for the Communications-Electronics Command's
Research, Development, and Engineering Center. The Company's largest hardware
services contract was for the Redstone Arsenal where the Telos Call Center
responded to support the Army's Aviation and Missile Command. In addition to
these traditional Telos customers and services, the Company has information
security, data integration, advance messaging, and wireless network and
enterprise management practices which generate higher margins than the
traditional business and represent a growing component of this segment.
For 1999, the Systems and Support Services Group generated revenue of
$93.5 million, or 54.6%, of the Company's reported consolidated revenue. The TFE
and TIS divisions were part of the Systems and Support Services Group prior to
their respective sales in 1999 and 1998.
PRODUCTS GROUP
The Products Group delivers product-based solutions for networking
environments. This group sells commercial products from most major original
equipment manufacturers. The Company is capable of staging, installing, and
deploying large network infrastructures with little disruption to the customer's
ongoing operations.
This operating segment also held the largest network integration
contract ever awarded by the U.S. federal government, the Small Multi-user
Computer ("SMC-II") contract which had a three-year term that commenced with the
original award in September 1995, and was extended through April 1999. The
Products Group was awarded the follow-on to the SMC II Contract, Infrastructure
Solutions 1, or IS1, awarded in February 1999.
For 1999, the Products Group had revenues of $77.8 million, or 45.4%,
of the Company's reported consolidated revenues.
ENTERWORKS, INC.
Enterworks develops, markets and supports a software framework that
integrates content and processes for companies seeking to participate in
e-business. They target operators and users of e-marketplaces and portals.
E-marketplaces and portals are Web-based destinations where employees,
customers, partners and suppliers can interact to obtain information about
products and services, and conduct business more efficiently. Enterworks'
products enable customers to build or join e-marketplaces and portals rapidly,
add new content and e-business participants easily, and automate the end-to-end
processes required for e-business interaction.
Enterworks' products are designed to meet the business and technical
challenges faced by operators and users of e-marketplaces and portals by
delivering integrated, real-time content and automating business processes that
bring together employees, customers, partners and suppliers. These products
offer numerous competitive advantages over traditional solutions by combining
both content and process integration, and by guiding people through e-business
interactions.
At the end of 1999, Enterworks completed a private placement of convertible
preferred stock and the Company and Enterworks completed a series of concurrent
transactions. As a result, Enterworks deconsolidated from Telos (See Note 2 of
Notes to Consolidated Financial Statements).
REVENUE BY MAJOR MARKET AND SIGNIFICANT CUSTOMERS
Revenue by major market for the Company are as follows:
PERCENTAGE OF TOTAL CONSOLIDATED REVENUE FOR
--------------------------------------------
1999(1) 1998 1997
------- ---- ----
Federal government 92.8% 92.9% 94.6%
Commercial 5.9 5.1 3.9
State and local governments 1.3 2.0 1.5
--- ---- ----
TOTAL 100.0% 100.0% 100.0%
====== ====== =====
1. Major market revenue includes Enterworks revenue.
Total consolidated revenue derived from the federal government for 1999
includes 57.4% of revenue from contracts with the United States Army, 12.2% of
revenue from contracts with the United States Navy, 7.4% of revenue with other
Department of Defense customers, and 6.8% of revenue from the Federal Judicial
branch.
COMPETITION
The segments of the information services industry in which the Company
operates are highly fragmented with no single company or small group of
companies in a dominant position. Some of the Company's competitors also operate
in international markets, along with other entities, which operate exclusively
or primarily outside the United States. Some of the large competitors offer
services in a number of markets which overlap many of the same areas in which
the Company offers services, while certain companies are focused on only one or
a few of these markets. The firms which compete with the Company are computer
services firms, applications software companies and consulting firms, as well as
the computer service arms of computer manufacturing companies and defense and
aerospace firms. Thousands of firms fall into these categories. As the Company
becomes more focused on network-enabled enterprise computing, the competition
shifts to include companies that perform enterprise integration for large and
complex information technology environments. In addition, the internal staffs of
client organizations, non-profit federal contract research centers and
universities are competitors of the Company.
The Company believes that the principal competitive factors in the
segments of the information and network technology market in which it competes
include project management capability, technical expertise, reputation for
providing quality service, and price. The Company believes its technical
competence in computer engineering, systems software, engineering, system and
network integration, and hardware maintenance will enable it to compete
favorably in the information and network technology market.
EMPLOYEES
The Company employed 833 persons as of December 31, 1999, down from
1,155 at December 31, 1998. The decline was principally due to the sale of TFE
and the deconsolidation of Enterworks. The services the Company provides require
proficiency in many fields, such as computer science, mathematics, physics,
engineering, operations research, economics, and business administration.
Of the total Company personnel, 570 provide Systems and Support
Services, while 122 provide System Integration (Products) Services. An
additional 141 employees provide corporate and business services functions.
Enterworks employed 168 persons as of December 31, 1999.
BACKLOG
Many of the Company's contracts with the U.S. Government are funded by
the procuring government agency from year to year, primarily based upon the
government's fiscal requirements. This results in two different categories of
backlog: funded and unfunded. Total backlog consists of the aggregate contract
revenues remaining to be earned by the Company at a given time over the life of
its contracts, whether or not funded. Funded backlog consists of the 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. Unfunded backlog is the
difference between total backlog and funded backlog. Included in unfunded
backlog are revenues which may be earned only if customers exercise delivery
orders and/or renewal options to continue existing contracts.
A number of contracts undertaken by the Company extend beyond one year
and, accordingly, portions of contracts are carried forward from one year to the
next as part of the backlog. Because many factors affect the scheduling and
continuation of projects, no assurance can be given as to when revenue will be
realized on projects included in the Company's backlog.
At December 31, 1999 and 1998, the Company had total backlog from
existing contracts of approximately $242.2 million and $923.3 million,
respectively. This is the maximum value of additional future orders for systems,
products, maintenance and other support services presently allowable under those
contracts, including renewal options available on the contracts if exercised by
the client, over periods extending up to seven years. Included in the backlog at
December 31, 1998 was $786 million from the Company's Small Multi-Computer II
("SMC-II") contract, which expired in April 1999 and therefore, did not convert
to orders and revenue of this magnitude in 1999. The Company was awarded the
follow-on contract to SMC II, Infrastructure Solutions-1 ("IS1"), in the first
quarter of 1999. This contract has a five-year term with an award amount not to
exceed $380 million. Approximately $45 million and $56 million of the total was
funded backlog at December 31, 1999 and 1998, respectively.
While backlog remains a measurement consideration, in recent years the
Company, as well as other federal contractors, experienced a change in the
manner in which the federal government procures equipment and services. These
procurement changes include the growth in the use of General Services
Administration ("GSA") schedules which allow agencies of the federal government
to purchase significant amounts of equipment and services. The use of the GSA
schedules results in a significantly shorter and much more flexible procurement
cycle, as well as increased competition as many companies hold such schedules.
Along with the GSA schedules, the federal government is awarding a large number
of omnibus contracts with multiple awardees. These contracts generally require
extensive marketing efforts by the awardees to procure business. The use of GSA
schedules and omnibus contracts, while generally not providing immediate
backlog, provide areas of potential growth that the Company continues to
aggressively pursue.
OVERVIEW OF 1999
During 1999, Telos continued to execute its strategy of transitioning
its business toward a larger mix of commerce solutions.
These efforts included the continued development of Enterworks' software
suite which includes Enterworks Content Integrator(TM) ("ECI"), formerly Virtual
DB, and Enterworks Process Integrator(TM) ("EPI"), formerly Enterworks Process
Manager. ECI 3.5 was released in December 1999 and EPI 2.0.1 was released
February 2000. These efforts also included doubling the size of the sales and
marketing infrastructure. As a result of these efforts, Enterworks' revenue
increased in excess of 50% from 1998 revenue.
In December 1999, Enterworks completed a private placement financing
whereby the Company's voting interest in Enterworks was reduced to 34.8%. As a
result of this decrease in ownership, effective December 30, 1999 Enterworks has
been deconsolidated from the Company's operating results. As a result, the
Company will no longer be required to fund the continuing investment needed for
Enterworks sales and marketing infrastructure and product development.
The Company's 1999 investments were also focused on its higher margin
information security, data integration, advanced messaging and wireless
networking practices. Revenue for these practices approximated $15.8 million for
1999, which represents a more than doubling of comparable 1998 revenues. The
Company expects total revenue for these practices will continue to grow in 2000
based in part on its continuing investments in sales and marketing to support
these practices.
The Company's 1999 activities also focused on reducing or eliminating
certain of its least profitable contracts. With these business reductions came
decreases in related corporate infrastructure costs, including selling, general
and administrative ("SG&A") expenses. However, on a total company basis, these
cost reductions were more than offset by increases in SG&A costs to support
Enterworks and the other higher margin businesses noted above.
In September 1999, the Company sold all of the net assets of its TFE
division for $10 million in cash.
ITEM 2. PROPERTIES
The Company leases 191,700 square feet of space in Ashburn, Virginia
for its corporate headquarters, integration facility, and primary service depot.
This lease expires in March 2016, with a ten-year extension available at the
Company's option. This facility supports all three of the Company's operating
segments.
As of January 1, 2000, Enterworks, Inc. is subleasing 35,214 rentable
square feet of space from Telos Corporation at the Ashburn, Virginia location
for its corporate headquarters and operating segments. This sublease will expire
in March 2001 unless a renewal of the sublease is reached by mutual agreement
between the Company and Enterworks.
The Company leases additional space for regional contract work sites,
training, and sales offices in 11 separate facilities located in 4 states and
Europe under various leases, which expire on various dates through March 2004.
At December 31, 1999, the Company sold the remaining building it owned in Amery,
Wisconsin. This facility principally supported the Company's Systems and Support
Services operating segment.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various lawsuits arising in the ordinary
course of business. In the opinion of management, while the results of
litigation cannot be predicted with certainty, the final outcome of such matters
will not have a material adverse effect on the Company's consolidated financial
position, results of operations or of cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, no matters were submitted to a vote
of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
No public market exists for the Company's Class A or Class B Common
Stock. As of March 1, 2000, there were 83 holders of the Company's Class A
Common Stock and 3 holders of the Company's Class B Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following should be read in connection with the accompanying
information presented in Item 7 and Item 8 of this document.
OPERATING RESULTS
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(amounts in thousands)
Sales (4)(6) $171,364 $207,086 $253,787 $188,895 $175,759
(Loss) income from
continuing operations (9,979) (9,171) 1,412 (9,816) 592
Discontinued operations:
Income from discontinued
Operations -- -- -- 500 423
Gain on sale of
Consulting Services -- -- -- 11,524 --
(Loss) income before
extraordinary items (9,979) (9,171) 1,412 2,208 1,015
Extraordinary items(5) 8,015 -- -- -- --
Net (loss) income (1,964) (9,171) 1,412 2,208 1,015
FINANCIAL CONDITION
As of December 31,
--------------------------------------------------------------------
1999(6) 1998 1997 1996 1995
------- ---- ---- ---- ----
(amounts in thousands)
Total assets (4) $ 56,886 $ 95,251 $109,718 $110,064 $94,492
Long-term debt (1) 25,045 54,651 56,875 32,857 47,316
Capital lease obligations, long-term (2) 11,362 11,710 12,085 12,537 --
Senior redeemable preferred stock (3) 6,054 5,631 5,207 4,828 4,494
Class B redeemable
preferred stock (3) -- -- 12,035 11,087 10,252
Redeemable preferred Stock (3) 36,975 31,729 29,951 24,230 18,647
(1) See note 5 to the consolidated financial statements in item 8 regarding
long-term debt obligations of the company. Total long-term debt obligations
include amounts due under the senior credit facility and subordinated
notes.
(2) See Note 9 to the Consolidated Financial Statements in Item 8 regarding the
capital lease obligations of the Company.
(3) See Note 6 to the Consolidated Financial Statements in Item 8 regarding
redeemable preferred stock of the Company.
(4) See Note 3 to the Consolidated Financial Statements in Item 8 regarding the
sales of TFE and TIS.
(5) See Note 2 to the Consolidated Financial Statements in Item 8 regarding the
extraordinary item relating to the concurrent transactions of the
Enterworks private placement.
(6) See Note 2 to the Consolidated Financial Statements in Item 8 regarding the
income statement presentation and exclusion of the assets, liabilities and
equity of Enterworks from the consolidated accounts.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Over the last three years, the Company has made significant investments in
the development of software products, in sales and marketing, and in positioning
its infrastructure to support its new business to business e-commerce products.
The Company's investments in new software products provide the Company with an
expanded product line that, the Company believes, offers its customers unique
value added solutions for their computing and information gathering analysis
problems. The investment in software products has been primarily through
Enterworks Inc. and is focused on the eBusiness infrastructure market, through
content and process integration products. As of December 31, 1999, the Company
will no longer fund Enterworks' activities as Enterworks is no longer included
in the Company's consolidated financial results. Additionally, the Company has
established a comprehensive offering of products and services on its GSA
schedule. These investments have enabled the Company to win most of its
significant contract rebids, and continue to provide significant new business
opportunities.
During 1999, the Company experienced decreases in revenue and
profitability. Revenue decreased $35.7 million, or 17.2%, as compared to 1998.
Approximately $23.9 million of this decrease was attributable to the expiration
of the Products segment's SMC II contract in April 1999 and the timing of the
subsequent start up period on IS-1. This decline is also due to the effects of
the deconsolidation of Enterworks, which presents the results from operations of
Enterworks in a single line item entitled "Equity in Net Losses of Enterworks".
Operating income for 1999 was $2.2 million, as compared to an operating loss of
$7.3 million in 1998. Operating profitability improved principally as a result
of the deconsolidation of Enterworks discussed above. Exclusive of Enterworks,
the Company's earnings before interest and taxes for 1999 were $2.2 million
compared to $4.3 million for 1998. This decline was principally due to the
decline in operating profit of the Products segment of $2.0 million from 1998 to
1999.
During 1998, the Company's revenue and profitability decreased as compared
to 1997. Revenue decreased $46.7 million, or 18.4%, primarily due to the
expiration of two large contracts in 1997 (further discussed below). Operating
losses for 1998 were $7.3 million, as compared to an operating profit of $7.4
million in 1997. Operating profitability declined principally as a result of the
decreases in revenue, as well as the Company's continued investment in
Enterworks.
REVENUE BY CONTRACT TYPE
Approximately 94% of the Company's total revenues in 1999 were attributable
to contracts with federal, state, and local governments, including 93%
attributable to the federal government. The Company's revenues are generated
from a number of contract vehicles. In general, the Company believes its
contract portfolio is characterized as having low to moderate financial risk as
the Company has limited long-term fixed price development contracts. The
Company's firm fixed price contracts consist principally of contracts for the
purchase of computer equipment at established contract prices or contracts for
maintenance of computer hardware. A significant portion of the Company's revenue
is from time and material contracts, which generally allow the pass-through of
allowable costs plus a profit margin. For 1999, revenue by contract type was as
follows (includes revenues generated by Enterworks): time and materials, 37.3%;
firm fixed price, 51.0%; cost reimbursable, 6.4%; fixed monthly rate, 4.8%; and
other, 0.5%. While the Company has not experienced any significant recent
terminations or renegotiations, government contracts may be terminated or
renegotiated at any time at the convenience of the government.
STATEMENT OF OPERATIONS DATA
The following table sets forth certain consolidated financial data and
related percentages for the periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
---- ---- ----
(dollar amounts in thousands)
Sales $171,364 100.0% $207,086 100.0% $253,787 100.0%
Cost of sales 151,216 88.2 182,915 88.3 218,430 86.1
Selling, general and
administrative expenses 17,459 10.2 30,842 14.9 27,054 10.7
Goodwill amortization 489 0.3 589 0.3 892 0.3
--- --- --- --- --- ---
Operating (loss) income 2,200 1.3 (7,260) (3.5) 7,411 2.9
Interest expense (6,065) (3.5) (6,555) (3.1) (7,455) (2.9)
Gain on sale of assets 4,731 2.8 5,683 2.7 -- --
Equity in net losses of Enterworks (18,765) (11.0) -- -- -- --
Other income (expense) 67 -- 64 -- 124 --
------ ---- ----- --- ----- ---
(Loss) income before taxes (17,832) (10.4) (8,068) (3.9) 80 --
Income tax benefit (provision) 7,853 4.6 (1,103) (0.5) 1,332 0.6
----- --- ------- ----- ----- ---
(Loss) income before
extraordinary item (9,979) (5.8) (9,171) (4.4) 1,412 0.6
Extraordinary item 8,015 4.7 -- -- -- --
----- --- ----- --- ----- ---
Net (loss) income $ (1,964) (1.1)% $ (9,171) (4.4)% $1,412 0.6%
======== ==== ======== ==== ====== ===
FINANCIAL DATA BY OPERATING SEGMENT
The Company had three reportable operating segments: Enterworks, Inc.,
Systems and Support Services, and Products. Enterworks, Inc. was deconsolidated
as of December 30, 1999 and therefore will not be reflected as a segment in the
year 2000.
Sales, gross profit and gross margin by market segment for the periods
designated below are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
---- ---- ----
(dollar amounts in thousands)
Revenue:
Enterworks, Inc. $ -- $ 7,073 $ 3,398
Systems and Support Services 93,538 98,277 121,052
Products 77,826 101,736 129,337
------- ------- -------
TOTAL $171,364 $ 207,086 $ 253,787
======== ======= =======
Gross Profit:
Enterworks, Inc. $ -- $ 1,542 $ (132)
Systems and Support Services 16,158 14,046 20,614
Products 3,990 8,583 14,875
------- ------ ------
TOTAL $ 20,148 $ 24,171 $ 35,357
======== ======= ======
Gross Margin:
Enterworks, Inc. --% 21.8% (3.9)%
Systems and Support Services 17.3% 14.3% 17.0%
Products 5.1% 8.4% 11.5%
TOTAL 11.8% 11.7% 13.9%
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenue for 1999 was $171.3 million, a $35.7 million or 17.2% decrease from
1998. Approximately $23.9 million of this decrease was attributable to the
Products Group, which experienced a decline in revenue primarily due to the
expiration of the Small Multi User Computer II ("SMCII") contract in April 1999.
The SMCII contract contributed revenue of approximately $44.1 million in 1998 as
compared to $8.8 million in 1999. In addition, the Systems and Support Services
Group experienced a $4.7 million decrease in revenue for the year ended December
31, 1999 as compared to the same period in 1998. This decrease was primarily due
to the sale of TIS in February 1998. TIS contributed $4.0 million of revenue in
1998 prior to its sale. In addition revenue declined in part due to the
deconsolidation of Enterworks to an "Equity in Enterworks nets losses"
presentation.
Cost of sales was 88.2% of sales for the year ended December 31, 1999, as
compared to 88.3% for the same period in 1998. The major changes in cost of
sales are attributable to favorable changes in contract mix and a high margin
transaction with one of the Company's partners within the Systems and Support
Services Group, offset by the elimination of high margin sales within the
Enterworks Group.
Gross profit decreased to $20.1 million for the year ended December 31,
1999 compared to the same 1998 period due to the aforementioned deconsolidation
of Enterworks. Gross margins were 11.8% for 1999 as compared to 11.7% for 1998.
Selling, general, and administrative expense ("SG&A") decreased by
approximately $13.4 million or 43.4%, to $17.4 million for the year ended
December 31, 1999 from $30.8 million in the comparable period of 1998. This
decrease is due primarily to the deconsolidation of Enterworks. SG&A as a
percentage of revenues decreased to 10.2% for 1999 from 14.9% in the comparable
1998 period.
Goodwill amortization expense decreased $100,000 for the comparative year
periods of 1999 and 1998. This reduction is due to a decrease in the goodwill
balance associated with the sales of TIS in early 1998, and TFE in September
1999.
Operating income of the Company increased by $9.5 million to $2.2 million
for the year ended December 31, 1999 from an operating loss of $7.3 million in
the comparable 1998 period. The increase in operating profit for the comparable
year periods is attributable to the decreases in S,G&A discussed above.
At the end of the third quarter of 1999, the Company sold substantially all
of the assets of its computer maintenance and service business, Telos Field
Engineering Inc. ("TFE"), to TFE Technology Holdings L.L.C., an affiliate of
Carr & Company, for $10 million. As a result of this sale, the Company has
recorded a gain of $4.7 million in its consolidated statement of operations for
the year ended December 31, 1999.
Telos sold substantially all of the net assets of one of its divisions,
TIS, in the first quarter of 1998. The transaction generated approximately $14.7
million in cash proceeds and a gain of $5.7 million was recorded for the year
ended December 31, 1998.
In order to present the statement of operations in accordance with APB 18,
the revenues, cost of sales, selling general and administrative and interest
expenses for Enterworks Inc. were presented in one line item "Equity in net
losses in Enterworks" due to the deconsolidation of Enterworks on December 30,
1999. (See Note 2 to the consolidated financial statements). The equity in net
losses in Enterworks for 1999 was $18.8 million.
Interest expense decreased $490,000 from $6.6 million in 1998 to $6.1
million for 1999. The decrease for the year period is due to the deconsolidated
presentation of Enterworks partially offset by increased debt levels in 1999.
The income tax benefit was $7.8 million for the year ended December 31,
1999. The benefit recorded was a result of the net operating losses of the
Company, partially offset by the gain from the sale of TFE. For 1998, the
Company incurred a tax provision of $1.1 million which was primarily
attributable to state income taxes and an increase in allowances relating to the
recoverability of deferred tax assets. The Company's net deferred tax asset
includes substantial amounts of net operating loss carryforwards. Failure to
achieve forecasted taxable income may affect the ultimate realization of the net
deferred tax assets. Management's tax strategy contemplates the generation of
taxable income in excess of operating losses sufficient in amounts to realize
the net deferred tax assets.
On December 30, 1999 the Company entered into a number of concurrent
transactions with its noteholders and its Enterworks subsidiary (See Note 2 of
Consolidated Financial Statements). The two most noteworthy of these
transactions affecting Telos were as follows:
1. The Company converted approximately $7.6 million of its Senior
Subordinated Notes, Series B, C and D held by investors, plus the
accrued interest and the waiver of prepayment premium associated with
these notes, into shares of Enterworks' Common Stock 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.
2. Enterworks purchased 5,000,000 shares of Enterworks' Common Stock owned
by the Company at a price of $1.00 per share. This amount was reduced
by 20% of the Agent's fee, the Company's pro rata share of the proceeds
from the transaction. The net amount received by Telos was $4.7
million.
These two transactions resulted in an extraordinary gain, net of tax,
of $8.0 million, and is included in the Company's statement of
operations for the year ended December 31, 1999.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenue for 1998 was $207.1 million, a $46.7 million or 18.4% decrease from
1997. Approximately $27.6 million of this decrease was attributable to the
Products Group, which experienced lower revenue primarily due to the completion
of the Immigration and Naturalization Services Contract ("INS Contract") in the
third quarter of 1997. The INS contract contributed revenue of $27.8 million in
1997. In addition, the Systems and Support Services Group experienced a $22.8
million decrease in revenue for the year ended December 31, 1998 compared to the
same period of 1997. This decrease was primarily due to the sale of TIS in
February 1998 and the expiration of its Immigration and Naturalization Services
Blanket Purchase Agreement for Field Operation Support Contract ("INS BPA") in
the fourth quarter of 1997. TIS and INS BPA contributed revenue of $24.7 million
and $12.2 million, respectively, during 1997 with corresponding 1998 revenues of
$4.0 million and $100,000, respectively. The declines in Products and Systems
and Support Services revenue were partially offset by an increase of $3.7
million, or 108%, in Enterworks revenue for the year ended December 31, 1998
compared to the same period of 1997.
Cost of revenue was 88.3% of revenue for 1998, as compared to 86.1% for
1997. The increase in cost of revenue as a percentage of revenue is primarily
attributable to unfavorable changes in product mix and the under absorption of
infrastructure costs. On a dollar basis, the decrease in cost of revenue for the
year is primarily attributable to the decreases in revenue.
Gross profit decreased by $11.2 million or 31.6% from 1997 to 1998. The
decrease is primarily attributable to the revenue declines discussed above, as
well as the unfavorable changes in product mix and under absorption of
infrastructure costs.
Selling, general and administrative expenses ("SG&A") were $30.8 million in
1998 and $27.1 million in 1997. During 1998, the Company increased expenditures
for Enterworks research and development and sales and marketing by $5.1 million
and $1.2 million, respectively, as compared to the same 1997 period. Research
and development expense for 1998 included a net realizable value adjustment of
$1.7 million to capitalized software costs. However, these increases were
partially offset by reductions in other SG&A expenditures, relating principally
to the consolidation of certain administrative support functions.
Goodwill amortization expense decreased $303,000 to $589,000 for 1998, as
compared to $892,000 in 1997. This reduction is primarily due to a decrease in
the goodwill balance associated with the sale of the TIS division in early 1998.
Telos sold substantially all of the net assets of TIS in the first quarter
of 1998. The transaction generated $14.7 million in cash proceeds and a gain of
$5.7 million.
Interest expense decreased $1.0 million to $6.5 million in 1998, from $7.4
million in 1997. This decrease is due principally to a decrease in the average
balance of the Senior Credit Facility for most of 1998 compared to 1997, as well
as a reduction in the bank's base rate due to changing economic conditions.
The income tax provision was $1.1 million for 1998. The tax provision was
primarily attributable to state income taxes, and increases in allowances
relating to the recoverability of deferred tax assets. An income tax benefit of
$1.3 million was recorded for 1997, principally because the Company reduced its
valuation allowance relating to net operating loss carryforwards expected to be
utilized as a result of the gain on the TIS sale.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital structure consists of a revolving credit facility,
subordinated notes, and redeemable preferred stock and common stock.
At December 31, 1999, the Company had an outstanding balance of $16.5
million on its $35 million Senior Credit Facility (the "Facility"). The Facility
matures on July 1, 2001 and is collateralized by a majority of the Company's
assets including inventory, accounts receivable and the Company's stock in
Enterworks, Inc. The amount of borrowings fluctuates based on the underlying
asset borrowing base. At December 31, 1999, the Company, under its borrowing
base formula, had $7.1 million of unused availability. The Facility has various
covenants which may, among other things, restrict the ability of the Company to
merge with another entity, sell or transfer certain assets, pay dividends and
make other distributions beyond certain limitations. The Facility also requires
the Company to meet certain leverage, net worth, interest coverage and operating
goals. At December 31, 1999, the Company was not in compliance with several
covenants contained in the Facility; however, the bank has waived this
non-compliance. In addition, the bank has amended the covenants to conform to
the Company's 2000 budget expectations.
The Company's subordinated notes are held principally by shareholders and
management, and totaled $8.5 million at December 31, 1999. These notes bear
interest at rates between 14% and 17% and become payable on April 1, 2001.
The Company currently has two primary classes of redeemable preferred stock
- - Senior Redeemable Preferred Stock and Public Preferred Stock. Each class
carries cumulative dividend rates of 12% to 14.125%. At December 31, 1999 the
total carrying value of redeemable preferred stock, including accumulated and
unpaid dividends, was $43.0 million. The Company accrues dividends and provides
for accretion related to the redeemable preferred stock. Mandatory redemption
for the Senior Redeemable Preferred Stock including all dividends payable, is
required on December 31, 2001, subject to the legal availability of funds.
Mandatory redemption for the Public Preferred Stock is required from 2005
through 2009, subject to the legal availability of funds.
Cash provided by operating activities was $11.2 million in 1999, due
primarily to a decrease in accounts receivable as a result of the sale of TFE
and the decline in sales from this year's fourth quarter compared to the prior
year's fourth quarter. Cash provided by investing activities was $12.7 million
in 1999, reflecting capital expenditures of $1.4 million and $800,000 in
continued investments in software development costs related to Enterworks,
offset by the proceeds from the sale of TFE of $10 million and the sale of the
Company's stock in Enterworks for $4.7 million. The Company used cash from
financing activities of $24.0 million in 1999, reflecting principally the net
payments on the Facility.
In September 1999, the Company sold its TFE division for approximately $10
million. The net proceeds from the sale were used to pay down amounts
outstanding under the Facility.
In December 1999, Enterworks completed a private placement financing
whereby the Company's voting interest in Enterworks was reduced to 34.8%. As a
result of this decrease in ownership, effective December 30, 1999 Enterworks has
been deconsolidated from the Company's operating results. As a result, the
Company will no longer be required to fund the continuing investment needed for
Enterworks sales and marketing infrastructure and product development.
CAPITAL EXPENDITURES
The Company believes that its business is generally not capital intensive.
Capital expenditures for property and equipment were $1.4 million in 1999 and
$1.2 million in 1998, and $2.6 million in 1997. The Company anticipates capital
expenditures of approximately $1.4 million in 2000; however, there can be no
assurance that this level of capital expenditures will occur.
INFLATION
The rate of inflation has been moderate over the past five years and,
accordingly, has not had a significant impact on the Company. The Company has
generally been able to pass through increased costs to customers through higher
prices to the extent permitted by competitive pressures. The Company's cost
reduction efforts have generally offset the effects of inflation, if any, on the
Company's performance.
YEAR 2000
Year 2000 issues refer generally to the problems that some software may
have in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
The Company, like most owners of computer software, modified significant
portions of its internal use software so that it would function properly in the
year 2000. Accordingly, the Company has incurred internal staff costs as well as
consulting and other expenses related to software and infrastructure
enhancements necessary to prepare the systems for the year 2000. Total
expenditures for such costs were not material to the Company's consolidated
financial statement in 1998 or 1999. The Company completed its internal use
software compliance efforts prior to December 31, 1999. There were no major
internal systems issues reported over the year 2000 transition.
The Company queried its key suppliers and vendors to assess their Year 2000
readiness and was informed that software licensed to the Company for resale was
compliant for the Year 2000. No major vendor issues were reported over the Year
2000 transition.
As is the case with other similarly situated computer companies, if Telos'
current or future customers failed to achieve Year 2000 compliance of if they
diverted technology expenditures to address Year 2000 compliance problems,
Telos' business, results of operations or financial condition could have been
materially adversely affected. For example, agencies of the United States
Government are principal customers of the Company. If such agencies experience
significant Year 2000 system failures, under terms of typical government
contracts, the Company's performance and/or receipt of payments due would have
been delayed or contracts could be terminated for convenience, which could have
a material adverse effect on the Company. If similar failures were experienced
by other customers or potential customers of the Company, this could also have
had a material adverse impact on the Company. To the best of the Company's
knowledge, none of its major customers experienced significant Year 2000 issues.
Because the Company experienced no major year 2000-related issues
internally or externally over the year 2000 transition, it does not believe that
it will incur material costs or experience material disruptions in its business
associated with the year 2000. However, there can be no assurance that the
Company's or its suppliers' current product offerings do not contain undetected
errors or defects associated with year 2000 date functions. These could give
rise to increased customer satisfaction costs related to year 2000 and to
litigation over year 2000 compliance issues. In addition, the Company could
experience a shift in revenue to the later quarters of 2000 as customers wrap up
issues in their IT environments and begin spending more proactively on new
projects.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1999, the Company adopted Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This standard requires companies to capitalize qualifying
computer software costs which incurred during the application development stage
and amortize them over the software's estimated useful life. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. The adoption of
SOP 98-1 did not have a material impact on the Company's results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting or Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133, as amended by
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the effective date of FASB Statement No. 133, an amendment of FASB
Statement No. 133", is effective for all quarters of the Company's year ending
December 31, 2001. The Company currently does not engage or plan to engage in
the use of derivative instruments, and does not expect SFAS 133 to have a
material impact on the results of operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin 101
"Revenue Recognition in Financial Statements" ("SAB 101") in December 1999. The
Company will continue to evaluate the impact of SAB 101 as new business
developments occur.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 forwarding-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 Annual Report on Form 10-K and presented elsewhere by management from time
to time.
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, general economic conditions,
the timing and approval of the federal government's fiscal year budget, business
growth through obtaining new business and, once obtained, the Company's ability
to successfully perform at a profit, the Company's ability to convert contract
backlog to revenue, the Company's ability to secure adequate capital and
financing to support its business, the success of the Company's investment in
Enterworks, and the risk of the federal government terminating contracts with
the Company. While the Company has not experienced contract terminations with
the federal government, the federal government can terminate at its convenience.
Should this occur, the Company's operating results could be adversely impacted.
As a high percentage of the Company's revenue is derived from business with
the federal government, the Company's operating results could be adversely
impacted should the federal government not approve and implement its annual
budget in a timely fashion.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations.
The Company is exposed to interest rate volatility with regard to its
variable rate debt obligations under its Senior Credit Facility. This facility
bears interest at 1.00%, subject to certain adjustments, over the bank's base
rate. The weighted average interest rate in 1999 was 9.89%. This facility
expires on July 1, 2001 and has an outstanding balance of $16.5 million at
December 31, 1999.
The Company's other long-term debt at December 31, 1999 consists of Senior
Subordinated Notes B and C which bear interest at fixed rates ranging from 14%
to 17%. The Senior Subordinated Notes mature as to principal in the aggregate
amount of $8,537,000 on April 1, 2001. The Company has no cash flow exposure due
to rate changes for its Senior Subordinated Notes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Accountants ........................................................................16
Consolidated Statements of Operations for the Years Ended
December 31, 1999, December 31, 1998, and December 31, 1997............................................17
Consolidated Balance Sheets as of December 31, 1999 and
December 31, 1998......................................................................................18-19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, December 31, 1998, and December 31, 1997............................................20
Consolidated Statements of Changes In Stockholders' Investment (Deficit)
for the Years Ended December 31, 1999, December 31, 1998, and December 31, 1997.......................21
Notes to Consolidated Financial Statements................................................................22-39
INDEX TO SCHEDULES
All schedules are omitted because they are not applicable or the required
information is included in the consolidated financial statements or notes
thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Telos Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
investment (deficit) and of cash flows present fairly, in all material respects,
the financial position of Telos Corporation and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
McLean, VA
March 30, 2000
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
---- ---- ----
Sales
Enterworks, Inc. $ -- $ 7,073 $ 3,398
Systems and Support Services 93,538 98,277 121,052
Products 77,826 101,736 129,337
------ ------- -------
171,364 207,086 253,787
------- ------- -------
Costs and expenses
Cost of Enterworks, Inc. -- 5,531 3,530
Cost of Systems and Support Services 77,380 84,231 100,438
Cost of Products 73,836 93,153 114,462
Selling, general and administrative expenses 17,459 30,842 27,054
Goodwill Amortization 489 589 892
------- ------- -------
169,164 214,346 246,376
------- ------- -------
Operating income (loss) 2,200 (7,260) 7,411
Other income (expenses)
Non-operating income (expense) 67 64 124
Gain on sale of assets 4,731 5,683 --
Equity in net losses of Enterworks (18,765) -- --
Interest Expense (6,065) (6,555) (7,455)
------- ----- -----
(Loss) income before income taxes (17,832) (8,068) 80
Benefit(provision) for Income Taxes 7,853 (1,103) 1,332
----- ------ -----
(Loss) Income before extraordinary item (9,979) (9,171) 1,412
Gain from early debt retirement and sale of stock
(net of income tax provision of $5,322) 8,015 -- --
----- ----- -----
Net (Loss) Income $(1,964) $ (9,171) $ 1,412
======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
DECEMBER 31,
-------------------------------
1999 1998
---- ----
Current assets
Cash and cash equivalents
(includes restricted cash of $54 and $160 at
December 31, 1999 and 1998, respectively ) $ 315 $ 408
Accounts receivable, net 25,030 56,783
Receivable from Enterworks 2,000 --
Inventories, net 4,779 8,662
Deferred income taxes 4,802 4,164
Prepaid income taxes -- 220
Other Current Assets 83 487
------ -------
Total Current Assets 37,009 70,724
------ -------
Property and equipment
Land and building -- 346
Furniture and equipment 18,924 21,677
Leasehold improvements 2,631 2,683
Property and equipment
Under Capital Leases 13,774 13,774
------ ------
35,329 38,480
Accumulated Depreciation And Amortization (23,093) (24,159)
------- -------
12,236 14,321
------ ------
Goodwill, net 4,284 6,896
Investment in Enterworks -- --
Deferred income taxes 2,930 442
Other Assets 427 2,868
------ -------
$56,886 $ 95,251
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' INVESTMENT (DEFICIT)
DECEMBER 31,
---------------------------
1999 1998
---- ----
Current liabilities
Accounts payable $13,792 $ 25,206
Accrued compensation and benefits 7,645 7,400
Unearned warranty revenue 5,183 1,349
Current portion, capital lease obligations 370 379
Other Current Liabilities 3,051 3,117
------ ------
Total current liabilities 30,041 37,451
Senior credit facility 16,508 36,159
Senior subordinated notes 8,537 18,492
Capital Lease Obligations 11,362 11,710
------ ------
Total Liabilities 66,448 103,812
------ -------
Commitments and contingencies (Note 9)
Senior mandatorily redeemable preferred stock 6,054 5,631
Mandatorily Redeemable Convertible Preferred Stock 36,975 31,729
------ ------
43,029 37,360
------ ------
Stockholders' investment
Class A common stock, no par value, 50,000,000 shares authorized, 21,241,980
and 21,238,980 shares issued and outstanding at 1999 and 1998, respectively 65 65
Class B common stock, no par value, 50,000,000 shares authorized, 4,037,628
shares issued and outstanding 13 13
Capital in excess of par -- 2,116
Accumulated Deficit (52,669) (48,115)
-------- ---------
Total Stockholders' Investment (Deficit) (52,591) (45,921)
-------- ---------
$56,886 $ 95,251
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
Operating activities:
Net (loss) income $(1,964) $ (9,171) $ 1,412
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation and amortization 4,133 4,266 4,098
Loss on disposal of fixed assets -- -- 715
Goodwill amortization 489 589 892
Amortization of debt issuance costs 243 243 243
Accretion of subordinated notes 412 181 143
Provision for inventory obsolescence 600 1,254 2,150
Provision for doubtful accounts receivable 400 39 490
Gain on sale of assets (4,731) (5,683) --
Gain on sale of fixed assets (80) -- --
Gain on sale of Enterworks stock and note conversion (8,015) -- --
Write off of debt issuance costs 72 -- --
Incentive bonus accrual 1,500 -- --
Provision for net realizable value of other assets -- 1,743 887
Deferred income tax (benefit) provision (8,159) 434 (1,719)
Changes in assets and liabilities
Decrease (increase) in accounts receivable 20,141 (2,329) (6,913)
Decrease in inventories 2,494 2,826 2,186
Increase in other assets (116) (76) 795
Increase (decrease) in accounts payable and other Liabilities 3,762 3,031 (20,559)
------ ------ --------
Cash Provided by (Used In) Operating Activities 11,181 (2,653) (15,180)
------ ------- -------
Investing activities:
Proceeds from sale of assets 10,000 14,675 --
Proceeds from sale of fixed assets 221 -- --
Proceeds from sale of Enterworks stock 5,000 -- --
Payment of offering costs (303) -- --
Purchase of property and equipment (1,389) (1,250) (2,589)
Investment in Other Assets (800) (2,040) (3,083)
------- ------- -------
Cash Provided by (Used In) Investing Activities 12,729 11,385 (5,672)
------ ------ -------
Financing activities:
(Payments) proceeds from Senior Credit Facility (19,651) (3,786) 24,526
Proceeds from debt issuance -- 1,800 --
(Decrease) increase in book overdrafts (3,998) 1,641 (4,838)
Repayment of long-term debt -- -- (651)
Retirement of Class B redeemable preferred stock -- (6,500) --
Repurchase of 410,000 shares of redeemable preferred stock -- (1,640) --
Proceeds from issuance of common stock upon exercise of Company stock options 3 -- --
Payments Under Capital Lease Obligations (357) (426) (379)
------- ------- -------
Cash (used in) provided by financing
Activities (24,003) ( 8,911) 18,658
-------- -------- ------
Decrease in cash and cash equivalents (93) (179) (2,194)
Cash and Cash Equivalents At Beginning of the Year 408 587 2,781
------- ------ -----
Cash and Cash Equivalents At End of Year $ 315 $ 408 $ 587
====== ====== =====
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest 5,409 $ 5,228 $6,872
===== ======= ======
Income Taxes $ 272 1,088 $ 92
===== ======= ======
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Year Ended December 31,
------------------------------
1999 1998 1997
---- ---- ----
Supplemental schedule of non-cash investing activities:
Equity in Enterworks issuance of common stock warrants 100 -- --
Contribution of Enterworks common stock 211 -- --
Forgiveness of Enterworks payable 20,445 -- --
Exchange of Enterworks stock for forgiveness of
Enterworks payable 4,000 -- --
Equity in Enterworks conversion of subordinated notes 1,140 -- --
Reduction of investment in Enterworks 27,386 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT (DEFICIT)
(AMOUNTS IN THOUSANDS)
Total
Class A Class B Capital Stockholders'
Common Common In Excess Accumulated Investment
Stock Stock of Par Deficit (Deficit)
------- ------- --------- ----------- ------------
Balance December 31, 1996 $ 65 $ 13 $ 4,048 $(37,356) $(33,230)
Senior redeemable preferred stock
dividend -- -- (379) -- (379)
Class B redeemable preferred
stock dividend -- -- (948) -- (948)
Redeemable preferred stock dividend -- -- (2,721) (1,594) (4,315)
Redeemable preferred stock accretion -- -- -- (1,406) (1,406)
Net Income for the Year -- -- -- 1,412 1,412
-- -- ------ ------ ------
Balance December 31, 1997 65 13 -- (38,944) (38,866)
Senior redeemable preferred stock
dividend -- -- (423) -- (423)
Class B redeemable preferred
stock dividend -- -- (347) -- (347)
Redeemable preferred stock dividend -- -- (4,068) -- (4,068)
Redeemable preferred stock accretion -- -- (1,527) -- (1,527)
Gain on retirement of Class B redeemable
preferred stock -- -- 5,883 -- 5,883
Repurchase of 410,000 shares of redeemable
preferred stock -- -- 2,178 -- 2,178
Issuance of Telos common stock warrants 420 420
Net Loss for the Year -- -- -- (9,171) (9,171)
-- -- ------ --------- ---------
Balance December 31, 1998 65 13 2,116 (48,115) (45,921)
Senior redeemable preferred
stock dividend -- -- (423) -- (423)
Redeemable preferred stock dividend -- -- (1,693) (2,132) (3,825)
Redeemable preferred stock accretion -- -- -- (1,424) (1,424)
Equity in Enterworks conversion of
subordinated notes -- -- -- 1,140 1,140
Issuance of common stock upon exercise
of Company stock options -- -- -- 3 3
Non-cash stock-based compensation -- -- -- 12 12
Deconsolidation of Enterworks accounts -- -- -- 27,197 27,197
Reduction of investment in Enterworks -- -- -- (27,388) (27,388)
Net Loss for the Year -- -- -- (1,964) (1,964)
-- -- ------ --------- ---------
Balance December 31, 1999 $ 65 $ 13 $ -- $(52,669) $(52,591)
==== ==== ======= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
Telos Corporation ("Telos" or "the Company") delivers e-Solutions for
Connected Enterprises(TM). Telos' complete e-business solutions help
organizations become more customer intimate, realize operational advantages,
and establish market leadership. Telos leverages the Internet and Web-based
strategies to link complex environments, encompassing people, processes, and
technologies.
Telos' clients, spanning both government agencies and commercial
enterprises, are preparing to meet the demands of the new, connected economy.
To address the business problems related to logistics, supply-chain
management, and Web-based commerce, Telos e-Solutions include order status
tracking, asset visibility, patient record access, security, motor pool and
aircraft maintenance, and financial reconciliation. Telos utilizes
fixed-price/fixed-time solutions to control costs and increase productivity.
The Company, founded in 1968, is incorporated under the laws of the
State of Maryland.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Telos Corporation and its wholly owned subsidiaries, Telos Corporation
(California), and Telos International Corporation. The accounts of the Company's
investment in Enterworks, Inc., ("Enterworks") have been deconsolidated as of
December 30, 1999, and therefore have been removed from the consolidated balance
sheet and statement of changes in stockholders equity. The statement of
operations includes the results of Enterworks Inc. as "Equity in Net Losses of
Enterworks" in accordance with APB 18 (Note 2). Significant intercompany
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Significant estimates and assumptions used in the
preparation of the Company's consolidated financial statements include
contract percentage of completion methodology, allowance for accounts
receivable, allowance for inventory obsolescence, valuation of goodwill, the
valuation allowance for deferred tax assets, employee benefits and estimated
useful lives of goodwill, property and equipment and other noncurrent assets,
including software development costs. Actual results could differ from those
estimates.
REVENUE RECOGNITION
The majority of the Company's sales are made directly or indirectly to
the federal government. A substantial portion of the Company's revenues are
derived from time and materials and cost reimbursement contracts, under which
revenue is recognized as services are performed and costs are incurred. The
Company generally recognizes product revenue as products are shipped, although
certain revenue recognition practices are dependent upon contract terms.
Revenue for maintenance contracts is recognized as such services are
performed. The Company records loss provisions for its contracts, if required,
at the time such losses are identified.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue from the licensing of software is recognized in accordance with
American Institute of Certified Public Accountants (AICPA) Statement of
Position ("SOP")97-2 and 98-4,"Software Revenue Recognition". In December
1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions". SOP 98-9 requires revenue
to be recognized using the "residual method" if certain conditions are met.
This approach results in contract discounts being applied to the license with
no such allocation to deferred support elements. The Company has adopted the
provisions of SOP 98-9 for the year ended December 31, 1999. The adoption of
SOP 98-9 did not have a significant effect on the Company's results from
operations. Revenue generated from warranty service contracts is recognized
ratably over the warranty service period.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash
equivalents. The Company's cash management program utilizes zero balance
accounts. Accordingly, all book overdraft balances have been reclassified to
accounts payable.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined primarily on the first-in, first-out method. Substantially all
inventories consist of purchased hardware and component computer parts used in
connection with system integration services performed by the Company.
Inventories also include spare parts of $478,000 and $729,000 at December 31,
1999 and 1998, respectively, which are utilized to support maintenance
contracts. Spare parts inventory is amortized on a straight line basis over
five years. An allowance for obsolete, slow-moving or non-salable inventory is
provided for all other inventory. This allowance is based on the Company's
overall obsolescence experience and its assessment of future inventory
requirements.
At December 31, 1999 and 1998, the Company's allowance for product
inventory was $1,992,000 and $3,074,000, respectively. The components of the
allowance for inventory obsolescence are set forth below (in thousands):
Additions
Balance, Charged to Balance,
Beginning Costs and End
Of Year Expense Deductions(1) of Year
------- ------- ------------- -------
Year Ended December 31, 1999 $ 3,074 $ 600 $ 1,682 $ 1,992
Year Ended December 31, 1998 $ 3,915 $ 1,090 $ 1,931 $ 3,074
Year Ended December 31, 1997 $ 2,357 $ 2,150 $ 592 $ 3,915
(1) Inventories written off or transferred to fixed assets.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided on
the straight-line method at rates based on the estimated useful lives of the
individual assets or classes of assets as follows:
Buildings 20 Years
Machinery and equipment 3-7 Years
Office furniture and fixtures 5-7 Years
Leasehold improvements Life of Lease
Leased property meeting certain criteria is capitalized at the present
value of the related minimum lease payments. Amortization of property and
equipment under capital leases is computed on the straight-line method over
the term of the related lease.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon sale or retirement of property and equipment, the costs and related
accumulated depreciation are eliminated from the accounts, and any gain or loss
on such disposition is reflected in the statement of operations. Expenditures
for repairs and maintenance are charged to operations as incurred.
The Company's policy on internal use software is in accordance with
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This standard requires
companies to capitalize qualifying computer software costs which are incurred
during the application development stage and amortize them over the software's
estimated useful life.
Depreciation and amortization expense related to property and equipment,
including property and equipment under capital leases, was $2,314,000,
$2,460,000 and $2,630,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
GOODWILL
Goodwill arose principally from the acquisition of Telos Corporation
(California) in 1992 and has been assigned a useful life of twenty years. The
useful life considered a number of factors including the Company's maintenance
of long-term significant customer relationships for periods of up to
twenty-seven years and its strong positions in the marketplace.
The Company assesses the potential impairment and recoverability of
goodwill on an annual basis and more frequently if factors dictate. Management
forecasts are used to evaluate the recovery of goodwill through determining
whether amortization of goodwill can be recovered through projected undiscounted
future cash flows. If an impairment of goodwill is indicated, the impairment is
measured based on projected discounted cash flows using a discount rate
reflecting the Company's cost of funds. In addition, the Company may assess the
net carrying amount of goodwill using internal and/or independent valuations of
the Company.
Accumulated amortization of goodwill at December 31, 1999 and 1998 was
$9,444,000 and $8,955,000 respectively.
OTHER ASSETS
Until the deconsolidation of Enterworks on December 30, 1999 (Note 2),
other noncurrent assets consist principally of capitalized software development
costs and debt issuance costs. The balance as of December 31, 1999 consists
mostly of refundable deposits.
With regard to the capitalized software development cost balances included
in the accounts for most of the year, the Company expenses all research and
development costs incurred in connection with software development projects
until such software achieves technological feasibility, determined based on the
achievement of a working model. Costs thereafter are capitalized. The Company
amortizes such capitalized costs on a product-by-product basis over the greater
of the amount computed using an estimated product life of two years or the ratio
that current gross revenues bears to the total of current and anticipated future
gross revenues. The Company periodically evaluates the realizability of these
capitalized costs through consideration of anticipated revenue and gross margin
as compared to current revenue and gross margin. At the time a determination is
made that capitalized amounts are not recoverable based on the estimated cash
flows to be generated from the applicable software product, a loss is
recognized.
Unamortized software and product costs at December 31, 1999 and 1998 were
- -0- and $1.9 million, respectively. Amortization expense associated with these
capitalized software and product costs was $1,646,000, $2,044,000, and
$1,128,000 in 1999, 1998 and 1997, respectively. Additionally, $1,743,000 and
$887,000 were written off as net realizable value adjustments in the fourth
quarter of 1998 and in the fourth quarter of 1997, respectively.
Debt issuance costs are amortized over the term of the underlying financial
instrument, which amortization method does not differ significantly from the
effective interest method. Due to the retirement of $7.6 million of Series B, C
and D subordinated notes in December 1999 (Note 5), $72,000 in debt issue costs
were written off in 1999. Unamortized costs amounted to $110,000 and $425,000 at
December 31, 1999 and 1998, respectively.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under this
asset and liability method, deferred tax assets and liabilities are recognized
for the estimated future tax consequences of temporary differences and income
tax credits. Deferred tax assets and liabilities are measured by applying
enacted statutory tax rates that are applicable to the future years in which
deferred tax assets or liabilities are expected to be settled or realized to the
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. Any change in tax rates on deferred tax
assets and liabilities is recognized in net income in the period in which the
tax rate change is enacted. The Company provides a valuation allowance that
reduces deferred tax assets when it is "more likely than not" that deferred tax
assets will not be realized.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method provided by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Under APB 25, compensation cost is
measured as the excess, if any, of the deemed fair market value of the Company's
common stock at the date of grant over the exercise price of the option granted.
Compensation cost for stock options, if any, is recognized over the vesting
period. The Company provides additional pro forma disclosures are made as if the
fair value measurement provisions of SFAS No. 123 had been used in determining
compensation expense (See Note 7).
RESEARCH AND DEVELOPMENT
The Company charges all research and development costs to expense as
incurred, until, as in the case of software, technological feasibility is
reached after which time such costs are capitalized. During 1999, 1998 and 1997,
the Company incurred $7.2 million, $6.1 million and $1.0 million in research and
development costs, respectively.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share." This Statement establishes standards for
computing and presenting earnings per share (EPS). As the Company does not have
publicly held common stock or potential common stock, this Statement is not
applicable and, accordingly, no EPS data is reported for any of the years
presented.
COMPREHENSIVE INCOME
Comprehensive income includes changes in equity (net assets) during a
period from non-owner sources. The Company has no comprehensive income
components other than its net loss.
FINANCIAL INSTRUMENTS
The Company uses various methods and assumptions to estimate the fair value
of its financial instruments. Due to their short-term nature, the carrying value
of cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximates fair value. The fair value of long-term debt is based on
the discounted cash flows for similar term borrowings based on market prices for
the same or similar issues. The Company has not estimated the fair value of its
subordinated debt or its redeemable preferred stock. The Company does not deem
such estimation practicable due to the unique features of these instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information. These estimates are subjective in nature and
involve matters of judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the current period presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1999, the Company adopted Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This standard requires companies to capitalize qualifying
computer software costs which incurred during the application development stage
and amortize them over the software's estimated useful life. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. The adoption of
SOP 98-1 did not have a material impact on the Company's results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting or Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133, as amended by
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the effective date of FASB Statement No. 133, an amendment of FASB
Statement No. 133", is effective for all quarters of the Company's year ending
December 31, 2001. The Company currently does not engage or plan to engage in
the use of derivative instruments, and does not expect SFAS 133 to have a
material impact on the results of operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin 101
"Revenue Recognition in Financial Statements" ("SAB 101") in December 1999. The
Company will continue to evaluate the impact of SAB 101 as new business
developments occur.
NOTE 2. DECONSOLIDATION OF ENTERWORKS, INC. SUBSIDIARY
On December 30, 1999, Enterworks, Inc. ("Enterworks"), a majority-owned
subsidiary of the Company, completed a private placement of 21,739,127 shares of
Series A Convertible Preferred Stock ("Preferred Stock") at a price of $1.15 per
share. The sale generated gross proceeds of $25,000,000. In addition, the
Company entered into a series of concurrent transactions pursuant to which the
Company's voting interest in Enterworks was reduced to approximately 34.8%. The
concurrent transactions were as follows:
1. The Company converted approximately $7.6 million of its Senior Subordinated
Notes, Series B, C and D held by investors, plus the accrued interest and
the waiver of prepayment premium associated with these notes, into shares
of Enterworks' Common Stock 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.
2. Enterworks purchased 5,000,000 shares of Enterworks' Common Stock owned by
the Company at a price of $1.00 per share. This amount was reduced by 20%
of the Agent's fee, the Company's pro rata share of the proceeds from the
transaction. The net amount received was $4.7 million. This transaction,
together with the one described above, resulted in an extraordinary gain,
net of tax of $5.3 million, of $8.0 million, which is included in the
Company's statement of operations for the year ended December 31, 1999.
3. Enterworks' payable to the Company, which was approximately $24.4 million
at December 30, 1999, was cancelled in its entirety before the issuance of
Series A Preferred Stock. The forgiveness of the payable increased the
Company's investment in Enterworks. Funding required to cover Enterworks'
working capital needs from November 30, 1999 to the date of closing was
funded by the Company and will be repaid through collections from
Enterworks' trade accounts receivable. This funding approximated $2.0
million. This forgiveness of intercompany debt is deemed by management to
be a normal occurrence of a capital raising transaction.
4. Enterworks issued 4,000,000 shares of Enterworks' Common Stock to Telos
concurrent with the issuance of Series A Preferred Stock. This issuance
increased the Company's investment in Enterworks as it increased the number
of shares the Company owned in Enterworks.
5. Enterworks issued a warrant to acquire 350,000 shares of Enterworks' Common
Stock to Telos' primary lender, Bank of America, in connection with
obtaining the necessary approvals for this offering. The exercise price of
the warrant equaled $1.15 per share, the same per share price of the Series
A Preferred Stock. This warrant was recorded at its fair market value as a
charge to interest expense and a reduction to the Company's investment in
Enterworks as it increased the number of shares the Company owned in
Enterworks.
6. Telos contributed 210,912 shares of Enterworks' Common Stock owned by
Telos to the Enterworks Treasury for the subsequent grant of warrants to
the Agent, Deutsche Bank Alex. Brown. This issuance of warrants was also
part of the Agent's fee. This contribution of shares was also a charge to
interest expense and a reduction to the Company's investment in Enterworks.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the reduction of the Company's ownership percentage in
Enterworks the Company has 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 have been excluded from
their respective captions in the Company's consolidated statement of operations,
and the Company's interest in the losses of Enterworks have been 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 Accounting Principles
Board PB 18. As of December 30, 1999, the balance is zero in the Investment in
Enterworks account.
The results of operations of Enterworks included in the "Equity in Net
Losses in Enterworks" caption are comprised of the following:
Sales $ 11,079
Cost of sales (6,795)
Selling, general and
administrative expenses (21,695)
Interest expense (1,354)
--------
Loss before income taxes $(18,765)
========
NOTE 3.SALE OF ASSETS
On September 29, 1999, the Company sold substantially all of the assets of
its computer maintenance and service business, Telos Field Engineering, Inc.
("TFE"), to TFE Technology Holdings, LLC ("TFE Holdings"), an affiliate of Carr
& Company, for $10 million. As a result of this sale, the Company has recorded a
gain of $4.7 million in its consolidated statement of operations for the year
ended December 31, 1999. This gain included a write-off of $2.1 million of
goodwill allocated to TFE operations. The Company and TFE Holdings entered into
a one-year corporate services agreement on the date of the sale. Under the terms
of the Agreement, Telos will continue to provide certain administrative support
functions to TFE Holdings, including but not limited to finance and accounting
and human resources, in return for a monthly payment.
In February 1998, Telos sold substantially all of the net assets of one of
its support services divisions, Telos Information Systems ("TIS"), to NYMA,
Inc., a subsidiary of Federal Data Corporation of Bethesda, Maryland, for
approximately $14.7 million in cash. In connection with this sale, the Company
has recorded a gain of $5.7 million in its consolidated statement of income for
the year ended December 31, 1998, which included a write-off of $4.9 million of
goodwill allocated to TIS operations.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. REVENUE AND ACCOUNTS RECEIVABLE
Revenue resulting from contracts and subcontracts with federal, state,
and local governments accounted for 94.1%, 94.9% and 96.1% of consolidated
revenue in 1999, 1998 and 1997, respectively. As the Company's primary
customer is the federal government, the Company has a concentration of credit
risk associated with its accounts receivable. However, the Company does not
believe the likelihood of loss arising from such concentration is significant.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral from its customers. The Company maintains
allowances for potential losses.
The components of accounts receivable are as follows (in thousands):
DECEMBER 31,
1999 1998
---- ----
Billed Accounts Receivable $22,592 $ 48,222
------ ------
Amounts billable upon acceptance by customer 2,841 1,422
Amounts Currently Billable 2,427 7,878
------ -------
Total Unbilled Accounts Receivable 5,268 9,300
------ -------
Allowance for Doubtful Accounts (830) (739)
------- ------
$27,030 $56,783
====== ======
The components of the allowance for doubtful accounts are set forth below
(in thousands):
Additions
Balance, Charged to Balance,
Beginning Costs and End of
of Year Expense Deductions(1) Year
------- ------- ---------- ----
Year ended December 31, 1999 $ 739 $ 400 $ (309) $ 830
Year ended December 31, 1998 964 39 (264) 739
Year ended December 31, 1997 925 490 (451) 964
1. Accounts receivable written-off
NOTE 5.DEBT OBLIGATIONS
SENIOR REVOLVING CREDIT FACILITY
At December 31, 1999, the Company has a $35 million Senior Revolving Credit
Facility (the "Facility") with a bank which expires on July 1, 2001 and has an
outstanding balance of $16.5 million. Borrowings under the facility are
collateralized by a majority of the Company's assets including accounts
receivable, inventory, and the remaining Enterworks stock owned by the Company.
The lien the bank held on the sold stock in Enterworks, Inc. as well as the
accounts receivable balance of Enterworks was released in order to complete the
Enterworks transaction and subsequent deconsolidation (Note 2). The amount of
the available borrowings fluctuates based on the underlying asset borrowing
base. The facility requires payment of a fee of .25% of the unused portion of
the Facility. The Facility bears interest at 1.00%, subject to certain
adjustments, over the bank's base rate, which was 9.5% at December 31, 1999.
The weighted average interest rate on the outstanding borrowings under the
Facility was 9.89% for 1999 compared with 9.95% for 1998. At December 31, 1999,
the Company had approximately $7.1 million available under the Facility.
The Facility has various covenants which may, among other things, restrict
the ability of the Company to merge with another entity, sell or transfer
certain assets, pay dividends and make other distributions beyond certain
limitations. The Facility also requires the Company to meet certain leverage,
net worth, interest coverage and operating goals. At December 31, 1999, the
Company was not in compliance with several covenants contained in the Facility;
however, the bank has waived such non-compliance. In addition, the bank has
amended the covenants to conform to the Company's 2000 budget expectations.
The carrying value of the Facility at December 31, 1999 and 1998
approximates fair value.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SENIOR SUBORDINATED NOTES
In 1995 the Company issued Senior Subordinated Notes ("Notes") to certain
shareholders. The Notes are classified as either Series B or Series C. Series B
Notes are collateralized by fixed assets of the Company. Series C Notes are
unsecured. Both the Series B and Series C Notes have a maturity date of April 1,
2001 and have interest rates ranging from 14% to 17%. Interest is paid quarterly
on January 1, April 1, July 1, and October 1 of each year. The Notes can be
prepaid at the Company's option. Additionally, these Notes have a cumulative
payment premium of 13.5% per annum payable only upon certain circumstances.
These circumstances include an initial public offering of the Company's common
stock or a significant refinancing, to the extent that net proceeds from either
of the above events are received and are sufficient to pay the premium. Due to
the contingent nature of the premium payment, the associated premium expense
will only be recorded after the occurrence of a triggering event. At December
31, 1999, the prepayment premium that would be due upon a triggering event is
$6.3 million.
In conjunction with the Enterworks private placement offering (See Note 2),
the Company retired approximately $1.0 million of Series B Notes, $4.8 million
of Series C Notes, and $1.8 million of Series D Notes in exchange for shares of
Enterworks' common stock owned by the Company at an exchange ratio of one share
of Enterworks' common stock for each $1.00 principal amount of notes payable. In
addition to the retirement of these notes, accrued interest of approximately
$300,000 was forgiven and the holders of these notes waived their rights to the
prepayment premium associated with these notes.
The balances of the Series B and Series C Notes were $5.5 million and $3.0
million, respectively, at December 31, 1999 compared to balances of $6.5 million
and $7.9 million, respectively, at December 31, 1998.
In November 1998, the Company issued additional Senior Subordinated Notes
to certain shareholders which are classified as Series D. The Series D Notes
total $1.8 million and were unsecured. The Series D Notes had a maturity date of
October 1, 2000 and bear interest at 14% per annum. Interest was paid quarterly
on January 1, April 1, July 1, and October 1 of each year. The notes could have
been prepaid at the Company's option. These Notes contained the same payment
premium provisions as the Series B and Series C Notes (see above). In connection
with the debt, the Company issued 1,500,000 warrants to purchase shares of the
Company's Class A Common Stock. The warrants have an exercise price of $.01 and
an exercise period of 22 months. The Company has assigned a value to the
warrants of $420,000 which has been included in capital in excess of par. These
notes were retired in conjunction with the Enterworks private placement (Note
2), making the outstanding carrying balance zero at December 31, 1999 compared
to $1.4 million at December 31, 1998.
ENTERWORKS SUBORDINATED NOTES
During 1996, Enterworks completed a private financing whereby $3,278,000 of
8% subordinated notes payable were issued. Approximately $2,278,000 of the
senior subordinated notes were payable to certain numbers of Telos' Board of
Directors, management and certain Telos stockholders. The subordinated notes
payable had a five-year maturity. Interest was paid quarterly on January 1,
April 1, July 1, and October 1 of each year, commencing on January 1, 1998. In
connection with the financing, Enterworks issued 2,048,725 detachable warrants
to purchase shares of Enterworks common stock. The warrants have an exercise
price of $1.00, were immediately exercisable and expire in July 2006. The
estimated fair value of the warrants of $922,000 was recorded to capital in
excess of par. Interest expense in the accompanying statements of operations
includes $142,000, $167,000, and $555,000 (including $359,000 related to the
acceleration of accretion at the time of repayment) in 1997, 1998, and 1999,
respectively, for accretion of the difference between the carrying value and
face value of these notes payable.
In connection with Enterworks' December 1999 issuance of Series A Preferred
Stock (Note 2), $572,000 of subordinated notes payable were paid and $2,706,000
were converted into Enterworks' Common Stock.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. REDEEMABLE 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 each carry a
cumulative dividend rate of 14.125% per annum of their liquidation value of
$1,000 per share. The dividends are payable semi-annually on June 30 and
December 31 of each year. The liquidation preference of the preferred stock is
the face amount of the Series A-1 and A-2 Stock ($1,000 per share), plus all
accrued and unpaid dividends. The Company is required to redeem all of the
outstanding shares of the stock on December 31, 2001, subject to the legal
availability of funds. Mandatory redemptions are required from excess cash
flows, as defined in the stock agreements. The Series A-1 and A-2 redeemable
preferred stock is senior to all other present and future equity of the Company.
The Series A-1 is senior to the Series A-2. The Company has not declared
dividends on its senior redeemable preferred stock since its issuance. At
December 31, 1999 and 1998 undeclared, unpaid dividends relating to Series A-1
and A-2 redeemable preferred stock totaled $3,054,000 and $2,631,000,
respectively, and have been accrued and are included in the Series A-1 and A-2
redeemable preferred stock balances.
12% CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK
A maximum of 6,000,000 shares of 12% Cumulative Exchangeable Mandatorily
Redeemable Preferred Stock, par value $.01 per share, has been authorized for
issuance.
The Company initially issued 2,858,723 shares of 12% Cumulative
Exchangeable Mandatorily Redeemable Preferred Stock (the "Public Preferred
Stock") pursuant to the acquisition of the Company during fiscal year 1990. The
Public Preferred Stock was recorded at fair value on the date of original issue,
November 21, 1989, and the Company is making periodic accretions under the
interest method of the excess of the redemption value over the recorded value.
Accretion for the years ended December 31, 1999 and 1998 was 1,424,000 and
$1,528,000, respectively. The Company declared stock dividends totaling 736,863
shares in 1990 and 1991.
In November 1998, the Company retired 410,000 shares of the Public
Preferred Stock held by certain shareholders. The Company repurchased the stock
at $4.00 per share. The carrying value of these shares was determined to be $3.8
million, and the $2.2 million excess of the carrying amount of these shares of
Public Preferred Stock over the redemption price of $1.6 million was recorded as
an increase in capital in excess of par; there was no impact on income from this
transaction.
The Public Preferred Stock has a 20 year maturity; however, the Company
must redeem, out of funds legally available, 20% of the Public Preferred Stock
on the 16th, 17th, 18th and 19th anniversaries of November 21, 1989, leaving 20%
to be redeemed at maturity. On any dividend payment date after November 21,
1991, the Company may exchange the Public Preferred Stock, in whole or in part,
for 12% Junior Subordinated Debentures that are redeemable upon terms
substantially similar to the Public Preferred Stock and subordinated to all
indebtedness for borrowed money and like obligations of the Company.
The Public Preferred Stock accrues a semi-annual dividend at an annual rate
of 12% ($1.20) per share, based on the liquidation preference of $10 per share,
and is fully cumulative. Through November 21, 1995, the Company had the option
to pay dividends in additional shares of Preferred Stock in lieu of cash.
Following November 21, 1995, dividend are only payable in cash. Dividends in
additional shares of the Preferred Stock are paid at the rate of 6% of a share
of the Preferred Stock for each $.60 of such dividends not paid in cash.
Dividends are payable by the Company, provided the Company has legally available
funds under Maryland law, when and if declared by the Board of Directors,
commencing June 1, 1990, and on each six month anniversary thereof. For the
years 1992 through 1994 and for the dividend payable June 1, 1995, the Company
has accrued undeclared dividends in additional shares of preferred stock. These
accrued dividends are valued at $3,950,000. Had the Company accrued such
dividends on a cash basis, the total amount accrued would have been $15,101,000.
For the cash dividends payable since December 1, 1995, the Company has accrued
$18,677,000.
The Company has not declared or paid dividends since 1991, due to
restrictions and ambiquities relating to the payment of dividends contained
within its charter, its working capital facility agreement, and under Maryland
law.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. STOCKHOLDERS' INVESTMENT AND EMPLOYEE BENEFIT PLANS
COMMON STOCK
The relative rights, preferences, and limitations of the Class A common
stock and the Class B common stock are in all respects identical. The holders of
the common stock have one vote for each share of common stock held. Subject to
the prior rights of the Public Preferred Stock or any series of the Series A
redeemable preferred stock, holders of Class A and the Class B common stock are
entitled to receive such dividends as may be declared.
STOCK WARRANTS
In 1994, Toxford Corporation deposited $3 million with the Company's bank
to provide the Company with increased borrowing capability under its Facility
(see Note 5). In exchange, Toxford Corporation was issued 500,000 shares of
Class A common stock for which the Company recorded additional interest expense
of $410,000. The Company also granted Toxford Corporation warrants to acquire
7,228,916 shares of the Company's Class A common stock at a purchase price of
$.83 per share which approximated the estimated market value of the Company's
common stock at the issuance date. In November 1998, 840,000 of these warrants
were transferred to certain other shareholders of the Company. The warrant is
fully exercisable and has a term of ten years from the date of issue.
STOCK OPTIONS
The Company has granted stock options to certain employees of the Company
under four plans. The Long-Term Incentive Compensation Plan was adopted in 1990
("1990 Stock Option Plan") and had option grants under it through 1993. In 1993,
stock option plan agreements were reached with certain employees. In 1996, the
Board of Directors approved and the shareholders ratified the 1996 Stock Option
Plan ("1996 Stock Option Plan").
The Company generally grants options under its respective plans at the
estimated fair value at the date of grant. Fair value is determined by the
members of the option committee based upon all information available to it.
1990 STOCK OPTION PLAN
Under the terms of the 1990 Stock Option Plan, 2,168,215 shares of the
Company's Class A common stock are available for issuance under options to key
employees, including officers and directors. The option price determined by the
Board of Directors was not less than the fair market value at the date of the
grant and the options are generally exercisable over a four-year period.
Additional information as to these options is as follows:
STOCK OPTION ACTIVITY
Numbers of Shares Weighted Average
---------------------------------------------
(000'S) EXERCISE PRICE
---------------------------------------
Outstanding at December 31, 1996 585 $1.42
Granted -- --
Exercised -- --
Canceled (55) 1.42
--- ----
Outstanding at December 31, 1997 530 $1.42
Granted 1,495 1.07
Exercised -- --
Canceled (85) 1.42
------ ----
Outstanding at December 31, 1998 1,940 $ 1.27
Granted 418 1.35
Exercised -- --
Canceled (640) 1.12
------ ----
Outstanding At December 31, 1999 1,718 $1.22
===== =====
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 STOCK OPTION PLAN
The 1996 Stock Option Plan allows for the award of up to 6,644,974 shares
of Class A common stock at an exercise price of not lower than fair market value
at the date of grant. Vesting of the stock options for key employees is based
both upon the passage of time and certain key events occurring including an
initial public offering or a change in control. Vesting for options granted to
employees is based upon the passage of time, generally four years. The stock
options may be exercised over a ten year period subject to the vesting
requirements. Additional information as to these options follows:
STOCK OPTION ACTIVITY
Number of Shares Weighted Average
---------------------------------------------
(000'S) EXERCISE PRICE
---------------------------------------
Outstanding at December 31, 1996 3,738 $0.95
Granted 772 1.01
Exercised -- --
Canceled (259) 0.97
------ ----
Outstanding at December 31, 1997 4,251 $0.96
Granted 1,447 1.07
Exercised -- --
Canceled (143) 0.98
------ ----
Outstanding at December 31, 1998 5,555 $0.99
Granted 353 1.35
Exercised (3) 0.95
Canceled (901) 1.01
------ ----
Outstanding At December 31, 1999 5,004 $1.01
===== =====
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER OPTION PLANS
In 1993, stock option plan agreements were reached to provide Mr. John
Wood, CEO and President, and Mr. Joseph Beninati, former Chairman, with
options to each purchase up to 700,459 shares of the Company's Class A common
stock from the Company at $0.50 per share. Under the terms of the agreements,
350,230 shares vested immediately and the remainder vested ratably over the
next twelve months. The Company recorded compensation expense related to these
options based upon the difference between the exercise price and the estimated
fair value of $0.82 per share at the measurement date of the stock option. Mr.
Beninati's agreement was canceled in 1996 and the shares now available will be
administered under the same terms as the 1996 Stock Option Plan. Additional
information as to these options follows:
STOCK OPTION ACTIVITY
Number of Shares Weighted Average
---------------------------------------------
(000'S) EXERCISE PRICE
---------------------------------------
Outstanding at December 31, 1996 1,401 $0.50
Granted 653 1.01
Exercised -- --
Canceled (700) 0.50
----- ----
Outstanding at December 31, 1997 1,354 $0.75
Granted -- --
Exercised -- --
Canceled -- --
-- --
Outstanding at December 31, 1998 1,354 $0.75
Granted -- --
Exercised -- --
Canceled (103) 1.01
----- ----
Outstanding At December 31, 1999 1,251 $0.72
===== =====
Mr. Wood has the option to cancel the 1993 stock options discussed above or
receive an equal number of options under the 1996 plan at an exercise price of
$0.95 per share. Additionally, the effect on the 1996 stock option plan as of
December 31, 1999 would be to increase the number of shares outstanding to
5,704,365 with a weighted average exercise price of $1.00 per share.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (000'S) Life in Years Price (000'S) Price
------ ------- ------------- ----- ------- -----
1990 Stock $1.07 918 8.4 years $1.07 368 $1.07
Option Plan $1.35 408 9.7 years $1.35 81 $1.35
$1.40 18 8.6 years $1.07 7 $1.07
$1.42 374 1.0 years $1.42 374 $1.42
----- --- --------- ----- --- -----
$1.07 - $1.42 1,718 7.1 years $1.22 830 $1.26
============= ===== ========= ==== === =====
Other Stock
Option Plan $0.50 701 4.0 years $0.50 701 $0.50
$1.01 550 7.1 years $1.01 330 $1.01
----- --- --------- ----- --- -----
$0.50 -$1.01 1,251 5.4 years $0.72 1,031 $0.66
============ ===== ========= ===== ===== =====
1996 Stock
Option Plan $0.95 3,016 6.4 years $0.95 1,592 $0.95
$0.97 88 6.6 years $0.97 70 $0.97
$1.01 469 7.2 years $1.01 248 $1.01
$1.07 1,046 8.4 years $1.07 361 $1.07
$1.35 315 9.5 years $1.35 86 $1.35
$1.40 70 8.7 years $1.40 61 $1.40
----- ---- --------- ----- ---- -----
$0.95 - $1.40 5,004 7.1 years $1.01 2,418 $1.00
============= ===== ========= ===== ===== =====
The weighted-average fair value of options granted under the 1990 Stock
Option Plan, the Other Stock Option Plan, and the 1996 Stock Option Plan, was
$0.28, $0, and $0.25, respectively, in 1999 and $0.26, $0, and $0.25 per share,
respectively, in 1998. Had the Company determined compensation cost consistent
with SFAS No. 123 methodology, net (loss) income would have been ($2,743,000),
($9,666,000), and $1,073,000 in 1999, 1998 and 1997, respectively. Significant
assumptions used in determining the fair value of each option grant at the date
of grant were as follows:
1990 Stock Other Stock
Option Plan Option Plan
------------------------- -------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Expected stock price volatility 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Risk free interest rate 5.82% 5.54% -- -- -- 6.28%
Expected life of options 4.0yrs 5.3yrs -- -- -- 4.0yrs
1996 Stock
Option Plan
-------------------------
1999 1998 1997
---- ---- ----
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 0.0% 0.0% 0.0%
Risk free interest rate 5.60% 5.54% 6.28%
Expected life of options 3.6yrs 4.8yrs 5.5yrs
Because the pro forma disclosures under SFAS No. 123 only apply to stock
options granted in or after 1995, pro forma net income for 1997, 1998 and 1999
is not necessarily indicative of future periods.
TELOS SHARED SAVINGS PLAN
The Company sponsors a defined contribution employee savings plan (the
"Plan") under which substantially all full-time employees are eligible to
participate. The Company matches one-half of voluntary participant contributions
to the Plan up to a maximum Company contribution of 3% of a participant's
salary. Total Company contributions to this Plan for 1999, 1998, and 1997 were
$1,080,000, $835,000, and $1,335,000, respectively.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES
The provision (benefit)for income taxes includes the following (in
thousands):
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---- ---- ----
Current provision (benefit)
Federal $ -- $ -- $ --
State 306 669 387
--- ---- ---
Total Current 306 669 387
--- ---- ---
Deferred provision (benefit)
Federal (6,946) 568 (1,464)
State (1,213) ( 134) (255)
-------- ------ -----
Total Deferred (8,159) 434 (1,719)
------- ------ -------
Total Provision (Benefit) $(7,853) $ 1,103 $(1,332)
====== ====== =====
The provision (benefit)for income taxes varies from the amount
determined by applying the federal income tax statutory rate to the income or
loss before income taxes. The reconciliation of these differences is as
follows:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
---- ---- ----
Computed expected income tax provision (benefit) (34.0)% (34.0)% 34.0%
Goodwill amortization 0.9 2.4 379.6
State income taxes, net of
federal income tax benefit (2.6) (1.8) 5.9
Change in valuation allowance
for deferred tax assets (12.9) 24.9 (2,214.0)
Meals and entertainment 0.5 1.1 111.8
Sale of division/other 4.1 20.9 17.2
--- ---- -----
(44.0)% 13.5% (1,665.5)%
====== ===== =======
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1999 and 1998 are as follows (in thousands):
DECEMBER 31,
-------------------------
1999 1998
---- ----
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ 161 $ 153
Allowance for inventory obsolescence and
amortization 946 1,377
Accrued liabilities not currently
deductible 1,842 794
Accrued compensation 1,786 1,562
Property and equipment, principally due
to differences in depreciation methods 895 396
Net operating loss carryforwards 2,174 5,660
Alternative minimum tax credit carryforward 703 703
----- -----
Total gross deferred tax assets 8,507 10,645
Less valuation allowance (572) (4,987)
----- --------
Net deferred tax assets 7,935 5,658
----- -----
Deferred tax liabilities:
Unbilled accounts receivable, deferred for tax purposes (203) (317)
Software development costs -- (735)
------ ------
Total deferred tax liabilities (203) (1,052)
------- -------
Net deferred tax assets $7,732 $4,606
====== ======
The components of the valuation allowance are as follows (in thousands):
Balance at Additions Balance at
Beginning of Charged to End of
Period Expenses Deductions Period
------ -------- ---------- ------
December 31, 1999 $ 4,987 $ -- $(4,415)(1) $ 572
December 31, 1998 2,974 2,013 -- 4,987
December 31, 1997 4,702 -- (1,728) 2,974
(1) Included $2,115 attributable to Enterworks
The net change in the valuation allowance was a decrease of $2,300,000 for
1999 and an increase of $2,013,000 for 1998. The decrease in the valuation
allowance for 1999 is attributable to management's view that it is more likely
than not that the deferred tax assets will be realized with forecasted taxable
income which justifies the recognition of the net deferred tax assets recorded.
The above deferred tax assets and liabilities were adjusted to reflect the
deconsolidation of Enterworks from Telos on December 30, 1999.
At December 31, 1999, for federal income tax purposes the Company had net
operating loss carryforwards of $4,012,000 available to offset future regular
taxable income. These net operating loss carryforwards expire in 2011 through
2015. Additionally, $2,439,000 of alternative minimum tax net operating loss
carryforwards are available to offset future alternative minimum taxable income.
These alternative minimum tax net operating loss carryforwards also expire from
2011 through 2015. In addition, the Company has $703,000 of alternative minimum
tax credits available to be carried forward indefinitely to reduce future
regular tax liabilities.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and equipment under non-cancelable
operating and capital leases with various expiration dates, some of which
contain renewal options.
On March 1, 1996, the Company entered into a twenty year capital lease for
a building that serves as its corporate headquarters. The Company has accounted
for this transaction as a capital lease and has accordingly recorded assets and
a corresponding liability of approximately $12.3 million. Under the terms of the
lease, the landlord furnished the Company with $1.3 million to fund tenant
improvements and other building costs.
The following is a schedule by years of future minimum payments under
capital leases together with the present value of the net minimum lease payments
as of December 31, 1999 (in thousands):
PROPERTY EQUIPMENT TOTAL
2000 $ 1,543 $ 113 $ 1,656
2001 1,543 54 1,597
2002 1,543 -- 1,543
2003 1,543 -- 1,543
2004 1,543 -- 1,543
Remainder 17,362 -- 17,362
------ -- ------
Total minimum obligations 25,077 167 25,244
Less amounts representing interest (13,470) (42) (13,512)
------- --- -------
Net present value of minimum obligations 11,607 125 11,732
Less current portion (270) (100) (370)
------- ----- -------
Long term capital lease
obligations at
December 31, 1999 $11,337 $ 25 $11,362
====== === ======
Accumulated amortization for property and equipment under capital leases at
December 31, 1999 and 1998 is $2,787,000 and $2,019,000, respectively.
Future minimum lease payments for all non-cancelable operating leases at
December 31, 1999 are as follows (in thousands):
2000 $ 1,653
2001 860
2002 615
2003 602
2004 128
Remainder --
-----
Total Minimum Lease Payments $ 3,858
=======
Net rent expense charged to operations for 1999, 1998, and 1997 totaled
$2,000,000, $2,001,000, and $2,545,000, respectively.
LEGAL
The Company is a party to various lawsuits arising in the ordinary course
of business. In the opinion of management, while the results of litigation
cannot be predicted with certainty, the final outcome of such matters will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
between the Company and certain of its current and former officers and directors
is set forth below.
Mr. Joseph P. Beninati served as Chairman of the Board for the majority of 1994
before resigning January 5, 1995. The Company paid Mr. Beninati $165,000
annually subject to a three-year employment agreement that began in 1995 and
terminated January 8, 1998. Mr. Beninati resigned from the Board in 1996 and
received his final payment in 1998.
Mr. John R. Porter, the owner of a majority of the Company's Class A Common
Stock, has a consulting agreement with the Company whereby he is compensated for
consulting services provided to the Company in the areas of marketing, product
development, strategic planning and finance as requested by the Company. Mr.
Porter was paid $200,000 by the Company in 1999, 1998, and 1997 pursuant to this
agreement, which amounts were determined by negotiation between the Company and
Mr. Porter.
Mr. Norman Byers, a director of the Company, had a consulting agreement with the
Company to help the Company expand its business operations into the
international marketplace. Under this agreement, Mr. Byers received $10,500 a
month for his services. Mr. Byers was compensated $125,000, $130,000 and
$128,000 for 1998, 1997 and 1996, respectively. This consulting agreement was
terminated in the fourth quarter of 1998.
Mr. Mark Hester, former Executive Vice President and former Chief Operating
Officer of the Company, has a consulting agreement with the Company to provide
strategic advice concerning the Company's hardware services division. Under this
agreement, Mr. Hester received $206,000 for his services during 1999 and 2000,
and was eligible for a bonus under certain circumstances, at the Company's
discretion. Under this agreement Mr. Hester will receive a bonus of $135,000
payable in installments during 2000 and 2001.
NOTE 11. 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. The information for 1998 and
1997 has been restated from the prior year's presentation in order to conform to
the 1999 presentation.
The Company has three reportable segments:
Systems and Support Services - provides software development and support
services for software and hardware including technology insertion, system
redesign and software re-engineering. This segment consists of four
divisions - solutions, services, international, and systems (systems was
sold in February 1998 as discussed in Note 2). The principal market for
this segment is the Federal government and its agencies.
Products - delivers information security, enterprise integration and
networking infrastructure solutions to its customers. These solutions
include providing commercial hardware, software and services to its
customers. The Products group is capable of staging, installing and
deploying large network infrastructures with virtually no disruption to
customer's ongoing operations. The principal market for this segment is the
Federal government and its agencies.
Enterworks - develops, markets and supports a software framework that
integrates content and processes for companies seeking to participate in
e-business. They target operators and users of e-marketplaces and portals.
E-marketplaces and portals are Web-based destinations where employees,
customers, partners and suppliers can interact to obtain information about
products and services, and conduct business more efficiently. Enterworks
product enables customers to build or join e-marketplaces and portals
rapidly, add new content and e-business participants easily, and automate
the end-to-end processes required for e-business interaction.
Enterworks' products are designed to meet the business and technical
challenges faced by operators and users of e-marketplaces and portals by
delivering integrated, real-time content and automating business processes
that bring together employees, customers, partners and suppliers. These
products offer numerous competitive advantages over traditional solutions
by combining both content and process integration, and by guiding people
through e-business interactions.
The accounting policies of the reportable segments are the same as those
described in Note 1. The Company evaluates the performance of its operating
segments based on revenue, gross profit and income before goodwill amortization,
income taxes, non-recurring items and interest income or expense.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "other" column includes corporate
related items.
Enterworks, Inc. is an equity investment of the Company as of December 30,
1999 (Note 2) and has been deconsolidated as of that date. The corresponding
assets and liabilities have been removed from the consolidated balance sheet as
of December 31, 1999.
Systems and
Support Services Products Enterworks Other (1) Total
---------------- -------- ---------- --------- -----
1999
External Revenues $ 93,538 $ 77,826 $ -- $ -- $171,364
Intersegment Revenues 404 -- -- -- 404
Gross Profit 16,158 3,990 -- -- 20,148
Segment profit (loss)(3) 4,731 (2,042) -- -- 2,689
Total assets 29,623 361 -- 26,902 56,886
Capital Expenditures 195 13 780 401 1,389
Depreciation &
Amortization(2) $ 773 $ 318 $ 2,210 $ 1,321 $ 4,622
1998
External Revenues $ 98,277 $101,736 $ 7,073 $ -- $207,086
Intersegment Revenues 970 2,622 1 -- 3,593
Gross Profit 14,046 8,583 1,542 -- 24,171
Segment profit (loss)(3) 4,849 14 (11,534) -- (6,671)
Total assets 45,340 24,206 6,119 19,586 95,251
Capital Expenditures 179 49 587 435 1,250
Depreciation &
Amortization(2) $ 557 $ 479 $ 2,332 $ 1,487 $ 4,855
1997
External Revenues $121,052 $129,337 $ 3,398 $ -- $ 253,787
Intersegment Revenues 667 1,387 4 -- 2,058
Gross Profit 20,614 14,875 (132) -- 35,357
Segment profit (loss)(3) 10,229 3,977 (5,903) -- 8,303
Total assets 55,834 24,323 6,374 23,187 109,718
Capital Expenditures 330 688 480 1,091 2,589
Depreciation &
Amortization(2) $ 716 $ 929 $ 1,075 $ 2,270 $ 4,990
(1) Corporate assets are principally property and equipment, cash and other
assets.
(2) Depreciation and amortization includes amounts relating to property and
equipment, goodwill, deferred software costs and spare parts inventory.
(3) Segment profit (loss) represents operating income (loss) before
goodwill amortization.
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 11 separate facilities located in 4 states.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The following is certain biographical information concerning the directors
and executive officers of the Company. The term of each of the directors to be
elected at the Annual Meeting continues until the next annual meeting of
shareholders and until his successor is elected and qualified, except that the
directorships held by the Class D Directors will terminate whenever all
accumulated dividends on the Exchangeable Preferred Stock have been paid.
Dr. Fred Charles Ikle, Chairman of the Board
Dr. Ikle (age 75) was elected to the Company's Board of Directors on
January 31, 1994 and was elected Chairman of the Board in January 1995. He is
Chairman of Conservation Management Corporation and is a member of the US
Advisory Board for Zurich Financial Services Group. Dr. Ikle is also a Director
of the National Endowment for Democracy and a Distinguished Scholar at the
Center for Strategic & International Studies. From 1981 to 1988, Dr. Ikle served
as Under Secretary of Defense for Policy.
John B. Wood, Executive Chairman of the Board
Mr. Wood (age 36) was elected to Executive Chairman of the Board on March
8, 2000. Mr. Wood also serves as Chairman of Enterworks and as Chief Executive
Officer of Enterworks. Previously, Mr. Wood was the President and Chief
Executive Officer of the Company. Mr. Wood was appointed Chief Operating Officer
on October 8,1993 after serving as Executive Vice President from May of 1992. He
was elected to the Board of Directors on May 13, 1992. Prior to joining the
Company, Mr. Wood founded a boutique investment banking firm. Mr. Wood has a BA
in Finance and Computer Science from Georgetown University.
David S. Aldrich, President, Chief Executive Officer, and Director
Mr. Aldrich (age 40) was elected to the positions of President and Chief
Executive Officer on March 8, 2000. He was elected to the Board of Directors on
February 8, 2000. He was appointed to the position of Chief Operating Officer of
the Company in January 1999. He joined the Company in September 1996 as Vice
President, Corporate Development and Strategy. Prior to joining the Company, he
was a partner in the Financial Advisory Services Group - Corporate Finance at
Coopers & Lybrand L.L.P. Prior to joining Coopers & Lybrand L.L.P. in 1991, Mr.
Aldrich was Senior Vice President at Dean Witter Capital Corp., the merchant
banking arm of Dean Witter Reynolds, Inc.
Dr. Stephen D. Bryen, Director
Dr. Stephen Bryen (age 57) was elected to the Company's Board of Directors
on January 31, 1994. He currently serves as a Director in Jefferson Partners,
L.L.C., a strategic management consulting and merchant banking firm with offices
in Washington, D.C. and New York, and as Senior Vice President of L-3 Network
Security, LLC in Denver, Colorado. Dr. Bryen currently serves on the board of
C-MAC Industries in Mechanicsburgh, Pennsylvania and is the senior technical
advisor to Hollinger Digital Corporation in New York. From 1981 to 1988 Dr.
Bryen served as the Deputy Under Secretary of Defense for Trade Security Policy
and as the Director of the Defense Technology Security Administration, which he
founded.
Norman P. Byers, Director
Mr. Byers (age 52) was elected to the Board of Directors on January 31,
1994. He is Chief Operating Officer of Carpe Diem, Inc. in Vienna, Virginia. He
has been president of Byers Consulting, a Fairfax County, Virginia international
business consulting firm since July 1996. Before that appointment, he had served
as the President of International Strategies Limited, another local
international business consulting firm. From 1968 until his retirement in 1989,
Mr. Byers served in a variety of operational and staff positions in the United
States Air Force.
Julio E. Heurtematte, Jr., Class D Director
Mr. Heurtematte (age 63) was elected to the Company's Board of Directors on
July 31, 1998. He has been a private consultant since 1989, specializing in
international projects, trade and investments. From 1963 to 1989, he held
various positions at the InterAmerican Development Bank ("IAD"), most recently
as the deputy Manager for Project Analysis. From 1979 to 1989, Mr. Heurtematte
was also a member of IAD Bank's Pension Fund Investment Committee. Mr.
Heurtematte is also a member of the Board of Directors of Trans World Gaming
Corporation. Mr. Huertematte resigned from the Board of Directors effective
December 16, 1999.
Malcolm M. B. Sterrett, Class D Director
Mr. Sterrett (age 57) is a private investor and was elected to the
Company's Board of Directors on July 31, 1998 as part of the preferred
stockholder class. From 1989 to 1993, he was a partner at the law firm of Pepper
Hamilton & Scheetz in Washington, D.C. From 1988 to 1989, he served as General
Counsel to the U.S. Department of Health and Human Services and from 1982 to
1988 he was a Commissioner on the U.S. Interstate Commerce Commission. Prior
thereto, he was Vice President and General Counsel to the United States Railway
Association and served as Staff Director and Counsel to the U.S. Senate
Committee on Commerce, Science and Transportation. Mr. Sterrett is also a member
of the Board of Directors of Trans World Gaming Corporation.
John C. Boland, Class D Director
Mr. Boland (age 52) was appointed to the Board of Directors on December 17,
1999 as a result of Mr. Huertematte's resignation. He has been owner of the
general partner of Remnant Partners L.P., an investment partnership, since 1992.
From 1989 to 1995, he was the publisher of Bankruptcy Values, an institutional
research service. Prior to entering the investment business, Mr. Boland was an
editor of Barron's Financial Weekly (from 1978 to 1983) and a freelance
financial writer.
William L. Prieur Brownley, Vice President and General Counsel
Mr. Brownley (age 43) joined the Company in April 1991 and is responsible
for the management of the Company's legal affairs. For the five years prior to
joining the Company, he served as Assistant General Counsel and then as General
Counsel at Infotechnology Inc., an investment company whose holdings included
various companies in the communications industry.
Gerald D. Calhoun, Former Vice President, Human Resources, and Corporate
Secretary, Telos Corporation and Enterworks, Inc.
Mr. Calhoun (age 50) joined the Company as Vice President, Human Resources,
in August 1989. Prior to joining the Company he served as: Director, Risk and
Financial Management of BDM International, a government contractor which
provides consulting services; Vice President, Human Resources of Halifax Corp.,a
government contractor providing technical services and third party computer
maintenance; and Director for the U.S. Department of Labor, Employment Standards
Administration. Mr. Calhoun left the Company during 1999.
Robert W. Lewis, President, Enterworks, Inc.
Mr. Lewis (age 38) has served as the President and Chief Operating Officer
of Enterworks, Inc. since its inception in 1996 and as director since January
2000. Prior to joining Enterworks, he was an employee of the Company for 11
years. From 1991 to 1995, Mr. Lewis served in product development, operational
and marketing roles. His most recent position was Director of Business
Development. Mr. Lewis has a BBA in Information Technology from James Madison
University and an MBA in Management and Marketing from George Mason University.
Robert J. Marino, Executive Vice President and Chief Sales and Marketing
Officer
Mr. Marino (age 63) joined the Company in 1988 as Senior Vice President of
Sales and Marketing. In 1990, his responsibilities were expanded to include
Program Management in addition to Sales and Marketing. On January 1, 1994, Mr.
Marino was appointed to President of Telos Systems Integration, and on January
1, 1998, he was appointed to his current position. Prior to joining the Company
in February 1988, Mr. Marino held the position of Senior Vice President of Sales
and Marketing with Centel Federal Systems and M/A-COM Information Systems, both
of which are U.S. Government contractors.
Lorenzo Tellez, former Chief Financial Officer, Treasurer, and Vice President
Mr. Tellez (age 42) was appointed Chief Financial Officer of the Company in
1993 and Treasurer in 1994. He joined Telos Corporation (California) in 1989
where he was responsible for all financial and regulatory functions. Prior to
joining Telos Corporation, Mr. Tellez served as a Senior Manager with Arthur
Andersen & Company. Mr. Tellez resigned from the position of Chief Financial
Officer and Treasurer in 1999.
Thomas J. Ferrara, Vice President, Finance and Accounting and Treasurer
Mr. Ferrara (age 42) was elected Vice President of Finance and Accounting
and Treasurer on February 8, 2000. He joined the Company in 1994 as Director of
Pricing and was responsible for all pricing of major contracts and Company
forecasts. Prior to joining Telos, Mr. Ferrara was the Accounting Manager for
Cordant, a privately held government contractor.
Andrea Ayoub, Vice President of Human Resources and Corporate Secretary
Ms. Ayoub (age 35) was appointed Vice President, Human Resources and
Assistant Corporate Secretary in late 1999. She was appointed as Corporate
Secretary in February 2000. Ms. Ayoub joined Telos in July, 1987 working
initially in the Marketing department and moved into the Human Resources
function in 1988. She has held various positions within the Human Resource
Department and has progressively assumed greater management responsibilities
over the years.
Each of the directors and executive officers of the Company is a United
States citizen.
ITEM. 11. EXECUTIVE COMPENSATION
The following table shows for the years ended December 31, 1999, 1998 and
1997, the cash compensation paid by the Company as well as certain other
compensation paid or accrued for those years, to the chief executive officer and
the four other most highly compensated executive officers of the Company in
fiscal year 1999.
SUMMARY COMPENSATION TABLE
Long Term
Name Compensation (2)
and Annual Compensation Awards
Principal Options/ All Other
Position Year Salary Bonus(1) Sars(#) Compensation(5)
--------------------------------------------------------------------------------------------------------
John B. Wood 1999 $348,574 $250,000 2,000,000(3) $13,000(6)
(Executive Chairman, 1998 $334,198 $ -- -- $13,500(6)
Former President, Chief 1997 $299,998 $382,000 -- $36,750(6)
Executive Officer)
Lorenzo Tellez 1999 $260,618 $ -- -- $ 5,000
(Former V.P., Treasurer, 1998 $218,080 $ -- 200,000(4) $ 5,500
Chief Financial Officer) 1997 $195,000 $150,000 150,000(4) $28,750
David Aldrich 1999 $205,119 $250,000 200,000(3) $ --
(President, Chief Executive 1998 $173,850 $ -- 210,000(4) $ 2,333
Officer) 1997 $150,010 $150,000 300,000(4) $ 6,000
Robert J. Marino 1999 $206,003 $100,000 200,000(3) $ 5,000
(Chief Sales and Marketing 1998 $204,734 $ -- 362,000(4) $ 5,500
Officer and Executive V.P.) 1997 $195,000 $ 76,000 -- $10,750
William L.P. Brownley 1999 $170,997 $100,000 200,000(3) $ 4,275
(V.P. General Counsel) 1998 $166,961 $ -- 135,000(4) $ 5,380
1997 $150,010 $ 85,000 -- $ 9,167
(1) 1997 amounts include bonuses relating to the TIS sale completed in
1998.
(2) There are no restricted stock awards or payouts pursuant to long-term
investment plans.
(3) Options granted in 1999 are in Enterworks, Inc., common stock.
(4) Options granted in 1998 and 1997 are in the Company's Class A common
stock.
(5) All other compensation represents Company contributions made on behalf
of the executive officers to the Telos Shared Savings Plan, and in
1998 and 1997 the amounts also include automobile and living
allowances.
(6) Included in these amounts for 1999, 1998 and 1997 are $8,000 in each
of these three years for director's fees paid.
STOCK OPTION GRANTS
The Summary Table of Options/SAR Grants in the Last Fiscal Year is set
forth below for the stock option grants in 1999.
Number of % of Potential Realizable
Securities Total Value At Assumed
Underlying Options/ Exercise Rates of Stock Price
Name and Principal Options/sars Sars or Base Expiration Appreciation for
Position Granted(1) Granted Price Date Option Term
---------------------------------------------------------------------------------------------------------
5% 10%
------ -----
John B. Wood
(Executive Chairman, Former
President, Chief Executive
Officer) 2,000,000 22.7% $0.77 Aug. 2009 $968,498 $2,454,363
Lorenzo Tellez
(Former V.P., Treasurer,
Chief Financial Officer) -- -- -- -- -- --
David Aldrich
(President, Chief
Executive Officer) 200,000 2.3% $0.77 Aug. 2009 $ 96,850 $ 245,436
Robert J. Marino
(Chief Sales and Marketing
Officer and Executive V.P.) 200,000 2.3% $0.77 Aug. 2009 $ 96,950 $ 245,436
William L.P. Brownley
(V.P., General Counsel) 200,000 2.3% $0.77 Aug. 2009 $ 96,950 $ 245,436
(1) Options granted to any of the named executive officers in 1999 were in
the common stock of Enterworks, Inc.
MANAGEMENT STOCK OPTIONS
The following table shows, as to the individuals named in the Summary
Compensation table, the number of shares acquired during such period through
the exercise of options, and the number of shares subject to and value of all
unexercised options held as of December 31, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End(1) at FY-End (2)
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable
-------------------------------------------------------------------------------------------------------
John B. Wood
(Executive Chairman,
former President,
Chief Executive Officer) -- -- 3,739,225/978,766 $1,499,696/$391,506
Lorenzo Tellez
(Former V.P., Treasurer,
Chief Financial Officer)(3) -- -- 352,500/330,000 $ 147,600/$120,000
David Aldrich
(President, Chief
Executive Officer) -- -- 653,500/256,500 $ 303,780/$79,020
Robert J. Marino
(Chief Sales and Marketing
Officer and Executive V.P.) -- -- 689,450/417,750 $ 177,944/$132,966
William L.P. Brownley -- -- 387,250/142,750 $ 138,430/$46,570
(V.P., General Counsel)
1. These aggregate amounts include exercisable options to purchase the
common stock of Enterworks, Inc. for 2,060,000 shares held by Mr.
Wood, 32,500 shares held by Mr. Tellez, 400,000 shares held by Mr.
Aldrich, and 245,000 shares held by Mr. Marino and 265,000 shares held
by Mr. Brownley, respectively.
2. These aggregate values include values for exercisable options to
purchase the common stock of Enterworks, Inc. of $512,800 for Mr.
Wood, $28,600 for Mr. Tellez, $222,000 for Mr. Aldrich, $85,600 for
Mr. Marino and $103,200 for Mr. Brownley, respectively. All remaining
amounts included in these values reflect the value of options to
purchase the Class A Common Stock of the Company. These values are
based upon an estimated fair market value at December 31, 1999 of
$1.35 per share for the Company's Class A Common Stock and $1.00 per
share for the common stock of Enterworks, Inc. These values were
derived from valuations performed by an independent third party for
the trustees of the Telos Shared Savings Plan, a defined contribution
employee savings plan in which substantially all full-time employees
are eligible to participate.
3. As of March 3, 2000, Mr. Tellez chose not to exercise his options and
therefore these options reverted back to their respective plans.
COMPENSATION OF DIRECTORS
During the fiscal year ended December 31, 1999, employee directors were
paid a fee of $2,000 for each Board meeting attended. Outside directors Mr.
Byers and Dr. Bryen were paid an annual fee of $25,000 each, and further
compensated at a rate of $750 for each meeting attended in excess of four
meetings a year. Outside directors Mr. Heurtematte and Mr. Sterrett earned
annual fees of $4,000 each, and were eligible for further compensation at a rate
of $750 for each meeting attended in excess of four meetings a year. The
Chairman of the Board, Dr. Ikle, is paid $25,000 quarterly for his service on
the Board. In addition, Mr. Byers receives $5,000 per annum for his service as
Proxy Chairman. The compensation paid to Mr. Byers and Dr. Bryen is paid
pursuant to a proxy agreement between the Company, the Defense Security Service
and certain of the Company shareholders. During the fiscal year ended December
31, 1999, Dr. Ikle received 15,000 options, Mr. Bryen and Mr. Byers received
5,000 options each, Mr. Sterrett received 2,500 options and John Wood received
2,000,000 options. All options granted to Directors were in Enterworks, Inc.
common stock.
EMPLOYMENT CONTRACTS
As of December 31, 1999, the Company was a party to agreements with certain
of its executive officers. Mr. David S. Aldrich, Vice President and Chief
Operating Officer, Mr. William L. P. Brownley, Vice President and General
Counsel, Mr. Robert J. Marino, Chief Sales and Marketing Officer, and Mr. John
B. Wood, Director, President and Chief Executive Officer, currently have
employment agreements with the Company. The agreements are for one year terms
and provide for a payment of two years' base salary then in effect if
involuntarily terminated or if the agreements are not extended.
Accordingly, Messrs. Aldrich, Brownley, Marino, and Wood would receive
annually, given their present salary levels, $205,000, $171,000, $206,000, and
$350,000, respectively, for a two year period.
In addition to base salary, the executives are eligible for a bonus and for
the grant of stock options under the agreements. The amount of the bonus is
determined by reference to the amount, if any, of earnings before taxes and
goodwill amortization of the Company for the year or at the Board of Directors
and Chief Executive Officer's discretion. Each year the Company renegotiates
these employment contracts as part of the yearly review process. Accordingly, in
2000, the Company expects to review the contracts described above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Title of Class Name and Address of Beneficial Owner Amount and Nature of Percent of
Beneficial Ownership as of Class
March 01, 2000
- --------------------------------------------------------------------------------------------------------------------
Class A Common Stock John R. C. Porter 22,190,718 shares(A) 80.31%
79 Mount Street
London W1Y 5HJ England
Class A Common Stock C3, Inc. 401(k) Plan and Telos 3,658,536 shares 17.22%
Corporation Savings Plan
c/o C3, Inc.
19886 Ashburn Road
Ashburn, VA 20147
Class A Common Stock F & C Enterprise Trust PLC 1,533,405 shares(B) 6.73%
Berkeley Square House, Berkeley Square
London W1X 5PA England
Class B Common Stock F&C Nominees Limited 3,143,358 shares (C) 77.85%
Berkeley Square House, Berkeley Square
London W1X 5PA England
Class B Common Stock North Atlantic Smaller Companies 815,700 shares 20.20%
Investment Trust PLC
10 Park Place
London SW1A 1LP England
Class A Common Stock David S. Aldrich 321,892 shares (D) 1.49%
Class A Common Stock William L. P. Brownley 139,342 shares (D) 0.65%
Class A Common Stock Robert J. Marino 603,535 shares (D) 2.78%
Class A Common Stock Lorenzo Tellez 525,268 shares (D) 2.43%
Class A Common Stock John B. Wood 1,724,391 shares (D) 7.52%
Class A Common Stock All Officers and Directors as a Group 3,602,156 shares (E) 14.76%
(10 persons)
12% Cumulative Exchangeable John C. Boland 76,500 shares (F) 2.40%
Redeemable Preferred Stock 28 Allegheny Avenue, Ste 505
Towson, MD 21204
12% Cumulative Exchangeable Value Partners, Ltd. 714,317 shares (G) 22.42%
Redeemable Preferred Stock 2200 Ross Avenue, Suite 4660
Dallas, TX 75201
Fisher Ewing Partners
2200 Ross Avenue, Suite 4660
Dallas, TX 75201
12% Cumulative Exchangeable Wynnefield Partners Small Cap Value, L.P. 228,500 shares (H) 7.17%
Redeemable Preferred Stock One Penn Plaza, Suite 4720
New York, NY 10119
Channel Partnership II, L.P.
One Penn Plaza, Suite 4720
New York, NY 10119
Wynnefield SmallCap Value
Offshore Fund, Ltd.
One Penn Plaza, Suite 4720
New York, NY 10119
12% Cumulative Exchangeable Magten Asset Management Corp. 197,105 shares 6.19%
Redeemable Preferred Stock 35 East 21st Street
New York, NY 10010
(A) Mr. Porter's holdings include 6,388,916 shares of Class A Common Stock
purchasable upon exercise of a warrant.
(B) The common stock holdings of F&C Enterprise Trust PLC include
1,533,405 shares of Class A Common Stock purchasable upon exercise of
a warrant.
(C) F&C Nominees Limited responded to the Company's request for the names
and addresses of the beneficial owners of the Company's Class B Common
Stock held by F&C Nominees Limited by providing the following
information: FACET - 1,681,959 shares, FACET L.P. - 420,490 shares,
Hare & Co. (Mills) - 371,021 shares, and Drayton - 669,888 shares. F&C
Nominees Limited did not provide to the Company the addresses of these
beneficial owners.
(D) The common stock holdings of Messrs. Aldrich, Brownley, Marino, Tellez
and Wood include -0-; 10,994; 20,283; 22,828 and 36,774 shares of the
Company's Class A Common Stock, respectively, held for their
beneficial interest by the C3, Inc. 401(k) Plan and Telos Corporation
Savings Plan. Messrs. Aldrich, Brownley, Marino, Tellez and Wood hold
options to acquire 313,500; 122,250; 461,200; 350,000; and 1,679,225
shares of the Company's Class A Common Stock, respectively, in
addition to their current common stock holdings. These shares are
purchasable upon exercise of the options and are exercisable within 60
days of March 1, 2000.
(E) The common stock holdings of the Company's officers and directors as a
group include 136,257 shares of the Company's Class A Common Stock
held for their beneficial interest by the C3, Inc. 401(k) Plan and
Telos Corporation Savings Plan. Under the Company's stock option plan
and certain stock option agreements, all officers and directors as a
group hold options to acquire 3,168,525 shares of Class A Common Stock
exercisable within 60 days of March 1, 2000.
(F) John C. Boland holds 30,000 shares of the 12% cumulative exchangeable
redeemable preferred stock. In addition, he is the manager and owner
of the general partner of Remnant Partners LP which beneficially owns
46,500 shares of the 12% cumulative exchangeable redeemable preferred
stock of the Company.
(G) Value Partners Ltd. ("VP") and Fisher Ewing Partners ("FEP") have
filed jointly a Schedule 13D under which they disclosed that they may
act as a "group" within the meaning of Section 13(d) of the Securities
Exchange Act. Each of the reporting persons disclosed that it may be
deemed to beneficially own the aggregate of 714,317 shares of the
Exchangeable Preferred Stock held of record by the reporting persons
collectively. According to an Amendment to the Schedule 13D filed on
May 10, 1996, each of FEP and Timothy G. Ewing and Richard W. Fisher
may be deemed to have the sole power to vote and to dispose of the
shares of the Exchangeable Preferred Stock held of record by the
reporting persons collectively.
(H) Wynnefield Partners SmallCap Value, L.P., ("WPSCV"), Channel
Partnership II, L.P. ("CP"), and Wynnefield SmallCap Value Offshore
Fund, Ltd. ("WSCVOF") have jointly filed a Schedule 13D under which
they disclosed they may act as a "group" within the meaning of Section
13(d) of the Securities Exchange Act. Each of the reporting persons
disclosed that it may be deemed to beneficially own the aggregate of
228,500 shares of the Exchangeable Preferred Stock held of record by
the reporting persons collectively. According to the Schedule 13D,
Nelson Obus and Joshua Landes, by virtue of their status as general
partners of WPSCV, Mr. Obus as general partner of CP and Messrs. Obus
and Landes, as officers of WSCVOF's investment manager, have the power
to vote or to direct the vote and the power to dispose and to direct
the disposition of the shares of Exchangeable Preferred Stock owned by
WPSCV, CP and WSCVOF, respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
between the Company and certain of its current and former officers and directors
is set forth below.
Mr. Joseph P. Beninati served as Chairman of the Board for the majority of
1994 before resigning January 5, 1995. The Company paid Mr. Beninati $165,000
annually subject to a three-year employment agreement that began in 1995 and
terminated January 8, 1998. Mr. Beninati resigned from the Board in 1996 and
received his final payment in 1998.
Mr. John R. Porter, the owner of a majority of the Company's Class A Common
Stock, has a consulting agreement with the Company whereby he is compensated for
consulting services provided to the Company in the areas of marketing, product
development, strategic planning and finance as requested by the Company. Mr.
Porter was paid $200,000 by the Company in 1999, 1998 and 1997 pursuant to this
agreement, which amounts were determined by negotiation between the Company and
Mr. Porter.
Mr. Norman Byers, a director of the Company, had a consulting agreement
with the Company to help the Company expand its business operations into the
international marketplace. Under this agreement, Mr. Byers received $10,500 a
month for his services. Mr. Byers was compensated $125,000, $130,000 and
$128,000 for 1998, 1997 and 1996, respectively. This consulting agreement was
terminated in the fourth quarter of 1998.
Mr. Mark Hester, former Executive Vice President and former Chief Operating
Officer of the Company, has a consulting agreement with the Company to provide
strategic advice concerning the Company's hardware services division. Under this
agreement, Mr. Hester received $206,000 for his services during 1999 and 2000,
and was eligible for a bonus under certain circumstances, at the Company's
discretion. Under this agreement Mr. Hester will receive a bonus of $135,000
payable in installments during 2000 and 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
All financial statements of the registrant as set forth under Item
8 of this report on Form 10-K.
(a) 2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is included in the consolidated financial
statements or notes thereto.
(a) 3. Exhibits:
Exhibits marked with (1*) are incorporated by reference to the
Company's Registration Statement No. 2-84171 filed June 2, 1983. Exhibits marked
with (3*) are incorporated by reference to the Company's Form 10-K report for
the fiscal year ended March 31, 1987. Exhibits marked with (4*) are incorporated
by reference to the Company's Form 10-K report for the fiscal year ended March
31, 1989. The registrant will furnish to stockholders a copy of other exhibits
upon payment of $.20 per page to cover the expense of furnishing such copies.
Requests should be directed to the attention of Investor Relations at Telos
Corporation, 19886 Ashburn Road, Ashburn, Virginia 20147-2358.
2.6 Stock Purchase Agreement dated as of January 14, 1992, by and among C3,
Inc., Telos Corporation and Contel Federal Systems, Inc. (Incorporated by
reference to C3, Inc. Form 8-K filed January 29, 1992)
3.1 (1*) Articles of Amendment and Restatement of C3, Inc.
3.2 (1*) Articles of Amendment of C3, Inc. dated August 31, 1981.
3.3 (3*) Articles supplementary of C3, Inc. dated May 31, 1984.
3.4 (4*) Articles of Amendment of C3, Inc. dated August 18, 1988.
3.5 Articles of Amendment and Restatement Supplementary to the Articles of
Incorporation dated August 3, 1990. (Incorporated by reference to C3, Inc.
10-Q for the quarter ended June 30, 1990)
3.6 Restated Bylaws of C3, Inc. (Incorporated by reference to C3, Inc. 10-Q for
the quarter ended December 31, 1990)
3.7 Articles of Amendment of C3, Inc. dated April 13, 1995
4.1 Form of Indenture between the Registrant and Bankers Trust Company, as
Trustee, relating to the 12% Junior Subordinated Debentures Due 2009.
(Incorporated herein by reference to C3's Registration Statement on Form
S-4 filed October 20, 1989)
4.3 Form of the terms of the 12% Cumulative Exchangeable Redeemable Preferred
Stock of the Registrant. (Incorporated herein by reference to C3's
Registration Statement on Form S-4 filed October 20, 1989)
4.4 Shareholders Agreement dated as of August 3, 1990 by and among C3, Inc.;
Union de Banques Suisses (Luxembourg), S.A.; C3 Investors, L.P.; Anthony
Craig, together with the investors; the Class A holders; MIM Limited; Knoll
and Associates, Inc.; Murray Enterprises PLC; Electra Development Holdings;
and Hartley Limited. (Incorporated by reference to C3, Inc. 10-Q for the
quarter ended June 30, 1990)
4.5 Articles of Amendment and Restatement of the Company, filed with the
Secretary of State of the State of Maryland on January 14, 1992.
(Incorporated by reference to C3, Inc. Form 8-K filed January 29, 1992)
10.20Revolving and Reducing Senior Facility Credit Agreement dated as of
January 14, 1992, among C3, Inc., Telos Corporation and NationsBank, N.A.
(Incorporated by reference to C3, Inc. Form 8-K filed January 29, 1992)
10.31September 27, 1993 Settlement Agreement among John R.C. Porter, Toxford
Corporation, Cantrade Nominees Ltd., Cantrade Trust Company (Cayman) Ltd.,
Cantrade Trustee, AG, Fred Knoll, Cottonwood Holdings, C3 Investors L.P.,
C3, Inc., Telos Corporation, Joseph P. Beninati, John B. Wood and Beninati
& Wood, Inc. (Incorporated by reference to C3, Inc. Form 8-K filed October
18, 1993)
10.32September 27, 1993 Stock Purchase and Sale Agreement between Mr. John R.C.
Porter and C3 Investors, L.P. (Incorporated by reference to C3, Inc. Form
8-K filed October 18, 1993)
10.33September 27, 1993 Stock Purchase and Sale Agreement between Mr. John R.C.
Porter and Cottonwood Holdings, Inc.(Incorporated by reference to C3,
Inc.Form 8-K filed October 18, 1993)
10.34September 27, 1993 Note Interest Purchase and Sale Agreement among Mr.John
R.C.Porter, Cottonwood and C3, Inc. (Incorporated by reference to C3, Inc.
Form 8-K filed October 18, 1993)
10.35October 8, 1993 Promissory Note in the amount of $8,438,000 issued by Mr.
John R.C. Porter in favor of C3 Investors, L.P. (Incorporated by reference
to C3, Inc. Form 8-K filed October 18, 1993)
10.36October 8, 1993 Promissory Note in the amount of $1,562,000 issued by Mr.
John R. C. Porter in favor of Cottonwood Holdings, Inc. (Incorporated by
reference to C3, Inc.Form 8-K filed October 18, 1993)
10.37September 27, 1993 Collateral Agency, Security and Pledge Agreement among
Mr. John R.C. Porter, Mr. Fred Knoll, Cottonwood Holdings, C3 Investors,
L.P., C3, Inc., Telos Corporation, Toxford Corporation, Cantrade Nominees
Limited, Mr.Robert M. Ercole and Mr. Frank S. Jones, Jr. (Incorporated by
reference to C3, Inc. Form 8-K filed October 18, 1993)
10.38September 27, 1993 Standstill Agreement among Mr. John R.C. Porter, Mr.
Fred Knoll, Mr. Alfredo Frohlich and C3, Inc. (Incorporated by reference to
C3, Inc. Form 8-K filed October 18, 1993)
10.39September 27, 1993 Mutual Release among Mr. John R.C. Porter, Mr. Fred
Knoll, Cottonwood Holdings, C3 Investors, L.P., C3, Inc., Telos
Corporation, Mr. Joseph P. Beninati, Mr. John B. Wood, and Beninati & Wood,
Inc. (Incorporated by reference to C3, Inc. Form 8-K filed October 18,
1993)
10.40September 27, 1993 Consulting Agreement among Mr. Fred Knoll, C3, Inc. and
Telos Corporation. (Incorporated by reference to C3, Inc. Form 8-K filed
October 18, 1993)
10.43Amendment to Revolving and Reducing Senior Credit Facility dated as of
December 31, 1993 among C3, Inc., Telos Corporation and NationsBank, N.A.
10.44Amendment to Revolving and Reducing Senior Credit Facility dated as of
April 11, 1994 among C3, Inc., Telos Corporation and NationsBank, N.A.
10.45Amendment to Revolving and Reducing Senior Credit Facility dated as of
June 8, 1994 among C3, Inc., Telos Corporation and NationsBank, N.A.
10.46Amendment to Revolving and Reducing Senior Credit Facility dated as of
October 7, 1994 among C3,Inc., Telos Corporation and NationsBank, N.A.
10.47October 7, 1994 Letter Agreement among C3, Inc., Toxford Corporation, and
NationsBank, N.A. regarding cash collateral held on behalf of the Company.
10.48October 25, 1994 General Release and Settlement memorandum among Sapiens
International Corporation N.V., Sapiens International Corporation
B.V.,Sapiens U.S.A., Inc., C3, Inc. and Telos Corporation.
10.49Amendment to Revolving and Reducing Senior Credit Facility dated as of
January 5,1995 among C3, Inc., Telos Corporation and NationsBank, N.A.
10.50Amendment to Revolving and Reducing Senior Credit Facility dated as of
January 12,1995 among C3, Inc.,Telos Corporation and NationsBank, N.A.
10.51Waiver and Amendment to Revolving and Reducing Senior Credit Facility
dated as of April 17, 1995 among C3, Inc., Telos Corporation and
NationsBank, N.A.
10.58Series B Senior Subordinated Secured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and Drayton English
and International Investment Trust
10.59Series B Senior Subordinated Secured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and J. O. Hambro
Investment Management, Ltd.
10.60Series B Senior Subordinated Secured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and North Atlantic
Smaller Companies Investment Trust, PLC
10.61Series B Senior Subordinated Secured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and Mr. John R.C.
Porter
10.62Series B Senior Subordinated Secured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and Sir Leslie Porter
10.63Series B Senior Subordinated Secured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and Second
Consolidated Trust, PLC
10.64Series B Senior Subordinated Secured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and Toxford Corp.
10.65Series C Senior Subordinated Unsecured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and Drayton English
and International Investment Trust
10.66Series C Senior Subordinated Unsecured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and J.O. Hambro
Investment Management, Ltd.
10.67Series C Senior Subordinated Unsecured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and North Atlantic
Smaller Companies Investment Trust, PLC
10.68Series C Senior Subordinated Unsecured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and Mr. John R.C.
Porter
10.69Series C Senior Subordinated Unsecured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and Sir Leslie Porter
10.70Series C Senior Subordinated Unsecured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and Second
Consolidated Trust, PLC
10.71Series C Senior Subordinated Unsecured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and Toxford Corp.
10.72Amendment to Revolving and Reducing Senior Credit Facility dated as of
August 4, 1995 Telos Corporation (Maryland), Telos Corporation (California)
and NationsBank N.A.
10.73Amendment to Revolving and Reducing Senior Credit Facility dated as of
October 13, 1995 Telos Corporation (Maryland), Telos Corporation
(California) and NationsBank N.A.
10.74 1996 Stock Option Plan
10.76Sixteenth Amendment to Credit Facility and Tenth Amended and Restated
Promissory Note
10.77 Enterworks, Inc. 1996 Stock Option Plan
10.78 Form of Series A Senior Subordinated Unsecured Note
10.79 Form of Enterworks, Inc., inc. Capital Stock Purchase Series A Warrant
10.80 Asset Purchase Agreement
10.81 Amendment No. 1 to Asset Purchase Agreement
10.82Amended and Restated Credit Agreement between Telos Corporation, a
Maryland corporation; Telos Corporation, a California corporation; and
NationsBank, N.A. dated as of July 1, 1997
10.83 Asset Purchase Agreement
10.84 Interim Agreement
10.85Share Purchase Agreement between Telos Corporation, a Maryland
corporation, formerly named and known as C3, Inc. and Union Bank of
Switzerland, dated May 7, 1998
10.86Series D Senior Subordinated Unsecured Note due October 1, 2000 as of
November 20, 1998 between Telos Corporation (Maryland) and Foreign and
Colonial Enterprise Trust PLC
10.87Series D Senior Subordinated Unsecured Note due October 1, 2000 as of
November 20, 1998 between Telos Corporation (Maryland) and Foreign and
Colonial Enterprise Trust LP
10.88Common Stock Purchase Series D Warrant between Telos Corporation
(Maryland) and Foreign and Colonial Enterprise Trust PLC
10.89Common Stock Purchase Series D Warrant between Telos Corporation (Maryland
and Foreign and Colonial Enterprise Trust LP
10.90 Form of Stock Purchase Agreement
10.91Asset Purchase Agreement, dated as of September 29, 1999 between Telos
Corporation (Maryland), Telos Corporation (California), Telos Field
Engineering, Inc. and TFE Technology Holdings, Inc.
10.92 Letter to Bank of America concerning Enterworks private placement
10.93 Form of Enterworks Subdebt conversion letter
10.94 Form of Telos Subdebt conversion letter
10.95 Listing of Subdebt conversion parties
10.96 Transaction agreement between Telos and Enterworks
21 Schedule of Subsidiaries.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Telos Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELOS CORPORATION
BY: DAVID S. ALDRICH
--------------------
President and
Chief Executive Officer
DATE: MARCH 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of Telos Corporation and in
the capacities and on the date indicated.
SIGNATURE TITLE DATE
- ----------------- ------------------ --------------
/S/ John B. Wood Executive Chairman of March 30, 2000
- ----------------- the Board of Directors
John B. Wood
/S/ Fred Charles Ikle Chairman of the March 30, 2000
- ---------------------- Board of Directors
Fred Charles Ikle
/S/ Stephen D. Bryen Director March 30, 2000
- ----------------------
Stephen D. Bryen
/S/ Norman P. Byers Director March 30, 2000
- ----------------------
Norman P. Byers
/S/ Malcolm M.B. Sterrett
- -------------------------
Malcolm M.B. Sterrett Director March 30, 2000
Director March 30, 2000
- ----------------------
John C. Boland
/S/ David S. Aldrich President, Chief Executive March 30, 2000
- -------------------- Officer (Principal Executive Officer)
David S. Aldrich
/S/ Thomas J. Ferrara Vice President, Finance & Acct. March 30, 2000
- ---------------------- (Principal Financial Officer
Thomas J. Ferrara & Principal Accounting Officer)
Telos Corporation
Exhibit Index
Exhibit
Number Exibit Name Page
- ------ ----------- ----
10.91 Asset Purchase Agreement, dated
September 29, 1999 between Telos
Corporation (Maryland), Telos
Corporation (California), Telos
Field Engineering, Inc. and TFE
Technology Holdings, Inc.
10.92 Letter to Bank of America concerning
Enterworks private placement
10.93 Form of Enterworks Subdebt conversion
letter
10.94 Form of Telos Subdebt conversion
letter
10.95 Listing of Subdebt conversion parties
10.95 Transaction agreement between Telos
and Enterworks