Back to GetFilings.com
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, 2000
[ ]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 1, 2001, the registrant had 21,171,202 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): 59
------
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 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 rapid 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 July 28, 2000, the Company completed the formation of a joint venture,
TelosOK, wherein the Company contributed its Ft. Sill based operation to a newly
created entity in return for 50% ownership in TelosOK and consideration of
approximately $9.0 million (See Note 2 to the consolidated financial
statements).
Reportable Operating Segments
During 2000, the Company provided its business solutions through three
operating segments: Systems and Support Services, the Products Group, and its
Xacta subsidiary.
Systems and Support Services
The Company's Systems and Support Services Group provides software
development and support services including technology insertion, system redesign
and software re-engineering. Key customers of this group include: the U.S. Army
at Ft. Monmouth in Red Bank, New Jersey; and the U.S. Army at Ft. Sill in
Lawton, Oklahoma.
Over the past three years, Telos has been a significant provider of
software engineering services to the U.S. Army. At Ft. Monmouth for
approximately 17 years, the Company has supported approximately 80 tactical land
and satellite communications systems for the Communications-Electronics
Command's Research, Development, and Engineering Center. During 2000, the
Company's Ft. Monmouth operation achieved a software development quality
assurance rating of Level 3 based on the Software Engineering Institute's (SEI)
Capability Maturity Model for Software (CMM).
At Ft. Sill for approximately 25 years, the Company has developed 93 fire
support systems and 177 major systems upgrades, totaling more than 11 million
lines of code using nine different computer-programming languages for CECOM SEC
Fire Support Software Engineering. During 2000, the Company's Ft. Sill operation
received the 2000 James S. Cogswell award for outstanding participation in the
Department of Defense National Industrial Security Program for the second time
in three years. Also, during 2000, the Company announced the formation of a
joint venture, TelosOK, wherein the Company contributed its Ft. Sill operation
to a newly created entity in return for 50% ownership in TelosOK and
consideration of approximately $9 million (See Note 2 to the consolidated
financial statements).
For 2000, the Systems and Support Services Group generated revenue of $48.4
million, or 33.3%, of the Company's reported consolidated revenue. The Ft. Sill
operation was included in the results of this Group until its deconsolidation
from the Company's results in July 2000 (see Note 2 to the Consolidated
Financial Statements). The TFE and TIS divisions were part of the Systems and
Support Services Group prior to their respective sales in 1999 and 1998 (see
Note 4 to the Consolidated Financial Statements).
Products Group
The Company's Products Group delivers solutions that combine information
technology products and services to solve customer problems. These solutions
consist of a combination of commercial-off-the-shelf (COTS) products from major
original equipment manufacturers (OEM's), Telos proprietary products, Telos and
subcontractor services and Telos proprietary practices. The Products Group
consists of a number of functional areas including procurement, manufacturing,
integration and testing, quality assurance, installation, hotline support and
warranty support. Key customers of this group are the U.S. Army, U.S. Navy, U.S.
Air Force, Federal Courts, FAA and Defense Agencies. Significant government
procurement vehicles for customers of the Products Group include: Infrastructure
Solutions - 1 (government-wide); GSA schedule (government-wide); Data
Communications Network Equipment/Software (US Courts); and Treasury Distributed
Processing Infrastructure (Treasury).
In addition to 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 2000, the Products Group had revenues of $83.7 million, or 57.6%, of
the Company's reported consolidated revenues.
Xacta Corporation
Formerly the e-solutions division of Telos Corporation, Xacta was
established in March 2000, and is a wholly owned subsidiary of Telos. Xacta
develops products that help organizations manage their information technology
risk and optimize critical business processes. The Company's first product,
Xacta Web C&A, was released in August 2000, and remains the only commercially
available software application to automate the federally mandated security
certification and accreditation process for government IT systems.
The software, which is sold on a subscription basis, simplifies
certification and accreditation and reduces its costs by guiding users through a
step-by-step process to determine vulnerability levels and assess network and
system configuration compliance with industry best practices and national and
international security regulations, policies, and standards. More importantly,
because Xacta Web C&A is automated and database-driven, it enforces a
consistent, repeatable C&A process and enables organizations to identify and
address vulnerabilities across multiple systems. In fact, Xacta Web C&A brings
such unique capabilities to the security/information assurance arena, that Xacta
has two patents pending for the technology.
In addition to Xacta Web C&A, Xacta also offers enterprise security
consulting services on a time-and-materials or fixed-price basis. In 2000, Xacta
products and services were sold through the Company's Products group, which
holds non-exclusive distribution rights for Xacta offerings within the federal
government. For 2000, revenues totaled $13.2 million or 9.1% of the Company's
consolidated revenue.
Revenue by Major Market and Significant Customers
Revenue by major market for the Company are as follows:
Percentage of total consolidated revenue for
---------------------------------------------
2000 1999 1998
---- ---- ----
Federal government 96.2% 92.8% 92.9%
Commercial 3.8 5.9 5.1
State and local governments -- 1.3 2.0
---- --- ----
Total 100.0% 100.0% 100.0%
====== ====== ======
Total consolidated revenue derived from the federal government for 2000
includes 59.9% of revenue from contracts with the United States Army, 6.3% of
revenue from contracts with the United States Navy, 16.2% of revenue with other
Department of Defense customers, and 10.4% 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 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, and system and network
integration will enable it to compete favorably in the information and network
technology market.
Employees
The Company employed 648 persons as of December 31, 2000, down from 833
people at December 31, 1999. The decline was principally due to the
deconsolidation of the Ft. Sill operation. 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, 247 provide Systems and Support Services,
162 provide Systems Integration (Products) Services, and 112 work for the
Company's Xacta subsidiary. An additional 127 employees provide corporate and
business services functions.
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, 2000 and 1999, the Company had total backlog from existing
contracts of approximately $124.4 million and $242.2 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. The decline in total
backlog is primarily attributable to the deconsolidation of the Company's Ft.
Sill contract in July 2000 (see Note 2 to the Consolidated Financial
Statements).
Approximately $43 million and $45 million of the total was funded backlog
at December 31, 2000 and 1999, 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 growth that the Company continues to aggressively
pursue.
Overview of 2000
During 2000, the Company continued in its efforts to transition to a higher
growth, more profitable mix of commerce solutions and away from lower growth and
less profitable business areas. In the System and Solutions Group, these efforts
resulted in the creation of TelosOK, a public-private partnership combining the
resources of the Company's Ft. Sill operation and a group of local partners to
further Telos' mission in the U.S. Army Fire Support, specifically, and across
the southwest United States in general. In addition, the Systems and Solutions
Group has created opportunities for Xacta in its customer base, CECOM, to
provide high margin, high value-add information assurance and security services
and solutions.
In the Products Group, efforts continue regarding expanding contract
offerings across the Company's customer base and including high margin, high
value-add products and services on various contract vehicles. These products and
services include wireless LAN capability in support of flight line maintenance
operations, certification and accreditation of network systems for information
assurance, advanced messaging for secure transmission of information and
information and process integration.
Xacta is the Company's newly formed subsidiary, focusing on information
assurance and information security products and services offerings. Xacta's
traditional services offerings were offered primarily on a time and material
basis in the past. During 2000, Xacta began offering firm fixed price
alternatives to its traditional time and material offerings, capitalizing on
efficiencies and methodologies established as a result of experience. In
addition, Xacta launched its Xacta Web C&A product in 2000. Xacta Web C&A is the
only commercially available software application to automate the federally
mandated security certification and accreditation process for government IT
systems.
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.
The Company subleases 35,214 rentable square feet of space at its Ashburn,
Virginia facility to its affiliate, Enterworks, Inc. for its corporate
headquarters and operating segments. This sublease will expire on March 31, 2002
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 9 separate facilities located in 4 states, the
District of Columbia and Europe under various leases, which expire on various
dates through March of 2006.
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 2000, 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, 2001, there were 86 holders of the Company's Class A Common Stock
and 4 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,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(amounts in thousands)
Sales (1) $145,310 $171,364 $207,086 $253,787 $188,895
(Loss) income from
continuing operations (1,794) (9,979) (9,171) 1,412 (9,816)
Discontinued operations:
Income from discontinued
Operations -- -- -- -- 500
Gain on sale of
Consulting Services -- -- -- -- 11,524
(Loss)income before extraordinary items (1,794) (9,979) (9,171) 1,412 2,208
Extraordinary items(2) -- 8,015 -- -- --
Net (loss) income (1,794) (1,964) (9,171) 1,412 2,208
FINANCIAL CONDITION
As of December 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(amounts in thousands)
Total assets (1) $ 77,090 $ 56,886 $ 95,251 $109,718 $110,064
Long-term debt (3) 32,846 25,045 54,651 56,875 32,857
Capital lease obligations,long-term (4) 11,030 11,362 11,710 12,085 12,537
Senior redeemable preferred stock (5) 6,480 6,054 5,631 5,207 4,828
Class B redeemable preferred stock -- -- -- 12,035 11,087
Redeemable preferred stock (5) 42,352 36,975 31,729 29,951 24,230
(1) See Notes 2,3 and 4 to the Consolidated Financial Statements in Item 8
regarding the contribution of Ft. Sill assets, the deconsolidation of
Enterworks and the sales of TFE and TIS.
(2) See Note 3 to the Consolidated Financial Statements in Item 8
regarding the extraordinary item relating to the concurrent
transactions of the Enterworks private placement.
(3) See Note 6 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.
(4) See Note 10 to the Consolidated Financial Statements in Item 8
regarding the capital lease obligations of the Company.
(5) See Note 7 to the Consolidated Financial Statements in Item 8
regarding redeemable preferred stock of the Company.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
During 2000, the Company continued in its efforts to transition to a higher
growth, more profitable mix of commerce solutions and away from lower growth and
less profitable business areas. In the System and Support Services Group, these
efforts resulted in the creation of TelosOK, a joint venture combining the
resources of the Company's Ft. Sill operation and a group of local partners to
further Telos' mission in the U.S. Army Fire Support, specifically, and across
the southwest United States in general. In addition, the Systems and Support
Services Group has created opportunities for Xacta in its customer base, CECOM,
for Xacta to provide high margin, high value-add information assurance and
security services and solutions.
In the Products Group, efforts continue regarding expanding contract
offerings across the Company's customer base and including high margin, high
value-add products and services on various contract vehicles. These products and
services include wireless LAN capability in support of flight line maintenance
operations, certification and accreditation of network systems for information
assurance, advanced messaging for secure transmission of information and
information and process integration.
Xacta is the Company's newly formed subsidiary, focusing on information
assurance and information security products and services offerings. Xacta's
traditional services offerings were offered primarily on a time and materials
basis in the past. During 2000, Xacta began offering firm fixed price
alternatives to its traditional time and material offerings, capitalizing on
efficiencies and methodologies established as a result of experience. In
addition, Xacta launched its Xacta Web C&A product in 2000. Xacta Web C&A is the
only commercially available software application to automate the federally
mandated security certification and accreditation process for government IT
systems.
During 2000, the Company experienced decreases in revenue and
profitability. Revenue decreased $26.1 million, or 15.2%, as compared to 1999.
Approximately $24.3 million of this decrease was attributable to the sale of TFE
in 1999. Approximately $11.5 million of this decline is due to the effects of
the 2000 deconsolidation of Ft. Sill operations, which presents the
pre-transaction results from operations of Ft. Sill in a single line item
entitled "Equity in Net Earnings of TelosOK". Operating income for 2000 was $1.2
million, as compared to an operating income of $2.2 million in 1999. Operating
profitability declined principally as a result of the sale of TFE in 1999 the
impact of which was approximately $3.9 million, and the deconsolidation of Ft.
Sill of approximately $1.4 million, as well as employee costs related to certain
severance agreements resulting in a $1.2 million charge to earnings in fiscal
2000.
During 1999, the Company's revenue and profitability decreased as compared
to 1998. Revenue decreased $35.7 million, or 17.2%, primarily due to the
expiration of the Products Segment's SMCII Contract in April 1999 and the timing
of the subsequent startup period on IS-1. Operating profit for 1999 was $2.2
million, as compared to an operating loss of $7.3 million in 1998. The 1999
operating profit excludes the results from operations of Enterworks, due to its
deconsolidation in December 1999. 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.
Revenue by Contract Type
Approximately 96.2% of the Company's total revenues in 2000 were
attributable to contracts with 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 certification and accreditation services offerings. The
Company's time and material contracts generally allow the pass-through of
allowable costs plus a profit margin. For 2000, revenue by contract type was as
follows: time and materials, 40.0%; firm fixed price, 59.2%; fixed monthly rate,
0.1%; and other, 0.7%. 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,
2000 1999 1998
---- ---- ----
(dollar amounts in thousands)
Sales $145,310 100.0% $171,364 100.0% $207,086 100.0%
Cost of sales 124,028 85.4 151,216 88.2 182,915 88.3
Selling, general and administrative expenses 19,796 13.6 17,459 10.2 30,842 14.9
Goodwill amortization 312 0.2 489 0.3 589 0.3
------ --- ------- ----- ------- ----
Operating income (loss) 1,174 0.8 2,200 1.3 (7,260) (3.5)
Interest expense (4,777) (3.3) (6,065) (3.5) (6,555) (3.1)
Gain on sale of assets -- -- 4,731 2.8 5,683 2.7
Equity in net losses of Enterworks -- -- (18,765) (11.0) -- --
Equity in earnings of TelosOK 2,328 1.6 -- -- -- --
Other income 98 0.1 67 -- 64 --
----- ---- ----- --- ---- ----
Loss before taxes (1,177) (0.8) (17,832) (10.4) (8,068) (3.9)
Income tax (provision)benefit (617) (0.4) 7,853 4.6 (1,103) (0.5)
------- ----- ------ --- ------- -----
Loss before extraordinary item (1,794) (1.2) (9,979) (5.8) (9,171) (4.4)
Extraordinary Item -- -- 8,015 4.7 -- --
----- ----- ------- --- ------ ---
Net loss $(1,794) (1.2)% $ (1,964) (1.1)% $ (9,171) (4.4)%
======= ===== ========= ====== ======= ======
Financial Data by Operating Segment
The Company has three reportable operating segments: Systems and Support
Services, Products, and Xacta. Enterworks, Inc. was deconsolidated as of
December 30, 1999 and therefore will not be reflected as a segment in the year
2000 and 1999.
Sales, gross profit and gross margin by market segment for the periods
designated below are as follows:
Year Ended December 31,
2000 1999 1998
---------------------------------------------------
(dollar amounts in thousands)
Revenue:
Systems and Support Services $ 48,429 $ 77,701 $ 92,315
Products 83,688 85,726 103,086
Xacta 13,193 7,937 4,612
Enterworks -- -- 7,073
------ ------- -------
Total $ 145,310 $ 171,364 $ 207,086
========= ========= =========
Gross Profit:
Systems and Support Services $ 5,278 $ 11,768 $ 12,384
Products 13,313 6,440 8,909
Xacta 2,691 1,940 1,336
Enterworks -- -- 1,542
------ ------- -------
Total $ 21,282 $ 20,148 $ 24,171
======= ========= =======
Gross Margin:
Systems and Support Services 10.9% 15.1% 13.4%
Products 15.9% 7.5% 8.6%
Xacta 20.4% 24.4% 29.0%
Enterworks -- -- 21.8%
Total 14.6% 11.8% 11.7%
Results of Operations
Years ended December 31, 2000 and 1999
Sales decreased $26.1 million or 15.2% to $145.3 million for the year ended
December 31, 2000, from $171.4 million for the comparable 1999 period. The
decrease includes a $2.0 million decrease in Products' sales and a $29.3 million
decrease in Systems and Support Services sales, partially offset by an increase
of $5.3 million in Xacta revenue. This decrease in revenue is primarily due to
the loss of revenue from the TFE division, which was sold in September 1999. The
TFE division generated sales of $24.3 million for the Company prior to being
sold. The decline in revenue was also partially attributable to the
deconsolidation of Ft. Sill revenue in 2000. These decreases were slightly
offset by increased sales under the Company's information security product line
of $4.7 million.
Cost of sales was 85.4% of sales for the year ended December 31, 2000, as
compared to 88.2% for the same period in 1999. The decrease in cost of sales as
a percentage of sales is primarily attributable to increased profits realized
under certain Products contracts including but not limited to IS-1, ATWCS and
Rapids. The decline in cost of sales as a percentage of sales is also due to
increased profits from the Company's information security product line in its
Xacta Group.
Gross profit increased approximately $1.1 million to $21.3 million in 2000
from $20.2 million in 1999. Gross margin was 14.6% for 2000 as compared to 11.8%
for the same period of 1999. The increase in gross margin was attributable to
the cost of sales decreases explained above.
Selling, general, and administrative expense ("SG&A") increased by
approximately $2.3 million or 13.4%, to $19.8 million for the year ended
December 31, 2000 from $17.5 million in the comparable period of 1999. This
increase is due primarily to the Company's increased investment in its Xacta
group, as well as increased expenses related to two severance agreements. SG&A
as a percentage of revenues increased to 13.6% for the year ended December 31,
2000 from 10.2% in the comparable 1999 period.
Goodwill amortization expense decreased for the comparative twelve month
period of 2000 from 1999. This reduction is due to a decrease in the goodwill
balance from write-offs associated with the sale of TFE in the third quarter
1999 and the asset transfer from the Ft. Sill transaction in the third quarter
of 2000.
The operating income of the Company decreased by $1.0 million to $1.2
million in the year ended December 31, 2000 from $2.2 million in the comparable
1999 period. The decrease in operating profit is mostly attributable to the
increase in S,G & A discussed above.
At the end of the third quarter 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, an affiliate of Carr &
Company, for $10 million. As a result of this sale, The Company recorded a gain
of $4.7 million in its consolidated statement of operations for the year ended
December 31, 1999.
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 3 to the consolidated financial statements). The equity in net
losses in Enterworks for 1999 was $18.8 million. In 2000, Enterworks continued
to recognize losses, accordingly no adjustments to earnings of the Company have
been made in fiscal 2000 related to the Enterworks investment because the
balance of the Company's investment in Enterworks is $0.
In order to present the statement of operations in accordance with APB 18,
the revenues and cost of sales for the Ft. Sill and DSTATS businesses
contributed to Telos OK, LLC were presented in one line item "Equity in net
earnings of Telos OK" due to the joint venture agreement signed July 28, 2000
(See Note 2). The equity in net earnings of Telos OK was $2.3 million for the
year ended December 31, 2000. From the effective date of the joint venture
agreement through the end of 2000, the Company's share in the equity of TelosOK
cumulatively was still negative. Therefore, under APB 18 the Company's
investment balance in TelosOK is $0 at December 31, 2000.
Interest expense decreased $1.3 million in the year ended December 31, 2000
to $4.8 million compared to $6.1 million in the same 1999 period. This decrease
is due to the decreased debt levels in 2000.
The income tax provision was approximately $600,000 for the year ended
December 31, 2000. The provision incurred was mostly a result of the taxable
gain generated from proceeds received from the contribution of assets to TelosOK
in July 2000 which was treated as a partial sale of assets for tax purposes (see
Note 2). The Company's net deferred tax assets total $7.8 million at December
31, 2000. 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. The Company
recorded an income tax benefit of $7.9 million for the year ended December 31,
1999. The tax benefit was a result of the net operating losses of the Company,
partially offset by the gain generated from the sale of TFE.
On December 30, 1999 the Company entered into a number of concurrent
transactions with its noteholders and its Enterworks subsidiary (See Note 3 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 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 were included in the Company's statement of operations for the
year ended December 31, 1999.
Years ended December 31, 1999 and 1998
Revenue for 1999 was $171.4 million, a $35.7 million or 17.2% decrease from
1998. Approximately $17.4 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 $14.6 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 net 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 $24.2 million for the same 1998 period due to the
aforementioned deconsolidation of Enterworks and decline in sales volume. 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 $17.5 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 SG&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 LLC, 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 3 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 3 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 was included in the Company's statement of operations for the
year ended December 31, 1999.
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, 2000, the Company had an outstanding balance of $25.5
million on its $35 million Senior Credit Facility (the "Facility"). The Facility
matures on March 1, 2002 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. 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. The bank has amended
the covenants to conform to the Company's 2001 budget expectations.
The Company's subordinated notes are held principally by common
shareholders and totaled $8.5 million at December 31, 2000. These notes bear
interest at rates between 14% and 17%, and approximately $1.2 million of these
notes become payable on April 1, 2001, with the balance maturing on April 1,
2002.
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, 2000 the
total carrying amount of redeemable preferred stock, including accumulated and
unpaid dividends was $48.8 million. The Company accrues dividends and provides
for accretion related to the redeemable preferred stock. Mandatory redemption
for 821.4 shares of the Senior Redeemable Preferred Stock plus all accrued
dividends on those shares is due December 31, 2001, subject to the legal
availability of funds. The remaining Senior Redeemable Preferred shares and
their accumulated dividends are payable by the Company on April 1, 2002.
Mandatory redemption for the Public Preferred Stock is required from 2005
through 2009, subject to the legal availability of funds.
Cash used in operating activities was $14.7 million in 2000, due primarily
to an increase in accounts receivable attributable to the increase in sales from
this year's fourth quarter compared to the prior year's fourth quarter. Cash
provided by investing activities was $4.3 million in 2000, reflecting capital
expenditures of $1.7 million in 2000, offset by $6.0 million of proceeds
received from the contribution of the Ft. Sill assets. The Company was provided
cash from financing activities of $10.4 million in 2000, reflecting principally
borrowings on the Facility.
In July 2000, the Company entered into a subscription agreement with
certain investors which provided for the formation of an Oklahoma limited
liability company named Telos OK, LLC. The Company contributed all of the assets
of its DSTATS and Ft. Sill businesses to Telos OK. In return for this
contribution, the Company received $6 million in cash, retained $2.5 million in
trade receivables of the Ft. Sill and DSTATs businesses, and received a $500,000
receivable from Telos OK. The Company has guaranteed $2 million of a $4 million
loan granted to Telos OK by a bank.
Capital Expenditures
The Company believes that its business is generally not capital intensive.
Capital expenditures for property and equipment were $1.7 million in 2000 and
$1.4 million in 1999, and $1.2 million in 1998. The Company anticipates capital
expenditures of approximately $1.7 million in 2001; 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.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133, as amended by
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the effective date of FASB Statement No. 133, an amendment of FASB
Statement No. 133", is effective for all quarters of the Company's year ending
December 31, 2001. The Company currently does not engage or plan to engage in
the use of derivative instruments, and does not expect SFAS 133 to have a
material impact on the results of operations.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" which amends SFA 133.
SFAS 138 amends SFAS 133 to 1) expand the scope of the "normal sales and normal
purchases" exception; 2) introduce the benchmark rate as an interest rate that
may be hedged; 3) permit a recognized foreign currency denominated asset to be
hedged and; 4) allow certain intercompany derivatives that are offset net to be
designated as hedging instruments. The Company does not anticipate SFAS 138 to
have a material impact on its financial statements.
On September 29, 2000, FASB Statement No. 140 ("FAS 140"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
was issued. The new standard replaces FASB Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
and becomes effective for transfers entered into after March 31, 2001.
FAS 140 significantly changes the collateral recognition guidance for
secured borrowings and related collateral disclosure requirements. The Company
does not anticipate FAS 140 will have a material impact on the Company's
consolidated financial statements.
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
which in the present period of economic downturn may include, and adversely
affect, the cost and continued availability of the Company to secure adequate
capital and financing to support its business; the impact of adverse economic
conditions on the Company's customers and suppliers; the ability to sell assets
or to obtain alternative sources of commercially reasonable refinancing for the
Company's debt; or the ability to successfully restructure its debt obligations.
Additional uncertainties include the Company's ability to convert contract
backlog to revenue, the success of the Company's investment in Enterworks and
the Company's access to ongoing development, product support and viable channel
partner relationships with Enterworks.
While in the past 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. The Company's U.S. Army contract at Ft. Monmouth is up for
re-bid, which, if unsuccessful, could adversely impact the Company's revenue. It
should also be noted that with the change of administration and its key
government personnel, related policy changes and detailed program-by-program
review at each agency of the federal government, especially the Department of
Defense, the Company's high percentage of revenue derived from business with the
federal government 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 improve 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 1.5%, subject to certain adjustments, over the bank's base
rate. The weighted average interest rate in 2000 was 10.07%. This facility
expires on March 1, 2002 and has an outstanding balance of $25.5 million at
December 31, 2000.
The Company's other long-term debt at December 31, 2000 consists of Senior
Subordinated Notes B and C which bear interest at fixed rates ranging from 14%
to 17%. Of the $8.5 million Senior Subordinated Notes balance at December 31,
2000, $1.2 million of this principal amount matures on April 1, 2001, and the
remaining $7.3 million in principal becomes payable on April 1, 2002. 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, 2000, December 31, 1999, and December 31, 1998.............................................17
Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999................................18-19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, December 31, 1999, and December 31, 1998............................................20-21
Consolidated Statements of Changes In Stockholders' Investment (Deficit)
for the Years Ended December 31, 2000, December 31, 1999,
and December 31, 1998..................................................................................22
Notes to Consolidated Financial Statements...............................................................23-43
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,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. 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 of America 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
April 2, 2001, except for Note 6 and Note 7, as to
which the date is April 13, 2001
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands)
Year Ended December 31,
-----------------------------------------------------
2000 1999 1998
---- ---- ----
Sales
Systems and Support Services $ 48,429 $ 77,701 $ 92,315
Products 83,688 85,726 103,086
Xacta 13,193 7,937 4,612
Enterworks -- -- 7,073
----- ------ -----
145,310 171,364 207,086
------- ------- -------
Costs and expenses
Cost of Systems and
Support Services 43,151 65,933 79,931
Cost of Products 70,375 79,286 94,177
Cost of Xacta 10,502 5,997 3,276
Cost of Enterworks -- -- 5,531
Selling, general and
administrative expenses 19,796 17,459 30,842
Goodwill amortization 312 489 589
--- --- ---
144,136 169,164 214,346
------- ------- -------
Operating income (loss) 1,174 2,200 (7,260)
Other income (expenses)
Non-operating income 98 67 64
Gain on sale of assets -- 4,731 5,683
Equity in net losses of Enterworks -- (18,765) --
Equity in earnings of Telos OK 2,328 -- --
Interest expense (4,777) (6,065) (6,555)
------ ------ ------
Loss before income taxes (1,177) (17,832) (8,068)
(Provision) benefit for income taxes (617) 7,853 (1,103)
---- ----- ------
Loss before extraordinary item (1,794) (9,979) (9,171)
Gain from early debt retirement and
sale of stock (net of income tax
provision of $5,322) -- 8,015 --
----- ----- -----
Net loss $ (1,794) $ (1,964) $ (9,171)
======== ========= ========
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,
--------------------------------
2000 1999
---- ----
Current assets
Cash and cash equivalents (includes restricted cash
of $54 at December 31, 2000 and 1999) $ 286 $ 315
Accounts receivable, net 45,682 25,030
Receivable from Enterworks -- 2,000
Inventories, net 7,045 4,779
Deferred income taxes 3,256 4,802
Other current assets 404 83
------ ------
Total current assets 56,673 37,009
------ ------
Property and equipment
Furniture and equipment 7,201 18,924
Leasehold improvements 675 2,631
Property and equipment
under capital leases 13,774 13,774
------ ------
21,650 35,329
Accumulated depreciation
and amortization (9,331) (23,093)
------- --------
12,319 12,236
------ ------
Goodwill, net 2,749 4,284
Investment in Enterworks -- --
Investment in Telos OK -- --
Deferred income taxes 4,603 2,930
Other assets 746 427
------ ------
$77,090 $56,886
======= =======
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,
---------------------
2000 1999
---- ----
Current liabilities
Accounts payable $19,049 $13,792
Accrued compensation and benefits 7,178 7,645
Unearned warranty revenue 8,609 5,183
Current portion, capital lease obligations 344 370
Senior subordinated notes 1,151 --
Other current liabilities 2,094 3,051
------ ------
Total current liabilities 38,425 30,041
Senior credit facility 25,460 16,508
Senior subordinated notes 7,386 8,537
Capital lease obligations 11,030 11,362
------ ------
Total liabilities 82,301 66,448
------ ------
Commitments and contingencies (Note 10)
Senior mandatorily redeemable preferred stock 6,480 6,054
Mandatorily redeemable exchangeable preferred stock 42,352 36,975
------ ------
48,832 43,029
------ ------
Stockholders' (deficit) investment
Class A common stock, no par value, 50,000,000 shares authorized, 21,171,202
and 21,241,980 shares issued and outstanding at 2000 and 1999, 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 2,718 --
Accumulated deficit (56,839) (52,669)
-------- --------
Total stockholders' investment (deficit) (54,043) (52,591)
-------- --------
$77,090 $56,886
======= =======
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,
-----------------------
2000 1999 1998
---- ---- ----
Operating Activities:
Net loss $(1,794) $(1,964) $ (9,171)
Adjustments to reconcile net loss
to cash (used in) provided by operating activities:
Depreciation and amortization 1,706 4,133 4,266
Goodwill amortization 312 489 589
Amortization of debt issuance costs 182 243 243
Accretion of subordinated notes -- 412 181
Provision for inventory obsolescence 50 600 1,254
Provision for doubtful accounts receivable 1,213 400 39
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 --
Reserve for termination agreements 1,186 -- --
Provision for net realizable value of other assets -- -- 1,743
Deferred income tax (benefit) provision (127) (8,159) 434
Changes in assets and liabilities
(Increase) decrease in accounts receivable (21,208) 20,141 (2,329)
(Increase) decrease in inventories (2,481) 2,494 2,826
Increase in other assets (805) (116) (76)
Increase in accounts payable and other liabilities 7,045 3,762 3,031
----- ------ ------
Cash (used in) provided by operating activities (14,721) 11,181 (2,653)
-------- ------ -------
Investing activities:
Proceeds from contribution of assets 6,000 -- --
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 (1,691) (1,389) (1,250)
Investment in other assets -- (800) (2,040)
------ ------- -------
Cash provided by investing activities 4,309 12,729 11,385
------ ------ ------
Financing activities:
Proceeds from (payments of) Senior Credit Facility 8,952 (19,651) (3,786)
Proceeds from debt issuance -- -- 1,800
Increase (decrease) in book overdrafts 1,789 (3,998) 1,641
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 (358) (357) (426)
------- ------- -------
Cash provided by (used in) financing
Activities 10,383 (24,003) ( 8,911)
------ -------- --------
(Decrease)in cash and cash equivalents (29) (93) (179)
Cash and cash equivalents at beginning of the year 315 408 587
------ ------- ------
Cash and cash equivalents at end of year $ 286 $ 315 $ 408
====== ====== ======
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $3,396 $5,409 $ 5,228
===== ===== ======
Income taxes $ 529 $ 272 $ 1,088
===== ===== ======
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
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, 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) (2,130) (3,823)
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)
-- -- ----- ------ ------
Senior redeemable preferred stock dividend -- -- (424) -- (424)
Deconsolidation of accounts -- -- -- 517 517
Redeemable preferred stock dividend -- -- (1,700) (2,123) (3,823)
Redeemable preferred stock accretion -- -- ( 785) ( 770) (1,555)
Contribution of assets to TelosOK -- -- 5,627 -- 5,627
Net loss for the year -- -- -- (1,794) (1,794)
-- -- ---- ----- -----
Balance December 31, 2000 $ 65 $ 13 $ 2,718 $(56,839) $(54,043)
-- -- ----- ------ ------
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
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 region of high technology
companies. During 2000, the Company provided its business solutions through
three operating segments: Systems and Support Services, the Products Group, and
its Xacta subsidiary.
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 July 28, 2000, the Company completed the formation of a joint venture,
TelosOK, wherein the Company contributed its Ft. Sill based operation to a newly
created entity in return for 50% ownership in TelosOK and consideration of
approximately $9.0 million (See Note 2).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Telos Corporation and its wholly owned subsidiaries, Telos Corporation
(California), Telos International Corporation, ubIQuity.com, inc., Xacta
Corporation, Telos.com, inc., and Telos Delaware, Inc. 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' investment (deficit).
The statement of operations includes the results of Enterworks, Inc. as "Equity
in Net Losses of Enterworks" in accordance with APB 18 (See Note 3). Significant
intercompany transactions have been eliminated. The Company also has a 50%
interest in TelosOK, LLC, which is accounted for under the equity method of
accounting.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 doubtful accounts
receivable, allowance for inventory obsolescence, valuation of goodwill,
valuation allowances 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 contracts, under which revenue is recognized as services
are performed and costs are incurred. For fixed price contracts revenue is
recognized in accordance with American Institute of Certified Public Accountants
(AICPA) Statement of Position ("SOP") 81-1 "Accounting for Performance of
Construction -Type and Certain Production-Type Contracts" using the percentage
of completion method as 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 over the term of the arrangements. The Company records loss
provisions for its contracts, if required, at the time such losses are
identified.
The Company has adopted the provisions of Staff Accounting Bulletin 101
"Revenue Recognition in Financial Statements" ("SAB 101") for the year ended
December 31, 2000. The adoption of SAB 101 did not have a material effect on the
Company's results from operations.
Revenue from the licensing of software is recognized in accordance SOP 97-2
"Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions" when persuasive
evidence of an arrangement exists, delivery has occured, the fee is fixed and
determinable and collectibility is probable. 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 material effect on the Company's results from operations. Revenue
generated from software subscription contracts is recognized ratably over the
subscription 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, where cost is
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 $613,000 and $478,000 at December 31,
2000 and 1999, 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, 2000 and 1999, the Company's allowance for product
inventory was $1,777,000 and $1,992,000, 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, 2000 $ 1,992 $ 50 $ 265 $ 1,777
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
(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.
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 $1,541,000,
$2,314,000 and $2,460,000 for the years ended December 31, 2000, 1999 and 1998,
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
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.
Accumulated amortization of goodwill at December 31, 2000 and 1999 was
$9,756,000 and $9,444,000 respectively.
Other Assets
Until the deconsolidation of Enterworks on December 30, 1999 (See Note 3),
other noncurrent assets consisted principally of capitalized software
development costs and debt issuance costs. The balance as of December 31, 2000
consists mostly of refundable deposits and an immaterial investment in a joint
venture.
With regard to the capitalized software development cost balances included
in the accounts for most of 1999, the Company expensed all research and
development costs incurred in connection with software development projects
until such software achieved technological feasibility, determined based on the
achievement of a working model. Costs thereafter were capitalized. The Company
amortized 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 would bear to the total of current and anticipated
future gross revenues. The Company periodically evaluated 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 was made that capitalized amounts were not recoverable based on
the estimated cash flows to be generated from the applicable software product, a
loss was recognized.
There were no unamortized software and product costs at December 31, 2000
and 1999. Amortization expense associated with prior years' capitalized software
and product costs was $0, $1,646,000, and $2,044,000 in 2000, 1999 and 1998,
respectively. Additionally, $1,743,000 was written off as a net realizable value
adjustment in the fourth quarter of 1998.
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 (See Note 6), $72,000 in debt issue
costs were written off in 1999. Unamortized costs amounted to $0 and $110,000 at
December 31, 2000 and 1999, 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.
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 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 has provided additional pro forma disclosures as if the fair
value measurement provisions of SFAS No. 123 had been used in determining
compensation expense (See Note 8).
In April 2000, the FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation; Interpretation of APB Opinion
No.25" ("FIN 44"). FIN 44 clarifies the application of APB 25 regarding certain
key issues. It addresses various interpretive guidelines including: 1) stock
compensation granted to non-employees or to employees who have changed their
employment status; 2) modifications made to a fixed stock option or award; 3)
share repurchase features and tax withholding features; 4) and exchanges due to
business combinations. The Company has applied FIN 44 to its stock option plans
as of July 1, 2000 and there has been no material impact to the consolidated
financial statements from the adoption of this interpretation.
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 2000, 1999 and 1998,
the Company incurred approximately $200,000, $7.2 million, and $6.1 million in
research and development costs, respectively. The significant reduction in
research and development from 1999 to 2000 is due to the deconsolidation of
Enterworks in December 1999.
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 material 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.
Reclassifications
Certain reclassifications have been made to the 1999 and 1998 financial
statements to conform to the current period presentation.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133, as amended by
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the effective date of FASB Statement No. 133, an amendment of FASB
Statement No. 133", is effective for all quarters of the Company's year ending
December 31, 2001. The Company currently does not engage or plan to engage in
the use of derivative instruments, and does not expect SFAS 133 to have a
material impact on the results of operations.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" which amends SFAS 133.
SFAS 138 amends SFAS 133 to 1) expand the scope of the "normal sales and normal
purchases" exception; 2) introduce the benchmark rate as an interest rate that
may be hedged; 3) permit a recognized foreign currency denominated asset to be
hedged and; 4) allow certain intercompany derivatives that are offset net to be
designated as hedging instruments. The Company does not anticipate SFAS 138 to
have a material impact on its financial statements.
On September 29, 2000, FASB Statement No. 140 ("FAS 140"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
was issued. The new standard replaces FASB Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
and becomes effective for transfers entered into after March 31, 2001.
FAS 140 significantly changes the collateral recognition guidance for
secured borrowings and related collateral disclosure requirements. The Company
does not anticipate FAS 140 will have a material impact on the Company's
consolidated financial statements.
Note 2. Contribution of Assets
On July 28, 2000, the Company entered into a Subscription Agreement with
certain investors ("Investors"), which provided for the formation of an Oklahoma
Limited Liability Company named Telos OK, LLC ("TelosOK"). The Company
contributed all of the assets of its Digital Systems Test and Training
Simulators ("DSTATS") business as well as its Government Contract with the
Department of the Army at Ft. Sill (hereafter referred to as the Company's Ft.
Sill operation) to TelosOK. The net assets contributed by the Company totaled
$373,000. The Investors contributed $3.0 million in cash to TelosOK, and at
closing TelosOK borrowed $4.0 million cash from a bank. The Company and the
Investors each have guaranteed a portion of the loan of TelosOK. The Company has
guaranteed $2 million and the Investors have guaranteed $1 million. In addition,
TelosOK entered into a $500,000 senior credit facility with the same bank, which
expires August 1, 2001. Borrowings under the facility, should there be any, will
be collateralized by certain assets of TelosOK (primarily accounts receivable).
The Company and the Investors have agreed to guarantee this credit facility in
the amount of $250,000 each when and if drawn.
In compliance with the subscription agreement, on the closing date the
following consideration was given to the Company for its contribution of assets
to TelosOK:
The Company received $6 million in cash, retained $2.5 million in trade
receivables of the Ft. Sill and DSTATS businesses, and received a $500,000
receivable from TelosOK for a total consideration of $9 million for the
contribution of the net assets.
The Company and the Investors each own a 50% voting membership interest in
TelosOK, and have signed an operating agreement which provides for three
subclasses of membership units, Classes A, B and C. The ownership of these
classes is as follows and can change upon Class B redemption:
Class A - owns 20% of TelosOK. The Company and the Investors each own 50%
of the 200,000 units of this class. This class has all voting rights of
Telos OK and has the sole right to elect the directors of TelosOK. The
units in this class do not have redemptive rights.
Class B - owns 40% of TelosOK. The Investors own all 2.9 million units of
this class. This class does not have voting rights, but can request the
redemption of all or a portion of the Class B units outstanding beginning
one year after the closing date, subject to certain restrictions. Class B
holders can redeem no more than 500,000 units per quarter at a price of
$1.00 per unit, and such redemption can only be made from the excess cash
flow of TelosOK as defined in the agreement.
Class C- owns 40% of TelosOK. The Company owns all 2.9 million units of
this class. This class does not have voting rights, and has the same
redemptive rights as class B above, except that no right of redemption will
exist until all Class B units have been redeemed. In addition, when any of
the Class B units have been redeemed, the Company will receive a warrant to
purchase a number of Class C units equal to the amount of the Class B units
redeemed at a price of $0.01 per unit.
As indicated in the operating agreement, one of the Investors will
initially serve as Chairman of the Board and may designate a Secretary, and
David Aldrich, President and CEO of the Company, and Thomas Ferrara, Treasurer
and CFO of the Company, will initially serve in those same capacities for
TelosOK. The Company has entered into a corporate services agreement with
TelosOK whereby the Company will provide certain administrative support
functions to TelosOK, including but not limited to finance and accounting and
human resources, in return for a monthly cash payment.
As indicated above, the Company owns 50% of TelosOK, and shares control
over TelosOK, and therefore has changed its method of accounting for the
contributed assets from the consolidation method to the equity method. Pursuant
to this change, the revenues, costs and expenses from the Ft. Sill and DSTATS
businesses have been excluded from their respective captions in the Company's
Consolidated Statement of Operations, and the net earnings from these businesses
have been reported separately as "Equity in Net Earnings of Telos OK" for the
year ended December 31, 2000. The results of operations of the Ft. Sill and
DSTATS businesses included in the "Equity in Net Earnings of Telos OK" caption
are comprised of the following:
(in thousands)
December 31, 2000
Year
ended
Sales $ 13,339
Cost of Sales (11,011)
------
Gross Profit $ 2,328
=====
From July 28, 2000 through December 31, 2000, the Company's share in the
cumulative equity of TelosOK was still negative. Therefore, the Company's
investment balance in TelosOK is $0 at December 31, 2000.
Note 3. 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 a 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.
6. Telos contributed 210,912 shares of Enterworks' Common Stock owned by Telos
to the Enterworks Treasury for the subsequent grant of warrants to the Agent,
Deutsche Bank Alex. Brown. This issuance of warrants was also part of the
Agent's fee. This contribution of shares was also a charge to interest expense
and a reduction to the Company's investment in Enterworks.
As a result of the reduction of the Company's ownership percentage in
Enterworks the Company 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 APB 18. The recognition of
this net loss by the Company reduced the carrying value of its investment in
Enterworks to $0 in 1999. Enterworks continued to recognize losses during fiscal
2000, and in accordance with APB18 the Company has not recognized these losses.
The results of operations of Enterworks included in the "Equity in Net
Losses in Enterworks" caption for the year ended December 31, 1999 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)
========
Enterworks has completed another round of private financing in the year
2000 which has further diluted the Company's interest in Enterworks. At December
31, 2000, the Company owns 17,153,059 shares of Enterwork's common stock which
equates to a beneficial ownership percentage of 29.6%.
Note 4. 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 provided certain administrative support functions to TFE
Holdings, including but not limited to finance and accounting and human
resources, in return for a monthly payment. This agreement was terminated in
2000.
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.
Note 5. Revenue and Accounts Receivable
Revenue resulting from contracts and subcontracts with federal, state, and
local governments accounted for 96.2%, 94.1% and 94.9% of consolidated revenue
in 2000, 1999 and 1998, 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,
--------------------------
2000 1999
---- ----
Billed accounts receivable $39,486 $22,592
------ ------
Amounts billable upon acceptance by customer 3,100 2,841
Amounts currently billable 4,931 2,427
----- ------
Total unbilled accounts receivable 8,031 5,268
----- ------
Allowance for doubtful accounts (1,835) (830)
------- -------
$45,682 $27,030
====== ======
The components of the allowance for doubtful accounts are set forth below (in thousands):
Balance Additions Charged
Beginning to Costs and Balance
Of Year Expenses Deductions(1) End of Year
------- -------- ------------- -----------
Year ended December 31, 2000 $ 830 $ 1,381 $ (376) $ 1,835
Year ended December 31, 1999 739 400 (309) 830
Year ended December 31, 1998 964 39 (264) 739
1. Accounts receivable written-off or reserve reversals.
Note 6.Debt Obligations
Senior Revolving Credit Facility
At December 31, 2000, the Company has a $35 million Senior Revolving Credit
Facility (the "Facility") with a bank which expires on March 1, 2002 and has an
outstanding balance of $25.5 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 amount of the available borrowings fluctuates based on the underlying asset
borrowing base. The facility requires payment of a fee of 0.375% of the unused
portion of the Facility. The Facility bears interest at 1.5%, subject to certain
adjustments, over the bank's base rate, which was 9.50% at December 31, 2000.
The weighted average interest rate on the outstanding borrowings under the
Facility was 10.07% for 2000 compared with 9.89% for 1999. At December 31, 2000,
the Company had approximately $1.0 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. The bank has amended the
covenants to conform to the Company's 2001 budget expectations.
The carrying value of the Facility at December 31, 2000 and 1999
approximates fair value.
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. Of the $8.5 million in combined principal of the Series B and Series
C Notes at December 31, 2000, $1.2 million of Notes mature on April 1, 2001, and
the remaining $7.3 million become payable on April 1, 2002. The Notes 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,
2000, the prepayment premium that would be due upon a triggering event is $8.4
million.
In conjunction with the Enterworks private placement offering (See Note 3),
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, 2000 and 1999, respectively.
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
warrants expired on October 1, 2000. These notes were retired in conjunction
with the Enterworks private placement (Note 3), making the outstanding carrying
balance zero at December 31, 2000 and 1999, respectively.
Note 7. 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 821.4 of the
3,000 shares outstanding on December 31, 2001, subject to the legal availability
of funds. The remaining 2,178.6 shares and their accrued dividends are required
to be redeemed on April 1, 2002, 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, 2000 and 1999 undeclared,
unpaid dividends relating to Series A-1 and A-2 redeemable preferred stock
totaled $3,480,000 and $3,054,000, 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, 2000 and 1999 was $1,555,000 and
$1,424,000, 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, dividends 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
$22,500,000.
The Company has not declared or paid dividends since 1991, due to
restrictions and other conditions relating to the payment of dividends contained
within its charter, its working capital facility agreement, and under Maryland
law. The Company is satisfied that the approach it has followed is supportable
and reasonable.
Note 8. 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 6). 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 five plans. The Long-Term Incentive Compensation Plan was adopted in 1990
("1990 Stock Option Plan") and had option grants under it through 2000. 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").
In 2000, the Board of Directors of the Company approved two new stock
option plans, one for Telos Delaware, Inc. and one for Xacta Corporation, both
wholly owned subsidiaries of the Company.
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 of the Board of Directors 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, 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
----- ----
Granted 632 1.37
Exercised -- --
Canceled (328) 1.42
----- ----
Outstanding at December 31, 2000 2,022 $ 1.23
----- ----
1993 Option Plan
In 1993, stock option plan agreements were reached to provide Mr. John
Wood, Executive Chairman, 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, 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
----- -----
Granted -- --
Exercised -- --
Canceled (168) 1.01
----- ----
Outstanding at December 31, 2000 1,083 $ 0.68
----- ----
Mr. Wood has the option to cancel the 1993 stock options discussed above
and 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, 2000 would be to increase the number of shares outstanding to
5,186,865 with a weighted average exercise price of $1.01 per share.
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, 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
----- ----
Granted 148 1.35
Exercised -- --
Canceled (666) 1.03
----- ----
Outstanding at December 31, 2000 4,486 $ 1.02
----- ----
Telos Delaware Stock Incentive Plan
During the third quarter of 2000, the Board of Directors of the Company
approved a new stock option plan for Telos Delaware, Inc., a wholly owned
subsidiary of the Company. Certain key executives and employees of the Company
are eligible to receive stock options under the plan. Under the plan, the
Company may award up to 3,500,000 shares of common stock as either incentive or
non-qualified stock options. An incentive option must have an exercise price of
not lower than fair market value on the date of grant. A non-qualified option
will not have an exercise price any lower than 85% of the fair market value on
the date of grant. All options have a term of ten years and vest no less rapidly
than the rate of 20% per year for each of the first five years unless changed by
the option committee of the Board of Directors. Additional information as to
these options follows:
Stock Option Activity
Number of Shares Weighted Average
(000's) Exercise Price
-----------------------------------------------
Outstanding at December 31, 1999 -- --
Granted 1,826 $3.85
Exercised -- --
Canceled (88) 3.85
--- ----
Outstanding at December 31, 2000 1,738 $3.85
----- ----
Xacta Stock Incentive Plan
In the third quarter of 2000, Xacta Corporation, a wholly owned subsidiary
of the Company, initiated a stock option plan under which up to 3,500,000 shares
of Xacta common stock may be awarded to key employees and associates. The
options may be awarded as incentive or non-qualified, have a term of ten years,
and vest no less rapidly than the rate of 20% per year for each of the first
five years unless changed by the option committee of the Board of Directors. The
exercise price may not be less than the fair market value on the date of grant
for an incentive option, or less than 85% of the fair market value on the date
of grant for a non-qualified stock option. Additional information as to these
options follows:
Stock Option Activity
-----------------------------------------------
Number of Shares Weighted Average
(000's) Exercise Price
-----------------------------------------------
Outstanding at December 31, 1999 -- --
Granted 1,287 $0.75
Exercised -- --
Canceled (79) 0.75
--- ----
Outstanding at December 31, 2000 1,208 $0.75
----- -----
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2000:
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 $1.07 940 7.4 years $1.07 564 $1.07
Option Plan $1.35 349 9.3 years $1.35 140 $1.35
$1.37 632 8.7 years $1.37 608 $1.37
$1.40 19 7.6 years $1.07 11 $1.07
$1.42 82 0.0 years $1.42 82 $1.42
----- -- --------- ----- -- -----
$1.07 - $1.42 2,022 8.1 years $1.23 1,405 $1.25
============= ===== ========= ==== ===== =====
1993 Stock
Option Plan $0.50 700 3.0 years $0.50 700 $0.50
$1.01 383 6.1 years $1.01 306 $1.01
----- --- --------- ----- --- -----
$0.50 -$1.01 1,083 4.1 years $0.68 1,006 $0.66
============ ===== ========= ===== ===== =====
1996 Stock
Option Plan $0.95 2,606 5.4 years $0.95 1,439 $0.95
$0.97 65 5.6 years $0.97 65 $0.97
$1.01 469 6.2 years $1.01 325 $1.01
$1.07 897 7.4 years $1.07 443 $1.07
$1.35 379 8.9 years $1.35 167 $1.35
$1.40 70 7.7 years $1.40 64 $1.40
----- ---- --------- ----- ---- -----
$0.95 - $1.40 4,486 5.9 years $1.02 2,503 $1.02
============= ===== ========= ===== ===== =====
2000 Telos Delaware
Option Plan $3.85 1,738 9.7 years $3.85 0 $ -
===== ===== ========= ===== = ====
2000 Xacta
Option Plan $0.75 1,208 9.7 years $0.75 0 $ -
===== ===== ========= ===== = ====
The weighted-average fair value of options granted under the 1990 Stock
Option Plan, the 1993 Stock Option Plan, the 1996 Stock Option Plan, the 2000
Telos Delaware Stock Option Plan, and the 2000 Xacta Stock Option Plan was
$0.16, $0, $0.31, $0.69, and $0.14, respectively, in 2000 and $0.28, $0, $0.25,
$0, and $0, respectively, in 1999. Had the Company determined compensation cost
consistent with SFAS No. 123 methodology, net loss would have been $(2,091,000),
($2,743,000), and ($9,666,000), in 2000, 1999, and 1998, respectively.
Significant assumptions used in determining the fair value of each option grant
at the date of grant were as follows:
1990 Stock Option Plan Other Stock Option Plan
---------------------- -----------------------
2000 1999 1998 2000 1999 1998
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 5.91% 5.82% 5.54% -- -- --
Expected life of options 2.09yrs 4.0yrs 5.3yrs -- -- --
1996 Stock Option Plan 2000 Telos Delaware Stock Option Plan
---------------------- -------------------------------------
2000 1999 1998 2000 1999 1998
Expected dividend yield 0.0% 0.0% 0.0% 0.0% -- --
Expected stock price volatility 0.0% 0.0% 0.0% 0.0% -- --
Risk free interest rate 6.59% 5.60% 5.54% 6.01% -- --
Expected life of options 4.0yrs 3.6yrs 4.8yrs 3.3yrs -- --
2000 Xacta Stock
Option Plan
-------------------------
2000 1999 1998
Expected dividend yield 0.0% -- --
Expected stock price volatility 0.0% -- --
Risk free interest rate 6.52% -- --
Expected life of options 3.3yrs -- --
Because the pro forma disclosures under SFAS No. 123 only apply to stock
options granted in or after 1995, pro forma net income for 1998, 1999, and 2000
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 2000, 1999, and 1998 were
$784,000, $1,080,000, and $835,000, respectively.
Note 9. Income Taxes
The provision (benefit)for income taxes includes the following (in
thousands):
For The Year Ended December 31,
----------------------------------
2000 1999 1998
---- ---- ----
Current provision (benefit)
Federal $353 $ -- $ --
State 391 306 669
--- --- ----
Total current 744 306 669
--- --- ----
Deferred provision (benefit)
Federal (105) (6,946) 568
State (22) (1,213) ( 134)
---- -------- ------
Total deferred (127) (8,159) 434
----- ------- ------
Total provision (benefit) $ 617 $(7,853) $ 1,103
=== ====== ======
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,
------------------------------------------------
2000 1999 1998
---- ---- ----
Computed expected income tax provision (benefit) (34.0)% (34.0)% (34.0)%
Goodwill amortization 9.0 0.9 2.4
State income taxes, net of federal income tax benefit 49.4 (2.6) (1.8)
Change in valuation allowance for deferred tax assets (28.7) (12.9) 24.9
Meals and entertainment 6.8 0.5 1.1
Recognition of deferred tax liabilities on contributions
to TelosOK LLC 35.3 -- --
Other 14.6 4.1 20.9
---- --- ----
52.4% (44.0)% 13.5%
===== ======= =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2000 and 1999 are as follows (in thousands):
December 31,
-------------------------
2000 1999
---- ----
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts $ 704 $ 161
Allowance for inventory obsolescence and amortization 734 946
Accrued liabilities not currently deductible 1,471 1,842
Accrued compensation 1,865 1,786
Property and equipment, principally due to differences in depreciation methods 705 895
Basis difference in TelosOK LLC interest 1,780 --
Net operating loss carryforwards - state 234 2,174
Alternative minimum tax credit carryforward 734 703
----- -----
Total gross deferred tax assets 8,227 8,507
Less valuation allowance (234) (572)
------ -----
Net deferred tax assets 7,993 7,935
----- -----
Deferred tax liabilities:
Unbilled accounts receivable, deferred for tax purposes (134) (203)
------ ------
Total deferred tax liabilities (134) (203)
------ -------
Net deferred tax assets $7,859 $7,732
====== ======
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, 2000 $ 572 $ -- $ 338 $ 234
December 31, 1999 4,987 -- (4,415)(1) 572
December 31, 1998 2,974 2,013 -- 4,987
(1) Included $2,115 attributable to Enterworks
The net change in the valuation allowance was a decrease of $338,000 for
2000 and a decrease of $2,300,000 for 1999. The decrease in the valuation
allowance for 1999 is attributable to forecasted taxable income, which justified
the future 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, 2000, for federal income tax purposes there were no net
operating loss carryforwards available to offset future taxable income. The net
operating loss carryforwards for both regular and alternative minimum tax
purposes were fully utilized in 2000. In addition, the Company has $734,000 of
alternative minimum tax credits available to be carried forward indefinitely to
reduce future regular tax liabilities.
Note 10. 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, 2000 (in thousands):
Property Equipment Total
-------- --------- -----
2001 $ 1,543 $ 54 $ 1,597
2002 1,543 -- 1,543
2003 1,543 -- 1,543
2004 1,543 -- 1,543
2005 1,543 -- 1,543
Remainder 15,819 -- 15,819
------ ----- ------
Total minimum obligations 23,534 54 23,588
Less amounts representing
interest (12,202) (11) (12,213)
-------- ---- --------
Net present value of
minimum obligations 11,332 43 11,375
Less current portion (302) (43) (345)
-------- ---- --------
Long-term capital lease
obligations at
December 31, 2000 $ 11,030 $ -- $ 11,030
====== ====== ======
Accumulated amortization for property and equipment under capital leases at
December 31, 2000 and 1999 is $3,502,000 and $2,787,000, respectively. Future
minimum lease payments for all non-cancelable operating leases at December 31,
2000 are as follows (in thousands):
2001 $ 1,038
2002 1,033
2003 1,049
2004 911
2005 941
Remainder 237
----
Total minimum lease payments $ 5,209
=====
Net rent expense charged to operations for 2000, 1999, and 1998 totaled
$1,300,000, $2,000,000, and $2,001,000, 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,
results of operations, or of cash flows.
Note 11. 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. 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 2000, 1999, and 1998 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 for 1998. 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 received a bonus of $135,000 payable
in installments during 2000.
Mr. Gerald Calhoun, former Vice President of Human Resources and Corporate
Secretary, entered into a settlement agreement with the Company to resolve a
dispute over Mr. Calhoun's employment contract with the Company. The Company
will pay Mr. Calhoun 24 months of severance in installments from 2000 until
2002. Mr. Calhoun will also receive medical and insurance benefits through the
Company for the same two-year period. Mr. Calhoun's payment of salary and fringe
benefits amounts to approximately $189,000 per annum. Under the agreement, the
Company extended the option term of Mr. Calhoun's vested options until September
2001.
Mr. William L.P. Brownley, former Vice President and General Counsel of the
Company, entered into an agreement with the Company whereby he will serve as an
of counsel attorney to the Company from December 31, 2000 through March 31,
2003. In return, Mr. Brownley will be paid $220,000 per annum from January 1,
2001 through March 31, 2003. The Company will also continue to provide him with
medical and insurance benefits during that same period.
Note 12. 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 1999 and
1998 has been restated from the prior year's presentation in order to conform to
the 2000 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 two divisions -
solutions and international. 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.
Xacta - offers innovative products which leverage its extensive consulting
experience, domain knowledge, and best practices implementation in enterprise
integration, enterprise management, and enterprise security. Through these core
competencies and innovative products, Xacta helps manage the security of its
customers' network environments through the integration of critical business
content and processes.
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 31,
2000 (Note 3) and has been deconsolidated from the financial statements of the
Company since December 30, 1999. The corresponding assets and liabilities have
been removed from the consolidated balance sheet since December 31, 1999.
Systems and
Support Services Products Xacta Enterworks Other(1) Total
---------------- -------- ----- ---------- -------- -----
2000
External Revenues $ 48,429 $ 83,688 $ 13,193 $ -- $ -- $145,310
Intersegment Revenues $ 88 $ 669 $ -- $ -- $ -- $ 757
Gross Profit $ 5,278 $ 13,313 $ 2,691 $ -- $ -- $ 21,282
Segment profit (loss)(3) $ (1,577) $ 4,944 $ (1,881) $ -- $ -- $ 1,486
Total assets $ 10,324 $ 39,425 $ 4,613 $ -- $22,728 $ 77,090
Capital Expenditures $ 159 $ 249 $ 465 $ -- $ 818 $ 1,691
Depreciation &
Amortization(2) $ 387 $ 304 $ 110 $ -- $ 1,217 $ 2,018
1999
External Revenues $ 77,701 $ 85,726 $ 7,937 $ -- $ -- $171,364
Intersegment Revenues $ 404 $ -- $ -- $ -- $ -- $ 404
Gross Profit $ 11,768 $ 6,440 $ 1,940 $ -- $ -- $ 20,148
Segment profit (loss)(3) $ 6,102 $ (2,263) $(1,150) $ -- $ -- $ 2,689
Total assets $ 5,632 $ 22,930 $ 1,422 $ -- $26,902 $ 56,886
Capital Expenditures $ 63 $ 82 $ 63 $ 780 $ 401 $ 1,389
Depreciation &
Amortization(2) $ 731 $ 333 $ 27 $ 2,210 $ 1,321 $ 4,622
1998
External Revenues $ 92,315 $103,086 $ 4,612 $ 7,073 $ -- $207,086
Intersegment Revenues $ 970 $ 2,622 -- $ 1 $ -- $ 3,593
Gross Profit $ 12,384 $ 8,909 $ 1,336 $ 1,542 $ -- $ 24,171
Segment profit (loss)(3) $ 4,334 $ 12 $ 532 $(11,549) $ -- $ (6,671)
Total assets $ 20,653 $ 47,560 $ 1,333 $ 6,119 $19,586 $ 95,251
Capital Expenditures $ 135 $ 62 $ 31 $ 587 $ 435 $ 1,250
Depreciation &
Amortization(2) $ 545 $ 483 $ 8 $ 2,332 $ 1,487 $ 4,855
(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 9 separate
facilities located in 4 states, the District of Columbia and Europe.
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 76) 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 37) has served as Executive Chairman of the Board since March
8, 2000. From January 1994 until March 8, 2000, Mr. Wood served as President and
Chief Executive Officer of the Company. Mr. Wood has also served as Chairman and
CEO of Enterworks since January 1996. Between 1992 and 1994, Mr. Wood served as
Chief Operating Officer and as an Executive Vice President of the Company. Prior
to joining the Company, Mr. Wood founded a boutique investment-banking firm on
Wall Street. Mr. Wood has a BSBA in Finance and Computer Science from Georgetown
University.
David S. Aldrich, President, Chief Executive Officer, and Director
Mr. Aldrich (age 41) 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 58) 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 54) was elected to the Board of Directors on January 31,
1994. He is Vice President and General Manager of Foxhunt Incorporated, a
provider of contract and long-term technical staffing and executive recruiting
services in McLean, Virginia. Previously Mr. Byers was President and CEO of
Virginia-based Classwise Inc., a distance learning ISP. Prior to his work at
Classwise, Mr. Byers was COO of The Carpe Diem Group, President of Telos
International Corporation, and managing partner of International Strategies Ltd.
From 1968 until his retirement in 1989, Mr. Byers served in a variety of
operational and staff positions in the United States Air Force.
Malcolm M. B. Sterrett, Class D Director
Mr. Sterrett (age 58) 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 Corporation.
John C. Boland, Class D Director
Mr. Boland (age 53) 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, Former Vice President and General Counsel
Mr. Brownley (age 44) joined the Company in April 1991 and was 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. Mr. Brownley resigned from the
Company in January 2001.
Robert J. Marino, Executive Vice President and Chief Sales and Marketing Officer
Mr. Marino (age 64) 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.
Thomas J. Ferrara, Chief Financial Officer and Treasurer
Mr. Ferrara (age 43) was appointed Chief Financial Officer of the Company
on September 14, 2000. He 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.
Michelle Wertz, Vice President of Human Resources and Corporate Secretary
Ms. Wertz (age 37) was appointed Vice President, Human Resources for Telos
Corporation in July of 2000 and Corporate Secretary in September, 2000. Ms.
Wertz joined Telos in May, 1998 to revamp the Recruiting and Retention
activities for the company leading to her position as Vice President, Resource
Management in December of 1999. Ms. Wertz' previous Human Resources experience
from 1995 - 1998 includes working for America Online, IPR Staffnet and Total
Systems Solutions to provide technical and professional staffing solutions and
best practice recruiting strategies.
Michael P. Flaherty, Executive VP, General Counsel and Chief Administrative
Officer
Mr. Flaherty (age 55) was appointed Executive Vice President, General
Counsel and Chief Administrative Officer January 3, 2001. Prior to joining Telos
Corporation Mr. Flaherty was of counsel in the law firm O'Donnell & Schaeffer
and Principal Shareholder and Chief Executive Officer of First Continental
Financial Group, Inc. Mr. Flaherty has extensive experience in all aspects of
civil litigation, serving as trial counsel for major corporations.
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, 2000, 1999 and
1998, 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 2000.
SUMMARY COMPENSATION TABLE
--------------------------
Long-term
Name Annual Compensation Compensation(1)
and Awards
Principal Options/ All Other
Position Year Salary Bonus SARs(#) Compensation(5)
--------------------------------------------------------------------------------------------------------------
John B. Wood 2000 $350,002(7) $ -- -- $18,100(6)
(Executive Chairman) 1999 $348,574 $245,000 2,000,000(3) $13,000(6)
1998 $334,198 $ -- -- $13,500(6)
David Aldrich 2000 $332,894 $ -- 250,000(2) $18,100(6)
(President, Chief Executive 1999 $205,119 $245,000 200,000(3) $ --
Officer) 1998 $173,850 $ -- 210,000(4) $2,333
Thomas J. Ferrara 2000 $133,561 $ -- 128,000(2) $5,100
(Chief Financial Officer, 1999 $98,435 $ 50,000 27,500(3)(4) $2,953
Treasurer) 1998 $90,898 $ -- 17,500(4) $2,952
Robert J. Marino 2000 $211,706 $ -- 292,900(2) $5,100
(Chief Sales and Marketing 1999 $206,003 $100,000 200,000(3) $5,000
Officer and Executive V.P.) 1998 $204,734 $ -- 362,000(4) $5,500
William L.P. Brownley 2000 $192,653 -- 20,000(2) $4,816
(Former V.P. General 1999 $170,997 $100,000 200,000(3) $4,275
Counsel) 1998 $166,961 $ -- 135,000(4) $5,380
(1) There are no restricted stock awards or payouts pursuant to long-term investment plans.
(2) Options granted in 2000 are in Telos, Telos Delaware, and Xacta common stock.
(3) Options granted in 1999 are in Enterworks, Inc., common stock.
(4) Options granted in 1999 and 1998 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 the amounts also include automobile and living allowances.
(6) Included in these amounts are $13,000 in 2000, $8,000 in 1999 and 1998 for director's fees paid.
(7) The Company and its affiliate, Enterworks, Inc., have an agreement whereby Enterworks, Inc. reimburses the Company
for $250,000 of Mr. Wood's annual salary.
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 2000.
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 Granted Price Date Option Term
- -------------------------------------------------------------------------------------------------------------------
5% 10%
-- ---
John B. Wood
(Executive Chairman) -- -- -- -- -- --
David Aldrich
(President, Chief
Executive Officer) 250,000(1) 6.4% $1.37 Oct. 2010 $215,396 $545,857
Thomas J. Ferrara
(Chief Financial Officer, 64,000(2) 1.6% $3.85 Sept. 2010 $154,960 $392,698
Treasurer) 64,000(3) 1.6% $0.75 Sept. 2010 $ 30,187 $ 76,500
Robert J. Marino
(Chief Sales and Marketing 164,900(1)(4) 4.2% $1.37 Oct. 2010 $142,075 $360,047
Officer and 64,000(2) 1.6% $3.85 Sept. 2010 $154,960 $392,698
Executive V.P.) 64,000(3) 1.6% $0.75 Sept. 2010 $ 30,187 $ 76,500
William L.P. Brownley
(Former V.P.,
General Counsel) 20,000(1)(4) 0.5% $1.37 Oct. 2010 $ 17,232 $ 43,669
(1) Options granted in 2000 were in the common stock of Telos.
(2) Options granted in 2000 were in the common stock of Telos Delaware, Inc.
(3) Options granted in 2000 were in the common stock of Xacta Corporation.
(4) Options originally issued in 1990 and 1991 at an exercise price of
$1.42 per share, were canceled and reissued on October 31, 2000. On
that date, the market price of the stock was $1.37 per share.
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, 2000.
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) -- -- 3,739,225/978,766 $3,284,281/$411,082
David Aldrich
(President, Chief
Executive Officer) -- -- 995,000/165,000 $679,900/$53,100
Thomas J. Ferrara
(V.P., Treasurer,
Chief Financial
Officer) -- -- 33,500/147,000 $13,510/$1,740
Robert J. Marino
(Chief Sales and Marketing
Officer and Executive V.P.) -- -- 717,600/472,300 $ 336,885/$118,365
William L.P. Brownley -- -- 407,500/122,500 $ 371,800/$43,350
(Former 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, 400,000
shares held by Mr. Aldrich, 7,500 shares held by Mr. Ferrara, 200,000 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 $2,263,800 for Mr. Wood,
$562,000 for Mr. Aldrich, $8,100 for Mr. Ferrara, $216,000 for Mr. Marino and
$328,450 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, 2000 of $1.37 per share for the Company's Class A Common Stock, $1.85 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.
Compensation of Directors
During the fiscal year ended, December 31, 2000, employee directors were
paid fees in total of $13,000 each for Board Meetings attended. Outside
directors Mr. Byers and Dr. Bryen were paid an annual fee of $25,000 each and
further compensated $5,000 and $1,000 for meetings attended in excess of four
per year. Outside director Mr. Sterrett earned annual fees of $7,000 and Mr.
Boland waived payment for Board Activity in 2000. Mr. Boland has asked to be
compensated in 2001 for his Board membership in accordance with the annual fees
for outside directors. The Chairman of the Board, Dr. Ikle receives $100,000
annually for his services to the Board. In addition, Mr. Byers receives $5,000
for his services 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.
Effective July 1, 2000, the Board of Directors implemented a new
compensation structure for the Board in which the Chairman of the Board receives
$100,000 for his services. The plan provides payment of $25,000 per year to
Proxy Holders, $5,000 per year for Proxy Chairman, Directors fees of $10,000 per
year with no additional compensation for meetings over four per year.
Additionally, the structure provides Directors who serve on the Executive, Audit
or Compensation Committees to receive annual options for 10,000 shares of Telos
Common Stock at market value.
Employment Contracts
As of December 31, 2000, the Company was a party to agreements with certain
of its executive officers. Mr. David S. Aldrich, Director, President and Chief
Executive Officer, Mr. Robert Marino, Chief Sales and Marketing Officer, and Mr.
John Wood, Director and Executive Chairman, currently have employment contracts
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, Marino and Wood would receive annually, given
their present salary levels, $350,000, $218,000 and $350,000 respectively, for a
two-year period.
In addition to base salary, the executives are eligible for a discretionary
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 and 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 2001, the Company expects to review the contracts described
above. In addition, strategic hires or promotions may increase the number of
Executives who have these Employment Contracts.
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, 2001
Class A Common Stock John R. C. Porter 22,190,718 shares(A) 80.52%
79 Mount Street
London W1K 2SN England
Class A Common Stock C3, Inc. 401(k) Plan and Telos 3,658,536 shares 17.28%
Corporation Savings Plan
c/o C3, Inc.
19886 Ashburn Road
Ashburn, VA 20147
Class B Common Stock F&C Nominees Limited 2,102,450 shares (B) 52.07%
Berkeley Square House, Berkeley Square
London W1X 5PA England
Class B Common Stock Hare & Company 1,186,720 shares 29.39%
c/o Bank of New York
P.O. Box 11203
New York, NY 10249
Class B Common Stock Cudd & Company 669,888 shares 16.59%
11th Floor, 4 New York Plaza
New York, NY 10004
Class A Common Stock David S. Aldrich 663,534 shares (C) 3.04%
Class A Common Stock William L. P. Brownley 160,099 shares (C) 0.75%
Class A Common Stock Robert J. Marino 474,034 shares (C) 2.20%
Class A Common Stock Thomas J. Ferrara 34,819 shares (C) 0.16%
Class A Common Stock John B. Wood 1,724,860 shares (C) 7.55%
Class A Common Stock All Officers and Directors as a Group 3,163,393 shares (D) 13.07%
(7 persons)
12% Cumulative Exchangeable John C. Boland 31,220 shares (E) 2.40%
Redeemable Preferred Stock 714 St. Johns Road
Baltimore, MD 21210-2134
12% Cumulative Exchangeable Value Partners, Ltd. 714,317 shares (F) 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 (G) 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
(A) Mr. Porter's holdings include 6,388,916 shares of Class A Common Stock
purchasable upon exercise of a warrant.
(B) 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. F&C Nominees Limited did not
provide to the Company the addresses of these beneficial owners.
(C) The common stock holdings of Messrs. Aldrich, Brownley, Marino, Ferrara
and Wood include 142; 11,501; 20,382; 8,819 and 37,243 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, Ferrara and Wood hold options to acquire 655,000; 142,500;
421,600; 26,000; 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, 2001.
(D) The common stock holdings of the Company's officers and directors as a
group include 78,134 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 3,030,325 shares
of Class A Common Stock exercisable within 60 days of March 1, 2001.
(E) 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 owns 46,500 shares of the 12%
cumulative exchangeable redeemable preferred stock of the Company. Mr. Boland
has filed on Form 3 with the Commission that he may be deemed to own 1,220 of
Remnant Partners LP's 46,500 shares.
(F) 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.
(G) 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. 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 2000, 1999, and 1998 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 for 1998. 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 received a bonus of $135,000
payable in installments during 2000.
Mr. Gerald Calhoun, former Vice President of Human Resources and Corporate
Secretary, entered into a settlement agreement with the Company to resolve a
dispute over Mr. Calhoun's employment contract with the Company. The Company
will pay Mr. Calhoun 24 months of severance in installments from 2000 until
2002. Mr. Calhoun will also receive medical and insurance benefits through the
Company for the same two-year period. Mr. Calhoun's payment of salary and fringe
benefits amounts to approximately $189,000 per annum. Under the agreement, the
Company extended the option term of Mr. Calhoun's vested options until September
2001.
Mr. William L.P. Brownley, former Vice President and General Counsel of the
Company, entered into an agreement with the Company whereby he will serve as an
of counsel attorney to the Company from December 31, 2000 through March 31,
2003. In return, Mr. Brownley will be paid $220,000 per annum from January 1,
2001 through March 31, 2003. The Company will also continue to provide him with
medical and insurance benefits during that same period.
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)
10.20 Revolving 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)
10.31 September 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)
10.32 September 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)
10.33 September 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)
10.34 September 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)
10.35 October 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)
10.36 October 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)
10.37 September 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)
10.38 September 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)
10.39 September 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)
10.40 September 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)
10.43 Amendment to Revolving and Reducing Senior Credit Facility dated as
of December 31, 1993 among C3, Inc., Telos Corporation and NationsBank,
N.A.
10.44 Amendment to Revolving and Reducing Senior Credit Facility dated as of
April 11, 1994 among C3, Inc., Telos Corporation and NationsBank, N.A.
10.45 Amendment to Revolving and Reducing Senior Credit Facility dated as
of June 8, 1994 among C3, Inc., Telos Corporation and NationsBank, N.A.
10.46 Amendment to Revolving and Reducing Senior Credit Facility dated as of
October 7, 1994 among C3, Inc., Telos Corporation and NationsBank, N.A.
10.47 October 7, 1994 Letter Agreement among C3, Inc., Toxford Corporation,
and NationsBank, N.A. regarding cash collateral held on behalf of the
Company.
10.48 October 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.
10.49 Amendment to Revolving and Reducing Senior Credit Facility dated as of
January 5, 1995 among C3, Inc., Telos Corporation and NationsBank, N.A.
10.50 Amendment to Revolving and Reducing Senior Credit Facility dated as of
January 12, 1995 among C3,Inc., Telos Corporation and NationsBank, N.A.
10.51 Waiver and Amendment to Revolving and Reducing Senior Credit Facility
dated as of April 17, 1995 among C3, Inc., Telos Corporation and
NationsBank, N.A.
10.58 Series 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
10.59 Series 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.
10.60 Series 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
10.61 Series B Senior Subordinated Secured Note due October 1, 2000 as
of October 13, 1995 between Telos Corporation (Maryland) and Mr.
John R.C. Porter
10.62 Series B Senior Subordinated Secured Note due October 1, 2000 as
of October 13, 1995 between Telos Corporation (Maryland) and Sir
Leslie Porter
10.63 Series B Senior Subordinated Secured Note due October 1, 2000 as
of October 13, 1995 between Telos Corporation (Maryland) and Second
Consolidated Trust, PLC
10.64 Series B Senior Subordinated Secured Note due October 1, 2000 as
of October 13, 1995 between Telos Corporation (Maryland) and Toxford
Corp.
10.65 Series 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
10.66 Series 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.
10.67 Series 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
10.68 Series C Senior Subordinated Unsecured Note due October 1, 2000 as
of October 13, 1995 between Telos Corporation (Maryland) and Mr.
John R.C. Porter
10.69 Series C Senior Subordinated Unsecured Note due October 1, 2000 as
of October 13, 1995 between Telos Corporation (Maryland) and Sir Leslie
Porter
10.70 Series C Senior Subordinated Unsecured Note due October 1, 2000 as
of October 13, 1995 between Telos Corporation (Maryland) and Second
Consolidated Trust, PLC
10.71 Series C Senior Subordinated Unsecured Note due October 1, 2000 as
of October 13, 1995 between Telos Corporation (Maryland) and Toxford
Corp.
10.72 Amendment to Revolving and Reducing Senior Credit Facility dated as of
August 4, 1995 Telos Corporation (Maryland), Telos Corporation
(California) and NationsBank N.A.
10.73 Amendment 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
10.76 Sixteenth 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
10.82 Amended 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
10.85 Share Purchase Agreement between Telos Corporation, a Maryland
corporation, formerly named and known as C3, Inc. and Union Bank of
Switzerland, dated May 7, 1998
10.86 Series 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
10.87 Series 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
10.88 Common Stock Purchase Series D Warrant between Telos Corporation
(Maryland) and Foreign and Colonial Enterprise Trust PLC
10.89 Common Stock Purchase Series D Warrant between Telos Corporation
(Maryland and Foreign and Colonial Enterprise Trust LP
10.90 Form of Stock Purchase Agreement
10.91 Asset 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: April 2, 2001
------------------------
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
- ----------------- the Board of Directors
John B. Wood April 16, 2001
/s/ Fred Charles Ikle Chairman of the April 16, 2001
- ---------------------- Board of Directors
Fred Charles Ikle
/s/ Stephen D. Bryen Director April 16, 2001
- ----------------------
Stephen D. Bryen
/s/ Norman P. Byers Director April 16, 2001
- ----------------------
Norman P. Byers
/s/ Malcolm M.B. Sterrett
- -------------------------
Malcolm M.B. Sterrett Director April 16, 2001
Director April 16, 2001
- ----------------------
John C. Boland
/s/ David S. Aldrich President, Chief Executive April 16, 2001
- -------------------- Officer (Principal Executive
David S. Aldrich Officer)
/s/ Thomas J. Ferrara Chief Financial Officer April 16, 2001
- ---------------------- (Principal Financial Officer
Thomas J. Ferrara & Principal Accounting Officer)