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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
[ ]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, 2002, 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): 60
--
PART 1
Item 1. Business
History and Introduction
Founded in 1968, Telos Corporation ("Telos" or the "Company") delivers
enterprise security and integration solutions and services to customers in the
U. S. Government and industry. During 2001, America and Telos' largest customer,
the U.S. Government, changed forever in terms of their need for an increase in
reliable and secure information and communication. Telos solutions address
critical needs in the areas of secure wireless networking, secure messaging,
secure local area networks ("LAN") data integration and enterprise risk
management.
Since 1996, Telos has identified and sold a number of business units that
were not a part of its strategic direction. These businesses were: Telos
Consulting Services, Telos Information Systems, and Telos Field Engineering. In
1999, Enterworks was separately funded and deconsolidated from Telos. Telos now
owns 23.1% of Enterworks. In 2000, Telos contributed the net assets of its Ft.
Sill operation to a new joint venture with outside investors, resulting in a 50%
ownership in TelosOK. These dispositions and ventures, as well as operating cash
flows, have enabled Telos to reduce corporate indebtedness from a high of $56.9
million in 1997 to $20.6 million in 2001.
Reportable Operating Segments
During 2001, Telos provided its business solutions through three operating
segments: the Products Group, Systems and Support Services Group (the "Services
Group"), and its wholly owned subsidiary, Xacta Corporation.
Products Group
The Company's Products Group delivers solutions that combine information
technology products and services to solve customer problems. For 2001, the
Products Group generated revenue of $96.3 million, up 9.7% from 2000. This Group
represents 56.6% of the Company's reported consolidated revenue for 2001.
Customers of the Products Group include agencies of the U.S. Government such as:
military services, Defense Agencies, Treasury Department, U.S. Courts and
others.
Solutions from the Products Group consist of a combination of
commercial-off-the-shelf ("COTS") products from major original equipment
manufacturers ("OEMs"), Telos proprietary products, Telos and subcontractor
services and Telos proprietary practices. For example, the Products Group sells
secure wireless networking and secure messaging solutions. Telos' secure
wireless networking solutions allow customers to securely access databases from
non-networked locations so that they can perform a variety of tasks safely.
Telos' secure messaging solution is known as the Automated Message Handling
System ("AMHS") and is a standard within the Department of Defense. The AMHS
allows users to securely access, send, search, and profile message traffic.
Services Group
The Company's Services Group provides post-deployment and post-production
software and systems development and support services including technology
insertion, systems redesign and software re-engineering. The Services Group's
largest customer is the U.S. Army's Communications and Electronics Command
("CECOM"). The Services Group has approximately 228 personnel. Of all tasks
performed by this Group, 96.9% of the tasks performed are on a time and
materials basis with the remaining 3.1% being performed by subcontractors on a
fixed price basis. For 2001, the Services Group generated revenue of $60.4
million, up 24.7% from 2000. The Group represents 35.5% of the Company's
consolidated revenue for 2001. The Services Group's principal operations are
located at Fort Monmouth, NJ and Fort Sill, OK.
Since, 1983, the Services Group at Fort Monmouth has supported
approximately 80 tactical land systems and satellite communications systems for
CECOM's Research, Development and Engineering Center. During 2001, Telos and its
partners organized a joint venture and were awarded a contract with a ceiling of
approximately $1.4 billion over 10 years. The Services Group at Fort Monmouth
achieved a software development assurance of Level 3 based on the Software
Engineering Institute's (SEI) capability maturity model for software (CMM).
Since 1977, the Services Group at Ft. Sill has developed 93 fire support
systems and 177 major systems upgrades, totaling more than 11 million lines of
code, using nine different programming languages for CECOM's Fire Support
Software Engineering Center. During 2000, Telos contributed its Ft. Sill
operation to a newly created entity, Telos-OK, in return for a 50% ownership,
cash and other consideration. During 2001, Telos-OK teamed with United Defense,
LP in support of the US Army's Crusader program and with Raytheon on the US
Army's Advanced Field Artillery Tactical Data System ("AFATDS") program.
Telos-OK has achieved SEI CMM Level 4 for software development assurance.
Results from the Services Group at Ft. Sill were included in Telos'
financial results until its deconsolidation in July 2000 (see Note 3 to the
Consolidated Financial Statements). Since that time, the Company remains as the
prime contractor on the Ft. Sill contract because the contract has yet to be
successfully novated by the government. Therefore, in accordance with generally
accepted accounting principles of the United States of America, the revenues and
related expenses for this contract are included in their respective captions in
the Company's financial statements. These "pass-through" revenues and related
expenses reported by the Company result in zero profit to the Company. The
Company anticipates this contract to be novated in the first half of 2002. The
TFE division was part of the Systems and Support Services Group prior to its
sale in 1999 (See Note 5 to the Consolidated Financial Statements).
Xacta Corporation
Xacta develops enterprise risk management software to help organizations to
proactively manage and monitor the security of their network environments in
accordance with internationally recognized industry and security standards. For
2001, Xacta generated revenue of $13.6 million, up 49.3% from 2000. This Group
represents 7.9% of the Company's consolidated revenue for 2001. Xacta currently
sells its solutions to agencies of the U.S. Government as well as credit unions.
Xacta has developed and is selling two products: Xacta Web C&A and Xacta
Commerce Trust. Xacta Web C&A automates the rigorous and time-consuming process
of security certification and accreditation. Xacta Web C&A simplifies
certification and accreditation by guiding users through a step-by-step process
which determines the customer's information security posture and assesses system
and network configuration compliance with applicable regulations, standards, and
industry best practices and processes. With Xacta Commerce Trust, organizations
are able to perform holistic security risk management on a continuous basis in
accordance with internationally recognized industry standards and best
practices.
Revenue by Major Market and Significant Customers
Revenue by major market for the Company is as follows:
Percentage of total consolidated revenue for
---------------------------------------------
2001 2000 1999
---- ---- ----
Federal government 97.7% 96.2% 92.8%
Commercial 2.3 3.8 5.9
State and local governments -- -- 1.3
---- ---- ---
Total 100.0% 100.0% 100.0%
====== ====== ======
Total consolidated revenue derived from the federal government for 2001
includes 58.7% of revenue from contracts with the United States Army, 6.9% of
revenue from contracts with the United States Air Force, 3.7% of revenue from
contracts with the United Sates Navy, 11.7% of revenue with other Department of
Defense customers, and 13.5% 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 that 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 625 persons as of December 31, 2001. 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, 228 provide Systems and Support Services,
159 provide Systems Integration (Products) Services, and 128 work for the
Company's Xacta subsidiary. An additional 110 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, 2001 and 2000, the Company had total backlog from existing
contracts of approximately $830.0 million and $124.4 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 increase in total
backlog is primarily attributable to the dual award of the US Army CECOM SEC
contract to the Company's 50% owned joint venture, ITel Solutions. The Company
will be a subcontractor to this joint venture, and estimates upon the successful
award of competing task orders total backlog up to approximately $700 million.
Approximately $28 million and $43 million of the total was funded backlog
at December 31, 2001 and 2000, 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 2001
During 2001, the Company continued to focus on its commitment to creating
unique, value added solutions, and reducing corporate indebtedness. The
following paragraphs illustrate several examples of how.
The Company's Services Group created ITel Solutions, a joint venture
between Telos and L3/Ilex. ITel Solutions was awarded a dual contract to provide
systems and software engineering support to CECOM. The award has a potential
value of approximately $1.4 billion over 10 years. Under this dual award
contract, ITel Solutions will compete for the award of tasks under the contract.
Telos has also created value added solutions through its wholly-owned
subsidiary, Xacta. There has never been a stronger need for reliable and secure
communication. Xacta provides solutions to both Government and commercial
customers to handle certain of these critical needs. Specifically, Xacta
solutions help organizations proactively manage and monitor the security of
their network environments in accordance with internationally recognized
information security and privacy standards, regulations, guidelines and industry
best practices.
The Company's Products Group continues to better serve its customers with
innovative product offerings, and as a result has experienced increased order
volume and profitability in 2001. For example, the Products Group sells secure
wireless networking and secure messaging solutions. Telos' secure wireless
networking solutions allow customers to securely access databases from
non-networked locations so that they can perform a variety of tasks safely.
Telos' secure messaging solution is known as the Automated Message Handling
System ("AMHS") and is a standard within the Department of Defense. The AMHS
allows users to securely access, send, search, and profile message traffic.
The Company made significant strides in reducing corporate indebtedness in
2001. The Company's term facility balance has been reduced by approximately 50%
from the 2000 balance due to cash generation from operations. The Company was
able to retire one of its Series C Subordinated Notes in 2001 and negotiated
extensions of all its Series B and Series C Subordinated Notes and its Senior
Redeemable Preferred Stock to May of 2003.
The Company did not receive its anticipated volume of orders at the end of
the federal government year (the federal government fiscal year ends September
30). In addition, the 2002 government budget approval was also delayed by
several months. These two issues caused the Company to experience a decline in
sales from the fourth quarter of 2001 compared to the fourth quarter of 2000.
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 21,816 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, 2003
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 5 separate facilities located in California, New
Jersey, 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
The Company's annual meeting of common shareholders was held on November 6,
2001. The only matter set forth in the meeting was the election of directors.
The shareholders of the common stock necessary to constitute a quorum were
present either in person or represented by proxy or attorney. Dr. Fred Charles
Ikle, John B. Wood, Norman P. Byers, Dr. Stephen D. Bryen, and David S. Aldrich
were elected to a term of approximately one year, a term to expire at the next
annual meeting of shareholders upon the election of their successors. Effective
March 20, 2002, Dr. Bryen resigned as a proxy holder and Director.
With regards to the holders of the 12% Cumulative Exchangeable Preferred
Stock, shareholders of such stock necessary to constitute a quorum were not
present and, therefore, the nominations of Malcolm M.B. Sterrett and Geoffrey B.
Baker were not considered. Subsequent to the shareholders meeting, Malcolm M.B.
Sterrett, an incumbent director, appointed Geoffrey B. Baker to fill the term of
John C. Boland, who resigned on October 2, 2001. Mr. Sterrett and Mr. Baker's
terms are for a period of one year, a term to expire at the next annual meeting
of shareholders upon the election of their successors. Such appointment was
consistent with Article Fifth (C)7(b)(vi) of the Company's Articles of Amendment
and Restatement.
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, 2002, there were 84 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,
---------------------------
(amounts in thousands)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Sales (1) $170,261 $145,310 $171,364 $207,086 $253,787
(Loss)income before
extraordinary items (671) (1,794) (9,979) (9,171) 1,412
Extraordinary items(2) -- -- 8,015 -- --
Net (loss) income $ (671) $ (1,794) $ (1,964) $ (9,171) $ 1,412
FINANCIAL CONDITION
As of December 31,
---------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(amounts in thousands)
Total assets (1) $ 53,561 $ 77,090 $ 56,886 $ 95,251 $109,718
Long-term debt (3) 20,566 32,846 25,045 54,651 56,875
Capital lease obligations,
long-term (4) 10,722 11,030 11,362 11,710 12,085
Senior redeemable
preferred stock (5) 6,903 6,480 6,054 5,631 5,207
Class B redeemable
preferred stock -- -- -- -- 12,035
Redeemable preferred
Stock (5) $ 47,876 $ 42,352 $ 36,975 $ 31,729 $ 29,951
(1) See Notes 3, 4 & 5 to the Consolidated Financial Statements in Item 8 regarding the contribution of Ft. Sill assets, the
deconsolidation of Enterworks and the sale of TFE.
(2) See Note 4 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 7 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 11 to the Consolidated Financial Statements in Item 8 regarding the capital lease obligations of the Company.
(5) See Note 8 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 2001, the Company continued to focus on its commitment to creating
unique, value added solutions, and reducing corporate indebtedness. The
following paragraphs illustrate several examples of how.
The Company's Services Group created ITel Solutions, a joint venture
between Telos and L3/Ilex. ITel Solutions was awarded a dual contract to provide
systems and software engineering support to CECOM. The award has a potential
value of approximately $1.4 billion over 10 years. Under this dual award
contract, ITel Solutions will compete for the award of tasks under the contract.
Telos has also created value added solutions through its wholly-owned
subsidiary, Xacta. There has never been a stronger need for reliable and secure
communication. Xacta provides solutions to both Government and commercial
customers to handle certain of these critical needs. Specifically, Xacta
solutions help organizations proactively manage and monitor the security of
their network environments in accordance with internationally recognized
information security and privacy standards, regulations, guidelines and industry
best practices.
The Company's Products Group continues to better serve its customers with
innovative product offerings, and as a result has experienced increased order
volume and profitability in 2001. For example, the Products Group sells secure
wireless networking and secure messaging solutions. Telos' secure wireless
networking solutions allow customers to securely access databases from
non-networked locations so that they can perform a variety of tasks safely.
Telos' secure messaging solution is known as the Automated Message Handling
System ("AMHS") and is a standard within the Department of Defense. The AMHS
allows users to securely access, send, search, and profile message traffic.
The Company made significant strides in reducing corporate indebtedness in
2001. The Company's term facility balance has been reduced by approximately 50%
from the 2000 balance due to cash generation from operations. The Company was
able to retire one of its Series C Subordinated Notes in 2001 and negotiated
extensions of all its Series B and Series C Subordinated Notes and its Senior
Redeemable Preferred Stock to May of 2003.
The Company did not receive its anticipated volume of orders at the end of
the federal government year (the federal government fiscal year ends September
30). In addition, the 2002 government budget approval was also delayed by
several months. These two issues caused the Company to experience a decline in
sales from the fourth quarter of 2001 compared to the fourth quarter of 2000.
During 2001, the Company experienced increases in revenue and
profitability. Revenue increased $25.0 million, or 17.2%, as compared to 2000.
Approximately $8.5 million of this increase was attributable to the Company's
Products Group, which experienced increased sales from its traditional contracts
with the federal government such as the Infrastructure Solutions I ("IS-1")
contract, the Realtime Automated Personnel Identification System Contract
("RAPIDS"), and the Company's contracts serving the US Courts ("US Courts"). The
increase in sales was also attributable to the pass-through sales from the
Company's prime relationship on the Ft. Sill Contract, which resulted in
increased sales of $12.0 million. This contract was contributed to TelosOK in
July 2000, however, the Company remains as the prime contractor until the
contract is successfully novated by the government. The Company anticipates this
novation to occur in the first half of 2002. The Xacta Group also experienced an
increase in revenue of $4.5 million, mostly due to increased sales of its
information security products and solutions. Operating income for 2001 was $2.3
million, as compared to an operating income of $1.2 million in 2000.
Profitability increased principally as a result of increased sales volume from
all three Groups, coupled with improved profits under the Company's traditional
businesses and its information security channel business in its Products Group
as well as increased margins in its Xacta subsidiary.
During 2000, the Company's revenue and profitability decreased as compared
to 1999. Revenue decreased $26.1 million, or 15.2%. 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 profit for 2000 was $1.2 million, as compared to an
operating profit 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.
Approximately 97.7% of the Company's total revenues in 2001 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 2001, revenue by contract type was as
follows: time and materials, 41.2%; firm fixed price, 58.3%; other, 0.5%. While
the Company has not experienced any significant recent terminations or
renegotiations, government contracts may be terminated or renegotiated at any
time at the convenience of the government.
Statement of Operations Data
The following table sets forth certain consolidated financial data and
related percentages for the periods indicated:
Year Ended December 31,
-----------------------
2001 2000 1999
-----------------------------------------------
(dollar amounts in thousands)
Sales $170,261 100.0% $145,310 100.0% $171,364 100.0%
Cost of sales 143,041 84.0 124,028 85.4 151,216 88.2
Selling, general and
administrative expenses 24,634 14.4 19,796 13.6 17,459 10.2
Goodwill amortization 250 0.2 312 0.2 489 0.3
--- --- --- --- --- ---
Operating income 2,336 1.4 1,174 0.8 2,200 1.3
Interest expense (4,073) (2.4) (4,777) (3.3) (6,065) (3.5)
Gain on sale of assets -- -- -- -- 4,731 2.8
Equity in net losses
of Enterworks -- -- -- -- (18,765) (11.0)
Equity in earnings of TelosOK -- -- 2,328 1.6 -- --
Other income 70 -- 98 0.1 67 --
----- --- ----- ---- ------ ----
Loss before taxes (1,667) (1.0) (1,177) (0.8) (17,832) (10.4)
Income tax benefit (provision) 996 0.6 (617) (0.4) 7,853 4.6
--- --- ---- ---- ----- ---
Loss before extraordinary item (671) (0.4) (1,794) (1.2) (9,979) (5.8)
Extraordinary Item -- -- -- -- 8,015 4.7
----- --- ----- ---- ------- ---
Net loss $ (671) (0.4)% $ (1,794) (1.2)% $ (1,964) (1.1)%
======== ==== ======== ==== ======== ====
Financial Data by Operating Segment
The Company has three reportable operating segments: Systems and Support
Services, Products, and Xacta. Sales, gross profit and gross margin by market
segment for the periods designated below are as follows:
(dollar amounts in thousands)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Revenue:
Systems and Support Services $ 60,402 $ 48,429 $ 77,701
Products 96,301 87,799 89,261
Xacta 13,558 9,082 4,402
------ ------ ------
Total $ 170,261 $ 145,310 $ 171,364
======= ======= =======
Gross Profit:
Systems and Support Services $ 5,261 $ 5,278 $ 11,768
Products 17,027 13,474 7,169
Xacta 4,932 2,530 1,211
------ ----- -----
Total $ 27,220 $ 21,282 $ 20,148
====== ======= =========
Gross Margin:
Systems and Support Services 8.7% 10.9% 15.1%
Products 17.7% 15.3% 8.0%
Xacta 36.4% 27.9% 27.5%
Total 16.0% 14.6% 11.8%
Results of Operations
Sales increased $25.0 million or 17.2% to $170.3 million for the year ended
December 31, 2001, from $145.3 million for the comparable 2000 period. The
increase for the period includes an $8.5 million increase in Products' sales, an
increase of $12.0 million in Systems and Support Services sales, and an increase
of $4.5 million in Xacta revenue. This increase in the revenue is primarily due
to the increases in revenue from the Products Group traditional businesses as
well as the pass-through sales contract as mentioned above. These increases were
enhanced by increased sales under the Information Security product line of $4.5
million.
Cost of sales was 84.0% of sales for the year ended December 31, 2001, as
compared to 85.4% for the same period in 2000. The reduction in cost of sales as
a percentage of sales is primarily attributable to increased profits realized on
Products Group traditional contracts, such as IS-1 and US Courts, and from
increased profits from sales of the Company's information security product line.
Gross profit increased $5.9 million in the period to $27.2 million in 2001
from $21.3 million in 2000. The gross margin was 16.0% for the twelve-month
period of 2001 as compared to 14.6% for the comparable period of 2000.
Selling, general, and administrative expense ("SG&A") increased by
approximately $4.8 million or 24.4%, to $24.6 million in the year ended December
31, 2001 from $19.8 million in the comparable period of 2000, which is primarily
attributable to the Company's increased investment in the product development,
sales and marketing effort for Xacta. The increase is also due to an
approximately $600,000 one-time write-off of an investment made in an
international joint venture, and a $1.8 million reserve recorded against the
Enterworks notes receivable held by the Company (See Note 2 to the Financial
Statements). SG&A as a percentage of revenues for the twelve-month period ended
December 31, 2001 increased to 14.4% from 13.6% compared to the same period in
2000.
Goodwill amortization expense decreased $62,000 for the comparative
year-end periods of 2001 and 2000. The reduction is exclusively due to the
goodwill transfer associated with the TelosOK transaction.
The operating income of the Company increased by $1.1 million to
approximately $2.3 million in the year ended December 31, 2001 from an operating
income of $1.2 million in the comparable 2000 period. The increase in operating
profit is mostly attributable to the increases in gross profit discussed above.
In order to present the statement of operations in accordance with APF 18,
the Company's share of Enterworks, Inc. was presented in one line item "Equity
in net losses in Enterworks" due to the deconsolidation of Enterworks on
December 30, 1999. (See Note 4 to the consolidated financial statements). In
2000 and 2001, Enterworks continued to recognize losses, accordingly no
adjustments to earnings of the Company were made in fiscal 2000 and 2001 related
to the Enterworks investment because the balance of the Company's investment in
Enterworks was $0.
In order to present the statement of operations in accordance with APB 18,
the revenues and costs of sales for the Ft. Sill operation contributed to
TelosOK were presented in one line item "Equity in Net Earnings of TelosOK" for
the year ended December 31, 2000 (See Note 3). For 2000, Equity in Net Earnings
of TelosOK was approximately $2.3 million. The Company, under APB 18, is unable
to recognize its pro rata share of the income generated by TelosOK for 2001, as
the Company's capital account for TelosOK is negative.
Interest expense decreased approximately $700,000 to $4.1 million in 2001
from approximately $4.8 million in the comparable 2000 period. These decreases
are primarily due to decreased debt levels and declining interest rates in 2001
compared to 2000.
The Company recorded an income tax benefit for the year ended December 31,
2001 of $996,000. This tax benefit was principally due to the net loss generated
by the Company. The Company's net deferred tax assets totaled $8.3 million at
December 31, 2001. Failure to achieve forecasted taxable income may affect the
ultimate realization of the net deferred tax assets. Management believes the
Company will generate taxable income in excess of operating losses sufficient in
amounts to realize the net deferred tax assets. The Company recorded an income
tax provision of approximately $600,000 for the year ended December 31, 2000.
The provision incurred was a result of the taxable gain generated from proceeds
received from the contribution of assets to TelosOK in July 2000 (see Note 3).
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 $1.5 million decrease in Products' sales and a $29.3 million
decrease in Systems and Support Services sales, partially offset by an increase
of $4.7 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 approximately $200,000 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 4 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 were
made in fiscal 2000 related to the Enterworks investment because the balance of
the Company's investment in Enterworks was $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 TelosOK presented in one line item "Equity in net earnings of
TelosOK" due to the joint venture agreement signed July 27, 2000 (See Note 3).
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 was
negative. Therefore, the Company's investment balance in TelosOK was $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 3). 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 4 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.
Liquidity and Capital Resources
The Company's capital structure consists of a revolving credit facility,
subordinated notes, redeemable preferred stock, and common stock.
At December 31, 2001, the Company had an outstanding balance of $12.4
million on its $20 million Senior Credit Facility (the "Facility"). The Facility
matures on January 15, 2003 and is collateralized by a majority of the Company's
assets including inventory, accounts receivable and the Company's stock in its
subsidiaries and affiliates. 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 fixed charge coverage and operating goals. At December 31, 2001,
the Company was not in compliance with several covenants contained in the
Facility, however, the bank has waived such non-compliance. The bank has amended
the covenants to conform to the Company's 2002 budget expectations. The Company
is in the process of actively negotiating a replacement for the Facility.
The Company's subordinated notes are held principally by common
shareholders and totaled $8.2 million at December 31, 2001. These notes bear
interest at rates between 14% and 17%, with all notes payable on May 23, 2003.
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, 2001 the
total carrying amount of redeemable preferred stock, including accumulated and
unpaid dividends was $54.8 million. The Company accrues dividends and provides
for accretion related to the redeemable preferred stock. Mandatory redemption
for all shares of the Senior Redeemable Preferred Stock plus all accrued
dividends on those shares is due May 23, 2003, subject to the legal availability
of funds. Mandatory redemption for the Public Preferred Stock is required from
2005 through 2009, subject to the legal availability of funds.
Cash provided by operating activities was $13.8 million in 2001, due
primarily to improved cash generation from operations, and a decline in the
overall accounts receivable balance due to decreases in sales from this year's
fourth quarter compared to the prior year's fourth quarter. Cash used in
investing activities was $656,000 in 2001, reflecting capital expenditures made
by the Company in 2001. The Company used cash for financing activities in the
amount of $13.3 million in 2001, reflecting primarily payments made to reduce
the balance of the Facility.
In July 2000, the Company entered into a subscription agreement with
certain investors that provided for the formation of an Oklahoma limited
liability company named Telos OK, LLC (See Note 3 to the Consolidated Financial
Statements). The Company owns 50% of this joint venture and has guaranteed 50%
of the outstanding balance of a term loan TelosOK has with a bank. The balance
of this loan was $2.4 million at December 31, 2001.
Capital Expenditures
The Company believes that its business is generally not capital intensive.
Capital expenditures for property and equipment were $656,000 in 2001, $1.7
million in 2000 and $1.4 million in 1999. The Company anticipates capital
expenditures of approximately $1.3 million in 2002; 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
The Company currently does not engage or plan to engage in the use of
hedging or derivative instruments. Therefore, the implementation of SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities"
did not have a material impact on the results of operations, cashflows or
financial position.
On September 29, 2000, FASB Statement No. 140 ("SFAS 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. SFAS 140
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The implementation of SFAS
140 did not have a material impact on the Company's consolidated financial
statements.
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
addresses financial accounting and reporting for business combinations. All
business combinations in the scope of this Statement shall be accounted for
using the purchase method of accounting. The provisions of SFAS No.141 apply to
all business combinations initiated after June 30, 2001, and business
combinations accounted for by the purchase method for which the date of
acquisition is July 1, 2001, or later. Certain transition provisions of SFAS
No.141 apply to business combinations for which the acquisition date was before
July 1, 2001, that were accounted for using the purchase method, as of the date
SFAS No. 141 is initially applied in its entirety. The adoption of SFAS No. 141
did not have a material effect on the Company's financial position, results of
operations or cash flows.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Implementation of this Statement will
require the Company to cease amortization of goodwill and goodwill will be
tested for impairment at least annually at the reporting unit level. Goodwill
will be tested for impairment on an interim basis if an event occurs or
circumstances change that would "more likely than not" reduce the fair value of
a reporting unit below its carrying value. Intangible assets that are subject to
amortization will be reviewed for impairment in accordance with SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". The provisions of SFAS 142 are required to be applied starting
with fiscal years beginning after December 15, 2001 and will therefore be
applied for the year ending December 31, 2002. As of January 1, 2002, the
Company will no longer amortize goodwill to expense, but will instead review
goodwill periodically for impairment. The adoption of SFAS 142 is expected to
reduce goodwill amortization expense by $250,000 annually. No material changes
to the carrying values of goodwill as a result of the adoption of SFAS 142 are
expected to be made.
In September 2001, FASB Statement No. 143 (SFAS 143) "Accounting for Asset
Retirement Obligations" was issued. SFAS 143 provides guidance on the initial
measurement and subsequent accounting for obligations associated with the sale,
abandonment, or other type of disposal of long-lived tangible assets. The
Company is currently evaluating the provisions of SFAS 143, but does not
anticipate the implementation of SFAS 143 to have a material impact on the
results of operations, cash flows or financial position.
In October 2001, FASB Statement No. 144 (SFAS 144) "Accounting for the
Impairment or Disposal of Long-lived Assets" was issued. SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and this statement supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of".
The Company is currently evaluating the impact and materiality thereof, if any,
of SFAS 144 on its financial statements and related disclosures.
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 forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this 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
Xacta and the Company's access to ongoing development, product support and
viable channel partner relationships with Enterworks and Xacta.
While in the past the Company has not experienced contract terminations
with the U.S. Government, the U.S. Government can terminate at its convenience.
Should such a termination occur, the Company's operating results could be
adversely impacted. The increase in the Company's total backlog (referenced
above) is primarily attributable to the dual award of the U.S. Army CECOM SEC
contract to the Company's 50% owned joint venture, ITel Solutions. The Company
will be a subcontractor to this joint venture, and estimates that upon the
successful award of each competing task order, its total backlog relating to
such contract could be up to $700 million. Conversely, failure to be awarded the
majority of the competing task orders for such contract would adversely impact
the Company.
It should also be noted that post September 11, 2001, all U.S. Government
programs, especially those pertaining to national security, have been subject to
review and reprioritization. While the Company believes its products and
services are well positioned to benefit from such post September 11 demands, the
magnitude of such events certainly serves to emphasize how the Company's high
percentage of revenue derived from business with the U.S. Government could
alternatively be dramatically, swiftly and adversely impacted.
In addition, as a high percentage of the Company's revenue is derived from
business with the U.S. Government, the Company's operating results could also be
adversely impacted should the U.S. Government's annual budget not be approved in
a timely fashion.
The Company has many patents and patents pending, trademarks and copyrights
and other valuable proprietary information, and the Company has taken reasonable
and prudent steps to so protect its intellectual property. With regard to the
Company's wholly owned subsidiary, Xacta, whose software products require
constant monitoring as it develops future releases and creates additional
intellectual property, vigilant oversight of such intellectual property rights
is imperative. Similarly, the intellectual property associated with our wireless
division and our automated message handling system division require constant
oversight with regard to the development and protection of their respective
intellectual property. Accordingly, any event that brings into question the
Company's ownership of its intellectual property could, therefore, materially
and adversely impact the Company.
Item 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. This rate will escalate 25 basis points every other month from April 1,
2002 until expiration. The weighted average interest rate in 2001 was 9.13%.
This facility expires on January 15, 2003 and has an outstanding balance of
$12.4 million at December 31, 2001.
The Company's other long-term debt at December 31, 2001 consists of Senior
Subordinated Notes B and C which bear interest at fixed rates ranging from 14%
to 17%. The Senior Subordinated Notes principal balance at December 31, 2001 is
$8.2 million, and this principal amount matures on May 23, 2003. The Company has
no cash flow exposure due to rate changes for its Senior Subordinated Notes.
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, 2001, December 31, 2000, and December 31, 1999................17
Consolidated Balance Sheets as of December 31, 2001 and
December 31, 2000.......................................................18-19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, December 31, 2000, and December 31, 1999............20-21
Consolidated Statements of Changes In Stockholders' Investment (Deficit)
for the Years Ended December 31, 2001, December 31, 2000,
and December 31, 1999.....................................................22
Notes to Consolidated Financial Statements...............................23-45
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 cash flows and of changes in
stockholders' investment (deficit) present fairly, in all material respects, the
financial position of Telos Corporation and its subsidiaries ("the Company") at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, 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 our opinion.
As discussed in Note 7, the Company's Senior Revolving Credit Facility
expires on January 15, 2003. The Company is in the process of actively
negotiating a replacement of the Senior Revolving Credit Facility.
/s/ PRICEWATERHOUSECOOPERS LLP
McLean, VA
April 2, 2002, except for Note 7, as to which the date is April 4, 2002
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Sales
Systems and Support Services $60,402 $ 48,429 $ 77,701
Products 96,301 87,799 89,261
Xacta 13,558 9,082 4,402
------ ------ ------
170,261 145,310 171,364
------- ------- -------
Costs and expenses
Cost of Systems and
Support Services 55,141 43,151 65,933
Cost of Products 79,274 74,325 82,092
Cost of Xacta 8,626 6,552 3,191
Selling, general and administrative
expenses 24,634 19,796 17,459
Goodwill amortization 250 312 489
------ ------ -------
167,925 144,136 169,164
------- ------- -------
Operating income 2,336 1,174 2,200
Other income (expenses)
Non-operating income 70 98 67
Gain on sale of assets -- -- 4,731
Equity in net losses of Enterworks -- -- (18,765)
Equity in earnings of TelosOK -- 2,328 --
Interest expense (4,073) (4,777) (6,065)
------- ------- --------
Loss before income taxes (1,667) (1,177) (17,832)
Benefit(provision) for income taxes 996 (617) 7,853
----- ------ ------
Loss before extraordinary item (671) (1,794) (9,979)
Gain from early debt retirement and
sale of stock (net of income tax
provision of $5,322) -- -- 8,015
----- ------ -------
Net loss $ (671) $ (1,794) $(1,964)
======== ========= ========
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,
------------
2001 2000
---- ----
Current assets
Cash and cash equivalents
(includes restricted cash of $54 at December
31, 2001 and 2000) $ 115 $ 286
Accounts receivable, net 26,353 45,682
Inventories, net 4,227 7,045
Deferred income taxes 3,146 3,256
Other current assets 540 404
--- ------
Total current assets 34,381 56,673
------ ------
Property and equipment
Furniture and equipment 7,835 7,201
Leasehold improvements 389 675
Property and equipment
under capital leases 13,774 13,774
------ ------
21,998 21,650
Accumulated depreciation
and amortization (10,628) (9,331)
-------- -------
11,370 12,319
------ ------
Goodwill, net 2,499 2,749
Investment in TelosOK -- --
Deferred income taxes 5,143 4,603
Other assets 168 746
------ ------
$53,561 $77,090
======= =======
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,
---------------------
2001 2000
---- ----
Current liabilities
Accounts payable $10,603 $19,049
Accrued compensation and benefits 6,948 7,178
Unearned warranty revenue 8,710 8,609
Current portion, capital lease obligations 337 344
Senior subordinated notes -- 1,151
Other current liabilities 1,057 2,094
----- ------
Total current liabilities 27,655 38,425
Senior credit facility 12,387 25,460
Senior subordinated notes 8,179 7,386
Capital lease obligations 10,722 11,030
------ ------
Total liabilities 58,943 82,301
------ ------
Commitments and contingencies (Note 11)
Senior mandatorily redeemable preferred stock 6,903 6,480
Mandatorily redeemable exchangeable
preferred stock 47,876 42,352
------ ------
54,779 48,832
------ ------
Stockholders' investment
Class A common stock, no par value, 50,000,000
shares authorized, 21,171,202 shares issued and
outstanding, 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 (60,239) (56,839)
-------- --------
Total stockholders' investment (deficit) (60,161) (54,043)
-------- --------
$53,561 $77,090
======= =======
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,
-----------------------
2001 2000 1999
---- ---- ----
Operating activities:
Net loss $(671) $(1,794) $(1,964)
Adjustments to reconcile net loss
to cash provided by (used in) operating activities:
Depreciation and amortization 1,821 1,706 4,133
Goodwill amortization 250 312 489
Amortization of debt issuance costs -- 182 243
Accretion of subordinated notes -- -- 412
Provision for inventory obsolescence 514 50 600
Provision for doubtful accounts receivable -- 1,213 400
Gain on sale of assets -- -- (4,731)
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 320 -- 1,500
Reserve for termination agreements -- 1,186 --
Write off of international joint venture 654 -- --
Deferred income tax benefit (430) (127) (8,159)
Changes in assets and liabilities
Decrease (increase) in accounts receivable 19,329 (21,208) 20,141
Decrease (increase) in inventories 2,082 (2,481) 2,494
Decrease (increase) in other assets 294 (805) (116)
(Decrease) increase in accounts payable
and other liabilities (10,402) 7,045 3,762
-------- ----- ------
Cash provided by (used in) operating activities 13,761 (14,721) 11,181
------ -------- ------
Investing activities:
Proceeds from contribution of assets -- 6,000 --
Proceeds from sale of assets -- -- 10,000
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 (656) (1,691) (1,389)
Investment in other assets -- -- (800)
----- ---- -------
Cash (used in) provided by investing activities (656) 4,309 12,729
---- ----- ------
Financing activities:
(Payments of)proceeds from Senior Credit Facility (13,073) 8,952 (19,651)
Repayment of Series C Subordinated Note (358) -- --
Increase (decrease) in book overdrafts 470 1,789 (3,998)
Proceeds from issuance of common stock upon
exercise of Company stock options -- -- 3
Payments under capital lease obligations (315) (358) (357)
------- ------- -------
Cash (used in) provided by financing activities (13,276) 10,383 (24,003)
------- ------ --------
Decrease in cash and cash equivalents (171) (29) (93)
Cash and cash equivalents at beginning of the year 286 315 408
------ ------ -------
Cash and cash equivalents at end of year $ 115 $ 286 $ 315
====== ====== ======
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $2,605 $3,396 $5,409
====== ===== =====
Income taxes $522 $ 529 $ 272
==== ===== =====
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
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, 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)
---- ---- ------- --------- ---------
Senior redeemable preferred
stock dividend -- -- (423) -- (423)
Redeemable preferred stock dividend -- -- (2,295) (1,527) (3,822)
Redeemable preferred stock accretion -- -- -- (1,702) (1,702)
Contribution of assets to TelosOK -- -- -- 500 500
Net loss for the year -- -- -- (671) (671)
---- ---- ----- -------- --------
Balance December 31, 2001 $ 65 $ 13 $ -- $(60,239) $(60,161)
==== === ===== ========= =========
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 security and integration solutions and services to customers in the
U. S. Government and industry. During 2001, America and Telos' largest customer,
the U.S. Government, changed forever in terms of their need for an increase in
reliable and secure information and communication. Telos solutions address
critical needs in the areas of secure wireless networking, secure messaging,
secure local area networks ("LAN") data integration and enterprise risk
management.
Since 1996, Telos has identified and sold a number of business units that
were not a part of its strategic direction. These businesses were: Telos
Consulting Services, Telos Information Systems, and Telos Field Engineering. In
1999, Enterworks was separately funded and deconsolidated from Telos. Telos now
owns 23.1% of Enterworks. In 2000, Telos contributed the net assets of its Ft.
Sill operation to a new joint venture with outside investors, resulting in a 50%
ownership in TelosOK. These dispositions and ventures, as well as operating cash
flows, have enabled Telos to reduce corporate indebtedness from a high of $56.9
million in 1997 to $20.6 million in 2001.
During 2001, the Company provided its business solutions through three
operating segments: Systems and Support Services Group, the Products Group, and
its Xacta subsidiary.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Telos Corporation and its wholly owned subsidiaries, Telos Corporation
(California), ubIQuity.com, Inc., Telos International Corporation, 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 equity. The Company also
has a 50% interest in TelosOK, LLC, ("TelosOK") which is accounted for under the
equity method of accounting. Significant intercompany transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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, the
valuation allowance for deferred tax assets, employee benefits and estimated
useful lives of goodwill, property and equipment and other noncurrent assets,
including software development costs. Actual results could differ from those
estimates.
Revenue Recognition
The majority of the Company's sales are made directly or indirectly to the
federal government. A substantial portion of the Company's revenues is derived
from time and materials contracts, under which revenue is recognized as services
are performed and costs are incurred. Revenue from fixed price services
contracts is generally recognized over the contract term using the percentage of
completion method. The Company generally recognizes product revenue as products
are shipped, although certain revenue recognition practices are dependent upon
contract terms. Revenue for maintenance contracts is recognized as such services
are performed. The Company records loss provisions for its contracts, if
required, at the time such losses are identified.
The Company adopted the provisions of Staff Accounting Bulletin 101
"Revenue Recognition in Financial Statements" ("SAB 101") during 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 with
American Institute of Certified Public Accountants (AICPA) Statement of Position
("SOP")97-2 and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions". Revenue generated from
software subscription contracts is recognized ratably over the subscription
period.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 customer off-the-shelf hardware and software,
and component computer parts used in connection with system integration services
performed by the Company. Inventories also include spare parts of $794,000 and
$613,000 at December 31, 2001 and 2000, 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, 2001 and 2000, the Company's allowance for product
inventory was $884,000 and $1,777,000, respectively. The components of the
allowance for inventory obsolescence are set forth below (in thousands):
Additions
Balance, Charge to Balance,
Beginning Costs and End
of Year Expense Deductions(1) Of Year
------- ------- ------------- -------
Year ended December 31, 2001 $ 1,777 $ 514 $ (1,407) $ 884
Year Ended December 31, 2000 $ 1,992 $ 50 $ (265) $ 1,777
Year Ended December 31, 1999 $ 3,074 $ 600 $ (1,682) $ 1,992
(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 $1,598,000,
$1,541,000 and $2,314,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill arose principally from the acquisition of Telos Corporation
(California) in 1992 and has been assigned a useful life of twenty years. The
useful life considered a number of factors including the Company's maintenance
of long-term significant customer relationships for periods of up to
twenty-seven years and its strong positions in the marketplace.
The Company assesses the potential impairment and recoverability of
goodwill on an annual basis and more frequently if factors dictate. Management
forecasts are used to evaluate the recovery of goodwill through determining
whether amortization of goodwill can be recovered through projected undiscounted
future cash flows. If an impairment of goodwill is indicated, the impairment is
measured based on projected discounted cash flows using a discount rate
reflecting the Company's cost of funds. In addition, the Company may assess the
net carrying amount of goodwill using internal and/or independent valuations of
the Company.
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statements of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Implementation of
this Statement will require the Company to cease amortization of goodwill and
goodwill will be tested for impairment at least annually at the reporting unit
level. Goodwill will be tested for impairment on an interim basis if an event
occurs or circumstances change that would "more likely than not" reduce the fair
value of a reporting unit below its carrying value. Intangible assets that are
subject to amortization will be reviewed for impairment in accordance with SFAS
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". The provisions of SFAS 142 are required to be applied
starting with fiscal years beginning after December 15, 2001 and will therefore
be applied for the year ending December 31, 2002. As of January 1, 2002, the
Company will no longer amortize goodwill to expense, but will instead review
goodwill periodically for impairment. The adoption of SFAS 142 is expected to
reduce goodwill amortization expense by $250,000 annually. No material changes
to the carrying values of goodwill as a result of the adoption of SFAS 142 are
expected to be made.
Accumulated amortization of goodwill at December 31, 2001 and 2000 was
$10,006,000 and $9,756,000 respectively.
Other Assets
Until the deconsolidation of Enterworks on December 30, 1999 (Note 4),
other noncurrent assets consisted principally of capitalized software
development costs and debt issuance costs. The balance as of December 31, 2001
consists mostly of refundable deposits.
There were no unamortized software and product costs at December 31, 2001
and 2000. Amortization expense associated with prior years' capitalized software
and product costs was $0, $0 and $1,646,000, in 2001, 2000 and 1999,
respectively.
Debt issuance costs are amortized over the term of the underlying financial
instrument, which amortization method does not differ significantly from the
effective interest method. Due to the retirement of $7.6 million of Series B, C
and D subordinated notes in December 1999 (Note 7), $72,000 in debt issue costs
were written off in 1999.
Since 1997, one of the Company's wholly owned subsidiaries, Telos
International Corporation ("TIC"), has been a 50% owner of a joint venture
between TIC and Filinvest Capital, Inc., a Philippine company. The Company
accounted for this joint venture under the equity method of accounting as
prescribed by APB No. 18. The investment in this joint venture was included in
the other asset balance prior to 2001. In the second quarter of 2001, the
Company became uncertain as to whether operations under the joint venture would
continue as a going concern. Therefore, the Company determined that its
investment in Telos International-Filinvest, Inc. was impaired, and reduced its
investment balance in the joint venture to zero. The amount of the write-off
totaled $654,000, and is included in the Selling, General and Administrative
caption in the statement of operations for the year ended December 31, 2001.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 9).
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 2001, 2000 and 1999,
the Company incurred approximately $925,000, $200,000, and $7.2 million in
research and development costs, respectively.
Earnings per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share." This Statement establishes standards for
computing and presenting earnings per share (EPS). As the Company does not have
publicly held common stock or potential common stock, this Statement is not
applicable and, accordingly, no EPS data is reported for any of the years
presented.
Comprehensive Income
Comprehensive income includes changes in equity (net assets) during a
period from non-owner sources. The Company has no comprehensive income
components other than its net loss.
Financial Instruments
The Company uses various methods and assumptions to estimate the fair value
of its financial instruments. Due to their short-term nature, the carrying value
of cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximates fair value. The fair value of long-term debt is based on
the discounted cash flows for similar term borrowings based on market prices for
the same or similar issues. The Company has not estimated the fair value of its
subordinated debt or its redeemable preferred stock. The Company does not deem
such estimation practicable due to the unique features of these instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information. These estimates are subjective in nature and
involve matters of judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Reclassifications
Certain reclassifications have been made to the 2000 and 1999 financial
statements to conform to the current period presentation.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
The Company currently does not engage or plan to engage in the use of
hedging or derivative instruments. Therefore, the implementation of SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities"
did not have a material impact on the results of operations, cashflows or
financial position.
On September 29, 2000, FASB Statement No. 140 ("SFAS 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. SFAS 140
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The implementation of SFAS
140 did not have a material impact on the Company's consolidated financial
statements.
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
addresses financial accounting and reporting for business combinations. All
business combinations in the scope of this Statement shall be accounted for
using the purchase method of accounting. The provisions of SFAS No.141 apply to
all business combinations initiated after June 30, 2001, and business
combinations accounted for by the purchase method for which the date of
acquisition is July 1, 2001, or later. Certain transition provisions of SFAS
No.141 apply to business combinations for which the acquisition date was before
July 1, 2001, that were accounted for using the purchase method, as of the date
SFAS No. 141 is initially applied in its entirety. The adoption of SFAS No. 141
did not have a material effect on the Company's financial position, results of
operations or cash flows.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Implementation of this Statement will
require the Company to cease amortization of goodwill and goodwill will be
tested for impairment at least annually at the reporting unit level. Goodwill
will be tested for impairment on an interim basis if an event occurs or
circumstances change that would "more likely than not" reduce the fair value of
a reporting unit below its carrying value. Intangible assets that are subject to
amortization will be reviewed for impairment in accordance with SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". The provisions of SFAS 142 are required to be applied starting
with fiscal years beginning after December 15, 2001 and will therefore be
applied for the year ending December 31, 2002. As of January 1, 2002, the
Company will no longer amortize goodwill to expense, but will instead review
goodwill periodically for impairment. The adoption of SFAS 142 is expected to
reduce goodwill amortization expense by $250,000 annually. No material changes
to the carrying values of goodwill as a result of the adoption of SFAS 142 are
expected to be made.
In September 2001, FASB Statement No. 143 (SFAS 143) "Accounting for Asset
Retirement Obligations" was issued. SFAS 143 provides guidance on the initial
measurement and subsequent accounting for obligations associated with the sale,
abandonment, or other type of disposal of long-lived tangible assets. The
Company is currently evaluating the provisions of SFAS 143, but does not
anticipate the implementation of SFAS 143 to have a material impact on the
results of operations, cash flows or financial position.
In October 2001, FASB Statement No. 144 (SFAS 144) "Accounting for the
Impairment or Disposal of Long-lived Assets" was issued. SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and this statement supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of".
The Company is currently evaluating the impact and materiality thereof, if any,
of SFAS 144 on its financial statements and related disclosures.
Note 2. Investment in Enterworks
During the first quarter of 2001, the Company and Enterworks, Inc.
("Enterworks") entered into an agreement whereby the Company, as a participant
in an additional round of financing for Enterworks, substituted approximately
$530,000 of receivables owed to the Company and in addition funded Enterworks
$470,000 of cash in three equal installments during the quarter. The receivables
included rent owed to the Company, services performed by the Company under a
service agreement between the Company and Enterworks, and expenses advanced by
the Company on behalf of Enterworks for which the Company is reimbursed. In
return, the Company received four separate Demand 10% Convertible Promissory
Notes from Enterworks totaling $1 million, as well as warrants to purchase 2.5
million of underlying shares of Enterworks common stock. The warrants to
purchase 2.5 million underlying shares of Enterworks common stock have an
exercise price of $0.01 per share and an exercise period of five years.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the second quarter of 2001, the Company and Enterworks entered into
an agreement whereby the Company, as a participant in an additional round of
financing for Enterworks, committed an additional $800,000 which represented the
estimate of amounts owed to the Company for the period May through December 2001
for rent and services performed by the Company under a service agreement. In
return, the Company received a $300,000 Demand 10% Convertible Promissory Note
from Enterworks, as well as a warrant to purchase 750,000 of underlying shares
of Enterworks common stock. The warrants to purchase the shares of Enterworks
common stock have an exercise price of $0.01 per share and an exercise period of
five years.
During the third and fourth quarters of 2001, the Company received five
separate Demand 10% Convertible Promissory Notes from Enterworks totaling
$500,000, as well as warrants to purchase 1,250,000 of underlying shares of
Enterworks common stock. The warrants to purchase the shares of Enterworks
common stock have an exercise price of $0.01 per share and an exercise period of
five years.
During 2001, the Company's ownership interest in Enterworks fell below 20%
and accordingly, the Telos designated voting representation on the Enterworks
Board was relinquished. However, due to the receipt of the warrants mentioned
above, at December 31, 2001 the Company's ownership interest became 23.1%, and
therefore the Company now accounts for its investment in Enterworks under the
equity method of accounting as prescribed by APB 18. Under this method, and in
accordance with EITF 98-13 "Accounting by an Equity Method Investor for Investee
Losses when the Investor has Loans to and Investments in Other Securities of the
Investee", the Company reduced the carrying amounts of the Notes to $-0- at
December 31, 2001, as the Company's share of the Enterworks losses exceeded the
carrying value of the Notes.
Note 3. Contribution of Assets
On July 27, 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 have each jointly and severally guaranteed the loan of TelosOK. The
Company has guaranteed 50% of the outstanding loan balance and the Investors
have guaranteed 25% of the outstanding loan balance. This loan has an
outstanding balance of approximately $2.4 million at December 31, 2001. In
addition, TelosOK entered into a $500,000 senior credit facility with the same
bank, which was subsequently increased to $750,000 on September 30, 2001, with
an expiration date of July 1, 2002. Borrowings under the facility, if 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 of the current $750,000 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.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 possesses all voting rights
of TelosOK and the sole right to elect the directors of TelosOK. The units
in this class do not have redemption rights.
Class B - owns 40% of TelosOK. The Investors own all 2.9 million units of
this class. This class has no voting rights, but can, subject to certain
restrictions, request the redemption of all or a portion of the Class B
units outstanding one year after the closing date. 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 operating agreement.
Class C- owns 40% of TelosOK. The Company owns all 2.9 million units of
this class. This class has no voting rights, and has the same redemption
rights as Class B, 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 are redeemed, the Company will receive a warrant to purchase Class C
units equal to the amount of the Class B units redeemed at a price of $0.01
per unit.
As provided for in the operating agreement, one of the Investors, Bill W.
Burgess, serves as Chairman of the Board and John R. Braught serves as
Secretary, and David Aldrich, President and CEO of the Company, and Thomas
Ferrara, Treasurer and CFO of the Company, serves in those same capacities for
TelosOK. The Company has entered into a corporate services agreement with
TelosOK whereby the Company has contracted to provide certain administrative
support functions to TelosOK, including but not limited to finance and
accounting and human resources, in consideration for a monthly cash payment.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As indicated above, the Company owns 50% of TelosOK, sharing control over
TelosOK, and accordingly 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 operation
have been excluded from their respective captions in the Company's Consolidated
Statement of Operations, and the net earnings from the operation have been
reported separately as "Equity in Net Earnings of TelosOK" for the year ended
December 31, 2000. The results of operations of the Ft. Sill operation included
in the "Equity in Net Earnings of TelosOK" 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 27, 2000 through December 31, 2001, the Company was unable to
recognize its pro rata share of the income generated from TelosOK because the
Company's share of TelosOK 's capital accounts was negative. Accordingly, under
the equity method of accounting as prescribed by Accounting Principles Board
Opinion 18, the Company's carrying value in TelosOK is $0 at December 31, 2001.
Note 4. 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.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the reduction of the Company's ownership percentage in
Enterworks, in 2000 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 rounds of private financing in 2000 and 2001 which
have further diluted the Company's interest in Enterworks. At December 31, 2001,
the Company owns 17,153,059 shares of Enterwork's common stock and holds
warrants to purchase 4,499,997 underlying common stock shares which equates to a
fully diluted ownership percentage of 23.1%.
At December 31, 2001, the Company accounts for this investment under the
equity method as prescribed by APB Opinon 18.
Note 5. 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.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Revenue and Accounts Receivable
Revenue resulting from contracts and subcontracts with federal, state, and
local governments accounted for 97.7%, 96.2%, and 94.1% of consolidated revenue
in 2001, 2000 and 1999, 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,
---------------------------
2001 2000
---- ----
Billed accounts receivable $20,953 $39,486
------- ------
Amounts currently billable and other 6,695 8,031
----- -----
Total unbilled accounts receivable 6,695 8,031
----- -----
Allowance for doubtful accounts (1,295) (1,835)
------- -------
$26,353 $45,682
======= ======
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, 2001 $1,835 $ 7 $ (547) $1,295
Year ended December 31, 2000 830 1,381 (376) 1,835
Year ended December 31, 1999 739 400 (309) 830
1. Accounts receivable written-off or reserve reversals.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Debt Obligations
Senior Revolving Credit Facility
At December 31, 2001, the Company has a $20 million Senior Revolving Credit
Facility (the "Facility") with a bank which expires on January 15, 2003 and has
an outstanding balance of $12.4 million. Borrowings under the facility are
collateralized by a majority of the Company's assets including accounts
receivable, inventory, and the Company's stock in its subsidiaries and
affiliates. The amount of the available borrowings fluctuates based on the
underlying asset borrowing base. The facility requires payment of a 0.375% fee
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 6.5% at
December 31, 2001. The interest rate will escalate 25 basis points every other
month beginning April 1, 2002 until maturity. The weighted average interest rate
on the outstanding borrowings under the Facility was 9.13% for 2001 compared
with 10.07% for 2000.
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 fixed charge
coverage and operating goals. At December 31, 2001, the Company was not in
compliance with several covenants contained in the Facility, however, the bank
has waived such non-compliance. The bank has amended the covenants to conform to
the Company's 2002 budget expectations. The Company is in the process of
actively negotiating a replacement for the Facility.
The carrying value of the Facility at December 31, 2001 and 2000
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. The notes mature on May 23, 2003, and have interest rates ranging
from 14% to 17%. Interest is paid quarterly on January 1, April 1, July 1, and
October 1 of each year. The Notes can be prepaid at the Company's option.
Additionally, these Notes have a cumulative payment premium of 13.5% per annum
payable only upon certain circumstances. These circumstances include an initial
public offering of the Company's common stock or a significant refinancing, to
the extent that net proceeds from either of the above events are received and
are sufficient to pay the premium. Due to the contingent nature of the premium
payment, the associated premium expense will only be recorded after the
occurrence of a triggering event. At December 31, 2001, the prepayment premium
that would be due upon a triggering event is $10.3 million.
In April 2001, the Company retired one of its series C subordinated notes
with a principal amount of $358,000.
In conjunction with the Enterworks private placement offering (See Note 4),
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 Notes were $5.5 million at December 31, 2001
and 2000. The balances of the Series C Notes were $2.6 million and $3.0 million,
respectively, at December 31, 2001 and 2000.
In November 1998, the Company issued additional Senior Subordinated Notes
to certain shareholders which were classified as Series D. The Series D Notes
totaled $1.8 million and were unsecured. In connection with the debt, the
Company issued two warrants to purchase a total of 1,500,000 shares of the
Company's Class A Common Stock. As previously discussed, the Warrants had an
exercise price of $.01 and an exercise period of 22 months and expired on
October 1, 2000. The Series D Notes were retired in conjunction with the
Enterworks private placement (Note 4) of 1999.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Redeemable Preferred Stock
Senior Redeemable Preferred Stock
The components of the senior redeemable preferred stock are Series A-1 and
Series A-2, each with $.01 par value and 1,250 and 1,750 shares authorized,
issued and outstanding, respectively. The Series A-1 and Series A-2 each carry a
cumulative dividend rate of 14.125% per annum of their liquidation value of
$1,000 per share. The dividends are payable semi-annually on June 30 and
December 31 of each year. The liquidation preference of the preferred stock is
the face amount of the Series A-1 and A-2 Stock ($1,000 per share), plus all
accrued and unpaid dividends. The Company is required to redeem all shares and
accrued dividends outstanding on May 23, 2003, subject to the legal availability
of funds. Mandatory redemptions are required from excess cash flows, as defined
in the stock agreements. The Series A-1 and A-2 redeemable preferred 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, 2001 and 2000
undeclared, unpaid dividends relating to Series A-1 and A-2 redeemable preferred
stock totaled $3,903,000 and $3,480,000, 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, 2001 and 2000 was $1,701,000 and
$1,555,000, 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 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
$26,323,000.
Based upon the Company's interpretation of charter provisions pertaining to
restrictions upon payment of dividends, similar dividend payment restrictions
contained in its Senior Credit Facility, and limitations pursuant to Maryland
law, the Company has not declared or paid dividends on its public preferred
stock since 1991.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. 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 7). 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 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, 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
----- ----
Granted -- --
Exercised -- --
Canceled (377) 1.19
------ ----
Outstanding at December 31, 2001 1,645 $1.24
----- -----
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 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
----- ----
Granted -- --
Exercised -- --
Canceled (60) 1.01
----- ----
Outstanding at December 31, 2001 1,023 $0.66
----- -----
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, 2001 would be to increase the number of shares outstanding to
4,725,690 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, 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
----- ----
Granted 150 1.07
Exercised -- --
Canceled (611) 1.04
----- ----
Outstanding at December 31, 2001 4,025 $1.02
----- -----
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
----- ----
Granted 811 3.85
Exercised -- --
Canceled (360) 3.85
---- ----
Outstanding at December 31, 2001 2,189 $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
----- -----
Granted 930 0.75
Exercised -- --
Canceled (291) 0.75
---- ----
Outstanding at December 31, 2001 1,847 $0.75
----- -----
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2001:
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 $1.07 704 6.4 years $1.07 563 $1.07
Option Plan $1.35 326 8.3 years $1.35 195 $1.35
$1.37 607 7.7 years $1.37 589 $1.37
$1.40 8 6.7 years $1.07 7 $1.07
----- --- --------- ----- --- -----
$1.07 - $1.40 1,645 7.5 years $1.24 1,354 $1.24
============= ===== ========= ==== ===== =====
1993 Stock
Option Plan $0.50 700 2.0 years $0.50 700 $0.50
$1.01 323 5.1 years $1.01 323 $1.01
----- --- --------- ----- --- -----
$0.50 -$1.01 1,023 3.0 years $0.66 1,023 $0.66
============ ===== ========= ===== ===== =====
1996 Stock
Option Plan $0.95 2,366 4.4 years $0.95 1,304 $0.95
$0.97 54 4.6 years $0.97 54 $0.97
$1.01 424 5.2 years $1.01 340 $1.01
$1.07 776 7.9 years $1.07 451 $1.07
$1.35 335 7.9 years $1.35 204 $1.35
$1.40 70 6.7 years $1.40 67 $1.40
----- ---- --------- ----- ---- -----
$0.95 - $1.40 4,025 4.7 years $1.02 2,420 $1.03
============= ===== ========= ===== ===== =====
2000 Telos Delaware
Option Plan $3.85 2,189 8.9 years $3.85 444 $ 3.85
===== ===== ========= ===== === ======
2000 Xacta
Option Plan $0.75 1,847 8.9 years $0.75 308 $ 0.75
===== ===== ========= ===== === ======
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
$0, $0.30, $0.50, and $0.10, respectively, in 2001 and $0.16, $0, $0.31, $0.69,
and $0.14, respectively, in 2000. Had the Company determined compensation cost
consistent with SFAS No. 123 methodology, net loss would have been $(1,259,000),
$(2,091,000), and ($2,743,000) in 2001, 2000, and 1999, respectively.
Significant assumptions used in determining the fair value of each option grant
at the date of grant were as follows:
1990 Stock 1993 Stock
Option Plan Option Plan
----------- -----------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
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% -- -- --
Expected life of options -- 2.09yrs 4.0yrs -- -- --
1996 Stock 2000 Telos Delaware
Option Plan Stock Option Plan
----------- -----------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% --
Expected stock price volatility 0.0% 0.0% 0.0% 0.0% 0.0% --
Risk free interest rate 4.96% 6.59% 5.60% 4.70% 6.01% --
Expected life of options 6.6yrs 4.0yrs 3.6yrs 3.0yrs 3.3yrs --
2000 Xacta Stock
Option Plan
-----------
2001 2000 1999
---- ---- ----
Expected dividend yield 0.0% 0.0% --
Expected stock price volatility 0.0% 0.0% --
Risk free interest rate 4.70% 6.52% --
Expected life of options 3.0yrs 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 1999, 2000, and 2001
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 2001, 2000, and 1999 were
$707,000, $784,000, and $1,080,000, respectively.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Income Taxes
The provision (benefit) for income taxes includes the following (in
thousands):
For The Year Ended December 31,
----------------------------------
2001 2000 1999
---- ---- ----
Current (benefit) provision
Federal $ (156) $ 353 $ --
State (410) 391 306
----- --- ---
Total current (566) 744 306
----- --- ---
Deferred benefit
Federal (105) (105) (6,946)
State (325) (22) (1,213)
----- ----- --------
Total deferred (430) (127) (8,159)
----- ----- -------
Total (benefit) provision $ (996) $ 617 $(7,853)
===== === ======
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,
----------------------------------
2001 2000 1999
---- ---- ----
Computed expected income tax
provision (benefit) (34.0)% (34.0)% (34.0)%
Goodwill amortization 5.1 9.0 0.9
State income taxes, net of
federal income tax benefit (24.4) 49.4 (2.6)
Change in valuation allowance
for deferred tax assets (11.4) (28.7) (12.9)
Meals and entertainment 4.9 6.8 0.5
Recognition of deferred tax liabilities
On contributions to TelosOK LLC -- 35.3 --
Sale of division/other -- 14.6 4.1
---- ---- ----
(59.8)% 52.4% (44.0)%
======= ===== =======
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2001 and 2000 are as follows (in thousands):
December 31,
--------------------
2001 2000
---- ----
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ 502 $ 704
Allowance for inventory obsolescence and
amortization 377 734
Accrued liabilities not currently
deductible 2,231 1,471
Accrued compensation 1,517 1,865
Property and equipment, principally due
to differences in depreciation methods 781 705
Basis difference in TelosOK LLC interest 2,216 1,780
Net operating loss carryforwards - state 241 234
Alternative minimum tax credit carryforward 853 734
---- -----
Total gross deferred tax assets 8,718 8,227
Less valuation allowance (44) (234)
----- ------
Net deferred tax assets 8,674 7,993
------ -----
Deferred tax liabilities:
Unbilled accounts receivable, deferred for
tax purposes (385) (134)
------ ------
Total deferred tax liabilities (385) (134)
----- ------
Net deferred tax assets $8,289 $7,859
====== ======
The components of the valuation allowance are as follows:
Balance at Additions Balance At
Beginning of Charged to End of
Period Expenses Deductions Period
------ -------- ---------- ------
December 31, 2001 $ 234 $ -- $ (190) $ 44
December 31, 2000 572 -- (338) 234
December 31, 1999 4,987 -- (4,415)(1) 572
(1) Included $2,115 attributable to Enterworks
The net change in the valuation allowance was a decrease of $190,000 and
$338,000 for 2001 and 2000, respectively. The decrease in the valuation
allowance is attributable to forecasted taxable income, which justified the
future recognition of the net deferred tax assets recorded.
At December 31, 2001, 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 $853,000 of
alternative minimum tax credits available to be carried forward indefinitely to
reduce future regular tax liabilities.
Note 11. 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.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2001 (in thousands):
Property Equipment Total
-------- --------- -----
2002 $ 1,543 $17 $1,560
2003 1,543 12 1,555
2004 1,543 3 1,546
2005 1,543 -- 1,543
2006 1,543 -- 1,543
Remainder 14,275 -- 14,275
------ -- ------
Total minimum obligations 21,990 32 22,022
Less amounts representing
interest (10,960) (3) (10,963)
-------- --- --------
Net present value of
minimum obligations 11,030 29 11,059
Less current portion (337) -- (337)
----- -- -----
Long-term capital lease
obligations at
December 31, 2001 $10,693 $29 $10,722
======= === =======
Accumulated amortization for property and equipment under capital leases at
December 31, 2001 and 2000 is $4,215,000 and $3,502,000, respectively. Future
minimum lease payments for all non-cancelable operating leases at December 31,
2001 are as follows (in thousands):
2002 $1,042
2003 1,049
2004 911
2005 941
2006 237
Remainder --
-----
Total minimum lease payments $ 4,180
=======
Net rent expense charged to operations for 2001, 2000, 1999, totaled
$1,408,000, $1,300,000, and $2,000,000, respectively.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 12. 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. C. 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. John R. C. Porter was paid $260,000 by the Company in 2001,
2000, and 1999 pursuant to this agreement, which amounts were determined by
negotiation between the Company and Mr. John R.C. Porter.
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. The Company completed payment to Mr. Hester in
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
April 19, 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. These options have now expired.
Mr. William L.P. Brownley, former Vice President and General Counsel of the
Company, entered into an agreement with the Company whereby Mr. Brownley 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 Mr. Brownley with medical and insurance benefits during that same
period.
Mr. Lorenzo Tellez, former Vice President, Treasurer, and Chief Financial
Officer of the Company, entered into a settlement agreement with the Company to
resolve a dispute on Mr. Tellez's employment contract with the Company. With
regard to the salary component of the contract, the Company paid Mr. Tellez the
equivalent of 24 months of severance in installments during 2001. The Company
continues to arbitrate the issue of Mr. Tellez's claim to a discretionary bonus.
Mr. Tellez also received medical and insurance benefits through the Company for
the same two-year period. Mr. Tellez's payment of salary and fringe benefits
amounts to approximately $243,000 per annum. The Company completed its payments
of the salary portion of the contract to Mr. Tellez on December 7, 2001.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Reportable Business Segments
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in 1998 that changes the way the Company
reports information about its operating segments. Certain businesses within the
Xacta segment in 2000 were transferred to the Products segment beginning January
2001. The information for 2000 and 1999 has been restated from the prior year's
presentation in order to conform to the 2001 presentation.
The Company has three reportable segments:
Systems and Support Services - provides post-deployment and post-production
software and systems development and support services including technology
insertion, system redesign and software re-engineering. This Group's largest
customer is the U.S. Army's Communications and Electronics Command ("CECOM") and
has significant operations at Ft. Monmouth in New Jersey and Ft. Sill in
Oklahoma. Tasks are performed on a time and materials basis and on a firm fixed
price basis.
Products - 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. Key customers of this
group include agencies of the US Government such as: military services, Defense
Agencies, Treasury Department, US Courts and others. Significant government
procurement vehicles for customers 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 the above, The Product's Group includes the Company's
wireless networking, secure messaging solutions and is a value added reseller
for Xacta's information security products into the federal government.
Xacta - develops enterprise risk management software to help organizations
to proactively manage and monitor the security of their network environments in
accordance with information security and privacy standards. The applications,
Xacta Web C&A and Xacta Commerce Trust, leverage information assurance
technology and processes that Xacta has proven in the government's most secure
and demanding agencies, departments, and branches (Defense, Intelligence, and
Treasury). Xacta customers include agencies of the U.S. Government and a number
of commercial credit unions.
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.
The Company's investment in Enterworks, Inc. is accounted for under the
equity method of accounting as of December 31, 2001 (Note 4) 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.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Systems and
Support Services Products Xacta Enterworks Other(1) Total
---------------- -------- ----- ---------- -------- -----
2001
External Revenues $ 60,402 $ 96,301 $13,558 $ -- $ -- $170,261
Intersegment Revenues 1,142 11,860 -- -- -- 13,002
Gross Profit 5,261 17,027 4,932 -- -- 27,220
Segment profit (loss)(3) (2,724) 7,472 (2,162) -- -- 2,586
Total assets 8,550 22,013 1,010 -- 21,988 53,561
Capital Expenditures 172 38 242 -- 204 656
Depreciation &
Amortization(2) $ 298 $ 390 $ 242 $ -- $ 1,141 $ 2,071
2000
External Revenues $ 48,429 $ 87,799 $ 9,082 $ -- $ -- $145,310
Intersegment Revenues 88 669 -- -- -- 757
Gross Profit 5,278 13,474 2,530 -- -- 21,282
Segment profit (loss)(3) (1,577) 3,488 (425) -- -- 1,486
Total assets 10,324 41,313 2,725 -- 22,728 77,090
Capital Expenditures 159 354 360 -- 818 1,691
Depreciation &
Amortization(2) $ 387 $ 348 $ 66 $ -- $ 1,217 $ 2,018
1999
External Revenues $ 77,701 $ 89,261 $ 4,402 $ -- $ -- $171,364
Intersegment Revenues 404 -- -- -- -- 404
Gross Profit 11,768 7,169 1,211 -- -- 20,148
Segment profit (loss)(3) 6,102 (3,088) (325) -- -- 2,689
Total assets 5,632 23,951 401 -- 26,902 56,886
Capital Expenditures 63 142 3 780 401 1,389
Depreciation &
Amortization(2) $ 731 $ 352 $ 8 $2,210 $ 1,321 $ 4,622
(1) Corporate assets are principally property and equipment, cash and other assets.
(2) Depreciation and amortization includes amounts relating to property and equipment, goodwill, capital leases and spare parts
inventory.
(3) Segment profit (loss) represents operating income (loss) before goodwill amortization.
The Company does not have material international revenues, profit (loss),
assets or capital expenditures. The Company's business is not concentrated in a
specific geographical area within the United States, as it has 5 separate
facilities located in various 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, Former Chairman of the Board, Director
Dr. Ikle (age 77) 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 a Governor of the Smith
Richardson Foundation. Dr. Ikle is a Distinguished Scholar at the Center for
Strategic & International Studies and a member of the Defense Policy Board that
advises the Secretary of Defense. He served as Under Secretary of Defense for
Policy from 1981-1988, and as Director of the US Arms Control and Disarmament
Agency from 1973-1976. Dr. Ikle resigned from the Chairmanship of the Board on
March 26, 2002. He remains a proxy holder and director.
John B. Wood, Executive Chairman of the Board
Mr. Wood (age 38) 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. Mr. Wood also serves on the Board of Directors of two privately held
companies.
David S. Aldrich, President, Chief Executive Officer, and Director
Mr. Aldrich (age 42) 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, Former Director
Dr. Stephen Bryen (age 59) 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. Dr. Bryen resigned as a proxy holder and Director on March 20, 2002.
Norman P. Byers, Director
Mr. Byers (55) was elected to the Board of Directors on January 31, 1994.
He is the chief of staff to a Fairfax County Supervisor and directs all
activities of a political staff serving 110,000 constituents. In addition, Mr.
Byers is a principal in Byers Consulting, a firm specializing in management and
corporate governance consulting to information technology firms. Mr. Byers is
also a Director of ETI Engineering Incorporated, Chantilly, Virginia and
Panalpina FMS Incorporated, Sterling, Virginia. From 1968 until his retirement
in 1989, Mr. Byers served in a variety of operational and staff positions in the
United States Air Force. Mr. Byers is also a proxy holder.
Malcolm M. B. Sterrett, Class D Director
Mr. Sterrett (age 59) is a private investor and was elected to the
Company's Board of Directors as a Class D Director 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.
Geoffrey Baker, Class D Director
Mr. Baker (age 53) was appointed as a Class D Director on November 6, 2001.
Mr. Baker is a private investor and since 1983 has been a partner in Baker &
Donaldson, a private investment firm. Previously, he served as Legislative
Director to U.S. Senator Lowell P. Weicker, Jr., and as counsel to the U.S.
Senate Committee on Commerce, Science and Transportation. A graduate of Stanford
University and of the Georgetown University Law Center, he has served on public
and private corporate boards and currently serves as Chairman of the Governing
Board of St. Albans School, Washington, D.C.
John C. Boland, former Class D Director
Mr. Boland (age 54) 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. Mr. Boland resigned as a Class D Director on October 2, 2001.
Robert J. Marino, Executive Vice President of Sales and Marketing
Mr. Marino (age 65) 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. Mr. Marino was recognized in 1999 by
Federal Computer Week as one of the top 100 Executives from government, industry
and academia.
Thomas J. Ferrara, Chief Financial Officer and Treasurer
Mr. Ferrara (age 44) 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 38) 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 Vice President, General Counsel and
Chief Administrative Officer
Mr. Flaherty (age 57) 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 proxy holders, 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, 2001, 2000 and
1999, 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 2001.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
Securities
Name and underlying All Other
Principal Position Year Salary Bonus Options(1) Compensation(5)
- ------------------------------------------------------------------------------------------------------
John B. Wood 2001 $350,002(7) $125,000 310,000(2) $28,859(6)
(Executive Chairman) 2000 $350,002(7) $ -- -- $18,100(6)
1999 $348,574 $245,000 2,000,000(3) $13,000(6)
David S. Aldrich 2001 $350,002 $125,000 310,000(2) $34,784(6)
(President, Chief Executive 2000 $332,894 $ -- 250,000(2) $18,100(6)
Officer) 1999 $205,119 $245,000 200,000(3) $ --
Thomas J. Ferrara 2001 $160,205 $ 80,000 -- $ 6,771
(Chief Financial Officer, 2000 $133,561 $ -- 128,000(2) $ 5,100
Treasurer) 1999 $ 98,435 $ 50,000 27,500(3)(4) $ 2,953
Robert J. Marino 2001 $222,390 $ 76,000 -- $23,517
( Executive Vice President 2000 $211,706 $ -- 292,900(2) $ 5,100
of Sales and Marketing) 1999 $206,003 $100,000 200,000(3) $ 5,000
Michael P. Flaherty 2001 $300,018 $132,692 300,000(2) $ 6,229
(Exec. V.P., General 2000 -- -- 30,000(4) $ --
Counsel and Chief 1999 -- -- 76,667(3)(4) $ --
Administrative Officer)
(1) There are no restricted stock awards or payouts pursuant to long-term investment plans.
(2) Options granted in 2001 and 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 2000 and 1999 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 life insurance premiums paid by the Company for the benefit of the executives.
(6) Included in these amounts are $10,000 in 2001, $13,000 in 2000 and $8,000 in 1999 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 2001.
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 10,000(1) 0.5% $1.07 May 2011 $ 6,800 $17,100
(Executive Chairman) 250,000(2) 13.2% 3.85 Jan.2011 602,500 1,535,000
250,000(3) 13.2% 0.75 Jan.2011 120,000 300,000
David S. Aldrich 10,000(1) 0.5% $1.07 May 2011 $ 6,800 $17,100
(President, Chief 250,000(2) 13.2% 3.85 Jan.2011 602,500 1,535,000
Executive Officer) 250,000(3) 13.2% 0.75 Jan.2011 120,000 300,000
Thomas J. Ferrara -- -- -- -- -- --
(Chief Financial Officer,
Treasurer)
Robert J. Marino -- -- -- -- -- --
(Executive Vice President
of Sales and Marketing)
Michael P. Flaherty 100,000(1) 5.3% $1.07 May 2011 $ 68,000 $171,000
(Exec.VP, General 100,000(2) 5.3% 3.85 Jan.2011 241,000 614,000
Counsel and 100,000(3) 5.3% 0.75 Jan.2011 48,000 120,000
Chief Administrative Officer)
(1) Options granted in 2001 were in the common stock of Telos.
(2) Options granted in 2001 were in the common stock of Telos Delaware, Inc.
(3) Options granted in 2001 were in the common stock of Xacta Corporation.
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, 2001.
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) -- -- 3,741,225/1,486,766 $516,714/$117,452
David S. Aldrich
(President, Chief
Executive Officer) -- -- 1,088,500/ 581,500 $ 18,000/$0
Thomas J. Ferrara
(V.P., Treasurer,
Chief Financial
Officer) -- -- 81,000/ 99,500 $ 750/$0
Robert J. Marino
(Executive Vice President
of Sales and Marketing) -- -- 814,000/ 375,900 $ 15,075/$15,075
Michael P. Flaherty -- -- 148,667/ 298,000 $ 0/$0
(Exec. V.P., General Counsel
and Chief Administrative
Officer)
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 16,667 shares held by Mr. Flaherty, respectively.
2. These aggregate values include values for exercisable options to purchase the Class A Common Stock of the Company. These values a
are based upon an estimated fair market value at December 31, 2001 of $1.07 per share for the Company's Class A Common Stock.
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, 2001, employee directors were
paid fees in total of $10,000 each for Board Meetings attended. Outside
directors and proxy holders Mr. Byers and Dr. Bryen were paid an annual fee of
$35,000 each. Outside Class D directors Mr. Sterrett and Mr. Boland were paid
annual fees of $10,000 and $7,500, respectively for 2001. Mr. Boland waived
payment for Board activity in 2000 and the first quarter of 2001. Mr. Boland
resigned from the Board of Directors on October 2, 2001. The Chairman of the
Board, Dr. Ikle received $75,000 annually for his services as Chairman of the
Board and $25,000 for his services as a proxy holder and director. Dr. Ikle
resigned as Chairman on March 26, 2002. He will remain as a proxy holder and
director. In addition, Mr. Byers receives $5,000 for his services as Proxy
Chairman. The compensation paid to Mr. Byers, Dr. Ikle and Dr. Bryen is paid
pursuant to a proxy agreement among the Company, the Defense Security Service
and Mr. John R.C. Porter. Dr. Bryen resigned as a proxy holder and Director on
March 20, 2002.
Effective March 27, 2002, the Board of Directors adopted a new compensation
structure for the Board annually which provides for the following: $25,000
annually for Proxy holder directors; $25,000 annually for Class D Directors; $0
for employee directors and committee participation; $5,000 for the Chairman of
the Board's annual retainer; $5,000 for the Proxy Board Chairman's annual
retainer; $5,000 annually for the Chairmen of the Executive and Audit
Committees; $2,000 annually for the Chairmen of the Compensation and Option
Committees; $2,000 annually for membership in the Audit or Executive Committees;
and each director other than employee directors is entitled to receive $1,250
for each meeting attended, up to four per year.
Employment Contracts
As of December 31, 2001, 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
$350,000, $227,000 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
discretionary bonus is determined at the Board of Directors and Executive
Chairman's discretion. Each year, the Company renegotiates such employment
contracts as part of the yearly review process. Accordingly in 2002, the Company
expects to review the contracts described above. In addition, strategic hires or
promotions may increase the number of Executives who have 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, 2002
- ----------------------- --------------------------------- ------------------------- -------------
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 697,569 shares(C) 3.19%
Class A Common Stock Michael P. Flaherty 132,000 shares(C) 0.62%
Class A Common Stock Robert J. Marino 488,603 shares(C) 2.26%
Class A Common Stock Thomas J. Ferrara 43,080 shares(C) 0.20%
Class A Common Stock John B. Wood 1,727,710 shares(C) 7.56%
Class A Common Stock Norman P. Byers 2,000 shares 0.01%
Class A Common Stock Stephen D. Bryen 2,000 shares 0.01%
Class A Common Stock Fred C. Ikle 2,000 shares 0.01%
Class A Common Stock All Officers and Directors as a Group 3,095,306 shares(D) 12.81%
(9 persons)
12% Cumulative Exchangeable Value Partners, Ltd. 714,317 shares(E) 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(F) 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. John R. C. 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, Flaherty, Marino, Ferrara and
Wood include 677; 0; 20,551; 9,580 and 38,093 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,
Flaherty, Marino, Ferrara and Wood hold options to acquire 688,500;
132,000; 446,000; 33,500; and 1,681,225 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, 2002.
(D) The common stock holdings of the Company's officers and directors as a
group include 69,245 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 2,987,225 shares of Class A Common Stock exercisable within 60 days
of March 1, 2002.
(E) 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 might 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.
(F) 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
might 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.C. 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. John R.C. Porter was paid $260,000 by the Company in 2001,
2000, and 1999 pursuant to this agreement, which amounts were determined by
negotiation between the Company and Mr. John R.C. Porter.
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. The Company competed payment to Mr. Hester in 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
April 19, 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. These options have now expired.
Mr. William L.P. Brownley, former Vice President and General Counsel of the
Company, entered into an agreement with the Company whereby Mr. Brownley 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 Mr. Brownley with medical and insurance benefits during that same
period.
Mr. Lorenzo Tellez, former Vice President, Treasurer, and Chief Financial
Officer of the Company, entered into a settlement agreement with the Company to
resolve a dispute on Mr. Tellez's employment contract with the Company. With
regard to the salary component of the contract,the Company paid Mr. Tellez the
equivalent of 24 months of severance in installments during 2001. Mr. Tellez
also received medical and insurance benefits through the Company for the same
two-year period. Mr. Tellez's payment of salary and fringe benefits amounts to
approximately $243,000 per annum. The Company completed its payments of the
salary portion of the contract to Mr. Tellez on December 7, 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
All financial statements of the registrant as set forth under Item
8 of this report on Form 10-K.
(a) 2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is included in the consolidated financial
statements or notes thereto.
(a) 3. Exhibits:
Exhibits marked with (1*) are incorporated by reference to the Company's
Registration Statement No. 2-84171 filed June 2, 1983. Exhibits marked with (3*)
are incorporated by reference to the Company's Form 10-K report for the fiscal
year ended March 31, 1987. Exhibits marked with (4*) are incorporated by
reference to the Company's Form 10-K report for the fiscal year ended March 31,
1989. The registrant will furnish to stockholders a copy of other exhibits upon
payment of $.20 per page to cover the expense of furnishing such copies.
Requests should be directed to the attention of Investor Relations at Telos
Corporation, 19886 Ashburn Road, Ashburn, Virginia 20147-2358.
2.6 Stock Purchase Agreement dated as of January 14, 1992, by and among C3, Inc., Telos Corporation and Contel
Federal Systems, Inc. (Incorporated by reference to C3, Inc. Form 8-K filed January 29, 1992)
3.1 (1*) Articles of Amendment and Restatement of C3, Inc.
3.2 (1*) Articles of Amendment of C3, Inc. dated August 31, 1981.
3.3 (3*) Articles supplementary of C3, Inc. dated May 31, 1984.
3.4 (4*) Articles of Amendment of C3, Inc. dated August 18, 1988.
3.5 Articles of Amendment and Restatement Supplementary to the Articles of Incorporation dated August 3, 1990.
(Incorporated by reference to C3, Inc. 10-Q for the quarter ended June 30, 1990)
3.6 Restated Bylaws of C3, Inc. (Incorporated by reference to C3, Inc. 10-Q for the quarter ended December 31,
1990)
3.7 Articles of Amendment of C3, Inc. dated April 13, 1995
4.1 Form of Indenture between the Registrant and Bankers Trust Company, as Trustee, relating to the 12% Junior
Subordinated Debentures Due 2009. (Incorporated herein by reference to C3's Registration Statement on Form
S-4 filed October 20, 1989)
4.3 Form of the terms of the 12% Cumulative Exchangeable Redeemable Preferred Stock of the Registrant.
(Incorporated herein by reference to C3's Registration Statement on Form S-4 filed October 20, 1989)
4.4 Shareholders Agreement dated as of August 3, 1990 by and among C3, Inc.; Union de Banques Suisses
(Luxembourg), S.A.; C3 Investors, L.P.; Anthony Craig, together with the investors; the Class A holders; MIM
Limited; Knoll and Associates, Inc.; Murray Enterprises PLC; Electra Development Holdings; and Hartley
Limited. (Incorporated by reference to C3, Inc. 10-Q for the quarter ended June 30, 1990)
4.5 Articles of Amendment and Restatement of the Company, filed with the Secretary of State of the State of
Maryland on January 14, 1992. (Incorporated by reference to C3, Inc. Form 8-K filed January 29, 1992)
10.20 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.
(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:/s/ David S. Aldrich
-----------------------
President and
Chief Executive Officer
Date: April 4, 2002
---------------------
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 April 4, 2002
- ---------------- the Board of Directors
John B. Wood
/s/Fred Charles Ikle Director April 4, 2002
- ---------------------
Fred Charles Ikle
/s/Norman P. Byers Director April 4, 2002
- ------------------
Norman P. Byers
/s/ Malcolm M.B. Sterrett Director April 4, 2002
- -------------------------
Malcolm M.B. Sterrett
/s/ Geoffrey Baker Director April 4, 2002
- ------------------
Geoffrey Baker
/s/ David S. Aldrich President, Chief Executive April 4, 2002
- -------------------- Officer (Principal Executive
David S. Aldrich Officer)
/s/ Thomas J. Ferrara Chief Financial Officer April 4, 2002
- --------------------- (Principal Financial Officer
Thomas J. Ferrara & Principal Accounting Officer)