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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, 1996
[ ]Transition Report Pursuant to Section 13 or 15(d)
the Securities Exchange Act of 1934
Commission file number: 1-8443
TELOS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-0880974
(State of Incorporation) (I.R.S. Employer Identification No.)
19886 Ashburn Road, Ashburn, Virginia 20147
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number,
including area code: (703) 724-3800
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act: 12% Cumulative
Exchangeable Redeemable Preferred Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
No public market exists for the registrant's Common Stock.
As of March 28, 1997, the registrant had 23,076,753 shares of Class A
Common Stock, no par value; 4,037,628 shares of Class B Common Stock, no par
value; and 3,595,586 shares of 12% Cumulative Exchangeable Redeemable Preferred
Stock, par value $.01 per share, outstanding.
Incorporation by Reference: None
Number of pages in this report (excluding exhibits): 50
PART 1
Item 1. Business
History and Introduction
Founded in 1968, Telos Corporation ("Telos" or the "Company") provides
information and network technology products and services primarily to the
government and industry. The Company's offerings encompass the full life cycle
of computer services, including analysis, system specification, evaluation,
hardware and software integration, deployment, installation, training, hardware
maintenance and software sustainment.
A substantial portion of the Company's revenues are generated by
long-standing customers. For example, since 1976, the Company has provided
life-cycle software engineering services for the U.S. Army's tactical fire
support systems. The first contract award from this customer was for $1.7
million of software services. Since 1976, the Company has generated $216 million
of revenue from this customer.
Certain other long-term customers of the Company include the California
Institute of Technology's Jet Propulsion Laboratory, for which the Company has
designed, developed and supported ground based telemetry and mission operations
systems since 1975, and the U.S. Navy and Marines, for which the Company has
provided ruggedized computer systems since 1988.
The Company has further enhanced its ability to deliver solutions to
its customers' information requirements by providing a number of software
applications that allow organizations to integrate data from disparate systems
and to model the business processes that move the information (workflow). The
Company also offers proprietary software applications that support
Internet-based electronic commerce, military tactical, and simulation training
environments.
Customers include organizations in numerous agencies of federal, state,
and local governments, as well as financial, industrial, and services
industries. The Company provides its services primarily in the United States and
in a limited number of international markets.
Operating Groups
For the majority of 1996, the Company provided its services through
three operating groups. After determining that it was not strategic to its
long-term business direction, which is focused on network infrastructure and
solutions, the Company sold its Consulting Services Division in late 1996 to
fund operations and to enhance its ability to invest in strategic business
segments. While the remaining groups operate on a substantially decentralized
basis, they work together, where appropriate, to offer customers a broad range
of information and network technology services. The Company believes that this
cooperative approach enables the operating groups to offer their services in
specific market segments using their specialized expertise and market knowledge.
At the same time, the operating groups can draw on the market access, technical
breadth and management capability of the entire Telos organization. The market
segments in which the Company operates and the operating groups performing
services within these areas are as follows:
Systems and Support Services Group provides cost competitive
network based solutions including hardware and software support
services to federal, state, and local governments, as well as
commercial entities.
enterWorks, a wholly owned subsidiary, develops, markets,
licenses, and supports a set of software products that allow
customers to deploy mission critical applications in an
internet/intranet based environment. enterWorks financial results
are included as a part of the Systems and Support Services Group
for financial reporting purposes.
Systems Integration Group provides computer and large scale
network integration services to customers; computer hardware
integration and component manufacture; and installation, training,
and service support to federal, state, and local government
clients.
Consulting Services Group provided computer consulting services
and contract labor to support its customers' existing information
technology capabilities. Specific tasks included concept
formulation, system specification, system engineering
design/development, and project management. The net assets of
this Group were sold in December 1996.
Systems and Support Services
The Company's Systems and Support Services Group provides turnkey
system solutions, maintains and extends the life of existing systems through
technology insertion, system redesign, and software reengineering; and provides
"one stop" hardware services, quality assurance, configuration management, and
property management. In response to the increasing prevalence of customers
owning more than one type or brand of computer, the Group's hardware services
area has specialized in servicing third party computer hardware and peripheral
equipment manufactured by others, including Sun Microsystems, DEC, IBM, Data
General, Hewlett-Packard, Wang, and TSI (previously known as C3) equipment.
Telos Systems and Support Services (i) is the largest provider of life
cycle software engineering services to the U.S. Army, and (ii) is one of the
largest providers of ground based technical services to the California Institute
of Technology Jet Propulsion Laboratory, a Federally Funded Research and
Development Center managed by the National Aeronautics and Space Administration.
In response to the growth in network based computing, the Company
formed enterWorks.com ("enterWorks"), a wholly owned subsidiary, to develop,
market, license, and support a set of software products that allow customers to
deploy mission critical applications in an internet/intranet based environment.
enterWorks innovative technology enables a company to bridge from its existing
corporate information systems to network-centric computing without disrupting
those existing systems, thus rapidly gaining the benefits of deploying its
applications as networked. enterWorks products provide the ability to assimilate
data from many different sources (data integration) and to model the processes
that will be used to move that information through the organization (workflow).
For fiscal year 1996, Systems and Support Services had revenues of $104
million or 54.9% of the total Company's revenue.
Systems Integration
The Systems Integration Group delivers network and information
technology solutions to customers worldwide. The Group performs value
engineering and system integration activities including design and
manufacturing, engineering, network integration, system installation, and
support services. The group holds the largest network integration contract ever
awarded by the Federal government, a three year contract awarded in 1995 valued
in excess of $900 million. Additionally, the group is developing and installing
the hardware and network infrastructure in support of the Immigration and
Naturalization Service (INS).
Telos Systems Integration is a leading implementer and innovator of
enabling technology that provides customers a complete solution to their
requirements from a single vendor. In 1981, the group implemented one of the
first client-server architecture's for the U.S. Coast Guard and as a system
integrator, developed the Navy's flagship desktop tactical computer system, the
DTC-II. Today, the group is focused on developing and bringing to market
applications to support network-based computing.
For fiscal year 1996, Systems Integration generated revenue of $85 million
or 45.1% of the Company's revenue.
Consulting Services
Consulting services were provided by Telos Consulting Services ("TCS").
TCS delivered consulting expertise, primarily on a contract labor basis, in
support of the client's own information technology capabilities. In 1996, the
Company determined that TCS, a staff augmentation business, was not a central
part of the Company's core strategy of providing network infrastructure and
solutions. Accordingly, the net assets of TCS were sold to COMSYS Technical
Services, Inc., a subsidiary of COREStaff, Inc., in December 1996 for
approximately $31.6 million. The financial results of TCS and the gain on the
sale of TCS have been presented as a disposal of a segment of business in the
financial results of the Company.
Revenues by Major Market and Significant Customers
Revenue by major market for the Company is:
Percentage of total revenues for fiscal year
--------------------------------------------
1996(1) 1995 1994
------- ---- ----
Federal government 84.8% 80.6% 84.5%
Commercial 13.6 15.2 11.4
State and local governments 1.6 4.2 4.1
---- --- ---
Total 100.0% 100.0% 100.0%
===== ===== =====
(1) 1996 major market revenue percentages exclude TCS revenue.
Total Company revenue at December 31, 1996 includes 50.0% of revenue
from contracts with the Department of Defense, 17.6% of revenue from contracts
with Department of Justice, 6.6% of revenue from the National Aeronautics and
Space Administration ("NASA"), and 10.5% of revenue from subcontracts with U.S.
government prime contractors.
Competition
The segments of the information services industry in which the Company
operates are highly fragmented with no single company or small group of
companies in a dominant position. Some of the Company's competitors also operate
in international markets, along with other entities which operate exclusively or
primarily outside the United States. Some of the large competitors offer
services in a number of markets which overlap many of the same areas in which
the Company offers services, while certain companies are focused on only one or
a few of these markets. The firms which compete with the Company are computer
services firms, applications software companies and accounting firms, as well as
the computer service arms of computer manufacturing companies and defense and
aerospace firms. Thousands of firms fall into these categories. Among the major
competitors are AT&T, Boeing Computer Services Corp., Computer Data Systems,
Computer Sciences Corp., Electronic Data Systems Corporation, Scientific
Applications International Corporation, GTE Corp. and General Electric
Corporation. In addition, the internal staffs of client organizations,
non-profit federal contract research centers and universities are competitors of
the Company.
The Company believes that the principal competitive factors in the
segments of the information and network technology market in which it competes
include project management capability, technical expertise, reputation for
providing quality service, and price. The Company believes its technical
competence in computer engineering, systems software, engineering, system and
network integration, and hardware maintenance will enable it to compete
favorably in the information and network technology market.
Employees
The Company employs 1,374 persons as of December 31, 1996. 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, 1,032 provide Systems and Support
Services, 56 are employed by enterWorks, and 168 provide System Integration
Services. An additional 118 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, 1996 and 1995, the Company had total backlog from
existing contracts of $1.2 billion and $1.3 billion, respectively. This is the
maximum value of additional future orders for systems, products, maintenance and
other support services presently allowable under those contracts, including
renewal options available on the contracts if exercised by the client, over
periods extending up to seven years. Included in the backlog at December 31,
1996 is $900 million from Indefinite Delivery, Indefinite Quantity ("IDIQ")
contracts of which the SMC-II contract comprises $876 million. Approximately
$115 million and $65.6 million of the total was funded backlog at December 31,
1996 and 1995, respectively.
While backlog remains an important measurement criteria, during 1996
the Company, as well as other federal contractors, experienced a change in the
manner in which the Federal government procures equipment and services. These
procurement changes include the growth in the use of General Services
Administration ("GSA") Schedules which allow agencies of the Federal government
to purchase significant amounts of equipment and services. The use of the GSA
Schedules results in a significantly shorter and much more flexible procurement
cycle as well as increased competition as many companies hold such schedules.
Along with the GSA Schedules, the Federal government is awarding a large number
of omnibus contracts with multiple awardees. These contracts generally require
extensive marketing efforts by the awardees to procure business. The use of GSA
Schedules and omnibus contracts, while generally not providing immediate
backlog, provide areas of potential growth that the Company is aggressively
pursuing.
Overview of 1996
The Company entered 1996 with the belief that the year would bring
enhanced operating and performance results over 1995. Its backlog at the
beginning of 1996 of $1.3 billion was the highest in Company history and its
focused diversification into the emerging Internet and international markets was
anticipated to bring additional business opportunities. While the Company had
revenue growth of 7.5% to $188.9 million from $175.8 million in 1995 from its
Systems Integration and Systems and Support Services Groups, the Company's
profitability decreased as compared to 1995. The primary reasons for the
decrease were: (1) The Federal government budget crisis in early 1996 resulted
in significantly lower than anticipated sales on certain of the Company's large
computer equipment contracts during the first half of 1996, and (2) The Company
experienced reduced gross margins on certain equipment and services contracts
due to changes in product mix from 1995 as well as changes in contract pricing
and (3) The Company incurred increased infrastructure costs associated with
supporting contracts awarded in late 1995.
The Company did experience increased order flow during the second half
of 1996, and while it believes its operational performance in 1997 will improve
significantly based on this order flow, there can be no assurance that such
order flow will continue. In the fourth quarter of 1996 the Company also
implemented a cost reduction plan to reduce infrastructure costs in certain
divisions. The cost reduction plan focused on indirect costs and included
employee reductions.
From an international perspective, the Company was successful in
broadening its business base through contract wins in the Philippines and is
actively pursuing other opportunities in the Pacific Rim and Middle East.
The Company has continued to invest in enterWorks, its wholly owned
subsidiary, primarily in product development and in the sales and marketing
areas. In 1996, enterWorks revenue doubled and it succeeded in expanding its
commercial customer base.
The Company, along with other companies that contract with the Federal
government, experienced a shift in the manner in which the government procures
equipment and services in 1996. This shift from long lead time multi-year sole
source contracts to multiple awardee contracts and GSA Schedules has resulted in
the Company modifying its new business development efforts. The Company has been
successful in this area with a number of contract wins in 1996 and the
establishment of a comprehensive GSA schedule. However, while the Company has
been successful in obtaining new contract vehicles, there can be no assurance
that orders and revenue will result.
In late 1996, the Company sold its Consulting Services Group for $31.6
million. The Company had determined that this Group was not a core part of its
long term business strategy and that the sale would provide the Company with
additional liquidity to fund operations and to invest in strategic business
areas.
Item 2. Properties
The Company leases 191,000 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.
The Company leases additional space for regional field engineering,
contract work sites, training, and sales offices in 62 separate facilities
located in 25 states, the District of Columbia, and Europe under various leases,
each of which expires on different dates through February, 2000. The Company
also owns two buildings and a warehouse in Amery, Wisconsin. One of these two
owned buildings is currently being leased to another company.
Item 3. Legal Proceedings
A description of certain legal matters follows:
Rosecliff, Inc., et al v. C3, Inc., et al. (94 CIV. 9104)
This case was filed in December, 1994 in the United States District
Court for the Southern District of New York. Rosecliff, Inc. ("Rosecliff") is a
merchant banking group with whom the Company had been negotiating an
equity/subordinated debt private placement transaction. Upon termination of this
transaction, Rosecliff filed a suit seeking payment of its expenses and $1
million for the violation of the "no-shop" provision in the Agreement. During
1996, the Company entered into a settlement agreement with Rosecliff and
recorded an additional $355,000 of non-operating expense based on the provisions
of the settlement. At December 31, 1996 all amounts related to the settlement
were paid.
The Company is a party to various other lawsuits arising in the
ordinary course of business. In the opinion of management, while the results of
litigation cannot be predicted with certainty, the final outcome of such matters
will not have a material adverse effect on the Company's consolidated financial
position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of fiscal year 1996, no matters were
submitted to a vote of security holders.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
No public market exists for the Company's Class A or B Common Stock. As
of March 1, 1997, there were 84 holders of the Company's Class A Common Stock
and 3 holders of the Company's Class B Common Stock.
Item 6. Selected Financial Data
The following should be read in connection with the accompanying
information presented in Item 7 and Item 8 of this document.
OPERATING RESULTS
Year Ended December 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(amounts in thousands)
Sales $188,895 $175,759 $150,676 $187,285 $200,606
(Loss) income from
Continuing operations (9,816) 592 (11,838) 1,250 (1,577)
Discontinued Operations: (1)
Income (loss) from
discontinued operations 500 423 (583) (702) (1,038)
Gain on sale of
Consulting Services 11,524 -- -- -- --
Income (loss) before
extraordinary items 2,208 1,015 (12,421) 548 (2,615)
Extraordinary items -- -- (196) -- 4,316
Net income (loss) 2,208 1,015 (12,617) 548 1,701
FINANCIAL CONDITION
As of December 31
-----------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(amounts in thousands)
Total assets $110,064 $94,492 $86,872 $84,796 $97,277
Debt (2) 32,857 47,316 40,414 30,790 40,710
Capital lease obligations,
long-term (3) 12,537 -- -- -- --
Senior redeemable
preferred stock 4,828 4,494 4,192 3,922 3,653
Class B redeemable
preferred stock 11,087 10,252 9,497 8,822 8,149
Redeemable preferred
stock 24,230 18,647 14,263 11,417 9,951
(1) See Note 2 to the Consolidated Financial Statements in Item 8 regarding the
sale of TCS.
(2) See Note 5 to the Consolidated Financial Statements in Item 8 regarding
debt obligations of the Company at December 31, 1996. Total debt
obligations include amounts due under the senior credit facility and
subordinated notes.
(3) See Note 9 to the Consolidated Financial Statements in Item 8 regarding the
capital leases of the Company.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations General
Over the last three years, the Company has invested significant
resources into sales and marketing, development of certain software and hardware
products, and into contract and Company infrastructure to support the contracts
awarded to the Company. The Company's investment in the sales and marketing area
has resulted in the Company's backlog growing from $328.4 million at December
31, 1994 to approximately $1.2 billion at December 31, 1996. Additionally, the
Company has established a comprehensive offering of products and services on its
GSA Schedule and has won a number of contracts in 1996 that provide additional
growth opportunities. This investment has also allowed the Company to win all of
its significant contract rebids.
The Company's investment in new software and hardware products is
providing the Company with an expanded product line that offers its customers
unique value added solutions to their computing and information gathering and
analysis problems. The investment in software products is primarily through
enterWorks, and is focused on data integration and information processing
(workflow). Its investment in hardware products is through its Systems
Integration Group and is focused on portable and ruggedized computers.
While 1996 was a difficult year from an operational perspective due to
the Federal government budget impasse in early 1996, the Company continued to
invest in contract and Company infrastructure to support a number of contracts
awarded in late 1995. This investment included additional personnel in program
and contract management and in sales and marketing. The Company also moved to a
larger headquarters and system integration facility in 1996 which resulted in
increased rent expense and other costs associated with the move. The Company
continually evaluates its cost structure and in the fourth quarter implemented a
cost reduction plan focused on indirect costs and personnel.
Late in 1996 the Company sold the net assets of its consulting services
division for $31.6 million. See the discussions included in the "Results of
Operations" and "Liquidity and Capital Resources" sections below.
Revenue by Contract Type
Approximately 86.4% of the Company's total revenues in 1996 were
attributable to contracts with federal, state, and local governments, including
84.8% attributable to the Federal government. The Company's revenues are
generated from various contract vehicles. In general, the Company believes its
contract portfolio is characterized as having low to moderate financial risk as
the Company has minimal long-term fixed price development contracts. The
Company's firm fixed price contracts represent either contracts for the purchase
of computer equipment at established contract prices or contracts for
maintenance of computer hardware. A significant portion of the Company's revenue
is from time and material and cost reimbursable contracts, which generally allow
the pass-through of allowable costs plus a profit margin. For the year ended
December 31, 1996, revenue by contract type was as follows: time and material,
28.2%; firm fixed price, 45.1%; cost reimbursable, 19.5%; fixed monthly rate,
6.7%; and other, 0.5%. While the Company has not experienced any significant
recent terminations or renegotiations, government contracts may be terminated or
renegotiated at any time at the convenience of the government.
Statement of Income Data
The following table sets forth certain consolidated financial data and
related percentages for the periods indicated:
Year Ended December 31
----------------------
1996 1995 1994
---- ---- ----
(dollar amounts in thousands)
Sales $188,895 100.0% $175,759 100.0% $150,676 100.0%
Cost of sales 168,281 89.1 145,522 82.8 127,218 84.4
Selling, general and
administrative expenses 29,055 15.4 23,262 13.2 25,321 16.8
Goodwill amortization 1,001 0.5 1,950 1.1 2,701 1.8
------ ---- ----- ---- ------ ----
Operating (loss) income (9,442) (5.0) 5,025 2.9 (4,564) (3.0)
Interest expense (5,668) (3.0) (4,385) (2.5) (3,029) (2.0)
Other (expense) income (445) (0.2) 27 -- (5,458) (3.6)
------- --- ----- --- ----- ---
(Loss) income before taxes
and minority interest (15,555) (8.2) 667 0.4 (13,051) (8.6)
Income tax (benefit) provision (5,739) (3.0) 75 -- (1,213) (0.8)
------- --- --- ---- ----- ---
(Loss) income from
continuing operations (9,816) (5.2) 592 0.4 (11,838) (7.8)
Discontinued Operations:
Income from discontinued
operations 500 0.2 423 0.2 (583) (0.4)
Gain on sale of TCS 11,524 6.1 -- -- -- --
Extraordinary item -- -- -- -- (196) (0.1)
----- --- ----- --- ------- ---
Net income (loss) $2,208 1.1% $1,015 0.6% $(12,617) (8.3)%
===== === ===== === ====== ===
Financial Data By Market Segment
With the sale of its Consulting Services Group, the Company operates in
two market segments: systems and support services (the "Systems and Support
Services Group"), which consists of enterWorks and software and hardware
services; and the Systems Integration Group.
Sales, gross profit and gross margin by market segment for the periods
designated below are as follows:
Year Ended December 31
----------------------
1996 1995 1994
---- ---- ----
(dollar amounts in thousands)
Sales:
Systems and Support Services $103,675 $105,801 $111,357
Systems Integration 85,220 69,958 39,319
------- ------- -------
Total $188,895 $175,759 $150,676
======= ======= =======
Gross Profit:
Systems and Support Services 12,192 $15,122 $16,783
Systems Integration 8,422 15,115 6,675
------ ------ ------
Total $20,614 $30,237 $23,458
====== ====== ======
Gross Margin:
Systems and Support Services 11.8% 14.3% 15.1%
Systems Integration 9.9% 21.6% 17.0%
Total 10.9% 17.2% 15.6%
Results of Operations
Years ended December 31, 1996 and 1995
Sales increased $13.1 million, or 7.5%, from $175.8 million to $188.9
million for the year ended December 31, 1996 as compared to 1995. This increase
was primarily attributable to the Systems Integration Group, which reported an
increase in sales of $15.3 million for the year. This increase was offset by a
decline in sales in the Systems and Support Services Group of $2.2 million for
the year.
The increase in the Systems Integration Group's revenue was due to
increased order volume during the second half of 1996. Increased orders in
systems integration were due to the Small Multi-user Computer II ("SMC-II")
contract, as well as increased sales under the GSA Schedule and other contract
vehicles.
The revenue decline in the Systems and Support Services Group is
primarily due to a decrease in hardware support revenue of $5.3 million from
1995 to 1996. This decline is a result of the continued migration from mainframe
to network based computing as the servers and desktop computers generally
provide lower maintenance revenue. Additionally, the hardware support area
continues to experience a shift from fixed price contracts to time and material
contracts which produce less predictable revenue streams. This decrease was
offset by increases in enterWorks revenue of $800,000 and software support
revenue of $2.3 million from 1995 to 1996. The enterWorks increase was
attributable to expanded sales and marketing efforts of the subsidiaries'
products and related consulting. The software support revenue increase is due to
increased services under certain of the Company's large labor contracts.
Based on the Company's backlog position and increased order flow in
late 1996, 1997 should present significant opportunities for revenue growth and
improved operational performance. However, there can be no assurance that such
performance improvement will occur.
Cost of sales increased by $22.8 million, or 15.6%, to $168.3 million
in 1996, from $145.5 million in 1995. This increase is the result of the
increase in sales for the period, changes in the revenue product mix, and
increases in contract infrastructure costs. Revenue, particularly within Systems
Integration, for 1996 included certain higher cost equipment and software as
compared to 1995. This mix change was a result of new contracts, such as SMC-II,
having increased sales of older technology equipment where the Company has
higher costs as well as increased sales of new products developed by the Company
that had higher manufacturing costs than anticipated. Additionally, within the
Systems and Support Services Group, the Company experienced increased labor and
material costs in the hardware support area. Cost of sales also increased due to
higher allocated rent expense in 1996 as a result of the move to a new facility.
Gross profit decreased by $9.6 million for the year to $20.6 million,
from $30.2 million in the comparable 1995 period. The decrease in the period is
primarily attributable to the cost of sales increases discussed above. The
Company has recently undertaken a number of cost-cutting measures such as staff
reduction and branch consolidation to increase its profitability. The Company's
gross margin was 10.9% for the year ended December 31, 1996 as compared to 17.2%
for the comparable period of 1995. The Company believes, although there can be
no assurance, that its gross margin should improve in 1997.
Selling, general, and administrative expense ("SG&A") increased for the
year by approximately $5.8 million, to $29.1 million in 1996 from $23.3 million
in 1995 for the comparable period. These increases were primarily due to an
increase in sales and marketing investment in 1996 as compared to 1995, as well
as an increased investment in infrastructure for contracts won in late 1995.
Also, in 1996, based on a review of its operations and requirements, the Company
had certain adjustments which increased SG&A by $1.6 million in the area of
accounts receivable, loss contracts and other reserves. This coupled with
certain 1995 adjustments, which reduced SG&A by $1.7 million in such areas as
employee benefits and certain closure reserves, led to the increase in SG&A. For
1997, the Company believes that SG&A will decrease from 1996 due to indirect
cost reductions resulting from its cost reduction efforts, the sale of its
Consulting Services Group, and the absence of the one-time adjustments described
above. However, there can be no assurance that SG&A expense will be less in
1997. SG&A as a percentage of sales increased to 15.4% for the year ended
December 31, 1996 from 13.2% in the comparable 1995 period.
Goodwill amortization expense was $1.0 million for the year ended
December 31, 1996 compared to $2.0 million for the period ended December, 1995.
The reduction in goodwill amortization is attributable to adjustments in the
goodwill balance as a result of realization of acquired tax benefits resulting
from the 1992 acquisition of Telos Corporation (California). Also, it declined
due to the completion of the goodwill amortization associated with the 1989
leveraged buy out of the Company.
Operating (loss) income decreased by $14.4 million to $(9.4) million in
the year from $5.0 million in the comparable 1995 period as a result of the
aforementioned decreases in gross profit and the increase in SG&A in 1996.
Other non-operating expense was approximately $445,000 for the year
ended December 31, 1996 compared to approximately $27,000 of other non-operating
income in the comparable 1995 period. The expense in 1996 was attributable to an
additional reserve to fully record the provision for the settlement of the
Rosecliff case (see Item 3).
Interest expense increased approximately $1,283,000 to $5.7 million for
the year ended December 31, 1996 from $4.4 million in the comparable 1995
period. The variance is a result of the increase in the average outstanding
balance of the senior credit facility for most of 1996, as well as the effect of
the subordinated debt issued in 1995 being outstanding for the entire year.
Also, as the Company is accounting for its new building lease as a capital
lease, $600,000 of the increased interest expense relates to the building.
The Company believes its interest expense in 1997 will be less than the 1996
levels given its reduced senior credit facility balance and its anticipated 1997
operating performance. However, there can be no assurance that the reduction in
interest expense will occur.
For the year 1996, the Company had a combined Federal and state income
tax provision of $1,154,000 including both continuing operations and
discontinued operations. The Company, using SFAS 109 allocation methodology,
recorded a benefit in continuing operations of $5.7 million. For the comparable
period, the Company had a tax provision of $75,000.
On December 27, 1996, the Company sold substantially all of the assets
of its consulting division, Telos Consulting Services (TCS), to COMSYS Technical
Services, Inc., a subsidiary of COREStaff, Inc. for approximately $31.6 million.
The resulting gain from the sale of TCS of $11.5 million included a write-off of
$6.9 million of goodwill allocated to the TCS operations and $6.3 million of
income tax expense.
The sale of Telos Consulting Services has been treated as a discontinued
operation in accordance with APB Opinion Number 30 ("APB 30"). Pursuant to APB
30, the revenue, costs and expenses of TCS have been excluded from their
respective captions in the Company's consolidated statements of income and the
net results of these operations have been reported separately as "Income (loss)
from discontinued operations." Included in the results of the discontinued
operations is allocated interest expense of $1,475,000, $1,106,000 and
$1,028,000 for 1996, 1995, and 1994, respectively. Interest has been allocated
based on the net assets of the discontinued operations in relation to the
Company's consolidated net assets plus non-specific debt. Additionally, goodwill
amortization of $418,000, $420,000 and $477,000 for 1996, 1995 and 1994,
respectively, has been included in the results of the discontinued operations.
Years ended December 31, 1995 and 1994
Sales increased $25.1 million, or 16.6%, from $150.7 million to $175.8
million for the year ended December 31, 1995 as compared to the same 1994
period. This increase was primarily attributable to the Systems Integration
Group, which reported an increase in sales of $30.6 million for the year. This
increase was offset by a decline in sales in the Systems and Support Services
Group of $5.6 million for the year.
The increase in the Systems Integration Group is due to increased order
volume during the second half of 1995. Increased orders in systems integration
were due to the INS contract, as well as increased sales in other business lines
of the division.
In the Systems and Support Services Group, software services sales
experienced a decline of $3.8 million for the year ended December 31, 1995 as
compared to the same period in 1994. These decreases in sales were due to
declines in contract activity on existing contracts as well as certain contracts
not being renewed during 1995.
The revenue decline in this Group is also due to the hardware support
division. The decline in revenue in this division is primarily due to lower
warranty revenue resulting from the low 1994 system integration sales, lack of
follow-on maintenance contracts after the end of the warranty period for certain
of the TSI equipment previously sold and delayed starts on certain of the
Group's recent contract awards. In addition, the Hardware support division is
experiencing a shift in its business as its customers migrate from mainframe
computing to distributed processing through personal computers and networks.
Generally, maintenance services for distributed processing equipment generate a
lower revenue stream as billing rates for maintaining personal computers are
lower.
Cost of sales increased by $18.3 million, or 14.4%, to $145.5 million
in 1995, from $127.2 million in 1994. This increase is the result of the
increase in sales for the period.
Gross profit increased by $6.8 million for the year to $30.2 million, from
$23.4 million in the comparable 1994 period. The increase in the period is
primarily attributable to the higher sales volume previously discussed within
the Systems Integration Group. These increases were offset by declines in gross
profit for the Systems and Support Services Group, attributable primarily to
start-up costs associated with recent contract awards as well as lower profit
margins associated with maintaining distributed processing equipment. Also
negatively impacting profit margins of the Group is the investment currently
being made in certain international offices to support the Company's
international efforts. The Group implemented a number of cost-cutting measures
such as staff reduction and branch consolidation to increase its profitability.
The Company's gross margin was 17.2% for the year ended December 31, 1995 as
compared to 15.6% for the comparable period of 1994.
Selling, general, and administrative expense ("SG&A") decreased for the
year by approximately $2.0 million, to $23.3 million in 1995 from $25.3 million
in 1994 for the comparable period. These decreases were primarily due to reduced
expenses associated with research and development initiatives, lower contract
rebid efforts in 1995 as compared to 1994, and reduced expenses in certain
administrative cost areas. Also, in 1995, based on a review of its operations
and requirements, the Company had certain one-time adjustments to previously
recorded reserves which reduced SG&A by $1.7 million in such areas as employee
benefits and certain closure reserves. SG&A as a percentage of sales decreased
to 13.2% for the year ended December 31, 1995 from 16.8% in the comparable 1994
period.
Goodwill amortization expense was $2.0 million for the year ended
December 31, 1995 compared to $2.7 million for the period ended December, 1994.
The reduction in goodwill amortization is attributable to the completion of the
amortization of the goodwill created by the 1989 leveraged buyout of the
Company. The Company continues to amortize the goodwill balance which resulted
from the acquisition of Telos Corporation (California).
Operating income (loss) increased by $9.6 million to $5.0 million in
the year from ($4.6) million in the comparable 1994 period as a result of the
aforementioned increases in sales and gross profit.
Other non-operating income was approximately $27,000 for the year ended
December 31, 1995 compared to approximately $5.5 million of other non-operating
expense in the comparable 1994 period. The $5.5 million expense in 1994 was
attributable to costs incurred from attempts to recapitalize the Company's
balance sheet and refinance the Company's existing debt. It was also due to the
write-off of the remaining asset value of a software license purchased from
Sapien's International. (See the transaction costs section in Note 5 as well as
the discussion of Sapiens International in Note 8 to the consolidated financial
statements.)
Interest expense increased approximately $1.4 million to $4.4 million
for the year ended December 31, 1995 from $3.0 million in the comparable 1994
period. The variance is a result of the increase in the average outstanding
balance of the senior credit facility and related interest rate, as well as an
increase in the outstanding balance of the subordinated debt and related
interest rate.
The Company had an income tax provision of $75,000 for the year ended
December 31, 1995 primarily due to state income taxes. For the comparable period
of 1994, the Company had a tax benefit of $1.2 million.
Liquidity And Capital Resources
For most of 1996, the Company experienced constrained liquidity. This
lack of liquidity was caused by the Company's operating performance in 1996 as
well as the Company's continued investment in enterWorks and in other strategic
initiatives. The disappointing operating performance was in part due to the
Federal government budget impasse and shut down that occurred in early 1996
which resulted in lower than anticipated order levels on certain equipment
contracts that negatively impacted the Company for the first half of 1996. The
Company also experienced lower gross margins on certain existing contracts as a
result of changes in product mix and in customer buying patterns. Coupled with
the above, the Company invested in contract support infrastructure for contracts
awarded in late 1995 as well as sales, marketing and product development
activities at enterWorks. The Company also incurred additional facility costs
with the relocation of the Company's headquarters in 1996.
The Company responded to its liquidity constraints by implementing an
aggressive cash management program which reduced discretionary spending and
obtained extended payment terms from certain of the Company's suppliers. The
Company also instituted a cost reduction program during the fourth quarter of
1996 focused on reducing indirect spending and headcount. The Company has
reduced indirect spending in late 1996 and in early 1997 although there can be
no assurance that such cost savings can continue throughout 1997.
The Company also completed a private financing of enterWorks
subordinated debt in the third quarter of 1996. From its inception, the Company
had internally funded its enterWorks investment of approximately $5.1 million.
The proceeds of the debt offering, which brought in $3.2 million, was used for
working capital requirements of the Company.
Also, late in the fourth quarter of 1996, the Company sold its
Consulting Services Group ("TCS") to COMSYS Technical Service, a wholly owned
subsidiary of COREStaff for $31.6 million. The decision to sell TCS was based
upon the determination that TCS was not core to the long term strategy of the
Company as well as recognizing the need to improve the Company's liquidity. The
proceeds from the sale are being used for working capital requirements and to
fund other business areas and investments. The Company believes that the
proceeds from the TCS sale have alleviated the short-term liquidity constraints.
However, there can be no assurances that the improved liquidity will continue
throughout 1997.
For the year ended December 31, 1996, the Company used approximately
$15.5 million of cash in operating activities. This use of cash in operations
was primarily a result of the operating performance as well as increases in the
accounts receivable and inventory balances after adjustment for non-cash items.
With the sale of TCS, the Company generated $27.6 million of cash from investing
activities. From a financing perspective, the Company used the cash generated by
the TCS sale to reduce the senior credit facility. The Company also received
$3.2 million from the issuance of enterWorks subordinated debt.
At December 31, 1996, the Company had an outstanding balance of $15.4
million on its $45 million senior credit facility. The Facility is
collateralized by certain assets of the Company (primarily inventory and
accounts receivable) and the amount of borrowings fluctuates based on the
underlying asset borrowing base as well as the Company's working capital
requirements. At December 31, 1996, the Company, under its borrowing base
formula, had $24 million of unused availability. The facility expires on July 1,
2000. Subsequent to December 31, 1996, the Company's bank entered into an
agreement with the Company to refinance its $45 million Facility and extend the
maturity date to July 1, 2000. Other terms and conditions of the Facility are
similar to the Company's previous Facility.
The Company continually evaluates its financing requirements to support
its business base and anticipated growth. The Company anticipates that its
current Facility will be adequate for 1997. However, should faster than
anticipated growth occur, the Company believes that an expanded senior credit
facility would be required through a multi-bank syndication arrangement.
The Company is actively reviewing its financing requirements for
enterWorks. While enterWorks issued $3.2 million of subordinated debt with
warrants in 1996, the Company is continuing to fund the on-going product
development, sales and marketing, and business activities of its subsidiary. The
Company will continue to evaluate the necessity of bringing external capital to
fully exploit this emerging market and to build the enterWorks business.
The Company has a net deferred tax asset of $3.1 million at December
31, 1996. Management believes that the asset is fully realizable given the
Company's existing backlog, projected future taxable income and potential tax
planning strategies existing at December 31, 1996.
Capital Expenditures
The Company believes that its business is generally not capital
intensive. However, the Company did have higher property, plant and equipment
expenditures in 1996 as a result of moving to a new headquarters and integration
facility. In 1996, the Company entered into a twenty year lease for a building
that provides significantly more integration and warehouse space and that will
result in significant cost savings to the Company as it provides for reduced
monthly lease payments compared to the costs incurred under the Company's
previous leasing arrangement. The Company, as a part of the lease, received $1.3
million in cash from the landlord for tenant improvements and other building
costs. At December 31, 1996, $231,000 of these funds remain and has been treated
as restricted cash.
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 offset the effects of inflation, if any, on the Company's
performance.
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,
the timing and approval of the Federal government's fiscal year budget, business
growth through obtaining new business and, once obtained, the Company's ability
to successfully perform at a profit, the Company's ability to convert contract
backlog to revenue, the Company's ability to secure adequate capital and
financing to support continued business growth, and the risk of the Federal
government terminating contracts with the Company. While the Company has not
experienced contract terminations with the Federal government, the Federal
government can terminate at its convenience. Should this occur, the Company's
operating results could be adversely impacted.
As a high percentage of the Company's revenue is derived from business
with the Federal government, the Company's operating results could be adversely
impacted should the Federal government not approve and implement its annual
budget in a timely fashion.
While the Company believes it has adequate financing to support its
revenue base anticipated for 1997, the Company's growth depends upon its ability
to obtain additional capital and financing sources. The Company continually
reviews the requirements for additional financing. However, no assurance can be
made on whether such financing, if necessary, can be obtained, or if available,
that it will be available on acceptable terms.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Telos Corporation and Subsidiaries: Page
Report of Independent Accountants - Coopers & Lybrand L.L.P...............................................17
Consolidated Statements of Income for the Years Ended
December 31, 1996, December 31, 1995, and December 31, 1994..............................................18
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1995.....................................................................................19-20
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, December 31, 1995, and December 31, 1994...........................................21
Consolidated Statements of Stockholders' Investment (Deficit)
for the Years Ended December 31, 1996, December 31, 1995,
and December 31, 1994.................................................................................22
Notes to Consolidated Financial Statements................................................................23-37
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
We have audited the accompanying consolidated balance sheets of Telos
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' investment (deficit), and cash
flows for each of the three years in the period ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Telos Corporation
and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
McLean, VA
March 28, 1997
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands)
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Sales
Systems and Support Services $103,675 $105,801 $111,357
Systems Integration 85,220 69,958 39,319
------ ------ ------
188,895 175,759 150,676
------- ------- -------
Costs and expenses
Cost of Systems and
Support Services 91,483 90,679 94,574
Cost of Systems Integration 76,798 54,843 32,644
Selling, general and
administrative expenses 29,055 23,262 25,321
Goodwill amortization 1,001 1,950 2,701
----- ------- -------
198,337 170,734 155,240
------- ------- -------
Operating (Loss) income (9,442) 5,025 (4,564)
Other income (expenses)
Non-operating (expense) income (445) 27 (5,458)
Interest expense (5,668) (4,385) (3,029)
----- ----- -----
(Loss) income before taxes (15,555) 667 (13,051)
Income tax (benefit) provision (5,739) 75 (1,213)
-------- ----- --------
(Loss) income from continuing
operations (9,816) 592 (11,838)
Discontinued operations:
Income (loss) from discontinued
operations (net of income tax
provision of $566 for 1996 and
an income tax benefit of $70
for 1994) 500 423 (583)
Gain on sale of Consulting
Services, (net of income tax
provision of $6,327) 11,524 -- --
------ ---- -----
Income (loss) before
extraordinary item 2,208 1,015 (12,421)
Extraordinary item
Loss from early debt
retirement -- -- (196)
------ ----- ------
Net income (loss) $2,208 $1,015 $(12,617)
===== ===== ======
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,
------------
1996 1995
---- ----
Cash and cash equivalents
(includes restricted cash of
$231 at December 31, 1996) $ 2,781 $ 735
Accounts receivable, net 51,549 44,112
Inventories, net 17,066 15,877
Deferred income taxes 1,643 1,217
Prepaid income taxes 694 320
Other current assets 230 384
------ ------
Total current assets 73,963 62,645
------ ------
Property and equipment
Land and building 408 408
Furniture and equipment 20,174 18,180
Leasehold improvements 2,650 2,683
Property and equipment
under capital leases 13,644 --
------ ------
36,876 21,271
Accumulated depreciation (20,390) (18,600)
------- ------
Total property and equipment 16,486 2,671
------ ------
Goodwill 13,545 22,814
Deferred income taxes 1,468 1,868
Other assets 4,602 4,494
------- ------
$110,064 $94,492
======= ======
The accompanying notes are an integral part of these consolidated
financial statements.
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
LIABILITIES AND STOCKHOLDERS' INVESTMENT
December 31,
------------
1996 1995
---- ----
Current liabilities
Accounts payable $35,730 $26,528
Accrued compensation and benefits 10,163 8,804
Unearned warranty revenue 1,575 699
Current portion, capital lease obligations 357 --
Other current liabilities 9,776 6,253
----- ------
Total current liabilities 57,601 42,284
Senior credit facility 15,418 32,312
Senior subordinated notes 17,439 15,004
Capital lease obligations 12,537 --
Other long-term liabilities 154 1,108
------ ------
Total liabilities 103,149 90,708
------- ------
Commitments and contingencies
Preferred stock
Senior redeemable preferred stock
Series A-1, and A-2 4,828 4,494
Class B Redeemable Preferred Stock par value $.01,
7,500 shares authorized, issued and outstanding 11,087 10,252
Redeemable preferred stock, $.01 par value,
6,000,000 shares authorized, 3,595,586 shares
issued, and outstanding $10.00 per share
liquidation and redemption value 24,230 18,647
------ ------
Total preferred stock 40,145 33,393
------ ------
Stockholders' investment
Class A common stock, no par value, 23,076,753 65 65
shares issued and outstanding
Class B common stock, no par value, 4,037,628
shares issued and outstanding 13 13
Capital in excess of par 4,048 7,669
Retained earnings (deficit) (37,356) (37,356)
------ ------
Total stockholders' investment (deficit) (33,230) (29,609)
------ ------
$110,064 $94,492
======= ======
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,
-----------------------
1996 1995 1994
---- ---- ----
Operating activities:
Net income (loss) $ 2,208 $1,015 $(12,617)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization 3,058 3,376 4,289
Gain on sale of TCS (17,176) -- --
Goodwill amortization 1,418 2,370 3,178
Amortization of discount on debt 78 17 68
Non-cash interest expense -- -- 410
Provision for inventory obsolescence 1,008 312 (899)
Provision for doubtful accounts receivable 647 103 (319)
Loss from early repayment of debt -- -- 196
Provision for loss on shutdown of division -- (760) --
Provision for deferred income taxes 900 -- --
Provision for employee benefits -- 974 600
Provision for employee insurance -- (891) --
Write-down of license investment -- -- 1,440
Changes in assets and liabilities
(Increase) in accounts receivable (14,487) (3,870) (9,347)
(Increase) in inventories (2,364) (8,582) (1,124)
(Increase) decrease in other assets (2,076) 1,845 (751)
Increase (decrease) in accounts payable and
other current liabilities and noncurrent
liabilities 11,283 (2,342) 7,796
------ ----- --------
Cash (used in) operating activities (15,503) (6,433) (7,080)
------ ----- ------
Investing activities:
Proceeds from sale of discontinued operations 31,579 -- --
Purchase of property and equipment (2,558) (1,013) (1,226)
Investment in joint venture -- (111) --
Investment in products (1,422) ( 569) (1,354)
----- ----- -----
Cash provided by (used in) investing activities 27,599 (1,693) (2,580)
------ ----- -----
Financing activities:
(Repayment of) proceeds from senior
credit facility (16,894) (1,688) 11,185
Proceeds from debt issuance 3,278 14,373 --
Increase in book overdrafts 3,833 2,722 --
Repayment of long-term debt -- (5,800) (1,825)
Debt issue costs -- (1,187) --
Payments under capital leases (267) -- --
Issuance of Class A common stock -- -- (3)
------ ------ ------
Cash (used in) provided by financing
activities (10,050) 8,420 9,357
------- ----- -----
Increase (decrease) in cash and cash equivalents 2,046 294 (303)
Cash and cash equivalents at beginning of the
period 735 441 744
----- ----- -----
Cash and cash equivalents at end of period $2,781 $ 735 $ 441
===== ===== =====
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $5,760 $ 5,348 $3,697
===== ===== =====
Income taxes paid (refunded) $ 187 $(2,155) $(1,672)
===== ===== =====
Supplemental schedule of non-cash investing activities:
Assets under capital lease $13,154 $ -- $ --
====== ===== =====
Sapiens Settlement $ -- $ -- $3,735
===== ===== =====
The accompanying notes are an integral part of these consolidated
financial statements.
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (DEFICIT)
(amounts in thousands)
Class A Class B Capital Retained Total
Common Common In Excess Earnings Stockholders'
Stock Stock of Par (Deficit) Investment (Deficit)
----- ----- ------ --------- --------------------
Balance as of December 31, 1993 $65 $13 $15,479 $(24,739) $(9,182)
Senior redeemable preferred stock dividend -- -- (271) -- (271)
Class B redeemable preferred stock dividend -- -- (675) -- (675)
Redeemable preferred stock dividend -- -- (1,805) -- (1,805)
Redeemable preferred stock accretion -- -- (1,040) -- (1,040)
Net loss for the year -- -- (12,617) (12,617)
Retirement of employee stock -- (3) -- (3)
Issuance of Class A common stock -- -- 410 -- 410
--- --- ----- ------ ------
Balance December 31, 1994 65 13 12,095 (37,356) (25,183)
-- -- ------ ------ ------
Senior redeemable preferred stock dividend -- -- -- (302) (302)
Class B redeemable preferred stock dividend -- -- (42) (713) (755)
Redeemable preferred stock dividend -- -- (3,236) -- (3,236)
Redeemable preferred stock accretion -- -- (1,148) -- (1,148)
Net income for the year -- -- -- 1,015 1,015
-- -- ----- ------ ------
Balance December 31, 1995 65 13 7,669 (37,356) (29,609)
-- -- ----- ------ ------
Senior redeemable preferred stock dividend -- -- -- (334) (334)
Class B redeemable preferred stock dividend -- -- -- (835) (835)
Redeemable preferred stock dividend -- -- (3,272) (1,039) (4,311)
enterWorks common stock warrants -- -- 921 -- 921
Redeemable preferred stock accretion -- -- (1,270) -- (1,270)
Net income for the year -- -- -- 2,208 2,208
-- -- ----- ------ ------
Balance December 31, 1996 $65 $13 $4,048 $(37,356) $(33,230)
== == ===== ====== ======
The accompanying notes are an integral part of these consolidated
financial statements.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 1. Summary of Significant Accounting Policies
Business and Organization
Telos Corporation ("Telos" or the "Company") provides information and
network technology products and services primarily to various agencies of the
Federal Government . The Company also provides these services to state and local
governments and the private sector. Services provided by the Company encompass
the full life cycle of computer services including system specification and
evaluation, hardware and software integration, deployment, installation,
training, hardware maintenance and software sustainment. The Company has further
enhanced its ability to deliver solutions to its customers by providing software
and applications focused on emerging information and network technology markets
such as data migration and integration, workflow and network security.
The Company, founded in 1968, is incorporated under the laws of the
State of Maryland.
Principles Of Consolidation
The accompanying consolidated financial statements include the accounts
of Telos Corporation and its wholly owned subsidiaries, Telos Corporation
(California), Telos Field Engineering, Inc., enterWorks.com and Telos
International Corporation (collectively the "Company"). All significant
inter-company transactions have been eliminated. The Company also has an
investment in an international joint venture that is accounted for under the
equity method of accounting.
Revenue Recognition
The majority of the Company's sales are made directly or indirectly to
the Federal government. A substantial portion of the Company's revenues are
derived from time and materials and cost reimbursement contracts, under which
revenue is recognized as services are performed and costs are incurred. The
Company generally recognizes equipment 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. Revenue
from the licensing of software is recognized in accordance with AICPA SOP 91-1
"Software Revenue Recognition" whereby revenue is recognized when a
noncancelable revenue agreement is in force, the product has been shipped and no
significant obligations remain. Revenue generated from warranty service
contracts is recognized ratably over the warranty service period. The Company
records loss provisions for its contracts, if required, at the time such losses
are identified.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash equivalents.
The Company's cash management program utilizes zero balance accounts.
Accordingly, all book overdraft balances have been reclassified to accounts
payable.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined primarily on the first-in, first-out method. Substantially all
inventories consist of purchased hardware and component computer parts used in
connection with system integration services performed by the Company.
Inventories also include spare parts of $1,414,000 and $1,508,000 at December
31, 1996 and 1995, 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.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
At December 31, 1996 and 1995 the Company's allowances for inventory
obsolescence were $2,357,000 and $1,385,000, respectively. The components of the
allowance for inventory obsolescence are set forth (in thousands):
Additions
Balance Charged to Balance
Beginning Costs and at End
of Period Expense Deductions(1) of Period
--------- ------- ------------- ---------
Year Ended December 31, 1996 $1,385 $1,008 $ 36 $2,357
Year Ended December 31, 1995 $1,078 $ 312 $ 5 $1,385
Year Ended December 31, 1994 $2,189 $ (899) $ 212 $1,078
(1) Inventories written off.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and
amortization are provided for using the straight-line method over the estimated
useful lives of the assets as follows:
Buildings 20 Years
Machinery and equipment 3-7 Years
Office furniture and fixtures 5-7 Years
Leasehold Life of 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 income. Expenditures for
repairs and maintenance are charged to operations as incurred.
Depreciation and amortization expense related to property and equipment was
$2,202,000, $1,862,000, and $2,463,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
Goodwill
Goodwill of approximately $31.19 million resulted from the acquisition
of Telos Corporation (California) in 1992 and has been assigned a useful life of
twenty years. The twenty year 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 undiscounted operating
cash flow (excluding goodwill amortization, interest expense, and non-recurring
charges). If an impairment of goodwill appears to have occurred, impairment is
measured based on projected discounted operating cash flow (excluding goodwill
amortization, interest expense, and non-recurring charges) using a discount rate
reflecting the Company's cost of funds. In addition, the Company may assess the
net carrying amount of goodwill using internal and/or independent valuations of
the Company.
Accumulated amortization of goodwill for Telos Corporation (California) at
December 31, 1996 and 1995 was $7,055,000 and $6,054,000, respectively.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards 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 portions of
the deferred tax assets will not be realized.
401(k) Retirement Savings And Profit Sharing 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. Additionally, the Company, on a discretionary basis, may contribute 1%
of all eligible employee wages to the Plan regardless of whether the employee
elected to participate in the Plan. This discretionary contribution was not made
in 1996. Total Company contributions to the Plan for 1996, 1995 and 1994 were
$1,679,000, $2,397,000, and $2,517,000, respectively.
Software Development Costs
The Company expenses all research and development costs incurred in
connection with software development projects until such software achieves
technical feasibility. All costs thereafter are capitalized. The Company is
amortizing such capitalized costs over the estimated product life of three
years. The Company periodically evaluates the realizability of these capitalized
costs through evaluation of anticipated revenue and gross margin as compared to
current revenue and gross margin.
Unamortized software costs at December 31, 1996 and 1995 were $1.5
million and $1.2 million, respectively. Amortization expense associated with
these capitalized software costs was $351,000, $80,000 and zero in 1996, 1995,
and 1994, respectively.
During 1996, 1995, and 1994, respectively, the Company incurred $1.2
million, $1.4 million, and $1.9 million in research and development costs,
respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the classifications used in the current period. (See
Note 2).
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 2. Discontinued Operations
On December 27, 1996, the Company sold substantially all of the assets
of its consulting division, Telos Consulting Services (TCS), to COMSYS Technical
Services, Inc., a subsidiary of COREStaff, Inc. for approximately $31.6 million.
The resulting gain from the sale of TCS of $11.5 million included a write-off of
$6.9 million of goodwill allocated to the TCS operations.
The sale of Telos Consulting Services has been treated as a discontinued
operation in accordance with APB Opinion Number 30 ("APB 30"). Pursuant to APB
30, the revenue, costs and expenses of TCS have been excluded from their
respective captions in the Company's consolidated statements of income and the
net results of these operations have been reported separately as "Income (loss)
from discontinued operations." Included in the results of the discontinued
operations is allocated interest expense of $1,475,000, $1,106,000 and
$1,028,000 for 1996, 1995, and 1994, respectively. Interest has been allocated
based on the net assets of the discontinued operations in relation to the
Company's consolidated net assets plus non-specific debt. Additionally, goodwill
amortization of $418,000, $420,000 and $477,000 for 1996, 1995 and 1994,
respectively, has been included in the results of the discontinued operations.
TCS had revenue of $33.1 million, $27.1 million, and $24.4 million for
1996, 1995 and 1994, respectively.
Note 3. Revenue and Accounts Receivable
Revenue resulting from contracts and subcontracts with federal, state,
and local governments accounted for 86.4%, 84.8% and 88.6%, of total revenue in
the years ended December 31, 1996, 1995 and 1994, 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 components of accounts receivable are as follows (in thousands):
December 31,
------------
1996 1995
---- ----
Billed accounts receivable $40,225 $30,286
------ ------
Amounts billable upon acceptance by customer 10,370 6,900
Amounts currently billable 1,879 7,650
------ -----
Total unbilled accounts receivable 12,249 14,550
------ ------
Allowance for doubtful accounts (925) (724)
------ ------
$51,549 $44,112
====== ======
The provision for doubtful accounts was $694,000, $103,000, and
$(319,000) for the years ended December 31, 1996, 1995 and 1994, respectively.
Reductions to the allowance were primarily due to account receivable write-offs
and other adjustments.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 4. Income Taxes
The provision (benefit) for income taxes include the following (in
thousands):
For The Year Ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
Current (benefit) provision
Federal $(421) $ -- $(3,017)
State -- 75 (406)
--- -- -----
Total current (421) 75 (3,423)
--- -- -----
Deferred (benefit) provision
Federal (4,527) -- 1,881
State (791) -- 329
----- -- ----
Total deferred (5,318) -- 2,210
------ -- -----
Total (benefit) provision $(5,739) $75 $(1,213)
====== == =====
The provisions for income taxes vary from the amount of income taxes
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,
-------------------------------
1996 1995 1994
---- ---- ----
Computed expected tax
provision (benefit) (34.0)% 34.0% (34.0)%
Goodwill amortization 2.2 99.4% 7.0%
State income taxes, net of
federal tax benefit (5.9)% 5.9% (5.9)%
Change in valuation allowance
of deferred tax assets 0.2% (136.2)% (7.1)%
Limitation of net operating loss
carryback -- -- 26.1%
Other 0.6% 8.1% 4.7%
--- --- ----
(36.9)% 11.2% ( 9.2)%
====== ==== ====
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are as follows (in thousands):
December 31,
------------
1996 1995
---- ----
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ 195 $ 176
Inventory valuation allowance and
amortization 1,091 1,500
Accrued liabilities not currently
deductible 716 1,412
Accrued compensation 1,425 2,486
Deferred office rents and accrued
sublease liabilities 633 498
Property and equipment, principally due
to differences in depreciation method 1,655 1,472
Net operating loss carryforward 2,272 3,922
Alternative minimum tax credit carryforward 573 994
------ ------
Total gross deferred tax assets 8,560 12,460
Less valuation allowance (4,702) (8,155)
----- -----
Net deferred tax assets 3,858 4,305
----- -----
Deferred tax liabilities:
Unbilled revenue, deferred for tax purposes (747) (1,166)
Other -- (54)
----- -----
Total deferred tax liabilities (747) (1,220)
----- -----
Net deferred tax assets $3,111 $3,085
===== =====
The net change in the valuation allowance was a decrease of $3,453,000
and $4,195,000 for 1996 and 1995, respectively. Included in the change in the
valuation allowance were decreases of approximately $926,000 and $1,391,000 for
1996 and 1995, respectively, related to the reversal of temporary differences
acquired from Telos Corporation (California). The reversals of the temporary
differences related to the 1992 Telos Corporation acquisition reduce goodwill.
The total tax benefits of future deductible temporary differences acquired in
connection with the Telos Corporation acquisition were $6,097,000 at January 14,
1992. As of December 31, 1996, $623,000 of tax benefits remain and will reverse
in future years.
For the year ended December 31, 1996, the Company generated taxable
income of $8,197,000 which was offset by the $13,886,000 net operating loss
available for regular federal income tax purposes, resulting in $5,689,000 net
operating loss available to offset future regular taxable income. Included in
the $8,197,000 taxable income was a $25,000,000 taxable gain from the sale of
the TCS division. Additionally, $3,135,000 of alternative minimum tax net
operating loss carryforward is available to offset future alternative minimum
taxable income. The net operating loss carryforward will begin expiring in the
year 2011. The Company also has $573,000 of alternative minimum tax credits
available to be carried forward indefinitely to reduce future regular tax
liabilities.
During 1995 the Company settled an Internal Revenue Service audit for
the years 1987 through 1991. The audit resulted in the disallowance of certain
costs that the Company had previously claimed. In 1996, due to tax legislation
enacted in 1996 which allowed the deduction of certain costs previously
disallowed during the audit, the Company filed amended returns claiming refunds
of taxes previously paid and recorded a tax benefit of $421,000.
At December 31, 1996, the Company has a $3.1 million deferred tax
asset. The realization of this asset is dependent upon future income, which
cannot be predicted with certainty, and on certain tax planning strategies that
would result in taxable income. The Company believes that it is more likely than
not that the Company will realize the net deferred tax asset recorded.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 5. Debt Obligations
Senior Revolving Credit Facility
At December 31, 1996, the Company has a $45 million Senior Revolving
Credit Facility (the "Facility") with its bank which expires on July 1, 1997 and
has an outstanding balance of $15.4 million. Borrowings under the facility are
collateralized by certain assets of the Company (primarily accounts receivable
and inventory), and the amount of borrowings fluctuate based on the underlying
asset borrowing base as well as on the Company's working capital requirements.
The Facility bears interest at 1.5% over the bank's base rate or 9.75% at
December 31, 1996. The weighted average interest rate on the outstanding
borrowings under the facility was 10.45% for the year ended December 31, 1996
compared with 9.32% for the year ended December 31, 1995. At December 31, 1996,
the Company had approximately $24 million of availability under the Facility.
Subsequent to December 31, 1996, the Company's bank has agreed to
refinance the Facility. Under the agreement, the Facility will remain at $45
million with terms and conditions similar to the Company's previous Facility
with an expiration date of July 1, 2000.
Senior Subordinated Notes
At December 31, 1996 the Company had a $675,000 Senior Subordinated
Note, Series A with a balance of $651,000 outstanding with John R. Porter, the
Company's principal common shareholder. The Note had an interest rate per annum
of 11.875% from January 1 through January 14, 1995, then increased to 14% per
annum from January 15, 1995 through January 14, 1997, and increases to 17%
thereafter. Interest is payable in semi-annual installments on June 30 and
December 31 of each year. The note is collateralized by certain assets of the
Company. The note was issued in 1992 and matures on January 14, 2002. The
Company retired this note in March 1997.
In 1995 the Company retired the Series B-1 an B-2 Senior Subordinated
Notes and related accrued interest and fees for $6.5 million. The funds to pay
Union de Banques Suisses, the noteholder, were provided by certain of the
Company's common shareholders. The shareholders were issued $6.5 million
Subordinated Bridge Notes in exchange for these funds. On October 13, 1995, the
Company issued to these shareholders $14.4 million of Senior Subordinated Notes
("Notes") which included shareholder fees related to the debt issuance, in
exchange for the $6.5 million Subordinated Bridge Notes, as well as the transfer
to the Company of certain shareholders' deposits of $7 million held with the
Company's bank which the Company had used for additional borrowing capacity. The
Notes are classified as either Series B or Series C. Series B Notes, which total
$6.5 million and replace the retired Senior Subordinated Notes, are
collateralized by fixed assets of the Company. Series C Notes which total $7.9
million are unsecured.
Both the Series B and Series C Notes have a maturity date of October 1,
2000 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 occurrence of a triggering event. At December 31,
1996, the prepayment premium that would be due upon a triggering event is
$2,483,000.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
enterWorks.com, Inc., Subordinated Notes
During 1996, the Company completed a private financing whereby
$3,277,960 of 8% subordinated debt of enterWorks, a wholly-owned subsidiary of
the Company, was issued. Investors included certain Board of Director members,
certain members of Company management and certain shareholders of the Company.
The subordinated debt has a five year maturity with interest payable
semi-annually beginning January 1, 1998. In connection with the debt, the
Company issued 2,048,725 of warrants to purchase shares of enterWorks common
stock. The warrants have an exercise price of one dollar and an exercise period
of ten years. The Company has assigned a value to the warrants of $921,926 which
has been included in capital in excess of par at December 31, 1996.
Transaction Costs
In 1994, the Company attempted to recapitalize its balance sheet and
refinance its existing debt. These transactions were not completed and
accordingly, the Company recorded $4,205,000 of non-operating expenses for the
cost of the failed transactions in December 1994. Included in the above amount
are certain provisions for settlement with parties involved in the failed
financing transaction. The Company has paid all costs associated with this
transaction as of December 31, 1996.
Note 6. Redeemable Preferred Stocks
Senior Redeemable Preferred Stock
The components of the senior redeemable preferred stock are Series A-1
and Series A-2 redeemable preferred stock each with $.01 par value and 1,250 and
1,750 shares authorized, issued and outstanding, respectively. Through June 30,
1995, the Series A-1 and Series A-2 carried a cumulative per annum dividend rate
of 9% of their liquidation value of $1,000 per share. From July 1, 1995 through
June 30, 1997, the Series A-1 and A-2 each carry a cumulative dividend rate
equal to 11.125%, and increases again to 14.125% per annum thereafter. The
liquidation preference of the preferred stock is the face amount of the Series
A-1 and A-2 Stock ($1,000 per share), plus all accrued and unpaid dividends. The
Company is required to redeem all of the outstanding shares of the stock on
December 31, 2001, subject to the legal availability of funds. The Series A-1
and A-2 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. At December 31, 1996 and
1995 undeclared, unpaid dividends relating to Series A-1 and A-2 Preferred Stock
totaled $1,828,000 and $1,494,000, respectively, and have been accrued and are
included in the Series A-1 and A-2 redeemable preferred stock balance. Mandatory
redemptions are required from excess cash flows, as defined in the stock
agreements. Through December 31, 1996, there has been no available cash flow
permitting mandatory redemption.
Class B Redeemable Preferred Stock
The Class B Redeemable Preferred Stock has a $.01 par value, with 7,500
shares authorized, issued and outstanding. Through June 30, 1995, the Class B
Redeemable Preferred Stock carried a cumulative per annum dividend rate of 9% of
its liquidation value of $1,000 per share. From July 1, 1995 through June 30,
1997, the Class B Redeemable Preferred Stock has a cumulative dividend rate per
annum equal to 11.125% and increases to 14.125% per annum thereafter. The Class
B Redeemable Preferred Stock may be redeemed at its liquidation value together
with all accrued and unpaid dividends at any time at the option of the Company.
The liquidation preference of the Class B Redeemable Preferred stock is the face
amount, $1,000 per share, plus all accrued and unpaid dividends. The Company is
required to redeem all of the outstanding shares of the stock on December 31,
2001, subject to the legal availability of funds. At December 31, 1996 and 1995
undeclared, unpaid dividends relating to the Class B Redeemable Preferred Stock
totaled $3,587,000 and $2,752,000, respectively, and have been accrued and are
included in the Class B Redeemable Preferred Stock balance.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Redemption of the stock may occur after payment in full of the
principal and interest amount due on the senior subordinated notes, and the
redemption of the Series A-1 and A-2 Preferred Stock. Mandatory redemptions are
required from excess cash flows, as defined in the stock agreements. Through
December 31, 1996, there has been no available cash flow permitting mandatory
redemption.
12% Cumulative Exchangeable Redeemable Preferred Stock
The Company initially issued 2,858,723 shares of 12% Cumulative
Exchangeable Redeemable Preferred Stock (the "Public Preferred Stock"), par
value $.01 per share, 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, 1996 and 1995 was
$1,270,000 and $1,148,000, respectively.
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, the date of
the stock's issuance, 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.
Dividends in additional shares of the Preferred Stock are paid at the rate of
0.06 of a share of the Preferred Stock for each $.60 of such dividends not paid
in cash. 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 $6,471,000.
The Company has not declared or paid dividends since 1991, due to
restrictions and ambiguities relating to the payment of dividends contained
within its charter, its working capital facility agreement, and under Maryland
law.
Note 7. Stockholders' Investment and Stock Options
Common Stock
At December 31, 1996 and 1995, common stock consists of 50,000,000
shares authorized and 23,076,753 shares issued and outstanding of Class A common
stock; and 5,000,000 shares authorized and 4,037,628 shares issued and
outstanding of Class B common stock. The common stock has no par value and an
aggregate capital value for all shares of $77,500.
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
preferred stock, holders of Class A and the Class B common stock are entitled to
receive such dividends as may be declared.
Stock Warrants
The Company issued the Class B Preferred Stock shareholder common stock
warrants to purchase up to 3,150,468 shares of Class A common stock of the
Company in 1992. The stock warrant was valued at $1,109,000 and such amount was
shown as an increase in Capital in Excess of Par. The warrant was initially
exercisable to purchase up to 1,181,425 shares at any time. The warrant
increased by 656,348 shares on June 30, 1993 and July 1, 1994 and by 656,347
shares on July 1, 1995. Through December 31, 1996, 1,837,773 shares of Class A
Common Stock has been purchased under the warrant. The price per share at which
shares have been purchased and are purchasable upon the exercise of the warrant
is $.0025.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
In 1994, Mr. John Porter, the Company's majority common stock
shareholder, deposited $3 million with the Company's bank to provide the Company
with increased borrowing capability under its senior credit facility (see Note
5). In exchange, Porter 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 Porter a warrant 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. The
warrant is fully exercisable and has a term of ten years from the date of issue.
Stock Options
Long-Term Incentive Compensation Plans
The Company has granted stock options to certain employees of the
Company under three plans. The Long-Term Incentive Compensation Plan was adopted
in 1990 ("1990 Stock Option Plan") and had option grants under it through 1993.
In 1993, stock option plan agreements were reached with certain employees. In
1996, the Board of Directors approved and the shareholders ratified the 1996
Stock Option Plan. The Company also approved an enterWorks stock option plan
during 1996.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. SFAS No. 123 "Accounting for Stock-Based
Compensation" was issued in late 1995 and introduced a fair value based method
of accounting for stock-based compensation. While the expense recognition
provision of SFAS 123 is optional, pro-forma disclosure of the effect on net
income as if the Company had adopted the cost measurement aspects of SFAS 123
are presented below.
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 granted
by the Plan Administrator, who is appointed by the Board of Directors, to key
employees, including officers and directors. The option price of $1.42 per
share, determined by the Board of Directors, is 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 options is as follows (amounts in
thousands, except per share data):
Options
Option price
Outstanding per share
---------------------------------------
Balance, December 31, 1993 683 $1.42
Granted -- --
Exercised -- --
Canceled (57) 1.42
----- ----
Balance, December 31, 1994 626 1.42
Granted -- --
Exercised -- --
Canceled (28) 1.42
----- ----
Balance, December 31, 1995 598 1.42
Granted -- --
Exercised -- --
Canceled (13) 1.42
--- ----
Balance, December 31, 1996 585 $1.42
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
1996 Stock Option Plan
The 1996 Stock Option Plan allows for the award of up to 6,644,974
shares of common stock at an exercise price of not lower than fair market value.
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 option may be exercised over a
ten year period subject to the vesting requirements.
During 1996, the Company granted 4,439,265 of stock options at a
weighted average exercise price of $.95 a share. At December 31, 1996, 887,853
stock options were exercisable.
Had the Company recorded compensation cost consistent with SFAS 123
methodology, pro forma net income for 1996 would have been $2,076,000.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
Executed dividend yield 0%
Expected stock price volatility 0%
Risk free interest rate 6.66%
Expected life of options 6 years
Other Option Plans
In 1993, stock option plan agreements were reached to provide Mr. John
Wood, CEO and President, and Mr. Joseph Beninati, former Chairman, with options
to each purchase up to 700,459 shares of the Company's Class A Common Stock from
the Company at $.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 $.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.
1996 enterWorks Option Plan
enterWorks, a wholly-owned subsidiary, implemented an option plan that
allows for the award of up to 5,000,000 shares of common stock at an exercise
price of not lower than fair market value. 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 option may be exercised over a ten year period subject to
the vesting requirements.
During 1996, the Company granted 2,694,000 of stock options at exercise
prices of $.12 and $.77 a share. At December 31, 1996, 583,800 stock options
were exercisable.
Had the Company recorded compensation cost consistent with SFAS 123
methodology, net income would not have materially changed.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
Executed dividend yield 0%
Expected stock price volatility 0%
Risk free interest rate 6.73%
Expected life of options 6 years
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 8. Agreement with Sapiens International
In 1993, the Company entered into a series of agreements (the "Sapiens
Agreements") with Sapiens, the developers of certain commercial user interface
software, for certain exclusive marketing and distribution rights on certain
Sapiens software. In 1994, the Company restructured these agreements and
recorded a provision of approximately $1.4 million to fully write-off the
remaining asset value of the Systems Software license based on a reevaluation of
its business plans.
Note 9. Commitments and Contingencies
Leases
The Company leases office space and equipment under non-cancelable
operating and capital leases with variable expiration dates, some of which
contain renewal options.
In 1996, the Company entered into a twenty year capital lease with
annual payments of $1,447,000 commencing March 1, 1996 for a building that
serves as its corporate headquarters. The building provides significant
additional manufacturing and integration space. 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 of which the Company has utilized
approximately $1,069,000 for such purposes as of December 31, 1996 with the
remaining balance of $231,000 recorded as restricted cash. The Company's move to
its new facilities was substantially completed in July 1996. The Company's
former headquarters facility was leased with a lease expiration date of March
31, 1997. In 1996, the Company recorded $781,000 of additional expense for the
remaining lease obligation of its former headquarters facility.
The Company also has certain equipment leases that are recorded as
capital leases. Such equipment totals approximately $600,000. 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, 1996 (in
thousands):
Real
Estate Equipment Total
1997 $1,447 $215 $1,662
1998 1,447 197 1,644
1999 1,447 132 1,579
2000 1,447 99 1,546
2001 1,447 44 1,491
Remainder 20,499 -- 20,499
------ --- ------
Total minimum obligations 27,734 687 28,421
Less interest 15,404 123 15,527
------ --- ------
Present value of net
minimum obligations 12,330 564 12,894
Less current portion 225 132 357
------- --- ------
Long term obligations at
December 31, 1996 $12,105 $432 $12,537
Accumulated amortization for assets under capital leases at December
31, 1996 is $397,000.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Future minimum lease payments for all non-cancellable operating leases
at December 31, 1996 are as follows (in thousands):
1997 $3,379
1998 2,323
1999 1,834
2000 1,151
2001 449
-----
Total minimum lease payments 9,136
Less total minimum
sublease rentals 331
---
Net minimum lease payments $8,805
======
Rent expense charged to operations for 1996, 1995, and 1994 totaled
$4,804,000, $4,349,000, and $5,178,000, respectively.
Legal
A description of certain legal matters follows:
Rosecliff, Inc., et al v. C3, Inc., et al. (94 CIV. 9104)
This case was filed in December, 1994 in the United States District
Court for the Southern District of New York. Rosecliff, Inc. ("Rosecliff") is a
merchant banking group with whom the Company had been negotiating an
equity/subordinated debt private placement transaction. Upon termination of this
transaction, Rosecliff filed a suit seeking payment of its expenses and $1
million for the violation of the "no-shop" provision in the Agreement. During
1996, the Company entered into a settlement agreement with Rosecliff and
recorded an additional $355,000 of non-operating expense to fully record the
provisions of the settlement. At December 31, 1996 all amounts related to the
settlement were fully paid.
The Company is a party to various other 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 materially adverse effect on the Company's consolidated
financial position or results of operations.
Note 10. Related Parties
Mr. John B. Wood became an employee of the Company in 1992 and serves as
President, Chief Executive Officer and Director, respectively.
Mr. Joseph P. Beninati served as Chairman of the Board for the majority of
1994 before resigning January 5, 1995. The Company is paying him $165,000
annually subject to a three year employment agreement that began in 1995. Mr.
Beninati resigned from the Board in 1996.
In 1996, the Company paid previously accrued advisory fees of $525,000 to
the firm Beninati and Wood, Inc.
Mr. John R. Porter, the majority common stock shareholder, has a consulting
agreement with the Company whereby he will be compensated $200,000 a year for
specified services. Accordingly, the Company has accrued $200,000 at December
31, 1996 for this agreement.
Mr. Byers, a Director of the Company, has a consulting agreement with the
Company to help the Company expand its business operations into the
international marketplace. Under this agreement Mr. Byers receives $8,000 a
month for his services, and receives an additional $500 per day for overseas
travel undertaken on behalf of the Company. Mr. Byers was compensated $184,300
and $121,500 for 1996 and 1995, respectively.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 11. Business Segments
In 1996, the Company reviewed and changed its organizational structure
to more efficiently support customer needs and address changing market
conditions. As a result of these organizational changes, the Company's business
segment disclosure has been modified to reflect the systems integration division
as one business segment ("Systems Integration") and the consolidation of
software and hardware support services into one business segment ("Systems and
Support Services"). The Company has restated its segment disclosure information
for 1995 and 1994 consistent with its revised organization. The Company has
excluded the Consulting Group from the revenue and operating income segment
disclosures as this group was sold in December 1996 and has been treated as a
disposal of a segment of a business under APB 30 (Note 2).
The Systems and Support Services Group consists of software and
trademark services. This group provides turnkey system solutions, supports
clients through software, hardware and systems engineering services, facilities
management, training, post-implementation technical services and third party
computer hardware maintenance.
The Systems and Integration Group provides computer hardware and
software integration services with a primary focus on network based computing.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Selected financial information for the Company's business segments is
presented below (in thousands). For a description of the accounting policies
related to this information see Note 1.
For the Year Ended December 31,
1996 1995 1994
----------------------------------------------------
Operating Revenues(1)
Systems and Support Services $103,675 $105,801 $111,357
Systems Integration 85,220 69,958 39,319
------- ------- ------
Total Revenues 188,895 $175,759 $150,676
======= ======= =======
Operating (Loss) Income
Systems and Support Services $(4,081) $1,955 $ 663
Systems Integration (5,361) 3,070 (5,227)
----- ----- -----
Total Operating (Loss) Income $(9,442) $5,025 $(4,564)
===== ===== ======
Identifiable Assets (2)
Systems and Support Services $58,259 $47,436 $47,343
Systems Integration 27,885 27,282 19,858
Corporate (3) 23,920 7,665 7,098
-------- ----- -----
Total Consolidated Assets $110,064 $82,383 $74,299
======= ====== ======
Depreciation and Amortization (4)
Systems and Support Services $1,919 $2,531 $3,533
Systems Integration 949 1,885 2,395
Corporate 1,126 853 975
----- ----- -----
Total Depreciation
and Amortization $3,994 $5,269 $6,903
===== ===== =====
Capital Expenditures (5)
Systems and Support Services $ 704 $294 $ 186
Systems Integration 1,087 311 463
Corporate 656 348 547
----- ----- -----
Total Capital Expenditures $2,447 $953 $1,196
===== === =====
(1) Revenues between segments are not material.
(2) The identifiable assets above are net of the TCS assets in 1995 and 1994 of
$12,109 and $12,573, respectively.
(3) Corporate assets are principally property and equipment, cash, and other
assets. Goodwill and related amortization from the acquisitions of C3 and
Telos Corporation has been allocated to their respective industry segments.
(4) The depreciation and amortization disclosure above is net of TCS
depreciation and amortization of $482, $478, and $564 for 1996, 1995 and
1994, respectively.
(5) The capital expenditure disclosure above is net of TCS capital expenditures
of $111, $60, and $30 for 1996, 1995 and 1994, respectively.
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
Dr. Fred Charles Ikle', Chairman of the Board
Dr. Ikle' (age 72) 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 Director of the
Zurich-American Insurance Companies. Dr. Ikle' is also a Director of the
National Endowment for Democracy and a Distinguished Scholar at the Center for
Strategic & International Studies. From 1981 to 1988, Dr. Ikle' served as Under
Secretary of Defense for Policy.
John B. Wood, Director, President and Chief Executive Officer
Mr. Wood (age 33) was elected President and Chief Executive Officer on
February 16, 1994. Mr. Wood was appointed Chief Operating Officer on October 8,
1993 after serving as Executive Vice President from May of 1992. He was elected
to the Board of Directors on May 13, 1992. Mr. Wood joined the Company on
February 13, 1992. Prior to joining the Company, Mr. Wood was a founder of
Beninati & Wood, Inc., an investment banking firm which had provided services to
the Company.
Joseph P. Beninati, Director
Mr. Beninati (age 33), resigned from the Board of Directors in October
1996. Previously, Mr. Beninati had served as the Company's Chairman from 1994 to
1995.
Dr. Stephen D. Bryen, Director
Dr. Stephen Bryen (54) was elected to the Company's Board of Directors on
January 31, 1994. He is currently President of Delta Tech, a high technology
consulting and government relations firm. Delta Tech specializes in U.S. and
foreign high technology issues. Concurrently, Dr. Bryen is President of Secured
Communications Technology, Inc. a developer of computer security software. Dr.
Bryen serves as a Security Board Member of the Space Systems/Loral Corporation
of Palo Alto, California which develops and manufactures civilian and military
satellites for telecommunications, television, weather forecasting, mapping,
scientific measurement and other tasks. Dr. Bryen is a board member of
Greenray/CMAC Industries, based in Mechanicsburg, Pennsylvania. Greenray/CMAC
makes high technology quartz crystals used in various defense and civilian
electronics applications. From 1981 to 1988 Dr. Bryen served as Deputy Under
Secretary of Defense for Trade Security Policy and as the Director of the
Defense Technology Security Administration, which he founded.
Norman P. Byers, Director
Mr. Byers (age 50) was elected to the Board of Directors on January 31,
1994. He has been president of International Strategies Limited, a Washington,
DC international business consulting firm since November, 1993. Before that
appointment, he had served as the vice president of the Beaconsfield
Corporation, another local international business consulting firm. From 1968
until his retirement in 1989, Mr. Byers served in a variety of operational and
staff positions in the United States Air Force.
David S. Aldrich, Vice President, Corporate Development and Strategy
Mr. Aldrich (age 37) 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 LLP. Prior to joining Coopers & Lybrand LLP in 1991, Mr.
Aldrich was Senior Vice President at Dean Witter Capital Corp., the merchant
banking arm of Dean Witter Reynolds, Inc.
William L. Prieur Brownley, Vice President and General Counsel
Mr. Brownley (age 40) joined the Company in April, 1991 and is responsible
for the management of the Company's legal affairs. For the five years prior to
joining the Company, he served as Assistant General Counsel and then as General
Counsel at Infotechnology Inc., an investment company whose holdings included
various companies in the communications industry.
Gerald D. Calhoun, Vice President, Human Resources, and Secretary,
Telos Corporation
Mr. Calhoun (age 47) joined the Company as Vice President, Human Resources,
in August, 1989. Prior to joining the Company he served as Director, Risk and
Financial Management of BDM International, a government contractor which
provides consulting services, Vice President, Human Resources of Halifax Corp. a
government contractor providing technical services and third party computer
maintenance, and as Director for the U.S. Department of Labor, Employment
Standards Administration.
Mark W. Hester, President, Telos Field Engineering and Vice President,
Telos Corporation
Mr. Hester (age 44) joined Telos in 1979 and was appointed as President of
Field Engineering in 1987. He is responsible for all new business activities and
operations activities at 85 computer Field Service locations nationally as well
as 6 overseas locations. Previously he has held progressive positions within
Telos as a Field and Regional Manager of Operations and Vice President of
Marketing. Mr. Hester received extensive training from IBM Corporation after a
successful military commitment of nearly eight years.
Robert W. Lewis, President, enterWorks.com
Mr. Lewis (age 35) has served as the President of enterWorks since its
inception in 1996. Mr. Lewis' prior experience has been with Telos Corporation.
From 1991 to 1995, he was Director, Business Development with responsibility for
major customer development and technology integration.
Robert J. Marino, President, Telos Systems Integration and
Executive Vice President
Mr. Marino (age 60) 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 promoted to President of Telos Systems Integration, a position he
currently holds. Prior to joining the Company in February, 1988, Mr. Marino held
the position of Sr. Vice President of Sales and Marketing with Centel Federal
Systems and M/A-COM Information Systems, both of which are U.S.
Government contractors.
Lorenzo Tellez, Chief Financial Officer, Treasurer, and Vice President
Mr. Tellez (age 39) was appointed Chief Financial Officer of the Company in
1993 and Treasurer in 1994. He joined Telos Corporation (California) in 1989
where he was responsible for all financial and regulatory functions. Mr. Tellez
is a Certified Public Accountant. Prior to joining Telos Corporation, Mr. Tellez
served as a Senior Manager with Arthur Andersen & Company, a public accounting
firm.
Each of the directors and executive officers of the Company is a United
States citizen.
Item. 11. Executive Compensation
Information is set forth in the Summary Compensation Table included on
the following page with respect to all forms of compensation for service
rendered in all capacities to the Company during the fiscal years ended December
31, 1996, 1995, and 1994, of the Chief Executive Officer and four other most
highly paid executive officers during 1996.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
Name Other Restricted LTIP All
and Annual Stock Pay- Other
Principal Compen- Award(s) Options/ outs Compen-
Position Year Salary Bonus sation(1) ($) SARs(#)(2) ($) sation (3)
- - ---------------------------------------------------------------------------------------------------------------------------
Gerald D. Calhoun 1996 $165,970 $85,000 $ 6,000 -- 130,000 -- $ --
(V.P., Human Resources, 1995 143,943 40,000 6,000 -- -- -- 4,603
& Secretary, Telos Corp.) 1994 119,595 65,657 6,000 -- -- -- 3,520
Mark W. Hester 1996 184,607 80,000 6,000 -- 185,000 -- 2,850
(President, Telos Field 1995 181,695 40,000 6,000 -- -- -- 4,992
Engineering, V.P. 1994 164,635 40,805 6,000 -- -- -- 3,949
Telos Corp.)
Robert J. Marino 1996 182,310 90,000 6,000 -- 212,500 -- 4,750
(President, Telos Systems 1995 158,546 50,000 6,000 -- -- -- 6,565
Integration, Senior V.P, 1994 147,118 36,000 6,000 -- -- -- 1,264
Telos Corp.)
Lorenzo Tellez 1996 188,269 145,000 15,000 -- 465,000 -- 4,750
(V.P., Treasurer, Chief 1995 166,624 50,000 6,000 -- -- -- 6,846
Financial Officer) 1994 157,014 56,000 6,000 -- -- -- 4,620
John B. Wood 1996 291,921 -- 23,000 -- 2,017,531 -- 4,750
(President, Chief 1995 234,990 325,000 24,000 -- -- -- 7,029
Executive Officer) 1994 161,833 -- 38,000 -- -- -- 3,976
(1) Other annual compensation represents Director's Fees paid and automobile
and living allowances provided to executives.
(2) Options granted are in both the Company's common stock as well as in
enterWorks.com, inc. common stock.
(3) All other compensation represents Company contributions made on behalf of
the executive officers to the Telos Corp. 401(k) Retirement Savings and
Profit Sharing Plan.
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 1996.
Potential Realizable
Number of % of Value at Assumed
Securities Total Rates of Stock Price
Underlying Options/ Exercise Appreciation for
Name and Principal Options/SARS SARS or Base Expiration Option Term
Position Granted Granted Price Date 5% 10%
-------- ------- ------- ----- ---- -- ---
Gerald D. Calhoun
(V.P., Human Resources
& Secretary, Telos Corp.)
Telos 100,000 2.7% $ .95 May 2006 $ 93,000 $ 151,000
enterWorks 30,000 1.3 .12 June 2006 2,400 5,700
Mark W. Hester
(President, Telos Field
Engineering, V.P
Telos Corp.)
Telos 150,000 4.0 .95 May 2006 139,500 226,500
enterWorks 35,000 1.5 .12 June 2006 2,800 6,650
Robert J. Marino
(President, Telos Systems
Integration, Senior V.P,
Telos Corp.)
Telos 167,500 4.5 .95 May 2006 155,775 252,925
enterWorks 45,000 1.9 .12 June 2006 3,600 8,550
Lorenzo Tellez
(V.P., Treasurer, Chief
Financial Officer)
Telos 400,000 10.7 .95 May 2006 372,000 604,000
enterWorks 65,000 2.8 .12 June 2006 5,200 12,350
John B. Wood
(President, Chief
Executive Officer)
Telos 1,957,531 52.4 .95 May 2006 1,820,504 2,955,872
enterWorks 60,000 2.6 .12 June 2006 4,800 11,400
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, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End at FY-End (1)(2)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- - ---- ----------- -------- ------------- -------------
Gerald D. Calhoun -- -- 95,900/104,000 $5,100/20,400
(V.P. Human Resources,
and Secretary, Telos Corp.)
Mark W. Hester -- -- 37,000/148,000 6,350/25,400
(President, Telos Field
Engineering & V.P.
Telos Corporation)
Robert J. Marino -- -- 207,400/170,000 7,860/31,440
(President, Telos Systems
Integration, Senior V.P.,
Telos Corp.)
Lorenzo Tellez -- -- 93,000/372,000 13,250/53,000
(V.P., Treasurer,
Chief Financial Officer)
John B. Wood -- -- 1,244,057/1,473,933 396,928/116,756
(President, Chief Executive
Officer)
(1) Based on an estimated fair market value of the Company's Class A common
stock of $1.01 per share at December 31, 1996.
(2) Based on an estimated fair market value of enterWorks common stock of $0.77
per share at December 31, 1996.
Compensation of Directors
During the fiscal year ended December 31, 1996, employee directors were
paid a fee of $2,000 for each Board meeting attended. Outside directors Mr.
Byers and Dr. Bryen were paid an annual fee of $25,000, and further compensated
at a rate of $750 for each meeting in excess of four meetings a year. Chairman
of the Board, Dr. Ikle', is paid $25,000 quarterly for his service on the Board.
In addition, Mr. Byers receives $5,000 per annum for his service as Proxy
Chairman. The compensation paid to the outside directors is paid pursuant to a
proxy agreement between the Company, the Defense Investigative Service and
certain of the Company shareholders.
During the fiscal year ended December 31, 1996, no directors of the Company
were awarded options.
Employment Contracts
The Company is a party to agreements with certain of its executive
officers. Mr. William Brownley, General Counsel, Mr. Gerald Calhoun, Vice
President Human Resources, Mr. Mark Hester, President of Telos Field
Engineering, Mr. Robert Marino, President of Telos Systems Integration, Mr.
Lorenzo Tellez, Chief Financial Officer, and Mr. John Wood, Chief Executive
Officer, have agreements with the Company which provide for a payment of two
year's base salary then in effect if involuntarily terminated. Accordingly, Mr.
Brownley, Calhoun, Hester, Marino, Tellez and Wood would receive, given their
present salary levels, $150,000, $158,000, $175,000, $195,000, $195,000 and
$300,000, respectively. In addition, these executive officers' agreements
provide for bonus payments should certain operating results be attained.
Item 12. Security Ownership of Certain Beneficial Owners and Management
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(1) (2) (3) (4)
Amount and Nature
Name and Address of Beneficial Ownership Percent of
Title of Class of Beneficial Owner as of March 1, 1997 Class
-------------- ------------------- ------------------- -----
Class A Common Stock John Porter 23,030,718 shares(A) 75.99%
15 Bernes St.
London SW1W 9EA England
Class A Common Stock C3, Inc. 401(k) Plan and 3,658,536 shares 15.85%
Telos Corporation Savings Plan
c/o C3, Inc.
19886 Ashburn Road
Ashburn, Virginia 20147
Class A Common Stock Union de Banques 3,150,468 shares(B) 12.92%
Suisses (Luxembourg) S.A.
299 Park Ave., 37th Fl.
New York, NY 10171
Class B Common Stock F&C Nominees Limited 3,143,358 shares 77.85%
11 Devonshire Square
London EC 2M 4YR England
Class B Common Stock Bank of Scotland (London) 815,700 shares 20.20%
Nominees Limited
11 Devonshire Square
London EC 2M 4YR England
Class A Common Stock Gerald A. Calhoun 108,293 shares (C) 0.47%
Class A Common Stock Mark W. Hester 90,976 shares (C) 0.39%
Class A Common Stock Robert J. Marino 320,452 shares (C) 1.38%
Class A Common Stock Lorenzo Tellez 232,440 shares (C) 1.00%
Class A Common Stock John B. Wood 1,091,965 shares (D) 4.52%
Class A Common Stock All Officers And Directors
As A Group (8 persons) 1,934,907 shares (E) 7.86%
12% Cumulative Exchangeable Value Partners, Ltd. 714,317 shares (F) 19.87%
Redeemable Preferred Stock 2200 Ross Avenue, Ste 4660
Dallas, TX 75201
12% Cumulative Exchangeable Fisher Ewing Partners 714,317 shares (F) 19.87%
Redeemable Preferred Stock 2200 Ross Avenue, Ste 4660
Dallas, TX 75201
(A) Mr. Porter's holdings include 7,228,916 shares of Class A Common Stock
purchasable upon exercise of a warrant.
(B) Union de Banques Suisses (Luxembourg) S.A. holdings include 1,312,695
shares of Class A Common Stock purchasable upon exercise of a warrant.
(C) Messrs. Calhoun, Hester, Marino, and Tellez hold options to acquire 89,900,
30,000, 198,400, and 80,000 shares of the Company's Class A Common Stock,
respectively, in addition to their current common stock holdings. These
shares are purchaseable upon exercise of warrant and are exercisable within
60 days of March 1, 1997.
(D) Mr. Wood owns no shares of Common Stock, however, he holds an option to
acquire 1,091,965 shares of the Company's Class A Common Stock
purchasable upon exercise of options.
(E) Under the Company's stock option plan and certain stock option agreements,
all officers and directors as a group hold options to acquire 1,532,265
shares of Class A Common Stock exercisable within 60 days after March 1,
1997.
(F) Value Partners Ltd. and Fisher Ewing Partners have filed jointly a Schedule
13D under which they disclosed that they may act as a "group" within the
meaning of Section 13(d) of the Securities Exchange Act. Each of the
reporting persons disclosed that it may be deemed to beneficially own the
aggregate of 714,317 shares of the Public Preferred Stock held of record by
the reporting persons collectively.
Item 13. Certain Relationships and Related Transactions
Mr. John B. Wood became an employee of the Company in 1992 and serves as
President, Chief Executive Officer and Director, respectively.
Mr. Joseph P. Beninati served as Chairman of the Board for the majority of
1994 before resigning January 5, 1995. The Company is paying him $165,000
annually subject to a three year employment agreement that began in 1995. Mr.
Beninati resigned from the Board in 1996.
In 1996, the Company paid previously accrued advisory fees of $525,000 to
the firm Beninati and Wood, Inc.
Mr. John R. Porter, the majority common shareholder, has a consulting
agreement with the Company whereby he will be compensated $200,000 a year for
specified services. Accordingly, the Company has accrued $200,000 at December
31, 1996 for this agreement.
Mr. Byers, a Director of the Company, has a consulting agreement with the
Company to help the Company expand its business operations into the
international marketplace. Under this agreement Mr. Byers receives $8,000 a
month for his services, and receives an additional $500 per day for overseas
travel undertaken on behalf of the Company. Mr. Byers was compensated $184,300
and $121,500 for 1996 and 1995, respectively.
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 acopy 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
10.75 None
10.76 Sixteenth Amendment to Credit Facility and Tenth Amended and Restated
Promissory Note
10.77 enterWorks.com 1996 Stock Option Plan
10.78 Form of Series A Senior Subordinated Unsecured Note
10.79 Form of enterWorks.com, inc. Capital Stock Purchase Series A Warrant
10.80 Asset Purchase Agreement
10.81 Amendment No. 1 to Asset Purchase Agreement
21 Schedule of Subsidiaries.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Telos Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELOS CORPORATION
By: John B. Wood
President and Chief Executive Officer
Date: March 28, 1997
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/ Fred Charles Ikle' Chairman of the March 28, 1997
- - -----------------------
Fred Charles Ikle' Board of Directors
/s/ John B. Wood President, Chief Executive
- - --------------------------
John B. Wood Officer & Director March 28, 1997
(Principal Executive Officer)
/s/ Stephen D. Bryen Director March 28, 1997
- - ------------------------
Stephen D. Bryen
/s/ Norman P. Byers Director March 28, 1997
- - ------------------------
Norman P. Byers
/s/ Lorenzo Tellez Chief Financial Officer March 28, 1997
- - ------------------------
Lorenzo Tellez (Principal Financial Officer
& Principal Accounting Officer)