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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)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number: 1-8443
TELOS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-0880974
(State of Incorporation) (I.R.S. Employer Identification No.)
460 Herndon Parkway, Herndon, Virginia 22070-5201
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number,
including area code: (703) 471-6000
C3, INC
(Former Name of Registrant)
Securities registered pursuant to Section 12(b) of the Act:
NONE
----
Securities registered pursuant to Section 12(g) of the Act:
12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports),and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
No public market exists for the registrant's Common Stock.
As of March 1, 1996, 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): 55
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. In 1995, over 55% of the Company's total revenue was
generated from customers who have done business continuously with the Company
for at least five years. 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 $197 million
of revenue from this customer, and in May 1994 a new five-year contract for an
additional $90 million was awarded. In addition, the Company has historically
received orders from this customer for follow-on work, which may significantly
increase the contract amount. The most recently completed fire support contract
was for an initial award of $70.5 million; however, $99.4 million was recognized
in revenue as a result of follow-on work.
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; subsidiaries of Hughes Aircraft Company, for which the
Company has provided technical consultation, design, development, and test
support for tactical military systems since 1969; the U.S. Coast Guard, for
which the Company has provided integrated hardware solutions and technical
support services since 1981; 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 tools and applications
focused in emerging information and network technology markets. These tools and
applications include, data mining, data warehousing, middleware connectivity,
public-private network security, data access and workflow, high speed
information exchange and communication systems; and electronic commerce. The
Company also offers proprietary software applications that support
Internet-based electronic commerce, criminal justice, 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
The Company provides its services through three operating groups.
Although the groups operate on a substantially decentralized basis, they work
together to offer customers a broad range of information and network technology
services. The Company believes that this cooperative approach enables each of
the operating groups to offer its services in specific market segments using
their specialized expertise and market knowledge, while drawing 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:
2
o Systems and Services provides computer and large scale network
integration services to customers through software and hardware
engineering; computer hardware integration and component
manufacture; and installation, training and service support.
o Field Engineering provides computer hardware maintenance to
federal, state and local government clients, as well as commercial
entities.
o Consulting Services provides computer consulting services and
contract labor to support its customers' existing information
technology capabilities. Specific tasks include concept
formulation, system specification, system engineering
design/development, and project management.
Systems and Services
The Company's Systems and Services Group provides turnkey system
solutions and maintains and extends the life of existing systems through
technology insertion, system redesign, and software reengineering. The units
also perform value engineering and system integration activities, including
design and manufacturing engineering, network integration, data warehousing and
middleware connectivity, COTS integration, system installation, and support
services. This group (i) holds the largest network integration contract ever
awarded by the federal government, a three year contract representing backlog of
over $900 million (see backlog discussions), (ii) is the largest provider of
life cycle software engineering services to the U.S. Army and (iii) is the
largest provider 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
("NASA"). Additionally, the group is developing and installing the information
system technology infrastructure in support of the Immigration and
Naturalization Service ("INS").
Telos' Systems and Services group is a leading implementer and
innovator of enabling technology. In 1981, the group implemented one of the
first client-server architectures for the U.S. Coast Guard and, as a system
integrator, developed the Navy's flagship desktop tactical computer system, the
DTC-II. Today, one of the main focuses of the group is developing and bringing
to market software applications to support the emerging Internet marketplace.
Subsequent to December 31, 1995 the Company formed enterWorks.com, a
wholly-owned subsidiary focused on the Internet and related software products
including Pangaea, the Company's Commerceware product line, to pursue and expand
such opportunities.
For fiscal year 1995, this group generated $142.9 million in revenues,
or 70.5% of the Company's total revenues. Of this amount, contracts with the
U.S. Army Communications-Electronics Command for its fire support and
communication life cycle software engineering contracts and its contract with
the Immigration and Naturalization Service accounted for 26% and 20%,
respectively, of the Company's total revenue in 1995.
Field Engineering
Hardware maintenance services are provided by the field engineering
group, known as Telos Field Engineering ("TFE"). TFE was formed in 1977 and
provides a "one stop" maintenance service approach that includes hardware
maintenance and repair, quality assurance, configuration management, and
property management. In response to the increasing prevalence of customers
owning more than one type or brand of computer, TFE specializes in third party
maintenance of computer hardware and peripheral equipment manufactured by
others. The majority of TFE's revenues are generated from work performed on Sun
Microsystems, DEC, IBM, Data General, Hewlett-Packard, Wang, and Telos
(previously known as C3) equipment.
For fiscal year 1995, TFE generated revenues of $32.8 million or 16.2%
of the Company's total revenue.
3
Consulting Services
Consulting services are provided by Telos Consulting Services ("TCS").
TCS, formed in 1969, delivers consulting expertise, primarily on a contract
labor basis, in support of the client's own information technology capabilities.
TCS's areas of expertise include business process reengineering, team
application development, software and hardware engineering and analysis,
networking, computer security, team facilitation, and team communication.
Operating from eleven field offices throughout the United States, TCS supports a
business base of several hundred clients, many with multiple contracts. TCS's
staff of professionals work as part of client organizations' teams, helping
customers meet their organizational goals.
For fiscal year 1995, TCS generated revenues of $27.1 million or 13.3%
of the Company's total revenue.
Revenues by Major Market and Significant Customers
Revenue by major market for the Company is:
Percentage of total revenues for fiscal year
1995 1994 1993
Federal Government 80.6% 84.5% 89.0%
Commercial 15.2 11.4 7.8
State and local governments 4.2 4.1 3.2
---- ---- ------
Total 100.0% 100.0% 100.0%
===== ===== =====
Total Company revenue at December 31, 1995 includes 43.1% of revenue
from contracts with the Department of Defense, 6.1% of revenue from subcontracts
with U.S. government prime contractors, 6.0% of revenue from the contracts with
National Aeronautics and Space Administration ("NASA"), and 20.0% of revenue
from contracts with the U.S. Department of Justice.
Overview of 1995
The Company viewed 1995 as a year to solidify its market position in
existing markets, achieve profitability, and create value through planned and
focused diversification in emerging markets. The Company was successful in
achieving these goals.
From a market positioning stand-point, the Company was successful in
its efforts to maintain and increase its contract base. During 1995, the Company
won a significant rebid with an award from the U.S. Army
Communication-Electronics Command of $118 million for systems and software
engineering. Additionally, the Company won the largest network integration
contract ever awarded by the federal government, a three year contract
representing backlog of over $900 million.
The Company achieved profitability and positioned itself for future
stability and growth through investment in bid and proposal, marketing and sales
activities. During 1995, the Company achieved 310% growth in total backlog,
establishing a solid base for future years. (See Backlog). While there can be no
assurance of future contract awards, the Company continued to invest in its
marketing, proposal and sales activities in 1995 in order to develop and capture
new business opportunities.
4
In the area of focused diversification, the Company is establishing
itself in two emerging markets: internet commerce and international business.
With regard to the emerging internet market, the Company has enhanced and
expanded its Commerceware product line, Pangaea. The Company's second generation
firewall, NetSeer, and its middleware connectivity/data mining product, Virtual
db, were successfully released and are in use by commercial customers, including
McDonnell Douglas, Northrop Grumman, and the Internet Cafe. In addition, the
Company established an international joint venture to pursue third party
maintenance contracts in the Middle East.
During 1995, the Company continued the streamlining and consolidation
of its infrastructure with consolidation of marketing efforts as well as
consolidation of various general and administrative functions. The Company
continuously evaluates its organizational structure in response to customer and
market demands as well as to ensure it is providing cost effective solutions. In
order to gain further operational efficiencies, in 1996 the Company will
consolidate and reorganize certain divisions.
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 that operate exclusively or
primarily outside the United States. Some of the larger competitors offer
services in a number of markets which overlap many of the same areas in which
the Company offers services, while certain companies are focused on only one or
a few of these markets. The firms that compete with the Company are consulting
firms, computer services firms, applications software companies and the
consulting groups of 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, Computer
Data Systems, Computer Sciences Corporation, Electronic Data Systems
Corporation, Unisys, Scientific Applications International Corporation, GTE
Corporation 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. Some of the Company's competitors
have greater financial and other resources than the Company and may have greater
capabilities to perform services similar to those provided by 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, and 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 approximately 1,658 persons as of December 31,
1995. 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, approximately 955 provide Systems and
Services, 295 provide Maintenance Services, and 280 provide Consulting Services.
An additional 128 employees provide corporate and business services functions.
5
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 based on total contract value
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 that 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 whether or when
revenue will be realized on projects included in the Company's backlog.
At December 31, 1995 and 1994, the Company had total backlog from
existing contracts of $1.3 billion and $328.4 million, respectively. This is the
maximum value of additional future orders for systems, products, consulting
services, 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 five years. Approximately $65.6 million
and $93.4 million of the total was funded backlog at December 31, 1995 and 1994,
respectively.
Other
The Company has been incorporated under the laws of Maryland since
1971.
In 1995, the Company's shareholders and directors approved an amendment
to the Company's Charter changing the Company's name to Telos Corporation.
References to the "Company" or to "Telos" herein represent Telos Corporation
(Maryland) (formerly C3, Inc.,) and except where expressly noted, its
consolidated subsidiaries. References to "Telos Corporation (California)" are to
the Company's wholly-owned subsidiary.
Item 2. Properties
The Company leases 150,256 square feet of space in Herndon, Virginia
for its corporate headquarters, integration facility, and primary service depot.
This lease expires in March 1997, with a five year extension available at the
Company's option. The Company, given its recent contract wins, has assessed its
current office and integration space requirements. In March 1996, the Company
signed a long-term lease for a building in Loudoun County, Virginia that will
serve as its Corporate headquarters as well as provide significant additional
manufacturing and integration space.
The Company leases additional space for regional field engineering,
contract work sites, training, and sales offices in 53 separate facilities
located in 22 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.
6
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, the
specific enforcement of the acquisition agreement (or in the alternative lost
profits) and $1 million for the violation of the "no-shop" provision in the
Agreement. On motion to dismiss, the Court dismissed the claim seeking specific
enforcement or lost profits (whether the plaintiffs will seek to replead that
claim is unclear). A magistrate has recommended that the Company be held liable
for the payment of Rosecliff's expenses in the amount of $1.1 million. Discovery
is ongoing as to the remainder of the suit. While no ultimate assurances can be
made as to those claims that the Court has not dismissed, the Company believes
it has substantial defenses to the claim for violation of the no-shop provision
and has made adequate provision for the payment of Rosecliff expenses.
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.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of fiscal year 1995, no matters were
submitted to a vote of security holders.
7
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, 1996, there were 72 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 Nine Month Period Ended
---------------------- -----------------------
1995 1994 1993 1992(1) December 31, 1991
---- ---- ---- ------- -----------------
(amounts in thousands)
Sales $202,828 $175,121 $211,229 $224,751 $82,798
Operating income (loss) 6,554 (4,189) 8,888 2,747 1,197
Income (loss) before
extraordinary item 1,015 (12,421) 548 (2,615) 930
Extraordinary item -- (196) --- 4,316 456
Net income (loss) 1,015 (12,617) 548 1,701 1,386
FINANCIAL CONDITION
As of December 31
------------------------------------------------------------------
1995 1994 1993 1992(1) 1991
---- ---- ---- ------- ----
(amounts in thousands)
Total assets $94,492 $86,872 $84,796 $97,277 $54,216
Debt (2) 47,316 40,414 30,790 40,710 23,126
Senior redeemable
preferred stock 4,494 4,192 3,922 3,653 8,256
Class B redeemable
preferred stock 10,252 9,497 8,822 8,149 ---
Redeemable preferred
stock 18,647 14,263 11,417 9,951 8,564
(1) See Note 1 to the Consolidated Financial Statements included in Item 8
regarding the acquisition of Telos Corporation during fiscal year 1992.
(2) See Note 5 to the Consolidated Financial Statements in Item 8 regarding
debt obligations of the Company at December 31, 1995. Total debt
obligations include amounts due under the senior credit facility and
senior subordinated notes.
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Over the past two years, the Company has invested significant resources
into marketing, bid and proposal efforts, and into development of certain
software and hardware products. The purpose of the marketing investment was to
(1) retain significant contracts that were being rebid and (2) to capture new
business. The Company has won all of its significant rebids including a $118
million software services contract with the U.S. Army Communications-Electronics
Command. In addition, in 1995, the Company was awarded the Army's Small
Multiuser Computer II Contract, which has a potential value of $907 million, the
Realtime Automated Personnel Identification System ("RAPIDS") contract valued at
nearly $18 million and a contract with the United States House of
Representatives with a minimum value of $3.4 million.
As a result of the above contract awards, total backlog from existing
contracts increased to $1.3 billion as of December 31, 1995, as compared to
$328.4 million at December 31, 1994. As of December 31, 1995, the funded backlog
of the Company totaled $65.6 million as compared to $93.4 million at December
31, 1994.
The Company has also invested in certain new software products
primarily focused around the Internet. These investments have led to the
development of a number of software products including NetSeer, an Internet
firewall product, and Pangaea, the Company's Commerceware product line. The
Company has also invested in certain new computer hardware products in support
of new contract and business initiatives. While there can be no assurance as to
the ultimate success of these investments, management believes that these
investments will provide the Company with opportunity to expand its presence in
the rapidly growing Internet market and to obtain additional revenues through
new contract vehicles.
Revenue by Contract Type
Approximately 84.8% of the Company's total revenues in 1995 were
attributable to contracts with federal, state, and local governments, including
80.6% 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, 1995, revenue by contract type was as follows: time and material,
36.7%; firm fixed price, 36.1%; cost reimbursable, 18.7%; fixed monthly rate,
8.1%; and other, 0.4%. 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.
9
Statement of Income Data
The following table sets forth certain consolidated financial data and
related percentages for the periods indicated:
Year Ended December 31
---------------------------------------------------------------------
1995 1994 1993
--------------------- ------------------ ---------------------
(dollar amounts in thousands)
Sales $202,828 100.0% $175,121 100.0% $211,229 100.0%
Cost of sales 167,578 82.6 147,236 84.1 173,651 82.2
Selling, general and
administrative expenses 26,326 13.0 28,896 16.5 25,512 12.1
Goodwill amortization 2,370 1.2 3,178 1.8 3,178 1.5
------ --- ------ ---- ------ ----
Operating income (loss) 6,554 3.2 (4,189) (2.4) 8,888 4.2
Interest expense (5,491) (2.7) (4,057) (2.3) (3,028) (1.4)
Other income (expense) 27 -- (5,458) (3.1) (3,440) (1.6)
--- --- ----- --- ----- ----
Income (loss) before
taxes and minority interest 1,090 0.5 (13,704) (7.8) 2,420 1.2
Income tax provision (benefit) 75 -- (1,283) .7 1,872 .9
Extraordinary item -- -- (196) (.1) -- --
--- --- ------ ------ ----- ----
Net income (loss) $ 1,015 0.5% $(12,617) (7.2)% $ 548 .3%
====== === ====== ==== ===== =====
Financial Data By Market Segment
The Company operates in three market segments: systems and services
(the "Systems and Services Group"), which consists of systems integration and
software services; computer hardware maintenance (the "Field Engineering
Group"); and consulting services (the "Consulting Group"). Field engineering and
consulting services are considered by the Company to be additional segments of
the complete life cycle services offered by the Company. The Company is
currently evaluating its organizational structure and its defined market
segments and in order to gain further operational efficiencies, in 1996 the
Company will consolidate and reorganize certain divisions.
10
Sales, gross profit and gross margin by market segment for the periods
designated below are as follows:
Year Ended December 31
-------------------------------------------------------------------
1995 1994 1993
---------------------- ----------------------- ---------------
(dollar amounts in thousands)
Sales:
Systems and Services $142,939 $116,059 $145,433
Field Engineering 32,820 34,617 41,852
Consulting Services 27,069 24,445 23,944
------- -------- ---------
Total $202,828 $175,121 $211,229
======= ======= =======
Gross Profit:
Systems and Services $26,844 $ 18,132 $ 27,851
Field Engineering 3,393 5,326 6,815
Consulting Services 5,013 4,427 2,912
------ -------- --------
Total $35,250 $ 27,885 $ 37,578
====== ======== =======
Gross Margin:
Systems and Services 18.8% 15.6% 19.2%
Field Engineering 10.3% 15.4 16.3
Consulting Services 18.5% 18.1 12.2
---- ---- ----
Total 17.4% 15.9% 17.8%
==== ==== ====
Results of Operations
Years ended December 31, 1995 and 1994
Sales increased $27.7 million, or 15.8%, from $175.1 million to $202.8
million for the year ended December 31, 1995 as compared to the same 1994
period. This increase was primarily attributable to the Systems and Services
Group, which reported an increase in sales of $26.9 million for the year, and to
the Consulting Group which reported increased sales of $2.6 million. These
increases were offset by a decline in sales in the Field Engineering Group of
$1.8 million for the year.
Within the Systems and Services Group, systems integration sales
accounted for the majority of the increase, as sales improved $30.7 million to
$70 million in 1995 from $39.3 million in 1994 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. 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 increase in Consulting Services sales of $2.6 million is
attributable to expansion of the breadth of services within this group in such
areas as system integration services and software products, as well as an
increase in billable hours in its traditional business areas. The revenue
decline in the Field Engineering Group 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 Field Engineering Group 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.
11
Based on the Company's significant growth in backlog, 1996 should
present significant opportunities for revenue growth. However, sales have been
adversely impacted during the first quarter of 1996 by the Federal government
shutdown and budget impasse that occurred in late 1995 and early 1996. As the
Company begins its 1996 fiscal year, the Company has experienced reduced order
flow on its large equipment contracts with certain agencies of the Federal
government. Accordingly, the Company anticipates lower sales and profitability
for the first half of 1996 than might otherwise have been expected given its
performance in the second half of 1995. It is management's belief that sales and
related profitability should recover during the second half of 1996, although
there can be no assurance as to such performance.
Cost of sales increased by $20.3 million, or 13.8%, to $167.6 million
in 1995, from $147.2 million in 1994. This increase is the result of the
increase in sales for the period.
Gross profit increased by $7.4 million for the year to $35.3 million,
from $27.9 million in the comparable 1994 period. The increase in the period is
primarily attributable to the higher sales volume previously discussed within
the Systems and Services Group and the Consulting Services Group. These
increases were offset by declines in gross profit for the Field Engineering
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 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 17.4% for the year
ended December 31, 1995 as compared to 15.9% for the comparable period of 1994.
Selling, general, and administrative expense ("SG&A") decreased for the
year by approximately $2.6 million, to $26.3 million in 1995 from $28.9 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. For 1996, the Company believes that SG&A
will increase over 1995 levels due to additional investment in sales, marketing
and products, and taking into account the effect of the one time adjustments
described above. SG&A as a percentage of sales decreased to 13.0% for the year
ended December 31, 1995 from 16.5% in the comparable 1994 period.
Goodwill amortization expense was $2.4 million for the year ended
December 31, 1995 compared to $3.2 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 $10.8 million to $6.6 million in
the year from ($4.2) 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 in 1993. (See the transaction costs section in Note 5 as
well as the discussion of Sapiens International in Note 8 to the consolidated
financial statements.)
12
Interest expense increased approximately $1.4 million to $5.5 million
for the year ended December 31, 1995 from $4.1 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 believes its interest expense in 1996 will at least
approximate the 1995 level and may be higher depending on its working capital
financing requirements.
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 $1.3 million.
Years Ended December 31, 1994 and 1993
The Company viewed 1994 with several objectives. These objectives
included completing a refinancing/recapitalization in order to provide enhanced
liquidity and funding for future growth. Second, to increase bid and proposal
spending to retain existing contracts up for rebid and to increase the Company's
contract base through new awards. Third, to continue to consolidate and
streamline its administrative functions as well as enhance its internal
information systems. The Company was successful in expanding its contract base
as demonstrated by its backlog growth. The Company also continued to consolidate
administrative functions including finance and accounting and certain marketing
efforts. The Company was not successful in completing several refinancing and
recapitalization alternatives, and incurred significant costs in doing so.
However, funding of the Company's financial requirements was completed by a
combination of an increased senior credit facility and additional advances by
certain of the Company's existing shareholders.
Sales declined $36.1 million, or 17.1%, from $211.2 million to $175.1
million for the year ended December 31, 1994 as compared to 1993. The decrease
for the year is primarily attributable to the Systems and Services Group, which
reported decreases in sales of $29.4 million for the year and to the Field
Engineering Group, which reported decreased sales of $7.2 million for 1994 as
compared to 1993.
Within the Systems and Services Group, systems integration sales
accounted for the majority of the decrease, as sales declined $25.3 million for
the year, due to reduced order volume which began in the fourth quarter of 1993
and continued throughout 1994. The reduced volume was a result of completion of
a large contract with the U.S. Navy in 1993 and lack of a significant new
contract. Services sales declined $4.1 million for the year ended December 31,
1994 due to reduced contract volume. The reduced volume in services is due to
the completion of certain contracts either as a result of the contract
requirements ending or the follow-on contract becoming small business set aside
contracts.
The decline in sales within the Field Engineering Group of $7.2 million
for 1994 is attributable to the shutdown of a board repair facility, reductions
in contract activity for the segment and a reduction in warranty services
related to systems integration customers.
Cost of sales decreased by $26.4 million, or 15.2%, to $147.2 million
for the year ended December 31, 1994, from $173.6 million in 1993. The decline
is the result of the decrease in sales for the year.
For 1994, gross profit decreased by $9.7 million to $27.9 million from
$37.6 million in 1993. The decline is primarily attributable to the lower sales
volume previously discussed within the Systems and Services Group and the Field
Engineering Group. The gross overall margin for 1994 was 15.9% as compared to
17.8% for the comparable period of 1993.
Selling, general, and administrative expense ("SG&A") increased by
approximately $3.4 million, to $28.9 million in 1994 from $25.5 million in 1993.
The increase is primarily due to an increase in marketing and bid and proposal
costs, funding of new product development and
13
technology research, and increased internal information system spending to
enhance the Company's capability. Also, SG&A for 1994 includes the costs
associated with Mr. Beninati's decision to resign as Chairman of the Board. Mr.
Beninati will continue to serve as a director of the Company. SG&A as a
percentage of sales increased to 16.5% in 1994 from 12.1% in the comparable 1993
period.
Goodwill amortization expense was $3.2 million in each of 1994 and
1993, as the Company continues to amortize its goodwill balance which resulted
primarily from the acquisition of Telos Corporation (California) in 1992.
Operating income decreased by $13.1 million to a loss of $4.2 million
for the year from $8.9 million in 1993, as a result of the aforementioned
declines in sales and gross profit as well as SG&A expenditures.
For 1994, non-operating expenses were $5.5 million as compared to an
expense of $3.4 million for 1993. During 1994 the Company attempted to
restructure its debt and capital structure. During the fourth quarter of 1994,
the Company concluded that the pending transactions were not going to be
completed and therefore expensed the associated costs that the Company had
incurred. Such expenses total $4.1 million, of which $1.9 million has been paid
at December 31, 1994. The Company recorded these financing expenses as
non-operating for financial statement presentation purposes. Also, during the
fourth quarter of 1994, the Company reassessed its business plans and strategy
for the mainframe software license tools purchased. As a result of concluding
that the initial strategy was not going to produce the business results first
planned, the Company wrote-off the remaining asset value of the license
investment. As the investment in licenses did not contribute to the operations,
the Company recorded the $1.4 million charge as a non-operating expense.
In 1993, the Company incurred $3.2 million in costs in connection with
the settlement of a shareholder suit. These costs represented legal fees paid on
behalf of the Company and other parties to the suit, and estimated future
consulting fees and expenses incurred in connection with the suit.
Interest expense for 1994 increased $1.1 million to $4.1 million from
$3.0 million in 1993. The increase is a result of the increase in the
outstanding balance of the senior credit facility and the related interest rate
due to increases in the prime lending rate. Also, during 1994, the Company
recorded interest expense of $410,000 associated with the funding by its
majority shareholder, Mr. John R.C. Porter ("Porter") (see "Liquidity and
Capital Resources" below).
The income tax benefit of $1.3 million for the year ended December 31,
1994, due to the carryback of the operating loss, compares to a provision of
$1.9 million in the comparable 1993 period.
The $196,000 of extraordinary loss in 1994 results from the early
retirement of $1.8 million of senior subordinated notes and represents
unamortized debt discount that was expensed when the notes were retired.
Liquidity And Capital Resources
In 1995, the Company experienced improved liquidity particularly during
the third and fourth quarters. This improvement in liquidity resulted from the
completion of the transaction with certain of the Company's common shareholders
whereby the shareholders provided $13.5 million of cash to the Company for the
retirement of senior subordinated notes, held by Union de Banques Suisses
(Luxembourg) S.A. ("UBS"), and for the reduction of the outstanding balance of
the senior credit facility. The Company issued Senior Subordinated Notes -
Series B and C, in the total amount of $14.4 million in October 1995 to the
shareholders providing the cash infusion.
14
Also improving the Company's liquidity were significantly improved
operating results in the third and fourth quarter of 1995. The combined third
and fourth quarter net income totaled $913,000 as compared to net income of
$102,000 for the first two quarters of 1995. The improved results were due to
significantly higher revenue in the last two quarters of 1995 due primarily to
the increased volume in the Company's system integration division.
For the year ended December 31, 1995, the Company used approximately
$6.4 million of cash in operating activities. This use of cash in operations was
primarily a result of the increases in the accounts receivable and inventory
balances after adjustment for non-cash items. The growth in accounts receivable
and inventory was primarily due to increased third and fourth quarter revenue
activity thereby increasing products and services purchased from the Company's
vendors. Also contributing to the growth in accounts receivable at December 31,
1995 was the Federal government shut-down which resulted in the closing of one
of the Company's significant customers and its paying office. The Company also
used cash in purchase of property and equipment as well as in investments in
internally developed software and hardware products for sale to third parties.
The use of cash resulting from the operating and investing activities was funded
by the issuance of the senior subordinated notes as mentioned above.
At December 31, 1995, the Company had an outstanding balance of $32.3
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, 1995, the Company, under its borrowing base
formula, had $7,200,000 of unused availability. The facility expires on July 1,
1996.
At December 31, 1995, the Company was not in compliance with two of the
four financial covenants contained in the Facility. Subsequent to December 31,
1995, the Company's bank waived the non-compliance with the covenants and
entered into an agreement with the Company to refinance its $45 million Facility
and extend the maturity date to July 1, 1997. Other terms and conditions of the
Facility are similar to the Company's previous Facility.
With the contract awards in 1995, the Company is evaluating its
financing requirements to support these contracts. The Company anticipates that
its current Facility will be adequate for the first half of 1996. The Company
currently believes that an expanded senior credit facility may be required in
the future and is currently reviewing with its senior lender a prospective
multi-bank syndication arrangement.
The Company is actively reviewing its business opportunities
surrounding its Internet products. Subsequent to December 31, 1995 the Company
formed enterWorks.com, a wholly-owned subsidiary focused on the Internet and
related software products, including Pangaea, to pursue and expand such
opportunities. While the Company is currently funding the on-going product
development and business growth in this area, it is reviewing the potential for
external capital to fully exploit this emerging market and to build the
enterWorks.com business.
During the first quarter of 1996, the Company's liquidity was impacted
by the various Federal Government shutdowns and the related impasse on the 1996
Federal Government budget. While the services side of the Company's business was
generally unaffected, certain of its large equipment contracts within its system
integration division were adversely impacted both through reduced order volume
and collections on outstanding accounts receivable. The effect of this was an
overall reduction in the Company's liquidity. The Company has counteracted this
negative effect with an aggressive cash management program. One of these
aggressive actions has been to establish extended payment terms to the Company's
vendors as well as to reduce discretionary spending in certain areas. While the
Company has recently begun to see improved order flow and cash collections, the
Company believes that the impact from the Government shut-down and budget
impasse will be felt through the middle of the second quarter of 1996 in its
results from operations and financial condition.
15
The Company has a net deferred tax asset of $3.1 million at December
31, 1995. Management believes that the asset is fully realizable given the
Company's existing backlog and projected future taxable income and the expected
reversal of temporary differences existing at December 31, 1995.
Capital Expenditures
The Company believes that its business is not capital intensive,
however, the Company expects that property, plant and equipment expenditures in
1996 will experience moderate growth compared to 1995 and 1994 levels. The
Company, given its recent contract wins, is actively reviewing its office and
integration space requirements. In March 1996, the Company signed a long term
lease for a building that will serve as its Corporate headquarters and provide
significant additional manufacturing and integration space. The lease, which has
a twenty year term, 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 current leasing arrangement.
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 forwarding-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual
results to differ materially from those indicated by forward-looking statements
made in this Annual Report on Form 10-K and presented elsewhere by management
from time to time.
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, general economic conditions,
the timing and approval of the Federal government's fiscal year budget, business
growth through obtaining new business and, once obtained, the Company's ability
to successfully perform at a profit, the Company's ability to convert contract
backlog to revenue, the Company's ability to secure adequate capital and
financing to support 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 its contracts at its convenience, should this occur,
the Company's operates results would 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.
The Company's success and future growth opportunities are highly
dependent upon its ability to timely identify new market opportunities, and
aggressively pursue and capture marketshare.
The Company has been successful in increasing its contract backlog in
1995. However, the Company's furture success is highly dependent upon it
converting the backlog into revenue.
While the Company believes it has adequate financing to support a
revenue base consistent with 1995 results, the Company's growth depends upon its
ability to obtain additional capital and financing sources. The Company is
actively identifying and planning for the additional financing. However, no
assurance can be made on whether such financing can be obtained, or if
available, that it will be available on acceptable terms.
16
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...............................................18
Consolidated Statements of Income for the Years Ended December 31, 1995,
December 31, 1994, and December 31, 1993..............................................................19
Consolidated Balance Sheets as of December 31, 1995 and December 31, 1994.................................20-1
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
December 31, 1994, and December 31, 1993..............................................................22
Consolidated Statements of Stockholders' Investment (Deficit) for the Years Ended
December 31, 1995, December 31, 1994, and December 31, 1993...........................................23
Notes to Consolidated Financial Statements................................................................24-39
INDEX TO SCHEDULES
All schedules are omitted because they are not applicable or the required
information is included in the consolidated financial statements or notes
thereto.
17
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Washington, DC
March 29, 1996
18
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands)
Year Ended December 31,
-----------------------------------------------------------
1995 1994 1993
------------- ------------- ----------
Sales
Systems and Services $142,939 $116,059 $145,433
Field Engineering 32,820 34,617 41,852
Consulting Services 27,069 24,445 23,944
------- ------- -------
202,828 175,121 211,229
------- ------- -------
Costs and expenses
Cost of Systems and Services 116,095 97,927 117,582
Cost of Field Engineering 29,427 29,291 35,037
Cost of Consulting Services 22,056 20,018 21,032
Selling, general and
administrative expenses 26,326 28,896 25,512
Goodwill amortization 2,370 3,178 3,178
------- ------- -------
196,274 179,310 202,341
------- ------- -------
Operating income (loss) 6,554 (4,189) 8,888
Other income (expenses)
Non-operating income (expense) 27 (5,458) (3,440)
Interest expense (5,491) (4,057) (3,028)
------- ------- -------
Income (loss) before taxes and
extraordinary items 1,090 (13,704) 2,420
Income tax provision (benefit) 75 (1,283) 1,872
------- ------- -------
Income (loss) before extraordinary item 1,015 (12,421) 548
Extraordinary items
Loss from early debt retirement -- (196) --
------- ------- -------
Net income (loss) $1,015 $(12,617) $ 548
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
19
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
ASSETS
As of December 31
-------------------------------
1995 1994
---- ----
Current assets
Cash and cash equivalents $ 735 $ 441
Accounts receivable, net 44,112 40,345
Inventories, net 15,877 8,696
Deferred income taxes 1,217 584
Prepaid income taxes 320 2,845
Other current assets 384 489
---- -------
Total current assets 62,645 53,400
------ ------
Property and equipment
Land and building 408 408
Furniture and equipment 18,180 17,178
Leasehold improvements 2,683 2,666
------ ------
21,271 20,252
Accumulated depreciation (18,600) (16,769)
------ ------
Total property and equipment 2,671 3,483
----- ------
Goodwill 22,814 26,822
Deferred income taxes 1,868 448
Other assets 4,494 2,719
------ -------
$94,492 $86,872
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
20
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
LIABILITIES AND STOCKHOLDERS' INVESTMENT
As of December 31,
-------------------------------
1995 1994
---- ----
Current liabilities
Accounts payable $ 26,528 $20,302
Accrued compensation and benefits 8,804 10,272
Senior subordinated notes -- 6,414
Unearned warranty revenue 699 515
Other current liabilities 6,253 9,659
------ -------
Total current liabilities 42,284 47,162
------ ------
Senior credit facility 32,312 34,000
Senior subordinated notes 15,004 --
Other long-term liabilities 1,108 2,941
------ ------
Total liabilities 90,708 84,103
------ ------
Commitments and contingencies
Preferred stock
Senior redeemable preferred stock
Series A-1, and A-2 4,494 4,192
Class B Redeemable Preferred Stock par value $.01,
7,500 shares authorized, issued and outstanding 10,252 9,497
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 18,647 14,263
------ ------
Total preferred stock 33,393 27,952
------ ------
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 7,669 12,095
Retained earnings (deficit) (37,356) (37,356)
------ ------
Total stockholders' investment (deficit) (29,609) (25,183)
------ ------
$94,492 $86,872
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
21
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Ended December 31,
--------------------------------------------------
1995 1994 1993
---- ---- ----
Operating activities:
Net income (loss) $1,015 $(12,617) $ 548
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization 3,376 4,289 3,898
Goodwill amortization 2,370 3,178 3,178
Amortization of discount on debt 17 68 18
Non-cash interest expense -- 410 --
Provision for inventory obsolescence 312 (899) 1,210
Provision for doubtful accounts receivable 103 (319) 1,243
Deferred rent obligation -- -- 342
Loss from early repayment of debt -- 196 --
Provision for loss on shutdown of division (760) -- 1,614
Provision for settlement agreement -- -- 1,197
Provision for lease terminations -- -- 780
Provision for employee benefits 974 600 --
Provision for employee insurance (891) -- --
Write-down of license investment -- 1,440 --
Changes in assets and liabilities
(Increase) decrease in accounts receivable (3,870) (9,347) 8,443
(Increase) decrease in inventories (8,582) (1,124) 184
Decrease (increase) in other assets 1,845 (751) (1,199)
(Decrease) increase in accounts payable and other
current liabilities and noncurrent liabilities (2,342) 7,796 (10,369)
----- ----- ------
Cash (used in) provided by operating activities (6,433) (7,080) 11,087
----- ----- ------
Investing activities:
Purchase of property and equipment (1,013) (1,226) (1,442)
Investment in joint venture (111) -- --
Investment in products ( 569) (1,354) --
----- ----- ------
Cash used in investing activities (1,693) (2,580) (1,442)
----- ----- ------
Financing activities:
(Repayment of) proceeds from senior credit facility (1,688) 11,185 (9,938)
Proceeds from debt issuance 14,373 -- --
Increase in book overdrafts 2,722 -- 377
Repayment of long-term debt (5,800) (1,825) (307)
Debt issue costs (1,187) -- --
Issuance of Class A common stock -- (3) 12
----- ----- ------
Cash provided by (used in) financing activities 8,420 9,357 (9,856)
----- ----- ------
Increase (decrease) in cash and cash equivalents 294 (303) (211)
Cash and cash equivalents at beginning of the
period 441 744 955
----- ----- ------
Cash and cash equivalents at end of period $ 735 $ 441 $ 744
======= ======== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $5,348 $ 3,697 $ 3,011
======= ======== ======
Income taxes paid (refunded) $(2,155) $ (1,672) $ 4,111
======= ======== ======
Supplemental schedule of non-cash investing activities:
Inventory transferred to property and equipment $ -- $ 16 $ 157
======= ======== ======
Sapiens Settlement $ -- $ 3,735 $ --
======= ======== ======
The accompanying notes are an integral part of these consolidated financial
statements.
22
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 December 31, 1992 65 13 17,326 (24,739) (7,335)
--- -- ------ -------- ------
Senior redeemable preferred stock dividend -- -- -- (269) (269)
Class B redeemable preferred stock dividend -- -- (394) (279) (673)
Redeemable preferred stock dividend -- -- (533) -- (533)
Redeemable preferred stock accretion -- -- (932) -- (932)
Net income for the year -- -- -- 548 548
Issuance of Class A common stock -- -- 12 -- 12
--- --- --- --- ------
Balance 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)
== == ===== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
23
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business and Organization
Telos Corporation ("Telos" or the "Company") (formerly C3, Inc.)
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 tools and applications focused on emerging
information and network technology markets such as data mining, data
warehousing, middleware connectivity and data access and workflow.
The Company, founded in 1968, is incorporated under the laws of the
State of Maryland.
Acquisitions
In 1992, the Company acquired all of the outstanding capital stock of
Telos Corporation, (California) from Contel Federal Systems, Inc. ("Contel"), a
wholly owned subsidiary of GTE Corporation for $32 million in a transaction
accounted for as a purchase.
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. and Telos International Corporation
(collectively the "Company"). All significant inter-company transactions have
been eliminated in consolidation. The Company also has an investment in a joint
venture located in Kuwait 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 non
cancelable 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.
24
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 $1,508,000 and $2,008,000 at December
31, 1995 and 1994, respectively, which are utilized to support maintenance
contracts. Spare parts inventory is amortized on a straight line basis over five
years. An allowance for obsolete, slow-moving or non-salable inventory is
provided for all other inventory. This allowance is based on the Company's
overall obsolescence experience and its assessment of future inventory
requirements.
At December 31, 1995, 1994, and 1993, the Company's allowance for
inventory obsolescence was $1,385,000, $1,078,000 and $2,189,000 respectively.
The components of the allowance for inventory obsolescence are set forth below
(in thousands):
Additions
Balance Charged to Balance
Beginning Costs and at End
of Period Expense Deductions(1) of Period
--------- ------- ------------- ---------
Year Ended December 31, 1995 $1,078 $ 312 $ 5 $ 1,385
Year Ended December 31, 1994 $2,189 $ (899) $ 212 $1,078
Year Ended December 31, 1993 $2,849 $1,210 $1,870 $2,189
(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 19 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 $1,862,000, $2,463,000, and $2,978,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
Goodwill
Goodwill of approximately $31.19 million resulted from the acquisition
of Telos Corporation (California) 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 customer relationships with significant
customers for periods of up to twenty-seven years and its strong
25
positions in the marketplace. Also, Telos Corporation (California) did not
perform significant software development for general resale or license to
customers thereby avoiding the risks associated with rapidly changing
technological environments .
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 cost 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, 1995 and 1994 was $6,054,000 and $4,628,000, respectively. The
goodwill amortization related to the purchase of Telos Corporation (Maryland)
(formerly C3, Inc.) was $944,000 for 1995 and has now been fully amortized as of
December 31, 1995.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS 109). Under this 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.
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, has contributed 1%
of all eligible employee wages to the Plan regardless of whether the employee
elected to participate in the Plan. Total Company contributions to the Plan for
1995 and 1994 were $2,397,000, $2,517,000, respectively. In 1993, the Company
had two different savings plans for which it contributed $2,925,000.
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 gross revenue as compared to current
gross revenues.
Unamortized software costs at December 31, 1995 and 1994 were $1.2
million and $649,000, respectively. Amortization expense associated with these
capitalized software costs was $80,000 in 1995 and zero during 1994.
26
During 1995 and 1994, the Company incurred $1.4 million, and $1.9
million in research and development costs, respectively. Prior to 1994, these
types of costs were not significant.
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.
Newly Issued Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS" or "Standard") No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" establishes standards for recognizing and measuring
impairment of long-lived assets to be held and used as well as assets held for
disposal. The effective date for SFAS 121 is for fiscal years beginning after
December 15, 1995, with earlier application encouraged. The Company's current
accounting policies incorporate the requirements of the new Standard; therefore,
the Company has effectively implemented the Standard as of December 31, 1995.
SFAS No. 123 "Accounting for Stock-Based Compensation" establishes a
fair-value based method of accounting for stock compensation plans with
employees and others. Entities are encouraged but not required to adopt SFAS
123; the entity may continue to account for stock-based compensation under APB
Opinion 25, so long as the entity adopts the disclosure requirements of SFAS
123. Recognition and measurement in accordance with SFAS 123 can only be applied
to awards granted after the beginning of the fiscal year in which the SFAS is
adopted. The disclosure requirements of the Standard are effective for fiscal
years beginning after December 15, 1995. The Company did not award stock based
compensation to employees or others during 1995, and is still reviewing which
method of recognition and disclosure it will adopt under the standard.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the classifications used in the current period.
Note 2. Changes in Company Ownership
In September 1993, the Company entered into a Settlement Agreement with
Mr. John R.C. Porter ("Porter"), the Company's majority shareholder, and related
entities; Mr. Fred Knoll, formerly Chairman of the Board of Directors;
Cottonwood Holdings, Inc. ("Cottonwood"); C3 Investors, L.P. ("C3 Investors");
Mr. Joseph P. Beninati, a Company director and formerly the Chairman of the
Board of Directors; Mr. John B. Wood, a Company director and its Chief Executive
Officer; and the Company's wholly-owned subsidiary, Telos Corporation
(California). The Settlement Agreement of October 8, 1993 provided for the
settlement of a dispute instituted by Mr. Knoll against the other three Company
directors, Messrs. Porter, Beninati and Wood, and the Company, regarding the
ownership, control and management of the Company.
Pursuant to the terms of the Settlement Agreement, Cottonwood and C3
Investors sold to Porter for a purchase price of $12,000,000 all of the Company
securities which they previously held, excepting only $1,825,000 in debt
evidenced by a Series A senior subordinated note issued by the Company which
Cottonwood retained (retired in July 1994).
27
In connection with the Settlement Agreement, Mr. Knoll resigned as a
Company director and officer and from all other posts held with the Company and
entered into an agreement prohibiting Mr. Knoll from acquiring any interest in
the Company's publicly-held 12% Cumulative Exchangeable Redeemable Preferred
Stock. Additionally, under the terms of the Settlement Agreement, Mr. Knoll has
been retained as a consultant to the Company for a period of four years at an
annual rate of $300,000. The parties also agreed to a schedule regarding the
payment by the Company of $450,000 in deferred fees owed to Mr. Knoll and these
fees were paid in 1995.
Under the terms of the Settlement Agreement the Company incurred
$3,174,000 of other non-operating expenses which include legal fees. All legal
costs incurred in connection with the suit were paid by the Company on behalf of
all the parties to the Settlement Agreement, pursuant to indemnification by the
Company's bylaws. Through the year ended December 31, 1995, the Company has paid
$2,652,000 related to the costs incurred under the Settlement Agreement.
Note 3. Revenue and Accounts Receivable
Revenue resulting from contracts and subcontracts with Federal, state,
and local governments accounted for 84.8% 88.6%, and 92.2% of total revenue in
the years ended December 31, 1995, 1994 and 1993, 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):
As of December 31,
------------------
1995 1994
---- ----
Billed accounts receivable $30,286 $32,483
------ ------
Amounts billable upon acceptance by customer 6,900 4,805
Amounts currently billable 7,650 4,326
Costs incurred in excess of contractual
authorization, billable upon contractual
amendment increasing funding -- 18
--- ---
Total unbilled accounts receivable 14,550 9,149
------ -----
Allowance for doubtful accounts (724) (1,287)
----- -----
$44,112 $40,345
====== ======
The provision for doubtful accounts was $103,000, $(319,000), and
$1,243,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Reductions to the allowance were primarily due to account receivable write-offs
and other adjustments.
28
Note 4. Income Taxes
The provision (benefit) for income taxes include the following (in
thousands):
For The Year Ended December 31,
---------------------------------------------------------------
1995 1994 1993
---- ---- ----
Current (benefit) provision
Federal $ -- $(3,017) $ 1,833
State 75 (406) 539
--- ------ -------
Total current 75 (3,423) 2,372
--- ----- -------
Deferred (benefit) provision
Federal -- 1,865 (448)
State -- 275 (52)
--- ----- -------
Total deferred -- 2,140 (500)
--- ------ -------
Total provision (benefit) $ 75 $(1,283) $ 1,872
=== ===== =======
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,
----------------------------------------------------------
1995 1994 1993
---- ---- ----
Computed expected tax
provision (benefit) 34.0% (34.0%) 34.0%
Goodwill amortization 74.4% 7.9% 49.9%
State income taxes, net of
federal tax benefit 5.9% (5.9%) 3.9%
Change in valuation allowance
of deferred tax assets (112.4)% (8.6%) (16.4%)
Limitation of net operating loss carryback -- 26.8% --
Other 5.0% 4.4% 5.9%
---- ---- ----
6.9% (9.4)% 77.3%
==== ===== ====
29
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are as follows (in thousands):
As of December 31,
-----------------------------------------
1995 1994
---- ----
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $ 176 $ 320
Inventory valuation allowance and amortization 1,500 3,033
Accrued liabilities not currently deductible 1,412 2,742
Accrued compensation 2,486 2,999
Deferred office rents and accrued sublease liabilities 498 815
Property and equipment, principally due to
differences in depreciation method 1,472 850
Net operations loss carryforward 3,922 3,398
Alternative minimum tax credit carryforwards 994 558
---- ----
Total gross deferred tax assets 12,460 14,715
Less valuation allowance ( 8,155) (12,350)
------ ------
Net deferred tax assets 4,305 2,365
====== ------
Deferred tax liabilities:
Unbilled revenue, deferred for tax purposes (1,166) (1,232)
Other (54) (101)
------ -----
Total deferred tax liabilities (1,220) (1,333)
----- -----
Net deferred tax assets $3,085 $ 1,032
===== ======
The net change in the valuation allowance was a decrease of $4,195,000
for 1995 and an increase of $2,314,000 for 1994. Included in the change in the
valuation allowance were decreases of approximately $1,391,000 and $720,000 for
1995 and 1994, respectively, related to the reversal of temporary differences
acquired from Telos Corporation. The reversals of the temporary differences
related to the 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, 1995, $1,549,000 of tax benefits remain and will reverse in future
years.
For the year ended December 31, 1995, for Federal income tax purposes,
the Company generated a net operating loss of $3,872,000 which increases the net
operating loss available for carryforward to $9,819,000 to offset future regular
taxable income. Additionally, $8,181,000 is available to offset future
alternative minimum taxable income. The net operating loss carryforward will
begin expiring in the year 2011. Additionally, the Company has $994,000 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, thereby reducing the Company's
net operating loss carryforward by $1.3 million. Accordingly, the Company
reduced its deferred tax asset and the related valuation allowance.
30
At December 31, 1995, the Company has a $3.1 million deferred tax
asset. The realization of this asset is largely dependent upon future income,
which cannot be predicted with certainty. However, given the Company's return to
profitability and its backlog growth, the Company believes that it is more
likely than not that the Company will realize the net deferred tax asset
recorded.
Note 5. Debt Obligations
The Company's debt obligations consist of a $45 million Senior
Revolving Credit Facility, and three levels of Senior Subordinated Notes, Series
A, B and C. Each of these obligations is described below.
Senior Revolving Credit Facility
At December 31, 1995, the Company has a $45 million Senior Revolving
Credit Facility (the "Facility") with its bank which expires on July 1, 1996 and
has an outstanding balance of $32.3 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 10.00% at
December 31, 1995. The weighted average interest rate on the outstanding
borrowings under the facility was 9.32% for the year ended December 31, 1995
compared with 8.60% for the year ended December 31, 1994. At December 31, 1995,
the Company had $7,200,000 of availability under the Facility.
During 1994 and 1995, Porter and certain of the Company's shareholders
deposited a total of $7.0 million with the Company's bank to provide the Company
with additional borrowing capacity under the Facility. In October, 1995, these
deposits were transferred to the Company in exchange for the issuance to the
shareholders of Senior Subordinated Notes, Series B and C. (Refer to Senior
Subordinated Notes and Note 7 for further discussion).
At December 31, 1995, the Company is not compliant with two of the four
financial covenants contained in the Facility. Subsequent to December 31, 1995,
the Company's bank waived the covenant violations and 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, 1997.
Senior Subordinated Notes
At December 31, 1995 the Company had a $675,000 Senior Subordinated
Note, Series A with a balance of $631,000 outstanding with Porter. 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.
On June 8, 1995, the Company entered into an agreement with Union de
Banques Suisses (Luxembourg) S.A. ("UBS") whereby the Company paid UBS $5.8
million in outstanding principal, $500,000 of accrued interest and $200,000 of
legal and other fees in exchange for the retirement of the Series B-1 and B-2
Senior Subordinated Notes.
The funds to pay UBS 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
31
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 these shareholders' deposits held with the
Company's bank. The Notes are classified as either Series B or Series C. Series
B Notes, which total $6.5 million and replace the Senior Subordinated Notes
Series B held by UBS, 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 expenses
will only be recorded after occurrence of a triggering event. However, the
interest portion of the notes is treated as a period expense.
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 $2.9 million of the costs as of
December 31, 1995.
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, 1995 and
1994 undeclared, unpaid dividends relating to Series A-1 and A-2 Preferred Stock
totaled $1,494,000 and $1,192,000, 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, 1995, 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
32
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, 1995 and 1994 undeclared, unpaid dividends relating to
the Class B Redeemable Preferred Stock totaled $2,752,000 and $1,997,000,
respectively, and have been accrued and are included in the Class B Redeemable
Preferred Stock balance.
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, 1995, 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, 1995 and 1994 was
$1,148,000 and $1,040,000, 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 dividend payable December 1, 1995, the Company accrued
$2,157,000 of dividends using a cash basis. All future dividend accruals will be
on a cash basis.
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.
33
Note 7. Stockholders' Investment and Stock Options
Common Stock
At December 31, 1995 and 1994, 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 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, 1995, 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.
In 1994, Porter 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.
34
Stock Options
The Company's Long-Term Incentive Compensation Plan (the "Stock Option
Plan") provides for the issuance of both incentive and non statutory stock
options. Under the terms of the 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, 1992 702 $1.42
Granted 10 1.42
Exercised (3) 1.42
Canceled (26) 1.42
--- ----
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
In 1993, an agreement was reached to provide Mr. Beninati and Mr. Wood
with an option to individually 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
agreement 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
options.
In March 1996, the Board of Directors approved, subject to ratification
by the voting common stockholders, two stock option plans for certain key
executives and for a larger employee group. Under the plans, a total of
6,644,974 shares of common stock may be awarded at an exercise price not lower
than fair market value with vesting based upon the passage of time and/or
certain significant events.
35
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. The Sapiens Agreements gave the Company exclusive rights to distribute
and integrate certain Sapiens software to the Federal Government, in selected
areas of the United States and parts of the Pacific Rim. During 1994, the
Company and Sapiens restructured the existing agreements releasing the Company
from its existing obligations under the agreements in certain U.S. locations and
parts of Asia and relinquishing certain exclusive rights in those territories.
The Company retained certain rights to market certain software to the Federal
Government and others in exchange for remaining payments of $800,000 in license
fees, payable in eight monthly installments of $100,000 beginning December 1994,
which have been fully paid. The Company also agreed to terminate a proposed
joint venture with Sapiens, and accordingly repaid Sapiens the amount of
$400,000 previously paid to the Company in contemplation of the proposed joint
venture. In 1994, the Company also recorded a provision of approximately $1.4
million to fully write-off the remaining asset value of the 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 leases with variable expiration dates, some of which contain renewal
options.
At December 31, 1995, minimum rent payments under non-cancelable
operating leases are as follows (in thousands):
1996 $5,486
1997 3,349
1998 2,005
1999 1,495
2000 254
----
Total minimum lease payments 12,589
Less total minimum sublease rentals (936)
------
Net minimum lease commitments $11,653
======
Rent expense charged to operations for 1995, 1994, and 1993 totaled
$4,349,000, $5,178,000 and $6,188,000, respectively.
In March 1996, the Company signed a twenty year lease with annual lease
payments of $1,447,000 for a building that will serve as its Corporate
headquarters and provide significant additional manufacturing and integration
space. This lease will result in a reduction of the Company's lease costs.
36
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, the
specific enforcement of the acquisition agreement (or in the alternative lost
profits) and $1 million for the violation of the "no-shop" provision in the
Agreement. On motion to dismiss, the Court dismissed the claim seeking specific
enforcement or lost profits (whether the plaintiffs will seek to replead that
claim is unclear). A magistrate has recommended that the Company be held liable
for the payment of Rosecliff's expenses in the amount of $1.1 million. Discovery
is ongoing as to the remainder of the suit. While no ultimate assurances can be
made as to those claims that the Court has not dismissed, the Company believes
it has substantial defenses to the claim for violation of the no-shop provision
and has made adequate provision for the payment of Rosecliff expenses.
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. Joseph P. Beninati and Mr. John B. Wood became employees of the
Company in 1992 and currently serve as a Director, and President, Chief
Executive Officer and Director, respectively. Mr. Beninati served as Chairman of
the Board for the majority of 1994 before resigning January 5, 1995 and the
Company will pay him $165,000 annually subject to a three year employment
agreement beginning in 1995. Prior to 1992 they provided consulting services to
the Company through their firm, Beninati & Wood, Inc. for which unpaid advisory
fees at December 31, 1995 totaled $525,000. During 1993, $132,000 in legal costs
were paid by the Company on behalf of Mr. Beninati and Mr. Wood in connection
with the Settlement Agreement, pursuant to indemnification provisions of the
Company's bylaws.
Mr. Fred Knoll, former Chairman of the Board of Directors of the
Company, and various related entities, were paid $759,000 in 1993 for
reimbursement of expenses. Amounts reimbursed in fiscal year 1993 include
$612,000 of legal fees and other costs incurred in connection with the
Settlement Agreement, pursuant to indemnification provisions of the Company's
bylaws.
Mr. Porter has a consulting agreement with the Company whereby he will
be compensated $200,000 a year for specified services. Mr. Porter has not
requested payment under this agreement in 1995 or 1994.
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. In 1995, Mr. Byers was compensated
$121,500.
37
Note 11. Business Segments
The Company operates in three market segments: systems and services
("The Systems and Services Group"); maintenance services (the "Field Engineering
Group") and consulting services (the "Consulting Group").
The Systems and Services Group consists of systems integration and
software services. This group provides turnkey system solutions, supports
clients through software, hardware and systems engineering services, hardware
integration, facilities management, training and post-implementation technical
services.
The Field Engineering Group provides third party computer hardware
maintenance services.
The Consulting Group provides computer consulting (primarily on a
contract labor basis) to support its customers' existing information technology
capabilities.
Field Engineering and Consulting are viewed by the Company to be
additional segments of the complete life cycle services offered by the Company.
In order to gain further operational efficiencies, in 1996 the Company
will consolidate and reorganize certain divisions.
38
Selected financial information for the Company's three 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,
1995 1994 1993
--------------------------------------------------------------
Operating Revenues(1)
Systems and Services $142,939 $116,059 $145,433
Field Engineering 32,820 34,617 41,852
Consulting Services 27,069 24,445 23,944
------- ------- -------
Total Revenues $202,828 $175,121 $211,229
======= ======= =======
Operating (Loss) Income
Systems and Services $6,378 $ (3,541) $ 8,972
Field Engineering 597 1,678 2,919
Consulting Services 1,949 852 175
----- ---- ----
8,924 (1,011) 12,066
Corporate and
Unallocable Expenses 2,370 3,178 3,178
----- ----- -------
Total Operating (Loss) Income 6,554 $(4,189) $ 8,888
===== ====== =====
Identifiable Assets
Systems and Services $51,410 $38,306 $ 42,526
Field Engineering 7,837 9,836 11,044
Consulting Services 4,766 4,810 4,020
Corporate (2) 30,479 33,920 27,206
------ ------ ------
Total Consolidated Assets $94,492 $ 86,872 $84,796
====== ======= ======
Depreciation and Amortization
Systems and Services $1,256 $ 1,704 $ 2,046
Field Engineering 1,210 1,523 1,417
Consulting Services 57 87 85
Corporate 3,223 4,153 3,528
----- ------ ------
Total Depreciation
and Amortization $5,746 $7,467 $7,076
===== ===== =====
Capital Expenditures
Systems and Services $575 $ 585 $ 968
Field Engineering 30 63 81
Consulting Services 60 31 72
Corporate 348 547 321
---- ----- ------
Total Capital Expenditures $1,013 $1,226 $1,442
===== ===== =====
(1) Revenues between segments are not material.
(2) Corporate assets are principally goodwill, property and equipment, cash,
and other assets. Goodwill and related amortization from the acquisitions
of C3 and Telos Corporation has not been allocated to the industry
segments due to the arbitrary nature of any allocation process.
39
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
40
PART III
Item 10. Directors and Executive Officers of the Registrant
Dr. Fred Charles Ikl'e, Chairman of the Board
- - ---------------------------------------------
Dr. Ikl'e (age 71) was elected to the Company's Board of Directors on
January 31, 1994 and was elected Chairman of the Board at the January 6, 1995
Board of Directors meeting. He is Chairman of Conservation Management
Corporation and Director of the Zurich-American Insurance Companies. Dr. Ikl'e
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. Ikl'e served as Under Secretary of Defense for Policy.
John B. Wood, Director, President and Chief Executive Officer
- - -------------------------------------------------------------
Mr. Wood (age 32) 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. Prior to that time, in 1990, he was a member of the Private
Placement Department at UBS Securities, Inc.
Joseph P. Beninati, Director
- - ----------------------------
Mr. Beninati (age 32), a director, is presently a founding general
partner of Antares, a private equity firm devoted to information technology and
healthcare investments. Mr. Beninati was the Company's Chairman of the Board
from 1994 until 1995. Mr. Beninati was appointed Chief Marketing Officer in
October of 1993, and prior to that served as Executive Vice President of
Finance. He joined the Company in February of 1992 and was elected to the Board
of Directors in May of 1992. Mr. Beninati resigned in 1995 to organize Antares
while operating Beninati & Wood, Inc., an investment banking firm which he
co-founded in 1990. In the 1980's Mr. Beninati was an officer of the Long-Term
credit Bank of Japan and in the Corporate Finance Department of Dean Witter
Reynolds, Inc.
Dr. Stephen D. Bryen, Director
- - ------------------------------
Dr. Stephen Bryen (53) 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. Delta Tech's mission is to promote new
technology, represent high technology companies and identify business
opportunities for Delta Tech clients. 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.
41
Norman P. Byers, Director
- - -------------------------
Mr. Byers (age 49) 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.
William L. Prieur Brownley, Vice President and General Counsel and Secretary
- - ----------------------------------------------------------------------------
Mr. Brownley (age 39) 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. Mr. Brownley
also served as a Director at Comtex Scientific Corporation and the Learning
Channel, Inc. from 1990 to 1991.
Gerald D. Calhoun, Vice President, Human Resources, and Secretary, Telos
- - --------------------------------------------------------------------------------
Corporation
- - -----------
Mr. Calhoun (age 46) 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.
F. Bruce Eckhoff, President, Telos Consulting Services
- - ------------------------------------------------------
Mr. Eckhoff (age 51) became President of Telos Consulting Services in
1992. Mr. Eckhoff served as Chairman and Chief Executive Officer of Telos's
Corporation subsidiary, Telecommunications Sciences Corporation, from 1989 until
its divestiture in 1992. Mr. Eckhoff joined Telos Corporation in 1980 as a
Regional Manager. Prior to joining Telos Corporation, Mr. Eckhoff was an
independent consultant in the programming and analysis field.
Mark W. Hester, President, Telos Field Engineering and Vice President, Telos
- - --------------------------------------------------------------------------------
Corporation
- - -----------
Mr. Hester (age 43) 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 J. Marino, President, Telos Systems Integration and Executive Vice
- - --------------------------------------------------------------------------------
President
- - ---------
Mr. Marino (age 59) 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.
42
Robert A. Spearing, President, Telos Information Systems
- - --------------------------------------------------------
Mr. Spearing (age 56) was appointed President of Telos Information
Systems in 1993 and is responsible for all sales and operations activities of
that division. Previously, Mr. Spearing held the position of Vice President of
Eastern Operations within the Telos Systems Group. Prior to joining Telos
Corporation in 1992, Mr. Spearing was with the National Aeronautics and Space
Administration for 28 years. His last assignment at NASA was Director of Mission
Operations and Data Systems at the Goddard Space Flight Center.
Lorenzo Tellez, Chief Financial Officer, Treasurer, and Vice President
- - ----------------------------------------------------------------------
Mr. Tellez (age 38) 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.
Lee R. Whitley, President, Telos Federal Systems
- - ------------------------------------------------
Mr. Whitley (age 58) was appointed President of Telos Federal Systems
in October 1993, and has been with Telos Corporation in various diversified key
management positions since 1981. Previously, Mr. Whitley was Vice President of
Central Operations in Telos Systems Group. Before joining Telos Corporation, Mr.
Whitley served for twenty years in the U.S. Army Field Artillery, retiring as a
Lieutenant Colonel. Mr. Whitley resigned from the Company in January 1996.
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, 1995, 1994, and 1993, of the Chief Executive Officer and four other most
highly paid executive officers during 1995.
43
SUMMARY COMPENSATION TABLE
Long-TermCompensation
---------------------
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(#) ($) sation (2)
- - -----------------------------------------------------------------------------------------------------------------------------
Gerald D. Calhoun 1995 $143,943 $40,000 $ 6,000 -- -- -- $4,603
(V.P., Human Resources, 1994 119,595 65,657 6,000 -- -- -- 3,520
& Secretary, Telos Corp.) 1993 105,000 63,000 6,000 -- -- -- 2,235
Mark W. Hester 1995 181,695 40,000 6,000 -- -- -- 4,992
(President, Telos Field 1994 164,635 40,805 6,000 -- -- -- 3,949
Engineering, V.P. 1993 161,384 130,000 -- -- -- -- 8,994
Telos Corp.)
Robert J. Marino 1995 158,546 50,000 6,000 -- -- -- 6,565
(President, Telos Systems 1994 147,118 36,000 6,000 -- -- -- 1,264
Integration, Senior V.P, 1993 150,000 150,000 6,000 -- -- -- 4,497
Telos Corp.)
Lorenzo Tellez 1995 166,624 50,000 6,000 -- -- -- 6,846
(V.P., Treasurer, Chief 1994 157,014 56,000 6,000 -- -- -- 4,620
Financial Officer) 1993 129,816 149,375 -- -- -- -- 8,994
John B. Wood 1995 234,990 325,000 24,000 -- -- -- 7,029
(President, Chief 1994 161,833 -- 38,000 -- -- -- 3,976
Executive Officer) 1993 150,870 145,000 6,000 -- 700,459 -- 3,317
(1) Other annual compensation represents Director's Fees paid and automobile
allowances provided to executives.
(2) 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.
44
Stock Option Grants
The Company did not grant any stock options in 1995, and therefore the
Summary Table of Options/SAR Grants in the Last Fiscal Year has been omitted.
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, 1995.
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)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable Unexercisable
Gerald Calhoun -- -- 69,900/0 --
(V.P. Human Resources,
and Secretary, Telos Corp.)
Mark W. Hester -- -- -- --
(President, Telos Field
Engineering & V.P.
Telos Corporation)
Robert J. Marino -- -- 164,900/0 --
(President, Telos Systems
Integration, Senior V.P.,
Telos Corp.)
Lorenzo Tellez -- -- -- --
(V.P., Treasurer,
Chief Financial Officer)
John B. Wood -- -- 700,459/0 $315,207/0
(President, Chief Executive
Officer)
(1) Based on an estimated fair market value of the Company's Class A common
stock of $ 0.95 per share at December 31, 1995.
Compensation of Directors
During the fiscal year ended December 31, 1995, 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. Other directors have been awarded stock
options in prior years as additional
45
compensation for their services as directors. Additional options may be awarded
to outside directors in the future. During the fiscal year ended December 31,
1995, 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, $130,000, $130,000, $163,500, $165,000, $170,000 and
$225,000, respectively. In addition, these executive officer's agreements
provide for bonus payments should certain operating results be attained.
The Company is also a party to a three year employment agreement with
Mr. Beninati, Director, and former Chairman of the Board. Under the agreement,
Mr. Beninati will receive $165,000 in each of the next two years.
46
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, 1996 Class
-------------- ------------------- ------------------- -----
Class A Common Stock John Porter 23,030,718 shares(A) 75.99%
Chelverton Properties Limited
63 Chester Square
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.
460 Herndon Parkway
Herndon, Virginia 22070
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 88,293 shares (C) 0.38%
Class A Common Stock Mark W. Hester 60,976 shares 0.26%
Class A Common Stock Robert J. Marino 286,952 shares (C) 1.23%
Class A Common Stock Lorenzo Tellez 152,440 shares 0.66%
Class A Common Stock John B. Wood 700,459 shares (D) 2.95%
Class A Common Stock All Officers And Directors
As A Group (8 persons) 2,058,360 shares (E) 8.32%
47
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Cont'd)
(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, 1996 Class
-------------- ------------------- ------------------- -----
12% Cumulative Exchange- Gotham Partners, L.P. 340,929 shares 9.45%
able Redeemable Preferred 230 Park Avenue, #1245
Stock New York, NY 10169
12% Cumulative Exchangeable C.C. Partners Ltd. 220,953 shares (F) 6.15%
Redeemable Preferred Stock 15 Hudson Ave., PO Box 832
Shelter Island Heights, NY 11965
12% Cumulative Exchangeable R. Cromwell Coulson 220,953 shares (F) 6.15%
Redeemable Preferred Stock Carr Securities Corp.
17 Battery Place
New York, NY 10004
12% Cumulative Exchangeable Value Partners, Ltd. 673,317 shares (G) 18.73%
Redeemable Preferred Stock 2200 Ross Avenue, Ste 4660
Dallas, TX 75201
12% Cumulative Exchangeable Fisher Ewing Partners 673,317 shares (G) 18.73%
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 and Marino hold options to acquire 69,900 and 164,900
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.
(D) Mr. Wood owns no shares of Common Stock, however, he holds an option to
acquire 700,459 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 1,655,718
shares of Class A Common Stock exercisable within 60 days after March 1,
1996.
(F) C.C. Partners Ltd. and R. Cromwell Coulson 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 220,953 shares of the Public Preferred Stock held of record
by the reporting persons collectively.
(G) 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 673,317 shares of the Public Preferred Stock held of
record by the reporting persons collectively.
48
Item 13. Certain Relationships and Related Transactions
Mr. Joseph P. Beninati and Mr. John B. Wood became employees of the
Company in 1992 and currently serve as a Director, and President, Chief
Executive Officer and Director, respectively. Mr. Beninati served as Chairman of
the Board for the majority of 1994 before resigning January 5, 1995 and the
Company will pay him $165,000 annually subject to a three year employment
agreement beginning in 1995. Prior to 1992 they provided consulting services to
the Company through their firm, Beninati & Wood, Inc. for which unpaid advisory
fees at December 31, 1995 totaled $525,000. During 1993, $132,000 in legal costs
were paid by the Company on behalf of Mr. Beninati and Mr. Wood in connection
with the Settlement Agreement, pursuant to indemnification provisions of the
Company's bylaws.
Mr. Fred Knoll, former Chairman of the Board of Directors of the
Company, and various related entities, were paid $759,000 in 1993 for
reimbursement of expenses. Amounts reimbursed in fiscal year 1993 include
$612,000 of legal fees and other costs incurred in connection with the
Settlement Agreement, pursuant to indemnification provisions of the Company's
bylaws.
Mr. Porter has a consulting agreement with the Company whereby he will
be compensated $200,000 a year for specified services. Mr. Porter has not
requested payment under this agreement in 1995 or 1994.
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 is compensated $8,000
per month for his services, as well as $500 per day for overseas travel
undertaken on behalf of the Company. In 1995, Mr. Byers was compensated
$121,500.
49
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. The exhibits
marked with (2*) are incorporated by reference to the Company's Amendment No. 1
to Schedule 14D-9 filed on December 2, 1988. 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.
Exhibits marked with (5*) are incorporated by reference to the Company's Form
10-K report for the fiscal year ended March 31, 1990. Exhibits marked with (6*)
are management contracts or compensatory plans or arrangements required to be
filed by Item 14(c) of Form 10K. The registrant will furnish to stockholders a
copy of other exhibits upon payment of $.20 per page to cover the expense of
furnishing such copies. Requests should be directed to the attention of Investor
Relations at Telos Corporation, 460 Herndon Parkway, Herndon, Virginia
22070-5201.
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
50
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)
10.10 (3*) Lease Agreement for the Herndon Facility.
10.11 (4*) Amended Lease Agreement - Herndon Facility.
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)
51
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)
10.41 September 27, 1993 Letter Agreement among C3, Inc.,
Knoll Capital Management, Inc. and Telos Corporation
regarding deferred Telos Corporation fees.
(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.
10.52 Subordinated Bridge Note/Promissory Note as of June 8,
1995 between Telos Corporation (Maryland) and Drayton
English and International Investment Trust
10.53 Subordinated Bridge Note/Promissory Note as of June 8,
1995 between Telos Corporation (Maryland) and J. O.
Hambro Investment Management, Ltd.
52
10.54 Subordinated Bridge Note/Promissory Note as of June 8,
1995 between Telos Corporation (Maryland) and North
Atlantic Smaller Companies Investment Trust, PLC
10.55 Subordinated Bridge Note/Promissory Note as of June 8,
1995 between Telos Corporation (Maryland) and Mr. John
R.C. Porter
10.56 Subordinated Bridge Note/Promissory Note as of June 8,
1995 between Telos Corporation (Maryland) and Sir
Leslie Porter
10.57 Subordinated Bridge Note/Promissory Note as of June 8,
1995 between Telos Corporation (Maryland) and Second
Consolidated Trust, PLC
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
Mangement, 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
53
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.
21 Schedule of Subsidiaries.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Telos Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELOS CORPORATION
By: /s/John B. Wood
------------------------------
President and
Chief Executive Officer
Date: March 29, 1996
-----------------------------
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 Ikl'e
- - -------------------------------------- Chairman of the March 29, 1996
Fred Charles Ikl'e Board of Directors
/s/ John B. Wood
- - -------------------------------------- President, Chief Executive
John B. Wood Officer & Director March 29, 1996
(Principal Executive Officer)
/s/ Stephen D. Bryen Director March 29, 1996
- - -----------------------------------
Stephen D. Bryen
/s/ Norman P. Byers Director March 29, 1996
- - -----------------------------------
Norman P. Byers
/s/ Joseph P. Beninati Director March 29, 1996
- - -------------------------------------
Joseph P. Beninati
/s/ Lorenzo Tellez
- - --------------------------------------- Chief Financial Officer March 29, 1996
Lorenzo Tellez (Principal Financial Officer &
Principal Accounting Officer)
55
Telos Corporation
Exhibit Index
Exhibit
Number Exhibit Name
------ ------------
3.7 Articles of Amendment of C3, Inc. dated April 13, 1995
10.72 Amendment to Revolving and ReducingSeniorCredit
Facility dated as of August 4, 1995 Telos
Corporation (Maryland), Telos Corporation
(California) and NationsBank N.A.
10.73 Amendment to Revolving and ReducingSeniorCredit
Facility dated as of October 13, 1995 Telos
Corporation (Maryland), Telos Corporation
(California) and NationsBank N.A.
21 Schedule of Subsidiaries
27 Financial Data Schedule
56