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, 19951996
[ ] Transition]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,19886 Ashburn Road, Ashburn, Virginia 22070-520120147
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number,
including area code: (703) 471-6000
C3, INC
(Former Name of Registrant)724-3800
Securities registered pursuant to Section 12(b) of the Act:
NONE
----
Securities registered pursuant to Section 12(g) of the Act: 12% Cumulative
Exchangeable Redeemable Preferred Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports),and (2) has been subject to such
filing requirements for the past 90 days. YES X NO -- --_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
No public market exists for the registrant's Common Stock.
As of March 1, 1996,28, 1997, the registrant had 23,076,753 shares of Class A
Common Stock, no par value; 4,037,628 shares of Class B Common Stock, no par
value; and 3,595,586 shares of 12% Cumulative Exchangeable Redeemable Preferred
Stock, par value $.01 per share, outstanding.
Incorporation by Reference: None
Number of pages in this report (excluding exhibits): 5550
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$216 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.customer.
Certain other long-term customers of the Company include the California
Institute of Technology's Jet Propulsion Laboratory, for which the Company has
designed, developed and supported ground based telemetry and mission operations
systems since 1975; 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;1975, and the U.S. Navy and Marines, for which the Company has
provided ruggedized computer systems since 1988.
The Company has further enhanced its ability to deliver solutions to
its customers' information requirements by providing toolsa number of software
applications that allow organizations to integrate data from disparate systems
and applications
focused in emergingto model the business processes that move the 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.(workflow). 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
TheFor the majority of 1996, the Company providesprovided its services through
three operating groups. AlthoughAfter determining that it was not strategic to its
long-term business direction, which is focused on network infrastructure and
solutions, the Company sold its Consulting Services Division in late 1996 to
fund operations and to enhance its ability to invest in strategic business
segments. While the remaining groups operate on a substantially decentralized
basis, they work together, where appropriate, to offer customers a broad range
of information and network technology services. The Company believes that this
cooperative approach enables each of
the operating groups to offer itstheir services in
specific market segments using their specialized expertise and market knowledge, while drawingknowledge.
At the same time, the operating groups can draw on the market access, technical
breadth and management capability of the entire Telos organization. The market
segments in which the Company operates and the operating groups performing
services within these areas are as follows:
2
o Systems and Support Services Group provides cost competitive
network based solutions including hardware and software support
services to federal, state, and local governments, as well as
commercial entities.
enterWorks, a wholly owned subsidiary, develops, markets,
licenses, and supports a set of software products that allow
customers to deploy mission critical applications in an
internet/intranet based environment. enterWorks financial results
are included as a part of the Systems and Support Services Group
for financial reporting purposes.
Systems Integration Group provides computer and large scale
network integration services to customers through software and hardware
engineering;customers; computer hardware
integration and component manufacture; and installation, training,
and service support.
o Field Engineering provides computer hardware maintenancesupport to federal, state, and local government
clients, as well as commercial
entities.
oclients.
Consulting Services providesGroup provided computer consulting services
and contract labor to support its customers' existing information
technology capabilities. Specific tasks includeincluded concept
formulation, system specification, system engineering
design/development, and project management. The net assets of
this Group were sold in December 1996.
Systems and Support Services
The Company's Systems and Support Services Group provides turnkey
system solutions, 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 1977reengineering; and provides
a "one stop" maintenance service approach that includes hardware maintenance and repair,services, quality assurance, configuration management, and
property management. In response to the increasing prevalence of customers
owning more than one type or brand of computer, TFE specializesthe Group's hardware services
area has specialized in servicing third party
maintenance of computer hardware and peripheral
equipment manufactured by others. The majority of TFE's revenues are generated from work performed onothers, including Sun Microsystems, DEC, IBM, Data
General, Hewlett-Packard, Wang, and TelosTSI (previously known as C3) equipment.
Telos Systems and Support Services (i) is the largest provider of life
cycle software engineering services to the U.S. Army, and (ii) is one of the
largest providers of ground based technical services to the California Institute
of Technology Jet Propulsion Laboratory, a Federally Funded Research and
Development Center managed by the National Aeronautics and Space Administration.
In response to the growth in network based computing, the Company
formed enterWorks.com ("enterWorks"), a wholly owned subsidiary, to develop,
market, license, and support a set of software products that allow customers to
deploy mission critical applications in an internet/intranet based environment.
enterWorks innovative technology enables a company to bridge from its existing
corporate information systems to network-centric computing without disrupting
those existing systems, thus rapidly gaining the benefits of deploying its
applications as networked. enterWorks products provide the ability to assimilate
data from many different sources (data integration) and to model the processes
that will be used to move that information through the organization (workflow).
For fiscal year 1995, TFE generated1996, Systems and Support Services had revenues of $32.8$104
million or 16.2%54.9% of the total Company's revenue.
Systems Integration
The Systems Integration Group delivers network and information
technology solutions to customers worldwide. The Group performs value
engineering and system integration activities including design and
manufacturing, engineering, network integration, system installation, and
support services. The group holds the largest network integration contract ever
awarded by the Federal government, a three year contract awarded in 1995 valued
in excess of $900 million. Additionally, the group is developing and installing
the hardware and network infrastructure in support of the Immigration and
Naturalization Service (INS).
Telos Systems Integration is a leading implementer and innovator of
enabling technology that provides customers a complete solution to their
requirements from a single vendor. In 1981, the group implemented one of the
first client-server architecture's for the U.S. Coast Guard and as a system
integrator, developed the Navy's flagship desktop tactical computer system, the
DTC-II. Today, the group is focused on developing and bringing to market
applications to support network-based computing.
For fiscal year 1996, Systems Integration generated revenue of $85 million
or 45.1% of the Company's total revenue.
3
Consulting Services
Consulting services arewere provided by Telos Consulting Services ("TCS").
TCS formed in 1969, deliversdelivered consulting expertise, primarily on a contract labor basis, in
support of the client's own information technology capabilities. TCS's areas of expertise includeIn 1996, the
Company determined that TCS, a staff augmentation 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 supportswas not a business base of several hundred clients, many with multiple contracts. TCS's
staff of professionals work ascentral
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.core strategy of providing network infrastructure and
solutions. Accordingly, the net assets of TCS were sold to COMSYS Technical
Services, Inc., a subsidiary of COREStaff, Inc., in December 1996 for
approximately $31.6 million. The financial results of TCS and the gain on the
sale of TCS have been presented as a disposal of a segment of business in the
financial results of the Company.
Revenues by Major Market and Significant Customers
Revenue by major market for the Company is:
Percentage of total revenues for fiscal year
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
---- ---- ------
Percentage of total revenues for fiscal year
--------------------------------------------
1996(1) 1995 1994
------- ---- ----
Federal government 84.8% 80.6% 84.5%
Commercial 13.6 15.2 11.4
State and local governments 1.6 4.2 4.1
---- --- ---
Total 100.0% 100.0% 100.0%
===== ===== =====
(1) 1996 major market revenue percentages exclude TCS revenue.
Total Company revenue at December 31, 19951996 includes 43.1%50.0% of revenue
from contracts with the Department of Defense, 6.1%17.6% of revenue from contracts
with Department of Justice, 6.6% of revenue from the National Aeronautics and
Space Administration ("NASA"), and 10.5% of revenue from subcontracts with U.S.
government prime contractors, 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.contractors.
Competition
The segments of the information services industry in which the Company
operates are highly fragmented with no single company or small group of
companies in a dominant position. Some of the Company's competitors also operate
in international markets, along with other entities thatwhich operate exclusively or
primarily outside the United States. Some of the largerlarge 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 thatwhich 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, Boeing Computer Services Corp., Computer Data Systems,
Computer Sciences Corporation,Corp., Electronic Data Systems Corporation, Unisys, Scientific
Applications International Corporation, GTE CorporationCorp. 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 1,6581,374 persons as of December 31, 1995.1996. The services
the Company provides require proficiency in many fields, such as computer
science, mathematics, physics, engineering, operations research, economics, and
business administration.
Of the total Company personnel, approximately 9551,032 provide Systems and Support
Services, 29556 are employed by enterWorks, and 168 provide Maintenance Services, and 280 provide ConsultingSystem Integration
Services. An additional 128118 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 valueat a given time over the life of
its contracts, whether or not funded. Funded backlog consists of the aggregate
contract revenues remaining to be earned by the Company at a given time, but
only to the extent, in the case of government contracts, funded by a procuring
government agency and allotted to the contracts. Unfunded backlog is the
difference between total backlog and funded backlog. Included in unfunded
backlog are revenues thatwhich 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, 19951996 and 1994,1995, the Company had total backlog from
existing contracts of $1.3$1.2 billion and $328.4 million,$1.3 billion, 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 fiveseven years. Included in the backlog at December 31,
1996 is $900 million from Indefinite Delivery, Indefinite Quantity ("IDIQ")
contracts of which the SMC-II contract comprises $876 million. Approximately
$65.6$115 million and $93.4$65.6 million of the total was funded backlog at December 31,
1996 and 1995, respectively.
While backlog remains an important measurement criteria, during 1996
the Company, as well as other federal contractors, experienced a change in the
manner in which the Federal government procures equipment and 1994,
respectively.
Otherservices. These
procurement changes include the growth in the use of General Services
Administration ("GSA") Schedules which allow agencies of the Federal government
to purchase significant amounts of equipment and services. The use of the GSA
Schedules results in a significantly shorter and much more flexible procurement
cycle as well as increased competition as many companies hold such schedules.
Along with the GSA Schedules, the Federal government is awarding a large number
of omnibus contracts with multiple awardees. These contracts generally require
extensive marketing efforts by the awardees to procure business. The use of GSA
Schedules and omnibus contracts, while generally not providing immediate
backlog, provide areas of potential growth that the Company is aggressively
pursuing.
Overview of 1996
The Company entered 1996 with the belief that the year would bring
enhanced operating and performance results over 1995. Its backlog at the
beginning of 1996 of $1.3 billion was the highest in Company history and its
focused diversification into the emerging Internet and international markets was
anticipated to bring additional business opportunities. While the Company had
revenue growth of 7.5% to $188.9 million from $175.8 million in 1995 from its
Systems Integration and Systems and Support Services Groups, the Company's
profitability decreased as compared to 1995. The primary reasons for the
decrease were: (1) The Federal government budget crisis in early 1996 resulted
in significantly lower than anticipated sales on certain of the Company's large
computer equipment contracts during the first half of 1996, and (2) The Company
experienced reduced gross margins on certain equipment and services contracts
due to changes in product mix from 1995 as well as changes in contract pricing
and (3) The Company incurred increased infrastructure costs associated with
supporting contracts awarded in late 1995.
The Company did experience increased order flow during the second half
of 1996, and while it believes its operational performance in 1997 will improve
significantly based on this order flow, there can be no assurance that such
order flow will continue. In the fourth quarter of 1996 the Company also
implemented a cost reduction plan to reduce infrastructure costs in certain
divisions. The cost reduction plan focused on indirect costs and included
employee reductions.
From an international perspective, the Company was successful in
broadening its business base through contract wins in the Philippines and is
actively pursuing other opportunities in the Pacific Rim and Middle East.
The Company has continued to invest in enterWorks, its wholly owned
subsidiary, primarily in product development and in the sales and marketing
areas. In 1996, enterWorks revenue doubled and it succeeded in expanding its
commercial customer base.
The Company, along with other companies that contract with the Federal
government, experienced a shift in the manner in which the government procures
equipment and services in 1996. This shift from long lead time multi-year sole
source contracts to multiple awardee contracts and GSA Schedules has resulted in
the Company modifying its new business development efforts. The Company has been
incorporated undersuccessful in this area with a number of contract wins in 1996 and the
lawsestablishment of Maryland since
1971.a comprehensive GSA schedule. However, while the Company has
been successful in obtaining new contract vehicles, there can be no assurance
that orders and revenue will result.
In 1995,late 1996, the Company's shareholdersCompany sold its Consulting Services Group for $31.6
million. The Company had determined that this Group was not a core part of its
long term business strategy and directors approved an amendmentthat the sale would provide the Company with
additional liquidity to the Company's Charter changing the Company's namefund operations and 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.invest in strategic business
areas.
Item 2. Properties
The Company leases 150,256191,000 square feet of space in Herndon,Ashburn, Virginia
for its corporate headquarters, integration facility, and primary service depot.
This lease expires in March 1997,2016, with a fiveten 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 5362 separate facilities
located in 2225 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 thatDuring
1996, the Company be held liable
forentered into a settlement agreement with Rosecliff and
recorded an additional $355,000 of non-operating expense based on the paymentprovisions
of Rosecliff's expenses in the amount of $1.1 million. Discovery
is ongoing assettlement. At December 31, 1996 all amounts related 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.settlement
were paid.
The Company is a party to various other lawsuits arising in the
ordinary course of business. In the opinion of management, while the results of
litigation cannot be predicted with certainty, the final outcome of such matters
will not have a materiallymaterial 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 1995,1996, 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, 1996,1997, there were 7284 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
---------------------- -----------------------
1996 1995 1994 1993 1992(1) December 31, 19911992
---- ---- ---- ------- --------------------- ----
(amounts in thousands)
Sales $202,828 $175,121 $211,229 $224,751 $82,798
Operating$188,895 $175,759 $150,676 $187,285 $200,606
(Loss) income from
Continuing operations (9,816) 592 (11,838) 1,250 (1,577)
Discontinued Operations: (1)
Income (loss) 6,554 (4,189) 8,888 2,747 1,197from
discontinued operations 500 423 (583) (702) (1,038)
Gain on sale of
Consulting Services 11,524 -- -- -- --
Income (loss) before
extraordinary itemitems 2,208 1,015 (12,421) 548 (2,615)
930
Extraordinary itemitems -- -- (196) ----- 4,316 456
Net income (loss) 2,208 1,015 (12,617) 548 1,701 1,386
FINANCIAL CONDITION
As of December 31
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992(1) 19911992
---- ---- ---- ----------- ----
(amounts in thousands)
Total assets $110,064 $94,492 $86,872 $84,796 $97,277
$54,216
Debt (2) 32,857 47,316 40,414 30,790 40,710
23,126Capital lease obligations,
long-term (3) 12,537 -- -- -- --
Senior redeemable
preferred stock 4,828 4,494 4,192 3,922 3,653 8,256
Class B redeemable
preferred stock 11,087 10,252 9,497 8,822 8,149
---
Redeemable preferred
stock 24,230 18,647 14,263 11,417 9,951
8,564
(1) See Note 12 to the Consolidated Financial Statements included in Item 8 regarding the
acquisitionsale of Telos Corporation during fiscal year 1992.TCS.
(2) See Note 5 to the Consolidated Financial Statements in Item 8 regarding
debt obligations of the Company at December 31, 1995.1996. Total debt
obligations include amounts due under the senior credit facility and
senior subordinated notes.
(3) See Note 9 to the Consolidated Financial Statements in Item 8 regarding the
capital leases of the Company.
8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations General
Over the past twolast three years, the Company has invested significant
resources into marketing, bidsales and proposal efforts, and intomarketing, development of certain software and hardware
products.products, and into contract and Company infrastructure to support the contracts
awarded to the Company. The purpose ofCompany's investment in the sales and marketing investment was to
(1) retain significant contracts that were being rebid and (2) to capture new
business. The Companyarea
has won all of its significant rebids including a $118
million software services contract withresulted in 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, totalCompany's backlog growing 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 compared1994 to $93.4 millionapproximately $1.2 billion at December 31, 1994.
The1996. Additionally, the
Company has also invested in certain new softwareestablished a comprehensive offering of products primarily focused around the Internet. These investments have led to the
development ofand services on its
GSA Schedule and has won a number of software products including NetSeer, an Internet
firewall product, and Pangaea, the Company's Commerceware product line. The
Companycontracts in 1996 that provide additional
growth opportunities. This investment has also investedallowed the Company to win all of
its significant contract rebids.
The Company's investment in certain new computersoftware and 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 provideis
providing the Company with opportunityan expanded product line that offers its customers
unique value added solutions to expandtheir computing and information gathering and
analysis problems. The investment in software products is primarily through
enterWorks, and is focused on data integration and information processing
(workflow). Its investment in hardware products is through its presenceSystems
Integration Group and is focused on portable and ruggedized computers.
While 1996 was a difficult year from an operational perspective due to
the Federal government budget impasse in early 1996, the Company continued to
invest in contract and Company infrastructure to support a number of contracts
awarded in late 1995. This investment included additional personnel in program
and contract management and in sales and marketing. The Company also moved to a
larger headquarters and system integration facility in 1996 which resulted in
increased rent expense and other costs associated with the move. The Company
continually evaluates its cost structure and in the rapidly growing Internet marketfourth quarter implemented a
cost reduction plan focused on indirect costs and to obtain additional revenues through
new contract vehicles.personnel.
Late in 1996 the Company sold the net assets of its consulting services
division for $31.6 million. See the discussions included in the "Results of
Operations" and "Liquidity and Capital Resources" sections below.
Revenue by Contract Type
Approximately 84.8%86.4% of the Company's total revenues in 19951996 were
attributable to contracts with federal, state, and local governments, including
80.6%84.8% attributable to the federalFederal 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, 1995,1996, revenue by contract type was as follows: time and material,
36.7%28.2%; firm fixed price, 36.1%45.1%; cost reimbursable, 18.7%19.5%; fixed monthly rate,
8.1%6.7%; and other, 0.4%0.5%. While the Company has not experienced any significant
recent terminations or renegotiations, government contracts may be terminated or
renegotiated at any time at the convenience of the government.
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
-------------------------------------------------------------------------------------------
1996 1995 1994
1993
--------------------- ------------------ ------------------------- ---- ----
(dollar amounts in thousands)
Sales $202,828$188,895 100.0% $175,121$175,759 100.0% $211,229$150,676 100.0%
Cost of sales 167,578 82.6 147,236 84.1 173,651 82.2168,281 89.1 145,522 82.8 127,218 84.4
Selling, general and
administrative expenses 26,326 13.0 28,896 16.5 25,512 12.129,055 15.4 23,262 13.2 25,321 16.8
Goodwill amortization 2,370 1.2 3,1781,001 0.5 1,950 1.1 2,701 1.8
3,178 1.5
------ --- ---------- ----- ---- ------ ----
Operating (loss) income (loss) 6,554 3.2 (4,189) (2.4) 8,888 4.2(9,442) (5.0) 5,025 2.9 (4,564) (3.0)
Interest expense (5,491) (2.7) (4,057) (2.3) (3,028) (1.4)(5,668) (3.0) (4,385) (2.5) (3,029) (2.0)
Other (expense) income (expense)(445) (0.2) 27 -- (5,458) (3.1) (3,440) (1.6)
---(3.6)
------- --- ----- --- ----- ----
Income (loss)---
(Loss) income before taxes
and minority interest 1,090 0.5 (13,704) (7.8) 2,420 1.2(15,555) (8.2) 667 0.4 (13,051) (8.6)
Income tax (benefit) provision (benefit)(5,739) (3.0) 75 -- (1,283) .7 1,872 .9(1,213) (0.8)
------- --- --- ---- ----- ---
(Loss) income from
continuing operations (9,816) (5.2) 592 0.4 (11,838) (7.8)
Discontinued Operations:
Income from discontinued
operations 500 0.2 423 0.2 (583) (0.4)
Gain on sale of TCS 11,524 6.1 -- -- -- --
Extraordinary item -- -- (196) (.1) -- -- (196) (0.1)
----- --- ----- --- ------ ------ ----- ----------- ---
Net income (loss) $ 1,015 0.5%$2,208 1.1% $1,015 0.6% $(12,617) (7.2)(8.3)%
$ 548 .3%
=========== === ===== === ====== ==== ===== ========
Financial Data By Market Segment
TheWith the sale of its Consulting Services Group, the Company operates in
threetwo market segments: systems and support services (the "Systems and Support
Services Group"), which consists of systems integrationenterWorks and software and hardware
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
Systems Integration Group.
Sales, gross profit and gross margin by market segment for the periods
designated below are as follows:
Year Ended December 31
-----------------------------------------------------------------------------------------
1996 1995 1994
1993
---------------------- ----------------------- ------------------- ---- ----
(dollar amounts in thousands)
Sales:
Systems and Support Services $142,939 $116,059 $145,433
Field Engineering 32,820 34,617 41,852
Consulting Services 27,069 24,445 23,944$103,675 $105,801 $111,357
Systems Integration 85,220 69,958 39,319
------- -------- ---------------- -------
Total $202,828 $175,121 $211,229$188,895 $175,759 $150,676
======= ======= =======
Gross Profit:
Systems and Support Services $26,844 $ 18,132 $ 27,851
Field Engineering 3,393 5,326 6,815
Consulting Services 5,013 4,427 2,91212,192 $15,122 $16,783
Systems Integration 8,422 15,115 6,675
------ -------- -------------- ------
Total $35,250 $ 27,885 $ 37,578$20,614 $30,237 $23,458
====== ======== ============= ======
Gross Margin:
Systems and Support Services 18.8% 15.6% 19.2%
Field Engineering 10.3% 15.4 16.3
Consulting Services 18.5% 18.1 12.2
---- ---- ----11.8% 14.3% 15.1%
Systems Integration 9.9% 21.6% 17.0%
Total 17.4% 15.9% 17.8%
==== ==== ====10.9% 17.2% 15.6%
Results of Operations
Years ended December 31, 1996 and 1995
Sales increased $13.1 million, or 7.5%, from $175.8 million to $188.9
million for the year ended December 31, 1996 as compared to 1995. This increase
was primarily attributable to the Systems Integration Group, which reported an
increase in sales of $15.3 million for the year. This increase was offset by a
decline in sales in the Systems and Support Services Group of $2.2 million for
the year.
The increase in the Systems Integration Group's revenue was due to
increased order volume during the second half of 1996. Increased orders in
systems integration were due to the Small Multi-user Computer II ("SMC-II")
contract, as well as increased sales under the GSA Schedule and other contract
vehicles.
The revenue decline in the Systems and Support Services Group is
primarily due to a decrease in hardware support revenue of $5.3 million from
1995 to 1996. This decline is a result of the continued migration from mainframe
to network based computing as the servers and desktop computers generally
provide lower maintenance revenue. Additionally, the hardware support area
continues to experience a shift from fixed price contracts to time and material
contracts which produce less predictable revenue streams. This decrease was
offset by increases in enterWorks revenue of $800,000 and software support
revenue of $2.3 million from 1995 to 1996. The enterWorks increase was
attributable to expanded sales and marketing efforts of the subsidiaries'
products and related consulting. The software support revenue increase is due to
increased services under certain of the Company's large labor contracts.
Based on the Company's backlog position and increased order flow in
late 1996, 1997 should present significant opportunities for revenue growth and
improved operational performance. However, there can be no assurance that such
performance improvement will occur.
Cost of sales increased by $22.8 million, or 15.6%, to $168.3 million
in 1996, from $145.5 million in 1995. This increase is the result of the
increase in sales for the period, changes in the revenue product mix, and
increases in contract infrastructure costs. Revenue, particularly within Systems
Integration, for 1996 included certain higher cost equipment and software as
compared to 1995. This mix change was a result of new contracts, such as SMC-II,
having increased sales of older technology equipment where the Company has
higher costs as well as increased sales of new products developed by the Company
that had higher manufacturing costs than anticipated. Additionally, within the
Systems and Support Services Group, the Company experienced increased labor and
material costs in the hardware support area. Cost of sales also increased due to
higher allocated rent expense in 1996 as a result of the move to a new facility.
Gross profit decreased by $9.6 million for the year to $20.6 million,
from $30.2 million in the comparable 1995 period. The decrease in the period is
primarily attributable to the cost of sales increases discussed above. The
Company has recently undertaken a number of cost-cutting measures such as staff
reduction and branch consolidation to increase its profitability. The Company's
gross margin was 10.9% for the year ended December 31, 1996 as compared to 17.2%
for the comparable period of 1995. The Company believes, although there can be
no assurance, that its gross margin should improve in 1997.
Selling, general, and administrative expense ("SG&A") increased for the
year by approximately $5.8 million, to $29.1 million in 1996 from $23.3 million
in 1995 for the comparable period. These increases were primarily due to an
increase in sales and marketing investment in 1996 as compared to 1995, as well
as an increased investment in infrastructure for contracts won in late 1995.
Also, in 1996, based on a review of its operations and requirements, the Company
had certain adjustments which increased SG&A by $1.6 million in the area of
accounts receivable, loss contracts and other reserves. This coupled with
certain 1995 adjustments, which reduced SG&A by $1.7 million in such areas as
employee benefits and certain closure reserves, led to the increase in SG&A. For
1997, the Company believes that SG&A will decrease from 1996 due to indirect
cost reductions resulting from its cost reduction efforts, the sale of its
Consulting Services Group, and the absence of the one-time adjustments described
above. However, there can be no assurance that SG&A expense will be less in
1997. SG&A as a percentage of sales increased to 15.4% for the year ended
December 31, 1996 from 13.2% in the comparable 1995 period.
Goodwill amortization expense was $1.0 million for the year ended
December 31, 1996 compared to $2.0 million for the period ended December, 1995.
The reduction in goodwill amortization is attributable to adjustments in the
goodwill balance as a result of realization of acquired tax benefits resulting
from the 1992 acquisition of Telos Corporation (California). Also, it declined
due to the completion of the goodwill amortization associated with the 1989
leveraged buy out of the Company.
Operating (loss) income decreased by $14.4 million to $(9.4) million in
the year from $5.0 million in the comparable 1995 period as a result of the
aforementioned decreases in gross profit and the increase in SG&A in 1996.
Other non-operating expense was approximately $445,000 for the year
ended December 31, 1996 compared to approximately $27,000 of other non-operating
income in the comparable 1995 period. The expense in 1996 was attributable to an
additional reserve to fully record the provision for the settlement of the
Rosecliff case (see Item 3).
Interest expense increased approximately $1,283,000 to $5.7 million for
the year ended December 31, 1996 from $4.4 million in the comparable 1995
period. The variance is a result of the increase in the average outstanding
balance of the senior credit facility for most of 1996, as well as the effect of
the subordinated debt issued in 1995 being outstanding for the entire year.
Also, as the Company is accounting for its new building lease as a capital
lease, $600,000 of the increased interest expense relates to the building.
The Company believes its interest expense in 1997 will be less than the 1996
levels given its reduced senior credit facility balance and its anticipated 1997
operating performance. However, there can be no assurance that the reduction in
interest expense will occur.
For the year 1996, the Company had a combined Federal and state income
tax provision of $1,154,000 including both continuing operations and
discontinued operations. The Company, using SFAS 109 allocation methodology,
recorded a benefit in continuing operations of $5.7 million. For the comparable
period, the Company had a tax provision of $75,000.
On December 27, 1996, the Company sold substantially all of the assets
of its consulting division, Telos Consulting Services (TCS), to COMSYS Technical
Services, Inc., a subsidiary of COREStaff, Inc. for approximately $31.6 million.
The resulting gain from the sale of TCS of $11.5 million included a write-off of
$6.9 million of goodwill allocated to the TCS operations and $6.3 million of
income tax expense.
The sale of Telos Consulting Services has been treated as a discontinued
operation in accordance with APB Opinion Number 30 ("APB 30"). Pursuant to APB
30, the revenue, costs and expenses of TCS have been excluded from their
respective captions in the Company's consolidated statements of income and the
net results of these operations have been reported separately as "Income (loss)
from discontinued operations." Included in the results of the discontinued
operations is allocated interest expense of $1,475,000, $1,106,000 and
$1,028,000 for 1996, 1995, and 1994, respectively. Interest has been allocated
based on the net assets of the discontinued operations in relation to the
Company's consolidated net assets plus non-specific debt. Additionally, goodwill
amortization of $418,000, $420,000 and $477,000 for 1996, 1995 and 1994,
respectively, has been included in the results of the discontinued operations.
Years ended December 31, 1995 and 1994
Sales increased $27.7$25.1 million, or 15.8%16.6%, from $175.1$150.7 million to $202.8$175.8
million for the year ended December 31, 1995 as compared to the same 1994
period. This increase was primarily attributable to the Systems and ServicesIntegration
Group, which reported an increase in sales of $26.9$30.6 million for the year, and to
the Consulting Group which reported increased sales of $2.6 million. These
increases wereyear. This
increase was offset by a decline in sales in the Field EngineeringSystems and Support Services
Group of $1.8$5.6 million for the year.
WithinThe increase in the Systems and ServicesIntegration 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 1994is 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
In the Systems and Support Services Group, software services sales
experienced a decline of $3.8 million for the year ended December 31, 1995 as
compared to the same period in 1994. These decreases in sales were due to
declines in contract activity on existing contracts as well as certain contracts
not being renewed during 1995.
The 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 this Group is also due to the Field Engineering Grouphardware support
division. The decline in revenue in this division is primarily due to lower
warranty revenue resulting from the low 1994 system integration sales, lack of
follow-on maintenance contracts after the end of the warranty period for certain
of the TSI equipment previously sold and delayed starts on certain of the
Group's recent contract awards. In addition, the Field Engineering GroupHardware support division is
experiencing a shift in its business as its customers migrate from mainframe
computing to distributed processing through personal computers and networks.
Generally, maintenance services for distributed processing equipment generate a
lower revenue stream as billing rates for maintaining personal computers are
lower.
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$18.3 million, or 13.8%14.4%, to $167.6$145.5 million
in 1995, from $147.2$127.2 million in 1994. This increase is the result of the
increase in sales for the period.
Gross profit increased by $7.4$6.8 million for the year to $35.3$30.2 million, from
$27.9$23.4 million in the comparable 1994 period. The increase in the period is
primarily attributable to the higher sales volume previously discussed within
the Systems and Services Group and the Consulting ServicesIntegration Group. These increases were offset by declines in gross
profit for the Field EngineeringSystems and Support Services Group, attributable primarily to
start-up costs associated with recent contract awards as well as lower profit
margins associated with maintaining distributed processing equipment. Also
negatively impacting profit margins of the Group is the investment currently
being made in certain international offices to support the Company's
international efforts. The Group has recently undertakenimplemented 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%17.2% for the year ended December 31, 1995 as
compared to 15.9%15.6% for the comparable period of 1994.
Selling, general, and administrative expense ("SG&A") decreased for the
year by approximately $2.6$2.0 million, to $26.3$23.3 million in 1995 from $28.9$25.3 million
in 1994 for the comparable period. These decreases were primarily due to reduced
expenses associated with research and development initiatives, lower contract
rebid efforts in 1995 as compared to 1994, and reduced expenses in certain
administrative cost areas. Also, in 1995, based on a review of its operations
and requirements, the Company had certain one-time adjustments to previously
recorded reserves which reduced SG&A by $1.7 million in such areas as employee
benefits and certain closure reserves. 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%13.2% for the year ended December 31, 1995 from 16.5%16.8% in the comparable 1994
period.
Goodwill amortization expense was $2.4$2.0 million for the year ended
December 31, 1995 compared to $3.2$2.7 million for the period ended December, 1994.
The reduction in goodwill amortization is attributable to the completion of the
amortization of the goodwill created by the 1989 leveraged buyout of the
Company. The Company continues to amortize the goodwill balance which resulted
from the acquisition of Telos Corporation (California).
Operating income (loss) increased by $10.8$9.6 million to $6.6$5.0 million in
the year from ($4.2)4.6) million in the comparable 1994 period as a result of the
aforementioned increases in sales and gross profit.
Other non-operating income was approximately $27,000 for the year ended
December 31, 1995 compared to approximately $5.5 million of other non-operating
expense in the comparable 1994 period. The $5.5 million expense in 1994 was
attributable to costs incurred from attempts to recapitalize the Company's
balance sheet and refinance the Company's existing debt. It was also due to the
write-off of the remaining asset value of a software license purchased from
Sapien's International in 1993.International. (See the transaction costs section in Note 5 as well as
the discussion of Sapiens International in Note 8 to the consolidated financial
statements.)
12
Interest expense increased approximately $1.4 million to $5.5$4.4 million
for the year ended December 31, 1995 from $4.1$3.0 million in the comparable 1994
period. The variance is a result of the increase in the average outstanding
balance of the senior credit facility and related interest rate, as well as an
increase in the outstanding balance of the subordinated debt and related
interest rate.
The Company 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$1.2 million.
Years Ended December 31, 1994 and 1993
The
Liquidity And Capital Resources
For most of 1996, the Company viewed 1994 with several objectives. These objectives
included completing a refinancing/recapitalization in order to provide enhancedexperienced constrained liquidity. This
lack of liquidity and funding for future growth. Second, to increase bid and proposal
spending to retain existing contracts up for rebid and to increasewas caused by the Company's contract base through new awards. Third, to continue to consolidate and
streamline its administrative functionsoperating performance in 1996 as
well as enhance its internal
information systems.the Company's continued investment in enterWorks and in other strategic
initiatives. The disappointing operating performance was in part due to the
Federal government budget impasse and shut down that occurred in early 1996
which resulted in lower than anticipated order levels on certain equipment
contracts that negatively impacted the Company was successful in expanding its contract base
as demonstrated by its backlog growth.for the first half of 1996. The
Company also continued to consolidate
administrative functions including financeexperienced lower gross margins on certain existing contracts as a
result of changes in product mix and accountingin customer buying patterns. Coupled with
the above, the Company invested in contract support infrastructure for contracts
awarded in late 1995 as well as sales, marketing and certain marketing
efforts.product development
activities at enterWorks. The Company was not successful in completing several refinancing and
recapitalization alternatives, andalso incurred significantadditional facility costs
in doing so.
However, fundingwith the relocation of the Company's financial requirements was completedheadquarters in 1996.
The Company responded to its liquidity constraints by a
combination ofimplementing an
increased senior credit facilityaggressive cash management program which reduced discretionary spending and
additional advances byobtained extended payment terms from certain of the Company's existing shareholders.
Sales declined $36.1 million, or 17.1%, from $211.2 million to $175.1
million forsuppliers. The
Company also instituted a cost reduction program during the year ended December 31, 1994 as compared to 1993.fourth quarter of
1996 focused on reducing indirect spending and headcount. The decrease
forCompany has
reduced indirect spending in late 1996 and in early 1997 although there can be
no assurance that such cost savings can continue throughout 1997.
The Company also completed a private financing of enterWorks
subordinated debt in the year is primarily attributable tothird quarter of 1996. From its inception, the Systems and Services Group, which
reported decreases in salesCompany
had internally funded its enterWorks investment 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 majorityapproximately $5.1 million.
The proceeds of the decrease, as sales declined $25.3debt offering, which brought in $3.2 million, was used for
working capital requirements of the year, due to reduced order volume which beganCompany.
Also, late in the fourth quarter of 1993
and continued throughout 1994.1996, the Company sold its
Consulting Services Group ("TCS") to COMSYS Technical Service, a wholly owned
subsidiary of COREStaff for $31.6 million. The reduced volumedecision to sell TCS was a result of completion of
a large contract withbased
upon 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 duedetermination that TCS was not core to the completion of certain contracts either as a resultlong term strategy 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 comparedrecognizing the need to an
expense of $3.4 millionimprove the Company's liquidity. The
proceeds from the sale are being used for 1993. During 1994 theworking capital requirements and to
fund other business areas and investments. The Company attempted to
restructure its debt and capital structure. During the fourth quarter of 1994,
the Company concludedbelieves that the
pending transactions were not going toproceeds from the TCS sale have alleviated the short-term liquidity constraints.
However, there can be completed and therefore expensed the associated costsno assurances 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.will continue
throughout 1997.
For the year ended December 31, 1995,1996, the Company used approximately
$6.4$15.5 million of cash in operating activities. This use of cash in operations
was primarily a result of the operating performance as well as increases in the
accounts receivable and inventory balances after adjustment for non-cash items.
The growth in accounts receivable
and inventory was primarily dueWith the sale of TCS, the Company generated $27.6 million of cash from investing
activities. From a financing perspective, the Company used the cash generated by
the TCS sale to increased third and fourth quarter revenue
activity thereby increasing products and services purchased fromreduce 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.senior credit facility. 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 resultingreceived
$3.2 million from the operating and investing activities was funded
by the issuance of the seniorenterWorks subordinated notes as mentioned above.debt.
At December 31, 1995,1996, the Company had an outstanding balance of $32.3$15.4
million on its $45 million senior credit facility. The facilityFacility 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, 1995,1996, the Company, under its borrowing base
formula, had $7,200,000$24 million 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.2000. Subsequent to December 31, 1995,1996, 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, 1997.2000. Other terms and conditions of the Facility are
similar to the Company's previous Facility.
With the contract awards in 1995, theThe Company is evaluatingcontinually evaluates its financing requirements to support
these contracts.its business base and anticipated growth. The Company anticipates that its
current Facility will be adequate for 1997. However, should faster than
anticipated growth occur, the first half of 1996. The Company
currently believes that an expanded senior credit
facility maywould be required in
the future and is currently reviewing with its senior lenderthrough 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.financing requirements for
enterWorks. While enterWorks issued $3.2 million of subordinated debt with
warrants in 1996, the Company is currently fundingcontinuing to fund the on-going product
development, sales and marketing, and business growth in this area, it is reviewingactivities of its subsidiary. The
Company will continue to evaluate the potential fornecessity of bringing external capital to
fully exploit this emerging market and to build the enterWorks.comenterWorks 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, 1995.1996. 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 differencespotential tax
planning strategies existing at December 31, 1995.1996.
Capital Expenditures
The Company believes that its business is generally not capital
intensive,
however,intensive. However, the Company expects thatdid have higher property, plant and equipment
expenditures in 1996 will experience moderate growth comparedas a result of moving to 1995 and 1994 levels. The
Company, given its recent contract wins, is actively reviewing its officea new headquarters and integration
space requirements.facility. In March 1996, the Company signedentered into a long termtwenty year lease for a building
that will serve as its Corporate headquartersprovides significantly more integration and provide
significant additional manufacturingwarehouse space and integration space. The lease, which has
a twenty year term,that will
result in significant cost savings to the Company as it provides for reduced
monthly lease payments compared to the costs incurred under the Company's
currentprevious leasing arrangement. The Company, as a part of the lease, received $1.3
million in cash from the landlord for tenant improvements and other building
costs. At December 31, 1996, $231,000 of these funds remain and has been treated
as restricted cash.
Inflation
The rate of inflation has been moderate over the past five years and,
accordingly, has not had a significant impact on the Company. The Company has
generally been able to pass through increased costs to customers through higher
prices to the extent permitted by competitive pressures. The Company's cost
reduction efforts have offset the effects of inflation, if any, on the Company's
performance.
Forward-lookingForward-Looking Statements
This annual reportAnnual 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-lookingforward-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, shouldconvenience. Should this occur, the Company's
operatesoperating results wouldcould 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 aits
revenue base consistent with 1995 results,anticipated for 1997, the Company's growth depends upon its ability
to obtain additional capital and financing sources. The Company is
actively identifying and planningcontinually
reviews the requirements for the additional financing. However, no assurance can be
made on whether such financing, if necessary, can be obtained, or if available,
that it will be available on acceptable terms.
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...............................................18L.L.P...............................................17
Consolidated Statements of Income for the Years Ended
December 31, 1995,1996, December 31, 1994,1995, and December 31, 1993..............................................................191994..............................................18
Consolidated Balance Sheets as of December 31, 19951996 and
December 31, 1994.................................20-11995.....................................................................................19-20
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995,1996, December 31, 1994,1995, and December 31, 1993..............................................................221994...........................................21
Consolidated Statements of Stockholders' Investment (Deficit)
for the Years Ended December 31, 1995,1996, December 31, 1994,1995,
and December 31, 1993...........................................231994.................................................................................22
Notes to Consolidated Financial Statements................................................................24-39Statements................................................................23-37
INDEX TO SCHEDULES
All schedules are omitted because they are not applicable or the required
information is included in the consolidated financial statements or notes
thereto.
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, 19951996 and 1994,1995, and the related
consolidated statements of income, stockholders' investment (deficit), and cash
flows for each of the three years in the period ended December 31, 1995.1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Telos Corporation
and Subsidiaries as of December 31, 19951996 and 1994,1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995,1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Washington, DCMcLean, VA
March 29, 1996
1828, 1997
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands)
Year Ended December 31,
----------------------------------------------------------------------------------
1996 1995 1994
1993
------------- ------------- -------------- ---- ----
Sales
Systems and Support 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$103,675 $105,801 $111,357
Systems Integration 85,220 69,958 39,319
------ ------ ------
188,895 175,759 150,676
------- ------- -------
Costs and expenses
Cost of Systems and
Support Services 116,095 97,927 117,58291,483 90,679 94,574
Cost of Field Engineering 29,427 29,291 35,037
Cost of Consulting Services 22,056 20,018 21,032Systems Integration 76,798 54,843 32,644
Selling, general and
administrative expenses 26,326 28,896 25,51229,055 23,262 25,321
Goodwill amortization 2,370 3,178 3,1781,001 1,950 2,701
----- ------- -------
-------
196,274 179,310 202,341198,337 170,734 155,240
------- ------- -------
Operating (Loss) income (loss) 6,554 (4,189) 8,888(9,442) 5,025 (4,564)
Other income (expenses)
Non-operating (expense) income (expense)(445) 27 (5,458)
(3,440)
Interest expense (5,491) (4,057) (3,028)
------- ------- -------(5,668) (4,385) (3,029)
----- ----- -----
(Loss) income before taxes (15,555) 667 (13,051)
Income tax (benefit) provision (5,739) 75 (1,213)
-------- ----- --------
(Loss) income from continuing
operations (9,816) 592 (11,838)
Discontinued operations:
Income (loss) before taxes and
extraordinary items 1,090 (13,704) 2,420
Incomefrom discontinued
operations (net of income tax
provision (benefit) 75 (1,283) 1,872
------- ------- -------of $566 for 1996 and
an income tax benefit of $70
for 1994) 500 423 (583)
Gain on sale of Consulting
Services, (net of income tax
provision of $6,327) 11,524 -- --
------ ---- -----
Income (loss) before
extraordinary item 2,208 1,015 (12,421)
548
Extraordinary itemsitem
Loss from early debt
retirement -- -- (196)
--
------- ------- ------------- ----- ------
Net income (loss) $2,208 $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
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
ASSETS
December 31,
------------
1996 1995
---- ----
Cash and cash equivalents
(includes restricted cash of
$231 at December 31, 1996) $ 2,781 $ 735
Accounts receivable, net 51,549 44,112
Inventories, net 17,066 15,877
Deferred income taxes 1,643 1,217
Prepaid income taxes 694 320
Other current assets 230 384
------ ------
Total current assets 73,963 62,645
------ ------
Property and equipment
Land and building 408 408
Furniture and equipment 20,174 18,180
Leasehold improvements 2,650 2,683
Property and equipment
under capital leases 13,644 --
------ ------
36,876 21,271
Accumulated depreciation (20,390) (18,600)
------- ------
Total property and equipment 16,486 2,671
------ ------
Goodwill 13,545 22,814
Deferred income taxes 1,468 1,868
Other assets 4,602 4,494
------- ------
$110,064 $94,492
======= ======
======
The accompanying notes are an integral part of these consolidated
financial statements.
20
TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
LIABILITIES AND STOCKHOLDERS' INVESTMENT
As of December 31,
-------------------------------------------
1996 1995 1994
---- ----
Current liabilities
Accounts payable $ 26,528 $20,302$35,730 $26,528
Accrued compensation and benefits 10,163 8,804
10,272Unearned warranty revenue 1,575 699
Current portion, capital lease obligations 357 --
Other current liabilities 9,776 6,253
----- ------
Total current liabilities 57,601 42,284
Senior credit facility 15,418 32,312
Senior subordinated notes -- 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 notes17,439 15,004
Capital lease obligations 12,537 --
Other long-term liabilities 154 1,108 2,941
------ ------
Total liabilities 103,149 90,708
84,103
------------- ------
Commitments and contingencies
Preferred stock
Senior redeemable preferred stock
Series A-1, and A-2 4,828 4,494 4,192
Class B Redeemable Preferred Stock par value $.01,
7,500 shares authorized, issued and outstanding 11,087 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 24,230 18,647 14,263
------ ------
Total preferred stock 40,145 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 4,048 7,669 12,095
Retained earnings (deficit) (37,356) (37,356)
------ ------
Total stockholders' investment (deficit) (33,230) (29,609) (25,183)
------ ------
$110,064 $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,
-------------------------------------------------------------------------
1996 1995 1994 1993
---- ---- ----
Operating activities:
Net income (loss) $ 2,208 $1,015 $(12,617) $ 548
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization 3,058 3,376 4,289
3,898Gain on sale of TCS (17,176) -- --
Goodwill amortization 1,418 2,370 3,178 3,178
Amortization of discount on debt 78 17 68 18
Non-cash interest expense -- -- 410 --
Provision for inventory obsolescence 1,008 312 (899) 1,210
Provision for doubtful accounts receivable 647 103 (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 agreementdeferred income taxes 900 -- -- 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 (14,487) (3,870) (9,347)
8,443(Increase) in inventories (2,364) (8,582) (1,124)
(Increase) decrease in inventories (8,582) (1,124) 184
Decrease (increase) in other assets (2,076) 1,845 (751)
(1,199)
(Decrease) increaseIncrease (decrease) in accounts payable and
other current liabilities and noncurrent
liabilities 11,283 (2,342) 7,796
(10,369)------ ----- ----- --------------
Cash (used in) provided by operating activities (15,503) (6,433) (7,080)
11,087
----------- ----- ------
Investing activities:
Proceeds from sale of discontinued operations 31,579 -- --
Purchase of property and equipment (2,558) (1,013) (1,226) (1,442)
Investment in joint venture -- (111) -- --
Investment in products (1,422) ( 569) (1,354)
--
----- ----- -----------
Cash used inprovided by (used in) investing activities 27,599 (1,693) (2,580)
(1,442)------ ----- ----- ------
Financing activities:
(Repayment of) proceeds from senior
credit facility (16,894) (1,688) 11,185 (9,938)
Proceeds from debt issuance 3,278 14,373 -- --
Increase in book overdrafts 3,833 2,722 -- 377
Repayment of long-term debt -- (5,800) (1,825) (307)
Debt issue costs -- (1,187) --
Payments under capital leases (267) -- --
Issuance of Class A common stock -- -- (3)
12------ ------ ------
Cash (used in) provided by financing
activities (10,050) 8,420 9,357
------- ----- ----- ------
Cash provided by (used in) financing activities 8,420 9,357 (9,856)
----- ----- ------
Increase (decrease) in cash and cash equivalents 2,046 294 (303) (211)
Cash and cash equivalents at beginning of the
period 735 441 744
955
----- ----- -----------
Cash and cash equivalents at end of period $2,781 $ 735 $ 441
$ 744
======= ======== =========== ===== =====
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $5,348$5,760 $ 3,697 $ 3,011
======= ======== ======5,348 $3,697
===== ===== =====
Income taxes paid (refunded) $ 187 $(2,155) $ (1,672) $ 4,111
======= ======== ======$(1,672)
===== ===== =====
Supplemental schedule of non-cash investing activities:
Inventory transferred to property and equipmentAssets under capital lease $13,154 $ -- $ 16 $ 157
======= ========--
====== ===== =====
Sapiens Settlement $ -- $ 3,735 $ -- ======= ======== ======$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
Issuanceas of Class A common stock -- -- 12 -- 12
--- --- --- --- ------
Balance December 31, 1993 65 13 15,479 (24,739) (9,182)
--- -- ------ -------- ------$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)
=== == ====== ====== ======13 12,095 (37,356) (25,183)
-- -- ------ ------ ------
Senior redeemable preferred stock dividend -- -- -- (302) (302)
Class B redeemable preferred stock dividend -- -- (42) (713) (755)
Redeemable preferred stock dividend -- -- (3,236) -- (3,236)
Redeemable preferred stock accretion -- -- (1,148) -- (1,148)
Net income for the year -- -- -- 1,015 1,015
--- --- ----- -- ----- ------ ------
Balance December 31, 1995 65 13 7,669 (37,356) (29,609)
-- -- ----- ------ ------
Senior redeemable preferred stock dividend -- -- -- (334) (334)
Class B redeemable preferred stock dividend -- -- -- (835) (835)
Redeemable preferred stock dividend -- -- (3,272) (1,039) (4,311)
enterWorks common stock warrants -- -- 921 -- 921
Redeemable preferred stock accretion -- -- (1,270) -- (1,270)
Net income for the year -- -- -- 2,208 2,208
-- -- ----- ------ ------
Balance December 31, 1996 $65 $13 $7,669$4,048 $(37,356) $(29,609)$(33,230)
== == ===== ====== ======
The accompanying notes are an integral part of these consolidated
financial statements.
23
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSTATEMENT
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 toolssoftware
and applications focused on emerging information and network technology markets
such as data mining, data
warehousing, middleware connectivitymigration and data accessintegration, workflow and workflow.network security.
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., enterWorks.com and Telos
International Corporation (collectively the "Company"). All significant
inter-company transactions have been eliminated in consolidation.eliminated. The Company also has an
investment in aan international 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.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
cancelablenoncancelable 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$1,414,000 and $2,008,000$1,508,000 at December
31, 19951996 and 1994,1995, respectively, which are utilized to support maintenance
contracts. Spare parts inventory is amortized on a straight line basis over five
years. An allowance for obsolete, slow-moving or non-salable inventory is
provided for all other inventory. This allowance is based on the Company's
overall obsolescence experience and its assessment of future inventory
requirements.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
At December 31, 1995, 1994,1996 and 1993,1995 the Company's allowanceallowances for inventory
obsolescence waswere $2,357,000 and $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, 1996 $1,385 $1,008 $ 36 $2,357
Year Ended December 31, 1995 $1,078 $ 312 $ 5 $ 1,385$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 1920 Years
Machinery and equipment 3 - 73-7 Years
Office furniture and fixtures 5 - 75-7 Years
Leasehold Life of Lease
Upon sale or retirement of property and equipment, the costs and related
accumulated depreciation are eliminated from the accounts, and any gain or loss
on such disposition is reflected in the statement of income. Expenditures for
repairs and maintenance are charged to operations as incurred.
Depreciation and amortization expense related to property and equipment was
$2,202,000, $1,862,000, $2,463,000, and $2,978,000$2,463,000 for the years ended December 31, 1996,
1995 1994 and 1993,1994, respectively.
Goodwill
Goodwill of approximately $31.19 million resulted from the acquisition
of Telos Corporation (California) in 1992 and has been assigned a useful life of
twenty years. The twenty year life considered a number of factors including the
Company's maintenance of long-term significant customer relationships 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 costcash flow (excluding goodwill
amortization, interest expense, and non-recurring charges) using a discount rate
reflecting the Company's cost of funds. In addition, the Company may assess the
net carrying amount of goodwill using internal and/or independent valuations of
the Company.
Accumulated amortization of goodwill for Telos Corporation (California) at
December 31, 1996 and 1995 was $7,055,000 and 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.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Income Taxes
The Company has adoptedaccounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under this asset
and liability method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences of temporary differences and income tax
credits. Deferred tax assets and liabilities are measured by applying enacted
statutory tax rates, that are applicable to the future years in which deferred
tax assets or liabilities are expected to be settled or realized, to the
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. Any change in tax rates on deferred tax
assets and liabilities is recognized in net income in the period in which the
tax rate change is enacted. The Company provides a valuation allowance that
reduces deferred tax assets when it is "more likely than not" that portions of
the deferred tax assets will not be realized.
401(k) Retirement Savings And Profit Sharing Plan
The Company sponsors a defined contribution employee savings plan (the
"Plan") under which substantially all full-time employees are eligible to
participate. The Company matches one-half of voluntary participant contributions
to the Plan up to a maximum Company contribution of 3% of a participant's
salary. Additionally, the Company, on a discretionary basis, has contributedmay contribute 1%
of all eligible employee wages to the Plan regardless of whether the employee
elected to participate in the Plan. This discretionary contribution was not made
in 1996. Total Company contributions to the Plan for 1996, 1995 and 1994 were
$1,679,000, $2,397,000, and $2,517,000, respectively. 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 revenue and gross revenuemargin as compared to
current revenue and gross revenues.margin.
Unamortized software costs at December 31, 1996 and 1995 were $1.5
million and 1994 were $1.2 million, and $649,000, respectively. Amortization expense associated with
these capitalized software costs was $351,000, $80,000 in 1995 and zero during 1994.
26
Duringin 1996, 1995,
and 1994, respectively.
During 1996, 1995, and 1994, respectively, the Company incurred $1.2
million, $1.4 million, and $1.9 million in research and development costs,
respectively. 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. (See
Note 2).
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 2. Changes in Company Ownership
In September 1993,Discontinued Operations
On December 27, 1996, 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 $12,000,000substantially all of the Company
securities which they previously held, excepting only $1,825,000 in debt
evidenced byassets
of its consulting division, Telos Consulting Services (TCS), to COMSYS Technical
Services, Inc., a Series A senior subordinated note issued bysubsidiary of COREStaff, Inc. for approximately $31.6 million.
The resulting gain from the Company which
Cottonwood retained (retired in July 1994).
27
In connection withsale of TCS of $11.5 million included a write-off of
$6.9 million of goodwill allocated to the Settlement Agreement, Mr. Knoll resignedTCS operations.
The sale of Telos Consulting Services has been treated as a Company directordiscontinued
operation in accordance with APB Opinion Number 30 ("APB 30"). Pursuant to APB
30, the revenue, costs and officer andexpenses of TCS have been excluded from all other posts held with the Company and
entered into an agreement prohibiting Mr. Knoll from acquiring any interesttheir
respective captions in the Company's publicly-held 12% Cumulative Exchangeable Redeemable Preferred
Stock. Additionally, underconsolidated statements of income and the
termsnet results of these operations have been reported separately as "Income (loss)
from discontinued operations." Included in the results of the Settlement Agreement, Mr. Knolldiscontinued
operations is allocated interest expense of $1,475,000, $1,106,000 and
$1,028,000 for 1996, 1995, and 1994, respectively. Interest has been retained as a consultantallocated
based on the net assets of the discontinued operations in relation to the
CompanyCompany's consolidated net assets plus non-specific debt. Additionally, goodwill
amortization of $418,000, $420,000 and $477,000 for a period of four years at an
annual rate of $300,000. The parties also agreed to a schedule regarding1996, 1995 and 1994,
respectively, has been included in the payment by the Company of $450,000 in deferred fees owed to Mr. Knoll and these
fees were paid in 1995.
Under the termsresults of the Settlement Agreement the Company incurred
$3,174,000discontinued operations.
TCS had revenue 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,$33.1 million, $27.1 million, and $24.4 million for
1996, 1995 the Company has paid
$2,652,000 related to the costs incurred under the Settlement Agreement.and 1994, respectively.
Note 3. Revenue and Accounts Receivable
Revenue resulting from contracts and subcontracts with Federal,federal, state,
and local governments accounted for 86.4%, 84.8% and 88.6%, and 92.2% of total revenue in
the years ended December 31, 1996, 1995 1994 and 1993,1994, respectively. As the Company's
primary customer is the Federal Government,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
December 31,
------------
1996 1995
---- ----
Billed accounts receivable $40,225 $30,286
------ ------
Amounts billable upon acceptance by customer 10,370 6,900
Amounts currently billable 1,879 7,650
------ ------
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)
----- -----
Total unbilled accounts receivable 12,249 14,550
------ ------
Allowance for doubtful accounts (925) (724)
------ ------
$51,549 $44,112 $40,345
====== ======
The provision for doubtful accounts was $694,000, $103,000, $(319,000), and
$1,243,000$(319,000) for the years ended December 31, 1996, 1995 1994 and 1993,1994, respectively.
Reductions to the allowance were primarily due to account receivable write-offs
and other adjustments.
28
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 4. Income Taxes
The provision (benefit) for income taxes include the following (in
thousands):
For The Year Ended December 31,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993
---- ---- ----
Current (benefit) provision
Federal $(421) $ -- $(3,017)
$ 1,833
State -- 75 (406)
539
--- ------ --------- -----
Total current (421) 75 (3,423)
2,372
--- -- ----- -------
Deferred (benefit) provision
Federal (4,527) -- 1,865 (448)1,881
State (791) -- 275 (52)
---329
----- --------- ----
Total deferred (5,318) -- 2,140 (500)
---2,210
------ --------- -----
Total (benefit) provision (benefit) $ 75 $(1,283) $ 1,872
===$(5,739) $75 $(1,213)
====== == ===== =======
The provisions for income taxes vary from the amount of income taxes
determined by applying the federal income tax statutory rate to the income or
loss before income taxes. The reconciliation of these differences is as follows:
For the Year Ended December 31,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993
---- ---- ----
Computed expected tax
provision (benefit) (34.0)% 34.0% (34.0%) 34.0%(34.0)%
Goodwill amortization 74.4% 7.9% 49.9%2.2 99.4% 7.0%
State income taxes, net of
federal tax benefit (5.9)% 5.9% (5.9%) 3.9%(5.9)%
Change in valuation allowance
of deferred tax assets (112.4)0.2% (136.2)% (8.6%) (16.4%)(7.1)%
Limitation of net operating loss
carryback -- 26.8% -- 26.1%
Other 5.0% 4.4% 5.9%0.6% 8.1% 4.7%
--- --- ----
---- ----
6.9% (9.4)(36.9)% 77.3%11.2% ( 9.2)%
====== ==== ===== ====
29
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
19951996 and 19941995 are as follows (in thousands):
As of December 31,
-----------------------------------------------------
1996 1995 1994
---- ----
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ 176195 $ 320176
Inventory valuation allowance and
amortization 1,091 1,500 3,033
Accrued liabilities not currently
deductible 716 1,412 2,742
Accrued compensation 1,425 2,486 2,999
Deferred office rents and accrued
sublease liabilities 633 498 815
Property and equipment, principally due
to differences in depreciation method 1,655 1,472
850
Net operationsoperating loss carryforward 2,272 3,922 3,398
Alternative minimum tax credit carryforwardscarryforward 573 994
558
---- ---------- ------
Total gross deferred tax assets 8,560 12,460 14,715
Less valuation allowance ( 8,155) (12,350)
------ ------(4,702) (8,155)
----- -----
Net deferred tax assets 3,858 4,305
2,365
====== ----------- -----
Deferred tax liabilities:
Unbilled revenue, deferred for tax purposes (747) (1,166)
(1,232)
Other -- (54)
(101)
----------- -----
Total deferred tax liabilities (747) (1,220) (1,333)
----- -----
Net deferred tax assets $3,111 $3,085
$ 1,032
===== ===========
The net change in the valuation allowance was a decrease of $3,453,000
and $4,195,000 for 1996 and 1995, and an increase of $2,314,000 for 1994.respectively. Included in the change in the
valuation allowance were decreases of approximately $926,000 and $1,391,000 for
1996 and $720,000 for
1995, and 1994, respectively, related to the reversal of temporary differences
acquired from Telos Corporation.Corporation (California). The reversals of the temporary
differences related to the 1992 Telos Corporation acquisition reduce goodwill.
The total tax benefits of future deductible temporary differences acquired in
connection with the Telos Corporation acquisition were $6,097,000 at January 14,
1992. As of December 31, 1995, $1,549,0001996, $623,000 of tax benefits remain and will reverse
in future years.
For the year ended December 31, 1995, for Federal income tax purposes,1996, the Company generated a net operating losstaxable
income of $3,872,000$8,197,000 which increaseswas offset by the $13,886,000 net operating loss
available for carryforward to $9,819,000regular federal income tax purposes, resulting in $5,689,000 net
operating loss available to offset future regular taxable income. Included in
the $8,197,000 taxable income was a $25,000,000 taxable gain from the sale of
the TCS division. Additionally, $8,181,000$3,135,000 of alternative minimum tax net
operating loss carryforward is available to offset future alternative minimum
taxable income. The net operating loss carryforward will begin expiring in the
year 2011. Additionally, theThe Company also has $994,000$573,000 of alternative minimum tax credits
available to be carried forward indefinitely to reduce future regular tax
liabilities.
During 1995 the Company settled an Internal Revenue Service audit for
the years 1987 through 1991. The audit resulted in the disallowance of certain
costs that the Company had previously claimed, thereby reducingclaimed. In 1996, due to tax legislation
enacted in 1996 which allowed the Company's
net operating loss carryforward by $1.3 million. Accordingly,deduction of certain costs previously
disallowed during the audit, the Company reduced its deferredfiled amended returns claiming refunds
of taxes previously paid and recorded a tax asset and the related valuation allowance.
30
benefit of $421,000.
At December 31, 1995,1996, 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
profitabilitycertainty, and its backlog growth, theon certain tax planning strategies that
would result in taxable income. The Company believes that it is more likely than
not that the Company will realize the net deferred tax asset recorded.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 5. Debt Obligations
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, 1995,1996, the Company has a $45 million Senior Revolving
Credit Facility (the "Facility") with its bank which expires on July 1, 19961997 and
has an outstanding balance of $32.3$15.4 million. Borrowings under the facility are
collateralized by certain assets of the Company (primarily accounts receivable
and inventory), and the amount of borrowings fluctuate based on the underlying
asset borrowing base as well as on the Company's working capital requirements.
The Facility bears interest at 1.5% over the bank's base rate or 10.00%9.75% at
December 31, 1995.1996. The weighted average interest rate on the outstanding
borrowings under the facility was 10.45% for the year ended December 31, 1996
compared with 9.32% for the year ended December 31, 1995
compared with 8.60% for the year ended December 31, 1994.1995. At December 31, 1995,1996,
the Company had $7,200,000approximately $24 million 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, 1995,1996, the Company's bank waived the covenant violations andhas 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, 1997.2000.
Senior Subordinated Notes
At December 31, 19951996 the Company had a $675,000 Senior Subordinated
Note, Series A with a balance of $631,000$651,000 outstanding with Porter.John R. Porter, the
Company's principal common shareholder. The Note had an interest rate per annum
of 11.875% from January 1 through January 14, 1995, then increased to 14% per
annum from January 15, 1995 through January 14, 1997, and increases to 17%
thereafter. Interest is payable in semi-annual installments on June 30 and
December 31 of each year. The note is collateralized by certain assets of the
Company. The note was issued in 1992 and matures on January 14, 2002. On June 8,The
Company retired this note in March 1997.
In 1995 the Company entered intoretired the Series B-1 an agreement withB-2 Senior Subordinated
Notes and related accrued interest and fees for $6.5 million. The funds to pay
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 UBSnoteholder, 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 thesecertain shareholders' deposits of $7 million held with the
Company's bank.bank which the Company had used for additional borrowing capacity. The
Notes are classified as either Series B or Series C. Series B Notes, which total
$6.5 million and replace the retired Senior Subordinated Notes,
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 expensesexpense
will only be recorded after occurrence of a triggering event. However,At December 31,
1996, the interest portionprepayment premium that would be due upon a triggering event is
$2,483,000.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
enterWorks.com, Inc., Subordinated Notes
During 1996, the Company completed a private financing whereby
$3,277,960 of 8% subordinated debt of enterWorks, a wholly-owned subsidiary of
the notes is treated asCompany, was issued. Investors included certain Board of Director members,
certain members of Company management and certain shareholders of the Company.
The subordinated debt has a five year maturity with interest payable
semi-annually beginning January 1, 1998. In connection with the debt, the
Company issued 2,048,725 of warrants to purchase shares of enterWorks common
stock. The warrants have an exercise price of one dollar and an exercise period
expense.of ten years. The Company has assigned a value to the warrants of $921,926 which
has been included in capital in excess of par at December 31, 1996.
Transaction Costs
In 1994, the Company attempted to recapitalize its balance sheet and
refinance its existing debt. These transactions were not completed and
accordingly, the Company recorded $4,205,000 of non-operating expenses for the
cost of the failed transactions in December 1994. Included in the above amount
are certain provisions for settlement with parties involved in the failed
financing transaction. The Company has paid $2.9 million of theall costs associated with this
transaction as of December 31, 1995.1996.
Note 6. Redeemable Preferred Stocks
Senior Redeemable Preferred Stock
The components of the senior redeemable preferred stock are Series A-1
and Series A-2 redeemable preferred stock each with $.01 par value and 1,250 and
1,750 shares authorized, issued and outstanding, respectively. Through June 30,
1995, the Series A-1 and Series A-2 carried a cumulative per annum dividend rate
of 9% of their liquidation value of $1,000 per share. From July 1, 1995 through
June 30, 1997, the Series A-1 and A-2 each carry a cumulative dividend rate
equal to 11.125%, and increases again to 14.125% per annum thereafter. The
liquidation preference of the preferred stock is the face amount of the Series
A-1 and A-2 Stock ($1,000 per share), plus all accrued and unpaid dividends. The
Company is required to redeem all of the outstanding shares of the stock on
December 31, 2001, subject to the legal availability of funds. The Series A-1
and A-2 Preferred Stock is senior to all other present and future equity of the
Company. The Series A-1 is senior to the Series A-2. At December 31, 19951996 and
19941995 undeclared, unpaid dividends relating to Series A-1 and A-2 Preferred Stock
totaled $1,494,000$1,828,000 and $1,192,000,$1,494,000, respectively, and have been accrued and are
included in the Series A-1 and A-2 redeemable preferred stock balance. Mandatory
redemptions are required from excess cash flows, as defined in the stock
agreements. Through December 31, 1995,1996, there has been no available cash flow
permitting mandatory redemption.
Class B Redeemable Preferred Stock
The Class B Redeemable Preferred Stock has a $.01 par value, with 7,500
shares authorized, issued and outstanding. Through June 30, 1995, the Class B
Redeemable Preferred Stock carried a cumulative per annum dividend rate of 9% of
its liquidation value of $1,000 per share. From July 1, 1995 through June 30,
1997, the Class B Redeemable Preferred Stock has a cumulative dividend rate per
annum equal to 11.125% and increases to 14.125% per annum 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, 19951996 and 19941995
undeclared, unpaid dividends relating to the Class B Redeemable Preferred Stock
totaled $2,752,000$3,587,000 and $1,997,000,$2,752,000, respectively, and have been accrued and are
included in the Class B Redeemable Preferred Stock balance.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Redemption of the stock may occur after payment in full of the
principal and interest amount due on the senior subordinated notes, and the
redemption of the Series A-1 and A-2 Preferred Stock. Mandatory redemptions are
required from excess cash flows, as defined in the stock agreements. Through
December 31, 1995,1996, there has been no available cash flow permitting mandatory
redemption.
12% Cumulative Exchangeable Redeemable Preferred Stock
The Company initially issued 2,858,723 shares of 12% Cumulative
Exchangeable Redeemable Preferred Stock (the "Public Preferred Stock"), par
value $.01 per share, pursuant to the acquisition of the Company during fiscal
year 1990. The Public Preferred Stock was recorded at fair value on the date of
original issue, November 21, 1989, and the Company is making periodic accretions
under the interest method of the excess of the redemption value over the
recorded value. Accretion for the years ended December 31, 1996 and 1995 was
$1,270,000 and 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 dividendcash dividends payable since December 1, 1995, the Company
has accrued $2,157,000 of dividends using a cash basis. All future dividend accruals will be
on a cash basis.$6,471,000.
The Company has not declared or paid dividends since 1991, due to
restrictions and ambiguities relating to the payment of dividends contained
within its charter, its working capital facility agreement, and under Maryland
law.
33
Note 7. Stockholders' Investment and Stock Options
Common Stock
At December 31, 19951996 and 1994,1995, common stock consists of 50,000,000
shares authorized and 23,076,753 shares issued and outstanding of Class A common
stock; and 5,000,000 shares authorized and 4,037,628 shares issued and
outstanding of Class B common stock. The common stock has no par value and an
aggregate capital value for all shares of $77,500.
The relative rights, preferences, and limitations of the Class A common
stock and the Class B common stock are in all respects identical. The holders of
the common stock have one vote for each share of common stock held. Subject to
the prior rights of the Public Preferred Stock or any series of the Series A
preferred stock, holders of Class A and the Class B common stock are entitled to
receive such dividends as may be declared.
Stock Warrants
The Company issued the Class B Preferred Stock shareholder common stock
warrants to purchase up to 3,150,468 shares of Class A common stock of the
Company in 1992. The stock warrant was valued at $1,109,000 and such amount was
shown as an increase in Capital in Excess of Par. The warrant was initially
exercisable to purchase up to 1,181,425 shares at any time. The warrant
increased by 656,348 shares on June 30, 1993 and July 1, 1994 and by 656,347
shares on July 1, 1995. Through December 31, 1995,1996, 1,837,773 shares of Class A
Common Stock has been purchased under the warrant. The price per share at which
shares have been purchased and are purchasable upon the exercise of the warrant
is $.0025.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
In 1994, Mr. John Porter, the Company's majority common stock
shareholder, deposited $3 million with the Company's bank to provide the Company
with increased borrowing capability under its senior credit facility (see Note
5). In exchange, Porter was issued 500,000 shares of Class A common stock for
which the Company recorded additional interest expense of $410,000. The Company
also granted Porter a warrant to acquire 7,228,916 shares of the Company's Class
A common stock at a purchase price of $.83 per share which approximated the
estimated market value of the Company's common stock at the issuance date. The
warrant is fully exercisable and has a term of ten years from the date of issue.
34
Stock Options
Long-Term Incentive Compensation Plans
The Company'sCompany has granted stock options to certain employees of the
Company under three plans. The Long-Term Incentive Compensation Plan (the "Stockwas adopted
in 1990 ("1990 Stock Option Plan") providesand had option grants under it through 1993.
In 1993, stock option plan agreements were reached with certain employees. In
1996, the Board of Directors approved and the shareholders ratified the 1996
Stock Option Plan. The Company also approved an enterWorks stock option plan
during 1996.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. SFAS No. 123 "Accounting for Stock-Based
Compensation" was issued in late 1995 and introduced a fair value based method
of accounting for stock-based compensation. While the issuanceexpense recognition
provision of both incentive and non statutory stock
options.SFAS 123 is optional, pro-forma disclosure of the effect on net
income as if the Company had adopted the cost measurement aspects of SFAS 123
are presented below.
1990 Stock Option Plan
Under the terms of the 1990 Stock Option Plan, 2,168,215 shares of the
Company's Class A common stock are available for issuance under options granted
by the Plan Administrator, who is appointed by the Board of Directors, to key
employees, including officers and directors. The option price of $1.42 per
share, determined by the Board of Directors, is not less than the fair market
value at the date of the grant and the options are generally exercisable over a
four year period. Additional information as to options is as follows (amounts in
thousands, except per share data):
Options
-----------------------------------------
Options
Option price
Outstanding per share
---------------------------------------
Balance, December 31, 1993 683 $1.42
Granted -- --
Exercised -- --
Canceled (57) 1.42
----- ----
Balance, December 31, 1994 626 1.42
Granted -- --
Exercised -- --
Canceled (28) 1.42
----- ----
Balance, December 31, 1995 598 1.42
Granted -- --
Exercised -- --
Canceled (13) 1.42
--- ----
Balance, December 31, 1996 585 $1.42
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
1996 Stock Option Plan
The 1996 Stock Option Plan allows for the award of up to 6,644,974
shares of common stock at an exercise price Outstanding per share
----------- ----------
Balance,of not lower than fair market value.
Vesting of the stock options for key employees is based both upon the passage of
time and certain key events occurring including an initial public offering or a
change in control. Vesting for options granted to employees is based upon the
passage of time, generally four years. The stock option may be exercised over a
ten year period subject to the vesting requirements.
During 1996, the Company granted 4,439,265 of stock options at a
weighted average exercise price of $.95 a share. At December 31, 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 $1.421996, 887,853
stock options were exercisable.
Had the Company recorded compensation cost consistent with SFAS 123
methodology, pro forma net income for 1996 would have been $2,076,000.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
Executed dividend yield 0%
Expected stock price volatility 0%
Risk free interest rate 6.66%
Expected life of options 6 years
Other Option Plans
In 1993, an agreement wasstock option plan agreements were reached to provide Mr. BeninatiJohn
Wood, CEO and President, and Mr. WoodJoseph Beninati, former Chairman, with an optionoptions
to individuallyeach 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 agreementagreements 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 Marchoption. Mr. Beninati's agreement
was canceled in 1996 and the Board of Directors approved, subject to ratification
byshares now available will be administered under the
voting common stockholders, twosame terms as the 1996 stock option plansplan.
1996 enterWorks Option Plan
enterWorks, a wholly-owned subsidiary, implemented an option plan that
allows for certain key
executives and for a larger employee group. Under the plans, a totalaward of 6,644,974up to 5,000,000 shares of common stock may be awarded at an exercise
price of not lower than fair market value with vestingvalue. Vesting of the stock options for key
employees is based both upon the passage of time and certain key events
occurring including an initial public offering or a change in control. Vesting
for options granted to employees is based upon the passage of time, and/or
certain significant events.
35generally
four years. The stock option may be exercised over a ten year period subject to
the vesting requirements.
During 1996, the Company granted 2,694,000 of stock options at exercise
prices of $.12 and $.77 a share. At December 31, 1996, 583,800 stock options
were exercisable.
Had the Company recorded compensation cost consistent with SFAS 123
methodology, net income would not have materially changed.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
Executed dividend yield 0%
Expected stock price volatility 0%
Risk free interest rate 6.73%
Expected life of options 6 years
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 8. Agreement with Sapiens International
In 1993, the Company entered into a series of agreements (the "Sapiens
Agreements") with Sapiens, the developers of certain commercial user interface
software. The Sapiens Agreements gave the Companysoftware, for certain exclusive marketing and distribution rights to distribute
and integrateon 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.software. In 1994, the Company alsorestructured these agreements and
recorded a provision of approximately $1.4 million to fully write-off the
remaining asset value of the Systems Software license based on a reevaluation of
its business plans.
Note 9. Commitments and Contingencies
Leases
The Company leases office space and equipment under non-cancelable
operating and capital leases with variable expiration dates, some of which
contain renewal options.
AtIn 1996, the Company entered into a twenty year capital lease with
annual payments of $1,447,000 commencing March 1, 1996 for a building that
serves as its corporate headquarters. The building provides significant
additional manufacturing and integration space. The Company has accounted for
this transaction as a capital lease and has accordingly recorded assets and a
corresponding liability of approximately $12.3 million. Under the terms of the
lease, the landlord furnished the Company with $1.3 million to fund tenant
improvements and other building costs of which the Company has utilized
approximately $1,069,000 for such purposes as of December 31, 1995,1996 with the
remaining balance of $231,000 recorded as restricted cash. The Company's move to
its new facilities was substantially completed in July 1996. The Company's
former headquarters facility was leased with a lease expiration date of March
31, 1997. In 1996, the Company recorded $781,000 of additional expense for the
remaining lease obligation of its former headquarters facility.
The Company also has certain equipment leases that are recorded as
capital leases. Such equipment totals approximately $600,000. The following is a
schedule by years of future minimum rent payments under non-cancelablecapital leases together with
the present value of the net minimum lease payments as of December 31, 1996 (in
thousands):
Real
Estate Equipment Total
1997 $1,447 $215 $1,662
1998 1,447 197 1,644
1999 1,447 132 1,579
2000 1,447 99 1,546
2001 1,447 44 1,491
Remainder 20,499 -- 20,499
------ --- ------
Total minimum obligations 27,734 687 28,421
Less interest 15,404 123 15,527
------ --- ------
Present value of net
minimum obligations 12,330 564 12,894
Less current portion 225 132 357
------- --- ------
Long term obligations at
December 31, 1996 $12,105 $432 $12,537
Accumulated amortization for assets under capital leases at December
31, 1996 is $397,000.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Future minimum lease payments for all non-cancellable operating leases
at December 31, 1996 are as follows (in thousands):
1996 $5,486
1997 3,349$3,379
1998 2,0052,323
1999 1,4951,834
2000 254
----1,151
2001 449
-----
Total minimum lease payments 12,5899,136
Less total minimum
sublease rentals (936)
------331
---
Net minimum lease commitments $11,653payments $8,805
======
Rent expense charged to operations for 1996, 1995, and 1994 totaled
$4,804,000, $4,349,000, 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 thatDuring
1996, the Company be held liable
forentered into a settlement agreement with Rosecliff and
recorded an additional $355,000 of non-operating expense to fully record the
paymentprovisions of Rosecliff's expenses in the amount of $1.1 million. Discovery
is ongoing assettlement. At December 31, 1996 all amounts related 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.settlement were fully paid.
The Company is a party to various other lawsuits arising in the
ordinary course of business. In the opinion of management, while the results of
litigation cannot be predicted with certainty, the final outcome of such matters
will not have a materially adverse effect on the Company's consolidated
financial position or results of operations.
Note 10. Related Parties
Mr. Joseph P. Beninati and Mr. John B. Wood became employeesan employee of the Company in 1992 and currently serveserves as a Director, and
President, Chief Executive Officer and Director, respectively.
Mr. Joseph P. Beninati served as Chairman of the Board for the majority of
1994 before resigning January 5, 1995 and the1995. The Company will payis paying him $165,000
annually subject to a three year employment agreement beginningthat began in 1995. Prior to 1992 they provided consulting servicesMr.
Beninati resigned from the Board in 1996.
In 1996, the Company paid previously accrued advisory fees of $525,000 to
the Company through their firm Beninati &and Wood, Inc.
for which unpaid advisory
fees at December 31, 1995 totaled $525,000. During 1993, $132,000 in legal costs
were paid byMr. John R. Porter, 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. Portermajority common stock shareholder, has a consulting
agreement with the Company whereby he will be compensated $200,000 a year for
specified services. Mr. PorterAccordingly, the Company has not
requested payment underaccrued $200,000 at December
31, 1996 for this agreement in 1995 or 1994.agreement.
Mr. Byers, a directorDirector 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$184,300
and $121,500 for 1996 and 1995, respectively.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 11. Business Segments
In 1996, the Company reviewed and changed its organizational structure
to more efficiently support customer needs and address changing market
conditions. As a result of these organizational changes, the Company's business
segment disclosure has been modified to reflect the systems integration division
as one business segment ("Systems Integration") and the consolidation of
software and hardware support services into one business segment ("Systems and
Support Services"). The Company operateshas restated its segment disclosure information
for 1995 and 1994 consistent with its revised organization. The Company has
excluded the Consulting Group from the revenue and operating income segment
disclosures as this group was sold in three market segments: systemsDecember 1996 and services
("The Systems and Services Group"); maintenance services (the "Field Engineering
Group") and consulting services (the "Consulting Group")has been treated as a
disposal of a segment of a business under APB 30 (Note 2).
The Systems and Support Services Group consists of systems integrationsoftware and
softwaretrademark 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 providesservices and third party
computer hardware maintenance services.maintenance.
The ConsultingSystems and Integration Group provides computer consulting (primarilyhardware and
software integration services with a primary focus 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.
38network based computing.
TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
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,
1996 1995 1994
1993
------------------------------------------------------------------------------------------------------------------
Operating Revenues(1)
Systems and Support Services $142,939 $116,059 $145,433
Field Engineering 32,820 34,617 41,852
Consulting Services 27,069 24,445 23,944$103,675 $105,801 $111,357
Systems Integration 85,220 69,958 39,319
------- ------- -------------
Total Revenues $202,828 $175,121 $211,229188,895 $175,759 $150,676
======= ======= =======
Operating (Loss) Income
Systems and Support Services $6,378$(4,081) $1,955 $ (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 3,178663
Systems Integration (5,361) 3,070 (5,227)
----- ----- ------------
Total Operating (Loss) Income 6,554 $(4,189) $ 8,888$(9,442) $5,025 $(4,564)
===== ===== ======
=====
Identifiable Assets (2)
Systems and Support Services $51,410 $38,306 $ 42,526
Field Engineering 7,837 9,836 11,044
Consulting Services 4,766 4,810 4,020$58,259 $47,436 $47,343
Systems Integration 27,885 27,282 19,858
Corporate (2) 30,479 33,920 27,206
------ ------ ------(3) 23,920 7,665 7,098
-------- ----- -----
Total Consolidated Assets $94,492 $ 86,872 $84,796$110,064 $82,383 $74,299
======= ====== ======= ======
Depreciation and Amortization (4)
Systems and Support Services $1,256 $ 1,704 $ 2,046
Field Engineering 1,210 1,523 1,417
Consulting Services 57 87 85$1,919 $2,531 $3,533
Systems Integration 949 1,885 2,395
Corporate 3,223 4,153 3,5281,126 853 975
----- ------ ----------- -----
Total Depreciation
and Amortization $5,746 $7,467 $7,076$3,994 $5,269 $6,903
===== ===== =====
Capital Expenditures (5)
Systems and Support Services $575 $ 585704 $294 $ 968
Field Engineering 30 63 81
Consulting Services 60 31 72186
Systems Integration 1,087 311 463
Corporate 656 348 547
321
---- ----- ----------- -----
Total Capital Expenditures $1,013 $1,226 $1,442$2,447 $953 $1,196
===== ======== =====
(1) Revenues between segments are not material.
(2) The identifiable assets above are net of the TCS assets in 1995 and 1994 of
$12,109 and $12,573, respectively.
(3) Corporate assets are principally 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 thetheir respective industry segments due to the arbitrary naturesegments.
(4) The depreciation and amortization disclosure above is net of any allocation process.TCS
depreciation and amortization of $482, $478, and $564 for 1996, 1995 and
1994, respectively.
(5) The capital expenditure disclosure above is net of TCS capital expenditures
of $111, $60, and $30 for 1996, 1995 and 1994, respectively.
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,Ikle', Chairman of the Board
- - ---------------------------------------------
Dr. Ikl'eIkle' (age 71)72) was elected to the Company's Board of Directors on
January 31, 1994 and was elected Chairman of the Board at thein January 6, 1995
Board of Directors meeting.1995. He is
Chairman of Conservation Management Corporation and Director of the
Zurich-American Insurance Companies. Dr. Ikl'eIkle' 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'eIkle' served as Under
Secretary of Defense for Policy.
John B. Wood, Director, President and Chief Executive Officer
- - -------------------------------------------------------------
Mr. Wood (age 32)33) was elected President and Chief Executive Officer on
February 16, 1994. Mr. Wood was appointed Chief Operating Officer on October 8,
1993 after serving as Executive Vice President from May of 1992. He was elected
to the Board of Directors on May 13, 1992. Mr. Wood joined the Company on
February 13, 1992. Prior to joining the Company, Mr. Wood was a founder of
Beninati & Wood, Inc., an investment banking firm which had provided services to
the Company.
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)33), 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 Boardresigned 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.October
1996. Previously, Mr. Beninati resigned in 1995had served as the Company's Chairman from 1994 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.1995.
Dr. Stephen D. Bryen, Director
- - ------------------------------
Dr. Stephen Bryen (53)(54) was elected to the Company's Board of Directors on
January 31, 1994. He is currently President of Delta Tech, a high technology
consulting and government relations firm. Delta Tech specializes in U.S. and
foreign high technology issues. 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)50) was elected to the Board of Directors on January 31,
1994. He has been president of International Strategies Limited, a Washington,
DC international business consulting firm since November, 1993. Before that
appointment, he had served as the vice president of the Beaconsfield
Corporation, another local international business consulting firm. From 1968
until his retirement in 1989, Mr. Byers served in a variety of operational and
staff positions in the United States Air Force.
David S. Aldrich, Vice President, Corporate Development and Strategy
Mr. Aldrich (age 37) joined the Company in September 1996 as Vice
President, Corporate Development and Strategy. Prior to joining the Company, he
was a partner in the Financial Advisory Services Group - Corporate Finance at
Coopers & Lybrand LLP. Prior to joining Coopers & Lybrand LLP in 1991, Mr.
Aldrich was Senior Vice President at Dean Witter Capital Corp., the merchant
banking arm of Dean Witter Reynolds, Inc.
William L. Prieur Brownley, Vice President and General Counsel
and Secretary
- - ----------------------------------------------------------------------------
Mr. Brownley (age 39)40) joined the Company in April, 1991 and is responsible
for the management of the Company's legal affairs. For the five years prior to
joining the Company, he served as Assistant General Counsel and then as General
Counsel at Infotechnology Inc., an investment company whose holdings included
various companies in the communications industry.
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)47) joined the Company as Vice President, Human Resources,
in August, 1989. Prior to joining the Company he served as Director, Risk and
Financial Management of BDM International, a government contractor which
provides consulting services, Vice President, Human Resources of Halifax Corp. a
government contractor providing technical services and third party computer
maintenance, and as Director for the U.S. Department of Labor, Employment
Standards Administration.
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)44) joined Telos in 1979 and was appointed as President of
Field Engineering in 1987. He is responsible for all new business activities and
operations activities at 85 computer Field Service locations nationally as well
as 6 overseas locations. Previously he has held progressive positions within
Telos as a Field and Regional Manager of Operations and Vice President of
Marketing. Mr. Hester received extensive training from IBM Corporation after a
successful military commitment of nearly eight years.
Robert W. Lewis, President, enterWorks.com
Mr. Lewis (age 35) has served as the President of enterWorks since its
inception in 1996. Mr. Lewis' prior experience has been with Telos Corporation.
From 1991 to 1995, he was Director, Business Development with responsibility for
major customer development and technology integration.
Robert J. Marino, President, Telos Systems Integration and
Executive Vice - - --------------------------------------------------------------------------------
President
- - ---------
Mr. Marino (age 59)60) joined the Company in 1988 as Senior Vice President
of Sales and Marketing. In 1990, his responsibilities were expanded to include
Program Management in addition to sales and marketing. On January 1, 1994, Mr.
Marino was promoted to President of Telos Systems Integration, a position he
currently holds. Prior to joining the Company in February, 1988, Mr. Marino held
the position of Sr. Vice President of Sales and Marketing with Centel Federal
Systems and M/A-COM Information Systems, both of which are U.S.
Government contractors.
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)39) was appointed Chief Financial Officer of the Company in
1993 and Treasurer in 1994. He joined Telos Corporation (California) in 1989
where he was responsible for all financial and regulatory functions. Mr. Tellez
is a Certified Public Accountant. Prior to joining Telos Corporation, Mr. Tellez
served as a Senior Manager with Arthur Andersen & Company, a public accounting
firm.
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, 1996, 1995, 1994, and 1993,1994, of the Chief Executive Officer and four other most
highly paid executive officers during 1995.
43
1996.
SUMMARY COMPENSATION TABLE
Long-TermCompensation
---------------------Long-Term Compensation
Annual Compensation Awards Payouts
------------------- ------ -------
Name Other Restricted LTIP All
and Annual Stock Pay- Other
Principal Compen- Award(s) Options/ outs Compen-
Position Year Salary Bonus sation(1) ($) SARs(#)(2) ($) sation (2)(3)
- - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gerald D. Calhoun 1996 $165,970 $85,000 $ 6,000 -- 130,000 -- $ --
(V.P., Human Resources, 1995 $143,943 $40,000 $143,943 40,000 6,000 -- -- -- $4,603
(V.P., Human Resources,4,603
& Secretary, Telos Corp.) 1994 119,595 65,657 6,000 -- -- -- 3,520
& Secretary, Telos Corp.) 1993 105,000 63,000Mark W. Hester 1996 184,607 80,000 6,000 -- 185,000 -- -- 2,235
Mark W. Hester2,850
(President, Telos Field 1995 181,695 40,000 6,000 -- -- -- 4,992
(President, Telos FieldEngineering, V.P. 1994 164,635 40,805 6,000 -- -- -- 3,949
Engineering, V.P. 1993 161,384 130,000 -- -- -- -- 8,994
Telos Corp.)
Robert J. Marino 1996 182,310 90,000 6,000 -- 212,500 -- 4,750
(President, Telos Systems 1995 158,546 50,000 6,000 -- -- -- 6,565
(President, Telos SystemsIntegration, Senior V.P, 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 1996 188,269 145,000 15,000 -- 465,000 -- 4,750
(V.P., Treasurer, Chief 1995 166,624 50,000 6,000 -- -- -- 6,846
(V.P., Treasurer, ChiefFinancial Officer) 1994 157,014 56,000 6,000 -- -- -- 4,620
Financial Officer) 1993 129,816 149,375 -- -- -- -- 8,994
John B. Wood 1996 291,921 -- 23,000 -- 2,017,531 -- 4,750
(President, Chief 1995 234,990 325,000 24,000 -- -- -- 7,029
(President, ChiefExecutive Officer) 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
and living allowances provided to executives.
(2) Options granted are in both the Company's common stock as well as in
enterWorks.com, inc. common stock.
(3) All other compensation represents Company contributions made on behalf of
the executive officers to the Telos Corp. 401(k) Retirement Savings and
Profit Sharing Plan.
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.is set
forth below for the stock option grants in 1996.
Potential Realizable
Number of % of Value at Assumed
Securities Total Rates of Stock Price
Underlying Options/ Exercise Appreciation for
Name and Principal Options/SARS SARS or Base Expiration Option Term
Position Granted Granted Price Date 5% 10%
-------- ------- ------- ----- ---- -- ---
Gerald D. Calhoun
(V.P., Human Resources
& Secretary, Telos Corp.)
Telos 100,000 2.7% $ .95 May 2006 $ 93,000 $ 151,000
enterWorks 30,000 1.3 .12 June 2006 2,400 5,700
Mark W. Hester
(President, Telos Field
Engineering, V.P
Telos Corp.)
Telos 150,000 4.0 .95 May 2006 139,500 226,500
enterWorks 35,000 1.5 .12 June 2006 2,800 6,650
Robert J. Marino
(President, Telos Systems
Integration, Senior V.P,
Telos Corp.)
Telos 167,500 4.5 .95 May 2006 155,775 252,925
enterWorks 45,000 1.9 .12 June 2006 3,600 8,550
Lorenzo Tellez
(V.P., Treasurer, Chief
Financial Officer)
Telos 400,000 10.7 .95 May 2006 372,000 604,000
enterWorks 65,000 2.8 .12 June 2006 5,200 12,350
John B. Wood
(President, Chief
Executive Officer)
Telos 1,957,531 52.4 .95 May 2006 1,820,504 2,955,872
enterWorks 60,000 2.6 .12 June 2006 4,800 11,400
Management Stock Options
The following table shows, as to the individuals named in the Summary
Compensation table, the number of shares acquired during such period through the
exercise of options, and the number of shares subject to and value of all
unexercised options held as of December 31, 1995.1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End at FY-End (1)(2)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable Unexercisable
- - ---- ----------- -------- ------------- -------------
Gerald D. Calhoun -- -- 69,900/0 --95,900/104,000 $5,100/20,400
(V.P. Human Resources,
and Secretary, Telos Corp.)
Mark W. Hester -- -- -- --37,000/148,000 6,350/25,400
(President, Telos Field
Engineering & V.P.
Telos Corporation)
Robert J. Marino -- -- 164,900/0 --207,400/170,000 7,860/31,440
(President, Telos Systems
Integration, Senior V.P.,
Telos Corp.)
Lorenzo Tellez -- -- -- --93,000/372,000 13,250/53,000
(V.P., Treasurer,
Chief Financial Officer)
John B. Wood -- -- 700,459/0 $315,207/01,244,057/1,473,933 396,928/116,756
(President, Chief Executive
Officer)
(1) Based on an estimated fair market value of the Company's Class A common
stock of $ 0.95$1.01 per share at December 31, 1995.1996.
(2) Based on an estimated fair market value of enterWorks common stock of $0.77
per share at December 31, 1996.
Compensation of Directors
During the fiscal year ended December 31, 1995,1996, employee directors were
paid a fee of $2,000 for each Board meeting attended. Outside directors Mr.
Byers and Dr. Bryen were paid an annual fee of $25,000, and further compensated
at a rate of $750 for each meeting in excess of four meetings a year. Chairman
of the Board, Dr. Ikle', is paid $25,000 quarterly for his service on the Board.
In addition, Mr. Byers receives $5,000 per annum for his service as Proxy
Chairman. The compensation paid to the outside directors is paid pursuant to a
proxy agreement between the Company, the Defense Investigative Service and
certain of the Company shareholders.
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, 1995,1996, no directors of the Company
were awarded options.
Employment Contracts
The Company is a party to agreements with certain of its executive
officers. Mr. William Brownley, General Counsel, Mr. Gerald Calhoun, Vice
President Human Resources, Mr. Mark Hester, President of Telos Field
Engineering, Mr. Robert Marino, President of Telos Systems Integration, Mr.
Lorenzo Tellez, Chief Financial Officer, and Mr. John Wood, Chief Executive
Officer, have agreements with the Company which provide for a payment of two
year's base salary then in effect if involuntarily terminated. Accordingly, Mr.
Brownley, Calhoun, Hester, Marino, Tellez and Wood would receive, given their
present salary levels, $130,000, $130,000, $163,500, $165,000, $170,000$150,000, $158,000, $175,000, $195,000, $195,000 and
$225,000,$300,000, respectively. In addition, these executive officer'sofficers' 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, 19961997 Class
-------------- ------------------- ------------------- -----
Class A Common Stock John Porter 23,030,718 shares(A) 75.99%
Chelverton Properties Limited
63 Chester Square15 Bernes St.
London SW1W 9EA England
Class A Common Stock C3, Inc. 401(k) Plan and 3,658,536 shares 15.85%
Telos Corporation Savings Plan
c/o C3, Inc.
460 Herndon Parkway
Herndon,19886 Ashburn Road
Ashburn, Virginia 2207020147
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 88,293108,293 shares (C) 0.38%0.47%
Class A Common Stock Mark W. Hester 60,97690,976 shares 0.26%(C) 0.39%
Class A Common Stock Robert J. Marino 286,952320,452 shares (C) 1.23%1.38%
Class A Common Stock Lorenzo Tellez 152,440232,440 shares 0.66%(C) 1.00%
Class A Common Stock John B. Wood 700,4591,091,965 shares (D) 2.95%4.52%
Class A Common Stock All Officers And Directors
As A Group (8 persons) 2,058,3601,934,907 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 100047.86%
12% Cumulative Exchangeable Value Partners, Ltd. 673,317714,317 shares (G) 18.73%(F) 19.87%
Redeemable Preferred Stock 2200 Ross Avenue, Ste 4660
Dallas, TX 75201
12% Cumulative Exchangeable Fisher Ewing Partners 673,317714,317 shares (G) 18.73%(F) 19.87%
Redeemable Preferred Stock 2200 Ross Avenue, Ste 4660
Dallas, TX 75201
(A) Mr. Porter's holdings include 7,228,916 shares of Class A Common Stock
purchasable upon exercise of a warrant.
(B) Union de Banques Suisses (Luxembourg) S.A. holdings include 1,312,695
shares of Class A Common Stock purchasable upon exercise of a warrant.
(C) Messrs. Calhoun, Hester, Marino, and MarinoTellez hold options to acquire 69,90089,900,
30,000, 198,400, and 164,90080,000 shares of the Company's Class A Common Stock,
respectively, in addition to their current common stock holdings. These
shares are purchaseable upon exercise of warrant.warrant and are exercisable within
60 days of March 1, 1997.
(D) Mr. Wood owns no shares of Common Stock, however, he holds an option to
acquire 700,4591,091,965 shares of the Company's Class A Common Stock
purchasable upon exercise of options.
(E) Under the Company's stock option plan and certain stock option agreements,
all officers and directors as a group hold options to acquire 1,655,7181,532,265
shares of Class A Common Stock exercisable within 60 days after March 1,
1996.1997.
(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 673,317714,317 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 employeesan employee of the Company in 1992 and currently serveserves as a Director, and
President, Chief Executive Officer and Director, respectively.
Mr. Joseph P. Beninati served as Chairman of the Board for the majority of
1994 before resigning January 5, 1995 and the1995. The Company will payis paying him $165,000
annually subject to a three year employment agreement beginningthat began in 1995. Prior to 1992 they provided consulting servicesMr.
Beninati resigned from the Board in 1996.
In 1996, the Company paid previously accrued advisory fees of $525,000 to
the Company through their firm Beninati &and Wood, Inc.
for which unpaid advisory
fees at December 31, 1995 totaled $525,000. During 1993, $132,000 in legal costs
were paid byMr. John R. Porter, 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. Portermajority common shareholder, has a consulting
agreement with the Company whereby he will be compensated $200,000 a year for
specified services. Mr. PorterAccordingly, the Company has not
requested payment underaccrued $200,000 at December
31, 1996 for this agreement in 1995 or 1994.agreement.
Mr. Byers, a directorDirector 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 compensatedreceives $8,000 pera
month for his services, as well asand receives an additional $500 per day for overseas
travel undertaken on behalf of the Company. In 1995, Mr. Byers was compensated $121,500.
49$184,300
and $121,500 for 1996 and 1995, respectively.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
All financial statements of the registrant as set forth under Item 8
of this report on Form 10-K.
(a) 2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is included in the consolidated financial
statements or notes thereto.
(a) 3. Exhibits:
Exhibits marked with (1*) are incorporated by reference to the Company's
Registration Statement No. 2-84171 filed June 2, 1983. 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
copyacopy 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,19886 Ashburn Road, Ashburn, Virginia 22070-5201.20147-2358.
2.6 Stock Purchase Agreement dated as of January 14, 1992, by and among
C3, Inc., Telos Corporation and Contel Federal Systems, Inc.
(Incorporated by reference to C3, Inc. Form 8-K filed January 29,
1992)
3.1 (1*) Articles of Amendment and Restatement of C3, Inc.
3.2 (1*) Articles of Amendment of C3, Inc. dated August 31, 1981.
3.3 (3*) Articles supplementary of C3, Inc. dated May 31, 1984.
3.4 (4*) Articles of Amendment of C3, Inc. dated August 18, 1988.
3.5 Articles of Amendment and Restatement Supplementary to the Articles of
Incorporation dated August 3, 1990. (Incorporated by reference to C3,
Inc. 10-Q for the quarter ended June 30, 1990)
3.6 Restated Bylaws of C3, Inc. (Incorporated by reference to C3, Inc.
10-Q for the quarter ended December 31, 1990)
3.7 Articles of Amendment of C3, Inc. dated April 13, 1995
4.1 Form of Indenture between the Registrant and Bankers Trust Company, as
Trustee, relating to the 12% Junior Subordinated Debentures Due 2009.
(Incorporated herein by reference to C3's Registration Statement on
Form S-4 filed October 20, 1989)
4.3 Form of the terms of the 12% Cumulative Exchangeable Redeemable
Preferred Stock of the Registrant. (Incorporated herein by reference
to C3's 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,Management, Ltd.
10.67 Series C Senior Subordinated Unsecured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and North
Atlantic Smaller Companies Investment Trust, PLC
10.68 Series C Senior Subordinated Unsecured Note due October 1, 2000 as of
October 13, 1995 between Telos Corporation (Maryland) and Mr. John
R.C. Porter
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.
10.74 1996 Stock Option Plan
10.75 None
10.76 Sixteenth Amendment to Credit Facility and Tenth Amended and Restated
Promissory Note
10.77 enterWorks.com 1996 Stock Option Plan
10.78 Form of Series A Senior Subordinated Unsecured Note
10.79 Form of enterWorks.com, inc. Capital Stock Purchase Series A Warrant
10.80 Asset Purchase Agreement
10.81 Amendment No. 1 to Asset Purchase Agreement
21 Schedule of Subsidiaries.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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
-----------------------------28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of Telos Corporation and in
the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Fred Charles 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, 1996Signature Title Date
/s/ Fred Charles Ikle' Chairman of the March 28, 1997
- - -----------------------
Fred Charles Ikle' Board of Directors
/s/ John B. Wood President, Chief Executive
- - --------------------------
John B. Wood Officer & Director March 28, 1997
(Principal Executive Officer)
/s/ Stephen D. Bryen Director March 28, 1997
- - ------------------------
Stephen D. Bryen
/s/ Norman P. Byers Director March 28, 1997
- - ------------------------
Norman P. Byers
/s/ Lorenzo Tellez Chief Financial Officer March 28, 1997
- - ------------------------
Lorenzo Tellez (Principal Financial Officer
& Principal Accounting Officer)
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