Business Context and Reporting Period
Company: TELOS CORP
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 1997
Business Overview: Telos operates in two segments: Systems and Support Services (hardware/software support, enterWorks) and Systems Integration. In December 1996, the company sold its consulting division (Telos Consulting Services) for approximately $31.6 million, treating it as a discontinued operation.
Key Financial Metrics
| Metric | Q1 1997 | Q1 1996 |
|---|---|---|
| Total Sales | $54,345,000 | $40,163,000 |
| Operating Income | $947,000 | $(2,066,000) |
| Net Loss | $(801,000) | $(3,394,000) |
| Gross Margin | 14.2% | 10.6% |
| Cash Used in Operating Activities | $(15,826,000) | $(217,000) |
| Total Debt (Outstanding) | $48,137,000 | N/A |
| Cash and Equivalents (End of Period) | $979,000 | $2,124,000 |
Note: All amounts in thousands unless otherwise noted. Debt consists of $31.3 million in senior credit facility and $16.8 million in senior subordinated notes.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 35.3% ($14.2 million) driven primarily by the Systems Integration Group, which saw a $14.3 million increase due to higher order volume on government contracts (Small Multiuser Computer II and Immigration Naturalization Service).
- Profitability Improvement: The company moved from an operating loss of $2.1 million in Q1 1996 to an operating profit of $947,000 in Q1 1997. This was achieved through cost reductions, branch consolidation, and improved product mix margins.
- Cash Flow Deterioration: Cash used in operating activities increased significantly to $15.8 million (from $0.2 million used in 1996). This was primarily due to a significant reduction in trade accounts payable and increased investment in the enterWorks division.
- Interest Expense: Increased by $560,000 to $1.76 million due to higher subordinated debt balances and capital lease interest.
Guidance, Outlook, and Risks
- Liquidity and Debt: The company is not in compliance with certain financial covenants in its senior credit facility as of March 31, 1997, though the bank has waived this non-compliance. The facility was refinanced with a maturity extension to July 1, 2000.
- Dividend Arrears: The company has not declared or paid dividends on its Senior Redeemable Preferred Stock or 12% Cumulative Exchangeable Redeemable Preferred Stock since 1991. Cumulative undeclared dividends accrued for financial reporting purposes totaled approximately $16.1 million across all preferred classes as of March 31, 1997.
- Outlook: Management anticipates the current senior credit facility will be adequate for 1997 but is actively evaluating additional financing alternatives to fund the enterWorks subsidiary and ongoing operations.
- Backlog: Total backlog was approximately $1.2 billion. Funded backlog was $126 million, an $11 million increase from the prior quarter.
Investor Verification Checklist
- Covenant Compliance: Verify the status of the waiver regarding financial covenant non-compliance and the terms of the refinanced credit facility.
- Preferred Stock Obligations: Assess the impact of over $16 million in accrued, undeclared preferred dividends and the legal restrictions on paying them.
- Cash Burn Rate: Review the sustainability of the $15.8 million cash outflow from operations and the reliance on debt financing to fund working capital and enterWorks investments.
- Discontinued Operations: Confirm the final accounting treatment and cash proceeds from the December 1996 sale of Telos Consulting Services.