TLS

TELOS CORP 10-Q Summary: Period Ended September 30, 1995

Business Context and Reporting Period

This is an unaudited quarterly report (Form 10-Q) for Telos Corporation and its subsidiaries for the three and nine months ended September 30, 1995. The Company operates in three segments: Systems and Services (systems integration and software), Field Engineering (computer hardware maintenance), and Consulting Services. As of November 13, 1995, there was no public market for the Company's Common Stock.

Key Financial Metrics

Note: Debt figures represent the balance as of September 30, 1995 ($32.0M Senior Credit Facility + $7.1M Subordinated Notes).

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 37.7% ($15.4M) for the quarter and 13.1% ($16.8M) for the nine-month period compared to 1994. This was driven primarily by the Systems and Services Group, which saw significant increases in systems integration sales.
• Profitability Turnaround: The Company returned to profitability, reporting Net Income of $418,000 for the quarter and $520,000 for the nine months, compared to a Net Loss of $2.8M and $2.6M, respectively, in the prior year periods.
• Operating Efficiency: Operating income improved significantly due to higher sales volume and a reduction in Selling, General, and Administrative (SG&A) expenses, which decreased by approximately $1.8M for the nine-month period.
• Backlog Expansion: Total backlog surged to $1.3 billion from $328 million at year-end 1994, largely due to the award of the Small Multi-user Computer II (SMC II) contract by the U.S. Army (max value $907M). Funded backlog increased to $97 million.

Outlook, Risks, and Subsequent Events

• Liquidity Constraints: Management notes continued constraints on liquidity to fund revenue growth and bid efforts. The Company expects to address longer-term financing needs in 1996.
• Debt Refinancing (Subsequent Event): On October 13, 1995, the Company issued $14.4 million in new Senior Subordinated Notes (Series B and C) to shareholders. These notes carry interest rates of 14% to 17% and mature in 2000. They replaced $6.5 million in bridge notes and included a transfer of shareholder deposits.
• Covenant Compliance: The Company was not in compliance with financial maintenance covenants for its Senior Subordinated Notes, Series A, as of September 30, 1995, though the majority shareholder agreed to waive the non-compliance.
• Preferred Stock Dividends: Significant cumulative undeclared dividends exist on various classes of preferred stock. Accrued dividends for Series A-1/A-2 were $1.41M, Class B were $2.54M, and 12% Cumulative Exchangeable Preferred Stock accrued dividends approximated $12.9M if paid in cash (though currently accrued in stock).

Investor Verification Checklist

• Debt Maturity Wall: Verify the status of the $32.0M Senior Credit Facility, which matures July 1, 1996, and the Company's ability to refinance or extend it.
• Preferred Stock Obligations: Assess the impact of the substantial accrued dividends on preferred stock classes and the requirement to redeem shares by December 31, 2001.
• Contract Funding: Confirm the funded status of the $1.3B backlog, noting that only $97M is currently funded, with the remainder dependent on future government appropriations.
• Interest Expense Burden: Monitor the impact of high interest rates (14-17%) on the new subordinated notes issued in October 1995 on future cash flows.
• Covenant Status: Review ongoing compliance with financial covenants for all debt instruments, particularly given the recent waiver for Series A notes.