TELOS CORP - 10-Q Summary (Period Ended Sep 30, 2001)
Business Context and Reporting Period
This is an unaudited Quarterly Report (Form 10-Q) for TELOS CORPORATION for the period ended September 30, 2001. The Company operates in three segments: Systems and Support Services, Products, and Xacta. Its principal market is the federal government and its agencies. The Company holds significant preferred stock obligations and has a complex debt structure including a Senior Credit Facility and Subordinated Notes.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2001 | 9 Months Ended Sep 30, 2000 |
|---|---|---|
| Total Sales | $120.2 million | $90.9 million |
| Operating Income | $3.3 million | ($0.6) million loss |
| Net Income (Loss) | $0.1 million | ($3.0) million loss |
| Gross Margin | 17.4% | 13.5% |
| Cash from Operations | $15.5 million | ($5.1) million used |
| Cash & Equivalents (End Period) | $0.2 million | $0.4 million |
| Total Debt & Obligations | $30.2 million | $43.9 million (approx) |
Debt Composition (Sep 30, 2001): Senior Credit Facility ($11.0M), Senior Subordinated Notes ($8.2M), and Capital Lease Obligations ($11.0M).
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 32.3% ($29.3M) year-over-year, driven by a $14.6M increase in the Products segment (government contracts) and growth in Xacta security products.
- Profitability Turnaround: The Company moved from an operating loss of $0.6M in the prior year to an operating income of $3.3M. This was achieved through improved gross margins (17.4% vs 13.5%) and cost controls.
- Cash Flow Improvement: Operating cash flow swung from a $5.1M outflow to a $15.5M inflow, primarily due to a $18.8M reduction in accounts receivable.
- Debt Reduction: The Company utilized operating cash to reduce borrowings under its Senior Credit Facility by $14.4M and retired $0.4M of Series C subordinated notes.
- Investment Write-off: A $0.6M write-off of an investment in a Philippine joint venture (Telos International - Filinvest) was recorded in SG&A expenses.
Outlook, Risks, and Contingencies
- Liquidity & Debt Maturity: The $25M Senior Credit Facility matures on March 1, 2002, and is classified as a current liability. The Company is exploring refinancing options. On October 20, 2001, Bank of America assigned 100% participation of this facility to Endeavour, LLC.
- Preferred Stock Defaults: The Company has not declared dividends on its Senior Redeemable Preferred Stock (accrued unpaid: $3.8M) or its 12% Cumulative Exchangeable Redeemable Preferred Stock (accrued unpaid: $28.4M) since 1991 due to legal and covenant restrictions.
- Government Dependency: A high percentage of revenue is derived from federal contracts. Risks include contract terminations, budget delays, and policy changes following the change in administration.
- Accounting Changes: The Company is evaluating the impact of new FASB standards (SFAS 141, 142, 143, 144) regarding goodwill, asset retirement, and impairment, though no material impact is currently anticipated.
- Investment in Enterworks: The Company converted to the cost method of accounting for its investment in Enterworks as its ownership interest fell below 20%.
Investor Verification Checklist
- Refinancing Status: Verify if the Senior Credit Facility ($11M outstanding) has been successfully refinanced or extended given its March 2002 maturity.
- Preferred Stock Redemption: Confirm the Company's ability to meet mandatory redemption requirements for Senior Preferred Stock due Dec 31, 2001, and April 1, 2002.
- Contract Backlog: Review the funded backlog ($36.8M) and the status of the Ft. Monmouth contract re-bid to assess future revenue visibility.
- Deferred Tax Assets: Assess the realizability of the $7.6M net deferred tax assets given the Company's history of losses and current low profitability.
- Enterworks Investment: Monitor the financial health of Enterworks, as the Company holds convertible notes and warrants but has relinquished board control.