Business Context and Reporting Period
Company: TELOS CORP
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2000
Business Overview: Telos operates in two primary segments: Systems and Support Services and Products. The company derives a high percentage of revenue from federal government contracts. As of May 1, 2000, there was no public market for the registrant's Common Stock.
Key Financial Metrics
| Metric | Q1 2000 | Q1 1999 |
|---|---|---|
| Total Sales | $32,094,000 | $38,631,000 |
| Cost of Sales | $28,093,000 | $34,176,000 |
| Gross Profit | $4,001,000 | $4,455,000 |
| Gross Margin | 12.5% | 11.5% |
| Operating Loss | $(298,000) | $(58,000) |
| Net Loss | $(928,000) | $(4,122,000) |
| Cash Flow from Operations | $(6,419,000) | $15,037,000 |
| Cash and Equivalents (End of Period) | $150,000 | $387,000 |
| Total Debt & Obligations | $43,044,000 | N/A |
Note: Debt includes $23.2M Senior Credit Facility, $8.5M Senior Subordinated Notes, and $11.3M Capital Lease Obligations.
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 16.9% ($6.5 million) year-over-year. This was driven by a $2.8 million drop in Systems and Support Services (due to the September 1999 sale of the TFE division) and a $3.7 million drop in Products (due to a delayed start on the Infrastructure Solutions 1 contract).
- Improved Net Loss: Net loss narrowed significantly to $0.9 million from $4.1 million in Q1 1999. The prior year included a $4.0 million "Equity in net losses of Enterworks" charge, which is no longer consolidated following the deconsolidation of Enterworks, Inc. in late 1999.
- Operating Cash Flow Reversal: Operating cash flow swung from a positive $15.0 million in Q1 1999 to a negative $6.4 million in Q1 2000, primarily due to a $5.7 million reduction in accounts payable and funding of operating losses.
- Margin Expansion: Despite lower sales, gross margin improved to 12.5% from 11.5%, attributed to a higher mix of sales from new, higher-margin business areas (information security, wireless, etc.).
Outlook, Risks, and Contingencies
- Liquidity and Covenants: The company had only $150,000 in cash at period end. While the bank has waived non-compliance, Telos was not in compliance with several covenants (leverage, net worth, fixed charge coverage) under its $35 million Senior Credit Facility as of March 31, 2000.
- Debt Obligations: Significant debt maturities are approaching, including the Senior Credit Facility (July 2001) and Senior Subordinated Notes (April 2001). A prepayment premium of $6.8 million is contingent on an IPO or refinancing.
- Preferred Stock Dividends: The company has not declared dividends on Senior Redeemable Preferred Stock or 12% Cumulative Exchangeable Redeemable Preferred Stock since 1991 due to legal and charter restrictions. Accrued undeclared dividends total approximately $21.8 million.
- Government Dependency: A high percentage of revenue is derived from federal contracts. Risks include the timing of the federal budget approval and the potential for contract termination by the government.
- Backlog: Total backlog was $229.2 million, with funded backlog at $56.8 million.
Investor Verification Checklist
- Covenant Compliance: Verify the status of the bank's waiver regarding the Senior Credit Facility covenants and the likelihood of renewal or refinancing before the July 2001 maturity.
- Cash Burn Rate: Assess the sustainability of operations given the low cash balance ($150k) and negative operating cash flow ($6.4M) for the quarter.
- Contract Start-up: Confirm the timeline for the "Infrastructure Solutions 1" contract to ensure the revenue decline in the Products segment is temporary.
- Preferred Stock Redemption: Review the legal availability of funds for the mandatory redemption of preferred stock due in 2001 and the impact of accrued dividends on equity.
- Enterworks Accounting: Confirm the valuation and status of the remaining 34.8% equity interest in Enterworks, Inc., which currently has a zero balance due to cumulative losses.