TLS

TELOS CORP - Form 10-Q Summary (Period Ended June 30, 2000)

Business Context and Reporting Period

This is an unaudited quarterly report for TELOS CORPORATION for the three and six months ended June 30, 2000. Telos operates in three reportable segments: Systems and Support Services, Products, and Xacta (e-commerce integration). The company derives a high percentage of revenue from federal government contracts. As of August 1, 2000, there was no public market for the registrant's Common Stock.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Sales for the six months ended June 30, 2000, decreased by 28.7% ($27.2 million) compared to the prior year. This was driven by an $18.7 million drop in the Products segment (due to reduced sales under a Joint Recruitive Information Support Services Blanket Purchase Agreement) and the sale of the Field Engineering division in September 1999.
• Profitability: Operating income fell from $5.5 million in the prior six-month period to $1.4 million. Net loss improved significantly from $(5.1) million to $(0.7) million, primarily due to the elimination of equity losses from the former subsidiary Enterworks, Inc., which was deconsolidated in late 1999.
• Cash Flow: Operating cash flow turned negative, using $4.4 million in the first half of 2000, compared to providing $12.5 million in the prior year. This was due to funding operating losses and reducing accounts payable.
• Debt Structure: The company retired approximately $5.8 million of Senior Subordinated Notes in exchange for Enterworks stock in late 1999. Current liabilities increased due to the reclassification of the Senior Credit Facility and Subordinated Notes as current (maturing within one year).

Outlook, Risks, and Unusual Items

• Subsequent Event (Telos OK): On July 28, 2000, the company contributed its Digital Systems Test and Training Simulators (DSTATS) and Ft. Sill government contract business to a new 50/50 joint venture, Telos OK, L.L.C. Telos received $6 million in cash and retained $2.5 million in receivables. Pro forma adjustments indicate this transaction would have reduced the six-month 2000 net loss to $(1.2) million.
• Liquidity Risks: The company has a $35 million Senior Credit Facility maturing July 1, 2001, with $22.1 million outstanding. It also has $8.5 million in Senior Subordinated Notes maturing April 1, 2001. Management believes it can service debt through ordinary operations.
• Dividend Arrears: The company has not declared dividends on its Senior Redeemable Preferred Stock or 12% Cumulative Exchangeable Redeemable Preferred Stock since 1991. Cumulative undeclared dividends totaled approximately $27.8 million as of June 30, 2000.
• Government Dependency: A significant risk factor is the reliance on federal government contracts, which are subject to budget approval timing and potential termination at the government's convenience.

Investor Verification Checklist

• Debt Maturity Wall: Verify the company's ability to refinance or repay the $22.1 million credit facility and $8.5 million subordinated notes maturing in early 2001.
• Backlog Conversion: Confirm the conversion rate of the $56.9 million funded backlog into actual revenue, given the recent sales decline.
• Telos OK Performance: Monitor the financial performance of the new Telos OK joint venture and its impact on future cash flows.
• Dividend Restrictions: Assess the impact of the $27.8 million in accrued preferred dividends on future capital flexibility and potential redemption obligations.
• Working Capital: Review the trend in accounts payable reduction and its effect on future operating cash flow.