TLS

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

Business Context and Reporting Period

This is an unaudited quarterly report for TELOS CORPORATION covering the three and nine months ended September 30, 2000. The company operates in three reportable segments: Systems and Support Services, Products, and Xacta. Significant structural changes occurred during the period, including the contribution of the Ft. Sill and DSTATS businesses to a new joint venture (Telos OK, LLC) in July 2000, resulting in a shift from consolidation to equity method accounting for those assets. Additionally, the company previously sold its Telos Field Engineering (TFE) division in September 1999.

Key Financial Metrics

Note: Debt figures include Senior Credit Facility ($17.4M), Senior Subordinated Notes ($8.5M), and Capital Lease Obligations ($11.1M).

Material Changes vs. Prior Period

• Revenue Decline: Sales for the nine months ended September 30, 2000, decreased by $46.0 million (33.6%) compared to the same period in 1999. This was driven by a $31.1 million drop in Systems and Support Services (due to the TFE sale and Ft. Sill deconsolidation) and a $19.7 million drop in Products.
• Profitability Shift: The company moved from an operating profit of $6.8 million in the first nine months of 1999 to an operating loss of $0.6 million in 2000. Gross margins declined from 14.2% to 13.5% for the nine-month period.
• Segment Performance: The Xacta segment showed growth, with sales increasing by $4.9 million year-over-year for the nine-month period, offsetting some declines in other segments.
• Accounting Changes: The sale of TFE in late 1999 resulted in a $4.7 million gain in the prior year, which is not present in the current period. The Ft. Sill business is now reported as "Equity in earnings of Telos OK" ($2.3 million for nine months) rather than consolidated revenue.

Guidance, Outlook, Risks, and Contingencies

• Liquidity and Debt Covenants: The company is not in compliance with several financial covenants (fixed charge coverage and leverage) under its $35 million Senior Credit Facility, though the bank has waived this non-compliance. The facility matures on July 1, 2001.
• Preferred Stock Dividends: The company has not declared or paid dividends on its Senior Redeemable Preferred Stock or 12% Cumulative Exchangeable Redeemable Preferred Stock since 1991 due to legal and charter restrictions. Cumulative undeclared dividends totaled approximately $27.9 million as of September 30, 2000.
• Government Contract Risk: A high percentage of revenue is derived from the Federal government. Risks include the timing of the federal budget approval and the potential for contract termination at the government's convenience.
• Backlog: Total backlog was $275.2 million as of September 30, 2000, with funded backlog at $61.3 million.
• Outlook: Management believes it will generate sufficient funds from operations or financing to service debt and fund operations for the next twelve months.

Key Facts for Investor Verification

• Covenant Compliance: Verify the status of the waiver for the Senior Credit Facility covenants and the company's ability to refinance or repay the $17.4 million facility maturing in July 2001.
• Preferred Stock Obligations: Assess the impact of the $27.9 million in accrued, undeclared preferred dividends on future cash flow and potential redemption requirements.
• Revenue Concentration: Confirm the extent of reliance on Federal government contracts and the stability of the $61.3 million funded backlog.
• Joint Venture Performance: Monitor the performance of Telos OK, LLC, which now holds the Ft. Sill and DSTATS assets, as its earnings are now equity-accounted rather than consolidated.
• Cash Burn: Review the $5.1 million cash used in operating activities for the nine-month period and the company's strategy to reverse this trend.