TELOS CORP 10-Q Summary: Period Ended September 30, 1997
Business Context and Reporting Period
This Form 10-Q covers the quarterly and nine-month periods ended September 30, 1997, for Telos Corporation, a provider of systems integration and support services. The company operates through two primary segments: Systems and Support Services (including the enterWorks subsidiary) and Systems Integration. As of November 13, 1997, the company had no public market for its common stock. The company sold its consulting division (TCS) in December 1996, which is reported as a discontinued operation.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 1997 | 9 Months Ended Sep 30, 1997 |
|---|---|---|
| Total Sales | $68,001 | $180,435 |
| Operating Income | $1,963 | $5,410 |
| Net Income (Loss) | $77 | $(96) |
| Gross Margin | 12.6% | 14.3% |
| Cash and Equivalents | $424 | $424 (Ending Balance) |
| Total Debt | $65,086 | $65,086 (Sep 30, 1997) |
| Operating Cash Flow | N/A | $(18,147) |
Debt Composition (Sep 30, 1997): Senior credit facility ($36.0M), Subordinated notes ($16.9M), and Capital lease obligations ($12.2M).
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 38.9% ($19.1M) for the quarter and 35.7% ($47.5M) for the nine months compared to 1996. This was driven by new contracts in Systems Integration (JRISS and U.S. Courts) and increased software support revenue.
- Profitability Turnaround: The company moved from an operating loss of $1.5M in Q3 1996 to an operating income of $1.96M in Q3 1997. For the nine months, operating income improved from a loss of $5.0M to a profit of $5.4M.
- Expense Management: Selling, General, and Administrative (SG&A) expenses decreased as a percentage of sales from 15.2% to 9.4% in Q3, attributed to cost reductions and branch consolidations implemented in late 1996.
- Cash Flow: Operating cash flow was negative $18.1M for the nine months, primarily due to a significant reduction in trade accounts payable and investments in the enterWorks division.
Guidance, Outlook, and Risks
Outlook: Management anticipates continued revenue growth in the fourth quarter based on current backlog and order flow. Total backlog stood at $1.2 billion, with funded backlog at $126.2 million.
Liquidity and Debt: The company is not compliant with certain covenants in its $45 million senior credit facility, though the bank has waived the noncompliance. The company relies on this facility and is evaluating financing alternatives for its enterWorks subsidiary.
Preferred Stock Dividends: The company has not declared or paid dividends on its Senior, Class B, or 12% Cumulative Exchangeable Redeemable Preferred Stock since 1991 due to legal and charter restrictions. Cumulative undeclared dividends accrued for financial reporting purposes totaled approximately $18.9 million as of September 30, 1997.
Risks: Risks include the inability to secure expanded financing if growth accelerates, the shift from fixed-price to time-and-material contracts in hardware support, and the lack of a public market for common stock.
Investor Verification Checklist
- Covenant Compliance: Verify the status of the waiver regarding the senior credit facility covenants and the risk of future default.
- Dividend Arrears: Confirm the total liability for accrued, undeclared preferred stock dividends and the legal restrictions preventing payment.
- enterWorks Viability: Assess the cash burn rate and financing strategy for the enterWorks subsidiary, which contributed to negative operating cash flow.
- Backlog Quality: Distinguish between total backlog ($1.2B) and funded backlog ($126.2M) to understand actual revenue visibility.
- Discontinued Operations: Ensure prior year comparisons exclude the Telos Consulting Services (TCS) division sold in late 1996.