TELOS CORP 10-Q Summary: Period Ended June 30, 1997
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1997, and the six-month period ended on that date. Telos Corporation operates in two primary segments: Systems and Support Services (including enterWorks.com) and Systems Integration. The company provides hardware/software support and systems integration services, primarily to government agencies. As of August 1, 1997, the company had no public market for its common stock.
Key Financial Metrics
| Metric | 3 Months Ended 6/30/97 | 6 Months Ended 6/30/97 |
|---|---|---|
| Revenue | $58.1 million | $112.4 million |
| Operating Income | $2.5 million | $3.4 million |
| Net Income (Loss) | $0.6 million | $(0.2) million |
| Gross Margin | 16.5% | 15.4% |
| Operating Margin | 4.3% | 3.1% |
| Cash from Operations | N/A | $(16.9) million |
| Total Debt | $50.0 million | $50.0 million |
| Cash & Equivalents | $0.8 million | $0.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 32.4% ($14.2 million) for the quarter and 33.8% ($28.4 million) for the six months compared to 1996. This was driven by increased order volume in Systems Integration and new contracts in Systems and Support Services.
- Profitability Turnaround: The company returned to profitability for the quarter with $0.6 million net income, compared to a $3.0 million net loss in the prior year quarter. For the six months, the net loss narrowed significantly to $0.2 million from $6.4 million in 1996.
- Margin Expansion: Gross margins improved to 16.5% (quarter) and 15.4% (six months) from 12.6% and 11.6% in the prior year, respectively, due to better product mix and cost reduction measures.
- Cash Flow: Operating cash flow was negative $16.9 million for the six months, primarily due to a significant reduction in trade accounts payable and investment in the enterWorks subsidiary.
Outlook, Risks, and Contingencies
- Backlog: Total backlog remained stable at $1.1 billion. However, funded backlog decreased to $103 million from $115 million at year-end 1996.
- Liquidity: Cash and cash equivalents dropped to $0.8 million. The company funded operations and investing activities through increased borrowings under its $45 million senior credit facility.
- Dividend Arrears: The company has not declared or paid dividends on its preferred stock since 1991 due to legal and charter restrictions. Cumulative undeclared dividends totaled approximately $18.6 million across all preferred classes as of June 30, 1997.
- Future Financing: Management anticipates current facilities are adequate for 1997 but may require an expanded multi-bank syndication if growth exceeds expectations.
Investor Verification Checklist
- Verify the sustainability of the 32% revenue growth rate given the decline in funded backlog.
- Confirm the company's ability to service $50 million in debt with only $0.8 million in cash and negative operating cash flow.
- Assess the impact of the $18.6 million in accrued preferred dividends on future liquidity and potential refinancing terms.
- Monitor the performance of the enterWorks subsidiary, which is a significant driver of recent SG&A spending and investment.