Business Context and Reporting Period
Company: TELOS CORP
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2003
Business Overview: Telos operates two primary continuing segments: the Products Group (government IT solutions, secure wireless, and messaging) and Xacta (enterprise risk management and security software). The company exited its Systems and Support Services segment in July 2002, reporting it as a discontinued operation. A significant portion of revenue is derived from U.S. Government contracts.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2003 |
Six Months Ended June 30, 2003 |
|---|---|---|
| Total Sales | $15,412 | $32,235 |
| Cost of Sales | $12,732 | $26,482 |
| Gross Profit | $2,680 | $5,753 |
| Gross Margin | 17.4% | 17.8% |
| Operating Loss | $(1,471) | $(2,480) |
| Net Income (Loss) | $(865) | $4,435 |
| Cash and Equivalents | $66 | $66 |
| Total Debt & Obligations | $17,900 | $17,900 |
Note: Net income for the six-month period includes a one-time gain of $10.1 million from the sale of TelosOK LLC.
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 21.2% in Q2 2003 and 16.4% in the first six months of 2003 compared to 2002. This was driven by a $4.5 million drop in the Products Group, partially offset by growth in the Xacta segment.
- Profitability Shift: While the company reported an operating loss of $1.5 million for Q2 2003, the six-month period showed a net income of $4.4 million. This reversal from a $2.8 million loss in the prior year's six-month period is almost entirely attributable to the $10.1 million gain on the sale of TelosOK LLC.
- Debt Reduction: The company reduced its Senior Credit Facility balance by approximately $4.3 million (from $6.6 million to $2.3 million) using proceeds from the TelosOK LLC sale.
- Liquidity: Cash and cash equivalents declined from $358,000 at year-end 2002 to $66,000 at June 30, 2003, despite the asset sale, due to debt repayments and operating cash usage.
Outlook, Risks, and Contingencies
- Backlog: Total backlog increased to $51.2 million at June 30, 2003, up from $33.6 million in the prior year. Funded backlog stands at $42.2 million.
- Accounting Changes: The company anticipates reclassifying its Redeemable Preferred Stock as liabilities under new FASB standards (SFAS 150) effective September 30, 2003.
- Dividend Arrears: The company has not declared dividends on its Senior Redeemable Preferred Stock or Public Preferred Stock since 1991. Accrued unpaid dividends on Senior Preferred Stock totaled $4.5 million, and Public Preferred Stock accrued dividends totaled over $32 million (cash basis).
- Key Risks:
- Government Dependence: High reliance on U.S. Government contracts exposes the company to budget delays, reprioritization due to national security events (e.g., Iraq/Afghanistan), and potential contract terminations.
- Liquidity Constraints: The company faces significant debt obligations and restricted cash flows due to dividend payment restrictions in its charter and credit facility.
- Investment Risk: The company holds a 21.5% interest in Enterworks, Inc., where the carrying value of notes has been written down to zero due to investee losses.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the Senior Credit Facility covenants, which were amended in March 2003 to reflect revised projections.
- Preferred Stock Liability: Confirm the impact of SFAS 150 on the balance sheet when Preferred Stock is reclassified as a liability in Q3 2003.
- Government Contract Stability: Assess the risk of funding delays or terminations for the Products Group's major government contracts (e.g., Census Bureau, U.S. Courts).
- Cash Runway: Evaluate the sufficiency of the $66,000 cash balance against upcoming debt maturities and accrued dividend obligations.
- Enterworks Exposure: Review the status of the Enterworks investment and the $123,000 reserve for future funding commitments.