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June 14, 2005
John B. Wood
Telos Corporation
19886 Ashburn Road
Ashburn, VA 20147
Re: Form 10-K for Fiscal Year Ended December 31, 2004
Filed April 18, 2005
File No. 001-08443
Form 10-Q for Fiscal Quarter Ended March 31, 2005
Filed May 16, 2005
File No. 001-08443
Dear Mr. Wood:
We have reviewed the above referenced filing and have the
following comments. Please note that we have limited our review
to
only your financial statements and related disclosures and do not
intend to expand our review to other portions of your document. We
may ask you to provide us with supplemental information so we may
better understand your disclosure. Please be as detailed as
necessary in your explanation. After reviewing this information,
we
may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form 10-K for the year ended December 31, 2004
Management Discussion and Analysis of Financial Condition and
Results
of Operations, page 8
Results of Continuing Operations, page 10
Years ended December 31, 2004, 2003 and 2002, page 10
Cost of sales, page 10
1. We note your disclosure that your 2003 cost of sales included a
credit of $1.1 million settlement received in July 2003, as a
result
of litigation against a former business partner. Please expand on
this litigation settlement and why you considered it appropriate
to
classify this in cost of sales.
Liquidity and Capital Resources, page 11
2. MD&A should consider enhanced analysis and explanation of the
sources and uses of cash and material changes in particular items
underlying the major captions reported in their financial
statements,
rather than recitation of the items in the cash flow statements.
Specifically explain the reasons for the significant increase in
billed accounts receivable at December 31, 2004. Discuss any
changes
in payment terms or credit terms, as applicable. Tell us how you
considered the guidance in Section IV of Release No. 34-48960
regarding your MD&A disclosures.
Consolidated Financial Statements
Consolidated Statements of Operations, page 18
3. We note in your disclosures that you have service and product
revenue. You should separately present revenue from the sales of
products and services on the face of the income statement. See
Regulation S-X, Article 5-03(b)(1) and (2). The costs relating to
each type of revenue similarly should be reported separately on
the
face of the income statement. We note similar disclosures within
your Form 10-Q filed on May 16, 2005.
Note 1. Summary of Significant Accounting Policies, page 24
Revenue Recognition, page 24
4. Your revenue recognition policy disclosures should reference
the
appropriate accounting principles. See APB No. 22, paragraph 12.
In
this regard, you should indicate the accounting literature that is
applicable to your various revenue generating arrangements. For
each
type of revenue generating activity (i.e., integration services,
products, integration, support services, software arrangements)
describe your accounting and refer to the authoritative accounting
literature you apply. Clarify whether you follow the guidance in
SOP
97-2, SAB 104, and/or EITF 00-21 for each type of activity and
explain the basis for that conclusion.
5. You indicate that you record revenues from fixed-price services
contracts using the percentage-of-completion method of accounting.
Tell us more about the nature of your service contracts and
explain
why you believe it is appropriate to use contract accounting for
those arrangements. In this regard, footnote 1 of SOP 81-1
indicates
that SOP 81-1 is not intended to apply to service transactions.
6. Your accounting policy disclosures should clearly indicate how
multiple element arrangements impact revenue recognition and how
you
apply EITF 00-21 and/or SOP 97-2 to your arrangements. In this
regard, it appears that your individual arrangements include
multiple
elements. Clearly identify the different elements included in
your
contractual arrangements, clarify how you allocate fair value to
each
element and refer to the accounting literature that supports your
accounting. If some of your arrangements have deliverables that
are
subject to the scope of more than one higher-level of literature
(e.g., SOP 81-1 or SOP 97-2) explain how your accounting is
consistent with the guidance in EITF 00-21.
7. Regarding your revenue recognition policy for `product
reselling`,
explain whether you record those revenues gross or net and refer
to
the criteria in EITF 99-19 to support your conclusions.
Financial Instruments, page 26
8. Further explain why you have not estimated the fair value of
your
subordinated debt or your redeemable preferred stock. Clarify the
nature of the unique features of these instruments and why
estimation
is not practicable.
Note 2. Investment in Enterworks, page 27
9. Please explain your accounting and income statement
classification
for the various transactions you consummated with Enterworks
during
2003. In this regard, clarify the various payments, products and
services you paid and received and how you have classified them in
your statements of operations. Refer to the accounting literature
that supports your accounting. Also, explain the reasons for the
$500,000 writedown of your investment in Enterworks International
in
2003. We note similar disclosures on page 9 of your Form 10-Q
filed
on May 16, 2005.
10. We note your 21.5% equity interest in Enterworks, Inc. as well
as
your statement that you own notes receivable from Enterworks
totaling
approximately $3.3 million. You indicate on page 27 that the
notes
receivable was reduced to zero during 2004 and 2003 as your share
of
the Enterworks losses exceeded the carrying value of the notes.
Quantify the amount of equity income/losses you recorded under APB
18
for this investment for all periods presented. Provide your
calculations under Rule 3-09 and 4-08(w) of Regulation S-X and
explain why the respective disclosures are not included in your
financial statements. Provide a similar calculation and analysis
for your investment in Enterworks International for periods prior
to
consolidating under FIN 46. We note similar disclosures on page 9
of
your Form 10-Q filed on May 16, 2005.
Note 3. Sale of Telos OK LLC, page 28
11. Explain the reasons why the deferred gain was recorded in July
2000. Explain the circumstances that required the gain to be
deferred until the Company disposed of its interest in TelosOK
LLC.
Provide a summary of the transaction that occurred in July 2000
and
explain the basis for deferral under SAB 81. We note similar
disclosures on page 16 of your Form 10-Q filed on May 16, 2005.
Note 7. Redeemable Preferred Stock, page 31
Senior Redeemable Preferred Stock, page 31
12. We understand from your disclosures that you will be required
to
redeem approximately 27% of all shares and accrued dividends
outstanding of your Senior Redeemable Preferred Stock on October
31,
2005. You further indicate that you have the intent and ability
to
refinance the Senior Redeemable Preferred Stock on a long-term
basis
by utilizing excess availability on the Facility and therefore,
you
have classified them as long-term. Explain how you considered the
guidance in paragraph 11(b) of SFAS 6. In this regard, address
how
you have determined that the terms are readily determinable since
the
amount of available borrowings fluctuates based on the underlying
asset-borrowing base. Also, tell us how you considered the
provisions of the Facility that affect your ability to pay
dividends
and how this impacts your conclusion that you have the ability to
consummate the refinancing. We note similar disclosures on page
12
of your Form 10-Q filed on May 16, 2005.
12% Cumulative Exchangeable Redeemable Preferred Stock, page 31
13. We note that for a number of reasons, you believe that the
likelihood is that you will not be able to meet the redemption
schedule set forth in the terms of the Public Preferred Stock. We
note, however, that you believe you have the ability and intent to
refinance amounts due on a short-term basis. If you truly have
the
ability and intent to refinance these amounts, explain why you
will
not be able to meet the redemption schedule. Please clarify this
apparent inconsistency. We note similar disclosures on page 12 of
your Form 10-Q filed on May 16, 2005.
14. Explain whether it is possible for you to re-finance the
portion
of the Public Preferred Stock that is redeemable in 2005. In this
regard, your disclosures suggest that you may be prohibited and/or
limited to redeeming the Public Preferred Securities due to
provisions in your Facility, Maryland law and other limitations.
Please advise. We note similar disclosures on page 12 of your
Form
10-Q filed on May 12, 2005.
15. We note that you have classified all of your Public Preferred
Stock as long-term obligations as of December 31, 2004 as you
believe
you have the intent and ability to refinance amounts due on a
short-
term basis. Tell us how you meet the requirements of paragraph 11
of
SFAS 6. In this regard, it does not appear that, before you
issued
your balance sheet, you have either (i) issued a long-term
obligation
or equity securities for the purpose of refinancing, or (ii)
entered
into a financing agreement that permits you to refinance. Please
advise. We note similar disclosures on page 12 of your Form 10-Q
filed on May 12, 2005.
16. If you are not able to classify the current portion of your
Senior Redeemable Preferred Stock or your Public Preferred Stock
as
long term following the guidance in SFAS 6, tell us if and to what
extent this classification impacts any working capital covenants
your
may be subject to.
17. We note that you have established a committee to consider
proposals and alternatives with respect to a possible
restructuring
or recapitalization of your capital. Explain to us the events
that
will occur if you have not successfully consummated such a
restructuring or recapitalization by the required redemption date,
October 2005. Address the various limitations you describe in
your
financial statements and how these may impact your ability to
redeem
according to the current redemption schedule. Explain the various
alternatives you are considering, including the failure to
consummate
a restructuring/recapitalization and how they may impact your cash
requirements over both the short and long term. Tell us how you
considered the guidance in Item 303 of Regulation S-K and Section
IV
of Release No. 34-48960 and why you have not provided this
information in MD&A. We note similar disclosures on page 13 of
your
Form 10-Q filed on May 12, 2005.
Note 8. Stockholders` Equity, Warrants, Option Plan and Employee
Benefit Plan, page 32
Stock Options, page 32
18. We note that you generally grant options under your respective
plans at the estimated fair value at the date of grant. Since no
public market exists for the common stock underlying your options,
tell us how you considered the disclosure guidance set forth in
SOP
94-6. Because the valuation of privately issued equity securities
required the use of estimates and judgments, explain why you did
not
provide disclosures about the risks and uncertainties that could
significantly affect the amounts reported in your financial
statements. Similarly address how you considered the guidance in
Section V of Release No. 34-48960 regarding these critical
accounting
estimates.
Note 10. Commitments and Contingencies, page 36
Warranties, page 37
19. Tell us more about the product warranties you provide and
explain
the basis for your accounting. Explain the nature and amount of
the
revenues you defer for a particular contractual arrangement and
explain how you determine the amount to defer. Do these revenues
relate to separately priced extended warranties, similar to those
addressed in FTB 90-1? If not, tell us how your accounting
complies
with paragraph 24 of SFAS 5.
Note 13. Summary of Selected Quarterly Financial Data
(Unaudited),
page 39
20. Explain the reasons for the significant gross profit during
the
quarter ended September 30, 2004. Also, explain the reasons for
the
significant increase in sales during the quarter ended September
30,
2003. Tell us how you considered the guidance in Item 302(a)(3)
of
Regulation S-K regarding these unusual items in the respective
periods.
Please respond to these comments within 10 business days or
tell us when you will provide us with a response. Please submit
all
correspondence and supplemental materials on EDGAR as required by
Rule 101 of Regulation S-T. You may wish to provide us with
marked
copies of any amendment to expedite our review. Please furnish a
cover letter with any amendment that keys your responses to our
comments and provides any requested information. Detailed cover
letters greatly facilitate our review. Please understand that we
may
have additional comments after reviewing any amendment and your
responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities
Exchange Act of 1934 and that they have provided all information
investors require for an informed investment decision. Since the
company and its management are in possession of all facts relating
to
a company`s disclosure, they are responsible for the accuracy and
adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Jason Niethamer at 202-551-3855, Lisa
Mitrovich
(Assistant Chief Accountant) at 202-551-3453 or me at 202-551-3730
if
you have questions regarding the above comments.
Sincerely,
Craig Wilson
Senior Assistant Chief Accountant
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John B. Wood
Telos Corporation
June 14, 2005
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