Acquisition of IT Logistics Inc

9 Months Ended

Sep. 30, 2011

Acquisition of IT Logistics Inc [Abstract]

Acquisition of IT Logistics Inc

Note 11.  Acquisition of IT Logistics, Inc.

On July 1, 2011, we entered into, and concurrently completed the transactions contemplated by, the Asset Purchase Agreement (the “Agreement”) with IT Logistics Inc., an Alabama Corporation (“ITL”), and its sole stockholder.  The Agreement provides for the purchase of certain assets relating to the operation of ITL's business of providing survey, design, engineering, and installation services of inside and outside plant secure networking infrastructure and program management expertise.  Under the terms of the Agreement, Telos assumed certain liabilities of ITL, principally liabilities that accrue on or after July 1, 2011, under certain contracts assumed by Telos.

The purchase price for the assets (in addition to the assumed liabilities described above) consisted of (1) $8 million payable on July 1, 2011 (“the Closing Date”), (2) $7 million payable in ten monthly payments of $700,000, together with interest on the unpaid balance of such amount at the rate of 0.50% per annum, beginning on August 1, 2011 and on the first day of each subsequent month thereafter, and (3) a subordinated promissory note (the “Note”) with a principal amount of $15 million.  The Note accrues interest at a rate of 6.0% per annum beginning November 1, 2012, and is payable on July 1, 2041.  The entire unpaid principal balance plus accrued and unpaid interest is due and payable upon the occurrence of a Change in Control (as defined in the Note), provided that all “Senior Obligations” are satisfied prior to or concurrent with such Change in Control.  For purposes of the Note, “Senior Obligations” means, collectively, all (1) outstanding indebtedness of Telos, and (2) amounts due to the holders of the outstanding shares of the Company's Series A-1 Redeemable Preferred Stock, Series A-2 Redeemable Preferred Stock, and 12% Cumulative Exchangeable Preferred Stock (or any securities redeemable or exchangeable for any of the foregoing) upon a Change in Control, upon the voluntary or involuntary liquidation, dissolution, or winding up of the affairs of Telos, or otherwise.

ITL had been a Telos subcontractor for several years, utilized by our Secure Networks Solutions business line. The acquisition allows the Company to internally maintain the capacity for the work ITL performs, instead of subcontracting such work.  Major General John W. Maluda, who serves on the Company's board of directors, served on the advisory board of ITL, and this relationship was disclosed to the Company's board of directors before its consideration of the acquisition.  General Maluda did not have any financial stake in ITL and did not receive any benefit from the sale of its assets to Telos.

The Agreement and the complete terms of the notes are filed as exhibits to the Form 8-K filed by the Company on July 8, 2011.  Borrowings of $8.0 million were drawn from Telos' Facility in order to finance the initial cash consideration.

The operating results of ITL have been included in the Company's condensed consolidated financial statements as of the acquisition date of July 1, 2011.  The acquisition has been accounted for under the purchase method of accounting.  Under the purchase method of accounting, the total purchase price was allocated to ITL's net tangible and intangible assets acquired based on their estimated fair values as of the Closing Date of the acquisition. The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill. Telos has made a preliminary allocation of the estimated purchase price as follows (amounts in thousands):

Inventories, net	$	221
Property and equipment, net		108
Goodwill		15,058
Other intangible assets		11,286
Total preliminary estimated purchase price allocation	$	26,673

Of the total purchase price, a preliminary estimate of approximately $11.3 million has been allocated to amortizable intangible assets acquired and a preliminary estimate of approximately $0.3 million has been allocated to tangible net assets assumed in connection with the acquisition. 

On a pro forma combined basis, the revenue effect of the ITL acquisition is immaterial as Telos was ITL's primary revenue source prior to the acquisition.  On a pro forma combined basis, net income for the three months ended September 30, 2011 and 2010 was $1.2 million and $1.6 million, respectively.  On a pro forma combined basis, net income for the nine months ended September 30, 2011 and 2010 was $3.6 million and $3.6 million, respectively.