Acquisition of IT Logistics, Inc

12 Months Ended

Dec. 31, 2012

Acquisition of IT Logistics, Inc. [Abstract]

Acquisition of IT Logistics, Inc.

Note 3.   Acquisition of IT Logistics, Inc.

On July 1, 2011, we entered into, and concurrently completed the transactions contemplated by, the Asset Purchase Agreement with IT Logistics Inc., an Alabama corporation ("ITL"), and its sole stockholder.  We purchased 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 asset purchase agreement, Telos assumed certain liabilities of ITL, principally liabilities that accrued 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, (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 was 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.   Based on the total fair value of the consideration paid, the total purchase price was determined to be $26.5 million.

As of December 31, 2012, the $7 million payable in ten monthly payments had been paid in full, the Note was prepaid at a discount of 50% off of its principal amount, with no prepayment penalties.  See Note 7 – "Current Liabilities and Debt Obligations."

ITL had been a Telos subcontractor for several years, utilized by our former Secure Networks business line which is currently part of the Cyber Operations and Defense 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 asset purchase agreement and the complete terms of the notes were filed as exhibits to the Form 8-K filed by the Company on July 8, 2011.  Borrowings of $8.0 million were drawn from the Facility in order to finance the initial cash consideration.

The operating results of ITL have been included in the Company's 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 July 1, 2011. The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill.  Goodwill is amortized and deducted over a 15-year period for tax purposes.  Telos has made an allocation of the purchase price as follows (amounts in thousands):

Inventories, net	$	221
Property and equipment, net		108
Goodwill		14,916
Other intangible asset		11,286
Total purchase price allocation	$	26,531

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