Note 6.

Current Liabilities and Debt Obligations

Accounts Payable and Other Accrued Payables

As of June 30, 2013 and December 31, 2012, the accounts payable and other accrued payables consisted of $16.6 million and $16.4 million, respectively, in trade account payables and $6.9 million and $6.7 million, respectively, in accrued payables.

Senior Revolving Credit Facility

On May 17, 2010, we amended our $25 million revolving credit facility (the “Facility”) with Wells Fargo Capital Finance, LLC (“Wells Fargo”). Under the amended terms, the maturity date of the Facility was extended to May 17, 2014 from September 30, 2011, the limit on the Facility was increased to $30 million from $25 million, and a term loan component of $7.5 million was added to the Facility. The principal of the term loan component will be repaid in quarterly installments of $93,750, with a final installment of the unpaid principal amount payable on May 17, 2014. On July 31, 2013, the maturity date of the Facility was extended to November 13, 2014. The interest rate on the term loan component is the same as that on the revolving credit component of the Facility, which was changed to the higher of the Wells Fargo Bank “prime rate” plus 1%, the Federal Funds rate plus 1.5%, or the 3-month LIBOR rate plus 2%. In lieu of having interest charged at the foregoing rates, the Company may elect to have the interest on all or a portion of the advances on the revolving credit component be a rate based on the LIBOR Rate (as defined in the Facility) plus 3.75%. As of June 30, 2013, we have not elected the LIBOR Rate option. Borrowings under the Facility continue to be collateralized by substantially all of the Company’s assets including inventory, equipment, and accounts receivable. The financial covenants were updated to include minimum EBITDA (as defined in the Facility), minimum recurring revenue and a limit on capital expenditures. The Facility’s anniversary fee was discontinued and the collateral management fee was reduced.

As of June 30, 2013, the interest rate on the Facility was 4.25%. We incurred interest expense in the amount of $0.2 million and $0.4 million for each of the three and six months ended June 30, 2013 and 2012, respectively, on the Facility.

On May 11, 2012, the Facility was amended to allow for the redemption of Senior Redeemable Preferred Stock, under certain conditions, at a discount from par value plus accrued dividends of at least 10%, at an aggregate price not to exceed $4.0 million. On May 16, 2012 and on August 24, 2012, a portion of the Senior Redeemable Preferred Stock was redeemed (see Note 7 – Redeemable Preferred Stock).

On June 11, 2013, the Facility was further amended to allow for the redemption of Senior Redeemable Preferred Stock, under certain conditions, at a discount from par value plus accrued dividends of at least 10%, at an aggregate price not to exceed $2.0 million. On June 14, 2013, a portion of the Senior Redeemable Preferred Stock was redeemed (see Note 7 – Redeemable Preferred Stock).

The Facility has various covenants that may, among other things, affect our ability to merge with another entity, sell or transfer certain assets, pay dividends and make other distributions beyond certain limitations. As of June 30, 2013, we were in compliance with the Facility’s financial covenants, including EBITDA covenants. The term loan component of the Facility amortizes at 5% per year, or $0.4 million, which is paid in quarterly installments and is classified as current on the condensed consolidated balance sheets. The remaining balance of the term loan, or $6.0 million, and the revolving component of the Facility mature over the period 2013 through 2014.

At June 30, 2013, we had outstanding borrowings of $13.6 million on the Facility, which included the $6.4 million term loan, of which $0.4 million was short-term. At December 31, 2012, we had outstanding borrowings of $18.9 million on the Facility, which included the $6.6 million term loan, of which $0.4 million was short-term. At June 30, 2013 and December 31, 2012, we had unused borrowing availability on the Facility of $7.0 million and $2.2 million, respectively. The effective weighted average interest rates on the outstanding borrowings under the Facility were 5.4% and 5.3% for the six months ended June 30, 2013 and 2012, respectively.

The following are maturities of the Facility presented by year (in thousands):

	2013		2014		Total
Short-term:
Term loan	$	375	$	----	$	375	¹
Long-term:
Term loan	$	----	$	6,000	$	6,000	¹
Revolving credit		----		7,199		7,199	²
Subtotal	$	----	$	13,199	$	13,199
Total	$	375	$	13,199	$	13,574

The principal will be repaid in quarterly installments of $93,750, with a final installment of the unpaid principal amount payable on November 13, 2014.

Balance due represents balance as of June 30, 2013, with fluctuating balances based on working capital requirements of the Company.

Notes payable – 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 (see Note 3 – Acquisition of IT Logistics, Inc.). 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 accrued interest at a rate of 6.0% per annum beginning November 1, 2012, and was 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” were 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.

On December 18, 2012, we prepaid and satisfied in full our obligations under the Note. As a condition to the prepayment of the Note, ITL accepted payment in the amount of $7.6 million, which is the sum of $7.5 million in principal plus $0.1 million in accrued interest. This amount represents a discount of 50% off of the principal amount of the Note. No penalties were due to ITL in connection with the prepayment of the Note. As a result of this transaction, a gain in the amount of $5.2 million was recorded in other income on the consolidated statements of operations. On or about December 17, 2012, ITL and Telos signed an agreement in which ITL agreed to accept the prepayment and discount in full satisfaction of the Note. Wells Fargo consented to the payment of approximately $7.6 million on December 17, 2012.

The $7 million payable in ten monthly payments had also been fully paid in May 2012. We incurred interest expense in the amount of $1,000 and $4,000 on these payments for the three and six months ended June 30, 2012, respectively.

Warranty Liability

We provide warranty services to our customers primarily in the network solutions deliverables of the Cyber Operations and Defense business line. The majority of our warranty services involves contractual coverage with the Original Equipment Manufacturer (“OEM”) and primarily involves referrals to the OEM for service calls. Additionally, certain contracts and programs require that we provide an enhanced level of warranty coverage. The balance of our accrued warranty liability as of June 30, 2013 and December 31, 2012 was $0.1 million and $0.2 million, respectively.