SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(C)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Amendment No. )
Filed by the registrant [X}
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Information Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14C-5(D)(2))
[X] Definitive Information Statement
TELOS CORPORATION
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
---------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------------
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
---------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------------
Telos Corporation
19886 Ashburn Road
Ashburn, Virginia 20147
INFORMATION STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 6, 2001
This Information Statement is furnished by Telos Corporation, a Maryland
corporation ("Telos" or the "Company"), formerly known as C3, Inc., to the
holders of the Company's 12% Cumulative Exchangeable Redeemable Preferred Stock
("Exchangeable Preferred Stock") in connection with the Annual Meeting of
Shareholders ("Annual Meeting") of the Company to be held in the auditorium at
the Company's headquarters located at 19886 Ashburn Road, Ashburn, Virginia
20147 on November 6, 2001 at 9:30 a.m., Eastern Standard Time, or any
adjournment of it, for the purposes set forth in the accompanying Notice of
Annual Meeting of Shareholders ("Annual Meeting Notice").
This Information Statement is being mailed to holders of the Exchangeable
Preferred Stock on or about October 5, 2001 together with the Annual Meeting
Notice and the Company's 2000 Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.
WE ARE NOT ASKING YOU FOR A PROXY, AND YOU ARE
REQUESTED NOT TO SEND US A PROXY.
Nominations
Telos has received nominations for election as Class D Directors for
the following persons:
Geoffrey Baker
Malcolm Sterrett
The Board of Directors of Telos does not take any position with respect to
the election of any of the nominees as Class D Directors, and does not make any
recommendation "For" or "Against" the election of any nominee.
Voting At Meeting
The record date for determining the shareholders entitled to vote at the
Annual Meeting is September 20, 2001 ("Record Date"). As of the Record Date,
there were 3,185,586 shares of Exchangeable Preferred Stock outstanding. Each
share of Exchangeable Preferred Stock is entitled to one vote at the Annual
Meeting on the election of Class D Directors and may be voted for as many
individuals as there are Class D Directors to be elected. The purpose of the
Annual Meeting is to allow the holders of the Exchangeable Preferred Stock to
elect two (2) Class D Directors to the Telos Board of Directors. The Company has
received two (2) nominations for these two (2) Class D Director positions.
Holders of Exchangeable Preferred Stock are not entitled to vote at the Annual
Meeting on the election of any directors other than Class D Directors. There is
no cumulative voting. Directors are elected by a plurality of the votes cast
with a quorum present. A quorum consists of shareholders representing, either in
person or by proxy, a majority of the outstanding shares of each class of stock
entitled to vote at the Annual Meeting. Abstentions are considered in
determining the presence of a quorum but will not affect the plurality vote
required for the election of directors.
Broker non-votes will have no effect on the election of directors by a
plurality vote. Because the election of the Class D Directors is not being
contested, the election of the nominees will be considered a "discretionary"
item upon which broker-dealers may vote on behalf of their clients where the
clients have not submitted voting instructions. Therefore, there will be no
broker non-votes at the annual meeting.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information concerning the security
ownership of management and those persons believed by the Company to be
beneficial owners of more than 5% of the Company's Class A Common Stock, Class B
Common Stock and Exchangeable Preferred Stock at June 30, 2001.
Title of Class Name and Address of Beneficial Owner Amount and Nature of Percent of
Beneficial Ownership Class
as of
June 30,2001
Class A Common Stock John R. C. Porter 22,190,718 shares (A) 80.52%
Collette House, 3rd Floor
52-55 Piccadilly
London W1J ODX
Class A Common Stock C3, Inc. 401(k) Plan and Telos 3,658,536 shares 17.28%
Corporation Savings Plan
c/o Telos Corporation
19886 Ashburn Road
Ashburn, VA 20147
Class B Common Stock F&C Nominees Limited 2,102,450 shares (B) 52.07%
Berkeley Square House, Berkeley Square
London W1X 5PA England
Class B Common Stock Hare and Company 1,186,720 shares 29.39%
C/o Bank of New York
PO Box 11203
New York, NY 10004
Class B Common Stock Cudd & Company 669,888 shares 16.59%
11th Floor, 4 New York Plaza
New York, NY 10004
Class A Common Stock David S. Aldrich 695,222 shares (C) 3.18%
Class A Common Stock William L. P. Brownley 189,348 shares (C) 0.89%
Class A Common Stock Michael P. Flaherty 112,000 shares (C) 0.53%
Class A Common Stock Robert J. Marino 616,473 shares (C) 2.83%
Class A Common Stock Thomas J. Ferrara 41,548 shares (C) 0.20%
Class A Common Stock John B. Wood 1,725,091 shares (C) 7.55%
Class A Common Stock All Officers and Directors as a Group 3,385,823 shares (D) 13.86%
(10 persons)
12% Cumulative John C. Boland 31,220 shares (E) 2.40%
Exchangeable Redeemable 714 St. Johns Road
Preferred Stock Baltimore, MD 21210-2134
12% Cumulative Exchangeable Value Partners, Ltd. 714,317 shares (F) 22.42%
Redeemable Preferred Stock 2200 Ross Avenue, Suite 4660
Dallas, TX 75201
Fisher Ewing Partners
2200 Ross Avenue, Suite 4660
Dallas, TX 75201
12% Cumulative Exchangeable Wynnefield Partners Small Cap Value, L.P. 228,500 shares (G) 7.17%
Redeemable Preferred Stock One Penn Plaza, Suite 4720
New York, NY 10119
Channel Partnership II, L.P.
One Penn Plaza, Suite 4720
New York, NY 10119
Wynnefield SmallCap Value
Offshore Fund, Ltd.
One Penn Plaza, Suite 4720
New York, NY 10119
(A) Mr. Porter's holdings include 6,388,916 shares of Class A Common Stock
purchasable upon exercise of a warrant.
(B) F&C Nominees Limited responded to the Company's request for the names and
addresses of the beneficial owners of the Company's Class B Common Stock
held by F&C Nominees Limited by providing the following information: FACET
- 1,681,959 shares, FACET L.P. - 420,490 shares. F&C Nominees Limited did
not provide to the Company the addresses of these beneficial owners.
(C) The common stock holdings of Messrs. Aldrich, Brownley, Flaherty, Marino,
Ferrara and Wood include 330; 12,000; 0; 20,421; 9,048 and 37,474 shares of
the Company's Class A Common Stock, respectively, held for their beneficial
interest by the C3, Inc. 401(k) Plan and Telos Corporation Savings Plan.
Messrs. Aldrich, Brownley, Flaherty, Marino, Ferrara and Wood hold options
to acquire 686,500; 171,250; 112,000; 574,000; 32,500; and 1,679,225 shares
of the Company's Class A Common Stock, respectively, in addition to their
current common stock holdings. These shares are purchasable upon exercise
of the options and are exercisable within 60 days of June 30, 2001.
(D) The common stock holdings of the Company's officers and directors as a
group include 79,414 shares of the Company's Class A Common Stock held for
their beneficial interest by the C3, Inc. 401(k) Plan and Telos Corporation
Savings Plan. The total of 79,414 shares includes 12,000 shares held for
the beneficial interest of Mr. Brownley, who resigned from the positions of
Vice President and General Counsel in 2000. Under the Company's stock
option plan and certain stock option agreements, all officers and directors
as a group hold options to acquire 3,261,475 shares of Class A Common Stock
exercisable within 60 days of June 30, 2001.
(E) John C. Boland holds 30,000 shares of the 12% Cumulative Exchangeable
Redeemable Preferred Stock. In addition, he is the manager and owner of the
general partner of Remnant Partners, LP which owns 46,500 shares of the 12%
Cumulative Exchangeable Redeemable Preferred Stock of the Company. Mr.
Boland has filed on Form 3 with the Commission that he may be deemed to own
1,220 of Remnant Partners LP's 46,500 shares.
(F) Value Partners Ltd. ("VP") and Fisher Ewing Partners ("FEP") have filed
jointly a Schedule 13D under which they disclosed that they may act as a
"group" within the meaning of Section 13(d) of the Securities Exchange Act.
Each of the reporting persons disclosed that it may be deemed to
beneficially own the aggregate of 714,317 shares of the Exchangeable
Preferred Stock held of record by the reporting persons collectively.
According to an Amendment to the Schedule 13D filed on May 10, 1996, each
of FEP and Timothy G. Ewing and Richard W. Fisher may be deemed to have the
sole power to vote and to dispose of the shares of the Exchangeable
Preferred Stock held of record by the reporting persons collectively.
(G) Wynnefield Partners SmallCap Value, L.P., ("WPSCV"), Channel Partnership
II, L.P. ("CP"), and Wynnefield SmallCap Value Offshore Fund, Ltd.
("WSCVOF") have jointly filed a Schedule 13D under which they disclosed
they may act as a "group" within the meaning of Section 13(d) of the
Securities Exchange Act. Each of the reporting persons disclosed that it
may be deemed to beneficially own the aggregate of 228,500 shares of the
Exchangeable Preferred Stock held of record by the reporting persons
collectively. According to the Schedule 13D, Nelson Obus and Joshua Landes,
by virtue of their status as general partners of WPSCV, Mr. Obus as general
partner of CP and Messrs. Obus and Landes, as officers of WSCVOF's
investment manager, have the power to vote or to direct the vote and the
power to dispose and to direct the disposition of the shares of
Exchangeable Preferred Stock owned by WPSCV, CP and WSCVOF, respectively.
Directors and Executive Officers
The following is certain biographical information concerning the directors
and executive officers of the Company. The term of each of the directors to be
elected at the Annual Meeting continues until the next annual meeting of
shareholders and until his successor is elected and qualified, except that the
directorships held by the Class D Directors will terminate whenever all
accumulated dividends on the Exchangeable Preferred Stock have been paid.
Dr. Fred Charles Ikle, Chairman of the Board
Dr. Ikle (age 77) was elected to the Company's Board of Directors on
January 31, 1994 and was elected Chairman of the Board in January 1995. He is
Chairman of Conservation Management Corporation and a member of the Defense
Policy Board of the Secretary of Defense. Dr. Ikle is on the Board of Governors
of the Smith Richardson Foundation and is a Distinguished Scholar at the Center
for Strategic & International Studies. From 1981 to 1988, Dr. Ikle served as
Under Secretary of Defense for Policy.
John B. Wood, Executive Chairman of the Board
Mr. Wood (age 38) has served as Executive Chairman of the Board since March
8, 2000. From January 1994 until March 8, 2000, Mr. Wood served as President and
Chief Executive Officer of the Company. Mr. Wood has also served as Chairman and
CEO of Enterworks, Inc. since January 1996. Between 1992 and 1994, Mr. Wood
served as Chief Operating Officer and as an Executive Vice President of the
Company. Prior to joining the Company, Mr. Wood founded a boutique
investment-banking firm on Wall Street.
David S. Aldrich, President, Chief Executive Officer and Director
Mr. Aldrich (age 42) was appointed to the positions of President and Chief
Executive Officer of the Company on March 8, 2000. He was elected to the Board
of Directors on February 8, 2000. He was appointed to the position of Chief
Operating Officer of the Company in January 1999. He joined the Company in
September 1996 as Vice President, Corporate Development and Strategy. Prior to
joining the Company, he was a partner in the Financial Advisory Services Group -
Corporate Finance at Coopers & Lybrand L.L.P. Prior to joining Coopers & Lybrand
L.L.P. in 1991, Mr. Aldrich was Senior Vice President at Dean Witter Capital
Corp., the merchant banking arm of Dean Witter Reynolds, Inc.
Dr. Stephen D. Bryen, Director
Dr. Stephen Bryen (age 58) was elected to the Company's Board of Directors
on January 31, 1994. He currently serves as a Director in Jefferson Partners,
L.L.C., a strategic management consulting and merchant-banking firm with offices
in Washington, D.C. and New York, and as Managing Director of Aurora Marketing
and Business Development of Washington D.C. From 1981 to 1988 Dr. Bryen served
as the Deputy Under Secretary of Defense for Trade Security Policy and as the
Director of the Defense Technology Security Administration, which he founded.
Norman P. Byers, Director
Mr. Byers (age 54) was elected to the Board of Directors on January 31,
1994. He is Vice President and General Manager of Foxhunt Incorporated, a
provided of contract and long-term technical staffing and executive recruiting
services in McLean, Virginia. Previously, Mr. Byers was President and CEO of
Virginia based Classwise, Incorporated, a distance learning ISP. Prior to his
work at Classwise, Mr. Byers was COO of The Carpe Diem Group, President of Telos
International Corporation, and managing partner of International Strategies
Limited. From 1968 until his retirement in 1989, Mr. Byers served in a variety
of operational and staff positions in the United States Air Force.
Malcolm M. B. Sterrett, Class D Director
Mr. Sterrett (age 58) is a private investor and was elected to the
Company's Board of Directors on July 31, 1998 as part of the preferred
stockholders class. From 1989 to 1993, he was a partner at the law firm of
Pepper Hamilton & Scheetz in Washington, D.C. From 1988 to 1989, he served as
General Counsel to the U.S. Department of Health and Human Services and from
1982 to 1988; he was a Commissioner on the U.S. Interstate Commerce Commission.
Prior thereto, he was Vice President and General Counsel to the United States
Railway Association and served as Staff Director and Counsel to the U.S. Senate
Committee on Commerce, Science and Transportation. Mr. Sterrett is also a member
of the Board of Directors of Trans World Corporation.
John C. Boland, Class D Director
Mr. Boland (age 53) was appointed to the Board of Directors on December 17,
1999 as a result of Mr. Huertematte's resignation. He has been owner of the
general partner of Remnant Partners L.P., an investment partnership, since 1992.
From 1989 to 1995, he was the publisher of Bankruptcy Values, an institutional
research service. Prior to entering the investment business, Mr. Boland was an
editor of Barron's Financial Weekly (from 1978 to 1983) and a freelance
financial writer. Mr. Boland has not been nominated for re-election as a Class D
Director.
William L. Prieur Brownley, Former Vice President and Former General Counsel
Mr. Brownley (age 44) joined the Company in April 1991 and is responsible
for the management of the Company's legal affairs. For the five years prior to
joining the Company, he served as Assistant General Counsel and then as General
Counsel at Infotechnology Inc., an investment company whose holdings included
various companies in the communications industry. Mr. Brownley resigned from the
Company in January 2001.
Robert J. Marino, Executive Vice President and Chief Sales and Marketing Officer
Mr. Marino (age 64) joined the Company in 1988 as Senior Vice President of
Sales and Marketing. In 1990, his responsibilities were expanded to include
Program Management in addition to Sales and Marketing. On January 1, 1994, Mr.
Marino was appointed to President of Telos Systems Integration, and on January
1, 1998, he was appointed to his current position. Prior to joining the Company
in February 1988, Mr. Marino held the position of Senior Vice President of Sales
and Marketing with Centel Federal Systems and M/A-COM Information Systems, both
of which are U.S. Government contractors.
Thomas J. Ferrara, Chief Financial Officer and Treasurer
Mr. Ferrara (age 43) was appointed Chief Financial Officer of the Company
on September 14, 2000. He was elected Vice President of Finance and Accounting
and Treasurer on February 8, 2000. He joined the Company in 1994 as Director of
Pricing and was responsible for all pricing of major contracts and Company
forecasts. Prior to joining Telos, Mr. Ferrara was the Accounting Manager for
Cordant, a privately held government contractor.
Michelle Wertz, Vice President of Human Resources and Corporate Secretary
Ms. Wertz (age 38) was appointed Vice President, Human Resources for Telos
Corporation in July of 2000 and Corporate Secretary in September, 2000. Ms.
Wertz joined Telos in May, 1998 to revamp the Recruiting and Retention
activities for the company leading to her position as Vice President, Resource
Management in December of 1999. Ms. Wertz' previous Human Resources experience
from 1995 - 1998 includes working for America Online, IPR Staffnet and Total
Systems Solutions to provide technical and professional staffing solutions and
best practice recruiting strategies.
Michael P. Flaherty, Executive Vice President, General Counsel and
Chief Administrative Officer
Mr. Flaherty (age 56) was appointed Executive Vice President, General
Counsel and Chief Administrative Officer on January 3, 2001. Prior to joining
Telos Corporation, Mr. Flaherty was of counsel in the law firm of O'Donnell &
Shaeffer, LLC and principal shareholder and Chief Executive Officer of First
Continental Group, Inc. Mr. Flaherty has extensive experience in all aspects of
civil litigation, serving as lead trial counsel for major corporations. Mr.
Flaherty has also served as General Counsel of the U.S. House of Representatives
Committee on Banking, Finance and Urban Affairs and Counsel to the Speaker of
the House of Representatives. Additionally, Mr. Flaherty is the past chairman of
the Executive Committee of the Federal Bar Association's Banking Law Committee.
Each of the directors and executive officers of the Company is a United
States citizen.
Biographies of Nominated Directors
Geoffrey Baker
Mr. Baker (age 52) is a private investor and since 1983 has been a partner
in Baker & Donaldson, a private investment firm. Previously, he served as
Legislative Director to U.S. Senator Lowell P. Weicker, Jr., and as counsel to
the U.S. Senate Committee on Commerce, Science and Transportation. A graduate of
Stanford University and of the Georgetown University Law Center, he has served
on public and private corporate boards and currently serves as Chairman of the
Board of St. Albans School, Washington, D.C.
Malcolm Sterrett*
Mr. Sterrett (age 58) is a private investor and was elected to the
Company's Board of Directors on July 31, 1998 as part of the preferred
stockholders class. From 1989 to 1993, he was a partner at the law firm of
Pepper Hamilton & Scheetz in Washington, D.C. From 1988 to 1989, he served as
General Counsel to the U.S. Department of Health and Human Services and from
1982 to 1988; he was a Commissioner on the U.S. Interstate Commerce Commission.
Prior thereto, he was Vice President and General Counsel to the United States
Railway Association and served as Staff Director and Counsel to the U.S. Senate
Committee on Commerce, Science and Transportation. Mr. Sterrett is also a member
of the Board of Directors of Trans World Corporation.
* Current Class D Director
Meetings of the Board of Directors and Committees of the Board of Directors
During the fiscal year ended December 31, 2000 (the "Last Fiscal Year"),
the Board of Directors held eight meetings. Each of the incumbent directors
attended at least 90% of the aggregate of all meetings of the Board of Directors
and of the committees, if any, upon which such director served.
The Board of Directors has three standing committees: the Audit Committee,
the Executive Committee and the Compensation Committee.
The Audit Committee, which consists of Directors Bryen, Byers and Sterrett,
met 4 times during the last Fiscal Year. Mr. Sterrett joined the Audit Committee
in 2001. Directors Bryen, Byers and Sterrett are considered independent
directors according to Rule 4200 (a)(15) of the NASD's listing standards.
The Executive Committee, which consists of Directors Ikle, Wood, and
Aldrich, met 6 times during the Last Fiscal Year.
The Compensation Committee, which consists of Directors Ikle, Bryen and
Byers, was established to review and approve the compensation of the Executive
Chairman of the Company, and its Options Subcommittee to grant stock options
under the Company's Option Plans and to review the Company's programs relating
to the recruitment, retention and motivation of employees, for recommendation to
the Board of Directors. The Compensation Committee met one time during the last
Fiscal Year.
Audit Committee Report
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, that might incorporate future filings, including this
Information Statement, in whole or in part, the following report and the
Compensation Committee Report set forth elsewhere in this Information Statement
shall not be deemed to be incorporated by reference into any such filings,
except to the extent the Company specifically incorporates this report by
reference therein.
On November 29, 2000, the Board adopted a charter for the Audit Committee,
a copy of which is attached as Exhibit A. Pursuant to the charter, the Audit
Committee, among other things, makes recommendations as to the engagement and
fees of the independent auditors, reviews the preparations for and the scope of
the audit of the Company's annual financial statements, reviews drafts of such
statements, monitors the functioning for the Company's accounting and internal
control systems by meeting with representatives of management, the independent
auditors and the internal auditors and reviews and approves transactions between
the Company and our directors, officers and affiliates. In addition, in
accordance with the regulations of the Securities and Exchange Commission, the
Audit Committee has issued the following report. The information contained in
this report shall not be deemed to be "soliciting material" or to be "filed"
with the Securities and Exchange Commission.
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements and the reporting process including the systems of
internal controls. In fulfilling its oversight responsibilities, the Audit
Committee reviewed the audited financial statements in the Annual Report with
management, the reasonableness of significant judgements, and the clarity of
disclosures in the financial statements.
The Audit Committee reviewed with the independent auditors, who are
responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting principles, their
judgments as to the quality, not just the acceptability, of the Company's
accounting principles and such other matters as are required to be discussed
with the Audit Committee under generally accepted auditing standards, including
SAS 61 (Codification of Statements on Auditing Standards, AU ss.380). In
addition, the Audit Committee has discussed with the independent auditors the
auditors' independence from management and the Company including the matters in
the written disclosures required by the Independence Standards Board in
Independence Standards Board Standard no. 1.
The Audit Committee discussed with the Company's independent auditors the
overall scope and plans for their respective audits. The Audit Committee meets
with the independent auditors, with and without management present, to discuss
the results of their examinations, their evaluations of the Company's internal
controls, and the overall quality of the Company's financial reporting.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the Annual Report on Form 10-K for the year ended
December 31, 2000 for filing with the Securities and Exchange Commission. The
Audit Committee has recommended, subject to stockholder approval, the selection
of PricewaterhouseCoopers LLP as the Company's independent auditors.
Submitted by the Audit Committee:
Dr. Stephen Bryen
Mr. Norman P. Byers
Mr. Malcolm M.B. Sterrett
Compensation Committee Report on Executive Compensation
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, that might incorporate future filings, including this
Information Statement, in whole or in part, the following report and the Audit
Committee Report set forth elsewhere in this Information Statement shall not be
deemed to be incorporated by reference into any such filings, except to the
extent the Company specifically incorporates this report by reference therein.
Executive Compensation
The Company's executive compensation program is intended to attract, retain
and reward experienced, highly motivated executive officers who are capable of
effectively leading and continuing the growth of the Company. Officers of the
Company are paid salaries in line with their responsibilities and generally
comparable to industry standards. Executive officers are also eligible to
receive discretionary bonuses upon the achievement of revenue and profit goals
established by the Company as an incentive for superior individual, group and
corporate performance. Likewise, stock option grants to officers (and other
employees) promote success by aligning employee financial interests with
long-term shareholder value. Stock option grants are based on various factors
primarily relating to the responsibilities of the individual officers and also
to their expected future contributions and prior option grants. All executive
officers are also significant shareholders and/or holders of options to purchase
significant amounts of Common Stock. To the extent that the performance of such
individual officers translates into an increase in the value of the Common
Stock, all shareholders, including such officers, share the benefits.
Compensation of the Executive Chairman
The Compensation Committee will annually review and approve the
compensation of the Executive Chairman of the Company. The Board believes that
Mr. Wood, the Company's Executive Chairman, is paid a reasonable salary based on
the same corporate financial goals as the other officers of the Company. Mr.
Wood, like other employees is eligible to receive discretionary bonuses based on
performance. In addition, Mr. Wood is a significant beneficial shareholder of
the Company through the Company's stock option plans, and to the extent his
performance as Executive Chairman translates into an increase in the value of
the common stock, all shareholders, including him, share the benefits.
The SEC requires that this report comment upon the Company's policy with
respect to Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), which limits the deductibility on the Company's tax return of
compensation over $1 million to any of the named executive officers of the
Company unless, in general, the compensation is paid pursuant to a plan which is
performance related, non-discretionary and has been approved by the Company's
shareholders. To the extent that certain executive officers will or may exceed
$1 million in any year, the provisions of Section 162 (m) of the code may limit
the deductibility of such compensation unless an exception to such limitations
is available. Because of the uncertainties surrounding the application and
interpretation of such limits, no assurance can be given that such compensation
will be deductible.
Submitted by the Compensation Committee:
Dr. Fred Ikle
Dr. Stephen Bryen
Mr. Norman P. Byers
Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
between the Company and certain of its current and former officers and directors
is set forth below.
Mr. John R. Porter, the owner of a majority of the Company's Class A Common
Stock, has a consulting agreement with the Company whereby he is compensated for
consulting services provided to the Company in the areas of marketing, product
development, strategic planning and finance as requested by the Company. Mr.
Porter was paid $200,000 by the Company in 2000, 1999 and 1998 pursuant to this
agreement, which amounts were established as a result of negotiations between
the Company and Mr. Porter.
Mr. Norman Byers, a director of the Company, previousl had a consulting
agreement with the Company to help the Company expand its business operations
into the international marketplace. Under such agreement, Mr. Byers received
$10,500 a month for his services. Mr. Byers was compensated $125,000 in 1998.
This consulting agreement was terminated in the fourth quarter of 1998.
Mr. Hester, former Executive Vice President and former Chief Operating
Officer of the Company, previously had a consulting agreement with the Company
to provide strategic advice concerning the Company's hardware services division.
Under this agreement, Mr. Hester received $206,000 for his services during 1999
and 2000 and was eligible for a bonus under certain circumstances, at the
Company's discretion. Under this agreement, Mr. Hester received a bonus of
$130,000 payable in installments during 2000. Mr. Hester's consulting agreement
was terminated December, 2000.
Mr. Gerald Calhoun, former Vice President of Human Resources and Corporate
Secretary, entered into a settlement agreement with the Company to resolve a
dispute over Mr. Calhoun's employment contract with the Company. The Company
will pay Mr. Calhoun 24 months of severance in installments from 2000 until 2002
and provide certain benefits pursuant to his employment contract. Mr. Calhoun's
payment of salary and fringe benefits amounts to approximately $189,000 per
annum. Under the agreement, the Company extended the option term of Mr.
Calhoun's vested options until September 2001.
Mr. William L.P. Brownley, former Vice President and General Counsel of the
Company, entered into an agreement with the Company whereby he will serve in an
of counsel capacity to the Company from December 31, 2000 through March 31, 2003
and provide certain benefits pursuant to his employment contract. In return, Mr.
Brownley will be paid $220,000 per annum from January 1, 2001 through March 31,
2003.
Mr. Lorenzo Tellez, former Chief Financial Officer, Treasure and Vice
President of the Company, resigned from the Company in December of 1999 and is
being paid $219,000 per annum and compensated for certain benefits, pursuant to
his employment contract with the Company, which will terminate in December 2001.
The Company sponsors a defined contribution employee savings plan known as
the Telos Shared Savings Plan ("the Plan"). Under the Plan, all full-time
employees are eligible to participate. The Company, as the sponsor of the Plan,
has the right to appoint and remove the persons who serve as Trustees for the
Plan. At June 30, 2001 the Trustees of the Plan were Michelle Wertz, Corporate
Secretary and Vice President of Human Resources; Richard Tracy, Senior Vice
President of Xacta, Inc., a wholly-owned subsidiary of the Company; Edward
Williams, Senior Vice President Operations; and David Pearson, Corporate
Controller.
Executive Compensation
Summary Compensation Table. The following table shows for the years ended
December 31, 2000, 1999 and 1998, the cash compensation paid by the Company as
well as certain other compensation paid or accrued for those years, to the chief
executive officer and the four other most highly compensated executive officers
of the Company in fiscal year 2000.
Long-Term
Compensation (1) All Other
Name and Principal Position Year Salary Bonus Options/SARs (#) Compensation (5)
--------------------------- ---- ------ ----- ---------------- ----------------
John B. Wood 2000 $ 350,002 (7) $ -- -- $ 18,100 (6)
(Executive Chairman) 1999 348,574 245,000 2,000,000 (3) 13,000 (6)
1998 334,198 -- -- 13,000 (6)
William L.P. Brownley 2000 192,653 -- 20,000 (2) 4,816
(former VP and Former 1999 170,997 100,000 200,000 (3) 4,275
General Counsel) 1998 166,961 -- 135,000 (4) 5,380
Thomas J. Ferrara 2000 133,561 -- 128,000 (2) 5,100
(Treasurer and Chief 1999 98,435 50,000 27,500(3)(4) 2,953
Financial Officer) 1998 90,898 -- 17,500 (4) 2,952
David S. Aldrich 2000 332,894 -- 250,000 (2) 18,100 (6)
(President and Chief 1999 205,119 245,000 200,000 (3) --
Executive Officer) 1998 173,850 -- 210,000 (4) 2,333
Robert J. Marino 2000 211,706 -- 292,900 (2) 5,100
(Executive V.P. and 1999 206,003 100,000 200,000 (3) 5,000
Chief Sales and 1998 $ 204,734 $ -- 362,000 (4) $ 5,500
Marketing Officer)
(1) There are no restricted stock awards or payouts pursuant to long-term
investment plans.
(2) Options granted in 2000 are in Telos; Telos, Delaware; and Xacta common
stock.
(3) Options granted in 1999 are in Enterworks, Inc.'s common stock.
(4) Options granted in 1999 and 1998 are in the Company's Class A common stock.
(5) All other compensation represents Company contributions on behalf of the
executive officers to the Telos Shared Savings Plan, and in 1998 the
amounts also include automobile and living allowances provided to certain
executives.
(6) Included in these amounts are $13,000 in 2000, $8,000 in 1999 and 1998 for
director's fees paid.
(7) The Company and its affiliate, Enterworks, Inc., have an agreement whereby
Enterworks, Inc. reimburses the Company for $250,000 of Mr. Wood's annual
salary.
Stock Option Grants
The Summary Table of Options/SAR Grants in the Last Fiscal Year is set
forth below for the stock option grants in 2000.
Potential Realizable
Number of Value at Assumed Rates
Securities of Stock Price
Underlying % of Total Appreciation of
Options/SARs Options/SARS Exercise or 5% or 10% for
Name and Principal Position Granted Granted Base Price Expiration Date Option Term
--------------------------- ------- ------- ---------- --------------- -----------
John B. Wood (Executive -- -- -- -- --
Chairman)
William L.P. Brownley (former 20,000 (1)(4) 0.5 $1.37 Oct 2010 $17,232/$43,669
V.P. and former General Counsel)
Thomas J. Ferrara 64,000 (2) 1.6 $3.85 Sept 2010 $154,960/$392,698
(Treasurer and Chief Financial 64,000 (3) 1.6 $0.75 Sept 2010 $30,187/$76,500
Officer)
David S. Aldrich (President and 250,000 (1) 6.4 $1.37 Oct 2010 $215,396/$545,857
Chief Executive Officer)
Robert J. Marino 164,900 (1)(4) 4.2 $1.37 Oct 2010 $142,075/$360,047
(Executive V.P. and Chief Sales 64,000 (2) 1.6 $3.85 Sept 2010 $154,960/$392,698
and Marketing Officer) 64,000 (3) 1.6 $0.75 Sept 2010 $30,187/$76,500
(1) Options granted were in the Class A common stock of the Company.
(2) Options granted were in the common stock of Telos Delaware, Inc.
(3) Options granted were in the common stock of Xacta Corporation.
(4) Options originally issued in 1990 and 1991 at an exercise price of $1.42
per share, were canceled and reissued on October 31, 2000. On that date,
the market price of the stock was $1.37 per share.
Management Stock Options
The following table shows, as to the individuals named in the Summary
Compensation table, the number of shares acquired during such period through the
exercise of options, and the number of shares subject to and value of all
unexercised options held as of December 31, 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs at
Shares Acquired Value Options/SARs at FY-End FY-End
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- -------- ------------------------- -------------------------
(1) (2)
John B. Wood (Executive Chairman) -- -- 3,739,225/978,766 $3,284,281/$411,082
William L.P. Brownley
(former V.P. and former General Counsel) -- -- 407,500/122,500 $371,800/$43,350
Thomas J. Ferrara (Treasurer
and Chief Financial Officer) -- -- 33,500/147,000 $13,510/$1,740
David S. Aldrich (President
and Chief Executive Officer) -- -- 995,000/165,000 $679,900/$53,100
Robert J. Marino
(Executive V.P. and Chief
Sales and Marketing Officer) -- -- 717,600/472,300 $336,885/$118,365
(1) These aggregate amounts include exercisable options to purchase the common
stock of Enterworks, Inc. for 2,060,000 shares held by Mr. Wood, 265,000
shares held by Mr. Brownley, 7,500 shares held by Mr. Ferrara, 400,000
shares held by Mr. Aldrich, and 200,000 shares held by Mr. Marino,
respectively.
(2) These aggregate values include values for exercisable and unexercisable
options to purchase the common stock of Enterworks, Inc. of $2,263,800 for
Mr. Wood, $328,450 for Mr. Brownley, $8,100 for Mr. Ferrara, $562,000 for
Mr. Aldrich, and $216,000 for Mr. Marino, respectively. All remaining
amounts included in these values reflect the value of options to purchase
the Class A Common Stock of the Company. These values are based upon an
estimated fair market value at December 31, 2000 of $1.37 per share for the
Company's Class A Common Stock and $1.85 per share for the common stock of
Enterworks, Inc. These values were derived from valuations performed by an
independent third party for the trustees of the Telos Shared Savings Plan,
a defined contribution employee savings plan in which substantially all
full-time employees are eligible to participate.
Compensation of Directors
During the fiscal year ended December 31, 2000, employee directors were
paid fees totaling $13,000 each for Board meetings attended. Outside directors,
Mr. Byers and Dr. Bryen were paid an annual fee of $25,000 each, and further
compensated $5,000 and $1,000 for meetings attended in excess of four meetings a
year. Outside director, Mr. Sterrett earned annual fees of $7,000, and Mr.
Boland waived payment for Board activity in 2000. Mr. Boland has asked to be
compensated in 2001 for his Board membership in accordance with the annual fees
for outside directors. The Chairman of the Board, Dr. Ikle, receives $100,000
annually for his service on the Board. In addition, Mr. Byers receives $5,000
per annum for his service as Proxy Chairman. The compensation paid to Mr. Byers
and Dr. Bryen is paid pursuant to a proxy agreement between the Company, the
Defense Security Service and certain of the Company shareholders. During the
fiscal year ended December 31, 2000, no outside directors of the Company were
awarded options.
Effective July 1, 2000, the Board of Directors implemented a new
compensation structure for the Board in which the Chairman of the Board receives
$100,000 for his services. The plan provides payment of $25,000 per year to
Proxy Holders, $5,000 per year for the Proxy Chairman, Directors fees of $10,000
per year with no additional compensation for meetings over four per year.
Additionally, the structure provides Directors who serve on the Executive, Audit
or Compensation Committees to receive annual options for 10,000 shares of Telos
Class A common stock at market value.
Employment Contracts
As of December 31, 2000, the Company was a party to agreements with certain
of its executive officers. Mr. William L.P. Brownley, former Vice President and
former General Counsel resigned in 2000. Mr. David S. Aldrich, Director,
President and Chief Executive Officer, Mr. Robert J. Marino, Chief Sales and
Marketing Officer, and Mr. John B. Wood, Director and Executive Chairman,
currently have employment agreements with the Company. The agreements are for
one year terms and provide for a payment of two years' base salary then in
effect if involuntarily terminated or if the agreements are not extended.
Accordingly, Messrs. Aldrich, Marino, and Wood would receive annually, given
their present salary levels, $350,000, $218,000 and $350,000, respectively, for
a two-year period.
In addition to base salary, the executives are eligible for a discretionary
bonus and for the grant of stock options under the agreements. The amount of the
bonus is determined by reference to the amount, if any, of earnings before taxes
and goodwill amortization of the Company for the year and at the Board of
Directors and Chief Executive Officer's discretion. Each year the Company
renegotiates these employment contracts as part of the yearly review process.
Accordingly, in 2001, the Company expects to review the contracts described
above. In addition, strategic hires or promotions may increase the number of
Executives who have employment contracts.
Disclosure of Relationship with Independent Accountants
PricewaterhouseCoopers LLP is the principal accountant for the Company.
They have been the principal accountant for the Company since the fiscal year
ended December 31, 1997. Their representatives will not be present at the
security holders' meeting, however, security holders may direct their written
correspondence to PricewaterhouseCoopers LLP. Total fees billed to the Company
for PricewaterhouseCoopers LLP services provided to the Company for the fiscal
year ended December 31, 2000 are as follows:
Financial Information Systems
Design and
Audit Fees Implementation fees All other Fees Total Fees
---------- ------------------- -------------- ----------
$ 184,000 $ 0 $ 77,224 $ 261,224
TELOS CORPORATION
By: /s/ Michelle C. Wertz
---------------------------------------
Michelle C. Wertz, Corporate Secretary
Ashburn, Virginia
Exhibits
--------
A. Audit Committee Charter
Telos Corporation
AUDIT COMMITTEE CHARTER
Purpose
The primary purpose of the Audit Committee (the "Committee") is to assist the
Board of Directors (the "Board") in fulfilling its responsibility to oversee
management's conduct of the Company's financial reporting process, including by
overviewing the financial reports and other financial information provided by
the Company to any governmental or regulatory body, or the public the Company's
systems of internal accounting and financial controls, and the annual
independent audit of the Company's financial statements.
In discharging its oversight role, the Committee is empowered subject to the
Boards discretion to investigate financial matters brought to its attention with
full access to all books, records, facilities and personnel of the Company and
the power to retain auditors for this purpose.
The Board shall review the adequacy of this Charter on an annual basis.
Membership
The Committee shall be comprised of not less than two members of the Board, and
the Committee's composition will meet the requirements of the Audit Committee
Policy of the SEC.
Accordingly, all of the members will be directors:
1. Who have no relationship to the Company that may interfere with the
exercise of their independence from management and the Company; and
2. Who are financially literate or who become financially literate within a
reasonable period of time after appointment to the Committee. In addition,
at least one member of the Committee will have accounting or related
financial management expertise.
Key Responsibilities
The Committee's job is one of oversight and it recognizes that the
Company's management is responsible for preparing the Company's financial
statements and that the outside auditors are responsible for auditing those
financial statements. Additionally, the Committee recognizes that financial
management, as well as the outside auditors, have more time, knowledge and more
detailed information on the Company than do Committee members; consequently, in
carrying out its responsibilities, the Committee is not providing any expert or
special assurance as to the Company's financial statements or any professional
certification as to the outside auditor's work.
The following functions shall be the common recurring activities of the
Committee in carrying out its oversight function. These functions are set forth
as a guide with the understanding that the Committee may diverge from this guide
as appropriate given the circumstances.
o The Committee shall review with management and the outside auditors the
audited financial statements to be included in the Company's Annual Report
on Form 10-K (or the Annual Report to the Shareholders if distributed prior
to the filing of Form 10-K) and review and consider with the outside
auditors the matters required to be discussed by Statement of Auditing
Standards (`SAS') No. 61 (as amended from time to time).
o As a whole, or through the Committee chair, the Committee shall review with
the outside auditors the Company's interim financial results to be included
in the Company's quarterly reports to be filed with Securities and Exchange
Commission and the matters required to be discussed by SAS No. 61 (as
amended from time to time); this review will occur prior to the Company's
filing of the Form 10-Q.
o The Committee shall discuss with management and the outside auditors the
quality and adequacy of the Company's internal controls.
o The Committee shall:
o request from the outside auditors annually, a formal written statement
delineating all relationships between the auditor and the Company
consistent with Independence Standards Board Standard Number 1;
o discuss with the outside auditors any such disclosed relationships and
their impact on the outside auditor's independence; and
o recommend that the Board take appropriate action to oversee the
independence of the outside auditor.
o The Committee, subject to any action that may be taken by the full Board,
shall have the ultimate authority and responsibility to select (or nominate
for shareholder approval), evaluate and, where appropriate, replace the
outside auditor.