SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 6)*
TELOS CORPORATION
-----------------------------------------------------------------------
(Name of Issuer)
12% Cumulative Exchangeable Redeemable Preferred Stock, $.01 par value
-----------------------------------------------------------------------
(Title of Class of Securities)
8796B200
-----------------------------------------------------------------------
(CUSIP Number)
Andrew R. Siegel
Costa Brava Partnership III, LP
237 Park Avenue, Suite 900
New York, New York 10017
(212) 692-6395
-----------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications)
October 17, 2005
-----------------------------------------------------------------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ].
Note: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Rule 13d-7 for other parties
to whom copies are to be sent.
*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the Notes)
Page 2 of 37
SCHEDULE 13D
CUSIP NO. 8796B200
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Costa Brava Partnership III, LP
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [ ]
(b) [X]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
Not Applicable
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS
2(D) OR 2(E)
[ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF 506,811
SHARES --------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY 0
EACH --------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON 506,811
WITH --------------------------------------------
10 SHARED DISPOSITIVE POWER
0
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
506,811
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
[X]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
15.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
Page 3 of 37
SCHEDULE 13D
CUSIP NO. 8796B200
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Roark, Rearden & Hamot, LLC
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [ ]
(b) [X]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
Not Applicable
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS
2(D) OR 2(E)
[ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF 0
SHARES --------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY 506,811
EACH --------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON 0
WITH --------------------------------------------
10 SHARED DISPOSITIVE POWER
506,811
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
506,811
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
[X]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
15.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
OO
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
Page 4 of 37
SCHEDULE 13D
CUSIP NO. 8796B200
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Seth W. Hamot
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [ ]
(b) [X]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
Not Applicable
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS
2(D) OR 2(E)
[ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States of America
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF 0
SHARES --------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY 506,811
EACH --------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON 0
WITH --------------------------------------------
10 SHARED DISPOSITIVE POWER
506,811
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
506,811
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
[X]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
15.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
Page 5 of 37
SCHEDULE 13D
CUSIP NO. 8796B200
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
White Bay Capital Management, LLC
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [ ]
(b) [X]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
Not Applicable
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS
2(D) OR 2(E)
[ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF 0
SHARES --------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY 506,811
EACH --------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON 0
WITH --------------------------------------------
10 SHARED DISPOSITIVE POWER
506,811
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
506,811
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
[X]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
15.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
OO
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
Page 6 of 37
SCHEDULE 13D
CUSIP NO. 8796B200
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Andrew R. Siegel
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [ ]
(b) [X]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
Not Applicable
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS
2(D) OR 2(E)
[ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States of America
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF 14,476
SHARES --------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY 506,811
EACH --------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON 14,476
WITH --------------------------------------------
10 SHARED DISPOSITIVE POWER
506,811
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
521,287
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
[ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
16.4%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
Page 7 of 37
AMENDMENT NO. 6 to SCHEDULE 13D
This amendment ("Amendment No. 6") amends the Schedule 13D previously
filed on March 25, 2005, and amended by Amendment No. 1 filed on May 9, 2005 and
further amended by Amendment No. 2 filed on June 6, 2005, and further amended by
Amendment No. 3 filed on July 13, 2005, and further amended by Amendment No. 4
filed on September 13, 2005, and further amended by Amendment No. 5 filed on
September 26, 2005 (collectively, the "Schedule"), by Costa Brava Partnership
III, LP ("Costa Brava"), Roark, Rearden & Hamot, LLC ("Roark"), Seth W. Hamot
("Hamot"), White Bay Capital Management, LLC ("White Bay"), and Andrew R. Siegel
("Siegel") with the Securities and Exchange Commission with respect to the 12%
Cumulative Exchangeable Redeemable Preferred Stock, $0.01 par value ("Redeemable
Preferred Stock") of Telos Corporation, a Maryland corporation (the "Issuer").
All defined terms refer to terms defined herein or in the Schedule. This
Amendment No. 6 speaks only as of its date. Costa Brava, Roark, Mr. Hamot, White
Bay and Mr. Siegel are collectively referred to herein as the "Reporting
Persons". The Schedule is amended only to the extent set forth below:
ITEM 4 PURPOSE OF TRANSACTION
Item 4. Purpose of Transaction appearing in the Schedule is hereby
amended and supplemented to add the following:
On October 17, 2005, Costa Brava filed a lawsuit in the Circuit Court
for Baltimore City in the State of Maryland against the Issuer, each
director of the Issuer, and certain of the Issuer's executive officers
(the "Lawsuit"). A copy of the complaint filed in the Lawsuit (the
"Complaint") is filed herewith and attached hereto as Exhibit 99.4 and
incorporated herein by reference. Any descriptions herein of the
Complaint are qualified in their entirety by reference to the
Complaint. The Reporting Persons do not have, and the Reporting Persons
specifically disclaim any obligation to provide, updated information
with respect to the proceedings relating to the Lawsuit.
As of the date of this Amendment No. 6, except as set forth above, and
as otherwise set forth in the Schedule, none of the Reporting Persons
has any present plan or intention which may result in, or relate to,
any of the actions described in subparagraphs (a) through (j) of Item 4
of Schedule 13D.
ITEM 7 MATERIAL TO BE FILED AS EXHIBITS.
Exhibit 1 Joint Filing Agreement
Exhibit 99.1 Letter dated May 3, 2005 to the Committee of Independent
Directors of the Board of Directors of the Issuer*
Exhibit 99.2 Costa Brava Letter dated June 30, 2005*
Exhibit 99.3 Letter dated September 20, 2005 to Mr. Joel Flax,
Partner in Charge, Goodman & Company, LLP*
Exhibit 99.4 Complaint filed in the Circuit Court for Baltimore City
in the State of Maryland on October 17, 2005.
*Filed with an earlier version of this Schedule 13D.
Page 8 of 37
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Amendment No. 6 to the Schedule
13D is true, complete and correct.
Dated: October 18, 2005 COSTA BRAVA PARTNERSHIP III, LP
By: Roark, Rearden & Hamot, LLC
Its General Partner
By: /s/ SETH W. HAMOT
-------------------------------------
Name: Seth W. Hamot
Title: Manager
ROARK, REARDEN & HAMOT, LLC
By: /s/ SETH W. HAMOT
-------------------------------------
Name: Seth W. Hamot
Title: Manager
/s/ SETH W. HAMOT
-----------------------------------------
Seth W. Hamot
WHITE BAY CAPITAL MANAGEMENT, LLC
By: /s/ ANDREW R. SIEGEL
-------------------------------------
Name: Andrew R. Siegel
Title: Manager
/s/ ANDREW R. SIEGEL
-----------------------------------------
Andrew R. Siegel
Page 9 of 37
EXHIBIT INDEX
-------------
Exhibit 1 Joint Filing Agreement, dated as of October 18, 2005.
Exhibit 99.1 Letter dated May 3, 2005 to the Committee of Independent
Directors of the Board of Directors of the Issuer*
Exhibit 99.2 Costa Brava Letter dated June 30, 2005*
Exhibit 99.3 Letter dated September 20, 2005 to Mr. Joel Flax, Partner in
Charge, Goodman & Company, LLP*
Exhibit 99.4 Complaint filed in the Circuit Court for Baltimore City in the
State of Maryland on October 17, 2005.
*Filed with an earlier version of this Schedule 13D.
Page 10 of 37
EXHIBIT 1 - JOINT FILING STATEMENT
Pursuant to Rule 13d-1(k)(1), we, the undersigned, hereby express our
agreement that the Amendment No. 6 to Schedule 13D for Telos Corporation is
filed on behalf of each of us. This agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
Dated: October 18, 2005 COSTA BRAVA PARTNERSHIP III, LP
By: Roark, Rearden & Hamot, LLC
Its General Partner
By: /s/ SETH W. HAMOT
-------------------------------------
Name: Seth W. Hamot
Title: Manager
ROARK, REARDEN & HAMOT, LLC
By: /s/ SETH W. HAMOT
-------------------------------------
Name: Seth W. Hamot
Title: Manager
/s/ SETH W. HAMOT
-----------------------------------------
Seth W. Hamot
WHITE BAY CAPITAL MANAGEMENT, LLC
By: /s/ ANDREW R. SIEGEL
-------------------------------------
Name: Andrew R. Siegel
Title: Manager
/s/ ANDREW R. SIEGEL
-----------------------------------------
Andrew R. Siegel
Page 11 of 37
EXHIBIT 99.4
Complaint Filed in the Circuit Court of Baltimore City
in the State of Maryland on October 17, 2005
COSTA BRAVA PARTNERSHIP III, L.P. * IN THE
237 Park Avenue, Suite 900
New York, New York 10017 * CIRCUIT COURT
Plaintiff, * FOR
vs. * BALTIMORE CITY
TELOS CORPORATION *
19886 Ashburn Road
Ashburn, Virginia 20147 *
Civil No.____________________
SERVE ON: *
THE CORPORATION TRUST *
INCORPORATED
300 East Lombard Street *
Baltimore, Maryland 21202
*
and
*
GEOFFREY B. BAKER
2410 Wyoming Avenue NW *
Washington, DC 20008
*
and
*
DAVID F. BORLAND
12113 Fort Craig Drive *
Woodbridge, Virginia 22192
*
and
*
NORMAN P. BYERS
7006 View Park Drive *
Burke, Virginia 22015
*
and
*
MICHAEL P. FLAHERTY
19886 Ashburn Road *
Ashburn, Virginia 20147
*
and
Page 12 of 37
FRED CHARLES IKLE *
7010 Glenbrook Road
Bethesda, Maryland 20814 *
and *
ROBERT J. MARINO *
19886 Ashburn Road
Ashburn, Virginia 20147 *
and *
JOHN M. McDUFFIE *
19886 Ashburn Road
Ashburn, Virginia 20147 *
and *
LANGHORNE A. MOTLEY *
1325 Windy Hill Road
McLean, Virginia 22102 *
and *
MICHELE NAKAZAWA *
19886 Ashburn Road
Ashburn, Virginia 20147 *
and *
MALCOLM M.B. STERRETT *
4516 Wetherill Road
Bethesda, Maryland 20816 *
and *
BRUCE J. STEWART *
8924 Belmart Road
Potomac, Maryland 20854 *
and *
RICHARD TRACY *
19886 Ashburn Road
Ashburn, Virginia 20147 *
and *
Page 13 of 37
EDWARD L. WILLIAMS *
19886 Ashburn Road
Ashburn, Virginia 20147 *
and *
JOHN B. WOOD *
19886 Ashburn Road
Ashburn, Virginia 20147 *
Defendants. *
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
COMPLAINT
---------
Plaintiff Costa Brava Partnership III, L.P., individually and on behalf
of Telos Corporation, by its attorneys Venable LLP, and Warner Stevens, L.L.P.,
for its Complaint herein, alleges as follows:
I. PARTIES
-------
1. Plaintiff Costa Brava Partnership III, L.P. ("Costa Brava"),
is a limited partnership organized under the laws of Delaware, with its
principal place of business in Massachusetts.
2. Defendant Telos Corporation ("Telos") is a Maryland
corporation with its principal place of business located at 19886 Ashburn Road,
Ashburn, Virginia 20147. Telos may be served through its registered agent for
service of process The Corporation Trust Incorporated, 300 East Lombard Street,
Baltimore, Maryland 21202.
3. Defendant Michael P. Flaherty ("Flaherty") is an officer of
Telos serving in the capacity of Executive Vice President. Flaherty may be
served with process at the corporate address of Telos, 19886 Ashburn Road,
Ashburn, Virginia 20147.
4. Defendant Robert J. Marino ("Marino") is a Director and an
officer of Telos, serving in the capacity of Executive Vice President. Marino
may be served with process at the corporate address of Telos, 19886 Ashburn
Road, Ashburn, Virginia 20147.
5. Defendant Edward L. Williams ("Williams") is an officer of
Telos, serving in the capacity of Executive Vice President. Williams may be
served with process at the corporate address of Telos, 19886 Ashburn Road,
Ashburn, Virginia 20147.
Page 14 of 37
6. Defendant John B. Wood ("Wood") is an officer and director of
Telos, serving in the capacity of Chief Executive Officer and Chairman of the
Board. Wood may be served with process at the corporate address of Telos, 19886
Ashburn Road, Ashburn, Virginia 20147.
7. Defendant Geoffrey B. Baker ("Baker") is an individual
residing, upon information and belief, at 2410 Wyoming Avenue NW, Washington, DC
20008. Baker serves as a Director of Telos.
8. Defendant David Borland ("Borland") is an individual residing,
upon information and belief, at 12113 Fort Craig Drive, Woodbridge, Virginia
22192. Borland serves as a Director of Telos.
9. Defendant Norman P. Byers ("Byers") is an individual residing,
upon information and belief, at 7006 View Park Drive, Burke, Virginia 22015.
Byers serves as a Director of Telos.
10. Defendant Doctor Fred Charles Ikle ("Ikle") is an individual
residing, upon information and belief, at 7010 Glenbrook Road, Bethesda,
Maryland 20814. Ikle serves as a Director of Telos.
11. Defendant Ambassador Langhorne A. Motley ("Motley") is an
individual residing, upon information and belief, at 1325 Windy Hill Road,
McLean, Virginia 22102. Motley serves as a Director of Telos.
12. Defendant Malcolm M.B. Sterrett ("Sterrett") is an individual
residing, upon information and belief, at 4516 Wetherill Road, Bethesda,
Maryland 20816. Sterrett serves as a Director of Telos.
13. Defendant Bruce J. Stewart ("Stewart") is an individual
residing, upon information and belief, 8924 Belmart Road, Potomac, Maryland
20854. Stewart serves as a Director of Telos.
14. Defendant Lieutenant General (ret.) John M. McDuffie
("McDuffie") is an officer of Telos serving as Executive Vice President and
Chief Marketing Officer. McDuffie may be served with process at the corporate
address of Telos, 19886 Ashburn Road, Ashburn, Virginia 20147.
15. Defendant Michele Nakazawa ("Nakazawa") is an officer of Telos
serving as Senior Vice President and Chief Financial Officer. Nakazawa may be
served with process at the corporate address of Telos, 19886 Ashburn Road,
Ashburn, Virginia 20147.
Page 15 of 37
16. Defendant Richard Tracy ("Tracy") is an officer of Telos
serving as Senior Vice President and Chief Security Officer. Tracy may be served
with process at the corporate address of Telos, 19886 Ashburn Road, Ashburn,
Virginia 20147.
II. JURISDICTION AND VENUE
----------------------
17. This Court has subject matter jurisdiction over this
proceeding because the amount at issue exceeds the minimum jurisdictional limits
of this Court.
18. Venue is proper in Baltimore City because Telos maintains its
resident agent for service of process there.
III. FACTS
-----
A. Introduction
19. Founded in 1968, and originally known as C3, Inc., Telos
provides information services in the areas of consulting, software services,
systems integration, and hardware maintenance, primarily to U.S. governmental
agencies and government-reliant industries. Telos' software services include
analysis, system specification, evaluation, hardware and software integration,
deployment, installation, training, and maintenance.
20. Telos' operations are comprised of two operating segments: IT
Solutions Group and Xacta. The IT Solutions Group develops, markets and sells
integration services conforming to a wide range of government information
technology requirements. The IT Solutions Group also provides general
information technology consulting and integration services in support of various
U.S. Government customers. Xacta develops, markets and sells
government-validated secure enterprise solutions to the U.S. Government and
financial institutions.
21. Defendants Flaherty, Marino, Williams, Wood, McDuffie,
Nakazawa and Tracy serve as officers of Telos (the "Officers").
22. Defendants Wood, Baker, Borland, Byers, Ikle, Motley, Marino,
Stewart and Sterrett serve as Directors of Telos (the "Directors").
Page 16 of 37
23. Securities issued by Telos include Class A and Class B Common
Stock with identical rights, preferences, and limitations. Holders of Common
Stock collectively hold the right to elect all of the members of Telos' board of
directors, except for two "Class D" directors as discussed further below.
24. Telos also issued certain classes of preferred securities.
Only one category of preferred securities issued by Telos is publicly traded:
the 12% Cumulative Exchangeable Redeemable Preferred Stock (the "ERPS").
25. Although issued by Telos in the form of stock, the ERPS have
all the characteristics of debt instruments.
26. Since the issuance of the ERPS, Telos and its Officers and
Directors have engaged in a consistent pattern of oppressive and obstructive
tactics to avoid paying mandatory dividends on the ERPS while rewarding the
Officers at the expense of the corporation.
27. Plaintiff Costa Brava holds shares of Telos' ERPS.
B. The Exchangeable Preferred Stock
28. As of June 1, 2005, there were 3,185,586 shares of ERPS
outstanding at a face value of $10.00 per ERPS share. The ERPS were issued in
1989, following the merger of Telos and C3 Acquisition Corporation.
29. Plaintiff Costa Brava holds 506,811 shares of Telos' ERPS.
These holdings constitute 15.9% of the Telos ERPS outstanding.
30. Rights of ERPS holders are set forth in a Registration
Statement on Form S-4 filed with the Securities and Exchange Commission in 1989
(the "Registration Statement").
(1) Dividend Rights
31. ERPS holders' dividend rights are set out in the Registration
Statement as follows:
Dividends. The Preferred Stock will bear semi-annual dividends at the
annual rate of 12% ($1.20) per share, based on the liquidation
preference of $10 per share, and will be fully cumulative. Dividends
will be payable by the Company, when and if declared by the Board of
Directors, commencing with the first sixth-month anniversary of the
first of the following to occur after the Effective Date (i) the
fifteenth day of the month in which the Effective Date occurs or (ii)
the first day of the following month and on each six-month anniversary
thereof (each of such dates being a "Dividend Payment Date"). Such
Page 17 of 37
dividends will be paid in preference to dividends on the Surviving
Corporation Common Stock and any other class or series of preferred
stock of the Company the terms of which specifically provide that such
class or series will rank junior to the Preferred Stock (the "Junior
Securities"). Such dividends will be paid to the holders of record at
the close of business on the date (not more than 90 days prior to the
respective Dividend Payment Date) specified by the Board of Directors
at the time the dividend is declared. Payment of cash dividends on the
Preferred Stock will be subject to certain restricted payment
provisions contained in certain of the Company's financing agreements.
In addition, Maryland Law contains certain restrictions on the payment
of dividends in cash or in additional shares of Preferred Stock.
32. By the terms of this provision, holders of the ERPS are
entitled to semi-annual fixed dividends on their shares. According to the
Registration Statement, Telos was obligated to make dividend payments to the
ERPS shareholders as of June 1, 1990 and on each six month anniversary
thereafter.
33. Telos ceased declaring and paying dividends on the ERPS in
1991. Telos has made no dividend payments to ERPS holders since that date.
34. Unpaid dividends due on the 3,185,586 outstanding ERPS have
accrued since December 1991 and continue to accrue. Accrued unpaid dividends on
the outstanding ERPS now total at least $39,700,000.
35. Telos has justified this 14-year long failure to pay dividends
by claiming that it did not have sufficient legally available funds to fulfill
this financial obligation.
36. The Registration Statement notes that Maryland law contains
certain restrictions on the payment of dividends, and conditions the mandatory
redemption of the ERPS on the "legal availability of funds." The Registration
Statement's reference to legally available funds is consistent with the
restriction, under Maryland Corporations and Associations Code ss. 2-311, that
corporate dividends may not be paid if, after giving effect to the dividends,
the corporation would not be able to pay its indebtedness as such indebtedness
becomes due in the usual course of business, or the corporation's total assets
would be less than the sum of the corporation's total liabilities plus, unless
the corporation's charter provides otherwise, the amount that would be needed,
if the corporation were to be dissolved at the time of the payment of dividends,
to satisfy the preferential rights upon dissolution of stockholders whose
preferential rights on dissolution are superior to those receiving the
dividends.
Page 18 of 37
37. Hence, in refusing to pay dividends on the grounds of lack of
"legally available funds," Telos admits that the corporation has been insolvent
since 1991 or that the payment of the dividends accrued since 1991 would render
the corporation insolvent.
(2) Redemption Rights
38. The ERPS are fixed-term securities which must be redeemed by
Telos. The Registration Statement establishes a mandatory ERPS redemption
schedule:
Redemption. Subject to the legal availability of funds therefor, any
contractual restrictions then binding on the Company and applicable
state law, the Preferred Stock may be redeemed at any time, in whole or
in part, at the Company's option, at a redemption price of $10 per
share together with all accrued and unpaid dividends (whether or not
earned or declared) thereon to the date fixed for redemption without
interest. Mandatory annual redemptions (subject to the legal
availability of funds, any contractual restrictions then binding on the
Company and applicable state law) will commence on the first Dividend
Payment Date (or, if any Exchange Debentures are outstanding, the first
interest payment date for the Exchange Debentures) after the sixteenth
anniversary of the Effective Date and will continue thereafter on the
first Dividend Payment Date (or, if any Exchange Debentures are
outstanding, the first interest payment date for the Exchange
Debentures following each subsequent anniversary of the Effective Date
at a redemption price of $10 per share, together with all accrued and
unpaid dividends (whether or not earned or declared) on the date fixed
for redemption, without interest. The number of shares of Preferred
Stock to be mandatorily redeemed on any such redemption date will be
equal to at least 20% of the greatest number of shares of Preferred
Stock issued and outstanding at any time, and on the first Dividend
Payment Date following the twentieth anniversary of the Effective Date,
the Company will redeem all outstanding shares of Preferred Stock at a
redemption price of $10 per share together with all accrued and unpaid
dividends (whether or not earned or declared) to such date.
39. Beginning this year, Telos must establish a sinking fund for
the redemption of, and must redeem at least 20% of the outstanding shares of
ERPS. At the same time Telos must pay accrued unpaid dividends on the ERPS.
40. In its most recent Form 10-Q filed with the Securities and
Exchange Commission, Telos stated that it "believes that the likelihood is that
[Telos] will not be able to meet the redemption schedule" of the ERPS.
Page 19 of 37
C. Telos Seeks to Avoid Mandatory Redemption of the ERPS and Payment of
Accrued Dividends
(1) Refusal to Act
41. Telos formed an Independent Committee of the Board of
Directors of Telos (the "Independent Committee") whose ostensible purpose is,
inter alia, to investigate ways to rectify Telos' capital structure insolvency
and finance the redemption of the ERPS.
42. Legal counsel for the Independent Committee sent a letter to
Plaintiff dated March 30, 2005, soliciting Plaintiff's aid in finding solutions
to Telos' insolvency.
43. Plaintiff attempted to assist Telos and the Independent
Committee in securing alternative financing to stabilize the capitalization of
Telos. Among other things, Plaintiff located several investment banks which are
prepared to explore a variety of strategic transactions with or on behalf of
Telos, and who have third parties as clients who are interested in exploring
strategic financing partnerships with Telos.
44. However, Telos and its Officers and Directors have refused to
take action on any of Plaintiff's proposals. The Independent Committee has
declined even to meet with some interested investors, thereby doing nothing to
improve Telos' insolvency or its ability to redeem the ERPS according to the
mandatory redemption schedule and pay accrued dividends.
45. Upon information and belief, Telos' Independent Committee
has yet to open substantive talks with any potential third-party lenders or
investors.
(2) Telos' Accounting Disclosures
46. As discussed above, the Registration Statement calls for a
mandatory redemption of at least 20% of the ERPS in 2005. The Registration
Statement specifies a mandated redemption price of $10 per share, along with the
accrued and unpaid dividends.
47. In its 2005 SEC filings, Telos has published public financial
statements invoking Statement of Financial Accounting Standards No. 6 ("SFAS No.
6") to recharacterize its short-term mandatory obligations to redeem the ERPS
Page 20 of 37
and pay accrued dividends as a long-term, rather than short-term liability.
Telos attempted to comply with SFAS No. 6 by stating that it has the "intent"
and "ability" to refinance the ERPS on a long-term basis after 2005.
48. SFAS No. 6, promulgated by the Financial Accounting Standards
Board, provides, in summary, that "short-term obligations arising from
transactions in the normal course of business that are due in customary terms
shall be classified as current liabilities. Short-term obligations expected to
be refinanced on a long-term basis shall be excluded from current liabilities
only if the enterprise intends to refinance the obligation on a long-term basis
and has the demonstrated ability to consummate the refinancing."
49. A necessary predicate to reclassifying a short-term obligation
as a long-term obligation, according to the terms of SFAS No. 6, is the
disclosure of certain facts. An enterprise's intent to refinance the short-term
obligation and its ability to consummate that refinancing must be supported by
disclosing either (i) that a long-term obligation or equity securities have been
issued for the purpose of refinancing the short-term obligation on a long-term
basis, or (2) that the enterprise has entered into a financing agreement to
refinance the obligation. In other words, SFAS No. 6 requires Telos to disclose
that it had either issued a long term obligation or security to refinance its
short-term obligations, or that it had entered an agreement making such
refinancing possible.
50. Nowhere in its filings with the SEC did Telos disclose that it
had either issued a long term obligation or security to refinance its short-term
obligations, or that it had entered an agreement making such refinancing
possible. As of the date of this Complaint - less than 2 months from the
mandatory redemption date - Telos management has yet to make any disclosure of
any refinancing arrangement or agreement.
Page 21 of 37
(3) Telos' Intention to Exchange the ERPS for Debentures
51. In its most recent Form 10-Q filed with the Securities and
Exchange Commission, Telos states that its ability to recharacterize the ERPS
and accrued unpaid dividends based on SFAS No. 6 is predicated upon an exchange
of the ERPS for certain debentures ("Exchange Debentures").
52. The Registration Statement contemplates that under certain
circumstances, Telos may exchange ERPS shares for Exchange Debentures. However,
the Registration Statement makes clear that such exchange must happen prior to
the mandatory redemption of the ERPS.
53. Moreover, the mandatory redemption schedule for the ERPS as
established in the Registration Statement applies in full force whether the
securities are in the form of ERPS or Exchange Debentures.
54. It its most recent Form 10-Q filed with the Securities and
Exchange Commission, Telos states its intentions to exchange the ERPS for
Exchange Debentures rather than follow the mandatory redemption schedule set
forth for the ERPS (and, indeed, the Exchange Debentures). If implemented, this
strategy contravenes the Registration Statement, fails to satisfy the
requirements of SFAS No. 6, and appears to be a misstatement of Telos' intention
and ability to refinance the mandatory redemption obligation.
D. Telos' History of Poor Management
55. The behavior of Telos and its Officers and Directors discussed
above is merely the latest example of a pattern of poor management which has
damaged the corporation generally and the ERPS holders in particular. Telos'
Officers and Directors routinely make decisions in their own best interests and
to the detriment of the corporation and its creditors and stockholders.
(1) Fraudulent Transfers
56. As discussed above, Telos' justification for its failure to
pay fixed dividends on the ERPS is an admission that for the past 14 years Telos
has been insolvent, or that the payment of such fixed dividends would render
Telos insolvent.
Page 22 of 37
57. Against this backdrop of admitted insolvency, Telos' Officers,
with the consent and approval of the Directors, have been paying themselves
exorbitantly high salaries and bonuses.
58. Chairman and C.E.O. John Wood - described in a recent
nationally published account as among the 100 highest paid executives in the
Washington D.C. area - alone received $1,056,057 in salary and $1,230,000 in
cash bonuses from 2002 to 2004.
59. Telos' recent filings with the Securities and Exchange
Commission report that, between 1998 and 2004, the company's executives have
received cash bonuses totaling $4,590,851. Telos conveyed (1) to Wood a total of
$1,600,000 in cash bonuses; (2) to Flaherty a total of $992,692 in cash bonuses;
(3) to Marino a total of $675,659 in cash bonuses; (4) to Williams a total of
$906,000 in cash bonuses; (5) to McDuffie a total of $250,000 in cash bonuses;
and (6) to Tracy a total of $166,500 in cash bonuses.
60. Additionally, the company's top five executives received a
total of 2,800,000 stock options in 2004 alone.
(2) The Porter Note
61. In addition to the payments described above, Telos issued
senior subordinated notes to certain majority common stockholders in 1995. These
notes essentially were loans to Telos by its majority common stockholders.
62. Amongst others, a loan was made by the majority holder of
Telos' Class A common stock, John R.C. Porter ("Porter"). Porter owns 75% of
Telos' Class A common stock.
63. The loan from Porter (the "Porter Note") totaled approximately
$5 million at an interest rate of 17% per year. By comparison, the average prime
interest rate in 1995 was only 8.8%.
64. Originally set to mature in 2000, the maturity date of the
Porter Note was extended to October 2005 at the same interest rate. When the
Porter Note was extended in 2000, the average prime interest rate was 9.2%.
65. Subsequent to the public announcement in November 2004 of the
Independent Committee's formation, the Officers and Directors made substantial
Page 23 of 37
and material changes to the Porter Note. In April 2005, the Porter Note, was
again renewed and extended to 2008 at the same 17% interest rate.
66. At the time of the April 2005 extension of the Porter Note,
the prime interest rate averaged 5.4%.
67. Also when the Porter Note was extended, Telos and its Officers
and Directors maintained an anti-takeover measure in the Porter Note. In the
event of any change in control of Telos, this provision requires a pre-payment
penalty payable to Porter which could reach the sum of $13.5 million. The
Officers and Directors renewed this provision contemporaneously with the
Independent Committee's solicitation of proposals for a solution to Telos'
insolvency.
68. The Board of Directors' extension of the Porter Note's
pre-payment penalty at the same time that Telos has represented publicly its
efforts to find solutions for its insolvency has the practical consequence of
chilling if not destroying possible solutions to its insolvency issues.
69. Evidently, Porter was able to leverage his standing as
majority stockholder to extract above market-rate cash interest payments from
Telos and other cash disbursements, while all other stockholders have been
forced to forego dividends on their shares.
70. Porter's status as a foreign citizen restricts his voting
rights in his shares. In accordance with a 1994 proxy agreement among Telos, the
U.S. Defense Security Service (an agency of the U.S. Department of Defense) and
Porter, certain designated members of Telos' Board of Directors are designated
to exercise the voting rights of Porter's common shares.
71. Porter received these regular and substantial payouts from
Telos despite his ostensible lack of direct control over the voting of his
shares.
(3) Porter's "Consulting Fees"
72. In addition to the inflated interest payments on the Porter
Note, Telos discloses that it makes payments to Porter for consulting fees.
Since 1997, these annual consulting fees range between $200,000 and $260,000.
Page 24 of 37
73. Telos has not disclosed what services Porter rendered each
year in exchange for these considerable sums, or even the nature of such
services.
74. This consulting fee arrangement is another vehicle by which
Telos and its Officers and Directors provided Porter, the majority shareholder,
with cash payments. During this same time, Telos and its Officers and Directors
have denied dividend payments to the ERPS shareholders on the publicly stated
bases of the company being insolvent.
75. Consulting fees paid to Porter by Telos total approximately
$1,960,000.
(4) SecureInfo Lawsuit
76. The management of Telos through its Officers and Directors
also threatens the company by inviting lawsuits predicated upon its business
practices.
77. In May 2005, SecureInfo Corporation ("SecureInfo") - a
Texas-based software manufacturer and competitor of Telos - initiated a lawsuit
against Telos and certain of Telos' officers. (See SecureInfo Corp. v. Telos
Corp. et al., United States District Court for the Eastern District of Virginia,
Civ. No. 1:05cv505, E.D. Va.)
78. SecureInfo alleged that the Telos, its subsidiary Xacta, and
others infringed SecureInfo's copyrights and trade secrets, as well as
intentionally interfering with SecureInfo's possessory interest in its
confidential information.
79. Plaintiff Costa Brava hopes and expects Telos to provide a
strong, meritorious defense to the specific violations of law alleged by
SecureInfo. In the best case, Telos will defeat the claims of SecureInfo. In the
worst case, Telos will expend significant resources and could incur substantial
financial liability.
80. In either case, the course of conduct pursued by Telos'
management exposed the company to the unnecessary risk and substantial legal
fees to defend that course of conduct.
81. On June 30, 2005 Plaintiff, through its attorneys, delivered a
letter to Telos' Board of Directors. Highlighting the seriousness of the
Page 25 of 37
allegations in the SecureInfo lawsuit, Plaintiff requested that these
allegations be immediately brought to the attention of the Audit Committee of
the Board of Directors. Additionally, Plaintiff requested that Telos' Audit
Committee, in accordance with the Sarbanes-Oxley Act of 2002, commence an
internal investigation of the activity of its senior officers. To date, Telos'
Audit Committee has failed to respond to Plaintiffs requests in any way. Upon
information and belief, Telos' Audit Committee has not begun any investigation
related to its executives' behavior.
(5) Resisting the "Class D" Directors
82. Telos established a provision in the Registration Statement
that, under certain circumstances, granted ERPS holders representation on Telos'
Board of Directors. Specifically, the Registration Statement provides:
If the company fails to pay dividends on the Preferred Stock either in
cash or additional shares of Preferred Stock for three consecutive
semi-annual periods, the Board of Directors will be increased by up to
two directors and the holders of the Preferred Stock, voting as a
class, will be entitled to elect the directors of the Company to fill
such newly created directorship.
83. Despite Telos' more than decade-long failure to pay the ERPS
holders a single penny of their dividends, Telos' management obstinately refused
to permit the ERPS holders to elect their "Class D" directors.
84. It was not until after Telos was sued and all parties expended
time and resources that the "Class D" directors could be elected. Telos was
ordered to do so by the federal district court in Alexandria, Virginia. (See
Telos Corp. v. Cede & Co., Civ. No. 97-439-A, E.D. Va., mem. opn. filed Apr. 22,
1998.)
(6) Executive Stock Option Grants
85. In its Form 10-K filed with the Securities and Exchange
Commission for the year 2000, Telos disclosed two new stock option compensation
plans. These incentive compensation plans were designed to issue stock options
in two of Telos' wholly-owned subsidiaries: Telos Delaware, Inc. ("Telos
Delaware") and Xacta, Inc. ("Xacta").
86. Under both the Telos Delaware and Xacta option plans, certain
key executives and employees of Telos are eligible to receive stock options.
Page 26 of 37
Telos may award up to 3,500,000 shares of common stock as either incentive or
non-qualified stock options under each plan.
87. In 2000, Marino was granted 292,900 options in Telos, Telos
Delaware, and Xacta common stock.
88. In 2001, Wood was granted 310,000 options in Telos, Telos
Delaware, and Xacta common stock. Also in 2001, Flaherty was granted 300,000
options in Telos, Telos Delaware, and Xacta common stock.
89. The latest detailed reports of the Telos Delaware and Xacta
stock option plans are contained within Telos' 2003 Form 10-K. In 2003, Telos
disclosed that 1,282,000 options were outstanding in the Telos Delaware plan, of
which 958,000 options were exercisable. Telos also disclosed that 1,066,000
options were outstanding in the Xacta plan, of which 757,000 options were
exercisable.
90. Telos' 2004 Form 10-K significantly clouded the picture of
Telos' numerous stock option plans. Prior to 2004, Telos discussed and made
disclosures of its stock options plans separately. Beginning in 2004, Telos
lumped all of its stock option programs together for the purposes of disclosure.
Rather than discuss the Telos Delaware and Xacta stock option plans separately,
Telos merely disclosed the total number of stock option grants under all
available stock option plans, totaling 4,468,000 in 2004.
91. In 2004, Wood was granted 600,000 options in Telos common
stock and 400,000 options in Xacta common stock. Also in 2004, Flaherty, Marino,
Williams, and McDuffie each were granted 250,000 options in Telos common stock
and 200,000 options in Xacta common stock.
92. Upon information and belief, Telos and its Officers are
concentrating the enterprise value of Telos in its wholly-owned subsidiaries
Xacta and Telos Delaware. While maintaining the parent Telos' insolvency and
saturating that entity with debt, including the ERPS and its unpaid accrued
dividends, Telos and its Directors and Officers are enhancing value of the
wholly owned subsidiaries, and rewarding themselves with grants of stock options
in those entities rather than the parent corporation.
93. By doing so, Telos and its Directors and Officers are
impermissibly favoring themselves over the creditors and stockholders of the
parent corporation Telos.
Page 27 of 37
E. Summary
94. The management of Telos by its Officers and Directors has
yielded 14 years of admitted insolvency and a pattern of behavior that exposes
the corporation to significant risks and expenses.
95. Admitting insolvency, Telos and its Officers and Directors
failed to make any dividend payments on the ERPS shares for the past 14 years
and will not fulfill its short-term obligations under the mandatory redemption
schedule.
96. Telos and its Officers and Directors engaged in behavior that
has invited a serious lawsuit from one of its competitors.
97. During this same time, Telos' Officers and Directors have
acted in their own interest by paying themselves substantial salaries and bonus
payments, and granting themselves significant numbers of stock options in the
subsidiaries of Telos. Telos' Officers and Directors also caused the diversion
of corporate assets to its majority stockholder by way of payments on a
repeatedly extended note with an above-market interest rate of 17% per year and
consulting fees totaling approximately $1,960,000.
98. When the ERPS holders sought to elect their own "Class D"
directors to the Telos' Board, Telos' Officers and Directors opted to fight to
protect their own interests.
99. Despite running an insolvent company for 14 years, Telos and
its Officers and Directors have been unwilling to entertain strategic
investments or partnerships to address its insolvency and its failure to pay
dividends on the ERPS despite appointing an Independent Committee to pursue
these very options.
100. Now, only two months before the ERPS shares are due to be
redeemed, Telos and its Officers and Directors disclose they believe the
mandatory redemption schedule of the ERPS as set out in the Registration
Statement will not be met.
101. Instead of redemption, it appears that Telos and its Officers
and Directors will seek to exchange the ERPS for Exchange Debentures and
reclassify those Exchange Debentures under SFAS No. 6. These actions contravene
Page 28 of 37
the Registration Statement of the securities, will further delay already overdue
dividend arrearage payments owed to the ERPS holders, and are in furtherance of
the pattern of oppressive and obstructive tactics by Telos and its Officers and
Directors towards the ERPS holders.
102. Telos and its Officers and Directors have failed and continue
to fail to operate and run Telos to the benefit of the stockholders. A receiver
should be appointed to take charge of Telos, put a halt the Officers' and
Directors' dangerous and oppressive business tactics, and either restore the
company to solvency or oversee its liquidation.
IV. CAUSES OF ACTION
----------------
103. Although labeled as "preferred shares," the ERPS effectively
function as debt, having all of the hallmarks of debt. ERPS debt characteristics
include: lack of voting rights in most circumstances; fixed dividend payments
with no participation in corporate growth; a fixed maturity date; redemption and
liquidation rights which do not exceed the security's issue price; and priority
over common stockholders. Tellingly, Telos identifies preferred stock as
"indebtedness" in its corporate charter.
104. This Court should look to the substance of the ERPS. The ERPS
shares contain the traditional hallmarks of debt instruments, and this Court
should treat them as debt rather than equity.
105. Even if this Court would not find the ERPS to be debt
instruments, the Court should consider the unpaid accrued dividends on the ERPS
to be debt. Telos itself treats the unpaid dividend obligations as an "interest
expense" and a "liability" in its publicly filed financial statements.
106. Alternatively, given Telos' consistent representations to the
public that the ERPS and the unpaid accrued dividends are debt, the defendants
should be estopped from denying that either the ERPS or the unpaid accrued
dividends are debt.
107. As a holder of the ERPS and a party entitled to receive
mandatory dividend payments, Plaintiff believes that it is a creditor of Telos
Corporation, rather than a stockholder, and, as such, has standing to assert the
causes of action and secure the remedies sought in Counts I, II and III.
Page 29 of 37
COUNT I
-------
Setting Aside and Recovery of Fraudulent Conveyance of Bonus Payments
Md. Comm. Law ss.ss. 15-201 et seq.
(against Telos, Wood, Flaherty, Marino, Williams, McDuffie, Tracy)
108. Plaintiff repeats and realleges each of the preceding
paragraphs of this Complaint as if fully set forth herein.
109. At all times relevant to the facts and claims set out herein,
Plaintiff was a creditor of Defendant Telos.
110. Between 1998 and 2004, Telos conveyed to Wood a total of
$1,600,000 in cash bonuses.
111. Between 2001 and 2004, Telos conveyed to Flaherty a total of
$992,692 in cash bonuses.
112. Between 1999 and 2004, Telos conveyed to Marino a total of
$675,659 in cash bonuses.
113. Between 2001 and 2004, Telos conveyed to Williams a total of
$906,000 in cash bonuses.
114. In 2004, Telos conveyed to McDuffie a total of $250,000 in
cash bonuses.
115. Between 2001 and 2004, Telos conveyed to Tracy a total of
$166,500 in cash bonuses.
116. At the time of each such conveyance enumerated above (the
"Fraudulent Bonus Conveyances"), Telos was either insolvent (i.e. the present
fair market value of its assets was less than the amount required to pay its
probable liability on its existing debts as they became absolute and matured),
or was driven into insolvency as a result of such conveyance, or was left with
unreasonably small capital as a result of such conveyance.
117. The Fraudulent Bonus Conveyances were made without fair
consideration.
118. As a result, Plaintiff requests a full and complete accounting
of the Fraudulent Bonus Conveyances, and that the Court impose a constructive
trust on such conveyances and any proceeds derived therefrom. By reason of the
fraudulent and otherwise wrongful manner in which the Defendant transferees
obtained their alleged right, claim or interest in and to the Fraudulent Bonus
Conveyances, those Defendant transferees have no legal or equitable right, claim
or interest therein. Instead, the Defendant transferees are involuntary trustees
holding said property and profits therefrom in constructive trust for Telos with
the duty to convey the same to Telos forthwith.
Page 30 of 37
COUNT II
--------
Preliminary and Permanent Injunction
Pursuant to Md. Code, Comm. Law ss. 15-210(b)
(against Telos)
119. Plaintiff repeats and realleges each of the preceding
paragraphs of this Complaint as if fully set forth herein.
120. Unless an injunction is granted, Telos will continue to engage
in fraudulent conveyances in the form of further exorbitant bonus payments to
Defendants and further grants of stock options. Such conveyances have caused
irreparable harm to Plaintiff and will continue to cause irreparable harm in the
future.
121. Accordingly, Plaintiff petitions this Court to enter a
preliminary and permanent injunction enjoining Telos from making future bonus
payments to any Directors or Officers unless and until dividend arrearages on
the ERPS are satisfied in full.
122. Further, Plaintiff petitions this Court to enter a preliminary
and permanent injunction enjoining Telos from making further grants of stock
options in Telos and its wholly-owned subsidiaries to any Directors or Officers
unless and until dividend arrearages on the ERPS are satisfied in full.
123. Plaintiff petitions this Court to enter a preliminary and
permanent injunction enjoining any Officers and Directors who have already
received grants of stock options in Telos' wholly owned subsidiaries from
exercising those options unless and until dividend arrearages on the ERPS are
satisfied in full.
COUNT III
---------
Appointment of Receiver
Pursuant to Md. Code, Comm. Law ss. 15-210(b)
(against Telos)
124. Plaintiff repeats and realleges each of the preceding
paragraphs of this Complaint as if fully set forth herein.
125. Defendants have engaged in, and continue to engage in, actions
which are ultra vires, fraudulent, and otherwise illegal.
Page 31 of 37
126. Unless a receiver is appointed, Defendants will continue to
engage in the ultra vires, fraudulent, and otherwise illegal acts complained of
herein, so as to pose an imminent danger to the assets of Telos.
127. Unless a receiver is appointed, Telos will continue to engage
in fraudulent conveyances in the form of further exorbitant bonus payments to
Defendants to the detriment of Plaintiff.
128. Accordingly, Plaintiff petitions this Court to appoint a
receiver for Telos to take charge of the company's assets and operate the
business of the corporation, as necessary and proper to preserve them, and to
take such actions as are necessary to remedy and/or prevent the fraudulent
conveyances complained of herein, pending further determination and action of
this Court.
ALTERNATIVE RELIEF
------------------
129. Plaintiff recognizes that this Court may determine the ERPS,
the unpaid accrued dividends, or both to be equity, not debt, and that such
findings could vitiate Plaintiff's standing as a creditor to assert the
foregoing causes of action. Accordingly, in the event that this Court should
determine that Plaintiff is solely a stockholder, rather than a creditor, of
Telos, or otherwise lack standing to assert Counts I, II and III hereinabove,
Plaintiff pleads the following Counts IV and V in the alternative, as a
stockholder of Telos.
COUNT IV
--------
Appointment of Receiver
Pursuant to Court's General Equitable Powers
130. Plaintiff repeats and realleges each of the preceding
paragraphs of this Complaint as if fully set forth herein.
131. Defendants have engaged in, and continue to engage in, actions
which are ultra vires, fraudulent, and otherwise illegal.
132. Unless a receiver is appointed, Defendants will continue to
engage in the ultra vires, fraudulent, and otherwise illegal acts complained of
herein, so as to pose an imminent danger to the assets of Telos.
Page 32 of 37
133. Accordingly, Plaintiff petitions this Court, under its general
equitable powers, to appoint a receiver for Telos to take charge of the
company's assets and operate the business of the corporation, as necessary and
proper to preserve them, and to take such actions as are necessary to terminate
and remedy defendants' ultra vires, fraudulent, and otherwise illegal acts
complained of herein, pending further determination and action of this Court.
COUNT V
-------
Petition for Dissolution of Corporation
Md. Code, Corporations & Associations, ss. 3-413(b)(2); ss. 3-414
134. Plaintiff repeats and realleges each of the preceding
paragraphs of this Complaint as if fully set forth herein.
135. Plaintiff is a stockholder of Telos Corporation.
136. Telos' Officers and Directors and majority stockholder Porter
have engaged in illegal, oppressive, and fraudulent acts, as alleged
hereinabove.
137. Plaintiff hereby petitions this Court that Telos be dissolved
and for the appointment of a temporary receiver to take charge of Telos' assets
and operate the business of the corporation, as necessary and proper to preserve
them, pending a final determination as to dissolution.
DERIVATIVE CLAIMS
-----------------
138. Regardless of whether this Court determines the ERPS, the
unpaid accrued dividends, or both to be equity or debt, Plaintiff, as a
stockholder or creditor of Telos, has standing to assert derivative claims on
behalf of Telos. Accordingly, Plaintiff pleads the following Counts VI and VII
in a derivative capacity.
COUNT VI
--------
Md. Code, Corporations & Associations, ss. 2-405.1
(against the Directors)
139. Plaintiff repeats and realleges each of the preceding
paragraphs of this Complaint as if fully set forth herein.
Page 33 of 37
140. The Directors are obligated to perform their duties in good
faith.
141. The Directors are obligated to perform their duties in a
manner they reasonably believe to be in the best interest of the corporation.
142. The Directors are obligated to perform their duties with the
care that an ordinarily prudent person in a like position would use under
similar circumstances.
143. The Directors breached their duties by causing Telos to make
numerous bonus payments and other grants of discretionary compensation to
certain officers and Telos' majority shareholder. The payment of discretionary
bonuses to certain officers and grants of stock options, while at the same time
withholding dividends to the ERPS holders, favors those officers over the
obligations of Telos to its ERPS holders. Similarly, the payment of inflated
interest the Porter Note and the repeated extension of the Porter Note favors a
particular shareholder to the detriment of the ERPS holders. The Directors have
failed to take action to revive Telos from its admitted insolvency and address
its impending deadline to redeem the ERPS and pay the unpaid accrued dividends.
144. As a direct and proximate result of the foregoing, Telos and
Telos' creditors suffered substantial damages and Telos' assets were impaired.
145. Plaintiff demanded that Telos (1) recover its fraudulent
transfers, (2) cease bonus payments and stock option grants to executives, (3)
actively pursue a financial resolution of its insolvency, and (4) pursue a
financial solution that facilitates payments of mandatory dividends and
mandatory redemption, including a demand for appropriate legal action, but Telos
has refused. Specifically, by letter to the Telos board of directors dated
September 9, 2005, Plaintiff demanded that Telos' Board of Directors take
corrective action within 30 days by providing a full and complete accounting, as
well as recovering cash bonus payments and canceling or prohibiting the exercise
of stock options granted to Wood, Flaherty, Marino, Williams, McDuffie and
Tracy. As of October 14, 2005, Telos had not responded to Plaintiff's demand
letter.
Page 34 of 37
146. As a result of the refusal by Telos, Plaintiff has standing to
bring this claim against the Directors derivatively on behalf of Telos.
147. The damages from the foregoing breaches of duty are in an
amount not yet fully ascertained.
COUNT VI
--------
Breach of Fiduciary Duty
(against the Officers)
148. Plaintiff repeats and realleges each of the preceding
paragraphs of this Complaint as if fully set forth herein.
149. The Officers stand in a fiduciary relationship with their
corporation, Telos.
150. The Officers are obligated to perform their duties with the
utmost good faith and loyalty.
151. The Officers are obligated not to engage in self-dealing to
the detriment of Telos and its creditors and stockholders.
152. The Officers breached their duties by causing Telos to make
numerous bonus payments and other grants of discretionary compensation including
stock options to certain officers and Telos' majority shareholder. The payment
of discretionary bonuses and the grant of stock option compensation to certain
officers while at the same time withholding dividends to the ERPS holders favors
those officers over the obligations of Telos to its shareholders. Similarly, the
payment of inflated interest the Porter Note favors a particular shareholder to
the detriment of the ERPS holders. The Officers and Directors have failed to
take action to revive Telos from its admitted insolvency and address its
impending deadline to redeem the ERPS and pay the unpaid accrued dividends.
153. In committing the breaches set out above, the Officers failed
to consider the interests of Telos and Telos' creditors, and instead were
motivated by their own self-interest.
154. In committing the breaches set out above, the Officers wholly
failed to exercise any business judgment whatsoever.
Page 35 of 37
155. In committing the breaches set out above, the Officers acted
carelessly, recklessly and/or were grossly negligent in the performance of their
duties.
156. As a direct and proximate result of the foregoing, Telos and
Telos' creditors suffered substantial damages and Telos' assets were impaired.
157. As a direct and proximate result of the foregoing, Telos and
Telos' creditors suffered substantial damages and Telos' assets were impaired.
158. Plaintiff demanded that Telos (1) recover its fraudulent
transfers, (2) cease bonus payments and stock option grants to executives and
any exercise thereof, (3) actively pursue a financial resolution of its
insolvency, and (4) pursue a financial solution that facilitates payments of
mandatory dividends and mandatory redemption, including a demand for appropriate
legal action, but Telos has refused. Specifically, by letter to the Telos board
of directors dated September 9, 2005, Plaintiff demanded that Telos' Board of
Directors take corrective action within 30 days by providing a full and complete
accounting, as well as recovering cash bonuses paid to Wood, Flaherty, Marino,
Williams, McDuffie and Tracy. Plaintiff also demanded that Telos' Board of
Directors cancel or prohibit the exercise of stock options granted to Wood,
Flaherty, Marino, Williams and McDuffie. As of October 14, 2005, Telos had not
responded to Plaintiff's demand letter.
159. As a result of the refusal by the Officers and Directors,
Plaintiff has standing to bring this claim derivatively on behalf of Telos.
160. The damages from the foregoing breaches of duty are in an
amount not yet fully ascertained.
Page 36 of 37
V. JURY DEMAND
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161. Trial by Jury is hereby demanded.
WHEREFORE, Plaintiff demands judgment against Defendants:
(1) for a full and complete accounting;
(2) for a declaration that the Officers and Directors hold all executive
bonus payments complained of hereinabove in constructive trust for
Telos;
(3) for an order requiring the Officers and Directors to account to
Plaintiff for all of the proceeds derived by Officers from the
executive bonus payments, and to pay to Telos the sum found due on such
accounting;
(4) for preliminary and permanent injunctions enjoining Telos from making
future bonus payments to any Directors or Officers unless and until
dividend arrearages on the ERPS are satisfied in full;
(5) for preliminary and permanent injunctions enjoining Telos from making
further grants of stock options in Telos and its wholly-owned
subsidiaries to any Directors or Officers unless and until dividend
arrearages on the ERPS are satisfied in full;
(6) for preliminary and permanent injunctions enjoining any Officers and
Directors who have already received grants of stock options in Telos'
wholly owned subsidiaries from exercising those options unless and
until dividend arrearages on the ERPS are satisfied in full;
(7) for damages to Telos;
(8) for the appointment of a receiver;
(9) for the dissolution of Telos;
(10) for such other and further relief as to which Plaintiff may be
entitled.
Page 37 of 37
Dated: October 17, 2005
VENABLE LLP
By: /s/ G. STEWART WEBB, JR.
--------------------------------------
James J. Hanks, Jr.
G. Stewart Webb, Jr.
1800 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
(410) 244-7742 (facsimile)
- and -
WARNER STEVENS, LLP
Lewis T. Stevens (TX Bar No. 24031366)
Jeffrey R. Erler (TX Bar No. 00796516)
J. Todd Key (TX Bar No. 24027104)
301 Commerce Street, Suite 1700
Fort Worth, Texas 76102
(817) 810-5250
ATTORNEYS FOR PLAINTIFF