SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 13)*
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)
February 15, 2007
----------------------------------------------------------------------
(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 28
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 28
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 28
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 28
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 28
SCHEDULE 13D
CUSIP NO. 8796B200
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Andrew R. Siegel
- --------------------------------------------------------------------------------
(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 28
AMENDMENT NO. 13 to SCHEDULE 13D
This amendment ("Amendment No. 13") 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, and further amended by Amendment No. 6 filed on October 18,
2005, and further amended by Amendment No. 7 filed on November 14, 2005, and
further amended by Amendment No. 8 filed on December 29, 2005, and further
amended by Amendment No. 9 filed on January 13, 2006, and further amended by
Amendment No. 10 filed on February 9, 2006, and further amended by Amendment No.
11 filed on June 2, 2006, and further amended by Amendment No. 12 filed on
February 8, 2007 (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. 13 speaks only as of its date. Costa Brava, Roark, Mr. Hamot,
White Bay and Mr. Siegel are collectively referred to herein as the "Costa Brava
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 February 15, 2007, in connection with that certain lawsuit pending
in the Circuit Court for Baltimore City in the State of Maryland (the
"Court") against the Issuer, each director of the Issuer, and certain
of the Issuer's executive officers (the "Lawsuit"), Costa Brava and
Wynnefield Partners Small Cap Value, L.P. (the "Partnership" or
"Wynnefield") filed a Motion for Preliminary Injunction asking the
Court to enter a preliminary injunction against the Issuer and the
other defendants in the Lawsuit and their agents enjoining them from
pursuing or closing any sale of the Issuer's assets outside the
ordinary course of business until such time as the Issuer has
reconstituted its Board of Directors through the election of new Class
D directors, and repopulated the Issuer's Transaction Committee. A copy
of the Motion for Preliminary Injunction filed by Costa Brava and
Wynnefield, through their respective counsel, is filed herewith and
attached hereto as Exhibit 99.14 and incorporated herein by reference
(the "Motion for Preliminary Injunction"). A copy of the Memorandum of
Points and Authorities in Support of Motion for Preliminary Injunction
filed by Costa Brava and Wynnefield, through their respective counsel,
is filed herewith and attached hereto as Exhibit 99.15 and incorporated
herein by reference (the "Memorandum of Points and Authorities"). Any
descriptions herein of the Motion for Preliminary Injunction and the
Memorandum of Points and Authorities are qualified in their entirety by
reference to the Motion for Preliminary Injunction and the Memorandum
of Points and Authorities respectively.
As of the date of this Amendment No. 13, except as set forth above, and
in the Motion for Preliminary Injunction and in the Memorandum of
Points and Authorities, and as otherwise set forth in the Schedule,
none of the Costa Brava Reporting Persons has any present plans or
intentions which would result in or relate to any of the transactions
described in subparagraphs (a) through (j) of Item 4 of the
instructions to Schedule 13D.
Page 8 of 28
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*
Exhibit 99.5 Goodman Letter dated November 11, 2005*
Exhibit 99.6 Form of Warner Stevens Audit Committee Demand
Letter dated December 27, 2005*
Exhibit 99.7 Form of Warner Stevens Board Demand Letter dated
December 27, 2005*
Exhibit 99.8 Form of Warner Stevens CEO/CFO Demand Letter
dated December 27, 2005*
Exhibit 99.9 Owsley Letter dated December 27, 2005*
Exhibit 99.10 Motion for Judgment filed in the Circuit Court
of the County of Fairfax in the State of Virginia on
December 28, 2005*
Exhibit 99.11 Motion for Preliminary Injunction filed in the
Circuit Court for Baltimore City in the State of
Maryland on May 26, 2006*
Exhibit 99.12 Memorandum of Points and Authorities in Support
of Motion for Preliminary Injunction filed in the
Circuit Court for Baltimore City in the State of
Maryland on May 26, 2006 (without the exhibits
thereto)*
Exhibit 99.13 Letter dated February 7, 2007 to the Corporate
Secretary of the Issuer*
Exhibit 99.14 Motion for Preliminary Injunction filed in the
Circuit Court for Baltimore City in the State of
Maryland on February 15, 2007
Exhibit 99.15 Memorandum of Points and Authorities in Support
of Motion for Preliminary Injunction filed in the
Circuit Court for Baltimore City in the State of
Maryland on February 15, 2007 (without the exhibits
thereto)
* Filed with an earlier version of this Schedule 13D.
Page 9 of 28
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Amendment No. 13 to the Schedule
13D is true, complete and correct.
Dated: February 15, 2007
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 10 of 28
EXHIBIT INDEX
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*
Exhibit 99.5 Goodman Letter dated November 11, 2005*
Exhibit 99.6 Form of Warner Stevens Audit Committee Demand Letter dated
December 27, 2005*
Exhibit 99.7 Form of Warner Stevens Board Demand Letter dated December 27,
2005*
Exhibit 99.8 Form of Warner Stevens CEO/CFO Demand Letter dated December
27, 2005*
Exhibit 99.9 Owsley Letter dated December 27, 2005*
Exhibit 99.10 Motion for Judgment filed in the Circuit Court of the County
of Fairfax in the State of Virginia on December 28, 2005*
Exhibit 99.11 Motion for Preliminary Injunction filed in the Circuit Court
for Baltimore City in the State of Maryland on May 26, 2006*
Exhibit 99.12 Memorandum of Points and Authorities in Support of Motion for
Preliminary Injunction filed in the Circuit Court for
Baltimore City in the State of Maryland on May 26, 2006
(without the exhibits thereto)*
Exhibit 99.13 Letter dated February 7, 2007 to the Corporate Secretary of
the Issuer*
Exhibit 99.14 Motion for Preliminary Injunction filed in the Circuit Court
for Baltimore City in the State of Maryland on February 15,
2007
Exhibit 99.15 Memorandum of Points and Authorities in Support of Motion for
Preliminary Injunction filed in the Circuit Court for
Baltimore City in the State of Maryland on February 15, 2007
(without the exhibits thereto)
* Filed with an earlier version of this Schedule 13D*
Page 11 of 28
EXHIBIT 1 - JOINT FILING STATEMENT
Pursuant to Rule 13d-1(k)(1), we, the undersigned, hereby express our
agreement that the Amendment No. 13 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: February 15, 2007
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 12 of 28
EXHIBIT 99.14
Motion for Preliminary Injunction filed in the Circuit Court for Baltimore City
in the State of Maryland on February 15, 2007
COSTA BRAVA PARTNERSHIP III, L.P., * IN THE
and WYNNEFIELD PARTNERS SMALL
CAP VALUE, L.P. * CIRCUIT COURT
Plaintiffs, * FOR
v. * BALTIMORE CITY
TELOS CORPORATION, et al., * Case No. 24-C-05-009296
Defendants. *
* * * * * * * *
MOTION FOR PRELIMINARY INJUNCTION
Pursuant to Maryland Rules 15-501 et seq., Plaintiffs, through
undersigned counsel, move this Court to enter a Preliminary Injunction against
Defendants and their agents barring them from selling or otherwise disposing of
any assets of Telos Corporation outside the normal course of business until
Telos' Board of Directors and Telos' Transaction Committee have been fully
reconstituted.
A Memorandum of Points and Authorities in support of the relief sought
by Plaintiffs accompanies this Motion.
Respectfully submitted,
WARNER STEVENS, LLP
By: /s/ LEWIS T. STEVENS
--------------------------------------
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
- and -
Page 13 of 28
SHUMAKER WILLIAMS, P.C.
Harry Levy
40 West Chesapeake Avenue
Suite 605
Towson, Maryland 21201
(410) 825-5223
(410) 825-5426 (facsimile)
ATTORNEYS FOR PLANITIFF
COSTA BRAVA PARTNERSHIP III, L.P.
WHITEFORD, TAYLOR & PRESTON, L.L.P.
By: /s/ JONATHAN E. CLAIBORNE
--------------------------------------
Jonathan E. Claiborne
7 St. Paul Street, Suite 1400
Baltimore, Maryland 21202-1626
(410) 347-9409
(410) 223-4309 (facsimile)
- and-
KANE KESSLER, P.C.
Jeffrey H. Daichman, Esq.
1350 Avenue of The Americas
New York, New York 10019-4896
(212) 519-5142
(212) 245-3009 (facsimile)
ATTORNEYS FOR
WYNNEFIELD PARTNERS SMALL CAP VALUE, L.P.
Page 14 of 28
EXHIBIT 99.15
Memorandum of Points and Authorities in Support of Motion for Preliminary
Injunction filed in the Circuit Court for Baltimore City in the State of
Maryland on February 15, 2007
COSTA BRAVA PARTNERSHIP III, L.P., * IN THE
and WYNNEFIELD PARTNERS SMALL
CAP VALUE, L.P. * CIRCUIT COURT
Plaintiffs, * FOR
v. * BALTIMORE CITY
TELOS CORPORATION, et al., * Case No. 24-C-05-009296
SPECIALLY ASSIGNED TO
Defendants. * JUDGE MATRICCIANI
* * * * * * * *
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF
MOTION FOR PRELIMINARY INJUNCTION
---------------------------------
Harry Levy Jonathan E. Claiborne
SHUMAKER WILLIAMS, P.C WHITEFORD, TAYLOR & PRESTON, L.L.P.
40 West Chesapeake Avenue 7 St. Paul Street, Suite 1400
Suite 605 Baltimore, Maryland 21202-1626
Towson, Maryland 21201 (410) 347-9409
(410) 825-5223 (410) 223-4309 (facsimile)
(410) 825-5426 (facsimile)
and and
Lewis T. Stevens (TX Bar No. 24031366) Jeffrey H. Daichman
Jeffrey R. Erler (TX Bar No. 00796516) KANE KESSLER, P.C.
J. Todd Key (TX Bar No. 24027104) 1350 Avenue of The Americas
WARNER STEVENS, LLP New York, New York 10019-4896
301 Commerce Street, Suite 1700 (212) 519-5142
Fort Worth, Texas 76102 (212) 245-3009 (facsimile)
(817) 810-5250
ATTORNEYS FOR PLAINTIFF
ATTORNEYS FOR PLANITIFF WYNNEFIELD PARTNERS SMALL CAP
COSTA BRAVA PARTNERSHIP III, L.P. VALUE, L.P.
Page 15 of 28
Plaintiffs Costa Brava Partnership III, L.P. and Wynnefield Partners
Small Cap Value, L.P. (collectively "Plaintiffs") hereby file this Memorandum of
Points and Authorities in support of their Motion for a Preliminary Injunction
(the "Motion"), and in support thereof state as follows:
INTRODUCTION
Plaintiffs previously moved this Court to enjoin Telos from selling its
subsidiary Xacta, citing the same conflicts of interest in that transaction as
were noted by Telos' own Special Litigation Committee. While that motion
remained on file with the Court, Telos agreed to provide Plaintiffs with 30 days
notice of any potential sales transaction so that Plaintiffs could set their
motion for a hearing, and the Court would have the opportunity review the terms
of the proposed deal to ensure that Telos' insiders were not disproportionately
benefited.
Recently, however, Plaintiffs' prior motion for preliminary injunction
was dismissed without prejudice, and the Court declined to order Telos to
provide notice to the Plaintiffs of any potential sale of assets. The Court's
Order leaves all Telos' stakeholders in a precarious position: Telos' insiders
can now complete a sale of Telos' assets without providing any advance notice.
Telos' insiders can take these actions at a time when Telos does not have a
complete Board of Directors or, more importantly, a disinterested Transaction
Committee. Instead, Telos' insiders have an opportunity to sell Telos' assets
outside the ordinary course of business, including Xacta even though Telos' own
Special Litigation Committee identified critical problems of self-interest
involved in that transaction.
Oversight by a fully reconstituted Board of Directors is especially
crucial for Telos because its recent history demonstrates that there are sharp
divisions between Telos' management and Telos' independent directors regarding
John Wood's and John Porter's push to sell off parts of Telos. In the absence of
a fully reconstituted Board of Directors and an operative Transaction Committee,
John Wood and John Porter may have been and might still be successful in
completing a transaction which is not in the best interest of Telos and all its
stakeholders. Plaintiffs merely request that this Court order Telos to reaffirm
its commitment to corporate governance and refrain from selling any of its
assets outside the course of business until such time as Telos has filled all
its vacant directorships and committees.
Page 16 of 28
FACTUAL BACKGROUND
A. Telos purposefully failed to reconstitute its Board after the en masse
resignation of its outside directors.
In 2006, seven of Telos' directors resigned from Telos' Board of
Directors ("Board"). Six of those seven directors resigned en masse in August
2006 citing an inability to function as fiduciaries for Telos and all its
stakeholders. Ex. A, pp. 11-28. John Wood ("Wood") and John Porter ("Porter")
refused to allow Telos' Transaction Committee to implement their recommendation
that Telos be sold as a whole, which effectively decimated Telos' independent
corporate governance by forcing the resignation of Telos' directors.(1) In
response to these resignations Telos appointed some new directors, and
repopulated some of Telos' five standing committees: the Audit Committee; the
Management Development and Compensation Committee; the Nominating and Corporate
Governance Committee; the Special Litigation Committee; and the Transaction
Committee. Ex. A, p. 13. Currently, only eight of Telos' ten available
directorships have been filled. Id.
Notably, Telos failed to make any genuine effort whatsoever to effect
the replacement of Telos' Class D directors because they are the only two
directorships which are not in any way beholden to either Wood or Porter.
Holders of Telos' 12% Cumulative Exchangeable Redeemable Preferred Stock
("ERPS") have the exclusive right to nominate and elect Telos' two Class D
directors. Ex. B, p. 13. Neither Wood in his capacity as Chief Executive Officer
of Telos, nor Porter through his controlling interest in Telos via his Proxy
Agreement and majority holdings in all Telos' securities except the ERPS, have
the power to appoint or remove Class D directors. The Class D directors cannot
be removed from the Board or otherwise silenced by either Wood or Porter. In
short, no genuine attempt has been made by any of the Defendants to replace the
two directors who are completely independent of Telos, Wood and Porter.
- ---------------------
(1) The facts surrounding Wood, Porter, and Telos' Transaction Committee, along
with supporting deposition testimony, have been previously presented to and
filed with the Court with the Plaintiffs' Motion to Appoint a Receiver and
Plaintiffs' Proposed Findings of Fact and Conclusions of Law. Plaintiffs
incorporate those documents and their exhibits herein by reference.
Page 17 of 28
B. Wood used the Class D vacancies as a litigation tactic, but Telos has
made no attempt to fill those vacancies.
On September 12, 2006, Wood delivered a letter ("Wood's Letter") to the
Plaintiffs in this case, in which Wood offered his assistance in electing new
Class D directors. Ex. C. Wood's Letter should not be given much consideration
as anything other than a litigation tactic and an attempt to whitewash Telos'
preference not to fill the Class D directorships. First, Telos' ERPS holders
have the exclusive right to nominate and elect the Class D directors with or
without the assistance of Wood. Telos' By-Laws (see Ex. D), Telos' Articles of
Amendment and Restatement (see Ex. B, "Charter") and the ERPS Registration
Statement (see Ex. E, the "Registration Statement") on Form S-4 (collectively,
"Organizational Documents") all clearly vest the right to nominate and elect
Class D directors in Telos' ERPS holders. These rights were confirmed by a
federal district court.(1) There is no necessary assistance Telos' CEO could
provide that is not already provided for by Telos' Organizational Documents.(2)
The insincerity of Wood's Letter is also demonstrated by its strategic
timing. Wood's Letter was delivered during the briefing of Plaintiffs' Motion to
Appoint a Reciever ("Receiver Motion"). Plaintiffs' Receiver Motion raised
several questions regarding Telos' management, and specifically questioned the
ability of any director of Telos to exert any meaningful oversight over Telos so
long as the Board was dominated by the Chief Executive Officer Wood in concert
with the majority shareholder Porter. Ex. F. The real purpose of Wood's Letter
was to induce Plaintiffs to take an inconsistent position by moving to elect new
Class D directors at a time when Plaintiffs were arguing that Telos' Board was
fundamentally flawed. Plaintiffs did not take the bait.(3) All in all, it is
clear that Wood only mentioned the Class D directorships when it suited Telos'
and his own litigation strategy.
- --------------------
(1) Telos Corp. v. Cede & Co., Civ. No. 97-439-A, E.D. Va., mem. opn. filed
Apr. 22, 1998. In that case, the Court ordered Telos to allow the ERPS
holders to elect their Class D directors.
(2) If Wood intended to offer "assistance" to the Plaintiffs by recommending
possible nominees, Plaintiffs suspect Wood's true motive was to recommend
nominees that would be more receptive to Wood's and Porter's plan to sell
Xacta than the former Class D directors and the rest of Telos' outside
directors who resigned en masse in August, 2006.
(3) At the time Plaintiffs received Wood's Letter, Plaintiffs' prior Motion for
Preliminary Injunction was still on file and Plaintiffs believed that they
were entitled to at least 30 days notice prior to any sale of Telos'
assets. Today, those protections are gone, because Wood and Porter are free
to complete self-interested transactions at any time without any objections
from a disinterested Transaction Committee. The only protection available
for Plaintiffs and all other stakeholders in Telos is a fully functioning
Board of Directors, including a reactivated Transaction Committee.
Page 18 of 28
C. Telos refused to reconstitute its Transaction Committee: the last group
to publicly disagree with Wood and Porter.
In 2006, Telos' outside directors formed the Transaction Committee to
review any sale of Telos' assets proposed by Porter or Telos' management. Ex. G,
p. 44. The purpose of the Transaction Committee was to explore a strategic
recapitalization of Telos that would benefit Telos and all of the constituent
stakeholders. Id. The Transaction Committee hired Stifel, Nicolaus & Co., Inc.
as its independent financial advisor. Id.
Porter and Wood favored a sale of only part of Telos' assets. Acting on
advice from its independent financial advisor, the Transaction Committee
concluded that a sale of Telos in its entirety, not simply a partial sale of
assets, was in the best interests of Telos and all of its stakeholders. Porter's
controlling interest in Telos allowed him to veto the Transaction Committee's
recommendation, which effectively nullified the ability of Telos' Transaction
Committee to fulfill its fiduciary obligations. Unable to act without violating
their business judgment that a sale of the entirety of Telos was necessary, the
six outside directors resigned.(1)
In response to these resignations Telos appointed some new directors,
and repopulated four of Telos' five standing committees: the Audit Committee;
the Management Development and Compensation Committee; the Nominating and
Corporate Governance Committee; and even the Special Litigation Committee. Ex.
A. Only the Transaction Committee remains empty, despite counsel for Telos'
representation to this Court that "the Transaction Committee will be
reconstituted once Telos can get on with the business of trying to come up with
a strategic transaction for the purposes of the sale."(2)
Despite Telos' representations to this Court, Telos' most recent
filings with the SEC make clear that Telos has no intention to reconstitute the
Transaction Committee. Telos does pay lip service to the Transaction Committee,
- --------------------
(1) Telos stated in its disclosures that the resigning independent directors
may have disagreed with Porter over the extent of any asset sale or other
strategic transaction Telos might conduct. See Ex. A.
(2) See Transcript of Hearing on Motion for Appointment of Receiver held
October 18, 2006, relevant portions are attached hereto as Exhibit H.
Page 19 of 28
stating that "the ultimate transaction approval process [should be] determined
by the disinterested (1) directors." Ex. G, p. 45. But Telos' true intention is
not to reform the Transaction Committee at all. Telos introduces all its
statements regarding the Transaction Committee by making the statements
contingent "if and when" the Transaction Committee is reactivated. Id. Counsel
for Telos never used the "if and when" qualifier when she represented to the
Court that Telos' Transaction Committee "will be reconstituted." If Wood, Porter
and Telos were serious about reactivating the Transaction Committee, it would
have already been done, and Telos' SEC filings would not waffle on Telos'
intention to reform the committee.
Telos' indifference toward the Transaction Committee is made all the
more egregious because Telos needs exactly the kind of transaction the
Transaction Committee was formed to approve: a strategic recapitalization of
Telos.
1. The Transaction Committee was Telos' outside directors'
response to the company's serious financial problems.
Telos is in financial distress. Telos' Independent Committee estimated
that the total liquidation value of the ERPS, plus accrued and unpaid dividends
was approximately $68.24 million as of June 30, 2005. Ex. K, p. 5. By contrast,
Telos accounts for the liability to the ERPS holders as of September 30, 2006 to
be $86.6 million.(2) Ex. G, p. 6. The increasing obligations owed to Telos'
preferred stockholders, including the ERPS, continue to erode the value of
Telos' common shares so long as the obligations remain unpaid.
- --------------------
(1) Plaintiffs assume that Telos excludes defendant director David Borland
("Borland") from its definition of "disinterested directors." While Borland
served on Telos' Audit Committee, Management Development and Compensation
Committee, and Independent Committee, he enjoyed the exclusive use of
Telos' corporate golf membership. However, Telos failed to disclose this
arrangement in its financial statements, and Borland failed to disclose
this arrangement to any of Telos' other outside directors, despite
Borland's membership on Telos' Audit Committee and Management Development
and Compensation Committee. These disclosure failures ultimately led to
Borland resigning from Telos' Audit Committee and stepping down from his
chairmanship of the Management Development and Compensation Committee in
August, 2006. These disclosure failures call Borland's status as an
"independent" director into question.
(2) Plaintiffs assert that this amount is materially understated by
approximately $30 million. See Affidavit of Scott Davis attached to
Plaintiffs' Motion for Preliminary Injunction previously filed with the
Court on May 26, 2006.
Page 20 of 28
Telos' balance sheet shows expanding negative common shareholder
equity. As of September 30, 2006, Telos reported a common shareholder deficit of
$125.2 million, (Ex. G, p. 6) as compared to the $89.1 million deficit as of
June 30, 2005 noted by Telos' Independent Committee.(1) Ex. K, p. 5. Telos'
independent auditors, Goodman & Company LLP, noted in August, 2006 that if a
sale transaction for Telos is not closed by the opinion date for Telos' 2006
audit, "in all likelihood, we will conclude that management's plans are
insufficient to alleviate doubt about the Company's ability to continue as a
going concern . . . ." Ex. I, p. 6.
2. The Transaction Committee fought to prevent Telos' insiders
from personally profiting from Wood and Porter's
self-interested and ill-advised proposal to sell Xacta.
Prior to the en masse resignation of Telos' directors, its Special
Litigation Committee noted a significant amount of any proceeds generated from
any proposed sale of Xacta would be diverted to Telos' management, whose Xacta
options would automatically be triggered at the time of sale.(10) Ex. J, p. 2.
In other words, a transaction intended to benefit the financial condition of
Telos would first and foremost benefit certain defendants in the lawsuit.(3)
Astonishingly, these same insider officers who stood to gain from a sale of
Xacta pushed for a sale of Xacta-branded businesses as a half-hearted attempt to
rectify Telos' balance sheet problems.
Other than the Plaintiffs, the only other constituency to stand up to
Telos' insiders was the Transaction Committee. The Transaction Committee hired
its own independent financial advisor to review management's preference to sell
Xacta and to provide alternatives to the transactions proposed by Telos' insider
- --------------------
(1) Again, Plaintiffs allege that this common shareholder deficit is
understated by approximately $30 million, as a result of the understatement
of the total liability owed to the ERPS holders. Telos' common shareholder
deficit will continue to grow as Telos continues to post operating losses
while Telos' ERPS obligations grow. (10) It is significant that the report
of Telos' own Special Litigation Committee mirrored the allegations made in
Plaintiffs' prior Motion for Preliminary Injunction, even though the
Special Litigation Committee interim report was not made available until
after the Plaintiffs filed the prior motion.
(3) Sixty percent of the issued and outstanding stock options in Telos'
subsidiary Xacta are owned by five Telos insiders: Wood, Michael Flaherty,
Robert Marino, Ed Williams and Richard Tracy, all of whom are defendants to
the underlying lawsuit between Plaintiffs and Telos. Only 30 percent of the
Xacta stock options are owned by non-executive employees of Xacta. Wood
alone owns approximately 25 percent of the Xacta stock options. Telos' SEC
filings state that Xacta is a wholly-owned subsidiary, but these
declarations are false since Telos fails to adequately disclose that the
hidden Xacta stock options to Telos' insiders significantly dilutes Telos'
ownership of Xacta.
Page 21 of 28
management. Acting on advice from its independent financial advisor, the
Transaction Committee concluded that a sale of Telos in its entirety, not simply
a sale of Xacta-branded assets, was in the best interests of Telos and all of
its stakeholders. Of all Telos' different corporate governance checks and
balances, its Transaction Committee has been the single most effective group in
preventing Telos' insiders from completing self-interested transactions. This is
precisely the reason that Telos has no intention of reactivating the Transaction
Committee.
3. Without the Transaction Committee in place, Telos' insiders
can pursue a variety of self-interested transactions.
In the absence of a reconstituted Transaction Committee, Telos is free
to pursue a sale of Xacta: precisely the sale to which the former Transaction
Committee objected because it was not in the best interest of Telos and all its
stakeholders. However, Xacta is not the only category of assets in which Telos'
insiders have awarded themselves questionable financial interests, and Telos'
insiders could likewise move to sell those assets while the Transaction
Committee is defunct.
For example, Telos formed a subsidiary in 1996 named Enterworks.(1) In
later years, Telos has given numerous interests in Enterworks to its insiders:
o In 1996, Telos caused the issuance of over $3 million in
Enterworks 8% subordinated debt to certain Telos' insiders. At
the same time, Telos granted over $2 million warrants to
purchase Enterworks common stock to these same persons, which
diluted Telos' stake in Enterworks.
o Telos established an Enterworks stock option plan which, over
the years 1996 through 2002 awarded stock options in
Enterworks to Telos' insiders, which diluted Telos' stake in
Enterworks.
o In 1999, Telos caused the issuance of 21.7 million shares of
convertible preferred stock in Enterworks. Upon information
and belief, Telos' insiders received a substantial proportion
of these shares, further diluting Telos' stake in Enterworks
and directly benefiting Telos' insiders.
Telos obviously believed that there was value in Enterworks. However,
Telos has chosen to simply write off its own investment interest in Enterworks.
In 1999, Telos voluntarily opted to cancel a $24.4 million payable to Telos from
- -------------------------------
(1) Telos' disclosures of its investments in Enterworks begin in 1996 and occur
throughout Telos' filings with the SEC since that date, which Plaintiffs
incorporate herein by reference. The most current summary of Telos'
investments in Enterworks is attached hereto. Ex. G, pp. 12-13.
Page 22 of 28
Enterworks, thereby significantly reducing its financial interest in
Enterworks.(1) Additionally, Telos chose to contribute 210,912 shares of
Enterworks stock owned by Telos to the Enterworks treasury. Since 1999, Telos
has continued to subsidize Enterworks on a yearly basis, but Telos continues to
write off those investments and does not consolidate Enterworks' financial
results in Telos' own balance sheets. Upon information and belief, Telos could
move to sell Enterworks at any time, which would disproportionately benefit
Telos' insiders at the expense of the entity as a whole.
It is of paramount importance that Telos reconstitute its Board and all
its standing committees because the same business pressures, which in the past
induced Telos to consider a sale of some or all of its assets, still exist
today. So long as there is not full oversight by the Board over Wood's and
Porter's decisions, there is a greater risk today than ever before that Telos'
insiders can inappropriately benefit by moving to sell some or all of its assets
outside the ordinary course of business.
D. Telos' Class D directors are a unique and vital source of corporate
oversight for Telos.
The Class D directors are unique and necessary for Telos' corporate
governance in several important aspects. First, Telos' Class D directors are the
only two directorships which are not in any way beholden to either Wood or
Porter. Holders of ERPS have the exclusive right to nominate and elect Telos'
two Class D directors. Neither Wood in his capacity as Chief Executive Officer
of Telos, nor Porter through his controlling interest in Telos via his Proxy
Agreement and majority holdings in all Telos' securities save the ERPS, have the
power to appoint or remove Class D directors. The Class D directors cannot be
removed from the Board or otherwise silenced by either Wood or Porter.
The Class D directors take on additional importance because they are
directly linked with Telos' only publicly traded security: the ERPS. The
existence of Telos' ERPS is only reason that Telos must publicly disclose its
financial condition and file statements with the SEC. If the ERPS did not exist,
Telos could run its business in private and Porter could hire and fire Telos'
entire Board at will. Unlike all other directors of Telos, the Class D directors
are definitionally independent of all Telos' insider interests, and therefore
- --------------------
(1) By contrast, Telos estimated that its total obligation with respect to the
ERPS was $36.9 million as of December 31, 1999.
Page 23 of 28
are the most important directorships on Telos' Board. Telos' attitude towards
the Class D directors bears this out: Telos has not made any genuine attempt to
replace the two directors who are completely independent of Telos, Wood and
Porter.
E. Telos is in the process of electing its final two directors.
Immediately after the resignation of the former Class D directors in
August, 2006, Telos did not initiate the process to elect new Class D directors.
In particular, Telos made no effort to solicit nominees publicly for new Class D
directors for an election of new Class D directors along with the elections it
held for Telos' other new directors at Telos' annual shareholders meeting on
December 14, 2006.
Recently the Plaintiffs, along with other ERPS holders, exercised their
right to call a special meeting of ERPS holders to fill the two vacant Class D
directorships. On February 7, 2007, the Plaintiffs mailed a letter to Telos
demanding a special meeting of ERPS holders to elect the two Class D directors,
and requested that Telos set a date for the special meeting and solicit nominees
from all ERPS holders for the vacant directorships. Ex. L. Plaintiffs are
confident that, with the cooperation of Telos, new Class D directors can be
elected as soon as Telos can call a special meeting of ERPS holders. Plaintiffs
merely request that while this process is ongoing, Telos be enjoined from
selling any of its assets outside the ordinary course of business. With the
final two directors in place both on Telos' Board and in Telos' standing
committees, Telos' corporate governance will be fully reconstituted and
Plaintiffs' requested injunction will no longer be necessary.
ARGUMENT
I. Legal standard.
The factors required for a preliminary injunction under Maryland law
are: (1) the likelihood that the plaintiff will succeed on the merits; (2) the
"balance of convenience" determined by whether greater injury would be done to
the defendant by granting the injunction than would result from its refusal; (3)
whether the plaintiff will suffer irreparable injury unless the injunction is
granted; and (4) the public interest. J.L. Matthews, Inc, v. Maryland-National
Capital Park and Planning Comm'n, 368 Md. 71, 83 n.8, 792 A.2d 288, 295 n.8
(2002) (citations omitted).
Page 24 of 28
II. The Plaintiffs are likely to succeed on the merits, because there is no
question that two vacancies remain on Telos' Board.
Prior to the resignation of seven of Telos' directors in 2006, Telos'
Board was composed of ten directors divided among Telos' five standing
committees. Since that time, Telos appointed five new directors, leaving the two
Class D directorships unfilled. As of November 21, 2006, Telos has eight
directors for the ten available directorships.
It is clear that Telos' ERPS holders are entitled to elect the two
remaining directors. Telos' Articles of Amendment and Restatement ("Charter")
clearly states in Article Fifth, Section Seven that:
If [both Class D] directors so elected by the holders of [ERPS] shall
cease to serve as directors before their terms expire, the holders of
[ERPS] then outstanding may, at a special meeting of the holders called
as provided above, elect successors to hold office for the unexpired
terms of the directors whose places shall be vacant.
A similar issue has been litigated before in Telos Corp. v. Cede & Co.,
Civ. No. 97-439-A, E.D. Va., mem. opn. filed Apr. 22, 1998, wherein Telos was
ordered to allow ERPS holders to elect Class D directors. Plaintiffs are
certainly likely to win on the merits of their rights to elect new Class D
directors.
III. The balance of convenience favors Plaintiffs.
The balance of convenience in granting Plaintiffs' requested
preliminary injunction weighs heavily in favor of the Plaintiffs. Plaintiffs'
requested injunction, if granted, will have no effect on the day-to-day
operations of Telos and the day-to-day duties of Telos' officers and directors.
Plaintiffs' requested injunction does nothing except maintain the status quo
until such time as Telos has reconstituted its Board and repopulated all five of
its standing committees.
Furthermore, Telos controls the duration of Plaintiffs' requested
preliminary injunction. Telos has complete control over the length of time it
will take to appoint new directors to fill the two vacant slots on Telos' Board
and then appoint those directors to Telos' five standing committees. Plaintiffs
have already requested that Telos call a special meeting to elect the Class D
directors, and will participate in the election of new Class D directors as soon
as Telos calls the special meeting. Telos alone controls the length of time
necessary to appoint its directors to available committee memberships.
Consequently, Telos will be bound by Plaintiffs' requested preliminary
injunction on for as long as Telos wishes to be bound. Simply put, the requested
Page 25 of 28
injunction does not prejudice the interests of Telos or its directors and
officers.
At the same time, the injunction would protect the value of Telos
pending the placement of independent directors on Telos' Board to provide
much-needed oversight on Telos' officer defendants ("Officers"). Plaintiffs'
requested preliminary injunction does no injury to the Defendants; it merely
maintains the status quo while Telos restores its much-needed corporate
governance. The balance of convenience clearly favors the Plaintiffs.
IV. Telos will suffer irreparable injury unless the injunction is granted.
It is well-settled in Maryland that irreparable injury "is a pliant
term adaptable to the unique circumstances which an individual case might
present." State Comm'n on Human Relations v. Talbot County Detention Ctr., 370
Md. 115, 140, 803 A.2d 527, 542 (2002). Such injury "need not be beyond all
possibility of compensation in damages, nor need it be very great."
Maryland-Nat'l Capital Park & Planning Comm'n v. Washington Nat'l Arena, 282 Md.
588, 615, 386 A.2d 1216, 1234 (1978). Rather, "irreparable injury is suffered
whenever monetary damages are difficult to ascertain or are otherwise
inadequate." Id.
It is abundantly clear that the Plaintiffs, and indeed all stakeholders
in Telos will suffer irreparable injury if Telos' Officers attempt to sell
Telos' valuable assets outside the normal course of business and without the
approval of a fully reconstituted Board of Directors. As explained in Section C.
herein, Telos' insiders have personal interests in most, if not all, of Telos'
valuable assets. Telos' Officers own stock options in Xacta which would be
triggered in the event of any sale of the entity. Telos' insiders have personal
interests in Enterworks. If Telos' insiders were to sell any of these or other
assets without the oversight and approval of a fully-reconstituted Board of
Directors and an operative Transaction Committee, the transactions would strip
Telos of substantial portions of its value. Telos' constituents would have no
recourse, and if the proceeds from any sale were transferred to Telos' insiders
in the event of a sale, there would be no way to recompense Telos' constituents
through monetary damages.
Page 26 of 28
Telos' own Special Litigation Committee described the dangers
associated with giving Telos' management free rein to pursue a sale of Xacta:
Should the contemplated sale be accomplished solely at the Xacta level,
the assets to be sold would have to be moved into Xacta and a
significant amount of sale proceeds could be required to be paid to
management whose options would automatically be triggered at the time
of sale.
This is precisely the kind of situation in which monetary damages would be
"difficult to ascertain or otherwise inadequate," and, thus, this factor weighs
heavily in favor of the granting of the requested injunction.
V. The public interest favors the granting of the injunction.
Finally, although there is always a public interest component in the
decision to grant a preliminary injunction, "[i]n private party litigation such
as this, the broad public interest concerns are generally not at stake except to
the extent of correctly enforcing the policy concerns expressed in the
applicable law." Glass, Lewis & Co., LLC v. McMahon, 2005 WL 2435896 at *7 n.4
(Md. Cir. Ct., Aug. 9, 2005).
Here, Maryland law of corporate governance is implicated by, and
applicable to, any contemplated sale of Telos' assets outside the normal course
of business. It is in the public interest of Maryland to ensure that Maryland
corporations are subject to the oversight of independent directors who adhere
strictly to the fiduciary duties they accepted when they became managers of the
corporation. Nothing in the corporate law of Maryland suggests that Maryland
corporations should be encouraged to complete extraordinary transactions
opportunistically outside the ordinary course of business during a time in which
their corporate governance has been decimated due to conflicts with majority
shareholders. The public interest should surely fall on the side of maintaining
the status quo while Telos reconstitutes its Board of Directors. For this
reason, the public interest factors involved weigh in favor of granting a
preliminary injunction.
Page 27 of 28
CONCLUSION
For all the foregoing reasons, Plaintiffs' Motion for Preliminary
Injunction should be granted, and Defendants and their agents should be enjoined
from pursuing or closing any sale of Telos' assets outside the ordinary course
of business until such time as Telos has reconstituted its Board of Directors
through the election of new Class D directors, and repopulated Telos'
Transaction Committee.
Respectfully submitted,
WARNER STEVENS, LLP
By: /s/ LEWIS T. STEVENS
--------------------------------------
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
- and -
SHUMAKER WILLIAMS, P.C.
Harry Levy
40 West Chesapeake Avenue
Suite 605
Towson, Maryland 21201
(410) 825-5223
(410) 825-5426 (facsimile)
ATTORNEYS FOR PLANITIFF
COSTA BRAVA PARTNERSHIP III, L.P.
WHITEFORD, TAYLOR & PRESTON, L.L.P.
By: /s/ JONATHAN E. CLAIBORNE
--------------------------------------
Jonathan E. Claiborne
7 St. Paul Street, Suite 1400
Baltimore, Maryland 21202-1626
(410) 347-9409
(410) 223-4309 (facsimile)
- and-
KANE KESSLER, P.C.
Jeffrey H. Daichman, Esq.
1350 Avenue of The Americas
New York, New York 10019-4896
(212) 519-5142
(212) 245-3009 (facsimile)
page 28 of 28
ATTORNEYS FOR PLAINTIFF
WYNNEFIELD PARTNERS SMALL CAP
VALUE, L.P.