SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 22)*
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 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 18
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
SHARES 506,811
BENEFICIALLY ---------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 0
PERSON ---------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER
506,811
---------------------------------------------------
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 18
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
SHARES 0
BENEFICIALLY ---------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 506,811
PERSON ---------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER
0
---------------------------------------------------
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 18
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
SHARES 0
BENEFICIALLY ---------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 506,811
PERSON ---------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER
0
---------------------------------------------------
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 18
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
SHARES 0
BENEFICIALLY ---------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 506,811
PERSON ---------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER
0
---------------------------------------------------
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 18
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
SHARES 14,476
BENEFICIALLY ---------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 506,811
PERSON ---------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER
14,476
---------------------------------------------------
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 18
AMENDMENT NO. 22 to SCHEDULE 13D
This amendment ("Amendment No. 22") 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, and further amended by Amendment No. 13 filed on
February 16, 2007, and further amended by Amendment No. 14 filed on March 7,
2007, and further amended by Amendment No. 15 filed on July 20, 2007, and
further amended by Amendment No. 16 filed on July 26, 2007, and further amended
by Amendment No. 17 filed on August 3, 2007, and further amended by Amendment
No. 18 filed on September 5, 2007, and further amended by Amendment No. 19 filed
on September 13, 2007, and further amended by Amendment No. 20 filed on
September 24, 2007, and further amended by Amendment No. 21 filed on October 2,
2007 (collectively, the "Schedule"), by Costa Brava Partnership III, LP ("Costa
Brava"), Roark, Rearden & Hamot, LLC ("Roark"), Seth W. Hamot ("Mr. Hamot"),
White Bay Capital Management, LLC ("White Bay"), and Andrew R. Siegel ("Mr.
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. 22 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 October 6, 2007, Messrs. Hamot and Siegel received a letter from
Director Benard C. Bailey, in his capacity as Chair of the Audit
Committee of the Issuer, concerning a discussion that took place at the
October 3, 2007 meeting of the Board of Directors of the Issuer with
regard to various statements contained in earlier versions of this
Schedule and alleging that they are inaccurate and/or misleading. On
October 15, 2007, Messrs. Hamot and Siegel responded to the such letter
with a letter to the Audit Committee of the Issuer in which they
further explained certain statements contained in earlier versions of
this Schedule and brought to the attention of the Audit Committee
evidence regarding potential misconduct, which letter is filed herewith
and attached hereto as Exhibit 99.31 and incorporated herein by
reference (the "10/15/07 Letter to Audit Committee").
Any descriptions herein of the 10/15/07 Letter to Audit Committee are
qualified in their entirety by reference to the 10/15/07 Letter to
Audit Committee.
As of the date of this Amendment No. 22, except as set forth above, and
in the 10/15/07 Letter to Audit Committee, 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 18
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)*
Exhibit 99.16 Second Amended Complaint filed in the Circuit
Court for Baltimore City in the State of Maryland on
February 27, 2007*
Exhibit 99.17 Nominating Letter dated March 1, 2007*
Exhibit 99.18 Letter dated July 18, 2007 to the Corporate
Secretary of the Issuer*
Exhibit 99.19 Letter dated July 26, 2007 to the Chief Financial
Officer of the Issuer*
Exhibit 99.20 Letter dated July 26, 2007 to the V.P., Corporate
Counsel & Secretary of the Issuer*
Exhibit 99.21 Complaint filed in the Circuit Court for Baltimore
City in the State of Maryland on August 2, 2007 (without
the exhibits thereto)*
Exhibit 99.22 Motion for Temporary Restraining Order filed in
the Circuit Court for Baltimore City in the State of
Maryland on August 2, 2007*
Exhibit 99.23 Memorandum of Points and Authorities in Support of
Motion for Temporary Restraining Order filed in the
Circuit Court for Baltimore City in the State of
Maryland on August 2, 2007*
Exhibit 99.24 Independence Letter dated August 18, 2007 to
Director Bailey of the Issuer*
Exhibit 99.25 Email dated September 5, 2007 from Director Hamot
to certain members of the Board of Directors of the
Issuer*
Exhibit 99.26 Email dated September 7, 2007 from Director Hamot
to Director Harris, copying certain members of the Board
of Directors of the Issuer*
Page 9 of 18
Exhibit 99.27 Letter dated September 21, 2007 to Mr. Tom
O'Grady, a Partner at the law firm of McGuireWoods LLP*
Exhibit 99.28 Second Amended Verified Complaint filed in the
Circuit Court for Baltimore City in the State of
Maryland on September 24, 2007*
Exhibit 99.29 Motion for Temporary Restraining Order filed in
the Circuit Court for Baltimore City in the State of
Maryland on September 24, 2007*
Exhibit 99.30 Memorandum of Points and Authorities in Support of
Motion for Temporary Restraining Order filed in the
Circuit Court for Baltimore City in the State of
Maryland on September 24, 2007*
Exhibit 99.31 Letter dated October 15, 2007 from Messrs. Hamot
and Siegel to the Audit Committee of the Issuer**
* Filed with an earlier version of this Schedule 13D.
** Confidential portions have been omitted and a confidential
treatment request has been made with the Securities and Exchange
Commission.
Page 10 of 18
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Amendment No. 22 to the Schedule
13D is true, complete and correct.
Dated: October 16, 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
Dated: October 18, 2007
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 18
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)*
Exhibit 99.16 Second Amended Complaint filed in the Circuit Court for
Baltimore City in the State of Maryland on February 27, 2007*
Exhibit 99.17 Nominating Letter dated March 1, 2007*
Exhibit 99.18 Letter dated July 18, 2007 to the Corporate Secretary of
the Issuer*
Exhibit 99.19 Letter dated July 26, 2007 to the Chief Financial Officer
of the Issuer*
Exhibit 99.20 Letter dated July 26, 2007 to the V.P., Corporate Counsel &
Secretary of the Issuer*
Exhibit 99.21 Complaint filed in the Circuit Court for Baltimore City in
the State of Maryland on August 2, 2007 (without the exhibits
thereto)*
Exhibit 99.22 Motion for Temporary Restraining Order filed in the Circuit
Court for Baltimore City in the State of Maryland on August 2,
2007*
Exhibit 99.23 Memorandum of Points and Authorities in Support of Motion
for Temporary Restraining Order filed in the Circuit Court for
Baltimore City in the State of Maryland on August 2, 2007*
Exhibit 99.24 Independence Letter dated August 18, 2007 to Director
Bailey of the Issuer*
Exhibit 99.25 Email dated September 5, 2007 from Director Hamot to
certain members of the Board of Directors of the Issuer*
Exhibit 99.26 Email dated September 7, 2007 from Director Hamot to
Director Harris, copying certain members of the Board of
Directors of the Issuer*
Exhibit 99.27 Letter dated September 21, 2007 to Mr. Tom O'Grady, a
Partner at the law firm of McGuireWoods LLP*
Exhibit 99.28 Second Amended Verified Complaint filed in the Circuit
Court for Baltimore City in the State of Maryland on September
24, 2007*
Page 12 of 18
Exhibit 99.29 Motion for Temporary Restraining Order filed in the Circuit
Court for Baltimore City in the State of Maryland on September
24, 2007*
Exhibit 99.30 Memorandum of Points and Authorities in Support of Motion
for Temporary Restraining Order filed in the Circuit Court for
Baltimore City in the State of Maryland on September 24, 2007
Exhibit 99.31 Letter dated October 15, 2007 from Messrs. Hamot and Siegel
to the Audit Committee of the Issuer**
* Filed with an earlier version of this Schedule 13D.
** Confidential portions have been omitted and a confidential treatment
request has been made with the Securities and Exchange Commission.
Page 13 of 18
EXHIBIT 1 - JOINT FILING STATEMENT
Pursuant to Rule 13d-1(k)(1), we, the undersigned, hereby express our
agreement that the Amendment No. 22 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 16, 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
Dated: October 18, 2007
WHITE BAY CAPITAL MANAGEMENT, LLC
By: /s/ ANDREW R. SIEGEL
-------------------------------------
Name: Andrew R. Siegel
Title: Manager
/s/ ANDREW R. SIEGEL
-----------------------------------------
Andrew R. Siegel
Page 14 of 18
CONFIDENTIAL TREATMENT REQUESTED BY THE REPORTING PERSONS OF
CERTAIN PORTIONS OF THIS AGREEMENT IN ACCORDANCE WITH RULE 24B-2
UNDER THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 99.31
Letter dated October 15, 2007 from Messrs. Hamot and Siegel to the Audit
Committee of the Issuer
TELOS CORPORATION MEMORANDUM
----------------------------
October 15, 2007
To: The Audit Committee of Telos Corporation
(Bernard Bailey, Bill Dvoranchik, Charles Mahan)
From: Seth Hamot and Andrew Siegel, Directors
This is in response to the letter dated October 6, 2007 from Bernard C.
Bailey, Chair of the Audit Committee of Telos Corporation ("Telos"), to Andrew
R. Siegel and Seth W. Hamot.
In Andrew Siegel's memorandum to Tom O'Grady at McGuire Woods dated
September 21, 2007, set forth as an Exhibit to our Schedule 13D, Amendment No.
20, he raised concerns regarding Telos' SEC reporting certified by Telos
Chairman of the Board and Chief Executive Officer John Wood.
Additionally, I called your attention to the draft termination letter
for Mr. Wood. This draft is referenced at page 18, footnote 14 of the Revised
Report of the Special Litigation Committee ("Committee") of Telos dated July 20,
2007 ("SLC Revised Report"). As directors, we have repeatedly raised concerns
about related issues. I asked that the Audit Committee share the draft
termination letter with Telos' new independent auditor, Reznick Group, and with
Goodman & Company, Reznick's predecessor as Telos' auditor. To be clear, the
statement in Mr. Siegel's September 21 memorandum that a majority of Telos'
independent directors found that Mr. Wood be terminated for cause was based on a
statement in footnote 14 in the SLC Revised Report.
That footnote stated that prior to withdrawing, DLA Piper, then counsel
to the independent directors of Telos, sent an e-mail to 4 of the 5 independent
director clients with a self described first draft of claims against Wood, based
largely on the allegations of the Plaintiffs in the Costa Brava and Wynnefield
lawsuit, that might justify his dismissal for cause. Footnote 14 also stated
that DLA Piper did not discuss this e-mail and termination letter with the
Committee.
I have seen the draft termination letter and I strongly disagree that
it is "based largely on the allegations of the Plaintiffs in the Costa Brava and
Wynnefield lawsuit". As you know, the derivative lawsuit does not seek the
termination of Mr. Wood. The Committee asserts that it investigated the
derivative claims before deciding not to support the Costa Brava and Wynnefield
derivative claims. However, there appears to be a major inconsistency in the SLC
Revised Report, because it does not show an evaluation of the contents of the
termination letter, but rather alternatively attempts to evaluate exclusively
the derivative claims that should not be supported.
Page 15 of 18
Additionally, the timing of the draft termination letter must be
evaluated by our independent auditor in relation to Telos' Form 8-K filed on
August 22, 2006. This 8-K reported the resignations by the same independent
directors who were delivered the draft termination letter. The 8-K does not
disclose the prospective termination of Mr. Wood. We believe that the following
statements contained in the resignation letters of three independent directors
(Messrs. Byers, Sterrett and Baker) are based in part on the frustration from
the failure to have their concerns about Mr. Wood addressed: "I regret that
other important participants in the corporate enterprise have impeded the board
of directors from taking actions that I believed were necessary and appropriate.
Because it has become clear to me that I will not be allowed to function
effectively as a fiduciary for the Company and all its stockholders, I hereby
resign as a director of the Company, effective immediately." Accordingly, we
believe a strong inference can be drawn that a majority of Telos' independent
directors found that Mr. Wood be terminated for cause.
Rather than permit Telos' independent auditor access to relevant
information, Director Bailey forwarded the September 21 memorandum from Seth
Hamot to members of the Committee and requested via email that they repudiate
the contents in the 2006 draft termination letter.
It is important to note that the SLC Revised Report states that it was
intended only to evaluate the derivative claims asserted in the Costa Brava and
Wynnefield case. Nowhere in the SLC Revised Report does it state that the
Committee had evaluated whether Telos' SEC financial filings, which were
certified under federal securities laws, were materially misstated or omitted
disclosures regarding executive compensation. In fact, the SLC Revised Report
contains no suggestion that the investigation evaluated these filings at all.
Notwithstanding the fact that the SLC Revised Report does not address the issue
of Telos' SEC filings, we strongly believe there is clear evidence that these
filings are materially misstated or omit certain disclosure regarding Telos'
financial controls. We believe these are issues for Telos' independent auditors
to evaluate, and that the independent Directors of Telos have a duty to ensure
that the material is passed by the Audit Committee to the independent auditors
for their evaluation.
Nonetheless, Director Bailey has made clear that he has no intention of
forwarding the draft termination letter to Reznick Group and Goodman & Company.
During the October 3, 2007 Board meeting, Director Bailey demanded that I
retract my September 21, 2007 memorandum. I refused to do so. Notably, that
meeting witnessed the passage of bylaw amendments (over our objections) that
radically alter Telos' corporate governance and could serve to exacerbate the
harms inflicted on Telos by the current management. As directors, we proposed
Board resolutions aimed at addressing these problems: (1) ensure the true
independence of Telos' "Independent Directors," in accordance with NASD Rules;
(2) compel CEO Wood to give the Board a full report disclosing all financial
interests held by current officers and their family members in Telos, its
subsidiaries, divisions, and affiliates; and (3) require that the Board act in
accordance with Telos' own bylaws and ensure Telos' compliance with all federal
securities laws. That these three proposals should even raise controversy speaks
volumes about the Board's apparent unwillingness to address the issues we have
raised concerning misconduct by Telos' management.
Notwithstanding that prior efforts have been in vain, our duties as
Directors compel us to reiterate our serious concerns that the current Board and
management are not fulfilling their obligations to Telos shareholders. We
believe that there are serious problems remaining unredressed, including:
o the large grants to Telos officers of stock options in Xacta,
a wholly owned subsidiary of Telos, without any disclosure in
SEC filings of the extreme dilutive impact of these stock
options for the benefit of insiders and the potential attempt
to transfer Telos' assets to Xacta with the effect of favoring
certain Telos officers over the public shareholders;
Page 16 of 18
o we believe there has been a failure to correct misstatements
and material omissions in Telos' SEC filings regarding the
granting and dilutive effect of the Xacta options grants; and
we believe the corresponding Sarbanes-Oxley certifications of
those financial statements by Mr. Wood, who is the primary
recipient of those inadequately disclosed Xacta stock options
should be evaluated;
o substantial questions exist concerning the financial controls
of Telos, its related-party arrangements and the disclosure
thereof in documents filed with the SEC; and
o Telos' relationship with John R.C. Porter and the various
off-shore family entities that hold interests in Telos, and
the possible illicit activities of those entities.
As Directors of Telos, we have fiduciary duties that obligate us to act
with utmost care and loyalty. As such, we have acted diligently to bring
evidence regarding potential misconduct before the Board and the Audit
Committee. However, both the tone and content of recent communications within
the Board lead us to conclude that the other independent Directors of the Board
have little interest in making a full and objective investigation of these
matters, and that a change of both officers and directors is necessary to
protect the company. If the Audit Committee continues to disregard its
responsibilities, we will be forced to fulfill our fiduciary duties by other
means.
Director Bailey's letter of October 6, 2007 is further discouraging
evidence that the Audit Committee will continue on its current path. I agree, as
set forth in earlier communications and herein, that it is crucial that Telos
file accurate SEC filings. That is precisely why we are unable to retract the
Schedule 13D filings referenced in Director Bailey's letter, just as we are
unable to remain silent in the face of evidence of misconduct. We believe it is
Director Bailey, and not us, who fails to respect his fiduciary duties to Telos.
Moreover, the substance of Director Bailey's letter is alarmingly
inaccurate.
First, as to Director Bailey's purported "independence," Mr. Bailey's
description of his relationship with L-1 Identity Solutions f/k/a Viisage omits,
among other facts, that his relationship with the company, which, as described
in an SEC S-4 filed by Viisage, continued into 2007 with significant
compensation, severance, non-compete payments, and the acceleration of stock
option vesting, being made to him.
Also, we believe that after joining the Telos Board on October 31,
2006, Director Bailey participated in the approval of Telos' sale, in April
2007, of Telos Identity Management Solutions, LLC ("TIMS") to certain parties,
including the brother of CEO Wood. As you know, we have raised concerns that the
10-Q filed in conjunction with the TIMS transaction (and approved, as Director
Bailey notes, only by the Audit Committee) failed to identify it as a related
party transaction and omitted critical disclosures regarding interests Mr.
Wood's brother has the right to acquire by virtue of Mr. Wood's involuntary
termination from Telos.
The 10-Q did, however, assure investors that "the Company has obtained
a fairness opinion from a [undisclosed] nationally recognized investment banking
firm that the consideration received in the [TIMS] transaction from the
financial investor is fair, from a financial point of view, to the Company." Of
course, the 10-Q, approved by Mr. Bailey in his capacity as Audit Committee
Chairman, fails to identify that the "nationally recognized investment banking
firm" that issued the fairness opinion is USBX Advisory Services. Mr. Bailey was
named CEO in Residence of USBX's Washington office in November 2006, many months
before the TIMS transaction was executed. Nationally-distributed press releases
issued by USBX at that time confirm this role of Bailey at USBX.
Page 17 of 18
Therefore, in this related-party TIMS transaction involving Mr. Wood's
brother and other unidentified parties, the purportedly independent fairness
opinion, as set forth in the SEC filings, was rendered by the investment banking
firm at which the Chairman of the Audit Committee apparently worked while also
chairing the Audit Committee. It is hard to imagine a more material omission or
a more glaring example of Director Bailey's attempt to hide his lack of
independence, and, absent some compelling explanation of this apparent total
lack of independence, Director Bailey cannot be permitted to continue to prevent
the company's independent auditors from learning information critical to their
function. Unless a satisfactory explanation is forthcoming, we request that
Director Bailey resign and that a truly independent Chairman of the Audit
Committee be appointed.
Second, to blame Costa Brava, as Director Bailey purports to do, for
Telos' inability to have its financial statements reviewed by an independent
public accountant turns the reality of Telos' past dealings with its auditors on
its head. Mr. Bailey stated in his letter that "Costa Brava itself caused this
unfortunate situation by precipitating the resignation of Telos' independent
public accountant, Goodman & Company". However, Telos' 8-K filed on July 13,
2007 reported that "The Company has requested that Goodman reconsider its
conclusion [to resign]... based on the belief of the Company's Audit Committee
that Goodman's independence has not been impaired" as a result of the fact that
"Seth W. Hamot and Andrew R. Siegel had been elected to the Company's Board of
Directors effective June 18, 2007." This reversal is puzzling. Indeed, in light
of Telos' history ** the circumstances surrounding the resignation of the
former independent Directors who authored the 2006 draft Committee report, and
Telos' difficulty in retaining a new accounting firm (see October 6, 2007 Bailey
Letter at 3), it is stunning that the current Audit Committee Chair would refuse
to share allegations of management misconduct with Telos' new independent
auditor, especially if Director Bailey truly believed those allegations to be
baseless.
Finally, with respect to the Audit Committee minutes to which we have
been denied access, you are well aware that the court's protective order covers
only documents protected by the attorney-client or work product privilege, or
which in good faith could be designated "Highly Confidential." We believe the
Audit Committee minutes fit none of these categories; indeed, it is ridiculous
to suggest that independent Directors of a publicly-held company could be denied
access to Board Committee minutes and yet be expected to fulfill their fiduciary
duties of oversight in any meaningful way. We are determined to fulfill those
duties, and we reiterate our request for all Board Committee minutes.
As we have consistently requested, the Audit Committee should take the
following actions:
o deliver the draft termination letter for Mr. Wood to the
independent auditors;
o direct the independent auditors to evaluate (i) the grant of
the options in Xacta and (ii) the TIMS transaction to ensure
that there were no material misstatements or omissions of
material facts contained in the Telos SEC filings;
o direct the Board to reconsider Mr. Bailey's independence in
light of his relationship with L-1 and USBX Advisory Services
and, absent a compelling explanation, Mr. Bailey should be
requested to resign from the Audit Committee; and
o deliver to the undersigned directors the Audit Committee
meeting minutes.
- -------------------------------
** CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND A CONFIDENTIAL TREATMENT
REQUEST HAS BEEN MADE WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE OMISSIONS.
Page 18 of 18
Sincerely,
/s/ SETH W. HAMOT
Seth W. Hamot
Director
Acknowledged:
/s/ ANDREW R. SIEGEL
Andrew R. Siegel
Director