Disgruntled Shareholders Get Seats on Telos' Board

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Disgruntled Shareholders Get Seats on Telos' Board

By Bob Starzynski
Staff Writer

Telos Corp. will be adding new faces to its corporate board in less than three months, thanks to a lawsuit that backfired on the Ashburn, Va.-based company.

When shareholders, upset with the company over $26 million in unpaid dividends, tried to increase Telos' board of directors by 50 percent last year, the company countered by suing the shareholders. But late last month, Judge T.S. Ellis of the U.S. District Court in Alexandria, Va., sided with the shareholders, allowing them to nominate and elect two new board members to Telos' four-member board.

While adding additional board members to a company does not typically change the company's direction, the new blood at Telos should have some different opinions on how to run the firm.

Telos, a government information technology contractor with more than 1,400 employees and sales last year of $254 million, has spent much of the past two years trying to reposition itself as more of a high-end systems integrator and less of a systems manager and equipment reseller. In doing so, the company's commercial work has decreased from 15 percent of overall business in 1995 to less than 4 percent last year.

The company, which is privately held except for several classes of preferred stock that are traded on the OTC Bulletin Board, currently does two-thirds of its work with the Department of Defense - providing, installing and maintaining computer systems. Other large government customers include the Department of Justice and NASA.

By May 11, Telos must send a letter to shareholders, notifying them of a special meeting July 31 for the election of new board members. According to the company's bylaws and the court's orders, Telos officials and existing board members do not have a say in the election and aren't permitted to stand in the way. A group of preferred shareholders will control the election.

"The current board has always voted as a block," said Suzanne Bakewell, a spokeswoman for Telos. "They will still be a majority of the board, so we're not really too concerned."

Regardless, "the interest of everyone is financial growth and health for the company," she said.

But the preferred shareholders say they will finally have their voice heard with the company.

"This is a real victory," said Paul Berger, a small investor in Telos who would not reveal his holdings. "We feel management has blatantly ignored us for too long." Berger did not specify what he would like to see changed with Telos.

The company's board of directors is made up of four members, including John Wood, who is also president and chief executive officer, and three company outsiders.

The shareholder issue dates back to 1989, when Telos - known as C3 Inc. then - issued 3.5 million shares of preferred stock. According to the firm's corporate charter, the shares were to pay an annual dividend of $1.20 per share in cash or additional stock. The dividends have not been paid since 1991, accruing an approximate value of $26 million in cash and stock.

The company's corporate charter reads: "If at any time ... dividends payable ... shall be in arrears and unpaid for three consecutive full semi-annual periods, then the number of directors constituting the board of directors ... shall be increased by up to two directors and the holders of the [preferred stock] shall have the exclusive right, voting separately as a class, to elect the directors."

By December 1996, Timothy Ewing, who heads Value Partners, a Dallas investment firm that owns 20 percent of the preferred class of stock, decided to fight for the unfilled board seats. He sent a letter to the company, demanding a shareholder meeting.

Cede & Co., a firm that holds Value Partners' shares for it, followed up with another letter a month later, saying that it would organize the meeting itself. Before the meeting could be arranged, Telos filed a suit against Cede in the Circuit Court in Loudoun County, Va., in February 1997. Telos wanted the court to issue a declaratory judgment as to whether the shareholders had a right to appoint two new directors.

Telos argued the dividends were not legally capable of being paid. Therefore, nonpayment should not count against the company. However, the company has been profitable since 1994 and has seen steady revenue growth in that time.

A month later, Cede had the case moved to the U.S. District Court. The case stayed in court for more than a year before Ellis handed down his decision. In ruling against Telos, he regarded the company's argument as "nonsensical."

Peter Haveles, the attorney for Value Partners, said that in a May 1 hearing with Judge Ellis, Telos agreed to hold a shareholder meeting July 31 to elect the new board members. Ewing, who deferred questions to Haveles, owns $4.1 million worth of Telos stock (valued on May 4). Haveles would only provide factual information from the case.


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