Interesting Accounting:
September 20, 2005
Mr. Joel Flax
Partner in Charge
Goodman & Company, LLP
One Commercial Place
Norfolk, VA 23510-2119
VIA FEDEX
Re: Telos Corporation
Dear Mr. Flax:
As you may be aware, Costa Brava Partnership III, L.P. ("CBIII") is a
significant holder of Telos' 12% Exchangeable Redeemable Preferred Stock (the
"Security").
CBIII has conducted a thorough review of Telos' Form 10-K for the fiscal year
ended 2004 and its Form 10-Q for the quarters ended March 2005 and June 2005.
Your firm acts as Telos' Independent Registered Public Accounting Firm and
rendered an unqualified audit opinion in the 2004 10-K.
CBIII would appreciate your assistance in understanding your firm's audit
opinion on Telos' election of SFAS 6 - Statement of Financial Accounting
Standards No. 6: Classification of Short-Term Obligations Expected to be
Refinanced.
As you know, Telos made this election in the 10-K and in the 10-Q's in regard to
the short-term obligation of Telos to conduct the mandatory redemption of the
Security. Furthermore, Telos stated that its compliance with the requirements of
SFAS 6 is its intent and ability to exchange the Security for 12% Junior
Subordinated Debentures.
As stated in Telos' 1989 Proxy Statement / Prospectus (the "Prospectus"), the
Debentures cited in the 10-K and 10-Q's have the identical mandatory redemption
terms as the Security. A copy of the Prospectus in enclosed for your reference.
As stated on page 81:
"On the first interest payment date after the sixteenth
anniversary [December 1, 2005] of the Effective Date [of the
C3 Inc. merger]...the Company will be required to redeem 20%
of the greatest principal amount of the Exchange Debentures
outstanding......"
It is clear that the first mandatory redemption of the Debentures is, in fact,
December 1, 2005.
Furthermore, the mandatory redemption terms of the Security are set forth on
page 77 of the Prospectus:
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Page 12 of 12
"Mandatory annual redemptions ...will commence on [December
1, 2005] and will continue thereafter...following each
subsequent anniversary of the Effective Date at a price of
$10, together with all accrued and unpaid dividends...The
number of shares to be mandatorily redeemed ...shall be equal
to at least 20%....issued and outstanding at any time..."
It is clear to CBIII that the respective mandatory redemption terms of the
Security and the Debentures are identical. Additionally, and most importantly,
there is no provision in the terms of the Security that permits the satisfaction
of the mandatory redemption obligation through an exchange into Exchange
Debentures.
In view of the aforementioned terms of the Security and the Exchange Debentures,
the election of SFAS 6 appears to be abusive.
While the managers of CBIII are knowledgeable in financial accounting matters,
CBIII is very unclear on the legitimacy of Telos' SFAS 6 election and your
firm's unqualified audit opinion thereof.
We would appreciate your assistance in providing clarity on this matter. Thank
you.
Sincerely,
/s/ ANDREW SIEGEL
-----------------------------
Andrew Siegel
Roark, Rearden & Hamot LLC,
the general partner of Costa Brava Partnership III, L.P.
enc: C3, Inc. 1989 Proxy Statement / Prospectus
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