Investor Sues Telos
Telos Corp ., an Ashburn-based defense technology contractor, was sued last week by an investor -- a New York hedge fund -- that claims the company's directors are frittering away money on million-dollar-plus executive pay packages and expensive consulting deals.
The plaintiff, Costa Brava Partnership III , is managed by Roark, Rearden & Hamot LLC , which often invests in the debt and equity of companies with troubled capital structures. Telos -- which is operationally profitable and has won some lucrative defense contracts in recent years -- went through a leveraged buyout in 1989 that saddled it with debt and debtlike publicly traded preferred stock.
The dividends on that preferred stock have been deferred since 1995, and now total close to $70 million. Under the terms of the preferred stock, Telos is required to begin redeeming it and paying the deferred dividends late this month. But Telos's charter prohibits it from paying dividends on the preferred stock while it has a negative net worth, and Telos has said its current deficit means it won't be able to begin redeeming the preferred stock.
Costa Brava began buying the preferred stock this year at a steep discount to its face value, and now owns more than 16 percent of it. In its lawsuit, it asked a Baltimore City Circuit Court -- Telos is incorporated in Maryland -- to consider the preferred stock as debt, and to put the company into receivership to protect Costa Brava's claim. Costa Brava claimed that the Telos board pays its executives too much money given its capital problems. Chief executive John B. Wood , for example, was paid $1,056,057 in salary and $1,230,000 in cash bonuses from 2002 to 2004.
A spokesman for Telos declined to comment. A group of independent Telos directors is to present recommendations this month for dealing with the company's capital deficit. The report is expected to address the fate of the public preferred shareholders, several of whom, including Costa Brava, have urged the company to seek a buyer or a public stock offering to raise enough cash to redeem the preferred shares.
"We have no comment in view of the pending litigation against the company and against the members of the board," said Douglas Gleason, in-house legal strategist for Roark, Rearden & Hamot.
Terence O'Hara's e-main addressoharat@washpost.com. |
