As reported in the washington post:
Telos Promises Probe of Hedge Fund's Claims
Monday, January 2, 2006; Page D02
The chess match between Ashburn defense technology company Telos Corp. and a New York hedge fund didn't take a break for the holidays -- to the extent that Telos is now in the position of investigating itself.
The managers of Costa Brava Partnership III LP, the hedge fund, last week sent letters to the company's board charging the firm had misstated its financial statements for 10 years and called for the resignation of chief executive John B. Woods and Chief Financial Officer Michele Nakazawa.
The letters are the latest in Costa Brava's increasingly pointed demands that Telos be restructured or sold. Telos, bolstered by a string of Air Force contracts, had $100 million in revenue in the first nine months of the year, a 25 percent increase.
Telos is privately owned, with 80 percent of its common stock held by British investor John Porter and the rest held by Telos management and employees. But in a 1989 leveraged buyout, it issued a publicly traded form of preferred stock. It hasn't paid dividends on that preferred stock for 10 years, and nearly $40 million in deferred dividends have begun to come due.
Costa Brava is one of four such funds that have bought more than half of that preferred stock in the past year. Costa Brava's managers want Telos to begin making good on the deferred dividends and begin redeeming the preferred stock. But Telos argues that it cannot do that. It still has $100 million in debt and a negative shareholder equity, and its lenders have first claim on its assets before preferred dividends are paid.
In the fall, a special committee of Telos's board recommended pursuing a swap in which Costa Brava and the other preferred stockholders would accept convertible debt at a "significant discount" to the preferred stock's face value.
But Costa Brava argues that accounting misstatements dating back a decade already resulted in a $30 million reduction in the face value of the preferred stock. The firm doesn't want to accept a discount on something that's improperly valued in the first place.
All of those twists and turns have ended up in court.
Costa Brava sued in Baltimore to force the company to make good on its preferred stock obligations, arguing that Porter, Woods and the rest of the board frittered away the company's cash on sweetheart consulting contracts for Porter and outsize pay packages for Woods.
On Dec. 21, in a Securities and Exchange Commission filing, Telos said it appointed two independent members of the board to investigate Costa Brava's claims.
Officials at Costa Brava and Telos declined to comment.
-- Terence O'Hara |
