Independence Letter dated August 18, 2007 to Director Bailey of the Issuer
420 Boylston Street
Boston, Massachusetts
02116
Telos Corporation
19886 Ashburn Road
Ashburn, Virginia
20147
August 18, 2007
Director Bailey:
I have reviewed the draft l0Q furnished by CFO Nakazawa, and have several concerns. You stated at the sparsely attended August 9th BOD meeting that you would be speaking with the SEC and seeking direction from them as to what are the filing requirements for a firm without an auditor. We have not heard back from you on this discussion, or whether it has even occurred.
Equally as important, though, I continue to request the tests done as per your independence. I was questioned by several Board Members regarding why I sought such information. Furthermore, General Counsel Flaherty denied that I was entitled to review the tests of independence and the results.
Frankly, Telos has a history of the Audit Committee being staffed by Directors who do not pass the tests for independence. The 8K of August 17, 2006 describes Mr. Borland's lack of independence while Audit Committee Chair, which of course Telos also cites in regards to the mass resignation of Directors that same week:
"In an abundance of caution and to avoid any appearance of a lack of independence caused by his use of the corporate golf membership and the non disclosure thereof, Mr. Borland has resigned from the Audit Committee of the Board and has stepped down from the chairmanship of the Compensation Committee. (8K filed with SEC on 8/21/06)"
It appears to me that your lack of independence is more obvious than Borland's.
Specifically, you'll note in the Telos' SEC Proxy Statement, 14A, of November 2006, the following comment:
"The Audit Committee, which as of the date of this Proxy Statement consists of, pursuant to Rule 4200(a)(15) of the NASD, independent Directors Bailey (chairman), Dvoranchik, and Mahan, was established to review, in consultation with the independent auditors, the Company's financial statements, accounting and other policies, accounting systems and systems of internal controls."
Hence, Telos has clearly stated that all directors of it Audit Committee must be "independent" as defined by the NASD.
Here is said NASD Rule 4200 (a)(15) and specifically part (D)...
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(15) "Independent director" means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent:
(D) a director who is a partner in, or a controlling shareholder or an executive officer of, any (for profit business] organization to which the [corporation] company made, or from which the [corporation] company received, payments (other than those arising solely from investments in the [corporation's] company's securities) that exceed 5% of the recipient's [corporation's or business organization's] consolidated gross revenues for that year, or $200, 000, whichever is more, in the current fiscal year or any of the past three fiscal years;
Please explain your "independence" in the context of these three documents and Telos' subcontractor relationship with your former company, originating from at least 2004:
First, your biography from the November 2006 Telos Proxy, 14a, filed with the
SEC.
"Mr. Bailey (age 53) was elected to the Board of Directors in October 2006. Mr. Bailey's career spans over two decades of management experience in the high technology and security industries. He served most recently from August 2002 to September 2006 as the president and CEO of Viisage Technology, Inc., a leading provider of advanced technology identity solutions. Under his four years of leadership, Viisage's market capitalization grew from $60 million to over $1 billion. During that period the company executed nine acquisitions, eventually culminating in the formation of L1 Identity Solutions, a NYSE listed company"
Second, this March 2005 Viisage press release..
"Following Successful Implementation, Additional Order Builds Upon Existing Relationship with Telos and the DoD
ARLINGTON, Va. & BILLERICA, Mass. -- (BUSINESS WIRE) -- March 24, 2005 --Viisage (Nasdaq: VISG), a leading provider of advanced technology identity solutions, today announced that it has received a new order for $1.7 million to continue to support the production of secure, smart credentials as part of the Common Access Card (CAC) program for the United States Department of Defense (DoD). The CAC program, which has more than four million users across the DoD, is widely regarded as the largest and most advanced use of smart cards, and has been recognized with major industry awards. This order follows the initial order for the CAC program announced in May 2004 ...
... Viisage received the order through Telos Corporation, one of the major support contractors to the Defense Manpower Data Center (DAMC), the organization inside DoD responsible for implementation of the CAC program. The contract calls for additional consumables and services for the ongoing production of the CAC secure identification cards throughout the agency's Real time Automated Personnel Identification System (RAPIDS). First implemented in 2004..."
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Third, On September 12, 2006, L-1, the surviving Viisage entity, issued the following press release:
"STAMFORD, Conn. -- (BUSINESS WIRE) -- Sept. 12, 2006 L-1 Identity Solutions (NYSE: ID), a leading provider of advanced technology identity solutions, today announced that it has received a new five-year $25 million award to continue to support the production of secure, smart credentials as part of the Common Access Card (CAC) program for the United States Department of Defense (DoD). The CAC program, which has more than three million users across the DoD, is widely regarded as the largest and most advanced use of smart cards and has been recognized with major industry awards.
Viisage received the order through Telos Corporation, one of the support contractors to the Defense Manpower Data Center (DAMC),.."
Furthermore, the continuance of your severance and pension plans by L-1 through this date, as per page IV of the Viisage S-4 filed at the SEC on July 26, 2006, seems to indicate to me an on going financial relationship between you and L-1/Viisage, a subcontractor to Telos:
"pursuant to a separation agreement to be entered into with Viisage, Bernard C. Bailey, current Chief Executive Officer of Viisage, will receive, subject to the consummation of the merger, one lump sum severance payment of $530,000 to be paid on January 1, 2007, which is equal to 12 months current base salary plus a target bonus of $200, 000; a prorated bonus payment for 2006 based on a current target bonus of $200,000 to be paid on the termination date, as defined in the separation agreement; in connection with his agreement to expand the scope of his non competition arrangement with Viisage, a payment of $530,000; on the first pay period following the closing of the merger, an integration incentive bonus of $105,000; and, because the merger constitutes a "change of control" as defined in his standing option agreements, all of Mr. Bailey's stock options and restricted stock grants will immediately vest in full, and, pursuant to his severance agreement, will be exercisable for 12 months from the termination date;"
Perhaps there are exemptions to NASD Rule 4200 (a)(15) of which I am not aware, despite Telos' affirmative declaration to the SEC that all Directors on the Audit Committee comply with the NASD's definition of independence, or perhaps the tests I requested support Telos's conclusion that you are "independent" and were on the date that you became Chairman of the Audit Committee. Of course, I've been denied access to those test results.
Perhaps, too, you could respond quickly to this missive and every Board member could be assured that corporate governance under the new regime is actually an improvement, complies with statutory requirements, and that the validity and legitimacy of any of Telos's recent SEC filings aren't in question. After all, the corporation has no auditor, you have not reported on your discussions with the SEC, and you appear to be insisting on now filing the l0Q, in contrast to your statements on August 9th.
Sincerely,
/s/ SETH W. HAMOT
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Seth W. Hamot
Director
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