EX-99.1 2 a05-8748_1ex99d1.htm EX-99.1

Exhibit 99.1

 

Dr. Fred C. Ikle

Mr. David Borland

Ambassador Langhorne A. Motley

Committee of Independent Directors of the Board of Directors

Telos Corporation

c/o Joseph M. Berl

Powell Goldstein LLP

901 New York Avenue, N.W.

Washington, D.C. 20001-4413

 

 

May 3, 2005

 

 

Gentlemen:

 

 

The parties signing this letter (the “Signatories”) are responding to your recent letters to them soliciting their input to the financial restructuring of Telos Corporation(1) (the “Company”). As the Signatories are among the largest holders of the Company’s sole public security, they are pleased to provide a joint response based on the verbal acknowledgement by legal counsel to the Independent Committee.

(1) Formerly C3 Inc.

 

The Signatories each hereby acknowledges and agrees that, by holding discussions and meetings relating to a possible restructuring of the capital of the Company, and by delivering this proposal in connection with such possible restructuring, none of the Signatories has acted together nor agreed to act together with another for purposes of acquiring, holding, voting or disposing of an equity security of the Company or for any other purpose, and therefore the Signatories do not constitute a group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Neither the submission of this letter nor anything contained herein or discussed shall be construed as an admission that the Signatories constitute a “person” or “group” for any purpose, or an admission that any Signatory is, for the purposes of Section 13(d) or 13(g) of the Exchange Act, the beneficial owner of any of the equity securities of the Company owned by any other Signatory. The Signatories expressly acknowledge and agree that no Signatory has any shared voting or dispositive power over the equity securities of the Company owned by any other Signatory. Except for the submission of this letter in response to the solicitation of the Company, the Signatories do not have any contracts, arrangements, understandings or relationships (legal or otherwise) with or among each other with respect to any securities of the Company, including but not limited to transfer or voting of any of the securities of the Company, finder’s fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies, or a pledge or contingency the occurrence of which would give another person voting or dispositive power over the securities of the Company.

 


 

Each of the Signatories is aware that the security that he owns, Telos’ 12% Cumulative Exchangeable Redeemable Preferred Stock (the “Security”), was issued in 1989 as a component of the leveraged buyout (“LBO”) of C3 Inc. by C3 Acquisition Corp. Each of the Signatories is also aware that the Security has a first mandatory redemption date of November 21, 2005 at a price of $10 per share, plus accrued and unpaid, contractually obligated dividends.

 

As you are aware, the Security is a fixed obligation of the Company and the holders of the Security are not considered by the Company to be equity participants, as disclosed in the October 20, 1989 Proxy Statement/Prospectus:

 

“As a result [of receiving the Security] the public shareholders of the Company [existing prior to completion of the LBO] will be deprived of the opportunity to share in any future earnings or growth of the Company”

 

Additionally, each of the Signatories is aware of the Board of Directors’ disclosure statements made in the Company’s SEC filings on Forms 8-K, 10-Q and 10-K beginning in March 2004 that the Company believes it will more likely than not be unable to meet the redemption schedule in accordance with the contractual obligations set forth in the terms of the Security.

 

Each of the Signatories acknowledges that based on the Company’s Form 10-K for the fiscal year ended December 31, 2004, on that date, the Company did not have sufficient cash on hand to effect the mandatory redemption that is scheduled to commence this year in accordance with the contractual obligations of the Company under the terms of the Security. However, each of the Signatories believes that the Company has substantial unrealized total enterprise value (“TEV”) that could be unlocked by the Board of Directors through a strategic transaction such as, but not limited to, a public equity offering or a merger transaction (a “Strategic Transaction”). Such a Strategic Transaction is interesting because it has the potential to unlock substantial value that can be made available to the Company to provide “legally available funds” to either completely or near completely fulfill the contractual obligations of the Company under the terms of the Security.

 

Based on independent analysis conducted by certain of the Signatories, and submitted in the enclosed summary, each of the Signatories estimates that the Company’s unrealized TEV is at least between $80 million and $100 million.

 

In exploring the Company’s ability to execute a Strategic Transaction, some of the Signatories have had informal extensive discussions with nationally-recognized investment banks that specialize in the Company’s sector, including Friedman Billings Ramsey, BB&T Windsor Group, RBC Capital Markets, Stephens Financial Group and Morgan Joseph. These investment banks have expressed confidence in their respective independent abilities to successfully execute a Strategic Transaction on behalf of the Company.

 

The Committee of Independent Directors, in addition to the entire Board of Directors, has a fiduciary duty to direct and aggressively pursue a Strategic Transaction that would unlock the unrealized TEV and provide “legally available funds” for fulfilling the contractual obligations of the Company under the terms of the Security.

 


 

To assist the Committee of Independent Directors and the Company in facilitating a Strategic Transaction for the purposes of unlocking unrealized TEV and fulfilling the contractual obligations of the Company under the terms of the Security, some interest has been expressed by the Signatories in the possibility that holders of the Security may consent to a reduction to the dollar amount of the accrued and unpaid dividends currently due and owed by the Company ($38.75 million as of March 31, 2005).

 

Each of the Signatories would welcome an opportunity to meet with you to discuss these issues. The Signatories understand from certain conversations with Counsel to the Committee of Independent Directors that a meeting will be held on May 10, 2005 at the office of Powell Goldstein. Subject to scheduling, each of the Signatories would be very pleased to meet with you at that time.

 

 

Sincerely,

 

 

/s/ Timothy G. Ewing

 

/s/ Andrew R. Siegel

 

Timothy G. Ewing

 

Andrew R. Siegel

 

Ewing & Partners

 

Costa Brava Partnership III, L.P.

 

 

 

 

 

 

 

 

 

/s/ Nelson Obus

 

 

 

Nelson Obus

 

Victor Morgenstern

 

Wynnefield Capital Management, LLC

 

 

 

 

 

 

 

 

 

 

 

/s/ David P. Cohen

 

 

 

David P. Cohen

 

 

 

Athena Capital Management, Inc.

 

 

 

 

 

Enc: summary valuation analysis

 


 

Submission to Committe of Independent Directors

Telos Corporation

 

 

 

 

Indicative

 

 

 

 

 

Value Ranges

 

Mid

 

 

 

($ in millions)

 

Point

 

Comparable M&A Transactions

 

 

 

 

 

 

 

 

 

Revenue

 

$

83.1

 

-

 

$

264.5

 

$

173.8

 

EBITDA

 

$

48.3

 

-

 

$

122.2

 

$

85.2

 

Adjusted EBITDA (1)

 

$

63.6

 

-

 

$

161.0

 

$

112.3

 

 

 

 

 

 

 

 

 

 

 

Comparable Public Equity Market

 

 

 

 

 

 

 

 

 

Revenue

 

$

84.2

 

-

 

$

291.2

 

$

187.7

 

EBITDA

 

$

60.3

 

-

 

$

128.0

 

$

94.2

 

Adjusted EBITDA (1)

 

$

79.4

 

-

 

$

168.7

 

$

124.0

 

 

 

 

 

 

 

 

 

 

 

Indicative Value Range

 

 

 

 

 

 

 

 

 

Revenue

 

$

83.1

 

-

 

$

291.2

 

$

187.1

 

EBITDA

 

$

48.3

 

-

 

$

128.0

 

$

88.2

 

Adjusted EBITDA (1)

 

$

63.6

 

-

 

$

168.7

 

$

116.1

 

(1) EBITDA adjusted for discretionary cash bonuses and “consulting fees” to the majority common shareholder

 


 

Indicative Valuation Ranges

($ in millions)

 

 


 

 

 

Indicative

 

 

 

Valuation Mutiples

 

Comparable M&A Transactions

 

 

 

 

 

 

 

Revenue multiples:

 

0.7x

 

-

 

2.3x

 

EBITDA multiples:

 

6.6x

 

-

 

16.6x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparable Public Equity Market

 

 

 

 

 

 

 

Revenue multiples:

 

0.7x

 

-

 

2.5x

 

EBITDA multiples:

 

8.2x

 

-

 

17.4x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicative Multiple Range

 

 

 

 

 

 

 

Revenue multiples

 

0.7x

 

-

 

2.5x

 

EBITDA multiples

 

6.6x

 

-

 

17.4x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telos LTM, as of 12/31/2004 (in $ millions)

 

 

 

 

 

 

 

Revenue

 

$

116.7

 

 

 

 

 

EBITDA

 

$

7.4

 

 

 

 

 

Adjusted EBITDA (1)

 

$

9.7

 

 

 

 

 

(1) EBITDA adjusted for discretionary cash bonuses and “consulting fees” to the majority common shareholder

 


 

($MM)

 

 

 

 

 

 

 

 

 

 

 

 

 

Date

 

 

 

 

 

Transaction

 

Target

 

TEV /

 

TEV /

 

Announced

 

Target

 

Acquirer

 

Value

 

LTM Revenue

 

LTM Revenue

 

LTM EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4/26/2005

 

PEC Solutions, Inc.

 

Nortel Networks Inc.

 

$

448.0

 

$

202.7

 

2.2x

 

14.0x

 

3/22/2005

 

ComGlobal Systems, Incorporated

 

Analex Corp.

 

$

47.0

 

$

39.5

 

1.2x

 

9.2x

 

2/18/2005

 

SYTEX Group Inc.

 

Lockheed Martin Corporation

 

$

462.0

 

$

425.0

 

1.1x

 

NA

 

2/18/2005

 

Integic Corporation

 

Northrop Grumman Corporation

 

$

313.0

 

$

161.0

 

1.9x

 

NA

 

1/19/2005

 

OnBoard Software Inc.

 

MTC Technologies Inc.

 

$

34.0

 

$

15.0

 

2.3x

 

NA

 

1/12/2005

 

Shenandoah Electronic Intelligence Inc.

 

SI International Inc.

 

$

75.0

 

$

73.9

 

1.0x

 

7.9x

 

1/7/2005

 

Windermere Group LLC

 

Essex Corp.

 

$

69.4

 

$

64.0

 

1.1x

 

NA

 

1/3/2005

 

Sytel Inc.

 

TechTeam Global, Inc.

 

$

20.5

 

$

28.8

 

0.7x

 

7.2x

 

12/27/2004

 

Manufacturing Technology Inc.

 

MTC Technologies Inc.

 

$

75.0

 

$

50.0

 

1.5x

 

NA

 

12/16/2004

 

RCI Holdings Corp.

 

Serco Group Plc

 

$

215.0

 

$

256.0

 

0.8x

 

14.3x

 

12/1/2004

 

Bridge Technology Corporation

 

SI International Inc.

 

$

30.0

 

$

22.2

 

1.4x

 

8.6x

 

9/11/2004

 

DigitalNet Holdings Inc.

 

BAE Systems North America

 

$

585.9

 

$

354.2

 

1.7x

 

NA

 

9/9/2004

 

AC Technologies Inc.

 

PEC Solutions, Inc.

 

$

49.7

 

$

48.5

 

1.0x

 

6.6x

 

8/11/2004

 

Integrated Management Services, Inc.

 

Anteon International Corp.

 

$

31.0

 

$

30.0

 

1.0x

 

NA

 

8/2/2004

 

Impact Innovations Group LLC (Gov division)

 

Dynamics Research Corporation

 

$

53.4

 

$

47.0

 

1.1x

 

NA

 

7/27/2004

 

Simulation Technologies, Inc.

 

Anteon International Corp.

 

$

15.0

 

$

20.0

 

0.8x

 

NA

 

6/29/2004

 

Command Technologies, Inc.

 

MTC Technologies Inc.

 

$

47.0

 

$

36.0

 

1.3x

 

NA

 

6/1/2004

 

EPOS Corp

 

Tier Technologies Inc.

 

$

19.0

 

$

15.0

 

1.3x

 

NA

 

5/28/2004

 

Integrated Information Technology Corp.

 

PEC Solutions Inc.

 

$

35.0

 

$

36.0

 

1.0x

 

8.3x

 

5/6/2004

 

Beta Analytics International Inc.

 

Analex Corp.

 

$

32.3

 

$

33.0

 

1.0x

 

NA

 

4/5/2004

 

STI Government Systems

 

BAE Systems North America

 

$

27.0

 

NA

 

NA

 

NA

 

3/10/2004

 

AMS Defense & Intelligence Group

 

CACI International

 

$

415.0

 

$

250.0

 

1.7x

 

16.6x

 

2/12/2004

 

CMS Information Services, Inc

 

CACI International

 

$

30.0

 

$

39.0

 

0.8x

 

10.7x

 

1/22/2004

 

Science & Engineering Associates, Inc.

 

ITS Services Inc.

 

$

100.0

 

$

108.0

 

0.9x

 

11.6x

 

1/8/2004

 

ORION Scientific Systems, Inc.

 

SRA International Inc.

 

$

34.5

 

$

30.0

 

1.2x

 

NA

 

1/8/2004

 

FAAC, Inc.

 

Arotech Corp.

 

$

14.0

 

$

15.0

 

0.9x

 

NA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

1.2x

 

10.5x

 

 

 

 

 

 

 

 

 

Median

 

1.1x

 

9.2x

 

 


 

Target

 

Services Provided to the U.S. Federal Government (DoD, Intelligence, other)

 

 

 

PEC Solutions, Inc.

 

Secure, interoperable technology solutions

ComGlobal Systems, Incorporated

 

Software and information technology firm providing C4I services to military and federal government agencies

SYTEX Group Inc.

 

Technology engineering and systems integration, network security solutions, business management solutions

Integic Corporation

 

Enterprise health and business process software solutions

OnBoard Software Inc.

 

Technical development of hardware and software

Shenandoah Electronic Intelligence Inc.

 

Records management, applications support, secure optical card processing

Windermere Group LLC

 

Software development, advanced engineering design and information assurance

Sytel Inc.

 

Network design and network security services, help desk support

Manufacturing Technology Inc.

 

Product life cycle support for systems and electronics

RCI Holdings Corp.

 

Systems engineering and HR business process management

Bridge Technology Corporation

 

Program management, systems and software engineering

DigitalNet Holdings Inc.

 

Networked infrastructure, information assurance solutions

AC Technologies Inc.

 

Software engineering and network services primarily to non-security civilian federal agencies

Integrated Management Services, Inc.

 

Information security / assurance, infrastructure security, enterprise IT architecture

Impact Innovations Group LLC (Gov division)

 

Enterprise content management, application development, IT service management, information security

Simulation Technologies, Inc.

 

Modeling and simulation software solutions and services

Command Technologies, Inc.

 

Professional and technical services, information technology

EPOS Corp

 

Interactive communications and transaction processing technologies

Integrated Information Technology Corp.

 

Network and computer services, satellite communications, communication system engineering and installation

Beta Analytics International Inc.

 

Security and intelligence data support

STI Government Systems

 

IT systems and integration

AMS Defense & Intelligence Group

 

IT support and software design for financial management, logistics, warfighting, intelligence

CMS Information Services, Inc

 

Enterprise network solutions, enterprise financial management systems, software engineering and integration

Science & Engineering Associates, Inc.

 

Advanced sensor development, spectral imaging, security solutions, system engineering and design

ORION Scientific Systems, Inc.

 

Analytical support, system development, proprietary knowledge management

FAAC, Inc.

 

Simulators, systems engineering and related software products

 


 

($ MM)

 

LTM
Revenue

 

EBITDA

 

Margin

 

Total
Debt

 

Net
Debt

 

Market
Cap

 

TEV

 

TEV /
Revenue

 

TEV /
EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CACI International Inc.

 

$

1,551.6

 

$

177.3

 

11.4

%

$

347.4

 

$

284.1

 

$

1,830.1

 

$

2,114.2

 

1.4x

 

11.9x

 

Anteon International Corp.

 

$

1,330.0

 

$

117.3

 

8.8

%

$

164.2

 

$

129.0

 

$

1,509.5

 

$

1,638.6

 

1.2x

 

14.0x

 

Mantech International Corp.

 

$

842.4

 

$

48.2

 

5.7

%

$

25.2

 

$

2.2

 

$

781.4

 

$

783.7

 

0.9x

 

16.3x

 

SRA International Inc.

 

$

755.5

 

$

89.0

 

11.8

%

$

0.0

 

$

(180.3

)

$

1,728.3

 

$

1,547.9

 

2.0x

 

17.4x

 

Cubic Corp.

 

$

740.9

 

$

57.8

 

7.8

%

$

93.6

 

$

77.3

 

$

478.3

 

$

555.6

 

0.7x

 

9.6x

 

MTC Technologies Inc.

 

$

298.4

 

$

35.7

 

12.0

%

$

63.3

 

$

63.3

 

$

471.5

 

$

534.8

 

1.8x

 

15.0x

 

SI International Inc.

 

$

290.1

 

$

21.8

 

7.5

%

$

100.0

 

$

87.7

 

$

258.7

 

$

346.3

 

1.2x

 

15.9x

 

Argon ST Inc. (1)

 

$

206.4

 

$

30.8

 

14.9

%

$

0.2

 

$

(42.2

)

$

557.0

 

$

514.8

 

2.5x

 

16.7x

 

PEC Solutions Inc.

 

$

202.7

 

$

31.9

 

15.7

%

$

0.0

 

$

(29.4

)

$

422.2

 

$

392.8

 

1.9x

 

12.3x

 

Analex Corp. (1)

 

$

145.7

 

$

15.0

 

10.3

%

$

73.8

 

$

73.2

 

$

49.3

 

$

122.5

 

0.8x

 

8.2x

 

Tier Technologies Inc.

 

$

133.1

 

$

7.1

 

5.3

%

$

0.2

 

$

(53.3

)

$

149.4

 

$

96.1

 

0.7x

 

13.5x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

1.4x

 

13.7x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Median

 

1.2x

 

14.0x

 

(1) LTM figues are pro forma for significant material merger transactions in the LTM period.