SEC Form DEF 14A filed by Telos Corporation

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Preliminary Proxy Statement

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Definitive Proxy Statement

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Definitive Additional Materials

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Soliciting Material under §240.14a-12

1.

ELECTION OF DIRECTORS: To elect seven Directors to the Board of Directors to serve until the 2026 Annual Meeting of Stockholders or until their successors are elected and qualified;

2.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: To ratify the selection of PricewaterhouseCoopers LLP to serve as the Company’s independent registered public accounting firm;

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AMENDMENT TO THE AMENDED AND RESTATED 2016 OMNIBUS LONG-TERM INCENTIVE PLAN: To approve Amendment No. 1 to the Amended and Restated 2016 Omnibus Long-Term Incentive Plan of the Company, substantially in the form attached hereto as Exhibit A (the “Plan Amendment”);

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ADVISORY VOTE ON EXECUTIVE COMPENSATION: To approve, on an advisory basis, the compensation of the Company’s named executive officers or “say-on-pay”; and

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OTHER BUSINESS: To transact such other business as may properly come before the Annual Meeting and any adjournment or postponement thereof.

(1)

Executing a proxy dated later than the most recent proxy given and mailing it to:

(2)

Appearing in person and voting using a ballot at the Annual Meeting, or

(3)

Filing an instrument of revocation with the Inspector of Elections at the 2025 Annual Meeting.

(1)

See assumptions made in the valuation of these awards for financial statement reporting purposes in Note 2 - Summary of Significant Accounting Policies to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024.

(2)

Mr. Borland received a grant of 40,323 RSUs on May 21, 2024, that will vest on May 21, 2026, if Mr. Borland remains a director until such date or earlier upon a change of control of the Company. As of December 31, 2024, he also held options to acquire 52,000 shares of the Company’s common stock.

(3)

Ms. Carroll received a grant of 40,323 RSUs on May 21, 2024, that will vest on May 21, 2026, if Ms. Carroll remains a director until such date or earlier upon a change of control of the Company. As of December 31, 2024, she also held options to acquire 50,000 shares of the Company’s common stock.

(4)

Mr. Dockery received a grant of 40,323 RSUs on May 21, 2024, that will vest on May 21, 2026, if Mr. Dockery remains a director until such date or earlier upon a change of control of the Company. As of December 31, 2024, he also held options to acquire 50,000 shares of the Company’s common stock.

(5)

Mr. Jacobs received a grant of 40,323 RSUs on May 21, 2024, that will vest on May 21, 2026, if Mr. Jacobs remains a director until such date or earlier upon a change of control of the Company. As of December 31, 2024, he also held options to acquire 60,000 shares of the Company’s common stock.

(6)

Gen. Maluda received a grant of 40,323 RSUs on May 21, 2024, that will vest on May 21, 2026, if Gen. Maluda remains a director until such date or earlier upon a change of control of the Company. As of December 31, 2024, he also held options to acquire 50,000 shares of the Company’s common stock.

(7)

Mr. Schaufeld received a grant 40,323 RSUs on May 21, 2024, that will vest on May 21, 2026, if Mr. Schaufeld remains a director until such date or earlier upon a change of control of the Company.

(1)

Audit fees include fees for the annual audit, including the integrated audit of internal control over financial reporting, the review of the Company’s quarterly reports on Form 10-Q and fees for various SEC filings.

(2)

Fees consist of PwC technical accounting and financial statement disclosure guidance/research tools.

(1)

This includes 287,000 shares of outstanding stock options and 12,653,333 shares issuable upon settlement of the restricted share unit awards previously granted but not yet vested under the 2016 LTIP.

(2)

Represents the weighted-average exercise price of the outstanding stock options.

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Plan Importance: Equity grants under the 2016 LTIP are critical to the Company’s success and continued growth because they directly align employee interests with those of the stockholders and create a culture of ownership. They are key to increasing the Company’s ability to attract, reward and motivate top talent needed to achieve and exceed the Company’s strategic and continued growth objectives. They also promote retention of top talent, as equity awards are subject to multi-year and time-based vesting and/or performance-based criteria. The labor market in which we compete for talent includes many government contractors and entities that are much larger in size and scope than Telos and who can offer higher compensation packages to their employees. Our ability to make equity grants to our employees helps to offset that disadvantage.

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Plan Participation: Awards are issued on a broad basis that includes our Board of Directors, our executive officers and leadership team, and our broader workforce. Approximately 58% of our current employees have been granted equity awards under the 2016 LTIP.

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Share Repurchases: The Company’s share repurchases under its share repurchase program offset the dilutive impacts of equity awards granted under the 2016 LTIP. On May 24, 2022, the Board of Directors approved a stock repurchase program for the repurchase of up to $50 million of our outstanding shares of Common Stock. Pursuant to this authorization, the Company may purchase shares of its common stock on a discretionary basis from time to time through open market purchases. The repurchase program has no expiration date and may be modified, suspended, or terminated at any time. As of December 31, 2023, the Company had repurchased 1,550,162 shares and still has approximately $38.7 million available under the stock repurchase program. No shares were repurchased in 2024. Since the inception of the share repurchase program, the Company has returned over $11.3 million in capital to stockholders. The shares repurchased are not returned to the pool of shares available for issuance under the 2016 LTIP.

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Favorable Plan Features: The 2016 Plan includes several features that are consistent with the interests of our stockholders and sound corporate governance practices.

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Potential Non-Favorable Strategic Actions: If the Plan Amendment is not approved, the Company will have to pursue multiple courses of less favorable strategic action. The Company will reassess current hiring practices and scale back equity awards for current employees, which can lead to less growth and higher turnover and related costs. Incentive awards only payable in cash tend to be less desirable for current employees and new hires resulting in discontent and frustration for our existing employees. Further, the Company will be less competitive in attracting top talent. Increasing cash awards will also reduce our cash position that could otherwise be used for future growth opportunities.

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Options: The Award Agreement provides the type of Option (non-qualified stock option (“NSO”) or incentive stock option (“ISO”)) awarded, the number of Options, the purchase price per share (also referred to as the “exercise price”), the term of the Option, and other conditions as the Administrator may determine. Any eligible individual may be granted a NSO and the maximum term is ten years from the grant date, although the Award Agreement may specify a shorter term. An NSO must have a purchase price at least equal to the fair market value of the underlying share on the grant date. The 2016 LTIP generally defines “fair market value” to mean the official closing price per share on the relevant date. An ISO may be granted only to employees of the Company or any of its subsidiaries. The purchase price must be at least equal to the fair market value of the underlying share on the grant date (or 110% of the fair market value if granted to someone who owns more than 10% of the total combined voting power of all classes of shares of the Company). An ISO grant is also limited by the following general restrictions: (i) an ISO must be granted within ten years of the 2016 LTIP’s adoption by the Board; (ii) the term of an ISO cannot exceed ten years (five years if granted to a 10%⁺ Stockholder); (iii) the total fair market value (determined as of the grant date) of shares for which all ISOs first become exercisable by an individual in any calendar year under this 2016 LTIP or any other plan may not exceed $100,000 or any other amount as may be permitted from time to time under Code Section 422; (iv) an ISO cannot be granted in tandem with an NSO in a manner that the exercise of one affects the right to exercise the other; and (v) an Option generally ceases to be treated as an ISO for tax purposes three months after the participant ceases to be an employee of the Company even if the terms of the Award Agreement specify that the Option remains exercisable beyond this three-month period. Upon vesting, the Option can be exercised by providing a written notice to the Company. The period during which an Option can be exercised is limited and may terminate when certain events occur, such as termination of employment or other service relationship with the Company. Shares purchased upon exercising the Option must be paid in full at the time of purchase plus amounts, if any, of federal and/or other taxes which the Company may be required to withhold with respect to the award. The purchase price may be paid (i) in cash or a cash-equivalent, (ii) by tendering or having withheld shares that have a total fair market value equal to the purchase price, (iii) by a broker-assisted cashless exercise procedure, (iv) by a combination of the foregoing methods, or (v) by any other means that the Administrator approves. If authorized under the Award Agreement, a participant may transfer, not for value, all or part of an NSO to a family member. No other Award is transferable other than by will or the laws of descent and distribution. Unless otherwise determined by the Administrator in accordance with the provisions of the immediately preceding sentence, an Award may be exercised during the lifetime of the awardee or, during the period under a legal disability, by the guardian or legal representative.

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Share Appreciation Rights (“SAR”): In general, a SAR entitles the participant to receive a payment upon exercise equal to (1) the excess of (a) the fair market value on the exercise date of one share over (b) the grant price per share specified in the Award Agreement, times (2) the number of shares for which the SAR is being exercised. The grant price per share of a SAR cannot be less than the lower of the fair market value of the underlying share on the grant date or the exercise price of any tandem Option to which the SAR relates. The Administrator determines whether to pay the amount due upon exercise of the SARs in cash, by delivery of shares, or by a combination of the two. If any portion of the payment is made in shares, the Administrator determines the number of shares by dividing the portion of the payment amount by the fair market value of a share on the exercise date. No fractional Shares to settle a SAR will be issued. The Administrator determines whether to pay cash in lieu of any fractional shares or whether to cancel fractional shares without payment.

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Share Award: The Administrator may grant an Award of restricted or unrestricted shares. The Administrator determines whether to pay the share award in cash, by delivery of shares, or by a combination of the two. For restricted shares, the Award Agreement specifies the restrictions, their duration, and events that would cause a forfeiture

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Restricted Share Units: A restricted share unit granted is credited to a bookkeeping reserve account solely for accounting purposes, and represents a right to receive, on a date specified in the Award Agreement or the “settlement date”, one share or cash in an amount equal to the value of one share. To settle a restricted

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Dividend Equivalent Rights: A dividend equivalent is the payment of an amount with respect to the restricted share units equal to the amount of dividends one would receive if one owned the underlying shares. If an Award Agreement provides that dividend equivalents are payable with respect to restricted share units, such dividend equivalents may be paid in any of the following ways: (1) in cash at the same time the cash dividends are paid to stockholders; (2) held in an account and paid in cash upon settlement of the restricted share units to which such dividend equivalents relate; or (3) in additional restricted share units. If additional restricted share units are paid with respect to cash dividends, the number of additional restricted share units to be granted will equal: (i) the product of (x) the per-share cash dividend, multiplied by (y) the total number of restricted share units which have not been settled or forfeited as of the record date for such dividend, divided by (ii) the fair market value of one share on the payment date of such dividend. Any dividend equivalents that are not paid in cash at the same time cash dividends are paid to stockholders shall be subject to the same terms and conditions as the restricted share units to which the dividend equivalents relate.

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Nonqualified Stock Option (NSO): There are no immediate U.S. federal income tax consequences of receiving an award of NSO under the 2016 LTIP. Upon exercise of the option, the difference between the exercise price and the fair market value of the shares subject to the option on the exercise date will constitute ordinary income taxable to the participant. Upon the participant’s disposition of shares acquired upon exercise, any gain realized in excess of the amount reported as ordinary income will be reportable by the participant as a capital gain, and any loss will be reportable as a capital loss. The capital gain or loss will be long-term if the participant held the share for more than one year. Otherwise, the capital gain or loss will be short-term.

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Incentive Stock Option (ISO): There are no immediate U.S. federal income tax consequences of receiving an award of ISO under the 2016 LTIP. Although a participant generally will not recognize taxable income upon the exercise of an ISO, the participant’s alternative minimum taxable income will be increased by the amount by which the aggregate fair market value of the shares underlying the option, which is generally determined as of the exercise date, exceeds the aggregate exercise price. Further, except in the case of the participant’s death or disability, if any option is exercised more than three months after the participant’s termination of employment, the option will cease to be treated as an ISO and will be subject to taxation under the rules applicable to NSO. If the participant sells the shares acquired upon exercise of any ISO at least two years after the dates on which the ISO was granted and at least one year after the date on which the ISO was exercised, any excess of the sale price of the option shares over the exercise price will be treated as long-term capital gain taxable to the option holder at the time of the sale. If the disposition occurs before the completion of the two-year and one-year periods, the excess of the fair market value of the option shares on the disposition date over the exercise price will be taxable income to the option holder at the time of the disposition. Of that income, the amount up to the excess of the fair market value of the shares at the time the option was exercised over the exercise price will be ordinary income for U.S. federal income tax purposes, and the balance, if any, will be long-term or short-term capital gain, depending upon whether or not the shares were sold more than one year after the option was exercised. The Company will not be entitled to a business expense deduction with respect to any ISO unless the participant engages in a disqualifying disposition, at which time the Company will be entitled to a deduction equal to the amount of the ordinary income taxable to the participant.

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Stock Appreciation Rights (SAR): There are no immediate U.S. federal income tax consequences of receiving an award of SAR under the Plan. Upon exercise of SAR, the distribution of shares of Common Stock or the cash payment in satisfaction of the SAR will be taxable as ordinary income when the distribution or payment is actually or constructively received by the participant. The amount taxable as ordinary income is the aggregate fair market value of the shares of Common Stock determined as of the dates they are received or, in the case of a cash award, the amount of the cash payment.

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Restricted Share Award: Generally, a participant will not recognize any taxable income for U.S. federal income tax purpose in the year of the restricted stock award if the shares are nontransferable and subject to a substantial risk of forfeiture. A participant, however, may elect under Section 83(b) of the Internal Revenue Code (“Code”) to recognize compensation income in the year of the award in an amount equal to the fair market value of the shares on the award date, determined without regard to the restrictions. If a participant does not make a Section 83(b) election, the fair market value of the shares on the date on which the restrictions lapse will be treated as compensation income to the participant and will be taxable in the year in which the restriction lapse.

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Restricted Share Units (RSU): There is no immediate U.S. federal income tax consequences of receiving an award of restricted share units. The value of the underlying Shares on the date that the RSU award vests is treated as wages for FICA (Social Security and Medicare) tax purposes on the vesting date, even if the award is settled on a later date. Generally, when a RSU award in cash and/or Shares settle, the participant recognizes ordinary income equal to the cash and the fair market value of the Shares received on the date of receipt. However, if the restricted share unit award provides that settlement of the Award may occur in a taxable year after the year in which the restrictions lapse (i.e., a RSU becomes vested), there is a possibility that the participant must recognize income for federal income tax purposes on each date that the Award becomes vested (notwithstanding its delayed settlement) unless the Award is designed to comply with the requirements of Code Section 409A regarding nonqualified deferred compensation arrangements. Although the Plan permits the Administrator to do so, the Company generally does not grant RSU awards that contain this delayed settlement feature.

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Dividend Equivalent Rights: There is no immediate U.S. federal income tax consequences of receiving an award of dividend equivalent rights. A participant who receives the dividend equivalent right will recognize ordinary income on the date of payment in the amount distributed to the participant pursuant to the award

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John B. Wood, Chairman and Chief Executive Officer

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Mark Bendza, Executive Vice President, Chief Financial Officer

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Mark D. Griffin, Executive Vice President, Security Solutions

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Hutch Robbins, Executive Vice President, General Counsel

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Malcolm Cooke, Vice President, Chief Information Technology Officer

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A compensation structure that incentivizes greater total stockholder return;

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Alignment of incentive compensation with stockholder interests;

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Compensation focused on improved cash flow and meaningful revenue generation; and

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An increase in the use of meaningful performance-based metrics in long-term incentive compensation.

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To attract, motivate, engage and retain highly talented and results-oriented key employees;

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To secure the future performance of services of those employees;

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To encourage key employees to put forth maximum efforts for both our short-term and long-term success;

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To drive achievement of our long-term growth, profitability and other objectives;

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To reward performance; and

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To drive increased stockholder value.

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Compensation should consist of a combination of fixed and at-risk compensation, with the at-risk compensation constituting a majority of the total compensation for at least our NEOs, in order to encourage improved annual and long-term performance.

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Compensation should be a mix of annual and long-term compensation. Ideally, long-term compensation for at least our NEOs will constitute a majority of the total compensation, in order to encourage retention and attainment of long-term performance goals.

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Compensation should be a mix of cash and equity, with cash typically rewarding achievement of goals and equity encouraging retention and long-term performance aligned with the interests of our stockholders.

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Additionally, the Compensation Committee continues to believe that equity ownership by the management team aligns the interests of management with our long-term corporate performance intended to drive and enhance stockholder value.

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Our executive compensation program objectives;

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Our performance against the financial, operational, and strategic objectives established by the Compensation Committee and our Board;

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Each individual NEO’s knowledge, skills, experience, qualifications, and tenure relative to other similarly-situated executives at the companies in our compensation peer group;

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The scope of each NEO’s role and responsibilities compared to other similarly-situated executives at the companies in our compensation peer group;

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The performance of each individual NEO, based on a subjective assessment of their contributions to our overall performance, ability to lead their business unit or function, and work as part of a team;

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The potential of each individual executive officer to contribute to our long-term financial, operational, and strategic objectives;

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Our CEO’s compensation relative to that of our NEOs, and pay equity among our NEOs;

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Our financial performance relative to our compensation and performance peers;

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The compensation practices of our compensation peer group and the positioning of each NEO’s compensation in a ranking of compensation levels based on an analysis of competitive market data;

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The feedback received from our stockholders and the results of our annual say-on-pay advisory votes of our stockholders; and

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The recommendations of our CEO with respect to the compensation of our other NEOs.

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Attending Compensation Committee meetings, with and without management present, for compensation strategy development;

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Providing annual peer group development, and review and advise on proposed executive compensation and awards and plan designs;

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Providing annual proxy study of named executive officers and independent director pay practices;

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Providing equity plan recommendations and annual and long-term incentive plan reviews; and

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Providing periodic share dilution and shareholder transfer value analysis.

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Performance Criteria #1 – 2024 Company Revenue

(1)

Payout dollar values rounded to the nearest thousand.

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Performance Criteria #2 – Finalized Subcontract for DMDC Program

(1)

Dollar values rounded to the nearest thousand.

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Performance Criteria #3 – Expansion to 125 TSA PreCheck Enrollment Sites

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Dollar values rounded to the nearest thousand

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Expansion of enrollment sites for Telos TSA PreCheck services to 250, 350 and then 500 sites prior to January 1, 2027

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Positive free cash flow for the Company in 2025, with additional performance levels at $2 million, $6 million and $12 million

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Meeting TLS share price targets of $6 a share, $8 a share, $10 a share and $12 a share for fifty consecutive days (each) prior to January 1, 2027

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PreCheck Site Expansion LTI Grants (“LTI PSU Grant #1”)

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2025 Free Cash Flow LTI Grants (“LTI PSU Grant #2”)

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Stock Price LTI Grants (“LTI PSU Grant #3)

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Time-Based Long-Term Incentive Grants (“LTI RSU Grant”)

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Value of the grants and rigor of the metrics and performance levels chosen

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Amounts calculated by multiplying the number of shares that would vest at achievement of the performance level times the reported TLS price per share on the grant date.

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Price on grant date

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Weighted average shares outstanding in 2024

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a lump-sum payment equivalent to the remaining unpaid portion of the executive’s salary for the period ending on the date of termination,

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lump-sum payment for all accrued and unused paid time off,

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any bonus which has been earned by the respective executive, but which remains unpaid as of the date of the executive’s termination of employment, at such time and in such manner as if the executive had continued to be employed by us, and

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any other payments or benefits provided to the executive pursuant to any employee benefit plans or arrangements adopted by the Company (to the extent such benefits are earned and vested or are required by law to be offered) through the date of termination.

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a monthly payment equivalent to base salary then in effect over a period of 24 months in the case of Mr. Wood, 18 months for Mr. Griffin, and 12 months for Messrs. Bendza, Robbins and Cooke,

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immediate vesting of the unvested portion of any outstanding stock options and any outstanding shares of restricted stock,

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the cash equivalent of premium payments for continued coverage under the medical, dental, short and long-term disability, and life insurance and other similar plans equal to 24 months in the case of Mr. Wood, 18 months for Mr. Griffin, and 12 months for Messrs. Bendza, Robbins and Cooke,

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the cash equivalent of the employer matching contribution as if the executive was still a plan participant under our 401(k) plan that would otherwise have been contributed on the executive’s behalf, based on certain assumptions, for a period of 24 months in the case of Mr. Wood, 18 months for Mr. Griffin, and 12 months for Messrs. Bendza, Robbins and Cooke, and

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payment of premiums to continue the Executive Life Policy, in which the executive is the holder of the policy, for 24 months from the date of termination for Mr. Wood.

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in the case of Mr. Wood, (i) the amount of monthly salary that Mr. Wood was being paid as of the date of his termination of employment times 24 months, plus (ii) two times the annual average of the bonuses earned or to be earned for the current year (i.e., the year in which the change of control occurs) and the two prior years; and

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in the case of Messrs. Bendza, Robbins and Cooke, (i) the amount of monthly salary that such executive was being paid as of the date of his termination of employment times 12 months, plus (ii) one times the annual average of the bonuses earned or to be earned for the current year and the two prior years; and

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in the case of Mr. Griffin, the amount of monthly salary that such executive was being paid as of the date of his termination of employment times 18 months; and