- Stock has significantly underperformed; down 29% in one year; down 76% over the past 10 years.
- Believes Training/Simulation unit (which generated $9.5 million of LTM EBITDA) alone is worth more than ARTX's entire enterprise value.
- Over the past 15 years the Company has paid Ehrlich and Esses combined compensation of over $25 million, which equates to over 60% of Company's current market cap.
- Believes corporate overhead is too high and can be easily reduced.
- Believes there are many, readily identifiable ways to create long-term shareholder value.
- Believes alternate slate is in best interests of ARTX's shareholders, employees and other stakeholders.
- Notes the price paid for just the UEC and Armour acquisitions exceeds Company's current enterprise value.
NEW YORK, NY / ACCESSWIRE / December 10, 2015 / Ephraim Fields of Echo Lake Capital today sent a letter announcing his intention to nominate an alternate slate of directors to the Board of Arotech Corporation ("ARTX" or the "Company") (NasdaqGM: ARTX). Mr. Fields is ARTX's largest single shareholder, owning 8.1% of the Company's shares (which includes shares underlying sold-short put options exercisable within 60 days hereof). The alternate slate seeks to replace three directors, including the current Executive Chairman and President/CEO. Mr. Fields believes that after years of shareholder value being destroyed, while insiders have personally benefitted from excessive compensation packages and questionable related party transactions, that changes at the Company are urgently needed.
As the following table[1] illustrates, ARTX's stock price has underperformed over an extended period of time, both on an absolute and relative basis:
[1] Data as per Bloomberg as of December 5, 2015.
Mr. Fields stated that he intends to nominate an alternate slate because, among other things, two of three directors up for re-election in 2016 have served for over 12 years and overseen what he believes is the Company's significant underperformance, excessive payments to management, poor corporate governance and failed acquisitions.
It is the view of Mr. Fields that ARTX shareholders deserve a Board that is committed to acting in the best interests of all shareholders, and he firmly believes that electing his nominees is in the best interests of ARTX's shareholders, employees, customers and other stakeholders, because it will bring fresh insights to help address the Company's prolonged underperformance.
Mr. Fields noted that despite significant underperformance by the Company, rather than replacing senior management, the Board has continued to retain them and, remarkably, to increase their already significant compensation. Over the past 15 years, the Board has granted Ehrlich and Esses combined compensation of over $25 million, which equates to over 60% of the Company's current market capitalization. He believes this compensation is excessive considering management's disappointing performance and the Company's small size.
In light of the Company's significant underperformance over such an extended period of time, Mr. Fields does not believe that continuing to pay Messrs. Ehrlich and Esses generous compensation packages is in the best interests of the Company and its shareholders. Furthermore, considering that they have both been with the Company for over 12 years, he wonders how much more time the Board considers reasonable to give them before the Board concludes that they should be replaced.
Mr. Fields stated that he believes that there are many, identifiable ways to create significant long-term shareholder value at the Company, and he noted that he believes the inherent value of the Company's assets significantly exceeds the Company's current stock price. For example, he believes that just one of these assets (the Training/Simulation division, which generated $9.5 million of LTM EBITDA) alone is worth more than the Company's entire current enterprise value. Mr. Fields also stated that he believes the Company's remaining three assets have significant additional value as well:
- The Power Systems division which generated LTM revenue of $43 million and could generate increased profitability next year,
- U.S. federal net operating losses (NOLs) of $35 million and foreign NOLs of $85 million, and
- Iron Flow, an early stage battery designed to provide storage for grid power.
Mr. Fields further believes there are many other easily implemented ways of creating meaningful additional shareholder value including:
1) reducing corporate overhead, which YTD appears to be over $4 million (excluding non-recurring gains), an amount that almost equals the Company's total projected Adjusted EBITDA for the entire year,
2) hiring more effective and U.S. based senior management team with the skills necessary to maximize ARTX's potential,
3) conducting a strategic review of all the Company's assets in an effort to maximize their long-term value, and
4) improving corporate governance in an effort to make it more shareholder friendly.
Finally, Mr. Fields stated that he believes that his nominees have significant financial, operational, strategic and capital markets experience, as evidenced by their business backgrounds, that can be used to help address the Company's significant underperformance.
A full copy of the letter can be found below.
CONTACT:
EPHRAIM FIELDS
ef@echolakecapital.com
Important Information
This filing is not a solicitation of a proxy from any security holder of Arotech Corporation (the "Company"). Ephraim Fields has nominated Mr. Ephraim Fields, Mr. Keith Rosenbloom and Mr. Lawrence F. Hagenbuch as nominees to the Company's board of directors and intends to solicit votes for the election of Mr. Ephraim Fields, Mr. Keith Rosenbloom and Mr. Lawrence F. Hagenbuch as members of the Company's board of directors (the "Nominees"). Ephraim Fields will send a definitive proxy statement, WHITE proxy card and related proxy materials to stockholders of the Company seeking their support of the Nominees at the Company's 2016 Annual Meeting of Stockholders. Stockholders are urged to read the definitive proxy statement and WHITE proxy card when they become available, because they will contain important information about Ephraim Fields, the other Nominees, the Company and related matters. Stockholders may obtain a free copy of the definitive proxy statement and WHITE proxy card (when available) and other documents filed by Ephraim Fields with the Securities and Exchange Commission ("SEC") at the SEC's web site at www.sec.gov. The definitive proxy statement (when available) and other related SEC documents filed by Ephraim Fields with the SEC may also be obtained free of charge from Ephraim Fields.
Participants in Solicitation
The following persons are participants in the solicitation from the Company's stockholders of proxies in favor of the Nominees: Ephraim Fields, Keith Rosenbloom, Cruiser Capital Advisors, LLC and Lawrence F. Hagenbuch. The participants may have interests in the solicitation, including as a result of holding shares of the Company's common stock. Information regarding the participants and their interests may be found in the Notice of Intent to Nominate Directors that Ephraim Fields sent to the Company on December 10, 2015, as filed with the SEC on that same date under Rule 14a-12 of the Securities Exchange Act of 1934, as amended.
December 10, 2015
The Board of Directors
Arotech Corporation
1229 Oak Valley Drive
Ann Arbor, Michigan 48108
Dear Members of the Board of Directors
Kenneth W. Cappell - Yeshiva University
Jay M. Eastman - Lucid, Inc.
Robert S. Ehrlich - Arotech Corp.
Steven Esses - Arotech Corp.
Seymour Jones - New York University
Michael E. Marrus - Chardan Capital Markets
Richard I. Rudy - Advanced Energy Capital, LLC:
I am the single largest shareholder of Arotech Corporation ("ARTX" or the "Company"), owning 8.1% of its outstanding shares (which includes shares underlying sold-short put options exercisable within 60 days hereof). I have been extremely disappointed with the Board of Directors' performance in representing the best interests of the Company and its stockholders, for the reasons expressed in this letter. As discussed in this letter, questionable decisions by the Board have contributed to significant shareholder losses, while members of the Board have continued to personally benefit from a generous compensation package.
Today I am announcing my intention to nominate an alternate slate for ARTX's Board of Directors (the "Board"). Attached hereto as Exhibit A is information regarding my nominees. I intend to nominate an alternate slate because, among other things, two of three directors up for re-election in 2016 have served for over 12 years and overseen the Company's significant underperformance, excessive payments to management, poor corporate governance and failed acquisitions, all as detailed in this letter, and I believe a change is urgently needed. I am particularly concerned that some members of the Board appear to be less interested in acting in shareholders' best interests and are more interested in maintaining their own personal lifestyles and increasing their ARTX-related income.
ARTX shareholders deserve a Board that is committed to acting in the best interests of all shareholders, and I firmly believe that electing my nominees is in the best interests of ARTX's shareholders, employees, customers and other stakeholders, because it will bring fresh insights to help address the prolonged underperformance.
Here are the key considerations addressed in this letter:
- Stock has significantly underperformed; down 29% in one year; down 76% over the past 10 years.
- Over the past 15 years the Company has paid excessive executive compensation, as evidenced by the fact that the Board has granted Ehrlich and Esses combined compensation of over $25 million, which equates to over 60% of Company's current market cap.
- Corporate overhead is too high, as evidenced by the fact that overhead year-to-date is over $4 million (excluding non-recurring gains), which seems staggeringly high for a company that expects to generate only approximately $5.5 million of Adjusted EBITDA for the entire year.
- The Board has approved questionable related party transactions, as evidenced by the Company paying for the use of what appears to be a private residence in Brooklyn, NY as an ancillary New York office.
- The Board appears to be not fully aligned with shareholders, as evidenced by the fact that most of them have never purchased even a single share of ARTX stock.
- There is significant value in the Company's assets and the stock is undervalued. For example, I believe the Training/Simulation unit alone is worth more than ARTX's entire enterprise value.
- The Board has not adequately protected Company assets. For example, the price paid by the Company for the UEC and Armour acquisitions significantly exceeds the Company's current enterprise value.
Stock Has Significantly Underperformed
As the following table[2] illustrates, ARTX's stock price has underperformed over an extended period of time, both on an absolute and relative basis:
[2] Data as per Bloomberg as of December 5, 2015.
Yet, despite the Company's prolonged underperformance, it does not appear the Board has taken necessary steps to improve performance because the underperformance continues.
Over the Past 15 Years the Company has Paid Excessive Executive Compensation
Despite significant underperformance by the Company, rather than replacing senior management, the Board has continued to retain them and, remarkably, to increase their already significant compensation. Over the past 15 years, the Board has granted Ehrlich and Esses combined compensation of over $25 million, which equates to over 60% of the Company's current market capitalization. I believe this compensation is excessive considering management's disappointing performance and the Company's small size.
I was also shocked to learn that the employment contracts that the Board approved for Messrs. Ehrlich and Esses provide them such an excessive number of paid sick/vacation days that they can effectively get paid for (but not have to work) one out of every 5 days in a given work week.
In light of the Company's significant underperformance over such an extended period of time, I do not believe that continuing to pay Messrs. Ehrlich and Esses generous compensation packages is in the best interests of the Company and its shareholders. Furthermore, considering that they have both been with the Company for over 12 years, I wonder how much more time the Board considers reasonable to give them before you conclude that they should be replaced.
Corporate Overhead is Too High
I am concerned that the Company's top two executive officers (but not the CFO) live in Israel when virtually all of the Company's revenue is generated in the USA. This atypical organizational structure seems illogical and ineffective and requires executives to embark on time consuming and costly travel, at the Company's expense, which means it is at the expense of shareholders as they are the true owners of the Company. Perhaps this willingness to expend Company resources for what I view as unnecessary expenses helps explain why ARTX's corporate overhead year-to-date is over $4 million (excluding non-recurring gains), which seems staggeringly high for a company that expects to generate only approximately $5.5 million of Adjusted EBITDA for the entire year.
The Board has Approved Questionable Related Party Transactions
I have grave concerns about the Board's approval of related party transactions because it appears that such transactions may not be in the best interests of the Company and its stockholders. In addition to a non-recourse loan given to Ehrlich, I question the agreement with Sampen Corporation, an entity controlled by Steven Esses's family. Under this agreement, ARTX pays Sampen for Esses to serve as ARTX's President and CEO. The agreement also requires ARTX to pay Sampen for the use of what appears to be a private residence in Brooklyn, NY "as an ancillary New York office for the Company, for meetings, mail and package deliveries, fax receptions, etc." This is in my experience a highly unusual agreement that appears to be more favorable to Steven Esses and Sampen than the Company. The agreement raises many troubling questions, including:
- Since Esses already has an employment contract directly with ARTX, why is the Company also making additional payments to Sampen for his services?
- Does ARTX really need "an ancillary" office in NYC and, if so, is what appears to be a private home in Brooklyn really the most appropriate place for such an office?
- If ARTX really does need an ancillary office in NYC (even though it appears to have no operations there), can't the Company rent space on an arm's length transaction from a landlord who is not related to senior management? Better yet, instead of renting office space, can't ARTX occasionally use the NYC offices of its Board members, law firm, investment bank or IR firm?
Public records indicate Sampen is located at 1133 East 22nd Street Brooklyn, New York 11210, and we encourage you to visit there as we have. Considering that last year ARTX provided Esses with $1.4 million in compensation (excluding additional payments to Sampen), despite ARTX's stock price declining by 33%, we do not believe approving the Sampen transaction was in the best interests of the Company and its shareholders.
Board is not Fully Aligned with Shareholders
As most of the members of the Board have not purchased even a single share of ARTX stock, despite numerous years of Board service and the associated compensation, I fear that the Board does not fully understand and appreciate the position of the owners of the Company.
It is clear to me that in order to protect the value of the investment of all the shareholders of the Company that change at the Company must occur. I believe these changes are long overdue and need to occur immediately. The first change I am proposing is to reconfigure the Board by adding some highly qualified and highly incentivized directors, while removing some existing directors. As a result, I have notified the Company that I intend to nominate an alternate slate of directors to ARTX's Board. I believe that my nominees have significant financial, operational, strategic and capital markets experience, as evidenced by their business backgrounds, that can be used to help address the Company's significant underperformance.
There is Significant Value in the Company's Assets and the Stock is Undervalued
There are many, identifiable ways to create significant long-term shareholder value at ARTX. I believe that beneath an excessively paid yet ineffective senior management team (as reflected in the underperformance and high corporate overhead), is a core business with both a highly motivated workforce and four valuable assets.
I believe the inherent value of these assets significantly exceeds ARTX's current stock price. For example, I believe that just one of these assets (the Training/Simulation division, which generated $9.5 million of LTM EBITDA) alone is worth more than ARTX's entire current enterprise value. ARTX's remaining three assets have significant additional value as well:
- The Power Systems division which generated LTM revenue of $43 million and could generate increased profitability next year,
- U.S. federal net operating losses (NOLs) of $35 million and foreign NOLs of $85 million, and
- Iron Flow, an early stage battery designed to provide storage for grid power.
I believe that significant shareholder value could be created by dramatically reducing corporate overhead. I believe much of this overhead is unnecessary, as evidenced by the atypical corporate structure, and yields a low (and perhaps negative) return on investment for shareholders. I feel shareholders would be far better served if the Company reduced corporate overhead and used this precious capital to either grow the business or buyback stock.
I believe ARTX's stock would appreciate if the Board adopted more shareholder friendly corporate governance policies. The Board is currently staggered and has a non-independent Chairman. In my experience, many investors avoid companies with these provisions because these provisions are often reflective of an entrenched Board that does not act in the best interests of shareholders.
Finally, considering ARTX's performance and the location of its customers, employees and shareholders, I believe significant shareholder value could be created by hiring, empowering and properly incentivizing a senior management team that lives in the U.S. These individuals must have the credibility, skill set and vision necessary to lead ARTX and fully maximize its potential.
The Board has not Adequately Protected Company Assets
Rather than acting in shareholders' best interests, I believe the Board has wasted significant amounts of shareholders' money on a variety of things including:
- Excessive and ineffective compensation for executive officers, as the Company has continually underperformed;
- The April 2014 acquisition of UEC in which the company paid over $35 million (a sum which approximates ARTX's current market capitalization) for an asset whose results to-date have disappointed, as noted below. ARTX's stock price was $6.22 the day before the acquisition was announced. Since then the stock price has declined rapidly and consistently and is down 73% in aggregate.
- The Armour acquisitions in which the Company spent over $20 million but suffered significant losses and ended up taking large write-offs and paying $2.9 million to settle a Class Action Complaint regarding management's actions.
As a result of these and other actions, significant shareholder value has been destroyed and the Company's financial position has been weakened.
Need to Act Now
While I had hoped to address the need I perceive for change to the Board without nominating my own directors, I found the Company was unwilling to engage in a timely manner to bring about this change. Believing that there is no time like the present to address the Company's significant underperformance, excessive payments to management and poor corporate governance, I acted now to bring about change. I hope the Board lets shareholders make a determination on what direction the Company should go, and that the Company does not waste more of shareholders' precious money in resisting proposed change at the Board level.
In the near future, I will be publishing additional information regarding the Board and what I perceive to be the questionable qualifications of some of its members. In light of the prolonged underperformance and the other actions referenced in this letter, I wonder why anyone would have confidence that the Board will act in the best interests of stockholders.
I am happy to meet with the Board to discuss this letter and actions that the Company can take to increase shareholder value.
Sincerely,
Ephraim Fields
Exhibit A
Ephraim Field's Nominees
Ephraim Fields:
Mr. Ephraim Fields is the founder of Echo Lake Capital, a value-oriented investment firm which invests in publicly traded U.S. equities. Prior to founding Echo Lake, Ephraim was the founder and portfolio manager of Clarus Capital, a value-oriented investment fund which invested primarily in small cap and microcap U.S. listed stocks. Earlier in his career Ephraim was an investment banker at Credit Suisse, Donaldson, Lufkin and Jenrette, and Wasserstein Perella. Ephraim has an MBA from the Wharton School at the University of Pennsylvania and a BSBA from Washington University in St. Louis. Ephraim has extensive experience in mergers and acquisitions, debt and equity capital markets, microcap stocks and private equity investing. Mr. Fields is the son of an Israeli mother and has spent significant time in Israel.
Keith Rosenbloom:
Mr. Keith Rosenbloom is the co-founder of Cruiser Capital Advisors, LLC, which acts as the investment advisor to pooled investment vehicles (the "Cruiser Portfolios") on a discretionary basis. He has managed the Cruiser Portfolios since inception. Mr. Rosenbloom has over 25 years of investing experience with an emphasis on applying traditional value oriented private equity techniques to public and private special situations. Prior to founding Cruiser Capital, Keith, co-founded and managed the CARE Capital Group, an investment company focused on investing in hedge funds and creating alternative investment opportunities, where he served as Portfolio Manager of the CARE Fund and CARE Market Neutral Fund. Prior to CARE Capital, Keith co-managed Comvest Venture Partners, a private equity and bridge loan fund, and served as Director of Merchant Banking for Commonwealth Associates. Keith also serves on a number of charitable boards including, Hillel International (Board of Governors), and Hatzalah (Israel's private EMT service). Keith acts as an advisor to two family offices on their alternative investment portfolios. Keith graduated cum laude from Yale University. Keith has extensive experience in corporate finance, mergers and acquisitions, and public market and private equity investing.
Lawrence F. Hagenbuch:
Mr. Lawrence Hagenbuch is currently the Chief Operating Officer and Chief Financial Officer for J. Hilburn, Inc., a custom clothier for men. The principal offices of J. Hilburn is located at located at 12700 Park Central Drive, Suite 2000, Dallas, TX 75251. Mr. Hagenbuch has been with J Hilburn since May 2010. Mr. Hagenbuch also serves on the board of directors of Remy International (NASDAQ REMY), since November 18, 2008, and currently serves on Remy International's audit and compensation committees. Mr. Hagenbuch has served in senior management positions for Suntx Capital partners, Alix Partners, GE / GE capital, and American National Can. Mr. Hagenbuch began his professional career in the United States Navy. Mr. Hagenbuch earned an undergraduate in engineering degree from Vanderbilt University and an MBA from the Wharton School of the University of Pennsylvania. Mr. Hagenbuch has extensive experience in supply chain, operational and profitability improvements, and through his background as a consultant and in senior management roles at various companies, he brings considerable experience in implementing lean manufacturing discipline and in creating innovative business and marketing strategies.
SOURCE: Echo Lake Capital
