Crown EMAK Partners, LLC Sends Letter to Stockholders of EMAK Worldwide, Inc. -Take Back EMAK Off the Mark -- Again
WASHINGTON, April 7 /PRNewswire/ -- Crown EMAK Partners, LLC today sent the following letter to stockholders of EMAK Worldwide, Inc. (OTC: EMAK):
CROWN EMAK PARTNERS, LLC
SUITE 1200
1775 PENNSYLVANIA AVENUE, NW
WASHINGTON, DC 20006
TEL (202) 466-5919
April 7, 2010
TAKE BACK EMAK OFF THE MARK -- AGAIN.
Dear Fellow EMAK Stockholder:
You might have seen Don Kurz's recent letter to EMAK stockholders, which claims that Crown is a threat to the interests of the common stockholders, is trying to liquidate the company, and offers no plan to benefit the common stockholders. By contrast, Don tells us he has a secret plan to restore EMAK's value. Don then urges you to revoke any consent you might have given Crown.
As has become usual, Don misses the point. Don wants you to believe that Crown--which has been a passive stockholder for 10 years -- suddenly wants to take control of the Company and liquidate it for its own ends. He wants to promote the idea that there is a fight between the common and the preferred. What Don can't seem to understand is that battles between classes of stock are unproductive for all stockholders and lead to wealth destruction, not wealth creation. That is why 75% of the common stock not part of Don's group has voted with us to shrink the size of the board and take other actions to keep Don from controlling the company.
The fact is that Crown is not a threat. We have no interest in controlling EMAK or undertaking any transaction hurtful to the common. Indeed, the reduction in the board size ["control"] that Crown seeks is temporary and can be eliminated if holders of 50% of the stock desire to increase the size of the board. Or if, at some point, the preferred is exchanged for common on terms that are fair to all stockholders, then we would expect that new sources of capital would seek to invest in the company. At or before that point the board should be expanded again with a majority of outside directors. Crown is an investor and capital allocator--not a manager. We look for good management and support them by encouraging first class outside directors to oversee the companies we are invested in. We are hoping for long-term profit, not short-term gain at the expense of others.
What Don forgot to tell you in his recent letter is that he offered last September to exchange Crown's preferred stock for $5.5 million of EMAK's cash and a three-year $20 million EMAK note. All Crown had to do was agree to Don becoming CEO with an annual salary of half a million dollars. In other words, he offered us the same liquidation that he now claims is a "threat". We didn't accept that proposal because we did not believe that Don could run EMAK successfully. Later, in an effort to stop the costly litigation we discussed with Don a settlement where he and his group would acquire the products business for a nominal sum. He wouldn't take it, unless EMAK also agreed to buyback all of his group's shares for $2 per share, or more than $5 million in total. Since this payment would have gone only to Don's group and not the rest of the stockholders, this demand for greenmail was not in the best interests of any of the stockholders (other than Don and his group), and we would not support it.
Don has been trying to regain his job as CEO for many years. In 2006, he ran an unsuccessful proxy campaign. In 2008, he tried to buy out the common stockholders for $1.25 per share. In the fall of 2009, he sued the individual members of EMAK's board for failing to make him the CEO, seeking an incomprehensible $400 million in damages. When it became obvious that his intimidation tactics were not going to work, Don started a consent to get control - all without paying a control premium. By counting the votes of stockholders that had sold their shares and shares that Don bought from a former employee to obtain his vote, Don claims to have received the consent of a slim majority of common stockholders.
His board is in place while we wait for the Delaware Supreme Court to rule on the legality of Don's consents. Their actions give us a clear and disconcerting picture of how they would run the company. Don has set up numerous board committees so that any two of his nominees can take action without disclosure or discussion with the full board. Crown's designees on the board have asked repeatedly for information, but sadly it will probably take court action to force Don to provide information that he is required by law to provide.
What we do know is that Don has spent his first month paying fees to his advisors and to himself. Don's fees are for his personal "consulting" services, but he claims those services are secret - neither the full board nor the stockholders are permitted to know their purpose. Mr. Konig has also collected "consulting" fees. Don has also paid hundreds of thousands of dollars to his advisors. When the stockholders tried to act to take control away from Don and his group by submitting consents from over 50% of the shares, they tried to increase the required vote to 60%. When 60% of the shares voted to take control away from Don, his group made it clear that they would oppose the will of holders of even 60% of the shares.
Don would have you believe that he played no role in instigating the litigation bombarding EMAK, and that his contingency fee lawyers should be paid by EMAK or Crown at exorbitant rates because they provided some benefit to EMAK's stockholders. When EMAK's board did not succumb to his desire to be named CEO, Don filed a $400 million lawsuit. When Don did not like the fact that the Board was continuing to evaluate a restructuring of the preferred stock, he filed a stockholder consent to take control of the Board. When EMAK's Board agreed to exchange Crown's right to have at least two directors on the Board for the right to vote for the election of directors and no guarantee of directors on EMAK's Board, Don filed suit to stop that. When Crown agreed to rescind that transaction so it could file a stockholder consent to shrink the board, giving its two directors a majority of EMAK's Board, Don fought that in Court, even though the majority of stockholders supported that action. At every turn, if Don does not get what he wants, he relies on his contingency fee lawyers to try to force EMAK's stockholders to adhere to his view of the world. And Don justifies his failure to oppose his lawyers' $2.4 million "preliminary" fee application for six weeks of work on the grounds that that expense "may" be the responsibility of Crown. What he fails to tell you is that he was advised to take this position by the same lawyers who are trying to collect that fee. And even if there is some chance that Crown will pay those fees, Don is still taking a risk that EMAK will be responsible for those fees. That risk will benefit only Don's lawyers, not EMAK.
Don already had his turn as CEO. During Don's tenure every acquisition, which were all paid for with the $25 million invested by Crown, was either impaired or written off entirely. Even the agency services business (Upshot) was marked down from its $10 million purchase price to $4 million due to the loss of a key client. In 2005, Don was removed as a CEO, and Jim Holbrook and Brian Kristofek started to rebuild Upshot so that it is currently the most important asset of EMAK.
Don's plans for the Company would--in our view--be tantamount to economic suicide. Don wants to fire Jim Holbrook, install himself as CEO, and plow the Company's remaining cash into a failing business. Crown's consent is designed to stop that and to allow Jim, Brian, and their talented management team, who are proven winners, to continue to grow our agency business. It is true that Crown is a "threat" to Don's attempts to regain the CEO position, but Crown is not a threat to the Company.
So, what potential for long-term gain do we see here? It is simple. We think Jim and Brian's agency business offers terrific opportunities for the future. We also think that Don's preferred product's business (the area that he managed in the past) is a capital-intensive, high-risk, low-margin business that we are lucky to be exiting. By stating this I do not mean to be disrespectful of the managers (including Don) who ran this business or the current employees. They have contributed to EMAK and it is not their fault that the products business is disappearing. Let me summarize the analysis that I did that fully allocates revenues and costs from 2005 to 2009:
Agency Business:
Sales growth of 17%, compounded annually
Operating income growth of 21%, compounded annually
Net margin grew from 26% to 30%
Net operating margin grew from 8% to 16%
Products Business
Sales decline of 14%, compounded annually
Operating income decline of 22%, compounded annually
Net margin declined from 23.6% to 20.4%
Net operating margin declined from 8.3% to 5.1%
These numbers understate the problem with the products business because the vast majority of our corporate overhead supports the products business. If you annually allocate $1 million of overhead to the agency business then over the last five years, with its overhead allocation, it has generated $131 million of sales and $13 million of EBITDA. For the same period, the products business had $720 million of sales and only $5 million of EBITDA.
If you owned 100% of EMAK and were fully in control, in which of those two businesses would you invest the Company's capital? To put it another way, would you reinforce success or would you reinforce failure? Jim Holbrook says that the agency business is the future. Don Kurz says that it is the products business, and that he can turn that business around and magically make it a winner. If I agreed with Don, if I thought one person could turn around the economics of that business (and if I also thought that Don was that person), Crown would be supporting Don right now. But we can all read those numbers and what they say is that Don's "return to the products business" strategy represents an exercise of nostalgia over common sense. The risks are enormous, the chances of success are slim at best and meanwhile we would be neglecting a highly profitable, rapidly growing business.
Finally, Don is trumpeting the report that ISS released today reaffirming their support for Don's group. Their conclusion is essentially that Don's board has not had enough time in power and therefore we cannot demonstrate that a change is warranted. For all the reasons in this letter, I respectfully disagree. The issue remains the same, who is better qualified to run the company?
Jim is now the Vice Chairman of the prestigious Promotional Marketing Leadership Conference and was just invited to become Co-Chairman. By way of comparison, please consider the credentials of the leaders of Take Back EMAK. Don has had no management experience since leaving EMAK in 2005; Mr. Konig's primary business experience is in selling condominiums; and Mr. Sems is a stock analyst and self-identified "activist investor" managing a fund of a few million dollars. None have ever competed to win agency services business, and I am very concerned whether any marketing executive of decent caliber will even return their calls. Furthermore, if Take Back EMAK assumes permanent control, all equity holders (common and preferred) will face the risk of the Kurz group demolishing the morale of those executives in agency services whose job is to fight every day for new business and provide world class performance for existing clients.
If you'd like to give me a call to find out more, please call me at (202) 466-5919. I'd love to discuss EMAK's future with you because if we do this right I think we could have a real winner on our hands.
Sincerely,
Peter Ackerman
SOURCE Crown EMAK Partners, LLC
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