- Believes Stock is Significantly Undervalued
- Believes Board and Management Have Failed to Create Shareholder Value
- Urges Company to Explore Alternatives to Maximize Shareholder Value
NEW YORK, Oct. 12, 2010 (GLOBE NEWSWIRE) -- Mr. Ephraim Fields of Echo Lake Capital today announced he had delivered a letter to the Board of Directors of Tix Corp. (Nasdaq:TIXC). In the letter, Mr. Fields expressed his belief that the company is significantly undervalued and that the board and senior management have failed to create shareholder value. Mr. Fields suggested that the board immediately hire a prominent investment bank to explore alternatives designed to maximize shareholder value including the sale of the entire company.
The full text of the letter follows:
October 10, 2010
Tix Corp.
12711 Ventura Boulevard
Suite 340
Studio City, CA 91604
To The Board of Directors of Tix Corporation:
As longstanding shareholders of Tix Corp. ("TIXC") we were very disappointed by the company's recent announcement regarding the planned stock delisting and deregistering (the "Proposal"). We do not believe the Proposal is in the best interests of TIXC's shareholders and considering TIXC's stock price has fallen 11.4% (and as much as 37.1% at one point) since the announcement (despite the overall market being up significantly during this period), clearly other investors agree with us. Unfortunately, this decline is not surprising since in recent years TIXC's stock price has dramatically underperformed and significant shareholder value has been destroyed. Since the beginning of 2008, TIXC's stock price has declined 89.4% while the Russell 2000 has declined only 5.7%. TIXC's stock now trades at only 3.1x our estimated LTM Adjusted EBITDA, which seems like a ridiculously low valuation considering the company's strong underlying business, healthy balance sheet, $20 million NOL (which is greater than the company's current equity market capitalization) and minimal capital expenditure requirements. We have serious concerns about the ability and motivation of TIXC's Board of Directors (the "Board"), and wanted to remind you of your fiduciary responsibility to act in the best interests of TIXC's shareholders. We believe TIXC's Board and senior management have failed to create value for shareholders. As a result, we suggest you immediately cancel the Proposal and hire a prominent investment bank to explore alternatives for maximizing shareholder value.
We believe the Board's justification for the Proposal is misguided and that you are mistaken by assuming that reducing TIXC's public company expenses will create shareholder value. TIXC's stock price has been undervalued for a long time. The problem with TIXC's stock price isn't that its earnings aren't high enough but rather that the multiple investors are applying to those earnings is too low. We believe investors apply an usually low multiple to TIXC's earnings because the company: (i) has been a poor allocator of capital, (ii) is significantly overcapitalized, with net cash representing almost 40% of its equity market capitalization, (iii) has significant non-cash and non-recurring expenses which distort the company's true profitability, (iv) has failed to adequately and effectively communicate with investors, and has alienated many investors by refusing to return phone calls or conduct earnings conference calls, and (v) is too small and illiquid to attract meaningful interest from institutional investors. A company's stock price is determined by the supply and demand for that stock (not the profitability of the underlying company) and we believe the Proposal will dramatically reduce demand for TIXC's stock by eliminating many potential investors who can't or won't buy stocks that have been delisted and deregistered, regardless of how undervalued they may be. As a result, we believe the Proposal will harm TIXC's stock price and further reduce the stock's already limited trading volume. Perhaps the best way to illustrate this is to examine what has happened to TIXC's stock price since you announced the Proposal. Even though the Proposal is projected to save the company $1.0 million annually, TIXC's stock price has declined since the Proposal was announced, resulting in the destruction of $2.5 million of shareholder value. In addition, the trading volume of TIXC's stock has declined and we expect the volume will decline even further once the Proposal is enacted.
We believe that in recent years TIXC's management and Board have made a number of questionable decisions. The impact of these decisions is best reflected by the massive underperformance of TIXC's stock price as illustrated below. We are long-term investors, but considering this tremendous underperformance and the amount of shareholder value that has been destroyed, hopefully you can understand our concern about the Board's interest in and ability to act in the best interests of shareholders.
Comparison of Stock Returns
| 2008 to Today | 2010 YTD | 2009 | 2008 | |
| Tix Corp. | (89.4)% | (64.4)% | (19.1)% | (63.2)% |
| Russell 2000 Total Return | (5.7)% | 12.0% | 27.2% | (33.8)% |
| TIXC Over/(Under) Performance | (83.7)% | (76.4)% | (46.2)% | (29.5)% |
We have been puzzled by many of the Board's actions and believe they have not been in the best interests of shareholders. We are especially troubled by the fact that in 2009, a year in which the company's stock significantly underperformed, the Board decided to meet only three times. Even more disturbing was that in that same year, two of the company's independent directors each missed a telephonic Board meeting. Presumably these meetings were scheduled well in advance, so we wonder why these directors were not able to get on a telephone for these meetings or why the meetings could not be rescheduled so that all directors could participate. This poor attendance to infrequent board meetings does not instill confidence in investors that TIXC's Board is focused, energized and motivated to act in the best interests of shareholders. We also wonder if the directors who missed 1/3 of the Board meetings were asked to resign or were given reduced compensation because we do not know of many jobs where someone can miss that much work without suffering some repercussion.
We are also concerned about the high level of senior management compensation and wonder how the Board can justify this compensation. For example, in 2009 TIXC's stock significantly underperformed (as it also had done in 2008) and the company reported a net income loss of $518,000. However, in 2009 the company's CEO (who also serves as Chairman of the Board) received $714,000 of total compensation, which seems excessive considering the poor performance of the company and the amount of shareholder value that was destroyed. Further compounding this issue was the recent announcement that in 2010 the company was forced to record a $1.0 million bad debt charge related to tickets that were sold in 2009. This makes the CEO's 2009 compensation seem even more excessive and raises further questions about the credibility of management and the Board. TIXC's investors also painfully remember management's decisions that eventually led to last year's unexpected $2.6 million write down for the company's ill-fated investment in the "101 Dalmatians Musical" and the company's questionable non-Ticketing Services acquisitions. Considering how poorly TIXC's stock price and its senior management have performed, we view such compensation (as well as the unnecessary change of control perks senior management has been granted) to be excessive.
We do not know what has motivated some of the Board's actions (or lack thereof), but we wonder if it has something to do with a lack of appropriate incentives and a lack of appropriate skills. Several Board directors own very little TIXC stock. As a result, we question how much of a financial incentive they have to act in the best interests of shareholders. For example, according to the latest proxy statement and excluding any options (that are likely deeply out of the money), one TIXC director does not own a single share of TIXC stock and another director owns only 10,000 shares (which have a current market value of only approximately $6,000). We hope this lack of stock ownership doesn't minimize the motivation of some Board directors to act in the best interests of shareholders. We also hope the cash compensation directors receive annually does not motivate them to worry more about preserving their high paying board seats than about acting in the best interests of shareholders.
Given the Board's responsibility to shareholders and the specific issues it should be considering as a microcap stock with a significant excess cash balance, we are also concerned that Board members do not have sufficient experience in finance, capital markets and public company issues. We believe this lack of experience may have contributed to the Board having taken steps that were not in the best interests of shareholders. One of our many questions on this topic is which Board members recommended the Proposal as part of the "independent committee" and what relevant experience do these directors have to assess such a complex and critical issue?
For a long time we have felt TIXC's stock has been undervalued and we have provided management suggestions on how to create shareholder value. Unfortunately, most of our advice (except our suggestion to divest the Live Entertainment segment) has been ignored and TIXC's stock has continued to underperform. TIXC has a collection of three undervalued businesses that we believe have not been optimally managed and were never successfully integrated after the Board and management approved their acquisition. Based on the latest publicly available data, TIXC has an equity market capitalization of $19.3 million, $1.0 million of debt and $8.5 million of cash, which implies an Enterprise Value of $11.8 million. Over the past 12 months, the company has generated Adjusted EBITDA (which we define as operating income + D&A + non-cash compensation + non-recurring legal expenses) of approximately $3.8 million. Therefore, TIXC's stock is trading at a ridiculously low EV/Adjusted EBITDA multiple of 3.1x. Excluding the company's $1.0 million of public company costs, this multiple would decrease to 2.5x. These multiples are even more attractive when one considers that the company's D&A expenses are far higher than its maintenance capital expenditures and the company has a large, $20 million NOL which can greatly reduce its future cash taxes. As a result, the company generates far more free cash flow than one might assume by looking only at the company's reported net income. Finally, the above valuations ascribe no value to the company's patent which management has indicated could be a potential source of income.
We believe TIXC is massively overcapitalized as its net cash represents almost 40% of its equity market capitalization. We see no reason for a company such as TIXC to retain so much cash. In fact, we believe that since the company generates strong free cash flow that TIXC shareholders would benefit if the company had a prudent amount of net debt. Management has indicated an interest in using this excess cash to make acquisitions; however, we believe that acquisitions are inherently risky and TIXC's management does not have a strong record of identifying and integrating acquisitions. We believe TIXC shareholders would be far better served if the company returned this excess cash to shareholders (through stock buybacks and/or cash dividends) instead of using this capital for potentially risky acquisitions. In the fourth quarter of 2009 TIXC repurchased $2.1 million of stock at $1.55 per share. So, if the Board thought buying back stock at $1.55 per share (150% higher than the current stock price) was a good idea, how can buying back stock now not be an even better idea considering the stock price is even lower and the company's underlying business is even stronger? We find it very difficult to believe management will be able to find a more accretive and less risky use of TIXC's excess cash than returning it to shareholders.
As longstanding TIXC shareholders our only motivation is to ensure that all shareholders receive fair value for their investment. We believe TIXC's Board and senior management have failed to create shareholder value and in fact have destroyed significant amounts of shareholder value. As a result, we strongly suggest the Board implement the following two initiatives which we believe can create immediate and meaningful shareholder value:
- Immediately cancel the Proposal - While we believe shareholders may be able to derail the Proposal by instructing their brokerage firms to list their shares under their actual names and not in "street name", we believe the Board should preempt this by cancelling the Proposal.
- Immediately hire a prominent investment bank to explore alternatives designed to maximize shareholder value - Such alternatives should include the return of TIXC's excess capital to shareholders through stock buybacks and/or cash dividends, as well as the sale of the entire company, either in whole or in parts. We have analyzed TIXC in great detail and believe selling the company would provide the greatest value to shareholders. We would be happy to discuss with you our analysis and list of potential strategic and financial buyers.
We left a message with TIXC's management the day the Proposal was announced (10 days ago) to discuss with them the thoughts conveyed in this letter, but (as has frequently been the case) they have not yet returned our call. We would welcome a dialogue with you if you believe anything we have said in this letter is mistaken. We would be especially interested in hearing from you as to why you may believe that implementing our two initiatives would not be in the best interests of shareholders.
Sincerely,
Ephraim Fields