MADISON, Wis., Nov. 18 /PRNewswire/ -- Avalon Portfolio, LLC, which is managed by Avalon Capital Group, Inc., today urged the board of directors of TomoTherapy Inc. (Nasdaq: TOMO - News) to immediately consider all available strategic options in the wake of the precipitous fall in TomoTherapy’s stock price since its 2007 initial public offering, including a possible sale. It also called on the company to reconsider recent moves to expand its sales and service operations amid declining market demand and tightening credit availability. In a Nov. 17 letter, Avalon told the board that it believed the company’s investments in sales and service infrastructure were a sub-optimal use of shareholder capital, given the niche nature of the company’s single product and limited installed customer base. Avalon pushed the board, instead, to focus on boosting shareholder value by monetizing TomoTherapy’s technology via the outright sale of the company, a joint venture or a licensing deal. The full letter is attached.
TomoTherapy, based in Madison, Wis., markets an integrated CT scanning and radiation therapy - known commercially as the Hi Art system - to hospitals and cancer centers. The technology was created in the early 1990s by scientists and researchers at the University of Wisconsin at Madison. The company employed 721 people as of Sept. 30, 2008, up from 618 employees on the same date in 2007, despite declining orders for its machines, economic uncertainty and growing competition.
In its letter, Avalon, which owns some 4% of TomoTherapy’s outstanding shares, contends it has been rebuffed by CEO Fred Robertson and the board in numerous attempts to meet and discuss strategic alternatives to reverse the company’s fortunes and monetize its technology.
Avalon asserts that, given the company’s low enterprise value, the equity markets now perceive TomoTherapy will exhaust its cash if it continues with its current strategic direction. Avalon believes a series of strategic missteps by TomoTherapy management has virtually squandered its technological and market leadership, arguing that the board is “making decisions without a full understanding of the (strategic) options available.”
“TomoTherapy’s insular board has been unwilling to hear opinions different from Dr. Robertson’s,” said Jonathan McCloskey, portfolio manager for Avalon. “Although the company’s products can yield better treatment plans and patient outcomes, the company cannot let pride of its technology guide its future at the expense of shareholder value. The board needs to face the harsh reality of the competitive environment and realize that shareholder value would be significantly increased by monetizing the company’s technology, rather than continuing on its current course.”
According to its most recent 10Q filing with the SEC, for the first three quarters of 2008, TomoTherapy posted a net loss of $26 million on revenue of $118 million, down from net income of $5.8 million on revenue of $154 million for the same period in 2007. Since Nov. 9, 2007, the company’s stock price has plummeted from $20.51 to $2.65, the closing price on Nov. 14, 2008. The stock opened at $24 in its May 2007 IPO. The bulk of the stock price decline resulted prior to the recent turmoil in the financial markets.
Avalon Capital Group, Inc, based in La Jolla, California, is the private investment company of Ted Waitt, co-founder of Gateway. The firm invests in a diverse array of industries, including real estate, technology, health care, finance and entertainment. More information on Avalon Capital Group can be found at www.avalon.com
November 17, 2008
Board of Directors TomoTherapy Incorporated 1240 Deming Way Madison, WI 53717
Dear Directors,
As you are aware, Avalon has been an investor in TomoTherapy since its first round of venture capital financing, and we have participated in subsequent capital raising rounds. As long-term investors holding more than four percent of the Company’s stock, we understand the attributes that make the Company unique and valuable.
However, after TomoTherapy’s IPO in May 2007, we witnessed several strategic missteps by management that we believe has ill-served a superior product offering, and squandered a once enviable market position, to the significant detriment of shareholders. As of Friday, TomoTherapy’s stock price has spiraled down from its July 2007 high of $26 to a price of $2.65, and the majority of this decline predated this fall’s crash in the financial markets. Based on this stock price, the Company now has an enterprise value of negative $8.8 million. This implies that if the Company were to shut down its business, liquidate its inventory at cost and dividend its cash to its shareholders, assuming no related termination costs and valuing the Company’s superior technology and other assets/liabilities at zero, this would result in a value of $95 million more than the Company’s current market capitalization, or an additional $1.89 per share. To be clear, the market apparently believes that the Company will not only fail to generate any meaningful additional profits but will also exhaust its cash balances in the process.
In our view, there are many alternative options available to the Company that should enhance shareholder value, which we believe would likely result in a valuation much greater than the Company’s market capitalization. We have made multiple attempts to engage management and the board in a discussion of our views -- a view we believe is shared by other large shareholders of TomoTherapy -- and to obtain more information about the Company to facilitate a more detailed analysis. However, management and the board have rebuffed our efforts at every turn.
Starting in April 2008, we attempted to initiate discussions with the CEO, Fred Robertson, to ascertain whether the Company has made any attempt to consider the value of the Company to a strategic buyer. The answer to this question from Dr. Robertson was a repeated “No.” We again sought to ascertain from Dr. Robertson whether the Company had considered its strategic options when the stock price was at $10, again at $7, and most recently in September at ASTRO, the industry’s foremost trade show, when the stock was at $5, in each case to no avail.
Given the strength of our ideas for enhancing shareholder value and the rapidly declining stock price, we were surprised that the board rejected our repeated requests, as a significant, engaged, long-term shareholder, to meet directly with the board. We came to the belief that Dr. Robertson may have been inappropriately controlling access to the board and failing to inform them of our requests. Accordingly, we wrote a letter to certain independent directors requesting an opportunity to present our views directly to the board at their most recent meeting on September 30th, 2008. Our request to meet with the board or, alternatively, with the independent directors as a group was again rejected. We have come to the unfortunate conclusion that this is an insular board unwilling to hear opinions different from Dr. Robertson’s, and thus making decisions without a full understanding of the options available to the Company. Perhaps more disturbing, it seems that the board is willing to abdicate its most important responsibility, representation of the interests of its shareholders, to Dr. Robertson.
Instead of engaging in a meaningful dialogue with us, the board has instead recently increased executive compensation and restricted shareholder rights. After announcing substantial losses in the most recent quarter and forecasting a per share loss for the 2008 fiscal year, the Company entered into new employment agreements that increased salaries for four of the five executives by an average of 12%. Moreover, all five of the employment agreements lowered the threshold of the change of control trigger to include, among other things, an acquisition of 30% of the Company’s stock and a change of a majority of the board that was not approved by the previous board. Furthermore, although a few of the bylaw amendments were purportedly shareholder friendly, we believe that on balance the bylaw amendments have significantly restricted shareholder rights, including with respect to calling special meetings, nominating directors and bringing shareholder proposals. Given our recent communications with the board, the timing of these compensation and bylaw changes are especially troubling.
The coming quarters are likely to be difficult for the Company in the face of established competition. Unfortunately, management appears rigidly committed to significantly increasing the Company’s sales and service infrastructure. TomoTherapy has just a single product and a small installed base. Increasing the sales staff and corporate overhead to promote a niche product is unjustified and a waste of shareholder capital. Moreover, given management’s poor track record of execution, it is clear to us that the current initiatives to build out infrastructure will not succeed and will permanently erode shareholder value.
We do agree that significantly better treatment plans and clinical outcomes are available with TomoTherapy products and technology. However, it is one matter to be proud of the technological superiority of your product, and an entirely different matter to allow that pride to guide the management at the expense of shareholder value. Rather than living in the glory days of the past, management and the board must wake up to the harsh reality of the current situation. We need to monetize TomoTherapy’s technology while the Company still has demonstrable technological advantage, whether through a sale of a company, joint venture, licensing arrangement (such as part of a larger suite of related healthcare products) or other strategic option. The board seems unwilling to consider these options. Because this advantage is eroding as competition is increasing, we fear that inaction now will leave the Company irreparably harmed in a few years, with a smaller amount of cash and a lower margin business.
TomoTherapy is a public company now owned by its shareholders, and is no longer the primary domain of Madison academia. It is time for management and the board to fulfill their fiduciary duties and act in the best interests of its shareholders. We urge the Company to end the value destruction and begin to focus on value creation. We will continue our efforts, and consider all available options, to maximize value for all TomoTherapy shareholders.
Very Truly Yours,
Jonathan McCloskey
Avalon Portfolio, LLC
By its Manager Avalon Capital Group, Inc.
Source: Avalon Portfolio, LLC
