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OTI Faces Takeover Attempt by Dissident Shareholders

The second-largest shareholder of Israel-based contactless and NFC vendor On Track Innovations is keeping up the pressure as he and his allies wage a battle for control of the company against its board and co-founder, Oded Bashan.

American investor Jerry Ivy, who is backed by veterans of successful proxy fights at a number of other, mostly American, companies, is seeking to take control of the board of OTI, a struggling company that hasn’t turned a profit in its 22-year history.

Ivy and his backers so far have convinced OTI shareholders to vote down three board candidates endorsed by Bashan, who is also the company’s chairman and CEO, at a meeting Nov. 9. The company’s largest shareholder, Marc Silk, was believed to have joined in the vote against the company-backed board candidates.

Ivy, who bought into OTI six years ago, now owns nearly 10% of the company. OTI shares hit a high of more than $16 in late 2005, but now are trading at just $1.24 a share, not far from the all-time low, and Ivy contends OTI’s board is to blame.

Ivy and his allies are now seeking to remove three more board members, expand the size of the board from nine to 11 members and get their slate of eight board candidates elected.

While OTI has agreed to another shareholders meeting, Dec. 13, it has refused to consider Ivy’s eight board candidates. Bashan has agreed to separate the role of chairman and CEO, however.

The slate of board members that Ivy wants shareholders to elect includes Dilip Singh, Rick Coleman, Chuck Gillman and Jeff Eberwein.

All four are also trying to take board seats as part of a proxy fight for control of U.S.-based semiconductor reliability test systems provider Aetrium. And the four are also waging a proxy battle at NTS Inc., a U.S.-based Internet and telecommunications network services supplier. Some of the members of the group also led successful proxy battles for Canada-based silver mining company MAG Silver and U.S.-based communications equipment supplier MRV Communications, among others. 

The shakeups often lead to sale of the companies and a sharp increase in the share price. But at least some of the executives of the takeover targets have charged that the proxy fighters don’t know the industries of the companies on whose boards they try to claim seats.

Ivy is waging his campaign in part through press releases and videos, in which he points out that OTI hasn't been profitable since its founding in 1990 and has posted a combined $90.4 million in operating losses over the past six fiscal years. Company executives were paid nearly $2.8 million in compensation in fiscal year 2011, about 80% more than in 2007, he notes.

“Oded Bashan has been the chairman and CEO since 1990 and is on the (board’s) compensation and investment committee,” wrote Ivy. “The CEO is also the chairman of the company, which calls into question the corporate governance policies of the company.”

OTI did not respond to a request from NFC Times for comment from Bashan. But Bashan, in an open letter to shareholders last month, warned that the proxy battle and attacks on him and the company were bad for business and ultimately bad for the share price.

“It is especially disappointing to see that the campaign of attacks against myself and OTI’s management by a dissident shareholder continues,” Bashan wrote, in an obvious reference to Ivy. “These scurrilous attacks have created significant difficulties for us in bringing in new business and recruiting new talent, thereby hurting all shareholders.”  

He said the dispute had caused some customers and suppliers to question whether the current management team would be around to support any contracts they sign. “They are concerned about who would replace it (management) if dissident shareholders took over the business.”

Most of Bashan’s letter, released Oct. 17, focused on what he sees as OTI’s accomplishments, its prospects for future growth and profits and support for his three board nominees, one of whom is a former Israeli government minister. Bashan even argued that a takeover would cut off the company from its Israeli roots, implying that OTI would cease to be an Israeli company following a takeover, putting the company at a disadvantage. All or most of Ivy's proposed board members are reported to be Americans.

“We have access to a highly skilled experienced workforce,” Bashan said. “Israel has a long history of supporting high-tech companies that have successfully developed some of the most exciting consumer, business and military technologies used today.”

Ivy and his allies have insisted their goal is not to remove either Bashan or his son, Ohad, who is OTI’s president and chief marketing officer. Instead, they say they want a new board that can capitalize on OTI’s engineering talent and its more than 100 patents, something it has had ample opportunity to do over the years, they contend.

But most observers believe the shareholder group would sack the Bashans if they were able to wrest control of the company by electing a new board.

Ivy, when reached by phone by NFC Times, declined to talk about his board takeover attempt. But he added that he has no plans to bail out on the effort: “You can understand, if I go this route, there must be value there.”

Silk, who owns more than 13% of the company, was not available for comment.

It’s not clear whether Ivy is counting on cashing in on OTI’s patents. The company has sued T-Mobile USA, charging that the telco infringed on its NFC patents. OTI expects a first court hearing early next year. Most of the company’s NFC patents likely relate to underlying contactless technology and the ISO/IEC 14443 standard.

OTI, in its first half 2012 earnings report released in August–in which it posted a sharp 24% drop in revenue to $20.3 million and a doubling of its net loss to $5.7 million–made a point of saying the company had received new U.S. patents. That includes one or more patents for adding contactless payment and NFC to “existing mobile handsets via the connection of a device to a phone’s existing SIM card.”

Oded Bashan also noted in his letter to shareholders that the company had won $2 million worth of orders for contactless readers, thanks to competitor Vivotech having to sell its reader business. Vivotech went out of business last month after selling off its other assets.

Bashan also predicted OTI’s SmartID products, which continue to be the company’s largest product line, would contribute to growth and profitability starting in 2013.

He closed out his letter asking shareholders for “support to continue,” saying the company was cutting costs and expected higher revenue. 

But shareholders may not give Bashan the extra time he is asking for. Ivy and his allies are vowing to take the issue to an Israeli court if they are not allowed to vote on their slate of board candidates.

Veteran Israeli financial journalist Slomi Cohen believes time is running out for Bashan. Writing in a recent column titled, “A losing battle for OTI founder,” in Israeli business daily Globes, he said that given the makeup of OTI’s shareholders, which include a number of frustrated and aggressive American investors, Ivy and his backers will likely have the votes they need to carry out their plan.

That plan is to remove Bashan and “maximize the value of the company for its shareholders, whether by selling all or part of it or by selling patents,” said Cohen.

 

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