1
|
NAME OF REPORTING PERSON
Engaged Capital Master Feeder I, LP
|
||
2
|
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(b) o
|
|
3
|
SEC USE ONLY
|
||
4
|
SOURCE OF FUNDS
WC
|
||
5
|
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
|
¨
|
|
6
|
CITIZENSHIP OR PLACE OF ORGANIZATION
CAYMAN ISLANDS
|
||
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE VOTING POWER
1,043,805
|
|
8
|
SHARED VOTING POWER
- 0 -
|
||
9
|
SOLE DISPOSITIVE POWER
1,043,805
|
||
10
|
SHARED DISPOSITIVE POWER
- 0 -
|
||
11
|
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,043,805
|
||
12
|
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
|
o
|
|
13
|
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
4.6%
|
||
14
|
TYPE OF REPORTING PERSON
PN
|
1
|
NAME OF REPORTING PERSON
Engaged Capital Master Feeder II, LP
|
||
2
|
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(b) o
|
|
3
|
SEC USE ONLY
|
||
4
|
SOURCE OF FUNDS
WC
|
||
5
|
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
|
¨
|
|
6
|
CITIZENSHIP OR PLACE OF ORGANIZATION
CAYMAN ISLANDS
|
||
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE VOTING POWER
109,296
|
|
8
|
SHARED VOTING POWER
- 0 -
|
||
9
|
SOLE DISPOSITIVE POWER
109,296
|
||
10
|
SHARED DISPOSITIVE POWER
- 0 -
|
||
11
|
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
109,296
|
||
12
|
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
|
o
|
|
13
|
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
Less than 1%
|
||
14
|
TYPE OF REPORTING PERSON
PN
|
1
|
NAME OF REPORTING PERSON
Engaged Capital I, LP
|
||
2
|
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(b) o
|
|
3
|
SEC USE ONLY
|
||
4
|
SOURCE OF FUNDS
OO
|
||
5
|
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
|
¨
|
|
6
|
CITIZENSHIP OR PLACE OF ORGANIZATION
DELAWARE
|
||
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE VOTING POWER
1,043,805
|
|
8
|
SHARED VOTING POWER
- 0 -
|
||
9
|
SOLE DISPOSITIVE POWER
1,043,805
|
||
10
|
SHARED DISPOSITIVE POWER
- 0 -
|
||
11
|
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,043,805
|
||
12
|
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
|
o
|
|
13
|
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
4.6%
|
||
14
|
TYPE OF REPORTING PERSON
PN
|
1
|
NAME OF REPORTING PERSON
Engaged Capital I Offshore, Ltd.
|
||
2
|
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(b) o
|
|
3
|
SEC USE ONLY
|
||
4
|
SOURCE OF FUNDS
OO
|
||
5
|
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
|
¨
|
|
6
|
CITIZENSHIP OR PLACE OF ORGANIZATION
CAYMAN ISLANDS
|
||
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE VOTING POWER
1,043,805
|
|
8
|
SHARED VOTING POWER
- 0 -
|
||
9
|
SOLE DISPOSITIVE POWER
1,043,805
|
||
10
|
SHARED DISPOSITIVE POWER
- 0 -
|
||
11
|
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,043,805
|
||
12
|
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
|
o
|
|
13
|
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
4.6%
|
||
14
|
TYPE OF REPORTING PERSON
CO
|
1
|
NAME OF REPORTING PERSON
Engaged Capital II, LP
|
||
2
|
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(b) o
|
|
3
|
SEC USE ONLY
|
||
4
|
SOURCE OF FUNDS
OO
|
||
5
|
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
|
¨
|
|
6
|
CITIZENSHIP OR PLACE OF ORGANIZATION
DELAWARE
|
||
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE VOTING POWER
109,296
|
|
8
|
SHARED VOTING POWER
- 0 -
|
||
9
|
SOLE DISPOSITIVE POWER
109,296
|
||
10
|
SHARED DISPOSITIVE POWER
- 0 -
|
||
11
|
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
109,296
|
||
12
|
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
|
o
|
|
13
|
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
Less than 1%
|
||
14
|
TYPE OF REPORTING PERSON
PN
|
1
|
NAME OF REPORTING PERSON
Engaged Capital, LLC
|
||
2
|
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(b) o
|
|
3
|
SEC USE ONLY
|
||
4
|
SOURCE OF FUNDS
OO
|
||
5
|
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
|
¨
|
|
6
|
CITIZENSHIP OR PLACE OF ORGANIZATION
DELAWARE
|
||
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE VOTING POWER
1,153,101
|
|
8
|
SHARED VOTING POWER
- 0 -
|
||
9
|
SOLE DISPOSITIVE POWER
1,153,101
|
||
10
|
SHARED DISPOSITIVE POWER
- 0 -
|
||
11
|
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,153,101
|
||
12
|
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
|
o
|
|
13
|
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.1%
|
||
14
|
TYPE OF REPORTING PERSON
OO
|
1
|
NAME OF REPORTING PERSON
Engaged Capital Holdings, LLC
|
||
2
|
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(b) o
|
|
3
|
SEC USE ONLY
|
||
4
|
SOURCE OF FUNDS
OO
|
||
5
|
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
|
¨
|
|
6
|
CITIZENSHIP OR PLACE OF ORGANIZATION
DELAWARE
|
||
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE VOTING POWER
1,153,101
|
|
8
|
SHARED VOTING POWER
- 0 -
|
||
9
|
SOLE DISPOSITIVE POWER
1,153,101
|
||
10
|
SHARED DISPOSITIVE POWER
- 0 -
|
||
11
|
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,153,101
|
||
12
|
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
|
o
|
|
13
|
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.1%
|
||
14
|
TYPE OF REPORTING PERSON
OO
|
1
|
NAME OF REPORTING PERSON
Glenn W. Welling
|
||
2
|
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(b) o
|
|
3
|
SEC USE ONLY
|
||
4
|
SOURCE OF FUNDS
OO
|
||
5
|
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
|
¨
|
|
6
|
CITIZENSHIP OR PLACE OF ORGANIZATION
USA
|
||
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE VOTING POWER
1,153,101
|
|
8
|
SHARED VOTING POWER
- 0 -
|
||
9
|
SOLE DISPOSITIVE POWER
1,153,101
|
||
10
|
SHARED DISPOSITIVE POWER
- 0 -
|
||
11
|
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,153,101
|
||
12
|
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
|
o
|
|
13
|
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.1%
|
||
14
|
TYPE OF REPORTING PERSON
IN
|
Item 4.
|
Purpose of Transaction.
|
Item 7.
|
Material to be Filed as Exhibits.
|
|
99.1
|
Letter to the Board of Directors, dated August 27, 2013.
|
|
99.2
|
Letter to the Board of Directors, dated July 3, 2013.
|
|
99.3
|
Letter to Dr. Gell-Mann, Chairman of Nominating and Corporate Governance Committee, dated August 7, 2013.
|
|
99.4
|
Follow-up Letter to Dr. Gell-Mann, dated August 12, 2013.
|
Engaged Capital Master Feeder I, LP
|
||||
By:
|
Engaged Capital, LLC
General Partner
|
|||
By:
|
/s/ Glenn W. Welling
|
|||
Name:
|
Glenn W. Welling
|
|||
Title:
|
Managing Member and Chief Investment Officer
|
Engaged Capital Master Feeder II, LP
|
|||
By:
|
Engaged Capital, LLC
General Partner
|
||
By:
|
/s/ Glenn W. Welling
|
||
Name:
|
Glenn W. Welling
|
||
Title:
|
Managing Member and Chief Investment Officer
|
Engaged Capital I, LP
|
|||
By:
|
Engaged Capital, LLC
General Partner
|
||
By:
|
/s/ Glenn W. Welling
|
||
Name:
|
Glenn W. Welling
|
||
Title:
|
Managing Member and Chief Investment Officer
|
Engaged Capital I Offshore, Ltd.
|
|||
By:
|
/s/ Glenn W. Welling
|
||
Name:
|
Glenn W. Welling
|
||
Title:
|
Director
|
Engaged Capital II, LP
|
|||
By:
|
Engaged Capital, LLC
General Partner
|
||
By:
|
/s/ Glenn W. Welling
|
||
Name:
|
Glenn W. Welling
|
||
Title:
|
Managing Member and Chief Investment Officer
|
Engaged Capital, LLC
|
|||
By:
|
/s/ Glenn W. Welling
|
||
Name:
|
Glenn W. Welling
|
||
Title:
|
Managing Member and Chief Investment Officer
|
Engaged Capital Holdings, LLC
|
|||
By:
|
/s/ Glenn W. Welling
|
||
Name:
|
Glenn W. Welling
|
||
Title:
|
Sole Member
|
/s/ Glenn W. Welling
|
|
Glenn W. Welling
|
·
|
In exchange for a standstill agreement, Engaged proposed that the Company provide us the right to have our candidate nominated as part of the Company’s slate at the 2014 annual meeting of shareholders. The idea being that we would work closely with management and the Board over the next year to address our concerns and hopefully avoid the need to exercise this option. On the August 16, 2013 call, Mr. Alibrandi called this proposal “ludicrous.”
|
·
|
Alternatively, Engaged proposed that the Company declassify the Board starting this year, electing directors to one-year terms, consistent with corporate governance best practices. Mr. Conver communicated that the Board’s rejection of this proposal was due to its importance as an M&A defense mechanism. Engaged views a tender offer for the Company as extremely unlikely; further, to succeed, such a tender would require support from a majority of shareholders.
|
·
|
Paradoxically, Mr. Conver then suggested that the Company would declassify the Board beginning in 2014 if Engaged was willing to withdraw its nomination. This is an unacceptable solution as the intent is clearly to guarantee the tenure of the Company’s Class I director nominees for three years, none of whom we view as independent.
|
·
|
The Board offered Engaged the option to review the Company’s plans under cover of an NDA. However, the long-term nature of the requisite information would result in an NDA of significant and uncertain length. Therefore, this “solution” would only serve to isolate us from communicating with other shareholders, prevent us from accumulating additional shares, constrain our ability to issue public statements, and expose us to unnecessary regulatory risk. Such restrictive terms are only acceptable in return for board representation.
|
·
|
The Company, through its advisors, offered to create a capital allocation committee. While Engaged would applaud the formation of such a committee, this in and of itself would not sufficiently address our concerns.
|
|
·
|
The short-cycle nature of AVAV’s core business, combined with customer concentration around the U.S. Department of Defense (“DoD”), creates significant volatility in AVAV’s operating results. This volatility was present even prior to the recent DoD budgetary morass.
|
|
·
|
The Company’s failure to provide an adequate level of financial disclosure to investors has hampered understanding of the Company’s historical results and management guidance.
|
|
·
|
The Company boasts many exciting growth opportunities; however, the timing, size, and required investment for these projects is not well understood by investors. The Company has presented no milestones, timetables, or structures of accountability to give investors comfort in the return characteristics of these investments. Without such disclosure, investors are left to assume the worst; that these projects are either analyzed on an ad-hoc basis, or that investors’ lack of visibility is shared by management.
|
|
·
|
Capital allocation has resulted in an increasingly large cash balance which management has commented may be needed to finance these significant growth opportunities. However, no timetable or budget framework is provided to help investors understand what amount of capital is required to finance these growth initiatives and when this cash might be needed or freed up for other uses.
|
|
·
|
Two of the Company’s major growth initiatives, Global Observer and the Department of State mission services RFP, have a history of disappointing results. This, combined with the lack of disclosure cited above, causes investors to further discount the likelihood of future success.
|
cc:
|
Joseph F. Alibrandi
|
|
Kenneth R. Baker
|
|
Arnold L. Fishman
|
Glenn W. Welling
Principal
Chief Investment Officer
|
|
•
|
While a great Company with market-leading technologies, AVAV has not created value since going public over six years ago. I recognize that all but one of the Company’s current directors have tenures extending well beyond the Company’s public life. However, current and prospective owners will judge the Board’s effectiveness only based on AVAV’s performance since its IPO. I believe my addition to the Board will send a message to shareholders that the Board is proactively seeking to improve oversight and add fresh perspective in the boardroom.
|
|
•
|
The Board’s understanding of, and conviction in, the Company’s strategy and future growth opportunities do not appear to be shared by investors (as reflected in the current share price). A plan to rectify this disconnect is critical to begin closing the gap between the quality of AVAV’s business and its public market valuation. As one of AVAV’s largest shareholders, I am confident my team and I will be able to provide valuable insights while working with the rest of the Board and senior management to increase the Company’s market valuation.
|
|
•
|
While having the largest shareholder as Chairman and CEO provides certain alignment of interests, the prerogatives of management are not always fully consistent with the best interests of shareholders. Having a large, independent shareholder representative in the boardroom will not only provide a different lens to the decision-making process, but will also give investors’ confidence that their interests are being adequately represented, as well.
|
cc:
|
Joseph F. Alibrandi
|
Kenneth R. Baker
|
|
Arnold L. Fishman
|
|
Timothy E. Conver
|