CPY -- “Da Bulls” Part I

The one sentence bullish thesis for CPY is that the company is shareholder friendly, management has the foresight and the balance sheet to grow the top line when the number of customers walking through the door is falling, and it looks like GAAP net income understates the company’s true cash flow generation ability.

Alright, lets take these one by one ……

Many company’s get labeled as “shareholder friendly” but it often means that the execs are buying you dinner before they have their way with your company. Things like stock buybacks, management’s vision and execution are NOT shareholder friendliness – this is what management is supposed to do! What is shareholder friendly is to have executive compensation aligned with shareholders.

Reading CPY’s proxy statements over the last 3 years one quickly gets the feeling that management knows exactly what is going to make them richer. For example, lets take the 2005 proxy and look at the Executive Compensation discussion, here is what we will find:

“Under our new performance plan, executives and other participants have the potential to earn significant gains in overall compensation, if pre−established, objective targets are met and exceeded. For fiscal year 2005, the incentive pool from which all awards were drawn (from the Chief Executive Officer on down) was determined on the basis of EBITDA generated by the Company. ….. The Board of Directors resets the EBITDA targets each year to provide performance awards designed to yield corresponding growth in stockholder value. ……..The Company exceeded pre−established performance benchmarks for fiscal year 2005. Accordingly, recipients throughout the organization, including hourly and salaried employees as well as key managers, were recognized and rewarded for their individual contributions. Importantly, a substantial portion of the total awards was paid in restricted shares, thus aligning the interests of our employees with those of stockholders.”

It appears that this board of directors understands the concepts of profitability, inflation, and that if you are not going to compete on price than share the wealth with the people actually servicing your customers.

The now ex-CEO that was hired in 2005 received 50% of his bonus in restricted stock that will not fully vest until 2010. The company states that non of the key execs have received base salary raises in the previous three years which further focuses them on the level of the stock.

Here is another golden nugget from the 2005 proxy:

The employment agreements for these executives [these are the guys that cashed in and also got canned after Knightspoint took over] also provide that following a Change of Control, the executive is entitled to a base salary at least equivalent ….[you know how the rest goes] ……The employment agreements for Mr. Rasmussen [at the time the new CEO] and Dr. Cataldo [at the time the new COO and now the new CEO] do not contain Change of Control provisions.”

Oh yeh, the new CEO and COO don’t get a pension either.

The one negative I found in the proxy is that one board member and co-founder of Knightspoint awarded himself roughly $650,000 in CPY stock for a years worth of work which is embarrassingly small by Wall Street standards but is substantially higher than many of the other execs received. Why did this happen? Despite owning arpox 15% of the company, Knightspoint effectively controls CPY due to the structure of the board of directors. Since 2004, they lowered the number of board seats to 5 from 9 when they took over and of the 5 seats they control 3.

All in all, this is pretty clean and provides a lot of evidence that management is on the side of shareholders. The proxy for 2006 should be coming out within a few weeks and the compensation structure of the newly hired CEO will provide more evidence on how management is incentivised.

* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.