WESTPORT, Conn.--(BUSINESS WIRE)--Yakira Capital Management, Inc. (“Yakira”), a long-term significant investor in Safeguard Scientifics Inc. (“SFE”, “Safeguard” or the “Company”) (NYSE: SFE), holding approximately 2.5% of outstanding Safeguard shares, today sent a public letter to the Board of Directors (“BOD” or the “Board”) of Safeguard.
The full text of the letter follows.
March 12, 2018
Mr. Robert Rosenthal
Chairman of the Board
Safeguard Scientifics, Inc.
170 North Radnor-Chester Road Suite 200
Radnor, PA 19087
We are writing to you and the rest of the Safeguard Scientifics, Inc. (“Safeguard” or the “Company”) Board, once again, after recent public statements made by the Company’s CEO, Steve Zarrilli. Specifically, we were appalled to learn that the Board is in the process of finalizing new employment contracts with the Senior Management of Safeguard. On the Q4 2017 Safeguard earnings conference call last week, Steve Zarrilli stated:
“Compensation and retention programs are currently being finalized by our Board. These programs will be designed to ensure an alignment of actions and results with compensation both short and long-term in nature. Details of such refinements will be disclosed as they are finalized and implemented.”1
We believe it is highly inappropriate, and a breach of proper corporate governance, for any Board that is in the midst of a proxy fight – particularly a contest with the high likelihood of a dramatically altered Board composition – to sign off on material compensation packages for the current management team.
In our view, it is in the best interests of ALL shareholders, and consistent with the Board’s fiduciary duty, to immediately curtail these discussions and let management operate under their current contracts. Decisions with respect to management’s compensation packages should be made by the Board seated in May, after the annual shareholders’ meeting.
Further, we are extremely dismayed by the Company’s decision to adopt a “poison pill” designed to bar, among others, eight of the top ten Company shareholders from acquiring more shares. If you were listening during the conference call, you know we are not alone in our concern. Two investors raised issue with the poison pill during the Q&A, expressing displeasure that the Board undertook such an anti-shareholder action. We believe this is a flagrant act of entrenchment.
Going forward, in our view, Safeguard needs Senior Management that can successfully execute on the following three areas:
(1) Assess when, and if, to add follow-on capital to existing portfolio companies: On the most recent conference call, shareholders were informed that management had written down its entire investment in Full Measure Education. This comes after Safeguard deployed $2.4 million within the past year; following the $4 million invested in 2016. The total loss on Full Measure Education was $11 million in less than three years. This is yet another example where the current management team failed with respect to follow-on funding allocations.
(2) Achieve the best possible exits for existing portfolio companies: The Board behaves as if it is not aware that management has only achieved one profitable sale over the past four years. Given the number of write-offs and investment failures, how can the Board maintain that current management is the best choice, or even a good choice, for this key responsibility?
(3) Return capital in the most beneficial way to shareholders: The Company had more than $200 million in net cash when Senior Management commenced their tenure. Safeguard is now burdened with approximately $60 million of net debt, and is in danger of violating the covenants of its credit facility and defaulting on the Company’s convertible debt. In addition, as of its most recent Form 10-K, the Company has received a “going-concern” qualification from its auditors. The current management team has demonstrated terrible cash management and forecasting skills. Even when returning capital, the buybacks executed by management have shown an embarrassing lack of sophistication and understanding of market dynamics.
It is part of the Board’s fiduciary duty to oversee management. How many more failures must management execute before the Board starts to question their competence?
Bob, we do not understand the point of wasting so much time and money in an effort to fight your own shareholders. The Board should realize it doesn’t have the votes to keep directors from turning over. We cannot comprehend why you are fighting for the architects of such value destruction. Despite the Company’s claims that it has entered into good faith discussions with Yakira, aside from the liquidation announcement, Safeguard’s actions have appeared to be insincere and run contrary to the spirit of good faith discussions.
The next few months are a critical time for Safeguard. It is not too late to act honorably and implement an unbiased approach that demonstrates a desire to act in the best interest of shareholders. That said, we have not veered from our position that the Board and Senior Management bear responsibility for Safeguard’s value destruction and cannot be allowed to continue in their respective positions. We will not hesitate to use every means at our disposal to that end.
CEO & Managing Partner
Yakira Capital Management, Inc.
About Yakira Capital Management, Inc.
Yakira Capital Management, Inc. is an investment advisor based in Westport, CT. Yakira employs a market-neutral, event-driven arbitrage strategy to invest opportunistically across the capital structure over varying market cycles. Bruce Kallins is CEO & Managing Partner of Yakira.
1 Safeguard Scientifics, Inc. Q4 2017 earnings call, March 1, 2018.