Former Chairman and CEO Kaleil Isaza Tuzman Sends Letter to KIT
digital Board of Directors
- Urges Company to Discuss Acquisition Offer and Conduct Open
and Transparent Sale Process
NEW YORK, Nov. 23, 2012 /PRNewswire/ --
Board of Directors
KIT digital, Inc.
26 West 17th Street, 2nd Floor
New York, NY
10011
Attention: Bill Russell,
Chairman
Dear KIT digital Board of Directors,
KIT digital, Inc.'s ("KITD" or the "Company") November 21, 2012 8-K (the "8-K") effectively
blamed prior management for the Company's delayed filing of third
quarter results and the Company's intent to restate its financial
statements for the 2009-2011 period, among other issues. The
Company's attempt to attribute its current problems to prior
management is spurious.
As one of KITD's largest shareholders and the Company's former
chairman and CEO, I have kept my opinions on the Company's
trajectory confidential since my departure in April 2012, in deference to the efforts being
expended by current management and to avoid unnecessary discord.
However, I can no longer silently abide the Company's attempt to
scapegoat previous management or tolerate the recent record of
deficient management and poor business execution. KITD shareholders
deserve to be leveled with on what has occurred at the Company to
date, and shown a path forward to success and enhancement of share
value, as we have set forth below.
First, some clarifications concerning some implications
contained in the Company's recent 8-K. During my tenure at the
Company, all revenue recognition decisions were made in
consultation with and approved by the Company's independent
accounting firm, and approved by your audit committee. We have no
reason to believe any of those decisions were improper. Since my
departure, it is possible that your new audit committee members
have elected, in consultation with the firm's outside auditors, to
apply different revenue recognition policies. That is not prior
management's responsibility, and a change in revenue recognition
policies and application may reflect your recently insinuated
decision to further separate the "software" and "services" lines of
the Company's business. As shareholders, we cannot yet opine on the
merit of your decision, since your 8-K lacked details on the
matter.
Similarly, the 8K's vague reference to a lack of disclosure
concerning certain undisclosed "related party transactions" is
misleading and inappropriate. During my tenure with KITD, all
related party transactions were vetted by KITD's outside counsel
and relevant disclosures in KITD financial statements were reviewed
and approved by the Company's independent accounting firm. For
instance, as you know, my affiliate investment companies, KIT Media
and KIT Capital, supported the Company by investing on four
different occasions between 2008 and 2011 in public share issuances
alongside other public shareholders. These transactions were
"related party transactions" in nature and were disclosed in great
detail in press releases and Company financial statements at the
time. The transactions were very positive for the Company (and
included two successfully completed financings during the depth of
the 2008-2009 financial crisis) and were broadly lauded by KITD's
shareholder base at the time as demonstrating management's "skin in
the game." In addition, stock options and restricted stock grants
over time to me or KIT Capital for services rendered were also
described in detail in the Company's public filings. Accordingly,
these transactions were all appropriately disclosed and benefited
the Company and its shareholders—and, in fact, neither myself nor
KIT Capital has ever exercised or sold any of these stock grants or
options, nor have I received a single dollar or share in
severance.
By comparison, you granted former CEO Barak Bar-Cohen a $250,000 "success bonus" for an extremely
dilutive, death-spiral financing concluded after my departure and
JEC Capital (the New York hedge
fund which currently controls the Company and for which current
KITD CEO Peter Heiland serves as
Managing Director) recently lent $2.5
million to the Company without a concomitant press
release—and the mention of this related party transaction received
only cursory mention in an indirectly related SEC filing.
Given the 8-K's emphasis on the dire current liquidity situation
of the Company, it appears to us that you, in conjunction with the
Company's senior creditors, may be conspiring to artificially
decrease the Company's stock price so as to acquire the Company at
a fire sale price that is unfair to shareholders. Indeed, the 8-K's
disclosure regarding covenant breaches of current lender agreements
could be interpreted as a lead-in to a pre-arranged, sweetheart
deal with the Company's lenders.
Previous management presided over a period between December 2007 and March
2012 during which monthly revenues expanded over 20x,
operating results went from huge losses to small gains, and the
Company's shares appreciated from $2.90 to over $9.00. Despite your attempt to blame past
management for your current results, those close to the Company
report that current management has shown disregard for the
underlying business—including key clients, employees and vendors.
Most startlingly, you seem to have presided over the Company
burning more cash from operations in the seven months since I left
than the Company had burned from operations in the prior two fiscal
years.
Adding to KITD's problems, the Company's current management
has:
- failed to visit many, if not most key clients
- failed to visit more than a handful of Company field
locations
- lost many, if not most, of the Company's key salespeople
- disassembled the Company's core engineering team
- demonstrated a lack of sufficient understanding of the
Company's core technology, products and capabilities, and failed to
make material progress in product development
- moved the Company headquarters from its low-cost European
center of Prague to a high-cost
NYC office—despite over 50% of the Company's revenues being
European in origin
- incurred ballooning operating losses
- poorly executed on an ill-conceived idea of stripping down and
selling individual pieces of the Company—without sufficient
comprehension of how software and services units complement each
other in serving clients
- failed to attract significant new talent to the business
- failed to add material new client contracts
- failed to communicate a coherent vision for the future to
staff, clients and industry observers
- left an impression with staff, clients, vendors and competitors
alike that KITD is under "temporary", "hedge fund", "Wall
Street-focused" management.
Ignoring these poor managerial decisions, the Company instead
seeks to scapegoat prior management in describing its current
condition. It is time to redress this situation.
I originally resigned from my post as CEO of KITD in
March 2012 (and subsequently resigned
from his role as Chairman in April, 2012) because I had come to
irreconcilable differences with the Board at the time concerning
strategic decisions and the future of the Company. As a major
shareholder, I ultimately felt I could make a greater positive
impact on the Company's development from the outside than from
within, especially considering that the Board formed a Special
Strategic Committee (the "Special Committee") in January 2012 which had effectively taken control
of all CEO-level decisions.
By way of background, in December
2011, my core management team had recommended to the Board
that the Company complete a major restructuring and consolidation
of operations (a plan that you finally began to implement about two
months ago). We also recommended to the Board at such time that the
Company pursue two competing strategic transactions, each with the
potential to be a homerun for shareholders (one a private equity
buy-out and the other a merger-of-equals). Instead, the Board
rejected management's suggested approach and formed the Special
Committee with a broad mandate to oversee "any and all strategic
decisions" at the Company. The Special Committee was comprised of
two board members—Wayne R. Walker and Santo Politi—and immediately
shut down or irreparably delayed the discussions with the strategic
transaction counterparties. KITD's management-by-special-committee
was predictably dysfunctional. After months of wrestling with the
Special Committee to no avail, myself and several members of the
core management team eventually resigned.
In connection with my resignation I issued a letter—which was
publicly filed by the Company as an 8-K at the time—stating that I
intended to independently consider strategic alternatives for the
Company. After my resignation, a bidding group (led by a large
private equity firm which I had introduced to the Company),
endeavored to obtain approval from the Special Committee to share
information with me so that I could participate in connection with
a potential offer for KITD. Unfortunately, the Special Committee
refused this request, to the detriment of all shareholders.
Since that time, KIT Capital and other prospective bidders have
been repeatedly delayed or stonewalled in our continued efforts to
create shareholder value, while the indecision and delay of new
management and board continues to result in value destruction. For
example, although KITD's current management and board finally
adopted the staff reduction and office consolidation plan prior
management first put forward almost a year ago, the delay has
caused KITD to effectively run out of money and may put the Company
into the pockets of its lenders.
KITD must right its ship. From an operational perspective, KITD
management must immediately:
- Articulate a vision of the "new" KIT digital, with the focus
being on clients, employees and vendors—and away from capital
markets
- Halve executive management costs
- Tour the top 30 clients globally to ensure contract compliance
and renewal
- Implement a program to re-invigorate the core team of top
50-performing employees globally
- Complete our original cost reduction and office consolidation
plan—including keeping headquarters in Prague, consolidating engineering team into
two locations, consolidating New
York and Atlanta office
into one location and shutting down six other locations globally
(including Dubai), while expanding
sales and business development staff by one-third
- Cease the "divide-and-sell" approach to assets
- Clearly articulate a balance sheet-fortification strategy,
centered on a significant private equity minority investment and
concomitant restructuring of existing debt, while conducting an
open and transparent auction of the Company (engaging both private
equity and strategic buyer prospects), with a publicly announced
minimum price of $3.75 per
share.
We do not believe that current management is capable of the
actions listed in this letter. As a result, we are prepared to lead
a bidding group to buy the Company at a reasonable and substantial
cash premium to the current traded price of the Company's common
stock. Since May 2012, we have
repeatedly requested that the board engage with us and certain
other private equity firms regarding a strategic transaction for
the Company. In light of KITD's mismanagement and the Company's
current circumstances, the Board can no longer afford to ignore
these overtures.
Based on our analysis of publicly available information, and
subject to due diligence and the execution of a mutually acceptable
definitive agreement, we are prepared to lead a bidding group to
buy the Company at $3.75 per share in
cash, which represents an 81% premium to the closing price of KITD
common stock on Wednesday, November 21,
2012 (and an approximately 750% premium to the reported
after-market trading price of KITD common stock on that date). We
have reviewed this transaction with two large private equity groups
who are interested in participating with us, and believe we have
the backing of the Company's prior and current executives,
salespeople and senior engineers who would be key to execute on our
plan to right the KITD ship. We believe we can finalize financing
and business terms with respect to this acquisition very quickly if
the Board responds forthwith.
For the benefit of all the shareholders, we ask that you to
cease and desist from defamatory and inaccurate descriptions of
KITD's prior management and immediately engage in an open dialogue
with us on this offer.
Regards,
Kaleil Isaza Tuzman
On behalf of:
KIT Capital, LLC
Contact: Jonathan Cutler
JCUTLER MEDIA GROUP
JC@jcutlermedia.com