INNOVATE Corp. — Proxy Solicitation & Information Statement 2020

Apr 24, 2020

DEFA14A 1 tm2015676-15_defa14a.htm DEFA14A

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

SCHEDULE 14A

(Rule 14a-101)

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No. )

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HC2 Holdings, Inc.

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

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HC2 H OLDINGS , I NC . © HC2 Holdings, Inc. 2020 © HC2 HOLDINGS, INC. 2020 Setting the Facts Straight April 2020

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 MG Capital’s Approach: Heavy on Falsehoods, Light on Facts Why is MG Capital leading investors down this road? 1 MG Capital advances false and misleading narratives… not supported by the facts  False Narrative : The Board has let Philip Falcone misuse HC2 resources x Mr. Falcone has NEVER used company resources for his personal benefit, including legal services (slide 2) x Mr. Falcone is NOT “extracting” ~$4M to Harbinger Capital through an opaque service agreement (slide 3) x NON - EXISTENT relationship between HC2 and Everest Entertainment (slide 4)  False Narrative: Avie Glazer is not independent x Avie Glazer is a FULLY independent Board candidate and represents all stockholder interests (slide 5)  False Narrative: HC2, which is run by Mr. Falcone, is providing investment management services to Continental General x HC2’s insurance segment is making prudent and appropriate investment decisions in the best interests of policyholders (slide 6)  False Narrative: HC2 Engages in Questionable Accounting Practices x MG Capital’s attack on HC2’s isolated 2014 accounting issues were properly corrected years ago (slide 7) x MG Capital’s false attacks concerning HC2’s KMG acquisition are misleading and baseless (slide 8) x The Audit Committee acted prudently by sharing MG Capital’s letter with Mr. Falcone (slide 9) x DBM Global shares were not “revalued” , and HC2’s valuation of DBM Global is completely appropriate (slide 10)  False Narrative: Mr. Falcone’s regulatory issues limit opportunities for HC2’s stockholders x Mr. Falcone took a company with one asset and in six years built an established and diversified holding company (slide 11)

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 Mr. Falcone Has Never Used Company Resources for His Personal Benefit, Including Legal Services What else is Mr. Gorzynski misleading stockholders about? 2 FALSE Narrative The TRUTH : Mr. Robinson provided legal services to Mr. Falcone/HCP, including with respect to the NYAG matter, pursuant to a Consulting Agreement dated January 3, 2018. (1) HC2 stockholders did not pay for these services Note: Cropped “ for brevity ” to mislead stockholders , with Mr. Falcone’s full testimony showing he simply did not recall the details of Mr. Robinson’s engagement The Board has never allowed Mr. Falcone to use company resources to fund his personal needs, legal or otherwise What MG Capital knowingly left out… (1) Mr. Robinson stepped down as Chief Legal Officer of HC2 on September 11, 2017, remained an HC2 employee through December 31, 2017 and provided consulting services to HC2 the following year.

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 HC2 is Not “Extracting” ~$ 4M to Harbinger Capital Through an Opaque Service Agreement MG Capital’s deliberate contortion of the facts is alarming Disclosure, Page F - 63, 2019 Form 10 - K ~$ 2.4M in total for 2019 varies from 2018 due to actual use MG Capital’s Selective Citation : “In January 2015 , the Company entered into an arm's length services agreement (the "Services Agreement") with Harbinger Capital Partners ("HCP"), a related party of the Company . The Services Agreement includes the provision of services such as providing office space, certain administrative salaries and benefits, and other overhead, and each party making available their respective employees to provide services as reasonably requested by the other party, subject to any limitations contained in applicable employment agreements and the terms of the Services Agreement . ” But is Missing the Full Disclosure : “ The costs allocated between the Company and HCP are based on actual use . Office space is an allocation of actual costs based on square footage and directly used by HC 2 employees . Time of administrative personnel is allocated by time spent on each entity and other shared overhead is based on actual shared overhead and is allocated based on amounts used for each vendor . Management of shared overhead and certain administrative personnel were transferred to HC 2 at the beginning of 2019 . Both of these services are charged back to HCP on the same basis described above . ” The costs allocated between HC2 and HCP are based on actual costs The TRUTH : The Services Agreement is not opaque and described in full in the 2019 Form 10 - K. HC2 discloses more facts on the Agreement which are blatantly ignored by MG Capital as it did not fit their narrative 3 Rent was ~$1.8M at Corporate and $0.8M at Broadcasting, Life Sciences and Insurance

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 A Relationship Between HC2 and Everest Entertainment Simply Does Not Exist MG Capital’s selective twisting of the facts is clear 4 The TRUTH : There is no publicly disclosed relationship between Everest Entertainment and HC2 because there is no relationship . A shared mailing address does not equal use of HC2 resources MG Capital highlights an insubstantial relationship between HC2 and Everest Entertainment, which has been non - operational since 2013 FALSE Narrative Administrative upkeep of corporate formalities does not mean the business is operational Everest Entertainment has not had an active project since 2013 , with HC2 starting in 2014 Absolutely no resources from HC2 are used by Everest Entertainment 3 HC2 is not invested in Everest Entertainment 1 HC2 is not involved in operating Everest Entertainment in anyway 2 Merely maintaining a legacy mailing address at HC2’s office location does not mean HC2 invests in, operates or maintains office space for the company 4 According to www.everestent.com, Everest Entertainment’s last project was in 2013 5

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 Zapata – The Real Story The purchase of an asset does not create a friendship. However, MG Capital wants you to believe that to be the case... Why? 5  Zapata sold its last operating asset  Had zero revenue or cost of revenue from 2006 – 2009 December 2006 Public shell only  Zapata consists primarily of cash and short - term investments  Glazer family sells their 51.3% interest in Zapata to Mr. Falcone for ~$75M  Mr. Falcone is elected to the Zapata board  Warren Gfeller does not stand for re - election July 2009 No interaction between Mr. Glazer and Mr. Falcone No overlap between Mr. Falcone and Mr. Gfeller Sale facilitated through brokers and lawyers Mr. Glazer and Mr. Gfeller had not spoken in over 10 years prior to him interviewing for the HC2 Board Mr. Glazer has not sat on a board with Mr. Gfeller since 2009 “The board's most recent announcement that it is considering adding Avram Glazer to the board and appointing him chairman appears to be an additional step in the right direction. While Glazer has a prior business relationship with some of the incu mbe nt directors, including Chairman Gfeller and director Leffler, there is no evidence that he maintained ties with Falcone after h e s old Zapata to Harbinger.” – ISS, Benchmark Proxy Report Published April 23, 2020

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 HC2’s Insurance Segment is Making Prudent and Appropriate Investment Decisions in the Best Interests of Policy Holders MG Capital cherry picked 3 assets to help support its false storyline 6 MG Capital’s continuous fixation on a handful of cherry - picked alternative and fixed income investments made by Continental ( not HC2) is just another shallow attempt to cast a dispersion upon Mr. Falcone FALSE Narrative The TRUTH : These investments were made by Continental (over which Mr. Falcone has no investment discretion), are ordinary and suitable for an insurance company and were properly disclosed Do Not Be Misled By MG Capital’s Deceitful Claims: 1. Arcot subleased space from HC2 at competitive market terms 2. Arcot is 100% owned by its operators 3. HC2 has no ownership of Arcot In fact, at December 31, 2019, 94% of the portfolio is invested in the highest two National Association of Insurance Commissioners (“NAIC”) rating classes, and over 98% in the three highest NAIC classes 3 Continental relies on income from its investments as a key source of support for meeting future policyholder obligations 1 Insurance regulations dictate permitted investments based on ratings and asset class, allowing insurance companies to allocate small amounts of the portfolio to higher yielding opportunities 2 4 Of $4.3 billion of assets and 40 pages of statutory disclosures, MG Capital has cherry picked less than 1% of the portfolio to help create their false storyline 5 There is nothing unusual or improper about Continental’s ownership of the three assets MG Capital highlights; insurance asset managers utilize small pockets of the portfolio for higher yielding assets to help support the company’s ability to support future policyholder obligations MG Capital ignores public disclosures previously pointed on to

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 Why Does MG Capital Attack HC2’s 2014 Accounting Issues Which Were Properly Corrected Years Ago? The accounting issues in the first year of operations do not support the false narrative of continued accounting issues... Again, the facts do not support the false storylines 7 MG Capital is trying desperately to create a record of continued accounting issues to support their false narrative around th e B PG in an attempt to distract investors from their unsuitable business plan and dissident slate FALSE Narrative The TRUTH : HC2 properly addressed and corrected any accounting deficiencies that stemmed solely from its 2014 financials These past accounting deficiencies had no impact on stockholder value and were addressed years ago Shouldn’t MG Capital be more focused on presenting stockholders with a viable business plan instead of attempting to mislead investors based on an isolated accounting deficiency that was corrected years ago? MG Capital fails to disclose that this issue is from 2014 activity and is deceitfully taking advantage of the fact that all periods thereafter had to be restated to correct the isolated 2014 issue HC2’s Board and management quickly remediated the internal control issue during HC2’s first year as a Company by hiring a new CFO and additional CPAs, making organizational structural changes, increasing review activities and engaging additional external advisors (1) (1) Please refer to Item 9A in HC2’s 2015 Form 10 - K for additional details around the remediation of HC2’s 2014 material weakness.

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 8 MG Capital’s False Attacks Concerning HC2’s KMG Acquisition Are Misleading and Baseless  There are no relevant similarities to the issues in the Miller case  MG Capital continues to mention the Miller case to support their false storyline MG Capital is trying to raise investor doubt about something that warrants no concern Miller  Relied upon reserves reports that did not present fair value AND were prepared for another purpose  Misrepresented fair values developed by management as third party  Double counted fixed assets  Errors in forecasting  Incorrect facts supporting a BPG KMG x Fair valued assets (primarily marketable securities) in accordance with US GAAP directly for this purpose x Fair valued liabilities in accordance with US GAAP, using nationally - recognized actuaries’ advice, directly for this purpose x Consulted with a Big 4 accounting firm and a nationally - recognized valuation firm x Employed heightened scrutiny throughout the process x Biggest driver was a 14% reduction in the applicable tax rate between signing (i.e., pricing) and closing, which led to higher expected after - tax cash flows over the life of the policies and, thus, a higher value of net assets received in the transaction, leading to a BPG

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 The Audit Committee Acted Prudently by Sharing MG Capital’s Letter with Mr. Falcone The Audit Committee acted in a manner consistent with its fiduciary duties to ALL stockholders despite MG Capital’s attempts to twist the narrative for its false storyline 9 FALSE Narrative 1 Mr. Falcone was HC2’s Chairman at the time of the March 2nd letter, and it would have been imprudent not to inform him of the severity of MG Capital’s claims within that letter 2 Independent investigation determined the claims made in the letter were baseless 3 It was necessary to inform the Chairman to ensure that proper due diligence would be done and appropriate actions would be taken to investigate the claims made in the letter, in an effort to protect stockholders The TRUTH : HC2’s Audit Committee responded appropriately pursuant to its fiduciary duties

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 HC2’s Valuations of DBM Global are Completely Appropriate MG Capital’s view of a “highly - questionable revaluation” demonstrates that either MG Capital does not understand the market or is attempting to mislead stockholders 10 The TRUTH: DBM Global was valued according to an independent, third party given the underlying inefficiencies in the over - the - counter (“OTC”) market. NAV consideration had no bearing on the valuation HC2 did not “re - value” DBM Global to boost NAV or otherwise FALSE Narrative 8% of DBM Global is traded on an illiquid OTC market where the share prices are not reflective of DMB Global’s true fair value 1 Given its low daily volume and very wide bid / ask spread, it is evident that DBMG OTC trades in a very inefficient market  For instance, the average Bid/Ask spread over the past year was over ~$10 (1) 2 MG Capital is either not aware of this fact and concept or has chosen to again ignore the facts to support his storyline 3 DBM Global’s fair value at the time had the full impact of the 2017 tax reform, resulting in lower tax rates, record backlog including the signing of the LA Rams stadium and favorable market conditions (1) Per Bloomberg, the average Bid/Ask reported from 03/24/2019 to 04/24/2020.

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 Mr. Falcone Took a Company with One Asset and in Six Years Built an Established and Diversified Holding Company Mr. Falcone has provided stockholders with continuous investment opportunities and will continue to do so 11 MG Capital states Mr. Falcone’s regulatory issues limit opportunities for HC2 stockholders Mr. Falcone created the vision for HC2 and built the company up from one struggling asset to the company that MG Capital now claims to have valuable and viable assets MG Capital’s smear attacks on Mr. Falcone “being banned” by the SEC and New York insurance sector have NO impact on HC2 because: 1. HC2 is a public holding company and not an investment advisor 2. HC2 does not operate an insurance company Mr. Falcone maintains positive relationships with HC2’s stakeholders to promote a constructive dialogue and best position HC2 for future opportunities: 1 2 3 However, MG Capital fails to acknowledge that: “HC2’s fulsome support of DBM Global’s management enabled us to grow to $75M of adjusted EBITDA in 2019, from $ 45M in 2014. This support has allowed DBM Global to implement and deploy a platform growth strategy that has generated greater and more recurring revenue streams, creating additional value for stakeholders” Rustin Roach DBM Global, Inc. Chief Executive Officer Drew West American Natural Gas, LLC Founder & Chief Executive Officer “Phil and HC2’s team have been extremely supportive in helping us reach our successes to date and have set us up for an even brighter future”

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 The Choice is Clear 12 Mark the “REVOKE MY CONSENT” boxes to oppose each of MG Capital’s proposals and support HC2’s independent, experienced and highly qualified directors Act today and make your voice heard regarding the future of HC2 VOTE ON THE WHITE CONSENT REVOCATION CARD www.HC2vision.com REVOKE MY CONSENT

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© 2020 H C 2 H OLDINGS , I NC . © HC2 HOLDINGS, INC. 2020 © HC2 HOLDINGS, INC. 2020 13 Disclaimer Cautionary Statement Regarding Forward - Looking Statements Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This communication, and certain oral statem ent s made by our representatives from time to time may contain, forward - looking statements. Generally, forward - looking statements include informa tion describing actions, events, results, strategies and expectations and are generally identifiable by use of the words “believes,” “expects,” “inten ds, ” “anticipates,” “plans,” “seeks,” “estimates,” “projects,” “may,” “will,” “could,” “might” or “continues” or similar expressions. The forward - looking sta tements in this communication include, without limitation, any statements regarding our expectations regarding building stockholder value, fu tur e cash flow, longer - term growth and invested assets, the timing or prospects of any refinancing of HC2's remaining corporate debt, any statements rega rdi ng HC2’s expectations regarding entering definitive agreements in respect of the potential divestitures of Continental Insurance and/or DBM Global, re ducing HC2’s leverage and related interest expense at the holding company level generally and with the net proceeds of such divestitures, reducing corp ora te overhead, growth opportunities at HC2’s Broadcasting and Energy businesses and unlocking value at HC2’s Life Sciences segment. Such statements ar e based on the beliefs and assumptions of HC2’s management and the management of HC2’s subsidiaries and portfolio companies. The Company believes th ese judgments are reasonable, but you should understand that these statements are not guarantees of performance or results, and the Company’s a ctu al results could differ materially from those expressed or implied in the forward - looking statements due to a variety of important factors, both positiv e and negative, that may be revised or supplemented in subsequent statements and reports filed with the Securities and Exchange Commission (the “SEC”), i ncl uding in our reports on Forms 10 - K, 10 - Q and 8 - K. Such important factors include, without limitation, issues related to the restatement of our financial statements; the fact that we have historically identified material weaknesses in our internal control over financial reporting, and any inability to remed iat e future material weaknesses; capital market conditions, including the ability of HC2 and its subsidiaries to raise capital; the ability of HC2’s subsidiar ies and portfolio companies to generate sufficient net income and cash flows to make upstream cash distributions; volatility in the trading price of HC2’s c omm on stock; the ability of HC2 and its subsidiaries and portfolio companies to identify any suitable future acquisition or disposition opportunities; our ab ili ty to realize efficiencies, cost savings, income and margin improvements, growth, economies of scale and other anticipated benefits of strategic transactions; di fficulties related to the integration of financial reporting of acquired or target businesses; difficulties completing pending and future acquisitions and dispositions; activities by activist stockholders, including a proxy contest, consent solicitation or any unsolicited takeover proposal; effects of litig ati on, indemnification claims and other contingent liabilities; changes in regulations and tax laws; the risks and uncertainties associated with, and resulting fr om, the COVID - 19 pandemic; and risks that may affect the performance of the operating subsidiaries and portfolio companies of the Company. Although HC2 bel ieves its expectations and assumptions regarding its future operating performance are reasonable, there can be no assurance that the expectations re fle cted herein will be achieved. These risks and other important factors discussed under the caption “Risk Factors” in our most recent Annual Report on Form 10 - K filed with the SEC, and our other reports filed with the SEC could cause actual results to differ materially from those indicated by the for war d - looking statements made in this communication. You should not place undue reliance on forward - looking statements. All forward - looking statements attributable to HC2 or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date h ere of, and unless legally required, HC2 undertakes no obligation to update or revise publicly any forward - looking statements, whether as a result of new i nformation, future events or otherwise.

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