The following events took place almost two months ago but unfortunately I neglected to write about my experiences until now.
As may be surmised from an earlier post on this blog, I have begun a minor activism campaign related to a small, publicly traded company called Solitron Devices. My previous posting reproduced the letter I sent to the Board of Directors of Solitron, recommending that they consider repurchasing some of the company’s shares with excess capital to enhance shareholder value. In response to that letter, I received a missive from the Chairman of the Board (and CEO, CFO, Treasurer, Secretary, etc. etc. ad nauseum), Shevach Saraf, informing me that my letter had been received and that my proposals would be discussed at the next meeting of the Board.
In other words, it was totally boilerplate and did not provide any kind of evidence that my proposal was being seriously considered or reflected upon. It seemed like a brush-off maneuver, especially when I noticed that the address copied onto the letter was for “FL” rather than “CA” where I am currently situated. A small detail to overlook but I believe it was something of an indicator of the general disregard with which I was to be treated going forward.
Not wanting to be a nuisance, I decided to wait several weeks before contacting the Chairman (Mr. Saraf) again, this time by phone, to try to get more color on the issue, have some questions answered and hopefully work to build the kind of trust and rapport I felt would be beneficial to seeing this proposal considered with a more serious mind. Then, I picked up the phone and called.
My call came likely after hours for the East Coast-situated Solitron Devices, but after navigating the phone tree menu I managed to connect to Mr. Saraf’s direct extension and he picked up the phone himself. He acted a little surprised to be receiving my call and in all honesty seemed confused as to who I was at first. I mentioned that I had written him a letter and he acted like he didn’t remember or hadn’t read any letters, which made me a little suspicious that perhaps he really hadn’t read my letter! But after trying to jog his memory he eventually did that “Yes, yes, I remember now… whaddaya want?” kind of thing.
I asked him if I could have more information on what the current state of discussion or consideration was with regard to my proposal and any other alternatives being considered and he brushed me off, saying that, as he said in the letter he sent me, it would be discussed at the next meeting of the Board of Directors.
I asked if this was a convenient time for him to answer some other questions I had and he recommended that I send my questions to him in an e-mail and he would address them that way. I thanked him for his time and advised I would do just that. I got off the phone and typed up a list of 15 questions I had for him and sent it off. I also included a PDF copy of my original letter to the Board of Directors since his memory seemed foggy as far as who I was and what I had proposed.
This was on July 31st, 2012. Here were my 15 questions:
- Capital allocation
- The firm has almost $8M on the balance sheet in the form of cash and near-cash short-term securities. Conservatively speaking (allowing an ample cushion for the challenges the business might reasonably be expected to face through a full business cycle), how much of this sum would you categorize as necessary working capital, capital necessary to fund potential growth opportunities and “excess capital”, respectively?
- You have said you haven’t spent much time thinking about IR and capital allocation. Have you considered consulting with outside help on this measure? What options do you feel you have with regards to getting assistance on improving the firm’s capital allocation process?
- Operations/competitive environment
- In previous interviews you gave to an editorial service called Wall Street Transcript over the last decade plus, you discussed the idea of R&D spending in order to remain competitive as well as explore potential growth opportunities. Does the company currently have an R&D effort (and if so, is this included in the SG&A account on the income statement?)? If it does not, do you still think such an initiative is necessary to maintain the firm’s competitive position or to realize potential growth opportunities?
- In interviews and company filings you have discussed raw materials costs, specifically gold and copper commodities, as one of the biggest obstacles to higher profitability. Specific language in recent SEC filings seem to indicate you are looking into cost cutting initiatives. How would the company be impacted if gold prices rose significantly over the next several years? What if the price of copper fell? What can be done to contain materials costs aside from commodity prices falling?
- Is MTBF (Mean Time Between Failures) still higher than competitors? What other competitive advantages do you possess?
- Describe your revenue and customers… how much of the revenue is “fixed” or long-term in nature and how much is “variable” and could fluctuate strongly with business conditions? In other words, how much of your business is generated by demand that is dependent upon the overall state of the economy at any given time, versus that which is generated by demand that is agnostic with regards to general economic conditions?
- You got rid of your CFO and took those duties on yourself. Why is this?
- Business/industry outlook
- Tell me about the 2008-2009 time period. What did that period look like business-wise from the eyes of SODI?
- What does this company’s business look like in 10 years, conservatively speaking (more business, less, about the same as today)? How does the industry look (consolidation? emerging entrants? technologically obsolete?)
- Shareholders
- Please comment on this, from an interview: “80% of those former unsecured creditors are current suppliers to the company.” <–Do you have any idea how many are shareholders?
- In one interview, you mentioned the idea that SODI could be a potential takeover candidate. Recently, you and your board adopted a Rights Agreement on behalf of shareholders, ostensibly aimed at warding off a change of control in the company. Do you feel that SODI is still a potential takeover target?
- In one interview, you suggested that SODI could realize some kind of synergy by merging with or acquiring an industry competitor, certain vendors or other related firms. In your mind, is there still a strong argument for this kind of strategic move with regards to merging/acquiring a competitor or vendor, and if so, what is it?
- What are your plans for yourself as a long-term shareholder of 30% of SODI? Are you interested in seeing the highest market value for those shares possible, within reason, or is it unimportant to you? Do you have heirs you hope to pass the shares onto in time? Is your ownership of the company part of your personal retirement planning? You made it clear in an interview that you’re aware of the market valuation of the company and you understand that the market valuation does not fairly represent the earnings power and other potential of the firm, but it is unclear what strategy you are following or intend to follow to help the market better understand the intrinsic value of Solitron Devices, which would result in substantial material benefit for you and other significant shareholders. (As an aside, I couldn’t agree more with your assertion that doing “investor road shows” to try to talk the stock up is a waste of time at best, and ethically suspect at worst– I admire your decision not to engage in such strategies for value realization as they are ineffective and short-term in nature.)
Now, let’s keep in mind a few things here.
First of all, I am not a securities lawyer. I don’t intend to put myself or an executive of a public company in a compromising position by asking them something which would constitute a request for “inside information.” I just asked what I was curious about, figuring he would know which questions he could and could not respond to and I’d learn going forward what kind of stuff was crossing the line.
Second, that being said, I think a solid majority of my questions were not things that could be construed as requests for insider info (which, again, I was not seeking, I was merely attempting to perform the kind of standard due diligence I’d perform on any investment). A lot of my questions were sourced from public documents or interviews he had given in the past which were in the public domain. They were aimed at better understanding the business– not getting an insider edge on some kind of material information or decision Saraf or his Board might be considering.
Third, communicating with someone like Saraf on these issues is inherently difficult because he plays so many roles. He is the Chairman of the Board, he is the CEO, CFO, etc., AND he is a shareholder to the tune of 30% of shares outstanding (more if you consider his unexercised options). He has a lot of competing roles and responsibilities and agendas, all of which put him in a bit of a tight squeeze when it comes to corporate governance.
Anyway, here is the response I got back from Saraf in reply to my rather exhaustive and detailed request for more information about his business:
Thank you for your interest as a stockholder of the Company. We value hearing from our stockholders. Under the securities rules, we cannot selectively disclose information to certain persons, including stockholders, if we are not releasing the information to the general public. As a result, I direct you to our filings with the Securities and Exchange Commission, and in particular our most recent Form 10-K and Form 10-Q for a discussion of our financial results for the most recently completed fiscal year and fiscal quarter as well as a discussion of our liquidity and trends impacting our results and liquidity. Please note that management and the Board periodically considers a variety of business and strategic initiatives as well as disclosure considerations and as such we will take the items noted in the letter and e-mail under advisement.
If you can’t see it, that is more boilerplate. It is hard to determine whether he actually read any of my questions from a standardized, form e-mail like that. It comes across as inauthentic as he notes that they will take issues mentioned “under advisement”, but doesn’t say which ones, why or what this even means.
There was no specific language addressing any of the many questions I raised. There was no acceptance nor rejection, nor any reason given. There was… nothing. I felt I had received the run-around once more.
This frustrated me, but I decided to wait a few days to cool off before considering my next move. I consulted with some friends and other investors with more experience than I had on these types of issues and shared my questions with them. They agreed that most if not all of my questions should’ve been answerable by Saraf and that it appeared he had simply chosen not to (even though he had specifically asked me to e-mail him my questions so he could respond to them). After considering it further, I decided to attempt to contact the “independent board members” on Saraf’s 3-man band… er, board, Jacob Davis and Joseph Schlig. According to their profiles culled from annual filings, the two board members are industry veterans and technical experts in the manufacturing processes and technologies of which Solitron Devices concerns itself.
They’re also very old and their terms as board members have all expired without renewal or shareholder action (but that’s another issue we’ll get to in a bit). A bit of creative Google searching led me to what appeared to be prior/present employment and research roles of each of the two gentlemen and, desperate to make contact, I started calling.
First, I called an organization that Mr. Davis appeared to be connected with at some point, asking if they had any contact info for him. I received an e-mail advising me that they could not hand his contact info over to me for privacy reasons. I said this was fine but asked if they could pass mine on to him with the request that he contact me. I was informed that this was acceptable and would be done.
I never heard from Mr. Davis.
Next, I called a number I had found for Mr. Schlig. Now, this part was just bizarre. The first time I called, the phone got picked up after a couple rings, but no one said anything. I could hear some breathing on the other end of the line and I started inquiring, “Hello? Hello, Mr. Schlig? Is this Mr. Schlig? Could I speak to Mr. Schlig please? I am a shareholder of Solitron Devices and would like to speak to you as a member of the board of directors about some concerns I have with the company…” CLICK! I got hung up on!!
I thought it was really odd but decided that maybe it was an accident. After all, according to the profile information Mr. Schlig appeared to be an elderly man. Perhaps he was having trouble with the phone or it had slipped out of his grasp. I dialed again.
The phone was picked up after one or two rings. “Hello?” I asked. There was no response. But clearly the phone was off the hook, as I heard the voice of a mysterious, elderly sounding woman shout, “God, these phone calls are SO… ANNOYING!” and then she mumbled something else in the background but I couldn’t hear what she said. I again began inquiring, “Hello? Hello, Mr. Schlig? Is this Mr. Schlig of Solitron Devices? Hello, Mr. Schlig, I am a shareholder of the company and I believe you have a responsibility to communicate with me. Hello? Am I to understand I am being purposefully ignored? Hello?” etc. I just kept trying to egg the other person on and get them to respond. But after four minutes of this I gave up and hung up. It was clear either the other person was more stubborn than I, or they had just taken the phone off the hook and set it down and walked away, having no intention to listen to me.
Honestly, chills ran up and down my spine at this point. I felt like the next scene in this movie would be me on the phone, trying to get to the bottom of this conspiracy as some assassins silently crept in from the hallway outside my office, looking to silence me once and for all…
But that was just the beginning of the extreme perversity of this company’s communication style with shareholders! The next day, I got an e-mail in my inbox from Mr. Saraf, which looked like this:
PLEASE KEEP IN MIND THAT ALL INVESTOR COMMUNICATIONS SHOULD BE DIRECTED TO THE CHAIRMAN OF THE BOARD OF SOLITRON DEVICES, INC.
Thank you for your interest as a stockholder of the Company. We value hearing from our stockholders. Under the securities rules, we cannot selectively disclose information to certain persons, including stockholders, if we are not releasing the information to the general public. As a result, I direct you to our filings with the Securities and Exchange Commission, and in particular our most recent Form 10-K and Form 10-Q for a discussion of our financial results for the most recently completed fiscal year and fiscal quarter as well as a discussion of our liquidity and trends impacting our results and liquidity. Please note that management and the Board periodically considers a variety of business and strategic initiatives as well as disclosure considerations and as such we will take the items noted in the letter and e-mail under advisement.
On behalf of the Solitron Devices, Inc. Board of Directors
Shevach Saraf
Chairman, President & CEO
There’s a few things worth noting about this communication. First, it included the same nonsensical, uncommunicative boilerplate language of the previous e-mail response, as if I hadn’t read it the first time, but also came appended with the ALL CAPS NOTICE to me of how I was to communicate with the board, as if I’d miss it without it being boldly asserted like so. Second, Mr. Saraf seemed like he really wanted to play up his role and responsibilities further by amending his signature, which in the previous e-mail had just said “Shevach Saraf” but this time asserted it was “on behalf of” the board, and reiterated that he holds three important titles with the company.
My interpretation of the e-mail was… confused. I wasn’t aware of any rule or law that said one MUST communicate solely with the Chairman of the Board. And it also seemed like a Catch-22 of sorts because Saraf had just ignored my previous communications, so why should I send things through him if he was just going to ignore them?
Curious, and hoping to get to the bottom of things, I immediately picked up the phone and called Mr. Saraf, who again picked up the phone. I told him I had received his e-mail and wanted to know what the meaning of it was– why had he sent it. He played it off as if he was just trying to clarify things for me, not explicitly acknowledging the fact that it must have been prompted by his sock puppet “independent board members” tattling on my shenanigans (you know, trying to contact them individually).
From here on out, things got pretty hostile. I don’t think anyone really cares for the he said-she said blow-by-blow replay but suffice it to say, Mr. Saraf got extremely upset with me. He made it clear he thought I was a pushy nuisance. He accused me of seeking insider information and he questioned my moral character and honesty, asserting that I was attempting to mislead and manipulate him into doing something wrong for my own benefit. It was incredibly rude, offensive and it was obvious from the get-go that it was consistent with his previously established pattern of behavior, which essentially boils down to being as obfuscatory and unhelpful as possible.
But that wasn’t the best part. The best part was this little logical trainwreck of a back-and-forth:
Me: Can you tell me what the board thinks of my shareholder proposal outlined in my letter?
Saraf: That information will be discussed at the next regularly scheduled board meeting.
Me: Well, when is the next regularly scheduled board meeting?
Saraf: That is undecided.
Me: Well, how is it a regularly scheduled board meeting if it’s not on the calendar and you’re currently undecided about it?
Saraf: I can not give you special information about when the company will be holding its meetings!
Followed by this:
Me: Okay, I understand you refuse to answer any of the questions in my e-mail and you don’t want to tell me when the next meeting of the board is. Can you at least tell me when the next shareholder’s meeting will be held?
Saraf: The date for the next shareholder’s meeting will be determined at the next meeting of the board. It is up to our sole discretion as members of the board to determine this. I can not give you this information without sharing it with everyone else!
Me: I’m not asking you to give it just to me, I would prefer you make an announcement of this to everyone and I am just trying to understand why you won’t do this.
Saraf: Again, as I have said so many times, this is up to our sole discretion.
Honestly, I have had few occasions in my life where I have been treated in such a blatantly rude and condescending manner in general, but especially by someone who is nominally supposed to be my legal and financial representative as the chairman of the elective board which represents shareholder interests. The hostility and arrogance, the anger directed toward me for merely trying to seek simple information any concerned shareholder would want to know, was truly alarming.
Overall, it left me feeling suspicious of Mr. Saraf and his motives. If he is on the shareholders’ side, why does he make so much effort to hide and conceal information, to not announce (and apparently to not even hold) meetings of the board nor shareholders, and why does he take such a frustrated, hostile attitude toward individuals trying to understand the company? Where is the sympathy? Where is the respect for the responsibilities he has to people like me?
Solitron Devices has serious corporate governance issues. The two “independent” board members, Jacob Davis and Joseph Schlig, appear to be little more than personal flunkies of Mr. Saraf, who sit on the board at his pleasure solely to make it appear as if the company has a board, when in reality Mr. Saraf appears to be not only the king, but the jury, judge and executioner. This appears to be the primary reason why this company is cheap and I believe the value will remain locked until the corporate governance issue can be busted open in favor of the shareholders’ at large.
