Titanium Holdings an out of fashion net-net

Investing is similar to fashion in many ways.  There are trends that are short lived, while other seemingly short lived trends become common place.  Some fashion trends will never be fashionable again no matter their usefulness.  Something like the Dogs of the Dow could be closely approximated to hip/fanny-packs.  In theory they're a great idea, but you don't want to be caught with one, or with that strategy.

Other fashion trends appear and have staying power.  The ETF boom is like casual Fridays.  At first it was alright to leave the coat at home, then a polo and pants were acceptable.  Now we've digressed to the point where people wear hoodies to work and showing up in dress pants or a dress shirt makes co-workers wonder if you're interviewing somewhere else.  ETF's were similar.  A few simple trackers for important indexes as a way to plug a hole in a portfolio.  Like casual Fridays the ETF world has descended into craziness.  No one is buying QQQQ anymore, now it's a reverse-inverse levered grain fund portfolio for farms with a ticker IOWA.

Investing fashion is driven by what the largest funds who are on TV and file 13-F reports are doing.  When the market is in a trough anyone and everyone can buy assets cheaply and buying cheap assets is in vogue.  It's also more of a sure thing.  In the midst of 2008 investors were uncertain about how durable company moats and brands would be in the "new normal".  But most investors were relatively certain that if you buy $1 for $.75 and throw in a profitable funeral parlor, a few F-150s written down to zero and other assorted assets that it's likely they'd get their money back, and potentially a gain as well.

As the market climbs out of a bottom value investing becomes more challenging and more complex.  The great deals of the bottom no longer exist that funds can scale into.  This means the funds and investors guiding the value investing fashion cycle move on from traditional asset bargains to companies with moats, companies that can compound at high rates in normal business environments, and companies that generate relatively high cash flow yields.

Investors follow the guiding lights that are in magazines, on TV, and in the blogs.  There are few original thinkers or original actors in the investing world.  The great news is that one doesn't need to be original to be successful in investing.

Now that the depths of 2008/2009 are far in the rear view mirror the idea that anyone can buy a traditional Graham value stock is almost laughable.  There are few stocks trading below book value, and few net-nets.  Investors are a fickle bunch.  If you asked investors right now most would say book value is meaningless and should be disregarded.  In a crisis book value and net current asset value are suddenly meaningful concepts only to be forgotten in the wake of gains.

If an investor is looking for a traditional value stock, not just a company selling for a lower P/FCF multiple compared to peers one needs to move down the size ladder significantly.  There are no net-nets with two billion dollar market caps.  As far as I know there aren't any net-nets with market caps above $100m in the US.  Net-nets are in markets that only the brave enter such as Japan, or Vietnam, or in extremely small stocks.

Titanium Holdings (TTHG) is an example of an extreme undervaluation in a bull market.  This is a name I've followed for years.  I've owned it off and on as it fluctuated between dramatically undervalued to just undervalued.  I don't own it anymore, but the stock is still attractive at current prices.

One thing that's nice about small companies is they're straightforward.  Titanium Holdings is simple, they own some cleaning supply stores in Texas as well as marketable securities and cash.

The value proposition is clear, they have $1.7m in cash, $348k in securities and $589k in liabilities.  Their net cash position is $1.486m.  The company has 9.228m shares outstanding and a last trade of $.20 meaning their market cap is $1.86m.  If you back out their cash and securities the market is valuing their cleaning supply stories that have a $2.2m book value for $374k.  This is a business that made $72k in the past six months.  If their earnings run rate continues the market is valuing them at slightly over 2x earnings.

Maybe a cleaning supply store in Texas is only worth $300k, I don't know, but it seems quite low.  What I do know is this.  With infrequent trading shares were trading with a quote 50% lower recently.  A buyer at those prices would have been buying this business for less than net cash, and would have only needed to wait a few weeks to double their money.

Titanium Holdings isn't a great business.  The auditors comment on the financials saying the company only discloses the absolute minimum necessary, and if they disclosed more investors might have a different impression.  Maybe there is more than meets the eye here?  We know the company has a majority shareholder who has used company resources to make bad investments in the past.  But the issue isn't the quality of the company, it's the company's valuation.

A savvy investor who keeps their eye on situations like Titanium Holdings can do well.  A question is naturally "How do you even buy shares?"  Here's a small secret, when a buyer of size wants to get out the price craters.  This serves two purposes for an investor, they get to purchase as much as they want at an attractive price.  The lesson is never dump your stake indiscriminately onto the market.

At current prices Titanium is still cheap.  In a sale they'd probably be worth 50% more, although I'd caution and say that a sale is extremely unlikely to happen.  But the company doesn't need to sell for value to be realized.  Value will be realized when stocks like Titanium come into fashion again.  Wearing neon was a bad decision for years, but then suddenly it was back like the 80s never stopped.

Vulcan International: The ultimate oddball stock

Warning: This company is extremely illiquid and management treats investors somewhere between something to be ignored and something to engage with in battle.  Investors are required to sign a NDA in order to receive financial statements.  This idea is only for sophisticated and experienced dark company investors.  I have not signed the NDA and I have not seen the financial statements for this company.  This write-up is based on publicly available details and certain other sources.  If you contact the company they will require you to sign an NDA.  

Some of the allure to investing in dark companies lies in the hunt for information.  Perhaps it’s our legacy hunter-gatherer instincts rearing their head.  Not many investors, if any, have an informational advantage with large cap companies such as Apple, GE, Kraft or Microsoft.  But with a little work any investor can have an almost unfair informational advantage for many dark companies.  

Investors are sometimes like water in that they prefer the path of least resistance.  There is significant resistance related to procuring Vulcan International’s financial statements and other related information, but stepping over that hurdle can be worth it, especially with what seems to be afoot at the moment.

Vulcan is a Delaware incorporated company with a $59.6m market cap.  The company owns a rubber and foam manufacturing company located in Tennessee, a sizable securities portfolio and various real estate holdings including timberland.  The company appears to believe that rubber and foam manufacturing is their main line of business.  If one visits the Vulcan International webpage they are presented with a nice picture of the company’s facilities along with sub-pages detailing specific manufacturing capabilities at the Tennessee location.

Vulcan reports abbreviated earnings on the OTCMarkets platform for investors.  If a potential investor were to examine Vulcan’s website as well as read their press releases they’d likely have the impression that the company was an overvalued manufacturer with some real estate interests.  This is where public perception, created and nurtured by the company’s management over a long period of time, is divorced from the truth.

Now for a brief digression.  There are three stages in a magic trick.  The first is called the “pledge”.  This is the setup of the trick where the audience is shown something ordinary.  Think of Vulcan’s so-called reporting as belonging here.  The second step is called the “turn” where the magician makes the ordinary act extraordinary.  Management’s extreme efforts to block and obfuscate investors fall in this category.  Finally, there is the “prestige” where the effect of the illusion is shown.  Read on magic lovers.

Vulcan International is a holding company that primarily consists of bank equity holdings, including US Bancorp and PNC shares, as well as real estate interests in Ohio and Minnesota.  Their small money-losing rubber and foam manufacturing firm in Tennessee which appears to the general public as the primary asset is in reality essentially an afterthought.

The company’s ownership is dominated by the Gettler family.  Benjamin Gettler, the former CEO passed away in 2013.  Gettler was well respected in the community.  A Google search reveals numerous articles about his community contributions.  At one point Gettler was Chairman of the Board of the University of Cincinnati.  Gettler's stepson is the company President, and two of Gettler's other sons are on the Board along with his widow.

The company was an SEC reporting entity until they filed a Form 15 in September of 2005.  At the time of their last quarterly filing in 2005 they had $58m worth of shareholder equity and assets of $85.74m consisting primarily of $72.6m in marketable securities, some cash and their manufacturing assets.  On the other side of the ledger, the company had a $3.2m note payable as well as some deferred tax liabilities.  It’s worth noting they are currently trading for only slightly more than their book value of 10 years ago.

Vulcan International at one point ran a large manufacturing operation that made bowling pins along with foam plants scattered throughout the US.  Foreign competitors invaded Vulcan’s market and Vulcan’s formerly profitable operations began to lose money.  The company sold off the majority of their factories except for one located in Clarksville, TN.  Past SEC filings show positive income from continuing operations, but these numbers include securities gains as income.  It’s my understanding that the Clarksville factory hasn’t operated profitably in decades if not longer, yet it continues on like some kind of undead creature.

After winding down their foam operations the company found themselves in a strange position.  They had excess capital, but no real reason to exist.  Management began putting their excess capital to work buying a portion of the Cincinnati Club Building in downtown Cincinnati, a second office in Cincinnati, as well as public bank stocks.  It’s worth mentioning at this point that my brother-in-law and his wife held their wedding reception at the Cincinnati Club Building, the facility is beautiful and my guess is the balance sheet value for this asset doesn’t reflect its true value.

It was only a matter of time before the growing equity portfolio outpaced the shrinking manufacturing operations.  At some point it became necessary to ask whether Vulcan should be classified as an Investment Company under applicable SEC rules and regulations.

Fortunately, someone did ask.  That person was Lloyd Miller, Jr., the infamous activist small cap value investor.  Miller owned a significant stake in the company in the 1990s and was on the Board of Directors.  Miller and the company had a falling out and Miller signed a release related to his right to vote his then current shares.  Miller then sold his stake over the next few years. Subsequently, Miller re-established a new position in Vulcan and took part in a rights offering.

Miller’s various legal filings have formed the basis of this article and they are worth a read.  Miller filed one of the most comprehensive books and record requests (Section 220 demand) I have ever seen.  Asking for access to everything from financial statements to board minutes, records related to sale or issuance of stock, as well as all material transactions with any subsidiaries.  

Vulcan countersued Miller alleging that he broke his release agreement by acquiring more shares and attempting to exercise his shareholder rights; a view the court disagrees with.  In the lawsuit Miller claims that Vulcan is an Investment Company under the Investment Act of 1940 and executives have engaged in insider trading.  So far the SEC hasn’t acted in regulating Vulcan as an Investment Company.

All of this is interesting and most likely entertaining, but you’re probably thinking, “Why is this company even being written about?”

While there are some egregious corporate governance issues, the company is an attractive investment.  An investor buying today is effectively purchasing PNC and US Bancorp stock at a large discount to their market prices.  

I’ve noticed a strange and familiar pattern with investors who do obtain the Vulcan financials.  They immediately become as guarded with the information as the company is so they can purchase as large of a stake as possible.  I’ve also heard more than one Vulcan investor mention that this is one of the more attractive opportunities they know of.  This is considerable given the types of investors who invest in Vulcan know the dark market very well. 

Before writing this article I asked what a few investors thought the shares were worth.  They all agreed at least double the current price if not more.

The problem is there are other dark companies trading for 50% of their intrinsic value with bad management.  Companies like this aren’t value traps they are value graveyards.  Places where investor dollars go to sit in the ground and disintegrate.  What’s different about Vulcan?  It seems investors have finally had enough of the Gettler black hole and there is a concerted effort to get the company to open up.

Management has been intentionally vague about the operating results at their Clarksville facility.  This is presumably because they have close personal bonds with employees there, as well as the notion that owning a money-losing factory will somehow help them avoid the fate of being classified as an Investment Company.  The reason Vulcan wants to avoid this classification is because if they were to be classified as an Investment Company they would suddenly be required to be more transparent as well as undergo regulation.  Note that it is extremely difficult if not impossible for a long-standing operational company to comply with the requirements of being an Investment Company.

Management at many dark companies operate with their head buried deep in the sand blissfully unaware of anything outside of their small kingdom.  Vulcan is the opposite.  A Gettler on the Board acts as their outside counsel and is extremely savvy regarding shareholder rights and securities law.  I have been told they play the clueless managers at company meetings, but they are far from it.  This is also why the company vigorously countersued Miller in response to his record requests and various lawsuits.

If shareholders have their way Vulcan International won’t become a value graveyard.  This is because a number of shareholders besides Miller have decided they’ve had enough with management and have decided to push for changes.  The Gettler family controls the company, but without a shareholder register it’s unknown as to their ownership percentage, or how firmly they really are entrenched.  Sometimes management at companies such as Vulcan will act as if they own a majority stake when they don’t actually own a true majority holding.

Management has responded with surprise that there are investors interested in the company.  The CEO has mentioned that changes are underway towards transparency, although nothing has occurred to date and its ultimately it’s unknown what might happen.

Fortunately for shareholders, the Gettlers don’t need to be removed and a shareholder uprising doesn’t need to take place for value to be realized.  Improved transparency is likely all that’s needed before Vulcan shares start to appreciate towards fair value.  Sunlight often is the best disinfectant.
There is a very good reason that Vulcan is selling for half or less of its intrinsic value.  They have a management team that has ignored shareholders and actively worked to block information from being released.  Yet, value has a way of being realized, especially if the discrepancy between market price and value becomes too large.  The gap between price and value has become large enough that a number of shareholders are interested in poking and prodding management until the gap closes.  For investors who have a taste for the darkest oddball companies the market has to offer Vulcan International might be worth a look.  If anyone is looking to purchase a sizable stake and help open this company up, please contact me and I can put you in contact with other Vulcan investors.

Recent interviews and podcasts

While I haven't been posting as often as I'd like (and I'm hoping to correct that!) I have been active in co-hosting a microcap investing podcast as well as giving interviews.  I wanted to link to all of these items in case you missed any of them.

Benzinga PreMarket

Here is my most recent interview on the Benzinga PreMarket show:

As always I spoke about banks and other related issues.  So far I've been correct in my prediction that the Fed wouldn't raise rates in 2015, maybe we'll be thrown a bone in December.

Interview with Tim Melvin

I also had a lengthy interview with Tim Melvin of the Banking on Profits newsletter.  Listen here

Microcap Investor Podcast links

As always I continue to co-host the Microcap Investor Podcast with Fred Rockwell.  You can subscribe on iTunes.

Here are a few recent episodes:
  • Talk with Brandon Mackie about Canadian stocks: listen
  • Interview with Wilson Wang of Twin Peaks Capital: listen
  • Talk with Maj Souiedan of GeoInvesting: listen
Microcap Conference

If you missed it I'm working with Fred Rockwell to organize The Microcap Conference in Philly on November 4th and 5th.  We have an exciting list of companies attending as well as a full slate of investor attendees.  There are still a few attendee spots open.

You can find out more information and register to attend on the website below.  The list of companies as well as a preliminary schedule will be posted soon.

Beyond value traps: The value graveyard

He couldn't stop talking about the great deal he got on his boat.  My friend purchased his boat over the internet from what he considered a sap Florida.  The boat was supposedly in mint condition, everything was like new, it ran well.  We looked at the same batch of pictures over and over as we listened to his savviness in buying cheap online.  Since he didn't live in Florida he paid someone to tow the boat to Pennsylvania.  It was there the problems started.

On the way back the boat trailer developed a problem with the wheel bearings.  My friend explained it away as something simple that happens to trailers that sit a lot.  He had a great reason too, in Florida boats are always in the water so the trailers rarely are used.  Once the boat was back in Pennsylvania the list of repairs began to grow.  That mint condition vinyl was a bit sun faded, it just needed to be replaced.  Then there were some issues with the engine that required an overhaul.  Some patches and paint and a number of other things were needed before the boat was sea-worthy.  Suddenly this incredible deal my friend got on his boat wasn't such a great deal.  He put so much money into the boat that if you added it all up it's likely he overpaid.

Investments can be like my friend's boat.  A company looks great on the surface and even cheap, but after a little while the problems start to crop up.  A bit of faded paint here, an old engine there, minor things, but all together they become a disaster.  Investors like to refer to companies like these as value traps.  Companies that appear to be cheap on a statistical basis, but once an investor has a little experience they realize the company isn't cheap at all, in many cases it's very expensive given the issues.  Value investors who purchase shares find themselves trapped in a bad situation.

Value traps are bad,  but they aren't the worst.  With a value trap in most cases an investor can escape with a loss and move on.  There is a category of investments so bad that they make value traps appear attractive, these are stocks in the value graveyard.  Perpetually cheap on a statisitical basis but with negative factors so large investors would be lucky if they merely experienced a loss.  Rather they're likely to have their capital tied up forever in a company who's management is slowly destroying value.

Value traps are usually companies caught in a shifting industry that fail to adapt.  A company like Radio Shack that believed we'd still be sodering our own toasters together in the age of iPhones.  Value traps are passive failures.  A company failed to act in response to some macro event.  Value graveyard stocks are active traps.  Management at these companies is either actively working to destroy value (and line their pockets in the process), or working to create value that shareholders can't partake in.

Many companies in the value graveyard trade on the pink sheets and file financial reports occasionally, or never at all.  It's much easier to hide what's happening if you don't give financial updates.  The best way to identify a value graveyard situation is one where management is clearly running the company for the benefit of themselves.  They earn a large salary, issue shares to themselves and regard shareholders as an annoyance.

When a company's management takes such a negative stance against shareholders it's no surprise that shareholders give up and sell the stock en masse.  Sometimes these stocks are illiquid because there are no buyers for such a terrible company.  Other times these stocks are illiquid because the company won't give out financials without an NDA, and for 99.999% of the market that is too high of a hurdle to overcome to invest.

Given enough time companies in the value graveyard atrophy.  Sometimes management is able to destroy (or take) value quicker than the share price falls.  But other times the price falls quicker than the slow decline initiated by management.  It's in the atrophy mismatch where opportunities arise for investors who wish to get their hands dirty.

Before the US Senate Benjamin Graham was asked why undervalued stocks eventually appreciated to fair value.  Graham responded it was a mystery and that no one knew why it happened.  We still don't know exactly why a given stock might appreciate, but I think we can make an assumption in general about why this happens.  With millions of investors combing the world of opportunity enough eventually find an undervalued situation, purchase, and push the price up. 

If a company falls to an incredibly low valuation, essentially too low of a valuation the investment can become attractive, but not by buying and patiently waiting.  For companies that live in the value graveyard investors need to become personally engaged in helping to realize value with the situation.  When management is working against shareholders the company's shareholders need to be working against management.

A recent example of this is Solitron Devices, a chip manufacturer based in Florida.  The company  went bankrupt in the early 1990s and the CEO claimed they've been emerging for the last twenty years.  During this emerging period he felt it was acceptable to ignore shareholders, not hold annual meetings and continually line his pockets with a large salary and stock options.  The stock price drifted downward over the years and eventually settled in net-net territory.  With a price so low for so long value investors and activist investors emerged.  This past week shareholders (who are predominantly value investors at this point) elected two activist investors from Eriksen Capital Management to the Board.  With this management suddenly decided to start thinking about value creation.  They initiated a large buyback and have begun talking about mergers or selling.  Of course what happens verses what is discussed remains to be seen, but this is a step in the right direction.  Shareholders have pushed back forcefully against management, and with only a minority ownership stake management is forced to act.

In the most recent issue of the Oddball Stocks Newsletter I highlighted another value graveyard situation that has finally attracted investor interest.  I will post the name here eventually after subscribers have an opportunity to purchase, but the company is attractive.  Like Solitron the majority of their market cap is in liquid assets that can be sold for a multiple of the current price.  The issue with this company is management is trying to hide these assets and keep them for themselves.  They require shareholders to sign an NDA to receive the annual report, and prefer to operate in secrecy rather than honestly in the daylight.  But like Solitron investors have taken notice of the extreme mis-valuation and have decided it's time for something to be done, and push back against management.

When an investor comes across a company in the value graveyard they have a choice, pass by, or do something.  Larger firms with significant resources might consider buying a stake an actively pushing for value creation.  Individual investors like myself can alert other investors to these types of situations.  You don't have to be an established activist with a large capital base to make a difference.  Sometimes a letter to management letting them know shareholders exist can be enough, or a short article in the local paper.  A little sunlight on a dark situation is never bad for shareholders, but is feared by management.

Recent interview and podcasts

I recently began co-hosting the Bulldog Investor Podcast with Fred Rockwell.  For anyone who didn't know I was doing this I wanted to share the four recent episodes that I've been on.  Each episode is linked with a short description.

  • Interview with Tim Melvin discussing community banks and banking: Episode here
  • We talk with Tim Stabosz about risk in value investing.  An interesting discussion about distressed turnaround stocks takes place: Episode here
  • John Huber of Base Hit Investing joins us to talk about compounding machines, undervalued stocks, portfolio management and Bank of Utica: Episode here
  • We talk to Philippe Belanger of Espace MicroCaps about finding investments in Canada: Episode here

July Benzinga Interview

Last Wednesday I had the chance to be a guest on the Benzinga PreMarket Prep show again.  The interview can be found below.

Neglected or distressed?

There is a common perception about value investing that it involves purchasing shares of companies on the brink of financial ruin with the hope they turn around.  Viewed through this lens value investing is risky and the value investor one step away from experiencing individual ruin as their investments go bad all at once.

It's not hard to see where this perception could have come from.  In the world of academic finance where everything can be reduced to a formula investment returns are a product of risk.  Riskless assets generate no returns whereas supposedly risky assets generate outsized returns.  Financial practitioners know what the academics don't, that life isn't a set of formulas.  Assets that appear safe can turn out to be risky, and assets that appear risky might be safe.

The question is how can an investor find a safe asset for a depressed price?  The answer to that lies in the distinction between different types of value investments.

In general low priced stocks can be broadly grouped into two opportunity sets: distressed investments, and neglected investments.

Distressed Investments

A distressed investment is any investment situation where the company is experiencing either business/operational distress or financial distress.  These are the stereotypical "value" investments.  Companies with operational difficulties trading at extremely low valuations.

An investment in a distressed company hinges on a few factors.  The first is an investor needs to be able to determine whether the market reaction to the company's results is too pessimistic or if they're accurate.  Then the investor needs to be able to determine if the company can recover from their operational difficulties.  If an investor can determine both of these factors correctly it's likely they will be able to do well investing in distressed investments.

The trouble with distressed investments is determining when the future of the company doesn't look like the past.  When a company faces a fundamental operating issue they need to innovate and solve their issue.  If they can it's likely results in the future will resemble the past, or might even be better.  If the company has a culture that can't react to their situation the chance that the future looks like the past becomes very small.  Short sellers like to look for companies that have stumbled and don't have the business-DNA to reinvent themselves.  Whereas distressed investors are looking for companies with that reinvention DNA.  It's worth noting that very few companies change their business from one industry or market to another successfully.  In many cases the odds are on the short sellers side.

Many novice value investors will find a distressed opportunity and presume the future will look like the past when in fact the business itself is undergoing a dramatic shift and it's likely the company will never recover their former glory.

With all these pitfalls distressed investing can be extremely profitable if done right.  A company on the brink of bankruptcy and trading at 10% of book value might return 500% or 1,000% if they avert disaster.  Where there's a chance for outsized returns there is also a chance for a complete loss.  Companies straddling a thin line between solvency and bankruptcy court usually don't leave much residual value for shareholders.

Even though equity investing in distressed situations is risky one method to reduce risk is to invest is at a higher level in the capital structure such as through preferred stock, or debt.

Neglected Investments

I feel that distressed equity situations tend to have binary outcomes, either the company will do exceptionally well, or a tax write-off is in short order.  I prefer a different type of value investment, the neglected company.

A neglected company is one that the market has mostly, or completely forgotten about.  Sometimes the company's business is so boring it's hard to generate investor excitement.  Investors, and especially the financial media likes whatever is popular or cutting edge.  A landscaping company that schedules appointments via an iPhone is suddenly the Uber of landscaping.  Whereas the hordes of other landscaping companies quickly fall into the camp of neglected investments, regardless of their investment merit.

The majority of my best investments have been neglected companies.  Companies that are profitable, growing, and trading at depressed valuations because no one knows or cares about them.

In many ways a distressed investment is the opposite of a neglected investment.  Companies that are neglected usually don't release news..ever.  Neglected companies don't hold conference calls, and sometimes it's hard to even obtain financials for them.  Neglected company CFO's are surprised any investors exist, especially ones that have intelligent questions to ask.

Distressed investors often live and die by the news flow.  One news release or announcement can mean the difference between a vacation in the French Riviera or a stay at the Days Inn at the Jersey Shore.

Neglected investments don't appreciate 3-5x in a year, but they might compound in silence at 15% or 20% for decades, all while trading at a large discount to book value.

An investor interested in neglected companies doesn't need to predict the future.  They just need a reasonable assumption that the future will be similar to the past.

The advantage to an investor looking at neglected investments is that these investments are not as risky.  Neglected companies aren't facing an existential crisis.  They can be great companies just operating outside the limelight.

Which is best?

I'm not sure there's a best way, but it's important to understand the differences in each investment you look at on a stand alone basis.  The worst mistakes happen when an investor believes a distressed company is merely neglected.  When this happens the investor misses a significant source of risk in their investment.  The converse can also be true.  An investor mistakes a neglected company for a distressed investment and never invests.  There are many neglected companies silently grinding out significant returns for shareholders.

The Solitron proxy battle heats up

The proxy battle between Solitron management and Eriksen Capital Management has reached new heights.  Solitron is clearly worried that they will lose this battle, and I expect them to.  They've hired an investment relations firm to send shareholders a letter containing their view on Ericksen's nominees.

Eriksen Capital hit back hard with a proxy filing today.  I will let Eriksen's own filing do the talking in this post.

The filing is here.

"Based on SEC filings, Saraf became CEO in December 1992. During the quarter Mr. Saraf was hired (12/1992 through 2/1993) shares traded as high as $8.12 and as low as $3.43 per share, adjusted for the reverse stock split. Solitron’s share price as of June 30, 2015 was just $4.47 per share. Thus under Saraf’s twenty two and half years of leadership, Solitron shareholders total return would range between a loss of 41% and a gain of 39%, including dividends. In comparison the Russell 2000 index, which covers small cap stocks, has risen over 669% since January 1, 1993 through June 30, 2015. Clearly, Solitron’s board has some serious performance issues that they are probably embarrassed to discuss."

"Summary of the facts:

1.  In 1992 Shevach Saraf was named President and CEO of Solitron Devices. The company was in Chapter 11 bankruptcy at the time. He was granted a very generous package that granted him a good salary, 10% ownership of the company at no cost to him, and ten year options to purchase 8% of the company.

2.  Prior to Mr. Saraf becoming CEO in late 1992 the Company made contributions to its 401k and Profit Sharing Plan to help employees in preparing for their retirement. Since becoming CEO, Mr. Saraf has received over $1.6 million in profit related bonuses, in addition to his generous salary. During that time, the company has made zero contributions to the 401k and Profit Sharing Plan for its employees.
3.  For nearly twenty years, from 1993 to 2013, CEO Shevach Saraf and the Board did not hold annual meetings even though Delaware corporate law requires it. From 1996 to 2013 the only directors were Mr. Saraf and two others appointed solely by him after his own term had already expired, and, based on a careful search of SEC filings, it seems clear none were presented to shareholders for affirmation.

4.  In 2000, CEO Saraf’s personally selected, never-shareholder-approved, expired-term directors voted to approve an employment agreement granting Mr. Saraf 15% of Solitron’s earnings in excess of a fixed $250,000 per year. The employment agreement also granted the CEO an automatically renewing five year contract along with generous change in control benefits.
5.  In 2000, CEO Saraf’s personally selected, never-shareholder-approved, expired-term directors granted a massive stock option plan, without shareholder approval, primarily for Mr. Saraf’s benefit. By our calculations 64% of options granted went to CEO Saraf, and 12% to the other directors.
6.  CEO Saraf’s personally selected, never-shareholder-approved, expired-term directors granted these massive options to him at ridiculously low prices. The first grant issued in December 2000 was for 10% of the company’s shares, and was priced at just one-third of book value. The second grant issued in May 2004 to replace the original 1992 grant, was for 8% of the company’s shares, and was priced at a substantial discount to book value. 3

7.  In 2007, CEO Saraf’s personally selected, never-shareholder-approved, expired-term directors approved a second 700,000 share option plan without shareholder approval. Thankfully Solitron has not issued shares on it, but they did recently file with the SEC in order to do so. One of our requests to the Board was that they put the plan up for shareholder approval at this year’s annual meeting. They refused. Wonder why?

8.  CEO Saraf’s option grants under the 2000 Stock Option Plan had ten year expirations from the date of the grant. Just prior to expiration, the Board changed the grants to having no expiration even though the plan expressly forbade such action. While Section 10(a) of the 2000 Stock Option Plan grants the Board the right to extend an option grant, it expressly states “that in no event shall the aggregate option period with respect to any Option, including the initial term of such Option and any extensions thereof, exceed (10) years.” No amendments to the Plan were ever filed, and we would add that an attorney representing Solitron stated in a letter to us that “I understand that the 2000 Stock Option Plan has not been amended since the date of its public filing.”

In case you weren’t keeping track. CEO Saraf was granted 10% of shares at his hiring for free. He was later granted options for another 18% of the company, plus 15% of profits in excess of $250,000 per year. If you add that up it is up to 43% of economic gains in addition to his significant $321,500 annual salary. By our calculation, CEO Saraf has received nearly half of Solitron’s economic gains during his twenty plus year tenure.4 Yet Solitron has the audacity to slander Mr. Eriksen and Mr. Pointer as “opportunists” who “care only about themselves.

Disclosure: Long SODI