"Thank you for coming here young man.." - Joseph Schlig
"It's not an us verses them…you treat shareholders like barnacles on a ship waiting to be scraped off.." - Nate Tobik
"..I think part of the problem is you've lived under a rock for the past 20 years.." - Jeff
"I'm actually surprised at how many people the company brought.." - Alex
The meeting was held in the SunTrust building in Miami. I arrived with my proxy and was greeted by a number of lawyers at the door. They took my ID and gave me the voting form, I voted on the spot. I also received a set of "rules" for the meeting.
The rules of conduct set out the agenda, rules for voting, and then two contentious items. The first states that shareholders are allowed two questions that are to be no longer than one minute long. That's it, just two one minute questions or comments.
Before the meeting started I had the opportunity to introduce myself to most of the other shareholders present. There were nine shareholders present, not including management. Shareholders ranged from large holders such as Alex Toppan, and Ancora Advisors to smaller holders such as myself. Universally everyone was excited the company had finally put something on the calendar, with the hope we'd be allowed to openly ask management a few questions.
The company came in with a posse of advisors, including the auditor, lawyers, and Board members. As an aside, I had a chance to talk to the auditor before the meeting for a few minutes. I asked what it was like working with Saraf, considering he is the CFO/COO/C-anything. The auditor said he barely worked with him, instead he worked with the company's controller and accounting department, which he spoke highly of. I think this is reassuring, Saraf isn't a one man band running the entire show, although his hands are clearly deep into all aspects of the company's operations.
The company read some prepared statements, then opened the floor for questions stating they expected to wrap up in 20 minutes, clearly not long enough to air 20 years worth of questions.
I will summarize some of the questions and answers below, but I want to point out two important points from the meeting.
The first was a short comment/question that Jeff, from Ancora stated. Jeff stated that he'd interacted with the company multiple times, and each time became much more frustrating. He said he felt the company had been in hiding for 20 years and suddenly they were found out. They can't go back and hide, they need to deal with shareholders. He gave the company a B+/A- for operations, but a D for corporate governance. Jeff spoke for his firm, but in truth he spoke for all shareholders, he just vocalized the frustration we all have with the Board. Jeff also asked if the company planned on keeping their auditor more than six months. The auditor expected to stay around, but I'm sure all of their auditors had a similar expectation.
Jeff's main comment was that it was great the company was having a meeting in a nice office, but what will be different over the next year? Will we all be sitting in the same room looking at the same numbers? Unfortunately Saraf's answer didn't answer much of anything, instead he evaded the main question asked and answered with a non-answer.
The second item worth noting was what happened when the company tried to close the meeting down. Jeff Moore (ragnarisapirate.blogspot.com) asked if the Board would stick around for an informal conversation. He was flatly rejected, I protested along with other shareholders. Eventually the company's counsel asked if we could take a five minute break. After the break the Board came back in, Saraf gave a mini speech about how he wasn't going to give out inside information, insinuating that somehow that's what we were there for, which of course wasn't true.
The informal question and answer session was the highlight of the meeting. Management let their hair down and answered basic questions about the business, as well as a few questions regarding capital allocation.
I also had the chance to look through the shareholder register at the end of the meeting. This was eye-opening. The company has around 2000 record holders, 95% of them hold less than 1000 shares. Most of the company's record holding shareholders appear to be remainder creditors from their bankruptcy, holders such as Florida Power and Light with 2,000 shares. There were many South Florida supply companies listed on the register, along with many individuals with 100-200 shares or less.
The company will be publishing an 8-k with the official election results, but this is what was announced at the meeting. Shareholders voted 1,917,570 shares in total, and voted:
- For Saraf
- For Gerrity
- For Kopperl
- Against Davis
- Against Schlig
- For ratification of the CPA
- For the Say on Pay
- Voted to evaluate pay once a year
A wide variety of questions were asked, where I remember the question I have it noted, otherwise these are just general answers and notes I took. Jeff, and Taylor (http://valueprax.wordpress.com/) might remember more, I'll let them fill in additional details. The answers are mixed with some commentary, none of these are direct quotes as far as I can tell.
- Is there a succession plan in place?
- There is a layer of management under the CEO, including the Controller, but otherwise all of the titles mentioned have no place in replacing the CEO. The answer was essentially no.
- What does the company plan on doing with their excess cash?
- The company likes to keep money in reserve.
- There are 72 (or 30 or 60, this number changed each time it was mentioned) before the EPA liability is completely eliminated. Saraf discussed how difficult it is to work with the EPA, he said it took 10 years to negotiate the initial payment plan, this was not for lack of trying. He said he has trouble getting them to return his calls, and hasn't been able to get a final date for satisfaction of the liability. Somewhere between 30 days, the number a director mentioned, and 72 the number Saraf mentioned.
- Much of the PP&E has been mostly depreciated or fully depreciated, does the equipment have years of service left?
- Yes, much of the fully depreciated equipment is very useful.
- Also worth noting the company is only operating at 50% capacity.
- The company also has a lot of empty warehouse space available.
- Sequestration has provided business opportunities, any conflict including a Middle East conflict would be a boom for business.
- The company would consider future buybacks.
- Why did auditors change?
- The company is required to change auditors every five years due to SEC regulations, that precipitated the switch.
- The most recent change was due to their former auditor merging with an auditing company that specialized in insurance instead of manufacturing.
- I didn't really buy the explanation of the change, especially considering most of the company's auditor changes were glossed over without any explanation.
- The company stated unequivocally that they will remain with this auditor, my view is this remains to be seen.
- Someone asked if the company could be more transparent, the company gave an evasive answer.
- The company stated that shareholders are allowed to contact directors directly, this is a change from the past where Saraf wanted all communication to go through him.
Informal meeting questions
- What type of marketing does the company employ?
- Word of mouth, no one attends industry events, the industry knows Solitron.
- The company is known as a niche supplier, they do their niche very well.
- The company's niche is a sunset technology, this was a strange answer. To a later question the company stated their product is unique and unlikely to ever go away.
- Jeff Moore asked what directors look for when they buy a stock for their own account. One director spoke and said he looks for a stock to go up, and at times looks for short term investments, and other times long term investments. Some shareholders joked that he should have said "I invested in the Barrons stock of the week."
- The military is willing to spend more on quality parts that meet qualifications.
- The military expects companies to earn a profit, Solitron charges for everything.
- DNA marking is a new requirement, each transistor is required to be stamped with a DNA stamp so a transistor can be uniquely identified, Solitron is stamping their chips and charges extra for it.
- The company might be required to test chips in some special gas chamber, the chamber is expensive, in the $500k range.
- The company's products are used in power supplies, there is no digital replacement, this answer is in contrast to the answer that the company's technology is a sunset technology.
- The company's packaging is unique, not sure what the point of this was.
- Some products are used to steer missiles.
- 90% of the company's products are customer designed, meaning the company employs no R&D.
- Of general note, a shareholder Doug explained afterward to me that the company doesn't sell anything unless the item has been ordered on contract yet. This means 100% of the company's inventory has been ordered on contract, the company builds nothing on spec. The company's inventory will all flow through to revenue.
- Gold is a significant factor in cost, copper a larger component. The management seemed worried about the cost, which is confusing because a few minutes later they stated they pass on all commodity costs.
- The company would consider an acquisition, possibly an upstream acquisition of a larger company to use all the NOLs.
- The company doesn't believe a buyback or dividend would have any effect on the stock price.
- Saraf doesn't appear to care much that the share price doesn't move.
- The company will only consider people for the Board who have industry experience.
- Foreign sales are through US certified partners, I was somewhat unclear on this aspect. It seemed that foreign sales aren't targeted to foreign buyers, but rather parts are sold to an American defense company, who then sends them to a foreign buyers.
- The company had a large and growing market in some part, but Chinese suppliers flooded the market cheaper.
- The company is facing an issue with wafer sizes, they currently use 3in wafers for production. The supply of 3in wafers is dwindling worldwide. Silicon manufacturers have moved to 5in and 8in wafers. Moving to larger wafers would require a $5-10m investment to completely re-tool the business.
- A note here, this was thrown up as a reason why the company doesn't want to distribute any cash, they "might" need it to re-tool. I talked to a shareholder after the meeting who pointed out that for how penny tight Saraf is it's unlikely he's going to dump all of their hard earned cash into re-tooling. This was most likely a red herring.
I enjoyed looking management in the eye and asking them questions. I think all shareholders were glad the company finally held a meeting. The problem is that management looked us in the eyes, nodded their heads, but in the end nothing will change. It's easy for them to entertain us for an hour and a half, but taking action is much different.
My biggest fear after the meeting is that the company could enter into a costly acquisition that's above what they can manage. My second biggest fear is that management will continue to have an us verses them mentality regarding shareholders, this isn't good for anyone, especially when management only owns around 10% of the shares outstanding.
Disclosure: Long Solitron