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

6 comments:

  1. The reasonable view of events is very clear here, and Mr. Saraf stands on the other side of such a view.

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  2. Nate, I really appreciate all the work that you have done on SODI. A big thank you (assuming he reads your blog) to Eriksen to do all the research of the past 20+ years of 10-Ks. I did not realize how egregious CEO compensation has been.

    As a shareholder, I am especially ashamed of the 1.6MM to the CEOs 401k and profit sharing while the employees got a zero. I hope that Eriksen can redirect that money (but probably too late) to the employees' 401k plan.

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  3. Nice work. Go get 'em, Tiger!

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  4. Hi Nate,

    Is there anything we can do to help you in this process? I mean, what can we do turn up the pressure for current management?

    Great work!

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    1. I'd say contact management and let your views be known. The disgust with current pay, and the fact that more capital hasn't been returned.

      I think Saraf needs to know if things aren't corrected this year there's a good chance he won't be elected next year.

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  5. Representing Solitron, Regan & Associates (a proxy solicitor) called me this morning. I didn't wait for the pitch.

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