SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 1997
Commission File No. 1-4978
SOLITRON DEVICES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 22-1684144
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(State or other jurisdiction (IRS Employer Identification Number)
of organization)
3301 ELECTRONICS WAY, WEST PALM BEACH, FLORIDA 33407
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(Address of principal executive offices)
Registrant's telephone number: (561) 848-4311
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Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
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Common Stock, $0.01 par value Electronic Bulletin
Board/Over the Counter
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
Documents incorporated by reference: None.
The aggregate market value of the registrant's common stock, par value $.01 per
share, held by non-affiliates of the registrant, based upon the closing market
price as of February 28, 1997, was approximately $618,000.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 28, 1997:1,974,799 shares of common stock, par
value $.01 per share. Note: Additional shares are issuable by the Company
without further consideration pursuant to the Company's Plan of Reorganization.
State issuer's revenues for its most recent fiscal year $7,159,000.
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PART I
ITEM 1. BUSINESS
GENERAL
Solitron Devices, Inc., a Delaware corporation (the "Company" or "Solitron"),
designs, develops, manufactures and markets solid-state semiconductor components
and related devices primarily for the military and aerospace markets. The
Company manufactures a large variety of bipolar and metal oxide semiconductor
("MOS") power transistors, power and control hybrids, junction and MOS field
effect transistors, thin film resistors and other related products. Most of the
Company's products are custom made pursuant to contracts with customers whose
end products are sold to the United States Government. Other products, such as
Joint Army Navy ("JAN") transistors, are sold as standard or catalog items.
The Company was incorporated under the laws of the State of New York in 1959,
and reincorporated under the laws of the State of Delaware in August 1987.
PRODUCTS
Prior to the consummation of the Vector Purchase Agreement in 1993, the Company
was organized into two operating divisions: the Semiconductor Division and the
Microwave Division. The Semiconductor Division continues to design, manufacture
and assemble bipolar and MOS power transistors, power and control hybrids,
junction and MOS field effect transistors, thin film resistors and other related
products. Pursuant to the terms of the Vector Purchase Agreement, substantially
all of the assets (other than real estate) comprising the Microwave Division and
certain related liabilities were transferred to Vector, which now operates the
Microwave Division as a privately-owned company, under the name of
Solitron/Vector Microwave Products, Inc.
Set forth below by principal product type are the percentage (i) contributions
to the Company's total sales of each of the Company's principal product lines
for the fiscal year ended February 28, 1997 and for the fiscal year ended
February 29, 1996 and (ii) contributions to the Company's total order backlog at
February 28, 1997.
FISCAL YEAR FISCAL YEAR BACKLOG BACKLOG
ENDED ENDED AT AT
----------- ----------- -------- --------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY
Product 28, 1997 29, 1996 28,1997 29, 1996
Transistor 31% 28% 14% 22%
Hybrids 37% 33% 63% 43%
Field Effect Transistors 16% 22% 7% 13%
Power MOSFETS 16% 17% 16% 22%
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100% 100% 100% 100%
The Company's backlog at February 28, 1997 and shipments for the year ended
February 28, 1997 reflect demand for the Company's products as at such date and
for such period. For more information see discussion on backlog. The variation
in the proportionate share of each product line reflects current demand and
changes emanating from the Congressional appropriations process and timing
associated with awards of defense contracts, as well as shifts in technology and
consolidation of defense prime contractors.
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The Company's semiconductor products can be classified into selected active and
passive electronic components. Active components are those which control and
direct the flow of electrical current by means of a control signal such as a
voltage or current. Passive components, on the other hand, include devices that
store or dissipate energy and are generally incapable of power gain (for
example, resistors, capacitors and inductors). The Company's active components
include bipolar transistors, integrated circuits and MOS transistors and the
Company's passive components consist of resistors.
It is customary to subdivide active components into those of a discrete nature
and those, which are non-discrete. Discrete devices contain one single
semiconductor element, as opposed to integrated circuits or hybrid circuits
which contain two or more elements, either active or passive, interconnected to
make up a selected complete electrical circuit. In the case of an integrated
circuit, a number of active and passive elements are incorporated onto a single
silicon chip. Hybrid circuit, on the other hand, is made up of a number of
individual components that are mounted onto a suitable surface material,
interconnected by various means and suitably encapsulated. Hybrid and integrated
circuits can either be analog or digital; presently, the Company manufactures
only analog components. The industry trend appears to be developing from analog
to digital circuitry in certain applications. Although no assurances may be
made, the Company believes that such industry trend will have only a limited
effect on the demand for the Company's custom power hybrids. The Company's
products can be either standard devices such as catalog type items (e.g.,
transistors and voltage regulators) or application-specific devices, also
referred to as custom or semi-custom products. The latter are designed and
manufactured to meet a customer's particular requirements.
Approximately 80% of the semiconductor components produced by the Company are
manufactured pursuant to approved Source Control Drawings from the United States
Government's prime contractors; the remainder are primarily JAN qualified
products. The Company's semiconductor products are used as components of
military, commercial and aerospace electronic equipment, such as ground and
airborne radar systems, power distribution, missiles, missile control systems
and spacecraft. The Company's products have been used on the space shuttle and
on spacecraft sent to the moon and recently on Galileo, which was sent to
Jupiter.
Approximately 80% of the Semiconductor Division's sales have historically been
attributable to contracts with customers whose products are sold to the United
States Government. The remaining 20% of sales are for non-military, scientific
and industrial applications. For the fiscal year ended February 28, 1997,
approximately 80% of the Semiconductor Division's sales have been of custom made
products, and the remaining 20% have been of standard or catalog products.
The following is a general description of the principal product lines
manufactured by the Semiconductor Division.
POWER TRANSISTORS:
Power transistors are high current and/or high voltage control devices commonly
used for active gain applications in electronic circuits. The Company
manufactures a large variety of power bipolar transistors for applications
requiring currents in the range of 0.1A to 150A or voltages in the range of 30V
to 1000V. The Company employs over 60 types of silicon chips to manufacture over
500 types of power bipolar transistors and is currently expanding this line in
response to market demand due to other companies (i.e., Motorola) leaving the
military market. The Company also manufactures power N-Channel and P-Channel
power MOS transistors and is currently expanding that line. The Company is
qualified to deliver products under MIL-PRF-19500.
HYBRIDS:
Hybrids are compact electronic circuits that contain a selection of passive and
active components mounted on printed substrates and encapsulated in appropriate
packages. The Company manufactures thick film hybrids, which generally contain
discrete semiconductor chips, integrated circuits, chip capacitors and thick
film or thin film resistors. Most of the hybrids are of the high power type, and
are custom manufactured for military and aerospace systems. Some of the
Company's hybrids include high power voltage regulators, power amplifiers, power
drivers, boosters and controllers.
Through February 28, 1997, the Company had expended approximately $ 2,000,000
toward a program to become certified and qualified under MIL-STD-1772 (now
MIL-PRF-38534), the standards promulgated by the Defense Electronic Supply
Center ("DESC"). These standards specify the uniformity and quality of hybrid
products purchased for United States military programs. The purpose of the
program is to standardize the documentation and testing for hybrid microcircuits
for use in United States military and aerospace applications. Attainment of
certification and/or qualification to MIL-STD-1772 (now MIL-PRF-38534)
requirements is important since it is a prerequisite for a
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manufacturer to be selected to supply hybrids for defense-related purposes.
MIL-STD-1772 (now MIL-PRF-38534) establishes definite criteria for manufacturing
construction techniques and materials used for hybrid microcircuits and assure
that these types of devices will be manufactured under conditions, which have
been demonstrated to be capable of continuously producing highly reliable
products. This program requires a manufacturer to demonstrate its products'
performance capabilities. Certification is a prerequisite of qualification. A
manufacturer receives certification once its Product Quality Assurance Program
Plan is reviewed and approved by DESC (Defense Electronics Supply Center). A
manufacturer receives qualification once it has demonstrated that it can build
and test a sample product in conformity with its certified Product Quality
Assurance Program Plan.
In addition, obtaining and maintaining military certifications and
qualifications is desirable because it enables a manufacturer to satisfy many of
the requirements for registration under the ISO 9000 International Quality
Program. The ISO 9000 Program is a series of quality Management and assurance
standards developed by a technical committee of the European Community
Commission working under the International Organization for Standardization.
Several European prime contractors have advised the Company that a prerequisite
to future sales by the Company to such contractors might be the key to the
Company's obtaining ISO 9000 registration. However, to date, the Company has not
encountered such a requirement. Based on the fact that 90% of the Company's
products are made to print in accordance with customer specifications and in
accordance with MIL-PRF-19500, MIL-PRF-38534 and MIL-PRF-883, which are stricter
requirements than ISO 9000, it is Management's opinion that the possibility that
such a requirement will bar the Company from performing or competing is highly
unlikely. Additionally, domestic customers including the United States
Department of Defense and certain leading private sector firms (e.g., DuPont, 3M
and AT&T) have also adopted ISO 9000 allowing their suppliers to comply with ISO
9000 as an alternative to military qualification. The Company's plan is to
initiate the necessary Program to obtain ISO 9000 qualification within the next
two years. It is anticipated, based on industry observed experience, that the
process might take up to two years. The Company will seek such certifications,
as Management believes that such certification might avail to it additional
business opportunities not currently available to it.
The Company achieved MIL-STD-1772 (now MIL-PRF-38534) certification in October
1990 and renewed in June 1993 and April 1995. In 1995, the Company received
written notification that it has received MIL-STD-1772 (now MIL-PRF-38534)
qualification. MIL-STD-1772 (now MIL-PRF-38534) qualification should continue to
improve the Company's business posture by increasing product marketability.
MIL-PRF-38534 replaced MIL-STD-1772. The Company is also qualified to deliver
products under MIL-PRF-19500.
FIELD EFFECT TRANSISTORS:
Field effect transistors are surface controlled devices where conduction of
electrical current is controlled by the electrical potential applied to a
capacitively coupled control element. The Company manufactures about 30
different types of junction and MOS field effect transistor chips. They are used
to produce over 350 different field effect transistor types. Most of the
Company's field effect transistors conform to standard Joint Electronic Device
Engineering Council designated transistors, commonly referred to as standard 2N
number types. The Company is currently expending its product offering. The
Company is qualified to deliver products under MIL-PRF-19500.
THIN FILM RESISTIVE PRODUCTS:
Thin film resistors are made of thin layers of metallic substances deposited
over the surface of a substrate to form a device that resists the flow of
electrical current. The Company also manufactures microwave coaxial rod
resistors and thin film chip resistors. Rod resistors are made primarily for
incorporation into products sold to Solitron/Vector Microwave Products, Inc. and
other microwave product manufacturers. Chip resistors are made for internal use
and for sale to others.
MANUFACTURING
The Company's engineer's design its transistors, diodes, field effect
transistors, resistors, hybrids and integrated circuits, as well as other
customized products, based upon requirements established by customers, with the
cooperation of the product and marketing personnel. The design of non-custom or
catalog products is based on specific industry standards.
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Each new design is first produced on a CAD/CAE computer system. The design
layout is then reduced to the desired microsize, and transferred to silicon
wafers in a series of steps which include photolithography, chemical or plasma
etching, oxidation, diffusion and metallization. The wafers then go through a
fabrication process. When the process is completed, each wafer contains a large
number of silicon chips, each chip being a single transistor device, single
diode or a single transistor. The wafers are tested using a computerized test
system prior to being separated into individual chips. The chips are then
assembled in standard or custom packages, incorporated in hybrids or sold as
chips to other companies. The chips are normally mounted inside a chosen package
using an eutectic soft solder or epoxy die attach technique, and then wire
bonded to the package pins using gold or aluminum wires. Many of the packages
are manufactured by the Company and, in most cases, the Company plates its
packages with gold, copper, nickel or other metals utilizing outside vendors to
perform the plating operation.
In the case of hybrids, design engineers formulate the circuit and layout
designs. Ceramic substrates are then printed with gold conductors to form the
interconnect pattern and with thick film resistive inks to form the resistors of
the designed circuit. Semiconductor chips, resistor chips and capacitor chips
are then mounted on the substrates and sequential wire bonding is used to
interconnect the various components to the printed substrate, as well as to
connect the circuit to the external package pins.The Company manufactures some
of the hybrid packages.
In addition to Company performed testing and inspection procedures, certain of
the Company's products are subject to source inspections required by customers
(including the United States Government). Designated inspectors are authorized
to perform a detailed on-premise inspection of each individual device prior to
encapsulation in a casing or before dispatch of the finished unit to ensure that
the quality and performance of the product meets the prescribed specifications.
The raw materials used in the manufacture of the Company's products are
generally readily available from multiple sources.
FINANCIAL INFORMATION ABOUT EXPORT SALES
Specific financial information with respect to the Company's export sales is
provided in Note 12 to the Consolidated Financial Statements.
MARKETING AND CUSTOMERS
The Company's products are sold throughout the United States and abroad
primarily through a network of manufactures representatives and distributors.
The Company is represented (i) in the United States by 4 representative
organizations which operate out of 9 different locations with 12 sales people
and 2 stocking distributor organizations which operate out of 40 locations with
300 sales people and (ii) in the international market by 4 representative
organizations in 4 countries with 15 sales people. Some of the international
groups serve as distributors as well as sales representatives. The Company also
directly employs several sales, marketing and application engineering personnel
to coordinate operations with the representatives and distributors and to handle
key accounts.
On February 28, 1997, the Company has had approximately 340 active customer
accounts. During the year ended February 28, 1997, Hughes accounted for
approximately 21% of net sales. No other company accounted for more than 10% of
net sales during the last fiscal year. Approximately 7 of the Company's
customers accounted for approximately 62.3% of the Company's sales during the
fiscal year ended February 28, 1997. It has been the Company's experience that a
large percentage of its sales have been attributable to a relatively small
number of customers in any particular period. The Company expects this type of
customer concentration to continue. The loss of any major customer without
offsetting orders from other sources would have a material adverse effect on the
business of the Company.
During the fiscal year ended February 28, 1997 and since that date, a
substantial portion of the Company's products were sold pursuant to contracts or
subcontracts with or to customers whose end products are sold to the United
States Government. Accordingly, the Company's sales have been and may continue
to be adversely impacted by reduced congressional appropriations and changes in
national defense policies and priorities. Notwithstanding such reduced
congressional appropriations and a significant decline in sales in recent years,
the Company had a 23% increase in bookings during the fiscal year ended February
28, 1997 as compared to the previous year. All of the Company's contracts with
the United States Government or its prime contractors contain provisions
permitting termination at any time at the convenience of the United States
Government or the prime contractor upon payment to the Company of costs incurred
plus a reasonable profit.
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In recognition of the changes in global geopolitical affairs and reduced United
States military spending, the Company is attempting to increase sales of its
products for non-military, scientific and industrial niche markets such as
medical electronics, machine tool controls, specialized telecommunications,
cellular telephone base stations and LEOS (Low Earth Orbit Satellites)
telecommunication networks, and other market segments in which purchasing
decisions are generally based primarily on product quality, long-term
reliability and performance, rather than on product price. The Company is also
attempting to offer additional products to the military markets that are
complementary to those currently sold by the Company to the military markets.
Although average sale prices are typically higher for products with military
applications than for products with non-military, scientific and industrial
applications, the Company hopes to minimize this differential by focusing on
these quality-sensitive niche markets where price sensitivity is very low. There
can be no assurance; however, that the Company will be successful in increasing
its sales to these market segments, which increase in sales could be critical to
the future success of the Company. To date, the Company has made only limited
inroads in penetrating such markets.
Sales to foreign customers, located mostly in Western Europe and Israel,
accounted for approximately 5% of the Company's net sales during the year ended
February 28, 1997 and 8% during the year ended February 29, 1996. This reduction
is a result of the decline in military spending in Western Europe and Israel.
All sales to foreign customers are conducted utilizing exclusively U.S. dollars.
The Company is considering a variety of actions to attempt to increase sales in
the overseas market, especially in the Far East.
BACKLOG
The Company's order backlog, which consists of semiconductor and hybrid related
open and pending orders scheduled for delivery primarily within 12 months, was
approximately $5,700,000 at February 28, 1997, compared to $4,300,000 as of
February 29, 1996. The entire backlog consisted of orders for electronic
components. The variation in backlog from fiscal year to fiscal year may be
attributable to a number of non-quantifiable factors, including fluctuations in
defense spending, demand and competition. The Company currently anticipates that
the majority of its entire open order backlog will be filled by February 28,
1998. See "Item 7. - Management's Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources."
Delivery times of new or non-standard products are effected by the availability
of raw material, scheduling factors, manufacturing considerations and customer
delivery requirements. The rate of booking new orders varies significantly from
month to month, mostly as a result of sharp fluctuations and delays in the
government budgeting and appropriation process. The Company has historically
experienced somewhat decreased levels of bookings during the summer months,
primarily as a result of such budgeting and appropriation activities. For these
reasons, and because of the possibility of customer changes in delivery
schedules or cancellations of orders, the Company's backlog as of any particular
date may not be indicative of actual sales for any succeeding period.
PATENTS AND LICENSES
The Company owns approximately 33 patents relating to the design and manufacture
of its products. While the Company considers that, in the aggregate, its patents
are important in the operation of its business, it believes that engineering
standards, manufacturing techniques and product reliability are more important
to the successful manufacture and sale of its products. However, an important
adjunct of the increased competition in the electronics industry has been a
growing emphasis on product and process patents and their exploitation, which
has resulted in increased activity intended to stimulate advantageous licensing
and cross-licensing agreements.
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COMPETITION
The electronic component industry, in general, is highly competitive and has
been characterized by price erosion, rapid technological changes and foreign
competition. The Company believes, however, that to the extent its business is
targeted at the military and aerospace markets, where there has been virtually
no foreign competition, it is subjected to less competition than manufacturers
of commercial electronic components. Additionally, because of the decline in
military orders, the number of competitors in this market has been stable,
affording the Company the opportunity to increase its market share. As the
Company attempts to shift its focus to the sale of products having non-military,
non-aerospace applications it may be subject to such price erosion and foreign
competition. None of the Company's direct competitors depend on the sale of an
identical component mix as their principal source of income. The Company is not
in direct competition with any other semiconductor manufacturer for an identical
mixture of products; however, one or more of the major manufacturers of
semiconductors manufactures some of the Company's products. A few such major
competitors, (e.g., Motorola), have elected to withdraw from the military market
altogether. The Company competes principally on the basis of product quality,
turn-around time and price. The Company believes that competition for sales of
products that will ultimately be sold to the United States Government has
intensified and will continue to intensify as United States defense spending
continues to decrease and the Department of Defense's pushes implementation of
its decision in the Summer of 1995 to purchase high-end commercial product in
lieu of Mil-Spec components. The Company believes that its primary competitive
advantage is its ability to produce high quality products as a result of its
years of experience, its sophisticated technologies and its experienced staff.
The Company believes that its ability to produce highly reliable custom hybrids
in a short period of time will give it a strategic advantage in attempting to
penetrate high-end commercial markets and in selling military products
complementary with those currently sold, as doing so would enable the Company to
produce products early in design and development cycles. One of the Company's
competitive disadvantages has been its history of delivery delays, due primarily
to industry-wide tight supply of silicon wafers, semiconductors-dies and
packages. For the year ended February 28, 1997, the Company's on-time delivery
record was 81% as compared with 80% for the year ending in February 29, 1996.
The Company believes that it will be able to improve its capability to respond
quickly to customer needs and deliver products on time, and that this will prove
to be a competitive advantage of the Company.
EMPLOYEES
At February 28, 1997, the Company had 105 employees (as compared to 100 at
February 29, 1996) of whom 73 are engaged in production activities, 6 in sales
and marketing, 5 in executive and administrative capacities and 21 in technical
and support activities.
The Company has never had a work stoppage, and none of its employees are
represented by a labor organization. The Company considers its employee
relations to be satisfactory.
SOURCES AND AVAILABILITY OF RAW MATERIAL
The Company purchases its raw materials from multiple suppliers and has a
minimum of two suppliers for all of its material requirements.
GOVERNMENT APPROVALS
The Company received Department of Defense's DESC (Defense Electronic Supply
Center) approval to supply its product in accordance with -MIL-PRF-19500, -
MIL-SPD- 883 and MIL-PRF--38534 (formerly MIL-SPD-1772)
RESEARCH AND DEVELOPMENT
During recent years, the Company has not spent any funds on research and
development.
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EFFECT OF GOVERNMENT REGULATION
As a result of May 1995 change in DOD policy, the Company can now sub-contract
wafer fabrication, die assembly and testing to other approved and qualified
vendors. This change may allow the Company to reduce its manufacturing cost by
transferring labor intensive operations to lower labor cost facilities, most
likely, off-shore. The Company manufactures some of its components off shore and
management is attempting to secure the services of additional
sources/subcontractors. However, no assurance can be given that these efforts
will be successful.
SEASONALITY
The Company's bookings of new orders and sales are largely dependent on
congressional budgeting and appropriation activities and the cycles associated
therewith. The Company has historically experienced somewhat decreased levels of
bookings during the summer months, primarily as a result of such budgeting and
appropriation activities.
ENVIRONMENTAL COMPLIANCE
During fiscal year ended February 28, 1995, the Company's environmental legal
counsel determined that the Environmental Protection Agency (the "EPA") was
reassessing all prior Comprehensive Environmental Response, Compensation and
Liability Information System sites for National Priority Ranking using the newly
adopted ranking formula. Counsel further determined that the Company's
facilities at Riviera Beach and Port Salerno were the subject of such
reassessment. After conducting a series of meetings with the State Department of
Environmental Protection (the "DEP") and with Region IV EPA officials, the DEP
requested that the Riviera Beach and Port Salerno sites be taken out of the
reevaluation process and, pursuant to both that request and the Company's
request, Region IV EPA, according to the responsible DEP official, took both
sites out of the reevaluation process and deferred informally further action
pending the Company's complying with the requirements of the Consent Final
Judgment that it had entered with the Florida Department of Environmental
Protection in accordance with its Plan of Reorganization.
The Company's former facility in Jupiter, Florida (which was sold in 1982) has
been the subject of a preliminary assessment by the EPA during calendar year
1995. The EPA requested site access from the present owner. The Company's
environmental legal counsel has no information concerning this facility nor has
the Company received a request for information concerning its activities there.
The Company's legal environmental counsel cannot assess at this time what the
impact of the EPA study of the site would be, if any, on the Company's liability
nor when the EPA would complete is assessment. For a further description of the
Company's environmental issues, refer to "Item 1 - Business - Bankruptcy
Proceedings" and to Note 13 of the accompanying Consolidated Financial
Statements.
During the fiscal year ended February 28, 1997, the Company has spent
approximately $11,000 for compliance with environmental laws (federal, state and
local). As part of this effort, the Company retained the services of an
environmental consultant who assisted in verifying that the Company operates in
compliance with all pertinent environmental laws and regulations.
Following the Effective Date of the Plan of Reorganization and consistent with
its agreement with the State of Florida Department of Environmental Protection,
the Company has performed environmental assessments to confirm that all soil
contamination has been remediated at the Old Riviera Beach Facility and the Port
Salerno Facility in accordance with the terms of the Consent Final Judgment,
entered in October 1993 (the "Consent Final Judgment"). Certain groundwater
remediation remains to be performed at both properties. Pursuant to the
provisions of the Consent Final Judgment, and the Plan of Reorganization, the
remediation would be performed from any proceeds of the sale or lease of the two
properties or from further payments required of the Company as set forth herein.
The properties can be sold and the prospective purchaser can obtain first
purchaser protection from further enforcement provided the sale price of the
property equals or exceeds the lesser of (i) 75% of its then appraised value or
(ii) the estimated cost of its remediation. In connection with facilitating the
remediation of the properties, the Company is obligated to escrow the following
amounts on a monthly basis beginning on the 25-month anniversary of the date of
the Final Judgment: (i) year 1-$5,000 per month; (ii) year 2 - $7,500 per month;
(iii) year 3 - $10,000 per month; and (iv) $10,000 per month thereafter until
remediation is completed. Due to cash flow problems, the Company is negotiating
with DEP to modify the payment schedule. While these negotiations are underway,
the Company is depositing $1,000 per month into the escrow account. As of
February 28, 1997, of the $97,500 due the Company has deposited $17,000 into
these escrow accounts. Certain insurance proceeds that were placed into the
escrow pursuant to the Consent Final Judgment and the Plan of Reorganization
have been utilized to confirm that soils at the Old Riviera Beach and the Port
Salerno facilities, do not require further remediation. DEP has acknowledged
that no further soil remediation is required at either site. In
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the event there are excess proceeds from the sale of either property above the
cost of its remediation, the excess funds will be utilized to remediate the
other property. Further, the Company has negotiated an amendment to the Consent
Final Judgment regarding the Riviera Beach site that would require completion of
remediation of the Old Riviera Beach site even if the sale of that site did not
result in sufficient proceeds to complete that remediation. See "Item 2. -
Properties" for a description of these facilities. The Company's financial
statement reflects liabilities of $1,057,000 relating to the foregoing
assessment and remediation obligations. Although the Company's environmental
consultants have advised the Company that they believe that this is the best
estimate of such liability, there can be no assurance that the actual cost of
remediation will not exceed such amount. In the event that the Company defaults
under the Consent Final Judgment, the DEP may assert a natural resource claim
against the Company, the amount of which (if any) would be determined by a court
of competent jurisdiction. For a more definitive description of environmental
matters pertaining to the Old Riviera Beach Facility and the Port Salerno
Facility, please refer to the Consent Final Judgment, as amended.
The Company's environmental consultants have estimated the costs of remediation
to be approximately $727,000 for the Port Salerno property and $342,000 for the
Old Riviera Beach property. Approximately $1,057,000 has been accrued in the
balance sheet as of February 28, 1997. The Company recorded these liabilities as
$183,000 short-term liabilities and $874,000 long-term liabilities.
Pursuant to the Plan of Reorganization, the Company paid $200,000 to extend the
large main public water line to the neighborhood around its Port Salerno
Facility and to extend smaller individual distribution lines to affected
properties with private wells. In the event that other private wells are
impacted in the future in excess of regulatory levels, the Company may be
obligated to extend small individual distribution lines to serve the affected
properties. However, retesting of private wells by the Martin County Health
Department during fiscal year 1995 did not reveal any additional properties to
be so impacted and the State Department of Environmental Protection has not
required further properties to be provided with public water supply. There is a
potential that such extension will be required in the future, but the State
Department of Environmental Protection has acknowledged that source removal from
soils and pond sediments on the site has been completed. Since the facility has
not been in use since 1988, the Company believes the likelihood of additional
extensions to be minimal and the costs of any such extensions if required in the
future to also be minimal.
During late 1996 and early 1997, the Company negotiated with prospective
purchasers of both sites to assume full responsibility for remediation of the
sites and the Company successfully consummated contracts to purchase, subject to
due diligence and closing conditions. In early 1997, EPA requested site access
to both properties for purposes of performing testing to further evaluate the
sites for National Priority List (NPL) testing and expressed its preliminary
view that both sites would qualify under the ranking formula. After a meeting
with DEP and EPA on March 21, 1997, DEP requested that two prospective
purchasers of the properties be afforded an opportunity to complete their due
diligence, obtain site data and assume responsibility for site remediation under
a state lead cleanup. EPA agreed to postpone its further processing of the sites
for ninety days (90) and determine whether DEP was in position to accept the
purchasers and their financial assurances that they would perform. DEP is
currently negotiating with the purchasers to assume full responsibility to
remediate and that the Company will be relieved of all liability upon the
completion thereof. The new Consent Agreements would relieve the Company of all
obligations under the Consent Final Judgment. Both purchasers have inspection
periods that have not yet expired and the Company will not know whether these
transactions will close until they do expire in the next several months. It
appears that EPA and DEP are cooperating and DEP, on behalf of the Governor,
must concur in EPA's resumption of processing for National Priority List (NPL)
listing. For further discussion of the Company's alternatives if the Purchasers
do not close on these purchases, see "Properties Section."
BANKRUPTCY PROCEEDINGS
On January 24, 1992 (the "Petition Date"), the Company and its wholly-owned
subsidiary, Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.),
a Delaware corporation, filed voluntary petitions seeking reorganization under
Chapter 11 ("Chapter 11") of the United States Bankruptcy Code, as amended (the
"Bankruptcy Code"), in the United States Bankruptcy Court for the Southern
District of Florida (the "Bankruptcy Court"). These bankruptcy estates were
subsequently consolidated by the Bankruptcy Court. On August 20, 1993, the
Bankruptcy Court entered an Order (the "Order of Confirmation") confirming the
Company's Fourth Amended Plan of Reorganization, as modified by the Company's
First Modification of Fourth Amended Plan of Reorganization (the "Plan of
Reorganization"). The Plan became effective on August 30, 1993 (the "Effective
Date"). On July 12, 1996, the Bankruptcy Court officially closed the case.
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Additionally, the following actions or events have taken or will take place
pursuant to the Plan of Reorganization:
(a) On February 28, 1993, pursuant to a Purchase Agreement, dated October
5, 1992, as amended (the "Vector Purchase Agreement"), the Company transferred
to Vector Trading and Holding Corporation ("Vector") (the successor in interest
to the Company's former primary lender, First Union National Bank ("First
Union")) substantially all of the assets, other than real estate, comprising the
Company's Microwave Division and certain related liabilities. Pursuant to the
terms of the Vector Purchase Agreement: (i) Vector subleases approximately 30%
of the Company's facilities in West Palm Beach, Florida, for a period ending
December 31, 2001 at an annual rate that started at approximately $50,000 during
the first year and increases to approximately $150,000 in the last four years,
with aggregate remaining payments of approximately $712,000 (the "Sublease");
(ii) the Company assigned to Vector insurance proceeds of approximately $5.4
million from National Union Fire Insurance Company stemming from a 1991 fire in
the Company's hybrid department; (iii) the Company and Vector entered into
mutual non-competition agreements for a period of five years, pursuant to which
neither will compete in the United States with respect to the types of products
produced by the other as of the date of the Vector Purchase Agreement; (iv) the
Company entered into a Shared Services and Equipment Agreement (the "Shared
Services Agreement") with Vector, pursuant to which it is estimated that Vector
will pay Solitron approximately $55,000 per year for eight years in exchange
for, among other things, (a) the Company's allowing Vector to use certain of the
Company's equipment, (b) the Company's providing to Vector certain services and
(c) Vector's reimbursing or paying the Company (in pro rata quarterly
installments through approximately the end of 1998) an aggregate of
approximately $210,000 in personal property taxes paid by the Company on the
assets transferred to Vector. As of February 1997, Vector had paid approximately
$82,000 of these taxes. As of February 28, 1997, Vector has been current with
its financial obligations.
(b) The Company has or will issue to certain pre-petition creditors that
number of shares of Solitron's common stock, par value $.01 per share (the
"Common Stock"), equal to 65% (approximately 1,424,504 shares) of the issued and
outstanding shares after all issuances contemplated by the Plan of
Reorganization (other than the shares issuable pursuant to the exercise of stock
options granted to Shevach Saraf, the Chairman of the Board, Chief Executive
Officer, President and Treasurer of the Company, as described below). Of this
65%, 40% (approximately 876,618 shares) will be issued to holders of unsecured
claims (pro rata) and 25% (approximately 547,886 shares) have been or will be
issued to Vector. As of April 24, 1996, 771,434 of the 876,618 that are to be
issued have been issued to holders of unsecured claims and 547,886 shares have
been issued to Vector participants and their successors (See Management
Discussion and Analysis). On December 15, 1995, the Company and Argo Partners,
Inc., an unsecured creditor reached an agreement under which Solitron Devices,
Inc. acquired Argo Partners' unsecured debt of $694,834 (which was carried as an
obligation of approximately $140,037) for $40,000 as complete settlement. Prior
to the acquisition, Argo Partners received payment of approximately $3,160 from
the Company as part of several distributions to unsecured creditors. Thus,
Solitron Devices, Inc. recognized in December 1995 an extraordinary gain of
approximately $96,877 due to the debt being carried on the books at a discounted
amount. Now that the claim of the State of California as an unsecured creditor
has been quantified, all shares issuable to the State of California as an
unsecured creditor were issued to the State of California in April 1996. The
common stock issued to the Vector participants and holders of unsecured claims
must be voted by them in accordance with the recommendation of the Company's
Board of Directors and, in general, the holders of such Common Stock have agreed
pursuant to the Plan of Reorganization to take no action hostile to the Company
such as to commence or assist in a proxy contest or tender offer. However, no
limitation on the transferability of this Common Stock was imposed pursuant to
the terms of the Fourth Amended Disclosure Statement or the Plan of
Reorganization. Solitron's pre-petition stockholders retained their issued and
outstanding shares of Common Stock which, after the issuance of the remaining
shares reserved for issuance under the Plan of Reorganization (other than those
shares issuable upon the exercise by Mr. Saraf of certain options), represent
20% (approximately 438,310 shares) of the issued and outstanding Common Stock.
Of the remaining 15%, 10% (approximately 219,155 shares) have already been
issued to Mr. Saraf, and 5% (approximately 109,577 shares) are reserved for
future issuance pursuant to employee stock incentive plans or programs.
Additionally, Mr. Saraf has been issued options to purchase an additional 8% of
the issued and outstanding Common Stock after giving effect to the foregoing
issuance. The Company intends to issue the remainder of the Common Stock
issuable pursuant to the Plan of Reorganization to unsecured creditors at such
time as all of its obligations to Ellco have been satisfied.
(c) Pursuant to the Plan of Reorganization, beginning in approximately May
1995, the Company was required to begin making quarterly payments to holders of
unsecured claims until they receive 35% of their claims. However, due to
negotiations between the parties, the unsecured creditors agreed to a deferment
of this payment (for more discussion see Management's Discussion and Analysis).
To date, these negotiations have not been completed and while they are in
progress, the Company made nine of its proposed distributions to the unsecured
creditors who have accepted the payments. These payments to unsecured creditors
covered the period March 1, 1995 through
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February 28, 1997 in the aggregate amount of approximately $65,376 of the
approximately $558,747 required by the Plan of Reorganization. Following the
settlement with the State of California of the amount of its unsecured claim (as
described below in (j) and the Company's acquisition of the unsecured claim of
Argo Partners, Inc. (as described below in (o) it is presently estimated that
there are an aggregate of approximately $7,095,252 in unsecured claims and,
accordingly, that the Company is required to pay approximately $2,483,338 (i.e.,
35% of $7,095,252) to holders of allowed unsecured claims in quarterly
installments of approximately $62,083. The Company has proposed to its unsecured
creditors that it make quarterly payments of $9,000. The Company carries its
debt to its unsecured creditors as $140,000 in short-term debt and $1,247,000 in
long-term debt. The aggregate and monthly payments to unsecured creditors
increases and decreases in proportion to $10,000 per month per $3.5 million in
allowed claims, subject to a maximum quarterly payment of $105,000. These
payments and the aggregate amounts thereof would also increase proportionately
in the event of default by the Company in its obligations to Ellco Leasing
Corporation ("Ellco"), as described in (e) below.
(d) In March 1995, the Company entered into negotiations with its unsecured
creditors, the IRS, Palm Beach County, Martin County and DEP in order to modify
the schedule of payments as prescribed by its Plan of Reorganization. These
negotiations continue. There can be no assurance that these negotiations will be
successful.
(e) The Company is required to pay to Ellco $255,000 plus interest at six
percent per annum in monthly payments over a four-year period beginning on the
Effective Date of the Plan of Reorganization. Approximately $226,000 plus
interest of such $255,000 had been paid as of April 30, 1997. Ellco has been
granted a security interest in certain of the Company's equipment to secure such
obligations. Ellco is required to release its liens on certain of the Company's
assets as the above-referenced payments are made. In the event of any default on
any of such payments which remains uncured after seven days' notice, Ellco would
have a claim as an unsecured creditor in the amount of the deficiency. This
deficiency claim might amount to 35% of the original amount due Ellco less
payments made to the date of the default and the Company would make monthly
payments to Ellco until an aggregate of 35% of the allowed claim was paid to
Ellco. Additionally, from the time of default, Ellco would be entitled to
receive a pro rata portion of the Profit Participation (as defined in (g) below)
payable to unsecured creditors. However, no retroactive payments would be made
to Ellco. In the event of such default, however, Ellco would also receive a pro
rata share of the Common Stock issuable to unsecured creditors. Approximately
105,000 shares of the Common Stock are held by the Company in trust for Ellco.
If no such default occurs, such Common Stock would be issued pro rata to the
unsecured creditors. The Company is current with Ellco and expects to remain
current.
(f) The Company received releases of substantially all liens on its assets
and properties existing as of the Effective Date. However, in accordance with
the Plan of Reorganization, Ellco, Southeast Bank Leasing Company, Greyhound
Financial Corporation and Met Life Capital Corporation WERE granted liens on
certain of the Company's equipment and the holders of pre-petition unsecured
claims were granted a lien on all of the Company's equipment to secure the
payments described in (c) above and in (g) below. As of May 31, 1995, the
Company has paid off all its obligations to Southeast Bank Leasing Company,
Greyhound Financial Corporation and MetLife Capital Corporation and the liens
held by those entities have been released.
(g) Beginning on the date the Company's net after tax income exceeds
$500,000, the Company will be obligated to pay (on an annual basis) each of the
holders of unsecured claims (pro rata) and Vector participants and their
successors, 5% of its net after tax income until the tenth anniversary of the
Effective Date, up to a maximum aggregate of $1,500,000 of such payments to the
holders of unsecured claims (pro rata) and up to a maximum aggregate of
$1,500,000 of such payments to Vector participants and their successors (the
"Profit Participation").
(h) The Company transferred to First Union the real property known as the
New Riviera Beach Facility and granted First Union a non-exclusive perpetual
easement for the use of approximately 125 parking spaces on the adjacent real
property owned by the Company known as the Old Riviera Beach Facility. First
Union has claimed that the Company is obligated to pay approximately $110,000 in
1993 real property taxes with respect to the New Riviera Beach Facility that
accrued prior to such transfer as well as the cost of removing personal property
from and cleaning the New Riviera Beach Facility. The Court denied First Union's
motion during fiscal year 1995. See "Item 2 - Properties".
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(i) Following the Effective Date and consistent with its agreement with the
State of Florida Department of Environmental Protection (the "DEP"), the Company
has begun to perform environmental assessments and is required to remediate the
Old Riviera Beach Facility and the Port Salerno Facility in accordance with the
terms of the Consent Final Judgment, entered in October, 1993 (the "Consent
Final Judgment"). The foregoing stems from the environmental contamination of
these properties. The monies to be utilized to fund these assessments and
remediations will be made available from the proceeds of the sale or lease of
the properties, to the extent that the Company is successful in its efforts to
sell or lease such properties. Pursuant to the Plan of Reorganization, unless
approved by the DEP, neither the Old Riviera Beach Facility nor the Port Salerno
Facility will be sold unless the price for such property equals or exceeds the
lesser of (i) 75% of its then appraised value or (ii) the estimated cost of its
remediation. In connection with facilitating the remediation of the properties,
the Company will also, to the extent the proceeds from the sale or lease of
these properties are not sufficient to pay for the remediation, be required to
escrow the following amounts on a monthly basis beginning on the 25-month
anniversary of the Effective Date: (i) year 1 - $5,000 per month; (ii) year 2-
$7,500 per month; (iii) year 3 - $10,000 per month; and (iv) $10,000 per month
thereafter until remediation is completed. The Company is negotiating with DEP
to modify this payment schedule. The Company is making payments of $1,000 per
month and hopes to remain on this payment schedule until the properties are
sold. As of February 28, 1997, of the $97,500 due according to the Plan, the
Company deposited $17,000 in the required escrow accounts. Additionally, $42,000
in proceeds from an insurance settlement was released from escrow and has been
utilized to investigate the extent to which the soil at the Old Riviera Beach
and Port Salerno facilities requires remediation. Following testing, final
determination has been made that the soil at the Old Riviera Beach and Port
Salerno facilities needs no further remediation. Any excess of such sale and
lease proceeds over the cost of assessment and remediation will be returned to
the Company following completion of the cleanup of both facilities. See "Item 2.
- - Properties" for a description of these facilities. The Company's financial
statements reflect liabilities of $1,057,000 relating to the foregoing
assessment and remediation obligations. Although the Company's environmental
consultants have advised the Company that they believe that this is the best
estimate of such liabilities, there can be no assurance that the actual cost of
remediation will not exceed such amount. In the event that the Company defaults
under the Consent Final Judgment, the DEP may assert a natural resource claim
against the Company, the amount of which (if any) would be determined by a court
of competent jurisdiction. For a more definitive description of environmental
matters pertaining to the Old Riviera Beach facility and the Port Salerno
facility, please refer to the Consent Final Judgment.
(j) The Company has paid all of the allowed administrative claims and
allowed wage claims since the Effective Date. The Company is required to pay
allowed tax claims (to the IRS, Palm Beach County, Florida and Martin County,
Florida), estimated at approximately $1,810,000 (which amount is accrued in the
consolidated financial statements and this amount includes interest). The
Company was required to begin making quarterly payments of allowed tax claims to
Palm Beach County according to the following schedule: $37,000 per quarter for
two years beginning in the second quarter of 1994; and approximately $82,000 per
quarter for the twelve quarters thereafter. The Company is negotiating with Palm
Beach County on restructuring the stream of payments. The Company entered into
an agreement to make quarterly payments of allowed tax claims to Martin County
of approximately $4,000 for a period of approximately four years beginning in
approximately October 1994. The Company is negotiating with Martin County on
restructuring the payment schedule. During January 1995, the amount of allowed
tax claims payable to the IRS was determined to be $401,000. At February 28,
1997, such amounts, including accrued interest, total $440,000. The Company was
expected to make quarterly payments of allowed tax claims to the IRS of no more
than approximately $21,000 per quarter beginning in April 1995 and ending in
approximately January 2001.
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The Company is negotiating with the IRS to restructure these payments. The State
of California Franchise Tax Board claim has now been quantified by the Court on
November 30, 1995 to be $680,179.35 and it is treated as an unsecured claim. The
Company is not making payments to the IRS, Palm Beach County and Martin County.
It is anticipated that the Martin County tax claim will be paid in full with the
sale of the Port Salerno property. It is anticipated that a large part of the
Palm Beach County Tax claim will be paid with the sale of the Riviera Beach
property. The Company has attempted to renegotiate the payment schedule with the
IRS and is awaiting their reply. The following table indicates the approximate
cumulative status of amounts due under Court Plans as of February 28, 1997:
DUE TO DATE PAID
----------- -----------
Martin County* $ 48,000 $ 7,957
Palm Beach County* $ 542,000 $ 225,605
IRS $ 168,000 $ -
(k) The Company has entered into a contract with Stateside Capital Group,
LLC, to sell the Riviera property that requires the Purchaser to assume full
liability for the cleanup, to enter into a Consent Agreement with DEP reflecting
such assumption of responsibility and to post a cleanup fund in escrow to assure
performance. The Purchaser is now in its inspection period during which it will
determine whether to close the transaction. The Purchaser is obligated under the
contract to pay outstanding real estate taxes, and to pay all of Company's costs
of closing including its brokerage fee and its attorney's fees. The Company will
retain a contingent liability until the cleanup is completed.
(l) The Company has entered into a contract with Brownfield Recovery Corp.
to purchase the Port Salerno property, to pay the outstanding real estate taxes
and all of the Company's closing costs including brokerage and attorney's fees,
and assume full responsibility for the required cleanup, including posting of a
one million dollar letter of credit to the Company to guarantee the Purchaser's
performance of the cleanup. The Company will retain a contingent liability until
the prescribed cleanup is completed.
(m) Solitron rejected substantially all of its pre-petition executory
contracts (including its outstanding stock option agreements except those with
Shevach Saraf, Solitron's Chairman of the Board, Chief Executive Officer,
President and Treasurer), except for certain contracts with distributors, sales
representatives, lessors of equipment, customers, suppliers and the lessor of
its West Palm Beach, Florida facility, and the Sublease with Vector, the Shared
Services Agreement with Vector and the Employment Agreement with Mr. Saraf.
(n) All of the members of Solitron's Board of Directors, other than Shevach
Saraf, resigned as of January 20, 1996. On August 26, 1996, the Board of
Directors of the Company appointed Messrs. Jacob A. Davis, Ph.D. and Joseph
Schlig to fill existing vacancies on the Board of Directors.
* For the years since Bankruptcy, additional taxes have become delinquent with
Martin and Palm Beach Counties in the following amounts respectively - $26,807
and $163,711.
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ITEM 2. PROPERTIES
During fiscal 1993, the Company consolidated all of its manufacturing operations
and its corporate headquarters to an existing facility (approximately 70,000
square feet (of which approximately one-third is being subleased to Vector)) in
West Palm Beach, Florida. The Company has leased the facility for a term ending
in 2001. The Company believes that its facilities in West Palm Beach, Florida
will be suitable and adequate to meet its requirements for the foreseeable
future. Pursuant to the Plan of Reorganization, the Company transferred to First
Union its 150,000 square foot facility in Riviera Beach, Florida that, prior to
August 30, 1992, housed the Company's executive offices and 137,000 square feet
of manufacturing space occupied by the Semiconductor Division (i.e., the New
Riviera Beach Facility). Pursuant to the terms of the Plan of Reorganization,
the Company granted First Union a non-exclusive perpetual easement on
approximately 125 parking spaces at the Old Riviera Beach Facility. First Union
has claimed that the Company is required to pay an aggregate of approximately
$110,000 in 1993 real property taxes with respect to the New Riviera Beach
Facility that arose prior to transfer. First Union filed a motion with the
Bankruptcy Court with respect to this issue. Such motion has been denied during
fiscal year 1995.
The Company owns a 78,000 square foot facility (the "Old Riviera Beach
Facility") within the same complex as the New Riviera Beach. The Company's Old
Riviera Beach facility is currently vacant. The Old Riviera Beach facility is
now under contract and the Purchaser is performing due diligence. The Purchaser
does not seek the first purchaser protection provided in the Consent Final
Judgment and the Company and the Purchaser have requested that in lieu of sale
proceeds, the DEP accepts the financial security proposed to be placed in escrow
under dual control of DEP and the Purchaser for the purpose of performing the
required remediation. The Purchaser would assume full liability to remediate the
property and to pay the Company's costs of closing the sale, including brokers'
and attorneys' fees, and the Company will be relieved of all environmental
liability when the remediation is completed.
The Company would be contingently liable if the Purchaser failed to complete
remidiation but would be able to utilize any unused escrow funds to perform the
remediation. Further, the remediation contractor is required to post a
performance bond and to perform under a fixed price contract, the amount of
which will have escrowed. DEP and EPA have agreed to defer processing of this
site for possible National Priority List (NPL) listing pending satisfactory
completion of the sale and negotiation of a Consent Agreement among the Company,
the Purchaser and DEP. If this sale does not proceed, the Company intends to
request the predecessor owner and operator of the property either to assume
responsibility for the remediation or to loan the Company the funds to perform
the cleanup secured by a mortgage on the property. The predecessor owner and
operator is financially able to perform and has advised the Company that it
wishes to take such steps as will prevent EPA from proceeding to place the
property on the National Priority List (NPL) and assuming jurisdiction over the
cleanup.
If all alternatives fail, the Riviera Beach site will be listed by EPA on the
National Priority List (NPL) and EPA will perform the cleanup and pursue the
Company and the predecessor owner and operator to recover all of its costs. The
Company would be able to sell the remediated property and use the proceeds to
satisfy its share of EPA's claim or would attempt to negotiate a settlement
based upon its limited ability to pay. It is uncertain whether any of these
alternatives will be successful but new test data indicate that the potential
cleanup costs will be significantly less due to the large reduction in the
levels of the groundwater contamination. The Company believes that the site is
not likely ever to be placed on the National Priority List (NPL).
The Company also owns the Port Salerno Facility, which consists of a 42,000
square foot building and 23 acres of undeveloped land located in Port Salerno,
Florida. The Port Salerno Facility is currently vacant and is under contract for
sale to Brownfield Recovery Corp. that specializes in remediating contaminated
properties through an affiliated remediation firm. The Purchaser and the Company
are requesting DEP to enter into a new Consent Agreement under which the
Purchaser would post a one million-dollar Letter of Credit to ensure performance
of the required remediation. The Company would remain contingently liable until
the Purchaser completed the remediation but if the Purchaser failed to so
complete, then Solitron would be authorized to use the unused portion of the
Letter of Credit to perform the remaining remediation. Solitron would not retain
a security interest in the property but would be able to sue to recover its
clean up costs and foreclose on the property to satisfy its judgment.
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In the event the Purchaser does not satisfy DEP's requirements or close the
purchase, then it is likely that this site will be placed on the National
Priority List (NPL) and remediated by EPA. EPA will then pursue the Company for
its costs. Following clean up by EPA, the Company will have a remediated
property to sell and use the proceeds from such sale to settle the EPA cost
claim. Whether the Company could settle based on the value of the property is
problematic.
Once the facilities are sold, the proceeds of the sale will be used as follows:
(1) pay for all outstanding real estate taxes; (2) real estate commission; (3)
legal fees; (4) all other costs associated with the sale, i.e., stamps, title
insurance, etc. The buyer will assume the Company's responsibility for the
cleanup and will provide the Company with a Letter of Credit to assure
completion of the cleanup or all remaining funds will be deposited in the
Riviera Beach or Port Salerno environmental escrow account. Should the cost of
cleanup exceed the escrowed amount, the Company will be required to pay any
additional funds in accordance with the Consent Final Judgment (see Consent
Final Judgment, as amended, included as an exhibit hereto).
The Company's payment in 1993 of $200,000 to extend the large main public water
line to the Port Salerno Facility neighborhood and to extend smaller individual
distribution lines to affected properties with private wells was the principal
cost for water service to the area. In the event that other private wells are
impacted in the future in excess of regulatory levels, the Company might be
obligated to extend small, individual distribution lines to serve the affected
properties. However, retesting of private wells by the Martin County Health
Department during fiscal year 1995 did not reveal additional wells to be so
impacted and the State Department of Environmental Protection has not required
further properties to be provided with public water supply. There is the
potential for the required extension in the future but the State Department of
Environmental Protection has acknowledged that source removal from soils and
pond sediments has been completed. As the facility has not been in use since
1988, the Company believes the likelihood of additional extensions to be minimal
and the costs of any such extensions if required in the future to also be
minimal.
ITEM 3. LEGAL PROCEEDINGS
Other than the Bankruptcy Proceedings (as described in "Item 1. - Business") and
the following matters, the Company is not aware of any other significant legal
proceedings to which it is a party.
INTERNAL REVENUE SERVICE TAX CLAIM
The Internal Revenue Service ("IRS") audited the Company's income tax returns
for the years 1980-1989. The Company appealed the IRS' original audit results.
During January 1995, the tax claim was determined to be $401,000, which is
included in the Company's financial statement as an accrual for the entire
amount plus interest. At February 28, 1997, such amounts including accrued
interest, total $440,000. The IRS' tax claim is subject to payment within six
years from January 1995. The Company is negotiating with the IRS to reschedule
this stream of payments.
STATE OF CALIFORNIA TAX CLAIM
On November 23, 1992, the State of California filed a claim asserting that the
Company owes the State of California approximately $900,000 for income taxes for
years prior to 1982. On November 30, 1995, this claim was settled for
approximately $680,000. As required by the Plan of Reorganization, this claim is
being treated as an unsecured claim. Accordingly, the liability representing 35%
of these claims was adjusted by approximately $220,000. In accordance with the
Plan of Reorganization, approximately 66,854 shares of stock have been issued to
the State of California during April 1996.
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ENVIRONMENTAL CLAIM REGARDING PORT SALERNO
The Company received a claim by an estate owning property northwest and across
Cove Road from the Port Salerno property. The estate has asserted that the
mailing address to which the bankruptcy notice was sent was in error. The estate
has been advised that public water has been made available to the property and
that the Company is prepared to settle for the allowance of a general unsecured
claim in the amount of $10,000. This offer was rejected. The claim is unresolved
and is currently dormant.
TEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS
Since March, 1995, the Company's Common Stock has been traded on NASDAQ's
Electronic Bulletin Board (over the counter. The Company's Common Stock was
traded on the New York Stock Exchange until October 13, 1993, at which time it
began trading on the NASDAQ Small Cap Market where it was traded until March
1995.
The following table sets forth for the periods indicated, high and low bid
information of the Common Stock. In September, 1993, the Bankruptcy Court
authorized a 1-for-10 reverse split of the Company's Common Stock, pursuant to
which each 10 shares of Common Stock were automatically converted into one share
of Common Stock, with cash paid in lieu of the issuance of fractional shares.
This reverse stock split became effective at the close of business on October
12, 1993, the record date for such reverse stock split. This reverse stock split
has been retroactively reflected herein. The prices set forth below reflect
inter-dealer prices, without retail markup, markdown or commission and may no
represent actual transactions.
FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 28, 1997 FEBRUARY 29, 1996
----------------- -----------------
HIGH LOW HIGH LOW
------- ------- ------ --------
First $0.3125 $0.1562 $0.625 $0.50
Second $0.50 $0.125 $0.75 $0.3125
Third $0.375 $0.125 $0.75 $0.3125
Fourth $0.420 $0.125 $0.50 $0.31
During the period beginning on March 1, 1997 and ending on April 30, 1997, the
high and low sales prices of the Common Stock were 0.3125 and 0.1562,
respectively.
As of February 28, 1997 and February 29, 1996, there were approximately 4,266
and 4,371 holders of record of the Company's Common Stock, respectively. On
February 28, 1997, the last sale price of the Common Stock as reported on the
Electronic Bulletin Board was $0.313 per share.
During the four years prior to the Effective Date, the Company was restricted by
its loan agreements from declaring dividends, and, accordingly, no dividends
were paid during that period. Although these restrictions no longer exist, the
Company does not contemplate declaring dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
In January, 1992, as a result of losses and liquidity deficiencies, the Company
and its wholly-owned subsidiary, Solitron Specialty Products, Inc. (f/k/a
Solitron Microwave, Inc.), filed voluntary petitions for relief under Chapter 11
of the Bankruptcy Code. On August 20, 1993, the Bankruptcy Court entered an
Order of Confirmation confirming the Company's Plan of Reorganization and on
August 30, 1993, the Plan of Reorganization became effective and the Company
emerged from bankruptcy. On July 12, 1996, the Bankruptcy Court officially
closed the case.
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<PAGE>
The following table is included solely for use in comparative analysis of income
(loss) before extraordinary items to complement management's discussion and
analysis.
(DOLLARS IN THOUSANDS)
YEAR ENDED FEBRUARY 29/28 28/29
-------------------------------
1997 1996
------- -------
Net Sales $ 7,159 $ 6,731
Cost of sales 5,581 5,558
------- -------
Gross profit 1,578 1,173
Selling, general and administrative
expenses 1,110 1,159
------- -------
Operating (loss) income 468 14
Chapter 11 administrative expenses and
fresh start adjustments (4) (2)
Gain on disposal of assets 7 14
Interest expense (145) (121)
Interest expense on unsecured creditors
claims (162) (174)
Write down of non-operating facilities
and related expenses (43) (21)
Interest income 17 24
Other, net 1 (3)
------- -------
(Loss) income before extraordinary items 138 (269)
------- -------
Extraordinary item -0- 419
Net (loss) income $ 139 $ 150
======= =======
Except for historical information contained herein, certain matters discussed
herein are forward-looking statements made pursuant to the safe harbor
provisions of the Securities Litigation Reform Act of 1995. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, including but not limited
to, economic, competitive, regulatory, strategies, available financing, and
other factors discussed elsewhere in this report and the documents filed by the
Company with the SEC. Many of these factors are beyond the Company's control.
Actual results could differ materially from the forward-looking statements. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this report will, in fact, occur.
LIQUIDITY AND CAPITAL RESOURCES
During the last several fiscal years, the Company has generally experienced
losses from operations and severe cash shortages caused by a significant decline
in both sales and open order backlog, decreased margins (which is characteristic
in the industry) on our products, significant expenses associated with the
reorganization proceedings, and the Company's inability to obtain additional
working capital through the sale of debt or equity securities or the sale of
non-operating assets. However, for the year ended February 28, 1997, the Company
recorded net income from operations of $139,000.
During the pendency of the Bankruptcy Proceedings, all secured and unsecured
claims against and indebtedness of the Company (including accrued and unpaid
interest) were stayed in accordance with the Bankruptcy Code while the Company
continued its operations as a debtor-in-possession, subject to the control and
supervision of the Bankruptcy Court. Because these stays limit cash outflow, the
Company, during the pendency of the Bankruptcy Proceedings, realized positive
cash flow from ongoing operations. Since the Company emerged from Chapter 11, it
has experienced a positive cash flow from recurring operations; however, until
the fiscal year ended February 28, 1997, overall cash flow was negative due
primarily to the necessity to make payments of administrative expenses and
unsecured debt payouts arising in connection with the Bankruptcy Proceedings.
The foregoing resulted in a decrease in cash and cash equivalents since
emergence from Chapter 11.
The Company has incurred a small gain from ongoing operations of approximately
$467,000 for the fiscal year ended February 28, 1997 and has significant
obligations arising from settlements in connection with its bankruptcy
necessitating it to make substantial cash payments which cannot be supported by
the current level of operations.
The Company has projected that it will continue to be able to generate
sufficient funds to support its ongoing operations. However, the Company must be
able to renegotiate its required payments to unsecured creditors, the IRS, the
DEP and certain taxing authorities or raise sufficient cash in order to pay
these obligations as currently due, in order to remain a going concern.
-18-
<PAGE>
The Company is currently in negotiations with the unsecured creditors, the IRS,
the DEP and other taxing authorities in an attempt to arrive at reduced payment
schedules. Further, the Company plans to be able to enter into a factoring
arrangement or to develop other financing facilities to improve cash flow should
the need arise. In addition, the Company has a contingency plan to reduce its
size and thereby reduce its cost of operations within certain limitations.
However, no assurance can be made that the Company can reach a suitable
agreement with the unsecured creditors, DEP or taxing authorities or obtain
additional sources of capital and/or cash or that the Company can generate
sufficient cash to meet its obligations.
At February 28, 1997 and February 29, 1996 respectively, the Company had cash
and cash equivalents of $537,000 and $364,000. The principal cash change was due
to managing disbursements and permitting the liabilities to rise.
At February 28, 1997, the Company had working capital of $1,027,000 as compared
with a working capital at February 29, 1996 of $1,451,000. The decrease was due
primarily to a major shift of long term debt to current and due to managing
disbursements and permitting the liabilities to rise, which was partially offset
by an increase in accounts receivables. Current assets increased in accounts
receivables and cash. All areas of current liabilities increased except the
current portion of long term debt and accrued Chapter 11 expenses.
Pursuant to the Plan of Reorganization, beginning in approximately May 1995, the
Company was required to begin making quarterly payments to holders of unsecured
claims until they receive 35% of their claims. However, due to negotiations
between the parties, the unsecured creditors agreed to a deferment of this
payment (for more discussion see Management's Discussion and Analysis). To date,
these negotiations have not been completed and while they are in progress, the
Company made nine of its proposed distributions to the unsecured creditors who
have accepted the payments. These payments to unsecured creditors covered the
period march 1, 1995 through February 28, 1997 in the aggregate amount of
approximately $65,376 of the approximately $558,747 required by the Plan of
Reorganization. Following the settlement with the State of California of the
amount of its unsecured claim and the Company's acquisition of the unsecured
claim of Argo Partners, Inc., it is presently estimated that there are an
aggregate of approximately $7,095,252 in unsecured claims and, accordingly, that
the Company is required to pay approximately $2,483,338 (i.e., 35% of
$7,095,252) to holders of allowed unsecured claims in quarterly installments of
approximately $62,083. The Company has proposed to its unsecured creditors that
it make quarterly payments of $9,000. The Company carries its debt to its
unsecured creditors as $140,000 in short-term debt and $1,247,000 as long-term
debt. The aggregate and monthly payments to unsecured creditors increases and
decreases in proportion to $10,000 per month per $3.5 million in allowed claims,
subject to a maximum quarterly payment of $105,000. These payments and the
aggregate amounts thereof would also increase proportionately in the event of a
default by the Company in its obligations to Ellco Leasing Corporation
("Ellco").
The Company received a claim by an estate owning property northwest and across
Cove Road from the Port Salerno property. The estate has asserted that the
mailing address to which the bankruptcy notice was sent was in error. The estate
has been advised that public water has been made available to the property and
that the Company is prepared to settle for an allowed general unsecured claim in
the amount of $10,000, to be paid as other unsecured creditor claims are being
paid. This offer was rejected, and the claim is unresolved and presently
dormant. During fiscal year 1995, the Company's environmental legal counsel
determined that the Environmental Protection Agency ("EPA") was reassessing all
prior Comprehensive Environmental Response, Compensation and Liability
Information System sites for National Priority Ranking using the newly adopted
ranking formula. The Company's facilities at Riviera Beach and Port Salerno were
the subject of such reassessment. After conducting a series of meetings with the
State Department of Environmental Protection (the "DEP") and with Region IV EPA
officials, the DEP requested that the Riviera Beach site be taken out of the
reassessment priority process and, pursuant to both that request and the
Company's request, Region IV EPA, according to the responsible DEP official,
took both sites out of the reevaluation process and deferred informally further
action pending the Company's complying with the requirements of the Consent
Final Judgment that it had entered with the Florida Department of Environmental
Protection in accordance with the Company's Plan of Reorganization.
-19-
<PAGE>
The Company's former facility in Jupiter, Florida (which was sold in 1982) has
been the subject of a preliminary assessment by the EPA during calendar year
1995. The EPA has requested site access from the current owner. The Company's
environmental legal counsel has no information concerning the Jupiter facility
nor has the Company received any request for information. The Company and its
environmental legal counsel cannot assess at this time what the impact of the
EPA study will be, if any, on the Company's liability nor when the EPA will
complete its study. For a further description of the Company's significant
environmental problems, refer to "Item 1 - Business Bankruptcy Proceedings" and
to Note 12 of the accompanying Consolidated Financial Statements.
Pursuant to the terms of the Plan of Reorganization and Consent Final Judgment,
the Company is required to complete the assessment and remediation of the Port
Salerno Facility and the Old Riviera Beach Facilities. The costs of these
assessments and remediations, estimated at $1,069,000, will be payable from the
proceeds of the sale or lease of these properties. The Company is required to
escrow the following amounts on a monthly basis beginning on the 25-month
anniversary of the Effective Date of the Plan of Reorganization to ensure the
remediation of these properties in the event the properties are not sold or
leased: (i) year 1 - $60,000; (ii) year 2 - $90,000; (iii) year 3 - $120,000;
and (iv) $120,000 per year thereafter until remediation is completed. Any excess
of such sale and lease proceeds and such escrows over the cost of assessment and
remediation will be returned to the Company. As part of these requirements, the
Company performed soil remediation assessment at both facilities. These tests
indicated that no soil remediation is required at the Port Salerno and Old
Riviera Beach facilities. DEP has concurred that no further soil remediation is
required at either property. For details see the Company's Plan of
Reorganization and Consent Final Judgment with the Department of Environmental
Protection. The Company is renegotiating with DEP the terms of the cash payments
into the aforementioned escrow account and while the negotiations are under way
the Company deposits $1,000 per month. As of February 28, 1997, of the $97,500
due in accordance with the Plan, the Company deposited $17,000 into the escrow
account.
The Company is required to pay an equipment lessor (Ellco) $255,000 plus
interest at six percent per annum in monthly payments over a four-year period
beginning on the Effective Date for equipment leased by the Company. These
monthly payments escalate from $3,500 to $6,000 during such four-year term.
Ellco has been granted a security interest in certain of the Company's equipment
to collateralize such obligations. In the event of any default by the Company,
Ellco would have an unsecured claim amounting to 35% of the original amount due
less payments made to the date of the default. Additionally, Ellco would be
entitled to certain amounts pursuant to a profit participation payable to
unsecured creditors and a pro rata share of the common stock issuable to
unsecured creditors pursuant to the Plan. As of April 30, 1997, the Company had
paid Ellco $226,000 meeting all of its then current obligations to Ellco.
Pursuant to the Plan of Reorganization, beginning on the date the Company's net
after tax income exceeds $500,000, the Company will be required to pay certain
pre-petition creditors 10% of net after tax income until the tenth anniversary
of the Effective Date, up to a maximum aggregate of $3,000,000 in such payments.
Further, the Company's lease payments (less sublease payments from Vector) for
its facilities in West Palm Beach, Florida will increase each year from
approximately $255,000 during the current fiscal year in accordance with
specified cost of living increases (which shall be no less than 3% nor more than
5% per year).
The Company has satisfied all of the allowed administrative claims and allowed
wage claims under the Plan of Reorganization. The Company is required to pay
allowed tax claims (to the Internal Revenue Service, Palm Beach County, Florida
and Martin County, Florida), estimated at approximately $1,810,000 (which amount
is accrued in the accompanying financial statements including interest). The
Company is required to make quarterly payments of allowed tax claims to Palm
Beach County according to the following schedules: $37,000 per quarter for two
years beginning in the second quarter of 1994; and approximately $82,000 per
quarter for the twelve quarters thereafter. The Company is required to make
quarterly payments of allowed tax claims to Martin County of approximately
$4,000 for a period of approximately four years beginning in approximately
October 1994. The allowed tax claims payable to the IRS was determined in
January 1995 to be $401,000. At February 28, 1997, such amounts include accrued
interest totalling $440,000. The Company is required to make payments of allowed
tax claims to the IRS of no more than approximately $21,000 per quarter
beginning in approximately April 1995 and ending approximately January 2001. The
Company is now negotiating with the IRS, Palm Beach County and Martin County to
modify these payment plans.
-20-
<PAGE>
The following table indicates the approximate cumulative status of amounts due
under Court Plans a of February 28, 1997:
DUE TO DATE PAID
----------- ---------
Martin County* $ 48,000 $ 7,957
Palm Beach County* $ 542,000 $ 225,605
IRS $ 168,000 $ --
Based upon (i) Management's best information as to current national defense
priorities, future defense programs, as well as Management's expectations as to
future defense spending; (ii) the market trends signaling an end to the price
erosion; and (iii) a continual lack of foreign competition in the defense and
aerospace market, the Company believes that its operations will continue to
generate sufficient cash to satisfy its operating needs over the next 12 months.
However, based on these factors and at the current bookings, prices, profit
margins and sales levels, the Company will not generate sufficient cash to
satisfy its operating needs and its obligations to pre-bankruptcy creditors in
accordance with the Plan. Thus, it is in negotiations with all claim holders to
reschedule these payments. In the event the Company is unable to restructure its
obligations to pre-bankruptcy claimants, the Company has a contingency plan to
further reduce its size and thereby reduce its cost of operations within certain
limitations. Over the long-term, the Company believes that, if the volume and
prices of product sales continues as presently anticipated, the Company will
generate sufficient cash from operations to sustain operations. In the event
that bookings in the long-term decline significantly below the level experienced
since emerging from Chapter 11, the Company may be required to implement further
cost-cutting or other downsizing measures to continue its business operations.
Such cost-cutting measures could inhibit future growth prospects. In addition,
the Company is pursuing additional sources of financing. There is no assurance
that financing will be available in amounts or upon terms satisfactory to the
Company. Further, in appropriate situations, the Company may seek strategic
alliances, joint ventures with others or acquisitions in order to maximize
marketing potential and utilization of existing resources and provide further
opportunities for growth.
BOOKINGS AND BACKLOG
During the fiscal year ended February 28, 1997, the Company's net bookings were
$8,640,000 in new orders as compared with $7,012,000 for the year ended February
29, 1996, an increase of 23.2%. This increase includes an approximate 36%
increase in the average sales price per unit, which indicates that the Company
would have had to ship 5.9% less units to achieve the same level of revenues.
The price increase was a direct result of a shift in mix of products shipped. A
23.2% increase in order intake and a 6.4% increase in shipments compared to the
prior year resulted in orders received being higher than shipments by
approximately $1,481,000 thus the Company's backlog increased to $5,800,000 at
February 28, 1997 as compared with $4,300,000 as of February 29, 1996, a 34,9%
increase. Overall, the Company's position in the market place as is evidenced
with the healthy level of bookings which are coming in at a steadier pace than
in the past, position the Company at a comfortable base for expansion. However,
their can be no assurance that the level of bookings and/or expansion will
materialize.
FUTURE PLANS
Due to the Company's current liquidity problems, the Company plans to (a)
continue improving operating efficiencies; (b) further reduce overhead expenses;
(c) develop off-shore manufacturing capability utilizing strategic partners
and/or sub-contractors. Also, the Company intends to identify lower cost base
assembly partners in the Pacific region, thus enhancing the Company's
competitive position while reducing costs.
* For the years since Bankruptcy, additional taxes have become delinquent with
Martin and Palm Beach Counties in the following amounts respectively - $26,807
and $163,711.
-21-
<PAGE>
The Company also plans to continue its efforts in selling privately labelled
commercial semiconductors and to develop offshore assembly or sub-assembly
whether as under contract or strategic alliance arrangements. If these plans are
successful, the Company intends to aggressively pursue sales of these products
which could require the Company to invest in the building up of inventories of
finished goods. The Company may seek to generate such funding through either
equity or debt financing. The Company has not made any commitments for any such
financing or strategic alliance and there can be no assurance that the Company
will be able to consummate any such arrangements should it seek to do so.
INFLATION
The rate of inflation has not had a material effect on the Company's revenues
and costs and expenses, and it is not anticipated that inflation will have a
material effect on the Company in the near future.
RESULTS OF OPERATIONS
1997 VS. 1996
Net sales for the fiscal year ended February 28, 1997 increased by 6.4% to
$7,159,000 versus $6,731,000 during the fiscal year ended February 29, 1996.
Such increase was primarily attributable to steady bookings and a strong backlog
and the ability to ship more. Bookings were higher than sales by 20.7%, thus
backlog increased from $4,300,000 as of February 29, 1996 to $5,700,00 as of
February 28, 1997.
During the year ending February 28, 1997, the Company shipped 1,545,617 units as
compared with 3,321,963 units shipped during the year ending February 29, 1996.
The Company has experienced an increase in the level of booking of 23% for the
year ended February 28, 1997 as compared to the previous year.
During the year ending February 28, 1997, the Company's gross margins were 22.0%
as compared to 17.4% for the year ending February 29, 1996. Such an increase was
primarily due to lower costs across the board and higher average unit sales
prices which was a direct result of improvement in product mix.
During the year ending February 28, 1997, selling, general and administrative
expenses as a percentage of sales was 15.5% as compared with 17.2% for the year
ending February 29, 1996. Selling, General and Administrative expenses decreased
4.2% to $1,110,000 for the fiscal year ended February 28, 1997 from $1,159,000
for the fiscal year ended February 29, 1996. Such decrease was due primarily to
a decrease in commissions of approximately $80,000.
Total interest expense increased from $295,000 for the fiscal year ended
February 29, 1996 to $326,000 for the fiscal year ended February 28, 1997
primarily due to additional interest being accrued for pre-bankruptcy property
taxes.
-22-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
PAGE
----
Report of Independent Certified Public Accountants 24
Consolidated Balance Sheet as of February 28, 1997 25
Consolidated Statements of Operations
for the years ended February 28, 1997 and February 29, 1996 26
Consolidated Statements of Stockholders'
Equity for the years ended February 28, 1997
and February 29, 1996 27
Consolidated Statements of Cash Flows for the years
ended February 28,1997 and February 29, 1996 28
Notes to Consolidated Financial Statements 29-42
-23-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Solitron Devices, Inc.:
We have audited the accompanying consolidated balance sheet of Solitron Devices,
Inc. and subsidiaries as of February 28, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended February 28, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Solitron Devices, Inc. and Subsidiaries as of February 28, 1997 and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended February 28, 1997 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has certain obligations resulting
from its settlement with unsecured creditors and with taxing authorities, the
present terms of which it is unable to meet, which raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
Millward & Co. CPAs
Fort Lauderdale, Florida
May 20, 1997
-24-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 537,000
Accounts receivable, less allowance for doubtful
accounts of $34,000 1,105,000
Inventories 2,088,000
Prepaid expenses and other current assets 102,000
Due from Vector 69,000
-----------
Total current assets $ 3,901,000
PROPERTY, PLANT AND EQUIPMENT, net 675,000
NON-OPERATING PLANT FACILITIES 1,745,000
DUE FROM VECTOR, less current portion 67,000
OTHER ASSETS 86,000
-----------
$ 6,474,000
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturates of long-term debt $ 56,000
Current portion of accrued environmental expenses 198,000
Accounts payable-Post-petition 512,000
Accounts payable-Pre-petition, current portion 95,000
Accrued expenses 1,922,000
Accrued Chapter 11 administrative expense 38,000
-----------
Total current liabilities $ 2,821,000
LONG-TERM DEBT, less current maturities 15,000
OTHER LONG-TERM LIABILITIES, net of current portion 2,866,000
-----------
TOTAL LIABILITIES $ 5,702,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
authorized 500,000 shares, 0 shares issued
and outstanding --
Common stock, $.01 par value, authorized
10,000,000 shares, 1,976,799 shares issued
and outstanding 20,000
Additional paid-in capital 2,618,000
Accumulated deficit (1,866,000)
-----------
Total stockholders' equity 772,000
-----------
$ 6,474,000
===========
The accompanying motes to consolidated financial statements are an integral
part of these statements.
-25-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
------------ ------------
FEBRUARY 28, FEBRUARY 29,
1997 1996
----------- -----------
Net sales $ 7,159,000 $ 6,731,000
Cost of sales 5,581,000 5,558,000
----------- -----------
Gross profit 1,578,000 1,173,000
Selling, general and administrative
expenses 1,110,00 1,159,000
----------- -----------
Operating income 468,000 14,000
Other income (expense):
Writedown of non-operating facilities
and related expenses (43,000) (21,000)
Interest expense (169,000) (121,000)
Interest expense on unsecured creditors
claim (162,000) (174,000)
Interest income 17,000 24,000
Other, net 28,000 9,000
----------- -----------
Other income (expense), net (329,000) (283,000)
----------- -----------
Income (Loss) before extraordinary items 139,000 (269,000)
Extraordinary item:gain on forgiveness of debt -- 419,000
Net income $ 139,000 $ 150,000
=========== ===========
INCOME (LOSS) PER SHARE OF COMMON STOCK:
Income (Loss) before extraordinary item .07 (.13)
Extraordinary item -- .20
----------- -----------
Net income per common share $ .07 $ .07
=========== ===========
Weighted average number of common shares
outstanding 2,138,000 2,082,000
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
-26-
<PAGE>
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended February 28, 1997 and
February 29, 1996
COMMON STOCK
------------------------ ADDITIONAL RETAINED
NUMBER OF PAID-IN EARNINGS
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1995 1,880,000 $ 19,000 $ 2,619,000 ($2,155,000) $ 483,000
Net Income -- -- -- 150,000 150,000
--------- ----------- ----------- ----------- -----------
Balance, February 29, 1996 1,880,000 $ 19,000 $ 2,619,000 ($2,005,000) $ 633,000
Issuance of shares of
Common stock Pursuant
To the Plan of Reorganization 97,000 1,000 (1,000) -- --
Net Income -- -- -- 139,000 139,000
--------- ----------- ----------- ----------- -----------
Balance, February 28, 1997 1,977,000 $ 20,000 $ 2,618,000 ($1,866,000) $ 772,000
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
-27-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
------------ -------------
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
Cash flows from operating activities:
Net income $ 139,000 $ 150,000
--------- ---------
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Extraordinary item:forgiveness of debt -- (419,000)
Depreciation and amortization 219,000 234,000
Gain on disposal of assets -- (14,000)
Provision for doubtful accounts 7,000 (12,000)
Decrease (increase) in:
Accounts receivable (218,000) (143,000)
Inventories (9,000) (269,000)
Prepaid expenses and other current assets 1,000 (53,000)
Due from Vector 57,000 166,000
Other assets (3,000) 7,000
Increase (decrease) in:
Accounts payable (68,000) 212,000
Accounts payable-pre-petition (7,000) 198,000
Accrued expenses 739,000 (393,000)
Accrued Chapter 11 expenses (23,000) (59,000)
Accrued environmental expenses 138,000 (6,000)
Other long-term liabilities (634,000) 78,000
Total adjustments 199,000 (473,000)
--------- ---------
Net cash provided by operating
activities $ 338,000 $ 323,000
--------- ---------
Cash flows from investing activities:
Proceeds from disposal of assets -- 61,000
Purchase of debt from Argo Partners -- (40,000)
Additions to property, plant and equipment (121,000) (128,000
--------- ---------
Net cash used in investing activities (121,000) (107,000)
--------- ---------
Cash flows from financing activities:
Proceeds from Bank Loans 45,000 --
Payments on capitalized lease obligations (89,000) (73,000)
Net cash used in financing activities (44,000) (73,000)
--------- ---------
Net increase (decrease) in cash 173,000 (503,000)
Cash and cash equivalents at beginning of period 364,000 867,000
--------- ---------
Cash and cash equivalents at end of period $ 537,000 $ 364,000
--------- ---------
Supplemental cash flow disclosures:
Interest paid $ 169,00 $ 121,000
--------- ---------
Income taxes paid $ -- $ --
--------- ---------
The accompanying notes to consolidated financial statements are an
integral part of these statements.
-28-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. All significant inter-company
balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS:
The Company considers all investments with a maturity of three months or less at
the date of purchase to be cash equivalents for purposes of its statements of
cash flows. As of February 28, 1997 the Company did not have any cash
equivalents.
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined using
the weighted average method.
PROPERTY, PLANT & EQUIPMENT:
Property, plant and equipment are carried at cost Depreciation, including
amortization of capitalized leases, is computed using the straight-line method
over the estimated useful lives of the related assets, ranging from 2 to 8
years, for owned assets and over the lease term for capitalized leases.
NON-OPERATING PLANT FACILITIES:
Facilities which are no longer being utilized for operations are being carried
at estimated fair values as non current assets. The facilities are not being
depreciated.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk, consist principally of cash and trade receivables. The Company
places its cash with high credit quality institutions. At times such amounts may
be in excess of the FDIC insurance limits. The Company has not experienced any
losses in such account and believes that it is not exposed to any significant
credit risk on the account. With respect to the trade receivables, most of the
Company's products are custom made pursuant to the contracts whose end products
are sold to the United States Government. The Company performs ongoing credit
evaluations of it's customers' financial condition and maintains allowances for
potential credit losses. Actual losses and allowances have been within
management's expectations.
REVENUE RECOGNITION:
Revenue is recognized upon shipment; however, the Company may receive payment of
some contracts in advance. When received, these amounts are deferred and are
recognized as revenue in the period in which the related products or services
are delivered.
INCOME TAXES:
Income taxes are accounted for under the asset and liability method of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities or a change in tax rate is recognized in income in the period that
includes the enactment date. Deferred tax assets are reduced to estimated
amounts to be realized by the use of a valuation allowance.
-29-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
EARNINGS PER SHARE:
The per share amounts are calculated based on the weighted average number of
shares of common stock outstanding during each period. For purposes of
calculating earnings per share, all shares of common stock issuable pursuant to
the terms of the Plan of Reorganization (excluding shares reserved for future
issuance under stock option plans) are considered issued and outstanding
(2,138,000 shares for the year ended February 28, 1997 and 2,082,000 February
29, 1996, respectively) and are included in the calculation of earnings per
share for the year ended February 28, 1997 and the year ended February 29, 1996.
Options issued to the Company's President are common stock equivalents. Common
stock equivalents have been included in the calculation except when their effect
would be anti-dilutive.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company adopted Statement Of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived
Assets to be Disposed Of"("SFAS 121") in 1997. SFAS 121establishes accounting
standards for recording the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The adoption of SFAS 121 did not have a material impact on the
Company's financial position or results of its operations.
STOCK BASED COMPENSATION:
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" in
1997. SFAS 123 allows either the adoption of a fair value method of accounting
for stock-based compensation plans or continuation of accounting under
Accounting Principles Board ("APB") Opinion No. 25 Accounting For Stock Issued
To Employees, and related interpretations with supplemental disclosures. The
Company has chosen to account for all stock based arrangements under which
employees receive shares of the Company's stock under APB 25 and make the
related disclosures under SFAS 123. Since the method of accounting prescribed
under SFAS 123 is not to be applied to options granted prior to March 1, 1995
there is no resulting pro forma compensation cost to be disclosed.
RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125 ("SFAS 125"), "Accounting for Transfer of Servicing of Financial Assets and
Extinguishing of Liabilities. SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is to be prospectively
applied. The Company believes that the adoption of SFAS 125 will not have an
effect on its financial statements.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Going Concern and Petition in Bankruptcy:
GOING CONCERN
The Company's consolidated financial statements are presented on an ongoing
basis which contemplates the realization of assets and satisfaction of
liabilities as they become due. Although the Company has projected that it will
be able to generate sufficient funds to support its ongoing operations, it has
significant obligations arising from settlements in connection with its
bankruptcy necessitating it to make substantial cash payments which cannot be
supported by the current level of operations. The Company must be able to obtain
forebearance or be able to renegotiate its bankruptcy related required payments
to unsecured creditors, the Department of Environmental Protection ("DEP"), the
Internal Revenue Service ("IRS") and certain taxing authorities or raise
sufficient cash in order to pay these obligations as currently due, in order to
remain a going concern.
-30-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(continued)
2. Going Concern and Petition in Bankruptcy (continued):
The Company is currently in negotiations with unsecured creditors, the DEP, the
IRS and other taxing authorities in an attempt to arrive at reduced payment
schedules. Further, the Company plans to be able to enter into a factoring
arrangement or to develop other financing facilities to provide additional
funding. In addition, the Company has a contingency plan to reduce its size and
thereby reduce its cost of operations within certain limitations. However, no
assurance can be made that the Company can reach a suitable agreement with the
unsecured creditors or taxing authorities or obtain additional sources of
capital and/or cash or that the Company can generate sufficient cash to meet its
obligations over the next year.
The financial statements do not include any adjustments to reflect the possible
future effect on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
PETITION IN BANKRUPTCY
On January 24, 1992, Solitron Devices, Inc. and its wholly-owned subsidiary,
Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.)
(collectively, the "Company"), filed voluntary petitions in the United States
Bankruptcy Court for the Southern District of Florida seeking to reorganize
under Chapter 11 of the federal Bankruptcy code. The Company was authorized
to continue in the management and control of its business and property as
debtor-in-possession under the Bankruptcy Code.
On August 20, 1993 the Company's Plan of Reorganization, as amended and modified
(the "Plan"), was confirmed by the Bankruptcy Court and the Company emerged from
bankruptcy on August 30, 1993 (August 31, 1993 for financial reporting
purposes). On July 12, 1996 the Bankruptcy Court officially closed the case.
(a) The Company is required to make quarterly payments to holders of
unsecured claims until they receive 35 percent of their pre-petition claims
starting May 31, 1995 following settlements (with IRS and the State of
California) and debt buyback from Argo Partners. At February 28, 1997, there are
approximately $7,100,000 of allowed unsecured claims, and accordingly, the
Company is currently scheduled to pay approximately $2,500,000 to holders of
allowed unsecured claims in quarterly installments of approximately $62,000. As
of February 28, 1997, the present value of this amount, $1,388,000, is accrued
as a pre-petition liability (Note 8) with imputed interest recognized in the
Statement of Operations. Certain claims were contested by the Company and their
resolution changed total allowed claims. Included in these contested claims was
an income tax claim by the State of California amounting to $900,000 for income
taxes prior to 1992 which was settled November 30, 1995 for approximately
$680,000. (See Note 2(g)).
(b) The Company was required to pay an equipment lessor (Ellco) $255,000
plus interest at 6% per annum (Note 7) in monthly payments over a four-year
period beginning on the Effective Date. As of February 28, 1997, the Company has
an outstanding balance of $41,000 plus interest remaining due on this claim.
Ellco has been granted a security interest in certain of the Company's equipment
to collateralize such obligations. In the event of any default by the Company,
Ellco would have an unsecured claim amounting to 35 percent of the original
amount due less payments made to the date of the default. Additionally, Ellco
would be entitled to certain amounts pursuant to a profit participation payable
to unsecured creditors and a pro rata share of the common stock issuable to
unsecured creditors pursuant to the Plan.
-31-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Going Concern and Petition in Bankruptcy (continued):
(c) The Company transferred to a secured lender ("First Union") the real
property known as the New Riviera Beach Facility and granted to the lender a
non-exclusive perpetual easement for the use of approximately 125 parking spaces
on the adjacent real property owned by the Company in satisfaction of the
lender's allowed claim of $3,170,000.
(d) Beginning on the later of (i) the payment of all administrative claims
and all unsecured claims, but not later than 18 months after the Effective Date
and (ii) the date the Company's net after tax income exceeds $500,000, the
Company will pay (on an annual basis) each of (x) the holders of unsecured
claims (pro rata) and (y) Vector, 5% of its net after tax income until the tenth
anniversary of the Effective Date, up to a maximum aggregate of $1,500,000 of
such payments to the holders of unsecured claims (pro rata) and up to a maximum
aggregate of $1,500,000 of such payments to Vector.
(e) The Company is required to remediate its non-operating facilities
located in Port Salerno and Riviera Beach, Florida. The monies to be utilized to
fund the remediation will be made available from the proceeds of the sale or
lease of the properties, to the extent that the Company is successful in its
efforts to sell or lease such properties. Pursuant to the Plan, unless otherwise
approved by the "DEP", neither the Riviera Beach Facility nor the Port Salerno
Facility will be sold unless the price for such property equals or exceeds the
lesser of (i) 75% of its appraised value or (ii) the estimated cost of its
remediation. Further, pursuant to the Plan, a purchaser of either of these
facilities would not be liable for existing environmental problems under certain
conditions. In connection with facilitating the remediation of the properties,
the Company will also, to the extent the proceeds from the sale or lease of
these properties are not sufficient to pay for the remediation, be required to
escrow the following amounts on a monthly basis beginning on September 30, 1995:
(i) year 1 - $5,000 per month; (ii) year 2 - $7,500 per month; (iii) year 3 -
$10,000 per month; and (iv) $10,000 per month thereafter until remediation is
completed. The Company is negotiating with the DEP to modify the payment
schedule and while negotiations are under way, the Company is making payments at
the rate of $1,000 per month. As of February 28, 1997, the Company deposited
$17,000 into the escrow accounts. (Note 12). Further, DEP has been requested to
approve pending sales contracts under which the purchasers will remediate the
properties rather than the Company, after posting adequate security for the
performance of the cleanup with DEP.
(f) The Company has paid all of the allowed administrative claims and
allowed wage claims since the Effective Date. The Company is required to pay
allowed tax claims to the IRS, Palm Beach County, Florida and Martin County,
Florida), estimated at approximately $1,800,000 (which amount is included in the
accompanying consolidated financial statements (Note 8), including interest).
The Company was required to start making quarterly payments of allowed tax
claims to Palm Beach County according to the following schedule: $37,000 per
quarter for two years beginning in the second quarter of 1994; and approximately
$82,000 per quarter for the twelve quarters thereafter. The Company is
negotiating with Palm Beach County to reschedule these payments. The Company has
an agreement to make quarterly payments of allowed tax claims to Martin County
of approximately $4,000 for a period of approximately four years beginning in
October 1994. The allowed tax claims payable to the IRS was determined in
January 1995 to be $401,000. The Company was expected to make quarterly payments
of allowed tax claims to the IRS of no more than approximately $21,000 for per
quarter beginning in approximately April 1995 and ending in approximately
January 2001. The Company is negotiating with the IRS to reschedule these
payments and has not started making these payments. These tax claims do not
include an unsecured claim (Note 2(a) by the State of California for
approximately $900,000 for income taxes for years prior to 1982. Solitron
disputed the extent of the State of California's claim. An objection to the
State of California's claim has been filed, and was settled November 30, 1995
for approximately $680,000. The Company's carrying value of approximately 35% of
the original claim was adjusted by $419,000 and had been included as an
extraordinary item for the year ended February 29, 1996.
-32-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Going Concern and Petition in Bankruptcy (continued):
The Plan provides for the distribution of common stock of the Company such that,
post-petition, the Company's common stock will be held as follows:
PARTY-IN-INTEREST COMMON STOCK
----------------- ------------
Vector 25%
Unsecured Creditors 40%
Company's President 10%
Pre-Petition Stockholders 20%
Reserved for future issuance under an
employee stock incentive plan 5%(1)
--
100%
===
On October 4, 1994, the Company and Vector agreed that Vector's 25% stock would
be distributed among various parties. Among these parties, 273,943 shares will
not be subject to the voting restrictions, while the balance of the parties will
continue to be subjected to the voting restrictions as long as they or their
affiliates hold Solitron stock.
3. Inventories:
As of February 28, 1997, inventories consist of the following:
Raw Materials $1,055,000
Work-In-Process and Finished Goods 1,033,000
----------
$2,088,000
==========
4. Property, Plant and Equipment:
As of February 28, 1997, property, plant and equipment consist of the following:
Building Improvements $ 595,000
Machinery and Equipment 964,000
----------
$1,559,000
Less Accumulated Depreciation
and Amortization 884,000
----------
$ 675,000
==========
Non-operating Plant Facilities $1,745,000
==========
Non-operating plant facilities at February 28, 1997 represent the Company's Port
Salerno facility and Riviera Beach microwave plant (the Old Riviera Beach
Facility), both of which are no longer being used in operations.
Depreciation expense was $219,000 and $234,000 for 1997 and 1996, respectively.
- ----------
(1) To be issued based upon the terms and conditions of the Plan at the
descretion of the Board of Directors.
-33-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Accrued Expenses:
As of February 28, 1997, accrued expenses consist of the following:
Payroll and related employee benefits $ 255,000
Property taxes 877,000
IRS tax claim, pre-petition 219,000
Other liabilities 191,000
Customer Advances 44,000
Interest Payable 336,000
----------
$1,922,000
==========
6. Financial Instruments:
The estimated fair value of the Company's financial instruments at February 28,
1997 are as follows:
CARRYING
AMOUNT FAIR VALUE
---------- ----------
Cash and Cash Equivalents $ 537,000 $ 537,000
Accounts Receivable 1,105,000 1,105,000
Long Term Debt (including current
maturities of $56,000) 71,000 71,000
Other Long-Term Liabilities (including
current maturities of $1,390,000) $4,256,000 $4,256,000
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash - Fair value was considered to be the same as the carrying amount.
Receivables - The Company believes that in the aggregate, the carrying
value of the receivables was not materially different from the fair value.
Long-term debt - The carrying amount of floating-rate long-term debt was
assumed to approximate its fair value.
-34-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. Long-Term Debt:
As of February 28, 1997, long-term debt consists of the following:
6% equipment finance agreements due in monthly
installments, with scheduled maturities through
September 1997 $ 41,000
9% equipment finance agreement due in monthly
installments, with scheduled maturities through
July 1997 10,000
7.5% automobile loan payable due in monthly
installments, with scheduled maturities through
February 2001 20,000
--------
$ 71,000
Less: current maturities (56,000)
--------
$ 15,000
========
Contractual Payment Requirements on all debt balances are as follows:
1999 $ 56,000
2000 5,000
2000 5,000
2001 5,000
--------
$ 71,000
========
8. Other Long-Term Liabilities:
As of February 28, 1997, other long-term liabilities consists of the following
pre-petitioned items:
Accrued Environmental Expenses $1,057,000
Accounts Payable-Pre-petition 1,388,000
IRS Tax Claim 441,000
County Property Tax Payable 1,370,000
-----------
$4,256,000
Less Current Portion (1,390,000)
----------
$2,866,000
==========
The current portion of the long-term liabilities is in the amount of $1,390,000
consists of accrued environmental expenses of $198,000, accounts payable
pre-petition of $95,000, IRS tax claim of $219,000 and County property tax
payable of $877,000, the latter two being included in accrued expenses.
-35-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. Other Long-Term Liabilities (continued):
Contractual or estimated payment requirements on other long-term liabilities
including amounts representing interest during the next five years and
thereafter are as follows:
YEAR ENDING
FEBRUARY 28/29 TOTAL
-------------- -----------
1998 $ 1,696,000
1999 997,000
2000 505,000
2001 505,000
2002 422,000
thereafter 1,349,000
---------
5,474,000
Less amount representing interest (1,157,000)
---------
$ 4,317,000
==========
Imputed interest expense for fiscal year ended February 28, 1997 and February
29, 1996 amounted to $162,000 and $174,000 relates to accounts payable
pre-petition.
9. Income Taxes:
At February 28, 1997, the Company has net operating loss carryforwards of
approximately $ 10,161,000 that expire through 2010. Such net operating losses
are available to offset future table income, if any. As the utilization of such
operating losses for tax purposes is not assured, the deferred tax asset has
been fully reserved through the recording of a 100% valuation allowance. Should
a cumulative change in the ownership of more than 50% occur within a three-year
period, there could be an annual limitation on the use of the net operating loss
carryforward.
Deferred tax assets are comprised of the following at February 28, 1997:
Depreciation and property basis adjustments $ 11,000
Loss carryforwards 3,861,000
Environmental Reserve 408,000
Accounts Receivable Reserve 13,000
Inventory tax reserves 4,705,000
Gross deferred tax asset 8,998,000
Deferred tax asset valuation allowance (8,998,000)
Net deferred tax asset --
----------
Net $ --
==========
A reconciliation of the provision for income taxes to the amount calculated
using the statutory federal rate (35%) for fiscal year ended February 28, 1997
is as follows. There was no provision for fiscal year ended February 29, 1996.
Income Tax Provision at
Federal Statutory Rates $ 49,000
State Taxes 8,000
Utilization of Net Operating Loss
Carryforward (57,000)
---------
Income Tax Provision $ --
=========
-36-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10. Stock Option Plans:
During 1987, the Company adopted the 1987 Stock Option Plan which, as amended,
provided for the grant of incentive stock options, non-qualified stock options,
tandem stock appreciation rights and stock appreciation rights exercisable in
conjunction with stock options to purchase up to an aggregate of 70,000 shares
of the Company's common stock through September 1997.
Pursuant to the Plan of Reorganization, all outstanding options granted under
the 1981 Incentive Stock Option Plan and under the 1987 Stock Option Plan were
terminated as of August 31, 1993, with the following exception:
On October 20, 1992, the Company's current President was issued an option to
purchase 4% of the outstanding shares of the Company's common stock at an
aggregate exercise price of $98,400 (representing market value as of the date of
the grant) pursuant to an Incentive Stock Option Agreement (the "Agreement")
issued under the Company's 1987 Stock Option Plan. Pursuant to the terms of the
Agreement, the number of shares subject to this option will be increased (and
the exercise price per share will be proportionately decreased so that the
aggregate exercise price will remain unchanged) so that the number of shares
issuable in connection with this option will be equal to four percent of all
shares issued and outstanding after giving effect to all issuances contemplated
by the Plan. One quarter of all such options vest and become exercisable on each
of the first four anniversaries of the date of grant. The options expire in
2002. On March 3, 1997, the Board adjusted the exercise price of such options to
the closing price of the Company's stock on that date ($0.156).
Effective August 20, 1993, the Company's President was issued an option to
purchase an additional four percent of the common stock on a fully-diluted basis
giving effect to all shares issuable pursuant to the Plan for an aggregate
exercise price of $120,300. However, as additional shares are issued in
connection with the Plan, the exercise price shall be reduced proportionately so
that the aggregate exercise price will remain unchanged. One quarter of all such
options vest and become exercisable on each of the first four anniversaries of
the date of grant. The options expire in 2003. On March 3, 1997, the Board
adjusted the exercise price of such options to the closing price of the Company.
Accordingly, pursuant to the provisions of the above stock option grants, the
Company's President is entitled to purchase 8% of the common stock of the
Company (175,636 shares based on the total amount of common shares issuable
pursuant to the Plan) for an aggregate exercise price of $27,400 based on the
March 3, 1997 adjustment.
11. Benefit Plans:
PROFIT SHARING PLAN:
The Company has a 401K and Profit Sharing Plan (the "Profit Sharing Plan") in
which substantially all employees may participate after one year of service.
Contributions to the Profit Sharing Plan by participants are voluntary. The
Company may match participant's contributions up to 25% of 4% of each
participant's annual compensation. In addition, the Company may make additional
contributions at its discretion. The Company did not contribute to the Profit
Sharing Plan during the fiscal years ended February 28, 1997 and February 29,
1996.
-37-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. Export Sales and Major Customers:
The Company designs, develops, manufactures and markets solid-state
semiconductor components and related devices primarily for the military and
aerospace markets.
Revenues from domestic and export sales to unaffiliated customers are as follows
(dollars in thousands)*:
FISCAL YEAR FISCAL YEAR
ENDED ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
----------- ------------
Export sales:
Europe $ 160 $ 328
Canada and Latin America 38 49
Far East and Middle East 158 187
United States 6,803 6,167
------- -------
$ 7,159 $ 6,731
======= =======
*All of the Company's domestic and foreign transactions are done in U.S.
dollars. Sales to the Company's top three customers accounted for 51% of the
Company's net sales for the year ended February 28, 1997 as compared with 35% of
the Company's net sales for the year ended February 29, 1996. Sales to
unaffiliated customers aggregating 10% or more of net sales are presented below:
FISCAL YEAR FISCAL YEAR
ENDED ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
Hughes 21.0% 21.2%
U.S. Government 11.3% 6.5%
Raytheon 10.0% 7.6%
-38-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. Commitments and Contingencies:
EMPLOYMENT AND CONSULTING AGREEMENTS:
In February 1993, the Company entered into an employment agreement with its
President which provides, among other things, for annual compensation of
$140,000 plus cost of living increases through August 30, 1998.
ENVIRONMENTAL MATTERS:
As a result of audits by the DEP principally conducted as early as 1986, it was
determined that chemical discharges occurred at several of the Company's
locations for which clean up or other actions were required. Management of the
Company believes that clean up and monitoring is still required at three
locations: one licensed treatment facility to which the Company shipped
hazardous waste, the Company's Port Salerno location and the Company's Old
Riviera Beach facility.
In addition to the matters described in the preceding paragraph, testing of
monitoring wells installed by the Company at the Company's Port Salerno location
has revealed that groundwater contamination extends off-site. After notification
to DEP of the off-site contamination, the State Division of Health tested
certain private residential wells and requested the Company supply bottled
drinking water to seven families which use four of the private wells in the
area. The Company complied with this request. Public water supply was thereafter
extended to serve these properties the cost of which was reimbursed to DEP by
the Company in the amount of $200,000. Other private wells nearby may also be
affected, and, in such case the Company will then extend public water supply to
affected homes.
The Plan of Reorganization provides a plan for the future remediation of the Old
Riviera Beach location and the Port Salerno location. The Plan of Reorganization
provides for, among other things, the following: (1) the Company reimburse DEP
$200,000 for providing water lines to serve properties affected by the
groundwater contamination from the Port Salerno site. This amount was paid ,
pursuant to the provision of the Plan, as an administrative expense to DEP
during the year ended February 28, 1993; (2) remediate site soils and
groundwater at the Port Salerno location; (3) remediate groundwater
contamination at the Old Riviera Beach property and 4) pay a final judgment of
$103,000 to DEP representing the balance of penalties owed at August 31, 1993 as
a result of the March 9, 1990 agreement. This amount was included in amounts
payable to unsecured creditors and accordingly, is subject to the same payment
terms and conditions as the Company's general unsecured creditors. Additionally,
the Company's $583,000 obligation to the City was classified as an unsecured
claim at August 31, 1993.
Since entry of the Consent Final Judgment, the Company's consultant submitted a
plan for further soils assessment at the Riviera Beach and Port Salerno
facilities, received approval thereof and of its Quality Assurance Plan, and,
after soil testing and filing an assessment report reporting their data,
received DEP approval of the report's conclusion that no further soils
remediation is required at either facility.
The Company's environmental consultants have estimated the costs of remediation
to be approximately $719,000 for the Port Salerno property and $338,000 for the
Old Riviera Beach property. These amounts have been accrued for in the balance
sheet as of February 28, 1997. The accrual balance is approximately $1,057,000.
-39-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. Commitments and Contingencies (continued):
During fiscal year ended February 28, 1995, the Company's environmental legal
counsel determined that the Environmental Protection Agency (the "EPA") was
reassessing all prior Comprehensive Environmental Response, Compensation and
Liability Information System site for National Priority Ranking using the newly
adopted ranking formula. The Company's facilities at Riviera Beach and Port
Salerno were the subject of such reassessment. After conducting a series of
meetings with the State Department of Environmental Protection (the "DEP") and
with Region IV EPA officials, the DEP requested that the Riviera Beach site be
taken out of the reevaluation process and, pursuant to both that request and the
Company's request, Region IV EPA, according to the responsible DEP official,
took both sites out of the reevaluation process and deferred informally further
action pending the Company's complying with the requirements of the Consent
Final Judgment that it had entered with the Florida Department of Environmental
Protection in accordance with its Plan of Reorganization. In 1997, EPA was again
requested by DEP to defer to a state lead cleanup provided the two pending sale
contracts were approved by DEP under satisfactory assurances that the Purchasers
will complete the required cleanups. EPA agrees to such deferral provided DEP
advises it is so satisfied. The Company's former facility in Jupiter, Florida
(which was sold in 1982) has been the subject of a preliminary assessment by the
EPA during fiscal year 1995. The EPA has requested site access from the current
owner. The Company's environmental legal counsel has no information concerning
the Jupiter facility nor has the Company received any request for information.
The Company and its environmental legal counsel cannot assess at this time what
the impact of the EPA study will be, if any, on the Company's liability nor when
the EPA will complete its study.
Pursuant to the Plan, the Company will sell or lease the two properties and
utilize the proceeds to remediate both sites. If funds to clean the sites are
not available within twenty-four months from October, 1993, the Company is
required to make periodic payments as follows: 1) $5,000 per month beginning on
the 25th month; 2) $7,500 per month beginning on the 37th month; and 3) $10,000
per month beginning on the 49th month. This funding will be suspended when total
amounts paid reach 125% of the estimated remediation costs. The Company is
negotiating with DEP to modify this payment schedule. While these negotiations
are under way, the Company is making monthly payments of $1,000 per month into
the escrow account. As of February 28, 1997 the Company deposited $17,000 into
the escrow account.
The Company received a claim by an estate owning property northwest and across
Cove Road from the Port Salerno property. The estate has asserted that the
mailing address to which the bankruptcy notice was sent was in error. The estate
has been advised that public water has been made available to the property and
that the Company is prepared to settle for the sum of $10,000, to be paid as
other unsecured creditor claims are being paid. This offer was rejected and the
claim is unresolved and is dormant.
The Old Riviera Beach facility is now under contract and the Purchaser is
performing due diligence. The Purchaser does not seek the first purchaser
protection provided in the Consent Final Judgement and the Company and the
Purchaser has requested that in lieu of sale proceeds, that DEP accept the
financial security proposed to be placed in escrow under dual control of DEO and
Purchaser for the purpose of performing the required remediation. The Purchaser
would assume full liability to remediate the property and to pay the Company's
costs of closing the sale including brokers' and attorneys' fees and the Company
will be relieved of all liability when the remediation is completed.
-40-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. Commitments and Contingencies (continued):
The Company would be contingently liable if the Purchaser failed to complete but
would be able to utilize any unused escrow funds to perform the remediation.
Further, the remediation contractor is required to post a performance bond and
to perform under a fixed price contract, the amount of which having been
escrowed. DEP and EPA have agreed to defer processing of this site for possible
National Priority List (NPL) listing pending satisfactory completion of the sale
and negotiation of a Consent Agreement among the Company, the Purchaser and DEP.
If this sale does not proceed, the Company intends to request the predecessor
owner and operator of property either to assume responsibility for the
remediation or to loan the Company the funds to perform the cleanup secured by a
mortgage on the property. The predecessor owner and operator is financially able
to perform and has advised the Company that it wishes to take steps as will
prevent EPA from proceeding to place the property on the National Priority List
(NPL) and assuming jurisdiction over the cleanup.
If all alternatives fail, the site will be listed by EPA on the National
Priority List (NPL) and EPA will perform the cleanup and pursue the Company and
the predecessor owner and operator to recover all of its costs. The Company
would be able to sell the remediated property and use the proceeds to satisfy
its share of EPA's claim or would attempt to negotiate a settlement based upon
its limited ability pay. It is uncertain whether any of these alternatives will
be successful but new test data indicate that the potential cleanup costs will
be significantly less due to the large reduction in the levels of the
groundwater contamination. The Company believes tha tthe site is not likely ever
to be placed on the National Priority List (NPL).
The Port Salerno facility is currently vacant and is under contract for sale to
Brownfield Recovery Corp. that specializes in remediating contaminated
properties through an affiliated remediation firm. The Purchaser and the Company
are requesting DEP to enter into a new Consent Agreement under which the
Purchaser would post a one million dollar Letter of Credit to ensure performance
of the required remediation. The Company would remain liable until the Purchaser
completed the remediation but if the Purchaser failed to so complete, then
Solitron would be authorized to use the unused portion of the Letter of Credit
to perform the remaining remediation. It would not retain a security interest in
the property but would be able to use for its costs and foreclose on the
property to satisfy its judgement.
In the event the Purchaser does not satisfy DEP's requirements to close the
purchase, then it is likely that this site will be placed on the National
Priority List and remediated by EPA. EPA will then pursue the Company for its
costs and the Company will have a remediated property to utilize in attempting
to settle the EPA cost claim. Whether the Company could settle based on the
value of the property is problematic.
No amounts were charged for environmental expenses during the year ended
February 28, 1997 and February 29, 1996.
OPERATING LEASES:
The Company has entered into a lease agreement for its production facility. The
lease has a 10 year term expiring in the year 2001. Future minimum lease
payments for all non-cancelable operating leases are as follows:
YEAR ENDING FEBRUARY 28/29 AMOUNT
-------------------------- ------
1998 236,000
1999 240,000
2000 245,000
2001 250,000
Thereafter 210,000
---------
Total $1,181,000
==========
-41-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. Commitments and Contingencies (continued):
Total rent expense was $ 346,000 for the year ended February 28, 1997 as
compared with $331,000 for the year ended February 29, 1996.
In connection with the Vector Purchase Agreement, the Company entered into a
sublease agreement whereby Vector has agreed to reimburse the Company for
one-third of the above noted rental obligations in exchange for Vector's use of
approximately one-third of the facility.
14. Extraordinary Item
For the year ended February 29, 1996, an early debt estinguishment resulted in
an extraordinary gain of $419,000 ($.20 per share). Such extraordinary gain
resulted from the Company's renegotiation and change in its prior rental
commitments with the RTC in the amount of $264,000 and the renegotiation and
settlement of pre-petition liabilities in the amount of $155,000.
-42-
<PAGE>
PART III
ITEM 8. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the name, age and position of the directors and
executive officers of the Company. The table below also sets forth the year in
which each of such directors was first elected to the Board and the year in
which the term of each of such directors expires. All of the then existing
directors of the Company, other than Shevach Saraf, resigned as of the Effective
Date. Pursuant to the Plan of Reorganization, the creditors committee submitted
to the Board of Directors three candidates, from which Anthony Parillo, Jr. was
selected as a member of the Board of Directors. In January 1996, Anthony
Parillo, Jr. and Robert Perfetto, who both became Directors in 1993, resigned
from the Board of Directors. On August 26, 1996, the Board of Directors elected
Dr. Jacob Davis and Mr. Joseph Schlig as directors. Pursuant to the Company's
Certificate of Incorporation, the Board of Directors is divided into three
classes, each of which consists of (as nearly as may be possible) one third of
the directors. Directors are elected for three year terms. Pursuant to the Plan
of Reorganization, all shares of Common Stock issued to Vector original
participants and to the holders of allowed unsecured claims must be voted for
all purposes (including the election of members of the Board of Directors) as
directed by the Board of Directors. Pursuant to the Plan of Reorganization,
Vector owns 25% and the holders of allowed unsecured claims own an aggregate of
40% of all shares of Common Stock issuable pursuant to the Plan of
Reorganization (other than shares issuable to Mr. Saraf upon the exercise of
options granted prior to the Effective Date). On October 4, 1994, the Company
and Vector agreed that 25% of Vector's stock would be redistributed between six
parties (see Note 2 the Consolidation Financial Statements). Five original
Vector participants continue to be subject to the voting restrictions as long as
they or their affiliates hold Solitron stock.
YEAR
FIRST TERM AS
BECAME DIRECTOR
NAME AGE POSITION WITH SOLITRON DIRECTOR EXPIRES(1)
- ---- --- ---------------------- -------- ----------
Shevach Saraf Chairman of the Board, 1992 1998
54 Chief Executive Officer,
President and Treasurer
Dr. Jacob Davis 60 Director 1999 2001
Mr. Joseph Schlig 69 Director 1996 1999
(1) This Director's term expires when his successor is elected at the next
annual meeting of shareholders.
-43-
<PAGE>
Mr. Shevach Saraf has been President of the Company since November 1992, Chief
Executive Officer of the Company since December 1992 and Chairman of the Board
since September 1993. He has 33 years experience in operations and engineering
management with electronics and electromechanical manufacturing companies.
Before joining Solitron in 1992, Mr. Saraf was Vice President of Operations and
a member of the Board of Directors of Image Graphics, Inc., a military and
commercial electron beam recorder manufacturer based in Shelton, CT. As head of
the company's engineering, manufacturing materials and field service operations,
he turned around the firm's chronic cost and schedule overruns to on-schedule
and better-than-budget performance. Earlier, he was President of Value Adding
Services, a management consulting firm in Cheshire, CT. The company provided
consulting and turnaround services to electronics and electromechanical
manufacturing companies with particular emphasis on operations. From 1982-1987,
Mr. Saraf was Vice President of operations for Harmer Simmons Power Supplies,
Inc., a power supplies manufacturer in Seymour, CT. He founded and directed all
aspects of the company's startup and growth, achieving $12 million in annual
sales and a staff of 180 employees. Mr. Saraf also held management positions
with Photofabrication Technology, Inc. and Measurements Group of Vishay
Intertechnology, Inc.
Born and raised in Tel Aviv, Israel, he served in the Israeli Air Force from
1960-1971 as an electronics technical officer. He received his master's in
business administration from Rensselaer Polytechnic Institute, Troy, NY, and his
master's in management from Hartford (CT) Graduate Center. He also received
associate degrees from the Israeli Institute of Productivity, the Teachers &
Instructors Institute, and the Israeli Air Force Technical Academy.
Dr. Jacob(Jay) A. Davis is Vice President of Business Planning and Finance for
AET, Inc, a developing, Melbourne based software company. In 1994 and 1995, he
was Visiting Professor in Engineering Management at Florida Institute of
Technology. He is presently Vice-Chairman of the Brevard SCORE Chapter and
devotes significant time to counseling with local businesses. He is an active
member of the International Executive Service Corps (IESC) serving in South
Russia during May and June of 1996.
Prior to joining AET, Dr. Davis was with Harris Semiconductor for 26 years.
During the last 12 years with Harris Semiconductor, he was Vice
President-General Manager of the Military and Aerospace Division, the Custom
Integrated Circuits Division and the Harris Microwave Division. Dr. Davis has
served in a variety of other capacities at Harris Semiconductor including Vice
President of Engineering, Director of Manufacturing, Director of Special
Services, and Device Research Engineer.
Dr. Davis received a doctor of philosophy from Purdue University in 1969 and a
bachelors of science in electrical engineering from North Carolina State
University. He is a Member of the IEEE and the Electrochemical Society, and has
served on a variety of advisory boards for several Universities. He holds four
patents and has given a number of overview papers and invited presentations at
several conferences.
Mr. Joseph Schlig was elected a Director of the Company on August 26, 1996. He
has been since 1995 the Vice President-Finance, CFO, Treasurer and Secretary of
Industrial Technologies Inc., of Trumbull, CT, (NASDAQ) a company that develops
sensing, monitoring, processing and inspection technologies that operate under
the demanding factory floor conditions encountered in a wide range of
industries. He is also Managing Director of Fairhaven Associates, a professional
consulting firm supporting small and medium size businesses in strategic
planning; financial, marketing and operations management; and organizational
development. For the prior five years, Mr. Schlig was a business consultant to
private companies and to the State of Connecticut Department of Economic
Development. Mr. Schlig has many years of business experience including Director
of Marketing, Latin America for ITT and Director of International Operations for
Revlon. Mr. Schlig has also operated several small/medium size companies in both
the public and private sectors. He also serves as a director of the Trumbull
Technology Foundation, the Bridgeport Economic Development Corporation and the
MIT Enterprise Forum of Connecticut. Mr. Schlig has an engineering degree from
the Stevens Institute of Technology and an M.B.A. from the Harvard Business
where he was a Baker Scholar. Mr. Schlig is a member of the Audit and
Compensation Committees.
-44-
<PAGE>
COMMITTEES OF THE BOARD
The Audit Committee provides assistance to the Board of Directors in fulfilling
its responsibilities relating to corporate accounting and reporting practices
and maintains a direct line of communication among the directors, the Company's
internal accounting staff and the Company's independent accountants. In
addition, the Audit Committee confers with the Company's independent accountants
to review the plan and scope of their proposed audit as well as their findings
and recommendations upon the completion of the audit. The members of the Audit
Committee were Mr. Schlig , Chairman, and Dr. Davis. During the year ended
February 28, 1997, the Audit Committee met one time.
Messrs. Joseph Schlig and Dr. Jay Davis served on the Compensation Committee
(Dr. Davis chairs the committee). Mr. Saraf serves on the Nominating Committee.
Mr. Saraf and Dr. Davis serve on the Executive Committee. Dr. Davis and Mr.
Schlig serve on the Capital Formation/Acquisition Committee. None of these
committees met during the year ended February 28, 1997.
During the year ended February 28, 1997, the Board of Directors met 3 times, and
each director attended at least 75% of the meetings held during the period he
was a director.
SECTION 16(A) COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors and executive officers of the Company and ten percent shareholders of
the Company to file initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company with the
Securities and Exchange Commission. Directors, executive officers and ten
percent shareholders are required to furnish the Company with copies of all
Section 16(a) forms they file. Although the Company has been unable to obtain
written representations with respect to the filing of Section 16(a) reports from
former directors and executive officers, based upon a review of the copies of
Section 16(a) filings furnished to the Company and written representations from
the Company's current executive officers and directors, the Company believes
that during the fiscal year ended February 28, 1997 directors and executive
officers of the Company complied with Section 16(a) filing requirements
applicable to them. On January 20, 1997 Bruce Paul filed a Schedule13D, but did
not, to the Company's knowledge, file a Form 3.
ITEM 9. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning compensation
paid by the Company, to or on behalf of the Company's Chief Executive Officer
for the fiscal years ended February 28, 1997, February 29, 1996, and February
28, 1995.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- -------------------------- -------
YEAR OTHER
ENDED ANNUAL RESTRICTED ALL OTHER
NAME AND FEBRUARY COMPEN- STOCK OPTIONS/ LTIP COMPENSA-
PRINCIPAL POSITION(1) 28/29 SALARY($) BONUS($) SATION($) AWARDS($) SARS(#) PAYOUTS($) TION($)
- --------------------- ----- --------- -------- --------- --------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shevach Saraf 1994 141,309 -0- 17,081(3) -0- 17,500(6) -0- 36,708(7)
Chairman of the Board, 1995 123,308 -0- 7,676 -0- -0- -0-
Chief Executive Officer 1996 132,462 53,680 -0- -0- -0- -0-
President and Treasurer 1997 140,000 -0- -0- -0- -0- -0-
-45-
<PAGE>
<FN>
- ----------
(1) Except for the Chief Executive Officer, no executive officer of the
Company received any compensation for acting in such capacity and,
therefore, none are included herein. Reflects one-for-ten reverse stock
split effective October 12, 1993.
(2) Shevach Saraf has been President of the Company since November, 1992,
Chief Executive Officer since December, 1992 and Chairman of the Board
since September, 1993.
</FN>
</TABLE>
Shevach Saraf is a party to an Employment Agreement with the Company, which
provides, among other things, for minimum annual compensation of $140,000, the
grant of incentive stock options to purchase 4% of the shares of the Company's
Common Stock on a fully diluted basis, and the issuance of shares of the
Company's Common Stock representing 10% of the outstanding Common Stock on a
fully-diluted basis. This grant of stock options is in addition to the other
stock options previously granted to Mr. Saraf, in October, 1992. The Employment
Agreement prohibits Mr. Saraf from competing with the Company during his
employment and for one year thereafter. The Employment Agreement expires on
August 30, 1998.
Executive officers of the Company may also participate in the Company's 1987
Stock Option Plan, the Company's Deferred Compensation Plan and the Company's
Employee 401-K and Profit Sharing Plan (the "Profit Sharing Plan"). During the
fiscal year ended February 28, 1997, no amounts were deferred by executive
officers under the Company's Deferred Compensation Plan and the Company did not
match any employee contributions to the Profit Sharing Plan.
OPTION/SAR GRANTS TABLE
No Stock options were granted during the fiscal year ended February 28, 1997.
Certain stock options granted at a meeting of the Board of Directors held on
March 14, 1994 were issuable upon the condition that the shareholders approved
such issuance prior to March 14, 1995. As a result of a lack of shareholder
approval prior to this date, all such option grants are void. No awards were
made under any long term plan during fiscal year end February 28, 1997. The
following table sets forth certain summary information covering unexercised
options to purchase the Company's Common Stock as of February 28, 1997 held by
the Company's Chief Executive Officer. The Company's Chief Executive Officer did
not exercise any stock options during the fiscal year ended February 29, 1996.
<TABLE>
<CAPTION>
VALUE OF UNEXERCSED
IN-THE-MONEY SHARES NUMBER OF UNEXERCISED IN THE MONEY
NAME AND ACQUIRED OR VALUE OPTIONS HELD AT OPTIONS HELD AT
PRINCIPAL POSITION EXERCISED(#) RECEIVED FISCAL YEAR END(#) FISCAL YEAR END($)
- ------------------ ------------ -------- ------------------ ------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UEXERCISABLE
----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shevach Saraf,
Chairman of the
Board, Chief Executive
Officer, President
and Treasurer -0- -0- 166,747(1) 23,821(1) -0- - 0-
DIRECTOR REMUNERATION
Each director who is not employed by the Company receives $1,000 for each
meeting of the Board he attends and $250 for each committee meeting he attends
on a date on which no meeting of the Board is held. In addition, all
out-of-pocket expenses incurred by a director in attending Board or committee
meetings are reimbursed by the Company. Total fees paid to all directors for
attendance at Board and committee meetings amounted to $4,000 for the fiscal
year ended February 28, 1997.
<FN>
- ----------
(1) Subject to applicable anti-dilution provisions.
</FN>
</TABLE>
-46-
<PAGE>
In consideration of their services to the Company and its shareholders during
the 1997 fiscal year, and to provide incentive for their continued efforts to
build shareholder value, the Company will issue to its Board members who are not
employed by the Company options to purchase 4,000 shares of the Company's common
stock, at a price equal to the closing price of the Company's common stock on
March 3, 1997, with such options to vest over a period of twelve months, and
otherwise upon the terms and subject to the conditions of the Company's existing
Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From August 26, 1996, Dr. Davis and Mr. Schlig served as its Compensation
Committee and made all compensation decisions during that period.
ITEM 10. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of April 30, 1997 by (i) all directors, (ii) all
officers and directors of the Company as a group and (iii) each person known by
the Company to beneficially own in excess of 5% of the Company's outstanding
common stock. The Company does not know of any beneficial owner of more than 5%
of the outstanding shares of Common Stock other than as shown below. Unless
otherwise indicated below, each shareholder has sole voting and investment power
with respect to the shares beneficially owned. Except as noted below, all shares
were owned directly with sole voting and investment power.
-47-
<PAGE>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING
NAME BENEFICIALLY OWNED(1) SHARES(1)
---- --------------------- -------------
Shevach Saraf(2) 220,154 10.0%
3301 Electronics Way
West Palm Beach, FL 33407
All executive officers and 220,154 10.0%
directors as a group (3 persons)
Inversiones Globales, S.A.(3) 273,943 12.5%
Board of Trustees of the 296,618 13.5%
Policemen and Firemen Retirement
System of the City of Detroit
Bruce Paul, Purchase, NY 150,000 7.2%
(1) Reflects one-for-ten reverse stock split effective October 12, 1993.
For purposes of this table, beneficial ownership is computed pursuant
to Rule 13d-3 under the Securities Exchange Act of 1934, as amended;
the inclusion of shares beneficially owned should not be construed as
an admission that such shares are beneficially owned for purposes of
Section 16 of such Act.
(2) Pursuant to the terms of the Plan of Reorganization, the Company has
issued Mr. Saraf 10% of the issued and outstanding Common Stock.
(3) Pursuant to the terms of the Plan of Reorganization, the Company
issued to Vector participants and successors that number of shares of
Common Stock equal 25% of all shares of Common Stock issued and
outstanding after giving effect to all issuances contemplated by the
Plan of Reorganization (other than shares issuable to Mr. Saraf upon
the exercise of options granted to him on or prior to the Effective
Date). Vector participants must vote such shares as directed by the
Board of Directors and, in general, has agreed to take no action
hostile to the Company such as to commence or assist in a proxy
contest or tender offer.
(4) On June 12, 1993, Mr. Saraf received 48,803 shares of the Company's
Common Stock pursuant to the terms of his Employment Agreement,
described below. Pursuant to the terms of his Employment Agreement
with the Company, Mr. Saraf has been and will be issued additional
shares of Solitron's Common Stock so that the number of shares issued
to him equals 10% of all shares of Common Stock issued and outstanding
after giving effect to all issuances contemplated by the Plan of
Reorganization (other than issuances pursuant to the exercise of stock
options by Mr. Saraf, as described below). After the issuance of all
shares of Common Stock contemplated in the Plan of Reorganization, Mr.
Saraf has received an aggregate of 219,155 shares of Common Stock
pursuant to this provision of his Employment Agreement. If dividends
are declared with respect to Common Stock, they will be paid with
respect to all such shares.
(5) On October 20, 1992, Mr. Saraf was issued an option to purchase 95,284
shares of the Company's Common Stock at an exercise price of $5.625
per share, pursuant to an Incentive Stock Option Agreement issued
under the Company's 1987 Stock Option Plan. As of the date of that
Agreement, 95,284 shares represented approximately four percent of the
Company's outstanding Common Stock. Pursuant to the terms of such
Agreement, the number of shares subject to such option will be
increased (and the exercise price per share will be proportionately
decreased so that the aggregate exercise price will remain unchanged)
so that the number of shares issuable in connection therewith will be
equal to four percent of all shares issued and outstanding after
giving effect to all issuances contemplated by the Plan of
Reorganization. After the issuance
-48-
<PAGE>
of all shares of Common Stock contemplated by the Plan of
Reorganization, there will be 2,191,545 shares outstanding and this
option will entitle Mr. Saraf to purchase approximately 109,577
shares. One quarter of all such options vest on each of the four
anniversaries of the date of grant In a Compensation Committee meeting
held on March 3, 1997, the exercised price of Mr. Saraf's option was
adjusted to the closing price of the stock on March 3, 1997 ($0.156
per share).
(6) Effective August 20, 1993, Mr. Saraf was issued an additional option
to purchase an additional our percent of the Common Stock on a
fully-diluted basis giving effect to all shares issuable pursuant to
the Plan of Reorganization. As of August 20, 1993, four percent of the
outstanding Common Stock was equal to 95,284 shares. After the
issuance of all shares of Common stock contemplated by the Plan of
Reorganization, this option will entitle Mr. Saraf to purchase
approximately 95,284 shares. These options are exercisable at a price
of $6.875 per share; provided, however, that as additional shares are
issued in connection with the above-referenced anti-dilution
provisions, the exercise price shall be reduced proportionately so
that the aggregate exercise price will remain unchanged. One quarter
of all such options vest on each of the four anniversaries of their
date of grant. In a Compensation Committee meeting held on March 3,
1997, the exercised value of Mr. Saraf's option was adjusted to the
closing price of the Company's stock on March 3, 1997 ($0.156 per
share).
ITEM 11. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
Pursuant to the Plan of Reorganization, the Company and Vector, a holder of 25%
of the Company's outstanding Common Stock, entered into a number of transactions
which are described under "Item 1 - Business - Bankruptcy Proceedings."
-49-
<PAGE>
ITEM 12. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
PAGE
----
(a)(1) The following financial statements are included in
Part II, Item 7.
Reports of Independent Certified Public Accountants 25-26
Financial Statements: 27
Consolidated Balance Sheet - February 29, 1996
Consolidated Statements of Operations - For the year 28
ended February 29, 1996 and February 28, 1995
Consolidated Statements of Stockholders' Equity - For 29
the year ended February 29, 1996 and February 28, 1995
Consolidated Statements of Cash Flows - For the years 20
ended February 29, 1996 and February 28, 1995
Notes to Consolidated Financial Statements 31-45
(2) Exhibits:
2.1 Debtors' Fourth Amended Plan of Reorganization of the Company
(incorporated by reference to the Company's Form 8-K, dated September
3, 1993, as amended by the Company's Form 8-K/A, dated October 12,
1993).
2.2 Debtors' First Modification of Fourth Amended Plan of Reorganization
of the Company (incorporated by reference to the Company's Form 8-K,
dated September 3, 1993, as amended by the Company's Form 8-K/A, dated
October 12, 1993).
2.3 Order Confirming Debtors' Fourth Amended Plan of Reorganization of the
Company (incorporated by reference to the Company's Form 8-K, dated
September 3, 1993, as amended by the Company's Form 8-K/A, dated
October 12, 1993).
2.4 Consent Final Judgment of the Company (incorporated by reference to
the Company's Form 8-K, dated September 3, 1993, as amended by the
Company's Form 8-K/A, dated October 12, 1993).
3.1 Certificate of Incorporation of the Company (incorporated by reference
to the Company's Form 10-K for the year ended February 28, 1993).
3.2 By-Laws of the Company (incorporated by reference to the Company's
Form 10-K for the year ended February 28, 1993).
10.1 1987 Incentive Stock Option Plan (incorporated by reference to the
Company's Form 10-K for the years ended February 28, 1994 and February
28, 1995).
-50-
<PAGE>
10.2 Purchase Agreement, dated October 5, 1992, by and among Solitron
Devices, Inc., Solitron Specialty Products, Inc. (f/k/a Solitron
Microwave, Inc.) and Vector Trading and Holding Corporation, along
with and as amended by: (i) Amendment Number One to Purchase
Agreement, dated October 28, 1992, by and among Solitron Devices,
Inc., Solitron Specialty Products, Inc. (f/k/a Solitron Microwave,
Inc.) and Vector Trading and Holding Corporation; (ii) Order, dated
December 23, 1992, Authorizing the Sale of Certain of the Debtors'
Assets to Vector Trading and Holding Corporation; (iii) Amendment
Number Two to Purchase Agreement. dated February 28, 1993, by and
among Solitron Devices, Inc., Solitron Specialty Products, Inc. (f/k/a
Solitron Microwave, Inc.) and Vector Trading and Holding Corporation;
and (iv) Order, dated March 4, 1993, Granting Vector Trading and
Holding Corporation's Motion for Entry of Amended Order Authorizing
Sale of Certain of the Debtors' Assets (incorporated by reference to
the Company's Form 10-K for the year ended February 28, 1993).
10.3 Shared Services and Equipment Agreement, dated February 28, 1993, by
and among Solitron Devices, Inc., Solitron Specialty Products, Inc.
(f/k/a Solitron Microwave, Inc.) and Solitron/Vector Microwave
Products, Inc. (incorporated by reference to the Company's Form 10-K
for the year ended February 28, 1993).
10.4 Sublease, dated March 1, 1993, by and between Solitron Devices, Inc.
and Solitron/Vector Microwave Products, Inc. (incorporated by
reference to the Company's Form 10-K for the year ended February 28,
1993).
10.5 Commercial Lease Agreement, dated January 1, 1992, between William C.
Clark, as Trustee, and Solitron Devices, Inc. (incorporated by
reference to the Company's Form 10-K for the year ended February 28,
1993).
10.6 Employment Agreement, dated February 3,1993, between Solitron Devices,
Inc. and Shevach Saraf (incorporated by reference to the Company's
Form 10-K for the year ended February 28, 1993).
21 List of Subsidiaries of the Company.
(b) Reports on Form 8-K - one.
27 Financial Data Schedule
-51-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Solitron Devices, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Solitron Devices, Inc.
/s/ SHEVACH SARAF
--------------------------------
By: Shevach Saraf, Chairman of the
Board, Chief Executive Officer,
President, and Treasurer
Date: June 12, 1997
-52-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of Solitron and in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/SHEVACH SARAF
- ------------------- Chairman of the Board, June 12, 1997
Shevach Saraf Chief Executive Officer,
President and Treasurer
-53-
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
- ------- ----
21 List of Subsidiaries
27 Financial Data Schedule
-54-
Exhibit 21
SOLITRON DEVICES, INC.
SUBSIDIARIES OF THE REGISTRANT
PERCENTAGE OF VOTING
SECURITIES OWNED STATE OF ACTIVE
BY REGISTRANT INCORPORATION DIVISION
--------------------- ------------- --------
Registrant:
Solitron Devices, Inc. Delaware *
Subsidiaries of Registrant:
Solitron Specialty Products, Inc. 100 Delaware
Array Devices, Inc. 100 California
Solidev International
Sales Corporation 100 New York
Solitron International, Inc. 100 Virgin Islands
Solidev Warenvertriebs GmbH 100 Germany
All subsidiaries are included in the consolidated financial statements: Solidev,
Ltd. England, and Solidev (H.K.) Ltd., Hong Kong were dissolved. All unnamed
subsidiaries and other affiliates when considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary. As none of them are
active, no separate financial statements are submitted for any subsidiary.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOLITRON
DEVICES, INC. AND SUBSIDIARIES FORM 10-KSB FOR THE YEAR ENDED FEBRUARY 28, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENT FISCAL
YEAR END - FEBRUARY 28, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 537,000
<SECURITIES> 0
<RECEIVABLES> 1,139,000
<ALLOWANCES> (34000)
<INVENTORY> 2,088,000
<CURRENT-ASSETS> 3,901,000
<PP&E> 1,559,000
<DEPRECIATION> (884,000)
<TOTAL-ASSETS> 6,474,000
<CURRENT-LIABILITIES> 2,873,000
<BONDS> 0
0
0
<COMMON> 20,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,474,000
<SALES> 7,159,000
<TOTAL-REVENUES> 7,159,000
<CGS> 5,581,000
<TOTAL-COSTS> 6,690,000
<OTHER-EXPENSES> (4,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 326,000
<INCOME-PRETAX> 139,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 139,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 139,000
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
