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, 1998
Commission File No. 1-4978
SOLITRON DEVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-1684144
(State or other jurisdiction (IRS Employer
of organization) Identification Number)
3301 ELECTRONICS WAY, WEST PALM BEACH, FLORIDA 33407
(Address of principal executive offices)
Registrant's telephone number: (561) 848-4311
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
-------------------
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, 1998, was approximately $254,252.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 28, 1998: 2,034,013 shares of common stock, par
value $.01 per share.
State issuer's revenues for its most recent fiscal year: $7,860,000.
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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, 1998 and for the fiscal year ended
February 28, 1997 and (ii) contributions to the Company's total order backlog at
February 28, 1998 and for the fiscal year ended February 28, 1997.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR BACKLOG BACKLOG
ENDED ENDED AT AT
FEBRUARY FEBRUARY FEBRUARY FEBRUARY
PRODUCT 28, 1998 28, 1997 28, 1998 28, 1997
- ------- -------- --------- ---------- --------
<S> <C> <C> <C> <C>
Power Transistor 25% 31% 10% 14%
Hybrids 44% 37% 66% 63%
Field Effect Transistors 15% 16% 11% 7%
Power MOSFETS 16% 16% 13% 16%
---------- ---------- ---------- --------
100% 100% 100% 100%
</TABLE>
The Company's backlog at February 28, 1998 and shipments for the year ended
February 28, 1998 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.
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.
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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, to Jupiter on Galileo and, most recently, to
Mars on Global Surveyor and Mars Sojourner. 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, 1998, 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, 1998, 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 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.
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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 9001 International Quality
Program. The ISO 9001 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 9001 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 9001, 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 9001 allowing their suppliers to comply with ISO
9001 as an alternative to military qualification. The Company initiated the
necessary Program to obtain ISO 9001 qualification within the next year. The
Company seeks 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, April 1995, and October 1997. 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. Presently, the Company is
undergoing the necessary training and updating of its procedures and systems
which will allow it to obtain ISO 9001 certification.
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. Chip resistors are made for internal use and for sale to
others.
MANUFACTURING
The Company's engineers 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.
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 eutectic, soft solder or epoxy die attach techniques, 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.
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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.
MANUFACTURING RISKS
The Company's manufacturing processes are highly complex, require advanced and
costly equipment, and are continuously being modified in an effort to improve
yields and product performance. Minute impurities or other difficulties in the
manufacturing process can lower yields. There can be no assurance that the
Company will not experience manufacturing difficulties in the future.
TECHNOLOGY CHANGE RISKS
The market for the Company's products is characterized by slowly changing
technology, evolving industry standards, changes in customer requirements,
moderate product obsolescense, and infrequent new product introductions. The
Company's continued viability will depend, in part, upon its ability to maintain
and develop competitive packaging technologies, to continue to develop and
introduce new products in a timely and cost-effective manner that satisfy its
customers' changing industry requirements, and to successfully market its new
products and technologies. In light of the fact that many of the Company's
competitors have substantially greater resources than the Company and that the
Company has spent little on research and development in recent years, the
Company will be challenged in doing the foregoing. The failure of the Company to
do the foregoing might have an adverse effect on the Company.
PRODUCT LIABILITY
The Company's business exposes it to potential liability risks that are inherent
in the manufacturing and marketing of high-reliability electronic components for
critical applications. No assurance can be made that the Company's product
liability insurance coverage is adequate or that present coverage will continue
to be available at acceptable costs, or that a product liability claim would not
adversely affect the business or financial condition of the Company.
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 manufacturers' representatives and distributors.
The Company is represented (i) in the United States by 7 representative
organizations which operate out of 11 different locations with 26 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.
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On February 28, 1998, the Company had approximately 280 active customer
accounts. During the year ended February 28, 1998, Raytheon (which includes, by
way of acquisition, Hughes, E-Systems, and T.I.) accounted for approximately 40%
of net sales. No other company accounted for more than 10% of net sales during
the last fiscal year. Approximately 6 of the Company's customers accounted for
approximately 62% of the Company's sales during the fiscal year ended February
28, 1998. 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. As a result of the mergers and acquisitions in general, and
among large defense contractors in particular, the number of customers will
continue to decline in number, not necessarily in the level of business. 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, 1998 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 17% decrease in bookings during the fiscal year ended February
28, 1998 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.
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 8% of the Company's net sales during the year ended
February 28, 1998 and 5% during the year ended February 28, 1997. This
improvement is a result of an increase 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 $5,256,000 at February 28, 1998, compared to $5,700,000 as of
February 28, 1997. The entire backlog consisted of orders for electronic
components. The Company currently anticipates that the majority of its entire
open order backlog will be filled by February 28, 1999. See "Item 7. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources."
The Company's backlog as of any particular date may not be representative of
actual sales for any succeeding period because lead times for the release of
purchase orders depend upon the scheduling practices of individual customers,
the delivery times of new or non-standard products can be affected by scheduling
factors and other manufacturing considerations, the rate of booking new orders
can vary significantly from month to month, and the possibility of customer
changes in delivery schedules or cancellations of orders. Also, delivery times
of new or non-standard products are effected by the availability of raw
material, scheduling factors, manufacturing considerations and customer delivery
requirements.
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A portion of the Company's sales are to military and aerospace markets which are
subject to the business risk of changes in governmental appropriations and
changes in national defense policies and priorities. All of the Company's
contracts with prime U.S. Government contractors contain customary provisions
permitting termination at any time at the convenience of the U.S. Government or
the prime contractors upon payment to the Company for costs incurred plus a
reasonable profit. Certain contracts are also subject to price re-negotiation in
accordance with U.S. Government sole source procurement provisions. None of the
Company's contracts has been terminated for cause or for the convenience of the
U.S. government or prime contractors, or had the prices so renegotiated.
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. See "Management's Discussions and
Analysis of Financial Conditions" and "Result of Operations" for a discussion of
decreased bookings for the year ended February 28, 1998 as compared to the
previous year.
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.
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 that it is well regarded by its customers in
the segments of the market, where competition is dependent less on price and
more on product reliability and performance. 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 some markets has been declining in some marketplaces, 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 will be subject to price erosion and foreign
competition. The Company has numerous competitors across all of its product
lines. 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, semiconductor die, and
packages. For the year ended February 28, 1998, the Company's on-time delivery
record was 75% as compared with 81% for the year ending in February 28, 1997.
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.
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EMPLOYEES
At February 28, 1998, the Company had 116 employees (as compared to 105 at
February 28, 1997) of whom 74 are engaged in production activities, 7 in sales
and marketing, 7 in executive and administrative capacities and 28 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.
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.
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 significant funds on research and
development.
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.
ENVIRONMENTAL REGULATION
While the Company believes that it has the environmental permits necessary to
conduct its business and that its operations conform to present environmental
regulations, increased public attention has been focused on the environmental
impact of semiconductor operations. The company, in the conduct of its
manufacturing operations, has handled and does handle materials that are
considered hazardous, toxic or volatile under federal, state, and local laws
and, therefore, is subject to regulations related to their use, storage,
discharge, and disposal. No assurance can be made that the risk of accidental
release of such materials can be completely eliminated. In the event of a
violation of environmental laws, the Company could be held liable for damages
and the costs of remediation and, along with the rest of the semiconductor
industry, is subject to variable interpretations and governmental priorities
concerning environmental laws and regulations. Environmental statues have been
interpreted to provide for joint and several liability and strict liability
regardless of actual fault. There can be no assurance that the Company and its
subsidiaries will not be required to incur costs to comply with, or that the
operations, business, or financial condition of the Company will not be
materially adversely affected by current or future environmental laws or
regulations.
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ENVIRONMENTAL COMPLIANCE
The Order of Confirmation (the "Confirmation Order") approving the Company's
Amended Plan of Reorganization with First Modification (the "Plan) was issued by
the Bankruptcy Court on August 19, 1993 (the "Confirmation Date"), and provided
a plan for future remediation of the two properties of the Company. One property
is Lot 1 (the north parcel) of the property at 1177 Blue Heron Road in the City
of Riviera Beach, and the second is its former Port Salerno facility, S.E. Cove
Road, Port Salerno, Martin County, Florida.
Contemporaneously with the confirmation Order, the Company and the State of
Florida Department of Environmental Protection (the "DEP") entered into a
Stipulation for entry of a Consent Final Judgement in the Circuit Court of the
Nineteenth Judicial Circuit of Florida in and for Martin County, Florida. The
Consent Final Judgement, entered by the Court on October 21, 1993, provides that
the Company shall: (a) reimburse the DEP $200,000 for providing main and lateral
water line extensions and property hookups to serve eight off-site properties
presently impacted by the groundwater contamination emanating from the Port
Salerno Site (paid as an administrative expense in accordance with the
Confirmation Order); (b) remediate site soils and groundwater at and emanating
from the Port Salerno site; (c) address residual soil contamination and a
limited, defined "hot spot" in the groundwater at and near the north end of the
Riviera Beach property; and (d) pay a final judgment of $102,860.57 to be paid
to the DEP pursuant to the Plan in the manner and to the extent of the Company's
payment of other unsecured creditor claims.
Pursuant to the Confirmation Order, all existing security interests on these two
properties, except real estate taxes, were removed. The properties were
appraised by an MAI appraiser, as if uncontaminated, at $1,950,000 for Riviera
Beach and $1,650,000 for Port Salerno. Under the Plan and the Consent Final
Judgement, the Company will sell or lease the two properties and utilize the
proceeds derived therefrom, together with certain insurance proceeds, to
remediate both sites. All such proceeds will be placed in escrow for that
purpose. Any excess funds after all escrow obligations are satisfied will belong
to the Company.
To facilitate the prompt sale or leasing of these properties, the DEP has
provided protection in the Consent Final Judgment to a tenant or purchaser of
the properties, limiting liability to the DEP solely to future discharges during
its ownership or occupancy.
The Company's consultant has estimated the costs of remediation to be
approximately $727,000 for the Port Salerno property and $342,000 for the
Riviera Beach property if performed pursuant to the Consent Final Judgement. The
remediation could cost more; particularly if further offsite wells become
contaminated at Port Salerno and the affected properties must be supplied public
water by further extension of the water lines. All residents who could be
potentially affected by further groundwater plume movement at Port Salerno were
notified of the pendency of the bankruptcy and that claims could be filed. The
claims filed, except as set forth below, have been settled.
The Company received a claim by an estate-owned 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 its property and
that the company is prepared to settle for the sum of $10,000, to be paid as
other unsecured credit claims are being paid. This offer was rejected. The claim
is unresolved and is currently dormant.
The Company's position has been that further off-site exposure to third party
property owners at Port Salerno is limited by its Chapter 11 proceeding solely
to its obligation for extension of public water lines to the affected property.
It cannot now be estimated whether some future extension may be required, but
the contaminated groundwater appears to move solwly and any remediation
contractor will utilize off-site recovery wells to contain its further movement.
The City of Riviera Beach previously settled its claim with the Company for
cleanup of contamination of its wellfield, except for the "hot spot" to be
addressed by the Company as required by the Consent Final Judgment. The unpaid
balance of the settlement amount with the City was approved in the Confirmation
Order, to be paid as and to the extent provided for other unsecured creditors.
After notice, no other claims were filed in the bankruptcy proceeding related to
offsite groundwater contamination at the Riviera Beach site, and potential
claims may have been extinguished thereby.
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If funds to clean the sites were not available within 24 months of entry of the
Consent Final Judgment, the Company, beginning in October 1995, was to make
periodic payments into the escrow to clean both sites based on the following
schedule:
1. Commencing on the 25th month, $5,000 per month, and
2. Commencing on the 37th month, $7,500 per month, and
3. Commencing on the 49th month, $10,000 per month.
4. This periodic funding will be suspended when funds available in escrow
reach 125% of the estimated costs to complete remediation.
The Company is not required to pay additional funds in excess of the schedule
set forth above, except that if funds are not available in the escrow for that
purpose, the Company must independently fund any further extension of public
water supply lines in the vicinity of the Port Salerno site. The Consent Final
Judgment requires providing any such extension within a reasonable time. The
prior payment to the state has extended the large water main to provide service
to the area. The further extension would be for lateral extensions and
individual property hookups.
During the period of October 1995 and October 1996, the Company advised the DEP
that it could pay only $1,000 per month into escrow, rather than the $5,000
specified in the Consent Final Judgment. Since then, the Company has paid $1,000
per month in the escrow for its two properties, the total escrow amounts for the
properties as of February 28, 1998 totaling $30,000. The DEP has acquiesced in
this payment level.
Since entry of the Consent Final Judgment, the Company's consultant submitted a
plan for further soil assessment at the Riviera Beach facility, received
approval thereof and of its Quality Assurance Project Plan, and, after filing an
assessment report reporting its data, received DEP approval of the report's
conclusion that no further soil remediation is required. After performing the
further soil assessment there, the balance of the original escrowed funds of
$42,000 were transferred to the Port Salerno escrow account to enable the soil
assessment to be performed there. This assessment has now been completed, and
the consultant's report of the data collected concludes that no further soil
remediation is required. The DEP has now concurred with the report. Until the
escrows are replenished as set forth herein, groundwater remediation will be
deferred at the two sites.
Following the EPA's placing of the Riviera Beach and Port Salerno sites under a
re-evaluation process for possible National Priority Listing ("NPL") under the
Superfund program, the Company requested, due to its settlement with the DEP and
the entry of the Consent Final Judgment pertaining thereto, that both sites be
withdrawn from the re-evaluation process. The DEP had requested the EPA that the
Riviera Beach site be assigned a low priority for re-evaluation. The EPA
temporarily discontinued the steps necessary to list the sites.
However, during 1997, the EPA revisited the need for site evaluation at both
sites and required the Company to sign site access agreements permitting the EPA
to perform expanded site assessments at both sites. At a meeting at the DEP in
Tallahassee on March 21, 1997, after a lengthy discussion with Company
representatives and the representatives of two contract vendees who had recently
executed purchase contracts, the DEP and the EPA agreed to defer further
evaluations of the sites for at least 90 days to permit due diligence
inspections by the prospective purchasers so that the DEP could determine if
they would take title, assume full responsibility for cleanup, and provide
financial security under their respective contracts.
After lengthy but unsuccessful negotiations regarding a state lead cleanup at
Port Salerno by a prospective purchaser willing to post a $1,000,000 bond to
secure performance of the cleanup, the prospective purchaser withdrew from its
contract and the EPA published notice that it is proposing the Port Salerno site
for NPL listing. The EPA has decided it will clean the site using monies from
the Superfund. The Company has now entered into negotiations with the EPA to
settle EPA's prospective cost claim against it that could arise from the costs
the EPA incurs in cleaning the property. There can be no assurance as to the
outcome of such negotiations.
The Company has provided full information of its financial condition and has
asked that except for the value of the Port Salerno property, it has an
inability to pay such claim under the agency's ability to pay guidelines. The
Company has offered to sell its property at its market value and after deducting
its costs including an agreed $50,000 attorneys fees, 5% broker's fee, back
taxes plus interest, and the closing costs, to pay the net proceeds of the sale
in discharge of all EPA claims. EPA has offered to enter into a prospective
purchaser agreement protecting the purchaser from EPA's cost recovery claim and
the regional counsel for the EPA is reviewing the Company's offer with EPA
headquarters.
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In the event the property is not sold on this basis, the Company may have to
await the EPA's completion of its cleanup that is likely to take several years
and then negotiate a settlement of the EPA's cost cleanup at the time. It is the
Company's position that any cost recovery claims by EPA is barred by the Amended
Order of Confirmation in Bankruptcy. Though it has knowledge of DEP's claim in
Bankruptcy and that it likewise had a claim, it did not file a claim, deferring
to the State DEP to file and resolve the future requirements for remediation.
At Riviera Beach, Honeywell, Inc. is the predecessor owner and operator of the
facility during a period when pollution occurred, and it is jointly and
severably liable therefor to the EPA. The Company has been informed by Honeywell
that it intends to secure a deferral of the EPA's potential listing of the site
on the site on the National Priority List by entering into a consent order with
the state DEP. Under such consent order, Honeywell will perform the cleanup of
the Riviera Beach site. The state DEP is expected to request a deferral by the
EPA to the state lead cleanup. It is the Company's position that its exposure to
Honeywell for contribution has been cut off by the Bankruptcy Court order since
Honeywell's claims were filed and resolved therein.
However, to dispose of the property, the Company needs Honeywell's cooperation
and the Company is negotiating to sell the property to a prospective buyer who
owns the adjacent back property. The net proceeds that would be derived from the
sale, about $250,000, would be paid to Honeywell in exchange for its waiver of
any claims for its cleanup activities against the buyer and the Company. There
can be no assurance as to the outcome of such negotiations.
In the event Honeywell is unable to secure deferral by the EPA to its proposed
site lead cleanup, then the Company may not be able to dispose of the property
until the EPA and Honeywell are willing to provide protection against liability
to a purchaser.
Whether Honeywell succeeds in obtaining approval to perform the cleanup under
the State Consent Order should be clarified over the next few months. In all
events, the Company has offered Honeywell site access and is nearing agreement
on terms of such access to permit Honeywell to perform the required cleanup
without participation by the Company. In all events, the position of the Company
is that Honeywell's claim for cleanup and the potential claim of EPA, if
asserted against the company, are barred by the Bankruptcy Court Order.
The Company's former facility in Jupiter, Florida (which was sold in 1982) was
the subject of a preliminary assessment by the EPA in 1995. The EPA requested
site access from the present owner. The Company's environmental legal counsel
has been advised that this facility is being remediated by the present owner.
The Company is not aware of the status of that remediation and has received no
communication from the present owner. 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, 1998, the Company has spent
approximately $3,000 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.
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 $1,045,000 has been accrued in the
balance sheet as of February 28, 1998. The Company recorded these liabilities as
$306,000 short-term liabilities and $739,000 long-term liabilities. These
reservations are predicated on cleanup being performed under the existing
Consent Final Judgement.
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 1998, Vector had
paid approximately $143,000 of these taxes. As of February 28, 1998, Vector has
been current with its financial obligations.
(b) The Company has issued 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% have been issued to holders of unsecured claims (pro rata) and 25% have
been to Vector. 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. In January 1998, the Company issued the remainder of the Common Stock
issuable pursuant to the Plan of Reorganization to unsecured creditors as its
obligations to Ellco have been satisfied in September 1997.
(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).
The Company has proposed to its unsecured creditors that it make quarterly
payments of $9,000, a level of payment which was maintained until FY1997.
Following discussion with the unsecured creditors committee, the Company agreed
to increase the level of such payments to approximately $11,000 per quarter
starting August 1997. To date, the Company made 13 of its proposed distributions
to the unsecured
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creditors who have accepted the payments. These payments to unsecured creditors
covered the period March 1, 1995 through February 28, 1998 in the aggregate
amount of approximately $103,423 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) below) and the
Company's acquisition of the unsecured claim of Argo Partners, Inc. (as
described below in (o) below), it is presently estimated that there are an
aggregate of approximately $7,100,000 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 carries its debt to its unsecured creditors
as $106,000 in short-term debt and $1,244,000 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 $255,000 plus
interest of such $255,000 had been paid as of February 28, 1998. 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 completed making the required payments to Ellco
in August of 1997 and received the release from Ellco in late 1997. Thereupon,
the Company issued the balance of the stock held in escrow for Ellco to the
unsecured creditors in January of 1998.
(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. As of August 30, 1997, the Company
has paid off its entire obligation to Ellco and the lien held by Ellco has 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 performed environmental soils 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
negotiated with DEP to modify this payment schedule. As a result, the Company is
making payments of $1,000 per month and expects to remain on this payment
schedule until the properties are sold. As of February 28, 1998, of the $120,000
due according to the Plan, the Company has deposited $30,000 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 soils at the Old Riviera Beach and Port Salerno facilities requires
remediation. Following testing, final determination has been made by DEP that
the soils at the Old Riviera Beach and Port Salerno facilities need 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 but no excess is now anticipated. See "Item
2." - Properties" for a description of these facilities. The Company's financial
statements reflect liabilities of $1,045,000 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, if cleanups are performed under the Consent Final
Judgment, 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 and the Environmental Compliance
Section hereof. If EPA proceeds with cleanups at either site, the total costs
cannot be estimated now. See Environmental Compliance Section for further
discussion of potential EPA assertions of jurisdiction.
(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 $1,861,000 (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,
1998, such amounts, including accrued interest, total $468,000. 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.
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, 1998:
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DUE TO DATE PAID
----------- ----
Martin County* $ 67,000 $ 7,957
Palm Beach County* $628,000 $225,605
IRS $252,000 $ -
The pre-petition taxes owed to Palm Beach County arose from three sources: (a)
tangible personal property, (b) real property formerly owned by the company, but
subsequently transferred to other entities, and (c) real property currently
owned by the Company. Following the confirmation of the Company's plan of
reorganization, Palm Beach County received funds in partial payment of these tax
liabilities. The Company believes that Palm Beach County applied these funds
without regard to the purpose for which they were being paid (e.g., payments
toward tangible personal property taxes were applied by the County against
amounts owed on real property taxes). There exist issues between the Company and
the County with regard to the proper application of the subject tax payments for
the three categories of property, and until these issues are resolved, the
precise amounts owed for tangible personal property taxes and real property
taxes for the pre-petition period cannot be stated with certainty.
(k) 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.
(l) 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.
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 Facility. The
Company's Old Riviera Beach facility is currently vacant. The Old Riviera Beach
Facility is under negotiation for sale as set forth in the Environmental
Compliance Section, and another potentially responsible party is planning to
clean up the site under a new State Consent Order to avoid a more costly cleanup
under EPA supervision.
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 EPA has proposed to list this property on the National Priority
List for cleanup using monies from its Superfund. EPA is likely to contend that
this cleanup renders the Company liable for its response costs. The Company has
offered to sell this property if EPA will protect the purchaser from liability
for past contamination, which EPA is agreeable to. The Company has proposed that
it convey the net proceed of the sale to EPA in full settlement of EPA's
potential cost recovery claim. The Company has provided financial information
under EPA's "ability to pay" guidelines. EPA is now considering this settlement
proposal. It is also
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reviewing the Company's position that its cost claim was waived by its failure
to assert a claim in their Bankruptcy proceed and its deferral to the State DEP,
which made the claim for site remediation. The reorganization plans contemplate
that the net proceeds of the sale of both contaminated properties be used to
remediate the sites. The Company's offer is consistent with this concept
embodied in the Plan.
In the event EPA is not prepared to accept the offer at this time, then the
cleanup will proceed with Superfund monies. When it is completed, EPA will again
negotiate, under its ability to pay, guidelines for recovering of some or all of
its costs as indicated by the guidelines and the Company's "ability to pay" at
that time.
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, 1998, such amounts including accrued
interest, total $468,000. 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-16-
<PAGE>
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. 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, 1998 FEBRUARY 28, 1997
----------------- -----------------
HIGH LOW HIGH LOW
First $0.3125 $0.1562 $0.3125 $0.1562
Second $0.1562 $0.125 $0.50 $0.125
Third $0.4688 $0.125 $0.375 $0.125
Fourth $0.3125 $0.125 $0.42 $0.125
During the period beginning on March 1, 1998 and ending on April 30, 1998, the
high and low sales prices of the Common Stock were 0.4688 and 0.1250,
respectively.
As of February 28, 1998 and February 28, 1997, there were approximately 4,239
and 4,266 holders of record of the Company's Common Stock, respectively. On
February 28, 1998, the last sale price of the Common Stock as reported on the
Electronic Bulletin Board was $0.1250 per share.
The company has not paid any dividends since emerging from bankruptcy and 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.
-17-
<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.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Year Ended February 28
1998 1997
<S> <C> <C>
Net Sales $ 7,860 $ 7,159
Cost of sales 5,930 5,581
Gross profit 1,930 1,578
Selling, general and administrative expenses 1,447 1,110
Operating income 483 468
Chapter 11 administrative expenses and fresh start adjustments (81) (4)
Gain on disposal of assets - 7
Interest expense (90) (145)
Interest expense on unsecured creditors claims (148) (162)
Write down of non-operating facilities and related expenses (45) (43)
Interest income 28 17
Other, net 47 1
Net income $ 194 $ 139
</TABLE>
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, technological, competitive, governmental procurement, 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 years ended February 28, 1998 and
February 28, 1997, the Company recorded net income from operations of $194,000
and $139,000 respectively.
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
$483,000 for the fiscal year ended February 28, 1998 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, 1998 and February 28, 1997 respectively, the Company had cash
and cash equivalents of $650,000 and $537,000. The principal cash change was due
to managing disbursements and permitting the liabilities to rise.
At February 28, 1998, the Company had working capital of $1,168,000 as compared
with a working capital at February 28, 1997 of $1,027,000. The increase was due
primarily to an increase in cash and inventory caused principally by forward
purchasing of materials in order to support on-time customer requirements and
offset in part by a major shift of long term obligations to current and due to
managing disbursements and permitting the liabilities to rise.
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). The
Company has proposed to its unsecured creditors that it make quarterly payments
of $9,000. Following discussion with the Company's unsecured creditor, the
Company started to make quarterly payments of $11,000 in August 1997. The
Company made 13 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, 1998 in the aggregate amount of
approximately $103,422 of the approximately $807,079 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 carries its debt to its unsecured creditors
as $106,000 in short-term debt and $1,244,000 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.
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.
EPA has now proposed the Port Salerno site for NPL listing and has advised the
Company that it intends to remediate the site using funds from the Superfund.
The Company has offered to settle EPA's potential cost cleanup by selling the
property and providing the net proceeds to EPA, an offer now being considered by
EPA. It is the position of the Company that any cost claim by EPA is barred by
its failure to assert a claim in the Bankruptcy Proceeding therefor, even though
it knew of its potential claim and of the proceeding. See further detailed
discussion under Properties and Environmental Compliance sections.
-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 been advised that this property's contamination
is being addressed by the owner, who is in the process of selling this property.
No claim has been received by the Company.
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 Facility. The costs of these
assessments and remediations, estimated at $1,045,000, 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 has renegotiated with DEP the terms of the cash payments
into the aforementioned escrow account and DEP has accepted a reduced level of
$1,000 per month. As of February 28, 1998, of the $120,000 due in accordance
with the Plan, the Company deposited $30,000 into the escrow account. For
further discussion of environmental liabilities see "Environmental Compliance"
and "Properties" sections.
The Company was 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 and ended
August 1997. These monthly payments escalated from $3,500 to $6,000 during such
four-year term. As of November 30, 1997, the Company had paid Ellco $255,000
plus interest, meeting all of its then current obligations to Ellco. On November
24, 1997, Ellco provided the Company with a release of its security interest
(UCC-3 was being filed with the Florida Secretary of State). Thus, Ellco no
longer has a security interest in the assets of Solitron Devices, Inc, and does
not have an allowed unsecured claim. As a result of the aforementioned, the
balance of stock held in escrow for Ellco was issued to the unsecured creditors
in January of 1998.
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, 1998, such amounts include accrued
interest totaling $468,000. 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, 1998:
DUE TO DATE PAID
----------- ----
Martin County* $ 64,000 $ 7,957
Palm Beach County* $ 870,000 $ 296,230
IRS $ 252,000 $ -
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 a slowdown and soft
level of booking and a renewed 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
or the slowdown in the intake of new orders continue, 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, 1998, the Company's net bookings were
$7,160,000 in new orders as compared with $8,640,000 for the year ended February
28, 1997, a decrease of 17%. This decrease includes an approximate 25% decrease
in the average sales price per unit, which indicates that the Company would have
had to ship 25% more units to achieve the same level of revenues. The price
decrease was a direct result of competitive market conditions and a shift in mix
of products shipped. A 17% decrease in order intake for 1997 and 1998, and a
9.8% increase in shipments for 1997 and 1998 compared to the prior year resulted
in orders received being lower than shipments by approximately $700,000. Thus
the Company's backlog decreased to $5,323,000 at February 28, 1998 as compared
with $5,800,000 as of February 28, 1997, an 8.2% decrease.
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; (d) develop alternative lower cost packaging
technologies. 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 - $16,000
and $328,000.
-21-
<PAGE>
The Company also plans to continue its efforts in selling privately labeled
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.
YEAR 2000
The Company is now assessing the potential impact of the Year 2000, which
concerns the inability of information systems, primarily computer software
programs, to properly recognize and process date sensitive information related
to the Year 2000 and beyond. The Company is currently evaluating the expected
cost to be incurred in connection with the Year 2000. Additionally, suppliers
and other third parties exchange electronic information with the Company. The
Company does not have any information concerning the compliance status of its
suppliers or such other third parties. However, because third party failures
could have a material impact on the Company's ability to conduct business,
confirmations are being requested from its suppliers to certify that plans are
being developed to address Year 2000 issues.
RESULTS OF OPERATIONS
1998 VS. 1997
Net sales for the fiscal year ended February 28, 1998 increased by 9.8% to
$7,860,000 versus $7,159,000 during the fiscal year ended February 28, 1997.
Such increase was primarily attributable to strong backlog and the ability to
ship more. Bookings were lower than sales by 8.9%, thus the backlog decreased
from $5,700,000 as of February 28, 1997 to $5,323,000 as of February 28, 1998.
During the year ending February 28, 1998, the Company shipped 2,234,193 units as
compared with 1,545,617 units shipped during the year ending February 28, 1997.
It should be noted that since the Company manufacturers a wide variety of
products with an average sale price ranging from less than one dollar to several
hundred dollars, such periodic variations in the Company's volume of units
shipped may not be a reliable indicator of the Company's performance.
The Company has experienced a decrease in the level of booking of 17% for the
year ended February 28, 1998 as compared to the previous year principally as a
direct result of the reduction in defense spending, lower demand for the
product, and lower average sales price of products sold.
During the year ending February 28, 1998, the Company's gross margins were
24.56% as compared to 22% for the year ending February 28, 1997. Such an
increase was primarily due to a broad base decrease of cost of goods sold.
During the year ending February 28, 1998, selling, general and administrative
based expenses as a percentage of sales were 18.4% as compared with 15.5% for
the year ending February 28, 1997. Selling, General and Administrative expenses
increased 30.4% to $1,447,000 for the fiscal year ended February 28, 1998 from
$1,110,000 for the fiscal year ended February 28, 1997. Such increase was due
primarily to higher salaries, higher commission rates, and bonus awards.
Total interest expense decreased from $326,000 for the fiscal year ended
February 28, 1997 to $238,000 for the fiscal year ended February 28, 1998
primarily due to lower 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, 1998 25
Consolidated Statements of Operations
for the years ended February 28, 1998 and February 28, 1997 26
Consolidated Statements of Stockholders'
Equity for the years ended February 28, 1998
and February 28, 1997 27
Consolidated Statements of Cash Flows for the years
ended February 28,1998 and February 28, 1997 28
Notes to Consolidated Financial Statements 29-41
-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, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended February 28, 1998. 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, 1998 and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended February 28, 1998 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 26, 1998
-24-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 650,000
Accounts receivable, less allowance for doubtful accounts of $34,000 1,097,000
Inventories 2,493,000
Prepaid expenses and other current assets 119,000
Due from Vector 69,000
-------------
Total current assets $ 4,428,000
PROPERTY, PLANT AND EQUIPMENT, net 570,000
NON-OPERATING PLANT FACILITIES 1,745,000
OTHER ASSETS 92,000
-------------
$ 6,835,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturates of long-term debt $ 7,000
Current portion of accrued environmental expenses 306,000
Accounts payable-Post-petition 347,000
Accounts payable-Pre-petition, current portion 106,000
Accrued expenses 2,459,000
Accrued Chapter 11 administrative expense 35,000
-------------
Total current liabilities $ 3,260,000
LONG-TERM DEBT, less current maturities 14,000
OTHER LONG-TERM LIABILITIES, net of current portion 2,595,000
-------------
TOTAL LIABILITIES $ 5,869,000
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,
2,034,013 shares issued and outstanding 20,000
Additional paid-in capital 2,618,000
Accumulated deficit (1,672,000)
-------------
Total stockholders' equity 966,000
-------------
$ 6,835,000
=============
</TABLE>
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
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997
---- ----
<S> <C> <C>
Net sales $ 7,860,000 $ 7,159,000
Cost of sales 5,930,000 5,581,000
--------- ---------
Gross profit 1,930,000 1,578,000
Selling, general and administrative expenses 1,447,000 1,110,00
--------- ---------
Operating income 483,000 468,000
Other income (expense):
Writedown of non-operating facilities
and related expenses $(45,000) (43,000)
Interest expense (90,000) (169,000)
Interest expense on unsecured creditors claim (148,000) (162,000)
Interest income 28,000 17,000
Other, net (34,000) 28,000
-------- ---------
Other income (expense), net (289,000) (329,000)
-------- ---------
Net income $ 194,000 $ 139,000
========= =========
INCOME (LOSS) PER SHARE OF COMMON STOCK:
Basic Net Income Per Share .09 .07
=== ===
Diluted Net Income Per Share .09 .07
=== ===
Weighted average number of common shares 2,248,000 2,138,000
========= =========
Weighted Average Common and Common
Equivalent Shares Outstanding 2,248,000 2,138,000
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-26-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended February 28, 1998 and
February 28, 1997
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- ADDITIONAL RETAINED
NUMBER OF PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
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
Issuance of shares of
Common Stock Pursuant
To the Plan of Reorganization 57,000 - - - -
Net Income - - - 194,000 194,000
--------- --------- ----------- ------------ ----------
Balance, February 28, 1998 2,034,000 $ 20,000 $ 2,618,000 ($ 1,672,000) $ 966,000
========= ========= =========== ============ =========
</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
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 194,000 $ 139,000
--------- ---------
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 219,000 219,000
Provision for doubtful accounts -0- 7,000
Decrease (increase) in:
Accounts receivable 8,000 (218,000)
Inventories (405,000) (9,000)
Prepaid expenses and other current assets (17,000) 1,000
Due from Vector 67,000 57,000
Other assets (6,000) (3,000)
Increase (decrease) in:
Accounts payable (165,000) (68,000)
Accounts payable-pre-petition 11,000 (7,000)
Accrued expenses 537,000 739,000
Accrued Chapter 11 expenses (3,000) (23,000)
Accrued environmental expenses 108,000 138,000
Other long-term liabilities (262,000) (634,000)
--------- ---------
Total adjustments 92,000 199,000
------ -------
Net cash provided by operating
activities $ 286,000 $ 338,000
--------- ---------
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 (114,000) (121,000)
-------- --------
Net cash used in investing activities (114,000) (121,000)
-------- --------
Payments on capitalized lease obligations (59,000) (89,000)
------- -------
Net cash used in financing activities (59,000) (73,000)
------- -------
Net increase (decrease) in cash 113,000 173,000
Cash and cash equivalents at beginning of period 537,000 364,000
------- -------
Cash and cash equivalents at end of period $ 650,000 $ 537,000
--------- ---------
Supplemental cash flow disclosures:
Interest paid $ 90,000 $169,000
--------- --------
Income taxes paid $ - $ -
--------- --------
</TABLE>
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, 1998 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 AND EQUIPMENT
Property, plant, and equipment are stated at cost. Major renewals and
improvements are capitalized, while maintenance and repairs are expensed when
incurred. Depreciation is provided on a straight-line basis over the estimated
useful lives of the related assets, which range from two to eight years.
Assets acquired under capital lease arrangements have been recorded at the
present value of the future minimum lease payments and are being amortized on a
straight-line basis over the estimated useful life of the asset or the lease
term, whichever is shorter. Amortization of this equipment is included in
depreciation and amortization expense.
NON-OPERATING PLANT FACILITIES:
Facilities that 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 its 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 delivery; 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)
1. Summary of Significant Accounting Policies (continued)
COMPUTATION OF NET INCOME PER SHARE
In 1997, The Financial Accounting standards Board issued SFAS No. 128. Earnings
per Share ("SFAS No. 128"). SFAS No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate restated, to conform to the SFAS No. 128
requirements.
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.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Management believes that this statement
will have no impact on the Company's consolidated financial position and results
of operations.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. This statement establishes standards for the way that public
companies report selected information about operating segments. Adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial position or results of operations but may have an effect
on disclosure of such.
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.
-30-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Going Concern and Petition in Bankruptcy:
GOING CONCERN
The Company's consolidated financial statements are presented on a going concern
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
forbearance 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.
The Company is currently in negotiations with its former 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. At February 28, 1998, there are approximately $7,100,000
of allowed unsecured claims, and accordingly, the Company is currently scheduled
to pay approximately $2,485,000 to holders of allowed unsecured claims in
quarterly installments of approximately $62,000. As of February 28, 1998, the
present value of this amount, $1,349,000, is accrued as a pre-petition liability
(Note 8) with imputed interest recognized in the Statement of Operations.
(b) The Company was required to pay an equipment lessor (Ellco)
$255,000 plus interest at 6% per annum in monthly payments over a four-year
period beginning on the Effective Date. As of February 28, 1998, the Company has
repaid the outstanding balance owed to Ellco and received a release thereon.
Thereupon, the Company issued the balance of the stock held in escrow for Ellco
to the unsecured creditors in January of 1998.
-31-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Going Concern and Petition in Bankruptcy (continued):
(c) 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. The targets
have not been reached and no amounts have been accrued.
(d) 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, 1998, the Company deposited
$30,000 into the escrow accounts. (Note 12).
The City of Riviera Beach previously settled its claim with the Company for
cleanup of contamination of its wellfield, except for the "hot spot" to be
addressed by the company as required by the Consent Final Judgment. The unpaid
balance of the settlement amount with the City was approved in the Confirmation
Order, to be paid as and to the extent provided for other unsecured creditors.
After notice, no other claims were filed in the bankruptcy proceeding related to
offsite groundwater contamination at the Riviera Beach site, and potential
claims may have been extinguished thereby.
Pending attempts to sell these properties, the Company is depositing $1,000 a
month into escrow accounts established by the Consent Final Judgment that
implements the Plan of Reorganization for these properties. For further
discussion of these contaminated properties, see "Environmental Compliance"
herein.
(e) 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. For additional
discussion about payment of property taxes to Palm Beach County see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." 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.
-32-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Going Concern and Petition in Bankruptcy (continued):
The Plan provided 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, 1998, inventories consist of the following:
Raw Materials $1,144,000
Work-In-Process and Finished Goods 1,349,000
----------
$2,493,000
4. Property, Plant and Equipment:
As of February 28, 1998, property, plant and equipment consist of the following:
Building Improvements $ 598,000
Machinery and Equipment 1,075,000
----------
$1,673,000
Less Accumulated Depreciation
and Amortization 1,103,000
---------
$ 570,000
==========
Non-operating Plant Facilities $1,745,000
==========
Non-operating plant facilities at February 28, 1998 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 $219,000 for 1998 and 1997, respectively.
- ----------
(1) To be issued based upon the terms and conditions of the Plan at the
discretion 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, 1998, accrued expenses consist of the following:
Payroll and related employee benefits $ 550,000
Property taxes 928,000
IRS tax claim, pre-petition 321,000
Other liabilities 171,000
Customer Advances 6,000
Interest Payable 483,000
-------
$2,459,000
6. Financial Instruments:
The estimated fair value of the Company's financial instruments at February 28,
1998 is as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
------ ----------
<S> <C> <C>
Cash and Cash Equivalents $ 650,000 $ 650,000
Accounts Receivable 1,097,000 1,097,000
Long Term Debt (including current
maturities of $7,000) 21,000 21,000
Other Long-Term Liabilities (including
current maturities of $1,661,000) 4,256,000 $ 4,256,000
</TABLE>
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, 1998, long-term debt consists of the following:
7.5% automobile loan payable due in monthly
installments, with scheduled maturities through
February 2001 15,000
15% equipment finance agreement due in monthly
installments, with scheduled maturities through
March 2000 6,000
-----
$21,000
Less: current maturities (7,000)
-----
$ 14,000
========
Contractual Payment Requirements on all debt balances are as follows:
1999 $ 7,000
2000 8,000
2001 6,000
-----
$21,000
=======
8. Other Long-Term Liabilities:
As of February 28, 1998, other long-term liabilities consists of the following
pre-petitioned items:
Accrued Environmental Expenses $1,045,000
Accounts Payable-Pre-petition 1,350,000
IRS Tax Claim 468,000
County Property Tax Payable 1,393,000
-----------
$4,256,000
Less Current Portion (1,661,000)
-----------
$2,595,000
==========
The current portion of the long-term liabilities is in the amount of $1,661,000
consists of accrued environmental expenses of $306,000, accounts payable
pre-petition of $106,000, IRS tax claim of $321,000 and County property tax
payable of $928,000, 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 TOTAL
----------- -----
1999 $ 1,151,000
2000 1,053,000
2001 561,000
2002 460,000
2003 460,000
thereafter 940,000
-------
4,625,000
Less amount representing interest (1,147,000)
---------
$ 3,478,000
===========
Imputed interest expense for fiscal year ended February 28, 1998 and February
28, 1997 amounted to $148,000 and $162,000 relates to accounts payable
pre-petition.
9. Income Taxes:
At February 28, 1998, the Company has net operating loss carryforwards of
approximately $ 9,967,000 that expire through 2011. 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, 1998:
Loss carryforwards $ 3,831,000
Environmental Reserve 408,000
Accounts Receivable Reserve 13,000
Inventory Reserves 4,691,000
-----------
Gross deferred tax asset 8,943,000
Deferred tax asset valuation allowance (8,943,000)
-----------
Net deferred tax -
-----------
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, 1998
is as follows.
Income Tax Provision at
Federal Statutory Rates $ 68,000
State Taxes 11,000
Utilization of Net Operating Loss Carryforward (79,000)
--------
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 ($0.125).
Effective August 20, 1993, the Company's President was issued an option to
purchase an additional 4% 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 stock on that
date ($0.125).
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 $21,955 based on the
March 3, 1997 adjustment.
The Company has adopted SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION."
As permitted by SFAS No. 123, the Company continues to follow the measurement
provisions of accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES," and does not recognize compensation expense for its stock
based incentive plan. Had compensation cost for the modifications on March 3,
1997 of the Company's stock-based incentive compensation plan been determined
based on the fair value at the modification dates for awards under the plan,
consistent with the methodology prescribed by SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro-forma amounts
indicated below.
FOR THE YEAR ENDED FOR THE YEAR ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997
---- ----
Net income:
As reported $ 194,000 $ 139,000
Pro-forma 167,000 139,000
Earnings per share:
As reported .09 .07
Pro-forma .07 .07
The pro-forma amounts may not be indicative of future pro-forma income and
earnings per share.
-37-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10. Stock Option Plans (continued):
The fair value of each option is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions applied to grants in 1998 and 1997:
1998 1997
---- ----
Dividend yields 0.0% N/A
Expected volatility 3.96 N/A
Risk-free interest rates 6.0% N/A
Expected life (in years) 5.5 N/A
Because the determination of the fair value of all options is based on the
assumptions described in the preceding paragraph and, because additional option
grants are expected to be made each year, the above pro-forma disclosures are
not representative of pro-form effects on reported net income or loss for future
years.
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, 1998 and February 28,
1997.
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 28,
1998 1997
------------ ------------
Export sales:
Europe $ 543 $ 160
Canada and Latin America 55 38
Far East and Middle East 60 158
United States 7,202 6,803
----- -----
$7,860 $7,159
====== ======
* All of the Company's domestic and foreign sales transactions are
denominated in U.S. dollars. Sales to the Company's top three customers
accounted for 55% of the Company's net sales for the year ended February
28, 1998 as compared with 49% of the Company's net sales for the year
ended February 28, 1997. Sales to unaffiliated customers aggregating 10%
or more of net sales are presented below:
-38-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. Export Sales and Major Customers (continued):
FISCAL YEAR FISCAL YEAR
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997
---- ----
Raytheon 40% 29%
(formerly known as Raytheon,
Hughes, E-Systems and T.I.)
13. Commitments and Contingencies:
EMPLOYMENT AGREEMENT:
In February 1993, the Company entered into an employment agreement with its
President. This agreement provides, among other things, for annual compensation
of $140,000, a bonus pursuant to a formula, plus cost of living increases
through August 30, 1998. Under this bonus formula, Mr. Saraf is entitled to an
annual bonus based upon the extent to which the Company's actual net profits
before tax and gross revenues exceed budgeted amounts during each year of the
term of his employment under the agreement. The budget is prepared each year by
the Company under Mr. Saraf's supervision and submitted to the Board of
Directors for approval. Certain ambiguities existed relating to the bonus
formula, such that the amount of bonus that Mr. Saraf was entitled to for the
years ended February 29, 1996 and February 28, 1997 was in dispute. Due to a
variety of factors including, without limitation, these ambiguities and the
Company's limited liquidity and losses since emergence from bankruptcy, no
bonuses were determined to be payable for the year ended February 29, 1996 and
February 28, 1997. However, in June of 1998, the Board of Directors approved a
bonus payment to Mr. Saraf of $296,000 for the years ended February 29, 1996,
February 28, 1997, and February 28, 1998. The Company and Mr. Saraf agreed that
Mr. Saraf have no further claim for any bonus for the aforementioned fiscal
years. Such $296,000 payment represents approximately $125,000 less than the
amount that would have been due Mr. Saraf under his employment agreement if such
ambiguities were resolved in his favor. This bonus was paid out in cash in June
1998 and charged to expense in February 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 two
locations: 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
become 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, which was converted to a
State Consent Final Judgment.
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.
-39-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. Commitments and Contingencies (continued):
The Company's environmental consultants have estimated the costs of further
remediation to be approximately $727,000 for the Port Salerno property and
$342,000 for the Old Riviera Beach property. These amounts have been accrued for
in the balance sheet as of February 28, 1998. The accrual balance is
approximately $1,045,000.
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. DEP has acquiesced in the
offer of the Company to make reduced monthly payments of $1,000 per month into
the escrow account. As of February 28, 1998 the Company deposited $30,000 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.
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.
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 owner of the property has reported to be addressing remediation of the
property. No claim has been received by the Company.
The Port Salerno property is now being listed on the National Priorities List
and will be remediated by EPA using Superfund monies. The Company has offered to
settle its potential cost recovery claim by selling the property and providing
the net proceeds to EPA in reduction of its costs. EPA is considering this
proposal. The Company's position is that because EPA failed to pursue its known
claims in the Bankruptcy proceeding, its claim is barred. The amount of EPA's
potential claim cannot be determined at this time.
The Riviera Beach property is still being evaluated by EPA for NPL listing, but
Honeywell, Inc., who is the predecessor owner and operator of the facility
during a period when pollution occurred, and who is jointly and severely liable
therefor to the EPA, is completing negotiation of a State Consent Order with
DEP, and has requested EPA to defer to that Consent Order supervised by DEP. The
Company is negotiating a potential sale of this property subject to successful
deferral to the state led, privately funded cleanup. Honeywell's claim against
the Company has been satisfied in the Bankruptcy proceedings. If EPA refuses to
defer, Honeywell will be pursued by EPA because it has the funds to remediate
the site. The Company will continue to offer the net value of the property to
resolve claims of EPA or Honeywell.
No amounts were charged for environmental expenses during the year ended
February 28, 1998 and February 28, 1997.
-40-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. Commitments and Contingencies (continued):
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 AMOUNT
----------------------- ------
1999 240,000
2000 245,000
2001 250,000
2002 210,000
Thereafter -0-
--------
Total $945,000
========
Total rent expense was $ 269,999 for the year ended February 28, 1998 as
compared with $265,500 for the year ended February 28, 1997
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. Since January 1997, Vector is making
such payments directly to the landlord.
-41-
<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. 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.
<TABLE>
<CAPTION>
YEAR
FIRST TERM AS
BECAME DIRECTOR
NAME AGE POSITION WITH SOLITRON DIRECTOR EXPIRES(1)
- ---- --- -------- ----------
<S> <C> <C> <C> <C>
Shevach Saraf 55 Chairman of the Board, 1992 2000
Chief Executive Officer,
President and Treasurer
Dr. Jacob Davis 61 Director 1996 1998
Mr. Joseph Schlig 70 Director 1996 1999
</TABLE>
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 35 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 executive 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 Rensselaer at Hartford (formerly known as 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.
- ----------
(1) Directors' terms expire when successors are elected at the next annual
meeting of shareholders.
-42-
<PAGE>
ITEM 8. (continued)
Dr. Jacob (Jay) A. Davis is Vice President of Business Planning and Finance for
AET, Inc, a developing, Melbourne, Florida 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
is 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. From 1995
to 1997, Mr. Schlig also served as Chief Financial Officer of Industrial
Technologies, Inc. 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 MBA from the
Harvard Business School where he was a Baker Scholar. Mr. Schlig is a member of
the Audit and Compensation Committees.
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, 1998, the Audit Committee met one time.
Mr. 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, 1998.
During the year ended February 28, 1998, 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.
-43-
<PAGE>
ITEM 8. (continued)
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. 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, 1998 directors and executive officers
of the Company complied with Section 16(a) filing requirements applicable to
them, except that the Company's Chief Financial Officer, who served in the
Company between October 31, 1995 and January 2, 1998, did not make any Section
16(a) filings.. 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 29, 1998, February 28, 1997, February 29,
1996, February 28, 1995, and February 28, 1994.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ -----------------------------------------------
YEAR OTHER
ENDED ANNUAL RESTRICTED ALL OTHER
NAME AND FEBRUARY COMPEN- STOCK OPTIONS/ LTIP COMP-
PRINCIPAL POSITION(1) 28/ 29 SALARY($) BONUS($) SATION($) AWARDS($) SARS(#) PAYOUTS($) ENSATION($)
- --------------------- ------ --------- -------- --------- --------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shevach Saraf 1994 141,309 -0- 17,081 -0- 17,500 -0- 36,708
Chairman of the Board, 1995 123,308 -0- 7,676 -0- -0- -0-
Chief Executive Officer 1996 132,462 25,000*/*** 28,680 -0- -0- -0-
President and Treasurer 1997 140,000 -0-*** -0- -0- -0- -0-
1998 153,063 -0-*** 30,715** -0- -0- -0-
</TABLE>
(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.
Shevach Saraf is a party to an Employment Agreement with the Company, which
provides, among other things, for minimum annual compensation of $140,000; a
bonus formula (for discussion on the bonus formula see "Employment Agreement"
under section 13. Commitments and Contingencies, resulting in a $296,000 bonus
paid to Mr. Saraf in June 1998); plus annual cost of living increases equal to
the consumer price index average; 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.
* Represents part of a $35,000 special bonus awarded to Mr. Saraf during a
Board meeting held July 12, 1994 but paid in 1996.
** Represents a retroactive cost of living adjustment equal to the consumer
price index average for the period 11/93 - 2/97 per the employment agreement
*** See Note 13 to Consolidated Financial Statements.
-44-
<PAGE>
ITEM 9. (Continued)
Executive officers of the Company may also participate in the Company's 1987
Stock Option Plan, the Company's Deferred Compensation Plan and the Company's
Employee 401-K and Profit Sharing Plan (the "Profit Sharing Plan"). During the
fiscal year ended February 28, 1997, no amounts were deferred by executive
officers under the Company's Deferred Compensation Plan and the Company did not
match any employee contributions to the Profit Sharing Plan.
OPTION/SAR GRANTS TABLE
No Stock options were granted during the fiscal year ended February 28, 1998.
Certain stock options granted at a meeting of the Board of Directors held on
March 14, 1994 were issuable upon the condition that the shareholders approved
such issuance prior to March 14, 1995. As a result of a lack of shareholder
approval prior to this date, all such option grants are void. No awards were
made under any long-term plan during fiscal year end February 28, 1997. The
following table sets forth certain summary information covering unexercised
options to purchase the Company's Common Stock as of February 28, 1998 held by
the Company's Chief Executive Officer. The Company's Chief Executive Officer did
not exercise any stock options during the fiscal year ended February 28, 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY SHARES NUMBER OF UNEXERCISED IN THE MONEY
NAME AND ACQUIRED OR VALUE OPTIONS HELD AT OPTIONS HELD AT
PRINCIPAL POSITION EXERCISED(#) RECEIVED FISCAL YEAR END(#) FISCAL YEAR END($)
- ------------------ ------------ -------- ------------------ ------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Shevach Saraf,
Chairman of the Board,
Chief Executive Officer,
President and Treasurer -0- -0- 175,324* -0- -0-
Dr. Jacob Davis -0- -0- 4,000 -0- -0- -0-
Mr. Joseph Schlig -0- -0- 4,000 -0- -0- -0-
</TABLE>
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 $6,000 for the fiscal
year ended February 28, 1998.
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 ($0.125), 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.
* Subject to applicable anti-dilution provisions.
-45-
<PAGE>
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, 1998 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.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING
NAME BENEFICIALLY OWNED (1) SHARES (1)
---- ---------------------- ----------
<S> <C> <C>
Shevach Saraf(2) 220,154 (7) 10.8%
3301 Electronics Way
West Palm Beach, FL 33407
All executive officers and 220,154 (7) 10.8%
directors as a group (3 persons)
Inversiones Globales, S.A.(3) 273,943 13.5%
Board of Trustees of the 336,407 16.5%
Policemen and Firemen Retirement
System of the City of Detroit
Bruce Paul, Purchase, NY 150,000 7.4%
</TABLE>
(1) 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. One of Vector's participants
sold his stock holdings to Inversiones Globables, S.A.
(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.
-46-
<PAGE>
ITEM 10. (continued)
(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 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 four 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. After the issuance 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 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 ($0.125 per share).
(7) Excludes presently exercisable options held by the Board of
Directors.
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."
-47-
<PAGE>
ITEM 12. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(a)(1) The following financial statements are included in Part II, Item 7.
Reports of Independent Certified Public Accountants 24
Financial Statements: 25
Consolidated Balance Sheet - February 29, 1998
Consolidated Statements of Operations - For the year ended February 28, 26
1998 and February 28, 1997
Consolidated Statements of Stockholders' Equity - For the year ended 27
February 28, 1998 and February 28, 1997
Consolidated Statements of Cash Flows - For the years ended February 28
28, 2998 and February 28, 1997
Notes to Consolidated Financial Statements 29-41
</TABLE>
(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 Bylaws 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).
-48-
<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
-49-
<PAGE>
SIGNATURES
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ SHEVACH SARAF
- ------------------------
Shevach Saraf Chairman, July 13, 1998
President, and
Chief Executive Officer
/s/ JAY DAVIS
- ------------------------
Jay Davis Director July 13, 1998
/s/ JOSEPH SCHLIG
- ------------------------
Joseph Schlig Director July 13, 1998
</TABLE>
-50-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
21 List of Subsidiaries of the Company.
27 Financial Data Schedule.
EXHIBIT 21
SOLITRON DEVICES, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PERCENTAGE OF VOTING
SECURITIES OWNED STATE OF ACTIVE
BY REGISTRANT INCORPORATION DIVISION
-------------------- ------------- --------
<S> <C> <C> <C>
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
</TABLE>
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 SOLITRION
DEVICES, INC. AND SUBSIDIARIES FORM 10-KSB FOR THE YEAR ENDED FEBRUARY 28, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERECE TO SUCH FINANCIAL STATEMENT FISCAL
YEAR END - FEBRUARY 28, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 650,000
<SECURITIES> 0
<RECEIVABLES> 1,131,000
<ALLOWANCES> (34,000)
<INVENTORY> 2,493,000
<CURRENT-ASSETS> 4,428,000
<PP&E> 1,673,000
<DEPRECIATION> (1,103,000)
<TOTAL-ASSETS> 6,835,000
<CURRENT-LIABILITIES> 3,260,000
<BONDS> 0
0
0
<COMMON> 20,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,835,000
<SALES> 7,858,000
<TOTAL-REVENUES> 7,858,000
<CGS> 5,930,000
<TOTAL-COSTS> 7,376,000
<OTHER-EXPENSES> 51,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 238,000
<INCOME-PRETAX> 193,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 193,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 193,000
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
