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, 1999
Commission File No. 1-4978
SOLITRON DEVICES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 22-1684144
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(State or other jurisdiction of organization) (IRS Employer
Identification Number)
3301 ELECTRONICS WAY, WEST PALM BEACH, FLORIDA 33407
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(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
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Common Stock, $0.01 par value Electronic Bulletin Board/Over the Counter
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
Documents incorporated by reference: None.
The aggregate market value of the registrant's common stock, par value $.01 per
share, held by non-affiliates of the registrant, based upon the closing market
price as of June 7, 1999, was approximately $1,271.690.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 28, 1999: 2,034,704 shares of common stock, par
value $.01 per share.
State issuer's revenues for its most recent fiscal year: $7,900,000.
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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 (defined) 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 Power MOSFETs, 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, 1999 and for the fiscal year ended
February 28, 1998 and (ii) contributions to the Company's total order backlog at
February 28, 1999 and for the fiscal year ended February 28, 1998.
FISCAL YEAR FISCAL YEAR BACKLOG BACKLOG
ENDED ENDED AT AT
FEBRUARY FEBRUARY FEBRUARY FEBRUARY
PRODUCT 28, 1999 28, 1998 28, 1999 28, 1998
- ------- -------- --------- ---------- --------
Power Transistor 20% 25% 6% 10%
Hybrids 52% 44% 64% 66%
Field Effect Transistors 13% 15% 9% 11%
Power MOSFETS 15% 16% 21% 13%
--- --- --- ---
100% 100% 100% 100%
The Company's backlog at February 28, 1999 and shipments for the year ended
February 28, 1999 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. A 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 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 95% 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 90% to 95% 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 5% of sales are for non-military, scientific and industrial
applications. For the fiscal year ended February 28, 1999, approximately 90% of
the Semiconductor Division's sales have been of custom made products, and the
remaining 10% 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 MOSFET 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.
The Company is certified and qualified under 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-PRF-38534 requirements is important since it is a
prerequisite for a manufacturer to be selected to supply hybrids for
defense-related purposes. MIL-PRF-38534 establishes definite criteria for
manufacturing construction techniques and materials used for hybrid
microcircuits and assure that these types of devices will be manufactured under
conditions, which have been demonstrated to be capable of continuously producing
highly reliable products. This program requires a manufacturer to demonstrate
its products' performance capabilities. Certification is a prerequisite of
qualification. A manufacturer receives certification once its Product Quality
Assurance Program Plan is reviewed and approved by DESC (Defense Electronics
Supply Center). A manufacturer receives qualification once it has demonstrated
that it can build and test a sample product in conformity with its certified
Product Quality Assurance Program Plan.
In addition, obtaining and maintaining military certifications and
qualifications is desirable because it enables a manufacturer to satisfy many of
the requirements for registration under the ISO 9001 International Quality
Program. The ISO 9001 Program is a series of quality management and assurance
standards developed by a technical committee
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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. 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-PRF-38534 (formerly MIL-STD-1772) certification in
October 1990 and renewed in June 1993, April 1995, and October 1997.
MIL-PRF-38534 replaced MIL-STD-1772. In 1995, the Company received written
notification that it has received MIL-PRF-38534 qualification. MIL-PRF-38534
qualification should continue to improve the Company's business posture by
increasing product marketability. 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, nickel or other metals utilizing outside vendors to perform the
plating operation.
In the case of hybrids, design engineers formulate the circuit and layout
designs. Ceramic substrates are then printed with gold conductors to form the
interconnect pattern and with thick film resistive inks to form the resistors of
the designed circuit. Semiconductor chips, resistor chips and capacitor chips
are then mounted on the substrates and sequential wire bonding is used to
interconnect the various components to the printed substrate, as well as to
connect the circuit to the external package pins. The Company manufactures some
of the hybrid packages it uses.
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
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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 11 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 6 representative
organizations which operate out of 16 different locations with 51 sales people
and 2 stocking distributor organizations which operate out of 49 locations with
610 sales people and (ii) in the international market by 3 representative
organizations in 3 countries with 5 sales people. Some of the international
groups serve as distributors as well as sales representatives. The Company also
directly employs several sales, marketing, and application engineering personnel
to coordinate operations with the representatives and distributors and to handle
key accounts.
On February 28, 1999, the Company had approximately 118 active customer
accounts. The reduction in number of customers is principally due to
consolidation in the defense industry and reduction in military spending. During
the year ended February 28, 1999, Raytheon accounted for approximately 42% of
net sales as compared to 40% for the year ended February 28, 1998. No other
company accounted for more than 10% of net sales during the last fiscal year.
Approximately 8 of the Company's customers accounted for approximately 65% of
the Company's sales during the fiscal year ended February 28, 1999. 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, 1999 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
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Government. Accordingly, the Company's sales may 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 military spending in recent years, the Company had a 19%
increase in bookings during the fiscal year ended February 28, 1999 as compared
to the previous year. There no assurance that such increase can be sustained.
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 for each of the years
ended February 28, 1999 and February 28, 1998. All sales to foreign customers
are conducted utilizing exclusively U.S. dollars.
BACKLOG
The Company's order backlog, which consists of semiconductor and hybrid related
open and pending orders, 85% of which are scheduled for delivery within 12
months, was approximately $5,921,000 at February 28, 1999, compared to
$5,323,000 as of February 28, 1998. 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, 2000. 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.
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
increased bookings for the year ended February 28, 1999 as compared to the
previous year.
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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. However, there is no assurance that the company business will
increase as a result. 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, 1999, the Company's on-time delivery
record was 86% as compared with 75% for the year ending in February 28, 1998.
The Company believes that it will be able to improve its capability to respond
quickly to customer needs and deliver products on time, and that this will prove
to be a competitive advantage of the Company.
EMPLOYEES
At February 28, 1999, the Company had 105 employees (as compared to 116 at
February 28, 1998) of whom 65 are engaged in production activities, 7 in sales
and marketing, 6 in executive and administrative capacities and 27 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
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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.
RESEARCH AND DEVELOPMENT
During recent years, the Company has not spent significant funds on research and
development. This may have an adverse effect on future operations.
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.
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
incorporated a plan for future remediation of the two properties of the Company
dependent upon the properties being sold and the purchase price being applied to
remediation costs. One property is Lot 1 (the north parcel) of the property at
1177 Blue Heron Road in the City of Riviera Beach, Florida (the "Riviera Beach
Property"), and the second is its former Port Salerno facility, S.E. Cove Road,
Port Salerno, Martin County, Florida (the "Port Salerno Property").
Contemporaneously with the Confirmation Order, the Company and the State of
Florida Department of Environmental Protection (the "FDEP") entered into a
Stipulation for entry of a Consent Final Judgment in the Circuit Court of the
Nineteenth Judicial Circuit of Florida in and for Martin County, Florida. The
Consent Final Judgment, entered by the Court on October 21, 1993, provided that
the Company would: (a) reimburse FDEP $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 Property (paid as an administrative expense in accordance with the
Confirmation Order); (b) remediate site soils and groundwater at and emanating
from the Port Salerno Property; (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
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$102,860.57 to be paid to FDEP 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. At the time, the properties
were appraised by an MAI appraiser, as if uncontaminated, at $1,950,000 for the
Riviera Beach Property and $1,650,000 for the Port Salerno Property. Under the
Plan and Consent Final Judgment, the Company was directed to sell or lease the
two properties and utilize the proceeds derived therefrom, together with certain
insurance proceeds, to remediate both sites. All such proceeds were to be placed
in escrow for that purpose. Under the Plan, any excess funds after all escrow
obligations were satisfied were to belong to the Company.
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 associated with the Riviera Beach Property,
and potential claims may have been extinguished thereby.
At the time of the Plan and Consent Final Judgment, the Company's consultant
estimated the costs of remediation pursuant to the Consent Final Judgment to be
approximately $727,000 for the Port Salerno Property and $342,000 for the
Riviera Beach Property. The consultant estimated that remediation costs could be
greater, particularly if further offsite wells became contaminated in 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 in 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 consultant did not estimate remediation
costs were the United States Environmental Protection Agency to take the lead
over the cleanup.
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 slowly and any remediation will
likely entail off-site recovery wells to contain its further movement.
Under the Plan, if funds to clean the properties 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 an escrow account to clean both
properties 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.
Periodic funding was to have been suspended when funds available in escrow
reached 125% of the estimated costs to complete remediation. The Plan does not
require the Company 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 Property. 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.
In October 1995, the Company advised the FDEP that it could pay only $1,000 per
month into escrow, rather than the amounts specified by the Consent Final
Judgment. Since then, the Company has paid $1,000 per month into the
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escrow for the properties. The total escrow amounts for the properties, as of
February 28, 1999 is $43,000. FDEP has acquiesced in this payment level.
Under the Plan and Consent Final Judgment, the Company's consultant undertook
additional soil contamination assessment of the Riviera Beach Property and
received FDEP approval of the consultant's contamination assessment report
recommendation that no further soil remediation is required. Similarly, the
consultant completed soil contamination assessment work at the Port Salerno
Property and FDEP agreed with the consultant's submitted data and analysis that
no further soil remediation is required.
Despite the Plan and Consent Final Judgment and the Company's repeated efforts
to negotiate a deferral of action by the United States Environmental Protection
Agency ("USEPA") to allow the Company to sell the properties, the USEPA
re-evaluated the Riviera Beach and Port Salerno properties for potential listing
on the Superfund National Priority List ("NPL"). During 1997, USEPA required the
Company to sign site access agreements permitting USEPA to perform expanded site
assessments at the properties. The Company was able to secure a 90-day deferral
of further NPL listing evaluation in an attempt to allow prospective purchasers
to complete due diligence on the properties. USEPA subsequently published notice
of its proposal to list the Port Salerno Property on the NPL and listed it on
July 27, 1998. By letter dated June 16, 1998, USEPA required the Company to
consent to allow USEPA access to the Riviera Beach Property to complete a
Remedial Investigation. By letter dated September 8, 1998, USEPA notified the
Company that it would not defer cleanup of the Riviera Beach Property to a FDEP
lead. USEPA stated, however, that it would defer listing the Riviera Beach
Property on the NPL if prior owner/operator Honeywell, Inc. agreed to proceed
with and fund a USEPA-lead voluntary Superfund cleanup. USEPA expressed
willingness to negotiate a prospective purchaser agreement with any purchaser
interested in redeveloping the Riviera Beach or Port Salerno properties.
USEPA is currently conducting a fund lead Remedial Investigation/Feasibility
Study (RI/FS) of the Port Salerno Property. The Company has signed consent to
access and is cooperating with the agency. USEPA anticipates completing the
RI/FS during the year 2000. USEPA and Martin County are evaluating any impact to
off-site private drinking water wells.
USEPA has completed a draft Remedial Investigation and Baseline Risk Assessment
for the Riviera Beach Property. Honeywell, Inc. has signed an Administrative
Order on Consent to perform the Feasibility Study for the Riviera Beach
Property. The Company has signed for purposes of granting USEPA and Honeywell
access. Honeywell is the predecessor owner and operator of the property during a
period when pollution occurred and is therefore jointly and severally liable to
USEPA. Honeywell's remedial action Feasibility Study (FS) may be completed in
1999. At that time, USEPA will propose a plan of action to the community, to
clean up the contamination. A public meeting will be held and comments on the
proposed plan will be accepted. Based on the comments, USEPA may or may not
revise the plan and prepare a remedial action Record of Decision (ROD). USEPA
expects to sign a ROD for the Riviera Beach property before January 2000. Due to
the nature of ground water contamination sites in Florida, cleanup is expected
to take decades.
The Company has entered into negotiations with USEPA to settle USEPA's cost
claims against it arising from the costs USEPA incurs in remediating or
overseeing the remedial activities of others in connection with the properties.
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 properties upon sale, it has an inability to pay any
USEPA claim under the Superfund's ability to pay mechanism.
The Company offered to sell the properties at market value and after deducting
its costs including $125,000 attorneys fees associated with the Riviera Beach
Property and $75,000 attorneys fees associated with the Port Salerno Property,
5% broker's fee, back taxes plus interest, and the closing costs, to pay the net
proceeds of the sales to USEPA to discharge all USEPA claims. USEPA has agreed
to consider entering into prospective purchaser agreements protecting the
property purchasers from USEPA cost recovery claims and third party contribution
claims, but is not willing to deduct legal fees of more than $25,000 and $20,000
from the Riviera Beach and Port Salerno properties, respectively. Since this
leaves the Company no way to pay its legal fees to its outside environmental
counsel, that counsel has had to withdraw from the legal representation. The
Company is currently seeking a new environmental consul.
Currently, the Riviera Beach Property is under contract with National Land
Company ("NLC") for market value of approximately $1,000,000. USEPA is currently
negotiating a prospective purchaser agreement with NLC, subject to
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appropriate deductions from the purchase price paid to USEPA, for back
property taxes and interest, legal fees in the amount of $25,000, 5% broker's
fee, and closing costs. Under these terms, NLC would pay USEPA $419,000 in net
purchase proceeds. USEPA is also seeking to have the environmental escrowed
monies relating to the Riviera Beach Property paid over to it by FDEP and the
Company to defray its cleanup costs. USEPA believes that it can compel Honeywell
to complete the cleanup of the Riviera Beach Property.
USEPA counsel had advised Solitron's counsel that once a prospective purchaser
agreement is signed, the property is sold, and USEPA receives the proceeds
($419,000) plus approximately $20,000 from the Riviera Beach escrow account,
USEPA will issue the Company and Honeywell a letter stating that it will not
hold them liable for any additional past response costs for the Riviera Beach
site. However, until the prospective purchaser agreement is signed by both the
USEPA and the prospective buyer and the sale is consummated, there can be no
guarantee that such transaction and release will take place.
USEPA advised the Company that it is unwilling to resolve its past and future
cleanup costs in relation to the Port Salerno site under the ability to pay
mechanism until the Port Salerno property is sold.
It is the Company's position that any USEPA cost recovery claims are discharged
in the prior bankruptcy and that USEPA is bound by the terms of the remediation
approved under the Amended Order of Confirmation in Bankruptcy. Though USEPA
received notice of Solitron's Bankruptcy, had knowledge of FDEP's claim and
participation in the Bankruptcy, and that it likewise had already incurred costs
to investigate the properties, USEPA did not file a claim in the Bankruptcy,
apparently deferring to FDEP's claims regarding the remediation of the
properties. USEPA does not agree with the Company's conclusion that its claims
have been discharged in the bankruptcy.
It is the Company's position that its legal exposure to Honeywell for
contribution to cleanup costs has been resolved in the bankruptcy, since
Honeywell's claims were filed and resolved in bankruptcy.
The Company's former facility in Jupiter, Florida was sold to Philips
Electronics in 1982. In 1995 the Jupiter facility was the subject of a
preliminary assessment by the USEPA. After its investigation, USEPA deferred any
further remedial action to an FDEP lead. The Company's environmental legal
counsel has been advised that this facility is being remediated and such
remediation will be completed under a consent order with FDEP. By letter dated
May 17, 1999, Philips put the Company on notice that it will seek to exercise
its indemnity rights against the Company under the 1982 purchase and sale
agreement. It is the Company's position that Philips' notice of and
participation in the prior bankruptcy has discharged Philips' claims. For a
further description of the Company's environmental issues, refer to "Item 1 -
Business - Bankruptcy Proceedings" and to Note 12 of the accompanying
Consolidated Financial Statements.
During the fiscal year ended February 28, 1999, the Company has spent
approximately $13,000 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 $1,032,000 has been accrued in the
balance sheet as of February 28, 1999. The Company recorded these liabilities as
$413,000 short-term liabilities and $619,000 long-term liabilities. These
reservations are predicated on cleanup being performed under the existing Plan
and Consent Final Judgment.
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
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became effective on August 30, 1993 (the "Effective Date"). On July 12, 1996,
the Bankruptcy Court officially closed the case.
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 $556,000
(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 1999, Vector had
completed making these payments in full.
(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 February 28,
1997. 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. Furthermore, effective August 1998, the Company
started making payments of $14,000 per quarter. To date, the Company made 17 of
its proposed
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distributions to the unsecured creditors who have accepted the payments. These
payments to unsecured creditors covered the period March 1, 1995 through
February 28, 1999 in the aggregate amount of approximately $191,000 of the
approximately $946,000 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
$2,292,000 to holders of allowed unsecured claims in quarterly installments of
approximately $62,083. The Company carries its debt to its unsecured creditors
as $129,000 in short-term debt and $1,173,000 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.
(d) In March 1995, the Company entered into negotiations with its
unsecured creditors, Palm Beach County, Martin County and FDEP 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) 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 in excess of $500,000 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").
(f) 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".
(g) Following the Effective Date and consistent with the Consent Final
Judgment with FDEP, the Company has performed environmental soils assessments
and is required to remediate the Riviera Beach Property and the Port Salerno
Property. The foregoing stems from the environmental contamination of these
properties. Under the Plan, the monies to be utilized to fund these assessments
and remediations are to 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 approved by the
FDEP, neither the Riviera Beach Property nor the Port Salerno Property can 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. The
Plan also required that to the extent the proceeds from the sale or lease of
these properties are not sufficient to pay for the remediation, the Company will
escrow monthly amounts 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 notified FDEP that it could not meet this payment
schedule and with FDEP's acquiescence 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, 1999, of the $120,000 due according to the Plan,
the Company has deposited $43,000 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 Riviera
Beach and Port Salerno properties require remediation. Following testing, a
determination has been made by FDEP that the soils at the Riviera Beach and Port
Salerno properties need no further remediation. Under the Plan, any excess of
such sale and lease proceeds over remediation costs was to be returned to the
Company. However, no excess is now anticipated. See "Item 2." - Properties" for
a description of these facilities. The Company's financial statements reflect
liabilities of $1,032,000 relating to the foregoing assessment and remediation
obligations. This best estimate of cleanup costs by the Company's environmental
consultants is based on the assumption that the Plan and Consent Final Judgment
will be implemented. Moreover, if the Company defaults under the Consent Final
Judgment, the FDEP may assert a natural resource claim against the Company, the
amount of which (if any) would be determined by a court of competent
jurisdiction. Given USEPA's assertion of jurisdiction over the properties, the
Company cannot give any assurance that actual remediation costs will not exceed
the estimate based on compliance with the Plan. For a more definitive
description of environmental matters pertaining to the Riviera Beach and Port
Salerno properties, please refer to the Consent Final Judgment and the
Environmental Compliance Section hereof. Because of the uncertainties of how
USEPA will
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proceed with cleanup of the properties and resolution of the Company's ability
to pay application, total costs to the Company cannot be estimated now. See
Environmental Compliance Section for further discussion of USEPA's assertions of
jurisdiction over the properties.
(h) 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 accrued 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. On August 21, 1998, the Company paid in full its 1980 tax obligation
plus interest. The Company also completed making payments to the IRS for its
1987 tax obligations plus interest on March 30, 1998.
The State of California Franchise Tax Board claim has been quantified by the
Court on November 30, 1995 to be $680,179.35 and it is treated as an unsecured
claim.
The Company has not been making payments to Palm Beach County or to 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 as well that the
Palm Beach County Tax claim will be paid with the sale of the Riviera Beach
property. The following table indicates the approximate cumulative status of
amounts due under Court Plans as of February 28, 1999:
DUE TO DATE PAID
----------- --------
Martin County $ 78,000 $ 7,957
Palm Beach County $870,000 $280,145
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.
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(i) 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.
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 was 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. This facility (the
Riviera Beach Property) is under contract for sale as set forth in the
Environmental Compliance Section.
The Company also owns the Port Salerno Property, which consists of a 42,000
square foot building and 23 acres of undeveloped land located in Port Salerno,
Florida. On July 27, 1992, the USEPA listed this property on the National
Priority List (NPL) for cleanup using monies from its Superfund and is
contending that the Company is liable for its response costs. The Company has a
pending ability to pay application before USEPA. The detail of the Company and
USEPA's positions is set forth in the Environmental Compliance Section.
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 material legal
proceedings to which it is a party.
INTERNAL REVENUE SERVICE TAX CLAIM
On August 21, 1998, the Company paid all of its 1980 tax obligation plus
interest and as of March 30, 1999, it completed making payments for its 1987 tax
obligation plus interest to the Internal Revenue Service. On April 18, 1999 the
IRS issued the certificate of release of the Federal Tax Lien for the 1987 tax
obligation.
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.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Since March, 1995, the Company's Common Stock has been traded on NASDAQ's
Electronic Bulletin Board (over the counter. The Company's Common Stock was
traded on the New York Stock Exchange until October 13, 1993, at which time it
began trading on the NASDAQ Small Cap Market where it was traded until March
1995.
The following table sets forth for the periods indicated, high and low bid
information of the Common Stock. The prices set forth below reflect inter-dealer
prices, without retail markup, markdown, or commission and may not represent
actual transactions.
FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 28, 1999 FEBRUARY 28, 1998
------------------ -------------------
HIGH LOW HIGH LOW
First $0.4375 $0.1750 $0.3125 $0.1562
Second $0.4375 $0.1250 $0.1562 $0.125
Third $0.4687 $0.2812 $0.4688 $0.125
Fourth $0.3750 $0.1250 $0.3125 $0.125
As of February 28, 1999 and February 28, 1998, there were approximately 4,189
and 4,239 holders of record of the Company's Common Stock, respectively. On
February 28, 1999, the last sale price of the Common Stock as reported on the
Electronic Bulletin Board was $0.2187 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.
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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.
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
1999 1998
<S> <C> <C>
Net Sales $7,900 $ 7,860
Cost of sales 6,009 5,930
Gross profit 1,891 1,930
Selling, general and administrative expenses 1,279 1,447
Operating income 612 483
Interest expense (49) (90)
Interest expense on unsecured creditors claims (105) (148)
Write down of non-operating facilities and related expenses (25) (45)
Interest income 35 28
Other, net 8 47
Net income $ 476 $ 194
</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 the Company's 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, 1999 and
February 28, 1998, the Company recorded net income of $476,000 and $194,000
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
-17-
<PAGE>
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 modest income from operations of approximately $612,000
for the fiscal year ended February 28, 1999 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 USEPA, the
FDEP 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 the unsecured creditors, the
USEPA, the FDEP, and taxing authorities in an attempt to arrive at reduced
payment schedules. 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, USEPA, FDEP 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, 1999 and February 28, 1998 respectively, the Company had cash
and cash equivalents of $784,000 and $650,000. The principal cash change was due
to managing disbursements and permitting the liabilities to rise.
At February 28, 1999, the Company had working capital of $1,340,000 as compared
with a working capital at February 28, 1998 of $1,168,000.
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.
Furthermore, effective August 1998, the Company started making payments of
$14,000 per quarter. The Company made 17 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, 1999 in the
aggregate amount of approximately $191,000 of the approximately $946,000
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 $7,095,000 in unsecured claims and,
accordingly, that the Company is required to pay approximately $2,292,000 to
holders of allowed unsecured claims in quarterly installments of approximately
$62,000. The Company carries its debt to its unsecured creditors as $129,000 in
short-term debt and $1,173,000 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.
Despite the Plan and Consent Final Judgment and the Company's repeated efforts
to negotiate a deferral of action by the United States Environmental Protection
Agency ("USEPA") to allow the Company to sell the properties, the USEPA
re-evaluated the Riviera Beach and Port Salerno properties for potential listing
on the Superfund National Priority List ("NPL"). USEPA subsequently published
notice of its proposal to list the Port Salerno Property on the NPL and listed
it on July 27, 1998. By letter dated September 8, 1998, USEPA notified the
Company that it would not defer cleanup of the Riviera Beach Property to a FDEP
lead. USEPA stated, however, that it would defer listing the Riviera Beach
Property on the NPL if prior owner/operator Honeywell, Inc. agreed to proceed
with and fund a USEPA-lead voluntary Superfund cleanup. USEPA expressed
willingness to negotiate a prospective purchaser agreement with any purchaser
interested in redeveloping the Riviera Beach or Port Salerno properties.
Honeywell has executed an administrative Order on Consent to perform the next
phase of remediation, the remedial action Feasibility Study. Until the
properties have been sold, USEPA has decided how to remediate them, and the
Company's ability to pay
-18-
<PAGE>
application has been ruled on by USEPA, it is not possible to quantify the
Company's contingent liability to USEPA. For further discussion of environmental
liabilities see "Environmental Compliance" and "Properties" sections.
USEPA counsel had advised Solitron's counsel that once a prospective purchaser
agreement is signed, the property is sold, and USEPA receives the proceeds
($419,000) plus approximately $20,000 from the Riviera Beach escrow account,
USEPA will issue the Company and Honeywell a letter stating that it will not
hold them liable for any additional past response costs for the Riviera Beach
site. However, until the prospective purchaser agreement is signed by both the
USEPA and the prospective buyer and the sale is consummated, there can be no
guarantee that such transaction and release will take place.
The Company's former facility in Jupiter, Florida was sold to Philips
Electronics in 1982. In 1995 the Jupiter facility was the subject of a
preliminary assessment by the USEPA. After its investigation, USEPA deferred any
further remedial action to an FDEP lead. The Company's environmental legal
counsel has been advised that this facility is being remediated and such
remediation will be completed under a consent order with FDEP. By letter dated
May 17, 1999, Philips put the Company on notice that it will seek to exercise
its indemnity rights against the Company under the 1982 purchase and sale
agreement. It is the Company's position that Philips' notice of and
participation in the prior bankruptcy has discharged Philips' claims.
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 (on an
annual basis) certain pre-petition creditors 5% of net after tax income in
excess of $500,000 until the tenth anniversary of the Effective Date, up to a
maximum aggregate of $1,500,000 in such payments.
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. On August 21, 1998 the Company paid all of its 1980 tax obligation
plus interest to the Internal Revenue. The Company is now negotiating with Palm
Beach County, and Martin County to modify these payment plans.
The following table indicates the approximate cumulative status of amounts due
under Court Plans a of February 28, 1999:
DUE TO DATE PAID
----------- ---------
Martin County $ 78,000 $ 7,957
Palm Beach County $ 870,000 $ 280,143
IRS $ 252,000 $ 91,870
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 continued 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 continuous 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
-19-
<PAGE>
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 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, 1999, the Company's net bookings were
$8,498,000 in new orders as compared with $7,160,000 for the year ended February
28, 1998, an increase of 19%. The Company's backlog increased to $5,921,000 at
February 28, 1999 as compared with $5,323,000 as of February 28, 1998, an 11%
increase.
FUTURE PLANS
To lessen 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 Asia-Pacific region, thus enhancing the Company's competitive
position while reducing costs.
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.
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 Year 2000 computer problem, commonly referred to as the Y2K, creates a risk
for the Company and therefore the Company makes the following Year 2000
readiness disclosure. An adverse impact on operations could occur if computer
systems do not correctly recognize date information when the year changes to
2000. The Company's risk exists in the following areas: (1) systems used by the
Company to run its business and (2) systems used by suppliers and service
providers.
The Company has attempted to obtain assurances of Year 2000 readiness from
suppliers and service providers. The Company will continue to obtain such
assurances for future internal systems, equipment, and facilities. In addition,
we will continue to monitor, including performing additional testing, as
appropriate, the Year 2000 readiness status of previous obtained equipment,
internal systems, and facilities. Noncompliant systems, equipment, or facilities
are expected to be replaced or upgraded in a timely manner prior to December 31,
1999. The Company has not identified alternative remediation strategies if
replacement or upgrade is not feasible, but will continue to reevaluate the need
for alternative remediation strategies and contingency plans as warranted by
further risk analysis. For internal system Year 2000 noncompliance issues
identified to date and expected throughout 1999, the cost of upgrade or
replacement is not expected to be material to operating results. However, if
significant, new noncompliance issues are subsequently identified, and
replacement or upgrade is delayed beyond December 31, 1999, operating results
could be materially adversely affected.
The Company has limited material relationships with suppliers whose inability to
provide products or services would have a material adverse impact on operating
results. Suppliers where such material relationships do exist appear to be
limited to those utilities (e.g. phone service, public service) whose inability
to provide service could materially affect all business entities. The Company
has and will continue to monitor their Year 2000 efforts and will develop
contingency plans as appropriate.
-20-
<PAGE>
In order to evaluate the above risks, implement any necessary remediations in
the future, and provide risk reevaluations and continued appropriate monitoring
activities, the Company has designated appropriate individuals within the
organization to be responsible for Year 2000 issues. The Company will continue
to assess the need for additional year 2000 readiness personnel as appropriate.
The Company's computer operating system and business software package have been
updated and, when tested on December 1998, found to be Y2K compliant. The
Company expects all of its internally written custom reports to be Y2K compliant
by July 31, 1999. As of April 30, 1999, fifty percent of such reports had been
updated and tested or have no Y2K impact. Having these custom management reports
updated to Y2K is not considered to be mission critical
In addition, the Company has contacted all of its business partners (i.e.,
services provider and raw material suppliers), and found that all of them are
Y2K compliant or plan to be compliant by the 3rd quarter of 1999. Based on the
currently available information, the Company does not anticipate any
interruption to its ability to continue conducting business. However, the
Company does not have control over such third parties and a failure of third
parties to be Y2K compliant could have a material impact on the Company's
ability to conduct business. Thus, the Company will continue to seek
confirmation and updates from its business partners to certify that they
addressed or will address year 2000 issues.
The cost of updating and testing the Company's year 2000 compliance has been
expensed as part of its operating expenses and was not material.
RESULTS OF OPERATIONS
1999 VS. 1998
Net sales for the fiscal year ended February 28, 1999 increased by 0.5% to
$7,900,000 versus $7,860,000 during the fiscal year ended February 28, 1998.
This small increase was primarily attributable to strong backlog and the ability
to ship more. Bookings were higher than sales by 7.5%; thus, the backlog
increased from $5,323,000 as of February 28, 1998 to $5,921,000 as of February
28, 1999.
During the year ending February 28, 1999, the Company shipped 2,462,221 units as
compared with 2,234,193 units shipped during the year ending February 28, 1998.
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 increase in the level of bookings of 19% for the
year ended February 28, 1999 as compared to the previous year principally as a
direct result a shift in customer demand for the Company's products.
During the year ending February 28, 1999, the Company's gross margins were 24%
as compared to 25% for the year ending February 28, 1998. The small decrease was
primarily due to a broad base increase of cost of goods sold associated
primarily with a change in product mix.
During the year ending February 28, 1999, selling, general and administrative
based expenses as a percentage of sales were 16% as compared with 18% for the
year ending February 28, 1998. Selling, General and Administrative expenses
decreased 13% to $1,260,000 for the fiscal year ended February 28, 1999 from
$1,447,000 for the fiscal year ended February 28, 1998. The decrease was due
primarily to lower payroll and bonus awards which were somewhat offset by higher
selling expenses.
Total interest expense decreased from $238,000 for the fiscal year ended
February 28, 1998 to $208,000 for the fiscal year ended February 28, 1999
primarily due to lower imputed interest.
-21-
<PAGE>
Item 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
PAGE
Independent Auditor's Report 23-24
Consolidated Balance Sheet as of February 28, 1999 25
Consolidated Statements of Income
for the years ended February 28, 1999 and February 28, 1998 26
Consolidated Statements of Stockholders'
Equity for the years ended February 28, 1999
and February 28, 1998 27
Consolidated Statements of Cash Flows for the years
ended February 28,1999 and February 28, 1998 28
Notes to Consolidated Financial Statements 29-41
-22-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
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, 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for the year then
ended. 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 financial position of Solitron Devices,
Inc. and Subsidiaries as of February 28, 1999 and the results of their
operations and their cash flows for the year then ended 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 the Company 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.
Goldstein Golub Kessler LLP
New York, New York
May 14, 1999, except for the second paragraph of Note 12 as to which the date is
June 4, 1999 and 22nd paragraph of Note 12 as to which the date is May 17,1999.
-23-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of Solitron Devices, Inc.:
We have audited the accompanying consolidated statement of operations,
shareholders' equity and cash flows of Solitron Devices, Inc. and Subsidiaries
for the year ending February 28,1998. Our audit also included the financial
statement schedule listed in the Index at Item 8. These consolidated financial
statements and schedule are the responsibility of the Company's Management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule 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 consolidated 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 consolidated 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 financial position of Solitron Devices,
Inc. and Subsidiaries for the year ended February 28, 1998 and the results of
their operations and their cash flows for the year then ended 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>
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1999
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 784,000
Accounts receivable, less allowance for doubtful accounts of $11,000 1,112,000
Inventories 2,737,000
Prepaid expenses and other current assets 119,000
Due from Vector 3,000
-----------
Total current assets $ 4,755,000
-----------
PROPERTY, PLANT AND EQUIPMENT, net 587,000
NON-OPERATING PLANT FACILITIES, net of cost to dispose -0-
OTHER ASSETS 83,000
-----------
$ 5,425,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7,000
Current portion of accrued environmental expenses 413,000
Accounts payable-Post-petition 600,000
Accounts payable-Pre-petition, current portion 129,000
Accrued expenses 2,229,000
Accrued Chapter 11 administrative expense 37,000
-----------
Total current liabilities $ 3,415,000
-----------
LONG-TERM DEBT, less current maturities 7,000
OTHER LONG-TERM LIABILITIES, net of current portion, net of cost to dispose
of non-operating facilities 561,000
-----------
TOTAL LIABILITIES $ 3,983,000
===========
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 500,000 shares, none issued --
Common stock, $.01 par value, authorized 10,000,000 shares,
2,034,704 shares issued and outstanding 20,000
Additional paid-in capital 2,618,000
Accumulated deficit (1,196,000)
-----------
Total stockholders' equity 1,442,000
-----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 5,425,000
===========
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.
-25-
<PAGE>
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 7,900,000 $ 7,860,000
Cost of sales 6,009,000 5,930,000
----------- -----------
Gross profit 1,891,000 1,930,000
Selling, general and administrative expenses 1,279,000 1,447,000
----------- -----------
Operating income 612,000 483,000
Other income (expense):
Writedown of non-operating facilities
and related expenses (25,000) $ (45,000)
Interest expense (49,000) (90,000)
Interest expense on unsecured creditors claim (105,000) (148,000)
Interest income 35,000 28,000
Other, net 8,000 (34,000)
----------- -----------
Other income (expense), net (136,000) (289,000)
----------- -----------
Net income $ 476,000 $ 194,000
=========== ===========
INCOME PER SHARE OF COMMON STOCK:
Basic Income Per Share .23 .09
=========== ===========
Diluted Income Per Share .23 .09
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 2,034,704 2,248,000
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 2,117,803 2,248,000
=========== ===========
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.
-26-
<PAGE>
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended February 28, 1999 and
February 28, 1998
COMMON STOCK
---------------------- ADDITIONAL RETAINED
NUMBER OF PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (ACCUMULATED DEFICIT) TOTAL
----------- ----------- ----------- --------------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1997 1,977,053 $ 20,000 $ 2,618,000 ($1,866,000) $ 772,000
Issuance of shares of
Common Stock Pursuant
To the Plan of Reorganization 56,960 -- -- -- --
Net Income -- -- -- 194,000 194,000
----------- ----------- ----------- ----------- -----------
Balance, February 28, 1998 2,034,013 $ 20,000 $ 2,618,000 ($1,672,000) $ 966,000
Issuance of shares of
Common Stock Pursuant
To the Plan of Reorganization 691 -- -- -- --
Net Income -- -- -- 476,000 476,000
----------- ----------- ----------- ----------- -----------
Balance, February 28, 1999 2,034,704 $ 20,000 $ 2,618,000 ($1,196,000) $ 1,442,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.
-27-
<PAGE>
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 476,000 $ 194,000
----------- -----------
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 214,000 219,000
Changes in operating assets and liabilities
Decrease (increase) in:
Accounts receivable (15,000) 8,000
Inventories (244,000) (405,000)
Prepaid expenses and other current assets -0- (17,000)
Due from Vector 66,000 67,000
Other assets 9,000 (6,000)
Increase (decrease) in:
Accounts payable 253,000 (165,000)
Accounts payable-pre-petition 23,000 11,000
Accrued expenses (230,000) 537,000
Accrued Chapter 11 expenses 2,000 (3,000)
Accrued environmental expenses 107,000 108,000
Other long-term liabilities (289,000) (262,000)
----------- -----------
Total adjustments (104,000) 92,000
----------- -----------
Net cash provided by operating
activities $ 372,000 $ 286,000
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment
Cash used in investing activities (231,000) (114,000)
----------- -----------
Cash flows used in financing activities
Payments on capitalized lease obligations
Net cash used in financing activities (7,000) (59,000)
----------- -----------
Net increase in cash 134,000 113,000
Cash and cash equivalents at beginning of year 650,000 537,000
----------- -----------
Cash and cash equivalents at end of year $ 784,000 $ 650,000
----------- -----------
Supplemental disclosures of cash flow information:
Cost to dispose non-operating plant facilities $ 1,745,000 $
----------- -----------
Interest paid $ 103,000 $ 90,000
----------- -----------
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the financial 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 Solitron Devices,
Inc. and its wholly owned Subsidiaries (collectively the "Company"). All
significant inter-company balances and transactions have been eliminated in
consolidation.
The Company designs, develops, manufacturers, and markets solid-state
semiconductor components and related devices primarily for the military and
aerospace markets.
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, 1999 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.
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
-29-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1. Summary of Significant Accounting Policies (continued)
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.
COMPUTATION OF NET INCOME PER SHARE
Basic earnings per common share is computed using the weighted average number of
shares outstanding. Diluted earnings per common share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options and warrants to purchase common stock.
Incremental shares of 83,099 were used in the calculation of diluted earnings
per common share in 1999. The incremental shares were computed based on stock
options outstanding, using the treasury stock method. In 1998, diluted earnings
per share are not presented as the result is antidilutive.
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 APB 25 and
make the related disclosures under SFAS 123.
NEW ACCOUNTING PRONOUNCEMENTS
Management does not believe that any recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying consolidated financial statements.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Going Concern and Petition in Bankruptcy:
GOING CONCERN
The Company's consolidated financial statements are presented on 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 Environmental Protection Agency ("USEPA"), the
Department of Environmental Protection ("FDEP"), 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 continues to negotiate with its unsecured creditors, the USEPA, the
FDEP, and taxing authorities in an attempt to arrive at reduced payment
schedules. Further, the Company plans 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.
-30-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Going Concern and Petition in Bankruptcy (continued):
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, 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. 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. At
February 28, 1999, the Company is currently scheduled to pay approximately
$2,292,000 to holders of allowed unsecured claims in quarterly installments of
approximately $62,000. As of February 28, 1999, the present value of this
amount, $1,302,000, is accrued as a pre-petition liability (Note 7) with imputed
interest recognized in the Statement of Income.
(b) 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 (see note 13) 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 in excess of $500,000 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.
(c) Under the Plan, the Company is required to remediate its
non-operating facilities located in Port Salerno and Riviera Beach, Florida. The
Plan contemplated that monies 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 Florida Department of
Environmental Protection (FDEP), neither the Riviera Beach Facility nor the Port
Salerno Facility can 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 has notified FDEP of its inability
to pay pursuant to this schedule and is making payments at the rate of $1,000
per month. As of February 28, 1999, the Company deposited $43,000 into the
escrow accounts. (Note 12).
(d) The Company has paid all of the allowed administrative claims and
allowed wage claims since August 1993. The Company is required to pay allowed
tax claims to Palm Beach County, Florida and Martin County, Florida, estimated
at approximately $1,428,000 (which amount is included in the accompanying
consolidated financial statements (Note 7), including interest. The Company was
required to start making quarterly payments of allowed tax claims to Palm Beach
County according to the following schedule: $37,000 per quarter for two years
beginning in the second quarter of 1994; and approximately $82,000 per quarter
for the twelve quarters thereafter. The Company is
-31-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Going Concern and Petition in Bankruptcy (continued):
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. On August 21, 1998, the Company paid off in full
its 1980 tax obligation plus interest and, on March 30, 1999, it completed
making payments of its 1987 tax obligations and interest. These tax claims do
not include an unsecured claim of $680,000 owed to the State of California for
income taxes for years prior to 1982.
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 to be issued based
upon the terms and conditions of the plan at the
discretion of the Board of Directors 5%
----
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 the Company's stock.
3. Inventories:
As of February 28, 1999, inventories consist of the following:
Raw Materials $1,419,000
Work-In-Process and Finished Goods 1,318,000
----------
$2,737,000
==========
4. Property, Plant and Equipment:
As of February 28, 1999, property, plant, and equipment consist of the
following:
ESTIMATED
USEFUL LIFE
-----------
Leasehold Improvements $ 598,000 5 years
Machinery and Equipment 1,306,000 5 years
-----------
$ 1,904,000
Less Accumulated Depreciation
and Amortization 1,317,000
-----------
$ 587,000
-----------
Non-operating Plant Facilities $ 1,745,000
LESS: COST TO DISPOSE OF
NON-OPERATING PLANT
FACILITY $(1,745,000)
-----------
NET 0
===========
-32-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. Property, Plant and Equipment (continued):
Non-operating plant facilities at February 28, 1999 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 and amortization was $214,000 and $219,000 for 1999 and
1998, respectively.
5. Accrued Expenses:
As of February 28, 1999, accrued expenses consist of the following:
Payroll and related employee benefits $ 259,000
Property taxes 975,000
IRS tax claim, pre-petition 344,000
Other liabilities 117,000
Interest Payable 534,000
----------
$2,229,000
==========
6. Long-Term Debt:
As of February 28, 1999, long-term debt consists of the following:
7.5% automobile loan payable due in monthly
installments, withscheduled maturities through
February 2001 11,000
15% equipment finance agreement due in monthly
installments, withscheduled maturities through
March 2000 3,000
-------
$14,000
Less: current maturities (7,000)
-------
$ 7,000
=======
Contractual Payment Requirements on all debt balances are as follows:
2000 $ 7,000
2001 7,000
-------
$14,000
At February 28, 1999, the carrying value of the Company's long-term debt
approximated its estimated fair value based upon current borrowing rates for
similar issues.
7. Other Long-Term Liabilities:
As of February 28, 1999, other long-term liabilities consists of the following
pre-petitioned items:
Accrued Environmental Expenses $ 619,000
Accounts Payable-Pre-petition 1,173,000
IRS Tax Claim 61,000
County Property Tax Payable 453,000
-----------
$ 2,306,000
LESS: COST TO DISPOSE OF
NON-OPERATING PLANT
FACILITY $(1,745,000)
-----------
NET $ 561,000
===========
-33-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. 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. It is reasonably possible that the estimates could
change in the near term:
Year Ending
FEBRUARY 28 TOTAL
2000 $1,934,000
2001 400,000
2002 361,000
2003 390,000
2004 426,000
thereafter 911,000
---------
4,422,000
Less amount representing interest (255,000)
----------
$4,167,000
==========
Imputed interest expense for fiscal years ended February 28, 1999 and February
28, 1998 amounted to $105,000 and $148,000 relating to accounts payable
pre-petition. Included in year ending February 28, 1999 are as follow:
Accrued Environmental Expenses $ 413,000
Accounts Payable-Pre-petition 202,000
IRS Tax Claim 344,000
County Property Tax Payable 975,000
----------
$1,934,000
==========
8. Income Taxes:
At February 28, 1999, the Company has net operating loss carryforwards of
approximately $ 9,491,000 that expire through 2019. Such net operating losses
are available to offset future taxable 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, 1999:
Loss carryforwards $ 3,607,000
Environmental Reserve 408,000
Accounts Receivable Reserve 4,000
Inventory Reserves 4,623,000
-----------
Gross deferred tax asset 8,642,000
Deferred tax asset valuation allowance (8,642,000)
------------
Net deferred tax --
-----------
Net $ --
-----------
-34-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. Income Taxes (continued):
A reconciliation of the provision for income taxes to the amount calculated
using the statutory federal rate (35%) for fiscal year ended February 28, 1999
is as follows.
1999 1998
--------- ---------
Income Tax Provision at
Federal Statutory Rates $ 158,000 $ 68,000
State Taxes 24,000 11,000
Utilization of Net Operating Loss Carryforward (182,000) (79,000)
--------- ---------
Income Tax Provision $ -- $ --
========= =========
9. Stock Options:
Pursuant to agreements dated October 20, 1992 and August 20, 1993, the Company's
President was granted options which entitle him to purchase 8% of the common
stock of the Company (175,636 shares at February 28, 1999, subject to adjustment
as defined in the Agreement) for an aggregate exercise price of $21,955. Half of
these options expire in 2002 and the other half expires in 2003. The options are
fully vested at February 28, 1999.
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. On March 3, 1997, the Company adjusted the exercise price
of its outstanding options to $0.156 per share. Had compensation cost for this
modification been determined based on the fair value at the modification dates
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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998
------------------ ------------------
<S> <C> <C>
Net income:
As reported $ 476,000 $ 194,000
Pro-forma 476,000 167,000
Earnings per share:
As reported - basic and diluted .23 .09
Pro-forma - basic and diluted .23 .07
</TABLE>
The pro-forma amounts may not be indicative of future pro-forma income and
earnings per share.
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 1999 and 1998:
1998
----
Dividend yields 0.0%
Expected volatility 3.96
Risk-free interest rates 6.0%
Expected life (in years) 5.5
-35-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
9. Stock Options (continued):
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.
10. Employee Benefit Plans:
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, 1999 and February 28,
1998.
11. Export Sales and Major Customers:
Revenues from domestic and export sales to unaffiliated customers are as
follows:
FISCAL YEAR FISCAL YEAR
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998
----------- ------------
Export sales:
Europe $ 408,000 $ 543,000
Canada and Latin America 48,000 55,000
Far East and Middle East 245,000 60,000
United States 7,199,000 7,202,000
---------- ----------
$7,900,000 $7,860,000
========== ==========
Sales to the Company's top three customers accounted for 61% of net sales
for the year ended February 28, 1999 as compared with 55% of the Company's
net sales for the year ended February 28, 1998.
Sales to Raytheon Company accounted for 42% and 40% of net sales for the
years ended February 28, 1999 and February 28, 1998 respectively.
No other customers accounted for 10% or more of net sales.
-36-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. 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, the President 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 the President'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 the President 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 emergency 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 the President of $296,000 for the years ended February 29,
1996, February 28, 1997, and February 28, 1998. The Company and the President
agreed that the President have not 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 the President under his
employment agreement if such ambiguities were resolved in his favor. This bonus
was paid in cash in June 1998 and charged to expense in February 1998.
In June of 1999, the Board of Directors approved a bonus payment to the
President of $40,000 for the year ended February 28, 1999. This bonus was paid
out in cash in June 1999 and charged to expense in February 1999.
ENVIRONMENTAL MATTERS:
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
incorporated a plan for future remediation of the two properties of the Company
dependent upon the properties being sold and the purchase price being applied to
remediation costs. One property is Lot 1 (the north parcel) of the property at
1177 Blue Heron Road in the City of Riviera Beach, Florida (the "Riviera Beach
Property"), and the second is its former Port Salerno facility, S.E. Cove Road,
Port Salerno, Martin County, Florida (the "Port Salerno Property").
Contemporaneously with the Confirmation Order, the Company and the State of
Florida Department of Environmental Protection (the "FDEP") entered into a
Stipulation for entry of a Consent Final Judgment in the Circuit Court of the
Nineteenth Judicial Circuit of Florida in and for Martin County, Florida. The
Consent Final Judgment, entered by the Court on October 21, 1993, provided that
the Company would: (a) reimburse FDEP $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 Property (paid as an administrative expense in accordance with the
Confirmation Order); (b) remediate site soils and groundwater at and emanating
from the Port Salerno Property; (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 to be paid to
FDEP 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. At the time, the properties
were appraised by an MAI appraiser, as if uncontaminated, at $1,950,000 for the
Riviera Beach Property and $1,650,000 for the Port Salerno Property. Under the
Plan and Consent Final Judgment, the Company was directed to sell or lease the
two properties and utilize the proceeds derived therefrom, together with certain
insurance proceeds, to remediate both sites. All such proceeds were to be placed
in escrow for that purpose. Under the Plan, any excess funds after all escrow
obligations were satisfied were to belong to the Company.
-37-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. Commitments and Contingencies (continued):
At the time of the Plan and Consent Final Judgment, the Company's consultant
estimated the costs of remediation pursuant to the Consent Final Judgment for
the Port Salerno Property and for the Riviera Beach Property to be approximately
$1,069,000 of which $1,032,000 is still outstanding and is included in current
portion of accrued environmental expenses and other long-term liabilities in the
accompanying balance sheet. The consultant estimated that remediation costs
could be greater, particularly if further offsite wells became contaminated in
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 in 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 consultant did not estimate
remediation costs were the USEPA to take the lead over the cleanup.
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 slowly and any remediation will likely entail 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 associated with the Riviera Beach Property,
and potential claims may have been extinguished thereby.
Under the Plan, if funds to clean the properties 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 an escrow account to clean both
properties 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.
Periodic funding was to have been suspended when funds available in escrow
reached 125% of the estimated costs to complete remediation. The Plan does not
require the Company 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 Property. 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.
In October 1995, the Company advised the FDEP that it could pay only $1,000 per
month into escrow, rather than the amounts specified by the Consent Final
Judgment. Since then, the Company has paid $1,000 per month into the escrow for
the properties. The total escrow amounts for the properties, as of February 28,
1999, is $43,000.
-38-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. Commitments and Contingencies (continued):
Under the Plan and Consent Final Judgment, the Company's consultant undertook
additional assessment of the Riviera Beach Property and received FDEP approval
of the consultant's contamination assessment report recommendation that no
further soil remediation is required. Similarly, the consultant completed soil
assessment work at the Port Salerno Property and FDEP agreed with the
consultant's submitted data and analysis that no further soil remediation is
required.
Despite the Plan and Consent Final Judgment and the Company's repeated efforts
to negotiate a deferral of action by the United States Environmental Protection
Agency ("USEPA") to allow the Company to sell the properties, the USEPA
re-evaluated the Riviera Beach and Port Salerno properties for potential listing
on the Superfund National Priority List ("NPL"). During 1997, USEPA required the
Company to sign site access agreements permitting USEPA to perform expanded site
assessments at the properties. The Company was able to secure a 90-day deferral
of further NPL listing evaluation in an attempt to allow prospective purchasers
to complete due diligence on the properties.
USEPA subsequently published notice of its proposal to list the Port Salerno
Property on the NPL and listed it on July 27, 1998. By letter dated June 16,
1998, USEPA required the Company to consent to allow USEPA access to the Riviera
Beach Property to complete a Remedial Investigation. By letter dated September
8, 1998, USEPA notified the Company that it would not defer cleanup of the
Riviera Beach Property to a FDEP lead. USEPA stated, however, that it would
defer listing the Riviera Beach Property on the NPL if prior owner/operator
Honeywell, Inc. agreed to proceed with and fund a USEPA-lead voluntary Superfund
cleanup. USEPA expressed willingness to negotiate a prospective purchaser
agreement with any purchaser interested in redeveloping the Riviera Beach or
Port Salerno properties.
USEPA is currently conducting a fund lead Remedial Investigation/Feasibility
Study (RI/FS) of the Port Salerno Property. The Company has signed a consent to
access and its cooperating with the agency. USEPA anticipates completing the
RI/FS during the year 2000. USEPA and Martin County are evaluating any impact to
off-site private drinking water wells.
USEPA has completed a draft Remedial Investigation and Baseline Risk Assessment
for the Riviera Beach Property. Honeywell, Inc. has signed an Administrative
Order on Consent to perform the Feasibility Study for the Riviera Beach
Property. The Company has signed for purposes of granting USEPA and Honeywell
access. Honeywell was the predecessor owner and operator of the property during
a period when pollution occurred and is therefore jointly and severally liable
to USEPA. Honeywell's remedial action Feasibility Study (FS) may be completed in
1999. At that time, USEPA will propose a plan of action to the community, to
clean up the contamination. A public meeting will be held and comments on the
proposed plan will be accepted. Based on the comments, USEPA may revise the plan
and prepare a remedial action Record of Decision (ROD). USEPA expects to sign an
ROD for the Riviera Beach Property before January 2000. Due to the nature of
ground water contamination sites in Florida, cleanup is expected to take
decades.
The Company has entered into negotiations with USEPA to settle USEPA's cost
claims against it arising from the costs USEPA incurs in remediating or
overseeing the remedial activities of others in connection with the properties.
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 properties upon sale, it has an inability to pay any
USEPA claim under the Superfund's ability to pay mechanism.
The Company offered to sell the properties at market value and after deducting
its costs including $125,000 attorneys fees associated with the Riviera Beach
Property and $75,000 attorneys fees associated with the Port Salerno Property,
5% broker's fee, back taxes plus interest, and the closing costs, to pay the net
proceeds of the sales to USEPA to discharge all USEPA claims. USEPA has agreed
to consider entering into prospective purchaser agreements protecting the
property purchasers from USEPA cost recovery claims and third party contribution
claims, but is not willing to deduct legal fees of more than $25,000 and $20,000
from the Riviera Beach and Port Salerno properties, respectively.
-39-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. Commitments and Contingencies (continued):
Since this leaves the Company no way to pay its legal fees to its outside
environmental counsel, that counsel has had to withdraw from the legal
representation.
Currently, the Riviera Beach Property is under contract with National Land
Company ("NLC") for market value of approximately $1,000,000. USEPA is currently
negotiating a prospective purchaser agreement with NLC, subject to appropriate
deductions from the purchase price paid to USEPA, for back property taxes and
interest, legal fees in the amount of $25,000, 5% broker's fee, and closing
costs. Under these terms, NLC would pay USEPA $419,000 in net purchase proceeds.
USEPA is also seeking to have the environmental escrowed monies relating to the
Riviera Beach Property paid over to it by FDEP and the Company to defray its
cleanup costs. USEPA believes that it can compel Honeywell to complete the
cleanup of the Riviera Beach Property.
USEPA counsel had advised Solitron's counsel that once a prospective purchaser
agreement is signed, the property is sold, and USEPA receives the proceeds
($419,000) plus approximately $20,000 from the Riviera Beach escrow account,
USEPA will issue the Company and Honeywell a letter stating that it will not
hold them liable for any additional past response costs for the Riviera Beach
site. However, until the prospective purchaser agreement is signed by both the
USEPA and the prospective buyer and the sale is consummated, there can be no
guarantee that such transaction and release will take place.
USEPA advised the Company that it is unwilling to resolve its past and future
cleanup costs in relation to the Port Salerno site under the ability to pay
mechanism until the Port Salerno property is sold.
It is the Company's position that any USEPA cost recovery claims are discharged
in the prior bankruptcy and that USEPA is bound by the terms of the remediation
approved under the Amended Order of Confirmation in Bankruptcy. Though USEPA
received notice of Solitron's Bankruptcy, has knowledge of FDEP's claim and
participation in the Bankruptcy, and that it likewise had already incurred costs
to investigate the properties, USEPA did not file a claim in the Bankruptcy,
apparently deferring to FDEP's claims regarding the remediation of the
properties. USEPA does not agree with the Company's conclusion that its claims
have been discharged in the prior bankruptcy.
It is the Company's position that its legal exposure to Honeywell for
contribution to cleanup costs has been resolved in the prior bankruptcy, since
Honeywell's claims were filed and resolved in bankruptcy.
The Company's former facility in Jupiter, Florida was sold to Philips
Electronics in 1982. In 1995 the Jupiter facility was the subject of a
preliminary assessment by the USEPA. After its investigation, USEPA deferred any
further
remedial action to an FDEP lead. The Company's environmental legal counsel has
been advised that this facility is being remediated and such remediation will be
completed under a consent order with FDEP. By letter dated May 17, 1999, Philips
put the Company on notice that it will seek to exercise its indemnity rights
against the Company under the 1982 purchase and sale agreement. It is the
Company's position that Philips' notice of and participation in the prior
bankruptcy has discharged Philips' claims.
During the fiscal year ended February 28, 1999, the Company has spent
approximately $13,000 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.
-40-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. 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. The lease is subject to
escalations based on operating expenses. Future minimum lease payments for all
non-cancelable operating leases are as follows:
YEAR ENDING FEBRUARY 28 AMOUNT
----------------------- --------
2000 245,000
2001 250,000
2002 210,000
--------
Total $705,000
========
Total rent expense was $ 283,000 for the year ended February 28, 1999 as
compared with $270,000 for the year ended February 28, 1998.
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 Mr. 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>
Shevach Saraf 56 Chairman of the Board, 1992 2000
Chief Executive Officer,
President and Treasurer
Mr. Jacob Davis 62 Director 1996 2001
Mr. Joseph Schlig 71 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. Mr. 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
-42-
<PAGE>
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, Mr. 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.
Mr. 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 Mr. Davis. During the year ended
February 28, 1999, the Audit Committee met twice.
Mr. Joseph Schlig and Mr. Jacob Davis served on the Compensation Committee (Mr.
Davis chairs the committee). Mr. Saraf serves on the Nominating Committee. Mr.
Saraf and Mr. Davis serve on the Executive Committee. Mr. Davis and Mr. Schlig
serve on the Capital Formation/Acquisition Committee. The Compensation Committee
met once during the ear ended February 28, 1999. None of these other committees
met during the year ended February 28, 1999.
During the year ended February 28, 1999, the Board of Directors met 4 times, and
each director attended at least 75% of the meetings held during the period he
was a director.
SECTION 16(A) COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors and executive officers of the Company and ten percent shareholders of
the Company to file initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company with the
Securities and Exchange Commission. Directors, executive officers, and ten-
percent shareholders are required to furnish the Company with copies of all
Section 16(a) forms they file. 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, 1999 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.
-43-
<PAGE>
ITEM 9. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning compensation
paid by the Company, to or on behalf of the Company's Chief Executive Officer
for the fiscal years ended February 28, 1999, February 28, 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 1998 153,063 -0- 30,715 -0- -0- -0- -0-
Chairman of the Board., 1999 167,477 296,000 26,592 -0- -0- -0- -0-
Chief Executive Officer,
President and Treasurer
</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 8% of the shares of the Company's Common Stock on a fully diluted
basis. The Employment Agreement prohibits Mr. Saraf from competing with the
Company during his employment and for one year thereafter. The Employment
Agreement expired on August 30, 1998, and was automatically extended to August
30, 1999 as stipulated in the agreement.
On June 7, 1999, the Compensation Committee approved payment of $40,000 to Mr.
Saraf for fiscal year ended February 28, 1999.
Executive officers of the Company may also participate in the Company's 1987
Stock Option Plan, the Company's Deferred Compensation Plan and the Company's
Employee 401-K and Profit Sharing Plan (the "Profit Sharing Plan"). During the
fiscal year ended February 28, 1997, no amounts were deferred by executive
officers under the Company's Deferred Compensation Plan and the Company did not
match any employee contributions to the Profit Sharing Plan.
-44-
<PAGE>
OPTION/SAR GRANTS TABLE
No Stock options were granted during the fiscal year ended February 28, 1999.
Certain stock options granted at a meeting of the Board of Directors held on
March 14, 1994 were issuable upon the condition that the shareholders approved
such issuance prior to March 14, 1995. As a result of a lack of shareholder
approval prior to this date, all such option grants are void. No awards were
made under any long-term plan during fiscal year end February 28, 1999. The
following table sets forth certain summary information covering unexercised
options to purchase the Company's Common Stock as of February 28, 1999 held by
the Company's Chief Executive Officer. The Company's Chief Executive Officer did
not exercise any stock options during the fiscal year ended February 28, 1999.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY SHARES NUMBER OF UNEXERCISED IN THE MONEY
NAME AND ACQUIRED OR VALUE OPTIONS HELD AT OPTIONS HELD AT
PRINCIPAL POSITION EXERCISED(#) RECEIVED FISCAL YEAR END(#) FISCAL YEAR END($)
- ------------------ ------------ -------- -------------------------- --------------------------
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- -0-
Mr. 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, 1999.
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 ($0.156), 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, Mr. Davis and Mr. Schlig served as its Compensation
Committee and made all compensation decisions during that period.
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<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.
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING
NAME BENEFICIALLY OWNED (1) SHARES (1)
---- ---------------------- ------------
Shevach Saraf(2) 220,154 (4) 10.8%
3301 Electronics Way
West Palm Beach, FL 33407
All executive officers and 220,154 (4) 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%
(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) 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."
-46-
<PAGE>
<TABLE>
<CAPTION>
ITEM 12. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
PAGE
-----
<S> <C> <C>
(a)(1) The following financial statements are included in Part II, Item 7.
Reports of Independent Certified Public Accountants 23-24
Financial Statements: 25
Consolidated Balance Sheet - February 29, 1999
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, 1999 and February 28, 1998
Consolidated Statements of Cash Flows - For the years ended February 28
28, 1999 and February 28, 1998
Notes to Consolidated Financial Statements 29-41
</TABLE>
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<PAGE>
(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).
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).
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<PAGE>
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.
27 Financial Data Schedule
(b) Reports on Form 8-K - one, filed with the SEC on April 8, 1999.
SEC file number 001-04978.
-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.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ SHEVACH SARAF Chairman, June 11, 1999
- ------------------- President, and
Shevach Saraf Chief Executive Officer
/s/ JACOB DAVIS Director June 11, 1999
- -------------------
Jacob Davis
/s/ JOSEPH SCHLIG Director June 11, 1999
- -------------------
Joseph Schlig
-50-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
21 List of Subsidiaries of the Company.
27 Financial Data Schedule.
-51-
Exhibit 21
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC.
SUBSIDIARIES OF THE REGISTRANT
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 SOLITRON
DEVICES, INC. AND SUBSIDIARIES FORM 10-KSB FOR THE YEAR ENDED FEBRUARY 28, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 784,000
<SECURITIES> 0
<RECEIVABLES> 1,123,000
<ALLOWANCES> (11,000)
<INVENTORY> 2,737,000
<CURRENT-ASSETS> 4,755,000
<PP&E> 1,904,000
<DEPRECIATION> (1,317,000)
<TOTAL-ASSETS> 7,170,000
<CURRENT-LIABILITIES> 3,450,000
<BONDS> 0
20,000
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,170,000
<SALES> 7,900,000
<TOTAL-REVENUES> 7,900,000
<CGS> 6,009,000
<TOTAL-COSTS> 7,288,000
<OTHER-EXPENSES> (18,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154,000
<INCOME-PRETAX> 476,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 476,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 476,000
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.23
</TABLE>
