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 29, 2000
Commission File No. 1-4978
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SOLITRON DEVICES, INC.
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(Exact name of Small Business Issuer as specified in Its Charter)
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Delaware 22-1684144
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(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification Number)
3301 Electronics Way, West Palm Beach, Florida 33407
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(Address of Principal Executive Offices)
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Issuer's telephone number: (561) 848-4311
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of Class)
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 in response to Item
405 of Regulation SB 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-KSB or any amendment to
this Form 10-KSB. [x]
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 May 9, 2000, was approximately $2,068,821.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 29, 2000: 2,068,821 shares of common stock, par
value $.01 per share.
State issuer's revenues for its most recent fiscal year: $7,970,000.
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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, diodes and Standard Military Drawings
("SMD") voltage regulators, 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 (as hereinafter
defined under "Bankruptcy Proceedings") 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 S/V 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 29, 2000 and for the fiscal year ended
February 28, 1999 and (ii) contributions to the Company's total order backlog at
February 29, 2000 and for the fiscal year ended February 28, 1999.
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Fiscal Year Fiscal Year Backlog Backlog
Ended Ended at at
February February February February
Product 29, 2000 28, 1999 29, 2000 28, 1999
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Power Transistor 15% 20% 9% 6%
Hybrids 59% 52% 61% 64%
Field Effect Transistors 9% 13% 8% 9%
Power MOSFETS 17% 15% 22% 21%
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100% 100% 100% 100%
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The Company's backlog at February 29, 2000 and revenue for the year ended
February 29, 2000 reflect demand for the Company's products as at such date and
for such period. For more information, see "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; non-discrete devices consist of 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 are 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. For the fiscal year ended February 29, 2000
approximately 90% of the Company's sales have been of custom products, and the
remaining 10% have been of standard or catalog products.
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 systems, 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 Company'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.
Custom products are typically sold to defense or aerospace companies such as
Raytheon, Lockheed Martin and Honeywell, while standard products are sold to the
same customer base and to the general electronic industry and incorporate such
items as power supplies and other electronic control products. The Company has
standard and custom products available in all of its major product lines.
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 increased market demand resulting from other companies' (e.g.,
Motorola) departure from the military market. The Company also manufactures
power diodes under the same military specification. Additionally, it
manufactures power N-Channel and P-Channel Power MOSFET transistors and are
currently expanding that line. The Company is qualified to deliver these
products under MIL-PRF-19500. Some of these parts made by the company are custom
or standard.
The Company has been certified and qualified since 1968 under MIL-PRF-19500 (and
its predecessor) standards promulgated by the Defense Supply Center Columbus
("DSCC"). These standards specify the uniformity and quality of bi-polar
transistors and diodes purchased for United States military programs. The
purpose of the program is to standardize the documentation and testing for
bi-polar semiconductors for use in United States military and aerospace
applications. Attainment of certification and/or qualification to MIL-PRF-19500
requirements is important since it is a prerequisite for a manufacturer to be
selected to supply bi-polar semiconductors for defense-related purposes.
MIL-PRF-19500 establishes definite criteria for manufacturing construction
techniques and materials used for bi-polar semiconductors and assures that these
types of devices will be manufactured under conditions that have been
demonstrated to be capable of continuously producing highly reliable products.
This program requires a manufacturer to demonstrate its products' performance
capabilities. A manufacturer receives certification once its Product Quality
Assurance Program Plan is reviewed and approved by DSSC. A manufacturer receives
qualification once it has demonstrated that it can build and test sample product
in conformity with its certified Product Quality Assurance Program Plan.
Continuing to maintain MIL-PRF-19500 qualification is expected to improve the
Company's business posture by increasing product marketability.
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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. Hybrids manufactured by the Company are
custom or standard.
The Company has been certified (since 1990) and qualified (since 1995) under
MIL-PRF-38534 (and its predecessor) standards promulgated by the DSCC. 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 that 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 DSSC (Defense Supply Center
Columbus). 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. Maintaining MIL-PRF-38534 qualification is
expected to improve the Company's business posture by increasing product
marketability.
The Company also qualified a line of voltage regulators in accordance with Class
M of MIL-PRF-38535, which allows it to sell these products in accordance with
SMD specifications published by DSCC. Standard and custom voltage regulators are
also made by the Company.
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 expanding its product offering. The
Company is qualified to deliver these products under MIL-PRF-19500. These
devices can be custom or standard.
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 micro size 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.
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In the case of hybrids, design engineers formulate the circuit and layout
designs. Ceramic substrates are then printed with gold conductors to form the
interconnect pattern and with thick film resistive inks to form the resistors of
the designed circuit. Semiconductor chips, resistor chips and capacitor chips
are then mounted on the substrates and sequential wire bonding is used to
interconnect the various components to the printed substrate, as well as to
connect the circuit to the external package pins. The Company manufactures some
of the hybrid packages 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 specifications.
The raw materials used in the manufacture of the Company's products are
generally readily available from multiple sources. Key suppliers of raw
materials are companies such as International Rectifiers, Intersil, IXYS,
Kyocera, Alberox, Platronics, Olin Aegis, EMCA-Remex, to name a few.
ISO 9001
In March 2000, Underwriters Laboratories awarded the Company ISO 9001
qualification. The ISO 9001 Program is a series of quality management and
assurance standards developed by a technical committee of the European Community
Commission working under the International Organization for Standardization.
Management believes that such qualification will open the Company to additional
business opportunities which were not available in the past.
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.
GOVERNMENT CONTRACTING RISK
A large 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 renegotiation 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.
TECHNOLOGY CHANGE RISKS
The market for the Company's products is characterized by changing technology,
evolving industry standards, changes in customer requirements, product
obsolescence and new product introductions. Although management does not believe
that such changes will occur rapidly, the Company's continued viability will
depend, in part, upon its ability to maintain 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 not spent any funds on research and
development in recent years, the Company may not be able to accomplish the
foregoing, which 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.
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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, DISTRIBUTION 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 5 representative
organizations which operate out of 11 different locations with 23 salespeople
and 2 stocking distributor organizations which operate out of 49 locations with
610 salespeople and (ii) in the international market by 2 representative
organizations in 2 countries with 6 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.
During the fiscal year ended February 29, 2000, the Company sold products to
approximately 235 customers. Of these 235 customers, at least 75 had not
purchased products from the Company during the previous fiscal year. During the
fiscal year ended February 29, 2000, Raytheon accounted for approximately 42% of
net sales, which was the same percentage it accounted for during the fiscal year
ended February 28, 1999. The U.S. government was the only other customer that
accounted for more than 10% of net sales during the last fiscal year. Sales to
the U.S. government represented almost 12% of the total sales for the fiscal
year ended February 29, 2000, up from just under 10% in 1999. Eleven of the
Company's customers accounted for approximately 81% of the Company's sales
during the fiscal year ended February 29, 2000. 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 large customers will continue to decline in number,
but this does not necessarily mean that the Company will experience a decline in
sales. The Company expects 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 29, 2000 and since that date, a
substantial portion of the Company's products were sold pursuant to contracts or
subcontracts with or to customers whose end products are sold to the United
States government. Accordingly, the Company's sales may be adversely impacted by
reduced Congressional appropriations and changes in national defense policies
and priorities. As a result of such reduced Congressional appropriations and a
significant decline in military spending in recent years, the Company had a 12%
decrease in net bookings during the fiscal year ended February 29, 2000 as
compared to the previous year. All of the Company's contracts with the United
States government or its prime contractors contain provisions permitting
termination at any time at the convenience of the United States government or
the prime contractor upon payment to the Company of costs incurred plus a
reasonable profit.
In recognition of the changes in global geopolitical affairs and reduced United
States military spending, the Company is attempting to increase sales of its
products for non-military, scientific and industrial niche markets, such as
medical electronics, machine tool controls, specialized telecommunications,
cellular telephone base stations and LEOS (Low Earth Orbit Satellites)
telecommunication networks and other market segments in which purchasing
decisions are generally based primarily on product quality, long-term
reliability and performance, rather than on product price. The Company is also
attempting to offer additional products to the military markets that are
complementary to those currently sold by the Company to the military markets.
On March 8, 2000, the Company announced the introduction of a line of voltage
regulators manufactured in accordance with standard military drawings, following
approval of its certification by the DSCC. These products typically are sold to
customers in the defense and aerospace industries that specify the use of these
industry standard military drawings.
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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 10% of the Company's net sales for the fiscal year
ended February 29, 2000 as compared to 8% for the year ended February 28, 1999.
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 $5,458,000 at February 29, 2000, compared to
$5,921,000 as of February 28, 1999. 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, 2001. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Bookings and Backlog."
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 affected by the availability of raw
material, scheduling factors, manufacturing considerations and customer delivery
requirements.
The rate of booking new orders varies significantly from month to month, mostly
as a result of sharp fluctuations and delays in the government budgeting and
appropriation process. The Company has historically experienced somewhat
decreased levels of bookings during the summer months, primarily as a result of
such budgeting and appropriation activities. For these reasons, and because of
the possibility of customer changes in delivery schedules or cancellations of
orders, the Company's backlog as of any particular date may not be indicative of
actual sales for any succeeding period. See "Management's Discussions and
Analysis of Financial Conditions - Result of Operations" for a discussion of the
decrease in bookings for the year ended February 29, 2000 as compared to the
previous year.
PATENTS AND LICENSES
The Company owned approximately 33 patents (most of which have now expired or
have been allowed to lapse) relating to the design and manufacture of its
products. The terminations of these patents has not had a material adverse
effect on the Company. The Company believes that engineering standards,
manufacturing techniques and product reliability are more important to the
successful manufacture and sale of its products than the old patents which it
had.
COMPETITION
The electronic component industry, in general, is highly competitive and has
been characterized by price erosion, rapid technological changes and foreign
competition. However, the market segments in which the Company operate, while
highly competitive and subject to the same price erosion, technological change
is slow and minimal. The Company believes that it is well regarded by its
customers in the segments of the market in which competition is dependent less
on price and more on product reliability and performance. Management believes,
however, that to the extent the Company's 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. Presently the Company is attempting to identify a niche market for
high end industrial custom power modules where the Company's capabilities can
offer a technological advantage to customers in the motor driver industry.
However, there is no guarantee that the Company will be successful in this
effort.
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The Company has numerous competitors across all of its product lines. 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
pushes for implementation of its 1995 decision to purchase high-end commercial
products in lieu of products made in accordance with more stringent military
specifications.
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. The Company believes that it will be able to
improve its capability to respond quickly to customer needs and deliver products
on time.
EMPLOYEES
At February 29, 2000, the Company had 92 employees (as compared to 105 at
February 28, 1999), 59 of whom are engaged in production activities, 6 in sales
and marketing, 6 in executive and administrative capacities and 21 in technical
and support activities. Of the 92 employees 89 were full time employees and 3
were part time.
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. A few of the key
suppliers of raw materials purchased by the Company are: Alberox, International
Rectifiers, Intersil, IXYS, Platronics, Kyocera, Brush Wellman, Abelstik
Laboratories, Olin Aegis, and others.
GOVERNMENT APPROVALS
The Company received DSCC approval to supply its products in accordance with
MIL-PRF-19500, MIL-PRF-38534 and some products in accordance with Class M of
MIL-PRF-38535.
RESEARCH AND DEVELOPMENT
During recent years, the Company has not spent any funds on research and
development. This may have an adverse effect on future operations. The cost of
designing custom products is borne in full by the customer, either as a direct
charge, or is amortized in the unit price charged to the customer.
EFFECT OF GOVERNMENT REGULATION
As a result of a 1995 change in Department of Defense policy, the Company can
now subcontract 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.
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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 statutes 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 20, 1993 (the "Confirmation Date") and
incorporated a plan for future remediation of 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"), which was sold on October 12, 1999,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 $102,860.57 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 a Certified Appraiser of the Member Appraisal Institute
("MAI"), as if uncontaminated, at $1,950,000 for the Riviera Beach Property (the
Riviera Beach Property was sold for approximately $1,000,000 on October 12,
1999) 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, by agreeing to pay part of the costs
of the City's installation of aeration facilities that address all volatile
contamination in the wellfield. 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 to offsite property owners,
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.
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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 which would result if the United States Environmental Protection Agency
were to take the lead over the cleanup.
Following the Effective Date (August 30, 1993) 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, the Riviera Beach Property could not have been sold unless
the price for the property equaled or exceeded the lesser of (i) 75% of its then
appraised value or (ii) the estimated cost of its remediation. The sale of the
Port Salerno Property is still subject to this restriction.
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 was prepared to settle for the sum of $10,000, to be paid as
other unsecured creditor claims are being paid. This offer was rejected. The
claim is unresolved and has been dormant since 1994.
The Company's position has been that further offsite 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 for one year, and
2. Commencing on the 37th month, $7,500 per month for one year, and
3. Commencing on the 49th month, $10,000 per month thereafter.
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 29,
2000 is $54,000.
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. However, the USEPA is contesting such
finding regarding the Port Salerno Property.
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
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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. 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 Port Salerno property.
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
2000. 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 will prepare a remedial action record of decision (ROD).
USEPA expects to sign a ROD for the Riviera Beach property during the calendar
year 2000. Due to the nature of ground water contamination sites in Florida,
cleanup is expected to take several years.
The Riviera Beach Property was sold October 12, 1999 to National Land Company
("NLC") for market value of approximately $1,000,000. USEPA has negotiated a
prospective purchaser agreement with NLC. Under the terms of the sale, NLC paid
USEPA $419,000. USEPA also received approximately $19,000 from the Riviera Beach
environmental escrowed monies 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 $19,000 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. To date, such letter has not been issued by USEPA.
It is the Company's position that its legal exposure to Honeywell for
contribution to cleanup costs has been removed in the bankruptcy, since
Honeywell's claim was filed and resolved against it in bankruptcy proceeding.
After having written-down the value of the property by $90,000 in the fiscal
year 2000 the Company has been offering to sell the Port Salerno Property for
about $895,000 and has advised respective purchasers that USEPA is prepared to
provide a respective purchaser's agreement to a purchaser permitting the
purchaser to proceed with development without liability for past contamination.
The Company is actively negotiating a sale and has applied to USEPA for its
determination that, due to Solitron's inability to pay more, that USEPA accept
the net proceeds of the sale in satisfaction of Solitron's potential exposure to
USEPA for its cost of cleanup that exceeds such amount.
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 ("ATP").
Under the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA" or "Superfund"), the United States may enter into ATP settlements with
individuals and businesses for recovery of response costs and performance of
cleanup work in appropriate cases. The ATP settlement process is reserved for
business potentially responsible parties ("PRPs") who demonstrate to USEPA's
satisfaction that payment of the amount sought by the
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government is likely to put a company out of business or otherwise jeopardize
its viability, and for both business and individual PRPs who demonstrate to the
USEPA that payment of such an amount is likely to create an undue financial
hardship. The ATP settlement process may provide for a reduction in the proposed
settlement to an amount that is not likely to create an undue financial
hardship. An undue financial hardship occurs if, in the opinion of USEPA,
satisfaction of the environmental claim will deprive a PRP of ordinary and
necessary assets or cause a PRP to be unable to pay for ordinary and necessary
business expenses and/or ordinary and necessary living expenses.
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 ATP 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.
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 "Bankruptcy
Proceedings" and to Note 12 of the accompanying Consolidated Financial
Statements.
During the fiscal year ended February 29, 2000, the Company has spent
approximately $8,000 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
Riviera Beach Property. Approximately $1,568,000 has been accrued in the balance
sheet for environmental remediation as of February 29, 2000. The Company
recorded these liabilities as $522,000 short-term liabilities and $1,046,000
long-term liabilities. These reservations are predicated on cleanup being
performed under the existing Plan and Consent Final Judgment. Included in the
long-term portion is an amount of approximately $547,000 reserved to cover a
lien that the USEPA has placed on the Port Salerno Property in June of 1999.
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" or "Plan"). The Plan 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 (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. Vector
subsequently formed S/V Microwave which operates the company's former Microwave
operation and is responsible for all of Vector's contractual obligations of the
company. Pursuant to the terms of the Vector Purchase
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Agreement: (i) S/V Microwave 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 next 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 S/V Microwave 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 S/V Microwave, pursuant to which it is estimated that S/V
Microwave will pay Solitron approximately $55,000 per year for eight years in
exchange for, among other things, (a) the Company's allowing S/V Microwave to
use certain of the Company's equipment, (b) the Company's providing to S/V
Microwave certain services and (c) S/V Microwave'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 S/V Microwave. As of February 1999, S/V
Microwave had completed making these payments in full.
(b) Based on the number of shares outstanding as of the effective date
(August 30, 1993), 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 as of 2000. Of this 65%, 40% (876,618 shares) has been issued
to holders of unsecured claims (pro rata) and 25% has been issued to Vector and
its participants. Vector participants were: Vector principal (Howard White) who
received 273,943 shares (subsequently sold to Inversiones Globales); AHI
Drillings, Inc. who received 77,037 shares; Cointrol Credit Co.II who received
20,095 shares; Service Finance who received 77,037 shares; Trans Resources who
received 77,037 shares; and Martin Associates who received 22,737 shares. The
Common Stock issued to Vector and its 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 has been
imposed. Following the sale of 273,943 shares by Vector to Inversiones Globales,
Inversiones Globales is not subject to such voting restriction. 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 approximately 20% (438,309
shares) of the then issued and outstanding Common Stock; the remaining
approximately 10% (219,155 shares) have already been issued to Mr. Saraf.
Approximately 109,577 shares (approximately 5%) 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.
(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 information see "Management's Discussion and Analysis
of Financial Condition and Results of Operations"). The Company proposed to its
unsecured creditors that it would 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 increased 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. As of February 29, 2000, the Company made 21 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 29, 2000 in the aggregate amount of approximately $241,000 of the
approximately $1,195,000 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 (h) below) and the Company's extinguishment of the unsecured
claim of Argo Partners, Inc. (as described below in (j) below), it is presently
estimated that there is 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 $150,000 in short-term debt and $1,102,000 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, Martin County Tax Collector and FDEP in order to modify the
schedule of payments as prescribed by its Plan of Reorganization. Since that
time, these parties have accepted the Company's payments described herein.
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(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, its participants and
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 to
the holders of unsecured claims (pro rata) and up to a maximum aggregate of
$1,500,000 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 both properties
are sold. As of February 29, 2000, the Company has deposited $54,000 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 was made by FDEP that
the soils at the Riviera Beach and Port Salerno Properties needed no further
remediation. Following additional testing, the USEPA now disagrees with the
results of the original testing concerning the Port Salerno Property. 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
"Properties" for a description of these facilities. The Company's financial
statements reflect liabilities of $1,568,000 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. 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. Because of the uncertainties of how USEPA will 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. For a more definitive description
of environmental matters pertaining to the Riviera Beach and Port Salerno
Properties, please refer to "Environmental Compliance".
(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. On October 12, 1999, the
Company settled with the Palm Beach County Tax Collector in connection with the
sale of the Old Riviera Beach Facility. 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. Martin County has not expressed objection to the Company's
plan to have the current, back taxes and interest paid from the proceeds of the
sale of the Port Salerno Property. 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, 1999. The Company has no known open tax obligations to the IRS as
of February 29, 2000.
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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 to be paid as described in (c ) above.
The Company has not been making payments 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. To date, the Martin County Tax Collector has not expressed
objection to this proposal. The following table indicates the approximate
cumulative status of amounts due under Court Plans as of February 29, 2000:
Due to Date Paid
----------- -----
Martin County $ 92,000 $ 7,957
(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
S/V Microwave, the Shared Services Agreement with S/V Microwave and the
Employment Agreement with Mr. Saraf.
(j) On December 15, 1995, the Company and Argo Partners, Inc., an
unsecured creditor, reached an agreement under which the Company extinguished
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
extinguishment, Argo Partners received payment of approximately $3,160 from the
Company as part of several distributions to unsecured creditors. Thus, the
Company recognized in December 1995 an extraordinary gain of approximately
$96,877 due to the debt being carried on the books at the discounted amount.
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 S/V
Microwave) in West Palm Beach, Florida. The Company has leased the facility for
a term ending December 31, 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 (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 (as hereinafter defined).
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.
On October 12, 1999, the Company sold its 78,000 square foot facility (the "Old
Riviera Beach Facility") within the same complex as the New Riviera Beach
Facility.
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.
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ITEM 3. LEGAL PROCEEDINGS
Other than the bankruptcy proceedings (as described in " Business - Bankruptcy
Proceedings") and the following matters, the Company is not aware of any other
material legal proceedings to which it is a party.
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. The Company has no known tax obligations to the IRS as of February
29, 2000.
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 has been dormant since 1993.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-16-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Since March, 1995, the Company's Common Stock has been traded on NASDAQ's
Electronic Bulletin Board (over the counter). The Company's Common Stock was
traded on the New York Stock Exchange until October 13, 1993, at which time it
began trading on the NASDAQ Small Cap Market where it was traded until March
1995.
The following table sets forth for the periods indicated, high and low bid
information of the Common Stock. The prices set forth below reflect inter-dealer
prices, without retail markup, markdown, or commission and may not represent
actual transactions.
FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
------------------------ -------------------------
HIGH LOW HIGH LOW
First $0.6250 $0.1250 $0.4375 $0.1750
Second $0.7500 $0.5000 $0.4375 $0.1250
Third $0.7500 $0.4375 $0.4688 $0.2812
Fourth $1.8750 $0.4375 $0.3750 $0.1250
As of February 29, 2000 and February 28, 1999, there were approximately 4,090
and 4,189 holders of record of the Company's Common Stock, respectively. On
February 29, 2000, the last sale price of the Common Stock as reported on the
Electronic Bulletin Board was $1.75 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.
The Company has not issued any shares of its Common Stock during the last three
years.
Certificates representing 346,187 "old shares" of Common Stock, which were
subject to an approximate 10 to 1 reverse split (which was authorized by the
Bankruptcy Court on September 1993), have not been exchanged by the shareholders
as of February 29, 2000. Subsequent to such stock split, these certificates now
represent 32,934 shares of Common Stock, which are included in the 2,068,821
shares outstanding as of February 29, 2000 indicated in the beginning of this
filing. These "old shares" have not been included in the number of shares
outstanding as set forth in the Company's filings with the commission since the
date of such stock split.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
In January 1992, as a result of losses and liquidity deficiencies, the Company
and its wholly-owned subsidiary, Solitron Specialty Products, Inc. (f/k/a
Solitron Microwave, Inc.) filed voluntary petitions for relief under Chapter 11
of the Bankruptcy Code. On August 20, 1993, the Bankruptcy Court entered an
Order of Confirmation confirming the Company's Plan of Reorganization and on
August 30, 1993, the Plan of Reorganization became effective, and the Company
emerged from bankruptcy. On July 12, 1996, the Bankruptcy Court officially
closed the case.
-17-
<PAGE>
The following table is included solely for use in comparative analysis of income
(loss) before extraordinary items to complement Management's Discussion and
Analysis:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Year Ended February
29, 2000 28, 1999
-------- --------
<S> <C> <C>
Net Sales $ 7,970 $ 7,900
Cost of sales 6,151 6,009
Gross profit 1,819 1,891
Selling, general and administrative expenses 1,219 1,279
Operating income 600 612
Interest expense (51) (49)
Interest expense on unsecured creditors claims (73) (105)
Write down of non-operating facilities and related expenses (90) (25)
Interest income 43 35
Increase in Environmental Reserve (547) 0
Other, net 65 8
Income (Loss) before Extraordinary Item (161) 476
Extraordinary Item 655 0
Net income $ 494 $ 476
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During the first few fiscal years, after its emergence from bankruptcy
proceedings, 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 29, 2000 and February 28, 1999,
the Company recorded net income of $494,000 and $476,000 respectively.
During the pendency of the bankruptcy proceedings, all secured and unsecured
claims against and indebtedness of the Company (including accrued and unpaid
interest) were stayed in accordance with the Bankruptcy Code while the Company
continued its operations as a debtor-in-possession, subject to the control and
supervision of the Bankruptcy Court. Because these stays limit cash outflow, the
Company, during the pendency of the Bankruptcy Proceedings, realized positive
cash flow from ongoing operations. Since the Company emerged from Chapter 11, it
has experienced a positive cash flow from recurring operations; however, until
the fiscal year ended February 28, 1997, overall cash flow was negative due
primarily to the necessity to make payments of administrative expenses and
unsecured debt payouts arising in connection with the bankruptcy proceedings.
The foregoing resulted in a decrease in cash and cash equivalents since
emergence from Chapter 11.
The Company has incurred income from operations of approximately $600,000 for
the fiscal year ended February 29, 2000 and has significant obligations arising
from settlements in connection with its bankruptcy which require the Company to
make substantial cash payments which cannot be supported by the current level of
operations.
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 continued 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 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
-18-
<PAGE>
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.
The Company cannot assure you, however, that it will be able to generate
sufficient liquidity to meet its operating needs.
The Company has projected that it will continue to be able to generate
sufficient funds to support its ongoing operations only if it is able to
renegotiate its required payments to unsecured creditors, the USEPA, the FDEP
and the Martin County tax authorities or raise sufficient cash in order to pay
these obligations as currently due; otherwise it will not be able to remain a
going concern.
The Company is continuing to negotiate with the unsecured creditors, the USEPA,
the FDEP, and Martin County tax authorities in an attempt to arrive at reduced
payment schedules. To date, these parties have not expressed objection to the
reduced level of payments. 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 Martin County
tax authorities or obtain additional sources of capital and/or cash or that the
Company can generate sufficient cash to meet its obligations.
At February 29, 2000 and February 28, 1999 respectively, the Company had cash
and cash equivalents of $1,184,000 and $784,000. The principal cash change was
due to managing disbursements and accelerating collections.
At February 29, 2000, the Company had working capital of $2,743,000 as compared
with a working capital at February 28, 1999 of $1,340,000. The principal change
was due to a reduction of current liability relating to the Riviera Beach
facility as well as the amounts due the IRS, and an increase in cash.
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. The Company had proposed to its unsecured creditors that it make
quarterly payments of $9,000. Following discussion with the Company's unsecured
creditors, 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 21 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 29, 2000 in the
aggregate amount of approximately $241,000 of the approximately $1,195,000
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
extinguishment 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
$2,242,000 to holders of allowed unsecured claims in quarterly installments of
approximately $62,000. The Company carries its debt to its unsecured creditors
as $150,000 in short-term debt and $1,252,000 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 has been dormant
since 1994.
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 and the
Port Salerno 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
-19-
<PAGE>
the Company's ATP 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 and ATP, see "Business - 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 $19,000 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
Property. The Riviera Beach Facility was sold on October 12, 1999 and the
aforementioned funds were transferred to the USEPA which, to date, has not
issued such a letter.
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 S/V Microwave) 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). On
October 12, 1999, the Company settled with the Palm Beach County Tax Collector
in connection with the sale of the Riviera Beach facility. 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 Company intends to pay Martin County for all of its tax obligations
from the proceeds of the sale of the Port Salerno facility.
The following table indicates the approximate cumulative status of amounts due
under Court Plans as of February 29, 2000:
Due to Date Paid
----------- ----
Martin County $ 92,000 $ 7,957
BOOKINGS AND BACKLOG
During the fiscal year ended February 29, 2000, the Company's net bookings were
$7,507,000 in new orders as compared with $8,498,000 for the year ended February
28, 1999, a decrease of 12%. The Company's backlog decreased to $5,458,000 at
February 29, 2000 as compared with $5,921,000 as of February 28, 1999, an 8%
decrease as a result of a decrease in the demand for the Company's products,
precipitated by the ongoing cuts in defense spending.
-20-
<PAGE>
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 power modules and to develop offshore assembly or
sub-assembly whether as 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 and invest in capital (automatic assembly and
test) equipment. The source of capital funding will be defined subsequent to
such strategic partnership being formed. Such financing could come from
equipment leasing.
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.
SEASONALITY
The Company's bookings of new orders and sales are largely dependent on
congressional budgeting and appropriation activities and the cycles associated
therewith. The Company has historically experienced somewhat decreased levels of
bookings during the summer months, primarily as a result of such budgeting and
appropriation activities.
RESULTS OF OPERATIONS
2000 vs. 1999
Net sales for the fiscal year ended February 29, 2000 increased by 0.1% to
$7,970,000 versus $7,900,000 during the fiscal year ended February 28, 1999.
Bookings were lower than sales by 5.8%; thus, the backlog decreased from
$5,921,000 as of February 28, 1999 to $5,458,000 as of February 29, 2000. The
Company has experienced a decrease in the level of bookings of 12% for the year
ended February 29, 2000 as compared to the previous year principally as a direct
result of a shift in customer demand for the Company's products.
During the year ending February 29, 2000, the Company shipped 1,400,577 units as
compared with 2,462,221 units shipped during the year ending February 28, 1999.
It should be noted that since the Company manufactures 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.
Cost of Sales for the fiscal year ended February 29, 2000 increased to
$6,151,000 from $6,009,000 during the fiscal year ended February 28, 1999. This
increase was primarily attributed to higher rent, material and labor costs.
During the year ending February 29, 2000, the Company's gross margins were 23%
as compared to 24% for the year ending February 28, 1999. The small decrease was
primarily due to a broad base increase of cost of goods sold of 1 % associated
primarily with a change in product mix.
During the year ending February 29, 2000, Selling, General and Administrative
based expenses, as a percentage of sales, were 15% as compared with 16% for the
year ending February 28, 1999. Selling, General and Administrative expenses
decreased 5% to $1,219,000 for the fiscal year ended February 29, 2000 from
$1,279,000 for the fiscal year ended February 28, 1999. The decrease was due
primarily to lower payroll and commissions.
-21-
<PAGE>
Operating Income for the fiscal year ended February 29, 2000 decreased to
$600,000 from $612,000 during the fiscal year ended February 28, 1999. This
decrease was primarily attributable to a product mix change that caused a higher
level of cost of sales.
Total interest expense decreased from $154,000 for the fiscal year ended
February 28, 1999 to $124,000 for the fiscal year ended February 29, 2000
primarily due to lower imputed interest.
Interest Expense on unsecured creditor claims for the fiscal year ended February
29, 2000 decreased to $73,000 from $105,000 during the fiscal year ended
February 28, 1999.
Write-down of non-operating facilities and related expenses for the fiscal year
ended February 29, 2000 increased to $90,000 from $25,000 during the fiscal year
ended February 28, 1999. The $90,000 write-down is fully attributable to the
reduction in the value of the Port Salerno Property.
Interest Income for the fiscal year ended February 29, 2000 increased to $43,000
from $35,000 during the fiscal year ended February 28, 1999. This small increase
was primarily attributable to higher cash position and higher interest from
overnight lending as a result of changes in prime interest rates by the Federal
Reserve Board.
Other net for the fiscal year ended February 29, 2000 increased to $65,000 from
$8,000 during the fiscal year ended February 28, 1999. The other net income is
due principally to an increase in interest income of $8,000, an increase in sale
of scrap of $9,000 and a reduction of property taxes of $25,000.
Net Income for the fiscal year ended February 29, 2000 increased to $494,000
from $476,000 during the fiscal year ended February 28, 1999. This increase is
attributable to higher level of sales, slightly lower level of imputed interest
and higher level of interest income offset by higher cost of sales.
FORWARD-LOOKING STATEMENTS
Information in this Form 10-KSB, including any information incorporated by
reference herein, includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended, and is subject to the safe-harbor created by
such sections. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements.
Statements regarding:
o the effects of certification or qualification of the Company's products;
o trends in the industry, including trends concerning consolidation, changes
in government military spending, price erosion and competition;
o the Company's ability to fill its backlog;
o the Company's competitive strengths and the nature of its competition;
o the Company's ability to move into new markets or to develop new products;
o the Company's ability to respond quickly to customers' needs and to deliver
products in a timely manner; o the Company's compliance with environmental
laws, orders and investigations and the future cost of such compliance;
o implementation of the Plan of Reorganization and the Company's ability to
make payments required under the Plan of Reorganization or otherwise or to
generate sufficient cash from operations or otherwise;
o amounts that the Company may receive (or not receive)upon the sale of
certain properties and the expected application of such funds;
o the suitability and adequacy of the Company's headquarters facilities;
o the effects of inflation;
o Section 16(a) compliance; and
o other statements contained in this report that address activities, events
of developments that the Company expects, believes or anticipates will or
may occur in the future, and similar statements are forward-looking
statements.
-22-
<PAGE>
These statements are based upon assumptions and analyses made by the Company in
light of current conditions, future developments and other factors the Company
believes are appropriate in the circumstances, or information obtained from
third parties and are subject to a number of assumptions, risks and
uncertainties. Readers are cautioned that forward-looking statements are not
guarantees of future performance and that actual results might differ materially
from those suggested or projected in the forward-looking statements. Factors
that may cause actual future events to differ significantly from those predicted
or assumed include, but are not limited to:
o the loss of certification or qualification of the Company's products or the
inability of the Company to capitalize on such certifications and/or
qualifications;
o a change in government regulations which hinders the Company's ability to
perform government contracts;
o a shift in or misinterpretation of industry trends;
o unforeseen factors which impair or delay the development of any or all of
its products if such decision is later determined to be in the best
interests of the Company;
o inability to capitalize on competitive strengths or a misinterpretation of
those strengths;
o a misinterpretation of the nature of the competition;
o inability to respond quickly to customers' needs and to deliver products in
a timely manner resulting from unforeseen circumstances;
o inability to move into new market segments based on unforeseen factors;
o an increase in the expected cost of environmental compliance based on
factors unknown at this time;
o changes in law or industry regulation;
o inability to sell certain properties or to obtain expected prices for such
properties;
o unexpected growth or stagnation of the business;
o unforeseen changes that render the Company's headquarters facilities
unsuitable or inadequate to meet the Company's current needs;
o unforeseen effects of inflation;
o misrepresentations of Company directors, officers and 10 percent
shareholders concerning their compliance with Section 16(a) of the
Securities Act of 1934; and
o other unforeseen activities, events and developments that may occur in the
future.
-23-
<PAGE>
Item 7. FINANCIAL STATEMENTS
--------------------
Index to Consolidated Financial Statements
Page
----
Independent Auditor's Report 25
Consolidated Balance Sheet as of February 29, 2000 26
Consolidated Statements of Income
for the years ended February 29, 2000 and February 28, 1999 27
Consolidated Statements of Stockholders'
Equity for the years ended February 29, 2000
and February 28, 1999 28
Consolidated Statements of Cash Flows for the years
ended February 29, 2000 and February 28, 1999 29
Notes to Consolidated Financial Statements 30-43
-24-
<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 29, 2000, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
years in the period 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 audits.
We conducted our audits 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 audits provide 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 29, 2000 and the results of their
operations and their cash flows for each of the two years in the period 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 25, 2000
-25-
<PAGE>
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 29, 2000
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,184,000
Accounts receivable, less allowance for doubtful accounts of $5,000 991,000
Inventories 2,510,000
Prepaid expenses and other current assets 111,000
Due from SV Microwave 2,000
-----------
Total current assets $ 4,798,000
-----------
PROPERTY, PLANT AND EQUIPMENT, net 424,000
NON-OPERATING PLANT FACILITIES, net of cost to dispose -0-
OTHER ASSETS 87,000
-----------
$ 5,309,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of accrued environmental expenses $ 522,000
Accounts payable-Post-petition 107,000
Accounts payable-Pre-petition, current portion 150,000
Accrued expenses and other liabilities 1,274,000
Accrued Chapter 11 administrative expense 2,000
-----------
Total current liabilities $ 2,055,000
-----------
OTHER LONG-TERM LIABILITIES, net of current portion, net of cost to dispose
of non-operating facilities 1,318,000
-----------
TOTAL LIABILITIES $ 3,373,000
===========
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,
2,068,821 shares issued and outstanding 21,000
Additional paid-in capital 2,617,000
Accumulated deficit (702,000)
-----------
Total stockholders' equity 1,936,000
-----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 5,309,000
===========
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.
-26-
<PAGE>
<TABLE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Year For The Year
Ended Ended
February 29, February 28,
2000 1999
------------ -----------
<S> <C> <C>
Net sales $7,970,000 $ 7,900,000
Cost of sales 6,151,000 6,009,000
--------- ---------
Gross profit 1,819,000 1,891,000
Selling, general and administrative expenses 1,219,000 1,279,000
--------- ---------
Operating income 600,000 612,000
Other income (expense):
Writedown of non-operating facilities
and related expenses (90,000) $(25,000)
Interest expense (51,000) (49,000)
Interest expense on unsecured creditors claim (73,000) (105,000)
Interest income 43,000 35,000
Increase in Environmental Reserve (547,000) 0
Other, net (43,000) 8,000
--------- ---------
Other income (expense), net (761,000) (136,000)
--------- ---------
Income (Loss) before Extraordinary Item (161,000) 476,000
Extraordinary Item:
Extinguishment of Debt 655,000 0
------- -
Net income $ 494,000 $ 476,000
========= =========
INCOME PER SHARE OF COMMON STOCK:
Basic
Income (Loss) per share before Extraordinary Item (0.08) 0.23
Extraordinary Item 0.32 0
Net Income 0.24 0.23
Diluted
Income (Loss) per share before Extraordinary Item (0.08) 0.23
Extraordinary Item 0.32 0
Net Income 0.24 0.23
Weighted Average shares outstanding-Basic 2,068,821 2,034,704
========= =========
Weighted Average shares outstanding-Diluted 2,068,821 2,117,803
========= =========
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.
-27-
<PAGE>
<TABLE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended February 29, 2000 and
February 28, 1999
<CAPTION>
Common Stock
--------------------------- Additional Retained
Number of Paid-in Earnings
Shares Amount Capital (Accumulated Deficit) Total
----------- ----------- ----------- --------------------- -----
<S> <C> <C> <C> <C> <C>
Balance, March 1, 1998 2,034,013 $ 20,000 $ 2,618,000 ($1,672,000) $ 966,000
----------- ----------- ----------- ----------- -----------
Issuance of New share Equivalent of
Non-converted Old Shares 691 -- -- -- --
Net Income -- -- -- 476,000 476,000
----------- ----------- ----------- ----------- -----------
Balance, March 1, 1999 2,034,704 $ 20,000 $ 2,618,000 ($1,196,000) $ 1,442,000
Issuance of New share Equivalent of
Non-converted Old Shares 34,117 1,000 (1,000) -- --
Net Income -- -- -- 494,000 494,000
----------- ----------- ----------- ----------- -----------
Balance, February 29, 2000 2,068,821 $ 21,000 $ 2,617,000 ($ 702,000) $ 1,936,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.
-28-
<PAGE>
<TABLE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For The Year For The Year
Ended Ended
February 29, February 28,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 494,000 $ 476,000
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 212,000 214,000
Allowance for doubtful accounts (7,000) 0
Writedown of Non Operating Facility (90,000) 0
Changes in operating assets and liabilities
Decrease (increase) in:
Accounts receivable 128,000 (15,000)
Inventories 227,000 (244,000)
Prepaid expenses and other current assets 8,000 -0-
Due from SV Microwave 1,000 66,000
Other assets (4,000) 9,000
Increase (decrease) in:
Accounts payable (493,000) 253,000
Accounts payable-pre-petition 21,000 23,000
Accrued expenses and Other Liabilities (865,000) (230,000)
Accrued Chapter 11 expenses (35,000) 2,000
Accrued environmental expenses 109,000 107,000
Other long-term liabilities 757,000 (289,000)
----------- -----------
Total adjustments (31,000) (104,000)
----------- -----------
Net cash provided by operating
activities $ 463,000 $ 372,000
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (49,000) 231,000
----------- -----------
Cash flows used in financing activities
Payments on capitalized lease obligations (14,000) (7,000)
----------- -----------
Net increase in cash 400,000 134,000
Cash at beginning of year 784,000 650,000
----------- -----------
Cash at end of year $ 1,184,000 $ 784,000
----------- -----------
Supplemental disclosures of cash flow information:
Cost to dispose non-operating plant facilities $ 1,745,000
----------- -----------
Interest paid $ 94,000 $ 103,000
----------- -----------
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.
-29-
<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.
Principal Business Activity:
The Company designs, develops, manufacturers, and markets solid-state
semiconductor components and related devices primarily for the military and
aerospace markets.
Cash:
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 29, 2000 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 as
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 minimum future 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 Facility:
The facility that is no longer being utilized for operations is being carried at
its estimated fair market value as a non-current asset. For reporting purposes,
it is netted against the cost necessary to dispose of the facility. The facility
is 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 shipment; however, the Company may receive payment of
some contracts in advance. When received, these amounts are deferred and are
recognized as revenue in the period in which the related products or services
are delivered.
Income Taxes:
Income taxes are accounted for under the asset and liability method of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
-30-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1. Summary of Significant Accounting Policies (continued)
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities or a change in tax rate is recognized in income in the period that
includes the enactment date. Deferred tax assets are reduced to estimated
amounts to be realized by the use of a valuation allowance.
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. In the Fiscal Year ended February 29, 2000 diluted
earnings per common share were not computed because the effect of incremental
shares would be antidilutive. The incremental shares were computed based on
stock options outstanding, using the treasury stock method.
Stock Based Compensation:
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" in
1997. SFAS 123 provides the adoption of a fair value method of accounting for
stock-based compensation plans. The Company can elect continuation of accounting
under Accounting Principles Board ("APB") Opinion No. 25 Accounting For Stock
Issued To Employees, and related interpretations with supplemental disclosures
for Stock Based Compensation issued to employees. The Company has chosen to
account for all stock based arrangements to employees 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
Florida 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.
-31-
<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 29, 2000, the Company is currently scheduled to pay approximately
$2,242,000 to holders of allowed unsecured claims in quarterly installments of
approximately $62,000. As of February 29, 2000, the present value of this
amount, $1,252,000, is accrued as a pre-petition liability 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 (August 30, 1993) 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 facility located in Port Salerno and its former facility located
in 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
(FDEP), the Port Salerno Facility can not 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 of this facility would not be liable for existing environmental
problems under certain conditions. In connection with facilitating the
remediation of the property, 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 29, 2000, the Company has deposited $54,000
into the escrow accounts.
(d) The Company has paid all of the allowed administrative claims and
allowed wage claims since August 1993. The Company is still required to pay
allowed tax claims to Martin County, Florida, estimated at approximately
$214,000, including approximately $30,000 of interest.
-32-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Going Concern and Petition in Bankruptcy (continued):
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 have been
completely settled by the Company on March 30, 1999, when 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. Vector participants were: Vector principal
(Howard White) who received 273,943 shares (subsequently sold to Inversiones
Globales); AHI Drillings, Inc. who received 77,037 shares; Cointrol Credit Co.
II who received 20,095 shares; Service Finance who received 77,037 shares; Trans
Resources who received 77,037 shares; and Martin Associates who received 22,848
shares. The 273,943 shares owned by Inversiones Globales are 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 29, 2000, inventories consist of the following:
Raw Materials $1,486,000
Work-In-Process and Finished Goods 1,024,000
-----------
$2,510,000
-33-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. Property, Plant and Equipment:
As of February 29, 2000, property, plant, and equipment consist of the
following:
Estimated
Useful Life
-----------
Leasehold Improvements $ 598,000 5 years
Machinery and Equipment 1,355,000 5 years
----------
$1,953,000
Less Accumulated Depreciation
and Amortization 1,529,000
----------
$ 424,000
----------
Non-operating Plant Facilities $ 895,000
Less: cost to dispose of non-operating
Plant Facilities ($895,000)
----------
-0-
----------
Non-operating plant facilities at February 29, 2000 represent the Company's Port
Salerno facility which is no longer being used in operations.
Depreciation expense and amortization was $212,000 and $214,000 for 2000 and
1999, respectively.
5. Accrued Expenses:
As of February 29, 2000, accrued expenses consist of the following:
Payroll and related employee benefits $ 346,000
Property taxes 163,000
Other liabilities 104,000
Interest Payable 661,000
-----------
$ 1,274,000
6. Other Long-Term Liabilities:
As of February 29, 2000, other long-term liabilities consists of the following
pre-petition items:
Accrued Environmental Expenses $ 1,046,000
Accounts Payable-Pre-petition 1,102,000
County Property Tax Payable 65,000
-----------
$ 2,213,000
Less: cost to dispose of non-operating
Plant Facilities ($895,000)
-----------
$ 1,318,000
-----------
-34-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. Other Long-Term Liabilities (continued):
Contractual or estimated payment requirements on other long-term liabilities
excluding 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 29 Total
------------ -----------
2001 $410,000
2002 371,000
2003 390,000
2004 426,000
2005 400,000
thereafter 216,000
-----------
$ 2,213,000
-----------
Imputed interest expense for fiscal years ended February 29, 2000 and
February 28, 1999 amounted to $73,000 and $105,000 relating to accounts
payable-pre-petition.
7. Income Taxes:
At February 29, 2000, the Company has net operating loss carryforwards of
approximately $ 9,563,000 that expire through 2020. 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 29, 2000:
Loss carryforwards $ 3,600,000
Environmental Reserve 388,000
Accounts Receivable Reserve 1,000
Inventory Reserves 4,623,000
-----------
Gross deferred tax asset 8,612,000
Deferred tax asset valuation allowance (8,612,000)
-----------
Net deferred tax $ -
===========
A reconciliation of the provision for income taxes to the amount calculated
using the statutory federal rate (35%) for fiscal year end February 28, 1999 and
February 29, 2000 is as follows:
2000 1999
--------- ---------
Income Tax Provision at
Federal Statutory Rates $ 168,000 $ 158,000
Income per Books Not Taxable (62,000) -
State Taxes 20,000 24,000
Utilization of Net Operating Loss Carryforward (126,000) (182,000)
--------- ---------
Income Tax Provision $ - $ -
========= =========
-35-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. 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. These
options are set to expire during 2002, 2003, 2004 and 2005 in equal amounts. The
options were fully vested at February 28, 1999.
On June 4, 1999 the Board of Directors granted Stock options to certain key
employees. The options, which become vested on June 5, 2000, are for a total
number of 28,000 shares and the exercisable price was fixed at $0.625 per share,
which was the price on the OTCBB at the time of the grant. The options are
exercisable through June 4, 2009.
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 grant 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.
For the Year Ended For the Year Ended
February 29, February 28,
2000 1999
---- ----
Net income:
As reported $ 494,000 $476,000
Pro-forma 478,000 476,000
Earnings per share:
As reported - basic .24 .23
- diluted .24 .23
Pro-forma - basic .23 .23
- diluted .23 .23
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 2000:
2000
----
Dividend yields 0.0%
Expected volatility 635.4%
Risk-free interest rates 6.0%
Expected life (in years) 10.0
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.
-36-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. Stock Options (continued):
Below is a summary of the Company's Stock Option Plan.
Stock Options
Average
-------
Shares Price
------ -----
Outstanding February 28, 1998 195,716 0.273
Expired or Canceled (5,480) 2.500
----------- -----------
Outstanding February 28, 1999 190,236 0.209
---------- -----------
Granted 28,000 0.625
Expired or Canceled (4,600) 1.073
----------- -----------
Outstanding February 29, 2000 213,636 $ 0.245
=========== ===========
The following table summarizes information about stock options outstanding and
exercisable at February 29, 2000:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------
Weighted Average Exercisable Options
Number of --------------------------- -------------------
Outstanding Remaining Weighted
Range of Shares Contractual Exercise Number Average
Exercise Prices at 2/29/00 Life Price at 2/29/00 Exercise Price
--------------- ---------- ------------- ----------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
$ 0.125 $ 0.125 175,636 5 years $ 0.125 175,636 $ 0.125
$ 0.156 $ 0.156 8,000 7 years $ 0.156 8,000 $ 0.156
$ 0.625 $ 0.625 24,500 9 years $ 0.625 - -
$ 2.500 $ 2.500 5,500 5 years $ 2.500 5,500 $ 2.500
---------
213,636 189,136
======= =========
</TABLE>
9. 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 29, 2000 and February 28,
1999.
-37-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10. Export Sales and Major Customers:
Revenues from domestic and export sales to unaffiliated customers are as
follows:
Fiscal Year Fiscal Year
Ended Ended
February 29, February 28,
2000 1999
---------- ----------
Export sales:
Europe $ 645,000 $ 408,000
Canada and Latin America 71,000 48,000
Far East and Middle East 106,000 245,000
United States 7,148,000 7,199,000
---------- ----------
$7,970,000 $7,900,000
---------- ----------
Sales to the Company's top three customers accounted for 60% of net sales
for the year ended February 29, 2000 as compared with 61% of the Company's
net sales for the year ended February 28, 1999.
Sales to Raytheon Company accounted for 42% for both of the years ended
February 29, 2000 and February 28, 1999.
In 2000, the US Government was the only other customer who accounted for
10% or more of net sales with a total representing just under 12%.
11. Extraordinary Item:
During the year ended February 29, 2000, the Company settled certain debt
obligations with various taxing authorities at a discount, resulting in an
extraordinary gain of $655,000 ($.30 per share). There was no income tax effect
as a result of this event.
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. The bonus formula stipulates that if the Company's
performance equals budget in both net profit before taxes and gross revenues,
the President is entitled to a bonus of 12% of his base salary. For each
percentage point the net profit exceeds budget, the President's 12% bonus will
be increased commensurately such that, for example, if net profit before taxes
exceeds budget by 10%, his bonus shall be 13.2%. No bonus will be based on a
reduction of net loss. The bonus payable hereunder shall be within ten days of
calculation of net profit before taxes by the Company's independent accountants.
This bonus is payable during the term of the President's 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.
-38-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. Commitments and Contingencies (continued):
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. The
President's employment agreement stipulates, in article 2.2 - Option to Extend,
that the contract is automatically extended for one year periods, unless a
notice is given by either party one year before the yearly anniversary.
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. In the fiscal
year 2000, a bonus of approximately $60,000 has been accrued. This bonus is
subject to a Compensation Committee meeting which will take place in July 2000.
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") which was sold on October 12, 1999, and the second is its 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 certified 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.
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 $1,021,000 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
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<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. Commitments and Contingencies (continued):
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 has been dormant since 1994.
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 for one year, and
2. Commencing on the 37th month, $7,500 per month for one year, 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 29,
2000, is $54,000.
In connection with the sale of the Riviera Beach facility on October 12, 1999,
the balance of the funds in the Riviera Beach escrow account (approximately
$19,000) were transferred to the USEPA. Since October 12, 1999 funds have been
deposited monthly in the Port Salerno escrow account.
-40-
<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. . However, the USEPA is now contesting such finding regarding the Port
Salerno Property.
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.
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
which has since been sold. 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 will prepare a remedial action Record of Decision (ROD).
USEPA expects to sign an ROD for the Riviera Beach Property during the calendar
year 2000. Due to the nature of ground water contamination sites in Florida,
cleanup is expected to take several years.
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.
USEPA has agreed to consider entering into prospective purchaser agreements
protecting the property purchasers from USEPA cost recovery claims and third
party contribution claims in connection with the sale of the Port Salerno
property, but is not willing to deduct legal fees of more than $20,000 from the
Port Salerno properties, respectively.
The Riviera Beach Property was sold to National Land Company ("NLC") on October
12, 1999 for market value of approximately $1,000,000. USEPA has negotiated a
prospective purchaser agreement with NLC. Under the terms of
-41-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. Commitments and Contingencies (continued)
the sale, NLC paid USEPA $419,000. USEPA also received approximately $19,000
from the Riviera Beach environmental escrowed monies 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 $19,000 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. To date, such letter has not been issued by USEPA.
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 claim was filed and resolved against it in the bankruptcy
proceeding.
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.
Under the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA" or "Superfund"), the United States may enter into ATP settlements with
individuals and businesses for recovery of response costs and performance of
cleanup work in appropriate cases. The ATP settlement process is reserved for
business potentially responsible parties ("PRPs") who demonstrate to USEPA's
satisfaction that payment of the amount sought by the government is likely to
put a company out of business or otherwise jeopardize its viability, and for
both business and individual PRPs who demonstrate to the USEPA that payment of
such an amount is likely to create an undue financial hardship. the ATP
settlement process may provide for a reduction in the proposed settlement to an
amount that is not likely to create an undue financial hardship. An undue
financial hardship occurs if, in the opinion of USEPA, satisfaction of the
environmental claim will deprive a PRP of ordinary and necessary assets or cause
a PRP to be unable to pay for ordinary and necessary business expenses and/or
ordinary and necessary living expenses.
It is the Company's position that any USEPA cost recovery claims were 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 prior 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 years ended February 29, 2000 and February 28, 1999, the
Company has spent approximately $8,000 and $13,000 respectively 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.
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:
-42-
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. Commitments and Contingencies (continued):
Fiscal Year Ending February 28 Amount
------------------------------ --------
2001 290,000
2002 242,000
--------
Total $532,000
--------
Total rent expense was $297,000 for the year ended February 29, 2000 as compared
with $283,000 for the year ended February 28, 1999.
In connection with the Vector Purchase Agreement, the Company entered into a
sublease agreement whereby S/V Microwave has agreed to reimburse the Company for
one-third of the above noted rental obligations in exchange for S/V Microwave's
use of approximately one-third of the facility. Since January 1997, S/V
Microwave is making such payments directly to the landlord.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
-43-
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
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 and its 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 originally owned 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 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 57 Chairman of the Board, 1992 2000
Chief Executive Officer,
President and Treasurer
Mr. Jacob Davis 63 Director 1996 2001
Mr. Joseph Schlig 72 Director 1996 2002
</TABLE>
(1) Directors' terms expire when successors are elected at the next annual
meeting of shareholders.
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.
-44-
<PAGE>
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 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.
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 29, 2000 directors and executive officers
of the Company complied with Section 16(a) filing requirements applicable to
them.
-45-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning compensation
paid by the Company, to or on behalf of the Company's Chief Executive Officer
for the fiscal years ended February 29, 2000, February 28, 1999 and February 28,
1998.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------
Year Other
Ended Annual
Name and February Compen-
Principal Position(1) 28/29 Salary ($) Bonus ($) sation($)
------------------ ----- ---------- --------- ---------
<S> <C> <C> <C> <C>
Shevach Saraf 1998 153,063 -0- 30,715
Chairman of the Board., 1999 167,477 296,000 26,592
Chief Executive Officer, 2000 166,727 40,000 19,303
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.
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, which resulted 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 formula for the annual
calculation of the bonus (Article 3.1, paragraph C of the Employment Agreement)
stipulates that if both gross revenues and net profits before tax are equal to
the amounts in the Budget approved by the Board of Directors, Mr. Saraf will
receive a bonus equal to 12% of his base salary. For each percentage point that
net profit before taxes exceeds the budget, Mr. Saraf's bonus will be increased
commensurately such that, for example, if net profit before tax exceeds budget
by 10 % Mr. Saraf's bonus shall be equal to 13.20% of his base salary. 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, 1999, and was automatically extended to August 30, 2000 as stipulated
in the agreement. In the event of a change in control of the Company, Mr. Saraf
is entitled to receive his minimum annual compensation and bonus for the
remainder of the term. The President's employment agreement stipulates, in
Article 2.2 - Option to Extend, that the contract is automatically extended for
one year periods, unless a notice is given by either party one year before the
yearly anniversary.
On June 7, 1999, the Compensation Committee approved payment of $40,000 to Mr.
Saraf for fiscal year ended February 28, 1999. Based on current year results, an
accrual of approximately $60,000 for such bonus has been recorded in the books
of the fiscal year 2000.
Executive officers of the Company may also participate in the Company's 1987
Stock Option Plan, the Company's Deferred Compensation Plan and the Company's
Employee 401-K and Profit Sharing Plan (the "Profit Sharing Plan"). During the
fiscal year ended February 28, 1997, no amounts were deferred by executive
officers under the Company's Deferred Compensation Plan and the Company did not
match any employee contributions to the Profit Sharing Plan.
Option Grants; Aggregated Option Exercises and Fiscal Year-End Option Values
On June 4, 1999 the Board of Directors granted Stock options to certain key
employees and to two Directors (but not to Mr. Saraf). The options, which become
vested on June 5, 2000, are for a total number of 28,000 shares and the
exercisable price was fixed at $0.625 per share, which was the price on the
OTCBB at the time of the grant. The options are exercisable through June 4,
2009.
-46-
<PAGE>
The following table sets forth certain summary information covering unexercised
options to purchase the Company's Common Stock as of February 28, 1999 held by
the Company's Chief Executive Officer. The Company's Chief Executive Officer did
not exercise any stock options during the fiscal year ended February 28, 1999.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Name and Options Held at Options Held at
Principal Position Fiscal Year End(#) Fiscal Year End ($)
------------------ ------------------ -------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shevach Saraf,
Chairman of the Board,
Chief Executive Officer,
President &Treasurer 175,324 -0- $280,518 -0-
Jacob Davis 4,000 4,000 $6,400 $5,000
Joseph Schlig 4,000 4,000 $6,400 $5,000
</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 29, 2000.
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 issued 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. On June 4, 1999 the non-employee Board
Members were granted Stock options of 4,000 shares at the exercisable price of
$0.625. They become vested on June 5, 2000 and are exercisable through June 4,
2009.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of February 29, 2000 by (i) all directors, (ii) the
Chief Executive Officer, (iii) all officers and directors of the Company as a
group, and (iv) each person known by the Company to beneficially own in excess
of 5% of the Company's outstanding Common Stock. The Company does not know of
any beneficial owner of more than 5% of the outstanding shares of Common Stock
other than as shown below. Unless otherwise indicated below, each shareholder
has sole voting and investment power with respect to the shares beneficially
owned. Except as noted below, all shares were owned directly with sole voting
and investment power.
-47-
<PAGE>
Percentage of
Number of Shares Outstanding
Name and Address Beneficially Owned (1) Shares (1)
---------------- ---------------------- ----------
Shevach Saraf (2) 395,478(4) 19.12%
3301 Electronics Way
West Palm Beach, FL 33407
Dr. Jacob Davis 8,000(4) *
370 Franklyn Avenue
Indialantic, FL 32903
Joseph Schlig 8,000(4) *
129 Mayfield Drive
Trumbull, CT 06611
All executive officers and 411,478(4) 19.89%
directors as a group (3 persons)
Inversiones Globales, S.A. (3) 73,943 13.2%
Turks & Caicos Islands
Board of Trustees of the 336,407 16.3%
Policemen and Firemen Retirement
System of the City of Detroit
Bruce Paul 150,000 7.3%
1 Hampton Road
Purchase, NY 10577
----------------
* Less than 2%
(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 and successors that number of shares
of Common Stock equal to 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 Globales, S.A.
(4) Includes shares that may be acquired upon exercise of options
which are exercisable within sixty (60) days in the following
amounts: Mr. Saraf - 175,324 shares; Mr. Schlig - 8,000
shares; Mr. Davis - 8,000 shares.
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<PAGE>
ITEM 12. 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 "Business - Bankruptcy Proceedings."
ITEM-13. EXHIBITS AND REPORTS ON FORM 8-K
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 S/V Microwave (incorporated by
reference to the Company's Form 10-K for the year ended February 28,
1993).
-49-
<PAGE>
10.4 Sublease, dated March 1, 1993, by and between Solitron Devices, Inc.
and S/V Microwave (incorporated by reference to the Company's Form 10-K
for the year ended February 28, 1993).
10.5 Commercial Lease Agreement, dated January 1, 1992, between William C.
Clark, as Trustee, and Solitron Devices, Inc. (incorporated by
reference to the Company's Form 10-K for the year ended February 28,
1993).
10.6 Employment Agreement, dated February 3,1993, between Solitron Devices,
Inc. and Shevach Saraf (incorporated by reference to the Company's Form
10-K for the year ended February 28, 1993).
21 List of Subsidiaries of the Company.
27 Financial Data Schedule
-50-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
SOLITRON DEVICES, INC.
/s/ SHEVACH SARAF
--------------------------------
By: Shevach Saraf
Title: Chairman of the Board,
President and Chief Executive Officer
Date: June 13, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ SHEVACH SARAF
------------------------
Shevach Saraf Chairman of the Board, 6/13/00
President, Chief
Executive Officer and
Treasurer
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
/s/ JACOB DAVIS
------------------------
Jacob Davis Director 6/9/00
/s/ JOSEPH SCHLIG
------------------------
Joseph Schlig Director 6/12/00
-51-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
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 S/V Microwave (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 S/V Microwave (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).
<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
* Filed herewith
