-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CxN3CzJ9cYVFpP+3hoGMHqYVL5URgTcEpdh1hDMK8IdgfPeVpOuRvfIyP5q0h8oj Q+y2j7e2Eq+Fka6YeGlr1A== 0000950170-99-001004.txt : 19990615 0000950170-99-001004.hdr.sgml : 19990615 ACCESSION NUMBER: 0000950170-99-001004 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990611 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLITRON DEVICES INC CENTRAL INDEX KEY: 0000091668 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 221684144 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-04978 FILM NUMBER: 99644877 BUSINESS ADDRESS: STREET 1: 3301 ELECTRONICS WAY CITY: WEST PALM BEACH STATE: FL ZIP: 33407 BUSINESS PHONE: 4078484311 10KSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 1999 Commission File No. 1-4978 SOLITRON DEVICES, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) DELAWARE 22-1684144 - -------------------------------------------- ---------------------- (State or other jurisdiction of organization) (IRS Employer Identification Number) 3301 ELECTRONICS WAY, WEST PALM BEACH, FLORIDA 33407 ---------------------------------------------------- (Address of principal executive offices) Registrant's telephone number: (561) 848-4311 Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS - ----------------------------- Common Stock, $0.01 par value Electronic Bulletin Board/Over the Counter Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] Documents incorporated by reference: None. The aggregate market value of the registrant's common stock, par value $.01 per share, held by non-affiliates of the registrant, based upon the closing market price as of June 7, 1999, was approximately $1,271.690. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of February 28, 1999: 2,034,704 shares of common stock, par value $.01 per share. State issuer's revenues for its most recent fiscal year: $7,900,000. PART I ITEM 1. BUSINESS GENERAL Solitron Devices, Inc., a Delaware corporation (the "Company" or "Solitron"), designs, develops, manufactures and markets solid-state semiconductor components and related devices primarily for the military and aerospace markets. The Company manufactures a large variety of bipolar and metal oxide semiconductor ("MOS") power transistors, power and control hybrids, junction and MOS field effect transistors, thin film resistors and other related products. Most of the Company's products are custom made pursuant to contracts with customers whose end products are sold to the United States Government. Other products, such as Joint Army Navy ("JAN") transistors, are sold as standard or catalog items. The Company was incorporated under the laws of the State of New York in 1959, and reincorporated under the laws of the State of Delaware in August 1987. PRODUCTS Prior to the consummation of the Vector Purchase Agreement (defined) in 1993, the Company was organized into two operating divisions: the Semiconductor Division and the Microwave Division. The Semiconductor Division continues to design, manufacture and assemble bipolar and MOS power transistors, power and control hybrids, junction and Power MOSFETs, thin film resistors and other related products. Pursuant to the terms of the Vector Purchase Agreement, substantially all of the assets (other than real estate) comprising the Microwave Division and certain related liabilities were transferred to Vector, which now operates the Microwave Division as a privately-owned company, under the name of Solitron/Vector Microwave Products, Inc. Set forth below by principal product type are the percentage (i) contributions to the Company's total sales of each of the Company's principal product lines for the fiscal year ended February 28, 1999 and for the fiscal year ended February 28, 1998 and (ii) contributions to the Company's total order backlog at February 28, 1999 and for the fiscal year ended February 28, 1998. FISCAL YEAR FISCAL YEAR BACKLOG BACKLOG ENDED ENDED AT AT FEBRUARY FEBRUARY FEBRUARY FEBRUARY PRODUCT 28, 1999 28, 1998 28, 1999 28, 1998 - ------- -------- --------- ---------- -------- Power Transistor 20% 25% 6% 10% Hybrids 52% 44% 64% 66% Field Effect Transistors 13% 15% 9% 11% Power MOSFETS 15% 16% 21% 13% --- --- --- --- 100% 100% 100% 100% The Company's backlog at February 28, 1999 and shipments for the year ended February 28, 1999 reflect demand for the Company's products as at such date and for such period. For more information see discussion on backlog. The variation in the proportionate share of each product line reflects current demand and changes emanating from the Congressional appropriations process and timing associated with awards of defense contracts, as well as shifts in technology and consolidation of defense prime contractors. The Company's semiconductor products can be classified into selected active and passive electronic components. Active components are those which control and direct the flow of electrical current by means of a control signal such as a voltage or current. Passive components, on the other hand, include devices that store or dissipate energy and are generally incapable of power gain (for example, resistors, capacitors, and inductors). The Company's active components include bipolar transistors, integrated circuits, and MOS transistors and the Company's passive components consist of resistors. -2- It is customary to subdivide active components into those of a discrete nature, and those which are non-discrete. Discrete devices contain one single semiconductor element, as opposed to integrated circuits or hybrid circuits which contain two or more elements, either active or passive, interconnected to make up a selected complete electrical circuit. In the case of an integrated circuit, a number of active and passive elements are incorporated onto a single silicon chip. A Hybrid circuit, on the other hand, is made up of a number of individual components that are mounted onto a suitable surface material, interconnected by various means, and suitably encapsulated. Hybrid and integrated circuits can either be analog or digital; presently, the Company manufactures only analog components. The Company's products can be either standard devices such as catalog type items (e.g., transistors and voltage regulators) or application-specific devices, also referred to as custom or semi-custom products. The latter are designed and manufactured to meet a customer's particular requirements. Approximately 95% of the semiconductor components produced by the Company are manufactured pursuant to approved Source Control Drawings from the United States Government's prime contractors; the remainder are primarily JAN qualified products. The Company's semiconductor products are used as components of military, commercial and aerospace electronic equipment, such as ground and airborne radar systems, power distribution, missiles, missile control systems and spacecraft. The Company's products have been used on the space shuttle and on spacecraft sent to the moon, to Jupiter on Galileo and, most recently, to Mars on Global Surveyor and Mars Sojourner. Approximately 90% to 95% of the Semiconductor Division's sales have historically been attributable to contracts with customers whose products are sold to the United States Government. The remaining 5% of sales are for non-military, scientific and industrial applications. For the fiscal year ended February 28, 1999, approximately 90% of the Semiconductor Division's sales have been of custom made products, and the remaining 10% have been of standard or catalog products. The following is a general description of the principal product lines manufactured by the Semiconductor Division. POWER TRANSISTORS: Power transistors are high current and/or high voltage control devices commonly used for active gain applications in electronic circuits. The Company manufactures a large variety of power bipolar transistors for applications requiring currents in the range of 0.1A to 150A or voltages in the range of 30V to 1000V. The Company employs over 60 types of silicon chips to manufacture over 500 types of power bipolar transistors and is currently expanding this line in response to market demand due to other companies (i.e., Motorola) leaving the military market. The Company also manufactures power N-Channel and P-Channel Power MOSFET transistors and is currently expanding that line. The Company is qualified to deliver products under MIL-PRF-19500. HYBRIDS: Hybrids are compact electronic circuits that contain a selection of passive and active components mounted on printed substrates and encapsulated in appropriate packages. The Company manufactures thick film hybrids, which generally contain discrete semiconductor chips, integrated circuits, chip capacitors and thick film or thin film resistors. Most of the hybrids are of the high power type, and are custom manufactured for military and aerospace systems. Some of the Company's hybrids include high power voltage regulators, power amplifiers, power drivers, boosters, and controllers. The Company is certified and qualified under MIL-PRF-38534, the standards promulgated by the Defense Electronic Supply Center ("DESC"). These standards specify the uniformity and quality of hybrid products purchased for United States military programs. The purpose of the program is to standardize the documentation and testing for hybrid microcircuits for use in United States military and aerospace applications. Attainment of certification and/or qualification to MIL-PRF-38534 requirements is important since it is a prerequisite for a manufacturer to be selected to supply hybrids for defense-related purposes. MIL-PRF-38534 establishes definite criteria for manufacturing construction techniques and materials used for hybrid microcircuits and assure that these types of devices will be manufactured under conditions, which have been demonstrated to be capable of continuously producing highly reliable products. This program requires a manufacturer to demonstrate its products' performance capabilities. Certification is a prerequisite of qualification. A manufacturer receives certification once its Product Quality Assurance Program Plan is reviewed and approved by DESC (Defense Electronics Supply Center). A manufacturer receives qualification once it has demonstrated that it can build and test a sample product in conformity with its certified Product Quality Assurance Program Plan. In addition, obtaining and maintaining military certifications and qualifications is desirable because it enables a manufacturer to satisfy many of the requirements for registration under the ISO 9001 International Quality Program. The ISO 9001 Program is a series of quality management and assurance standards developed by a technical committee -3- of the European Community Commission working under the International Organization for Standardization. Several European prime contractors have advised the Company that a prerequisite to future sales by the Company to such contractors might be the key to the Company's obtaining ISO 9001 registration. However, to date, the Company has not encountered such a requirement. Based on the fact that 90% of the Company's products are made to print in accordance with customer specifications and in accordance with MIL-PRF-19500, MIL-PRF-38534 and MIL-PRF-883, which are stricter requirements than ISO 9001, it is Management's opinion that the possibility that such a requirement will bar the Company from performing or competing is highly unlikely. The Company initiated the necessary Program to obtain ISO 9001 qualification within the next year. The Company seeks such certifications, as Management believes that such certification might avail to it additional business opportunities not currently available to it. The Company achieved MIL-PRF-38534 (formerly MIL-STD-1772) certification in October 1990 and renewed in June 1993, April 1995, and October 1997. MIL-PRF-38534 replaced MIL-STD-1772. In 1995, the Company received written notification that it has received MIL-PRF-38534 qualification. MIL-PRF-38534 qualification should continue to improve the Company's business posture by increasing product marketability. The Company is also qualified to deliver products under MIL-PRF-19500. Presently, the Company is undergoing the necessary training and updating of its procedures and systems which will allow it to obtain ISO 9001 certification. FIELD EFFECT TRANSISTORS: Field effect transistors are surface controlled devices where conduction of electrical current is controlled by the electrical potential applied to a capacitively coupled control element. The Company manufactures about 30 different types of junction and MOS field effect transistor chips. They are used to produce over 350 different field effect transistor types. Most of the Company's field effect transistors conform to standard Joint Electronic Device Engineering Council designated transistors, commonly referred to as standard 2N number types. The Company is currently expending its product offering. The Company is qualified to deliver products under MIL-PRF-19500. THIN FILM RESISTIVE PRODUCTS: Thin film resistors are made of thin layers of metallic substances deposited over the surface of a substrate to form a device that resists the flow of electrical current. Chip resistors are made for internal use and for sale to others. MANUFACTURING The Company's engineers design its transistors, diodes, field effect transistors, resistors, hybrids and integrated circuits, as well as other customized products, based upon requirements established by customers, with the cooperation of the product and marketing personnel. The design of non-custom or catalog products is based on specific industry standards. Each new design is first produced on a CAD/CAE computer system. The design layout is then reduced to the desired microsize, and transferred to silicon wafers in a series of steps which include photolithography, chemical or plasma etching, oxidation, diffusion and metallization. The wafers then go through a fabrication process. When the process is completed, each wafer contains a large number of silicon chips, each chip being a single transistor device, single diode, or a single transistor. The wafers are tested using a computerized test system prior to being separated into individual chips. The chips are then assembled in standard or custom packages, incorporated in hybrids or sold as chips to other companies. The chips are normally mounted inside a chosen package using eutectic, soft solder or epoxy die attach techniques, and then wire bonded to the package pins using gold or aluminum wires. Many of the packages are manufactured by the Company and, in most cases, the Company plates its packages with gold, nickel or other metals utilizing outside vendors to perform the plating operation. In the case of hybrids, design engineers formulate the circuit and layout designs. Ceramic substrates are then printed with gold conductors to form the interconnect pattern and with thick film resistive inks to form the resistors of the designed circuit. Semiconductor chips, resistor chips and capacitor chips are then mounted on the substrates and sequential wire bonding is used to interconnect the various components to the printed substrate, as well as to connect the circuit to the external package pins. The Company manufactures some of the hybrid packages it uses. In addition to Company performed testing and inspection procedures, certain of the Company's products are subject to source inspections required by customers (including the United States Government). Designated inspectors are authorized to perform a detailed on-premise inspection of each individual device prior to encapsulation in a casing or before dispatch of the finished unit to ensure that the quality and performance of the product meets the prescribed -4- specifications. The raw materials used in the manufacture of the Company's products are generally readily available from multiple sources. MANUFACTURING RISKS The Company's manufacturing processes are highly complex, require advanced and costly equipment, and are continuously being modified in an effort to improve yields and product performance. Minute impurities or other difficulties in the manufacturing process can lower yields. There can be no assurance that the Company will not experience manufacturing difficulties in the future. TECHNOLOGY CHANGE RISKS The market for the Company's products is characterized by slowly changing technology, evolving industry standards, changes in customer requirements, moderate product obsolescense, and infrequent new product introductions. The Company's continued viability will depend, in part, upon its ability to maintain and develop competitive packaging technologies, to continue to develop and introduce new products in a timely and cost-effective manner that satisfy its customers' changing industry requirements, and to successfully market its new products and technologies. In light of the fact that many of the Company's competitors have substantially greater resources than the Company and that the Company has spent little on research and development in recent years, the Company will be challenged in doing the foregoing. The failure of the Company to do the foregoing might have an adverse effect on the Company. PRODUCT LIABILITY The Company's business exposes it to potential liability risks that are inherent in the manufacturing and marketing of high-reliability electronic components for critical applications. No assurance can be made that the Company's product liability insurance coverage is adequate or that present coverage will continue to be available at acceptable costs, or that a product liability claim would not adversely affect the business or financial condition of the Company. FINANCIAL INFORMATION ABOUT EXPORT SALES Specific financial information with respect to the Company's export sales is provided in Note 11 to the Consolidated Financial Statements. MARKETING AND CUSTOMERS The Company's products are sold throughout the United States and abroad primarily through a network of manufacturers' representatives and distributors. The Company is represented (i) in the United States by 6 representative organizations which operate out of 16 different locations with 51 sales people and 2 stocking distributor organizations which operate out of 49 locations with 610 sales people and (ii) in the international market by 3 representative organizations in 3 countries with 5 sales people. Some of the international groups serve as distributors as well as sales representatives. The Company also directly employs several sales, marketing, and application engineering personnel to coordinate operations with the representatives and distributors and to handle key accounts. On February 28, 1999, the Company had approximately 118 active customer accounts. The reduction in number of customers is principally due to consolidation in the defense industry and reduction in military spending. During the year ended February 28, 1999, Raytheon accounted for approximately 42% of net sales as compared to 40% for the year ended February 28, 1998. No other company accounted for more than 10% of net sales during the last fiscal year. Approximately 8 of the Company's customers accounted for approximately 65% of the Company's sales during the fiscal year ended February 28, 1999. It has been the Company's experience that a large percentage of its sales have been attributable to a relatively small number of customers in any particular period. As a result of the mergers and acquisitions in general, and among large defense contractors in particular, the number of customers will continue to decline in number, not necessarily in the level of business. The Company expects this type of customer concentration to continue. The loss of any major customer without offsetting orders from other sources would have a material adverse effect on the business of the Company. During the fiscal year ended February 28, 1999 and since that date, a substantial portion of the Company's products were sold pursuant to contracts or subcontracts with or to customers whose end products are sold to the United States -5- Government. Accordingly, the Company's sales may be adversely impacted by reduced Congressional appropriations and changes in national defense policies and priorities. Notwithstanding such reduced Congressional appropriations and a significant decline in military spending in recent years, the Company had a 19% increase in bookings during the fiscal year ended February 28, 1999 as compared to the previous year. There no assurance that such increase can be sustained. All of the Company's contracts with the United States Government or its prime contractors contain provisions permitting termination at any time at the convenience of the United States Government or the prime contractor upon payment to the Company of costs incurred plus a reasonable profit. In recognition of the changes in global geopolitical affairs and reduced United States military spending, the Company is attempting to increase sales of its products for non-military, scientific and industrial niche markets such as medical electronics, machine tool controls, specialized telecommunications, cellular telephone base stations and LEOS (Low Earth Orbit Satellites) telecommunication networks, and other market segments in which purchasing decisions are generally based primarily on product quality, long-term reliability and performance, rather than on product price. The Company is also attempting to offer additional products to the military markets that are complementary to those currently sold by the Company to the military markets. Although average sale prices are typically higher for products with military applications than for products with non-military, scientific and industrial applications, the Company hopes to minimize this differential by focusing on these quality-sensitive niche markets where price sensitivity is very low. There can be no assurance; however, that the Company will be successful in increasing its sales to these market segments, which increase in sales could be critical to the future success of the Company. To date, the Company has made only limited inroads in penetrating such markets. Sales to foreign customers, located mostly in Western Europe and Israel, accounted for approximately 8% of the Company's net sales for each of the years ended February 28, 1999 and February 28, 1998. All sales to foreign customers are conducted utilizing exclusively U.S. dollars. BACKLOG The Company's order backlog, which consists of semiconductor and hybrid related open and pending orders, 85% of which are scheduled for delivery within 12 months, was approximately $5,921,000 at February 28, 1999, compared to $5,323,000 as of February 28, 1998. The entire backlog consisted of orders for electronic components. The Company currently anticipates that the majority of its entire open order backlog will be filled by February 28, 2000. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Company's backlog as of any particular date may not be representative of actual sales for any succeeding period because lead times for the release of purchase orders depend upon the scheduling practices of individual customers. The delivery times of new or non-standard products can be affected by scheduling factors and other manufacturing considerations, the rate of booking new orders can vary significantly from month to month, and the possibility of customer changes in delivery schedules or cancellations of orders. Also, delivery times of new or non-standard products are effected by the availability of raw material, scheduling factors, manufacturing considerations and customer delivery requirements. A portion of the Company's sales are to military and aerospace markets which are subject to the business risk of changes in governmental appropriations and changes in national defense policies and priorities. All of the Company's contracts with prime U.S. Government contractors contain customary provisions permitting termination at any time at the convenience of the U.S. Government or the prime contractors upon payment to the Company for costs incurred plus a reasonable profit. Certain contracts are also subject to price re-negotiation in accordance with U.S. Government sole source procurement provisions. None of the Company's contracts has been terminated for cause or for the convenience of the U.S. government or prime contractors, or had the prices so renegotiated. The rate of booking new orders varies significantly from month to month, mostly as a result of sharp fluctuations and delays in the government budgeting and appropriation process. The Company has historically experienced somewhat decreased levels of bookings during the summer months, primarily as a result of such budgeting and appropriation activities. For these reasons, and because of the possibility of customer changes in delivery schedules or cancellations of orders, the Company's backlog as of any particular date may not be indicative of actual sales for any succeeding period. See "Management's Discussions and Analysis of Financial Conditions" and "Result of Operations" for a discussion of increased bookings for the year ended February 28, 1999 as compared to the previous year. -6- PATENTS AND LICENSES The Company owns approximately 33 patents relating to the design and manufacture of its products. While the Company considers that, in the aggregate, its patents are important in the operation of its business, it believes that engineering standards, manufacturing techniques and product reliability are more important to the successful manufacture and sale of its products. However, an important adjunct of the increased competition in the electronics industry has been a growing emphasis on product and process patents and their exploitation, which has resulted in increased activity intended to stimulate advantageous licensing and cross-licensing agreements. COMPETITION The electronic component industry, in general, is highly competitive and has been characterized by price erosion, rapid technological changes, and foreign competition. The Company believes that it is well regarded by its customers in the segments of the market, where competition is dependent less on price and more on product reliability and performance. The Company believes, however, that to the extent its business is targeted at the military and aerospace markets, where there has been virtually no foreign competition, it is subjected to less competition than manufacturers of commercial electronic components. Additionally, because of the decline in military orders, the number of competitors in some markets has been declining in some marketplaces, affording the Company the opportunity to increase its market share. As the Company attempts to shift its focus to the sale of products having non-military, non-aerospace applications it will be subject to price erosion and foreign competition. The Company has numerous competitors across all of its product lines. None of the Company's direct competitors depend on the sale of an identical component mix as their principal source of income. The Company is not in direct competition with any other semiconductor manufacturer for an identical mixture of products; however, one or more of the major manufacturers of semiconductors manufactures some of the Company's products. A few such major competitors, (e.g., Motorola), have elected to withdraw from the military market altogether. However, there is no assurance that the company business will increase as a result. The Company competes principally on the basis of product quality, turn-around time and price. The Company believes that competition for sales of products that will ultimately be sold to the United States Government has intensified and will continue to intensify as United States defense spending continues to decrease and the Department of Defense's pushes implementation of its decision in the Summer of 1995 to purchase high-end commercial product in lieu of Mil-Spec components. The Company believes that its primary competitive advantage is its ability to produce high quality products as a result of its years of experience, its sophisticated technologies, and its experienced staff. The Company believes that its ability to produce highly reliable custom hybrids in a short period of time will give it a strategic advantage in attempting to penetrate high-end commercial markets and in selling military products complementary with those currently sold, as doing so would enable the Company to produce products early in design and development cycles. One of the Company's competitive disadvantages has been its history of delivery delays, due primarily to industry-wide tight supply of silicon wafers, semiconductor die, and packages. For the year ended February 28, 1999, the Company's on-time delivery record was 86% as compared with 75% for the year ending in February 28, 1998. The Company believes that it will be able to improve its capability to respond quickly to customer needs and deliver products on time, and that this will prove to be a competitive advantage of the Company. EMPLOYEES At February 28, 1999, the Company had 105 employees (as compared to 116 at February 28, 1998) of whom 65 are engaged in production activities, 7 in sales and marketing, 6 in executive and administrative capacities and 27 in technical and support activities. The Company has never had a work stoppage, and none of its employees are represented by a labor organization. The Company considers its employee relations to be satisfactory. SOURCES AND AVAILABILITY OF RAW MATERIAL The Company purchases its raw materials from multiple suppliers and has a minimum of two suppliers for all of its material requirements. SEASONALITY -7- The Company's bookings of new orders and sales are largely dependent on congressional budgeting and appropriation activities and the cycles associated therewith. The Company has historically experienced somewhat decreased levels of bookings during the summer months, primarily as a result of such budgeting and appropriation activities. GOVERNMENT APPROVALS The Company received Department of Defense's DESC (Defense Electronic Supply Center) approval to supply its product in accordance with -MIL-PRF-19500, - -MIL-SPD-883, and MIL-PRF--38534. RESEARCH AND DEVELOPMENT During recent years, the Company has not spent significant funds on research and development. This may have an adverse effect on future operations. EFFECT OF GOVERNMENT REGULATION As a result of May 1995 change in DOD policy, the Company can now sub-contract wafer fabrication, die assembly and testing to other approved and qualified vendors. This change may allow the Company to reduce its manufacturing cost by transferring labor intensive operations to lower labor cost facilities, most likely, off-shore. The Company manufactures some of its components off shore and Management is attempting to secure the services of additional sources/subcontractors. However, no assurance can be given that these efforts will be successful. ENVIRONMENTAL REGULATION While the Company believes that it has the environmental permits necessary to conduct its business and that its operations conform to present environmental regulations, increased public attention has been focused on the environmental impact of semiconductor operations. The Company, in the conduct of its manufacturing operations, has handled and does handle materials that are considered hazardous, toxic or volatile under federal, state, and local laws and, therefore, is subject to regulations related to their use, storage, discharge, and disposal. No assurance can be made that the risk of accidental release of such materials can be completely eliminated. In the event of a violation of environmental laws, the Company could be held liable for damages and the costs of remediation and, along with the rest of the semiconductor industry, is subject to variable interpretations and governmental priorities concerning environmental laws and regulations. Environmental statues have been interpreted to provide for joint and several liability and strict liability regardless of actual fault. There can be no assurance that the Company and its subsidiaries will not be required to incur costs to comply with, or that the operations, business, or financial condition of the Company will not be materially adversely affected by current or future environmental laws or regulations. ENVIRONMENTAL COMPLIANCE The Order of Confirmation (the "Confirmation Order") approving the Company's Amended Plan of Reorganization with First Modification (the "Plan") was issued by the Bankruptcy Court on August 19, 1993 (the "Confirmation Date"), and incorporated a plan for future remediation of the two properties of the Company dependent upon the properties being sold and the purchase price being applied to remediation costs. One property is Lot 1 (the north parcel) of the property at 1177 Blue Heron Road in the City of Riviera Beach, Florida (the "Riviera Beach Property"), and the second is its former Port Salerno facility, S.E. Cove Road, Port Salerno, Martin County, Florida (the "Port Salerno Property"). Contemporaneously with the Confirmation Order, the Company and the State of Florida Department of Environmental Protection (the "FDEP") entered into a Stipulation for entry of a Consent Final Judgment in the Circuit Court of the Nineteenth Judicial Circuit of Florida in and for Martin County, Florida. The Consent Final Judgment, entered by the Court on October 21, 1993, provided that the Company would: (a) reimburse FDEP $200,000 for providing main and lateral water line extensions and property hookups to serve eight off-site properties presently impacted by the groundwater contamination emanating from the Port Salerno Property (paid as an administrative expense in accordance with the Confirmation Order); (b) remediate site soils and groundwater at and emanating from the Port Salerno Property; (c) address residual soil contamination and a limited, defined "hot spot" in the groundwater at and near the north end of the Riviera Beach Property; and (d) pay a final judgment of -8- $102,860.57 to be paid to FDEP pursuant to the Plan in the manner and to the extent of the Company's payment of other unsecured creditor claims. Pursuant to the Confirmation Order, all existing security interests on these two properties, except real estate taxes, were removed. At the time, the properties were appraised by an MAI appraiser, as if uncontaminated, at $1,950,000 for the Riviera Beach Property and $1,650,000 for the Port Salerno Property. Under the Plan and Consent Final Judgment, the Company was directed to sell or lease the two properties and utilize the proceeds derived therefrom, together with certain insurance proceeds, to remediate both sites. All such proceeds were to be placed in escrow for that purpose. Under the Plan, any excess funds after all escrow obligations were satisfied were to belong to the Company. The City of Riviera Beach previously settled its claim with the Company for cleanup of contamination of its wellfield, except for the "hot spot" to be addressed by the Company as required by the Consent Final Judgment. The unpaid balance of the settlement amount with the City was approved in the Confirmation Order, to be paid as and to the extent provided for other unsecured creditors. After notice, no other claims were filed in the bankruptcy proceeding related to offsite groundwater contamination associated with the Riviera Beach Property, and potential claims may have been extinguished thereby. At the time of the Plan and Consent Final Judgment, the Company's consultant estimated the costs of remediation pursuant to the Consent Final Judgment to be approximately $727,000 for the Port Salerno Property and $342,000 for the Riviera Beach Property. The consultant estimated that remediation costs could be greater, particularly if further offsite wells became contaminated in Port Salerno and the affected properties must be supplied public water by further extension of the water lines. All residents who could be potentially affected by further groundwater plume movement in Port Salerno were notified of the pendency of the bankruptcy and that claims could be filed. The claims filed, except as set forth below, have been settled. The consultant did not estimate remediation costs were the United States Environmental Protection Agency to take the lead over the cleanup. The Company received a claim by an estate-owned property northwest and across Cove Road from the Port Salerno Property. The estate has asserted that the mailing address to which the bankruptcy notice was sent was in error. The estate has been advised that public water has been made available to its property and that the Company is prepared to settle for the sum of $10,000, to be paid as other unsecured credit claims are being paid. This offer was rejected. The claim is unresolved and is currently dormant. The Company's position has been that further off-site exposure to third party property owners at Port Salerno is limited by its Chapter 11 proceeding solely to its obligation for extension of public water lines to the affected property. It cannot now be estimated whether some future extension may be required, but the contaminated groundwater appears to move slowly and any remediation will likely entail off-site recovery wells to contain its further movement. Under the Plan, if funds to clean the properties were not available within 24 months of entry of the Consent Final Judgment, the Company, beginning in October 1995, was to make periodic payments into an escrow account to clean both properties based on the following schedule: 1. Commencing on the 25th month, $5,000 per month, and 2. Commencing on the 37th month, $7,500 per month, and 3. Commencing on the 49th month, $10,000 per month. Periodic funding was to have been suspended when funds available in escrow reached 125% of the estimated costs to complete remediation. The Plan does not require the Company to pay additional funds in excess of the schedule set forth above, except that if funds are not available in the escrow for that purpose, the Company must independently fund any further extension of public water supply lines in the vicinity of the Port Salerno Property. The Consent Final Judgment requires providing any such extension within a reasonable time. The prior payment to the state has extended the large water main to provide service to the area. The further extension would be for lateral extensions and individual property hookups. In October 1995, the Company advised the FDEP that it could pay only $1,000 per month into escrow, rather than the amounts specified by the Consent Final Judgment. Since then, the Company has paid $1,000 per month into the -9- escrow for the properties. The total escrow amounts for the properties, as of February 28, 1999 is $43,000. FDEP has acquiesced in this payment level. Under the Plan and Consent Final Judgment, the Company's consultant undertook additional soil contamination assessment of the Riviera Beach Property and received FDEP approval of the consultant's contamination assessment report recommendation that no further soil remediation is required. Similarly, the consultant completed soil contamination assessment work at the Port Salerno Property and FDEP agreed with the consultant's submitted data and analysis that no further soil remediation is required. Despite the Plan and Consent Final Judgment and the Company's repeated efforts to negotiate a deferral of action by the United States Environmental Protection Agency ("USEPA") to allow the Company to sell the properties, the USEPA re-evaluated the Riviera Beach and Port Salerno properties for potential listing on the Superfund National Priority List ("NPL"). During 1997, USEPA required the Company to sign site access agreements permitting USEPA to perform expanded site assessments at the properties. The Company was able to secure a 90-day deferral of further NPL listing evaluation in an attempt to allow prospective purchasers to complete due diligence on the properties. USEPA subsequently published notice of its proposal to list the Port Salerno Property on the NPL and listed it on July 27, 1998. By letter dated June 16, 1998, USEPA required the Company to consent to allow USEPA access to the Riviera Beach Property to complete a Remedial Investigation. By letter dated September 8, 1998, USEPA notified the Company that it would not defer cleanup of the Riviera Beach Property to a FDEP lead. USEPA stated, however, that it would defer listing the Riviera Beach Property on the NPL if prior owner/operator Honeywell, Inc. agreed to proceed with and fund a USEPA-lead voluntary Superfund cleanup. USEPA expressed willingness to negotiate a prospective purchaser agreement with any purchaser interested in redeveloping the Riviera Beach or Port Salerno properties. USEPA is currently conducting a fund lead Remedial Investigation/Feasibility Study (RI/FS) of the Port Salerno Property. The Company has signed consent to access and is cooperating with the agency. USEPA anticipates completing the RI/FS during the year 2000. USEPA and Martin County are evaluating any impact to off-site private drinking water wells. USEPA has completed a draft Remedial Investigation and Baseline Risk Assessment for the Riviera Beach Property. Honeywell, Inc. has signed an Administrative Order on Consent to perform the Feasibility Study for the Riviera Beach Property. The Company has signed for purposes of granting USEPA and Honeywell access. Honeywell is the predecessor owner and operator of the property during a period when pollution occurred and is therefore jointly and severally liable to USEPA. Honeywell's remedial action Feasibility Study (FS) may be completed in 1999. At that time, USEPA will propose a plan of action to the community, to clean up the contamination. A public meeting will be held and comments on the proposed plan will be accepted. Based on the comments, USEPA may or may not revise the plan and prepare a remedial action Record of Decision (ROD). USEPA expects to sign a ROD for the Riviera Beach property before January 2000. Due to the nature of ground water contamination sites in Florida, cleanup is expected to take decades. The Company has entered into negotiations with USEPA to settle USEPA's cost claims against it arising from the costs USEPA incurs in remediating or overseeing the remedial activities of others in connection with the properties. There can be no assurance as to the outcome of such negotiations. The Company has provided full information of its financial condition and has asked that except for the value of the properties upon sale, it has an inability to pay any USEPA claim under the Superfund's ability to pay mechanism. The Company offered to sell the properties at market value and after deducting its costs including $125,000 attorneys fees associated with the Riviera Beach Property and $75,000 attorneys fees associated with the Port Salerno Property, 5% broker's fee, back taxes plus interest, and the closing costs, to pay the net proceeds of the sales to USEPA to discharge all USEPA claims. USEPA has agreed to consider entering into prospective purchaser agreements protecting the property purchasers from USEPA cost recovery claims and third party contribution claims, but is not willing to deduct legal fees of more than $25,000 and $20,000 from the Riviera Beach and Port Salerno properties, respectively. Since this leaves the Company no way to pay its legal fees to its outside environmental counsel, that counsel has had to withdraw from the legal representation. The Company is currently seeking a new environmental consul. Currently, the Riviera Beach Property is under contract with National Land Company ("NLC") for market value of approximately $1,000,000. USEPA is currently negotiating a prospective purchaser agreement with NLC, subject to -10- appropriate deductions from the purchase price paid to USEPA, for back property taxes and interest, legal fees in the amount of $25,000, 5% broker's fee, and closing costs. Under these terms, NLC would pay USEPA $419,000 in net purchase proceeds. USEPA is also seeking to have the environmental escrowed monies relating to the Riviera Beach Property paid over to it by FDEP and the Company to defray its cleanup costs. USEPA believes that it can compel Honeywell to complete the cleanup of the Riviera Beach Property. USEPA counsel had advised Solitron's counsel that once a prospective purchaser agreement is signed, the property is sold, and USEPA receives the proceeds ($419,000) plus approximately $20,000 from the Riviera Beach escrow account, USEPA will issue the Company and Honeywell a letter stating that it will not hold them liable for any additional past response costs for the Riviera Beach site. However, until the prospective purchaser agreement is signed by both the USEPA and the prospective buyer and the sale is consummated, there can be no guarantee that such transaction and release will take place. USEPA advised the Company that it is unwilling to resolve its past and future cleanup costs in relation to the Port Salerno site under the ability to pay mechanism until the Port Salerno property is sold. It is the Company's position that any USEPA cost recovery claims are discharged in the prior bankruptcy and that USEPA is bound by the terms of the remediation approved under the Amended Order of Confirmation in Bankruptcy. Though USEPA received notice of Solitron's Bankruptcy, had knowledge of FDEP's claim and participation in the Bankruptcy, and that it likewise had already incurred costs to investigate the properties, USEPA did not file a claim in the Bankruptcy, apparently deferring to FDEP's claims regarding the remediation of the properties. USEPA does not agree with the Company's conclusion that its claims have been discharged in the bankruptcy. It is the Company's position that its legal exposure to Honeywell for contribution to cleanup costs has been resolved in the bankruptcy, since Honeywell's claims were filed and resolved in bankruptcy. The Company's former facility in Jupiter, Florida was sold to Philips Electronics in 1982. In 1995 the Jupiter facility was the subject of a preliminary assessment by the USEPA. After its investigation, USEPA deferred any further remedial action to an FDEP lead. The Company's environmental legal counsel has been advised that this facility is being remediated and such remediation will be completed under a consent order with FDEP. By letter dated May 17, 1999, Philips put the Company on notice that it will seek to exercise its indemnity rights against the Company under the 1982 purchase and sale agreement. It is the Company's position that Philips' notice of and participation in the prior bankruptcy has discharged Philips' claims. For a further description of the Company's environmental issues, refer to "Item 1 - Business - Bankruptcy Proceedings" and to Note 12 of the accompanying Consolidated Financial Statements. During the fiscal year ended February 28, 1999, the Company has spent approximately $13,000 for compliance with environmental laws (federal, state and local). As part of this effort, the Company retained the services of an environmental consultant who assisted in verifying that the Company operates in compliance with all pertinent environmental laws and regulations. The Company's environmental consultants have estimated the costs of remediation to be approximately $727,000 for the Port Salerno property and $342,000 for the Old Riviera Beach property. Approximately $1,032,000 has been accrued in the balance sheet as of February 28, 1999. The Company recorded these liabilities as $413,000 short-term liabilities and $619,000 long-term liabilities. These reservations are predicated on cleanup being performed under the existing Plan and Consent Final Judgment. BANKRUPTCY PROCEEDINGS On January 24, 1992 (the "Petition Date"), the Company and its wholly-owned subsidiary, Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.), a Delaware corporation, filed voluntary petitions seeking reorganization under Chapter 11 ("Chapter 11") of the United States Bankruptcy Code, as amended (the "Bankruptcy Code"), in the United States Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court"). These bankruptcy estates were subsequently consolidated by the Bankruptcy Court. On August 20, 1993, the Bankruptcy Court entered an Order (the "Order of Confirmation") confirming the Company's Fourth Amended Plan of Reorganization, as modified by the Company's First Modification of Fourth Amended Plan of Reorganization (the "Plan of Reorganization"). The Plan -11- became effective on August 30, 1993 (the "Effective Date"). On July 12, 1996, the Bankruptcy Court officially closed the case. Additionally, the following actions or events have taken or will take place pursuant to the Plan of Reorganization: (a) On February 28, 1993, pursuant to a Purchase Agreement, dated October 5, 1992, as amended (the "Vector Purchase Agreement"), the Company transferred to Vector Trading and Holding Corporation ("Vector") (the successor in interest to the Company's former primary lender, First Union National Bank ("First Union")) substantially all of the assets, other than real estate, comprising the Company's Microwave Division and certain related liabilities. Pursuant to the terms of the Vector Purchase Agreement: (i) Vector subleases approximately 30% of the Company's facilities in West Palm Beach, Florida, for a period ending December 31, 2001 at an annual rate that started at approximately $50,000 during the first year and increases to approximately $150,000 in the last four years, with aggregate remaining payments of approximately $556,000 (the "Sublease"); (ii) the Company assigned to Vector insurance proceeds of approximately $5.4 million from National Union Fire Insurance Company stemming from a 1991 fire in the Company's hybrid department; (iii) the Company and Vector entered into mutual non-competition agreements for a period of five years, pursuant to which neither will compete in the United States with respect to the types of products produced by the other as of the date of the Vector Purchase Agreement; (iv) the Company entered into a Shared Services and Equipment Agreement (the "Shared Services Agreement") with Vector, pursuant to which it is estimated that Vector will pay Solitron approximately $55,000 per year for eight years in exchange for, among other things, (a) the Company's allowing Vector to use certain of the Company's equipment, (b) the Company's providing to Vector certain services and (c) Vector's reimbursing or paying the Company (in pro rata quarterly installments through approximately the end of 1998) an aggregate of approximately $210,000 in personal property taxes paid by the Company on the assets transferred to Vector. As of February 1999, Vector had completed making these payments in full. (b) The Company has issued to certain pre-petition creditors that number of shares of Solitron's common stock, par value $.01 per share (the "Common Stock"), equal to 65% (approximately 1,424,504 shares) of the issued and outstanding shares after all issuances contemplated by the Plan of Reorganization (other than the shares issuable pursuant to the exercise of stock options granted to Shevach Saraf, the Chairman of the Board, Chief Executive Officer, President and Treasurer of the Company, as described below). Of this 65%, 40% have been issued to holders of unsecured claims (pro rata) and 25% have been to Vector. On December 15, 1995, the Company and Argo Partners, Inc., an unsecured creditor reached an agreement under which Solitron Devices, Inc. acquired Argo Partners' unsecured debt of $694,834 (which was carried as an obligation of approximately $140,037) for $40,000 as complete settlement. Prior to the acquisition, Argo Partners received payment of approximately $3,160 from the Company as part of several distributions to unsecured creditors. Thus, Solitron Devices, Inc. recognized in December 1995 an extraordinary gain of approximately $96,877 due to the debt being carried on the books at a discounted amount. Now that the claim of the State of California as an unsecured creditor has been quantified, all shares issuable to the State of California as an unsecured creditor were issued to the State of California in April 1996. The common stock issued to the Vector participants and holders of unsecured claims must be voted by them in accordance with the recommendation of the Company's Board of Directors and, in general, the holders of such Common Stock have agreed pursuant to the Plan of Reorganization to take no action hostile to the Company such as to commence or assist in a proxy contest or tender offer. However, no limitation on the transferability of this Common Stock was imposed pursuant to the terms of the Fourth Amended Disclosure Statement or the Plan of Reorganization. Solitron's pre-petition stockholders retained their issued and outstanding shares of Common Stock which, after the issuance of the remaining shares reserved for issuance under the Plan of Reorganization (other than those shares issuable upon the exercise by Mr. Saraf of certain options), represent 20% (approximately 438,310 shares) of the issued and outstanding Common Stock. Of the remaining 15%, 10% (approximately 219,155 shares) have already been issued to Mr. Saraf, and 5% (approximately 109,577 shares) are reserved for future issuance pursuant to employee stock incentive plans or programs. Additionally, Mr. Saraf has been issued options to purchase an additional 8% of the issued and outstanding Common Stock after giving effect to the foregoing issuance. In January 1998, the Company issued the remainder of the Common Stock issuable pursuant to the Plan of Reorganization to unsecured creditors as its obligations to Ellco have been satisfied in September 1997. (c) Pursuant to the Plan of Reorganization, beginning in approximately May 1995, the Company was required to begin making quarterly payments to holders of unsecured claims until they receive 35% of their claims. However, due to negotiations between the parties, the unsecured creditors agreed to a deferment of this payment (for more discussion see Management's Discussion and Analysis). The Company has proposed to its unsecured creditors that it make quarterly payments of $9,000, a level of payment which was maintained until February 28, 1997. Following discussion with the unsecured creditors committee, the Company agreed to increase the level of such payments to approximately $11,000 per quarter starting August 1997. Furthermore, effective August 1998, the Company started making payments of $14,000 per quarter. To date, the Company made 17 of its proposed -12- distributions to the unsecured creditors who have accepted the payments. These payments to unsecured creditors covered the period March 1, 1995 through February 28, 1999 in the aggregate amount of approximately $191,000 of the approximately $946,000 required by the Plan of Reorganization. Following the settlement with the State of California of the amount of its unsecured claim (as described below in (j) below) and the Company's acquisition of the unsecured claim of Argo Partners, Inc. (as described below in (o) below), it is presently estimated that there are an aggregate of approximately $7,100,000 in unsecured claims and, accordingly, that the Company is required to pay approximately $2,292,000 to holders of allowed unsecured claims in quarterly installments of approximately $62,083. The Company carries its debt to its unsecured creditors as $129,000 in short-term debt and $1,173,000 in long-term debt. The aggregate and monthly payments to unsecured creditors increases and decreases in proportion to $10,000 per month per $3.5 million in allowed claims, subject to a maximum quarterly payment of $105,000. (d) In March 1995, the Company entered into negotiations with its unsecured creditors, Palm Beach County, Martin County and FDEP in order to modify the schedule of payments as prescribed by its Plan of Reorganization. These negotiations continue. There can be no assurance that these negotiations will be successful. (e) Beginning on the date the Company's net after tax income exceeds $500,000, the Company will be obligated to pay (on an annual basis) each of the holders of unsecured claims (pro rata) and Vector participants and their successors, 5% of its net after tax income in excess of $500,000 until the tenth anniversary of the Effective Date, up to a maximum aggregate of $1,500,000 of such payments to the holders of unsecured claims (pro rata) and up to a maximum aggregate of $1,500,000 of such payments to Vector participants and their successors (the "Profit Participation"). (f) The Company transferred to First Union the real property known as the New Riviera Beach Facility and granted First Union a non-exclusive perpetual easement for the use of approximately 125 parking spaces on the adjacent real property owned by the Company known as the Old Riviera Beach Facility. First Union has claimed that the Company is obligated to pay approximately $110,000 in 1993 real property taxes with respect to the New Riviera Beach Facility that accrued prior to such transfer as well as the cost of removing personal property from and cleaning the New Riviera Beach Facility. The Court denied First Union's motion during fiscal year 1995. See "Item 2 - Properties". (g) Following the Effective Date and consistent with the Consent Final Judgment with FDEP, the Company has performed environmental soils assessments and is required to remediate the Riviera Beach Property and the Port Salerno Property. The foregoing stems from the environmental contamination of these properties. Under the Plan, the monies to be utilized to fund these assessments and remediations are to be made available from the proceeds of the sale or lease of the properties, to the extent that the Company is successful in its efforts to sell or lease such properties. Pursuant to the Plan, unless approved by the FDEP, neither the Riviera Beach Property nor the Port Salerno Property can be sold unless the price for such property equals or exceeds the lesser of (i) 75% of its then appraised value or (ii) the estimated cost of its remediation. The Plan also required that to the extent the proceeds from the sale or lease of these properties are not sufficient to pay for the remediation, the Company will escrow monthly amounts beginning on the 25-month anniversary of the Effective Date: (i) year 1 - $5,000 per month; (ii) year 2- $7,500 per month; (iii) year 3 - - $10,000 per month; and (iv) $10,000 per month thereafter until remediation is completed. The Company notified FDEP that it could not meet this payment schedule and with FDEP's acquiescence the Company is making payments of $1,000 per month and expects to remain on this payment schedule until the properties are sold. As of February 28, 1999, of the $120,000 due according to the Plan, the Company has deposited $43,000 in the required escrow accounts. Additionally, $42,000 in proceeds from an insurance settlement was released from escrow and has been utilized to investigate the extent to which the soils at the Riviera Beach and Port Salerno properties require remediation. Following testing, a determination has been made by FDEP that the soils at the Riviera Beach and Port Salerno properties need no further remediation. Under the Plan, any excess of such sale and lease proceeds over remediation costs was to be returned to the Company. However, no excess is now anticipated. See "Item 2." - Properties" for a description of these facilities. The Company's financial statements reflect liabilities of $1,032,000 relating to the foregoing assessment and remediation obligations. This best estimate of cleanup costs by the Company's environmental consultants is based on the assumption that the Plan and Consent Final Judgment will be implemented. Moreover, if the Company defaults under the Consent Final Judgment, the FDEP may assert a natural resource claim against the Company, the amount of which (if any) would be determined by a court of competent jurisdiction. Given USEPA's assertion of jurisdiction over the properties, the Company cannot give any assurance that actual remediation costs will not exceed the estimate based on compliance with the Plan. For a more definitive description of environmental matters pertaining to the Riviera Beach and Port Salerno properties, please refer to the Consent Final Judgment and the Environmental Compliance Section hereof. Because of the uncertainties of how USEPA will -13- proceed with cleanup of the properties and resolution of the Company's ability to pay application, total costs to the Company cannot be estimated now. See Environmental Compliance Section for further discussion of USEPA's assertions of jurisdiction over the properties. (h) The Company has paid all of the allowed administrative claims and allowed wage claims since the Effective Date. The Company is required to pay allowed tax claims (to the IRS, Palm Beach County, Florida and Martin County, Florida), estimated at approximately $1,861,000 (which amount is accrued in the consolidated financial statements and this amount includes accrued interest). The Company was required to begin making quarterly payments of allowed tax claims to Palm Beach County according to the following schedule: $37,000 per quarter for two years beginning in the second quarter of 1994; and approximately $82,000 per quarter for the twelve quarters thereafter. The Company is negotiating with Palm Beach County on restructuring the stream of payments. The Company entered into an agreement to make quarterly payments of allowed tax claims to Martin County of approximately $4,000 for a period of approximately four years beginning in approximately October 1994. The Company is negotiating with Martin County on restructuring the payment schedule. During January 1995, the amount of allowed tax claims payable to the IRS was determined to be $401,000. On August 21, 1998, the Company paid in full its 1980 tax obligation plus interest. The Company also completed making payments to the IRS for its 1987 tax obligations plus interest on March 30, 1998. The State of California Franchise Tax Board claim has been quantified by the Court on November 30, 1995 to be $680,179.35 and it is treated as an unsecured claim. The Company has not been making payments to Palm Beach County or to Martin County. It is anticipated that the Martin County tax claim will be paid in full with the sale of the Port Salerno property. It is anticipated as well that the Palm Beach County Tax claim will be paid with the sale of the Riviera Beach property. The following table indicates the approximate cumulative status of amounts due under Court Plans as of February 28, 1999: DUE TO DATE PAID ----------- -------- Martin County $ 78,000 $ 7,957 Palm Beach County $870,000 $280,145 The pre-petition taxes owed to Palm Beach County arose from three sources: (a) tangible personal property, (b) real property formerly owned by the Company, but subsequently transferred to other entities, and (c) real property currently owned by the Company. Following the confirmation of the Company's plan of reorganization, Palm Beach County received funds in partial payment of these tax liabilities. The Company believes that Palm Beach County applied these funds without regard to the purpose for which they were being paid (e.g., payments toward tangible personal property taxes were applied by the County against amounts owed on real property taxes). There exist issues between the Company and the County with regard to the proper application of the subject tax payments for the three categories of property, and until these issues are resolved, the precise amounts owed for tangible personal property taxes and real property taxes for the pre-petition period cannot be stated with certainty. -14- (i) Solitron rejected substantially all of its pre-petition executory contracts (including its outstanding stock option agreements except those with Shevach Saraf, Solitron's Chairman of the Board, Chief Executive Officer, President and Treasurer), except for certain contracts with distributors, sales representatives, lessors of equipment, customers, suppliers and the lessor of its West Palm Beach, Florida facility, and the Sublease with Vector, the Shared Services Agreement with Vector and the Employment Agreement with Mr. Saraf. ITEM 2. PROPERTIES During fiscal 1993, the Company consolidated all of its manufacturing operations and its corporate headquarters to an existing facility (approximately 70,000 square feet, of which approximately one-third is being subleased to Vector) in West Palm Beach, Florida. The Company has leased the facility for a term ending in 2001. The Company believes that its facilities in West Palm Beach, Florida will be suitable and adequate to meet its requirements for the foreseeable future. Pursuant to the Plan of Reorganization, the Company transferred to First Union its 150,000 square foot facility in Riviera Beach, Florida that, prior to August 30, 1992, housed the Company's executive offices and 137,000 square feet of manufacturing space occupied by the Semiconductor Division (i.e., the New Riviera Beach Facility). Pursuant to the terms of the Plan of Reorganization, the Company granted First Union a non-exclusive perpetual easement on approximately 125 parking spaces at the Old Riviera Beach Facility. First Union has claimed that the Company is required to pay an aggregate of approximately $110,000 in 1993 real property taxes with respect to the New Riviera Beach Facility that arose prior to transfer. First Union filed a motion with the Bankruptcy Court with respect to this issue. Such motion was denied during fiscal year 1995. The Company owns a 78,000 square foot facility (the "Old Riviera Beach Facility") within the same complex as the New Riviera Beach Facility. The Company's Old Riviera Beach facility is currently vacant. This facility (the Riviera Beach Property) is under contract for sale as set forth in the Environmental Compliance Section. The Company also owns the Port Salerno Property, which consists of a 42,000 square foot building and 23 acres of undeveloped land located in Port Salerno, Florida. On July 27, 1992, the USEPA listed this property on the National Priority List (NPL) for cleanup using monies from its Superfund and is contending that the Company is liable for its response costs. The Company has a pending ability to pay application before USEPA. The detail of the Company and USEPA's positions is set forth in the Environmental Compliance Section. ITEM 3. LEGAL PROCEEDINGS Other than the Bankruptcy Proceedings (as described in "Item 1" - Business") and the following matters, the Company is not aware of any other material legal proceedings to which it is a party. INTERNAL REVENUE SERVICE TAX CLAIM On August 21, 1998, the Company paid all of its 1980 tax obligation plus interest and as of March 30, 1999, it completed making payments for its 1987 tax obligation plus interest to the Internal Revenue Service. On April 18, 1999 the IRS issued the certificate of release of the Federal Tax Lien for the 1987 tax obligation. ENVIRONMENTAL CLAIM REGARDING PORT SALERNO The Company received a claim by an estate owning property northwest and across Cove Road from the Port Salerno property. The estate has asserted that the mailing address to which the bankruptcy notice was sent was in error. The estate has been advised that public water has been made available to the property and that the Company is prepared to settle for the allowance of a general unsecured claim in the amount of $10,000. This offer was rejected. The claim is unresolved and is currently dormant. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -15- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Since March, 1995, the Company's Common Stock has been traded on NASDAQ's Electronic Bulletin Board (over the counter. The Company's Common Stock was traded on the New York Stock Exchange until October 13, 1993, at which time it began trading on the NASDAQ Small Cap Market where it was traded until March 1995. The following table sets forth for the periods indicated, high and low bid information of the Common Stock. The prices set forth below reflect inter-dealer prices, without retail markup, markdown, or commission and may not represent actual transactions. FISCAL YEAR ENDED FISCAL YEAR ENDED FEBRUARY 28, 1999 FEBRUARY 28, 1998 ------------------ ------------------- HIGH LOW HIGH LOW First $0.4375 $0.1750 $0.3125 $0.1562 Second $0.4375 $0.1250 $0.1562 $0.125 Third $0.4687 $0.2812 $0.4688 $0.125 Fourth $0.3750 $0.1250 $0.3125 $0.125 As of February 28, 1999 and February 28, 1998, there were approximately 4,189 and 4,239 holders of record of the Company's Common Stock, respectively. On February 28, 1999, the last sale price of the Common Stock as reported on the Electronic Bulletin Board was $0.2187 per share. The Company has not paid any dividends since emerging from bankruptcy and the Company does not contemplate declaring dividends in the foreseeable future. -16- ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION In January, 1992, as a result of losses and liquidity deficiencies, the Company and its wholly-owned subsidiary, Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. On August 20, 1993, the Bankruptcy Court entered an Order of Confirmation confirming the Company's Plan of Reorganization and on August 30, 1993, the Plan of Reorganization became effective, and the Company emerged from bankruptcy. On July 12, 1996, the Bankruptcy Court officially closed the case. The following table is included solely for use in comparative analysis of income (loss) before extraordinary items to complement Management's discussion and analysis:
(DOLLARS IN THOUSANDS) YEAR ENDED FEBRUARY 28 1999 1998 Net Sales $7,900 $ 7,860 Cost of sales 6,009 5,930 Gross profit 1,891 1,930 Selling, general and administrative expenses 1,279 1,447 Operating income 612 483 Interest expense (49) (90) Interest expense on unsecured creditors claims (105) (148) Write down of non-operating facilities and related expenses (25) (45) Interest income 35 28 Other, net 8 47 Net income $ 476 $ 194
Except for historical information contained herein, certain matters discussed herein are forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, including but not limited to, economic, technological, competitive, governmental procurement, regulatory, strategies, available financing, and other factors discussed elsewhere in this report and the documents filed by the Company with the SEC. Many of these factors are beyond the Company's control. Actual results could differ materially from the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will, in fact, occur. LIQUIDITY AND CAPITAL RESOURCES During the last several fiscal years, the Company has generally experienced losses from operations and severe cash shortages caused by a significant decline in both sales and open order backlog, decreased margins (which is characteristic in the industry) on the Company's products, significant expenses associated with the reorganization proceedings, and the Company's inability to obtain additional working capital through the sale of debt or equity securities or the sale of non-operating assets. However, for the years ended February 28, 1999 and February 28, 1998, the Company recorded net income of $476,000 and $194,000 respectively. During the pendency of the Bankruptcy Proceedings, all secured and unsecured claims against and indebtedness of the Company (including accrued and unpaid interest) were stayed in accordance with the Bankruptcy Code while the Company continued its operations as a debtor-in-possession, subject to the control and supervision of the Bankruptcy Court. Because these stays limit cash outflow, the Company, during the pendency of the Bankruptcy Proceedings, realized positive cash flow from ongoing operations. Since the Company emerged from Chapter 11, it has experienced a positive cash flow from recurring operations; however, until the fiscal year ended February 28, 1997, overall cash flow was negative due primarily to the necessity to make payments of administrative expenses and unsecured debt -17- payouts arising in connection with the Bankruptcy Proceedings. The foregoing resulted in a decrease in cash and cash equivalents since emergence from Chapter 11. The Company has incurred modest income from operations of approximately $612,000 for the fiscal year ended February 28, 1999 and has significant obligations arising from settlements in connection with its bankruptcy necessitating it to make substantial cash payments which cannot be supported by the current level of operations. The Company has projected that it will continue to be able to generate sufficient funds to support its ongoing operations. However, the Company must be able to renegotiate its required payments to unsecured creditors, the USEPA, the FDEP and certain taxing authorities or raise sufficient cash in order to pay these obligations as currently due, in order to remain a going concern. The Company is currently in negotiations with the unsecured creditors, the USEPA, the FDEP, and taxing authorities in an attempt to arrive at reduced payment schedules. In addition, the Company has a contingency plan to reduce its size and thereby reduce its cost of operations within certain limitations. However, no assurance can be made that the Company can reach a suitable agreement with the unsecured creditors, USEPA, FDEP or taxing authorities or obtain additional sources of capital and/or cash or that the Company can generate sufficient cash to meet its obligations. At February 28, 1999 and February 28, 1998 respectively, the Company had cash and cash equivalents of $784,000 and $650,000. The principal cash change was due to managing disbursements and permitting the liabilities to rise. At February 28, 1999, the Company had working capital of $1,340,000 as compared with a working capital at February 28, 1998 of $1,168,000. Pursuant to the Plan of Reorganization, beginning in approximately May 1995, the Company was required to begin making quarterly payments to holders of unsecured claims until they receive 35% of their claims. However, due to negotiations between the parties, the unsecured creditors agreed to a deferment of this payment (for more discussion see Management's Discussion and Analysis). The Company has proposed to its unsecured creditors that it make quarterly payments of $9,000. Following discussion with the Company's unsecured creditor, the Company started to make quarterly payments of $11,000 in August 1997. Furthermore, effective August 1998, the Company started making payments of $14,000 per quarter. The Company made 17 of its proposed distributions to the unsecured creditors who have accepted the payments. These payments to unsecured creditors covered the period March 1, 1995 through February 28, 1999 in the aggregate amount of approximately $191,000 of the approximately $946,000 required by the Plan of Reorganization. Following the settlement with the State of California of the amount of its unsecured claim and the Company's acquisition of the unsecured claim of Argo Partners, Inc., it is presently estimated that there are an aggregate of approximately $7,095,000 in unsecured claims and, accordingly, that the Company is required to pay approximately $2,292,000 to holders of allowed unsecured claims in quarterly installments of approximately $62,000. The Company carries its debt to its unsecured creditors as $129,000 in short-term debt and $1,173,000 as long-term debt. The aggregate and monthly payments to unsecured creditors increases and decreases in proportion to $10,000 per month per $3.5 million in allowed claims, subject to a maximum quarterly payment of $105,000. The Company received a claim by an estate owning property northwest and across Cove Road from the Port Salerno property. The estate has asserted that the mailing address to which the bankruptcy notice was sent was in error. The estate has been advised that public water has been made available to the property and that the Company is prepared to settle for an allowed general unsecured claim in the amount of $10,000, to be paid as other unsecured creditor claims are being paid. This offer was rejected, and the claim is unresolved and presently dormant. Despite the Plan and Consent Final Judgment and the Company's repeated efforts to negotiate a deferral of action by the United States Environmental Protection Agency ("USEPA") to allow the Company to sell the properties, the USEPA re-evaluated the Riviera Beach and Port Salerno properties for potential listing on the Superfund National Priority List ("NPL"). USEPA subsequently published notice of its proposal to list the Port Salerno Property on the NPL and listed it on July 27, 1998. By letter dated September 8, 1998, USEPA notified the Company that it would not defer cleanup of the Riviera Beach Property to a FDEP lead. USEPA stated, however, that it would defer listing the Riviera Beach Property on the NPL if prior owner/operator Honeywell, Inc. agreed to proceed with and fund a USEPA-lead voluntary Superfund cleanup. USEPA expressed willingness to negotiate a prospective purchaser agreement with any purchaser interested in redeveloping the Riviera Beach or Port Salerno properties. Honeywell has executed an administrative Order on Consent to perform the next phase of remediation, the remedial action Feasibility Study. Until the properties have been sold, USEPA has decided how to remediate them, and the Company's ability to pay -18- application has been ruled on by USEPA, it is not possible to quantify the Company's contingent liability to USEPA. For further discussion of environmental liabilities see "Environmental Compliance" and "Properties" sections. USEPA counsel had advised Solitron's counsel that once a prospective purchaser agreement is signed, the property is sold, and USEPA receives the proceeds ($419,000) plus approximately $20,000 from the Riviera Beach escrow account, USEPA will issue the Company and Honeywell a letter stating that it will not hold them liable for any additional past response costs for the Riviera Beach site. However, until the prospective purchaser agreement is signed by both the USEPA and the prospective buyer and the sale is consummated, there can be no guarantee that such transaction and release will take place. The Company's former facility in Jupiter, Florida was sold to Philips Electronics in 1982. In 1995 the Jupiter facility was the subject of a preliminary assessment by the USEPA. After its investigation, USEPA deferred any further remedial action to an FDEP lead. The Company's environmental legal counsel has been advised that this facility is being remediated and such remediation will be completed under a consent order with FDEP. By letter dated May 17, 1999, Philips put the Company on notice that it will seek to exercise its indemnity rights against the Company under the 1982 purchase and sale agreement. It is the Company's position that Philips' notice of and participation in the prior bankruptcy has discharged Philips' claims. Pursuant to the Plan of Reorganization, beginning on the date the Company's net after tax income exceeds $500,000, the Company will be required to pay (on an annual basis) certain pre-petition creditors 5% of net after tax income in excess of $500,000 until the tenth anniversary of the Effective Date, up to a maximum aggregate of $1,500,000 in such payments. The Company's lease payments (less sublease payments from Vector) for its facilities in West Palm Beach, Florida will increase each year from approximately $255,000 during the current fiscal year in accordance with specified cost of living increases (which shall be no less than 3% nor more than 5% per year). The Company has satisfied all of the allowed administrative claims and allowed wage claims under the Plan of Reorganization. The Company is required to pay allowed tax claims (to the Internal Revenue Service, Palm Beach County, Florida and Martin County, Florida), estimated at approximately $1,810,000 (which amount is accrued in the accompanying financial statements including interest). The Company is required to make quarterly payments of allowed tax claims to Palm Beach County according to the following schedules: $37,000 per quarter for two years beginning in the second quarter of 1994; and approximately $82,000 per quarter for the twelve quarters thereafter. The Company is required to make quarterly payments of allowed tax claims to Martin County of approximately $4,000 for a period of approximately four years beginning in approximately October 1994. On August 21, 1998 the Company paid all of its 1980 tax obligation plus interest to the Internal Revenue. The Company is now negotiating with Palm Beach County, and Martin County to modify these payment plans. The following table indicates the approximate cumulative status of amounts due under Court Plans a of February 28, 1999: DUE TO DATE PAID ----------- --------- Martin County $ 78,000 $ 7,957 Palm Beach County $ 870,000 $ 280,143 IRS $ 252,000 $ 91,870 Based upon (i) Management's best information as to current national defense priorities, future defense programs, as well as Management's expectations as to future defense spending; (ii) the market trends signaling a continued slowdown and soft level of booking and a renewed price erosion, and (iii) a continual lack of foreign competition in the defense and aerospace market, the Company believes that its operations will continue to generate sufficient cash to satisfy its operating needs over the next 12 months. However, based on these factors and at the current bookings, prices, profit margins and sales levels, the Company will not generate sufficient cash to satisfy its operating needs and its obligations to pre-bankruptcy creditors in accordance with the Plan. Thus, it is in continuous negotiations with all claim holders to reschedule these payments. In the event the Company is unable to restructure its obligations to pre-bankruptcy claimants or the slowdown in the intake of new orders continue, the Company has a contingency plan to -19- further reduce its size and thereby reduce its cost of operations within certain limitations. Over the long-term, the Company believes that, if the volume and prices of product sales continues as presently anticipated, the Company will generate sufficient cash from operations to sustain operations. In the event that bookings in the long-term decline significantly below the level experienced since emerging from Chapter 11, the Company may be required to implement further cost-cutting or other downsizing measures to continue its business operations. Such cost-cutting measures could inhibit future growth prospects. In appropriate situations, the Company may seek strategic alliances, joint ventures with others or acquisitions in order to maximize marketing potential and utilization of existing resources and provide further opportunities for growth. BOOKINGS AND BACKLOG During the fiscal year ended February 28, 1999, the Company's net bookings were $8,498,000 in new orders as compared with $7,160,000 for the year ended February 28, 1998, an increase of 19%. The Company's backlog increased to $5,921,000 at February 28, 1999 as compared with $5,323,000 as of February 28, 1998, an 11% increase. FUTURE PLANS To lessen the Company's current liquidity problems, the Company plans to (a) continue improving operating efficiencies; (b) further reduce overhead expenses; (c) develop off-shore manufacturing capability utilizing strategic partners and/or sub-contractors; (d) develop alternative lower cost packaging technologies. Also, the Company intends to identify lower cost base assembly partners in the Asia-Pacific region, thus enhancing the Company's competitive position while reducing costs. The Company also plans to continue its efforts in selling privately labeled commercial semiconductors and to develop offshore assembly or sub-assembly whether as under contract or strategic alliance arrangements. If these plans are successful, the Company intends to aggressively pursue sales of these products which could require the Company to invest in the building up of inventories of finished goods. INFLATION The rate of inflation has not had a material effect on the Company's revenues and costs and expenses, and it is not anticipated that inflation will have a material effect on the Company in the near future. YEAR 2000 The Year 2000 computer problem, commonly referred to as the Y2K, creates a risk for the Company and therefore the Company makes the following Year 2000 readiness disclosure. An adverse impact on operations could occur if computer systems do not correctly recognize date information when the year changes to 2000. The Company's risk exists in the following areas: (1) systems used by the Company to run its business and (2) systems used by suppliers and service providers. The Company has attempted to obtain assurances of Year 2000 readiness from suppliers and service providers. The Company will continue to obtain such assurances for future internal systems, equipment, and facilities. In addition, we will continue to monitor, including performing additional testing, as appropriate, the Year 2000 readiness status of previous obtained equipment, internal systems, and facilities. Noncompliant systems, equipment, or facilities are expected to be replaced or upgraded in a timely manner prior to December 31, 1999. The Company has not identified alternative remediation strategies if replacement or upgrade is not feasible, but will continue to reevaluate the need for alternative remediation strategies and contingency plans as warranted by further risk analysis. For internal system Year 2000 noncompliance issues identified to date and expected throughout 1999, the cost of upgrade or replacement is not expected to be material to operating results. However, if significant, new noncompliance issues are subsequently identified, and replacement or upgrade is delayed beyond December 31, 1999, operating results could be materially adversely affected. The Company has limited material relationships with suppliers whose inability to provide products or services would have a material adverse impact on operating results. Suppliers where such material relationships do exist appear to be limited to those utilities (e.g. phone service, public service) whose inability to provide service could materially affect all business entities. The Company has and will continue to monitor their Year 2000 efforts and will develop contingency plans as appropriate. -20- In order to evaluate the above risks, implement any necessary remediations in the future, and provide risk reevaluations and continued appropriate monitoring activities, the Company has designated appropriate individuals within the organization to be responsible for Year 2000 issues. The Company will continue to assess the need for additional year 2000 readiness personnel as appropriate. The Company's computer operating system and business software package have been updated and, when tested on December 1998, found to be Y2K compliant. The Company expects all of its internally written custom reports to be Y2K compliant by July 31, 1999. As of April 30, 1999, fifty percent of such reports had been updated and tested or have no Y2K impact. Having these custom management reports updated to Y2K is not considered to be mission critical In addition, the Company has contacted all of its business partners (i.e., services provider and raw material suppliers), and found that all of them are Y2K compliant or plan to be compliant by the 3rd quarter of 1999. Based on the currently available information, the Company does not anticipate any interruption to its ability to continue conducting business. However, the Company does not have control over such third parties and a failure of third parties to be Y2K compliant could have a material impact on the Company's ability to conduct business. Thus, the Company will continue to seek confirmation and updates from its business partners to certify that they addressed or will address year 2000 issues. The cost of updating and testing the Company's year 2000 compliance has been expensed as part of its operating expenses and was not material. RESULTS OF OPERATIONS 1999 VS. 1998 Net sales for the fiscal year ended February 28, 1999 increased by 0.5% to $7,900,000 versus $7,860,000 during the fiscal year ended February 28, 1998. This small increase was primarily attributable to strong backlog and the ability to ship more. Bookings were higher than sales by 7.5%; thus, the backlog increased from $5,323,000 as of February 28, 1998 to $5,921,000 as of February 28, 1999. During the year ending February 28, 1999, the Company shipped 2,462,221 units as compared with 2,234,193 units shipped during the year ending February 28, 1998. It should be noted that since the Company manufacturers a wide variety of products with an average sale price ranging from less than one dollar to several hundred dollars, such periodic variations in the Company's volume of units shipped may not be a reliable indicator of the Company's performance. The Company has experienced a increase in the level of bookings of 19% for the year ended February 28, 1999 as compared to the previous year principally as a direct result a shift in customer demand for the Company's products. During the year ending February 28, 1999, the Company's gross margins were 24% as compared to 25% for the year ending February 28, 1998. The small decrease was primarily due to a broad base increase of cost of goods sold associated primarily with a change in product mix. During the year ending February 28, 1999, selling, general and administrative based expenses as a percentage of sales were 16% as compared with 18% for the year ending February 28, 1998. Selling, General and Administrative expenses decreased 13% to $1,260,000 for the fiscal year ended February 28, 1999 from $1,447,000 for the fiscal year ended February 28, 1998. The decrease was due primarily to lower payroll and bonus awards which were somewhat offset by higher selling expenses. Total interest expense decreased from $238,000 for the fiscal year ended February 28, 1998 to $208,000 for the fiscal year ended February 28, 1999 primarily due to lower imputed interest. -21- Item 7. FINANCIAL STATEMENTS Index to Consolidated Financial Statements PAGE Independent Auditor's Report 23-24 Consolidated Balance Sheet as of February 28, 1999 25 Consolidated Statements of Income for the years ended February 28, 1999 and February 28, 1998 26 Consolidated Statements of Stockholders' Equity for the years ended February 28, 1999 and February 28, 1998 27 Consolidated Statements of Cash Flows for the years ended February 28,1999 and February 28, 1998 28 Notes to Consolidated Financial Statements 29-41 -22- INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Solitron Devices, Inc.: We have audited the accompanying consolidated balance sheet of Solitron Devices, Inc. and Subsidiaries as of February 28, 1999, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's Management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Solitron Devices, Inc. and Subsidiaries as of February 28, 1999 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has certain obligations resulting from its settlement with unsecured creditors and with taxing authorities, the present terms of which the Company is unable to meet, which raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Goldstein Golub Kessler LLP New York, New York May 14, 1999, except for the second paragraph of Note 12 as to which the date is June 4, 1999 and 22nd paragraph of Note 12 as to which the date is May 17,1999. -23- INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Solitron Devices, Inc.: We have audited the accompanying consolidated statement of operations, shareholders' equity and cash flows of Solitron Devices, Inc. and Subsidiaries for the year ending February 28,1998. Our audit also included the financial statement schedule listed in the Index at Item 8. These consolidated financial statements and schedule are the responsibility of the Company's Management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Solitron Devices, Inc. and Subsidiaries for the year ended February 28, 1998 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has certain obligations resulting from its settlement with unsecured creditors and with taxing authorities, the present terms of which it is unable to meet, which raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Millward & Co., CPAs Fort Lauderdale, Florida May 26, 1998 -24-
SOLITRON DEVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET FEBRUARY 28, 1999 ASSETS CURRENT ASSETS: Cash $ 784,000 Accounts receivable, less allowance for doubtful accounts of $11,000 1,112,000 Inventories 2,737,000 Prepaid expenses and other current assets 119,000 Due from Vector 3,000 ----------- Total current assets $ 4,755,000 ----------- PROPERTY, PLANT AND EQUIPMENT, net 587,000 NON-OPERATING PLANT FACILITIES, net of cost to dispose -0- OTHER ASSETS 83,000 ----------- $ 5,425,000 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 7,000 Current portion of accrued environmental expenses 413,000 Accounts payable-Post-petition 600,000 Accounts payable-Pre-petition, current portion 129,000 Accrued expenses 2,229,000 Accrued Chapter 11 administrative expense 37,000 ----------- Total current liabilities $ 3,415,000 ----------- LONG-TERM DEBT, less current maturities 7,000 OTHER LONG-TERM LIABILITIES, net of current portion, net of cost to dispose of non-operating facilities 561,000 ----------- TOTAL LIABILITIES $ 3,983,000 =========== COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, authorized 500,000 shares, none issued -- Common stock, $.01 par value, authorized 10,000,000 shares, 2,034,704 shares issued and outstanding 20,000 Additional paid-in capital 2,618,000 Accumulated deficit (1,196,000) ----------- Total stockholders' equity 1,442,000 ----------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 5,425,000 ===========
The accompanying notes and independent auditor's report should be read in conjunction with the financial statements. -25-
SOLITRON DEVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR FOR THE YEAR ENDED ENDED FEBRUARY 28, FEBRUARY 28, 1999 1998 ----------- ----------- Net sales $ 7,900,000 $ 7,860,000 Cost of sales 6,009,000 5,930,000 ----------- ----------- Gross profit 1,891,000 1,930,000 Selling, general and administrative expenses 1,279,000 1,447,000 ----------- ----------- Operating income 612,000 483,000 Other income (expense): Writedown of non-operating facilities and related expenses (25,000) $ (45,000) Interest expense (49,000) (90,000) Interest expense on unsecured creditors claim (105,000) (148,000) Interest income 35,000 28,000 Other, net 8,000 (34,000) ----------- ----------- Other income (expense), net (136,000) (289,000) ----------- ----------- Net income $ 476,000 $ 194,000 =========== =========== INCOME PER SHARE OF COMMON STOCK: Basic Income Per Share .23 .09 =========== =========== Diluted Income Per Share .23 .09 =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 2,034,704 2,248,000 =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 2,117,803 2,248,000 =========== ===========
The accompanying notes and independent auditor's report should be read in conjunction with the financial statements. -26-
SOLITRON DEVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For The Years Ended February 28, 1999 and February 28, 1998 COMMON STOCK ---------------------- ADDITIONAL RETAINED NUMBER OF PAID-IN EARNINGS SHARES AMOUNT CAPITAL (ACCUMULATED DEFICIT) TOTAL ----------- ----------- ----------- --------------------- ----------- Balance, February 28, 1997 1,977,053 $ 20,000 $ 2,618,000 ($1,866,000) $ 772,000 Issuance of shares of Common Stock Pursuant To the Plan of Reorganization 56,960 -- -- -- -- Net Income -- -- -- 194,000 194,000 ----------- ----------- ----------- ----------- ----------- Balance, February 28, 1998 2,034,013 $ 20,000 $ 2,618,000 ($1,672,000) $ 966,000 Issuance of shares of Common Stock Pursuant To the Plan of Reorganization 691 -- -- -- -- Net Income -- -- -- 476,000 476,000 ----------- ----------- ----------- ----------- ----------- Balance, February 28, 1999 2,034,704 $ 20,000 $ 2,618,000 ($1,196,000) $ 1,442,000 =========== =========== =========== =========== ===========
The accompanying notes and independent auditor's report should be read in conjunction with the financial statements. -27-
SOLITRON DEVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR FOR THE YEAR ENDED ENDED FEBRUARY 28, FEBRUARY 28, 1999 1998 ------------ ----------- Cash flows from operating activities: Net income $ 476,000 $ 194,000 ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 214,000 219,000 Changes in operating assets and liabilities Decrease (increase) in: Accounts receivable (15,000) 8,000 Inventories (244,000) (405,000) Prepaid expenses and other current assets -0- (17,000) Due from Vector 66,000 67,000 Other assets 9,000 (6,000) Increase (decrease) in: Accounts payable 253,000 (165,000) Accounts payable-pre-petition 23,000 11,000 Accrued expenses (230,000) 537,000 Accrued Chapter 11 expenses 2,000 (3,000) Accrued environmental expenses 107,000 108,000 Other long-term liabilities (289,000) (262,000) ----------- ----------- Total adjustments (104,000) 92,000 ----------- ----------- Net cash provided by operating activities $ 372,000 $ 286,000 ----------- ----------- Cash flows from investing activities: Additions to property, plant and equipment Cash used in investing activities (231,000) (114,000) ----------- ----------- Cash flows used in financing activities Payments on capitalized lease obligations Net cash used in financing activities (7,000) (59,000) ----------- ----------- Net increase in cash 134,000 113,000 Cash and cash equivalents at beginning of year 650,000 537,000 ----------- ----------- Cash and cash equivalents at end of year $ 784,000 $ 650,000 ----------- ----------- Supplemental disclosures of cash flow information: Cost to dispose non-operating plant facilities $ 1,745,000 $ ----------- ----------- Interest paid $ 103,000 $ 90,000 ----------- -----------
The accompanying notes and independent auditor's report should be read in conjunction with the financial statements. -28- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Solitron Devices, Inc. and its wholly owned Subsidiaries (collectively the "Company"). All significant inter-company balances and transactions have been eliminated in consolidation. The Company designs, develops, manufacturers, and markets solid-state semiconductor components and related devices primarily for the military and aerospace markets. CASH AND CASH EQUIVALENTS: The Company considers all investments with a maturity of three months or less at the date of purchase to be cash equivalents for purposes of its statements of cash flows. As of February 28, 1999 the Company did not have any cash equivalents. INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined using the weighted average method. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Assets acquired under capital lease arrangements have been recorded at the present value of the future minimum lease payments and are being amortized on a straight-line basis over the estimated useful life of the asset or the lease term, whichever is shorter. Amortization of this equipment is included in depreciation and amortization expense. NON-OPERATING PLANT FACILITIES: Facilities that are no longer being utilized for operations are being carried at estimated fair values as non current assets. The facilities are not being depreciated. CONCENTRATIONS OF CREDIT RISK Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and trade receivables. The Company places its cash with high credit quality institutions. At times such amounts may be in excess of the FDIC insurance limits. The Company has not experienced any losses in such account and believes that it is not exposed to any significant credit risk on the account. With respect to the trade receivables, most of the Company's products are custom made pursuant to the contracts whose end products are sold to the United States Government. The Company performs ongoing credit evaluations of its customers' financial condition and maintains allowances for potential credit losses. Actual losses and allowances have been within Management's expectations. REVENUE RECOGNITION: Revenue is recognized upon delivery; however, the Company may receive payment of some contracts in advance. When received, these amounts are deferred and are recognized as revenue in the period in which the related products or services are delivered. INCOME TAXES: Income taxes are accounted for under the asset and liability method of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and -29- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. Summary of Significant Accounting Policies (continued) liabilities or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated amounts to be realized by the use of a valuation allowance. COMPUTATION OF NET INCOME PER SHARE Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per common share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options and warrants to purchase common stock. Incremental shares of 83,099 were used in the calculation of diluted earnings per common share in 1999. The incremental shares were computed based on stock options outstanding, using the treasury stock method. In 1998, diluted earnings per share are not presented as the result is antidilutive. STOCK BASED COMPENSATION: The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" in 1997. SFAS 123 allows either the adoption of a fair value method of accounting for stock-based compensation plans or continuation of accounting under Accounting Principles Board ("APB") Opinion No. 25 Accounting For Stock Issued To Employees, and related interpretations with supplemental disclosures. The Company has chosen to account for all stock based arrangements under APB 25 and make the related disclosures under SFAS 123. NEW ACCOUNTING PRONOUNCEMENTS Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Going Concern and Petition in Bankruptcy: GOING CONCERN The Company's consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities as they become due. Although the Company has projected that it will be able to generate sufficient funds to support its ongoing operations, it has significant obligations arising from settlements in connection with its bankruptcy necessitating it to make substantial cash payments which cannot be supported by the current level of operations. The Company must be able to obtain forbearance or be able to renegotiate its bankruptcy related required payments to unsecured creditors, the Environmental Protection Agency ("USEPA"), the Department of Environmental Protection ("FDEP"), and certain taxing authorities or raise sufficient cash in order to pay these obligations as currently due, in order to remain a going concern. The Company continues to negotiate with its unsecured creditors, the USEPA, the FDEP, and taxing authorities in an attempt to arrive at reduced payment schedules. Further, the Company plans to develop other financing facilities to provide additional funding. In addition, the Company has a contingency plan to reduce its size and thereby reduce its cost of operations within certain limitations. However, no assurance can be made that the Company can reach a suitable agreement with the unsecured creditors or taxing authorities or obtain additional sources of capital and/or cash or that the Company can generate sufficient cash to meet its obligations over the next year. -30- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Going Concern and Petition in Bankruptcy (continued): The financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. PETITION IN BANKRUPTCY On January 24, 1992, the Company filed voluntary petitions in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the federal Bankruptcy code. The Company was authorized to continue in the management and control of its business and property as debtor-in-possession under the Bankruptcy Code. On August 20, 1993 the Company's Plan of Reorganization, as amended and modified (the "Plan"), was confirmed by the Bankruptcy Court and the Company emerged from bankruptcy on August 30, 1993. On July 12, 1996 the Bankruptcy Court officially closed the case. (a) The Company is required to make quarterly payments to holders of unsecured claims until they receive 35 percent of their pre-petition claims. At February 28, 1999, the Company is currently scheduled to pay approximately $2,292,000 to holders of allowed unsecured claims in quarterly installments of approximately $62,000. As of February 28, 1999, the present value of this amount, $1,302,000, is accrued as a pre-petition liability (Note 7) with imputed interest recognized in the Statement of Income. (b) Beginning on the later of (i) the payment of all administrative claims and all unsecured claims, but not later than 18 months after the Effective Date (see note 13) and (ii) the date the Company's net after tax income exceeds $500,000, the Company will pay (on an annual basis) each of (x) the holders of unsecured claims (pro rata) and (y) Vector, 5% of its net after tax income in excess of $500,000 until the tenth anniversary of the Effective Date, up to a maximum aggregate of $1,500,000 of such payments to the holders of unsecured claims (pro rata) and up to a maximum aggregate of $1,500,000 of such payments to Vector. The targets have not been reached and no amounts have been accrued. (c) Under the Plan, the Company is required to remediate its non-operating facilities located in Port Salerno and Riviera Beach, Florida. The Plan contemplated that monies to fund the remediation will be made available from the proceeds of the sale or lease of the properties, to the extent that the Company is successful in its efforts to sell or lease such properties. Pursuant to the Plan, unless otherwise approved by the Florida Department of Environmental Protection (FDEP), neither the Riviera Beach Facility nor the Port Salerno Facility can be sold unless the price for such property equals or exceeds the lesser of (i) 75% of its appraised value or (ii) the estimated cost of its remediation. Further, pursuant to the Plan, a purchaser of either of these facilities would not be liable for existing environmental problems under certain conditions. In connection with facilitating the remediation of the properties, the Company will also, to the extent the proceeds from the sale or lease of these properties are not sufficient to pay for the remediation, be required to escrow the following amounts on a monthly basis beginning on September 30, 1995: (i) year 1 - $5,000 per month; (ii) year 2 - $7,500 per month; (iii) year 3 - $10,000 per month; and (iv) $10,000 per month thereafter until remediation is completed. The Company has notified FDEP of its inability to pay pursuant to this schedule and is making payments at the rate of $1,000 per month. As of February 28, 1999, the Company deposited $43,000 into the escrow accounts. (Note 12). (d) The Company has paid all of the allowed administrative claims and allowed wage claims since August 1993. The Company is required to pay allowed tax claims to Palm Beach County, Florida and Martin County, Florida, estimated at approximately $1,428,000 (which amount is included in the accompanying consolidated financial statements (Note 7), including interest. The Company was required to start making quarterly payments of allowed tax claims to Palm Beach County according to the following schedule: $37,000 per quarter for two years beginning in the second quarter of 1994; and approximately $82,000 per quarter for the twelve quarters thereafter. The Company is -31- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Going Concern and Petition in Bankruptcy (continued): negotiating with Palm Beach County to reschedule these payments. The Company has an agreement to make quarterly payments of allowed tax claims to Martin County of approximately $4,000 for a period of approximately four years beginning in October 1994. The allowed tax claims payable to the IRS was determined in January 1995 to be $401,000. On August 21, 1998, the Company paid off in full its 1980 tax obligation plus interest and, on March 30, 1999, it completed making payments of its 1987 tax obligations and interest. These tax claims do not include an unsecured claim of $680,000 owed to the State of California for income taxes for years prior to 1982. The Plan provided for the distribution of common stock of the Company such that, post-petition, the Company's common stock will be held as follows: PARTY-IN-INTEREST COMMON STOCK ----------------- ------------ Vector 25% Unsecured Creditors 40% Company's President 10% Pre-Petition Stockholders 20% Reserved for future issuance under an employee stock incentive plan to be issued based upon the terms and conditions of the plan at the discretion of the Board of Directors 5% ---- 100% On October 4, 1994, the Company and Vector agreed that Vector's 25% stock would be distributed among various parties. Among these parties, 273,943 shares will not be subject to the voting restrictions, while the balance of the parties will continue to be subjected to the voting restrictions as long as they or their affiliates hold the Company's stock. 3. Inventories: As of February 28, 1999, inventories consist of the following: Raw Materials $1,419,000 Work-In-Process and Finished Goods 1,318,000 ---------- $2,737,000 ========== 4. Property, Plant and Equipment: As of February 28, 1999, property, plant, and equipment consist of the following: ESTIMATED USEFUL LIFE ----------- Leasehold Improvements $ 598,000 5 years Machinery and Equipment 1,306,000 5 years ----------- $ 1,904,000 Less Accumulated Depreciation and Amortization 1,317,000 ----------- $ 587,000 ----------- Non-operating Plant Facilities $ 1,745,000 LESS: COST TO DISPOSE OF NON-OPERATING PLANT FACILITY $(1,745,000) ----------- NET 0 =========== -32- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. Property, Plant and Equipment (continued): Non-operating plant facilities at February 28, 1999 represent the Company's Port Salerno facility and Riviera Beach microwave plant (the Old Riviera Beach Facility), both of which are no longer being used in operations. Depreciation expense and amortization was $214,000 and $219,000 for 1999 and 1998, respectively. 5. Accrued Expenses: As of February 28, 1999, accrued expenses consist of the following: Payroll and related employee benefits $ 259,000 Property taxes 975,000 IRS tax claim, pre-petition 344,000 Other liabilities 117,000 Interest Payable 534,000 ---------- $2,229,000 ========== 6. Long-Term Debt: As of February 28, 1999, long-term debt consists of the following: 7.5% automobile loan payable due in monthly installments, withscheduled maturities through February 2001 11,000 15% equipment finance agreement due in monthly installments, withscheduled maturities through March 2000 3,000 ------- $14,000 Less: current maturities (7,000) ------- $ 7,000 ======= Contractual Payment Requirements on all debt balances are as follows: 2000 $ 7,000 2001 7,000 ------- $14,000 At February 28, 1999, the carrying value of the Company's long-term debt approximated its estimated fair value based upon current borrowing rates for similar issues. 7. Other Long-Term Liabilities: As of February 28, 1999, other long-term liabilities consists of the following pre-petitioned items: Accrued Environmental Expenses $ 619,000 Accounts Payable-Pre-petition 1,173,000 IRS Tax Claim 61,000 County Property Tax Payable 453,000 ----------- $ 2,306,000 LESS: COST TO DISPOSE OF NON-OPERATING PLANT FACILITY $(1,745,000) ----------- NET $ 561,000 =========== -33- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. Other Long-Term Liabilities (continued): Contractual or estimated payment requirements on other long-term liabilities including amounts representing interest during the next five years and thereafter are as follows. It is reasonably possible that the estimates could change in the near term: Year Ending FEBRUARY 28 TOTAL 2000 $1,934,000 2001 400,000 2002 361,000 2003 390,000 2004 426,000 thereafter 911,000 --------- 4,422,000 Less amount representing interest (255,000) ---------- $4,167,000 ========== Imputed interest expense for fiscal years ended February 28, 1999 and February 28, 1998 amounted to $105,000 and $148,000 relating to accounts payable pre-petition. Included in year ending February 28, 1999 are as follow: Accrued Environmental Expenses $ 413,000 Accounts Payable-Pre-petition 202,000 IRS Tax Claim 344,000 County Property Tax Payable 975,000 ---------- $1,934,000 ========== 8. Income Taxes: At February 28, 1999, the Company has net operating loss carryforwards of approximately $ 9,491,000 that expire through 2019. Such net operating losses are available to offset future taxable income, if any. As the utilization of such operating losses for tax purposes is not assured, the deferred tax asset has been fully reserved through the recording of a 100% valuation allowance. Should a cumulative change in the ownership of more than 50% occur within a three-year period, there could be an annual limitation on the use of the net operating loss carryforward. Deferred tax assets are comprised of the following at February 28, 1999: Loss carryforwards $ 3,607,000 Environmental Reserve 408,000 Accounts Receivable Reserve 4,000 Inventory Reserves 4,623,000 ----------- Gross deferred tax asset 8,642,000 Deferred tax asset valuation allowance (8,642,000) ------------ Net deferred tax -- ----------- Net $ -- ----------- -34- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. Income Taxes (continued): A reconciliation of the provision for income taxes to the amount calculated using the statutory federal rate (35%) for fiscal year ended February 28, 1999 is as follows. 1999 1998 --------- --------- Income Tax Provision at Federal Statutory Rates $ 158,000 $ 68,000 State Taxes 24,000 11,000 Utilization of Net Operating Loss Carryforward (182,000) (79,000) --------- --------- Income Tax Provision $ -- $ -- ========= ========= 9. Stock Options: Pursuant to agreements dated October 20, 1992 and August 20, 1993, the Company's President was granted options which entitle him to purchase 8% of the common stock of the Company (175,636 shares at February 28, 1999, subject to adjustment as defined in the Agreement) for an aggregate exercise price of $21,955. Half of these options expire in 2002 and the other half expires in 2003. The options are fully vested at February 28, 1999. The Company has adopted SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION." As permitted by SFAS No. 123, the Company continues to follow the measurement provisions of accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and does not recognize compensation expense for its stock based incentive plan. On March 3, 1997, the Company adjusted the exercise price of its outstanding options to $0.156 per share. Had compensation cost for this modification been determined based on the fair value at the modification dates consistent with the methodology prescribed by SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro-forma amounts indicated below.
FOR THE YEAR ENDED FOR THE YEAR ENDED FEBRUARY 28, FEBRUARY 28, 1999 1998 ------------------ ------------------ Net income: As reported $ 476,000 $ 194,000 Pro-forma 476,000 167,000 Earnings per share: As reported - basic and diluted .23 .09 Pro-forma - basic and diluted .23 .07
The pro-forma amounts may not be indicative of future pro-forma income and earnings per share. The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions applied to grants in 1999 and 1998: 1998 ---- Dividend yields 0.0% Expected volatility 3.96 Risk-free interest rates 6.0% Expected life (in years) 5.5 -35- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. Stock Options (continued): Because the determination of the fair value of all options is based on the assumptions described in the preceding paragraph and, because additional option grants are expected to be made each year, the above pro-forma disclosures are not representative of pro-form effects on reported net income or loss for future years. 10. Employee Benefit Plans: The Company has a 401K and Profit Sharing Plan (the "Profit Sharing Plan") in which substantially all employees may participate after one year of service. Contributions to the Profit Sharing Plan by participants are voluntary. The Company may match participant's contributions up to 25% of 4% of each participant's annual compensation. In addition, the Company may make additional contributions at its discretion. The Company did not contribute to the Profit Sharing Plan during the fiscal years ended February 28, 1999 and February 28, 1998. 11. Export Sales and Major Customers: Revenues from domestic and export sales to unaffiliated customers are as follows: FISCAL YEAR FISCAL YEAR ENDED ENDED FEBRUARY 28, FEBRUARY 28, 1999 1998 ----------- ------------ Export sales: Europe $ 408,000 $ 543,000 Canada and Latin America 48,000 55,000 Far East and Middle East 245,000 60,000 United States 7,199,000 7,202,000 ---------- ---------- $7,900,000 $7,860,000 ========== ========== Sales to the Company's top three customers accounted for 61% of net sales for the year ended February 28, 1999 as compared with 55% of the Company's net sales for the year ended February 28, 1998. Sales to Raytheon Company accounted for 42% and 40% of net sales for the years ended February 28, 1999 and February 28, 1998 respectively. No other customers accounted for 10% or more of net sales. -36- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. Commitments and Contingencies: EMPLOYMENT AGREEMENT: In February 1993, the Company entered into an employment agreement with its President. This agreement provides, among other things, for annual compensation of $140,000, a bonus pursuant to a formula, plus cost of living increases through August 30, 1998. Under this bonus formula, the President is entitled to an annual bonus based upon the extent to which the Company's actual net profits before tax and gross revenues exceed budgeted amounts during each year of the term of his employment under the agreement. The budget is prepared each year by the Company under the President's supervision and submitted to the Board of Directors for approval. Certain ambiguities existed relating to the bonus formula, such that the amount of bonus that the President was entitled to for the years ended February 29, 1996 and February 28, 1997 was in dispute. Due to a variety of factors including, without limitation, these ambiguities and the Company's limited liquidity and losses since emergency from bankruptcy, no bonuses were determined to be payable for the year ended February 29, 1996 and February 28, 1997. However, in June of 1998, the Board of Directors approved a bonus payment to the President of $296,000 for the years ended February 29, 1996, February 28, 1997, and February 28, 1998. The Company and the President agreed that the President have not further claim for any bonus for the aforementioned fiscal years. Such $296,000 payment represents approximately $125,000 less than the amount that would have been due the President under his employment agreement if such ambiguities were resolved in his favor. This bonus was paid in cash in June 1998 and charged to expense in February 1998. In June of 1999, the Board of Directors approved a bonus payment to the President of $40,000 for the year ended February 28, 1999. This bonus was paid out in cash in June 1999 and charged to expense in February 1999. ENVIRONMENTAL MATTERS: The Order of Confirmation (the "Confirmation Order") approving the Company's Amended Plan of Reorganization with First Modification (the "Plan") was issued by the Bankruptcy Court on August 19, 1993 (the "Confirmation Date"), and incorporated a plan for future remediation of the two properties of the Company dependent upon the properties being sold and the purchase price being applied to remediation costs. One property is Lot 1 (the north parcel) of the property at 1177 Blue Heron Road in the City of Riviera Beach, Florida (the "Riviera Beach Property"), and the second is its former Port Salerno facility, S.E. Cove Road, Port Salerno, Martin County, Florida (the "Port Salerno Property"). Contemporaneously with the Confirmation Order, the Company and the State of Florida Department of Environmental Protection (the "FDEP") entered into a Stipulation for entry of a Consent Final Judgment in the Circuit Court of the Nineteenth Judicial Circuit of Florida in and for Martin County, Florida. The Consent Final Judgment, entered by the Court on October 21, 1993, provided that the Company would: (a) reimburse FDEP $200,000 for providing main and lateral water line extensions and property hookups to serve eight off-site properties presently impacted by the groundwater contamination emanating from the Port Salerno Property (paid as an administrative expense in accordance with the Confirmation Order); (b) remediate site soils and groundwater at and emanating from the Port Salerno Property; (c) address residual soil contamination and a limited, defined "hot spot" in the groundwater at and near the north end of the Riviera Beach Property; and (d) pay a final judgment of $102,860 to be paid to FDEP pursuant to the Plan in the manner and to the extent of the Company's payment of other unsecured creditor claims. Pursuant to the Confirmation Order, all existing security interests on these two properties, except real estate taxes, were removed. At the time, the properties were appraised by an MAI appraiser, as if uncontaminated, at $1,950,000 for the Riviera Beach Property and $1,650,000 for the Port Salerno Property. Under the Plan and Consent Final Judgment, the Company was directed to sell or lease the two properties and utilize the proceeds derived therefrom, together with certain insurance proceeds, to remediate both sites. All such proceeds were to be placed in escrow for that purpose. Under the Plan, any excess funds after all escrow obligations were satisfied were to belong to the Company. -37- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. Commitments and Contingencies (continued): At the time of the Plan and Consent Final Judgment, the Company's consultant estimated the costs of remediation pursuant to the Consent Final Judgment for the Port Salerno Property and for the Riviera Beach Property to be approximately $1,069,000 of which $1,032,000 is still outstanding and is included in current portion of accrued environmental expenses and other long-term liabilities in the accompanying balance sheet. The consultant estimated that remediation costs could be greater, particularly if further offsite wells became contaminated in Port Salerno and the affected properties must be supplied public water by further extension of the water lines. All residents who could be potentially affected by further groundwater plume movement in Port Salerno were notified of the pendency of the bankruptcy and that claims could be filed. The claims filed, except as set forth below, have been settled. The consultant did not estimate remediation costs were the USEPA to take the lead over the cleanup. The Company received a claim by an estate-owned property northwest and across Cove Road from the Port Salerno Property. The estate has asserted that the mailing address to which the bankruptcy notice was sent was in error. The estate has been advised that public water has been made available to its property and that the Company is prepared to settle for the sum of $10,000, to be paid as other unsecured credit claims are being paid. This offer was rejected. The claim is unresolved and is currently dormant. The Company's position has been that further off-site exposure to third party property owners at Port Salerno is limited by its Chapter 11 proceeding solely to its obligation for extension of public water lines to the affected property. It cannot now be estimated whether some future extension may be required, but the contaminated groundwater appears to move slowly and any remediation will likely entail off-site recovery wells to contain its further movement. The City of Riviera Beach previously settled its claim with the Company for cleanup of contamination of its wellfield, except for the "hot spot" to be addressed by the Company as required by the Consent Final Judgment. The unpaid balance of the settlement amount with the City was approved in the Confirmation Order, to be paid as and to the extent provided for other unsecured creditors. After notice, no other claims were filed in the bankruptcy proceeding related to offsite groundwater contamination associated with the Riviera Beach Property, and potential claims may have been extinguished thereby. Under the Plan, if funds to clean the properties were not available within 24 months of entry of the Consent Final Judgment, the Company, beginning in October 1995, was to make periodic payments into an escrow account to clean both properties based on the following schedule: 1. Commencing on the 25th month, $5,000 per month, and 2. Commencing on the 37th month, $7,500 per month, and 3. Commencing on the 49th month, $10,000 per month. Periodic funding was to have been suspended when funds available in escrow reached 125% of the estimated costs to complete remediation. The Plan does not require the Company to pay additional funds in excess of the schedule set forth above, except that if funds are not available in the escrow for that purpose, the Company must independently fund any further extension of public water supply lines in the vicinity of the Port Salerno Property. The Consent Final Judgment requires providing any such extension within a reasonable time. The prior payment to the state has extended the large water main to provide service to the area. The further extension would be for lateral extensions and individual property hookups. In October 1995, the Company advised the FDEP that it could pay only $1,000 per month into escrow, rather than the amounts specified by the Consent Final Judgment. Since then, the Company has paid $1,000 per month into the escrow for the properties. The total escrow amounts for the properties, as of February 28, 1999, is $43,000. -38- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. Commitments and Contingencies (continued): Under the Plan and Consent Final Judgment, the Company's consultant undertook additional assessment of the Riviera Beach Property and received FDEP approval of the consultant's contamination assessment report recommendation that no further soil remediation is required. Similarly, the consultant completed soil assessment work at the Port Salerno Property and FDEP agreed with the consultant's submitted data and analysis that no further soil remediation is required. Despite the Plan and Consent Final Judgment and the Company's repeated efforts to negotiate a deferral of action by the United States Environmental Protection Agency ("USEPA") to allow the Company to sell the properties, the USEPA re-evaluated the Riviera Beach and Port Salerno properties for potential listing on the Superfund National Priority List ("NPL"). During 1997, USEPA required the Company to sign site access agreements permitting USEPA to perform expanded site assessments at the properties. The Company was able to secure a 90-day deferral of further NPL listing evaluation in an attempt to allow prospective purchasers to complete due diligence on the properties. USEPA subsequently published notice of its proposal to list the Port Salerno Property on the NPL and listed it on July 27, 1998. By letter dated June 16, 1998, USEPA required the Company to consent to allow USEPA access to the Riviera Beach Property to complete a Remedial Investigation. By letter dated September 8, 1998, USEPA notified the Company that it would not defer cleanup of the Riviera Beach Property to a FDEP lead. USEPA stated, however, that it would defer listing the Riviera Beach Property on the NPL if prior owner/operator Honeywell, Inc. agreed to proceed with and fund a USEPA-lead voluntary Superfund cleanup. USEPA expressed willingness to negotiate a prospective purchaser agreement with any purchaser interested in redeveloping the Riviera Beach or Port Salerno properties. USEPA is currently conducting a fund lead Remedial Investigation/Feasibility Study (RI/FS) of the Port Salerno Property. The Company has signed a consent to access and its cooperating with the agency. USEPA anticipates completing the RI/FS during the year 2000. USEPA and Martin County are evaluating any impact to off-site private drinking water wells. USEPA has completed a draft Remedial Investigation and Baseline Risk Assessment for the Riviera Beach Property. Honeywell, Inc. has signed an Administrative Order on Consent to perform the Feasibility Study for the Riviera Beach Property. The Company has signed for purposes of granting USEPA and Honeywell access. Honeywell was the predecessor owner and operator of the property during a period when pollution occurred and is therefore jointly and severally liable to USEPA. Honeywell's remedial action Feasibility Study (FS) may be completed in 1999. At that time, USEPA will propose a plan of action to the community, to clean up the contamination. A public meeting will be held and comments on the proposed plan will be accepted. Based on the comments, USEPA may revise the plan and prepare a remedial action Record of Decision (ROD). USEPA expects to sign an ROD for the Riviera Beach Property before January 2000. Due to the nature of ground water contamination sites in Florida, cleanup is expected to take decades. The Company has entered into negotiations with USEPA to settle USEPA's cost claims against it arising from the costs USEPA incurs in remediating or overseeing the remedial activities of others in connection with the properties. There can be no assurance as to the outcome of such negotiations. The Company has provided full information of its financial condition and has asked that except for the value of the properties upon sale, it has an inability to pay any USEPA claim under the Superfund's ability to pay mechanism. The Company offered to sell the properties at market value and after deducting its costs including $125,000 attorneys fees associated with the Riviera Beach Property and $75,000 attorneys fees associated with the Port Salerno Property, 5% broker's fee, back taxes plus interest, and the closing costs, to pay the net proceeds of the sales to USEPA to discharge all USEPA claims. USEPA has agreed to consider entering into prospective purchaser agreements protecting the property purchasers from USEPA cost recovery claims and third party contribution claims, but is not willing to deduct legal fees of more than $25,000 and $20,000 from the Riviera Beach and Port Salerno properties, respectively. -39- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. Commitments and Contingencies (continued): Since this leaves the Company no way to pay its legal fees to its outside environmental counsel, that counsel has had to withdraw from the legal representation. Currently, the Riviera Beach Property is under contract with National Land Company ("NLC") for market value of approximately $1,000,000. USEPA is currently negotiating a prospective purchaser agreement with NLC, subject to appropriate deductions from the purchase price paid to USEPA, for back property taxes and interest, legal fees in the amount of $25,000, 5% broker's fee, and closing costs. Under these terms, NLC would pay USEPA $419,000 in net purchase proceeds. USEPA is also seeking to have the environmental escrowed monies relating to the Riviera Beach Property paid over to it by FDEP and the Company to defray its cleanup costs. USEPA believes that it can compel Honeywell to complete the cleanup of the Riviera Beach Property. USEPA counsel had advised Solitron's counsel that once a prospective purchaser agreement is signed, the property is sold, and USEPA receives the proceeds ($419,000) plus approximately $20,000 from the Riviera Beach escrow account, USEPA will issue the Company and Honeywell a letter stating that it will not hold them liable for any additional past response costs for the Riviera Beach site. However, until the prospective purchaser agreement is signed by both the USEPA and the prospective buyer and the sale is consummated, there can be no guarantee that such transaction and release will take place. USEPA advised the Company that it is unwilling to resolve its past and future cleanup costs in relation to the Port Salerno site under the ability to pay mechanism until the Port Salerno property is sold. It is the Company's position that any USEPA cost recovery claims are discharged in the prior bankruptcy and that USEPA is bound by the terms of the remediation approved under the Amended Order of Confirmation in Bankruptcy. Though USEPA received notice of Solitron's Bankruptcy, has knowledge of FDEP's claim and participation in the Bankruptcy, and that it likewise had already incurred costs to investigate the properties, USEPA did not file a claim in the Bankruptcy, apparently deferring to FDEP's claims regarding the remediation of the properties. USEPA does not agree with the Company's conclusion that its claims have been discharged in the prior bankruptcy. It is the Company's position that its legal exposure to Honeywell for contribution to cleanup costs has been resolved in the prior bankruptcy, since Honeywell's claims were filed and resolved in bankruptcy. The Company's former facility in Jupiter, Florida was sold to Philips Electronics in 1982. In 1995 the Jupiter facility was the subject of a preliminary assessment by the USEPA. After its investigation, USEPA deferred any further remedial action to an FDEP lead. The Company's environmental legal counsel has been advised that this facility is being remediated and such remediation will be completed under a consent order with FDEP. By letter dated May 17, 1999, Philips put the Company on notice that it will seek to exercise its indemnity rights against the Company under the 1982 purchase and sale agreement. It is the Company's position that Philips' notice of and participation in the prior bankruptcy has discharged Philips' claims. During the fiscal year ended February 28, 1999, the Company has spent approximately $13,000 for compliance with environmental laws (federal, state and local). As part of this effort, the Company retained the services of an environmental consultant who assisted in verifying that the Company operates in compliance with all pertinent environmental laws and regulations. -40- SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. Commitments and Contingencies (continued): OPERATING LEASES: The Company has entered into a lease agreement for its production facility. The lease has a 10-year term expiring in the year 2001. The lease is subject to escalations based on operating expenses. Future minimum lease payments for all non-cancelable operating leases are as follows: YEAR ENDING FEBRUARY 28 AMOUNT ----------------------- -------- 2000 245,000 2001 250,000 2002 210,000 -------- Total $705,000 ======== Total rent expense was $ 283,000 for the year ended February 28, 1999 as compared with $270,000 for the year ended February 28, 1998. In connection with the Vector Purchase Agreement, the Company entered into a sublease agreement whereby Vector has agreed to reimburse the Company for one-third of the above noted rental obligations in exchange for Vector's use of approximately one-third of the facility. Since January 1997, Vector is making such payments directly to the landlord. -41- PART III ITEM 8. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The table below sets forth the name, age, and position of the directors and executive officers of the Company. The table below also sets forth the year in which each of such directors was first elected to the Board and the year in which the term of each of such directors expires. On August 26, 1996, the Board of Directors elected Mr. Jacob Davis and Mr. Joseph Schlig as directors. Pursuant to the Company's Certificate of Incorporation, the Board of Directors is divided into three classes, each of which consists of (as nearly as may be possible) one third of the directors. Directors are elected for three-year terms. Pursuant to the Plan of Reorganization, all shares of Common Stock issued to Vector original participants and to the holders of allowed unsecured claims must be voted for all purposes (including the election of members of the Board of Directors) as directed by the Board of Directors. Pursuant to the Plan of Reorganization, Vector owns 25% and the holders of allowed unsecured claims own an aggregate of 40% of all shares of Common Stock issuable pursuant to the Plan of Reorganization (other than shares issuable to Mr. Saraf upon the exercise of options granted prior to the Effective Date). On October 4, 1994, the Company and Vector agreed that 25% of Vector's stock would be redistributed between six parties (see Note 2 the Consolidation Financial Statements). Five original Vector participants continue to be subject to the voting restrictions as long as they or their affiliates hold Solitron stock.
YEAR FIRST TERM AS BECAME DIRECTOR NAME AGE POSITION WITH SOLITRON DIRECTOR EXPIRES(1) - ---- --- ---------------------- -------- ---------- Shevach Saraf 56 Chairman of the Board, 1992 2000 Chief Executive Officer, President and Treasurer Mr. Jacob Davis 62 Director 1996 2001 Mr. Joseph Schlig 71 Director 1996 1999
Mr. Shevach Saraf has been President of the Company since November 1992, Chief Executive Officer of the Company since December 1992 and Chairman of the Board since September 1993. He has 35 years experience in operations and engineering management with electronics and electromechanical manufacturing companies. Before joining Solitron in 1992, Mr. Saraf was Vice President of Operations and a member of the Board of Directors of Image Graphics, Inc., a military and commercial electron beam recorder manufacturer based in Shelton, CT. As head of the Company's engineering, manufacturing materials and field service operations, he turned around the firm's chronic cost and schedule overruns to on-schedule and better-than-budget performance. Earlier, he was President of Value Adding Services, a management consulting firm in Cheshire, CT. The Company provided consulting and turnaround services to electronics and electromechanical manufacturing companies with particular emphasis on operations. From 1982-1987, Mr. Saraf was Vice President of operations for Harmer Simmons Power Supplies, Inc., a power supplies manufacturer in Seymour, CT. He founded and directed all aspects of the Company's startup and growth, achieving $12 million in annual sales and a staff of 180 employees. Mr. Saraf also held executive positions with Photofabrication Technology, Inc. and Measurements Group of Vishay Intertechnology, Inc. Born and raised in Tel Aviv, Israel, he served in the Israeli Air Force from 1960-1971 as an electronics technical officer. He received his master's in business administration from Rensselaer Polytechnic Institute, Troy, NY, and his master's in management from Rensselaer at Hartford (formerly known as Hartford [CT] Graduate Center). He also received associate degrees from the Israeli Institute of Productivity, the Teachers & Instructors Institute, and the Israeli Air Force Technical Academy. (1) Directors' terms expire when successors are elected at the next annual meeting of shareholders. Mr. Jacob (Jay) A. Davis is Vice President of Business Planning and Finance for AET, Inc, a developing, Melbourne, Florida based software company. In 1994 and 1995, he was Visiting Professor in Engineering Management at Florida -42- Institute of Technology. He is presently Vice-Chairman of the Brevard SCORE Chapter and devotes significant time to counseling with local businesses. He is an active member of the International Executive Service Corps (IESC) serving in South Russia during May and June of 1996. Prior to joining AET, Mr. Davis was with Harris Semiconductor for 26 years. During the last 12 years with Harris Semiconductor, he was Vice President-General Manager of the Military and Aerospace Division, the Custom Integrated Circuits Division and the Harris Microwave Division. Dr. Davis has served in a variety of other capacities at Harris Semiconductor including Vice President of Engineering, Director of Manufacturing, Director of Special Services, and Device Research Engineer. Mr. Davis received a doctor of philosophy from Purdue University in 1969 and a bachelors of science in electrical engineering from North Carolina State University. He is a Member of the IEEE and the Electrochemical Society, and has served on a variety of advisory boards for several Universities. He holds four patents and has given a number of overview papers and invited presentations at several conferences. Mr. Joseph Schlig was elected a Director of the Company on August 26, 1996. He is Managing Director of Fairhaven Associates, a professional consulting firm supporting small and medium size businesses in strategic planning; financial, marketing and operations management; and organizational development. From 1995 to 1997, Mr. Schlig also served as Chief Financial Officer of Industrial Technologies, Inc. For the prior five years, Mr. Schlig was a business consultant to private companies and to the State of Connecticut Department of Economic Development. Mr. Schlig has many years of business experience including Director of Marketing, Latin America for ITT and Director of International Operations for Revlon. Mr. Schlig has also operated several small/medium size companies in both the public and private sectors. He also serves as a director of the Trumbull Technology Foundation, the Bridgeport Economic Development Corporation, and the MIT Enterprise Forum of Connecticut. Mr. Schlig has an engineering degree from the Stevens Institute of Technology and an MBA from the Harvard Business School where he was a Baker Scholar. Mr. Schlig is a member of the Audit and Compensation Committees. COMMITTEES OF THE BOARD The Audit Committee provides assistance to the Board of Directors in fulfilling its responsibilities relating to corporate accounting and reporting practices and maintains a direct line of communication among the directors, the Company's internal accounting staff and the Company's independent accountants. In addition, the Audit Committee confers with the Company's independent accountants to review the plan and scope of their proposed audit as well as their findings and recommendations upon the completion of the audit. The members of the Audit Committee were Mr. Schlig, Chairman, and Mr. Davis. During the year ended February 28, 1999, the Audit Committee met twice. Mr. Joseph Schlig and Mr. Jacob Davis served on the Compensation Committee (Mr. Davis chairs the committee). Mr. Saraf serves on the Nominating Committee. Mr. Saraf and Mr. Davis serve on the Executive Committee. Mr. Davis and Mr. Schlig serve on the Capital Formation/Acquisition Committee. The Compensation Committee met once during the ear ended February 28, 1999. None of these other committees met during the year ended February 28, 1999. During the year ended February 28, 1999, the Board of Directors met 4 times, and each director attended at least 75% of the meetings held during the period he was a director. SECTION 16(A) COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires directors and executive officers of the Company and ten percent shareholders of the Company to file initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company with the Securities and Exchange Commission. Directors, executive officers, and ten- percent shareholders are required to furnish the Company with copies of all Section 16(a) forms they file. Based upon a review of the copies of Section 16(a) filings furnished to the Company and written representations from the Company's current executive officers and directors, the Company believes that during the fiscal year ended February 28, 1999 directors and executive officers of the Company complied with Section 16(a) filing requirements applicable to them, except that the Company's Chief Financial Officer, who served in the Company between October 31, 1995 and January 2, 1998, did not make any Section 16(a) filings.. On January 20, 1997 Bruce Paul filed a Schedule13D, but did not, to the Company's knowledge, file a Form 3. -43- ITEM 9. EXECUTIVE COMPENSATION Summary Compensation Table The following table provides certain summary information concerning compensation paid by the Company, to or on behalf of the Company's Chief Executive Officer for the fiscal years ended February 28, 1999, February 28, 1998, February 28, 1997, February 29, 1996, February 28, 1995, and February 28, 1994.
LONG-TERM COMPENSATION ---------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ---------------------------------- --------------------------------- YEAR OTHER ENDED ANNUAL RESTRICTED ALL OTHER NAME AND FEBRUARY COMPEN- STOCK OPTIONS/ LTIP COMP- PRINCIPAL POSITION(1) 28/ 29 SALARY ($) BONUS ($) SATION($) AWARDS($) SARS(#) PAYOUTS($) ENSATION($) - --------------------- -------- ---------- --------- --------- --------- -------- ---------- ----------- Shevach Saraf 1998 153,063 -0- 30,715 -0- -0- -0- -0- Chairman of the Board., 1999 167,477 296,000 26,592 -0- -0- -0- -0- Chief Executive Officer, President and Treasurer
(1) Except for the Chief Executive Officer, no executive officer of the Company received any compensation for acting in such capacity and, therefore, none are included herein. Reflects one-for-ten reverse stock split effective October 12, 1993. (2) Shevach Saraf has been President of the Company since November 1992, Chief Executive Officer since December 1992 and Chairman of the Board since September 1993. Shevach Saraf is a party to an Employment Agreement with the Company, which provides, among other things, for minimum annual compensation of $140,000; a bonus formula (for discussion on the bonus formula see "Employment Agreement" under section 13. Commitments and Contingencies, resulting in a $296,000 bonus paid to Mr. Saraf in June 1998); plus annual cost of living increases equal to the consumer price index average; the grant of incentive stock options to purchase 8% of the shares of the Company's Common Stock on a fully diluted basis. The Employment Agreement prohibits Mr. Saraf from competing with the Company during his employment and for one year thereafter. The Employment Agreement expired on August 30, 1998, and was automatically extended to August 30, 1999 as stipulated in the agreement. On June 7, 1999, the Compensation Committee approved payment of $40,000 to Mr. Saraf for fiscal year ended February 28, 1999. Executive officers of the Company may also participate in the Company's 1987 Stock Option Plan, the Company's Deferred Compensation Plan and the Company's Employee 401-K and Profit Sharing Plan (the "Profit Sharing Plan"). During the fiscal year ended February 28, 1997, no amounts were deferred by executive officers under the Company's Deferred Compensation Plan and the Company did not match any employee contributions to the Profit Sharing Plan. -44- OPTION/SAR GRANTS TABLE No Stock options were granted during the fiscal year ended February 28, 1999. Certain stock options granted at a meeting of the Board of Directors held on March 14, 1994 were issuable upon the condition that the shareholders approved such issuance prior to March 14, 1995. As a result of a lack of shareholder approval prior to this date, all such option grants are void. No awards were made under any long-term plan during fiscal year end February 28, 1999. The following table sets forth certain summary information covering unexercised options to purchase the Company's Common Stock as of February 28, 1999 held by the Company's Chief Executive Officer. The Company's Chief Executive Officer did not exercise any stock options during the fiscal year ended February 28, 1999.
VALUE OF UNEXERCISED IN-THE-MONEY SHARES NUMBER OF UNEXERCISED IN THE MONEY NAME AND ACQUIRED OR VALUE OPTIONS HELD AT OPTIONS HELD AT PRINCIPAL POSITION EXERCISED(#) RECEIVED FISCAL YEAR END(#) FISCAL YEAR END($) - ------------------ ------------ -------- -------------------------- -------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- Shevach Saraf, Chairman of the Board, Chief Executive Officer, President and Treasurer -0- -0- 175,324 -0- -0- -0- Mr. Jacob Davis -0- -0- 4,000 -0- -0- -0- Mr. Joseph Schlig -0- -0- 4,000 -0- -0- -0-
DIRECTOR REMUNERATION Each director who is not employed by the Company receives $1,000 for each meeting of the Board he attends and $250 for each committee meeting he attends on a date on which no meeting of the Board is held. In addition, all out-of-pocket expenses incurred by a director in attending Board or committee meetings are reimbursed by the Company. Total fees paid to all directors for attendance at Board and committee meetings amounted to $6,000 for the fiscal year ended February 28, 1999. In consideration of their services to the Company and its shareholders during the 1997 fiscal year, and to provide incentive for their continued efforts to build shareholder value, the Company will issue to its Board members who are not employed by the Company options to purchase 4,000 shares of the Company's common stock, at a price equal to the closing price of the Company's common stock on March 3, 1997 ($0.156), with such options to vest over a period of twelve months, and otherwise upon the terms and subject to the conditions of the Company's existing Stock Option Plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION From August 26, 1996, Mr. Davis and Mr. Schlig served as its Compensation Committee and made all compensation decisions during that period. -45- ITEM 10. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of Common Stock as of April 30, 1998 by (i) all directors, (ii) all officers and directors of the Company as a group, and (iii) each person known by the Company to beneficially own in excess of 5% of the Company's outstanding common stock. The Company does not know of any beneficial owner of more than 5% of the outstanding shares of Common Stock other than as shown below. Unless otherwise indicated below, each shareholder has sole voting and investment power with respect to the shares beneficially owned. Except as noted below, all shares were owned directly with sole voting and investment power. PERCENTAGE OF NUMBER OF SHARES OUTSTANDING NAME BENEFICIALLY OWNED (1) SHARES (1) ---- ---------------------- ------------ Shevach Saraf(2) 220,154 (4) 10.8% 3301 Electronics Way West Palm Beach, FL 33407 All executive officers and 220,154 (4) 10.8% directors as a group (3 persons) Inversiones Globales, S.A. (3) 273,943 13.5% Board of Trustees of the 336,407 16.5% Policemen and Firemen Retirement System of the City of Detroit Bruce Paul, Purchase, NY 150,000 7.4% (1) For purposes of this table, beneficial ownership is computed pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended; the inclusion of shares beneficially owned should not be construed as an admission that such shares are beneficially owned for purposes of Section 16 of such Act. (2) Pursuant to the terms of the Plan of Reorganization, the Company has issued Mr. Saraf 10% of the issued and outstanding Common Stock. (3) Pursuant to the terms of the Plan of Reorganization, the Company issued to Vector participants and successors that number of shares of Common Stock equal 25% of all shares of Common Stock issued and outstanding after giving effect to all issuances contemplated by the Plan of Reorganization (other than shares issuable to Mr. Saraf upon the exercise of options granted to him on or prior to the Effective Date). Vector participants must vote such shares as directed by the Board of Directors and, in general, has agreed to take no action hostile to the Company such as to commence or assist in a proxy contest or tender offer. One of Vector's participants sold his stock holdings to Inversiones Globables, S.A. (4) Excludes presently exercisable options held by the Board of Directors. ITEM 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to the Plan of Reorganization, the Company and Vector, a holder of 25% of the Company's outstanding Common Stock, entered into a number of transactions which are described under "Item 1 - Business - Bankruptcy Proceedings." -46-
ITEM 12. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K PAGE ----- (a)(1) The following financial statements are included in Part II, Item 7. Reports of Independent Certified Public Accountants 23-24 Financial Statements: 25 Consolidated Balance Sheet - February 29, 1999 Consolidated Statements of Operations - For the year ended February 28, 26 1998 and February 28, 1997 Consolidated Statements of Stockholders' Equity - For the year ended 27 February 28, 1999 and February 28, 1998 Consolidated Statements of Cash Flows - For the years ended February 28 28, 1999 and February 28, 1998 Notes to Consolidated Financial Statements 29-41
-47- (2) Exhibits: 2.1 Debtors' Fourth Amended Plan of Reorganization of the Company (incorporated by reference to the Company's Form 8-K, dated September 3, 1993, as amended by the Company's Form 8-K/A, dated October 12, 1993). 2.2 Debtors' First Modification of Fourth Amended Plan of Reorganization of the Company (incorporated by reference to the Company's Form 8-K, dated September 3, 1993, as amended by the Company's Form 8-K/A, dated October 12, 1993). 2.3 Order Confirming Debtors' Fourth Amended Plan of Reorganization of the Company (incorporated by reference to the Company's Form 8-K, dated September 3, 1993, as amended by the Company's Form 8-K/A, dated October 12, 1993). 2.4 Consent Final Judgment of the Company (incorporated by reference to the Company's Form 8-K, dated September 3, 1993, as amended by the Company's Form 8-K/A, dated October 12, 1993). 3.1 Certificate of Incorporation of the Company (incorporated by reference to the Company's Form 10-K for the year ended February 28, 1993). 3.2 Bylaws of the Company (incorporated by reference to the Company's Form 10-K for the year ended February 28, 1993). 10.1 1987 Incentive Stock Option Plan (incorporated by reference to the Company's Form 10-K for the years ended February 28, 1994 and February 28, 1995). 10.2 Purchase Agreement, dated October 5, 1992, by and among Solitron Devices, Inc. Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.) and Vector Trading and Holding Corporation, along with and as amended by: (i) Amendment Number One to Purchase Agreement, dated October 28, 1992, by and among Solitron Devices, Inc., Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.) and Vector Trading and Holding Corporation; (ii) Order, dated December 23, 1992, Authorizing the Sale of Certain of the Debtors' Assets to Vector Trading and Holding Corporation; (iii) Amendment Number Two to Purchase Agreement. dated February 28, 1993, by and among Solitron Devices, Inc., Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.) and Vector Trading and Holding Corporation; and (iv) Order, dated March 4, 1993, Granting Vector Trading and Holding Corporation's Motion for Entry of Amended Order Authorizing Sale of Certain of the Debtors' Assets (incorporated by reference to the Company's Form 10-K for the year ended February 28, 1993). 10.3 Shared Services and Equipment Agreement, dated February 28, 1993, by and among Solitron Devices, Inc., Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.) and Solitron/Vector Microwave Products, Inc. (incorporated by reference to the Company's Form 10-K for the year ended February 28, 1993). 10.4 Sublease, dated March 1, 1993, by and between Solitron Devices, Inc. and Solitron/Vector Microwave Products, Inc. (incorporated by reference to the Company's Form 10-K for the year ended February 28, 1993). 10.5 Commercial Lease Agreement, dated January 1, 1992, between William C. Clark, as Trustee, and Solitron Devices, Inc. (incorporated by reference to the Company's Form 10-K for the year ended February 28, 1993). -48- 10.6 Employment Agreement, dated February 3,1993, between Solitron Devices, Inc. and Shevach Saraf (incorporated by reference to the Company's Form 10-K for the year ended February 28, 1993). 21 List of Subsidiaries of the Company. 27 Financial Data Schedule (b) Reports on Form 8-K - one, filed with the SEC on April 8, 1999. SEC file number 001-04978. -49- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Solitron and in the capacities and on the date indicated. SIGNATURE TITLE DATE - --------- ----- ---- /s/ SHEVACH SARAF Chairman, June 11, 1999 - ------------------- President, and Shevach Saraf Chief Executive Officer /s/ JACOB DAVIS Director June 11, 1999 - ------------------- Jacob Davis /s/ JOSEPH SCHLIG Director June 11, 1999 - ------------------- Joseph Schlig -50- EXHIBIT INDEX EXHIBIT DESCRIPTION 21 List of Subsidiaries of the Company. 27 Financial Data Schedule. -51- EX-21 2 Exhibit 21
SOLITRON DEVICES, INC. SUBSIDIARIES OF THE REGISTRANT PERCENTAGE OF VOTING SECURITIES OWNED STATE OF ACTIVE BY REGISTRANT INCORPORATION DIVISION -------------------- ------------- -------- Registrant: Solitron Devices, Inc. Delaware * Subsidiaries of Registrant: Solitron Specialty Products, Inc. 100 Delaware Array Devices, Inc. 100 California Solidev International Sales Corporation 100 New York Solitron International, Inc. 100 Virgin Islands Solidev Warenvertriebs GmbH 100 Germany
All subsidiaries are included in the consolidated financial statements: Solidev, Ltd. England, and Solidev (H.K.) Ltd., Hong Kong were dissolved. All unnamed subsidiaries and other affiliates when considered in the aggregate as a single subsidiary would not constitute a significant subsidiary. As none of them are active, no separate financial statements are submitted for any subsidiary. EX-27 3
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOLITRON DEVICES, INC. AND SUBSIDIARIES FORM 10-KSB FOR THE YEAR ENDED FEBRUARY 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT 12-MOS FEB-28-1999 MAR-01-1998 FEB-28-1999 784,000 0 1,123,000 (11,000) 2,737,000 4,755,000 1,904,000 (1,317,000) 7,170,000 3,450,000 0 20,000 0 0 0 7,170,000 7,900,000 7,900,000 6,009,000 7,288,000 (18,000) 0 154,000 476,000 0 476,000 0 0 0 476,000 0.23 0.23
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