UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended February 29, 2004
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File No. 1-4978
SOLITRON DEVICES, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 22-1684144
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(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
3301 Electronics Way, West Palm Beach, Florida 33407
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (561) 848-4311
Securities registered under 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $7,690,000.
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 14, 2004, was approximately $1,245,811.
The number of shares outstanding of each of the issuer's classes of common
stock, as of June 14, 2004: 2,076,351 shares of common stock, par value $.01 per
share.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format:
Yes [_] No [X]
1
PART I
ITEM 1. DESCRIPTION OF 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 power MOS
field effect transistors ("Power MOSFETS") and other related products. Most of
the Company's products are custom made pursuant to contracts with customers
whose end products are sold to the United States government. Other products,
such as Joint Army/Navy ("JAN") transistors, diodes and Standard Military
Drawings ("SMD") voltage regulators, are sold as standard or catalog items.
The Company was incorporated under the laws of the State of New York in 1959,
and reincorporated under the laws of the State of Delaware in August 1987.
PRODUCTS
The Company designs, manufactures and assembles bipolar and MOS power
transistors, power and control hybrids, junction and Power MOSFETs, field effect
transistors and other related products.
Set forth below by principal product type are the percentage (i) contributions
to the Company's total sales of each of the Company's principal product lines
for the fiscal year ended February 29, 2004 and for the fiscal year ended
February 28, 2003 and (ii) contributions to the Company's total order backlog at
February 29, 2004 and February 28, 2003.
% of Total Sales % of Total Sales Backlog Backlog
for Fiscal Year Ended for Fiscal Year Ended at at
February February February February
Product 29, 2004 28, 2003 29, 2004 28, 2003
------- -------- -------- -------- --------
Power Transistor 18% 17% 14% 18%
Hybrids 59% 53% 66% 62%
Field Effect Transistors 5% 6% 3% 5%
Power MOSFETS 18% 24% 17% 15%
-------- -------- -------- --------
100% 100% 100% 100%
The Company's backlog at February 29, 2004 and revenue for the year ended
February 29, 2004 reflect demand for the Company's products at such date and for
such period. For more information, see "Backlog". The variation in the
proportionate share of each product line for each period reflects changes in
demand, 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 as active electronic
components. Active electronic components are those that control and direct the
flow of electrical current by means of a control signal such as a voltage or
current. The Company's active electronic components include bipolar transistors
and MOS transistors.
It is customary to subdivide active electronic components into those of a
discrete nature and those, which are non-discrete. Discrete devices contain one
single semiconductor element; non-discrete devices consist of integrated
circuits or hybrid circuits, which contain two or more elements, either active
or passive, interconnected to make up a selected complete electrical circuit. In
the case of an integrated circuit, a number of active and passive elements are
incorporated onto a single silicon chip. A hybrid circuit, on the other hand, is
made up of a number of individual components that are mounted onto a suitable
surface material, interconnected by various means, and suitably encapsulated.
Hybrid and integrated circuits can either be analog or digital; presently, the
Company manufactures only analog components. The Company's products are either
standard devices, such as catalog type items (e.g., transistors
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and voltage regulators), or application-specific devices, also referred to as
custom or semi-custom products. The latter are designed and manufactured to meet
a customer's particular requirements. For the fiscal year ended February 29,
2004 approximately 90% of the Company's sales have been of custom products, and
the remaining 10% have been of standard or catalog products.
Approximately 93% of the semiconductor components produced by the Company are
manufactured pursuant to approved Source Control Drawings (SCD) from the United
States government's prime contractors; the remainder are primarily JAN qualified
products approved for use by the military. The Company's semiconductor products
are used as components of military, commercial and aerospace electronic
equipment, such as ground and airborne radar systems, power distribution
systems, missiles, missile control systems and spacecraft. The Company's
products have been used on the space shuttle and on spacecraft sent to the moon,
to Jupiter (on Galileo) and, most recently, to Mars (on Global Surveyor and Mars
Sojourner). Approximately 94% of the Company's sales have historically been
attributable to contracts with customers whose products are sold to the United
States government. The remaining 6% of sales are for non-military, scientific
and industrial applications.
Custom products are typically sold to the US Government and defense or aerospace
companies such as Raytheon, Lockheed Martin, Smith Industries, Harris, and
Northrop Grumman, while standard products are sold to the same customer base and
to the general electronic industry and incorporate such items as power supplies
and other electronic control products. The Company has standard and custom
products available in all of its major product lines.
The following is a general description of the principal product lines
manufactured by the Company.
Power Transistors:
Power transistors are high current and/or high voltage control devices commonly
used for active gain applications in electronic circuits. The Company
manufactures a large variety of power bipolar transistors for applications
requiring currents in the range of 0.1A to 150A or voltages in the range of 30V
to 1000V. The Company employs over 60 types of silicon chips to manufacture over
500 types of power bipolar transistors and is currently expanding this line in
response to increased market demand resulting from other companies' (e.g.,
Motorola) departure from the military market. The Company also manufactures
power diodes under the same military specification. Additionally, it
manufactures power N-Channel and P-Channel Power MOSFET transistors and is
continuously expanding that line in accordance with customers' requirements. The
Company is qualified to deliver these products under MIL-PRF-19500 in accordance
with JAN, JANTX and JANTXV. JAN, JANTX AND JANTXV denotes various quality
military screening levels. Some of these parts made by the company are custom
or standard.
The Company has been certified and qualified since 1968 under MIL-PRF-19500 (and
its predecessor) standards promulgated by the Defense Supply Center Columbus
("DSCC"). These standards specify the uniformity and quality of bipolar
transistors and diodes purchased for United States military programs. The
purpose of the program is to standardize the documentation and testing for
bipolar semiconductors for use in United States military and aerospace
applications. Attainment of certification and/or qualification to MIL-PRF-19500
requirements is important since it is a prerequisite for a manufacturer to be
selected to supply bipolar semiconductors for defense-related purposes.
MIL-PRF-19500 establishes definite criteria for manufacturing construction
techniques and materials used for bipolar semiconductors and assures that these
types of devices will be manufactured under conditions that have been
demonstrated to be capable of continuously producing highly reliable products.
This program requires a manufacturer to demonstrate its products' performance
capabilities. A manufacturer receives certification once its Product Quality
Assurance Program Plan is reviewed and approved by DSCC. A manufacturer receives
qualification once it has demonstrated that it can build and test sample product
in conformity with its certified Product Quality Assurance Program Plan.
Continuing to maintain MIL-PRF-19500 qualification is expected to improve the
Company's business posture by increasing product marketability.
Hybrids:
Hybrids are compact electronic circuits that contain a selection of passive and
active components mounted on printed substrates and encapsulated in appropriate
packages. The Company manufactures thick film hybrids, which generally contain
discrete semiconductor chips, integrated circuits, chip capacitors and thick
film or thin film resistors. Most of the hybrids are of the high-power type and
are custom manufactured for military and aerospace systems. Some of the
Company's hybrids include high power voltage regulators, power amplifiers, power
drivers, boosters and controllers. Hybrids manufactured by the Company are
custom or standard.
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The Company has been certified (since 1990) and qualified (since 1995) under
MIL-PRF-38534 Class H (and its predecessor) standards promulgated by the DSCC.
These standards specify the uniformity and quality of hybrid products purchased
for United States military programs. The purpose of the program is to
standardize the documentation and testing for hybrid microcircuits for use in
United States military and aerospace applications. Attainment of certification
and/or qualification to MIL-PRF-38534 Class H requirements is important since it
is a prerequisite for a manufacturer to be selected to supply hybrids for
defense-related purposes. MIL-PRF-38534 Class H establishes definite criteria
for manufacturing construction techniques and materials used for hybrid
microcircuits and assure that these types of devices will be manufactured under
conditions that have been demonstrated to be capable of continuously producing
highly reliable products. This program requires a manufacturer to demonstrate
its products' performance capabilities. Certification is a prerequisite of
qualification. A manufacturer receives certification once its Product Quality
Assurance Program Plan is reviewed and approved by DSCC. A manufacturer receives
qualification once it has demonstrated that it can build and test a sample
product in conformity with its certified Product Quality Assurance Program Plan.
Maintaining MIL-PRF-38534 Class H qualification is expected to improve the
Company's business posture by increasing product marketability.
Voltage Regulators:
The Company also qualified a line of voltage regulators in accordance with Class
M of MIL-PRF-38535 Class M, which allows it to sell these products in accordance
with SMD specifications published by DSCC. The Company also makes standard and
custom voltage regulators.
Field Effect Transistors:
Field effect transistors are surface-controlled devices where conduction of
electrical current is controlled by the electrical potential applied to a
capacitively coupled control element. The Company manufactures about 30
different types of junction and MOS field effect transistor chips. They are used
to produce over 350 different field effect transistor types. Most of the
Company's field effect transistors conform to standard Joint Electronic Device
Engineering Council designated transistors, commonly referred to as standard 2N
number types. The Company is currently expanding its product offering. The
Company is qualified to deliver these products under MIL-PRF-19500. These
devices can be custom or standard.
MANUFACTURING
The Company's engineers design its transistors, diodes, field effect transistors
and hybrids, as well as other customized products, based upon requirements
established by customers, with the cooperation of the product and marketing
personnel. The design of non-custom or catalog products is based on specific
industry standards.
Each new design is first produced on a CAD/CAE computer system. The design
layout is then reduced to the desired micro size and transferred to silicon
wafers in a series of steps that 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 or a single
diode. 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 thick film 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,
capacitor chips and inductors 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 approximately 30% of the hybrid packages it uses and
purchases the balance from suppliers.
4
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). In such cases, designated inspectors
are authorized to perform a detailed on-premise inspection of each individual
device prior to encapsulation in a casing or before dispatch of the finished
unit to ensure that the quality and performance of the product meets the
prescribed specifications.
ISO 9001:2000
In March 2000, Underwriters Laboratories awarded the Company ISO 9001
qualification. The ISO 9001 Program is a series of quality management and
assurance standards developed by a technical committee of the European Community
Commission working under the International Organization for Standardization.
During the Fiscal Year ended February 29, 2004 the Company underwent two
additional surveillance audits that resulted in recertification. During the
August, 2003 surveillance audit, the Company was qualified as meeting the new
ISO 9001:2000 standard. Management believes that such qualification will
continue to open the Company to additional business opportunities that were not
available prior to such qualification.
FINANCIAL INFORMATION ABOUT EXPORT SALES AND MAJOR CUSTOMERS
Specific financial information with respect to the Company's export sales is
provided in Note 10 to the Consolidated Financial Statements contained in Item 7
of this Annual Report.
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 three representative
organizations that operate out of 9 different locations with 7 salespeople and 2
stocking distributor organizations that operate out of 39 locations with 270
salespeople and (ii) in the international market by 2 representative
organizations in 2 countries with 4 sales people. Some of the international
groups serve as distributors as well as sales representatives. The Company also
directly employs several sales, marketing, and application engineering personnel
to coordinate operations with the representatives and distributors and to handle
key accounts.
During the fiscal year ended February 29, 2004, the Company sold products to
approximately 163 customers. Of these 163 customers, 59 had not purchased
products from the Company during the previous fiscal year. During the fiscal
year ended February 29, 2004, Raytheon accounted for approximately 41% of net
sales, as compared to the 45% it accounted for during the fiscal year ended
February 28, 2003. The U.S. government, accounted for approximately 11% of total
net sales, as compared to approximately 9% for the fiscal year ended February
28, 2003. Other than Raytheon and the U.S. Government, the Company had no
customers, which accounted for more than 10% of net sales during the last fiscal
year. Fifteen of the Company's customers accounted for approximately 85% of the
Company's sales during the fiscal year ended February 29, 2004. It has been the
Company's experience that a large percentage of its sales have been attributable
to a relatively small number of customers in any particular period. As a result
of the mergers and acquisitions in general, and among large defense contractors
in particular, the number of large customers will continue to decline in number,
but this does not necessarily mean that the Company will experience a decline in
sales. The Company expects customer concentration to continue. The loss of any
major customer without offsetting orders from other sources would have a
material adverse effect on the business, financial condition and results of
operations of the Company.
During the fiscal year ended February 29, 2004 and since that date, a
substantial portion of the Company's products were sold pursuant to contracts or
subcontracts with or to customers whose end products are sold to the United
States government. Accordingly, the Company's sales may be adversely impacted by
Congressional appropriations and changes in national defense policies and
priorities. As a result of such Congressional appropriations and significant
changes in military spending in recent years, the Company had a 2% increase in
net bookings during the fiscal year ended February 29, 2004 as compared to the
previous year. All of the Company's contracts with the United States government
or its prime contractors contain provisions permitting termination at any time
at the convenience of the United States government or the prime contractor upon
payment to the Company of costs incurred plus a reasonable profit.
In recognition of the changes in global geopolitical affairs and in 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, LEOS (Low Earth Orbit Satellites)
telecommunications networks and other market
5
segments in which purchasing decisions are generally based primarily on product
quality, long-term reliability and performance, rather than on product price.
Although average sales 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.
In addition to these newer sales efforts, 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, but as of yet has
not made significant inroads in this endeavor.
Sales to foreign customers, located mostly in Canada, Western Europe and Israel,
accounted for approximately 9% of the Company's net sales for the fiscal year
ended February 29, 2004 as compared to 10% for the year ended February 28, 2003.
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 orders, more than 90% of which are scheduled for delivery within 12 months,
was approximately $5,963,000 at February 29, 2004, as compared to $5,193,000 as
of February 28, 2003. The entire backlog consisted of orders for electronic
components. The Company currently anticipates that the majority of its open
order backlog will be filled by February 28, 2005. In the event that bookings in
the long-term decline significantly below the level experienced in the last
fiscal year, 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Bookings and
Backlog."
The Company's backlog as of any particular date may not be representative of
actual sales for any succeeding period because lead times for the release of
purchase orders depend upon the scheduling practices of individual customers.
The delivery times of new or non-standard products can be affected by scheduling
factors and other manufacturing considerations, variances in the rate of booking
new orders from month to month and the possibility of customer changes in
delivery schedules or cancellations of orders. Also, delivery times of new or
non-standard products are affected by the availability of raw material,
scheduling factors, manufacturing considerations and customer delivery
requirements.
The rate of booking new orders varies significantly from month to month, mostly
as a result of sharp fluctuations in the government budgeting and appropriation
process. The Company has historically experienced somewhat decreased levels of
bookings during the summer months, primarily as a result of such budgeting and
appropriation activities. For these reasons, and because of the possibility of
customer changes in delivery schedules or cancellations of orders, the Company's
backlog as of any particular date may not be indicative of actual sales for any
succeeding period. See "Management's Discussions and Analysis of Financial
Conditions - Result of Operations" for a discussion of the increase in bookings
for the year ended February 29, 2004 as compared to the previous year.
PATENTS AND LICENSES
The Company owned approximately 33 patents (most of which have now expired or
have been allowed to lapse) relating to the design and manufacture of its
products. The terminations of these patents have not had a material adverse
effect on the Company. The Company believes that engineering standards,
manufacturing techniques and product reliability are more important to the
successful manufacture and sale of its products than the old patents that it
had.
6
COMPETITION
The electronic component industry, in general, is highly competitive and has
been characterized by price erosion, rapid technological changes and foreign
competition. However, in the market segments in which the Company operates,
while highly competitive and subject to the same price erosion, technological
change is slow and minimal. The Company believes that it is well regarded by its
customers in the segments of the market in which competition is dependent less
on price and more on product reliability and performance. Management believes,
however, that to the extent the Company's business is targeted at the military
and aerospace markets, where there has been virtually no foreign competition, it
is subjected to less competition than manufacturers of commercial electronic
components. Additionally, the decline in military orders and the shift in the
requirement of the Defense Department whereby the use of Commercial Off The
Shelf (COTS) components is encouraged over the use of high reliability
components that the Company manufactures, prompting the number of competitors to
decline, afford 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 greater price erosion and
foreign competition. Presently the Company is attempting to identify a niche
market for high-end industrial custom power modules and custom motor controllers
where the Company's capabilities can offer a technological advantage to
customers in the motor driver, and power supplies industries. However, there is
no guarantee that the Company will be successful in this effort.
The Company has numerous competitors across all of its product lines. The
Company is not in direct competition with any other semiconductor manufacturer
for an identical mixture of products; however, one or more of the major
manufacturers of semiconductors manufactures some of the Company's products. A
few such major competitors (e.g., Motorola, Intersil, Fairchild, among others)
have elected to withdraw from the military market altogether. However, there is
no assurance that the Company's business will increase as a result of such
withdrawals. Other competitors in the military market include International
Rectifier (the Omnirel Division), Microsemi (the NES Division), MS Kennedy and
Sensitron. 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 on
high reliability components continues to decrease and the Department of Defense
pushes for implementation of its 1995 decision to purchase high-end, COTS
standard products in lieu of products made in accordance with more stringent
military specifications.
The Company believes that its primary competitive advantage is its ability to
produce high quality products as a result of its years of experience, its
sophisticated technologies and its experienced staff. The Company believes that
its ability to produce highly reliable custom hybrids in a short period of time
will give it a strategic advantage in attempting to penetrate high-end
commercial markets and in selling military products complementary with those
currently sold, as doing so would enable the Company to produce products early
in design and development cycles. The Company believes that it will be able to
improve its capability to respond quickly to customer needs and deliver products
on time.
EMPLOYEES
At February 29, 2004, the Company had 90 employees (as compared to 86 at
February 28, 2003), 65 of whom are engaged in production activities, 3 in sales
and marketing, 6 in executive and administrative capacities and 16 in technical
and support activities. Of the 90 employees, 84 were full time employees and 6
were part time employees.
The Company has never had a work stoppage, and none of its employees are
represented by a labor organization. The Company considers its employee
relations to be satisfactory.
SOURCES AND AVAILABILITY OF RAW MATERIAL
The Company purchases its raw materials from multiple suppliers and has a
minimum of two suppliers for all of its material requirements. A few of the key
suppliers of raw materials and finished packages purchased by the Company are:
Egide USA Inc., Platronics Seals, Kyocera America, Morgan Advanced Ceramics,
Coining, Kilburn Isotronics, IXYS, Purecoat International, Stellar Industries,
and others. Because of a diminishing number of sources of component packages the
Company has been obliged to pay higher prices, which consequently has increased
costs of goods sold. Should a shortage of three-inch silicon wafers occur, we
might not be able to switch our manufacturing capabilities to another size wafer
in time to meet our customer's needs, leading to lost revenues.
7
EFFECT OF GOVERNMENT REGULATION
The Company received DSCC approval to supply its products in accordance with
MIL-PRF-19500, Class H of MIL-PRF-38534, and some products in accordance with
Class M of MIL-PRF-38535. These qualifications are required to supply to the
U.S. Government or its prime contractors. Continuing to maintain these
qualifications is expected to improve the Company's business posture by
maintaining product marketability.
RESEARCH AND DEVELOPMENT
During the last two fiscal years, the Company has not spent any significant
funds on research and development. This may have an adverse effect on future
operations. The cost of designing custom products is borne in full by the
customer, either as a direct charge or is amortized in the unit price charged to
the customer.
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 manufacturing operations. The Company, in the conduct of
its manufacturing operations, has handled and does handle materials that are
considered hazardous, toxic or volatile under federal, state and local laws and,
therefore, is subject to regulations related to their use, storage, discharge
and disposal. No assurance can be made that the risk of accidental release of
such materials can be completely eliminated. In the event of a violation of
environmental laws, the Company could be held liable for damages and the costs
of remediation and, along with the rest of the semiconductor industry, is
subject to variable interpretations and governmental priorities concerning
environmental laws and regulations. Environmental statutes have been interpreted
to provide for joint and several liability and strict liability regardless of
actual fault. There can be no assurance that the Company and its subsidiaries
will not be required to incur costs to comply with, or that the operations,
business or financial condition of the Company will not be materially adversely
affected by current or future environmental laws or regulations.
ENVIRONMENTAL LIABILITIES
The Company is currently engaged in negotiations with the United States
Environmental Protection Agency ("USEPA") to resolve the Company's alleged
liability to USEPA at the following sites: Solitron Microwave Superfund Site,
Port Salerno, Florida; Petroleum Products Corporation Superfund Site, Pembroke
Park, Florida; Casmalia Disposal Superfund Site, Santa Barbara County,
California; and Solitron Devices Site, Riviera Beach, Florida. USEPA contends
that the Company is liable for a share of past and future costs incurred by
USEPA in connection with the investigation and remediation of the sites. At a
meeting with USEPA on March 23, 2001, USEPA contended that the Company's alleged
share of liability at the four (4) sites totals approximately $7.65 million,
which USEPA broke down on a site by site basis as follows: Solitron Microwave,
Port Salerno - $3.8 million; Petroleum Products - $150,000; Casmalia Disposal -
$2.7 million; and Solitron Devices, Riviera Beach - $1 million.
In addition to the claims asserted by USEPA against the Company at the Casmalia
Disposal Superfund Site, claims have been asserted against the Company by a
group of alleged responsible parties formed at the site for all past and future
cleanup expenses incurred or to be incurred by the respective group. During the
negotiations with USEPA to resolve the Company's alleged liability at all sites,
the Company was advised by USEPA that a settlement with USEPA would most likely
resolve the claims of the groups of alleged responsible parties formed at the
Casmalia Disposal Superfund Sites. Preliminary communications with attorneys
representing the respective groups support USEPA's representations in this
regard.
The Company contends that the claims of USEPA and the Casmalia private party
group referenced above were discharged in bankruptcy pursuant to the Bankruptcy
Court's Order Confirming Solitron's Fourth Amended Plan of Reorganization,
entered in August 1993. Nevertheless, the Company is negotiating with USEPA to
settle its outstanding liability at all sites based on an ability to pay ("ATP")
determination.
Following a settlement conference on October 24, 2003, the Company received a
final ATP Multi-Site Settlement Agreement from EPA on January 23, 2004. The
substantial provisions of the Agreement obligate the Company to pay to EPA the
sum of $74,000 over two years, in equal quarterly payments, plus interest. In
addition, the Company is obligated to pay to EPA the sum of $10,000 or 5% of
Solitron's net after-tax income over the first $500,000, if any, whichever is
greater, for years 3-7 following the effective date of the Agreement. The
Company signed the Agreement and returned it to EPA for execution on January 26,
2004. After receipt of the signed Agreement, EPA notified the Company that
8
additional edits to the Agreement may be necessary. The Company expects to
complete negotiations with EPA in 2004. Once the agreement becomes effective, it
is anticipated that EPA will recommend to the PRP group at the Casmalia Disposal
Superfund Site that the group release the Company from further liability at the
site upon the Company's compliance with the Agreement.
On August 7, 2002, the Company received a Request for Information from the State
of New York Department of Environmental Conservation ("NYDEC"), seeking
information on whether the Company had disposed of certain wastes at the
Clarkstown Landfill site located in the Town of Clarkstown, Rockland County, New
York. By letter dated August 29, 2002, the Company responded to the Request for
Information and advised NYDEC that the Company's former Tappan, New York
facility closed in the mid-1980s, prior to the initiation of the Company's
bankruptcy proceedings described above. The Company contends that, to the extent
that NYDEC has a claim against the Company as a result of the Company's alleged
disposal of wastes at the Clarkstown landfill prior to the closing of the
Company's former Tappan facility in the mid-1980s, the claim was discharged in
bankruptcy as a result of the Bankruptcy Court's August 1993 Order referenced
above. The Company entered into a Tolling Agreement with the State of New York
in August 2003, which provides for the tolling of applicable statutes of
limitation through the earlier of August 23, 2004 or the date the State
institutes a suit against Solitron, for any claims associated with the
Clarkstown Landfill site. It is not known at this time whether the State of New
York will pursue a claim against the Company in connection with the Clarkstown
Landfill site.
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"). On August 20, 1993, the Bankruptcy
Court entered an Order (the "Order of Confirmation") confirming the Company's
Fourth Amended Plan of Reorganization, as modified by the Company's First
Modification of Fourth Amended Plan of Reorganization (the "Plan of
Reorganization" or "Plan"). The Plan became effective on August 30, 1993 (the
"Effective Date"). On July 12, 1996, the Bankruptcy Court officially closed the
case.
Pursuant to the Plan of Reorganization, beginning in approximately May 1995, the
Company was required to begin making quarterly payments to holders of unsecured
claims until they receive 35% of their claims. However, due to negotiations
between the parties, the unsecured creditors agreed to a deferment of this
payment (for more information see "Management's Discussion and Analysis of
Financial Condition and Results of Operations"). At the time, it was estimated
that there was an aggregate of approximately $7,100,000 in unsecured claims and,
accordingly, that the Company was required to pay approximately $2,292,000 to
holders of allowed unsecured claims in quarterly installments of approximately
$62,083. During the fiscal year ended February 29, 2004, the Company reached
agreement with one unsecured creditor under which $5,000 was paid as settlement
of slightly less than $114,000 of recorded debts to unsecured creditors. Other
income of approximately $109,000 from extinguishment of debt was consequently
recorded.
Beginning on the date the Company's net after tax income exceeds $500,000, the
Company is obligated to pay (on an annual basis) each of the holders of
unsecured claims (pro rata) and Vector Trading and Holding Corporation
("Vector"), a successor to certain assets and liabilities of the Company, and
Vector's participants and successors, 5% of its net after tax income in excess
of $500,000 until the tenth anniversary of the Effective Date, up to a maximum
aggregate of $1,500,000 to the holders of unsecured claims (pro rata) and up to
a maximum aggregate of $1,500,000 to Vector participants and their successors
(the "Profit Participation"). As the Company earned $637,000 in the fiscal year
ended February 28, 2001, net after the accrual of $15,000 for the Profit
Participation, it distributed, during the fiscal year ended February 28, 2002
approximately $7,500 to its unsecured creditors and approximately $7,500 to
Vector and its successors in interest as contemplated by the Plan. As net income
for the fiscal year ended February 28, 2003 did not exceed $500,000, there were
no distributions related to such fiscal year. As the level of income for the
fiscal year ended February 29, 2004 did not exceed $500,000 no such payments are
anticipated.
Pursuant to the Plan, the monies to be utilized to fund environmental
assessments and remediations are to be made available from the proceeds of the
sale or lease of the Port Salerno and the Riviera Beach properties, to the
extent that the Company is successful in its efforts to sell or lease such
properties, as discussed in "Environmental Liabilities". 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 would escrow monthly
amounts. As of February 29, 2004, the Company has deposited $90,000 in the
required escrow accounts, including $19,000 that has been paid out in connection
with the Riviera Beach Property. The Riviera Beach property was sold on October
9
12, 1999 by the Company. Under the terms of the sale, the USEPA received the net
proceeds of $419,000. USEPA also received approximately $19,000 from the Riviera
Beach environmental escrowed monies to defray its cleanup costs. The Port
Salerno (formally occupied by Solitron Microwave) property was sold on March 17,
2003. Under the terms of the sale, the USEPA received $153,155 and Martin County
received on behalf of FDEP $278,148 (the net proceeds). The Company's financial
statements reflect liabilities of $1,416,701 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. with respect to environmental
liabilities. Given USEPA's assertion of jurisdiction over the properties, the
Company cannot give any assurance that actual remediation costs will not exceed
the estimate based on compliance with the Plan. Because of the uncertainties of
how USEPA will proceed with cleanup of the properties and resolution of the
Company's ability to pay application, total costs to the Company cannot be
estimated now. For a more definitive description of environmental matters
pertaining to the Riviera Beach and Port Salerno Properties, please refer to
"Environmental Liabilities".
The Company has not been making agreed payments under the Plan and otherwise to
Martin County with respect to tax claims. The following table indicates the
approximate cumulative status of amounts due under the Plan of Reorganization as
of February 29, 2004:
Due to Date Paid
----------- ----
Martin County $ 283,000 $ 7,957
When the Port Salerno property was sold on March 17, 2003 the Company paid
Martin County $282,502 in Delinquent Real Estate Taxes and $4,898 in 2002 Real
Estate Taxes out of the proceeds of the sale.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's manufacturing operations and its corporate headquarters are
located in one leased facility in West Palm Beach, Florida. The Company
originally had leased the facility for a term ending December 31, 2001 and
subleased approximately 25,000 square feet to S/V Microwave Products, Inc., a
private company which bought substantially all the assets and certain
liabilities of Solitron's microwave division in 1993. In 2001, the Company
renegotiated a new lease to exclude the area previously subleased to S/V
Microwave; and, accordingly with the terms of the new lease, had walls
constructed and utilities divided so that the space previously occupied by S/V
Microwave would be completely separate from the space occupied by the Company.
Subsequent to this reduction in space, the Company leases approximately 47,000
sq. ft. of the facility. The new lease is for a term of ten years ending
December 31, 2011 and does not include an option to renew the lease under
current terms. The Company believes that its facility in West Palm Beach,
Florida will be suitable and adequate to meet its requirements currently and for
the foreseeable future.
The Company also owned the Port Salerno Property, which consisted of a 42,000
square foot building and 23 acres of undeveloped land located in Port Salerno,
Florida. The Port Salerno property was sold on March 17, 2003. 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 Item 1,
"Business - Environmental Liabilities".
ITEM 3. LEGAL PROCEEDINGS
On March 24, 2003 the Company filed a complaint against its landlord, Technology
Place, in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach
County, Florida. The complaint alleges breach of contract on several grounds and
demands specific performance by the Landlord. The case is expected to be heard
in court in late summer or early fall of 2004.
See also Item 1, "Business - Environmental Liabilities".
10
The Company's former controller has filed a "Whistleblower" claim with the U.S.
Department of Labor, Occupational Safety & Health Administration (OSHA) pursuant
to Section 806 of the Sarbanes-Oxley Act of 2002, codified at 185 U.S.C. sec.
1514A, which is also known as the "Corporate and Criminal Fraud Accountability
Act of 2002". The matter is being handled as an administrative proceeding before
OSHA at this point. At the present time, OSHA is still conducting an
investigation of the claim, and OSHA has not yet issued its findings. The claim
is being vigorously contested. At this early state, it is difficult to predict
the eventual outcome, but an unfavorable outcome before this administrative
agency is reasonably possible. Should the claimant prevail on his claim, the
damages available to him include back pay, front pay, compensation for loss of
benefits, non-economic damages, attorneys' fees and costs. The Company is being
defended in this action by its liability insurance carrier, under a reservation
of rights.
The Southeast Regional Office of the Securities and Exchange Commission is
conducting a formal investigation concerning the Company. To date, the SEC
investigation has focused on the propriety of the Company's past accounting. The
Company has produced documents to the SEC, and the SEC has taken sworn testimony
of several individuals. As of this date, the SEC has not requested a "Wells"
submission from the Company, and has not indicated an intention to file any
civil or administrative complaint against the Company. An unfavorable outcome of
the SEC investigation may have a material adverse effect on the Company's
financial condition or results of operations. At this time, we are unable to
conclude that the likelihood of an adverse outcome is probable or remote. We
therefore are unable to express an opinion as to the likelihood of an
unfavorable outcome. We also are unable to express an opinion as to an amount or
range of potential loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 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 as reported by NASDAQ's Over the Counter
Electronic Bulletin Board ("OTCBB"). The prices set forth below reflect
inter-dealer prices, without retail mark-up, mark-down, or commission and may
not represent actual transactions.
FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 29, 2004 FEBRUARY 28, 2003
----------------- -----------------
HIGH LOW HIGH LOW
First Quarter $0.5000 $0.3300 $0.2800 $0.1300
Second Quarter $0.8500 $0.4300 $0.6000 $0.1700
Third Quarter $1.1000 $0.5000 $0.7200 $0.2500
Fourth Quarter $1.7600 $0.4300 $0.6500 $0.3200
As of June 14, 2004, there were approximately 3,331 holders of record of the
Company's Common Stock. On June 14, 2004, the last sale price of the Common
Stock as reported on the Electronic Bulletin Board was $0.60 per share.
Certificates representing 229,787 "old shares" of Common Stock, which were
subject to an approximate 10 to 1 reverse split (which was authorized by the
Bankruptcy Court on September 1993), have not been exchanged by the stockholders
as of February 28, 2003. Subsequent to such stock split, these certificates now
represent 22,978 shares of Common Stock, which are included in the 2,076,351
shares outstanding as of February 29, 2004 indicated in the beginning of this
filing. These "old shares" have not been included in the number of shares
outstanding as set forth in the Company's filings with the commission since the
date of such stock split through its Annual Report on Form 10-KSB for the period
ended February 29, 2004.
The Company has not paid any dividends since emerging from bankruptcy and the
Company does not contemplate declaring dividends in the foreseeable future.
Pursuant to the Company's ability to pay settlement proposal with the USEPA, the
Company agreed not to pay dividends on any shares of capital stock until the
settlement amount for environmental liabilities is agreed upon and paid in full.
During the fiscal year ending February 29, 2004, the Company issued 6,000 shares
of its Common Stock to employees who exercised stock options pursuant to the
Company's stock option plan.
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.
12
The following table is included solely for use in comparative analysis of income
before extraordinary items to complement Management's Discussion and Analysis of
Financial Condition and Results of Operations:
(Dollars in Thousands)
Year Ended February 28,
2004 2003
Net Sales $7,690 $7,347
Cost of sales 6,576 5,887
Gross profit 1,114 1,460
Selling, general and administrative expenses 1,117 1,092
Operating income (loss) (3) 368
Disposal of non-operating facilities (0) (175)
Interest expense (0) (18)
Interest expense on unsecured creditors claims (10) (26)
Interest income 18 29
Environmental Expenses Reserve (0) 113
Other, net 159 3
Net income (loss) $ 164 $ 294
RESULTS OF OPERATIONS
2004 vs. 2003
Net sales for the fiscal year ended February 29, 2004 increased by approximately
4% to $7,690,000 versus $7,347,000 during the fiscal year ended February 28,
2003, reflecting a change in the demand for the Company's products due to
increased defense spending and economic activity.
Bookings were higher than sales by approximately 9%; thus, the backlog increased
from $5,193,000 as of February 28, 2003 to $5,963,000 as of February 29, 2004.
The Company has experienced an increase in the level of bookings of
approximately 2% for the year ended February 29, 2004 as compared to the
previous year.
During the year ended February 29, 2004, the Company shipped 373,454 units as
compared with 605,442 units shipped during the year ended February 28, 2003. It
should be noted that since the Company manufactures a wide variety of products
with an average sale price ranging from less than one dollar to several hundred
dollars, such periodic variations in the Company's volume of units shipped might
not be a reliable indicator of the Company's performance.
Cost of Sales for the fiscal year ended February 29, 2004 increased to
$6,576,000 from $5,887,000 during the fiscal year ended February 28, 2003. One
reason for this increase was an increase of approximately 4% in sales that
resulted in a $109,000 increase in material costs. Additionally, $108,000 of
work in process was scrapped during the year ending February 29, 2004 and the
reserve for obsolete inventory was increased by $112,000. Expressed as a
percentage of sales, cost of sales increased from approximately 80% for the
fiscal year ended February 28, 2003 to approximately 85% for the fiscal year
ended February 29, 2004.
During the year ended February 29, 2004 the Company's gross profits were
$1,114,000 (15% margin) as compared to $1,460,000 (20% margin) for the year
ended February 28, 2003. The gross profit decrease was due principally to the
approximately 11% increase in cost of sales percentage.
During the year ended February 29, 2004, Selling, General and Administrative
based expenses, as a percentage of sales, were approximately 14% as compared
with 15% for the year ending February 28, 2003. Selling, General and
Administrative expenses increased approximately 2% to $1,118,000 for the fiscal
year ended February 29, 2004 from $1,092,000 for the fiscal year ended February
28, 2003. This increase results from approximately $83,000 of higher legal and
professional fees associated with the SEC investigation and approximately
$46,000 in legal fees associated with the Company's lawsuit against its
landlord.
Operating Loss for the fiscal year ended February 29, 2004 was $3,000 as
compared to an operating income of $368,000 for the fiscal year ended February
28, 2003. This decrease was primarily attributable to an increase in
manufacturing overhead and legal and professional fees.
13
Total interest expense decreased from $44,000 for the fiscal year ended February
28, 2003 to $10,000 for the fiscal year ended February 29, 2004 due primarily to
lower imputed interest on debt to unsecured creditors.
Interest Expense on unsecured creditors claims for the fiscal year ended
February 29, 2004 decreased to $10,000 from $26,000 during the fiscal year ended
February 28, 2003 primarily due to the lower interest rates in the economy.
Interest Income for the fiscal year ended February 29, 2004 decreased to $18,000
from $29,000 during the fiscal year ended February 28, 2003. This decrease was
attributable to lower interest rates received from the bank.
Net Income for the fiscal year ended February 29, 2004 was $164,000 as compared
to a Net Income of $294,000 for the fiscal year ended February 28, 2003. This
decrease is attributable to a lower level of Gross Profit, a higher level of
manufacturing overhead and higher legal and professional fees.
LIQUIDITY AND CAPITAL RESOURCES
Subject to the following discussion, the Company expects its sole source of
liquidity over the next twelve months to be cash from operations. The Company
anticipates that its capital expenditures will be approximately $200,000 for the
next Fiscal year.
During the first few fiscal years after its emergence from bankruptcy
proceedings, the Company generally experienced losses from operations and severe
cash shortages caused by a significant decline in both sales and open order
backlog, decreased margins (which is characteristic in the industry) on the
Company's products, significant expenses associated with the reorganization
proceedings, and the Company's inability to obtain additional working capital
through the sale of debt or equity securities or the sale of non-operating
assets. However, for the years ended February 29, 2004 and February 28, 2003,
the Company recorded a net income of $164,000 and a net income of $294,000
respectively.
During the pendency of the bankruptcy proceedings, all secured and unsecured
claims against any indebtedness of the Company (including accrued and unpaid
interest) were stayed in accordance with the Bankruptcy Code while the Company
continued its operations as a debtor-in-possession, subject to the control and
supervision of the Bankruptcy Court. Because these stays limit cash outflow, the
Company, during the pendency of the Bankruptcy Proceedings, realized positive
cash flow from ongoing operations. Since the Company emerged from Chapter 11, it
has experienced a positive cash flow from recurring operations; however, until
the fiscal year ended February 28, 1997, overall cash flow was negative due
primarily to the necessity to make payments of administrative expenses and
unsecured debt payouts arising in connection with the bankruptcy proceedings.
The Company has incurred an operating loss of approximately $3,000 for the
fiscal year ended February 29, 2004 and has significant obligations arising from
settlements in connection with its bankruptcy that require the Company to make
substantial cash payments that cannot be supported by the current level of
operations.
Based upon (i) management's best information as to current national defense
priorities, future defense programs, as well as management's expectations as to
future defense spending, (ii) the market trends signaling a continued slowdown
and soft level of booking and a continued price erosion, and (iii) a continual
lack of foreign competition in the defense and aerospace market, the Company
believes that it will have sufficient cash on hand to satisfy its operating
needs over the next 12 months. However, due to the level of current backlog and
new order intake (due to the status of the general economy and the shift to COTS
by the defense industry), the Company might operate at a loss during part of the
next fiscal year. Thus, 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 creditors
or the slowdown in the intake of new orders continue, the Company has a
contingency plan to further reduce its size and thereby reduce its cost of
operations within certain limitations. Over the long-term, the Company believes
that if the volume and prices of product sales remain steady 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 during the last fiscal year, 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. The Company cannot assure you, however, that
it will be able to generate sufficient liquidity to meet its operating needs now
or in the future.
14
The Company is continuing to negotiate with the unsecured creditors, and the
USEPA, in an attempt to arrive at reduced payment schedules. To date, these
parties have not expressed objection to the reduced level of payments. However,
no assurance can be made that the Company can reach a suitable agreement with
the unsecured creditors, USEPA, or obtain additional sources of capital and/or
cash or that the Company can generate sufficient cash to meet its obligations.
At February 29, 2004 and February 28, 2003 respectively, the Company had cash
and cash equivalents of $1,883,000 and $1,448,000. The principal cash change was
due to net cash flow from operations.
At February 29, 2004, the Company had working capital of $2,035,000 as compared
with a working capital at February 28, 2003 of $2,194,000. The principal change
was due to an increase in the current portion of pre-petition liabilities.
See "Environmental Liabilities", "Bankruptcy Proceedings" and "Properties" in
Part I, Items 1 and 2, for more information.
OFF-BALANCE SHEET ARRANGEMENTS
We are not involved in any off-balance sheet arrangements.
BOOKINGS AND BACKLOG
During the fiscal year ended February 29, 2004, the Company's net bookings were
$8,458,000 in new orders as compared with $8,270,000 for the year ended February
28, 2003, reflecting an increase of approximately 2%. The Company's backlog
increased to $5,963,000 at February 29, 2004 as compared with $5,193,000 as of
February 28, 2003, reflecting a 14% increase. In the event that bookings in the
long-term decline significantly below the level experienced in the last fiscal
year, the Company may be required to implement further cost-cutting or other
downsizing measure to continue its business operations. Such cost-cutting
measures could inhibit future growth prospects. Furthermore, the Company cannot
assure you that such measures would be sufficient to enable the Company to
continue its business operations.
See Part I, Item 1, "Business - Marketing and Customers".
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; (e) develop products utilizing its current manufacturing
technologies geared toward market segments it is currently unable to serve.
Also, the Company intends to identify lower cost base assembly partners in the
Asia-Pacific region in an effort to enhance the Company's competitive position
while reducing costs.
The Company also plans to continue its efforts in selling privately labeled
commercial semiconductors and power modules and to develop offshore assembly or
sub-assembly whether as contract or strategic alliance arrangements. If these
plans are successful, the Company intends to aggressively pursue sales of these
products which could require the Company to invest in the building up of
inventories of finished goods and invest in capital (automatic assembly and
test) equipment. The source of capital funding will be defined subsequent to
such strategic partnership being formed. Such financing could come from
equipment leasing.
Despite its intentions, the Company cannot assure you that these plans will be
successful in easing liquidity problems, reducing costs or improving sales.
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.
15
SEASONALITY
The Company's bookings of new orders and sales are largely dependent on
congressional budgeting and appropriation activities and the cycles associated
therewith. The Company has historically experienced somewhat decreased levels of
bookings during the summer months, primarily as a result of such budgeting and
appropriation activities.
FORWARD-LOOKING STATEMENTS
Information in this Form 10-KSB, including any information incorporated by
reference herein, includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended, and is subject to the safe-harbor created by
such sections. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements.
Statements regarding:
o the Company's expectations regarding the effects of certification or
qualification of the Company's products;
o the speed of technological change and its effects on the Company's
business;
o trends in the industry, including trends concerning consolidation,
customer concentration, changes in government military spending, changes
in defense priorities, price erosion and competition;
o sources and availability of liquidity;
o the Company's anticipated level of capital expenditures for the next
fiscal year;
o the Company's ability to generate sufficient cash flow from operations to
sustain operations;
o strategic plans to improve the Company's performance in the future;
o the Company's ability to fill its customers' scheduled backlog by February
28, 2005;
o the Company's expectations regarding average selling prices for its
products continuing to decline;
o the Company's competitive strengths, industry reputation and the nature of
its competition;
o the Company's belief regarding the relative importance of patented
technology;
o the Company's ability to move into new markets or to develop new products;
o the Company's belief 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 to those currently sold;
o the Company's belief that it will be able to improve its capability to
respond quickly to customers' needs and to deliver products in a timely
manner;
o the Company's ability to implement effectively cost-cutting or downsizing
measures;
o the Company's compliance with environmental laws, orders and
investigations and the future cost of such compliance;
o implementation of the Plan of Reorganization and the Company's ability to
make payments required under the Plan of Reorganization or otherwise to
generate sufficient cash from operations or otherwise;
o expectations of being released from certain environmental liabilities and
the Company's ability to satisfy such liabilities;
o the suitability and adequacy of the Company's headquarters and
manufacturing facilities;
o the effects of the SEC investigation;
o the effects of inflation; and
o other statements contained in this report that address activities, events
of developments that the Company expects, believes or anticipates will or
may occur in the future, and similar statements are forward-looking
statements.
These statements are based upon assumptions and analyses made by the Company in
light of current conditions, future developments and other factors the Company
believes are appropriate in the circumstances, or information obtained from
third parties and are subject to a number of assumptions, risks and
uncertainties. Readers are cautioned that forward-looking statements are not
guarantees of future performance and that actual results might differ materially
from those suggested or projected in the forward-looking statements. Factors
that may cause actual future events to differ significantly from those predicted
or assumed include, but are not limited to:
o the loss of certification or qualification of the Company's products or
the inability of the Company to capitalize on such certifications and/or
qualifications;
o unexpected rapid technological change;
o a misinterpretation of the Company's capital needs and sources and
availability of liquidity;
16
o a change in government regulations which hinders the Company's ability to
perform government contracts;
o a shift in or misinterpretation of industry trends;
o unforeseen factors which impair or delay the development of any or all of
its products;
o inability to sustain or grow bookings and sales;
o inability to capitalize on competitive strengths or a misinterpretation of
those strengths;
o the emergence of improved, patented technology by competitors;
o a misinterpretation of the nature of the competition, the Company's
competitive strengths or its reputation in the industry;
o inability to respond quickly to customers' needs and to deliver products
in a timely manner resulting from unforeseen circumstances;
o inability to generate sufficient cash to sustain operations;
o failure of price or volume recovery;
o failure to successfully implement cost-cutting or downsizing measures,
strategic plans or the insufficiency of such measures and plans;
o changes in military or defense appropriations;
o inability to make or renegotiate payments under the Plan of
Reorganization;
o inability to move into new market segments based on unforeseen factors;
o unexpected impediments affecting ability to fill backlog;
o inability to be released from environmental liabilities;
o an increase in the expected cost of environmental compliance based on
factors unknown at this time;
o changes in law or industry regulation;
o inability to sell certain properties or to obtain expected prices for such
properties;
o unexpected growth or stagnation of the business;
o the results of the SEC investigation;
o unforeseen changes that render the Company's headquarters and
manufacturing facilities unsuitable or inadequate to meet the Company's
current needs; and
o unforeseen effects of inflation; other unforeseen activities, events and
developments that may occur in the future.
RISK FACTORS
The following important business risks and factors, and those business risks and
factors described elsewhere in this report or our other Securities and Exchange
Commission filings, could cause our actual results to differ materially from
those stated in our forward-looking statements, and which could affect the value
of an investment in the Company. All references to "we", "us", "our" and the
like refer to the Company.
OUR COMPLEX MANUFACTURING PROCESSES MAY LOWER YIELDS AND REDUCE OUR REVENUES.
Our 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. Our manufacturing efficiency will be an
important factor in our future profitability, and we cannot assure you that we
will be able to maintain our manufacturing efficiency or increase manufacturing
efficiency to the same extent as our competitors.
In addition, as is common in the semiconductor industry, we have from time to
time experienced difficulty in effecting transitions to new manufacturing
processes. As a consequence, we have suffered delays in product deliveries or
reduced yields. We may experience manufacturing problems in achieving acceptable
yields or experience product delivery delays in the future as a result of, among
other things, capacity constraints, construction delays, upgrading or expanding
existing facilities or changing our process technologies, any of which could
result in a loss of future revenues. Our operating results could also be
adversely affected by the increase in fixed costs and operating expenses related
to increases in production capability if revenues do not increase
proportionately.
Our ability to repair and maintain the aging manufacturing equipment we own may
adversely affect our ability to deliver product to our customers' requirements.
We may be forced to expend significant funds in order to acquire replacement
capital equipment that may not be readily available, thus resulting in
manufacturing delays.
17
OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED IF WE ARE UNABLE TO
OBTAIN QUALIFIED SUPPLIES OF RAW MATERIALS, PARTS AND FINISHED COMPONENETS ON A
TIMELY BASIS AND AT A COST-EFFECTIVE PRICE.
The Company relies on its relationships with certain key suppliers for its
supply of raw materials, parts and finished components that are qualified for
use in the end-products the Company manufactures. While the Company currently
has favorable working relationships with its suppliers, it cannot be sure that
these relationships will continue in the future. Additionally, the Company
cannot guarantee the availability or pricing of raw materials. The price of
qualified raw materials can be highly volatile due to several factors, including
a general shortage of raw materials, an unexpected increase in the demand for
raw materials, disruptions in the suppliers' business and competitive pressure
among suppliers of raw materials to increase the price of raw materials.
Suppliers may also choose, from time to time, to extend lead times or limit
supplies due to a shortage in supplies. Additionally, some of the Company's key
suppliers of raw materials may have the capability of manufacturing the end
products themselves and may therefore cease to supply the Company with its raw
materials and compete directly with the Company for the manufacture of the
end-products. Any interruption in availability of these qualified raw materials
may impair the Company's ability to manufacture its products on a timely and
cost-effective basis. If the Company must identify alternative sources for its
qualified raw materials, it would be adversely affected due to the time and
process required in order for such alternative raw materials to be qualified for
use in the applicable end-products. Any significant price increase in the
Company's raw materials that cannot be passed on to customers or a shortage in
the supply of raw materials could have a material adverse effect on the
Company's business, financial condition or results of operations.
WE ARE DEPENDENT ON GOVERNMENT CONTRACTS, WHICH ARE SUBJECT TO TERMINATION,
PRICE RENEGOTIATIONS AND REGULATORY COMPLIANCE, WHICH CAN INCREASE THE COST OF
DOING BUSINESS AND NEGATIVELY IMPACT OUR REVENUES.
All of our contracts with prime U.S. government contractors contain customary
provisions permitting termination at any time at the convenience of the U.S.
government or its prime contractors upon payment to us for costs incurred plus a
reasonable profit. Certain contracts are also subject to price renegotiations in
accordance with U.S. government sole source procurement provisions. None of our
contracts have been terminated for cause or for the convenience of the U.S.
government or its prime contractors, or had the prices renegotiated.
Nevertheless, we cannot assure you that the foregoing government contracting
risks will not materially and adversely affect our business, prospects,
financial condition or results of operations. Furthermore, we cannot assure you
that we would be able to procure new government contracts to offset any revenue
losses incurred due to early termination or price renegotiation of existing
government contracts.
Our government business is also subject to specific procurement regulations,
which increase our performance and compliance costs. These costs might increase
in the future, reducing our margins. Failure to comply with procurement
regulations could lead to suspension or debarment, for cause, from government
subcontracting for a period of time. Among the causes for debarment are
violations of various statutes, including those related to procurement
integrity, export control, government security regulations, employment
practices, protection of the environment, and accuracy of records. The
termination of a government contract or relationship as a result of any of these
violations would have a negative impact on our reputation and operations, and
could negatively impact our ability to obtain future government contracts.
CHANGES IN GOVERNMENT POLICY OR ECONOMIC CONDITIONS COULD NEGATIVELY IMPACT OUR
RESULTS.
A large portion of the Company's sales are to military and aerospace markets
which are subject to the business risk of changes in governmental appropriations
and changes in national defense policies and priorities. Any such changes could
result in reduced demand for the Company's products, which could have a material
and adverse effect on the Company's business, prospects, financial condition and
results of operations.
Our results may also be affected by changes in trade, monetary and fiscal
policies, laws and regulations, or other activities of U.S. and non-U.S.
governments, agencies and similar organizations. Furthermore, our business,
prospects, financial condition and results of operations may be adversely
affected by the shift in the requirement of the U.S. Department of Defense
policy toward the use of standard industrial components over the use of high
reliability components that we manufacture. Our results may also be affected by
social and economic conditions, which impact our sales, including in markets
subject to ongoing political hostilities, such as regions of the Middle East.
OUR INVENTORIES MAY BECOME OBSOLETE AND OTHER ASSETS MAY BE SUBJECT TO RISKS.
The life cycles of some of our products depend heavily upon the life cycles of
the end products into which our products are designed. Products with short life
cycles require us to manage closely our production and inventory levels.
Inventory may also become obsolete because of adverse changes in end-market
demand. We may in the future be adversely affected by obsolete or excess
inventories which may result from unanticipated changes in the estimated total
demand for our products or the estimated life cycles of the end products into
which our products are designed. The asset values determined under Generally
Accepted Accounting Principles for inventory and other assets each involve the
making of material estimates by us, many of which could be based on mistaken
assumptions or judgments.
ENVIRONMENTAL REGULATIONS COULD REQUIRE US TO INCUR SIGNIFICANT COSTS.
In the conduct of our manufacturing operations, we have handled and do handle
materials that are considered hazardous, toxic or volatile under federal, state
and local laws and, therefore, are 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, we could be held liable for damages and
the cost of remediation and, along with the rest of the semiconductor industry,
we are subject to variable interpretations and governmental priorities
concerning environmental laws and regulations. Environmental statutes have been
interpreted to provide for joint and several liability and strict liability
regardless of actual fault. There can be no assurance that we will not be
required to incur costs to comply with, or that our operations, business or
financial condition will not be materially affected by, current or future
environmental laws or regulations. See "Business - Environmental Liabilities."
18
OUR BUSINESS IS HIGHLY COMPETITIVE, AND INCREASED COMPETITION COULD REDUCE GROSS
PROFIT MARGINS AND THE VALUE OF AN INVESTMENT IN OUR COMPANY.
The semiconductor industry, and the semiconductor product markets specifically,
are highly competitive. Competition is based on price, product performance,
quality, turn-around time, reliability and customer service. The gross profit
margins realizable in our markets can differ across regions, depending on the
economic strength of end-product markets in those regions. Even in strong
markets, price pressures may emerge as competitors attempt to gain more share by
lowering prices. Competition in the various markets in which we participate
comes from companies of various sizes, many of which are larger and have greater
financial and other resources than we have and thus can better withstand adverse
economic or market conditions. In addition, companies not currently in direct
competition with us may introduce competing products in the future.
DOWNTURNS IN THE BUSINESS CYCLE COULD REDUCE THE REVENUES AND PROFITABILITY OF
OUR BUSINESS.
The semiconductor industry is highly cyclical. Semiconductor industry-wide sales
declined significantly in 2001 and 2002. Our markets may experience other,
possibly more severe and prolonged, downturns in the future. We may also
experience significant changes in our operating profit margins as a result of
variations in sales, changes in product mix, price competition for orders and
costs associated with the introduction of new products.
OUR OPERATING RESULTS MAY DECREASE DUE TO THE DECLINE OF AVERAGE SELLING PRICES
IN THE SEMICONDUCTOR INDUSTRY.
Intense competition and a general slowdown in the demand for military-rated
semiconductors worldwide have resulted in decreases in the average selling
prices of many of our products. We expect that average selling prices for our
products will continue to decline in the future. A decline in average selling
prices for our products, if not offset by reductions in the costs of
manufacturing these products, would decrease our gross profits and could have a
material adverse effect on our business, financial condition and results of
operations.
UNCERTAINTY OF CURRENT ECONOMIC CONDITIONS, DOMESTICALLY AND GLOBALLY, COULD
CONTINUE TO AFFECT DEMAND FOR OUR PRODUCTS AND NEGATIVELY IMPACT OUR BUSINESS.
Current conditions in the domestic and global economies are extremely uncertain.
As a result, it is difficult to estimate the level of growth for the economy as
a whole. It is even more difficult to estimate growth in various parts of the
economy, including the markets in which we participate. Because all components
of our budgeting and forecasting are dependent upon estimates of growth in the
markets we serve and demand for our products, the prevailing economic
uncertainties render estimates of future income and expenditures even more
difficult than usual to make. The future direction of the overall domestic and
global economies will have a significant impact on our overall performance.
The terrorist attacks in 2001 created many economic and political uncertainties
that have severely impacted the global economy. We experienced a further decline
in demand for our products after the attacks. The long-term effects of the
attacks on our business and the global economy remain unknown. In addition, the
potential for future terrorist attacks is creating worldwide uncertainties and
makes it very difficult to estimate how quickly the economy will recover and our
business will improve.
COST REDUCTION EFFORTS MAY BE UNSUCCESSFUL OR INSUFFICIENT TO IMPROVE OUR
PROFITABILITY.
During fiscal year 2004, we continued certain cost-cutting measures originally
begun two years ago, and we have a plan to implement further cost-saving
measures if necessary. The impact of these cost-reduction efforts on our
profitability may be influenced by:
o our ability to successfully complete these ongoing efforts;
o the possibility that these efforts may not generate the level of cost
savings we expect or enable us to effectively compete and return to
profitability; and
o the risk that we may not be able to retain key employees.
Since these cost-reduction efforts involve all aspects of our business, they
could adversely impact productivity to an extent we did not anticipate. Even if
we successfully complete these efforts and generate the anticipated cost
savings, there may be other factors that adversely impact our profitability.
19
WE MAY NOT ACHIEVE THE INTENDED EFFECTS OF OUR NEW BUSINESS STRATEGY, WHICH
COULD ADVERSELY IMPACT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
In recognition of the changes in global geopolitical affairs and in United
States military spending, we are attempting to increase sales of our products
for non-military, scientific and industrial niche markets, such as medical
electronics, machine tool controls, and LEOS (Low Earth Orbit Satellites)
telecommunications 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. We are also
attempting to offer additional products to the military markets that are
complementary to those we currently sell to the military markets. We cannot
assure you that these efforts will be successful and, if they are, that they
will have the intended effects of increasing profitability. Furthermore, as we
attempt to shift our focus to the sale of products having non-military,
non-aerospace applications, we will be subject to greater price erosion and
foreign competition.
OUR INABILITY TO INTRODUCE NEW PRODUCTS COULD RESULT IN DECREASED REVENUES AND
LOSS OF MARKET SHARE TO COMPETITORS; NEW TECHNOLOGIES COULD ALSO REDUCE THE
DEMAND FOR OUR PRODUCTS.
Rapidly changing technology and industry standards, along with frequent new
product introductions, characterize the semiconductor industry. Our success in
these markets depends on our ability to design, develop, manufacture, assemble,
test, market and support new products and enhancements on a timely and
cost-effective basis. There can be no assurance that we will successfully
identify new product opportunities and develop and bring new products to market
in a timely and cost-effective manner or that products or technologies developed
by others will not render our products or technologies obsolete or
noncompetitive. A fundamental shift in technology in our product markets could
have a material adverse effect on us. In light of the fact that many of our
competitors have substantially greater revenues than us and that we have not
spent any funds on research and development in recent years, we may not be able
to accomplish the foregoing, which might have a material adverse effect on the
Company, our business, prospects, financial condition or results of operations.
LOSS OF, OR REDUCTION OF BUSINESS FROM, SUBSTANTIAL CLIENTS COULD HURT OUR
BUSINESS BY REDUCING OUR REVENUES, PROFITABILITY AND CASH FLOW.
During the fiscal year ended February 29, 2004, fifteen customers accounted for
approximately 85% of our revenues. A loss of these customers, or reduced
business from such customers whose business comes mainly from the US Defense
Department, could have a significant adverse impact on our business and results
of operations in future periods. Furthermore, due to industry consolidation, the
loss of any one customer may have a greater impact than we anticipate. We cannot
guarantee that we will be able to retain long-term relationships or secure
renewals of short-term relationships with our more substantial customers in the
future.
A SHORTAGE OF THREE-INCH SILICON WAFERS COULD RESULT IN LOST REVENUES DUE TO AN
INABILITY TO BUILD OUR PRODUCTS.
Some of our products contain components manufactured in house from three-inch
silicon wafers. The worldwide supply of three-inch silicon wafers is dwindling.
We currently have enough wafers in inventory and on order to meet our
manufacturing needs for three years. Should a shortage of three-inch silicon
wafers occur, we might not be able to switch our manufacturing capabilities to
another size wafer in time to meet our customer's needs, leading to lost
revenues.
20
THE NATURE OF OUR PRODUCTS EXPOSES US TO POTENTIALLY SIGNIFICANT PRODUCT
LIABILITY RISK.
Our business exposes us to potential product liability risks that are inherent
in the manufacturing and marketing of high-reliability electronic components for
critical applications. No assurance can be made that our 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
materially and adversely affect our business, prospects, financial conditions or
results of operations.
WE DEPEND ON THE RECRUITMENT AND RETENTION OF QUALIFIED PERSONNEL, AND OUR
FAILURE TO ATTRACT AND RETAIN SUCH PERSONNEL COULD SERIOUSLY HARM OUR BUSINESS.
Due to the specialized nature of our business, our future performance is highly
dependent on the continued services of our key engineering personnel and
executive officers. Our prospects depend on our ability to attract and retain
qualified engineering, manufacturing, marketing, sales and management personnel
for our operations. Competition for personnel is intense, and we may not be
successful in attracting or retaining qualified personnel. Our failure to
compete for these personnel could seriously harm our business, prospects,
results of operations and financial condition.
PROVISIONS IN OUR CHARTER DOCUMENTS AND RIGHTS AGREEMENT COULD MAKE IT MORE
DIFFICULT TO ACQUIRE OUR COMPANY AND MAY REDUCE THE MARKET PRICE OF OUR STOCK.
Our Certificate of Incorporation and Bylaws contain certain provisions, and we
have adopted a stockholder rights plan (as more fully described in our current
report on Form 8-K filed on June 20, 2001), each of which could delay or prevent
a change in control of our company or the removal of management, and which could
also deter potential acquirers from making an offer to our stockholders and
limit any opportunity to realize premiums over prevailing market prices of our
common stock.
21
Item 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm 23
Consolidated Balance Sheet as of February 29, 2004 24
Consolidated Statements of Operations
for the years ended February 29, 2004 and February 28, 2003 25
Consolidated Statements of Stockholders'
Equity for the years ended February 29, 2004 and February 28, 2003 26
Consolidated Statements of Cash Flows for the years
ended February 29, 2004 and February 28, 2003 27
Notes to Consolidated Financial Statements 28-39
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors
Solitron Devices, Inc.
West Palm Beach, Florida
We have audited the accompanying consolidated balance sheet of Solitron Devices,
Inc. and Subsidiaries as of February 29, 2004, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended February 29, 2004 and February 28, 2003. These consolidated financial
statements are the responsibility of the Company's Management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board Standards (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Solitron Devices, Inc. and Subsidiaries as of February 29, 2004 and the results
of its operations and cash flows for the years ended February 29, 2004 and
February 28, 2003, in conformity with United States generally accepted
accounting principles.
Berkovits, Lago & Company, LLP
Fort Lauderdale, Florida
May 24, 2004
23
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 29, 2004
ASSETS (in thousands, except
for per share amounts)
CURRENT ASSETS:
Cash and cash equivalents $ 1,883
Accounts receivable, less allowance for doubtful
accounts of $1,000 988
Inventories 2,416
Prepaid expenses and other current assets 164
-------
TOTAL CURRENT ASSETS 5,451
PROPERTY, PLANT AND EQUIPMENT, net 562
OTHER ASSETS 52
-------
TOTAL ASSETS $ 6,065
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of accrued environmental expenses $ 966
Accounts payable-Post-petition 409
Accounts payable-Pre-petition, current portion 851
Accrued expenses and other liabilities 1,189
-------
TOTAL CURRENT LIABILITIES 3,415
LONG-TERM LIABILITIES, net of current portion 33
-------
TOTAL LIABILITIES 3,448
-------
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, 2,076,357 shares issued
and outstanding 21
Additional paid-in capital 2,620
Accumulated deficit (24)
-------
TOTAL STOCKHOLDERS' EQUITY 2,617
-------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,065
=======
The accompanying notes are an integral part of the financial statements.
24
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDING FEBRUARY 29, 2004 AND FEBRUARY 28, 2003
2004 2003
---- ----
(in thousands, except for per
share amounts)
Net sales $ 7,690 $ 7,347
Cost of sales 6,576 5,887
----------- -----------
Gross profit 1,114 1,460
Selling, general and administrative expenses 1,117 1,092
----------- -----------
Operating (loss) income (3) 368
Other income (expenses):
Disposal of non-operating facility 0 (175)
Interest expense 0 (18)
Interest expense on unsecured
creditors claim (10) (26)
Interest income 18 29
Environmental expenses reserve 0 113
Other, net 159 3
----------- -----------
Net income $ 164 $ 294
=========== ===========
INCOME PER SHARE OF COMMON STOCK:
Basic
Net Income per share $ 0.08 $ 0.14
----------- -----------
Diluted
Net Income per share $ 0.08 $ 0.14
----------- -----------
Weighted Average shares outstanding-Basic 2,076,357 2,070,821
=========== ===========
Weighted Average shares outstanding-Diluted 2,076,357 2,070,821
=========== ===========
The accompanying notes are an integral part of the financial statements.
25
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended February 29, 2004 and FEBRUARY 28, 2003
Common Stock Retained
------------ Additional Earnings
Number of Paid-in (Accumulated
Shares Amount Capital Deficit) Total
------------ ------------ ------------ ------------ ------------
(in thousands, except for number of shares)
Balance, February 28, 2002 2,070,821 $ 21 $ 2,617 $ (482) $ 2,156
Net Income -- -- -- 294 294
------------ ------------ ------------ ------------ ------------
Balance, February 28, 2003 2,070,821 21 2,617 (188) 2,450
Fractional shares paid Cash-in-Lieu (464)
New shares issued due to exercise
of stock options 6,000 3 3
Net Income -- -- -- 164 164
------------ ------------ ------------ ------------ ------------
Balance, February 29, 2004 2,076,357 $ 21 $ 2,620 $ (24) $ 2,617
============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
26
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 29, 2004 AND FEBRUARY 28, 2003
2004 2003
---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 164 $ 294
------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 185 176
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 63 (87)
Inventories 454 (177)
Prepaid expenses and other current assets (24) (4)
Increase (decrease) in:
Accounts payable (140) 140
Accounts payable-pre-petition 51 149
Accrued expenses and Other liabilities 69 (172)
Accrued environmental expenses 120 108
Other long-term liabilities (331) (47)
------- -------
Total adjustments 447 86
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 611 380
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES;
Additions to property, plant and equipment (179) (267)
------- -------
NET CASH (USED IN) INVESTING ACTIVITIES (179) (267)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES;
Proceeds from conversion of stock options 3 0
------- -------
NET CASH FROM FINANCING ACTIVITIES 3 0
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 435 113
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 1,448 1,335
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,883 $ 1,448
======= =======
The accompanying notes are an integral part of the financial statements.
27
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Activities
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 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.
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.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money market accounts,
with maturities of ninety days or less.
Accounts receivable
The Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated credit risk by performing credit checks
and actively pursuing past due accounts. An allowance for doubtful accounts has
been established. The allowance amount was $1,000 for 2004.
Principal Business Activity
The Company designs, develops, manufactures and markets solid-state
semiconductor components and related devices primarily for the military and
aerospace markets.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the weighted average method.
Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Major renewals and
improvements are capitalized, while maintenance and repairs are expensed as
incurred. Depreciation is provided on a straight-line basis over the estimated
useful lives of the related assets.
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. As of February 29, 2004, approximately $1,700,000 is
subject to this risk. 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 historically been
within Management's expectations.
Revenue Recognition
Revenue is recognized upon shipment; however, the Company may receive payment of
some contracts in advance. When received, these amounts are deferred and are
recognized as revenue in the period in which the related products are shipped.
28
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
Income Taxes
Income taxes are accounted for under the asset and liability method of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities or a change in tax rate is recognized in income in the period that
includes the enactment date. Deferred tax assets are reduced to estimated
amounts to be realized by the use of a valuation allowance.
Computation of Earnings per Share
Basic earnings per common share are 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.
In the fiscal years ended February 29, 2004 and February 28, 2003 diluted
earnings per common share were not computed because the effect of the
incremental shares would be anti-dilutive. The incremental shares were computed
based on stock options outstanding, using the treasury stock method.
Stock Based Compensation
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" in
1997. In December 2002, The FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure, and amendment of FASB Statement No. 123 (SFAS No. 148)." This
statement amends SFAS No. 123, to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. This statement also amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and disclosure requires that the Company continue to account
for stock-based employee compensation under APB No. 25, "Accounting for Stock
Issued Employees" with pro forma disclosure of net income and earnings per share
as if the fair value method prescribed by SFAS No. 123 had been applied in
accordance with SFAS 148.
Financial Statement 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.
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. Also, Management believes that
accounting standards adopted during fiscal year 2004 are not applicable to the
Company.
29
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Going Concern and Petition in Bankruptcy
The Company's consolidated financial statements as of February 29, 2004 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 United States
Environmental Protection Agency ("USEPA"), the Florida Department of
Environmental Protection ("FDEP"), and certain taxing authorities or raise
sufficient cash in order to pay these obligations as currently due, in order to
remain a going concern. The Company continues to negotiate with its unsecured
creditors, the USEPA, the FDEP, and taxing authorities in an attempt to arrive
at reduced payment schedules. The Company has a contingency plan to reduce its
size and thereby reduce its cost of operations within certain limitations.
However, no assurance can be made that the Company can reach a suitable
agreement with the unsecured creditors or taxing authorities or obtain
additional sources of capital and/or cash or that the Company can generate
sufficient cash to meet its obligations over the next year. The financial
statements do not include any adjustments to reflect the possible future effect
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
Petition in Bankruptcy
On January 24, 1992, the Company filed voluntary petitions in the United States
Bankruptcy Court for the Southern District of Florida seeking to reorganize
under Chapter 11 of the federal Bankruptcy code. The Company was authorized to
continue in the management and control of its business and property as
debtor-in-possession under the Bankruptcy Code.
On August 20, 1993 the Company's Plan of Reorganization, as amended and modified
(the "Plan"), was confirmed by the Bankruptcy Court and the Company emerged from
bankruptcy on August 30, 1993. On July 12, 1996 the Bankruptcy Court officially
closed the case.
(a) The Company is required to make quarterly payments to holders of
unsecured claims until they receive 35 percent of their pre-petition claims. At
February 29, 2004 the Company is currently scheduled to pay approximately
$1,874,000 to holders of allowed unsecured claims in quarterly installments of
approximately $62,000. As of February 29, 2004, the present value of this
amount, $864,000, is accrued as a pre-petition liability with imputed interest
recognized in the Statement of Operations.
(b) Beginning on the later of (i) the payment of all administrative claims
and all unsecured claims, but not later than 18 months after the Effective Date
(August 30, 1993) and (ii) the date the Company's net after tax income exceeds
$500,000, the Company will pay (on an annual basis) each of (x) the holders of
unsecured claims (pro rata) and (y) Vector Trading and Holding Corporation
("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.
30
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Going Concern and Petition in Bankruptcy (continued)
(c) Under the Plan, the Company is required to remediate its former
non-operating facility located in Port Salerno and its former facility located
in Riviera Beach, Florida. The Plan contemplated that monies to fund the
remediation will be made available from the proceeds of the sale or lease of the
properties, to the extent that the Company is successful in its efforts to sell
or lease such properties. The Riviera Beach Property was sold on October 12,
1999 by the Company. Under the terms of the sale, the United States Environment
Protection Agency ("USEPA") received the net proceeds of $419,000. USEPA also
received approximately $19,000 from the Riviera Beach environmental escrowed
monies to defray its cleanup costs. The Port Salerno (formerly occupied by
Solitron Microwave) property was sold on March 17, 2003. Under the terms of the
sale, the USEPA received $153,155 and Martin County received on behalf of FDEP
$278,148 (the net proceeds). Further, pursuant to the Plan, a purchaser of this
facility would not be liable for existing environmental problems under certain
conditions. In connection with facilitating the remediation of the property, the
Company will also, to the extent the proceeds from the sale or lease of these
properties are not sufficient to pay for the remediation, be required to escrow
the following amounts on a monthly basis beginning on September 30, 1995: (i)
year 1 - $5,000 per month; (ii) year 2 - $7,500 per month; (iii) year 3 -
$10,000 per month; and (iv) $10,000 per month thereafter until remediation is
completed. The Company has notified FDEP of its inability to pay pursuant to
this schedule and is making payments at the rate of $1,000 per month. As of
February 29, 2004, the Company has deposited $90,000 into the escrow accounts.
(d) The Company has paid all of the allowed administrative claims and
allowed wage claims since August 1993.
The Plan provided for the distribution of common stock of the Company such that,
post-petition, the Company's common stock would be held as follows:
Party-In-Interest Common Stock
----------------- ------------
Vector 25%
Unsecured Creditors 40%
Company's President 10%
Pre-Petition Stockholders 20%
Reserved for future issuance under an
employee stock incentive plan to be issued based
upon the terms and conditions of the plan at the
discretion of the Board of Directors 5%
----
100%
====
On October 4, 1994, the Company and Vector agreed that Vector's 25% stock would
be distributed among various parties. Vector participants were: Vector principal
(Howard White) who received 273,943 shares (subsequently sold to Inversiones
Globales); AHI Drillings, Inc. who received 77,037 shares; Cointrol Credit Co.
II who received 20,095 shares; Service Finance who received 77,037 shares; Trans
Resources who received 77,037 shares; and Martin Associates who received 22,848
shares. The 273,943 shares owned by Inversiones Globales are not 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. Based solely on the Company's knowledge (and not from any
filings which may have to be made with the SEC), and as the result of an out of
court agreement made subsequent to a lawsuit filed against Vector by John
Stayduhar, a previous Chairman/CEO of the Company, shares held by Inversiones
Globales (174,000), by AHI Drillings, Inc. (77,037), by Service Finance
(77,037), by Trans Resources (77,037), and by Martin Associates (22,737) were
transferred to Mr. Stayduhar. This gives Mr. Stayduhar approximately 20.66% of
the shares of the Company.
31
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Inventories
As of February 29, 2004, inventories consist of the following:
Raw Materials $1,411,788
Work-In-Process 1,242,952
Finished Goods 327,204
----------
Gross Inventory 2,981,944
Reserve (566,423)
----------
Net Inventory $2,415,521
==========
4. Property, Plant and Equipment
As of February 29, 2004, property, plant, and equipment consist of the
following:
Estimated
Useful Life
-----------
Leasehold Improvements $ 777,000 The remaining lease term
Machinery and Equipment 1,034,000 is 7 years
----------
1,811,000
Less Accumulated Depreciation
And Amortization 1,249,000
----------
$ 562,000
==========
Depreciation and amortization expense was $185,000 and $176,000 for 2004 and
2003, respectively.
5. Accrued Expenses
As of February 29, 2004 accrued expenses and other liabilities consist of the
following:
Payroll and related employee
benefits $ 316,000
Property taxes 6,000
Other liabilities 64,000
Interest Payable 803,000
----------
$1,189,000
==========
6. Other Long-Term Liabilities
As of February 29, 2004, other long-term liabilities consist of the following
pre-petition items:
Accrued Environmental Expenses $ 20,000
Accounts Payable-Pre-petition 13,000
--------
$ 33,000
========
32
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Other Long-Term Liabilities (continued)
Contractual or estimated payment requirements on other long-term liabilities
excluding amounts representing interest during the next five years and
thereafter are as follows. It is reasonably possible that the estimates could
change in the near term:
Year Ending
February 28
-----------
2005 $33,000
=======
Imputed interest expense for fiscal years ended February 29, 2004 and February
28, 2003 amounted to $10,000 and $26,000 relating to accounts payable -
pre-petition.
7. Income Taxes
At February 29, 2004, the Company has net operating loss carryforwards of
approximately $15,487,000 that expire through 2022. Such net operating losses
are available to offset future taxable income, if any. As the utilization of
such net operating losses for tax purposes is not assured, the deferred tax
asset has been fully reserved through the recording of a 100% valuation
allowance. Should a cumulative change in the ownership of more than 50% occur
within a three-year period, there could be an annual limitation on the use of
the net operating loss carryforward.
Deferred tax assets are comprised of the following at February 29, 2004:
Loss carryforwards $ 5,266,000
Allowance for doubtful accounts 1,000
Inventory Allowance 3,369,000
-----------
Gross deferred tax asset 8,636,000
Deferred tax asset valuation allowance (8,636,000)
-----------
Net deferred tax $ --
===========
A reconciliation of the provision for income taxes to the amount calculated
using the statutory federal rate (34%) for fiscal years ended February 29, 2004
and February 28, 2003 is as follows:
2004 2003
---- ----
Income Tax Provision at
Federal Statutory Rates $ 47,000 $ 103,000
State Taxes 9,000 19,000
Utilization of Net Operating Loss
Carryforward (56,000) (122,000)
-------- ----------
Income Tax Provision $ -- $ --
33
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock Options
Pursuant to agreements dated October 20, 1992 and August 20, 1993, the Company's
President was granted options, which entitle him to purchase 8.5% of the common
stock of the Company (175,636 shares at February 28, 1999, subject to adjustment
as defined in the Agreement) for an aggregate exercise price of $21,955. These
options have now expired.
The Company inadvertently understated the number of stock options granted in
fiscal year 2001 by 38,751. The revised number of options granted are reflected
in the Notes to Consolidated Financial Statements as of February 29, 2004.
On May 19, 2003 the Board of Directors granted Stock options to certain key
employees. The options, which became vested on May 18, 2004, were for a total
number of 45,500 shares and the exercise price was fixed at $0.450 per share,
which was the price on the OTCBB at the time of the grant. The options are
exercisable through May 19, 2013. On June 17, 2002 the Board of Directors
granted Stock options to certain key employees. The options, which became vested
on June 18, 2003, were for a total number of 40,000 shares and the exercise
price was fixed at $0.200 per share, which was the price on the OTCBB at the
time of the grant. The options are exercisable through June 17, 2012. In
December 2000 another grant equal to 10% of the outstanding shares (245,624) was
made to Mr. Saraf at the exercisable price of $0.400 per share. Fifty percent
(50%) of the total number of shares is immediately exercisable and the other 50%
vests in five equal installments over the following five years.
The Company complies with SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by SFAS No. 123, the Company continues to follow the
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and does not recognize compensation
expense for its stock based incentive plan. Had compensation cost been
determined based on the fair value on the grant dates consistent with the
methodology prescribed by SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the pro-forma amounts indicated below.
Year Ended Year Ended
February 29, 2004 February 28, 2003
As Pro As Pro
Reported Forma Reported Forma
-------- ----- -------- -----
Net income $164,000 $144,000(1) $294,000 $279,000(1)
Basic income $ 0.08 $ 0.07 $ 0.14 $ 0.13
per common share
Diluted income $ 0.08 $ 0.07 $ 0.14 $ 0.13
per common share
(1) The total stock-based employee compensation expense for the years ended
February 29, 2004 and February 28, 2003, $20,000 and $15,000, respectively,
determined under fair value based method for all awards, net of related tax
effects, has been deducted from the pro forma net income.
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 fiscal year 2004:
2003
----
Dividend Yields 0.0%
Expected Volatility 184.0%
Risk-free Interest Rates 5.0%
Expected Life (in years) 9.0
34
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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-forma effects on reported net income or loss for
future years
Below is a summary of the Company's Stock Option Plan.
Average
Shares Price
------ -----
Balance, February 28, 2003 487,209 $ 0.343
Stock options never
recorded for Fiscal
year 2001 stock option
grant 38,751 $ 0.400
Granted 45,500 $ 0.450
Expired or Cancelled (179,386) $ 0.135
Exercised (6,000) $ 0.423
-------- -------
Balance, February 29, 2004 386,074 $ 0.457
======== =======
During the year ended February 29, 2004 the Company awarded options for 45,500
shares at a price of $0.45. The weighted average fair value of options granted
during the year ended February 29, 2004 was $0.45.
The following table summarizes information about stock options outstanding and
exercisable at February 29, 2004
Options Outstanding Exercisable Options
------------------- -------------------
Weighted Average Weighted Average
---------------- ----------------
Range of Number Remaining
Exercise Prices Outstanding Contractual Exercise Exercise
--------------- Shares Life Price Number Prices
------ ---- ----- ------ ------
$0.156 $0.156 4,000 3 years $0.156 4,000 $0.156
$0.200 $0.200 36,400 8 years $0.200 36,400 $0.200
$0.400 $0.400 245,624 7 years $0.400 196,499 $0.400
$0.450 $0.450 44,500 10 years $0.450 44,500 $0.450
$0.625 $0.625 16,500 5 years $0.625 18,000 $0.625
$0.670 $0.670 24,750 6 years $0.670 26,000 $0.670
$2.500 $2.500 14,300 1 years $2.500 14,300 $2.500
------- -------
386,074 336,949
======= =======
9. Employee Benefit Plans
The Company has a 401K and Profit Sharing Plan (the "Profit Sharing Plan") in
which substantially all employees may participate after three months of service.
Contributions to the Profit Sharing Plan by participants are voluntary. The
Company may match participant's contributions up to 25% of 4% of each
participant's annual compensation. In addition, the Company may make additional
contributions at its discretion. The Company did not contribute to the Profit
Sharing Plan during the fiscal years ended February 29, 2004 and February 28,
2003.
35
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Export Sales and Major Customers
Revenues from domestic and export sales to unaffiliated customers are as
follows:
Year Ended Year Ended
February 29, February 28,
2004 2003
---- ----
Export sales:
Europe $ 412,000 $ 401,000
Canada and Latin America 125,000 57,000
Far East and Middle East 119,000 280,000
United States 7,034,000 6,609,000
----------- -----------
$ 7,690,000 $ 7,347,000
=========== ===========
Sales to the Company's top two customers accounted for 52% of net sales for the
year ended February 29, 2004 as compared with 59% of the Company's net sales for
the year ended February 28, 2003. Sales to Raytheon Company accounted for
approximately 41% of net sales for the year ended February 29, 2004 and 45% for
the year ended February 28, 2003. During the fiscal year ended February 29,
2004, the US Government represented approximately 11% of net sales as compared
to 9% for the fiscal year ended February 28, 2003
11. Commitments and Contingencies
Employment Agreement
In December 2000, the Company entered into a five-year employment agreement with
its President. This agreement provides, among other things, for annual
compensation of $240,000 and a bonus pursuant to a formula. The agreement
stipulates that the President shall be entitled to a bonus equal to fifteen
percent (15%) of pre-tax income in excess of Two Hundred Fifty Thousand Dollars
($250,000). For purposes of the agreement, "pre -tax income" shall mean net
income before taxes, excluding (i) all extraordinary gains or losses, (ii) gains
resulting from debt forgiven associated with the buyout of unsecured creditors,
and (iii) any bonuses paid to employees. The bonus payable hereunder shall be
paid within ninety (90) days after the end of the fiscal year. The President of
the Company voluntarily took a 30% reduction in compensation at the time that
salary reductions, ranging from 6% to 12%, went into effect for all of the
employees of the Company during fiscal year 2002. As of June 2, 2003, 66% of the
reduction in salary was restored. As of January 1, 2004, the President's salary
was restored to 94% of the contracted value.
The President's employment agreement stipulates, in Article 2.2, "Option to
Extend", that the contract is automatically extended for one year periods unless
a notice is given by either party one year prior to the yearly anniversary.
Upon execution of the agreement, the President received a grant of options to
purchase ten percent (10%) of the outstanding shares of the Company's common
stock, par value $.01 calculated on a fully diluted basis, at an exercise price
per share equal to the closing asking price of the Company's common stock on the
NASDAQ Over-the-Counter Bulletin Board (the "OTCBB") on the date of the grant
($0.40). Fifty percent (50%) of the Initial Stock Options granted are vested
immediately upon grant. The remaining fifty percent (50%) of the Initial Stock
Options will vest in equal amounts on each of the first five anniversaries of
the date of grant.
36
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Commitments and Contingencies (continued)
These stock options are in addition to, and not in lieu of or in substitution
for, the Stock Options (the "1992 Stock Options") granted to employee pursuant
to the Incentive Stock Option Plan Agreement dated October 20, 1992 under
Solitron Devices, Inc. 1987 Stock Option Plan between the Company and the
employee.
No bonus was accrued for the President for the fiscal year ending February 29,
2004. A bonus of $18,219 was accrued for the President for the fiscal year ended
February 29, 2003.
Environmental Compliance:
The Company is currently engaged in negotiations with the United States
Environmental Protection Agency ("USEPA") to resolve the Company's alleged
liability to USEPA at the following sites: Solitron Microwave Superfund Site,
Port Salerno, Florida; Petroleum Products Corporation Superfund Site, Pembroke
Park, Florida; Casmalia Disposal Superfund Site, Santa Barbara County,
California; and Solitron Devices Site, Riviera Beach, Florida. USEPA contends
that the Company is liable for a share of past and future costs incurred by
USEPA in connection with the investigation and remediation of the sites. At a
meeting with USEPA on March 23, 2001, USEPA contended that the Company's alleged
share of liability at the four (4) sites totals approximately $7.65 million,
which USEPA broke down on a site by site basis as follows: Solitron Microwave,
Port Salerno - $3.8 million; Petroleum Products - $150,000; Casmalia Disposal -
$2.7 million; and Solitron Devices, Riviera Beach - $1 million.
In addition to the claims asserted by USEPA against the Company at the Casmalia
Disposal Superfund Site, claims have been asserted against the Company by a
group of alleged responsible parties formed at the site for all past and future
cleanup expenses incurred or to be incurred by the respective group. During the
negotiations with USEPA to resolve the Company's alleged liability at all sites,
the Company was advised by USEPA that a settlement with USEPA would most likely
resolve the claims of the groups of alleged responsible parties formed at the
Casmalia Disposal Superfund Site. Preliminary communications with attorneys
representing the respective groups support USEPA's representations in this
regard.
The Company contends that the claims of USEPA and the Casmalia private party
group referenced above were discharged in bankruptcy pursuant to the Bankruptcy
Court's Order Confirming Solitron's Fourth Amended Plan of Reorganization,
entered in August 1993. Nevertheless, the Company is negotiating with USEPA to
settle its outstanding liability at all sites based on an ability to pay ("ATP")
determination.
Following a settlement conference on October 24, 2003, the Company received a
final ATP Multi-Site Settlement Agreement from EPA on January 23, 2004. The
substantial provisions of the Agreement obligate the Company to pay to EPA the
sum of $74,000 over two years, in equal quarterly payments, plus interest. In
addition, the Company is obligated to pay to EPA the sum of $10,000 or 5% of
Solitron's net after-tax income over the first $500,000, if any, whichever is
greater, for years 3-7 following the effective date of the Agreement. The
Company signed the Agreement and returned it to EPA for execution on January 26,
2004. After receipt of the signed Agreement, EPA notified the Company that
additional edits to the Agreement may be necessary. The Company expects to
complete negotiations with EPA in 2004. Once the agreement becomes effective, it
is anticipated that EPA will recommend to the PRP group at the Casmalia Disposal
Superfund Site that the group release the Company from further liability at the
site upon the Company's compliance with the Agreement.
On August 7, 2002, the Company received a Request for Information from the State
of New York Department of Environmental Conservation ("NYDEC"), seeking
information on whether the Company had disposed of certain wastes at the
Clarkstown Landfill site located in the Town of Clarkstown, Rockland County, New
York. By letter dated August 29, 2002, the Company responded to the Request for
Information and advised NYDEC that the Company's former Tappan, New York
facility closed in the mid-1980s, prior to the initiation of the Company's
bankruptcy proceedings described above. The Company contends that, to the extent
that NYDEC has a claim against the Company as a result of the Company's alleged
disposal of wastes at the Clarkstown landfill prior to the closing of the
Company's former Tappan facility in the mid-1980s, the claim was discharged in
bankruptcy as a result of the Bankruptcy Court's August 1993 Order referenced
above. The Company entered into a Tolling Agreement with the State of New York
37
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Commitments and Contingencies (continued)
in August 2003, which provides for the tolling of applicable statutes of
limitation through the earlier of August 23, 2004 or the date the State
institutes a suit against Solitron, for any claims associated with the
Clarkstown Landfill site. It is not known at this time whether the State of New
York will pursue a claim against the Company in connection with the Clarkstown
Landfill site.
Operating Leases
The Company has entered into a new lease agreement for its production facility.
The lease has a 10-year term, which expires in the year 2011 and has no option
to renew under current terms. The lease is subject to escalations based on
operating expenses. Future minimum lease payments for all non-cancelable
operating leases are as follows:
Fiscal Year Ending February 28/29 Amount
--------------------------------- ------
2005 402,000
2006 414,000
2007 427,000
2008 439,000
2009 452,000
Thereafter 946,000
----------
Total $3,080,000
==========
Total rent expense was $408,000 for the year ended February 29, 2004 as compared
with $415,000 for the year ended February 28, 2003. These figures include rental
of storage space, which is made on a month-to-month basis.
In connection with the Vector Purchase Agreement, the Company entered into a
sublease agreement whereby S/V Microwave had agreed to reimburse the Company for
one-third of the rental obligations in exchange for S/V Microwave's use of
approximately one-third of the facility. From January 1997 through December
2001, S/V Microwave made these payments directly to the landlord. S/V Microwave
terminated the sublease at its original termination date of December 31, 2001
and has left the premises. The Company renegotiated a new lease to exclude the
area previously utilized by S/V Microwave. The Company, according to the terms
of the new lease, had walls constructed and utilities divided so that the space
previously occupied by S/V Microwave would be completely separate from the space
occupied by the Company. The new lease is for a term of ten years ending
December 31, 2011 and does not contain a renewal option.
Legal Proceedings
The Company's former controller has filed a "Whistleblower" claim with the U.S.
Department of Labor, Occupational Safety & Health Administration (OSHA) pursuant
to Section 806 of the Sarbanes-Oxley Act of 2002, codified at 185 U.S.C. sec.
1514A, which is also known as the "Corporate and Criminal Fraud Accountability
Act of 2002". The matter is being handled as an administrative proceeding before
OSHA at this point. At the present time, OSHA is still conducting an
investigation of the claim, and OSHA has not yet issued its findings. The claim
is being vigorously contested. At this early state, it is difficult to predict
the eventual outcome, but an unfavorable outcome before this administrative
agency is reasonably possible. Should the claimant prevail on his claim, the
damages available to him include back pay, front pay, compensation for loss of
benefits, non-economic damages, attorneys' fees and costs. The Company is being
defended in this action by its liability insurance carrier, under a reservation
of rights.
38
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Commitments and Contingencies (continued)
The Southeast Regional Office of the Securities and Exchange Commission is
conducting a formal investigation concerning the Company. To date, the SEC
investigation has focused on the propriety of the Company's past accounting. The
Company has produced documents to the SEC, and the SEC has taken sworn testimony
of several individuals. As of this date, the SEC has not requested a "Wells"
submission from the Company, and has not indicated an intention to file any
civil or administrative complaint against the Company. An unfavorable outcome of
the SEC investigation may have a material adverse effect on the Company's
financial condition or results of operations. At this time, we are unable to
conclude that the likelihood of an adverse outcome is probable or remote. We
therefore are unable to express an opinion as to the likelihood of an
unfavorable outcome. We also are unable to express an opinion as to an amount or
range of potential loss.
12. Other Income
During the year ended February 29, 2004, the Company recognized other income,
which totaled approximately $109,000 ($0.05/share). This other income was the
result of settlement of a debt obligation to an unsecured creditor which the
Company bought at a discount. The Company settled a debt obligation of $114,000
and recognized $109,000 of other income.
13. Sale of Non-Operating Facility
On March 17, 2003 the Company sold its non-operating plant facilities located in
Port Salerno, Florida. The Port Salerno property consisted of a 42,000 square
foot building and 23 acres of undeveloped land. The property was carried at its
estimated fair market value, net of disposal costs, per the Company's accounting
policy. Since the particulars of the sale were probable and reasonably estimable
at the end of fiscal year 2003, the February 28, 2003 financial statements were
adjusted to reflect the sale of the Port Salerno property.
The transaction is summarized as follows from the settlement statement:
Gross Sales Price of Property $801,691
Less Disbursements Paid at Closing:
USEPA (153,155)
Martin County on Behalf of FDEP (278,148)
Real Estate Taxes (287,401)
Sales Commission ( 48,000)
Attorney's Fees ( 23,309)
State Tax/Stamps ( 5,600)
Title and Other Fees ( 6,078)
--------
Net $0
========
14. Subsequent Event
On May 17, 2004, the Board of Directors granted stock options to certain key
employees. The options, which will vest on May 16, 2005, were for a total of
47,500 shares and the exercise price was fixed at $1.05 per share (the closing
price on the Over-The-Counter Bulletin Board at the time of the grant). On the
same date, the Board of Directors awarded Mr. Saraf 175,636 shares, which are
fully vested, to replace options that expired during fiscal year 2004. The
exercise price was fixed at $1.05 per share (the closing price on the
Over-The-Counter Bulletin Board at the time of the grant).
39
SOLITRON DEVICES, INC. AND SUBSIDIARIES
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 8A. CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and procedures as
of February 29, 2004, Shevach Saraf, Chairman, President, Chief Executive
Officer, Treasurer and Chief Financial Officer of the Company, has concluded
that the Company's disclosure controls and procedures are effective in ensuring
that information required to be disclosed by the Company in the reports that it
files or submits under the Securities and Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time period specified by
the Securities and Exchange Commission rules and forms.
There were no significant changes in the Company's internal control over
financial reporting that has materially affected or is reasonably likely to
materially affect the Company's internal control over financial reporting.
40
PART III
ITEM 9. DIRECTORS , EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The table below sets forth the name, age, and position of the directors and
executive officers of the Company. The table below also sets forth the year in
which each of such directors was first elected to the Board and the year in
which the term of each of such directors expires. Pursuant to the Company's
Certificate of Incorporation, the Board of Directors is divided into three
classes, each of which consists of (as nearly as may be possible) one third of
the directors. Directors are elected for three-year terms. Pursuant to the Plan
of Reorganization, all shares of Common Stock issued to Vector and its
participants and to the holders of allowed unsecured claims must be voted for
all purposes (including the election of members of the Board of Directors) as
directed by the Board of Directors. Pursuant to the Plan of Reorganization,
Vector originally owned 25% and the holders of allowed unsecured claims own an
aggregate of 40% of all shares of Common Stock issuable pursuant to the Plan of
Reorganization (other than shares issuable to Mr. Saraf upon the exercise of
options granted prior to the Effective Date). On October 4, 1994, the Company
and Vector agreed that 25% of Vector stock would be redistributed between six
parties (see Note 2 the Consolidation Financial Statements). Five original
Vector participants continue to be subject to the voting restrictions as long as
they or their affiliates hold Solitron stock.
Year
First Term As
Became Director
Name Age Position with Solitron Director Expires(1)
---- --- ---------------------- -------- ----------
Shevach Saraf 61 Chairman of the Board, 1992 Expired
Chief Executive Officer,
President and Treasurer
Dr. Jacob A. Davis 67 Director 1996 Expired
Mr. Joseph Schlig 76 Director 1996 Expired
1) The term of each Director has expired. Each Director shall continue in office
until his successor is elected at the next annual meeting of stockholders.
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 42 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.
41
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.
Dr. Jacob (Jay) A. Davis was elected a Director of the Company on August 26,
1996. For five years, he was Vice President of Business Planning and Finance for
AET, Inc, a developing, Melbourne, Florida based software company. In 1994 and
1995, he was Visiting Professor in Engineering Management at Florida Institute
of Technology. He is presently Vice-Chairman of the Brevard SCORE Chapter and
devotes significant time to counseling with local businesses. He is an active
member of the International Executive Service Corps (IESC) serving in South
Russia during May and June of 1996.
Prior to joining AET, Dr. Davis was with Harris Semiconductor for 26 years.
During the last 12 years with Harris Semiconductor, he was Vice
President-General Manager of the Military and Aerospace Division, the Custom
Integrated Circuits Division and the Harris Microwave Division. Dr. Davis has
served in a variety of other capacities at Harris Semiconductor including Vice
President of Engineering, Director of Manufacturing, Director of Special
Services, and Device Research Engineer.
Dr. Davis received a doctor of philosophy from Purdue University in 1969 and a
bachelors of science in electrical engineering from North Carolina State
University. He is a Member of the IEEE and the Electrochemical Society, and has
served on a variety of advisory boards for several Universities. He holds four
patents and has given a number of overview papers and invited presentations at
several conferences.
Dr. Davis is the Chairman of the Compensation Committee and a member of the
Audit Committee.
Mr. Joseph Schlig was elected a Director of the Company on August 26, 1996.
Since 1985, he has been 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. Prior to 1985, Mr. Schlig had
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 served as a director of the Trumbull Technology Foundation, and
a Director of the MIT Enterprise Forum of Connecticut and currently serves as a
director of the Bridgeport Economic Development Corporation. He is an alternate
member of the Board of Finance of the Town of Trumbull, 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 the
Chairman of the Audit Committee and a member of the Compensation Committee.
Audit Committee
The Company's Board of Directors has an Audit Committee. The Audit Committee
consists of Messrs. Davis and Schlig (Chairman). The Audit Committee is composed
of independent directors. The Company's Audit Committee generally has
responsibility for appointing, overseeing and determining the compensation of
our independent certified public accountants, reviewing the plan and scope of
the independent certified public accountants' audit, reviewing our audit and
control functions, approving all non-audit services provided by our independent
certified public accountants and reporting to our full Board of Directors
regarding all of the foregoing. Additionally, our Audit Committee provides our
Board of Directors with such additional information and materials as it may deem
necessary to make our Board of Directors aware of significant financial matters
that require its attention. The Company has adopted an Audit Committee Charter,
a copy of which is published on the Company's web site, www.solitrondevices.com
on the Investor Relations page. The Audit Committee "financial expert" is Mr.
Joseph Schlig.
The Company has adopted a Code of Ethics for Senior Financial Officers, pursuant
to the Sarbanes-Oxley Act of 2002. The Code of Ethics is published on the
Company's web site, www.solitrondevices.com on the Investor Relations page.
42
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors and executive officers of the Company and ten percent stockholders 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 stockholders are required to furnish the Company with copies of all
Section 16(a) forms they file. To the Company's knowledge, based solely on a
review of the copies of such reports furnished to the Company and
representations that no other reports were required during the year ended
February 29, 2004, all Section 16(a) filing requirements applicable to directors
and executive officers of the Company and ten percent stockholders of the
Company were complied with, except that Messrs. David and Schlig inadvertently
failed to report one transaction.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning compensation
paid by the Company, to or on behalf of the Company's Chief Executive Officer
for the fiscal years ended February 29, 2004 and February 28, 2003 and 2002. The
Company has no other named executive officers.
Annual Compensation
------------------------------------------------
Other
Name and Annual
Principal Position Year Salary ($) Bonus ($) Compensation($)
------------------ ---- ---------- --------- ---------------
Shevach Saraf 2004 205,338 -0- 21,814(1)
Chairman of the Board, 2003 169,194 18,219 15,800(2)
Chief Executive Officer, 2002 188,030 -0- 24,352(3)
President, Chief Financial
Officer and Treasurer
_________
(1) Life, Disability, & Medical Insurances plus personal car expenses and legal
fees
(2) Life, Disability, & Medical Insurances plus personal car expenses
(3) Life, Disability, & Medical Insurances plus personal car expenses and legal
fees
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
-------------------- ------------ ---------------- ------------ -----------
Shevach Saraf 0 - - -
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain summary information covering unexercised
options to purchase the Company's Common Stock as of February 29, 2004 held by
the Company's Chief Executive Officer. The Company's Chief Executive Officer did
not exercise any stock options during the fiscal year ended February 29, 2004.
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED OPTIONS THE-MONEY OPTIONS AT
SHARES AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)
ACQUIRED ON VALUE ------------------------------------ -------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------- ------------- --------------- ---------------- ------------------ ------------- ----------------
Shevach Saraf -0- - 196,499 49,125 $186,674 $46,669
43
Director Compensation
Each director who is not employed by the Company receives $1,500 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 $13,000 for the fiscal year ended February 29, 2004.
Employment Agreement
In December 2000, the Company entered into a five-year employment agreement with
its President and CEO. This agreement provides, among other things, for annual
compensation of $240,000 and a bonus pursuant to a formula. The agreement
stipulates that the President shall be entitled to a bonus equal to fifteen
percent (15%) of the Company's pre-tax income in excess of Two Hundred Fifty
Thousand Dollars ($250,000). For purposes of the agreement , "pre-tax income"
shall mean net income before taxes, excluding (i) all extraordinary gains or
losses, (ii) gains resulting from debt forgiven associated with the buyout of
unsecured creditors, and (iii) any bonuses paid to employees. The bonus payable
hereunder shall be paid within ninety (90) days after the end of the fiscal
year.
The employment agreement stipulates that the contract is automatically extended
for one year periods unless a notice is given by either party one year prior to
the yearly anniversary.
Upon execution of the agreement, the President received a grant to purchase ten
percent (10%) of the outstanding shares of the Company's common stock, par value
$.01 calculated on a fully diluted basis, at an exercise price per share equal
to the closing asking price of the company's common stock on the NASDAQ
Over-the-Counter Bulletin Board (the "OTCBB") on the date of the grant ($0.40).
Fifty percent (50%) of the initial stock options granted are vested immediately
upon grant. The remaining fifty percent (50%) of the initial stock options vest
in equal amount on each of the first five anniversaries of the date of grant.
These stock options are in addition to, and not in lieu of or in substitution
for, the Stock Options (the "1992 Stock Options") granted to the President
pursuant to the Incentive Stock Option Plan Agreement dated October 20, 1992
under Solitron Devices, Inc. 1987 Stock Option Plan between the Company and the
President.
The President of the Company voluntarily took a 30% reduction in compensation at
the time that salary reductions, ranging from 6% to 12%, went into effect for
all of the employees of the Company. As of June 2, 2003, 66% of the reduction in
salary was restored. As of January 1, 2004, the President's salary was restored
to 94% of the contracted value.
The President 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 29, 2004, 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of February 29, 2004 by (i) all directors, (ii) the
Chief Executive Officer, (iii) all officers and directors of the Company as a
group, and (iv) each person known by the Company to beneficially own in excess
of 5% of the Company's outstanding Common Stock.
The Company does not know of any other beneficial owner of more than 5% of the
outstanding shares of Common Stock other than as shown below. Unless otherwise
indicated below, each stockholder 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.
44
Number of Shares Percentage of
Name and Address Beneficially Owned (1) Outstanding Shares (1)
---------------- ---------------------- ----------------------
Shevach Saraf
3301 Electronics Way
West Palm Beach, FL 33407 466,779(2) 22.48%
Dr. Jacob Davis
370 Franklyn Avenue 21,000(2) *
Indialantic, FL 32903
Joseph Schlig
129 Mayfield Drive 21,000(2) *
Trumbull, CT 06611
All Executive Officers and
Directors as a Group (3
persons) 508,779(2) 24.50%
John Stayduhar Revocable
Trust 427,848 20.61%
c/o Boyes & Farina
1001 Forum Place, Suite 900
West Palm Beach, FL 33401
Bruce Paul 181,500 8.74%
Hampton Road
Purchase, NY 10577
* Less than 2%
(1) For purposes of this table, beneficial ownership is computed pursuant
to Rule 13d-3 under the Securities Exchange Act of 1934, as amended; the
inclusion of shares beneficially owned should not be construed as an
admission that such shares are beneficially owned for purposes of Section
16 of such Act.
(2) Includes shares that may be acquired upon exercise of options that are
exercisable within sixty (60) days in the following amounts: Mr. Saraf -
196,499 shares; Mr. Schlig - 21,000 shares; Mr. Davis - 21,000 shares.
45
------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE OF EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))
------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 0 - -
------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders 386,074 $0.457 308,000
------------------------------------------------------------------------------------------------------------------
Total 386,074 $0.457 308,000
------------------------------------------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
46
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(A) 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).
4.1 Rights Agreement dated as of May 31, 2001, between Solitron Devices,
Inc. and Continental Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to the Company's current report on Form
8-K filed on June 20, 2001).
10.1 1987 Incentive Stock Option Plan (incorporated by reference to the
Company's Form 10-K for the years ended February 28, 1994 and
February 28, 1995).
10.2 Purchase Agreement, dated October 5, 1992, by and among Solitron
Devices, Inc., Solitron Specialty Products, Inc. (f/k/a Solitron
Microwave, Inc.) and Vector Trading and Holding Corporation, along
with and as amended by: (i) Amendment Number One to Purchase
Agreement, dated October 28, 1992, by and among Solitron Devices,
Inc., Solitron Specialty Products, Inc. (f/k/a Solitron Microwave,
Inc.) and Vector Trading and Holding Corporation; (ii) Order, dated
December 23, 1992, Authorizing the Sale of Certain of the Debtors'
Assets to Vector Trading and Holding Corporation; (iii) Amendment
Number Two to Purchase Agreement. dated February 28, 1993, by and
among Solitron Devices, Inc., Solitron Specialty Products, Inc.
(f/k/a Solitron Microwave, Inc.) and Vector Trading and Holding
Corporation; and (iv) Order, dated March 4, 1993, Granting Vector
Trading and Holding Corporation's Motion for Entry of Amended Order
Authorizing Sale of Certain of the Debtors' Assets (incorporated by
reference to the Company's Form 10-K for the year ended February 28,
1993).
10.3 Shared Services and Equipment Agreement, dated February 28, 1993, by
and among Solitron Devices, Inc., Solitron Specialty Products, Inc.
(f/k/a Solitron Microwave, Inc.) and S/V Microwave (incorporated by
reference to the Company's Form 10-K for the year ended February 28,
1993).
10.4 Commercial Lease Agreement, dated January 1, 1992, between William C.
Clark, as Trustee, and Solitron Devices, Inc. (incorporated by
reference to the Company's Form 10-K for the year ended February 28,
1993).
10.5 Reduction in Space and Rent Agreement dated November 1, 2001 between
Solitron Devices, Inc. and Technology Place, Inc.
47
10.6 Employment Agreement, dated December 1, 2000, between Solitron
Devices, Inc. and Shevach Saraf (incorporated by reference to the
Company's Form 10-K for the year ended February 28, 2001)
21* List of Subsidiaries of the Company.
31* Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32* Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K
None
* Filed herewith
48
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed to the Company for the years ended February 28, 2003
and February 29, 2004, by its principal accounting firm, Berkovits, Lago &
Company LLP ("BL&C"), are as follows:
Audit Fees: The aggregate fees for professional services rendered by BL&C in
connection with (i) the audit of our annual financial statements (Form 10-KSB),
and (ii) reviews of our quarterly financial statements (Form 10-QSB) for the
years ended February 28, 2003 and February 29, 2004, were approximately $28,000
and $49,000 respectively.
Audit Related Fees: The aggregate fees for professional services rendered by
BL&C for audit-related services in connection with special procedures for the
year ended February 28, 2003 and February 29, 2004, were approximately $0 and
$26,252 respectively.
Tax Fees: The aggregate fees for professional services rendered by BL&C for tax
compliance, tax advice and tax planning for the years ended February 28, 2003
and February 29, 2004 were approximately $3,000 and $3,000 respectively.
All Other Fees: There were no other fees paid for professional services that
were not included in audit fees, audit-related fees and tax fees for the years
ended February 28, 2003 and February 29, 2004.
PRE-APPROVAL POLICIES AND PROCEDURES FOR AUDIT AND PERMITTED NON-AUDIT SERVICES.
The Audit Committee has a policy of considering and, if deemed appropriate,
approving, on a case by case basis, any audit or permitted non-audit service
proposed to be performed by BL&C in advance of the performance of such service.
These services may include audit services, audit-related services, tax services
and other services. The Audit Committee has not implemented a policy or
procedure which delegates the authority to approve, or pre-approve, audit or
permitted non-audit services to be performed by BL&C. In connection with making
any pre-approval decision, the Audit Committee must consider whether the
provision of such permitted non-audit services by BL&C is consistent with
maintaining BL&C's status as our independent auditors.
Consistent with these policies and procedures, the Audit Committee approved all
of the services rendered by BL&C during the year ended February 29, 2004, as
described above.
49
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
SOLITRON DEVICES, INC.
/s/ Shevach Saraf
--------------------------------
By: Shevach Saraf
Title: Chairman of the Board, President,
Chief Executive Officer, Treasurer and
Chief Financial Officer
Date: June 16, 2004
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Shevach Saraf June 16, 2004
------------------------
Shevach Saraf Chairman of the Board,
President, Chief
Executive Officer,
Treasurer and Chief
Financial Officer.
/s/ Jacob Davis June 16, 2004
------------------------
Jacob Davis Director
/s/ Joseph Schlig
------------------------ June 16, 2004
Joseph Schlig Director
50
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
21* List of Subsidiaries of the Company
31* Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32* Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
51