FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2003
Commission File No. 1-4978
SOLITRON DEVICES, INC.
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(Name of Small Business Issuer in Its Charter)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Delaware 22-1684144
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
3301 Electronics Way, West Palm Beach, Florida 33407
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(Address of Principal Executive Offices)
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
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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: $7,347,000.
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 May 19, 2003, was approximately $931,869.
The number of shares outstanding of each of the issuer's classes of common
stock, as of May 19, 2003: 2,070,821 shares of common stock, par value $.01 per
share.
Transitional Small Business Disclosure Format:
Yes No X
-- --
Documents incorporated by reference: None
1
PART I
ITEM 1. BUSINESS
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GENERAL
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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 28, 2003 and for the fiscal year ended
February 28, 2002 and (ii) contributions to the Company's total order backlog at
February 28, 2003 and 2002.
Fiscal Year Fiscal Year Backlog Backlog
Ended Ended at at
February February February February
Product 28, 2003 28, 2002 28, 2003 28, 2002
------------------------ ------------ --------- --------- ---------
Power Transistor . . . . 17% 19% 18% 16%
Hybrids. . . . . . . . . 53% 55% 62% 58%
Field Effect Transistors 6% 6% 5% 3%
Power MOSFETS. . . . . . 24% 20% 15% 23%
------------ --------- --------- ---------
100% 100% 100% 100%
The Company's backlog at February 28, 2003 and revenue for the year ended
February 28, 2003 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
28, 2003 approximately 85% of the Company's sales have been of custom products,
and the remaining 15% 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 (Joint
Army Navy) 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. The Company is qualified to deliver these
products under MIL-PRF-19500 in accordance with the JAN, JANTX and JANTXV
quality 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:
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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.
3
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 some of the hybrid packages it uses and purchases some 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
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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 28, 2003 the Company underwent two
additional surveillance audits that resulted in recertification. 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 28, 2003, the Company sold products to
approximately 203 customers. Of these 203 customers, 46 had not purchased
products from the Company during the previous fiscal year. During the fiscal
year ended February 28, 2003, Raytheon accounted for approximately 45% of net
sales, as compared to the 39% it accounted for during the fiscal year ended
February 28, 2002. The U.S. government, accounted for approximately 9% of total
net sales, as compared to approximately 11% for the fiscal year ended February
28, 2002. Other than Raytheon, 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 83% of the Company's sales
during the fiscal year ended February 28, 2003. 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 28, 2003 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 21% increase in
net bookings during the fiscal year ended February 28, 2003 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 segments in which purchasing
5
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 10% of the Company's net sales for the fiscal year
ended February 28, 2003 as compared to 7% for the year ended February 28, 2002.
All sales to foreign customers are conducted utilizing exclusively U.S. dollars.
BACKLOG
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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 $5,193,000 at February 28, 2003, as compared to $4,266,000
as of February 28, 2002. 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, 2004. 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 28, 2003 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
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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 28, 2003, the Company had 86 employees (as compared to 88 at
February 28, 2002), 62 of whom are engaged in production activities, 5 in sales
and marketing, 5 in executive and administrative capacities and 14 in technical
and support activities. Of the 86 employees, 81 were full time employees and 5
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.
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 four (4)
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
$8 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 assert by USEPA against the Company at the
Petroleum Products Corporation and Casmalia Disposal Superfund Sites, claims
have been asserted against the Company by groups of alleged responsible parties
formed at each of these two sites for all past and future cleanup expenses
incurred or to be incurred by the respective groups. During the negotiations
with USEPA to resolve the Company's alleged liability at all four (4) 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
Petroleum Products Corporation and 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 private parties
referenced above were discharged in bankruptcy pursuant to the Bankruptcy
Court's Order Confirming Solitron's Fourth Amended Plan of Re-Organization,
entered in August 1993. Nevertheless, the Company is negotiating with USEPA to
settle its outstanding liability at all four (4) sites based on an ability to
pay ("ATP") determination. Under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or "Superfund"), the United States may
enter into ATP settlements with individuals and businesses for recovery of
response costs and performance of cleanup work in appropriate cases. The ATP
settlement process is reserved for potentially responsible parties ("PRPs") who
demonstrate to USEPA's satisfaction that payment of the amount sought by the
government is likely to put an entity out of business or otherwise jeopardize
its viability by creating an undue financial hardship. An undue financial
8
hardship occurs if, in the opinion of USEPA, satisfaction of the environmental
claim will deprive a PRP of ordinary and necessary assets or cause a PRP to be
unable to pay for ordinary and necessary business expenses and/or ordinary and
necessary living expenses. The ATP settlement process provides for a reduction
in the proposed settlement to an amount that is not likely to create an undue
financial hardship.
In connection with the foregoing settlement negotiations, the Riviera Beach
property was sold on October 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 property (formally occupied by
Solitron Microwave) was sold on March 17, 2003. Under the terms of the sale,
the USEPA received $153,155 and Martin County received on behalf of the Florida
Department of Environmental Protection ("FDEP") $278,148 (the net proceeds)
pursuant to an allocation agreed to by USEPA and FDEP. In addition, USEPA has
advised the Company that the Company will be required to contribute additional
funds to effect the settlement. The Company was advised in March 2000 that
USEPA had determined initially that USEPA's model evaluating the Company's
ability to pay determined that the Company could contribute an additional
$80,000 plus a percentage of profits to effect the settlement, and the net
proceeds of the sale of the Port Salerno Property. On May 20, 2002, the Company
submitted it's ATP settlement offer to USEPA, the substantial provisions of
which included payment of the sum of $65,000.00 over two years, and payment to
USEPA of 5% of Solitron's net after tax income over the first $500,000.00, if
any, for years 3-7 following the effective date of the settlement, plus the net
proceeds of the sale of the Port Salerno property. USEPA is currently
considering the Company's offer. Once the Company and USEPA have reached
agreement on the ATP negotiations, it is anticipated that USEPA will recommend
to the PRP groups at the Petroleum Products Corporation and Casmalia Disposal
Superfund Sites that the respective groups release the Company from further
liability at either site upon the Company's compliance with the ATP settlement
terms and conditions.
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 2002, which provides for the tolling of applicable statutes of
limitation through the earlier of August 23, 2003, 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.
On January 6, 2003 the Company received from the USEPA a letter requesting
information pursuant to Section 104 of CERCLA and Section 3007 of RCRA for the
43rd Street Bay Drum and Steel Site in Tampa, Florida to which the Company
responded on January 13, 2003 indicating that the Company purchased less then
ten used drums from the site and has not sent any chemical waste or used drums
to the aforementioned site for disposal. Therefore, the Company does not
believe that it has any financial exposure on this site. To date the Company
has not received any further communication regarding the site from the USEPA.
9
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 28, 2002, the Company reached
agreement with one unsecured creditor under which a small amount was paid as
settlement of slightly more than $2,000 of recorded debts to unsecured
creditors. An extraordinary income of approximately $2,000 from extinguishments
of debt was consequently recorded. There were no settlements during the fiscal
year ended February 28, 2003.
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 there was
no income for the fiscal year ended February 28, 2002, there were no
distributions related to such fiscal year. As the level of income for the
fiscal year ended February 28, 2003 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 Rivera 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 28, 2003, 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 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".
10
The Company has not been making agreed payments under the Plan and otherwise to
Martin County with respect to tax claims. It is anticipated that the Martin
County tax claim will be paid in full with the sale of the Port Salerno
Property. To date, the Martin County Tax Collector has not expressed objection
to this proposal. The following table indicates the approximate cumulative
status of amounts due under the Plan of Reorganization as of February 28, 2003:
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. DISCUSSION 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.
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. Settlement negotiations are
underway but there is no assurance that such negotiations will be successful.
See also Item 1, "Business - Environmental Liabilities".
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 28, 2003 FEBRUARY 28, 2002
------------------ ------------------
HIGH LOW HIGH LOW
First Quarter. $ 0.2800 $ 0.1300 $ 0.5100 $ 0.3600
Second Quarter $ 0.6000 $ 0.1700 $ 0.4800 $ 0.4000
Third Quarter. $ 0.7200 $ 0.2500 $ 0.4500 $ 0.2700
Fourth Quarter $ 0.6500 $ 0.3200 $ 0.3300 $ 0.2000
As of February 28, 2003, there were approximately 3,404 holders of record of the
Company's Common Stock. On February 28, 2003, the last sale price of the Common
Stock as reported on the Electronic Bulletin Board was $0.37 per share.
Certificates representing 275,300 "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 27,973 shares of Common Stock, which are included in the 2,070,821
shares outstanding as of February 28, 2003 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 28, 2002.
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.
The Company has not issued any shares of its Common Stock during the last three
years.
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
(loss) before extraordinary items to complement Management's Discussion and
Analysis:
(Dollars in Thousands)
Year Ended February 28,
------------------------
2003 2002
---------- ------------
Net Sales . . . . . . . . . . . . . . . . . . . $ 7,347 $ 6,399
Cost of sales . . . . . . . . . . . . . . . . . 5,887 5,612
Gross profit. . . . . . . . . . . . . . . . . . 1,460 787
Selling, general and administrative expenses. . 1,092 1,214
Operating income (loss) . . . . . . . . . . . . 368 (427)
Disposal of non-operating facilities. . . . . . (175) -
Interest expense. . . . . . . . . . . . . . . . (18) (19)
Interest expense on unsecured creditors claims. (26) (44)
Interest income . . . . . . . . . . . . . . . . 29 75
Environmental Expenses Reserve. . . . . . . . . 113 -
Other, net. . . . . . . . . . . . . . . . . . . 3 (8)
Income (loss) before Extraordinary Item . . . . 294 (423)
Extraordinary Item. . . . . . . . . . . . . . . - 6
Net income (loss) . . . . . . . . . . . . . . . $ 294 $ (417)
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
Subject to the following discussion, the Company expects its sole source of
liquidity over the next twelve months to come from cash from operations. The
Company anticipates that its capital expenditures will be approximately $100,000
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 28, 2003 and February 28, 2002,
the Company recorded a net income of $294,000 and a net loss of $417,000
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 profit of approximately $368,000 for the
fiscal year ended February 28, 2003 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 slowdown 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
13
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.
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. In
addition, the Company has a contingency plan to reduce its size and thereby
reduce its cost of operations within certain limitations. However, no assurance
can be made that the Company can reach a suitable agreement with the unsecured
creditors, USEPA, or obtain additional sources of capital and/or cash or that
the Company can generate sufficient cash to meet its obligations.
At February 28, 2003 and February 28, 2002 respectively, the Company had cash
and cash equivalents of $1,448,000 and $1,335,000. The principal cash change
was due to net income from operations.
At February 28, 2003, the Company had working capital of $2,194,000 as compared
with a working capital at February 28, 2002 of $2,057,000. The principal
change was due to an increase in cash and inventories.
See "Environmental Liabilities", "Bankruptcy Proceedings" and "Properties" in
Part I, Items 1 and 2, for more information.
BOOKINGS AND BACKLOG
----------------------
During the fiscal year ended February 28, 2003, the Company's net bookings were
$8,270,000 in new orders as compared with $6,842,000 for the year ended February
28, 2002, reflecting an increase of approximately 28%. The Company's backlog
increased to $5,193,000 at February 28, 2003 as compared with $4,266,000 as of
February 28, 2002, reflecting a 21% 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.
14
INFLATION
---------
The rate of inflation has not had a material effect on the Company's revenues
and costs and expenses, and it is not anticipated that inflation will have a
material effect on the Company in the near future.
SEASONALITY
-----------
The Company's bookings of new orders and sales are largely dependent on
congressional budgeting and appropriation activities and the cycles associated
therewith. The Company has historically experienced somewhat decreased levels
of bookings during the summer months, primarily as a result of such budgeting
and appropriation activities.
RESULTS OF OPERATIONS
-----------------------
2003 vs. 2002
---------------
Net sales for the fiscal year ended February 28, 2003 increased by approximately
15% to $7,347,000 versus $6,399,000 during the fiscal year ended February 28,
2002, reflecting a change in the demand for the Company's products due to
defense spending and economic activity.
Bookings were higher than sales by approximately 13%; thus, the backlog
increased from $4,266,000 as of February 28, 2002 to $5,193,000 as of February
28, 2003. The Company has experienced an increase in the level of bookings of
approximately 21% for the year ended February 28, 2003 as compared to the
previous year.
During the year ended February 28, 2003, the Company shipped 605,442 units as
compared with 360,416 units shipped during the year ended February 28, 2002. 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 28, 2003 increased to
$5,887,000 from $5,612,000 during the fiscal year ended February 28, 2002. The
major reason for this increase was an increase of approximately 15% in sales
that resulted in a $290,000 increase in material costs. A $56,000 increase in
direct labor costs and a $37,000 increase in manufacturing overhead also
contributed to the increase in cost of sales, partially offset by a $72,000
reduction in indirect labor costs. Expressed as a percentage of sales, cost of
sales decreased from approximately 88% for the fiscal year ended February 28,
2002 to approximately 80% for the fiscal year ended February 28, 2003.
During the year ended February 28, 2003 the Company's gross profits were
$1,460,000 (20% margin) as compared to $787,000 (12% margin) for the year ended
February 28, 2002. The gross profit increase was due principally to the
increase of approximately 15% in the volume of sales and the approximate 8%
improvement in cost of sales percentage.
During the year ended February 28, 2003, Selling, General and Administrative
based expenses, as a percentage of sales, were approximately 15% as compared
with 19% for the year ending February 28, 2002. Selling, General and
Administrative expenses decreased approximately 10% to $1,092,000 for the fiscal
year ended February 28, 2003 from $1,214,000 for the fiscal year ended February
28, 2002. This decrease was due mainly to lower wages, lower legal fees, offset
by higher commissions.
Operating Income for the fiscal year ended February 28, 2003 was $368,000 as
compared to a loss of $427,000 for the fiscal year ended February 28, 2002.
This increase was primarily attributable to a higher volume of sales and to the
change in product mix.
Total interest expense decreased from $63,000 for the fiscal year ended February
28, 2002 to $44,000 for the fiscal year ended February 28, 2003 due primarily to
lower imputed interest on debt to unsecured creditors.
Interest Expense on unsecured creditors claims for the fiscal year ended
February 28, 2003 decreased to $26,000 from $44,000 during the fiscal year ended
February 28, 2002 primarily due to the lower interest rates in the economy.
Interest Income for the fiscal year ended February 28, 2003 decreased to $29,000
from $75,000 during the fiscal year ended February 28, 2002. This decrease was
attributable to a lower cash position as well as to lower interest rates
received from the bank.
15
For the fiscal year ended February 28, 2002, Other Net included an expense of
$8,000 related to the non-operating facility at Port Salerno.
Extraordinary Items: During the year ended February 28, 2003, the Company wrote
down the book value of its dormant Port Salerno facility, which was sold on
March 17, 2003. During the year ended February 28, 2002, the Company had
extraordinary gains, which totaled approximately $6,000. Included in
extraordinary gains was the settlement of debt obligation to an unsecured
creditor which the Company bought at a discount, resulting in an extraordinary
gain of $2,000 ($0.00 per share), and the extinguishment of debt to a vendor for
approximately $4,000 ($0.00 per share).
Net Income for the fiscal year ended February 28, 2003 was $294,000 as compared
to a Net Loss of $417,000 for the fiscal year ended February 28, 2002. This
increase is attributable to a higher level of revenue, a higher level of Gross
Profit, lower level of selling, General and Administrative expenses, and lower
level of imputed interest, partially offset by a lower level of interest
income.
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:
- the effects of certification or qualification of the Company's products;
- the speed of technological change and its effects on the Company's
business;
- trends in the industry, including trends concerning consolidation, customer
concentration, changes in government military spending, changes in defense
priorities, price erosion and competition;
- sources and availability of liquidity;
- anticipated recovery of volume and price of product sales;
- the Company's ability to generate sufficient cash flow from operations to
sustain operations;
- strategic plans to improve the Company's performance;
- the Company's ability to fill its backlog;
- the Company's ability to sustain or grow bookings and sales;
- the Company's competitive strengths, industry reputation and the nature of
its competition;
- the relative importance of patented technology;
- the Company's ability to move into new markets or to develop new products;
- the Company's expectation 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;
- the Company's ability to respond quickly to customers' needs and to deliver
products in a timely manner;
- the Company's ability to implement effectively cost-cutting or downsizing
measures;
- the Company's compliance with environmental laws, orders and investigations
and the future cost of such compliance;
- expectations regarding military and defense spending;
- 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;
- expectations of being released from certain environmental liabilities and
the Company's ability to satisfy such liabilities; amounts that the Company
may receive (or not receive) upon the sale of certain properties and the
expected application of such funds;
- the suitability and adequacy of the Company's headquarters and
manufacturing facilities;
- the effects of inflation; and
- 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.
16
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:
- 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;
- unexpected rapid technological change;
- a misinterpretation of the Company's capital needs and sources and
availability of liquidity;
- a change in government regulations which hinders the Company's ability to
perform government contracts;
- a shift in or misinterpretation of industry trends;
- unforeseen factors which impair or delay the development of any or all of
its products if such decision is later determined to be in the best
interests of the Company;
- inability to sustain or grow bookings and sales;
- inability to capitalize on competitive strengths or a misinterpretation of
those strengths;
- the emergence of improved, patented technology by competitors;
- a misinterpretation of the nature of the competition, the Company's
competitive strengths or its reputation in the industry;
- inability to respond quickly to customers' needs and to deliver products in
a timely manner resulting from unforeseen circumstances;
- inability to generate sufficient cash to sustain operations;
- failure of price or volume recovery;
- failure to successfully implement cost-cutting or downsizing measures,
strategic plans or the insufficiency of such measures and plans;
- changes in military or defense appropriations;
- inability to make or renegotiate payments under the Plan of Reorganization;
- inability to move into new market segments based on unforeseen factors;
- unexpected impediments affecting ability to fill backlog;
- inability to be released from environmental liabilities;
- an increase in the expected cost of environmental compliance based on
factors unknown at this time;
- changes in law or industry regulation;
- inability to sell certain properties or to obtain expected prices for such
properties;
- unexpected growth or stagnation of the business;
- unforeseen changes that render the Company's headquarters and manufacturing
facilities unsuitable or inadequate to meet the Company's current needs;
- unforeseen effects of inflation; other unforeseen activities, events and
developments that may occur in the future.
17
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.
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.
18
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".
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, 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 semiconductor industry
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.
THE ECONOMIC RECESSION MAY CONTINUE TO HAVE NEGATIVE EFFECTS ON OUR BUSINESS.
Our business has been negatively impacted by the economic recession that began
in the latter part of 2000 and continued in 2001 and 2002. The success of
ongoing changes in fiscal monetary and regulatory policies worldwide will
continue to influence the severity and the length of this recession. If these
actions are not successful in spurring overall economic recovery, our business
will continue to be negatively impacted as our customers buy fewer products from
us.
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.
19
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 2003, we implemented certain cost-cutting measures 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:
- our ability to successfully complete these ongoing efforts;
- 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
- 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.
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 ABILITY 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 28, 2003, fifteen customers accounted for
approximately 83% 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.
20
INADEQUATE AVAILABILITY OF SUPPLIES COULD NEGATIVELY IMPACT OUR ABILITY TO
TIMELY PROVIDE PRODUCTS TO CUSTOMERS AND COULD RESULT IN SIGNIFICANTLY INCREASED
PRICES.
Our ability to meet customer demands depends, in part, on our ability to obtain
timely and adequate delivery of raw materials, parts and finished components
from our suppliers. Although we work closely with our suppliers to avoid
shortages, there can be no assurances that we will not encounter these problems
in the future. From time to time, suppliers may extend lead times, limit
supplies or increase prices due to capacity constraints or other factors. A
reduction or interruption in supplies or a significant increase in the price of
one or more supplies could have a material adverse effect on our business.
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
----
Independent Auditor's Reports 23-24
Consolidated Balance Sheet as of February 28, 2003 25
Consolidated Statements of Operations
for the years ended February 28, 2003 and 2002 26
Consolidated Statements of Stockholders'
Equity for the years ended February 28, 2003 and 2002 27
Consolidated Statements of Cash Flows for the years
ended February 28, 2003 and 2002 28
Notes to Consolidated Financial Statements 29-40
22
Independent Auditor's Report
------------------------------
To the Board of Directors and Stockholders of Solitron Devices, Inc.:
We have audited the accompanying consolidated balance sheet of Solitron Devices,
Inc. and Subsidiaries (the "Company") as of February 28, 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's Management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of the Company for the year ended February 28, 2002 were audited by other
auditors whose report, dated May 30, 2002, expressed a qualified opinion in
those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Solitron Devices,
Inc. and Subsidiaries as of February 28, 2003 and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
Berkovits , Lago & Company, LLP
Plantation, FL
April 29, 2003
23
Independent Auditor's Report
------------------------------
To the Board of Directors and Stockholders of Solitron Devices, Inc.:
We have audited the consolidated balance sheet of Solitron Devices, Inc. and
Subsidiaries as of February 28, 2002, (not presented herein) and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period then ended (February 28, 2001 not presented
herein). These financial statements are the responsibility of the Company's
Management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by Management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Solitron Devices,
Inc. and Subsidiaries as of February 28, 2002 (not presented herein) and the
results of their operations and their cash flows for each of the two years in
the period then ended (February 28, 2001 not presented herein) in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has certain obligations
resulting from its settlement with unsecured creditors and with taxing
authorities, the present terms of which the Company is unable to meet, which
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Goldstein Golub Kessler LLP
New York, New York
May 29, 2003
24
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 2003
ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands, except for per share amounts)
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 1,448
Accounts receivable, less allowance for doubtful accounts of $3,000 . . 1,052
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,869
Prepaid expenses and other current assets . . . . . . . . . . . . . . . 139
--------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 5,508
PROPERTY, PLANT AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . 568
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
--------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,128
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of accrued environmental expenses . . . . . . . . . . . $ 846
Accounts payable-Post-petition. . . . . . . . . . . . . . . . . . . . . 549
Accounts payable-Pre-petition, current portion. . . . . . . . . . . . . 800
Accrued expenses and other liabilities. . . . . . . . . . . . . . . . . 1,119
--------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . 3,314
LONG-TERM LIABILITIES, net of current portion. . . . . . . . . . . . . . . 364
--------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . 3,678
--------------
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,
2,070,821 shares issued and outstanding. . . . . . . . . . . . . . . 21
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 2,617
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (188)
--------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . 2,450
--------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . $ 6,128
==============
The accompanying notes are an integral part of the financial statements.
25
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED FEBRUARY 28,
2003 2002
----------- -----------
(in thousands, except for per share amounts)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,347 $ 6,399
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 5,887 5,612
----------- -----------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . 1,460 787
Selling, general and administrative expenses. . . . . . . . 1,092 1,214
----------- -----------
Operating income (loss) . . . . . . . . . . . . . . . . . . 368 (427)
Other income (expenses):
Disposal of non-operating facility . . . . . . . . (175) -
Interest expense . . . . . . . . . . . . . . . . . (18) (19)
Interest expense on unsecured creditors claim. . . (26) (44)
Interest income. . . . . . . . . . . . . . . . . . 29 75
Environmental expenses reserve . . . . . . . . . . 113 -
Other, net . . . . . . . . . . . . . . . . . . . . 3 (8)
----------- -----------
Income (loss) before extraordinary Item . . . . . . . . . . 294 (423)
Extraordinary Item:
Extinguishment of debt . . . . . . . . . . . . . . - 6
----------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 294 $ (417)
=========== ===========
INCOME (LOSS) PER SHARE OF COMMON STOCK:
Basic
Income (loss) per share before Extraordinary Item. $ 0.14 $ (0.20)
Extraordinary Item . . . . . . . . . . . . . . . . - -
----------- -----------
Net Income (loss) per share. . . . . . . . . . . . $ 0.14 $ (0.20)
----------- -----------
Diluted
Income (loss) per share before Extraordinary Item. $ 0.14 $ (0.20)
Extraordinary Item . . . . . . . . . . . . . . . . - -
----------- -----------
Net Income (loss) per share. . . . . . . . . . . . $ 0.14 $ (0.20)
----------- -----------
Weighted Average shares outstanding-Basic . . . . . . . . . 2,070,821 2,069,776
=========== ===========
Weighted Average shares outstanding-Diluted . . . . . . . . 2,070,821 2,069,776
=========== ===========
The accompanying notes are an integral part of the financial statements.
26
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED FEBRUARY 28, 2003 AND 2002
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, 2001. . . . . 2,068,731 $ 21 $ 2,617 $ (65) $ 2,573
Issuance of New share Equivalent of
Non-converted Old Shares . . . . 2,090
Net Loss. . . . . . . . . . . . . . - - - (417) (417)
---------- -------- ------------ -------------- ----------
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
========= ======== ============ ============== ==========
The accompanying notes are an integral part of the financial statements.
27
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28,
2003 2002
------- -------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 294 $ (417)
------- -------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 176 214
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . . (87) (63)
Inventories . . . . . . . . . . . . . . . . . . . . . . (177) (245)
Prepaid expenses and other current assets . . . . . . . (4) (15)
Due from S/V Microwave. . . . . . . . . . . . . . . . . - 4
Increase (decrease) in:
Accounts payable. . . . . . . . . . . . . . . . . . . . 140 30
Accounts payable-pre-petition . . . . . . . . . . . . . 149 144
Accrued expenses and Other Liabilities. . . . . . . . . (172) (48)
Accrued environmental expenses. . . . . . . . . . . . . 108 108
Other long-term liabilities . . . . . . . . . . . . . . (47) (280)
------- -------
Total adjustments . . . . . . . . . . . . . . . . . . . 86 (151)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. 380 (568)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES;
Additions to property, plant and equipment . . . . . . . . . . . (267) (287)
------- -------
NET CASH (USED IN) INVESTING ACTIVITIES. . . . . . . (267) (287)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . 113 (855)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR . . . . . . . 1,335 2,190
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . $1,448 $1,335
======= =======
The accompanying notes are an integral part of the financial statements.
28
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 $3,000 for 2003.
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.
Non-Operating Plant Facility
------------------------------
Facilities no longer utilized for operations are carried at their estimated fair
market value net of disposal costs. See Note 13.
Concentrations of Credit Risk
--------------------------------
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and trade receivables. The Company
places its cash with high credit quality institutions. At times such amounts
may be in excess of the FDIC insurance limits. The Company has not experienced
any losses in such account and believes that it is not exposed to any
significant credit risk on the account. With respect to the trade receivables,
most of the Company's products are custom made pursuant to the contracts whose
end products are sold to the United States Government. The Company performs
ongoing credit evaluations of its customers' financial condition and maintains
allowances for potential credit losses. Actual losses and allowances have been
within Management's expectations.
Reclassification
----------------
Certain reclassifications were made to the fiscal year ended February 28, 2002
consolidated financial statements in order for the presentation to conform to
the fiscal year ended February 28, 2003 consolidated financial statement
presentation.
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.
29
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 Net Income (Loss) per Share
------------------------------------------------
Basic earnings (loss) 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 28, 2003 and 2002 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 Company will 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.
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. (see Note 8) 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 28, 2003 February 28, 2002
As Pro As Pro
Reported Forma Reported Forma
---------- --------- ---------- --------
Net income (loss) . . . . . . . . . . . . . . $ 294,000 $279,000(1) $ (417,000) $(437,000)(1)
Basic income (loss) . . . . . . . . . . . . . $ 0.14 $0.13 $ (0.20) $ (0.21)
per common share
Diluted income (loss) . . . . . . . . . . . . $ 0.14 $0.13 $ (0.20) $ (0.21)
per common share
--------
(1) The total stock-based employee compensation expense for the years ended
February 28, 2003 and 2002, $15,000 and $20,000, respectively, determined under
fair value based method for all awards, net of related tax effects, has been
deducted from the pro forma net income (loss).
30
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
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.
2. Going Concern and Petition in Bankruptcy
The Company's consolidated financial statements as of February 28, 2002 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 continued 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. 2. Petition in Bankruptcy
(continued):
On August 20, 1993 the Company's Plan of Reorganization, as amended and modified
(the "Plan"), was confirmed by the Bankruptcy Court and the Company emerged from
bankruptcy on August 30, 1993. On July 12, 1996 the Bankruptcy Court officially
closed the case.
(a) The Company is required to make quarterly payments to holders of
unsecured claims until they receive 35 percent of their pre-petition claims. At
February 28, 2003 the Company is currently scheduled to pay approximately
$1,987,000 to holders of allowed unsecured claims in quarterly installments of
approximately $62,000. As of February 28, 2003, the present value of this
amount, $1,025,000, is accrued as a pre-petition liability with imputed interest
recognized in the Statement of Operations.
31
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Going Concern and Petition in Bankruptcy (continued)
(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.
(c) Under the Plan, the Company is required to remediate its
non-operating facility located in Port Salerno and its former facility located
in Riviera Beach, Florida. The Plan contemplated that monies to fund the
remediation will be made available from the proceeds of the sale or lease of the
properties, to the extent that the Company is successful in its efforts to sell
or lease such properties. 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. Pursuant to the Plan, unless otherwise
approved by the Florida Department of Environmental Protection ("FDEP"), the
Port Salerno Facility can not be sold unless the price for such property equals
or exceeds the lesser of (i) 75% of its appraised value or (ii) the estimated
cost of its remediation. Further, pursuant to the Plan, a purchaser of 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 28, 2003, the Company has deposited $90,000 into the escrow accounts.
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).
(d) The Company has paid all of the allowed administrative claims and
allowed wage claims since August 1993. On February 28, 2003 the Company was
still required to pay allowed tax claims to Martin County, Florida, estimated at
approximately $217,000, including approximately $66,000 of interest. However,
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.
The allowed tax claims payable to the IRS have been completely settled by the
Company on March 30, 1999, when it completed making payments of its 1987 tax
obligations and interest. These tax claims do not include an unsecured claim of
$680,000 owed to the State of California for income taxes for years prior to
1982.
The Plan provided for the distribution of common stock of the Company such that,
post-petition, the Company's common stock 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%
====
32
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Going Concern and Petition in Bankruptcy (continued)
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 would give
Mr. Stayduhar approximately 20.66% of the shares of the Company.
3. Inventories
As of February 28, 2003, inventories consist of the following:
Raw Materials $1,455,000
Work-In-Process and Finished Goods 1,414,000
-----------
$2,869,000
==========
4. Property, Plant and Equipment
As of February 28, 2003, property, plant, and equipment consist of the
following:
Estimated
Useful Life
-------------------------------
Leasehold Improvements $ 771,000 The remaining term of the lease
Machinery and Equipment 861,000 5 years
----------
1,632,000
Less Accumulated Depreciation
And Amortization 1,064,000
----------
$ 568,000
==========
Depreciation and amortization expense was $176,000 and $214,000 for 2003 and
2002, respectively.
5. Accrued Expenses
As of February 28, 2003 accrued expenses and other liabilities consist of the
following:
Payroll and related employee benefits $ 278,000
Property taxes 6,000
Other liabilities 42,000
Interest Payable 793,000
----------
$1,119,000
==========
33
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Other Long-Term Liabilities
As of February 28, 2003, other long-term liabilities consist of the following
pre-petition items:
Accrued Environmental Expenses $ 139,000
Accounts Payable-Pre-petition 225,000
-------
$ 364,000
==========
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
------------
2004 $345,000
2005 19,000
Net Long Term Liabilities ----------
$364,000
========
Imputed interest expense for fiscal years ended February 28, 2003 and 2002
amounted to $26,000 and $44,000 relating to accounts payable - pre-petition.
7. Income Taxes
At February 28, 2003, the Company has net operating loss carryforwards of
approximately $15,651,000 that expire through 2022. Such net operating losses
are available to offset future taxable income, if any. As the utilization of
such operating losses for tax purposes is not assured, the deferred tax asset
has been fully reserved through the recording of a 100% valuation allowance.
Should a cumulative change in the ownership of more than 50% occur within a
three-year period, there could be an annual limitation on the use of the net
operating loss carryforward.
Deferred tax assets are comprised of the following at February 28, 2003:
Loss carryforwards $5,822,000
Allowance for double accounts 3,000
Inventory Allowance 3,242,000
---------
Gross deferred tax asset 9,067,000
Deferred tax asset valuation allowance (9,067,000)
----------
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 28, 2003
and 2002 is as follows:
2003 2002
----------- -----------
Income Tax Provision at
Federal Statutory Rates. . . . . . . . . . . . $ 103,000 $( 142,000)
State Taxes. . . . . . . . . . . . . . . . . . 19,000 (16,000)
Utilization of Net Operating Loss Carryforward (122,000) _
-----------
Increase in Valuation Allowance. . . . . . . . 158,000
----------- -----------
Income Tax Provision . . . . . . . . . . . . . $ - $ -
=========== ===========
34
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 are set to expire during 2003, 2004, 2005 and 2006 in equal amounts.
The options are fully vested.
On June 17, 2002 the Board of Directors granted Stock options to certain key
employees. The options, which become 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. On July 17, 2000 the Board of Directors
granted Stock options to certain key employees. The options, which become vested
on July 18, 2001, were for a total number of 32,750 shares and the exercise
price was fixed at $0.670 per share, which was the price on the OTCBB at the
time of the grant. The options are exercisable through July 17, 2010. In
December 2000 another grant equal to 10% of the outstanding shares (206,873) 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 28, 2003 February 28, 2002
As Pro As Pro
Reported Forma Reported Forma
-------- ------- -------- --------
Net income (loss) $294,000 $279,000 $(417,000) $(437,000)
Basic income (loss) $ 0.14 $ 0.13 $ (0.20) $ (0.21)
per common share
Diluted income (loss) $ 0.14 $ 0.13 $ (0.20) $ (0.21)
per common share
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 2002:
2002
----
Dividend Yields 0.0%
Expected Volatility 635.4%
Risk-free Interest Rates 5.0%
Expected Life (in years) 9.0
Because the determination of the fair value of all options is based on the
assumptions described in the preceding paragraph and, because additional option
grants are expected to be made each year, the above pro-forma disclosures are
not representative of pro-forma effects on reported net income or loss for
future years
35
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock Options (continued)
Below is a summary of the Company's Stock Option Plan.
Average
-------
Shares Price
------ -----
Balance, February 28, 2002 444,509 $ 0.340
Adjustment 10,200 $ 0.340
Granted 40,000 $ 0.437
Expired or Canceled (7,500) $ 0.657
------ -----
Balance, February 28, 2003 487,209 $ 0.340
======= =======
During the year ended February 28, 2003 the Company awarded options for 40,000
shares at a price of $0.20. The weighted average fair value of options granted
during the year ended February 28, 2003 was $0.20.
The following table summarizes information about stock options outstanding and
exercisable at February 28, 2003
Options Outstanding Exercisable Options
-------------------- -------------------
Weighted Average Weighted Average
------------------ -----------------
Range of Number of Remaining
Exercise Prices Outstanding Contractual Excersise Excersise
Shares Life Price Number Prices
------ ------- ----- ------ -------
0.125 $0.125. . . 175,636 2 years $0.125 175,636 $ 0.125
0.156 $0.156. . . 4,000 4 years $0.156 4,000 $ 0.156
0.200 $0.200. . . 39,400 9 years $0.200 39,400 $ 0.200
0.400 $0.400 206,873 8 years $0.400 124,124 $ 0.400
0.625 $0.625. . . 19,500 6 years $0.625 19,500 $ 0.625
0.670 $0.670. . . 27,500 7 years $0.670 27,500 $ 0.670
2.500 $2.500. . . 14,300 2 years $2.500 14,300 $ 2.500
------- -------
487,209 404,460
======= =======
9. Employee Benefit Plans
The Company has a 401K and Profit Sharing Plan (the "Profit Sharing Plan") in
which substantially all employees may participate after one year of service.
Contributions to the Profit Sharing Plan by participants are voluntary. The
Company may match participant's contributions up to 25% of 4% of each
participant's annual compensation. In addition, the Company may make additional
contributions at its discretion. The Company did not contribute to the Profit
Sharing Plan during the fiscal years ended February 28, 2003 and 2002.
36
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 28, February 28,
2003 2002
----------- -------------
Export sales:
Europe. . . . . . . . . . . . . $ 401,000 $ 201,000
Canada and Latin America 57,000 171,000
Far East and Middle East. . . . . 280,000 105,000
United States . . . . . . . . . . 6,609,000 5,922,000
----------- ------------
$ 7,347,000 $ 6,399,000
=========== ============
Sales to the Company's top three customers accounted for 59% of net sales for
the year ended February 28, 2003 as compared with 56% of the Company's net sales
for the year ended February 28, 2002.
Sales to Raytheon Company accounted for 45% for the year ended February 28, 2003
and 39% for the year ended February 28, 2002.
During the fiscal year ended February 28, 2003, the US Government represented 9%
of net sales as compared to 11% for the fiscal year ended February 28, 2002.
11. Extraordinary Item
During the year ended February 28, 2002, the Company had extraordinary gains,
which totaled approximately $6,000. Included in extraordinary gains was the
settlement of a debt obligation to an unsecured creditor which the Company
bought at a discount, resulting in an extraordinary gain of $2,000 ($0.00 per
share), and the extinguishment of debt to a vendor for approximately $4,000
($0.00 per share). There were no income tax effects as a result of these events.
During the year ended February 28, 2003, the Company wrote down the book value
of the Port Salerno facility ($175,000) to reflect the sale value of the
property, the sale of which took place in March, 17, 2003.
12. 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
employer's regularly retained independent auditor, shall make the determination
of "pre-tax income" after consultation with the Board of Directors Compensation
Committee, which determination shall be final and conclusive on the parties
hereto. 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. Effective January 1, 2003
the Board restored 5% of the pay cut to the President.
37
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Commitments and Contingencies (continued)
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.
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 under Solitron Devices, Inc. 1987
Stock Option Plan dated October 20, 1992 between the Company and the employee.
A bonus of $18,219 was accrued for the President for the fiscal year ended
February 28, 2003. No bonus was accrued for the President for the year ended
February 28, 2002.
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 four (4)
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
$8 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 assert by USEPA against the Company at the Petroleum
Products Corporation and Casmalia Disposal Superfund Sites, claims have been
asserted against the Company by groups of alleged responsible parties formed at
each of these two sites for all past and future cleanup expenses incurred or to
be incurred by the respective groups. During the negotiations with USEPA to
resolve the Company's alleged liability at all four (4) 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 Petroleum
Products Corporation and 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 private parties referenced
above were discharged in bankruptcy pursuant to the Bankruptcy Court's Order
Confirming Solitron's Fourth Amended Plan of Re-Organization, entered in August
1993. Nevertheless, the Company is negotiating with USEPA to settle its
outstanding liability at all four (4) sites based on an ability to pay ("ATP")
determination. Under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA" or "Superfund"), the United States may enter into ATP
settlements with individuals and businesses for recovery of response costs and
performance of cleanup work in appropriate cases. The ATP settlement process is
reserved for potentially responsible parties ("PRPs") who demonstrate to USEPA's
satisfaction that payment of the amount sought by the government is likely to
put an entity out of business or otherwise jeopardize its viability by creating
an undue financial hardship. An undue financial hardship occurs if, in the
opinion of USEPA, satisfaction of the environmental claim will deprive a PRP of
ordinary and necessary assets or cause a PRP to be unable to pay for ordinary
and necessary business expenses and/or ordinary and necessary living expenses.
The ATP settlement process provides for a reduction in the proposed settlement
to an amount that is not likely to create an undue financial hardship.
38
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Commitments and Contingencies (continued)
In connection with the foregoing settlement negotiations, the Riviera Beach
property was sold on October 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 property (formally occupied by
Solitron Microwave) was sold on March 17, 2003. Under the terms of the sale,
the USEPA received $153,155 and Martin County received on behalf of the Florida
Department of Environmental Protection ("FDEP") $278,148 (the net proceeds)
pursuant to an allocation agreed to by USEPA and FDEP. In addition, USEPA has
advised the Company that the Company will be required to contribute additional
funds to effect the settlement. The Company was advised in March 2000 that
USEPA had determined initially that USEPA's model evaluating the Company's
ability to pay determined that the Company could contribute an additional
$80,000 plus a percentage of profits to effect the settlement, and the net
proceeds of the sale of the Port Salerno Property. On May 20, 2002, the Company
submitted it's ATP settlement offer to USEPA, the substantial provisions of
which included payment of the sum of $65,000.00 over two years, and payment to
USEPA of 5% of Solitron's net after tax income over the first $500,000.00, if
any, for years 3-7 following the effective date of the settlement, plus the net
proceeds of the sale of the Port Salerno property. USEPA is currently
considering the Company's offer. Once the Company and USEPA have reached
agreement on the ATP negotiations, it is anticipated that USEPA will recommend
to the PRP groups at the Petroleum Products Corporation and Casmalia Disposal
Superfund Sites that the respective groups release the Company from further
liability at either site upon the Company's compliance with the ATP settlement
terms and conditions.
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 2002, which provides for the tolling of applicable statutes of
limitation through the earlier of August 23, 2003, 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.
On January 6, 2003 the Company received from the USEPA a letter requesting
information pursuant to Section 104 of CERCLA and Section 3007 of RCRA for the
43rd Street Bay Drum and Steel Site in Tampa, Florida to which the Company
responded on January 13, 2003 indicating that the Company purchased less then
ten used drums from the site and has not sent any chemical waste to the
aforementioned site for disposal. Therefore, the Company does not believe that
it has any financial exposure on this site. To date the Company has not
received any further communication regarding the site from the USEPA.
39
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Commitments and Contingencies (continued)
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
--------------------------------- ----------
2004 $ 390,000
2005 402,000
2006 414,000
2007 427,000
2008 439,000
Thereafter 1,893,000
----------
Total $3,965,000
==========
Total rent expense was $415,000 for the year ended February 28, 2003 as compared
with $353,000 for the year ended February 28, 2002. 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 above noted 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, 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. The new lease is for a term of ten years
ending December 31, 2011 and does not contain a renewal option.
13. Material Subsequent Event
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. SAS No. 1, Section 560,
Subsequent Events, as amended by SAS No. 12, Inquiry of a Client's Lawyer
Concerning Litigation Claims, and Assessments, sets forth criteria for the
proper treatment of subsequent events. The property was carried at its
estimated fair market value, net of disposal costs, per the Company's accounting
policy. 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)
-----------
$ 0
============
40
SOLITRON DEVICES, INC. AND SUBSIDIARIES
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
----------------------
None
PART III
---------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the name, age, and position of the directors and
executive officers of the Company. The table below also sets forth the year in
which each of such directors was first elected to the Board and the year in
which the term of each of such directors expires. 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. . . . . . . . 60 Chairman of the Board, 1992 Expired
Chief Executive Officer,
President and Treasurer
Dr. Jacob Davis. . . . . . . 66 Director 1996 Expired
Mr. Joseph Schlig. . . . . . 75 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 41 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
SOLITRON DEVICES, INC. AND SUBSIDIARIES
PART III
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. He is Vice President of Business Planning and Finance for AET, Inc, a
developing, Melbourne, Florida based software company. In 1994 and 1995, he was
Visiting Professor in Engineering Management at Florida Institute of Technology.
He is presently Vice-Chairman of the Brevard SCORE Chapter and devotes
significant time to counseling with local businesses. He is an active member of
the International Executive Service Corps (IESC) serving in South Russia during
May and June of 1996.
Prior to joining AET, Dr. Davis was with Harris Semiconductor for 26 years.
During the last 12 years with Harris Semiconductor, he was Vice
President-General Manager of the Military and Aerospace Division, the Custom
Integrated Circuits Division and the Harris Microwave Division. Dr. Davis has
served in a variety of other capacities at Harris Semiconductor including Vice
President of Engineering, Director of Manufacturing, Director of Special
Services, and Device Research Engineer.
Dr. Davis received a doctor of philosophy from Purdue University in 1969 and a
bachelors of science in electrical engineering from North Carolina State
University. He is a Member of the IEEE and the Electrochemical Society, and has
served on a variety of advisory boards for several Universities. He holds four
patents and has given a number of overview papers and invited presentations at
several conferences.
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. He
is Managing Director of Fairhaven Associates, a professional consulting firm
supporting small and medium size businesses in strategic planning; financial,
marketing and operations management and organizational development. From 1995
to 1997, Mr. Schlig also served as Chief Financial Officer of Industrial
Technologies, Inc. For the prior five years, Mr. Schlig was a business
consultant to private companies and to the State of Connecticut Department of
Economic Development. Mr. Schlig has many years of business experience
including Director of Marketing, Latin America for ITT and Director of
International Operations for Revlon. Mr. Schlig has also operated several
small/medium size companies in both the public and private sectors. He also
serves as a director of the Trumbull Technology Foundation, the Bridgeport
Economic Development Corporation, and served as a Director of the MIT Enterprise
Forum of Connecticut. Mr. Schlig has an engineering degree from the Stevens
Institute of Technology and an MBA from the Harvard Business School where he was
a Baker Scholar. Mr. Schlig is the Chairman of the Audit Committee and a member
of the Compensation Committees.
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. Based upon a review of the copies of Section
16(a) filings furnished to the Company and written representations from the
Company's current executive officers, directors and ten percent stockholders,
the Company believes that during the fiscal year ended February 28, 2003,
directors, executive officers and ten percent stockholders of the Company
complied with Section 16(a) filing requirements applicable to them.
42
SOLITRON DEVICES, INC. AND SUBSIDIARIES
PART III
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 28, 2003, 2002 and 2001.
Annual Compensation
-------------------------------------
Other
Name and Annual
Principal Position Year Salary ($) Bonus ($) Compensation
------------------------------------- ---------- ----------- ----------- ------------
Shevach Saraf . . . . . . . . . . . . 2001 184,459 56,430 20,060(1)
Chairman of the Board,. . . . . . . 2002 188,030 -0- 24,352(2)
Chief Executive Officer,. . . . . . 2003 169,194 18,219 15,800(3)
President 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
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 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
within ninety (90) days after the end of the fiscal year. The determination of
"pre-tax income" shall be made by the employer's regularly retained independent
auditor, after consultation with the Board of Directors Compensation Committee,
which determination shall be final and conclusive on the parties hereto.
The President's 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 will
vest in equal amounts 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 under Solitron Devices,
Inc. 1987 Stock Option Plan dated October 20, 1992 between the Company and the
employee.
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 January 1, 2003 the Board has
restored 5% of the pay cut for the President.
In fiscal year 2003, $18,219 was accrued as bonus for the President, and in
fiscal year 2002, no bonus was accrued.
The President of the Company may also participate in the Company's 1987 Stock
Option Plan, the Company's Deferred Compensation Plan and the Company's Employee
401-K and Profit Sharing Plan (the "Profit Sharing Plan"). During the fiscal
year ended February 28, 2003, no amounts were deferred by executive officers
under the Company's Deferred Compensation Plan and the Company did not match any
employee contributions to the Profit Sharing Plan.
43
SOLITRON DEVICES, INC. AND SUBSIDIARIES
PART III
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
---------------- ------------ ----------------- ----------- ----------
Shevach Saraf 0 - - -
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
--------------------------------------------------------------------------------
Values
------
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- - 299,760 82,749 $59,952 $16,550
Director Remuneration
----------------------
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 $6,000 for the fiscal year ended February 28, 2003.
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 28, 2003 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
SOLITRON DEVICES, INC. AND SUBSIDIARIES
PART III
Number of Shares Percentage of
Name and Address Beneficially Owned (1) Outstanding Shares (1)
-------------------------------- ---------------------- ----------------------
Shevach Saraf
3301 Electronics Way . . . . . . 602,351(2) 29.11%
West Palm Beach, FL 33407
Dr. Jacob Davis
370 Franklyn Avenue
Indialantic, FL 32903 . . . . . 13,000(2) *
Joseph Schlig
129 Mayfield Drive
Trumbull, CT 06611. . . . . . . 13,000(2) *
All Executive Officers and
Directors as a Group (3 persons) 628,351(2) 30.37%
John Stayduhar Revocable Trust . 427,848 20.66%
c/o Boyes & Farina
1001 Forum Place, Suite 900
West Palm Beach, FL 33401
Bruce Paul . . . . . . . . . . . 231,500 11.18%
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 -
382,197 shares; Mr. Schlig - 13,000 shares; Mr. Davis - 13,000 shares.
45
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
TO BE ISSUED UPON EXERCISE PRICE OF EQUITY COMPENSATION
EXERCISE OF OUTSTANDING PLANS (EXCLUDING
OUTSTANDING OPTIONS, OPTIONS, WARRANTS SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS COLUMN (A))
--------------------- ---------------------- ---------------------- --------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 0 - -
Equity compensation plans not
approved by security holders 487,209 $0.340 213,000
------- -------- -------
Total 487,209 $0.340 213,000
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.
99.1* Certification of Chief Executive Officer and Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on February 14, 2003. In the report,
the Company reported under Item 4, that the Board of Directors, decided not
to re-engage Goldstein Golub Kessler and engaged Berkowitz, Lago & Company
LLP to serve as the Company's independent certified public accountants.
* Filed herewith
ITEM 14. CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and procedures as
of a date within 90 days of the filing date of this annual report, Shevach
Saraf, Chairman, President, Chief Executive Officer, Treasurer and Principal
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's rules and forms.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
48
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: May 30, 2003
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Shevach Saraf
------------------------
Shevach Saraf Chairman of the Board, May 30, 2003
President, Chief
Executive Officer,
Treasurer and Chief Financial
Officer.
/s/ Jacob Davis
------------------------
Jacob Davis Director May 30, 2003
/s/ Joseph Schlig
------------------------
Joseph Schlig Director May 30, 2003
49
CERTIFICATION
I, Shevach Saraf, Chairman, President, Chief Executive Officer, Treasurer and
Chief Financial Officer of Solitron Devices, Inc., certify that:
1. I have reviewed this annual report on Form 10-KSB of Solitron Devices, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report my conclusions about the
effectiveness of the disclosure controls and procedures based on my evaluation
as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of my most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 30, 2003 /s/ Shevach Saraf
Shevach Saraf
Chairman, President,
Chief Executive Officer,
Treasurer and
Chief Financial Officer
50
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
2.1 Debtors' Fourth Amended Plan of Reorganization of the Company (incorporated
by reference to the Company's Form 8-K, dated September 3, 1993, as amended
by the Company's Form 8-K/A, dated October 12, 1993).
2.2 Debtors' First Modification of Fourth Amended Plan of Reorganization of the
Company (incorporated by reference to the Company's Form 8-K, dated
September 3, 1993, as amended by the Company's Form 8-K/A, dated October
12, 1993).
2.3 Order Confirming Debtors' Fourth Amended Plan of Reorganization of the
Company (incorporated by reference to the Company's Form 8-K, dated
September 3, 1993, as amended by the Company's Form 8-K/A, dated October
12, 1993).
2.4 Consent Final Judgment of the Company (incorporated by reference to the
Company's Form 8-K, dated September 3, 1993, as amended by the Company's
Form 8-K/A, dated October 12, 1993).
3.1 Certificate of Incorporation of the Company (incorporated by reference to
the Company's Form 10-K for the year ended February 28, 1993).
3.2 Bylaws of the Company (incorporated by reference to the Company's Form 10-K
for the year ended February 28, 1993).
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).
51
10.5 Reduction in Space and Rent Agreement dated November 1, 2001 between
Solitron Devices, Inc. and Technology Place, Inc.
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.
99.1* Certification of Chief Executive Officer and Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith
52