SECURITIES & EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission file number 1-4978
SOLITRON DEVICES, INC.
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-1684144
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
3301 ELECTRONICS WAY, WEST PALM BEACH, FLORIDA 33407
----------------------------------------------------
(Address of principal executive offices)
(407) 848-4311
---------------------------
(Issuer's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 1,880,000 Note: Additional shares are
issuable by the Company without further consideration pursuant to the Company's
Plan of Reorganization. Note: Reflects the 1-for-10 reverse split effected
October 12, 1993.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements: Pages 4 - 18
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Pages 19 - 26
2
<PAGE>
SOLITRON DEVICES, INC.
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheet -- August 31, 1995
Condensed Consolidated Statements of Operations -- Three And
Six Months Ended August 31, 1995 and 1994
Condensed Consolidated Statements of Cash Flows -- Six Months
Ended August 31, 1995 and 1994
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
3
<PAGE>
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
ASSETS
August 31, 1995
(Unaudited)
---------------
<S> <C>
Current Assets:
Cash* $ 636
Accounts receivable, less allowance
for doubtful accounts of $35 938
Inventories 1,800
Prepaid expenses and other current assets 8
Due from Vector 234
-------
Total current assets 3,616
Property, plant and equipment, net 835
Non-operating plant facilities 1,745
Due from Vector 184
Other assets 88
-------
$ 6,468
=======
<FN>
*Including $463,000 reserved for rent as disclosed in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
August 31, 1995
(Unaudited)
---------------
<S> <C>
Current liabilities:
Current maturities of long-term debt $ 58
Accounts payable - post-petition 474
Current portion of accounts payable - pre-petition 294
Accrued expenses 1,567
Accrued Chapter 11 administrative expenses 78
-------
Total current liabilities 2,471
-------
Long-term debt, less current maturities 75
-------
Other long-term liabilities 3,601
-------
Stockholders' Equity
Preferred stock, $.01 par value,
authorized 500,000 shares -
Common stock $.01 par value,
authorized 10,000,000 shares,
issued and outstanding 1,880,000 19
Additional paid-in capital 2,619
Deficit (2,317)
-------
321
-------
$ 6,468
=======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
August 31, August 31,
1995 1994 1995 1994
----------------- -----------------
<S> <C> <C> <C> <C>
NET SALES $1,690 $1,705 $3,330 $3,215
Cost of sales 1,448 1,223 2,831 2,477
------ ------ ------ ------
Gross Profit 242 482 499 738
Selling, general and
administrative expenses 283 464 630 745
------ ------ ------ ------
Operating (loss) income (41) 18 (131) (7)
------ ------ ------ ------
OTHER INCOME (EXPENSE):
Other Income 18 5 28 10
Interest expense (29) (9) (54) (37)
Chapter 11 expenses - (13) - (14)
Other (3) (10) (5) (23)
------ ------ ------ ------
Net other expense (14) (27) (31) (64)
------ ------ ------ ------
Net loss $ (55) $ (9) $ (162) $ (71)
====== ====== ====== ======
LOSS PER SHARE: $ (.03) $ (.01) $ (.08) $ (.04)
====== ====== ====== ======
WEIGHTED AVERAGE SHARES
OUTSTANDING 2,082,000 2,082,000 2,082,000 2,082,000
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
6
<PAGE>
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Six Months Ended August 31,
---------------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(162) $ (71)
----- -----
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 120 160
Provision for doubtful accounts (4) (5)
Gain on disposal of assets (13) -
(Increase) decrease in account receivable (202) 59
(Increase) decrease in inventories 10 (57)
Decrease in prepaid expenses and
other current assets 42 7
Increase in due from Vector (59) (41)
Decrease in other assets 2 3
Increase (decrease) in accounts payable 106 (100)
Increase in current portion of
accounts payable-pre-petition 17 -
Increase (decrease) in accrued expenses
and other liabilities (64) 20
Decrease in accrued Chapter 11
administrative expenses (42) (55)
Increase in other long-term liabilities 121 -
----- -----
Total adjustments 34 (9)
----- -----
Net cash used in operating activities (128) (80)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of assets 13 -
Additions to property, plant and equipment (76) (23)
----- -----
Net cash used in investing activities (63) (23)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (40) (44)
----- -----
Net cash used in financing activities (40) (44)
----- -----
NET DECREASE IN CASH (231) (147)
</TABLE>
(Continued)
7
<PAGE>
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(CONTINUED)
Six Months Ended August 31,
---------------------------
1995 1994
---- ----
<S> <C> <C>
CASH AT BEGINNING OF PERIOD 867 897
----- -----
CASH AT END OF PERIOD $ 636 $ 750
===== =====
</TABLE>
Supplemental cash flow disclosure:
Interest paid during the six months ended August 31, 1995 and 1994 was
approximately $5,000 and $26 respectively.
The accompany notes are an integral of
these condensed consolidated financial statements.
8
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
statement of the results for the interim period.
The information contained in this Form 10-QSB should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended February 28, 1995
and the Company's Quarterly Report for the quarter ended May 31, 1995.
The results of operations for the six month period ended August 31, 1995 are not
necessarily indicative of the results to be expected for the full year.
2. BANKRUPTCY PROCEEDINGS
On January 24, 1992 (the "Petition Date"), the Company and its wholly-owned
subsidiary, Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.),
a Delaware corporation, filed voluntary petitions seeking reorganization under
Chapter 11 ("Chapter 11") of the United States Bankruptcy Code, as amended (the
"Bankruptcy Code"), in the United States Bankruptcy Court for the Southern
District of Florida (the "Bankruptcy Court"). These petitions were subsequently
consolidated by the Bankruptcy Court. On August 20, 1993, the Bankruptcy Court
entered an Order (the "Order of Confirmation") confirming the Company's Fourth
Amended Plan of Reorganization, as modified by the Company's First Modification
of Fourth Amended Plan of Reorganization (the "Plan of Reorganization"). The
Plan became effective on August 30, 1993 (the "Effective Date").
Additionally, the following actions or events have taken or will take place
pursuant to the Plan of Reorganization:
(a) On February 28, 1993, pursuant to a Purchase Agreement, dated
October 5, 1992, as amended (the "Vector Purchase Agreement"), the Company
transferred to Vector Trading and Holding Corporation ("Vector") (the successor
in interest to the Company's former primary lender, First Union National Bank
("First Union")) substantially all of the assets, other than real estate,
comprising the Company's Microwave Division and certain related liabilities.
Pursuant to the terms of the Vector Purchase Agreement: (i) Vector subleases
approximately 30% of the Company's facilities in West Palm Beach, Florida, for a
period ending December 31, 2001 at an annual rate that escalates from
approximately $50,000 during the first year to approximately $80,000 in the last
four years, with aggregate remaining payments of approximately $513,000 (the
"Sublease"); (ii) the Company assigned to Vector insurance proceeds of
approximately $5.4 million from National Union Fire Insurance Company stemming
from a 1991 fire in the Company's hybrid department; (iii) the Company and
Vector entered into mutual non-competition agreements for a period of five
years, pursuant to which neither will compete in the United States with respect
to the types of products produced by the other as of the date of the Vector
Purchase Agreement; (iv) the Company entered into a Shared Services and
Equipment Agreement (the "Shared Services Agreement") with Vector, pursuant to
which it is estimated that Vector will pay Solitron approximately $55,000 per
9
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
year for eight years in exchange for, among other things, the Company's (a)
allowing Vector to use certain of the Company's equipment, (b) providing to
Vector certain janitorial and other services and (c) agreeing to share certain
of its computer equipment with Vector through August, 1994; and (v) Vector will
reimburse or pay the Company (in pro rata quarterly installments through
approximately the end of 1998) an aggregate of approximately $210,000 in
personal property taxes paid by the Company on the assets transferred to Vector.
As of August 1995, Vector had paid approximately $44,000 of these taxes. The
Company is currently engaged in a dispute with its landlord regarding the
landlord's alleged breach of the Company's lease for its West Palm Beach
facility and the Company's related retainage and segregation of approximately
$463,000 for the period March 1, 1993 to August 31, 1995 in rent payments (See
"Item 2 - Properties"). In connection therewith, Vector has withheld payments
required to be made by it under the Sublease, which for the period March 1, 1993
to August 31, 1995, aggregated approximately $193,000.
(b) The Company has or will issue to certain pre-petition creditors
that number of shares of Solitron's common stock, par value $.01 per share (the
"Common Stock"), equal to 65% (approximately 1,424,504 shares) of the issued and
outstanding shares after all issuances contemplated by the Plan of
Reorganization (other than the shares issuable pursuant to the exercise of stock
options granted to Shevach Saraf, the Chairman of the Board, Chief Executive
Officer, President and Treasurer of the Company, as described below). Of this
65%, 40% (approximately 876,618 shares) have been or will be issued to holders
of unsecured claims (pro rata) and 25% (approximately 547,886 shares) have been
or will be issued to Vector. As of May 31, 1995, 673,743 shares of the 876,618
which are to be issued have been issued to holders of unsecured claims and
547,886 shares have been issued to Vector participants and their successors (See
Management Discussion and Analysis). Of the remainder, approximately 115,000
shares are held in reserve for Ellco should the Company default on its payments
to Ellco as specified in the Plan and as more particularly described below in
sub-section (e) and approximately, 85,000 shares are being held back until
resolution of the State of California claim as described in subjection (j)
below.. The Common Stock issued to the remaining Vector participants and holders
of unsecured claims must be voted by them in accordance with the recommendation
of the Company's Board of Directors and in general, the holders of such Common
Stock have agreed pursuant to the Plan of Reorganization to take no action
hostile to the Company such as to commence or assist in a proxy contest or
tender offer. However, no limitation on the transferability of this Common Stock
was imposed pursuant to the terms of the Fourth Amended Disclosure Statement.
Solitron's pre-petition stockholders will retain their issued and outstanding
shares of Common Stock which, after the issuance of the remaining shares
reserved for issuance under the Plan of Reorganization (other than those shares
issuable upon the exercise by Mr. Saraf of such options), will represent 20%
(approximately 438,309 shares) of the issued and outstanding Common Stock. Of
the remaining 15%, 10% (approximately 219,155 shares) have already been issued
to Mr. Saraf, and 5% (approximately 109,578 shares) are reserved for future
issuance pursuant to employee stock incentive plans or programs. Additionally,
Mr. Saraf has been issued options to purchase an additional 8% of the issued and
outstanding Common Stock after giving effect to the foregoing issuances. The
Company intends to issue the remainder of the Common Stock issuable pursuant to
the Plan of Reorganization to unsecured creditors as soon as the number of
shares issuable can be calculated. The Company has issued the balance of the
Common Stock issuable to Vector and Mr. Saraf.
10
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(c) Pursuant to the Plan of Reorganization, beginning in
approximately May 1995, the Company was required to begin making quarterly
payments to holders of unsecured claims until they receive 35% of their claims.
However, due to negotiations between the parties, the unsecured creditors agreed
to a one month deferment of this payment (for more discussion see Management's
Discussion and Analysis). To date, these negotiations have not been completed
and while they are in progress, the Company made three of its proposed
distributions to the unsecured creditors who have accepted the payments. These
payments in the aggregate amount of $21,000 covered the period March 1, 1995
through September 30, 1995. It is presently estimated that there are an
aggregate of approximately $8,073,000 of allowed unsecured claims, and,
accordingly, that the Company is required to pay approximately $2,825,000 (i.e.,
35% of $8,073,000) to holders of allowed unsecured claims in quarterly
installments of approximately $69,000. The Company has proposed to its unsecured
creditors that it make quarterly payments of $9,000. To the extent allowed
unsecured claims exceed $8,000,000, the aggregate and monthly payments to
unsecured creditors will be increased proportionately; however, the maximum
quarterly payment is subject to a $105,000 cap. These payments and the aggregate
amounts thereof would also increase proportionately in the event of a default by
the Company in its obligations to Ellco Leasing Corporation ("Ellco"), as
described in (e) below. These payments and the aggregate thereof would decrease
proportionately to the extent the claims made by the State of California, as
described in (j) below, are not allowed.
(d) In March 1995, the Company entered into negotiations with its
unsecured creditors, the IRS and Palm Beach County in order to modify the
schedule of payments as prescribed by its Plan of Reorganization. There can be
no assurance that these negotiations will be successful.
(e) The Company is required to pay to Ellco $250,000 plus interest at
six percent per annum in monthly payments over a four-year period beginning on
the Effective Date. Approximately $117,500 of such $250,000 had been paid as of
August 31, 1995. Ellco has been granted a security interest in certain of the
Company's equipment to secure such obligations. Ellco is required to release its
liens on certain of the Company's assets as the above-referenced payments are
made. In the event of any default on any of such payments which remains uncured
after seven days' notice, Ellco would have a claim as an unsecured creditor in
the amount of the deficiency and the Company would make monthly payments to
Ellco until an aggregate of 35% of the deficiency amount was paid to Ellco.
Additionally, from the time of default, Ellco would be entitled to receive a pro
rata portion of the Profit Participation (as defined in (g) below) payable to
unsecured creditors. However, no retroactive payments would be made to Ellco. In
the event of such a default, however, Ellco would also receive a pro rata share
of the Common Stock issuable to unsecured creditors. Approximately 115,000
shares of the Common Stock will be held by the Company in trust for Ellco. If no
such default occurs, such Common Stock would be issued pro rata to the unsecured
creditors.
11
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(f) The Company received releases of substantially all liens on its
assets and properties existing as of the Effective Date. However, in accordance
with the Plan of Reorganization, Ellco, Southeast Bank Leasing Company,
Greyhound Financial Corporation and Met Life Capital Corporation have been
granted liens on certain of the Company's equipment and the holders of
pre-petition unsecured claims shall be granted a lien on all of the Company's
equipment to secure the payments described in (c) above and in (g) below. As of
August 31, 1995, the Company has paid off all its obligations to Southeast Bank
Leasing Company, Greyhound Financial Corporation and MetLife Capital
Corporation.
(g) Beginning on 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 participants and their successors, 5%
of its net after tax income until the tenth anniversary of the Effective Date,
up to a maximum aggregate of $1,500,000 of such payments to the holders of
unsecured claims (pro rata) and up to a maximum aggregate of $1,500,000 of such
payments to Vector participants and their successors (the "Profit
Participation").
(h) The Company transferred to First Union the real property known as
the New Riviera Beach Facility and granted First Union a non-exclusive perpetual
easement for the use of approximately 125 parking spaces on the adjacent real
property owned by the Company known as the Old Riviera Beach Facility. First
Union has claimed that the Company is obligated to pay approximately $110,000 in
1993 real property taxes with respect to the New Riviera Beach Facility that
accrued prior to such transfer as well as the cost of removing personal property
from and cleaning the New Riviera Beach Facility. The Court has denied First
Union's motion.
(i) Following the Effective Date and consistent with its agreement
with the State of Florida Department of Environmental Protection (the "DEP"),
the Company has begun to perform environmental assessments and is required to
remediate the Old Riviera Beach Facility and the Port Salerno Facility in
accordance with the terms of the Consent Final Judgment, entered in October,
1993 (the "Consent Final Judgment"). The foregoing stems from the environmental
contamination of certain of Solitron's properties. The monies to be utilized to
fund these assessments and remediations will be made available from the proceeds
of the sale or lease of the properties, to the extent that the Company is
successful in its efforts to sell or lease such properties. Pursuant to the Plan
of Reorganization, unless approved by the DEP, neither the Old Riviera Beach
Facility nor the Port Salerno Facility will be sold unless the price for such
property equals or exceeds the lesser of (i) 75% of its then appraised value or
(ii) the estimated cost of its remediation. In connection with facilitating the
remediation of the properties, the Company will also, to the extent the proceeds
from the sale or lease of these properties are not sufficient to pay for the
remediation, be required to escrow the following amounts on a monthly basis
beginning on the 25-month anniversary of the Effective Date: (i) year 1 - $5,000
per month; (ii) year 2- $7,500 per month; (iii) year 3 - $10,000 per month; and
(iv) $10,000 per month thereafter until remediation is completed. Additionally,
$42,000 in proceeds from an insurance settlement were released from escrow and a
portion of these funds have been utilized to investigate the extent to which the
soil at the Old Riviera Beach Facility requires remediation. Final determination
has been made that the soil at the Old Riviera Beach
12
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
facility needs no further remediation. The remainder of such $42,000 was used to
investigate the extent to which the soil at the Port Salerno Facility requires
remediation. Final determination has been made, that the soil at Port Salerno
requires no remediation. Any excess of such sale and lease proceeds over the
cost of assessment and remediation will be returned to the Company. The
Company's financial statements reflect liabilities of $1,075,000 relating to the
foregoing assessment and remediation obligations. Although the Company's
environmental consultants have advised the Company that they believe that this
is the best estimate of such liabilities, there can be no assurance that the
actual cost of remediation will not exceed such amount. In the event that the
Company defaults under the Consent Final Judgment, the DEP may assert a natural
resource claim against the Company, the amount of which (if any) would be
determined by a court of competent jurisdiction. See "Environmental Matters,"
below, for a further discussion of environmental matters. For a more definitive
description of environmental matters pertaining to the Old Riviera Beach
facility and the Port Salerno facility, please refer to the Consent Final
Judgment.
(j) The Company has paid all of the allowed administrative claims
and allowed wage claims since the Effective Date. The Company is required to pay
allowed tax claims (to the IRS, Palm Beach County, Florida and Martin County,
Florida), estimated at approximately $1,395,000 (which amount is accrued in the
consolidated financial statements), plus interest. The Company was required to
begin making quarterly payments of allowed tax claims to Palm Beach County
according to the following schedule: $37,000 per quarter for two years beginning
in the second quarter of 1994; and approximately $82,000 per quarter for the
twelve quarters thereafter. The Company is negotiating with Palm Beach County on
restructuring of the stream of payments. The Company has entered into an
agreement to make quarterly payments of allowed tax claims to Martin County of
approximately $4,000 for a period of approximately four years beginning in
approximately October 1994, but will start making these payments on or about
January 1996. During January 1995, the amount of allowed tax claims payable to
the IRS was determined to be $401,000. The Company was expected to make
quarterly payments of allowed tax claims to the IRS of no more than
approximately $21,000 for a period beginning in April 1995 and ending in
approximately January 2001. As the Company seeks to modify the terms of its
payments to the IRS, which were set by its Plan of Reorganization, it will have
to renegotiate the terms with an IRS field agent. These tax claims do not
include an unsecured claim by the State of California for approximately $900,000
for income taxes for years prior to 1982. Solitron disputes the extent of the
State of California's claim. An objection to the State of California's claim has
been filed, but such matter has not yet been resolved or settled. Resolution of
the State of California tax claims can occur now that the IRS claim was
finalized. Based on the results of the IRS appeal, the Company expects that the
State of California tax claim will be reduced significantly and will be treated
as an unsecured claim.
13
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(k) The Company had entered into a contract for the sale of the New
Riviera Beach facility on April 17, 1995. Under the terms of the sale, the buyer
was to have assumed all of Solitron's real property tax obligation for the
facility. This agreement required DEP approval in accordance with the Consent
Agreement. The DEP has notified the Company on September 1, 1995 that it would
not object to the sale of the facility and on September 29, 1995 had issued a
letter to the EPA regarding the sale clearing the way for the completion of the
transaction. However, on October 2, 1995, just prior to the expiration of the
due diligence period, the buyer notified the Company that it was no longer able
to obtain the required financing and withdrew from the project. The property was
thus placed back on the open market.
(l) Solitron rejected substantially all of its pre-petition
executory contracts (including its outstanding stock option agreements except
those with Shevach Saraf, Solitron's Chairman of the Board, Chief Executive
Officer, President and Treasurer), except for certain contracts with
distributors, sales representatives, lessors of equipment, customers, suppliers
and the lessor of its West Palm Beach, Florida facility, and the Sublease with
Vector, the Shared Services Agreement with Vector and the Employment Agreement
with Mr. Saraf.
(m) All of the members of Solitron's Board of Directors, other than
Shevach Saraf, resigned as of August 30, 1993. Two additional new directors were
appointed in August, 1993, and an additional three directors were appointed in
September, 1993. Robert P. Adler, a director appointed in September, 1993,
resigned in October, 1993 and Samuel B. Robinson, a director appointed in
September, 1993 resigned on April 3, 1994 and Peter Chiasson appointed in
September 1993, resigned on November 7, 1994.
(n) In September 1993, the Bankruptcy Court authorized a 1-for-10
reverse split of the Company's Common Stock, pursuant to which each 10 shares of
Common Stock were automatically converted into one share of Common Stock, with
cash paid in lieu of the issuance of fractional shares. This reverse stock split
became effective at the close of business on October 12, 1993, the record date
for such reverse stock split. This reverse stock split has been retroactively
reflected herein and all references to amounts of shares and share prices have
been retroactively adjusted herein to reflect same.
3. INVENTORIES:
Inventory consists of the following (in thousands):
August 31, 1995
---------------
Raw materials $ 823
Work-in-process 977
-------
$1,800
=======
14
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. LONG-TERM DEBT:
Long-term debt consists of the following:
(in thousands):
August 31, 1995
---------------
6% equipment finance
agreement due in monthly
installments with scheduled
maturities through August 1997 $ 133
Less: Current maturities (58)
------
Net balance $ 75
======
5. OTHER LONG-TERM LIABILITIES:
Other long-term liabilities consist of the following:
(in thousands):
August 31, 1995
---------------
Accrued Environmental Expenses $ 1,020
Accounts Payable - Pre-petition 1,317
IRS Tax Claim 318
County Property Tax Payable 946
-------
$ 3,601
=======
6. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Included in selling, general and administrative expenses for the six months
ended August 31, 1994 is a reversal of $73,000 which was accrued at February 28,
1994 for real estate taxes on the New Riviera Beach facility. On June 24, 1994,
the Bankruptcy Court denied First Union's motion to compel and accordingly the
Company will not have any obligation to pay the property taxes.
7. ENVIRONMENTAL MATTERS:
As a result of audits by the State of Florida Department of Environmental
Protection ("DEP") principally conducted as early as 1986, it was determined
that chemical discharges occurred at several of the Company's locations for
which clean up or other actions were required. Management of the Company
believes that clean up and monitoring is still required at three locations: one
licensed treatment facility to which the Company shipped hazardous waste, the
Company's Port Salerno location and the Company's Old Riviera Beach facility.
15
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In addition to the matters described in the preceding paragraph, testing of
monitoring wells installed by the Company at the Company's Port Salerno location
has revealed that groundwater contamination extends off-site. After notification
to DEP of the off-site contamination, the State Division of Health tested
certain private residential wells and requested the Company supply bottled
drinking water to seven families which use four of the private wells in the
area. The Company complied with this request. Other private wells nearby may
also be affected, and, in such case the Company will then extend public water
supply to affected homes. City water lines were connected to affected homes by
DEP at a cost of $200,000.
Based upon a tentative settlement with the City of Riviera Beach (the "City"), a
penalty assessed by DEP and remediation costs estimated by environmental
consultants and management, the Company initially accrued $2,331,000 for
environmental costs as of February 28, 1989. On March 9, 1990, the Company
reached a final settlement with the City which provided, among other things, for
the payment to the City of $700,000 plus interest at 8.5%, payable in quarterly
installments through 1995 and the payment of $171,000 in penalties to DEP plus
interest at 8.5% payable annually through 1995. At August 31, 1993, the Company
owed the City and DEP $583,000 and $103,000, respectively, on its obligations
under this agreement. The Plan provides a plan for the future remediation of the
Old Riviera Beach location and the Port Salerno location. The Plan provides for,
among other things, the following: (1) the Company reimburse DEP $200,000 for
providing water lines to serve properties affected by the groundwater
contamination from the Port Salerno site. This amount was paid as an
administrative expense during the year ended February 28, 1993; (2) remediate
site soils and groundwater at the Port Salerno location; (3) remediate
groundwater contamination at the Old Riviera Beach property and 4) pay a final
judgment of $103,000 to DEP representing the balance of penalties owed at August
31, 1993 as a result of the March 9, 1990 agreement. This amount was included in
amounts payable to unsecured creditors and accordingly, is subject to the same
payment terms and conditions as the Company's general unsecured creditors. Final
determination has been made that the soil at the Port Salerno Facility needs no
further remediation. Final determination was made that no soil remediation is
required at Riviera Beach Facility. Additionally, the Company's $583,000
obligation to the City was classified as an unsecured claim at August 31, 1993
pursuant to the provisions of the Plan and reimbursed DEP $200,000 as an
administrative payment.
Since entry of the Consent Final Judgment, the Company's consultant submitted a
plan for further soils assessment at the Riviera Beach and Port Salerno
facilities, received approval thereof and of its Quality Assurance Plan, and,
after filing assessments report reporting its data, received DEP approval of
both reports' conclusion that no further soils remediation is required at these
two sites. Until the escrows are replenished as set forth herein, groundwater
remediation will be deferred at the two sites.
16
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's environmental consultants have estimated the costs of remediation
to be approximately $727,000 for the Port Salerno property and $329,000 for the
Old Riviera Beach property. These amounts have been accrued for in the balance
sheet as of August 31, 1995.
Pursuant to the Plan, the Company will sell or lease the two properties and
utilize the proceeds to remediate both sites. If funds to clean the sites are
not available within twenty-four months from October, 1993, the Company is
required to make periodic payments as follows: 1) $5,000 per month beginning on
the 25th month; 2) $7,500 per month beginning on the 37th month; and 3) $10,000
per month beginning on the 49th month. This funding will be suspended when total
amounts paid reach 125% of the estimated remediation costs. Presently, the
Company is negotiating with the DEP to restructure its payments. On April 17,
1995, the Company entered into an agreement to sell the Riviera Beach Facility.
It was originally expected that the sale would be consummated in August or
September 1995. The sale price was $850,000, and after payment of existing
taxes, brokerage and attorneys' fees, certain moving costs and other expenses,
the proceeds were to provide approximately $410,000 to $430,000 for the escrow
account to complete groundwater remediation at the Riviera Beach site. If the
purchaser was satisfied, the contract called for a closing within 30 days
thereafter. The DEP had notified the Company on September 1, 1995 that it would
not object to the sale of the facility and on September 29, 1995 had issued a
letter to the EPA requesting that the EPA remove the site from the EPA
site-screening process for possible National Priority List listing. The Region
IV Administrator of the EPA has verbally assured counsel for the Company that
the EPA will honor such request. This action by the DEP cleared the way for the
completion of the transaction. However on October 2, 1995, just prior to the
expiration of the due diligence, the buyer notified the Company that it was no
longer able to obtain the required financing and withdrew from the project.
The Company received a claim by an estate owning property northwest and across
Cove Road from the Port Salerno property. The estate has asserted that the
mailing address to which the bankruptcy notice was sent was in error. The estate
has been advised that public water has been made available to the property and
that the Company is prepared to settle for the sum of $10,000, to be paid as
other unsecured creditor claims are being paid. Counsel is now handling such
negotiations.
During fiscal year ended February 28, 1995, the Company's environmental legal
counsel received a request for information from the Environmental Protection
Agency (the "EPA") which is reassessing all prior Comprehensive Environmental
Response, Compensation and Liability Information System sites for National
Priority Ranking using the newly adopted ranking formula. The Company's
facilities at Riviera Beach and Port Salerno are the subject of such
re-assessment. The Company and its environmental legal counsel do not consider
it probable that either the Company's Riviera Beach or Port Salerno facilities
will be added to the national priority list under the federal superfund law. The
Company's former facility in Jupiter, Florida (which was sold in 1982) has been
the subject of a preliminary assessment by the EPA. The EPA has requested site
access from the current owner. The Company's environmental legal counsel has no
information concerning the Jupiter facility nor has the Company received any
request for information. The Company and its environmental legal counsel cannot
assess at this time what the impact of the EPA study will be, if any, on the
Company's liability nor when the EPA will complete its study.
17
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company has been named as a potentially responsible party at a Nuclear
Disposal Facility located in Kentucky (Maxey Flats). During fiscal year 1995,
the Company, along with other responsible parties has signed a de-minimis
agreement to settle the case. Under the agreement, the Company will be
reimbursed a small amount (less than $1,000) which does not materially affect
the Company. However, final court action on the matter has not taken place.
Accordingly, as a result of the above, the Company's initial accrual for
environmental claims was reduced by approximately $777,000 as of August 31,
1993, which amount was included in environmental expenses net of insurance
recoveries in the statement of operations for the six months ended August 31,
1993. The Company's current reserve for environmental claims is approximately
$1,075,000 as of August 31, 1995.
Amounts expensed for environmental expenses were $00.00 for the six months ended
August 31, 1995 as compared with $18,000 for the six months ended August 31,
1994.
8. REVERSE STOCK SPLIT:
On September 28, 1993, the Board of Directors of the Company declared a
one-for-ten reverse split of the Company's common stock which became effective
October 12, 1993.
18
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying condensed consolidated
financial statements.
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.
In connection with the Company's reorganization, effective August 31, 1993 the
Company utilized "Fresh Start Reporting". Use of this method requires that
adjustments be made to assets and liabilities to record them at fair value, and
adjustments to reflect forgiveness of debt (in accordance with the Plan) be
included in the Company's consolidated statement of operations prior to its
emergence from bankruptcy. As a result, the reorganized Company's financial
statements prior to August 30, 1993 (August 31, 1993 for financial statement
purposes), are not comparable to subsequent periods (See Note 2 to the Company's
Condensed Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
During the last several fiscal years, the Company experienced losses from
operations and severe cash shortages caused by a significant decline in both
sales and open order backlog, a severe disruption of production caused by a fire
in one of the Company's production lines in 1991, significant non-recurring
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.
During the pendency of the Bankruptcy Proceedings, all secured and unsecured
claims against and indebtedness of the Company (including accrued and unpaid
interest) were stayed in accordance with the Bankruptcy Code while the Company
continued its operations as a debtor-in-possession, subject to the control and
supervision of the Bankruptcy Court. Because these stays limit cash outflow, the
Company, during the pendency of the Bankruptcy Proceedings, realized positive
cash flow from ongoing operations. Since the Company emerged from Chapter 11, it
has experienced a positive cash flow from recurring operations; however, overall
cash flow has been negative due primarily to the necessity to make payments of
administrative expenses arising in connection with the Bankruptcy Proceedings.
The foregoing resulted in a decrease in cash and cash equivalents since
emergence from Chapter 11.
19
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
After giving effect to the Plan of Reorganization, the Company's outstanding
liabilities at August 31, 1993, were reduced from approximately $32,069,000 to
approximately $6,760,000 and the Company's accumulated deficit was eliminated
with a corresponding charge to additional paid in capital.
The Company incurred losses from ongoing operations of $131,000 for the six
months ended August 31, 1995 and $244,000 for the fiscal year ended February 28,
1995 and has significant obligations arising from settlements in connection with
its bankruptcy necessitating it to make substantial cash payments which cannot
be supported by the current level of operations.
The Company has projected that it will be able to generate sufficient funds to
support its ongoing operations. However, the Company must be able to renegotiate
its required payments to unsecured creditors, the IRS and certain taxing
authorities or raise sufficient cash in order to pay these obligations as
currently due, in order to remain a going concern.
The Company is currently in negotiations with unsecured creditors, the IRS and
other taxing authorities in an attempt to arrive at reduced payment schedules.
Further, the Company plans to be able to enter into a factoring arrangement to
provide additional funding. In addition, the Company has a contingency plan to
reduce its size and thereby reduce its cost of operations within certain
limitations. However, no assurance can be made that the Company can reach a
suitable agreement with the unsecured creditors or taxing authorities or obtain
additional sources of capital and/or cash or that the Company can generate
sufficient cash to meet its obligations.
Pursuant to the Plan, beginning approximately May 1995, the Company is required
to make quarterly payments to holders of unsecured claims at the rate of $23,066
per month until $2,825,545 is paid to unsecured creditors. This amount can
increase to up to a $35,000 per month cap to the extent certain contested claims
are approved and added to the pool of unsecured claims or to the extent the
Company defaults on its payment obligations to Ellco. The Company is
renegotiating with its unsecured creditors to modify these payment requirements.
However, due to negotiations between the parties, the unsecured creditors agreed
to a one month deferment of this payment (for more discussion see Management's
Discussion and Analysis). To date, these negotiations have not been completed
and while they are in process, the Company has made three of its proposed
distributions in the aggregate amount of $21,000 to the unsecured creditors who
have accepted payments. These payments cover the period March 1, 1995 through
September 30, 1995. The Company has proposed to its unsecured creditors that it
make quarterly payments of $9,000.
The Company received a claim by an estate owning property northwest and across
Cove Road from the Port Salerno property. The estate has asserted that the
mailing address to which the bankruptcy notice was sent was in error. The estate
has been advised that public water has been made available to the property and
that the Company is prepared to settle for the sum of $10,000, to be paid as
other unsecured creditor claims are being paid. Counsel is now handling such
negotiations.
20
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
During the fiscal year, the Company's environmental legal counsel received a
request for information from the Environmental Protection Agency the ("EPA")
which is reassessing all prior Comprehensive Environmental Response,
Compensation and Liability Information System sites for National Priority
Ranking using the newly adopted ranking formula. The Company's facilities at
Riviera Beach and Port Salerno are the subject of such reassessment. The Company
and its environmental counsel do not consider it probable that either the
Company's Riviera Beach or Port Salerno facilities will be added to the national
priority list under the federal superfund law. The Company's former facility in
Jupiter, Florida (which was sold in 1982) has been the subject of a preliminary
assessment by the EPA. The EPA has requested site access from the current owner.
The Company's environmental legal counsel has no information concerning the
Jupiter facility nor has the Company received any request for information. The
Company and its environmental legal counsel cannot assess at this time what the
impact of the EPA study will be, if any, on the Company's liability nor when the
EPA will complete its study. For a further description of the Company's
significant environmental problems, refer to Note 1 of the accompanying
Condensed Consolidated Financial Statements.
The Company had entered into a contract (now cancelled) for the sale of the New
Riviera Beach facility on April 17, 1995. Once the New Riviera Beach facility
was to have been sold, the proceeds of the sale were to be used as follows: (1)
pay for all outstanding real estate taxes; (2) real estate commissions; (3)
legal fees; (4) cost of relocating equipment and material currently stored in
the facility and (5) cost of environmental assessment and computer modeling
demanded by DEP prior to the approval of the sale. All remaining funds
(approximately $410,000-$430,000) were to be deposited in the Riviera Beach
environmental escrow account. Under the terms of the sales agreement, the buyer
was to issue the Company an irrevocable letter of credit for the amount of
$50,000 which was to be available for use by the Company for clean-up should
clean-up costs exceed $400,000. The Company is required to perform the clean-up
with funds available in the escrow account. Should the cost of clean-up exceed
the escrowed amount, the Company will be required to pay any additional funds in
accordance with the Consent Final Judgment (see Consent Final Judgment included
as an exhibit hereto). Following protracted negotiations with the DEP, on
September 1, 1995 the Department advised the Company that it would not object to
the sale of the facility. Following additional negotiations, on September 29,
1995 the DEP requested that the EPA defer placing the facility on the National
Priority List. However, on October 2, 1995, the potential buyer withdrew from
the purchased as it was no longer able to obtain financing for the proposed
transaction. The property is now, again, listed for sale on the open market.
Also pursuant to the terms of the Plan of Reorganization and Consent Agreement,
the Company is required to complete the assessment and remediation of the Port
Salerno Facility and the Old Riviera Beach Facilities. The costs of these
assessments and remediations, estimated at $1,075,000, will be payable from the
proceeds of the sale or lease of these properties. The Company is required to
escrow the following amounts on a monthly basis beginning on the 25-month
anniversary of the Effective Date of the Plan of Reorganization to ensure the
remediation of these properties in the event the properties are not sold or
leased: (i) year 1 - $60,000; (ii) year 2 - $90,000; (iii) year 3 - $120,000;
and (iv) $120,000 per year thereafter until remediation is
21
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
completed. In October 1995, the Company entered into negotiations with DEP to
modify these payments into the escrow accounts. Any excess of such sale and
lease proceeds and such escrows over the cost of assessment and remediation
shall be returned to the Company. As part of these requirements, the Company
performed soil remediation assessment at both facilities. These tests indicated
that no soil remediation is required at the Port Salerno and Riviera Beach
facilities. For details see the Company's Plan of Reorganization and Consent
Final Judgment with the Department of Environmental Protection.
The Company is required to pay an equipment lessor (Ellco) $250,000 plus
interest at six percent per annum in monthly payments over a four-year period
beginning on the Effective Date in satisfaction of an allowed claim amounting to
approximately $1,214,000. These monthly payments escalate from $3,500 to $6,000
during such four-year term. Ellco has been granted a security interest in
certain of the Company's equipment to collateralize such obligations. In the
event of any default by the Company, Ellco would have an unsecured claim
amounting to 35% of the original amount due less payments made to the date of
the default. Additionally, Ellco would be entitled to certain amounts pursuant
to a profit participation payable to unsecured creditors and a pro rata share of
the common stock issuable to unsecured creditors pursuant to the Plan. As of
August 31, 1995, the Company had paid Ellco $117,500.
Pursuant to the Plan of Reorganization, beginning on the date the Company's net
after tax income exceeds $500,000, the Company will be required to pay certain
pre-petition creditors 10% of net after tax income until the tenth anniversary
of the Effective Date, up to a maximum aggregate of $3,000,000 in such payments.
Further, the Company's lease payments (less sublease payments from Vector) for
its facilities in West Palm Beach, Florida will increase each year from
approximately $117,000 during the current fiscal year in accordance with
specified cost of living increases (which shall be no less than 3% nor more than
5% per year).
The Company has paid all of the allowed administrative claims and allowed wage
claims since the Effective Date. The Company is required to pay allowed tax
claims (to the Internal Revenue Service, Palm Beach County, Florida and Martin
County, Florida), estimated at approximately $1,395,000 (which amount is accrued
in the accompanying financial statements) plus interest. The Company is required
to make quarterly payments of allowed tax claims to Palm Beach County according
to the following schedules: $37,000 per quarter for two years beginning in the
second quarter of 1994; and approximately $82,000 per quarter for the twelve
quarters thereafter. The Company is required to make quarterly payments of
allowed tax claims to Martin County of approximately $4,000 for a period of
approximately four years beginning in approximately October 1994. The allowed
tax claims payable to the IRS was determined in January 1995 to be $401,000. The
Company is required to make quarterly payments of allowed tax claims to the IRS
of no more than approximately $21,000 for a period beginning in approximately
April 1995 and ending approximately January 2001. As the Company seeks to modify
the terms of its payments to the IRS, which were set by its Plan of
Reorganization, it will have to renegotiate the terms with an IRS field agent.
These tax claims do not include an unsecured claim by the State of California
for
22
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
approximately $900,000 for income taxes for years prior to 1982. The Company
disputes the extent of the State of California's claim. An objection to the
State of California's claim has been filed, following resolution of the IRS
claim; this claim can now be resolved. The Company expects that it will be
resolved by December 1995 and will be significantly reduced and treated as an
unsecured claim. At August 31, 1995 and February 28, 1995, respectively, the
Company had cash and cash equivalents of $636,000 and $867,000 (including
$461,000 and $394,000 restricted, primarily for rent on its West Palm Beach
Facility). The decrease in cash and cash equivalents was due primarily to a slow
down in collections of accounts receivable. Accounts receivable were $938,000
and $732,000 at August 31, 1995 and February 28, 1995, respectively. The
increase in accounts receivable was due primarily to the aforementioned slow
down in collecting and a 3% increase in sales as compared to the previous
quarter. At August 31, 1995 and February 28, 1995, the Company's working capital
was $1,145,000 and $1,202,000, respectively, and the ratio of current assets to
current liabilities was 1.46:1 and 1.49:1, respectively.
The Company used $128,000 of net cash from operating activities during the six
months ended August 31, 1995, compared to $147,000 during the six months ended
August 31, 1994. This decrease in cash generated from operating activities was
primarily due to the Company's increase in accounts receivable and an increase
in accumulated net losses.
During the six months ended August 31, 1995, the Company used $63,000 of net
cash for investing activities, primarily for additions to property, plant and
equipment at the Company's leased facility in West Palm Beach, Florida, compared
to $23,000 of net cash for investing activities for the six months ended August
31, 1994. During the six months ended August 31, 1995, the Company used
approximately $40,000 of net cash for financing activities, compared to the use
of approximately $44,000 of net cash for financing activities during the six
months ended August 31, 1994. In addition, the Company has paid a total of
$41,075 (including interest) to Ellco, Southeast Leasing Company and MetLife
Capital and $18,000 of net cash to pay back its unsecured creditors during the
six months ended August 31, 1995. All of these amounts are bankruptcy discharge
related obligations.
The Company believes that operations will continue to generate sufficient cash
to satisfy its operating needs over the next 12 months. However, at the current
bookings and sales level 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 negotiations with all claim holders to
reschedule these payments. In the event the Company is unable to restructure its
obligations to pre-bankruptcy claimants, the Company has a contingency plan to
reduce its size and thereby reduce its cost of operations within certain
limitations. Over the long-term, the Company believes that, if the volume of
product sales continues as presently anticipated and it can restructure its
obligations to pre-bankruptcy creditors, the Company will generate sufficient
cash from operations. In the event that bookings in the long-term decline
significantly below the level experienced since emerging from Chapter 11, the
Company may be required to implement further cost-cutting or other downsizing
measures to continue its business operations. Such cost-cutting measures could
23
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
inhibit future growth prospects. In addition, the Company is pursuing additional
sources of financing. There is no assurance that financing will be available in
amounts or upon terms satisfactory to the Company. Further, 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.
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.
24
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS-THREE MONTHS ENDED AUGUST 31, 1995:
Net sales for the three months ended August 31, 1995 decreased 1% to $1,690,000
as compared to $1,705,000 for the three months ended August 31, 1994. The
variance in net sales reflects a variance in customer delivery rate
requirements. The Company's backlog increased 6.6% for the three months ended
August 31, 1995 as compared to 2.8% for the three months ended August 31, 1994.
Gross margins decreased from 28% for the three months ended August 31, 1994 to
14% for the three months ended August 31, 1995 primarily due to 20% lower per
unit sales prices as compared to the previous period combined with higher
materials costs and lower than expected yields due to the requirement for more
complex products.
Selling, general and administrative expenses decreased from $464,000 for the
three months ended August 31, 1994 to $283,000 for the three months ended August
31, 1995. The decrease was due primarily to a reversal of $60,000 for personal
property taxes and decreases in commissions, legal and professional fees, bad
debt expense and recruiting and relocation costs.
The Company recorded net other expense of $14,000 for the three months ended
August 31, 1995 versus net other expense of $27,000 for the three months ended
August 31, 1994. The variance was due primarily to a decrease in other expense
of $7,000, a decrease in Chapter 11 expenses of $17,000, an increase in other
income of $13,000 offset by an increase in interest expense of $20,000.
Due primarily to the Company's net revenue being lower than the sum of its fixed
and variable expenses as a result of lower average sales prices and lower than
expected yields, the Company realized an operating loss of $41,000 for the three
months ended August 31, 1995 versus operating income of $18,000 for the three
months ended August 31, 1994. The Company incurred a net loss of $55,000 for the
quarter ended August 31, 1995 compared to a net loss of $9,000 for the three
months ended August 31, 1994.
RESULTS OF OPERATIONS - SIX MONTHS ENDED AUGUST 31, 1995
Net sales for the six months ended August 31, 1995 increased 4% to $3,330,000 as
compared to $3,215,000 for the six months ended August 31, 1994. The Company's
backlog increased 15.4% for the six months ended August 31, 1995 as compared to
25% for the six months ended August 31, 1994. Gross margins decreased from 23%
for the six months ended August 31, 1994 to 14% for the six months ended August
31, 1994 to 15% for the six months ended August 31, 1995 due to a 20% lower per
unit sales price as compared to the previous period combined with higher
material costs and lower than expected yields due to higher complexity of
products being manufactured.
25
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Selling, general and administrative expenses decreased from $745,000 for the six
months ended August 31, 1994 to $630,000 for the six months ended August 31,
1995. The decrease was due to decreases in commissions, travel, public
relations, professional fees, and relocation and recruiting expenses.
The Company recorded net other expense of $31,000 for the six months ended
August 31, 1995 versus net other expense of $64,000 for the six months ended
August 31, 1994. The variance was due primarily to an increase of $18,000 of
other income, decreases of $14,000 and $18,000 in Chapter 11 expense and other
expense, respectively, offset by a $17,000 increase in interest expense.
Due primarily to the Company's net revenue being lower than the sum of its fixed
and variable expenses, as a result of lower average sales prices and lower than
expected yields, the Company realized an operating loss of $131,000 for the six
months ended August 31, 1995 compared to an operating loss of $7,000 for the six
months ended August 31, 1994 and a net loss of $162,000 for the six months ended
August 31, 1995 compared to a net loss of $71,000 for the six months ended
August 31, 1994.
26
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
Other than the Bankruptcy Proceedings (as described in "Item 1. - Business") and
the following matters, The Company is not aware of any other significant legal
proceedings to which it is a party.
INTERNAL REVENUE SERVICE TAX CLAIM
The Internal Revenue Service ("IRS") audited the Company's income tax returns
for the years 1980-1989. The Company appealed the IRS' original audit results.
During January 1995, the tax claim was determined to be $401,000 which is
included in the Company's financial statement as an accrual for the entire
amount. The IRS' tax claim is subject to payment within six years from January
1995. The Company is negotiating with the IRS to reschedule this stream of
payments.
STATE OF CALIFORNIA TAX CLAIM
On November 23, 1992, the State of California filed a claim asserting that the
Company owes the State of California approximately $900,000 for income taxes for
years prior to 1982. Solitron disputes the extent of the State of California's
claim. This claim will be treated as an unsecured claim. An objection to the
State of California's claim has been filed, but such matter has not yet been
resolved by the Bankruptcy Court or between the parties. This objection can now
be resolved since the Company's appeal of the IRS claim was resolved. Based on
the results of the IRS appeal, the Company expects that this claim will be
reduced. Once resolved, this claim will be treated as an unsecured claim.
ENVIRONMENTAL CLAIM REGARDING PORT SALERNO
The Company received a claim by an estate owning property northwest and across
Cove Road from the Port Salerno property. The estate has asserted that the
mailing address to which the bankruptcy notice was sent was in error. The estate
has been advised that public water has been made available to the property and
that the Company is prepared to settle for the allowance of a general unsecured
claim in the amount of $10,000. Counsel is now handling such negotiations.
RESOLUTION TRUST CORPORATION (COMPANY'S LANDLORD)
On June, 1995, the Company filed a Motion in Federal Court to compel RTC for
specific performance for the repair of the roof and HVAC system and for damages.
Mandatory mediation failed and a trial date of December 4, 1995 was set. As the
Company segregated funds to pay for rent and has a written consent of the
landlord's agent (Tecton) to withhold rent payments until the roof and HVAC
system are replaced or repaired, no adverse result to the Company is expected.
ITEM 2.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Part 1.
27
<PAGE>
PART II - OTHER INFORMATION
(CONTINUED)
ITEMS 4-5.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended August
31, 1995.
28
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned as a duly authorized officer of the Registrant.
SOLITRON DEVICES, INC.
/s/ SHEVACH SARAF
------------------------------------
SHEVACH SARAF
CHAIRMAN, CEO & PRESIDENT
Dated: October 18, 1995
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM SOLITRON DEVICES, INC. AND SUBSIDIARIES FORM 10-QSB FOR THE
QUARTER ENDED AUGUST 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENT
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> AUG-31-1995
<CASH> 636,000
<SECURITIES> 0
<RECEIVABLES> 973,000
<ALLOWANCES> (35,000)
<INVENTORY> 1,800,000
<CURRENT-ASSETS> 3,616,000
<PP&E> 1,431,000
<DEPRECIATION> (596,000)
<TOTAL-ASSETS> 6,468,000
<CURRENT-LIABILITIES> 2,471,000
<BONDS> 0
<COMMON> 19,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,468,000
<SALES> 3,330,000
<TOTAL-REVENUES> 3,330,000
<CGS> 2,831,000
<TOTAL-COSTS> 3,461,000
<OTHER-EXPENSES> (31,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (54,000)
<INCOME-PRETAX> (162,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (162,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (162,000)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
