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 November 30, 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
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(Address of principal executive offices)
(407) 848-4311
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(Issuer's telephone number)
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(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 [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: 1,879,093 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 -- November 30, 1995
Condensed Consolidated Statements of Operations --
Three And Nine Months Ended November 30, 1995 and 1994
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended November 30, 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>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
ASSETS
NOVEMBER 30, 1995
(UNAUDITED)
-----------
Current Assets:
Cash* $ 779
Accounts receivable, less allowance
for doubtful accounts of $35 880
Inventories 1,938
Prepaid expenses and other current assets 76
Due from S/V Microwave Products, Inc. 274
-------
Total current assets 3,947
Property, plant and equipment, net 805
Non-operating plant facilities 1,745
Due from S/V Microwave Products, Inc. 184
Other assets 93
--------
$6,774
========
*Including $548,000 reserved for rent as disclosed in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
4
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
NOVEMBER 30, 1995
(UNAUDITED)
-----------
Current liabilities:
Current maturities of long-term debt $ 58
Accounts payable - post-petition 683
Current portion of accounts payable - pre-petition 289
Accrued expenses 1,775
Accrued Chapter 11 administrative expenses 72
--------
Total current liabilities 2,877
--------
Long-term debt, less current maturities 64
--------
Other long-term liabilities 3,613
--------
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 2,620
Deficit (2,415)
--------
224
--------
$ 6,774
========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
5
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1995 1994 1995 1994
---------------------- ----------------------
NET SALES $1,747 $1,541 $5,077 $4,755
Cost of sales 1,479 1,304 4,310 3,780
--------- --------- --------- ---------
Gross Profit 268 237 767 975
Selling, general and
administrative expenses 327 358 957 1,103
--------- --------- --------- ---------
Operating (loss) income (59) (121) (190) (128)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Other Income 7 7 36 17
Interest expense (40) (40) (94) (77)
Chapter 11 expenses - (11) - (25)
Other (6) (13) (11) (36)
--------- --------- --------- ---------
Net other expense (39) (57) (70) (121)
--------- --------- --------- ---------
Net loss $ (97) $ (178) $ (260) $ (249)
========= ========= ========= =========
LOSS PER SHARE: $ (.05) $ (.09) $ (.12) $ (.12)
========= ========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING 2,082,000 2,082,000 2,082,000 2,082,000
--------- --------- --------- ---------
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)
NINE MONTHS ENDED NOVEMBER 30,
------------------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(260) $(249)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 179 233
Provision for doubtful accounts (3) (10)
Gain on disposal of assets (13) --
(Increase) decrease in account receivable (145) 108
(Increase) decrease in inventories (127) (91)
Decrease in prepaid expenses and
other current assets (26) (10)
Increase in due from S/V Microwave Products, Inc. (97) (54)
Decrease in other assets (4) 11
Increase (decrease) in accounts payable 466 (42)
Increase in current portion of
accounts payable-pre-petition 12 --
Increase (decrease) in accrued expenses
and other liabilities (28) 87
Decrease in accrued Chapter 11
administrative expenses (48) (55)
Increase in other long-term liabilities 149 --
----- -----
Total adjustments 315 177
----- -----
Net cash used in operating activities 55 (72)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of assets 13 --
Additions to property, plant and equipment (106) (28)
----- -----
Net cash used in investing activities (93) (28)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (50) (70)
----- -----
Net cash used in financing activities (50) (70)
----- -----
NET DECREASE IN CASH (88) (170)
</TABLE>
(Continued)
7
<PAGE>
<TABLE>
<CAPTION>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(CONTINUED)
NINE MONTHS ENDED NOVEMBER 30,
------------------------------
1995 1994
---- ----
<S> <C> <C>
CASH AT BEGINNING OF PERIOD 867 897
------- -------
CASH AT END OF PERIOD $ 779 $ 727
======= =======
</TABLE>
Supplemental cash flow disclosure:
Interest paid during the nine months ended November 30, 1995 and 1994 was
approximately $11,000 and $36,000 respectively.
The accompanying notes are an integral part
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 Reports for the quarters ended May 31, 1995 and
August 31, 1995.
The results of operations for the nine month period ended November 30, 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 "S/V Microwave Products, Inc. Purchase
Agreement"), (formerly known as Vector) the Company transferred to S/V Microwave
Products, Inc. (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 S/V Microwave
Products, Inc. Purchase Agreement: (i) S/V Microwave Products, Inc. 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 S/V Microwave Products, Inc. insurance
proceeds of approximately $5.4 million from National Union Fire Insurance
Company stemming from a 1991 fire in the Company's hybrid department; (iii) the
Company and S/V Microwave Products, Inc. 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
9
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
products produced by the other as of the date of the S/V Microwave Products,
Inc. Purchase Agreement; (iv) the Company entered into a Shared Services and
Equipment Agreement (the "Shared Services Agreement") with S/V Microwave
Products, Inc., pursuant to which it is estimated that S/V Microwave Products,
Inc. will pay Solitron approximately $55,000 per year for eight years in
exchange for, among other things, the Company's (a) allowing S/V Microwave
Products, Inc. to use certain of the Company's equipment, (b) providing to S/V
Microwave Products, Inc. certain janitorial and other services and (c) agreeing
to share certain of its computer equipment with S/V Microwave Products, Inc.
through August, 1994; and (v) S/V Microwave Products, Inc. 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 S/V Microwave Products, Inc.. As of
February 6, 1996, S/V Microwave Products, Inc. had paid approximately $68,261 of
these taxes. The Company was 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 rent of
approximately $348,000 for the period March 1, 1993 to November 30, 1995 in rent
payments (See "Item 2 - Properties"). The Company settled its dispute with the
RTC out of court on December 15, 1995. Under the terms of the settlement, the
Company and S/V Microwave Products, Inc. paid the RTC $325,000 in complete
settlement of all the then outstanding rent. The Company has expended
approximately $139,000 in legal expenses before settlement has been reached. As
a result of the settlement with the RTC, the Company netted a reduction in rent
of approximately $239,000 ($563,066 was Solitron's share of back rent less
$185,000 it paid in settlement less approximately $138,845 expended for legal
and professional fees). In December a reclassification was made from operating
expenses to other expenses of approximately $104,000 for the current year
expenses pertaining to the RTC claim; and an extraordinary gain of approximately
$274,000 was recorded due to the settlement.
(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 S/V Microwave Products, Inc.. 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 S/V Microwave Products,
Inc. participants and their successors (See Management Discussion and Analysis).
Of the remainder, approximately 114,137 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 88,738
shares which were held back until resolution of the State of California claim as
described in subsection (j) below will be issued in March 1996 following
resolution of same. Now that the State of California claim has been settled, the
Company expects these shares (88,738) to be issed in March or April 1996. The
Common Stock issued to the remaining S/V Microwave Products, Inc. participants
and holders of unsecured claims must be voted by them in accordance with the
recommendation of the
10
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Company's Board of Directors and in general, the holders of such Common Stock
have agreed pursuant to the Plan of Reorganization (other than those share
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 55 (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 S/V Microwave Products, Inc. and Mr. Saraf.
(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 four of its proposed
distributions to the unsecured creditors who have accepted the payments. These
payments to unsecured creditors in the aggregate amount of approximately $25,196
covered the period March 1, 1995 through December 31, 1995 of approximatelY
$204,437 as required by the Plan of Reorganization. Following the settlement
with the State of California of the amount of its unsecured claim (as described
below in (j), and the Company's acquisition of the unsecured claim of Argo
Partners, Inc. (as described below in (o), it is presently estimated that there
are an aggregate of approximately $7,155,252 unsecured claims, and, accordingly,
that the Company is required to pay approximately $2,504,338 (i.e., 35% of
$7,155,252) to holders of allowed unsecured claims in quarterly installments of
approximately $61,331. The Company has proposed to its unsecured creditors that
it make quarterly payments of $9,000. The aggregate and monthly payments to
unsecured creditors increases and decreases in proportion to $10,000 per month
per $3.5 million in allowed claims, subject to a maximum quarterly payment of
$105,000. 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.
(d) In March 1995, the Company entered into negotiations with
its unsecured creditors, the IRS, Martin County 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.
11
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(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 $127,000 of such $250,000 had been paid as of
November 30, 1995. Ellco has been granted a security interest in certain of the
Company's equipment to secure such obligations. In a subsequent agreement
between the parties, Solitron agreed to pay Ellco an additional $5,000 which
will be added to the end of the payment due Ellco. The $5,000 will not bear
interest. 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 (the
balance between the original claim less the principal amount paid) 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.
(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 MetLife 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
November 30, 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 the holders
of unsecured claims (pro rata) and S/V Microwave Products, Inc. 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 S/V Microwave Products, Inc. participants and
their successors (the "Profit Participation").
12
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(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. In September
1995, the Company notified the DEP that it is unable to meet its original
obligation of making monthly deposits of $5,000 into escrow and proposed that it
would make payment of $1,000 per month. The DEP advised the Company that it
cannot agree to such a change but that it would not seek enforcement. As of
January 31, 1996, the Company deposited $4,000 (out of $20,000) in the
environmental escrow account. 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 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 $1,074,000 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
13
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 (with interest balance
is $1,697,626). 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. As of
January 31, 1996, the Company had paid approximately $154,979 of the $259,000
due Palm Beach County. 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. As of January 31, 1996, the Company had paid
approximately $7,957 of the $24,000 due Martin County. The Company is
negotiating with Martin County to modify the payment plan. During January 1995,
the amount of allowed tax claims payable to the IRS was determined to be
$401,000 (balance with interest was $401,110 as of November 30, 1995). 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. To date, the Company
has made no payments to the IRS.
These tax claims do not include an unsecured claim by the
State of California for approximately $680,000 for income taxes for years prior
to 1982. Solitron disputed the extent of the State of California's claim. An
objection to the State of California's claim has been filed. Based on the
results of the IRS appeal, the State of California tax claim has been reduced to
approximately $694,834. This reduction was approved by the bankruptcy court on
December 26, 1995 and is being treated as an unsecured claim.
(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.
14
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(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
S/V Microwave Products, Inc., the Shared Services Agreement with S/V Microwave
Products, Inc. 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. On January 17, 1996 Mr. Robert P.
Perfetto, a Director appointed in September 1993, resigned from the Board of
Directors. On January 22, 1996 Mr. Anthony Parillo, Jr., a director appointed in
September 1993, resigned from the Board of Directors.
(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.
(o) On December 15, 1995, the Company has entered into agreement
to acquire Argo Partners, Inc.'s unsecured debt obligation of $694,834 for
$40,000. Prior to this acquisition, Argo Partners received payment of
approximately $1,297 from the Company as part of several distributions to
unsecured creditors. The Company recorded an extraordinary gain of $98,740 as a
result of this transaction.
3. INVENTORIES:
Inventory consists of the following
(in thousands):
NOVEMBER 30, 1995
-----------------
Raw materials $1,026
Work-in-process 912
------
$1,938
======
15
<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):
NOVEMBER 30, 1995
-----------------
6% equipment finance
agreement due in monthly
installments with scheduled
maturities through August 1997 $ 123
Less: Current maturities (59)
------
Net balance $ 64
======
5. OTHER LONG-TERM LIABILITIES:
Other long-term liabilities consist of the following:
(in thousands):
NOVEMBER 30, 1995
-----------------
Accrued Environmental Expenses $ 1,005
Accounts Payable - Pre-petition 1,317
IRS Tax Claim 318
County Property Tax Payable 968
-------
$ 3,608
=======
6. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Included in selling, general and administrative expenses for the nine months
ended November 30, 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.
16
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
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 November 30, 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
November 30, 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.
17
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
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 November 30, 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. In September 1995,
the Company notified the DEP that it is unable to meet its original obligation
of making monthly deposits of $5,000 and proposed that it would make payments of
$1,000 per month. The DEP advised the Company that it cannot agree to such a
change but that it would not seek enforcement. As of January 31, 1996, the
Company deposited $4,000 (out of $20,000 due) in the escrow accounts. 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
did not properly file a claim in the bankruptcy case and there is some questions
as to whether service of notice was defective. 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. The estate declined the Company's offer. The
Company and its counsel believe that the Court will treat the
18
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
estate in the same manner as other properties in the area were treated which is
the same as the Company proposed.
The Company's payment of $200,000 to extend the large main public water line to
the neighborhood and to extend smaller individual distribution lines to affected
properties with private wells was the principal cost for water service to the
area. In the event that other private wells are impacted in the future in excess
of regulatory levels, the Company might be obligated to extend small, individual
distribution lines to serve the affected properties. However, the recent
re-testing private wells by the Martin County Health Department did not reveal
additional wells to be so impacted and the State Department of Environmental
Protection has not required further properties to be provided with pubic water
supply. There is the potential for the required extension in the future but the
State Department of Environmental Protection has acknowledged that source
removal from soils and pond sediments has been completed. As the facility has
not been in use since 1988, the Company believes the likelihood of additional
extensions to be minimal and the cost of any such extensions if required in the
future to also be minimal.
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. 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 November 30,
1993. The Company's current reserve for environmental claims is $1,073,539 as of
November 30, 1995.
19
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Amounts expensed for environmental expenses were $00.00 for the nine months
ended November 30, 1995 as compared with $20,000 for the nine months ended
November 30, 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.
20
<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.
21
<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 approximately $260,000
for the nine months ended November 30, 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, and following the
settlement with the State of California and the acquisition of the unsecured
claim of Argo Partners, Inc., the Company was required to make quarterly
payments to holders of unsecured claims at the rate of $20,444 per month until
approximately $2,504,338 is paid to unsecured creditors. This amount can
increase up to a $35,000 per month cap to the extent the Company defaults on its
payment obligations to Ellco. The amount increases and decreases in proportion
to $10,000 per month per $3.5 million in allowed claims. 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 four of its
proposed distributions in the aggregate amount of approximately $25,196 to the
unsecured creditors who have accepted payments. These payments cover the period
March 1, 1995 through November 30, 1995. The Company has proposed to its
unsecured creditors that it make quarterly payments of $9,000.
22
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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
did not properly file a claim in the bankruptcy case and there is some question
as to whether service of notice was defective. 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. The estate decline the Company's offer. The
Company and its counsel believe that the bankruptcy court is likely to treat the
estate in the same manner as other properties in the area were treated which is
what the Company proposed. 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.
23
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 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. In a subsequent agreement between the parties,
Solitron agreed to pay Ellco an additional $5,000 which will be added to the end
of the payments due Ellco. The $5,000 will not bear interest. 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 principal 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 November 30, 1995, the Company
had paid Ellco $127,000.
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 S/V Microwave
Products, Inc.) 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. As of
24
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
January 31, 1996, the Company had paid approximately $154,978 of the $259,000
due Palm Beach County to date. 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. As
of January 31, 1996, the Company had paid approximately $7,957 of the $24,000
due Martin County to date. 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 of this date, the Company has made no
payments to the IRS. 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 $680,179.35 for
income taxes for years prior to 1982. The California tax claim, which is being
treated as an unsecured claim, has been allowed by the bankruptcy court at
$680,179.35 on December 26, 1995.
On November 30, 1995 and February 28, 1995, respectively, the Company had cash
and cash equivalents of $779,000 and $867,000 (including $548,000 and $388,000
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 $880,000 and $732,000 at November
30, 1995 and February 28, 1995, respectively. The increase in accounts
receivable was due primarily to the aforementioned slow down in collecting and a
5% increase in sales as compared to previous two quarters. At November 30, 1995
and February 28, 1995, the Company's working capital was $1,070,307 and
$1,202,000, respectively, and the ratio of current assets to current liabilities
was 1.37:2 and 1.49:1, respectively. As disclosed, this reduction is a
reflection of payments of pre-bankruptcy obligations and losses the Company
suffered.
The Company used $88,000 of net cash during the nine months ended November 30,
1995, compared to $170,000 during the nine months ended November 30, 1994. This
decrease in cash was primarily due to the Company's increase in accumulated net
losses, an increase in investment activities and decreases in operating and
financial activities.
During the nine months ended November 30, 1995, the Company generated $55,000 of
net cash from operating activities compared to ($72,000) used for the period of
nine months ended November 30, 1994. This was due to major increases in both
short-term and long-term liabilities which were mostly offset by decreases in
other working capital items and depreciation. During the nine months ended
November 30, 1995, the Company used $93,000 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 $28,000 of
net cash for investing activities for the nine months ended November 30, 1994.
During the nine months ended November 30, 1995,
25
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
the Company used approximately $50,000 of net cash for financing activities,
compared to the use of approximately $70,000 of net cash for financing
activities during the nine months ended November 30, 1994. Included in the
above, the Company has paid a total of $57,798 (including interest) to Ellco,
Southeast Leasing Company and MetLife Capital and $18,041 of net cash topay back
its unsecured creditors during the nine months ended November 30, 1995. All of
these amounts are bankruptcy discharge related obligations.
In January 1996, the Company implemented a plan to reduce its size and thereby
was able to further reduce its cost of operations within certain limitations.
This course of action is designed to improve the cash flow position of the
Company.
Based upon (i) management's best information as to current national defense
priorities and future programs, as well as management's expectations as to
future defense spending; (ii) market trends signaling an end/decline in price
erosion; and (iii) a continual lack of foreign competition in the defense and
aerospace market, the Company believes that its operations will continue to
generate sufficient cash to satisfy its operating needs over the next 12 months.
However, at the current bookings, price, profit margins 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 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. However, world wide shortage
in polysilicon raw wafer fabrication capacity (especially 3" wafers used by the
Company) resulted in spotted higher prices for some raw
26
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
materials and components used by the company. These higher material prices and
shortages have some effect on the Company's revenue, costs and expenses.
However, it is not anticipated that they will have severe impact on the Company
in the near future.
RESULTS OF OPERATIONS-THREE MONTHS ENDED NOVEMBER 30, 1995:
Net sales for the three months ended November 30, 1995 increased 13% to
$1,747,000 as compared to $1,541,000 for the three months ended November 30,
1994. The variance in net sales reflects an increase in customer delivery rate
requirements. The Company's backlog increased .3% for the three months ended
November 30, 1995 as compared to an increase of 12.2% for the three months ended
November 30, 1994. Gross margins decreased from 15.4% for the three months ended
November 30, 1994 to 15.3% for the three months ended November 30, 1995 as
compared to the previous period combined with significantly higher materials
costs and slightly higher yields.
During the three months ending November 30, 1995, the Company shipped 1,112,665
units as compared with 801,647 units shipped during the three months ending
November 30, 1994. Selling, general and administrative expenses decreased from
$358,000 for the three months ended November 30, 1994 to $327,000 for the three
months ended November 30, 1995. During the three months ending November 30, 1995
selling, general and administrative expenses as a percentage of sales was 18.71%
as compared with 23.23% for the three months ending November 30, 1994. The
decrease was due primarily to decreases in commissions, legal and professional
fees, bad debt expense and recruiting and relocation costs.
The Company recorded net other expense of $39,000 for the three months ended
November 30, 1995 versus net other expense of $57,000 for the three months ended
November 30, 1994. The variance was due primarily to a decrease in other expense
of $7,000, and a decrease in Chapter 11 expenses of $11,000. The Company
recorded legal expenses of approximately $53,000, which was directly associated
with its currently settled lawsuit to compel its landlord (RTC) to repair the
roof and HVAC system in the building the Company leases. These unusual expenses
represent nearly 50% of the loss for the three months ended November 30, 1995.
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 $59,000 for the three
months ended November 30, 1995 versus operating loss of $121,000 for the three
months ended November 30, 1994. The Company incurred a net loss of $97,000 for
the quarter ended November 30, 1995 compared to a net loss of $178,000 for the
three months ended November 30, 1994. The loss mostly reflected amounts spent by
the Company for legal fees on lawsuits now settled against the RTC.
27
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS - NINE MONTHS ENDED NOVEMBER 30, 1995
Net sales for the nine months ended November 30, 1995 increased 7% to $5,007,000
as compared to $4,755,000 for the nine months ended November 30, 1994. The
Company's backlog increased 11.3% for the nine months ended November 30, 1995 as
compared to 40.5% for the nine months ended November 30, 1994. Gross margins
decreased from 20.5% for the nine months ended November 30, 1994 to 15.1% for
the nine months ended November 30, 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.
During the nine months ending November 30, 1995, the Company shipped 2,575,864
units as compared with 1,797,530 units shipped during the yea ending November
30, 1994.
Selling, general and administrative expenses decreased from $1,103,000 for the
nine months ended November 30, 1994 to $957,000 for the nine months ended
November 30, 1995. During the nine months ending November 30, 1995, selling,
general and administrative expenses as a percentage of sales was 18.85% as
compared with 23.20% for the nine months ending November 30, 1994. Such a
decrease was primarily due to certain SG&A expenses being fixed, and the
decrease in unit prices mentioned above. 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 $70,000 for the nine months ended
November 30, 1995 versus net other expense of $121,000 for the nine months ended
November 30, 1994. The variance was due primarily to an increase of $19,000 of
other income, decreases of $25,000 and $25,000 in Chapter 11 expense and other
expense, respectively, offset by a $17,000 increase in interest expense.
The Company recorded net legal expenses of approximately $104,000 during the
nine months ended November 30, 1995, which was associated with its now SEttled
law suit against its landlord (RTC). These unusual expenses represent
approximately 40% of the loss recorded during the nine month period ending
November 30, 1995.
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 $190,000 for the nine
months ended November 30, 1995 compared to an operating loss of $128,000 for the
nine months ended November 30, 1994 and a net loss of $260,000 for the nine
months ended November 30, 1995 compared to a net loss of $249,000 for the nine
months ended November 30, 1994.
28
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Under the terms of the settlement between the Company and the RTC, the Company
and S/V Microwave Products paid RTC $325,000 in complete settlement of all of
the then outstanding rent. As a result of the aforementioned settlement, the
Company netted a reduction in rent of approximately $239,221 ($563,066 was
Solitron's share of back rent less $185,000 it paid RTC in settlement less
approximately $138,845 expended for legal and professional fees during fiscal
years 1995 and 1996). In December 1995, a reclassification was made from
operating expenses to other expenses of approximately $104,000 for the current
year expenses pertaining to the RTC claim, and an extraordinary gain of
approximately $274,000 was recorded due to the settlement.
29
<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 (the balance,
including interest, was $401,110 as of November 30, 1995) 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 disputed 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, and on December 26, 1995, it has
been resolved by the Bankruptcy Court. Based on the results of the IRS appeal,
the claim was reduced to $680,179 by the Bankruptcy Court.
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
did not properly file a claim in the bankruptcy case, and there is some question
as to whether service of notice was defective. 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. The estate declined the Company's offer. The Company and its counsel
believe that the Court is likely to treat the estate in the same manner as other
properties in the area as the Company proposed.
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 18, 1995 was set. A
settlement was reached between the parties December 15, 1995, which will result
in a favorable reclassification of current year legal expenses of $104,164 and a
non-operating gain of $273,871. Under the terms of the settlement, the Company
and S/V Microwave Products paid the RTC $325,000 in complete settlement of all
the then outstanding rent. As a result of the settlement, the Company netted a
reduction in rent of approximately $239,221 ($563,066 is Solitron's share of
back rent less $185,000 it paid at settlement less approximately $138,845
expended for legal and professional fees).
ITEM 2.
None.
30
<PAGE>
PART II - OTHER INFORMATION
(CONTINUED)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Part 1.
ITEMS 4-5.
On December 15, 1995 the Company and Argo Partners, Inc., an unsecured creditor
have reached an agreement under which Solitron Devices, Inc., has acquired Argo
Partners' unsecured debt of $694,834 (which was carried as an obligation of
approximately $140,037) for $40,000 as complete settlement. Prior to the
acquisition, Argo Partners received payment of approximately $1,297 from the
Company as part of several distributions to unsecured creditors. Thus, Solitron,
Devices, Inc., will recognize in December 1995 and extraordinary gain of
approximately $98,740 due to the debt being carried on the books at a discounted
amount.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
November 30, 1995.
31
<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: February 9, 1996
32
<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 NOVEMBER 30,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> NOV-30-1995
<CASH> 779,000
<SECURITIES> 0
<RECEIVABLES> 915,000
<ALLOWANCES> (35,000)
<INVENTORY> 1,938,000
<CURRENT-ASSETS> 3,947,000
<PP&E> 1,460,000
<DEPRECIATION> (656,000)
<TOTAL-ASSETS> 6,774,000
<CURRENT-LIABILITIES> 2,877,000
<BONDS> 0
0
0
<COMMON> 19,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,774,000
<SALES> 5,077,000
<TOTAL-REVENUES> 5,077,000
<CGS> 4,307,000
<TOTAL-COSTS> 5,269,000
<OTHER-EXPENSES> (70,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (94,000)
<INCOME-PRETAX> (260,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (260,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (260,000)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
