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 May 31, 1998
[ ] 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)
(561) 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: 2,034,013.
1
<PAGE>
SOLITRON DEVICES, INC.
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheet -- May 31, 1998
Condensed Consolidated Statements of Operations -- Three Months
Ended May 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows -- Three Months
Ended May 31, 1998 and 1997
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
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements: Pages 4 - 16
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Pages 17- 20
3
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
MAY 31, 1998
------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 714,000
Accounts receivable, less allowance
for doubtful accounts of $34,000 1,081,000
Inventories 2,556,000
Prepaid expenses and other current assets 149,000
Due from Vector 70,000
------------
Total current assets $ 4,570,000
PROPERTY, PLANT AND EQUIPMENT, net 566,000
NON-OPERATING PLANT FACILITIES 1,745,000
OTHER ASSETS 92,000
------------
$ 6,973,000
============
The accompanying notes are an integral part
of these condensed financial statements
4
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7,000
Current portion of accrued environmental expenses 333,000
Accounts payable - Post petition 256,000
Accounts payable - Pre-petition, current portion 96,000
Accrued expenses 2,576,000
Accrued Chapter 11 administrative expense 51,000
-------------
Total current liabilities $ 3,319,000
LONG-TERM DEBT, less current maturities 13,000
OTHER LONG-TERM LIABILITIES 2,555,000
-------------
TOTAL LIABILITIES $ 5,887,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized 500,000 shares,
0 shares issued and outstanding -0-
Common stock $.01 par value,
authorized 10,000,000 shares,
issued and outstanding 1,977,000 20,000
Additional paid-in capital 2,618,000
Accumulated deficit (1,552,000)
-------------
Total shareholder equity 1,086,000
-------------
$ 6,973,000
=============
The accompanying notes are an integral part
of these condensed financial statements
5
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31,
1998 1997
---------------------------------
<S> <C> <C>
NET SALES $ 2,103,000 $ 1,888,000
Cost of sales 1,554,000 1,526,000
----------- ------------
Gross Profit 549,000 362,000
Selling, general and administrative expenses 337,000 269,000
----------- ------------
Operating income 212,000 93,000
----------- ------------
OTHER INCOME (EXPENSE):
Other income 9,000 15,000
Interest expense (89,000) (67,000)
Other (12,000) (11,000)
----------- ------------
Net other expense (92,000) (63,000)
----------- ------------
Net income $ 120,000 $ 30,000
=========== ============
INCOME PER SHARE: $ .01 $ .01
WEIGHTED AVERAGE SHARES
OUTSTANDING 2,034,000 2,034,000
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
6
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31,
1998 1997
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit $ 120,000 $ 30,000
---------- ----------
Adjustments to reconcile net loss to
Net cash used in operating activities:
Depreciation and amortization 50,000 56,000
(Increase) decrease in account receivable 16,000 70,000
(Increase) decrease in inventories (63,000) (42,000)
(Increase) in prepaid expenses
and other current assets (31,000) (95,000)
Decrease in due from
S/V Microwave Products, Inc. (1,000) 19,000
Increase (decrease) in accounts payable (90,000) (111,000)
Increase in accrued expenses
and other liabilities 94,000 113,000
Increase in accrued Chapter 11
administrative expenses 16,000 -0-
---------- ----------
Total adjustments (9,000) 10,000
---------- ----------
Net cash generated in operating activities 111,000 40,000
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from the disposal of assets, additions
to property, plant and equipment (46,000) (26,000)
---------- ----------
Net Cash used in investing activities (46,000) (26,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (2,000) (17,000)
---------- ----------
Net cash used in financing activities (2,000) (17,000)
---------- ----------
NET INCREASE (DECREASE) IN CASH 63,000 (3,000)
CASH AT BEGINNING OF PERIOD $ 650,000 $ 537,000
---------- ----------
CASH AT END OF PERIOD $ 713,000 $ 534,000
========== ==========
</TABLE>
Supplemental cash flow disclosure: Interest paid during the three months ended
May 31, 1998 and 1997 was approximately $30,000 and $30,000 respectively.
The accompanying notes are an integral part
of these condensed consolidated financial statements
7
<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 accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-QSB. Pursuant to such rules and
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted.
The information contained in this Form 10-QSB should be read in conjunction with
the Notes to Consolidated Financial Statements appearing in the Company's Annual
Report on Form 10-KSB for the year ended February 28, 1998.
The results of operations for the three-month period ended May 31, 1998 are not
necessarily indicative of the results to be expected for the year ended February
28, 1999.
As previously noted in documents filed with the SEC, on August 20, 1993, the
United States Bankruptcy Court for the Southern District of Florida (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"). On July 12, 1996, the Bankruptcy Court officially closed the
case.
Additionally, the following actions or events have taken or will take place
pursuant to the Plan of Reorganization:
(a) Pursuant to the Plan of Reorganization, which began in May 1995, the Company
is required to begin making quarterly payments to holders of unsecured claims
until they receive 35% of their claims. The Company continues to negotiate with
its unsecured creditors to reduce its quarterly payment obligations and has
proposed to those creditors that it make reduced quarterly payments of
approximately $9,000. Following discussion with the unsecured creditors
committee, the Company agreed to increase the level of such payments to
approximately $11,000 per quarter starting August 1997. The Company has made
fourteen reduced payments to its unsecured creditors, and, as of May 31, 1998,
the Company has paid approximately $115,329 to its unsecured creditors, as
opposed to the $869,162 called for under the Company's Plan of Reorganization.
To date, the Company's unsecured creditors have accepted all such reduced
payments, though no assurances can be made that they will continue to do so in
the future or that the company's negotiation with its unsecured creditors will
be successful.
8
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(b) The Company is now negotiating with Honeywell, the former owner of the
Riviera Beach property, on a proposed site access and cleanup agreement under
which Honeywell will undertake the responsibility for the environmental cleanup
in exchange for a limited security interest in the building. Honeywell, who is
financially able to perform the required cleanup, has advised the Company that
it wishes to take such steps as will prevent EPA from proceeding to place the
property on the National Priority List (NPL) and assuming jurisdiction over the
cleanup. Honeywell is now negotiating with DEP and EPA in order to complete an
appropriate consent agreement that will govern its cleanup activities. While
Honeywell expressed interest, there is no assurance that the parties will reach
a satisfactory agreement. The DEP, which is a party to these negotiations, is
requesting that EPA withhold proceeding with its efforts to list the property on
the National Priority List (NPL) in order to allow for the completion of said
negotiation. Furthermore, the Company has continued to keep the old Riviera
Beach property on the market.
(c) On June 19, 1998, the Company received a Letter of Intent to purchase the
Riviera Beach facility from Ruckman Properties, Inc., the current owner and
developer of the property located at the rear of the Company's facility at
Riviera Beach. The Letter of Intent, to which the Company agreed to, outlines
the general terms of the agreement to purchase the Riviera Beach facility, which
is to be completed by July 31, 1998.
Under the terms of the proposed property purchase agreement, Ruckman properties
will assume all of the Company's outstanding real estate tax obligations of
approximately $560,000, as well as real estate broker commission of
approximately $45,000, and the Company's legal fees associated with the sale of
the aforementioned facility of approximately $100,000. Ruckman Properties will
also be responsible for all closing costs traditionally paid by the seller.
Under the proposed new agreement, Ruckman Properties will pay Honeywell
$250,000 at the time of closing to cover the Company's cleanup obligations. This
agreement will require Honeywell's consent that the agreed upon sum covers the
Company's total cleanup obligations. Honeywell has made a counter-offer of
$350,000. Thus, the agreement is subject to further negotiations.
At the conclusion of such transaction, the Company expects to receive a
complete release of all of its obligations associated with the Riviera Beach
facility. While all parties expressed interest to complete such agreement, there
can be no assurance that such transaction will be completed.
9
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(d) As disclosed in documents filed previously with the Securities and Exchange
Commission, the Company is negotiating with various taxing authorities
(including the Internal Revenue Service [IRS], Palm Beach County, Florida, and
Martin County, Florida) to restructure its payment obligations for various back
taxes. While these negotiations are pending, the Company has, in some cases,
been making reduced payments to those taxing authorities. The following table
indicates the approximate cumulative status of amounts due under Court Plans as
of May 31, 1998:
DUE PAID
------------ ----------
Martin County $ 68,000 $ 8,000
Palm Beach County 952,000 314,000
IRS 273,000
For the years since bankruptcy, additional taxes have become delinquent with
Martin and Palm Beach Counties in approximately the following amounts
respectively, $4,000 and $82,000.
To date, no objections to have been raised to the amounts of the Company's
payments to these taxing authorities, though no assurances can be made that such
an objection will not be raised in the future concerning the Company's
obligations to those taxing authorities or that any of the Company's
negotiations to restructure its payment obligations will be successful.
2. FINANCIAL CONDITION:
Although the Company has recorded a small amount of net income and net income
from operations during each of the last two fiscal years, in recent years the
Company generally experienced losses from operations and severe cash shortages
caused by a significant decline in both sales and open order backlog, declining
average sale prices, and decreased margins on products sold (which is
characteristic in the Company's industry), significant non-recurring expenses
associated with the company's bankruptcy 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.
From when the Company emerged from Chapter 11 on August 30, 1993 through the
fiscal year ended February 28, 1996, the Company generally experienced a
positive cash flow from recurring operations; however, overall cash flow was
negative due primarily to the necessity to make payments of administrative
expenses and required payouts arising in connection with the bankruptcy
proceedings. The foregoing resulted in a decrease in cash and cash equivalents
following the Company's emergence from Chapter 11. During the fiscal years ended
February 28, 1997 and February 28, 1998 and in the quarters thereafter, the
company has recorded net income and net income from operations.
10
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the three months ended May 31, 1998, the company's book-to-bill ratio
fell to approximately 0.83, reflecting a slowdown in the demand for the
Company's products and a lower average unit sale price. It is believed that such
slowdown in the intake of orders has been the general experience of most
semiconductor manufacturers who participate in the same market as the Company.
The Company continued implementing steps intended to reduce its variable
manufacturing cost to offset the impact of lower average sale price. However,
should order intake continue to decline, the company may be required to
implement further cost-cutting or other downsizing measures to continue its
business operations. The Company's liquidity continues to be adversely effected
by significant non-recurring expenses associated with the company's pre-petition
obligations, 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.
The Company currently believes, based on information available to it, that its
operations will continue to generate sufficient cash to satisfy its operating
needs over the next 12 months. However, based on the Company's current bookings,
prices, profit margins and sales levels, the Company does not believe it will
generate sufficient cash to satisfy its operating needs and its obligations to
pre-bankruptcy creditors in accordance with the Plan of Reorganization. Thus,
the Company is in negotiations with all such claim holders to reschedule the
Company's payments. In the event the Company is unable to restructure its
obligations to pre-bankruptcy claimants, the Company will be required to further
reduce its size and reduce its cost of operations. However, over the long term,
the Company believes that if the volume and prices of its product sales continue
as presently anticipated, it will, subject to the continued deferral of certain
obligations, generate sufficient cash from operations to sustain its current
operations. In the event that sales decline significantly below the current
level experienced by the Company, the Company may be required to implement
further cost-cutting or other downsizing measures to continue its business
operations. Although the Company is pursuing additional sources of financing,
there can be no assurance that financing will be available in amounts or upon
terms sufficient to meet the Company's needs. However, in appropriate
situations, the Company may seek strategic alliances, joint ventures with
others, or acquisitions in order to maximize the Company's marketing potential,
its utilization of existing resources, and to provide further opportunities for
growth.
3. ENVIRONMENTAL MATTERS:
While the Company believes that it has the environmental permits necessary to
conduct its business and that its operations conform to present environmental
regulations, increased public attention has been focused on the environmental
impact of semiconductor operations. The company, in the conduct of its
manufacturing operations, has handled and does handle materials that are
considered hazardous, toxic or volatile under federal, state, and local laws
and, therefore, is subject to regulations related to their use, storage,
discharge, and disposal. No assurance can be made that the risk of accidental
release of such materials can be completely eliminated. In the event of a
violation of environmental laws, the Company could be held liable for damages
and the costs of remediation and, along with the rest of the semiconductor
industry, is subject to variable interpretations and governmental priorities
concerning environmental laws and regulations.
11
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Environmental statues have been interpreted to provide for joint and several
liability and strict liability regardless of actual fault. There can be no
assurance that the Company and its subsidiaries will not be required to incur
costs to comply with, or that the operations, business, or financial condition
of the Company will not be materially adversely affected by current or future
environmental laws or regulations.
The Order of Confirmation (the "Confirmation Order") approving the Company's
Amended Plan of Reorganization with First Modification (the "Plan) was issued by
the Bankruptcy Court on August 19, 1993 (the "Confirmation Date"), and provided
a plan for future remediation of the two properties of the Company. One property
is Lot 1 (the north parcel) of the property at 1177 Blue Heron Road in the City
of Riviera Beach, and the second is its former Port Salerno facility, S.E. Cove
Road, Port Salerno, Martin County, Florida.
Contemporaneously with the confirmation Order, the Company and the State of
Florida Department of Environmental Protection (the "DEP") entered into a
Stipulation for entry of a Consent Final Judgement in the Circuit Court of the
Nineteenth Judicial Circuit of Florida in and for Martin County, Florida. The
Consent Final Judgement, entered by the Court on October 21, 1993, provides that
the Company shall: (a) reimburse the DEP $200,000 for providing main and lateral
water line extensions and property hookups to serve eight off-site properties
presently impacted by the groundwater contamination emanating from the Port
Salerno Site (paid as an administrative expense in accordance with the
Confirmation Order); (b) remediate site soils and groundwater at and emanating
from the Port Salerno site; (c) address residual soil contamination and a
limited, defined "hot spot" in the groundwater at and near the north end of the
Riviera Beach property; and (d) pay a final judgment of $102,860.57 to be paid
to the DEP pursuant to the Plan in the manner and to the extent of the Company's
payment of other unsecured creditor claims.
Pursuant to the Confirmation Order, all existing security interests on these two
properties, except real estate taxes, were removed. The properties were
appraised by an MAI appraiser, as if uncontaminated, at $1,950,000 for Riviera
Beach and $1,650,000 for Port Salerno. Under the Plan and the Consent Final
Judgement, the Company will sell or lease the two properties and utilize the
proceeds derived therefrom, together with certain insurance proceeds, to
remediate both sites. All such proceeds will be placed in escrow for that
purpose. Any excess funds after all escrow obligations are satisfied will belong
to the Company.
To facilitate the prompt sale or leasing of these properties, the DEP has
provided protection in the Consent Final Judgment to a tenant or purchaser of
the properties, limiting liability to the DEP solely to future discharges during
its ownership or occupancy.
The Company's consultant has estimated the costs of remediation to be
approximately $727,000 for the Port Salerno property and $356,000 for the
Riviera Beach property if performed pursuant to the Consent Final Judgement. The
remediation could cost more; particularly if further offsite wells become
contaminated at Port Salerno and the affected properties must be supplied public
water by further extension of the water lines. All residents who could be
potentially affected by further groundwater plume movement at Port Salerno were
notified of the pendency of the bankruptcy and that claims could be filed. The
claims filed, except as set forth below, have been settled.
12
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company received a claim by an estate-owned property northwest and across
Cove Road from the Port Salerno property. The estate has asserted that the
mailing address to which the bankruptcy notice was sent was in error. The estate
has been advised that public water has been made available to its property and
that the company is prepared to settle for the sum of $10,000, to be paid as
other unsecured credit claims are being paid. This offer was rejected. The claim
is unresolved and is currently dormant.
The Company's position has been that further off-site exposure to third party
property owners at Port Salerno is limited by its Chapter 11 proceeding solely
to its obligation for extension of public water lines to the affected property.
It cannot now be estimated whether some future extension may be required, but
the contaminated groundwater appears to move slowly and any remediation
contractor will utilize off-site recovery wells to contain its further movement.
The City of Riviera Beach previously settled its claim with the Company for
cleanup of contamination of its wellfield, except for the "hot spot" to be
addressed by the Company as required by the Consent Final Judgment. The unpaid
balance of the settlement amount with the City was approved in the Confirmation
Order; to be paid as and to the extent provided for other unsecured creditors.
After notice, no other claims were filed in the bankruptcy proceeding related to
offsite groundwater contamination at the Riviera Beach site, and potential
claims may have been extinguished thereby.
If funds to clean the sites were not available within 24 months of entry of the
Consent Final Judgment, the Company, beginning in October 1995, was to make
periodic payments into the escrow to clean both sites based on the following
schedule:
1. Commencing on the 25th month, $5,000 per month, and
2. Commencing on the 37th month, $7,500 per month, and
3. Commencing on the 49th month, $10,000 per month.
4. This periodic funding will be suspended when funds available in escrow
reach 125% of the estimated costs to complete remediation.
The Company is not required to pay additional funds in excess of the schedule
set forth above, except that if funds are not available in the escrow for that
purpose, the Company must independently fund any further extension of public
water supply lines in the vicinity of the Port Salerno site. The Consent Final
Judgment requires providing any such extension within a reasonable time. The
prior payment to the state has extended the large water main to provide service
to the area. The further extension would be for lateral extensions and
individual property hookups.
During the period of October 1995 and October 1996, the Company advised the DEP
that it could pay only $1,000 per month into escrow, rather than the $5,000
specified in the Consent Final Judgment. Since then, the Company has paid $1,000
per month in the escrow for its two properties, the total escrow amounts for the
properties as of March 31, 1998 totaling $32,000. The DEP has acquiesced in this
payment level.
13
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Since entry of the Consent Final Judgment, the Company's consultant submitted a
plan for further soil assessment at the Riviera Beach facility, received
approval thereof and of its Quality Assurance Project Plan, and, after filing an
assessment report reporting its data, received DEP approval of the report's
conclusion that no further soil remediation is required. After performing the
further soil assessment there, the balance of the original escrowed funds of
$42,000 were transferred to the Port Salerno escrow account to enable the soil
assessment to be performed there. This assessment has now been completed, and
the consultant's report of the data collected concludes that no further soil
remediation is required. The DEP has now concurred with the report. Until the
escrows are replenished as set forth herein, groundwater remediation will be
deferred at the two sites.
Following the EPA's placing of the Riviera Beach and Port Salerno sites under a
re-evaluation process for possible National Priority Listing ("NPL") under the
Superfund program, the Company requested, due to its settlement with the DEP and
the entry of the Consent Final Judgment pertaining thereto, that both sites be
withdrawn from the re-evaluation process. The DEP had requested the EPA that the
Riviera Beach site be assigned a low priority for re-evaluation. The EPA
temporarily discontinued the steps necessary to list the sites.
However, during 1997, the EPA revisited the need for site evaluation at both
sites and required the Company to sign site access agreements permitting the EPA
to perform expanded site assessments at both sites. At a meeting at the DEP in
Tallahassee on March 21, 1997, after a lengthy discussion with Company
representatives and the representatives of two contract vendees who had recently
executed purchase contracts, the DEP and the EPA agreed to defer further
evaluations of the sites for at least 90 days to permit due diligence
inspections by the prospective purchasers so that the DEP could determine if
they would take title, assume full responsibility for cleanup, and provide
financial security under their respective contracts.
After lengthy but unsuccessful negotiations regarding a state lead cleanup at
Port Salerno by a prospective purchaser willing to post a $1,000,000 bond to
secure performance of the cleanup, the prospective purchaser withdrew from its
contract and the EPA published notice that it is proposing the Port Salerno site
for NPL listing. The EPA has decided it will clean the site using monies from
the Superfund. The Company has now entered into negotiations with the EPA to
settle EPA's prospective cost claim against it that could arise from the costs
the EPA incurs in cleaning the property. There can be no assurance as to the
outcome of such negotiations.
The Company has provided full information of its financial condition and has
asked that except for the value of the Port Salerno property, it has an
inability to pay such claim under the agency's ability to pay guidelines. The
Company has offered to sell its property at its market value and after deducting
its costs including an agreed $50,000 attorneys fees, 5% broker's fee, back
taxes plus interest, and the closing costs, to pay the net proceeds of the sale
in discharge of all EPA claims. EPA has offered to enter into a prospective
purchaser agreement protecting the purchaser from EPA's cost recovery claim and
the regional counsel for the EPA is reviewing the Company's offer with EPA
headquarters.
14
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the event the property is not sold on this basis, the Company may have to
await the EPA's completion of its cleanup that is likely to take several years
and then negotiate a settlement of the EPA's cost cleanup at the time. It is the
Company's position that any cost recovery claims by EPA is barred by the Amended
Order of Confirmation in Bankruptcy. Though it has knowledge of DEP's claim in
Bankruptcy and that it likewise had a claim, it did not file a claim, deferring
to the State DEP to file and resolve the future requirements for remediation.
At Riviera Beach, Honeywell, Inc. is the predecessor owner and operator of the
facility during a period when pollution occurred, and it is jointly and
severably liable therefor to the EPA. The Company has been informed by Honeywell
that it intends to secure a deferral of the EPA's potential listing of the site
on the site on the National Priority List by entering into a consent order with
the state DEP. Under such consent order, Honeywell will perform the cleanup of
the Riviera Beach site. The state DEP is expected to request a deferral by the
EPA to the state lead cleanup. It is the Company's position that its exposure to
Honeywell for contribution has been cut off by the Bankruptcy Court order since
Honeywell's claims were filed and resolved therein.
However, to dispose of the property, the Company needs Honeywell's cooperation
and the Company is negotiating to sell the property to a prospective buyer who
owns the adjacent back property. The net proceeds that would be derived from the
sale, about $250,000, would be paid to Honeywell in exchange for its waiver of
any claims for its cleanup activities against the buyer and the Company. There
can be no assurance as to the outcome of such negotiations.
In the event Honeywell is unable to secure deferral by the EPA to its proposed
site lead cleanup, then the Company may not be able to dispose of the property
until the EPA and Honeywell are willing to provide protection against liability
to a purchaser.
Whether Honeywell succeeds in obtaining approval to perform the cleanup under
the State Consent Order should be clarified over the next few months. In all
events, the Company has offered Honeywell site access and is nearing agreement
on terms of such access to permit Honeywell to perform the required cleanup
without participation by the Company. In all events, the position of the Company
is that Honeywell's claim for cleanup and the potential claim of EPA, if
asserted against the company, are barred by the Bankruptcy Court Order. For
additional discussion about the Company's effort to sell the Riviera Beach
facility see "Notes to Condensed Consolidated Financial Statements (c)".
The Company's former facility in Jupiter, Florida (which was sold in 1982) was
the subject of a preliminary assessment by the EPA in 1995. The EPA requested
site access from the present owner. The Company's environmental legal counsel
has been advised that this facility is being remediated by the present owner.
The Company is not aware of the status of that remediation and has received no
communication from the present owner. For a further description of the Company's
environmental issues, refer to "Item 1 - Business - Bankruptcy Proceedings" and
to Note 13 of the accompanying Consolidated Financial Statements.
During the fiscal year ended February 28, 1998, the Company has spent
approximately $3,000 for compliance with environmental laws (federal, state and
local). As part of this effort, the Company retained the services of an
environmental consultant who assisted in verifying that the Company operates in
compliance with all pertinent environmental laws and regulations.
15
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's environmental consultants have estimated the costs of remediation
to be approximately $727,000 for the Port Salerno property and $356,000 for the
Old Riviera Beach property. Approximately $1,042,000 has been accrued in the
balance sheet as of March 31, 1998. The Company recorded these liabilities as
$333,000 short-term liabilities and $709,000 long-term liabilities. These
reservations are predicated on cleanup being performed under the existing
Consent Final Judgement.
16
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of factors which have affected the
Company's financial position and operating results during the periods included
in the accompanying condensed consolidated financial statements should be read
in conjunction with the Consolidated Financial Statements and the related Notes
to Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-KSB for the year ended February 28, 1998 and the Condensed
Consolidated Financial Statements and the related Notes to Condensed
Consolidated Financial Statements included in Item 1 of this Quarterly Report on
Form 10-QSB.
INTRODUCTION:
Except for historical information contained herein, certain matters discussed
herein are forward-looking statements made pursuant to the safe harbor
provisions of the Securities Litigation Reform Act of 1995. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, including but not limited
to, economic, technological, competitive, governmental procurement, regulatory,
strategies, available financing, and other factors discussed elsewhere in this
report and the documents filed by the Company with the SEC. Many of these
factors are beyond the Company's control. Actual results could differ materially
from the forward-looking statements. In light of these risks and uncertainties,
there can be no assurance that the forward-looking information contained in this
report will, in fact, occur.
RESULTS OF OPERATIONS-THREE MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS
ENDED MAY 31, 1997:
Net sales for the three months ended May 31, 1998 increased 11.4% to $2,103,000
as compared to $1,888,000 for the three months ended May 31, 1997. Such increase
was primarily attributable to strong backlog and the ability to ship more
product in accordance with customer delivery requirements. The Company's backlog
of open orders decreased 14.9% for the three months ended May 31, 1998 as
compared to a decrease of 2.4% for the three months ended May 31, 1997. Such
decrease is attributable to lower demand for the Company's product, resulting
from the cut in defense spending and lower average sales price. Gross margins on
the Company's sales increased to 26.1% for the three months ended May 31, 1998
in comparison to 19.2% for the three months ended May 31, 1997. This increase is
the result of a more favorable product mix change, and a decrease in the cost of
goods sold. Gross profit for the three months ended May 31, 1998 increased to
$549,000 from $362,000 for the three months ended May 31, 1997. This increase is
primarily due to increased sales volume and a decrease in the cost of goods sold
as a percentage of sales.
17
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Gross profit for the three months ended May 31, 1998 increased to $549,000 from
$362,000 for the three months ended May 31, 1997. This increase is primarily due
to increased sales volume and a decrease in the cost of goods sold as a
percentage of sales.
For the three months ending May 31, 1998, the Company shipped 656,489 units as
compared with 428,733 units shipped during the same period of the prior year. It
should be noted that since the Company manufactures a wide variety of products
with an average sale price ranging from less than one dollar to several hundred
dollars. Such periodic variations in the Company's volume of units shipped may
not be a reliable indicator of the Company's performance.
The company has experienced a decrease in the level of booking of approximately
26% for the quarter ended May 31, 1998 as compared to the same period for the
previous year principally as a result of the reduction in defense spending,
lower demand for the product, and lower average sales price of products sold.
Selling, general, and administrative expenses increased to $336,943 for the
three months ended May 31, 1998 from $269,000 for the comparable period in 1997.
During the three months ending May 31, 1998, selling, general, and
administrative expenses as a percentage of sales was 16.02% as compared with
14.26% for the three months ending May 31, 1997. The increase was due primarily
to increased salaries and commissions.
Operating income for the three months ended May 31, 1998 increased to $212,000
from $93,000 for the three months ended May 31, 1997. This increase is
principally due to an increase in sales volume and a decrease in the cost of
goods sold as percentage of sales, which was partially offset by an increase in
selling, and general and administrative expenses.
The Company recorded a net other expense of $91,000 for the three months ended
May 31, 1998 versus a net other expense of $63,000 for the three months ended
May 31, 1997. The variance was due to decreases in the Company's other income of
$9,000 as compared to $15,000 for three months ended May 31, 1998 and May 31,
1997 respectively. This was supplemented by a significant increase in the
Company's imputed interest expense of $59,000 as compared to $37,000 for the
three months ended May 31, 1998 and May 31, 1997 respectively. This increase was
principally due to the fact that the company will be required to complete making
payments of its pre-petition obligations over a shorter period of time as
compared to previous periods.
Net income for the three months ended May 31, 1998 increased to $120,992 versus
$30,000 for the same period in 1997. The major contributing factor to this
increase was increased sales volume and a decrease in cost of goods sold as
percentage of sales.
18
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company reported a net income of $121,000 and operating income of $212,000
for the three months ended May 31, 1998. However, the Company has significant
obligations arising from settlements related to its bankruptcy proceeding which
requires it to make substantial cash payments which cannot be supported by the
Company's current level of operations.
At May 31, 1998, February 28, 1998 and May 31, 1997 respectively, the Company
had cash and cash equivalents of $713,000, $650,000 and $534,000. In June 1998,
the Company paid a cash bonus to the Company's chairman, president, and chief
executive officer of $296,000. For details see section 13. "Commitments and
Contingencies:Employment Agreement" Form 10-KSB for the period ended February
28, 1998.
At May 31, 1998, the Company had working capital of $1,251,000 as compared with
a working capital at May 31, 1997 of $1,111,000. At February 28, 1998, the
Company had a working capital of $1,168,000. The approximately $83,000 change
for the three months ended May 31, 1998 was due primarily to an increase in
pre-paid expenses. The from year to year decrease was due primarily to a major
shift from long term to short term debt on the Company's liabilities due to Palm
Beach County and DEP.
Pursuant to the Plan or Reorganization, the Company is required to pay an
aggregate of approximately $2,483,338 to holders of allowed unsecured claims in
quarterly installments of approximately $62,083. The Company has proposed to its
unsecured creditors that it reduce its payments to quarterly payments of $9,000.
Following discussions between the Company and the unsecured creditors committee,
the Company agreed to make quarterly payments of $11,000 starting August 1997.
As of May 31, 1998, the Company had paid to the unsecured creditors $115,329 of
the $869,162 due. Of amounts owed to unsecured creditors $95,927 is carried as
short-term debt and $1,243,840 is carried as long-term debt.
Pursuant to the terms of the Plan of Reorganization and Consent Final Judgment,
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 $1,042,000, will be payable from the
proceeds of the sale or lease of these properties. 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 old Riviera Beach facilities and the DEP has concurred that no
further soil remediation is required at either property. The Company is
renegotiating with DEP the terms of the cash payments into the aforementioned
escrow account and, while the negotiations are under way, the Company deposits
$1,000 per month. As of May 31, 1998, the Company had deposited $32,000 of the
$120,000 due in accordance with the Plan into the escrow account.
For discussion regarding the status of the sale of the Riviera Beach facility,
please see section 1 of "Notes to Condensed Consolidated Financial Statements."
19
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pursuant to the Plan of Reorganization, beginning on the date the Company's net
after tax income exceeds $500,000, the Company would be required to pay certain
pre-petition creditors 10% of net after tax income until August 30, 2003 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 would increase each year from approximately $255,000 during the
current fiscal year in accordance with specified cost of living increases of not
more than 5% per year.
The Company has satisfied all of the allowed administrative claims and allowed
wage claims under the Plan of Reorganization. The Company is required to pay
allowed tax claims estimated at approximately $1,830,000 (which amount is
accrued in the accompanying financial statements including interest). For more
information as to the Company's tax obligations and their effect on the
Company's finances and prospects, reference is made to note 1(c) to the
Condensed Consolidated Financial Statements included in Item 1 of this Quarterly
Report on Form 10-QSB.
The Company has projected that it will continue to be able to generate
sufficient funds to support its ongoing operations. However, the Company must be
able to renegotiate its required payments to unsecured creditors, the IRS, the
DEP and certain taxing authorities or raise sufficient cash in order to pay
these obligations as currently due, in order to remain a going concern.
The Company is currently in negotiations with the unsecured creditors, the IRS,
the DEP, 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 or to develop other financial facilities to improve cash flow should
the need arise. 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, DEP or taxing authorities or obtain
additional sources of capital and/or cash, or that the Company can generate
sufficient cash to meet its obligations.
The company is now assessing the potential impact of the Year 2000, which
concerns the inability of information systems, primarily computer software
programs, to properly recognize and process date sensitive information related
to the Year 2000 and beyond. The Company is currently evaluating the expected
cost to be incurred in connection with the Year 2000. Additionally, suppliers
and other third parties exchange electronic information with the Company. The
Company does not have any information concerning the compliance status of its
suppliers or such other third parties. However, because third party failures
could have a material impact on the Company's ability to conduct business,
confirmations are being requested from its suppliers to certify that plans are
being developed to address Year 2000 issues.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
None
ITEM 2.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
See Part 1.
ITEM 4.
None.
ITEM 5.
None
ITEM 6.
None.
21
<PAGE>
SIGNATURES
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,
CHIEF EXECUTIVE OFFICER
& PRESIDENT
Dated: July 29, 1998
22
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOLITRON
DEVICES, INC. AND SUBSIDIARIES FORM 10QSB FOR THE QUARTER ENDED MAY 31,1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<CASH> 714,000
<SECURITIES> 0
<RECEIVABLES> 1,115,000
<ALLOWANCES> (34,000)
<INVENTORY> 2,556,000
<CURRENT-ASSETS> 4,570,000
<PP&E> 1,719,000
<DEPRECIATION> (1,153,000)
<TOTAL-ASSETS> 6,973,000
<CURRENT-LIABILITIES> 3,319,000
<BONDS> 0
0
0
<COMMON> 20,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,973,000
<SALES> 2,103,000
<TOTAL-REVENUES> 2,103,000
<CGS> 1,554,000
<TOTAL-COSTS> 1,891,000
<OTHER-EXPENSES> 2,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,000
<INCOME-PRETAX> 121,000
<INCOME-TAX> 1,000
<INCOME-CONTINUING> 120,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,000
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
