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, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For
the transition period from to
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Commission file number 1-4978
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SOLITRON DEVICES, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 22-1684144
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
3301 ELECTRONICS WAY, WEST PALM BEACH, FLORIDA 33407
----------------------------------------------------
(Address of principal executive offices)
(561) 848-4311
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(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: 2,034.704.
1
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SOLITRON DEVICES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheet -- November 30, 1999
Condensed Consolidated Income Statement -- Three Months and Nine
months Ended November 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows -- Nine Months
Ended November 30, 1999 and 1998
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 Proceeding
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
Signatures
2
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SOLITRON DEVICES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements: Pages 4 - 13
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Pages 14- 20
3
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SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1999
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 971,000
Accounts receivable, less allowance
for doubtful accounts of $11,000 870,000
Inventories 2,576,000
Prepaid expenses and other current assets 108,000
Due from Vector 5,000
-----------
Total current assets $ 4,530,000
PROPERTY, PLANT AND EQUIPMENT, net 471,000
NON-OPERATING PLANT FACILITIES, net of cost
to dispose -0-
OTHER ASSETS 83,000
-----------
$ 5,084,000
===========
The accompanying notes are an integral part
of these condensed financial statements
4
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SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1999
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of accrued environmental expenses 495,000
Accounts payable - Post petition 231,000
Accounts payable - Pre-petition, current portion 92,000
Accrued expenses 1,175,000
Accrued Chapter 11 administrative expense 2,000
-----------
Total current liabilities $ 1,994,000
Other long-term liabilities net of current portion,
net of cost to dispose of non-operating plant facilities 1,418,000
-----------
TOTAL LIABILITIES: $ 3,413,000
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 2,034,704 20,000
Additional paid-in capital 2,618,000
Accumulated deficit (967,000)
-----------
Total shareholder equity 1,671,000
-----------
$ 5,084,000
===========
The accompanying notes are an integral part
of these condensed financial statements
5
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SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,015,000 $ 1,988,000 $ 5,843,000 $ 6,078,000
Cost of sales 1,530,000 1,580,000 4,559,000 4,657,000
----------- ----------- ----------- -----------
Gross Profit 485,000 408,000 1,284,000 1,421,000
Selling, general and
administrative expenses 285,000 307,000 884,000 959,000
----------- ----------- ----------- -----------
Operating income 200,000 101,000 400,000 462,000
----------- ----------- ----------- -----------
Other income (expense):
Other income 616,000 16,000 636,000 38,000
Interest expense (28,000) (97,000) (117,000) (326,000)
Other (672,000) (9,000) (689,000) (26,000)
----------- ----------- ----------- -----------
Net other expense (84,000) (90,000) (170,000) (314,000)
----------- ----------- ----------- -----------
Net income $ 116,000 $ 11,000 $ 230,000 $ 148,000
=========== =========== =========== ===========
INCOME PER SHARE: $ .06 $ .01 $ .11 $ .07
WEIGHTED AVERAGE
SHARES OUTSTANDING 2,034,704 2,034,704 2,034,704 2,034,704
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
6
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SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NOVEMBER 30,
1999 1998
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit $ 230,000 $ 148,000
--------- ---------
Adjustments to reconcile net loss to
Net cash used in operating activities:
Depreciation and amortization 157,000 162,000
(Increase) decrease in accounts receivable 242,000 (185,000)
(Increase) decrease in inventories 161,000 5,000
(Increase) decrease in prepaid expenses
and other current assets 11,000 (34,000)
(Increase) decrease in due from Vector (2,000) 49,000
Increase (decrease) in accounts payable (406,000) 138,000
Increase (decrease) in accrued expenses
and other liabilities (980,000) (8,000)
Increase (decrease) in accrued Chapter 11
administrative expenses (35,000) 16,000
Increase (decrease) in Other
Long Term Liabilities 850,000 0
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Total adjustments (2,000) 143,000
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Net cash generated from operating activities 228,000 291,000
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CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from the disposal of assets, additions
to property, plant and equipment (41,000) (178,000)
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Net Cash used in investing activities (41,000) (178,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases 0 (6,000)
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Net cash used in financing activities 0 (6,000)
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NET INCREASE (DECREASE) IN CASH 187,000 107,000
CASH AT BEGINNING OF PERIOD $ 784,000 $ 650,000
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CASH AT END OF PERIOD $ 971,000 $ 757,000
========= =========
</TABLE>
Supplemental cash flow disclosure: Interest paid during the Nine months ended
November 30, 1999 and 1998 was approximately $117,000 and $326,000 respectively.
The accompanying notes are an integral part
of these condensed consolidated financial statements
7
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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, 1999.
The results of operations for the Nine month period ended November 30, 1999 are
not necessarily indicative of the results to be expected for the year ended
February 29, 2000.
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:
Pursuant to the Plan of Reorganization, beginning in approximately May 1995, the
Company was required to begin making quarterly payments to holders of unsecured
claims until they receive 35% of their claims. However, due to negotiations
between the parties, the unsecured creditors agreed to a deferment of this
payment. The Company has proposed to its unsecured creditors that it make
quarterly payments of $9,000, a level of payment which was maintained until
February 28, 1997. 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. Furthermore, effective August 1998,
the Company started making payments of $14,000 per quarter. To date, the Company
made 18 of its proposed distributions to the unsecured creditors who have
accepted the payments. These payments to unsecured creditors covered the period
March 1, 1995 through November 30, 1999 in the aggregate amount of approximately
$229,000 of the approximately $1,200,000 required by the Plan of Reorganization.
Following the settlement with the State of California of the amount of its
unsecured claim and the Company's acquisition of the unsecured claim of Argo
Partners, Inc. (as described in the Company's form 10KSB for the period ending
February 28, 1999), it is presently estimated that there are an aggregate of
approximately $7,095,000 in unsecured claims and, accordingly, that the Company
is required to pay approximately $2,292,000 to holders of allowed unsecured
claims in quarterly installments of approximately $62,000. The Company carries
its debt to its unsecured creditors as $ 92,000 in short-term debt and $
1,173,000 in long-term debt. The aggregate and monthly payments to unsecured
creditors increases and decreases in proportion to $10,000 per month per
$3,500,000 in allowed claims, subject to a maximum quarterly payment of
$105,000.
8
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SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On October 12, 1999, the Company completed the sale of the Riviera Beach
facility to National Land Company. Contemporaneously with the sale, the Company
has settled all of its tax obligations to Palm Beach County other than the 1999
personal property taxes still not due or payable. Also, the sum of $419,000 was
transferred to the United States Environmental Protection Agency (USEPA) in
settlement of the lien that the USEPA had placed on the property. The USEPA also
received approximately $15,000 from the Riviera Beach escrow account. The
Company continues its effort to receive from Florida Department of Environmental
Protection (FDEP) a confirmation that the previous owner (Honeywell) has the
primary responsibility for continued clean up of the site.
USEPA advised the Company that it is unwilling to resolve its past and future
cleanup costs in relation to the Port Salerno site under the USEPA's ability to
pay mechanism until the Port Salerno property is sold. Subsequent to informing
the company of their above mentioned intentions, the USEPA placed a lien of
approximately $547,000 on the Port Salerno Property. After consultation with
attorneys, the Company recorded this liability during the quarter ended November
30, 1999 and classified it as an additional environmental liability. The Company
has offered to settle USEPA past and future cost claims arising from the site by
paying the USEPA the net proceeds of the sale of the property under a
prospective purchaser agreement, after deducting certain sales expenses and the
amount required to pay the outstanding real estate taxes.
It is the Company's position that any USEPA cost recovery claims are discharged
in the prior bankruptcy and that USEPA is bound by the terms of the remediation
approved under the Amended Order of Confirmation in Bankruptcy. Though USEPA
received notice of Solitron's Bankruptcy, had knowledge of FDEP's claim and
participation in the Bankruptcy, and that it likewise had already incurred costs
to investigate the properties, USEPA did not file a claim in the Bankruptcy,
apparently deferring to FDEP's claims regarding the remediation of the
properties. USEPA does not agree with the Company's conclusion that its claims
have been discharged in the bankruptcy. As there have been varying
interpretations of the laws regarding obligations to the USEPA for companies
previously in bankruptcy the Company has decided to accrue for the lien that the
USEPA has placed on the Port Salerno property.
It is the Company's position that its legal exposure to Honeywell for
contribution to cleanup costs has been resolved in the bankruptcy, since
Honeywell's claims were filed and rejected by bankruptcy court.
The Company's former facility in Jupiter, Florida was sold to Philips
Electronics in 1982. In 1995 the Jupiter facility was the subject of a
preliminary assessment by the USEPA. After its investigation, USEPA deferred any
further remedial action to an FDEP lead. The Company's environmental legal
counsel has been advised that this facility is being remediated and such
remediation will be completed under a consent order with FDEP. By letter dated
May 17, 1999, Philips put the Company on notice that it will seek to exercise
its indemnity rights against the Company under the 1982 purchase and sale
agreement. It is the Company's position that Philips' notice of and
participation in the prior bankruptcy has discharged Philips' claims. For a
further description of the Company's environmental issues, refer to "Item 1 -
Business - Bankruptcy Proceedings" and to Note 12 of the Consolidated Financial
Statements in the Company's form 10KSB for the fiscal year ending February 28,
1999.
The Real Estate Property Taxes due to the Martin County Tax Collector's Office,
including the interest due on the delinquent part, amount to approximately
$209,000 as of November 30, 1999.
9
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SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. FINANCIAL CONDITION:
During the last several fiscal years, the Company has generally experienced
losses from operations and severe cash shortages caused by a significant decline
in both sales and open order backlog, decreased margins (which is characteristic
in the industry) on the Company's products, significant expenses associated with
the reorganization proceedings, and the Company's inability to obtain additional
working capital through the sale of debt or equity securities or the sale of
non-operating assets. However, for the years ended February 28, 1999 and
February 28, 1998, the Company recorded net income of $476,000 and $194,000
respectively.
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, until
the fiscal year ended February 28, 1997, overall cash flow was negative due
primarily to the necessity to make payments of administrative expenses and
unsecured debt payout arising in connection with the Bankruptcy Proceedings. The
foregoing resulted in a decrease in cash and cash equivalents since emergence
from Chapter 11. 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 USEPA, the FDEP and Martin County taxing authorities or raise
sufficient cash in order to pay these obligations as currently due, in order to
remain a going concern.
10
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SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ENVIRONMENTAL REGULATION
While the Company believes that it has the environmental permits necessary to
conduct its business and that its operations conform to present environmental
regulations, increased public attention has been focused on the environmental
impact of semiconductor operations. The Company, in the conduct of its
manufacturing operations, has handled and does handle materials that are
considered hazardous, toxic or volatile under federal, state, and local laws
and, therefore, is subject to regulations related to their use, storage,
discharge, and disposal. No assurance can be made that the risk of accidental
release of such materials can be completely eliminated. In the event of a
violation of environmental laws, the Company could be held liable for damages
and the costs of remediation and, along with the rest of the semiconductor
industry, is subject to variable interpretations and governmental priorities
concerning environmental laws and regulations. Environmental 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 20, 1993 (the "Confirmation Date"), and
incorporated a plan for future remediation of the two properties of the Company
dependent upon the properties being sold and the purchase price being applied to
remediation costs. One property is Lot 1 (the north parcel) of the property at
1177 Blue Heron Road in the City of Riviera Beach, Florida (the "Riviera Beach
Property"), and the second is its former Port Salerno facility, S.E. Cove Road,
Port Salerno, Martin County, Florida (the "Port Salerno Property").
Contemporaneously with the Confirmation Order, the Company and the State of
Florida Department of Environmental Protection (the "FDEP") entered into a
Stipulation for entry of a Consent Final Judgment in the Circuit Court of the
Nineteenth Judicial Circuit of Florida in and for Martin County, Florida. The
Consent Final Judgment, entered by the Court on October 21, 1993, provided that
the Company would: (a) reimburse FDEP $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 Property (paid as an administrative expense in accordance with the
Confirmation Order); (b) remediate site soils and groundwater at and emanating
from the Port Salerno Property; (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 FDEP 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. At the time, the properties
were appraised by an MAI appraiser, as if uncontaminated, at $1,950,000 for the
Riviera Beach Property and $1,650,000 for the Port Salerno Property. Under the
Plan and Consent Final Judgment, the Company was directed to sell or lease the
two properties and utilize the proceeds derived therefrom, together with certain
insurance proceeds, to remediate both sites. All such proceeds were to be placed
in escrow for that purpose. Under the Plan, any excess funds after all escrow
obligations were satisfied were to belong to the Company.
11
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SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 associated with the Riviera Beach Property,
and potential claims may have been extinguished thereby.
At the time of the Plan and Consent Final Judgment, the Company's consultant
estimated the costs of remediation pursuant to the Consent Final Judgment to be
approximately $727,000 for the Port Salerno Property and $342,000 for the
Riviera Beach Property. Approximately $1,571,000 has been accrued in the balance
sheet as of November 30, 1999. The Company recorded these liabilities as
$495,000 current liabilities and $1,076,000 non-current liabilities. Included in
this latter amount is $547,000 to cover the lien placed by the USEPA on the Port
Salerno Property. These reservations are predicated on cleanup being performed
under the existing Plan and Consent Final Judgment. The consultant estimated
that remediation costs could be greater, particularly if further offsite wells
became contaminated in 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 in 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. The consultant did
not estimate remediation costs were the United States Environmental Protection
Agency to take the lead over the cleanup.
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 will
likely entail off-site recovery wells to contain its further movement.
Under the Plan, if funds to clean the properties 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 an escrow account to clean both
properties 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.
Periodic funding was to have been suspended when funds available in escrow
reached 125% of the estimated costs to complete remediation. The Plan does not
require the Company 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 Property. 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.
12
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SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In October 1995, the Company advised the FDEP that it could pay only $1,000 per
month into escrow, rather than the amounts specified by the Consent Final
Judgment. Since then, the Company has paid $1,000 per month into the escrow for
the properties. The total escrow amount paid relating to the properties, as of
November 30, 1999 is $52,000. FDEP has acquiesced in this payment level.
Under the Plan and Consent Final Judgment, the Company's consultant undertook
additional soil contamination assessment of the Riviera Beach Property and
received FDEP approval of the consultant's contamination assessment report
recommendation that no further soil remediation is required. Similarly, the
consultant completed soil contamination assessment work at the Port Salerno
Property and FDEP agreed with the consultant's submitted data and analysis that
no further soil remediation is required.
Despite the Plan and Consent Final Judgment and the Company's repeated efforts
to negotiate a deferral of action by the United States Environmental Protection
Agency ("USEPA") to allow the Company to sell the properties under the terms of
the state judgement, the USEPA re-evaluated the Riviera Beach and Port Salerno
properties for potential listing on the Superfund National Priority List
("NPL"). During 1997, USEPA required the Company to sign site access agreements
permitting USEPA to perform expanded site assessments at the properties. The
Company was able to secure a 90-day deferral of further NPL listing evaluation
in an attempt to allow prospective purchasers to complete due diligence on the
properties. USEPA subsequently published notice of its proposal to list the Port
Salerno Property on the NPL and listed it on July 27, 1998 and is performing the
cleanup using Superfund monies. By letter dated June 16, 1998, USEPA required
the Company to consent to allow USEPA access to the Riviera Beach Property to
complete a Remedial Investigation. By letter dated September 8, 1998, USEPA
notified the Company that it would not defer cleanup of the Riviera Beach
Property to a FDEP lead. USEPA stated, however, that it would defer listing the
Riviera Beach Property on the NPL if prior owner/operator Honeywell, Inc. agreed
to proceed with and fund an USEPA-lead voluntary Superfund cleanup. USEPA
expressed willingness to negotiate a prospective purchaser agreement with any
purchaser interested in redeveloping the Riviera Beach or Port Salerno
properties. The subsequent sale of the Riviera Beach site included a USEPA
agreement with the purchaser holding it to have no liability for the past
releases at the site.
The Company has provided Honeywell site access and is nearing agreement on terms
of such access to permit Honeywell to perform the required cleanup without any
participation from the Company or from the new owner of the property. Again, 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
I "general". Pursuant to a consent agreement with the USEPA, Honeywell (now
Allied Signal) has performed a remedial investigation of the site. Its
feasibility study is scheduled for completion within a few months. Honeywell
(Allied Signal) has indicated its willingness to perform the remedial action
required at the site and USEPA has advised the Company that it will look to
Honeywell to complete the remediation either under a consent agreement or an
order directing it to perform the clean up.
13
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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, 1999 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 in 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.
During the Nine months ended November 30, 1999, the Company's book-to-bill ratio
dropped to approximately 1.056 from 1.084 for the equivalent period of the prior
year. Net orders booked for the three months ended November 30, 1999 exceeded
$2,540,000. It is believed that such change 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 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 affected
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 both 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.
14
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THREE
MONTHS ENDED NOVEMBER 30, 1998:
Net sales for the three months ended November 30, 1999 increased 1.4% to
$2,015,000 as compared to $1,988,000 for the three months ended November 30,
1998. This increase was primarily attributable to increased productivity. The
Company's backlog of open orders increased 9.2% for the three months ended
November 30, 1999 as compared to an increase of 7.3% for the three months ended
November 30, 1998.
Gross margins on the Company's sales increased to 24.07% for the three months
ended November 30, 1999 in comparison to 20.52% for the three months ended
November 30, 1998. This increase is the result of a more favorable product mix
and an increase in yields.
Gross profit for the three months ended November 30, 1999 increased to $485,000
from $408,000 for the three months ended November 30, 1998. This increase is due
to a better product mix and to a reduction of manufacturing overhead expense.
For the three months ending November 30, 1999, the Company shipped 206,883 units
as compared with 448,980 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 increase in the level of booking of approximately
8.3% for the quarter ended November 30, 1999 as compared to the same period for
the previous year principally as a result of the changes in the rate and timing
of defense spending. Subsequent to November 30, 1999 bookings have declined
considerably again demonstrating the irregularity of defense spending.
Selling, general, and administrative expenses decreased to $285,000 for the
three months ended November 30, 1999 from $307,000 for the comparable period in
1998. During the three months ending November 30, 1999, selling, general, and
administrative expenses as a percentage of sales was 14.14% as compared with
15.44% for the three months ending November 30, 1998
15
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Operating income for the three months ended November 30, 1999 increased to
$200,000 from $101,000 for the three months ended November 30, 1998. This
increase is due to both an increase in gross margin and a reduction in Selling
and General and Administrative expenses.
The Company recorded a net other expense of $84,000 for the three months ended
November 30, 1999 versus a net other expense of $90,000 for the three months
ended November 30, 1998. This variance was due to a significant decrease in the
Company's imputed interest expense of $24,000 for the three months ended
November 30, 1999 as compared to $59,000 for the three months ended November 30,
1998. The pre-petition interest expense for the three month period ending
November 30, 1999 decreased to $4,000 from $38,000 from the same three month
period in 1998. This decrease is due to the fact that the Company paid off its
delinquent income taxes and settled its delinquent Property Taxes due to Palm
Beach County. The extinguishment of debt resulting from the settlements
aggregating $607,000 which was offset by the accrual for the USEPA lien of
$547,000 and by the write down of the Port Salerno property by $90,000, also
contributed to this variance.
Net income for the three months ended November 30, 1999 increased to $116,000
versus $11,000 for the same period in 1998. The major contributing factor to
this increase was the increase in gross margin.
RESULTS OF OPERATIONS-NINE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO NINE
MONTHS ENDED NOVEMBER 30, 1998:
Net sales for the Nine months ended November 30, 1999 decreased 3.9% to
$5,843,000 as compared to $6,078,000 for the Nine months ended November 30,
1998. This decrease was primarily attributable to a weak backlog and scheduling
requirements of the Company's customers. The Company's backlog of open orders
decreased 3.4% for the Nine months ended November 30, 1999 as compared to a
decrease of 5.8% for the Nine months ended November 30, 1999 Such decrease is
attributable to lower demand for the Company's product, resulting from the lower
defense spending and lower average sales price and general slowdown for military
grade power semiconductors experienced industry wide. Gross margins on the
Company's sales decreased to 21.98% for the Nine months ended November 30, 1999
in comparison to 23.38% for the Nine months ended November 30, 1999. This
decrease is the result of a higher material cost as a percentage of sales. Gross
profit for the Nine months ended November 30, 1999 decreased to $1,284,000 from
$1,421,000 for the Nine months ended November 30, 1998. This decrease is
primarily due to declined sales volume and an increase in the cost of goods sold
as a percentage of sales.
July 1999 sales totaled only $601,000 due to an obligatory shutdown of
operations for a period of four days. During the night of July 19, the chiller
of the air conditioning unit of the building stopped and eventually was
replaced. Because of the temperature, humidity and air purity restrictions
imposed on the production of electronic components used in military
applications, Solitron had to stop all manufacturing and testing operations for
these four days. Solitron Devices, Inc. submitted a claim for business
interruption, higher overtime premium for loss of product, and for damaged
equipment. Solitron received payments from the insurance company to cover the
extra expenses incurred and loss of product. The total value of damaged
equipment did not reach the deductible amount of $10,000 so there was no
reimbursement by the insurance company. In August, Solitron Devices Inc. was
able to bring its production back to the level sustained before the incident but
has not yet been able to make up for the lost time.
16
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
For the Nine months ending November 30, 1999, the Company shipped 794,113 units
as compared with 1,864,487 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
6.2% for the Nine months ended November 30, 1999 as compared to the same period
for the previous year.
Selling, General, and Administrative expenses decreased to $884,000 for the Nine
months ended November 30, 1999 from $959,000 for the comparable period in 1998.
During the Nine months ending November 30, 1999, Selling, General, and
Administrative expenses as a percentage of sales totaled 15.13% as compared with
15.78% for the Nine months ending November 30, 1998. The decrease was due
primarily to lower salaries and lower commissions which were due to lower sales
volume.
Operating income for the Nine months ended November 30, 1999 decreased to
$400,000 from $462,000 for the Nine months ended November 30, 1998. This
decrease is principally due to a lower sales volume and to an increase in the
cost of goods sold, offset by a decrease in Selling, and General and
Administrative expenses.
The Company recorded a net other expense of $170,000 for the Nine months ended
November 30, 1999 versus a net other expense of $314,000 for the Nine months
ended November 30, 1998. The variance was due mainly to decreases in the
Company's interest expense for the Nine months period of 1999. The
extinguishment of debt of $607,000, offset by the reserve for the USEPA lien of
$547,000 and by the write-down of the Port Salerno property value by $90,000
also contributed to this variance.
Net income for the Nine months ended November 30, 1999 increased to $230,000
versus $148,000 for the same period in 1998. The major contributing factor to
this increase was the decrease in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported a net income of $230,000 and operating income of $400,000
for the Nine months ended November 30, 1999. 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 November 30, 1999, February 28, 1999 and November 30, 1998 respectively, the
Company had cash and cash equivalents of $971,000, $784,000 and $757,000. This
increase was primarily the result of a $400,000 reduction of receivables offset
by the Company settling with the IRS its 1987 tax obligations.
At November 30, 1999, the Company had working capital of $2,536,000 as compared
with a working capital at November 30, 1998 of $1,191,000. At February 28, 1999,
the Company had a working capital of $1,340,000. The approximately $1,196,000
change for the Nine months ended November 30, 1999 was due mainly to decreases
in accounts payable and in accrued expenses.
17
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The decrease of approximately $1,054,000 in accrued expenses for the nine month
period ending November 30, 1999 is due to the aforementioned settlement of the
Palm Beach County property taxes as well as to the payment of delinquent taxes
due to the IRS and to a reclassification to Long Term Liabilities. The $850,000
increase in Other Long Term Liabilities is due mainly to the accrual for the
lien that the USEPA placed on the Port Salerno Property. The remainder of the
increase is due to a reclassification from current liabilities.
Pursuant to the Plan of Reorganization, the Company is required to pay an
aggregate of approximately $2,483,000 to holders of allowed unsecured claims in
quarterly installments of approximately $62,000. 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.
Furthermore, effective August 1998, the Company started making payments of
$14,000 per quarter. As of November 30, 1999, the Company had paid to the
unsecured creditors approximately $229,000 of the approximately $1,200,000
required by the plan of reorganization. Of amounts owed to unsecured creditors
$92,000 is carried as short-term debt and $1,173,000 is carried as long-term
debt.
Pursuant to the terms of the Plan of Reorganization and Consent Final Judgment,
the Company was required to perform 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, was to be payable from
the proceeds of the sale or lease of these properties. As part of these
requirements, the Company performed soil assessment at both facilities. These
tests indicated that no further soil remediation was 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 November 30, 1999, the Company had deposited $47,000 of
the $410,000 due in accordance with the Plan into the escrow account. Following
the sale of the Riviera Beach facility all funds in this account were
transferred to the USEPA, and monthly payments are now being made only to the
Port Salerno 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."
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 the amount of income that exceeds $500,000 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.
YEAR 2000
The Year 2000 computer problem, commonly referred to as the Y2K, creates a risk
for the Company and therefore the Company makes the following Year 2000
readiness disclosure. An adverse impact on operations could occur if computer
systems do not correctly recognize date information when the year changes to
2000. The Company's risk exists in the following areas: (1) systems used by the
Company to run its business and (2) systems used by suppliers and service
providers.
18
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Company has attempted to obtain assurances of Year 2000 readiness from
suppliers and service providers. The Company will continue to obtain such
assurances for future internal systems, equipment, and facilities. In addition,
we will continue to monitor, including performing additional testing, as
appropriate, the Year 2000 readiness status of previous obtained equipment,
internal systems, and facilities. Noncompliant systems, equipment, or facilities
are expected to be replaced or upgraded in a timely manner prior to December 31,
1999. The Company has not identified alternative remediation strategies if
replacement or upgrade is not feasible, but will continue to reevaluate the need
for alternative remediation strategies and contingency plans as warranted by
further risk analysis. For internal system Year 2000 noncompliance issues
identified to date and expected throughout 1999, the cost of upgrade or
replacement is not expected to be material to operating results. However, if
significant, new noncompliance issues are subsequently identified, and
replacement or upgrade is delayed beyond December 31, 1999, operating results
could be materially adversely affected.
The Company has limited material relationships with suppliers whose inability to
provide products or services would have a material adverse impact on operating
results. Suppliers where such material relationships do exist appear to be
limited to those utilities (e.g. phone service, public service) whose inability
to provide service could materially affect all business entities. The Company
has and will continue to monitor their Year 2000 efforts and will develop
contingency plans as appropriate.
In order to evaluate the above risks, implement any necessary remediations in
the future, and provide risk reevaluations and continued appropriate monitoring
activities, the Company has designated appropriate individuals within the
organization to be responsible for Year 2000 issues. The Company will continue
to assess the need for additional year 2000 readiness personnel as appropriate.
The Company's computer operating system and business software package have been
updated and, when tested on December 1998, found to be Y2K compliant. The
Company expects all of its internally written custom reports to be Y2K compliant
by October 31, 1999. As of November 30, 1999, 100% of such reports had been
updated or have no Y2K impact. Having these custom management reports updated to
Y2K is not considered to be mission critical
In addition, the Company has contacted all of its business partners (i.e.,
services provider and raw material suppliers), and found that all of them are
Y2K compliant or plan to be compliant by October 31, 1999. Based on the
currently available information, the Company does not anticipate any
interruption to its ability to continue conducting business. However, the
Company does not have control over such third parties and a failure of third
parties to be Y2K compliant could have a material impact on the Company's
ability to conduct business. Thus, the Company will continue to seek
confirmation and updates from its business partners to certify that they
addressed or will address year 2000 issues.
After one week of operations in the year 2000 the Company has not experienced
any Y2K related problems and does not anticipate doing so. The Company is not
aware of any of its suppliers having Y2K related servicing or delivery problems.
The cost of updating and testing the Company's year 2000 compliance has been
expensed as part of its operating expenses and was not material.
19
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
See Part 1
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
None
20
<PAGE>
SOLITRON DEVICES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following person on behalf of Solitron and in the
capacity and on the date indicated..
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Shevach Saraf
- ------------------------
Shevach Saraf Chairman, January 14, 2000
President, and
Chief Executive Officer
21
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
22
<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,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> MAR-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 971,000
<SECURITIES> 0
<RECEIVABLES> 881,000
<ALLOWANCES> (11,000)
<INVENTORY> 2,576,000
<CURRENT-ASSETS> 4,530,000
<PP&E> 1,946,000
<DEPRECIATION> (1,475,000)
<TOTAL-ASSETS> 5,084,000
<CURRENT-LIABILITIES> 1,994,000
<BONDS> 0
0
0
<COMMON> 20,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,084,000
<SALES> 5,843,000
<TOTAL-REVENUES> 5,843,000
<CGS> 4,559,000
<TOTAL-COSTS> 5,443,000
<OTHER-EXPENSES> 53,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117,000
<INCOME-PRETAX> 232,000
<INCOME-TAX> 2,000
<INCOME-CONTINUING> 230,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,000
<EPS-BASIC> .11
<EPS-DILUTED> .11
</TABLE>
