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, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission file number 1-4978
SOLITRON DEVICES, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-1684144
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
3301 ELECTRONICS WAY, WEST PALM BEACH, FLORIDA 33407
(Address of principal executive offices)
(407) 848-4311
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to filing requirements for the past 90 days. Yes X No ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes X No______
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 1,974,799 Note: Additional shares are
issuable by the Company without further consideration pursuant to the Company's
Plan of Reorganization. Note: Reflects the 1-for-10 reverse split effected
October 12, 1993.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements: Pages 4 - 20
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations: Pages 21 - 27
2
SOLITRON DEVICES, INC.
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheet -- May 31, 1996
Condensed Consolidated Statements of Operations -- Three Months Ended
May 31, 1996 and 1995
Condensed Consolidated Statements of Cash Flows -- Three Months Ended
May 31, 1996 and 1995
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
3
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
ASSETS
May 31, 1996
(UNAUDITED)
---------
Current Assets:
Cash $ 426
Accounts receivable, less allowance
for doubtful accounts of $27 839
Inventories 2,160
Prepaid expenses and other current assets 178
Due from S/V Microwave Products, Inc. 65
--------
Total current assets 3,668
Property, plant and equipment, net 720
Non-operating plant facilities 1,745
Due from S/V Microwave Products, Inc. 123
Other assets 111
-------
$6,367
=======
4
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
May 31, 1996
(UNAUDITED)
---------
Current liabilities:
Current maturities of long-term debt $ 75
Accounts payable - post-petition 613
Current portion of accounts payable - pre-petition 115
Accrued expenses 1,316
Accrued Chapter 11 administrative expenses 47
---------
Total current liabilities 2,166
---------
Long-term debt, less current maturities 23
---------
Other long-term liabilities 3,525
---------
Stockholders' Equity
Preferred stock, $.01 par value,
authorized 500,000 shares -
Common stock $.01 par value,
authorized 10,000,000 shares,
issued and outstanding 1,880,000 19
Additional paid-in capital 2,620
Deficit (1,986)
---------
653
---------
$ 6,367
=========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
May 31,
1996 1995
--------------------------
NET SALES $1,730 $1,640
Cost of sales 1,395 1,382
------ ------
Gross Profit 335 258
Selling, general and
administrative expenses 264 347
------ ------
Operating (loss) income 71 (89)
------ ------
OTHER INCOME (EXPENSE):
Other Income 34 10
Interest expense (73) (26)
Chapter 11 expenses - -
Other (12) (2)
------ ------
Net other expense (51) (18)
------ ------
Net (loss) income $ 20 $ (107)
======== ========
INCOME (LOSS) PER SHARE: $ .01 $ (.05)
========= ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 2,082,000 2,082,000
--------- ---------
The accompanying notes are an integral part
of these condensed consolidated financial statements
6
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three MONTHS ENDED MAY 31,
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss) $ 20 $ (107)
------------ ------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 56 58
Provision for doubtful accounts (5) (4)
Gain on disposal of assets - (2)
(Increase) decrease in account receivable 53 (205)
(Increase) decrease in inventories (81) (36)
(Increase) decrease in prepaid expenses and
other current assets (75) 33
(Increase)decrease in due from S/V Microwave
Products, Inc. 4 (27)
Decrease in other assets - 1
Increase (decrease) in accounts payable 54 145
Increase (decrease) in accrued expenses
and other liabilities 75 (22)
Decrease in accrued Chapter 11
administrative expenses (15) (29)
------------- ------------
Total adjustments 66 (88)
------------- ------------
Net cash used in operating activities 86 (195)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of assets - 2
Additions to property, plant and equipment (6) (54)
------------- ------------
Net cash used in investing activities (6) (52)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (18) (23)
------------- ------------
Net cash used in financing activities (18) (23)
------------- ------------
NET INCREASE (DECREASE) IN CASH 62 (270)
(Continued)
7
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(CONTINUED)
THREE MONTHS ENDED MAY 31,
1996 1995
---- ----
CASH AT BEGINNING OF PERIOD 364 867
------------ ------------
CASH AT END OF PERIOD $ 426 $ 597
============ ============
Supplemental cash flow disclosure:
Interest paid during the three months ended May 31, 1996 and 1995 was
approximately $36,000 and $26,000 respectively.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
8
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
statement of the results for the interim period.
The information contained in this Form 10-QSB should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended February 29, 1996.
The results of operations for the three month period ended May 31, 1996 are not
necessarily indicative of the results to be expected for the full year.
2. BANKRUPTCY PROCEEDINGS
On January 24, 1992 (the "Petition Date"), the Company and its wholly-owned
subsidiary, Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.),
a Delaware corporation, filed voluntary petitions seeking reorganization under
Chapter 11 ("Chapter 11") of the United States Bankruptcy Code, as amended (the
"Bankruptcy Code"), in the United States Bankruptcy Court for the Southern
District of Florida (the "Bankruptcy Court"). These bankruptcy estates were
subsequently consolidated by the Bankruptcy Court. On August 20, 1993, the
Bankruptcy Court entered an Order (the "Order of Confirmation") confirming the
Company's Fourth Amended Plan of Reorganization, as modified by the Company's
First Modification of Fourth Amended Plan of Reorganization (the "Plan of
Reorganization"). The Plan became effective on August 30, 1993 (the "Effective
Date"). On April 24, 1996 a motion was filed with the U.S. Bankruptcy Court to
officially close the case.
Additionally, the following actions or events have taken or will take place
pursuant to the Plan of Reorganization:
(a) On February 28, 1993, pursuant to a Purchase Agreement, dated
October 5, 1992, as amended (the "Vector Purchase Agreement"), the Company
transferred to Vector Trading and Holding Corporation ("Vector") (the successor
in interest to the Company's former primary lender, First Union National Bank
("First Union")) substantially all of the assets, other than real estate,
comprising the Company's Microwave Division and certain related liabilities.
Pursuant to the terms of the Vector Purchase Agreement: (i) Vector subleases
approximately 30% of the Company's facilities in West Palm Beach, Florida, for a
period ending December 31, 2001 at an annual rate that started at approximately
$50,000 during the first year and increases to approximately $150,000 in the
last four years, with aggregate remaining payments of approximately $804,000
(the "Sublease"); (ii) the Company assigned to Vector insurance proceeds of
approximately $5.4 million from National Union Fire Insurance Company stemming
from a 1991 fire in the Company's hybrid department; (iii) the Company and
Vector entered into mutual non-competition agreements for a period of five
years, pursuant to which neither will compete in the United States with respect
to the types of products produced by the other as of the date of the Vector
Purchase Agreement; (iv) the
9
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Company entered into a Shared Services and Equipment Agreement (the "Shared
Services Agreement") with Vector, pursuant to which it is estimated that Vector
will pay Solitron approximately $55,000 per year for eight years in exchange
for, among other things, the Company's (a) allowing Vector to use certain of the
Company's equipment, (b) providing to Vector certain services and (c) Vector
will reimburse or pay the Company (in pro rata quarterly installments through
approximately the end of 1998) an aggregate of approximately $210,000 in
personal property taxes paid by the Company on the assets transferred to Vector.
As of May 31, 1996, Vector had paid approximately $40,000 of these taxes. As of
May 31, 1996, Vector has been current with its financial obligations. The
Company is currently engaged in a dispute with the new landlord who acquired the
facility from the RTC regarding its lease payments and the parties' obligations
under the lease. The Company has filed a motion with the District Court to
resolve these disputes. The parties are negotiating out of court, and there can
be no assurance that these negotiations will be successful
b) The Company has or will issue to certain pre-petition creditors that
number of shares of Solitron's common stock, par value $.01 per share (the
"Common Stock"), equal to 65% (approximately 1,424,504 shares) of the issued and
outstanding shares after all issuances contemplated by the Plan of
Reorganization (other than the shares issuable pursuant to the exercise of stock
options granted to Shevach Saraf, the Chairman of the Board, Chief Executive
Officer, President and Treasurer of the Company, as described below). Of this
65%, 40% (approximately 876,618 shares) have been issued to holders of unsecured
claims (pro rata) and 25% (approximately 547,886 shares) have been or will be
issued to Vector. As of April 24, 1996, 771,434 of the 876,618 which are to be
issued have been issued to holders of unsecured claims and 547,886 shares have
been issued to Vector participants and their successors (See Management
Discussion and Analysis). On December 15, 1995, the Company and Argo Partners,
Inc., an unsecured creditor have reached an agreement under which Solitron
Devices, Inc. has acquired Argo Partners' unsecured debt of $694,834 (which was
carried as an obligation of approximately $140,037) for $40,000 as complete
settlement. Prior to the acquisition, Argo Partners received payment of
approximately $3,160 from the Company as part of several distributions to
unsecured creditors. Thus, Solitron Devices, Inc. recognized in December 1995 an
extraordinary gain of approximately $96,877 due to the debt being carried on the
books at a discounted amount. Now that the claim of the State of California as
an unsecured creditor has been quantified, all shares issuable to the State of
California as an unsecured creditor were issued to the State of California in
April 1996. The common stock issued to the Vector participants and holders of
unsecured claims must be voted by them in accordance with the recommendation of
the Company's Board of Directors and, in general, the holders of such Common
Stock have agreed pursuant to the Plan of Reorganization to take no action
hostile to the Company such as to commence or assist in a proxy contest or
tender offer. However, no limitation on the transferability of this Common Stock
was imposed pursuant to the terms of the Fourth Amended Disclosure Statement or
the Plan of Reorganization. Solitron's pre-petition stockholders retained their
issued and outstanding shares of Common Stock which, after the issuance of the
remaining shares reserved for issuance under the Plan of Reorganization (other
than those shares issuable upon the exercise by Mr. Saraf of certain options),
represents 20% (approximately 438,310 shares) of the issued and outstanding
Common
10
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Stock. Of the remaining 15%, 10% (approximately 219,155 shares) have already
been issued to Mr. Saraf, and 5% (approximately 109,577 shares) are reserved for
future issuance pursuant to employee stock incentive plans or programs.
Additionally, Mr. Saraf has been issued options to purchase an additional 8% of
the issued and outstanding Common Stock after giving effect to the foregoing
issuances. The Company intends to issue the remainder of the Common Stock
issuable pursuant to the Plan of Reorganization to unsecured creditors at such
time as all of such conditions precedent have been satisfied.
(c) Pursuant to the Plan of Reorganization, beginning in approximately
May 1995, the Company was required to begin making quarterly payments to holders
of unsecured claims until they receive 35% of their claims. However, due to
negotiations between the parties, the unsecured creditors agreed to a one month
deferment of this payment (for more discussion see Management's Discussion and
Analysis). To date, these negotiations have not been completed and while they
are in progress, the Company made six of its proposed distributions to the
unsecured creditors who have accepted the payments. These payments to unsecured
creditors in the aggregate amount of approximately $43,085 covered the period
March 1, 1995 through May 31, 1996 of approximately $307,256 as required by the
Plan of Reorganization. Following the settlement with the State of California of
the amount of its unsecured claim (as described below in (j), and the Company's
acquisition of the unsecured claim of Argo Partners, Inc. (as described below in
(o), it is presently estimated that there are an aggregate of approximately
$7,095,252 unsecured claim and, accordingly, that the Company is required to pay
approximately $3,483,338 (i.e., 35% of $7,095,252) to holders of allowed
unsecured claims in quarterly installments of approximately $62,083. The Company
has proposed to its unsecured creditors that it make quarterly payments of
$9,000. As of May 31, 1996, of $307,256 due the Company paid to the unsecured
creditors $43,085. The Company carries its debt to its unsecured creditors as
$107,000 in short-term debt and $1,302,000 as long-term debt. The aggregate and
monthly payments to unsecured creditors increases and decreases in proportion to
$10,000 per month per $3.5 million in allowed claims, subject to a maximum
quarterly payment of $105,000. These payments and the aggregate amounts thereof
would also increase proportionately in the event of a default by the Company in
its obligations to Ellco Leasing Corporation ("Ellco"), as described in (e)
below.
(d) In March 1995, the Company entered into negotiations with its
unsecured creditors, the IRS, Palm Beach County, Martin County and DEP in order
to modify the schedule of payments as prescribed by its Plan of Reorganization.
These negotiations continue. There can be no assurance that these negotiations
will be successful.
(e) The Company is required to pay to Ellco $255,000 plus interest at
six percent per annum in monthly payments over a four-year period beginning on
the Effective Date. Approximately $173,000 plus interest of such $255,000 had
been paid as of May 31, 1996. Ellco has been granted a security interest in
certain of the Company's equipment to secure such obligations. Ellco is required
to release its liens on certain of the Company's assets as the above-referenced
payments are made. In the event of any default on any of such payments which
remains uncured after seven days' notice, Ellco would have a claim as an
unsecured creditor in the amount
11
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
of the deficiency and the Company would make monthly payments to Ellco until an
aggregate of 35% of the allowed claim was paid to Ellco. Additionally, from the
time of default, Ellco would be entitled to receive a pro rata portion of the
Profit Participation (as defined in (g) below) payable to unsecured creditors.
However, no retroactive payments would be made to Ellco. In the event of such a
default, however, Ellco would also receive a pro rata share of the Common Stock
issuable to unsecured creditors. Approximately 105,000 shares of the Common
Stock are held by the Company in trust for Ellco. If no such default occurs,
such Common Stock would be issued pro rata to the unsecured creditors. The
Company is current with Ellco and expects to remain current.
(f) The Company received releases of substantially all liens on its
assets and properties existing as of the Effective Date. However, in accordance
with the Plan of Reorganization, Ellco, Southeast Bank Leasing Company,
Greyhound Financial Corporation and Met Life Capital Corporation WERE granted
liens on certain of the Company's equipment and the holders of pre-petition
unsecured claims were granted a lien on all of the Company's equipment to secure
the payments described in (c) above and in (g) below. As of May 31, 1995, the
Company has paid off all its obligations to Southeast Bank Leasing Company,
Greyhound Financial Corporation and MetLife Capital Corporation and the liens
held by those entities have been released.
(g) Beginning on the date the Company's net after tax income exceeds
$500,000, the Company will pay (on an annual basis) each of the holders of
unsecured claims (pro rata) and Vector participants and their successors, 5% of
its net after tax income until the tenth anniversary of the Effective Date, up
to a maximum aggregate of $1,500,000 of such payments to the holders of
unsecured claims (pro rata) and up to a maximum aggregate of $1,500,000 of such
payments to Vector participants and their successors (the "Profit
Participation").
(h) The Company transferred to First Union the real property known as
the New Riviera Beach Facility and granted First Union a non-exclusive perpetual
easement for the use of approximately 125 parking spaces on the adjacent real
property owned by the Company known as the Old Riviera Beach Facility. First
Union has claimed that the Company is obligated to pay approximately $110,000 in
1993 real property taxes with respect to the New Riviera Beach Facility that
accrued prior to such transfer as well as the cost of removing personal property
from and cleaning the New Riviera Beach Facility. The Court has denied First
Union's motion during fiscal year 1995. See "Item 2 - Properties" .
(i) Following the Effective Date and consistent with its agreement with
the State of Florida Department of Environmental Protection (the "DEP"), the
Company has begun to perform environmental assessments and is required to
remediate the Old Riviera Beach Facility and the Port Salerno Facility in
accordance with the terms of the Consent Final Judgment, entered in October,
1993 (the "Consent Final Judgment"). The foregoing stems from the environmental
contamination of these properties. The monies to be utilized to fund these
assessments and remediations will be made available from the proceeds of the
sale or lease of the properties, to the extent that the Company is successful in
its efforts to sell or lease such properties. Pursuant to the Plan of
12
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Reorganization, unless approved by the DEP, neither the Old Riviera Beach
Facility nor the Port Salerno Facility will be sold unless the price for such
property equals or exceeds the lesser of (i) 75% of its then appraised value or
(ii) the estimated cost of its remediation. In connection with facilitating the
remediation of the properties, the Company will also, to the extent the proceeds
from the sale or lease of these properties are not sufficient to pay for the
remediation, be required to escrow the following amounts on a monthly basis
beginning on the 25-month anniversary of the Effective Date: (i) year 1 - $5,000
per month; (ii) year 2- $7,500 per month; (iii) year 3 - $10,000 per month; and
(iv) $10,000 per month thereafter until remediation is completed. The Company is
negotiating with DEP to modify this payment schedule. The Company is making
payments of $1,000 per month and hopes to remain on this payment schedule until
the properties are sold. As of May 31, 1996, of the $40,000 due according to the
Plan, the Company deposited $8,000 in the required escrow accounts.
Additionally, $42,000 in proceeds from an insurance settlement were released
from escrow and have been utilized to investigate the extent to which the soil
at the Old Riviera Beach and Port Salerno facilities requires remediation.
Following testing, final determination has been made that the soil at the Old
Riviera Beach and Port Salerno facilities needs no further remediation. Any
excess of such sale and lease proceeds over the cost of assessment and
remediation will be returned to the Company following completion of the cleanup
of both facilities. See "Item 2. - Properties" for a description of these
facilities. The Company's financial statements reflect liabilities of $1,066,000
relating to the foregoing assessment and remediation obligations. Although the
Company's environmental consultants have advised the Company that they believe
that this is the best estimate of such liabilities, there can be no assurance
that the actual cost of remediation will not exceed such amount. In the event
that the Company defaults under the Consent Final Judgment, the DEP may assert a
natural resource claim against the Company, the amount of which (if any) would
be determined by a court of competent jurisdiction. See "Environmental
Compliance," below, for a further discussion of environmental matters. For a
more definitive description of environmental matters pertaining to the Old
Riviera Beach facility and the Port Salerno facility, please refer to the
Consent Final Judgment.
(j) The Company has paid all of the allowed administrative claims and
allowed wage claims since the Effective Date. The Company is required to pay
allowed tax claims (to the IRS, Palm Beach County, Florida and Martin County,
Florida), estimated at approximately $1,750,000 (which amount is accrued in the
consolidated financial statements-this amount includes interest). The Company
was required to begin making quarterly payments of allowed tax claims to Palm
Beach County according to the following schedule: $37,000 per quarter for two
years beginning in the second quarter of 1994; and approximately $82,000 per
quarter for the twelve quarters thereafter. The Company is negotiating with Palm
Beach County on restructuring the stream of payments. The Company entered into
an agreement to make quarterly payments of allowed tax claims to Martin County
of approximately $4,000 for a period of approximately four years beginning in
approximately October 1994. The Company is negotiating with Martin County on
restructuring the payment schedule. During January 1995, the amount of allowed
tax claims payable to the IRS was determined to be $401,000. At May 31, 1996,
such amounts include accrued interest totalling $417,000. The Company was
expected to make quarterly payments of
13
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
allowed tax claims to the IRS of no more than approximately $21,000 per quarter
beginning in April 1995 and ending in approximately January 2001. The Company is
negotiating with the IRS to restructure these payments. The State of California
Franchise Tax Board claim has now been quantified by the Court on November 30,
1995 to be $680,179.35 and it is treated as an unsecured claim. The Company is
not making payments to the IRS, Palm Beach County and Martin County. The Martin
County tax claim will be paid in full with the sale of the Port Salerno
property. A large part of the Palm Beach County Tax claim will be paid with the
sale of the Riviera Beach property. The Company has attempted to renegotiate the
payment schedule with the IRS and is awaiting their reply. The following table
indicates the approximate cumulative status of amounts due under Court Plans as
of May 31, 1996:
DUE PAID
-------- -------
Martin County $ 28,000 $ 7,957
Palm Beach County 296,000 168,509
IRS 105,000 --
(k) There has been an active interest in both the Port Salerno and
Riviera Beach properties from potential purchasers but no current contracts for
sale have been signed.
(l) Solitron rejected substantially all of its pre-petition executory
contracts (including its outstanding stock option agreements except those with
Shevach Saraf, Solitron's Chairman of the Board, Chief Executive Officer,
President and Treasurer), except for certain contracts with distributors, sales
representatives, lessors of equipment, customers, suppliers and the lessor of
its West Palm Beach, Florida facility, and the Sublease with Vector, the Shared
Services Agreement with Vector and the Employment Agreement with Mr. Saraf.
(m) All of the members of Solitron's Board of Directors, other than
Shevach Saraf, resigned as of January 20, 1996. Replacements are actively being
recruited
(n) In September 1993, the Bankruptcy Court authorized a 1-for-10
reverse split of the Company's Common Stock, pursuant to which each 10 shares of
Common Stock were automatically converted into one share of Common Stock, with
cash paid in lieu of the issuance of fractional shares. This reverse stock split
became effective at the close of business on October 12, 1993, the record date
for such reverse stock split. This reverse stock split has been retroactively
reflected herein and all references to amounts of shares and share prices have
been retroactively adjusted herein to reflect same.
14
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(o) On December 15, 1995, the Company and Argo Partners, Inc. an
unsecured creditor have reached an agreement under which Solitron Devices, Inc.
has acquired Argo Partners' unsecured debt of $694,834 (which was carried as an
obligation of approximately $140,037) for $40,000 as complete settlement. Prior
to the acquisition, Argo Partners received payment of approximately $3,160 from
the Company as part of several distributions to unsecured creditors. Thus,
Solitron Devices, Inc. recognized in December 1995 and extraordinary gain of
approximately $96,877 due to the debt being carried on the books at a discounted
amount.
3. INVENTORIES:
Inventory consists of the following
(in thousands):
MAY 31, 1996
------------
Raw materials $1,121
Work-in-process 1,039
--------
$2,160
4. LONG-TERM DEBT:
Long-term debt consists of the following:
(in thousands):
MAY 31, 1996
------------
6% equipment finance
agreement due in monthly
installments with scheduled
maturities through August 1997 $ 98
Less: Current maturities (75)
Net balance $ 23
=======
15
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. OTHER LONG-TERM LIABILITIES:
Other long-term liabilities consist of the following:
(in thousands):
MAY 31, 1996
------------
Accrued Environmental Expenses $ 1,009
Accounts Payable - Pre-petition 1,302
IRS Tax Claim 314
County Property Tax Payable 1,000
---------
$ 3,625
=========
6. ENVIRONMENTAL MATTERS:
As a result of audits by the DEP principally conducted as early as 1986, it was
determined that chemical discharges occurred at several of the Company's
locations for which clean up or other actions were required. Management of the
Company believes that clean up and monitoring is still required at three
locations: one licensed treatment facility to which the Company shipped
hazardous waste, the Company's Port Salerno location and the Company's Old
Riviera Beach facility.
In addition to the matters described in the preceding paragraph, testing of
monitoring wells installed by the Company at the Company's Port Salerno location
has revealed that groundwater contamination extends off-site. After notification
to DEP of the off-site contamination, the State Division of Health tested
certain private residential wells and requested the Company supply bottled
drinking water to seven families which use four of the private wells in the
area. The Company complied with this request. Public water supply was thereafter
extended to serve these properties the cost of which was reimbursed to DEP by
the Company in the amount of $200,000. Other private wells nearby may also be
affected, and, in such case the Company will then extend public water supply to
affected homes.
Based upon a tentative settlement with the City of Riviera Beach (the "City"), a
penalty assessed by DEP and remediation costs estimated by environmental
consultants and management, the Company initially accrued $2,331,000 for
environmental costs as of February 28, 1989. On March 9, 1990, the Company
reached a final settlement with the City which provided, among other things, for
the payment to the City of $700,000 plus interest at 8.5%, payable in quarterly
installments through 1995 and the payment of $171,000 in penalties to DEP plus
interest at 8.5% payable annually through 1995. At August 31, 1993, the Company
owed the City and DEP $583,000 and $103,000, respectively, on its obligations
under this agreement.
16
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Plan of Reorganization provides a plan for the future remediation of the Old
Riviera Beach location and the Port Salerno location. The Plan of Reorganization
provides for, among other things, the following: (1) the Company reimburse DEP
$200,000 for providing water lines to serve properties affected by the
groundwater contamination from the Port Salerno site. This amount was paid,
pursuant to the provision of the Plan, as an administrative expense to DEP
during the year ended February 28, 1993; (2) remediate site soils and
groundwater at the Port Salerno location; (3) remediate groundwater
contamination at the Old Riviera Beach property and 4) pay a final judgment of
$103,000 to DEP representing the balance of penalties owed at August 31, 1993 as
a result of the March 9, 1990 agreement. This amount was included in amounts
payable to unsecured creditors and accordingly, is subject to the same payment
terms and conditions as the Company's general unsecured creditors. Additionally,
the Company's $583,000 obligation to the City was classified as an unsecured
claim at August 31, 1993.
Following the Effective Date of the Plan of Reorganization and consistent with
its agreement with the State of Florida Department of Environmental Protection,
the Company has performed environmental assessments to confirm that all soil
contamination has been remediated at the Old Riviera Beach Facility and the Port
Salerno Facility in accordance with the terms of the Consent Final Judgment,
entered in October 1993 (the "Consent Final Judgment"). Certain groundwater
remediation remains to be performed at both properties. Pursuant to the
provisions of the Consent Final Judgment, and the Plan of Reorganization, the
remediation would be performed from any proceeds of the sale or lease of the two
properties or from further payments required of the Company as set forth herein.
The properties can be sold and the prospective purchaser can obtain first
purchaser protection from further enforcement provided the sale price of the
property equals or exceeds the lesser of (i) 75% of its then appraised value or
(ii) the estimated cost of its remediation. In connection with facilitating the
remediation of the properties, the Company is obligated to escrow the following
amounts on a monthly basis beginning on the 25-month anniversary of the date of
the Final Judgment: (i) year 1-$5,000 per month; (ii) year 2 - $7,500 per month;
(iii) year 3 - $10,000 per month; and (iv) $10,000 per month thereafter until
remediation is completed. Due to cash flow problems, the Company is negotiating
with DEP to modify the payment schedule. While these negotiations are underway,
the Company is depositing $1,000 per month into the escrow account. As of May
31, 1996, of the $40,000 due the Company has deposited $8,000 into these escrow
accounts. Certain insurance proceeds that were placed into the escrow pursuant
to the Consent Final Judgment and the Plan of Reorganization have been utilized
to confirm that neither soil at the Old Riviera Beach nor the Port Salerno
facilities require remediation. DEP has acknowledged that no further soil
remediation is required at either site. In the event there are excess proceeds
from the sale of either property above the cost of its remediation, the excess
funds will be utilized to remediate the other property. Further, the Company
during this fiscal year has negotiated an amendment to the Consent Final
Judgment regarding the Riviera Beach site that would require completion of
remediation of the Old Riviera Beach site even if the sale of that site did not
result in sufficient proceeds to complete that remediation. See "Item 2. -
Properties" for a description of these facilities. The Company's financial
statement reflects liabilities of $1,066,000 relating to the foregoing
assessment and remediation obligations. Although the Company's environmental
consultants have advised the Company that they believe that this is the best
estimate of such liability, there can be no assurance that the actual cost of
remediation will not exceed such
17
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
amount. In the event that the Company defaults under the Consent Final Judgment,
the DEP may assert a natural resource claim against the Company, the amount of
which (if any) would be determined by a court of competent jurisdiction. See
"Environmental Compliance" below for a further discussion of environmental
matters. For a more definitive description of environmental matters pertaining
to the Old Riviera Beach Facility and the Port Salerno Facility, please refer to
the Consent Final Judgment.
Pursuant to the Plan of Reorganization, the Company paid $200,000 to extend the
large main public water line to the neighborhood around its Port Salerno
Facility and to extend smaller individual distribution lines to affected
properties with private wells. In the event that other private wells are
impacted in the future in excess of regulatory levels, the Company may be
obligated to extend small individual distribution lines to serve the affected
properties. However, retesting of private wells by the Martin County Health
Department during fiscal year 1995 did not reveal any additional properties to
be so impacted and the State Department of Environmental Protection has not
required further properties to be provided with public water supply. There is a
potential that such extension will be required in the future, but the State
Department of Environmental Protection has acknowledged that source removal from
soils and pond sediments on the site has been completed. Since the facility has
not been in use since 1988, the Company believes the likelihood of additional
extensions to be minimal and the costs of any such extensions if required in the
future to also be minimal.
Since entry of the Consent Final Judgment, the Company's consultant submitted a
plan for further soils assessment at the Riviera Beach and Port Salerno
facilities, received approval thereof and of its Quality Assurance Plan, and,
after soil testing and filing an assessment report reporting their data,
received DEP approval of the report's conclusion that no further soils
remediation is required at either facility.
The Company's environmental consultants have estimated the costs of remediation
to be approximately $727,000 for the Port Salerno property and $342,000 for the
Old Riviera Beach property. These amounts have been accrued for in the balance
sheet as of May 31, 1996. The accrual balance is approximately $1,066,000.
Pursuant to the Plan, the Company will sell or lease the two properties and
utilize the proceeds to remediate both sites. If funds to clean the sites are
not available within twenty-four months from October, 1993, the Company is
required to make periodic payments as follows: 1) $5,000 per month beginning on
the 25th month; 2) $7,500 per month beginning on the 37th month; and 3) $10,000
per month beginning on the 49th month. This funding will be suspended when total
amounts paid reach 125% of the estimated remediation costs. The Company is
negotiating with DEP to modify this payment schedule. While these negotiations
are under way, the Company is making monthly payments of $1,000 per month into
the escrow account. As of May 31, 1996 the Company deposited $8,000 into the
escrow account.
On April 17, 1995, the Company entered into an agreement to sell the Riviera
Beach Facility. Under the terms of the agreement, the DEP was reviewing this
contract and had until July 2, 1995 to approve it as stipulated by the Consent
Agreement. The DEP granted its approval of the sale on
18
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
August 16, 1995. The sale price was $850,000, and after payment of existing
taxes, brokerage and attorneys' fees, certain moving costs and other expenses,
the proceeds were to provide approximately $410,000 to $430,000 for the escrow
account to complete groundwater remediation at the Riviera Beach site. Once the
DEP approved the sale, it was required to request the EPA to remove the site
from the EPA site-screening process for possible National Priority List listing.
The Region IV Administrator of the EPA has verbally assured counsel for the
Company that the EPA will honor such request. The prospective purchaser then has
an additional 30 days to inspect the environmental conditions of the sale. If
the purchaser was satisfied, the contract called for a closing within 30 days
thereafter. By the time the DEP approved the sale, the buyer lost its ability to
continue with the purchase of the facility. There are several new parties
interested in purchasing the Riviera Beach Facility.
The Company received a claim by an estate owning property northwest and across
Cove Road from the Port Salerno property. The estate has asserted that the
mailing address to which the bankruptcy notice was sent was in error. The estate
has been advised that public water has been made available to the property and
that the Company is prepared to settle for the sum of $10,000, to be paid as
other unsecured creditor claims are being paid. Counsel is now handling such
negotiations.
During fiscal year ended February 28, 1995, the Company's environmental legal
counsel determined that the Environmental Protection Agency (the "EPA") was
reassessing all prior Comprehensive Environmental Response, Compensation and
Liability Information System site for National Priority Ranking using the newly
adopted ranking formula. The Company's facilities at Riviera Beach and Port
Salerno were the subject of such reassessment. After conducting a series of
meetings with the State Department of Environmental Protection (the "DEP") and
with Region IV EPA officials, the DEP requested that the Riviera Beach site be
taken out of the reevaluation process and, pursuant to both that request and the
Company's request, Region IV EPA, according to the responsible DEP official,
took both sites out of the reevaluation process and deferred informally further
action pending the Company's complying with the requirements of the Consent
Final Judgment that it had entered with the Florida Department of Environmental
Protection in accordance with its Plan of Reorganization. The Company's former
facility in Jupiter, Florida (which was sold in 1982) has been the subject of a
preliminary assessment by the EPA during fiscal year 1995. The EPA has requested
site access from the current owner. The Company's environmental legal counsel
has no information concerning the Jupiter facility nor has the Company received
any request for information. The Company and its environmental legal counsel
cannot assess at this time what the impact of the EPA study will be, if any, on
the Company's liability nor when the EPA will complete its study.
The Company has been named as a potentially responsible party at a Nuclear
Disposal Facility located in Kentucky (Maxey Flats). During fiscal year 1995,
the Company, along with other responsible parties has signed a de-minimis
agreement to settle the case. Under the agreement, the Company will be
reimbursed approximately $1,200 which does not materially affect the Company.
19
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Accordingly, as a result of the above, the Company's initial accrual for
environmental claims was reduced by approximately $777,000 as of August 31,
1993, which amount has been included in environmental expenses net of insurance
recoveries in the accompanying statement of operations for the six months ended
August 31, 1993. The Company's current reserve for environmental claims is
approximately $1,066,000 as of May 31, 1996.
The Company's former facility in Jupiter, Florida (which was sold in 1982) has
been the subject of a preliminary assessment by the EPA during calendar year
1995. The EPA requested site access from the present owner. The Company's
environmental legal counsel has no information concerning this facility nor has
the Company received a request for information concerning its activities there.
The Company's legal environmental counsel cannot assess at this time what the
impact of the EPA study of the site would be, if any, on the Company's liability
nor when the EPA would complete is assessment. 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.
Amounts expensed for environmental expenses were $0.00 for the quarter ended May
31, 1996 as compared with $1,000 for the quarter ended May 31, 1995. However,
$3,000 was paid from the accrual to an escrow account for the Department of
Environmental Regulation.
7. REVERSE STOCK SPLIT:
On September 28, 1993, the Board of Directors of the Company declared a
one-for-ten reverse split of the Company's common stock which became effective
October 12, 1993.
20
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying condensed consolidated
financial statements.
INTRODUCTION:
This report contains forward-looking statements which are based largely on the
Company's expectations and are subject to a number of risks and uncertainties,
many of which are beyond the Company's control. Actual results could differ
materially from these forward-looking statements as a result of various factors.
In light of these risks and uncertainties, there can be no assurances that the
forward-looking information will in fact occur.
In January, 1992, as a result of losses and liquidity deficiencies, the Company
and its wholly-owned subsidiary, Solitron Specialty Products, Inc. (f/k/a
Solitron Microwave, Inc.), filed voluntary petitions for relief under Chapter 11
of the Bankruptcy Code. On August 20, 1993, the Bankruptcy Court entered an
Order of Confirmation confirming the Company's Plan of Reorganization and on
August 30, 1993, the Plan of Reorganization became effective and the Company
emerged from bankruptcy.
LIQUIDITY AND CAPITAL RESOURCES
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 our products, significant non-recurring expenses associated
with the reorganization proceedings, and the Company's inability to obtain
additional working capital through the sale of debt or equity securities or the
sale of non-operating assets.
During the pendency of the Bankruptcy Proceedings, all secured and unsecured
claims against and indebtedness of the Company (including accrued and unpaid
interest) were stayed in accordance with the Bankruptcy Code while the Company
continued its operations as a debtor-in-possession, subject to the control and
supervision of the Bankruptcy Court. Because these stays limit cash outflow, the
Company, during the pendency of the Bankruptcy Proceedings, realized positive
cash flow from ongoing operations. Since the Company emerged from Chapter 11, it
has experienced a positive cash flow from recurring operations; however, overall
cash flow has been negative due primarily to the necessity to make payments of
administrative expenses and unsecured debt payouts arising in connection with
the Bankruptcy Proceedings. The foregoing resulted in a decrease in cash and
cash equivalents since emergence from Chapter 11.
After giving effect to the Plan of Reorganization, the Company's outstanding
liabilities at August 31, 1993, were reduced from approximately $32,069,000 to
approximately $6,760,000 and the Company's accumulated deficit was eliminated
with a corresponding charge to additional paid in capital.
21
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Company has incurred a net income of $20,000 and operating income of $71,000
for the quarter ended May 31, 1996 and has significant obligations arising from
settlements in connection with its bankruptcy necessitating it to make
substantial cash payments which cannot be supported by the current level of
operations.
The Company has projected that it will 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 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 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.
At May 31, 1996, February 29, 1996 and May 31, 1995 respectively, the Company
had cash and cash equivalents of $426,000 (which includes no restricted cash),
$364,000 (which includes no restricted cash) and $597,000 (which included
$394,000 restricted cash for rent and administrative claims in connection with
the Bankruptcy Proceedings). The principal cash change from year to year was due
to the RTC settlement. The principal change for the three months ended May 31,
1996 was due payment scheduling.
At May 31, 1996, the Company had working capital of $1,502,000 as compared with
a working capital at May 31, 1995 of $1,175,000. The increase was due primarily
to decreases in current liabilities which more than offset the small increase in
current assets. Current assets increased in accounts receivables, inventories
and prepaid expenses, and decreased in cash (principally as a result of the
settlement of the Company's claim against its former landlord and the payment in
cash settlement in connection therewith for which cash has been restricted on
the Company's balance sheet and the amounts due from Vector. The major cash
change was due to the RTC settlement. At February 29, 1996, the Company has
working capital of $1,451,000. The change for the three months ended May 31,
1996 was due primarily to an increase in cash.
Pursuant to the Plan of Reorganization, beginning in approximately May 1995, the
Company was required to begin making quarterly payments to holders of unsecured
claims until they receive 35% of their claims. However, due to negotiations
between the parties, the unsecured creditors agreed to a one month deferment of
this payment (for more discussion see Management's Discussion and Analysis). To
date, these negotiations have not been completed and while they are in progress,
the
22
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Company made six of its proposed distributions to the unsecured creditors who
have accepted the payments. These payments to unsecured creditors in the
aggregate amount of approximately $43,085 covered the period March 1, 1995
through May 31, 1996 of approximately $307,256 as 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., it is presently estimated that there are an
aggregate of approximately $7,095,252 unsecured claim and, accordingly, that the
Company is required to pay approximately $3,483,338 (i.e., 35% of $7,095,252) to
holders of allowed unsecured claims in quarterly installments of approximately
$62,083. The Company has proposed to its unsecured creditors that it make
quarterly payments of $9,000. As of May 31, 1996, of $307,256 due the Company
paid to the unsecured creditors $43,805. The Company carries its debt to its
unsecured creditors as $107,000 in short-term debt and $1,302,000 as long-term
debt. The aggregate and monthly payments to unsecured creditors increases and
decreases in proportion to $10,000 per month per $3.5 million in allowed claims,
subject to a maximum quarterly payment of $105,000. These payments and the
aggregate amounts thereof would also increase proportionately in the event of a
default by the Company in its obligations to Ellco Leasing Corporation
("Ellco").
The Company received a claim by an estate owning property northwest and across
Cove Road from the Port Salerno property. The estate has asserted that the
mailing address to which the bankruptcy notice was sent was in error. The estate
has been advised that public water has been made available to the property and
that the Company is prepared to settle for the sum of $10,000, to be paid as
other unsecured creditor claims are being paid. Counsel is now handling such
negotiations.
During fiscal year 1995, the Company's environmental legal counsel determined
that the Environmental Protection Agency the ("EPA") was reassessing all prior
Comprehensive Environmental Response, Compensation and Liability Information
System sites for National Priority Ranking using the newly adopted ranking
formula. The Company's facilities at Riviera Beach and Port Salerno were the
subject of such reassessment. After conducting a series of meetings with the
State Department of Environmental Protection (the "DEP") and with Region IV EPA
officials, the DEP requested that the Riviera Beach site be taken out of the
reassessment priority process and, pursuant to both that request and the
Company's request, Region IV EPA, according to the responsible DEP official,
took both sites out of the reevaluation process and deferred informally further
action pending the Company's complying with the requirements of the Consent
Final Judgment that it had entered with the Florida Department of Environmental
Protection in accordance with its Plan of Reorganization. The Company's former
facility in Jupiter, Florida (which was sold in 1982) has been the subject of a
preliminary assessment by the EPA during calendar year 1995. The EPA has
requested site access from the current owner. The Company's environmental legal
counsel has no information concerning the Jupiter facility nor has the Company
received any request for information. The Company and its environmental legal
counsel cannot assess at this time what the impact of the EPA study will be, if
any, on the Company's liability nor when the EPA will complete its study. For a
further description of the Company's significant environmental problems, refer
to "Item 1 - Business - Bankruptcy Proceedings" and to Note 12 of the
accompanying Consolidated Financial Statements.
23
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 $1,066,000, will be payable from the
proceeds of the sale or lease of these properties. The Company is required to
escrow the following amounts on a monthly basis beginning on the 25-month
anniversary of the Effective Date of the Plan of Reorganization to ensure the
remediation of these properties in the event the properties are not sold or
leased: (i) year 1 - $60,000; (ii) year 2 - $90,000; (iii) year 3 - $120,000;
and (iv) $120,000 per year thereafter until remediation is completed. Any excess
of such sale and lease proceeds and such escrows over the cost of assessment and
remediation shall be returned to the Company. As part of these requirements, the
Company performed soil remediation assessment at both facilities. These tests
indicated that no soil remediation is required at the Port Salerno and Old
Riviera Beach facilities. DEP has concurred that no further soil remediation is
required at either property. For details see the Company's Plan of
Reorganization and Consent Final Judgment with the Department of Environmental
Protection. 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, 1996, of the $40,000 due in
accordance with the Plan, the Company deposited $8,000 into the escrow account.
The proceeds of the sale of the New Riviera Beach Facility would be used to: (1)
pay for all outstanding real estate taxes; (2) real estate commissions; (3)
legal fees; (4) all miscellaneous costs associated with the sale (i.e., stamps,
title insurance, etc.) and (5) cost of relocating equipment and material
currently stored in the facility. The Company would like to sell the New Riviera
Beach facility in such a manner that the buyer would will assume the Company's
obligation to perform the cleanup and will provide the Company with a suitable
performance bond to guarantee that the cleanup will be done appropriately or the
remaining funds (approximately $410,000-$430,000) will be deposited in the New
Riviera Beach environmental escrow account. The Company is then required to
perform the clean-up with funds available in the escrow account. Should the cost
of clean-up exceed the escrowed amount, the Company will be required to pay any
additional funds in accordance with the Consent Final Judgment (see Consent
Final Judgment).
On April 17, 1995, the Company entered into an agreement to sell the Old Riviera
Beach Facility for $850,000 and accordingly, has wrote down this asset by
$1,140,000 to $760,000 which represented the sales price less costs to dispose
of the property. (This contract has since been terminated.) The Port Salerno
property was written down by $665,000 to $985,000, which is Management's
estimate of its net realizable value based upon appraisal information and the
proposed fiscal year 1995 contract for sale of the Riviera Beach Facility. These
writedowns are reflected in the February 28, 1995 statement. Management is
hopeful that both properties can be sold at no cash flow impact to the Company.
See Note 13 for discussion of environmental matters related to the Company's
non-operating plant facilities.
24
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Company is required to pay an equipment lessor (Ellco) $255,000 plus
interest at six percent per annum in monthly payments over a four-year period
beginning on the Effective Date in satisfaction of an allowed claim amounting to
approximately $1,214,000. These monthly payments escalate from $3,500 to $6,000
during such four-year term. Ellco has been granted a security interest in
certain of the Company's equipment to collateralize such obligations. In the
event of any default by the Company, Ellco would have an unsecured claim
amounting to 35% of the original amount due less payments made to the date of
the default. Additionally, Ellco would be entitled to certain amounts pursuant
to a profit participation payable to unsecured creditors and a pro rata share of
the common stock issuable to unsecured creditors pursuant to the Plan. As of May
31, 1996, the Company had paid Ellco $173,000 meeting all of its then current
obligations to Ellco.
Pursuant to the Plan of Reorganization, beginning on the date the Company's net
after tax income exceeds $500,000, the Company will be required to pay certain
pre-petition creditors 10% of net after tax income until the tenth anniversary
of the Effective Date, up to a maximum aggregate of $3,000,000 in such payments.
Further, the Company's lease payments (less sublease payments from Vector) for
its facilities in West Palm Beach, Florida will increase each year from
approximately $255,000 during the current fiscal year in accordance with
specified cost of living increases (which shall be no less than 3% nor more than
5% per year).
The Company has 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 (to the Internal Revenue Service, Palm Beach County, Florida
and Martin County, Florida), estimated at approximately $1,750,000 (which amount
is accrued in the accompanying financial statements including interest). The
Company is required to make quarterly payments of allowed tax claims to Palm
Beach County according to the following schedules: $37,000 per quarter for two
years beginning in the second quarter of 1994; and approximately $82,000 per
quarter for the twelve quarters thereafter. The Company is required to make
quarterly payments of allowed tax claims to Martin County of approximately
$4,000 for a period of approximately four years beginning in approximately
October 1994. The allowed tax claims payable to the IRS was determined in
January 1995 to be $401,000. At May 31, 1996, such amounts include accrued
interest totalling $417,000. The Company is required to make payments of allowed
tax claims to the IRS of no more than approximately $21,000 per quarter
beginning in approximately April 1995 and ending approximately January 2001. The
Company is now negotiating with the IRS, Palm Beach County and Martin County to
modify these payment plans. The following table indicates the approximate
cumulative status of amounts due under Court Plans a of May 31, 1996:
DUE PAID
======= =======
Martin County $ 28,000 $ 7,957
Palm Beach County 296,000 168,509
IRS 105,000 --
25
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Based upon (i) Management's best information as to current national defense
priorities, future defense programs, as well as Management's expectations as to
future defense spending; (ii) the market trends signaling an end to the price
erosion; and (iii) a continual lack of foreign competition in the defense and
aerospace market, the Company believes that its operations will continue to
generate sufficient cash to satisfy its operating needs over the next 12 months.
However, based on these factors and at the current bookings, prices, profit
margins and sales levels, the Company will not generate sufficient cash to
satisfy its operating needs and its obligations to pre-bankruptcy creditors in
accordance with the Plan. Thus, it is in negotiations with all claim holders to
reschedule these payments. In the event the Company is unable to restructure its
obligations to pre-bankruptcy claimants, the Company has a contingency plan to
further reduce its size and thereby reduce its cost of operations within certain
limitations. Over the long-term, the Company believes that, if the volume and
prices of product sales continues as presently anticipated, that the Company
will generate sufficient cash from operations to sustain operations. In the
event that bookings in the long-term decline significantly below the level
experienced since emerging from Chapter 11, the Company may be required to
implement further cost-cutting or other downsizing measures to continue its
business operations. Such cost-cutting measures could inhibit future growth
prospects. In addition, the Company is pursuing additional sources of financing.
There is no assurance that financing will be available in amounts or upon terms
satisfactory to the Company. Further, in appropriate situations, the Company may
seek strategic alliances, joint ventures, with others or acquisitions in order
to maximize marketing potential and utilization of existing resources and
provide further opportunities for growth.
Pursuant to the Plan, beginning approximately May 1995, and following the
settlement with the State of California and the acquisition of the unsecured
claim of Argo Partners, Inc., the Company was required to make quarterly
payments to holders of unsecured claims at the rate of $20,444 per month until
approximately $2,504,338 is paid to unsecured creditors. This amount can
increase up to a $35,000 per month cap to the extent the Company defaults on its
payment obligations to Ellco. The amount increases and decreases in proportion
to $10,000 per month per $3.5 million in allowed claims. The Company is
renegotiating with its unsecured creditors to modify these payment requirements.
However, due to negotiations between the parties, the unsecured creditors agreed
to a one month deferment of this payment (for more discussion see Management's
Discussion and Analysis). To date, these negotiations have not been completed
and while they are in process, the Company has made six of its proposed
distributions in the aggregate amount of approximately $43,085 to the unsecured
creditors who have accepted payments. These payments cover the period March 1,
1995 through May 31, 1996. The Company has proposed to its unsecured creditors
that it make quarterly payments of $9,000.
26
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS-THREE MONTHS ENDED MAY 31, 1996:
Net sales for the three months ended May 31, 1996 increased 5.5% to $1,730,000
as compared to $1,640,000 for the three months ended May 31, 1995. The variance
in net sales reflects an increase in customer demand. The Company's backlog
increased 2.3% for the three months ended May 31, 1996 as compared to an
increase of 5.8% for the three months ended May 31, 1995. Gross margins
increased from 15.7% for the three months ended May 31, 1995 to 19.4% for the
three months ended May 31, 1996 as compared to the previous period resulting
from slightly higher product yields.
During the three months ending May 31, 1996, the Company shipped 388,672 units
as compared with 766,420 units shipped during the three months ending May 31,
1995. The Company manufactures a wide variety of products with an average sale
price ranging from less than one dollar to several hundred dollars. Therefore,
periodic variations in the number of units shipped may not be a true indicator
of the Company's performance.
Selling, general and administrative expenses decreased from $347,000 for the
three months ended May 31, 1995 to $264,000 for the three months ended May 31,
1996. During the three months ending May 31, 1996 selling, general and
administrative expenses as a percentage of sales was 15.28% as compared with
21.15% for the three months ending May 31, 1995. The decrease was due primarily
to decreases in commissions, legal and professional fees, recruiting and copier
costs.
The Company recorded net other expense of $51,000 for the three months ended May
31, 1996 versus net other expense of $18,000 for the three months ended May 31,
1995. The variance was due primarily to an increase in the booking of imputed
interest of $37,000.
Net income for the three months ended May 31, 1996 increased to $20,000 from a
loss of ($107,000) for the three months ended May 31, 1995. The major
contributing factors to this turnaround were selling and G&A expenses, materials
and direct labor. These favorable impacts were slightly offset by a small
overhead variance and the booking of $37,000 of imputed interest.
27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
Other than the Bankruptcy Proceedings (as described in "Item 1. - Business") and
the following matters, The Company is not aware of any other significant legal
proceedings to which it is a party.
The Company is now engaged in a dispute with its new landlord with regards to
each party's obligation in connection with the lease. The Company has filed a
motion with the District Court to clarify the lease. Both parties are
negotiating an out of court settlement.
INTERNAL REVENUE SERVICE TAX CLAIM
The Internal Revenue Service ("IRS") audited the Company's income tax returns
for the years 1980-1989. The Company appealed the IRS' original audit results.
During January 1995, the tax claim was determined to be $401,000 which is
included in the Company's financial statement as an accrual for the entire
amount plus interest. At May 31, 1996, such amounts include accrued interest
totalling $417,000. The IRS' tax claim is subject to payment within six years
from January 1995. The Company is negotiating with the IRS to reschedule this
stream of payments.
STATE OF CALIFORNIA TAX CLAIM
On November 23, 1992, the State of California filed a claim asserting that the
Company owes the State of California approximately $900,000 for income taxes for
years prior to 1982. On November 30, 1995, this claim was settled for
approximately $680,000. As required by the Plan of Reorganization, this claim is
being treated as an unsecured claim. Accordingly, the liability representing 35%
of these claims was adjusted by approximately $220,000. In accordance with the
Plan of Reorganization, approximately 66,854 shares of stock have been issued to
the State of California during April 1996 in satisfaction of such $680,000
claim.
ENVIRONMENTAL CLAIM REGARDING PORT SALERNO
The Company received a claim by an estate owning property northwest and across
Cove Road from the Port Salerno property. The estate has asserted that the
mailing address to which the bankruptcy notice was sent was in error. The estate
has been advised that public water has been made available to the property and
that the Company is prepared to settle for the allowance of a generally
unsecured claim in the amount of $10,000.
Environmental counsel is now handling such negotiation.
BUYOUT OF ARGO PARTNERS' CLAIM
On December 15, 1995, the Company and Argo Partners, Inc. an unsecured creditor
have reached an agreement under which Solitron Devices, Inc. has acquired Argo
Partners' unsecured debt of $694,834 (which was carried as an obligation of
approximately $140,037) for $40,000 as complete settlement. Prior to the
acquisition, Argo Partners received payment of approximately $3,160 from the
Company as part of several distributions to unsecured creditors. Thus, Solitron
Devices, Inc. recognized in December 1995 and extraordinary gain of
approximately $96,877.
28
PART II - OTHER INFORMATION
(CONTINUED)
RESOLUTION TRUST CORPORATION (COMPANY'S FORMER LANDLORD)
In June, 1995, the Company filed a Motion in Federal Court to compel RTC for
specific performance for the repair of the roof and HVAC system and for damages.
The Company settled its dispute with the RTC out of Court on December 15, 1995.
Under the terms of the settlement, the Company and S/V Microwave Products, Inc.
paid the RTC $325,000 in complete settlement of all the then outstanding rent.
The Company has expended approximately $139,000 in legal expenses before
settlement has been reached. As a result of the settlement with the RTC, the
Company netted a reduction in rent of approximately $239,000 ($563,066 was
Solitron's share of back rent less $185,000 it paid in settlement less
approximately $138,845 expended for legal and professional fees). In December
1995 a reclassification was made from operating expenses to other expenses of
approximately $104,000 for the current year expenses pertaining to the RTC
claim; and an extraordinary gain of approximately $264,000 was recorded due to
the settlement.
TECHNOLOGY PLACE, INC. (CURRENT LANDLORD)
The Company is now engaged in a dispute with its new landlord with regards to
each party's obligation in connection with the lease. The Company has filed a
motion with the District Court to clarify the lease. Both parties are
negotiating an out of court settlement.
ITEM 2.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Part 1.
ITEM 4.
None.
ITEM 5.
On December 15, 1995 the Company and Argo Partners, Inc., an unsecured creditor
have reached an agreement under which Solitron Devices, Inc., acquired Argo
Partners' unsecured debt of $694,834 (which was carried as an obligation of
approximately $140,037) for $40,000 as complete settlement. Prior to the
acquisition, Argo Partners received payment of approximately $3,160 from the
Company as part of several distributions to unsecured creditors. Thus, Solitron,
Devices, Inc., recognized in December 1995 and extraordinary gain of
approximately $96,877.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EX.27 Financial Data Schedule (for SEC use only).
No reports on Form 8-K were filed by the Company during the quarter ended May
31, 1996.
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned as a duly authorized officer of the Registrant.
SOLITRON DEVICES, INC.
/s/ SHEVACH SARAF
-------------------------
SHEVACH SARAF
CHAIRMAN, CEO & PRESIDENT
Dated: July 12 , 1996
30