SECURITIES & EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission file number 1-4978
SOLITRON DEVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-1684144
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
3301 ELECTRONICS WAY, WEST PALM BEACH, FLORIDA 33407
----------------------------------------------------
(Address of principal executive offices)
(561) 848-4311
---------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to filing requirements for the past 90 days. Yes X No ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes X No ______
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 2,243,783.
SOLITRON DEVICES, INC.
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheet - August 31, 1998
Condensed Consolidated Statements of Operations --
Three Months and Six Months Ended August 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows --
Six Months Ended August 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements: Pages 4 - 16
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Pages 17 - 22
3
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
------
AUGUST 31, 1998
---------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 662,000
Accounts receivable, less allowance
for doubtful accounts of $34,000 1,054,000
Inventories 2,463,000
Prepaid expenses and other current assets 135,000
Due from Vector 35,000
------------
Total current assets $ 4,349,000
PROPERTY, PLANT AND EQUIPMENT, net 557,000
NON-OPERATING PLANT FACILITIES 1,745,000
OTHER ASSETS 82,000
------------
$ 6,733,000
============
The accompanying notes are an integral part
of these condensed financial statements
4
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7,000
Current portion of accrued environmental expenses 360,000
Accounts payable - Post petition 219,000
Accounts payable - Pre-petition, current portion 83,000
Accrued expenses 2,366,000
Accrued Chapter 11 administrative expense 51,000
--------------
Total current liabilities $ 3,086,000
LONG-TERM DEBT, less current maturities 10,000
OTHER LONG-TERM LIABILITIES 2,536,000
--------------
TOTAL LIABILITIES $ 5,632,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized 500,000 shares,
0 shares issued and outstanding -0-
Common stock $.01 par value,
authorized 10,000,000 shares,
issued and outstanding 1,977,000 20,000
Additional paid-in capital 2,618,000
Accumulated deficit (1,537,000)
--------------
Total shareholder equity 1,101,000
--------------
$ 6,733,000
==============
The accompanying notes are an integral part
of these condensed financial statements
5
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED AUGUST 31, SIX MONTHS ENDED AUGUST 31,
1998 1997 1998 1997
---- ---- ---- ----
NET SALES $ 1,987,000 $ 1,948,000 $ 4,090,000 $ 3,836,000
Cost of sales 1,523,000 1,559,000 3,077,000 3,085,000
----------- ------------ ----------- -----------
Gross Profit 464,000 389,000 1,013,000 751,000
Selling, general and
administrative expenses 315,000 289,000 652,000 558,000
----------- ------------ ----------- -----------
Operating income 149,000 100,000 361,000 193,000
----------- ------------ ----------- -----------
OTHER INCOME (EXPENSE):
Other income 13,000 11,000 22,000 26,000
Interest expense (140,000) (62,000) (229,000) (129,000)
Other (5,000) (11,000) (17,000) (21,000)
----------- ------------ ----------- -----------
Net other expense (132,000) (62,000) (224,000) (124,000)
----------- ------------ ----------- -----------
Net income $ 17,000 $ 38,000 $ 137,000 $ 69,000
=========== ============ =========== ===========
INCOME PER SHARE: $ .01 $ .02 $ .06 $ .03
WEIGHTED AVERAGE
SHARES OUTSTANDING 2,244,000 2,138,000 2,244,000 2,138,000
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
(UNAUDITED)
SIX MONTHS ENDED AUGUST 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit $ 137,000 $ 69,000
---------- ----------
Adjustments to reconcile net loss to
Net cash used in operating activities:
Depreciation and amortization 106,000 111,000
Provision for doubtful accounts -0- 7,000
(Increase) decrease in account receivable 43,000 (10,000)
(Increase) decrease in inventories 30,000 (33,000)
(Increase) in prepaid expenses
and other current assets (17,000) (42,000)
Decrease in due from
S/V Microwave Products, Inc. 34,000 32,000
Increase (decrease) in accounts payable (128,000) (116,000)
Increase (decrease) (in accrued expenses
and other liabilities (121,000) 109,000
Increase (decrease) in accrued Chapter 11
administrative expenses 16,000 (10,000)
---------- ----------
Total adjustments (37,000) 48,000
---------- ----------
Net cash generated in operating activities 100,000 117,000
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from the disposal of assets, additions
to property, plant and equipment (84,000) (41,000)
---------- ----------
Net Cash used in investing activities (84,000) (41,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (4,000) (49,000)
---------- ----------
Net cash used in financing activities (4,000) (49,000)
---------- ----------
NET INCREASE (DECREASE) IN CASH 12,000 27,000
CASH AT BEGINNING OF PERIOD $ 650,000 $ 537,000
---------- ----------
CASH AT END OF PERIOD $ 662,000 $ 564,000
========== ==========
Supplemental cash flow disclosure: Interest paid during the six months ended
August 31, 1998 and 1997 was approximately $229,00 and 129,000 respectively.
The accompanying notes are an integral part
of these condensed consolidated financial statements
7
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
statement of the results for the interim period.
The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-QSB. Pursuant to such rules and
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted.
The information contained in this Form 10-QSB should be read in conjunction with
the Notes to Consolidated Financial Statements appearing in the Company's Annual
Report on Form 10-KSB for the year ended February 28, 1998.
The results of operations for the three- and six-month periods ended May 31,
1998 and August 31, 1998 respectively are not necessarily indicative of the
results to be expected for the year ended February 28, 1999.
As previously noted in documents filed with the SEC, on August 20, 1993, the
United States Bankruptcy Court for the Southern District of Florida (the
"Bankruptcy Court") entered an Order (the "Order of Confirmation") confirming
the Company's Fourth Amended Plan of Reorganization, as modified by the
Company's First Modification of Fourth Amended Plan of Reorganization (the "Plan
of Reorganization"). The Plan became effective on August 30, 1993 (the
"Effective Date"). On July 12, 1996, the Bankruptcy Court officially closed the
case.
Additionally, the following actions or events have taken or will take place
pursuant to the Plan of Reorganization:
(a) Pursuant to the Plan of Reorganization, which began in May 1995, the
Company is required to begin making quarterly payments to holders of unsecured
claims until they receive 35% of their claims. The Company continues to
negotiate with its unsecured creditors to reduce its quarterly payment
obligations and has proposed to those creditors that it make reduced quarterly
payments of approximately $9,000. Following discussion with the unsecured
creditors committee, the Company agreed to increase the level of such payments
to approximately $11,000 per quarter starting August 1997. Starting August
1998, the Company agreed to increase the level of such payment to $14,000 per
quarter. The Company has made 14 reduced payments plus one increased payment to
its unsecured creditors. As of August 31, 1998, the Company has paid
approximately $127,810 to its unsecured creditors, as opposed to the $931,245
called for under the Company's Plan of Reorganization. To date, the Company's
unsecured creditors have accepted all such reduced payments, though no
assurances can be made that they will continue to do so in the future or that
the Company's negotiation with its unsecured creditors will be successful.
8
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(b) The Company is now negotiating with Honeywell, the former owner of the
Riviera Beach property, on a proposed site access and cleanup agreement under
which Honeywell will undertake the responsibility for the environmental cleanup
in exchange for a Site Access Agreement and a payment by the purchaser to
Honeywell to be made at the time of closing of a proposed sale of the property.
EPA is proceeding to place the property on the National Priority List (NPL) and
assuming jurisdiction over the cleanup. Honeywell is now negotiating with EPA in
order to complete an appropriate Administrative Order on Consent that will
govern its cleanup activities.
(c) On June 19, 1998, the Company received a Letter of Intent to purchase the
Riviera Beach facility from Ruckman Properties, Inc., the current owner and
developer of the property located at the rear of the Company's facility at
Riviera Beach. Since that time, Ruckman Properties, Inc. has submitted a
contract to purchase the property subject to the following provisions.
Under the terms of the proposed property purchase agreement, Ruckman properties
will assume all of the Company's outstanding real estate tax obligations with
respect to this property of approximately $560,000, as well as real estate
broker commission of approximately $45,000, and the Company's legal fees
associated with the sale of the aforementioned facility of approximately
$100,000. Ruckman Properties will also be responsible for all closing costs
traditionally paid by the seller.
Under the proposed new agreement, Ruckman Properties would pay Honeywell
$250,000 at the time of closing to cover the Company's cleanup obligations with
respect to this property. This agreement will require Honeywell's consent that
the agreed upon sum covers the Company's total cleanup obligations and Honeywell
will be responsible to complete the cleanup of this property. Honeywell has made
a counter-offer of $350,000. Thus, the agreement is subject to further
negotiations.
At the conclusion of such transaction, the Company expects to receive a
complete release of all of its obligations associated with the Riviera Beach
facility. While all parties expressed interest to complete such agreement, there
can be no assurance that such transaction will be completed.
9
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(d) As disclosed in documents filed previously with the Securities and Exchange
Commission, the Company is negotiating with various taxing authorities
(including the Internal Revenue Service [IRS], Palm Beach County, Florida, and
Martin County, Florida) to restructure its payment obligations for various back
taxes. While these negotiations are pending, the Company has, in some cases,
been making reduced payments to those taxing authorities. The following table
indicates the approximate cumulative status of amounts due under Court Plans as
of August 31, 1998:
DUE PAID
------------- -----------
Martin County $ 72,000 $ 8,000
Palm Beach County 1,034,000 332,000
IRS 294,000 17,000
For the years since bankruptcy, additional taxes have become delinquent with
Martin and Palm Beach Counties in approximately the following amounts
respectively, $4,000 and $82,000.
To date, no objections to have been raised to the amounts of the Company's
payments to these taxing authorities, though no assurances can be made that such
an objection will not be raised in the future concerning the Company's
obligations to those taxing authorities or that any of the Company's
negotiations to restructure its payment obligations will be successful.
2. FINANCIAL CONDITION:
Although the Company has recorded a small amount of net income and net income
from operations during each of the last two fiscal years, in recent years the
Company generally experienced losses from operations and severe cash shortages
caused by a significant decline in both sales and open order backlog, declining
average sale prices, and decreased margins on products sold (which is
characteristic in the Company's industry), significant non-recurring expenses
associated with the Company's bankruptcy proceedings, and the Company's
inability to obtain additional working capital through the sale of debt or
equity securities or the sale of non-operating assets.
From when the Company emerged from Chapter 11 on August 30, 1993 through the
fiscal year ended February 28, 1996, the Company generally experienced a
positive cash flow from recurring operations; however, overall cash flow was
negative due primarily to the necessity to make payments of administrative
expenses and required payouts arising in connection with the bankruptcy
proceedings. The foregoing resulted in a decrease in cash and cash equivalents
following the Company's emergence from Chapter 11. During the fiscal years ended
February 28, 1997 and February 28, 1998 and in the quarters thereafter, the
Company has recorded net income from operations.
10
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the six months ended August 31, 1998, the Company's book-to-bill ratio
was approximately 1.03, reflecting a slowdown in the demand for the Company's
products and a lower average unit sale price. It is believed that such slowdown
in the intake of orders has been the general experience of most semiconductor
manufacturers who participate in the same market as the Company. The Company
continued implementing steps intended to reduce its variable manufacturing cost
to offset the impact of lower average sale price. However, should order intake
continue to decline, the Company may be required to implement further
cost-cutting or other downsizing measures to continue its business operations.
The Company's liquidity continues to be adversely effected by significant
non-recurring expenses associated with the Company's pre-petition obligations,
and the Company's inability to obtain additional working capital through the
sale of debt or equity securities or the sale of non-operating assets.
The Company currently believes, based on information available to it, that its
operations will continue to generate sufficient cash to satisfy its operating
needs over the next 12 months. However, based on the Company's current bookings,
prices, profit margins and sales levels, the Company does not believe it will
generate sufficient cash to satisfy its operating needs and its obligations to
pre-bankruptcy creditors in accordance with the Plan of Reorganization. Thus,
the Company is in negotiations with all such claim holders to reschedule the
Company's payments. In the event the Company is unable to restructure its
obligations to pre-bankruptcy claimants, the Company will be required to further
reduce its size and reduce its cost of operations. However, over the long term,
the Company believes that if the volume and prices of its product sales continue
as presently anticipated, it will, subject to the continued deferral of certain
obligations, generate sufficient cash from operations to sustain its current
operations. In the event that sales decline significantly below the current
level experienced by the Company, the Company may be required to implement
further cost-cutting or other downsizing measures to continue its business
operations. Although the Company is pursuing additional sources of financing,
there can be no assurance that financing will be available in amounts or upon
terms sufficient to meet the Company's needs. However, in appropriate
situations, the Company may seek strategic alliances, joint ventures with
others, or acquisitions in order to maximize the Company's marketing potential,
its utilization of existing resources, and to provide further opportunities for
growth.
3. ENVIRONMENTAL MATTERS:
While the Company believes that it has the environmental permits necessary to
conduct its business and that its operations conform to present environmental
regulations, increased public attention has been focused on the environmental
impact of semiconductor operations. The Company, in the conduct of its
manufacturing operations, has handled and does handle materials that are
considered hazardous, toxic or volatile under federal, state, and local laws
and, therefore, is subject to regulations related to their use, storage,
discharge, and disposal. No assurance can be made that the risk of accidental
release of such materials can be completely eliminated. In the event of a
violation of environmental laws, the Company could be held liable for damages
and the
11
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. Nonetheless, the Company's policies require
strict compliance with such laws and it has a policy of prompt addressment of
accidental spills.
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 such laws, or that the operations, business, or financial
condition of the Company will not be materially adversely affected by current or
future environmental laws or regulations.
The Order of Confirmation (the "Confirmation Order") approving the Company's
Amended Plan of Reorganization with First Modification (the "Plan) was issued by
the Bankruptcy Court on August 19, 1993 (the "Confirmation Date"), and provided
a plan for future remediation of the two properties of the Company. One property
is Lot 1 (the north parcel) of the property at 1177 Blue Heron Road in the City
of Riviera Beach, and the second is its former Port Salerno facility, S.E. Cove
Road, Port Salerno, Martin County, Florida.
Contemporaneously with the confirmation Order, the Company and the State of
Florida Department of Environmental Protection (the "DEP") entered into a
Stipulation for entry of a Consent Final 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, provides that
the Company would: (a) reimburse the DEP $200,000 for providing main and lateral
water line extensions and property hookups to serve eight off-site properties
presently impacted by the groundwater contamination emanating from the Port
Salerno Site (paid as an administrative expense in accordance with the
Confirmation Order); (b) remediate site soils and groundwater at and emanating
from the Port Salerno site; (c) address residual soil contamination and a
limited, defined "hot spot" in the groundwater at and near the north end of the
Riviera Beach property; and (d) pay a final judgment of $102,860.57 to be paid
to the DEP pursuant to the Plan in the manner and to the extent of the Company's
payment of other unsecured creditor claims.
Pursuant to the Confirmation Order, all existing security interests on these two
properties, except real estate taxes, were removed. The properties were
appraised by an MAI appraiser, as if uncontaminated, at $1,950,000 for Riviera
Beach and $1,650,000 for Port Salerno. Under the Plan and the Consent Final
Judgment, the Company was 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 placed in escrow for that purpose.
Any excess funds after all escrow obligations are satisfied would belong to the
Company.
12
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's consultant has estimated the costs of remediation to be
approximately $727,000 for the Port Salerno property and $356,000 for the
Riviera Beach property if performed pursuant to the Consent Final Judgment.
Because EPA now asserted jurisdiction of both sites, the remediation costs are
likely to be more. But with reference to the Riviera Beach site, the Company may
not have to incur any cost beyond a proposed payment from sales proceeds of the
property if the pending negotiation for the sale of the Company is consummated.
The amount of the payment is being negotiated between Honeywell's proposal of
$350,000 and the prospective buyer's offer of $250,000.
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 an affected property as
set forth in the Consent Final Judgment. It cannot now be estimated whether some
future extension may be required, but the contaminated groundwater appears to
move slowly and EPA, which is proceeding to remediate the property from
Superfund monies, will utilize off-site recovery wells to contain its further
movement, if needed.
The Company is not required to pay additional funds in excess of the schedule
set forth above, except that if funds are not available in the escrow for that
purpose, the Company must independently fund any further extension of public
water supply lines required in the vicinity of the Port Salerno site. The
Consent Final Judgment requires providing any such extension within a reasonable
time. The prior payment to the state has extended the large water main to
provide service to the area. The further extension would be for lateral
extensions and individual property hookups.
The City of Riviera Beach previously settled its claim with the Company for
cleanup of contamination of its wellfield, except for the "hot spot" to be
addressed by the Company as required by the Consent Final Judgment. The unpaid
balance of the settlement amount with the City was approved in the Confirmation
Order; to be paid as and to the extent provided for other unsecured creditors.
After notice, no other claims were filed in the bankruptcy proceeding related to
offsite groundwater contamination at the Riviera Beach site, and potential
claims may have been extinguished thereby.
If funds to clean the sites were not available within 24 months of entry of the
Consent Final Judgment, the Company, beginning in October 1995, was to make
periodic payments into the escrow to clean both sites based on the following
schedule:
1. Commencing on the 25th month, $5,000 per month, and
2. Commencing on the 37th month, $7,500 per month, and
3. Commencing on the 49th month, $10,000 per month.
4. This periodic funding will be suspended when funds available in escrow
reach 125% of the estimated costs to complete remediation.
13
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the period of October 1995 and October 1996, the Company advised the DEP
that it could pay only $1,000 per month into escrow, rather than the amounts
specified in the Consent Final Judgment. Since then, the Company has paid $1,000
per month in the escrow for its two properties, the total escrow amounts for the
properties as of August 31, 1998 totaling approximately $35,000. The DEP has
acquiesced in this payment level.
However, during 1997, the EPA revisited the need for site evaluation at both
sites and required the Company to sign site access agreements permitting the EPA
to perform expanded site assessments at both sites. During 1998, EPA has
initiated placement of the Port Salerno site on the National Priority List (NPL)
and is proceeding to assess the extent of the contamination. It is expected that
it will proceed to clean the site under Superfund authority and funding.
The Company has now entered into negotiations with the EPA to settle EPA's
prospective cost claim against it that could arise from the costs the EPA incurs
in cleaning the property. There can be no assurance as to the outcome of such
negotiations.
The Company has provided full information of its financial condition and has
advised EPA that except for the value of the Port Salerno property, it has an
inability to pay such claim under the agency's ability to pay guidelines. The
Company has offered to sell its property at its market value and after deducting
its costs including an agreed $50,000 attorneys fees, 5% broker's fee, back
taxes plus interest, and the closing costs, to pay the net proceeds of the sale
in discharge of all EPA claims. EPA has offered to enter into a prospective
purchaser agreement protecting a prospective purchaser from EPA's cost recovery
claim and the regional counsel for the EPA is reviewing the Company's offer.
There is no assurance that it will settle the Company's potential liability at
this time.
In the event the property is not sold on this basis, the Company may have to
await the EPA's completion of its cleanup that is likely to take several years
and then negotiate a settlement of the EPA's cost claim at that time based on
the Company's financial condition at that time. It is the Company's position
that any cost recovery claim by EPA is barred by the Amended Order of
Confirmation in Bankruptcy. Though it had knowledge of DEP's claim in Bankruptcy
and that it likewise had a claim, it did not file a claim, deferring to the
State DEP to file and resolve the future requirements for remediation.
14
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At Riviera Beach, Honeywell, Inc. is the predecessor owner and operator of the
facility during a period when pollution occurred, and it is jointly and
severally liable therefor to the EPA. The Company has been informed by Honeywell
that it intends to enter into an administrative Order on Consent with EPA. Under
such consent order, Honeywell will fully perform the cleanup of the Riviera
Beach site.
To sell the Riviera Beach property, the Company needs Honeywell's cooperation
and the Company is negotiating to sell the property to a prospective buyer who
owns the adjacent back property. The net proceeds that would be derived from the
sale, about $250,000, would be paid to Honeywell in exchange for its waiver of
any claims for its cleanup activities against the buyer and the Company. There
can be no assurance as to the outcome of such negotiations.
In all events, the position of the Company is that Honeywell's claim for cleanup
and the potential claim of EPA, if asserted against the Company, are barred by
the Bankruptcy Court Order. For additional discussion about the Company's effort
to sell the Riviera Beach facility see "Notes to Condensed Consolidated
Financial Statements (c)".
The Company's former facility in Jupiter, Florida (which was sold in 1982) was
the subject of a preliminary assessment by the EPA in 1995. The EPA requested
site access from the present owner. The Company's environmental legal counsel
has been advised that this facility is being remediated by the present owner.
The Company is not aware of the status of that remediation and has received no
communication from the present owner. For a further description of the Company's
environmental issues, refer to "Item 1 - Business - Bankruptcy Proceedings" and
to Note 13 of the accompanying Consolidated Financial Statements.
Since the beginning of the fiscal year, the Company has spent approximately
$6,000 for compliance with environmental laws (federal, state and local). As
part of this effort, the Company retained the services of an environmental
consultant who assisted in verifying that the Company operates in compliance
with all pertinent environmental laws and regulations.
15
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's environmental consultants have estimated the costs of remediation
to be approximately $727,000 for the Port Salerno property and $356,000 for the
Old Riviera Beach property. These costs may now increase with EPA's assertion of
jurisdiction. However, Honeywell is about to undertake the Riviera Beach site
cleanup and the Company expects the prospective purchaser of the site and the
Company to settle any potential claims against the Company by Honeywell by
making a lump sum payment to Honeywell from the purchase price in exchange for a
release. Furthermore, it is the position of the Company that Honeywell's
potential claim against the Company is barred by the Bankruptcy proceeding when
Honeywell's claim was resolved. Approximately $1,039,000 has been accrued in the
balance sheet as of August 31, 1998. The Company recorded these liabilities as
$360,000 short-term liabilities and $679,000 long-term liabilities. These
reservations are predicated on cleanup being performed under the existing
Consent Final Judgment, which is no longer directly applicable because of EPA's
assertion of jurisdiction over cleanup of both properties.
The Company is negotiating with EPA for a settlement of the Port Salerno site
potential liability or cleanup costs that EPA may seek to recover against the
Company. The Company is also attempting to sell the property and obtain
protection from EPA for a prospective purchaser. EPA's potential cost recovery
claim cannot be estimated because EPA has not yet conducted the full site and
off-site assessment. However, EPA has incurred about $250,000 in costs to date
according to its regional counsel.
16
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of factors which have affected the
Company's financial position and operating results during the periods included
in the accompanying condensed consolidated financial statements should be read
in conjunction with the Consolidated Financial Statements and the related Notes
to Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-KSB for the year ended February 28, 1998, the Company's
quarterly report on Form 10-QSB for the period ended May 31, 1998, and the
Condensed Consolidated Financial Statements and the related Notes to Condensed
Consolidated Financial Statements included in Item 1 of this Quarterly Report on
Form 10-QSB.
INTRODUCTION:
Except for historical information contained herein, certain matters discussed
herein are forward-looking statements made pursuant to the safe harbor
provisions of the Securities Litigation Reform Act of 1995. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, including but not limited
to, economic, technological, competitive, governmental procurement, regulatory,
strategies, available financing, and other factors discussed elsewhere in this
report and the documents filed by the Company with the SEC. Many of these
factors are beyond the Company's control. Actual results could differ materially
from the forward-looking statements. In light of these risks and uncertainties,
there can be no assurance that the forward-looking information contained in this
report will, in fact, occur.
RESULTS OF OPERATIONS - THREE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE
MONTHS ENDED AUGUST 31, 1997:
Net sales for the three months ended August 31, 1998 increased 2% to $1,987,000
as compared to $1,948,000 for the three months ended August 31, 1997. Such
increase was primarily attributable to existing backlog and the ability to ship
more product in accordance with customer delivery requirements. The Company's
backlog of open orders increased 20.7% for the three months ended August 31,
1998 as compared to a decrease of 19.2% for the three months ended August 31,
1997. Such increase is attributable to higher demand for the Company's product.
Gross margins on the Company's sales increased to 23.35% for the three months
ended August 31, 1998 in comparison to 20% for the three months ended August 31,
1997. This increase is the result of a more favorable product mix change, and a
decrease in the cost of goods sold.
17
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Gross profit for the three months ended August 31, 1998 increased to $464,000
from $389,000 for the three months ended August 31, 1997. This increase is
primarily due to increased sales volume and a decrease in the cost of goods sold
as a percentage of sales.
For the three months ending August 31, 1998, the Company shipped 559,012 units
as compared with 467,278 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 an increase in the level of booking of approximately
63% for the quarter ended August 31, 1998 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, changes to demand for the product, and variance in average
sales price of products sold.
Selling, general, and administrative expenses increased to $315,000 for the
three months ended August 31, 1998 from $289,000 for the comparable period in
1997. During the three months ending August 31, 1998, selling, general, and
administrative expenses as a percentage of sales was 15.85% as compared with
14.83% for the three months ending August 31, 1997. The increase was due
primarily to increased salaries and commissions.
Operating income for the three months ended August 31, 1998 increased to
$149,000 from $100,000 for the three months ended August 31, 1997. This increase
is principally due to an increase in sales volume and a decrease in the cost of
goods sold as percentage of sales, which was partially offset by an increase in
selling, and general and administrative expenses.
The Company recorded a net other expense of $132,000 for the three months ended
August 31, 1998 versus a net other expense of $62,000 for the three months ended
August 31, 1997. This variance was due principally to a significant increase in
the Company's imputed interest expense of $59,000 as compared to $37,000 for the
three months ended August 31, 1998 and August 31, 1997 respectively. Because the
Company will be required to complete making payments of its pre-petition
obligation within 10 years of its discharge from Bankruptcy and because the
Company has not paid these pre-petition obligations as quickly as required by
the Bankruptcy plan, the imputed interest expense has increased and will
continue to increase if the Company continues to pay its pre-petition obligation
more slowly as contemplated by the plan.
Net income for the three months ended August 31, 1998 decreased to $17,000
versus $38,000 for the same period in 1997. The major contributing factor to
this decrease was an increase in the level of imputed interest, which was
partially offset by an increase in operating income.
18
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - SIX MONTHS ENDED AUGUST 31, 1998 COMPARED TO SIX MONTHS
ENDED AUGUST 31, 1997
Net sales for the six months ended August 31, 1998 increased by 6.6% to
$4,090,000 as compared to $3,836,000 for the six months ended August 31, 1997.
The Company's backlog of open orders increased 2.79% for the six months ended
August 31, 1998 as compared to a decrease of 2.8% for the six months ended
August 31, 1997.
Gross margins on the Company's sales increased to 24.76% for the six months
ended August 31, 1998 from 19.57% for the six months ended August 31, 1997. This
increase is the result of a more favorable product mix change, and a decrease in
the cost of goods sold.
Gross profit for the six months ended August 31, 1998 increased to $1,013,000
from $751,000 for the six months ended August 31, 1997. This increase is
primarily due to increased sales volume and a decrease in the cost of goods sold
as a percentage of sales.
For the six months ended August 31, 1998, the Company shipped 1,215,501 units as
compared with 896,051 units shipped during the same period of the prior year.
However, since the Company manufactures a wide variety of products with an
average sale price ranging from less than one dollar to several hundred dollars,
management does not consider such periodic variations in the Company's volume of
units shipped to be a reliable indicator of the Company's performance.
The Company has experienced an increase in the level of bookings of
approximately 18.25% for the six months ended August 31. 1998 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, changes to demand for the product, and
variance in average sales price of products sold.
Selling general and administrative expenses increased to $652,000 for the six
months ended August 31, 1998 from $558,000 for the comparable period in 1997.
During the six months ended August 31, 1998 selling, general and administrative
expenses as a percentage of sales were 15.94% as compared with 14.56 % for the
six months ended August 31, 1997. The increase was due primarily to higher
selling expenses and salary costs including higher sales commissions.
Operating income for the sic months ended August 31, 1998 increased to $361,000
from $193,000 for the six months ended August 31, 1997. This increase is
principally due to an increase in sales volume and a decrease in the cost of
goods sold as percentage of sales, which was partially offset by an increase in
selling, and general and administrative expenses.
19
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company recorded a net other expense of $224,000 for the six months ended
August 31, 1998 versus a net other expense of $124,000 for the six months ended
August 31, 1997. This was principally the result of a significant increase in
the Company's imputed interest expense of $117,000 as compared to $74,000 for
the six months ended August 31, 1998 and August 31, 1997 respectively. Because
the Company will be required to complete making payments of its pre-petition
obligation within 10 years of its discharge from Bankruptcy and because the
Company has not paid these pre-petition obligations as quickly as required by
the Bankruptcy plan, the imputed interest expense has increased and will
continue to increase if the Company continues to pay its pre-petition obligation
more slowly as contemplated by the plan.
Net income for the six months ended August 31, 1998 increased to $137,000 versus
$69,000 for the same period of 1997. The major contributing factor to this
increase was increased level of shipments and decreased cost of goods sold as
percentage of sales, which was partially offset by higher SG&A and higher
imputed interest expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported net income of $137,000 and operating income of $361,000 for
the six months ended August 31, 1998. However, the Company has significant
obligations arising from settlements related to its bankruptcy proceeding which
requires it to make substantial cash payments which cannot be supported by the
Company's current level of operations.
At August 31, 1998, February 28, 1998 and August 31, 1997 respectively, the
Company had cash and cash equivalents of $662,000, $650,000 and $564,000. The
principal cash change from year to year was due primarily to profit from
operations, which was offset by a decrease in inventory and an increase in
accrued expenses.
At August 31, 1998, the Company had working capital of $1,263,000 as compared
with working capital at August 31, 1997 of $1,140,000. At February 28, 1998, the
Company had a working capital of $1,168,000. The approximately $12,000 change
for the six months ended August 31, 1998 was due primarily to an increase in
pre-paid expenses. The from year to year increase was due primarily to a major
shift from long term to short term debt on the Company's liabilities due to Palm
Beach County and DEP.
Pursuant to the Plan or Reorganization, the Company is required to pay an
aggregate of approximately $2,483,338 to holders of allowed unsecured claims in
quarterly installments of approximately $62,083. The Company has proposed to its
unsecured creditors that it reduce its payments to quarterly payments of $9,000.
Following discussions between the Company and the unsecured creditors committee,
the Company agreed to make quarterly payments of $11,000 starting August 1997.
Furthermore, effective August 1998, the Company started making payments of
$14,000 per quarter. As of August 31, 1998, the Company had paid to the
unsecured creditors $127,810 of the $931,245 due. Of amounts owed to unsecured
creditors $83,446 is carried as short-term debt and $1,243,840 is carried as
long-term debt.
20
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, initially estimated at $1,039,000, would be
payable from the proceeds of the sale or lease of these properties. As part of
these requirements, the Company performed soil remediation assessment at both
facilities. These tests indicated that no soil remediation is required at the
Port Salerno and old Riviera Beach facilities and the DEP has concurred that no
further soil remediation is required at either property. The Company is
renegotiating with DEP the terms of the cash payments into the aforementioned
escrow account and, while the negotiations are under way, the Company deposits
$1,000 per month. As of August 31, 1998, the Company had deposited $35,000 of
the $150,000 due in accordance with the Plan into the escrow account. The
Company is seeking satisfaction of this Consent Final Judgment from DEP to
coincide with sales of the properties since EPA's assertion of jurisdiction
overrides the basis for that Judgment. DEP has concurred in EPA's assertion of
jurisdiction, which is inconsistent with its further enforcement of the
obligations of the Consent Final Judgment.
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 net after tax income until August 30, 2003 up to a
maximum aggregate of $3,000,000 in such payments. Further, the Company's lease
payments (less sublease payments from Vector) for its facilities in West Palm
Beach, Florida would increase each year from approximately $255,000 during the
current fiscal year in accordance with specified cost of living increases of not
more than 5% per year.
The Company has satisfied all of the allowed administrative claims and allowed
wage claims under the Plan of Reorganization. The Company is required to pay
allowed tax claims estimated at approximately $1,830,000 (which amount is
accrued in the accompanying financial statements including interest). For more
information as to the Company's tax obligations and their effect on the
Company's finances and prospects, reference is made to note 1(c) to the
Condensed Consolidated Financial Statements included in Item 1 of this Quarterly
Report on Form 10-QSB.
The Company has projected that it will continue to be able to generate
sufficient funds to support its ongoing operations. However, the Company must be
able to renegotiate its required payments to unsecured creditors, the IRS, the
DEP and certain taxing authorities or raise sufficient cash in order to pay
these obligations as currently due, in order to remain a going concern.
The Company is currently in negotiations with the unsecured creditors, the IRS,
the DEP, and other taxing authorities in an attempt to arrive at reduced payment
schedules. Further, the Company plans to be able to enter into a factoring
arrangement or to develop other financial facilities to improve cash flow should
the need arise. In addition, the Company has a contingency plan to reduce its
size and thereby reduce its cost of operations within certain limitations.
21
SOLITRON DEVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
However, no assurance can be made that the Company can reach a suitable
agreement with the unsecured creditors, DEP or taxing authorities or obtain
additional sources of capital and/or cash, or that the Company can generate
sufficient cash to meet its obligations.
The Company is now assessing the potential impact of the Year 2000, which
concerns the inability of information systems, primarily computer software
programs, to properly recognize and process date sensitive information related
to the Year 2000 and beyond. The Company expects to complete its internal
assessment and remediation procedures by December 31, 1998. The Company is
currently evaluating the expected cost to be incurred in connection with the
Year 2000. The Company does not have any information concerning the compliance
status of its suppliers or other third parties with whom the Company interacts.
However, because third party failures could have a material impact on the
Company's ability to conduct business, confirmations are being requested from
its suppliers to certify that plans are being developed to address Year 2000
issues.
Based on preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations, or cash flows in future periods. While the
Company believes its Year 2000 procedures are designed to be successful, because
of the complexity of the Year 2000 issue and the interdependence of
organizations using computer systems, it is possible that the Company's' efforts
or those of third parties with whom the Company interacts, will not be
successful or satisfactorily completed in a timely fashion.
Based on modifications and conversions of software made to date and the
assessment of yet to be completed modifications and conversions that have been
identified at its facilities to date, the Company does not believe that
contingency planning is warranted at this time. The assessment of third parties
external to the Company is underway, and the results of this assessment, when
completed, may reveal the need for contingency planning at a later date. The
Company will regularly evaluate the need for contingency planning based on the
progress and findings of the Year 2000 project.
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
None
ITEM 2.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
See Part 1.
ITEM 4.
None.
ITEM 5.
None
ITEM 6.
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned as a duly authorized officer of the Registrant.
SOLITRON DEVICES, INC.
/S/ SHEVACH SARAF
----------------------------------
SHEVACH SARAF
CHAIRMAN, CHIEF EXECUTIVE
OFFICER & PRESIDENT
SOLITRON DEVICES, INC.
/S/ WILLIAM J. MUILENBURG
----------------------------------
WILLIAM J. MUILENBURG
CHIEF FINANCIAL OFFICER
Dated: October 14, 1998
24
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule