-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C552yaKUvsv6mlLaVkDROsH8hGecxF6vBiVPrkO+Tg0qv0TUz14X+JwFFq4hmDGJ fL7233HNiR+U+Iw+q4Qepg== 0000950170-98-001527.txt : 19980803 0000950170-98-001527.hdr.sgml : 19980803 ACCESSION NUMBER: 0000950170-98-001527 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980731 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLITRON DEVICES INC CENTRAL INDEX KEY: 0000091668 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 221684144 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-04978 FILM NUMBER: 98674799 BUSINESS ADDRESS: STREET 1: 3301 ELECTRONICS WAY CITY: WEST PALM BEACH STATE: FL ZIP: 33407 BUSINESS PHONE: 4078484311 10QSB 1 SECURITIES & EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from _________ to _________ Commission file number 1-4978 SOLITRON DEVICES, INC. (Exact name of small business issuer as specified in its charter) DELAWARE 22-1684144_______ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 3301 ELECTRONICS WAY, WEST PALM BEACH, FLORIDA 33407 (Address of principal executive offices) (561) 848-4311 (Issuer's telephone number) (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 2,034,013. 1 SOLITRON DEVICES, INC. INDEX PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited): Condensed Consolidated Balance Sheet -- May 31, 1998 Condensed Consolidated Statements of Operations -- Three Months Ended May 31, 1998 and 1997 Condensed Consolidated Statements of Cash Flows -- Three Months Ended May 31, 1998 and 1997 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signature 2 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements: Pages 4 - 16 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: Pages 17- 20 3 SOLITRON DEVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET ASSETS MAY 31, 1998 ------------ (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 714,000 Accounts receivable, less allowance for doubtful accounts of $34,000 1,081,000 Inventories 2,556,000 Prepaid expenses and other current assets 149,000 Due from Vector 70,000 ------------ Total current assets $ 4,570,000 PROPERTY, PLANT AND EQUIPMENT, net 566,000 NON-OPERATING PLANT FACILITIES 1,745,000 OTHER ASSETS 92,000 ------------ $ 6,973,000 ============ The accompanying notes are an integral part of these condensed financial statements 4 SOLITRON DEVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 7,000 Current portion of accrued environmental expenses 333,000 Accounts payable - Post petition 256,000 Accounts payable - Pre-petition, current portion 96,000 Accrued expenses 2,576,000 Accrued Chapter 11 administrative expense 51,000 ------------- Total current liabilities $ 3,319,000 LONG-TERM DEBT, less current maturities 13,000 OTHER LONG-TERM LIABILITIES 2,555,000 ------------- TOTAL LIABILITIES $ 5,887,000 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, authorized 500,000 shares, 0 shares issued and outstanding -0- Common stock $.01 par value, authorized 10,000,000 shares, issued and outstanding 1,977,000 20,000 Additional paid-in capital 2,618,000 Accumulated deficit (1,552,000) ------------- Total shareholder equity 1,086,000 ------------- $ 6,973,000 ============= The accompanying notes are an integral part of these condensed financial statements 5 SOLITRON DEVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MAY 31, 1998 1997 --------------------------------- NET SALES $ 2,103,000 $ 1,888,000 Cost of sales 1,554,000 1,526,000 ----------- ------------ Gross Profit 549,000 362,000 Selling, general and administrative expenses 337,000 269,000 ----------- ------------ Operating income 212,000 93,000 ----------- ------------ OTHER INCOME (EXPENSE): Other income 9,000 15,000 Interest expense (89,000) (67,000) Other (12,000) (11,000) ----------- ------------ Net other expense (92,000) (63,000) ----------- ------------ Net income $ 120,000 $ 30,000 =========== ============ INCOME PER SHARE: $ .01 $ .01 WEIGHTED AVERAGE SHARES OUTSTANDING 2,034,000 2,034,000
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)
THREE MONTHS ENDED MAY 31, 1998 1997 ------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net profit $ 120,000 $ 30,000 ---------- ---------- Adjustments to reconcile net loss to Net cash used in operating activities: Depreciation and amortization 50,000 56,000 (Increase) decrease in account receivable 16,000 70,000 (Increase) decrease in inventories (63,000) (42,000) (Increase) in prepaid expenses and other current assets (31,000) (95,000) Decrease in due from S/V Microwave Products, Inc. (1,000) 19,000 Increase (decrease) in accounts payable (90,000) (111,000) Increase in accrued expenses and other liabilities 94,000 113,000 Increase in accrued Chapter 11 administrative expenses 16,000 -0- ---------- ---------- Total adjustments (9,000) 10,000 ---------- ---------- Net cash generated in operating activities 111,000 40,000 ---------- ---------- CASH FLOW FROM INVESTING ACTIVITIES: Proceeds from the disposal of assets, additions to property, plant and equipment (46,000) (26,000) ---------- ---------- Net Cash used in investing activities (46,000) (26,000) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital leases (2,000) (17,000) ---------- ---------- Net cash used in financing activities (2,000) (17,000) ---------- ---------- NET INCREASE (DECREASE) IN CASH 63,000 (3,000) CASH AT BEGINNING OF PERIOD $ 650,000 $ 537,000 ---------- ---------- CASH AT END OF PERIOD $ 713,000 $ 534,000 ========== ==========
Supplemental cash flow disclosure: Interest paid during the three months ended May 31, 1998 and 1997 was approximately $30,000 and $30,000 respectively. The accompanying notes are an integral part of these condensed consolidated financial statements 7 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL: The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of the results for the interim period. The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-QSB. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The information contained in this Form 10-QSB should be read in conjunction with the Notes to Consolidated Financial Statements appearing in the Company's Annual Report on Form 10-KSB for the year ended February 28, 1998. The results of operations for the three-month period ended May 31, 1998 are not necessarily indicative of the results to be expected for the year ended February 28, 1999. As previously noted in documents filed with the SEC, on August 20, 1993, the United States Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court") entered an Order (the "Order of Confirmation") confirming the Company's Fourth Amended Plan of Reorganization, as modified by the Company's First Modification of Fourth Amended Plan of Reorganization (the "Plan of Reorganization"). The Plan became effective on August 30, 1993 (the "Effective Date"). On July 12, 1996, the Bankruptcy Court officially closed the case. Additionally, the following actions or events have taken or will take place pursuant to the Plan of Reorganization: (a) Pursuant to the Plan of Reorganization, which began in May 1995, the Company is required to begin making quarterly payments to holders of unsecured claims until they receive 35% of their claims. The Company continues to negotiate with its unsecured creditors to reduce its quarterly payment obligations and has proposed to those creditors that it make reduced quarterly payments of approximately $9,000. Following discussion with the unsecured creditors committee, the Company agreed to increase the level of such payments to approximately $11,000 per quarter starting August 1997. The Company has made fourteen reduced payments to its unsecured creditors, and, as of May 31, 1998, the Company has paid approximately $115,329 to its unsecured creditors, as opposed to the $869,162 called for under the Company's Plan of Reorganization. To date, the Company's unsecured creditors have accepted all such reduced payments, though no assurances can be made that they will continue to do so in the future or that the company's negotiation with its unsecured creditors will be successful. 8 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (b) The Company is now negotiating with Honeywell, the former owner of the Riviera Beach property, on a proposed site access and cleanup agreement under which Honeywell will undertake the responsibility for the environmental cleanup in exchange for a limited security interest in the building. Honeywell, who is financially able to perform the required cleanup, has advised the Company that it wishes to take such steps as will prevent EPA from proceeding to place the property on the National Priority List (NPL) and assuming jurisdiction over the cleanup. Honeywell is now negotiating with DEP and EPA in order to complete an appropriate consent agreement that will govern its cleanup activities. While Honeywell expressed interest, there is no assurance that the parties will reach a satisfactory agreement. The DEP, which is a party to these negotiations, is requesting that EPA withhold proceeding with its efforts to list the property on the National Priority List (NPL) in order to allow for the completion of said negotiation. Furthermore, the Company has continued to keep the old Riviera Beach property on the market. (c) On June 19, 1998, the Company received a Letter of Intent to purchase the Riviera Beach facility from Ruckman Properties, Inc., the current owner and developer of the property located at the rear of the Company's facility at Riviera Beach. The Letter of Intent, to which the Company agreed to, outlines the general terms of the agreement to purchase the Riviera Beach facility, which is to be completed by July 31, 1998. Under the terms of the proposed property purchase agreement, Ruckman properties will assume all of the Company's outstanding real estate tax obligations of approximately $560,000, as well as real estate broker commission of approximately $45,000, and the Company's legal fees associated with the sale of the aforementioned facility of approximately $100,000. Ruckman Properties will also be responsible for all closing costs traditionally paid by the seller. Under the proposed new agreement, Ruckman Properties will pay Honeywell $250,000 at the time of closing to cover the Company's cleanup obligations. This agreement will require Honeywell's consent that the agreed upon sum covers the Company's total cleanup obligations. Honeywell has made a counter-offer of $350,000. Thus, the agreement is subject to further negotiations. At the conclusion of such transaction, the Company expects to receive a complete release of all of its obligations associated with the Riviera Beach facility. While all parties expressed interest to complete such agreement, there can be no assurance that such transaction will be completed. 9 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (d) As disclosed in documents filed previously with the Securities and Exchange Commission, the Company is negotiating with various taxing authorities (including the Internal Revenue Service [IRS], Palm Beach County, Florida, and Martin County, Florida) to restructure its payment obligations for various back taxes. While these negotiations are pending, the Company has, in some cases, been making reduced payments to those taxing authorities. The following table indicates the approximate cumulative status of amounts due under Court Plans as of May 31, 1998: DUE PAID ------------ ---------- Martin County $ 68,000 $ 8,000 Palm Beach County 952,000 314,000 IRS 273,000 For the years since bankruptcy, additional taxes have become delinquent with Martin and Palm Beach Counties in approximately the following amounts respectively, $4,000 and $82,000. To date, no objections to have been raised to the amounts of the Company's payments to these taxing authorities, though no assurances can be made that such an objection will not be raised in the future concerning the Company's obligations to those taxing authorities or that any of the Company's negotiations to restructure its payment obligations will be successful. 2. FINANCIAL CONDITION: Although the Company has recorded a small amount of net income and net income from operations during each of the last two fiscal years, in recent years the Company generally experienced losses from operations and severe cash shortages caused by a significant decline in both sales and open order backlog, declining average sale prices, and decreased margins on products sold (which is characteristic in the Company's industry), significant non-recurring expenses associated with the company's bankruptcy proceedings, and the company's inability to obtain additional working capital through the sale of debt or equity securities or the sale of non-operating assets. From when the Company emerged from Chapter 11 on August 30, 1993 through the fiscal year ended February 28, 1996, the Company generally experienced a positive cash flow from recurring operations; however, overall cash flow was negative due primarily to the necessity to make payments of administrative expenses and required payouts arising in connection with the bankruptcy proceedings. The foregoing resulted in a decrease in cash and cash equivalents following the Company's emergence from Chapter 11. During the fiscal years ended February 28, 1997 and February 28, 1998 and in the quarters thereafter, the company has recorded net income and net income from operations. 10 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) During the three months ended May 31, 1998, the company's book-to-bill ratio fell to approximately 0.83, reflecting a slowdown in the demand for the Company's products and a lower average unit sale price. It is believed that such slowdown in the intake of orders has been the general experience of most semiconductor manufacturers who participate in the same market as the Company. The Company continued implementing steps intended to reduce its variable manufacturing cost to offset the impact of lower average sale price. However, should order intake continue to decline, the company may be required to implement further cost-cutting or other downsizing measures to continue its business operations. The Company's liquidity continues to be adversely effected by significant non-recurring expenses associated with the company's pre-petition obligations, and the Company's inability to obtain additional working capital through the sale of debt or equity securities or the sale of non-operating assets. The Company currently believes, based on information available to it, that its operations will continue to generate sufficient cash to satisfy its operating needs over the next 12 months. However, based on the Company's current bookings, prices, profit margins and sales levels, the Company does not believe it will generate sufficient cash to satisfy its operating needs and its obligations to pre-bankruptcy creditors in accordance with the Plan of Reorganization. Thus, the Company is in negotiations with all such claim holders to reschedule the Company's payments. In the event the Company is unable to restructure its obligations to pre-bankruptcy claimants, the Company will be required to further reduce its size and reduce its cost of operations. However, over the long term, the Company believes that if the volume and prices of its product sales continue as presently anticipated, it will, subject to the continued deferral of certain obligations, generate sufficient cash from operations to sustain its current operations. In the event that sales decline significantly below the current level experienced by the Company, the Company may be required to implement further cost-cutting or other downsizing measures to continue its business operations. Although the Company is pursuing additional sources of financing, there can be no assurance that financing will be available in amounts or upon terms sufficient to meet the Company's needs. However, in appropriate situations, the Company may seek strategic alliances, joint ventures with others, or acquisitions in order to maximize the Company's marketing potential, its utilization of existing resources, and to provide further opportunities for growth. 3. ENVIRONMENTAL MATTERS: While the Company believes that it has the environmental permits necessary to conduct its business and that its operations conform to present environmental regulations, increased public attention has been focused on the environmental impact of semiconductor operations. The company, in the conduct of its manufacturing operations, has handled and does handle materials that are considered hazardous, toxic or volatile under federal, state, and local laws and, therefore, is subject to regulations related to their use, storage, discharge, and disposal. No assurance can be made that the risk of accidental release of such materials can be completely eliminated. In the event of a violation of environmental laws, the Company could be held liable for damages and the costs of remediation and, along with the rest of the semiconductor industry, is subject to variable interpretations and governmental priorities concerning environmental laws and regulations. 11 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Environmental statues have been interpreted to provide for joint and several liability and strict liability regardless of actual fault. There can be no assurance that the Company and its subsidiaries will not be required to incur costs to comply with, or that the operations, business, or financial condition of the Company will not be materially adversely affected by current or future environmental laws or regulations. The Order of Confirmation (the "Confirmation Order") approving the Company's Amended Plan of Reorganization with First Modification (the "Plan) was issued by the Bankruptcy Court on August 19, 1993 (the "Confirmation Date"), and provided a plan for future remediation of the two properties of the Company. One property is Lot 1 (the north parcel) of the property at 1177 Blue Heron Road in the City of Riviera Beach, and the second is its former Port Salerno facility, S.E. Cove Road, Port Salerno, Martin County, Florida. Contemporaneously with the confirmation Order, the Company and the State of Florida Department of Environmental Protection (the "DEP") entered into a Stipulation for entry of a Consent Final Judgement in the Circuit Court of the Nineteenth Judicial Circuit of Florida in and for Martin County, Florida. The Consent Final Judgement, entered by the Court on October 21, 1993, provides that the Company shall: (a) reimburse the DEP $200,000 for providing main and lateral water line extensions and property hookups to serve eight off-site properties presently impacted by the groundwater contamination emanating from the Port Salerno Site (paid as an administrative expense in accordance with the Confirmation Order); (b) remediate site soils and groundwater at and emanating from the Port Salerno site; (c) address residual soil contamination and a limited, defined "hot spot" in the groundwater at and near the north end of the Riviera Beach property; and (d) pay a final judgment of $102,860.57 to be paid to the DEP pursuant to the Plan in the manner and to the extent of the Company's payment of other unsecured creditor claims. Pursuant to the Confirmation Order, all existing security interests on these two properties, except real estate taxes, were removed. The properties were appraised by an MAI appraiser, as if uncontaminated, at $1,950,000 for Riviera Beach and $1,650,000 for Port Salerno. Under the Plan and the Consent Final Judgement, the Company will sell or lease the two properties and utilize the proceeds derived therefrom, together with certain insurance proceeds, to remediate both sites. All such proceeds will be placed in escrow for that purpose. Any excess funds after all escrow obligations are satisfied will belong to the Company. To facilitate the prompt sale or leasing of these properties, the DEP has provided protection in the Consent Final Judgment to a tenant or purchaser of the properties, limiting liability to the DEP solely to future discharges during its ownership or occupancy. The Company's consultant has estimated the costs of remediation to be approximately $727,000 for the Port Salerno property and $356,000 for the Riviera Beach property if performed pursuant to the Consent Final Judgement. The remediation could cost more; particularly if further offsite wells become contaminated at Port Salerno and the affected properties must be supplied public water by further extension of the water lines. All residents who could be potentially affected by further groundwater plume movement at Port Salerno were notified of the pendency of the bankruptcy and that claims could be filed. The claims filed, except as set forth below, have been settled. 12 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company received a claim by an estate-owned property northwest and across Cove Road from the Port Salerno property. The estate has asserted that the mailing address to which the bankruptcy notice was sent was in error. The estate has been advised that public water has been made available to its property and that the company is prepared to settle for the sum of $10,000, to be paid as other unsecured credit claims are being paid. This offer was rejected. The claim is unresolved and is currently dormant. The Company's position has been that further off-site exposure to third party property owners at Port Salerno is limited by its Chapter 11 proceeding solely to its obligation for extension of public water lines to the affected property. It cannot now be estimated whether some future extension may be required, but the contaminated groundwater appears to move slowly and any remediation contractor will utilize off-site recovery wells to contain its further movement. The City of Riviera Beach previously settled its claim with the Company for cleanup of contamination of its wellfield, except for the "hot spot" to be addressed by the Company as required by the Consent Final Judgment. The unpaid balance of the settlement amount with the City was approved in the Confirmation Order; to be paid as and to the extent provided for other unsecured creditors. After notice, no other claims were filed in the bankruptcy proceeding related to offsite groundwater contamination at the Riviera Beach site, and potential claims may have been extinguished thereby. If funds to clean the sites were not available within 24 months of entry of the Consent Final Judgment, the Company, beginning in October 1995, was to make periodic payments into the escrow to clean both sites based on the following schedule: 1. Commencing on the 25th month, $5,000 per month, and 2. Commencing on the 37th month, $7,500 per month, and 3. Commencing on the 49th month, $10,000 per month. 4. This periodic funding will be suspended when funds available in escrow reach 125% of the estimated costs to complete remediation. The Company is not required to pay additional funds in excess of the schedule set forth above, except that if funds are not available in the escrow for that purpose, the Company must independently fund any further extension of public water supply lines in the vicinity of the Port Salerno site. The Consent Final Judgment requires providing any such extension within a reasonable time. The prior payment to the state has extended the large water main to provide service to the area. The further extension would be for lateral extensions and individual property hookups. During the period of October 1995 and October 1996, the Company advised the DEP that it could pay only $1,000 per month into escrow, rather than the $5,000 specified in the Consent Final Judgment. Since then, the Company has paid $1,000 per month in the escrow for its two properties, the total escrow amounts for the properties as of March 31, 1998 totaling $32,000. The DEP has acquiesced in this payment level. 13 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Since entry of the Consent Final Judgment, the Company's consultant submitted a plan for further soil assessment at the Riviera Beach facility, received approval thereof and of its Quality Assurance Project Plan, and, after filing an assessment report reporting its data, received DEP approval of the report's conclusion that no further soil remediation is required. After performing the further soil assessment there, the balance of the original escrowed funds of $42,000 were transferred to the Port Salerno escrow account to enable the soil assessment to be performed there. This assessment has now been completed, and the consultant's report of the data collected concludes that no further soil remediation is required. The DEP has now concurred with the report. Until the escrows are replenished as set forth herein, groundwater remediation will be deferred at the two sites. Following the EPA's placing of the Riviera Beach and Port Salerno sites under a re-evaluation process for possible National Priority Listing ("NPL") under the Superfund program, the Company requested, due to its settlement with the DEP and the entry of the Consent Final Judgment pertaining thereto, that both sites be withdrawn from the re-evaluation process. The DEP had requested the EPA that the Riviera Beach site be assigned a low priority for re-evaluation. The EPA temporarily discontinued the steps necessary to list the sites. However, during 1997, the EPA revisited the need for site evaluation at both sites and required the Company to sign site access agreements permitting the EPA to perform expanded site assessments at both sites. At a meeting at the DEP in Tallahassee on March 21, 1997, after a lengthy discussion with Company representatives and the representatives of two contract vendees who had recently executed purchase contracts, the DEP and the EPA agreed to defer further evaluations of the sites for at least 90 days to permit due diligence inspections by the prospective purchasers so that the DEP could determine if they would take title, assume full responsibility for cleanup, and provide financial security under their respective contracts. After lengthy but unsuccessful negotiations regarding a state lead cleanup at Port Salerno by a prospective purchaser willing to post a $1,000,000 bond to secure performance of the cleanup, the prospective purchaser withdrew from its contract and the EPA published notice that it is proposing the Port Salerno site for NPL listing. The EPA has decided it will clean the site using monies from the Superfund. The Company has now entered into negotiations with the EPA to settle EPA's prospective cost claim against it that could arise from the costs the EPA incurs in cleaning the property. There can be no assurance as to the outcome of such negotiations. The Company has provided full information of its financial condition and has asked that except for the value of the Port Salerno property, it has an inability to pay such claim under the agency's ability to pay guidelines. The Company has offered to sell its property at its market value and after deducting its costs including an agreed $50,000 attorneys fees, 5% broker's fee, back taxes plus interest, and the closing costs, to pay the net proceeds of the sale in discharge of all EPA claims. EPA has offered to enter into a prospective purchaser agreement protecting the purchaser from EPA's cost recovery claim and the regional counsel for the EPA is reviewing the Company's offer with EPA headquarters. 14 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) In the event the property is not sold on this basis, the Company may have to await the EPA's completion of its cleanup that is likely to take several years and then negotiate a settlement of the EPA's cost cleanup at the time. It is the Company's position that any cost recovery claims by EPA is barred by the Amended Order of Confirmation in Bankruptcy. Though it has knowledge of DEP's claim in Bankruptcy and that it likewise had a claim, it did not file a claim, deferring to the State DEP to file and resolve the future requirements for remediation. At Riviera Beach, Honeywell, Inc. is the predecessor owner and operator of the facility during a period when pollution occurred, and it is jointly and severably liable therefor to the EPA. The Company has been informed by Honeywell that it intends to secure a deferral of the EPA's potential listing of the site on the site on the National Priority List by entering into a consent order with the state DEP. Under such consent order, Honeywell will perform the cleanup of the Riviera Beach site. The state DEP is expected to request a deferral by the EPA to the state lead cleanup. It is the Company's position that its exposure to Honeywell for contribution has been cut off by the Bankruptcy Court order since Honeywell's claims were filed and resolved therein. However, to dispose of the property, the Company needs Honeywell's cooperation and the Company is negotiating to sell the property to a prospective buyer who owns the adjacent back property. The net proceeds that would be derived from the sale, about $250,000, would be paid to Honeywell in exchange for its waiver of any claims for its cleanup activities against the buyer and the Company. There can be no assurance as to the outcome of such negotiations. In the event Honeywell is unable to secure deferral by the EPA to its proposed site lead cleanup, then the Company may not be able to dispose of the property until the EPA and Honeywell are willing to provide protection against liability to a purchaser. Whether Honeywell succeeds in obtaining approval to perform the cleanup under the State Consent Order should be clarified over the next few months. In all events, the Company has offered Honeywell site access and is nearing agreement on terms of such access to permit Honeywell to perform the required cleanup without participation by the Company. In all events, the position of the Company is that Honeywell's claim for cleanup and the potential claim of EPA, if asserted against the company, are barred by the Bankruptcy Court Order. For additional discussion about the Company's effort to sell the Riviera Beach facility see "Notes to Condensed Consolidated Financial Statements (c)". The Company's former facility in Jupiter, Florida (which was sold in 1982) was the subject of a preliminary assessment by the EPA in 1995. The EPA requested site access from the present owner. The Company's environmental legal counsel has been advised that this facility is being remediated by the present owner. The Company is not aware of the status of that remediation and has received no communication from the present owner. For a further description of the Company's environmental issues, refer to "Item 1 - Business - Bankruptcy Proceedings" and to Note 13 of the accompanying Consolidated Financial Statements. During the fiscal year ended February 28, 1998, the Company has spent approximately $3,000 for compliance with environmental laws (federal, state and local). As part of this effort, the Company retained the services of an environmental consultant who assisted in verifying that the Company operates in compliance with all pertinent environmental laws and regulations. 15 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company's environmental consultants have estimated the costs of remediation to be approximately $727,000 for the Port Salerno property and $356,000 for the Old Riviera Beach property. Approximately $1,042,000 has been accrued in the balance sheet as of March 31, 1998. The Company recorded these liabilities as $333,000 short-term liabilities and $709,000 long-term liabilities. These reservations are predicated on cleanup being performed under the existing Consent Final Judgement. 16 SOLITRON DEVICES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of factors which have affected the Company's financial position and operating results during the periods included in the accompanying condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and the related Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-KSB for the year ended February 28, 1998 and the Condensed Consolidated Financial Statements and the related Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-QSB. INTRODUCTION: Except for historical information contained herein, certain matters discussed herein are forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, including but not limited to, economic, technological, competitive, governmental procurement, regulatory, strategies, available financing, and other factors discussed elsewhere in this report and the documents filed by the Company with the SEC. Many of these factors are beyond the Company's control. Actual results could differ materially from the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will, in fact, occur. RESULTS OF OPERATIONS-THREE MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS ENDED MAY 31, 1997: Net sales for the three months ended May 31, 1998 increased 11.4% to $2,103,000 as compared to $1,888,000 for the three months ended May 31, 1997. Such increase was primarily attributable to strong backlog and the ability to ship more product in accordance with customer delivery requirements. The Company's backlog of open orders decreased 14.9% for the three months ended May 31, 1998 as compared to a decrease of 2.4% for the three months ended May 31, 1997. Such decrease is attributable to lower demand for the Company's product, resulting from the cut in defense spending and lower average sales price. Gross margins on the Company's sales increased to 26.1% for the three months ended May 31, 1998 in comparison to 19.2% for the three months ended May 31, 1997. This increase is the result of a more favorable product mix change, and a decrease in the cost of goods sold. Gross profit for the three months ended May 31, 1998 increased to $549,000 from $362,000 for the three months ended May 31, 1997. This increase is primarily due to increased sales volume and a decrease in the cost of goods sold as a percentage of sales. 17 SOLITRON DEVICES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross profit for the three months ended May 31, 1998 increased to $549,000 from $362,000 for the three months ended May 31, 1997. This increase is primarily due to increased sales volume and a decrease in the cost of goods sold as a percentage of sales. For the three months ending May 31, 1998, the Company shipped 656,489 units as compared with 428,733 units shipped during the same period of the prior year. It should be noted that since the Company manufactures a wide variety of products with an average sale price ranging from less than one dollar to several hundred dollars. Such periodic variations in the Company's volume of units shipped may not be a reliable indicator of the Company's performance. The company has experienced a decrease in the level of booking of approximately 26% for the quarter ended May 31, 1998 as compared to the same period for the previous year principally as a result of the reduction in defense spending, lower demand for the product, and lower average sales price of products sold. Selling, general, and administrative expenses increased to $336,943 for the three months ended May 31, 1998 from $269,000 for the comparable period in 1997. During the three months ending May 31, 1998, selling, general, and administrative expenses as a percentage of sales was 16.02% as compared with 14.26% for the three months ending May 31, 1997. The increase was due primarily to increased salaries and commissions. Operating income for the three months ended May 31, 1998 increased to $212,000 from $93,000 for the three months ended May 31, 1997. This increase is principally due to an increase in sales volume and a decrease in the cost of goods sold as percentage of sales, which was partially offset by an increase in selling, and general and administrative expenses. The Company recorded a net other expense of $91,000 for the three months ended May 31, 1998 versus a net other expense of $63,000 for the three months ended May 31, 1997. The variance was due to decreases in the Company's other income of $9,000 as compared to $15,000 for three months ended May 31, 1998 and May 31, 1997 respectively. This was supplemented by a significant increase in the Company's imputed interest expense of $59,000 as compared to $37,000 for the three months ended May 31, 1998 and May 31, 1997 respectively. This increase was principally due to the fact that the company will be required to complete making payments of its pre-petition obligations over a shorter period of time as compared to previous periods. Net income for the three months ended May 31, 1998 increased to $120,992 versus $30,000 for the same period in 1997. The major contributing factor to this increase was increased sales volume and a decrease in cost of goods sold as percentage of sales. 18 SOLITRON DEVICES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company reported a net income of $121,000 and operating income of $212,000 for the three months ended May 31, 1998. However, the Company has significant obligations arising from settlements related to its bankruptcy proceeding which requires it to make substantial cash payments which cannot be supported by the Company's current level of operations. At May 31, 1998, February 28, 1998 and May 31, 1997 respectively, the Company had cash and cash equivalents of $713,000, $650,000 and $534,000. In June 1998, the Company paid a cash bonus to the Company's chairman, president, and chief executive officer of $296,000. For details see section 13. "Commitments and Contingencies:Employment Agreement" Form 10-KSB for the period ended February 28, 1998. At May 31, 1998, the Company had working capital of $1,251,000 as compared with a working capital at May 31, 1997 of $1,111,000. At February 28, 1998, the Company had a working capital of $1,168,000. The approximately $83,000 change for the three months ended May 31, 1998 was due primarily to an increase in pre-paid expenses. The from year to year decrease was due primarily to a major shift from long term to short term debt on the Company's liabilities due to Palm Beach County and DEP. Pursuant to the Plan or Reorganization, the Company is required to pay an aggregate of approximately $2,483,338 to holders of allowed unsecured claims in quarterly installments of approximately $62,083. The Company has proposed to its unsecured creditors that it reduce its payments to quarterly payments of $9,000. Following discussions between the Company and the unsecured creditors committee, the Company agreed to make quarterly payments of $11,000 starting August 1997. As of May 31, 1998, the Company had paid to the unsecured creditors $115,329 of the $869,162 due. Of amounts owed to unsecured creditors $95,927 is carried as short-term debt and $1,243,840 is carried as long-term debt. Pursuant to the terms of the Plan of Reorganization and Consent Final Judgment, the Company is required to complete the assessment and remediation of the Port Salerno facility and the old Riviera Beach facilities. The costs of these assessments and remediations, estimated at $1,042,000, will be payable from the proceeds of the sale or lease of these properties. As part of these requirements, the Company performed soil remediation assessment at both facilities. These tests indicated that no soil remediation is required at the Port Salerno and old Riviera Beach facilities and the DEP has concurred that no further soil remediation is required at either property. The Company is renegotiating with DEP the terms of the cash payments into the aforementioned escrow account and, while the negotiations are under way, the Company deposits $1,000 per month. As of May 31, 1998, the Company had deposited $32,000 of the $120,000 due in accordance with the Plan into the escrow account. For discussion regarding the status of the sale of the Riviera Beach facility, please see section 1 of "Notes to Condensed Consolidated Financial Statements." 19 SOLITRON DEVICES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pursuant to the Plan of Reorganization, beginning on the date the Company's net after tax income exceeds $500,000, the Company would be required to pay certain pre-petition creditors 10% of net after tax income until August 30, 2003 up to a maximum aggregate of $3,000,000 in such payments. Further, the Company's lease payments (less sublease payments from Vector) for its facilities in West Palm Beach, Florida would increase each year from approximately $255,000 during the current fiscal year in accordance with specified cost of living increases of not more than 5% per year. The Company has satisfied all of the allowed administrative claims and allowed wage claims under the Plan of Reorganization. The Company is required to pay allowed tax claims estimated at approximately $1,830,000 (which amount is accrued in the accompanying financial statements including interest). For more information as to the Company's tax obligations and their effect on the Company's finances and prospects, reference is made to note 1(c) to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-QSB. The Company has projected that it will continue to be able to generate sufficient funds to support its ongoing operations. However, the Company must be able to renegotiate its required payments to unsecured creditors, the IRS, the DEP and certain taxing authorities or raise sufficient cash in order to pay these obligations as currently due, in order to remain a going concern. The Company is currently in negotiations with the unsecured creditors, the IRS, the DEP, and other taxing authorities in an attempt to arrive at reduced payment schedules. Further, the Company plans to be able to enter into a factoring arrangement or to develop other financial facilities to improve cash flow should the need arise. In addition, the Company has a contingency plan to reduce its size and thereby reduce its cost of operations within certain limitations. However, no assurance can be made that the Company can reach a suitable agreement with the unsecured creditors, DEP or taxing authorities or obtain additional sources of capital and/or cash, or that the Company can generate sufficient cash to meet its obligations. The company is now assessing the potential impact of the Year 2000, which concerns the inability of information systems, primarily computer software programs, to properly recognize and process date sensitive information related to the Year 2000 and beyond. The Company is currently evaluating the expected cost to be incurred in connection with the Year 2000. Additionally, suppliers and other third parties exchange electronic information with the Company. The Company does not have any information concerning the compliance status of its suppliers or such other third parties. However, because third party failures could have a material impact on the Company's ability to conduct business, confirmations are being requested from its suppliers to certify that plans are being developed to address Year 2000 issues. 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS: None ITEM 2. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES: See Part 1. ITEM 4. None. ITEM 5. None ITEM 6. None. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned as a duly authorized officer of the Registrant. SOLITRON DEVICES, INC. /S/ SHEVACH SARAF ----------------- SHEVACH SARAF CHAIRMAN, CHIEF EXECUTIVE OFFICER & PRESIDENT Dated: July 29, 1998 22 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ------------- 27 Financial Data Schedule EX-27 2
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOLITRON DEVICES, INC. AND SUBSIDIARIES FORM 10QSB FOR THE QUARTER ENDED MAY 31,1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT 3-MOS FEB-28-1999 MAR-01-1998 MAY-31-1998 714,000 0 1,115,000 (34,000) 2,556,000 4,570,000 1,719,000 (1,153,000) 6,973,000 3,319,000 0 0 0 20,000 0 6,973,000 2,103,000 2,103,000 1,554,000 1,891,000 2,000 0 89,000 121,000 1,000 120,000 0 0 0 120,000 .01 .01
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