UNITED STATES
SECURITIES AND 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, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission file number 001-04978
---------
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, including area code)
N/A
--------------------------------------------------------------------------
(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 such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act )
Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of October 11, 2005: 2,123,804.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
1
SOLITRON DEVICES, INC.
INDEX
PART 1 - FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheet 3
August 31, 2005
Condensed Consolidated Statements of Income 4
Three and Six Months Ended August 31, 2005 and 2004
Condensed Consolidated Statements of Cash Flows 5
Six Months Ended August 31, 2005 and 2004
Notes to Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition and 13-16
Results of Operations
Item 3. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits 17
Signatures 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited, in thousands)
August 31, 2005
---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,685
Accounts receivable 971
Inventories 2,346
Prepaid expenses and other current assets 103
---------------
TOTAL CURRENT ASSETS 6,105
PROPERTY, PLANT AND EQUIPMENT, net 584
OTHER ASSETS 52
---------------
TOTAL ASSETS $ 6,741
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of accrued environmental expenses $ 985
Accounts payable - Post-petition 339
Accounts payable - Pre-petition 1,378
Accrued expenses and other current liabilities 462
---------------
TOTAL CURRENT LIABILITIES 3,164
LONG TERM LIABILITIES, net of current portion --
---------------
TOTAL LIABILITIES 3,164
---------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 500,000 shares, none issued -0-
Common stock, $.01 par value, authorized 10,000,000 shares, 2,058,052
shares issued and outstanding, net of 173,287 shares of treasury stock 21
Additional paid-in capital 2,621
Retained earnings 935
---------------
TOTAL STOCKHOLDERS' EQUITY 3,577
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,741
===============
The accompanying notes are an integral part of the financial statements.
3
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED AUGUST 31,
(Unaudited, in thousands except for share and per share amounts)
Three Months Six Months
2005 2004 2005 2004
---- ---- ---- ----
NET SALES $ 2,011 $ 1,954 $ 4,114 $ 3,889
Cost of Sales 1,616 1,517 3,230 3,122
------------ ------------ ------------ ------------
Gross Profit 395 437 884 767
Selling, General and Administrative Expenses 265 294 536 612
------------ ------------ ------------ ------------
Operating Income 130 143 348 155
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Gain on Extinguishments of Debt 76 -0- 144 -0-
Other Income & (Expense), Net 13 5 21 -0-
Interest Expense -- (1) (2) (3)
------------ ------------ ------------ ------------
Other Income (Expense), Net 89 4 163 (3)
------------ ------------ ------------ ------------
Net Income $ 219 $ 147 $ 511 $ 152
============ ============ ============ ============
INCOME PER SHARE: Basic $ 0.11 $ 0.07 $ 0.25 $ 0.07
------------ ------------ ------------ ------------
: Diluted $ 0.10 $ 0.07 $ 0.23 $ 0.07
------------ ------------ ------------ ------------
WEIGHTED AVERAGE
SHARES OUTSTANDING: Basic 2,076,247 2,070,703 2,076,150 2,073,529
============ ============ ============ ============
: Diluted 2,294,653 2,135,742 2,241,107 2,168,791
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
4
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED AUGUST 31,
(Unaudited, in thousands)
2005 2004
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 511 $ 152
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 95 91
Changes in operating assets and liabilities:
(Increase) Decrease in: Accounts receivable 10 143
Inventories 51 (80)
Prepaid expenses and other current assets 24 67
Other assets -0- (16)
Increase (Decrease) in:
Accounts payable - Post-petition (16) (34)
Accounts payable - Pre-petition 570 (22)
Accrued expenses and other current liabilities (882) (14)
Accrued environmental expenses -0- 19
Other long-term liabilities (13) (19)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 350 287
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (69) (97)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (69) (97)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Exercise of stock options 1 -0-
----------- -----------
NET CASH FROM FINANCING ACTIVITIES 1 -0-
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 282 190
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 2,403 1,883
----------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 2,685 $ 2,073
=========== ===========
The accompanying notes are an integral part of the financial statements.
5
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL AND SIGNIFICANT ACCOUNTING POLICIES:
GENERAL:
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting primarily of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
statement of the results for the interim period. Certain amounts in the prior
year's consolidated financial statements have been re-classified to conform to
the current year's presentation.
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 accounting principles generally
accepted in the United States 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 Solitron
Devices, Inc. and Subsidiaries' (the "Company") Annual Report on Form 10-KSB for
the year ended February 28, 2005.
The results of operations for the six-month period ended August 31, 2005 are not
necessarily indicative of the results to be expected for the entire year ending
February 28, 2006.
SIGNIFICANT ACCOUNTING PRINICPLES:
Basis for Consolidation
The condensed consolidated financial statements include the accounts of the
Company and subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
Earnings Per Common Share
Earnings per common share is presented in accordance with SFAS No. 128 "Earnings
per Share." Basic earnings per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share incorporate the incremental shares issuable upon the assumed
exercise of stock options to the extent they are not anti-dilutive using the
treasury stock method.
Shipping and Handling
Shipping and handling costs billed to customers by the Company are recorded in
net sales. Shipping costs incurred by the Company are recorded in cost of sales.
6
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock Based Compensation
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123
(SFAS No. 148)." This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. This statement also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The transition guidance
and disclosure requires that companies that continue to account for stock-based
employee compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees (APB No. 25)" include pro forma
disclosure of net income and earnings per share as if the fair value method
prescribed by SFAS No. 123 had been applied in accordance with SFAS No. 148.
The Company complies with SFAS No. 123. As permitted by SFAS No. 123, the
Company continues to follow the measurement provisions of APB No. 25 and does
not recognize compensation expense for its stock based incentive plan. Had
compensation cost been determined based on the fair value on the grant dates
consistent with the methodology prescribed by SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro-forma amounts
indicated below.
Six months ended Aug. 31,
2005 2004
---- ----
Net income, as reported $ 511 $ 152
Less: total stock based employee
compensation expense, net of tax effects 55 76
--------- ---------
Pro-forma net income/(loss) $ 456 $ 76
========= =========
Reported basic earnings per common share $ 0.25 $ 0.07
========= =========
Pro-forma basic earnings/(loss) per common share $ 0.22 $ 0.04
========= =========
Reported diluted earnings per common share $ 0.23 $ 0.07
========= =========
Pro-forma diluted earnings/(loss) per common share $ 0.20 $ 0.04
========= =========
The total fair value of the options granted during the six months ended August
31, 2005 and 2004 was $33,000 and $215,000, respectively, determined under the
fair value based method for all awards.
The weighted average estimated value of employee stock options granted during
the six months ended August 31, 2005 was $0.70 ($.96 for the six months ended
August 31, 2004). The fair value of options granted during the six months ended
August 31, 2005 and 2004 was estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Six months ended Aug. 31,
-------------------------
2005 2004
---- ----
Dividend Yields 0.0% 0.0%
Expected Volatility 109.8% 103.8%
Risk-free Interest Rates 4.1% 4.5%
Expected Life (in years) 10.0 10.0
The pro-forma amounts may not be indicative of future pro-forma income and
earnings per share.
7
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. ENVIRONMENTAL REGULATION:
While the Company believes that it has the environmental permits necessary to
conduct its business and that its operations conform to present environmental
regulations, increased public attention has been focused on the environmental
impact of semiconductor operations. The Company, in the conduct of its
manufacturing operations, has handled and does handle materials that are
considered hazardous, toxic or volatile under federal, state, and local laws
and, therefore, is subject to regulations related to their use, storage,
discharge, and disposal. No assurance can be made that the risk of accidental
release of such materials can be completely eliminated. In the event of a
violation of environmental laws, the Company could be held liable for damages
and the costs of remediation and, along with the rest of the semiconductor
industry, is subject to variable interpretations and governmental priorities
concerning environmental laws and regulations. Environmental statutes 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.
3. ENVIRONMENTAL LIABILITIES
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable.
The Company is currently engaged in negotiations with the United States
Environmental Protection Agency ("USEPA") to resolve the Company's alleged
liability to USEPA under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), 42 U.S.C. 9600 et seq. at the following five
sites: (1) Solitron Microwave Superfund Site, Port Salerno, Florida (the "Port
Salerno Site"); (2) Petroleum Products Corporation Superfund Site, Pembroke
Park, Florida; (3) Casmalia Resources Superfund Site, Santa Barbara, California
(the "Casmalia Site"); (4) Solitron Devices Site, Riviera Beach, Florida (the
"Riviera Beach Site"); and (5) City Industries, Inc. Superfund Site, Orlando,
Florida. USEPA contends that the Company is liable for a share of past and
future costs incurred by USEPA in connection with the investigation and
remediation of the sites. At a meeting with USEPA on March 23, 2001, USEPA
contended that the Company's alleged share of liability at four of the sites
totals approximately $7.65 million, which USEPA broke down on a site by site
basis as follows: Port Salerno Site -$3.8 million; Petroleum Products
Corporation Superfund Site - $150,000; Casmalia Site -$2.7 million; and Riviera
Beach Site - $1.0 million. The Company does not agree with USEPA's estimates and
USEPA has never provided any supporting detail to the Company to justify the
estimates. USEPA previously indicated that the Company was a potentially
responsible party ("PRP") at a sixth site in Tampa, Florida. However, USEPA
recently notified the Company that it does not consider the Company to be a PRP
at this site.
In addition to the claims asserted by USEPA against the Company at the Casmalia
Site, a claim has been asserted against the Company by a group of alleged
potentially responsible parties ("PRP Group") formed at the site for all past
and future cleanup expenses incurred or to be incurred by the PRP Group. The
Company executed a Third Amendment to Tolling Agreement with USEPA and the PRP
Group in May 2005, which provides for the tolling of applicable statutes of
limitation through the earlier of: (i) November 16, 2006; (ii) sixty (60) days
after the date USEPA issues any administrative order, initiates an
administrative enforcement action, or files a lawsuit relating to the site
against another party to the Tolling Agreement ("Party"); (iii) the date any
third party files a legal action for investigation, remediation, or the recovery
of costs relating to the site against any Party; or (iv) the date any Party
gives written notification of termination of the Tolling Agreement to the other
Parties. During the negotiations with USEPA on the ATP Agreement, the Company
was advised by USEPA that the settlement with USEPA would most likely resolve
any claim of the PRP Group against the Company. Preliminary communications with
attorneys representing the PRP Group support USEPA's representations in this
regard.
The Company contends that USEPA's claims at the five sites were discharged in
the Company's prior bankruptcy proceeding and that USEPA is bound by the terms
of the remediation approved under the Amended Order of Confirmation in
Bankruptcy. Though USEPA was notified of the bankruptcy, had knowledge of FDEP's
(as defined below) claim and participation in the bankruptcy proceeding, and was
aware that USEPA had incurred response
8
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
costs to investigate the properties, USEPA did not file a claim in the
bankruptcy. To avoid the cost and uncertainty of litigating the issue, however,
the Company has negotiated a settlement with USEPA to settle any liability at
all five sites based on an ability to pay determination. The terms and
conditions of the Ability-To-Pay Multi-Site Settlement Agreement ("ATP
Agreement") require the Company to pay to USEPA the total sum of $75,000 during
the first two years from the effective date of the ATP Agreement, and $10,000
per year or 5% of the Company's net income above $500,000 per year, whichever is
greater, in years three to seven from the effective date of the ATP Agreement.
The Company's net earnings over the last ten years exceeded $500,000 only once
($637,000 in FY 2001). The average over the last five years was $225,200
($256,900 over ten years). For payment to USEPA to be above $10,000 per year,
the Company's net income must exceed $700,000 per year. The ATP Agreement
provides that, in consideration of the Company's obligations under the ATP
Agreement, USEPA covenants not to sue or to take administrative action against
the Company under CERCLA with regard to the five sites. The ATP Agreement was
signed by the Company on July 28, 2005, and is now being circulated for
signature by USEPA and the United States Department of Justice. The ATP
Agreement will then become effective upon expiration of the required public
comment period. The Company expects that it will incur approximately $5,000 in
legal fees in connection with finalizing the ATP Agreement.
The Company currently accrues $985,000 for environmental remediation expenses
for the Port Salerno Site and Riviera Beach Site. Estimates of the Company's
potential liability at these two sites is based on previous estimates provided
by a consultant to the Company for the Port Salerno Site in 1993 ($727,000) and
for the Riviera Beach Site in 1995 ($356,000), less payments made by the Company
into cleanup escrow accounts for the two sites ($90,000) and less payments
incurred by the Company for environmental testing at the Riviera Beach Site
($8,000). On October 21, 1993, a Consent Final Judgment was entered into between
the Company and the Florida Department of Environmental Protection ("FDEP"), in
the Circuit Court of the Nineteenth Judicial Circuit of Florida in and for
Martin County Florida, in State of Florida Department of Environmental
Protection v. Solitron Devices, Inc., Case No. 91-1232 CA. The Company's Fourth
Amended Plan of Reorganization and the Consent Final Judgment, in part,
obligated the Company to assess and remediate the Port Salerno and Riviera Beach
Sites, make monthly payments to escrow accounts for each site until the sale of
the sites to fund the assessment and remediation of the two sites, take all
reasonable steps to sell the Port Salerno and Riviera Beach Sites and, upon the
sale of the Sites, apply the net proceeds from the sales to fund such work.
Prior to the sale of the Port Salerno and Riviera Beach Sites, USEPA took over
from FDEP as the lead regulatory agency for the assessment and remediation of
the two sites. USEPA then entered into an Administrative Order on Consent with a
former property owner of the Riviera Beach Site, Honeywell, Inc., which
obligated Honeywell to perform a remedial investigation/feasibility study at the
Riviera Beach Site. The Company made payments to the Riviera Beach escrow
account until the sale of the site in 1999. Upon the sale of the Riviera Beach
Site, USEPA received the net proceeds of $419,000 plus an additional amount from
the Riviera Beach escrow account to offset USEPA's costs of investigation,
remediation and oversight of the remedial site activities at the Riviera Beach
Site. By letter dated October 29, 1999, FDEP consented to such use of the
Riviera Beach escrow account and advised the Company that Honeywell's
performance of remedial action at the Riviera Beach site to complete the cleanup
requirements of the Consent Final Judgment will be construed by FDEP as
discharging the Company's obligations under the Consent Final Judgment. USEPA
has advised the Company that Honeywell continues to perform work at the Riviera
Beach Site under the supervision of USEPA.
The Company made payments to the Port Salerno escrow account until the sale of
the Port Salerno Site in 2003. Upon the sale of the Port Salerno property, the
net proceeds of sale were distributed to USEPA and Martin County Environmental
Services Department for the benefit of FDEP ("Martin County"), as directed by
USEPA and FDEP. At closing, FDEP executed a release of lien, including a release
of the operation, force and effect of the Consent Final Judgment on the Port
Salerno property sold to the buyer. FDEP also issued a Certificate of Compliance
with Consent Final Judgment at closing that confirmed FDEP's consent to the sale
and the distribution of the net proceeds to USEPA and Martin County. The current
balance in the Port Salerno escrow account is approximately $58,000.
9
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Performance of the remediation task at the Port Salerno site by USEPA and at the
Riviera Beach site by Honeywell will effectively discharge the Company's
remaining obligations under the Consent Final Judgment, provided that the final
remedy at each site meets the state cleanup requirements imposed by the Consent
Final Judgment. There remains a risk that FDEP will determine at some time in
the future that the final remedy approved by USEPA and implemented at either, or
both of, the Port Salerno and Riviera Beach Sites do not meet the state cleanup
requirements imposed by the Consent Final Judgment. If such a determination is
made by FDEP, there is a risk that FDEP will require the Company to implement
additional remedial action at either, or both of, the Port Salerno and Riviera
Beach Sites. The risk of such determination is deemed to be remote by the
Company and the amount of loss that may result from such a remote event cannot
be reasonably estimated at this time.
On August 7, 2002, the Company received a Request for Information from the State
of New York ("State") Department of Environmental Conservation ("NYDEC"),
seeking information on whether the Company had disposed of certain wastes at the
Clarkstown Landfill site located in the Town of Clarkstown, Rockland County, New
York. By letter dated August 29, 2002, the Company responded to the Request for
Information and advised NYDEC that the Company's former Tappan, New York
facility closed in the mid-1980s, prior to the initiation of the Company's
bankruptcy proceedings described above. The Company contends that, to the extent
that NYDEC has a claim against the Company as a result of the Company's alleged
disposal of wastes at the Clarkstown landfill prior to the closing of the
Company's former Tappan facility in the mid-1980s, the claim was discharged in
bankruptcy as a result of the Bankruptcy Court's August 1993 Order referenced
above. At NYDEC's request, the Company executed a revised Tolling Agreement with
NYDEC in March 2005, which provides for the tolling of applicable statutes of
limitation through the earlier of October 23, 2005, or the date NYDEC institutes
a suit against Solitron, for any claims associated with the Clarkstown Landfill
site. The revised Tolling Agreement also prohibits, generally, NYDEC from
commencing an action against any Potential Defendant in connection with the site
prior to September 23, 2005. It is not known at this time whether NYDEC will
pursue a claim against the Company in connection with the Clarkstown Landfill
site. As of the date of this filing, no claims have been made.
4. EARNINGS PER SHARE:
The shares used in the computation of the Company's basic and diluted earnings
per common share were as follows:
For the three months ended For the six months ended
August 31, August 31,
2005 2004 2005 2004
---- ---- ---- ----
Weighted average common shares outstanding 2,076,247 2,070,703 2,076,150 2,073,529
Dilutive effect of employee stock options 218,405 65,039 164,957 95,262
----------- ----------- ----------- -----------
Weighted average common shares outstanding, assuming dilution 2,294,653 2,135,742 2,241,107 2,168,791
=========== =========== =========== ===========
Weighted average common shares outstanding, assuming dilution, include the
incremental shares that would be issued upon the assumed exercise of stock
options. For the six month period ended August 31, 2005, none of the Company's
stock options were excluded from the calculation of diluted earnings per share
because the average price of the common shares is greater than the exercise
price of the options. For the six month period ended August 31, 2004, 256,000 of
the Company's stock options were excluded from the calculation of diluted
earning per share because the exercise prices of the stock options were greater
than or equal to the average price of the common shares, and therefore their
inclusion would have been anti-dilutive. These options could be dilutive in the
future if the average share price increases and is greater than the exercise
price of these options.
10
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INVENTORIES:
As of August 31, 2005 net inventories consist of the following:
Raw Materials $ 1,340,000
Work-In-Process 1,463,000
Finished Goods 413,000
-----------
Gross Inventories 3,216,000
Reserve (870,000)
-----------
Net Inventories $ 2,346,000
===========
6. INCOME TAXES:
At August 31, 2005, the Company has net operating loss carryforwards of
approximately $15,867,000 that expire through 2022. Such net operating losses
are available to offset future taxable income, if any. As the utilization of
such net operating losses for tax purposes is not assured, the deferred tax
asset has been fully reserved through the recording of a 100% valuation
allowance. Should a cumulative change in the ownership of more than 50% occur
within a three-year period, there could be an annual limitation on the use of
the net operating loss carryforward.
A reconciliation of the provision for income taxes to the amount calculated
using the statutory federal rate (34%) for the period ended August 31, 2005 is
as follows:
Income Tax Provision at
U.S. Statutory Rate $ 174,000
State Taxes, Net of Federal Benefit 28,000
Utilization of Net Operating Loss Carryforward (202,000)
---------
Income Tax Provision $ --
=========
The change in the valuation allowance on deferred tax assets is due primarily to
the utilization of the net operating loss for the period ended August 31, 2005.
7. OTHER INCOME:
During the fiscal quarter ended August 31, 2005, the Company settled
approximately $97,000 of debt obligations to unsecured creditors at a discount.
The Company has recognized approximately $76,000 of income from debt forgiveness
as a result of these settlements. This $76,000 of income from debt forgiveness
is a major component of the $89,000 of other income reflected in the condensed
consolidated statements of income for the quarter ended August 31, 2005. The
remaining $13,000 of other income is interest income on cash deposits.
8. ACCRUED EXPENSES:
As of August 31, 2005 accrued expenses and other liabilities consist of the
following:
Payroll and related employee benefits $378,000
Property taxes 28,000
Other liabilities 56,000
--------
$462,000
========
11
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. COMMITMENTS AND CONTINGENCIES:
As described in Item 3 to the Company's Annual Report on Form 10-KSB for the
year ended February 28, 2005, we are involved in certain legal proceedings.
Except for a confidential settlement reached with Technology Place, the
Company's landlord, there have been no material developments in these legal
proceedings since the filing of our Form 10-KSB. See Part II, Item 1 on page 16
of this report for further discussion of the settlement with the Company's
landlord.
For a discussion of the Company's accrual for losses associated with
environmental remediation obligations, see Note 3. With respect to the ATP
Agreement discussed in Note 3, the Company currently estimates that it will pay
the total sum of $75,000 during the first two years from the effective date of
the ATP Agreement and $10,000 per year for years three to seven from the
effective date of the ATP Agreement. Following the effective date of the ATP
Agreement, the Company will reduce its accrued environmental costs to $125,000
until paid.
10. EXPORT SALES AND MAJOR CUSTOMERS:
Revenues from domestic and export sales to unaffiliated customers are as
follows:
Three months ended August 31,
2005 2004
---- ----
Export sales:
Europe $ 87,000 $ 76,000
Canada and Latin America 133,000 49,000
Far East and Middle East 52,000 23,000
United States 1,739,000 1,806,000
------------ ------------
$ 2,011,000 $ 1,954,000
============ ============
Sales to the Company's top two customers accounted for 49% of net sales for the
quarter ended August 31, 2005 as compared to 54% for the quarter ended August
31, 2004. Sales to Raytheon Company accounted for approximately 40% of net sales
for the quarter ended August 31, 2005 and 46% for the quarter ended August 31,
2004. During the quarter ended August 31, 2005, the US Government represented
approximately 9% of net sales as compared to 8% for the quarter ended August 31,
2004.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview:
Solitron Devices, Inc., a Delaware corporation (the "Company" or "Solitron"),
designs, develops, manufactures and markets solid-state semiconductor components
and related devices primarily for the military and aerospace markets. The
Company manufactures a large variety of bipolar and metal oxide semiconductor
power transistors, power and control hybrids, junction and MOS field effect
transistors and other related products. Most of the Company's products are
custom made pursuant to contracts with customers whose end products are sold to
the United States government. Other products, such as Joint Army Navy
transistors, diodes and Standard Military Drawings voltage regulators, are sold
as standard or catalog items.
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, 2005 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.
Critical Accounting Policies:
The discussion and analysis of our financial condition and results of operations
are based upon the condensed consolidated financial statements included
elsewhere in this Form 10-QSB which are prepared in accordance with accounting
principles generally accepted in the United States. Preparing financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, and expenses. These estimates
and assumptions are affected by management's application of accounting policies.
Our critical accounting policies include inventories, valuation of plant,
equipment and intangible assets, revenue recognition and accounting for income
taxes. A discussion of all of these critical accounting policies can be found in
Note 1 of the "Notes to the consolidated financial statements" in Item 7 of our
Annual Report on Form 10-KSB for the fiscal year ended February 28, 2005.
Trends and Uncertainties:
During the three months ended August 31, 2005, the Company's book-to-bill ratio
was approximately 1.06 as compared to .58 for the three months ended August 31,
2004, reflecting an increase in the volume of orders booked. The Company does
not believe that the quarter-to-quarter change in the book-to-bill ratio
indicates a specific trend in the demand for the Company's products. Generally,
the intake of orders over the last eighteen months has varied greatly as a
result of the fluctuations in the general economy and of variations in defense
spending on programs the Company supports, which is expected to continue over
the next twelve months. The Company continues to identify means intended to
reduce its variable manufacturing costs to offset the potential impact of low
volume of orders to be shipped should a slow down in the intake of orders
reoccur. However, should order intake fall significantly below the level
experienced in the last twelve months, the Company might be required to
implement further cost cutting or other downsizing measures to continue its
business operations.
Results of Operations-Three Months Ended August 31, 2005 Compared to Three
Months Ended August 31, 2004:
Net sales for the three months ended August 31, 2005 increased 3% to $2,011,000
as compared to $1,954,000 for the three months ended August 31, 2004. This
increase was primarily attributable to a higher level of orders that were
shipped in accordance with customer requirements.
Cost of sales for the three months ended August 31, 2005 increased to $1,616,000
from $1,517,000 for the comparable period in 2004. Expressed as a percentage of
sales, cost of sales increased to 80% from 78% for the same periods in 2004.
This change was due mainly to an increase in the cost of raw materials. The cost
of raw materials increased to 29% of sales for the three months ended August 31,
2005 from 26% of sales for the three months ended August 31, 2004.
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Gross profit for the three months ended August 31, 2005 decreased to $395,000
from $437,000 for the three months ended August 31, 2004. Accordingly, gross
margins on the Company's sales decreased to 20% for the three months ended
August 31, 2005 in comparison to 22% for the three months ended August 31, 2004.
This change was due mainly to an increase in cost of sales as mentioned above.
For the three months ended August 31, 2005, the Company shipped 135,234 units as
compared to 59,705 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
should not be regarded as a reliable indicator of the Company's performance.
The Company's backlog of open orders increased 3%, from 4,944,000 to 5,074,000,
for the three months ended August 31, 2005, as compared to a decrease of 14% for
the three months ended August 31, 2004. Changes in the backlog reflect changes
in the intake of orders and in the delivery dates required by customers.
The Company has experienced an increase of 88% in the level of bookings during
the quarter ended August 31, 2005 as compared to a 10% decrease in bookings for
the same period in 2004 principally as a result of a higher demand for its
products in this period.
Selling, general, and administrative expenses decreased to $265,000 for the
three months ended August 31, 2005 from $294,000 for the comparable period in
2004. During the three months ended August 31, 2005, selling, general, and
administrative expenses as a percentage of net sales decreased to 13% as
compared with 15% for the three months ended August 31, 2004. Included in
selling, general and administrative expenses for the three month period was a
decrease in legal fees of $28,000 as compared with the same period in 2004. This
decrease reflects the resolution of an SEC investigation that took place in the
prior fiscal year.
Operating income for the three months ended August 31, 2005 decreased to
$130,000 from $143,000 for the three months ended August 31, 2004. This decrease
is due mainly to an increase in cost of sales slightly offset by an increase in
sales.
The Company recorded net other income of $89,000 for the three months ended
August 31, 2005 versus net other income of $4,000 for the three months ended
August 31, 2004. This increase was due primarily to a $76,000 gain on the
extinguishment of debt resulting from the settlements of certain debt
obligations to unsecured creditors recorded in the quarter ended August 31,
2005.
Net income for the three months ended August 31, 2005 increased to $219,000 from
$147,000 for the same period in 2004. This increase was due primarily to gain on
extinguishments of debt resulting from settlements of debt obligations to
unsecured creditors that were recorded in the quarter ended August 31, 2005 and
to an increase in sales.
Results of Operations-Six Months Ended August 31, 2005 Compared to Six Months
Ended August 31, 2004:
Net sales for the six months ended August 31, 2005 increased 6% to $4,114,000 as
compared to $3,889,000 for the six months ended August 31, 2004. This increase
was primarily attributable to a higher level of orders that were shipped in
accordance with customer requirements.
Cost of sales for the six months ended August 31, 2005 increased to $3,230,000
from $3,122,000 for the comparable period in 2004. Expressed as a percentage of
sales, cost of sales decreased to 79% for the six months ended August 31, 2005
compared to 80% for the six months ended August 31, 2004.
Gross profit for the six months ended August 31, 2005 increased to $884,000 from
$767,000 for the six months ended August 31, 2004. Expressed as a percentage of
sales, gross profit increased to 21% for the six months ended August 31, 2005
compared to 20% for the six months ended August 31, 2004.
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For the six months ended August 31, 2005 the Company shipped 315,389 units as
compared to 156,693 units shipped during the same period in 2004. It should be
noted that since the Company manufactures a wide variety of products with an
average sales price ranging from less than one dollar to several hundred
dollars, such periodic variations in the Company's volume of units shipped might
not be a reliable indicator of the Company's performance.
The Company's backlog of open orders increased 6%, from $4,771,000 to
$5,704,000, for the six months ended August 31, 2005 as compared to a decrease
of 16% for the six months ended August 31, 2004. Changes in the backlog reflect
the changes in the intake of orders and in the delivery dates required by
customers.
The Company has experienced an increase of 52% in the level of bookings for the
six months ended August 31, 2005 as compared to a decrease of 18% during the
same period in 2004 principally as a result of a higher demand for its products
in this period.
Selling, general, and administrative expenses decreased to $536,000 for the six
months ended August 31, 2005 from $612,000 for the comparable period in 2004.
During the six months ended August 31, 2005, selling, general, and
administrative expenses as a percentage of net sales decreased to 13% as
compared with 15% for the six months ended August 31, 2004. This decrease is due
in part to a decrease of $72,000 in legal fees and $32,000 in accounting fees.
These decreases reflect the resolution of an SEC investigation that took place
in the prior fiscal year.
Operating income for the six months ended August 31, 2005 increased to $348,000
from $155,000 for the six months ended August 31, 2004. This increase is due
primarily to a decrease in selling, general and administrative expenses as well
as an increase in sales.
The Company recorded net other income of $163,000 for the six months ended
August 31, 2005 versus net other expense of $3,000 for the six months ended
August 31, 2004. The variance was due primarily to a $144,000 gain on
extinguishment of debt as discussed above.
Net income for the six months ended August 31, 2005 increased to $511,000 from
$152,000 for the same period in 2004. This increase is mainly due to increased
sales, decreased cost of materials, decreased selling, general and
administrative expenses and to gain on extinguishments of debt resulting from
settlements of debt obligations to unsecured creditors that were recorded in the
quarter ended August 31, 2005.
Liquidity and Capital Resources:
The Company's sole source of liquidity is cash generated by ongoing operations.
The Company's liquidity is expected to be adversely affected in the short term
due to the anticipated lower level of revenue in the next six to nine months.
The Company's liquidity is not expected to improve until the Company's revenues
increase to a level above its breakeven point.
Furthermore, the Company's liquidity continues to be adversely affected by
significant non-recurring expenses associated with the Company's 1993 bankruptcy
petition obligations and the Company's inability to obtain additional working
capital through the sale of debt or equity securities. For a more complete
discussion of the Company's bankruptcy obligations, see "Business - Bankruptcy
Proceedings" in the Company's Form 10-KSB filed for the period ended February
28, 2005.
The Company is required to make quarterly payments to holders of unsecured
claims until they receive 35 percent (35%) of their pre-petition claims. As of
August 31, 2005, the Company has paid $608,000 to its unsecured creditors. The
Company`s remaining obligation is $1,378,000 to holders of allowed unsecured
claims in quarterly installments.
The Company reported a net income of $511,000 and operating income of $348,000
for the six months ended August 31, 2005. The Company has significant
obligations arising from settlements related to its bankruptcy proceeding which
require it to make substantial cash payments, which cannot be supported by the
Company's current level of operations.
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At August 31, 2005, February 28, 2005 and August 31, 2004 respectively, the
Company had cash of $2,685,000, $2,403,000 and $2,073,000 respectively. A
reduction in accounts receivable contributed $10,000 to the last three months'
positive cash flow generated by ongoing operations.
At August 31, 2005, the Company had working capital of $2,941,000 as compared
with a working capital at August 31, 2004 of $2,145,000. At February 28, 2005,
the Company had a working capital of $2,416,000. The $525,000 increase for the
six months ended August 31, 2005 was due mainly to a $282,000 increase in cash
resulting primarily from increased net income.
Off-Balance Sheet Arrangements:
The Company is not involved in any off-balance sheet arrangements.
FORWARD-LOOKING STATEMENTS
Information in this Form 10-QSB, including any information incorporated by
reference herein, includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and is subject to the safe-harbor
created by such sections. The Company's actual results may differ significantly
from the results discussed in such forward-looking statements.
Specifically, this quarterly report contains forward-looking statements
regarding:
o the Company's belief regarding changes in its book-to-bill ratio;
o the Company's expectations regarding fluctuations in the general economy
and variations in defense spending, and the effects of such fluctuations
and variations on the intake of orders;
o sources and availability of liquidity;
o anticipated lower revenue in the next six to nine months;
o the Company's ability to generate sufficient cash flow from operations to
sustain operations;
o the Company's ability to implement effectively cost-cutting or downsizing
measures;
o the Company's compliance with environmental laws, orders and
investigations and the future cost of such compliance;
o the Company's ability to make payments required under its Plan of
Reorganization or otherwise to generate sufficient cash from operations or
otherwise; and
o the Company's expectations of being released from certain environmental
liabilities and the Company's ability to satisfy such liabilities.
These statements are based upon assumptions and analyses made by the Company in
light of current conditions, future developments and other factors the Company
believes are appropriate in the circumstances, or information obtained from
third parties and are subject to a number of assumptions, risks and
uncertainties. Readers are cautioned that forward-looking statements are not
guarantees of future performance and that actual results might differ materially
from those suggested or projected in the forward-looking statements. Factors
that may cause actual future events to differ significantly from those predicted
or assumed include, but are not limited to:
o a misinterpretation of the Company's capital needs and sources and
availability of liquidity;
o a change in government regulations which hinders the Company's ability to
perform government contracts;
o inability to sustain or grow bookings and sales;
o inability to generate sufficient cash to sustain operations;
o failure to successfully implement cost-cutting or downsizing measures,
strategic plans or the insufficiency of such measures and plans;
o changes in military or defense appropriations;
o inability to make or renegotiate payments under the Plan of
Reorganization;
o unexpected impediments affecting ability to fill backlog;
o inability to be released from environmental liabilities; and
o an increase in the expected cost of environmental compliance based on
factors unknown at this time.
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ITEM 3. CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and procedures as
of August 31, 2005, Shevach Saraf, Chairman, President, Chief Executive Officer,
Treasurer and Chief Financial Officer of the Company, has concluded that the
Company's disclosure controls and procedures were effective as of August 31,
2005.
There were no changes in the Company's internal control over financial reporting
during the quarter ended August 31, 2005, that has materially affected or is
reasonably likely to materially affect the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
On March 24, 2003, the Company filed a complaint against its landlord,
Technology Place, in the Circuit Court of the 15th Judicial Circuit in and for
Palm Beach County, Florida. The complaint alleged breach of contract on several
grounds and demanded specific performance by the landlord. On July 7, 2005, the
Company and Technology Place agreed to settle the lawsuit between the parties.
The terms of the settlement are confidential.
The Company has negotiated an Ability-To-Pay Multi-Site Settlement Agreement
("ATP Agreement") with the United States Environmental Protection Agency
("USEPA") in connection with the Company's alleged environmental liability at
five sites. The ATP Agreement would require the Company to pay to USEPA the
total sum of $75,000 during the first two years from the effective date of the
ATP Agreement, and $10,000 per year or 5% of the Company's net income above
$500,000 per year, whichever is greater, in years three to seven from the
effective date of the ATP Agreement. The ATP Agreement was signed by the Company
on July 28, 2005, and is now being circulated for signature by USEPA and the
United States Department of Justice and is subject to a public comment period.
See Note 3 to the Company's condensed consolidated financial statements for
further discussion.
ITEM 6. EXHIBITS:
Exhibits
31 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SOLITRON DEVICES, INC.
Date: October 14, 2005 By: /s/ Shevach Saraf
----------------------
Name: Shevach Saraf
Title: Chairman, President, Chief
Executive Officer and Chief
Financial Officer
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
31 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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