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 November 30, 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 January 12, 2006: 2,166,799
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
SOLITRON DEVICES, INC.
INDEX
PART 1 - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheet 3
November 30, 2005
Condensed Consolidated Statements of Income 4
Three and Nine Months Ended November 30, 2005 and 2004
Condensed Consolidated Statements of Cash Flows 5
Nine Months Ended November 30, 2005 and 2004
Notes to Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-17
Item 3. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits 18
Signatures 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited, in thousands)
November 30, 2005
-----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,888
Accounts receivable 984
Inventories 2,395
Prepaid expenses and other current assets 92
------------
TOTAL CURRENT ASSETS 6,359
PROPERTY, PLANT AND EQUIPMENT, net 559
OTHER ASSETS 107
------------
TOTAL ASSETS $ 7,025
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of accrued environmental expenses $ 985
Accounts payable - Post-petition 259
Accounts payable - Pre-petition 1,370
Accrued expenses and other current liabilities 491
------------
TOTAL CURRENT LIABILITIES 3,105
LONG TERM LIABILITIES, net of current portion --
------------
TOTAL LIABILITIES 3,105
------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 500,000
shares, none issued -0-
Common stock, $.01 par value, authorized 10,000,000
shares, 2,162,799 shares issued and outstanding,
net of 173,287 shares of treasury stock 22
Additional paid-in capital 2,663
Retained earnings 1,235
------------
TOTAL STOCKHOLDERS' EQUITY 3,920
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,025
============
The accompanying notes are an integral part of the financial statements.
3
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED NOVEMBER 30,
(Unaudited, in thousands except for share and per share amounts)
Three Months Nine Months
2005 2004 2005 2004
---- ---- ---- ----
NET SALES $ 2,136 $ 1,910 $ 6,250 $ 5,799
Cost of Sales 1,563 1,581 4,793 4,703
------------- -------------- ------------- ------------
Gross Profit 573 329 1,457 1,096
Selling, General and Administrative Expenses 283 266 819 878
------------- -------------- ------------- ------------
Operating Income 290 63 638 218
------------- -------------- ------------- ------------
OTHER INCOME (EXPENSE)
Gain on Extinguishments of Debt 1 -0- 145 -0-
Other Income & (Expense), Net 10 5 31 5
Interest Expense -- (1) (2) (4)
------------- -------------- ------------- ------------
Other Income (Expense), Net 11 4 174 1
------------- -------------- ------------- ------------
Net Income $ 301 $ 67 $ 812 $ 219
============= ============== ============= ============
INCOME PER SHARE: Basic $ 0.14 $ 0.03 $ 0.39 $ 0.11
------------- -------------- ------------- ------------
: Diluted $ 0.13 $ 0.03 $ 0.36 $ 0.10
------------- -------------- ------------- ------------
WEIGHTED AVERAGE
SHARES OUTSTANDING: Basic 2,145,071 2,080,315 2,099,124 2,075,791
============= ============== ============= ============
: Diluted 2,339,050 2,175,406 2,273,754 2,170,996
============= ============== ============= ============
The accompanying notes are an integral part of the financial statements.
4
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED NOVEMBER 30,
(Unaudited, in thousands)
2005 2004
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 812 $ 219
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 145 139
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable (3) (236)
Inventories 2 (29)
Prepaid expenses and other current assets 35 86
Other assets (55) (7)
Increase (Decrease) in:
Accounts payable - Post-petition (96) (7)
Accounts payable - Pre-petition 562 (32)
Accrued expenses and other current liabilities (853) (4)
Accrued environmental expenses -0- 19
Other long-term liabilities (13) (19)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 536 129
--------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (95) (177)
--------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (95) (177)
--------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Exercise of stock options 44 -0-
--------- --------
NET CASH FROM FINANCING ACTIVITIES 44 -0-
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 485 (48)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 2,403 1,884
--------- --------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 2,888 $ 1,836
========= ========
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 nine month period ended November 30, 2005 are
not necessarily indicative of the results to be expected for the entire year
ending February 28, 2006.
SIGNIFICANT ACCOUNTING PRINCIPLES:
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.
Nine months ended Nov. 30,
--------------------------
2005 2004
---- ----
Net income, as reported $812 $219
Less: total stock based employee
compensation expense, net of tax effects 63 120
----- -----
Pro-forma net income/(loss) $749 $99
===== =====
Reported basic earnings per common share $0.39 $0.11
===== =====
Pro-forma basic earnings/(loss) per common share $0.36 $0.05
===== =====
Reported diluted earnings per common share $0.36 $0.10
===== =====
Pro-forma diluted earnings/(loss) per common share $0.33 $0.05
===== =====
The total fair value of the options granted during the nine months ended
November 30, 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 nine months ended November 30, 2005 was $0.70 ($.96 for the nine months
ended November 30, 2004). The fair value of options granted during the nine
months ended November 30, 2005 and 2004 was estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
Nine months ended Nov. 30,
--------------------------
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.
8
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 $74,000 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 was
circulated for signature by USEPA and the United States Department of Justice.
On December 5, 2005, the USEPA published a Federal Register Notice stating that
under section 122(h) of the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA), the USEPA had entered into the ATP Agreement with
the Company to settle its liability at the five sites referenced above. The ATP
Agreement will become effective upon receipt of written notice from USEPA that
the public comment period has closed and that comments received, if any, do not
require modification of or withdrawal by the United States from the Agreement.
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.
9
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 to offset costs of investigation, remediation and oversight of
the remedial site activities. 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.
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, as determined by FDEP. 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 on October 6, 2005, which provides for the tolling of applicable statutes
of limitation through the earlier of February 28, 2006, 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 nine months
November 30, ended November 30,
------------ ------------------
2005 2004 2005 2004
---- ---- ---- ----
Weighted average common shares outstanding 2,145,071 2,080,315 2,099,124 2,075,791
Dilutive effect of employee stock options 193,979 95,091 174,630 95,205
--------- --------- --------- ---------
Weighted average common shares outstanding, assuming dilution 2,339,050 2,175,406 2,273,754 2,170,996
========= ========= ========= =========
10
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Weighted average common shares outstanding, assuming dilution, include the
incremental shares that would be issued upon the assumed exercise of stock
options. For the nine-month period ended November 30, 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 nine month period ended November 30,
2004, 223,000 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.
5. INVENTORIES:
As of November 30, 2005 net inventories consist of the following:
Raw Materials $1,434,000
Work-In-Process 1,478,000
Finished Goods 289,000
-----------
Gross Inventories 3,201,000
Reserve (806,000)
-----------
Net Inventories $2,395,000
===========
6. INCOME TAXES:
At November 30, 2005, the Company has net operating loss carryforwards of
approximately $15,748,000 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 November 30, 2005 is
as follows:
Income Tax Provision at
U.S. Statutory Rate $ 276,000
State Taxes, Net of Federal Benefit 45,000
Utilization of Net Operating Loss Carryforward (321,000)
----------
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 November 30,
2005.
7. OTHER INCOME:
The $11,000 of other income reflected in the condensed consolidated statements
of income for the quarter ended November 30, 2005 consists of $10,000 of
interest income on cash deposits and $1,000 of income from the extingushment of
pre-petition unsecured debt.
11
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. ACCRUED EXPENSES:
As of November 30, 2005 accrued expenses and other liabilities consist of the
following:
Payroll and related employee benefits $ 439,000
Other liabilities 52,000
------
$491,000
9. COMMITMENTS AND CONTINGENCIES:
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 $74,000 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 November 30,
---------------------------------
2005 2004
---- ----
Export sales:
Europe $ 91,000 $ 105,000
Canada and Latin America 50,000 29,000
Far East and Middle East 19,000 17,000
United States 1,976,000 1,758,000
--------- ---------
$2,136,000 $1,909,000
Sales to the Company's top two customers accounted for 54% of net sales for the
quarter ended November 30, 2005 as compared to 48% for the quarter ended
November 30, 2004. Sales to Raytheon Company accounted for approximately 44% of
net sales for the quarter ended November 30, 2005 and 36% for the quarter ended
November 30, 2004. During the quarter ended November 30, 2005, the US Government
represented approximately 10% of net sales as compared to 12% for the quarter
ended November 30, 2004.
11. SUBSEQUENT EVENTS:
On December 5, 2005, the USEPA published a Federal Register Notice stating that
under section 122(h) of the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA), the USEPA has entered into a Cost Recovery
Settlement with the Company to settle liability at the following Superfund
Sites: Solitron Devices Superfund Site located in Riviera Beach, Florida;
Solitron Microwave Superfund Site located in Port Salerno, Florida; Petroleum
Products Corporation Superfund Site located in Pembroke Park, Florida; City
Industries, Inc. Superfund Site located in Orlando, Florida; and the Casmalia
Resources Superfund Site located in Santa Barbara County, California. The ATP
Agreement will become effective upon receipt of written notice from USEPA that
the public comment period has closed and that comments received, if any, do not
require modification of or withdrawal by the United States from the Agreement.
In December 2005, the Company reached an agreement with an unsecured creditor to
settle approximately $194,000 of pre-petition liability for a one-time payment
of $55,000. The Company will recognize the income from the extinguishment of
pre-petition unsecured debt as other income in the fiscal quarter ending
February 28, 2006.
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 November 30, 2005, the Company's book-to-bill
ratio was approximately 2.02 as compared to 1.07 for the three months ended
November 30, 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, variations in defense
spending on programs the Company supports, and the timing of contract awards by
the Department of Defense and subsequently by its prime contractors, which is
expected to continue over the next twelve months. The Company plans 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 significant slow
down in the intake of orders occur. However, should order intake fall
drastically below the level experienced in the last twelve to eighteen 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 November 30, 2005 Compared to Three
Months Ended November 30, 2004:
Net sales for the three months ended November 30, 2005 increased 12% to
$2,136,000 as compared to $1,910,000 for the three months ended November 30,
2004. This increase was primarily attributable to a higher level of orders that
were shipped in accordance with customer requirements. While sales were
negatively affected in the week immediately following Hurricane Wilma, the
Company was able to regain lost sales during subsequent weeks leading to the end
of the fiscal quarter.
13
Cost of sales for the three months ended November 30, 2005 decreased to
$1,563,000 from $1,581,000 for the comparable period in 2004. Expressed as a
percentage of sales, cost of sales decreased to 73% from 83% for the same period
in 2004. The cost of sales for the three months ended November 30, 2004 was
higher due to increased labor costs that were necessary to maintain the
Company's shipping schedules which were negatively affected by Hurricanes
Francis and Jeanne and also due to expenses associated with repair and
replacement of equipment damaged during the storms. Cost of sales for the three
months ended November 30, 2005 were also adversely affected due to labor costs,
equipment and facility repair costs and fixed expenses not offset by sales
volume as a result of Hurricane Wilma.
Gross profit for the three months ended November 30, 2005 increased to $573,000
from $329,000 for the three months ended November 30, 2004. Accordingly, gross
margins on the Company's sales increased to 27% for the three months ended
November 30, 2005 in comparison to 17% for the three months ended November 30,
2004. This increase in gross profit is a result of higher sales for the three
months ended November 30, 2005 as described above, offset by the impact of the
Company's business from Hurricane Wilma.
For the three months ended November 30, 2005, the Company shipped 78,648 units
as compared to 76,847 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 43%, from 5,074,000 to 7,244,000,
for the three months ended November 30, 2005, as compared to an increase of 3%
for the three months ended November 30, 2004. Changes in backlog resulted
changes in the intake of orders and in the delivery dates required by customers
as well as timing differences in the awarding of contracts by the Department of
Defense and its prime contractors.
The Company has experienced an increase of 110% in the level of bookings during
the quarter ended November 30, 2005 as compared to an 18% decrease in bookings
for the same period in 2004 principally as a result of a higher demand for its
products in this period and timing differences in the awarding of contracts by
the Department of Defense and its prime contractors.
Selling, general, and administrative expenses increased to $283,000 for the
three months ended November 30, 2005 from $266,000 for the comparable period in
2004. During the three months ended November 30, 2005, selling, general, and
administrative expenses as a percentage of net sales decreased to 13% as
compared with 14% for the three months ended November 30, 2004. Included in
selling, general and administrative expenses for the three month period was an
increase in wages of $12,000 as compared with the same period in 2004.
Operating income for the three months ended November 30, 2005 increased to
$290,000 from $63,000 for the three months ended November 30, 2004. This
increase is due mainly to a higher sales volume and lower cost of sales as
described above.
The Company recorded net other income of $11,000 for the three months ended
November 30, 2005 versus net other income of $4,000 for the three months ended
November 30, 2004. This increase was due primarily to an increase in interest
income caused by higher interest rates and higher money market account balances.
Net income for the three months ended November 30, 2005 increased to $301,000
from $67,000 for the same period in 2004. This increase was due primarily to
increased sales and a lower cost of sales percentage as compared to the previous
year.
14
Results of Operations - Nine Months Ended November 30, 2005 Compared to Nine
Months Ended November 30, 2004:
Net sales for the nine months ended November 30, 2005 increased 8% to $6,250,000
as compared to $5,799,000 for the nine months ended November 30, 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 nine months ended November 30, 2005 increased to
$4,793,000 from $4,703,000 for the comparable period in 2004. Expressed as a
percentage of sales, cost of sales decreased to 77% for the nine months ended
November 30, 2005 compared to 81% for the nine months ended November 30, 2004.
The dollar increase in cost of sales is attributable to higher labor and
materials costs associated with the increase in sales as well as labor costs,
equipment and facility repair costs and fixed expenses not offset by sales
volume as a result of Hurricane Wilma.
Gross profit for the nine months ended November 30, 2005 increased to $1,457,000
from $1,096,000 for the nine months ended November 30, 2004. Expressed as a
percentage of sales, gross profit increased to 23% for the nine months ended
November 30, 2005 compared to 19% for the nine months ended November 30, 2004.
The higher gross profit is attributable to a higher level of sales for the nine
months ended November 30, 2005.
For the nine months ended November 30, 2005 the Company shipped 394,037 units as
compared to 233,540 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 52%, from $4,771,000 to
$7,244,000, for the nine months ended November 30, 2005 as compared to a
decrease of 4% for the nine months ended November 30, 2004. Changes in the
backlog reflect the changes in the intake of orders and in the delivery dates
required by customers as well as timing differences in the awarding of contracts
by the Department of Defense and its prime contractors.
The Company has experienced an increase of 76% in the level of bookings for the
nine months ended November 30, 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, which is fully attributable to timing differences in the
awarding of contracts by the Department of Defense and its prime contractors.
Selling, general, and administrative expenses decreased to $819,000 for the nine
months ended November 30, 2005 from $878,000 for the comparable period in 2004.
During the nine months ended November 30, 2005, selling, general, and
administrative expenses as a percentage of net sales decreased to 13% as
compared with 15% for the nine months ended November 30, 2004. This decrease is
due principally to a decrease of $57,000 in legal fees and $29,000 in accounting
fees. These decreases reflect the resolution of an SEC investigation that took
place in the prior fiscal year.
Operating income for the nine months ended November 30, 2005 increased to
$638,000 from $218,000 for the nine months ended November 30, 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 $174,000 for the nine months ended
November 30, 2005 versus net other income of $1,000 for the nine months ended
November 30, 2004. The increase was due primarily to a $145,000 gain on
extinguishment of debt associated with the buyout of unsecured debt, with the
remainder due to an increase in interest income caused by higher interest rates
and higher cash balances.
Net income for the nine months ended November 30, 2005 increased to $812,000
from $219,000 for the same period in 2004. This increase is mainly due to
increased sales, decreased selling, general and administrative expenses and to
the gain on extinguishments of multiples of debt resulting from settlements of
debt obligations associated with the buyout of unsecured debt to unsecured
creditors.
15
Liquidity and Capital Resources:
The Company's sole source of liquidity is cash generated by ongoing operations.
The Company's liquidity continues to be adversely affected by 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
November 30, 2005, the Company has paid $616,000 to its unsecured creditors. The
Company`s remaining obligation is $1,370,000 (approximately 50% of the original
debt) to holders of allowed unsecured claims in quarterly installments.
The Company reported a net income of $812,000 and operating income of $638,000
for the nine months ended November 30, 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.
At November 30, 2005, February 28, 2005 and November 30, 2004 respectively, the
Company had cash of $2,888,000, $2,403,000 and $1,836,000 respectively.
Reductions in inventories and prepaid expenses contributed $95,000 to the last
three months' positive cash flow generated by ongoing operations.
At November 30, 2005, the Company had working capital of $3,254,000 as compared
with a working capital at November 30, 2004 of $2,190,000. At February 28, 2005,
the Company had a working capital of $2,416,000. The $838,000 increase for the
nine months ended November 30, 2005 was due mainly to a $485,000 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 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, the future cost of such compliance and the adequacy of the
Company's accrual for environmental remediation;
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, including the Company's expectations regarding the ATP
Agreement, 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:
16
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 failure of the ATP Agreement to become effective or the Company's inability
to comply with the terms of the ATP agreement once effective;
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.
ITEM 3. CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and procedures as
of November 30, 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
November 30, 2005.
There were no changes in the Company's internal control over financial reporting
during the quarter ended November 30, 2005, that have materially affected or are
reasonably likely to materially affect the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
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 $74,000 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. On December 5, 2005, USEPA published a Federal Register
Notice stating that under section 122(h) of the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA), the USEPA has entered into a
Cost Recovery Settlement with the Company to settle liability at the following
Superfund Sites: Solitron Devices Superfund Site located in Riviera Beach,
Florida; Solitron Microwave Superfund Site located in Port Salerno, Florida;
Petroleum Products Corporation Superfund Site located in Pembroke Park, Florida;
City Industries, Inc. Superfund Site located in Orlando, Florida; and the
Casmalia Resources Superfund Site located in Santa Barbara County, California.
The ATP Agreement will become effective upon receipt of written notice from
USEPA that the public comment period has closed and that comments received, if
any, do not require modification of or withdrawal by the United States from the
Agreement.
17
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.
18
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: January 17, 2006 By: /s/ Shevach Saraf
-----------------------------------
Name: Shevach Saraf
Title: Chairman, President, Chief
Executive Officer and Chief
Financial Officer
19
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.
20