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 May 31, 2006
|_| 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 June 23, 2006: 2,260,049
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
May 31, 2006
Condensed Consolidated Statements of Income 4
Three Months Ended May 31, 2006 and 2005
Condensed Consolidated Statements of Cash Flows 5
Three Months Ended May 31, 2006 and 2005
Notes to Condensed Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition 12-15
and Results of Operations
Item 3. Controls and Procedures 15
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits 16
Signatures 17
2
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
(Unaudited, in thousands)
May 31, 2006
------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,119
Accounts receivable, less allowance for doubtful accounts of $1 983
Inventories, net 2,516
Prepaid expenses and other current assets 192
------------
TOTAL CURRENT ASSETS 6,810
PROPERTY, PLANT AND EQUIPMENT, net 569
OTHER ASSETS 45
------------
TOTAL ASSETS $ 7,424
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - Post-petition $ 464
Accounts payable - Pre-petition, current portion 1,163
Accrued expenses and other current liabilities 654
------------
TOTAL CURRENT LIABILITIES 2,281
LONG TERM LIABILITIES, net of current portion 78
------------
TOTAL LIABILITIES 2,359
------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 500,000 shares, none issued -0-
Common stock, $.01 par value, authorized 10,000,000 shares, 2,260,049
shares issued and outstanding, net of 173,287 shares of treasury stock 22
Additional paid-in capital 2,731
Retained earnings 2,312
------------
TOTAL STOCKHOLDERS' EQUITY 5,065
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,424
============
The accompanying notes are an integral part of the
financial statements.
3
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MAY 31,
--------------------------
(Unaudited, in thousands except for share and per share amounts)
2006 2005
----------- -----------
NET SALES $ 1,901 $ 2,103
Cost of sales 1,697 1,614
----------- -----------
Gross profit 204 489
Selling, general and administrative expenses 288 271
----------- -----------
Operating (loss)/income (84) 218
----------- -----------
OTHER INCOME (EXPENSE)
Other income, net -- 64
Interest income 31 13
Interest expense on unsecured creditors claim -- (3)
----------- -----------
Other income (expense), net 31 74
----------- -----------
Net (loss)/income $ (53) $ 292
=========== ===========
(LOSS)/INCOME PER SHARE: Basic $ (0.02) $ 0.14
----------- -----------
: Diluted: $ (0.02) $ 0.13
----------- -----------
WEIGHTED AVERAGE
SHARES OUTSTANDING: Basic 2,194,126 2,076,053
=========== ===========
: Diluted 2,433,196 2,187,561
=========== ===========
The accompanying notes are an integral part of the
financial statements.
4
SOLITRON DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MAY 31,
--------------------------
(Unaudited, in thousands)
2006 2005
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)/income $ (53) $ 292
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 46 46
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable 5 91
Inventories 54 (19)
Prepaid expenses and other current assets (57) (14)
Other assets 19
Increase (Decrease) in:
Accounts payable - Post-petition (49) 11
Accounts payable - Pre-petition (7) 682
Accrued expenses and other current liabilities 25 (769)
Other long-term liabilities -- (13)
------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (17) 307
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (65) (26)
------- -------
NET CASH (USED IN) INVESTING ACTIVITIES (65) (26)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Exercise of stock options 20 --
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20 --
------- -------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (62) 281
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 3,181 2,403
------- -------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 3,119 $ 2,684
======= =======
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, 2006.
The results of operations for the three month period ended May 31, 2006 are not
necessarily indicative of the results to be expected for the entire year ending
February 28, 2007.
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 Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, ("SFAS No. 123") 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 expense 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.
Three months ended May 31,
--------------------------
2006 2005
------- -------
Net (loss)/income, as reported $ (53) $ 292
Less: total stock based employee
compensation expense, net of tax effects -- 47
------- -------
Pro-forma net (loss)/income $ (53) $ 245
======= =======
Reported basic (loss)/earnings per common share $ (0.2) $ 0.14
======= =======
Pro-forma basic (loss)/earnings per common share $ (0.2) $ 0.12
======= =======
Reported diluted (loss)/earnings per common share $ (0.2) $ 0.13
======= =======
Pro-forma diluted (loss)/earnings per common share $ (0.2) $ 0.11
======= =======
The total fair value of the options granted during the three months ended May
31, 2006 and 2005 was $0 and $33,000, respectively, determined under the fair
value based method for all awards.
No employee stock options were granted during the three months ended May 31,
2006. The weighted average estimated value of employee stock options granted
during the three months ended May 31, 2005 was $.70. The fair value of options
granted during the three months ended May 31, 2005 was estimated on the date of
the grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Three months ended May 31,
--------------------------
2006 2005
----- -----
Dividend Yields 0.0% 0.0%
Expected Volatility 0% 109.8%
Risk-free Interest Rates 0% 4.1%
Expected Life (in years) 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 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 entered into an Ability to Pay Multi-Site Settlement Agreement with
the United States Environmental Protection Agency ("USEPA"), effective February
24, 2006 ("Settlement Agreement"), to resolve the Company's alleged liability to
USEPA at the following sites: Solitron Microwave Superfund Site, Port Salerno,
Florida ("Port Salerno Site"); Petroleum Products Corporation Superfund Site,
Pembroke Park, Florida; Casmalia Resources Superfund Site, Santa Barbara,
California ("Casmalia Site"); Solitron Devices Site, Riviera Beach, Florida (the
"Riviera Beach Site"); and City Industries Superfund Site, Orlando, Florida
(collectively, the "Sites"). The Settlement Agreement required the Company to
pay to USEPA the sum of $74,000 by February 24, 2008; the Company paid the
entire sum of $74,000 to USEPA on February 27, 2006. In addition, the Company is
required to pay to USEPA the sum of $10,000 or 5% of Solitron's net after-tax
income over the first $500,000, if any, whichever is greater, for each year from
2008-2012. For payment to USEPA to be above $10,000 for any of these five years,
the Company's net income must exceed $700,000 for such year, which has only
happened twice in the past ten years (in fiscal year 2001 and fiscal year 2006).
The Company accrues $50,000 for its remaining obligations under the Settlement
Agreement.
In consideration of the payments made by the Company under the Settlement
Agreement, USEPA agreed not to sue or take any administrative action against the
Company with regard to any of the Sites. The Company has also been notified by a
group of alleged responsible parties formed at the Casmalia Site ("Casmalia PRP
Group") that, based on their review and lack of objection to the Settlement
Agreement, the Casmalia PRP Group does not anticipate pursuing Solitron for cost
recovery at the Casmalia site.
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 Case No. 92-1232 CA. The Consent Final Judgment required the
Company to 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 remediation work, take all reasonable steps to sell the two Sites and, upon
the sale of the Sites, apply the net proceeds from the sales to fund the
remediation work. Both Sites have been sold pursuant to purchase agreements
approved by FDEP.
8
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
Prior to the sale of the Port Salerno and Riviera Beach Sites, USEPA took over
from FDEP as the lead regulatory agency for the remediation of the Sites. At the
sale of each Site, the net proceeds of sale were distributed to USEPA and/or
FDEP or other parties, as directed by the agencies. In addition, upon the sale
of the Riviera Beach Site, the Riviera Beach Escrow Account was transferred to
USEPA, as directed by the agencies. The current balance in the Port Salerno
Escrow Account is approximately $59,000. At present, work at the Port Salerno
Site is being performed by USEPA. Work at the Riviera Beach Site is being
performed by Honeywell, Inc., pursuant to an Administrative Order on Consent
entered into between Honeywell and USEPA. The Company has been notified by FDEP
that the performance of remediation work by USEPA at the Port Salerno Site and
by Honeywell at the Riviera Beach Site will be construed by FDEP as discharging
the Company's remediation obligations under the Consent Final Judgment.
There remains a possibility 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 does not meet the State cleanup
requirements imposed by the Consent Final Judgment. If such a final
determination is made by FDEP, there is a possibility that FDEP will require the
Company to implement additional remedial action at either, or both of, the Port
Salerno and Riviera Beach Sites. The likelihood 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 reasonably be estimated at this time.
On August 7, 2002, the Company received a Request for Information from the State
of New York 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-1980's, 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-1980's, the claim was discharged in
bankruptcy as a result of the Bankruptcy Court's August 1993 Order. At NYDEC's
request, the Company entered into a revised Tolling Agreement with NYDEC on
February 18, 2006, which provides for the tolling of applicable statutes of
limitation through the earlier of September 28, 2006 or the date the State
institutes a suit against Solitron for any claims associated with the Clarkstown
Landfill Site. It is not known at this time whether NYDEC will pursue a claim
against the Company in connection with this Site. As of the date of this filing,
no such claim has 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
May 31,
---------------------
2006 2005
--------- ---------
Weighted average common shares outstanding 2,194,126 2,076,053
Dilutive effect of employee stock options 239,070 111,508
--------- ---------
Weighted average common shares outstanding,
assuming dilution 2,433,196 2,187,561
========= =========
Weighted average common shares outstanding, assuming dilution, include the
incremental shares that would be issued upon the assumed exercise of stock
options. For the three month period ended May 31, 2006, 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 three month period ended May 31, 2005, 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.
9
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
5. INVENTORIES:
As of May 31, 2006 net inventories consist of the following:
Raw Materials $ 1,511,000
Work-In-Process 1,509,000
Finished Goods 432,000
-----------
Gross Inventories 3,452,000
Reserve (936,000)
-----------
Net Inventories $ 2,516,000
===========
6. INCOME TAXES:
At May 31, 2006, 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 carryforwards.
A reconciliation of the provision for income taxes to the amount calculated
using the statutory federal rate (34%) for the period ended May 31, 2006 as
follows:
Income Tax Provision at 5/31/06
----------
U.S. Statutory Rate $ --
State Taxes, Net of Federal Benefit --
Alternative Minimum Tax --
Utilization of Net Operating Loss Carryforward --
----------
Income Tax Provision $ --
==========
No change in the valuation allowance on deferred tax assets was recorded for the
period ended May 31, 2006.
7. OTHER INCOME:
The $31,000 of other income reflected in the condensed consolidated statements
of income for the quarter ended May 31, 2006 consists of $31,000 of interest
income on cash and cash equivalents. During the fiscal quarter ended May 31,
2005, the Company settled approximately $341,000 of debt obligations to
unsecured creditors at a discount. The Company recognized approximately $69,000
of other income as a result of these settlements. This $69,000 of other income
is shown net of $5,000 of other expense in the Condensed Consolidated Statements
of Income for the quarter ended May 31, 2005.
8. ACCRUED EXPENSES:
As of May 31, 2006 accrued expenses and other liabilities consist of the
following:
Payroll and related employee benefits $532,000
Property taxes 17,000
Other liabilities 105,000
--------
$654,000
========
10
SOLITRON DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
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
Settlement Agreement discussed in Note 3, the Company currently estimates that
it will pay $10,000 per year for years three to seven from the effective date of
the Settlement Agreement.
10. EXPORT SALES AND MAJOR CUSTOMERS:
Revenues from domestic and export sales to unaffiliated customers are as
follows:
Three months ended May 31,
--------------------------
2006 2005
---------- ----------
Export sales:
Europe $ 159,000 $ 159,000
Canada and Latin America 11,000 134,000
Far East and Middle East 10,000 38,000
United States 1,721,000 1,772,000
---------- ----------
$1,901,000 $2,103,000
========== ==========
Sales to the Company's top two customers accounted for approximately 59% of net
sales for the quarter ended May 31, 2006 as compared to 54% for the quarter
ended May 31, 2005. Sales to Raytheon Company accounted for approximately 52% of
net sales for the quarter ended May 31, 2006 as compared to 46% for the quarter
ended May 31, 2005. During the quarter ended May 31, 2006, the US Government
represented approximately 7% of net sales as compared to 8% for the quarter
ended May 31, 2005.
11
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
("MOS") power transistors, power and control hybrids, junction and power 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, 2006 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, 2006.
Trends and Uncertainties:
During the three months ended May 31, 2006, the Company's book-to-bill ratio was
approximately .98 as compared to 1.08 for the three months ended May 31, 2005,
reflecting a decrease 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 twenty four 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 May 31, 2006 Compared to Three Months
Ended May 31, 2005:
Net sales for the three months ended May 31, 2006 decreased 10% to $1,901,000 as
compared to $2,103,000 for the three months ended May 31, 2005. This decrease
was primarily attributable to a lower level of scheduled orders that were
shipped in accordance with customer requirements.
12
Cost of sales for the three months ended May 31, 2006 increased to $1,697,000
from $1,614,000 for the comparable period in 2005. Expressed as a percentage of
sales, cost of sales increased to 89% from 77% for the same period in 2005. The
change was due primarily to higher costs of raw materials, outside services,
labor, and an increase in the cost of scrap material as compared to the same
period last year.
Gross profit for the three months ended May 31, 2006 decreased to $204,000 from
$489,000 for the three months ended May 31, 2005. Accordingly, gross margins on
the Company's sales decreased to approximately 11% for the three months ended
May 31, 2006 in comparison to approximately 23% for the three months ended May
31, 2005. This change was due primarily to higher costs of raw materials,
outside services, labor, and an increase in the cost of scrap material as well
as a lower level of sales.
For the three months ended May 31, 2006, the Company shipped 58,448 units as
compared to 180,155 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 sales 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 decreased 1%, from 6,042,000 to 6,004,000,
for the three months ended May 31, 2006, as compared to an increase of
approximately 4% for the three months ended May 31, 2005. Changes in backlog
resulted from 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 a decrease in the level of bookings of approximately
19% for the quarter ended May 31, 2006 as compared to the same period for the
previous year principally as a result of timing differences in the awarding of
contracts by the Department of Defense and its prime contractors.
Selling, general, and administrative expenses increased to $288,000 for the
three months ended May 31, 2006 from $271,000 for the comparable period in 2005.
During the three months ended May 31, 2006, selling, general, and administrative
expenses as a percentage of net sales increased to 15% as compared with 13% for
the three months ended May 31, 2005. Included in the increase in selling,
general and administrative expenses for the three month period was an increase
in wages of $18,000 and an increase in sales commissions of $8,000 as compared
with the same period in 2005, offset by variances in other expenses.
Operating (loss)/income for the three months ended May 31, 2006 decreased to a
loss of $84,000 from income of $218,000 for the three months ended May 31, 2005.
This decrease is due mainly to a lower sales volume and higher cost of sales as
described above.
The Company recorded net other income of $31,000 for the three months ended May
31, 2006 versus net other income of $74,000 for the three months ended May 31,
2005. Other income decreased because income from debt forgiveness was recognized
in the three months ended May 31, 2005 while none was recognized in the three
months ended May 31, 2006. Interest income for the three months ended May 31,
2006 increased to $31,000 from $8,000 for the same period in 2005 due to higher
interest rates earned and higher cash and cash equivalents account balances.
Net (loss)/income for the three months ended May 31, 2006 decreased to a loss of
$53,000 from income of $292,000 for the same period in 2005. This decrease was
due primarily to lower sales volume and higher cost of sales as described above.
13
Liquidity and Capital Resources:
The Company's sole source of cash is revenue 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 due
to customers' delivery requirements. The Company 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 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 Annual Report on Form
10-KSB filed for the period ended February 28, 2006.
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
May 31, 2006, the Company has paid approximately $685,000 to its unsecured
creditors. The Company's remaining obligation is approximately $1,163,000 to
holders of allowed unsecured claims to be paid in quarterly installments.
The Company reported a net loss of $53,000 and operating loss of $84,000 for the
three months ended May 31, 2006. 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 May 31, 2006, February 28, 2006 and May 31, 2005, the Company had cash of
approximately $3,119,000, $3,181,000 and $2,684,000 respectively. Purchases of
replacement capital manufacturing equipment contributed $65,000 to the last
three months' negative cash flow generated by ongoing operations.
At May 31, 2006, the Company had working capital of $4,529,000 as compared with
a working capital at May 31, 2005 of $2,715,000. At February 28, 2006, the
Company had a working capital of $4,562,000. The $33,000 decrease for the three
months ended May 31, 2006 was due mainly to $65,000 of new manufacturing
equipment purchases, offset by a decrease in current liabilities.
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 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 expectations regarding liquidity, including sources and
availability;
o the Company's expectations regarding a lower level of revenue during the
next six to nine months;
o the Company's beliefs regarding its ability to generate sufficient cash
flow from operations to sustain operations;
o the Company's beliefs regarding the quarter-to-quarter change in the
book-to-bill ratio;
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 implementation of the Plan of Reorganization and the Company's ability to
make payments required under the Plan of Reorganization;
o expectations of being released from certain environmental liabilities and
the Company's ability to satisfy such liabilities; and
14
o the Company's estimates that it will pay $10,000 per year during years
three to seven from the effective date of the Settlement Agreement.
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 the loss of certification or qualification of the Company's products or
the inability of the Company to capitalize on such certifications and/or
qualifications;
o unexpected rapid technological change;
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 a shift in or misinterpretation of industry trends;
o unforeseen factors which impair or delay the development of any or all of
its products;
o inability to sustain or grow bookings and sales;
o inability to capitalize on competitive strengths or a misinterpretation of
those strengths;
o the emergence of improved, patented technology by competitors;
o inability to protect the Company's proprietary technologies;
o a misinterpretation of the nature of the competition, the Company's
competitive strengths or its reputation in the industry;
o inability to respond quickly to customers' needs and to deliver products
in a timely manner resulting from unforeseen circumstances;
o inability to generate sufficient cash to sustain operations;
o inability to adequately respond to continued pricing pressure;
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 inability to move into new markets or develop new products;
o unexpected impediments affecting the Company's ability to fill backlog;
o inability to be released from certain environmental liabilities;
o an increase in the expected cost of environmental compliance;
o changes in law or industry regulation;
o unexpected growth or stagnation of the business;
o any changes that render the Company's headquarters and manufacturing
facilities unsuitable or inadequate to meet the Company's current needs;
o significant fluctuations in the price and volume of trading in the
Company's common stock;
o unforeseen effects of inflation; and
o the impact of hurricanes, tornadoes and other weather conditions on our
business.
ITEM 3. CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and procedures as
of May 31, 2006, 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 May 31, 2006.
There were no changes in the Company's internal control over financial reporting
during the quarter ended May 31, 2006, that have materially affected or are
reasonably likely to materially affect the Company's internal control over
financial reporting.
15
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.
16
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: June 27, 2006 By: /s/ Shevach Saraf
-------------------------------
Name: Shevach Saraf
Title: Chairman, President,
Chief Executive Officer
and Chief Financial Officer
17
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.
18