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EX-32 - SOLITRON DEVICES INCv207585_ex32.htm
EX-31 - SOLITRON DEVICES INCv207585_ex31.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
(Mark one)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2010

or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______

Commission File No.  1-4978

SOLITRON DEVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
22-1684144       
(State or Other Jurisdiction of
(I.R.S. Employer   
 Incorporation or Organization)
Identification No.)

 
3301 Electronics Way, West Palm Beach, Florida
33407           
 
(Address of Principal Executive Offices)
(Zip Code)      

(561) 848-4311
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”  “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer      
¨
Accelerated filer  ¨
     
Non-accelerated filer
¨
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨   No x
 
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of January 3, 2011 was 2,263,775.

 

 

SOLITRON DEVICES, INC.

TABLE OF CONTENTS

       
Page No.
PART 1 - FINANCIAL INFORMATION    
         
Item
1.
Financial Statements (unaudited)
 
3
         
   
Condensed Balance Sheets
 
3
   
November 30, 2010 and February 28, 2010
   
         
   
Condensed Statements of Income
 
4
   
Three and Nine months ended November 30, 2010 and 2009
   
         
   
Condensed Statements of Cash Flows
 
5
   
Nine months ended November 30, 2010 and 2009
   
         
   
Notes to Condensed Financial Statements
 
6-12
         
Item
2.
Management’s Discussion and Analysis of Financial Condition and
   
   
Results of Operations
 
13-16
         
Item
3.
Quantitative and Qualitative Disclosures about Market Risk
 
17
         
Item
4.
Controls and Procedures
 
18
         
PART II – OTHER INFORMATION
   
         
Item
6.
Exhibits
 
18
         
Signatures
   
18

 
2

 

PART I – FINANCIAL INFORMATION

ITEM 1.         FINANCIAL STATEMENTS

SOLITRON DEVICES, INC.
CONDENSED BALANCE SHEETS
AS OF NOVEMBER 30, 2010 (Unaudited) AND FEBRUARY 28, 2010

   
Nov 30,
   
Feb 28,
 
   
2010
   
2010
 
   
Unaudited
       
   
(in thousands, except for shares)
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 510     $ 400  
Treasury bills
    6,097       5,601  
Accounts receivable, less allowance for doubtful accounts of $2
    851       685  
Inventories, net (Note 5)
    2,977       2,809  
Prepaid expenses and other current assets
    113       125  
TOTAL CURRENT ASSETS
    10,548       9,620  
                 
PROPERTY, PLANT AND EQUIPMENT, net
    683       561  
                 
OTHER ASSETS
    65       52  
TOTAL ASSETS
  $ 11,296     $ 10,233  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable-Post-petition
  $ 252     $ 266  
Accounts payable-Pre-petition, current portion
    1,037       1,058  
Customer deposits
    126       39  
Accrued expenses and other current liabilities    (Note 8)
    618       505  
TOTAL CURRENT LIABILITIES
    2,033       1,868  
                 
LONG-TERM LIABILITIES, net of current portion
    138       148  
TOTAL LIABILITIES
    2,171       2,016  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, $.01 par value, authorized 500,000 shares, none issued
    -       -  
Common stock, $.01 par value, authorized 10,000,000 shares, 2,263,775 shares issued and outstanding, net of 173,287 shares of treasury stock
    23       23  
Additional paid-in capital
    2,733       2,733  
Retained earnings
    6,369       5,461  
TOTAL STOCKHOLDERS' EQUITY
    9,125       8,217  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 11,296     $ 10,233  

The accompanying notes are an integral part of the condensed financial statements.

 
3

 

SOLITRON DEVICES, INC.
CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30,
(Unaudited)
(In thousands except for share and per share amounts)

   
Three months
   
Nine Months
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net Sales
  $ 2,281     $ 1,989     $ 6,690     $ 5,747  
Cost of Sales
    1,561       1,563       4,848       4,428  
                                 
Gross Profit
    720       426       1,842       1,319  
                                 
Selling, General and Administrative Expenses
    400       251       938       763  
                                 
Operating Income
    320       175       904       556  
                                 
OTHER INCOME (EXPENSES)
                               
Other Income (Expense), Net (Note 7)
    (1 )     -       1       9  
Interest Income
    1       4       12       15  
Income Tax Expense
    (4 )     -       (9 )     -  
Other, Net
    (4 )     4       4       24  
                                 
Net Income
  $ 316     $ 179     $ 908     $ 580  
                                 
Net Income Per Share   : Basic
  $ .14     $ .08     $ .40     $ .26  
         : Diluted
  $ .13     $ .07     $ .37     $ .24  
                                 
Weighted Average
                               
Shares Outstanding      : Basic
    2,263,775       2,263,775       2,263,775       2,263,775  
         : Diluted
    2,466,310       2,453,356       2,469,130       2,453,107  

The accompanying notes are an integral part of the condensed financial statements.

 
4

 

SOLITRON DEVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED NOVEMBER 30,
(Unaudited)
(In thousands)

   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income
  $ 908     $ 580  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    153       148  
Changes in operating assets and liabilities:
               
(Increase) Decrease in:
               
Accounts receivable
    (166 )     74  
Inventories
    (168 )     (105 )
Prepaid expenses and other current assets
    12       28  
Other non-current assets
    (13 )     -  
Increase (Decrease) in:
               
Accounts payable – Post-petition
    (14 )     (98 )
Accounts payable – Pre-petition
    (21 )     (21 )
Customer deposits
    87       11  
Accrued expenses and other current liabilities
    113       (200 )
Other non-current liabilities
    (10 )     (10 )
NET CASH PROVIDED BY OPERATING ACTIVITIES
    881       407  
                 
CASH FLOW FROM INVESTING ACTIVITIES:
               
Investment in treasury bills
    (496 )     (349 )
Purchases of property, plant and equipment
    (275 )     (123 )
NET CASH (USED IN) INVESTING ACTIVITIES
    (771 )     (472 )
                 
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    110       (65 )
                 
CASH AT THE BEGINNING OF PERIOD
    400       440  
                 
CASH AT THE END OF PERIOD
  $ 510     $ 375  

The accompanying notes are an integral part of the condensed financial statements.

 
5

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Activities
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 was incorporated under the laws of the State of New York in 1959 and reincorporated under the laws of the State of Delaware in August 1987.

Basis of Presentation
The financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America. In management’s opinion, all adjustments necessary for a fair statement of the results of the interim periods have been made. All adjustments are of a normal, recurring nature.

Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money market accounts.

Investment in Treasury Bills
Investment in Treasury Bills includes treasury bills with maturities of one year or less and is stated at market value.

Accounts Receivable
Accounts receivable consists of unsecured credit extended to the Company’s customers in the ordinary course of business.  The Company reserves for any amounts deemed to be uncollectible based on past collection experiences and an analysis of outstanding balances using an allowance account.  The allowance amount was $2,000 as of November 30, 2010 and February 28, 2010.

Shipping and Handling
Shipping and handling costs billed to customers are recorded in net sales.  Shipping costs incurred by the Company are recorded in cost of sales.

Inventories
Inventories are stated at the lower of cost or market.  Cost is determined using the “first-in, first-out” (FIFO) method.  The Company buys raw material only to fill customer orders.  Excess raw material is created only when a vendor imposes a minimum buy in excess of actual requirements.  Such excess material will usually be utilized to meet the requirements of the customer’s subsequent orders.  If excess material is not utilized after two fiscal years it is fully reserved.  Any inventory item once designated as reserved is carried at zero value in all subsequent valuation activities.
 
The Company’s inventory valuation policy is as follows:

Raw material /Work in process:
 
All material purchased, processed, and/or used in the last two fiscal years is valued at the lower of its acquisition cost or market.  All material not purchased/used in the last two fiscal years is fully reserved for.
     
Finished goods:
 
All finished goods with firm orders for later delivery are valued (material and overhead) at the lower or cost or market.  All finished goods with no orders are fully reserved.
     
Direct labor costs:
  
Direct labor costs are allocated to finished goods and work in process inventory based on engineering estimates of the amount of man-hours required from the different direct labor departments to bring each device to its particular level of completion.

 
6

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

Financial Statement  Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates, and the differences could be material.  Such estimates include depreciable life, valuation allowance, and allowance for inventory obsolescence.

Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and trade receivables.  The Company places its cash with high credit quality institutions.  At times, such amounts may be in excess of the $250,000 FDIC insurance limits.  The Company has not experienced any losses in such account and believes that it is not exposed to any significant credit risk on the account.  As of November 30 and February 28, 2010, $260,000 and $150,000 respectively, of the Company’s cash reserves were subject to this risk as the Company had cash of $510,000 and $400,000 on those dates.  With respect to the trade receivables, most of the Company’s products are custom made pursuant to contracts with customers whose end-products are sold to the United States Government.  The Company performs ongoing credit evaluations of its customers’ financial condition and maintains allowances for potential credit losses.  Actual losses and allowances have historically been within management’s expectations.

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 manufacturing 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. In addition, the Company, 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.
COMMITMENTS AND CONTINGENCIES:

Environmental
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, 2009; 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 fiscal years 2010-2013.  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 happened in fiscal year 2001, fiscal year 2006, fiscal year 2009 and fiscal year 2010.  In February 2010, the Company paid $10,000 to USEPA for fiscal year 2010 based on preliminary net income projections. In July 2010, the Company paid an additional $4,000 for fiscal year 2010 pursuant to its obligations under the Settlement Agreement. The Company has accrued $30,000 for its remaining minimum obligations under the Settlement Agreement.  This amount is reflected in “Accrued expenses and other current liabilities” on the Company’s balance sheets at November 30, 2010. The Company has also accrued an additional $10,000 in current liability to USEPA for the estimated amount due on net income in excess of $700,000 for the current fiscal year.

 
7

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

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. 91-1232 CA (the “Consent Final Judgment”).  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.

Prior to the sale of the Port Salerno Site and Riviera Beach Site, USEPA took over from FDEP as the lead regulatory agency for the remediation of the Sites.   At the closing of 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 Company continues to maintain the Port Salerno escrow account with a current balance of approximately $58,000 as of November 30, 2010.  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. (“Honeywell”), pursuant to an Administrative Order on Consent entered into between Honeywell and USEPA.  The Company has been notified by FDEP that the successful performance of remediation work in accordance with the Consent Final Judgment standards 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 Site and Riviera Beach Site 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 Site and Riviera Beach Site.

By letter dated November 16, 2006, FDEP notified the Company that FDEP has unreimbursed expenses associated with the Port Salerno Site and Riviera Beach Site of $214,800.  In 2006, FDEP also notified the Company that FDEP required the Company to resume payments under the Consent Final Judgment to ensure that there are adequate funds to cover FDEP’s unreimbursed expenses and the Company’s residual liability under the Consent Final Judgment.  During a follow up telephone conversation in 2006 with the Company’s attorney, FDEP advised the Company that FDEP would prepare a justification for the asserted unreimbursed expenses.  Upon receipt of the cost reimbursement package, the Company is required to transfer $55,000 from the Port Salerno Escrow Account to FDEP as partial payment for FDEP’s unreimbursed expenses that are otherwise recoverable under the Consent Final Judgment.  FDEP further stated, during the telephone conversation, that FDEP will work with the Company to establish a reduced payment schedule for the Company to resume under the Consent Final Judgment based on an appropriate showing by the Company of financial hardship.  The Company is currently awaiting receipt of FDEP’s cost reimbursement package.  Upon receipt of that documentation, the Company will be required to provide a recommendation to FDEP for resumption of payments to FDEP under the Consent Final Judgment based on the Company’s present ability to pay.

 
8

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

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 (The Clarkstown Landfill Site”).  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 had closed in the mid-1980’s, prior to the initiation of the Company’s bankruptcy proceedings described below.  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 Site 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 December 28, 2009, which provides for the tolling of applicable statutes of limitation through the earlier of December 3, 2010, or the date the State institutes a suit against the Company for any claims associated with the Clarkstown Landfill Site. As of the date of this filing, NYDEC has not served any such claim on Solitron Devices, Inc. in connection with the Clarkstown Landfill Site.  As of the date of this filing, no such claim has been made by NYDEC. The Clarkstown Landfill Joint Defense Group (“Clarkstown JDG”), a group of potentially responsible parties formed to respond to claims by NYDEC for recovery of closure and clean-up response costs at the Clarkstown Landfill Site, is negotiating with NYDEC to settle the claims of NYDEC against all potentially responsible parties at the Clarkstown Landfill site that participate in the Clarkstown JDG.  In connection with those negotiations, the Clarkstown JDG, by letter dated March 17, 2010, offered to pursue a settlement of NYDEC’s potential claim against the Company in return for the Company’s agreement to pay the sum of $125,000.00, representing the Company’s alleged share of the overall settlement with NYDEC.  The Company rejected the settlement offer on March 29, 2010, based on its continuing contention that any claim of NYDEC against the Company was discharged in bankruptcy as a result of the Bankruptcy Court’s August 1993 Order.

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
November 30,
   
For the nine months ended
November 30,
 
   
2010
   
2009
   
2010
   
2009
 
Weighted average common shares outstanding
    2,263,775       2,263,775       2,263,775       2,263,775  
Dilutive effect of employee stock options
    202,535       189,581       205,355       189,332  
Weighted average common shares outstanding, assuming dilution
    2,466,310       2,453,356       2,469,130       2,453,107  

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 and nine month periods ended November 30, 2010 and November 30, 2009, 13,500 shares (at $3.95) underlying  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.

5.
INVENTORIES:

As of November 30, 2010, inventories consist of the following:

   
Gross
   
Reserve
   
Net
 
Raw Materials
  $ 1,786,000     $ (430,000 )   $ 1,356,000  
Work-In-Process
    2,488,000       (868,000 )     1,620,000  
Finished Goods
    457,000       (456,000 )     1,000  
Totals
  $ 4,731,000     $ (1,754,000 )   $ 2,977,000  

 
9

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

As of February 28, 2010, inventories consist of the following:

   
Gross
   
Reserve
   
Net
 
Raw Materials
  $ 1,515,000     $ (379,000 )   $ 1,136,000  
Work-In-Process
    2,364,000       (760,000 )     1,604,000  
Finished Goods
    557,000       (488,000 )     69,000  
Totals
  $ 4,436,000     $ (1,627,000 )   $ 2,809,000  

6.
INCOME TAXES:

At November 30, 2010, the Company has net operating loss carryforwards of approximately $14,918,000 that expire through 2024.  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 mostly 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.

Total net deferred taxes were comprised of the following as of November 30 and February 28, 2010:

Deferred tax assets:
 
November 30,
2010
   
February 28,
2010
 
Loss carryforwards
  $ 5,614,000     $ 6,005,000  
Allowance for doubtful accounts
    1,000       1,000  
Inventory allowance
    660,000       612,000  
Depreciation
    107,000       109,000  
Section 263A capitalized costs
    126,000       126,000  
Total deferred tax assets
    6,508,000       6,853,000  
Valuation allowance
    (6,508,000 )     (6,853,000 )
                 
Total net deferred taxes
  $ 0     $ 0  

The change in the valuation allowance on deferred tax assets is due principally to the utilization of the net operating loss for the quarter ended November 30, 2010 and for the year ended February 28, 2010.

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate for the quarter ended November 30, 2010 and for the year ended February 28, 2010 is as follows:

   
November 30,
2010
   
February 28,
2010
 
U.S. federal statutory rate
    34.0 %     34.0 %
Change in valuation allowance
     (34.0 )      (34.0 )
Effective income tax rate
     0.0 %      0.0 %

7.
OTHER INCOME/(EXPENSE):

For the quarters ended November 30, 2010 and 2009, other income/(expense) consisted of the following:

   
November 30,
2010
   
November 30,
2009
 
Interest income
  $ 1,000     $ 4,000  
Income tax benefit
    2,000       -  
Income tax expense
    (6,000 )     -  
Loss on disposal of asset
    (1,000 )     -  
Net other income/(expense)
  $ (4,000 )   $ 4,000  

 
10

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

8.
ACCRUED EXPENSES:

As of November 30, 2010 and February 28, 2010, accrued expenses and other liabilities consisted of the following:

   
November 30,
2010
   
February 28,
2010
 
Payroll and related employee benefits
  $ 585,000     $ 469,000  
Other liabilities
    33,000       36,000  
    $ 618,000     $ 505,000  

9.
EXPORT SALES AND MAJOR CUSTOMERS:

Revenues from domestic and export sales to unaffiliated customers for the three months ended November 30, 2010 are as follows:

   
Power
         
Field Effect
   
Power
       
Geographic Region
 
Transistors
   
Hybrids
   
Transistors
   
MOSFETS
   
Totals
 
                               
Europe and Australia
  $ 8,000     $ 384,000     $ 1,000     $ 0     $ 393,000  
Canada and Latin America
    0       0       0       1,000       1,000  
Far East and Middle East
    0       0       23,000       82,000       105,000  
United States
    345,000       1,021,000       160,000       256,000       1,782,000  
Totals
  $ 353,000     $ 1,405,000     $ 184,000     $ 339,000     $ 2,281,000  

Revenues from domestic and export sales to unaffiliated customers for the three months ended November 30, 2009 are as follows:

   
Power
         
Field Effect
   
Power
       
Geographic Region
 
Transistors
   
Hybrids
   
Transistors
   
MOSFETS
   
Totals
 
                               
Europe and Australia
  $ 0     $ 237,000     $ 0     $ 0     $ 237,000  
Canada and Latin America
    8,000       0       4,000       0       12,000  
Far East and Middle East
    2,000       0       0       22,000       24,000  
United States
    164,000       1,113,000       152,000       287,000       1,716,000  
Totals
  $ 174,000     $ 1,350,000     $ 156,000     $ 309,000     $ 1,989,000  

Revenues from domestic and export sales are attributed to global geographic region according to the location of the customer’s primary manufacturing or operating facilities.

For the quarters ended November 30, 2010 and 2009, sales to the Companies top two customers consisted of the following:

   
November 30,
2010
   
November 30,
2009
 
Raytheon Company
    24 %     48 %
BAE Systems Australia
    17 %     12 %
Totals
    41 %     60 %

 
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10.
MAJOR SUPPLIERS:

For the quarters ended November 30, 2010 and 2009, purchases from the Companies top two vendors consisted of  the following:

   
November 30,
2010
   
November 30,
2009
 
Egide, USA
    10 %      
Platronics Seals
            17 %
WUXI Streamtek
    9 %     14 %
                 
Totals
    19 %     31 %

 
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 (“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 Financial Statements should be read in conjunction with the Financial Statements and the related Notes to 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-K for the year ended February 28, 2010 and the Condensed Financial Statements and the related Notes to Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
 
Significant Accounting Policies:
 
The discussion and analysis of our financial condition and results of operations are based upon the Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q 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 significant accounting policies include inventories, valuation of property, plant and equipment, revenue recognition and accounting for income taxes. A discussion of all of these significant accounting policies can be found in Note 1 of the “Notes To Financial Statements” in Part I, Item 8 of our Annual Report on Form 10-K for the fiscal year ended February 28, 2010.
 
Trends and Uncertainties:
 
During the three months ended November 30, 2010, the Company’s book-to-bill ratio was approximately .77 as compared to approximately 1.12 for the three months ended November 30, 2009, reflecting a decrease in the volume of orders booked.  Generally, the intake of orders varies greatly from period to period 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. For example, in December 2010 alone, after the quarter ended November 30, 2010, the Company booked approximately $2,100,000 of new orders, representing approximately 24% of the year-to-date bookings. This fluctuation in the intake of orders has existed for the past 18 years and is expected to continue over the next 24 months. The Company continues its efforts to reduce its variable manufacturing costs to offset the potential impact of low volume of orders to be shipped.  However, should order intake fall drastically below the level experienced in the last twenty four months, the Company might be required to implement further cost cutting or other downsizing measures to continue its business operations.
 
Inventories
Inventories are stated at the lower of cost or market.  Cost is determined using the “first-in, first-out” (FIFO) method.  The Company buys raw material only to fill customer orders.  Excess raw material is created only when a vendor imposes a minimum buy in excess of actual requirements.  Such excess material will usually be utilized to meet the requirements of the customer’s subsequent orders.  If excess material is not utilized after two fiscal years it is fully reserved.  Any inventory item once designated as reserved is carried at zero value in all subsequent valuation activities.

 
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The Company’s inventory valuation policy is as follows:

Raw material /Work in process:
 
All material purchased, processed and/or used in the last two fiscal years is valued at the lower of its acquisition cost or market.  All material not purchased/used in the last two fiscal years is fully reserved for.
     
Finished goods:
 
All finished goods with firm orders for later delivery are valued (material and overhead) at the lower of cost or market.  All finished goods with no orders are fully reserved.
     
Direct labor costs:
 
Direct labor costs are allocated to finished goods and work in process inventory based on engineering estimates of the amount of man hours required from the different direct labor departments to bring each device to its particular level of completion.

Results of Operations-Three Months Ended November 30, 2010 Compared to Three Months Ended November 30, 2009:

Net sales for the three months ended November 30, 2010 increased 15% to $2,281,000 as compared to $1,989,000 for the three months ended November 30, 2009.  This increase was primarily attributable to a higher level of orders that were shipped in accordance with customer requirements.

Cost of sales for the three months ended November 30, 2010 decreased to $1,561,000 from $1,563,000 for the comparable period in 2009, primarily due to improved yields and recovery of scrap precious metal.  Expressed as a percentage of sales, cost of sales decreased to 68% from 79% for the same period in 2009.  This decrease in percentage was due primarily to a decrease in cost of raw materials percentage.

Gross profit for the three months ended November 30, 2010 increased to $720,000 from $426,000 for the three months ended November 30, 2009, primarily due to an increase in net sales and lower cost of materials as described above.  Accordingly, gross margins on the Company’s sales increased to 32% for the three months ended November 30, 2010 in comparison to 21% for the three months ended November 30, 2009.  This percentage increase was due primarily to higher sales and lower cost of raw materials percentage.

For the three months ended November 30, 2010, the Company shipped 24,491 units as compared to 46,687 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.

As of November 30, 2010, the Company’s backlog of open orders increased 8% to $5,989,000 as compared to the end of the same quarter in 2009. As of November 30, 2009, the Company’s backlog of open orders decreased 18% to $5,556,000 as compared to the end of same quarter in 2008.  Changes in backlog reflect changes in the intake of orders and in the delivery requirements of customers.

The Company has experienced a decrease of 21% to $1,759,000 in the level of bookings during the quarter ended November 30, 2010 as compared to the same period in the prior year. For the three months ended November 30, 2009, the Company experienced a 26% decrease to $2,223,000 in the level of bookings as compared to the same period in the prior year. The decrease in bookings for the current quarter is principally as a result of delays in the placement of orders by key customers, a decrease in defense spending, resulting in a decrease in the monetary value of, and timing differences in the placement of contracts by the Department of Defense and its prime contractors.

Selling, general, and administrative expenses increased to $400,000 for the three months ended November 30, 2010 from $251,000 for the comparable period in 2009.  The increase reflects higher labor and sales commission expenses. During the three months ended November 30, 2010, selling, general, and administrative expenses as a percentage of net sales increased to 18% as compared with 13% for the three months ended November 30, 2009.  The percentage increase was due primarily to an increase in labor and sales commission expenses.

Operating income for the three months ended November 30, 2010 increased to $320,000 as compared to $175,000 for the three months ended November 30, 2009. This increase is due primarily to higher net sales and lower cost of materials.

 
14

 

The Company recorded net other expense of $4,000 for the three months ended November 30, 2010 as compared to net other income of $4,000 for the three months ended November 30, 2009.  Included in net other income was $1,000 of interest income on investment in treasury bills net of changes in market value for the three months ended November 30, 2010 minus $4,000 of income tax expense minus a $1,000 loss on disposal of a fixed asset.  For the three months ended November 30, 2009, the Company recorded $4,000 of interest income on investment in treasury bills net of changes in market value.  The increase in interest income is due primarily to higher rates of return on invested funds.
 
Net income for the three months November 30, 2010 increased to $316,000 as compared to $179,000 for the same period in 2009.  This increase is due primarily to higher net sales and lower cost of materials.
 
Results of Operations-Nine months ended November 30, 2010 Compared to Nine months ended November 30, 2009:

Net sales for the nine months ended November 30, 2010 increased 16% to $6,690,000 as compared to $5,747,000 for the nine months ended November 30, 2009.  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, 2010 increased to $4,848,000 from $4,428,000 for the comparable period in 2009, primarily due to an increase in net sales.  Expressed as a percentage of sales, cost of sales decreased to 72% from 77% for the same period in 2009.  This percentage decrease was due primarily to an increase in net sales and a lower cost of raw materials as a result of improved yields and scrap precious metal recovery.
 
Gross profit for the nine months ended November 30, 2010 increased to $1,842,000 from $1,319,000 for the nine months ended November 30, 2009, primarily due to an increase in net sales and lower cost of raw materials. Gross margins on the Company’s sales increased to 28% from 23% for the same period in 2009.  This percentage increase was primarily due to an increase in net sales and lower cost of raw materials as described above.
 
For the nine months ended November 30, 2010, the Company shipped 110,614 units as compared to 127,367 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.
 
As of November 30, 2010, the Company’s backlog of open orders increased 8% to $5,989,000 as compared to the end of the same quarter in 2009. As of November 30, 2009, the Company’s backlog of open orders decreased 18% to $5,556,000 as compared to the end of same quarter in 2008.  Changes in backlog reflect changes in the intake of orders and in the delivery requirements of customers.

The Company has experienced an increase of 35% to $6,750,000 in the level of bookings during the nine months ended November 30, 2010 when compared with the nine months ended November 30, 2009. The increase occurred principally as a result of a shift in defense spending priorities, resulting in an increase in the monetary value of, and timing differences in the placement of contracts by the Department of Defense and its prime contractors. The increase occurred primarily during the three months ended May 31, 2010.

Selling, general, and administrative expenses increased to $938,000 for the nine months ended November 30, 2010 from $763,000 for the comparable period in 2009, primarily due to higher sales commissions and general labor costs.  During the nine months ended November 30, 2010, selling, general, and administrative expenses as a percentage of net sales increased to 14% as compared to 13% for the nine months ended November 30, 2009.  This percentage increase was primarily due to increases in sales commissions and general labor costs as mentioned above.

Operating income for the nine months ended November 30, 2010 increased to $904,000 from $556,000 for the nine months ended November 30, 2009. This increase is due primarily to an increase in net sales and lower cost of raw materials offset by an increase in selling, general and administrative expenses.

The Company recorded net other income of $4,000 for the nine months ended November 30, 2010 as compared to net other income of $24,000 for the nine months ended November 30, 2009.  Included in net other income was interest income of $12,000 for the nine months ended November 30, 2010, $1,000 of net other income, and $9,000 of income tax expense. Included in net other income for the nine months ended November 30, 2009 was $15,000 of interest income, and $16,000 of income tax benefit offset by $7,000 of expense from receivables adjustments. Interest income has decreased by $3,000 due to lower T-Bill rates.

 
15

 
 
Net income for the nine months ended November 30, 2010 increased to $908,000 from $580,000 for the same period in 2009.  This increase was due primarily to an increase in net sales and a decrease in cost of sales percentage as discussed above.
 
Liquidity and Capital Resources:
 
Subject to the following discussion, the Company expects its sole source of liquidity over the next twelve months to be cash from operations. The Company anticipates that its capital expenditures required to sustain operations will be approximately $250,000 during the current fiscal year and will be funded from operations.

Based upon (i) management’s best information as to current national defense priorities, future defense programs, as well as management’s expectations as to future defense spending, (ii) a fluctuation in the intake of orders as discussed above (see Part I, Item 2 of this Quarterly Report on Form 10-Q), and an increase in the cost of recently procured raw materials and operations that will result in the potential erosion of profit levels and continued price pressures due to severe price lowering pressures by defense customers, and (iii) the continued intense competition in the defense and aerospace market, the Company believes that it will have sufficient cash on hand to satisfy its operating needs during the current fiscal year.  However, due to the level of current backlog and new order intake (due to the status of the general economy and the shift to Commercial Off –The-Shelf (COTS) by the defense industry), the Company might operate at a break even or a small profit during the balance of the current fiscal year.  In the event the Company experiences a significant slowdown in the intake of new orders, the Company may be required to implement cost-cutting or other downsizing measures to continue its business operations.  Such cost-cutting measures could inhibit future growth prospects. In appropriate situations, the Company may seek strategic alliances, joint ventures with others or acquisitions in order to maximize marketing potential and utilization of existing resources and provide further opportunities for growth.

The Company reported net income of $908,000 and operating income of $904,000 for the nine months ended November 30, 2010.

At November 30, 2010, February 28, 2010 and November 30, 2009, the Company had cash of approximately $510,000, $400,000 and $468,000, respectively.  Net income contributed $908,000 to the last nine months’ cash flow generated by ongoing operations.

At November 30, 2010, February 28, 2010 and November 30, 2009, the Company had investments in treasury bills of approximately $6,097,000, $5,601,000 and $5,462,000, respectively.

At November 30, 2010, the Company had working capital of $8,515,000 as compared with working capital of $7,567,000 at November 30, 2009.  At February 28, 2010, the Company had a working capital of $7,752,000.  The $948,000 increase for the nine months ended November 30, 2010 was due mainly to a $940,000 combined increase in cash, receivables, inventories and investments in treasury bills.

Off-Balance Sheet Arrangements:

The Company has not engaged in any off-balance sheet arrangements.

 
16

 

ITEM 3.              QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable

FORWARD-LOOKING STATEMENTS
 
Some of the statements in this Quarterly Report on Form 10-Q are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended February 28, 2010, including those identified below. We do not undertake any obligation to update forward-looking statements.
 
Some of the factors that may impact our business, financial condition, results of operations, strategies or prospects include:

 
·
Our complex manufacturing processes may lower yields and reduce our revenues.
 
·
Our business could be materially and adversely affected if we are unable to obtain qualified supplies of raw materials, parts and finished components on a timely basis and at a cost-effective price.
 
·
We are dependent on government contracts, which are subject to termination, price renegotiations and regulatory compliance, which can increase the cost of doing business and negatively impact our revenues.
 
·
Changes in government policy or economic conditions could negatively impact our results.
 
·
Our inventories may become obsolete and other assets may be subject to risks.
 
·
Environmental regulations could require us to incur significant costs.
 
·
Our business is highly competitive, and increased competition could reduce gross profit margins and the value of an investment in our Company.
 
·
Downturns in the business cycle could reduce the revenues and profitability of our business.
 
·
Our operating results may decrease due to the decline of profitability in the semiconductor industry.
 
·
Uncertainty of current economic conditions, domestically and globally, could continue to affect demand for our products and negatively impact our business.
 
·
Cost reduction efforts may be unsuccessful or insufficient to improve our profitability and may adversely impact productivity.
 
·
We may not achieve the intended effects of our new business strategy, which could adversely impact our business, financial condition and results of operations.
 
·
Our inability to introduce new products could result in decreased revenues and loss of market share to competitors; new technologies could also reduce the demand for our products.
 
·
Loss of, or reduction of business from, substantial clients could hurt our business by reducing our revenues, profitability and cash flow.
 
·
A shortage of three-inch silicon wafers could result in lost revenues due to an inability to build our products.
 
·
The nature of our products exposes us to potentially significant product liability risk.
 
·
We depend on the recruitment and retention of qualified personnel, and our failure to attract and retain such personnel could seriously harm our business.
 
·
Provisions in our charter documents and rights agreement could make it more difficult to acquire our Company and may reduce the market price of our stock.
 
·
Natural disasters, like hurricanes, or occurrences of other natural disasters whether in the United States or internationally may affect the markets in which our common stock trades, the markets in which we operate and our profitability.
 
·
Failure to protect our proprietary technologies or maintain the right to use certain technologies may negatively affect our ability to compete.
 
·
The price of our common stock has fluctuated widely in the past and may fluctuate widely in the future.

 
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ITEM 4.               CONTROLS AND PROCEDURES

Our Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of its management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e), and 15d-15(e)) as of the end of the period covered by this Quarterly Report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

Changes in Internal Control over Financial Reporting

Based on an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, there has been no change in our internal control over financial reporting during our last fiscal quarter identified in connection with that evaluation, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II– OTHER INFORMATION

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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
SOLITRON DEVICES, INC.
   
Date: January 7, 2011,
 
 
/s/ Shevach Saraf
 
Shevach Saraf
 
Chairman, President,
 
Chief Executive Officer,
 
Treasurer and
 
Chief Financial Officer
 
(Principal executive officer and
 
principal financial officer)

 
18

 

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.

 
19