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EX-31 - SOLITRON DEVICES INCv186553_ex31.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 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. 

 (Name of Registrant as Specified in Its Charter)
Delaware
 
22-1684144
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification Number)
3301 Electronics Way, West Palm Beach, Florida
 
33407
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant’s Telephone Number, Including Area Code:  (561) 848-4311

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
  
Name of Each Exchange on Which Registered
None
  
N/A

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form           10-K.  ¨
 
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 Act).    Yes  ¨    No  x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of August 31, 2009 was $3,651,000 (based on the closing sales price of the registrant’s common stock on that date).
 
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of May 20, 2010 was 2,263,775.

 

 

Table of Contents
   
Page
     
PART I
 
3
Item 1.
Business
3
Item 1A.
Risk Factors
11
Item 1B.
Unresolved Staff Comments
16
Item 2.
Properties
16
Item 3.
Legal Proceedings
16
Item 4.
(Removed and Reserved)
16
   
17
Part II
 
17
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and  Issuer Purchases of Equity Securities
17
Item 6.
Selected Financial Data
17
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
22
Item 8.
Financial Statements and Supplementary Data
23
     
 
Independent Auditors Report
25
     
 
Solitron Devices, Inc., Notes to Financial Statements
30
     
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
42
Item 9A(T).
Controls and Procedures
42
Item 9B.
Other Information
42
     
Part III
 
43
Item 10.
Directors, Executive Officers and Corporate Governance
43
Item 11.
Executive Compensation
45
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
49
Item 13.
Certain Relationships and Related Transactions, and Director Independence
50
Item 14.
Principal Accounting Fees and Services
50
     
Part IV
 
52
Item 15.
Exhibits, Financial Statement Schedules
52
     
Signatures
 
54

 
2

 

PART I
ITEM 1.                 BUSINESS

GENERAL

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 ("Power MOSFETS"), 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 ("JAN") transistors, diodes and Standard Military Drawings (“SMD”) voltage regulators, are sold as standard or catalog items.

The Company was incorporated under the laws of the State of New York in March 1959, and reincorporated under the laws of the State of Delaware in August 1987.  For information concerning the Company’s financial condition, results of operations, and related financial data, you should review the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Financial Statements and Supplementary Data” sections of this document.  You should also review and consider the risks relating to the Company’s business, operations, financial performance, and cash flows below under “Risk Factors.”

PRODUCTS

The Company designs, manufactures and assembles bipolar and MOS power transistors, power and control hybrids, junction and Power MOSFETs, field effect transistors and other related products.

Set forth below by principal product type are the percentage (i) contributions to the Company's total sales of each of the Company's principal product lines for the fiscal year ended February 28, 2010 and for the fiscal year ended February 28, 2009 and (ii) contributions to the Company's total order backlog at February 28, 2010 and February 28, 2009.

   
% of Total Sales
   
% of Total Sales
   
% Backlog
   
% Backlog
 
   
for Fiscal Year Ended
   
for Fiscal Year Ended
   
at
   
at
 
   
February
   
February
   
February
   
February
 
Product
 
28, 2010
   
28, 2009
   
28, 2010
   
28, 2009
 
                         
Power Transistors
    12 %     14 %     13 %     7 %
Hybrids
    57 %     59 %     54 %     58 %
Field Effect Transistors
    10 %     8 %     12 %     12 %
Power MOSFETS
    21 %     19 %     21 %     23 %
      100 %     100 %     100 %     100 %

The Company’s backlog at February 28, 2010 and revenue for the year ended February 28, 2010 reflect demand for the Company’s products at such date and for such period.  For more information, see “Backlog” below.  The variation in the proportionate share of each product line for each period reflects changes emanating from: demand, Congressional appropriations process and timing associated with awards of defense contracts, and shifts in technology and consolidation of defense prime contractors.

The Company’s semiconductor products can be classified as active electronic components.  Active electronic components are those that control and direct the flow of electrical current by means of a control signal such as a voltage or current.  The Company’s active electronic components include bipolar transistors and MOS transistors.

 
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It is customary to subdivide active electronic components into those of a discrete nature and those which are non-discrete.  Discrete devices contain one single semiconductor element; non-discrete devices consist of integrated circuits or hybrid circuits, which contain two or more elements, either active or passive, interconnected to make up a selected complete electrical circuit.  In the case of an integrated circuit, a number of active and passive elements are incorporated onto a single silicon chip.  A hybrid circuit, on the other hand, is made up of a number of individual components that are mounted onto a suitable surface material, interconnected by various means, and suitably encapsulated.  Hybrid and integrated circuits can either be analog or digital; presently, the Company manufactures only analog components. The Company’s products are either standard devices, such as catalog type items (e.g., transistors and voltage regulators), or application-specific devices, also referred to as custom or semi-custom products.  The latter are designed and manufactured to meet a customer’s particular requirements.  For the fiscal year ended February 28, 2010 approximately 90% of the Company’s sales have been of custom products, and the remaining 10% have been of standard or catalog products.

Approximately 90% of the semiconductor components produced by the Company are manufactured pursuant to approved Source Control Drawings (SCD) from the United States government and/or its prime contractors; the remainder are primarily JAN qualified products approved for use by the military.  The Company’s semiconductor products are used as components of military, commercial, and aerospace electronic equipment, such as ground and airborne radar systems, power distribution systems, missiles, missile control systems, and spacecraft.  The Company’s products have been used on the space shuttle and on spacecraft sent to the moon, to Jupiter (on Galileo) and, most recently, to Mars (on Global Surveyor and Mars Sojourner).  Approximately 90% of the Company’s sales have been attributable to contracts with customers whose products are sold to the United States government.  The remaining 10% of sales are for non-military, scientific and industrial applications.

Custom products are typically sold to the United States Government and defense or aerospace companies such as Raytheon Company, Lockheed Martin, Smith Industries, Harris Corporation, General Electric Aviation, and Northrop Grumman Systems Corporation, while standard products are sold to the same customer base and to the general electronic industry and incorporate such items as power supplies and other electronic control products.  The Company has standard and custom products available in all of its major product lines.

The following is a general description of the principal product lines manufactured by the Company.

Power Transistors:

Power transistors are high current and/or high voltage control devices commonly used for active gain applications in electronic circuits.  The Company manufactures a large variety of power bipolar transistors for applications requiring currents in the range of 0.1A to 300A or voltages in the range of 30V to 1000V.  The Company employs over 60 types of silicon chips to manufacture over 500 types of power bipolar transistors and is currently expanding this line in response to increased market demand resulting from other companies’ (e.g., Motorola—now “On” Semiconductors) departure from the military market.  The Company also manufactures power diodes under the same military specification.  Additionally, it manufactures power N-Channel and P-Channel Power MOSFET transistors and is continuously expanding that line in accordance with customers’ requirements.  The Company is qualified to deliver these products under MIL-PRF-19500 in accordance with JAN, JANTX and JANTXV. JAN, JANTX AND JANTXV denotes various quality military screening levels.  The Company manufactures both standard and custom power transistors.

The Company has been certified and qualified since 1968 under MIL-PRF-19500 (and its predecessor) standards promulgated by the Defense Supply Center Columbus (“DSCC”).  These standards specify the uniformity and quality of bipolar transistors and diodes purchased for United States military programs.  The purpose of the program is to standardize the documentation and testing for bipolar semiconductors for use in United States military and aerospace applications.  Attainment of certification and/or qualification to MIL-PRF-19500 requirements is important since it is a prerequisite for a manufacturer to be selected to supply bipolar semiconductors for defense-related purposes.  MIL-PRF-19500 establishes specific criteria for manufacturing construction techniques and materials used for bipolar semiconductors and assures that these types of devices will be manufactured under conditions that have been demonstrated to be capable of continuously producing highly reliable products.  This program requires a manufacturer to demonstrate its products’ performance capabilities.  A manufacturer receives certification once its Product Quality Assurance Program Plan is reviewed and approved by DSCC.  A manufacturer receives qualification once it has demonstrated that it can build and test a sample product in conformity with its certified Product Quality Assurance Program Plan. The Company expects that its continued maintenance of MIL-PRF-19500 qualification will continue to improve its business posture by increasing product marketability. The Company is currently expanding its Transistor product offering.

 
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Hybrids:

Hybrids are compact electronic circuits that contain a selection of passive and active components mounted on printed substrates and encapsulated in appropriate packages.  The Company manufactures thick film hybrids, which generally contain discrete semiconductor chips, integrated circuits, chip capacitors and thick film or thin film resistors.  Most of the hybrids are of the high-power type and are custom manufactured for military and aerospace systems.  Some of the Company’s hybrids include high power voltage regulators, power amplifiers, power drivers, boosters and controllers.  The Company manufactures both standard and custom hybrids.

The Company has been certified (since 1990) and qualified (since 1995) under MIL-PRF-38534 Class H (and its predecessor) standards promulgated by the DSCC.  These standards specify the uniformity and quality of hybrid products purchased for United States military programs.  The purpose of the program is to standardize the documentation and testing for hybrid microcircuits for use in United States military and aerospace applications.  Attainment of certification and/or qualification under MIL-PRF-38534 Class H requirements is important since it is a prerequisite for a manufacturer to be selected to supply hybrids for defense-related purposes.  MIL-PRF-38534 Class H establishes definite criteria for manufacturing construction techniques and materials used for hybrid microcircuits and assure that these types of devices will be manufactured under conditions that have been demonstrated to be capable of continuously producing highly reliable products.  This program requires a manufacturer to demonstrate its products’ performance capabilities.  Certification is a prerequisite of qualification.  A manufacturer receives certification once its Product Quality Assurance Program Plan is reviewed and approved by DSCC.  A manufacturer receives qualification once it has demonstrated that it can build and test a sample product in conformity with its certified Product Quality Assurance Program Plan. The Company expects that its continued maintenance of MIL-PRF-38534 Class H qualification will continue to improve its business posture by increasing product marketability.

Voltage Regulators:

The Company makes standard and custom voltage regulators.

Field Effect Transistors:

Field effect transistors are surface-controlled devices where conduction of electrical current is controlled by the electrical potential applied to a capacitively coupled control element.  The Company manufactures about 30 different types of junction and MOS field effect transistor chips.  They are used to produce over 350 different field effect transistor types.  Most of the Company’s field effect transistors conform to standard Joint Electronic Device Engineering Council designated transistors, commonly referred to as standard 2N number types.  The Company is currently expanding its Field Effect Transistor product offering.  The Company manufactures both standard and custom field effect transistors.

MANUFACTURING

The Company’s engineers design its transistors, diodes, field effect transistors and hybrids, as well as other customized products, based upon requirements established by customers, with the cooperation of the product and marketing personnel.  The design of standard or catalog products is based on specific industry standards.

Each new design is first produced on a CAD/CAE (Computer Aided Design/Computer Aided Engineering) computer system.  The design layout is then reduced to the desired micro size and transferred to silicon wafers in a series of steps that include photolithography, chemical or plasma etching, oxidation, diffusion and metallization.  The wafers then go through a fabrication process.  When the process is completed, each wafer contains a large number of silicon chips, each chip being a single transistor device or a single diode.  The wafers are tested using a computerized test system prior to being separated into individual chips.  The chips are then assembled in standard or custom packages, incorporated in hybrids or sold as chips to other companies.  The chips are normally mounted inside a chosen package using eutectic, soft solder or epoxy die attach techniques, and then wire bonded to the package pins using gold or aluminum wires.  Many of the packages are manufactured by the Company and, in most cases, the Company plates its packages with gold, nickel or other metals utilizing outside vendors to perform the plating operation.

 
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In the case of hybrids, design engineers formulate the circuit and layout designs.  Ceramic substrates are then printed with thick film gold conductors to form the interconnect pattern and with thick film resistive inks to form the resistors of the designed circuit.  Semiconductor chips, resistor chips, capacitor chips and inductors are then mounted on the substrates and sequential wire bonding is used to interconnect the various components to the printed substrate, as well as to connect the circuit to the external package pins.  The Company manufactures approximately 20% of the hybrid packages it uses and purchases the balance from suppliers.

In addition to Company-performed testing and inspection procedures, certain of the Company’s products are subject to source inspections required by customers (including the United States government).  In such cases, designated inspectors are authorized to perform a detailed on-premise inspection of each individual device prior to encapsulation in a casing or before dispatch of the finished unit to ensure that the quality and performance of the product meets the prescribed specifications.

ISO 9001:2000

In March 2000, Underwriters Laboratories awarded the Company ISO 9001 qualification.  The ISO 9001 Program is a series of quality management and assurance standards developed by a technical committee of the European Community Commission working under the International Organization for Standardization.   During an August 2004 surveillance audit, the Company was subsequently qualified as meeting the new ISO 9001:2000 standard.   During the fiscal year ended February 28, 2010, the Company underwent an additional surveillance audit that resulted in recertification.

AS9100

In September 2009, Underwriters Laboratories awarded the Company AS9100 qualification as well as re-certification for the ISO 9001:2000 quality management standard certification.  Companies in the aerospace industry are increasingly selecting suppliers on the basis of AS9100 certification. Achieving certified status means that the Company may now obtain new business that may have been out of reach in the past and as obtaining such certification is now a requirement of several customers we expect to maintain ongoing relationships with our existing aerospace customers long into the future.

MARKETING AND CUSTOMERS

The Company’s products are sold throughout the United States and abroad primarily directly and through a network of manufacturers’ representatives and distributors.  The Company is represented (i) in the United States by three representative organizations that operate out of four different locations with 14 salespeople and 2 stocking distributor organizations that operate out of 12 locations and a third stocking distributor that operates out of 350 sales offices worldwide employing 2,700 people and (ii) in the international market by a representative organization in Israel with one salesperson.  The Company also directly employs several sales, marketing, and application engineering personnel to coordinate operations with the representatives and distributors and to handle key accounts.

During the fiscal year ended February 28, 2010, the Company sold products to approximately 119 customers. Of these 119 customers, 49 had not purchased products from the Company during the previous fiscal year.   During the fiscal year ended February 28, 2010, Raytheon Company accounted for approximately 39% of total sales, as compared to the 35% it accounted for during the fiscal year ended February 28, 2009. During the fiscal year ended February 28, 2010, sales to BAE Systems accounted for approximately 13% of total sales, as compared to the 11% it accounted for during the fiscal year ended February 28, 2009. Other than Raytheon Company and BAE Systems Australia, the Company had no customers that accounted for more than 10% of net sales during the last fiscal year. Fifteen of the Company’s customers accounted for approximately 88% of the Company’s sales during the fiscal year ended February 28, 2010.  It has been the Company’s experience that a large percentage of its sales have been attributable to a relatively small number of customers in any particular period.  As a result of the mergers and acquisitions in general, and among large defense contractors in particular, the number of large customers will most likely continue to decline in number, but this does not necessarily mean that the Company will experience a decline in sales.  The Company expects customer concentration to continue.  The loss of any major customer without offsetting orders from other sources would have a material adverse effect on the business, financial condition and results of operations of the Company.

 
6

 

During the fiscal year ended February 28, 2010 and since that date, a substantial portion of the Company’s products were sold pursuant to contracts or subcontracts with or to customers whose end products are sold to the United States Government.  Accordingly, the Company’s sales may be adversely impacted by Congressional appropriations and changes in national defense policies and priorities.  As a result of recent Congressional appropriations and a decrease in military spending on programs that the Company participates in, the Company had an 18% decrease in net bookings during the fiscal year ended February 28, 2010 as compared to the previous year.   All of the Company’s contracts with the United States Government or its prime contractors contain provisions permitting termination at any time at the convenience of the United States Government or the prime contractor upon payment to the Company of costs incurred plus a reasonable profit.

Although average sales prices are typically higher for products with military and space applications than for products with non-military, scientific and industrial applications, the Company hopes to minimize this differential by focusing on these quality-sensitive niche markets where price sensitivity is very low.  There can be no assurance; however, that the Company will be successful in increasing its sales to these market segments, which increase in sales could be critical to the future success of the Company.  To date, the Company has made only limited inroads in penetrating such markets.

Sales to foreign customers, located mostly in Canada, Western Europe and Israel, accounted for approximately 16% of the Company’s net sales for the fiscal year ended February 28, 2010 as compared to 14% for the year ended February 28, 2009.  All sales to foreign customers are conducted utilizing exclusively U.S. dollars.

BACKLOG

The Company’s order backlog, which consists of semiconductor and hybrid related open orders, more than 96% of which are scheduled for delivery within 12 months, was approximately  $5,922,000 at February 28, 2010, as compared to $6,304,000 as of February 28, 2009. The entire backlog consisted of orders for electronic components.  The Company currently anticipates that the majority of its open order backlog will be filled by February 28, 2011.  In the event that bookings in the long-term decline significantly below the level experienced in the last fiscal year, 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.   See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Bookings and Backlog.”

The Company’s backlog as of any particular date may not be representative of actual sales for any succeeding period because lead times for the release of purchase orders depend upon the scheduling practices of individual customers.  The delivery times of new or non-standard products can be affected by scheduling factors and other manufacturing considerations, variances in the rate of booking new orders from month to month and the possibility of customer changes in delivery schedules or cancellations of orders.  Also, delivery times of new or non-standard products are affected by the availability of raw material, scheduling factors, manufacturing considerations and customer delivery requirements.

The rate of booking new orders varies significantly from month to month, mostly as a result of sharp fluctuations in the government budgeting and appropriation process.  The Company has historically experienced somewhat decreased levels of bookings during the summer months, primarily as a result of such budgeting and appropriation activities.  For these reasons, and because of the possibility of customer changes in delivery schedules or cancellations of orders, the Company’s backlog as of any particular date may not be indicative of actual sales for any succeeding period.  See “Management’s Discussions and Analysis of Financial Conditions – Result of Operations” for a discussion of the decrease in bookings for the year ended February 28, 2010 as compared to the previous year.

PATENTS AND LICENSES

The Company owned approximately 33 patents (all of which have now expired or have been allowed to lapse) relating to the design and manufacture of its products. The terminations of these patents have not had a material adverse effect on the Company.   The Company believes that engineering standards, manufacturing techniques and product reliability are more important to the successful manufacture and sale of its products than the old patents it had.

FUTURE PLANS

To increase liquidity, the Company plans to (a) continue improving operating efficiencies, (b) further reduce overhead expenses, (c) develop alternative lower cost packaging technologies and lower cost packaging supplies, and (d) develop products utilizing its current manufacturing technologies geared toward market segments it is currently unable to serve.

 
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The Company also plans to continue its efforts in selling commercial semiconductors and power modules and to develop appropriate strategic alliance arrangements.  If these plans are successful, the Company intends to aggressively pursue sales of these products which could require the Company to invest in the building up of inventories of finished goods and invest in capital  (automatic assembly and test) equipment.  The source of capital funding will be defined and disclosed subsequent to such strategic partnership being formed. Such financing could come from equipment leasing, among other financing alternatives.

Despite its intentions, the Company cannot assure you that these plans will be successful in easing liquidity problems, reducing costs or improving sales.

COMPETITION

The electronic component industry, in general, is highly competitive and has been characterized by price erosion, rapid technological changes and foreign competition.    However, in the market segments in which the Company operates, while highly competitive and subject to the same price erosion, technological change is slow and minimal. The Company believes that it is well regarded by its customers in the segments of the market in which competition is dependent less on price and more on product reliability, performance and service. Management believes, however, that to the extent the Company’s business is targeted at the military and aerospace markets, where there has been virtually no foreign competition, it is subjected to less competition than manufacturers of commercial electronic components.  Additionally, the decline in military orders in programs the Company participates in and the shift in the requirement of the Defense Department whereby the use of Commercial Off The Shelf (COTS) components is encouraged over the use of high reliability components that the Company manufactures, prompting the number of competitors to decline, afford the Company the opportunity to increase its market share.  As the Company attempts to shift its focus to the sale of products having non-military, non-aerospace applications it will be subject to greater price erosion and foreign competition.   The Company continues its efforts to identify a niche market for high-end industrial custom power modules and custom motor controllers where the Company’s capabilities can offer a technological advantage to customers in the motor driver, and power supplies industries.  However, there is no guarantee that the Company will be successful in this effort. The Company continues its effort to offer a solution to customers who seek alternative sources to bi-polar semiconductors that are discontinued by other manufacturers.

The Company has numerous competitors across all of its product lines.   The Company is not in direct competition with any other semiconductor manufacturer for an identical mixture of products; however, one or more of the major manufacturers of semiconductors manufactures some of the Company’s products.  A few such major competitors (e.g., IXYS Corporation, Motorola Inc. (now On Semiconductors), Fairchild Semiconductor, among others) have elected to withdraw from the military market altogether. However, there is no assurance that the Company’s business will increase as a result of such withdrawals.  Other competitors in the military market include International Rectifier (the Omnirel Division), Microsemi Corporation (the NES and APT Divisions), M.S. Kennedy Corporation (a wholly owned subsidiary of Anaren, Inc.), Natel Engineering Company and Sensitron Semiconductor.  The Company competes principally on the basis of product quality, turn-around time, customer service and price.  The Company believes that competition for sales of products that will ultimately be sold to the United States government has intensified and will continue to intensify as United States defense spending on high reliability components continues to decrease and the Department of Defense pushes for implementation of its 1995 decision to purchase COTS standard products in lieu of products made in accordance with more stringent military specifications.

The Company believes that its primary competitive advantage is its ability to produce high quality products as a result of its years of experience, its sophisticated technologies and its experienced staff.  The Company believes that its ability to produce highly reliable custom hybrids in a short period of time will give it a strategic advantage in attempting to penetrate high-end commercial markets and in selling military products complementary with those currently sold, as doing so would enable the Company to produce products early in design and development cycles.  The Company believes that it will be able to improve its capability to respond quickly to customer needs and deliver products on time.

EMPLOYEES

At February 28, 2010, the Company had 79 employees (as compared to 81 at February 28, 2009), 52 of whom were engaged in production activities, 2 in sales and marketing, 6 in executive and administrative capacities and 19 in technical and support activities. Of the 79 employees, 75 were full time employees and 4 were part time employees.

The Company has never had a work stoppage, and none of its employees are represented by a labor organization.  The Company considers its employee relations to be good.

 
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SOURCES AND AVAILABILITY OF RAW MATERIAL

The Company purchases its raw materials from multiple suppliers and has a minimum of two suppliers for most of its material requirements.  A few of the key suppliers of raw materials and finished packages purchased by the Company are: Egide USA Inc., Platronics Seals, CPS Technologies Corporation, Coining Inc., IXYS Corporation, Purecoat International LLC, Stellar Industries Inc, and Streamtek Ltd. Because of a diminishing number of sources for components and packages in particular, and the sharp increase in the prices of raw silicon semiconductor wafers, precious metals and gold (used in the finish of the packages), the Company has been obliged to pay higher prices, which consequently has increased costs of goods sold.  Should a shortage of three-inch silicon wafers occur, we might not be able to switch our manufacturing capabilities to another size wafer in time to meet our customer’s needs, leading to lost revenues.

EFFECT OF GOVERNMENT REGULATION

The Company received DSCC approval to supply its products in accordance with MIL-PRF-19500 and Class H of MIL-PRF-38534.  These qualifications are required to supply to the U.S. Government or its prime contractors.  The Company expects that its continued maintenance of these qualifications will continue to improve its business posture by increasing product marketability.

RESEARCH AND DEVELOPMENT

During the last two fiscal years, the Company has not spent any significant funds on research and development.  This may have an adverse effect on future operations.  The cost of designing custom products is borne in full by the customer, either as a direct charge or is amortized in the unit price charged to the customer.

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 and its subsidiaries will not be required to incur costs to comply with, or that the operations, business or financial condition of the Company will not be materially adversely affected by current or future environmental laws or regulations.

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 fiscal years 2009-2013.  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 2008, fiscal year 2009, and the current fiscal year.  In February 2009, the Company paid $10,000 to USEPA for fiscal year 2009 based on preliminary net income projections. In June 2009, the Company paid an additional $15,000 pursuant to its obligations under the Settlement Agreement. This amount is carried as an environmental expense. The Company has accrued $40,000 for its remaining minimum obligations under the Settlement Agreement. On March 15, 2010 the Company paid $10,000 to USEPA for fiscal year 2010 based on preliminary net income projections and has accrued an additional $9,000 current liability for fiscal year 2010.  The final amount will be paid to USEPA after the Company’s independent auditor will finish the fiscal year 2010 year-end audit  in  June 2009. This  amount is carried as  an environmental expense.  The Company  has  accrued $40,000 for its remaining minimum obligations under the Settlement Agreement which is reflected in “Accrued expenses and other current liabilities” on the Company’s Balance Sheets at February 28, 2010. 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.

 
9

 

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 Site and Riviera Beach Site, 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 (Riviera Beach Site on October 12, 1999 and Port Salerno Site on March 17, 2003) 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 current balance in the Port Salerno Escrow Account is approximately $58,000.  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. (“Honeywell”), 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 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.  FDEP further 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 with the Company’s attorney, FDEP advised the Company that FDEP will prepare a justification for the asserted unreimbursed expenses.  Upon receipt of the cost reimbursement package, the Company is required to transfer $58,000.00 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.

 
10

 

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 November 19, 2010, or the date the State institutes a suit against the Company 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 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 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.

BANKRUPTCY PROCEEDINGS

On January 24, 1992 (the “Petition Date”), the Company and its wholly-owned subsidiary, Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.), a Delaware corporation, filed voluntary petitions seeking reorganization under Chapter 11 (“Chapter 11”) of the United States Bankruptcy Code, as amended (the “Bankruptcy Code”), in the United States Bankruptcy Court for the Southern District of Florida (the “Bankruptcy Court”).  On August 20, 1993, the Bankruptcy Court entered an Order (the “Order of Confirmation”) confirming the Company’s Fourth Amended Plan of Reorganization, as modified by the Company’s First Modification of Fourth Amended Plan of Reorganization (the “Plan of Reorganization” or “Plan”).  The Plan became effective on August 30, 1993 (the “Effective Date”). On July 12, 1996, the Bankruptcy Court officially closed the case.

Pursuant to the Plan of Reorganization, beginning in approximately May 1995, the Company was required to begin making quarterly payments to holders of unsecured claims until they received 35% of their claims.  However, due to negotiations between the parties, the unsecured creditors agreed to a deferment of this payment and the Company agreed to make payments until its obligations are fulfilled (for more information see “Management’s Discussion and Analysis of Financial Condition and Results of Operations”). At the time, it was estimated that there was an aggregate of approximately $7,100,000 in unsecured claims and, accordingly, that the Company was required to pay approximately $2,292,000 to holders of allowed unsecured claims in quarterly installments of approximately $62,000.  On February 28, 2010, the remaining balance of these claims was approximately $1,058,000.

Beginning on the date the Company’s net after tax income exceeds $500,000, the Company is obligated to pay (on an annual basis) each of the holders of unsecured claims (pro rata) and Vector Trading and Holding Corporation  (“Vector”), a successor to certain assets and liabilities of the Company, and Vector’s participants and successors, 5% of its net after tax income in excess of $500,000 until the tenth anniversary of the Effective Date, up to a maximum aggregate of $1,500,000 to the holders of unsecured claims (pro rata) and up to a maximum aggregate of  $1,500,000 to Vector participants and their successors (the “Profit Participation”).   As the Company earned $637,000 in the fiscal year ended February 28, 2001, net after the accrual of $15,000 for the Profit Participation, it distributed, during the fiscal year ended February 28, 2002, approximately $7,500 to its unsecured creditors and approximately $7,500 to Vector and its successors in interest as contemplated by the Plan. As net income for the fiscal years ended February 28, 2003, 2004 and 2005 did not exceed $500,000, there were no distributions related to those fiscal years.  As of August 2005, this obligation for profit participation had expired.

ITEM 1A.    RISK FACTORS

The following important business risks and factors, and those business risks and factors described elsewhere in this report or our other Securities and Exchange Commission filings, could cause our actual results to differ materially from those stated in our forward-looking statements, and which could affect the value of an investment in the Company.  All references to “we”, “us”, “our” and the like refer to the Company.

11

 
Our complex manufacturing processes may lower yields and reduce our revenues.

Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified in an effort to improve yields and product performance.  Minute impurities or other difficulties in the manufacturing process can lower yields.  Our manufacturing efficiency will be an important factor in our future profitability, and we cannot assure you that we will be able to maintain our manufacturing efficiency or increase manufacturing efficiency to the same extent as our competitors.

In addition, as is common in the semiconductor industry, we have from time to time experienced difficulty in effecting transitions to new manufacturing processes.  As a consequence, we may suffer delays in product deliveries or reduced yields.  We may experience manufacturing problems in achieving acceptable yields or experience product delivery delays in the future as a result of, among other things, capacity constraints, construction delays, upgrading or expanding existing facilities or changing our process technologies, any of which could result in a loss of future revenues.  Our operating results could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capability if revenues do not increase proportionately.

Our ability to repair and maintain the aging manufacturing equipment we own may adversely affect our ability to deliver products to our customers’ requirements.  We may be forced to expend significant funds in order to acquire replacement capital equipment that may not be readily available, thus resulting in manufacturing delays.

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.

The Company relies on its relationships with certain key suppliers for its supply of raw materials, parts and finished components that are qualified for use in the end-products the Company manufactures.  While the Company currently has favorable working relationships with its suppliers, it cannot be sure that these relationships will continue in the future.  Additionally, the Company cannot guarantee the availability or pricing of raw materials.  The price of qualified raw materials can be highly volatile due to several factors, including a general shortage of raw materials, an unexpected increase in the demand for raw materials, disruptions in the suppliers’ business and competitive pressure among suppliers of raw materials to increase the price of raw materials.  Suppliers may also choose, from time to time, to extend lead times or limit supplies due to a shortage in supplies.  Additionally, some of the Company’s key suppliers of raw materials may have the capability of manufacturing the end products themselves and may therefore cease to supply the Company with its raw materials and compete directly with the Company for the manufacture of the end-products.  Any interruption in availability of these qualified raw materials may impair the Company’s ability to manufacture its products on a timely and cost-effective basis.  If the Company must identify alternative sources for its qualified raw materials, it would be adversely affected due to the time and process required in order for such alternative raw materials to be qualified for use in the applicable end-products.  Any significant price increase in the Company’s raw materials that cannot be passed on to customers or a shortage in the supply of raw materials could have a material adverse effect on the Company’s business, financial condition or results of operations.

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.

All of our contracts with the U.S. government and its prime contractors contain customary provisions permitting termination at any time at the convenience of the U.S. government or its prime contractors upon payment to us for costs incurred plus a reasonable profit.  Certain contracts are also subject to price renegotiations in accordance with U.S. government sole source procurement provisions.  Nevertheless, we cannot assure you that the foregoing government contracting risks will not materially and adversely affect our business, prospects, financial condition or results of operations.  Furthermore, we cannot assure you that we would be able to procure new government contracts to offset any revenue losses incurred due to early termination or price renegotiation of existing government contracts.

Our government business is also subject to specific procurement regulations, which increase our performance and compliance costs.  These costs might increase in the future, reducing our margins.  Failure to comply with procurement regulations could lead to suspension or debarment, for cause, from government subcontracting for a period of time.  Among the causes for debarment are violations of various statutes, including those related to procurement integrity, export control, government security regulations, employment practices, protection of the environment, and accuracy of records.  The termination of a government contract or relationship as a result of any of these violations would have a negative impact on our reputation and operations, and could negatively impact our ability to obtain future government contracts.

 
12

 

Changes in government policy or economic conditions could negatively impact our results.

A large portion of the Company’s sales are to military and aerospace markets which are subject to the business risk of changes in governmental appropriations and changes in national defense policies and priorities.  Any such changes could result in a change in demand for the Company’s products, which could have a material effect on the Company’s business, prospects, financial condition and results of operations.

Our results may also be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations.  Furthermore, our business, prospects, financial condition and results of operations may be adversely affected by the shift in the requirement of the U.S. Department of Defense policy toward the use of standard industrial components over the use of high reliability components that we manufacture.  Our results may also be affected by social and economic conditions, which impact our sales, including in markets subject to ongoing political hostilities, such as regions of the Middle East.

Our inventories may become obsolete and other assets may be subject to risks.

The life cycles of some of our products depend heavily upon the life cycles of the end products into which our products are designed.  Products with short life cycles require us to manage closely our production and inventory levels.  Inventory may also become obsolete because of adverse changes in end-market demand.  We may in the future be adversely affected by obsolete or excess inventories which may result from unanticipated changes in the estimated total demand for our products or the estimated life cycles of the end products into which our products are designed.  The asset values determined under Generally Accepted Accounting Principles for inventory and other assets each involve the making of material estimates by us, many of which could be based on mistaken assumptions or judgments.

Environmental regulations could require us to incur significant costs.

In the conduct of our manufacturing operations, we have handled and do handle materials that are considered hazardous, toxic or volatile under federal, state and local laws and, therefore, are 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, we could be held liable for damages and the cost of remediation and, along with the rest of the semiconductor industry, we are 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 we will not be required to incur costs to comply with, or that our operations, business or financial condition will not be materially affected by, current or future environmental laws or regulations.  See “Business – Environmental Liabilities.”

Our business is highly competitive, and increased competition could reduce gross profit margins and the value of an investment in our Company.

The semiconductor industry, and the semiconductor product markets specifically, are highly competitive.  Competition is based on price, product performance, quality, turn-around time, reliability and customer service.  The gross profit margins realizable in our markets can differ across regions, depending on the economic strength of end-product markets in those regions.  Even in strong markets, price pressures may emerge as competitors attempt to gain more share by lowering prices.  Competition in the various markets in which we participate comes from companies of various sizes, many of which are larger and have greater financial and other resources than we have and thus can better withstand adverse economic or market conditions.  In addition, companies not currently in direct competition with us may introduce competing products in the future.

Downturns in the business cycle could reduce the revenues and profitability of our business.

The semiconductor industry is highly cyclical.  Semiconductor industry-wide sales declined significantly in 2001, 2002 2004, 2008, and the beginning of 2009.  Our markets may experience other, possibly more severe and prolonged, downturns in the future.  We may also experience significant changes in our operating profit margins as a result of variations in sales, changes in product mix, price competition for orders and costs associated with the introduction of new products.

 
13

 

Our operating results may decrease due to the decline of profitability in the semiconductor industry.

Intense competition and a general slowdown in the demand for military-rated semiconductors worldwide have resulted in decreases in the profitability of many of our products.  We expect that profitability for our products will continue to decline in the future.  A decline in profitability for our products, if not offset by reductions in the costs of manufacturing these products, would decrease our profits and could have a material adverse effect on our business, financial condition and results of operations.

Uncertainty of current economic conditions, domestically and globally, could continue to affect demand for our products and negatively impact our business.

Current conditions in the domestic and global economies are extremely uncertain.  As a result, it is difficult to estimate the level of growth for the economy as a whole.  It is even more difficult to estimate growth in various parts of the economy, including the markets in which we participate.  Because all components of our budgeting and forecasting are dependent upon estimates of growth in the markets we serve and demand for our products, the prevailing economic uncertainties render estimates of future income and expenditures even more difficult than usual to make. The future direction of the overall domestic and global economies will have a significant impact on our overall performance.

Cost reduction efforts may be unsuccessful or insufficient to improve our profitability and may adversely impact productivity.

During fiscal years 2009 and 2010, we continued certain cost-cutting measures originally started several years ago, and we have a plan to implement further cost-saving measures if necessary.  The impact of these cost-reduction efforts on our profitability may be influenced by:

 
·
our ability to successfully complete these ongoing efforts;
 
·
the possibility that these efforts may not generate the level of cost savings we expect or enable us to effectively compete and return to profitability; and
 
·
the risk that we may not be able to retain key employees.

Since these cost-reduction efforts involve all aspects of our business, they could adversely impact productivity to an extent we did not anticipate and may inhibit future growth prospects.

We may not achieve the intended effects of our new business strategy, which could adversely impact our business, financial condition and results of operations.

In recognition of the changes in global geopolitical affairs and in United States military spending, we are attempting to increase sales of our products for non-military, scientific and industrial niche markets, such as medical electronics, machine tool controls, satellites, telecommunications networks and other market segments in which purchasing decisions are generally based primarily on product quality, long-term reliability and performance, rather than on product price.  We are also attempting to offer additional products to the military markets that are complementary to those we currently sell to the military markets.  We cannot assure you that these efforts will be successful and, if they are, that they will have the intended effects of increasing profitability.  Furthermore, as we attempt to shift our focus to the sale of products having non-military, non-aerospace applications, we will be subject to greater price erosion and foreign competition.

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.

Rapidly changing technology and industry standards, along with frequent new product introductions, characterize the semiconductor industry.  Our success in these markets depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis.  There can be no assurance that we will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner or those products or technologies developed by others will not render our products or technologies obsolete or noncompetitive.  A fundamental shift in technology in our product markets could have a material adverse effect on us.  In light of the fact that many of our competitors have substantially greater revenues than us and that we have not spent any funds on research and development in recent years, we may not be able to accomplish the foregoing, which might have a material adverse effect on the Company, our business, prospects, financial condition or results of operations.

 
14

 

Loss of, or reduction of business from, substantial clients could hurt our business by reducing our revenues, profitability and cash flow.

During the fiscal year ended February 28, 2010, fifteen customers accounted for approximately 88% of our revenues.  The loss or financial failure of any significant customer or distributor, any reduction in orders by any of our significant customers or distributors, or the cancellation of a significant order could materially and adversely affect our business.   Furthermore, due to industry consolidation, the loss of any one customer or significant order may have a greater impact than we anticipate.  We cannot guarantee that we will be able to retain long-term relationships or secure renewals of short-term relationships with our more substantial customers in the future.

A shortage of three-inch silicon wafers could result in lost revenues due to an inability to build our products.

Some of our products contain components manufactured in-house from three-inch silicon wafers.  The worldwide supply of three-inch silicon wafers is dwindling.  We currently have enough wafers in inventory and on order to meet our manufacturing needs for three years.  Should a shortage of three-inch silicon wafers occur, or if we are not able to obtain three-inch silicon wafers at an economically suitable cost, we may not be able to switch our manufacturing capabilities to another size wafer in time to meet our customer’s needs, leading to lost revenues.

The nature of our products exposes us to potentially significant product liability risk.

Our business exposes us to potential product liability risks that are inherent in the manufacturing and marketing of high-reliability electronic components for critical applications.  No assurance can be made that our product liability insurance coverage is adequate or that present coverage will continue to be available at acceptable costs, or that a product liability claim would not materially and adversely affect our business, prospects, financial conditions or results of operations.

We depend on the recruitment and retention of qualified personnel, and our failure to attract and retain such personnel could seriously harm our business.

Due to the specialized nature of our business, our future performance is highly dependent on the continued services of our key engineering personnel and executive officers.  Our prospects depend on our ability to attract and retain qualified engineering, manufacturing, marketing, sales and management personnel for our operations.  Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel.  Our failure to compete for these personnel could seriously harm our business, prospects, results of operations and financial condition.

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.

Our Certificate of Incorporation and Bylaws contain certain provisions, and we have adopted a stockholder rights plan (as more fully described in our current report on Form 8-K filed on June 20, 2001), each of which could delay or prevent a change in control of our company or the removal of management, and which could also deter potential acquirers from making an offer to our stockholders and limit any opportunity to realize premiums over prevailing market prices of our common 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.

Natural disasters, like those related to hurricanes, or threats or occurrences of other similar events, 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.  Hurricanes have affected us in the past, and may continue to affect us in the future, resulting in damage to our manufacturing facility in South Florida and our manufacturing equipment, office closures and impairing our ability to produce and deliver our products.  Such events could also affect our domestic and international sales, disrupt our supply chains, primarily for raw materials and process chemicals and gases, affect the physical facilities of our suppliers or customers, and make transportation of our supplies and products more difficult or cost prohibitive. Due to the broad and uncertain effects that natural events have had on financial and economic markets generally, we cannot provide any estimate of how these activities might affect our future results.

 
15

 

Failure to protect our proprietary technologies or maintain the right to use certain technologies may negatively affect our ability to compete.

We rely heavily on our proprietary technologies. Our future success and competitive position may depend in part upon our ability to obtain or maintain protection of certain proprietary technologies used in our principal products. We do not have patent protection on many aspects of our technology. Our reliance upon protection of some of our technology as “trade secrets” will not necessarily protect us from the use by other persons of our technology, or their use of technology that is similar or superior to that which is embodied in our trade secrets. Others may be able to independently duplicate or exceed our technology in whole or in part. We may not be successful in maintaining the confidentiality of our technology, dissemination of which could have material adverse effects on our business. In addition, litigation may be necessary to determine the scope and validity of our proprietary rights.

Obtaining or protecting our proprietary rights may require us to defend claims of intellectual property infringement by our competitors. We could become subject to lawsuits in which it is alleged that we have infringed or are infringing upon the intellectual property rights of others with or without our prior awareness of the existence of those third-party rights, if any.

If any infringements, real or imagined, happen to exist, arise or are claimed in the future, we may be exposed to substantial liability for damages and may need to obtain licenses from the patent owners, discontinue or change our processes or products or expend significant resources to develop or acquire non-infringing technologies. We may not be successful in such efforts or such licenses may not be available under reasonable terms. Our failure to develop or
acquire non-infringing technologies or to obtain licenses on acceptable terms or the occurrence of related litigation itself could have material adverse effects on our operating results, financial condition and cash flows.

The price of our common stock has fluctuated widely in the past and may fluctuate widely in the future.

Our common stock, which is traded on the over-the-counter bulletin board, has experienced and may continue to experience significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in financial results, financial performance and other activities of other publicly traded companies in the semiconductor industry could cause the price of our common stock to fluctuate substantially. In addition, in recent periods, our common stock, the stock market in general and the market for shares of semiconductor industry-related stocks in particular have experienced extreme price fluctuations which have often been unrelated to the operating performance of the affected companies. Any similar fluctuations in the future could adversely affect the market price of our common stock.

ITEM 1B               UNRESOLVED STAFF COMMENTS.

None
 
ITEM 2.                 PROPERTIES.
 
The Company’s manufacturing operations and its corporate headquarters are located in one leased facility in West Palm Beach, Florida.  The Company leases approximately 47,000 sq. ft. for its facility.  The lease is for a term of ten years ending on December 31, 2011 and does not include an option to renew the lease under current terms. The Company believes that its facility in West Palm Beach, Florida is suitable and adequate to meet its requirements currently and for the foreseeable future.
 
ITEM 3.                 LEGAL PROCEEDINGS
 
We may from time to time become a party to various legal proceedings arising in the ordinary course of business.  As of February 28, 2010, we had no known material current, pending, or threatened litigation.

ITEM 4.                 (Removed and Reserved)

 
16

 

PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Since March 1995, the Company’s Common Stock has been traded on the Over The Counter Bulletin Board (“OTCBB”).  The Company’s Common Stock was traded on the New York Stock Exchange until October 13, 1993, at which time it began trading on the Nasdaq Small Cap Market where it was traded until March 1995.

The following table sets forth for the periods indicated, high and low bid information of the Common Stock as reported by the OTCBB.  The prices set forth below reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.

   
FISCAL YEAR ENDED
   
FISCAL YEAR ENDED
 
   
FEBRUARY 28, 2010
   
FEBRUARY 28, 2009
 
   
HIGH
   
LOW
   
HIGH
   
LOW
 
                         
First Quarter
  $ 2.49     $ 1.70     $ 3.30     $ 1.50  
Second Quarter
  $ 2.49     $ 1.53     $ 3.48     $ 2.28  
Third Quarter
  $ 2.40     $ 1.71     $ 2.98     $ 2.10  
Fourth Quarter
  $ 2.53     $ 2.13     $ 2.60     $ 1.65  

As of May 20, 2010, there were approximately 1,644 holders of record of the Company’s Common Stock.  On May 20, 2010, the last sale price of the Common Stock as reported on the OTCBB was $2.60 per share.

Certificates representing 38,276 “old shares” of Common Stock, which were subject to an approximate 10 to 1 reverse split (which was authorized by the Bankruptcy Court on September 1993), have not been exchanged by the stockholders as of February 28, 2010.  Subsequent to such stock split, these certificates now represent 3,747 shares of Common Stock, which are included in the 2,263,775 shares outstanding as of May 15, 2010.  These “old shares” have been included in the number of shares outstanding as set forth in the Company’s filings with the commission since the date of such stock split through its Annual Report on Form 10-K for the period ended February 28, 2010.

The Company has not paid any dividends since emerging from bankruptcy in 1993 and the Company does not contemplate declaring dividends in the foreseeable future.  Pursuant to the Company’s ability to pay its settlement proposal with the USEPA, the Company agreed not to pay dividends on any shares of capital stock until the settlement amount for environmental liabilities is agreed upon and paid in full.

ITEM 6.
SELECTED FINANCIAL DATA.
 
Not applicable.

 
17

 

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with the “Financial Statements and Supplementary Data” section of this Annual Report on Form 10-K.  You also should review and consider the risks relating to the Company’s business, operations, financial performance, and cash flows presented earlier under “Risk Factors.”

INTRODUCTION

The Company 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 MOS power transistors, power and control hybrids, junction and power MOFSET’s, 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 JAN transistors, diodes and SMD voltage regulators, are sold as standard or catalog items.

The following table is included solely for use in comparative analysis of income before extraordinary items to complement Management’s Discussion and Analysis of Financial Condition and Results of Operations:

   
(Dollars in Thousands)
 
   
Year Ended February 28,
 
   
2010
   
2009
 
             
Net Sales
  $ 7,723     $ 8,459  
Cost of sales
    5,874       6,338  
Gross profit
    1,849       2,121  
Selling, general and administrative expenses
    1,092       1,191  
Operating income
    757       930  
Environmental Expenses
    (4 )     (15 )
Interest income
    18       64  
Other income, net
    13       12  
Income tax expense
    (14 )     (22 )
Net income
  $ 770     $ 969  

TRENDS AND UNCERTAINTIES:
 
During the fiscal year ended February 28, 2010, the Company’s book-to-bill ratio was approximately .95 as compared to approximately 1.06 for the fiscal year ended February 28, 2009 reflecting a decrease in the volume of orders booked.  The Company does not believe that, in most years, the year-to-year 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 to twenty four months. The Company continues to identify means intended to reduce its variable manufacturing costs to offset the potential impact of low volume of orders to be shipped. 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.
 
SIGNIFICANT ACCOUNTING PRINCIPLES:
 
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money market accounts.
 
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.

 
18

 

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.

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.

RESULTS OF OPERATIONS

2010 vs. 2009
Net sales for the fiscal year ended February 28, 2010 decreased by approximately 9% to $7,723,000 versus $8,459,000 during the fiscal year ended February 28, 2009, as a result of a decrease in the demand for the Company’s products due to changes in defense spending on military programs the Company supports, as well as decreased delivery requirements by its customers.

Net bookings were less than net sales by approximately 5%; thus, the backlog decreased from $6,304,000 as of February 28, 2009 to $5,922,000 as of February 28, 2010.   The Company has experienced a decrease in the level of bookings of approximately 18% for the year ended February 28, 2010 as compared to the previous year primarily due to changes in military spending on programs the Company supports and to the downturn in the general economy.

During the year ended February 28, 2010, the Company shipped 160,500 units as compared with 249,919 units shipped during the year ended February 28, 2009.  It should be noted that since the Company manufactures a wide variety of products with an average sales price ranging from less than one dollar to several hundred dollars, such periodic variations in the Company’s volume of units shipped might not be a reliable indicator of the Company’s performance.

Cost of sales for the fiscal year ended February 28, 2010 decreased to $5,874,000 from $6,338,000 for the fiscal year ended February 28, 2009.   Expressed as a percentage of sales, cost of sales increased from approximately 75% for the fiscal year ended February 28, 2009 to approximately 76% for the fiscal year ended February 28, 2010.  This increase as a percentage of sales was principally as a result of higher direct and indirect labor and manufacturing overhead costs.

During the year ended February 28, 2010, the Company’s gross profit was $1,849,000 (24% margin) as compared to $2,121,000 (25% margin) for the year ended February 28, 2009.  The gross profit decrease was due principally to lower sales and higher other costs cited above.

During the year ended February 28, 2010, selling, general and administrative based expenses, as a percentage of sales, increased to approximately 15%, as compared to 14% for the year ended February 28, 2009.  Selling, general and administrative expenses decreased approximately 8% to $1,092,000 for the fiscal year ended February 28, 2010 from $1,191,000 for the fiscal year ended February 28, 2009.  This decrease is primarily the result of a decrease in sales wages and sales travel.

 
19

 

Operating income for the fiscal year ended February 28, 2010 was $757,000 as compared to an operating income of $930,000 for the fiscal year ended February 28, 2009.  This decrease was primarily attributable to lower sales and higher other costs cited above.

Interest income for the fiscal year ended February 28, 2010 decreased to $18,000 from $64,000 during the fiscal year ended February 28, 2009.  This decrease was attributable to lower interest rates earned on cash and cash equivalents.

Environmental expenses for the fiscal year ended February 28, 2010 decreased to $4,000 from $15,000 for the fiscal year ended February 28, 2009.  This decrease was due to a lower amount due to USEPA under the Company’s Ability to Pay Multi-Site Settlement Agreement with USEPA dated February 4, 2006 as described earlier under “Business – Environmental Liabilities”.

Net income for the fiscal year ended February 28, 2010 was $770,000 as compared to net income of $969,000 for the fiscal year ended February 28, 2009.  This decrease is attributable a decrease in sales and to increases in direct and indirect labor and manufacturing overhead costs.

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 $300,000 for the next 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) the market trends signaling a steady level of bookings, but with an increase in the cost of raw materials and operations that will result in the potential erosion of   profit levels and continued price pressures due to intense competition, and (iii) the continued competition in the defense and aerospace market, the Company believes that it will have sufficient cash on hand to satisfy its operating needs over the next 12 months and the current level of payments to its pre-bankruptcy creditors.  However, due to the level of current backlog and projected 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 breakeven or at a small loss during part of the next fiscal year.

Over the long term, based on these factors and at the current level of bookings, costs of raw materials and services, profit margins and sales levels, the Company believes it will generate sufficient cash to satisfy its operating needs and the level of payments to pre-bankruptcy creditors it has maintained over the last 17 years. In  the event that bookings in  the long-term decline significantly below the level experienced during the previous two fiscal years, the Company may be required to implement further 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.

At February 28, 2010 and February 28, 2009 respectively, the Company had cash and cash equivalents of  $400,000 and $440,000.  The cash decrease was primarily due to an increase in the Company’s investment in treasury bills. At February 28, 2010 and February 28, 2009 respectively, the Company had investments in Treasury bills of $5,601,000 and $5,113,000 . The increase in investments was primarily due to investing free cash from operations.

At February 28, 2010, the Company had working capital of $7,752,000 as compared with a working capital at February 28, 2009 of  $6,972,000.  The increase was due to an increase in the Company’s investment in treasury bills.

See “Environmental Liabilities”, “Bankruptcy Proceedings” and “Properties” in Part I, Items 1 and 2, for more information.

OFF-BALANCE SHEET ARRANGEMENTS
 
The Company has not engaged in any off-balance sheet arrangements.

 
20

 
BOOKINGS AND BACKLOG

During the fiscal year ended February 28, 2010, the Company’s net bookings were $7,341,000 in new orders as compared with $8,932,000 for the year ended February 28, 2009, reflecting a decrease of approximately 18%. The Company’s backlog decreased to $5,922,000 at February 28, 2010 as compared with $6,304,000 as of February 28, 2009, reflecting a 6% decrease.  In the event that bookings in the long-term decline significantly below the level experienced in the period ended February 28, 2010, the Company may be required to implement cost-cutting and other downsizing measures to continue its business operations.  Such cost-cutting measures could inhibit future growth prospects and current productivity.

See Part I, Item 1, “Business – Marketing and Customers”.

FUTURE PLANS

To increase liquidity, the Company plans to (a) continue improving operating efficiencies, (b) further reduce overhead expenses, (c) develop alternative lower cost packaging technologies and lower cost packaging supplies, and (d) develop products utilizing its current manufacturing technologies geared toward market segments it is currently unable to serve.

The Company also plans to continue its efforts in selling commercial semiconductors and power modules and to develop appropriate strategic alliance arrangements.  If these plans are successful, the Company intends to aggressively pursue sales of these products which could require the Company to invest in the building up of inventories of finished goods and invest in capital  (automatic assembly and test) equipment.  The source of capital funding will be defined subsequent to such strategic partnership being formed. Such financing could come from equipment leasing, among other financing alternatives.

Despite its intentions, the Company cannot assure you that these plans will be successful in easing liquidity problems, reducing costs or improving sales.

INFLATION

The rate of inflation has not had a material effect on the Company’s revenues and costs and expenses, and it is not anticipated that inflation will have a material effect on the Company in the near future.  However, sharp increases in the cost of precious metals has had an adverse impact on the Company’s cost of raw materials.

SEASONALITY

The Company’s bookings of new orders and sales are largely dependent on congressional budgeting and appropriation activities and the cycles associated therewith.  The Company has historically experienced a decreased level of bookings during the summer months as a result of a slowdown in the level of budgeting and appropriation activities.

FORWARD-LOOKING STATEMENTS

Some of the statements in this Annual Report on Form 10-K 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 this Annual Report on Form 10-K, 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 and parts 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.

 
21

 

 
·
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.
 
·
Natural disasters, like hurricanes, or occurrences of other natural disasters whether in the United States or internationally may affect the availability of raw materials which may adversely affect 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.
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

 
22

 

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Financial Statements

 
Page
Management’s Report on Internal Control Over Financial Reporting
24
   
Independent Auditors Report
25
   
Balance Sheets as of February 28, 2010 and February28, 2009
26
   
Statements of Income for the years ended February 28, 2010 and February 28, 2009
27
   
Statements of Stockholders’ Equity for the years ended February 28, 2010 and February 28, 2009
28
   
Statements of Cash Flows for the years ended February 28, 2010 and February 28, 2009
29
   
Notes to Financial Statements
30-41

 
23

 

Management’s Report on Internal Control over Financial Reporting

Management of Solitron Devices, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act Rule 13a-15(f).  Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial officer), the Company’s management conducted an evaluation of the effectiveness of its internal control over financial reporting as of February 28, 2010.  In making this assessment, the Company’s management used the criteria set forth in the framework in “Internal Control – Integrated framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on the evaluation conducted under the framework in “Internal Control – Integrated Framework,” the Company’s management concluded that the Company’s internal control over financial reporting was effective as of February 28, 2010.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

Solitron Devices, Inc.

May 24, 2010

 
24

 

Independent Auditors Report

To the Board of Directors and
Stockholders of Solitron Devices, Inc.

We have audited the accompanying balance sheets of. Solitron Devices, Inc. as of February 28, 2010 and 2009 and the related statements of income, changes in stockholders’ equity, and cash flows for the years then ended. Solitron Devices, Inc.’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Solitron Devices, Inc. as of February 28, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Friedman, Cohen, Taubman & Company LLC
Plantation, Florida
May 24, 2010

 
25

 
 
SOLITRON DEVICES, INC.
BALANCE SHEETS
AS OF FEBRUARY 28, 2010 AND FEBRUARY 28, 2009


   
2010
   
2009
 
 
 
(in thousands, except for shares)
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 400     $ 440  
Treasury bills
    5,601       5,113  
Accounts receivable, less allowance for doubtful accounts of $2 and $7, respectively
    685       871  
Inventories, net (Note 4)
    2,809       2,569  
Prepaid expenses and other current assets
    125       139  
TOTAL CURRENT ASSETS
    9,620       9,132  
                 
PROPERTY, PLANT AND EQUIPMENT, net     (Note 5)
    561       581  
                 
OTHER ASSETS
    52       52  
TOTAL ASSETS
  $ 10,233     $ 9,765  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable-Post-petition
  $ 266     $ 443  
Accounts payable-Pre-petition, current portion  (Note 2)
    1,058       1,086  
Customer deposits
    39       61  
Accrued expenses and other current liabilities  (Note 6)
    505       570  
TOTAL CURRENT LIABILITIES
    1,868       2,160  
                 
LONG-TERM LIABILITIES, net of current portion
    148       158  
TOTAL LIABILITIES
    2,016       2,318  
                 
COMMITMENTS AND CONTINGENCIES  (Note 13)
               
                 
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
    5,461       4,691  
TOTAL STOCKHOLDERS' EQUITY
    8,217       7,447  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 10,233     $ 9,765  

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

 
26

 
 
SOLITRON DEVICES, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED FEBRUARY 28, 2010 AND FEBRUARY 28, 2009

   
2010
   
2009
 
   
(in thousands, except for share and per
share amounts)
 
             
Net sales
  $ 7,723     $ 8,459  
Cost of sales
    5,874       6,338  
Gross profit
    1,849       2,121  
Selling, general and administrative expenses
    1,092       1,191  
Operating income
    757       930  
Other income (expenses):
               
Environmental expenses
    (4 )     (15 )
Interest income
    18       64  
Other, net (Note 14)
    13       12  
Income before provision for income taxes
    784       991  
Provision for income taxes
    14       22  
                 
Net income
  $ 770     $ 969  
                 
Income per share from continuing operations-Basic
  $ 0.33     $ 0.41  
Income per share from continuing operations-Diluted
  $ 0.31     $ 0.38  
                 
Net income per share-Basic
  $ 0.34     $ 0.43  
Net income per share-Diluted
  $ 0.31     $ 0.39  
                 
Weighted average shares outstanding-Basic
    2,263,775       2,263,253  
Weighted average shares outstanding-Diluted
    2,452,601       2,454,155  

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

 
27

 

SOLITRON DEVICES, INC.
STATEMENTS OF  STOCKHOLDERS' EQUITY
YEARS ENDED FEBRUARY 28, 2010 AND FEBRUARY 28, 2009

   
Common Stock
   
Additional
             
   
Number of
         
Paid-in
   
Retained
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Total
 
(in thousands, except for number of shares)
           
                               
Balance, February 28, 2008
    2,263,037     $ 23     $ 2,733     $ 3,722     $ 6,478  
                                         
Fractional shares issued in lieu of cash
    738                                  
                                         
Net income
    -       -       -       969       969  
                                         
Balance, February 28, 2009
    2,263,775       23       2,733       4,691       7,447  
                                         
Net income
    -       -       -       770       770  
                                         
Balance, February 28, 2010
    2,263,775     $ 23     $ 2,733     $ 5,461     $ 8,217  

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

 
28

 

 
SOLITRON DEVICES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 2010 AND FEBRUARY 28, 2009

   
2010
   
2009
 
   
(in thousands)
 
             
Net income
  $ 770     $ 969  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    195       202  
Decrease (increase) in operating assets and liabilities:
               
Accounts receivable
    186       155  
Inventories
    (240 )     416  
Prepaid expenses and other current assets
    14       (35 )
Other assets
    -       193  
Increase (decrease) in:
               
Accounts payable-post-petition
    (177 )     (86 )
Accounts payable-pre-petition
    (28 )     (28 )
Customer deposit
    (22 )     (326 )
Accrued expenses and other liabilities
    (65 )     16  
Other long-term liabilities
    (10 )     (187 )
Total adjustments
    (147 )     320  
NET CASH PROVIDED BY OPERATING ACTIVITIES
    623       1,289  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Investment in treasury bills
    (488 )     (703 )
Purchase of property, plant and equipment
    (175 )     (221 )
NET CASH (USED IN) INVESTING ACTIVITIES
    (663 )     (924 )
                 
Net increase (decrease) in cash and cash equivalents
    (40 )     365  
                 
Cash and cash equivalents – beginning of the year
    440       75  
                 
Cash and cash equivalents - end of the year
  $ 400     $ 440  

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

 
29

 

SOLITRON DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS
 
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.

Change of Entity
During the fiscal year ended February 29, 2009 the Company dissolved its subsidiaries, all of which were inactive, by board resolution and the Company dropped the titles  “Consolidated” and  “And Subsidiaries” from its financial statements.

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.

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 February 28, 2010 and $7,000 as of February 28, 2009.

 
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.

 
30

 
 
SOLITRON DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS
 
Property, Plant and Equipment
Property, plant, and equipment is recorded at cost.  Major renewals and improvements are capitalized, while maintenance and repairs that do not extend their expected life are expensed as incurred.  Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets:

Leasehold Improvements
4-10 years
Machinery and Equipment
5 years

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 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 February 28, 2010 and 2009, $150,000 and $190,000 respectively, of the Company’s cash reserves were subject to this risk.  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.

Revenue Recognition
Revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition.  This pronouncement requires that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. We recognize revenue upon determination that all criteria for revenue recognition have been met.  The criteria are usually met at the time of product shipment. Shipping terms are generally FCA (Free Carrier) shipping point.

Income Taxes
Income taxes are accounted for under the asset and liability method of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Under SFAS 109, the effect on deferred tax assets and liabilities or a change in tax rate is recognized in income in the period that includes the enactment date.  Deferred tax assets are reduced to estimated amounts to be realized by the use of a valuation allowance.

The Company adopted new guidance related to accounting for uncertainty in income taxes in accordance with FASB Interpretation Number 48 (FIN 48) and began evaluating tax positions utilizing a two-step process.  The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination based on the technical merits of the position.  The second step is to measure the benefit to be recorded from tax positions that meet the more-likely-than-not recognition threshold by determining the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement and recognizing that amount in the financial statements.  Solitron has adopted FIN 48 and there if no material impact on its financial condition, results of operations, cash flows, or disclosures.

Net Income Per Common Share
Net income 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.

 
31

 

SOLITRON DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS
 
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.
 
Recent Accounting Pronouncements

No recent accounting pronouncements that affect the Company were issued.

2.  PETITION IN BANKRUPTCY
 
Petition in Bankruptcy

On January 24, 1992, the Company filed voluntary petitions under the Federal Bankruptcy Code.  The Company was authorized to continue in the management and control of its business and property as debtor-in-possession under the Bankruptcy Code.

On August 20, 1993 the Company’s Plan of Reorganization, as amended and modified (the “Plan”), was confirmed by the Bankruptcy Court and the Company emerged from bankruptcy on August 30, 1993.  On July 12, 1996 the Bankruptcy Court officially closed the case.

(a)           Pursuant to the Plan of Reorganization, the Company was required to make quarterly payments to holders of unsecured claims until they receive 35% of their pre-petition claims over a period of ten years beginning in approximately May 1995.  However, due to negotiations between the parties, the unsecured creditors agreed to a reduced payment schedule and the Company agreed to make payments until its obligations are fulfilled.  At February 28, 2010, the Company is scheduled to pay approximately $1,058,000 to holders of allowed unsecured claims in quarterly installments of approximately $7,000.  As of February 28, 2010, the amount due to holders of allowed unsecured claims is accrued as a current pre-petition liability.
 
(b)           Beginning on the later of (i) the payment of all administrative claims and all unsecured claims, but not later than 18 months after the Effective Date (August 30, 1993) and (ii) the date the Company's net after tax income exceeds $500,000, the Company will pay (on an annual basis) each of (x) the holders of unsecured claims (pro rata) and (y) Vector Trading and Holding Corporation (“Vector”), 5% of its net after tax income in excess of $500,000 until the tenth anniversary of the Effective Date, up to a maximum aggregate of $1,500,000 of such payments to the holders of unsecured claims (pro rata) and up to a maximum aggregate of $1,500,000 of such payments to Vector.  This obligation expired as of August 2005.
 
(c)           Under the Plan, the Company is required to remediate its former non-operating facility located in Port Salerno and its former facility located in Riviera Beach, Florida.  The Plan contemplated that monies to fund the remediation will be made available from the proceeds of the sale or lease of the properties, to the extent that the Company is successful in its efforts to sell or lease such properties.   The Riviera Beach Property was sold on October 12, 1999 by the Company.  Under the terms of the sale, USEPA received the net proceeds of $419,000.  USEPA also received approximately $19,000 from the Riviera Beach environmental escrowed monies to defray its cleanup costs.  The Port Salerno (formerly occupied by Solitron Microwave) property was sold on March 17, 2003.  Under the terms of the sale, USEPA received $153,155 and Martin County received on behalf of FDEP $278,148 (the net proceeds).  Further, pursuant to the Plan, a purchaser of this facility would not be liable for existing environmental problems under certain conditions.  In connection with facilitating the remediation of the property, the Company will  also, to the extent the proceeds from the sale or lease of  these properties are not sufficient to pay for the remediation, be required to escrow the following amounts on a monthly basis beginning on September 30, 1995:  (i) year 1 - $5,000 per month;  (ii) year 2 - $7,500 per month; (iii) year 3 - $10,000 per month; and (iv) $10,000 per month thereafter until remediation is completed. The Company has notified FDEP of its inability to pay pursuant to this schedule and is making payments at the rate of $1,000 per month.  As of February 28, 2010, the Company has deposited $90,000 into the escrow accounts.  As of February 28, 2010, approximately $58,000 remains in the Port Salerno escrow account.

 
32

 
 
SOLITRON DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS
 
(d)           The Company has paid all of the allowed administrative claims and allowed wage claims since August 1993.

The Plan provided for the distribution of common stock of the Company such that, post-petition, the Company's common stock would be held as follows:

Party-In-Interest
 
Common Stock
 
Vector
    25 %
Unsecured Creditors
    40 %
Company's President
    10 %
Pre-Petition Stockholders
    20 %
Reserved for future issuance under an employee stock incentive plan to be issued based upon the terms and conditions of the plan at the discretion of the Board of Directors
    5 %
      100 %
 
On October 4, 1994, the Company and Vector agreed that Vector’s 25% stock ownership would be distributed among various parties.   Vector participants were:  Vector principal (Howard White) who received 273,943 shares (subsequently sold to Inversiones Globales); AHI Drillings, Inc. who received 77,037 shares; Cointrol Credit Co. II who received 20,095 shares; Service Finance who received 77,037 shares; Trans Resources who received 77,037 shares; and Martin Associates who received 22,848 shares.    Based solely on the Company’s knowledge (and not from any filings which may have to be made with the SEC), and as the result of an out of court agreement made subsequent to a lawsuit filed against Vector by John Stayduhar, a previous Chairman/CEO of the Company, shares held by Inversiones Globales (174,000), by AHI Drillings, Inc. (77,037), by Service Finance (77,037), by Trans Resources (77,037), and by Martin Associates (22,737) were transferred to Mr. Stayduhar.  This gave Mr. Stayduhar approximately 20.61% of the shares of the Company.
 
3.  EARNINGS PER SHARE
 
The shares used in the computation of the Company’s basic and diluted earnings per common share were as follows:

   
Fiscal Year Ended
 
   
February 28,
 
   
2010
   
2009
 
Weighted average common shares outstanding
    2,263,775       2,263,253  
Dilutive effect of employee stock options
    188,826       190,902  
Weighted average common shares outstanding, assuming dilution
    2,452,601       2,454,155  

Weighted average common shares outstanding, assuming dilution, include the incremental shares that would be issued upon the assumed exercise of stock options.  For fiscal years 2010 and 2009 respectively, 13,500 and 13,800 of the Company’s outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares, and therefore their inclusion would have been anti-dilutive.  These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options.

 
33

 
 
SOLITRON DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS

4.  INVENTORIES
 
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  

As of February 28, 2009, inventories consist of the following:

   
Gross
   
Reserve
   
Net
 
Raw Materials
  $ 1,462,000     $ (319,000 )   $ 1,143,000  
Work-In-Process
    1,963,000       (614,000 )     1,349,000  
Finished Goods
    509,000       (432,000 )     77,000  
     Totals
  $ 3,934,000     $ (1,365,000 )   $ 2,569,000  

5. PROPERTY, PLANT AND EQUIPMENT

As of February 28, 2010 and 2009, property, plant, and equipment consist of the following:

   
2010
   
2009
 
Leasehold Improvements
  $ 200,000     $ 197,000  
Machinery and Equipment
    2,156,000       1,983,000  
Subtotal
    2,356,000       2,180,000  
Less: Accumulated Depreciation and Amortization
    (1,795,000 )     (1,599,000 )
Net Property, Plant and Equipment
  $ 561,000     $ 581,000  

Depreciation and amortization expense was $195,000 and $202,000 for the years ended 2010 and 2009 respectively, and is included in Cost of Sales in the accompanying Statements of Income.

6. ACCRUED EXPENSES

As of February 28, 2010 and 2009, accrued expenses and other current liabilities consist of the following:

   
2010
   
2009
 
Payroll and related employee benefits
  $ 469,000     $ 522,000  
Income taxes
    14,000       22,000  
Property taxes
    7,000       7,000  
Environmental liabilities
    4,000       15,000  
Other liabilities
    11,000        4,000  
Totals
  $ 505,000     $ 570,000  
 
 
34

 
 
SOLITRON DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS

7. LONG-TERM LIABILITIES

As of February 28, 2010 and 2009, long-term liabilities consist of the following items:

   
2010
   
2009
 
Environmental liability
  $ 148,000     $ 158,000  

Environmental liability has an estimated payout period of seven years at a discounted interest rate of 8.25%.  Environmental liability is shown net of an interest discount of $54,000.

Contractual or estimated payment requirements on other long-term liabilities excluding amounts representing interest during the next five years and thereafter are as follows. It is reasonably possible that the estimates could change in the near term:

Fiscal Year Ending February 28/29
 
2010
 
2011
  $ 27,000  
2012
    27,000  
2013
    27,000  
2014
    27,000  
2015
    27,000  
         Thereafter
    13,000  
Total
  $ 148,000  
8.  INCOME TAXES

At February 28, 2010, the Company has net operating loss carryforwards of approximately $15,958,000 that expire through 2015.  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 carryforwards.

Total net deferred taxes are comprised of the following at February 28, 2010 and 2009:

Deferred tax assets:
 
2010
   
2009
 
Loss carryforwards
  $ 6,005,000     $ 3,266,000  
Allowance for doubtful accounts
    1,000       3,000  
Inventory allowance
    612,000       3,545,000  
Depreciation
    109,000       80,000  
Section 263A capitalized costs
    126,000       342,000  
Total deferred tax assets
    6,853,000       7,236,000  
Valuation allowance
    (6,853,000 )     (7,236,000 )
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 years ended February 28, 2010 and 2009.

 
35

 

SOLITRON DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate for fiscal year ended February 28, 2010 and 2009 is as follows:

   
2010
   
2009
 
U.S. federal statutory rate
    34.0 %     34.0 %
Change in valuation allowance
    (34.0 )     (34.0 )
Alternative Minimum Taxes
     0.1        0.0  
Effective income tax rate
     0.1 %      0.0 %

9. STOCK OPTIONS

The Company’s 2000 Stock Option Plan provides that stock options are valid for ten years and vest twelve months after the award date unless otherwise stated in the option awards.

On January 23, 2006, the Board of Directors granted stock options to certain key employees and directors. The options, which become vested on January 23, 2007, were for a total of 14,700 shares and the exercise price was fixed at $3.95 per share, which was the price on the OTCBB at the time of the grant. The options are exercisable through January 23, 2016.

On May 16, 2005, the Board of Directors granted stock options to certain key employees and directors. The options, which became vested on May 15, 2006, were for a total of 47,000 shares and the exercise price was fixed at $0.75 per share, which was the price on the OTCBB at the time of the grant. The options are exercisable through May 15, 2015.

On May 17, 2004, the Board of Directors granted stock options to certain key employees and directors. The options, which became vested on May 16, 2005, were for a total number of 47,500 shares and the exercise price was fixed at 1.05 per share, which was the price on the OTCBB at the time of the grant. The options are exercisable through May 16, 2014.

On May 17, 2004, the Board of Directors awarded the Company’s President options totaling 175,636 shares, which are fully vested.  The exercise price of these options was fixed at $1.05 per share (the closing price on the OTCBB at the time of the grant).

In December 2000, a grant equal to 10% of the outstanding shares (254,624) was made to the Company’s President at the exercisable price of $0.40 per share (the closing stock price on the date of the grant). Fifty percent  (50%) of the total number of shares is immediately exercisable and the other 50% vests in five equal installments over the following five years.  All of these options are now fully vested.

The Company’s 2007 Stock Incentive Plan allows the Company to grant common stock, options, restricted stock, and stock appreciation rights to eligible individuals.  As of February 28, 2010, the Company had not granted any awards under the 2007 Stock Incentive Plan.

Below is a summary of the Company’s Stock Option Activity:
   
 
 
Options
Outstanding
   
Weighted-
Average
Exercise
 Price
   
Weighted-
Average
Remaining
Contractual
Term
   
 
Aggregate
Intrinsic
Value
 
                         
Balance, February 28, 2008
    467,060     $ 0.767       6.5       880,000  
                                 
Balance, February 28, 2009
    467,060     $ 0.767       5.5       412,000  
Expired or Cancelled
    (300 )                        
Balance, February 28, 2010
    466,760     $ 0.767       4.5       814,000  
 
 
36

 

SOLITRON DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS

No options were granted or exercised in the years ended February 28, 2010 and February 28, 2009.

All of the Company’s outstanding options were vested as of February 28, 2010.  No shares vested during the years ended February 28, 2010 and February 28, 2009.

The following table summarizes information about stock options outstanding and exercisable at February 28, 2010:

       
Options Outstanding
       
Exercisable Options
 
 
 
Range of
Exercise Prices
   
Number of
Outstanding
Options
 
 
Remaining
Contractual
Life
 
Weighted
Average
Exercise
Price
   
 
 
Number
   
Weighted
Average
Exercise
Price
 
$
0.400
  $ 0.400       254,624  
1 years
  $ 0.400       254,624     $ 0.400  
$
1.050
  $ 1.050       176,636  
5 years
  $ 1.050       176,636     $ 1.050  
$
0.750
  $ 0.750       22,000  
6 years
  $ 0.750       22,000     $ 0.750  
$
3.950
  $ 3.950       13,500  
6 years
  $ 3.950       13,500     $ 3.950  
                466,760       $ 0.767       466,760     $ 0.767  

All options with a remaining contractual life outstanding are fully vested.

10.  EMPLOYEE BENEFIT PLANS

The Company has a 401k and Profit Sharing Plan (the "Profit Sharing Plan") in which substantially all employees may participate after three months of service.  Contributions to the Profit Sharing Plan by participants are voluntary. The Company may match participant's contributions up to 25% of 4% of each participant's annual compensation.  In addition, the Company may make additional contributions at its discretion.  The Company did not contribute to the Profit Sharing Plan during the fiscal years ended February 28, 2010 and February 28, 2009.

11. EXPORT SALES AND MAJOR CUSTOMERS

Revenues from domestic and export sales to unaffiliated customers for the year ended February 28, 2010 are as follows:

   
Power
         
Field Effect
   
Power
       
Geographic Region
 
Transistors
   
Hybrids
   
Transistors
   
MOSFETS
   
Totals
 
                               
Europe and Australia
  $ 48,000     $ 933,000     $ 2,000     $ 4,000     $ 987,000  
Canada and Latin America
    34,000       0       30,000       2,000       66,000  
Far East and Middle East
    2,000       0       0       189,000       191,000  
United States
    849,000       3,466,000       739,000       1,425,000       6,479,000  
Totals
  $ 933,000     $ 4,399,000     $ 771,000     $ 1,620,000     $ 7,723,000  

Revenues from domestic and export sales to unaffiliated customers for the year ended February 28, 2009 are as follows:

   
Power
         
Field Effect
   
Power
       
Geographic Region
 
Transistors
   
Hybrids
   
Transistors
   
MOSFETS
   
Totals
 
                               
Europe and Australia
  $ 76,000     $ 914,000     $ 42,000     $ 0     $ 1,032,000  
Canada and Latin America
    26,000       0       10,000       22,000       58,000  
Far East and Middle East
    20,000       0       3,000       66,000       89,000  
United States
    1,039,000       4,094,000       618,000       1,529,000       7,280,000  
Totals
  $ 1,161,000     $ 5,008,000     $ 673,000     $ 1,617,000     $ 8,459,000  

 
37

 

SOLITRON DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS 
 
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.

Sales to the Company's top two customers accounted for 52% of net sales for the year ended February 28, 2010 as compared with 46% of the Company's net sales for the year ended February 28, 2009.  Sales to Raytheon Company accounted for approximately 39% of net sales for the year ended February 28, 2010 and 35% for the year ended February 28, 2009.  Sales to BAE Systems Australia accounted for approximately 13% of net sales for the year ended February 28, 2010 and 11% for the year ended February 28, 2009.

12. MAJOR SUPPLIERS

For the year ended February 28, 2010, purchases from the Company’s two top suppliers, Platronics Seals and Streamtek Electronics Ltd., accounted for 26% of the Company's total purchases of production materials. For the year ended February 28, 2009, purchases from the Company’s two top suppliers, Platronics Seals and Egide USA Inc., accounted for 19% of total purchases of production materials.

13. COMMITMENTS AND CONTINGENCIES

Employment Agreement
In December 2000, the Company entered into a five-year employment agreement with its President.  This agreement provides, among other things, for annual compensation of $240,000 and a bonus pursuant to a formula.  The agreement stipulates that the President shall be entitled to a bonus equal to fifteen percent (15%) of the Company’s pre-tax income in excess of Two Hundred Fifty Thousand Dollars ($250,000).  For purposes of the agreement, “pre –tax income” shall mean net income before taxes, excluding (i) all extraordinary gains or losses, (ii) gains resulting from debt forgiven associated with the buyout of unsecured creditors, and (iii) any bonuses paid to employees.  The bonus payable hereunder shall be paid within ninety (90) days after the end of the fiscal year.

At a meeting of the Compensation Committee on January 23, 2006, the Committee approved an increase to the President’s annual compensation to $280,000, effective March 1, 2006.

The Company accrued $93,000 as a bonus to Mr. Saraf for the fiscal year ended February 28, 2010.  The Compensation Committee will meet on May 24, 2010 to approve the bonus to be paid during June 2010.

The Company accrued $131,000 as a bonus to Mr. Saraf for the fiscal year ended February 28, 2009.  The Compensation Committee met and approved the bonus that was paid in June 2009.

The President’s employment agreement stipulates, in Article 2.2, “Option to Extend”, that the contract is automatically extended for one year periods unless a notice is given by either party one year prior to the yearly anniversary.

Upon execution of the agreement, the President received a grant of options to purchase ten percent (10%) of the outstanding shares of the Company’s common stock, par value $.01 calculated on a fully diluted basis, at an exercise price per share equal to the closing asking price of the Company’s common stock on the OTCBB on the date of the grant ($0.40).  Fifty percent (50%) of the Initial Stock Options granted were vested immediately upon grant.  The remaining fifty percent (50%) of the Initial Stock Options vested in equal amounts on each of the first five anniversaries of the date of grant.  These options were fully vested during the year ended February 28, 2006.

These stock options were in addition to, and not in lieu of or in substitution for, the stock options (the “1992 Stock Options”) granted to the President pursuant to the Incentive Stock Option Plan Agreement dated October 20, 1992 under Solitron Devices, Inc. 1987 Stock Option Plan between the Company and the President.

 
38

 

SOLITRON DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS

Environmental Compliance:
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 fiscal years 2009-2013.  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 2008, and  fiscal year 2009. On March 15, 2010 the Company paid $10,000 to USEPA for fiscal year 2010 based on preliminary net income projections and has accrued an additional $4,000 current liability for fiscal year 2010.  The final amount will be paid to USEPA after the Company’s independent auditor will finish the fiscal year 2010 year-end audit  in  June 2009. This  amount is carried as  an environmental expense.  The Company  has  accrued $40,000 for its remaining minimum obligations under the Settlement Agreement which is reflected in “Accrued expenses and other current liabilities” on the Company’s Balance Sheets at February 28, 2010.

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 current balance in the Port Salerno Escrow Account is approximately $58,000.  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. (“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.

 
39

 
 
SOLITRON DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS

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.  The Company has accrued a long term environmental liability of $118,000 for this expense, which is the present value of 28 equal quarterly payments at 8.25% assumed interest. FDEP further notified the Company that FDEP required the Company to resume payments under 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 with the Company’s attorney, FDEP advised the Company that FDEP will prepare a justification for the asserted unreimbursed expenses.  Upon receipt of the cost reimbursement package, the Company is required to transfer $55,000.00 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.

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 October 8, 2007, which provides for the tolling of applicable statutes of limitation through the earlier of June 26, 2009, or the date the State institutes a suit against the Company 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 the Clarkstown Landfill Site.  As of the date of this filing, no such claim has been made. 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 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.

Operating Leases
In 2001, the Company entered into a lease agreement for its production facility.  The lease has a 10-year term, which expires in December 2011 and has no option to renew under current terms.  The lease is subject to escalations based on operating expenses.  Future minimum lease payments for this non-cancelable operating lease is as follows:

Fiscal Year Ending February 28/29
 
Amount
 
2011
    481,000  
Thereafter
    411,000  
Total
  $ 892,000  

Total rent expense was $480,000 for the year ended February 28, 2010 as compared with $443,000 for the year ended February 28, 2009.

 
40

 

SOLITRON DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS

14. OTHER INCOME

During the fiscal year ended February 28, 2010, the Company recognized approximately $13,000 of other income attributable to attributable to $16,000 of income tax benefit offset by $3,000 of other expenses.  During the fiscal year ended February 28, 2009, the Company recognized approximately $12,000 of other income attributable to receivable adjustments.

 
41

 

ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A(T).
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 Annual 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 Annual 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.

ITEM 9B.
OTHER INFORMATION

None.
 
42

 
PART  III

ITEM 10.
DIRECTORS , EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The table below sets forth the name, age, and position of the directors and executive officers of the Company.  The table below also sets forth the year in which each director was first elected to the Board and the year in which the term of each director expires. Pursuant to the Company's Certificate of Incorporation, the Board of Directors is divided into three classes, each of which consists of (as nearly as may be possible) one third of the directors.  Directors are elected for three-year terms.
 
           
Year
   
           
First
 
Term As
           
Became
 
Director
Name
 
Age
 
Position with Solitron
 
Director
 
Expires(1) 
                 
Shevach Saraf
 
67
 
Chairman of the Board,
 
1992
 
Expired
       
Chief Executive Officer,
       
       
President, Chief Financial Officer
       
       
and Treasurer
       
                 
Dr. Jacob A. Davis (2)
 
73
 
Director
 
1996
 
Expired
                 
Mr. Joseph Schlig  (2)
 
82
 
Director
 
1996
 
Expired

1)   The term of each Director has expired.  Each Director shall continue in office until his successor is elected at the next annual meeting of stockholders.
2)   A member of the Audit Committee and Compensation Committee.

Mr. Shevach Saraf has been President of the Company since November 1992, Chief Executive Officer of the Company since December 1992, Chairman of the Board since September 1993 and Chief Financial Officer since 2000. He has 45 years experience in operations and engineering management with electronics and electromechanical manufacturing companies.

Before joining Solitron in 1992, Mr. Saraf was Vice President of Operations and a member of the Board of Directors of Image Graphics, Inc (“Image Graphics”), a military and commercial electron beam recorder manufacturer based in Shelton, CT.  As head of Image Graphics’ engineering, manufacturing materials and field service operations, he turned around the firm’s chronic cost and schedule overruns to on-schedule and better-than-budget performance.  Earlier, he was President of Value Adding Services, a management consulting firm in Cheshire, CT.  This company provided consulting and turnaround services to electronics and electromechanical manufacturing companies with particular emphasis on operations.  From 1982-1987, Mr. Saraf was Vice President of operations for Harmer Simmons Power Supplies, Inc., a power supplies manufacturer in Seymour, CT.  He founded and directed all aspects of the company’s startup and growth, achieving $12 million in annual sales and a staff of 180 employees.  Mr. Saraf also held executive positions with Photofabrication Technology, Inc. and Measurements Group of Vishay Intertechnology, Inc.

 
43

 

Born and raised in Tel Aviv, Israel, he served in the Israeli Air Force from 1960-1971 as an electronics technical officer.  He received his master’s in business administration from Rensselaer Polytechnic Institute, Troy, NY, and his master’s in management from Rensselaer at Hartford (formerly known as Hartford [CT] Graduate Center).  He also received associate degrees from the Israeli Institute of Productivity, the Teachers & Instructors Institute, and the Israeli Air Force Technical Academy.

Dr. Jacob (Jay) A. Davis was elected a Director of the Company on August 26, 1996. Dr. Davis also serves as the Chairman of the Compensation Committee and a member of the Audit Committee.  From 1995 to 1999, he was Vice President of Business Planning and Finance for AET, Inc, a developing software company based in Melbourne, Florida. He has served on the Board of AET since the inception of the company in 1995.  In 1994 and 1995, he was Visiting Professor in Engineering Management at Florida Institute of Technology.  He was a Vice-Chairman of the Brevard SCORE Chapter and has devoted significant time to counseling with local businesses.  He was an active member of the International Executive Service Corps (IESC) serving in South Russia during May and June of 1996, and again in February and March of 1998.

Prior to joining AET, Dr. Davis was with Harris Semiconductor for 26 years.  During the last 12 years with Harris Semiconductor, he was Vice President-General Manager of the Military and Aerospace Division, the Custom Integrated Circuits Division and the Harris Microwave Division.  Dr. Davis has served in a variety of other capacities at Harris Semiconductor including Vice President of Engineering, Director of Manufacturing, Director of Special Services, and Device Research Engineer.

Dr. Davis received a doctor of philosophy from Purdue University in 1969 and a bachelors of science in electrical engineering from North Carolina State University.  He is a Member of the IEEE and the Electrochemical Society, and has served on a variety of advisory boards for several Universities.  He holds four patents and has given a number of overview papers and invited presentations at several conferences.

Mr. Joseph Schlig was elected a Director of the Company on August 26, 1996.  Since 1985, he has been Managing Director of Fairhaven Associates, a professional consulting firm supporting small and medium size businesses in strategic planning, financial, marketing and operations management and organizational development.  From 1995 to 1997, Mr. Schlig also served as Chief Financial Officer of Industrial Technologies, Inc., (INTE.PK—NASDAQ).  For the prior five years, Mr. Schlig was a business consultant to private companies and to the State of Connecticut Department of Economic Development.
 
Prior to 1985, Mr. Schlig had many years of business experience including Director of Marketing, Latin America for ITT and Director of International Operations for Revlon.  Mr. Schlig has also operated several small/medium size companies in both the public and private sectors.  He also served as a director of the Trumbull Technology Foundation and as a Director of the MIT Enterprise Forum of Connecticut and served as a director of the Bridgeport [Connecticut] Economic Development Corporation.  He was an alternate member of the Board of Finance of the Town of Trumbull, Connecticut.  He is currently a Trustee of the Trumbull Public Library System.
 
Mr. Schlig brings merger and acquisition experience to the Board of Directors as well as the experience of having held CEO and CFO positions with companies in the public sector.  He was also a director of a public technology company whose primary business was with agencies of the US government.  In addition, he has been engaged with technology companies both domestically and internationally.
 
Mr. Schlig has an engineering degree from the Stevens Institute of Technology and an MBA from the Harvard Business School where he was a Baker Scholar.  Mr. Schlig is the Chairman of the Audit Committee and a member of the Compensation Committee.

 
44

 

Audit Committee
 
The Company’s Board of Directors has an Audit Committee.  The Audit Committee consists of Messrs. Davis and Schlig (Chairman).  The Company has determined that the members of the audit committee are independent pursuant to the Nasdaq Stock Marketplace Rules.  The Company’s Audit Committee generally has responsibility for appointing, overseeing and determining the compensation of our independent certified public accountants, reviewing the plan and scope of the independent certified public accountants’ audit, reviewing our audit and control functions, approving all non-audit services provided by our independent certified public accountants and reporting to our full Board of Directors regarding all of the foregoing.  Additionally, our Audit Committee provides our Board of Directors with such additional information and materials as it may deem necessary to make our Board of Directors aware of significant financial matters that require its attention.  The Company has adopted an Audit Committee Charter, a copy of which is published on the Company’s web site, www.solitrondevices.com on the Investor Relations page.  The Company has determined that the audit committee  “financial expert” is Mr. Joseph Schlig.
 
CODE OF ETHICS
 
The Company has adopted a Code of Ethics for Senior Financial Officers, which includes the Company’s principal executive officer, principal financial officer and controller, pursuant to the Sarbanes-Oxley Act of 2002. The Code of Ethics is published on the Company’s web site, www.solitrondevices.com on the Investor Relations page.
 
Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires directors and executive officers of the Company and ten percent stockholders of the Company to file initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company with the Securities and Exchange Commission.  Directors, executive officers, and ten percent stockholders are required to furnish the Company with copies of all Section 16(a) forms they file.  To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and representations that no other reports were required during the year ended February 28, 2010, all Section 16(a) filing requirements applicable to directors and executive officers of the Company and ten percent stockholders of the Company were timely filed, except that GRT Deep Woods GP, L.L.C., a ten percent stockholder of the Company, untimely filed a Form 3 on June 2, 2009 and a Form 4 reporting one transaction, which Form 4 was filed on June 2, 2009.

ITEM 11.
EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table provides certain summary information concerning compensation paid by the Company, to or on behalf of the following named officer for the fiscal years ended February 28, 2010 and February 28, 2009.

Name and
Principal Position
 
Year
 
Salary($)
   
Bonus($)
   
All Other
Compensation($)
   
Total($)
 
Shevach Saraf
 
2010
    290,384       92,571
(1)
    24,627
(2)
    407,582  
Chairman of the Board,
 
2009
    271,346       130,883
(3)
    22,358
(2)
    424,587  
President, CFO, Treasurer
                                   
 
(1)
The Compensation Committee met on May 24, 2010 and approved a bonus of $92,571 to Mr. Saraf for fiscal year ended February 28, 2010  to be paid during June 2010. This amount was accrued in fiscal year 2010.
(2)
Life, Disability, & Medical Insurance premiums plus personal car expenses.
(3)
The Company accrued $130,883 for a bonus to Mr. Saraf for fiscal year ended February 28, 2009.  The Compensation Committee met and approved the bonus and the bonus was paid during June 2009.

 
45

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

The following table sets forth certain summary information covering unexercised options to purchase the Company's Common Stock as of February 28, 2010 held by the following named officer.

   
Option Awards
 
Name
 
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(1)
   
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexerciseable
   
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
   
Option
Exercise
Price
($)
   
Option
Expiration
Date
 
Shevach Saraf
    254,624       -       -     $ .40       (2 )
      175,636       -       -     $ 1.05       (2 )

(1) These options were fully vested as of February 28, 2010.
(2) These options do not expire.

DIRECTOR COMPENSATION

Name
 
Fees Earned
Or Paid
In Cash($)
   
Non-Equity
Incentive Plan
Compensation($)
(2)
   
Total($)
 
Dr. Jacob A. Davis (1)
    12,000       9,000       21,000  
Mr. Joseph Schlig (1)
    12,000       9,000       21,000  

(1)
As of February 28, 2010, the directors hold fully vested unexercised options in the following amounts:
Dr. Davis: 11,000 shares, Mr. Schlig: 3,000 shares.
(2)
During fiscal year 2010, the Company paid each of its directors $9,000 as additional incentive for services rendered during fiscal year 2009.

Each director who is not employed by the Company receives $1,500 for each meeting of the Board he attends and $250 for each committee meeting he attends on a date on which no meeting of the Board is held.  In addition, all out-of-pocket expenses incurred by a director in attending Board or committee meetings are reimbursed by the Company.  The Chairmen of the Audit and Compensation Committees receive $1,500 per quarter for their additional duties and responsibilities.  In addition, annually at the discretion of the CEO each director who is not employed by the Company may receive additional cash or equity awards for their services on the Board.

Employment Agreement

In December 2000, the Company entered into a five-year employment agreement with its President and CEO.  The employment agreement stipulates that the contract is automatically extended for one-year periods unless a notice is given by either party one year prior to the yearly anniversary.  This agreement provides, among other things, for annual compensation of $240,000 and a bonus pursuant to a formula.  The employment agreement stipulates that the President shall be entitled to a bonus equal to fifteen percent (15%) of the Company’s pre-tax income in excess of Two Hundred Fifty Thousand Dollars ($250,000).  For purposes of the agreement, “pre-tax income” shall mean net income before taxes, excluding (i) all extraordinary gains or losses, (ii) gains resulting from debt forgiven associated with the buyout of unsecured creditors, and (iii) any bonus paid to employee.  The bonus payable thereunder shall be paid within ninety (90) days after the end of the fiscal year.

 
46

 

Upon execution of the agreement, the President received a grant to purchase ten percent (10%) of the outstanding shares of the Company’s common stock, par value $.01 calculated on a fully diluted basis, at an exercise price per share equal to the closing asking price of the company’s common stock on the OTCBB on the date of the grant ($0.40).  Fifty percent (50%) of the initial stock options granted vested immediately upon grant.  The remaining fifty percent (50%) of the initial stock options vested in equal amount on each of the first five anniversaries of the date of grant.  All of these options are now fully vested.  These stock options are in addition to, and not in lieu of or in substitution for, the stock options (the “1992 Stock Options”) granted to the President pursuant to the Incentive Stock Option Plan Agreement dated October 20, 1992 under Solitron Devices, Inc. 1987 Stock Option Plan between the Company and the President.

Under the employment agreement, if the