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SOLITRON DEVICES INC - Quarter Report: 2014 May (Form 10-Q)

f10q0514_solitrondevicesinc.htm


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

FORM 10-Q
 
(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended May 31, 2014
 
or
 
o 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.  001-04978
 
SOLITRON DEVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
22-1684144
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
     
3301 Electronics Way, West Palm Beach, Florida
 
33407
(Address of Principal Executive Offices)
 
(Zip Code)

(561) 848-4311
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”  “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer  o
 
Accelerated filer  o
Non-accelerated filer    ¨
 
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨   No x
 
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of July 1, 2014 was 2,185,832.
 


 
 

 
 
SOLITRON DEVICES, INC.

TABLE OF CONTENTS
 
PART 1 - FINANCIAL INFORMATION
 
   
Page No.
Item 1.
Financial Statements
 
     
 
Condensed Balance Sheets
1
 
May 31, 2014 (unaudited) and February 28, 2014
 
     
 
Condensed Statements of Income (unaudited)
2
 
Three Months Ended May 31, 2014 and 2013
 
     
 
Condensed Statements of Cash Flows (unaudited)
3
 
Three Months Ended May 31, 2014 and 2013
 
     
 
Notes to Condensed Financial Statements
4-10
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11-15
     
Item 4.
Controls and Procedures
16
     
PART II – OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
17
     
Item 6.
Exhibits
18
     
Signatures
 
19

 
 

 
 
PART I – FINANCIAL INFORMATION

ITEM 1.         FINANCIAL STATEMENTS

SOLITRON DEVICES, INC.
CONDENSED BALANCE SHEETS
AS OF MAY 31, 2014 AND FEBRUARY 28, 2014
(Unaudited)

   
May 31,
   
Feb 28,
 
   
2014
   
2014
 
   
(in thousands, except for shares)
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 792     $ 625  
Treasury bills and certificates of deposit
    6,406       6,261  
Accounts receivable, less allowance for doubtful accounts of $2
    643       785  
Inventories, net (Note 5)
    4,317       4,316  
Prepaid expenses and other current assets
    210       155  
TOTAL CURRENT ASSETS
    12,368       12,142  
                 
PROPERTY, PLANT AND EQUIPMENT, net
    521       558  
                 
OTHER ASSETS
    6       7  
TOTAL ASSETS
  $ 12,895     $ 12,707  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable – Post-petition
  $ 397     $ 307  
Accounts payable – Pre-petition
    -       8  
Dividend payable
    109       -  
Customer deposits
    6       94  
Accrued expenses and other liabilities (Note 8)
    631       605  
TOTAL CURRENT LIABILITIES
    1,143       1,014  
                 
TOTAL LIABILITIES
    1,143       1,014  
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, $.01 par value, authorized 500,000 shares, none issued
    -       -  
Common stock, $.01 par value, authorized 10,000,000 shares, 2,185,832 shares issued and outstanding, net of 273,230 shares of treasury stock at May 31, 2014 and 2,177,832 shares issued and outstanding, net of 273,230 shares of treasury stock at Feb 28, 2014
    23       23  
Additional paid-in capital
    2,749       2,743  
Accumulated other comprehensive income
    13       14  
Retained earnings
    9,242       9,188  
Less treasury stock
    (275 )     (275 )
TOTAL STOCKHOLDERS' EQUITY
    11,752       11,693  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 12,895     $ 12,707  
 
The accompanying notes are an integral part of the unaudited condensed financial statements.

 
1

 
 
SOLITRON DEVICES, INC.
CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED MAY 31, 2014 AND MAY 31, 2013
(Unaudited)

   
2014
   
2013
 
   
(in thousands, except for share and
per share amounts)
 
             
Net sales
  $ 2,305     $ 2,276  
Cost of sales
    1,814       1,670  
Gross profit
    491       606  
Selling, general and administrative expenses
    336       445  
Operating income
    155       161  
Other income (expenses):
               
Interest income
    4       9  
Other, net (Note 7)
    8       86  
Income before provision for income taxes
    167       256  
Provision for income taxes
    4       4  
Net income
  $ 163     $ 252  
                 
Other comprehensive income:
               
Unrealized (loss)/gain on investments
    (1 )     10  
Total comprehensive income
  $ 162     $ 262  
                 
Income per share from operating income-Basic
  $ 0.07     $ 0.07  
Income per share from operating income-Diluted
  $ 0.07     $ 0.07  
                 
Net income per share-Basic
  $ 0.07     $ 0.12  
Net income per share-Diluted
  $ 0.07     $ 0.11  
                 
Weighted average shares outstanding-Basic
    2,178,008       2,177,832  
Weighted average shares outstanding-Diluted
    2,402,138       2,403,591  
 
The accompanying notes are an integral part of the unaudited condensed financial statements.

 
2

 
 
SOLITRON DEVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MAY 31, 2014 AND MAY 31, 2013
(Unaudited)

   
2014
   
2013
 
   
(in thousands)
 
             
Net income
  $ 163     $ 252  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    56       58  
Decrease (increase) in operating assets:
               
Accounts receivable
    142       316  
Inventories, net
    (1 )     (118 )
Prepaid expenses and other current assets
    (55 )     8  
Other assets
    1       2  
Increase (decrease) in operating liabilities:
               
Accounts payable – Post-petition
    90       (24 )
Accounts payable – Pre-petition
    (8 )     (185 )
Customer deposit
    (88 )     233  
Accrued expenses and other liabilities
    25       (160 )
Total adjustments
    162       130  
NET CASH PROVIDED BY OPERATING ACTIVITIES
    325       382  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Sales of treasury bills and certificates of deposit
    1,598       662  
Purchases of treasury bills and certificates of deposit
    (1,743 )     (1,494 )
Purchases of property, plant and equipment
    (19 )     (94 )
NET CASH (USED IN) INVESTING ACTIVITIES
    (164 )     (926 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Cash from exercise of employee stock options
    6       -  
NET CASH PROVIDED BY FINANCING ACTIVITIES
    6       -  
                 
Net increase/(decrease) in cash and cash equivalents
    167       (544 )
                 
Cash and cash equivalents – beginning of the period
    625       1,297  
                 
Cash and cash equivalents - end of the period
  $ 792     $ 753  

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

 
3

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

1.           ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Activities
 
Solitron Devices, Inc., a Delaware corporation (the “Company” or “Solitron”), designs, develops, manufactures, and markets solid-state semiconductor components and related devices primarily for the military and aerospace markets.  The Company was incorporated under the laws of the State of New York in 1959 and reincorporated under the laws of the State of Delaware in August 1987.

Basis of Presentation
 
The unaudited condensed financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
 
The unaudited condensed financial information furnished herein reflects all adjustments, consisting of normal recurring items that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods.  The results of operations for the three months ended May 31, 2014 are not necessarily indicative of the results to be expected for the year ending February 28, 2015.
 
The information included in this Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended February 28, 2014.

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

Investment in Treasury Bills and Certificates of Deposit
 
Investment in treasury bills and certificates of deposit include treasury bills with maturities of one year or less, and is stated at market value.

All of the Company’s investments are classified as available-for-sale.  As they are available for current operations, they are classified as current on the balance sheets.  Investments in available-for-sale securities are reported at fair value with unrecognized gains or losses, net of tax, as a component of accumulated other comprehensive income and is included as a separate component of stockholders’ equity. The Company monitors its investments for impairment periodically and records appropriate reductions in carrying values when the declines are determined to be other-than-temporary.

The following table summarizes the total face value of treasury bills and certificates of deposit.
 
Total Face Value as of 5/31/14 (In thousands)
 
Treasury bills
    683  
Certificates of deposit
    5,725  
      6,408  

 
4

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

As of May 31, 2014, contractual maturities of the Company's available-for-sale non-equity investments were as follows:

   
Face value
   
Fair Value
 
   
(In thousands)
   
(In thousands)
 
Maturing within one year
  $ 6,408     $ 6,406  

Fair Value of Financial Instruments
 
Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures”, defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  ASC 820 also sets forth a valuation hierarchy of the inputs (assumptions that market participants would use in pricing an asset or liability) used to measure fair value.  This hierarchy prioritizes the inputs into the following three levels:

Level 1:
Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
Level 2:
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3:
Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that results in management’s best estimate of fair value.

The Company’s brokered Treasury bills and certificates of deposits are subject to Level 1 fair value measurement.

The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, accounts payable, accrued expenses and other liabilities approximate their fair value due to the relatively short period to maturity for these instruments. The fair value of long-term debt is based on current rates at which the Company could borrow funds with similar remaining maturities, and the carrying amount of the long-term debt approximates fair 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 May 31, 2014 and February 28, 2014.

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.

 
5

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

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.
   
Finished goods:
All finished goods with firm orders for later delivery are valued (material and overhead) at the lower of cost or market.  All finished goods with no orders are fully reserved.
   
Direct labor costs:
Direct labor costs are allocated to finished goods and work in process inventory based on engineering estimates of the amount of man-hours required from the different direct labor departments to bring each device to its particular level of completion.

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.

Financial Statement  Estimates
 
The preparation of condensed 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 affecting the Company were issued by the Financial Accounting Standards Board or other standards-setting bodies.

2.           ENVIRONMENTAL REGULATION

While the Company believes that it has the environmental permits necessary to conduct its business and that its operations conform to present environmental regulations, increased public attention has been focused on the environmental impact of semiconductor manufacturing operations.  The Company, in the conduct of its manufacturing operations, has handled and does handle materials that are considered hazardous, toxic or volatile under federal, state and local laws and, therefore, is subject to regulations related to their use, storage, discharge and disposal.  No assurance can be made that the risk of accidental release of such materials can be completely eliminated.  In the event of a violation of environmental laws, the Company could be held liable for damages and the costs of remediation. In addition, the Company, along with the rest of the semiconductor industry, is subject to variable interpretations and governmental priorities concerning environmental laws and regulations.  Environmental statutes have been interpreted to provide for joint and several liability and strict liability regardless of actual fault.  There can be no assurance that the Company will not be required to incur costs to comply with, or that the operations, business or financial condition of the Company will not be materially adversely affected by current or future environmental laws or regulations.

 
6

 
 
SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
3.           ENVIRONMENTAL LIABILITIES

In November 2013, the Company was served with a Third Party Complaint that was filed in the United States District Court for the Northern District of New York, in which the Company was named as a defendant in a suit brought by the Clarkstown Landfill Joint Defense Group (“JDG”).  In the Third Party Complaint, the JDG contends that the Company is liable for an equitable share of the JDG’s settlement payment to the New York State Department of Environmental Conservation (“NYSDEC”) in connection with response costs incurred by NYSDEC  to remediate the Clarkstown Landfill Site located in the Town of Clarkstown, Rockland County, New York (the “Clarkstown Landfill Site”).   The JDG previously offered to settle its claim against the Company for the sum of $125,000; the offer has now been withdrawn.  The Company contends that the JDG’s claim derives from NYSDEC’s 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, a claim that the Company contends was discharged in bankruptcy as a result of the final order of Bankruptcy Court Confirming Debtor’s Fourth Amended Plan of Reorganization, entered on August 19, 1993 order (“1993 Order”).  On January 24, 2014, the Company filed with the Bankruptcy Court an Emergency Motion to Enforce the Bankruptcy Court’s 1993 Order. Following a hearing on April 22, 2014, the Bankruptcy Court entered an Order on May 23, 2014, finding that NYSDEC’s claim against the Company was discharged in the 1993 Order and that the JDG has no legal basis to pursue the JDG’s claim asserted against the Company in the Third Party Complaint.  On June 2, 2014, the JDG filed a Notice of Voluntary Dismissal of its lawsuit against the Company with the U.S. District Court, Southern District of  New York.

 
4.           EARNINGS PER SHARE

The shares used in the computation of the Company’s basic and diluted earnings per common share were as follows:

   
For the three months ended
May 31,
 
   
2014
   
2013
 
Weighted average common shares outstanding
    2,178,008       2,177,832  
Dilutive effect of employee stock options
    224,130       225,759  
Weighted average common shares outstanding, assuming dilution
    2,402,138       2,403,591  

Weighted average common shares outstanding, assuming dilution, include the incremental shares that would be issued upon the assumed exercise of stock options.  For the three-month periods ended May 31, 2014 and May 31, 2013 respectively, 0 and 12,300 shares underlying the Company's 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.

5.           INVENTORIES

As of May 31, 2014, inventories consist of the following:

   
Gross
   
Reserve
   
Net
 
Raw Materials
  $ 1,902,000     $ (447,000 )   $ 1,455,000  
Work-In-Process
    3,473,000       (1,292,000 )     2,181,000  
Finished Goods
    1,363,000       (682,000 )     681,000  
     Totals
  $ 6,738,000     $ (2,421,000 )   $ 4,317,000  

 
7

 
 
SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

As of February 28, 2014, inventories consist of the following:

   
Gross
   
Reserve
   
Net
 
Raw Materials
  $ 1,878,000     $ (447,000 )   $ 1,431,000  
Work-In-Process
    3,103,000       (1,292,000 )     1,811,000  
Finished Goods
    1,782,000       (708,000 )     1,074,000  
     Totals
  $ 6,763,000     $ (2,447,000 )   $ 4,316,000  
 
6.           INCOME TAXES

At May 31, 2014, the Company has net operating loss carryforwards of approximately $13,822,000 that expire through 2031.  Such net operating losses are available to offset future taxable income, if any.  As the utilization of such net operating losses for tax purposes is not assured, the deferred tax asset has been fully reserved through the recording of a 100% valuation allowance.  Should a cumulative change in the ownership of more than 50% occur within a three-year period, there could be an annual limitation on the use of the net operating loss carryforwards.

Total net deferred taxes are comprised of the following at May 31, 2014 and February 28, 2014:
 
Deferred Tax Asset (Liability):
 
5/31/14
   
2/28/14
 
Current
           
Allowance for doubtful accounts
  $ 1,000     $ 1,000  
Inventory allowance
    919,000       930,000  
Section 263A capitalized costs
    246,000       246,000  
Total current deferred tax assets
    1,166,000       1,177,000  
Valuation allowance
    (1,166,000 )     (1,177,000 )
    $ 0     $ 0  
                 
Long-term
               
Loss carryforwards
  $ 5,246,000     $ 5,309,000  
Depreciation
    (32,000 )     (46,000 )
Total long-term deferred tax assets
    5,214,000       5,263,000  
Valuation allowance
    (5,214,000 )     (5,263,000 )
    $ 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 period ended May 31, 2014 and the year ended February 28, 2014. A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate for the quarter ended May 31, 2014 and for the year ended February 28, 2014 is as follows:

   
5/31/14
   
2/28/14
 
U.S. federal statutory rate
    34.0 %     34.0 %
Change in valuation allowance
    (34.0 )     (34.0 )
Alternative minimum taxes
    1.0       1.0  
Effective income tax rate
     1.0 %      1.0 %

7.           OTHER INCOME

The Company earned $8,000 of other income for the quarter ended May 31, 2014 as compared to $86,000 of other income for the quarter ended May 31, 2013. The $8,000 of other income reflected in the unaudited condensed statements of income for the quarter ended May 31, 2014 consists of income from relief of obligation related to the Company’s 1992 bankruptcy proceedings. The $86,000 of other income reflected in the unaudited condensed statements of income for the quarter ended May 31, 2013 consists of $90,000 of income from relief of obligation related to the Company’s 1992 bankruptcy proceedings offset by $4,000 of other expense due to receivables adjustments.

 
8

 
 
SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
8.           ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

As of May 31, 2014 and February 28, 2014, accrued expenses and other liabilities consisted of the following:

   
5/31/14
   
2/28/14
 
Payroll and related employee benefits
  $ 562,000     $ 539,000  
Income taxes
    9,000       15,000  
Property taxes
    18,000       7,000  
Other liabilities
    42,000       44,000  
    $ 631,000     $ 605,000  

9.           EXPORT SALES AND MAJOR CUSTOMERS

Revenues from domestic and export sales to unaffiliated customers for the three months ended May 31, 2014 are as follows:

Geographic Region
 
Power
Transistors
   
Hybrids
   
Field Effect
Transistors
   
Power
MOSFETS
   
Totals
 
                               
Europe and Australia
  $ 0     $ 329,000     $ 4,000     $ 0     $ 333,000  
Canada and Latin America
    23,000       0       0       0       23,000  
Far East and Middle East
    0       0       74,000       0       74,000  
United States
    406,000       944,000       39,000       486,000       1,875,000  
Totals
  $ 429,000     $ 1,273,000     $ 117,000     $ 486,000     $ 2,305,000  

Revenues from domestic and export sales to unaffiliated customers for the three months ended May 31, 2013 are as follows:

Geographic Region
 
Power
Transistors
   
Hybrids
   
Field Effect
Transistors
   
Power
MOSFETS
   
Totals
 
Europe and Australia
  $ 0     $ 160,000     $ 0     $ 0     $ 160,000  
Canada and Latin America
    51,000       0       0       0       51,000  
Far East and Middle East
    0       0       5,000       109,000       114,000  
United States
    276,000       1,114,000       118,000       443,000       1,951,000  
Totals
  $ 327,000     $ 1,274,000     $ 123,000     $ 552,000     $ 2,276,000  
 
Revenues from domestic and export sales are attributed to global geographic region according to the location of the customer’s primary manufacturing or operating facilities.

For the quarter ended May 31, 2014, sales to the Company’s top two customers consisted of the following:

Customer
 
% of Sales
 
Raytheon Company
    30 %
United States Government
    25 %
      55 %

For the quarter ended May 31, 2013, sales to the Company’s top two customers consisted of the following:

Customer
 
% of Sales
 
Raytheon Company
    51 %
BAE Systems Australia
    7 %
      58 %
 
 
9

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
10.         MAJOR SUPPLIERS

For the quarter ended May 31, 2014, purchases from the Company’s top two vendors consisted of the following:

Vendor
 
% of Purchases
 
Egide, USA
    27 %
Wuxi Streamtek Ltd
    13 %
      40 %
 
For the quarter ended May 31, 2013, purchases from the Company’s top two vendors consisted of the following:

Vendor
 
% of Purchases
 
Egide, USA
    40 %
Stellar Industries
    12 %
      52 %
 
11.         COMMITMENTS AND CONTINGENCIES

Future minimum lease payments for the Company’s manufacturing facility are as follows:
 
Fiscal Year Ending February 28/29
 
Amount
 
2015
    303,000  
2016
    415,000  
2017
    355,000  
    $ 1,073,000  

12.         DIVIDEND

On May 27, 2014, The Board of Directors of Solitron Devices, Inc. declared a cash dividend of $.05 per share of common stock payable on or about June 24, 2014 to stockholders of record as of the close of business on June 9, 2014. On June 9, 2014 there were 2,183,417 shares of common stock outstanding; as a result the Company recorded a $109,000 liability for dividends payable, which is reflected on the May 31, 2014 balance sheet.

 
10

 
 
Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview:
 
Solitron Devices, Inc., a Delaware corporation (the “Company” or “Solitron”), designs, develops, manufactures and markets solid-state semiconductor components and related devices primarily for the military and aerospace markets.  The Company manufactures a large variety of bipolar and metal oxide semiconductor (“MOS”) power transistors, power and control hybrids, junction and power MOS field effect transistors and other related products.  Most of the Company’s products are custom made pursuant to contracts with customers whose end products are sold to the United States government.  Other products, such as Joint Army/Navy transistors, diodes and Standard Military Drawings voltage regulators, are sold as standard or catalog items.
 
The following discussion and analysis of factors which have affected the Company's financial position and operating results during the periods included in the accompanying unaudited condensed financial statements should be read in conjunction with the Financial Statements and the related Notes to Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2014 and the Unaudited Condensed Financial Statements and the related Notes to Unaudited Condensed Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
 
Significant Accounting Policies:
 
The discussion and analysis of our financial condition and results of operations are based upon the unaudited condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q which are prepared in accordance with accounting principles generally accepted in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Our critical accounting policies include cash and cash equivalents, investment in Treasury bills and Certificates of Deposit, revenue recognition, earnings per common share, shipping and handling, and inventories. A discussion of  these critical accounting policies are included in Note 1 of the “Notes To Financial Statements” in Item 8 of our Annual Report on Form 10-K for the fiscal year ended February 28, 2014.
 
Trends and Uncertainties:
 
During the three months ended May 31, 2014, the Company’s book-to-bill ratio was approximately .95 as compared to approximately .20 for the three months ended May 31, 2013, reflecting an increase 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 in the coming periods, the Company might be required to implement further cost cutting or other downsizing measures to continue profitable business operations.
 
Inventories
 
Inventories are stated at the lower of cost or market.  Cost is determined using the “first-in, first-out” (FIFO) method.  The Company buys raw material only to fill customer orders.  Excess raw material is created only when a vendor imposes a minimum buy in excess of actual requirements.  Such excess material will usually be utilized to meet the requirements of the customer’s subsequent orders.  If excess material is not utilized after two fiscal years it is fully reserved.  Any inventory item once designated as reserved is carried at zero value in all subsequent valuation activities.
 
 
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The Company’s inventory valuation policy is as follows:

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

Results of Operations-Three Months Ended May 31, 2014 Compared to Three Months Ended May 31, 2013:

Net sales for the three months ended May 31, 2014 increased 1% to $2,305,000 as compared to $2,276,000 for the three months ended May 31, 2013.  This increase was primarily attributable to a higher level of orders that were shipped in accordance with customer requirements.

Cost of sales for the three months ended May 31, 2014 increased to $1,814,000 from $1,670,000 for the three months ended May 31, 2013, primarily due to higher raw material costs.  Expressed as a percentage of sales, cost of sales increased to 79% from 73% for the same period in 2013.

Gross profit for the three months ended May 31, 2014 decreased to $491,000 from $606,000 for the three months ended May 31, 2013, primarily due to an increase in raw material costs.  Accordingly, gross margins on the Company’s sales decreased to 21% for the three months ended May 31, 2014 in comparison to 27% for the three months ended May 31, 2013.

For the three months ended May 31, 2014, the Company shipped 23,582 units as compared to 25,830 units shipped during the same period of the prior year.  It should be noted that since the Company manufactures a wide variety of products with an average sales price ranging from less than one dollar to several hundred dollars, such periodic variations in the Company’s volume of units shipped should not be regarded as a reliable indicator of the Company’s performance.

For the three months ended May 31, 2014, the Company’s backlog of open orders decreased 1% to $8,058,000 as compared to the backlog as of February 28, 2014. The Company’s backlog as of May 31, 2014 is 39% higher than the backlog of as of May 31, 2013.  Changes in backlog reflect changes in the intake of orders and in the delivery requirements of customers.

The Company has experienced an increase of 383% to $2,193,000 in the level of bookings during the three months ended May 31, 2014 as compared to the three months ended May 31, 2013. The increase in bookings for the three months ended May 31, 2014 is principally a result of an increase in the placement of orders by key customers, resulting in an increase in the monetary value of, and timing differences in the placement of, contracts by the Department of Defense and its prime contractors.

Selling, general, and administrative expenses decreased to $336,000 for the three months ended May 31, 2014 from $445,000 for the three months ended May 31, 2013. The decrease reflects lower legal fees, recruiting fees, and fees related to our 2013 annual shareholders’ meeting (Expenses associated with the 2014 annual shareholders’ meeting will be expensed in the second quarter of the current fiscal year. Expenses associated with the 2013 annual shareholders’ meeting were expensed in the first quarter of last year).  During the three months ended May 31, 2014, selling, general, and administrative expenses as a percentage of net sales decreased to 15% as compared with 20% for the three months ended May 31, 2013.

Operating income for the three months ended May 31, 2014 decreased to $155,000 as compared to $161,000 for the three months ended May 31, 2013. This decrease is due primarily to higher cost of sales partially offset by lower selling, general, and administrative expenses as described above.
 
 
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The Company earned $8,000 of other income for the quarter ended May 31, 2014 as compared to $86,000 of other income for the quarter ended May 31, 2013. The $8,000 of other income for the quarter ended May 31, 2014 consists of income from relief of obligation related to the Company’s 1992 bankruptcy proceedings. The $86,000 of other income for the quarter ended May 31, 2013 consists of $90,000 of income from relief of obligation related to the Company’s 1992 bankruptcy proceedings offset by $4,000 of other expense due to receivables adjustments.

Interest income for the three months ended May 31, 2014 decreased to $4,000 as compared to $9,000 for the three months ended May 31, 2013. This decrease is due primarily to a lower rate of return on funds invested in certificates of deposit and treasury bills.
 
Net comprehensive income for the three months ended May 31, 2014 decreased to $162,000 as compared to $262,000 for the three months ended May 31, 2013.  This decrease is due primarily to higher cost of sales and to a decrease in other income as outlined above which was partially offset by a decrease in selling, general and administrative expenses.
 
Liquidity and Capital Resources:

Operating Activities:
 
Net cash provided by operating activities was $325,000 for the three months ended May 31, 2014 principally reflecting net income of $163,000, depreciation of $56,000 and $142,000 of accounts receivable.

Net cash provided by operating activities was $382,000 for the three months ended May 31, 2013 principally reflecting net income of $252,000 and $316,000 of accounts receivable which was partially offset by a decrease in inventory of $118,000.
 
Investing Activities:
 
Net cash used in investing activities was $164,000 for the three months ended May 31, 2014 principally reflecting $1,598,000 in sales of treasury bills and certificates of deposit, $1,743,000 in purchases of treasury bills and certificates of deposit, and $19,000 in purchases of property, plant and equipment.
 
Net cash used in investing activities was $926,000 for the three months ended May 31, 2013 principally reflecting $662,000 in sales of treasury bills and certificates of deposit, $1,494,000 in purchases of treasury bills and certificates of deposit, and $94,000 in purchases of property, plant and equipment.

Financing Activities:
 
Net cash provided by financing activities was $6,000 for the three months ended May 31, 2014 principally reflecting $6,000 from stock option exercises by the Company’s employees.
 
There was no net cash from financing activities for the three months ended May 31, 2013.

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 during the current fiscal year and will be funded from operations.

Based upon (i) management’s best information as to current national defense priorities, future defense programs, as well as management’s expectations as to future defense spending, (ii) the market trends signaling a declining 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 more 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 twelve months and cash from operations.  However, due to the level of current backlog, projected new order intake, the status of the general economy and the shift to Commercial Off –The-Shelf (COTS) by the defense industry, the Company might be required to take cost cutting and productivity enhancing activity to assure its continued profitability.

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 that it will generate sufficient cash from operations to satisfy its operating needs over the next twelve months.  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.

 
13

 
 
At May 31, 2014, February 28, 2014 and May 31, 2013, the Company had cash of approximately $792,000, $625,000 and $753,000, respectively.  The cash increase for the three months ended May 31, 2014 was primarily due to a reduction of $142,000 to accounts receivable due to cash collections.

At May 31, 2014, February 28, 2014 and May 31, 2013, the Company had investments in treasury bills and certificates of deposit of approximately $6,406,000, $6,261,000 and $6,015,000, respectively.

At May 31, 2014, the Company had working capital of $11,225,000 as compared with a working capital at February 28, 2014 of $11,128,000.  The $97,000 increase for the three months ended May 31, 2014 was due mainly to a $167,000 increase in cash and a $145,000 increase in investments in treasury bills and certificates of deposit, offset by a $109,000 dividend accrual.

Off-Balance Sheet Arrangements:

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

Forward Looking Statements:
 
Some of the statements in this Quarterly Report on Form 10-Q are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended February 28, 2014, including those identified below. We do not undertake any obligation to update forward-looking statements, except as required by law.
 
Some of the factors that may impact our business, financial condition, results of operations, strategies or prospects include:
 
·
Our complex manufacturing processes may lower yields and reduce our revenues.
·
Our business could be materially and adversely affected if we are unable to obtain qualified supplies of raw materials, parts and finished components on a timely basis and at a cost-effective price.
·
We are dependent on government contracts, which are subject to termination, price renegotiations and regulatory compliance, which can increase the cost of doing business and negatively impact our revenues.
·
Changes in government policy or economic conditions could negatively impact our results.
·
Our inventories may become obsolete and other assets may be subject to risks.
·
Environmental regulations could require us to incur significant costs.
·
Our business is highly competitive, and increased competition could reduce gross profit margins and the value of an investment in our Company.
·
Downturns in the business cycle could reduce the revenues and profitability of our business.
·
Our operating results may decrease due to the decline of profitability in the semiconductor industry.
·
Uncertainty of current economic conditions, domestically and globally, could continue to affect demand for our products and negatively impact our business.
·
Cost reduction efforts may be unsuccessful or insufficient to improve our profitability and may adversely impact productivity.
·
We may not achieve the intended effects of our new business strategy, which could adversely impact our business, financial condition and results of operations.
·
Our inability to introduce new products could result in decreased revenues and loss of market share to competitors; new technologies could also reduce the demand for our products.
·
Loss of, or reduction of business from, substantial clients could hurt our business by reducing our revenues, profitability and cash flow.
 
 
14

 
 
·
A shortage of three-inch silicon wafers could result in lost revenues due to an inability to build our products.
·
The nature of our products exposes us to potentially significant product liability risk.
·
We depend on the recruitment and retention of qualified personnel, and our failure to attract and retain such personnel could seriously harm our business.
·
Provisions in our charter documents and rights agreement could make it more difficult to acquire our Company and may reduce the market price of our stock.
·
Natural disasters, like hurricanes, or occurrences of other natural disasters whether in the United States or internationally may affect the markets in which our common stock trades, the markets in which we operate and our profitability.
·
Failure to protect our proprietary technologies or maintain the right to use certain technologies may negatively affect our ability to compete.
·
We cannot promise that we will have sufficient capital resources to make necessary investments in manufacturing technology and equipment.
·
We may make substantial investments in plant and equipment that may become impaired.
·
While we attempt to monitor the credit worthiness of our customers, we may be at risk due to the adverse financial condition of one or more customers.
·
Our international operations expose us to material risks, including risks under U.S. export laws.
·
Security breaches and other disruptions could compromise the integrity of our information and expose us to liability, which could cause our business and reputation to suffer.
·
The price of our common stock has fluctuated widely in the past and may fluctuate widely in the future.
·
Compliance with new regulations regarding the use of "conflict minerals" could limit the supply and increase the cost of certain metals used in manufacturing our products.

 
15

 
 
ITEM 4.          CONTROLS AND PROCEDURES:
 
Our Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

 
16

 
 
PART II– OTHER INFORMATION
 
ITEM 1.          LEGAL PROCEEDINGS

We may from time to time become a party to various legal proceedings arising in the ordinary course of business.

As previously disclosed in this Form 10-Q (Note 3), In November 2013, the Company was served with a Third Party Complaint that was filed in the United States District Court for the Northern District of New York, in which the Company was named as a defendant in a suit brought by the Clarkstown Landfill Joint Defense Group (“JDG”).  In the Third Party Complaint, the JDG contends that the Company is liable for an equitable share of the JDG’s settlement payment to the New York State Department of Environmental Conservation (“NYSDEC”) in connection with response costs incurred by NYSDEC  to remediate the Clarkstown Landfill Site located in the Town of Clarkstown, Rockland County, New York (the “Clarkstown Landfill Site”).   The JDG previously offered to settle its claim against the Company for the sum of $125,000; the offer has now been withdrawn.  The Company contends that the JDG’s claim derives from NYSDEC’s 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, a claim that the Company contends was discharged in bankruptcy as a result of the final order of Bankruptcy Court Confirming Debtor’s Fourth Amended Plan of Reorganization, entered on August 19, 1993 order (“1993 Order”).  On January 24, 2014, the Company filed with the Bankruptcy Court an Emergency Motion to Enforce the Bankruptcy Court’s 1993 Order. Following a hearing on April 22, 2014, the Bankruptcy Court entered an Order on May 23, 2014, finding that NYSDEC’s claim against the Company was discharged in the 1993 Order and that the JDG has no legal basis to pursue the JDG’s claim asserted against the Company in the Third Party Complaint. On June 2, 2014, the JDG filed a Notice of Voluntary Dismissal of its lawsuit against the Company with the U.S. District Court, Southern District of New York.

As of the filing date of this report, we had no known material current, pending, or threatened litigation.

 
17

 
 
ITEM 6.          EXHIBITS

Exhibits
 
   
31
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
   
32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
   
101.INS*
XBRL Instance Document
   
101.SCH*
XBRL Taxonomy Extension Schema
   
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
   
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
   
101.LAB*
XBRL Taxonomy Label Linkbase
   
101.PRE*
XBRL Taxonomy Presentation Linkbase

*            Filed herewith
 
**          Furnished herewith

 
18

 
 
SIGNATURES

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

 
SOLITRON DEVICES, INC.
   
Date: July 3, 2014
 
   
 
/s/ Shevach Saraf
 
Shevach Saraf
 
Chairman, President,
 
Chief Executive Officer,
 
Treasurer and Chief Financial Officer
 
(Principal Executive and Financial Officer)

 
19

 
 
EXHIBIT INDEX

EXHIBIT
NUMBER
 
DESCRIPTION
     
31
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
     
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
     
101.INS*
 
XBRL Instance Document
     
101.SCH*
 
XBRL Taxonomy Extension Schema
     
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase
     
101.LAB*
 
XBRL Taxonomy Label Linkbase
     
101.PRE*
 
XBRL Taxonomy Presentation Linkbase

*            Filed herewith

**          Furnished herewith
 
 
20