-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SahSsRlS9DSodzabiaMav2TWpPsJnG/c0YRYshiu+8rZwljwrk0gpsRz7OZwr/nF SThsztI2ZZHobAu2Rwm+/Q== 0001144204-06-024722.txt : 20060614 0001144204-06-024722.hdr.sgml : 20060614 20060614114123 ACCESSION NUMBER: 0001144204-06-024722 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20060228 FILED AS OF DATE: 20060614 DATE AS OF CHANGE: 20060614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLITRON DEVICES INC CENTRAL INDEX KEY: 0000091668 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 221684144 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-04978 FILM NUMBER: 06904056 BUSINESS ADDRESS: STREET 1: 3301 ELECTRONICS WAY CITY: WEST PALM BEACH STATE: FL ZIP: 33407 BUSINESS PHONE: 4078484311 10KSB 1 v045337_10ksb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 2006 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-4978 SOLITRON DEVICES, INC. - -------------------------------------------------------------------------------- (Name of Small Business Issuer in Its Charter) Delaware 22-1684144 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (IRS Employer Identification Number) Incorporation or Organization) 3301 Electronics Way, West Palm Beach, Florida 33407 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Issuer's telephone number, including area code: (561) 848-4311 Securities registered under Section 12(b) of the Exchange Act: Title of Each Class Name of Each Exchange on Which Registered - ------------------- ----------------------------------------- None N/A Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.01 par value (Title of Class) Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ] Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Issuer's revenues for its most recent fiscal year: $8,342,000. The aggregate market value of the registrant's common stock, par value $.01 per share, held by non-affiliates of the registrant, based upon the closing market price as of May 31, 2006, was approximately $7,956,000. The number of shares outstanding of each of the issuer's classes of common stock, as of May 31, 2006: 2,260,049 shares of common stock, par value $.01 per share. Documents incorporated by reference: None Transitional Small Business Disclosure Format: Yes [ ] No [X] PART I ITEM 1. DESCRIPTION OF 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 1959, and reincorporated under the laws of the State of Delaware in August 1987. 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, 2006 and for the fiscal year ended February 28, 2005 and (ii) contributions to the Company's total order backlog at February 28, 2006 and February 28, 2005.
% of Total Sales % of Total Sales for Fiscal for Fiscal % Backlog % Backlog Year Ended Year Ended at at February February February February Product 28, 2006 28, 2005 28, 2006 28, 2005 - ------- ---------- ---------- ---------- ---------- Power Transistors 17% 17% 12% 16% Hybrids 54% 60% 71% 54% Field Effect Transistors 7% 5% 3% 6% Power MOSFETS 22% 18% 14% 24% ---------- ---------- ---------- ---------- 100% 100% 100% 100%
The Company's backlog at February 28, 2006 and revenue for the year ended February 28, 2006 reflect demand for the Company's products at such date and for such period. For more information, see "Backlog". The variation in the proportionate share of each product line for each period reflects changes in demand, changes emanating from the Congressional appropriations process and timing associated with awards of defense contracts, as well as 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. 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, 2006 approximately 90% of the Company's sales have been of custom products, and the remaining 10% have been of standard or catalog products. 2 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 88% of the Company's sales have been attributable to contracts with customers whose products are sold to the United States government. The remaining 12% of sales are for non-military, scientific and industrial applications. Custom products are typically sold to the US Government and defense or aerospace companies such as Raytheon, Lockheed Martin, Smith Industries, Harris, and Northrop Grumman, 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 150A 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) 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. 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. 3 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 II qualification will continue to improve its business posture by increasing product marketability. Voltage Regulators: The Company also qualified a line of voltage regulators in accordance with Class M of MIL-PRF-38535 Class M, which allows it to sell these products in accordance with SMD specifications published by DSCC. The Company also 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 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 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. 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 30% of the hybrid packages it uses and purchases the balance from suppliers. 4 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, 2006 the Company underwent an additional surveillance audit that resulted in recertification. FINANCIAL INFORMATION ABOUT EXPORT SALES AND MAJOR CUSTOMERS Specific financial information with respect to the Company's export sales is provided in Note 11 to the Consolidated Financial Statements contained in Item 7 of this Annual Report. 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 one representative organization that operates out of 3 different locations with 3 salespeople and 1 stocking distributor organization that operates out of 6 locations with 24 salespeople and (ii) in the international market by 2 representative organizations in Israel and the United Kingdom with 4 sales people. Some of the international groups serve as distributors as well as sales representatives. 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, 2006, the Company sold products to approximately 157 customers. Of these 157 customers, 51 had not purchased products from the Company during the previous fiscal year. During the fiscal year ended February 28, 2006, Raytheon accounted for approximately 48% of total sales, as compared to the 46% it accounted for during the fiscal year ended February 28, 2005. The U.S. Government accounted for approximately 8% of total sales for the fiscal years ended February 28, 2005 and 2006. Other than Raytheon 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 83% of the Company's sales during the fiscal year ended February 28, 2006. 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 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. During the fiscal year ended February 28, 2006 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 such Congressional appropriations and significant increases in military spending in recent years, the Company had a 40% increase in net bookings during the fiscal year ended February 28, 2006 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. In recognition of the changes in global geopolitical affairs and in United States military spending, the Company is attempting to increase sales of its 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 geopolitical affairs, appropriations for military spending and product price. 5 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. In addition to these newer sales efforts, the Company is also attempting to offer additional products to the military and aerospace markets that are complementary to those currently sold by the Company to the military markets, but as of yet has not made significant inroads in this endeavor. Sales to foreign customers, located mostly in Canada, Western Europe and Israel, accounted for approximately 10% of the Company's net sales for the fiscal year ended February 28, 2006 as compared to 7% for the year ended February 28, 2005. 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 $6,042,000 at February 28, 2006, as compared to $4,771,000 as of February 28, 2005. 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, 2007. 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 further 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 increase in bookings for the year ended February 28, 2006 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 that it had. 6 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 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 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, Motorola, Intersil, Fairchild, 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 (the NES Division), MS Kennedy, Natel and Sensitron. 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, 2006, the Company had 89 employees (as compared to 91 at February 28, 2005), 60 of whom are engaged in production activities, 4 in sales and marketing, 6 in executive and administrative capacities and 19 in technical and support activities. Of the 89 employees, 85 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 SOURCES AND AVAILABILITY OF RAW MATERIAL The Company purchases its raw materials from multiple suppliers and has a minimum of two suppliers for all 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, Kyocera America, Coining, IXYS, Purecoat International, Stellar Industries, and others. Because of a diminishing number of sources for components and packages in particular, and the sharp increase in the prices of 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. 7 EFFECT OF GOVERNMENT REGULATION The Company received DSCC approval to supply its products in accordance with MIL-PRF-19500, Class H of MIL-PRF-38534, and some products in accordance with Class M of MIL-PRF-38535. 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 and, along with the rest of the semiconductor industry, is subject to variable interpretations and governmental priorities concerning environmental laws and regulations. Environmental statutes have been interpreted to provide for joint and several liability and strict liability regardless of actual fault. There can be no assurance that the Company and its subsidiaries will not be required to incur costs to comply with, or that the operations, business or financial condition of the Company will not be materially adversely affected by current or future environmental laws or regulations. 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"); and City Industries Superfund Site, Orlando, Florida (collectively, the "Sites"). The Settlement Agreement required the Company to pay to USEPA the sum of $74,000 by February 24, 2008; the Company paid the entire sum of $74,000 to USEPA on February 27, 2006. In addition, the Company is required to pay to USEPA the sum of $10,000 or 5% of Solitron's net after-tax income over the first $500,000, if any, whichever is greater, for each year from 2008-2012. For payment to USEPA to be above $10,000 for any of these five years, the Company's net income must exceed $700,000 for such year, which has only happened twice in the past ten years (in fiscal year 2001 and fiscal year 2006). The Company accrues $50,000 for its remaining obligations under the Settlement Agreement. In consideration of the payments made by the Company under the Settlement Agreement, USEPA agreed not to sue or take any administrative action against the Company with regard to any of the Sites. The Company has also been notified by a group of alleged responsible parties formed at the Casmalia Site ("Casmalia PRP Group") that, based on their review and lack of objection to the Settlement Agreement, the Casmalia PRP Group does not anticipate pursuing Solitron for cost recovery at the Casmalia site. On October 21, 1993, a Consent Final Judgment was entered into between the Company and the Florida Department of Environmental Protection ("FDEP") in the Circuit Court of the Nineteenth Judicial Circuit of Florida in and for Martin County, Florida, in Case No. 92-1232 CA. The Consent Final Judgment required the Company to remediate the Port Salerno and Riviera Beach Sites, make monthly payments to escrow accounts for each Site until the sale of the Sites to fund the remediation work, take all reasonable steps to sell the two Sites and, upon the sale of the Sites, apply the net proceeds from the sales to fund the remediation work. Both Sites have been sold pursuant to purchase agreements approved by FDEP. 8 Prior to the sale of the Port Salerno and Riviera Beach Sites, USEPA took over from FDEP as the lead regulatory agency for the remediation of the Sites. At the sale of each Site, the net proceeds of sale were distributed to USEPA and/or FDEP or other parties, as directed by the agencies. In addition, upon the sale of the Riviera Beach Site, the Riviera Beach Escrow Account was transferred to USEPA, as directed by the agencies. The current balance in the Port Salerno Escrow Account is approximately $59,000. At present, work at the Port Salerno Site is being performed by USEPA. Work at the Riviera Beach Site is being performed by Honeywell, Inc., pursuant to an Administrative Order on Consent entered into between Honeywell and USEPA. The Company has been notified by FDEP that the performance of remediation work by USEPA at the Port Salerno Site and by Honeywell at the Riviera Beach Site will be construed by FDEP as discharging the Company's remediation obligations under the Consent Final Judgment. There remains a possibility that FDEP will determine at some time in the future that the final remedy approved by USEPA and implemented at either, or both of, the Port Salerno and Riviera Beach Sites does not meet the State cleanup requirements imposed by the Consent Final Judgment. If such a final determination is made by FDEP, there is a possibility that FDEP will require the Company to implement additional remedial action at either, or both of, the Port Salerno and Riviera Beach Sites. The likelihood of such determination is deemed to be remote by the Company and the amount of loss that may result from such a remote event cannot reasonably be estimated at this time. On August 7, 2002, the Company received a Request for Information from the State of New York Department of Environmental Conservation ("NYDEC"), seeking information on whether the Company had disposed of certain wastes at the Clarkstown Landfill Site located in the Town of Clarkstown, Rockland County, New York. By letter dated August 29, 2002, the Company responded to the Request for Information and advised NYDEC that the Company's former Tappan, New York facility closed in the mid-1980's, prior to the initiation of the Company's bankruptcy proceedings described above. The Company contends that, to the extent that NYDEC has a claim against the Company as a result of the Company's alleged disposal of wastes at the Clarkstown landfill prior to the closing of the Company's former Tappan facility in the mid-1980's, the claim was discharged in bankruptcy as a result of the Bankruptcy Court's August 1993 Order referenced above. At NYDEC's request, the Company entered into a revised Tolling Agreement with NYDEC on February 18, 2006, which provides for the tolling of applicable statutes of limitation through the earlier of September 28, 2006 or the date the State institutes a suit against Solitron for any claims associated with the Clarkstown Landfill Site. It is not known at this time whether NYDEC will pursue a claim against the Company in connection with this Site. As of the date of this filing, no such claim has been made. 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 receive 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 $62,083. During the fiscal year ended February 28, 2006, the Company reached agreements with several unsecured creditor under which $154,000 was paid as settlement of slightly more than $477,000 of recorded debts to unsecured creditors. Other income of approximately $284,000 from extinguishment of debt was consequently recorded. On February 28, 2006 the remaining balance was approximately $1,170,000. 9 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 expired. ITEM 2. DESCRIPTION OF PROPERTY 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 will be suitable and adequate to meet its requirements currently and for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 10 PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES Since March 1995, the Company's Common Stock has been traded on the Over The Counter Electronic 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 represent actual transactions. FISCAL YEAR ENDED FISCAL YEAR ENDED FEBRUARY 28, 2006 FEBRUARY 28, 2005 ----------------- ------------------ HIGH LOW HIGH LOW ---- --- ---- --- First Quarter $0.93 $0.60 $1.05 $0.69 Second Quarter $1.79 $0.60 $0.72 $0.38 Third Quarter $2.94 $1.40 $0.81 $0.56 Fourth Quarter $4.64 $1.52 $0.80 $0.55 As of May 31, 2006, there were approximately 1,953 holders of record of the Company's Common Stock. On May 31, 2006, the last sale price of the Common Stock as reported on the OTCBB was $3.90 per share. Certificates representing 64,681 "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, 2006. Subsequent to such stock split, these certificates now represent 6,468 shares of Common Stock, which are included in the 2,235,549 shares outstanding as of February 28, 2006 indicated in the beginning of this filing. These "old shares" have not 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-KSB for the period ended February 28, 2006. The Company has 173,287 shares of treasury stock in certificate form in its possession. These shares of treasury stock are not included in the number of shares issued and outstanding for the fiscal years ended February 28, 2006 and February 28, 2005. The Company has not paid any dividends since emerging from bankruptcy and the Company does not contemplate declaring dividends in the foreseeable future. Pursuant to the Company's ability to pay its settlement proposal with 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. During the fiscal year ended February 28, 2006, the Company did not issue any shares of its Common Stock to employees other than 159,500 shares of its common stock issued pursuant to option exercises. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 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. 11 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, ----------------------- 2006 2005 ------- ------- Net Sales $ 8,342 $ 8,055 Cost of sales 6,346 6,347 Gross profit 1,996 1,708 Selling, general and administrative expenses 1,218 1,272 Operating income (loss) 778 436 Forgiveness of Debt 1,145 0 Imputed Interest expense on unsecured creditors claims (2) (9) Interest income 54 21 Other, net (34) 0 Net income $ 1,941 $ 448 RESULTS OF OPERATIONS 2006 vs. 2005 Net sales for the fiscal year ended February 28, 2006 increased by approximately 4% to $8,342,000 versus $8,055,000 during the fiscal year ended February 28, 2005, as a result of an increase in the demand for the Company's products due to increased defense spending and economic activity, and delivery requirements by its customers, offset by the loss of five working days due to Hurricane Wilma that affected South Florida, where the Company's manufacturing facility is located. Bookings were greater than sales by approximately 15%; thus, the backlog increased from $4,771,000 as of February 28, 2005 to $6,042,000 as of February 28, 2006. The Company has experienced an increase in the level of bookings of approximately 40% for the year ended February 28, 2006 as compared to the previous year mostly due to increases in military spending on programs the Company supports. During the year ended February 28, 2006, the Company shipped 575,517 units as compared with 385,604 units shipped during the year ended February 28, 2005. It should be noted that since the Company manufactures a wide variety of products with an average sale price ranging from less than one dollar to several hundred dollars, such periodic variations in the Company's volume of units shipped might not be a reliable indicator of the Company's performance. Cost of sales for the fiscal year ended February 28, 2006 decreased to $6,346,000 from $6,347,000 for the fiscal year ended February 28, 2005. This decrease was primarily due to higher production yields and variations in product mix for the fiscal year ended February 28, 2006. Expressed as a percentage of sales, cost of sales decreased from approximately 79% for the fiscal year ended February 28, 2005 to approximately 76% for the fiscal year ended February 28, 2006. During the year ended February 28, 2006 the Company's gross profit was $1,996,000 (24% margin) as compared to $1,708,000 (21% margin) for the year ended February 28, 2005. The gross profit increase was due principally to the approximately 3% decrease in cost of sales percentage resulting from higher production yields and variations in product mix. During the year ended February 28, 2006, selling, general and administrative based expenses, as a percentage of sales, were approximately 15% as compared with 16% for the year ended February 28, 2005. Selling, general and administrative expenses decreased approximately 4% to $1,218,000 for the fiscal year ended February 28, 2006 from $1,272,000 for the fiscal year ended February 28, 2005. This decrease is primarily the result of an approximate $64,000 decrease in legal fees. Operating income for the fiscal year ended February 28, 2006 was $778,000 as compared to an operating income of $436,000 for the fiscal year ended February 28, 2005. This increase was primarily attributable to an increase in sales, a lower cost of sales percentage, and decreased selling, general and administrative based expenses. 12 Imputed interest expense on unsecured creditor's claims for the fiscal year ended February 28, 2006 decreased to $2,000 from $9,000 during the fiscal year ended February 28, 2005 primarily due to the lower present value of the outstanding obligation. Interest income for the fiscal year ended February 28, 2006 increased to $54,000 from $21,000 during the fiscal year ended February 28, 2005. This increase was attributable to higher interest rates earned on cash and cash equivalents and to a higher cash and cash equivalents balance. Net income for the fiscal year ended February 28, 2006 was $1,941,000 as compared to net income of $448,000 for the fiscal year ended February 28, 2005. This increase is attributable to higher sales, a lower percentage cost of sales, lower selling, general and administrative based expenses, and to income from extinguishments of debt as described in Part 1 in the "Environmental Liabilities" and the "Bankruptcy Proceedings" sections of this report. 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 will be approximately $200,000 for the next fiscal year. During the first few fiscal years after its emergence from bankruptcy proceedings, the Company generally experienced losses from operations and severe cash shortages caused by a significant decline in both sales and open order backlog, decreased margins (which is characteristic in the industry) on the Company's products, significant expenses associated with the reorganization proceedings, and the Company's inability to obtain additional working capital through the sale of debt or equity securities or the sale of non-operating assets. However, for the years ended February 28, 2006 and February 28, 2005, the Company recorded a net income of $1,941,000 ($778,000 from operations) and $448,000 respectively. During the pendency of the bankruptcy proceedings, all secured and unsecured claims against any indebtedness of the Company (including accrued and unpaid interest) were stayed in accordance with the Bankruptcy Code while the Company continued its operations as a debtor-in-possession, subject to the control and supervision of the Bankruptcy Court. Because these stays limit cash outflow, the Company, during the pendency of the Bankruptcy Proceedings, realized positive cash flow from ongoing operations. Since the Company emerged from Chapter 11, it has experienced positive cash flow from recurring operations; however, until the fiscal year ended February 28, 1997, overall cash flow was negative due primarily to the necessity to make payments of administrative expenses and unsecured debt payouts arising in connection with the bankruptcy proceedings. The Company has earned operating income of approximately $778,000 for the fiscal year ended February 28, 2006. However, the Company has significant obligations arising from settlements in connection with its bankruptcy that require the Company to make substantial cash payments that cannot be supported by the current level of 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. However, due to the level of current backlog and new order intake (due to the status of the general economy and the shift to Commercial Off The Shelf (COTS) by the defense industry), the Company might operate at a loss during part of the next fiscal year. Thus, based on these factors and at the current level of bookings, costs of raw materials and services, profit margins and sales levels, the Company will not generate sufficient cash to satisfy its operating needs and its obligations to pre-bankruptcy creditors in accordance with the Plan. Thus, it is in continuous negotiations with all claim holders to reschedule these payments. In the event the Company is unable to restructure its obligations to pre-bankruptcy creditors or the slowdown in the intake of new orders continue, the Company has a contingency plan to further reduce its size and thereby reduce its cost of operations within certain limitations. Over the long-term, the Company believes that if the volume and prices of product sales remain as presently anticipated, the Company will generate sufficient cash from operations to sustain operations. In the event that bookings in the long-term decline significantly below the level experienced during the previous fiscal year, 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. The Company cannot assure you, however, that it will be able to generate sufficient liquidity to meet its operating needs now or in the future. 13 The Company is continuing to negotiate with the unsecured creditors in an attempt to arrive at reduced payment schedules. To date, these parties have not expressed objection to the reduced level of payments. However, no assurance can be made that the Company can reach a suitable agreement with the unsecured creditors, or obtain additional sources of capital and/or cash or that the Company can generate sufficient cash to meet its obligations. At February 28, 2006 and February 28, 2005 respectively, the Company had cash and cash equivalents of $3,181,000 and $2,403,000. The cash increase was due to net cash flow from operations. At February 28, 2006, the Company had working capital of $4,562,000 as compared with a working capital at February 28, 2005 of $2,416,000. The increase was due to an increase in cash. 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. BOOKINGS AND BACKLOG During the fiscal year ended February 28, 2006, the Company's net bookings were $9,605,000 in new orders as compared with $6,846,000 for the year ended February 28, 2005, reflecting an increase of approximately 40%. The Company's backlog increased to $6,042,000 at February 28, 2006 as compared with $4,771,000 as of February 28, 2005, reflecting a 27% increase. In the event that bookings in the long-term decline significantly below the level experienced in the period ended February 28, 2005, the Company may be required to implement serious cost-cutting or other downsizing measures to continue its business operations. Such cost-cutting measures could inhibit future growth prospects. Furthermore, the Company cannot assure you that such measures would be sufficient to enable the Company to continue its business operations. See Part I, Item 1, "Business - Marketing and Customers". FUTURE PLANS To lessen the Company's current liquidity problems, the Company plans to (a) continue improving operating efficiencies, (b) further reduce overhead expenses, (c) develop alternative lower cost packaging technologies, 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 privately labeled 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. 14 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 somewhat decreased levels of bookings during the summer months, primarily as a result of such budgeting and appropriation activities. 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. 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. 15 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. None of our contracts have been terminated for cause or for the convenience of the U.S. government or its prime contractors, or had the prices renegotiated. 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. 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 reduced demand for the Company's products, which could have a material and adverse 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." 16 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 and 2004. 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. 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. The terrorist attacks in 2001 created many economic and political uncertainties that have severely impacted the global economy. We experienced a decline in demand for our products since the attacks. The long-term effects of the attacks on our business and the global economy remain unknown. In addition, the potential for future terrorist attacks is creating worldwide uncertainties and makes it very difficult to estimate how quickly the economy will recover and our business will improve. Cost reduction efforts may be unsuccessful or insufficient to improve our profitability. During fiscal year 2006, we continued certain cost-cutting measures originally begun four 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: o our ability to successfully complete these ongoing efforts; o 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 o the risk that we may not be able to retain key employees. 17 Since these cost-reduction efforts involve all aspects of our business, they could adversely impact productivity to an extent we did not anticipate. Even if we successfully complete these efforts and generate the anticipated cost savings, there may be other factors that adversely impact our profitability. 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. 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, 2006, fifteen customers accounted for approximately 83% 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, 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. 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. 18 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 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. 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. 19 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. FORWARD-LOOKING STATEMENTS Information in this Form 10-KSB, including any information incorporated by reference herein, includes "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended, and is subject to the safe-harbor created by such sections. The Company's actual results may differ significantly from the results discussed in such forward-looking statements. Specifically, this annual report contains forward-looking statements regarding: o the Company's expectations regarding the effects of certification or qualification of the Company's products; o the speed of technological change and its effects on the Company's business; o trends in the industry, including trends concerning consolidation, customer concentration, changes in government military spending, changes in defense priorities, price pressure and competition; o sources and availability of liquidity; o the Company's anticipated level of capital expenditures for the next fiscal year; o the Company's beliefs regarding its ability to generate sufficient cash flow from operations to sustain operations; o strategic plans to improve the Company's performance and lessen its liquidity problems in the future; o the Company's ability to fill its customers' scheduled backlog by February 28, 2007; o the Company's expectations regarding continuing to experience pricing pressures on the average selling prices for its products; o the Company's competitive strengths, industry reputation and the nature of its competition; o the Company's ability to move into new markets or to develop new products; o the Company's belief 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 to those currently sold; o the Company's belief that it will be able to improve its capability to respond quickly to customers' needs and to deliver products in a timely manner; o the Company's ability to implement effectively cost-cutting or downsizing measures; o the Company's compliance with environmental laws, orders and investigations and the future cost of such compliance; o implementation of the Plan of Reorganization and the Company's ability to make payments required under the Plan of Reorganization or otherwise to generate sufficient cash from operations or otherwise; o expectations of being released from certain environmental liabilities and the Company's ability to satisfy such liabilities; o the suitability and adequacy of the Company's headquarters and manufacturing facilities; and o the effects of inflation. These statements are based upon assumptions and analyses made by the Company in light of current conditions, future developments and other factors the Company believes are appropriate in the circumstances, or information obtained from third parties and are subject to a number of assumptions, risks and uncertainties. Readers are cautioned that forward-looking statements are not guarantees of future performance and that actual results might differ materially from those suggested or projected in the forward-looking statements. Factors that may cause actual future events to differ significantly from those predicted or assumed include, but are not limited to: 20 o the loss of certification or qualification of the Company's products or the inability of the Company to capitalize on such certifications and/or qualifications; o unexpected rapid technological change; o a misinterpretation of the Company's capital needs and sources and availability of liquidity; o a change in government regulations which hinders the Company's ability to perform government contracts; o a shift in or misinterpretation of industry trends; o unforeseen factors which impair or delay the development of any or all of its products; o inability to sustain or grow bookings and sales; o inability to capitalize on competitive strengths or a misinterpretation of those strengths; o the emergence of improved, patented technology by competitors; o inability to protect the Company's proprietary technologies; o a misinterpretation of the nature of the competition, the Company's competitive strengths or its reputation in the industry; o inability to respond quickly to customers' needs and to deliver products in a timely manner resulting from unforeseen circumstances; o inability to generate sufficient cash to sustain operations; o inability to adequately respond to continued pricing pressure; o failure to successfully implement cost-cutting or downsizing measures, strategic plans or the insufficiency of such measures and plans; o changes in military or defense appropriations; o inability to make or renegotiate payments under the Plan of Reorganization; o inability to move into new markets or develop new products; o unexpected impediments affecting ability to fill backlog; o inability to be released from certain environmental liabilities; o an increase in the expected cost of environmental compliance; o changes in law or industry regulation; o unexpected growth or stagnation of the business; o any changes that render the Company's headquarters and manufacturing facilities unsuitable or inadequate to meet the Company's current needs; o significant fluctuations in the price and volume of trading in the Company's common stock; and o unforeseen effects of inflation, other unforeseen activities, events and developments that may occur in the future. 21 ITEM 7. FINANCIAL STATEMENTS Index to Consolidated Financial Statements Page Reports of Independent Registered Public Accounting Firms 23-24 Consolidated Balance Sheet as of February 28, 2006 25 Consolidated Statements of Operations for the years ended February 28, 2006 and February 28, 2005 26 Consolidated Statements of Stockholders' Equity for the years ended February 28, 2006 and February 28, 2005 27 Consolidated Statements of Cash Flows for the years ended February 28, 2006 and February 28, 2005 28 Notes to Consolidated Financial Statements 29-41 22 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors And Stockholders of Solitron Devices, Inc. We have audited the accompanying balance sheet of SOLITRON DEVICES, INC. and SUBSIDIARIES as of February 28, 2006 and the related statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The statements of operations, stockholders' deficit and cash flows for the fiscal year ended February 28, 2005, which were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the year ended February 28, 2005, is based solely on the report of other auditors. 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 audit 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 audit 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 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, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of SOLITRON DEVICES, INC. and SUBSIDIARIES as of February 28, 2006, and the results of its operations and its cash flows for the year then ended and in conformity with accounting principles generally accepted in the United States of America. DeLeon & Company, P.A. Pembroke Pines, Florida April 28, 2006 23 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Solitron Devices, Inc. West Palm Beach, Florida We have audited the accompanying consolidated statement of operations, stockholders' equity and cash flows for the year ended February 28, 2005 of Solitron Devices, Inc. and Subsidiaries. These consolidated financial statements are the responsibility of the Company's Management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board Standards (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Solitron Devices, Inc. and Subsidiaries for the year ended February 28, 2005, in conformity with U.S. generally accepted accounting principles. /s/ Goldstein Lewin & Co. Certified Public Accountants Boca Raton, Florida June 7, 2005 24 SOLITRON DEVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET FEBRUARY 28, 2006 ASSETS (in thousands, except for share and per share amounts) CURRENT ASSETS: Cash and cash equivalents $3,181 Accounts receivable, less allowance for doubtful accounts of $1 988 Inventories, net 2,570 Prepaid expenses and other current assets 135 ------ TOTAL CURRENT ASSETS 6,874 PROPERTY, PLANT AND EQUIPMENT, net 550 OTHER ASSETS 64 ------ TOTAL ASSETS $7,488 ====== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable-Post-petition $ 513 Accounts payable-Pre-petition, current portion 1,170 Accrued expenses and other current liabilities 629 ------ TOTAL CURRENT LIABILITIES 2,312 LONG-TERM LIABILITIES, net of current portion 78 ------ TOTAL LIABILITIES 2,390 ------ COMMITMENTS & CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, authorized 500,000 shares, none issued -- ------- Common stock, $.01 par value, authorized 10,000,000 shares, 2,235,549 shares issued and outstanding, net of 173,287 shares of treasury stock 22 Additional paid-in capital 2,711 Retained Earnings 2,365 ------ TOTAL STOCKHOLDERS' EQUITY 5,098 ------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $7,488 ====== The accompanying notes are an integral part of the financial statements. 25 SOLITRON DEVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED FEBRUARY 28, 2006 AND FEBRUARY 28, 2005
2006 2005 ----------- ----------- (in thousands, except for share and per share amounts) Net sales $ 8,342 $ 8,055 Cost of sales 6,346 6,347 ----------- ----------- Gross profit 1,996 1,708 Selling, general and administrative expenses 1,218 1,272 ----------- ----------- Operating income (loss) 778 436 Other income (expenses): Forgiveness of debt 1,145 0 Interest expense on unsecured creditors claim (2) (9) Interest income 54 21 Other, net 6 0 ----------- ----------- Income before income taxes $ 1,981 $ 448 Provision for income taxes 40 -- ----------- ----------- Net Income $ 1,941 $ 448 =========== =========== INCOME PER SHARE OF COMMON STOCK: Basic Net Income per share $ 0.92 $ 0.22 ----------- ----------- Diluted Net Income per share $ 0.84 $ 0.21 ----------- ----------- Weighted Average shares outstanding-Basic 2,121,382 2,075,855 =========== =========== Weighted Average shares outstanding-Diluted 2,310,623 2,168,727 =========== =========== The accompanying notes are an integral part of the financial statements. 26
SOLITRON DEVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED FEBRUARY 28, 2006 AND FEBRUARY 28, 2005
Common Stock Retained ------------ Additional Earnings Number of Paid-in (Accumulated Shares Amount Capital Deficit) Total ---------- ---------- ---------- ---------- ---------- (in thousands, except for number of shares) Balance, February 29, 2004 2,076,357 $ 21 $ 2,620 $ (24) $ 2,617 Fractional shares paid Cash-in-Lieu (304) Net Income -- -- -- 448 448 ---------- ---------- ---------- ---------- ---------- Balance, February 28, 2005 2,076,053 21 2,620 424 3,065 New shares issued in exchange for old and escheatment shares 484 Fractional shares paid Cash-in-Lieu (488) New shares issued due to exercise of stock options 159,500 1 91 92 Net Income -- -- -- 1,941 1,941 ---------- ---------- ---------- ---------- ---------- Balance, February 28, 2006 $2,235,549 $ 22 $ 2,711 $ 2,365 $ 5,098 ========== ========== ========== ========== ========== The accompanying notes are an integral part of the financial statements. 27
SOLITRON DEVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED FEBRUARY 28, 2006 AND FEBRUARY 28, 2005 2006 2005 ------- ------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,941 $ 448 ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 198 193 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable (7) 7 Inventories (173) 18 Prepaid expenses and other current assets (8) 36 Deposits (12) 0 Increase (decrease) in: Accounts payable-post-petition 158 (54) Accounts payable-pre-petition 362 (43) Accrued expenses and Other liabilities (715) 155 Accrued environmental expenses (985) 19 Other long-term liabilities 65 (19) ------- ------- Total adjustments (1,117) 312 NET CASH PROVIDED BY OPERATING ACTIVITIES 824 760 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES; Purchases of property, plant and equipment (137) (240) ------- ------- NET CASH (USED IN) INVESTING ACTIVITIES (137) (240) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES; Proceeds from conversion of stock options 91 0 ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 91 0 ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 778 520 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 2,403 1,883 ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,181 $ 2,403 ======= ======= The accompanying notes are an integral part of the financial statements. 28 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Operations and 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. Principles of Consolidation The consolidated financial statements include the accounts of Solitron Devices, Inc. and its wholly owned Subsidiaries (collectively the "Company"). All significant inter-company balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents Cash and cash equivalents include demand deposits, money market accounts, and treasury bills with maturities of ninety days or less. The Company had $2,785,061 in treasury bills that mature within three months of the balance sheet date and are classified as cash equivalents. Accounts Receivable The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated credit risk by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts has been established. The allowance amount was $1,000 as of February 28, 2006. 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 has not changed its inventory costing method. The Company's policy is to reserve inventory that has not had any sales or use in the past two years. Property, Plant and Equipment Property, plant, and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed as incurred. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. 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, 2006, approximately $296,000 is 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 upon shipment; however, the Company may receive payment of some contracts in advance. When received, these amounts are deferred and are recognized as revenue in the period in which the related products are shipped. 29 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. Stock Based Compensation In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure, and amendment of FASB Statement No. 123". This statement amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and disclosure requires that the Company continue to account for stock-based employee compensation under APB No. 25, "Accounting for Stock Issued Employees" with pro forma disclosure of net income and earnings per share as if the fair value method prescribed by SFAS No. 123 had been applied in accordance with SFAS No. 148. The Company complies with SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company continues to follow the measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and does not recognize compensation expense for its stock based incentive plan. Had compensation cost been determined based on the fair value on the grant dates consistent with the methodology prescribed by SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro-forma amounts indicated below. Fiscal Year Ended February 28, 2006 2005 ------- ------- Net income, as reported $ 1,941 $ 448 Less: total stock based employee compensation expense, net of tax effects 86 215 ------- ------- Pro-forma net income $ 1,855 $ 233 ======= ======= Reported basic earnings per common share $ 0.92 $ 0.22 ======= ======= Pro-forma basic earnings per common share $ 0.87 $ 0.11 ======= ======= Reported diluted earnings per common share $ 0.84 $ 0.21 ======= ======= Pro-forma diluted earnings per common share $ 0.80 $ 0.11 ======= ======= The total stock-based employee compensation expense for the years ended February 28, 2006 and February 28, 2005, of $86,000 and $215,000, respectively, determined under the fair value based method for all awards, net of related tax effects, has been deducted from the pro forma net income. 30 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The pro-forma amounts may not be indicative of future pro-forma income and earnings per share. The weighted average estimated value of employee stock options granted during fiscal year 2006 was $1.40 ($0.96 in fiscal year 2005). The fair value of options granted in fiscal years 2006 and 2005 was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 2006 2005 ----- ----- Dividend Yields 0.0% 0.0% Expected Volatility 105.9% 103.8% Risk-free Interest Rates 4.5% 4.5% Expected Life (in years) 10.0 10.0 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. Recent Accounting Pronouncements No recent accounting pronouncements that affect the Company were issued. 2. Liquidity and Petition in Bankruptcy Liquidity The Company has significant obligations arising from settlements in connection with its bankruptcy necessitating it to make substantial cash payments that cannot be supported by the current level of operations. However, the Company has projected that it will be able to generate sufficient funds to support its ongoing operations. The Company must be able to obtain forbearance or be able to renegotiate its bankruptcy related required payments to unsecured creditors, the Florida Department of Environmental Protection ("FDEP"), or raise sufficient cash in order to pay these obligations as currently due, in order to remain a going concern. The Company continues to negotiate with its unsecured creditors and FDEP in an attempt to arrive at reduced payment schedules. The Company has a contingency plan to reduce its size and thereby reduce its cost of operations within certain limitations. However, no assurance can be made that the Company can reach a suitable agreement with the unsecured creditors or taxing authorities or obtain additional sources of capital and/or cash or that the Company can generate sufficient cash to meet its obligations. The financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible uncertainties described above. 31 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 is 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, 2006, the Company is currently scheduled to pay approximately $1,170,000 to holders of allowed unsecured claims in quarterly installments of approximately $62,000. As of February 28, 2006, 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, 2006, the Company has deposited $90,000 into the escrow accounts. As of February 28, 2006, approximately $58,000 remains in the Port Salerno escrow account. (d) The Company has paid all of the allowed administrative claims and allowed wage claims since August 1993. 32 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 gives 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, 2006 2005 --------- --------- Weighted average common shares outstanding 2,121,382 2,075,855 Dilutive effect of employee stock options 189,241 92,872 --------- --------- Weighted average common shares outstanding, assuming dilution 2,310,623 2,168,727 ========= =========
Weighted average common shares outstanding, assuming dilution, include the incremental shares that would be issued upon the assumed exercise of stock options. For fiscal year 2006, none of the Company's outstanding stock options (245,000 in fiscal year 2005) 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. 4. Inventories As of February 28, 2006, inventories consist of the following: Raw Materials $ 1,549,000 Work-In-Process 1,509,000 Finished Goods 460,000 ----------- Gross Inventory 3,518,000 Reserve (948,000) ----------- Net Inventory $ 2,570,000 =========== 33 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Property, Plant and Equipment As of February 28, 2006, property, plant, and equipment consist of the following: Estimated Useful Life ----------- Leasehold Improvements $ 166,000 5 years Machinery and Equipment 1,412,000 5 years ----------- 1,578,000 Less Accumulated Depreciation And Amortization 1,028,000 ----------- $ 550,000 =========== Depreciation and amortization expense was $198,000 and $193,000 for 2006 and 2005 respectively, and is included in Cost of Sales in the accompanying Statements of Operations. 6. Accrued Expenses As of February 28, 2006 accrued expenses and other liabilities consist of the following: Payroll and related employee benefits $ 494,000 Property taxes 7,000 Environmental liabilities 37,000 Other liabilities 91,000 --------- $ 629,000 ========= 7. Other Long-Term Liabilities As of February 28, 2006, other long-term liabilities consist of the following items: Environmental liability $ 78,000 ======== 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 Amount --------------------------------- ------ 2008 28,000 2009 10,000 2010 10,000 2011 10,000 2012 10,000 Thereafter 10,000 ------ Total $78,000 ======= Imputed interest expense for fiscal years ended February 28, 2006 and February 28, 2005 amounted to $2,000 and $9,000 relating to accounts payable - pre-petition. Such pre-petition payables were scheduled to be paid by May 2005 at the end of ten years based on the payment schedules set by the court and carried imputed interest to that date. The Company was not able to meet the payment plan and agreed to a lower amount after negotiating with the creditor committees. As a result of such agreement, the amounts due to pre-petition creditors has been classified as a current liability and no further imputed interest has been calculated. 34 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Income Taxes At February 28, 2006, the Company has net operating loss carryforwards of approximately $14,027,000 that expire through 2022. Such net operating losses are available to offset future taxable income, if any. As the utilization of such net operating losses for tax purposes is not assured, the deferred tax asset has been fully reserved through the recording of a 100% valuation allowance. Should a cumulative change in the ownership of more than 50% occur within a three-year period, there could be an annual limitation on the use of the net operating loss carryforward. Total net deferred taxes are comprised of the following at February 28, 2006: Deferred tax assets: Loss carryforwards $ 5,278,000 Allowance for doubtful accounts 1,000 Inventory allowance 3,790,000 Section 263A capitalized costs 1,007,000 Other 30,000 ------------ Total deferred tax assets 10,106,000 Valuation allowance (9,904,000) ------------ Net deferred tax assets 202,000 ------------ Deferred tax liabilities: Depreciation 202,000 ------------ Total deferred tax liabilities 202,000 ------------ Total net deferred taxes $ -- ============ The change in the valuation allowance on deferred tax assets is due principally to the utilization of the net operating loss for the year ending February 28, 2006. A reconciliation of the provision for income taxes to the amount calculated using the statutory federal rate (34%) for fiscal year ended February 28, 2006 is as follows: 2006 2005 --------- --------- Income Tax Provision at U.S. Statutory Rate $ 674,000 $ 152,000 State Taxes, Net of Federal Benefit 72,000 16,000 Alternative Minimum Taxes 40,000 -- --------- --------- Utilization of Net Operating Loss Carryforward (746,000) (168,000) --------- --------- Income Tax Provision $ 40,000 $ -- ========= ========= 9. Stock Options The Company's 2000 Stock Option Plan provided that stock options are valid for ten years and vest in 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. 35 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On May 16, 2005 the Board of Directors granted Stock options to certain key mployees 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 Over-The-Counter Bulletin Board at the time of the grant). In December 2000 another grant equal to 10% of the outstanding shares (245,624) was made to the Company's President at the exercisable price of $0.40 per share. 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. Because the determination of the fair value of all options is based on the assumptions described earlier in Note 1 and, because additional option grants are expected to be made each year, the pro-forma disclosures are not representative of pro-forma effects on reported net income or loss for future years. Below is a summary of the Company's Stock Option Activity: Weighted Options Average Outstanding Exercise Price ----------- -------------- Balance, February 29, 2004 385,624 $ 0.438 Granted 223,136 $ 1.050 Expired or Cancelled (6,500) $ 2.215 ----------- -------------- Balance, February 28, 2005 602,260 $ 0.646 Granted 47,000 $ 0.750 Granted 14,700 $ 3.950 Exercised (159,500) $ 0.580 Expired or Cancelled (8,000) $ 0.682 ----------- -------------- Balance, February 28, 2006 496,460 $ 0.774 =========== ============== The weighted average fair value of options granted during the year ended February 28, 2006 and February 28, 2005 were $1.40 and $.96 respectively. 36 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about stock options outstanding and exercisable at February 28, 2006: Options Outstanding Exercisable Options ------------------- ------------------- Weighted Weighted Number of Remaining Average Average Range of Outstanding Contractual Exercise Exercise Exercise Prices Options Life Price Number Price --------------- ------- ---- ----- ------ ------- $ 0.400 $ 0.400 254,624 5 years $ 0.400 254,624 $ 0.400 $ 0.670 $ 0.670 1,500 4 years $ 0.670 1,500 $ 0.670 $ 1.050 $ 1.050 179,636 9 years $ 1.050 179,636 $ 1.050 $ 0.75 $ 0.75 46,000 10 years $ 0.750 0 $ 0.750 $ 3.950 $ 3.950 14,700 10 years $ 3.950 0 $ 3.950 ------ - 496,460 $ 0.774 435,760 $ 0.669 ======= ======= ======= ======= 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, 2006 and February 28, 2005. 11. Export Sales and Major Customers Revenues from domestic and export sales to unaffiliated customers are as follows: Year Ended Year Ended February 28, February 28, 2006 2005 ----------- ------------ Export sales: Europe $ 678,000 $ 298,000 Canada and Latin America 125,000 215,000 Far East and Middle East 73,000 60,000 United States 7,466,000 7,482,000 ---------- ---------- $8,342,000 $8,055,000 ========== ========== Sales to the Company's top two customers accounted for 56% of net sales for the year ended February 28, 2006 as compared with 54% of the Company's net sales for the year ended February 28, 2005. Sales to Raytheon Company accounted for approximately 48% of net sales for the year ended February 28, 2006 and 46% for the year ended February 28, 2005. During the fiscal years ended February 28, 2005 and 2006, the US Government represented approximately 8% of net sales. 12. Major Suppliers Purchases from the Company's two top suppliers accounted for 20% of total purchases of production materials for the year ended February 28, 2006 compared with 31% of the Company's total purchases of production materials for the year ended February 28, 2005. 37 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The President of the Company voluntarily took a 30% reduction in compensation at the time that salary reductions, ranging from 6% to 12%, went into effect for all of the employees of the Company during fiscal year 2002. As of June 2, 2003, 66% of the reduction in salary was restored. As of January 1, 2004, the President's salary was restored to 94% of the contracted value. As of January 30, 2005, the President's salary was restored to 100% of the contracted value. At a meeting of the Compensation Committee on January 23, 2006, the Committee approved an increase to the President's salary to $280,000, effective March 1, 2006. At a meeting of the the Compensation Committee on June 5, 2006, the Committee also approved a bonus payment for the Company's President in the amount of $104,000 for the fiscal year ended February 28, 2006. 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 NASDAQ Over-the-Counter Bulletin Board (the "OTCBB") on the date of the grant ($0.40). Fifty percent (50%) of the Initial Stock Options granted are vested immediately upon grant. The remaining fifty percent (50%) of the Initial Stock Options will vest in equal amounts on each of the first five anniversaries of the date of grant. As of February 28, 2006, 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. 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"); and City Industries Superfund Site, Orlando, Florida (collectively, the "Sites"). The Settlement Agreement required the Company to pay to USEPA the sum of $74,000 by February 24, 2008; the Company paid the entire sum of $74,000 to USEPA on February 27, 2006. In addition, the Company is required to pay to USEPA the sum of $10,000 or 5% of Solitron's net after-tax income over the first $500,000, if any, whichever is greater, for each year from 2008-2012. For payment to USEPA to be above $10,000 for any of these five years, the Company's net income must exceed $700,000 for such year, which has only happened twice in the past ten years (in fiscal year 2001 and fiscal year 2006). The Company accrues $50,000 for its remaining obligations under the Settlement Agreement. 38 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In consideration of the payments made by the Company under the Settlement Agreement, USEPA agreed not to sue or take any administrative action against the Company with regard to any of the Sites. The Company has also been notified by a group of alleged responsible parties formed at the Casmalia Site ("Casmalia PRP Group") that, based on their review and lack of objection to the Settlement Agreement, the Casmalia PRP Group does not anticipate pursuing Solitron for cost recovery at the Casmalia site. On October 21, 1993, a Consent Final Judgment was entered into between the Company and the Florida Department of Environmental Protection ("FDEP") in the Circuit Court of the Nineteenth Judicial Circuit of Florida in and for Martin County, Florida, in Case No. 92-1232 CA. The Consent Final Judgment required the Company to remediate the Port Salerno and Riviera Beach Sites, make monthly payments to escrow accounts for each Site until the sale of the Sites to fund the remediation work, take all reasonable steps to sell the two Sites and, upon the sale of the Sites, apply the net proceeds from the sales to fund the remediation work. Both Sites have been sold pursuant to the purchase agreements approved by FDEP. Prior to the sale of the Port Salerno and Riviera Beach Sites, USEPA took over from FDEP as the lead regulatory agency for the remediation of the Sites. At the sale of each Site, the net proceeds of sale were distributed to USEPA and/or FDEP or other parties, as directed by the agencies. In addition, upon the sale of the Riviera Beach Site, the Riviera Beach Escrow Account was transferred to USEPA, as directed by the agencies. The current balance in the Port Salerno Escrow Account is approximately $59,000. At present, work at the Port Salerno Site is being performed by USEPA. Work at the Riviera Beach Site is being performed by Honeywell, Inc., pursuant to an Administrative Order on Consent entered into between Honeywell and USEPA. The Company has been notified by FDEP that the performance of remediation work by USEPA at the Port Salerno Site and by Honeywell at the Riviera Beach Site will be construed by FDEP as discharging the Company's remediation obligations under the Consent Final Judgment. There remains a possibility that FDEP will determine at some time in the future that the final remedy approved by USEPA and implemented at either, or both of, the Port Salerno and Riviera Beach Sites does not meet the State cleanup requirements imposed by the Consent Final Judgment. If such a final determination is made by FDEP, there is a possibility that FDEP will require the Company to implement additional remedial action at either, or both of, the Port Salerno and Riviera Beach Sites. The likelihood of such determination is deemed to be remote by the Company and the amount of loss that may result from such a remote event cannot reasonably be estimated at this time. On August 7, 2002, the Company received a Request for Information from the State of New York Department of Environmental Conservation ("NYDEC"), seeking information on whether the Company had disposed of certain wastes at the Clarkstown Landfill Site located in the Town of Clarkstown, Rockland County, New York. By letter dated August 29, 2002, the Company responded to the Request for Information and advised NYDEC that the Company's former Tappan, New York facility closed in the mid-1980's, prior to the initiation of the Company's bankruptcy proceedings described above. The Company contends that, to the extent that NYDEC has a claim against the Company as a result of the Company's alleged disposal of wastes at the Clarkstown landfill prior to the closing of the Company's former Tappan facility in the mid-1980's, the claim was discharged in bankruptcy as a result of the Bankruptcy Court's August 1993 Order referenced above. At NYDEC's request, the Company entered into a revised Tolling Agreement with NYDEC on February 18, 2006, which provides for the tolling of applicable statutes of limitation through the earlier of September 28, 2006 or the date the State institutes a suit against Solitron for any claims associated with the Clarkstown Landfill Site. It is not known at this time whether NYDEC will pursue a claim against the Company in connection with this Site. As of the date of this filing, no such claim has been made. 39 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 the year 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 all non-cancelable operating leases are as follows: Fiscal Year Ending February 28/29 Amount --------------------------------- ---------- 2007 427,000 2008 439,000 2009 452,000 2010 466,000 2011 481,000 Thereafter 411,000 ---------- Total $2,676,000 ========== Total rent expense was $385,000 for the year ended February 28, 2006 as compared with $419,000 for the year ended February 28, 2005. These figures include rental of storage space, which is made on a month-to-month basis. Legal Proceedings On March 24, 2003 the Company filed a complaint against its landlord, Technology Place, in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida. The complaint alleges breach of contract on several grounds and demands specific performance by the landlord. On July 7, 2005, the Company and Technology Place agreed to settle the lawsuit between the parties. The terms of the settlement are confidential. 14. Other Income During the year ended February 26, 2006, the Company settled $477,000 of debt obligations to unsecured creditors at a discount. The Company recognized $284,000 of other income as a result of the settlement. Also during the year ended February 28, 2006, the Company entered into an Ability to Pay Agreement with the USEPA. The Company recognized $861,000 of other income as a result of the settlement. This $1,145,000 of other income is reflected in the Consolidated Statements of Operations for the year ended February 28, 2006. 15. Material Event As a result of Hurricane Wilma, the Company's operations were suspended for five days. However, the Company was able to regain lost sales during subsequent weeks leading to the end of the third fiscal quarter. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None 40 SOLITRON DEVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ITEM 8A. CONTROLS AND PROCEDURES Based on the evaluation of the Company's disclosure controls and procedures as of February 28, 2006, Shevach Saraf, Chairman, President, Chief Executive Officer, Treasurer and Chief Financial Officer of the Company, has concluded that the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified by the Securities and Exchange Commission rules and forms. There were no significant changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting. ITEM 8B. OTHER INFORMATION At a meeting of the Compensation Committee on January 23, 2006, the Committee approved an increase to the President's annual salary to $280,000, effective March 1, 2006. At a meeting of the Compensation Committee on June 5, 2006, the Committee also approved a bonus payment for the Company's President in the amount of $104,000 for the fiscal year ended February 28, 2006. 41 PART III ITEM 9. DIRECTORS , EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. 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 of such directors was first elected to the Board and the year in which the term of each of such directors 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. Pursuant to the Plan of Reorganization, all shares of Common Stock issued to Vector and its participants and to the holders of allowed unsecured claims must be voted for all purposes (including the election of members of the Board of Directors) as directed by the Board of Directors. Pursuant to the Plan of Reorganization, Vector originally owned 25% and the holders of allowed unsecured claims own an aggregate of 40% of all shares of Common Stock issuable pursuant to the Plan of Reorganization (other than shares issuable to Mr. Saraf upon the exercise of options granted prior to the Effective Date). On October 4, 1994, the Company and Vector agreed its 25% of stock would be redistributed between six parties (see Note 2 of the Consolidated Financial Statements). Some of the Vector stock subsequently was transferred to John Stayduhar's Revocable Trust which is not subject to voting restrictions (see Note 2 of the Consolidated Financial Statements). Year First Term As Became Director Name Age Position with Solitron Director Expires(1) - ---- --- ---------------------- -------- ---------- Shevach Saraf 63 Chairman of the Board, 1992 Expired Chief Executive Officer, President, Chief Financial Officer and Treasurer Dr. Jacob A. Davis 69 Director 1996 Expired Mr. Joseph Schlig 78 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. 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 44 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., a military and commercial electron beam recorder manufacturer based in Shelton, CT. As head of the Company's 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. The 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. 42 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. From 1995 to 1999, he was Vice President of Business Planning and Finance for AET, Inc, a developing, Melbourne, Florida based software company. In 1994 and 1995, he was Visiting Professor in Engineering Management at Florida Institute of Technology. He was Vice-Chairman of the Brevard SCORE Chapter and devotes significant time to counseling with local businesses. He is an active member of the International Executive Service Corps (IESC) serving in South Russia during May and June of 1996. 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. Dr. Davis is the Chairman of the Compensation Committee and a member of the Audit Committee. 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. 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 a Director of the MIT Enterprise Forum of Connecticut and currently serves as a director of the Bridgeport Economic Development Corporation. He was an alternate member of the Board of Finance of the Town of Trumbull, Connecticut. 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. Audit Committee The Company's Board of Directors has an Audit Committee. The Audit Committee consists of Messrs. Davis and Schlig (Chairman). The Audit Committee is composed of independent directors. 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 Audit Committee "financial expert" is Mr. Joseph Schlig. 43 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 principal accounting officer, 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, 2006, all Section 16(a) filing requirements applicable to directors and executive officers of the Company and ten percent stockholders of the Company were complied with, except that Messrs. Davis and Schlig inadvertently failed to report one transaction. ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table The following table provides certain summary information concerning compensation paid by the Company, to or on behalf of the Company's Chief Executive Officer for the fiscal years ended February 28, 2006 and 2005, and February 29, 2004. The Company has no other named executive officers.
Annual Compensation Long-Term Compensation ------------------- ---------------------- Name and Other Annual Securities Underlying Principal Position Year Salary($) Bonus($) Compensation($) Options (#) - ------------------ ---- --------- -------- -------------- ----------- Shevach Saraf 2006 252,695 103,554 25,174 (1) -0- Chairman of the Board, 2005 211,987 34,921 26,102 (1) 175,636 Chief Executive Officer, 2004 205,338 -0- 21,814 (1) -0- President, Chief Financial Officer and Treasurer
- --------- (1)Life, Disability, & Medical Insurance premiums plus personal car expenses AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES TABLE The following table sets forth certain summary information covering unexercised options to purchase the Company's Common Stock as of February 28, 2006 held by the Company's Chief Executive Officer.
Number of Securities Value of Unexercised In- Shares Underlying Unexercised Options The-Money Options At Acquired on at Fiscal Year-End (#) Fiscal Year-End ($) (1) Exercise Value ------------------------------------------------------------ Name (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - --------------------------------------- -------------- -------------- ---------------- ------------ -------------- Shevach Saraf -0- - 430,260 -0- $1,692,929 -0-
(1) Based on the closing price of the Company's common stock on February 28, 2006 of $4.60. Director Compensation 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. 44 The Chairmen of the Audit and Compensation Committees receive $1,500 per quarter for their additional duties and responsibilities. Total fees paid to all directors for attendance at Board and committee meetings amounted to $21,000 for the fiscal year ended February 28, 2006. Employment Agreement In December 2000, the Company entered into a five-year employment agreement with its President and CEO. 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 bonus paid to employee. The bonus payable hereunder shall be paid within ninety (90) days after the end of the fiscal year. 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. 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 NASDAQ Over-the-Counter Bulletin Board (the "OTCBB") on the date of the grant ($0.40). Fifty percent (50%) of the initial stock options granted are vested immediately upon grant. The remaining fifty percent (50%) of the initial stock options vest 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. 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 President of the Company may also participate in the Company's 2000 Stock Option Plan, the Company's deferred Compensation Plan and the Company's Employee 401-K and Profit Sharing Plan (the "Profit Sharing Plan"). During the fiscal year ended February 28, 2006, no amounts were deferred by executive officers under the Company's deferred Compensation Plan and the Company did not match any employee contributions to the Profit Sharing Plan. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information regarding the beneficial ownership of Common Stock as of May 31, 2006 by (i) all directors, (ii) the Chief Executive Officer, (iii) all officers and directors of the Company as a group, and (iv) each person known by the Company to beneficially own in excess of 5% of the Company's outstanding Common Stock. 45 The Company does not know of any other beneficial owner of more than 5% of the outstanding shares of Common Stock other than as shown below. Unless otherwise indicated below, each stockholder has sole voting and investment power with respect to the shares beneficially owned. Except as noted below, all shares were owned directly with sole voting and investment power. Number of Shares Percentage of Name and Address Beneficially Owned (1) Outstanding Shares (1) ---------------- ---------------------- ---------------------- Shevach Saraf 3301 Electronics Way 651,415(2) 24.44% West Palm Beach, FL 33407 Dr. Jacob Davis 370 Franklyn Avenue 8,000(2) * Indialantic, FL 32903 Joseph Schlig 129 Mayfield Drive 8,000(2) * Trumbull, CT 06611 All Executive Officers and Directors as a Group (3 persons) 667,415(2) 24.56% John Stayduhar Revocable Trust 169,232(3) 7.57% c/o Boyes & Farina, P.A. 1601 Forum Place, Suite 900 West Palm Beach, FL 33401 John Farina 116,000(4) 5.18% Boyes & Farina, P.A. 1601 Forum Place, Suite 900 West Palm Beach, FL 33401 Alexander C. Toppan 138,830(5) 6.21% 40 Spectacle Ridge Road South Kent, CT 06785 Steven T. Newby 114,000(6) 5.10% 12716 Split Creek Court North Potomac, MD 20878 * Less than 2% (1) For purposes of this table, beneficial ownership is computed pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended; the inclusion of shares beneficially owned should not be construed as an admission that such shares are beneficially owned for purposes of Section 16 of such Act. (2) Includes shares that may be acquired upon exercise of options that are exercisable within sixty (60) days in the following amounts: Mr. Saraf - 432,260 shares; Mr. Schlig - 0 shares; Dr. Davis - 8,000 shares. (3) This number is based solely on the Form 4 filed with the Commission on January 31, 2006. (4) This number is based solely on the Form 4 filed with the Commission on February 24, 2006. (5) This number is based solely on the Schedule 13G filed with the Commission on January 20, 2006. (6) This number is based solely on the Schedule 13G filed with the Commission on February 14, 2006. 46 EQUITY COMPENSATION PLAN INFORMATION
- ---------------------------------- ------------------------ --------------------- ------------------------- Number of securities Number of securities Weighted-average remaining available for to be issued upon exercise price of future issuance under exercise of outstanding equity compensation plans outstanding options, options, warrants (excluding securities Plan Category warrants and rights and rights reflected in column (a) - ---------------------------------- ------------------------ --------------------- ------------------------- (a) (b) (c) - ---------------------------------- ------------------------ --------------------- ------------------------- Equity compensation plans approved 0 - - by security holders - ---------------------------------- ------------------------ --------------------- ------------------------- Equity compensation plans not 496,460 $0.774 203,540 approved by security holders - ---------------------------------- ------------------------ --------------------- ------------------------- Total 496,460 $0.774 203,540 - ---------------------------------- ------------------------ --------------------- ------------------------- ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 47
ITEM 13. EXHIBITS (a) Exhibits 2.1 Debtors' Fourth Amended Plan of Reorganization of the Company (incorporated by reference to the Company's Form 8-K, dated September 3, 1993, as amended by the Company's Form 8-K/A, dated October 12, 1993). 2.2 Debtors' First Modification of Fourth Amended Plan of Reorganization of the Company (incorporated by reference to the Company's Form 8-K, dated September 3, 1993, as amended by the Company's Form 8-K/A, dated October 12, 1993). 2.3 Order Confirming Debtors' Fourth Amended Plan of Reorganization of the Company (incorporated by reference to the Company's Form 8-K, dated September 3, 1993, as amended by the Company's Form 8-K/A, dated October 12, 1993). 2.4 Consent Final Judgment of the Company (incorporated by reference to the Company's Form 8-K, dated September 3, 1993, as amended by the Company's Form 8-K/A, dated October 12, 1993). 3.1 Certificate of Incorporation of the Company (incorporated by reference to the Company's Form 10-K for the year ended February 28, 1993). 3.2 Bylaws of the Company (incorporated by reference to the Company's Form 10-K for the year ended February 28, 1993). 4.1 Rights Agreement dated as of May 31, 2001, between Solitron Devices, Inc. and Continental Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to the Company's current report on Form 8-K filed on June 20, 2001). 10.1 1987 Incentive Stock Option Plan (incorporated by reference to the Company's Form 10-K for the years ended February 28, 1994 and February 28, 1995). 10.2 Purchase Agreement, dated October 5, 1992, by and among Solitron Devices, Inc., Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.) and Vector Trading and Holding Corporation, along with and as amended by: (i) Amendment Number One to Purchase Agreement, dated October 28, 1992, by and among Solitron Devices, Inc., Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.) and Vector Trading and Holding Corporation; (ii) Order, dated December 23, 1992, Authorizing the Sale of Certain of the Debtors' Assets to Vector Trading and Holding Corporation; (iii) Amendment Number Two to Purchase Agreement. dated February 28, 1993, by and among Solitron Devices, Inc., Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.) and Vector Trading and Holding Corporation; and (iv) Order, dated March 4, 1993, Granting Vector Trading and Holding Corporation's Motion for Entry of Amended Order Authorizing Sale of Certain of the Debtors' Assets (incorporated by reference to the Company's Form 10-K for the year ended February 28, 1993). 10.3 Shared Services and Equipment Agreement, dated February 28, 1993, by and among Solitron Devices, Inc., Solitron Specialty Products, Inc. (f/k/a Solitron Microwave, Inc.) and S/V Microwave (incorporated by reference to the Company's Form 10-K for the year ended February 28, 1993). 10.4 Commercial Lease Agreement, dated January 1, 1992, between William C. Clark, as Trustee, and Solitron Devices, Inc. (incorporated by reference to the Company's Form 10-K for the year ended February 28, 1993). 10.5 Reduction in Space and Rent Agreement dated November 1, 2001 between Solitron Devices, Inc. and Technology Place, Inc. 48 10.6 Employment Agreement, dated December 1, 2000, between Solitron Devices, Inc. and Shevach Saraf (incorporated by reference to the Company's Form 10-K for the year ended February 28, 2001) 10.7* Ability to Pay Multi-Site Settlement Agreement, effective as of February 24, 2006, between Solitron Devices, Inc. and the United States Environmental Protection Agency. 21* List of Subsidiaries of the Company. 23.1* Consent of Independent Registered Public Accounting Firm 23.2* Consent of Independent Registered Public Accounting Firm 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. * Filed herewith 49 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The aggregate fees billed to the Company for the years ended February 28, 2005 and February 28, 2006, by its former accounting firms, Berkovits, Lago & Co. ("BL&C"), Goldstein Lewin & Co. ("GL&C"), and by its current accounting firm, DeLeon & Company ("DL&C") are as follows: Audit Fees: The aggregate fees for professional services rendered by BL&C in connection with reviews of the Company's quarterly financial statements (Form 10-QSB) for the year ended February 28, 2005 were approximately $20,000. The aggregate fees for professional services rendered by GL&C in connection with (i) the audit of our annual financial statements (Form 10-KSB), and (ii) a review of our quarterly financial statements (Form 10-QSB) for the year ended February 28, 2005 and and the quarter ended May 31, 2005 were approximately $42,000 and $6,000 respectively. The aggregate fees for professional services rendered by DL&C in connection with (i) the audit of our annual financial statements (Form 10-KSB), and (ii) reviews of our quarterly financial statements (Form 10-QSB) for the years ended February 28, 2005 and February 28, 2006, were approximately $0 and $41,000 respectively. Audit Related Fees: The aggregate fees for professional services rendered by BL&C for audit-related services in connection with special procedures for the year ended February 28, 2005 were $9,000. There were no other fees paid for audit-related services for the years ended February 28, 2005 and 2006. Tax Fees: The aggregate fees for professional services rendered by GL&C and DL&C for tax compliance and tax advice for the years ended February 28, 2005 and February 28, 2006 were approximately $4,000 and $5,000 respectively. There were no other fees paid for tax services for the years ended February 28, 2005 and 2006. All Other Fees: The aggregate fees for professional services rendered by BL&C for tax compliance and tax advice for the year ended February 28, 2005 were $11,000. There were no other fees paid for professional services that were not included in audit fees, audit-related fees and tax fees for the years ended February 28, 2005 and February 28, 2006. Pre-Approval Policies and Procedures for Audit and Permitted Non-Audit Services. The Audit Committee has a policy of considering and, if deemed appropriate, approving, on a case by case basis, any audit or permitted non-audit service proposed to be performed previously by BL&C and GL&C and currently by DL&C in advance of the performance of such service. These services may include audit services, audit-related services, tax services and other services. The Audit Committee has not implemented a policy or procedure which delegates the authority to approve, or pre-approve, audit or permitted non-audit services to be performed previously by BL&C and GL&C and currently by DL&C. In connection with making any pre-approval decision, the Audit Committee must consider whether the provision of such permitted non-audit services currently performed by DL&C is consistent with maintaining DL&C's status as our current independent auditors. Consistent with these policies and procedures, the Audit Committee approved all of the services previously rendered by BL&C and GL&C and currently rendered by DL&C during the year ended February 28, 2006, as described above. 50 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized. SOLITRON DEVICES, INC. /s/ Shevach Saraf ---------------------------------------- By: Shevach Saraf Title: Chairman of the Board, President, Chief Executive Officer, Treasurer and Chief Financial Officer Date: June 14, 2006 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Shevach Saraf June 14, 2006 - ------------------------ ---------------- Shevach Saraf Chairman of the Board, President, Chief Executive Officer, Treasurer and Chief Financial Officer. /s/ Jacob Davis June 14, 2006 - ------------------------ ---------------- Jacob Davis Director /s/ Joseph Schlig June 14, 2006 - ------------------------ ---------------- Joseph Schlig Director 51 EXHIBIT INDEX EXHIBIT DESCRIPTION 10.7* Ability to Pay Multi-Site Settlement Agreement, effective as of February 24, 2006, between Solitron Devices, Inc. and the United States Environmental Protection Agency. 21* List of Subsidiaries of the Company 23.1* Consent of Independent Registered Public Accounting Firm 23.2* Consent of Independent Registered Public Accounting Firm 31* Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32* Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 52 EX-10.7 2 v045337_ex10-7.txt Exhibit 10.7 UNITED STATES ENVIRONMENTAL PROTECTION AGENCY AND UNITED STATES DEPARTMENT OF JUSTICE CERCLA SECTION 122(h)(1) CASHOUT AGREEMENT FOR ABILITY TO PAY PARTIES SOLITRON DEVICES, INC. ABILITY TO PAY MULTI-SITE SETTLEMENT CERCLA SECTION 122(h)(1) CASHOUT AGREEMENT FOR ABILITY TO PAY PERIPHERAL PARTIES TABLE OF CONTENTS Page I. JURISDICTION............................................................1 II. BACKGROUND..............................................................1 III. PARTIES BOUND...........................................................2 IV. STATEMENT OF PURPOSE....................................................2 V. DEFINITIONS.............................................................2 VI. PAYMENT OF RESPONSE COSTS...............................................3 VII. FAILURE TO COMPLY WITH AGREEMENT........................................5 VIII. COVENANT NOT TO SUE BY EPA..............................................6 IX. RESERVATIONS OF RIGHTS BY EPA...........................................6 X. COVENANT NOT TO SUE BY SETTLING PARTY...................................7 XI. EFFECT OF SETTLEMENT/CONTRIBUTION PROTECTION............................8 XII. ACCESS TO INFORMATION...................................................8 XIII. RETENTION OF RECORDS....................................................9 XIV. CERTIFICATION..........................................................10 XV. NOTICES AND SUBMISSIONS................................................10 XVI. INTEGRATION/APPENDICES.................................................11 XVII. PUBLIC COMMENT.........................................................11 XVIII. EFFECTIVE DATE.........................................................11 CERCLA SECTION 122(h)(1) CASHOUT AGREEMENT FOR ABILITY TO PAY PARTIES IN THE MATTER OF: ) AGREEMENT ) THE SOLITRON DEVICES, INC. ) ABILITY TO PAY ) U.S. EPA Region 4 MULTI-SITE SETTLEMENT ) CERCLA Docket No.------------- ) Solitron Devices, Inc. ) PROCEEDING UNDER SECTION SETTLING PARTY ) 122(h)(1) OF CERCLA ) 42 U.S.C. ss. 9622(h)(1) - --------------------------------------------- I. JURISDICTION 1. This Agreement is entered into pursuant to the authority vested in the Administrator of the U.S. Environmental Protection Agency ("EPA") by Section 122(h)(1) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), 42 U.S.C. ss. 9622(h)(1), which authority has been delegated to the Regional Administrators of the EPA by EPA Delegation No. 14-14-D and redelegated through the Director, Waste Management Division to the Chief, CERCLA Program Services Branch by EPA Delegation No. 14-14-D. This Agreement is also entered into pursuant to the authority of the Attorney General of the United States to compromise and settle claims of the United States. 2. This Agreement is made and entered into by EPA and Solitron Devices, Inc. ("Settling Party"). Settling Party consents to and will not contest the authority of the United States to enter into this Agreement or to implement or enforce its terms. II. BACKGROUND 3. This Agreement concerns the following sites which will be collectively known as "the Sites": Solitron Devices Superfund Site located in Riviera Beach, Florida; Solitron Microwave Superfund Site, located in Port Salerno, Florida; Petroleum Products Corporation Superfund Site located in Pembroke Park, Florida; City Industries, Inc. Superfund Site located in Orlando, Florida; and Casmalia Resources Superfund Site located in Santa Barbara County, California. EPA alleges that each Site is a facility as defined by Section 101(9) of CERCLA, 42 U.S.C. ss. 9601(9). 4. In response to the release or threatened release of hazardous substances at or from the Sites, EPA undertook response actions at the Sites pursuant to Section 104 of CERCLA, 42 U.S.C. ss. 9604, and may undertake additional response actions in the future. 5. In performing response actions at the Sites, EPA has incurred response costs and may incur additional response costs in the future. 6. EPA alleges that Settling Party is a responsible party pursuant to Section 107(a) of CERCLA, 42 U.S.C. ss. 9607(a), and is jointly and severally liable for response costs incurred and to be incurred at the Sites. 1 7. EPA has reviewed the Financial Information submitted by Settling Party to determine whether Settling Party is financially able to pay response costs incurred and to be incurred at the Sites. Based upon this Financial Information, EPA has determined that Settling Party has limited financial ability to pay for response costs incurred and to be incurred at the Sites. 8. EPA and Settling Party recognize that this Agreement has been negotiated in good faith and that this Agreement is entered into without the admission or adjudication of any issue of fact or law. The actions undertaken by Settling Party in accordance with this Agreement do not constitute an admission of any liability. Settling Party does not admit, and retains the right to controvert in any subsequent proceedings other than proceedings to implement or enforce this Agreement, the validity of the facts or allegations contained in this Section. III. PARTIES BOUND 9. This Agreement shall be binding upon EPA and upon Settling Party and its successors and assigns. Any change in ownership or corporate or other legal status of Settling Party, including but not limited to any transfer of assets or real or personal property, shall in no way alter Settling Party's responsibilities under this Agreement. Each signatory to this Agreement certifies that he or she is authorized to enter into the terms and conditions of this Agreement and to bind legally the party represented by him or her. IV. STATEMENT OF PURPOSE 10. By entering into this Agreement, the mutual objective of the Parties is to avoid difficult and prolonged litigation by allowing Settling Party to make a cash payment to address its alleged civil liability for the Sites as provided in the Covenant Not to Sue by EPA in Section VIII, subject to the Reservations of Rights by EPA in Section IX. V. DEFINITIONS 11. Unless otherwise expressly provided herein, terms used in this Agreement which are defined in CERCLA or in regulations promulgated under CERCLA shall have the meaning assigned to them in CERCLA or in such regulations. Whenever terms listed below are used in this Agreement or in any appendix attached hereto, the following definitions shall apply: a. "Agreement" shall mean this Agreement and any attached appendices. In the event of conflict between this Agreement and any appendix, the Agreement shall control. b. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. ss. 9601, et seq. -- ---- c. "Day" shall mean a calendar day. In computing any period of time under this Agreement, where the last day would fall on a Saturday, Sunday, or federal holiday, the period shall run until the close of business of the next working day. d. "EPA" shall mean the United States Environmental Protection Agency and any successor departments, agencies, or instrumentalities of the United States. 2 e. "Financial Information" shall mean all documents and other information pertaining to the financial ability to pay of the Settling Party which the Settling Party has provided to the United States prior to its signature date on this Agreement. f. "Interest" shall mean interest at the rate specified for interest on investments of the Hazardous Substance Superfund established by 26 U.S.C. ss. 9507, compounded on October 1 of each year, in accordance with 42 U.S.C. ss. 9607(a). The applicable rate of interest shall be the rate in effect at the time the interest accrues. The rate of interest is subject to change on October 1 of each year. g. "Paragraph" shall mean a portion of this Agreement identified by an Arabic numeral or a lower case letter. h. "Parties" shall mean EPA and Settling Party. i. "RCRA" shall mean the Solid Waste Disposal Act, as amended, 42 U.S.C. ss.ss. 6901, et seq. (also known as the Resource Conservation and Recovery Act). j. "Section" shall mean a portion of this Agreement identified by a Roman numeral. k. "Settling Party" shall mean Solitron Devices, Inc. l. "Sites" shall mean the Solitron Devices Superfund Site located in Riviera Beach, Florida; the Solitron Microwave Superfund Site, located in Port Salerno, Florida; the Petroleum Products Corporation Superfund Site located in Pembroke Park, Florida; the City Industries, Inc. Superfund Site located in. Orlando, Florida; and the Casmalia Resources Superfund Site located in Santa Barbara County, California. These Sites are generally shown on the maps included in Appendix A. m. "United States" shall mean the United States of America, including its departments, agencies, and instrumentalities. VI. PAYMENT OF RESPONSE COSTS 12. Settling Party shall pay to the EPA Hazardous Substance Superfund the principal sum of $74,000, plus an additional sum for Interest as explained below. Payment shall be made in quarterly installments over a two year period. Each installment, except for the first, on which no interest shall be due, shall include the principal amount due plus an additional sum for accrued Interest on the declining principal balance calculated from the effective date of this Agreement as defined by Paragraph 39. The first payment of $9,250 shall be due within 30 days of the effective date of this Agreement as defined by Paragraph 39. Subsequent payments of $9,338.20, plus interest, shall be due at intervals of ninety (90) days after date of the first payment until all payments have been made. Settling Party may accelerate these payments, and Interest due on the accelerated payments shall be reduced accordingly. Payment shall be made by Electronic Funds Transfer ("EFT") in accordance with instructions to be provided to Settling Party by EPA Region 4, and shall be accompanied by a statement identifying the name and address of Settling Party, the Site name Solitron Microwave Superfund Site, the EPA Region and Site/Spill ID # 04T7, and the EPA docket number for this action, and shall be sent to: 3 U.S. EPA Region 4 Superfund Accounting P.O. Box 100142 Atlanta, GA 30384 Attention: Collection Officer in Superfund At the time of each payment, Settling Party shall send notice that such payment has been made to: Paula V. Batchelor EPA - Region 4 4WD-PSB/11th Floor 61 Forsyth Street, S.W. Atlanta, GA 30303 13. The United States agrees to the payment by the Settling Party of $74,000 in settlement of all its claims related to the Sites encompassed herein, based in part on the determination by the United States' financial analyst that Settling Party was not capable of any additional payments at this time. However, the Settling Party may become more financially solvent as a result of this Agreement, and it is equitable that a portion of that settlement benefit should inure to the United States and EPA. The amount of $74,000 is to be paid over a two year period after the AOC has been executed (Year #1 and #2). In succeeding years (Years #3 through #7) Solitron agrees to make an Additional Payment as set forth in Paragraph 14. 14. The Additional Payment shall be determined in each of Years #3 through #7 as follows: The first step is determining the Settling Party's Net After Tax Income. EPA and the Settling Party agree that the term "Net After Tax Income" shall he determined in accordance with generally accepted accounting principles and shall not utilize an accelerated depreciation schedule. Within thirty days (30) of the anniversary of the AOC's execution in each of Years #3 through #7, the Settling Party shall submit to EPA, at the address indicated in paragraph 12, a written letter from its Chief Executive Officer and certified public accountant certifying the preceding year's Net After Tax income amount, if any. The Settling Party shall also at that time submit to EPA a copy of its 10Q and 10K statements for the prior year, filed with the Securities and Exchange Commission (SEC). In the alternative, the Settling Party can submit a copy of its current audited financial statement if there are no filings with the SEC. EPA reserves the right to request and review additional supporting documentation for the financial data as it deems necessary. The second step is for the Settling Party to determine whether its Net After Tax Income exceeds $500,000, and if so the amount by which the Net After Tax Income exceeds $500,000. If the Net After Tax Income exceeds $500,000 by any amount between $1 and $200,000 then the Settling Party must pay an additional $10,000. If the Net After Tax Income exceeds $500,000 by any amount more than $200,000, then the Settling Party must pay 5% of that amount. In the third and final step, the Settling Party must submit the Additional Payment within sixty (60) days of the anniversary of the AOC's execution in each of Years #3 through #7, unless the Settling Party receives an objection from EPA with regard to the calculation of the Net After Tax Income. If for any Year #3 through #7, EPA makes a determination of Net After Tax Income which differs from the Settling Party's determination of Net After Tax Income, EPA will notify the Settling Party within twenty days (20) of EPA's receipt of the Settling Party's certification of Net After Tax Income, as to what the adjusted amount of Net After Tax Income is and the adjusted amount of Additional Payment if any. The Settling Party will pay the adjusted amount of Additional Payment within Thirty Days (30) of receipt of notice from EPA. 4 15. The total amount(s) to be paid by Settling Party pursuant to Paragraphs 12 through 14 shall be deposited in the Solitron Microwave Superfund Site Special Account within the EPA Hazardous Substance Superfund to be retained and used to conduct or finance response actions at or in connection with the Site, or to be transferred by EPA to the EPA Hazardous Substance Superfund. VII. FAILURE TO COMPLY WITH AGREEMENT 16. If Settling Party fails to make any payment required by Paragraph 12 by the required due date, all remaining installment payments and all accrued Interest shall become due immediately upon such failure. Interest shall continue to accrue on any unpaid amounts until the total amount due has been received. If Settling Party fails to make any payment under Paragraph 13 by the required due date, Interest shall accrue on the unpaid balance through the date of payment. 17. Stipulated Penalty. a. If any amounts due under Paragraph 12 and Paragraph 13 are not paid by the required date, Settling Party shall be in violation of this Agreement and shall pay to EPA, as a stipulated penalty, in addition to the Interest required by Paragraph 16, $500 per violation per day that such payment is late. b. Stipulated penalties are due and payable within 30 days of the date of demand for payment of the penalties. All payments under this Paragraph shall be identified as "stipulated penalties" and shall made by certified or cashier's check made payable to "EPA Hazardous Substance Superfund." The check, or a letter accompanying the check, shall reference the name and address of Settling Party, the Site name Solitron Microwave Superfund Site, the EPA Region and Site/Spill ID # 04T7, and the EPA docket number for this action, and shall be sent to: U.S. EPA Region 4 Superfund Accounting P.O. Box 100142 Atlanta, GA 30384 Attention: Collection Officer in Superfund c. At the time of each payment, Settling Party shall send notice that such payment has been made to EPA in accordance with Section XV (Notices and Submissions). Such notice shall identify the Region and Site-Spill ID # 04T7 and the EPA Docket Number for this action. d. Penalties shall accrue as provided above regardless of whether EPA has notified Settling Party of the violation or made a demand for payment, but need only be paid upon demand. All penalties shall begin to accrue on the day after payment is due and shall continue to accrue through the date of payment. Nothing herein shall prevent the simultaneous accrual of separate penalties for separate violations of this Agreement. 5 18. In addition to the Interest and Stipulated Penalty payments required by this Section and any other remedies or sanctions available to the United States by virtue of Settling Party's failure to comply with the requirements of this Agreement, if Settling Party fails or refuses to comply with any term or condition of this Agreement, it shall be subject to enforcement action pursuant to Section 122(h)(3) of CERCLA, 42 U.S.C. ss. 9622(h)(3). If the United States brings an action to enforce this Agreement, Settling Party shall reimburse the United States for all costs of such action, including but not limited to costs of attorney time. 19. Notwithstanding any other provision of this Section, EPA may, in its unreviewable discretion, waive payment of any portion of the stipulated penalties that have accrued pursuant to this Agreement. Settling Party's payment of stipulated penalties shall not excuse Settling Party from payment as required by Paragraph 12 and Paragraph 13 or from performance of any other requirements of this Agreement. VIII. COVENANT NOT TO SUE BY EPA 20. Except as specifically provided in Section IX (Reservations of Rights by EPA), EPA covenants not to sue or to take administrative action against Settling Party pursuant to Sections 106 and 107(a) of CERCLA, 42 U.S.C. ss.ss. 9606 and 9607(a), with regard to the Sites. With respect to present and future liability, this covenant shall take effect upon receipt by EPA. of the first payment required by Section VI, Paragraph 12 (Payment of Response Costs). This covenant not to sue is conditioned upon the satisfactory performance by Settling Party of its obligations under this Agreement, including but not limited to, payment of all amounts due under Section VI (Payment of Response Costs) and any amount due under Section VII (Failure to Comply with Agreement). This covenant not to sue is also conditioned upon the veracity and completeness of the Financial Information provided to EPA by Settling Party. If the Financial Information is subsequently determined by EPA to be false or, in any material respect, inaccurate, Settling Party shall forfeit all payments made pursuant to this Agreement and the covenant not to sue shall be null and void. Such forfeiture shall not constitute liquidated damages and shall not in any way foreclose EPA's right to pursue any other causes of action arising from Settling Party's false or materially inaccurate information. This covenant not to sue extends only to Settling Party and does not extend to any other person. IX. RESERVATIONS OF RIGHTS BY EPA 21. EPA reserves, and this Agreement is without prejudice to, all rights against Settling Party with respect to all matters not expressly included within the Covenant Not to Sue by EPA in Paragraph 20. Notwithstanding any other provision of this Agreement, EPA reserves all rights against Settling Party with respect to: a. liability for failure of Settling Party to meet a requirement of this Agreement; b. criminal liability; 6 c. liability for damages for injury to, destruction of, or loss of natural resources, and for the costs of any natural resource damage assessments; d. liability, based upon Settling Party's ownership or operation of the Sites, or upon Settling Party's transportation, treatment, storage, or disposal, or the arrangement for the transportation, treatment, storage, or disposal, of a hazardous substance or a solid waste at or in connection with the Sites, after signature of this Agreement by Settling Party; and e. liability arising from the past, present, or future disposal, release or threat of release of a hazardous substance, pollutant, or contaminant outside of the Sites. 22. Notwithstanding any other provision of this Agreement, EPA reserves, and this Agreement is without prejudice to, the right to reinstitute or reopen this action, or to commence a new action seeking relief other than as provided in this Agreement, if the Financial Information provided by Settling Party, or the financial certification made by Settling Party in Paragraph 35(b), is false or, in an material respect, inaccurate. 23. Nothing in this Agreement is intended to be nor shall it be construed as a release, covenant not to sue, or compromise of any claim or cause of action, administrative or judicial, civil or criminal, past or future, in law or in equity, which EPA may have against any person, firm, corporation or other entity not a signatory to this Agreement. X. COVENANT NOT TO SUE BY SETTLING PARTY 24. Settling Party agrees not to assert any claims or causes of action against the United States, or its contractors or employees, with respect to the Sites or this Agreement, including but not limited to: a. any direct or indirect claim for reimbursement from the EPA Hazardous Substance Superfund established by 26 U.S.C. ss. 9507, based on. Sections 106(b)(2), 107, 111, 112, or 113 of CERCLA, 42 U.S.C. ss.ss. 9606(b)(2), 9607, 9611, 9612, or 9613, or any other provision of law; b. any claim arising out of response actions at or in connection with the Sites, including any claim under the United States Constitution, the Florida or California State Constitutions, the Tucker Act, 28 U.S.C. ss. 1491, the Equal Access to Justice Act, 28 U.S.C. ss. 2412, as amended, or at common law; or c. any claim against the United States pursuant to Sections 107 and 113 of CERCLA, 42 U.S.C. ss.ss. 9607 and 9613, relating to the Sites. Except as provided in Paragraph 26 (Waiver of Claims) and Paragraph 29 (Waiver of Claim-Splitting Defenses), these covenants not to sue shall not apply in the event the United States brings a cause of action or issues an order pursuant to the reservations set forth in Paragraph 21(c) - (e), but only to the extent that Settling Party's claims arise from the same response action or response costs that the United States is seeking pursuant to the applicable reservation. 7 25. Nothing in this Agreement shall be deemed to constitute approval or preauthorization of a claim within the meaning of Section 111 of CERCLA, 42 U.S.C. ss. 9611, or 40 C.F.R. 300.700(d). 26. Settling Party agrees not to assert any claims or causes of action that it may have for all matters relating to the Sites, including for contribution, against any other person. This waiver shall not apply with respect to any defense, claim, or cause of action that Settling Party may have against any person if such person asserts a claim or cause of action relating to the Sites against Settling Party. XI. EFFECT OF SETTLEMENT/CONTRIBUTION PROTECTION 27. Except as provided in Paragraph 26, nothing in this Agreement shall be construed to create any rights in, or grant any cause of action to, any person not a Party to this Agreement. EPA reserves any and all rights (including, but not limited to, any right to contribution), defenses, claims, demands, and causes of action that it may have with respect to any matter, transaction, or occurrence relating in any way to the Sites against any person not a Party hereto. 28. The Parties agree that Settling Party is entitled, as of the effective date of this Agreement, to protection from contribution actions or claims as provided by Sections 113(0(2) and 122(h)(4) of CERCLA, 42 U.S.C. ss.ss. 9613(f)(2) and 9622(h)(4), for "matters addressed" in this Agreement. The "matters addressed" in this Agreement are all response actions taken or to be taken and all response costs incurred or to be incurred, at or in connection with the Sites, by the United States or any other person. The "matters addressed" in this Agreement do not include those response costs or response actions as to which EPA has reserved its rights under this Agreement (except for claims for failure to comply with this Agreement), in the event that EPA asserts rights against Settling Party coming within the scope of such reservations. 29. In any subsequent administrative or judicial proceeding initiated by the United States for injunctive relief, recovery of response costs, or other relief relating to the Sites, Settling Party shall not assert, and may not maintain, any defense or claim based upon the principles of waiver, res judicata, collateral estoppel, issue preclusion, claim-splitting, or other defenses based upon any contention that the claims raised by the United States in the subsequent proceeding were or should have been addressed in this Agreement; provided, however, that nothing in this Paragraph affects the enforceability of the Covenant Not to Sue by EPA set forth in Paragraph 20. XII. ACCESS TO INFORMATION 30. Settling Party shall provide to EPA, upon request, copies of all records, reports, or information (hereinafter referred to as "records") within its possession or control or that of its contractors or agents relating to activities at the Sites or to the implementation of this Agreement, including, but not limited to, sampling, analysis, chain of custody records, manifests, trucking logs, receipts, reports, sample traffic routing, correspondence, or other documents or information related to the Sites. 8 31. Confidential Business Information and Privileged Documents. a. Settling Party may assert business confidentiality claims covering part or all records submitted to EPA under this Agreement to the extent permitted by and in accordance with Section 104(e)(7) of CERCLA, 42 U.S.C. ss. 9604(e)(7), and 40 C.F.R. 2.203(b). Records determined to be confidential by EPA will be accorded the protection specified in 40 C.F.R. Part 2, Subpart B. EPA agrees that copies of any of Settling Party's corporate income tax returns provided to EPA shall be maintained by EPA as confidential documents subject to a business confidentiality claim under this Agreement. If no claim of confidentiality accompanies other records when they are submitted to EPA, or if EPA has notified Settling Party that the records are not confidential under the standards of Section 104(e)(7) of CERCLA or 40 C.F.R. Part 2 Subpart B, the public may be given access to such records without further notice to Settling Party. b. Settling Party may assert that certain records are privileged under the attorney-client privilege or any other privilege recognized by federal law. If Settling Party asserts such a privilege in lieu of providing records, it shall provide EPA with the following: 1) the title of the record; 2) the date of the record; 3) the name, title, affiliation (e.g., company or firm), and address of the author of the record; 4) the name and title of each addressee and recipient; 5) a description of the subject of the record; and 6) the privilege asserted. If a claim of privilege applies only to a portion of a record, the record shall be provided to EPA in redacted form to mask the privileged portion only. Settling Party shall retain all records that it claims to be privileged until EPA has had a reasonable opportunity to dispute the privilege claim and any such dispute has been resolved in Settling Party's favor. However, no records created or generated pursuant to the requirements of this or any other settlement with the EPA pertaining to the Sites shall be withheld on the grounds that they are privileged. 32. No claim of confidentiality shall be made with respect to any data, including but not limited to, all sampling, analytical, monitoring, hydrogeologic, scientific, chemical, or engineering data, or any other documents or information evidencing conditions at or around the Sites. XIII. RETENTION OF RECORDS 33. Until 5 years after the effective date of this Agreement, Settling Party shall preserve and retain all records now in its possession or control, or which come into its possession or control, that relate in any manner to response actions taken at the Sites or to the liability of any person for response actions or response costs at or in connection with the Sites, regardless of any corporate retention policy to the contrary. 34. After the conclusion of the document retention period in the preceding paragraph, Settling Party shall notify EPA at least 90 days prior to the destruction of any such records, and, upon request by EPA, Settling Party shall deliver any such records to EPA. Settling Party may assert that certain records are privileged under the attorney-client privilege or any other privilege recognized by federal law. If Settling Party asserts such a privilege, it shall provide EPA with the following: 1) the title of the record; 2) the date of the record; 3) the name, title, affiliation (e.g., company or firm), and address of the author of the record; 4) the name and title of each addressee and recipient; 5) a description of the subject of the record; and 6) the privilege asserted. If a claim of privilege applies only to a portion of a record, the record will be provided to EPA in redacted form to mask the privileged portion only. Settling Party shall retain all records that it claims to be privileged until EPA has bad a reasonable opportunity to dispute the privilege claim and any such dispute has been resolved in Settling Party's favor. However, no records created or generated pursuant to the requirements of this or any other settlement with the EPA pertaining to the Sites shall be withheld on the grounds that they are privileged. 9 XIV. CERTIFICATION 35. Settling Party hereby certifies that, to the best of its knowledge and belief, after thorough inquiry, it has: a. not altered, mutilated, discarded, destroyed or otherwise disposed of any records, reports, or information relating to its potential liability regarding the Sites since notification of potential liability by the United States or the states or the filing of a suit against it regarding the Sites and that it has fully complied with any and all EPA requests for documents or information regarding the Sites and Settling Party's financial circumstances pursuant to Sections 104(e) and 122(e) of CERCLA, 42 U.S.C. ss.ss. 9604(e) and 9622(e), or Section 3007 of RCRA, 42 U.S.C. ss. 6927; b. submitted to EPA Financial Information that fairly, accurately, and materially sets forth its financial circumstances, and that those circumstances have not materially changed between the time the Financial Information was submitted to EPA and the time Settling Party executes this Agreement; and c. fully disclosed the existence of any insurance policies that may cover claims relating to cleanup of the Sites. XV. NOTICES AND SUBMISSIONS 36. Whenever, under the terms of this Agreement, notice is required to be given or a document is required to be sent by one Party to another, it shall be directed to the individuals at the addresses specified below, unless those individuals or their successors give notice of a change to the other Party in writing. Written notice as specified herein shall constitute complete satisfaction of any written notice requirement of this Agreement with respect to EPA and. Settling Party. As to EPA: Kathleen West Associate Regional Counsel U.S. EPA, Region 4 Atlanta Federal Center 61 Forsyth St., S.W. Atlanta, GA 30303 10 As to Settling. Party: Shevach Saraf, President Solitron Devices, Inc. 3301 Electronics Way West Palm Beach, FL 33407 with a copy to: William. L. Pence Akerman Senterfitt P.O. Box 231 Orlando, Florida 32802-0231 XVI. INTEGRATION/APPENDICES 37. This Agreement and its Appendix A constitute the final, complete and exclusive agreement and understanding between the Parties with respect to the settlement embodied in this Agreement. The Parties acknowledge that there are no representations, agreements, or understandings relating to the settlement other than those expressly contained in this Agreement. Appendix A, which contains maps generally showing the location of the Sites, is attached to and incorporated into this Agreement. XVII. PUBLIC COMMENT 38. This Agreement shall be subject to a public comment period of not less than 30 days pursuant to Section 122(i) of CERCLA, 42 U.S.C. ss. 9622(i). In accordance with Section 122(i)(3) of CERCLA, the United States may modify or withdraw its consent to this Agreement if comments received disclose facts or considerations which indicate that this Agreement is inappropriate, improper, or inadequate. XVIII. EFFECTIVE DATE 39. The effective date of this Agreement shall be the date upon which EPA issues written notice that the public comment period pursuant to Paragraph 38 has closed and that comments received, if any, do not require modification of or withdrawal by the United States from this Agreement. IT IS SO AGREED: U.S. Environmental Protection Agency By:/s/ Rosalind Brown Rosalind Brown, Chief CERCLA Superfund Enforcement and Information Management Branch Waste Management Division 11 Solitron Devices, Inc. Global Settlement- 122(h) Cost Recovery Agreement U.S. Department of Justice /s/ Kelly A. Johnson ---------------------------------------------------------- KELLY A. JOHNSON Acting Assistant Attorney General Environment and Natural Resources Division United States Department of Justice Washington, D.C. 20530 /s/ Cheryl L. Smout ---------------------------------------------------------- CHERYL L. SMOUT Attorney Environmental Enforcement Section Environment and Natural Resources Division U.S. Department of Justice P.O. Box 7611 Washington, D.C. 20044-7611 12 Solitron Devices, Inc. Global Settlement- 122(h) Cost Recovery Agreement THE UNDERSIGNED SETTLING PARTY enters into this Agreement in the matter of 04T7. relating to the Solitron Devices. Inc. Global Settlement: SETTLING PARTY: Solitron Devices. Inc. 3301 Electronics Way ------------------------- West Palm Beach, FL 33407 ------------------------- [Address] By:/s/ Shevach Saraf 07/28/2005 ----------------------------------- -------------------------------- [Signature] [Date] Chairman, President & CEO - ------------------------- [Title] Shevach Saraf - ------------------------- [Printed Name] 13 Figure 1-1 Site Location Map [Graphics Omitted] 14 Appendix C [Graphic Omitted] 15 EX-21 3 v045337_ex21.txt Exhibit 21 SOLITRON DEVICES, INC. SUBSIDIARIES OF THE REGISTRANT Percentage of Voting Securities Owned State of by Registrant Incorporation ------------- -------------- Subsidiaries of Registrant: Solitron Specialty Products, Inc. 100% Delaware Solidev International Sales Corporation 100% Germany Solitron International, Inc. 100% Virgin Islands Solidev Warenvertriebs GmbH 100% Germany All subsidiaries are included in the consolidated financial statements. EX-23.1 4 v045337_ex23-1.txt Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-112102) of Solitron Devices, Inc. of our report dated June 7, 2005 relating to the financial statements, which appears in this Form 10-KSB /s/ Goldstein Lewin & Co Certified Public Accountant Boca Raton, Florida June 9, 2006 EX-23.2 5 v045337_ex23-2.txt Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-112102) of Solitron Devices, Inc. of our report dated April 28, 2006, relating to the financial statements, which appears in this Form 10-KSB. /s/ DeLeon & Company, P.A. Certified Public Accountants Pembroke Pines, Florida June 9, 2006 EX-31 6 v045337_ex31.txt Exhibit 31 CERTIFICATION I, Shevach Saraf, Chairman, President, Chief Executive Officer, Treasurer and Chief Financial Officer of Solitron Devices, Inc., certify that: 1. I have reviewed this annual report on Form 10-KSB of Solitron Devices, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small business issuer and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions absent the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting. 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal controls over financial reporting. Date: June 14, 2006 /s/ Shevach Saraf ------------------------ Shevach Saraf Chairman, President, Chief Executive Officer, Treasurer and Chief Financial Officer EX-32 7 v045337_ex32.txt Exhibit 32 Certification Required by 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) In connection with the Annual Report of Solitron Devices, Inc. (the "Company") on Form 10-KSB for the period ended February 28, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Shevach Saraf, as Chairman, President, Chief Executive Officer, Treasurer and Chief Financial Officer of Solitron Devices, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), that to my knowledge: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 14, 2006 /s/ Shevach Saraf ------------------------------------- Shevach Saraf Chairman, President, Chief Executive Officer, Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----