MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
March 31, 2007
|
|
|
|
(Unaudited)
|
|
|
Audited
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,631,624
|
|
|
$
|
7,058,524
|
|
Marketable securities
|
|
|
500,000
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $351,142 and $297,886 in September 30, 2007 and March 31, 2007,
respectively
|
|
|
5,909,822
|
|
|
|
3,932,029
|
|
Inventories, net
|
|
|
6,794,178
|
|
|
|
5,548,691
|
|
Deferred tax asset
|
|
|
153,316
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
622,928
|
|
|
|
784,649
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
15,611,868
|
|
|
|
17,323,893
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
4,081,521
|
|
|
|
4,017,465
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Security deposits
|
|
|
23,384
|
|
|
|
12,302
|
|
Other long term assets
|
|
|
41,216
|
|
|
|
138,493
|
|
Intangible assets, net of accumulated amortization
|
|
|
3,727,915
|
|
|
|
2,344,364
|
|
Goodwill
|
|
|
8,924,325
|
|
|
|
5,982,709
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
12,716,840
|
|
|
|
8,477,868
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
32,410,229
|
|
|
$
|
29,819,226
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
372,149
|
|
|
$
|
|
|
Current portion of long-term debt
|
|
|
1,440,882
|
|
|
|
1,449,443
|
|
Accounts payable
|
|
|
757,382
|
|
|
|
695,142
|
|
Accrued expenses
|
|
|
2,303,189
|
|
|
|
3,342,365
|
|
Current portion of deferred tax liability
|
|
|
52,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,926,104
|
|
|
|
5,486,950
|
|
Long-term debt, net of current portion
|
|
|
4,939,021
|
|
|
|
5,633,386
|
|
Non-current income taxes payable
|
|
|
99,243
|
|
|
|
|
|
Deferred tax liability
|
|
|
1,421,917
|
|
|
|
721,917
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
11,386,285
|
|
|
|
11,842,253
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.10 par value; 100,000 shares authorized; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 10,000,000 shares authorized; 5,358,217 and 5,025,457 shares issued and outstanding at September 30, 2007
and March 31, 2007, respectively
|
|
|
53,582
|
|
|
|
50,255
|
|
Additional paid-in capital
|
|
|
11,083,293
|
|
|
|
8,541,274
|
|
Retained earnings
|
|
|
11,619,268
|
|
|
|
10,912,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,756,143
|
|
|
|
19,503,987
|
|
Treasury stock at cost, 383,475 and 358,541 shares at September 30, 2007 and March 31, 2007
|
|
|
(1,732,199
|
)
|
|
|
(1,527,014
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
21,023,944
|
|
|
|
17,976,973
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
32,410,229
|
|
|
$
|
29,819,226
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Net sales
|
|
$
|
9,762,964
|
|
|
$
|
5,061,326
|
|
Cost of sales
|
|
|
6,111,204
|
|
|
|
3,313,253
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,651,760
|
|
|
|
1,748,073
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
158,600
|
|
|
|
224,431
|
|
Selling, general and administrative
|
|
|
1,991,673
|
|
|
|
1,136,540
|
|
Amortization of intangible assets
|
|
|
183,357
|
|
|
|
178,295
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,333,630
|
|
|
|
1,539,266
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,318,130
|
|
|
|
208,807
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18,943
|
|
|
|
45,790
|
|
Interest expense
|
|
|
(162,100
|
)
|
|
|
(112,015
|
)
|
Loss on sale of assets
|
|
|
(17,760
|
)
|
|
|
|
|
Other (expense) income
|
|
|
(76,118
|
)
|
|
|
14,007
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(237,035
|
)
|
|
|
(52,218
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
1,081,095
|
|
|
|
156,589
|
|
Provision for income taxes
|
|
|
462,936
|
|
|
|
115,309
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
618,159
|
|
|
$
|
41,280
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,974,742
|
|
|
|
4,642,041
|
|
Diluted
|
|
|
5,012,526
|
|
|
|
4,808,262
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Net sales
|
|
$
|
16,073,629
|
|
|
$
|
11,867,764
|
|
Cost of sales
|
|
|
10,028,279
|
|
|
|
7,083,872
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,045,350
|
|
|
|
4,783,892
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
312,464
|
|
|
|
411,934
|
|
Selling, general and administrative
|
|
|
3,630,328
|
|
|
|
2,836,361
|
|
Amortization of intangible assets
|
|
|
366,450
|
|
|
|
356,590
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,309,242
|
|
|
|
3,604,885
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,736,108
|
|
|
|
1,179,007
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
59,774
|
|
|
|
86,387
|
|
Interest expense
|
|
|
(276,846
|
)
|
|
|
(227,847
|
)
|
Gain on sale of assets
|
|
|
44,749
|
|
|
|
|
|
Other (expense) income
|
|
|
(67,665
|
)
|
|
|
32,830
|
|
|
|
|
|
|
|
|
|
|
Total other (expense)
|
|
|
(239,988
|
)
|
|
|
(108,630
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
1,496,120
|
|
|
|
1,070,377
|
|
Provision for income taxes
|
|
|
692,867
|
|
|
|
480,824
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
803,253
|
|
|
$
|
589,553
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.16
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,874,142
|
|
|
|
4,626,732
|
|
Diluted
|
|
|
4,910,823
|
|
|
|
4,883,862
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Par
Value
|
|
Paid-In
Capital
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Total
|
|
Balance at March 31, 2007
|
|
5,025,457
|
|
$
|
50,255
|
|
$
|
8,541,274
|
|
$
|
10,912,458
|
|
|
$
|
(1,527,014
|
)
|
|
$
|
17,976,973
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
84,625
|
|
|
846
|
|
|
268,019
|
|
|
|
|
|
|
|
|
|
|
268,865
|
|
Issuance of common stock for MICA acquisition
|
|
248,135
|
|
|
2,481
|
|
|
1,997,487
|
|
|
|
|
|
|
|
|
|
|
1,999,968
|
|
Stock based compensation
|
|
|
|
|
|
|
|
148,972
|
|
|
|
|
|
|
|
|
|
|
148,972
|
|
Cumulative effect of the recognition of uncertain income tax positions
|
|
|
|
|
|
|
|
|
|
|
(96,443
|
)
|
|
|
|
|
|
|
(96,443
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(205,185
|
)
|
|
|
(205,185
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
185,094
|
|
|
|
|
|
|
|
185,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007
|
|
5,358,217
|
|
$
|
53,582
|
|
$
|
10,955,752
|
|
$
|
11,001,109
|
|
|
$
|
(1,732,199
|
)
|
|
$
|
20,278,244
|
|
Stock based compensation
|
|
|
|
|
|
|
|
127,541
|
|
|
|
|
|
|
|
|
|
|
127,541
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
618,159
|
|
|
|
|
|
|
|
618,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
5,358,217
|
|
$
|
53,582
|
|
$
|
11,083,293
|
|
$
|
11,619,268
|
|
|
$
|
(1,732,199
|
)
|
|
$
|
21,023,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
803,253
|
|
|
$
|
589,553
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
850,511
|
|
|
|
814,027
|
|
Stock-based compensation
|
|
|
276,513
|
|
|
|
338,236
|
|
Unrealized gain from marketable securities
|
|
|
|
|
|
|
(17,436
|
)
|
Net gain on sale of assets
|
|
|
(44,749
|
)
|
|
|
|
|
Provision for allowances on accounts receivable
|
|
|
53,256
|
|
|
|
(8,926
|
)
|
Provision for inventory obsolescence and losses
|
|
|
202,424
|
|
|
|
197,384
|
|
Non-cash charges for options issued for services
|
|
|
|
|
|
|
7,480
|
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,355,142
|
)
|
|
|
1,409,523
|
|
Inventories
|
|
|
(139,332
|
)
|
|
|
(347,771
|
)
|
Other long term assets
|
|
|
97,276
|
|
|
|
|
|
Income taxes payable
|
|
|
|
|
|
|
(1,008,901
|
)
|
Prepaid expenses, other current assets, and other assets
|
|
|
57,125
|
|
|
|
(145,956
|
)
|
Accounts payable
|
|
|
(315,217
|
)
|
|
|
(221,024
|
)
|
Accrued expenses and deferred revenue
|
|
|
134,626
|
|
|
|
(739,419
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
620,544
|
|
|
|
866,770
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by investing activities
|
|
|
|
|
|
|
|
|
Sale of building
|
|
|
461,898
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(500,000
|
)
|
|
|
(500,000
|
)
|
Purchase of equipment
|
|
|
(482,612
|
)
|
|
|
(451,549
|
)
|
Additional cash paid for Stealth acquisition
|
|
|
(1,500,000
|
)
|
|
|
(92,455
|
)
|
Cash paid for MICA acquisition, net of cash acquired
|
|
|
(3,112,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,133,528
|
)
|
|
|
(1,044,004
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities:
|
|
|
|
|
|
|
|
|
Repayment of the line of credit
|
|
|
(356,379
|
)
|
|
|
(475,972
|
)
|
Proceeds from line of credit
|
|
|
728,528
|
|
|
|
|
|
Repayments on mortgages and term loan
|
|
|
(701,415
|
)
|
|
|
(427,400
|
)
|
Repayments of MICA debt
|
|
|
(646,820
|
)
|
|
|
|
|
Repayments of capital leases
|
|
|
(1,510
|
)
|
|
|
(11,053
|
)
|
Purchase of treasury stock
|
|
|
(205,185
|
)
|
|
|
|
|
Proceeds from the issuance of common stock
|
|
|
268,865
|
|
|
|
212,559
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(913,916
|
)
|
|
|
(701,866
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(5,426,900
|
)
|
|
|
(879,100
|
)
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
7,058,524
|
|
|
|
5,266,580
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,631,624
|
|
|
$
|
4,387,480
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
128,999
|
|
|
$
|
226,526
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
737,000
|
|
|
$
|
1,600,228
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Shares issued to MICA stockholders
|
|
$
|
1,999,968
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q. It is suggested that these consolidated condensed financial statements be read in conjunction with the Companys Annual Report on Form 10-KSB for its fiscal year ended March 31, 2007. In the
opinion of management, the statements contain all adjustments, including normal recurring adjustments necessary in order to present fairly the financial position as of September 30, 2007, the results of operations for the three and six months
ended September 30, 2007 and 2006, and the cash flows for the six months ended September 30, 2007 and 2006.
The results of
operations for the three and six months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year ended March 31, 2008.
2. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summary of
operations and basis of consolidation
Micronetics, Inc. and subsidiaries (collectively the Company or Micronetics) are engaged in the design, development, manufacturing and marketing of a broad range of high
performance wireless components and test equipment used in cellular, microwave, satellite, radar and communication systems around the world.
The consolidated financial statements include the accounts of Micronetics, Inc. (Micronetics) and its wholly-owned subsidiaries, Microwave & Video Systems, Inc. (MVS), Enon Microwave, Inc.
(Enon), Microwave Concepts, Inc. (MicroCon) Stealth Microwave, Inc. (Stealth) and MICA Microwave Corporation (MICA). The operating results of MICA have been included in the Companys consolidated
financial statements since June 5, 2007, the date of acquisition (See Note 3). All material intercompany balances and transactions have been eliminated in consolidation.
Use of estimates
US generally accepted accounting principles (GAAP) 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 revenue and expenses during the reporting period. Estimates and judgments include
revenue recognition, assumptions used in stock option and goodwill valuations, reserves for accounts receivable and inventories, useful lives of property, plant and equipment, purchase price allocation, intangibles, accrued liabilities, and deferred
income taxes and various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from those estimates.
Marketable securities
The Companys investments in marketable securities are classified as available for sale and are reported at fair value in the Companys consolidated balance
sheets, with net unrealized holding gains or losses recorded in the statement of income.
Revenue recognition
The Company
generates revenue from the sale of products, technology development, and licensing. Revenue is recognized when persuasive evidence of an arrangement exists, delivery of product has occurred or services have been rendered, the price to the customer
is fixed or determinable, collection is reasonably assured, and no future services are required. The Companys products are primarily hardware components, and to a lesser extent bundled hardware components and software, that are delivered to
original equipment manufacturers (OEMs) of telecommunication and networking products who are considered to be end users.
The Company sells
its products using a direct sales force and sales representatives. Contracts with customers do not include product return rights or price protection. The estimated costs of product warranties are accrued based on historical experience at the time
the revenue is recognized. Unless customers purchase an extended warranty, Micronetics offers a one-year warranty.
Recent accounting
pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement
No. 109
(FIN No. 48). FIN No. 48 provides guidance with respect to the recognition and measurement in the financial statements of uncertain tax positions taken or expected to be taken in a tax return, and also
provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN No. 48 in the first quarter of Fiscal 2008. The adoption of FIN
No. 48 resulted in an adjustment for unrecognized tax benefits of $96,443.
8
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(SFAS 157)
,
which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective in
the first quarter of Fiscal 2009. The Company is currently evaluating the effect of this statement on its consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,
The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
(SFAS 159)
. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted,
provided the Company also elects to apply the provisions of SFAS 157. The Company is currently evaluating the effect that the adoption of SFAS 159 will have on its consolidated results of operations and financial condition.
3. ACQUISITION
On June 5, 2007, the Company
entered into an Agreement of Merger and Plan of Reorganization (the Merger Agreement) with MICA, a California corporation whereby MICA became a wholly-owned subsidiary of Micronetics. Pursuant to the terms and conditions of the Merger
Agreement, the Company acquired all of the common stock of MICA for $3.0 million in cash and $2.0 million in shares of Micronetics common stock (248,135 shares), subject to a post-closing adjustment based upon MICAs net worth on the
closing date.
The acquisition of MICA provides a broader range of RF/Microwave products, including high performance mixers and ferrites to
the Company, and will provide the Company with further integrated microwave sub-systems and systems solutions.
The following table
summarizes the preliminary fair value assigned to the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
(Unaudited)
(in thousands)
|
|
Cash and accounts receivable
|
|
$
|
773
|
|
Inventory
|
|
|
1,308
|
|
Property, plant and equipment
|
|
|
483
|
|
Other assets
|
|
|
41
|
|
Development technology drawings
|
|
|
220
|
|
Customer relationships
|
|
|
1,180
|
|
Order backlog
|
|
|
90
|
|
Trade name
|
|
|
260
|
|
Goodwill
|
|
|
2,942
|
|
Debt
|
|
|
(647
|
)
|
Deferred taxes
|
|
|
101
|
|
Deferred taxes on acquired intangible assets
|
|
|
(700
|
)
|
Income taxes payable
|
|
|
(137
|
)
|
Accounts payable and accrued expenses
|
|
|
(704
|
)
|
|
|
|
|
|
Subtotal
|
|
|
5,210
|
|
Less: cash assumed
|
|
|
(97
|
)
|
|
|
|
|
|
Net purchase price
|
|
$
|
5,113
|
|
|
|
|
|
|
The acquisition of MICA was accounted for as a purchase under SFAS No. 141, Business
Combinations. Accordingly, the operating results of MICA have been included in the Companys consolidated financial statements since the June 5, 2007 acquisition date. The Company estimated the useful lives of the acquired other
intangible assets to be one to ten years and has included them in intangible assets, net, in the accompanying consolidated balance sheet as of September 30, 2007. The values assigned to intangible assets were based on an independent appraisal.
The allocation of the purchase price is preliminary and may be subject to adjustments.
9
The following table sets forth certain pro forma results for the six months ended September 30, 2007
and 2006 if the acquisition of MICA had taken place on April 1, 2006:
|
|
|
|
|
|
|
|
|
Six Months Ended
(Unaudited)
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
|
(in thousands, except
earnings per share)
|
|
(in thousands, except
earnings per share)
|
Pro forma revenue
|
|
$
|
16,874
|
|
$
|
14,588
|
Pro forma net income (1)
|
|
$
|
811
|
|
$
|
671
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
$
|
0.14
|
Diluted
|
|
$
|
0.17
|
|
$
|
0.14
|
(1)
|
Amortization costs of approximately $92,000 related to the purchase price in 2007 were assessed to the 2006 income. Management believes that including these adjustments in the above
periods allow investors to better compare results in the future periods.
|
4. INVENTORIES, NET
At September 30, 2007 and March 31, 2007, inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
March 31, 2007
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Raw materials
|
|
$
|
4,819,627
|
|
|
$
|
4,072,116
|
|
Work in process
|
|
|
2,088,389
|
|
|
|
1,339,160
|
|
Finished goods
|
|
|
668,705
|
|
|
|
717,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,576,721
|
|
|
|
6,128,810
|
|
Less allowance for obsolescence
|
|
|
(782,543
|
)
|
|
|
(580,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,794,178
|
|
|
$
|
5,548,691
|
|
|
|
|
|
|
|
|
|
|
5. PROPERTY, PLANT AND EQUIPMENT, NET
At September 30, 2007 and March 31, 2007, property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
March 31, 2007
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Land
|
|
$
|
162,000
|
|
|
$
|
162,000
|
|
Buildings and leasehold improvements
|
|
|
1,105,746
|
|
|
|
1,555,106
|
|
Machinery and equipment
|
|
|
8,532,534
|
|
|
|
7,877,654
|
|
Furniture, fixtures and other
|
|
|
242,563
|
|
|
|
286,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,042,843
|
|
|
|
9,881,276
|
|
Less accumulated depreciation
|
|
|
(5,961,322
|
)
|
|
|
(5,863,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,081,521
|
|
|
$
|
4,017,465
|
|
|
|
|
|
|
|
|
|
|
In May 2007, the commercial condominium housing Micronetics Enon division was sold. The
proceeds from the sale were $461,898. The Company recorded a gain on the sale of the building of $69,609 in the quarter ended June 30, 2007.
10
6. INTANGIBLE ASSETS AND GOODWILL
The Companys finite-lived intangible assets include certain identifiable intangible assets acquired as a result of business combinations, including customer relationships, covenants not to compete, order
backlog, trade name and developed technology.
The following table presents details of the Companys finite-lived intangible assets as
of September 30, 2007 and March 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
(Unaudited)
|
|
March 31, 2007
(Audited)
|
Intangible Assets
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net
Value
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net
Value
|
Customer relationships (non-contractual)
|
|
$
|
4,130
|
|
$
|
1,013
|
|
$
|
3,117
|
|
$
|
2,950
|
|
$
|
761
|
|
$
|
2,189
|
Covenants not to compete
|
|
|
480
|
|
|
480
|
|
|
|
|
|
480
|
|
|
433
|
|
|
47
|
Order backlog
|
|
|
380
|
|
|
319
|
|
|
61
|
|
|
290
|
|
|
290
|
|
|
|
Trade name
|
|
|
260
|
|
|
8
|
|
|
252
|
|
|
|
|
|
|
|
|
|
Developed technology-drawings
|
|
|
390
|
|
|
92
|
|
|
298
|
|
|
170
|
|
|
62
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
$
|
5,640
|
|
$
|
1,912
|
|
$
|
3,728
|
|
$
|
3,890
|
|
$
|
1,546
|
|
$
|
2,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company amortizes intangible assets with finite lives over the estimated useful lives of the
respective assets. The following is a summary of estimated aggregate amortization expense for each of the five succeeding fiscal years:
|
|
|
|
|
|
(in thousands)
|
Remainder of 2008
|
|
$
|
368
|
2009
|
|
|
660
|
2010
|
|
|
643
|
2011
|
|
|
616
|
2012
|
|
|
618
|
Thereafter
|
|
|
823
|
|
|
|
|
Total
|
|
$
|
3,728
|
|
|
|
|
Changes in the carrying amount of goodwill at September 30, 2007 and March 31, 2007 are
as follows:
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
March 31, 2007
|
|
|
(Unaudited)
|
|
(Audited)
|
Balance at the beginning of the period
|
|
$
|
5,982,709
|
|
$
|
4,390,254
|
Acquisitions
|
|
|
2,941,616
|
|
|
|
Earnout payment
|
|
|
|
|
|
1,500,000
|
Purchase accounting adjustments
|
|
|
|
|
|
92,455
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
8,924,325
|
|
$
|
5,982,709
|
|
|
|
|
|
|
|
7. ACCRUED EXPENSES
At September 30, 2007 and March 31, 2007 accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
March 31, 2007
|
|
|
(Unaudited)
|
|
(Audited)
|
Unbilled payables
|
|
$
|
393,641
|
|
$
|
169,755
|
Professional fees
|
|
|
215,606
|
|
|
261,372
|
Payroll, benefits and related taxes
|
|
|
1,108,654
|
|
|
1,195,273
|
Warranty
|
|
|
96,499
|
|
|
100,178
|
Miscellaneous
|
|
|
488,789
|
|
|
1,615,787
|
|
|
|
|
|
|
|
|
|
$
|
2,303,189
|
|
$
|
3,342,365
|
|
|
|
|
|
|
|
11
Included in accrued payroll are bonuses of $412,192 and $572,951 at September 30, 2007 and
March 31, 2007. Miscellaneous accrued expenses at March 31, 2007 included $1.5 million in earnout payments due to the former stockholders of Stealth that was paid in April 2007.
8. LONG-TERM DEBT
At September 30, 2007 and
March 31, 2007 long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
March 31, 2007
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Term loan
|
|
|
6,175,000
|
|
|
|
6,500,000
|
|
Mortgage payable, MA
|
|
|
|
|
|
|
310,531
|
|
Mortgage payable, NH
|
|
|
198,443
|
|
|
|
264,076
|
|
Capital leases
|
|
|
6,460
|
|
|
|
8,222
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,379,903
|
|
|
|
7,082,829
|
|
Less current portion
|
|
|
(1,440,882
|
)
|
|
|
(1,449,443
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt net of current portion
|
|
$
|
4,939,021
|
|
|
$
|
5,633,386
|
|
|
|
|
|
|
|
|
|
|
Term Loan and Revolver
In March 2007, the Company entered into a credit facility which consists of a $6.5 million five year secured term loan and a $5.0 million three year revolving line of credit, which replaced the then existing $6.0
million term loan entered into in June 2005.
The Company entered into an interest rate swap agreement in April 2007 to mitigate interest
rate fluctuations on the term loan. At the end of each reporting period the Company records the current fair value of the interest rate swap on the balance sheet. Any unrealized gain or loss is charged to earnings.
The term loan is guaranteed by the Companys subsidiaries and secured by substantially all of the Companys assets. The term loan is payable in
quarterly principal installments of $325,000 plus accrued interest at the 3 Month LIBOR rate plus 1.8%, which at September 30, 2007 was 7.16%. The term loan expires in June 2012.
The revolving line of credit bears interest at the current 30 day LIBOR rate plus 1.8%, which at September 30, 2007 was 6.93%. The company had $4.6
million available under the line at September 30, 2007.
Under the terms of the term loan and the revolver, the Company is required to
maintain certain financial covenants on a quarterly and annual basis, including total funded debt to EBITDA not exceeding 2.25:1, minimum debt service coverage of 1.25:1, and minimum tangible net worth of $7.5 million. At September 30, 2007,
the Company was in compliance with all financial debt covenants.
Mortgage payable, NH
In February 2004, Micronetics refinanced the mortgage on its headquarters, entering into a new five-year mortgage payable for $630,000. The note bears
interest at 5.75% per annum and is payable in monthly installments, including interest, of $12,107. This loan is secured by the land and building of Micronetics headquarters.
Mortgage payable, MA
In March 2003, in connection with the purchase of a portion of a commercial
condominium housing Micronetics Enon division, Micronetics entered into a mortgage payable for $352,750. In May 2007, the commercial condominium was sold and the remaining mortgage was settled.
Capital leases
Commercial capital leases payable are reflected at
their present value based upon interest rates that range from 8.67% to 8.88% per annum, and are secured by the underlying assets. The assets are depreciated over their estimated useful lives.
9. STOCK- BASED COMPENSATION
On April 1, 2006, the Company
adopted the provisions of SFAS 123R, Share-Based Payment, a revision of SFAS 123, Accounting for Stock-Based Compensation and superseding Accounting Principles Board (APB) Opinion 25, Accounting for Stock
Issued to Employees. SFAS 123R requires the Company to recognize the cost of employee services received in exchange for grants issued under stock option and employee stock purchase plans, based on the fair value of the
12
awards, and recognized over the vesting period of the plans, using the modified-prospective transition method. Prior to April 1, 2006 the Company
measured employee stock-based compensation cost under the provisions of APB Opinion 25 as permitted by SFAS 123, Accounting for Stock-Based Compensation. APB Opinion 25 provided for compensation cost to be recognized over the vesting
period of the options based on the difference, if any, between the fair market value of the Companys stock and the option price on the grant date. As the Company only issued fixed term stock option grants at or above the quoted market price on
the date of grant, no compensation expense was recognized in the consolidated statements of income prior to April 1, 2006.
Under the
modified-prospective method, the Company recognized compensation expense in the financial statements issued subsequent to April 1, 2006 for all stock-based payments granted, modified or settled subsequent to April 1, 2006 as well as for
any awards that were granted prior to April 1, 2006 which were not fully vested as of that date. Compensation expense for those awards issued prior to April 1, 2006 was recognized using the fair values determined for the pro forma
disclosures on stock-based compensation. The amount of stock based compensation expense recognized on awards that have not fully vested excludes the compensation expense for vested options recognized in the pro forma disclosures for stock-based
compensation.
The following table summarizes the effects of stock-based compensation resulting from the application of SFAS
No. 123(R) for the three months ended September 30, 2007 and September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2007
(unaudited)
|
|
|
September 30, 2006
(unaudited)
|
|
Cost of sales
|
|
$
|
16,762
|
|
|
$
|
5,624
|
|
Selling, general and administrative
|
|
|
110,779
|
|
|
|
114,212
|
|
Research and development
|
|
|
|
|
|
|
51,406
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effect in income before taxes
|
|
|
127,541
|
|
|
|
171,242
|
|
Income taxes
|
|
|
(18,502
|
)
|
|
|
(31,022
|
)
|
|
|
|
|
|
|
|
|
|
Net stock-based compensation effect on basic earnings per common share
|
|
$
|
109,039
|
|
|
$
|
140,220
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effect on basic earnings per common share
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
Stock-based compensation effect on diluted earnings per common share
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
The following table summarizes the effects of stock-based compensation resulting from the
application of SFAS No. 123(R) for the six months ended September 30, 2007 and September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
September 30, 2007
(unaudited)
|
|
|
September 30, 2006
(unaudited)
|
|
Cost of sales
|
|
$
|
33,374
|
|
|
$
|
58,435
|
|
Selling, general and administrative
|
|
|
215,919
|
|
|
|
228,395
|
|
Research and development
|
|
|
27,220
|
|
|
|
51,406
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effect in income before taxes
|
|
|
276,513
|
|
|
|
338,236
|
|
Income taxes
|
|
|
(41,957
|
)
|
|
|
(57,490
|
)
|
|
|
|
|
|
|
|
|
|
Net stock-based compensation effect on basic earnings per common share
|
|
$
|
234,556
|
|
|
$
|
280,746
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effect on basic earnings per common share
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
Stock-based compensation effect on diluted earnings per common share
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
Unrecognized stock-based compensation expense related to the unvested options is approximately
$1.4 million, and will be recorded over the remaining vesting periods of one to ten years. This estimate is based on the number of unvested options currently outstanding and could change based on the number of options granted or forfeited in the
future.
In accordance with SFAS No. 123(R), the Company adjusts share-based compensation on an annual basis for changes to the
estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate for all expense amortization after April 1, 2006 will be recognized in the period the forfeiture estimate is
changed.
There were no options granted in the second quarter of Fiscal 2008 and Fiscal 2007. The fair value of options issued in the first
quarter of Fiscal 2008 was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions (unaudited):
13
|
|
|
|
|
|
September 30, 2007
|
|
Risk Free Interest Rate
|
|
4.98
|
%
|
Expected Life
|
|
3.97 years
|
|
Expected Volatility
|
|
60
|
%
|
Expected Dividend Yield
|
|
0
|
%
|
The per share weighted average fair value of stock options granted for the six months ended
September 30, 2007 was $4.08.
At September 30, 2007, the Company had three stock option plans under which grants were
outstanding. The stock options outstanding are for grants issued under the Companys 1996 Stock Option Plan, the 2003 Stock Option Plan and the 2006 Equity Incentive Plan.
The 1996 Stock Option Plan
During the fiscal year ended March 31, 1997, the Company adopted a
stock option plan, entitled the 1996 Stock Option Plan (the 1996 Plan), under which the Company may grant options to purchase up to 300,000 shares of common stock. During the fiscal year ended March 31, 2002, the
Board of Directors amended the 1996 Plan to increase the number of shares of common stock that may be granted under the Plan to 900,000. As of September 30, 2007, there were 2,500 options outstanding under the 1996 Plan. In 2003, the Board of
Directors determined that it would not issue any new option awards under the 1996 Plan.
The 2003 Stock Incentive Plan
During the fiscal year ended March 31, 2004, the Company adopted a stock option plan entitled The 2003 Stock Incentive Plan (the
2003 Plan) under which the Company may grant options to purchase up to 900,000 shares of common stock plus any shares of common stock remaining available for issuance as of July 22, 2003 under the 1996 Plan. In July 2006 the
Board of Directors determined that it would not issue any new option awards under the 2003 Plan. As of September 30, 2007, there were 511,825 options outstanding under the 2003 Plan.
The 2006 Equity Incentive Plan
During the fiscal
year ending March 31, 2007, the Company adopted a stock option plan entitled The 2006 Equity Incentive Plan (the 2006 Plan) under which the Company may grant options to purchase up to 1,000,000 shares of common stock. As of
September 30, 2007 there were 236,000 options outstanding under the 2006 Plan.
The 1996 Plan, the 2003 Plan and the 2006 Plan are
administered by the Board of Directors or a Committee of the Board of Directors which has the authority to determine the persons to whom the options may be granted, the number of shares of common stock to be covered by each option grant, and the
terms and provisions of each option grant. Options granted under the 1996 Plan, the 2003 Plan and the 2006 Plan may be incentive stock options or non-qualified options, and may be issued to employees, consultants, advisors and directors of the
Company and its subsidiaries. The exercise price of options granted under the 1996 Plan, the 2003 Plan and the 2006 Plan may not be less than the fair market value of the shares of common stock on the date of grant, and may not be granted more than
ten years from the date of adoption of each respective plan or exercised more than ten years from the date of grant.
The following table
sets forth the Companys stock option activity during the six months ended September 30, 2007 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Underlying
options
|
|
|
Weighted
Average
Exercise
price
|
|
Weighted
Average
Remaining
Contractual
life
|
|
Aggregate
Intrinsic
value
|
Outstanding at March 31, 2007
|
|
796,825
|
|
|
$
|
7.29
|
|
|
|
|
|
Granted
|
|
178,000
|
|
|
|
8.06
|
|
|
|
|
|
Exercised
|
|
(84,625
|
)
|
|
|
3.18
|
|
|
|
|
|
Canceled
|
|
(139,875
|
)
|
|
|
7.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007
|
|
750,325
|
|
|
$
|
7.83
|
|
4.57
|
|
$
|
1,223,214
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007
|
|
265,600
|
|
|
$
|
7.63
|
|
2.19
|
|
$
|
486,334
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The following table sets forth the status of the Companys non-vested stock options as of
September 30, 2007 (unaudited):
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted-Average
Grant-Date
Fair
Value
|
Non-vested as of March 31, 2007
|
|
481,025
|
|
|
$
|
3.48
|
Granted
|
|
178,000
|
|
|
|
4.08
|
Forfeited
|
|
(72,250
|
)
|
|
|
3.26
|
Vested
|
|
(102,050
|
)
|
|
|
3.28
|
|
|
|
|
|
|
|
Non-vested as of September 30, 2007
|
|
484,725
|
|
|
$
|
3.77
|
|
|
|
|
|
|
|
During the year ended March 31, 2004, the Company granted options to purchase an aggregate of
8,000 shares of common stock to consultants for services to be provided. These options are exercisable at $7.12 per share, and vest 25% per year on each anniversary date, with an expiration of five years from the date of grant for all options.
The Company has valued these at their fair value on the date of grant using the Black-Scholes option-pricing model. The consultants have since ceased performance of services. During the fiscal year ended March 31, 2007, the Company expensed the
remaining unamortized amount of $5,940.
10. INCOME TAXES
The Companys effective tax rate was 43% and 74% for the three months ended September 30, 2007 and 2006 as compared to 46% and 45% for the six months ended September 30, 2007 and 2006. The decrease for
the quarter ended September 30, 2007 is primarily a result of the effect of incentive stock option compensation expense in relation to pre-tax income.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109
(FIN No. 48), which clarifies the accounting for uncertainty in income taxes by prescribing the minimum recognition threshold and measurement requirements a tax position must meet before recognized a benefit in the financial
statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting for interim periods and disclosures for uncertain tax positions. FIN No. 48 is effective for fiscal years
beginning after December 15, 2006.
The Companys adoption of FIN No. 48 on April 1, 2007 resulted in the recognition
of $96,443 of previously unrecognized tax benefits which, in accordance with FIN No. 48, the cumulative amount was accounted for as an adjustment to the April 1, 2007 retained earnings balance in the first quarter of Fiscal 2008. In the
second quarter of Fiscal 2008 the liability for unrecognized tax benefits increased by $2,800, primarily as a result of additional accrued interest and penalties in the period. The Companys policy is to recognize interest and penalties accrued
on any unrecognized tax positions as a component of income tax expense.
As a result of the adoption of FIN No. 48, the Company has
$99,243 of unrecognized tax benefits, substantially all of which, if recognized, would be recorded as a component of the provision for income taxes.
As of April 1, 2007, the Company is subject to tax in the U.S. Federal and various state jurisdictions. The Company is generally open to examination for tax years 2003 through 2006.
11. EARNINGS PER SHARE
Basic earnings per share is computed based on
the net income for each period divided by the weighted average actual shares outstanding during the period. Diluted earnings per share is computed based on the net income per period divided by the weighted average number of common shares and common
equivalent shares outstanding during each period. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding stock options. The computations of basic and diluted EPS for the three months ended
September 30, 2007 and 2006 (unaudited) are:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30, 2007
|
|
September 30, 2006
|
Net income
|
|
$
|
618,159
|
|
$
|
41,280
|
Weighted average shares outstanding
|
|
|
4,974,742
|
|
|
4,642,041
|
Basic earnings per share
|
|
$
|
0.12
|
|
$
|
0.01
|
Common stock equivalents
|
|
|
37,784
|
|
|
166,221
|
Weighted average common and common equivalent shares outstanding
|
|
|
5,012,526
|
|
|
4,808,262
|
Diluted earnings per share
|
|
$
|
0.12
|
|
$
|
0.01
|
15
The computations of basic and diluted EPS for the six months ended September 30, 2007 and 2006
(unaudited) are:
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
September 30, 2007
|
|
September 30, 2006
|
Net income
|
|
$
|
803,253
|
|
$
|
589,553
|
Weighted average shares outstanding
|
|
|
4,874,142
|
|
|
4,626,732
|
Basic earnings per share
|
|
$
|
0.16
|
|
$
|
0.13
|
Common stock equivalents
|
|
|
36,681
|
|
|
257,130
|
Weighted average common and common equivalent shares outstanding
|
|
|
4,910,823
|
|
|
4,883,862
|
Diluted earnings per share
|
|
$
|
0.16
|
|
$
|
0.12
|
16
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
|
Forward Looking Statements
Certain statements in this report contain words such as
could, expects, may, anticipates, believes, intends, estimates, plans, envisions, and other similar language and are considered
forward-looking statements. These statements are based on our expectations, estimates, forecasts and projections about the operating environment, economies and markets in which we operate and are merely our current predictions of future events. In
addition, other written or oral statements which are considered forward-looking may be made by us or others on our behalf. These statements are subject to important risks, uncertainties and assumptions, which are difficult to predict and the actual
outcome may be materially different. Some of the factors which could cause results or events to differ from current expectations include, but are not limited to, the factors described below. We assume no obligation to update our forward-looking
statements to reflect new information or developments.
An investment in our common stock involves a high degree of risk. We urge readers
to review carefully the risk factors described below and in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov. If any of these risks, or other risks not presently known to us or
that we currently believe are not significant, develops into an actual event, then our business, financial condition and results of operations could be adversely affected. If that happens, the market price of our common stock could decline.
Critical Accounting Policies
The discussion and analysis of our financial condition and the results of operations are based on our consolidated financial statements and the data used to prepare them. Our consolidated financial statements have been prepared based on
accounting principles generally accepted in the United States of America. On an on-going basis, we evaluate our judgments and estimates including those related to allowances for doubtful accounts and sales returns, inventory valuation and
obsolescence, long-lived assets, business combination purchase price allocation and goodwill impairment, stock-based compensation, warranty obligations, and the valuation allowance on our deferred tax asset. These estimates and judgments are based
on historical experience and various other assumptions that are believed to be reasonable under current business conditions and circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition And Product Warranties
We generate revenue from the sale of products, technology development, and licensing. Revenue is recognized when persuasive evidence of a sales arrangement exists, delivery of product has occurred or services have been rendered, the price
to the customer is fixed or determinable, collection is reasonably assured, and no future services are required. Our products are primarily hardware components, and to a lesser extent bundled hardware components and software, that are delivered to
original equipment manufacturers (OEMs) of telecommunication and networking products who are considered to be end users.
Advance payments
received from customers prior to product shipment are recorded as deferred revenue.
We record amounts for shipping and handling fees
billed to customers as revenue. The cost of shipping and handling fees are recorded as a component of cost of sales.
We sell our products
using a direct sales force and sales representatives. Contracts with customers do not include product return rights or price protection. The estimated cost of product warranties are accrued based on historical experience at the time the revenue is
recognized. Unless customers purchase an extended warranty, Micronetics offers a one-year warranty.
Accounts Receivable, Net of
Allowance For Doubtful Accounts
Accounts receivable are customer obligations due under normal trade terms, carried at face value less
an allowance for doubtful accounts. We regularly monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon the review of the aging of outstanding accounts, loss experiences, factors related
to specific customers ability to pay, current economic trends and any specific customer collection issues that have been identified. While such credit losses have historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same credit loss rates that have been experienced in the past. We write off accounts receivable against the allowance in the period that a receivable is determined to be uncollectible.
17
Inventories
Inventories are valued at the lower of cost or market, based on the first in, first out method. Inventory items are reviewed regularly for excess and obsolete inventory based on an estimated forecast of product
demand. Inventories that are in excess of future requirements are written down to their estimated value based upon projected demand. Demand for our products can be forecasted based on current backlog, customer options to reorder under existing
contracts, and the need to retrofit older units and parts needed for general repairs. Although management makes every effort to insure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or
technological developments could have an impact on the level of obsolete material in our inventories and operating results could be affected accordingly.
Business Combinations
We are required to allocate the purchase price of an acquired company based on
the estimated fair values of assets acquired and liabilities assumed, determined as of the date of acquisition. Micronetics employs independent valuation specialists to determine the fair values of identifiable intangible assets in order to
determine the portion of the purchase price allocable to these assets. The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill.
Valuation Of Long-Lived Assets, Goodwill And Intangible Assets And Their Impairment
We assess the need to record impairment losses on long-lived assets, including fixed assets, goodwill and other intangible assets, to be held and used in
operations, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, we estimate the
undiscounted future cash flows to result from the use of the asset and its ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value, we would recognize an impairment loss, measured as the amount by which the
carrying value exceeds the fair value of the asset. Assets to be disposed of are carried at their lower of the carrying value or fair value less costs to sell. Additionally, goodwill is assessed for impairment on an annual basis in accordance with
the provisions of SFAS 142. We completed the annual impairment test for FY 2007 in the fiscal fourth quarter and determined that no impairment exists.
On an on-going basis, management reviews the value and period of amortization or depreciation of long-lived assets. During this review, we evaluate the significant assumptions used in determining the original cost of
long- lived assets. Although the assumptions may vary from transaction to transaction, they generally include revenue growth, operating results, cash flows and other indicators of value. Management then determines whether there has been an
impairment of the value of long-lived assets based upon events or circumstances that have occurred since the acquisition. The impairment policy is consistently applied in evaluating impairment for each of our wholly-owned subsidiaries and
investments.
Stock Compensation Expense
Effective April 1, 2006, we account for stock-based compensation in accordance with the fair value recognition provision of FAS 123R. We use the Black-Scholes option-pricing model, which requires the input of
subjective assumptions. These assumptions include estimates of the length of time employees will retain their vested stock options before exercising them, the volatility of our common stock price over the expected term and the number of options that
will not vest. Changes in these assumptions could materially affect the estimate of fair value stock-based compensation and consequently, the related amount recognized on the consolidated statements of income.
Income Taxes And Valuation Allowances
We recognize income taxes under the asset and liability method. Under this method deferred tax assets and liabilities are established for temporary differences. Temporary differences occur when income and expenses are recognized in
different periods for financial reporting purposes and for purposes for computing income taxes currently payable. A valuation allowance is provided when it is more likely than not that some portion, or all, of the deferred tax asset will not be
realized. No valuation allowance was required at September 30, 2007 and 2006.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation (FIN) No. 48,
Accounting for
Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109
(FIN No. 48). FIN No. 48 provides guidance with respect to the recognition and measurement in the financial statements of uncertain tax
positions taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted the provisions of FIN No. 48 in
the first quarter of Fiscal 2008. The adoption of FIN No. 48 resulted in an adjustment for unrecognized tax benefits of $96,443 to the April 1, 2007 retained earnings balance.
18
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(SFAS 157)
,
which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective in
the first quarter of Fiscal 2009. We are currently evaluating the effect of this statement on our consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,
The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
(SFAS
159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted, provided the
Company also elects to apply the provisions of SFAS 157. We are currently evaluating the effect that the adoption of SFAS 159 will have on our consolidated results of operations and financial condition.
Acquisition
On June 5, 2007, we entered
into an Agreement of Merger and Plan of Reorganization (the Merger Agreement with MICA Microwave Corporation (MICA), a California corporation, whereby MICA became a wholly-owned subsidiary of Micronetics. Pursuant to the
terms and conditions of the Merger Agreement, the holders of MICA common stock were paid $3.0 million in cash and $2.0 million in shares of Micronetics common stock, subject to a post-closing adjustment based upon MICAs net worth on the
closing date.
The acquisition of MICA provides us with a broader range of RF/Microwave products, including high performance mixers and
ferrites, and will provide us with further integrated microwave sub-systems and systems solutions.
Overview
Micronetics manufactures microwave and radio frequency (RF) components and integrated multifunction subassemblies used in a variety of commercial
wireless, defense and aerospace products, including satellite communications, electronic warfare and electronic counter-measures. We also manufacture and design test equipment, subassemblies and components that are used to test the strength,
durability and integrity of signals in communications equipment. Our products are embedded in a variety of radars, electronic warfare systems, guidance systems, wireless telecommunications and satellite equipment. Our microwave devices are used on
subassemblies and integrated systems in addition to being sold on a component basis.
Micronetics operates through its five wholly owned
subsidiaries, Enon, Micro-Con, MVS, Stealth and MICA. These subsidiaries, along with Micronetics NH based facility, manufacture products in three major product categories: RF Microwave Components, Microwave Integrated Multifunction
Subassemblies and Test Solutions.
We sell primarily to original equipment manufacturers of communications equipment in either the
commercial or the defense electronic marketplace. Many of those customers are prime contractors for defense work or larger Fortune 500 companies with world-wide operations.
A key driver of demand for Micronetics products is the pervasive transformation of information from the analog domain to the digital domain.
Because digital technologies require greater degrees of precision and rely more on miniature circuits than analog technologies, testing is critical for the rapid commercialization of reliable products necessitated by broadband and wireless
communication technologies. As the speed to market challenges increase, larger companies are relying increasingly on other companies to manufacture a module or an integrated subassembly to perform such testing. This module or subassembly is then
assembled by the larger company into an integrated piece of equipment and sold to a customer. Micronetics has been seeking to capitalize on this trend by increasing its capability of manufacturing integrated subassemblies. Our goal is to leverage
our high power and noise technology to continue to be the most reliable microwave subsystem supplier in the merchant marketplace.
19
Results of Operations
The Consolidated Statements of Income for the three and six months ended September 30, 2007 include the operations of MICA from the acquisition date of June 5, 2007.
Three Months Ended September 30, 2007 compared to September 30, 2006
Net sales
Net sales for the three months ended September 30, 2007 (Q2 FY 08) were $9,762,964, an increase of $4,701,638, or 93% as compared to
$5,061,326 for the three months ended September 30, 2006 (Q2 FY 07). The increase in net sales for Q2 FY 08 is primarily attributable to an increase in net sales of high performance power amplifiers to the commercial market of $3.0
million and $1.3 million in sales of high performance mixers and ferrites from MICA. As a result, commercial and defense revenues were 74% and 26%, respectively, of the total revenues for Q2 FY 08, as compared to 67% and 33%, respectively, for Q2 FY
07.
Gross profit margin
Gross profit
as a percent of sales increased for Q2 FY 08 to 37% from 35% for Q2 FY 07. The increase is primarily attributable to the volume increase in net sales of high performance power amplifiers, offset in part by lower average selling prices of amplifiers
to a major customer and lower margins on our ferrite products.
Research and development
Research and development (R&D) expense decreased $65,831 for Q2 FY 08 as compared to Q2 FY 07. The decrease is primarily due to the decrease in
R&D salaries and stock-based compensation associated with Stealth. R&D expenses decreased to 1.6% of net sales for Q2 FY 08 as compared to 4% of Q2 FY 07.
Selling, general and administrative
Selling, general and administrative (SG&A) expense decreased to 20% of net sales
for Q2 FY 08 from 22% for Q2 FY 07. SG&A expenses were $1,991,673, an increase of $855,133 or 75%, for the three months ended September 30, 2007, as compared to $1,136,540 for September 30, 2006. The overall increase in spending was
primarily attributable to increases in salaries and benefits of $225,000, bonus expense of $198,000, audit and professional fees of $77,000, commissions of $32,000 and the inclusion of $286,000 in MICA SG&A expenses.
Amortization of intangible assets
Amortization
expense was $183,357 for Q2 FY 08 as compared to $178,295 for Q2 FY 07.
Interest expense
Interest expense increased by $50,085 or 45% for Q2 FY 08 as compared to Q2 FY 07, primarily a result of the effect of incentive stock option compensation
expense in relation to pre-tax income.
Provision for income taxes
Our effective tax rate was 43% for Q2 FY 08 as compared to 74% for Q2 FY 07. The decrease in the effective tax rate for the quarter ended September 30, 2007 is primarily due to an increase in tax benefits from
stock-based compensation expense as compared to the quarter ended September 30, 2006.
In July 2006, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109
(FIN No. 48), which clarifies the accounting for
uncertainty in income taxes by prescribing the minimum recognition threshold and measurement requirements a tax position must meet before recognized a benefit in the financial statements. FIN No. 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting for interim periods and disclosures for uncertain tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006.
Our adoption FIN No. 48 on April 1, 2007 resulted in the recognition of $96,443 of previously unrecognized tax benefits which, in accordance
with FIN No. 48, the cumulative amount was accounted for as an adjustment to the April 1, 2007 balance of retained earnings. In the second quarter of Fiscal 2008 the liability for unrecognized tax benefits increased by $2,800, primarily as
a result of additional accrued interest and penalties in the period. Our policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense, if any.
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As a result of the adoption of FIN No. 48, the Company has $99,243 of unrecognized tax benefits,
substantially all of which, if recognized, would be recorded as a component of the provision for income taxes.
As of April 1, 2007,
the Company is subject to tax in the U.S. Federal and various state jurisdictions. The Company is generally open to examination for tax years 2003 through 2006.
Six Months Ended September 30, 2007 compared to September 30, 2006
Net sales
Net sales for the six months ended September 30, 2007 were $16,073,629, an increase of $4,205,865, or 35% as compared to $11,867,764 for the six
months ended September 30, 2006. The increase in net sales for the six months ended September 30, 2007 is primarily attributable to a increase in net sales of high performance power amplifiers to the commercial market of $2.2 million and
$1.9 million in sales of high performance mixers and ferrites from MICA. As a result, commercial and defense revenues were 72% and 28%, respectively, as a percent of the total revenues for the six months ended September 30, 2007, as compared to
65% and 35%, respectively, for the six months ended September 30, 2006.
Gross profit margin
Gross profit as a percent of sales decreased for the six months ended September 30, 2007 to 38% from 40% for the six months ended September 30,
2006. The decrease is primarily attributable to the lower average selling prices of power amplifiers to a major customer, and lower margins on our ferrite products.
Research and development
Research and development (R&D) expense decreased $99,470 for the six
months ended September 30, 2007 as compared to the six months ended September 30, 2006. R&D expenses decreased from 3% of net sales for the six months ended September 30, 2006 to 2% of net sales for the six months ended
September 30, 2007.
Selling, general and administrative
Selling, general and administrative (SG&A) expense decreased to 23% of net sales for the six months ended September 30, 2007 from 24% for the six months ended September 30, 2006. SG&A expenses were
$3,630,328 an increase of $793,967 or 28%, for the six months ended September 30, 2007, as compared to $2,836,361 for the six months ended September 30, 2006. The overall increase in spending was primarily attributable to increases in
salaries and benefits of $284,000, bonus expense of $43,000, travel and entertainment expenses of $45,000 and the inclusion of $375,000 in MICA selling expenses.
Amortization of intangible assets
Amortization expense was $366,450 for the six months ended September 30, 2007 as
compared to $356,590 for the six months ended September 30, 2006.
Interest expense
Interest expense increased $48,999 or 22% to $276,846 for the six months ended September 30, 2007 as compared to $227,847 for the six months ended
September 30, 2006.
Provision for income taxes
Our effective tax rate was 46% for the six months ended September 30, 2007 as compared to 45% for the six months ended September 30, 2006.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income
TaxesAn Interpretation of FASB Statement No. 109
(FIN No. 48), which clarifies the accounting for uncertainty in income taxes by prescribing the minimum recognition threshold and measurement requirements a tax
position must meet before recognized a benefit in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting for interim periods and disclosures for uncertain
tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006.
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We adopted FIN No. 48 on April 1, 2007 resulting in the recognition of $96,443 of previously
unrecognized tax benefits which, in accordance with FIN No. 48, the cumulative amount was accounted for as an adjustment to the April 1, 2007 balance of retained earnings. The FIN No. 48 analysis for the six months ended
September 30, 2007 resulted in an additional $2,800 in unrecognized tax benefit.
Following the adoption of FIN No. 48, we had
$99,243 of unrecognized tax benefits, substantially all of which, if recognized, would be recorded as a component of the provision for income taxes. There have been no significant changes to these amounts during the six months ended
September 30, 2007.
Our policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of
income tax expense, if any. No material amount of such expense was recognized during the six months ended September 30, 2007.
Liquidity and
Capital Resources
We finance our operating and investment requirements primarily through cash flow and borrowings. We had cash and
working capital at September 30, 2007 of $1,631,624 and $10,685,765, respectively, as compared with cash and working capital of $7,058,524 and $11,836,943, respectively at March 31, 2007. Our current ratio was approximately 2.9 to 1 at
September 30, 2007, as compared to 3.2 to 1 at March 31, 2007. The reduction in cash was primarily related to the cash used in connection with the acquisition of MICA, and the increase in working capital other than cash.
Net cash provided by operating activities was $620,544 during the six months ended September 30, 2007 as compared to net cash provided by operating
activities of $866,770 during the six months ended September 30, 2006. Cash provided by operating activities resulted from net income of $803,253, adjusted by non-cash charges for depreciation and amortization of $850,511, stock-based
compensation of $276,513, and a decrease in working capital changes of $1,520,664. Working capital changes primarily resulted from an increase in accounts receivable of $1,355,142 and a decrease in accounts payable of $315,217, offset by an increase
in accrued expenses of $134,626. Accounts receivable increased primarily due to strong sales in the six months ended September 30, 2007.
Net cash used in investing activities was $5,133,528 during the six months ended September 30, 2007 as compared to $1,044,004 during the six months ended September 30, 2006, primarily as a result of the acquisition of MICA of
$3,112,814 and the final earnout payment of $1.5 million to the former stockholders of Stealth in Q1 FY 08. Investing activities incurred by the Company during the six months ended September 30, 2007, also included $482,612 of capital
expenditures and $500,000 of marketable securities offset by $461,898 related to the sale of the Enon condominium in Q1 FY 08.
Net cash
used in financing activities was $913,916 during the six months ended September 30, 2007 as compared to $701,866 during the six months ended September 30, 2006 primarily due to repayments on the mortgages, line of credit and term loans in
the six months ended September 30, 2007.
Term Loan and Revolver
In March 2007, we entered into a credit facility consisting of a $6.5 million five year secured term loan and a $5.0 million three year revolving line of credit, which replaced our existing $6.0 million term loan
entered into in June 2005.
The Company entered into an interest rate swap agreement in April 2007 to mitigate interest rate fluctuations
on the term loan. At the end of each reporting period the Company records the current fair value of the interest rate swap on the balance sheet. Any unrealized gain or loss is charged to earnings.
The term loan is guaranteed by the Companys subsidiaries and secured by substantially all of our assets. The term loan is payable in quarterly
principal installments of $325,000 plus accrued interest at the 3 month LIBOR rate plus 1.8%, which at September 30, 2007 was 7.16%. The term loan expires in June 2012.
The revolving line of credit bears interest at the current 30 day LIBOR rate plus 1.8%, which at September 30, 2007 was 6.93%. We had
$4.6 million available under the line at September 30, 2007.
Under the terms of the term loan and the revolver, we are required
to maintain certain financial covenants on a quarterly and annual basis, including total funded debt to EBITDA not exceeding 2.25:1, minimum debt service coverage of 1.25:1, and minimum tangible net worth of $7.5 million. At September 30, 2007,
we were in compliance with all financial debt covenants.
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Mortgage payable, NH
In February 2004, Micronetics refinanced the mortgage on its headquarters, entering into a new five-year mortgage payable for $630,000. The note bears interest at 5.75% per annum and is payable in monthly
installments, including interest, of $12,107. This loan is secured by the land and building of Micronetics headquarters.
Mortgage payable, MA
In March 2003, in connection with the purchase of a portion of a commercial condominium housing Micronetics Enon division,
Micronetics entered into a mortgage payable for $352,750. In May 2007, the commercial condominium was sold and the remaining mortgage was settled.
Capital leases
Commercial capital leases payable are reflected at their present value based upon interest rates that range
from 8.67% to 8.88% per annum, and are secured by the underlying assets. The assets are depreciated over their estimated useful lives.
We believe that cash and cash equivalents on hand, anticipated future cash receipts, and borrowings available under our line of credit will be sufficient to meet our obligations as they become due for the next twelve months. However, a
decrease in our sales or demand for our products would likely adversely affect our working capital amounts. As part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a
portion of our available cash may be used at any time for the acquisition of complementary products or businesses. These potential transactions may require substantial capital resources, which, in turn, may require us to seek additional debt or
equity financing. There are no assurances that we will be able to consummate any such transaction. There are no current plans to raise additional debt or equity capital, nor is there a projected need to raise any such capital.
Off-Balance Sheet Arrangements
Micronetics
has no off-balance sheet arrangements.
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