MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
March 31, 2007
|
|
|
(Unaudited)
|
|
|
Audited
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,008,459
|
|
|
$
|
7,058,524
|
|
Marketable securities
|
|
|
650,000
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $415,274 and $297,886 in December 31, 2007 and March 31, 2007,
respectively
|
|
|
4,892,399
|
|
|
|
3,932,029
|
|
Inventories, net
|
|
|
6,658,946
|
|
|
|
5,548,691
|
|
Deferred tax asset
|
|
|
153,316
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
705,293
|
|
|
|
784,649
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,068,413
|
|
|
|
17,323,893
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
4,135,424
|
|
|
|
4,017,465
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Security deposits
|
|
|
24,909
|
|
|
|
12,302
|
|
Other long term assets
|
|
|
41,216
|
|
|
|
138,493
|
|
Intangible assets, net of accumulated amortization
|
|
|
3,544,557
|
|
|
|
2,344,364
|
|
Goodwill
|
|
|
8,932,444
|
|
|
|
5,982,709
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
12,543,126
|
|
|
|
8,477,868
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
32,746,963
|
|
|
$
|
29,819,226
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
1,442,869
|
|
|
$
|
1,449,443
|
|
Accounts payable
|
|
|
662,481
|
|
|
|
695,142
|
|
Accrued expenses
|
|
|
2,645,369
|
|
|
|
3,342,365
|
|
Current portion of deferred tax liability
|
|
|
52,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,803,221
|
|
|
|
5,486,950
|
|
Long-term debt, net of current portion
|
|
|
4,577,581
|
|
|
|
5,633,386
|
|
Non-current income taxes payable
|
|
|
114,731
|
|
|
|
|
|
Deferred tax liability
|
|
|
1,421,917
|
|
|
|
721,917
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,917,450
|
|
|
|
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; 5,391,217 and 5,025,457 shares issued and outstanding at December 31, 2007
and March 31, 2007, respectively
|
|
|
53,912
|
|
|
|
50,255
|
|
Additional paid-in capital
|
|
|
11,332,499
|
|
|
|
8,541,274
|
|
Retained earnings
|
|
|
12,175,301
|
|
|
|
10,912,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,561,712
|
|
|
|
19,503,987
|
|
Treasury stock at cost, 383,475 and 358,541 shares at December 31, 2007 and March 31, 2007, respectively
|
|
|
(1,732,199
|
)
|
|
|
(1,527,014
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
21,829,513
|
|
|
|
17,976,973
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
32,746,963
|
|
|
$
|
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 December 31,
|
|
|
2007
|
|
|
2006
|
|
Net sales
|
|
$
|
8,828,302
|
|
|
$
|
5,510,155
|
|
Cost of sales
|
|
|
5,202,993
|
|
|
|
3,373,503
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,625,309
|
|
|
|
2,136,652
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
288,880
|
|
|
|
179,920
|
|
Selling, general and administrative
|
|
|
1,986,427
|
|
|
|
1,444,882
|
|
Amortization of intangible assets
|
|
|
183,357
|
|
|
|
178,296
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,458,664
|
|
|
|
1,803,098
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,166,645
|
|
|
|
333,554
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
23,570
|
|
|
|
53,551
|
|
Interest expense
|
|
|
(107,846
|
)
|
|
|
(108,022
|
)
|
Other (expense) income
|
|
|
(84,973
|
)
|
|
|
15,861
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(169,249
|
)
|
|
|
(38,610
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
997,396
|
|
|
|
294,944
|
|
Provision for income taxes
|
|
|
441,363
|
|
|
|
183,840
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
556,033
|
|
|
$
|
111,104
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,987,525
|
|
|
|
4,642,041
|
|
Diluted
|
|
|
4,993,559
|
|
|
|
4,715,315
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31,
|
|
|
2007
|
|
|
2006
|
|
Net sales
|
|
$
|
24,901,931
|
|
|
$
|
17,377,919
|
|
Cost of sales
|
|
|
15,231,272
|
|
|
|
10,457,375
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,670,659
|
|
|
|
6,920,544
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
601,344
|
|
|
|
591,853
|
|
Selling, general and administrative
|
|
|
5,616,755
|
|
|
|
4,281,243
|
|
Amortization of intangible assets
|
|
|
549,807
|
|
|
|
534,887
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,767,906
|
|
|
|
5,407,983
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2,902,753
|
|
|
|
1,512,561
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
83,344
|
|
|
|
139,939
|
|
Interest expense
|
|
|
(384,692
|
)
|
|
|
(335,869
|
)
|
Gain on sale of assets
|
|
|
44,364
|
|
|
|
|
|
Other (expense) income
|
|
|
(152,253
|
)
|
|
|
48,690
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(409,237
|
)
|
|
|
(147,240
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
2,493,516
|
|
|
|
1,365,321
|
|
Provision for income taxes
|
|
|
1,134,230
|
|
|
|
664,665
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,359,286
|
|
|
$
|
700,656
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.28
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.28
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,911,995
|
|
|
|
4,631,854
|
|
Diluted
|
|
|
4,936,774
|
|
|
|
4,827,284
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Total
|
|
|
Shares
|
|
Par
Value
|
|
|
|
|
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
|
|
Exercise of stock options
|
|
8,000
|
|
|
80
|
|
|
61,034
|
|
|
|
|
|
|
|
|
|
|
61,114
|
|
Issuance of restricted stock
|
|
25,000
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Stock based compensation
|
|
|
|
|
|
|
|
188,172
|
|
|
|
|
|
|
|
|
|
|
188,172
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
556,033
|
|
|
|
|
|
|
|
556,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
5,391,217
|
|
$
|
53,912
|
|
$
|
11,332,499
|
|
$
|
12,175,301
|
|
|
$
|
(1,732,199
|
)
|
|
$
|
21,829,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
|
2007
|
|
|
2006
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,359,286
|
|
|
$
|
700,656
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,286,641
|
|
|
|
1,216,555
|
|
Stock-based compensation
|
|
|
464,685
|
|
|
|
514,676
|
|
Unrealized gain from marketable securities
|
|
|
|
|
|
|
(32,745
|
)
|
Net gain on sale of assets
|
|
|
(44,364
|
)
|
|
|
|
|
Provision for allowances on accounts receivable
|
|
|
117,388
|
|
|
|
27,017
|
|
Provision for inventory obsolescence and losses
|
|
|
401,698
|
|
|
|
273,539
|
|
Non-cash charges for options issued for services
|
|
|
|
|
|
|
7,480
|
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(401,851
|
)
|
|
|
997,589
|
|
Inventories
|
|
|
(203,375
|
)
|
|
|
(357,997
|
)
|
Other long term assets
|
|
|
97,276
|
|
|
|
|
|
Income taxes payable
|
|
|
|
|
|
|
(1,008,901
|
)
|
Prepaid expenses, other current assets, and other assets
|
|
|
(11,276
|
)
|
|
|
(568,960
|
)
|
Accounts payable
|
|
|
(410,118
|
)
|
|
|
(243,939
|
)
|
Accrued expenses and deferred revenue
|
|
|
476,806
|
|
|
|
(874,662
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,132,796
|
|
|
|
650,308
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by investing activities
|
|
|
|
|
|
|
|
|
Proceeds from sale of building
|
|
|
461,898
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(650,000
|
)
|
|
|
(500,000
|
)
|
Purchase of equipment
|
|
|
(789,671
|
)
|
|
|
(574,171
|
)
|
Additional cash paid for Stealth acquisition
|
|
|
(1,500,000
|
)
|
|
|
(92,455
|
)
|
Cash paid for MICA acquisition, net of cash acquired
|
|
|
(3,120,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,598,706
|
)
|
|
|
(1,166,626
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities:
|
|
|
|
|
|
|
|
|
Repayment of the line of credit
|
|
|
(728,528
|
)
|
|
|
(475,972
|
)
|
Proceeds from line of credit
|
|
|
728,528
|
|
|
|
|
|
Repayments on mortgages and term loan
|
|
|
(1,059,736
|
)
|
|
|
(648,164
|
)
|
Repayments of MICA debt
|
|
|
(646,820
|
)
|
|
|
|
|
Repayments of capital leases
|
|
|
(2,643
|
)
|
|
|
(11,933
|
)
|
Purchase of treasury stock
|
|
|
(205,185
|
)
|
|
|
|
|
Proceeds from the exercise of stock options and issuance of restricted common stock
|
|
|
330,229
|
|
|
|
212,559
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,584,155
|
)
|
|
|
(923,510
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(4,050,065
|
)
|
|
|
(1,439,828
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
7,058,524
|
|
|
|
5,266,580
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
3,008,459
|
|
|
$
|
3,826,752
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
247,656
|
|
|
$
|
334,356
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
1,134,000
|
|
|
$
|
2,086,899
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2007, the results of operations for the three and nine months
ended December 31, 2007 and 2006, and the cash flows for the nine months ended December 31, 2007 and 2006.
The results of
operations for the three and nine months ended December 31, 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). In September 2007, the Enon subsidiary was dissolved and its operations were merged with and into the Micronetics operations. All material intercompany
balances and transactions have been eliminated in consolidation.
Use of estimates
US 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 as a separate component of other comprehensive income, net of tax.
Financial instruments
The Company entered into an interest rate swap agreement with a notional amount of $6.5 million in April 2007, as
required under its credit facility, to mitigate the effect of interest rate fluctuations on the term loan. This interest rate swap was not designated as a hedging instrument at the initiation of the swap, and the Company has not applied hedge
accounting. As a result, at the end of each period, the interest rate swap is recorded on the consolidated balance sheet, with any related gains or loses charged to earnings. During the three and nine months ending December 31, 2007, the Company
recorded a loss of $83,973 and $154,041, respectively, to reflect the fair value for the interest rate swaps.
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.
8
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 Companys adoption of FIN No. 48 on April 1, 2007 resulted in the recognition of
$96,443 of previously uncertain 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 December 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.
In June 2007, the FASB ratified Emerging Issues Task Force (EITF) 07-03,
Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development
Activities
(EITF 07-03). EITF 07-03 requires companies to defer and capitalize prepaid nonrefundable advance payments for goods or services that will be used for future research and development activities over the period
that the research and development activities are performed or the services are provided, subject to an assessment of recoverability. The provisions of EITF 07-3 are effective beginning April 1, 2008. The Company is currently evaluating the
effect that the adoption of EITF 07-03 will have on its consolidated results of operations and financial condition.
In December 2007,
the FASB issued Statement of Financial Accounting Standards No. 141(R),
Business Combinations
(SFAS 141(R)), which replaces Statement of Financial Accounting Standards No. 141,
Business
Combinations
(SFAS 141). SFAS 141(R) requires the assets acquired, liabilities assumed, and any non-controlling interest to be measured at their fair values as of the acquisition date. SFAS 141(R) also requires expensing
of acquisition related costs and restructuring costs, and re-measurement of earn out provisions at fair value. SFAS 141(R) is effective for any of the Companys business combinations on or after April 1, 2009. The Company is currently
evaluating the effect that the adoption of SFAS 141(R) will have on its consolidated results of operations and financial condition.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements
(SFAS 160). SFAS 160 clarifies the accounting and
reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS 160 is effective for the Company on April 1, 2009. The Company is currently evaluating the effect that the adoption of
SFAS 160 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.
9
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
|
|
|
2,950
|
|
Debt
|
|
|
(647
|
)
|
Deferred taxes
|
|
|
101
|
|
Deferred taxes on acquired intangible assets
|
|
|
(700
|
)
|
Income taxes payable
|
|
|
(137
|
)
|
Accounts payable and accrued expenses
|
|
|
(704
|
)
|
|
|
|
|
|
Subtotal
|
|
|
5,218
|
|
Less: cash assumed
|
|
|
(97
|
)
|
|
|
|
|
|
Net purchase price
|
|
$
|
5,121
|
|
|
|
|
|
|
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 December 31, 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.
The following table sets forth certain pro forma
results for the nine months ended December 31, 2007 and 2006 if the acquisition of MICA had taken place on April 1, 2006:
|
|
|
|
|
|
|
|
|
Nine Months Ended
(Unaudited)
|
|
December 31, 2007
|
|
December 31, 2006
|
|
(in thousands, except
earnings per share)
|
|
(in thousands, except
earnings per share)
|
Pro forma revenue
|
|
$
|
25,697
|
|
$
|
21,554
|
Pro forma net income (1)
|
|
$
|
1,404
|
|
$
|
767
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
$
|
0.16
|
Diluted
|
|
$
|
0.28
|
|
$
|
0.16
|
(1)
|
Amortization costs of approximately $161,000 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.
|
10
4. INVENTORIES, NET
At December 31, 2007 and March 31, 2007, inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
March 31, 2007
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Raw materials
|
|
$
|
5,235,587
|
|
|
$
|
4,072,116
|
|
Work in process
|
|
|
1,765,598
|
|
|
|
1,339,160
|
|
Finished goods
|
|
|
639,579
|
|
|
|
717,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,640,764
|
|
|
|
6,128,810
|
|
Less allowance for obsolescence
|
|
|
(981,818
|
)
|
|
|
(580,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,658,946
|
|
|
$
|
5,548,691
|
|
|
|
|
|
|
|
|
|
|
5. PROPERTY, PLANT AND EQUIPMENT, NET
At December 31, 2007 and March 31, 2007, property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
March 31, 2007
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Land
|
|
$
|
162,000
|
|
|
$
|
162,000
|
|
Buildings and leasehold improvements
|
|
|
1,105,746
|
|
|
|
1,555,106
|
|
Machinery and equipment
|
|
|
8,839,593
|
|
|
|
7,877,654
|
|
Furniture, fixtures and other
|
|
|
242,563
|
|
|
|
286,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,349,902
|
|
|
|
9,881,276
|
|
Less accumulated depreciation
|
|
|
(6,214,478
|
)
|
|
|
(5,863,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,135,424
|
|
|
$
|
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.
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 December 31, 2007 and March 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
December 31, 2007
(Unaudited)
|
|
March 31, 2007
(Audited)
|
|
Useful
Life
(years)
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net
Value
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net
Value
|
Customer relationships (non-contractual)
|
|
7-10
|
|
$
|
4,130
|
|
$
|
1,148
|
|
$
|
2,982
|
|
$
|
2,950
|
|
$
|
761
|
|
$
|
2,189
|
Covenants not to compete
|
|
2
|
|
|
480
|
|
|
480
|
|
|
|
|
|
480
|
|
|
433
|
|
|
47
|
Order backlog
|
|
1
|
|
|
380
|
|
|
341
|
|
|
39
|
|
|
290
|
|
|
290
|
|
|
|
Trade Name
|
|
10
|
|
|
260
|
|
|
15
|
|
|
245
|
|
|
|
|
|
|
|
|
|
Developed technology- drawings
|
|
5
|
|
|
390
|
|
|
112
|
|
|
278
|
|
|
170
|
|
|
62
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
|
|
$
|
5,640
|
|
$
|
2,096
|
|
$
|
3,544
|
|
$
|
3,890
|
|
$
|
1,546
|
|
$
|
2,344
|
11
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
|
|
$
|
184
|
2009
|
|
|
660
|
2010
|
|
|
643
|
2011
|
|
|
616
|
2012
|
|
|
618
|
Thereafter
|
|
|
823
|
|
|
|
|
Total
|
|
$
|
3,544
|
|
|
|
|
Changes in the carrying amount of goodwill at December 31, 2007 and March 31, 2007 are
as follows:
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
March 31, 2007
|
|
(Unaudited)
|
|
(Audited)
|
Balance at the beginning of the period
|
|
$
|
5,982,709
|
|
$
|
4,390,254
|
Acquisitions
|
|
|
2,949,735
|
|
|
|
Earnout payment
|
|
|
|
|
|
1,500,000
|
Purchase accounting adjustments
|
|
|
|
|
|
92,455
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
8,932,444
|
|
$
|
5,982,709
|
|
|
|
|
|
|
|
7. ACCRUED EXPENSES
At December 31, 2007 and March 31, 2007 accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
March 31, 2007
|
|
(Unaudited)
|
|
(Audited)
|
Unbilled payables
|
|
$
|
643,517
|
|
$
|
169,755
|
Professional fees
|
|
|
297,776
|
|
|
261,372
|
Payroll, benefits and related taxes
|
|
|
1,088,883
|
|
|
1,195,273
|
Warranty
|
|
|
98,443
|
|
|
100,178
|
Miscellaneous
|
|
|
516,750
|
|
|
1,615,787
|
|
|
|
|
|
|
|
|
|
$
|
2,645,369
|
|
$
|
3,342,365
|
|
|
|
|
|
|
|
Included in accrued payroll are bonuses of $534,951 and $572,951 at December 31, 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 December 31, 2007 and
March 31, 2007 long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
March 31, 2007
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Term loan
|
|
|
5,850,000
|
|
|
|
6,500,000
|
|
Mortgage payable, MA
|
|
|
|
|
|
|
310,531
|
|
Mortgage payable, NH
|
|
|
164,871
|
|
|
|
264,076
|
|
Capital leases
|
|
|
5,579
|
|
|
|
8,222
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,020,450
|
|
|
|
7,082,829
|
|
Less current portion
|
|
|
(1,442,869
|
)
|
|
|
(1,449,443
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt net of current portion
|
|
$
|
4,577,581
|
|
|
$
|
5,633,386
|
|
|
|
|
|
|
|
|
|
|
12
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 December 31, 2007 was 7.03%. 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 December 31, 2007 was 6.62%. The company had $5.0
million available under the line at December 31, 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 December 31, 2007, the
Company was in compliance with all financial debt covenants.
Mortgage payable, NH
In February 2004, Micronetics refinanced the mortgage on its headquarters by 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 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.
13
The following table summarizes the effects of stock-based compensation resulting from the application of
SFAS No. 123(R) for the three months ended December 31, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31, 2007
(Unaudited)
|
|
|
December 31, 2006
(Unaudited)
|
|
Cost of sales
|
|
$
|
13,096
|
|
|
$
|
22,718
|
|
Selling, general and administrative
|
|
|
175,076
|
|
|
|
125,597
|
|
Research and development
|
|
|
|
|
|
|
28,125
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effect in income before taxes
|
|
|
188,172
|
|
|
|
176,440
|
|
Income taxes
|
|
|
(46,956
|
)
|
|
|
(24,767
|
)
|
|
|
|
|
|
|
|
|
|
Net stock-based compensation effect on basic earnings per common share
|
|
$
|
141,216
|
|
|
$
|
151,673
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effect on basic earnings per common share
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
Stock-based compensation effect on diluted earnings per common share
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
The following table summarizes the effects of stock-based compensation resulting from the
application of SFAS No. 123(R) for the nine months ended December 31, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
December 31, 2007
(Unaudited)
|
|
|
December 31, 2006
(Unaudited)
|
|
Cost of sales
|
|
$
|
46,470
|
|
|
$
|
81,153
|
|
Selling, general and administrative
|
|
|
390,995
|
|
|
|
353,992
|
|
Research and development
|
|
|
27,220
|
|
|
|
79,531
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effect in income before taxes
|
|
|
464,685
|
|
|
|
514,676
|
|
Income taxes
|
|
|
(88,913
|
)
|
|
|
(71,746
|
)
|
|
|
|
|
|
|
|
|
|
Net stock-based compensation effect on basic earnings per common share
|
|
$
|
375,772
|
|
|
$
|
442,930
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effect on basic earnings per common share
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
Stock-based compensation effect on diluted earnings per common share
|
|
$
|
0.08
|
|
|
$
|
0.09
|
|
Unrecognized stock-based compensation expense related to the unvested options is approximately
$1.5 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.
The Company granted 25,000 shares of restricted stock to an employee under the 2006 Equity Incentive Plan on November 14,
2007. The shares were issued at a purchase price of $.01 per share. The fair value of the restricted stock was determined based on the fair value of the Companys common stock on the grant date. Upon issuance of the restricted stock 10,000
shares were vested, with the remaining 15,000 shares to vest twenty percent upon the completion of each quarterly period thereafter. The stock will be fully vested on August 14, 2008. As a result of the issuance of the restricted stock, the
Company recognized $184,750 of stock compensation costs, $73,900 of which was expensed in Q3 FY 08 and $110,850 remaining in unearned compensation cost as of December 31, 2007, to be recognized during the next three quarters.
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 55,000 options granted in the third quarter of Fiscal 2008 and 178,000 in the first quarter of Fiscal 2008. No options were granted in the
second quarter of Fiscal 2008. The fair value of options issued in the first and third quarters of Fiscal 2008 were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions
(unaudited):
14
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
June 30, 2007
|
|
Risk Free Interest Rate
|
|
3.89
|
%
|
|
4.98
|
%
|
Expected Life
|
|
7.57 years
|
|
|
3.97 years
|
|
Expected Volatility
|
|
55
|
%
|
|
60
|
%
|
Expected Dividend Yield
|
|
0
|
%
|
|
0
|
%
|
The per share weighted average fair value of stock options granted for the nine months ended
December 31, 2007 was $4.19.
At December 31, 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 December 31, 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 December 31, 2007, there were 501,325 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 shares of restricted stock or options to purchase up to 1,000,000 shares of common stock. As of December 31,
2007 there were 236,000 options and 25,000 shares of restricted stock 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 nine months ended December 31, 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
|
|
233,000
|
|
|
|
7.90
|
|
|
|
|
|
Exercised
|
|
(92,625
|
)
|
|
|
3.51
|
|
|
|
|
|
Canceled
|
|
(142,375
|
)
|
|
|
7.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
794,825
|
|
|
$
|
7.81
|
|
4.75
|
|
$
|
526,692
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
332,850
|
|
|
$
|
7.58
|
|
2.22
|
|
$
|
297,319
|
|
|
|
|
|
|
|
|
|
|
|
|
15
The following table sets forth the status of the Companys non-vested stock options as of
December 31, 2007 (unaudited):
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted-Average
Grant-Date
Fair
Value
|
Non-vested as of March 31, 2007
|
|
481,025
|
|
|
$
|
3.48
|
Granted
|
|
233,000
|
|
|
|
4.19
|
Forfeited
|
|
(74,750
|
)
|
|
|
3.26
|
Vested
|
|
(177,300
|
)
|
|
|
3.38
|
|
|
|
|
|
|
|
Non-vested as of December 31, 2007
|
|
461,975
|
|
|
$
|
3.91
|
|
|
|
|
|
|
|
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 44% and 62% for the three months ended December 31, 2007 and 2006 as compared to 45% and 49% for the nine months ended December 31, 2007 and 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 de-recognition, 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 uncertain 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. The FIN No. 48 analysis for the nine months ended December 31, 2007 resulted in an additional $18,288 in uncertain tax benefits. The Companys policy is to recognize interest and
penalties accrued on any uncertain tax positions as a component of income tax expense. The Company incurred $4,650 in interest and penalty expense for the nine months ended December 31, 2007.
As a result of the adoption of FIN No. 48, the Company has $114,731 of uncertain 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 2004 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 December 31, 2007 and 2006 (unaudited) are:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
December 31, 2007
|
|
December 31, 2006
|
Net income
|
|
$
|
556,033
|
|
$
|
111,104
|
Weighted average shares outstanding
|
|
|
4,987,525
|
|
|
4,642,041
|
Basic earnings per share
|
|
$
|
0.11
|
|
$
|
0.02
|
Common stock equivalents
|
|
|
6,034
|
|
|
73,274
|
Weighted average common and common equivalent shares outstanding
|
|
|
4,993,559
|
|
|
4,715,315
|
16
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
December 31, 2007
|
|
December 31, 2006
|
Diluted earnings per share
|
|
$
|
0.11
|
|
$
|
0.02
|
The computations of basic and diluted EPS for the nine months ended December 31, 2007 and
2006 (unaudited) are:
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
December 31, 2007
|
|
December 31, 2006
|
Net income
|
|
$
|
1,359,286
|
|
$
|
700,656
|
Weighted average shares outstanding
|
|
|
4,911,995
|
|
|
4,631,854
|
Basic earnings per share
|
|
$
|
0.28
|
|
$
|
0.15
|
Common stock equivalents
|
|
|
24,779
|
|
|
195,430
|
Weighted average common and common equivalent shares outstanding
|
|
|
4,936,774
|
|
|
4,827,284
|
Diluted earnings per share
|
|
$
|
0.28
|
|
$
|
0.15
|
17
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.
18
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 December 31, 2007 and 2006.
19
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 uncertain tax benefits of $96,443 to the April 1, 2007 retained earnings balance.
In December 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.
In June 2007, the FASB ratified Emerging Issues Task Force (EITF) 07-03,
Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development
Activities
(EITF 07-03). EITF 07-03 requires companies to defer and capitalize prepaid nonrefundable advance payments for goods or services that will be used for future research and development activities over the period
that the research and development activities are performed or the services are provided, subject to an assessment of recoverability. The provisions of EITF 07-3 are effective beginning April 1, 2008. We are currently evaluating the effect that
the adoption of EITF 07-03 will have on our consolidated results of operations and financial condition.
In December 2007, the FASB
issued Statement of Financial Accounting Standards No. 141(R),
Business Combinations
(SFAS 141(R)), which replaces Statement of Financial Accounting Standards No. 141,
Business
Combinations
(SFAS 141). SFAS 141(R) requires the assets acquired, liabilities assumed, and any non-controlling interest to be measured at their fair values as of the acquisition date. SFAS 141(R) also requires expensing
of acquisition related costs and restructuring costs, and re-measurement of earn out provisions at fair value. SFAS 141(R) is effective for any of the Companys business combinations on or after April 1, 2009. We are currently evaluating
the effect that the adoption of SFAS 141(R) will have on its consolidated results of operations and financial condition.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements
(SFAS 160). SFAS 160 clarifies the accounting and
reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS 160 is effective for the Company on April 1, 2009. We are currently evaluating the effect that the adoption of SFAS 160
will have on its 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
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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 four
wholly owned subsidiaries, Micro-Con, MVS, Stealth and MICA. During Q3 FY 08, the Enon subsidiary was dissolved and its operations were merged within the Micronetics operations in NH. 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.
Results of Operations
The Consolidated Statements of Income
for the three and nine months ended December 31, 2007 include the operations of MICA from the acquisition date of June 5, 2007.
Three
Months Ended December 31, 2007 compared to December 31, 2006
Net sales
Net sales for the three months ended December 31, 2007 (Q3 FY 08) were $8,828,302, an increase of $3,318,147, or 60% as compared to
$5,510,155 for the three months ended December 31, 2006 (Q3 FY 07). The increase in net sales for Q3 FY 08 is primarily attributable to an increase in net sales of high performance power amplifiers to the commercial market of $1.4
million, $1.3 million in sales of high performance mixers and ferrites from MICA, as well as an increase in net sales of voltage controlled oscillators used in electronic jamming systems of $.4 million and an increase in net sales of noise sources
of $.4 million. As a result, commercial and defense revenues were 71% and 29%, respectively, of the total revenues for Q3 FY 08, as compared to 65% and 35%, respectively, for Q3 FY 07.
Gross profit margin
Gross profit as a percent of sales increased to 41% for Q3 FY 08 from 39% for Q3
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 increased $108,960 for Q3 FY 08 as compared to Q3 FY 07. The increase is primarily due to the increase in R&D salaries related to new development programs. R&D expenses as a percentage of sales remained at 3.3%
for Q3 FY 08 as compared to Q3 FY 07.
Selling, general and administrative
Selling, general and administrative (SG&A) expense increased $541,545 for Q3 FY 08 as compared to Q3 FY 07. The increase was primarily attributable to
increases in salaries and benefits of $133,000, professional fees of $52,000, commissions of $48,000, and the inclusion of MICAs SG&A expenses of $243,000. SG&A expenses as a percentage of sales decreased to 22.5% on Q3 FY 08 as
compared to 26.2% for Q3 FY 07, primarily due to the increase in net sales for Q3 FY 08 as compared to Q3 FY 07.
Amortization of intangible assets
Amortization expense was $183,357 for Q3 FY 08 as compared to $178,296 for Q3 FY 07.
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Interest expense
Interest expense was $107,847 for Q3 FY 08 as compared to $108,022 for Q3 FY 07.
Provision for income taxes
Our effective tax rate was 44% for Q3 FY 08 as compared to 62% for Q3 FY 07. The decrease in the effective tax rate for the quarter
ended December 31, 2007 is primarily due to a decrease in incentive stock-based compensation expense, which is not deductible for tax purposes, as well as an increase in tax benefits associated with the domestic production activity deduction as
compared to the quarter ended December 31, 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 de-recognition, 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 uncertain 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 third quarter of Fiscal 2008 the liability for uncertain tax benefits increased by $15,000. Our policy is to
recognize interest and penalties accrued on any uncertain tax positions as a component of income tax expense, if any.
As a result of the
adoption of FIN No. 48, the Company has $114,731 of uncertain 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 2004 through 2006.
Nine Months Ended December 31, 2007 compared to December 31, 2006
Net sales
Net sales for the nine months ended
December 31, 2007 were $24,901,931, an increase of $7,524,012, or 43% as compared to $17,377,919 for the nine months ended December 31, 2006. The increase in net sales for the nine months ended December 31, 2007 is primarily
attributable to a increase in net sales of high performance power amplifiers to the commercial market of $3.5 million, $3.2 million in sales of high performance mixers and ferrites from MICA, as well as an increase in net sales of voltage controlled
oscillators used in electronic jamming systems of $.9 million. As a result, commercial and defense revenues were 71% and 29%, respectively, as a percent of the total revenues for the nine months ended December 31, 2007, as compared to 65% and
35%, respectively, for the nine months ended December 31, 2006.
Gross profit margin
Gross profit as a percent of sales decreased for the nine months ended December 31, 2007 to 39% from 40% for the nine months ended December 31,
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 increased $9,491 for the nine
months ended December 31, 2007 as compared to the nine months ended December 31, 2006. R&D expenses decreased to 2% of net sales for the nine months ended December 31, 2007 from 3% of net sales for the nine months ended
December 31, 2006.
Selling, general and administrative
Selling, general and administrative (SG&A) expense increased $1,335,512 for the nine months ended December 31, 2007 as compared to the nine months ended December 31, 2006. SG&A expenses decreased to
23% of net sales for the nine months ended December 31, 2007 from 25% for the nine months ended December 31, 2006. The increase in spending was primarily attributable to increases in salaries and benefits of $315,000, commissions of
$87,000, professional expenses of $76,000, travel and entertainment expenses of $47,000 and the inclusion of $619,000 in MICA selling expenses.
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Amortization of intangible assets
Amortization expense was $549,807 for the nine months ended December 31, 2007 as compared to $534,887 for the nine months ended December 31, 2006.
Interest expense
Interest expense increased $48,824
or 15% to $384,693 for the nine months ended December 31, 2007 as compared to $335,869 for the nine months ended December 31, 2006.
Provision
for income taxes
Our effective tax rate was 45% for the nine months ended December 31, 2007 as compared to 49% for the nine months
ended December 31, 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 de-recognition, 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.
We adopted FIN No. 48 on April 1, 2007 resulting in the recognition of $96,443 of uncertain 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 nine months ended December 31, 2007 resulted in an additional $18,288 in uncertain tax benefits.
Following the adoption of FIN No. 48, we had $114,731 of uncertain 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 nine months ended December 31, 2007.
Our policy is to recognize interest and
penalties accrued on any uncertain tax positions as a component of income tax expense, if any. No material amount of such expense was recognized during the nine months ended December 31, 2007.
Liquidity and Capital Resources
We finance our
operating and investment requirements primarily through operating cash flow and borrowings. We had cash and working capital at December 31, 2007 of $3,008,459 and $11,274,063, 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 3.3 to 1 at December 31, 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 $3,132,796 during the nine months ended December 31, 2007 as compared to net cash provided by operating activities of $650,308 during the nine months ended December 31, 2006. Cash provided by operating activities resulted from net
income of $1,359,286, adjusted by non-cash charges for depreciation and amortization of $1,286,641, stock-based compensation of $464,685, increases in accounts receivable and inventory reserves of $519,086, and a decrease in working capital changes
of $461,408. Working capital changes primarily resulted from an increase in accounts receivable of $401,851 and a decrease in accounts payable of $410,118, offset by an increase in accrued expenses of $476,806. Accounts receivable increased
primarily due to strong sales in the nine months ended December 31, 2007.
Net cash used in investing activities was $5,598,706 during
the nine months ended December 31, 2007 as compared to $1,166,626 during the nine months ended December 31, 2006, primarily as a result of the acquisition of MICA of $3,120,933 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 nine months ended December 31, 2007 also included $789,671 of capital expenditures and $650,000 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 $1,584,155 during the nine months ended
December 31, 2007 as compared to $923,510 during the nine months ended December 31, 2006 primarily due to repayments on the mortgages, line of credit and term loans in the nine months ended December 31, 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.
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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 December 31, 2007 was 7.03%. 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 December 31, 2007 was 6.62%. We had
$5.0 million available under the line at December 31, 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 December 31, 2007,
we were 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.
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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