UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the fiscal year ended March 31, 2008
|
¨
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the transition period from to
|
Commission File No.: 0-17966
MICRONETICS, INC.
(Name of small business issuer in its charter)
|
|
|
Delaware
|
|
22-2063614
|
(State or other jurisdiction of
incorporation or organization)
|
|
(IRS Employer
Identification No.)
|
|
|
26 Hampshire Drive, Hudson, NH
|
|
03051
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Issuers telephone number: (603) 883-2900
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common
Stock, par value $.01 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
¨
No
x
Indicate by check mark if the registrant in not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer
¨
|
|
Accelerated filer
¨
|
|
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
x
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
¨
No
x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the issuer was approximately $37,022,590 based on the closing price of $9.46 of the issuers common stock, par value
$.01 per share, as reported by NASDAQ on September 30, 2007.
On June 15, 2008, there were 5,391,217 shares of the issuers
common stock outstanding.
The Proxy Statement of the registrant to be filed on or before July 29, 2008 is incorporated by reference to
Part III herein.
TABLE OF CONTENTS
2
Part I
This Annual Report on Form 10-K contains statements which constitute forward-looking statements. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief or
current expectations of Micronetics, Inc. Forward-looking statements are merely our current predictions of future events. Investors are cautioned that any such forward-looking statements are inherently uncertain, are not guaranties of future
performance and involve risks and uncertainties. Actual results may differ materially from our predictions. Important factors that could cause actual results to differ from our predictions include those discussed under Risk Factors,
Managements Discussion and Analysis and Description of Business. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be
realized, nor can there be any assurance that we have identified all possible issues which we might face. We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review
carefully the risk factors described in this annual report and in the other documents that we file with the Securities and Exchange Commission. You can read these documents at
www.sec.gov
.
Where we say we, us, our, Company or Micronetics we mean Micronetics, Inc. and its
subsidiaries.
ITEM 1. Business.
General
Micronetics was incorporated in New Jersey in 1975 and re-incorporated in Delaware in 1987.
In June 2007, we acquired all of the issued and outstanding capital stock of MICA Microwave Corporation (MICA), a California corporation
located in Manteca, California. The acquisition of MICA was accounted for as a purchase, and the operating results of MICA have been included in the consolidated financial statements since the June 5, 2007 acquisition date. The purchase price
has been allocated to the fair value of assets acquired and liabilities assumed based on their fair value at the date of acquisition.
In
June 2005, we acquired all of the issued and outstanding capital stock of Stealth Microwave, Inc. (Stealth), a New Jersey corporation located in Trenton, New Jersey. The acquisition of Stealth was accounted for as a purchase, and the
operating results of Stealth have been included in the consolidated financial statements since the June 10, 2005 acquisition date. The purchase price has been allocated to the fair value of assets acquired and liabilities assumed based on their
fair value at the date of acquisition.
In January 2003, Microwave Concepts, Inc. (Micro-Con), a Delaware corporation and a
wholly-owned subsidiary of Micronetics acquired substantially all of the assets of Microwave Concepts, Inc., a New Jersey corporation (MCI) located in Fairfield, New Jersey. The acquisition was recorded under the purchase method of
accounting for financial statement purposes. The purchase price has been allocated to the fair value of assets acquired and liabilities assumed based on their fair value at the date of acquisition.
In March 2002, Enon Microwave, Inc., a Massachusetts corporation (EMI) located in Topsfield, MA, merged with and into Enon Microwave, Inc.
(Enon), a Delaware corporation and wholly owned subsidiary of Micronetics. In September 2007, the Enon subsidiary was dissolved and its operations were merged with and into the Micronetics operations. In January 1999, Micronetics
acquired Microwave & Video Systems, Inc. (MVS) and in February 1999, Micronetics acquired Vectronics Microwave Corporation (Vectronics).
Business of Issuer
Headquartered in Hudson, New Hampshire, 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. It
3
also manufactures and designs test equipment, subassemblies and components that are used to test the strength, durability and integrity of signals in
communications equipment. Its products are embedded in a variety of radars, electronic warfare systems, guidance systems, wireless telecommunications and satellite equipment. Its 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. 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.
Management has determined that we operate as a single integrated business and as such have one operating segment as a provider of RF and microwave
components and sub-assemblies for defense and commercial customers worldwide. Our product groups have similar characteristics such as cost to design and manufacture, applications, types of customers, and sales channels.
The following are descriptions of Micronetics three major product categories:
RF Microwave Components:
Micronetics RF Microwave Component product family consists of high
performance receiver components, noise components, voltage controlled oscillator components, linearized and non-linearized power amplifier components and Ferrite components. These components are designed and manufactured at our wholly owned
subsidiaries MVS, Micro-Con, Stealth, MICA and the Micronetics NH facility.
Our
receiver components
(switches, attenuators,
phase shifters, detectors and mixers) are used widely in military ground-based, shipboard and airborne radar for tracking and simulation, phased array radar, electronic warfare systems, electronic intelligence and tactical/satellite communication
systems. In addition, receiver components have commercial applications such as wireless communications, radar surveillance and test equipment to support systems. This category of products offers several competitive technical advantages, including a
dedicated high power design and development facility, which manufactures receiver components in power levels up to 1200W CW (carrier wave). We are only aware of a few companies with this expertise. These designs are successfully embedded into
applications such as radar measurement, airborne synthetic aperture radar polarization and receiver protection in radar and communications. In addition, Micronetics also offers high power testing services.
Micronetics
noise components
are employed in testing and measuring sophisticated communication systems to determine the quality of the
reception and transmission of information. The widest application for our noise components is as a reference standard in test instruments that measure unwanted noise in devices and components. Our noise components are used in wireless communication
systems as part of built-in test equipment to continuously monitor the quality of the receiver. The major application of the noise source components involves some function of detection, calibration, simulation, security and statistical analysis. The
components apply impulses of noise to the receiver to measure the radar sensitivity, signal gain, and frequency bandwidth. Our components used in conjunction with other electronic components are an effective means of jamming, blocking and disturbing
hostile radar and other communications, as well as insulating and protecting friendly communications. Micronetics noise source components are also used to test satellite communications and automated test equipment.
Micronetics
voltage controlled oscillators (VCOs)
provide a precise signal source within a given frequency range. These products generate
sinusoidal signals in frequency ranges from 100MHz to over 7.5GHz, utilizing packaged silicon bipolar transistors that are controlled by an input voltage signal. Our VCOs are used in wireless applications including some military communications and
satellite voice/messaging. We offer products in a series of narrow-band, wide-band and selective octave tuning bandwidths. Depending on the series, packaging configurations for MIL and commercial applications include PIN types, SMT, hermetic and
miniature packages.
4
Micronetics designs and manufactures a broad selection of
linearized and non linearized power
amplifiers.
Our specialized amplifiers are designed with a proprietary linearization capability that allows for smaller size amplifier solutions with a fraction of the power consumption. Our amplifier products are used in various commercial and
military applications, and are currently in operation in applications such as base stations for commercial telecommunications standards to 3G and 4G standards, portable mobile video transmitters, MMDS transmitters, digital electronic news gathering
equipment, RF test and measurement, multi-band military radio systems for man-pack, vehicular, and flight applications military countermeasures, jamming systems, and RF medical devices.
Microneticsdesigns and manufactures broadband mixers and ferrites. Its products offer exceptional performance for systems where spectral purity is
important, including IED Jamming, TD-CDMA, WiMAX, COFDM, Radar, Electronic Warfare and Space application.
Microwave Integrated Multifunction
Subassemblies:
Micronetics designs and manufactures complex
microwave integrated multifunction subassemblies
, also know as
microwave multifunction modules, which consist of sophisticated assemblies that perform many functions related to the switching of microwave signals. Micronetics integrated subassemblies are employed in several defense, commercial or aerospace
electronics systems and programs. These subassemblies combine microwave functions such as amplification, attenuation, switching of multiple signals, and phase and amplitude control. We also facilitate the assembly and testing services of high-end,
customer-designed RF microwave assemblies, including all assembly, testing and environmental screening of customer-designed complex subassemblies.
The primary design and development of these subassemblies is performed at our Micro-Con facility, where the manufacturing capability extends across the 0.1GHz to 40GHz frequency range for both broadband multi-octave and narrowband
applications. We have design proficiencies in over 125 unique designs that include such highly integrated multi-function modules as, low noise receivers, both up and down conversion modules, RF microwave distribution networks, transmit drivers,
broadband frequency synthesizers and phase/amplitude control networks.
Test Solutions
Micronetics designs and manufactures several broadband
test solution
platforms specifically designed to serve the wireless telecommunications and
satellite communication markets employing such application standards as TDMA, CDMA, GSM, PCS, HDTV and other markets employing cable modem transmission and other internet infrastructure applications. The test equipment is centered around the
following four platforms: Carrier-to-Noise, Automated Noise Generators, bench-top Noise Generators and hand-held Power Meter instruments. These platforms perform a variety of tests, which are used in performance verification, and the emulation of
impairments in cellular/PCN/PCS, satellite, television and cable modem communication systems.
Overview of Markets Served
Defense/Aerospace Marketplace
The
defense/aerospace marketplace is in a period of transition, attempting to keep pace with a U.S. military strategy that has been evolving to respond to the decentralized, asymmetric threats that have emerged since the mid-1980s. Current U.S. defense
strategy and force structure is moving towards lighter, smarter and more flexible weapons systems with an emphasis on intelligence, surveillance and reconnaissance.
The defense industry is currently dominated by a small number of large domestic prime contractors and a few large European defense companies with an increasing presence in U.S. markets. The large defense prime
contractors have shifted their business strategies to focus on platforms and systems integration and consequently have subcontracted the development of many systems and subsystems.
5
After a decade of reduced spending, the defense procurement budget has been increasing in recent years.
Driven by the need to modernize U.S. forces increased procurement spending is necessary. As a result, it appears that the current business, political and global security environments are creating new opportunities for mid-tier defense/aerospace
manufacturers to develop strategic relationships with prime contractors and provide additional system development and production for the next generation platforms and weapons systems.
Commercial Marketplace
Wireless
communication is the transmission of voice and data signals through the air, without a physical connection, such as metal wire or fiber-optic cable. Information transmitted through wireless communications equipment is transmitted by electromagnetic
waves, also known as signals. Electromagnetic waves vary in length, or frequency, and intensity. The range of electromagnetic waves is called the spectrum, which encompasses sound near the low end and light toward the higher end. In between is the
radio spectrum that is used in all wireless communications. RF indicates lower frequencies, while microwave refers to relatively higher frequencies in the spectrum.
Different types of wireless communications systems utilize different frequencies in the spectrum. Frequency is measured in cycles per second, or Hertz.
The spectrum currently in use by all types of wireless communications equipment ranges from 1 kilohertz (1 thousand cycles per second) to 20 gigahertz (20 billion cycles per second). The Federal Communications Commission (FCC) allocates
portions of the spectrum for the various types of wireless communication systems. Wireless communications systems currently in use include cellular and PCS telephones and base stations, wireless cable, satellite communications, global positioning
systems, direct broadcast satellites, local area networks, as well as radar systems. Non- wireless communications systems are also concerned whether there is unwanted noise in the line that could disrupt the integrity of the communicating signals.
Our products are designed for use in wireless and non-wireless applications.
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 marketplace.
Micronetics overall strategy in these markets is to:
|
|
|
INCREASE VALUE THROUGH HIGHER LEVELS OF INTEGRATION AND BUILT-IN SELF TEST. Combining our extensive expertise in both microwave components and microwave subsystem
integration (with built-in test) we are able to achieve significant cost reduction and improved reliability over subsystems based on components alone. This is an attractive solution for long-term high reliability programs.
|
|
|
|
REMAIN THE LEADING SUPPLIER OF KEY TECHNOLOGIES. We are a leading supplier of certain key technologies in all our business segments. Our core competencies are our
broadband noise sources, low noise amplifiers, low IMD switches and mixers, high power components and linearized power amplifiers. These areas provide a real lead into many microwave system applications.
|
|
|
|
STRENGTHEN OUR EXISTING RELATIONSHIPS WITH PRIME CONTRACTORS. Our history as a supplier of quality high reliability microwave components for airborne platforms has
established us as a key supplier to many prime contractors. We continue to leverage off that legacy to support higher integration subsystems with those prime contractors.
|
6
|
|
|
CAPITALIZE ON OUTSOURCING DYNAMICS IN THE AEROSPACE AND DEFENSE INDUSTRY. As new platforms are becoming increasingly expensive and world threats are becoming less
defined, key industries are facing an urgent need to upgrade existing platforms with new electronics. Government agencies are working with smaller companies as opposed to the large OEMs for these upgrades. Our ability to provide a timely, cost
effective, and reliable design upgrade allows us to become a prime contractor in this area.
|
|
|
|
PURSUE STRATEGIC ACQUISITIONS. We will continue to look for small profitable, entrepreneurial organizations with compatible technologies for potential acquisitions.
We believe our philosophy of leaving the operations intact, adding some corporate structure, sharing sales and marketing intelligence and combining forces to win large microwave subsystems positions us for growth.
|
|
|
|
CONTROL COSTS THROUGH OUTSOURCING. We have controlled costs of goods sold through the use of manufacturing partners. These partnership arrangements allow us to
focus on the quality, integrity and intelligence of our engineering designs, while maintaining tight control over costs, scheduling, quality, manufacturing and final test.
|
|
|
|
MAINTAIN DIVERSITY IN THE DEFENSE AND COMMERCIAL MARKETPLACE. We balance business in defense with commercial marketplaces in order to sustain consistent growth. The
defense marketplace provides stable growth opportunities with long-range visibility, while the commercial marketplace offers more aggressive growth opportunities. We believe this combined effort promotes stable growth.
|
Manufacturing
Our components that require
automated assembly equipment are generally manufactured by third parties and tested by Micronetics for quality assurance. The production process for these products is usually completed within two to three weeks. Manufacturing of our other products,
which involve less automated assembly equipment, takes place at our Hudson, NH, Danbury, CT, Fairfield, NJ, Trenton, NJ, or Manteca, CA facilities. The production process for these products ranges from one to twenty-four weeks. We generally
maintain inventory of the raw materials required for production of our products for a period of up to one year.
Micronetics Hudson,
NH facility, Micro-Con Stealth and MICA are ISO 9001: 2000 certified facilities. Independent ISO 9001 quality system registrars certified these facilities as compliant, following rigorous audits to assess our quality assurance systems against ISO
certification requirements. To be in compliance with ISO standards, we had to demonstrate our use of well-documented and highly disciplined controls and processes to ensure consistency and reliability of product quality, interaction with our
customers and a continuous effort to improve.
Suppliers
We have approximately 500 suppliers, a few of which are the sole source for some raw materials. During the past ten years, we have experienced limited supply problems and do not anticipate any material increase in
these problems in the foreseeable future. We do not believe there would be any significant business disruption if we were to lose one of our sole suppliers because we generally have sufficient inventory to give us time to develop an alternative
supplier.
Sales and Marketing
Our
sales are made primarily through direct sales personnel or through independent sales representatives who promote and solicit orders for our products on a commission basis in exclusive marketing territories. We select our sales representatives on the
basis of technical and marketing expertise, reputation within the industry and financial stability. These sales representatives represent other manufacturers with products complementary to, rather than competitive with Micronetics products.
7
We also use various methods to promote our products including field visits to customers, telephone
solicitation, direct mailing campaigns, advertising in trade journals, participation in trade shows and maintenance of a website.
During
Fiscal 2008 and Fiscal 2007, the approximate mix of sales was 69% and 66% respectively, for commercial applications and 31% and 34% respectively, for defense applications.
Customers
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. Our three largest customers, ITT Electronic Warfare Systems,
Aerosat Avionics, LLC and Nextwave/Jabil Circuit accounted for 9.2%, 8.1% and 8.0% of the consolidated sales in Fiscal 2008, respectively. We believe that replacing any of these customers could be difficult.
Other customers of Micronetics include Airspan, EDO/Benchmark, Comtech, Raytheon, Northrop Grumman Corporation, Pegasus GSS, LLC and Anaren Microwave. In
addition, direct government customers include DFAS, Hill AFB, and NAVICP. Our customers generally purchase our products on the basis of purchase orders, rather than long-term supply contracts.
Competition
We are subject to active competition in
the sale of virtually all of our products. Many of our competitors, including divisions of major corporations, have significantly greater resources than those currently available to us. Additionally, some of our customers compete directly by
manufacturing certain components themselves, rather than purchasing them from Micronetics.
Our primary competitors are Herley Industries,
Inc., Chelton, M/A Com, Filtronics, Spectrum Control, Crane Inc., DBM Microwave, Wireless Telecom Group, Mini-Circuits, Synergy, Teledyne, Aeroflex and Z-Comm.
Micronetics competitive position is supported by:
|
|
|
A HISTORY OF RELIABILITY ON AIRBORNE PROGRAMS. We have an excellent performance track record in airborne programs. Our experience has allowed us to deliver complex
integrated subsystems to meet the exacting requirements of airborne in- flight satellite broadcasting.
|
|
|
|
DIVERSE PRODUCTS AND MARKET BASE. With a balanced combination of defense and commercial markets, we are able to leverage the non-recurring engineering funding from
defense programs to technology for commercial products and the large volume and price pressure on commercial products reduces manufacturing cost on our defense products.
|
|
|
|
SUCCESSFUL ACQUISITION TRACK RECORD. We believe our acquisition strategy based on keeping the operations of acquired entities intact is key to successfully
integrating and operating acquired entities. Our strategy allows for a smooth transition and maintains valuable resources. Our goal is to continue to expand our Company by increasing our resources to manufacture and design complex integrated
subassemblies through acquisitions.
|
Research and Development
Micronetics maintained an engineering staff of 24 individuals as of March 31, 2008, whose duties include the improvement of existing products,
modification of products to meet customer needs and the engineering, research and development of new products and applications. Expenses for research and development
8
predominantly involve engineering for improvements and development of new products for commercial markets. Such expenditures include the cost of engineering
services and engineering-support personnel. These expenses were $1,018,010 and $782,329 for Fiscal 2008 and Fiscal 2007, respectively. The increase in research and development expenses is due primarily to our development work on an inflight
high-speed internet transceiver product.
Micronetics intends to continue its research and development activities and considers these
efforts to be vital to its future business expansion and success.
Backlog
Micronetics backlog of firm orders was approximately $14.1 million and $12.9 million on March 31, 2008 and 2007, respectively.
Government Regulatory Matters
In many instances, we
have been required to obtain export licenses before filling foreign orders. United States Export Administration regulations control high tech exports like our products for reasons of national security and compliance with foreign policy, to
guarantee domestic reserves of products in short supply and, under certain circumstances, for the security of a destination country. Thus, any foreign sales of our products requiring export licenses must comply with these general policies. Although
we have not experienced any significant export licensing problems to date, such problems may arise in the future, since many of our products have military and other governmental applications. These regulations are subject to change, and any such
change may require us to improve our technologies, incur expenses or both in order to comply with such regulations.
Employees
As of March 31, 2008, we had 167 full-time employees including 27 engaged in management and administration, 24 in engineering, 111 in production and
testing and 5 in sales. Management believes that relations with our employees are good.
Intellectual Property
Micronetics has been granted U.S. patents on certain of its designs, including the MicroCal test components and a VCO design. In the absence of patents,
Micronetics relies upon trade secret laws and confidentiality procedures to protect its confidential and proprietary information.
Due to
the rapid rate of technological change in our market, we believe the ability to innovate is of greater importance to our business than availability of patents and proprietary rights. We believe barriers to competitor entry into our markets include
the time and expense necessary to design and manufacture components and the difficulty of selling to an established customer who has already designed our products into its equipment.
We have registered Micronetics and Innovation For the Future as trademarks with the U.S. Patent and Trademark Office.
Warranty and Service
We generally provide
one-year warranties on all of our products covering both parts and labor. Micronetics, at its option, repairs or replaces products that are defective during the warranty period if the proper preventative maintenance procedures have been followed by
the customer. Repairs that are necessitated by misuse of such products or are required outside the warranty period are not covered by warranty.
9
In the case of defective products, the customer typically returns them to our facility. Micronetics
service personnel replace or repair the defective items and ship them back to the customer. Generally, all servicing is done at our plant, and we charge our customers a fee for those service items that are not covered by warranty. We do not offer
our customers any formal written service contracts.
Product Liability Coverage
The testing of electronic communications equipment and the accurate transmission of information entail a risk of product liability by customers and
others. Claims may be asserted against Micronetics by end-users of any of our products. We maintain product liability insurance coverage with an aggregate annual liability coverage limit, regardless of the number of occurrences, of $2.0 million.
There is no assurance that such insurance will continue to be available at a reasonable cost or sufficient to cover all possible liabilities. In the event of a successful suit against us, lack or insufficiency of insurance coverage could have a
material adverse effect on our business.
Environmental Laws
The costs and effects of compliance with federal, state and local environmental laws were not material to our business.
Item 1A. Risk Factors.
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors in evaluating our business. 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.
We may
be materially and adversely affected by reductions in spending by certain of our customers.
The significant slowdown in capital
spending by certain of our customers, coupled with existing economic and geopolitical uncertainties and the potential impact on customer demand, has created uncertainty as to market demand. As a result, revenues and operating results for a
particular period can be difficult to predict. In addition, there can be no certainty as to the severity or duration of the current industry adjustment. As a result of changes in industry and market conditions, many of our customers have
significantly reduced their capital spending. Our revenues and operating results have been and may continue to be materially and adversely affected by reductions in capital spending by our customers.
Our operating results have historically been subject to yearly and quarterly fluctuations and are expected to continue to fluctuate.
Our operating results have historically been and are expected to continue to be subject to quarterly and yearly fluctuations as a result of a number of
factors including:
|
|
|
our ability to successfully implement programs to stimulate sales by anticipating and offering the kinds of products and services customers will require in the
future to increase the efficiency and profitability of their products;
|
|
|
|
our ability to successfully complete programs on a timely basis, to reduce our cost structure, including fixed costs, to streamline our operations and to reduce
product costs;
|
|
|
|
our ability to focus our business on what we believe to be potentially higher growth, higher margin businesses and to dispose of or exit non-core businesses;
|
|
|
|
increased price and product competition in our markets;
|
10
|
|
|
the inherent uncertainties of using forecasts, estimates and assumptions for asset valuations and in determining the amounts of accrued liabilities and other items
in our consolidated financial statements;
|
|
|
|
our ability to implement our work plan without negatively impacting our relationships with our customers, the delivery of products based on new and developing
technologies, the delivery of high quality products at competitive prices, the maintenance of technological leadership, the effectiveness of our internal processes and organizations and the retention of qualified personnel;
|
|
|
|
fluctuations in our gross margins;
|
|
|
|
the development, introduction and market acceptance of new technologies;
|
|
|
|
variations in sales channels, product costs and the mix of products sold;
|
|
|
|
the size and timing of customer orders and shipments;
|
|
|
|
our ability to maintain appropriate inventory levels;
|
|
|
|
the impact of acquired businesses and technologies;
|
|
|
|
the impact of our product development schedules, product quality variances, manufacturing capacity and lead times required to produce our products;
|
|
|
|
changes in legislation, regulation and/or accounting rules; the impact of higher insurance premiums and deductibles and greater limitations on insurance coverage;
and
|
|
|
|
acts of terrorism or the outbreak of hostilities or armed conflict between countries.
|
There are a number of trends and factors which affect our markets, including economic conditions in the United States, Europe and globally, and are beyond our
control. These trends and factors may result in reduced demand and pricing pressure on our products.
There are trends and factors
affecting our markets that are beyond our control and may affect our operations. Such trends and factors include:
|
|
|
adverse changes in the public and private equity and debt markets and our ability, as well as the ability of our customers and suppliers, to obtain financing or to
fund working capital and capital expenditures;
|
|
|
|
adverse changes in our current credit condition or the credit quality of our customers and suppliers;
|
|
|
|
adverse changes in the market conditions in our markets;
|
|
|
|
the trend towards the sale of integrated products;
|
|
|
|
visibility to, and the actual size and timing of, capital expenditures by our customers;
|
|
|
|
inventory practices, including the timing of product and service deployment, of our customers;
|
|
|
|
policies of our customers regarding utilization of single or multiple vendors for the products they purchase;
|
|
|
|
the overall trend toward industry consolidation and rationalization among our customers, competitors and suppliers;
|
|
|
|
conditions in the broader market for military and communications products;
|
|
|
|
governmental regulation or intervention affecting our products; and
|
|
|
|
the effects of war and acts of terrorism, such as disruptions in general global economic activity, changes in logistics and security arrangements and reduced
customer demand for our products and services.
|
11
Economic conditions affecting the industry, which affect market conditions in the military and communication
infrastructure industry in the United States, Europe and globally, affect our business.
Reduced capital spending and/or negative
economic conditions in the United States, Europe as well as other areas of the world have resulted in, and could continue to result in, reduced demand for or increased pricing pressures on our products.
We have made, and may continue to make, strategic acquisitions in order to enhance our business. If we are not successful in operating or integrating these
acquisitions, our business, results of operations and financial condition may be materially and adversely affected.
In the past, we
acquired companies to enhance the expansion of our business and products. We may consider additional acquisitions which could involve significant risks and uncertainties.
These risks and uncertainties include:
|
|
|
the risk that the industry may develop in a different direction than anticipated and that the technologies we acquire do not prove to be those we need to be
successful in the industry;
|
|
|
|
the risk that future valuations of acquired businesses may decrease from the market price we paid for these acquisitions;
|
|
|
|
the generation of insufficient revenues by acquired businesses to offset increased operating expenses associated with these acquisitions;
|
|
|
|
the potential difficulties in completing in-process research and development projects and delivering high quality products to our customers;
|
|
|
|
the potential difficulties in integrating new products, businesses and operations in an efficient and effective manner;
|
|
|
|
the risk that our customers or customers of the acquired businesses may defer purchase decisions as they evaluate the impact of the acquisitions on our future
product strategy;
|
|
|
|
the potential loss of key employees of the acquired businesses;
|
|
|
|
the risk that acquired businesses will divert the attention of our senior management from the operation of our business; and
|
|
|
|
the risks of entering new markets in which we have limited experience and where competitors may have a stronger market presence.
|
Our inability to successfully operate and integrate newly-acquired businesses appropriately, effectively and in a timely manner could have a material
adverse effect on our ability to take advantage of further growth in demand for products in our marketplace, as well as on our revenues, gross margins and expenses.
If we cannot effectively manage our growth, our business may suffer.
We have previously expanded our
operations through acquisitions in order to pursue existing and potential market opportunities. If we fail to manage our growth properly, we may incur unnecessary expenses and the efficiency of our operations may decline. To manage our growth
effectively, we must, among other things:
|
|
|
successfully attract, train, motivate and manage a larger number of employees for production and testing, engineering and administration activities;
|
|
|
|
control higher inventory and working capital requirements; and
|
|
|
|
improve the efficiencies within our operating, administrative, financial and accounting systems, and our procedures and controls.
|
12
We depend on single manufacturing lines for our products, and any significant disruption in production could impair
our ability to deliver our products.
We currently manufacture and assemble our products at our various facilities using individual
production lines for certain product categories. We have experienced manufacturing difficulties in the past, and any significant disruption to one of these production lines will require time either to reconfigure and equip an alternative production
line or to restore the original line to full capacity. Some of our production processes are complex, and we may be unable to respond rapidly to the loss of the use of any production line. This could result in delayed shipments, which could result in
customer dissatisfaction, loss of sales and damage to our reputation.
We depend on sole or limited source suppliers, and any disruption in supply could
impair our ability to deliver our products on time or at expected cost.
We obtain many key components for our products from third-party
suppliers, and in some cases we use a single or a limited number of suppliers. Any interruption in supply could impair our ability to deliver our products until we identify a new source of supply, which could take several weeks, months or longer and
could increase our costs significantly. In general, we do not have written long-term supply agreements with our suppliers but instead purchase components through purchase orders, which expose us to potential price increases and termination of supply
without notice or recourse. If we are required to use a new source of materials or components, it could also result in unexpected manufacturing difficulties and could affect product performance and reliability.
Our gross margins may be negatively affected, which in turn would negatively affect our operating results.
Our gross margins may be negatively affected as a result of a number of factors, including:
|
|
|
increased price competition;
|
|
|
|
excess capacity or excess fixed assets;
|
|
|
|
customer and contract settlements;
|
|
|
|
higher product, material or labor costs;
|
|
|
|
increased inventory provisions or contract and customer settlement costs;
|
|
|
|
loss of cost savings on future inventory purchases as a result of high inventory levels;
|
|
|
|
introductions of new products and costs of entering new markets;
|
|
|
|
increased levels of customer services;
|
|
|
|
changes in distribution channels; and
|
|
|
|
changes in product and geographic mix.
|
Lower than expected gross margins would negatively affect our operating results.
We may not be able to attract or retain the specialized
technical and managerial personnel necessary to achieve our business objectives.
Competition for certain key positions and specialized
technical personnel in the high-technology industry is strong. We believe that our future success depends in part on our continued ability to hire, assimilate, and retain qualified personnel in a timely manner, particularly in key senior management
positions and in our key areas of potential growth. An important factor in attracting and retaining qualified employees is our ability to provide employees with the opportunity to participate in the potential growth of our business through programs
such as stock option plans. We may also find it more difficult to attract or retain qualified employees because of our size. In addition, if we have not properly sized our workforce and retained those employees with the appropriate skills,
13
our ability to compete effectively may be adversely affected. If we are not successful in attracting, retaining or recruiting qualified employees, including
members of senior management, in the future, we may not have the necessary personnel to effectively compete in the highly dynamic, specialized and volatile industry in which we operate or to achieve our business objectives.
Future cash flow fluctuations may affect our ability to fund our working capital requirements or achieve our business objectives in a timely manner.
Our working capital requirements and cash flows historically have been, and are expected to continue to be, subject to quarterly and yearly
fluctuations, depending on such factors as timing and size of capital expenditures, levels of sales, timing of deliveries and collection of receivables, inventory levels, customer payment terms and supplier terms and conditions. We believe our cash
on hand will be sufficient to fund our current business model, manage our investments and meet our customer commitments for at least the next 12 months. However, a greater than expected slow down in capital spending by our customers may require us
to adjust our current business model. As a result, our revenues and cash flows may be materially lower than we expect and we may be required to reduce our capital expenditures and investments or take other measures in order to meet our cash
requirements. We may seek additional funds from liquidity- generating transactions and other conventional sources of external financing (which may include a variety of debt, convertible debt and/or equity financings). We cannot provide any assurance
that our net cash requirements will be as we currently expect. Our inability to manage cash flow fluctuations resulting from the above factors could have a material adverse effect on our ability to fund our working capital requirements from
operating cash flows and other sources of liquidity or to achieve our business objectives in a timely manner.
Our business may be materially and
adversely affected by increased levels of debt.
In order to finance our business or to finance possible acquisitions we may incur
significant levels of debt compared to historical levels, and we may need to secure additional sources of funding, which may include debt or convertible debt financing, in the future. A high level of debt, arduous or restrictive terms and conditions
relating to accessing certain sources of funding, failure to meet the financial and/or other covenants in our credit and/or support facilities and any significant reduction in, or access to, such facilities, poor business performance or lower than
expected cash inflows could have adverse consequences on our ability to fund our business and the operation of our business.
Other effects
of a high level of debt include the following:
|
|
|
we may have difficulty borrowing money in the future or accessing sources of funding;
|
|
|
|
we may need to use a large portion of our cash flow from operations to pay principal and interest on our indebtedness, which would reduce the amount of cash
available to finance our operations and other business activities;
|
|
|
|
a high debt level, arduous or restrictive terms and conditions, or lower than expected cash flows would make us more vulnerable to economic downturns and adverse
developments in our business; and
|
|
|
|
if operating cash flows are not sufficient to meet our operating expenses, capital expenditures and debt service requirements as they become due, we may be
required, in order to meet our debt service obligations, to delay or reduce capital expenditures or the introduction of new products, sell assets and/or forego business opportunities including acquisitions, research and development projects or
product design enhancements.
|
We operate in highly dynamic and volatile industries characterized by changing technologies, evolving
industry standards, frequent new product introductions and relatively short product life cycles.
The markets for our products are
characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. We expect our success to depend, in substantial part, on the timely and successful introduction of high
quality, new products and upgrades, as well as
14
cost reductions on current products to address the operational speed, bandwidth, efficiency and cost requirements of our customers. Our success will also
depend on our ability to comply with emerging industry standards, to operate with products of other suppliers, to address emerging market trends, to provide our customers with new revenue-generating opportunities and to compete with technological
and product developments carried out by others. The development of new, technologically advanced products, is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market
trends. Investments in such development may result in expenses growing at a faster rate than revenues, particularly since the initial investment to bring a product to market may be high. We may not be successful in targeting new market
opportunities, in developing and commercializing new products in a timely manner or in achieving market acceptance for our new products.
The success of new or enhanced products, depends on a number of other factors, including the timely introduction of such products, market acceptance of new technologies and industry standards, the quality and robustness of new or enhanced
products, competing product offerings, the pricing and marketing of such products and the availability of funding for such networks. Products and technologies developed by our competitors may render our products obsolete. If we fail to respond in a
timely and effective manner to unanticipated changes in one or more of the technologies affecting telecommunications or our new products or product enhancements fail to achieve market acceptance, our ability to compete effectively in our industry,
and our sales, market share and customer relationships could be materially and adversely affected.
We face significant competition and may not be able
to increase or maintain our market share and may suffer from competitive pricing practices.
We operate in an industry that is
characterized by industry rationalization and consolidation, vigorous competition for market share and rapid technological development. Competition is heightened in periods of slow overall market growth. These factors could result in aggressive
pricing practices and growing competition from niche companies, established competitors, as well as well-capitalized companies, which, in turn, could have a material adverse effect on our gross margins.
We expect that we will face additional competition from existing competitors and from a number of companies that have entered or may enter our existing
and future markets. Some of our current and potential competitors have greater marketing, technical and financial resources, including access to capital markets and/or the ability to provide customer financing in connection with the sale of
products. Many of our current and potential competitors have also established, or may in the future establish, relationships with our current and potential customers. Other competitive factors include the ability to provide new technologies and
products, end-to-end solutions, and new product features, as well as conformance to industry standards. Increased competition could result in price reductions, negatively affecting our operating results, reducing profit margins and potentially
leading to a loss of market share.
Our business may suffer if we cannot protect our proprietary technology.
Our ability to compete depends significantly upon our patents and our other proprietary technology. The steps we have taken to protect our technology may
be inadequate to prevent others from using what we regard as our technology to compete with us. Our patents could be challenged, invalidated or circumvented, and the rights we have under our patents could provide no competitive advantages. Existing
trade secrets, copyright and trademark laws offer only limited protection. In addition, other companies could independently develop similar or superior technology without violating our intellectual property rights. Any misappropriation of our
technology or the development of competing technology could seriously harm our competitive position, which could lead to a substantial reduction in net sales.
If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive, distract the attention of management, and there can be no assurance that we
would prevail.
15
Claims by others that we infringe their intellectual property rights could harm our business and financial condition.
We cannot be certain that our products do not and will not infringe issued patents, patents that may be issued in the future, or other
intellectual property rights of others. We do not conduct exhaustive patent searches to determine whether the technology used in our products infringes patents held by third parties.
Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract the
attention of our management. If any of our products are found to violate third-party proprietary rights, we may be required to pay substantial damages. In addition, we may be required to re-engineer our products or obtain licenses from third parties
to continue to offer our products. Any efforts to re-engineer our products or obtain licenses on commercially reasonable terms may not be successful, which would prevent us from selling our products, and, in any case, could substantially increase
our costs and have a material adverse effect on our business, financial condition and results of operations.
The market price of our common stock may
be volatile.
Our stock price has historically been volatile. From April 1, 2006 to March 31, 2008, the trading price of our
common stock ranged from $22.81 to $6.07. Many factors may cause the market price of our common stock to fluctuate, including:
|
|
|
variations in our quarterly results of operations;
|
|
|
|
the introduction of new products by us or our competitors;
|
|
|
|
the hiring or departure of key personnel;
|
|
|
|
acquisitions or strategic alliances involving us or our competitors;
|
|
|
|
changes in, or adoptions of, accounting principles; and
|
|
|
|
market conditions in our industries.
|
In addition, the stock market can experience extreme price and volume fluctuations. These fluctuations, which are often unrelated to the operating performance of particular companies, may adversely affect the market price of our common
stock.
Declines in the market price of our common stock may negatively impact our ability to make future strategic acquisitions, raise capital, issue
debt or retain employees.
The stock markets have experienced extreme price fluctuations that have affected the market price and trading
volumes of many technology and telecommunications companies in particular, with potential consequential negative effects on the trading of securities of such companies. A major decline in the capital markets generally, or an adjustment in the market
price or trading volumes of our common stock may negatively impact our ability to raise capital, issue debt, retain employees or make future strategic acquisitions. These factors, as well as general economic and political conditions, and continued
negative events within the technology sector, may in turn have a material adverse effect on the market price of our common stock.
The testing of
electronic communications equipment and the accurate transmission of information entail a risk of product liability claims by customers and others.
Claims may be asserted against Micronetics by end-users of any of our products. We maintain product liability insurance coverage with an aggregate annual liability coverage limit, regardless of the number of
occurrences, of $2.0 million. There is no assurance that such insurance will continue to be available at a
16
reasonable cost or will be sufficient to cover all possible liabilities. In the event of a successful suit against us, lack or insufficiency of insurance
coverage could result in substantial cost and could have a material adverse effect on our business.
Our products with military applications are subject
to export regulations, which may be costly.
We are required to obtain export licenses before filling foreign orders for many of our
products with military or other governmental applications. United States Export Administration regulations control high tech exports like our products for reasons of national security and compliance with foreign policy, to guarantee domestic
reserves of products in short supply and, under certain circumstances, for the security of a destination country. Thus, any foreign sales of our products requiring export licenses must comply with these general policies. Although we have not
experienced any significant export licensing problems to date, such problems may arise in the future. In addition, these regulations are subject to change, and any such change may require us to improve our technologies, incur expenses or both in
order to comply with such regulations.
We are subject to recently enacted environmental regulation, compliance with which may be costly.
In 2006 the European Union (EU) implemented two new directives known as the Restriction on Certain Hazardous Substances
Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE). These directives place restrictions on the distribution within the EU of certain substances, and require a manufacturer to recycle products containing the
restricted substances. We believe that the majority of our products are exempt from the directives because they are used for military purposes rather than by consumers. However, we may not be able to rely on such an exemption until regulators review
documentation and issue a ruling on each product. We are redesigning our products that we believe may not be exempt from the directives in order to be able to continue to offer such products for sale in the EU. We may encounter unanticipated delays
in the completion of the redesign or in the delivery of any products that are not exempt from the directives. In addition certain products that we maintain in inventory may be rendered obsolete if not in compliance with the directives and may have
to be written off. Although we cannot predict the ultimate impact of the directives, they will likely result in additional costs or decreased revenue and could require that we redesign or change how we manufacture our products.
Changes in the securities laws and regulations have increased, and are likely to continue to increase, our costs, and may also adversely affect our ability to attract
and retain qualified directors.
The Sarbanes-Oxley Act has required changes in some of our corporate governance, securities disclosure
and compliance practices. Pursuant to the requirements of that Act, the SEC and the Nasdaq Stock Market have promulgated rules and listing standards covering a variety of subjects. Compliance with these new rules and listing standards has
increased our legal costs, and increased our accounting and auditing costs, and we expect these costs to continue to increase, and to materially impact our financial results. In particular, we have incurred and will continue to incur
substantial expense in the on-going evaluation and testing of our internal control over financial reporting as we comply with Section 404 of the Sarbanes-Oxley Act. These changes in securities laws and regulations may make it more
difficult and more expensive for us to obtain directors and officers liability insurance. Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors, particularly
independent directors, or qualified executive officers.
Our common stock is thinly traded; therefore, our stock price may fluctuate more than the stock
market as a whole.
Although our shares are traded on the Nasdaq Stock Market, our stock is thinly traded. As a result, its market price
may fluctuate significantly more than the stock market as a whole or the stock prices of similar companies. Without a larger float, our common stock will be less liquid than the stock of companies with broader public ownership, and as a result, the
trading prices for our common stock may be more volatile. Among other things, trading of a relatively small volume of common stock may have a greater impact on the trading price than would be the case if the public float were larger.
17
If we or our independent registered public accounting firm are unable to affirm the effectiveness of our internal
control over financial reporting in future years, the market value of our common stock could be adversely affected.
Our independent
registered public accounting firm must audit and report on our internal controls over financial reporting as of March 31, 2010 and subsequent fiscal year end dates, respectively, and such report must be included in our Annual Report on Form
10-K for the year ending March 31, 2010, and in subsequent Annual Reports on Form 10-K for subsequent years, respectively. We cannot assure you that we or our independent registered public accounting firm will be able to report that our
internal controls over financial reporting are effective as of March 31, 2010 and subsequent fiscal year end dates, respectively. In this event, investors could lose confidence in the reliability of our financial statements, which could result
in a decrease in the market value of our Common Stock.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2. Properties.
Our principal manufacturing facility and corporate office is located in 25,000 square feet of general office, warehouse and
manufacturing space situated in a 32,000 square foot building that we own. This facility is located in an industrial park in Hudson, NH. Until May 31, 2007 we leased the remaining 7,000 square feet of this facility to an unaffiliated entity. In
February 2004, we refinanced our mortgage on this facility, entering into a new five year mortgage payable for $630,000 with interest at 5.75%, payable in monthly installments of $12,107. This loan is secured by the land and the building.
MVS operates out of a 3,700 square foot facility located in Monroe, CT, which is leased from an unaffiliated entity.
Micro-Con operates out of a 9,600 square foot facility located in Fairfield, NJ, which is leased from an unaffiliated entity.
Stealth operates out of a 7,100 square foot facility located in Trenton, NJ, which is leased from an unaffiliated entity.
MICA operates out of a 20,750 square foot facility located in Manteca, CA, which is leased from an unaffiliated entity.
We believe our facilities are adequate for our current and presently anticipated future needs.
ITEM 3. Legal Proceedings.
Micronetics is not a party to any pending legal proceedings.
ITEM 4. Submission of Matters to a Vote of Security
Holders.
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
18
Part II
ITEM 5.
|
Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.
|
The common stock is traded on the NASDAQ Capital Market under the symbol NOIZ.
The closing high and low bid prices for the Common Stock for each fiscal quarter from April 1, 2006 until March 31, 2008 as reported by NASDAQ, were
as follows:
Bid Prices
|
|
|
|
|
Quarter Ended
|
|
High
|
|
Low
|
Fiscal 2007
|
|
|
|
|
First Quarter
|
|
22.81
|
|
10.64
|
Second Quarter
|
|
17.74
|
|
7.26
|
Third Quarter
|
|
8.58
|
|
6.69
|
Fourth Quarter
|
|
9.25
|
|
6.90
|
|
|
|
Fiscal 2008
|
|
|
|
|
First Quarter
|
|
9.16
|
|
7.28
|
Second Quarter
|
|
10.39
|
|
7.80
|
Third Quarter
|
|
9.66
|
|
6.57
|
Fourth Quarter
|
|
8.97
|
|
6.07
|
The number of holders of record of the common stock as of June 16, 2008 was 231. Micronetics
believes that there are a substantially greater number of beneficial owners of shares of its common stock who maintain their shares in street name. On June 16, 2008, the last sale price of the common stock as reported by NASDAQ was
$7.80 per share.
Micronetics has not paid any cash dividends during its two most recent fiscal years, nor during any subsequent interim
period. Under its loan agreements, it is restricted from paying dividends without the consent of its bank.
Recent Sales of Unregistered Securities; Use
of Proceeds From Registered Securities
The following summarizes sales of our unregistered securities during the fiscal year ended
March 31, 2008. The securities referenced below were (i) issued without registration and (ii) were subject to restrictions under the Securities Act and the securities laws of certain states, in reliance on the private offering
exemptions contained in Sections 4(2), 4(6) and/or 3(b) of the Securities Act and on Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state laws as a transaction not involving a public offering. No
placement or underwriting fees were paid in connection with these transactions.
The acquisition of MICA Microwave Corporation closed on
June 5, 2007. At that time, we issued 248,135 shares of our common stock to the stockholders of MICA as partial consideration in our acquisition.
The securities issued as consideration in our acquisition were issued to U.S. investors in reliance upon exemptions from the registration provisions of the Securities Act set forth in Section 4(2) thereof
relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.
19
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
Plan category
|
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
|
|
Weighted-average
exercise price of
outstanding
options, warrants
and rights
|
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a)
|
Equity compensation plans and warrants approved by security holders
|
|
755,825
|
|
$
|
7.75
|
|
694,000
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
755,825
|
|
$
|
7.75
|
|
694,000
|
|
|
|
|
|
|
|
|
ITEM 6. Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended March 31, (in thousands, except earnings per share)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Net sales
|
|
$
|
32,625
|
|
|
$
|
23,690
|
|
|
$
|
26,909
|
|
|
$
|
14,059
|
|
|
$
|
13,832
|
|
Gross profit
|
|
$
|
12,919
|
|
|
$
|
9,377
|
|
|
$
|
11,695
|
|
|
$
|
6,421
|
|
|
$
|
6,294
|
|
Gross profit
|
|
|
40
|
%
|
|
|
40
|
%
|
|
|
43
|
%
|
|
|
46
|
%
|
|
|
46
|
%
|
Net income
|
|
$
|
1,662
|
|
|
$
|
1,041
|
|
|
$
|
2,540
|
|
|
$
|
1,275
|
|
|
$
|
1,511
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
$
|
0.34
|
|
|
$
|
0.22
|
|
|
$
|
0.57
|
|
|
$
|
0.29
|
|
|
$
|
0.34
|
|
Basic weighted average shares
|
|
|
4,932
|
|
|
|
4,637
|
|
|
|
4,465
|
|
|
|
4,375
|
|
|
|
4,389
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
|
|
$
|
0.34
|
|
|
$
|
0.22
|
|
|
$
|
0.54
|
|
|
$
|
0.29
|
|
|
$
|
0.34
|
|
Diluted weighted average shares
|
|
|
4,951
|
|
|
|
4,789
|
|
|
|
4,697
|
|
|
|
4,452
|
|
|
|
4,474
|
|
Total assets
|
|
$
|
33,386
|
|
|
$
|
29,819
|
|
|
$
|
27,748
|
|
|
$
|
14,636
|
|
|
$
|
12,964
|
|
Total current liabilities
|
|
$
|
5,426
|
|
|
$
|
5,487
|
|
|
$
|
5,598
|
|
|
$
|
1,918
|
|
|
$
|
2,051
|
|
Long-term debt, net of current portion
|
|
$
|
4,226
|
|
|
$
|
5,633
|
|
|
$
|
5,328
|
|
|
$
|
734
|
|
|
$
|
920
|
|
Other long-term liabilities
|
|
$
|
1,325
|
|
|
$
|
722
|
|
|
$
|
963
|
|
|
$
|
170
|
|
|
$
|
163
|
|
ITEM 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
This section should be read in combination with the accompanying audited consolidated financial statements and
related notes prepared in accordance with accounting principles generally accepted in the United States of America. This section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussed under the heading Risk Factors and elsewhere in this annual report.
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.
20
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS
No. 157). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. Under SFAS 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. The Provisions of SFAS 157, as issued, are effective for the fiscal years beginning after November 15,
2007. However, in February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, (FSP 157-2) that amended SFAS 157 to delay the effective date for all non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). FSP 157-2 defers the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items within the scope. We are currently evaluating the effect, if any, that the adoption of SFAS No. 157 may have on our 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. Although the Company has adopted SFAS 159 as of April 1, 2008, the Company has not yet
elected the fair value option for any items permitted under SFAS 159.
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(Revised),
Business
Combinations
(SFAS 141(Revised)), which replaces Statement of Financial Accounting Standards No. 141,
Business Combinations
(SFAS 141). SFAS 141(Revised) 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(Revised) also requires expensing of acquisition related costs and restructuring costs, and re-measurement of
earn out provisions at fair value. SFAS 141(Revised) is effective for any of the Companys business combinations on or after April 1, 2009. SFAS 141(Revised) will have an impact on accounting for business combinations once adopted, but the
effect is dependent upon acquisitions at the time.
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.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities(SFAS 161). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effects of the derivative
instruments on an entitys financial position, financial performance, and cash flows. SFAS 161 is effective for the Company on April 1, 2009. The Company is currently evaluating the effect that the adoption of SFAS 161 will have on its
consolidated results of operations and financial condition.
21
Critical Accounting Policies and Estimates
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 integrated assembly which includes microwave hardware and embedded 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.
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.
22
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 help 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.
Goodwill and other indefinite lived intangible assets are tested for impairment in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142), which requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but rather, be tested annually for impairment.
The Company assesses goodwill, by reporting unit, for impairment at least once each year by applying a direct value-based fair value test. Goodwill could
be impaired due to market declines, reduced expected future cash flows, or other factors or events. Should the fair value of goodwill at the measurement date fall below its carrying value, a charge for impairment of goodwill would occur in that
period. SFAS 142 requires a two-step impairment testing approach. Companies must first determine whether goodwill is impaired and if so, they must value that impairment based on the amount by which the book value exceeds the estimated fair
value. As a result of the annual impairment test performed as of March 31, 2008, the Company determined that the carrying amount of goodwill did not exceed its fair value and, accordingly, did not record a charge for impairment. There can be no
assurance that goodwill will not become impaired in future periods.
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 Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS 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.
23
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 March 31, 2008 and 2007.
Effective April 1, 2007, we adopted Interpretation No. 48, Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109 (FIN 48), which prescribes a
comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. In particular, the Interpretation requires that a tax benefit
related to a given tax position be reflected in the financial statements only if it is more likely than not that it would be sustained on its technical merits in the event of a tax audit. The assessment of each tax position and the application of
the measurement methodology of FIN 48 requires significant judgment. All tax positions are periodically analyzed and adjusted as a result of events, such as the resolution of tax audits or the expiration of statutes of limitations, which may result
in charges or credits to the provision for income taxes. See Note 13 to the Consolidated Financial Statements included in this Form 10-K for further disclosure regarding FIN 48.
Results of Operations
Fiscal 2008 versus Fiscal 2007
The Consolidated Statement of Income for the twelve months ended March 31, 2008 include the operations of MICA from the acquisition date of
June 5, 2007.
Net sales
Net
sales for Fiscal 2008 were $32,624,946, an increase of $8,934,710 or 38% as compared to net sales of $23,690,236 for Fiscal 2007. The increase in net sales for the fiscal year is primarily attributable to $4.4 million in sales of high performance
mixers and ferrites from MICA, an increase in net sales of high performance power amplifiers to the commercial market of $2.7 million, an increase in voltage controlled oscillators used in electronic jamming systems of $1.0 million and an increase
in net sales of noise sources of $.8 million. Foreign sales accounted for approximately $8,797,497 and $5,225,943 in Fiscal 2008 and Fiscal 2007, respectively. The increase is primarily attributable to the increase in foreign sales related to high
performance power amplifiers shipped to the United Kingdom.
Gross profit margin
Gross profit as a percent of sales is consistent at 40% for both Fiscal 2008 and Fiscal 2007.
Research and development
Research and development
(R&D) expense was consistent at 3% of net sales in Fiscal 2008 and Fiscal 2007. However, R&D expenses increased $235,681, or 30% for Fiscal 2008 as compared to Fiscal 2007 primarily due to development work on an inflight
high-speed internet transceiver product.
Selling, general and administrative
Selling, general and administrative (SG&A) expense decreased as a percent of net sales to 23% in Fiscal 2008 from 24% in Fiscal 2007,
primarily due to the increase in net sales. However, SG&A expenses increased $1,905,225 or 33% to $7,589,390 for Fiscal 2008, as compared to $5,684,165 for Fiscal 2007. The overall
24
increase in spending was primarily attributable to the inclusion of MICAs SG&A expenses of $944,000, an increase in salaries and benefit expense of
$607,000 due to an increase in staffing, an increase in professional fees related to compliance with Section 404(a) of the Sarbanes-Oxley Act of $168,000, an increase in commission expense of $100,000 and a increase in stock-based compensation
expense of $94,000 primarily related to a grant of restricted stock during Fiscal 2008.
Amortization of intangible assets
Amortization expense attributable to the intangible assets related to the acquisitions of Stealth and MICA was $733,160 in Fiscal 2008 as compared to
$751,819 in Fiscal 2007.
Interest expense
Interest expense increased $56,368 or 13% to $485,356 for Fiscal 2008 as compared to $428,988 in Fiscal 2007. The increase in interest expense was primarily attributable to the increase in borrowings in March 2007 as a result of the $6.5
million term loan used to finance the MICA acquisition.
Unrealized loss on interest rate swap
An unrealized loss of $280,865 was recorded in Fiscal 2008 to reflect the fair value for an interest rate swap agreement entered into in April 2007 to
mitigate the interest rate fluctuations on our term loan.
Provision for income taxes
Our effective tax rate was 45% for Fiscal 2008 as compared to 48% for Fiscal 2007. The decrease in the effective tax rate is primarily related to a larger
credit for domestic production activities deduction in Fiscal 2008 as compared to Fiscal 2007.
Financial Condition, Liquidity and Capital Resources
We finance our operating and investment requirements primarily through operating cash flows and borrowings. We had cash and working
capital at March 31, 2008 of $3,163,415 and $11,197,241, 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 3.08 to 1 at March 31,
2008, as compared to 3.16 to 1 at March 31, 2007.
Net cash provided by operating activities was $3,888,038 in Fiscal 2008 compared to
$1,111,173 during Fiscal 2007. The increase in net cash provided by operating activities was primarily the result of an increase in net income of $621,663, unrealized loss on interest rate swap of $280,865 and a net increase in working capital of
$2,287,712, offset by an increase in deferred tax assets of $411,079. The primary change in working capital was a reduction in prepaid expenses due to lower tax payments made during Fiscal 2008 as compared to Fiscal 2007 and an increase in accrual
expenses in Fiscal 2008 as compared to Fiscal 2007.
Net cash used in investing activities was $5,839,078 during Fiscal 2008 as compared to
$114,286 in Fiscal 2007 primarily as a result of the acquisition of MICA of $3,120,833 and the final earnout payment of $1.5 million to the former stockholders of Stealth in Fiscal 2008, and $1,086,643 in property and equipment purchases.
Net cash used in financing activities was $1,944,069 during Fiscal 2008 as compared to cash provided by financing activities of $795,057
during Fiscal 2007. In Fiscal 2008, $2,065,589 was used to repay mortgages, line of credit and term loan. In Fiscal 2007, proceeds from the new Citizens term loan of $6,500,000 was offset by payments against the TD Banknorth term loan, line of
credit and mortgages of $6,090,935.
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.
25
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 a 3 month libor plus 1.8%, which at March 31, 2008 was 6.50%. The term loan expires in June 2012.
The revolving line of credit bears interest at the 1 month libor plus 1.8% rate, which at March 31, 2008 was 5.07%. The company had an entire line
of $5.0 million available at March 31, 2008.
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 March 31, 2008 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.
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.
Acquisition
On June 5, 2007, the Company
acquired MICA Microwave, Inc. (MICA), a California corporation in a merger transaction pursuant to which MICA became a wholly-owned subsidiary of Micronetics, and 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.
Off-Balance Sheet Arrangements
Micronetics has no off-balance sheet arrangements.
26
ITEM 8. Financial Statements and Supplementary Data.
This information is contained on pages F-1 through F-24 hereof.
27
ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure.
None.
ITEM 9A(T). Controls and Procedures.
Evaluation of disclosure controls and procedures
As of March 31, 2008,
the Company carried out an evaluation, under the supervision and with the Companys management, including the Companys Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Acting Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective as of March 31, 2008, to provide reasonable assurance that material information relating to the Company was made known to him by others within the Company.
Evaluation of internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Act of 1934. Under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. In making its assessment of internal control over financial reporting, management used criteria issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our evaluation under such framework, our management concluded that our internal control over financial reporting was effective as of
March 31, 2008.
This annual report does not include an attestation report of our independent registered public accounting firm
regarding internal control over financial reporting pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only managements report in this annual report.
Changes in internal control
There were no significant changes in the Companys internal controls over financial reporting that occurred
during the year ended March 31, 2008 that have materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
Important Considerations
The effectiveness of our disclosure controls and procedures is subject to various inherent limitations, including
cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Because of these limitations, there can be no assurance that
any system of disclosure controls and procedures will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.
ITEM 9B. Other Information.
None.
28
P
A
R
T
III
The information to be contained in Items 10-14 herein is incorporated by reference to the Companys proxy statement to be filed with the Securities and Exchange Commission on or before July 29, 2008.
29
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.
(a) Financial Statements, Schedules and Exhibits:
(1),(2) The consolidated financial statements and required schedules begin on page F-1.
(3) Exhibits.
|
|
|
|
|
2.1
|
|
Stock Purchase Agreement among Micronetics, Inc., and the Stockholders of Stealth Microwave, Inc., dated June 10, 2005 (incorporated by reference to Exhibit 2.1 to the Current Report on
Form 8-K filed by the Company on June 16, 2005.
|
|
|
2.2
|
|
Earnout Agreement, dated June 10, 2005, among Micronetics, Inc., Stealth Microwave, Inc., the Stockholders of Stealth Microwave, Inc. and Stephen N. Barthelmes Sr., Stephen N. Barthelmes
Jr. and Brian E. Eggleston as the representatives of the stockholders (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed by the Company on June 16, 2005).
|
|
|
2.3
|
|
Amendment No. 1 to Earnout Agreement, dated as of February 9, 2006, among Micronetics, Inc., Stealth Microwave, Inc.; and Stephen N. Barthelmes Sr., Stephen N. Barthelmes Jr., and Brian E.
Eggleston, as representatives of the Sellers (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-QSB filed by the Company on February 10, 2006).
|
|
|
2.4
|
|
Agreement of Merger and Plan of Reorganization among Micronetics, Inc., Del Merger Subsidiary, Inc., MICA Microwave Corporation, Frederick Mills, Individually, and Frederick Mills, As the
Stockholders Representative, dated June 5, 2007 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on June 5, 2007).
|
|
|
2.5
|
|
Company Stockholders Agreement, by and among Micronetics, Inc., MICA Microwave Corporation, Del Merger Subsidiary, Inc., the Stockholders of MICA Microwave Corporation listed on Exhibit A
thereto, Frederick Mills, individually, and Frederick Mills as the Stockholders Representative, dated June 5, 2007 (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed by the Company on June 5,
2007).
|
|
|
3.1
|
|
Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to Registration Statement No. 33-16453 (the Registration
Statement)).
|
|
|
3.2
|
|
Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed on October 19, 2007).
|
|
|
4.1
|
|
Specimen certificate for common stock of Micronetics, Inc. (incorporated by reference to Exhibit 4.1 to the Registration Statement.
|
|
|
10.1
|
|
First Amended and Restated 1996 Stock Option Plan (incorporated by reference to Exhibit 99.1 of Registration Statement No. 333-46646 filed on Form S-8 filed on September 26,
2000).*
|
|
|
10.2
|
|
2003 Stock Incentive Plan (incorporated by reference to Appendix A to the Companys Definitive Proxy Statement filed on September 24, 2003).*
|
|
|
10.3
|
|
2006 Equity Incentive Plan (incorporated by reference to Appendix B to the Companys Definitive Proxy Statement filed on July 31, 2006).*
|
|
|
10.4
|
|
Mortgage Note dated February 13, 2004 by the Company to Banknorth, N.A. (incorporated by reference to Exhibit 10.4 of the Companys Annual Report on form 10-KSB for its fiscal year ended
March 31, 2004 (Fiscal 2004)).
|
|
|
10.5
|
|
Mortgage Deed and Security Agreement dated February 13, 2004 between the Company and Banknorth, N.A. (incorporated by reference to Exhibit 10.5 of the Companys Annual Report for
Fiscal 2004).
|
30
|
|
|
|
|
10.6
|
|
Amended and Restated 401(k) Plan (incorporated by reference to Exhibit 10.6 to the Companys Annual Report on Form 10-KSB for its fiscal year ended March 31, 2005).*
|
|
|
10.7
|
|
Amended and Restated Employment Agreement, dated as of June 26, 2006, between Stealth Microwave, Inc. and Stephen N. Barthelmes, Jr. (incorporated by reference to Exhibit 10.14 to the
Annual Report on Form 10-KSB filed by the Company on June 29, 2006).*
|
|
|
10.8
|
|
Amended and Restated Employment Agreement, dated as of June 26, 2006, between Stealth Microwave, Inc. and Brian E. Eggleston (incorporated by reference to Exhibit 10.15 to the Annual Report on
Form 10-KSB filed by the Company on June 29, 2006).*
|
|
|
10.9
|
|
Commercial Loan Agreement, dated as of March 30, 2007, between Micronetics, Inc. and Citizens Bank New Hampshire (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed by the Company on March 30, 2007).
|
|
|
10.10
|
|
Revolving Credit Note, dated as of March 30, 2007, between Micronetics, Inc. and Citizens Bank New Hampshire (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K
filed by the Company on March 30, 2007).
|
|
|
10.11
|
|
Term Note, dated as of March 30, 2007, between Micronetics, Inc. and Citizens Bank New Hampshire (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Company
on March 30, 2007).
|
|
|
10.12
|
|
Security Agreement, dated as of March 30, 2007, between Micronetics, Inc. and Citizens Bank New Hampshire (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed
by the Company on March 30, 2007).
|
|
|
10.13
|
|
Security Agreement (Intellectual Property), dated as of March 30, 2007, between Micronetics, Inc. and Citizens Bank New Hampshire (incorporated by reference to Exhibit 10.5 to the Current Report
on Form 8-K filed by the Company on March 30, 2007).
|
|
|
10.14
|
|
Stock Pledge and Security Agreement, dated as of March 30, 2007, between Micronetics, Inc. and Citizens Bank New Hampshire (incorporated by reference to Exhibit 10.6 to the Current Report on
Form 8-K filed by the Company on March 30, 2007).
|
|
|
10.15
|
|
Employment Agreement between MICA Microwave Corporation and Frederick Mills dated June 5, 2007 (incorporated by reference to Exhibit 2.3 to the Current Report on Form 8-K filed by the Company on
June 5, 2007).*
|
|
|
10.16
|
|
Employment Agreement between the Company and David Robbins dated July 17, 2007 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on July 18,
2007).*
|
|
|
21
|
|
List of Subsidiaries of the Company.
|
|
|
23.1
|
|
Consent of Grant Thornton LLP dated June 30, 2008.
|
|
|
31.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
|
Certification pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
*
|
Management contract or compensatory plan or arrangement
|
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
|
|
MICRONETICS, INC.
|
|
|
|
|
Dated: June 30, 2008
|
|
|
|
By:
|
|
/s/ D
AVID
R
OBBINS
|
|
|
|
|
|
|
|
|
David Robbins,
President and Chief Executive Officer
Principal Executive Officer
|
In accordance with the Exchange Act this report has been signed below by the following person on
behalf of the registrant and in the capacities and on the dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
/s/ D
AVID
R
OBBINS
David Robbins
|
|
President, Chief Executive Officer and Acting Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting
Officer)
|
|
June 30, 2008
|
|
|
|
/s/ D
AVID
S
IEGEL
David Siegel
|
|
Director
|
|
June 30, 2008
|
|
|
|
/s/ D
OROTHY
A
NNE
H
URD
Dorothy Anne Hurd
|
|
Director
|
|
June 30, 2008
|
|
|
|
/s/ G
ERALD
H
ATTORI
Gerald Hattori
|
|
Director
|
|
June 30, 2008
|
|
|
|
/s/ S
TEPHEN
B
ARTHELMES
J
R
.
Stephen Barthelmes Jr.
|
|
Director
|
|
June 30, 2008
|
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Micronetics, Inc.
We have audited the accompanying consolidated balance sheets of Micronetics, Inc. and subsidiaries (a Delaware
Corporation) (collectively, the Company) as of March 31, 2008 and 2007 and the related statements of income, shareholders equity and cash flows for the years then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our
audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 14 to the consolidated financial
statements, as of April 1, 2008, the Company adopted Financial Accounting Standard Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income TaxesAn Interpretation of SFAS No. 109.
|
/s/ G
RANT
T
HORNTON
L
LP
|
Boston, Massachusetts
|
June 30, 2008
|
F-1
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,163,415
|
|
|
$
|
7,058,524
|
|
Short-term investment
|
|
|
400,000
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $364,981 and $297,886 in March 31, 2008 and March 31, 2007,
respectively
|
|
|
4,861,780
|
|
|
|
3,932,029
|
|
Inventories, net
|
|
|
7,316,246
|
|
|
|
5,548,691
|
|
Deferred tax asset
|
|
|
576,170
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
306,159
|
|
|
|
784,649
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,623,770
|
|
|
|
17,323,893
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
4,159,963
|
|
|
|
4,017,465
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Security deposits
|
|
|
24,659
|
|
|
|
12,302
|
|
Long-term investment
|
|
|
250,000
|
|
|
|
|
|
Other long term assets
|
|
|
35,034
|
|
|
|
138,493
|
|
Intangible assets, net
|
|
|
3,361,200
|
|
|
|
2,344,364
|
|
Goodwill
|
|
|
8,931,944
|
|
|
|
5,982,709
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
12,602,837
|
|
|
|
8,477,868
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
33,386,570
|
|
|
$
|
29,819,226
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
1,434,193
|
|
|
$
|
1,449,443
|
|
Accounts payable
|
|
|
1,284,567
|
|
|
|
695,142
|
|
Accrued expenses
|
|
|
2,707,769
|
|
|
|
3,342,365
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,426,529
|
|
|
|
5,486,950
|
|
Long-term debt, net of current portion
|
|
|
4,226,342
|
|
|
|
5,633,386
|
|
Other long-term liability
|
|
|
80,000
|
|
|
|
|
|
Deferred tax liability
|
|
|
1,245,052
|
|
|
|
721,917
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,977,923
|
|
|
|
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 March 31, 2008 and
March 31, 2007, respectively
|
|
|
53,912
|
|
|
|
50,255
|
|
Additional paid-in capital
|
|
|
11,608,536
|
|
|
|
8,541,274
|
|
Retained earnings
|
|
|
12,478,398
|
|
|
|
10,912,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,140,846
|
|
|
|
19,503,987
|
|
Treasury stock at cost, 383,475 and 358,541 shares at March 31, 2008 and March 31, 2007, respectively
|
|
|
(1,732,199
|
)
|
|
|
(1,527,014
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
22,408,647
|
|
|
|
17,976,973
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
33,386,570
|
|
|
$
|
29,819,226
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net sales
|
|
$
|
32,624,946
|
|
|
$
|
23,690,236
|
|
Cost of sales
|
|
|
19,705,886
|
|
|
|
14,313,091
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,919,060
|
|
|
|
9,377,145
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,018,010
|
|
|
|
782,329
|
|
Selling, general and administrative
|
|
|
7,589,390
|
|
|
|
5,684,165
|
|
Amortization of intangible assets
|
|
|
733,160
|
|
|
|
751,819
|
|
Gain on sale of property and equipment
|
|
|
(90,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,250,208
|
|
|
|
7,218,313
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,668,852
|
|
|
|
2,158,832
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
106,684
|
|
|
|
195,641
|
|
Interest expense
|
|
|
(485,356
|
)
|
|
|
(428,988
|
)
|
Rental income
|
|
|
5,572
|
|
|
|
33,425
|
|
Unrealized loss on interest rate swap
|
|
|
(280,865
|
)
|
|
|
|
|
Miscellaneous (expense) income
|
|
|
(1,568
|
)
|
|
|
43,679
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(655,533
|
)
|
|
|
(156,243
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
3,013,319
|
|
|
|
2,002,589
|
|
Provision for income taxes
|
|
|
1,350,936
|
|
|
|
961,869
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,662,383
|
|
|
$
|
1,040,720
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.34
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,932,545
|
|
|
|
4,637,528
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
4,951,195
|
|
|
|
4,789,232
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares
|
|
Stock
par
value
|
|
Additional
paid-in
capital
|
|
Retained
earnings
|
|
|
Treasury
stock
|
|
|
Total
|
|
Balance at March 31, 2006
|
|
4,955,582
|
|
|
49,556
|
|
|
7,464,691
|
|
|
9,871,738
|
|
|
|
(1,527,014
|
)
|
|
|
15,858,971
|
|
Exercise of stock options
|
|
69,875
|
|
|
699
|
|
|
350,448
|
|
|
|
|
|
|
|
|
|
|
351,147
|
|
Issuance of options for service
|
|
|
|
|
|
|
|
7,480
|
|
|
|
|
|
|
|
|
|
|
7,480
|
|
Tax benefit from the exercise of stock options
|
|
|
|
|
|
|
|
47,660
|
|
|
|
|
|
|
|
|
|
|
47,660
|
|
Stock based compensation
|
|
|
|
|
|
|
|
670,995
|
|
|
|
|
|
|
|
|
|
|
670,995
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,040,720
|
|
|
|
|
|
|
|
1,040,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
92,625
|
|
|
926
|
|
|
329,053
|
|
|
|
|
|
|
|
|
|
|
329,979
|
|
Issuance of common stock for MICA acquisition
|
|
248,135
|
|
|
2,481
|
|
|
1,997,487
|
|
|
|
|
|
|
|
|
|
|
1,999,968
|
|
Issuance of restricted stock
|
|
25,000
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Cumulative effect of the recognition of uncertain income tax positions
|
|
|
|
|
|
|
|
|
|
|
(96,443
|
)
|
|
|
|
|
|
|
(96,443
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(205,185
|
)
|
|
|
(205,185
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
740,722
|
|
|
|
|
|
|
|
|
|
|
740,722
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,662,383
|
|
|
|
|
|
|
|
1,662,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
5,391,217
|
|
$
|
53,912
|
|
$
|
11,608,536
|
|
$
|
12,478,398
|
|
|
$
|
(1,732,199
|
)
|
|
$
|
22,408,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,662,383
|
|
|
$
|
1,040,720
|
|
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,731,919
|
|
|
|
1,655,856
|
|
Stock-based compensation
|
|
|
740,722
|
|
|
|
670,995
|
|
Gain on sale of property and equipment
|
|
|
(90,352
|
)
|
|
|
|
|
Unrealized loss on interest rate swap
|
|
|
280,865
|
|
|
|
|
|
Provision (reduction) for allowances on accounts receivable
|
|
|
67,095
|
|
|
|
(66,221
|
)
|
Provision for inventory obsolescence and losses
|
|
|
312,394
|
|
|
|
495,964
|
|
Non-cash charges for options issued for services
|
|
|
|
|
|
|
7,480
|
|
Deferred taxes
|
|
|
(652,221
|
)
|
|
|
(241,142
|
)
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(320,938
|
)
|
|
|
401,936
|
|
Inventories
|
|
|
(771,370
|
)
|
|
|
(316,065
|
)
|
Other long term assets
|
|
|
103,458
|
|
|
|
|
|
Income taxes payable
|
|
|
|
|
|
|
(1,008,901
|
)
|
Prepaid expenses, other current assets, and other assets
|
|
|
353,774
|
|
|
|
(836,129
|
)
|
Accounts payable
|
|
|
211,968
|
|
|
|
110,402
|
|
Accrued expenses and deferred revenue (see note 3)
|
|
|
258,341
|
|
|
|
(803,722
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,888,038
|
|
|
|
1,111,173
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(650,000
|
)
|
|
|
|
|
Sale of investments
|
|
|
|
|
|
|
582,730
|
|
Purchase of equipment
|
|
|
(1,086,643
|
)
|
|
|
(604,561
|
)
|
Proceeds from sale of property and equipment
|
|
|
518,398
|
|
|
|
|
|
MICA acquisition, net of cash acquired
|
|
|
(3,120,833
|
)
|
|
|
|
|
Stealth acquisition, net of cash acquired (see note 3)
|
|
|
(1,500,000
|
)
|
|
|
(92,455
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,839,078
|
)
|
|
|
(114,286
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from provided by financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the term loan
|
|
|
|
|
|
|
6,500,000
|
|
Proceeds from line of credit
|
|
|
728,528
|
|
|
|
|
|
Repayment of the line of credit
|
|
|
(728,528
|
)
|
|
|
(475,972
|
)
|
Repayments on mortgages and term loan
|
|
|
(1,418,769
|
)
|
|
|
(5,614,964
|
)
|
Repayment of the MICA debt
|
|
|
(646,820
|
)
|
|
|
|
|
Repayments of capital leases
|
|
|
(3,524
|
)
|
|
|
(12,814
|
)
|
Tax benefit upon exercise of stock options
|
|
|
|
|
|
|
47,660
|
|
Proceeds from the exercise of stock options and issuance of restricted common stock
|
|
|
125,044
|
|
|
|
351,147
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,944,069
|
)
|
|
|
795,057
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(3,895,109
|
)
|
|
|
1,791,944
|
|
Cash and cash equivalents at beginning of period
|
|
|
7,058,524
|
|
|
|
5,266,580
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
3,163,415
|
|
|
$
|
7,058,524
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
361,226
|
|
|
$
|
435,312
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
1,619,000
|
|
|
$
|
2,704,899
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Treasury stock purchase from stock option exercise
|
|
$
|
205,185
|
|
|
$
|
|
|
Shares issued to MICA shareholders
|
|
$
|
1,999,968
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008 AND 2007
Note 1. 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 2). 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
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America (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, valuation of investments, 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.
Investments
The Companys investments consist of auction rate securities
(ARS) with varying maturities. The Companys ARS are issued by a closed-end fixed income investment fund that holds auctions every 28 days to reset the dividend rates for the next period.
The ARS market has experienced widespread failures, which could expose these securities to a failed auction. Although a failed auction results in a lack
of liquidity in the securities it does not signify a default by the issuer.
Subsequent to year end, the Company redeemed $400,000 of its
ARS at par and as a result, this amount has been classified as a short-term investment. The remaining $250,000 has not been redeemed and based on the lack of liquidity relating to these securities, the Company has classified them as a long-term
investment. The Company believes that the carrying value of its ARS approximates fair value as of March 31, 2008. The investments are classified as available for sale and any unrealized holding gains or losses, if any, will be
recorded as a separate component of other comprehensive income, net of tax.
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 integrated assembly which includes microwave hardware and embedded software,
that are delivered to original equipment manufacturers (OEMs) of telecommunication and networking products who are considered to be end users.
F-6
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
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 cost of product warranties are accrued based on historical experience at the time the revenue is recognized. The Company offers a one-year warranty unless customers
purchase an extended warranty.
Shipping and handling fees
The Company records shipping and handling fees billed to customers
as revenue. Shipping and handling costs are reported as a component of cost of sales.
Cash and cash equivalents
The Company
considers certificates of deposit, money market funds, and highly liquid debt instruments with an original maturity of three months or less to be cash equivalents.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, investments, interest rate swap and accounts
receivable. The Company may invest in high-quality money market instruments, securities of the U.S. government, and high-quality corporate issues. Accounts receivable are generally unsecured and are derived from the Companys customers
located around the world. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses.
Fair value of financial instruments
The carrying amounts reported in the consolidated balance sheet for cash, investments, trade receivables, accounts payable, and accrued expenses approximate fair value because of the
relatively short maturity of these instruments. ARSs are valued based upon prices received from third parties. The interest rate swap is at fair value and is arrived at by discounting the present value of the difference between the contractual
swap rate and the current market swap rates on March 31, 2008, utilizing the notional amounts and the remaining terms of the swap agreement. As of March 31, 2008, the fair value of the swap was recorded as a liability in the amount of
$280,865. The fair value of the Companys long-term debt approximates fair value as it bears interest at variable market rates.
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. The Company regularly monitors
collections and payments from their customers and maintains 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, the Company cannot guarantee that it will continue to
experience the same credit loss rates that have been experienced in the past. The Company writes off accounts receivable against the allowance in the period that a receivable is determined to be uncollectible. Recovery of amounts previously written
off are recorded when received.
Inventories
Inventories are valued at the lower of cost or market (net realizable value),
determined using the first-in, first-out method. Inventory items are reviewed regularly for excess and obsolete inventory based on an estimated forecast of product demand. Demand for the Companys products can be forecasted based on current
backlog, customer options to reorder under existing contracts, the need to retrofit older units and parts needed for general repairs. Inventories that are in excess of future requirements are written down their estimated value based upon projected
demand. 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
the companys our inventories and operating results could be affected accordingly.
F-7
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
Property, plant and equipment
Property, plant and equipment are stated at historical cost
less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets as follows:
|
|
|
Buildings and improvements
|
|
Up to 40 years
|
Machinery and equipment
|
|
3-10 years
|
Furniture and fixtures
|
|
7 years
|
Leasehold improvements
|
|
lesser of the lease term or useful life
|
Goodwill and intangible assets
Intangible assets consist of certain identifiable
assets resulting from business combinations, including intellectual property, customer relationships, backlog and non-compete covenants. These assets are being amortized over their estimated useful lives.
Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired.
In accordance with Statement of Financial Accounting Standards No. 142 (SFAS 142)Goodwill and Other Intangible Assets, goodwill is not amortized, but rather, is tested annually for impairment.
Impairment of long-lived assets
Goodwill and other indefinite lived intangible assets are tested for impairment in accordance with
SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142), which requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but rather, be tested annually for impairment.
The Company assesses goodwill, by reporting unit, for impairment at least once each year by applying a direct value-based fair value test.
Goodwill could be impaired due to market declines, reduced expected future cash flows, or other factors or events. Should the fair value of goodwill at the measurement date fall below its carrying value, a charge for impairment of goodwill would
occur in that period. SFAS 142 requires a two-step impairment testing approach. Companies must first determine whether goodwill is impaired and if so, they must value that impairment based on the amount by which the book value exceeds the
estimated fair value. As a result of the annual impairment test performed as of March 31, 2008, the Company determined that the carrying amount of goodwill did not exceed its fair value and, accordingly, did not record a charge for impairment.
There can be no assurance that goodwill will not become impaired in future periods.
Research and development
Research and
development costs are accounted for in accordance with Statement of Financial Accounting Standards No. 2 (SFAS 2), Accounting for Research and Development Costs. As such, research and development costs are charged to
expense when incurred. Amounts expended for the years ended March 31, 2008 and 2007 were $1,018,010 and $782,329, respectively.
Advertising costs
Advertising costs are expensed as incurred and are reported as a component of Sales, general and administrative expenses in the companys consolidated statements of income. Advertising expenses
were $125,601 in Fiscal 2008 and $64,026 in Fiscal 2007.
Income taxes
The Company calculates its provision for federal and
state income taxes based on current tax law and recognizes 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 March 31, 2008 and 2007.
F-8
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
Earnings per share
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Potential
dilutive common shares represent the dilutive effect of the assumed exercise of certain outstanding stock options.
Restricted shares of
common stock that vest based on the satisfaction of certain conditions are treated as contingently issuable shares until the conditions are satisfied. These shares are excluded from the basic earnings per share calculation and included in the
diluted earnings per share calculation.
Comprehensive income (loss)
There are no items of other comprehensive income (loss) at
March 31, 2008.
Off-balance sheet arrangements
The Company does not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (SPEs), which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purpose. As of March 31, 2008 and 2007, the Company was not involved in any unconsolidated SPE transactions.
Stock-based Compensation
The Company accounts for share-based compensation in accordance with Statement of Financial Accounting Standard
No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), and related interpretations. SFAS 123(R) requires the measurement and recognition of compensation expense based on estimated fair value for all share-based payment awards
including stock options, employee stock purchases under employee stock purchase plans, non-vested share awards (restricted stock) and stock appreciation rights. The Company uses the Black-Scholes pricing model as the most appropriate method for
determining the estimated fair value of all applicable awards. For share-based awards granted after April 1, 2006, the Company recognized compensation expense based on the estimated grant date fair value method required under SFAS 123(R). For
all awards the Company has recognized compensation expense using the straight-line amortization method over the vesting period of the award. As SFAS 123(R) requires that share-based compensation expense be based on awards that ultimately vest,
estimated share-based compensation for 2008 and 2007 has been reduced for estimated forfeitures.
The Company adopted the provisions of
SFAS 123(R), using the modified prospective transition method, beginning April 1, 2006. Accordingly, the Company recorded share-based compensation expense during fiscal year 2007 for awards granted prior to but not yet vested as of
April 1, 2006 as if the fair value method required for pro forma disclosure under SFAS 123 were in effect for expense recognition purposes. In accordance with that transition method, the Company has not restated prior periods for the effect of
compensation expense calculated under SFAS 123(R).
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.
F-9
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
(SFAS No. 157). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under SFAS 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. The Provisions of SFAS 157, as issued, are effective for the fiscal years beginning after
November 15, 2007. However, in February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, (FSP 157-2) that amended SFAS 157 to delay the effective date for all
non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). FSP 157-2 defers the effective date of SFAS 157 to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope. The Company is currently evaluating the effect, if any, that the adoption of SFAS No. 157 may have on its 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. Although the Company has adopted SFAS 159 as of April 1, 2008, the
Company has not yet elected the fair value option for any items permitted under SFAS 159.
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 (Revised),
Business Combinations
(SFAS 141 (Revised)), which replaces Statement of Financial Accounting Standards No. 141,
Business Combinations
(SFAS
141). SFAS 141 (Revised) 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 (Revised) also requires expensing of acquisition
related costs and restructuring costs, and re-measurement of earn out provisions at fair value. SFAS 141 (Revised) is effective for any of the Companys business combinations on or after April 1, 2009. SFAS 141 (Revised) will have an
impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at the time.
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.
In March 2008, the FASB issued SFAS
No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand the effects of the derivative instruments on an entitys financial position, financial performance, and cash flows. SFAS 161 is effective for the Company on April 1, 2009. The Company is
currently evaluating the effect that the adoption of SFAS 161 will have on its consolidated results of operations and financial condition.
F-10
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
2. ACQUISITIONS
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:
|
|
|
|
|
|
|
(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 Statement of Financial Accounting
Standards No. 141 (SFAS 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 March 31, 2008. The values and useful lives
assigned to the intangible assets were based on management estimates and guidance from an independent appraisal. The allocation of the purchase price is preliminary and may be subject to adjustments. The Company expects the allocation of the
purchase price to be finalized by Q1 Fiscal 2009 and does not anticipate any material adjustments.
F-11
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
The following table sets forth certain pro forma results for the year ended March 31, 2008 and
2007 if the acquisition of MICA had taken place on April 1, 2006 (unaudited):
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
(in thousands, except
earnings per share)
|
|
(in thousands, except
earnings per share)
|
Pro forma revenue
|
|
$
|
33,439
|
|
$
|
29,141
|
Pro forma net income (1)
|
|
$
|
1,698
|
|
$
|
997
|
Pro forma earnings per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
$
|
0.20
|
Diluted
|
|
$
|
0.34
|
|
$
|
0.20
|
(1)
|
Amortization costs of approximately $231,000 related to the purchase price in fiscal year 2008 were assessed to the fiscal year 2007 income. Management believes that including these
adjustments in the above periods allow investors to better compare results in the future periods.
|
3. INTANGIBLE ASSETS AND GOODWILL
The following table presents details of the Companys finite-lived intangible assets as of March 31, 2008 and March 31, 2007
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Useful
Life
(years)
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net
Value
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net
Value
|
Customer relationships (non-contractual)
|
|
7-10
|
|
$
|
4,130
|
|
$
|
1,282
|
|
$
|
2,848
|
|
$
|
2,950
|
|
$
|
761
|
|
$
|
2,189
|
Covenants not to compete
|
|
2
|
|
|
480
|
|
|
480
|
|
|
|
|
|
480
|
|
|
433
|
|
|
47
|
Order backlog
|
|
1
|
|
|
380
|
|
|
364
|
|
|
16
|
|
|
290
|
|
|
290
|
|
|
|
Trade Name
|
|
10
|
|
|
260
|
|
|
21
|
|
|
239
|
|
|
|
|
|
|
|
|
|
Developed technology-drawings
|
|
5
|
|
|
390
|
|
|
132
|
|
|
258
|
|
|
170
|
|
|
62
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
|
|
$
|
5,640
|
|
$
|
2,279
|
|
$
|
3,361
|
|
$
|
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)
|
2009
|
|
$
|
660
|
2010
|
|
|
643
|
2011
|
|
|
616
|
2012
|
|
|
609
|
2013
|
|
|
234
|
Thereafter
|
|
|
599
|
|
|
|
|
Total
|
|
$
|
3,361
|
|
|
|
|
F-12
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
Changes in the carrying amount of goodwill at March 31, 2008 and March 31, 2007 are as
follows:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Balance at the beginning of the period
|
|
$
|
5,982,709
|
|
$
|
4,390,254
|
Acquisitions
|
|
|
2,949,235
|
|
|
|
Earnout payment
|
|
|
|
|
|
1,500,000
|
Adjustments
|
|
|
|
|
|
92,455
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
8,931,944
|
|
$
|
5,982,709
|
|
|
|
|
|
|
|
The Company recorded as an adjustment to goodwill the final earnout payment of $1.5 million earned
by the former stockholders of Stealth as of March 31, 2007, based on meeting certain financial targets as provided for under the acquisition documents. This amount was earned and accrued as of March 31, 2007, however payment was made in April
2007. The Company has revised its Fiscal 2007 Consolidated Statement of Cash Flows presented in this Annual Report. The Fiscal 2007 Consolidated Statement of Cash Flows previously reflected this payment being made in Fiscal 2007 rather than Fiscal
2008. The effect of this revision on the Fiscal 2007 Consolidated Statement of Cash Flows is to reduce the Net cash provided by operating activities and the Net cash used in investing activities by approximately $1.5 million. Management believes the
impact of this revision is immaterial.
During Fiscal 2008, the Company determined to consolidate its Enon reporting unit located in
Topsfield, MA into its Hudson, NH facility to provide operational and financial efficiencies. As a result, the assets and liabilities of the Enon reporting unit were combined and are being used in the consolidated entity and were used to determine
the fair value of the combined new reporting unit in the testing of goodwill impairment at March 31, 2008.
Approximately $1.1 million
of goodwill is deductible for income tax purposes and approximately $7.8 million is not deductible for income tax purposes. At March 31, 2008, $178,752 is recorded as a deferred income tax liability resulting from the acquisition.
4. ACCOUNTS RECEIVABLE, NET
At March 31,
2008 and 2007 accounts receivable, net of allowances consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Accounts receivable
|
|
$
|
5,226,761
|
|
|
$
|
4,229,915
|
|
Less allowances
|
|
|
(364,981
|
)
|
|
|
(297,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,861,780
|
|
|
$
|
3,932,029
|
|
|
|
|
|
|
|
|
|
|
The activity related to the Companys allowances for doubtful accounts on accounts receivable
for Fiscal 2008 and Fiscal 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Balance at beginning of period
|
|
$
|
297,886
|
|
$
|
367,268
|
|
Charged to costs and expenses
|
|
|
67,095
|
|
|
(66,221
|
)
|
Deductions and write-offs
|
|
|
|
|
|
(3,161
|
)
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
364,981
|
|
$
|
297,886
|
|
|
|
|
|
|
|
|
|
F-13
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
5. INVENTORIES, NET
At March 31, 2008 and 2007 inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Raw materials
|
|
$
|
4,549,171
|
|
|
$
|
4,072,116
|
|
Work in process
|
|
|
2,346,513
|
|
|
|
1,339,160
|
|
Finished goods
|
|
|
885,650
|
|
|
|
717,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,781,334
|
|
|
|
6,128,810
|
|
Less:
|
|
|
|
|
|
|
|
|
allowance for obsolescence
|
|
|
(465,088
|
)
|
|
|
(580,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,316,246
|
|
|
$
|
5,548,691
|
|
|
|
|
|
|
|
|
|
|
6. PROPERTY, PLANT AND EQUIPMENT, NET
At March 31, 2008 and 2007, property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Land
|
|
$
|
162,000
|
|
|
$
|
162,000
|
|
Buildings and leasehold improvements
|
|
|
1,105,745
|
|
|
|
1,555,106
|
|
Machinery and equipment
|
|
|
8,979,161
|
|
|
|
7,877,654
|
|
Furniture and fixtures, and other
|
|
|
242,563
|
|
|
|
286,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,489,469
|
|
|
|
9,881,276
|
|
Less accumulated depreciation
|
|
|
(6,329,506
|
)
|
|
|
(5,863,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,159,963
|
|
|
$
|
4,017,465
|
|
|
|
|
|
|
|
|
|
|
In May 2007, the commercial condominium housing Micronetics Enon division was sold.
7. ACCRUED EXPENSES
At March 31,
2008 and 2007 accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Unbilled payables
|
|
$
|
370,541
|
|
$
|
169,755
|
Professional fees
|
|
|
310,865
|
|
|
261,372
|
Payroll, benefits and related taxes
|
|
|
1,453,369
|
|
|
1,195,273
|
Warranty
|
|
|
119,252
|
|
|
100,178
|
Due to former stockholders
|
|
|
|
|
|
1,500,000
|
Unrealized loss on interest rate swap
|
|
|
280,865
|
|
|
|
Miscellaneous
|
|
|
172,877
|
|
|
115,787
|
|
|
|
|
|
|
|
|
|
$
|
2,707,769
|
|
$
|
3,342,365
|
|
|
|
|
|
|
|
F-14
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
Included in accrued payroll are bonuses of $646,630 and $572,951 for Fiscal 2008 and Fiscal 2007,
respectively.
8. ACCRUED WARRANTY
The
Company provides one-year warranties on all of its products covering both parts and labor. Micronetics, at its option, repairs or replaces products that are defective during the warranty period if the proper preventative maintenance procedures have
been followed by the customer.
Product warranty activity in Fiscal 2008 and Fiscal 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Balance at beginning of period
|
|
$
|
100,178
|
|
|
$
|
128,401
|
|
Accruals for warranties
|
|
|
80,309
|
|
|
|
36,171
|
|
Charges to accrual for warranty costs
|
|
|
(61,235
|
)
|
|
|
(64,394
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
119,252
|
|
|
$
|
100,178
|
|
|
|
|
|
|
|
|
|
|
9. LONG-TERM DEBT
At March 31, 2008 and 2007 long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Term loan
|
|
$
|
5,525,000
|
|
$
|
6,500,000
|
Mortgage payable, NH
|
|
|
130,837
|
|
|
264,076
|
Mortgage payable, MA
|
|
|
|
|
|
310,531
|
Capital leases
|
|
|
4,698
|
|
|
8,222
|
|
|
|
|
|
|
|
Total
|
|
|
5,660,535
|
|
|
7,082,829
|
Less current portion
|
|
|
1,434,193
|
|
|
1,449,443
|
|
|
|
|
|
|
|
Long-term debt net of current portion
|
|
$
|
4,226,342
|
|
$
|
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. 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 March 31,
2008 was 6.50%. The term loan expires in June 2012.
The Company entered into an interest rate swap agreement with a notional amount of
$6.5 million in April 2007 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 therefore the Company has not applied hedge
accounting. As a result, at the end of each reporting period, the value of the interest rate swap is recorded as an accrued expense on the consolidated balance sheet, with any related gains or loses charged to earnings. As of March 31, 2008,
the Company recorded a loss of $280,865 to reflect the estimated fair value for the interest rate swap in the consolidated income statement.
F-15
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
The revolving line of credit bears interest at the 1 month libor plus 1.8% rate, which at
March 31, 2008 was 5.07%. The company had an entire line of $5.0 million available at March 31, 2008.
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 March 31, 2008, 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.
Aggregate annual maturities of long-term debt, including capital leases and line of credit, are as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal year ending March 31,
|
|
Capital
lease
Obligations
|
|
Mortgages
and notes
payable
|
|
Total
|
2009
|
|
$
|
3,356
|
|
$
|
1,430,837
|
|
$
|
1,434,193
|
2010
|
|
|
1,342
|
|
|
1,300,000
|
|
|
1,301,342
|
2011
|
|
|
|
|
|
1,300,000
|
|
|
1,300,000
|
2012
|
|
|
|
|
|
1,300,000
|
|
|
1,300,000
|
2013
|
|
|
|
|
|
325,000
|
|
|
325,000
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,698
|
|
$
|
5,655,837
|
|
$
|
5,660,535
|
|
|
|
|
|
|
|
|
|
|
10. STOCK OPTION PLANS AND STOCK- BASED COMPENSATION
At March 31, 2008, 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.
F-16
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
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
March 31, 2008, 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 March 31, 2008,
there were 472,325 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 March 31, 2008 there were 281,000 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 year ended
March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
248,000
|
|
|
|
7.91
|
|
|
|
|
Exercised
|
|
(92,625
|
)
|
|
|
3.51
|
|
|
|
|
Canceled
|
|
(196,375
|
)
|
|
|
8.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
755,825
|
|
|
$
|
7.75
|
|
4.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2008
|
|
322,350
|
|
|
$
|
7.52
|
|
2.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
The following table sets forth the status of the Companys non-vested stock options as of
March 31, 2008:
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted-Average
Grant-Date
Fair Value
|
Non-vested as of March 31, 2007
|
|
481,025
|
|
|
$
|
3.42
|
Granted
|
|
248,000
|
|
|
|
4.22
|
Forfeited
|
|
(112,750
|
)
|
|
|
3.70
|
Vested
|
|
(182,800
|
)
|
|
|
3.43
|
|
|
|
|
|
|
|
Non-vested as of March 31, 2008
|
|
433,475
|
|
|
$
|
3.87
|
|
|
|
|
|
|
|
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 year ended March 31, 2008, the Company granted options to purchase 10,000 shares of common stock with an exercise price of $8.40 to a
former employee. In the fourth quarter of Fiscal 2008, 5,000 options vested with the remaining options vesting on July 31, 2008. The options have a contractual life of 10 years. The Company valued the options under SFAS 123(R) at the fair value
on the date of grant using the Black-Scholes option-pricing model. The Company recorded $32,185 in compensation expense through March 2008 related to the non-employee options, and will re-measure compensation expense related to the unvested options
at each reporting date until fully vested.
The following table summarizes information about stock options outstanding at March 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of exercise prices
|
|
Options
outstanding
|
|
Weighted
average
remaining
contractual
life
|
|
Weighted
average
exercise
price of
options
outstanding
|
|
Options
exercisable
|
|
Weighted
average
exercise
price of
options
exercisable
|
$ 5.18 $ 6.89
|
|
8,875
|
|
1.36 yrs
|
|
$
|
6.60
|
|
6,375
|
|
$
|
6.60
|
$ 6.90 $ 8.61
|
|
722,550
|
|
4.64 yrs
|
|
$
|
7.72
|
|
303,775
|
|
$
|
7.49
|
$ 8.62 $ 10.33
|
|
24,400
|
|
2.52 yrs
|
|
$
|
8.87
|
|
12,200
|
|
$
|
8.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
755,825
|
|
4.54 yrs
|
|
$
|
7.75
|
|
322,350
|
|
$
|
7.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the effects of stock-based compensation resulting from the
application of SFAS No. 123(R) for Fiscal 2008 and Fiscal 2007:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Cost of sales
|
|
$
|
65,967
|
|
$
|
104,318
|
Selling, general and administrative
|
|
|
647,535
|
|
|
462,136
|
Research and development
|
|
|
27,220
|
|
|
104,541
|
|
|
|
|
|
|
|
Stock-based compensation effect on income before taxes
|
|
$
|
740,722
|
|
$
|
670,995
|
|
|
|
|
|
|
|
F-18
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
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 4.54 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 $197,500 of stock compensation costs, $138,250 of which was expensed in Fiscal 2008 and $59,250 remaining in unearned compensation cost as of March 31, 2008, to be recognized during the first two quarters of Fiscal 2009.
During the fiscal year ended March 31, 2008, the Company used the Black-Scholes option-pricing model to value option grants and to
determine the related compensation expense. The assumptions used in calculating the fair value of stock-based payment awards represent managements best estimates.
The Company based its expected volatility on the historical volatility of the Companys stock price with consideration given to the expected life of the award. The Company intends to continue to consistently use
its historical stock price to determine volatility in the future.
The risk-free interest rate used for each grant is equal to the U.S.
Treasury yield in effect at the time of grant for instruments with a similar expected life.
The expected term of options granted was
determined based on the historical exercise behavior of similar peer groups. For Fiscal 2008 the expected term was calculated based upon the simplified method as permitted by the Securities Exchange Commission Staff Accounting Bulletin
(SAB) 107, Share-Based Payments as the Company issued options in 2008 with a longer contractual term.
The Company has never
declared or paid a cash dividend, and has no current plans to pay a cash dividend in the future.
SFAS 123(R) also requires that the
Company recognize compensation expense for only the portions that are expected to vest. Therefore, the Company has estimated expected forfeitures of stock options with the adoption of SFAS 123(R). In developing a forfeiture rate estimate, the
Company considered its historical experience. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.
The fair value of options issued after April 1, 2006 were estimated at the date of grant with the following weighted-average assumptions for the
fiscal years ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Risk Free Interest Rate
|
|
3.89 4.98
|
%
|
|
3.63 4.60
|
%
|
Expected Life
|
|
6.75 7.57 years
|
|
|
2 - 4.86 years
|
|
Expected Volatility
|
|
55 60
|
%
|
|
64 75
|
%
|
Expected Dividend Yield
|
|
0
|
%
|
|
0
|
%
|
The per share weighted average fair value of stock options granted for the fiscal years ended
March 31, 2008 and 2007 was $4.22 and $4.28, respectively.
F-19
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
11. PREFERRED STOCK
Pursuant to the Companys Certificate of Incorporation, the Board of Directors has the authority, without further action by the stockholders, to issue up to 100,000 shares of preferred stock, par value $.10 per
share, in one or more series and to fix the designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the common stock.
12.
SHAREHOLDERS EQUITY
During the years ended March 31, 2008 and 2007, the Company issued a total of 92,625 and 69,875 shares,
respectively, for net proceeds of $329,979 and $351,147, respectively, upon the exercise of stock options granted under the Companys various option plans.
13. INCOME TAXES
The following sets forth the provision for income taxes at March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,563,270
|
|
|
$
|
918,096
|
|
State
|
|
|
556,161
|
|
|
|
284,916
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(612,663
|
)
|
|
|
(186,804
|
)
|
State
|
|
|
(155,832
|
)
|
|
|
(54,339
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income tax
|
|
$
|
1,350,936
|
|
|
$
|
961,869
|
|
|
|
|
|
|
|
|
|
|
The Company and its subsidiaries file a consolidated federal income tax return. Tax benefits from
the early disposition of stock by optionees under incentive stock options and from exercises of non-qualified options are credited to additional paid-in capital, to the extent that the benefit exceeds stock compensation recorded for book purposes.
At March 31, 2008 and 2007 the difference between the income tax provision computed at the Federal statutory rate and the actual tax
provision is accounted for as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Taxes computed at the federal statutory rate
|
|
$
|
1,024,528
|
|
|
$
|
680,880
|
|
State income tax (net of federal benefit)
|
|
|
264,217
|
|
|
|
152,181
|
|
Effect of permanent differences
|
|
|
141,641
|
|
|
|
147,308
|
|
Research and development tax credits
|
|
|
(63,007
|
)
|
|
|
(18,500
|
)
|
FIN 48 Settlements
|
|
|
(16,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
1,350,936
|
|
|
$
|
961,869
|
|
|
|
|
|
|
|
|
|
|
F-20
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
At March 31, 2008 and 2007 deferred tax assets (liabilities) are comprised of:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Current deferred tax asset (liability):
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
408,135
|
|
|
$
|
320,584
|
|
Inventory reserve
|
|
|
68,313
|
|
|
|
44,668
|
|
Bad debt reserve
|
|
|
39,526
|
|
|
|
43,047
|
|
Warranty reserve
|
|
|
47,629
|
|
|
|
40,011
|
|
Sales return reserve
|
|
|
34,152
|
|
|
|
19,688
|
|
Prepaid expenses
|
|
|
(21,585
|
)
|
|
|
(36,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
576,170
|
|
|
$
|
431,397
|
|
|
|
|
|
|
|
|
|
|
Long term deferred tax (liability):
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
$
|
211,126
|
|
|
$
|
111,731
|
|
Intangible amortization
|
|
|
(22,984
|
)
|
|
|
(148,737
|
)
|
Depreciation
|
|
|
(111,658
|
)
|
|
|
(369,178
|
)
|
Purchase price adjustment
|
|
|
(1,321,536
|
)
|
|
|
(747,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,245,052
|
)
|
|
$
|
(1,153,314
|
)
|
|
|
|
|
|
|
|
|
|
In June 2005, the Company acquired Stealth Microwave, Inc. In conjunction with this acquisition,
the Company recorded certain intangible assets which have an associated deferred tax liability of $1,357,960. These intangibles are being amortized for book purposes over various lives. The current year deferred tax benefit includes the current year
recognition of $200,534 and a 2007 recognition of $293,770 of that deferred tax expense. Additionally, there was a book to tax difference relating to the property, plant & equipment that equated to a deferred tax liability of $150,143 that
is a change in the balance of deferred tax liability but does not effect current year activity.
In June 2007, the Company acquired MICA
Microwave, Inc. as noted in Note 2. In conjunction with this acquisition, the company recorded certain intangible assets which have an associated deferred tax liability of $700,000. These intangibles are being amortized for book purposes over
various lives. The current year deferred tax benefit includes the current year recognition of $92,290 of that deferred tax expense
The
Companys effective tax rate was 45% and 48% for the twelve months ended March 31, 2008 and 2007, respectively. The decrease in the effective tax rate is primarily related to a larger credit for domestic production activities deduction in
Fiscal 2008 as compared to Fiscal 2007.
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 amount of uncertain tax benefits as of March 31, 2008 was $80,000, which, if ultimately recognized, will reduce the Companys annual
effective tax rate. The Company does not expect any material change in uncertain tax benefits within the next twelve months.
F-21
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
The change in uncertain tax benefits for the twelve months ended March 31, 2008 is as follows:
|
|
|
|
|
|
|
2008
|
|
Balance at beginning of period
|
|
$
|
96,443
|
|
Change in tax positions related to prior years
|
|
|
|
|
Change in tax positions related to the current year
|
|
|
20,000
|
|
Settlements
|
|
|
(36,443
|
)
|
Reductions for expiration of statute of limitations
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
80,000
|
|
|
|
|
|
|
As of March 31, 2008, the Company is subject to tax in the U.S. Federal and various state
jurisdictions. The Company is open to examination for tax years March 31, 2005 through 2008.
The Companys policy is to
recognize interest and penalties accrued on any uncertain tax positions as a component of income tax expense, if any. As of March 31, 2008, the Company has accrued interest and penalties for uncertain tax benefits in its statement of operations
of $13,000.
14. 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 earnings per share at March 31, 2008 and 2007 are:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Net income
|
|
$
|
1,662,383
|
|
$
|
1,040,720
|
Weighted average shares outstanding:
|
|
|
4,932,545
|
|
|
4,637,528
|
Basic earnings per share
|
|
$
|
.34
|
|
$
|
.22
|
Common stock equivalents
|
|
|
18,650
|
|
|
151,704
|
Weighted average common and common equivalent shares outstanding
|
|
|
4,951,195
|
|
|
4,789,232
|
Diluted earnings per share
|
|
$
|
.34
|
|
$
|
.22
|
15. COMMITMENTS AND CONTINGENCIES
Leases:
The Company is obligated under various non-cancelable operating leases for manufacturing
facilities and equipment, which expire through January 2011.
F-22
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
The aggregate future minimum lease payments, are as follows:
|
|
|
|
|
|
Fiscal year ending March 31,
|
2009
|
|
$
|
203,879
|
2010
|
|
|
44,783
|
2011
|
|
|
20,733
|
2012
|
|
|
16,165
|
2013
|
|
|
2,549
|
|
|
|
|
|
|
$
|
288,109
|
|
|
|
|
Rental expense for the years ended March 31, 2008 and 2007 was $519,546 and $224,206
respectively.
Rental income for the years ended March 31, 2008 and 2007 was $5,572 and $33,425, respectively. The sub-lease on this
facility expired in May 2007.
Stealth Employment Agreements
Stealth entered into employment agreements with two key employees (one of whom is also a director of the Company) in June 2005. Under the terms of the employment agreements, each key employee is provided with salary
and benefits, including stock options and additional incentive compensation based on meeting certain pre-established financial targets, should their employment with the Company be terminated other than for cause or their disability or death, or they
resign for good reason as defined in the agreements. The employment agreements expired on June 11, 2007.
Stealth Earnout Agreement
The Company entered into an agreement at the time of the Stealth acquisition that provides for earnout payments in the amounts of $1.8 million in the
first earnout period ended March 31, 2006 and $1.5 million in the second earnout period ending March 31, 2007, provided certain financial targets are met, as defined in the agreement. The first earnout payment of $1.8 million was made in
the fourth quarter of fiscal 2006 and the second earnout payment of $1.5 million was made in April 2007. Both payments were recorded as an adjustment to goodwill as of March 31, 2007.
16. MAJOR CUSTOMERS
The Company sells 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 Fortune 500 companies with world-wide operations. The top
three customers accounted for 9.2%, 8.1% and 8.0% of the Companys consolidated sales in Fiscal 2008. For Fiscal 2007, the top three customers accounted for 15.5%, 7.1% and 5.3% of the Companys consolidated sales.
17. INDUSTRY SEGMENT INFORMATION
The Companys
product groups have similar characteristics such as cost to design and manufacture, applications, types of customers, and sales channels. Accordingly, Management has determined that the Company operates as a single integrated business and as such
has one operating segment as a provider of RF and microwave components and subassemblies for defense and commercial customers worldwide. The Company continues to break out revenues between its commercial and defense applications.
F-23
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2008
AND 2007
Exports accounted for 27% and 32% of the Companys sales in the years ended March 31, 2008
and 2007, respectively. Sales representing shipments by geographical area are shown below (in thousands):
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2008
|
|
2007
|
United States and Canada
|
|
$
|
24,286
|
|
$
|
18,659
|
Europe
|
|
|
6,660
|
|
|
4,093
|
Asia
|
|
|
1,605
|
|
|
912
|
Central and South America/Other
|
|
|
74
|
|
|
26
|
|
|
|
|
|
|
|
|
|
$
|
32,625
|
|
$
|
23,690
|
|
|
|
|
|
|
|
18. EMPLOYEE BENEFIT PLANS
The Company has in effect a defined contribution plan under section 401(k) of the Internal Revenue Code under which it provides matching contributions of 50% up to 6% of the participants annual salary. Effective
December 31, 2004, the Company merged the existing 401K Plans of its wholly-owned subsidiaries Microwave & Video Systems, Inc., MVS Applications 401(k) and Savings Plan (the MVS Plan) with and into the Micronetics
Plan, with the Micronetics Plan the surviving plan. Effective January 1, 2007, the Company merged the SIMPLE retirement plan of its wholly-owned subsidiary Stealth Microwave into the Micronetics Plan.
Company contributions to the plan for the years ended March 31, 2008 and March 31, 2007 were $138,984 and $109,556, respectively.
MICA maintains a defined contribution plan under section 401 (k) of the Internal Revenue Code under which employees may elect to contribute an
amount of their eligible compensation to the plan, subject to the annual limits as defined in the plan. MICA does not provide matching contributions.
F-24
19. Unaudited Quarterly Financial Information (amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL 2008
|
|
Q1 FY08
|
|
|
Q2 FY08
|
|
|
Q3 FY08
|
|
|
Q4 FY08
|
|
Net sales
|
|
$
|
6,310
|
|
|
$
|
9,763
|
|
|
$
|
8,828
|
|
|
$
|
7,724
|
|
Gross profit
|
|
$
|
2,393
|
|
|
$
|
3,652
|
|
|
$
|
3,625
|
|
|
$
|
3,249
|
|
Gross profit %
|
|
|
38
|
%
|
|
|
37
|
%
|
|
|
41
|
%
|
|
|
42
|
%
|
Net income
|
|
$
|
185
|
|
|
$
|
618
|
|
|
$
|
556
|
|
|
$
|
303
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.06
|
|
Basic weighted average shares
|
|
|
4,727
|
|
|
|
4,975
|
|
|
|
4,987
|
|
|
|
4,995
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.06
|
|
Diluted weighted average shares
|
|
|
4,758
|
|
|
|
5,012
|
|
|
|
4,993
|
|
|
|
5,013
|
|
|
|
|
|
|
FISCAL 2007
|
|
Q1 FY07
|
|
|
Q2 FY07
|
|
|
Q3 FY07
|
|
|
Q4 FY07
|
|
Net sales
|
|
$
|
6,806
|
|
|
$
|
5,061
|
|
|
$
|
5,510
|
|
|
$
|
6,313
|
|
Gross profit
|
|
$
|
3,036
|
|
|
$
|
1,748
|
|
|
$
|
2,137
|
|
|
$
|
2,456
|
|
Gross profit %
|
|
|
45
|
%
|
|
|
35
|
%
|
|
|
39
|
%
|
|
|
39
|
%
|
Net income
|
|
$
|
548
|
|
|
$
|
41
|
|
|
$
|
111
|
|
|
$
|
341
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
Basic weighted average shares
|
|
|
4,611
|
|
|
|
4,642
|
|
|
|
4,642
|
|
|
|
4,655
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
Diluted weighted average shares
|
|
|
4,936
|
|
|
|
4,808
|
|
|
|
4,715
|
|
|
|
4,723
|
|
F-25
Micronetics (NASDAQ:NOIZ)
Historical Stock Chart
From Jun 2024 to Jul 2024
Micronetics (NASDAQ:NOIZ)
Historical Stock Chart
From Jul 2023 to Jul 2024