UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended March 31, 2010
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
Commission File No.: 0-17966
MICRONETICS,
INC.
(Name of small business issuer in its charter)
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Delaware
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22-2063614
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.)
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26 Hampshire Drive, Hudson, NH
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03051
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(Address of principal executive offices)
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(Zip Code)
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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
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No
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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
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No
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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
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
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No
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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.
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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.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
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No
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The aggregate market value of the voting and non-voting common equity held by non-affiliates of the issuer was approximately $12,358,330
based on the closing price of $3.39 of the issuers common stock, par value $.01 per share, as reported by NASDAQ on September 26, 2009.
On June 14, 2010, there were 4,553,635 shares of the issuers common stock outstanding.
The definitive proxy statement of the registrant to be filed on or before July 29, 2010 is incorporated by reference to Part III
herein.
TABLE OF CONTENTS
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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
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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 March 2009, we acquired certain assets of
M/A-COM RFID Inc. The acquisition of the radio frequency identification system product line (RFID) was accounted for as a purchase, and the operating results are included in the consolidated financial statements since the March 18,
2009 acquisition date. The purchase price has been allocated to the relative fair value of assets acquired and liabilities assumed based on their fair value at the date of acquisition.
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. We also manufacture and design test equipment,
subassemblies and components that are used to test the strength, durability and integrity of signals in communications equipment. Our products are embedded in a variety of radars, electronic warfare systems, guidance systems, wireless
telecommunications and satellite equipment. Our microwave devices are used on subassemblies and integrated systems in addition to being sold on a component basis.
Micronetics operates through its four wholly-owned subsidiaries, Microwave Concepts, Inc. (Micro-Con), Microwave &
Video Systems, Inc. (MVS), Stealth Microwave, Inc. (Stealth) and MICA Microwave Corporation (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.
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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 measures 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.
Micronetics designs and manufactures a broad selection
of linearized and non linearized power amplifiers including analog and digital pre-distortion products. 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.
Micronetics designs and manufactures broadband mixers and ferrites. Our products
offer exceptional performance for systems where spectral purity is important, including IED Jamming, TD-CDMA, WiMAX, COFDM, Radar, Electronic Warfare and Space applications.
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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.
The current business, political and global
security environments continue to provide opportunities for mid-tier defense/aerospace manufacturers to develop strategic relationships with prime contractors. Retro-fits and upgrades of existing platforms continue to be funded even as major new
programs are being deferred.
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
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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 for manufacturing integrated subassemblies. Our goal is to leverage our high power and noise technology to continue to be one of the most reliable microwave subsystem supplier in the
marketplace.
Micronetics overall strategy in these markets is to:
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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.
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REMAIN A 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.
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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.
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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 key provider in this area.
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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.
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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.
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MAINTAIN DIVERSITY IN THE DEFENSE AND COMMERCIAL MARKETPLACE. We balance business in defense with commercial marketplaces in order to diversify our
customers. The defense marketplace provides stable growth opportunities with long-range visibility, while the commercial marketplace offers more aggressive growth opportunities and is more variable. We believe this dual focus maximizes our growth
potential.
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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, Monroe, CT, West Caldwell, NJ,
Trenton, NJ, or Manteca, CA facilities. The production process for these products ranges from one to twenty-four weeks.
Micronetics, 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.
We also promote our products through field visits to customers, telephone solicitation, direct mailing campaigns, advertising
in trade journals, participation in trade shows and maintenance of a website.
During Fiscal 2010 and Fiscal 2009, the
approximate mix of sales was 23% and 31% respectively, for commercial applications and 77% and 69% 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
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Warfare Systems, BAE Systems and Lockheed accounted for 25%, 7% and 5% of the consolidated sales in Fiscal 2010, respectively. We believe that replacing any of these customers could be difficult.
Other customers of Micronetics include General Dynamics, Cobham, Northrop Grumman Corporation, L3 Communications Corporation,
Raytheon, DRS Technical Services, Thales and the Department of Defense. 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 Aeroflex, Inc., Aethercomm, Anaren Inc., Cobham, PLC, Comtech Telecommunications Corporation, Herley Industries, Inc., Spectrum Control, Inc., and Teledyne Technologies, Inc.
Micronetics competitive position is supported by:
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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.
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DIVERSE PRODUCTS AND MARKET BASE. With a balanced combination of defense and commercial markets, we are able to leverage technology development for
defense programs to commercial products and the volume on commercial applications reduces manufacturing cost for our defense products.
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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.
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Research and Development
Micronetics maintained an engineering staff of 28 individuals as of March 31, 2010, 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 predominantly involve engineering for improvements and development of new
products. Such expenditures include the cost of engineering services and engineering-support personnel. These expenses were $1,708,532 and $1,869,142 for Fiscal 2010 and Fiscal 2009, respectively. The decrease was primarily due to lower spending on
an in-flight high-speed internet transceiver product, offset to some degree by increased spending on a complex integrated assembly for a defense application.
Micronetics intends to continue our research and development activities and considers these efforts to be vital to its future growth and
success.
Backlog
Micronetics backlog of firm orders was approximately $30 million and $26 million on March 31, 2010 and 2009, respectively.
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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, 2010, we had 189 full-time employees including 38 engaged in management and administration, 28 in engineering, 118 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.
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.
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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.
Current Economic Conditions May Adversely Affect Our
Business.
The recent global economic downturn could adversely affect our business. In response to such economic conditions
we may experience, insolvency of key suppliers resulting in product delays; customer insolvencies; decreased customer confidence; and decreased customer demand. Any of these events, or any other events caused by current economic conditions, may have
a material adverse effect on our business, operating results, and financial condition.
We may be materially and adversely affected by
reductions in spending by certain of our customers.
Our results of operations may be materially adversely affected by the
conditions in the global economy and the impact of those conditions on U.S. and foreign government spending. In recent years, demand for our products has been favorably impacted by an upward trend in U.S. defense spending. Future defense budgets,
however, may be impacted by numerous economic and political factors. In addition, the specific programs in which we participate, or in which we may seek to participate in the future, must compete with other programs for consideration during the
budget formulation and appropriation processes. While we believe many of our products are used in high priority military/defense programs, one or more of the programs that we currently serve could be phased-out or terminated. Reductions in these
existing programs, unless offset by other programs and opportunities, would adversely affect our future revenues and profitability.
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:
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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;
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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;
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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;
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increased price and product competition in our markets;
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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;
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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;
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fluctuations in our gross margins;
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the development, introduction and market acceptance of new technologies;
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variations in sales channels, product costs and the mix of products sold;
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the size and timing of customer orders and shipments;
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our ability to maintain appropriate inventory levels;
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the impact of acquired businesses and technologies;
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the impact of our product development schedules, product quality variances, manufacturing capacity and lead times required to produce our products;
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changes in legislation, regulation and/or accounting rules; the impact of higher insurance premiums and deductibles and greater limitations on
insurance coverage; and
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acts of terrorism or the outbreak of hostilities or armed conflict between countries.
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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:
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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;
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adverse changes in our current credit condition or the credit quality of our customers and suppliers;
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adverse changes in the market conditions in our markets;
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the trend towards the sale of integrated products;
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visibility to, and the actual size and timing of, capital expenditures by our customers;
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inventory practices, including the timing of product and service deployment, of our customers;
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policies of our customers regarding utilization of single or multiple vendors for the products they purchase;
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the overall trend toward industry consolidation and rationalization among our customers, competitors and suppliers;
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conditions in the broader market for military and communications products;
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governmental regulation or intervention affecting our products; and
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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.
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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:
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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;
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the risk that future valuations of acquired businesses may decrease from the market price we paid for these acquisitions;
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the generation of insufficient revenues by acquired businesses to offset increased operating expenses associated with these acquisitions;
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the potential difficulties in completing in-process research and development projects and delivering high quality products to our customers;
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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
Our reliance on a limited number of customers for a large portion of our revenues could materially and
adversely affect our results of operations and financial condition.
Relatively few customers have accounted for a
substantial portion of our net sales. During Fiscal 2010 our top three customers collectively accounted for 37% of our total net sales. We may not continue to receive significant revenues from any of these or from other large customers. Because of
our significant customer concentration, our net sales and operating income could fluctuate significantly due to the loss of, reduction of business with, or less favorable terms for any of our significant customers. A reduction or delay in orders
from any of our significant customers, or a delay or default in payment by any significant customer could materially harm our results of operation and liquidity.
We depend on single manufacturing lines for certain of 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 obtain raw materials from a single or a limited number of suppliers. Interruptions in supply of components or other products from third-party suppliers 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.
13
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, 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 and availability under our line of credit 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
|
14
|
|
|
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 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.
15
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.
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, 2008 to March 31, 2010, the trading price of our common stock
ranged from $8.57 to $1.57. 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.
16
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.
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 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 environmental regulation and compliance with which may be costly.
Certain of our products may be rendered obsolete due to environmental directives and could require that we redesign or change how we
manufacture our products. This could result in additional costs and expense, shipment delays and possible inventory obsolescence.
17
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.
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 will be required to audit and report on our internal controls over financial reporting
as of March 31, 2011 and subsequent fiscal year end dates to be included in our Annual Report on Form 10-K. 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, 2011 and subsequent fiscal year end dates. 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.
Our Financing Requirements May Increase and We Could Have Limited Access to Capital Markets.
The United States and worldwide capital and credit markets have recently experienced significant price volatility, dislocations and
liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. In addition, declining capital ratios of many lending institutions and the very
weak commercial paper market have adversely impacted various lending institutions, which may adversely impact our ability to borrow under our existing lines of credit. While we believe that our current resources and access to capital markets are
adequate to support operations over the near term and foreseeable future, we cannot assure you that these circumstances will remain unchanged. Our need for capital is dependent on operating results and may be greater than expected. Our ability to
maintain our current sources of debt financing depends on our ability to remain in compliance with covenants contained in our financing agreements, including, among other requirements, maintaining minimum tangible net assets, a minimum current
ratio, a minimum quarterly EBITDA and a minimum quarterly debt service ratio. If changes in capital markets restrict the availability of funds or increase the cost of funds, we may be required to modify, delay or abandon some of our planned
expenditures, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
ITEM
|
1B. Unresolved Staff Comments.
|
None.
18
ITEM 2. Properties.
Our principal manufacturing facility and corporate office is located in a 32,000 square foot building in Hudson, NH which we own.
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 23,000 square foot facility located in West Caldwell, NJ, which is leased from an unaffiliated
entity.
Stealth operates out of a 21,000 square foot facility located in Trenton, NJ, which is leased from an entity whose
owners include two executives of Micronetics.
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. Reserved
19
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 sale prices for the Common Stock for each fiscal quarter from April 1, 2008 until March 31, 2010 as
reported by NASDAQ, were as follows:
Sales Prices
|
|
|
|
|
|
|
Fiscal Quarter
|
|
High
|
|
Low
|
Fiscal 2009
|
|
|
|
|
|
|
First Quarter
|
|
$
|
8.57
|
|
$
|
6.41
|
Second Quarter
|
|
|
8.49
|
|
|
5.54
|
Third Quarter
|
|
|
7.52
|
|
|
1.57
|
Fourth Quarter
|
|
|
3.65
|
|
|
1.88
|
|
|
|
Fiscal 2010
|
|
|
|
|
|
|
First Quarter
|
|
|
3.95
|
|
|
1.91
|
Second Quarter
|
|
|
4.00
|
|
|
2.52
|
Third Quarter
|
|
|
3.65
|
|
|
2.81
|
Fourth Quarter
|
|
|
4.49
|
|
|
2.49
|
The number of holders
of record of the common stock as of June 14, 2010 was 202. 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 14, 2010, the last sale price of the common stock as reported by NASDAQ was $4.61 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 the lender.
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 approved by security holders
|
|
511,100
|
|
$
|
6.79
|
|
725,500
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
511,100
|
|
$
|
6.79
|
|
725,500
|
|
|
|
|
|
|
|
|
20
ITEM 6. Selected Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended March 31, (in thousands, except earnings per
share)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net sales
|
|
$
|
34,868
|
|
|
$
|
30,347
|
|
|
$
|
32,625
|
|
|
$
|
23,690
|
|
|
$
|
26,909
|
|
Gross margin
|
|
$
|
11,703
|
|
|
$
|
9,184
|
|
|
$
|
12,919
|
|
|
$
|
9,377
|
|
|
$
|
11,695
|
|
Gross margin %
|
|
|
34
|
%
|
|
|
30
|
%
|
|
|
40
|
%
|
|
|
40
|
%
|
|
|
43
|
%
|
Net income (loss)
|
|
$
|
1,148
|
|
|
$
|
(9,564
|
)
|
|
$
|
1,662
|
|
|
$
|
1,041
|
|
|
$
|
2,540
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
$
|
0.25
|
|
|
$
|
(1.98
|
)
|
|
$
|
0.34
|
|
|
$
|
0.22
|
|
|
$
|
0.57
|
|
Basic weighted average shares
|
|
|
4,554
|
|
|
|
4,836
|
|
|
|
4,932
|
|
|
|
4,637
|
|
|
|
4,465
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
|
|
$
|
0.25
|
|
|
$
|
(1.98
|
)
|
|
$
|
0.34
|
|
|
$
|
0.22
|
|
|
$
|
0.54
|
|
Diluted weighted average shares
|
|
|
4,554
|
|
|
|
4,836
|
|
|
|
4,951
|
|
|
|
4,789
|
|
|
|
4,697
|
|
Total assets
|
|
$
|
26,965
|
|
|
$
|
25,526
|
|
|
$
|
33,386
|
|
|
$
|
29,819
|
|
|
$
|
27,748
|
|
Total current liabilities
|
|
$
|
10,804
|
|
|
$
|
9,303
|
|
|
$
|
5,426
|
|
|
$
|
5,487
|
|
|
$
|
5,598
|
|
Long-term debt, net of current portion
|
|
$
|
1,786
|
|
|
$
|
3,085
|
|
|
$
|
4,226
|
|
|
$
|
5,633
|
|
|
$
|
5,328
|
|
Other long-term liabilities
|
|
$
|
1,035
|
|
|
$
|
908
|
|
|
$
|
1,325
|
|
|
$
|
722
|
|
|
$
|
963
|
|
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
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial
statements, see Note 1 of Notes to Consolidated Financial Statements.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and the results of operations are based on the Companys 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 (US GAAP). On an on-going basis, we
evaluate our judgments and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and 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 we believe are reasonable under the circumstances. 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 an
arrangement exists, delivery of product has occurred or services have
21
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 assemblies 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.
We occasionally enter into contracts for production of highly customized microwave and radio frequency components and integrated
sub-assemblies which we record revenue based on the percentage of completion method (assuming all other requirements for revenue recognition have been satisfied) typically using labor hours to measure progress toward completion of the contract as we
have determined this methodology best reflects the fundamentals of the contract. If estimates to complete the contract change materially from one period to the next, profit levels could significantly vary. Deferred revenue represents billings in
excess of revenue recognized and unbilled revenue represents revenue recognized in excess of billings.
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 costs of product warranties are accrued based on historical experience at the time the revenue is recognized. Unless customers purchase an extended warranty, Micronetics typically 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 obsolescence 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 ensure the accuracy of its forecasts of future product
demand, any significant unanticipated changes in demand or technological developments could have an impact on the level of obsolete material in our inventories and operating results could be affected accordingly.
Business Combinations
We are required to allocate the purchase price of an acquired company based on the estimated fair values of assets acquired and
liabilities assumed, determined as of the date of acquisition. Micronetics employs independent valuation specialists to 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.
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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 annually for impairment. We assess 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. A two-step impairment testing approach is required. We must first determine whether goodwill is impaired and if so, we must value that
impairment based on the amount by which the book value exceeds the estimated fair value. We used discounted cash flows, sales and EBITDA multiples as the best evidence of fair value. In preparing the goodwill impairment test for this reporting unit
we assumed operating margin performance consistent with historical performance and revenue growth between 3% and 5%. If actual results are significantly different than these assumptions, the associated goodwill may be subject to an impairment
charge. For the third quarter of Fiscal 2009, we recorded a goodwill impairment charge of approximately $8.0 million. Please see Impairment of Goodwill under Results of Operations below for further description. At
March 31, 2010 and 2009, we performed our goodwill impairment assessment for the remaining $1.1 million of goodwill and determined that the carrying value did not exceed its fair value.
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. For the third quarter of Fiscal 2009, we recorded a long-lived asset impairment charge of approximately $1.3 million. Please see Impairment of Long-Lived
Assets under Results of Operations below for further description. At March 31, 2010 and 2009 we determined that no new triggering events had occurred warranting a further impairment assessment of our long-lived assets.
Stock Compensation Expense
We measure compensation cost for stock-based compensation at fair value We use the Black-Scholes option-pricing model, which requires the
input of subjective assumptions. These assumptions include estimates of the expected term, the volatility of our common stock price over the expected term, risk free interest rate 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 operations.
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
23
the deferred tax asset will not be realized. No valuation allowance was required at March 31, 2010 and 2009 because we believe we have adequate carryback profit to fully utilize this
deferred tax asset. If actual results are significantly different from our assumptions the deferred tax asset may be subject to a valuation allowance.
Significant judgement is required in evaluating our uncertain tax positions and determining our provision for income taxes. We evaluate
the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on its technical merit in the event of a tax audit.
We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an
estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes
includes the impact of reserve provisions as well as related interest and penalties.
Results of Operations
Fiscal 2010 versus Fiscal 2009
Net sales
Net sales for
Fiscal 2010 were $34,867,746, an increase of $4,520,461 or 15% as compared to net sales of $30,347,285 for Fiscal 2009. Of the increase approximately $2.0 million is due to an increase in sales of integrated component sub-systems for defense jamming
and electronic system modernization applications. Approximately $1.5 million of the increase is due to a contract for components for a space based application which was substantially completed in the fourth quarter of FY 2010. Approximately $0.7
million of the increase is due to RFID technology which we acquired in March 2009 and is for the beta test portion of a purchase agreement containing an option for full scale production roll-out. It is uncertain when a follow-on contract will be
awarded. The remaining increase of $0.3 million was due to all other component sales.
Foreign sales accounted for
approximately $3,734,000 and $5,215,000 in Fiscal 2010 and Fiscal 2009, respectively.
Gross margin
Gross margin was 33.6% for Fiscal 2010 as compared to 30.3% for Fiscal 2009. Of the increase, approximately 2.7% was due to approximately
$838,000 of FY 2009 inventory charges related to shifts in customer requirements and our high power amplifier business. The remaining increase of 0.6% was due to increased sales without a corresponding increase in costs offset to some degree by
start-up costs associated with our RFID product line and initial costs to support the increase in backlog related to integrated component sub-systems.
Research and development
Research and development (R&D) expense for Fiscal 2010 was $1,708,532 a decrease of $160,610 or 9% as compared to
$1,869,142 for Fiscal 2009. The decrease was primarily due to lower spending on an in-flight high-speed internet transceiver product, offset to some degree by increased spending on a complex integrated assembly for a defense application.
Selling, general and administrative
Selling, general and administrative (SG&A) expense for Fiscal 2010 was $7,250,306 a decrease of $648,447 or 8% as compared
to $7,898,753 for Fiscal 2009. Approximately $510,000 of the decrease was due to
24
lower stock compensation expense. Of this amount approximately $370,000 is due to fewer stock options being granted and some outstanding options being fully expensed. Approximately $140,000 is
due to the reversal of stock compensation expense for options forfeited during the year. Approximately $100,000 was due to lower salary and benefits expense.
Amortization of intangible assets
Amortization expense attributable to the intangible assets related to the acquisitions of Stealth, MICA and RFID was $348,093 for Fiscal
2010 a decrease of $217,410 as compared to $565,503 for Fiscal 2009. Approximately $300,000 of the decrease was due to an intangible asset impairment charge, which we recorded in the third quarter of Fiscal 2009, which was offset in part by an
increase of approximately $81,000 associated with the acquisition of our RFID product line.
Impairment of Goodwill
During the third quarter of Fiscal 2009, we experienced a significant decline in our stock price. As a result of this decline in stock
price the Companys market capitalization fell significantly below the recorded value of its consolidated net assets. In addition, we experienced a decline in the commercial market for high performance analog amplifiers necessary for wireless
applications, which had an adverse affect on our high performance amplifier sales. Accordingly, in the third quarter of Fiscal 2009, we performed an assessment of goodwill for impairment which resulted in an impairment charge of approximately $4.9
million and $3.1 million for the high performance amplifier and mixer/ferrite reporting units, respectively. In performing the step 1 goodwill assessment, we used, discounted cash flows, sales and EBITDA multiples as the best evidence of fair value.
For purposes of testing impairment we have three separate reporting units with goodwill. Testing was performed separately for each of the three goodwill reporting units and an impairment charge was recorded at two of the goodwill reporting units
(high power amplifier and mixer/ferrite product groups).
There remains approximately $1.1 million of goodwill associated with
our power amplifier, noise module, phase shifter, switches and attenuator product group. The estimated fair value of this reporting unit exceeded its carry value as of March 31, 2010.
Impairment of Long-Lived Assets
In the third quarter of Fiscal 2009 we determined that the customer list intangible asset related to the high performance amplifier
business was impaired and we recorded a charge of approximately $1.3 million as a result of significant decline in sales and projected sales to this group of customers. In Fiscal 2010, we determined that no triggering event had occurred warranting a
long-lived asset impairment review.
Interest expense
Interest expense for Fiscal 2010 was $523,274 or an increase of $142,951 as compared to $380,323 for Fiscal 2009. The increase is due to
higher average borrowings during FY 2010.
Interest rate swap
An unrealized gain of $115,600 was recorded in Fiscal 2010 as compared to an unrealized gain of $215 for Fiscal 2009 to reflect the change
in fair value of the mark to market valuation for the 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 42.8% for Fiscal 2010 as compared to 11% for Fiscal 2009. In Fiscal 2009 we recorded a discrete item of
$2.7 million related to a goodwill impairment charge that is not tax deductible. In
25
addition, approximately $75,000 of uncertain tax benefits were recognized due to statute of limitations expiring for previously filed tax returns.
Financial Condition, Liquidity and Capital Resources
We finance our operating and investment requirements primarily through operating cash flows and borrowings. Cash and cash equivalents was
$482,442 at March 31, 2010 as compared to $620,259, at March 31, 2009. Working capital defined as accounts receivable, inventory, unbilled revenue, prepaid expenses, other current assets net of accounts payable, accrued expenses and
deferred revenue was $11,961,963 at March 31, 2010 as compared to $11,549,933 at March 31, 2009. Borrowings under our revolving line of credit were $4,234,435 at March 31, 2010 as compared to $3,502,620 at March 31, 2009.
Our current ratio was approximately 1.81 at March 31, 2010 as compared to 1.92 at March 31, 2009.
Net cash provided by operating activities was $1,702,559 in Fiscal 2010 as compared to cash used in operating activities of $2,565,989 in
Fiscal 2009. For a detailed explanation of the change please see the following two paragraphs.
In Fiscal 2010, cash provided
by net income after adjusting for non-cash items including depreciation, amortization, stock-based compensation, changes in working capital reserves and an unrealized gain on interest rate swap was approximately $3.1 million. Approximately $1.4
million was used to fund working capital needs. Of this amount, approximately $1.1 million was used to fund receivables and unbilled revenue as a result of higher sales and approximately $1.7 million was used to fund inventory requirements primarily
related to specific contracts. A tax refund net of tax payments provided approximately $0.6 million, increases in accounts payable and accrued expenses provided approximately $0.8 million and cash received and recorded as deferred revenue provided
approximately $0.2 million. Approximately $0.2 million was for a charge to a deferred tax asset related to the cancellation of non-qualified stock options.
In Fiscal 2009 cash provided by net loss after adjusting for non-cash items including depreciation, amortization, stock-based
compensation, changes in working capital reserves and goodwill and intangible asset impairment charges was approximately $3.2 million. Approximately $3.1 million was used for inventory related largely to contracts in anticipation of future sales.
Approximately $1.2 million was used for prepaid income taxes. Approximately $1.3 million was used for deferred taxes.
In
Fiscal 2010 net cash used in investing activities was $1,129,853 as compared to cash used in investing activities of $762,623 in Fiscal 2009. In Fiscal 2010, investing activities was solely comprised of capital expenditures. A key contributor to our
capital expenditures was outfitting Microwave Concepts new expanded leased facility in order to accommodate business growth. In Fiscal 2009 we purchased equipment of approximately $1.0 million, purchased the assets of a radio frequency
identification system product line (RFID) for approximately $.4 million and sold investments of approximately $.6 million.
In Fiscal 2010 net cash used for financing activities was $710,523 as compared to cash provided by financing activities in Fiscal 2009 of
$785,456. In Fiscal 2010 we repaid $1.3 million of our term loan, paid approximately $0.3 million for capital leases and borrowed approximately $0.7 from our line of credit. In addition, approximately $0.2 million of a deferred tax asset related to
the cancellation of non-qualified stock options was charged to additional paid in capital.
In Fiscal 2009 we borrowed
approximately $3.5 million from our line of credit, repaid mortgage and term debt obligations of approximately $1.4 million and repurchased shares of our common stock for approximately $1.2 million.
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
26
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.
Term Loan and Revolver
In March 2007, we entered into a credit facility consisting of a $6.5 million five year secured term loan and a $5.0 million three year
revolving line of credit, which replaced the then existing $6.0 million term loan entered into in June 2005. In December 2008 we extended the term of the revolving line of credit for two years.
We 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 we record the current fair value of the interest rate swap on the balance sheet. Any unrealized gain or loss on the swap is charged to earnings.
The term loan is guaranteed by our subsidiaries and secured by substantially all of our assets. The term loan is payable in quarterly
principal installments of $325,000 plus accrued interest at the rate of 5.2% plus the applicable margin. At March 31, 2010 our interest rate was 8.95%. The final payment for the term loan is in April 2012.
The revolving line of credit bears interest at LIBOR plus the applicable margin. At March 31, 2010 our interest rate was 4.50%. We
had approximately $0.8 million available under the line at March 31, 2010. The revolving line of credit expires in March 2012.
Under the terms of the term loan and the revolver, we are required to maintain certain financial covenants on a quarterly and annual
basis, including total funded debt to EBITDA not exceeding 2.25:1, minimum debt service coverage of 1.25:1, a minimum current ratio of 1.25:1 and minimum tangible net worth of $7.5 million. We obtained an amendment to the term loan and revolver
agreements to include the goodwill and intangible asset impairment charges as an add-back to the EBITDA covenants. We also obtained an Amendment and Waiver Agreement to the term loan and revolver agreements to waive our EBITDA covenants and to
substitute modified quarterly EBITDA covenants through March 31, 2010. Under the terms of our amendment, our interest rate increased from a maximum of LIBOR plus 2.5% to a maximum of LIBOR plus 4.25% for our revolving line of credit and a
maximum adjusted LIBOR plus 3.75% for our term loan. The interest rate may decrease to a minimum of LIBOR plus 2.5% based upon future performance. In October 2009 we obtained an additional waiver and amendment to our quarterly EBITDA covenants
related to timing of EBITDA. On March 31, 2010 the waiver for our EBITDA covenants expired and we returned to the original EBITDA terms of the agreement as set out above. As of March 31, 2010, we were in compliance with our bank covenants.
Capital leases
Commercial capital leases payable are reflected at their present value based upon interest rates that approximate 6.8% per annum, and
are secured by the underlying assets. The assets are depreciated over their estimated useful lives.
Stock Repurchase Plan
In November 2008 our Board of Directors approved a stock repurchase plan. Pursuant to such plan, in November 2008 we re-purchased 454,107
shares of our common stock for $1,248,314. Bank approval for the plan expired on May 5, 2009. We have no plans at this time to make an additional repurchases under the plan.
27
Acquisition
On March 18, 2009, we purchased the assets of an RFID product line for approximately $0.4 million. This product line includes
forklift, wall and floor mount radio frequency identification systems for inventory management and other applications. It also adds antennas to our component product line.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements, other than operating leases, that have or are, in the opinion of management, likely to
have a current or future material effect on our financial statements.
28
ITEM 8. Financial Statements and Supplementary Data.
This information is contained on pages F-1 through F-24 hereof.
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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, 2010, 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, 2010, to provide reasonable assurance that material information relating to the Company was made known to our Chief Executive Officer and Acting Chief Financial Officer 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, 2010.
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 control over financial reporting
that occurred during the quarterly period ended March 31, 2010 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.
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PART 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, 2010.
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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.
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2.1
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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).
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2.2
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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).
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2.3
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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).
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2.4
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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).
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2.5
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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).
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2.6
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Asset Purchase Agreement, by and among Micronetics, Inc., M/A-COM RFID Inc., solely for the purposes of Section 5.3 and Section 5.9, Cobham Defense Electronic Systems Corporation,
and solely for the purposes of Section 5.10 and Article VI, Cobham Defense Electronic Systems M/A-COM Inc., dated March 18, 2009 (incorporated by reference to Exhibit 2.6 to the Current Report on Form 10-K filed by the Company on June
29, 2009.
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3.1
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Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to Registration Statement No. 33-16453 (the Registration Statement)).
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3.2
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Certificate of Amendment of Certificate of Incorporation of the Company, dated October 2, 1995.
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3.3
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Certificate of Amendment of Certificate of Incorporation of the Company, dated November 6, 2002.
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3.4
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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).
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4.1
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Specimen certificate for common stock of Micronetics, Inc. (incorporated by reference to Exhibit 4.1 to the Registration Statement).
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10.1
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2003 Stock Incentive Plan (incorporated by reference to Appendix A to the Companys Definitive Proxy Statement filed on September 24, 2003).*
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10.2
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2006 Equity Incentive Plan (incorporated by reference to Appendix B to the Companys Definitive Proxy Statement filed on July 31, 2006).*
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10.3
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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).*
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10.4
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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).
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10.5
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Amendment to Commercial Loan Agreement and Loan Documents, by and between, Micronetics, Inc., Microwave & Video Systems, Inc., Microwave Concepts, Inc., Stealth Microwave, Inc.,
MICA Microwave Corporation and RBS Citizens National Association (successor by merger to Citizens Bank New Hampshire), dated December 12, 2008 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on
December 15, 2008).
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10.6
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Amendment to Commercial Loan Agreement and Loan Documents, by and between, Micronetics, Inc., Microwave & Video Systems, Inc., Microwave Concepts, Inc., Stealth Microwave, Inc.,
MICA Microwave Corporation and RBS Citizens National Association (successor by merger to Citizens Bank New Hampshire), dated March 5, 2009 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on
March 9, 2009).
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10.7
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Amendment and Waiver To Commercial Loan Agreement and Loan Documents, by and between, Micronetics, Inc., Microwave & Video Systems, Inc., Microwave Concepts, Inc., Stealth
Microwave, Inc., MICA Microwave Corporation and RBS Citizens National Association (successor by merger to Citizens Bank New Hampshire), dated June 26, 2009. (incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K filed by the
Company on June 29, 2009).
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10.8
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Mortgage and Security Agreement, by and between, Micronetics, Inc., and RBS Citizens National Association (successor by merger to Citizens Bank New Hampshire), dated June 26,
2009. (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K filed by the Company on June 29, 2009).
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10.9
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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).
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10.10
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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).
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10.11
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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).
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10.12
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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).
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10.13
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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).
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10.14
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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).*
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10.15
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Lease by and between Microwave Concepts, Inc. and SAI Property Management LLC, dated October 17, 2008 (incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed by the Company on November 5, 2008.)
|
|
|
10.16
|
|
Guaranty by Micronetics, Inc. to SAI Property Management LLC, dated October 17, 2008 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the
Company on November 5, 2008.)
|
33
|
|
|
10.17
|
|
Lease, dated September 4, 2008, by and between Micronetics, Inc. and SBJ Development, LLC (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by
the Company on November 12, 2008.)
|
|
|
21
|
|
List of Subsidiaries of the Company.
|
|
|
23.1
|
|
Consent of Grant Thornton LLP dated June 21, 2010.
|
|
|
31.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
|
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.
|
|
|
32.2
|
|
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
|
34
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
|
|
MICRONETICS, INC.
|
|
|
|
|
Dated: June 21, 2010
|
|
|
|
By:
|
|
/s/ D
AVID
R
OBBINS
|
|
|
|
|
|
|
|
|
David Robbins,
Chief Executive Officer and Treasurer
(Principal Executive Officer)
|
|
|
|
|
Dated: June 21, 2010
|
|
|
|
By:
|
|
/s/ C
ARL
L
UEDERS
|
|
|
|
|
|
|
|
|
Carl Lueders,
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
/
S
/ D
AVID
R
OBBINS
David Robbins
|
|
Chief Executive Officer and Treasurer (Principal Executive Officer)
|
|
June 21, 2010
|
|
|
|
/
S
/ D
AVID
S
IEGEL
David Siegel
|
|
Director
|
|
June 21, 2010
|
|
|
|
/
S
/ D
OROTHY
A
NNE
H
URD
Dorothy Anne Hurd
|
|
Director
|
|
June 21, 2010
|
|
|
|
/
S
/ G
ERALD
H
ATTORI
Gerald Hattori
|
|
Director
|
|
June 21, 2010
|
35
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. (a Delaware Corporation) and subsidiaries (collectively,
the Company) as of March 31, 2010 and 2009 and the related statements of operations, 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, 2010 and 2009 and the results of their operations and their cash flows for the years then ended
in conformity with accounting principles generally accepted in the United States of America.
|
/s/ G
RANT
T
HORNTON
LLP
|
Boston, Massachusetts
|
June 21, 2010
|
F-1
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
482,442
|
|
|
$
|
620,259
|
|
Accounts receivable, net of allowance for doubtful accounts of $570,782 and $449,799 at March 31, 2010 and March 31,
2009, respectively
|
|
|
5,691,334
|
|
|
|
4,949,004
|
|
Inventories, net
|
|
|
10,943,968
|
|
|
|
9,436,210
|
|
Unbilled revenue
|
|
|
219,958
|
|
|
|
31,920
|
|
Net deferred tax asset
|
|
|
1,557,093
|
|
|
|
1,464,958
|
|
Prepaid income taxes
|
|
|
434,379
|
|
|
|
1,068,832
|
|
Prepaid expenses and other current assets
|
|
|
218,554
|
|
|
|
276,222
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
19,547,728
|
|
|
|
17,847,405
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
4,787,880
|
|
|
|
4,703,529
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Security deposits
|
|
|
97,079
|
|
|
|
86,839
|
|
Other long-term assets
|
|
|
18,547
|
|
|
|
26,791
|
|
Intangible assets, net
|
|
|
1,396,595
|
|
|
|
1,744,691
|
|
Goodwill
|
|
|
1,117,197
|
|
|
|
1,117,197
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
2,629,418
|
|
|
|
2,975,518
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
26,965,026
|
|
|
$
|
25,526,452
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
1,457,267
|
|
|
$
|
1,588,175
|
|
Line of credit
|
|
|
4,234,435
|
|
|
|
3,502,620
|
|
Accounts payable
|
|
|
2,179,422
|
|
|
|
1,070,831
|
|
Accrued expenses and other current liabilities
|
|
|
2,732,429
|
|
|
|
3,141,424
|
|
Deferred revenue
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,803,553
|
|
|
|
9,303,050
|
|
Long-term debt, net of current portion
|
|
|
1,786,378
|
|
|
|
3,085,290
|
|
Other long-term liability
|
|
|
1,740
|
|
|
|
6,200
|
|
Net deferred tax liability
|
|
|
1,033,531
|
|
|
|
901,722
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,625,202
|
|
|
|
13,296,262
|
|
|
|
|
|
|
|
|
|
|
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 issued, 4,553,635 outstanding at March 31, 2010 and
March 31, 2009
|
|
|
53,912
|
|
|
|
53,912
|
|
Additional paid-in capital
|
|
|
12,204,124
|
|
|
|
12,242,320
|
|
Retained earnings
|
|
|
4,062,301
|
|
|
|
2,914,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,320,337
|
|
|
|
15,210,703
|
|
Treasury stock at cost, 837,582 shares at March 31, 2010 and March 31, 2009, respectively
|
|
|
(2,980,513
|
)
|
|
|
(2,980,513
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
13,339,824
|
|
|
|
12,230,190
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
26,965,026
|
|
|
$
|
25,526,452
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Net sales
|
|
$
|
34,867,746
|
|
|
$
|
30,347,285
|
|
Cost of sales
|
|
|
23,165,053
|
|
|
|
21,163,552
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
11,702,693
|
|
|
|
9,183,733
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,708,532
|
|
|
|
1,869,142
|
|
Selling, general and administrative
|
|
|
7,250,306
|
|
|
|
7,898,753
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
7,964,916
|
|
Intangible asset impairment charge
|
|
|
|
|
|
|
1,295,000
|
|
Amortization of intangible assets
|
|
|
348,093
|
|
|
|
565,503
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,306,931
|
|
|
|
19,593,314
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,395,762
|
|
|
|
(10,409,581
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
233
|
|
|
|
33,285
|
|
Interest expense
|
|
|
(523,274
|
)
|
|
|
(380,323
|
)
|
Unrealized gain on interest rate swap
|
|
|
115,600
|
|
|
|
215
|
|
Miscellaneous income
|
|
|
17,951
|
|
|
|
18,593
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(389,490
|
)
|
|
|
(328,230
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
2,006,272
|
|
|
|
(10,737,811
|
)
|
Provision (benefit) for income taxes
|
|
|
858,442
|
|
|
|
(1,173,884
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,147,830
|
|
|
$
|
(9,563,927
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) earnings per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
|
$
|
(1.98
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
(1.98
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,553,635
|
|
|
|
4,836,052
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
4,553,851
|
|
|
|
4,836,052
|
|
|
|
|
|
|
|
|
|
|
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, 2008
|
|
5,007,742
|
|
|
$
|
53,912
|
|
$
|
11,608,536
|
|
|
$
|
12,478,398
|
|
|
$
|
(1,732,199
|
)
|
|
$
|
22,408,647
|
|
Purchase of treasury stock
|
|
(454,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,248,314
|
)
|
|
|
(1,248,314
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
633,784
|
|
|
|
|
|
|
|
|
|
|
|
633,784
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,563,927
|
)
|
|
|
|
|
|
|
(9,563,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
4,553,635
|
|
|
$
|
53,912
|
|
$
|
12,242,320
|
|
|
$
|
2,914,471
|
|
|
$
|
(2,980,513
|
)
|
|
$
|
12,230,190
|
|
Reduction of deferred tax asset related to cancellation of non-qualified stock options
|
|
|
|
|
|
|
|
|
(151,886
|
)
|
|
|
|
|
|
|
|
|
|
|
(151,886
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
113,690
|
|
|
|
|
|
|
|
|
|
|
|
113,690
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
1,147,830
|
|
|
|
|
|
|
|
1,147,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
4,553,635
|
|
|
$
|
53,912
|
|
$
|
12,204,124
|
|
|
$
|
4,062,301
|
|
|
$
|
(2,980,513
|
)
|
|
$
|
13,339,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,147,830
|
|
|
$
|
(9,563,927
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,557,999
|
|
|
|
1,665,862
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
7,964,916
|
|
Intangible asset impairment charge
|
|
|
|
|
|
|
1,295,000
|
|
Stock-based compensation
|
|
|
113,690
|
|
|
|
633,784
|
|
Unrealized gain on interest rate swap
|
|
|
(115,600
|
)
|
|
|
(215
|
)
|
Provision for allowances on accounts receivable
|
|
|
120,983
|
|
|
|
84,818
|
|
Provision for inventory obsolescence and losses
|
|
|
240,992
|
|
|
|
1,070,169
|
|
Deferred taxes related to non-qualified stock options
|
|
|
(151,886
|
)
|
|
|
|
|
Deferred taxes
|
|
|
(112,211
|
)
|
|
|
(1,316,017
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(863,313
|
)
|
|
|
(172,042
|
)
|
Unbilled revenue
|
|
|
(188,038
|
)
|
|
|
(31,920
|
)
|
Inventories
|
|
|
(1,748,750
|
)
|
|
|
(3,143,697
|
)
|
Other long term assets
|
|
|
8,243
|
|
|
|
8,243
|
|
Prepaid income taxes
|
|
|
629,994
|
|
|
|
(1,256,449
|
)
|
Prepaid expenses, other current assets, and other assets
|
|
|
47,429
|
|
|
|
(5,215
|
)
|
Accounts payable
|
|
|
1,108,592
|
|
|
|
(213,734
|
)
|
Accrued expenses
|
|
|
(293,395
|
)
|
|
|
414,435
|
|
Deferred revenue
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
1,702,559
|
|
|
|
(2,565,989
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of investments
|
|
|
|
|
|
|
650,000
|
|
Capital expenditures
|
|
|
(1,129,853
|
)
|
|
|
(1,033,145
|
)
|
RFID acquisition
|
|
|
|
|
|
|
(400,000
|
)
|
MICA acquisition, net of cash acquired
|
|
|
|
|
|
|
20,522
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,129,853
|
)
|
|
|
(762,623
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from line of credit
|
|
|
731,815
|
|
|
|
3,502,620
|
|
Repayments on term loan and mortgages
|
|
|
(1,300,000
|
)
|
|
|
(1,430,837
|
)
|
Repayments of capital leases
|
|
|
(294,224
|
)
|
|
|
(38,013
|
)
|
Additional paid in capital charge related to cancellation of non-qualified stock options
|
|
|
151,886
|
|
|
|
|
|
Purchase of treasury shares
|
|
|
|
|
|
|
(1,248,314
|
)
|
Proceeds from the issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(710,523
|
)
|
|
|
785,456
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(137,817
|
)
|
|
|
(2,543,156
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
620,259
|
|
|
|
3,163,415
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
482,442
|
|
|
$
|
620,259
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
492,368
|
|
|
$
|
375,586
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
340,660
|
|
|
$
|
1,459,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Equipment acquired under capital leases
|
|
$
|
164,404
|
|
|
$
|
481,780
|
|
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, 2010 AND 2009
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 and integrated multifunction subassemblies 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), Microwave Concepts, Inc. (MicroCon) Stealth Microwave, Inc. (Stealth) and MICA
Microwave Corporation (MICA). All intercompany activity has been eliminated.
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, 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.
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.
The Company occasionally enters into contracts for production of highly customized microwave and radio frequency components and
integrated sub-assemblies which it records revenue based on the percentage of completion method (assuming all other requirements for revenue recognition have been satisfied) typically using labor hours to measure progress toward completion of the
contract as the Company has determined this methodology best reflects the fundamentals of the contract. If estimates to complete the contract change materially from one period to the next, profit levels could significantly vary. Deferred revenue
represents billings in excess of revenue recognized and unbilled revenue represents revenue recognized in excess of billings.
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. Unless customers purchase an extended warranty, Micronetics typically offers a one-year
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. As of
F-6
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
March 31, 2010, substantially all the Companys cash and cash equivalents consisted of money market investments which the Company believes are subject to minimal credit and market
risks.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents, interest rate swap and accounts receivable. The Company may invest in high-quality money market funds that invest in securities of the U.S. government, and other 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.
The Company has one customer that accounts for 37% of its accounts receivable at March 31, 2010. The Company believes there is minimal risk associated with this receivable.
Fair value of financial instruments
The carrying amounts reported in the consolidated balance sheet for cash, trade
receivables, accounts payable, and accrued expenses approximate fair value because of the relatively short maturity of these instruments. 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, 2010, utilizing the notional amounts and the remaining terms of the swap agreement. The fair value of the swap was recorded as a liability in the amount of
$165,050 and $280,650, at March 31, 2010 and March 31, 2009, respectively. 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.
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
|
F-7
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
Goodwill and intangible assets
Goodwill is recorded when the consideration
paid for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired.
The Company tests
goodwill for impairment annually and when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Goodwill is tested for impairment using a two-step process. The
first step is to determine if there is an impairment and the second step is to determine the amount of the impairment.
In the
third quarter of Fiscal 2009 the Company experienced a significant decline in its stock price. As a result of this decline in stock price the Companys market capitalization fell significantly below the recorded value of its consolidated net
assets. In addition, the Company experienced a decline in the commercial market for high performance analog amplifiers necessary for wireless applications, which had an adverse affect on our high performance amplifier sales. Accordingly, in the
third quarter of Fiscal 2009, the Company performed an assessment of goodwill for impairment which resulted in an impairment charge of approximately $4.9 million and $3.1 million for the high performance amplifier and mixer/ferrite reporting units,
respectively. In performing the step 1 goodwill assessment, we used, discounted cash flows, sales and EBITDA multiples as the best evidence of fair value. For purposes of testing impairment we have three separate reporting units with goodwill.
Testing was performed separately for each of the three goodwill reporting units and an impairment charge was recorded at two of the goodwill reporting units (high power amplifier and mixer/ferrite product groups). At March 31, 2010 and 2009 we
performed our goodwill impairment assessment for the remaining $1.1 million of goodwill and determined that the carrying value did not exceed its fair value.
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.
In the
third quarter of Fiscal 2009 the Company determined that the customer list intangible asset related to the high performance amplifier business was impaired and we recorded a charge of approximately $1.3 million as a result of significant decline in
sales and projected sales to this group of customers. At March 31, 2010 and 2009 we determined that no new triggering events had occurred warranting a further impairment assessment of our long-lived assets.
Research and development
Research and development costs are charged to expense when incurred. Amounts expended for the years
ended March 31, 2010 and 2009 were $1,708,532 and $1,869,142, respectively. R&D expenses consist of salaries, materials and third party costs.
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 operation. Advertising expense was $55,039 in Fiscal 2010 and $107,165 in Fiscal 2009.
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, 2010 and 2009.
Earnings per share
Basic earnings per share is computed
by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is
F-8
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
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.
Stock-based Compensation
The Company measures compensation cost for stock-based compensation at fair value The
Company uses 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, expected
term, the volatility of our common stock price over the expected term, risk free interest rate 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 operations. For all awards the Company has recognized compensation expense using the straight-line amortization method over the vesting period of the awards and this
estimated expense for Fiscal 2010 and 2009 has been reduced for estimated forfeitures.
Subsequent Events
The
Company evaluated its March 31, 2010 financial statements for subsequent events through the date the financial statements were issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial
statements.
Recently adopted accounting pronouncements
On April 1, 2009, the Company implemented the
provisions ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 provides a consistent definition of fair value that focuses on exit price, prioritizes the use of market-based inputs over entity-specific inputs
for measuring fair value and establishes a three-level hierarchy for fair value measurements. The Provisions of ASC 820, as issued, are effective for the fiscal years beginning after November 15, 2007. In February 2008, the Financial Accounting
Standards Board, or FASB delayed 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)
to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope. The adoption of this standard did not have any effect on the Companys consolidated financial statements.
On April 1, 2009, the Company implemented the provisions of ASC 805 Business Combinations (ASC
805) which provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired. The standard now requires the assets acquired, liabilities assumed, and any non-controlling interest to be measured at their fair
values as of the acquisition date. ASC 805 also requires expensing of acquisition related costs and restructuring costs, and re-measurement of earn out provisions at fair value. This standard is effective for any of the Companys business
combinations on or after April 1, 2009. The adoption of this standard did not have any effect on the Companys consolidated financial statements.
In February 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-09 (ASU 2010-09), which amends
ASC 855 to address certain implementation issues related to an entitys requirement to perform and disclose subsequent-events procedures. The new guidance clarifies that management must evaluate, as of each reporting period, events or
transactions that occur after the balance sheet date through the date that the financial statements are issued. Management must perform its assessment for both interim and annual financial reporting periods. ASU 2010-09 also exempts SEC filers from
disclosing the date through which subsequent events have been evaluated. The adoption of this amended standard did not have a material impact on the companys consolidated financial statements.
F-9
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
In June 2009, the FASB, issued ASC 105 which is the single source of authoritative
nongovernmental U.S. generally accepted accounting principles, or GAAP, superseding existing FASB, American Institute of Certified Public Accountants, or AICPA, Emerging Issues Task Force, or EITF, and related accounting literature. This standard
reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in
separate sections. This standard was effective for financial statements issued for reporting periods that end after September 15, 2009. The Company adopted this standard for the interim period ending September 26, 2009. The adoption of
this standard did not have a material impact on our financial statements, however, it did change our references to GAAP in our consolidated financial statements.
Recently issued accounting pronouncements
In October 2009, the FASB issued ASU No. 2009-13, Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force), which amends ASC 605-25, Revenue Recognition: Multiple-Element Arrangements. ASU No. 2009-13 addresses
how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate consideration to each unit of accounting in the arrangement. This ASU replaces all references to fair value as the
measurement criteria with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement
consideration. Additionally, ASU No. 2009-13 requires expanded disclosures. This ASU will become effective for us for revenue arrangements entered into or materially modified on or after April 1, 2011. Earlier application is permitted with
required transition disclosures based on the period of adoption. We are currently evaluating the impact of this standard on our consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include
Software Elements (a consensus of the FASB Emerging Issues Task Force). ASU No. 2009-14 amends ASC 985-605, Software: Revenue Recognition, such that tangible products, containing both software and non-software components that
function together to deliver the tangible products essential functionality, are no longer within the scope of ASC 985-605. It also amends the determination of how arrangement consideration should be allocated to deliverables in a
multiple-deliverable revenue arrangement. This ASU will become effective for us for revenue arrangements entered into or materially modified on or after April 1, 2011. Earlier application is permitted with required transition disclosures based
on the period of adoption. We are currently evaluating the impact of this standard on our consolidated financial statements. Both ASU No. 2009-13 and ASU No. 2009-14 must be adopted in the same period and must use the same transition
disclosures.
In January 2010, the FASB issued an update that improves the requirements related to fair value measurements and
disclosures about transfers between Level 1, Level 2 and Level 3 assets and the disaggregated activity in the roll forward for Level 3 fair value measurements. These new disclosures are effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. The Company does not expect the adoption of these expanded disclosures to have a material impact on its consolidated financial statements.
2. ACQUISITIONS
On
March 18, 2009, the Company purchased the assets of a Radio Frequency Identification product line (RFID) for approximately $400,000, which has been accounted for as a business acquisition under purchase accounting. This product line
includes forklift, wall and floor mount radio frequency identification systems for inventory management and other applications. It also adds antennas to our component product line.
F-10
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
The following table summarizes the fair value assigned to the assets acquired and
liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
(in thousands)
|
|
Inventory
|
|
$
|
47
|
|
Property, plant and equipment
|
|
|
129
|
|
Development technology drawings
|
|
|
123
|
|
Customer relationships
|
|
|
121
|
|
Accounts payable
|
|
|
(20
|
)
|
|
|
|
|
|
Net purchase price
|
|
$
|
400
|
|
|
|
|
|
|
3. INTANGIBLE ASSETS AND GOODWILL
The Company tests goodwill for impairment annually and when an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying value.
The following table presents details of the Companys
finite-lived intangible assets as of March 31, 2010 and March 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
Life
(years)
|
|
March 31, 2010
|
|
March 31, 2009
|
Intangible Assets
|
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net
Value
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Impairment
Charge
|
|
Net
Value
|
Customer relationships (non-contractual)
|
|
3-10
|
|
$
|
2,956
|
|
$
|
1,931
|
|
$
|
1,025
|
|
$
|
4,251
|
|
$
|
1,728
|
|
$
|
1,295
|
|
$
|
1,228
|
Trade name
|
|
10
|
|
|
260
|
|
|
73
|
|
|
187
|
|
|
260
|
|
|
47
|
|
|
|
|
|
213
|
Developed technology-drawings
|
|
5
|
|
|
513
|
|
|
328
|
|
|
185
|
|
|
513
|
|
|
209
|
|
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
|
|
$
|
3,729
|
|
$
|
2,332
|
|
$
|
1,397
|
|
$
|
5,024
|
|
$
|
1,984
|
|
$
|
1,295
|
|
$
|
1,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of Fiscal 2009, the Company
recorded an impairment charge of $1,295,000 related to the customer relationship intangible asset of its high performance amplifier business. The Company evaluates the carrying value of its intangible assets on an ongoing basis. No triggering
event occurred warranting a review of our intangible assets as of March 31, 2010.
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)
|
2011
|
|
$
|
321
|
2012
|
|
|
314
|
2013
|
|
|
163
|
2014
|
|
|
144
|
2015
|
|
|
144
|
Thereafter
|
|
|
311
|
|
|
|
|
Total
|
|
$
|
1,397
|
|
|
|
|
F-11
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
Changes in the carrying amount of goodwill at March 31, 2010 and March 31,
2009 are as follows:
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Balance at the beginning of the period
|
|
$
|
1,117,197
|
|
$
|
8,931,944
|
|
Impairment charge
|
|
|
|
|
|
(7,964,916
|
)
|
Purchase accounting adjustments
|
|
|
|
|
|
150,169
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
1,117,197
|
|
$
|
1,117,197
|
|
|
|
|
|
|
|
|
|
During the third quarter of Fiscal 2009, the Company recorded impairment charges of $7,964,916 related to
the goodwill for its high performance amplifier and mixer/ferrite reporting units. The Company evaluates the carrying value of its goodwill asset on an ongoing basis. No additional impairment charge was warranted as of March 31, 2010.
Approximately $1.1 million of goodwill is deductible for income tax purposes at March 31, 2010 and March 31, 2009.
4. ACCOUNTS RECEIVABLE, NET
At March 31, 2010 and 2009 accounts receivable, net of allowances consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Accounts receivable
|
|
$
|
6,262,116
|
|
|
$
|
5,398,803
|
|
Less allowances
|
|
|
(570,782
|
)
|
|
|
(449,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,691,334
|
|
|
$
|
4,949,004
|
|
|
|
|
|
|
|
|
|
|
The activity related to the Companys allowances for doubtful accounts on accounts receivable for
Fiscal 2010 and Fiscal 2009 is as follows:
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
Balance at beginning of period
|
|
$
|
449,799
|
|
$
|
364,981
|
Charged to costs and expenses
|
|
|
120,983
|
|
|
84,818
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
570,782
|
|
$
|
449,799
|
|
|
|
|
|
|
|
5. INVENTORIES, NET
At March 31, 2010 and 2009 inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Raw materials
|
|
$
|
7,170,056
|
|
|
$
|
6,222,709
|
|
Work in process
|
|
|
3,941,829
|
|
|
|
3,588,857
|
|
Finished goods
|
|
|
1,368,591
|
|
|
|
1,164,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,480,476
|
|
|
|
10,976,467
|
|
Less: allowance for obsolescence
|
|
|
(1,536,508
|
)
|
|
|
(1,540,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,943,968
|
|
|
$
|
9,436,210
|
|
|
|
|
|
|
|
|
|
|
F-12
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
6. PROPERTY, PLANT AND EQUIPMENT
At March 31, 2010 and 2009, property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Land
|
|
$
|
162,000
|
|
|
$
|
162,000
|
|
Buildings and leasehold improvements
|
|
|
2,170,278
|
|
|
|
1,317,657
|
|
Machinery and equipment
|
|
|
10,833,486
|
|
|
|
10,409,567
|
|
Furniture and fixtures, and other
|
|
|
244,171
|
|
|
|
244,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,409,935
|
|
|
|
12,133,395
|
|
Less accumulated depreciation
|
|
|
(8,622,055
|
)
|
|
|
(7,429,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,787,880
|
|
|
$
|
4,703,529
|
|
|
|
|
|
|
|
|
|
|
Assets held under capital leases are classified as property, plant and equipment and amortized over their
useful lives. Lease amortization is included in depreciation expense.
7. ACCRUED EXPENSES
At March 31, 2010 and 2009 accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
Unbilled payables
|
|
$
|
837,603
|
|
$
|
1,125,365
|
Professional fees
|
|
|
15,750
|
|
|
7,607
|
Payroll, benefits and related taxes
|
|
|
1,142,532
|
|
|
1,373,688
|
Warranty
|
|
|
211,240
|
|
|
136,763
|
Commissions
|
|
|
185,967
|
|
|
143,876
|
Customer Deposits
|
|
|
71,348
|
|
|
|
Unrealized loss on interest rate swap
|
|
|
165,050
|
|
|
280,650
|
Miscellaneous
|
|
|
102,939
|
|
|
73,475
|
|
|
|
|
|
|
|
|
|
$
|
2,732,429
|
|
$
|
3,141,424
|
|
|
|
|
|
|
|
Included in accrued payroll are bonuses of $600,000
and $403,322 for Fiscal 2010 and Fiscal 2009, 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 2010 and Fiscal 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Balance at beginning of period
|
|
$
|
136,763
|
|
|
$
|
119,252
|
|
Accruals for warranties
|
|
|
266,799
|
|
|
|
93,453
|
|
Charges to accrual for warranty costs
|
|
|
(192,322
|
)
|
|
|
(75,942
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
211,240
|
|
|
$
|
136,763
|
|
|
|
|
|
|
|
|
|
|
F-13
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
9. LONG-TERM DEBT
At March 31, 2010 and 2009 long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
Term loan
|
|
$
|
2,925,000
|
|
$
|
4,225,000
|
Capital leases
|
|
|
318,645
|
|
|
448,465
|
|
|
|
|
|
|
|
Total
|
|
|
3,243,645
|
|
|
4,673,465
|
Less current portion
|
|
|
1,457,267
|
|
|
1,588,175
|
|
|
|
|
|
|
|
Long-term debt net of current portion
|
|
$
|
1,786,378
|
|
$
|
3,085,290
|
|
|
|
|
|
|
|
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. In the third quarter of Fiscal 2009, the revolving line of credit was extended by two years and expires in March 2012. 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 rate of 5.2% plus the applicable margin. At March 31, 2010, the interest rate was 8.95%. The final payment
for the term loan is in April 2012. The revolving line of credit bears interest at LIBOR plus the applicable margin. At March 31, 2010, the interest rate was 4.50%. The Company had approximately $765,000 available under the line at
March 31, 2010.
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. The 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 change in value of the interest rate swap is recorded on the consolidated balance sheet, with any related gains or losses charged to earnings. For the years ended March 31, 2010 and March 31, 2009, the
Company recorded an unrealized gain of $115,600 and $215, respectively, in the statement of operations to reflect the change in estimated fair value for the interest rate swap.
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, a minimum current ratio of 1.25:1 and minimum tangible net worth of $7.5 million. The Company obtained an amendment to the term loan
and revolver agreements to include the goodwill and intangible asset impairment charges as an add-back to the EBITDA covenants. The Company also obtained an Amendment and Waiver Agreement to the term loan and revolver agreements to waive the EBITDA
covenants and to substitute modified quarterly EBITDA covenants through March 31, 2010. Under the terms of the amendment, the interest rate increased from a maximum of LIBOR plus 2.5% to a maximum of LIBOR plus 4.25% for the revolving line of
credit and a maximum adjusted LIBOR plus 3.75% for the term loan. The interest rate may decrease to a minimum of LIBOR plus 2.5% based upon future performance. In October 2009 the Company obtained an additional waiver and amendment to the quarterly
EBITDA covenants. On March 31, 2010 the waiver for the Companys EBITDA covenants expired and the Company returned to the original EBITDA terms of the agreement as set out above. As of March 31, 2010, the Company was in compliance
with its bank covenants.
Capital leases
Commercial capital leases payable are reflected at their present value based upon interest rates that approximates 6.8% per annum,
and are secured by the underlying assets. The assets are depreciated over their
F-14
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
estimated useful lives. Included in the current portion of long-term debt is $157,267 for capital lease obligations. Included in long-term debt net of current portion is $161,378 for capital
lease obligations. The remaining interest associated with the Companys capital lease obligations amounts to approximately $22,600 over the lease terms.
Aggregate annual maturities of long-term debt, capital lease obligations and the line of credit, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ending March 31,
|
|
Line of Credit
|
|
Capital
Lease
Obligation
|
|
Mortgages
and notes
payable
|
|
Total
|
2011
|
|
$
|
4,234,435
|
|
$
|
157,267
|
|
$
|
1,300,000
|
|
$
|
5,691,702
|
2012
|
|
|
|
|
|
161,378
|
|
|
1,300,000
|
|
|
1,461,378
|
2013
|
|
|
|
|
|
|
|
|
325,000
|
|
|
325,000
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,234,435
|
|
$
|
318,645
|
|
$
|
2,925,000
|
|
$
|
7,478,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION
At March 31, 2010, the Company had two stock option plans under which grants were outstanding. The stock options outstanding are for
grants issued under the Companys 2003 Stock Option Plan and the 2006 Equity Incentive 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
Stock Option 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, 2010, there were 236,600 options outstanding under the 2003 Plan.
The 2006 Equity Incentive Plan
During the fiscal year ended 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, 2010 there were 274,500 options outstanding under the 2006 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 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 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.
F-15
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
The following table sets forth the Companys stock option activity during the year
ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Underlying
options
|
|
|
Weighted
Average
Exercise
price
|
|
Weighted
Average
Remaining
Contractual
life
|
|
Aggregate
Intrinsic
value
|
Outstanding at March 31, 2009
|
|
699,125
|
|
|
$
|
7.78
|
|
|
|
|
Granted
|
|
137,000
|
|
|
|
3.32
|
|
|
|
91,765
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(156,125
|
)
|
|
|
6.93
|
|
|
|
|
Forfeited
|
|
(168,900
|
)
|
|
|
7.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010
|
|
511,100
|
|
|
$
|
6.79
|
|
4.58
|
|
91,765
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2010
|
|
319,350
|
|
|
$
|
8.04
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There is no intrinsic value for fully vested,
exercisable options at March 31, 2010 based on the Companys closing stock price of Common Stock on that date of $4.02.
The following table sets forth the status of the Companys non-vested stock options as of March 31, 2010:
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted-Average
Grant-Date
Fair Value
|
Non-vested as of March 31, 2009
|
|
314,500
|
|
|
$
|
4.61
|
Granted
|
|
137,000
|
|
|
|
2.20
|
Forfeited
|
|
(126,000
|
)
|
|
|
5.00
|
Vested
|
|
(133,750
|
)
|
|
|
4.15
|
|
|
|
|
|
|
|
Non-vested as of March 31, 2010
|
|
191,750
|
|
|
$
|
2.95
|
|
|
|
|
|
|
|
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 and the remaining options vested on July 31, 2008. The options have a
contractual life of 10 years. The Company valued the options at the fair value on the date of grant using the Black-Scholes options-pricing model. The Company recorded $32,150 in compensation expense for the year ended March 31, 2009 related to
the non-employee options.
The following table summarizes information about stock options outstanding at March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$ 1.72 $ 3.44
|
|
76,500
|
|
9.22 yrs
|
|
$
|
2.83
|
|
|
|
|
|
$ 3.44 $ 5.17
|
|
58,000
|
|
9.98 yrs
|
|
$
|
4.00
|
|
2,500
|
|
$
|
4.02
|
$ 5.17 $ 6.89
|
|
3,000
|
|
8.55 yrs
|
|
$
|
6.65
|
|
750
|
|
$
|
6.65
|
$ 6.89 $ 8.61
|
|
353,600
|
|
2.88 yrs
|
|
$
|
7.98
|
|
296,100
|
|
$
|
8.02
|
$ 8.61 $ 10.33
|
|
20,000
|
|
.56 yrs
|
|
$
|
8.89
|
|
20,000
|
|
$
|
8.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
511,100
|
|
4.58 yrs
|
|
$
|
6.79
|
|
319,350
|
|
$
|
8.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
Total stock-based compensation reported in the consolidated statements of operations for
Fiscal 2010 and Fiscal 2009:
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
Cost of sales
|
|
$
|
43,883
|
|
$
|
58,573
|
Selling, general and administrative
|
|
|
69,807
|
|
|
575,211
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
113,690
|
|
$
|
633,784
|
|
|
|
|
|
|
|
Unrecognized stock-based compensation expense, net of
estimated forfeitures, related to the unvested options is approximately $0.4 million, and will be recorded over the remaining service period of 3.18 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 fully vested on
August 14, 2008. As a result of the issuance of the restricted stock, the Company recognized $59,250 of stock compensation expense in Fiscal 2009.
During the fiscal year ended March 31, 2010, 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.
For Fiscal 2010 and Fiscal 2009 the expected term was calculated based upon the simplified method as
the Company issued options with a longer contractual term and did not have sufficient history of exercises under these terms.
The Company has not declared or paid a cash dividend, and has no current plans to pay a cash dividend in the future.
The Company recognizes compensation expense for only the portions that are expected to vest. Therefore, the Company has estimated
expected forfeitures of stock options. 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.
F-17
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
The fair value of options issued during Fiscal years 2010 and 2009 were estimated at the
date of grant with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Risk Free Interest Rate
|
|
2.49 3.01
|
%
|
|
2.93 3.55
|
%
|
Expected Life
|
|
6.25 years
|
|
|
6.13 years
|
|
Expected Volatility
|
|
69 70
|
%
|
|
57 60
|
%
|
Expected Dividend Yield
|
|
0
|
%
|
|
0
|
%
|
The per share
weighted average fair value of stock options granted for the fiscal years ended March 31, 2010 and 2009 was $2.20 and $3.89, respectively.
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
In November 2008 in accordance with a stock repurchase plan approved by our Board of Directors the Company repurchased a total of 454,107
shares of our common stock for $1,248,314. Under the plan the Company may purchase up to 500,000 shares of the Companys common stock. We have no plans at this time to make additional repurchases under the plan.
13. INCOME TAXES
The
following sets forth the provision for income taxes at March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
679,619
|
|
|
$
|
(79,266
|
)
|
State
|
|
|
291,037
|
|
|
|
210,919
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(71,905
|
)
|
|
|
(891,142
|
)
|
State
|
|
|
(40,309
|
)
|
|
|
(414,395
|
)
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income tax
|
|
$
|
858,442
|
|
|
$
|
(1,173,884
|
)
|
|
|
|
|
|
|
|
|
|
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. Tax
deficiencies related to the cancellation of non-qualified stock options is charged to additional paid in capital to the extent there are amounts available to absorb such tax deficiencies.
F-18
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
At March 31, 2010 and 2009 the difference between the income tax provision computed
at the Federal statutory rate and the actual tax provision is accounted for as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Taxes computed at the federal statutory rate
|
|
$
|
682,133
|
|
|
$
|
(3,650,855
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
2,708,071
|
|
State income tax (net of federal benefit)
|
|
|
165,481
|
|
|
|
(134,294
|
)
|
Effect of permanent differences
|
|
|
83,427
|
|
|
|
80,961
|
|
Research and development tax credits
|
|
|
(68,139
|
)
|
|
|
(103,967
|
)
|
Settlements/reductions in uncertain tax positions
|
|
|
(4,460
|
)
|
|
|
(73,800
|
)
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
$
|
858,442
|
|
|
$
|
(1,173,884
|
)
|
|
|
|
|
|
|
|
|
|
At March 31, 2010 and 2009 deferred tax assets (liabilities) are comprised of:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Net current deferred tax asset:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
418,279
|
|
|
$
|
334,749
|
|
Inventory reserve
|
|
|
668,144
|
|
|
|
760,501
|
|
Bad debt reserve
|
|
|
233,005
|
|
|
|
150,215
|
|
Warranty reserve
|
|
|
86,233
|
|
|
|
56,394
|
|
Sales return reserve
|
|
|
|
|
|
|
35,260
|
|
UNICAP
|
|
|
161,944
|
|
|
|
136,473
|
|
Prepaid expenses
|
|
|
(10,512
|
)
|
|
|
(8,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,557,093
|
|
|
$
|
1,464,958
|
|
|
|
|
|
|
|
|
|
|
Net long term deferred tax liability:
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
$
|
192,690
|
|
|
$
|
372,426
|
|
State operating loss carryforward
|
|
|
135,074
|
|
|
|
192,096
|
|
State credits
|
|
|
1,538
|
|
|
|
|
|
Intangible amortization
|
|
|
(94,106
|
)
|
|
|
(44,957
|
)
|
Depreciation
|
|
|
(680,282
|
)
|
|
|
(606,274
|
)
|
Purchase price adjustment
|
|
|
(480,633
|
)
|
|
|
(597,207
|
)
|
Section 481(a) adjustment
|
|
|
(107,812
|
)
|
|
|
(217,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,033,531
|
)
|
|
$
|
(901,722
|
)
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, the Company has state net operating loss carryforwards of approximately $992,000,
of which $967,000 will expire in 2016 and $25,000 will expire in 2029. The Companys effective tax rate was 42.8% and 11% for the year ended March 31, 2010 and 2009, respectively. In Fiscal 2009 the Company recorded a discrete tax item of
$2.7 million related to a goodwill impairment charge that is non-tax deductible. In addition, approximately $75,000 of uncertain tax benefits were recognized due to statute of limitations expiring for previously filed tax returns.
The amount of uncertain tax benefits as of March 31, 2010 was $1,740, 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-19
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
The change in uncertain tax benefits for the twelve months ended March 31, 2010 and
2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Balance at beginning of period
|
|
$
|
6,200
|
|
|
$
|
80,000
|
|
Changes in tax positions related to prior years:
|
|
|
|
|
|
|
1,000
|
|
Changes in tax positions related to the current year
|
|
|
205
|
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
(74,800
|
)
|
Reductions for expiration of statute of limitations
|
|
|
(4,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,740
|
|
|
$
|
6,200
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, the Company is subject to tax in the U.S. and various state jurisdictions. The
Company is open to examination for tax years March 31, 2007 through 2010.
The Company is under an IRS audit for its
Fiscal 2008 tax returns.
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, 2010, the Company has accrued interest and penalties for uncertain tax benefits in its statement of operations of $200.
14. EARNINGS PER SHARE
Basic earnings (loss) per share, or EPS, is computed based on the net income or loss for each period divided by the weighted average
actual shares outstanding during the period. Diluted earnings (loss) per share is computed based on the net income or loss per period divided by the weighted average number of common shares and common equivalent shares outstanding during each period
unless the effect would be anti-dilutive. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding stock options using the treasury stock method. The computations of basic and diluted earnings per share
at March 31, 2010 and 2009 are:
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Net income (loss)
|
|
$
|
1,147,830
|
|
$
|
(9,563,927
|
)
|
Weighted average shares outstanding:
|
|
|
4,553,635
|
|
|
4,836,052
|
|
Basic earnings (loss) per share
|
|
$
|
0.25
|
|
$
|
(1.98
|
)
|
Common stock equivalents
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares outstanding
|
|
|
4,553,851
|
|
|
4,836,052
|
|
Diluted earnings (loss) per share
|
|
$
|
0.25
|
|
$
|
(1.98
|
)
|
At March 31, 2010 and
2009, 376,600 and 699,125 stock options, respectively, were excluded from the diluted earnings per share calculation because they would have been anti-dilutive.
F-20
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
15. COMMITMENTS AND CONTINGENCIES
Leases:
The Company is
obligated under various non-cancelable operating leases for manufacturing facilities and equipment, which expire through January 2014. The Company has options to extend leases in its leased facilities. The Company pays building operating costs in
its leased facilities.
The aggregate future minimum lease payments, are as follows:
|
|
|
|
|
|
March 31,
|
2011
|
|
$
|
647,824
|
2012
|
|
|
627,595
|
2013
|
|
|
597,287
|
2014
|
|
|
425,729
|
|
|
|
|
|
|
$
|
2,298,435
|
|
|
|
|
Rental expense for the years ended March 31, 2010
and 2009 was $889,613 and $751,973 respectively.
16. FAIR VALUE MEASUREMENTS
The Company assesses fair value as an exit price representing the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for
considering such assumptions, this standard establishes a three-tier value hierarchy, which prioritizes, in descending order, the inputs used in measuring fair value as follows:
Level 1 Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical
assets or liabilities as of the reporting date.
Level 2 Inputs used to measure fair value, other than quoted prices
included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not
active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors,
are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
Level 3 Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect
the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize managements estimates of market participant assumptions.
F-21
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
This hierarchy requires the Company to use observable market data, when available, and
to minimize the use of unobservable inputs when determining fair value. Assets and liabilities measured at fair value on a recurring basis, include the following as of March 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2010
Using
|
|
|
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total Fair
Value as of
March 31, 2010
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund (included in cash and cash equivalents)
|
|
|
|
$
|
419,000
|
|
|
|
|
$
|
419,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
|
|
$
|
419,000
|
|
|
|
|
$
|
419,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap (included in accrued expenses and other current liabilities)
|
|
|
|
$
|
(165,000
|
)
|
|
|
|
$
|
(165,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
|
|
$
|
(165,000
|
)
|
|
|
|
$
|
(165,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2009
Using
|
|
|
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total Fair
Value as of
March 31, 2009
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund (included in cash and cash equivalents)
|
|
|
|
$
|
555,000
|
|
|
|
|
$
|
555,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
|
|
$
|
555,000
|
|
|
|
|
$
|
555,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap (included in accrued expenses and other current liabilities)
|
|
|
|
$
|
(280,000
|
)
|
|
|
|
$
|
(280,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
|
|
$
|
(280,000
|
)
|
|
|
|
$
|
(280,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following provides a summary of the change in fair value for the interest rate swap as of March 31,
2010:
|
|
|
|
|
Balance at March 31, 2009
|
|
$
|
(280,000
|
)
|
Unrealized gain
|
|
|
115,000
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
$
|
(165,000
|
)
|
|
|
|
|
|
The fair value of the money market fund was determined by using available market prices for the underlying
securities. There has been no change in the fair value of the money market fund since March 31, 2010. The fair value of the interest rate swap was determined by using a market driven valuation model using the LIBOR rate forecast applied to
common intervals for the remaining term of the interest rate swap.
The carrying amounts reported in the consolidated balance
sheet for cash, investments, trade receivables, accounts payable, and accrued expenses and amounts borrowed under the revolving line of credit and capital
F-22
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
leases approximate fair value because of the relatively short maturity of these instruments. The carrying amount of our term debt approximates fair market value because it is based on a variable
interest rate.
17. RELATED PARTY TRANSACTION
On September 4, 2008, Micronetics, Inc. entered into a lease with SBJ Development, LLC (the Landlord) for a new
headquarters for Stealth Microwave, Inc, its subsidiary. The property is located in the Township of Ewing, New Jersey. The lease has an initial term of five years and contains three options to extend the lease, each for a term of five years. The
annual rent for the initial term of the lease is $225,600. The Company reimbursed the Landlord approximately $10,000 of building operating costs per the lease agreement during Fiscal 2010. The Company reimbursed the Landlord approximately $33,000 of
building operating costs and leasehold improvement costs during Fiscal 2009.
Both Stephen N. Barthelmes, Jr., President of
Micronetics subsidiary Stealth Microwave, Inc., and Kevin Beals, President of Micronetics, are members of the Landlord. Mr. Barthelmes and Mr. Beals own twenty-one percent and sixteen percent, respectively, of the outstanding units
of membership interest of the Landlord.
The Audit Committee of the Board of Directors of Micronetics reviewed and approved
the terms of the lease prior to its execution.
18. 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 25%, 7% and 5% of the Companys consolidated sales in Fiscal 2010.
For Fiscal 2009, the top three customers accounted for 22%, 5% and 5% of the Companys consolidated sales. The top customer also accounts for 37% of the Companys accounts receivable at March 31, 2010.
19. 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.
Exports
accounted for 11% and 17% of the Companys sales in the years ended March 31, 2010 and 2009, respectively. Sales representing shipments by geographical area are shown below (in thousands):
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2010
|
|
2009
|
United States and Canada
|
|
$
|
31,387
|
|
$
|
25,493
|
Europe
|
|
|
3,043
|
|
|
3,445
|
Asia
|
|
|
410
|
|
|
1,363
|
Central and South America/Other
|
|
|
28
|
|
|
46
|
|
|
|
|
|
|
|
|
|
$
|
34,868
|
|
$
|
30,347
|
|
|
|
|
|
|
|
F-23
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MARCH 31, 2010 AND 2009
20. 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.
Company contributions to the plan for the years ended
March 31, 2010 and March 31, 2009 were $167,894 and $137,285, respectively.
21. Unaudited Quarterly Financial Information
(amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL 2010
|
|
Q1 FY10
|
|
|
Q2 FY10
|
|
|
Q3 FY10
|
|
|
Q4 FY10
|
|
Net sales
|
|
$
|
7,913
|
|
|
$
|
8,820
|
|
|
$
|
9,009
|
|
|
$
|
9,126
|
|
Gross profit
|
|
$
|
2,476
|
|
|
$
|
2,882
|
|
|
$
|
3,307
|
|
|
$
|
3,038
|
|
Gross profit %
|
|
|
31
|
%
|
|
|
33
|
%
|
|
|
37
|
%
|
|
|
33
|
%
|
Net (loss) income
|
|
$
|
(12
|
)
|
|
$
|
186
|
|
|
$
|
504
|
|
|
$
|
470
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
Basic weighted average shares
|
|
|
4,554
|
|
|
|
4,554
|
|
|
|
4,554
|
|
|
|
4,554
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
Diluted weighted average shares
|
|
|
4,554
|
|
|
|
4,554
|
|
|
|
4,554
|
|
|
|
4,557
|
|
|
|
|
|
|
FISCAL 2009
|
|
Q1 FY09
|
|
|
Q2 FY09
|
|
|
Q3 FY09
|
|
|
Q4 FY09
|
|
Net sales
|
|
$
|
7,087
|
|
|
$
|
6,545
|
|
|
$
|
8,398
|
|
|
$
|
8,317
|
|
Gross profit(1)
|
|
$
|
2,978
|
|
|
$
|
2,069
|
|
|
$
|
2,746
|
|
|
$
|
1,390
|
(1)
|
Gross profit %
|
|
|
42
|
%
|
|
|
32
|
%
|
|
|
33
|
%
|
|
|
17
|
%
|
Net income (loss)
|
|
$
|
158
|
|
|
$
|
(67
|
)
|
|
$
|
(9,384
|
)
|
|
$
|
(271
|
)
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.96
|
)
|
|
$
|
(0.06
|
)
|
Basic weighted average shares
|
|
|
5,000
|
|
|
|
5,005
|
|
|
|
4,788
|
|
|
|
4,554
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.96
|
)
|
|
$
|
(0.06
|
)
|
Diluted weighted average shares
|
|
|
5,008
|
|
|
|
5,005
|
|
|
|
4,788
|
|
|
|
4,554
|
|
(1)
|
Includes a $638,000 inventory reserve related to a shift in customer requirements.
|
F-24
Micronetics (NASDAQ:NOIZ)
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