UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
FORM 10-K
(Mark
One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the fiscal year ended March 31, 2008
[ ]
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _____________________to____________________
Commission
file number 000-12196
NVE Corporation
(Exact
name of registrant as specified in its charter)
Minnesota
|
41-1424202
|
State
or other jurisdiction of incorporation or
organization |
(I.R.S.
Employer Identification
No.) |
|
|
11409
Valley View Road, Eden Prairie,
Minnesota
|
55344
|
(Address of principal executive offices) |
(Zip Code) |
Registrants
telephone number, including area code (952) 829-9217
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name
of each exchange on which registered
|
Common
stock, $0.01 par value (Common Stock)
|
The
NASDAQ Stock Market, LLC
|
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in
Rule 405 of the Securities Act.
Yes [ ] No
[X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No
[X]
Indicate
by check mark whether the registrant (1) has filed all reports required
to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the
preceding 12 months (or for such shorter period that the registrant
was required to file
such
reports), and (2) has been subject to such filing requirements for
the past 90
days.
Yes [X]
No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ] |
Accelerated
filer [X] |
Non-accelerated
filer [ ] (Do not check if a smaller reporting
company)
|
Smaller
reporting company [ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the voting stock
held by non-affiliates of the Registrant, based on the closing price on September
28, 2007, the last business day of the Registrants most recently completed
second fiscal quarter, as reported on the NASDAQ Stock Market, was approximately
$125 million.
The number of shares of the registrants
Common Stock (par value $0.01) outstanding as of May 15, 2008 was 4,638,683.
_______________
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of our Proxy Statement for our 2008 Annual Meeting of Stockholders are incorporated
by reference into Items 10, 11, 12, 13, and 14 of Part III hereof.
INDEX
TO FORM 10-K
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of Contents
FORWARD-LOOKING
STATEMENTS
Some
of the statements made in this Report or in the documents incorporated by reference
in this Report and in other materials filed or to be filed by us with the Securities
and Exchange Commission (SEC) as well as information included in verbal
or written statements made by us constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These statements
are subject to the safe harbor provisions of the reform act. Forward-looking statements
may be identified by the use of the terminology such as may, will, expect, anticipate,
intend, believe, estimate, should, or continue, or the negatives of these terms
or other variations on these words or comparable terminology. To the extent that
this Report contains forward-looking statements regarding the financial condition,
operating results, business prospects or any other aspect of NVE, you should be
aware that our actual financial condition, operating results and business performance
may differ materially from that projected or estimated by us in the forward-looking
statements. We have attempted to identify, in context, some of the factors that
we currently believe may cause actual future experience and results to differ
from their current expectations. These differences may be caused by a variety
of factors, including but not limited to adverse economic conditions, competition
including entry of new competitors, progress in research and development activities
by us and others, variations in costs that are beyond our control, adverse legal
proceedings, lower sales, failure of suppliers to meet our requirements, failure
to obtain new customers, inability to carry out marketing and sales plans, inability
to meet customer technical requirements, inability to consummate license agreements,
ineligibility for SBIR awards, loss of key executives, and other specific risks
that may be alluded to in this Report or in the documents incorporated by reference
in this Report. For further information regarding our risks and uncertainties,
see Item 1A Risk Factors of this Report.
ITEM 1. BUSINESS.
In General
NVE Corporation, referred to as NVE, we, us, or
our, develops and sells devices that use spintronics, a nanotechnology that relies
on electron spin rather than electron charge to acquire, store and transmit information.
We manufacture high-performance spintronic products including sensors and couplers
that are used to acquire and transmit data. We have also licensed our spintronic
magnetoresistive random access memory technology, commonly known as MRAM.
NVE History and Background
NVE is a Minnesota corporation headquartered
in a suburb of Minneapolis. We were founded in 1989 by James M. Daughton,
Ph.D., a recognized pioneer in spintronics. Our common stock became publicly traded
in 2000 through a reverse merger and became NASDAQ listed in 2003. Since our founding,
we have been awarded more than $50 million in government research contracts, including
more than 30 MRAM development contracts. These contracts have helped us build
our intellectual property portfolio. Over the years our product sales have increased
and we have reduced our dependence on research contracts. Fiscal years referenced
in this report end March 31.
Industry Background
Much of the electronics industry is devoted
to the acquisition, storage, and transmission of information. We have focused
on three applications for our spintronic technology: magnetic sensors, couplers,
and memories. Sensors acquire information, couplers transmit information, and
memories store information. In that sense, our technology can provide the eyes,
nerves, and brains of electronic systems.
Magnetic sensors can be used to detect the position
or speed of robotics and mechanisms, or for communication with implantable medical
devices. We believe our spintronic sensors are smaller, more precise, and more
reliable than competing devices.
Couplers are widely used in factory automation,
providing reliable digital communication between electronic subsystems in factories.
For example, couplers are used to send data between robots and central controllers
at very high speed. As manufacturing automation expands, there is a need for higher
speed data and more channel density. Because of their unique properties, we believe
our couplers transmit more data at higher speeds and over longer distances than
conventional devices.
Near-term potential MRAM applications include mission-critical
storage such as military, industrial, and anti-tamper applications. As its density
increases and cost per bit decreases, MRAM could replace semiconductor memories
in cellphones, computers, and other electronic devices enabling smaller, faster,
and more power-efficient electronics.
Our Enabling Technology
Our designs use one of two nano-scale spintronic
structures: giant magnetoresistors or spin-dependent tunnel junctions. Both structures
produce a large change in electrical resistance depending on the electron spin
orientation in a free layer.
In giant magnetoresistance (GMR) devices, resistance
changes due to conduction electrons scattering at interfaces within the devices.
The GMR effect is only significant if the layer thicknesses are less than the
mean free path of conduction
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electrons,
which is approximately five nanometers. Our critical GMR conductor layers are
generally less than two nanometers or five atomic layers thick.
The second type of spintronic structure we use is
spin-dependent tunnel junctions, which are also known as SDT junctions, Magnetic
Tunnel Junctions (MTJs), or Tunneling Magnetic Junctions (TMJs). SDT junctions
use tunnel barriers that are so thin that electrons can tunnel through
a normally insulating material to cause a resistance change. SDT barrier thicknesses
are in the range of one to four nanometers (less than ten molecules). Technological
advances in recent years have made it practical to manufacture such small dimensions.
In our products, the spintronic elements are connected
to integrated circuitry and packaged in much the same way as conventional integrated
circuits.
Our Strategy
Our vision is to become the leading developer
of practical spintronics technology and devices. We plan to do that by selling
the products described below and licensing MRAM technology. To grow product sales,
we plan to broaden our sensor and coupler product lines, and longer-term to target
larger markets such as consumer electronics.
Our
Products and Markets
We operate in one reportable segment. For financial
information concerning this segment see Note 7 - Segment Information
of the Financial Statements included elsewhere in this Report.
Sensor
Products and Markets
Our sensor products detect the presence of a
magnet or metal to determine position or speed. The GMR changes its electrical
resistance depending on the magnetic field. In our devices, GMR is combined with
conventional foundry integrated circuitry and packaged in much the same way as
conventional integrated circuits. We sell standard or catalog sensors, and custom
sensors designed to meet customers exact requirements. Our sensors are quite
small, very sensitive to magnetic fields, precise, and reliable. These advantages
have allowed us to establish a presence in the industrial, scientific, and medical
(ISM) market.
Standard sensors
Our standard or catalog sensors are generally
used to detect the presence of a magnet or metal to determine position or speed.
We believe our spintronic sensors are smaller, more precise, and more reliable
than competing devices. Our major market for standard sensors is factory automation.
Custom and medical sensors
Our primary custom products are sensors for
medical devices, which are customized to our customers requirements and
manufactured under stringent medical device quality standards. Most are used to
replace electromechanical magnetic switches. We believe our sensors have important
advantages in medical devices compared to electromechanical switches, including
no moving parts for inherent reliability, and being smaller, more sensitive, and
more precise. Our sensors can be customized using customer-specific integrated
signal processing and design variations that can include the range and sensitivity
to magnetic fields, electrical resistance, and multi-sensor elements configuration.
Future custom sensor target markets include consumer electronics.
Coupler Products and Markets
Our spintronic couplers combine a GMR sensor element
and an IsoLoop integrated microscopic coil. The coil creates a small
magnetic field that is picked up by the spintronic sensor, transmitting data almost
instantly. Couplers are also known as isolators because they electrically
isolate the coupled systems. Our IsoLoop couplers are much faster than the fastest
optical couplers.
We have two main series of couplers: the original
IsoLoop 700 Series, and the newer, award-winning IsoLoop 600 Series.
The newer couplers use spintronic input stages while our original products use
semiconductor input stages. Our couplers are sold primarily for factory and industrial
networks. Automotive markets are a possible future growth market.
MRAM Products and Markets
MRAM uses spintronics to store data, combining the
speed of semiconductor memory with the nonvolatility of magnetic disk drives.
MRAM is inherently nonvolatile, meaning the data remains even if power is removed.
MRAM has been called the ideal or universal memory because it has the potential
to combine the speed of SRAM, the density of DRAM, and the nonvolatility of flash
memory.
Data is stored in the spin of the electrons in thin
metal alloy films, and read with spin-dependent tunnel junctions. Unlike electrical
charge, the spin of an electron is inherently permanent. In MRAMs, the spin of
the electrons is set with tiny bursts of energy. We have invented several types
of MRAM memory cells and modes of operation.
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Advanced MRAM designs that we are developing or
have developed include Vertical transport MRAM (also known as VMRAM), magnetothermal
MRAM, and spin-momentum transfer MRAM. We believe such design approaches have
the potential to increase the scalability of MRAM.
In the near term, MRAM could replace battery-backed-up
SRAMs in mission-critical systems such as military, factory control, point-of-sale
terminals, and gaming electronics. MRAM has the potential advantages of being
simpler, lower cost, and more reliable than battery/memory systems. Long term,
MRAM could address the market for ubiquitous high-density memory.
Product Manufacturing
Our fabrication facility is a clean-room area
with specialized equipment to deposit, pattern, etch, and process spintronic materials.
Most of our products are fabricated in our facility using either raw wafers or
foundry wafers. Foundry wafers contain conventional electronics that perform housekeeping
functions such as voltage regulation and signal conditioning in our products.
Each wafer may include thousands of devices. We
build spintronics structures on wafers in our fabrication facility. We either
saw wafers to be sold in die form, or wafers are sent to Asia for dicing and packaging.
Packaged parts are returned to us to be tested, inventoried, and shipped.
Sales and Product Distribution
We rely on distributors who stock and sell our
products in more than 75 countries. Distributors of our products include two of
the largest electronic component distributors in the world: Digi-Key Corporation
and the Premier Farnell Group. Our distributor agreements generally renew annually.
In addition, Avago Technologies, a leading supplier of solid-state couplers, distributes
private-branded versions of some of our couplers under an agreement that expires
in June 2010.
New Product Status
In the past year we began marketing several
new products including:
a
new line of spintronic couplers with industry-standard network protocol functions
in a very small package;
signal
processing integrated circuits for sensors; and
nanopower
spintronic sensors with integrated signal processing.
Our Competition
Industrial Sensor Competition
A limited number of other companies claim
to either make or have the capability to make GMR sensors. Also, several competitors
make solid-state industrial magnetic sensors including silicon Hall-effect sensors
and anisotropic magnetoresistive (AMR) sensors. We believe those types of sensors
are not as sensitive or precise as our GMR sensors.
Medical Sensor Competition
Our sensors for medical devices face competition
from other solid-state magnetic sensors and from electromechanical magnetic sensors.
Compared to other solid-state magnetic sensors, we believe our medical sensors
have small size, high sensitivity to small magnetic fields, simpler electrical
interfaces, and inherent reliability. Electromechanical magnetic sensors such
as reed switches have been in use for several decades. Electromechanical competitors
include Hermetic Switch, Inc., Meder Electronic AG (Engen/Welschingen, Germany),
and Memscap SA (Grenoble, France). Because our sensors have no moving parts,
we believe they are inherently more reliable than electromechanical magnetic sensors.
We also believe our sensors are smaller than the smallest electromechanical magnetic
sensors, more precise in their magnetic switch points, and more sensitive.
Coupler Competition
Competing digital coupler technologies include
optical couplers, inductive couplers (transformers), and capacitive couplers.
In addition to being a customer, Avago is a leading
producer of high-speed optical couplers. Other prominent optical coupler suppliers
are Fairchild Semiconductor International, NEC Corporation, Sharp Corporation,
Toshiba Corporation, and Vishay Intertechnology. We believe our couplers are faster
than optical couplers.
Inductive couplers are made by a number of companies
including Analog Devices, Inc. and Silicon Laboratories Inc. Unlike our IsoLoop
couplers, inductive couplers require special encoding to transmit logic signals.
Furthermore, IsoLoop couplers require much less board space than most optical
or inductive couplers. MEMS inductive couplers are smaller than other inductive
couplers, but we believe our devices generally have higher channel density per
area, higher speed, less signal distortion, and generate less noise. Manufacturers
of capacitive couplers include Texas Instruments Incorporated. We believe we have
a broader product line and higher channel density than is available for capacitive
couplers.
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We make several network signal couplers that combine
spintronics coupling with network protocol functions such as RS-485 (also
known as TIA-485 or EIA-485), in a single package. Competitive network
signal couplers are available from Analog Devices; Linear Technology Corporation;
and Maxim Integrated Products, Inc. Based on a comparison of published specifications,
we believe our devices have speed, miniaturization, and product-line breadth advantages
over other network signal couplers.
MRAM Competition
Most currently available memories are volatile,
meaning data is lost when power is removed. Memories in this category include
dynamic random access memory (DRAM) and static random access memory (SRAM). MRAM
has the potential to match or exceed the speed of such memories without the volatility.
Currently available nonvolatile memories include flash memory and ferroelectric
random access memory (FRAM). MRAM is potentially faster and uses less power than
existing nonvolatile memories. Furthermore, existing nonvolatile memories can
be written only a limited number of times before they wear out, while MRAM has
virtually unlimited life. Additionally, flash memory may be subject to scalability
limitations that could limit its density in coming years. We do not believe MRAM
is subject to those limitations.
Battery-backed-up SRAM uses stored energy to preserve
data after the main power has been removed. We believe that MRAM has the potential
of being simpler, lower cost, and more reliable than battery-backed-up SRAM. Battery-backed-up
SRAM manufacturers include Maxim.
Emerging technologies competing with MRAM include
carbon nanotubes, phase-change memory (PCM; also known as PRAM, chalcogenide,
CRAM, or Ovonic memory), and ferroelectric random access memory (FRAM). We believe
that MRAM has advantages over these technologies in some or all of the following
areas: manufacturability, speed, and endurance. Companies developing carbon nanotube
memory include Nantero, Inc. A number of companies are developing PCM, and there
are several current and potential FRAM manufacturers.
Other companies that may compete with us for MRAM
research and development or service business, or that may be attempting to develop
MRAM intellectual property with the intention of licensing to others include Crocus
Technology SA (Grenoble, France), Grandis, Inc., Spintec (Grenoble, France),
Spintron (Marseille, France), and Spintronics Plc (London, UK).
Principal Suppliers and Raw Materials
Our principal suppliers include manufacturers
of semiconductor wafers that are incorporated into our products. These include
Advanced Semiconductor Manufacturing Corporation of Shanghai (China); AMI Semiconductor,
Inc.; Intersil Corporation; Silicon Quest International, Inc.; Taiwan Semiconductor
Manufacturing Corporation; and Texas Instruments Inc. Other companies provide
device packaging services, including Circuit Electronics Industries (Ayutthaya,
Thailand); United Test and Assembly Center Ltd., (Singapore); and SPEL Semiconductor
Limited (Chennai, India).
Intellectual Property
Patents
As of March 31, 2008 we had 45 issued
U.S. patents assigned to us. We also have a number of foreign patents, a number
of U.S. and foreign patents pending, and we have licensed patents from others.
Our technology is protected by more than 100 patents worldwide either issued,
pending or licensed from others. We are continuing to develop inventions and expect
to add to our patent portfolio. There are no patents we regard as critical to
our business owned by us or licensed to us that expire in the next 12 months.
Much of our intellectual property has been developed
with U.S. Government support. Under federal legislation, companies normally may
retain the principal worldwide patent rights to any invention developed with U.S.
Government support.
Certain of our patents cover MRAM cells with transistor
selection for data retrieval, which we believe may be necessary for successful
high-density, high-performance MRAMs. We believe our 6,275,411 and 6,349,053 U.S.
patents, both titled Spin Dependent Tunneling Memory, are particularly
important. Both patents cover MRAMs using arrays of Spin Dependent Tunnel Junctions.
Based on their public disclosures, we believe several companies are pursuing the
approach described in these patents. The 6,275,411 patent expires in 2019 and
the 6,349,053 patent expires in 2021. We also have patents on advanced MRAM designs
that we believe are important, including patents that relate to magnetothermal
MRAM, spin-momentum MRAM, and synthetic antiferromagnetic storage.
Trademarks
NVE and IsoLoop
are our registered trademarks. Other trademarks include AT-MRAM,
GMR Switch, and GT Sensor.
Licenses
We have licensed certain of our MRAM intellectual
property to several companies, including Cypress, Honeywell, and Motorola, Inc.
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Agreements with Honeywell
We have agreements and amendments to agreements
with Honeywell dating back approximately to our founding. Under these agreements
we have not paid royalties to Honeywell for the use of their intellectual property,
and Honeywell has intellectual property rights to certain of our earlier-developed
MRAM technology.
Motorola License
We granted Motorola a non-exclusive, non-transferable,
and non-assignable license to our MRAM intellectual property and received advance
payments in conjunction with the agreement. Motorola has since separated Freescale.
Motorola and Freescale asked us to consent to Motorolas assignment of the
Patent License Option Agreement to Freescale. We have declined to provide such
consent without additional consideration. We believe the Motorola agreement likely
terminated in 2005 because Motorola transferred manufacturing to Freescale.
Royalty Agreement
We have licensed rights to another organizations
GMR-related patent family, and that agreement calls for us to pay royalties on
our sales of certain products. Payments under this agreement have been less than
$5,000 for each of the most recent three fiscal years. The agreement remains in
force until the expiration of the last patent, which is in 2009, or until cumulative
royalties of $1.2 million have been paid, whichever is earlier.
Other Licenses
We have a technology exchange agreement with
Cypress Semiconductor Corporation and rights to license certain patents that originated
at a university. None of the rights we have under these agreements is currently
important to our business.
Working Capital Items
Like other companies in the electronics industry,
we have historically invested in capital equipment for manufacturing and testing
our products, as well as research and development equipment. We have historically
deployed significant capital in inventories to have products available from stock,
to receive more favorable pricing for raw materials, and to guard against raw
material shortages.
Major Customers
We rely on several large customers for a large
percentage of our revenue. These include: Avago Technologies; St. Jude Medical,
Inc.; Starkey Laboratories, Inc.; the U.S. Government; and certain distributors.
The loss of any one or more of these customers could have a material adverse effect
on us. For the purposes of this disclosure, all agencies of the U.S. Government
are considered a single customer.
Backlog
As of March 31, 2008 we had $898,101 of
contract research and development backlog we believed to be firm, compared to
$1,417,844 as of March 31, 2007. We expect most of the firm backlog as of
March 31, 2008 to be filled in fiscal 2009. Approximately 96% of our backlog
as of March 31, 2008 and 98% as of March 31, 2007 was from agencies
of the U.S. Government. U.S. Government orders that are not yet funded, or contracts
awarded but not yet signed, are not included in firm backlog. The portion of orders
already included in operating revenues on the basis of percentage of completion
or program accounting are excluded. We do not believe any material portion of
our business is subject to renegotiation of profits or termination of contracts
or subcontracts at the election of the U.S. Government. There can be no assurance,
however, of additional contracts or follow-on contracts for expired or completed
U.S. Government contracts.
We do not believe product sales backlog as of any
particular date is indicative of future results. Our product sales are made primarily
under standard purchase orders for delivery of standard products. We have certain
agreements that require customers to forecast purchases, however these agreements
do not generally obligate the customer to purchase any particular quantity of
products. Shipment schedules and quantities actually purchased by customers are
often revised to reflect changes in customers needs. In light of semiconductor
industry practice and our experience, we do not believe that such agreements are
meaningful for determining backlog amounts. We believe that only a small portion
of our product order backlog is non-cancelable and that the dollar amount associated
with the non-cancelable portion is not significant.
Seasonality
In each of the three most recent fiscal years,
our product sales have been less in quarters ended December 31 than the immediately
preceding or subsequent quarters. This may have been due in part to distributor
ordering patterns or customer vacations and shutdowns late in calendar years.
We do not know if this pattern will continue.
Research and Development Activities
We spent $1,202,504 for fiscal 2008, $1,789,844
for fiscal 2007, and $1,096,970 for fiscal 2006 in company-sponsored research
and development activities. Over the past three fiscal years these activities
have included development of new sensors
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and couplers, and lower-cost product designs. Additionally, we spent $2,139,059
during fiscal 2008, $2,090,200 during fiscal 2007, and $3,817,378 during fiscal
2006 on customer-sponsored research and development contract activities. These
research and development contracts were with various agencies of the U.S. Government
as well as with other companies.
Government Regulations
We are subject to various local, state, and
federal laws, regulations and agencies that affect businesses generally. These
include regulations promulgated by federal and state environmental and health
agencies, the federal Occupational Safety and Health Administration, and laws
pertaining to the hiring, treatment, safety, and discharge of employees. Compliance
with these laws and regulations has not had a material effect on our capital expenditures,
earnings, or competitive position.
Number of Employees
We had 50 employees as of March 31, 2008
compared to 48 as of March 31, 2007. A shift in revenue mix toward product
sales and increased manufacturing productivity allowed us to increase our revenue
per employee. Our employment can fluctuate due to a variety of factors. None of
our employees is represented by a labor union or is subject to a collective bargaining
agreement, and we believe we maintain good relations with our employees.
Financial Information About Geographical
Areas
Foreign sales accounted for approximately 47%
of our revenue in fiscal 2008, 40% in fiscal 2007, and 32% in fiscal 2006. The
increases in the proportion of sales from outside the U.S. is due in part to a
shift in our revenue mix toward product sales, which tend to be worldwide, from
contract research and development, which is primarily domestic. More information
about geographical areas is contained in Note 7 - Segment
Information of the Financial Statements included elsewhere in this Report.
Environmental Matters
We are subject to environmental laws and regulations,
particularly with respect to industrial waste. Compliance with these laws and
regulations has not had a material impact on our capital expenditures, earnings,
or competitive position.
Available Information
All reports we file with the SEC, including
our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and proxy statements on Schedule 14A,
as well as any amendments to those reports, are accessible at no cost through
the Investors section of our Website (www.nve.com). These filings
are also accessible through the SECs Website (www.sec.gov).
ITEM 1A. RISK FACTORS.
We caution readers that the following important
factors, among others, could affect our financial condition, operating results,
business prospects or any other aspect of NVE, and could cause our actual results
to differ materially from that projected or estimated by us in the forward-looking
statements made by us or on our behalf. Although we have attempted to list below
the important factors that do or may affect our financial condition, operating
results, business prospects, or any other aspect of NVE, other factors may in
the future prove to be more important. New factors emerge from time to time and
it is not possible for us to predict all of such factors. Similarly, we cannot
necessarily assess or quantify the impact of each such factor on the business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in forward-looking statements.
Risks Related to Our Business
We may lose revenue if any of our large customers cancel, postpone, or reduce
their purchases.
We rely on several large customers for a large
percentage of our revenue. These large customers include Avago Technologies; St. Jude
Medical, Inc.; Starkey Laboratories, Inc.; the U.S. Government; and certain distributors.
Orders from these large customers could be cancelled, postponed, or reduced, and
the loss of any of these customers could have a significant impact on our revenue
and our profitability.
We will lose revenue if government contract funding is reduced or eliminated.
Although U.S. Government contract revenue
was less than 10% of our total revenue in fiscal 2008, a material decrease in
U.S. Government funding research or disqualification as a vendor to the U.S. Government
for any reason would likely hamper future research and development activity and
decrease related revenue. U.S. Government funding is dependent upon adequate continued
funding of the agencies and their programs. A significant portion of our U.S.
Government funding is through Small Business Innovation Research (SBIR) contracts.
SBIR budgets may be changed by legislation or by agencies such as the Department
of Defense. Changes in the U.S. presidential administration or Congress could
affect government spending priorities. Furthermore, government spending priorities
over which we have no control, such as the wars in Iraq and Afghanistan, may affect
availability of U.S. Government funds in general and SBIR funds in particular.
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Failure to qualify as a small business under federal regulations could make
us ineligible for some government-funded research contracts, which could have
a significant adverse impact on our revenue and our ability to make research and
development progress.
We received approximately $1.25 million
in Small Business Innovation Research (SBIR) contract awards in fiscal 2008. Federal
regulations place a number of criteria for a business to be eligible to compete
for SBIR awards. Those criteria currently include number of employees and ownership
structure. While we believe we meet the eligibility criteria, changes in our ownership
beyond our control could cause us to lose our eligibility to compete for SBIR
awards, which in turn could have a material adverse effect on our revenue, profits,
and research and development efforts. In addition, SBIR eligibility requirements
could be changed at any time.
Our backlog may not result in future revenue.
While we evaluate each order to determine
qualification for inclusion in our firm backlog, there can be no assurance that
amounts included in our firm backlog ultimately will result in future revenue.
A reduction in our firm backlog during any particular period, or the failure of
our firm backlog to result in future revenue, could harm our business and revenue.
We face an uncertain economic environment in our industry that could adversely
affect our business and operations.
The semiconductor market, which is the primary
market for our products, has been subject to sudden downturns in the past. Any
future downturn in the economic environment would likely have a material adverse
impact on our business and revenue.
Our reputation could be damaged and we could lose revenue if we fail to
meet technical challenges required to produce marketable products.
Our products use new technology and we are continually
researching and developing product designs and production processes. Our production
processes require control of magnetic and other parameters that are not required
in conventional semiconductor processes. If we are unable to develop stable designs
and production processes, we may not be able to produce products that meet our
customers requirements, which could cause damage to our reputation and loss
of revenue.
Our failure to meet stringent customer technical requirements could result
in the loss of key customers and potentially reduce our sales.
Some of our customers, including Avago Technologies,
St. Jude Medical, and Starkey Laboratories, have stringent technical requirements
which require our products to pass certain test and qualification criteria before
they are accepted by such customers. Failure to meet those criteria could result
in the loss of current sales revenue, customers, and future sales.
Our sensors are incorporated into medical devices, which could expose us
to a risk of product liability claims and such claims could seriously harm our
business and financial condition.
Certain of our sensor products are used
in medical devices, including devices that help sustain human life. We are also
marketing our sensor technology to other manufacturers of cardiac pacemakers and
ICDs. Although we have indemnification agreements with certain customers with
provisions designed to limit our exposure to product liability claims, there can
be no assurance that we will not be subject to losses, claims, damages, liabilities,
or expenses resulting from bodily injury or property damage arising from the incorporation
of our products in devices sold by our customers. Existing or future laws or unfavorable
judicial decisions could limit or invalidate the provisions of our indemnification
agreements, or the agreements may not be enforceable in all instances. A successful
product liability claim could require us to pay, or contribute to payment of,
substantial damage awards, which would have a significant negative effect on our
business and financial condition.
Federal legislation may not protect us against liability for the use of
our sensors in medical devices and a successful liability claim could seriously
harm our business and financial condition.
Although the Biomaterials Access Assurance
Act of 1998 may provide us some protection against potential liability claims,
that Act includes significant exceptions to supplier immunity provisions, including
limitations relating to negligence or willful misconduct. A successful product
liability claim could require us to pay, or contribute to payment of, substantial
damage awards, which would have a significant negative effect on our business
and financial condition. Any product liability claim against us, with or without
merit, could result in costly litigation, divert the time, attention, and resources
of our management and have a material adverse impact on our business.
Any malfunction of our sensors in existing medical devices could lead to
the need to recall devices incorporating our sensors from the market, which may
be harmful to our reputation and cause a significant loss of revenue.
Any malfunction of our sensors could lead
to the need to recall existing medical devices incorporating our sensors from
the market, which may be harmful to our reputation because it is dependent on
product safety and efficacy. Even if assertions that our sensors caused or contributed
to device failure do not lead to product liability or contract claims, such assertions
could harm our reputation and our customer relationships. Any damage to our reputation
and/or the reputation of our products, or the reputation of our customers or their
products could limit the market for our and our customers products and harm
our results of operations.
Table
of Contents
We may lose business and revenue if our critical production equipment fails.
Our production process relies on certain
critical pieces of equipment for defining, depositing, and modifying the magnetic
properties of very thin metal films. Some of this equipment was designed or customized
by us, and some may no longer be in production. While we have an in-house maintenance
staff, maintenance agreements for certain equipment, some critical spare parts,
and back-ups for some of the equipment, we cannot be sure we could repair or replace
critical manufacturing equipment were it to fail.
The loss of supply from any of our key single-source wafer suppliers could
impact our ability to produce and deliver products and cause loss of revenue.
Our critical suppliers include suppliers
of certain raw silicon and semiconductor wafers that are incorporated in our products.
We maintain inventory of some critical wafers, but we have not identified or qualified
alternate suppliers for many of the wafers now being obtained from single sources.
Any supply interruptions could seriously jeopardize our ability to provide products
that are critical to our business and operations and may cause us to lose revenue.
The loss of supply of any critical chemicals or supplies could impact our
ability to produce and deliver products and cause loss of revenue.
There are a number of critical chemicals
and supplies that we require to make products. These include certain photoresists,
polymers, metals, and alloys. We maintain inventory of critical chemicals and
materials, but in many cases we are dependant on single sources, and some of the
materials could be discontinued by their suppliers at any time. Any supply interruptions
could seriously jeopardize our ability to provide products that are critical to
our business and operations and may cause us to lose revenue.
The loss of supply from any of our single-source packaging vendors could
impact our ability to produce and deliver products and cause loss of revenue.
We are dependent on our packaging vendors
including Circuit Electronic Industries Public Co., Ltd. (CEI) of
Ayutthaya, Thailand. Some of our products use processes or tooling unique to a
particular packaging vendor, and it might be expensive, time-consuming, or impractical
to convert to another vendor in the event of a supply interruption. CEI has been
operating under voluntary debt rehabilitation under Thailand law since 2005. We
have identified potential alternate vendors in case CEIs ability to serve
our needs becomes impaired, but it could prove expensive, time-consuming, or technically
challenging to convert to an alternate vendor. If one of our packaging vendors
were to become insolvent we might not be able to recover work in process or finished
goods in their possession. Any supply interruptions or loss of inventory could
seriously jeopardize our ability to provide products that are critical to our
business and operations and may cause us to lose revenue.
We are subject to risks inherent in doing business in foreign countries
that could impair our results of operations.
Foreign sales have been an increasing portion
of our revenue, and we expect foreign sales to continue to represent a significant
portion of our revenue in the future. Approximately 47% of our revenue for fiscal
2008, 40% for fiscal 2007, and 32% for fiscal 2006 was from foreign customers.
Furthermore, we rely on suppliers in China, India, Taiwan, Thailand, and other
foreign countries. Risks relating to or arising from operating in foreign markets
that could impair our results of operations include economic and political instability;
changes in regulatory requirements, tariffs, customs, duties, and other trade
barriers; transportation delays; acts of God, including floods, typhoons, and
earthquakes; and other uncertainties relating to the administration of, or changes
in, or new interpretation of, the laws, regulations, and policies of the jurisdictions
where we do business.
Because we are significantly smaller than the many of our competitors, we
may lack the financial resources needed to increase our market share and future
revenue.
Our known product competitors include Avago
Technologies; Analog Devices, Inc.; Fairchild Semiconductor International; Hermetic
Switch, Inc.; Linear Technology Inc.; Maxim Integrated Products, Inc.; Meder
Electronic AG; Memscap SA; NEC Corporation; Sharp Corporation; Silicon
Laboratories, Inc.; Texas Instruments Inc.; Toshiba Corporation; Vishay Intertechnology;
and others. Many of our competitors and potential competitors are established
companies that have significantly greater financial, technical, and marketing
resources than us. We believe that our competition is increasing as the technology
matures. This has meant more competitors and more severe pricing pressure. In
addition, our competitors may be narrowing or eliminating our performance advantages.
We expect these trends to continue, and our future competitiveness will depend
on our ability to develop new products and reduce our product costs. While we
believe that our products have important competitive advantages, our competitors
may succeed in developing and marketing products that perform better or are less
expensive than ours, or that would render our products and technology obsolete
or noncompetitive.
Our business may suffer because we have limited influence over the rate
of adoption of our technology, and MRAM technology may not build into a large
or significant market.
A significant portion of our future revenue and
profits is dependent on our licensees introducing MRAM products. Production difficulties,
technical barriers, high production costs, poor market reception, or other problems,
almost all of which are outside our control, could prevent the deployment of MRAM
or limit its market potential. In addition, our licensees may have other priorities
that detract attention and resources from introduction of MRAM products using
our technology. Furthermore, competing technologies could prevent or supplant
MRAM from becoming an important memory technology.
Table
of Contents
Our future
business may suffer because we may not be able to consummate additional MRAM
license agreements.
Although there are potential licensees
for our MRAM intellectual property in addition to our current licensees, we
may never be able to consummate additional license agreements. Potential licensees
for our MRAM intellectual property might not be interested unless and until
the commercial viability of the technology is demonstrated. Potential licensees
could also use their own or a third partys MRAM intellectual property
rather than ours.
We may not be able to enforce our intellectual property rights or our
technology may prove to infringe upon patents or rights owned by others, which
may prevent the future sale of our products or increase the cost of such sales.
We protect our proprietary technology
and intellectual property by seeking patents, trademarks, and copyrights, and
by maintaining trade secrets through entering into confidentiality agreements
with employees, suppliers, customers, and prospective customers depending on
the circumstances. We hold patents or are the licensee of others owning patented
technology covering certain aspects of our sensor, coupler, and MRAM technology.
These patent rights may be challenged, rendered unenforceable, invalidated or
circumvented. In addition, rights granted under the patents or under licensing
agreements may not provide a competitive advantage to us. At least several potential
MRAM competitors have described designs that we believe would infringe on our
patents if such designs were to be commercialized. Efforts to legally enforce
patent rights can involve substantial expense, which we may not be able to afford
and in any case may not be successful. Further, others may independently develop
similar, superior, or parallel technologies to any technology developed by us,
or our technology may prove to infringe upon patents or rights owned by others.
Thus the patents held by or licensed to us may not afford us any meaningful
competitive advantage. Also, our confidentiality agreements may not provide
meaningful protection of our proprietary information. Our inability to maintain
our proprietary rights could have a material adverse effect on our business,
financial condition and results of operations.
We may not be able to negotiate a new MRAM licensing agreement with Freescale.
Our Patent License Option Agreement with
Motorola provided for termination on December 31, 2005 or on the date Motorola
ceases manufacturing MRAM Products whichever is later. We believe such a termination
is likely to have occurred as a result of Motorola apparently having eliminated
its ability to manufacture MRAM Products through its spinoff of Freescale. We
believe we are free to negotiate a new agreement with Freescale or an assignment
of the Motorola Patent License Option Agreement to Freescale, but we have said
we would do so only with amendments thereto. We have notified Freescale that
we believe that MRAM products it has sold come within the scope of claims of
a number of our patents. There can be no assurance, however, that any agreement
can be reached with Freescale, or that any such agreement with Freescale would
be on more favorable terms to NVE than our agreement with Motorola, or that
NVE would receive any value under the existing agreement with Motorola or any
value under any such further agreement with Freescale.
Our future business may suffer if we are unable to enforce our intellectual
property rights with existing licensees.
Our existing license agreements have not
generated royalties and may never become active or generate significant royalties.
Furthermore, our success in enforcing our intellectual property rights may be
dependent on our ability to enforce our contract rights under existing license
agreements. Our existing licensees could claim without merit that they do not
use our intellectual property or claim that one or more of our patents are invalid.
In 2000 we were forced to resort to litigation to enforce our intellectual property
rights with Motorola, and we plan to continue to vigorously defend our intellectual
property rights. Our limited capital resources could put us at a disadvantage
if we take legal action to enforce our intellectual property rights.
Our business success may be adversely affected if we are unable to attract
and retain highly qualified management and technical employees.
We have no employment agreements with any of our
management other than our Chief Executive Officer and Chief Financial Officer,
and have no key-person insurance covering employees. Competition for highly
qualified management and technical personnel is generally intense and we may
not be able to attract and retain the personnel necessary for the development
and operation of our business. The loss of the services of key personnel could
have a material adverse effect on our business, financial condition, and results
of operations.
We are presently involved in class action litigation.
On February 10, 2006 the first of
three lawsuits was filed in the U.S. District Court for the District of Minnesota
against NVE and certain of its current and former executive officers and directors
by individual shareholders seeking to represent a class of purchasers of our
common stock. These lawsuits were subsequently consolidated into a single case
and a consolidated complaint was filed seeking unspecified damages. On July 3,
2007 the U.S. District Court granted our motion to dismiss these consolidated
lawsuits, with prejudice. The plaintiffs filed an appeal from the Courts
order and the appeal is still pending. Two related actions brought by individual
shareholders who seek to represent NVE derivatively were filed in Hennepin County
District Court. These related actions were subsequently consolidated into a
single case and an amended derivative complaint was filed. The derivative action
has been stayed pending a resolution of the appeal from the U.S. District Courts
order. We believe the lawsuits are wholly without merit and intend to vigorously
defend the actions. We have incurred legal expenses related to these lawsuits
and could incur additional expenses. Furthermore, if we do not prevail in these
lawsuits, we may be required to pay substantial amounts, which could have a
material adverse impact on our future results of operation and financial condition.
Table
of Contents
Risks Related to Buying Our Stock
Our stock has been more volatile than other technology sector stocks.
The market price of our common stock has experienced
significant fluctuations and may continue to fluctuate in the future. Depending
on the metric used, we believe this volatility is more than the overall market
or other technology-sector stocks.
The price of our common stock may be adversely affected by significant price
fluctuations due to a number of factors, many of which are beyond our control.
From time to time our stock price has decreased
sharply, and could decline in the future. The market price of our common stock
may be significantly affected by many factors, some of which are beyond our control,
including:
  |
technological
innovations by us, our licensees, or our competitors; |
  |
the announcement
of new products, product enhancements, contracts, or license agreements
by us, our licensees, or our competitors; |
  |
the announcement
of changes in strategy or discontinuation of products by us or licensees; |
  |
changes in
requirements or demands for our products or technology; |
  |
changes in
prices of our products and services or our competitors products and
services; |
  |
quarterly
variations in our operating results; |
  |
changes in
our revenue or revenue growth rates; |
  |
changes in
revenue estimates, earnings estimates, or market projections by market analysts,
speculation in the press or analyst community; |
  |
short selling
and covering of short positions in our stock; and |
  |
general market
conditions or market conditions specific to particular industries served
by us, our customers, or our licensees. |
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our principal executive offices and manufacturing
facility are located at 11409 Valley View Road, Eden Prairie, Minnesota, 55344.
The space consists of 21,362 square feet of offices, laboratories, and production
areas. The space is owned and managed by Carlson Real Estate Company, Inc. In
2007 we executed a third amendment to our lease agreement to extend the lease
through December 31, 2015, with a one-time right to cancel the lease at our
option on December 31, 2012. We plan to expand our production clean room
within the facility and we believe the facility is adequate to support our needed
production capacity. We hold no investments in real estate.
ITEM 3. LEGAL PROCEEDINGS. See
Note 8 - Commitments and Contingencies - Other
Contingencies of the Financial Statements included elsewhere in this Report
for information about a legal proceeding in which we are involved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to our shareholders during
the quarter ended March 31, 2008.
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock trades on the Capital Market tier of the NASDAQ Stock
Market under the symbol NVEC. The following table shows the high and low sales
prices of our Common Stock as reported on the NASDAQ for each quarter within
our two most recent fiscal years:
|
Quarter
Ended
|
3/31/08
|
|
12/31/07
|
|
9/30/07
|
|
6/30/07
|
|
3/31/07
|
|
12/31/06
|
|
9/30/06
|
|
6/30/06
|
High
|
|
$
|
31.73
|
|
$
|
32.70
|
|
$
|
41.95
|
|
$
|
37.67
|
|
$
|
32.30
|
|
$
|
46.35
|
|
$
|
39.85
|
|
$
|
17.75
|
Low
|
|
$
|
19.50
|
|
$
|
22.44
|
|
$
|
29.44
|
|
$
|
25.30
|
|
$
|
20.75
|
|
$
|
26.82
|
|
$
|
14.06
|
|
$
|
12.36
|
Shareholders and Dividends
We had approximately 129 shareholders of
record and 7,448 total shareholders as of May 8, 2008. We have never
paid or declared any cash dividends on our Common Stock. We do not anticipate
paying dividends in the foreseeable future, as we intend to retain any earnings
we may generate if needed to provide for the expansion of our business or
for the possible defense of our intellectual property.
Table
of Contents
Stock Price Performance
Graph
The graph below compares the performance of
our Common Stock to the cumulative five-year performance of the NASDAQ Industrial
Index and the Global Crown Capital Nanotechnology Index. NVE is included in
both indices. We presented the Merrill Lynch Nanotech Index in our previous
years report on Form 10-K, however that index was discontinued effective
December 27, 2007. The NASDAQ Industrial Index includes NASDAQ domestic
and international based common-type stocks. The graph and table assume $100
was invested on March 31, 2003 in each of our Common Stock, the NASDAQ
Industrial Index, the Global Crown Capital Nanotechnology Index, and the Merrill
Lynch Nanotech Index, with reinvestment of dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The following balance sheet and income statement
selected financial data should be read in conjunction with our financial statements
and notes included in Item 8 of this Report, and with Managements Discussion
and Analysis of Financial Condition and Results of Operation included in Item
7 of this Report. The data are derived from our financial statements.
|
Balance
Sheet Data as of March 31
|
2008
|
|
2007
|
|
2006
|
|
2005 |
|
2004 |
Cash,
cash equivalents, and
|
marketable
securities
|
|
$
|
24,736,874
|
|
$
|
18,289,191
|
|
$
|
10,891,326
|
|
$
|
7,717,264
|
|
$
|
7,544,643
|
Working
capital and
|
marketable
securities
|
|
$
|
30,148,080
|
|
$
|
22,850,508
|
|
$
|
15,535,200
|
|
$
|
11,342,300
|
|
$
|
9,394,741
|
Total
assets
|
|
$
|
32,768,128
|
|
$
|
25,010,494
|
|
$
|
17,758,919
|
|
$
|
14,190,004
|
|
$
|
12,419,727
|
Total
liabilities
|
|
$
|
1,254,646
|
|
$
|
1,122,239
|
|
$
|
980,808
|
|
$
|
1,153,423
|
|
$
|
1,686,483
|
Total
shareholders equity
|
|
$
|
31,513,482
|
|
$
|
23,888,255
|
|
$
|
16,778,111
|
|
$
|
13,036,581
|
|
$
|
10,733,244
|
|
Income Statement Data for Years Ended March 31 |
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
Revenue
|
Product
sales
|
|
$
|
18,505,650
|
|
$
|
14,425,632
|
|
$
|
8,345,967
|
|
$
|
5,522,250
|
|
$
|
5,393,540
|
Contract
research
|
and
development
|
|
2,023,162
|
|
2,035,198
|
|
3,824,559
|
|
6,093,320 |
|
6,617,311
|
Total
revenue
|
|
$
|
20,528,812
|
|
$
|
16,460,830
|
|
$
|
12,170,526
|
|
$
|
11,615,570
|
|
$
|
12,010,851
|
|
Gross
profit
|
|
$
|
13,695,504
|
|
$
|
10,673,172
|
|
$
|
5,951,993
|
|
$
|
4,604,836
|
|
$
|
4,565,945
|
Income
before taxes
|
|
$
|
11,080,004
|
|
$
|
7,191,803
|
|
$
|
2,840,779
|
|
$
|
1,619,850
|
|
$
|
1,874,698
|
Net income
|
|
$
|
7,187,384
|
|
$
|
4,780,783
|
|
$
|
1,797,746
|
|
$
|
1,758,254
|
|
$
|
2,107,720
|
Net income
per share –
|
diluted
|
|
$
|
1.51
|
|
$
|
1.00
|
|
$
|
0.39
|
|
$
|
0.37
|
|
$
|
0.45
|
Weighted
average shares
|
outstanding
– diluted
|
|
|
4,763,101
|
|
|
4,771,297
|
|
|
4,667,994
|
|
|
4,733,955
|
|
|
4,726,759
|
Table of Contents
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.
You should read this discussion together with
our financial statements and notes included elsewhere in this Report. In addition
to historical information, the following discussion contains forward-looking
information that involves risks and uncertainties. Our actual future results
could differ materially from those presently anticipated due to a variety
of factors, including those discussed in Item 1A of this Report.
General
We develop and sell devices that use spintronics,
a nanotechnology that relies on electron spin rather than electron charge
to acquire, store, and transmit information. We manufacture high-performance
spintronic products including sensors and couplers to revolutionize data sensing
and transmission. We are also a licensor of spintronic magnetoresistive random
access memory technology, commonly known as MRAM.
Application of Critical Accounting Policies and Estimates
In accordance with SEC guidance, those material
accounting policies that we believe are the most critical to an investors
understanding of our financial results and condition and require complex management
judgment are discussed below.
Research and Development Contract Percentage of Completion Estimation
We recognize research and development contract
revenue and gross profit as work is performed, based on actual costs incurred.
We apply the percentage-of-completion method to firm-fixed-price contracts.
This requires us to make estimates of the percentage of completion of firm-fixed-price
contracts. If increases in projected costs-to-complete are sufficient to create
a loss contract, the entire estimated loss is charged to operations in the
period the loss first becomes known. This estimate has not affected our financial
statements in fiscal years 2008, 2007, or 2006. Increases in projected costs
to complete contracts could materially impact our future results, however.
Product Warranty Estimation
We maintain a reserve for warranty claims
based on the trend in the historical ratio of claims to sales, releases of
new products and other factors. The warranty period for our products is generally
one year. Although we believe the likelihood to be relatively low, claims
experience could be materially different from actual results because of the
introduction of new products, manufacturing changes that could impact product
quality, or as yet unrecognized defects in products sold. As of March 31,
2008 and 2007 our reserve for estimated warranty claims was not material to
our financial statements.
Inventory Valuation
Inventories are stated at the lower of cost
or net realizable value. Cost is determined by the first in, first out method,
or net realizable value. Where there is evidence that inventory could be disposed
of at less than carrying value, the inventory is written down to the net realizable
value in the current period. Additionally, we periodically examine our inventory
in the context of sales trends, turnover, competition, and other market factors,
and record provisions to inventory reserve when we determine certain inventory
is unlikely to be sold. If reserved inventory is subsequently sold, corresponding
reductions in inventory and inventory reserve are made. Our inventory reserve
was $280,000 at March 31, 2008 and $240,000 at March 31, 2007.
Allowance for Doubtful Accounts Estimation
We must make estimates of the uncollectibility
of our accounts receivable. The most significant risk is the risk of sudden
unexpected deterioration in financial condition of a significant customer
that is not considered in the allowance. We specifically analyze accounts
receivable, historical bad debts, and customer credit-worthiness when evaluating
the adequacy of the allowance for doubtful accounts. Our results could be
materially impacted if the financial condition of a significant customer deteriorated
and related accounts receivable are deemed uncollectible. Our allowance for
doubtful accounts was $15,000 at March 31, 2008 and 2007. Our allowance
for doubtful accounts is a relatively small percentage of our accounts receivable
because our revenues are primarily from large customers, distributors, and
U.S. Government agencies, all of which we consider generally credit-worthy.
Our allowance for doubtful accounts could increase in the future if larger
portions of our sales come from small end-user customers.
Deferred Tax Assets Estimation
In determining the carrying value of our
net deferred tax assets, we must assess the likelihood of sufficient future
taxable income in certain tax jurisdictions, based on estimates and assumptions
to realize the benefit of these assets. We evaluate the realizability of the
deferred assets quarterly and assess the need for valuation allowances or
reduction of existing allowances quarterly.
As of March 31, 2008 our deferred tax assets
were $453,405 compared to $1,328,106 as of March 31, 2007. Deferred tax
assets included $99,962 of stock-based compensation deductions as of March 31,
2008 and $527,442 in stock-based compensation deductions as of March 31,
2007. Our deferred tax assets could be subject to an Internal Revenue Code
Section 382 limitation.
Table
of Contents
Results
of Operations
The following table summarizes the percentage
of revenue and year-to-year changes for various items for the last three fiscal
years:
|
Percentage
of Revenue
Year Ended March 31 |
|
Year-to-Year Change
Years Ended March 31 |
2008 |
|
2007 |
|
2006 |
2007
to
2008 |
|
2006
to
2007 |
Revenue |
Product
sales
|
90.1
|
%
|
|
87.6
|
%
|
|
68.6
|
%
|
|
28.3
|
%
|
|
72.8
|
%
|
Contract research and development
|
9.9
|
%
|
|
12.4
|
%
|
|
31.4
|
%
|
|
(0.6
|
)%
|
|
(46.8
|
)%
|
Total
revenue
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
24.7
|
%
|
|
35.3
|
%
|
Cost
of sales
|
33.3
|
%
|
|
35.2
|
%
|
|
51.1
|
%
|
|
18.1
|
%
|
|
(6.9
|
)%
|
Gross
profit
|
66.7
|
%
|
|
64.8
|
%
|
|
48.9
|
%
|
|
28.3
|
%
|
|
79.3
|
%
|
Expenses |
Selling,
general, and administrative
|
10.5
|
%
|
|
11.9
|
%
|
|
14.4
|
%
|
|
10.7
|
%
|
|
11.1
|
%
|
Research and development
|
7.2
|
%
|
|
13.2
|
%
|
|
14.2
|
%
|
|
(31.6
|
)%
|
|
26.2
|
%
|
Total
expenses
|
17.7
|
%
|
|
25.1
|
%
|
|
28.6
|
%
|
|
(11.7
|
)%
|
|
18.6
|
%
|
Income
from operations
|
49.0
|
%
|
|
39.8
|
%
|
|
20.3
|
%
|
|
53.5
|
%
|
|
164.9
|
%
|
Net
interest and other income
|
5.0
|
%
|
|
3.9
|
%
|
|
3.0
|
%
|
|
59.6
|
%
|
|
74.8
|
%
|
Income
before taxes
|
54.0
|
%
|
|
43.7
|
%
|
|
23.3
|
%
|
|
54.1
|
%
|
|
153.2
|
%
|
Income
tax provision
|
19.0
|
%
|
|
14.7
|
%
|
|
8.5
|
%
|
|
61.5
|
%
|
|
131.2
|
%
|
Net
income
|
35.0
|
%
|
|
29.0
|
%
|
|
14.8
|
%
|
|
50.3
|
%
|
|
165.9
|
%
|
Total revenue for fiscal 2008 increased 25% to
$20,528,812 compared to $16,460,830 for fiscal 2007, and increased 35% in fiscal
2007 compared to $12,170,526 for fiscal 2006. The increases in both fiscal years
were due to increases in product sales, partially offset in fiscal 2007 by a
decrease in contract research and development revenue. Furthermore, the increases
in total revenue for both fiscal 2008 and 2007 were primarily due to increases
outside the U.S. In fiscal 2008, revenue increased 68% in Europe and 27% in
Asia. In fiscal 2007, revenue increased 65% in Europe and 78% in Asia.
Product sales increased 28% to $18,505,650 compared
to $14,425,632 in fiscal 2007. Fiscal 2007 product sales increased 73% from
$8,345,967 in fiscal 2006. The increases in both years were due to increased
sales of both spintronic sensors and spintronic couplers due to both the addition
of new customers and increased purchases by existing customers.
Contract research and development revenue decreased
by less than 1% for fiscal 2008 compared to fiscal 2007, following a 47% decrease
for fiscal 2007 compared to fiscal 2006. The decrease for fiscal 2007 compared
to fiscal 2006 was due to a decrease in U.S. Government contract awards to us,
due to what we believe is a more challenging Government funding environment
and our strategy to concentrate on product sales.
Gross profit margin increased to 67% of revenue
for fiscal 2008 compared to 65% for fiscal 2007 and 49% for fiscal 2006. The
increase in gross profit margin in fiscal 2008 from fiscal 2007 was due to a
more profitable revenue mix consisting of a higher percentage of product sales.
The increase in gross profit margin in fiscal 2007 from fiscal 2006 was due
to a more profitable revenue mix consisting of a higher percentage of product
sales and increased product margins. The increased product margins in fiscal
2007 were due to price increases and deployment of lower-cost coupler designs.
Increases in gross profit margin might not continue because we may not have
additional opportunities to increase prices or decrease product costs. Furthermore,
successfully implementing our long-term strategy of expanding into large markets
such as consumer or automotive might result in increased revenue but decreased
gross profit margin.
Selling, general, and administrative expense for
fiscal 2008 increased 11% to $2,158,818 compared to $1,950,999 for fiscal 2007,
and also increased 11% for fiscal 2007 from fiscal 2006. The increase for fiscal
2008 was primarily due to increased expenses relating to commissions on product
sales and incentive compensation, and a $33,236 increase in the effect of SFAS
No. 123(R). The increase in the effect of SFAS No. 123(R) was primarily due
to a higher market stock price at the date of automatic grant of stock options
to our non-employee directors on their reelection to our Board compared to the
market stock price at the prior-year date of grant. The increase in selling, general,
and administrative expense for fiscal 2007 was primarily due to $136,370 in non-cash
effects of stock-based compensation under SFAS No. 123(R), expenses related
to preparation for our first Sarbanes-Oxley Act Section 404 controls-based
audit, and increased legal expenses. Of the $136,370 effect of SFAS No. 123(R)
in fiscal 2007, $126,094 was attributable to the automatic award of options to
our directors on their election or reelection at our 2006 Annual Meeting of Shareholders.
Increased legal expenses for fiscal 2007 were primarily related to class-action
lawsuits.
Table
of Contents
Research and development expense decreased 32%
for fiscal 2008 compared to fiscal 2007 due to the completion of certain research
and development projects. This decrease may not be representative of future expense
trends. Our research and development expense can fluctuate significantly depending
on staffing, project requirements, and contract research and development obligations.
Research and development expense increased 26% for fiscal 2007 compared to fiscal
2006 due to our efforts to develop new and improved products and a shift to company-funded
research from contract-funded research.
Net interest and other income for fiscal 2008 increased
60% to $1,031,225 compared to $646,234 for fiscal 2007. Net interest and other
income increased 75% for fiscal 2007 from $369,753 for fiscal 2006. The increase
for fiscal 2008 was primarily due to an increase in interest income from a larger
portfolio of marketable securities and an increase in other income primarily from
net gains on sales of marketable securities. These increases were partially offset
by a decline in interest income as a percentage of marketable securities due to
lower prevailing interest rates and a shift toward federally tax-free investments
with lower pretax yields. The increase in net interest and other income in fiscal
2007 from fiscal 2006 was due to an increase in interest-bearing marketable securities
and a decrease in interest expense due to the reduction and elimination of our
debt in fiscal 2007.
The effective income tax rate in fiscal 2008 was
35.1% of income before taxes compared to 33.5% in fiscal 2007 and 36.7% in fiscal
2006. The tax rate was less in fiscal 2007 than the prior or subsequent years
primarily due to our assessment that it was more likely than not that we would
realize certain deferred tax assets. Our tax rate can fluctuate due to a number
of factors, including the mix between taxable and tax-exempt securities in our
marketable securities and deductions related to disqualifying dispositions of
our common stock. We did not pay significant cash taxes for fiscal 2007 or 2006
because of stock-based compensation deductions. We exhausted our available stock-based
compensation deductions during fiscal 2008 and began accruing and paying cash-tax
obligations.
Net income increased 50% in fiscal 2008 compared
to fiscal 2007 due to increases in revenue, gross profit as a percentage of revenue,
interest income, and a decrease in total expenses. Net income increased 166% for
fiscal 2007 compared to fiscal 2006 due to increases in revenue, gross profit
as a percentage of revenue, and interest income, as well as a decrease in the
effective income tax rate.
Liquidity and Capital Resources
The following table provides aggregate information
about our contractual payment obligations and the periods in which payments are
due:
|
Payments
Due by Period
|
Contractual
Obligations
|
|
Total
|
|
<1 Year
|
|
1-3
Years
|
|
3-5
Years
|
|
>5 Years |
Operating
Lease Obligations
|
|
$
|
1,931,517
|
|
$
|
232,491
|
|
$
|
486,839
|
|
$
|
755,788
|
|
$
|
456,399 |
Purchase
Obligations
|
|
|
138,350
|
|
|
138,350
|
|
|
-
|
|
|
-
|
|
|
-
|
Total
|
|
$
|
2,069,867
|
|
$
|
370,841
|
|
$
|
486,839
|
|
$
|
755,788
|
|
$
|
456,399
|
Note 8 -
Commitments and Contingencies provides additional information about our
lease obligations.
Purchase obligations as of March 31, 2008 consisted
of fixed asset purchase commitments. Such commitments were to increase manufacturing
capacity. We expect to meet these commitments from cash, marketable securities,
or cash provided by operating activities. We currently expect capital expenditures
to decrease in fiscal 2009 compared to fiscal 2008 because much of the near-term
investments we have identified have already been made. We plan to continue to
evaluate capital expenditures as needs and opportunities arise, and our actual
capital expenditures could vary significantly from our current expectations.
Purchases of fixed assets increased to $817,596
in fiscal 2008 compared to $321,997 in fiscal 2007 and $74,110 in fiscal 2006.
Purchases for fiscal 2008 were primarily for capital equipment to increase our
production capacity. Purchases of fixed assets in fiscal 2007 were primarily for
capital equipment to increase our production capacity. We financed purchases of
fixed assets in all three fiscal years with cash provided by operating activities.
Our primary sources of working capital for fiscal
years 2006 through 2008 were product sales and research and development contract
revenue. At March 31, 2008 we had $24,736,874 in cash plus short-term and
long-term marketable securities compared to $18,289,191 at March 31, 2007.
The increase in cash and marketable securities was primarily due to $6,909,226
in net cash provided by operating activities, partially offset by purchases of
fixed assets of $817,596.
We reinvested proceeds from the maturities and sales
of marketable securities primarily into municipal notes and bonds exempt from
federal income tax as part of a strategy to reduce our taxes.
Table
of Contents
Net cash provided by operating activities
was due to net income, partially offset by increases in accounts receivable and
inventories. The increase in receivables was due to the increase in revenue and
the weighting of the increase toward late in the fiscal year. The increase in
inventories was primarily to support increased product sales, and we currently
expect inventories to increase if product sales continue to increase.
Cash paid for income taxes increased $3,210,013
in fiscal 2008 compared to fiscal 2007 as we began paying regular income taxes
in fiscal 2008 because our stock-based compensation deductions and tax credits
were fully utilized. We did not pay cash taxes other than Alternative Minimum
Taxes for fiscal 2007 or 2006 because of stock-based compensation deductions.
We believe our working capital and cash generated
from operations will be adequate for our needs at least through fiscal 2009.
Foreign Currency Transactions
We have some limited revenue risks from fluctuations
in values of foreign currency due to product sales abroad. Foreign sales are generally
made in U.S. currency, and currency transaction gains or losses in the past three
fiscal years were not significant.
Inflation
Inflation has not had a significant impact on our
operations since our inception. Prices for our products and for the materials
and labor going into those products are governed by market conditions. It is possible
that inflation in future years could impact both materials and labor in the production
of our products.
Off-Balance-Sheet Arrangements
We believe that our off-balance sheet arrangements
do not have a material current or anticipated future effect on our consolidated
earnings, financial position, or cash flows. Our off-balance sheet arrangements
consist of operating leases for our facility and purchase commitments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
The primary objective of our investment activities
is to preserve principal while at the same time maximizing after-tax yields without
significantly increasing risk. To achieve this objective, we maintain our portfolio
of cash equivalents and marketable securities in a variety of securities including
government agency obligations, municipal obligations, corporate obligations, and
money market funds. Short-term and long-term marketable securities are generally
classified as available-for-sale and consequently are recorded on the balance
sheet at fair value with unrealized gains or losses reported as a separate component
of accumulated other comprehensive income or loss, net of estimated tax. Our marketable
securities as of March 31, 2008 had remaining maturities between 16 weeks
and 58 months. Marketable securities had a market value of $22,851,007 at
March 31, 2008, representing approximately 70% of our total assets. We have
not used derivative financial instruments in our investment portfolio.
Table
of Contents
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
Financial
statements and accompanying notes are in this Report beginning on page F-1.
Selected unaudited quarterly financial data for fiscal 2008 and 2007, presented
as supplementary financial information, are as follows:
|
Unaudited;
Quarter Ended
|
|
|
March
31, 2008
|
|
Dec.
31, 2007
|
|
Sept.
30, 2007 |
|
June
30, 2007 |
Revenue
|
Product
sales
|
|
$
|
5,674,879
|
|
$
|
4,249,809
|
|
$
|
4,311,862
|
|
$
|
4,269,100
|
Contract
research and development
|
|
|
374,505
|
|
|
515,716
|
|
|
692,758
|
|
|
440,183
|
Total
revenue
|
|
|
6,049,384
|
|
|
4,765,525
|
|
|
5,004,620
|
|
|
4,709,283
|
Cost
of sales
|
|
|
1,876,335
|
|
|
1,663,045
|
|
|
1,850,960
|
|
|
1,442,968
|
Gross
profit
|
|
|
4,173,049
|
|
|
3,102,480
|
|
|
3,153,660
|
|
|
3,266,315
|
Expenses
|
Selling,
general, and administrative
|
|
|
526,882
|
|
|
492,771
|
|
|
575,422
|
|
|
563,743
|
Research
and development
|
|
|
318,889
|
|
|
347,344
|
|
|
314,037
|
|
|
507,637
|
Total
expenses
|
|
|
845,771
|
|
|
840,115
|
|
|
889,459
|
|
|
1,071,380
|
Income
from operations
|
|
|
3,327,278
|
|
|
2,262,365
|
|
|
2,264,201
|
|
|
2,194,935
|
Income
before taxes
|
|
|
3,564,330
|
|
|
2,585,160
|
|
|
2,511,058
|
|
|
2,419,456
|
Net
income
|
|
$
|
2,252,982
|
|
$
|
1,702,
293
|
|
$
|
1,644,774
|
|
$
|
1,587,335
|
Net
income per share – diluted |
|
$
|
0.47
|
|
$
|
0.36
|
|
$
|
0.34
|
|
$
|
0.33
|
|
Unaudited; Quarter Ended
|
|
|
March 31, 2007 |
|
Dec.
31, 2006 |
|
Sept.
30, 2006 |
|
June
30, 2006 |
Revenue
|
Product
sales
|
|
$
|
4,192,307
|
|
$
|
3,402,937
|
|
$
|
3,777,060
|
|
$
|
3,053,328
|
Contract
research and development
|
|
|
372,911
|
|
|
459,112
|
|
|
621,308
|
|
|
581,867
|
Total
revenue
|
|
|
4,565,218
|
|
|
3,862,049
|
|
|
4,398,368
|
|
|
3,635,195
|
Cost
of sales
|
|
|
1,563,493
|
|
|
1,385,163
|
|
|
1,439,181
|
|
|
1,399,821
|
Gross
profit
|
|
|
3,001,725
|
|
|
2,476,886
|
|
|
2,959,187
|
|
|
2,235,374
|
Expenses
|
Selling,
general, and administrative
|
|
|
529,667
|
|
|
479,387
|
|
|
535,213
|
|
|
406,732
|
Research
and development
|
|
|
534,967
|
|
|
544,779
|
|
|
566,246
|
|
|
530,612
|
Total
expenses
|
|
|
1,064,634
|
|
|
1,024,166
|
|
|
1,101,459
|
|
|
937,344
|
Income
from operations
|
|
|
1,937,091
|
|
|
1,452,720
|
|
|
1,857,728
|
|
|
1,298,030
|
Income
before taxes
|
|
|
2,139,985
|
|
|
1,610,057
|
|
|
2,032,414
|
|
|
1,409,347
|
Net
income
|
|
$
|
1,553,953
|
|
$
|
1,051,553
|
|
$
|
1,283,471
|
|
$
|
891,806
|
Net
income per share – diluted |
|
$
|
0.33
|
|
$
|
0.22
|
|
$
|
0.27
|
|
$
|
0.19
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Management, with the participation of the Chief
Executive Officer and Chief Financial Officer, has performed an evaluation of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act) as of the end of the period covered
by this Report. This evaluation included consideration of the controls, processes
and procedures that are designed to ensure that information required to be disclosed
by us in the reports we file under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms
and that such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that, as of March 31,
2008, our disclosure controls and procedures were effective.
Table
of Contents
Managements Annual Report on 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 Rule 13a-15(f) under the Exchange Act. Our management,
including our Chief Executive Officer and Chief Financial Officer, assessed
the effectiveness of our internal control over financial reporting as of March
31, 2008. In making this assessment, management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control - Integrated Framework.
Based on our assessment using the criteria set
forth by COSO in Internal Control - Integrated Framework,
management concluded that our internal control over financial reporting was
effective as of March 31, 2008. Our internal control over financial reporting
as of March 31, 2008 has been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their report.
Our management, including our Chief Executive
Officer and Chief Financial Officer, does not expect that our internal control
over financial reporting will prevent all errors and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within NVE have been detected. Our internal controls over
financial reporting, however, are designed to provide reasonable assurance that
the objectives of internal control over financial reporting are met.
There were no changes in our internal control
over financial reporting during the fourth quarter of fiscal 2008 that have
materially affected, or were reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Shareholder Proposals for Nominations to Our Board
The discussion under the section titled Corporate
Governance - Shareholder Nominees to be included in our Proxy
Statement for our 2008 Annual Meeting of Shareholders is incorporated by reference
into this section.
Directors and Executive Officers
Each NVE director is elected annually and serves
for a term of approximately one year or until his or her successor is duly elected
and qualified. The section titled Proposal 1. Election of Board of Directors
to be included in our Proxy Statement for our 2008 Annual Meeting of Shareholders
sets forth certain information regarding our directors required by Item 10,
and the section titled Executive Officers of the Company sets forth
information regarding our executive officers required by Item 10. Both sections
are incorporated by reference into this section.
Audit Committee Financial Experts
Our Board of Directors has determined that Terrence W.
Glarner, James D. Hartman, and Patricia M. Hollister qualify as audit
committee financial experts as that term is defined under Section 407
of the Sarbanes-Oxley Act of 2002 and the rules promulgated by the SEC in furtherance
of Section 407. Furthermore, Ms. Hollister, Mssrs. Glarner and
Hartman, and Robert H. Irish are independent as that term is
defined under the corporate governance rules of the NASDAQ Stock Market.
Audit Committee
The discussion under the section titled Board
Committees - Corporate Governance - Audit Committee
to be included in our Proxy Statement for our 2008 Annual Meeting of Shareholders
is incorporated by reference into this section.
Code of Ethics
We have adopted a Policy on Ethics and Business
Conduct that applies to all officers, directors, and employees of the Company.
The Policy is available from the Investors section of our Website
(www.nve.com). We intend to disclose future amendments to the Policy, or waivers
of such provisions granted to executive officers and directors, on our Website
within four business days following the date of such amendment or waiver.
Table
of Contents
Section
16(a) Beneficial Ownership Reporting Compliance
The discussion under the section titled Security
Ownership - Section 16(a) Beneficial Ownership Reporting Compliance
to be included in our Proxy Statement for our 2008 Annual Meeting of Shareholders
is incorporated by reference in this section.
ITEM
11. EXECUTIVE COMPENSATION.
The
information appearing under the sections Executive Compensation, Compensation
Discussion and Analysis, Corporate Governance - Board Committees -
Compensation Committee Interlocks and Insider Participation, Compensation
Committee Report, and Directors Compensation to be included
in our Proxy Statement for our 2008 Annual Meeting of Shareholders is incorporated
by reference into this section.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The
information to be included in our Proxy Statement for our 2008 Annual Meeting
of Shareholders in the section titled Security Ownership is incorporated
by reference into this section.
The following table summarizes Common Stock that
may be issued as of March 31, 2008 on the exercise of options under our
2000 Stock Option Plan, as amended. Information regarding the material features
of the Plan is contained in Note 5 to the Financial Statements included
elsewhere in this Report.
|
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 Equtiy Compensation
Plans (Excluding Securities Reflected in Column (A)) |
Plan
Category
|
|
(A) |
(B) |
(C) |
Equity
compensation plans
|
approved
by security holders
|
|
308,400
|
|
|
|
178,230
|
|
Equity
compensation plans not
|
approved
by security holders
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
Total
at March 31, 2008
|
|
308,400
|
|
$16.09
|
|
178,230
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information to be included in our Proxy Statement
for our 2008 Annual Meeting in the sections titled Security Ownership -
Transactions With Related Persons, Promoters, and Certain Control Persons
and Corporate Governance - Board Composition, Independence, and Meeting
Attendance is incorporated by reference into this section.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information to be
included in our Proxy Statement for our 2008 Annual Meeting of Shareholders
in the sections titled Audit Committee Disclosure - Fees Billed
to Us by Ernst & Young During Fiscal 2008 and 2007 and Audit
Committee Disclosure - Audit Committee Pre-Approval Policy
is incorporated by reference into this section.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Financial Statements and Schedules
The financial statements are provided pursuant
to Item 8 of this Report. Financial statement schedules have been omitted
since they are either not required or not applicable, or the required information
is shown in the financial statements or notes.
Table
of Contents
(b)
Exhibits
|
3.1 |
Amended
and Restated Articles of Incorporation of the company as amended by the
Board of Directors effective November 21, 2002 (incorporated by reference
to our Quarterly Report on Form 10-QSB for the period ended December 31,
2002). |
|
3.2
|
Bylaws
of the company as amended by the Board of Directors effective December
18, 2007 (incorporated by reference to our Current Report on Form 8-K
filed December 19, 2007).
|
|
4
|
Form
of Common Stock Certificate (incorporated by
reference to our Registration
Statement on Form S-8 filed July 20,
2001). |
|
10.1 |
Lease
dated October 1, 1998 between the company and
Glenborough Properties, L.P.
(incorporated by reference to our Quarterly Report
on Form 10-QSB for the
period ended September 30, 2002). |
|
10.2 |
First
amendment to lease between the company and Glenborough Properties, L.P.
dated September 18, 2002 (incorporated by reference to our Quarterly
Report on Form 10-QSB for the period ended September 30, 2002).
|
|
10.3 |
Second
amendment to lease between the company and Glenborough
Properties, L.P.
dated December 1, 2003 (incorporated by reference
to our Quarterly Report
on Form 10-QSB for the period ended December
31,
2003). |
|
10.4 |
Notification
from Glenborough Properties, L.P. relating to
change in building ownership
(incorporated by reference to our Current Report
on Form 8-K filed October
11, 2005). |
|
10.5 |
Notification
from Carlson Real Estate Company, Inc. relating
to change in building
ownership (incorporated by reference to our Current
Report on Form 8-K
filed October 11, 2005). |
|
10.6
|
Third amendment to lease between the company and Carlson Real Estate Company, Inc. dated December 17, 2007
(incorporated by reference to our Current Report on Form 8-K/A filed December 20, 2007).
|
|
10.7*
|
Employment
Agreement between the company and Daniel A. Baker dated January 29,
2001 (incorporated by reference to our Annual Report on Form 10-KSB
for the year ended March 31, 2001).
|
|
10.8*
|
NVE
Corporation 2000 Stock Option Plan as Amended
July 19, 2001 by the
shareholders (incorporated by reference to our
Registration Statement on
Form S-8 filed July 20, 2001). |
|
10.9+
|
Agreement
between the company and Agilent Technologies,
Inc. dated September 27,
2001 (incorporated by reference to our Quarterly
Report on Form 10-QSB for
the period ended September 30,
2001). |
|
10.10
|
Amendment
dated October 18, 2002 to Agreement between the
company and Agilent
Technologies, Inc. (incorporated by reference
to our Quarterly Report on
Form 10-QSB for the period ended December 31,
2002). |
|
10.11
|
Notification
from Agilent Technologies of planned sale of
Agilents Semiconductor
Product Group (incorporated by reference to our
Current Report on Form 8-K
filed October 19, 2005). |
|
10.12
|
Report
of completion of the divestiture of Agilents Semiconductor Products
business (incorporated by reference to our Current
Report on Form 8-K/A
filed December 6, 2005). |
|
10.13
|
Amendment Number 2 to OEM Purchase Agreement dated September 10, 2007 to Agreement between Agilent
Technologies, Inc. (and subsequently assigned to Avago Technologies, Inc.) and the company (incorporated by
reference to our Exhibit 10.5 filed with our Current Report on Form 8-K/A filed September 11, 2007).
|
|
10.14*
|
Amendment
No. 1 dated March 28, 2005 to Stock Option Agreement dated May 7, 2004
between the Company and Daniel A. Baker (incorporated by reference to
our Current Report on Form 8-K filed March 30, 2005).
|
|
10.15
|
Amendment
No. 1 dated March 28, 2005 to Stock Option Agreement
dated August 17, 2004
between the Company and Patricia M. Hollister
(incorporated by reference
to our Current Report on Form 8-K filed March
30,
2005). |
|
10.16
|
Indemnification
Agreement by and between Pacesetter, Inc., a
St. Jude Medical Company,
d.b.a. St. Jude Medical Cardiac Rhythm Management
Division, and the
company (incorporated by reference to our Current
Report on Form 8-K filed
September 27, 2005). |
|
10.17+
|
Supplier
Partnering Agreement by and between Pacesetter,
Inc., a St. Jude Medical
Company, d.b.a. St. Jude Medical Cardiac Rhythm
Management Division, and
the company (incorporated by reference to our
Current Report on Form 8-K
filed January
4, 2006). |
|
10.18+
|
Amendment Number 1 to Supplier Partnering Agreement dated September 6, 2007 between Pacesetter, Inc., a St.
Jude Medical Company, d.b.a. St. Jude Medical Cardiac Rhythm Management Division, and the company
(incorporated by reference to our Current Report on Form 8-K/A filed September 10, 2007).
|
|
10.19*
|
Verbal
agreement with Curt A. Reynders (incorporated by reference to Item 1.01
of our Current Report on Form 8-K filed January 18, 2006).
|
|
23 |
Consent
of Ernst & Young LLP. |
|
31.1 |
Certification
by Daniel A. Baker pursuant to Rule
13a-14(a)/15d-14(a). |
|
31.2 |
Certification
by Curt A. Reynders pursuant to Rule
13a-14(a)/15d-14(a). |
|
32 |
Certification
by Daniel A. Baker and Curt A. Reynders pursuant
to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002. |
__________
*Indicates a management contract or compensatory plan or arrangement.
+Confidential portions of this exhibit have been deleted and filed separately with the SEC under a request for confidential
treatment pursuant to Rule 24b-2 or Rule 406.
Copies of documents filed as exhibits to our Form 10-K
may be accessed from the Investors section of our Website (www.nve.com),
or obtained by making a written request to Curt A. Reynders, our Chief
Financial Officer.
Table
of Contents
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of
1934, the registrant has duly caused this report to be
signed on its behalf by
the undersigned, thereunto duly authorized.
NVE
CORPORATION
(Registrant)
/s/
Daniel A. Baker
by
Daniel
A. Baker
President
and Chief Executive Officer
Date May
19, 2008
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.
Name |
Title |
Date
|
/s/
Terrence W. Glarner
Terrence
W. Glarner |
Director
and
Chairman
of the Board |
May
19, 2008
|
/s/
Daniel A. Baker
Daniel
A. Baker |
Director,
President
& Chief Executive Officer
(Principal
Executive Officer) |
May
19, 2008
|
/s/
Curt A. Reynders
Curt
A. Reynders |
Treasurer
and
Chief
Financial Officer
(Principal
Financial and
Accounting
Officer) |
May
19, 2008
|
/s/
James D. Hartman
James
D. Hartman |
Director |
May
19, 2008
|
/s/
Patricia M. Hollister
Patricia
M. Hollister |
Director |
May
19, 2008
|
/s/
Robert H. Irish
Robert
H. Irish |
Director |
May
19, 2008
|
Table
of Contents
NVE
CORPORATION
INDEX
TO
Table
of Contents
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Shareholders of NVE Corporation
We have audited NVE Corporations internal control over financial reporting
as of March 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). NVE Corporations management
is responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying report of management entitled Managements
Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on NVE Corporations internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, NVE Corporation maintained, in all material respects, effective
internal control over financial reporting as of March 31, 2008, based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of NVE Corporation as of March 31,
2008 and 2007, and the related statements of income, shareholders equity,
and cash flows for each of the three years in the period ended March 31,
2008, and our report dated May 14, 2008 expressed an unqualified opinion thereon.
Minneapolis, Minnesota
May 14, 2008
Table
of Contents
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of NVE Corporation
We have audited the accompanying balance sheets of NVE Corporation as of March 31,
2008 and 2007, and the related statements of income, shareholders equity,
and cash flows for each of the three years in the period ended March 31,
2008. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NVE Corporation at March 31,
2008 and 2007, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 2008, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 2, Summary of Significant Accounting Policies, to the
financial statements, effective April 1, 2006, the Company adopted Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment using the modified prospective method.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), NVE Corporations internal control over
financial reporting as of March 31, 2008, based on criteria established in
Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated May
14, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 14, 2008
Table of
Contents
BALANCE
SHEETS
MARCH
31, 2008 and 2007
|
March
31
|
2008
|
|
2007
|
ASSETS |
Current
assets |
Cash
and cash equivalents
|
|
$
|
1,885,867
|
|
|
$
|
397,423
|
|
Marketable
securities, short term
|
|
|
795,728
|
|
|
|
982,415
|
|
Accounts
receivable, net of allowance for
|
|
|
|
|
|
|
|
|
uncollectible
accounts of $15,000
|
|
|
3,226,027
|
|
|
|
2,005,005
|
|
Inventories
|
|
|
2,456,804
|
|
|
|
2,016,858
|
|
Deferred
tax assets
|
|
|
453,405
|
|
|
|
1,328,106
|
|
Prepaid
expenses and other assets
|
|
|
529,616
|
|
|
|
333,587
|
|
Total
current assets |
|
|
9,347,447
|
|
|
|
7,063,394
|
|
Fixed
assets |
Machinery
and equipment
|
|
|
5,205,288
|
|
|
|
4,458,948
|
|
Leasehold
improvements
|
|
|
436,794
|
|
|
|
413,482
|
|
|
|
|
5,642,082
|
|
|
|
4,872,430
|
|
Less
accumulated depreciation
|
|
|
4,276,680
|
|
|
|
3,834,683
|
|
Net
fixed assets |
|
|
1,365,402
|
|
|
|
1,037,747
|
|
Marketable
securities, long term |
|
|
22,055,279
|
|
|
|
16,909,353
|
|
Total
assets |
|
$
|
32,768,128
|
|
|
$
|
25,010,494
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY |
Current
liabilities |
Accounts
payable
|
|
$
|
434,808
|
|
|
$
|
502,595
|
|
Accrued
payroll and other
|
|
|
632,338
|
|
|
|
590,287
|
|
Deferred
revenue
|
|
187,500
|
|
|
29,357
|
|
Total
current liabilities
|
|
|
1,254,646
|
|
|
|
1,122,239
|
|
|
Shareholders
equity |
Common
stock
|
|
|
46,387
|
|
|
|
46,274
|
|
Additional
paid-in capital
|
|
|
18,539,538
|
|
|
|
18,289,248
|
|
Accumulated
other comprehensive income (loss)
|
|
|
103,158
|
|
|
|
(84,282
|
)
|
Retained
earnings
|
|
|
12,824,399
|
|
|
|
5,637,015
|
|
Total
shareholders equity |
|
|
31,513,482
|
|
|
|
23,888,255
|
|
Total
liabilities and shareholders equity |
|
$
|
32,768,128
|
|
|
$
|
25,010,494
|
|
Table
of Contents
STATEMENTS
OF INCOME
YEARS
ENDED MARCH 31, 2008, 2007, and 2006
|
Year
Ended March 31
|
2008
|
|
2007
|
|
2006 |
Revenue |
Product
sales
|
$
|
18,505,650
|
|
|
$
|
14,425,632
|
|
|
$
|
8,345,967
|
|
Contract
research and development
|
|
2,023,162
|
|
|
|
2,035,198
|
|
|
|
3,824,559
|
|
Total
revenue |
|
20,528,812
|
|
|
|
16,460,830
|
|
|
|
12,170,526
|
|
|
Cost
of sales |
|
6,833,308
|
|
|
|
5,787,658
|
|
|
|
6,218,533
|
|
Gross
profit |
|
13,695,504
|
|
|
|
10,673,172
|
|
|
|
5,951,993
|
|
|
Expenses |
Selling,
general, and administrative
|
|
2,158,818
|
|
|
|
1,950,999
|
|
|
|
1,756,142
|
|
Research
and development
|
|
1,487,907
|
|
|
|
2,176,604
|
|
|
|
1,724,825
|
|
Total
expenses |
|
3,646,725
|
|
|
|
4,127,603
|
|
|
|
3,480,967
|
|
|
Income
from operations |
|
10,048,779
|
|
|
|
6,545,569
|
|
|
|
2,471,026
|
|
|
Interest
income |
|
974,990
|
|
|
|
621,577
|
|
|
|
332,784
|
|
Interest
expense |
|
-
|
|
|
|
(589
|
)
|
|
|
(6,051
|
)
|
Other
income |
|
56,235
|
|
|
|
25,246
|
|
|
|
43,020
|
|
Income
before taxes |
|
11,080,004
|
|
|
|
7,191,803
|
|
|
|
2,840,779
|
|
|
Provision
for income taxes
|
|
3,892,620
|
|
|
|
2,411,020
|
|
|
|
1,043,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
$
|
7,187,384
|
|
|
$
|
4,780,783
|
|
|
$
|
1,797,746
|
|
|
Net
income per share – basic |
$
|
1.55
|
|
|
$
|
1.03
|
|
|
$
|
0.39
|
|
|
Net
income per share – diluted |
$
|
1.51
|
|
|
$
|
1.00
|
|
|
$
|
0.39
|
|
|
Weighted
average shares outstanding |
Basic
|
|
4,635,470
|
|
|
|
4,620,371
|
|
|
|
4,580,684
|
|
Diluted
|
|
4,763,101
|
|
|
|
4,771,297
|
|
|
|
4,667,994
|
|
Table
of Contents
STATEMENTS
OF SHAREHOLDERS EQUITY
YEARS
ENDED MARCH 31, 2008, 2007, and 2006
|
Accumulated
Other
Comprehen-
sive Income
(Loss) |
|
|
|
|
|
|
|
|
|
Additional
Paid-In
Capital |
|
|
|
Retained
Earnings
(Deficit) |
|
|
|
|
|
|
|
|
Common
Stock |
Shares |
|
Amount |
|
|
|
|
Total |
Balance
at March 31, 2005
|
4,569,784
|
|
$ |
45,698
|
|
$ |
14,064,625
|
|
$ |
(132,228
|
)
|
|
$ |
(941,514
|
)
|
|
$ |
13,036,581
|
|
Exercise
of stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
and warrants
|
38,720
|
|
|
387
|
|
|
173,547
|
|
|
-
|
|
|
|
-
|
|
|
|
173,934
|
|
Shares
issued pursuant
|
to
employee stock
|
purchase
plan
|
6,449
|
|
|
65
|
|
|
79,967
|
|
|
-
|
|
|
|
-
|
|
|
|
80,032
|
|
Comprehensive
income:
|
Unrealized
loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable securities
|
-
|
|
|
-
|
|
|
-
|
|
|
(34,680
|
)
|
|
|
|
|
|
|
(34,680
|
)
|
Net
income
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
1,797,746
|
|
|
|
1,797,746
|
|
Total
comprehensive
|
|
|
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,763,066
|
|
Tax
benefit of stock-
based
compensation
|
|
|
1,724,498
|
|
|
1,724,498
|
|
Balance
at March 31, 2006
|
4,614,953
|
|
|
46,150
|
|
|
16,042,637
|
|
|
(166,908
|
)
|
|
|
856,232
|
|
|
|
16,778,111
|
|
Exercise
of stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
and warrants
|
12,430
|
|
|
124
|
|
|
26,355
|
|
|
-
|
|
|
|
-
|
|
|
|
26,479
|
|
Comprehensive
income:
|
Unrealized
gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable securities
|
-
|
|
|
-
|
|
|
-
|
|
|
82,626
|
|
|
|
|
|
|
|
82,626
|
|
Net
income
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
4,780,783
|
|
|
|
4,780,783
|
|
Total
comprehensive
|
|
|
income
|
|
4,863,409
|
|
Stock-based
compensation
|
|
|
|
|
|
|
136,370
|
|
|
|
|
|
|
|
|
|
|
136,370
|
|
Tax
benefit of stock-
based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,083,886
|
|
|
2,083,886
|
|
Balance
at March 31, 2007
|
4,627,383
|
|
|
46,274
|
|
|
18,289,248
|
|
|
(84,282
|
)
|
|
|
5,637,015
|
|
|
|
23,888,255
|
|
Exercise
of stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
and warrants
|
11,300
|
|
|
113
|
|
|
46,911
|
|
|
-
|
|
|
|
-
|
|
|
|
47,024
|
|
Comprehensive
income:
|
Unrealized
gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable securities
|
-
|
|
|
-
|
|
|
-
|
|
|
187,440
|
|
|
|
|
|
|
|
187,440
|
|
Net
income
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
7,187,384
|
|
|
|
7,187,384
|
|
Total
comprehensive
|
|
|
income
|
|
7,374,824
|
|
Stock-based
compensation
|
|
|
|
|
|
|
169,606
|
|
|
|
|
|
|
|
|
|
|
169,606
|
|
Tax
benefit of stock-
based
compensation
|
|
33,773
|
|
|
33,773
|
|
Balance
at March 31, 2008
|
4,638,683
|
|
$
|
46,387
|
|
$
|
18,539,538
|
|
$
|
103,158
|
|
|
$
|
12,824,399
|
|
|
$
|
31,513,482
|
|
Table
of Contents
STATEMENTS
OF CASH FLOWS
YEARS
ENDED MARCH 31, 2008, 2007, and 2006
|
Year
Ended March 31
|
2008
|
|
2007
|
|
2006
|
OPERATING
ACTIVITIES
|
Net
income
|
$
|
7,187,384
|
|
|
$
|
4,780,783
|
|
|
$
|
1,797,746
|
|
Adjustments
to reconcile net income to net cash
provided
by operating activities:
|
Depreciation
and amortization
|
|
560,528
|
|
|
|
530,050
|
|
|
|
569,886
|
|
Stock-based
compensation
|
|
169,606
|
|
|
|
136,370
|
|
|
|
-
|
|
Excess
tax benefits
|
|
(33,773
|
) |
|
|
(2,083,886
|
) |
|
|
-
|
|
Gain
(loss) on sale of fixed assets
|
|
601
|
|
|
|
-
|
|
|
|
(24,581
|
)
|
Gain
on marketable securities, net
|
|
(56,837 |
) |
|
|
- |
|
|
|
- |
|
Deferred
income taxes
|
|
806,307
|
|
|
|
2,289,687
|
|
|
|
990,083
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(1,221,022
|
)
|
|
|
(337,976
|
)
|
|
|
618,443
|
|
Inventories
|
|
(439,946
|
) |
|
|
132,911
|
|
|
|
(577,010
|
)
|
Prepaid
expenses and other assets
|
|
(196,029
|
)
|
|
|
(102,175
|
)
|
|
|
(100,539
|
)
|
Accounts
payable and accrued expenses
|
|
(25,736 |
) |
|
|
222,728
|
|
|
|
84,797
|
|
Deferred
revenue
|
|
158,143
|
|
|
|
(48,016
|
) |
|
|
(189,982
|
) |
Net
cash provided by operating activities
|
|
6,909,226
|
|
|
|
5,520,476
|
|
|
|
3,168,843
|
|
|
INVESTING
ACTIVITIES
|
Purchases
of fixed assets
|
(817,596
|
) |
|
|
(321,997
|
) |
|
|
(74,110
|
) |
Proceeds
from sale of fixed assets
|
|
1,500
|
|
|
|
-
|
|
|
|
25,500
|
|
Purchases
of marketable securities
|
|
(16,518,287
|
) |
|
|
(9,506,521
|
) |
|
|
(3,258,612
|
) |
Proceeds
from maturities and sales of marketable securities
|
|
11,832,804
|
) |
|
|
1,340,019
|
|
|
|
-
|
|
Net
cash used in investing activities
|
|
(5,501,579
|
)
|
|
|
(8,488,499
|
)
|
|
|
(3,307,222
|
)
|
|
FINANCING
ACTIVITIES
|
Net
proceeds from sale of common stock
|
|
47,024
|
|
|
|
26,479
|
|
|
|
253,966
|
|
Excess
tax benefits
|
|
33,773
|
|
|
|
2,083,886
|
|
|
|
-
|
|
Repayment
of capital lease obligations |
|
-
|
|
|
|
(33,281
|
) |
|
|
(67,430
|
) |
Net
cash provided by financing activities
|
|
80,797
|
|
|
|
2,077,084
|
|
|
|
186,536
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
1,488,444
|
|
|
|
(890,939
|
)
|
|
|
48,157
|
|
Cash
and cash equivalents at beginning of year
|
|
397,423
|
|
|
|
1,288,362
|
|
|
|
1,240,205
|
|
|
Cash
and cash equivalents at end of year
|
$
|
1,885,867
|
|
|
$
|
397,423
|
|
|
$
|
1,288,362
|
|
|
Supplemental
disclosures of cash flow information:
|
Cash
paid during the year for:
|
Interest
|
$
|
-
|
|
|
$
|
589
|
|
|
$
|
6,051
|
|
Income
taxes
|
$
|
3,254,313
|
|
|
$
|
44,300
|
|
|
$
|
52,950
|
|
Table
of Contents
NOTE 1. DESCRIPTION OF BUSINESS
We develop and sell devices that use spintronics,
a nanotechnology that relies on electron spin rather than electron charge to acquire,
store, and transmit information.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
We consider all highly-liquid investments with maturities
of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents,
accounts receivable, and accounts payable approximates fair value because of the
short maturity of these instruments. Fair values of marketable securities are
based on quoted market prices.
Marketable Securities
We classify and account for marketable securities
in accordance with Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Securities with original maturities greater than three
months and remaining maturities less than one year are classified as short-term
marketable securities; securities with remaining maturities greater than one year
are classified as long-term marketable securities. Securities not due at a single
maturity date are classified by their average life.
We classify all of our marketable securities as
available-for-sale, thus securities are recorded at fair market value and any
associated unrealized gain or loss, net of tax, is included as a separate component
of shareholders equity, Accumulated other comprehensive income.
We use a specific-identification cost basis to determine gains and losses.
We determine whether our marketable securities have
other than temporary impairments in accordance with SFAS 115 Paragraph 16,
which indicates that an other-than-temporary impairment exists if it is probable
that the investor will be unable to collect all amounts due according to the contractual
terms of a debt security. If we judged a decline in fair value for any security
to be other than temporary, the cost basis of the individual security would be
written down. In accordance with SAB Topic 5M, we consider a number of factors
in determining whether other-than-temporary impairment exists, including: credit
market conditions; the credit ratings of the securities; historical default rates
for securities of comparable credit rating; the presence of insurance of the securities
and, if insured, the financial condition of the insurer; the effect of market
interest rates on the value of the securities; and the duration and extent of
any unrealized losses. We also consider our ability to hold the securities to
maturity based on our financial condition and anticipated cash flows. We have
determined that no write-downs were required on available-for-sale securities
during fiscal 2008, 2007, or 2006.
Concentration of Risk and Financial Instruments
Financial instruments potentially subject to significant
concentrations of credit risk consist principally of cash equivalents, marketable
securities, and accounts receivable.
We invest our excess cash in U.S. Government agency
securities, corporate- and municipal-backed notes and bonds, and other money market
instruments. Our investment policy prescribes investment only in high-grade securities,
and limits the amount of credit exposure to any one issuer.
Our customers include Agencies of the U.S. Government
and other customers throughout the world. We generally do not require collateral
from our customers, but we perform ongoing credit evaluations of their financial
condition. More information on accounts receivable is contained in the section
titled Accounts Receivable and Allowance for Doubtful Accounts of
this Note.
Additionally, we are dependent on critical suppliers
including our packaging vendors and suppliers of certain raw silicon and semiconductor
wafers that are incorporated in our products.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded net of an allowance
for doubtful accounts. We make estimates of the uncollectibility of accounts receivable.
We specifically analyze accounts receivable, historical bad debts, and customer
credit-worthiness when evaluating the adequacy of the allowance. We had no charges
or provisions to our allowance for doubtful accounts in fiscal 2008 or fiscal
2007. Charges and provisions to our allowance for doubtful accounts were $157
for fiscal 2006..
Table
of Contents
Inventories
Inventories are stated at the lower of cost or
net realizable value. Cost is determined by the first in, first out method.
We record inventory reserves when we determine certain inventory is unlikely
to be sold based on sales trends, turnover, competition, and other market factors.
Product Warranty
In general we warrant our products to be free
from defects in material and workmanship for one year. We maintain a reserve
for the estimated cost of maintaining product warranties.
Fixed Assets
Fixed assets are stated at cost. Depreciation
of machinery and equipment, and furniture and fixtures is recorded over the
estimated useful lives of the assets, generally five years, using the straight-line
method. Amortization of leasehold improvements is recorded using the straight-line
method over the lesser of the lease term or five-year useful life. We record
losses on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amount.
Revenue Recognition
We recognize product revenue in accordance with
SAB No. 101, Revenue Recognition in Financial Statements, as amended by
SAB No. 104 and codified in SAB Topic 13, Revenue Recognition.
Product Revenue Recognition
We recognize product revenue on shipment because
the terms of our sales are FOB shipping point, meaning that our customers (end
users and distributors) take title and assume the risks and rewards of ownership
upon shipment. Our customers may return defective products for refund or replacement
under warranty, and have other very limited rights of return. We maintain reserves
based on historical returns.
Shipping charges billed to customers are included
in product sales and the related shipping costs are included in selling, general,
and administrative expense. Such shipping costs were $28,930 for fiscal 2008
and $18,219 for fiscal 2007.
Payments from our distributors are not contingent
on resale or any other matter other than the passage of time, and delivery of
products is not dependent on the number of units resold to the ultimate customer.
There are no other significant acceptance criteria, pricing or payment terms
that would affect revenue recognition.
Under our agreement dated September 27, 2001
with Agilent Technologies, Inc. to distribute our couplers under its brand,
Agilent provided a refundable prepayment of $500,000. In accordance with SAB
No. 101 and SAB Topic 13A as amended by SAB No. 104, we classified
this prepayment as Deferred revenue. In accordance with the agreement,
we recognized the prepayment as revenue at a rate equal to a percentage of the
sale price to Agilent when we shipped products to Agilent or Avago Technologies,
Inc., and reduced deferred revenue by a corresponding amount. Inventory costs
associated with amortization of the prepayment were recognized as Costs
of sales as revenue was recognized. The 2001 prepayment was fully satisfied
during fiscal 2007. We executed Amendment No. 2 to the Agreement between
us and Agilent effective as of June 27, 2007. Among other provisions, Amendment
No. 2 provided for a nonrefundable payment of $250,000 by Avago to us.
In accordance with SAB No. 101 and SAB Topic 13A as amended by SAB
No. 104, we are recognizing revenue from the $250,000 payment over the
Amendment term ending June 27, 2010.
Accounting for Commissions and Discounts
We sometimes utilize independent sales representatives
that provide services relating to promoting our products and facilitating product
sales but do not purchase our products. We pay commissions to sales representatives
based on the amount of revenue facilitated, and such commissions are recorded
as selling, general, and administrative expenses.
Our stocking distributors take title and assume
the risks and rewards of product ownership. We recognize discounts to our distributors
in accordance with Emerging Issues Task Force Issue No. 01‑09, Accounting
for Consideration Given by a Vendor to a Customer. EITF 01‑09 addresses
whether a vendor should recognize consideration given to a customer as an expense
or as an offset to revenue being recognized from that same customer. We presume
consideration given to a customer is a reduction in revenue unless both of the
following conditions are met: (i) we receive an identifiable benefit in
exchange for the consideration and the identifiable benefit is sufficiently
separable from the customers purchase of our products such that we could
have purchased the products or services from a third party; and (ii) we
can reasonably estimate the fair value of the benefit received. Under EITF 01‑09
we recognize discounts provided to our distributors as reductions in revenue.
Under certain limited circumstances, our distributors
may earn commissions for activities unrelated to their purchases of our products,
such as for facilitating the sale of custom products or research and development
contracts with third parties. We recognize any such commissions as selling, general, and administrative expenses.
Table
of Contents
Research and Development Contract Revenue Recognition
We recognize government contract revenue in accordance
with Accounting Research Bulletin No. 43, Chapter 11, Government Contracts.
Revenue and gross profit are recognized as work is performed, based on actual
costs incurred.
Our government research and development contracts
may be either firm-fixed-price or cost-plus-fixed-fee. Cost-plus-fixed-fee contracts
are cost-reimbursement contracts that also provide for payment to us of a negotiated
fee that is fixed at the inception of the contract. Cost-plus-fixed-fee contracts
normally require us to complete and deliver the specified end product (such as
a final report of research accomplishing the goal or target) within the estimated
cost, if possible, as a condition for payment of the entire fixed fee. Our research
and development contracts do not contain post-shipment obligations.
Our commercial research and development contracts
are generally firm-fixed-price contracts. Firm-fixed-price contracts provide for
a price that is not subject to any adjustment based on our cost in performing
the contract. We apply the percentage-of-completion method to these contracts
for revenue recognition.
Revenue Recognition of Up-Front Fees
We account for nonrefundable up-front fees from
licensing and technology development programs in accordance with SAB Topic 13A.
Revenue from up-front fees is deferred and recognized over the periods that the
fees are earned. We recognize revenue from licensing and technology development
programs which is refundable, recoupable against future royalties, or for which
future obligations exist over the term of the agreement.
Income Taxes
We account for income taxes using the liability
method. Deferred income taxes are provided for temporary differences between the
financial reporting and tax bases of assets and liabilities. We provide valuation
allowances against deferred tax assets if we determine that it is less likely
than not that we will be able to utilize the deferred tax assets.
Research and Development Expense Recognition
Research and development costs are expensed as they
are incurred.
Stock-Based Compensation
Effective April 1, 2006 we adopted the provisions
of, and began accounting for, stock-based compensation in accordance with, SFAS
No. 123 (revised 2004), Share-Based Payment. Under the fair value recognition
provisions of SFAS No. 123(R), we measure stock-based compensation cost at
the grant date based on the fair value of the award and recognize the compensation
expense over the requisite service period, which is generally the vesting period.
We estimate pre-vesting option forfeitures at the time of grant by analyzing historical
data and revise those estimates in subsequent periods if actual forfeitures differ
from those estimates. Ultimately, the total expense recognized over the vesting
period will only be for those awards that vest. We elected the modified-prospective
method of adopting SFAS No. 123(R) so that prior periods are not retroactively
revised. The valuation provisions of SFAS No. 123(R) apply to awards granted
after the April 1, 2006 effective date. Stock-based compensation expense
for awards that were granted prior to the effective date but remain unvested on
the effective date is being recognized over the remaining service period using
the compensation cost estimated for our SFAS No. 123 pro forma disclosures.
Net Income Per Share
We calculate our net income per share in accordance
with SFAS No. 128, Earnings per Share. Basic earnings per share are computed
based on the weighted-average number of common shares issued and outstanding during
each year. Diluted net income per share amounts assume conversion, exercise or
issuance of all potential common stock instruments (stock options and warrants).
The following table reflects the components of common shares outstanding in accordance
with SFAS No. 128:
|
Year Ended
March 31 |
2008 |
|
2007 |
|
2006 |
Weighted
average common shares outstanding – basic
|
4,635,470
|
|
4,620,371
|
|
4,580,684
|
Effect
of dilutive securities:
|
Stock
options
|
123,195
|
|
146,154
|
|
81,927
|
Warrants
|
4,436
|
|
4,772
|
|
5,383
|
Shares
used in computing net income per share – diluted
|
4,763,101
|
|
4,771,297
|
|
4,667,994
|
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
us to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Table
of Contents
Recent Accounting Pronouncements
In September 2006 the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 establishes a framework for measuring
fair value, clarifies the definition of fair value, and requires additional
disclosures about fair-value measurements. SFAS No. 157 applies only to
fair value measurements that are already required or permitted by other accounting
standards (except for measurements of share-based payments) and is expected
to increase the consistency of those measurements. SFAS No. 157, as issued,
is effective for fiscal years beginning after November 15, 2007. In February
2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-2, Effective Date
of FASB Statement No. 157 (FSP SFAS No. 157-2) that deferred of the effective
date of SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial
liabilities. Accordingly, we adopted certain parts of SFAS No. 157 at the beginning
of fiscal year 2009 and we will adopt the remaining parts of SFAS No. 157
at the beginning of fiscal year 2010. We currently do not expect the adoption
in fiscal 2009 to result in a material impact to our financial statements. We
are evaluating the impact of the remaining parts of SFAS No. 157 that will
be adopted in fiscal 2010.
In February 2007 the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities ‑
Including an amendment of FASB Statement No. 115, which permits entities
to choose to measure many financial instruments and certain other items at fair
value. We adopted SFAS No. 159 as of the beginning of fiscal 2009, and
we currently do not expect the adoption to have a material impact on our financial
statements.
NOTE 3. MARKETABLE SECURITIES
As of March 31, 2008 and 2007 our marketable
securities were as follows:
|
Adjusted
Cost |
|
Gross
Unrealized
Gains |
|
Gross
Unrealized
Losses |
|
Estimated
Fair Market
Value |
As
of March 31, 2008 |
U.S.
agency securities
|
$ |
2,435,145 |
|
$ |
8,018 |
|
$ |
(11,308 |
) |
|
$ |
2,431,855 |
Corporate
notes and bonds |
|
7,094,793 |
|
|
58,702 |
|
|
(9,157 |
) |
|
|
7,144,338 |
Municipal
notes and bonds
|
|
13,159,161
|
|
|
149,104 |
|
|
(33,451
|
) |
|
|
13,274,814 |
Total
marketable securities |
$ |
22,689,099
|
|
$ |
215,824 |
|
$ |
(53,916
|
) |
|
$
|
22,851,007 |
As
of March 31, 2007 |
U.S.
agency securities
|
$ |
9,862,712 |
|
$ |
4,031 |
|
$ |
(122,620 |
) |
|
$ |
9,744,123 |
Corporate
notes and bonds |
|
8,156,755 |
|
|
21,735 |
|
|
(30,845 |
) |
|
|
8,147,645 |
Total
marketable securities |
$ |
18,019,467 |
|
$ |
25,766 |
|
$ |
(153,465 |
) |
|
$ |
17,891,768 |
Marketable securities with remaining maturities
less than one year are classified as short-term, and those with remaining maturities
greater than one year are classified as long-term. The maturities of our marketable
securities as of March 31, 2008 were as follows:
Total
|
|
<1
Year |
|
1-3
Years |
|
3-5
Years |
|
>5
Years |
$
|
22,851,007
|
|
$
|
795,728
|
|
$
|
1,349,776
|
|
$
|
20,705,503
|
|
$
|
-
|
The
following table shows the gross unrealized losses and fair value of our investments
with unrealized losses, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position at March 31,
2008:
|
Less
Than 12 Months
|
|
12
Months or Greater
|
|
Total
|
Fair
Market
Value |
|
Gross
Unrealized
Losses |
|
Fair
Market
Value |
|
Gross
Unrealized
Losses |
|
Fair
Market
Value |
|
Gross
Unrealized
Losses |
U.S.
agency securities |
$
|
847,586
|
|
$
|
(6,193
|
)
|
|
$
|
494,885
|
|
$
|
(5,115
|
)
|
|
$
|
1,342,471
|
|
$
|
(11,308
|
)
|
Corporate
notes and bonds |
3,506,909
|
|
|
(9,157
|
)
|
- |
- |
|
3,506,909 |
(9,157 |
)
|
Municipal
notes and bonds |
|
3,323,926
|
|
|
(33,451
|
)
|
|
|
-
|
|
|
-
|
|
|
|
3,323,926
|
|
|
(33,451
|
)
|
Total |
$
|
7,678,421 |
|
$
|
(48,801
|
)
|
|
$
|
494,885
|
|
$
|
(5,115
|
)
|
|
$
|
8,173,306
|
|
$
|
(53,916
|
)
|
Our gross unrealized losses on U.S. agency securities
relate to two securities and were primarily caused by market fluctuations. Because
agency issues are of very high credit quality, and because we have the ability
and intent to hold both investments until a recovery of fair value, which may
be maturity, we do not consider either of the investments to be other-than-temporarily
impaired at March 31, 2008.
Table of
Contents
Three bonds make up the gross unrealized losses
for corporate notes and bonds, and another three bonds make up such losses for
municipal notes and bonds. These losses were primarily due to interest rate fluctuations
and market-price movements. For each corporate- and municipal-backed bond with
an unrealized loss, we determined that it was not probable that we would not collect
all amounts due. In reaching this determination, we considered factors including
the credit ratings of the bonds and historical default rates for securities of
comparable credit rating. Because we determined that it was not probable that
we would not collect all amounts due, and because we have the ability and intent
to hold the bonds until a recovery of fair value, which may be maturity, we do
not consider our corporate- or municipal-backed notes and bonds to be other-than-temporarily
impaired at March 31, 2008.
NOTE
4. INVENTORIES
Inventories consisted of the following:
|
March
31
|
2008 |
|
2007
|
Raw
materials
|
$
|
741,361
|
|
|
$
|
862,440
|
|
Work-in-process |
|
1,184,062
|
|
|
|
811,261 |
|
Finished
goods |
|
811,381 |
|
|
|
583,157 |
|
|
|
2,736,804
|
|
|
|
2,256,858
|
|
Less
inventory reserve
|
|
(280,000
|
)
|
|
|
(240,000
|
)
|
Total
inventories
|
$
|
2,456,804
|
|
|
$
|
2,016,858
|
|
NOTE 5. STOCK-BASED COMPENSATION
On April 1, 2006 we adopted SFAS 123(R),
which requires the measurement and recognition based on estimated fair values
of compensation expense for all share-based payment awards made to employees
and directors. SFAS 123(R) applies to awards including stock options and
employee stock purchase plans. SFAS 123(R) superseded Accounting Principles
Board (APB) Opinion No. 25, which we previously applied, for periods beginning
in fiscal 2007.
We adopted SFAS 123(R) using the modified
prospective transition method, which requires application of the accounting
standard as of April 1, 2006, the first day of fiscal 2007. Our financial
statements as of and for the fiscal years ended March 31, 2008 and 2007
reflect the impact of SFAS 123(R). In accordance with the modified prospective
transition method, our Financial Statements for prior periods have not been
restated to reflect the impact of SFAS 123(R). Therefore, the results for
fiscal 2008 and 2007 are not directly comparable to prior years.
Stock Option Plan
Our 2000 Stock Option Plan, as amended, provides
for issuance to employees, directors, and certain service providers of incentive
stock options and nonstatutory stock options. Generally, the options may be
exercised at any time prior to expiration, subject to vesting based on terms
of employment. The period ranges from immediate vesting to vesting over a five-year
period. The options have exercisable lives ranging from one year to ten years
from the date of grant, and are generally not eligible to vest early in the
event of retirement, death, disability, or change in control. Exercise prices
are not less than fair market value of the underlying Common Stock at the date
the options are granted.
Valuation assumptions
We use the Black-Scholes standard option-pricing
model to determine the fair value of stock options. The following assumptions
were used to estimate the fair value of options granted:
|
Year
Ended March 31
|
|
2008
|
|
2007
|
|
2006
|
Risk-free
interest rate |
4.2
|
% |
|
4.9 |
% |
|
3.9 |
% |
Expected
volatility |
70
|
% |
|
81 |
% |
|
85 |
% |
Expected
life (years) |
3.5
|
|
|
6.5 |
|
|
10 |
|
Dividend
yield |
0 |
% |
|
0 |
% |
|
0 |
% |
The determination of the fair value of the
awards on the date of grant using the Black-Scholes model is affected by our
stock price as well as assumptions of other variables, including projected employee
stock option exercise behaviors, risk-free interest rate, and expected volatility
of our stock price in future periods. Our estimates and assumptions affect the
amounts reported in the financial statements and accompanying notes.
Table
of Contents
Expected life
We analyze historical employee exercise and termination
data to estimate the expected life assumption. We believe historical data currently
represents the best estimate of the expected life of a new employee option.
Prior to adopting SFAS No. 123(R), we estimated that the expected life
was equal to the option term. For determining the fair value of options under
SFAS No. 123(R) we use different expected lives for officers and directors
than we use for our general employee population. We examined the historical
pattern of option exercises to determine if there was a discernible pattern
as to how different classes of employees exercised their options. Our analysis
showed that officers and directors held their stock options for a longer period
of time before exercising compared to the rest of our employee population.
Risk-free interest rate
The risk-free rate is based on the yield of U.S.
Treasury securities on the grant date for maturities similar to the expected
lives of the options.
Volatility
We use historical volatility to estimate the expected
volatility of our common stock.
Dividend yield
We assume a dividend yield of zero because we
do not anticipate paying dividends in the foreseeable future.
Expenses related to share-based payments
The following table shows the effect of our adoption
of SFAS No. 123(R) on our net income and earning per share for fiscal 2008
and 2007. Expenses and costs related to share-based payments are presented in
the same line or lines as cash compensation paid to the same employees. The
effect of SFAS No. 123(R) is included in Selling, general, and administrative
expenses and presented in the line titled Stock-based compensation
on our Statements of Cash Flows:
|
Year
Ended March 31
|
2008
|
|
2007
|
Effect
of SFAS No. 123(R) on net income |
$ |
(169,606
|
) |
|
$ |
(136,370
|
) |
Effect
of SFAS No. 123(R) on net income per share: |
|
|
|
|
|
|
|
Basic |
$ |
(0.04
|
) |
|
$ |
(0.03 |
) |
Diluted |
$ |
(0.04
|
) |
|
$ |
(0.03 |
) |
Prior to the adoption of SFAS
No. 123(R), we presented all tax benefits of deductions resulting from
the exercise of stock options as operating cash flows in the Statement of Cash
Flows. SFAS No. 123(R) requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized
for those options (excess tax benefits) to be classified as financing cash flows.
Prior to April 1, 2006
we accounted for our stock-based employee compensation plans under the recognition
and measurement principles of APB Opinion No. 25 and related interpretations.
The following table illustrates the effect on net earnings and net earnings
per share for fiscal 2006 if we had applied the fair value recognition provisions
of SFAS No. 123 to our stock-based employee compensation:
|
Year
Ended
March 31, 2006
|
Net
income:
|
As
reported
|
$
|
1,797,746
|
|
Pro
forma adjustment for stock options
|
|
(478,549
|
)
|
Pro forma
net income
|
$
|
1,319,197
|
|
Net
income per share:
|
Basic
– as reported
|
$
|
0.39
|
|
Basic
– pro forma
|
$
|
0.29
|
|
|
Diluted
– as reported
|
$
|
0.39
|
|
Diluted
– pro forma
|
$
|
0.28
|
|
Tax effects of stock-based compensation
Stock-based compensation increased deferred taxes
for fiscal 2008 by $60,599.
Table
of Contents
General stock option information
A summary of the status of our nonvested shares
at March 31, 2008 and changes during fiscal 2008 is presented below:
Nonvested
Shares
|
|
Shares
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
Nonvested
at March 31, 2007
|
|
6,250
|
|
|
$
|
16.18
|
|
Granted
|
|
8,000
|
|
|
$
|
34.71
|
|
Vested
|
|
(11,250
|
)
|
|
$
|
28.31
|
|
Forfeited
|
|
-
|
|
|
$
|
-
|
|
Nonvested
at March 31, 2008
|
|
3,000
|
|
|
$
|
20.12
|
|
The
following table summarizes information about options outstanding and options
exercisable at March 31, 2008:
Options
Outstanding
|
|
Options
Exercisable
|
Ranges
of
Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Remaining
Contractual
Life
(years)
|
Number
Outstanding
|
|
Weighted
Average
Exercise
Price |
$ 5.10 - 7.35
|
|
84,650
|
|
$
|
6.53
|
|
3.0
|
|
84,650
|
|
$
|
6.53
|
|
10.01 - 20.12
|
|
165,750
|
|
|
15.53
|
|
6.7
|
|
162,750
|
|
|
15.44
|
|
21.99 - 58.27
|
|
58,000
|
|
|
31.65
|
|
6.7
|
|
58,000
|
|
|
31.65
|
|
|
|
308,400
|
|
$
|
16.09
|
|
5.6
|
|
305,450
|
|
$
|
16.05
|
|
Our 2000 Stock Option Plan, as amended, provides for issuance to employees, directors, and certain service providers of incentive stock options and nonstatutory stock options. Generally, the options may be exercised at any time prior to expiration, subject to vesting based on terms of employment. The period ranges from immediate vesting to vesting over a five-year period. The options have exercisable lives ranging from one year to ten years from the date of grant. Exercise prices are not less than fair market value as determined by our Board at the date the options are granted.
A summary of our incentive stock options and warrants are shown in the following table:
|
Option Shares
Reserved
|
|
Options
Outstanding
|
|
Weighted
Average Option Exercise Price per Share |
|
Warrants
Outstanding
|
|
Weighted
Average Warrant Exercise Price per Share
|
Balance
at March 31, 2005
|
240,530
|
|
|
308,550
|
|
|
$
|
13.10
|
|
413,889
|
|
$
|
14.92
|
|
Granted
|
(56,500
|
)
|
|
56,500
|
|
|
$
|
15.48
|
|
-
|
|
|
|
-
|
|
Exercised
|
-
|
|
|
(38,720
|
)
|
|
$
|
4.49
|
|
-
|
|
|
-
|
|
Terminated
|
14,200
|
|
|
(14,200
|
)
|
|
$
|
15.95
|
|
(401,292
|
)
|
|
$
|
14.96
|
|
Balance
at March 31, 2006
|
198,230
|
|
|
312,130
|
|
|
$
|
14.47
|
|
12,597
|
|
|
$
|
13.51
|
|
Granted
|
(12,000
|
)
|
|
12,000
|
|
|
$
|
20.12
|
|
-
|
|
|
|
-
|
|
Exercised
|
-
|
|
|
(12,430
|
)
|
|
$
|
2.13
|
|
-
|
|
|
-
|
|
Terminated
|
-
|
|
|
-
|
|
|
|
-
|
|
(2,597
|
)
|
|
$
|
2.86
|
|
Balance
at March 31, 2007
|
186,230
|
|
|
311,700
|
|
|
$
|
15.18
|
|
10,000
|
|
$
|
16.28
|
|
Granted
|
(8,000
|
)
|
|
8,000
|
|
|
$
|
34.71
|
|
-
|
|
|
|
-
|
|
Exercised
|
-
|
|
|
(11,300
|
)
|
|
$
|
4.16
|
|
-
|
|
|
-
|
|
Terminated
|
-
|
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
Balance
at March 31, 2008
|
178,230
|
|
|
308,400
|
|
|
$
|
16.09
|
|
10,000
|
|
|
$
|
16.28
|
|
Exercisable options were outstanding covering 305,400
shares at March 31, 2008; 305,450 shares at March 31, 2007; and 308,630
shares at March 31, 2006 at weighted-average exercise prices of $16.05, $15.16,
and $14.56 per share. The remaining weighted-average exercisable life was 5.6,
6.3, and 7.1 years.
No warrants were issued in fiscal 2008, 2007, or 2006. Exercisable warrants covering 10,000 shares with a weighted-average exercise price of $16.28 were outstanding at March 31, 2008 and 2007. Exercisable warrants covering 12,597 shares at a weighted-average exercise price of $13.51 per share were outstanding at March 31, 2006. Remaining weighted-average exercisable life was 4.9, 5.9, and 5.6 years at March 31, 2008, 2007, and 2006.
Table
of Contents
The
total intrinsic value of options exercised during fiscal 2008 was $312,256.
At March 31, 2008 the total intrinsic value of options outstanding was
$3,070,608, of which $3,034,398 were exercisable. Intrinsic value is based on
our closing stock price on the last trading day of the fiscal year for in-the-money
options.
The total fair value of grants was $145,520 in
fiscal 2008. At March 31, 2008, there was $30,674 of total unrecognized
stock-based compensation expense, adjusted for estimated forfeitures, which
is expected to be recognized over a weighted-average period of 17 months
and will be adjusted for any future changes in estimated forfeitures.
NOTE 6. INCOME TAXES
Income tax provisions for fiscal 2006 through
2008 consisted of the following:
|
Year
Ended March 31
|
2008 |
|
2007 |
|
2006 |
Current
taxes
|
Federal
|
$
|
2,808,433
|
|
|
$
|
2,338,592
|
|
|
$
|
852,969
|
|
State
|
|
314,904
|
|
|
|
278,309
|
|
|
|
104,531
|
|
|
Deferred
taxes
|
Federal
|
|
719,197
|
|
|
|
(188,476
|
)
|
|
|
76,196
|
|
State
|
|
50,086
|
|
|
|
(17,405
|
)
|
|
|
9,337
|
|
Income
tax provision
|
$
|
3,892,620
|
|
|
$
|
2,411,020
|
|
|
$
|
1,043,033
|
|
A reconciliation of income tax provisions at the
U.S. statutory rate for fiscal 2006 through 2008 is as follows:
|
Year
Ended March 31
|
2008 |
|
2007 |
|
2006
|
Tax expense
at U.S. statutory rate
|
$
|
3,767,201
|
|
|
$
|
2,445,214
|
|
|
$
|
929,165
|
State
income taxes, net of Federal benefit
|
|
238,861
|
|
|
|
179,984
|
|
|
|
113,868
|
Other
|
|
87,512
|
|
|
|
(50,311
|
)
|
|
|
-
|
Benefit
of tax credits
|
|
-
|
|
|
|
(61,302
|
)
|
|
|
-
|
Change
in valuation allowance
|
|
(200,954
|
)
|
|
|
(102,565
|
)
|
|
|
-
|
Income
tax provision
|
$
|
3,892,620
|
|
|
$
|
2,411,020
|
|
|
$
|
1,043,033
|
Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of our deferred tax assets and liabilities as of March 31,
2008 and 2007 were as follows:
|
March
31
|
2008 |
|
2007 |
Deferred
tax assets
|
Deferred
revenue
|
$
|
68,035
|
|
|
$
|
10,729
|
Vacation
accrual
|
|
95,301
|
|
|
|
86,498
|
Inventory
reserve
|
|
101,598
|
|
|
|
87,711
|
Depreciation
|
|
68,668
|
|
|
|
-
|
Tax
credits
|
|
-
|
|
|
|
481,534
|
Stock-based
compensation deductions
|
|
106,681
|
|
|
|
573,524
|
Unrealized
(gain) loss
|
|
(58,748
|
) |
|
|
46,669
|
Other
|
|
71,870
|
|
|
|
41,441
|
Net
deferred tax assets
|
$
|
453,405
|
|
|
$
|
1,328,106
|
We had no tax credits at March 31, 2008. We
had $481,534 of tax credits at March 31, 2007, which could be used to offset
future taxable income. We also had $1,443,223 in stock-based compensation deductions
at March 31, 2007 that were used to offset taxable income in fiscal 2008.
Realizations of stock-based compensation deductions
are credited to Additional paid-in capital and included in Tax
benefit of stock-based compensation on our statements of shareholders
equity. Credits of $33,773 in fiscal 2008, $2,083,886 in fiscal 2007, and $990,083
in fiscal 2006 to Additional paid-in capital were due principally
to the reversal of valuation allowances against deferred tax assets for carryforwards
of net operating losses that were attributable to stock-based
Table
of Contents
compensation deductions. The reversals occurred as a result of the actual utilization
of such net operating loss carryforwards in those respective years. The Additional
paid-in capital credits also included the tax benefit of stock-based compensation
deductions in those years. In fiscal 2006, the amount credited to Additional
paid-in capital was the full tax benefit of the deduction. In fiscal 2008
and 2007, following our adoption of FAS 123(R), the amounts credited to Additional
paid-in capital were the tax benefits of the deductions to the extent they
exceeded the corresponding compensation expense recognized for financial reporting
purposes, in accordance with paragraph 62 of FAS 123(R).
In fiscal 2006, Tax benefit of stock-based
compensation on our statements of shareholders equity represented
(i) the full tax benefit of deductions for stock-based compensation consisting
of realized current-year deductions, and (ii) reversals of valuation allowances
against deferred tax assets for net operating loss carryforwards attributable
to stock-based compensation deductions. In fiscal 2008 and 2007, following our
adoption of FAS 123(R), Tax benefit of stock-based compensation
represented: (i) in accordance with paragraph 62 of FAS 123(R),
the tax benefits of deductions for stock-based compensation to the extent they
exceeded the corresponding compensation expense recognized for financial reporting
purposes, and (ii) reversals of valuation allowances against deferred tax
assets for net operating loss carryforwards attributable to stock-based compensation
deductions.
Cash we received from the exercise of stock options
related to excess tax benefits is included in Net proceeds from sale of
common stock in the statement of cash flows for the year in which the option
was exercised and cash received by us.
During fiscal 2006 we reversed $990,083 of our valuation
allowance due to the utilization of net operating loss carryforwards from stock
based compensation, and $820,398 of the remaining valuation allowance was reversed
due to our assessment that it was more likely than not that we would earn sufficient
operating income to realize $1,576,472 of the remaining deferred tax assets. We
provided a valuation allowance of $1,855,848 as of March 31, 2006 because
we did not believe that it was more likely than not that we would utilize the
remaining deferred tax assets before they expire. During fiscal 2007 we reversed
the $1,855,848 valuation allowance due to our assessment that it was more likely
than not that we would earn sufficient operating income to realize the remaining
deferred tax assets. We exhausted our stock-based compensation deductions during
fiscal 2008.
We have $311,584 of net operating losses that expire
in fiscal 2020. These net operating losses are subject to limitation under Section 382
of the Internal Revenue Code.
In July 2006 the Financial Accounting Standards
Board issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes ‑ an interpretation of FASB Statement No. 109, which prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN 48 seeks to reduce the diversity in practice associated
with certain aspects of the recognition and measurement related to accounting
for income taxes. This interpretation is effective for fiscal years beginning
after December 15, 2006. We adopted the provisions of FIN 48 on April 1,
2007. We recognized no material adjustment in the liability for unrecognized income
tax benefits as a result of the adoption, and at the adoption date of April 1,
2007 we had no unrecognized tax benefits that would affect our effective tax rate
if recognized. At March 31, 2008 we had no unrecognized tax benefits. We
do not believe unrecognized tax benefits will significantly change within twelve
months of the reporting date. We recognize interest and penalties related to income
tax matters in income tax expense. As of March 31, 2008 we had no accrued
interest related to uncertain tax positions. The tax years 2003 through 2007 remain
open to examination by the major taxing jurisdictions to which we are subject.
NOTE 7. SEGMENT INFORMATION
We operate in one reportable segment. We manufacture
and sell spintronic products, and we receive contracts for research and development.
U.S. Government Agencies accounted for less than
10% of our total revenue in fiscal 2008, 10% in fiscal 2007, and 22% in fiscal
2006. A second customer accounted for approximately 17% of total revenue in fiscal
2008, 23% in fiscal 2007, and 18% in fiscal 2006. A third customer accounted for
approximately 10% of total revenue in fiscal 2008 and 11% in fiscal 2007. Revenue
by geographic region was as follows:
|
Year
Ended March 31
|
2008
|
|
2007
|
|
2006
|
United
States
|
$
|
10,792,550
|
|
$
|
9,901,667
|
|
$
|
8,254,566
|
Europe
|
|
5,981,940
|
|
|
3,568,014
|
|
|
2,160,473
|
Asia
|
|
3,274,700
|
|
|
2,577,961
|
|
|
1,451,903
|
Other
|
|
479,622
|
|
|
413,188
|
|
|
303,584
|
Total
Revenue
|
$
|
20,528,812
|
|
$
|
16,460,830
|
|
$
|
12,170,526
|
Table
of Contents
NOTE
8. COMMITMENTS AND CONTINGENCIES
Leases
Lease payments were $224,712 for fiscal 2008,
$193,010 for fiscal 2007, and $200,441 for fiscal 2006. In fiscal 2008 we executed
a third amendment extending the operating lease for our facility through December 31,
2015. We pay operating expenses including maintenance, utilities, real estate
taxes, and insurance in addition to rental payments. We also lease a piece of
office equipment under an operating lease expiring September 2009 with payments
due quarterly. Our future minimum lease payments are shown in the following
table:
Year
Ending March 31
|
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
Total |
$ |
232,491 |
|
$ |
242,191 |
|
$ |
244,648 |
|
$ |
248,280 |
|
$ |
251,911 |
|
$ |
255,596 |
|
$ |
259,495 |
|
$ |
196,904 |
|
$ |
1,931,517 |
|
Other Contingencies
On February 10, 2006 the first of three lawsuits
was filed in the U.S. District Court for the District of Minnesota against NVE
and certain of its current and former executive officers and directors by individual
shareholders seeking to represent a class of purchasers of our common stock.
These lawsuits were subsequently consolidated into a single case and a consolidated
complaint was filed seeking unspecified damages. The consolidated complaint
generally alleged that the defendants violated the Securities Exchange Act by
issuing material misrepresentations concerning NVEs projected revenues
and product technology, which artificially inflated the market price of our
common stock. On July 3, 2007 the U.S. District Court granted our motion
to dismiss these consolidated lawsuits, with prejudice. The plaintiffs filed
an appeal from the Courts order and the appeal is still pending. Two related
actions brought by individual shareholders who seek to represent NVE derivatively
were filed in Hennepin County District Court. These related actions were subsequently
consolidated into a single case and an amended derivative complaint was filed.
The derivative action has been stayed pending a resolution of the appeal from
the U.S. District Courts order.
Because there is a possibility of a successful
appeal by the plaintiffs and the court has yet to rule on the derivative action,
we are unable to determine the ultimate disposition of these lawsuits and have
therefore not recorded a liability on our balance sheet related to these actions.
We have incurred legal expenses related to these lawsuits and could incur additional
expenses.
NOTE 9. COMMON STOCK
Our authorized stock is stated as six million
shares of common stock, $0.01 par value, and ten million shares of all types.
Our Board may designate any series and fix any relative rights and preferences
to authorized but undesignated stock.
NOTE 10. CYPRESS WARRANT
In 2002 we issued a warrant to Cypress Semiconductor
Corporation for the purchase of up to 400,000 shares of Common Stock at $15
per share. The warrant accompanied an investment in NVE by Cypress and a technology
exchange agreement between NVE and Cypress. In April 2005 the warrant expired
with no shares exercised.
NOTE 11. INFORMATION AS TO EMPLOYEE STOCK PURCHASE, SAVINGS, AND SIMILAR
PLANS
401(k) Employee Savings Plan
All of our employees are eligible to participate
in our 401(k) savings plan the first quarter after reaching age 21. Employees
may contribute up to the Internal Revenue Service maximum. In calendar year
2005 we made matching contributions equal to 100% of the first 2% of elective
salary deferral contributions made by eligible participants. In 2006 we began
making matching contributions of 100% of the first 3% of participants
salary deferral contributions. Our matching contributions were $94,585 for fiscal
2008, $97,674 for fiscal 2007, and $93,606 for fiscal 2006.
Employee Stock Purchase Plan
In 2001 our shareholders approved and we implemented
an Employee Stock Purchase Plan, which allowed us to issue up to 200,000 shares
of Common Stock. The Plan was terminated effective January 1, 2006 in anticipation
of the impact of SFAS No. 123(R), which would have required us to recognize
expenses associated with the issuance of shares under the plan. We issued 6,449
shares of Common Stock under the plan for fiscal 2006.
Table
of Contents
EXHIBIT
INDEX
Exhibit # |
Description
|
|
|
23
|
Consent
of Ernst & Young LLP.
|
|
|
31.1 |
Certification
by Daniel A. Baker pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
31.2 |
Certification
by Curt A. Reynders pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
32 |
Certification
by Daniel A. Baker and Curt A. Reynders pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |