NVE CORP /NEW/ - Annual Report: 2007 (Form 10-K)
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, 2007
[ ] 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)
|
Registrant’s 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 (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s 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, or a non-accelerated filer. See definition of
“accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer
[ ]
|
Accelerated filer [ x ]
|
Non-accelerated
filer
[ ]
|
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 and non-voting common equity
held by
non-affiliates as of the last business day of the registrant’s most recently
completed second fiscal quarter was approximately $138 million based on the
last sale price of $29.99 per share as reported by the NASDAQ Stock Market
for September 30, 2006.
The
number of shares of the registrant’s Common Stock (par value $0.01) outstanding
as of May 15, 2007 was 4,632,383.
______________
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of our Proxy Statement for our 2007 Annual Meeting of Stockholders
are
incorporated by reference into Items 10, 11, 12, and 14 of Part III
hereof.
NVE
CORPORATION
INDEX
TO FORM 10-K
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. For
further information regarding our risks and uncertainties, see Item
1A “Risk
Factors” of this Report.
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 primarily as a government contract research company. Our
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.
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
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.
Industry
Background
Much
of
the electronics industry is devoted to the acquisition, storage and
transmission
of information. Global trends such as richer data, more video, and
remote data
collection test the speed and capacity of conventional electronics.
We
believe spintronics represents the first major change in microelectronic
technology since the advent of these devices a generation ago. The
1970s brought
microelectronic devices including Hall-effect sensors for data acquisition,
3
semiconductor
random access memory (commonly known as RAM) for data storage, and
light-emitting diode-based optical couplers for data transmission.
There have
been incremental improvements to these devices over the years, but
the inherent
limitations of charge-based electronics remain. We believe spintronics
can
address these significant markets.
Memories
are a critical part of almost every electronic device. For some electronic
device functions speed is required; others require a large amount
of memory; and
some require nonvolatility. No single semiconductor memory meets
all three of
these requirements. For example, a cellphone requires the bit density
of DRAM
for the operating software, the speed of SRAM for digital signal
processing, and
the nonvolatility of flash memory for phone books, ring tones, and
other
permanent storage. The three memories consume power and space. Because
they use
incompatible materials, the three memories are difficult to combine
with each
other or with other cellphone circuitry in a single integrated
circuit.
Near-term
potential MRAM applications include mission-critical storage such
as military
and industrial 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
sensors are used to detect small changes in magnetic fields. We believe
our
spintronic sensors are smaller, more precise, and more reliable than
competing
devices. They can be used to detect the position or speed of robotics
and
mechanisms, or to acquire information in medical devices or automobiles.
As
factories become more automated, there is a need for more precise
position
sensing. Better sensors could also enable smaller, more reliable
medical devices
and more efficient automobiles.
Like
sensors, couplers are widely used in factory automation. Couplers
provide
reliable digital communication between the various 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.
Our
vision is to become the leading developer of practical spintronics
technology
and devices. We plan to do that by selling products and licensing
MRAM
technology. Our strategy is to continue to reduce our dependence
on government
contracts and transition toward product sales and licensing as our
principal
revenue sources.
Grow
Product Sales
We
plan
to broaden our sensor and coupler product lines, expand our distribution
network, and promote our products with advertising or direct mail
campaigns.
Monetize
MRAM Intellectual Property Through Licensing
Because
of the large capital investment required to make large-scale memories,
our
strategy is to monetize our MRAM intellectual property by licensing
other
companies to make devices using our technology. We intend to pursue
new license
agreements, although there can be no assurance as to when or if we
will
consummate additional agreements. For a discussion regarding our
existing
license agreements, see Item 1 “Business - Intellectual
Property -
Licenses.”
Transition
to Product Sales and License Revenue from Contract
Research
Government
research and development contracts were the source of some of our
patents and
product developments, and our primary source of revenue for much
of our history.
We have redeployed personnel from contract research to company-funded
product
research because we believe product sales have higher profit and
growth
potential, and that company-funded research will have a higher rate
of
return.
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.
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.
4
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 in accordance with 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.
Anticipated future custom sensor markets include consumer and automotive
markets.
Our
spintronic couplers add an “IsoLoop” integrated microscopic coil to our basic
GMR sensor element. 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
and medical
applications are possible in the future.
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.
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.
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 and send the completed wafers
to Asia for
dicing and packaging. The packaged parts are returned to us to be
tested,
inventoried, and shipped.
We
rely
primarily on distributors who stock and sell our products in more
than 75
countries. Our distributors include Digi-Key Corporation and Newark
InOne, two
of the largest electronic component distributors in the U.S. Our
agreements with
distributors generally renew annually. In addition, Avago Technologies,
one of
the world’s leading suppliers of solid-state couplers, distributes Agilent-
and
Avago-branded versions of some of our couplers under an agreement
between
Agilent Technologies, Inc. and us that expires in June 2007. Avago
is comprised
of the former Agilent Semiconductor Product Group. We believe we
are less
dependent on Avago than in past years because we have expanded our
own
distribution. We do not know whether we will reach an agreement for
Avago to
continue to distribute our products.
5
In
the past year we began selling several new products including:
| · |
new
custom spintronic sensors for certain medical device
manufacturers;
|
| · |
a
new signal coupler combining spintronic coupling with RS-422
network
protocol functions in a small package;
|
| · |
additional
coupler models in Micro-Small Outline Packages (MSOPs);
and
|
| · |
a
new series of spintronic couplers called the IsoLoop 700S-Series,
which
transmit up to two channels of data at up to 150 million
bits per
second.
|
Industrial
Sensor Competition
A
limited
number of other companies claim to either make or have the capability
to make
GMR sensors. Several competitors also 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
medical sensors face competition from electromechanical magnetic
sensors such as
reed switches. Reed switches have been in use for several decades.
A reed switch
uses a pair of contacts that pull together when subjected to a magnetic
field,
closing an electrical circuit. Our medical sensor competitors include
Hermetic
Switch, Inc., which manufactures miniature magnetically operated
reed switches.
Additionally, Meder Electronic AG (Engen/Welschingen, Germany) and
Memscap SA (Grenoble, France) manufacture microelectromechanical system
(MEMS) reed switches. Because our sensors have no moving parts, we
believe they
are inherently more reliable than miniature and MEMS reed switches.
We also
believe our sensors are smaller than the smallest reed switches,
more precise in
their magnetic switch points, and more sensitive to small magnetic
fields.
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.
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, input voltage range, 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.
There
are
many flash memory manufacturers, most of which are large semiconductor
companies. Silicon-oxide-nitride-oxide-silicon (SONOS) and thin-film
storage
(TFS) have been proposed as improvements to flash memories. Simtek
Corporation
and Cypress Semiconductor Corporation are among companies reported
to be
developing SONOS memory; Freescale Semiconductor, Inc. has said it is
developing TFS memory. Both types of memory appear to have many of
the
limitations of conventional flash memory such as limited speed and
endurance.
6
Battery-backed-up
SRAM manufacturers include Maxim. We believe that MRAM has the potential
of
being simpler, lower cost, and more reliable than battery-backed-up
SRAM.
Emerging
technologies competing with MRAM include carbon nanotubes, phase-change
memory
(PCM; also known as PRAM, chalcogenide, CRAM, or Ovonic memory),
polymer memory,
and polymeric ferroelectric random access memory (PFRAM). We believe
that MRAM
has advantages over these technologies in some or all of the following
areas:
degree of commercialization, manufacturability, speed, and endurance.
Companies
developing carbon nanotube memory include Nantero, Inc. Companies
developing PCM
include Elpida Memory, Inc.; IBM Corporation; Infineon; Intel; Macronix
International Company, Ltd.; Ovonyx, Inc.; Philips; Samsung Electronics
Company
Ltd.; and STMicroelectronics. Companies developing polymer memory
include Thin
Film Electronics ASA and Coatue.
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), and
Spintron
(Marseille, France).
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 supply our device packaging
services,
including CIRTEK Electronics Corporation (Laguna, The Philippines);
Circuit
Electronics Industries (Ayutthaya, Thailand); NS Electronics Bangkok
(Thailand),
Ltd.; and SPEL Semiconductor Limited (Chennai, India).
Patents
As
of
March 31, 2007 we had 41 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. In
accordance with 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
Our
trademarks include “AT-MRAM,” “GMR Switch,” and “GT Sensor.” “IsoLoop” is our
registered trademark.
Licenses
We
have
licensed certain MRAM intellectual property to several companies,
including
Cypress, Honeywell, Union Semiconductor Technology Corporation, and
Motorola,
Inc.
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 Motorola’s 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.
7
Royalty
Agreement
We
have
licensed rights to another organization’s GMR-related patent family, and that
agreement calls for us to pay royalties on our sales of certain products.
Payments under this agreement have not been material to date. 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.
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.
We
rely on several large customers for a large percentage of our revenue;
these
include Avago Technologies (the company comprised of the former Agilent
Technologies, Inc. Semiconductor Product Group); 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.
As
of March 31, 2007 we had $1,417,844 of contract research and development
backlog we believed to be firm, compared to $682,685 as of March 31, 2006.
We expect most of the firm backlog as of March 31, 2007 to be filled within
fiscal 2008. Approximately 98%
of
our backlog as of March 31, 2007 and 90% as of March 31, 2006 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.
In
each of the past three 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.
We
spent $1,789,844
for
fiscal 2007, $1,096,970 for fiscal 2006, and $841,731 for fiscal
2005 in
company-sponsored
research
and development activities.
Over
the past three fiscal years these activities have included development
of new
sensors and couplers, and lower-cost product designs. Additionally,
we spent
$2,090,200 during fiscal 2007,
$3,817,378 during fiscal 2006, and $5,018,469 during fiscal 2005
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 other companies.
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.
We
had 48
employees as of March 31, 2007 compared to 50 as of March 31,
2006.
The
decrease in employees was primarily due to a shift in revenue mix
toward product
sales and increased manufacturing productivity. These changes 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.
8
Foreign
sales accounted for approximately 40% of our revenue in fiscal 2007,
32% in
fiscal 2006, and 24% in fiscal 2005. The increases in the proportion
of
international sales 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 from the U.S. 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.
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 Form 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 SEC’s Website
(www.sec.gov).
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 can be cancelled, postponed, or reduced without
cause, and
the loss of any of these customers could have a significant impact
on our
revenue and our profitability.
We
may lose revenue if we are unable to renew agreements with large
customers.
The
agreement between Agilent Technologies, Inc. and us, as amended, expires
June 26, 2007 and our Supplier Partnering Agreement with St. Jude
Medical expires December 31, 2007. Avago Technologies purchases components
from us under the Agilent agreement. We cannot predict if either
the Agilent or
St. Jude agreements will be renewed, or if renewed, under what terms.
The
inability to agree on mutually acceptable terms or the loss of either
of these
large customers could have a significant adverse impact on our revenue
and our
profitability.
We
rely on government contracts for a significant percentage of our
revenue and we
will lose revenue if government funding is reduced or
eliminated.
U.S.
Government contracts accounted for the majority of our fiscal 2005
revenue.
While U.S. Government contract revenue decreased as a percentage
of our revenues
in fiscal 2006 and was less than 10% of our total revenue in fiscal
2007, such
contracts remain important to us. 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 program budgets may be changed by legislation or
by agencies
such as the Department of Defense. Other 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.
Failure
to qualify as a small business under federal regulations could make
us
ineligible for some government-funded research grants, which could
have a
significant adverse impact on our revenue and our ability to make
research and
development progress.
We
received approximately $1.43 million in Small Business Innovation
Research
(SBIR) contract awards in fiscal 2007. 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.
9
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 cardiac
pacemakers
and implantable cardioverter defibrillators (ICDs) made by St. Jude
Medical, which help sustain human life. We are also marketing our
sensor
technology to other manufacturers of cardiac pacemakers and ICDs.
Although we
have an indemnification agreement with a St. Jude Medical company 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 sensors in products sold by St. Jude Medical
or others. Existing or future laws or unfavorable judicial decisions
could limit
or invalidate the provisions of our indemnification agreement, or
the agreement
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.
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.
10
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,” 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. We have identified
alternate vendors in case CEI’s 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. Higher packaging costs
with an
alternate vendor could have a significant adverse impact on our
profitability.
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 40% of our revenue for fiscal 2007, 32% for
fiscal 2006,
and 24% for fiscal 2005 was from foreign countries. We also rely
on vendors in
China, India, Taiwan, Thailand, The Philippines, 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 majority of our competitors,
we may lack
the financial resources needed to increase our market share and future
revenue.
Our
known
competitors and potential competitors include Avago
Technologies, Analog Devices, Inc.; Fairchild Semiconductor International;
Fujitsu Limited, Grandis, Inc.; Hermetic Switch, Inc.; IBM Corporation;
Infineon
Technologies AG; Intel Corporation; Linear Technology Inc.; Macronix
International Co., Ltd.; Maxim Integrated Products, Inc.; Meder
Electronic AG; Memscap SA; Nantero, Inc.; NEC Corporation;
Ovonyx, Inc.; Ramtron International Corporation; Silicon
Laboratories, Inc.; Simtek Corporation; Spintec; Spintron; Texas
Instruments Inc.; Thin Film Electronics ASA; Toshiba Corporation;
Vishay
Intertechnology; and others. 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. Most of our competitors and potential competitors
are
established companies that have significantly greater financial,
technical, and
marketing resources than us. 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.
11
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
party’s
MRAM intellectual property rather than ours. In addition, our existing
agreements place restrictions on future license agreements. Specifically,
one of
our agreements allows one of our licensees to approve licenses with
certain
other potential licensees. Each of these limitations could hinder
our ability to
consummate additional MRAM license agreements.
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. While our
founder,
Dr. James M. Daughton, no longer generally works full time, he makes
his technical, intellectual property, and contract development expertise
available to us. If that arrangement terminates we may not be able
to replace
his expertise.
12
We
are required to evaluate our internal control over financial reporting
under
Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from
such evaluation could result in a loss of investor confidence in
our financial
reports and have an adverse affect on our financial results and the
market price
of our common stock.
As
required by Section 404 of the Sarbanes-Oxley Act of 2002, this Report
includes a management report assessing the effectiveness of our internal
control
over financial reporting and related attestation from our independent
registered
public accounting firm auditing our financial statements. We are
subject to this
requirement because we are filing this Report as an “accelerated filer” as
defined in Rule 12b-2 of the Exchange Act. While we were able to implement
the requirements relating to compliance with Section 404 for this Report,
we cannot be certain that we will meet the requirements in subsequent
years if
we are required to do so. We have incurred significant expenses in
order to
comply with the requirements and could incur significant ongoing
expenses. If we
are not able to comply with the requirements of Section 404 in the future,
investors could lose confidence in the reliability of our financial
statements,
which could result in a decrease in the market price of our common
stock. In
addition, to the extent we or our independent registered public accounting
firm
identify a significant deficiency in our internal control over financial
reporting, the resources and costs required to remediate such deficiency
could
have a material adverse impact on our future results of
operations.
We
are presently involved in class action litigation.
On
February 10, 2006 a lawsuit was filed against NVE and certain of its
current and former executive officers and directors in the U.S. District
Court
for the District of Minnesota by an individual shareholder seeking
to represent
a class of purchasers of our common stock during the period from
May 22,
2003 through February 11, 2005. On March 6 and March 7, 2006, two
additional lawsuits were filed in the same court by two additional
NVE
shareholders, with the same proposed class period, purporting to
represent the
same class. These lawsuits were subsequently consolidated into a
single case and
a consolidated complaint was filed. The consolidated complaint generally
alleges
that the defendants violated the Securities Exchange Act by issuing
material
misrepresentations concerning NVE’s projected revenues and product technology,
which artificially inflated the market price of our common stock.
Two related
actions brought by individual shareholders who seek to represent
NVE
derivatively have been filed in Hennepin County District Court. These
related
actions were subsequently consolidated into a single case and an
amended
derivative complaint was filed. The amended derivative complaint
generally
alleges that certain officers and directors violated their fiduciary
duties to
the company. We believe the lawsuits are wholly without merit and
intend to
vigorously defend the actions. We have incurred and expect to continue
to incur
legal expenses related to these lawsuits. Although insurance may
cover portions
of legal expenses and of any judgments, 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.
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. We believe these fluctuations
have been
greater on a percentage basis than 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.
Although
our stock price increased in fiscal 2007, it decreased in each of
fiscal 2005
and 2006 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;
|
| · |
changes
in requirements or demands for our
products;
|
| · |
changes
in prices of our products and services or our competitors’ products and
services;
|
| · |
quarterly
variations in our operating results;
|
| · |
changes
in our revenue and 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.
|
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
13
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. and is leased to
us under an
agreement expiring December 31, 2008. We believe the building is adequately
insured. We believe our facility is adequate to support our needed
production
capacity and we have no significant near-term facility expansion
plans. We hold
no investments in real estate.
On
February 10, 2006 a lawsuit was filed against NVE and certain of its
current and former executive officers and directors in the U.S. District
Court
for the District of Minnesota by an individual shareholder seeking
to represent
a class of purchasers of our common stock during the period from
May 22,
2003 through February 11, 2005. On March 6 and March 7, 2006, two
additional lawsuits were filed in the same court by two additional
NVE
shareholders, with the same proposed class period, purporting to
represent the
same class. These lawsuits were subsequently consolidated into a
single case and
a consolidated complaint was filed. The consolidated complaint generally
alleges
that the defendants violated the Securities Exchange Act by issuing
material
misrepresentations concerning NVE’s projected revenues and product technology,
which artificially inflated the market price of our common stock.
Two related
actions brought by individual shareholders who seek to represent
NVE
derivatively have been filed in Hennepin County District Court. These
related
actions were subsequently consolidated into a single case and an
amended
derivative complaint was filed. The amended derivative complaint
generally
alleges that certain officers and directors violated their fiduciary
duties to
the company. We believe the lawsuits are wholly without merit and
intend to
vigorously defend the actions.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
No
matters were submitted to our shareholders during the quarter ended
March 31, 2007.
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 Capital Market for each quarter
within
the two most recent fiscal years:
|
|
Quarter
Ended
|
||||||||||||||||||||||||
|
|
3/31/07
|
12/31/06
|
9/30/06
|
6/30/06
|
3/31/06
|
12/31/05
|
9/30/05
|
6/30/05
|
|||||||||||||||||
|
High
|
$
|
32.30
|
$
|
46.35
|
$
|
39.85
|
$
|
17.75
|
$
|
18.86
|
$
|
17.90
|
$
|
19.91
|
$
|
22.23
|
|||||||||
|
Low
|
$
|
20.75
|
$
|
26.82
|
$
|
14.06
|
$
|
12.36
|
$
|
14.57
|
$
|
12.81
|
$
|
13.55
|
$
|
11.50
|
|||||||||
Shareholders
and Dividends
We
had
approximately 128 shareholders of record and 8,327 total shareholders
as of
April 30, 2007. 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 and for the possible defense of our intellectual
property.
The
graph
and table below compare the performance of our Common Stock to the
cumulative
five-year performance of the NASDAQ
Industrial
Index
and the Merrill Lynch Nanotech Index. NVE is included in both indices.
The
NASDAQ
Industrial Index
includes NASDAQ
domestic and international based common type stocks.
The
Merrill Lynch Nanotech Index is quoted on the American Stock Exchange
under the
symbol NNZ. Prior to January 22, 2003, our Common Stock was quoted on the
Over-the-Counter Bulletin Board. The graph and table assume $100
was invested on
March 31, 2002 in each of our Common Stock, the NASDAQ
Industrial Index,
and the
Merrill Lynch Nanotech Index, with reinvestment of
dividends.
|
|
3/31/2002
|
3/31/2003
|
3/31/2004
|
3/31/2005
|
3/31/2006
|
3/31/2007
|
|||||||||||||
|
NVE
Corporation
|
$
|
100.00
|
$
|
70.30
|
$
|
476.80
|
$
|
190.20
|
$
|
160.20
|
$
|
272.80
|
|||||||
|
NASDAQ
Industrial Index
|
$
|
100.00
|
$
|
72.51
|
$
|
118.30
|
$
|
121.40
|
$
|
142.85
|
$
|
152.15
|
|||||||
|
Merrill
Lynch Nanotech Index
|
$
|
100.00
|
$
|
47.87
|
$
|
103.74
|
$
|
81.97
|
$
|
103.41
|
$
|
88.57
|
|||||||
The
selected financial data presented below should be read in conjunction
with the
our financial statements and notes included in Item 8 of this Report with
“Management’s 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
|
|||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
Cash,
cash equivalents, and
|
||||||||||||||||
|
marketable
securities
|
$
|
18,289,191
|
$
|
10,891,326
|
$
|
7,717,264
|
$
|
7,544,643
|
$
|
6,475,865
|
||||||
|
Working
capital and
|
||||||||||||||||
|
marketable
securities
|
$
|
22,850,508
|
$
|
15,535,200
|
$
|
11,342,300
|
$
|
9,394,741
|
$
|
6,535,004
|
||||||
|
Total
assets
|
$
|
25,010,494
|
$
|
17,758,919
|
$
|
14,190,004
|
$
|
12,419,727
|
$
|
9,681,752
|
||||||
|
Capital
lease obligations,
|
||||||||||||||||
|
less
current portion
|
$
|
-
|
$
|
-
|
$
|
33,281
|
$
|
100,711
|
$
|
223,191
|
||||||
|
Total
liabilities
|
$
|
1,122,239
|
$
|
980,808
|
$
|
1,153,423
|
$
|
1,686,483
|
$
|
2,203,438
|
||||||
|
Total
shareholders’ equity
|
$
|
23,888,255
|
$
|
16,778,111
|
$
|
13,036,581
|
$
|
10,733,244
|
$
|
7,478,314
|
||||||
|
|
|
|||||||||||||||
|
Income
Statement Data for Years Ended March 31
|
||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
Revenue
|
||||||||||||||||
|
Product
sales
|
$
|
14,425,632
|
$
|
8,345,967
|
$
|
5,522,250
|
$
|
5,393,540
|
$
|
2,503,096
|
||||||
|
Contract
research
|
||||||||||||||||
|
and
development
|
2,035,198
|
3,824,559
|
6,093,320
|
6,617,311
|
6,552,730
|
|||||||||||
|
License
revenue
|
-
|
-
|
-
|
-
|
391,664
|
|||||||||||
|
Total
revenue
|
$
|
16,460,830
|
$
|
12,170,526
|
$
|
11,615,570
|
$
|
12,010,851
|
$
|
9,447,490
|
||||||
|
Gross
profit
|
$
|
10,673,172
|
$
|
5,951,993
|
$
|
4,604,836
|
$
|
4,565,945
|
$
|
3,536,110
|
||||||
|
Income
before taxes
|
$
|
7,191,803
|
$
|
2,840,779
|
$
|
1,619,850
|
$
|
1,874,698
|
$
|
646,850
|
||||||
|
Net
income
|
$
|
4,780,783
|
$
|
1,797,746
|
$
|
1,758,254
|
$
|
2,107,720
|
$
|
646,850
|
||||||
|
Net
income per share –
|
||||||||||||||||
|
diluted
|
$
|
1.00
|
$
|
0.39
|
$
|
0.37
|
$
|
0.45
|
$
|
0.15
|
||||||
|
Weighted
average shares
|
||||||||||||||||
|
outstanding
– diluted
|
4,771,297
|
4,667,994
|
4,733,955
|
4,726,759
|
4,324,493
|
|||||||||||
15
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF
OPERATION.
You
should read this discussion together with our financial statements
and the notes
to those financial statements included 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 investor’s 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
2007, 2006, or 2005. 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, 2007 and 2006 our reserves for estimated
warranty claims were not material to our financial
statements.
Inventory
Reserves Estimation
We
maintain reserves for potentially excess, obsolete, and slow-moving
inventory.
The amounts of these reserves are based upon expected product
lives, competitive
conditions, industry conditions, and forecasted sales demand.
Our results could
be materially different if demand for our products decreased
because of economic
or competitive conditions, length of an industry downturn, or
if products become
obsolete because of technical advancements by us or in the industry.
Alternatively, if we are able to sell previously reserved inventory,
we reverse
a portion of the reserve. Changes in inventory reserves
are recorded as a component of cost of sales. As of March 31, 2007 our
obsolescence reserve was $240,000 compared to
$145,000 at March 31, 2006. The increase was due to additional product
considered slow moving.
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,
2007 and 2006. We expect our allowance for doubtful accounts
to remain a
relatively small percentage of our accounts receivable because
much of our
receivables are with 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. In
fiscal 2005 we reduced the amount of our valuation allowances
based upon our
history and our expectations for taxable income.
We
began recognizing tax expenses for reporting purposes in fiscal
2006 because we
had exhausted our net operating losses net of stock based compensation.
Under
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes,
stock-based compensation deductions for tax return purposes do
not reduce taxes
reported for book purposes but are credited to “Additional paid-in capital.” As
of March 31, 2007, our deferred tax assets were $1,328,106 with a related
valuation allowance of nil, compared to $3,432,320 with a valuation
allowance of
$1,855,848 as of March 31, 2006. Deferred tax assets included $527,442 of
stock-based compensation deductions as of March 31, 2007 compared to
$2,866,868 as of March 31, 2006. These amounts could be subject to an
Internal Revenue Code Section 382 limitation.
16
The
table shown below summarizes the percentage of revenue and period-to-period
changes for various items for the periods indicated:
|
|
|
|
|
|
|
|
|
Period-to-Period
Change
|
|||||||||||
|
|
|
|
Percentage
of Revenue
|
|
|
Years
Ended March 31
|
|||||||||||||
|
|
Year
Ended March 31
|
2006
to
|
2005
to
|
||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
|||||||||||||||
| Revenue | |||||||||||||||||||
|
Product
sales
|
87.6
|
%
|
68.6
|
%
|
47.5
|
%
|
72.8
|
%
|
51.1
|
%
|
|||||||||
|
Contract
research and development
|
12.4
|
%
|
31.4
|
%
|
52.5
|
%
|
(46.8
|
)%
|
(37.2
|
)%
|
|||||||||
|
Total
revenue
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
35.3
|
%
|
4.8
|
%
|
|||||||||
|
Cost
of sales
|
35.2
|
%
|
51.1
|
%
|
60.4
|
%
|
(6.9
|
)%
|
(11.3
|
)%
|
|||||||||
|
Gross
profit
|
64.8
|
%
|
48.9
|
%
|
39.6
|
%
|
79.3
|
%
|
29.3
|
%
|
|||||||||
|
Total
expenses
|
25.1
|
%
|
28.6
|
%
|
28.1
|
%
|
18.6
|
%
|
6.7
|
%
|
|||||||||
|
Income
from operations
|
39.8
|
%
|
20.3
|
%
|
11.5
|
%
|
164.9
|
%
|
83.9
|
%
|
|||||||||
|
Net
interest and other income
|
3.9
|
%
|
3.0
|
%
|
2.4
|
%
|
74.8
|
%
|
33.9
|
%
|
|||||||||
|
Income
before taxes
|
43.7
|
%
|
23.3
|
%
|
13.9
|
%
|
153.2
|
%
|
75.4
|
%
|
|||||||||
|
Income
tax provision (benefit)
|
14.7
|
%
|
8.5
|
%
|
(1.2
|
)%
|
|||||||||||||
|
Net
income
|
29.0
|
%
|
14.8
|
%
|
15.1
|
%
|
165.9
|
%
|
2.2
|
%
|
|||||||||
17
Total
revenue for fiscal 2007 increased 35% to $16,460,830
compared to $12,170,526
in fiscal 2006, and increased 5% for fiscal 2006 compared to
$11,615,570 in
fiscal 2005. The increases in both fiscal years were due to
increases in product
sales partially offset by decreases in research and development
revenue.
Product
sales increased 73% to $14,425,632 in fiscal 2007 from $8,345,967
in fiscal
2006. Fiscal 2006 product sales increased 51% from $5,522,250
in fiscal 2005.
The increases in both years were due to increased sales of
both spintronic
sensors and spintronic couplers.
Contract
research and development revenue decreased 47% for fiscal 2007
compared to
fiscal 2006, and decreased 37% for fiscal 2006 compared to
fiscal 2005. Both
decreases were due to shifts to company-funded research from
contract-funded
research and decreases in U.S. Government contract awards to
us.
Gross
profit margin increased to 65% of revenue for fiscal 2007 compared
to 49% for
fiscal 2006 and 40% for fiscal 2005. 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. Increased
gross profit
margin in fiscal 2006 from fiscal 2005 was due to a more profitable
revenue mix
consisting of a higher percentage of product sales and higher
product margins
due primarily to lower-cost coupler designs.
Research
and development expense increased 26%
for
fiscal 2007 compared to fiscal 2006 and 24% for fiscal 2006
compared to fiscal
2005. The increases in both years were due to efforts to develop
new and
improved products and a shift to company-funded research from
contract-funded
research. Company-funded research and development programs
included new
spintronic sensor and spintronic coupler products.
Selling,
general, and administrative expense for fiscal 2007 increased
11% to $1,950,999
compared to $1,756,142 for fiscal 2006. The increase was primarily
due to
$136,370 in non-cash effects of stock-based compensation under
SFAS
No. 123(R), expenses related to preparation for a Sarbanes-Oxley
Act
Section 404 controls-based audit, and increased legal expenses. Increased
legal expenses were primarily related to class-action lawsuits.
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 initial
election or
reelection at our Annual Meeting of Shareholders in August
2006. Selling,
general, and administrative expense for fiscal 2006 decreased
6% from fiscal
2005 due to a strategic shift to distributors selling our products
rather than
manufacturers’ representatives. This shift reduced commissions we paid and
expenses associated with supporting manufacturers’ representatives.
Interest
income net of interest expense plus other income increased
75% to $646,234 for
fiscal 2007 compared to $369,753 for
fiscal 2006 and
34%
for fiscal 2006 compared to $276,073 for fiscal 2005. Both
yearly increases were
due to increases in interest-bearing marketable securities,
increases in
interest rates, and decreases in interest expense due to the
reduction and then
elimination of our debt.
Income
before taxes increased 153% for fiscal 2007 compared to fiscal
2006 and 75% for
fiscal 2006 compared to fiscal 2005. Both increases were primarily
due to
increases in product revenue and gross profit margin.
The
effective income tax rate in fiscal 2007 declined to 34% of
income before taxes
from 37% in fiscal 2006 due to our assessment that it was more
likely than not
that we would realize certain tax credits. Provisions for income
tax for fiscal
2007 and 2006 were due to the exhaustion of our net operating
losses during
fiscal 2005, although we did not pay significant cash taxes
for fiscal 2007 and
2006 because of stock-based compensation deductions. The income
tax benefit for
fiscal 2005 was from the reduction of our valuation allowances
relating to
deferred tax assets for tax return purposes.
The
156% increase in net income in fiscal 2007 compared to fiscal
2006 was due to an
increase in income before taxes. The 2% increase in fiscal
2006 compared to
fiscal 2005 was due to an increase in income before taxes,
partially offset by a
provision for income tax in fiscal 2006 rather than an income
tax benefit in
fiscal 2005.
The
increase in weighted-average diluted shares for fiscal 2007
compared to fiscal
2006 was primarily due to a higher share price at March 31, 2007 compared
to March 31, 2006, which increased the dilutive effect of options. The
decrease in weighted-average diluted shares for fiscal 2006
compared to fiscal
2005 was due to the expiration of a warrant issued to Cypress
Semiconductor
Corporation for the purchase of up to 400,000 shares of our
Common Stock,
partially offset by an increase in shares from stock options
issued and
exercised.
18
Our
primary sources of working capital for fiscal years 2005 through
2007 were
product sales and research and development contract revenue.
At March 31,
2007 we had $18,289,191
in cash plus short-term and long-term marketable securities
compared to
$10,891,326 at March 31, 2006. The increase in cash and marketable
securities was primarily due to cash generated by operations
in fiscal
2007.
Capital
expenditures were $321,997 in fiscal 2007, $74,110 in fiscal
2006, and $846,281
in fiscal 2005. Capital expenditures in fiscal 2007 were primarily
for equipment
to increase our capabilities for processing and testing very
small components
that we sell as our product mix moves toward such smaller products.
The larger
expenditure in fiscal 2005 was primarily to improve manufacturing
efficiency,
increase manufacturing
capacity,
and
provide redundancy for critical production equipment.
Commitments
for capital expenditures were approximately $142,082 as of
March 31, 2007.
Such commitments are primarily for production equipment to
allow us to make
smaller products, increase manufacturing capacity, and provide
redundancy for
critical production equipment. We expect to meet such commitments
from cash,
marketable securities, or cash generated from operations.
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
|
$
|
398,250
|
$
|
225,807
|
$
|
172,443
|
$
|
-
|
$
|
-
|
||||||
|
Purchase
Obligations
|
$
|
142,082
|
142,082
|
-
|
-
|
-
|
||||||||||
|
Total
|
$
|
540,332
|
$
|
367,889
|
$
|
172,443
|
$
|
-
|
$
|
-
|
||||||
We
believe our working capital and cash generated from operations
will be adequate
for our needs at least through fiscal 2008.
In
fiscal
2008 we plan to continue our existing business strategy, including
developing
new sensors, couplers, and MRAM technology. We expect contract
research and development revenue to continue to decrease as
a percentage of
total revenue in fiscal 2008 as product sales increase and
our emphasis
continues to shift to company-funded from contract-funded research.
We
may
exhaust our tax credits and stock-based compensation tax deductions
in fiscal
2008. We would then accrue obligations to pay cash taxes. For
more information
see “Note 6 - Income Taxes” of the Financial Statements included
elsewhere in this Report.
We
currently expect capital expenditures to increase in fiscal
2008 compared to
fiscal 2007, as we increase our product manufacturing capacity
and add
capabilities to make smaller products. 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.
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
have
no off-balance sheet arrangements.
The
primary objective of our investment activities is to preserve
principal while at
the same time maximizing 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 and
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 (loss), net of estimated tax. Our marketable
securities as
of March 31, 2007 had remaining maturities between seven and
59 months. Marketable securities had a market value of $17,891,768
at
March 31, 2007, representing approximately 72% of our total assets.
We have
not used derivative financial instruments in our investment
portfolio.
19
Financial
statements and accompanying notes are in this Report beginning
on page F-1.
Selected quarterly financial data for fiscal 2007 and 2006,
presented as
supplementary financial information, are as follows:
|
|
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
|
|||||||||||||
|
Research
and development
|
534,967
|
544,779
|
566,246
|
530,612
|
|||||||||
|
Selling,
general, and administrative
|
529,667
|
479,387
|
535,213
|
406,732
|
|||||||||
|
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
|
|||||
|
|
Unaudited;
Quarter Ended
|
||||||||||||
|
|
March
31, 2006
|
Dec.
31, 2005
|
Sept.
30, 2005
|
June
30, 2005
|
|||||||||
|
Revenue
|
|||||||||||||
|
Product
sales
|
$
|
2,797,882
|
$
|
1,742,163
|
$
|
2,021,672
|
$
|
1,784,250
|
|||||
|
Contract
research and development
|
684,892
|
868,119
|
1,030,250
|
1,241,298
|
|||||||||
|
Total
revenue
|
3,482,774
|
2,610,282
|
3,051,922
|
3,025,548
|
|||||||||
|
Cost
of sales
|
1,600,990
|
1,308,752
|
1,627,673
|
1,681,118
|
|||||||||
|
Gross
profit
|
1,881,784
|
1,301,530
|
1,424,249
|
1,344,430
|
|||||||||
|
Expenses
|
|||||||||||||
|
Research
and development
|
487,470
|
342,616
|
517,939
|
376,800
|
|||||||||
|
Selling,
general, and administrative
|
517,385
|
434,183
|
394,980
|
409,594
|
|||||||||
|
Total
expenses
|
1,004,855
|
776,799
|
912,919
|
786,394
|
|||||||||
|
Income
from operations
|
876,929
|
524,731
|
511,330
|
558,036
|
|||||||||
|
Income
before taxes
|
978,493
|
614,664
|
592,505
|
655,117
|
|||||||||
|
Net
income
|
$
|
619,744
|
$
|
401,385
|
$
|
363,968
|
$
|
412,649
|
|||||
|
Net
income per share – diluted
|
$
|
0.13
|
$
|
0.09
|
$
|
0.08
|
$
|
0.09
|
|||||
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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
SEC’s 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, 2007, our disclosure
controls and procedures were effective.
20
Management’s
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. Under the supervision and with
the participation of
management, including our Chief Executive Officer and Chief
Financial Officer,
we conducted an assessment of the effectiveness of our
internal control over
financial reporting as of
March 31, 2007. 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,
2007.
The
attestation report concerning management’s assessment of the effectiveness of
our internal control over financial reporting as of March 31, 2007, issued
by Ernst & Young, LLP, Independent Registered Public Accounting Firm,
appears in this Report.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial
reporting during the
fourth quarter of fiscal 2007 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 2007 Annual
Meeting of
Shareholders is
incorporated by reference in this section.
Directors
and Executive Officers
Each
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 Directors”
to
be
included in our Proxy Statement for our 2007 Annual Meeting
of Shareholders sets
forth certain information regarding our directors required
by Item 10, and
the section titled “Executive Compensation -
Executive
Officers of the Company” sets forth information regarding our executive officers
required by Item 10. Both sections are incorporated by
reference in 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 “Corporate Governance - Audit
Committee” to be included in our Proxy Statement for our 2007 Annual
Meeting of
Shareholders is
incorporated by reference in 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
Web site within four business days following the date of
such amendment or
waiver.
The
discussion under the section titled “Corporate Governance - Code of Ethics”
to be included in our Proxy Statement for our 2007 Annual
Meeting of
Shareholders is incorporated by reference in this section.
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 2007 Annual Meeting of Shareholders
is
incorporated by reference in this section.
21
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 2007 Annual Meeting
of Shareholders
is
incorporated by reference in 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
2007 Annual Meeting of
Shareholders in the section titled “Security Ownership” is incorporated by
reference in this section.
The
following table summarizes Common Stock that may be issued
as of March 31,
2007 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
|
311,700
|
|
$15.18
|
186,230
|
||||||
|
Equity
compensation plans not
|
||||||||||
|
approved
by security holders
|
-
|
-
|
-
|
|||||||
|
Total
at March 31, 2007
|
311,700
|
|
$15.18
|
186,230
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.
The
information to be included in our Proxy Statement for our
2007 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 in this section.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES.
The
information to be included in our Proxy Statement for our
2007 Annual Meeting of
Shareholders in the sections titled “Audit
Committee Disclosure - Fees Billed to Us by Ernst & Young During
Fiscal 2007 and 2006” and “Audit
Committee Disclosure - Audit Committee Pre-Approval Policy”
is
incorporated by reference in this section.
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
22
(b)
Exhibits
Exhibit
#
Description
|
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
|
By-laws
of the company as amended by the Board of Directors,
May 31, 2002
(incorporated by reference to our Annual Report
on Form 10-KSB for the
year ended March 31, 2002).
|
|
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*
|
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).
|
|
10.7*
|
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).
|
|
10.8+
|
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).
|
|
10.9
|
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).
|
|
10.10
|
Notification
from Agilent Technologies of planned sale of
Agilent’s Semiconductor
Product Group (incorporated by reference to our
Current Report on Form 8-K
filed October 19, 2005).
|
|
10.11
|
Report
of completion of the divestiture of Agilent’s Semiconductor Products
business (incorporated by reference to our Current
Report on Form 8-K/A
filed December 6, 2005).
|
|
10.12*
|
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).
|
|
10.13
|
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).
|
|
10.14
|
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).
|
|
10.15+
|
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).
|
|
10.16*
|
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
treatment has been requested with respect to
portions of this exhibit, and
such confidential portions have been deleted
and separately filed with the
SEC 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.
23
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
25,
2007
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
25, 2007
|
|
/s/
Daniel A. Baker
Daniel
A. Baker
|
Director,
President
& Chief Executive Officer
(Principal
Executive Officer)
|
May
25, 2007
|
|
/s/
Curt A. Reynders
Curt
A. Reynders
|
Treasurer
and
Chief
Financial Officer
(Principal
Financial and
Accounting
Officer)
|
May
25, 2007
|
|
/s/
James D. Hartman
James
D. Hartman
|
Director
|
May
25, 2007
|
|
/s/
Patricia M. Hollister
Patricia
M. Hollister
|
Director
|
May
25, 2007
|
|
/s/
Robert H. Irish
Robert
H. Irish
|
Director
|
May
25, 2007
|
24
NVE
CORPORATION
INDEX
TO
F-1
Board
of
Directors and Shareholders of NVE Corporation
We
have
audited the accompanying balance sheets of NVE Corporation
as of March 31,
2007 and 2006, and the related statements of income, shareholders’ equity, and
cash flows for each of the three years in the period ended
March 31, 2007.
These financial statements are the responsibility of the
Company’s 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,
2007 and 2006, and the results of its operations and its
cash flows for each of
the three years in the period ended March 31, 2007, 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.
We
also
have audited, in accordance with the standards of the Public
Company Accounting
Oversight Board (United States), the effectiveness of NVE
Corporation’s internal
control over financial reporting as of March 31, 2007, based on criteria
established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our
report dated April 28, 2007 expressed an unqualified opinion
thereon.
/s/
Ernst
& Young LLP
Minneapolis,
Minnesota
April
28,
2007
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Shareholders of NVE Corporation
We
have
audited management’s assessment, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting
in Item 9A, that
NVE Corporation maintained effective internal control over
financial reporting
as of March 31, 2007, based on criteria established in Internal Control
-
Integrated Framework issued by the Committee of Sponsoring
Organizations of the
Treadway Commission (the COSO criteria). NVE Corporation’s management is
responsible for maintaining effective internal control
over financial reporting
and for its assessment of the effectiveness of internal
control over financial
reporting. Our responsibility is to express an opinion
on management’s
assessment and an opinion on the effectiveness of the company’s 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, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control,
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
company’s 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 company’s 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 company’s 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, management’s assessment that NVE Corporation maintained effective
internal control over financial reporting as of March 31, 2007, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our
opinion, NVE Corporation maintained, in all material respects,
effective
internal control over financial reporting as of March 31, 2007, 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, 2007 and 2006, and the related statements of income,
shareholders’ equity, and cash flows for each of the three years in the
period
ended March 31, 2007 and our report dated April 28, 2007 expressed
an
unqualified opinion thereon.
/s/
Ernst
& Young LLP
Minneapolis,
Minnesota
April
28,
2007
|
|
March
31
|
||||||
|
2007
|
2006
|
||||||
|
ASSETS
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
397,423
|
$
|
1,288,362
|
|||
|
Marketable
securities
|
982,415
|
1,248,103
|
|||||
|
Accounts
receivable, net of allowance for
|
|||||||
|
uncollectible
accounts of $15,000
|
2,005,005
|
1,667,029
|
|||||
|
Inventories
|
2,016,858
|
2,149,769
|
|||||
|
Deferred
tax assets
|
1,328,106
|
1,576,472
|
|||||
|
Prepaid
expenses and other assets
|
333,587
|
231,412
|
|||||
|
Total
current assets
|
7,063,394
|
8,161,147
|
|||||
|
Fixed
assets
|
|||||||
|
Machinery
and equipment
|
4,458,948
|
4,149,080
|
|||||
|
Leasehold
improvements
|
413,482
|
413,482
|
|||||
|
4,872,430
|
4,562,562
|
||||||
|
Less
accumulated depreciation
|
3,834,683
|
3,319,651
|
|||||
|
Net
fixed assets
|
1,037,747
|
1,242,911
|
|||||
|
Marketable
securities, long term
|
16,909,353
|
8,354,861
|
|||||
|
Total
assets
|
$
|
25,010,494
|
$
|
17,758,919
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$
|
502,595
|
$
|
399,762
|
|||
|
Accrued
payroll and other
|
590,287
|
470,392
|
|||||
|
Deferred
revenue
|
29,357
|
77,373
|
|||||
|
Capital
lease obligations
|
-
|
33,281
|
|||||
|
Total
current liabilities
|
1,122,239
|
980,808
|
|||||
|
Shareholders’
equity
|
|||||||
|
Common
stock
|
46,274
|
46,150
|
|||||
|
Additional
paid-in capital
|
18,289,248
|
16,042,637
|
|||||
|
Accumulated
other comprehensive loss
|
(84,282
|
)
|
(166,908
|
)
|
|||
|
Retained
earnings
|
5,637,015
|
856,232
|
|||||
|
Total
shareholders’ equity
|
23,888,255
|
16,778,111
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
25,010,494
|
$
|
17,758,919
|
|||
See
accompanying notes.
F-4
|
|
Year
Ended March 31
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenue
|
||||||||||
|
Product
sales
|
$
|
14,425,632
|
$
|
8,345,967
|
$
|
5,522,250
|
||||
|
Contract
research and development
|
2,035,198
|
3,824,559
|
6,093,320
|
|||||||
|
Total
revenue
|
16,460,830
|
12,170,526
|
11,615,570
|
|||||||
|
Cost
of sales
|
5,787,658
|
6,218,533
|
7,010,734
|
|||||||
|
Gross
profit
|
10,673,172
|
5,951,993
|
4,604,836
|
|||||||
|
Expenses
|
||||||||||
|
Research
and development
|
2,176,604
|
1,724,825
|
1,393,503
|
|||||||
|
Selling,
general, and administrative
|
1,950,999
|
1,756,142
|
1,867,556
|
|||||||
|
Total
expenses
|
4,127,603
|
3,480,967
|
3,261,059
|
|||||||
|
Income
from operations
|
6,545,569
|
2,471,026
|
1,343,777
|
|||||||
|
Interest
income
|
621,577
|
332,784
|
235,341
|
|||||||
|
Interest
expense
|
(589
|
)
|
(6,051
|
)
|
(13,256
|
)
|
||||
|
Other
income
|
25,246
|
43,020
|
53,988
|
|||||||
|
Income
before taxes
|
7,191,803
|
2,840,779
|
1,619,850
|
|||||||
|
Provision
(benefit) for income taxes
|
2,411,020
|
1,043,033
|
(138,404
|
)
|
||||||
|
Net
income
|
$
|
4,780,783
|
$
|
1,797,746
|
$
|
1,758,254
|
||||
|
Net
income per share – basic
|
$
|
1.03
|
$
|
0.39
|
$
|
0.39
|
||||
|
Net
income per share – diluted
|
$
|
1.00
|
$
|
0.39
|
$
|
0.37
|
||||
|
Weighted
average shares outstanding
|
||||||||||
|
Basic
|
4,620,371
|
4,580,684
|
4,512,247
|
|||||||
|
Diluted
|
4,771,297
|
4,667,994
|
4,733,955
|
|||||||
See
accompanying notes.
F-5
|
|
Accumulated
Other
|
||||||||||||||||||
|
|
Additional
|
Comprehen-
|
Retained
|
||||||||||||||||
|
|
|
|
Common
Stock
|
Paid-In
|
sive
Income
|
Earnings
|
|||||||||||||
|
|
Shares |
Amount
|
Capital
|
(Loss)
|
|
(Deficit)
|
|
Total
|
|||||||||||
|
Balance
at March 31, 2004
|
4,488,895
|
$
|
44,889
|
$
|
13,297,753
|
$
|
90,370
|
$
|
(2,699,768
|
)
|
$
|
10,733,244
|
|||||||
|
Exercise
of stock
|
|||||||||||||||||||
|
options
and warrants
|
73,880
|
739
|
221,869
|
-
|
-
|
222,608
|
|||||||||||||
|
Shares
issued pursuant
|
|||||||||||||||||||
|
to
employee stock
|
|||||||||||||||||||
|
purchase
plan
|
7,009
|
70
|
165,833
|
-
|
-
|
165,903
|
|||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||
|
Unrealized
loss on
|
|||||||||||||||||||
|
investment
securities
|
-
|
-
|
-
|
(222,598
|
)
|
(222,598
|
)
|
||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
1,758,254
|
1,758,254
|
|||||||||||||
|
Total
comprehensive
|
|||||||||||||||||||
|
income
|
1,535,656
|
||||||||||||||||||
|
Deferred
tax asset
|
|||||||||||||||||||
|
from
stock-based
|
|||||||||||||||||||
|
compensation
|
379,170
|
379,170
|
|||||||||||||||||
|
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
|
|||||||||||||||||||
|
investment
securities
|
-
|
-
|
-
|
(34,680
|
)
|
(34,680
|
)
|
||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
1,797,746
|
1,797,746
|
|||||||||||||
|
Total
comprehensive
|
|||||||||||||||||||
|
income
|
1,763,066
|
||||||||||||||||||
|
Deferred
tax asset
|
|||||||||||||||||||
|
from
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
|
|||||||||||||||||||
|
investment
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
|
|||||||||||||||||
|
Deferred
tax asset
|
|||||||||||||||||||
|
from
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
|
|||||||
See
accompanying notes.
F-6
|
|
Year
Ended March 31
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
OPERATING
ACTIVITIES
|
||||||||||
|
Net
income
|
$
|
4,780,783
|
$
|
1,797,746
|
$
|
1,758,254
|
||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||
|
provided
by operating activities:
|
||||||||||
|
Depreciation
and amortization
|
530,050
|
569,886
|
573,443
|
|||||||
|
Gain
on sale of fixed assets
|
-
|
(24,581
|
)
|
-
|
||||||
|
Stock
based compensation
|
136,370
|
-
|
-
|
|||||||
|
Excess
tax benefits
|
(2,083,886
|
)
|
-
|
-
|
||||||
|
Deferred
income taxes
|
2,289,687
|
990,083
|
(126,904
|
)
|
||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Accounts
receivable
|
(337,976
|
)
|
618,443
|
(545,993
|
)
|
|||||
|
Inventories
|
132,911
|
(577,010
|
)
|
(422,905
|
)
|
|||||
|
Prepaid
expenses and other
|
(102,175
|
)
|
(100,539
|
)
|
165,664
|
|||||
|
Accounts
payable and accrued expenses
|
222,728
|
84,797
|
(253,759
|
)
|
||||||
|
Deferred
revenue
|
(48,016
|
)
|
(189,982
|
)
|
(156,821
|
)
|
||||
|
Net
cash provided by operating activities
|
5,520,476
|
3,168,843
|
990,979
|
|||||||
|
INVESTING
ACTIVITIES
|
||||||||||
|
Proceeds
from the sale of fixed assets
|
-
|
25,500
|
-
|
|||||||
|
Purchases
of fixed assets
|
(321,997
|
)
|
(74,110
|
)
|
(846,281
|
)
|
||||
|
Maturities
of marketable securities
|
1,340,019
|
-
|
-
|
|||||||
|
Purchases
of marketable securities
|
(9,506,521
|
)
|
(3,258,612
|
)
|
(226,320
|
)
|
||||
|
Net
cash used in investing activities
|
(8,488,499
|
)
|
(3,307,222
|
)
|
(1,072,601
|
)
|
||||
|
FINANCING
ACTIVITIES
|
||||||||||
|
Net
proceeds from sale of common stock
|
26,479
|
253,966
|
388,511
|
|||||||
|
Excess
tax benefits
|
2,083,886
|
-
|
-
|
|||||||
|
Repayment
of note payable and capital
|
||||||||||
|
lease
obligations
|
(33,281
|
)
|
(67,430
|
)
|
(122,480
|
)
|
||||
|
Net
cash provided by financing activities
|
2,077,084
|
186,536
|
266,031
|
|||||||
|
(Decrease)
increase in cash and cash equivalents
|
(890,939
|
)
|
48,157
|
184,409
|
||||||
|
Cash
and cash equivalents at beginning of year
|
1,288,362
|
1,240,205
|
1,055,796
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
397,423
|
$
|
1,288,362
|
$
|
1,240,205
|
||||
|
|
||||||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||
|
Cash
paid (refunded) during the year for:
|
||||||||||
|
Interest
|
$
|
589
|
$
|
6,051
|
$
|
13,256
|
||||
|
Income
taxes
|
$
|
44,300
|
$
|
52,950
|
$
|
(11,500
|
)
|
|||
See
accompanying notes.
F-7
NOTES
TO FINANCIAL STATEMENTS
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 debt and equity 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 marketable
securities;
securities with remaining maturities greater than one
year are classified as
marketable securities, long-term. Securities not due
at a single maturity date,
such as mortgage-backed securities, 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.”
Concentration
of Credit Risk
We
invest
our excess cash in U.S. Government agency securities,
high-grade
corporate-backed notes and bonds , investment grade commercial
paper, and other
money market instruments and have established guidelines
relative to
diversification and maturities in an effort to maintain
safety and liquidity.
These guidelines are periodically reviewed to take advantage
of trends in yields
and interest rates. We have not experienced any significant
losses on our cash,
cash equivalents, or marketable securities. 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. Charges and
provisions to our allowance for doubtful accounts were
nil for fiscal 2007, $157
for fiscal 2006, and $430 for fiscal 2005.
Inventories
Inventories
are stated at the lower of cost or market determined
by the first in, first out
method, or net realizable value. We record reserves for
potentially excess,
obsolete and slow-moving inventory. The amounts of these
reserves are based on
expected product lives, competitive conditions, industry
conditions, and
forecasted sales demand.
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 SEC Staff
Accounting Bulletin (SAB)
No. 101, Revenue
Recognition in Financial Statements,
as
amended by SAB No. 104 and codified in SAB Topic 13, Revenue
Recognition.
F-8
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 costs were $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 with Agilent Technologies, Inc. to distribute
our couplers under
its brand, Agilent provided a refundable prepayment of
$500,000. The prepayment
was fully satisfied during fiscal 2007. In accordance
with SAB No. 101 and
SAB Topic 13A as amended by SAB No. 104, we classified the 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,
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.
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: (a) we receive
an identifiable benefit in exchange for the consideration
and the identifiable
benefit is sufficiently separable from the customer’s purchase of our products
such that we could have purchased the products or services
from a third party;
and (b) 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.
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 on the basis of our cost in performing
the contract. We apply the
percentage-of-completion method to these contracts for
revenue
recognition.
F-9
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 more likely than not
that we will not 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 account for
stock-based
compensation in accordance with, Financial Accounting
Standards Board (FASB)
Statement of Financial Accounting Standards (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), under which 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 Common Share
We
calculate our net income per share pursuant to SFAS No. 128, Earnings
per Share.
Basic
earnings per share are computed based upon 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). Stock options
totaling 46,000 and
stock warrants totaling 2,000 were not included in the
computation of diluted
earnings per share because the exercise prices of the
options and warrants were
greater than the market price of the common stock. The
following table reflects
the components of common shares outstanding in accordance
with SFAS
No. 128:
|
|
Year
Ended March 31
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Weighted
average common shares outstanding – basic
|
4,620,371
|
4,580,684
|
4,512,247
|
|||||||
|
Effect
of dilutive securities:
|
||||||||||
|
Stock
options
|
146,154
|
81,927
|
130,178
|
|||||||
|
Warrants
|
4,772
|
5,383
|
91,530
|
|||||||
|
Shares
used in computing net income per common share
– diluted
|
4,771,297
|
4,667,994
|
4,733,955
|
|||||||
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.
Recent
Accounting Pronouncements
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.
SFAS
No. 159 is effective for us as of the beginning of fiscal
2009. Early
adoption is permitted beginning in our fiscal 2007.
We currently do not expect
the adoption of SFAS No. 159 to have a material impact our financial
statements.
In
July 2006 the
FASB
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. We are required to adopt the
provisions of FIN 48 in
fiscal 2008. We are currently evaluating the effects,
if any, that FIN 48
may have on our financial statements.
F-10
NOTE
3. MARKETABLE SECURITIES
As
of
March 31, 2007 and 2006 our marketable
securities
were as follows:
|
|
Adjusted
|
Gross
Unrealized
|
Gross
Unrealized
|
Fair
Market
|
|||||||||
|
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||
|
As
of March 31, 2007
|
|||||||||||||
|
U.S.
Treasury and 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
|
||||
|
As
of March 31, 2006
|
|||||||||||||
|
U.S.
Treasury and agency securities
|
$
|
7,907,880
|
$
|
-
|
$
|
(201,660
|
)
|
$
|
7,706,220
|
||||
|
Corporate
notes and bonds
|
1,947,975
|
$
|
-
|
(51,231
|
)
|
1,896,744
|
|||||||
|
Total
marketable securities
|
$
|
9,855,855
|
$
|
-
|
$
|
(252,891
|
)
|
$
|
9,602,964
|
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, 2007 were as follows:
|
Estimated
Fair Market Value of Investment Securities
as of March 31, 2007, Maturing
in:
|
|||||||||||||
|
Total
|
<1
Year
|
1-2
Years
|
2-3
Years
|
>3
Years
|
|||||||||
|
$
17,891,768
|
$
|
982,415
|
$
|
3,533,270
|
$
|
983,200
|
$
|
12,392,883
|
|||||
In
accordance with our policy, we reviewed our investment
portfolio for declines
that may be other than temporary, and we have determined
that no write-downs
were required on available-for-sale securities
during fiscal 2007, 2006, or
2005.
NOTE 4.
INVENTORIES
Inventories
consisted of the following:
|
|
March
31
|
||||||
|
2007
|
2006
|
||||||
|
Raw
materials
|
$
|
862,440
|
$
|
703,407
|
|||
|
Work-in-process
|
811,261
|
740,578
|
|||||
|
Finished
goods
|
583,157
|
850,784
|
|||||
|
2,256,858
|
2,294,769
|
||||||
|
Less
obsolescence reserve
|
(240,000
|
)
|
(145,000
|
)
|
|||
|
Total
inventories
|
$
|
2,016,858
|
$
|
2,149,769
|
|||
NOTE
5. STOCK-BASED COMPENSATION
On
April 1, 2006 we adopted SFAS 123(R), which requires the measurement
and recognition of compensation expense for all
share-based payment awards made
to employees and directors. The awards include
employee stock options,
restricted stock units and restricted stock awards,
based on estimated fair
values. SFAS 123(R) supersedes APB 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 our fiscal year 2007. Our Financial
Statements as of and for the
fiscal year ended March 1, 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 2007
are not directly
comparable to the 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.
F-11
On
March 28, 2005, in anticipation of the impact of
SFAS No. 123(R), the
Compensation Committee of our Board of Directors
approved an immediate and full
acceleration of vesting of all stock options
outstanding under our Stock Option
Plan with an exercise price greater than $20
per share. As a result of the
acceleration, out-of-the-money options to purchase
42,125 shares of our Common
Stock became immediately exercisable as of
March 28,
2005.
On
January 1, 2006 we terminated our Employee Stock Purchase
Plan in
anticipation of SFAS No. 123(R), which we believed would have required
recognizing expenses under SFAS No. 123(R) associated with the issuance of
shares.
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
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Risk-free
interest rate
|
4.9
|
%
|
3.9
|
%
|
4.1
|
%
|
||||
|
Expected
volatility
|
81
|
%
|
85
|
%
|
99
|
%
|
||||
|
Expected
life (years)
|
6.5
|
10
|
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.
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
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
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, 2007
|
|||
|
Effect
of SFAS No. 123(R) on net income
|
$
|
(136,370
|
)
|
|
|
Effect
of SFAS No. 123(R) on net income
per share:
|
||||
|
Basic
|
$
|
(0.03
|
)
|
|
|
Diluted
|
$
|
(0.03
|
)
|
|
F-12
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 and 2005 if we
had applied the fair value recognition provisions
of SFAS No. 123 to our
stock-based employee compensation:
|
|
Year
Ended March 31
|
||||||
|
2006
|
2005
|
||||||
|
Net
income:
|
|||||||
|
As
reported
|
$
|
1,797,746
|
$
|
1,758,254
|
|||
|
Pro
forma adjustment for stock options
|
(478,549
|
)
|
(2,744,836
|
)
|
|||
|
Pro
forma net (loss) income
|
$
|
1,319,197
|
$
|
(986,582
|
)
|
||
|
Net
income per share:
|
|||||||
|
Basic
– as reported
|
$
|
0.39
|
$
|
0.39
|
|||
|
Basic
– pro forma
|
$
|
0.29
|
$
|
(0.22
|
)
|
||
|
Diluted
– as reported
|
$
|
0.39
|
$
|
0.37
|
|||
|
Diluted
– pro forma
|
$
|
0.28
|
$
|
(0.21
|
)
|
||
Tax
effects of stock-based compensation
Stock-based
compensation increased deferred taxes for
fiscal 2007 by
$46,082.
General
stock option information
A
summary
of the status of our nonvested shares at
March 31, 2007 and changes during
fiscal 2007 is presented below:
|
Nonvested
Shares
|
Shares
|
|
Weighted
Average Grant-Date Fair Value
|
|||||||
|
Nonvested
at March 31, 2006
|
3,500
|
$
|
6.05
|
|||||||
|
Granted
|
12,000
|
$
|
20.12
|
|||||||
|
Vested
|
(9,250
|
)
|
$
|
17.46
|
||||||
|
Forfeited
|
-
|
$
|
-
|
|||||||
|
Nonvested
at March 31, 2007
|
6,250
|
$
|
16.18
|
The
following table summarizes information
about options outstanding and options
exercisable at March 31, 2007:
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|||||||||||||
|
|
Weighted
|
|||||||||||||||
|
|
Weighted
|
Remaining
|
Weighted
|
|||||||||||||
|
|
Average
|
Contractual
|
Average
|
|||||||||||||
|
Ranges
of
|
Number
|
Exercise
|
Life
|
Number
|
Exercise
|
|||||||||||
|
Exercise
Prices
|
Outstanding
|
Price
|
(years)
|
|
Outstanding
|
Price
|
||||||||||
|
$
0.86 - 10.00
|
95,950
|
$
|
6.25
|
3.7
|
94,200
|
$
|
6.25
|
|||||||||
|
10.01
- 20.12
|
165,750
|
15.53
|
7.6
|
161,250
|
15.40
|
|||||||||||
|
21.99
- 58.27
|
50,000
|
31.16
|
7.1
|
50,000
|
31.16
|
|||||||||||
|
311,700
|
$
|
15.18
|
6.3
|
305,450
|
$
|
15.16
|
||||||||||
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.
F-13
|
|
|
Weighted
Average
|
|
Weighted
Average
|
||||||||||||||||||
|
|
Option
|
|
|
Option
Exercise
|
|
|
Warrant
Exercise
|
|||||||||||||||
|
Shares
Reserved
|
Options Outstanding |
|
Price
per Share
|
Warrants Outstanding |
Price
per Share
|
|||||||||||||||||
|
Balance
at March 31, 2004
|
361,530
|
261,430
|
$
|
5.99
|
411,889
|
$
|
14.81
|
|||||||||||||||
|
Granted
|
(121,000
|
)
|
121,000
|
$
|
22.30
|
2,000
|
$
|
37.38
|
||||||||||||||
|
Exercised
|
-
|
(73,880
|
)
|
$
|
3.01
|
-
|
$
|
-
|
||||||||||||||
| Terminated |
-
|
-
|
$ |
-
|
- | $ |
-
|
|||||||||||||||
|
Balance
at March 31, 2005
|
240,530
|
308,550
|
$
|
13.10
|
413,889
|
$
|
14.92
|
|||||||||||||||
|
Granted
|
(56,500
|
)
|
56,500
|
$
|
15.48
|
-
|
$
|
0.00
|
||||||||||||||
|
Exercised
|
-
|
(38,720
|
)
|
$
|
4.49
|
-
|
$
|
0.00
|
||||||||||||||
|
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
|
-
|
-
|
$
|
0.00
|
(2,597
|
)
|
$
|
2.86
|
||||||||||||||
|
Balance
at March 31, 2007
|
186,230
|
311,700
|
$
|
15.18
|
10,000
|
$
|
16.28
|
|||||||||||||||
Exercisable
options were outstanding covering
305,450 shares at March 31, 2007; 308,630
shares at March 31, 2006; and 266,858 shares at March 31, 2005 at
weighted-average exercise prices
of $15.16, $14.56, and $14.08 per
share. The
remaining weighted-average exercisable
life was 6.3, 7.1, and 6.5 years.
The
average fair-market value of grants
was $15.18 in fiscal 2007, $15.48
in fiscal
2006, and $19.65 in fiscal 2005.
Exercisable
warrants covering 10,000; 12,597;
and 412,389 shares were outstanding
at
March 31, 2007, 2006, and 2005 at weighted-average
exercise prices of
$16.28, $13.51, and $14.94 per share.
Remaining weighted-average exercisable
life was 5.9, 5.6, and 0.2 years.
The average fair-market value of
warrants
issued was nil in fiscal 2007 and
2006, and $37.38 in fiscal 2005.
The
total intrinsic value of options
exercised during fiscal 2007 was
$399,989. At
March 31, 2007 the total intrinsic value
of options outstanding was
$3,988,157 of which $3,917,695 were
exercisable. The total intrinsic
value at
March 31, 2007 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 $179,160
in fiscal 2007. At March 31, 2007,
there was $54,760 of total unrecognized
stock-based compensation expense,
adjusted for estimated forfeitures,
which is expected to be recognized
over a
weighted-average period of 28 months and will be adjusted for any
future
changes in estimated forfeitures.
NOTE
6. INCOME TAXES
Provision
(benefit) for income tax for fiscal
2005 through 2007 consisted of the
following:
|
|
Year
Ended March 31
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Current
taxes
|
||||||||||
|
Federal
|
$
|
2,338,592
|
$
|
852,969
|
$
|
(13,500
|
)
|
|||
|
State
|
278,309
|
104,531
|
2,000
|
|||||||
|
Deferred
taxes
|
||||||||||
|
Federal
|
(188,476
|
)
|
76,196
|
(126,904
|
)
|
|||||
|
State
|
(17,405
|
)
|
9,337
|
-
|
||||||
|
Income
tax provision (benefit)
|
$
|
2,411,020
|
$
|
1,043,033
|
$
|
(138,404
|
)
|
|||
A
reconciliation of income tax provisions
provided to income tax expense
at the
U.S. statutory rate for fiscal
2005 through 2007
is as
follows:
|
|
Year
Ended March 31
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Tax
expense at U.S. statutory
rate
|
$
|
2,445,214
|
$
|
929,165
|
$
|
550,749
|
||||
|
State
income taxes, net
of Federal benefit
|
179,984
|
113,868
|
40,496
|
|||||||
|
Other
|
(50,311
|
)
|
-
|
(4,231
|
)
|
|||||
|
Benefit
of tax credits
|
(61,302
|
)
|
-
|
(143,374
|
)
|
|||||
|
Change
in valuation allowance
|
(102,565
|
)
|
-
|
(582,044
|
)
|
|||||
|
Income
tax provision (benefit)
|
$
|
2,411,020
|
$
|
1,043,033
|
$
|
(138,404
|
)
|
|||
F-14
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, 2007 and 2006 were as
follows:
|
|
March
31
|
||||||
|
2007
|
2006
|
||||||
|
Deferred
tax assets
|
|||||||
|
Deferred
revenue
|
$
|
10,729
|
$
|
26,307
|
|||
|
Vacation
accrual
|
86,498
|
76,047
|
|||||
|
Inventory
reserve
|
87,711
|
49,300
|
|||||
|
Tax
credits
|
481,534
|
275,376
|
|||||
|
Stock-based
compensation deductions
|
573,524
|
2,866,868
|
|||||
|
Unrealized
loss
|
46,669
|
85,983
|
|||||
|
Other
|
41,441
|
52,439
|
|||||
|
1,328,106
|
3,432,320
|
||||||
|
Valuation
allowance
|
-
|
(1,855,848
|
)
|
||||
|
Net
deferred tax assets
|
$
|
1,328,106
|
$
|
1,576,472
|
|||
We
had tax credits totaling
$481,534 at
March 31, 2007 and
$275,376 at March 31, 2006, which could be
used to offset future taxable
income. Tax
provisions of $2,083,886
for fiscal 2007 and $990,083
for fiscal 2006 were
credited to “Additional paid-in capital.” We also had $1,443,223 at
March 31, 2007, and $8,431,966
at March 31, 2006 in stock-based
compensation deductions that
could be used to offset future
income. Realizations
of stock-based compensation
deductions are credited to
“Additional paid-in
capital.”
During
fiscal 2005 we reversed $595,462
of our valuation allowance
due to the
utilization of net operating
loss carryforwards and tax
credits, and $506,074 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
$756,074 of the remaining
deferred tax assets.
We
began
recognizing tax expenses
for reporting purposes in
fiscal 2006 because under
SFAS No. 109, Accounting
for Income Taxes,
our
stock-based compensation
deductions do not reduce
the provision for income
taxes
reported for book purposes.
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
$1,855,848
of our
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.
Although
there can be no assurance
that we will generate any
specific level of earnings
in fiscal 2008, if our operating
income during fiscal 2008
were similar to our
operating income during comparable
periods of fiscal 2007, we
would exhaust our
existing tax credits and
stock-based compensation
deductions during fiscal
2008.
NOTE 7.
SEGMENT INFORMATION
We
operate in one reportable
segment. In addition to licensing
MRAM technology, we
receive research and development
contracts and we manufacture
and sell two
product lines: sensors to
acquire information and data
couplers to transmit
information.
U.S.
Government Agencies accounted
for approximately
10%
of
our total revenue in fiscal
2007,
22%
in
fiscal
2006,
and
45% in
fiscal 2005. A
second
customer
accounted for approximately
23%
of
total
revenue in fiscal 2007,
18%
in
fiscal 2006,
and
10%
in fiscal 2005.
A
third customer accounted
for approximately 11% of
total revenue in fiscal 2007.
Revenue by geographic region
was as follows:
|
|
Year
Ended March 31
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
United
States
|
$
|
9,901,667
|
$
|
8,254,566
|
$
|
8,783,590
|
||||
|
Europe
|
3,568,014
|
2,160,473
|
1,758,848
|
|||||||
|
Asia
|
2,577,961
|
1,451,903
|
945,429
|
|||||||
|
Other
|
413,188
|
303,584
|
127,703
|
|||||||
|
Total
Revenue
|
$
|
16,460,830
|
$
|
12,170,526
|
$
|
11,615,570
|
||||
F-15
NOTE
8. COMMITMENTS AND CONTINGENCIES
Leases
We
lease
our facility under an operating
lease that expires December 31, 2008. We
pay operating expenses
including maintenance,
utilities, real estate
taxes, and
insurance in addition to
rental payments. We also
lease equipment under
operating leases that expire
September 2009 and with
payments due quarterly.
Total rent expense for
operating leases, including
building and equipment,
was
$207,462 for fiscal 2007,
$215,873 for fiscal 2006,
and $220,070 for fiscal
2005. Our future commitments
under operating leases
total $398,250, of which
$225,807 is due in fiscal
2008, $171,768 in fiscal
2009, and $675 in fiscal
2010. We had no capital
lease obligations as of
March 31, 2007 after
retiring a capital lease
for production equipment
in June 2006. At
March 31, 2006 the payable amount
under that capital lease
was $33,281, the
equipment cost basis was
$310,000, and the accumulated
amortization was
$273,833.
Other
Contingencies
On
February 10, 2006 a lawsuit was
filed against NVE and certain
of its
current and former executive
officers and directors
in the U.S. District Court
for the District of Minnesota
by an individual shareholder
seeking to represent
a class of purchasers of
our common stock during
the period from May 22,
2003 through February 11, 2005. On March 6 and March 7, 2006, two
additional lawsuits were
filed in the same court
by two additional NVE
shareholders, with the
same proposed class period,
purporting to represent
the
same class. These lawsuits
were subsequently consolidated
into a single case and
a consolidated complaint
was filed. The consolidated
complaint generally alleges
that the defendants violated
the Securities Exchange
Act by issuing material
misrepresentations concerning
NVE’s projected revenues and
product technology,
which artificially inflated
the market price of our
common stock. Two related
actions brought by individual
shareholders who seek to
represent NVE
derivatively have been
filed in Hennepin County
District Court. These related
actions were subsequently
consolidated into a single
case and an amended
derivative complaint was
filed. The amended derivative
complaint generally
alleges that certain officers
and directors violated
their fiduciary duties
to
the company. We believe
the lawsuits are wholly
without merit and intend
to
vigorously defend the actions.
We have incurred and expect
to continue to incur
legal expenses related
to these lawsuits. Insurance
may cover portions of legal
expenses and of any judgments.
Based
on
our evaluation of the likelihood
of prevailing we have not
recorded a liability
on our balance sheet. In
addition to these lawsuits,
we are subject to various
litigation matters from
time to time in the normal
course of our business.
We
currently believe that
the ultimate outcome of
these proceedings will
not have a
material adverse affect
on our financial position
or results of operations.
However, because of the
nature and inherent uncertainties
of litigation, should
the outcome of these actions
be unfavorable, our business,
financial position,
and results of operations
could be materially and
adversely
affected.
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.
LICENSE AGREEMENTS
We
have
entered into two separate
license agreements, which
provided for royalties
to us
based upon revenue generated
by the respective parties.
As of March 31,
2007 no royalties had been
recognized under either
agreement.
We
have
acquired rights to another
organization’s GMR-related patents in
exchange for
payment of royalties by
us of 1.5% of the sales
of certain of our products.
Total payments under this
license agreement were
less than $5,000 for each
of
fiscal years 2005 through
2007.
NOTE 11.
TECHNOLOGY EXCHANGE AGREEMENT
In
2002
we executed a technology
exchange agreement accompanied
by an investment by
Cypress Semiconductor Corporation.
Cypress purchased 686,849
shares of our
Common Stock for $6,228,000.
Cypress also received a
warrant for the purchase
of
up to an additional 400,000
shares of Common Stock
at $15 per share, which
expired in April 2005 with no shares exercised.
NOTE 12.
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 years
2005 and 2004 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 $97,674
for fiscal 2007, $93,606
for fiscal 2006, and $81,704
for fiscal 2005.
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. We issued
6,449
shares of Common Stock
under the plan for fiscal
2006 and 7,009 shares for
fiscal 2005. 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.
F-16
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.
|