UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(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, 2003
[ ] 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
(Name of small business issuer in its charter)
Minnesota
(State or other jurisdiction of incorporation or organization)
41-1424202
(I.R.S. Employer Identification No.)
11409 Valley View Road, Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip code)
Issuer's telephone number (952) 829-9217
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common stock,
$0.01 par value ("Common Stock")
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check here if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for the most recent fiscal year: $9,447,490
The aggregate market value of the voting stock (Common Stock) held by non-
affiliates of the Registrant, as of May 16, 2003, was approximately $8,166,498
based on the last sale price reported for such date on The NASDAQ Stock Market.
The number of shares of the Registrant's Common Stock (par value $0.01)
outstanding as of May 16, 2003 was 4,174,778.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of our Proxy Statement for the 2003 Annual Meeting of Stockholders are
incorporated by reference into Items 10, 11, 12 and 13 hereof.
Transitional Small Business Disclosure Format (Check one): Yes[ ]; No [X]
PART I
FORWARD LOOKING STATEMENTS
Certain statements included in this Annual Report on Form 10-KSB and the
documents incorporated by reference, except for the historical information
contained herein, may be "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are subject to the safe harbors created by those
statutes, and further, may contain "forward-looking statements" that are made
in reliance upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project,"
"believe" or similar expressions identify forward-looking statements. Although
we believe that expectations reflected in such forward-looking statements are
based on reasonable assumptions, we can give no assurance that these
expectations will prove to have been correct and actual results may be
different from those described. Future events involve risks and uncertainties
including, among others, such factors as industry economic trends, our
dependence on significant suppliers, including Taiwan Semiconductor
Manufacturing Corporation for foundry semiconductor wafers, our ability to meet
stringent customer technical requirements, our ability to consummate additional
license agreements, competitive threats and the other risks discussed in the
"Risk Factors" section of this report. Some of these risks and uncertainties
are outside the control of management. Readers are cautioned against placing
undue reliance on the forward-looking statements due to these risks and
uncertainties and are cautioned to review the historical information and
statements of risk contained herein.
Item 1. Description of Business.
In General
We develop and sell devices using "spintronics," a technology we helped
pioneer, which utilizes electron spin rather than electron charge to acquire,
store, and transmit information. Our products include magnetic sensors to
acquire ultra-precise data such as the position of a robot arm, and couplers to
transmit data between electronic systems at very high speed. We are also a
licensor of spintronics/magnetic random access memory technology, commonly
referred to as MRAM, which we believe has the potential to revolutionize
electronic memory.
We currently have two commercial product lines based on our spintronics
technology:
1. Sensors to precisely and quickly determine position;
2. Couplers which transmit digital data at high speed.
We believe there are four primary advantages of our devices:
* Bandwidth--Based on a comparison of specifications, our devices are five to
ten times faster than optical couplers. This higher speed maximizes network
productivity.
* Bounds--Our devices can withstand more electrical noise than optical
devices, resulting in longer data transmission range in noisy
environments.
* Bits--More precise (more useful bits) for more productive controls and
robotics.
* Boxes--Unlike optical couplers, our devices can transmit several data
channels with a single one millimeter-scale element. This allows system
miniaturization and cost savings compared to conventional devices.
We were founded in 1989 primarily as a government contract research
company. During the past several years we began licensing our intellectual
property to others, including Union Semiconductor Technology Corporation
(USTC), Honeywell International (Honeywell), Motorola, Inc. (Motorola), and
Cypress Semiconductor Corporation (Cypress). We have also begun selling
commercial products, primarily for factory automation. Our products are sold
throughout the world through a network of manufacturers' representatives and
distributors. We also have an agreement with Agilent Technologies, Inc. to
distribute our couplers under their brand. Our commercial product revenues have
been growing rapidly, allowing us to make a profit in the most recent fiscal
year.
History and Background
Our predecessor, Nonvolatile Electronics, Incorporated, was incorporated
under the laws of the state of Minnesota in 1989 to exploit and continue
development of research completed by our founder, Dr. James M. Daughton, while
employed with Honeywell. Historically, NVE had been a research and development
company funded largely by government contracts.
In November 2000, our shareholders approved our merger with and into
Premis Corporation, a publicly-traded and reporting corporation, with Premis
surviving under the new name NVE Corporation.
We executed a one-for-five reverse split of our common stock to
shareholders of record at the close of business on November 21, 2002, and on
January 22, 2003 our common stock began trading on the NASDAQ Stock Market(r).
Our enabling technology is a quantum-mechanics effect known as
"spintronics." We are pioneers in this field, and have invented and patented
unique, practical designs for devices utilizing the direction spin of electrons
rather than their charge. Because spintronics can represent data with far fewer
electrons than conventional charge-based electronics, our devices are
considerably smaller and faster than conventional microelectronics.
Our products use patented spintronic materials called giant
magnetoresistors, which were discovered in 1988 and developed by NVE under
government research grants. GMR is made from exotic alloys as thin as a few
atoms thick, which because of their unique physics produce a very large
electrical signal (the "giant" in "giant magnetoresistor") when subjected to a
magnetic field. Such sensitivity was previously possible only with super-
cooling. In our products, GMR elements are connected to integrated circuitry
and packaged in much the same way as conventional integrated circuits.
NVE first sold and shipped products using GMR spintronics materials in
1995, and produced what we believe were the first products combining such
materials with integrated circuits in 1998.
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 bandwidth and speed limits of conventional
electronics.
The 1970s brought microelectronic devices including Hall effect sensors
for data acquisition, semiconductor random access memory (commonly referred to
as RAM) for data storage, and light-emitting diode-based opto-couplers for data
transmission. There have been incremental improvements to these devices over
the years, but the basic limitations of charge-based electronics remain.
We believe spintronics represents the first major change in
microelectronic technology since the advent of these devices a generation ago.
Because of their unique properties, our devices for transmitting data have
much higher speed and longer transmission range than conventional devices. That
means more data can be transmitted where it is needed in a factory or over a
general-purpose network such as a DSL-type telephone line. Our technology can
be used to store data at speeds many times faster than hard disks. Unlike most
semiconductor memories which lose data when power is removed, our devices'
technology allows data to be stored permanently at very high speed. Configured
as sensors, our devices acquire information such as the position of a robot arm
or the speed of a motor, faster and more accurately than existing devices. That
can lead to more productive factories producing higher-quality products.
In the near-term, we believe our technology is ideally suited to improving
the productivity of factories, but longer term could enable revolutionary
automotive, broadband, and computer products.
PRODUCTS
Our commercial product portfolio consists of two lines:
1. Sensors to precisely and quickly determine position;
2. Couplers which transmit digital data at high speed.
Sensors
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. Our sensors are quite small and they are very sensitive to
magnetic fields. This combination of attributes allows them to be used in a
variety of industrial control applications such as robotics.
Over the past two years we have concentrated our sensor marketing efforts
on pneumatic cylinder position sensing (CPS) components and assemblies, which
are used in robotics and similar systems. Three of the top four CPS suppliers
are currently integrating our sensors. We announced and are continuing the
development of several new sensor products, including a rotational speed sensor
and sensor interface devices. Contract research and development programs
continue, including advanced sensors and couplers.
Couplers
Our magnetic couplers, which are also known as "isolators" because they
electrically isolate the coupled systems, add an IsoLoop, an 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. Thus IsoLoop magnetic couplers are many times faster than
conventional optical coupling (110 million bits per second, compared to 20
million bits per second for the fastest optical couplers). Optical coupler
speed is limited by the latency of the emitting element, much as an electric
oven element has a "warm-up" time, while our devices, like a microwave oven
magnetron, start up almost immediately.
Our target market is the high-performance end of the coupler market.
Currently most of our couplers are used in factories. For example, couplers are
used to send data such as the position of a robot to a central controller, at
very high speed, which sends instructions back to the robot via a coupler. A
large factory might use thousands of our couplers.
MRAM INTELLECTUAL PROPERTY
Magnetic Random Access Memory (commonly referred to as 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.
The advantages that MRAM has over other solid-state nonvolatile memory
technologies are its ability to write fast (less than 100 billionths of a
second) and indefinitely (competing nonvolatile memory technologies will wear
out with continuous writing. Near-term applications that could potentially use
these properties include factory controls, cell phones, personal digital
assistants, and cameras. In the longer term, MRAM could replace conventional
memories in computers.
Electrons have two stable spins, often called "spin up" and "spin down."
In MRAM, data is stored in the spin of the electrons in thin metal alloy films,
and read with tiny spintronic sensors. Unlike electrical charge, which is
inherently unstable, the spin of an electron is permanent until it is changed.
In MRAMs, the spin of the electrons is set with tiny bursts of magnetism. We
have invented several types of MRAM memory cells and modes of operation.
In addition to our own intellectual property relating to MRAM we have a
license to use Honeywell MRAM technology and certain Cypress and Motorola
intellectual property. Cypress has announced a goal of the first production
MRAM devices in calendar 2003; Motorola has announced a goal of producing MRAM
samples in 2003. If MRAM products are produced under our license agreements, we
could potentially earn significant royalty revenues.
OUR STRATEGY
Our goal is to become the leading developer of practical spintronics
technology and devices.
Expand commercial product distribution and product promotion
Distribution
We have been adding manufacturers' representatives for our commercial
products, especially domestic coupler representatives. We target
representatives with pull-through lines, i.e., other lines that might require
couplers in the system. Examples of pull-through lines are analog-to-digital
converters, network transceivers, and power-control integrated circuits. Thus
representatives combine sales of our products and other products in their line,
providing customers with compatible sets of parts and a single point of
contact.
Advertising
Based on response rate data, direct mail and targeted inserts have proven
quite cost-effective in generating product sales, and have become our primary
means of promoting our commercial products. Targeted inserts are a hybrid
between advertising and direct mail where the inserts are bound in selected
magazines reaching only readers who meet our target criteria. Direct-marketing
database lists can also be sorted by industry, business type, job function, or
company size. We primarily target factory/industrial controls and
instrumentation business types; and engineering job functions. Our campaign
highlights the advantages of NVE Couplers compared to opto-couplers (the "Hate
Optos" campaign).
Publicity and product placements
We will continue to use publicity to build credibility for spintronics and
our products. Articles in two German and two United States trade journals
generated a significant number of leads. An article in ChipCenter, an online
trade magazine generated leads and resulted in our couplers winning a "Product
of the Month" award.
Incremental product development strategy
Our new product development strategy will focus on broadening our product
lines with incremental innovation from our present products. This strategy
involves very little technical risk because the building blocks are proven, and
little market risk because customers have requested the parts in this plan.
Furthermore, because we have already developed similar products, we believe we
should be able to predict development cost and schedule with reasonable
accuracy.
Support product development with contract research and development
Contract research and development was the source of our underlying patents
and product developments, and still accounts for most of our revenues. As
commercial product growth accelerates, we expect contract revenues as a
percentage of total revenues to shrink. We are repositioning contract research
and development to support commercial product development rather than to remain
solely an ongoing source of revenue. For example, we are developing eight-
channel bi-directional couplers for the United States Air Force which we
believe have significant commercial potential, and we are receiving military
funds to match payments by Agilent. Those matching funds were $625,000 in the
most recent fiscal year. Government funding continues to support our long-term
research, such as a three-year, $1.5 million spintronics contract with the
Defense Advanced Research Projects Agency.
Deploy MRAM intellectual property through manufacturing partnerships
Because of the large capital investment required to make large-scale
memories, our strategy is to use manufacturing partnerships to capitalize on
our MRAM intellectual property.
In April 2002 we entered into a technology exchange agreement with
Cypress. Cypress has announced plans to have the world's first production MRAMs
by the end of calendar year 2003. We will not receive royalties from Cypress,
but have gained rights to certain intellectual property, and Cypress agreed to
manufacture MRAMs for us. These devices might be sold in niche markets where
NVE has a strong presence such as factory automation or military applications.
Alternatively, we may private-label Cypress-manufactured MRAMs for other
companies. Such a private-label strategy could provide us with a higher per-
device profit than license royalties.
MANUFACTURING
Most of our products are fabricated in our facility using either raw or
"foundry" wafers. Foundry wafers contain standard electronics that perform
housekeeping functions such as voltage regulation and signal conditioning in
our products. A wafer includes thousands of devices. We add spintronics
structures to the wafers in our factory, and then send the completed wafers to
the Far East for cutting and packaging. The packaged parts are returned to us
for testing, stocking, and shipment.
INTELLECTUAL PROPERTY
Patents
Our technology is protected by over 75 United States and international
patents either issued, pending, or licensed from others. We are continuing to
develop and intend to add to our patent portfolio.
Licenses
We have licensed certain MRAM intellectual property to several companies.
Our current MRAM licensees include Cypress Semiconductor Corporation, Honeywell
International, Union Semiconductor Technology Corporation, and Motorola, Inc.
We have received advance payments in conjunction with the Honeywell, USTC, and
Motorola agreements, and we expect to receive royalties under the Motorola and
USTC agreements if and when those licensees begin selling devices using our
intellectual property. There are minimum quantities before royalties are paid,
and ceilings on the royalties we will receive.
Technology Exchange Agreement
Under our technology exchange agreement with Cypress, each party gained
rights to certain of the other party's patents and other intellectual property.
We believe the Cypress partnership significantly strengthens our intellectual
property portfolio. Cypress also agreed to assist us in defending our
intellectual property rights under certain circumstances.
Royalty Agreement
We have licensed rights to another organization's GMR-related patent, 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
could remain in force until cumulative royalties of $1.2 million have been
paid.
MARKETS
A presentation by Dr. Stuart Wolf of the Defense Advanced Research
Projects Agency estimated the total spintronics market at $100 billion. Our
present sensor market is factory and robotic controls, and we are developing
automotive sensors as a potential future market. Couplers are sold primarily
for factory and industrial networks, with broadband and telecommunications
anticipated in the future. According to a December 2001 article in Spectrum
magazine, MRAMs could capture a significant share of the $35 billion random
access memory ("RAM") market. Large MRAM markets include hard-disk replacement
and computers with no boot-up cycle.
DISTRIBUTION
We rely primarily on indirect channels to sell our products. We have
distributors who stock and sell our products throughout the world, including
Digi-Key Corporation, one of this country's largest electronic component
distributors. We also have several manufacturers' representatives in the United
States who sell but do not stock our products. We have an agreement with
Agilent, a major seller of solid-state couplers, to distribute private-labeled
version of our couplers. We met key milestones in the qualification of our
products for sale by Agilent in October 2002. The Agilent agreement expires in
2008.
We have built a modest direct sales force, including an international
sales manager based in the United Kingdom and a United States-based sales
director. Our sales force is primarily geared toward adding and supporting
manufacturers' representatives and distributors, as well as identifying and
supporting large accounts.
RESEARCH AND DEVELOPMENT
We invested $5,888,781 and $5,731,764 in the years ended March 31, 2003
and 2002 on research and development. All but $1,308,129 and $1,583,008 were
borne by customers through research and development contracts.
OUR COMPETITORS
Sensor Competition
Our three main sensor competitors are: 1) Honeywell, 2) Royal Philips
Electronics, and 3) Allegro Microsystems, Inc., Honeywell, and Philips make
traditional nickel-iron anisotropic magnetoresistive (AMR) sensors. AMR sensors
are used in automotive and high-performance industrial control systems. Unlike
our GMR sensors, AMR sensors have "flipping" artifacts that we believe limit
their usability. Flipping is when the device polarity is reversed when exposed
to a stray magnetic field causing erroneous data. Allegro makes inexpensive
silicon Hall sensors, but we believe Hall sensors are not as sensitive or
precise as our products.
Coupler Competition
The two main competing digital couplers are opto-couplers and inductive
couplers (transformers). Opto-couplers use light and light detectors to
transmit information; transformers use magnetic fields transmitted between
coils of wire. In addition to being a customer, Agilent, a Hewlett Packard
spin-off, is a leading producer of high-speed opto-couplers. Other top opto-
coupler suppliers are Vishay Intertechnology (formerly Infineon, a Siemens AG
spin-off), NEC Corporation, Toshiba Corporation, and Fairchild Semiconductor
International. Inductive couplers are made by a number of companies. We believe
our couplers are considerably faster than even the fastest opto-couplers.
Unlike our IsoLoop couplers, inductive couplers require special encoding to
transmit logic signals. Furthermore, IsoLoop Couplers require much less board
space than most opto- or inductive couplers.
Analog Devices, Inc. (ADI) markets microelectronic mechanical system
(MEMS) inductive couplers. While these devices are smaller than other inductive
couplers, our devices still offer more channel density, ADI does not offer
multi-channel devices, and our devices are twice as fast as ADI's competing
devices at the most common supply voltage.
We make several network signal couplers that combine spintronics coupling
with network protocol functions in a single package. Our competitors in this
area include Linear Technology Inc. and Maxim Products. Based on a comparison
of published specifications, we believe our devices are 100 times faster than
competitive 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 the speed of such memories without the volatility. Currently available
nonvolatile memories include "flash" memories, ferroelectric random access
memories (FRAMs), and electrically-erasable programmable read-only memories
(EEPROMs). MRAMs are potentially faster and use less power than existing
nonvolatile memories. Furthermore, existing nonvolatile memories can be written
only a limited number of times before they wear out. MRAMs have virtually
unlimited life.
Flash memory manufacturers include Advanced Micro Devices, Inc. and Intel
Corporation. Current and potential FRAM manufacturers include Ramtron
International Corporation, Infineon Technologies AG, and Texas Instruments Inc.
EEPROM manufacturers include Samsung Electronics Co. Ltd., STMicroelectronics
N.V., and Xicor, Inc. Emerging technologies competing with MRAM include
polymeric ferroelectric random access memory (PFRAM) and ovonyx unified
memories (OUM). While we believe MRAM has advantages over these emerging
technologies, they could supplant MRAM.
In addition to our licensees, a number of competing companies are
developing MRAM technology and products. Those competitors include Hewlett-
Packard Corporation, IBM Corporation, Infineon Technologies AG, Fujitsu
Limited, and Toshiba Corporation.
Most of our MRAM competitors and potential competitors are established
companies that have significantly greater financial, technical, and marketing
resources than us.
OUR EMPLOYEES
As of March 31, 2003, we had 63 employees, 58 of whom were full time. Of
the full-time employees, there were six general and administrative employees,
six sales and marketing employees, 23 technicians, and 23 scientists. Ten
employees have earned doctorate degrees. 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.
AVAILABILITY OF OUR COMMISSION FILINGS
We make available through the Investor Relations section of our Web site
(www.nve.com), our annual reports on Form 10-KSB, quarterly reports on Form 10-
QSB and current reports on Form 8-K as soon as reasonably practicable after
these items are electronically filed with the Securities and Exchange
Commission.
Item 2. Description of Property.
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 Glenborough Properties, L.P. and is leased to us under an
agreement expiring December 31, 2006. We believe the space will be adequate for
our needs for at least the next several years.
Item 3. Legal Proceedings.
In March 2003 an attorney representing Analog Devices, Inc. (ADI)
contacted us alleging infringement of ADI's "AD" trademark, false advertising,
and unfair competition. We believe we have meritorious defenses to these
allegations and we are exploring an amicable resolution. We believe the
outcome of these discussions 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 ADI sue us and the outcome of the
action be unfavorable, our business, financial condition, results of
operations, and cash flows could be materially and adversely affected.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to security holders during the quarter ended
March 31, 2003.
PART II
Item 5. Market Common Equity and Related Stockholder Matters.
Our Common Stock trades on The NASDAQ Stock Market under the symbol NVEC.
Prior to January 22, 2003, our Common Stock was traded on the Over-the-Counter
Bulletin Board. The following data set forth, for the fiscal quarters
indicated, a summary of the high and low price of our common stock as reported
on NASDAQ Stock Market or Over-the-Counter Bulletin Board without retail mark-
up, mark-down or commissions, and may not represent actual transactions. Data
prior to our one-for-five reverse split effective November 22, 2002 are
adjusted for the split. Data for the quarter ending June 2002 and subsequent
quarters are high and low sales prices. Data for the quarters ending prior to
June 2002 reflect high and low bid information.
Common Stock
------------
Low High
------ ------
FISCAL 2002 (YEAR ENDED MARCH 31, 2002)
First Quarter $ 3.75 $ 5.94
Second Quarter 4.75 7.70
Third Quarter 6.00 10.25
Fourth Quarter 6.50 10.00
FISCAL 2003 (YEAR ENDED MARCH 31, 2003)
First Quarter $ 8.75 $12.45
Second Quarter 6.50 9.00
Third Quarter 7.20 9.00
Fourth Quarter 5.00 8.60
We have never paid or declared any cash dividends on our common stock. We
do not anticipate paying any dividends in the foreseeable future, and intend to
retain any earnings we may generate to provide for the operation and projected
expansion of our business.
In the past three years, we have sold unregistered securities as specified
below. No commissions or discounts were paid or given, directly or indirectly,
to any underwriter or agent with respect to the sales described below. All of
these sales were effected in reliance on exemptions contained in Section 4(2)
and 4(6) of the Securities Act of 1933, as amended and/or Rules 506 of
Regulation D and Rule 701 of Regulation E promulgated under the Securities Act.
Approximately 3.2 million shares of common stock were issued to
approximately 75 shareholders of Nonvolatile Electronics, Incorporated, not
more than 35 of whom were "non-accredited" as that term is defined in Rule 1 of
Regulation D, in November, 2000 in connection with the merger by and between
Nonvolatile Electronics, Incorporated and Premis Corporation.
Also in November 2000 we issued approximately 13,800 shares of common
stock to three individuals in connection with the exercise of warrants provided
in exchange for services rendered.
In June 2001 we sold approximately 15,400 shares of common stock to the
K.K.Rocky Group in connection with an agreement for the Group to distribute our
products in Japan and Korea.
In April 2002 we sold 686,849 shares of common stock to Cypress. As part
of the sale, Cypress was also granted a warrant to purchase up to an additional
400,000 shares of common stock at a price of $15 per share for a term of three
years.
As of March 31, 2003 we had approximately 208 shareholders of record and
approximately 926 total shareholders.
Item 6. Management's Discussion and Analysis or Plan of Operation.
General
We develop and sell devices using "spintronics," a technology we helped
pioneer, which utilizes electron spin rather than electron charge to acquire,
store, and transmit information. Our products include magnetic sensors to
acquire ultra-precise data such as the position of a robot arm, and couplers to
transmit data between electronic systems at very high speed. We are also a
licensor of spintronics/magnetic random access memory technology, commonly
referred to as MRAM, which we believe has the potential to revolutionize
electronic memory.
Our strategy is to continue to rapidly expand our product revenues while
relying on government contracts for basic technology development. The expansion
of product revenue will require additional product development and marketing
expenditures as well as working capital to fund receivables and inventories.
Critical accounting policies
It is important to understand our significant accounting policies in order
to understand our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. These
accounting principles require us to make estimates and assumptions that affect
amounts reported in our financial statements and the accompanying notes. Actual
results are likely to differ from those estimates, but we do not believe such
differences will materially affect our financial position or results of
operations for the periods presented in this report.
Revenue recognition
Revenue from product sales to direct customers is recognized upon
shipment. Revenue from licensing and technology development programs, which is
nonrefundable and for which no significant future obligations exist, is
recognized when the license is signed. Revenue from licensing and technology
development programs, which is refundable, recoupable against future royalties,
or for which future obligations exist, is recognized when we complete our
obligations under the terms of the agreements. Revenue from royalties is
recognized upon the shipment of product from our technology license partners to
direct customers. Certain research and development activities are conducted for
third parties and such revenue is recognized as the services are performed.
Payments received from licensing and technology development programs relating
to future obligations as well as prepayments for future discounts on product
sales are recorded as deferred revenue.
Bad Debt
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Inventory
We reduce the stated value of our inventory for excess quantities or
obsolescence in an amount equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. Additional reductions in stated value may be required if
actual future demand or market conditions are less favorable than we projected.
Income Taxes
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.
Results From Operations
The table shown below summarizes the percentage of revenue for the various
items for the periods indicated:
Year Ended March 31
2003 2002
------- -------
Revenue:
Research and development 69.4 % 68.8 %
Product sales 26.5 22.8
License fees 4.1 8.4
------- -------
Total revenue 100.0 100.0
Cost of sales 62.6 83.2
------- -------
Gross profit 37.4 16.8
Total expenses 30.6 46.8
------- -------
Net income (loss) 6.8 % (30.0)%
======= =======
Revenue for the year ended March 31, 2003 ("Fiscal 2003") was $9,447,490,
an increase of 35% from revenue of $6,995,325 for the year ended March 31, 2002
("Fiscal 2002"). The revenue increase was due to increases in commercial
product sales and research and development revenue. Commercial product sales
increased 57% to $2,503,096 from $1,593,182. Research and development revenue
increased 36% to $6,552,730 from $4,816,029 due to increased government
contract revenue and increased revenue recognized under our agreement with
Agilent. Increases in commercial product sales and research and development
revenue were partially offset by a decrease in license revenue to $391,664 from
$586,114. The decrease in license revenue was due to completion of revenue
recognition for one of our MRAM license agreements. Revenue recognition was
completed in March 2003 for a second MRAM license agreement.
Research and development expenses decreased by 17% to $1,308,129 for
Fiscal 2003 as compared to $1,583,008 in Fiscal 2002. The decrease was due to
completion of the development of some of our commercial products.
Gross profit margins increased to 37% for Fiscal 2003 as compared to 17%
for Fiscal 2002. Gross profit on commercial product sales increased to 47% and
gross profit on contract research and development increased to 30% for Fiscal
2003 as compared to (5%) and 14% for Fiscal 2002. This increase was due to
higher yields on commercial products as well as increased margins on contract
research and development.
Selling, general and administrative expenses for Fiscal 2003 increased by
2% to $1,837,549 compared to $1,807,273 for Fiscal 2002. The increase was
primarily due to higher expenses associated with a ramp-up in commercial
selling activities.
Net income totaled $646,850 for Fiscal 2003 compared to a net loss of
$2,100,442 for Fiscal 2002. The increase in net income was due to a change from
operational losses to profits, and higher interest income on our increased
investments.
Liquidity and capital resources
At March 31, 2003 we had $6,475,865 in cash and available-for-sale
securities, consisting of marketable fixed-income investments. The increase in
cash and available-for-sale securities was due to a strategic investment by
Cypress, payments by Agilent, and operating profits. These sources of liquidity
were partially offset by the retirement of debt and equipment leases. We
believe our working capital is adequate for our needs at least through the year
ending March 31, 2004 ("Fiscal 2004").
Outlook
We expect commercial product revenues to continue to grow in Fiscal 2004.
In Fiscal 2004, approximately $250,000 per quarter of Agilent contract research
and development and recognition of MRAM license revenues of approximately
$98,000 per quarter will cease. We hope to replace those revenue and profit
sources with expanded commercial product sales and continue to be profitable in
Fiscal 2004, but there can be no assurance we will continue to be profitable.
In Fiscal 2004 we plan to continue our business strategy, including the
support of a planned ramp-up in shipments to Agilent, increased domestic sales
through manufacturers' representatives, and the possible deployment of our MRAM
intellectual property through manufacturing partnerships.
Foreign Currency Transactions
Due to product sales abroad, we have some limited revenue risks from
fluctuations in values of foreign currency. Foreign sales are generally made in
United States currency, and currency transaction gains or losses in the past
two 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. Rates paid by the United States Government on research and
development contracts are adjustable with inflation.
SHARE REPURCHASE PROGRAM
On November 11, 2002, we announced that our board of directors had
authorized the repurchase of up to 50,000 shares of our Common Stock. The
program will expire May 25, 2003. Through March 31, 2003 we had not repurchased
any shares under the program.
RISK FACTORS
WE HAVE A HISTORY OF OPERATING LOSSES AND COULD SUFFER FURTHER LOSSES IN THE
FUTURE.
We had net (loss) income of ($2,100,442) and $127,258 for the years ended
March 31, 2002 and 2001. The net income in Fiscal 2001 relied on a non-
recurring payment; without that payment we would have reported a loss of
($1,122,742). As of March 31, 2003 we had an accumulated deficit of $4,807,488.
We reported net income in the most recent fiscal year and in each quarter of
the most recent year, but in Fiscal 2004 approximately $250,000 per quarter of
contract research and development from Agilent milestone achievements and
recognition of MRAM license revenues of approximately $98,000 per quarter will
cease. We may be able to replace those revenue and profit sources with expanded
commercial product sales, but there can be no assurance we will continue to be
profitable.
WE RELY ON GOVERNMENT CONTRACTS FOR A LARGE PERCENTAGE OF OUR REVENUES, WHICH
MEANS THAT WE FACE A RISK OF LOSS OF REVENUES IF WE LOSE THESE CONTRACTS.
During Fiscal 2003, United States government contracts accounted for
approximately 60% of our revenues. Although we are not aware of any problems
currently with respect to any government contract or with our relationship with
the government funding vehicles, disqualification as a vendor to the United
States government or a material decrease in government funding research would
cause serious setbacks and would likely hamper future research and development
activity.
WE FACE A RISK OF LOSS OF REVENUES IF ANY OF OUR SEVERAL LARGE CUSTOMERS
CANCEL, POSTPONE, OR REDUCE THEIR PURCHASES.
We rely on several large customers for a large percentage of our
commercial revenues; these include Agilent, St. Jude Medical, Inc., and certain
distributors. Orders from these customers can be cancelled, postponed, or
reduced without cause or notice, and the loss of any of these customers could
have a significant impact on our commercial revenues and our profitability.
WE FACE A DIFFICULT AND UNCERTAIN ECONOMIC ENVIRONMENT IN OUR INDUSTRY.
The semiconductor industry and electronics industry in general have
experienced a significant economic downturn in the past year. The poor economic
environment may have adversely affected the sales of many of our customers'
products, thus limiting our device sales. Economic conditions may not improve
in the near term or at all.
FAILURE TO MEET TECHNICAL CHALLENGES COULD LIMIT OUR ABILITY TO PRODUCE
MARKETABLE PRODUCTS.
Our products use new technology and we are continually 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
revenues.
FAILURE OF CRITICAL PRODUCTION EQUIPMENT COULD SIGNIFICANTLY IMPAIR OUR ABILITY
TO PRODUCE PRODUCTS.
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. We have back-ups for some of the equipment, an in-
house maintenance staff, some critical spare parts, and maintenance agreements
for certain pieces of equipment. Nevertheless, we cannot be sure we could
repair or replace critical manufacturing equipment that were to fail.
FAILURE TO MEET STRINGENT CUSTOMER TECHNICAL REQUIREMENTS COULD REDUCE SALES
AND AVAIL CUSTOMERS OF OTHER REMEDIES.
Some of our customers have stringent technical requirements. Specifically,
Agilent and St. Jude Medical require our products to pass certain test and
qualification criteria before they accept deliveries. Failure to meet those
criteria could result in the loss of current and potential sales, as well as
the forfeiture of rights to certain future payments.
WE FACE PENALTIES IF WE ARE UNABLE TO DELIVER PRODUCTS.
Our Agilent supply agreement allows Agilent to gain coupler manufacturing
rights if we are unable to deliver their products on time. The imposition of
this penalty could have a material impact on future sales of our products.
Furthermore, on reaching certain sales goals, Agilent would gain exclusive
rights to distribute certain couplers based on our technology, which could
reduce our product sales and leave us partially or totally dependent on Agilent
for future coupler sales.
OUR LICENSE AGREEMENTS HAVE REVENUE LIMITS.
Our existing MRAM license agreements place limits on future royalty and
license payments. Such limits are common practice in our industry, but they
could limit our potential MRAM revenues and profits even if our intellectual
property is widely adopted.
WE MAY NOT BE ABLE TO CONSUMMATE ADDITIONAL LICENSE AGREEMENTS.
Although there are potential licensees for our MRAM intellectual property
in addition to our current licensees and partners, our existing agreements
place restrictions on future license agreements, and we may never gain
additional license agreements. Specifically, one of our agreements prohibits us
from granting more favorable terms to subsequent licensees, and another
agreement allows one of our licensees to approve licenses with certain other
potential licensees. An agreement with Honeywell prohibits us from sublicensing
their intellectual property in the future, although it does not restrict our
licensing of our own intellectual property.
LOSS OF SUPPLY FROM ANY OF OUR KEY SINGLE-SOURCE SUPPLIERS COULD IMPACT OUR
ABILITY TO PRODUCE AND DELIVER PRODUCTS.
Critical suppliers include our suppliers of certain semiconductor wafers
which are incorporated in our products. These critical suppliers include Taiwan
Semiconductor Manufacturing Corporation, Advanced Semiconductor Manufacturing
Corporation of Shanghai (China), Texas Instruments Inc., and AMI Semiconductor,
Inc. 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. We are also dependent on our packaging vendors, including
Circuit Electronics Industries (Ayutthaya, Thailand), and NS Electronics
Bangkok (Thailand), Ltd. 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 case of supply interruption. Supply
interruptions could seriously jeopardize our ability to provide products that
are critical to our business and operations. All of our agreements with
suppliers can be canceled by either party under certain circumstances.
Furthermore, our suppliers could obsolete the products we use, and we may not
be able to find suitable substitutes or alternatives.
BECAUSE WE ARE SIGNIFICANTLY SMALLER THAN THE MAJORITY OF OUR COMPETITORS, WE
MAY LACK THE FINANCIAL RESOURCES NEEDED TO INCREASE OUR MARKET SHARE.
Our competitors and potential competitors include Royal Philips
Electronics, Allegro Microsystems, Inc., Agilent Technologies, Inc., Vishay
Intertechnology, NEC Corporation, Analog Devices, Inc., Advanced Micro Devices,
Inc., Intel Corporation, Ramtron International Corporation, Infineon
Technologies AG, Xicor, Inc., IBM Corporation, and Fujitsu Limited. 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.
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 revenues and profits is dependent on
our licensees and manufacturing partners introducing production MRAM products.
Production difficulties, technical barriers, high production costs, poor market
reception or other problems, many of which are outside our control, could
prevent the deployment of MRAM or limit its market potential. In addition, our
licensees and manufacturing partners 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.
WE RELY ON A LIMITED NUMBER OF STRATEGIC RELATIONSHIPS TO REACH OUR MARKETS AND
IF THESE RELATIONSHIPS DETERIORATE OUR FUTURE REVENUE COULD BE REDUCED.
Our license agreements do not require our licensees to use our
intellectual property. Our licensees could circumvent or find alternatives to
our technology. We rely on these license relationships to address the MRAM
market, and the deterioration of any of these relationships could significantly
impair our access to the MRAM market and reduce future revenues.
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.
We protect our proprietary technology and intellectual property by seeking
patents and maintaining trade secrets which we implement by entering into
confidentiality agreements with employees and suppliers, depending on the
circumstances. We hold patents or are the licensee of 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. Efforts to legally
enforce patent rights can involve substantial expense and may not be
successful. Further, others may independently develop similar or superior
technologies or duplicate 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.
OUR SUCCESS DEPENDS IN LARGE PART ON OUR ABILITY 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, Dr. Baker, 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. Our Chief Technology Officer,
Dr. Daughton, may decide to retire at any time in the next several years, and
we may not be able to replace his technical or contract development expertise.
Item 6a. Quantitative and qualitative disclosures about market risk.
We are subject to interest rate risks on cash, cash equivalents and
available-for-sale securities. Our investments in fixed-rate debt securities,
which are classified as available-for-sale at March 31, 2003, have remaining
maturities from two to 60 months, and are exposed to the risk of fluctuating
interest rates. Available-for-sale securities had a market value of $5,880,097
at March 31, 2003, and represented 61% of our total assets. The primary
objective of our investment activities is to preserve capital. We have not used
derivative financial instruments in our investment portfolio.
We performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in interest rates applicable to fixed rate instruments maturing during
the next twelve months that are subject to reinvestment risk. As of March 31,
2003, the analysis indicated that these hypothetical market movements would not
have a material effect on our financial position, results of operations, or
cash flow.
Item 7. Financial Statements.
Financial Statements and Notes are in this report following the signature
page.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Directors and Executive Officers
The following table sets forth certain information regarding our executive
officers and directors. Each director and executive officer is elected annually
and serves for a term of one year or until his successor is duly elected and
qualified.
NAME AND POSITION AGE
----------------------------------------------
Terrence W. Glarner 60
Director, Chairman of the Board
Daniel A. Baker 45
Director, President, and
Chief Executive Officer
Richard L. George 58
Treasurer and Chief Financial Officer
James M. Daughton 66
Director and Chief Technical Officer
Robert H. Irish 63
Director
Jeffrey K. Kaszubinski 47
Director
Terrence W. Glarner has been a director since August 1999, and Chairman of
the Board since January 2001. Since February 1993, Mr. Glarner has been the
President of West Concord Ventures, Inc. Mr. Glarner also consults with Norwest
Venture Partners, an affiliate of Norwest Growth Fund, Inc. Prior to starting
West Concord Ventures, Mr. Glarner was the President of North Star Ventures,
Inc. from 1988 to February 1993, a firm which he joined in 1976. From 1968 to
1976, Mr. Glarner was a Securities Analyst and Vice President in the Research
Department of Dain Bosworth, Inc. Mr. Glarner has a B.A. in English from the
University of St. Thomas, a J.D. from the University of Minnesota School of Law
and is a Chartered Financial Analyst. Mr. Glarner supervised investments in
approximately 100 small companies during his involvement with North Star
Ventures. Mr. Glarner currently serves as a director of the following publicly-
held companies: Aetrium Inc., CIMA Laboratories Inc., Datakey Inc., and FSI
International Inc. He is also a director of privately-held Oncotech, Inc.
Daniel A. Baker has been a director and the President and Chief Executive
Officer since January 2001. From 1993 until joining the company, he was
President and CEO of Printware, Inc., a NASDAQ National Market company now
known as Printware LLC, which makes high-speed laser imaging systems. Dr. Baker
has over 25 years of experience in high-tech industries, including executive
positions with Minntech Corporation and Percom Data Corporation. Dr. Baker has
Ph.D. and M.S. degrees in engineering from the University of Minnesota, an
M.B.A. in finance from the University of Minnesota, and a B.S. in engineering
from Case Western Reserve University.
Richard L. George has served as the Treasurer and Chief Financial Officer
of NVE since March 1995. From 1991 to 1995, Mr. George served as Controller for
NVE. From 1966 to 1991, Mr. George held various financial and financial
management positions in the areas of operations and contracts at Honeywell Inc.
Mr. George received a B.A. in economics in 1966 from the University of
Minnesota, where he later took graduate courses in law and management.
James M. Daughton has been a director since our inception in 1989 and
Chief Technical Officer since January 2001. He served as Chairman of the Board
and Chief Executive Officer from 1991 to January 2001. From 1974 to 1989, Dr.
Daughton held various research and product development positions at Honeywell,
Inc. including Vice President of The Solid State Development Center. From 1964
to 1974, he developed magnetic and semiconductor memory devices at IBM
Corporation. Dr. Daughton holds a doctorate in electrical engineering from Iowa
State University and is an adjunct professor of physics at the University of
Minnesota.
Robert H. Irish has been a director since 1992. Mr. Irish has been a
consultant since 1999. From 1994 to 1999 he held various sales and sales
management positions at Compuware and Prodea Software. From 1988 to 1994, Mr.
Irish acted as a consultant and co-investor with Norwest Venture Capital. From
1981 to 1988, he was the Executive Vice President of Centron DPL, responsible
for technical marketing, product marketing and research and development. Mr.
Irish worked at IBM in management, sales and systems from 1966 to 1981. Mr.
Irish attended Rensselaer Polytechnic Institute and received a B.S. in Physics
from Syracuse University in 1965.
Jeffrey K. Kaszubinski has been a director since July 2002. Mr.
Kaszubinski is currently President and Chief Executive Officer of Silicon
Magnetic Systems, a Cypress subsidiary corporation which is developing MRAM
technology and products. He has worked in the semiconductor memory business for
24 years, the past 15 at Cypress Semiconductor in a variety of executive
positions, including product line management, manufacturing, quality assurance,
and engineering. Prior to joining Cypress, Mr. Kaszubinski worked at Texas
Instruments Inc., where he led the development of groundbreaking nonvolatile
memories. Mr. Kaszubinski received a BSEE degree in 1978 from the University of
New Orleans and holds five nonvolatile memory patents.
Key Employees
John K. Myers, Vice President of Development, age 54, joined NVE in 1997
as Vice President of New Business Development and was been instrumental in
developing the Coupler business as Vice President of the Coupler Products
Business Unit until assuming his current position in April, 2003. Mr. Myers has
30 years of experience in management and new business development in the
semiconductor and other industries. Prior to joining NVE he held management
positions with FSI International and the Allen-Bradley Company. Mr. Myers holds
BSEE and M.B.A. degrees from the University of Minnesota.
Jay L. Brown, Vice President, age 44, has been with NVE for over ten
years, and responsible for NVE's sensor business for the past five years. He
was promoted to Vice President in late 2000. In his current position he manages
sensor sales and marketing, customer engineering, and product engineering.
Previously at NVE, Mr. Brown designed circuits and managed a number of key
programs. Prior to joining NVE, he was an engineer at St. Jude Medical, Inc.
Mr. Brown earned a B.S. degree in electrical engineering from Minnesota State
University-Mankato.
Anthony F. Leali, Director of Standard Product Sales, age 45, has been
with has been with NVE since July 2001 and has over 15 years of sales and
engineering experience. Prior to joining NVE, he held sales management
positions with Unique Technologies and Future Electronics, Inc., both
distributors of semiconductor devices. He has a B.S. in Electrical Engineering
from the University of Minnesota and an M.B.A. from the University of St.
Thomas.
Other information required by this Item will be contained in our Proxy
Statement for our 2003 Annual Meeting of Shareholders and is incorporated
herein by reference.
Item 10. Executive Compensation.
The information required by Item 10 is incorporated herein by reference to
the section titled "Executive Compensation" contained in the Proxy Statement
for our 2003 Annual Meeting of Shareholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 11 is incorporated herein by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" contained in our Proxy Statement for our 2003 Annual Meeting of
Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated herein by reference to
the section titled "Executive Compensation" contained in the Proxy Statement
for our 2003 Annual Meeting of Shareholders.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-B.
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 Amendment dated September 18, 2002 to lease 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).
*10.3 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).
*10.4 NVE Corporation 2001 Employee Stock Purchase Plan Summary
(incorporated by reference to our Definitive Proxy Statement on
Schedule 14A filed June 1, 2001).
10.5 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. Confidential
treatment has been requested with respect to portions of this
exhibit, and such confidential portions have been deleted and
separately filed with the Securities and Exchange Commission pursuant
to Rule 24b-2 or Rule 406.).
10.6 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).
10.7 Stock Purchase Agreement dated April 12, 2002 with Cypress
Semiconductor Corporation (incorporated by reference to our Quarterly
Report on Form 10-QSB for the period ended June 30, 2002).
10.8 Cypress Semiconductor Corporation Common Stock Purchase Warrant dated
April 12, 2002 (incorporated by reference to our Quarterly Report on
Form 10-QSB for the period ended June 30, 2002).
10.9 License Agreement dated April 12, 2002 with Cypress Semiconductor
Corporation (incorporated by reference to our Quarterly Report on
Form 10-QSB for the period ended June 30, 2002. Confidential
treatment has been requested with respect to portions of this
exhibit, and such confidential portions have been deleted and
separately filed with the Securities and Exchange Commission pursuant
to Rule 24b-2 or Rule 406.).
21 Subsidiaries of the Registrant. None.
23 Consent of Ernst & Young LLP (incorporated by reference within this
Annual Report on Form 10-KSB).
99.1 Certification by Daniel A. Baker pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Richard L. George 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.
(b) Reports on Form 8-K.
We submitted a Form 8-K on January 30, 2003 including certifications for
our Quarterly Report on Form 10-QSB for the period ending December 31,
2002 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Item 14. Controls and Procedures.
Within 90 days prior to the date of filing of this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer and the Chief Financial
Officer, of the design and operation of our disclosure controls and procedures.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information we are required to disclose
in the reports we file under the Exchange Act, within the time periods
specified in the Securities and Exchange Commission's rules and forms. There
have been no significant changes in our internal controls or in other factors
that could significantly affect internal controls subsequent to the date of
this evaluation.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
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 16, 2003
In accordance with the Exchange Act, 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
----------------------- Director and May 16, 2003
Terrence W. Glarner Chairman of the Board
/s/ Daniel A. Baker
------------------- Director, May 16, 2003
Daniel A. Baker President & Chief Executive Officer
(Principal Executive Officer)
/s/ Richard L. George
--------------------- Treasurer and May 16, 2003
Richard L. George Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ James M. Daughton
--------------------- Director and May 16, 2003
James M. Daughton Chief Technical Officer
/s/ Robert H. Irish
------------------- Director May 16, 2003
Robert H. Irish
/s/ Jeffrey K. Kaszubinski
-------------------------- Director May 16, 2003
Jeffrey K. Kaszubinski
CERTIFICATION PURSUANT TO SECTION 302
I, Daniel A. Baker, certify that:
1. I have reviewed this annual report on Form 10-KSB of NVE Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls, which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 16, 2003
/s/ Daniel A. Baker
Daniel A. Baker
President and Chief Executive Officer
CERTIFICATION PURSUANT TO SECTION 302
I, Richard L. George, certify that:
1. I have reviewed this annual report on Form 10-KSB of NVE Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls, which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 16, 2003
/s/ Richard L. George
Richard L. George
Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
Board of Directors
NVE Corporation
We have audited the accompanying balance sheet of NVE Corporation as of
March 31, 2003 and the related statements of operations, shareholders' equity
and cash flows for the years ended March 31, 2003 and 2002. 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 auditing standards generally
accepted in the 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, 2003 and the results of its operations and its cash flows for the years
ended March 31, 2003 and 2002 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 25, 2003
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the NVE Corporation 2000 Stock Option Plan (as amended
by the shareholders on July 19, 2001) and the NVE Corporation 2001 Employee
Stock Purchase Plan of our report dated April 25, 2003, with respect to the
financial statements of NVE Corporation included in its Annual Report (Form 10-
KSB) for the year ended March 31, 2003, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 16, 2003
NVE CORPORATION
BALANCE SHEET
MARCH 31, 2003
Current assets:
Cash $ 595,768
Investment securities 5,880,097
Accounts receivable, net of allowance for
uncollectable accounts of $15,000 1,028,290
Inventories 840,776
Prepaid expenses and other assets 170,320
-----------
Total current assets 8,515,251
Fixed assets:
Machinery and equipment 2,637,007
Furniture and fixtures 35,499
Leasehold improvements 365,187
-----------
3,037,693
Less accumulated depreciation 1,871,192
-----------
Total fixed assets 1,166,501
-----------
Total assets $9,681,752
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 310,658
Accrued payroll and other 625,755
Deferred revenue 889,627
Capital lease obligations 154,207
-----------
Total current liabilities 1,980,247
Capital lease obligations, less current portion 223,191
-----------
Total liabilities 2,203,438
Shareholders' equity:
Common stock 41,748
Additional paid-in capital 12,170,833
Accumulated other comprehensive income 73,221
Accumulated deficit (4,807,488)
-----------
Total shareholders' equity 7,478,314
-----------
Total liabilities and shareholders' equity $9,681,752
===========
SEE ACCOMPANYING NOTES.
NVE CORPORATION
STATEMENT OF OPERATIONS
YEARS ENDED MARCH 31, 2003 AND 2002
Year Ended March 31
2003 2002
------------ -----------
Revenue
Contract research and development $ 6,552,730 $ 4,816,029
Product sales 2,503,096 1,593,182
License revenue 391,664 586,114
------------ ------------
Total revenue 9,447,490 6,995,325
Cost of sales 5,911,380 5,822,536
------------ ------------
Gross profit 3,536,110 1,172,789
Expenses
Research and development 1,308,129 1,583,008
Selling, general & administrative 1,837,549 1,807,273
------------ ------------
Total expenses 3,145,678 3,390,281
------------ ------------
Income (loss) from operations 390,432 (2,217,492)
Interest income 210,823 21,630
Interest expense (40,570) (45,710)
Other income 86,165 141,130
------------ ------------
Net income (loss) $ 646,850 $(2,100,442)
============ ============
Net income (loss) per share-basic $ $.16 $ (.62)
============ ============
Net income (loss) per share-diluted $ $.15 $ (.62)
============ ============
Weighted average shares outstanding:
Basic 4,131,463 3,405,774
Diluted 4,324,493 3,405,774
SEE ACCOMPANYING NOTES.
NVE CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2003 AND 2002
Common Stock Additional Accumulated
------------------ Paid-in Other Comprehensive Accumulated
Shares Amount Capital Income Deficit Total
--------------------------------------------------------------------------------
Balance, March 31, 2001 3,384,246 $33,843 $5,783,997 $ - $(3,353,896) $2,463,944
Exercise of stock
options and warrants 51,420 514 17,710 18,224
Shares issued pursuant
to employee stock
purchase plan 2,839 28 15,054 15,082
Sale of common stock 15,527 155 79,845 80,000
Net loss (2,100,442) (2,100,442)
---------------------------------------------------------------------------------
Balance, March 31, 2002 3,454,032 34,540 5,896,606 - (5,454,338) 476,808
Exercise of stock
options and warrants 24,980 250 12,697 12,947
Shares issued pursuant
to employee stock
purchase plan 8,917 89 54,680 54,769
Sale of common stock 686,849 6,869 6,206,850 6,213,719
Comprehensive income:
Unrealized gain on
Investment securities 73,221 73,221
Net income 646,850 646,850
----------
720,071
--------------------------------------------------------------------------------
Balance, March 31, 2003 4,174,778 $41,748 $12,170,833 $ 73,221 $(4,807,488) $7,478,314
================================================================================
SEE ACCOMPANYING NOTES.
NVE CORPORATION
STATEMENT OF CASH FLOWS
YEARS ENDED MARCH 31, 2003 AND 2002
Year Ended March 31
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ 646,850 $(2,100,442)
Adjustments to reconcile net income (loss) to net
cash provided by (used in)operating activities:
Depreciation and amortization 511,049 332,290
Changes in operating assets and liabilities:
Accounts receivable 232,883 55,555
Inventories (328,561) 575,601
Prepaid expenses and other (111,115) 14,674
Accounts payable and accrued expenses 120,931 193,938
Deferred revenue (675,680) 249,885
------------ ------------
Net cash provided by (used in) operating activities 396,357 (678,499)
INVESTING ACTIVITIES
Purchases of fixed assets (422,547) (224,735)
Purchases of investment securities (5,836,274) -
------------ ------------
Net cash used in investing activities (6,258,821) (224,735)
FINANCING ACTIVITIES
Net proceeds from sale of common stock 6,281,435 113,306
Repayment of note payable and
capital lease obligations (360,461) (164,894)
----------- ------------
Net cash provided by (used in)
financing activities 5,920,974 (51,588)
----------- ------------
Increase (decrease) in cash 58,510 (954,822)
Cash and cash equivalents at beginning of year 537,258 1,492,080
----------- ------------
Cash and cash equivalents at end of year $ 595,768 $ 537,258
=========== ============
Supplemental disclosure of non-cash activity
Assets acquired through capital lease obligations - 634,865
=========== ============
SEE ACCOMPANYING NOTES.
NVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
We develop and sell devices using "spintronics," a technology we helped
pioneer, which utilizes electron spin rather than electron charge to acquire,
store, and transmit information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
We consider all highly-liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
Investments
We classify and account for debt and equity securities in accordance with
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Our entire portfolio consists of government backed and corporate bonds and is
classified 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."
Inventories
Inventories are stated at lower of cost or market determined on a first-
in, first-out method.
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 useful life of five years. 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
Revenue from product sales to direct customers is recognized upon
shipment. Revenue from licensing and technology development programs, which is
nonrefundable and for which no significant future obligations exist, is
recognized when the license is signed. Revenue from licensing and technology
development programs, which is refundable, recoupable against future royalties,
or for which future obligations exist, is recognized when we have completed our
obligations under the terms of the agreements. Revenue from royalties is
recognized upon the shipment of product from our technology license partners to
direct customers. Certain research and development activities are conducted for
third parties and such revenue is recognized as the services are performed.
Stock-Based Compensation
We have adopted the disclosure-only provisions of SFAS Nos. 123 and 148,
Accounting for Stock-Based Compensation, but apply Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for our plans. Under APB No. 25, when the
exercise price of employee stock options equals or exceeds the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and income per share is
required by SFAS Nos. 123 and 148, and has been determined as if we had
accounted for our employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rate of 2.7% for Fiscal 2003 and 4.8%
for Fiscal 2002, expected volatility of 55%, a weighted-average expected life
of the options of four to seven years, and no dividend yield.
Option valuation models were developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of our employee stock options.
The pro forma information is as follows:
Year Ended March 31
2003 2002
------------ ------------
Net income (loss) applicable to common shares:
As reported $ 646,850 $(2,100,442)
Pro forma adjustment
for stock options (658,838) (185,650)
------------ ------------
Pro forma net loss $ (11,988) $(2,286,092)
============ ============
Earnings per share:
Basic - as reported $ 0.16 $ (0.62)
Basic - pro forma $ 0.00 $ (0.67)
Diluted - as reported $ 0.15 $ (0.62)
Diluted - pro forma $ 0.00 $ (0.67)
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 when it is determined that it is more likely than
not that we will not be able to utilize the deferred tax assets.
Net Income Per Common Share
We calculate our net income (loss) per share pursuant to SFAS No. 128,
Earnings Per Share. Basic earnings per share is 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, warrants and
convertible preferred stock). Potentially dilutive securities including
warrants and stock options are excluded from diluted earnings per share for
Fiscal 2002 because these securities would be anti-dilutive. Stock options were
not included in the computation of diluted earnings per share per share if the
exercise prices of the options 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
2003 2002
--------- ---------
Weighted average common
shares outstanding - basic 4,131,463 3,405,774
Effect of dilutive securities:
Stock options 189,783 -
Stock warrants 3,247 -
--------- ---------
Shares used in computing
net income (loss) per
common share - diluted 4,324,493 3,405,774
========= =========
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from the estimates.
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate resulting in an
impairment of their ability to make payments, additional allowances may be
required.
We reduce the stated value of our inventory for excess quantities or
obsolescence in an amount equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. Additional reductions in stated value may be required if
actual future demand or market conditions are less favorable than we projected.
Condensed Format
Statements contained herein are condensed as permitted under Regulation
S-B.
New Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition, which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements. SAB 101 requires that license and other up-front fees
received from research collaborators be recognized over the term of the
agreement unless the fee is in exchange for products delivered or services
performed that represent the culmination of a separate earnings process. We
adopted SAB 101 effective January 1, 2000. As a result of the adoption, we
reported a cumulative effect of a change in accounting principle in the amount
of $611,110, or $.20 per share, which represented the deferral of recoupable
up-front license fees for which the earnings process was not complete. We
recognized $0 and $194,445 of revenue that was included in the cumulative
effect adjustment for Fiscal 2003 and Fiscal 2002. The effect of that revenue
was to increase income by the amounts reported.
Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, investment
securities, short-term trade receivables, and accounts payable. The carrying
values of our financial instruments approximate fair value due to their short-
term nature.
3. INVENTORIES
Inventories consist of the following:
March 31
2003
----------
Raw materials $ 328,003
Work-in-progress 448,944
Finished goods 263,829
---------
1,040,776
Less obsolescence reserve (200,000)
----------
$ 840,776
==========
4. INCOME TAXES
As of March 31, 2003 we had net operating loss carryforwards of
approximately $5,850,000 which expire in fiscal years 2006 through 2021 and
$500,000 general business credits which can be used to offset federal income
taxes. Credits will expire in fiscal years 2004 through 2008. 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 are as follows:
March 31
2003
------------
Deferred tax assets:
Net operating loss carryforwards $ 1,908,000
Tax credit carryforward 500,000
------------
2,408,000
Valuation allowance (2,408,000)
------------
$ -
============
The significant components of income tax expense (benefit) are as follows:
Year Ended March 31
2003 2002
-------------------------
Current tax expense (benefit) $ 232,000 $(755,000)
Benefit from operating loss
carryforwards (232,000) -
Valuation allowance - 755,000
-------------------------
$ - $ -
=========================
5. LEASES
We lease our facility under an operating lease expiring December 31, 2006.
We also pay operating expenses including maintenance, utilities, real estate
taxes, and insurance. We also lease various pieces of equipment under operating
leases. Terms of the leases range from 36 to 60 months through March 2005, with
payments due the first of each month. Total rent expense for operating leases,
including building and equipment, was $389,003 and $444,041 for Fiscal 2003 and
Fiscal 2002.
We have a lease payable to a leasing company totaling $158,001 at March
31, 2003. The lease has an effective annual rate of 8.48% with monthly payments
of $8,894 through October 2004. The lease is for production equipment. We have
another lease payable to a leasing company totaling $219,397 at March 31, 2003.
The lease has an effective annual rate of 8.96% with monthly payments of $6,123
through June 2006 and a payoff amount of $15,000 due June 2006. The lease is
for production equipment. The cost and accumulated amortization at March 31,
2003 for assets reported under capital lease obligations amounted to $624,865
and $241,242 respectively.
Our future lease commitments under operating and capital leases are
summarized as follows:
Year Operating lease
Ending Future Minimum Capital Lease
March 31 Payments Obligations
-------- --------------- -------------
2004 $ 269,994 $ 180,203
2005 225,006 135,736
2006 197,748 73,481
2007 140,626 33,870
---------- ---------
Total payments $ 833,374 423,290
==========
Less interest portion 45,892
---------
Principal amount 377,398
Less current portion 154,207
---------
$ 223,191
=========
6. STOCK OPTIONS AND WARRANTS
Our 2000 Stock Option Plan, as amended by our shareholders in 2001
provides for issuance to employees, directors, and certain service providers
of incentive stock options and non-statutory 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 of directors at the
date the options are granted. A summary of our incentive stock options is
shown in the table at the bottom of this page.
As of March 31, 2003 and 2002 there were exercisable options outstanding
covering 372,675 and 285,950 shares, respectively, at a weighted average
exercise price of $3.45 and $2.52 per share. The remaining weighted-average
exercisable life was 3.0 and 4.7 years at March 31, 2003 and 2002.
Weighted Average
Shares Options Exercise Price
Reserved Outstanding Per Share
----------- ------------ ----------------
Balance at March 31, 2001 400,000 $0.70
Additional options authorized 600,000 - -
Granted* (154,050) 154,050 6.35
Exercised - (51,420) .35
Terminated 3,080 (3,080) .85
----------- ------------ ----------------
Balance at March 31, 2002 449,030 499,550 $3.25
Granted (90,000) 90,000 9.53
Exercised - (24,980) 0.52
Terminated 3,000 (3,000) 10.01
----------- ------------ ----------------
Balance at March 31, 2003 362,030 561,570 $4.36
=========== ============ ================
*Includes 75,650 shares committed to in the year ended March 31, 2001 in excess
of those authorized. Those options were issued following shareholder approval
of an amendment to our 2000 Stock Option Plan.
7. COMMON STOCK
Our authorized stock is stated as six million shares of Common Stock, $.01
par value and ten million shares of all types. Our board of directors may
designate any series and fix any relative rights and preferences to authorized
but undesignated stock.
We executed a one-for-five reverse split of our Common Stock to
stockholders of record at the close of business on November 21, 2002. All
share and per share amounts have been restated for both Fiscal 2003 and
Fiscal 2002 in the accompanying financial statements.
8. LICENSE AGREEMENTS
We have entered into two separate license agreements which provided for
advanced payments plus royalties of 1% based upon revenue generated by the
respective parties. To date, no royalties have been recognized under either
agreement.
9. TECHNOLOGY EXCHANGE AGREEMENT
In April 2002 we closed a technology exchange agreement accompanied by an
investment by Cypress Semiconductor Corporation ("Cypress"). Cypress purchased
686,849 shares of our common stock for $6.228 million. Cypress also received a
warrant for the purchase of up to an additional 400,000 shares of common stock
for $15 per share for a term of three years.
10. ROYALTIES
We have licensed rights to another organization's GMR-related patents in
exchange for payment of royalties of 1.5% of the sales of certain of our
products. Payments under this license agreement have not been material.
11. EMPLOYEE BENEFITS
All employees are eligible to participate in our 401(k) savings plan the
first quarter after reaching age 21. Employees may contribute up to 100% of
their gross wages up to the Internal Revenue Service maximum. We make matching
contributions equal to 100% of the first 2% of elective salary deferral
contributions made by eligible participants. We made matching contributions of
$79,521 and $80,616 for Fiscal 2003 and Fiscal 2002.
Our 2001 Employee Stock Purchase Plan was approved by Shareholders in July
2001 and implemented October 1, 2001. The plan allows us to issue up to 200,000
shares of common stock. With certain exceptions, all of our employees who have
been employed by us for at least one year and who are employed at least 20
hours per week and at least five months per year, including officers and
directors who are employees, are eligible to participate. The plan consists of
periodic offerings for a period determined by our board of directors. Under the
plan, an employee may elect to have up to 10% deducted from regular salary to
purchase shares. The price at which the employee's shares are purchased is the
lower of (a) 85% of the closing price of the common stock on the day that the
offering commences or (b) 85% of the closing price of the common stock on the
day that the offering terminates. We issued 8,917 and 2,839 shares of common
stock under the plan for Fiscal 2003 and Fiscal 2002.
12. LEGAL
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.