UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 33-16453
MICRONETICS WIRELESS, INC.
(Name of small business issuer in its charter)
Delaware 22-2063614
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
26 Hampshire Drive, Hudson, New Hampshire 03051
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (603) 883-2900
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
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 if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, 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]
Issuer's revenues for its most recent fiscal year were
$4,789,278.
The aggregate market value of the shares of Common Stock held
by non-affiliates of the issuer was approximately $5,624,370 based
on the closing price of the issuer's Common Stock, par value $.01
share, as reported by NASDAQ on June 11, 1998.
On June 11, 1998, there were 3,416,098 shares of the issuer's
Common Stock outstanding.
The Proxy Statement of the registrant to be filed on or before
July 29, 1998 is incorporated herein by reference.
Page 1 of 49
The Exhibit Index is located on page 40.
Part I
ITEM 1. Description of Business.
Business Development
The Company was incorporated under the laws of the State of
New Jersey in 1975. In May 1987, Micronetics, Inc. (NJ) merged
with and into Micronetics, Inc. (Del) and in April 1988, the
Company completed an initial public offering of its Common Stock
(the "Common Stock"). It changed its name to Micronetics Wireless,
Inc. in September 1995.
Business of Issuer
The Company is a manufacturer of specialized radio frequency
(RF) components and test equipment which are designed to provide
solutions for its customers, original equipment manufacturers
(OEMs) of wireless communication systems and communication service
providers, to enable them to deliver high quality communication
systems or offer high quality communication services. The
Company's products are used in cellular, microwave, satellite,
radar and communications systems around the world.
Industry Overview. Wireless service providers compete in
dynamic markets characterized by evolving industry standards,
technologies and applications. In recent years, there has been a
significant increase in the demand for wireless telecommunications
services from business and consumer users worldwide. This trend
has been driven by lower overall subscriber costs made possible by
changes in the regulatory environment that encourage competition
and the emergence of new enabling technologies. Wireless service
providers are seeking to increase system capacity in order to
accommodate the growing number of subscribers. To increase
capacity, these service providers are investing in infrastructure
equipment that provides greater efficiency in the management of the
limited spectrum licensed to them.
Cellular service has been one of the fastest growing segments
of the wireless telecommunications market. According to the
Cellular Telephone Industry Association, the total number of
worldwide subscribers for cellular services increased five-fold
during the past five years and is estimated to reach 520 million by
the end of year 2000. The growth in cellular communications has
required, and will continue to require, substantial investment by
cellular service providers in wireless infrastructure equipment.
Moreover, intensified competition among cellular service providers
is resulting in declining costs to-end-users as well as new types
of service offerings. In response to the increase in subscribers,
cellular service providers are taking steps to expand the capacity
of their existing systems, such as incorporating micro cellular
networks, converting from analog to digital protocols and
implementing adaptive channel allocation.
Partially in response to concerns about the limited capacity
of existing cellular networks, the FCC began to allocate spectrum
for new wireless services in 1989. This has led to the auctioning
of spectrum for PCS. PCS applications include mobile telephone
services, personal digital services and long distance carrier
bypass of local exchange carriers. Service providers bid over 12
Billion Dollars for spectrum auctioned by the FCC for use in PCS
applications. These bidders have significantly deployed
infrastructure and are currently offering service.
In many developing countries, where access to the public
switch telephone network ("PSTN") by the general population is
significantly less than in developed countries, the Company
believes that wireless telecommunications systems are the most
economic means to provide basic telephone service. The expense,
difficulty and time requirements of building and maintaining a
cellular network is generally less than the cost of building and
maintaining a comparable wireline network. Thus, in many less
developed countries, wireless service may provide the primary
service platform for both mobile and fixed telecommunications
applications. In a wireless local loop system, channels use radio
systems instead of wireline networks to connect telephone
subscribers to the PSTN. The Company believes that the potential
opportunities for wireless communications in countries without
reliable or extensive wireline systems may be even greater than in
countries with developed telecommunications systems. The Company
also believes that in developed countries, market trends such as
deregulation and increased competition for subscribers are leading
to the increased use of wireless local loop systems as an
alternative to the existing wireline network.
The same factors which are driving the growth of wireless
telecommunications services and equipment sales are also creating
new market dynamics for industry participants. Competition among
service providers for subscribers intensified and future market
growth is being realized primarily through the penetration of the
consumer market. The shift of the customer base from relatively
high-usage price-insensitive business subscribers to price-
sensitive consumer subscribers is leading to reduced revenue per
subscriber. The Company also expects that increasing competition
for subscribers and decreasing revenue per subscriber will cause
wireless service providers to seek the most cost-effective
infrastructure available without sacrificing quality. In addition,
the uncertainty surrounding analog and emerging digital protocols
provides an incentive for service providers to minimize platform
and protocol selection risk. These changing market conditions, the
emergence of open hardware standards and protocols and new market
entrants in the form of PCS and wireless local loop providers
create a significant opportunity for the Company.
Technical Overview. Wireless communication is the
transmission of voice and data signals through the air, without a
physical connection, such as metal wire or fiberoptic cable.
Information transmitted through wireless communications equipment
is transmitted by electromagnetic waves, also known as signals.
Electromagnetic waves vary in length, or frequency, and intensity.
The range of electromagnetic waves is called the spectrum, which
encompasses sound near the low end and light toward the higher end.
In between is the radio spectrum which is used in all wireless
communications. Radio Frequency ("RF") indicates lower
frequencies, while "microwave" refers to relatively higher
frequencies in the spectrum.
Different types of wireless communications systems utilize
different frequencies in the spectrum. Frequency is measured in
cycles per second, or Hertz. The spectrum currently in use by all
types of wireless communications equipment ranges from 1 kilohertz
(1 thousand cycles per second) to 20 gigahertz (20 billion cycles
per second). The Federal Communications Commission ("FCC")
allocates portions of the spectrum for the various types of
wireless communication systems. Wireless communications systems
currently in use include cellular and PCS telephones and base
stations, wireless cable, satellite communications, global
positioning systems, direct broadcast satellites, local area
networks, as well as radar systems. The Company's products are
designed for use in these applications.
Higher demand for wireless communication is requiring higher
system capacity. Multiple access techniques are the key methods
for increasing such capacity. Multiple access refers to the
simultaneous transmission by numerous users to or through a common
receiving port. There are four domains in which such simultaneous
transmission or sharing can take place: (i) bandwidth; (ii) time;
(iii) code; or (iv) space. Frequency Division Multiple Access
(FDMA) divides the frequency bandwidth among different users. Time
Division Multiple Access (TDMA) enables each user to use the entire
frequency for a brief period of time. Code Division Multiple
Access (CDMA) utilizes spread spectrum modulation to allow multiple
users to share the frequency bandwidth; and Space Division Multiple
Access (SDMA) enables the same frequency to be used simultaneously,
but in a different geographic area. Initially this was done by the
use of cells; improved digital signal processing technology is now
able to utilize SDMA techniques within individual cells. The
Company's beamformer technology and smart antenna test equipment
currently under development are being designed to address the SDMA
market for simultaneous transmission.
Products Micronetics's products may be classified into four
product groups: (1) Frequency Generation Products; (2) Control
Components; (3) Noise Source Components; and (4) Wireless Test
Instruments.
(1) Frequency Generation Products - Voltage Controlled
Oscillators
Micronetics designs, manufactures and markets a series of
voltage controlled oscillators ("VCOs") which provide a precise
signal source within a given frequency range. The output frequency
of the oscillator is determined by a direct current ("DC") control
voltage. This applied voltage tunes the oscillator over a
specified range. The Company's products generate sinusoidal
signals in frequency ranges from 100MHz to 3.5GHz, utilizing
packaged silicon bipolar transistors which are controlled by an
input voltage signal. Most of the uses of those frequency ranges
are identified with wireless applications including some military
(MIL) communications and satellite voice/messaging. Products are
offered in a series of narrow-band, wide-band and selective octave
tuning bandwidths. Depending on the series, packaging
configurations for MIL and commercial applications include PIN
types, SMT, hermetic and miniature packages.
A. Wide-Band Series. Designed and developed at
Qualcomm, Inc., Micronetics acquired the sole rights to manufacture
and distribute this product. The M3500 Series features 13 standard
wide-band VCOs at typically + 12V, from 100MHz to 3.5GHz. -Packag-
ing includes 0.81" square PIN type and 0.91" surface mount. The
product line has been expanded to include six models in frequencies
up to 1GHz in miniature 0.50" surface mount packages.
B. Narrow-Band Series. The Company offers several
series of low phase, high performance VCOs. The products are
available in frequency ranges from 100MHz to 3GHz, in narrow
bandwidths (1%) to full octave wide bandwidths, with supply
voltages ranging from 3 to 12 Volts. Targeted communications
markets include cellular, wireless local loop, PCS, handsets,
mobile radios, subscriber units, secure communications, satellite
networks, point-to-point radio and support test equipment.
(2) Control Components
Micronetics designs solid-state control components for the
control of RF signals in level, direction or phase shift in
frequencies up to 26.5 GHz. The products consist of switches,
attenuators, and phase shifters which incorporate either silicon
PIN diodes or GaAs MESFETs packaged in chip and wire assemblies.
Micronetics PIN designs covers the frequency range of 10MHz to
26.5GHz, with strong expertise in controlling switching transients
in 50 to 200MHz bandwidths; reducing inter-modulation distortion by
a factor of 100 over conventional PIN switching designs; and linear
switching capability with RF power levels up to 25 Watts. With
GaAs MESFET designs, the product capability extends from DC to
18GHz, with expertise in controlling rise/fall times and high
isolation characteristics.
Micronetics' solid-state control components are used widely in
MIL ground-based, shipboard and airborne radar for tracking and
simulation, phased array radar, electronic warfare systems, ELINT
and tactical/satellite communications systems. To a lesser extent,
Micronetics' solid-state control components revenues are identified
with commercial applications such as wireless communications, radar
surveillance and test equipment support systems. Typical functions
include pulse shaping, attenuating, automatic gain control,
duplexing and receiver protection. Much of Micronetics' product
success has been identified with the high end radar simulation and
electronic intelligence (ELINT) markets. The Company's products
are typically designed to handle 100 watts average power, with peak
power levels to 1KW. Micronetics offers a range of package styles,
in both connectorless and connectorized types, including surface
mount, drop-in's and microstrip.
A. Diode Switches. Diodes switches feature high
reliability and performance and are a well established building
block for system design. Diode switches offer faster switching
speed than ferrite and mechanical counterparts, as well as high
isolation, low insertion loss, and high power handling.
B. Diode Attenuators. Primarily MIL designs, diode
attenuators cover the frequency bands from DC to 18GHz.
Applications include electronic warfare, radar simulation,
automatic gain control, power control and communications channel
simulation.
C. Phase Shifters. Micronetics designs both analog
and digital diode phase shifters for use in applications involving
phased array radar, radar simulation, phase tuning, cellular
communications, satellite communications, and automatic test
equipment. This capability has been applied to coaxial, stripline
and microstrip mediums for both low and high power applications.
Models can be custom designed into any circuit medium to meet any
module requirement.
Micronetics diode phase shifters offer several advantages over
the more conventional electro-mechanical or ferrite phase shifters;
namely, low drive requirements, fast switching speed, low
intermodulation distortion, low temperature sensitivity, high
reliability and repeatability. 2 and 6-Bits designs are available
for the cellular and PCN/PCS commercial bands. 5-Bit versions are
offered in the 6 to 18GHz bands and 6-Bits in the 1.2 to 1.5GHz and
9 to 1GHz frequency bands. Variable types are offered in octave
bandwidths from 2GHz to 18GHz.
(3) Noise Source Components
Noise source are employed as a method of testing and measuring
sophisticated radar and communications systems to determine the
quality of the reception and transmission of information.
Micronetics offers noise chips and diodes, noise modules, and
calibrated noise standards. The widest application for the
Company's noise source components are reference standards in test
instruments which measure unwanted noise in devices and components
in radar and communications equipment. The Company is capable of
calibrating White Gaussian Noise (AWGN) up to 3 Watts peak over
frequency ranges which extend from 10Hz to 99GHz utilizing PIN and
Schottky-Barrier diodes packaged in chip and wire assemblies or
packaged parts mounted on soft/hard substrates. The products can
be incorporated into electronic equipment or may serve as stand-
alone components or devices that are connected to, or used in
conjunction with operating equipment. Most of the applications
involve radar equipment or wireless communications systems as part
of built-in test equipment to continuously monitor the receiver.
Complex measurements may be taken at increasing speeds to enhance
productivity, offer improved accuracy, provide wider performance
ranges, and present repeatable uniformity in results.
The Company's noise source components are widely used in
wireless communication systems as part of built-in test equipment
to continuously monitor the receiver. The major application of the
noise source products involves some function of detection,
calibration, simulation, security and statistical analysis.
Impulses of noise are applied to the receiver to measure the radar
sensitivity, signal gain, and frequency bandwidth. The products
used in conjunction with other electronic components are an
effective means of jamming, blocking and disturbing hostile radar
and other communications, as well as insulating and protecting
friendly communications. The Company's noise source components are
also used to test satellite communications receivers for video,
telephony and datacom.
A. Noise Chips & Diodes. The product line consists of
noise diodes in chip form, surface mount or axial leaded package
styles, which cover the frequency bands from 10Hz to 110GHz. The
devices deliver symmetrical white Gaussian noise and flat output
power versus frequency. The devices are capable of operating over
wide bandwidths and are designed for use in spread spectrum signal
simulators, self-test communications receivers, digital video
testers and component tests (amplifiers, filters and switches).
Miniaturized diodes are available which address the 10kHz to 10MHz
and the 500MHz to 3GHz frequency bands.
B. Noise Modules. The product line includes four
diverse module product series and include drop-ins that are
designed for built-in test equipment (BITE) requirements for both
MIL and commercial communications systems. Each series features
high power in small module packages with excellent temperature
stability. The product groups are available in frequency bands
that extend from 100Hz to 18GHz, in various module packages and
supply voltages.
C. Baseband Modules. A series of baseband modules are
offered which are designed for applications involving signal
simulation, spread spectrum and security/digital encryption in
commercial communications systems. Models are offered over six
frequency ranges which extend from 100Hz up to 6GHz.
D. Calibrated Noise Standards. These products are
used as a calibrated reference source directly built into a system
or used in conjunction with noise figure meters to provide noise
measurements. The products are supplied with calibrated data and
traceability to NIST standards, with a recalibration service
program offer by the Company. The products are offered in
frequency bands which range from 10kHz to 40GHz. These products
are available with coaxial or waveguide outputs. Micronetics
offers a unique series of sub-miniature surface mount noise
standards for applications up to 18GHz. In addition, a series of
waveguide noise standards are available from 12.4GHz to 95GHz.
(4) Wireless Test Instruments
Micronetics offers a line of test instruments specifically
designed to serve the wireless telecommunication markets employing
such application standards as TDMA, CDMA, GSM, PCS and others.
These products perform a variety of tests which are required for
performance verification and the emulation of impairments in
cellular/PCN/PCS and satellite communication systems. Products
include (1) Multipath Fading Emulators; (2) Noise Generators; (3)
Noise Figure Instruments; (4) Noise Power Carrier Test Stations.
A. Multipath Fading Emulators. These instruments
emulate a wireless communications channel with a multitude of
different reflected RF signal paths and perform many different
testing functions including path fading, delay spread, path loss
and more.
Micronetics has recently filed for a patent on a multi-path
fading smart (or adaptive) antenna directed at service providers
and OEMs, which could provide a significant new product and future
competitive edge. Traditionally, cellular radio has operated with
either omni or sectored antenna systems, which use antennas with
fixed beamwidths and a set of channels that are divided between
them. Unlike traditional sectoring, a smart antenna can
automatically calibrate its radiation pattern in response to its
signal environment and provide the intelligence to maintain
capacity while simultaneously improving voice quality by directing
the RF energy only in a particular direction toward an individual
user. Smart antennas use beamformers to combine the signals from
a phased array of antennas or elements that produce a composite of
antenna patterns, which can be controlled by adjusting the
amplitude and phase when the individual antenna element signals are
combined. In cellular-base systems, smart antennas can improve the
signal quality, maximize capacity by increasing the number of users
per area and increase overall capacity of the service.
B. Noise Generators.
1) NOD 5000 Series. Portable instrument line which
consists of 15 models that selectively address frequency bands from
10Hz to 18GHz. The Series is designed to provide low cost accurate
carrier to noise measurements with spectrum analyzers.
2) MX-5000 Series. Programmable multi-purpose
micro-processor noise generator that is designed for bench-top and
automatic testing equipment applications.
3) CNG-100 Series. Fully automated series of test
equipment used to set accurate carrier to noise (C/N) ratios over
a wide range of signal power and frequency ranges. The CNG-100
automatically accepts the C/N ratio to provide precision bit-error-
rate and sensitivity testing. The Series features 12 models which
address a multitude of frequency bands which cover cellular,
PCN/PCS, GSM, wireless local loop, CATV and ISM. Product
advantages include accuracy, self-test power meter calibration,
long-term accuracy and an active matrix color display.
4) Multi-Channel Noise Generators. New digital beam-
forming product for use in global satellite, cellular and data
communications test platforms which allows several weak signals
from surface base mobile units to be combined for stronger
transmissions. The multi-channel noise generator stimulates the
beam-former to test for specified levels of noise reduction,
interference nulling and signal enhancement.
C. Noise Figure Instruments. The NF-100D Series of
microprocessor noise figure instruments are designed for use with
spectrum analyzers. Six models are offered which address frequency
ranges from 100kHz to 18GHz.
D. Noise Power Carrier Ratio Test Station. The NPR
Series performs automatic distortion measurement in wireless
systems using multiple carriers. Similar in product architecture
to the CNG-100 Series, the NPR Series offers product enhancements
in filtering and an active matrix color monitor.
Manufacturing
The Company's components that require automated assembly
equipment are generally manufactured by third parties and tested by
the Company for quality assurance. The length of the production
process for these products is usually completed within two to three
weeks. Manufacturing of the Company's other products, which
involve less automated assembly equipment, takes place at its New
Hampshire facility. The length of the production process for these
products ranges from one to twenty-four weeks. The Company may
maintain inventory of the raw materials required for production of
its products for a period of up to one year or more.
Suppliers
The Company has approximately 300 suppliers, a few of which
are a sole source for some raw materials. Over the past ten years,
the Company has not experienced any unusual supply problems and
does not anticipate any in the foreseeable future. The Company
does not believe there would be any significant business disruption
if it were to lose one of its sole suppliers because it has
sufficient inventory to give it time to develop an alternative.
Sales and Marketing
In the past, the Company's primary business was to engineer,
manufacture and market high performance, high reliability microwave
signal processing components used in military applications like
advanced radar systems. Over the last few years the Company has
shifted its focus to the increased opportunities available in the
commercial marketplace. As a result of this shift, the Company
believes that variances in its business will now be more dependent
on general business cycles, changes in market demand for the
commercial products built with the Company's components, and on
technological innovations. The percentage of the Company's orders
attributable to commercial versus military customers has
consistently increased over the last several years. In Fiscal 1997
and Fiscal 1998 the approximate mix of customer orders was 50% for
commercial applications and 50% for military applications, of which
10% is directly to the military.
The Company's sales are made through direct sales personnel or
through independent sales representatives who promote and solicit
orders for the Company's products on a commission basis in
exclusive marketing territories. The Company selects its sales
representatives on the basis of technical and marketing expertise,
reputation within the industry and financial stability. These
sales representatives represent other manufacturers with products
complementary to, rather than competitive with, the Company's
products.
The Company also uses various methods to promote its products
including field visits to customers, telephone solicitation, direct
mailing campaigns, advertising in trade journals, participation in
trade shows and maintenance of a website. The Company increased
its advertising expenditures during Fiscal 1998 and intends to
further expand these activities in its current fiscal year.
The Company has recently engaged several distributors for its
M3500 line of VCOs. These distributors maintain inventories of the
Company's products for resale to their customers. The Company
recognizes revenues from sales to distributors at the time of
shipment to the distributor. As is common in the industry, the
Company may grant price protection to distributors. Under this
policy, distributors will be granted credits for the difference
between the price they were originally charged for products in
inventory at the time of a price reduction and the reduced price
which the Company subsequently charges distributors. From time to
time, distributors may also be granted credits on an individual
basis for Company-approved price reductions to specific customers
made to meet competition. The Company may also grant distributors
limited rights to return products. The Company maintains a reserve
against which these credits and returns are charged.
Customers
The Company sells primarily to original equipment
manufacturers of communications equipment in either the commercial
or military marketplace. Many of those customers are prime
contractors for military work or larger Fortune 500 companies with
world-wide operations. Management believes it has a strong
reputation for high performance products.
Key customers of the Company include NEC, L3 Communications,
Lucent, EF Data, Dacom, Hughes, Loral, and Stanford Telecom in the
commercial market, and DASA, GEC-Marconi, Litton Industries, Texas
Instruments, General Dynamics and Lockheed Martin in the military
market. The Company's customers buy products from the Company on
the basis of purchase orders, rather than long-term supply
contracts.
Competition
The Company is subject to active competition in the sale of
virtually all of its products. Its competitors, including
divisions of major corporations, have significantly greater
resources than those currently available to the Company.
Additionally, some of the Company's customers compete directly by
manufacturing certain components themselves, rather than purchasing
them from the Company. Large foreign firms, principally Japanese,
manufacture competitive products in larger production runs than
those of the Company. The Company believes that its VCOs produced
for use in commercial applications compete with other
manufacturers' products manufactured for military applications,
primarily on the basis of quality. These products are typically
high performance, high reliability components which are required to
meet high quality standards. The Company considers Mini-Circuits
Laboratory, Var-L Company, Inc., Z-Com, Inc., Synergy Microwave and
Modco, Inc. as competitors in the VCO market. Its primary
competitors in the noise source and instrument market are Wireless
Telecom Group, Inc., Hewlett Packard and Telecom Analysis Systems.
Research and Development
The Company maintains an engineering staff of six individuals
as of May 31, 1998, whose duties include the improvement of
existing products, modification of products to meet customer needs
and the engineering, research and development of new products and
applications. The Company also has engaged an independent
consultant to assist in its research and development activities.
Expenses for research and development predominantly involve
engineering for improvements and development of new products for
commercial markets. Such expenditures include the cost of
engineering services, engineering-support personnel and overhead
allocation and were approximately $239,860 and $203,493 for the
years ended March 31, 1998 and 1997, respectively.
The Company intends to expand its research and development
activities and considers these efforts to be vital to its future
business expansion and success.
Government Regulation
In many instances, the Company has been required to obtain
export licenses before filling foreign orders. United States
Export Administration regulations control high tech exports like
the Company's products for reasons of national security and
compliance with foreign policy, to guarantee domestic reserves of
products in short supply and, under certain circumstances, for the
security of a destination country. Thus, any foreign sales of the
Company's products requiring export licenses must comply with these
general policies. Although the Company has not experienced any
significant export licensing problems to date, such problems may
arise in the future, since many of the Company's products have
military and other governmental applications.
Employees
As of May 31, 1998, the Company had 45 full-time employees
including eight engaged in management and administration, six in
engineering, 25 in production and testing, and six in sales. It
also periodically engages consultants to assist it in various
engineering related activities. The Company believes that its
employee relations are good.
Patents and Trademarks
The Company has been granted U.S. patents on its VCOs and its
Micro Cal noise sources. It has also filed for a patent on its
Smart Antenna Test instrument. There is no assurance that any
patent on this instrument will ever be issued. In the absence of
patents, the Company relies upon trade secret laws to protect its
confidential and proprietary information. Due to the rapid rate of
technological change in its market, the Company believes that the
ability to innovate is of greater importance to its business than
availability of patents and proprietary rights. Other barriers to
competitor entry include the time and expense of new competitors to
design and manufacture components and the difficulty of selling to
an established customer who has already designed the Company's
products into its equipment.
The Company has registered "Micronetics," "The Noise Line,"
and "The Noise Source" as trademarks with the U.S. Patent and
Trademark Office. It has applied for registration of the trademark
"PocketSource", but there is no assurance that this application
will mature into a registered trademark.
Warranty and Service
The Company generally provides one year warranties on all of
its products covering both parts and labor. The Company, at its
option, repairs or replaces products that are defective during the
warranty period if the proper preventative maintenance procedures
have been followed by its customers. Repairs that are necessitated
by misuse of such products or are required outside the warranty
period are not covered by the Company's warranty.
In cases of defective products, the customer typically returns
them to the Company's facility. The Company's service personnel
replace or repair the defective items and ship them back to the
customer. Generally, all servicing is done at the Company's plant,
and it charges its customers a fee for those service items that are
not covered by warranty. It does not offer its customers any
formal written service contracts.
Product Liability Coverage
The testing of electronic communications equipment and the
accurate transmission of information entail a risk of product
liability by customers and others. Claims may be asserted against
the Company by end-users of any of the Company's products. The
Company maintained product liability insurance coverage with an
aggregate annual liability coverage limit, regardless of the number
of occurrences, of $2,000,000. There is no assurance that such
insurance will continue to be available at a reasonable cost or
sufficient to cover all possible liabilities. In the event of a
successful suit against the Company, lack or insufficiency of
insurance coverage could have a material adverse effect on it.
ITEM 2. Description of Property.
The Company operates out of 15,500 square feet of general
office, warehouse and manufacturing space in a 31,000 square foot
building that it owns, which is located at 26 Hampshire Drive,
Hudson, New Hampshire 03051. The building is located in an
industrial park and the Company believes its premises are in good
condition. The Company presently leases out 15,500 square feet of
this facility pursuant to a lease with an unaffiliated entity.
ITEM 3. Legal Proceedings.
The Company is not engaged in any material legal proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
(a) The Common Stock is traded on the over-the-counter
market under the symbol NOIZ. The closing high and low bid prices
for the Common Stock for each fiscal quarter from April 1, 1996
until June 11, 1998 as reported by the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), were as
follows:
Bid Prices
High Low
Quarter Ended
Fiscal 1997
First Quarter 3 1/8 2 1/4
Second Quarter 2 3/4 1 3/4
Third Quarter 2 3/8 1 3/8
Fourth Quarter 2 1/2 1 3/8
Fiscal 1998
First Quarter 2 1/2 1 1/2
Second Quarter 2 3/4 1 5/8
Third Quarter 4 1/16 2 3/16
Fourth Quarter 2 3/4 2 1/32
Fiscal 1999
First Quarter 3 2 1/2
(through June 11, 1998)
These over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
(b) The number of recordholders of the Common Stock as of
June 11, 1998 was 302. The Company believes that there are a
substantially greater number of beneficial owners of shares of its
Common Stock who maintain their shares in "street" name.
(c) The Company has not paid any cash dividends during its
two most recent fiscal years, nor any subsequent interim period.
Under the Company's loan agreement with Bank of New Hampshire (the
"Bank"), it is restricted from paying dividends without the consent
of the Bank.
ITEM 6. Management's Discussion and Analysis.
(a) Results of Operations.
Net sales for the Company's fiscal year ended March 31, 1998
("Fiscal 1998") were $4,789,278 as compared to net sales of
$3,770,398 for its fiscal year ended March 31, 1997 ("Fiscal 1997),
an increase of $1,018,880 or 27.0%. This was primarily due to
increased sales of the Company's wireless test instruments.
Gross profit as a percentage of net sales increased to 45.4%
in Fiscal 1998 from 42.8% in Fiscal 1997. Gross profit has
increased and is expected to further increase as the Company
continues to expand its commercial wireless activities. Selling,
general and administrative expenses ("SG&A") as a percentage of net
sales increased to 29.2% from 26.2% in Fiscal 1997. The increase
in SG&A was attributable primarily to higher commissions (primarily
on increased sales of test equipment), advertising and marketing
expenses. As the Company's commercial activities increase, the
Company expects to continue to increase its marketing and
advertising activities. Research and development expenses
increased to $239,860 from $203,493 due to the increase of
development expenditures primarily related to developing and
improving the Company's test equipment. These costs are expected
to increase during the Company's current fiscal year.
The Company had net income for Fiscal 1998 of $428,101 or $.13
per share. This compared to net income of $395,470 or $.12 per
share during Fiscal 1997. Fiscal 1997 net income included a one-
time extraordinary item gain of $70,987, or $.02 per share, from an
insurance settlement.
(b) Liquidity and Capital Resources.
On March 31, 1998, the Company's working capital was
$2,891,793 as compared with working capital of $2,357,699 at March
31, 1997. This reflects a current ratio of 5.08 to 1 at March 31,
1998 as compared to 4.47 to 1 at March 31, 1997.
Net cash of $96,656 was provided by operating activities
during Fiscal 1998 as compared to $969,161 during Fiscal 1997.
Last year the Company received an insurance settlement. Net cash
used by investing activities during Fiscal 1998 was $71,168 as
compared to net cash used by investing activities of $198,751
during Fiscal 1997 since less equipment was purchased in Fiscal
1998. Net cash provided by financing activities during Fiscal 1998
was $44,823 as compared to $44,230 during Fiscal 1996.
In accordance with loans from the Bank, the Company is
required to maintain a minimum net worth of at least $2,000,000, a
ratio of total debt to net worth not exceeding 1.25:1, and a debt
coverage ratio of not less than 1.25:1. At present, the Company
does not anticipate failing to comply with any of these financial
ratios.
The Company believes its systems are in compliance with year
2000. The Company does not expect the costs associated with this
to be material.
(c) Safe Harbor Statement.
Statements which are not historical facts, including
statements about the Company's confidence and strategies and its
expectations about new and existing products, technologies and
opportunities, market and industry segment growth, demand and
acceptance of new and existing products are forward looking
statements that involve risks and uncertainties. These risks
include, but are not limited to, product demand and market
acceptance risks; the impact of competitive products and pricing;
the results of financing efforts; the loss of any significant
customers of any business; the effect of the Company's accounting
policies; the effects of economic conditions and trade, legal,
social, and economic risks, such as import, licensing, and trade
restrictions; the results of the Company's business plan and the
impact on the Company of its relationship with its lender.
<PAGE>
ITEM 7. Financial Statements.
This information is contained on pages F-1 through F-19
hereof.
(a) (1) Financial Statements Page
Report of Independent Auditor F-1
Balance Sheets - March 31, 1998 and 1997 F-2 - F-3
Statements of Income, Years
ended March 31, 1998 and 1997 F-4 - F-5
Statements of Changes in Shareholders'
Equity, Years ended March 31, 1998 and 1997 F-6
Statements of Cash Flows,
Years ended March 31, 1998 and 1997 F-7 - F-8
Notes to Financial Statements,
March 31, 1998 and 1997. F-9 - F-19
(a) (2) Financial Statement Schedules
Schedule 8 - Valuation and Qualifying Accounts S-1
ITEM 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
PART III
The information to be contained herein is incorporated by
reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission on or before July 29, 1998.
<PAGE>
PART IV
ITEM 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Certificate of Incorporation of the Company, as
amended, incorporated by reference to Exhibit 3.1 to
Registration Statement No. 83-16453 (the "Registration
Statement").
3.2 By-Laws of the Company incorporated by reference to
Exhibit 3.2 of the Registration Statement.
10.1 Incentive Stock Option Plan incorporated by reference
to Exhibit 10.1 of the Registration Statement.
10.3 Stock Option Plan approved by the Board of Directors
of the Company incorporated by reference to Exhibit
10.8 of the 1994 10-K.
10.4 Loan Agreement dated February 2, 1996 between the
Company and the Bank of New Hampshire incorporated by
reference to Exhibit 7(c)(1) of the Form 8-K filed
with the Securities and Exchange Commission on
February 16, 1996.
10.5 Authorization and Debenture Guaranty Agreement dated
February 2, 1996 between the Company and the U.S.
Small Business Administration incorporated by
reference to Exhibit 10.8 of the 1996 10-K.
10.6 Fourth Amendment to Sublease Agreement dated February
3, 1995 assigned to the Company between Jokah Realty,
L.L.C and Ames Textile Corporation.
10.7 1996 Stock Option Plan is incorporated by reference to
Exhibit 4.1 of Registration Statement No. 333-48087
filed on Form S-8.
10.8 Employment Agreement dated September 19, 1996 between
the Company and Richard S. Kalin.
23.1 Consent of Paul C. Roberts, C.P.A. dated June 22,
1998.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.<PAGE>
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.
MICRONETICS WIRELESS, INC.
Dated: June 22, 1998 By: s/Richard S. Kalin
Richard S. Kalin,
Chairman and President
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.
Signature Title Date
s/Richard S. Kalin Chairman and President June 22, 1998
Richard S. Kalin (principal executive
and financial officer)
s/David Siegel Director June 22, 1998
David Siegel
s/Roy L. Boe Director June 22, 1998
Roy L. Boe
s/Barbara Meirisch Director June 22, 1998
Barbara Meirisch
s/Donna Hillsgrove Treasurer and June 22, 1998
Donna Hillsgrove Secretary
(principal accounting
officer)
PAUL C. ROBERTS
Certified Public Accountant
P.O. Box 1404
Edgartown, MA 02539
(508) 627-3094
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Micronetics Wireless, Inc.
Hudson, New Hampshire
I have audited the accompanying balance sheets of Micronetics
Wireless, Inc. as of March 31, 1998 and 1997 and the related
statements of income, changes in shareholders' equity and cash
flows for each of the two years in the period ended March 31, 1998.
These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these
financial statements based on my audits. In connection with my
audits of the financial statements, I have also audited the
financial statement schedules as listed in the accompanying index.
I conducted my audits in accordance with generally accepted
auditing standards. Those standards require that I 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. I believe that my audits provide
a reasonable basis for my opinion.
In my opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Micronetics Wireless, Inc. as of March 31, 1998 and 1997 and the
results of its operations and its cash flows for each of the two
years in the period ended March 31, 1998 in conformity with
generally accepted accounting principles. Also in my opinion, the
related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
PAUL C. ROBERTS
Certified Public Accountant
Edgartown, Massachusetts
June 22, 1998
F-1
MICRONETICS WIRELESS, INC.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
ASSETS
(Note 3b)
1998 1997
Current assets: --------- ---------
Cash and cash equivalents $1,031,625 $ 961,314
Accounts receivable, net of
allowance for doubtful accounts
of $35,092 and $23,488 at March 31,
1998 and 1997, respectively 1,010,219 755,716
Inventories 1,421,685 1,151,640
Prepaid expenses 37,238 43,318
Deferred tax asset 43,302 118,481
Other current assets 57,338 6,250
--------- ---------
Total current assets 3,601,407 3,036,719
--------- ---------
Property and Equipment:
Furniture, fixtures and equipment 1,324,586 1,269,938
Equipment held under capital leases 82,990 33,500
Building and improvements 850,009 846,547
Land 162,000 162,000
--------- ---------
2,419,585 2,311,985
Less: accumulated depreciation
and amortization 898,516 800,030
--------- ---------
1,521,069 1,511,955
--------- ---------
Other assets:
Security deposits 4,479 1,102
Intangibles, net of accumulated
amortization of $37,525 and
$26,086 at March 31, 1998 and
March 31, 1997, respectively 86,936 98,375
--------- ---------
91,415 99,477
--------- ---------
$5,213,891 $4,648,151
========= =========
See accompanying notes to financial statements.
F-2
MICRONETICS WIRELESS, INC.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
-------- ---------
Current liabilities:
Note payable - bank, current
portion $ 79,766 $ 78,856
Current portion - capital leases
payable 26,705 12,847
Debenture payable 25,000 25,000
Accounts payable 321,713 374,746
Accrued expenses and taxes, other
than income taxes 248,620 155,953
Income taxes payable 17,810 31,618
--------- ----------
Total current liabilities 719,614 679,020
--------- ----------
Long-term debt -- net of current
portion
Note payable - bank 868,720 948,022
Capitalized lease obligations 40,308 7,616
--------- ----------
909,028 955,638
--------- ----------
Shareholders' equity:
Preferred stock - $.10 par value;
authorized - 100,000 shares;
issued and outstanding - 0 shares
at March 31, 1998 and 1997 - -
Common stock - $.01 par value;
authorized - 10,000,000 shares;
issued and outstanding - 3,415,298
and 3,188,658 shares at March 31,
1998 and 1997, respectively 34,153 31,887
Additional paid - in capital 2,535,137 2,393,748
Retained earnings 1,015,959 587,858
--------- ---------
3,585,249 3,013,493
--------- ---------
$5,213,891 $4,648,151
========= =========
See accompanying notes to financial statements.
F-3
MICRONETICS WIRELESS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
1998 1997
---------- -----------
Net sales $4,789,278 $3,770,398
Cost of sales 2,616,228 2,156,520
--------- ---------
Gross profit 2,173,050 1,613,878
--------- ---------
Selling, general and administrative
expenses 1,410,677 987,293
Research and development expenses 239,860 203,493
Legal fees - related party 37,816 26,462
--------- ---------
1,688,353 1,217,248
--------- ---------
Income from operations 484,697 396,630
--------- ---------
Other income (expense):
Interest income 37,144 21,306
Interest expense (87,523) (90,705)
Rental income 60,250 60,250
Gain on sale of equipment 22,712 -
--------- ---------
32,583 (9,149)
--------- ---------
Income before provision for income
taxes and extraordinary item 517,280 387,481
Provision for income taxes 89,179 62,998
--------- ---------
Income before extraordinary item 428,101 324,483
Extraordinary item - gain on
inventory from flood, net of
taxes - 70,987
--------- ---------
Net income $ 428,101 $ 395,470
========= =========
See accompanying notes to financial statements.
F-4<PAGE>
MICRONETICS WIRELESS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(continued)
1998 1997
-------- ---------
Primary and fully diluted earnings
per common share:
Income before extraordinary item $.13 $.10
Extraordinary item - gain on
inventory from flood, net of taxes - .02
--------- ---------
Net income $.13 $.12
========= =========
Weighted average shares outstanding
Primary 3,403,688 3,370,753
Fully diluted 3,403,688 3,370,753
========= =========
See accompanying notes to financial statements.
F-5<PAGE>
MICRONETICS WIRELESS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
Common Stock Additional
Par Paid-In Retained
Shares Value Capital Earnings Total
Balance
March 31, 1996 3,116,638 $31,166 $2,335,530 $192,388 $2,559,084
Shares issued upon
exercise of
options 72,020 721 58,218 - 58,939
Net income - - - 395,470 395,470
Balance - --------- ------ --------- --------- ---------
March 31, 1997 3,188,658 31,887 2,393,748 587,858 3,013,493
Shares issued upon
exercise of
options 226,640 2,266 141,389 - 143,655
Net income - - - 428,101 428,101
Balance - --------- ------ --------- --------- ---------
March 31, 1998 3,415,298 $34,153 $2,535,137 $1,015,959 $3,585,249
========= ====== ========= ========= =========
See accompanying notes to financial statements.
F-6
MICRONETICS WIRELESS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998 AND 1997
1998 1997
-------- --------
Cash flows from operating activities:
Net income $ 428,101 $ 395,470
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 163,195 137,498
(Gain) on sale of assets (22,712) -
Deferred tax asset 75,179 57,910
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable (254,503) 66,888
(Increase) decrease in inventories (270,045) 317,431
(Increase) decrease in insurance
claim receivable - 596,376
(Increase) decrease in prepaid
expenses and other current
assets (45,008) (25,775)
(Increase) decrease in other
assets (3,377) -
Increase (decrease) in accounts
payable (53,033) 156,700
Increase (decrease) in accrued expenses
and taxes, other than
income taxes 92,667 7,498
Increase (decrease) in income taxes
payable (13,808) 27,803
------- --------
Net cash provided by operating
activities 96,656 969,161
------- --------
Cash flows from investing activities:
Purchase of property and equipment (102,656) (202,735)
Purchase of patents and licenses - -
Proceeds from sale of assets 31,488 -
Proceeds from security deposits - -
------- --------
Net cash (used) by investing activities (71,168) (198,751)
------- --------
See accompanying notes to financial statements.
F-7<PAGE>
MICRONETICS WIRELESS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998 AND 1997
(continued)
1998 1997
-------- ---------
Cash flows from financing activities:
Repayment of bank loans $ (78,392) $ (267,642)
Borrowings of long-term debt - 270,000
Net proceeds from stock options
exercised 143,655 58,938
Principal payments on capital lease
obligations (20,440) (17,066)
--------- ---------
Net cash provided by financing
activities 44,823 44,230
--------- ---------
Net increase (decrease) in cash and
cash equivalents 70,311 814,640
Cash and cash equivalents, begin-
ning of year 961,314 146,674
--------- ---------
Cash and cash equivalents,
end of year $1,031,625 $ 961,314
========= =========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the years for:
Interest $ 87,992 $ 99,794
Income taxes $ 61,571 $ 8,667
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
During the years ended March 31, 1998 and 1997, the Company acquired
equipment through a capital lease obligation in the amount of $66,990 and
$16,000, respectively.
See accompanying notes to financial statements.
F-8<PAGE>
MICRONETICS WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business:
The Company changed its name in September 1995 from Micronetics,
Inc. to Micronetics Wireless, Inc. The Company is engaged in the
design, development, manufacture and marketing of a broad range of
high performance wireless components and test equipment used in
digital cellular, microwave, satellite, radar and communication
systems around the world. Approximately 25% of the Company's sales
derive from foreign markets.
(b) Inventory Valuation:
Inventory is valued at the lower of cost (first-in, first-out
method) or market.
(c) Depreciation and Amortization:
Fixed assets are reflected at cost.
Depreciation and amortization of fixed assets are computed by both
straight-line and accelerated methods at rates adequate to allocate
the cost of applicable assets over their expected useful lives.
(d) Intangibles:
Patents and licensing agreements are carried at cost less
accumulated amortization which is calculated on a straight-line
basis over the estimated useful lives of the assets. Patents and
licensing agreements are both being amortized over 10 years.
(e) Income taxes:
The financial statements (including the provision for income taxes)
are prepared on an accrual basis. Temporary differences occur when
income and expenses are recognized in different periods for
financial reporting purposes and for purposes for computing income
taxes currently payable. Deferred taxes are provided as a result
of such temporary differences.
(f) Research and Development Costs:
Research and development costs are charged to expense in the year
incurred. The amounts expended for the years ended March 31, 1998
and 1997 were approximately $240,000 and $203,000, respectively.
F-9
<PAGE>
MICRONETICS WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) Net Income Per Share:
Primary and fully diluted net income per share is calculated based
on the net income for each period divided by the weighted average
number of common shares and common equivalent shares outstanding
during each period. Common stock equivalents represent the
dilutive effect of the assumed exercise of certain outstanding
stock options.
(h) Statement of Cash Flows:
For purposes of the statement of cash flows, the Company considers
all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents.
(i) Use of Estimates:
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
(j) Vulnerability Due to Certain Concentrations:
All of the Company's assets and operations are located in a single
facility.
(k) Revenue Recognition:
The Company recognizes revenues when goods are shipped.
2--INVENTORIES
Inventories consist of the following:
March 31, March 31,
1998 1997
--------- ---------
Raw materials and
work-in-process $1,064,264 $974,337
Finished goods 357,421 177,303
---------- ----------
$1,421,685 $1,151,640
========== ==========
F-10
MICRONETICS WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
3--LONG-TERM DEBT
The following table summarizes the Company's long-term debt:
March 31, March 31,
1998 1997
-------- -------
Debenture
8% Debenture due
April 30, 1996 (b) $ 25,000 $ 25,000
Notes
Prime plus 1% note due
February, 2006 (a) 422,939 431,432
6.763% note due March, 2016 (a) 345,547 355,143
Prime plus 1% note due
April, 2001 (a) 180,000 240,000
Capital lease obligations (c) 67,013 20,766
--------- ---------
Total 1,040,499 1,072,341
Less current maturities 131,471 116,703
--------- ---------
Total long-term debt $ 909,028 $ 955,638
========= =========
(a) During the year ended March 31, 1996, the Company financed the
purchase of its building and refinanced its equipment loan, with
three new loans, one of which was refinanced by the SBA Loan
defined below. The Company borrowed from a bank $440,000, which
bears interest at prime plus 1% and is due in equal monthly
installments with the final payment due on February 2, 2006. The
Company also borrowed (from the same bank) $225,000, which bears
interest at prime plus 1% requiring principal payments of $5,000
monthly plus accrued interest. In October 1996, the Company
refinanced the $225,000 loan (from the same bank) and borrowed
$270,000 at prime plus 1%, with payments due in $5,000 monthly
installments with the final payment due on April 2, 2001.
These two loans contain certain covenants pertaining to financial
ratios and payment of dividends. At March 31, 1998, the Company is
not in violation of these covenants.
F-11<PAGE>
MICRONETICS WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
3--LONG-TERM DEBT (CONTINUED)
The Company borrowed $365,000 from the Small Business
Administration (the "SBA Loan"), and bears interest at 6.763% per
annum. Payments are due in monthly installments of $2,777 through
March 1, 2016 when the unpaid balance of principal and interest
become due. These loans are secured by substantially all of the
assets of the Company.
(b) Debenture:
The Company issued this 8% Subordinated Debenture during the year
ended March 31, 1995.
(c) Obligation Under Capital Leases:
Leases are reflected at their present value based upon an imputed
interest rate of 9% per annum.
The assets are depreciated over their estimated productive lives.
For the years ended March 31, 1998 and 1997 depreciation of assets
under capital leases is included in depreciation expense.
As of March 31, 1998 and 1997, property held under capital leases
was as follows:
March 31, March 31,
1998 1997
--------- -------
Machinery and equipment $ 82,990 $ 33,500
Less: accumulated depreciation 13,100 5,388
-------- --------
$ 69,890 $ 28,112
======== ========
Annual maturities of long term debt due in the next five years will
approximate $106,500 (1999), $106,500 (2000), $98,500 (2001),
$25,500 (2002), $27,500 (2003) and $651,000 thereafter.
F-12<PAGE>
MICRONETICS WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
4--INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes."
Under the standard, a deferred tax liability or asset is recognized
for the estimated future tax effects attributable to net operating
loss carry-forwards and to temporary differences between the tax
basis and GAAP basis of an asset or liability. Under this method,
the Company's deferred tax assets and liabilities were determined
by applying federal and state tax rates currently in effect to its
cumulative temporary book/tax differences.
The Company's deferred tax asset relates entirely to its net
operating loss carry-forwards and tax credits.
At March 31, 1998, the Company has recognized a deferred tax asset
attributable to net operating loss carryforwards and tax credits.
A valuation allowance has not been provided since management
believes that all net operating losses and tax credits will be
utilized.
At March 31, 1998 the Company has tax credit carryovers of
approximately $43,000 for federal tax purposes, which credits can
be used to offset future taxes through the year ending March 31,
2013.
The following sets forth the provision for income taxes:
March 31, March 31,
1998 1997
________ _________
Federal tax on income $ 179,275 $ 156,735
State tax provided for 14,000 38,667
Stock option compensation (a) (117,445) (33,975)
Deferred tax benefit 75,179 57,910
------- -------
151,009 219,337
Less: Benefit from net operating
loss carryforward 61,830 119,760
------- -------
89,179 99,575
Taxes attributable to
extraordinary item - 36,579
Provision for income taxes ------- -------
$ 89,179 $ 62,998
======= =======
F-13
<PAGE>
MICRONETICS WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
4--INCOME TAXES (CONTINUED)
(a) With the exercise of 226,640 and 72,000 of options during the
fiscal years ended March 31, 1998 and 1997, respectively, the
Company derived a permanent difference for tax purposes of
approximately $345,000 and $100,000 for the years ended March
31, 1998 and 1997, respectively.
5--COMMITMENTS
Leases:
Rent expense including real estate taxes, for the year ended March
31, 1998 was $10,542.
6--MAJOR CUSTOMERS
Approximately 40% of the Company's net sales for each of the years
ended March 31, 1998 and 1997, respectively, are for military
applications of which 10% is directly to U.S. governmental agencies
for both years.
7--CAPITAL STOCK, OPTIONS AND WARRANTS
(I) Common Stock:
(a) Stock Options:
(i) Stock Option Plans:
On August 7, 1987, the Company adopted an Incentive Stock Option
Plan, pursuant to which the Company may grant options to purchase
up to 100,000 shares of common stock in the form of incentive stock
options as defined in Section 422A of the Internal Revenue Code.
In December 1989, an amendment to increase the number of shares of
common stock which may be granted under the plan to 200,000 shares
was approved by the shareholders of the Company. The plan requires
that the exercise price of options granted not be less than the
fair market value at the date of grant. With respect to holders of
more than 10% of the Company's securities, the exercise price of
the option must be equal to 110% of the fair market value at the
date of grant. The maximum exercise period for any option under
the plan is ten years from the date the option is granted (five
years for an optionee who owns more than 10% of the Company's
securities).
F-14
<PAGE>
MICRONETICS WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
7--CAPITAL STOCK, OPTIONS AND WARRANTS - (CONTINUED)
(a)(i)(1):
On August 7, 1987, the Company also adopted an Executive Stock
Option Plan, pursuant to which the Company may grant options to
purchase up to 100,000 shares of common stock.
(a)(i)(2):
During the year ended March 31, 1995, the Company adopted a stock
option plan, "1994 Stock Option Plan", pursuant to which the
Company may grant options to purchase up to 300,000 shares of
common stock.
(a)(i)(3):
During the year ended March 31, 1997, the Company adopted a stock
option plan, "1996 Stock Option Plan", pursuant to which the
Company may grant options to purchase up to 300,000 shares of
Common Stock.
The following tables summarize the activity in options under the
stock option plans:
Price
ISOP Plan Shares Range
- --------- ------ ------------
Outstanding at March 31, 1996 101,450 $ .63 - $1.25
Granted 32,500 $1.87 - $2.13
Exercised 10,800 $ .63 - $1.25
------- -------------
Outstanding at March 31, 1997 123,150 $ .63 - $2.13
------- ------------
Granted 2,500 $1.78
Exercised 38,300 $ .63 - $2.13
Expired or Canceled 32,500 $2.13
------- -------------
Outstanding at March 31, 1998 54,850 $1.06 - $1.78
------- -------------
Exercisable at March 31, 1998 41,500 $ .63 - $1.25
F-15
<PAGE>
MICRONETICS WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
7--CAPITAL STOCK, OPTIONS AND WARRANTS (CONTINUED)
Price
ESOP Plan Shares Range
- --------- ------ ------------
Outstanding at March 31, 1996 100,000 1.06
Exercised 5,000 1.06
------- ------------
Outstanding at March 31, 1997 95,000 1.06
Exercised 55,000 1.06
Outstanding at March 31, 1998 40,000 1.06
------- ------------
Exercisable at March 31, 1998 40,000 1.06
------- ------------
Other Options
- -------------
Outstanding at March 31, 1996 288,720 $ .63 - $2.88
Expired 15,000 $ .75
Granted 79,000 $1.78 - $2.50
Exercised 48,720 $ .63
------- -------------
Outstanding at March 31, 1997 304,000 $ .63 - $2.88
------- -------------
Granted 70,000 $1.78 - $2.50
Exercised 126,840 $ .63 - $1.25
Expired or Canceled 77,160 $ .63 - $2.88
------- -------------
Outstanding at March 31, 1998 170,000 $1.78 - $2.25
------- -------------
Exercisable at March 31, 1998 160,000 $1.78 - $2.00
F-16<PAGE>
MICRONETICS WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
7--CAPITAL STOCK, OPTIONS AND WARRANTS (CONTINUED)
Price
Other Options Shares Range
- ------------- ------ ------------
1994 Stock Option Plan:
- ----------------------
Outstanding at March 31, 1996 253,750 $1.25 - $2.41
Exercised 7,500 $2.125
------- -------------
Outstanding at March 31, 1997 246,250 $1.25 - $2.41
------- -------------
Granted 37,500 $1.78 - $2.13
Exercised 6,500 $1.25 - $2.13
Expired or Canceled 9,500 $1.75
------- -------------
Outstanding at March 31, 1998 267,750 $1.25 - $2.41
------- -------------
Exercisable at March 31, 1998 136,750 $1.25 - $2.41
1996 Stock Option Plan:
- ----------------------
Granted 82,500 $1.875
------- -------------
Outstanding at March 31, 1997 82,500 $1.875
Granted 97,500 $2.00 - $2.13
Expired or Canceled 5,000 $2.00
------- -------------
Outstanding at March 31, 1998 175,000 $1.88 - $2.13
------- -------------
Exercisable at March 31, 1998 66,875 $1.88 - $2.13
In October 1995, the FASB issued Statement of Financial
Accounting Standards No. 123 "Accounting and Disclosure of Stock-
Based Compensation" (Statement 123). Statement 123 is effective
for fiscal years beginning after December 15, 1995, and allows for
the option of continuing to follow Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees"
and the related interpretations of selecting the fair value method
of expense recognition as described in Statement 123. The Company
has elected to follow APB 25 in accounting for its employees' stock
options. Under APB 25, because the exercise price of the Company's
stock options is equal to or less than the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
F-17
MICRONETICS WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
Pro forma net (loss) income, had Statement 123 been applied,
would have resulted in net (loss), net of taxes, of approximately
($110,000) and net income of $31,000 for the years ended March 31,
1998 and 1997, respectively.
8--PREFERRED STOCK
Pursuant to the Company's certificate of incorporation, the Board
of Directors has the authority, without further action by the
stockholders, to issue up to 100,000 shares of preferred stock, par
value $.10 per share, in one or more series and to fix the
designations, powers, preferences, privileges, and relative
participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption and
liquidation preferences, any or all of which may be greater than
the rights of the Common Stock.
9--INTANGIBLES
Intangible assets at March 31, 1998 and 1997 are as follows:
1998 1997
-------- --------
Licensing agreements $ 100,000 $ 100,000
Patents 24,461 24,461
------- -------
124,461 124,461
Less accumulated amortization 37,525 26,086
------- -------
$ 86,936 $ 98,375
======= =======
10--RELATED PARTY TRANSACTIONS
Related party legal fees of $37,816 and $26,462 for the years ended
March 31, 1998 and March 31, 1997, respectively, were to a firm of
which a member is an officer and significant shareholder of the
Company.
11--COMMITMENTS
The Company has an employment agreement with a key employee
terminating September 2001 which provides for a base salary of
$50,000 per annum plus three percent of the Company's pre-tax
profits up to the levels reported in the prior fiscal year and five
percent of any such profits in excess of such amount.
F-18
12--CONTINGENCY
During the year ended March 31, 1995, the Company suffered damage
to its inventory, lease improvements and equipment due to a flood.
The Company had insurance to cover this contingency and as a
result, wrote down its inventory, lease improvements and equipment
and filed a claim with the insurance company. During the year
ended March 31, 1997, the Company received $812,417 from its claim
and reported an extraordinary gain on inventory of $70,987 net of
taxes.
13--IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 129, Disclosure of Information about Capital
Structure (SFAS No. 129). In June 1997, the Financial Accounting
Standards Board issued Statement No. 130, Reporting Comprehensive
Income (SFAS No. 130) and Statement No. 131, Disclosure about
Segments of an Enterprise and Related Information (SFAS No. 131).
The Company is required to adopt these statements in 1998. SFAS
No. 129 consolidates the existing guidance from several other
pronouncements relating to an entity's capital structure. SFAS No.
130 establishes new standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 requires
disclosure of certain information regarding operating segments,
products and services, geographic areas of operation and major
customers. Adoption of these statements is expected to have no
impact on the Company's financial position, results of operations
or cash flows.
F-19
<PAGE>
MICRONETICS WIRELESS, INC.
SCHEDULE 8 - VALUATION AND QUALIFYING ACCOUNTS
Balance Charged Charged
at to Costs to Balance
Beginning and Other at End
Description of Period Expenses Accounts Deductions(a) of Period
- ----------- --------- -------- -------- ------------ ---------
Reserve for
Bad Debts $23,488 $15,795 - 4,191 $35,092
========= ======== ======= =========== ========
(a) Write off of accounts receivable against reserve.
S-1
WP51\MICRONET\10-KSB.98
<PAGE>
EXHIBIT INDEX
PAGE
10.8 Employment Agreement dated September 19, 1996
between the Company and Richard S. Kalin. E-1
23.1 Consent of Paul C. Roberts, C.P.A. dated
June 22, 1998. E-9
40<PAGE>
EXHIBIT 23.1
Consent of Independent Public Accountant
As independent public accountant, I hereby consent to the incorporation
of my report included in this Form 10-KSB, into the Company's previously
filed Registration Statements File Nos. 33-72516, 333-80151, 333-48087.
Paul C. Roberts, C.P.A.
Edgartown, Massachusetts
June 22, 1998
E-9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,031,635
<SECURITIES> 0
<RECEIVABLES> 1,045,311
<ALLOWANCES> 35,092
<INVENTORY> 1,421,685
<CURRENT-ASSETS> 3,601,407
<PP&E> 2,419,585
<DEPRECIATION> 8,988,516
<TOTAL-ASSETS> 5,213,891
<CURRENT-LIABILITIES> 719,614
<BONDS> 0
0
0
<COMMON> 34,153
<OTHER-SE> 3,551,096
<TOTAL-LIABILITY-AND-EQUITY> 5,213,891
<SALES> 4,789,278
<TOTAL-REVENUES> 4,918,160
<CGS> 2,616,228
<TOTAL-COSTS> 4,304,501
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87,523
<INCOME-PRETAX> 517,280
<INCOME-TAX> 89,179
<INCOME-CONTINUING> 428,101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 428,101
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
EXHIBIT 23.1
Consent of Independent Public Accountant
As independent public accountant, I hereby consent to the
incorporation of my report included in this Form 10-KSB, into the
Company's previously filed Registration Statements File Nos. 33-
72516, 333-80151, 333-48087.
Paul C. Roberts, C.P.A.
Edgartown, Massachusetts
June 22, 1998
E-9
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of this 19th day of September,
1996 between Micronetics Wireless, Inc., a Delaware corporation
(hereinafter called the "Company") with offices at 26 Hampshire
Drive, Hudson, New Hampshire 03051, and RICHARD S. KALIN, residing
at One Oak Forest Lane, Mendham, New Jersey 07945 (hereinafter
called the "Executive").
W I T N E S S E T H
WHEREAS, the Company manufactures and markets specialized
radio frequency components and test equipment for wireless
communication systems.
WHEREAS, the Company and the Executive desire to enter into an
agreement to memorialize their understandings with regard to the
employment of the Executive by the Company.
NOW, THEREFORE, in consideration of the mutual covenants,
conditions and promises contained herein, the parties hereby agree
as follows:
1. Employment Term. The Company hereby agrees to
employ the Executive and the Executive agrees to enter the employ
of the Company on the terms and conditions set forth below for a
term commencing on the date hereof (the "Commencement Date"), and
terminating September 19, 2001 unless sooner terminated (such term
of this Agreement is herein referred to as the "Term").
2. Compensation. For the full, prompt and faithful
performance of all of the duties and services to be performed by
Executive hereunder, the Company agrees to pay, and the Executive
agrees to accept, a base salary at the rate of $50,000 per annum
during the Term plus three percent (3%) of the Company's pre-tax
profits up to the levels reported in the prior fiscal year and five
percent (5%) of any such profits in excess of such amount. In
addition, the Executive shall receive an automobile allowance of
$500 per month during the term of this Agreement.
3. Duties. Subject to the authority, control and
direction of the Board of Directors of the Company, the Executive
shall be appointed President of the Company, and the Executive will
perform such duties and services in a location as determined by the
Executive commensurate with his position as President of the
Company, including such duties as may from time to time be assigned
to him by the Board of Directors. It is understood and
acknowledged that the Executive shall have the right to conduct
such activities in the time he determines for such activities and
it is contemplated that such activities will not take all of his
business time. Also, the Executive shall be entitled to engage
Kalin & Banner as attorneys for the Company and pay such attorneys'
fees as the Company shall incur. Also, the Executive shall be
entitled to conduct any non-competitive activities with such other
firms as he shall see fit.
4. Vacation. The Executive shall be entitled to four
weeks of vacation per year during the Term, which shall be taken at
such time or times as shall be mutually determined by the Company
and the Executive.
5. Death. In the event of the death of the Executive
during the Term or any extension thereof, the employment of the
Executive hereunder shall terminate and come to an end on the last
day of the month three months following the death of the Executive.
The estate of the Executive (or such persons as the Executive shall
designate in writing) shall be entitled to receive, and the Company
agrees to pay, the compensation of the Executive earned pursuant to
this Agreement up to the end of the three month period in which
such death occurs.
6. Disability. In the event that the Executive shall,
because of illness or incapacity, physical or mental, be unable to
perform the duties and services to be performed by him hereunder
for a consecutive period of six months, or nine months during any
twelve month period, the Company may terminate the employment of
the Executive hereunder after the expiration of such period. The
Executive shall be entitled to receive the compensation earned
pursuant to this Agreement up to the date of such termination.
7. Administration; Expenses. The Executive shall
report to the Board of Directors of the Company, or to a person
designated by the Board of Directors, at such intervals as may be
determined from time to time. The Executive shall be reimbursed by
the Company for all expenses reasonably incurred by him on behalf
of the Company in accordance with the Company's standard policies
with respect thereto.
8. Restrictive Covenants.
8.1 Inventions. Any program, discovery, process,
design, invention or improvement which the Executive makes or
develops during his employment by the Company, whether or not
during regular working hours or in connection with the Company's
business or research activities as then conducted or contemplated,
shall belong to the Company and shall be promptly disclosed to the
Company. During the Executive's employment and for a period of two
years thereafter, the Executive shall, without additional
compensation, execute and deliver to the Company any instruments of
transfer and take such other action as the Company may request to
carry out the provisions of this Section 8.1, including without
limitation, filing, at the Company's expense, patent applications
for anything covered by this Section 8.1 and the prompt assignment
of the same to the Company.
8.2 Nondisclosure. The Executive covenants and agrees
for a period of one year following the termination of his
employment with the Company, he will not, directly or indirectly,
during or after the term of employment disclose to any person not
authorized by the Company to receive or use such information,
except for the sole benefit of the Company, any of the Company's
confidential or proprietary data, information, designs, styles, or
techniques, including customer lists. Notwithstanding the
foregoing, this applies solely to information that is not generally
known to anyone other than the Company, its Board of Directors or
its employees.
8.3 If any term of this Article 8 is found by any court
having jurisdiction to be too broad, then and in that case, such
term shall nevertheless remain effective, but shall be considered
amended (as to the time or area or otherwise, as the case may be)
to a point considered by said court as reasonable, and as so
amended shall be fully enforceable.
8.4 In the event that the Executive shall violate any
provision of this Agreement (including but not limited to the
provisions of this Article 8) the Executive hereby consents to the
granting of a temporary or permanent injunction against him by any
court of competent jurisdiction prohibiting him from violating any
provision of this Agreement. In any proceeding for an injunction,
the Executive agrees that his ability to answer in damages shall
not be a bar or interposed as a defense to the granting of such
temporary or permanent injunction against the Executive. The
Executive further agrees that the Company will not have an adequate
remedy at law in the event of any breach by Executive hereunder and
that the Company will suffer irreparable damage and injury if the
Executive breaches any of the provisions of this Agreement.
9. Termination for Cause. The Company may terminate
the Executive's employment without liability (other than for
payments accrued to the date of termination) if the Executive's
employment is terminated "for cause". The term "for cause" shall,
for the purposes of this Agreement, mean (i) a material breach by
the Executive of the provisions of this Agreement, (ii) the
commission by the Executive of a fraud against the Company or the
conviction of the Executive for aiding or abetting, or the
commission of, a felony or of a fraud or a crime involving moral
turpitude or a business crime, (iii) the knowing possession or use
of illegal drugs or prohibited substances, the excessive drinking
of alcoholic beverages which impairs the Executive's ability to
perform his duties hereunder, and (iv) being under the influence of
such drugs, substances or alcohol during the Executive's hours of
employment. In the event of such termination for cause, Executive
shall be entitled to receive the compensation provided for pursuant
hereto up to the date of such termination.
10. No Impediments. The Executive warrants and
represents that he is free to enter into this Agreement and to
perform the services contemplated thereby and that such actions
will not constitute a breach of, or default under, any existing
agreement.
11. No Waiver. The failure of any of the parties hereto
to enforce any provision hereof on any occasion shall not be deemed
to be a waiver of any preceding or succeeding breach of such
provision or of any other provision.
12. Entire Agreement. This Agreement constitutes the
entire agreement and understanding of the parties hereto and no
amendment, modification or waiver of any provision herein shall be
effective unless in writing, executed by the party charged
therewith.
13. Governing Law. This Agreement shall be construed,
interpreted and enforced in accordance with and shall be governed
by the laws of the State of New York applicable to agreements to be
wholly performed therein.
14. Binding Effect. This Agreement shall bind and inure
to the benefit of the parties, their successors and assigns.
15. Assignment and Delegation of Duties. This Agreement
may not be assigned by the parties hereto except that the Company
shall have the right to assign this Agreement in connection with a
sale or transfer of all or substantially all of its assets, a
merger or consolidation. This Agreement is in the nature of a
personal services contract and the duties imposed hereby are non-
delegable.
16. Paragraph Headings. The paragraph headings herein
have been inserted for convenience of reference only and shall in
no way modify or restrict any of the terms or provisions hereof.
17. Notices. Any notice under the provisions of this
Agreement shall be given by registered or certified mail, return
receipt requested, directed to the addresses set forth above,
unless notice of a new address has been sent pursuant to the terms
of this paragraph.
18. Unenforceability; Severability. If any provision of
this Agreement is found to be void or unenforceable by a court of
competent jurisdiction, the remaining provisions of this Agreement,
shall, nevertheless, be binding upon the parties with the same
force and effect as though the unenforceable part has been severed
and deleted.
19. Counterparts. This Agreement may be executed in one
or more counterparts, all of which shall be deemed to be duplicate
originals.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first above written.
MICRONETICS WIRELESS, INC.
By: s/David Siegel
David Siegel
s/Richard S. Kalin
Richard S. Kalin
WPDOCS\MICRO\EMP-AGR.RSK
