-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MsJGvjiQELAaHntNeYMyUSD/zLZ+f2AfB94xZKKttCVsg5GFBUOkVk7a3unWgQpK gDJyaEqHgspzFmZxUl1ATQ== 0000724910-04-000015.txt : 20041020 0000724910-04-000015.hdr.sgml : 20041020 20041020161027 ACCESSION NUMBER: 0000724910-04-000015 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041020 DATE AS OF CHANGE: 20041020 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NVE CORP /NEW/ CENTRAL INDEX KEY: 0000724910 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 411424202 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-12196 FILM NUMBER: 041087659 BUSINESS ADDRESS: STREET 1: 11409 VALLEY VIEW ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 9528299217 MAIL ADDRESS: STREET 1: 11409 VALLEY VIEW ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 FORMER COMPANY: FORMER CONFORMED NAME: PREMIS CORP DATE OF NAME CHANGE: 19920703 10QSB 1 tenq2q05.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from _______________to______________ Commission file number 000-12196 NVE Corporation (Exact name of small business issuer as specified in its charter) Minnesota 41-1424202 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 11409 Valley View Road, Eden Prairie, Minnesota 55344 (Address of principal executive offices) (952) 829-9217 (Issuer's telephone number) 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 [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock, $.01 Par Value - 4,501,345 shares outstanding as of October 15, 2004 Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] PART I--FINANCIAL INFORMATION Item 1. Financial Statements. NVE CORPORATION BALANCE SHEET SEPTEMBER 30, 2004 (Unaudited)
Current assets: Cash and cash equivalents $ 808,767 Investment securities 6,416,036 Accounts receivable, net of allowance for uncollectible accounts of $15,000 2,548,143 Inventories 1,090,171 Deferred tax asset 250,000 Prepaid expenses and other assets 179,239 ------------ Total current assets 11,292,356 Fixed assets: Machinery and equipment 4,017,087 Leasehold improvements 379,588 ------------ 4,396,675 Less accumulated depreciation 2,524,543 ------------ Net fixed assets 1,872,132 ------------ Total assets $13,164,488 ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 447,072 Accrued payroll and other 593,402 Deferred revenue 348,598 Capital lease obligations 73,432 ------------ Total current liabilities 1,462,504 Capital lease obligations, less current portion 67,719 ------------ Total liabilities 1,530,223 Shareholders' equity: Common stock 45,013 Additional paid-in capital 13,376,776 Accumulated other comprehensive income 5,275 Accumulated deficit (1,792,799) ------------ Total shareholders' equity 11,634,265 ------------ Total liabilities and shareholders' equity $13,164,488 ============
SEE ACCOMPANYING NOTES. NVE CORPORATION STATEMENTS OF INCOME THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (Unaudited)
Three Months Ended Sept. 30 2004 2003 ------------ ------------ Revenue: Contract research and development $ 1,645,662 $ 1,595,612 Product sales 1,450,052 1,268,573 ------------ ------------ Total revenue 3,095,714 2,864,185 Cost of sales 1,960,797 1,738,702 ------------ ------------ Gross profit 1,134,917 1,125,483 Expenses: Research and development 306,593 302,573 Selling, general & administrative 481,648 475,691 ------------ ------------ Total expenses 788,241 778,264 ------------ ------------ Income from operations 346,676 347,219 Interest income 58,497 44,455 Interest expense (3,605) (6,907) Other income 21,730 21,709 ------------ ------------ Net income $ 423,298 $ 406,476 ============ ============ Net income per share-basic $ 0.09 $ 0.10 ============ ============ Net income per share-diluted $ 0.09 $ 0.09 ============ ============ Weighted average shares outstanding: Basic 4,499,180 4,232,666 Diluted 4,932,500 4,679,415
SEE ACCOMPANYING NOTES. NVE CORPORATION STATEMENTS OF INCOME SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (Unaudited)
Six Months Ended Sept. 30 2004 2003 ------------ ------------ Revenue: Contract research and development $ 3,171,749 $ 3,316,518 Product sales 2,813,192 2,367,516 ------------ ------------ Total revenue 5,984,941 5,684,034 Cost of sales 3,586,678 3,647,697 ------------ ------------ Gross profit 2,398,263 2,036,337 Expenses: Research and development 667,852 481,242 Selling, general & administrative 966,244 926,554 ------------ ------------ Total expenses 1,634,096 1,407,796 ------------ ------------ Income from operations 764,167 628,541 Interest income 113,366 93,468 Interest expense (8,062) (14,598) Other income 37,498 33,483 ------------ ------------ Net income $ 906,969 $ 740,894 ============ ============ Net income per share-basic $ 0.20 $ 0.18 ============ ============ Net income per share-diluted $ 0.18 $ 0.16 ============ ============ Weighted average shares outstanding: Basic 4,495,442 4,199,715 Diluted 4,928,762 4,646,464
SEE ACCOMPANYING NOTES. NVE CORPORATION STATEMENTS OF CASH FLOWS SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (Unaudited)
Six Months Ended Sept. 30 2004 2003 ------------ ------------ OPERATING ACTIVITIES Net income $ 906,969 $ 740,894 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 254,531 244,459 Changes in operating assets and liabilities: Accounts receivable (808,664) (71,138) Inventories 59,683 (427,586) Prepaid expenses and other 117,298 36,755 Accounts payable and accrued expenses 1,358 273,134 Deferred revenue (75,578) (262,812) ------------ ------------ Net cash provided by operating activities 455,597 533,706 INVESTING ACTIVITIES Purchases of fixed assets (679,812) (650,911) Purchases of investment securities (19,921) 455,929 ------------ ------------ Net cash used in investing activities (699,733) (194,982) FINANCING ACTIVITIES Net proceeds from sale of common stock 79,147 166,791 Repayment of capital lease obligations (82,040) (75,503) ------------ ------------ Net cash (used in) provided by financing activities (2,893) 91,288 ------------ ------------ (Decrease) increase in cash and cash equivalents (247,029) 430,012 Cash and cash equivalents at beginning of period 1,055,796 595,768 ------------ ------------ Cash and cash equivalents at end of period $ 808,767 $ 1,025,780 ============ ============
SEE ACCOMPANYING NOTES. NVE CORPORATION NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2004 1. INTERIM FINANCIAL INFORMATION The accompanying unaudited financial statements of NVE Corporation (the "Company") are consistent with accounting principles generally accepted in the United States and reporting with SEC regulations. In the opinion of management, these financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the financial statements. Although we believe that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed financial statements be read in conjunction with the audited financial statements and the notes included in our latest annual financial statements included in our report on Form 10-KSB. The results of operations for the three and six month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the full year ending March 31, 2005. 2. NATURE OF BUSINESS We develop, manufacture, and sell "spintronics" devices, a nanotechnology which relies on electron spin rather than electron charge to acquire, store, and transmit information. 3. REVENUE RECOGNITION Revenue from product sales is recognized when title transfers, generally 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. 4. EARNINGS PER SHARE We calculate our net income 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 and warrants). Stock options were not included in the computation of diluted earnings per share if the exercise prices of the options were greater than the market price of the common stock. 5. INVESTMENTS We classify and account for debt and equity securities in accordance with Statement of Financial Accounting Standards (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." 6. COMPREHENSIVE INCOME The components of comprehensive income are as follows:
Three months Six months ended September 30 ended September 30 2004 2003 2004 2003 -------- -------- -------- -------- Net income $423,298 $406,476 $906,969 $740,894 Change in unrealized gains 73,150 (26,352) (85,095) 1,235 -------- -------- -------- -------- Comprehensive income $496,448 $380,124 $821,874 $742,129 ======== ======== ======== ========
7. INVENTORIES Inventories consist of the following: Raw materials $ 447,839 Work-in-process 509,096 Finished goods 313,236 ----------- 1,270,171 Less obsolescence reserve (180,000) ----------- $1,090,171 ===========
8. 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 Opinion 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. 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 3.1% and 2.7% for the three and six months ended September 30, 2004 and 2003, expected volatility of 55% to 99% and 55% for the three and six months ended September 30, 2004 and 2003, a weighted average expected life of the options of one to five 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:
Three Months Ended Sept. 30 2004 2003 ------------ ------------ Net income applicable to common shares: As reported $ 423,298 $ 406,476 Pro forma adjustment for stock options (241,196) (81,325) ------------ ------------ Pro forma net income $ 182,102 $ 325,151 ============ ============ Earnings per share: Basic - as reported $ 0.09 $ 0.10 Basic - pro forma $ 0.04 $ 0.08 Diluted - as reported $ 0.09 $ 0.09 Diluted - pro forma $ 0.04 $ 0.07
Six Months Ended Sept. 30 2004 2003 ------------ ------------ Net income applicable to common shares: As reported $ 906,969 $ 740,894 Pro forma adjustment for stock options (383,982) (162,650) ------------ ------------ Pro forma net income $ 522,987 $ 578,244 ============ ============ Earnings per share: Basic - as reported $ 0.20 $ 0.18 Basic - pro forma $ 0.12 $ 0.14 Diluted - as reported $ 0.18 $ 0.16 Diluted - pro forma $ 0.11 $ 0.12
Item 2. Management's Discussion and Analysis or Plan of Operation. Forward-looking statements Some of the statements made in this Quarterly Report on Form 10-QSB constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to the safe harbor provisions of the reform act. Forward-looking statements may be identified by the use of the terminology such as may, will, expect, anticipate, intend, believe, estimate, should, or continue or the negatives of these terms or other variations on these words or comparable terminology. To the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of NVE, you should be aware that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in the forward-looking statements. We have attempted to identify, in context, some of the factors that we currently believe may cause actual future experience and results to differ from their current expectations. These differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including entry of new competitors, our ability to obtain sufficient financing to support our operations, progress in research and development activities by us and others, variations in costs that are beyond our control, adverse federal, state and local government regulations, unexpected costs, lower sales and net income, or higher net losses than forecasted, price increases for equipment, 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, our ability to continue eligibility for SBIR awards, our inability to raise prices, failure to obtain new customers, the possible fluctuation and volatility of our operating results and financial condition, inability to carry out marketing and sales plans, loss of key executives, and other specific risks included in our most recent Annual Report on Form 10-KSB. General We develop and sell devices using "spintronics," a nanotechnology we helped pioneer, which utilizes electron spin rather than electron charge to acquire, store and transmit information. We are a licensor of spintronic magnetic random access memory technology, commonly referred to as MRAM, which we believe has the potential to revolutionize electronic memory. We also manufacture high-performance spintronic products including sensors and couplers to revolutionize data sensing and transmission. 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 is recognized when title transfers, generally 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. Three months ended September 30, 2004 compared to three months ended September 30, 2003 The table below summarizes the percentage of revenue for the various items for the periods indicated:
Three Months Ended Sept. 30 2004 2003 ------- ------- Revenue: Research and development 53.2 % 55.7 % Product sales 46.8 44.3 ------- ------- Total revenue 100.0 100.0 Cost of sales 63.3 60.7 ------- ------- Gross profit 36.7 39.3 Total expenses 23.0 25.1 ------- ------- Net income 13.7 % 14.2 % ======= =======
Revenue for the three months ended September 30, 2004 (the second quarter of fiscal 2005) was $3,095,714, an increase of 8% from revenue of $2,864,185, for the three months ended September 30, 2003 (the second quarter of fiscal 2004). The revenue increase was due to a 14% increase in commercial product sales to $1,450,052 from $1,268,573 and a 3% increase in research and development revenue to $1,645,662 from $1,595,612. Gross profit margins decreased to 37% for the three months ended September 30, 2004 as compared to 39% for the three months ended September 30, 2003. The decrease was due to a shift in product mix partially offset by a more favorable mix between product sales and contract research and development. Research and development expenses increased by 1% to $306,593 for the three months ended September 30, 2004 as compared to $302,573 for the three months ended September 30, 2003. Selling, general and administrative expenses for the three months ended September 30, 2004 increased by 1% to $481,648 compared to $475,691 for the three months ended September 30, 2003. We recorded pre-tax income of $423,298 and $406,476 for the three months ended September 30, 2004 and September 30, 2003, respectively. The income tax provision for the three months ended September 30, 2004 is comprised of a U.S. Federal income tax expense of $143,921, offset by a tax valuation allowance adjustment of $143,921. The income tax provision for the three months ended September 30, 2003 is comprised of a U.S. Federal income tax expense of $138,202, offset by a tax valuation allowance adjustment of $138,202. Net income totaled $423,298 for the three months ended September 30, 2004 compared to $406,476 for the three months ended September 30, 2003. The increase in net income was due primarily to higher revenues and higher interest income. Six months ended September 30, 2004 compared to six months ended September 30, 2003 The table below summarizes the percentage of revenue for the various items for the periods indicated:
Six Months Ended Sept. 30 2004 2003 ------- ------- Revenue: Research and development 53.0 % 58.3 % Product sales 47.0 41.7 ------- ------- Total revenue 100.0 100.0 Cost of sales 59.9 64.2 ------- ------- Gross profit 40.1 35.8 Total expenses 24.9 22.8 ------- ------- Net income 15.2 % 13.0 % ======= =======
Revenue for the six months ended September 30, 2004 was $5,984,941, an increase of 5% from revenue of $5,684,034, for the six months ended September 30, 2003. The revenue increase was due to increases in commercial product sales partially offset by a decline in research and development revenue. Research and development revenue decreased 4% for the six months ended September 30, 2004 to $3,171,749 from $3,316,518 for the six months ended September 30, 2003 due to a shift in resources from government-funded research contracts to company-funded research. Commercial product sales increased 19% to $2,813,192 from $2,367,516. Gross profit margins increased to 40% for the six months ended September 30, 2004 as compared to 36% for the six months ended September 30, 2003. The increase was due to manufacturing efficiencies on commercial products and a more favorable mix between product sales and contract research and development, partially offset by a shift in product mix. Research and development expenses increased by 39% to $667,852 for the six months ended September 30, 2004 as compared to $481,242 for the six months ended September 30, 2003. The increase was due to shifting resources from government-funded research contracts to company-funded research. Selling, general and administrative expenses for the six months ended September 30, 2004 increased by 4% to $966,244 compared to $926,554 for the six months ended September 30, 2003. The increase was due primarily to higher intellectual property legal expenses. We recorded pre-tax income of $906,969 and $740,894 for the six months ended September 30, 2004 and September 30, 2003, respectively. The income tax provision for the six months ended September 30, 2004 is comprised of a U.S. Federal income tax expense of $308,369, offset by a tax valuation allowance adjustment of $308,369. The income tax provision for the six months ended September 30, 2003 is comprised of a U.S. Federal income tax expense of $251,904, offset by a tax valuation allowance adjustment of $251,904. Net income totaled $906,969 for the six months ended September 30, 2004 compared to $740,894 for the six months ended September 30, 2003. The increase in net income was due to higher gross profit margins partially offset by higher expenses. Liquidity and capital resources At September 30, 2004 we had $7,224,803 in cash and available-for-sale securities, consisting of marketable fixed-income investments. We believe our working capital is adequate to meet our requirements for at least the next twelve months. Outlook We have been shifting resources from government-funded research contracts to company-funded research in order to develop new commercial products. Our contract research and development revenue may decline in the remainder of fiscal 2005. Gross profit margins could decrease in the balance of fiscal 2005 compared to the prior year as competitive pressures could force us to decrease our selling prices and our mix may shift to industrial product sales from medical product sales. Increased MRAM development expenses could reduce research and development revenue and increase research and development expenses going forward. We expect selling, general and administrative expenses to increase in fiscal 2005 if we rollout MRAM manufactured under our technology agreement with Cypress Semiconductor Corporation. We may also increase expenditures relating to MRAM license procurement. Legal expenses relating to enforcing our MRAM intellectual property may also increase. We expect general and administrative expenses to increase in the remainder of fiscal 2005 due to consulting and auditing related to compliance with Sarbanes-Oxley. While we expect to remain profitable in the rest of the fiscal year, there is a risk that these additional expenses could lead to lower net income compared to the prior year or operating losses. We may purchase additional capital equipment needed to package and test MRAM from wafers manufactured under our technology agreement with Cypress. Item 3. Controls and Procedures. Disclosure Controls and Procedures The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. Internal Control Over Financial Reporting There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II--OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders An annual meeting of shareholders was held on August 17, 2004. There were 4,496,245 shares of common stock entitled to vote at the meeting with a majority represented at the meeting. The shareholders elected six directors to serve until the next Annual Meeting of Shareholders: Terrence Glarner, Daniel A. Baker, James M. Daughton, Robert H. Irish, Jeffrey K. Kaszubinski, and Patricia M. Hollister. Item 5. Other Information. IMPLICATIONS OF MOTOROLA'S SPIN OFF OF FREESCALE On March 10, 1995, we executed a Patent License Option Agreement with Motorola, Inc., which gave Motorola the right but not the obligation to take a license under our MRAM intellectual property within a limited time. On April 14, 2000 we executed a Patent License Option Agreement Amendment which obligated Motorola to pay NVE $500,000 in consideration for extending the Patent License Option Agreement, and gave Motorola the right to elect to exercise its option to license our intellectual property for a further payment of $800,000. On September 18, 2000 Motorola notified us that it was electing to exercise its option to acquire a non-exclusive, non-transferable, and non-assignable license under the Patent License Option Agreement Amendment and made the corresponding further payment. Certain of our patents cover MRAM cells with transistor selection for data retrieval, which we believe may be necessary for successful high-density, high- performance MRAMs. We know of no practical alternative design being pursued by potential MRAM suppliers that could be sold in commercial quantities in the foreseeable future. On July 16, 2004 Motorola spun off its Freescale Semiconductor Division as a separate, publicly-traded entity affiliated with, and controlled by, Motorola including Motorola's semiconductor manufacturing facilities. In early October 2004 we received written notification that Motorola intends to distribute its remaining ownership interest in Freescale to its common stockholders. In its filings with the SEC, Freescale Semiconductor, Inc. has said it has been advised by Motorola that Motorola anticipates that the distribution will occur by the end of 2004. Completion of the distribution is contingent upon a variety of conditions, and Freescale has stated that the distribution may not occur by the contemplated time or may not occur at all. In a letter received in early October 2004, Motorola and Freescale asked us to consent to Motorola's assignment of the Patent License Option Agreement to Freescale without additional consideration. We have declined to provide such consent. Our attorneys have reviewed our agreements with Motorola in light of the Freescale spinoff. Based on that review, we believe that as long as Motorola controls Freescale, Motorola and Freescale both enjoy rights granted to our intellectual property under our agreements with Motorola. We believe that Motorola cannot, however, effectively assign its rights to our MRAM intellectual property under our Patent License Option Agreement to Freescale without our consent when, if ever, it no longer controls Freescale. Furthermore, we believe that our Patent License Option Agreement with Motorola will terminate December 31, 2005 or on the date Motorola ceases manufacturing MRAM Products whichever is later. Such a termination appears likely should Motorola eliminate its ability to manufacture MRAM Products through its spinoff of, and any ending control of, Freescale. If Freescale loses its license through Motorola from NVE through ceasing to be controlled by Motorola, or if the Patent License Option Agreement is terminated through a cessation of manufacturing of MRAM Products by Motorola, we would be free to negotiate a new license agreement with Freescale. We have had exploratory discussions with Freescale concerning the possible structure of a new agreement or an assignment of the Patent License Option Agreement with additional amendments. There can be no assurance, however, that agreement will be reached with Freescale, or that any such agreement with Freescale would be on more favorable terms to NVE than the present agreement with Motorola, or that NVE would receive any value under the existing Patent License Option Agreement or any value under any such further agreement with Freescale. Item 6. Exhibits. 31.1 Certification by Daniel A. Baker pursuant to Rule 13a-14(a)/15d-14(a). 31.2 Certification by Richard L. George pursuant to Rule 13a-14(a)/15d-14(a). 32 Certification by Daniel A. Baker and Richard L. George pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99 Cautionary statements for purposes of the "safe harbor" provisions of The Private Securities Litigation Reform Act. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NVE CORPORATION (Registrant) Date October 20, 2004 /s/ Daniel A. Baker ---------------- ------------------------------------- Daniel A. Baker President and Chief Executive Officer Date October 20, 2004 /s/ Richard L. George ---------------- ------------------------------------- Richard L. George Chief Financial Officer EX-31 2 dabex31.txt EXHIBIT 31.1 - CERTIFICATION BY DANIEL A. BAKER Exhibit 31.1 CERTIFICATION I, Daniel A. Baker, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of NVE Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: October 20, 2004 /s/ Daniel A. Baker ------------------- Daniel A. Baker President and Chief Executive Officer EX-31 3 dgex31.txt EXHIBIT 31.2 - CERTIFICATION BY RICHARD L. GEORGE Exhibit 31.2 CERTIFICATION I, Richard L. George, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of NVE Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: October 20, 2004 /s/ Richard L. George ----------------------- Richard L. George Chief Financial Officer EX-32 4 ex32.txt EXHIBIT 32 - SECTION 906 CERTIFICATION Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of NVE Corporation (the "Company") on Form 10-QSB for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Daniel A. Baker, Chief Executive Officer; and Richard L. George, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on our knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 20, 2004 /s/ Daniel A. Baker - --------------------- Daniel A. Baker President and Chief Executive Officer /s/ Richard L. George - --------------------- Richard L. George Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 5 risk2q05.txt EXHIBIT 99 - CAUTIONARY STATEMENTS EXHIBIT 99 CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT NVE Corporation is filing this Exhibit 99 to its Quarterly Report on Form 10- QSB to avail itself of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report on Form 10- QSB, future filings with the Securities and Exchange Commission, press releases and in oral statements made with the approval of an authorized executive officer, the words may, will, expect, anticipate, intend, believe, estimate, should, or continue or the negatives of these terms or other variations on these words or comparable terminology are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These types of statements and the facts or events to which they relate express risks and uncertainties that could cause actual results to differ materially from historical financial condition, operating results, business prospects or any other aspect of NVE, and those presently anticipated or projected. We caution readers that the following important factors, among others, could affect our financial condition, operating results, business prospects or any other aspect of NVE, and could cause our actual results to differ materially from that projected or estimated by us in the forward-looking statements made by us or on our behalf. Although we have attempted to list below the important factors which do or may affect our financial condition, operating results, business prospects or any other aspect of NVE, other factors may in the future prove to be more important. New factors emerge from time to time and it is not possible for us to predict all of such factors. Similarly, we cannot necessarily assess or quantify the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in forward- looking statements. RISKS RELATED TO OUR BUSINESS ALTHOUGH WE HAVE BEEN PROFITABLE RECENTLY, WE HAVE A HISTORY OF OPERATING LOSSES AND COULD SUFFER FURTHER LOSSES IN THE FUTURE. We had an accumulated deficit of $2,699,768 as of March 31, 2004. Although we reported positive net income in fiscal 2004 and fiscal 2003, prior to fiscal 2003 we had a history of losses. Additional expenditures could lead to operating losses in fiscal 2005 and beyond. Shifting resources from government- funded research contracts to company-funded research may increase our research and development expenses. We expect selling, general and administrative expenses to increase in fiscal 2005 if we rollout MRAM manufactured under our technology agreement with Cypress Semiconductor Corporation. Expenditures relating to MRAM license procurement and legal expenses relating to enforcing our MRAM intellectual property may also increase. WE RELY ON GOVERNMENT CONTRACTS FOR A LARGE PERCENTAGE OF OUR REVENUES AND WE WILL LOSE REVENUE IF WE LOSE THESE CONTRACTS. During fiscal 2004 United States government contracts accounted for approximately 54% of our revenues. Disqualification as a vendor to the United States government for any reason or a material decrease in government funding research would cause serious setbacks and would likely hamper both future research and development activity, as well as related revenues. FAILURE TO QUALIFY AS A SMALL BUSINESS UNDER FEDERAL REGULATIONS COULD MAKE US INELIGIBLE FOR SOME GOVERNMENT-FUNDED RESEARCH GRANTS WHICH COULD HAVE A SIGNIFICANT IMPACT ON OUR REVENUE AND OUR ABILITY TO MAKE RESEARCH AND DEVELOPMENT PROGRESS. Federal regulations place a number of criteria for a business to be eligible to compete for Small Business Innovation Research (SBIR) awards. Those criteria include number of employees and ownership structure. While we believe we meet the criteria, changes in our ownership beyond our control could cause us to lose our eligibility to compete for SBIR awards, which in turn could have a material adverse effect on our revenues profits, and research and development efforts. WE MAY LOSE REVENUE IF ANY OF OUR LARGE CUSTOMERS CANCEL, POSTPONE, OR REDUCE THEIR PURCHASES. We rely on several large customers for a large percentage of our commercial revenues; these include Agilent Technologies, Inc., St. Jude Medical, Inc., the United States Government, 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 WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS. The semiconductor and electronics industries in general have experienced a significant economic downturn during recent years, and several experts are predicting weak demand in the coming quarters. The poor economic environment may have adversely affected the sales of many of our customers' products, thus limiting our sales. Economic conditions may not improve in the near term or at all. Any failure of the economic environment to improve or a future downturn would likely have a material adverse impact on our business and revenues. OUR REPUTATION COULD BE DAMAGED AND WE COULD LOSE REVENUE IF WE FAIL TO MEET TECHNICAL CHALLENGES REQUIRED TO PRODUCE MARKETABLE PRODUCTS. Our products use new technology and we are continually researching and developing product designs and production processes. Our production processes require control of magnetic and other parameters that are not required in conventional semiconductor processes. If we are unable to develop stable designs and production processes we may not be able to produce products that meet our customers' requirements, which could cause damage to our reputation and loss of revenues. WE MAY LOSE BUSINESS AND REVENUE IF OUR CRITICAL PRODUCTION EQUIPMENT FAILS. Our production process relies on certain critical pieces of equipment for defining, depositing, and modifying the magnetic properties of very thin metal films. Some of this equipment was designed or customized by us, and some may no longer be in production. While we have back-ups for some of the equipment, an in-house maintenance staff, some critical spare parts, and maintenance agreements for certain pieces of equipment, we cannot be sure we could repair or replace critical manufacturing equipment were it to fail. OUR FAILURE TO MEET STRINGENT CUSTOMER TECHNICAL REQUIREMENTS COULD RESULT IN THE LOSS OF KEY CUSTOMERS AND POTENTIAL REDUCED SALES. Some of our customers, including Agilent and St. Jude Medical, have stringent technical requirements which require our products to pass certain test and qualification criteria before they are accepted by such customers. Failure to meet those criteria could result in the loss of current sales revenue, customers and future sales. IF WE ARE UNABLE TO DELIVER PRODUCTS WE FACE PENALTIES, INCLUDING LOSS OF CERTAIN EXCLUSIVE MANUFACTURING RIGHTS. Our Agilent supply agreement allows Agilent to gain rights to manufacture couplers based on our technology if we are unable to deliver 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 could 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. THE LOSS OF SUPPLY FROM ANY OF OUR KEY SINGLE-SOURCE WAFER SUPPLIERS COULD IMPACT OUR ABILITY TO PRODUCE AND DELIVER PRODUCTS AND CAUSE LOSS OF REVENUE. Critical suppliers include our suppliers of certain semiconductor wafers which are incorporated in our products. These critical suppliers include Advanced Semiconductor Manufacturing Corporation of Shanghai (China), AMI Semiconductor, Inc., Intersil Corporation, Taiwan Semiconductor Manufacturing Corporation, and Texas Instruments 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. THE LOSS OF SUPPLY FROM ANY OF OUR SINGLE-SOURCE PACKAGING VENDORS COULD IMPACT OUR ABILITY TO PRODUCE AND DELIVER PRODUCTS AND CAUSE LOSS OF REVENUE. We are dependent on our packaging vendors including Circuit 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 the event of a supply interruption. Supply interruptions could seriously jeopardize our ability to provide products that are critical to our business and operations which may cause us to lose revenue. BECAUSE WE ARE SIGNIFICANTLY SMALLER THAN THE MAJORITY OF OUR COMPETITORS, WE MAY LACK THE FINANCIAL RESOURCES NEEDED TO INCREASE OUR MARKET SHARE AND FUTURE REVENUE. Our known competitors and potential competitors include Advanced Micro Devices, Inc., Agilent Technologies, Inc., Allegro Microsystems, Inc., NEC Corporation, Analog Devices, Inc., Fujitsu Limited, Hewlett-Packard Company, IBM Corporation, Infineon Technologies AG, Intel Corporation, NEC Corporation, Ramtron International Corporation, Renesas Technology Corporation, Royal Philips Electronics, Samsung Electronics, Ltd., Sony Corporation, Texas Instruments Inc., Vishay Intertechnology, Xicor, Inc., and others. We believe that our competition has increased in the past year as the technology matures. This has meant more competitors and more severe pricing pressure. Furthermore, our competitors are narrowing or eliminating performance advantages we may have had. We expect these trends to continue, and our future competitiveness will depend on our ability to develop new products and reduce our product costs. Most of our competitors and potential competitors are established companies that have significantly greater financial, technical, and marketing resources than us. While we believe that our products have important competitive advantages, our competitors may succeed in developing and marketing products that perform better or are less expensive than ours, or that would render our products and technology obsolete or noncompetitive. OUR LICENSE AGREEMENTS INCLUDE REVENUE MINIMUMS AND ROYALTY LIMITS WHICH COULD LIMIT THE TOTAL AMOUNT OF REVENUE WE CAN DERIVE UNDER THESE AGREEMENTS. Our existing license agreements do not provide for us to receive royalties until revenue minimums are met by licensees. In addition, some of these agreements place limits on future royalty and license payments. These provisions could substantially delay our potential revenues and profits from these licensing arrangements and could limit the total amount of revenue that we can derive under these license agreements. 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. OUR BUSINESS MAY SUFFER BECAUSE WE HAVE LIMITED INFLUENCE OVER THE RATE OF ADOPTION OF OUR TECHNOLOGY, AND MRAM TECHNOLOGY MAY NOT BUILD INTO A LARGE OR SIGNIFICANT MARKET. A significant portion of our future revenues and profits is dependent on our licensees and manufacturing partners introducing MRAM products. Production difficulties, technical barriers, high production costs, poor market reception or other problems, almost all of which are outside our control, could prevent the deployment of MRAM or limit its market potential. In addition, our licensees 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. OUR LICENSEES MAY NOT BE ABLE TO MAKE COMMERCIALLY VIABLE MRAMS, WHICH WOULD LIMIT OUR REVENUE FROM MRAM AND LIKELY CAUSE OUR STOCK PRICE TO DECLINE. MRAM is a new technology, and we are almost completely dependent on our licensees to convert our intellectual property into commercially viable MRAM. While our licensees have made prototypes and samples, several technical and manufacturing issues must be resolved before commercially viable devices can be produced, and these problems may never successfully be solved. Cypress has said it expects to sample in calendar 2004, but has missed several schedule targets for sample devices, and further delays could have a material impact on our revenues from MRAM. In July 2004, Motorola, Inc. transferred its semiconductor business to a majority owned subsidiary, Freescale Semiconductor, Inc. Freescale expects to be in production with standard MRAM products in 2005, but any delays could have a material impact on our potential MRAM license revenues. WE ARE HIGHLY DEPENDENT ON MOTOROLA OR FREESCALE TO COMBINE OUR MRAM TECHNOLOGY WITH CONVENTIONAL SEMICONDUCTORS AND WE MAY LOSE POTENTIAL REVENUE IF MOTOROLA OR FREESCALE ARE UNSUCCESSFUL. Embedded MRAM, that is, MRAM combined with conventional semiconductors, is a major market for MRAM and our primary potential source of royalties from Motorola. We are highly dependent on the success of Motorola's majority owned subsidiary, Freescale, embedding MRAM into cellphone and system integrated circuits. Technical difficulties with embedding, production difficulties, high production costs, or other problems, almost all of which are outside our control, could limit our potential MRAM royalties under our license agreement with Motorola. WE ARE HIGHLY DEPENDENT ON CYPRESS FOR POTENTIAL SUPPLY OF MRAM DEVICES USING THEIR DESIGNS AND MAY LOSE REVENUE IF WE NEED TO REPLACE CYPRESS AS A SUPPLIER. Although we have rights to Cypress' MRAM designs, mask works, and other intellectual property, it could be difficult for us to fabricate devices based on those designs and intellectual property at a foundry other than Cypress. This is because other potential foundries might not have the needed equipment, and Cypress' designs are tailored for their factories. If Cypress is unable to manufacture devices for us for any reason, it could be difficult for us to find another manufacturer for their designs. WE MUST PACKAGE AND TEST CYPRESS MRAM WAFERS TO MAKE SALABLE PRODUCTS, AND MAY LOSE REVENUE IF WE ARE UNABLE TO PROCURE SUCH SERVICES. Although Cypress is obligated under our agreement to provide us MRAM wafers, it is not obligated to provide us packaged, tested devices. We may be able to reach an agreement with Cypress to provide packaging and testing services, or we may be able to procure such "back-end" services from a third party. Delays or failure to procure such services could cause us to lose or delay potential revenues from selling MRAM devices. ONE OR MORE OF OUR LICENSEES COULD CANCEL THEIR MRAM DEVELOPMENT PROGRAMS, WHICH WOULD REDUCE OUR FUTURE REVENUE POTENTIAL. Freescale and Cypress could cancel their MRAM development programs at any time because of financial or other consideration. A cancellation of Freescale's MRAM program would eliminate our opportunity to receive royalties from the sale of devices under our agreement with Motorola. A cancellation of Cypress' MRAM program would likely eliminate our opportunity to sell devices based on their designs. OUR FUTURE BUSINESS MAY SUFFER BECAUSE WE MAY NOT BE ABLE TO CONSUMMATE ADDITIONAL MRAM LICENSE AGREEMENTS. Although there are potential licensees for our MRAM intellectual property in addition to our current licensees and partners, we may never be able to consummate additional license agreements. Potential licensees for our MRAM intellectual property might not be interested unless and until the commercial viability of the technology is demonstrated. Potential licensees could also use their own or a third party's MRAM intellectual property rather than ours. In addition, our existing agreements place restrictions on future license agreements. Specifically, one of our agreements allows one of our licensees to approve licenses with certain other potential licensees. Each of these limitations could hinder our ability to consummate additional MRAM license agreements. WE WILL NOT RECEIVE ROYALTIES IF OUR LICENSEES DO NOT USE OUR INTELLECTUAL PROPERTY. Our license agreements do not require our licensees to use our intellectual property. Although we believe, based on their public disclosures, that the devices that Motorola, Inc. and Cypress Semiconductor Corporation have demonstrated would use our intellectual property at least to some extent, our licensees could circumvent or find alternatives to all or some of our technology, and our license agreements require royalty payments only if our licensees use our intellectual property in their devices. It is possible that our licensees might make MRAM devices without using our technology or infringing on our patents, and we would not receive royalties on such devices. WE MAY NOT BE ABLE TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS OR OUR TECHNOLOGY MAY PROVE TO INFRINGE UPON PATENTS OR RIGHTS OWNED BY OTHERS WHICH MAY PREVENT THE FUTURE SALE OF OUR PRODUCTS OR INCREASE THE COST OF SUCH SALES. We protect our proprietary technology and intellectual property by seeking patents, trademarks, and copyrights, and by maintaining trade secrets through entering into confidentiality agreements with employees, suppliers, customers, and prospective customers depending on the circumstances. We hold patents or are the licensee of others owning patented technology covering certain aspects of our sensor, coupler, and MRAM technology. These patent rights may be challenged, rendered unenforceable, invalidated or circumvented. In addition, rights granted under the patents or under licensing agreements may not provide a competitive advantage to us. At least several potential MRAM competitors have described designs that we believe would infringe on our patents if such designs were to be commercialized. Efforts to legally enforce patent rights can involve substantial expense which we may not be able to afford and in any case may not be successful. Further, others may independently develop similar, superior, or parallel technologies to any technology developed by us, or our technology may prove to infringe upon patents or rights owned by others. Thus the patents held by or licensed to us may not afford us any meaningful competitive advantage. Also, our confidentiality agreements may not provide meaningful protection of our proprietary information. Our inability to maintain our proprietary rights could have a material adverse effect on our business, financial condition and results of operations. OUR FUTURE BUSINESS MAY SUFFER IF WE ARE UNABLE TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS WITH EXISTING LICENSEES. Our success in enforcing our intellectual property rights may be dependent on our ability to enforce our contract rights under existing license agreements. Our existing licensees could claim without merit that they do not use our intellectual property or claim that one or more of our patents are invalid. In 2000 we were forced to resort to litigation to enforce our intellectual property rights with Motorola, and we plan to continue to vigorously defend our intellectual property rights. Our limited capital resources could put us at a disadvantage if we take legal action to enforce our intellectual property rights. WE MAY NEED TO NEGOTIATE A NEW MRAM LICENSING AGREEMENT WITH FREESCALE SEMICONDUCTOR AND THE OUTCOME OF SUCH NEGOTIATIONS IS UNCERTAIN. We believe that our Patent License Option Agreement with Motorola will terminate December 31, 2005 or on the date Motorola ceases manufacturing MRAM Products whichever is later. We believe Motorola is manufacturing MRAM products through its majority owned subsidiary, Freescale. However, we have been notified that Motorola intends to distribute its remaining ownership interest in Freescale to its common stockholders. In its filings with the SEC, Freescale Semiconductor, Inc. has said it has been advised by Motorola that Motorola anticipates that the distribution will occur by the end of 2004. If Freescale loses its license through Motorola from NVE through ceasing to be controlled by Motorola, or if the Patent License Option Agreement is terminated through a cessation of manufacturing of MRAM Products by Motorola, we would be free to negotiate a new license agreement with Freescale. There can be no assurance, however, that agreement will be reached with Freescale, or that any such agreement with Freescale would be on more favorable terms to NVE than the present agreement with Motorola, or that NVE would receive any value under the existing Patent License Option Agreement or any value under any such further agreement with Freescale. MOTOROLA MAY NOT DISTRIBUTE ITS CONTROLLING INTEREST IN FREESCALE, IN WHICH CASE OUR AGREEMENT WITH MOTOROLA WOULD CONTINUE TO APPLY TO FREESCALE AND WE WOULD NOT HAVE THE OPPORTUNITY TO NEGOTIATE A MORE FAVORABLE LICENSING AGREEMENT WITH FREESCALE. Completion of Motorola's distribution of its remaining ownership interest in Freescale is contingent upon a variety of conditions, and may not occur by the contemplated time or may not occur at all. If Motorola does not distribute its controlling interest in Freescale, our patent license option agreement with Motorola might continue to apply to Freescale in which case we would not have the opportunity to negotiate a more favorable license agreement with Freescale. The limitations of our agreement with Motorola may continue to apply at least until other termination provisions are met. Limitations of our agreement with Motorola include revenue minimums and royalty limits which could limit our royalties from Freescale's sales of MRAM products. OUR BUSINESS SUCCESS MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO ATTRACT AND RETAIN HIGHLY-QUALIFIED MANAGEMENT AND TECHNICAL EMPLOYEES. We have no employment agreements with any of our management other than our Chief Executive Officer, 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. RISKS RELATED TO BUYING OUR STOCK OUR STOCK HAS BEEN MORE VOLATILE THAN OTHER TECHNOLOGY SECTOR STOCKS. The market price of our common stock has experienced significant fluctuations and may continue to fluctuate in the future. We believe these fluctuations have been greater on a percentage basis than other technology sector stocks. OUR STOCK MAY BE SUBJECT TO VOLATILITY BECAUSE IT IS NOT LISTED ON A NATIONAL MARKET. Our common stock is traded on the NASDAQ SmallCap Market, which has less daily trading volume on average than the average trading market for companies quoted on the NASDAQ National Market or the New York Stock Exchange. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. THE PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED BY SIGNIFICANT PRICE FLUCTUATIONS DUE TO A NUMBER OF FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL. The market price of the common stock may be significantly affected by many factors, including: * technological innovations by us, our licensees, or our competitors; * the announcement of new products, product enhancements, contracts, or license agreements by us, our licensees, or our competitors; * changes in requirements or demands for our products; * changes in prices of our or our competitors' products and services; * quarterly variations in our operating results; * changes in our revenue and revenue growth rates; * changes in revenue estimates, earnings estimates, or market projections by market analysts, speculation in the press or analyst community; * short selling and covering of short positions in our stock; and * general market conditions or market conditions specific to particular industries. The stock prices for many companies in the technology sector have experienced wide fluctuations that often have been unrelated to their operating performance. Such fluctuations may adversely affect the market price of our common stock. -----END PRIVACY-ENHANCED MESSAGE-----