-----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, C3ZJiKgSsbZVQY78qVnahQrfX5ylLnfhTej813fjrfSTguojQpGX6/VDfGfPq7iG pvP7c78EMjk3FWelz4TwDA== 0000724910-05-000017.txt : 20050720 0000724910-05-000017.hdr.sgml : 20050720 20050720160905 ACCESSION NUMBER: 0000724910-05-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050720 DATE AS OF CHANGE: 20050720 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12196 FILM NUMBER: 05963983 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 10-Q 1 tenq1-06.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005 Commission File Number: 000-12196 NVE Corporation (Exact name of registrant as specified in its charter) Minnesota 41-1424202 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11409 Valley View Road, Eden Prairie, Minnesota 55344 (Address of principal executive offices) (Zip Code) (952) 829-9217 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $0.01 Par Value - 4,570,104 shares outstanding as of July 15, 2005 PART I--FINANCIAL INFORMATION Item 1. Financial Statements. NVE CORPORATION BALANCE SHEETS JUNE 30, 2005 AND MARCH 31, 2005
(Unaudited) * June 30, 2005 March 31, 2005 -------------- -------------- ASSETS Current assets Cash and cash equivalents $ 1,462,601 $ 1,240,205 Short-term investments 759,030 252,775 Accounts receivable, net of allowance for uncollectible accounts of $15,000 2,207,720 2,285,472 Inventories 1,660,158 1,572,759 Deferred tax asset 783,395 756,074 Prepaid expenses and other assets 130,990 130,873 -------------- -------------- Total current assets 7,003,894 6,238,158 Fixed assets Machinery and equipment 4,102,089 4,140,307 Leasehold improvements 413,482 413,482 -------------- -------------- 4,515,571 4,553,789 Less accumulated depreciation 2,927,035 2,826,227 -------------- -------------- Net fixed assets 1,588,536 1,727,562 Long-term investments 6,269,848 6,224,284 -------------- -------------- Total assets $ 14,862,278 $ 14,190,004 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 280,426 $ 319,427 Accrued payroll and other 506,061 465,930 Deferred revenue 219,914 267,355 Capital lease obligations 84,392 67,430 -------------- -------------- Total current liabilities 1,090,793 1,120,142 Capital lease obligations, less current portion - 33,281 -------------- -------------- Total liabilities 1,090,793 1,153,423 Shareholders' equity: Common stock 45,701 45,698 Additional paid-in capital 14,307,683 14,064,625 Accumulated other comprehensive loss (53,034) (132,228) Accumulated deficit (528,865) (941,514) -------------- -------------- Total shareholders' equity 13,771,485 13,036,581 -------------- -------------- Total liabilities and shareholders' equity $ 14,862,278 $ 14,190,004 ============== ==============
*The March 31, 2005 Balance Sheet is from the audited financial statements contained in our Annual Report on Form 10-KSB for the year ended March 31, 2005. See accompanying notes. NVE CORPORATION STATEMENTS OF INCOME QUARTERS ENDED JUNE 30, 2005 AND 2004 (Unaudited)
Quarter Ended June 30 2005 2004 ------------ ------------ Revenue Product sales $ 1,784,250 $ 1,363,140 Contract research and development 1,241,298 1,526,087 ------------ ------------ Total revenue 3,025,548 2,889,227 Cost of sales 1,681,118 1,625,881 ------------ ------------ Gross profit 1,344,430 1,263,346 Expenses Research and development 376,800 361,259 Selling, general, and administrative 409,594 484,596 ------------ ------------ Total expenses 786,394 845,855 ------------ ------------ Income from operations 558,036 417,491 Interest income 68,319 54,869 Interest expense (2,053) (4,457) Other income 30,815 15,768 ------------ ------------ Income before taxes 655,117 $ 483,671 Provision for income taxes 242,468 - ------------ ------------ Net income $ 412,649 $ 483,671 ============ ============ Net income per share - basic $ 0.09 $ 0.11 ============ ============ Net income per share - diluted $ 0.09 $ 0.10 ============ ============ Weighted average shares outstanding Basic 4,569,861 4,493,180 Diluted 4,683,151 4,977,489
See accompanying notes. NVE CORPORATION STATEMENTS OF CASH FLOWS QUARTERS ENDED JUNE 30, 2005 AND 2004 (Unaudited)
Quarter Ended June 30 2005 2004 ------------ ------------ OPERATING ACTIVITIES Net income $ 412,649 $ 483,671 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 143,142 118,587 Gain on sale of fixed assets (25,500) - Deferred income taxes 240,468 - Changes in operating assets and liabilities: Accounts receivable 77,752 (211,486) Inventories (87,399) 30,221 Prepaid expenses and other (117) (26,670) Accounts payable and accrued expenses 1,130 (76,442) Deferred revenue (47,441) (31,040) ------------ ------------ Net cash provided by operating activities 714,684 286,841 INVESTING ACTIVITIES Proceeds from the sale of fixed assets 25,500 - Purchases of fixed assets - (233,666) Purchases of investment securities (504,063) (19,922) ------------ ------------ Net cash used in investing activities (478,563) (253,588) FINANCING ACTIVITIES Net proceeds from sale of common stock 2,594 50,003 Repayment of capital lease obligations (16,319) (40,594) ------------ ------------ Net cash (used in) provided by financing activities (13,725) 9,409 ------------ ------------ Increase in cash and cash equivalents 222,396 42,662 Cash and cash equivalents at beginning of period 1,240,205 1,055,796 ------------ ------------ Cash and cash equivalents at end of period $ 1,462,601 $ 1,098,458 ============ ============
See accompanying notes. NVE CORPORATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 (Unaudited) 1. 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. 2. 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 Securities and Exchange Commission rules and 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 unaudited financial statements be read in conjunction with the audited financial statements and the notes included in our latest annual financial statements included in our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2005. The results of operations for the quarter ended June 30, 2005 are not necessarily indicative of the results that may be expected for the full fiscal year ending March 31, 2006. NOTE 3. FINANCIAL INSTRUMENTS Our financial instruments consist of cash and cash equivalents, investments, short-term trade receivables, and accounts payable. Because of their short-term nature, carrying values of our financial instruments approximate their fair value. NOTE 4. COMPREHENSIVE INCOME The components of comprehensive income are as follows:
Quarter ended June 30 2005 2004 ------------ ------------ Net income $ 412,649 $ 483,671 Unrealized gain (loss) from investments 79,194 (158,245) ------------ ------------ Comprehensive income $ 491,843 $ 325,426 ============ ============
NOTE 5. INVENTORIES Inventories consisted of the following:
June 30 March 31 2005 2005 ------------ ------------ Raw materials $ 852,590 $ 754,456 Work-in-process 619,641 614,337 Finished goods 367,927 383,966 ------------ ------------ 1,840,158 1,752,759 Less obsolescence reserve (180,000) (180,000) ------------ ------------ $ 1,660,158 $ 1,572,759 ============ ============
NOTE 6. STOCK-BASED COMPENSATION We have adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) Nos. 123 and 148, Accounting for Stock-Based Compensation, but apply Accounting Principles Board 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 2.7% to 3.1% for the three months ended June 30, 2005 and 2004; expected volatility of 55% to 99% for the three months ended June 30, 2005 and 2004; 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:
Quarter Ended June 30 2005 2004 ------------ ------------ Net income applicable to common shares: As reported $ 412,649 $ 483,671 Pro forma adjustment for stock options (10,319) (132,564) ------------ ------------ Pro forma net income $ 402,330 $ 351,107 ============ ============ Earnings per share: Basic - as reported $ 0.09 $ 0.11 Basic - pro forma $ 0.09 $ 0.08 Diluted - as reported $ 0.09 $ 0.10 Diluted - pro forma $ 0.09 $ 0.07
NOTE 7. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We do not expect to pay taxes in the near future because we have stock- based compensation deductions. We began recognizing tax expenses for reporting purposes in fiscal 2006, however, because under SFAS No. 109, Accounting for Income Taxes, stock-based compensation deductions do not reduce provision for income taxes reported for book purposes. Regardless of our expectations, there can be no assurance that we will generate any specific level of continuing earnings. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. Forward-looking statements Some of the statements made in this Report 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 that may be alluded to in this report and those discussed in Exhibit 99 to this Report, as well as those discussed in Exhibit 99 to our Annual Report on Form 10-KSB for the year ended March 31, 2005. General We develop, manufacture, 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. Quarter ended June 30, 2005 compared to the quarter ended June 30, 2004 The table below summarizes certain summary information for various items for the periods indicated:
Percentage of Revenue Period- Quarter Ended June 30 to-Period 2005 2004 Change ------- ------- --------- Revenue Product sales 59.0 % 47.2 % 30.9 % Research and development 41.0 % 52.8 % (18.7)% ------- ------- Total revenue 100.0 % 100.0 % 4.7 % Cost of sales 55.6 % 56.3 % ------- ------- Gross profit 44.4 % 43.7 % Total expenses 26.0 % 29.3 % (7.0)% ------- ------- Income from operations 18.4 % 14.4 % 33.7 % Net interest and other income 3.2 % 2.3 % 46.7 % ------- ------- Income before taxes 21.6 % 16.7 % 35.4 % Provision for income taxes 8.0 % - - ------- ------- Net income 13.6 % 16.7 % (14.7)% ======= =======
Total revenue for the quarter ended June 30, 2005 (the first quarter of fiscal 2006) was $3,025,548, an increase of 5% from revenue of $2,889,227 for the quarter ended June 30, 2004 (the first quarter of fiscal 2005). The increase was due to a 31% increase in product sales to $1,784,250 from $1,363,140, partially offset by a decrease in contract research and development revenue. Gross profit margin increased to 44.4% for the first quarter of fiscal 2006 from 43.7% for fiscal 2005. The increase was due to a more favorable revenue mix and higher product margins due to the deployment of lower-cost coupler designs. Research and development expenses increased by 4% to $376,800 for the quarter ended June 30, 2005 compared to $361,259 for the quarter ended June 30, 2004. The increase was due to a shift from government-funded to company-funded research, an increase in efforts to secure new research contracts, and efforts to develop new and improved commercial products. Selling, general and administrative expenses for the quarter ended June 30, 2005 decreased by 15% to $409,594 compared to $484,596 for the quarter ended June 30, 2004. The decrease was due to a shift to distributors to sell our products rather than manufacturers' representatives. This shift reduced commissions we paid and expenses associated with supporting the manufacturers' representatives. Pre-tax income increased 35% to $655,117 for the quarter ended June 30, 2005 from $483,671 for the quarter ended June 30, 2004. The increase was due to an increase in revenue, an increase in gross profit margin, and a decrease in selling, general and administrative expenses. These changes were partially offset by an increase in research and development expense. The provision for income taxes for the quarter ended June 30, 2005 is due to the exhaustion of our net operating losses in fiscal 2005. We do not expect to pay cash taxes in the near future, however, because we have significant stock-based compensation deductions. Net income totaled $412,649 for the quarter ended June 30, 2005 compared to $483,671 for the quarter ended June 30, 2004. The decrease in net income was due to the provision for income taxes. Liquidity and capital resources At June 30, 2005 we had $8,491,479 in cash and investments compared to $7,717,264 at March 31, 2005. The increase was due to cash generated from operations. Accounts receivable decreased to $2,207,720 at June 30, 2005 from $2,285,472 at March 31, 2005. The decrease was primarily due to payments for product shipments weighted toward late in fiscal 2005 as product sales recovered from a downturn in the quarter ended December 31, 2004. We expect accounts receivable in the future to approximately track revenue. Inventory increased to $1,660,158 at June 30, 2005 from $1,572,759 at March 31, 2005. The increase was primarily due to purchases of foundry wafers either to secure more favorable pricing or to guard against a possible supply shortage. The risk of a foundry wafer supply shortage appears to have since abated. We currently have no material commitments for capital expenditures. We believe our working capital is adequate for our needs at least for the next 12 months. Our Outlook Electronic component industry conditions appeared to improve in the first half of calendar 2005 after a weak second half of calendar 2004, as excess inventories in the electronic component distribution channel were burned off. We are therefore cautiously optimistic for product sales in fiscal 2006 compared to fiscal 2005. We expect research and development revenue to continue to decline in fiscal 2006 due to more limited availability of government research funds, our shift in emphasis from government-funded to company-funded research, particularly new product development, and our focus of contract research on certain strategic areas. We expect gross profit margin to continue to tend to increase in fiscal 2006 due to a continued shift in our revenue mix to product sales from research and development revenue, and as a result of lower-cost product designs completed in fiscal 2005. These increases could be offset, however, by competitive pressures that could cause us to decrease our product selling prices, and by our shift from sales representatives to distributors. Selling, general and administrative expenses could increase as we attempt to acquire additional MRAM license agreements or if we need to enforce existing MRAM license agreements. We expect research and development expenses to increase in fiscal 2006 as we develop new products and continue to shift from government-funded to company-funded research and development. A shortage of budget funds in the last quarter of the government fiscal year could also lead to a decrease in government revenue in the quarter ending September 30, 2005. We do not expect to pay any significant income taxes in fiscal 2006 due to our stock based compensation deductions, however we expect to recognize provisions for income taxes at an effective rate of approximately 37% percent of net income. Unlike net operating loss carryforwards, stock based compensation deductions do not reduce taxes reported for book purposes when realized. Although we anticipate being profitable in fiscal 2006, no assurance can be given that we will be successful in achieving this goal. We are not currently planning any significant capital expenditures in fiscal 2006, although we evaluate capital investments as needs and opportunities arise. We would likely fund any capital expenditures from operating profits, our cash and cash equivalents, or from the sale of a portion of our investments. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Our interest income is subject to interest rate risks on cash, cash equivalents, and investments. Our investments in fixed-rate debt securities, which were classified as available-for-sale as of June 30, 2005, have remaining maturities from one to 60 months, and are exposed to the risk of fluctuating interest rates. Available-for-sale securities had a market value of $7,028,878 at June 30, 2005, representing 47% of our total assets. The primary objective of our investment activities is to preserve capital. We have not used derivative financial instruments in our investment portfolio. We performed a sensitivity analysis assuming a hypothetical 10% adverse movement in interest rates applicable to fixed rate instruments maturing during the next 12 months that are subject to reinvestment risk. As of June 30, 2005, the analysis indicated that these hypothetical market movements would not have a material effect on our financial position, results of operations, or cash flow. Item 4. Controls and Procedures. As of the end of the period covered by this Report, we conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II--OTHER INFORMATION 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 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NVE CORPORATION (Registrant) July 20, 2005 /s/ Daniel A. Baker ------------- ------------------------------------- Date Daniel A. Baker President and Chief Executive Officer July 20, 2005 /s/ Richard L. George ------------- ------------------------------------- Date Richard L. George Chief Financial Officer EX-31 2 dabex31.txt CERTIFICATION BY DANIEL A. BAKER PURSUANT TO RULE 13A-14(A)/15D-14(A) Exhibit 31.1 CERTIFICATION I, Daniel A. Baker, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q 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 registrant as of, and for, the periods presented in this report; 4. The registrant'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 registrant 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 registrant, 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 registrant'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 registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant'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 registrant'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 registrant's internal control over financial reporting. Date: July 20, 2005 /s/ Daniel A. Baker ------------------- Daniel A. Baker President and Chief Executive Officer EX-31 3 rlgex31.txt CERTIFICATION BY RICHARD L. GEORGE PURSUANT TO RULE 13A-14(A)/15D-14(A) Exhibit 31.2 CERTIFICATION I, Richard L. George, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q 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 registrant as of, and for, the periods presented in this report; 4. The registrant'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 registrant 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 registrant, 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 registrant'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 registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant'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 registrant'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 registrant's internal control over financial reporting. Date: July 20, 2005 /s/ Richard L. George ----------------------- Richard L. George Chief Financial Officer EX-32 4 ex32.txt CERTIFICATION BY DANIEL A. BAKER AND RICHARD L. GEORGE PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) The undersigned certify pursuant to 18 U.S.C. Section 1350, that: 1. The accompanying Quarterly Report of NVE Corporation (the "Company") on Form 10-Q for the quarter ended June 30, 2005, 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: July 20, 2005 /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 risk1q06.txt CAUTIONARY STATEMENTS FOR PURPOSES OF THE ???SAFE HARBOR??? PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT 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-Q 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-Q, 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 WE RELY ON GOVERNMENT CONTRACTS FOR A LARGE PERCENTAGE OF OUR REVENUE AND WE WILL LOSE REVENUE IF GOVERNMENT FUNDING IS REDUCED OR ELIMINATED. During fiscal 2005 United States government contracts accounted for the majority of our revenue. A shortage of budget funds in the last quarter of the government fiscal year ending September 30, 2005 could lead to a decrease in our government revenue in our quarter ending September 30, 2005. Certain federal budget proposals for the next government fiscal year ending September 30, 2006 have included less than an inflationary increase for overall research and development funding, and a reduction in dollar terms in the National Nanotechnology Initiative. Furthermore, government research and development funding may move away from basic research, which is the area where most of our contracts are classified, toward near-term development. A material decrease in government funding research or disqualification as a vendor to the U.S. government for any reason would cause serious setbacks and would likely hamper both future research and development activity, as well as related revenue. 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 revenue, 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 revenue; these include Agilent Technologies, Inc., St. Jude Medical, Inc., the United States Government, Digi-Key Corporation, and certain other distributors. In the quarter ended June 30, 2005 we reduced our number of manufacturer's representatives, which increased our dependence on Digi-Key to distribute our products in North America. Orders from these large 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 revenue and our profitability. WE FACE AN UNCERTAIN ECONOMIC ENVIRONMENT IN OUR INDUSTRY THAT COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS. Industry reports indicated a sudden downturn in the semiconductor market in the final months of calendar 2004. Economic conditions appear to have improved in calendar 2005, but conditions could change suddenly. Any future downturn in the economic environment would likely have a material adverse impact on our business and revenue. OUR REPUTATION COULD BE DAMAGED AND WE COULD LOSE REVENUE IF WE FAIL TO MEET TECHNICAL CHALLENGES REQUIRED TO PRODUCE MARKETABLE PRODUCTS. Our products use new technology and we are continually researching and developing product designs and production processes. Our production processes require control of magnetic and other parameters that are not required in conventional semiconductor processes. If we are unable to develop stable designs and production processes we may not be able to produce products that meet our customers' requirements, which could cause damage to our reputation and loss of revenue. OUR FAILURE TO MEET STRINGENT CUSTOMER TECHNICAL REQUIREMENTS COULD RESULT IN THE LOSS OF KEY CUSTOMERS AND POTENTIALLY REDUCE OUR SALES. Some of our customers, including 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. 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. 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 that 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 OF ANY CRITICAL CHEMICALS OR SUPPLIES COULD IMPACT OUR ABILITY TO PRODUCE AND DELIVER PRODUCTS AND CAUSE LOSS OF REVENUE. There are a number of critical chemicals and supplies that we require to make products. These include certain photoresists, polymers, metals, and alloys. We maintain inventory of critical chemicals and materials, but in many cases we are dependant on single sources, and some of the materials could be discontinued by their suppliers at any time. Any supply interruptions could seriously jeopardize our ability to provide products that are critical to our business and operations and may cause us to lose revenue. THE LOSS OF SUPPLY FROM ANY OF OUR SINGLE-SOURCE PACKAGING VENDORS COULD IMPACT OUR ABILITY TO PRODUCE AND DELIVER PRODUCTS AND CAUSE LOSS OF REVENUE. We are dependent on our packaging vendors including NS Electronics Bangkok (Thailand), Ltd., and Circuit Electronic Industries Public Co., Ltd. ("CEI," Ayutthaya, Thailand). Some of our products use processes or tooling unique to a particular packaging vendor, and it might be expensive, time-consuming, or impractical to convert to another vendor in the event of a supply interruption. CEI has notified us that it has entered voluntary debt rehabilitation under Thailand law, which we understand to be roughly analogous to a reorganization proceeding under Chapter 11 of the U.S. Bankruptcy Code. CEI has told us that the rehabilitation process will not affect their ability to support their customers in any way. We have identified alternate vendors in case CEI's ability to serve our needs becomes impaired, however it could prove expensive or time-consuming to convert to an alternate vendor. Any supply interruptions could seriously jeopardize our ability to provide products that are critical to our business and operations and may cause us to lose revenue. Higher packaging costs with an alternate vendor could have a significant impact on our profitability. 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., Analog Devices, Inc., Coatue, Cypress Semiconductor Corporation, Elpida Memory, Inc., Fairchild Semiconductor International, Fujitsu Limited, Grandis, Inc., IBM Corporation, Infineon Technologies AG, Intel Corporation, Linear Technology Inc., Macronix International Co., Ltd., Maxim Integrated Products, Inc., Nantero, Inc., NEC Corporation, Ovonyx, Inc., Ramtron International Corporation, Renesas Technology Corporation, Royal Philips Electronics, Samsung Electronics, Ltd., Sensitec GmbH, Simtek Corporation, Spintec, Spintron, STMicroelectronics NV, Texas Instruments Inc., Thin Film Electronics ASA, Toshiba Corporation, Vishay Intertechnology, and others. We believe that we face particularly aggressive competition in our coupler business, and we believe that our competition is increasing 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 revenue 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 revenue 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 revenue and profits is dependent on our current and future licensees introducing MRAM products. Production difficulties, technical barriers, high production costs, poor market reception or other problems, almost all of which are outside our control, could prevent the deployment of MRAM or limit its market potential. In addition, our licensees may have other priorities that detract attention and resources from introduction of MRAM products using our technology. Furthermore, competing technologies could prevent or supplant MRAM from becoming an important memory technology. 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 licensees to convert our intellectual property into commercially viable MRAM. While our licensees have made samples, there may be technical and manufacturing issues to be resolved before commercially viable devices can be produced, and these problems may never successfully be solved. 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, Inc. We are highly dependent on the success of Motorola or Freescale Semiconductor, Inc. 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. FREESCALE COULD CANCEL ITS MRAM DEVELOPMENT PROGRAM AT ANY TIME, WHICH WOULD REDUCE OUR FUTURE REVENUE POTENTIAL. Freescale could cancel its MRAM development programs at any time because of financial or other considerations. Such a cancellation would likely eliminate our opportunity to negotiate a license agreement with Freescale or receive royalties from the sale of devices under our agreements with Motorola. Furthermore, we believe Royal Philips Electronics and STMicroelectronics NV are dependent on Freescale for their MRAM designs. Therefore a cancellation or lack of success of Freescale's MRAM programs would likely hamper or eliminate any opportunity to negotiate license agreements with Philips or STMicroelectronics. OUR FUTURE BUSINESS MAY SUFFER BECAUSE WE MAY NOT BE ABLE TO CONSUMMATE ADDITIONAL MRAM LICENSE AGREEMENTS. Although there are potential licensees for our MRAM intellectual property in addition to our current licensees, we may never be able to consummate additional license agreements. Potential licensees for our MRAM intellectual property might not be interested unless and until the commercial viability of the technology is demonstrated. Potential licensees could also use their own or a third party's MRAM intellectual property rather than ours. In addition, our existing agreements place restrictions on future license agreements. Specifically, one of our agreements allows one of our licensees to approve licenses with certain other potential licensees. Each of these limitations could hinder our ability to consummate additional MRAM license agreements. WE 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 devices Freescale and Motorola have described 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 NOT BE ABLE TO NEGOTIATE A NEW MRAM LICENSING AGREEMENT WITH FREESCALE. Our Patent License Option Agreement with Motorola provides for termination December 31, 2005 or on the date Motorola ceases manufacturing MRAM Products whichever is later. Such a termination appears likely as a result of Motorola apparently having eliminated its ability to manufacture MRAM Products through its spinoff of Freescale. We are free to negotiate a new agreement with Freescale or an assignment of the Motorola Patent License Option Agreement to Freescale, but would do so only with amendments thereto. There can be no assurance, however, that any such agreement can 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 ATTEMPT TO HAVE MRAM MANUFACTURED BY FREESCALE FOR MOTOROLA UNDER OUR AGREEMENT WITH MOTOROLA, WHICH COULD BE UNDER LESS FAVORABLE TERMS FOR US THAN AN AGREEMENT WITH FREESCALE. Motorola has indicated to us that it may attempt to have MRAMs manufactured by Freescale for Motorola under the so-called "have made" rights in our agreement with Motorola. We believe Motorola will likely have terminated this agreement and so relinquish its have-made rights at the end of 2005, as a result of having transferred its MRAM manufacturing capability to Freescale. If Freescale commences MRAM production, we hope to, before the termination of the Motorola agreement, negotiate a new agreement with Freescale, or an assignment of the Motorola agreement to Freescale, though only with amendments thereto, but there can be no assurances that we will complete such an agreement or assignment. 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, could decide to retire in Fiscal 2006 and we may not be able to replace his technical or contract development expertise. WHILE WE BELIEVE THAT WE CURRENTLY HAVE ADEQUATE INTERNAL CONTROL OVER FINANCIAL REPORTING IN PLACE, IN THE FUTURE OUR MANAGEMENT WILL BE REQUIRED TO EVALUATE OUR INTERNAL CONTROL OVER FINANCIAL REPORTING UNDER SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 AND ANY ADVERSE RESULTS FROM SUCH EVALUATION COULD RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND HAVE AN ADVERSE AFFECT ON OUR FINANCIAL RESULTS AND THE MARKET PRICE OF OUR COMMON STOCK. As required by Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404"), the SEC adopted rules requiring each public company to include a management report assessing the effectiveness of its internal control over financial reporting in Annual Reports on Form 10-KSB or 10-K, and the independent registered public accounting firm auditing such company's financial statements must attest to and report on management's assessment of the effectiveness of the internal control over financial reporting. This requirement will apply to our Annual Report for the fiscal year ending March 31, 2007. While we currently anticipate being able to fully implement the requirements relating to compliance with Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of such activities on our operations due in large part to the lack of precedent available by which to measure compliance with such requirements. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the market price of our common stock. In addition, to the extent we or our independent registered public accounting firm identify a significant deficiency in our internal control over financial reporting, the resources and costs required to remediate such deficiency could have a material adverse impact on our future results of operations. 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. Our stock price declined significantly in the past fiscal year, and could continue to decline. In the past, securities class-action litigation has often been brought against a company following periods of decline in the market price of its securities. In the future we could be the target of this type of litigation. Securities litigation may result in substantial costs and divert management's attention and resources, which can seriously harm our business. The market price of our common stock may be significantly affected by many factors, some of which are beyond our control, including: * technological innovations by us, our licensees, or our competitors; * the announcement of new products, product enhancements, contracts, or license agreements by us, our licensees, or our competitors; * changes in requirements or demands for our products; * changes in prices of our 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. -----END PRIVACY-ENHANCED MESSAGE-----