UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 29, 1996.
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Commission File Number 0-7207
National Micronetics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 14-1507019
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
71 Smith Avenue
Kingston, New York 12401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 338-0333
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
(Title of Class)
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
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in this Form 10-K or any amendment to
this Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates as of
September 4, 1996 was $10,000. For purposes of determining this number all
officers and directors of the registrant are considered to be affiliates of
the registrant. This number is provided only for the purposes of this report
on Form 10-K and does not represent an admission by either the registrant or
any such person as to the status of such person.
As of September 4, 1996, the registrant had 22,312,524 shares of Common Stock
issued and outstanding.
PART I
Item 1. Business
National Micronetics, Inc. (the "Company") was originally incorporated in
1969 in New York and reincorporated in Delaware in 1982. On December 24,
1990, Newmax Co., Ltd. ("Newmax") acquired a controlling interest (50.9%) in
the Company through the purchase of common stock. Newmax, a Korean
corporation, is affiliated with Tae Il Media Co., Ltd. ("Tae Il") which is
a significant customer of the Company. The Company historically had operated
exclusively in the magnetic recording head industry.
In reliance primarily upon assembly facilities owned and operated by its
parent company, Newmax, sales revenue attributable to its parent companies
and debt financing supplied or guaranteed by its parent companies or its
affiliated companies since May 10, 1991, the Company is principally an
integrated manufacturer of magnetic recording heads primarily for computer
disk drives. The Company is currently primarily performing pilot projects
concerning ferrite bars, cores and recording head assemblies.
The Company has begun the distribution and sale of other products. Some,
such as electrical light fixture ballasts and tee shirts, are imported and
outside its previous markets. The Company is dependent upon other
manufacturers and vendors for production and assembly work.
Sales and Customers
The Company's computer products are sold to original equipment
manufacturers.
Because product life cycles for computer products are relatively short, sales
in one period are not necessarily indicative of future sales. At any given
time, the Company is likely to be dependent on sales of specific computer
products to specific customers. Please refer to note 9 to the consolidated
financial statements on page 39 for an analysis of export sales of computer
products, exports of which comprised 75% of net sales in fiscal 1996.
The past sales and customers of the Company may not be indicative of its
future sales and customers, since during the two fiscal years ended June 24,
1995, the Company had sold most of its assembly line production equipment for
manufacturing ferrite cores and slider assemblies and is contemplating
selling different products in new markets. The Company has sold and
solicited orders for electronic light ballasts and tee shirts.
In fiscal 1996, one customer, Newmax, accounted for 67% of net sales on a
consolidated basis. Victas, Inc., accounted for 13% of net sales in fiscal
1996. See footnote 9 on page 39 for a summary of major customers and
footnote 10 to the consolidated financial statements on pages 39 and 40 for
a discussion of related party transactions.
Backlog
A comparison of backlog at fiscal year-end is shown below:
June 29, 1996 June 24, 1995
(in thousands)
$ 878 $1,300
Backlog (primarily Tae Il/Newmax orders at June 29, 1996) includes only those
orders for which a delivery schedule has been specified by the customer,
although such orders may be subject to cancellation or modification by the
customer without significant penalty. The backlog at June 29, 1996 includes
$154,000 in tee shirt orders. Sales fluctuations are not seasonal and often
are not anticipated.
Competition
The Company's principal market is supplying recording heads primarily for
computer disk drives. Newmax, Tae Il and their related entities (see Item
10, under the caption Relationships and Beneficial Interests) are larger and
better capitalized than the Company, which has become almost entirely
dependent upon them for working capital, assembly facilities, personnel,
sales revenue and for bank loan financing. Physical proximity to customers
does not significantly affect competition for computer components due to low
shipping costs for this small and light product. Competition from both
recording head and ferrite core suppliers is principally in the areas of
price, quality and product performance. In addition to changes within the
disk storage market, other types of computer memory technologies may become
competitive with current disk drive applications.
The Company has recently entered two new, unrelated markets - electrical
light fixture ballasts and tee shirts - both of which are highly
competitive.
The Company has not yet ascertained whether there are other markets in which
it will actively compete for significant market share though the Company has
given substantial consideration to at least two product lines as to which
final decisions have not been made.
Research, Development and Engineering
During fiscal years 1996 and 1995 the Company spent approximately $231,000
and $259,000, respectively, in connection with continuing engineering and
product development of computer related products. Research and engineering
efforts are currently being directed toward the enhancement of its floppy
disk drive and tape drive recording head products. For the past four years
there has been substantial direct support from Newmax and Tae Il of
manufacturing operations and current product lines.
The Company is currently performing technical and market research on products
that could be sold by the Company. Many of these products are outside the
Company's previous markets and many would be manufactured for the Company by
contractors or vendors.
Employees
At June 29, 1996 the Company actively employed 45 persons.
Environmental Compliance
The material effects that compliance with federal, state and local provisions
that have been enacted or adopted regulating the discharge of materials into
the environment or otherwise relating to the protection of the environment
upon the future capital expenditures or earnings of the Company are described
in Item 3, Legal Proceedings.
Item 2. Properties
The Company's corporate offices are located at 71 Smith Avenue, Kingston, New
York, 12401. The Company's operations are conducted from 83,000 square feet
of facilities located in Kingston, New York, owned by the Company, and
mortgaged by an institutional lender. The loan from the institutional lender
has been in default since June 30, 1995. In addition to the above, the
Company sold a 5,400 square foot building on September 7, 1995 and vacant
buildings totalling 42,000 square feet remain available for sale.
The Company believes that its facilities and the equipment located therein
are in good working condition and are adequate and sufficient for the current
conduct of its business. The Company has sold or disposed of idle and
obsolete equipment and could not return to the production volumes of previous
years without significant changes in operations or use of subcontractors.
The Company is dependent upon its parent companies for contract production
assembly facilities. See Item 1 above and note 2 to the consolidated
financial statements on page 34 for a discussion of efforts to overcome
underutilization of facilities.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings, except that the
Company has been notified it is one of many potentially responsible parties
("PRP's") for an Environmental Protection Agency ("EPA") Superfund site. A
"PRP" may be jointly and severally liable for clean-up of a Superfund site,
except to the extent of any settlement agreement with the Environmental
Protection Agency.
The site is known as the Solvents Recovery Service of New England Superfund
site and is located on Lazy Lane in Southington, Connecticut. The Company
was notified by the EPA on June 12, 1992 that it was considered to be a PRP
under the Comprehensive Environmental Response, Compensation and Liability
Act (CERCLA) with respect to the above referenced site. The EPA has
identified in excess of 1,600 PRP's for this site.
The EPA has indicated it has incurred costs in excess of $3.35 million but
has not as yet completed a remedial action plan. The EPA is not prepared at
this time to estimate the total cost of remedial action. Two Non-Time
Critical Removal Actions have been undertaken by the PRP's with EPA
approval.
The actions undertaken to date are designed to help limit further
environmental damage and to obtain data to better understand the extent of
damage. Additional treatment will be based upon analysis of data obtained.
The Company has paid its allocated share of these costs, the amount not being
significant to the financial statements of the Company.
The Company is currently unable to predict the outcome of this matter as the
total cost of remedial action has not been determined and the method of
allocation of liability among parties who may ultimately be found liable
remains uncertain.
Item 4. Submission of Matters to a Vote of Security Holders
The last annual meeting of stockholders of the Company was held on March 20,
1991. Since that date, no actions have been taken by written consent of
stockholders and no meetings of stockholders have been held.
PART II
Item 5. Market for Company's Common Stock and Related Stockholder Matters
(a). Price Range of Common Stock
There is no established public trading market for the common stock of the
Company. The Company's Common Stock is traded on the OTC Bulletin Board and
pink sheets. The following table sets forth for the periods indicated the
bid prices of the Company's Common Stock as reported by market makers.
Over-the-counter market quotations reflect inter-dealer prices, without
retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
Fiscal Year High Low
1996
First Quarter $ N/A $ N/A
Second Quarter .01 .01
Third Quarter N/A N/A
Fourth Quarter .001 .001
1995
First Quarter .02 .001
Second Quarter .02 .001
Third Quarter N/A N/A
Fourth Quarter N/A N/A
(b). Approximate Number of Equity Security Holders
The approximate number of holders of record of the Company's common stock as
of August 31, 1996 was 2,500.
(c). Dividends
The Company has not paid any cash dividends on its Common Stock. Due in part
to the working capital deficiency of $11,069,000 and the stockholders'
deficiency of $7,933,000 as of June 29, 1996, the Company does not anticipate
paying dividends for the foreseeable future.
Item 6. Selected Financial Data
Selected Consolidated Statement of Operations Data
(in thousands, except per share amounts)
Year Ended In June
1996 1995 1994 1993 1992
Net sales $ 4,151 $ 3,822 $ 7,227 $12,664 $ 7,397
Cost of products sold 3,605 3,849 7,777 15,287 10,222
Gross profit (loss) 546 (27) (550) (2,623) (2,825)
Research, development
and engineering expense 231 259 481 887 1,141
Selling and administration
expense 849 712 816 849 169
Loss before income taxes (1,336) (1,599) (2,699) (5,083) (5,079)
Net loss (1,336) (1,599) (2,699) (5,083) (5,079)
Net loss per common share $ (0.06) $ (0.07) $(0.12) $ (0.23) $(0.25)
Weighted average shares
outstanding 22,313 22,313 22,313 22,313 20,726
Cash dividends - - - - -
Selected Consolidated Balance Sheet Data
(in thousands)
Year Ended in June
1996 1995 1994 1993 1992
Working capital
deficiency $(11,069) $(10,806) $(11,267) $(12,846) $(4,783)
Total assets 4,817 5,400 5,449 6,819 12,772
Long-term debt and lease
obligations, including
current portion 4,363 4,626 4,494 5,408 6,618
Stockholders' deficiency (7,933) ( 7,059) (6,514) (6,986) (2,469)
The reasons for the significant changes in net sales and cost of products
sold, the significant net losses and the decline in assets are discussed at
Item 7, Management's Discussion and Analysis of Financial Condition, and
Results of Operations.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Fiscal 1992 began with the lay-off of 40 non-production employees. The
Philippine assembly operation of the Company's independent contractor was
closed during August to reduce costs. Total employment was at or about 100
for six months. The remaining 40 production employees were utilized
primarily for engineering experiments to improve the production process. Net
sales for the first six months of fiscal 1992 were a very disappointing
$1,390,000. Every effort was made to reduce overhead spending, but it was
impossible to attempt to break even at this low a sales volume.
During the third quarter of fiscal 1992, the Company began to see signs of
improvement. The Company rehired 100 production employees during the quarter
to work on orders for metal-in-gap recording head ("MIG") products.
Work-in-progress increased significantly as the Company prepared for fourth
quarter deliveries.
Net sales for the fourth quarter of fiscal 1992 were $4,615,000. The backlog
exceeded $7 million at May 4, 1992 and $5 million at June 27, 1992. The
fourth quarter and full year results benefited by the recording of the value
of Maxtor Corporation common stock received from Maxtor as a result of the
Miniscribe bankruptcy. The stock was recorded as a recovery within selling
and administrative expenses of $883,000. At year-end the stock was reduced
to market value of $689,000 by a charge to other expense of $194,000.
The Company sold its Maxtor stock for $1,089,000 in late August and early
September 1992 pursuant to a registration statement filed by Maxtor. The
gain on the sale of $400,000 was recorded in other income during the first
quarter of fiscal 1993. The improved sales trend established during fiscal
1992 continued through the first half of fiscal 1993. Sales began to decline
during the third quarter of fiscal 1993 as the demand for MIG products with
a single sputtered surface declined. The Company continued to sell
significant quantities of established products as it intensified efforts to
develop a double MIG product. The Company qualified a double MIG product
with one customer. The Company continued efforts to qualify double MIG
products with additional customers.
Fiscal 1994 began with increasing volume of double MIG slider sales as well
as an increase in sales of floppy recording head bars. The sale of MIG
products dropped significantly after December 1993 and stopped by the end of
February 1994. Sales of floppy recording head bars increased significantly
beginning in February 1994 and represented the majority of sales recorded for
the rest of fiscal year. The Company continued efforts to obtain orders for
double MIG products throughout fiscal 1994. The dramatic changes in disk
drive design and ready availability of thin-film recording heads combined to
make a very difficult market for selling double MIG products.
Fiscal 1995 saw a continuation of the trend established during the second
half of fiscal 1994. There was a significant lay-off in September 1994 as
the demand for finished floppy recording head bars dropped dramatically. At
that time, the Company began shipping unfinished floppy disc recording head
bars which were less labor intensive and had a higher profit margin. The
lower selling price resulting from a lower labor and overhead content of the
product being sold resulted in a significant reduction in sales for fiscal
1995. There was some improvement in sales to unrelated parties of ferrite
based products made to customers' specifications.
Fiscal 1996 began with significant sales of ferrite products to unrelated
parties. This business began to decline mid-year as orders were completed
and not replaced with new orders. There was an increase in related party
orders for ferrite products in the fourth quarter as well as increased sales
of non-ferrite products to unrelated parties. Employment remained consistent
throughout the year and the Company achieved a positive gross profit margin
for the year. This was the first positive gross profit in over five years.
Current levels of production are low by historic standards for the Company.
The Company recognizes it must significantly increase production to absorb
the engineering and other overhead of its products. Further increases in
production are dependent upon receiving larger orders from current customers
and cooperation of parent companies or independent contractors. Due to the
"customer specific" nature of the Company's products and qualification
procedures, these increases require time and patience to materialize.
Fiscal Year Ended June 29, 1996 ("1996")
Compared to
Fiscal Year Ended June 24, 1995 ("1995")
Net Sales.
The Company's net sales increased by $329,000, or 9%, over 1995. The
increase is due to sales of tee-shirts of $543,000 offset by a decline in
sales of recording head products to related parties.
Gross Profit.
Gross profit, as a percentage of sales, increased from a negative 1% in 1995
to 13% in 1996. This improvement is due to reductions in material and
overhead spending as well as a significant reduction in depreciation charged
to operations as a result of fixed assets becoming fully depreciated.
Research, Development and Engineering.
Research, development and engineering ("R & D"), as a percentage of sales,
decreased from 7% in 1995 to 6% in 1996. The decrease is primarily due to
tee-shirt sales, which require no R & D activity, and a reduction in facility
overhead charged to the R & D department.
Selling and Administration.
Selling and administration expenses ("S & A"), as a percent of sales,
increased from 19% in 1995 to 20% in 1996. The increase in S & A as a
percent of sales is due primarily to the costs associated with developing new
markets for the new product lines being introduced during 1996.
Interest Expense.
Interest expense decreased by $46,000 or 5% from 1995 to 1996. This is a
result of a 3/4% decrease in the prime rate during fiscal 1996 and a
reduction of total long-term debt.
Fiscal Year Ended June 24, 1995 ("1995")
Compared to
Fiscal Year Ended June 25, 1994 ("1994")
Net Sales.
The Company's net sales decreased by $3.4 million, or 47%, from 1994 to
1995.
The decrease was due to a reduction in orders from and sales to the Company's
parent (Newmax) and affiliates.
Gross Profit.
Gross profit, as a percentage of sales, improved from a negative 8% in 1994
to a negative 1% in 1995. This improvement was due to a reduction in sales
of finished products with high labor content and lower than average margins.
Research, Development and Engineering.
Research, development and engineering ("R & D"), as a percentage of sales,
remained constant at 7% of sales for both 1994 and 1995. The R & D effort
was adjusted consistent with the decline in sales during this period.
Selling and Administration.
Selling and administration expenses ("S & A"), as a percentage of sales,
increased from 11% in 1994 to 19% in 1995. The increase in S & A as a
percent of sales is due primarily to the inability to make significant
reductions in administrative costs as sales declined from 1994 to 1995.
Interest Expense.
Interest expense increased by $42,000 or 5% from 1994 to 1995. This is the
result of an increase of 3/4% in the prime interest rate from 1994 to 1995
and a revision in the term loan increasing the stated rate from prime to
prime plus 1%.
Inflation
Prices in the peripheral data storage market do not ordinarily increase to
offset the effects of inflation. The Company anticipates that inflationary
effects on its costs will be largely offset through productivity increases.
The Company has curtailed production of certain products due to the inability
to obtain price increases and reduce costs.
Liquidity and Capital Resources
The Company entered into an agreement with a lending institution on May 10,
1991. On April 30, 1992 this loan was converted from a $4,000,000 one year
renewable loan to a loan with a fixed repayment plan. On December 23, 1994
the lending institution agreed to a modification of repayment terms resulting
in quarterly payments due from September 30, 1996 through June 30, 1997. The
balance remaining unpaid on this loan is $2,741,000 as of June 29, 1996 and
$2,841,000 as of June 24, 1995. Although the Company has not made principal
payments and is therefore in default, monthly interest payments have been
made within 90 days of their respective due dates. Collateral provided by
a Newmax affiliate (guarantor) included a letter of credit issued by a Korean
bank. The current letter of credit for $2,850,000 expires November 19, 1996
and must be replaced at that time. The Company expects the letter of credit
to be renewed upon maturity. The Company entered into a $3,000,000 term loan
agreement with the same lending institution on November 5, 1991. On December
23, 1994 the lending institution agreed to a modification of repayment terms
resulting in quarterly payments due from June 30, 1995 through June 30,
1996.
The balance remaining unpaid on this loan is $1,611,000 as of June 29, 1996
and $1,645,000 as of June 24, 1995. Although the Company has not made
principal payments and is therefore in default, monthly interest payments
have been made within 90 days of their respective due dates.
The term loan and the May 1991 revolving credit loan are secured by
substantially all the assets of the Company, including a $7,000,000 first
mortgage on the facilities of the Company in Kingston, New York. The term
loan has been guaranteed by the related parties Newmax, Co., Ltd., Tae Il
Media Co., Ltd. and Mr. K.H. Chung. The term loan requires principal
payments of $1,611,000 in fiscal 1997, as all payments are past due.
The Company had no material commitments for capital expenditures as of June
29, 1996. Depreciation has exceeded capital expenditures by at least
$500,000 per year for the last three years. Required repayments of long-term
debt for fiscal 1997 are $3,752,000. The repayment terms with the primary
lending institution had been modified to decrease the payments originally
scheduled for fiscal 1995 and increase payments that will be required for
fiscal 1997. The Company did not make the $329,000 payment due on June 30,
1995 or subsequent quarterly payments, due to its limited cash resources and
thereby defaulted on the lending agreements. Therefore, $611,000 of payments
originally due after June 29, 1997 have been reclassified as current
liabilities. A revised payment schedule is being discussed with the primary
lending institution, but no agreement has been reached as to terms. The
primary lending institution has not issued any notices of default or
acceleration or initiated any legal action against the Company.
The Company is hopeful that funds generated by operations and received from
Newmax will be adequate to fund production, new product development, debt
service and other operational needs. Although there is no firm commitment,
affiliated parties and parents are expected to advance funds on a short-term
as needed basis to offset operational cash shortfalls. Management believes
that the combination of reduction in overhead spending, continued cooperation
of parent companies and their affiliates, cooperation of the institutional
lender and development of new distribution markets for non-manufactured
products will enable the Company to remain viable for the next twelve months.
See note 2 to the Company's consolidated financial statements included herein
(page 34) for a further discussion of liquidity and management's action plan.
Item 8. Financial Statements and Supplementary Data
The information called for by item 8 is set forth on pages 24 to 41 and
listed on page 24 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Shares Owned
Position with As a Percentage
Name, Age and Company or Director Of Outstanding
Committee Membership Principal Occupation Since Shares
Dr. Yoon H. Choo,......Chairman, President, 1990 -
58 Chief Executive Officer,
Secretary and Treasurer
Dr. Heehwan Lee,.......Vice President and 1990 (2) -
46 Chief Operations Officer
Mr. K.H. Chung,........President, Tae Il Media 1990 (1) (2) -
51 Co., Ltd. Ansan City &
Seoul, Korea
All directors and officers as a group (3 persons).... (1) (3) -
(1) See the caption Relationships and Beneficial Interests for shares of
capital stock of the parents of the Company owned by Mr. K.H. Chung.
(2) Not listed are shares owned by Newmax Co., Ltd. as explained in detail
in Item 12, Security Ownership of Certain Beneficial Owners and Management.
Mr. K.H. Chung and Dr. Heehwan Lee expressly disclaim that either of them is
at the present time the beneficial owner of any shares of common stock of the
Company for the purpose of Section 13(d) or 13(g) of the Securities Exchange
Act of 1934, as amended, or that either of them is at the present time able
to exercise a controlling influence over the Company.
(3) Not listed are shares owned by Newmax as explained in detail in Item 12,
Security Ownership of Certain Beneficial Owners and Management.
Business Experience of Directors
Dr. Yoon H. Choo was elected Chairman of the Board in January 1991. He was
elected President, Chief Executive Officer, Secretary and Treasurer on
February 11, 1991. He has been a director of the Company since December
1990. He has been President of Tae Il USA, Inc. since 1984, and Gigamax
Corporation since 1989. Tae Il USA, Inc. and Gigamax Corporation are
affiliates of the Company and are engaged in businesses which are similar to
that of the Company. He previously had more than seven years experience with
Digital Equipment Corporation.
Dr. Heehwan Lee has been a director since December 1990. He was elected Vice
President and Chief Operations Officer on March 1, 1992. He has been Vice
President of Tae Il Media Co., Ltd. since August 1986. He had been Vice
President of Newmax from August 1990 until March 29, 1994. Newmax and Media
are parents and affiliates of the Company and are engaged in businesses which
are similar to that of the Company. From July 1975 to July 1986 he was a
Senior Researcher with the Korean Agency for Defense Development.
Mr. K.H. Chung has been a director since December 1990. He has been
President of Tae Il Media Co., Ltd. since October 1983. He had been
president of Tae Il Magnetics Co., Ltd., from July 1987 until March 29,
1994.
He had been president of Newmax Co., Ltd. from August 1990 until March 29,
1994. Newmax, Tae Il Media and Tae Il Magnetics are parents and affiliates
of the Company and are engaged in businesses which are similar to that of the
Company. He previously had more than seventeen years experience with Hanil
Textile Co., Ltd. as Chief of the Corporate Planning Board.
Relationships and Beneficial Interests
Newmax designated Mr. K.H. Chung, Dr. Yoon H. Choo and Dr. Heehwan Lee as
nominees pursuant to its right to designate a majority of the directors to
be nominated pursuant to the Stock Purchase Agreement dated November 30, 1990
between Newmax and the Company.
Newmax owns 47.1 percent of the common stock of the Company. Pursuant to the
Stock Purchase Agreement dated November 30, 1990 between the Company and
Newmax, Newmax may agree to purchase additional shares of common stock of
the Company from time to time in an amount (presently 2,000,000 shares) which
will enable Newmax to own more than 50 percent of the issued and outstanding
shares of common stock of the Company. This provision directly inures to the
benefit of Newmax and may be deemed indirectly to inure to the benefit of Tae
Il Media Co., Ltd. ("Media"), Tae Il Magnetics Co., Ltd, ("Magnetics"), Mr.
K.H. Chung, Dr. Heehwan Lee, and Mr. Yoon K. Choo. This provision does not
extend to other holders of the common stock of the Company.
Until March 29, 1994, Mr. K.H. Chung was the representative director and the
president of Newmax and Dr. Heehwan Lee was a director and vice president of
Newmax. Media and Magnetics combined own 30 percent of the common stock of
Newmax.
Mr. K. H. Chung owns approximately 3 percent of the common Stock of Media and
is a representative director and the president of Media and Dr. Heehwan Lee
a director and vice president of Media. Mr. Yoon K. Choo is a director and
the chairman of the board of directors of Media. Media owns 25 percent of
the capital stock of Dae Bang Venture Capital Co., Ltd., which owns 7.1
percent of the common stock of the Company. Media owns approximately 14
percent of the capital stock of Newmax.
Mr. K.H. Chung owns approximately 6 percent of the common stock of
Magnetics.
Until March 29, 1994, Mr. K.H. Chung was the representative director and the
president of Magnetics. Magnetics owns 16 percent of the capital stock of
Newmax.
Dr. Yoon H. Choo is the brother of Mr. Yoon K. Choo and Mr. K.H. Chung and
Dr. Heehwan Lee are sons-in-law of Mr. Yoon K. Choo.
Mr. Yoon K. Choo is related by blood or marriage to Mr. K.H. Chung, Dr.
Heehwan Lee and Dr. Yoon H. Choo, who are directors of the Company. Newmax
and Media also are associates of Mr. K.H. Chung and Dr. Heehwan Lee.
Magnetics was an associate of Mr. K.H. Chung and Dr. Heehwan Lee until March
29, 1994.
Newmax, Media, Magnetics, Mr. Yoon K. Choo, Mr. K.H. Chung and Dr. Heehwan
Lee also have a substantial direct interest in the transactions described
below.
The Stock Purchase Agreement dated November 30, 1990 between Newmax and the
Company states that they mutually shall provide technical assistance and
patent licenses to one another under the terms of the technical assistance
agreement to be agreed upon by them, subject to appropriate government
approval.
Transactions with Management and Others
Newmax, Media, Magnetics, or their affiliates have made payments to the
Company or its subsidiaries for property or services. In particular, the
Company sold to Newmax in fiscal 1995 and 1994 equipment comprising machining
assembly lines and other excess equipment in exchange for cash in an amount
equal to fair market value, as determined by an independent appraisal in
1991, and by subsequent determinations by employees of the Company,
($1,281,000 and $610,000 in fiscal 1995 and 1994 respectively), of that
equipment. Furthermore, the Company or its subsidiaries have made payments
to Newmax, Media, Magnetics or their affiliates for property or services in
amounts material to the Company. Nearly $5 million has been borrowed by the
Company at 8 percent interest from Gigamax Corporation and Tae Il U.S.A.,
Inc., both of which are controlled by Dr. Yoon H. Choo, President of the
Company. Payment of interest with respect to fiscal year 1996, however, was
forgiven. See note 10 to the Company's consolidated financial statements
included herein (page 39) for a further discussion of related party
transactions.
See also Item 7, Liquidity and Capital Resources, for a discussion of loans
obtained by the Company with the assistance of guarantees provided by Newmax
and other related parties. See note 5 to the Company's consolidated
financial statements included herein (page 35) for a further discussion of
short-term debt and related party assistance and note 6 (page 36) for a
further discussion of long-term debt and related party assistance.
Board and Committee Meetings
The Board of directors has a standing Audit Committee, but does not have a
Nominating Committee or Compensation Committee.
The functions of the Audit Committee include recommending the appointment of
independent auditors, reviewing with the independent auditors the results of
the annual audit, reviewing the independence of the auditors, determining the
appropriateness of fees for audit and non-audit services provided by
independent auditors and reviewing transactions between the Company and
associates of the directors or officers of the Company.
During fiscal 1996 and 1995 there were no meetings of the Board of Directors,
and no meetings of the Audit Committee. The Independent Public Accountants
attended no meetings.
Item 11. Executive Compensation
Summary Compensation Table
The compensation of the chief executive officer of the Company for services
rendered to the Company and its subsidiaries is set forth below:
Name and Principal Position Year Annual Salary
Dr. Yoon H. Choo, 1996 $ 80,000
Chairman, President and Chief 1995 $ 80,000
Executive Officer 1994 $ 80,000
There are no other officers whose total annual salary and bonus exceeds
$100,000.
Board Interlocks and Insider Participation
Dr. Yoon H. Choo and Dr. Heehwan Lee served as officers of the Company and
as members of the Board of Directors for fiscal 1996 and as such, were
entitled to participate in deliberations of the Board of Directors concerning
executive officer compensation.
Dr. Yoon H. Choo is a director and president of Gigamax Corporation and of
Tae Il USA, Inc., which are affiliates of the Company.
Dr. Heehwan Lee was a director and vice president of Newmax until March 29,
1994 and is a director and vice president of Media, both of which were
parents of the Company.
Mr. K.H. Chung also served as a member of the Board of Directors of the
Company for fiscal 1996 and, as such, was entitled to participate in
deliberations of the Board of Directors concerning executive officer
compensation. He is the president and a representative director of Media,
which is an affiliate of the Company. Until March 29, 1994 he was the
president and representative director of Magnetics and of Newmax. He owns
3 percent of the capital stock of Media and 6 percent of the capital stock
of Magnetics.
See Transactions with Management and Others on page 13. Also see
Relationships and Beneficial Interests on pages 12-13 with respect to the
ownership by Media and Magnetics of 30 percent of the outstanding shares of
capital stock of Newmax and the ownership of Newmax of 47.1 percent of the
outstanding shares of common stock of the Company, as well as the ownership
by Media of 25 percent of the capital stock of Dae Bang Venture Capital Co.,
Ltd., which owns 7.1 percent of the outstanding shares of capital stock of
the Company.
Dr. Yoon H. Choo has a direct material interest in the loans provided by
Gigamax Corporation and by Tae Il USA, Inc. to the Company, as described in
notes 5 and 10 to the consolidated financial statements on pages 35 and 39
because of his control over those two companies.
Dr. Heehwan Lee may be deemed to have a material indirect interest in the
transactions between the Company and each of Newmax and Media and in the
credit enhancements provided by Newmax and Media to the Company, as described
in notes 5, 6, and 10 to the consolidated financial statements on pages 35,
36 and 39-40, respectively, because of his official relationships with Media
and because the father-in-law of Dr. Heehwan Lee, Mr. Yoon K. Choo, is a
director and chairman of the Board of directors of Media.
Mr. K.H. Chung has a direct material interest in the credit enhancement which
he personally provides to the Company and may be deemed to have an indirect
material interest in the transactions between the Company and each of Newmax
and Media and in the credit enhancements provided by Newmax and Media to the
Company as described in notes 5, 6, and 10 to the consolidated financial
statements on pages 35, 36, and 39-40, respectively.
Mr. K.H. Chung, who is a director of the Company, a representative director
and president of Media, a 3 percent stockholder of Media, and a 6 percent
stockholder of Magnetics, has a direct material interest in the credit
enhancement which he personally provides to the Company and may be deemed to
have an indirect material interest in the transactions between the Company
and each of Media and Newmax, and in the credit enhancements provided by
Newmax and Media to the Company, as described in notes 5, 6 and 10 to the
consolidated financial statements on pages 35, 36 and 39-40, respectively.
Newmax owed the Company $12,000 and the Company owed Media $1,195,000 as of
June 29, 1996.
Dr Heehwan Lee, who is a director and the vice president and chief operations
officer of the Company, the vice president of Media and the son-in-law of Mr.
Yoon K. Choo, may be deemed to have a material indirect interest in the
transactions between the Company and each of Media and Newmax, and in credit
enhancements provided by Newmax and Media to the Company, as described in
notes 5, 6, and 10 to the consolidated financial statements on pages 35, 36,
and 39-40. Newmax owed the Company $12,000 and the Company owed Media
$1,195,000, respectively, as of June 29, 1996.
Dr. Yoon H. Choo, who is a director, the chairman, the president, the
treasurer, and the secretary of the Company, a director and the president of
Gigamax Corporation and a director and the president of Tae Il USA, Inc., has
a direct material interest in the loans provided by Gigamax Corporation and
by Tae Il USA, Inc., to the Company, as described in notes 5 and 10 to the
consolidated financial statements on pages 35 and 39-40, respectively. The
Company owed Gigamax $4,896,000, in principal and $1,370,000 of net accrued
expenses (primarily interest accrued prior to June 24, 1995), as of June 29,
1996.
Compensation of Directors
The annual fee for directors who are not employees of the Company is $8,000.
All of the outside directors earn $1,000 for each Board meeting or Committee
meeting attended, except that if a Committee meets on the same day as the
full Board, Committee members earn only $500 for the Committee meeting.
Telephonic meetings are compensated at fifty percent of the rates noted
above. Fees earned but unpaid to current and former Board members are
$183,000 at June 29, 1996. Board members are eligible to receive stock
options. See Board Interlocks and Insider Participation above.
Employment Contract
The Company entered into a Compensation Agreement with Dr. Yoon H. Choo on
April 17, 1991 for a one year period. Based upon the terms of the agreement,
it automatically renews for another year on each anniversary date. The
agreement requires periodic salary payments totaling $150,000 per year.
Effective November 18, 1991, the salary was renegotiated down to $80,000 per
year due to continuing losses of the Company. The agreement provides for
payment of one year's salary in the event of contract non-renewal or
termination of employment. In the event of a change in control, then a
change in title or responsibilities is contractually defined as a termination
of employment.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
The following table presents information as to the persons who have reported
or are otherwise known to the Company to be the beneficial owners of more
than 5% of the outstanding Common Stock of the Company as of September 4,
1996.
Amount and
Nature of Percent
Name and Address of Beneficial Owner Beneficial Ownership of Class
Newmax Co., Ltd. .............................10,500,000 47.1%
27-15 Song Jeong-Dong Direct owner (1)
Cheongju, Chungbuk sole voting and
360-290, Korea investment powers
Gwang Jai Koh ................................10,500,000 47.1%
Jung Kyun Bae Indirect owner (2)
Hong Kyu Shin shared voting
Jeong Soo Choi power, shared
Y.R. Kwon investment power
456-1 Moknae-Dong
Ansan, Kyunggi-Do
425-100, Korea
Dae Bang Venture Capital Co., Ltd. ...........1,575,000 7.1%
1-181 Chagin-Dong Direct owner
Iri-si, Jullabuk-do sole voting and
Korea investment powers
S.Y. Choi ....................................1,575,000 7.1%
K.H. Chang Indirect owner (2)
Y.W. Kim shared voting
K.W. Oh power, shared
C.D. Um investment power
D.H. Koo
KWTC Building, Suite 4202
Samsung-dong
Kangnam-gu
Seoul, Korea
(1) See the caption Relationships and Beneficial Interests in Item 10,
Directors and Executive Officers of the Registrant.
(2) The persons who are deemed to be indirect owners possessing shared
voting power and shared investment power expressly disclaim that any of them
is at the present time the beneficial owner of any shares of common stock of
the Company for the purposes of Section 13(d) or 13(g) of the Securities
Exchange Act of 1934, as amended, or that any one of them is at the present
time able to exercise a controlling influence over the Company.
Security Ownership of Management
Identification of and certain information concerning executive officers and
directors of the Company is set forth in part III, Item 10 under the heading
"Directors and Executive Officers of the Registrant".
According to Rule 13d-3 of the Securities and Exchange Commission, the
directors and the executive officers of the Company are not beneficial owners
of any equity securities of the Company. The following table presents
information as to those directors' and executive officers' beneficial
ownership of equity securities in the parents of the Company.
Title Name of Amount and Nature Percent
of Beneficial of Beneficial of
Class Owner Ownership Class
Capital Stock Kang Hoan Chung 262,643 2.7%
of Tae Il Direct owner (2)
Media Co., Ltd. (1) Sole voting power
Sole investment power
Capital Stock Kang Hoan Chung 37,396 6.2%
of Tae Il Direct owner (2)
Magnetics Co., Ltd. (1) Sole voting power
Sole investment power
Capital Stock Kang Hoan Chung 935,595 29.8%
of Newmax Indirect owner (2)
Co., Ltd. (1) Shared voting power
Shared investment power
Capital Stock Heehwan Lee 410,006 13.6%
of Newmax Indirect owner (2)
Co., Ltd. (1) Shared voting power
Shared investment power
Capital Stock Directors and 935,595 29.8%
of Newmax Executive Indirect owners (2)
Co., Ltd. Officers as a Shared voting power
Group Shared investment power
(1) See the caption Relationships and Beneficial Interests in Item 10,
Directors and Executive Officers of the Registrant.
(2) The person who is the direct owner possessing sole voting and sole
investment power of shares of the parents of the Company and the persons who
are deemed to be indirect owners possessing shared voting power and shared
investment power of shares of a parent of the Company, expressly disclaim
that either of them is at the present time the beneficial owner of any shares
of the common stock of the Company for purposes of Section 13(d) or 13(g) of
the Securities Exchange Act of 1934, as amended, or that either one of them
is at the present time able to exercise a controlling influence over the
Company.
Item 13. Certain Relationships and Related Transactions
Identification of and certain information concerning executive officers and
directors of the Company is set forth in Part III, Item 10 under the heading
"Directors and Executive Officers of the Registrant" and under the heading
"Transactions with Management and Others" and in Part III, Item 11 under the
heading "Board Interlocks and Insider Participation."
Identification of certain information concerning security holders who are
known to the Company to own of record or beneficially more than 5% of its
outstanding shares of common stock and members of the immediate families of
those persons and of executive officers and directors of the Company are set
forth in Part I, Item 1, Business, under the headings "Sales and Customers",
"Backlog", in Part II, Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, under the Headings, "Liquidity
and Capital Resources", Item 8, Financial Statements and Supplementary Data,
notes 2,5,6,9, and 10, Part III, Item 10, Directors and Executive Officers
of the Registrant, under the headings, "Relationships and Beneficial
Interests", "Transactions with Management and Others", and Item 11, Executive
Compensation, under the heading "Board Interlocks and Insider Participation."
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
Consolidated Financial Statements, Notes to Consolidated
Financial Statements and the Report of Independent Certified
Public Accountants are incorporated in Part II of this report
(see index on page 24).
2. Financial Statement Schedules
Included In Part IV of this report:
Page #
Independent Auditors' Report on Schedule 42
Schedule II- Valuation and Qualifying Accounts 43
Other schedules are omitted because of the absence of
conditions under which they are required or because the
required information is given in the consolidated financial
statements or notes thereto.
Separate financial statements and supplemental schedules of the Company are
omitted since the Company is primarily an operating company and its
subsidiaries, included in the consolidated financial statements being filed,
do not have a minority equity interest or indebtedness to any person other
than the Company in an amount which exceeds five percent of the total assets
as shown by the consolidated financial statements as filed herein.
3. Exhibits
3.1 Certificate of Incorporation of the Company dated October
15, 1981 (Incorporated by reference to Exhibit 3.1 to the
annual report on Form 10-K for the year ended June 24, 1995,
Commission File Number 0-7207).
3.2 Amendment to Certificate of Incorporation of the Company
dated March 2, 1982 (Incorporated by reference to Exhibit 3.2
to Registration Statement of the Company, Registration
No. 2-77035).
3.3 Amendment to the Certificate of Incorporation of the Company
dated November 30, 1983 (Incorporated by reference to Exhibit
3.3 to the annual report on Form 10-K for the year ended June
24, 1995, Commission File Number 0-7207).
3.4 Amendment to the Certificate of Incorporation of the Company
dated December 27, 1984 (Incorporated by reference to
Exhibit 3.4 to the annual report on Form 10-K for the year
ended June 29, 1985, Commission File Number 0-7207).
3.5 Amendment to the Certificate of Incorporation of the Company
dated December 26, 1986 (Incorporated by reference to
Exhibit 3.5 to the annual report on Form 10-K for the year
ended June 27, 1987, Commission File Number 0-7207).
3.6 Amendment to the Certificate of Incorporation of the Company
dated April 1, 1991 (Incorporated by reference to Exhibit
3.6 to the annual report on Form 10-K for the year ended
June 29, 1991, Commission File Number 0-7207).
3.7 By-Laws of the Company as amended on December 17, 1990
(Incorporated by reference to Exhibit 3.7 to the annual
report on form 10-K for the year ended June 29, 1991,
Commission File Number 0-7207).
4.1 Revolving Credit Agreement dated May 10, 1991 between
the Company and Shinhan Bank New York Branch
(Incorporated by reference to Exhibit (4)(b) to the
Report on Form 8-K dated May 10, 1991, Commission File Number
0-7207).
4.2 Promissory Note dated May 10, 1991 in the maximum principal
amount of $4,000,000 payable by the Company to Shinhan Bank
New York Branch (Incorporated by reference to Exhibit (4)
(c) to the Report on Form 8-K dated May 10, 1991, Commission
File Number 0-7207).
4.3 Term Loan Agreement between the Company and Shinhan Bank
New York Branch dated November 5, 1991 (Incorporated
by reference to Exhibit 4.1 to the quarterly report on
Form 10Q for the quarter ended September 28, 1991, Commission
File Number 0-7207).
4.4 Promissory Note dated November 5, 1991 in the principal
amount of $3,000,000 payable by the Company to Shinhan
Bank New York Branch (Incorporated by reference to Exhibit
4.2 to the quarterly report on Form 10Q for the quarter
ended September 28, 1991, Commission File Number 0-7207).
4.5 General Loan and Security Agreement between the Company
and Shinhan Bank New York Branch dated November 5, 1991
(Incorporated by reference to Exhibit 4.3 to the quarterly
report on Form 10Q for the quarter ended September 28, 1991,
Commission File Number 0-7207).
4.6 Mortgage between the Company and Shinhan Bank New York
Branch dated November 5, 1991 (Incorporated by reference
to Exhibit 4.4 to the quarterly report on Form 10Q for the
quarter ended September 28, 1991, Commission File Number 0-
7207).
4.7 Revised repayment schedule between the Company and Shinhan
Bank New York Branch dated December 23, 1994 (Incorporated by
reference to Exhibit 4.7 to the annual report on Form 10-K for
the year ended June 24, 1995, Commission File Number 0-7207).
4.8 Promissory Note dated May 31, 1995 in the maximum principal
amount of $142,916 payable by the Company to Hartford Fire
Insurance Company (Incorporated by reference to Exhibit 4.8
to the annual report on Form 10-K for the year ended June 24,
1995, Commission File Number 0-7207).
10.1 1987 Stock Incentive Program, as amended in 1989 (Incorporated
by reference to Appendix A to the Company's Proxy Statement
dated September 22, 1989 for Annual Meeting of Stockholders
to be held on November 2, 1989, Commission File Number 0-
7207).
10.2 Warrant which is Exhibit B to the Second Restated Credit
Agreement between the Company and Wells Fargo Bank, N.A.
dated June 30, 1986 (Incorporated by reference to Exhibit
10.5 to the annual report on form 10-K for the year ended
June 28, 1986, Commission File Number 0-7207).
10.3 Compensation agreement between the Company and Yoon H. Choo
dated April 17, 1991 (Incorporated by reference to Exhibit
10.15 to the annual report on Form 10-K for the year ended
June 29, 1991, Commission File Number 0-7207).
10.4 Letter dated December 26, 1990 from the Company to Wells
Fargo Bank, N.A. in respect of the Warrant dated July 23,
1986 (Incorporated by reference to Exhibit 10.16 to the annual
report on Form 10-K for the year ended June 29, 1991,
Commission File Number 0-7207).
10.5 Stock Purchase Agreement dated as of November 30, 1990
between Newmax Co. Ltd. and the Company (Incorporated by
reference to Exhibit 10.8 to the annual report on Form 10-K
for the year ended June 24, 1995, Commission File Number 0-
7207).
21. Subsidiaries of the Company (Incorporated by reference
to Exhibit 22 to the annual report on Form 10-K for the year
ended June 30, 1990, Commission File Number 0-7207).
23. Consent of KPMG Peat Marwick LLP to incorporation by
reference of its report on Financial Statements in
Registration Statements on Form S-8 Registration Nos.
2-81098, 2-81456, 2-89221, 2-96120, 2-96139, 33-14778
and 33-33567.
27. Financial Data Schedule (For electronic filing purposes only).
Copies of Exhibits listed above may be obtained for a nominal
fee by writing to the Company's Investor Relations Department
at 71 Smith Avenue, Kingston, New York 12401.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NATIONAL MICRONETICS, INC.
By DR. YOON H. CHOO
Dr. Yoon H. Choo
President and Chief
Executive Officer
Dated: September 18, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 18th day of September,
1996.
Signature Title
DR. YOON H. CHOO Chairman of the Board of Directors,
(Dr. Yoon H. Choo) President, Chief Executive Officer,
Treasurer and Secretary (Principal
Executive, Financial and Accounting
Officer).
DR. HEEHWAN LEE Director, Vice President and Chief
(Dr. Heehwan Lee) Operations Officer
Director
(Mr. K.H. Chung)
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
Index to Financial Statements and Schedule
Pages
Independent Auditors' Report 25
Consolidated Balance Sheets as of June 29, 1996
and June 24, 1995 26-27
Consolidated Statements of Operations for the years
ended June 29, 1996, June 24, 1995 and June 25,
1994 28
Consolidated Statements of Changes in Stockholders'
Deficiency for the years ended June 29, 1996, June 24,
1995 and June 25, 1994 29
Consolidated Statements of Cash Flows
for the years ended June 29, 1996, June 24, 1995
and June 25, 1994 30-31
Notes to Consolidated Financial Statements 32-41
Independent Auditors' Report on Schedule 42
Schedule of Valuation and Qualifying Accounts 43
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
National Micronetics, Inc.:
We have audited the accompanying consolidated balance sheets of National
Micronetics, Inc. and subsidiaries as of June 29, 1996 and June 24, 1995, and
the related consolidated statements of operations, changes in stockholders'
deficiency, and cash flows for each of the years in the three-year period
ended June 29, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to report
on these consolidated financial statements based on the results of our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our report.
The accompanying consolidated financial statements have been prepared
assuming that National Micronetics, Inc. and subsidiaries will continue as
a going concern. The Company has suffered recurring losses from operations
and has net capital deficiencies. As a result of these recurring losses, the
Company has experienced a significant deterioration in liquidity. The
Company has received funding for operations from its parent, Newmax Co.,
Ltd., and affiliated companies in the current and prior years; however, the
Company has no guarantee that this funding will continue. These
circumstances raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are
described in note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Because of the effects on the consolidated financial statements of such
adjustments, if any, as might have been required had the outcome of the
uncertainty discussed in the preceding paragraph been known, we are unable
to, and do not, express an opinion on the accompanying consolidated financial
statements as of June 29, 1996 and June 24, 1995, and for each of the years
in the three-year period ended June 29, 1996.
KPMG PEAT MARWICK LLP
Albany, New York
August 28, 1996
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 29, 1996 and June 24, 1995
(in thousands)
ASSETS
1996 1995
Current assets (note 6):
Cash and cash equivalents $ 464 $ 538
Trade receivables (less allowance of
$132 in 1996) 233 125
Inventories (note 3) 902 814
Prepaid and other current assets 82 78
Total current assets 1,681 1,555
Property, plant and equipment, at cost
(notes 4 and 6) 12,129 17,173
Less accumulated depreciation and amortization ( 8,993) (13,328)
Net property, plant and equipment 3,136 3,845
$ 4,817 $ 5,400
(Continued)
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
June 29, 1996 and June 24, 1995
(in thousands, except common share amounts)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
1996 1995
Current liabilities:
Current portion of long-term debt (note 6) $ 3,752 $ 1,358
Long-term debt classified as current (note 6) 611 3,170
Short-term debt (note 5) 4,896 4,896
Accounts payable 394 675
Accrued salaries and related expenses 212 212
Other accrued expenses 298 205
Due to related parties, net (note 10) 2,587 1,845
Total current liabilities 12,750 12,361
Long-term debt, less current portion (note 6) - 98
Total liabilities 12,750 12,459
Stockholders' deficiency (note 7):
Common stock ($.10 par value; authorized -
40,000,000 shares; issued and
outstanding 22,312,524 shares) 2,231 2,231
Additional paid-in capital 58,805 58,343
Accumulated deficit (68,969) (67,633)
Total stockholders' deficiency ( 7,933) ( 7,059)
Commitments and contingencies (notes 2,4 and 12)
$ 4,817 $ 5,400
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 29, 1996, June 24, 1995, and June 25, 1994
(in thousands, except per share amounts)
1996 1995 1994
Net sales $ 4,151 $ 3,822 $ 7,227
Cost and expenses:
Cost of products sold 3,605 3,849 7,777
Research, development and engineering 231 259 481
Selling and administration 849 712 816
4,685 4,820 9,074
Loss from operations ( 534) ( 998) ( 1,847)
Other expense (income):
Interest expense 865 911 869
Interest income ( 36) ( 3) ( 1)
Other (income) expense, net ( 27) ( 307) ( 16)
802 601 852
Loss before income taxes ( 1,336) ( 1,599) ( 2,699)
Income taxes (note 8) - - -
Net loss $(1,336) $(1,599) $(2,699)
Loss per common share (note 1) $( 0.06) $( 0.07) $( 0.12)
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' DEFICIENCY
Years ended June 29, 1996, June 24, 1995 and June 25, 1994
(in thousands, except common share amounts)
Additional
Common Stock (note 7) Paid-In Accumulated
Shares Par Value Capital (Deficit)
Balance June 26, 1993 22,312,524 $ 2,231 $ 54,118 $ (63,335)
Net loss -- 1994 - - - (2,699)
Sale of assets to a
related party (note 10) - - 3,171 -
Balance June 25, 1994 22,312,524 2,231 57,289 (66,034)
Net loss -- 1995 - - - ( 1,599)
Sale of assets to a
related party (note 10) - - 1,054 -
Balance June 24, 1995 22,312,524 2,231 58,343 (67,633)
Net loss -- 1996 - - - ( 1,336)
Interest forgiven on
related party debt (note 5) - - 462 -
Balance June 29, 1996 22,312,524 $ 2,231 $ 58,805 $ (68,969)
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 29, 1996, June 24, 1995 and June 25, 1994
(in thousands)
1996 1995 1994
Cash flows from operating activities:
Net loss $(1,336) $(1,599) $(2,699)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Depreciation and amortization 549 723 992
Provision for losses (recoveries)
on receivables 135 - (28)
Retirements of property and equipment 171 168 70
Interest forgiven on related party debt 462 - -
Changes in operating assets and liabilities:
Decrease (Increase) in trade receivables (243) (76) 31
Increase (Decrease) in inventories (88) (443) 110
Decrease in prepaid and other
current assets ( 4) 26 257
Increase in other assets - 17 53
Decrease in accounts payable
and accrued expenses (188) (767) (1,241)
Increase (Decrease) in due to related
parties, net 742 1,131 (428)
Net cash provided (used) by operating
activities 200 (820) (2,883)
Cash flows from investing activities:
Additions to property and equipment ( 11) - -
Cash flows from financing activities:
Sale of assets to a related party - 1,054 3,171
Proceeds of long-term debt - 143 -
Repayments on long-term debt and
capitalized lease obligations (263) (11) (914)
Proceeds of short-term debt - - 741
Net cash provided (used) by financing
activities (263) 1,186 2,998
Net increase (decrease) in cash and
cash equivalents ( 74) 366 115
Cash and cash equivalents at
beginning of year 538 172 57
Cash and cash equivalents at end of year $ 464 $ 538 $ 172
(Continued)
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended June 29, 1996, June 24, 1995 and June 25, 1994
1996 1995 1994
Supplemental cash flow disclosures:
Interest paid $342 $422 $442
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 29, 1996, June 24, 1995 and June 25, 1994
(1) Description of Business and Summary of Significant Accounting Policies
On December 24, 1990, Newmax Co., Ltd. ("Newmax") acquired a controlling
interest (50.9%) in the Company through the purchase of common stock.
Newmax, a Korean corporation, and its affiliate Tae Il Media Co., Ltd. ("Tae
Il") operate businesses with product lines similar to that of the Company.
The percentage ownership declined to 47.1% at June 27, 1992 due to other
equity transactions of the Company. The Company has purchased components
from and sold products and equipment to Newmax and its affiliates.
In reliance primarily upon assembly facilities owned and operated by its
parent and affiliated companies, sales revenue attributable to its parent
and affiliated companies and debt financing supplied or guaranteed by its
parent and affiliated companies since May 10, 1991, the Company is
principally an integrated manufacturer of magnetic recording heads primarily
for computer disk drives. The Company is currently primarily performing
pilot projects concerning ferrite bars, cores and recording head assemblies.
The Company has begun the distribution and sale of other products. Some,
such as electrical light fixture ballasts and tee shirts, are outside its
previous markets. The Company is dependent upon other manufacturers and
vendors for production and assembly work.
(a) Principles of Consolidation
The consolidated financial statements include National Micronetics, Inc. and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Consolidated Statements of Cash Flows
For purpose of the statements of cash flows, the Company considers all
short-term investments and highly liquid debt instruments with original
maturities
of three months or less to be cash equivalents. Cash equivalents consist of
certificates of deposit of $300,000 and $500,000 at June 29, 1996 and June
24, 1995, respectively.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis.
(d) Property, Plant and Equipment
Depreciation and amortization for financial reporting purposes are provided
by the straight-line method. Depreciation for tax purposes is on an
accelerated method. Leasehold improvements are amortized either over the
estimated useful lives of the improvements or the lease term (including
option periods expected to be utilized) whichever is less.
(Continued)
NATIONAL MICRONETICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(1) Summary of Significant Accounting Policies, Continued
(e) Income Taxes
The Company utilizes the asset and liability method, whereby deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
(f) Loss per Share
Loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding during the respective periods.
The weighted average number of common shares was 22,312,524 for fiscal years
1996, 1995 and 1994. Common stock equivalents are not considered in this
calculation since their effect would be anti-dilutive.
(g) Fiscal Year
The Company's fiscal year ends on the last Saturday in June. The fiscal year
ended June 29, 1996 was comprised of 53 weeks. The fiscal years ended June
24, 1995 and June 25, 1994 were comprised of 52 weeks.
(h) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(i) New Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("FAS 121"), which is effective for fiscal years beginning after December
15, 1995. Effective June 30, 1996, the Company will adopt FAS 121, which
requires that long-lived assets (e.g., property, plant and equipment and
goodwill) held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the net book value of the
assets may not be recoverable. An impairment loss will be recognized if the
sum of the expected future cash flows (undiscounted and before interest) from
the use of the asset is less than the net book value of the asset. The
amount of the impairment loss will generally be measured as the difference
between the net book value of the assets and the estimated fair value of the
related assets. It is anticipated that adoption in the first quarter of
fiscal 1997 will have no effect on the Company's financial results.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(1) Summary of Significant Accounting Policies, Continued
(i) New Accounting Standards, Continued
In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), which is effective for fiscal years beginning
after December 15, 1995. Effective June 30, 1996, the Company will adopt FAS
123, which establishes financial accounting and reporting standards for
stock-based employee compensation plans. The pronouncement defines a fair
value based method of accounting for an employee stock option or similar
equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock option compensation plans.
However, it also allows an entity to continue to measure compensation cost
for those plans using the intrinsic value based method of accounting as
prescribed by Acounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Entities electing to remain with the
accounting in APB 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined
in FAS 123 had been applied. The Company will continue to account for
stock-based employee compensation plans under the intrinsic method pursuant
to APB
25 and will make any required disclosures in its footnotes.
(2) Liquidity and Management's Action Plan
The Company continues to experience difficulty generating sufficient cash
flow from operations to meet its obligations. Several factors have had a
negative impact on liquidity including product development costs,
qualification of products at customers, and under utilization of facilities.
The Company is aggressively seeking new orders with existing and new
customers. During this rebuilding process, the Company will continue to need
significant amounts of operating cash. The Company has not made $1,611,000
in payments due through June 30, 1996 to its primary lending institution due
to its limited cash resources. An additional $710,000 payment is due by
September 30, 1996. A revised payment schedule is being discussed with the
primary lending institution but no agreement has been reached as to terms.
Since December 1990, the Company has received direct and indirect support
from Newmax to fund operational needs. Although there is no formal
commitment for continuing support, Newmax has made no indication that this
support will cease. The Company will continue to make every effort to become
self sufficient and profitable.
The Company is hopeful that funds generated by operations and received from
Newmax will be adequate to fund debt service and other operational needs.
Although there is no firm commitment, related parties are expected to advance
funds on a short-term as needed basis to offset operational cash shortfalls.
Management believes that the combination of reduction in overhead spending
and development of distribution markets for non-manufactured products will
enable the Company to remain viable for the next twelve months.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(3) Inventories
June 29, 1996 June 24, 1995
(in thousands)
Finished goods $ 793 $ 667
Work in process 25 61
Raw materials and supplies 84 86
$ 902 $ 814
Finished goods at June 29, 1996 includes $641,000 of electronic light
ballasts purchased from Tae Il for resale to distributors and lighting
fixture manufacturers. The Company has the right of return for all of the
ballast inventory if any remains unsold on July 1, 1997.
(4) Property, Plant and Equipment
June 29, June 24,
Classification Life 1996 1995
(in thousands)
Land - $ 263 $ 267
Buildings and improvements 20 years 7,435 7,869
Machinery and equipment 3-8 years 4,274 8,791
Leasehold improvements
and fixtures 3-10 years 157 246
$12,129 $17,173
The Company conducts certain of its operations using equipment under
operating leases that expire at various times over the next three years.
Total rental expense was $11,000, $22,000, and $16,000 for fiscal 1996, 1995,
and 1994, respectively. The total minimum rental commitments at June 29,
1996 under noncancellable operating leases are approximately $7,000.
(5) Short-Term Debt
A revolving credit agreement was established in April 1991 for $4,000,000
with a lending institution not previously used by the Company. This credit
line was renewed on November 16, 1994 and has been collateralized by a Newmax
affiliate. Collateral provided by the Newmax affiliate included a letter of
credit issued by a Korean bank, which has been renewed until November 19,
1996. The Company expects the letter of credit to be renewed upon maturity.
Interest on the revolving credit agreement is payable at prime plus 1% (9.25%
at June 29, 1996; 10% at June 24, 1995). In addition to the above, the
Company borrowed funds from affiliates Gigamax Corporation ("Gigamax"), and
Tae Il USA, Inc. from time to time during fiscal 1996, 1995 and 1994. These
loans were unsecured at an 8% interest rate. At June 29, 1996 and June 24,
1995 the balance of these loans was $4,896,000. The average amount of
short-term debt outstanding and weighted average interest rate was
$4,896,000 at
8% in fiscal 1996 and 1995, and $4,699,000 at 8% in fiscal 1994. The maximum
short-term debt outstanding was $4,896,000 in fiscal 1996 and 1995,and
$5,011,000 in fiscal 1994, respectively. Interest expense recorded on the
related party debt was $462,000 for fiscal 1996 and as a result of the
interest being forgiven by related parties in the fourth quarter due to the
Company's limited resources and inability to pay interest on a timely basis,
this amount has been recorded as additional paid-in capital in the
accompanying financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(6) Long-term Debt
A summary of long-term debt follows:
Annual Interest
Rate at Balance at
June 29, 1996 June 29, 1996 June 24, 1995
(in thousands)
Term loan 9.25% $ 1,611 $ 1,645
Converted revolving loan 8.25% 2,741 2,841
Debt settlement agreement 4% 11 140
Total long-term debt 4,363 4,626
Less: Current portion 3,752 1,358
Long-term debt classified
as current 611 3,170
$ 0 $ 98
The Company entered into a $3,000,000 term loan agreement with a lending
institution on November 5, 1991. This loan, which based upon a December 23,
1994 revision matured on June 30, 1996, is secured by substantially all the
assets of the Company. As a condition of this loan, the Company granted a
$7,000,000 mortgage to the lending institution which serves as collateral for
this loan as well as for a revolving credit agreement executed with the same
lending institution in May 1991. Payments were scheduled quarterly through
June 30, 1996 but not paid on a timely basis. The term loan, which bears
interest at prime plus 1%, has been guaranteed by the related parties Newmax
Co., Ltd., Tae Il Media Co., Ltd. and Mr. K.H. Chung. The amended revolving
credit agreement, which bears interest at the prime rate, requires no payment
until September 1996 and then four quarterly payments to pay the loan in full
by June 30, 1997. The repayment terms have been modified to decrease the
payments originally scheduled for both loans and extend payment terms through
June 1997.
The Company has not made the payments to its primary lending institution due
to its limited cash resources. A revised payment schedule is being discussed
but no agreement has been reached as to terms. The long-term portion of the
related debt has been reclassified as current due to the unresolved default
on payment terms.
Long-term debt maturities, based upon contractual terms, are as follows:
Year Amount
1997 $ 3,752,000
1998 611,000
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(7) Common Stock and Employee Benefits
On June 24, 1992, Dae Bang Venture Capital Co., Ltd. purchased 1,575,000
shares of common stock at $.40 per share for a total of $630,000. The
proceeds were recorded as additional paid-in capital.
On December 27, 1990, Newmax purchased 10,500,000 shares of common stock at
$.40 per share for a total of $4,200,000. The proceeds, net of expenses of
$371,000, were recorded as additional paid-in capital.
The Company issued a warrant in connection with a lending agreement, which
provided for the issuance of 1,131,165 shares of common stock at $3.00 per
share exercisable to June 30, 1996. This exercise price was reduced to $.40
during fiscal 1991 upon the issuance of common stock to Newmax, in accordance
with the original warrant. The warrant also included a right of first
refusal to buy a proportionate amount of stock which may be issued by the
Company.
Under the Stock Incentive Program, 1,525,000 shares of Common Stock were
authorized for the grant of options and the issuance of awards. Under the
terms of this program, options for the purchase of 50,700 shares of common
stock were outstanding at June 29, 1996. Options issued under the plans
generally become exercisable over a period of from six months to five years
from the date of grant at a price per share not less than the fair market
value on the date of the grant. Amounts received upon exercise of options
in excess of par value of shares sold are credited to additional paid-in
capital. At June 29, 1996, 1,122,797 shares are available for future grants
under the Program.
As of June 29, 1996 and June 24, 1995 there were no outstanding restricted
stock awards for shares issued under the Company's stock award plans.
Options Outstanding Number of Shares Option Price Per Share
June 26, 1993 132,700 $ .22 - $2.50
Cancelled (18,500) .22 - 2.13
June 25, 1994 114,200 .22 - 2.50
Cancelled (63,500) .22 - 1.13
June 24, 1995 and
June 29, 1996 50,700 $ .22 - $2.50
Options exercisable:
June 29, 1996 50,700 $ .22 - $2.50
(Continued)
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(7) Common Stock and Employee Benefits, Continued
The Company's profit sharing plan covers all employees with six months
employment with the Company. Contributions to the plan by the Company are
made with its common shares. The annual contribution is determined under a
formula that considers each participant's compensation for the plan year and
the fair market value of the Company's common shares on the last trading day
of the Company's fiscal year. The Company's 401(k) retirement savings plan
allows for employee contributions through payroll deductions with optional
matching contributions by the Company.
There was no Company contribution to either plan for fiscal 1994 through
1996. The plans as amended are intended to comply with the Internal Revenue
Code and the Employee Retirement Income Security Act of 1974 and are
administered by trustees appointed by the Board of Directors.
(8) Income taxes
No income tax expense or benefit was recognized for fiscal 1996, 1995 and
1994 due to losses incurred and the inability to utilize these losses for
income tax purposes. At June 29, 1996, the Company has net operating loss
carryforwards of approximately $20,000,000 which will expire as follows:
Year Amount
(in thousands)
2006 $ 6,167
2007 6,176
2008 5,436
2009 1,272
2010 220
2011 813
$20,084
Carryforwards from prior years have been limited due to the change in control
of the Company which took place on December 24, 1990. Loss carryforwards
available as of June 29, 1996 from years prior to the change in control,
which are included above, are approximately $1,600,000.
Deferred tax liabilities (assets) are comprised of the following at June 29,
1996 and June 24, 1995: 1996 1995
Depreciation $ 528,000 $ 893,000
Net operating loss carryforwards (6,828,000) (4,710,000)
Inventory reserves (510,000) (511,000)
Allowance for bad debts (45,000) -
Other (16,000) (16,000)
(7,399,000) (5,237,000)
Deferred tax valuation allowance 6,871,000 4,344,000
Deferred taxes, net $ - $ -
The deferred tax valuation allowance increased by $2,527,000 and $544,000
during fiscal 1996 and 1995, respectively.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(9) Export Sales - Major Customers
The Company's operations consist primarily of the manufacture of recording
heads. The principal products manufactured and sold are ferrite materials,
recording head cores, and recording head assemblies. A recording head
assembly is a significant component of a computer disk or tape memory.
Net sales of the United States operations includes export sales as follows:
Asia
(in thousands)
1994 $ 7,021
1995 $ 3,587
1996 $ 3,101
The amount and percent of sales to those customers comprising 10 percent or
more of total sales are shown below.
Products
($ in thousands)
1996 1995 1994
Major Customer 1 $ 2,763 - 67% $ 3,287 - 86% $ 5,825 - 81%
Major Customer 2 $543 - 13% - - - -
Major Customer 3 $40 - 1% $15 - $ 1,063 - 15%
(10) Related Party Transactions
During fiscal 1995 and 1994, the Company sold equipment to Newmax for
$1,281,000 and $918,000 respectively. The gain on the sale of $1,054,000
and $837,000 respectively, was recorded as additional paid-in capital and was
not recognized in the consolidated statement of operations.
Inventory was sold to Newmax during fiscal 1994 totalling $2,124,000 whereby
Newmax retained the right to return the goods. These transactions were not
recorded as sales due to the high probability that the goods would be
returned. Effective June 25, 1994 Newmax waived the right of return on
$2,334,000 of merchandise previously purchased. This amount has been
recorded as an increase to additional paid-in-capital and not in the
statement of operations due to the related party nature of the transactions.
Net sales for fiscal 1996, 1995 and 1994 included sales of goods totalling
$2,763,000, $3,287,000 and $5,825,000 respectively, to Newmax of products
made to specification of Newmax's customer. These products required
significant additional value added before sale to the ultimate customer.
During fiscal 1994, the Company purchased approximately $187,000 of other
goods from Newmax in the ordinary course of business.
(Continued)
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(10) Related Party Transactions, Continued
Newmax owed the Company $12,000 and $63,000, respectively, at June 29, 1996
and June 24, 1995 which is included in the consolidated balance sheets under
due to related parties, net.
The Company purchased equipment during 1996 at the request of an affiliated
company, Tae Il Magnetics Co., Ltd. ("Magnetics"), to be sold to and used by
Magnetics. The Company earned a fee of $33,000 for these services which is
included in other (income) expense, net.
The Company also sold products to Tae Il Media Co., Ltd. ("Tae Il") totaling
approximately $40,000, $15,000 and $1,063,000 in fiscal 1996, 1995 and 1994,
respectively. Tae Il sold the Company approximately $211,000 and $562,000
of electrical light fixture ballasts during fiscal 1996 and 1995,
respectively. Tae Il sold the Company approximately $500,000 of
non-electronic consumer goods for resale during fiscal 1996. The Company
owed
Tae Il $1,195,000 and $640,000 at June 29, 1996 and June 24 1995,
respectively. These balances have been included in the consolidated balance
sheets under due to related parties, net.
Newmax has provided quarantees via a letter of credit to assist in obtaining
a $4 million revolving credit agreement. Gigamax has made short-term loans
averaging $4,896,000 for fiscal 1996 and 1995. Both of these are also
discussed in note (5). Included in due to related parties at June 29, 1996
and June 24, 1995 is $1,370,000 and $1,268,000, respectively, due to Gigamax
and Tae Il USA, Inc. for interest on short-term borrowings and other charges.
The Company was advanced $34,000 by Techmedia International Corporation
("Techmedia"), an affiliated company, during fiscal 1996 to fund operating
expenses. This amount was owed to Techmedia at June 29, 1996.
Although negotiated in good faith, the impact of the above transactions on
the financial statements may be significantly different than had the
transactions been negotiated with unrelated parties.
(11) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value.
(a) Cash and Cash Equivalents, Trade Receivables, Accounts Payable
and Accrued Expenses
The carrying amount of cash, trade receivables, accounts payable
and accrued expenses approximate fair value because of the short
maturity of these instruments.
(Continued)
NATIONAL MICRONETICS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(11) Fair Value of Financial Instruments, Continued
(b) Debt
The interest rates on the Company's short-term and long-term debt are
reset according to changes in the current market (see note 6).
Consequently, the carrying value of the debt approximates fair value.
(12) Contingent Liabilities
The Company is not a party to any material legal proceedings, except that the
Company has been notified it is one of many potentially responsible parties
("PRP's") for an Environmental Protection Agency ("EPA") Superfund site. A
"PRP" may be jointly and severally liable for clean-up of a Superfund site,
except to the extent of any settlement agreement with the Environmental
Protection Agency.
The site is known as the Solvents Recovery Service of New England Superfund
site and is located on Lazy Lane in Southington, Connecticut. The EPA has
identified in excess of 1,600 PRP's for this site. The EPA has indicated it
has incurred costs in excess of $3.35 million but has not as yet completed
a remedial action plan. The EPA is not prepared at this time to estimate the
total cost of remedial action. Two Non-Time Critical Removal Actions have
been undertaken by the PRP's with EPA approval. The actions undertaken to
date are designed to help limit further environmental damage and to obtain
data to better understand the extent of damage. Additional treatment will
be based upon analysis of data obtained. The Company has paid its allocated
share of these costs, the amount not being significant to the financial
statements of the Company.
The Company is currently unable to predict the outcome of this matter as the
total cost of remedial action has not been determined and the method of
allocation of liability among parties who may ultimately be found liable
remains uncertain. The Company believes, however, that it is unlikely that
any liability it may incur would have a significant effect on its financial
statements.
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Stockholders
National Micronetics, Inc.:
Under date of August 28, 1996, we reported on the consolidated balance sheets
of National Micronetics, Inc. and subsidiaries as of June 29, 1996 and June
24, 1995, and the related consolidated statements of operations, changes in
stockholders' deficiency and cash flows for each of the years in the
three-year period ended June 29, 1996. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related financial statement schedule as listed in the index on page 24. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to report on this financial statement
schedule based on the results of our audits.
The accompanying financial statement schedule has been prepared assuming that
National Micronetics, Inc. and subsidiaries will continue as a going
concern.
The Company has suffered recurring losses from operations and has net capital
deficiencies. As a result of these recurring losses, the Company has
experienced a significant deterioration in liquidity. The Company has
received funding for operations from its parent, Newmax Co., Ltd., and
affiliated companies in the current and prior years; however, the Company has
no guarantee that this funding will continue. These circumstances raise
substantial doubt about the Company's ability to continue as a going
concern.
Management's plans in regard to these matters are described in note 2 to the
consolidated financial statements. The financial statement schedule does not
include any adjustments that might result from the outcome of this
uncertainty.
Because of the effects on the financial statement schedule of such
adjustments, if any, as might have been required had the outcome of the
uncertainty discussed in the preceding paragraph been known, we are unable
to, and do not express, an opinion on the accompanying financial statement
schedule for the years ended June 29, 1996, June 24, 1995 and June 25, 1994.
KPMG PEAT MARWICK LLP
Albany, New York
August 28, 1996
Schedule II
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended June 1996, 1995 and 1994
(in thousands)
Accounts
Balance at Charged to written off Balance
beginning costs and as uncollectible, at end
Description of period expenses net of recoveries of period
Year ended June 1996:
Allowance for doubtful
accounts receivable $ - $ 135 $ 3 $ 132
Year ended June 1995:
Allowance for doubtful
accounts receivable $ - $ - $ - $ -
Year ended June 1994:
Allowance for doubtful
accounts receivable $ 33 $ (28) $ 5 $ -
Exhibits Filed Electronically
Page
23 Consent of KPMG Peat Marwick LLP to incorporation by
reference of its report on Financial Statements in
Registration Statements on Form S-8 Registration Nos.
2-81098, 2-81456, 2-89221, 2-96120, 2-96139, 33-14778
and 33-33567. 45
27 Financial Data Schedule (For electronic filing purposes only). 46
Consent of Independent Auditors'
The Board of Directors
National Micronetics, Inc.:
We consent to incorporation by reference in the Registration Statement Nos.
2-81098, 2-81456, 2-89221, 2-96120, 2-96139, 33-14778 and 33-33567 on Forms
S-8 of National Micronetics, Inc. of our reports dated August 28, 1996,
relating to the consolidated balance sheets as of June 29, 1996 and June 24,
1995, and the consolidated statements of operations, changes in stockholders'
deficiency and cash flows and related schedule for each of the years in the
three-year period ended June 29, 1996, which reports appear in the June 29,
1996 annual report on Form 10-K of National Micronetics, Inc.
Our reports dated August 28, 1996 contain explanatory paragraphs that state
that the Company's recurring losses from operations, its net capital
deficiencies, the deterioration in liquidity and other matters raise
substantial doubt about the Company's ability to continue as a going concern.
Because of the effects on the consolidated financial statements of such
adjustments, if any, as might have been required had the outcome of the
uncertainty discussed in the preceding paragraph been known, we were unable
to, and did not express, an opinion on the consolidated financial statements
and schedule as of June 29, 1996 and June 24, 1995 and for each of the years
in the three-year period ended June 29, 1996.
KPMG PEAT MARWICK LLP
Albany, New York
September 20, 1996
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<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-END> JUN-29-1996
<CASH> 464
<SECURITIES> 0
<RECEIVABLES> 365
<ALLOWANCES> 132
<INVENTORY> 902
<CURRENT-ASSETS> 1,681
<PP&E> 12,129
<DEPRECIATION> 8,993
<TOTAL-ASSETS> 4,817
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<BONDS> 0
0
0
<COMMON> 2,231
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<TOTAL-LIABILITY-AND-EQUITY> 4,817
<SALES> 4,151
<TOTAL-REVENUES> 4,151
<CGS> 3,605
<TOTAL-COSTS> 4,685
<OTHER-EXPENSES> (63)
<LOSS-PROVISION> 135
<INTEREST-EXPENSE> 865
<INCOME-PRETAX> (1,336)
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