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 28, 1997.
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 5, 1997 was $20,000. 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 5, 1997, the registrant had 22,312,524 shares of Common Stock
issued and outstanding.
Index to Exhibits is on sequential page No. 21. Total pages 50.
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 installing a sealed lead acid battery
manufacturing line as well as performing pilot projects concerning ferrite
bars, cores and recording head assemblies. The battery manufacturing line
is expected to be operational in January 1998 using equipment leased from a
related party.
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 41 for an analysis of export sales of computer
products, exports of which comprised 94% of net sales in fiscal 1997.
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 1997, one customer, Newmax, accounted for 93% of net sales on a
consolidated basis. Victas, Inc., accounted for 13% of net sales in fiscal
1996. Newmax operates in South Korea and has recently been subject to
business disruptions caused by political unrest and banking changes. Also,
the strained relationship between South Korea and North Korea is a continuing
concern. See footnote 9 on page 41 for a summary of major customers and
footnote 10 to the consolidated financial statements on pages 41 and 42 for
a discussion of related party transactions.
Backlog
A comparison of backlog at fiscal year-end is shown below:
June 28, 1997 June 29, 1996
$ 35 (in thousands) $ 878
Backlog (primarily Newmax orders at June 28, 1997) 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. Sales fluctuations are not seasonal and often
are not anticipated. As of September 19, 1997, all backlog orders had been
completed and there were no new orders.
Competition
The Company's principal market has been 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 is principally
in the areas of price, quality and product performance.
The Company has recently begun plant modifications necessary to enter a new,
unrelated market - sealed lead acid batteries - which is highly competitive.
The Company has not yet ascertained whether there are other markets in which
it will actively compete for significant market share.
Research, Development and Engineering
During fiscal years 1997 and 1996 the Company spent approximately $209,000
and $231,000, respectively, in connection with continuing engineering and
product development of computer related products. Research and engineering
efforts during this period had been directed toward the enhancement of its
floppy disk drive and tape drive recording head products. For the past
several 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 28, 1997 the Company actively employed 39 persons. Subsequent to
year end, the Company temporarily reduced the workforce by 27 employees
pending new production orders.
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 to an institutional lender. At this time, approximately 60% of
available space is being set-up for the battery line and the remaining 40%
is utilized for computer related products. Other products do not require
significant space at this time. It is anticipated that new equipment for
battery production will be leased from a related party at fair market value
when and if production orders are obtained. In addition to the above, the
Company sold a 5,400 square foot building on September 7, 1995, a 5,000
square foot building on August 22, 1997 and vacant buildings totalling 37,000
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 inadequate cash flow at this time
to satisfy the notes secured by the mortgage when they mature in November
1997. The Company anticipates that the parent company will renew the letter
of credit in November of 1997 as it has in past years, allowing the Company
to extend the maturing notes for another year. 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 36 for a
discussion of efforts to overcome under utilization 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 all 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 (ending in June) High Low
1997
First Quarter $ .001 $ .001
Second Quarter .005 .001
Third Quarter .01 .001
Fourth Quarter .005 .002
1996
First Quarter N/A N/A
Second Quarter .01 .01
Third Quarter N/A N/A
Fourth Quarter .001 .001
(b). Approximate Number of Equity Security Holders
The approximate number of holders of record of the Company's common stock as
of August 31, 1997 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 $11,431,000 and the stockholders'
deficiency of $8,655,000 as of June 28, 1997, 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
1997 1996 1995 1994 1993
Net sales $ 2,682 $ 4,151 $ 3,822 $ 7,227 $12,664
Cost of products sold 2,556 3,605 3,849 7,777 15,287
Gross profit (loss) 126 546 (27) (550) (2,623)
Research, development
and engineering expense 209 231 259 481 887
Selling and administration
expense 489 849 712 816 849
Loss before income taxes (1,267) (1,336) (1 599) (2,699) (5,083)
Net loss (1,267) (1,336) (1 599) (2,699) (5,083)
Net loss per common share $ (0.06) $ (0.06) $(0.07) $ (0.12) $ (0.23)
Weighted average shares
outstanding 22,313 22,313 22,313 22,313 22,313
Cash dividends - - - - -
Selected Consolidated Balance Sheet Data
(in thousands)
Year Ended in June
1997 1996 1995 1994 1993
Working capital
deficiency $(11,431) $(11,069) $(10,806) $(11,267) $(12,846)
Total assets 2,977 4,817 5,400 5,449 6,819
Long-term debt and lease
obligations, including
current portion 4,191 4,363 4,626 4,494 5,408
Stockholders' deficiency (8,655) (7,933) (7,059) (6,514) (6,986)
The reasons for the significant changes in net sales and gross profit margin,
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. The reasons that enable the Company to operate with a working
capital deficiency are discussed on page 10 under the caption Liquidity and
Capital Resources.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company sold Maxtor stock it acquired as a result of the Miniscribe
bankruptcy 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.
Fiscal 1997 has sales of non-ferrite products to unrelated parties only in
the first quarter. The vast majority of sales for the year were unfinished
floppy disc recording head products sold to related parties (Newmax). The
gross profit margin remained positive for the second year in a row even
though sales declined by 35%. By the fourth quarter, sales declined
significantly and most employees were working a reduced number of hours at
reduced pay. Significant effort was devoted to consolidating remaining
operations to a reduced square footage to make room for a new product line
to be operational in fiscal 1998.
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 developing a new product line, 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 28, 1997 ("1997")
Compared to
Fiscal Year Ended June 29, 1996 ("1996")
Net Sales.
The Company's net sales decreased by $1,469,000 or 35%, from 1996. The
decrease is due to a decline in sales of tee-shirts of $400,000, a decline
in sales to Newmax of $276,000 and a decline in sales of ferrite products to
other customers of $793,000.
Gross Profit.
Gross profit, as a percentage of sales, declined from 13% in 1996 to 5% in
1997. This decline in performance is due to the significant decline in sales
combined with the inability to further reduce significant overhead items such
as electricity, real estate taxes, and etc.
Research, Development and Engineering.
Research, development and engineering ("R&D"), as a percentage of sales,
increased from 6% in 1996 to 8% in 1997. This is due to a reduction in
sales, but a constant level of development and engineering support.
Selling and Administration.
Selling and administration expenses ("S&A"), as a percent of sales, decreased
from 20% in 1996 to 18% in 1997. The decline in S&A as a percent of sales
is due to significant bad debt recoveries in 1997, and a reduction in
marketing staff and expenses for new products.
Interest Expense.
Interest expense decreased by $125,000 or 14% from 1996 to 1997. This is due
to a reduction in interest expense on related party debt of $70,000 based
upon a revised method of calculation and a reduction in bank interest of
$55,000 primarily due to a negotiated rate decrease of 1% during November
1996.
Total Assets.
Total assets declined by $1,840,000 or 38% from 1996 to 1997. This is
primarily due to a reduction in inventories and accounts receivable
resulting from declining sales. It is also due to a lower cash position due
to continuing losses.
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. Reduced R & D spending over time,
due in part to cash flow constraints, has led to reduced sales.
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.
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 November 19, 1996
the lending institution agreed to a modification of repayment terms resulting
in payment due November 18, 1997. The balance remaining unpaid on this loan
is $2,741,000 as of June 28, 1997 and June 29, 1996. Collateral provided by
a Newmax affiliate (guarantor) included a letter of credit issued by a Korean
bank. The current letter of credit for $2,789,000 expires November 19, 1997
and must be replaced at that time. The Company expects the letter of credit
to be renewed upon maturity. If the letter of credit is not renewed, the
Company would attempt to obtain additional direct or indirect financing from
its parent companies and affiliates. The Company entered into a $3,000,000
term loan agreement with the same lending institution on November 5, 1991.
On November 26, 1996 the lending institution agreed to a modification of
repayment terms resulting in no principal payments due until the November
26, 1997 maturity. The balance remaining unpaid on this loan is $1,450,000
and $1,611,000 as of June 28, 1997 and June 29, 1996, respectively. 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 maturity dates can be extended to
November 18, 2001 if the Company continues to obtain a new irrevocable letter
of credit each year and does not default on other loan terms.
Working capital consists of very little current assets as inventory and
orders for older products were very low at year-end. Current assets will
remain very low until battery production commences or orders are obtained for
other products. It is anticipated that related party assistance will be
obtained in financing working capital needs for inventory and accounts
receivable when and if orders for new products are obtained.
The Company had commitments for capital expenditures of $145,000 as of June
28, 1997. Depreciation has exceeded capital expenditures by at least
$300,000 per year for the last three years. Required repayments of long-term
debt for fiscal 1998 are $4,191,000, unless a new letter of credit is
obtained. The repayment terms with the primary lending institution have been
modified to allow for year to year renewal until November 26, 2001 if a new
letter of credit is obtained each year and other basic requirements of the
lending agreement are met. 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, start up of a sealed lead acid
battery manufacturing line, 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 36) 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 25 to 46 and
listed on page 25 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Change in Registrant's Certifying Accountant
KPMG Peat Marwick LLP ("KPMG") was previously the independent public
accountants of National Micronetics, Inc. On July 7, 1997, that firm's
appointment as the independent public accountants was terminated. The
decision to change accountants was approved by the Board of Directors.
The reports of KPMG on the Company's financial statements for the fiscal
years ended June 24, 1995 and June 29, 1996 declined to express an opinion
on the financial statements due to the uncertainty caused by recurring losses
and ongoing liquidity issues of the Company. The reports were not qualified
or modified as to audit scope or accounting principles.
In connection with the audits of the Company's financial statements for each
of the fiscal years ended June 24, 1995 and June 29, 1996, and the subsequent
period from June 30, 1996 to July 7, 1997, there were no disagreements with
KPMG on matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedures which, if not resolved to the
satisfaction of KPMG, would have caused KPMG to make reference to such matter
of disagreement in its report.
The Company's Board of Directors has engaged Sung I. Rhee, C.P.A. as of July
7, 1997 as the Company's independent public accountant for its fiscal year
ended June 28, 1997.
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 -
59 Chief Executive Officer,
Secretary and Treasurer
Dr. Heehwan Lee,.......Vice President and 1990 (1) (2) -
47 Chief Operations Officer
Mr. K.H. Chung,........President, Tae Il Media 1990 (1) (2) -
52 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 and Dr.
Heehwan Lee.
(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 28 percent of the common stock of
Newmax as of June 28, 1997.
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 12
percent of the capital stock of Newmax as of June 28, 1997.
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 as of June 28, 1997.
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. From time to time, varying amounts of services are rendered by the
Company to Newmax or its designees and by Newmax to the Company pursuant to
this commitment.
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 1997 and 1995 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, ($157,000
and $1,281,000 in fiscal 1997 and 1995, 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.
Techmedia International Corporation ("Techmedia"), which is wholly owned by
Media and has the same president as Newmax, has occasionally advanced funds
to the Company. Payment of interest with respect to fiscal years 1997 and
1996, however, was forgiven. See note 10 to the Company's consolidated
financial statements included herein (page 41) 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 37) for a further discussion of
short-term debt and related party assistance and note 6 (page 38) 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 1997 and
1996 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, 1997 $ 80,000
Chairman, President and Chief 1996 $ 80,000
Executive Officer 1995 $ 80,000
There are no other officers whose total annual salary and bonus exceeds
$100,000. Dr. Yoon H. Choo received no other annual compensation or
long-term compensation or other compensation from the Company. Dr. Yoon H.
Choo
received no grants of stock options or SARs from the Company and had no stock
options or SARs of the Company to exercise or to be repriced or amended. Dr.
Yoon H. Choo received no long-term incentive plan awards from the Company.
See Board Interlocks and Insider Participation below.
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 1997 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 1997 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 14. Also see
Relationships and Beneficial Interests on pages 13-14 with respect to the
ownership by Media and Magnetics of 28 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 37 and 42
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 37,
38 and 41-42, 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 37, 38, and 41-42, 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 37, 38 and 41-42, respectively.
The Company owed Newmax $30,000 and Media $210,000 as of June 28, 1997.
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 37, 38, and 41-42. The Company owed Newmax $30,000 and
Media $210,000 as of June 28, 1997.
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 37 and 41-42, 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 28,
1997.
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
$191,000 at June 28, 1997. 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 5,
1997.
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
Jung Kyun Bae ...........................10,500,000 47.1%
Hong Kyu Shin Indirect owner (2)
Jeong Soo Choi shared voting
Kwang Jae Ko power, shared
Young Taek Kwon investment power
Byong Hee Lee
456-1 Moknae-Dong, Ansan
Kyunggi-Do, 425-100, Korea
Dae Bang Investment Finance Corp.........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)
D.H. Coue shared voting
H.S. Kil power, shared
Y.W. Kim investment power
K.O. Oh
C.D. Um
O.J. Kwon
D.K. Lee
J.M. Lee
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 262,646 2.6%
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 574,008 12.2%
of Newmax Indirect owner (2)
Co., Ltd. (1) Shared voting power
Shared investment power
Capital Stock Heehwan Lee 45,393 .5%
of Tae Il Direct owner (2)
Media Co., Ltd. Sole voting power
Sole investment power
Capital Stock Heehwan Lee 1,280 .2%
of Tae Il Direct owner (2)
Magnetics Co., Ltd. Sole voting power
Sole investment power
Capital Stock Heehwan Lee 574,008 12.2%
of Newmax Indirect owner (2)
Co., Ltd. (1) Shared voting power
Shared investment power
Capital Stock Directors and 574,008 12.2%
of Newmax Executive Indirect owners (2)
Co., Ltd. Officers as a Shared voting power
Group Shared investment power
See footnotes on next page.
(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 Reports of Independent Certified
Public Accountants are incorporated in Part II of this report
(see index on page 25).
2. Financial Statement Schedules
Included In Part IV of this report:
Page #
Independent Auditors' Reports on Schedule 44-45
Schedule II- Valuation and Qualifying Accounts 46
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 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 10-Q for the quarter ended September 28, 1991, Commission
File Number 0-7207).
4.3 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 10-Q for the quarter ended September 28, 1991,
Commission File Number 0-7207).
4.4 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 10-Q for the
quarter ended September 28, 1991, Commission File Number 0-
7207).
4.5 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).
4.6 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).
4.7 Amended Term Note dated November 26, 1996 in the maximum
principal amount of $1,450,000 payable by the Company to
Shinhan Bank New York Branch (Incorporated by reference to
Exhibit 4.1 to the quarterly report on Form 10-Q for the
quarter ended March 29, 1997, Commission File Number 0-7207).
4.8 First Amendment to Term Loan Agreement between the Company and
Shinhan Bank New York Branch dated November 26, 1996.
(Incorporated by reference to Exhibit 4.2 to the quarterly
report on Form 10-Q for the quarter ended March 29, 1997,
Commission File Number 0-7207).
4.9 Amended Revolving Credit Note dated November 19, 1996 in the
principal amount of $2,741,000 payable by the Company to
Shinhan Bank New York Branch (Incorporated by reference to
Exhibit 4.3 to the quarterly report on Form 10-Q for the
quarter ended March 29, 1997, Commission File Number 0-7207).
4.10 Second Amendment to Revolving Credit Agreement between the
Page
Company and Shinhan Bank New York Branch dated November 19,
1996 (Incorporated by reference to Exhibit 4.4 to the
quarterly report on Form 10-Q for the quarter ended March 29,
1997, 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 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).
10.3 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. 48
23.1 Consent of Sung I. Rhee, C.P.A. to incorporation by 49
reference of his 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.
23.2 Consent of KPMG Peat Marwick LLP to incorporation by reference 50
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
Item 4.
Change in Registrant's Certifying Accountant. Report dated
July 7, 1997 disclosing a change in independent public
accountants from KPMG Peat Marwick LLP to Sung I. Rhee,C.P.A.
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
President and Chief
Executive Officer
Dated: September 19, 1997
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 19th day of September,
1997.
Signature Title
Chairman of the Board of Directors,
(Dr. Yoon H. Choo) President, Chief Executive Officer,
Treasurer and Secretary (Principal
Executive, Financial and Accounting
Officer).
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' Reports 26-27
Consolidated Balance Sheets as of June 28, 1997
and June 29, 1996 28-29
Consolidated Statements of Operations for the years
ended June 28, 1997, June 29, 1996 and June 24,
1995 30
Consolidated Statements of Changes in Stockholders'
Deficiency for the years ended June 28, 1997, June 29,
1996 and June 24, 1995 31
Consolidated Statements of Cash Flows
for the years ended June 28, 1997, June 29, 1996
and June 24, 1995 32-33
Notes to Consolidated Financial Statements 34-43
Independent Auditors' Reports on Schedule 44-45
Schedule of Valuation and Qualifying Accounts 46
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
National Micronetics, Inc.:
We have audited the accompanying consolidated balance sheet of National
Micronetics, Inc. and subsidiaries as of June 28, 1997, and the related
consolidated statements of operations, changes in stockholders' deficiency,
and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to report on these consolidated financial statements based
on our audit.
We conducted our audit 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 audit provides 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 possible material effect of the matter discussed in the
preceding paragraph, we are unable to express, and do not express, an opinion
on the consolidated financial statements referred to above.
Sung I. Rhee, C.P.A.
Fort Lee, New Jersey
September 5, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
National Micronetics, Inc.:
We have audited the accompanying consolidated balance sheet of National
Micronetics, Inc. and subsidiaries as of June 29, 1996, and the related
consolidated statements of operations, changes in stockholders' deficiency,
and cash flows for each of the years in the two-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 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 a net capital deficiency. 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 1996 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 balance
sheet as of June 29, 1996 and the related consolidated statements of
operations, changes in stockholders' deficiency and cash flows for each of
the years in the two-year period ended June 29, 1996.
KPMG PEAT MARWICK LLP
Albany, N.Y.
August 28, 1996
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 28, 1997 and June 29, 1996
(in thousands)
ASSETS
1997 1996
Current assets (note 6):
Cash and cash equivalents $ 35 $ 464
Trade receivables (less allowance of
$132 in 1996) - 233
Inventories (note 3) 22 902
Prepaid and other current assets 144 82
Total current assets 201 1,681
Property, plant and equipment, at cost
(notes 4 and 6) 11,648 12,129
Less accumulated depreciation and amortization ( 8,872) ( 8,993)
Net property, plant and equipment 2,776 3,136
$ 2,977 $ 4,817
(Continued)
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
June 28, 1997 and June 29, 1996
(in thousands, except common share amounts)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
1997 1996
Current liabilities:
Current portion of long-term debt (note 6) $ 1,450 $ 3,752
Long-term debt classified as current (note 6) - 611
Revolving loan (note 5) 2,741 -
Short-term debt (note 5) 4,896 4,896
Accounts payable 407 394
Accrued salaries and related expenses 248 212
Other accrued expenses 244 298
Due to related parties, net (note 10) 1,646 2,587
Total current liabilities 11,632 12,750
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 59,350 58,805
Accumulated deficit (70,236) (68,969)
Total stockholders' deficiency ( 8,655) ( 7,933)
Commitments and contingencies (notes 2,4 and 12)
$ 2,977 $ 4,817
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 28, 1997, June 29, 1996, and June 24, 1995
(in thousands, except per share amounts)
1997 1996 1995
Net sales $ 2,682 $ 4,151 $ 3,822
Cost and expenses:
Cost of products sold 2,556 3,605 3,849
Research, development and engineering 209 231 259
Selling and administration 489 849 712
3,254 4,685 4,820
Loss from operations ( 572) ( 534) ( 998)
Other expense (income):
Interest expense 740 865 911
Interest income ( 8) ( 36) ( 3)
Other (income) expense, net ( 37) ( 27) ( 307)
695 802 601
Loss before income taxes ( 1,267) ( 1,336) ( 1,599)
Income taxes (note 8) - - -
Net loss $(1,267) $(1,336) $(1,599)
Loss per common share (note 1) $( 0.06) $( 0.06) $( 0.07)
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' DEFICIENCY
Years ended June 28, 1997, June 29, 1996 and June 24, 1995
(in thousands, except common share amounts)
Additional
Common Stock (note 7) Paid-In Accumulated
Shares Par Value Capital (Deficit)
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)
Net loss -- 1997 - - - ( 1,267)
Interest forgiven on
related party debt (note 5) - - 392 -
Sale of assets to a
related party (note 10) - - 153 -
Balance June 28, 1997 22,312,524 $ 2,231 $ 59,350 $ (70,236)
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 28, 1997, June 29, 1996 and June 24, 1995
(in thousands)
1997 1996 1995
Cash flows from operating activities:
Net loss $(1,267) $(1,336) $(1,599)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Depreciation and amortization 412 549 723
Provision for losses (recoveries)
on receivables (132) 135 -
Retirements of property and equipment 4 171 168
Interest forgiven on related party debt 392 462 -
Changes in operating assets and liabilities:
Decrease (Increase) in trade receivables 365 (243) (76)
Decrease (Increase) in inventories 880 (88) (443)
Decrease (Increase) in prepaid and other
current assets (62) (4) 26
Decrease in other assets - - 17
Decrease in accounts payable
and accrued expenses (5) (188) (767)
Increase (Decrease) in due to related
parties, net (941) 742 1,131
Net cash provided (used) by operating
activities (354) 200 (820)
Cash flows from investing activities:
Additions to property and equipment (56) (11) -
Cash flows from financing activities:
Sale of assets to a related party 153 - 1,054
Proceeds of long-term debt - - 143
Repayments on long-term debt (172) (263) (11)
Net cash provided (used) by financing
activities (19) (263) 1,186
Net increase (decrease) in cash and
cash equivalents (429) (74) 366
Cash and cash equivalents at
beginning of year 464 538 172
Cash and cash equivalents at end of year $ 35 $ 464 $ 538
(Continued)
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended June 28, 1997, June 29, 1996 and June 24, 1995
1997 1996 1995
Supplemental cash flow disclosures:
Interest paid $386 $342 $422
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 28, 1997, June 29, 1996 and June 24, 1995
(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 has been
principally an integrated manufacturer of magnetic recording heads primarily
for computer disk drives. The Company is currently modifying its facility
to begin manufacturing sealed lead acid batteries.
The Company has at times been involved in 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 consisted
of certificates of deposit of $300,000 at June 29, 1996.
(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) Revenue Recognition
Revenue is recognized upon shipment of products to customers.
(f) 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.
(g) 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
1997, 1996 and 1995. Common stock equivalents are not considered in this
calculation since their effect would be anti-dilutive.
(h) 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 28, 1997 were comprised of 52 weeks.
(i) 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.
(j) 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 adopted 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. (cont'd)
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(1) Summary of Significant Accounting Policies, Continued
(j) New Accounting Standards, Continued
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. Adoption in the first quarter of fiscal 1997
had no effect on the Company's financial results.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 adopted 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. 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. If Newmax does not continue
its direct and indirect support of the Company, financing would be sought
from other parent and affiliated Companies or if possible, through
unaffiliated sources of capital. 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,
adding a sealed lead acid battery manufacturing line 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 28, 1997 June 29, 1996
(in thousands)
Finished goods $ - $ 793
Work in process 14 25
Raw materials and supplies 8 84
$ 22 $ 902
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 returned the ballast inventory remaining
unsold for credit on June 9, 1997.
(4) Property, Plant and Equipment June 28, June 29,
Classification (in thousands) Life 1997 1996
Land - $ 263 $ 263
Buildings and improvements 20 years 7,491 7,435
Machinery and equipment 3-8 years 3,741 4,274
Furnishings and fixtures 3-10 years 153 157
$11,648 $12,129
The Company conducts certain of its operations using equipment under
operating leases that expire over the next year. Total rental expense was
$22,000, $11,000, and $22,000 for fiscal 1997, 1996, and 1995, respectively.
The total minimum rental commitments at June 28, 1997 under noncancellable
operating leases are approximately $1,000. The Company had commitments for
capital expenditures of $145,000 as of June 28, 1997 related to plant
modifications necessary to manufacture sealed lead acid batteries.
(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 26, 1996 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,
1997. The Company expects the letter of credit to be renewed upon maturity.
Interest on the revolving credit agreement is payable at prime minus 1%
(stated rate was prime in 1996), (7.50% at June 28, 1997; 8.25% at June 28,
1996). 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 1997, 1996 and 1995. These loans were unsecured at an 8%
interest rate. At June 28, 1997 and June 29, 1996, the balance of these
loans was $4,896,000. The average amount of short-term debt outstanding and
weighted average interest rate was $7,637,000 at 7.9% in fiscal 1997 and
$4,896,000 at 8% in fiscal 1996 and 1995. The maximum short-term debt
outstanding was $7,637,000 in fiscal 1997 and $4,896,000 in fiscal 1996 and
1995. Interest expense recorded on the related party debt was $392,000 for
fiscal 1997 and $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 28, 1997 June 28, 1997 June 29, 1996
(in thousands)
Term loan 8.50% $ 1,450 $ 1,611
Converted revolving loan - 2,741
Debt settlement agreement - 11
Total long-term debt 1,450 4,363
Less: Current portion 1,450 3,752
Long-term debt classified
as current - 611
$ 0 $ 0
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 November 26,
1996 revision matures on November 26, 1997, 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. The term loan, which bears interest
at prime, has been guaranteed by the related parties Newmax Co., Ltd., Tae
Il Media Co., Ltd. and Mr. K.H. Chung. The repayment terms have been
modified to require interest only payments and be renewable on an annual
basis until November 26, 2001 if a new letter of credit is obtained each year
and other basic requirements of the lending agreements are met.
The converted revolving loan has been reclassified to short-term debt due to
the modification of terms during November 1996.
Long-term debt, based upon contractual terms, all matures in fiscal 1998.
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.
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 48,700 shares of common
stock were outstanding at June 28, 1997. Options issued under the plans
generally become exercisable over a period of from six months to ten 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 28, 1997, 1,124,797 shares are available for future grants
under the Program.
As of June 28, 1997 and June 29, 1996 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 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
Cancelled (2,000) .22 - -
June 28, 1997 48,700 $ .22 - $2.50
Options exercisable:
June 28, 1997 48,700 $ .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 1995 through
1997. 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 1997, 1996 and
1995 due to losses incurred and the inability to utilize these losses for
income tax purposes. At June 28, 1997, the Company has net operating loss
carryforwards of approximately $21,389,000 which will expire as follows:
Year Amount (in thousands)
2006 $ 6,455
2007 6,177
2008 5,436
2009 1,272
2010 220
2011 808
2012 1,021
$21,389
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 28, 1997 from years prior to the change in control,
which are included above, are approximately $1,875,000.
Deferred tax liabilities (assets) are comprised of the following at June 29,
1997 and June 29, 1996: 1997 1996
Depreciation $ 554,000 $ 528,000
Net operating loss carryforwards (7,272,000) (6,828,000)
Inventory reserves (475,000) (510,000)
Allowance for bad debts - (45,000)
Other (16,000) (16,000)
(7,763,000) (7,399,000)
Deferred tax valuation allowance 7,209,000 6,871,000
Deferred taxes, net $ - $ -
The deferred tax valuation allowance increased by $338,000 and $2,527,000
during fiscal 1997 and 1996, 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)
1995 $ 3,587
1996 $ 3,101
1997 $ 2,517
The amount and percent of sales to those customers comprising 10 percent or
more of total sales are shown below.
Products
($ in thousands)
1997 1996 1995
Major Customer 1 $ 2,487 - 93% $ 2,763 - 67% $ 3,287 - 86%
Major Customer 2 $143 - 5% $543 - 13% - -
(10) Related Party Transactions
During fiscal 1997 and 1995, the Company sold equipment, at fair value, to
Newmax for $157,000 and $1,281,000, respectively. The gain on the sale of
$173,000 and $1,054,000 respectively, was recorded as additional paid-in
capital and was not recognized in the consolidated statement of operations.
The gain was not recognized in the statement of operations since the sale was
of "items not held for sale in the ordinary course of business" and income
recognition on items sold to a related party where fair value was judgmental
could be misleading.
Net sales for fiscal 1997, 1996 and 1995 included sales of goods totalling
$2,487,000, $2,763,000 and $3,287,000 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.
(Continued)
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(10) Related Party Transactions, Continued
The Company owed Newmax $30,000 at June 28, 1997 and Newmax owed the Company
$12,000 at June 29, 1996 which are 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 and $15,000 in fiscal 1996 and 1995, respectively. Tae
Il sold the Company approximately $211,000 and $562,000 of electrical light
fixture ballasts during fiscal 1996 and 1995, respectively. The unsold
ballast inventory was returned for credit on June 9, 1997. Tae Il sold the
Company approximately $500,000 of non-electronic consumer goods for resale
during fiscal 1996. The Company owed Tae Il $210,000 and $1,195,000 at June
28, 1997 and June 29, 1996, 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 1997 and 1996. Both of these are also
discussed in note (5). Included in due to related parties at June 28, 1997
and June 29, 1996 is $1,370,000 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. During fiscal
1997, the Company repaid the $34,000 previously owed and then borrowed a
total of $35,000 from Techmedia which remains payable at June 28, 1997.
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 September 5, 1997, we reported on the consolidated balance
sheet of National Micronetics, Inc. and subsidiaries as of June 28, 1997, and
the related consolidated statements of operations, changes in stockholders'
deficiency and cash flows for the year then ended. In connection with our
audit of the aforementioned consolidated financial statements, we also have
audited the related financial statement schedule as listed in the index on
page 25. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to report on this financial
statement schedule based on our audit.
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 possible material effect of the matter discussed in the
preceding paragraph, we are unable to express, and do not express, an opinion
on the financial statement schedule referred to above.
Sung I. Rhee, C.P.A.
Fort Lee, New Jersey
September 5, 1997
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 sheet
of National Micronetics, Inc. and subsidiaries as of June 29, 1996 and the
related consolidated statements of operations, changes in stockholders'
deficiency and cash flows for each of the years in the two-year period ended
June 29, 1996. In connection with our audit of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedule as listed in the index on page 25. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to report on this financial statement schedule based on
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 a net
capital deficiency. 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 1996 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 and June 24, 1995.
KPMG PEAT MARWICK LLP
Albany, New York
August 28, 1996
Schedule II
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended June 1997, 1996 and 1995
(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 1997:
Allowance for doubtful
accounts receivable $ 132 $ (132) $ - $ -
Year ended June 1996:
Allowance for doubtful
accounts receivable $ - $ 135 $ 3 $ 132
Year ended June 1995:
Allowance for doubtful
accounts receivable $ - $ - $ - $ -
Exhibits Filed Electronically
Page
21 Subsidiaries of the Company 48
23.1 Consent of Sung I. Rhee, C.P.A. 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. 49
23.2 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. 50
27 Financial Data Schedule (For electronic filing purposes only).
Exhibit 21
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
State or County in
Name which incorporated
National Micronetics Sales, Inc...................Delaware
National Micronetics International Limited........Hong Kong
Exhibit 23.1
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 September 5, 1997,
relating to the consolidated balance sheet as of June 28, 1997, and the
consolidated statements of operations, changes in stockholders' deficiency
and cash flows and related schedule for the year then ended, which reports
appear in the June 28, 1997 annual report on Form 10-K of National
Micronetics, Inc.
Our reports dated September 5, 1997 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 possible material effect of the matter discussed in the
preceding paragraph, we are unable to express, and do not express, an opinion
on the consolidated financial statements and schedule referred to above.
Sung I. Rhee, C.P.A.
Fort Lee, New Jersey
September 23, 1997
Exhibit 23.2
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 sheet as of June 29, 1996 and the
consolidated statements of operations, changes in stockholders' deficiency
and cash flows for each of the years in the two-year period ended June 29,
1996, and related schedule, which reports appear in the June 28, 1997 annual
report on Form 10-K of National Micronetics, Inc.
Our reports dated August 28, 1996 contained an explanatory paragraph that
states that the Company's recurring losses from operations, its net capital
deficiency, the deterioration in liquidity and other matters raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements and financial statement schedule 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 were unable
to, and did not, express an opinion on the consolidated financial statements
and schedule as of June 29, 1996 and for each of the years in the two-year
period ended June 29, 1996.
KPMG PEAT MARWICK LLP
Albany, New York
September 23, 1997
<TABLE> <S> <C>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> JUN-28-1997
<CASH> 35
<SECURITIES> 0
<RECEIVABLES> 0
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<CURRENT-ASSETS> 201
<PP&E> 11,648
<DEPRECIATION> 8,872
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0
0
<COMMON> 2,231
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<TOTAL-LIABILITY-AND-EQUITY> 2,977
<SALES> 2,682
<TOTAL-REVENUES> 2,682
<CGS> 2,556
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<INTEREST-EXPENSE> 740
<INCOME-PRETAX> (1,267)
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<EPS-PRIMARY> (0.06)
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</TABLE>
