UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED
September 27, 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
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
As of September 27, 1997, the registrant had 22,312,524 shares
of Common Stock issued and outstanding.
NATIONAL MICRONETICS, INC.
INDEX
Part I. Financial Information:
Consolidated Balance Sheets - September 27, 1997
and June 28, 1997 ................................... 3
Consolidated Statements of Operations - Three Months
Ended September 27, 1997, and
September 28, 1996 ................................... 4
Consolidated Statements of Cash Flows
Three Months Ended September 27, 1997 and
September 28, 1996 ................................... 5
Notes to Consolidated Financial Statements ............ 6
Management's Discussion and Analysis of the
Financial Condition and Results of Operations ........ 7,8
Part II. Other Information ............................... 9,10
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
Sept. 27, June 28,
1997 1997
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 63 $ 35
Inventories 13 22
Other current assets 261 144
Total current assets 337 201
Property, plant and equipment, net 2,801 2,776
$3,138 $2,977
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
and lease obligations $1,408 $1,450
Revolving loan 2,741 2,741
Short-term debt 5,396 4,896
Accounts payable 425 407
Accrued salaries and related expenses 249 248
Other accrued expenses 291 244
Due to related parties, net 1,757 1,646
Total current liabilities 12,267 11,632
Stockholders' deficit:
Common stock $.10 par value 2,231 2,231
Additional paid-in capital 59,350 59,350
Accumulated deficit (70,710) (70,236)
Total stockholders'
deficit (9,129) (8,655)
$ 3,138 $ 2,977
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts)
Three Months Ended
Sept. 27, Sept. 28,
1997 1996
Net Sales $ 73 $ 791
Cost and expenses:
Cost of products sold 328 715
Research, development
and engineering 29 54
Selling and administration 112 181
469 950
Income (Loss) from
operations (396) (159)
Other deductions (income):
Interest expense 187 194
Interest income - (3)
Other (income) expense, net (109) (2)
78 189
Net loss $ (474) $ (348)
Net loss per common share $ (0.02) $ (0.02)
Average common shares
outstanding 22,313 22,313
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Three Months Ended
Sept. 27, Sept. 28,
1997 1996
Cash flows from operating activities:
Net income (loss) $ (474) $ (348)
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 95 108
Retirements of property and equipment 40 -
Changes in operating assets and liabilities:
Decrease (Increase) in trade receivables - 160
Decrease (Increase) in inventories 9 151
Decrease (Increase) in other current assets (117) 17
Increase (Decrease) in accounts payable
and accrued expenses 66 34
Increase (Decrease) in due to related parties 111 (180)
Net cash provided (used) by
operating activities (270) (58)
Cash flows from investing activities:
Additions to property and equipment (160) -
Cash flows from financing activities:
Repayment on long-term debt and
capitalized lease obligations (42) (8)
Proceeds of short-term debt 500 -
Net cash provided (used) by
financing activities 458 (8)
Net increase (decrease) in cash and cash
equivalents 28 (66)
Cash and cash equivalents at beginning
of period 35 464
Cash and cash equivalents at end of period $ 63 $ 398
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments necessary
to present fairly the financial position as of September 27, 1997
and the results of operations for the three month periods ended
September 27, 1997 and September 28, 1996 and changes in cash flows
for the three month periods then ended. The results of operations
for the three month period ended September 27, 1997 are not
necessarily indicative of the results to be expected for the full
year.
The accounting policies followed by the Company are set forth in
Note (1) to the Company's fiscal year 1997 financial statements
which have been incorporated in form 10-K filed for the year ended
June 28, 1997.
2. Inventories consisted of the following (in thousands):
September 27, 1997 June 28, 1997
Finished goods $ - $ -
Work in process - 14
Raw materials and supplies 13 8
$ 13 $ 22
3. Three months of interest payments were due the primary lending
institution at September 27, 1997 resulting in both the
revolving credit and term loan being in default. Two months
of interest totaling approximately $56,000 were paid on
September 30, 1997 leaving September and subsequent accrued
interest unpaid. The Company has recently been notified that
its parent Companies have developed liquidity problems that
resulted in them obtaining 60 day waivers from their banks
effective October 14, 1997 and for their filing for reorganization
in bankruptcy on November 8, 1997. The lending institution has
initiated collection efforts against the bank issuing the
$2,789,000 letter of credit serving as collateral for the revolving
loan of $2,741,000. If the bank collects the $2,741,000, the
Company will owe that money to the Newmax affiliate supplying
the letter of credit and not the lending institution. It is
unclear what actions the lending institution will take to
collect the $1,408,000 term loan.
4. Earnings per common share has been determined on the basis of
the weighted average number of common shares outstanding during
the respective quarters. At September 27, 1997 and September 28,
1996 there was no dilutive effect from common stock options or
warrants.
5. On October 15, 1997, the Company was served a summons in an
action brought as the result of an accident involving a Company
automobile. The total of the damages claimed in the causes of
action is $7,700,000. The summons designates the Supreme Court
State of New York, County of New York, as the place of trial. The
Company plans a vigorous defense against this action.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated the
relative percentages that certain items in the Company's Consolidated
Statements of Operations bear to net sales.
Three Months Ended In September
Income and Expense
Items as percent Percent Change
of sales in dollars
1997 1996 from 1996-1997
Net Sales 100% 100% (91)%
Cost of products sold 449 90 (54)
Gross Profit (loss) (349) 10 (436)
Research, development & engineering 40 7 (46)
Selling and administration 153 23 (38)
Other deductions (income) 107 24 (53)
Net earnings (loss) (649)% (44)% (36)%
Sales volume has decreased 91% from the same period in the prior
year. Production volume has remained at a level where it is unable
to absorb significant overhead. Shipment of products ceased prior
to the end of the September 27, 1997 quarter and have not yet
resumed. A significant increase in volume from the prior quarter
would be required for the Company to reach breakeven for net
earnings.
The Company continues to perform market research on products that
could be sold by the Company. Spending on research, development and
engineering has decreased 46% from the same period in the prior year.
Efforts have been made to reduce selling and administration costs as
much as possible while maintaining all necessary services. This cost
has decreased 38% from the prior year and represents 153% of net
sales as a result of the historically low volume.
The consolidated balance sheet at September 27, 1997 reflects an
approximate decrease of $500,000 in net working capital since fiscal
year-end. This decrease is the result of an increase in short-term
debt to fund the operating loss and capital improvements. Within the
components of working capital, due to related parties increased by
$111,000 as a result of increases in interest expense on related
party debt remaining unpaid.
Liquidity and Capital Resources
The consolidated balance sheet at September 27, 1997 reflects an
$42,000 reduction of long-term debt for the three month period. The
Company owed three months interest to the primary lending institution
as of September 27, 1997 resulting in both the revolving credit and
term loan being in default. Two months of interest totaling
approximately $56,000 were paid on September 30, 1997 leaving
September and subsequent accrued interest unpaid.
The term loan note and the revolving credit note are secured by a
mortgage on the real estate and a security interest in virtually all
of the personal property of the Company. The term loan note is
guaranteed by Newmax Co., Ltd., Tae Il Media Co., Ltd, and Mr. K.H.
Chung. The Company has been advised that Newmax Co., Ltd. and Tae
Il Media Co., Ltd. have obtained waivers of defaults in the payment
of amounts due pursuant to their indebtedness from their
institutional lenders and on November 8, 1997 have filed for
reorganization pursuant to bankruptcy laws in Korea.
The Company has been dependent upon funds received from Newmax to
continue operations. The Company has just been advised that Newmax
has filed for bankruptcy protection in Korea, hence the likelihood
of continued support of the Company is uncertain at this time. The
Company has been unable to identify a substitute for this support and
is unsure of what action will be taken by its lending institution to
collect a $1,408,000 term loan, but has explained the action which
that lending institution is taking to collect the $2,741,000
revolving credit loan in Note 3 to its financial statements. The
Company will be unable to complete the installation and start-up for
its battery assembly line without parent working capital. Management
believes that the Company will be unable to remain viable unless
there is continued parent company support.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See note 5 to the consolidated financial statements included
herein on page 6 for a discussion of current legal proceedings.
Item 3. Defaults Upon Senior Securities.
Inadequate funds were generated by operations and received
from Newmax to fund debt service during the quarter ended September
27, 1997 and during the current quarter, so the Company defaulted on
the payment of accrued interest with respect to both its revolving
credit note and its term loan note to its institutional lender. The
amount of interest in default and in arrears is $55,000. As a
result, the institutional lender accelerated payment of the
$2,741,000 principal amount and accrued interest of the revolving
credit note dated November 19, 1996 which had born interest at one
percent (1%) below the prime rate. The Company does not have the
funds to satisfy the principal amount and accrued interest of the
revolving credit note. The interest rate of the revolving credit
note has increased to one percent (1%) above the prime rate.
Consequently, the institutional lender started collection proceedings
against the letter of credit in the amount of $2,789,000 securing
payment of the revolving credit note. An affiliated company, Tae Il
Magnetics Co., Ltd, which had provided a mortgage on its real estate
as collateral for that letter of credit, will become entitled to
assert a claim against the Company for any amounts which may be
collected from it by the institutional lender out of the pledge of
its assets; however, the Company has been asked to grant to the bank
which had issued that letter of credit a second mortgage on all of
its assets as collateral for any excess of the amount of the letter
of credit and the expenses of its collection over the net proceeds
of the foreclosure sale of the collateral for the letter of credit.
The November 26, 1997 maturity date of the $1,408,000 principal
balance of the term loan note dated November 26, 1996 in the original
principal amount of $1,450,000 which had born interest at the prime
rate may be accelerated by the institutional lender without notice
due to the default in payment of interest by the Company. The
Company does not have the funds to satisfy the principal balance and
accrued interest of the term loan note. The interest rate of the
term loan note will increase after either demand or maturity to two
percent (2%) above the prime rate.
See note 3 on page 6 and the caption Liquidity and Capital
Resources on page 8 for additional discussions concerning defaults
on the revolving credit and term loan.
Item 5. Other Information.
On November 8, 1997, Newmax (Company parent) and four related
Korean affiliates filed for bankruptcy protection in Korea. Although
it is too early to determine the impact this will have on the
Company, it is apparent that the Company will not obtain the amount
of support it has received in the past to stay in operation. Also
see note 3 on page 6 and Liquidity and Capital Resources on page 8
for additional information.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
Exhibit No. Description
27 Financial data schedule
Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NATIONAL MICRONETICS, INC.
By DR. YOON H. CHOO
Dr. Yoon H. Choo
President, Chief
Executive Officer
and Treasurer
(Principal Financial
Officer)
Dated: November 10, 1997
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