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 26, 1998.
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 No X
As of September 26, 1998, the registrant had 22,312,524 shares
of Common Stock issued and outstanding.
NATIONAL MICRONETICS, INC.
INDEX
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets - September 26, 1998
and June 27, 1998 ............................... 3
Consolidated Statements of Operations - Three Months
Ended September 26, 1998, and
September 27, 1997 .............................. 4
Consolidated Statements of Cash Flows
Three Months Ended September 26, 1998 and
September 27, 1997 .............................. 5
Notes to Consolidated Financial Statements ....... 6,7
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations ... 8-10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ..................................... 10
Part II. Other Information
Item 1. Legal Proceedings ................................ 11
Item 3. Defaults upon Senior Securities .................. 11
Item 6. Exhibits and Reports on Form 8-K ................. 11
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
Sept. 26, June 27,
1998 1998
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 26 $ 22
Inventories - -
Other current assets - 20
Total current assets 26 42
Property, plant and equipment, net 2,672 2,765
$2,698 $2,807
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
and lease obligations $1,420 $1,420
Revolving loan - -
Short-term debt 8,397 8,337
Accounts payable 582 577
Accrued salaries and related expenses 122 145
Other accrued expenses 350 312
Due to related parties, net 2,002 1,835
Total current liabilities 12,873 12,626
Stockholders' deficit:
Common stock $.10 par value 2,231 2,231
Additional paid-in capital 59,785 59,785
Accumulated deficit (72,191) (71,835)
Total stockholders'
deficit (10,175) (9,819)
$ 2,698 $ 2,807
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. 26, Sept. 27,
1998 1997
Net Sales $ - $ 73
Cost and expenses:
Cost of products sold - 328
Research, development
and engineering 17 29
Selling and administration 60 112
77 469
Income (Loss) from
operations ( 77) (396)
Other deductions (income):
Interest expense 206 187
Interest income - -
Other (income) expense, net ( 75) (109)
131 78
Net loss $ (208) $ (474)
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. 26, Sept. 27,
1998 1997
Cash flows from operating activities:
Net income (loss) $ (208) $ (474)
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 92 95
Retirements of property and equipment - 40
Changes in operating assets and liabilities:
Decrease (Increase) in trade receivables - -
Decrease (Increase) in inventories - 9
Decrease (Increase) in other current assets ( 20) (117
Increase (Decrease) in accounts payable
and accrued expenses 20 66
Increase (Decrease) in due to related parties 167 (111)
Net cash provided (used) by
operating activities ( 91) (270)
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)
Proceeds of short-term debt 60 500
Net cash provided (used) by
financing activities 60 458
Net increase (decrease) in cash and cash
equivalents 4 (28)
Cash and cash equivalents at beginning
of period 22 35
Cash and cash equivalents at end of period $ 26 $ 63
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 26, 1998 and the results of operations for the three
month periods ended September 26, 1998 and September 27, 1997
and changes in cash flows for the three month periods then
ended.
The results of operations for the three month period ended
September 26, 1998 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 1998 financial
statements which have been incorporated in form 10-K filed for
the year ended June 27, 1998.
2. Inventories consisted of the following (in thousands):
September 26, 1998 June 27, 1998
Finished goods $ - $ -
Work in process - -
Raw materials and supplies - -
$ - $ -
3. Twelve months of interest payments totaling approximately
$162,000 were due the primary lending institution at September
26, 1998 in respect of the term loan note, which had matured on
November 26, 1997. The Company does not have the funds to
satisfy the principal balance of $1,408,000 and accrued interest
of the term loan note; however, no foreclosure action as yet
has been instituted by the primary institutional lender of the
Company. The Company believes that the forbearance of
this primary lending institution may be due to the on-going
negotiations by the Company to dispose of part of the real
estate which is collateral for the mortgage securing the term
loan note at a price which, if obtained, would enable the
Company to satisfy the term loan note, but no assurance can
be
made that such a disposition will be consummated.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
Notes to consolidated Financial Statements (Unaudited)
The 2,741,000 revolving credit loan was in default before its
maturity on November 18, 1997. The amount of interest in
default and in arrears is $341,000 at September 26, 1998 in
respect of the revolving credit note and the amount of the
principal balance of the revolving credit note is $2,741,000.
The institutional lender completed collection proceedings
against a Korean bank letter of credit in the amount of
$2,789,000 securing payment of the revolving credit note. An
affiliated company which had provided a mortgage on its Korean
real estate as collateral for that Korean bank letter of credit
will become entitled to assert a claim against the Company for
all amounts collected from it by the institutional lender out
of the pledge of its assets. It may be possible that the two
year moratorium on collection of certain debts from certain
affiliated companies of the Company, as approved by a Korean
court during September, 1998, may prolong those collection
efforts.
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 26, 1998 and September
27, 1997 there was no dilutive effect from common stock options
or warrants.
5. The Company is a defendant in a lawsuit 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's insurer has
assumed responsibility and is defending the Company; however
the damages claimed exceed the $300,000 policy limits.
Depositions were scheduled for October 1998, but were postponed
and no new date was scheduled. After consulting with counsel
the Company has determined that it is not possible, at this
time, to estimate the amount of damage, if any, that may
ultimately be incurred. Accordingly no provision has been made
in the financial statements of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Material changes in 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
1998 1997 from 1997-1998
Net Sales 0% 100% (100)%
Cost of products sold 0 449 (100)
Gross Profit (loss) 0 (349) (100)
Research, development & engineering 0 40 (41)
Selling and administration 0 153 (46)
Other deductions (income) 0 107 (31)
Net earnings (loss) 0% (649)% (56)%
Sales volume has decreased 100% from the same period in the prior
year. The decrease is due to the suspension of sales of recording
head product to Newmax Co., Ltd., a parent of the Company, and all
other customers.
The Company continues to perform market research on products that
could be sold by the Company. Spending on research, development and
engineering has decreased 41% 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 46% from the prior year.
Material Changes in Financial Condition
The consolidated balance sheet at September 26, 1998 reflects a
decrease 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. Within the components of working capital, due to related
parties increased by $167,000 as a result of increases in interest
expense on related party debt remaining unpaid.
Liquidity and Capital Resources
The $2,741,000 revolving credit loan was in default before its
maturity on November 18, 1997. The amount of interest in default and
in arrears in $341,000 at September 26, 1998 and $358,000 at October
26, 1998 in respect of the revolving credit note and the amount of
the principal balance of the revolving credit note is $2,741,000.
The institutional lender completed collection proceedings against a
Korean bank letter of credit in the amount of $2,789,000 securing
payment of the revolving credit note. An affiliated company which
had provided a mortgage on its Korean real estate as collateral for
that Korean bank letter of credit will become entitled to assert a
claim against the Company for all amounts collected from it by the
institutional lender out of the pledge of its assets. It may be
possible that the two year moratorium on collection of certain debts
from certain affiliated companies of the Company, as approved by a
Korean court during September, 1998, may prolong those collection
efforts.
The term loan balance remaining unpaid is $1,408,000. Monthly
interest payments have not been made since August 1997. The amount
of interest in default and in arrears pursuant to the term loan note,
which had matured on November 26, 1997 was $162,000 as of September
26, 1998 and $175,000 as of October 26, 1998. The Company does not
have the funds to satisfy the principal balance and accrued interest
of the term loan note; however, no foreclosure action as yet has been
instituted by the primary institutional lender of the Company. The
Company believes that the forbearance of this primary lending
institution may be due to the on-going negotiations by the Company
to dispose of part of the real estate which is collateral for the
mortgage securing the term loan note at a price which, if obtained,
would enable the Company to satisfy the term loan note but no
assurance can be made that such a disposition will be consummated.
The $1,408,000 term loan is secured by substantially all the assets
of the Company, including a 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 company has been advised that Newmax Co., Ltd.
and Tae Il Media Co., Ltd. on October 14, 1997 had obtained waivers
of defaults in the payment of amount due pursuant to their
indebtedness from their institutional lenders and on November 8, 1997
had filed for reorganization pursuant to bankruptcy laws in Korea so
that they might become entitled to a two-year moratorium on the
repayment of certain obligations to certain creditors. The debt
restructuring plan of Tae Il Media Co., Ltd. was accepted by its
creditors and was approved by Suwon District Court in Korea on
September 4, 1998. The debt restructuring plan of Newmax Co., Ltd.
was accepted by its creditors and was approved by Cheongju District
Court in Korea on September 15, 1998. The Company can make no
assurance that its primary lending institution will continue to
forebear from foreclosing on the mortgage if its negotiations to sell
part of the collateral for that mortgage should not yield funds to
satisfy the mortgage indebtedness in a reasonable amount of time.
Moreover, if the sale of the facility which has been modified for the
production of sealed lead acid batteries should occur, then the
Company will need additional funds from Newmax or its other
affiliated companies to modify its remaining facility in Kingston,
New York or a leased facility not yet identified for that purpose.
Meanwhile, the Company will continue to need significant amounts of
operating cash. Since December 1990, the Company has received
support from Newmax to fund operational needs. Although there is no
formal commitment for continuing support from Newmax, Newmax has made
no indication that this support will cease.
The Company is in negotiations to sell its 83,000 square foot
facility and some of the surrounding land in Kingston, New York.
Working capital consists of very little current assets as there was
neither inventory nor orders for products at quarter-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 necessary to finance working capital
needs for inventory and accounts receivable when and if orders for
new products are obtained.
The Company is hopeful that funds generated by facility sales
proceeds 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 sales of manufacturing facilities,
reduction in overhead spending, continued cooperation of parent
companies and their affiliates, start up of a sealed lead acid
battery manufacturing line and cooperation of the institutional
lender will enable the Company to remain viable for the next twelve
months. The Company cannot assure that it will receive funds needed
from its affiliates to be able to commence production of sealed lead
acid battery manufacturing line during the next twelve months.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
According to Item 305(e) of Regulation S-K and Rule 12b-2, the
Company need not provide the information required by Item 305 about
quantitative and qualitative disclosures about market risk, because
the Company is a small business issuer.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See note 5 to the consolidated financial statements included herein
on page 7 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 26,
1998 and during the current quarter, so the Company defaulted on the
payment of accrued interest with respect to its term loan note to its
institutional lender. The amount of interest in default and in
arrears is $162,000 as of September 26, 1998 and is $179,000 as of
October 26, 1998, which is the date of this Quarterly Report. The
amount of $1,408,000 of principal of the term loan note has been
immediately due and payable since the maturity date of November 26,
1997, which was followed by a notice of default on December 16,
1997.
The Company does not have the funds to satisfy the principal amount
and accrued interest.
The institutional lender completed collection proceedings against the
letter of credit in the amount of $2,789,000 securing payment of the
revolving credit note, which had matured on November 18, 1997. The
amount of interest in default and in arrears as of September 26, 1998
is $341,000 and as of October 26, 1998 is $358,000 in respect of the
revolving credit note and the amount of the principal balance of the
revolving credit note is $2,741,000. An affiliated company, Tae Il
Magnetics, Co., Ltd., which had provided a mortgage on its real
estate in Korea as collateral for that Korean bank 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. It may be possible that the two
year moratorium on collection of certain debts from certain
affiliated companies of the Company, as approved by a Korean court
during September, 1998, may prolong those collection efforts.
See note 3 on page 6-7 and the caption Liquidity and Capital
Resources on page 9 and 10 for additional discussions concerning
defaults on the revolving credit and term loan.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
27 Financial data schedule
(b) 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 2, 1998
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