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
March 28, 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 X No
As of March 28, 1998, the registrant had 22,312,524 shares of
Common Stock issued and outstanding.
Total pages 10.
NATIONAL MICRONETICS, INC.
INDEX
Part I. Financial Information:
Consolidated Balance Sheets - March 28, 1998
and June 28, 1997 ................................... 3
Consolidated Statements of Operations - Three Months
and Nine Months Ended March 28, 1998, and
March 29, 1997....................................... 4
Consolidated Statements of Cash Flows
Nine months Ended March 28, 1998 and
March 29, 1997....................................... 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 ................................ 8,9
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
Mar. 28, June 28,
1998 1997
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 12 $ 35
Inventories - 22
Other current assets 370 144
Total current assets 382 201
Property, plant and equipment, net 2,687 2,776
$3,069 $2,977
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $1,408 $1,450
Revolving loan -0- 2,741
Short-term debt 8,317 4,896
Accounts payable 619 407
Accrued salaries and related expenses 141 248
Other accrued expenses 257 244
Due to related parties, net 2,102 1,646
Total current liabilities 12,844 11,632
Stockholders' equity:
Common stock ($.10 par value; 2,231 2,231
authorized - 40,000,000 shares;
issued and outstanding 22,312,524
shares)
Additional paid-in capital 59,350 59,350
Accumulated deficit (71,356) (70,236)
Total stockholders'
equity (deficit) (9,775) (8,655)
$ 3,069 $ 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 Nine Months Ended
Mar. 28, Mar. 29, Mar. 28, Mar. 29,
1998 1997 1998 1997
Net Sales $ -0- $ 723 $ 73 $ 2,206
Cost and expenses:
Cost of products sold 165 709 639 2,008
Research, development
and engineering 17 58 59 162
Selling and administration 62 61 241 382
244 828 939 2,552
Income (Loss) from
operations (244) (105) (866) (346)
Other deductions (income):
Interest expense 232 180 577 565
Other (income) expense, net (133) (24) (323) (33)
99 156 254 532
Net earnings (loss) $ (343) $ (261) $(1,120) $ (878)
Basic earnings (loss) per
common and common
equivalent share $ (0.02) $ (0.01) $ (0.05) $ (0.04)
Average common shares
outstanding 22,313 22,313 22,313 22,313
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Nine Months Ended
Mar. 28, Mar. 29,
1998 1997
Cash flows from operating activities:
Net income (loss) $(1,120) $ (878)
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 284 316
Retirements of property and equipment 111 -
Changes in operating assets and liabilities:
Decrease (Increase) in trade receivables - 231
Decrease (Increase) in inventories 22 178
Decrease (Increase) in other current assets (226) (31)
Increase (Decrease) in accounts payable
and accrued expenses 118 72
Increase (Decrease) in due to related parties 456 (94)
Net cash provided (used) by
operating activities (355) (206)
Cash flows from financing activities:
Purchases of plant and equipment (306)
Repayment on long-term debt ( 42) (172)
Payment of revolving loan by related party (2,741) -
Increase in short-term debt to related parties 3,421 -
Net cash provided (used) by
financing activities 332 (172)
Net increase (decrease) in cash and cash
equivalents ( 23) (378)
Cash and cash equivalents at beginning
of period 35 464
Cash and cash equivalents at end of period $ 12 $ 86
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 March 28, 1998 and the results of
operations for the three month periods and nine month periods ended
March 28, 1998 and March 29, 1997 and changes in cash flows for the
nine month periods then ended. The results of operations for the nine
month period ended March 28, 1998 are not necessarily indicative of
the
results to be expected for the full year.
The accounting policies followed by the Company are set fourth 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):
March 28, 1998 June 28, 1997
Finished goods $ - $ -
Work in process - 14
Raw materials and supplies - 8
$ - $ 22
3. Six months of interest payments were due the primary lending
institution at March 28, 1998 resulting in the term loan being in default.
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
institutuion has completed collection efforts against the bank issuing the
$2,789,000 letter of credit serving as collateral for the revolving loan
of $2,741,000. The Company now owes the $2,741,000 to the Newmax
affiliate supplying the letter of credit and not the lending institution.
It is unclear what actions the lending institution might 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 March 28, 1998 and March 29, 1997 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 about 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, 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
Nine Months Ended March 1998 Compared to March 1997
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.
Nine Months Ended In March
Income and Expense
Items as percent Percent Change
of sales in dollars
1998 1997 from 1997-1998
Net Sales 100% 100% ( 97)%
Cost of products sold 875 91 ( 68)
Gross Profit (loss) (775) 9 (368)
Research, development & engineering 81 8 ( 64)
Selling and administration 330 17 ( 37)
Other deductions (income) 348 24 ( 52)
Net earnings (loss) (1,534)% (40)% ( 28)%
Sales volume has decreased 97% 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.
The Company continues to perform technical and market research on products
that could be sold by the Company. Spending on research, development and
engineering has decreased 64% 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. Although this cost
has decreased 37% compared to the prior year, it represents 330% of net
sales as a result of the historically low volume.
The consolidated balance sheet at March 28, 1998 reflects a decrease of
$1,031,000 in net working capital since fiscal year-end. Within the
components of working capital, short-term debt due to related parties
increased by $680,000 plus the $2,741,000 revolving loan balance assumed
by the related parties. Due to related parties increased by $456,000
representing accrued interest on short-term debt due to related parties.
Additions to plant exceeded depreciation expense by $22,000. The cash
was used to repay bank debt of $42,000 and to offset continuing losses.
Three Months Ended March 1998 Compared to March 1997
The three months ended March 28, 1998 had no net sales compared to
$723,000 in the same quarter of the prior year. The Company received no
orders for its older products and was unable to commence production of any
new products.
Costs related to maintaining the facility continue to be charged to cost
of products sold. It is anticipated that the facility will be utilized
for new production. the same quarter in the prior year included much
higher costs as it included a full range of direct and indirect product
costs.
Research, development and engineering as well as selling and
administration have been minimized as much as possible. In the same
quarter of the prior year these costs combined were approximately double
due to the active support of manufacturing operations.
Liquidity and Capital Resources
The consolidated balance sheet at March 28, 1998 reflects a $42,000
reduction of total long-term debt for the nine month period. The Company
owed six months interest to the primary lending institution as of March
28, 1998 resulting in the term loan being in default.
The term loan note is 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 been advised that Newmax has filed for
bankruptcy protection in Korea, hence the likelihood of continued support
of the Company is uncertain at the 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.
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 six months ended March 28, 1998 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 $70,000. 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. Consequently, 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.
An affiliated company, Tae Il Magnetics Co., Ltd, which had provided a
mortgage on its real estate as collateral for the letter of credit, will
become entitled to assert a claim against the Company for any amounts
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 Yoon H. Choo
Dr. Yoon H. Choo
President, Chief
Executive Officer
and Treasurer
(Principal Financial
Officer)
Dated: May 4, 1998
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