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
December 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 December 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 - December 27, 1997
and June 28, 1997 ................................... 3
Consolidated Statements of Operations - Three Months
and Six Months Ended December 27, 1997, and
December 28, 1996.................................... 4
Consolidated Statements of Cash Flows
Six months Ended December 27, 1997 and
December 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 ................................ 8
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
Dec. 27, June 28,
1997 1997
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 58 $ 35
Inventories 13 22
Other current assets 203 144
Total current assets 274 201
Property, plant and equipment, net 2,796 2,776
$3,070 $ 2,977
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $1,408 $1,450
Revolving Loan - 2,741
Short-term debt 8,237 4,896
Accounts payable 518 407
Accrued salaries and related expenses 190 248
Other accrued expenses 249 244
Due to related parties, net 1,900 1,646
Total current liabilities 12,502 11,632
Stockholders' deficit:
Common stock ($.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 59,350
Accumulated deficit (71,013) (70,236)
Total stockholders'
deficit (9,432) (8,655)
$ 3,070 $ 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 Six Months Ended
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1997 1996 1997 1996
Net Sales $ - $ 692 $ 73 $ 1,483
Cost and expenses:
Cost of products sold 146 584 474 1,299
Research, development
and engineering 13 50 42 104
Selling and administration 67 140 179 321
226 774 695 1,724
Income (Loss) from
operations (226) (82) (622) (241)
Other deductions (income):
Interest expense 158 191 345 385
Other (income) expense, net (81) (4) (190) (9)
77 187 155 376
Net earnings (loss) $ (303) $ (269) $ (777) $ (617)
Basic earnings (loss) per
common share $ (0.01) $ (0.01) $ (0.03) $ (0.03)
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)
Six Months Ended
Dec. 27, Dec. 28,
1997 1996
Cash flows from operating activities:
Net income (loss) $ (777) $ (617)
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 190 216
Retirements of property and equipment 96 -
Changes in operating assets and liabilities:
Decrease (Increase) in trade receivables - 229
Decrease (Increase) in inventories 9 151
Decrease (Increase) in other current assets (59) (17)
Increase (Decrease) in accounts payable
and accrued expenses 58 (24)
Increase (Decrease) in due to related parties 254 (62)
Net cash provided (used) by
operating activities (229) (124)
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 3,341 -
Net cash provided from (used by)
financing activities 252 (172)
Net increase (decrease) in cash and cash
equivalents 23 (296)
Cash and cash equivalents at beginning
of period 35 464
Cash and cash equivalents at end of period $ 58 $ 168
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 December 27, 1997 and
the results of operations for the three month periods and six month
periods ended December 27, 1997 and December 28, 1996 and changes in
cash flows for the six month periods then ended. The results of
operations for the six month period ended December 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 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):
December 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 December 27, 1997 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 institution 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 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 December 27, 1997 and December 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
Six Months Ended December 1997 Compared to December 1996
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.
Six Months Ended In December
Income and Expense
Items as percent Percent Change
of sales-six months in dollars
1997 1996 from 1996-1997
Net Sales 100% 100% (95)%
Cost of products sold 649 88 (172)
Gross Profit (loss) (549) 12 (318)
Research, development & engineering 58 7 (60)
Selling and administration 245 22 (44)
Other deductions (income) 212 25 (59)
Net earnings (loss) (1,064)% (42)% (26)%
Sales volume has decreased 95% 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 60% 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 44% compared to the prior year, it represents
245% of net sales as a result of the historically low volume.
The consolidated balance sheet at December 27, 1997 reflects a
$797,000 decrease in net working capital since fiscal year-end.
Within the components of working capital, short-term debt due to
related parties increased by $600,000 plus the $2,741,000 revolving
loan balance assumed by the related parties. Additions to plant
exceeded depreciation expense by $116,000. The cash was used to
repay bank debt of $42,000 and to offset continued losses.
Three Months Ended December 1997 Compared to December 1996
The three months ended December 27, 1997 had no net sales compared
to $692,000 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 were approximately double due
to the active support of manufacturing operations.
Liquidity and Capital Resources
The consolidated balance sheet at December 27, 1997 reflects a
$42,000 reduction of long-term debt for the six month period. The
Company owed three months interest to the primary lending institution
as of December 27, 1997 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 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. 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 December 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 $41,000. 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 that 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 DR. YOON H. CHOO
Dr. Yoon H. Choo
President, Chief
Executive Officer
and Treasurer
(Principal Financial
Officer)
Dated: February 3, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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